<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1998
REGISTRATION NO. 333-53281
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
HUDSON HOTELS TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
300 BAUSCH & LOMB PLACE
ROCHESTER, NEW YORK 14604
(716) 454-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
E. ANTHONY WILSON
300 BAUSCH & LOMB PLACE
ROCHESTER, NEW YORK 14604
(716) 454-3400
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID C. WRIGHT, ESQUIRE ALAN J. PRINCE, ESQUIRE
HUNTON & WILLIAMS KING & SPALDING
RIVERFRONT PLAZA, EAST TOWER 191 PEACHTREE STREET
951 EAST BYRD STREET ATLANTA, GEORGIA 30303
RICHMOND, VIRGINIA 23219 (404) 572-4600
(804) 788-8200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
----------------
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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 23, 1998
PROSPECTUS
12,500,000 SHARES
[LOGO OF HUDSON HOTELS
APPEARS HERE]
HUDSON HOTELS TRUST
Hudson Hotels Trust (the "Company") is a recently formed self-advised
Maryland real estate investment trust that intends to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. Upon completion of
the Formation Transactions (described herein), the Company, through Hudson
Hotels Limited Partnership, L.P. and its subsidiaries (the "Partnership"), will
own 29 existing hotels with 3,558 rooms (the "Initial Hotels"), including 26
Fairfield Inn(R) by Marriott hotels with a total of 3,179 rooms. The Initial
Hotels will be leased to three wholly-owned subsidiaries (collectively, the
"Lessee") of Hudson Hotels Corporation (the "Strategic Partner"), a publicly-
owned company whose common stock is listed on the Nasdaq Stock Market under the
symbol "HUDS." The Company's business strategy is to acquire stabilized hotels
that the Company believes are undervalued by prevailing market conditions and
offer the potential for high current rates of return to the Company, a
substantial dividend to the Company's shareholders, and long term increases in
value. To facilitate its strategy, the Company will enter into a 10-year
strategic alliance agreement (the "Strategic Alliance") with the Strategic
Partner. See "Strategic Alliance."
COMMON SHARES OF BENEFICIAL INTEREST
----------
All of the Common Shares of Beneficial Interest, par value $.01 per share
(the "Common Shares"), offered hereby (the "Offering") are being offered by the
Company. Prior to the Offering, there has been no public market for the Common
Shares. The Common Shares have been approved for listing, subject to final
notice of issuance, on the New York Stock Exchange under the symbol "HHT." The
initial public offering price per share is expected to be between $9.50 and
$10.50. See "Underwriting" for a discussion of factors to be considered in
establishing the initial public offering price. The Company initially intends
to make regular quarterly distributions to its shareholders at an initial
annual rate of $.95 per share or 9.5% of an assumed initial public offering
price of $10.00, the mid-point of the price range. The Company's Declaration of
Trust generally limits the number of Common Shares that may be owned by any
single shareholder or affiliated group to 9.9% of the outstanding Common
Shares. See "Risk Factors--Anti-takeover Effect of Ownership Limit, Staggered
Board, Power To Issue Additional Shares and Certain Provisions of Maryland Law"
and "Description of Shares of Beneficial Interest--Restrictions on Ownership
and Transfer."
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON SHARES, INCLUDING, AMONG OTHERS:
. the Company's lack of control over the daily operations of its hotels due
to tax restrictions that prevent REITs from operating hotels;
. the Company's dependence on rent payments from the Lessee for substantially
all of the Company's income and risks associated with the Strategic
Partner's capacity to manage a significant increase in the number of its
managed hotels;
. the Company's lack of experience operating as a REIT, and the fact that the
Company and the Partnership are newly formed entities;
. adverse developments with respect to the Fairfield Inn by Marriott
franchise brand, under which approximately 90% of the Initial Hotels
operate, which could reduce the Company's cash available for distribution
to its shareholders;
. conflicts of interest between the Company and certain of its officers and
trustees, who also serve as officers and directors of the Strategic
Partner, including conflicting demands on management time;
. tax risks, including taxation of the Company as a regular corporation if it
fails to qualify as a REIT, which could reduce materially the Company's
cash available for distribution to its shareholders; and
. the effect of increases in hotel room supply exceeding increases in demand
and other economic conditions which may adversely affect real estate
investments or the hospitality industry, the revenue of the Initial Hotels
and the Lessee's ability to make lease payments from the operation of the
Initial Hotels.
----------
THESE SECURITIES HAVE NOT 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. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................................... $ $ $
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Total(3)..................................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated at approximately $1,500,000 payable by
the Company.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 1,875,000 Common Shares at the Price to Public less Underwriting
Discount, solely to cover over-allotments, if any. If all such shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
----------
The Common Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by the Underwriters, and subject
to approval of certain legal matters by counsel for the Underwriters and to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Common Shares offered hereby will be made on or
about July , 1998.
MORGAN KEEGAN & COMPANY, INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
CROWELL, WEEDON & CO.
INTERSTATE/JOHNSON LANE
CORPORATION
SUTRO & CO. INCORPORATED
TUCKER ANTHONY
INCORPORATED
WHEAT FIRST UNION
The date of this Prospectus is July , 1998.
<PAGE>
[LOGO OF HUDSON HOTELS
APPEARS HERE]
[MAP APPEARS HERE]
THE INITIAL HOTELS
FAIRFIELD INN BY MARRIOTT
NORTHEASTERN REGION
Hartford, Connecticut
Wilmington, Delaware
Portland, Maine
Buffalo, New York
Syracuse, New York
Harrisburg, Pennsylvania
Warrendale (Metropolitan Pittsburgh), Pennsylvania
WESTERN REGION
Flagstaff, Arizona
Phoenix West, Arizona
Scottsdale, Arizona
Ontario, California
Rancho Cordova, California
Las Vegas, Nevada
FAIRFIELD INN BY MARRIOTT
MIDWESTERN REGION
Glenview (Metropolitan Chicago), Illinois
Willowbrook (Metropolitan Chicago), Illinois
Fort Wayne, Indiana
Cedar Rapids, Iowa
Florence (Metropolitan Cincinnati), Kentucky
Louisville, Kentucky
Akron, Ohio
Sharonville (Metropolitan Cincinnati), Ohio
Columbus, Ohio
Willoughby (Metropolitan Cleveland), Ohio
SOUTHEASTERN REGION
Winter Park (Orlando), Florida
Rocky Mount, North Carolina
Chattanooga, Tennessee
COMFORT SUITES
Cheektowaga
(Metropolitan Buffalo), New York
HAMPTON INN
Cheektowaga
(Metropolitan Buffalo), New York
HOLIDAY INN
Cleveland, Ohio
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF THE COMMON SHARES TO STABILIZE THE MARKET PRICE, THE
PURCHASE OF COMMON SHARES TO COVER SYNDICATE SHORT POSITIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY......................................................... 1
The Company.............................................................. 1
Risk Factors............................................................. 2
Business and Investment Strategy......................................... 3
The Initial Hotels....................................................... 4
The Hotel Industry....................................................... 5
Growth Strategy.......................................................... 6
Acquisition Strategy................................................... 6
Internal Growth Strategy............................................... 6
The Strategic Alliance................................................... 7
Formation Transactions................................................... 8
Benefits to Related Parties.............................................. 10
Receipt of Units by the Strategic Partner.............................. 10
The Pre-Offering Debt.................................................. 10
Payment to the Strategic Partner....................................... 11
Issuance of Shares and Grants of Options to Officers and Trustees...... 11
Policies with Respect to Conflicts of Interest........................... 11
Distribution Policy...................................................... 11
Tax Status............................................................... 11
The Offering............................................................. 12
Summary Financial Data................................................... 13
RISK FACTORS............................................................... 17
Lack of Control Over Operations of the Hotels............................ 17
Dependence on Lessee and Payments Under the Percentage Leases............ 17
Potential Adverse Impact of Increased Hotel Management by the Strategic
Partner................................................................. 17
Newly Organized Company and Partnership, Limited Financial Data and
Company's Lack of Experience as a REIT or as a Public Company........... 18
Emphasis on Fairfield Inn by Marriott Hotels............................. 18
Requirements of the Franchise Agreements................................. 18
Conflicts of Interest.................................................... 18
Tax Risks................................................................ 19
Hotel Industry Risks..................................................... 19
Real Estate Investment Risks............................................. 21
Potential Adverse Effects of Leverage and Lack of Limits on
Indebtedness............................................................ 24
No Prior Market for Common Shares........................................ 24
Effect of Market Interest Rates on Price of Common Shares................ 25
Reliance on Board of Trustees and Key Personnel.......................... 25
Ability of Board of Trustees to Change Certain Policies.................. 25
Anti-takeover Effect of Ownership Limit, Staggered Board, Power to Issue
Additional Shares and Certain Provisions of Maryland Law................ 25
THE COMPANY................................................................ 27
General.................................................................. 27
The Strategic Alliance................................................... 28
BUSINESS AND PROPERTIES.................................................... 30
Business and Investment Strategy......................................... 30
The Hotel Industry....................................................... 30
Growth Strategy.......................................................... 33
Acquisition Strategy..................................................... 33
Internal Growth Strategy................................................. 34
Fairfield Inn Hotels..................................................... 34
USE OF PROCEEDS............................................................ 35
DISTRIBUTION POLICY........................................................ 36
PRO FORMA CAPITALIZATION................................................... 38
SELECTED FINANCIAL INFORMATION............................................. 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 43
Overview................................................................. 43
Results of Operations of the Initial Hotels.............................. 43
Liquidity and Capital Resources.......................................... 44
Inflation................................................................ 45
Seasonality.............................................................. 45
Year 2000 Compliance..................................................... 45
THE INITIAL HOTELS......................................................... 46
Descriptions of Initial Hotels........................................... 47
The Percentage Leases.................................................... 53
Franchise Agreements..................................................... 60
Operating Practices...................................................... 61
Employees................................................................ 62
Environmental Matters.................................................... 62
Competition.............................................................. 63
Depreciation............................................................. 63
Insurance................................................................ 64
Legal Proceedings........................................................ 64
FORMATION TRANSACTIONS..................................................... 65
Benefits to Related Parties.............................................. 66
MANAGEMENT................................................................. 68
Trustees and Executive Officers.......................................... 68
Audit Committee.......................................................... 70
Acquisition Committee.................................................... 70
Compensation Committee................................................... 70
</TABLE>
<TABLE>
<S> <C>
Executive Compensation................................................... 70
Employment Agreements.................................................... 71
Compensation of Trustees................................................. 71
Exculpation and Indemnification.......................................... 71
1998 Share Incentive Plan................................................ 72
The Trustees' Plan....................................................... 75
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 76
The Strategic Partner.................................................... 76
Receipt of Units by the Strategic Partner................................ 76
Repayment of Indebtedness................................................ 76
Payment to the Strategic Partner......................................... 76
Issuance of Shares and Grants of Options to Officers and Trustees........ 77
The Percentage Leases.................................................... 77
Franchise Licenses....................................................... 77
Financial Advisory Fee................................................... 77
THE STRATEGIC PARTNER AND THE LESSEE....................................... 78
General.................................................................. 78
Management Team.......................................................... 79
PRINCIPAL SHAREHOLDERS..................................................... 80
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST............................... 81
General.................................................................. 81
Common Shares............................................................ 81
Preferred Shares......................................................... 82
Classification or Reclassification of Common Shares or Preferred Shares.. 82
Restrictions on Ownership and Transfer................................... 82
Other Matters............................................................ 85
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF
TRUST AND BYLAWS.......................................................... 86
Classification of the Board of Trustees.................................. 86
Removal of Trustees...................................................... 86
Business Combinations.................................................... 86
Control Share Acquisitions............................................... 87
Amendment................................................................ 87
Limitation of Liability and Indemnification.............................. 88
Operations............................................................... 89
Dissolution of the Company............................................... 89
Advance Notice of Trustees Nominations and New Business.................. 89
Possible Anti-takeover Effect of Certain Provisions of Maryland Law and
of the Declaration of Trust and Bylaws.................................. 89
Maryland Asset Requirements.............................................. 89
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES................. 90
Investment Policies...................................................... 90
Financing................................................................ 91
Conflict of Interest Policies............................................ 91
Other Activities......................................................... 93
Working Capital Reserves................................................. 93
SHARES AVAILABLE FOR FUTURE SALE........................................... 93
PARTNERSHIP AGREEMENT...................................................... 95
Management............................................................... 95
Transferability of Interests............................................. 95
Capital Contribution..................................................... 95
Redemption Rights........................................................ 96
Operations............................................................... 96
Distributions............................................................ 96
Allocations.............................................................. 97
Term..................................................................... 97
Tax Matters.............................................................. 97
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 98
Taxation of the Company.................................................. 98
Requirements for Qualification........................................... 99
Failure to Qualify....................................................... 106
Taxation of Taxable U.S. Shareholders.................................... 107
Taxation of Shareholders on the Disposition of the Common Shares......... 107
Capital Gains and Losses................................................. 108
Information Reporting Requirements and Backup Withholding................ 108
Taxation of Tax-Exempt Shareholders...................................... 108
Taxation of Non-U.S. Shareholders........................................ 109
Other Tax Consequences................................................... 110
Tax Aspects of the Partnership........................................... 110
Income Taxation of the Partnership and its Partners...................... 112
Sale of the Company's or the Partnership's Property...................... 113
UNDERWRITING............................................................... 114
EXPERTS.................................................................... 116
REPORTS TO SHAREHOLDERS.................................................... 116
LEGAL MATTERS.............................................................. 116
ADDITIONAL INFORMATION..................................................... 116
GLOSSARY................................................................... 117
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information contained in this Prospectus
assumes (i) an offering price for the Common Shares of $10.00 per share (the
"Offering Price"), the mid-point of the price range, and (ii) that the
Underwriters' over-allotment option is not exercised. Unless the context
requires otherwise, the "Company" as used herein, includes Hudson Hotels Trust
and its subsidiaries, including Hudson Hotels Limited Partnership, L.P. and its
subsidiaries (the "Partnership") and the "Strategic Partner" refers to Hudson
Hotels Corporation and its subsidiaries. The offering of 12,500,000 Common
Shares pursuant to this Prospectus is referred to herein as the "Offering." See
"Glossary" for the definitions of certain terms used in this Prospectus.
THE COMPANY
Hudson Hotels Trust (the "Company") is a self-advised Maryland real estate
investment trust, formed in April 1998, that intends to qualify as a real
estate investment trust ("REIT") for federal income tax purposes. The Company
intends to own and acquire stabilized hotel properties that the Company
believes are undervalued in prevailing market conditions and offer the
potential for high current rates of return to the Company, a substantial
dividend to its shareholders, and long term increases in value. At the present
time, the Company has identified such characteristics in stabilized limited
service hotels operating under nationally recognized franchises. Upon
completion of the Formation Transactions (as defined herein), the Company,
through the Partnership, will own 29 existing hotels with 3,558 rooms (the
"Initial Hotels"). The Initial Hotels have an average age of approximately nine
years and will be leased, pursuant to leases providing for rent payments based,
in part, on revenues from the Initial Hotels (the "Percentage Leases"), to
three wholly-owned subsidiaries (collectively, the "Lessee") of Hudson Hotels
Corporation (the "Strategic Partner"), a publicly-owned company whose common
stock is listed on the Nasdaq Stock Market under the symbol "HUDS."
Concurrently with the closing of the Offering, the Company will enter into a
10-year strategic alliance agreement (the "Strategic Alliance") with the
Strategic Partner, pursuant to which (i) the Company will have an option and
right of first refusal to purchase 25 existing hotels currently owned by the
Strategic Partner (the "Option Hotels") and any hotel developed by the
Strategic Partner during the term of the Strategic Alliance, (ii) the Company
will have a right of first opportunity to acquire any hotel identified for
acquisition by the Strategic Partner, and (iii) the Strategic Partner will have
a right of first offer to lease any hotel property acquired by the Company that
is not acquired subject to a condition that a specified party serve as lessee
or manager of the property. The Company believes that the Strategic Alliance
will enhance the Company's growth strategy by (i) providing the Company with a
strategic partner that can assist the Company in identifying and evaluating
hotel acquisition opportunities, (ii) providing the Company with a source of
future acquisitions through the Option Hotels and hotels subsequently owned or
developed by the Strategic Partner, and (iii) providing an experienced operator
and lessee of the Company's hotel properties pursuant to the Percentage Leases.
To facilitate its operating and acquisition strategy, the Company will work
closely with the Strategic Partner, and the two companies will share a
management team with extensive experience in the hospitality industry. E.
Anthony Wilson, Chairman of the Board and Chief Executive Officer of the
Strategic Partner, will also serve as Chairman of the Board and Chief Executive
Officer of the Company. Mr. Wilson was named the Hospitality Valuation Services
Hotel Executive of the Year in 1996 and was named to Advertising Age magazine's
list of the Top 100 Marketing Executives in 1995. John M. Sabin will serve as
the Company's President and Chief Financial Officer and the Strategic Partner's
Executive Vice President and Chief Financial Officer. Mr. Sabin has recently
served as Senior Vice President, Treasurer and Chief Financial Officer of
Vistana, Inc., a publicly-owned owner, operator and developer of time share
resorts, and previously served as Vice President--Finance and Vice President--
Mergers and Acquisitions of Choice Hotels International, Inc. ("Choice") and
Vice President--Corporate Mergers and Acquisitions at Marriott International,
Inc. ("Marriott"). Michael T. George will serve as the Company's Executive Vice
President and the Lessee's President and Chief Operating Officer. Mr. George
most recently served as Chief Operating Officer of Sunstone Hotel Properties
and has previously served as Senior Vice President of Operations at Capstar
Hotels Company.
1
<PAGE>
Upon completion of the Formation Transactions, the Company will own the 29
Initial Hotels, which include 26 Fairfield Inn(R) by Marriott hotels with a
total of 3,179 rooms (the "Initial Fairfield Inns") and one Hampton Inn(R)
hotel, one Comfort Suites(R) hotel and one Holiday Inn(R) hotel with a total of
379 rooms (the "Other Initial Hotels"). The Initial Hotels will be leased to
the Lessee under seven year leases designed to allow the Company to participate
in increases in revenues at the Initial Hotels and to provide an incentive for
the Lessee to exceed certain target hotel revenues. In the year ended December
31, 1997 and the quarter ended March 31, 1998, revenue per available room
("REVPAR") at the Initial Hotels increased by 3.5% and 5.7%, respectively over
the same periods in 1996 and 1997. Upon completion of the Offering, the Company
will acquire the Initial Hotels from two sellers unaffiliated with the Company
for approximately $155.1 million in cash (exclusive of the $630,000 in option
payments paid by the Strategic Partner for the Other Initial Hotels). In
addition, the Company expects to invest approximately $10 million over the next
three years to fund certain property improvement programs ("PIPs") at the
Initial Hotels as required by the franchisors, of which approximately $5
million is expected to be funded by ongoing capital expenditure reserves.
The Company believes that the operation of the Initial Hotels under
nationally recognized hotel franchises will provide the Company with certain
benefits, such as the franchisors' national reservation systems and
comprehensive physical and operational guidelines. Fairfield Inn by Marriott
hotels ("Fairfield Inns") are limited service hotels designed for business and
leisure travelers. According to Marriott, the first Fairfield Inn opened in
1987, and as of March 31, 1998, 346 hotels operated under the Fairfield Inn
name. Limited service hotels generally, and Fairfield Inns particularly, do not
include restaurants or lounges and contain little non-revenue producing space.
Fairfield Inns are constructed, maintained and operated in accordance with a
comprehensive set of building, maintenance, operational, record-keeping and
reservation system guidelines designed to insure uniform service, appearance
and quality.
The Company has received commitments for $125 million in financing facilities
(the "Credit Facility") from The Capital Company of America LLC ("Capital
America"). Concurrently with the completion of the Offering and the Formation
Transactions, the Company expects to incur approximately $42.6 million of
indebtedness (representing approximately 27% of the Company's investment in
hotels, at cost) under such Credit Facility to fund, in part, the acquisition
of the Initial Hotels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
On a pro forma basis, if the Formation Transactions had been consummated as
of January 1, 1997, the Company's "Funds From Operations" or "FFO" (as defined
herein) for the year ended December 31, 1997 would have been approximately $16
million. See note 10 in "Summary Financial Data." The Company initially intends
to make regular quarterly distributions of $.2375 per share, which, on an
annualized basis, would equal $.95 per share or 9.5% of the Offering Price.
RISK FACTORS
An investment in the Common Shares involves various risks, and investors
should carefully consider the matters discussed under "Risk Factors." The
following risks, among others, may lead to a reduction in the Company's cash
available for distribution to its shareholders:
. the Company's lack of control over the daily operations of the Initial
Hotels due to tax restrictions that prevent REITs from operating hotels
and the Company's dependence on the Lessee to conduct such operations;
. the Company's dependence on the rent payments from the Lessee under the
Percentage Leases for substantially all of the Company's income,
including the risks related to the Lessee's inability to make rent
payments in an amount sufficient to permit the Company to make
distributions to its shareholders;
2
<PAGE>
. the Strategic Partner's capacity to successfully manage rapid growth in
its hotel management operations resulting from its leasing and
management of the Initial Hotels;
. the Company and the Partnership were recently formed, and the Company
and its management have no experience operating as a REIT;
. adverse developments in the business or prospects of the Fairfield Inn
by Marriott franchise brand, under which approximately 90% of the
Initial Hotels operate, which may adversely impact the Company's
revenues from the lease of the 26 Initial Fairfield Inns and its cash
available for distribution to its shareholders;
. conflicts of interest between the Company and certain of its officers
and trustees, who are also officers, directors and stockholders of the
Strategic Partner, including the lack of arm's-length negotiations with
respect to the terms of the Strategic Alliance, the Percentage Leases
and future acquisitions by the Company from the Strategic Partner, which
could lead to decisions that do not solely reflect the interests of the
Company's shareholders;
. tax risks, including taxation of the Company as a corporation if it
fails to qualify as a REIT and the Company's liability for federal and
state taxes on its taxable income in such event, which could reduce
materially the Company's cash available for distribution to its
shareholders;
. risks affecting the real estate or hospitality industries generally,
including the risk that increases in hotel room supply may exceed
increases in room demand and other economic conditions that may
adversely affect the Company's real estate investments and the Lessee's
ability to make lease payments, potential increases in assessed real
estate values or property tax rates, the relative illiquidity of real
estate, uninsured or underinsured losses, and the potential liability
for unknown or future environmental liabilities;
. the risk of potential losses of franchise licenses with respect to the
Initial Hotels and the varying capital requirements of franchisors that
may adversely affect the Company's return on its investment in hotels;
. the absence of a prior market for the Common Shares, the lack of
assurance that an active trading market will develop or that the Common
Shares will trade at or above the initial offering price, and the
potential negative effect of an increase in interest rates on the market
price of the Common Shares; and
. the restriction on ownership of Common Shares and certain other
provisions in the Company's declaration of trust (the "Declaration of
Trust") or the Company's bylaws (the "Bylaws"), may have the effect of
inhibiting a change of control of the Company, even when a change of
control may be beneficial to the Company's shareholders.
BUSINESS AND INVESTMENT STRATEGY
The Company's business strategy is to acquire hotels that the Company
believes are undervalued in prevailing market conditions and that have achieved
stabilized occupancy and average daily rates ("ADR"). The Company believes that
such properties offer the potential for high current rates of return to the
Company, a substantial dividend to the Company's shareholders, and long term
increases in value. At the present time, the Company believes that there are
opportunities to acquire undervalued limited service hotels operating under
nationally recognized franchise brands. The Company will seek to enhance
shareholder value (i) by acquiring additional existing hotels that meet the
Company's investment criteria and (ii) by participating in any increased room
revenue from the Initial Hotels and any subsequently acquired hotels through
the Percentage Leases. The Company believes that the Strategic Alliance will be
an integral part of both the Company's acquisition and internal growth
strategies by providing the Company with (i) a strategic partner that can
assist the Company in identifying and evaluating hotel acquisition
opportunities, (ii) a source of future acquisitions through the Option Hotels
and hotels subsequently owned or developed by the Strategic Partner, and (iii)
an experienced operator and lessee of the Company's hotel properties pursuant
to the Percentage Leases.
3
<PAGE>
THE INITIAL HOTELS
Upon completion of the Formation Transactions, the Company will own 29
existing hotels with 3,558 rooms, including 26 Fairfield Inn by Marriott hotels
with a total of 3,179 rooms and, one Comfort Suites hotel, one Hampton Inn
hotel and one Holiday Inn hotel with a total of 379 rooms. The Company will
acquire the Initial Hotels from two unrelated sellers for approximately $155.1
million in cash (exclusive of the $630,000 in option payments paid by the
Strategic Partner for the Other Initial Hotels). The Initial Hotels have an
average age of approximately nine years and are located in 16 states, with nine
Initial Hotels in the northeastern region, three Initial Hotels in the
southeastern region, 11 Initial Hotels in the midwestern region, and six
Initial Hotels in the western region of the United States. The following table
sets forth certain information with respect to the Initial Hotels:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
PRO FORMA
INCOME FROM 1997
NUMBER HOTEL OPERATIONS PRO FORMA
OF DATE ROOM BEFORE LEASE LEASE
ROOMS OPENED REVENUE PAYMENTS(1) PAYMENT(2) OCCUPANCY ADR(3) REVPAR(4)
------ ------- ----------- ---------------- ----------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FAIRFIELD INN:
NORTHEASTERN REGION
Hartford, CT........... 135 1990 $ 1,936,869 $ 813,931 $ 809,798 78.5% $50.08 $39.31
Wilmington, DE......... 135 1990 2,158,159 1,003,728 1,033,533 76.0 57.62 43.80
Portland, ME........... 120 1991 1,935,249 889,093 886,226 78.8 56.09 44.18
Buffalo, NY............ 135 1991 1,628,936 607,919 650,540 72.3 45.74 33.06
Syracuse, NY........... 135 1990 1,824,127 740,962 753,282 76.0 48.71 37.02
Harrisburg, PA......... 105 1990 1,139,992 337,163 339,729 69.6 42.76 29.75
Warrendale
(Metropolitan
Pittsburgh), PA....... 105 1991 1,608,608 748,036 730,894 76.9 54.60 41.97
SOUTHEASTERN REGION
Winter Park (Orlando),
FL.................... 135 1990 1,951,985 751,303 782,433 83.9 47.21 39.61
Rocky Mount, NC........ 104 1990 1,357,700 513,098 506,563 87.8 40.75 35.77
Chattanooga, TN........ 105 1991 1,437,419 533,053 529,671 74.6 50.25 37.51
MIDWESTERN REGION
Glenview (Metropolitan
Chicago), IL.......... 138 1990 2,205,956 1,008,581 1,059,793 80.7 54.26 43.80
Willowbrook
(Metropolitan
Chicago), IL.......... 129 1990 2,110,276 1,070,119 1,025,436 85.2 52.58 44.82
Fort Wayne, IN......... 105 1990 1,396,179 557,588 525,307 73.7 49.42 36.43
Cedar Rapids, IA....... 105 1990 1,321,734 489,551 520,177 73.5 46.90 34.49
Florence (Metropolitan
Cincinnati), KY....... 135 1990 1,742,502 692,965 740,774 72.1 49.03 35.36
Louisville, KY......... 105 1991 1,596,667 663,823 692,980 77.4 53.85 41.66
Akron, OH.............. 117 1990 1,353,518 577,559 554,190 63.8 49.69 31.69
Sharonville, OH........ 135 1990 1,619,251 614,635 629,821 67.4 48.73 32.86
Columbus, OH........... 105 1990 1,438,786 473,921 515,286 80.2 46.80 37.54
Willoughby
(Metropolitan
Cleveland), OH........ 134 1990 2,000,130 970,575 955,776 78.7 51.95 40.89
WESTERN REGION
Flagstaff, AZ.......... 135 1990 1,676,678 569,129 649,388 64.6 52.63 34.03
Phoenix West, AZ....... 126 1987 1,637,454 556,573 621,714 63.0 56.47 35.60
Scottsdale, AZ......... 133 1990 2,367,906 1,198,239 1,239,585 77.7 62.74 48.78
Ontario, CA............ 117 1990 1,521,932 526,531 526,284 80.6 44.20 35.64
Rancho Cordova, CA..... 117 1990 1,703,051 736,865 787,763 76.1 52.43 39.88
Las Vegas, NV.......... 129 1990 2,209,344 1,073,206 997,719 72.7 64.54 46.92
COMFORT SUITES:
Cheektowaga
(Metropolitan
Buffalo), NY.......... 100 1993 2,096,973 998,487 984,396 83.2 69.05 57.45
HAMPTON INN:
Cheektowaga
(Metropolitan
Buffalo), NY.......... 133 1995 2,782,451 1,409,316 1,378,150 81.3 70.52 57.32
HOLIDAY INN:
Cleveland, OH.......... 146 1968/91(5) 3,153,900 1,297,160 1,442,007 84.4 70.09 59.18
----- ----------- ----------- -----------
Consolidated
Totals/Weighted
Average............... 3,558 $52,913,732 $22,423,109 $22,869,215 76.2% $53.46 $40.75
</TABLE>
4
<PAGE>
- --------
(1) Represents pro forma income from hotel operations exclusive of real estate
and personal property taxes, property and casualty insurance and ground
lease payments (all of which will become the responsibility of the
Company), assuming the Formation Transactions occurred January 1, 1997.
Does not reflect corporate overhead expenses for the Lessee or the
Strategic Partner. Certain unallocated repairs and maintenance expenses for
1997 under the seller's accounting policies for the combined Initial
Fairfield Inns, totalling $1,213,000, were allocated to each property based
on its proportionate share of room revenues.
(2) Represents pro forma lease payments from the Lessee to the Partnership
calculated by applying the rent provisions in the Percentage Leases to the
historical room revenue of the Initial Hotels as if January 1, 1997 were
the beginning of the lease year.
(3) Determined by dividing room revenue by occupied rooms.
(4) Determined by dividing room revenue by available rooms.
(5) Originally opened in 1968, and substantially renovated in 1991.
THE HOTEL INDUSTRY
According to Smith Travel Research, the United States lodging industry is
continuing to experience a significant recovery from an extended downturn in
the late 1980's and early 1990's. The Company believes that this broad industry
recovery will contribute to the growth in total revenues and REVPAR at the
Initial Hotels (and hotels subsequently acquired by the Company) which, through
the Percentage Leases, will result in increases in the Company's cash available
for distribution.
As reflected in the chart below, demand growth has been strong in the hotel
industry as a whole. In the strong economy since 1995, demand for midscale
hotels with food and beverage operations declined from year to year, and the
10-year compound annual growth rate for such hotels was a nominal 0.2%.
Conversely, demand in the Midscale without Food & Beverage sector, the sector
currently targeted by the Company, grew at a compound annual growth rate of
15.2% over the past 10 years. The Company believes this difference in growth is
due to a shift in consumer preferences and the capturing of market share by the
limited service product.
PERCENT CHANGE IN DEMAND OVER PRIOR YEAR
<TABLE>
<CAPTION>
FIRST
QUARTER
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All U.S. Hotels......... 4.2% 4.9% 2.0% (1.4)% 2.0% 1.7% 3.0% 1.8% 2.2% 2.6% 3.4%
Midscale with Food &
Beverage............... 1.8 1.6 (1.1) (2.6) 2.1 1.3 1.7 (0.7) (1.3) (0.9) 0.0
Midscale without Food &
Beverage............... 28.1 21.7 15.3 12.9 11.1 10.2 13.5 12.9 12.9 14.4 14.0
</TABLE>
- --------
Source: Smith Travel Research
As a result of the strong growth in demand since 1988, the Midscale without
Food and Beverage sector has enjoyed annual increases in ADR and REVPAR and
occupancy levels have remained above 65%. As a result of these strong operating
statistics, this sector has achieved gross operating profits of 40% or more
since 1990. (Source: Smith Travel Research). Management believes these
favorable operating indicators, results and profitability fit the Company's
investment criteria. See "Business and Properties--The Hotel Industry."
Smith Travel Research has not provided any form of consultation, advice or
counsel regarding any aspects of, and is in no way whatsoever associated with,
this Offering.
5
<PAGE>
GROWTH STRATEGY
The Company's primary objective is to enhance shareholder value by increasing
cash flow and distributions per share and working to increase the long term
value of the Common Shares by implementing its acquisition and internal growth
strategies.
ACQUISITION STRATEGY
The Company intends to acquire additional existing hotel properties
throughout the United States that the Company believes are undervalued in
current market conditions and that have achieved stabilized occupancy and ADR.
The Company believes that such properties offer the potential for high current
rates of return to the Company, a substantial dividend to the Company's
shareholders and long term increases in value. The Company initially intends to
focus on the acquisition of limited service hotel properties (i) with
stabilized occupancy and ADR, (ii) that can be acquired at prices that are
accretive to FFO per share and (iii) that operate under strong, national
franchise affiliations, such as the Fairfield Inn by Marriott and Hampton Inn
brands.
The Company believes that a substantial number of existing hotel properties
that meet its investment criteria are available at attractive prices. According
to the Smith Travel Research 1997 Host Study, there were 926,634 rooms
(approximately 27% of all hotel rooms in the United States) in hotels
classified as midscale chain hotels without food and beverage and economy and
budget chain hotels.
The Company has received commitments from Capital America for the $125
million Credit Facility. Concurrently with the completion of the Offering, the
Company expects to incur approximately $42.6 million of indebtedness under the
Credit Facility (representing approximately 27% of the Company's investment in
the Initial Hotels, at cost) to fund, in part, the acquisition of the Initial
Hotels. The Board of Trustees expects to adopt a policy to limit the
consolidated indebtedness of the Company to approximately 50% of the Company's
investment in hotel properties, valued at undepreciated total cost (the "Debt
Policy"). However, the Company's organizational documents do not limit the
amount of indebtedness that the Company may incur, and the Company's Board of
Trustees may modify the Debt Policy at any time without approval of the
shareholders. The Company intends to repay indebtedness incurred under the
Credit Facility and any other borrowings from time to time, for acquisitions or
otherwise, out of cash flow and from the proceeds of issuances of Common Shares
and other securities of the Company. See "Risk Factors--Potential Adverse
Effects of Leverage and Lack of Limits on Indebtedness," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," and "Policies and Objectives with Respect to
Certain Activities--Investment Policies" and "--Financing."
INTERNAL GROWTH STRATEGY
The Percentage Leases are designed to allow the Company to participate in
growth in revenues at the Initial Hotels and to provide an incentive for the
Lessee to exceed a target level of revenue. The Percentage Leases provide that
a percentage of room revenues in specified ranges will be paid as Percentage
Rent (as defined herein). The percentage of room revenues paid as Percentage
Rent will increase as a higher specified range of room revenues is achieved up
to a target revenue amount, which is above historical and projected
performance, at which point the percentage of room revenue paid as Percentage
Rent will decrease. Pursuant to the Percentage Leases, the ranges of room
revenues specified for purposes of calculating Percentage Rent will be adjusted
upward for inflation under a formula based on annual increases in the United
States Consumer Price Index. See "The Initial Hotels--The Percentage Leases."
The Lessee will use established systems to manage and seek to increase revenues
at the Initial Hotels, including detailed business and marketing plans and
operating budgets for each Initial Hotel. The Lessee will employ a mix of
marketing techniques designed for each specific hotel, which may include a toll
free reservation number designated for that hotel, direct corporate sales
efforts, and billboard advertising to further capitalize on Fairfield Inn's and
other franchisors' reputations, national advertising,
6
<PAGE>
nationwide toll free reservation numbers and other marketing efforts. The
Percentage Leases require the Company to fund capital expenditures to regularly
maintain and upgrade its hotels. The Company expects that such capital
expenditures on the Initial Hotels will be approximately 5% of total revenues
at the Initial Hotels on an annual basis. Management believes that regular
maintenance and upgrading are essential to establishing strong customer
satisfaction and consistently favorable occupancy levels and ADR.
Consolidated REVPAR for the Initial Hotels has increased each year since 1993
and increased at a 5.0% compound annual growth rate from 1993 to 1997.
Management believes that the year-to-year growth in REVPAR since 1993 reflects
the increasing popularity of and demand for limited service hotels in general,
and Fairfield Inn hotels in particular, improving hotel industry conditions
since 1990, an improving economy, marketing practices at the Initial Hotels,
and regular expenditures to maintain and upgrade the Initial Hotels.
THE STRATEGIC ALLIANCE
The Company believes its operating and growth strategies will benefit from
its alliance with the Strategic Partner. The Strategic Partner is an owner and
operator of hotel properties, and its common stock is traded on the Nasdaq
Stock Market under the symbol "HUDS." The Strategic Partner was organized in
1987 to develop and franchise a national chain of economy, limited service
lodging facilities operating under the name Microtel(R), which offer downsized
rooms with high quality furnishings at rates below those available at competing
national budget chains. In 1992, the Strategic Partner acquired Hudson Hotels
Corporation, a hotel management and development company. In 1995, the Strategic
Partner signed an exclusive Joint Venture Agreement (the "Joint Venture
Agreement") with U.S. Franchise Systems, Inc., pursuant to which U.S. Franchise
Systems, Inc. purchased worldwide franchising and administration rights for the
Microtel franchise chain. Since entering the Joint Venture Agreement, the
Strategic Partner has focused its efforts on acquiring, managing and developing
various hotel properties, including Microtels.
During 1996, the Strategic Partner began a significant expansion program,
which included the acquisition of the Option Hotels and development of six
Microtel Inns. As of July 1, 1998, the Strategic Partner managed 40 hotel
properties with 4,474 rooms primarily in the northeastern and southeastern
United States, including Fairfield Inn, Hampton Inn, Comfort Inn and Microtel
Inn hotels. Of the 40 hotel properties that the Strategic Partner manages, 25
are owned by the Strategic Partner. After completion of the Formation
Transactions, the Strategic Partner and its subsidiaries will manage 69 hotel
properties, including the 29 Initial Hotels owned by the Company.
Pursuant to the Strategic Alliance, the Company will have the option, for a
period of two years from the closing of the Offering, and right of first
refusal to acquire the 25 Option Hotels from the Strategic Partner. The Option
Hotels currently are owned by special purpose subsidiaries of the Strategic
Partner formed to undertake a collateralized mortgage backed securities
financing (the "CMBS Debt"), which is collateralized by mortgage loans secured
by the Option Hotels. The CMBS Debt agreements prohibit the repayment of such
debt or the transfer of the Option Hotels at this time. See "The Company--The
Strategic Alliance."
For as long as the Strategic Alliance is in effect, the Company will also
have a two-year option and a right of first refusal to acquire any hotel
property developed by the Strategic Partner or its Affiliates. The Company may
exercise its option to purchase any developed hotel within two years of the
opening of such hotel at a price equal to 105% of the Strategic Partner's
undepreciated development cost of such property. The Company does not expect to
exercise its option to acquire a developed hotel if the purchase price exceeds
the hotel's fair market value. The Company believes that new hotels developed
by the Strategic Partner will provide the Company opportunities to acquire well
constructed, well positioned and competitively priced hotels, without the
investment and construction risks associated with new hotel development. The
Company currently anticipates that a property developed by the Strategic
Partner will have achieved stabilized operations and cash flows before the
Company would consider purchasing such property. See "Policies and Objectives
With Respect to Certain Activities--Investment Policies."
7
<PAGE>
The Lessee will lease and operate the Initial Hotels and the Option Hotels,
if acquired, and any other hotels acquired by the Company from the Strategic
Partner under Percentage Leases, and the Company's right to purchase the Option
Hotels and such other hotels is subject to entering into satisfactory lease
agreements with the Lessee. In addition, during the term of the Strategic
Alliance, the Lessee will have a right of first offer to lease any hotel
acquired by the Company that is not acquired subject to a condition that a
specified party continue as the manager or lessee of the hotel. The Strategic
Partner will guarantee in full the Lessee's rent obligations under the
Percentage Leases. See "The Strategic Partner and the Lessee." The Strategic
Alliance will have an initial term of ten years from the date of the Offering.
The Company has certain rights to terminate the Strategic Alliance and the
Percentage Leases in the event of a change in control of the Strategic Partner
or the Lessee without the consent of the Company.
FORMATION TRANSACTIONS
The principal transactions in connection with the formation of the Company
and the acquisition of the Initial Hotels (the "Formation Transactions") are as
follows:
. In April 1998, the Company and the Partnership were formed as a Maryland
real estate investment trust and a Virginia limited partnership,
respectively.
. In May 1998, the Partnership issued 67,742 units of limited partnership
interest in the Partnership ("Units") to the Strategic Partner in
exchange for the assignment to the Partnership of an option to purchase
the Other Initial Hotels. Such Units will represent 0.5% of the total
outstanding Units following the closing of the Offering. The Strategic
Partner paid $630,000 in option payments in connection with obtaining
the option to acquire the Other Initial Hotels, which amount will be
credited to the purchase price of such hotels. The Units are redeemable,
at the option of the Strategic Partner, beginning on the first
anniversary of the closing of the Offering for Common Shares on a one-
for-one basis, or at the option of the Company, for cash.
. In May 1998, the Partnership borrowed $1.2 million from the Strategic
Partner (the "Strategic Partner Loan") to fund certain earnest money
deposits in connection with the acquisition of the Initial Hotels.
Interest on the Strategic Partner Loan accrues at a rate of 12% per
annum and the Company expects to repay the Strategic Partner Loan in
full with the proceeds of the Offering.
. In May 1998, the Partnership borrowed an aggregate of $4 million from
two individuals (the "Pre-Offering Debt"), including $2 million borrowed
from a partnership in which one of the Independent Trustees is a
partner, to fund certain earnest money deposits and other expenses in
connection with the Offering and the acquisition of the Initial Hotels.
Interest on the Pre-Offering Debt accrues at a rate of 12% per annum,
and the Company expects to repay the Pre-Offering Debt in full with a
portion of the net proceeds of the Offering. In addition, the Company
will pay approximately $850,000 to the Strategic Partner to cover
expenses incurred by the Strategic Partner in connection with the Pre-
Offering Debt.
. The Company will sell 12,500,000 Common Shares in the Offering and will
contribute all of the net proceeds from the Offering to the Partnership
in exchange for a 1% general partnership interest and a 98.5% limited
partnership interest in the Partnership to be held by HHT Ltd., a
wholly-owned subsidiary of the Company. The Company is the sole general
partner of the Partnership, and HHT Ltd. and the Strategic Partner will
be the initial limited partners of the Partnership.
. The Partnership will use the net proceeds of the Offering, together with
approximately $42.6 million of borrowings under the Credit Facility to
acquire the 29 Initial Hotels concurrently with the closing of the
Offering from two sellers unaffiliated with the Company for total
acquisition costs of $155.1 million in cash (exclusive of the $630,000
in option payments paid by the Strategic Partner for the Other Initial
Hotels as described above), including the repayment in full of the
Strategic Partner Loan and the Pre-Offering Debt, and to pay expenses
incurred in connection with the Offering and the acquisition of the
Initial Hotels.
8
<PAGE>
. The Company and the Strategic Partner will enter into the Strategic
Alliance concurrently with the closing of the Offering, pursuant to
which (i) the Strategic Partner will grant the Company an option and
right of first refusal to purchase the Option Hotels and any hotel
developed by the Strategic Partner during the term of the Strategic
Alliance, (ii) the Strategic Partner will grant the Company a right of
first opportunity to purchase any hotel identified for acquisition by
the Strategic Partner, and (iii) the Strategic Partner will have a right
of first offer to lease any hotel acquired by the Company that is not
purchased subject to a condition that a specified party serve as the
lessee or manager.
. In order for the Company to qualify as a REIT, neither the Company nor
the Partnership can operate the Initial Hotels. Therefore, the
Partnership will lease each Initial Hotel to the Lessee for a term of
seven years pursuant to a Percentage Lease that provides for rent equal
to the greater of fixed annual base rent ("Base Rent") or a percentage
of gross revenues of each hotel ("Percentage Rent"). In addition, the
Strategic Partner will guarantee in full the rent payments to the
Company under the Percentage Leases. The Lessee will hold the franchise
license for each Initial Hotel. The Strategic Partner is discussing
entering into an agreement with the current manager of the 26 Initial
Fairfield Inns, pursuant to which such manager would provide
transitional management services with respect to some or all of the
Initial Fairfield Inns on an interim basis which the Company does not
expect to extend beyond December 31, 1998.
. Concurrently with the completion of the Offering, the Company will issue
an aggregate of 45,000 Common Shares to officers and 14,000 Common
Shares to the Independent Trustees, of the Company and will grant to
officers and Trustees of the Company options to purchase an aggregate of
1,660,000 Common Shares at an exercise price per share equal to the
Offering Price. Twenty percent of such shares and options will vest
immediately and 80% will vest at various times during the five year
period following completion of the Offering.
9
<PAGE>
Following consummation of the Formation Transactions, the structure and
relationships of the Company, the Partnership, the Initial Hotels and the
Strategic Partner will be as follows:
[CHART SHOWING STRUCTURE AND RELATIONSHIPS OF THE COMPANY, THE PARTNERSHIP, THE
INITIAL HOTELS AND THE STRATEGIC PARTNER APPEARS HERE]
BENEFITS TO RELATED PARTIES
RECEIPT OF UNITS BY THE STRATEGIC PARTNER
Prior to the Offering, the Strategic Partner received 67,742 Units from the
Partnership in consideration for its assignment to the Partnership of its
option to purchase three of the Initial Hotels. These Units will represent
approximately 0.5% of the partnership interests in the Partnership immediately
following the completion of the Offering and will have a total value of
approximately $677,420, based on the Offering Price, as compared to the
$630,000 that the Strategic Partner actually paid for such option. As of the
first anniversary of the Offering, these Units are redeemable at the option of
the Strategic Partner for Common Shares, or at the option of the Company, for
cash, on a one-for-one basis in accordance with the terms of the Partnership
Agreement. See "Partnership Agreement--Redemption Rights."
THE PRE-OFFERING DEBT
Richard Sands will become a member of the Company's Board of Trustees upon
completion of the Offering. A partnership in which Mr. Sands is a general
partner (the "Sands Partnership"), loaned the Company $2 million of the Pre-
Offering Debt. The Pre-Offering Debt, including the portion loaned by the Sands
Partnership, bears interest at a per annum rate of 12% and will be repaid with
the net proceeds of the Offering. In connection with the funding of the Pre-
Offering Debt, the Strategic Partner issued to the Sands Partnership warrants
to purchase 250,000 shares of common stock of the Strategic Partner at a
purchase price of $4.00 per share, which was the approximate market price of
the Strategic Partner's common stock at the time of issuance of such warrants.
10
<PAGE>
PAYMENT TO THE STRATEGIC PARTNER
Prior to the Offering, the Strategic Partner incurred expenses related to
warrants issued by the Strategic Partner in connection with the Pre-Offering
Debt, which was incurred to fund expenses associated with the Offering and the
Company's acquisition of the Initial Hotels. The Company will pay the Strategic
Partner $850,000 from the proceeds of the Offering as reimbursement for such
expenses.
ISSUANCE OF SHARES AND GRANTS OF OPTIONS TO OFFICERS AND TRUSTEES
Concurrently with the completion of the Offering, the Company will issue an
aggregate of 45,000 Common Shares to officers of the Company, 14,000 Common
Shares to the Independent Trustees, and will grant to officers and Trustees of
the Company options to purchase an aggregate of 1,660,000 Common Shares at an
exercise price per share equal to the Offering Price. Twenty percent of such
shares and options will vest immediately and 80% will vest at various times
during the five year period following completion of the Offering, and with
respect to the options, upon achievement of certain incentive-based criteria.
See "Management--Executive Compensation."
POLICIES WITH RESPECT TO CONFLICTS OF INTEREST
The Company will be subject to certain conflicts of interest resulting from
its relationship with the Strategic Partner and Lessee. Specifically, the
senior officers of the Company will also be senior officers of the Strategic
Partner and will thus be subject to conflicting fiduciary duties when
negotiating between those entities. In addition, certain officers of the
Company own equity interests in the Strategic Partner and their fiduciary duty
to the Company may be in conflict with their pecuniary interest in the
Strategic Partner. As a result, the terms of negotiations and agreements
between the Company and the Strategic Partner may not soley reflect the
interests of the Company's shareholders. See "The Strategic Partner and the
Lessee" and "Risk Factors - Conflict of Interest." The Company has entered into
the Strategic Alliance and is subject to provisions of its governing
instruments and Maryland law that address those conflicts. See "Policies and
Objectives With Respect to Certain Activities--Conflict of Interest Policies."
All transactions between the Company and the Strategic Partner, the Lessee or
its Affiliates must be approved by a majority of the Company's "Independent
Trustees." An "Independent Trustee" is a Trustee of the Company who is not an
officer or employee of the Company, the Strategic Partner, the Lessee or any
Affiliate of those entities. See "Management."
DISTRIBUTION POLICY
The Company intends to make regular quarterly distributions to holders of the
Common Shares initially equal to $.2375 per share, which on an annualized basis
would be equal to $.95 per share, or 9.5% of the Offering Price. The first
distribution, for the period from the closing of the Offering to September 30,
1998, is expected to be a pro rata distribution of the anticipated initial
quarterly distribution. Based on the Company's pro forma statements of
operations for the twelve months ended March 31, 1998, such distributions would
represent approximately 87% of the Company's cash available for distribution
and the Company estimates that approximately 2% of the anticipated initial
annual distribution to shareholders would represent a return of capital for
federal income tax purposes. See "Distribution Policy" for information
regarding the basis for determining the initial distribution rate. The Company
believes that the pro forma financial information constitutes a reasonable
basis for setting the initial distribution rate. The Board of Trustees will
determine the actual distribution rate based on the Company's actual results of
operations, economic conditions and other factors. The Company does not expect
to adjust the initial distribution rate if the Underwriters' over-allotment
option is exercised. See "Partnership Agreement" and "Distribution Policy."
TAX STATUS
The Company intends to make an election to be taxed as a REIT under Sections
856-860 of the Internal Revenue Code of 1986, as amended, (the "Code")
commencing with its taxable year ending December 31, 1998. If the Company
qualifies for taxation as a REIT, with certain exceptions, the Company will not
be taxed at the
11
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corporate level on its taxable income that is distributed currently to the
shareholders of the Company. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 95% of its taxable income. Failure to qualify as a REIT
will render the Company subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
distributions to the shareholders in any such year will not be deductible by
the Company. Although the Company does not intend to request a ruling from the
Internal Revenue Service (the "Service") with respect to its REIT status, the
Company has obtained the opinion of its legal counsel, Hunton & Williams, based
on certain assumptions and representations described in "Federal Income Tax
Considerations," that the Company has been organized in conformity with the
requirements for qualification as a REIT beginning with the taxable year ending
December 31, 1998, and that its proposed method of operation as represented to
its counsel and as described herein will enable it to satisfy the requirements
of such qualification. Investors should be aware, however, that opinions of
counsel are not binding on the Service or any court. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to certain state
and local taxes on its income and property. In connection with the Company's
election to be taxed as a REIT, the Company's Declaration of Trust and Bylaws
impose restrictions on the ownership and transfer of Common Shares. The Company
intends to adopt the calendar year as its taxable year. See "Risk Factors--Tax
Risks," "--Anti-Takeover Effect of Ownership Limit, Staggered Board, Power To
Issue Additional Shares and Certain Provisions of Maryland Law," "Federal
Income Tax Considerations--Taxation of the Company" and "Description of Shares
of Beneficial Interest--Restrictions on Ownership and Transfer."
THE OFFERING
<TABLE>
<C> <S>
Common Shares offered by the Company.......................... 12,500,000 Common Shares
Common Shares and Units to be outstanding after the Offering.. 12,626,742 Common
Shares(1)
Use of Proceeds............................................... To pay a portion of the
purchase price for the
Initial Hotels and to
repay in full the
Strategic Partner Debt
and the Pre-Offering
Debt
Proposed New York Stock Exchange Symbol....................... "HHT"
</TABLE>
- --------
(1) Includes 12,500,000 Common Shares to be sold in the Offering; an aggregate
of 14,000 restricted Common Shares to be issued to four trustees in
consideration of their service on the Board of Trustees; an aggregate of
45,000 restricted Common Shares to be issued to officers of the Company in
consideration for their service to the Company; and 67,742 Units issued to
the Strategic Partner prior to the Offering in connection with the transfer
to the Company of an option to acquire three of the Initial Hotels.
Excludes 1,900,000 Common Shares reserved for issuance pursuant to the
Company's Trustee Plan and 1998 Share Incentive Plan. Options to purchase
1,660,000 Common Shares at the Offering Price will be granted to certain of
the Company's officers and to the Trustees concurrently with the closing of
the Offering. See "Formation Transactions" and "Management--Executive
Compensation" and "--Compensation of Trustees."
12
<PAGE>
SUMMARY FINANCIAL DATA
The following tables set forth summary unaudited pro forma consolidated
financial information for the Company, and summary combined audited and
historical unaudited pro forma financial information for the combined Initial
Hotels. Such data should be read in conjunction with the financial statements
and the notes thereto contained elsewhere in this Prospectus. The pro forma
operating information for the Company is presented as if the consummation of
the Formation Transactions had occurred as of January 1, 1997. The pro forma
balance sheet data for the Company is presented as if the consummation of the
Offering and the Formation Transactions had occurred on March 31, 1998.
HUDSON HOTELS TRUST
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA (1)(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
PRO FORMA MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1997 1997 1998
----------------- --------- ---------
<S> <C> <C> <C>
OPERATING DATA:
Percentage lease revenue(3)........... $ 22,869 $ 5,236 $ 5,540
Depreciation and amortization(4)...... 5,341 1,335 1,335
Real estate and personal property
taxes and property insurance(5)...... 2,646 662 628
General and administrative(6)......... 600 150 150
Interest expense(7)................... 3,193 798 798
Ground lease.......................... 323 81 81
-------- --------- ---------
Total expenses........................ 12,103 3,026 2,992
Minority interest(8).................. 54 11 13
Net income applicable to holders of
common shares........................ $ 10,712 $ 2,199 $ 2,535
======== ========= =========
Earnings per common share(9).......... $ .85 $ .18 $ .20
======== ========= =========
Weighted average number of common
shares outstanding................... 12,559 12,559 12,559
<CAPTION>
PRO FORMA
MARCH 31, 1998
-----------------
<S> <C>
BALANCE SHEET DATA:
Net investment in hotel properties.... $155,770
Shareholders' equity.................. 113,900
Total assets.......................... 157,405
Total debt............................ 42,575
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
PRO FORMA MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1997 1997 1998
----------------- --------- ---------
<S> <C> <C> <C>
OTHER DATA:
Funds from operations(10)............. $ 15,975 $ 3,510 $ 3,848
Net cash provided by operating
activities........................... 16,107 3,545 3,883
Net cash (used in) investing
activities(11)....................... (2,646) (588) (622)
Net cash (used in) financing
activities(12)....................... (11,931) (2,983) (2,983)
</TABLE>
(notes on following page)
13
<PAGE>
THE COMBINED INITIAL HOTELS
SUMMARY COMBINED HISTORICAL OPERATING AND FINANCIAL DATA (13)
(IN THOUSANDS--EXCEPT OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,(16)
----------------------------------- -----------------------------------
PRO FORMA PRO FORMA PRO FORMA
1995 1996 1997 1997 1997 1997 1998 1998
------- ------- ------- ----------- ------- --------- ------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Room revenue............ $48,300 $51,252 $52,913 $52,913 $11,760 $11,760 $12,436 $12,436
Other revenue........... 3,328 3,483 3,422 3,422 850 850 889 889
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........... 51,628 54,735 56,335 56,335 12,610 12,610 13,325 13,325
Hotel operating
expenses(14)........... 34,547 37,126 39,195 33,912 9,083 7,865 9,400 8,391
Lease payment(3)........ -- -- -- 22,869 -- 5,236 -- 5,540
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from hotel
operations(15)......... 17,081 17,609 17,140 (446) 3,527 (491) 3,925 (606)
OPERATING DATA:
Occupancy............... 76.0% 77.3% 76.2% 71.7% 71.5%
ADR..................... $49.27 $50.94 $53.46 $51.23 $54.31
REVPAR.................. $37.44 $39.36 $40.75 $36.72 $38.82
</TABLE>
- --------
(1) The pro forma information does not purport to represent what the Company's
financial position or results of operations would actually have been if
the consummation of the Formation 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. The summary unaudited pro forma financial and
other data of the Company do not include a material non-recurring charge
of $850 paid to the Strategic Partner to cover expenses incurred by the
Strategic Partner in connection with the Pre-Offering Debt. The Company
intends that such payment will be paid and expensed out of the Offering
proceeds.
(2) The pro forma information is presented as if the Partnership recorded
depreciation and amortization, paid interest on debt incurred in the
Formation Transactions, and paid real and personal property taxes and
property insurance as contemplated by the Percentage Leases.
(3) Represents lease payments from the Lessee to the Company and is calculated
on a pro forma basis by applying the rent provisions in the Percentage
Leases to the historical room revenue of the Initial Hotels for the period
indicated.
(4) Represents depreciation on the Initial Hotels, amortization of capitalized
franchise fees and amortization of stock compensation expense.
Depreciation is computed based upon estimated useful lives of 39.5 and
seven years for buildings and improvements and furniture and equipment,
respectively. Franchise fees are amortized over 10 years. Stock
compensation is amortized over the five year vesting period. These
estimated useful lives are based on management's knowledge of the
properties and the hotel industry in general.
(5) Represents real estate and personal property taxes and property and
casualty insurance to be paid by the Company.
(6) Estimated at $150 per quarter for compensation, legal, audit and other
expenses. The Strategic Partner has agreed to reimburse the Company for
general and administrative expenses in excess of $150 per quarter for the
remainder of 1998.
(7) Based on an assumed annual interest rate on the Line of Credit of 7.5% for
each period presented.
(8) Calculated at 0.5% of the Partnership's net income.
(9) Pro forma earnings per Common Share is computed by dividing net income
applicable to the holders of Common Shares by the pro forma weighted
average number of Common Shares outstanding. The exchange of Units for
Common Shares will have no effect on diluted pro forma earnings per Common
Share as Unit holders and shareholders effectively share equally in the
net income of the Partnership on a per Common Share and per Unit basis.
14
<PAGE>
(10) Funds from Operations ("Funds from Operations" or "FFO"), as defined by
the National Association of Real Estate Investment Trusts ("NAREIT"),
represents net income applicable to common shareholders (computed in
accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of property (including
furniture and equipment), plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs), and
after adjustments for unconsolidated partnerships and joint ventures.
Funds from Operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles, is
not necessarily indicative of cash flow available to fund cash needs and
should not be considered as an alternative to net income as an indication
of performance or to cash flow as a measure of liquidity. The Company
considers FFO to be an appropriate measure of the performance of an equity
REIT in that such calculation is a measure used by the Company to evaluate
its performance against its peer group and is a basis for making the
determination as to the allocation of its resources and reflects the
Company's ability to meet general operating expenses. Although Funds from
Operations has been computed in accordance with the current NAREIT
definition, Funds from Operations as presented may not be comparable to
other similarly titled measures used by other REITs. Funds from Operations
does not reflect cash expenditures for capital improvements or principal
amortization of indebtedness on the Initial Hotels. Under the Percentage
Leases, the Partnership will be obligated to fund capital expenditures
with respect to the Initial Hotels, which the Company anticipates will
approximate 5% of room revenues at the Initial Hotels. In addition, the
Partnership will be obligated under the Percentage Leases to maintain the
underground utilities and structural elements of the Initial Hotels. FFO
has been calculated as follows:
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA THREE MONTHS ENDED-
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------
1997 1997 1998
------------ --------- ---------
<S> <C> <C> <C>
Pro forma income before minority
interest............................... $10,766 $ 2,210 $ 2,548
Pro forma depreciation.................. 5,209 1,300 1,300
------- --------- ---------
Pro forma Funds from Operations......... $15,975 $ 3,510 $ 3,848
======= ========= =========
</TABLE>
Under the Percentage Leases, the Partnership will be obligated to fund
capital expenditures with respect to the Initial Hotels, which the Company
anticipates will approximate 5% of room revenues at the Initial Hotels on
an annual basis. In addition, the Partnership will be obligated under the
Percentage Leases to maintain the underground utilities and structural
elements of the Initial Hotels. See "Business and Properties--The
Percentage Leases".
(11) Represents capital expenditures for the Initial Hotels based on 5% of room
revenues as described in Note 10 above.
(12) Represents estimated initial distributions to be paid based on the
estimated initial annual distribution rate of $0.95 per share and
12,559,000 Common Shares outstanding for the year ended December 31, 1997.
(13) The Initial Hotel data is derived by adding the selected combined
historical financial data of (i) the 26 Initial Fairfield Inns to be
acquired from MFI Partners, Limited Partnership, and (ii) the Other
Initial Hotels, consisting of one Hampton Inn hotel, one Comfort Suites
hotel and one Holiday Inn hotel. The 26 Initial Fairfield Inns were owned
and managed by entities other than MFI Partners prior to August 5, 1994;
therefore, the Company believes that the financial information for the
hotels for the periods prior to the year ended December 31, 1995 is not
comparable, and thus is not relevant to the financial information for
subsequent periods.
(14) For historical periods, represents departmental costs and expenses,
general and administrative, repairs and maintenance, utilities, marketing,
management fees, real estate and personal property taxes, property and
casualty insurance and ground leases. The pro forma amounts exclude real
estate and personal property taxes, property and casualty insurance,
ground leases (all of which will be the responsibility of the Company) and
management fees paid by the sellers to the managers of the Initial Hotels,
which management may be terminated following completion of the Offering
and the Formation Transactions. Does not include corporate overhead
expenses for the Lessee or the Strategic Partner.
(15) Income (loss) from hotel operations represents earnings before interest,
taxes, depreciation and amortization from the Initial Hotels, and should
not be considered an alternative to net income as an indicator of
operating performance or to cash flow as a measure of liquidity. The line
item Income (loss) from hotel operations is the presentation that most
closely represents the operations of the Lessee after the completion of
the Formation Transactions.
(16) For information reflecting interim period Percentage Lease revenue under
recently released FASB EITF 98-9, see "Prospectus Summary--Recent
Developments."
15
<PAGE>
RECENT DEVELOPMENTS
Recently, the Financial Accounting Standards Board Emerging Issues Task Force
("EITF") released Issue No. 98-9 entitled "Accounting for Contingent Rent in
Interim Financial Periods" ("EITF 98-9"). The consensus of the EITF in EITF 98-
9 is that a lessor should defer recognition of contingent rental income in
interim periods until a specified revenue target that triggers the contingent
rental income is achieved.
Pursuant to the Percentage Leases, Percentage Rent will be payable by the
Lessee quarterly and will be determined utilizing the annual hotel room revenue
thresholds described herein under "The Initial Hotels--The Percentage Leases,"
divided by four to obtain quarterly hotel room revenue thresholds to which the
Percentage Lease rent formulas are applied. Pursuant to the Percentage Leases,
beginning with the second calendar quarter each year, the quarterly Percentage
Rent calculations will be determined and Percentage Rent will be paid using the
quarterly room revenue thresholds on a cumulative year-to-date basis to the
effect that the annual rent paid under the Percentage Leases will be the amount
determined under the annual Percentage Lease rent formulas described herein.
The effect of EITF 98-9 could be to defer the Company's recognition of
Percentage Lease revenue for accounting purposes in interim quarterly periods
until annual year-to-date hotel room revenues reach the threshold levels
described herein. EITF 98-9 would not affect the Lessee's rent payments or the
Company's receipt of Percentage Rent under the Percentage Leases. The Company
is discussing with its independent accountants the applicability of EITF 98-9
to the Company. If it is determined that EITF 98-9 requires the Company to
defer recognition of Percentage Rent received in interim quarterly periods, the
Company will report its Percentage Lease revenue in accordance with EITF 98-9
but may request that the Lessee agree to amend the rent provisions of the
Percentage Leases for the Initial Hotels in such a way as to leave the rent
payments by the Lessee unchanged but to permit accounting recognition of
Percentage Lease revenues in interim periods in a manner which more closely
follows the Company's receipt of the rent payments.
Under EITF 98-9, and assuming no adjustments to the Percentage Leases, for
the first quarter of 1997 and 1998, the Company's pro forma Percentage Lease
revenue would be approximately $3,974,000 and $4,163,000, respectively, pro
forma total expenses would not change, pro forma net income applicable to
holders of Common Shares would be approximately $943,000 and $1,165,000,
respectively, pro forma earnings per common share would be $.08 and $.09,
respectively, and Funds from Operations would be approximately $2,248,000 and
$2,471,000, respectively.
EITF 98-9 has no effect on the Company's pro forma financial data for the
year ended December 31, 1997.
16
<PAGE>
This Prospectus may contain forward-looking statements including, without
limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import. Such forward-looking statements relate
to future events and the future financial performance of the Company, and
involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company or
industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Prospective investors should specifically consider the various factors
identified in this prospectus which could cause actual results to differ,
including particularly those discussed in the section entitled "Risk Factors"
beginning on this page. Other than the disclosure obligations imposed on the
Company pursuant to the federal securities laws, the Company disclaims any
obligation to update any such risk factors or to publicly announce the result
of any revisions to any forward-looking statements to reflect future events or
developments.
RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Common Shares in the Offering.
LACK OF CONTROL OVER OPERATIONS OF THE HOTELS
To maintain its status as a REIT, the Company will not be able to operate
the Initial Hotels or any subsequently acquired hotels. The Company is
dependent on the ability of the Lessee to operate and manage the Initial
Hotels. As a result, the Company will be unable to directly implement
strategic business decisions with respect to the operation and marketing of
its hotels, such as decisions with respect to the setting of room rates, food
and beverage operations, if applicable, and certain similar matters.
DEPENDENCE ON LESSEE AND PAYMENTS UNDER THE PERCENTAGE LEASES
The Company's ability to make distributions to its shareholders depends
solely upon the ability of the Lessee to make rent payments under the
Percentage Leases, which will be dependent primarily on the ability of the
Lessee to generate sufficient revenues from the Initial Hotels in excess of
operating expenses. Any failure or delay by the Lessee in making rent payments
would adversely affect the Company's ability to make anticipated distributions
to its shareholders. Such failure or delay by the Lessee may be caused by
reductions in revenue from the Initial Hotels or in the net operating income
of the Lessee or otherwise. Although failure on the part of the Lessee to
materially comply with the terms of a Percentage Lease (including failure to
pay rent when due) gives the Company the non-exclusive right to terminate such
lease, repossess the applicable property and enforce the payment obligations
under the lease, the Company would then be required to find another lessee to
lease such hotel. There can be no assurance that the Company would be able to
find another lessee or that, if another lessee were found, the Company would
be able to enter into a new lease on favorable terms. The Strategic Partner
will guarantee the Lessee's rent obligations under the Percentage Leases. The
Strategic Partner's guarantee of the Lessee's obligations under the Percentage
Lease will be subordinated to the Strategic Partner's $35 million of existing
indebtedness owed to an affiliate of Capital America. For the year ended
December 31, 1997 and the three months ended March 31, 1998, the Strategic
Partner had net losses of approximately $1,892,000 and $545,000, respectively.
There can be no assurance that the Strategic Partner will be able to pay the
Lessee's rent obligations pursuant to the guaranty in the event the Lessee is
unable to make the rent payments under the Percentage Leases.
POTENTIAL ADVERSE IMPACT OF INCREASED HOTEL MANAGEMENT BY THE STRATEGIC
PARTNER
The Strategic Partner currently is experiencing a period of rapid growth. In
1996 and 1997, the Strategic Partner added 29 hotels to its management
portfolio. The Strategic Partner currently operates and manages approximately
4,474 rooms in 40 primarily limited service hotels. Upon completion of the
Formation Transactions, the Strategic Partner and its subsidiary, the Lessee,
will operate and manage 8,032 rooms in 69 primarily limited service hotels
(including the 29 Initial Hotels), increasing its number of managed rooms by
approximately 80%. The Lessee's ability to manage its growth effectively will
require it to hire employees and
17
<PAGE>
acquire other resources to operate the Initial Hotels. There can be no
assurance that the Strategic Partner will be able to manage its rapid growth
or these additional hotels effectively.
NEWLY ORGANIZED COMPANY AND PARTNERSHIP, LIMITED FINANCIAL DATA AND COMPANY'S
LACK OF EXPERIENCE AS A REIT OR AS A PUBLIC COMPANY
The Company and the Partnership have been recently organized and have no
operating history. The Company is a Maryland real estate investment trust
recently formed to own the Initial Hotels and has not previously operated as a
REIT or as a public company. Although the officers of the Company and the
Strategic Partner have experience in developing, financing and operating hotel
properties, they have no experience operating a REIT. The Company must rely on
the Lessee to generate sufficient cash flow from the operation of the Initial
Hotels to enable the Lessee to meet the rent obligations under the Percentage
Leases. The obligations of the Lessee under the Percentage Leases are
unsecured.
EMPHASIS ON FAIRFIELD INN BY MARRIOTT HOTELS
The Company initially will own 29 hotels, 26 of which will be operated as
Fairfield Inn by Marriott Hotels. Significant adverse changes in the
operations of any Initial Hotel could have a material adverse effect on lease
revenues and the Company's ability to make expected distributions to its
shareholders. In addition, the Company initially will be subject to risks
inherent in concentrating investments in a single franchise brand, such as a
decrease in business at the Initial Fairfield Inns because of adverse
publicity about one or more Fairfield Inns or the Fairfield Inn brand name,
which could materially affect the Company's cash available for distribution to
its shareholders.
REQUIREMENTS OF THE FRANCHISE AGREEMENTS
All of the Initial Hotels are subject to franchise agreements. The
franchisors under such agreements are expected to require the Company to
complete PIPs involving certain capital improvements to hotels, in connection
with the Company's acquisition of those hotels or otherwise. Prior to the
completion of the improvements, franchisors typically permit the operation of
the hotels under a conditional license. Failure to complete the improvements
in a manner satisfactory to the franchisors could result in the cancellation
of the franchise license. In addition, the continuation of the franchises is
subject to specified operating standards and other terms and conditions.
Franchisors will typically periodically inspect licensed properties to confirm
adherence to operating standards. The failure of an Initial Hotel, the
Company, the Partnership or the Lessee to maintain such standards or adhere to
such other terms and conditions could result in the loss or cancellation of
the franchise license. It is possible that a franchisor could condition the
continuation of a franchise license on the completion of capital improvements
which the Board of Trustees determines are too expensive or otherwise
unwarranted in light of general economic conditions or the operating results
or prospects of the affected hotel. In that event, the Board of Trustees may
elect to allow the franchise license to lapse. In any case, if a franchise is
terminated, the Company and the Lessee may seek to obtain a suitable
replacement franchise, or to operate the Initial Hotel independent of a
franchise license. The loss of a franchise license could have a material
adverse effect upon the operations or the underlying value of the hotel
covered by the franchise because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor.
CONFLICTS OF INTEREST
General
E. Anthony Wilson serves as the Company's Chairman of the Board of Trustees
and Chief Executive Officer and as the Strategic Partner's Chairman of the
Board of Directors and Chief Executive Officer. John Sabin serves as the
President, Chief Operating Officer, Chief Financial Officer and a Trustee of
the Company and as the Executive Vice President and Chief Financial Officer of
the Strategic Partner. Michael T. George serves as Executive Vice President of
the Company and as President, Chief Operating Officer and a director of the
18
<PAGE>
Strategic Partner. Ralph Peek serves as a Vice President, Treasurer and
Trustee of the Company and as a Vice President, Treasurer and director of the
Strategic Partner. Taras M. Kolcio serves as Vice President and Controller of
both the Company and the Strategic Partner. See "Management--Executive
Compensation." In addition, Mr. Wilson and Mr. Peek are deemed to beneficially
own, on a fully diluted basis, approximately 20% and 10%, respectively, of the
outstanding common stock of the Strategic Partner. As Trustees and officers of
both entities, such individuals are subject to competing fiduciary duties
arising from such positions, and may experience competing pecuniary interests
arising from such individuals' ownership interest in the Strategic Partner.
These inherent conflicts of interest arise in the context of the Strategic
Alliance and the Percentage Leases and in any ongoing negotiations among the
Company, the Strategic Partner and the Lessee with respect to the leasing,
acquisition, disposition, operation or management of hotels. Accordingly, the
interests of the Company's shareholders may not have been the sole
consideration in the negotiation of the Strategic Alliance and the Percentage
Leases and may not be the sole consideration in any ongoing negotiations among
the Company, the Strategic Partner and the Lessee. Except as specifically
provided in the Strategic Alliance, the Declaration of Trust, the ByLaws, and
certain provisions of Maryland law, the Company's officers and Trustees, are
not prohibited from engaging for their own account in business activities of
the types conducted or to be conducted by the Company.
No Arm's-Length Bargaining
The terms of the Percentage Leases, the Strategic Alliance and the
agreements pursuant to which the Company will acquire additional hotels from
the Strategic Partner were not and will not be negotiated on an arm's length
basis and, as a result, the terms of such agreements may not be as favorable
to the Company as terms negotiated on an arm's-length basis. The consideration
paid or received by the Company pursuant to such agreements or in such
transactions may be more or less than amounts deemed to represent fair market
value as may have been obtained through arm's-length negotiation. The rent
payments under the Percentage Leases were calculated with reference to
historical financial data and projected operating and financial performance of
the Initial Hotels. In addition, the Company may acquire hotel properties from
the Strategic Partner from time to time as contemplated by the Strategic
Alliance, and such acquisitions will not be negotiated on an arms' length
basis. The Company will not own any interest in the Strategic Partner.
TAX RISKS
Failure to Qualify as a REIT
The Company intends to operate so as to qualify as a REIT for federal income
tax purposes. Although the Company has not requested, and does not expect to
request, a ruling from the Service that it qualifies as a REIT, it has
received an opinion of its counsel, Hunton & Williams, that, based on certain
assumptions and representations described in "Federal Income Tax
Considerations," the Company has been organized in conformity with the
requirements for qualification as a REIT beginning with the taxable year
ending December 31, 1998 and that its proposed method of operation as
represented to its counsel and as described herein will enable it to satisfy
the requirements of such qualification. Investors should be aware, however,
that opinions of counsel are not binding on the Service or any court. The REIT
qualification opinion only represents the view of counsel to the Company based
on counsel's review and analysis of existing law, which includes no
controlling precedent. Furthermore, both the validity of the opinion and the
continued qualification of the Company as a REIT will depend on the Company's
continuing ability to meet various requirements concerning, among other
things, the ownership of its outstanding shares, the nature of its assets, the
sources of its income, and the amount of its distributions to the shareholders
of the Company. See "Federal Income Tax Considerations--Taxation of the
Company."
If the Company were to fail to qualify as a REIT for any taxable year, the
Company would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain Code
provisions, the Company also would be disqualified from treatment as a REIT
for the four taxable years following the year during which qualification was
lost. As a result, the cash
19
<PAGE>
available for distribution to the shareholders would be reduced for each of
the years involved. Although the Company currently intends to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the Board of Trustees,
with the consent of a majority of the shareholders, to revoke the REIT
election. See "Federal Income Tax Considerations."
REIT Minimum Distribution Requirements
In order to qualify as a REIT, the Company generally will be required each
year to distribute to its shareholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company will be subject to
a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the
sum of (i) 85% of its ordinary income for the year, (ii) 95% of its capital
gain net income for that year, and (iii) 100% of its undistributed taxable
income from prior years. To the extent that the Company elects to retain and
pay income tax on its net capital gain, such retained amounts will be treated
as having been distributed for purposes of the 4% excise tax.
The Company intends to make distributions to its shareholders to comply with
the 95% distribution requirement and to avoid the nondeductible excise tax.
The Company's income will consist primarily of its share of the income of the
Partnership, and the Company's cash available for distribution will consist
primarily of its share of cash distributions from the Partnership. Differences
in timing between the recognition of taxable income and the actual receipt of
cash available for distribution due to the seasonality of the hospitality
industry could require the Company, through the Partnership, to borrow funds
on a short-term basis to meet the 95% distribution requirement and to avoid
the nondeductible excise tax. For federal income tax purposes, distributions
paid to shareholders may consist of ordinary income, capital gains, nontaxable
return of capital, or a combination thereof. The Company will provide its
shareholders with an annual statement as to its designation of the taxability
of distributions.
Distributions by the Partnership will be determined by the Company's Board
of Trustees and will be dependent on a number of factors, including the amount
of the Partnership's cash available for distribution, the Partnership's
financial condition, any decision by the Board of Trustees to reinvest funds
rather than to distribute such funds, the Partnership's capital expenditures,
the annual distribution requirements under the REIT provisions of the Code and
such other factors as the Board of Trustees deems relevant. See "Federal
Income Tax Considerations--Requirements for Qualification--Distribution
Requirements."
Failure of the Partnership to be Classified as a Partnership for Federal
Income Tax Purposes; Impact on REIT Status
Although the Company has not requested, and does not expect to request, a
ruling from the Service that the Partnership will be classified as a
partnership for federal income tax purposes, the Company will receive at the
closing of the Offering an opinion of its counsel stating that the Partnership
will be so classified. If the Service were to challenge successfully the tax
status of the Partnership as a partnership for federal income tax purposes,
the Partnership would be taxable as a corporation. In such event, the Company
would cease to qualify as a REIT for a variety of reasons. Furthermore, the
imposition of a corporate tax on the Partnership would substantially reduce
the amount of cash available for distribution to the Company and its
shareholders. See "Federal Income Tax Considerations--Income Taxation of the
Partnership and its Partners."
HOTEL INDUSTRY RISKS
Operating Risks
The Initial Hotels will be subject to all operating risks common to the
hotel industry. These risks include, among other things: increases in hotel
room supply potentially exceeding increases in hotel room demand; competition
for guests from other hotels, some of which may have greater marketing and
financial resources; continuing development in the hotel industry which may
adversely affect occupancy and ADR; increases in
20
<PAGE>
operating costs due to inflation and other factors (which increases may not
necessarily be offset by increased room rates) which may deter travelers;
dependence on business and commercial travelers and tourism; increases in
energy costs and other expenses of travel; and adverse effects of general and
local economic conditions. The Company currently intends to focus on the
acquisition of limited service hotels, including midscale hotels without food
and beverage. In recent years, the increase in hotel room supply has exceeded
the increase in room demand for the hotel industry as a whole as well as for
midscale hotels without food and beverage. These increases could have an
adverse effect on occupancy and ADR for such hotels. These factors could
adversely affect the Lessee's ability to generate revenues and make lease
payments and therefore the Company's ability to make expected distributions to
shareholders.
Competition for Investment Opportunities
The Company may be competing for investment opportunities with entities
which have substantially greater financial resources than the Company. These
entities may generally be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator or the geographic proximity of its investments. Competition may
generally reduce the number of suitable investment opportunities offered to
the Company and increase the bargaining power of property owners seeking to
sell.
Investment Concentration in Single Industry
The Company's current strategy is to acquire interests in hotel properties.
The Company will not seek to invest in assets selected to reduce the risks
associated with an investment in real estate in the hotel industry, and will
be subject to risks inherent in investments in a single industry. The effects
on the Company's cash available for distribution to its shareholders may be
more pronounced than if the Company diversifies its investments.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth
quarters. This seasonality can be expected to cause quarterly fluctuations in
the Company's lease revenues.
Risks of Necessary Operating Costs and Capital Expenditures; Required Hotel
Renovations
Hotels, including the Initial Hotels, generally require ongoing renovations
and other capital improvements, including periodic replacement or
refurbishment of furniture, fixtures and equipment ("FF&E"). In addition,
hotel franchisors typically inspect properties periodically to confirm
adherence to the franchisors' standards with respect to the properties'
physical condition. Under the terms of the Percentage Leases, the Company is
obligated to fund certain capital expenditures at the Initial Hotels and pay
for periodic replacement or refurbishment of FF&E. However, if capital
expenditures exceed the Company's expectations, there can be no assurance that
sufficient sources of financing will be available to fund such expenditures.
The additional cost of such expenditures could have an adverse effect on the
Company's cash available for distribution to its shareholders. Although it
presently has no plans to do so, the Company may acquire hotels in the future
that require significant renovation. Renovation of hotels involves certain
risks, including the possibility of environmental problems, construction cost
overruns and delays, uncertainties as to market demand or deterioration in
market demand after commencement of renovation and the emergence of
unanticipated competition from other hotels.
REAL ESTATE INVESTMENT RISKS
General Risks
The Company's investments will be subject to varying degrees of risk
generally incident to the ownership of real property. The underlying value of
the Company's real estate investments and the Company's income and ability to
make distributions to its shareholders is dependent upon the ability of the
Lessee to operate the Initial Hotels in a manner sufficient to maintain or
increase revenues and to generate sufficient income in excess of
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operating expenses to make rent payments under the Percentage Leases. Income
from the Initial Hotels may be adversely affected by adverse changes in
national economic conditions; adverse changes in local market conditions due
to changes in general or local economic conditions and neighborhood
characteristics; competition from other hotel properties; changes in interest
rates and in the availability, cost and terms of mortgage funds; the impact of
present or future environmental legislation and compliance with environmental
laws; the ongoing need for capital improvements, particularly in older
structures; changes in real estate tax rates and other operating expenses;
adverse changes in governmental rules and fiscal policies; civil unrest; acts
of God, including earthquakes, catastrophic wind and other natural disasters
(which may result in uninsured losses); acts of war; adverse changes in zoning
laws; and other factors which are beyond the control of the Company.
Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions
will be limited. Because management believes it is appropriate to value the
Company as an ongoing business rather than through liquidation values of the
Company or the Initial Hotels, the valuation of the Company has been
determined based primarily upon a capitalization of the estimated cash flow
available for distribution and other factors discussed under "Underwriting"
rather than on a property by property basis considering historical cost or
current market value. See "Underwriting." There can be no assurance that the
Company will be able to dispose of an investment when it finds disposition
advantageous or necessary or that the sale price of any disposition will
recoup or exceed the amount of the Company's investment.
Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be maintained on
each of the Initial Hotels, including liability, fire and extended coverage.
The Company believes such specified coverage is of the type and amount
customarily obtained for or by an owner of hotels. Leases for subsequently
acquired hotels will contain similar provisions. However, there are certain
types of losses, generally of a catastrophic nature, such as earthquakes and
floods, that may be uninsurable or not economically insurable. The Company's
Board of Trustees and officers will use their discretion in determining
amounts, coverage limits and deductibility provisions of insurance, with a
view to maintaining appropriate insurance coverage on the Company's
investments at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost of
the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations, and other factors also might make it
infeasible to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company might not be adequate to restore
its economic position with respect to such property.
Environmental Matters
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, the presence of
hazardous or toxic substances, or the failure to remediate such property
properly, may adversely affect the owner's ability to use the property, sell
the property or borrow using such real property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removal or remediation of such substances at
the disposal or treatment facility, whether or not such facility is or ever
was owned or operated by such person. Certain environmental laws and common
law principles could be used to impose liability for release of asbestos-
containing materials ("ACMs") or other hazardous materials into the
environment and third parties may seek recovery from owners or operators of
real properties for personal injury associated with exposure to released ACMs
or other hazardous materials. In connection with the ownership of the Initial
Hotels, the Company or the Partnership may be potentially liable for any such
costs. Phase I environmental audits have been obtained, or will be obtained
prior to completion of the Offering, on all
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of the Initial Hotels from a qualified independent environmental engineer. The
purpose of Phase I audits is to identify potential sources of contamination
for which the Initial Hotels may be responsible and to assess the status of
environmental regulatory compliance. The Phase I audit reports have not
revealed any environmental liability or compliance concerns that the Company
believes would have a material adverse effect on the Company's business,
assets or results of operations or liquidity, nor is the Company aware of any
such liability. Nevertheless, it is possible that these audits do not reveal
all environmental liabilities or compliance concerns or that there are
material environmental liabilities of which the Company is unaware.
Compliance with Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. The Company believes, based on its due
diligence review, that the Initial Hotels are substantially in compliance with
these requirements. However, a determination that the Company is not in
compliance with the ADA could result in imposition of fines or an award of
damages to private litigants. If the Company were required to make
modifications to comply with the ADA, the Company's ability to make expected
distributions to its shareholders could be adversely affected.
Fluctuations in Property Taxes and Casualty Insurance Premiums
Each Initial Hotel is subject to real property taxes. The real property
taxes on hotel properties in which the Company invests may increase or
decrease as property tax rates change and as the properties are assessed or
reassessed by taxing authorities. Each Initial Hotel will be covered by
casualty insurance. Like real property tax rates, casualty insurance rates may
increase or decrease depending on the claims experience at the Initial Hotels
and as the replacement value of the hotels increases or decreases. The
Partnership is obligated under the Percentage Leases to pay for real property
taxes and casualty insurance. If property taxes or casualty insurance premiums
increase, the Company's ability to make expected distributions to its
shareholders could be adversely affected.
Acquisition Risks; Option Hotels
The Company intends to pursue acquisitions of additional hotels, including
the Option Hotels. Acquisitions entail risks that investments will fail to
perform in accordance with expectations and that estimates of the cost of
improvements necessary to market and acquire hotels will prove inaccurate, as
well as general investment risks associated with any new real estate
investment. The fact that the Company must distribute at least 95% of its
taxable income (excluding net capital gain) in order to maintain its
qualification as a REIT may limit the Company's ability to rely upon lease
income from the Initial Hotels or subsequently acquired hotels to finance
acquisitions. As a result, if debt or equity financing were not available on
acceptable terms, further acquisitions might be curtailed or amounts available
for distribution to shareholders might be adversely affected.
The Company has an option and right of first refusal to purchase the Option
Hotels from the Strategic Partner. The Option Hotels are owned by special
purpose subsidiaries of the Strategic Partner formed to undertake the CMBS
Debt, which is collateralized by mortgage loans secured by the Option Hotels
that prohibit the payment of such debt and the transfer of the Option Hotels
at this time. The Company and the Strategic Partner intend to proceed with the
Company's acquisition of the Option Hotels, subject to the existing CMBS Debt
(which, as of May 1, 1998, was $85.1 million), as soon as (i) the requisite
consents can be obtained from various third parties as required by the CMBS
Debt agreements, and (ii) the Company's capital structure will enable it to
assume the CMBS Debt in a manner acceptable to the Board of Trustees. The
aggregate purchase price for the Option Hotels will be the Strategic Partner's
undepreciated acquisition costs plus depreciated capital expenditures
associated with such properties. The Company does not expect to exercise its
option to purchase the Option Hotels unless (i) the purchase price and the
lease terms would yield at least a 12% return to the Company (on an
unleveraged and trailing 12 months basis after an allowance for capital
expenditure reserves) at the time of purchase, and (ii) the purchase price
does not exceed the Option Hotels' fair market value. If the
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Company completes the acquisition of the Option Hotels, the Company
anticipates that the purchase price will be paid through a combination of the
Company's assumption of the CMBS Debt, the issuance of Units and cash.
However, there can be no assurance that the required third party consents can
be obtained, or when they will be obtained or that the Company otherwise will
complete the acquisition of the Option Hotels.
POTENTIAL ADVERSE EFFECTS OF LEVERAGE AND LACK OF LIMITS ON INDEBTEDNESS
In connection with the acquisition of the Initial Hotels, the Company
expects to borrow approximately $42.6 million under the Credit Facility
(approximately 27% of the cost of the Initial Hotels). The Company presently
intends to limit consolidated indebtedness to no more than approximately 50%
of the Company's investment in hotels valued at undepreciated acquisition
costs, after giving effect to the use of proceeds from any indebtedness.
However, neither the Company's Declaration of Trust nor its Bylaws limits the
amount of indebtedness the Company may incur, and the Company may modify the
Debt Policy at any time without Shareholder approval. See "Policies and
Objectives with Respect to Certain Activities--Financing." The Credit Facility
will be used to fund a portion of the purchase prices for the Initial Hotels,
to pay certain costs in connection with the closing of the Offering and for
working capital. The Credit Facility consists of a line of credit in the
amount of $100 million (the "Line of Credit") and permanent mortgage financing
in the amount of $25 to $50 million (the "Permanent Financing"). To the extent
that the Company utilizes the Permanent Financing in excess of $25 million,
the amounts available under the Line of Credit will be correspondingly
reduced. All of the 26 Initial Fairfield Inns and certain properties acquired
subsequent to the Offering will serve as security for either the Line of
Credit or the Permanent Financing. The Credit Facility may require lender
approval of certain Company actions. Subject to the limitations described
above and other limitations contained in the Credit Facility, the Company may
borrow additional amounts from the same or other lenders in the future or may
issue corporate debt securities in public or private offerings. Certain of
such additional borrowings may be secured by mortgages on hotels owned by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," and "Policies and
Objectives with Respect to Certain Activities--Financing" and "Business and
Properties--Acquisition Strategy."
There can be no assurances that the Company will be able to meet its debt
service obligations and, to the extent that it cannot, the Company risks the
loss of some or all of its assets, including the Initial Hotels, to
foreclosure. To the extent lenders require the Company to cross-collateralize
its properties, or its loan agreements contain cross-default provisions, a
default under a loan agreement could subject multiple properties to
foreclosures. Adverse economic conditions could result in higher interest
rates which could increase debt service requirements on variable rate debt and
could reduce the amounts available for distribution to shareholders. Adverse
economic conditions could cause the terms on which borrowings become available
to be unfavorable. In such circumstances, if the Company is in need of capital
to repay indebtedness in accordance with its terms or otherwise, it could be
required to liquidate one or more investments in hotel properties at times
which may not permit realization of the maximum return on such investments.
The Company may employ a hedging strategy to limit the effects of changes in
interest rates on its operations, including engaging in interest rate swaps,
caps, floors and other interest rate exchange contracts. The use of these
types of derivatives to hedge the Company's assets and liabilities carries
certain risks, including the risk that losses on a hedge position will reduce
the funds available for distribution to shareholders and, indeed, that such
losses may exceed the amount invested in such instruments. There is no perfect
hedge and a hedge may not perform its intended use of offsetting losses.
Moreover, with respect to certain of the instruments used as hedges for the
Company's assets and liabilities, the Company is exposed to the risk that the
counterparties with which the Company trades may cease making markets and
quoting prices in such instruments, which may render the Company unable to
enter into an offsetting transaction with respect to an open position.
NO PRIOR MARKET FOR COMMON SHARES
Prior to the Offering, there has been no public market for the Common
Shares. The Common Shares have been approved for listing, subject to final
notice of issuance, on the New York Stock Exchange ("NYSE"). See
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"Underwriting." The initial public offering price may not be indicative of the
market price for the Common Shares after the Offering, and there can be no
assurance that an active public market for the Common Shares will develop or
continue after the Offering. See "Underwriting" for a discussion of factors to
be considered in establishing the initial public offering price. There can be
no assurances that the Company will continue to meet the criteria for
continued listing of the Common Shares on the NYSE.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON SHARES
One of the factors that may influence the price of the Common Shares in
public trading markets will be the annual yield from distributions by the
Company on the Common Shares as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of the Common Shares.
RELIANCE ON BOARD OF TRUSTEES AND KEY PERSONNEL
Shareholders have no right or power to take part in the management of the
Company except through the exercise of voting rights on certain specified
matters. The Board of Trustees will be responsible for managing the Company.
The Company also will rely for strategic business direction upon the services
and expertise of the Lessee and Strategic Partner.
The Company is dependent on the efforts of its executive officers,
particularly Messrs. Wilson and Sabin. The loss of their services could have
an adverse effect on the operations of the Company. Each of Messrs. Wilson and
Sabin have entered into an employment agreement with the Company and the
Strategic Partner. See "Management--Employment Agreements." Certain of the
executive officers of the Company, including Messrs. Wilson and Sabin, will
devote some of their management time to the Lessee and Strategic Partner. See
"--Conflicts of Interest."
ABILITY OF BOARD OF TRUSTEES TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, operations, debt capitalization and
distributions, will be determined by its Board of Trustees. The Board of
Trustees may amend or revise these and other policies from time to time
without a vote of the shareholders of the Company. The Company cannot change
its policy of seeking to maintain its qualification as a REIT without the
approval of the holders of a majority of the outstanding Common Shares.
The Company's policy currently is that it will not develop hotel properties.
The Company's Board of Trustees will consider development from time to time,
however. If the Board of Trustees determines that the Company will develop
hotels, the Company will be subject to additional risks, including the risks
of construction, significant time lapses between making an investment and
realizing a return and investing in properties with no performance history.
Any decision to develop hotels must be approved by a majority of the
Independent Trustees. See "Policies and Objectives with Respect to Certain
Activities--Investment Policies" and "--Financing."
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT, STAGGERED BOARD, POWER TO ISSUE
ADDITIONAL SHARES AND CERTAIN PROVISIONS OF MARYLAND LAW
Potential Effects of Ownership Limit.
For the Company to maintain its qualification as a REIT under the Code, no
more than 50% in value of the outstanding Common Shares may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the Company's taxable
year (other than the first taxable year for which the election to be treated
as a REIT has been made). To ensure that the Company will not fail to qualify
as a REIT under this and other tests under the Code, the Company's Declaration
of Trust, subject to certain exceptions, limits direct and indirect ownership
of the Common Shares by any person to no more than 9.9% of the number of
outstanding Common Shares or the number of outstanding Preferred Shares of
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any series of the Company (the "Ownership Limit"). The Company's Board of
Trustees, upon receipt of a ruling from the Service, an opinion of counsel or
other evidence satisfactory to the Board and upon such other conditions as the
Board may establish, may exempt a proposed transferee from the Ownership
Limit. However, the Board may not grant an exemption from the Ownership Limit
to any proposed transferee whose ownership, direct or indirect, of Common
Shares in excess of the Ownership Limit would result in the termination of the
Company's status as a REIT. See "Description of Shares of Beneficial
Interest--Restrictions on Ownership and Transfer." The foregoing restrictions
on transferability and ownership will continue to apply until (i) the Board of
Trustees determines that it is no longer in the best interests of the Company
to continue to qualify as a REIT and (ii) there is an affirmative vote of a
majority of the votes entitled to be cast on such matter at a regular or
special meeting of the shareholders of the Company.
The Ownership Limit may have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company that might involve a
premium price for the Common Shares or otherwise be in the best interests of
the shareholders. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer."
Potential Effects of Staggered Board.
The Company's Board of Trustees is divided into three classes. The initial
terms of the Class I, Class II and Class III Trustees will expire in 1999,
2000, and 2001, respectively. Beginning in 1999, trustees of each class will
be chosen for three-year terms upon the expiration of their current terms and
each year one class of trustees will be elected by the shareholders. The
staggered terms of trustees may reduce the possibility of a tender offer or an
attempt to change control of the Company, even though a tender offer or change
in control might be in the best interest of the shareholders. See "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws--Classification of the Board of Trustees."
Potential Effects of Issuance of Additional Shares.
The Company's Declaration of Trust authorizes the Board of Trustees to (i)
amend the Declaration of Trust, without shareholder approval, to increase or
decrease the aggregate number of shares of beneficial interest or the number
of shares of beneficial interest of any class, including Common Shares, that
the Company has the authority to issue, (ii) cause the Company to issue
additional authorized but unissued Preferred or Common Shares and (iii)
classify or reclassify any unissued Common or Preferred Shares and to set the
preferences, rights and other terms of such classified or unclassified shares.
See "Description of Shares of Beneficial Interest." Although the Board of
Trustees has no such intention to do so at the present time, it could
establish a class or series of shares of beneficial interest that could,
depending on the terms of such series, delay, defer or prevent a transaction
or a change in control of the Company that might involve a premium price for
the Common Shares or otherwise be in the best interest of the shareholders.
The Declaration of Trust and Bylaws of the Company also contain other
provisions that may have the effect of delaying, deferring or preventing a
transaction or a change in control of the Company that might involve a premium
price for the Common Shares or otherwise be in the best interest of the
shareholders. See "Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and Bylaws--Removal of Trustees," "--Business
Combinations," "--Control Share Acquisitions" and "--Advance Notice of Trustee
Nominations and New Business."
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THE COMPANY
GENERAL
The Company is a self-advised Maryland real estate investment trust, formed
in April 1998, that intends to qualify as a REIT for federal income tax
purposes. The Company intends to own and acquire stabilized hotel properties
that the Company believes are undervalued in prevailing market conditions and
offer the potential for high current rates of return to the Company, a
substantial dividend to its shareholders, and long term increases in value. At
the present time, the Company has identified such characteristics in
stabilized limited service hotels operating under nationally recognized
franchises. Upon completion of the Formation Transactions, the Company,
through the Partnership, will own the 29 Initial Hotels with 3,558 rooms. The
Initial Hotels have an average age of approximately nine years and will be
leased under the Percentage Leases to the three wholly-owned subsidiaries of
the Strategic Partner (collectively, the "Lessee"). The Strategic Partner is a
publicly-owned company and its common stock is listed on the Nasdaq Stock
Market under the symbol "HUDS."
Concurrently with the completion of the Formation Transactions, the Company
will enter into the Strategic Alliance with the Strategic Partner pursuant to
which (i) the Company will have an option and right of first refusal to
purchase the Option Hotels and any hotel developed by the Strategic Partner
during the term of the Strategic Alliance, (ii) the Company will have a right
of first opportunity to acquire any hotel identified for acquisition by the
Strategic Partner, and (iii) the Strategic Partner will have a right of first
offer to lease any hotel property acquired by the Company that is not acquired
subject to a condition that a specified party serve as lessee or manager of
the property. The Company believes that the Strategic Alliance will enhance
the Company's growth strategy by (i) providing the Company with a strategic
partner that can assist the Company in identifying and evaluating hotel
acquisition opportunities, (ii) providing the Company with a source of future
acquisitions through the Option Hotels and hotels subsequently owned or
developed by the Strategic Partner, and (iii) providing an experienced
operator and lessee of the Company's hotel properties pursuant to the
Percentage Leases.
To facilitate its operating and acquisition strategy, the Company will work
closely with the Strategic Partner, and the two companies have assembled a
management team with extensive experience in the hospitality industry. E.
Anthony Wilson, Chairman of the Board and Chief Executive Officer of the
Strategic Partner, will also serve as Chairman of the Board and Chief
Executive Officer of the Company. Mr. Wilson was named the Hospitality
Valuation Services Hotel Executive of the Year in 1996 and was named to
Advertising Age magazine's list of the top 100 Marketing Executives in 1995.
John M. Sabin will serve as the Company's President, Chief Operating Officer
and Chief Financial Officer and the Strategic Partner's Executive Vice
President and Chief Financial Officer. Mr. Sabin has recently served as Senior
Vice President, Treasurer and Chief Financial Officer of Vistana, Inc., a
publicly-owned owner, operator and developer of time share resorts, and
previously served as Vice President--Finance and Vice President--Mergers and
Acquisitions of Choice and Vice President--Corporate Mergers and Acquisitions
at Marriott. Michael T. George will serve as the Company's Executive Vice
President and the Lessee's President and Chief Operating Officer. Mr. George
most recently served as Chief Operating Officer of Sunstone Hotel Properties
and has previously served as the Senior Vice President of Operations at
Capstar Hotel Company.
Upon completion of the Formation Transactions, the Company will own the 29
Initial Hotels, which include the 26 Initial Fairfield Inns with a total of
3,179 rooms and one Hampton Inn(R) hotel, one Comfort Suites(R) hotel and one
Holiday Inn(R) hotel with a total of 379 rooms. The Initial Hotels will be
leased to the Lessee under seven year leases designed to allow the Company to
participate in increases in revenues at the Initial Hotels and to provide an
incentive for the Lessee to exceed certain target hotel revenues. In the year
ended December 31, 1997 and the quarter ended March 31, 1998, REVPAR at the
Initial Hotels increased by 3.5% and 5.7%, respectively over the same periods
in 1996 and 1997, respectively. The Initial Hotels are located in 16 states,
with 11 Initial Hotels in the midwestern region, nine Initial Hotels in the
northeastern region, three Initial Hotels in the southeastern region and six
Initial Hotels in the western region, of the United States. Upon completion of
the Offering, the Company will acquire the Initial Hotels from two sellers
unaffiliated with the Company for
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approximately $155.1 million in cash (exclusive of the $630,000 in option
payments paid by the Strategic Partner for the Other Initial Hotels as
described above). In addition, the Company expects to invest approximately $10
million over the next three years to fund certain PIPs at the Initial Hotels
as required by the respective franchisors of which approximately $5 million is
expected to be funded by ongoing capital expenditure reserves.
The Company believes that the operation of the Initial Hotels under
nationally recognized hotel franchises will provide the Company with certain
benefits, such as the franchisors' national reservation systems and
comprehensive physical and operational guidelines. Fairfield Inns are limited
service hotels designed for business and leisure travelers. According to
Marriott, the first Fairfield Inn opened in 1987, and as of March 31, 1998,
346 hotels operated under the Fairfield Inn brand name. Limited service hotels
generally, and Fairfield Inns particularly, do not include restaurants or
lounges and contain little non-revenue producing space. Fairfield Inns are
constructed, maintained and operated in accordance with a comprehensive set of
building, maintenance, operational, record-keeping and reservation system
guidelines designed to insure uniform service, appearance and quality.
The Company has received commitments for the $125 million Credit Facility,
which consists of the $100 million Line of Credit and the Permanent Financing
for $25 to $50 million. Concurrently with the completion of the Offering and
the Formation Transactions, the Company expects to incur approximately $42.6
million of indebtedness (representing approximately 27% of the Company's
investment in hotels, at cost) under the Credit Facility. The Line of Credit
will bear interest at the one month LIBOR rate plus 185 basis points. All of
the 26 Initial Fairfield Inns will serve as security for either the Line of
Credit or the Permanent Financing. The Permanent Financing will be subject to
debt service coverage limitations and a required 65% loan-to-value ratio. The
Permanent Financing will bear interest at a variable rate based on the yield
of ten-year Treasury obligations, plus a spread that varies based on the
Company's actual debt service coverage ratio and the length of time between
the execution of the Line of Credit and its conversion to Permanent Financing.
THE STRATEGIC ALLIANCE
The Company believes its operating and growth strategies will benefit from
its alliance with the Strategic Partner. The Strategic Partner is an owner and
operator of hotel properties and its common stock is traded on the Nasdaq
Stock Market under the symbol "HUDS." The Strategic Partner was organized in
1987 to develop and franchise a national chain of economy, limited service
lodging facilities operating under the name Microtel(R), which offer downsized
rooms with high quality furnishings at rates below those available at
competing national budget chains. In 1992, the Strategic Partner acquired
Hudson Hotels Corporation, a hotel management and development company. In
1995, the Strategic Partner signed an exclusive Joint Venture Agreement with
U.S. Franchise Systems, Inc., pursuant to which U.S. Franchise Systems, Inc.
purchased worldwide franchising and administration rights for the Microtel
franchise chain. Since entering the Joint Venture Agreement, the Strategic
Partner has focused its efforts on acquiring, managing and developing various
hotel properties, including Microtels.
During 1996, the Strategic Partner began a significant expansion program,
which included the acquisition of the Option Hotels and development of six
Microtel Inns. As of July 1, 1998, the Strategic Partner managed 40 hotel
properties with 4,474 rooms primarily in the northeastern and southeastern
United States, including Fairfield Inn, Hampton Inn, Comfort Inn and Microtel
Inn hotels. Of the 40 hotel properties that the Strategic Partner manages, 25
are owned by the Strategic Partner. After completion of the Formation
Transactions, the Strategic Partner and its subsidiaries will manage 69 hotel
properties, including the 29 Initial Hotels owned by the Company. The
Strategic Partner is discussing entering into an agreement with the current
manager of the 26 Initial Fairfield Inns, pursuant to which such manager would
provide transitional management services with respect to some or all of the
Initial Fairfield Inns on an interim basis, which is not expected to extend
beyond December 31, 1998.
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Pursuant to the Strategic Alliance, the Company will have the option, for a
term of two years from the closing of the Offering, and right of first refusal
to acquire the 25 Option Hotels from the Strategic Partner. The Option Hotels
currently are owned by special purpose subsidiaries of the Strategic Partner
formed to undertake CMBS Debt financing, which is collateralized by mortgage
loans secured by the Option Hotels. The CMBS Debt agreements prohibit the
repayment of such debt or the transfer of the Option Hotels at this time. In
addition, the Company's assumption of the CMBS Debt (which as of May 1, 1998
was $85.1 million) at the current time would result in the Company's initial
indebtedness exceeding levels that the Company's Board of Trustees deems
prudent. Thus, the Company has elected not to proceed with the acquisition of
the Option Hotels at this time. However, the Company intends to proceed with
the acquisition of the Option Hotels as soon as (i) the requisite consents can
be obtained from various third parties as required by the CMBS Debt
agreements, and (ii) the Company's capital structure will enable it to assume
the CMBS Debt in a manner acceptable to the Board of Trustees. The aggregate
purchase price for the Option Hotels will be the Strategic Partner's
undepreciated acquisition costs plus depreciated capital expenditures
associated with the properties (which as of June 1, 1998 was approximately
$141 million). The Company does not expect to exercise its option to purchase
the Option Hotels unless (i) the purchase price and the lease terms would
yield at least a 12% rate of return to the Company (on an unleveraged and
trailing 12 month basis) at the time of purchase, and (ii) the purchase price
does not exceed the properties' fair market value. If the Company completes
the acquisition of the Option Hotels, the Company anticipates that the
purchase price for the Option Hotels will be paid through a combination of the
Company's assumption of the CMBS Debt, the issuance of Units and cash. There
can be no assurance whether or when the required third party consents can be
obtained or that the Company otherwise will complete the acquisition of the
Option Hotels.
For as long as the Strategic Alliance is in effect, the Company will also
have an option, for a term of two years from the opening of the hotel, and
right of first refusal to acquire any hotel properties developed by the
Strategic Partner or its Affiliates. The Company may exercise its option to
purchase any developed hotel within two years of the opening of the hotel at a
price equal to 105% of the Strategic Partner's undepreciated development cost
of such property. The Company does not expect to exercise its option to
acquire a developed hotel if the purchase price exceeds the property's fair
market value. The Strategic Partner currently owns four parcels of land
located in Texas and Arizona on which it is developing Microtel Inns. The
Company believes that new hotels developed by the Strategic Partner will
provide the Company opportunities to acquire well constructed, well positioned
and competitively priced hotels, without the investment and construction risks
associated with new hotel development. The Company currently anticipates that
a property developed by the Strategic Partner will have achieved stabilized
operations and cash flows before the Company would consider purchasing such
property. See "Policies and Objectives With Respect to Certain Activities--
Investment Policies."
The Lessee will lease and operate the Initial Hotels, the Option Hotels, if
acquired, and any other hotels acquired by the Company from the Strategic
Partner under Percentage Leases, and the Company's rights to purchase the
Option Hotels and such other hotels are subject to entering into satisfactory
lease agreements with the Lessee. In addition, during the term of the
Strategic Alliance the Lessee will have a right of first offer to lease any
hotel acquired by the Company that is not acquired subject to a condition that
a specified party continue as the manager or lessee of the property.
The Strategic Alliance will have an initial term of ten years from the date
of the Offering. All transactions between the Company and the Strategic
Partner, the Lessee or its Affiliates must be approved by a majority of the
Company's Independent Trustees. See "Management." The Company has certain
rights to terminate the Strategic Alliance and the Percentage Leases in the
event of a change in control of the Strategic Partner or the Lessee without
the consent of the Company.
29
<PAGE>
BUSINESS AND PROPERTIES
BUSINESS AND INVESTMENT STRATEGY
The Company's business strategy is to acquire stabilized hotels that the
Company believes are undervalued in prevailing market conditions and offer the
potential for high current rates of return to the Company, a substantial
dividend to the Company's shareholders, and long term increases in value. At
the present time, the Company believes that opportunities exist to acquire
undervalued limited service hotels operating under nationally recognized
franchise brands. The Company will seek to enhance shareholder value (i) by
acquiring additional existing hotels that meet the Company's investment
criteria and (ii) by participating in any increased room revenue from the
Initial Hotels and any subsequently acquired hotels through the Percentage
Leases. The Company believes that the Strategic Alliance will be an integral
part of both the Company's acquisition and internal growth strategies by
providing the Company with (i) a strategic partner that can assist the Company
in identifying and evaluating hotel acquisition opportunities, (ii) a source
of future acquisitions through the Option Hotels and hotels subsequently owned
or developed by the Strategic Partner, and (iii) an experienced operator and
lessee of the Company's hotel properties pursuant to the Percentage Leases.
THE HOTEL INDUSTRY
According to Smith Travel Research, the United States lodging industry is
continuing to experience a significant recovery from an extended downturn in
the late 1980's and early 1990's. The Company believes that continuing broad
industry recovery will contribute to growth in total revenues and REVPAR at
the Initial Hotels (and hotels subsequently acquired by the Company) which,
through the Percentage Leases, would result in increases in the Company's cash
available for distribution to shareholders.
Hotel Demand
As reflected in the chart below, demand growth has been strong in the hotel
industry as a whole. The Company believes that limited service hotels have
gained market share within the industry. In the strong economy since 1995,
demand for midscale hotels with food and beverage operations declined from
year to year, and the 10-year compounded annual growth rate for such hotels
was a nominal 0.2%. Conversely, demand in the midscale hotels without food and
beverage sector, the sector currently targeted by the Company, grew at a rate
of 15.2% compounded over the past 10 years. The Company believes this
difference in growth is due to a shift in consumer preferences.
PERCENT CHANGE IN DEMAND OVER PRIOR YEAR
<TABLE>
<CAPTION>
FIRST
QUARTER
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All U.S. Hotels......... 4.2% 4.9% 2.0% (1.4)% 2.0% 1.7% 3.0% 1.8% 2.2% 2.6% 3.4%
Midscale with Food &
Beverage............... 1.8 1.6 (1.1) (2.6) 2.1 1.3 1.7 (0.7) (1.3) (0.9) 0.0
Midscale without Food &
Beverage............... 28.1 21.7 15.3 12.9 11.1 10.2 13.5 12.9 12.9 14.4 14.0
</TABLE>
- --------
Source: Smith Travel Research
30
<PAGE>
Limited Service Segment of the Hotel Industry
According to Smith Travel Research, since 1988 the midscale without food and
beverage sector has enjoyed consistent, ten percent or greater, annual growth
in demand. During that time period annual occupancy has remained in excess of
65%. Management believes these levels of demand growth and occupancy have
driven the increases in ADR, and resulting REVPAR growth, that have occurred
each year since 1988. During this time period, the compounded annual growth
rates for ADR and REVPAR were 4.5% and 4.9%, respectively. The following table
shows market and operating statistics over the last ten years:
DEMAND AND OPERATING STATISTICS OF MIDSCALE WITHOUT FOOD & BEVERAGE
<TABLE>
<CAPTION>
% CHANGE
IN DEMAND
OVER
PRIOR
YEAR OCCUPANCY ADR REVPAR
--------- --------- ------ ------
<S> <C> <C> <C> <C>
1988.......................................... 28.1% 65.3% $39.46 $25.76
1989.......................................... 21.7 66.5 41.45 27.55
1990.......................................... 15.3 66.2 43.39 28.75
1991.......................................... 12.9 66.4 44.68 29.66
1992.......................................... 11.1 67.8 45.75 31.02
1993.......................................... 10.2 69.0 47.31 32.63
1994.......................................... 13.5 70.6 49.32 34.81
1995.......................................... 12.9 70.2 52.57 36.91
1996.......................................... 12.9 68.5 55.92 38.32
1997.......................................... 14.4 67.5 58.88 39.73
1st Quarter 1997.............................. 14.7 62.2 56.90 35.39
1st Quarter 1998.............................. 14.0 61.6 60.08 37.08
</TABLE>
- --------
Source: Smith Travel Research
During the 1990's, the limited service sector, the sector currently targeted
by the Company, was more profitable through both good and bad economic
environments than the full service sector, which posted significant losses
during the recession of the early 1990's. The following table sets forth
certain comparative information, as a percentage of revenue, with respect to
the profitability of limited service and full service sectors of the hotel
industry.
SELECTED FINANCIAL RATIOS TO TOTAL REVENUE
<TABLE>
<CAPTION>
FULL SERVICE LIMITED SERVICE
------------------------ ------------------------
GROSS GROSS
OPERATING PRE TAX INCOME OPERATING PRE TAX INCOME
YEAR PROFIT(1) (LOSS) PROFIT(1) (LOSS)
- ---- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
1990.......................... 21.9% (10.2)% 44.0% (1.5)%
1991.......................... 24.4 (6.0) 41.3 1.9
1992.......................... 26.5 (1.4) 43.1 10.5
1993.......................... 27.4 2.6 42.8 13.8
1994.......................... 30.8 6.8 45.2 14.6
1995.......................... 31.8 9.6 46.6 23.0
1996.......................... 35.7 15.7 48.4 27.0
1997.......................... 37.2 20.1 53.4 36.0
</TABLE>
- --------
(1) Calculated as revenue less departmental expenses and administrative and
general, marketing, utility and property operations and maintenance
expenses.
Source: Smith Travel Research
Limited service hotels, with lower fixed costs, generally have higher gross
operating profit margins than full service hotels that must also support food
and beverage and banquet operations. Management believes the higher profit
margins of limited service hotels can lead to more consistent profitability
through industry cycles.
31
<PAGE>
Market Share Growth of Limited Service Hotels
Management believes that customer preferences have changed in favor of
hotels that can be characterized as limited service. For the period 1991-1997
the number of hotels affiliated with limited service chains has grown from
53.4% to 61.4% of chain affiliated hotels. It is management's opinion that
this gain in market share reflects a shift of preferences of business and
leisure travelers toward limited service properties offering quality
accomodations at reasonable rates.
[PIE GRAPHS SHOWING MARKET SHARE GROWTH OF LIMITED SERVICE AND FULL SERVICE
HOTELS APPEAR HERE]
Chain Affiliated Hotels By Segment /(1)/
1991 1997
---- ----
Limited Service 53.4% Limited Service 61.4%
Full Service 46.6% Full Service 38.6%
/(1)/ Includes only U.S. hotels associated with chains, Limited Service is
comprised of Midscale Hotels Without Food & Beverage, Economy Hotels and
Budget Hotels as defined by Smith Travel Research. Full Service is
comprised of Upper Upscale Hotels, Upscale Hotels and Midscale Hotels With
Food & Beverage as defined by Smith Travel Research.
- --------
Source: Smith Travel Research
REVPAR Growth vs. CPI Growth
REVPAR GROWTH VS. CPI GROWTH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------- FIRST QUARTER
1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ----- ---- ---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All U.S. Hotels(1)...... 2.0% (2.6)% 2.7% 4.2% 5.8% 5.4% 6.4% 5.2% 4.8%
Midscale without Food &
Beverage(1)............ 4.4 3.2 4.6 5.2 6.7 6.0 3.8 3.7 4.6%
Consumer Price
Index(2)............... 5.4 4.2 3.0 3.0 2.6 2.8 3.0 2.3 --
</TABLE>
- --------
(1) Source: Smith Travel Research. Reflects percentage increase in REVPAR over
prior year.
(2) Source: U.S. Department of Labor Bureau of Labor Statistics. Reflects
percentage increases in CPI over prior year.
Management believes that changes and trends in occupancy, ADR and REVPAR are
indicators of the recovery in the hotel industry. Other than during the
industry's downturn in 1990 through 1992, industrywide hotel REVPAR growth has
exceeded inflation since 1990. In 1991, REVPAR for the industry as a whole
declined. However, REVPAR growth for midscale hotels without food and beverage
remained positive even
32
<PAGE>
during the downturn years of 1990 and 1991. From 1992 to 1995, the midscale
hotel without food and beverage sector grew faster than the industry.
Management believes that REVPAR growth at hotels in the midscale without food
and beverage sector has stabilized in 1996 and 1997. Management believes that
full service hotel property REVPAR growth accounts for a substantial portion
of the industry-wide increase in recent years. Additionally, management
believes the cost structure of limited service hotels as well as overall
consumer demand for the limited service product make limited service hotels a
more stable hotel investment through industry cycles.
GROWTH STRATEGY
The Company's primary objective is to enhance shareholder value by
increasing cash flow and distributions per share and working to increase the
long term value of the Common Shares by implementing its acquisition and
internal growth strategies.
ACQUISITION STRATEGY
The Company intends to acquire additional existing stabilized hotel
properties throughout the United States that the Company believes are
undervalued in current market conditions and offer the potential for high
current rates of return to the Company, a high dividend yield to the Company's
shareholders and long term increases in value. The Company initially intends
to focus on the acquisition of limited service hotel properties with
stabilized occupancy and ADR that can be acquired at prices that are accretive
to FFO per share and operate under strong, national franchise affiliations,
such as the Fairfield Inn by Marriott and Hampton Inn brands.
The Company believes that a substantial number of existing hotel properties
that meet its investment criteria are available at attractive prices.
According to the Smith Travel Research 1997 Host Study, there were 926,634
rooms (approximately 27% of all hotel rooms in the United States) in hotels
classified as midscale chain hotels without food and beverage and economy and
budget chain hotels.
The Company has received commitments from Capital America for the $125
million Credit Facility, which consists of the $100 million Line of Credit and
the Permanent Financing for $25 to $50 million. Concurrently with the
completion of the Offering and the Formation Transactions, the Company expects
to incur approximately $42.6 million of indebtedness (representing
approximately 27% of the Company's investment in hotels, at cost) under the
Credit Facility. All of the 26 Initial Fairfield Inns will serve as security
for either the Line of Credit or the Permanent Financing. The Line of Credit
will bear interest at the one month LIBOR rate plus 185 basis points. The
Permanent Financing will be subject to debt service coverage limitations and a
required 65% loan-to-value ratio. The Permanent Financing will bear interest
at a variable rate based on the yield of ten-year Treasury obligations, plus a
spread that varies based on the Company's actual debt service coverage ratio
and the length of time between the execution of the Line of Credit and its
conversion to Permanent Financing. The Permanent Financing may not be repaid
without penalty for 10 years but permits limited substitution of collateral
without penalty. In addition, the Permanent Financing will require the Company
to establish reserves for taxes and insurance, deferred maintenance, capital
expenditures, debt service, ground rent and seasonality. In the event of a
default, the reserves will be funded by a "cash trap" with respect to the
lease payments received by the Company. To the extent that the Company
utilizes the Permanent Financing in excess of $25 million, the amount
available under the Line of Credit will be correspondingly reduced.
The Board of Trustees intends to limit the consolidated indebtedness of the
Company to approximately 50% of the Company's investment in hotel properties,
valued at undepreciated total cost (the "Debt Policy"). However, the Company's
organizational documents do not limit the amount of indebtedness that the
Company may incur, and the Company's Board of Trustees may modify the Debt
Policy at any time. The Company intends to repay indebtedness incurred under
the Credit Facility from time to time, for acquisitions or otherwise, out of
cash flow and from the proceeds of issuances of Common Shares and other
securities of the Company. See "Risk Factors--Potential Adverse Effects of
Leverage and Lack of Limits on Indebtedness," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," and "Policies and Objectives with Respect to Certain
Activities--Investment Policies" and "--Financing."
33
<PAGE>
INTERNAL GROWTH STRATEGY
The Percentage Leases are designed to allow the Company to participate in
growth in revenues at the Initial Hotels and to provide an incentive for the
Lessee to exceed a target level of revenue. The Percentage Leases provide that
a percentage of room revenues in specified ranges will be paid as Percentage
Rent (as herein defined). The percentage of room revenues paid as Percentage
Rent will increase as a higher specified range of room revenues is achieved up
to a target revenue amount, which is above historical and projected
performance, at which point the percentage of room revenue paid as Percentage
Rent will decrease. Pursuant to the Percentage Leases, the ranges of room
revenues specified for purposes of calculating Percentage Rent will be
adjusted upward for inflation under a formula based on annual increases in the
United States Consumer Price Index ("CPI"). See "The Initial Hotels--The
Percentage Leases." The Lessee will use established systems to manage and seek
to increase revenues at the Initial Hotels, including detailed business and
marketing plans and operating budgets for each Initial Hotel. The Lessee will
employ a mix of marketing techniques designed for each specific hotel, which
may include a toll free reservation number designated for that hotel, direct
corporate sales efforts, and billboard advertising to further capitalize on
Fairfield Inn's and other franchisors' reputations, national advertising,
nationwide toll free reservation numbers and other marketing efforts. The
Percentage Leases require the Company to fund capital expenditures to
regularly maintain and upgrade its hotels. The Company expects that such
capital expenditures on the Initial Hotels will be approximately 5% of total
revenues at the Initial Hotels on an annual basis. Management believes that
regular maintenance and upgrading are essential to establishing strong
customer satisfaction and consistently favorable occupancy levels and rates.
Consolidated REVPAR for the Initial Hotels has increased each year since
1993 and increased at a 5.0% compound annual growth rate from 1993 to 1997.
Management believes that the year-to-year growth in REVPAR since 1993 reflects
the increasing popularity of and demand for limited service hotels in general,
and Fairfield Inn hotels in particular, improving hotel industry conditions
since 1990, an improving economy, marketing practices at the Initial Hotels,
and regular expenditures to maintain and upgrade the Initial Hotels.
In light of the Strategic Partner's anticipated hotel development activities
and the Company's option and right of first refusal to purchase those
developed hotels, the Company has no current plans to develop hotel properties
on its own. The Board of Trustees will from time to time consider hotel
development by the Company and the Company may develop hotels in the future.
In considering development opportunities, the Board of Trustees will review
the availability and pricing of suitable acquisition opportunities, the
availability of suitable sites, the costs and risks of developing hotels, the
availability of development financing, the expected return on the development
projects, as well as any other factors the Board of Trustees deems relevant.
Any decision to develop a hotel will be made by a majority of the Board of
Trustees, including a majority of the Independent Trustees. See "Business and
Properties--Growth Strategy" and "Risk Factors--Ability of Board of Trustees
to Change Certain Policies."
FAIRFIELD INN HOTELS
Twenty-six of the Initial Hotels are licensed to operate as Fairfield Inns.
According to Marriott, the Fairfield Inn brand was developed by Marriott in
1987, the first Fairfield Inn hotel was opened in 1987, and Marriott began
selling Fairfield Inn franchises in 1989. In addition, as of March 31, 1998,
there were 346 Fairfield Inn hotels operating in the United States, Mexico and
Canada.
A Fairfield Inn hotel typically has from 63 to 135 rooms, a swimming pool,
complimentary continental breakfast each morning, a facsimile machine, a
copier, vending machines and smoking and non-smoking rooms. Some Fairfield Inn
hotels have meeting rooms. Rooms usually include an over-sized work desk with
an upholstered chair, a king-sized bed or two double beds, an individually-
operated heating and cooling system and remote-control television with free
cable stations.
34
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be $114.8
million (based on the Offering Price), after deducting the Underwriters'
discounts and commissions and estimated Offering expenses payable by the
Company of $1.5 million. The Company will contribute the net proceeds of the
Offering to the Partnership in exchange for Units in the Partnership. The
Partnership will use the proceeds received from the Company along with
approximately $42.6 million in indebtedness incurred under the Line of Credit
as follows: (i) approximately $150.3 million in cash to finance the balance of
the purchase price of the Initial Hotels (after application of deposits,
option payments and fees); (ii) repayment of the $1.2 million Strategic
Partner Loan and $4.0 million of Pre-Offering Debt (a portion of which was
used to pay deposits, option payments and fees with respect to the Initial
Hotels); (iii) payment of $850,000 to the Strategic Partner as reimbursement
for certain expenses incurred in connection with the Formation Transactions;
and (iv) the balance of approximately $1.1 million for working capital.
Neither the Company nor the Partnership currently has any agreement or
understanding to invest in any specific property other than the Initial
Hotels. The Company has options and rights of first refusal with respect to
hotel properties developed or owned or acquired by the Strategic Partner,
including the Option Hotels, as described in "The Strategic Alliance."
Pending such uses, the net proceeds will be invested in interest-bearing
accounts and short-term, interest-bearing securities, which are consistent
with the Company's intention to qualify as a REIT. Such investments may
include, for example, government and government agency securities,
certificates of deposit, interest-bearing bank deposits and mortgage loan
participations.
The Strategic Partner Loan and the Pre-Offering Debt to be repaid from the
Offering proceeds were incurred in May 1998, mature on December 31, 1998 (or
the closing of the Offering, whichever is earlier) and bear interest at a rate
of 12% per annum. The Strategic Partner Loan and the Pre-Offering Debt were
incurred to fund the various deposits and expenses in connection with the
Offering and the acquisition of the Initial Hotels. See note 3 of Notes to
Combined Financial Statements and "Certain Relationships and Transactions" and
"Formation Transactions--Benefits to Related Parties."
35
<PAGE>
DISTRIBUTION POLICY
After the Offering, the Company intends to make regular quarterly
distributions to its shareholders. The Company's ability to make distributions
will be dependent on the receipt of distributions from the Partnership and
lease payments from the Lessee with respect to the Initial Hotels. Initially,
the Partnership's sole source of revenue will be rent payments under the
Percentage Leases for the Initial Hotels. The Company must rely on the Lessee
to generate sufficient cash flow from the operation of the Initial Hotels to
meet the Lessee's rent obligations under the Percentage Leases. The
obligations of the Lessee under the Percentage Leases are guaranteed by its
parent company, the Strategic Partner. The Company intends to make regular
quarterly distributions to holders of the Common Shares initially equal to
$.2375 per share, which, on an annualized basis, would be equal to $.95 per
share, or 9.5% of the Offering Price. The first distribution, for the period
from the closing of the Offering to September 30, 1998, is expected to be a
pro rata distribution of the anticipated initial quarterly distribution. Based
on the Company's pro forma statement of operations for the twelve months ended
March 31, 1998, such distributions would represent approximately 87.1% of the
Company's cash available for distribution annually and approximately 2% of the
initial annual distribution to shareholders would represent a return of
capital for federal income tax purposes. The Company does not intend to change
its estimated initial distribution per share if the Underwriters' over-
allotment option is exercised.
The Company believes that its initial distribution rate, which is based on
the Company's pro forma FFO per share for the 12 months ended March 31, 1998,
is reasonable. Industry analysts generally consider FFO to be an appropriate
measure of the performance of an equity REIT. FFO, however, should not be
considered an alternative to net income or other measurements under generally
accepted accounting principles as an indicator of the Company's operating
performance or to cash flows from operating, investing or financing activities
as a measure of liquidity. The Company expects to maintain its initial
distribution rate for the remainder of 1998 unless actual results of
operations, economic conditions or other factors differ from the pro forma
results for the twelve months ended March 31, 1998. The estimated distribution
is for the remainder of the year ending December 31, 1998 only. The Company's
actual FFO will be affected by a number of factors, including changes in
occupancy or ADR at the Initial Hotels.
In order to maintain its qualification as a REIT, the Company must
distribute to its shareholders each year at least 95% of its taxable income
(which does not include net capital gains). Under certain circumstances, the
Company may be required to make distributions in excess of cash available for
distribution in order to meet such distribution requirements. In such event,
the Company would seek to borrow the amount of the deficiency or sell assets
to obtain the cash necessary to make distributions to retain its qualification
as a REIT for federal income tax purposes.
Distributions by the Company will be determined by the Board of Trustees and
will depend on a number of factors, including the Company's FFO, the
Partnership's financial condition, capital expenditure requirements for the
Company's hotels, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Trustees deems
relevant. For a discussion of the tax treatment of distributions to holders of
Common Shares, see "Federal Income Tax Considerations."
36
<PAGE>
The following table sets forth certain pro forma financial information for
the Company on a consolidated basis with the Partnership:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
MARCH 31, 1998
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Pro forma income before minority interest........... $11,104
Pro forma depreciation.............................. 5,209
-------
Pro forma Funds from Operations (1)................. 16,313
Pro forma amortization of stock compensation........ 132
-------
Pro forma cash flow from operating activities (2)... 16,445
Pro forma cash used in investing activities:
Additions to capital expenditure reserves (3)..... (2,679)
Pro forma cash used in financing activities:
Repayment of debt (4)............................. (361)
-------
Estimated cash available for distribution........... $13,405
=======
Expected initial annual distribution (5)............ $11,995
-------
Company's share of expected initial annual
distribution (6)................................... $11,935
=======
Estimate initial annual distribution per share...... $ 0.95
Estimated payout ratio of estimated cash available
for distribution (7)............................... 89.5%
</TABLE>
- --------
(1) Funds from Operations (FFO), as defined by NAREIT, represents net income
applicable to common shareholders (computed in accordance with generally
accepted accounting principles), excluding gains (losses) from debt
restructuring and sales of property (including furniture and equipment),
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs), and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not represent
cash generated from operating activities in accordance with generally
accepted accounting principles, is not necessarily indicative of cash flow
available to fund cash needs and should not be considered as an
alternative to net income as an indication of performance or to cash flow
as a measure of liquidity. The Company considers FFO to be an appropriate
measure of the performance of an equity REIT in that such calculation is a
measure used by the Company to evaluate its performance against its peer
group and is a basis for making the determination as to the allocation of
its resources and reflects the Company's ability to meet general operating
expenses. Although FFO has been computed in accordance with the current
NAREIT definition, FFO as presented may not be comparable to other
similarly titled measures used by other REITs.
(2) Pro forma cash flow from operating activities excludes cash provided by
(used in) operating activities due to changes in working capital. The
Company does not believe that the excluded items are material to the
estimated cash available for distribution.
(3) Represents the Company's obligation under the Percentage Leases (adjusted
to exclude the minority interest obligation and to reflect the Company's
ownership percentage in the Partnership of 99.5%) to pay for capital
improvements (including the replacement or refurbishment of FF&E) on a pro
forma basis for the 12 months ended March 31, 1998. The Company
anticipates that cash flow from operations, borrowing capacity and
reserves will be sufficient to fund such obligation.
(4) Represents the Company's amortized principal paydown of long term debt.
(5) Based on 12,626,742 Common Shares and Units to be outstanding upon
completion of the Formation Transactions.
(6) Represents the Company's approximately 99.5% share of the initial annual
distribution from the Partnership.
(7) Represents the anticipated initial aggregate annual distribution divided
by estimated cash available for distribution.
37
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the pro forma short-term debt and
capitalization of the Company as of March 31, 1998 giving effect to the
Formation Transactions on such date including the sale of the Common Shares
offered in the Offering and the use of the net proceeds therefrom as described
under "Use of Proceeds."
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, 1998
--------------
(IN THOUSANDS)
<S> <C>
Short-term debt............................................. $ 42,575
Minority interest........................................... 630
Shareholders' equity:
Preferred Shares, $.01 par value, 20,000,000 shares
authorized, no shares issued and outstanding............... --
Common Shares, $.01 par value, 100,000,000 shares
authorized, 12,559,000 shares issued and outstanding(1).... 126
Additional paid-in capital.................................. 115,214
Unamortized stock compensation(2)........................... (590)
Retained deficit(3)......................................... (850)
--------
Total shareholders' equity................................ 113,900
--------
Total capitalization.................................... $157,105
========
</TABLE>
- --------
(1) Includes 12,500,000 Common Shares to be sold in the Offering; an aggregate
of 14,000 restricted Common Shares to be issued to four trustees in
consideration of their service on the Board of Trustees; and an aggregate
of 45,000 restricted Common Shares to be issued to officers of the Company
in consideration for their service to the Company. Does not include 67,742
Units issued to the Strategic Partner prior to the Offering in connection
with the transfer to the Company of an option to acquire three of the
Initial Hotels and 1,900,000 Common Shares reserved for issuance pursuant
to the Company's Trustee and Employee Option Plans. Options to purchase
1,660,000 Common Shares at the Offering Price will be granted concurrently
with the closing of the Offering. See "Formation Transactions" and
"Management--Executive Compensation" and "--Compensation of Trustees."
(2) Represents 59,000 Common Shares granted to officers and Trustees which
will be amortized over a five year vesting period.
(3) Represents a payment to the Strategic Partner to cover expenses incurred
by the Strategic Partner related to warrants issued in connection with the
Pre-Offering Debt.
38
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth (i) unaudited selected pro forma consolidated
financial data for the Company for the year ended December 31, 1997 and for
the three months ended March 31, 1997 and 1998, and (ii) selected combined
historical financial data for the Initial Hotels for each of the years in the
three year period ended December 31, 1997 and for the three months ended March
31, 1997 and 1998, respectively. The selected combined historical operating
and financial data for the three years ended December 31, 1997, have been
derived from the historical combined financial statements of MFI Partners,
Limited Partnership (with respect to the Initial Fairfield Inns), audited by
Arthur Andersen LLP, independent public accountants and the Other Initial
Hotels (the three remaining Initial Hotels) audited by Coopers & Lybrand LLP,
independent public accountants, as set forth in their reports thereon. Such
reports are located elsewhere in this Prospectus. In the opinion of
management, the unaudited financial data includes all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
information set forth therein. The results of operations for the three months
ended March 31, 1997 and 1998 are not necessarily indicative of the results to
be obtained for the full fiscal year.
The selected unaudited pro forma financial and other data are presented as
if the Formation Transactions had occurred as of January 1, 1997, and
therefore incorporates certain assumptions that are included in the Notes to
the Pro Forma Condensed Statement of Operations included elsewhere in this
Prospectus. The pro forma balance sheet data is presented as if the Formation
Transactions had occurred on March 31, 1998. The pro forma information does
not purport to represent what the Company's financial position or the
Company's or the combined Initial Hotels' results of operations would actually
have been if the Formation Transactions had, in fact, occurred on such date or
at the beginning of the year indicated, or to project the Company's or the
combined Initial Hotels' financial position or results of operations at any
future date or for any future period.
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and all of the financial statements and notes thereto included
elsewhere in this Prospectus.
39
<PAGE>
HUDSON HOTELS TRUST
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA (1)(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF COMMON SHARES)
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS ENDED
PRO FORMA MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1997 1997 1998
----------------- --------- ---------
<S> <C> <C> <C>
OPERATING DATA:
Percentage lease revenue(3)........... $ 22,869 $ 5,236 $ 5,540
Depreciation and amortization (4)..... 5,341 1,335 1,335
Real estate and personal property
taxes and property
insurance (5)........................ 2,646 662 628
General and administrative (6)........ 600 150 150
Interest expense (7).................. 3,193 798 798
Ground lease.......................... 323 81 81
-------- --------- ---------
Total expenses........................ 12,103 3,026 2,992
Minority interest (8)................. 54 11 13
Net income applicable to holders of
common shares........................ $ 10,712 $ 2,199 $ 2,535
======== ========= =========
Earnings per common share (basic)
(9).................................. $0.85 $0.18 $0.20
======== ========= =========
Weighted average number of common
shares outstanding................... 12,559 12,559 12,559
<CAPTION>
PRO FORMA
MARCH 31, 1998
--------------
<S> <C>
BALANCE SHEET DATA:
Net investment in hotel properties.... $155,770
Shareholders' equity.................. 113,900
Total assets.......................... 157,405
Total debt............................ 42,575
<CAPTION>
PRO FORMA
THREE MONTHS
PRO FORMA ENDED MARCH 31,
YEAR ENDED --------------------
DECEMBER 31, 1997 1997 1998
----------------- --------- ---------
<S> <C> <C> <C>
OTHER DATA:
Funds from operations (10)............ $ 15,975 $ 3,510 $ 3,848
Net cash provided by operating
activities........................... 16,107 3,545 3,883
Net cash (used in) investing
activities (11)...................... (2,646) (588) (622)
Net cash (used in) financing
activities (12)...................... (11,931) (2,983) (2,983)
</TABLE>
- --------
(notes on following page)
40
<PAGE>
THE COMBINED INITIAL HOTELS
SELECTED COMBINED HISTORICAL OPERATING AND FINANCIAL DATA (13)
(IN THOUSANDS--EXCEPT OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, (16)
----------------------------------- -----------------------------------
(UNAUDITED)
PRO FORMA PRO FORMA PRO FORMA
1995 1996 1997 1997 1997 1997 1998 1998
------- ------- ------- ----------- ------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Room revenue............ $48,300 $51,252 $52,913 $52,913 $11,760 $11,760 $12,436 $12,436
Other revenue........... 3,328 3,483 3,422 3,422 850 850 889 889
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........... 51,628 54,735 56,335 56,335 12,610 12,610 13,325 13,325
Hotel operating expenses
(14)................... 34,547 37,126 39,195 33,912 9,083 7,865 9,400 8,391
Lease payment........... -- -- -- 22,869 -- 5,236 -- 5,540
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from hotel
operations(15)......... 17,081 17,609 17,140 (446) 3,527 (491) 3,925 (606)
OPERATING DATA:
Occupancy............... 76.0% 77.3% 76.2% 71.7% 71.5%
ADR..................... $49.27 $50.94 $53.46 $51.23 $54.31
REVPAR.................. $37.44 $39.36 $40.75 $36.72 $38.82
</TABLE>
- --------
(1) The pro forma information does not purport to represent what the
Company's financial position or results of operations would actually have
been if the consummation of the Formation 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. The summary unaudited pro forma
financial and other data of the Company does not include a material non-
recurring charge of $850 paid to the Strategic Partner to cover expenses
incurred by the Strategic Partner in connection with the Pre-Offering
Debt. The Company intends that such payment will be paid and expensed out
of the Offering proceeds.
(2) The pro forma information is presented as if the Partnership recorded
depreciation and amortization, paid interest on remaining debt after the
Formation Transactions occurred, and paid real and personal property
taxes and property insurance as contemplated by the Percentage Leases.
(3) Represents lease payments from the Lessee to the Company and is
calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases to the historical room revenue of the Initial Hotels
for the period indicated.
(4) Represents depreciation on the Initial Hotels, amortization of
capitalized franchise fees and amortization of stock compensation
expense. Depreciation is computed based upon estimated useful lives of
39.5 and seven years for buildings and improvements and furniture and
equipment, respectively. Franchise fees are amortized over 10 years.
Stock compensation is amortized over the five year vesting period. These
estimated useful lives are based on management's knowledge of the
properties and the hotel industry in general.
(5) Represents real estate and personal property taxes and property and
casualty insurance to be paid by the Company.
(6) Estimated at $150 per quarter for compensation, legal, audit and other
expenses. The Strategic Partner has agreed to reimburse the Company for
general and administrative expenses in excess of $150 per quarter for the
remainder of 1998.
(7) Based on an assumed annual interest rate on the Line of Credit of 7.5%
for each period presented.
(8) Calculated at 0.5% of Partnership's net income.
(9) Pro forma earnings per Common Share is computed by dividing net income
applicable to the holders of Common Shares by the pro forma weighted
average number of Common Shares outstanding. The exchange of Units for
Common Shares will have no effect on diluted pro forma earnings per
Common Share as Unit holders and Shareholders effectively share equally
in the net income of the Partnership on a per Common Share and per Unit
basis.
41
<PAGE>
(10) FFO, as defined by NAREIT, represents net income applicable to common
shareholders (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from debt restructuring and sales
of property (including furniture and equipment), plus real estate related
depreciation and amortization (excluding amortization of deferred
financing costs), and after adjustments for unconsolidated partnerships
and joint ventures. Funds from Operations does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles, is not necessarily indicative of cash flow
available to fund cash needs and should not be considered as an
alternative to net income as an indication of performance or to cash flow
as a measure of liquidity. The Company considers FFO to be an appropriate
measure of the performance of an equity REIT in that such calculation is
a measure used by the Company to evaluate its performance against its
peer group and is a basis for making the determination as to the
allocation of its resources and reflects the Company's ability to meet
general operating expenses. Although Funds from Operations has been
computed in accordance with the current NAREIT definition, Funds from
Operations as presented may not be comparable to other similarly titled
measures used by other REITs. Funds from Operations does not reflect cash
expenditures for capital improvements or principal amortization of
indebtedness on the Initial Hotels. Under the Percentage Leases, the
Partnership will be obligated to fund capital expenditures with respect
to the Initial Hotels, which the Company anticipates will approximate 5%
of room revenues at the Initial Hotels. In addition, the Partnership will
be obligated under the Percentage Leases to maintain the underground
utilities and structural elements of the Initial Hotels. FFO has been
calculated as follows:
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------
1997 1997 1998
------------ --------- ---------
<S> <C> <C> <C>
Pro forma income before minority
interest............................... $10,766 $ 2,210 $ 2,548
Pro forma depreciation.................. 5,209 1,300 1,300
------- --------- ---------
Pro forma Funds from Operations......... $15,975 $ 3,510 $ 3,848
======= ========= =========
</TABLE>
(11) Represents capital expenditures for the Initial Hotels based on 5% of
room revenues as described in Note 10 above.
(12) Represents estimated initial distributions to be paid based on the
estimated initial annual distribution rate of $0.95 per share and
12,559,000 Common Shares outstanding for the year ended December 31,
1997.
(13) The Initial Hotel data is derived by adding the selected combined
historical financial data of (i) the twenty-six Fairfield Inn hotels to
be acquired from MFI Partners, Limited Partnership, and (ii) the Other
Initial Hotels, consisting of the one Hampton Inn hotel, one Comfort
Suites hotel and one Holiday Inn hotel. The 26 Fairfield Inn hotels were
owned and managed by entities other than MFI Partners prior to August 5,
1994; therefore, the Company believes that the financial information for
the hotels for the periods prior to the year ended December 31, 1995 is
not comparable, and thus is not relevant to the financial information for
subsequent periods.
(14) For historical periods, represents departmental costs and expenses,
general and administrative, repairs and maintenance, utilities,
marketing, management fees, real estate and personal property taxes,
property and casualty insurance and ground leases. The pro forma amounts
exclude real estate and personal property taxes, property and casualty
insurance, ground leases (all of which will be the responsibility of the
Company) and management fees paid by the sellers to the managers of the
Initial Hotels, which management may be terminated following completion
of the Offering and the Formation Transactions. Does not include
corporate overhead expenses for the Lessee or the Strategic Partner.
(15) Income (loss) from hotel operations represents earnings before interest,
taxes, depreciation and amortization from the Initial Hotels, and should
not be considered an alternative to net income as an indicator of
operating performance or to cash flow as a measure of liquidity. The line
item Income (loss) from hotel operations is the presentation that most
closely represents the operations of the Lessee after completion of the
Formation Transactions.
(16) For information reflecting interim period Percentage Lease revenue under
recently released FASB EITF 98-9, see "Prospectus Summary--Recent
Developments."
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Upon consummation of the Formation Transactions, the Company will own a 1%
general partnership interest and, through HHT Ltd., a wholly-owned subsidiary
of the Company, will own a 98.5% limited partnership interest in the
Partnership. In order for the Company to qualify as a REIT, neither the
Company nor the Partnership may operate hotels. Therefore, the Partnership
will lease the Initial Hotels to the Lessee. The Partnership's, and therefore
the Company's, principal source of revenue will be rent paid by the Lessee
under the Percentage Leases. See "The Initial Hotels--The Percentage Leases."
The Lessee's ability to perform its obligations, including making rent
payments to the Partnership under the Percentage Leases, will be dependent on
the Lessee's ability to generate sufficient room revenues and net cash flow
from the operation of the Initial Hotels, and any other hotels leased to the
Lessee by the Partnership. Each of the Initial Hotels will be managed by the
Lessee under the Percentage Leases. Income from hotel operations, as described
in the Selected Unaudited Pro Forma Consolidated Financial and Other Financial
Data, is the presentation that most clearly represents the operation of the
Lessee after completion of the Formations Transactions.
The following table sets forth certain combined historical information for
the Initial Hotels for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Room Revenue....................... $48,300 $51,252 $52,913 $ 11,760 $ 12,436
Other Revenue...................... 3,328 3,483 3,422 850 889
------- ------- ------- --------- ---------
Total Revenue...................... 51,628 54,735 56,335 12,610 13,325
Hotel Operating Expenses........... 34,547 37,126 39,195 9,083 9,400
------- ------- ------- --------- ---------
Income from hotel operations....... $17,081 $17,609 $17,140 $ 3,527 $ 3,925
</TABLE>
RESULTS OF OPERATIONS OF THE INITIAL HOTELS
Comparison of Three Months Ended March 31, 1998 to the Three Months Ended
March 31, 1997
Room revenue for the Initial Hotels increased approximately $.68 million or
5.7%, to $12.44 million in the first quarter of 1998 from $11.76 million in
the comparable period in 1997. The primary reason for the increase in the
first quarter of 1998 was a 6.1% increase in ADR to $54.34 from $51.23, which
was offset by a 0.3% decrease in occupancy to 71.5% from 71.7%. REVPAR
increased by 5.7% to $38.82 from $36.72.
Hotel operating expenses increased by $.3 million, or 3.5%, to $9.4 million,
but decreased as a percentage of total revenue to 70.5% from 72.0%. Income
from hotel operations increased by 11.3% to $3.9 million from $3.5 million.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Room revenue for the Initial Hotels increased $1.6 million, or 3.2%, to
$52.9 million in 1997 from $51.3 million in 1996. The primary reason for the
increase in 1997 was a 4.9% increase in ADR to $53.46 from $50.94, which was
offset by a 1.4% decrease in occupancy to 76.2% from 77.3%. The increase in
ADR reflected increases in room rates in response to improving consumer
demand. REVPAR increased 3.5% to $40.75 from $39.36.
Hotel operating expenses increased by $2.1 million, or 5.6%, to $39.2
million, and increased as a percentage of total revenue to 70.0% from 67.8%.
The increase in hotel operating expenses is primarily attributable to $0.9
million of additional repairs and maintenance incurred in 1997 in addition to
an increase in minimum wages,
43
<PAGE>
which increased labor costs by $0.9 million. As a result of the above, income
from hotel operations decreased by 2.7% to $17.1 million from $17.6 million.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Room revenue increased $3.0 million, or 6.1%, to $51.3 million in 1996 from
$48.3 million in 1995. The increase in revenue is attributable to a 3.4%
increase in ADR to $50.94 from $49.27, which was augmented by an increase in
occupancy of 1.7% to 77.3% from 76.0%. The increase in room revenue is
primarily a result of (i) increasing ADR reflecting increase in room rates in
response to improving consumer demand and (ii) the recognition of revenue for
the full year in 1996 from one of the Other Initial Hotels, which opened in
August 1995.
Hotel operating expenses increased by $2.6 million, or 7.5%, to $37.1
million from $34.5 million and increased as a percentage of total revenue to
67.8% from 66.9%. The increase is primarily attributable to additional labor
costs of approximately $0.75 million due to increased staffing, employee
training to increase hotel revenues, an increase of approximately $0.3 million
in repairs and maintenance to keep the facilities competitive, and an increase
of approximately $0.5 million in costs related to the complimentary breakfast,
travel agency fees and credit card charges due to the higher volume. As a
result of the above, income from hotel operations increased by 3.1% to $17.6
million from $17.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to its shareholders, will be its share of the
Partnership's cash flow from the Percentage Leases. On a pro forma basis, cash
flows from operating activities for the year ended December 31, 1997,
excluding changes in working capital, would have been $16.1 million based upon
the Percentage Lease payments and the anticipated operating expenses of the
Company. Pro forma cash flows used in investing activities for the year ended
December 31, 1997 would have been $2.6 million representing funding of the
capital expenditure reserves (based upon 5% of room revenues of the Initial
Hotels). Pro forma cash flow used in financing activities for the year ended
December 31, 1997 would have been $11.9 million representing distributions
(based upon the initial annual distribution rate of $.95 per share) to the
common shareholders.
The Company has received commitments from Capital America for the $125
million Credit Facility, which consists of the $100 million Line of Credit and
the Permanent Financing for $25 million. Concurrently with the completion of
the Offering and the Formation Transactions the Company expects to incur
approximately $42.6 million of indebtedness (representing approximately 27% of
the Company's investment in the Initial Hotels, at cost) under the Credit
Facility (approximately $25.0 million under the Permanent Financing and $17.6
million under the Line of Credit). The Line of Credit will bear interest at
the one month LIBOR rate plus 185 basis points. The Permanent Financing will
bear interest at a variable rate based on the yield of ten-year Treasury
obligations, plus a spread that varies based on the Company's actual debt
service coverage ratio and the length of time between the execution of the
Line of Credit and its conversion to Permanent Financing. The Permanent
Financing will be subject to debt service coverage limitations and a required
65% loan-to-value ratio. All of the 26 Initial Fairfield Inns and certain
properties acquired subsequent to the Offering will serve as security for
either the Line of Credit or the Permanent Financing. Upon the occurrence of
certain events, revenues from the properties securing the Line of Credit and
Permanent Financing may be subject to certain cash management or "cash trap"
mechanisms in favor of the lender. To the extent that the Company utilizes the
Permanent Financing in excess of $25 million, the amount available under Line
of Credit will be correspondingly reduced. The Company in the future may seek
to increase the amount of the Credit Facility, negotiate additional credit
facilities, or issue corporate debt instruments. Any debt incurred or issued
by the Company may be secured or unsecured, long-term or short-term, fixed or
variable interest rate and may be subject to such other terms as the Board of
Trustees of the Company deems prudent.
The Board of Trustees intends to limit the consolidated indebtedness of the
Company to approximately 50% of the Company's investment in hotel properties,
valued at un-depreciated total acquisition cost (the "Debt
44
<PAGE>
Policy"). However, the Company's organizational documents do not limit the
amount of indebtedness that the Company may incur and the Board of Trustees
may modify the debt policy at any time. The Company intends to repay
indebtedness incurred under the Credit Facility and other borrowings from time
to time, for acquisitions or otherwise, out of cash flow and from the proceeds
of issuances of Common Shares and other securities of the Company. See "Risk
Factors--Potential Adverse Effects of Leverage and Lack of Limits on
Indebtedness" and "Policies and Objectives with Respect to Certain
Activities--Investment Policies" and "--Financing."
The Company will invest in additional hotel properties only as suitable
opportunities arise, and the Company will not undertake investments unless
adequate sources of financing are available. The Company expects that future
investments in hotel properties will be financed, in whole or in part, with
proceeds from additional issuances of Common Shares or other securities or
borrowings under the Line of Credit or other credit facilities. The Company
currently has no agreement or understanding to invest in any hotel property
other than the Initial Hotels, and there can be no assurance that the Company
will make any investments in any other hotel properties which meet its
investment criteria. See "Business and Properties--Growth Strategy--
Acquisition Strategy."
The Company and the Partnership intend to spend approximately $10 million
over the next three years to fund certain capital improvements at the Initial
Hotels as required by the franchisors at such hotels and for the replacement
or refurbishment of FF&E, renovation of common areas and improvement of hotel
exteriors at the Initial Hotels, of which $5 million is expected to be funded
by ongoing capital expenditure reserves. Pursuant to the Percentage Leases,
the Company will be required to fund the costs of certain capital improvements
at the Initial Hotels, which the Company expects to be approximately 5% of
room revenue at the Initial Hotels. The Company intends to cause the
Partnership to spend amounts in excess of 5% of room revenue if necessary to
maintain the franchise licenses for the Initial Hotels and otherwise to the
extent that the Company deems such expenditures to be in the best interests of
the Company. Management believes that such amounts will be sufficient to fund
required expenditures for the foreseeable future.
The Company believes that it will have sufficient capital reserves to
satisfy its obligations during the 12 month period following the completion of
the Offering. Thereafter, the Company expects that capital needs will be met
through a combination of net cash provided by operations and additional
borrowings under the Credit Facility.
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the Lessee's ability to
raise room rates in the face of inflation, and annual increases in ADR may
fail to keep pace with inflation.
SEASONALITY
The Initial Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Company's quarterly
lease revenue to the extent that it receives Percentage Rent.
YEAR 2000 COMPLIANCE
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the
year 1900 (commonly known as the "Year 2000 Problem"). Like other
organizations, the Company could be adversely affected if the computer systems
used by it or service providers do not properly address this problem prior to
January 1, 2000. Currently, the Company does not anticipate that the
transition to the year 2000 will have any material impact on its performance.
In addition, the Company has sought assurances from the Lessee and other
service providers that they are taking all necessary steps to ensure that
their computer systems will accurately reflect the year 2000, and the Company
will continue to monitor the situation. At this time, however, no assurance
can be given that the Company's service providers have anticipated every step
necessary to avoid any adverse effects on the Company attributable to the Year
2000 Problem.
45
<PAGE>
THE INITIAL HOTELS
Upon the concurrent completion of the Offering and of the Formation
Transactions, the Company will own the 29 Initial Hotels with 3,558 rooms,
including 26 Initial Fairfield Inns with a total of 3,179 rooms and one
Comfort Suites hotel, one Hampton Inn hotel and one Holiday Inn hotel with a
total of 379 rooms. The Initial Hotels will be acquired from sellers not
affiliated with the Company for approximately $155.1 million (exclusive of the
$630,000 in option payments paid by the Strategic Partner for the Other
Initial Hotels). The Initial Hotels have an average age of approximately nine
years and are located in 16 states, with nine Initial Hotels in the
northeastern region, three Initial Hotels in the southeastern region, 11
Initial Hotels in the midwestern region, and six Initial Hotels in the western
region of the United States. The following table sets forth certain
information with respect to the Initial Hotels:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------
PRO FORMA
INCOME FROM 1997
NUMBER HOTEL OPERATIONS PRO FORMA
OF DATE ROOM BEFORE LEASE LEASE
ROOMS OPENED REVENUE PAYMENTS(1) PAYMENT(2) OCCUPANCY ADR(3) REVPAR(4)
------ ------- ----------- ---------------- ----------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FAIRFIELD INN:
NORTHEASTERN REGION
Hartford, CT........... 135 1990 $ 1,936,869 $ 813,931 $ 809,798 78.5% $50.08 $39.31
Wilmington, DE......... 135 1990 2,158,159 1,003,728 1,033,533 76.0 57.62 43.80
Portland, ME........... 120 1991 1,935,249 889,093 886,226 78.8 56.09 44.18
Buffalo, NY............ 135 1991 1,628,936 607,919 650,540 72.3 45.74 33.06
Syracuse, NY........... 135 1990 1,824,127 740,962 753,282 76.0 48.71 37.02
Harrisburg, PA......... 105 1990 1,139,992 337,163 339,729 69.6 42.76 29.75
Warrendale
(Metropolitan
Pittsburgh), PA....... 105 1991 1,608,608 748,036 730,894 76.9 54.60 41.97
SOUTHEASTERN REGION
Winter Park (Orlando),
FL.................... 135 1990 1,951,985 751,303 782,433 83.9 47.21 39.61
Rocky Mount, NC........ 104 1990 1,357,700 513,098 506,563 87.8 40.75 35.77
Chattanooga, TN........ 105 1991 1,437,419 533,053 529,671 74.6 50.25 37.51
MIDWESTERN REGION
Glenview (Metropolitan
Chicago), IL.......... 138 1990 2,205,956 1,008,581 1,059,793 80.7 54.26 43.80
Willowbrook
(Metropolitan
Chicago), IL.......... 129 1990 2,110,276 1,070,119 1,025,436 85.2 52.58 44.82
Fort Wayne, IN......... 105 1990 1,396,179 557,588 525,307 73.7 49.42 36.43
Cedar Rapids, IA....... 105 1990 1,321,734 489,551 520,177 73.5 46.90 34.49
Florence (Metropolitan
Cincinnati), KY....... 135 1990 1,742,502 692,965 740,774 72.1 49.03 35.36
Louisville, KY......... 105 1991 1,596,667 663,823 692,980 77.4 53.85 41.66
Akron, OH.............. 117 1990 1,353,518 577,559 554,190 63.8 49.69 31.69
Sharonville, OH........ 135 1990 1,619,251 614,635 629,821 67.4 49.73 32.86
Columbus, OH........... 105 1990 1,438,786 473,921 515,286 80.2 46.80 37.54
Willoughby
(Metropolitan
Cleveland), OH........ 134 1990 2,000,130 970,575 955,776 78.7 51.95 40.89
WESTERN REGION
Flagstaff, AZ.......... 135 1990 1,676,678 569,129 649,388 64.6 52.63 34.03
Phoenix West, AZ....... 126 1987 1,637,454 556,573 621,714 63.0 56.47 35.60
Scottsdale, AZ......... 133 1990 2,367,906 1,198,239 1,239,585 77.7 62.74 48.78
Ontario, CA............ 117 1990 1,521,932 526,531 526,284 80.6 44.20 35.64
Rancho Cordova, CA..... 117 1990 1,703,051 736,865 787,763 76.1 52.43 39.88
Las Vegas, NV.......... 129 1990 2,209,344 1,073,206 997,719 72.7 64.54 46.92
COMFORT SUITES:
Cheektowaga
(Metropolitan
Buffalo), NY.......... 100 1993 2,096,973 998,487 984,396 83.2 69.05 57.45
HAMPTON INN:
Cheektowaga
(Metropolitan
Buffalo), NY.......... 133 1995 2,782,451 1,409,316 1,378,150 81.3 70.52 57.32
HOLIDAY INN:
Cleveland, OH.......... 146 1968/91(5) 3,153,900 1,297,160 1,442,007 84.4 70.09 59.18
----- ----------- ----------- ----------- ---- ------ ------
Consolidated
Totals/Weighted
Average............... 3,558 $52,913,732 $22,423,109 $22,869,215 76.2% $53.46 $40.75
</TABLE>
46
<PAGE>
- --------
(1) Represents pro forma income from hotel operations exclusive of real estate
and personal property taxes, property and casualty insurance and ground
lease payments (all of which will become the responsibility of the
Company), assuming the Formation Transactions occurred January 1, 1997.
Does not reflect corporate overhead expenses for the Lessee or the
Strategic Partner. Certain unallocated repairs and maintenance expenses
for 1997 under the seller's accounting policies for the combined Initial
Fairfield Inns, totalling $1,213,000, were allocated to each property
based on its proportionate share of room revenues.
(2) Represents pro forma lease payments from the Lessee to the Partnership
calculated by applying the rent provisions in the Percentage Leases to the
historical room revenue of the Initial Hotels as if April 1, 1997 were the
beginning of the lease year.
(3) Determined by dividing room revenue by occupied rooms.
(4) Determined by dividing room revenue by available rooms.
(5) Originally opened in 1968, but substantially renovated in 1991.
DESCRIPTIONS OF INITIAL HOTELS
Set forth below is certain descriptive information regarding the Initial
Hotels.
INITIAL FAIRFIELD INNS
NORTHEASTERN REGION
Fairfield Inn--Hartford (Airport), Connecticut
This 135 room hotel is located at Hartford's Bradley International Airport.
Area demand generators include Continental Airlines, United Parcel Service,
Great American Insurance and nearby attractions such as the Basketball Hall of
Fame and the New England Air Museum.
Fairfield Inn--Wilmington, Delaware
This 135 room hotel is located on Interstate 95, approximately six miles
southwest of downtown Wilmington, and west of the Greater Wilmington Airport.
Nearby demand generators include Chrysler, the University of Delaware,
Delaware Park Racetrack, and traffic along Interstate 95.
Fairfield Inn--Portland (Scarborough), Maine
This 120 room hotel is located near the intersection of Interstates 295 and
95, approximately two miles south of Portland International Jetport. Local
demand generators include Portland International Airport, Jacobs Engineering,
Hannaford Brothers, IBM, Scarborough Downs, and the Beaches/Waterfront area.
Fairfield Inn--Buffalo, New York
This 135 room hotel is located on the New York Thruway, approximately two
miles northeast of the Buffalo International Airport. Local demand generators
include Best Foods, S.U.N.Y. of Buffalo, Westinghouse, the Buffalo
International Airport, Darien Lake Theme Park, Lancaster Speedway, Lake Erie
and Downtown Buffalo.
Fairfield Inn--Syracuse, New York
This 135 room hotel, which is subject to a long-term ground lease, is
located at Carrier Circle on the New York Thruway (Interstate 90). Local
demand generators include nearby commercial businesses such as United Parcel
Service and Carrier Corp., as well as nearby attractions such as Syracuse
University, the Carrier Dome, New York State Fairgrounds, and the Civic
Center.
Fairfield Inn--Harrisburg (West), Pennsylvania
This 105 room hotel is located approximately five miles south of Harrisburg,
at the intersection of Interstates I-76 and I-83. In addition to Harrisburg
International Airport, approximately seven miles to the east, demand
generators include ADM Milling, Pennsylvania Department of Corrections,
Defense Distribution Region East, Hershey Park and Arena, Ski Roundtop, and
Penn National Race Course.
47
<PAGE>
Fairfield Inn--Warrendale (Pittsburgh), Pennsylvania
This 105 room hotel is located near the intersection of Interstates I-76 and
I-79, north of Pittsburgh. Local demand generators include the nearby
corporate facilities of Sysco and Armour Swift-Eckrich and area attractions
such as Three Rivers Stadium, Blade Runners Hockey Rink and the University of
Pittsburgh.
SOUTHEASTERN REGION
Fairfield Inn--Winter Park (Orlando), Florida
This 135 room hotel is located off Interstate 4, a major east/west artery
crossing the State of Florida. Local demand generators include Walt Disney
Attractions, Sea World, Rollins College, Universal Studios, and downtown
Orlando.
Fairfield Inn--Rocky Mount, North Carolina
This 104 room hotel is located north of the Rocky Mount Wilson Airport, at
the crossroads of State Route 43 and Highway 301. Demand generators include
the nearby corporate facilities of CSX Railroad, Allied Signal, Cummins and
Abbott Labs, and North Carolina Wesleyan College.
Fairfield Inn--Chattanooga, Tennessee
This 105 room hotel is located approximately four miles directly northeast
of Metropolitan Airport directly on Interstate 75. Commercial demand
influences include such companies as Bi-Lo, DuPont and McKee Foods, while
leisure demand is generated from nearby attractions such as the Metropolitan
Airport, the Tennessee Aquarium and downtown Chattanooga.
MIDWESTERN REGION
Fairfield Inn--Glenview (Chicago), Illinois
This 138 room hotel, which is subject to a long-term ground lease, is
located North of Chicago, at Grand Avenue just off Interstate 94 (which runs
from Detroit, Michigan to the east, to Billings, Montana to the west). Demand
generators include the Mormon Temple, the Chicago O'Hare Airport, Downtown
Chicago, Gurnee Mills Mall, Palwaukee Airport, and Six Flags Great America.
Fairfield Inn--Willowbrook (Chicago), Illinois
This 129 room hotel is located in a suburban community approximately 25
miles southeast of downtown Chicago off Route 83, a major north-south highway.
Area companies such as Argonne National Laboratory, Correctional Foods, Case
Corporation, Nanophase, Sysco Foods, and RR Donnelley Financial contribute to
commercial market demand.
Fairfield Inn--Fort Wayne, Indiana
This 105 room hotel is located on and visible from Interstate 69. Key demand
generators include the nearby corporate facilities of GTE, General Motors and
Kroger and area attractions such as Memorial Coliseum, Indiana/Purdue
University and Lincoln Museum.
Fairfield Inn--Cedar Rapids, Iowa
This 105 room hotel is located on Interstate 380, approximately three miles
south of downtown Cedar Rapids and approximately six miles northeast of the
Cedar Rapids Municipal Airport. Area companies such as MCI, Cargill, McLeod,
Rockwell, and General Mills contribute to commercial market demand. Demand
from the leisure market is generated from nearby attractions and landmarks
such as the Brucemore Mansion, Hawkeye Downs, and the Westdale Mall.
48
<PAGE>
Fairfield Inn--Florence, Kentucky (Greater Cincinnati Area)
This 135 room hotel is located on Interstate 75, a major north/south
highway, approximately four miles southeast of the Cincinnati International
Airport. Demand generators include the nearby corporate facilities of
Schwanns, Marriott Health, Rockwell International, Cracker Barrel, Delta
Airlines and Norfolk Southern Railroad and nearby attractions such as
Riverfront Stadium, Turfway Park Racetrack and Downtown Cincinnati.
Fairfield Inn--Louisville (East), Kentucky
This 105 room hotel is located approximately ten miles east of Standiford
Airport, directly off Interstate 64. Demand generators include the adjacent
Blue Grass Business Park, Xerox, Bell South, and Ford and nearby attractions
such as the University of Louisville, Churchill Downs, Kentucky State
Fair/Expo Center and Downtown Louisville.
Fairfield Inn--Akron, Ohio
This 117 room hotel, which is subject to a long-term ground lease, is
located approximately seven miles west of Akron on Interstate 77, a major
north-south corridor from Cleveland to Canton, Ohio, one of the primary routes
leading into downtown Akron. Nearby demand generators include Akron
University, Bridgestone/Firestone, the Pro Football Hall of Fame in Canton,
Sea World, and Geauga Lake in Cleveland.
Fairfield Inn--Sharonville (Cincinnati), Ohio
This 135 room hotel is located adjacent to Interstate 75, near its
intersection with Interstate 275. Key demand generators include Winn Dixie,
Marriott Health Care, Communicare, Ford Motor Company, General Electric, the
Kings Island Amusement Park, downtown Cincinnati and the Convention Center.
Fairfield Inn--Columbus West, Ohio
This 105 room hotel is located on Interstate 70, a major east/west highway,
approximately three miles west of Interstate 270--the beltway around Columbus.
Nearby demand generators include the Columbus Gift Mart, UPS, Lucent
Technologies, the Ohio State Fairgrounds, Ohio State University and downtown
Columbus.
Fairfield Inn--Willoughby (Cleveland), Ohio
This 134 room hotel is located in Willoughby Hills, an eastern suburb of
Cleveland, Ohio, at the intersection of Interstates 90 and 271. Demand is
generated by Lubrrol, CEI, General Electric, Lake Erie, Sea World, Geauga
Lake, and downtown Cleveland.
WESTERN REGION
Fairfield Inn--Flagstaff, Arizona
This 135 room hotel is located in the northwest quadrant of Interstate 17
and Interstate 40, north of the Flagstaff Municipal Airport. Business demand
results from American Tours International, the Arizona state capitol and
Mountain West Airlines/Mesa Air. Leisure demand is driven by nearby
attractions and landmarks such as the Grand Canyon, Walnut Canyon, Wupatki
Ruins, and Sunset Crater.
Fairfield Inn--Phoenix (West), Arizona
This 126 room hotel, which was renovated and converted from a Hampton Inn in
1987, is located close to Interstate 10. Major commercial and leisure demand
generators in the area include Steere Tank Lines, Watkins Trucking, General
Parts/Carquest, the State Fairgrounds, Manzanita Speedway, Blockbuster Desert
Sky Pavilion, and Downtown Phoenix.
49
<PAGE>
Fairfield Inn--Scottsdale, Arizona
This 133 room hotel is located on Scottsdale Road one-half mile from the
Scottsdale Municipal Airport, eight miles north of the Scottsdale Fifth Avenue
Shops, and downtown Scottsdale. Major area companies such as Giant Industries,
Robb & Stuckey, Mountain County Supply, SimCom, and Food for the Hungry,
contribute to commercial market demand. Leisure market demand is generated by
nearby attractions and landmarks such as the John Jacobs Golf School, the
Barrett Jackson Car Show and the Specialized Cactus Cup Bike Race.
Fairfield Inn--Ontario, California
This 117 room hotel is located approximately two miles from the Ontario
International Airport, adjacent to Interstate 10. Commercial and leisure
demand generators in the area include the Ontario Convention Center, Ontario
International Airport, Goodyear Training Center, Disneyland, Ontario Mills
Outlet Mall and California Speedway.
Fairfield Inn--Rancho Cordova (Sacramento), California
This 117 room hotel is located along Highway 50, near the recreational areas
of Lake Natoma and Folsom Lake. Key demand generators include the adjacent
business parks, RMI, Intel, Allstate Insurance, EDS, the California Capitol,
Old Sacramento Historic Area, Cal Expo, and the Sacramento Raceway.
Fairfield Inn--Las Vegas, Nevada
This 129 room hotel, which was renovated from a Hampton Inn in 1990, is
located on Paradise Road, just north of McCarran International Airport, close
to Interstate 15. Commercial and leisure demand is generated in part by
McCarran International Airport, the Las Vegas Convention Center, Sands Expo
and Convention Center, the UNLV Campus, the Las Vegas Strip, Hoover Dam/Lake
Mead, and Nellis Air Force Base.
COMFORT SUITES
Cheektowaga (Metropolitan Buffalo), New York
This 100 suite (1 and 2 bedrooms with separate living, sleeping and kitchen
areas) hotel is adjacent to the Greater Buffalo International Airport, near
the intersection of Interstate 90 and State Route 33. Local demand generators
include Niagara Falls, downtown Buffalo, State University of New York at
Buffalo, Walden Galleria Mall and Rich Stadium.
HAMPTON INN
Cheektowaga (Metropolitan Buffalo), New York
This 135 room hotel is located just off Exit 52W of Interstate 90. Nearby
demand generators include General Motors, Calspan, Sierra Technologies, Acts
Testing Labs, American Precision Industries, Niagara Falls and Walden Galleria
Mall.
HOLIDAY INN
Holiday Inn--Cleveland, Ohio
This 146 room hotel is located just off Interstate 71, approximately two
miles northeast of the Cleveland Hopkins International Airport. Demand
generators include downtown Cleveland, NASA Space Museum, the Flats, IX
Center, area Cleveland museums, Gund Arena, Jacobs Field and the Rock 'n Roll
Hall of Fame.
As owner of the Initial Hotels, the Partnership will be liable for all
property taxes and property and casualty insurance on the Initial Hotels after
completion of the Formation Transactions. The aggregate real estate property
tax obligations for the Initial Hotels during the year ended December 31, 1997
was approximately $2.2 million.
50
<PAGE>
The following table sets forth certain historical operating information with
respect to each Initial Hotel and the Initial Hotels on a consolidated basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
INITIAL FAIRFIELD INNS:
NORTHEASTERN REGION
Hartford, CT
Occupancy.............................................. 77.6% 79.0% 78.5%
ADR.................................................... $44.41 $48.75 $50.08
REVPAR................................................. $34.45 $38.51 $39.31
Wilmington, DE
Occupancy.............................................. 73.6% 79.1% 76.0%
ADR.................................................... $45.40 $47.93 $57.62
REVPAR................................................. $33.43 $37.91 $43.80
Portland, ME
Occupancy.............................................. 71.8% 77.3% 78.8%
ADR.................................................... $51.70 $51.73 $56.09
REVPAR................................................. $37.11 $40.01 $44.18
Buffalo, NY
Occupancy.............................................. 73.5% 75.7% 72.3%
ADR.................................................... $42.77 $44.38 $45.74
REVPAR................................................. $31.43 $33.58 $33.06
Syracuse, NY
Occupancy.............................................. 73.9% 74.4% 76.0%
ADR.................................................... $44.78 $45.11 $48.71
REVPAR................................................. $33.08 $33.58 $37.02
Harrisburg, PA
Occupancy.............................................. 68.2% 67.7% 69.6%
ADR.................................................... $41.50 $42.66 $42.76
REVPAR................................................. $28.30 $28.90 $29.75
Warrendale (Metropolitan Pittsburgh), PA
Occupancy.............................................. 80.4% 78.7% 76.9%
ADR.................................................... $51.50 $52.88 $54.60
REVPAR................................................. $41.41 $41.64 $41.97
SOUTHEASTERN REGION
Winter Park (Orlando), FL
Occupancy.............................................. 69.1% 82.0% 83.9%
ADR.................................................... $42.35 $42.51 $47.21
REVPAR................................................. $29.25 $34.86 39.61
Rocky Mount, NC
Occupancy.............................................. 77.9% 85.3% 87.8%
ADR.................................................... $41.75 $38.20 $40.75
REVPAR................................................. $32.51 $32.60 $35.77
Chattanooga, TN
Occupancy.............................................. 81.8% 74.8% 74.6%
ADR.................................................... $49.81 $51.35 $50.25
REVPAR................................................. $40.76 $38.43 $37.51
MIDWESTERN REGION
Glenview (Metropolitan Chicago), IL
Occupancy.............................................. 79.2% 78.3% 80.7%
ADR.................................................... $44.64 $48.57 $54.26
REVPAR................................................. $35.34 $38.05 $43.80
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Willowbrook (Metropolitan Chicago), IL
Occupancy......................................... 84.4% 85.1% 85.2%
ADR............................................... $47.01 $49.91 $52.58
REVPAR............................................ $39.70 $42.49 $44.82
Fort Wayne, IN
Occupancy......................................... 75.6% 73.5% 73.7%
ADR............................................... $45.88 $48.77 $49.42
REVPAR............................................ $34.68 $35.85 $36.43
Cedar Rapids, IA
Occupancy......................................... 77.3% 74.4% 73.5%
ADR............................................... $43.68 $45.39 $46.90
REVPAR............................................ $33.79 $33.79 $34.49
Florence (Metropolitan Cincinnati), KY
Occupancy......................................... 73.6% 75.3% 72.1%
ADR............................................... $45.80 $46.11 $49.03
REVPAR............................................ $33.72 $34.70 $35.36
Louisville, KY
Occupancy......................................... 78.2% 76.8% 77.4%
ADR............................................... $50.61 $54.22 $53.85
REVPAR............................................ $39.55 $41.65 $41.66
Akron, OH
Occupancy......................................... 79.2% 68.3% 63.8%
ADR............................................... $46.57 $49.57 $49.69
REVPAR............................................ $36.90 $33.85 $31.69
Sharonville (Metropolitan Cincinnati), OH
Occupancy......................................... 68.7% 69.3% 67.4%
ADR............................................... $47.65 $48.51 $48.73
REVPAR............................................ $32.74 $33.61 $32.86
Columbus, OH
Occupancy......................................... 76.8% 71.2% 80.2%
ADR............................................... $46.49 $48.70 $46.80
REVPAR............................................ $35.69 $34.66 $37.54
Willoughby (Metropolitan Cleveland), OH
Occupancy......................................... 76.9% 78.5% 78.7%
ADR............................................... $47.80 $50.37 $51.95
REVPAR............................................ $36.77 $39.55 $40.89
WESTERN REGION
Flagstaff, AZ
Occupancy......................................... 71.4% 72.2% 64.6%
ADR............................................... $54.78 $53.39 $52.63
REVPAR............................................ $39.14 $38.53 $34.03
Phoenix West, AZ
Occupancy......................................... 72.2% 74.1% 63.0%
ADR............................................... $50.90 $50.64 $56.47
REVPAR............................................ $36.82 $37.51 $35.60
Scottsdale, AZ
Occupancy......................................... 80.5% 80.8% 77.7%
ADR............................................... $63.82 $63.05 $62.74
REVPAR............................................ $51.40 $50.92 $48.78
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Ontario, CA
Occupancy........................................ 67.6% 74.3% 80.6%
ADR.............................................. $42.31 $41.45 $44.20
REVPAR........................................... $28.62 $30.80 $35.64
Rancho Cordova, CA
Occupancy........................................ 76.1% 75.3% 76.1%
ADR.............................................. $42.17 $45.26 $52.43
REVPAR........................................... $32.10 $34.06 $39.88
Las Vegas, NV
Occupancy........................................ 81.0% 83.8% 72.7%
ADR.............................................. $58.17 $60.90 $64.54
REVPAR........................................... $47.14 $51.03 $46.92
COMFORT SUITES:
Metropolitan Buffalo, NY
Occupancy........................................ 80.8% 84.9% 83.2%
ADR.............................................. $66.73 $67.95 $69.05
REVPAR........................................... $53.91 $57.71 $57.45
HAMPTON INN:
Metropolitan Buffalo, NY
Occupancy........................................ 69.6% 81.2% 81.3%
ADR.............................................. $62.35 $65.46 $70.52
REVPAR........................................... $43.39 $53.15 $57.32
HOLIDAY INN:
Cleveland, OH
Occupancy........................................ 86.7% 85.6% 84.4%
ADR.............................................. $60.45 $64.30 $70.09
REVPAR........................................... $52.43 $55.06 $59.18
TOTAL WEIGHTED AVERAGE OF COMBINED INITIAL HOTELS
Occupancy........................................ 76.0% 77.3% 76.2%
ADR.............................................. $49.27 $50.94 $53.46
REVPAR........................................... $37.44 $39.36 $40.75
</TABLE>
THE PERCENTAGE LEASES
In order for the Company to qualify as a REIT, the Company cannot operate
hotels. Therefore, the Company will lease each Initial Hotel to the Lessee for
a term of seven years. The Percentage Leases, which provide for rent equal to
the greater of Base Rent or Percentage Rent, are designed to allow the Company
to participate in growth in revenues from the Initial Hotels and to provide
incentives for the Lessee to exceed certain revenue targets. This return is
based on certain assumptions and historical revenues for the Initial Hotels
and no assurance can be given that future revenues for the Initial Hotels will
be consistent with prior performance or the estimates. See "Risk Factors--
Hotel Industry Risks." The Initial Hotels will be operated by the Lessee. The
Strategic Partner will guarantee the Lessee's rent obligations under the
Percentage Leases. See "The Strategic Partner and Lessee." The Strategic
Partner's guarantee of the Lessee's obligations under the Percentage Lease
will be subordinated to the Strategic Partner's $35 million of existing
indebtedness owed to an affiliate of Capital America. Each Percentage Lease
contains the provisions described below, and the Company anticipates that
future leases with respect to its hotel property investments will contain
substantially similar provisions, although the Company's Board of Trustees
may, in its discretion, alter any of these provisions with respect to any
particular lease, depending on the purchase price paid, economic conditions
and other factors deemed relevant at the time. The following summary is
qualified in its entirety by the Percentage Leases, the form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part.
53
<PAGE>
Percentage Lease Terms.
Each Percentage Lease for the Initial Hotels will have a non-cancelable term
of seven years, which is subject to earlier termination upon the occurrence of
certain contingencies described in the Percentage Lease (including,
particularly, the provisions described herein under "Damage to Initial
Hotels," "Condemnation of Initial Hotel" and "Termination of Percentage Leases
on Disposition of the Initial Hotels").
Amounts Payable Under the Percentage Leases.
During the term of each Percentage Lease, the Lessee will be obligated to
pay (i) the greater of Base Rent or Percentage Rent and (ii) certain other
amounts, including interest accrued on any late payments or charges (the
"Additional Charges"). Base Rent accrues and is required to be paid monthly.
Percentage Rent is calculated by multiplying fixed percentages by gross room
revenues for each of the Initial Hotels. The percentage of room revenues to be
paid as Percentage Rent generally increases as certain ranges of room revenue
are achieved. However, if room revenues exceed a target amount (which target
is in excess of the Company's projected room revenues), the percent of room
revenues payable as Percentage Rent will decrease. (See the table below.) This
decrease in the percentage of room revenues payable as Percentage Rent is
intended to provide an incentive for the Lessee to exceed a targeted level of
room revenue at the Initial Hotels. Percentage Rent is due within 30 days of
the end of each of the first three calender quarters and on or before February
10 of the following year for the fourth calender quarter.
54
<PAGE>
The table below sets forth (i) the annual Base Rent, (ii) Percentage Rent
formulas and (iii) the pro forma rent that would have been paid for each
Initial Hotel pursuant to the terms of the Percentage Leases based on pro
forma revenues for the year ended December 31, 1997, as if the Partnership had
owned the Initial Hotels and the Percentage Leases had been in effect since
January 1, 1997. For each Initial Hotel, Percentage Rent would have been
greater than Base Rent, and the pro forma rents shown below represent such
Percentage Rent.
<TABLE>
<CAPTION>
ANNUAL 1997 PRO FORMA LEASE
HOTEL BASE RENT ANNUAL PERCENTAGE LEASE FORMULA PAYMENT
----- --------- ------------------------------- --------------------
<C> <C> <S> <C>
INITIAL FAIRFIELD INNS:
NORTHEASTERN REGION
Hartford, CT.............................. $ 391,322 20% of all non-room $ 809,798
revenue plus 28.9% of
room revenue up to
$1,369,000, plus 69.7%
of room revenue in
excess of $1,369,000,
but less than $2,151,572
and 50% of room revenue
in excess of $2,151,572.
Wilmington, DE............................ $ 483,764 20% of all non-room $1,033,533
revenue plus 37.1% of
room revenue up to
$1,497,000, plus 68.6%
of room revenue in
excess of $1,497,000,
but less than $2,352,988
and 50% of room revenue
in excess of $2,352,988.
Portland, ME.............................. $ 440,349 20% of all non-room $ 886,226
revenue plus 36.4% of
room revenue up to
$1,396,000, plus 67% of
room revenue in excess
of $1,396,000, but less
than $2,193,573 and 50%
of room revenue in
excess of $2,193,573.
Buffalo, NY............................... $ 321,446 20% of all non-room $ 650,540
revenue plus 27.3% of
room revenue up to
$1,168,000, plus 68.2%
of room revenue in
excess of $1,168,000,
but less than $1,835,223
and 50% of room revenue
in excess of $1,835,223.
Syracuse, NY.............................. $ 369,618 20% of all non-room $ 753,282
revenue plus 28.9% of
room revenue up to
$1,302,000, plus 69.1%
of room revenue in
excess of $1,302,000,
but less than $2,046,516
and 50% of room revenue
in excess of $2,046,516.
Harrisburg, PA............................ $ 182,937 20% of all non-room $ 339,729
revenue plus 15.4% of
room revenue up to
$845,000, plus 66.7% of
room revenue in excess
of $845,000, but less
than $1,327,911 and 50%
of room revenue in
excess of $1,327,911.
Warrendale (Metropolitan Pittsburgh), PA.. $ 371,861 20% of all non-room $ 730,894
revenue plus 35.7% of
room revenue up to
$1,179,000, plus 68.9%
of room revenue in
excess of $1,179,000,
but less than $1,853,355
and 50% of room revenue
in excess of $1,853,355.
SOUTHEASTERN REGION
Winter Park (Orlando), FL................. $ 358,039 20% of all non-room $ 782,433
revenue plus 25.7% of
room revenue up to
$1,339,000, plus 68.7%
of room revenue in
excess of $1,339,000,
but less than $2,103,730
and 50% of room revenue
in excess of $2,103,730.
Rocky Mount, NC........................... $ 263,319 20% of all non-room $ 506,563
revenue plus 27.5% of
room revenue up to
$1,005,000, plus 61.7%
of room revenue in
excess of $1,005,000,
but less than $1,580,000
and 50% of room revenue
in excess of $1,580,000.
Chattanooga, TN........................... $ 276,784 20% of all non-room $ 529,671
revenue plus 24.6% of
room revenue up to
$1,059,000, plus 67.8%
of room revenue in
excess of $1,059,000,
but less than $1,664,733
and 50% of room revenue
in excess of $1,664,733.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
ANNUAL 1997 PRO FORMA LEASE
HOTEL BASE RENT ANNUAL PERCENTAGE LEASE FORMULA PAYMENT
----- --------- ------------------------------- --------------------
<S> <C> <C> <C>
MIDWESTERN REGION
Glenview, IL............ $499,071 20% of all non-room revenue plus $1,059,793
37.4% of room revenue up to
$1,536,000, plus 69.4% of room
revenue in excess of $1,536,000, but
less than $2,413,899 and 50% of room
revenue in excess of $2,413,899.
Willowbrook, IL......... $520,947 20% of all non-room revenue plus $1,025,436
40.1% of room revenue up to
$1,548,000, plus 68.4% of room
revenue in excess of $1,548,000, but
less than $2,432,954 and 50% of room
revenue in excess of $2,432,954.
Fort Wayne, IN.......... $285,225 20% of all non-room revenue plus $ 525,307
25.9% of room revenue up to
$1,053,000, plus 69.4% of room
revenue in excess of $1,053,000, but
less than $1,654,654 and 50% of room
revenue in excess of $1,654,654.
Cedar Rapids, IA........ $277,511 20% of all non-room revenue plus $ 520,177
28.1% of room revenue up to
$987,000, plus 68.6% of room revenue
in excess of $987,000, but less than
$1,550,535 and 50% of room revenue
in excess of $1,550,535.
Florence, KY............ $391,926 20% of all non-room revenue plus $ 740,774
32.8% of room revenue up to
$1,302,000, plus 68.2% of room
revenue in excess of $1,302,000, but
less than $2,046,487 and 50% of room
revenue in excess of $2,046,487.
Louisville, KY.......... $352,886 20% of all non-room revenue plus 33% $ 692,980
of room revenue up to $1,170,000,
plus 68.3% of room revenue in excess
of $1,170,000, but less than
$1,838,272 and 50% of room revenue
in excess of $1,838,272.
Arkon, OH............... $276,701 20% of all non-room revenue plus $ 554,190
28.6% of room revenue up to
$976,000, plus 69.5% of room revenue
in excess of $976,000, but less than
$1,533,705 and 50% of room revenue
in excess of $1,533,705.
Sharonville, OH......... $335,681 20% of all non-room revenue plus $ 629,821
28.4% of room revenue up to
$1,214,000, plus 66.8% of room
revenue in excess of $1,214,000, but
less than $1,906,963 and 50% of room
revenue in excess of $1,906,963.
Columbus, OH............ $254,724 20% of all non-room revenue plus 22% $ 515,286
of room revenue up to $1,027,000,
plus 67.1% of room revenue in excess
of $1,027,000, but less than
$1,613,324 and 50% of room revenue
in excess of $1,613,324.
Willoughby, OH.......... $462,982 20% of all non-room revenue plus $ 955,776
37.8% of room revenue up to
$1,420,000, plus 69% of room revenue
in excess of $1,420,000, but less
than $2,231,025 and 50% of room
revenue in excess of $2,231,025.
WESTERN REGION
Flagstaff, AZ........... $321,629 20% of all non-room revenue plus $ 649,388
27.4% of room revenue up to
$1,204,000, plus 64.9% of room
revenue in excess of $1,204,000, but
less than $1,891,419 and 50% of room
revenue in excess of $1,891,419.
Phoenix West, AZ........ $319,673 20% of all non-room revenue plus 27% $ 621,714
of room revenue up to $1,201,000,
plus 64.1% of room revenue in excess
of $1,201,000, but less than
$1,887,509 and 50% of room revenue
in excess of $1,887,509.
Scottsdale, AZ.......... $612,371 20% of all non-room revenue plus $1,239,585
44.2% of room revenue up to
$1,707,000, plus 69.9% of room
revenue in excess of $1,707,000, but
less than $2,682,782 and 50% of room
revenue in excess of $2,682,782.
</TABLE>
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<TABLE>
<CAPTION>
ANNUAL 1997 PRO FORMA LEASE
HOTEL BASE RENT ANNUAL PERCENTAGE LEASE FORMULA PAYMENT
----- ----------- -------------------------------- --------------------
<C> <C> <S> <C>
Ontario, CA......... $ 264,692 20% of all non-room revenue plus 20% $ 526,284
of room revenue up to $1,097,000,
plus 68.1% of room revenue in excess
of $1,097,000, but less than
$1,724,310 and 50% of room revenue
in excess of $1,724,310.
Rancho Cordova, CA.. $ 396,466 20% of all non-room revenue plus $ 787,763
36.4% of room revenue up to
$1,241,000, plus 68.6% of room
revenue in excess of $1,241,000, but
less than $1,949,633 and 50% of room
revenue in excess of $1,949,633.
Las Vegas, NV....... $ 584,403 20% of all non-room revenue plus $ 997,719
38.3% of room revenue up to
$1,783,000, plus 67.7% of room
revenue in excess of $1,783,000, but
less than $2,802,213 and 50% of room
revenue in excess of $2,802,213.
COMFORT SUITES:
Cheektowaga, NY $ 423,695 20% of all non-room revenue plus $ 984,396
32.8% of room revenue up to
$1,379,000, plus 72.5% of room
revenue in excess of $1,379,000, but
less than $2,166,346 and 50% of room
revenue in excess of $2,166,346.
HAMPTON INN:
Cheektowaga, NY $ 693,900 20% of all non-room revenue plus $ 1,378,150
40.7% of room revenue up to
$2,027,000, plus 71.3% of room
revenue in excess of $2,027,000, but
less than $3,184,695 and 50% of room
revenue in excess of $3,184,695.
HOLIDAY INN:
Cleveland, OH $ 748,579 20% of all non-room revenue plus $ 1,442,007
29.1% of room revenue up to
$2,374,000, plus 67.6% of room
revenue in excess of $2,374,000, but
less than $3,731,173 and 50% of room
revenue in excess of $3,731,173.
----------- -----------
Total............... $11,482,500 $22,869,215
=========== ===========
</TABLE>
The revenue figures under the "Base Rent" and "Annual Percentage Rent
Formula" columns will adjust upward to reflect increases in the CPI. Beginning
in 2000 and for each year thereafter, Base Rent and the dollar amounts at
which the higher percentage of room revenues begins to be paid to the
Partnership or the Company, as the case may be (the "Rent Break Points"), will
each be increased by 100% of any CPI increase for such year. The annual
adjustment to the highest Rent Break Point will be increased based on the
higher of (i) 100% of the CPI increase or (ii) 80% of the increase in REVPAR
for the hotel for the preceding year. The Company will calculate the CPI
related adjustments and communicate such adjustments to the Lessee as soon as
possible after the CPI becomes available for the prior year. If any rent is
paid prior to notification of such adjustments, any short fall in such
payments will be due in the first rent payment after the CPI adjustments have
been determined.
Other than real estate taxes, ground rents, property and casualty insurance,
the cost of capital improvements and maintenance of structural elements, which
for the Initial Hotels are the obligations of the Company, the Percentage
Leases require the Lessee to pay rent, insurance, all costs and expenses and
all utility and other charges incurred in the operation of the Initial Hotels.
The Percentage Leases also provide for rent reductions and abatements in the
event of damage or destruction or a partial taking of any Initial Hotel as
described under "Damage to Initial Hotels" and "Condemnation of Initial
Hotel."
Guarantee by Strategic Partner.
The Lessee's payment obligations under the Percentage Leases will be
guaranteed in full by the Strategic Partner. The Strategic Partner's guarantee
of the Lessee's obligations under the Percentage Lease will be subordinated to
the Strategic Partner's $35 million of existing indebtedness owed to an
affiliate of Capital America.
Maintenance and Modifications.
Under the Percentage Leases, the Company is required to maintain the
structural elements of the improvements with respect to the Initial Hotels. In
addition, the Percentage Leases obligate the Company to fund
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<PAGE>
periodic capital improvements (in addition to maintenance of structural
elements) to the buildings and grounds comprising the Initial Hotels, and the
periodic repair, replacement and refurbishment of FF&E in the Initial Hotels,
when and as deemed necessary by the Lessee. The Company estimates that such
capital expenditures will approximate 5% of the room revenues at the Initial
Hotels. However, the Company intends to cause the Partnership to spend amounts
in excess of 5% of room revenues if necessary to maintain the franchise
licenses for the Initial Hotels and otherwise to the extent that the Company
deems such expenditures to be in the best interests of the Company. In
addition, the Company anticipates spending approximately $5 million in excess
of the 5% capital expenditure reserves over the next three years to fund
certain PIPs at the Initial Hotels required by the franchisors. Management
believes that such amounts will be sufficient to fund required expenditures
for the foreseeable future. Except for capital improvements and maintenance of
structural elements, the Lessee will be required, at its expense, to maintain
the Initial Hotels in good order and repair, except for ordinary wear and
tear, and to make non-structural, foreseen and unforeseen, and ordinary and
extraordinary, repairs which may be necessary and appropriate to keep the
Initial Hotels in good order and repair.
The Lessee is not obligated to bear the cost of capital improvements to the
Initial Hotels. With the consent of the Company, however, the Lessee, at its
expense, may make non-capital and capital additions, modifications or
improvements to the Initial Hotels, provided that such action does not
significantly alter the character or purposes of the Initial Hotels or
significantly detract from the value or operating efficiencies of the Initial
Hotels. All such alterations, replacements and improvements shall be subject
to all the terms and provisions of the Percentage Leases and will become the
property of the Company, upon termination of the Percentage Leases. The
Company will own substantially all personal property (other than inventory)
not affixed to, or deemed a part of, the real estate or improvements thereon
comprising the Initial Hotels, except to the extent that ownership of such
personal property would cause the rents under the Percentage Leases not to
qualify as "rents from real property" for REIT income test purposes. See
"Federal Income Tax Considerations--Requirements for Qualification--Income
Tests."
Insurance and Property Taxes.
The Company is responsible for paying real estate taxes and property and
casualty insurance on the Initial Hotels (except to the extent that personal
property associated with the Initial Hotels is owned by the Lessee). The
Lessee is required to pay or reimburse the Company for all liability insurance
on the Initial Hotels, with extended coverage, comprehensive general public
liability, workers' compensation and other insurance appropriate and customary
for properties similar to the Initial Hotels and naming the Company as an
additional named insured.
Indemnification.
Under each of the Percentage Leases, the Lessee will indemnify, and will be
obligated to hold harmless, the Company from and against all liabilities,
costs and expenses (including reasonable attorneys' fees and expenses)
incurred by, imposed upon or asserted against the Company on account of, among
other things, (i) any accident or injury to person or property on or about the
Initial Hotels, (ii) any misuse by the Lessee or any of its agents of the
leased property, (iii) any environmental liability resulting from conditions
arising from any action or negligence of the Lessee (see "Business and
Properties--Environmental Matters"); (iv) taxes and assessments in respect of
the Initial Hotels (other than real estate taxes and income taxes of the
Company on income attributable to the Initial Hotels); (v) the sale or
consumption of alcoholic beverages on or in the real property or improvements
thereon; or (vi) any breach of the Percentage Leases by the Lessee; provided,
however, that such indemnification will not be construed to require the Lessee
to indemnify the Company against the Company's own grossly negligent acts or
omissions or willful misconduct.
Assignment and Subleasing.
The Lessee will not be permitted to sublet all or any part of the Initial
Hotels or assign its interest under any of the Percentage Leases, other than
an assignment to an Affiliate of the Lessee, without the prior written
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<PAGE>
consent of the Company. No assignment or subletting will release the Lessee
from any of its obligations under the Percentage Leases.
Damage to Initial Hotels.
In the event of damage to or destruction of any Initial Hotel covered by
insurance which then renders the hotel unsuitable for the Lessee's use and
occupancy, the Lessee will be obligated to repair, rebuild, or restore the
hotel on the terms set forth in the applicable Percentage Lease. If the Lessee
rebuilds the hotel, the Company is obligated to disburse to the Lessee, from
time to time and upon satisfaction of certain conditions, any insurance
proceeds actually received by the Company as a result of such damage or
destruction, and any excess costs of repair or restoration will be paid by the
Lessee. If the Lessee decides not to rebuild on the terms set forth in the
Percentage Lease, the Percentage Lease will terminate and the insurance
proceeds will be retained by the Company. In the event that damage to or
destruction of an Initial Hotel which is covered by insurance does not render
the hotel wholly unsuitable for the Lessee's use and occupancy, the Lessee
generally will be obligated to repair or restore the hotel. In the event of
damage to or destruction of any Initial Hotel which is not covered by
insurance, the Lessee will be obligated to either repair, rebuild, or restore
the hotel on the terms and conditions set forth in the Percentage Lease. The
Percentage Lease shall remain in full force and effect during the first 12
months of any period required for repair or restoration of any damaged or
destroyed hotel, after which time, rent will be equitably abated.
Condemnation of Initial Hotel.
In the event of a total condemnation of an Initial Hotel, the relevant
Percentage Lease will terminate with respect to such hotel as of the date of
taking, and the Company and the Lessee will be entitled to their shares of any
condemnation award in accordance with the provisions of the Percentage Lease.
In the event of a partial taking which does not render the hotel unsuitable
for the Lessee's use, then the Lessee shall restore the untaken portion of the
hotel to a complete architectural unit and the Company shall contribute to the
cost of such restoration that part of the condemnation award specified for
restoration.
Events of Default.
Events of Default under the Percentage Leases include, among others, the
following:
(i) the occurrence of an Event of Default under any other lease between
the Company and the Lessee or any Affiliate of Lessee;
(ii) the failure by the Lessee to pay Base Rent when due and the
continuation of such failure for a period of 10 days after receipt by the
Lessee of notice from the Company thereof;
(iii) the failure by the Lessee to pay the excess of Percentage Rent over
Base Rent when due and the continuation of such failure for a period of 10
days after receipt by the Lessee of notice from the Company thereof;
(iv) the failure by the Lessee to observe or perform any other term of a
Percentage Lease and the continuation of such failure for a period of 30
days after receipt by the Lessee of notice from the Company thereof, unless
such failure cannot be cured within such period and the Lessee commences
appropriate action to cure such failure within said 30 days and thereafter
acts, with diligence, to correct such failure within such time as is
necessary;
(v) if the Lessee shall file a petition in bankruptcy or reorganization
pursuant to any federal or state bankruptcy law or any similar federal or
state law, or shall be adjudicated a bankrupt or shall make an assignment
for the benefit of creditors or shall admit in writing its inability to pay
its debts generally as they become due, or if a petition or answer
proposing the adjudication of the Lessee as a bankrupt or its
reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law shall be filed in any court and the Lessee
shall be adjudicated a bankrupt and such adjudication shall not be vacated
or set aside or stayed within 60 days after the entry of an order in
respect thereof, or if a receiver of the
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<PAGE>
Lessee or of all or substantially all of the assets of the Lessee shall be
appointed in any proceeding brought by the Lessee or if any such receiver,
trustee or liquidator shall be appointed in any proceeding brought against
the Lessee and shall not be vacated or set aside or stayed within 60 days
after such appointment. It is possible that a bankruptcy court may control
whether or under what terms the Company may terminate the Percentage Lease;
(vi) if the Lessee voluntarily discontinues operations of an Initial
Hotel for more than 30 days, except as a result of damage, destruction, or
condemnation; or
(vii) if the franchise agreement with respect to an Initial Hotel is
terminated by the franchisor as a result of any action or failure to act by
the Lessee or its agents.
If an Event of Default occurs and continues beyond any curative period, the
Company will have the option of terminating the Percentage Lease or any or all
other Percentage Leases by giving the Lessee ten days' written notice of the
date for termination of the Percentage Leases and, unless such Event of
Default is cured prior to the termination date set forth in said notice, the
Percentage Leases shall terminate on the date specified in the Company's
notice and the Lessee is required to surrender possession of the affected
Initial Hotels.
Termination of Percentage Leases on Disposition of the Initial Hotels.
In the event the Company enters into an agreement to sell or otherwise
transfer one or more of the Initial Hotels, the Company will have the right to
terminate the Percentage Lease with respect to such hotel upon (i) paying the
Lessee the fair market value of the Lessee's leasehold interest in the
remaining term of the Percentage Lease to be terminated, or (ii) in the 12
months immediately following (or in certain circumstances, in the 12 months
prior to) the termination of the Percentage Lease, offering to lease to the
Lessee a hotel on terms that would create a leasehold interest in such hotel
with a fair market value equal to or exceeding the fair market value of the
Lessee's remaining leasehold interest under the Percentage Lease to be
terminated.
Franchise License.
The Lessee will be the licensee under the franchise licenses on the Initial
Hotels. Upon the occurrence of certain events of default by the Lessee under a
franchise license, the franchisor has agreed to transfer the franchise license
for that hotel to the Company (or its designee). See "--Franchise Agreements."
Breach by Partnership.
If the Company fails to cure a breach by it under a Percentage Lease, the
Lessee (i) shall have the right to terminate the lease, (ii) may cure the
Company's default and obtain reimbursement from the Company for costs it has
incurred, or (iii) set off the amount of any such costs against amounts due
the Company by the Lessee. Upon notice from Lessee that Lessor has breached
the Percentage Lease, the Company has 30 days to cure the breach or proceed to
cure the breach, which period may be extended in the event of certain
specified, unavoidable delays.
Inventory.
All inventory required in the operation of the Initial Hotels will be
purchased and owned by the Lessee at its expense. The Company will have the
option to purchase all inventory related to a particular Initial Hotel at its
fair market value upon termination of the related Percentage Lease.
FRANCHISE AGREEMENTS
Fairfield Inn, Hampton Inn, Comfort Suites and Holiday Inn are registered
trademarks of Marriott, Promus Hotels, Inc. ("Promus"), Choice and Holiday
Hospitality Franchising, Inc. ("Holiday"), respectively. The Company expects
that each of the respective franchisors will approve the transfer of the
franchise licenses to the Lessee upon acquisition by the Company of the
Initial Hotels, subject to any required PIPs.
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<PAGE>
The Company anticipates that most of the additional hotel properties in
which it invests will be operated under franchise licenses. The Company
believes that the public's perception of quality associated with a franchisor
is an important feature in the operation of a hotel. Franchisors provide a
variety of benefits for franchisees which include national advertising,
publicity and other marketing programs designed to increase brand awareness,
training of personnel, continuous review of quality standards and centralized
reservation systems.
The franchise licenses generally will specify certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the Lessee must comply. The franchise licenses will
obligate the Lessee to comply with the franchisors' standards and requirements
with respect to training of operational personnel, safety, maintaining
specified insurance, the types of services and products ancillary to guest
room services that may be provided by the Lessee, display of signs, and the
type, quality and age of FF&E included in guest rooms, lobbies and other
common areas.
Each franchise license will give the Lessee the right to operate the
particular Initial Hotel until its expiration date. The franchise agreements
will provide for termination at the franchisor's option upon the occurrence of
certain events, including the Lessee's failure to pay royalties and fees or
perform its other covenants under the license agreement, bankruptcy,
abandonment of the franchise, commission of a felony, assignment of the
license without the consent of the franchisor, or failure to comply with
applicable law in the operation of the relevant Initial Hotel. The Lessee will
be entitled to terminate the franchise license only by giving at least 12
months' notice and paying a specified amount of liquidated damages. The
license agreements will not renew automatically upon expiration. The Lessee
will be responsible for making all payments under the franchise agreements to
the franchisors. Under each franchise agreement, the Lessee will pay a
franchise fee based on a percentage of revenue from the Initial Hotels. The
Company is required by Marriott to guarantee the payment of these fees and
certain other obligations of the Lessee to Marriott under the franchise
agreement.
The Company will enter into an owner's agreement with Marriott with respect
to the Initial Fairfield Inns which provides, among other things, that (i) if
the Company wants to sell or lease any of the Initial Fairfield Inns to a
"Competitor" (defined as a company that owns or has an interest, other than as
a franchisee, in a hotel brand, tradename, system or chain which is comprised
of at least ten hotels) Marriott (A) will have a right of first refusal to
purchase or lease such hotels on the same terms and conditions as those set
forth in a bona fide third party offer or (B) will have the right to terminate
the franchise agreement and require the Company to pay 150% of the liquidated
damages amount set forth in the franchise agreement; (ii) if the Company
proposes to sell all or a portion of its stock or assets (which includes the
Initial Fairfield Inns), Marriott or its designee shall have the right to
purchase the Initial Fairfield Inns at a price determined by arbitration;
(iii) the Company may not sell an Initial Fairfield Inn to a purchaser which
is not a Competitor without the prior written consent of Marriott; and (iv)
the Company will guarantee franchise fees and other obligations of the Lessee
to Marriott.
FAIRFIELD INN(R) IS A REGISTERED TRADEMARK OF MARRIOTT. HAMPTON INN(R) IS A
REGISTERED TRADEMARK OF PROMUS. COMFORT SUITES(R) IS A REGISTERED TRADEMARK OF
CHOICE. HOLIDAY INN(R) IS A REGISTERED TRADEMARK OF HOLIDAY. NEITHER MARRIOTT,
PROMUS, CHOICE OR HOLIDAY HAS ENDORSED OR APPROVED THE OFFERING. A GRANT OF A
MARRIOTT, PROMUS, CHOICE, OR HOLIDAY FRANCHISE LICENSE FOR THE INITIAL HOTELS
IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED
APPROVAL OR ENDORSEMENT BY SUCH FRANCHISOR (OR ANY OF THEIR RESPECTIVE
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR THE
COMMON SHARES OFFERED HEREBY.
OPERATING PRACTICES
The Company's management recognizes the need for aggressive, market driven,
creative management given the competitive conditions in the hospitality
industry. Each of the Initial Hotels will be leased by the Lessee
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under the Percentage Leases. The Lessee will utilize the expertise of the
Strategic Partner in the the management of the Initial Hotels. See "The
Strategic Partner and the Lessee."
The Lessee will utilize systems for marketing, rate achievement, expense
management, physical facility maintenance, human resources, accounting and
internal auditing. Each hotel files daily, weekly and monthly reports on items
such as revenues, ADR and payroll (front desk, sales, maintenance and
housekeeping). Expenses are managed by carefully tracking expenses per rented
room as reported on reports designed to quickly identify unusually high or
unexpected expenses. Managers are trained in all aspects of hotel operations,
with particular emphasis placed on customer service. Managers are trained in
negotiation of prices with corporate and other clients and to be responsive to
marketing requirements in their particular markets. The Lessee intends to
devote substantial resources to advertising, and will employ a mix of
marketing techniques designed for each specific Initial Hotel, which may
include individual toll free lines, billboards and direct marketing, as well
as taking advantage of national advertising by the franchisors of the Initial
Hotels.
Each quarter, the general manager of each hotel develops a quarterly
marketing plan with careful attention given to measurable results. Management
monitors the results for each quarter as compared to the plan.
EMPLOYEES
The Company intends to be self-advised and thus will utilize the services of
its officers rather than retain an advisor. The Company initially will employ
five persons. See "Management--Trustees and Executive Officers." The Lessee
expects to employ approximately 500 people in operating the Initial Hotels.
The Strategic Partner has advised the Company that its relationship with its
employees is good.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment
a hazardous substance at another property may be liable for the costs of
removal or remediation of hazardous substances released into the environment
at that property. The costs of remediation or removal of such substances may
be substantial, and the presence of such substances, or the failure to
promptly remediate such substances, may adversely affect the owner's ability
to use or to sell such real estate or to borrow using such real estate as
collateral. In connection with the ownership and operation of the Initial
Hotels, the Company, the Partnership or the Lessee, as the case may be, may be
potentially liable for such costs.
Phase I environmental audits have been obtained, or will be obtained prior
to the closing of the Offering, on all of the Initial Hotels from various
independent environmental engineers. The Phase I audits are intended to
identify potential sources of contamination for which the Initial Hotels may
be responsible and to assess the status of environmental regulatory
compliance. The Phase I audits include historical reviews of the Initial
Hotels, reviews of certain public records, preliminary investigations of the
sites and surrounding properties, screening for the presence of asbestos,
PCB's and underground storage tanks, and the preparation and issuance of a
written report. The Phase I assessments did not include invasive procedures,
such as soil sampling or ground water analysis.
The Phase I audit reports have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any
such liability. Nevertheless, it is possible that these reports do not reveal
all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, no assurances can be
given that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition
of the Initial Hotels will not be affected by the condition of the properties
in the vicinity of the Initial Hotels (such as the presence of leaking
underground storage tanks) or by third parties unrelated to the Partnership or
the Company.
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The Company believes that the Initial Hotels are in compliance in all
material respects with all federal, state and local ordinances and regulations
regarding hazardous or toxic substances and other environmental matters.
Neither the Company nor, to the knowledge of the Company, any of the current
owners of the Initial Hotels has been notified by any governmental authority
of any material noncompliance, liability or claim relating to hazardous or
toxic substances or other environmental substances in connection with any of
its present or former properties.
COMPETITION
The hotel industry is highly competitive. Each of the Initial Hotels is
located in a developed area that includes other hotels, many of which are
competitive with the Initial Hotels in their locality. The number of
competitive hotels in a particular area could have a material adverse effect
on revenues of the Initial Hotels or at hotels acquired in the future. See
"The Initial Hotels--Descriptions of the Initial Hotels."
There will be competition for investment opportunities from entities
organized for purposes substantially similar to the Company's objectives as
well as other purchasers of hotels. The Company will compete for such
investment opportunities with entities which have substantially greater
financial resources than the Company, including access to capital or better
relationships with franchisors, lenders and sellers. The Company's policy is
to limit consolidated indebtedness to less than approximately 50% of the
Company's total undepreciated cost for the hotels in which it has invested.
The aggregate purchase price paid by the Company for the Initial Hotels is
approximately $155.1 million (exclusive of the $630,000 in option payments
paid by the Strategic Partner for the Other Initial Hotels). Upon completion
of the Formation Transactions, the indebtedness incurred under the Credit
Facility will equal approximately 27% of the purchase prices paid by the
Company for the Initial Hotels. The success of the Company's acquisition
strategy may depend on its ability to access additional capital through
issuance of equity securities. The Company's competitors may generally be able
to accept more risk than the Company can manage prudently and may be able to
borrow the funds needed to acquire hotels. Competition may generally reduce
the number of suitable investment opportunities offered to the Company and
increase the bargaining power of property owners seeking to sell.
DEPRECIATION
The Company's initial basis in the Initial Hotels for federal income tax
purposes generally will be equal to the purchase price paid by the Company.
The Company plans to depreciate the depreciable property associated with the
Initial Hotels for federal income tax purposes under either the modified
accelerated cost recovery system of depreciation ("MACRS") or the alternative
depreciation system of depreciation ("ADS"). The Company plans to use MACRS
for the furnishings and equipment in the Initial Hotels. Under MACRS, the
Company generally will depreciate such furnishings and equipment over a seven-
year recovery period using a 200% declining balance method and a half-year
convention. If, however, the Company places more than 40% of its furnishings
and equipment in service during the last three months of a taxable year, a
mid-quarter depreciation convention must be used for the furnishings and
equipment placed in service during that year. The Company plans to use ADS for
the buildings and improvements comprising the Initial Hotels. Under ADS, the
Company generally will depreciate such buildings and improvements over a 40-
year recovery period using a straight line method and a mid-month convention.
To the extent that the Partnership in the future acquires, directly or
indirectly, hotels in exchange for Units, the Partnership's initial basis in
each such hotel for federal income tax purposes should be the same as the
seller's basis in such hotel on the date of acquisition. Depending on the
circumstances, the Partnership may be required to depreciate such depreciable
hotel property for federal income tax purposes over the same remaining useful
lives and under the same methods used by the sellers. The Partnership's tax
depreciation deductions will be allocated among the partners in accordance
with their respective interests in the Partnership (except to the extent that
the Partnership is required under Code Section 704(c) to use a method for
allocating depreciation deductions attributable to contributed properties that
results in the Company receiving a disproportionately larger share of such
deductions).
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INSURANCE
The Company will keep in force comprehensive insurance, including, fire,
extended coverage, and when available on reasonable commercial terms, flood
and earthquake insurance, with policy specifications, limits and deductibles
customarily carried for similar properties. Certain types of losses, however
(generally of a catastrophic nature such as acts of war, earthquakes, etc.),
are either uninsurable or are not economically insurable. Certain types of
losses, such as those arising from subsidence activity, are insurable only to
the extent that certain standard policy exceptions to insurability are waived
by agreement with the insurer. The Lessee is required under the Lease to
maintain liability, worker's compensation, rental loss, and other forms of
insurance as the Company may require. See "Risk Factors--Real Estate
Investment Risks." The Company believes, however, that the properties are
adequately insured in accordance with industry standards.
LEGAL PROCEEDINGS
Neither the Company nor the Partnership is currently involved in any
material litigation nor, to the Company's knowledge, is any material
litigation currently threatened against the Company or the Partnership. The
Strategic Partner has advised the Company that it currently is not involved in
any material litigation, other than as described in the Strategic Partner's
public filings with the SEC under the Securities Act of 1933 (the "Securities
Act") and the Securities Exchange Act of 1934, as amended, (the "Exchange
Act"). The current owners of the Initial Hotels have represented to the
Partnership that there is no material litigation threatened against the
Initial Hotels.
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FORMATION TRANSACTIONS
The principal transactions in connection with the formation of the Company
and the acquisition of the Initial Hotels are as follows:
. In April 1998, the Company and the Partnership were formed as a Maryland
real estate investment trust and a Virginia limited partnership,
respectively.
. In May 1998, the Partnership issued 67,742 Units to the Strategic
Partner in exchange for the assignment to the Partnership of an option
to purchase the Other Initial Hotels. Such Units will represent 0.5% of
the total outstanding Units following the closing of the Offering. The
Strategic Partner paid $630,000 in option payments in connection with
obtaining the option to acquire the three Initial Hotels, which amount
will be credited to the purchase price of such hotels. The Units are
redeemable, at the option of the Strategic Partner, beginning on the
first anniversary of the closing of the Offering, for Common Shares on a
one-for-one basis, or cash, at the Company's option.
. In May 1998, the Company borrowed $1.2 million from the Strategic
Partner (the "Strategic Partner Loan") to fund certain earnest money
deposits in connection with the acquisition of the Initial Hotels.
Interest on the Strategic Partner Loan accrues at a rate of 12% per
annum and the Company expects to repay the Strategic Partner Loan in
full with the proceeds at the Offering.
. In May 1998, the Company borrowed an aggregate of $4 million from two
individuals (the "Pre-Offering Debt"), including $2 million to be
borrowed from the Sands Partnership, to fund certain earnest money
deposits and other expenses in connection with the Offering and the
acquisition of the Initial Hotels. Interest on the Pre-Offering Debt
accrues at a rate of 12% per annum, and the Company expects to repay the
Pre-Offering Debt in full with a portion of the net proceeds of the
Offering. In addition, the Company will pay approximately $850,000 to
the Strategic Partner to cover expenses incurred by the Strategic
Partner in connection with the Pre-Offering Debt.
. The Company will sell 12,500,000 Common Shares in the Offering and will
contribute all of the net proceeds from the Offering to the Partnership
in exchange for a 1% general partnership interest and a 98.5% limited
partnership interest in the Partnership to be held by HHT Ltd. The
Company will be the sole general partner of the Partnership, and HHT
Ltd. and the Strategic Partner will be the sole initial limited partners
of the Partnership.
. The Partnership will use the net proceeds of the Offering, together with
approximately $42.6 million of borrowings under the Credit Facility, to
acquire the 29 Initial Hotels concurrently with the closing of the
Offering from two sellers unaffiliated with the Company for acquisition
costs of $155.1 million in cash (exclusive of the $630,000 in option
payments paid by the Strategic Partner for the Other Initial Hotels as
described above), including the repayment in full of the Strategic
Partner Loan and the Pre-Offering Debt and to pay expenses incurred in
connection with the Offering and the acquisition of the Initial Hotels.
. The Company and the Strategic Partner will enter into the Strategic
Alliance concurrently with the closing of the Offering, pursuant to
which (i) the Strategic Partner will grant the Company an option and
right of first refusal to purchase the Option Hotels and any hotel
developed by the Strategic Partner during the term of the Strategic
Alliance, (ii) the Strategic Partner will grant the Company a right of
first opportunity to purchase any hotel identified for acquisition by
the Strategic Partner, and (iii) the Strategic Partner will have a right
of first offer to lease any hotel acquired by the Company that is not
purchased subject to a condition that a specified party serve as the
lessee or manager.
. In order for the Company to qualify as a REIT, neither the Company nor
the Partnership can operate the Initial Hotels. Therefore, the
Partnership will lease each Initial Hotel to the Lessee for a term of
seven years pursuant to a Percentage Lease that provides for rent equal
to the greater of fixed annual Base Rent or Percentage Rent. In
addition, the Strategic Partner will guarantee in full the payments to
the Company under the terms of the Percentage Leases. The Lessee will
hold the franchise license for each Initial Hotel. The Strategic Partner
is discussing entering into an agreement with the current manager of the
26 Initial Fairfield Inns, pursuant to which such manager would provide
transitional
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management services with respect to some or all of the Initial Fairfield
Inns on an interim basis which the Company does not expect to extend
beyond December 31, 1998.
. Concurrently with the completion of the Offering, the Company will issue
an aggregate of 45,000 Common Shares to officers of the Company and will
grant to officers and Trustees of the Company options to purchase an
aggregate of 1,660,000 Common Shares at an exercise price per share
equal to the Offering Price. Twenty percent of such shares and options
will vest immediately and 80% will vest at various times during the five
year period following completion of the Offering.
Following consummation of the Formation Transactions, the structure and
relationships of the Company, the Partnership, the Initial Hotels and the
Strategic Partner will be as follows:
[FLOW CHART APPEARS HERE]
BENEFITS TO RELATED PARTIES
Receipt of Units by the Strategic Partner
Prior to the Offering, the Strategic Partner received 67,742 Units from the
Partnership in consideration for its assignment to the Partnership of its
option to purchase three of the Initial Hotels. These Units represent
approximately 0.5% of the equity interest in the Company on a consolidated
basis and will have a total value of approximately $677,420, based on the
Offering Price, as compared to the $630,000 that the Strategic Partner
actually paid for such option. As of the first anniversary of the closing of
the Offering, these Units are redeemable at the option of the Strategic
Partner for Common Shares, or at the option of the Company, for cash, in
accordance with the terms of the Partnership Agreement. See "Partnership
Agreement--Redemption Rights."
Payment to the Strategic Partner
Prior to the Offering, the Strategic Partner incurred various costs in
connection with the Pre-Offering Debt, which was incurred to fund expenses
associated with the Offering and the Company's acquisition of the Initial
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Hotels. The Company will pay the Strategic Partner $850,000 from the proceeds
of the Offering as reimbursement for such expenses.
The Pre-Offering Debt
Richard Sands will become a member of the Company's Board of Trustees upon
completion of the Offering. The Sands Partnership loaned the Company $2
million of the Pre-Offering Debt. The Pre-Offering Debt, including the portion
loaned by the Sands Partnership, bears interest at a per annum rate of 12% and
will be repaid with the net proceeds of the Offering. In connection with the
funding of the Pre-Offering Debt, the Strategic Partner issued to the Sands
Partnership warrants to purchase 250,000 shares of common stock of the
Strategic Partner at a purchase price of $4.00 per share, which was the
approximate market price of the Strategic Partner's common stock at the time
of the Strategic Partner's issuance of such warrants
Issuance of Shares and Grants of Options to Officers and Trustees
Concurrently with the closing of the Offering, Messrs. Wilson, Sabin,
George, Peek and Kolcio will receive 15,000, 10,000, 10,000, 5,000 and 5,000
Common Shares, valued at $150,000, $100,000, $100,000, $50,000 and $50,000
respectively, based on the Offering Price. In addition, those individuals will
receive options to purchase 500,000, 500,000, 500,000, 50,000 and 50,000
Common Shares at the Offering Price, respectively. Twenty percent of such
Common Shares and options will vest immediately and the remainder will vest at
various times during the five year period following completion of the
Offering, and with respect to the options, upon achievement of certain
incentive-based criteria. See "Management--Executive Compensation."
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MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
Initially, the Board of Trustees will consist of seven members, four of whom
are Independent Trustees. All of the Trustees will serve staggered terms and
the Board of Trustees will be divided into three classes. Mr. Wilson will
serve as the Company's Chairman of the Board and Chief Executive Officer. Mr.
Sabin will serve as the Company's President and Chief Financial Officer. Each
of the Independent Trustees will begin their service on the Board of Trustees
as of the closing of the Offering.
Certain information regarding the trustees and executive officers of the
Company is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
E. Anthony Wilson (class 53 Chairman of the Board and Chief Executive Officer
III)...................
John M. Sabin (class 43 President, Chief Operating Officer, Chief Financial Officer
II).................... and Trustee
Ralph L. Peek (class 50 Vice President, Treasurer and Trustee
I).....................
Richard C. Fox (class 51 Independent Trustee
II)....................
Richard E. Sands (class 47 Independent Trustee
III)...................
E. Philip Saunders 60 Independent Trustee
(class I)..............
John W. Stokes (class 59 Independent Trustee
I).....................
Michael T. George....... 39 Executive Vice President
Taras M. Kolcio......... 32 Vice President and Controller
</TABLE>
E. Anthony Wilson will serve as the Chairman of the Board and Chief
Executive Officer of the Company and the Strategic Partner. Mr. Wilson was a
co-founder of the Strategic Partner, has served as its Chairman of the Board
since its inception, and as Chief Executive Officer since January 1993. In
1984 he co-founded Hudson Hotels Corp. which was acquired by the Strategic
Partner in June 1992. In addition to his hotel experience, Mr. Wilson was a
founder of S&W Restaurants, and of Mid-America Properties, which is the owner
of eight Chi-Chi's Restaurants, and was a partner and developer of the Ocean
Club, a night club and restaurant, and Union Square, a theme restaurant. He
has over 25 years experience in the hospitality and real estate industries as
a developer, owner and manager. As general partner of Wilson Enterprises,
L.P., real estate development firm in Rochester, New York, he has developed a
significant amount of office, warehouse, apartments and related facilities for
tenants, including Xerox Corporation, Eastman Kodak, Rochester Telephone
Corp., R.T. French, Champion Products, the United States Government and other
national corporations. Mr. Wilson is an alumnus of the School of Business at
Indiana University. He has served as the Chairperson of the Strong Memorial
Hospital Children's Fund, and has been a Director of the First National Bank
of Rochester, Erdle Perforating Corp., and the Rochester Family of Mutual
Funds.
John M. Sabin serves as the Company's President, Chief Operating Officer and
Chief Financial Officer and the Strategic Partner's Executive Vice President
and Chief Financial Officer. From February 1997 to May 1998, Mr. Sabin served
as Senior Vice President and Treasurer of Vistana, Inc., a publicly owned
company that owns, operates and develops time share resorts, and served as
Chief Financial Officer of Vistana from February 1997 to November 1997. From
June 1996 to February 1997, Mr. Sabin served as Vice President--Finance of
Choice Hotels International, Inc. From June 1995 to February 1997, Mr. Sabin
also served as Vice President--Mergers and Acquisitions of Choice Hotels
International, Inc. and, from December 1993 to October 1996, he served as Vice
President--Finance and Assistant Treasurer of Manor Care, Inc., the former
parent of Choice Hotels International, Inc. From 1990 to December 1993, Mr.
Sabin served as Vice President--Corporate Mergers and Acquisitions of Marriott
Corporation. In addition, Mr. Sabin is a director of Competitive Technologies,
Inc., a publicly-owned technology licensing and transfer company. Mr. Sabin
received B.S., M.Acc. (Masters of
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Accountancy) and M.B.A. degrees from Brigham Young University and a J.D.
degree from the J. Reuben Clark Law School at Brigham Young University.
Ralph L. Peek has been a general partner with E. Anthony Wilson in Wilson
Enterprises, L.P. since 1978 and he has been involved with the Strategic
Partner and has served as a director of the Strategic Partner since its
inception in 1987. As of December 31, 1996 Mr. Peek was named Vice President
and Treasurer of the Strategic Partner. Mr. Peek is also a certified public
accountant and received his degree from Rochester Institute of Technology.
Richard C. Fox currently owns and operates 86 Wendy's restaurants and has
been a franchisee of Wendy's for 21 years. Mr. Fox's restaurants are located
principally in Rochester, New York, Ft. Wayne and South Bend, Indiana, Erie,
Pennsylvania, Cleveland, Ohio and Buffalo, New York. Mr. Fox is originally
from the Cleveland, Ohio area, is a graduate of Kenyon College and received
his MBA from Harvard Business School in 1971. After graduating from Harvard,
Mr. Fox worked with Price Waterhouse Co. In 1974, he moved to Columbus, Ohio
to become the Financial Vice President of Wendy's International, Inc. He left
Wendy's International, Inc. to become a Wendy's franchisee in 1976. Mr. Fox is
a member of the Board of Trustees of the Norman Howard School, the McQuaid
Jesuit High School, St. Thomas More Church, Genesee Country Museum and is a
member of the Board of Directors of Vehicare Corp.
Richard E. Sands is President and Chief Executive Officer of Canandaigua
Brands, Inc., which is a publicly traded company that is headquartered in
Fairport, New York, and has 16 production facilities in five states and over
2,500 employees. Mr. Sands has served Canandaigua Brands as Chief Executive
Officer since 1993, as President and Chief Operating Officer from 1986 to 1993
and as Executive Vice President from 1982 to 1986. Canandaigua Brands is a
leading producer and marketer of alcoholic beverage products with
approximately $1.7 billion of sales for the year ended February 28, 1998. Mr.
Sands received his Ph.D. in Social Psychology from the University of North
Carolina at Chapel Hill. He joined his father, Marvin Sands, in the wine
business after graduate school in 1979.
E. Philip Saunders has been the Chairman and CEO of Griffith Energy, Inc.,
Sugar Creek Stores and Travel Ports of America in Rochester, New York for more
than five years. He is a member of the Executive Committees for the Boy Scouts
of America: Steuben Area Council, Bath, New York and the National Association
of Truckstops Operators in Alexandria, Virginia. He is also a member of the
Board of Directors for Hahn Automotive Warehouse, Inc., Blue Cross/Blue
Shield, AAA Automobile Club and American Red Cross in Rochester, New York and
Paul Smiths College in Paul Smiths, New York.
John W. Stokes, Jr. is the Vice Chairman of Morgan Keegan & Company, Inc.,
the representative of the Underwriters, a position he has held since 1983. He
has been an employee and Director of Morgan Keegan since 1970 and, from 1990
to 1997, he served as the President of the Equity Capital Markets Division of
Morgan Keegan. He is a director of Morgan Keegan, Inc., a New York Stock
Exchange listed company and the parent company of Morgan Keegan, O'Charley's,
Inc. and RFS Hotel Investors, Inc. He is a graduate of Vanderbilt University.
Michael T. George will serve as the Company's Executive Vice President. Mr.
George is a Certified Hotel Administrator with approximately 17 years of
experience in the hotel industry. From 1997 to 1998, he served as Chief
Operating Officer of Sunstone Hotel Properties, the affiliated lessee of
Sunstone Investors, Inc., a hotel REIT located in San Clemente, California
that owns hotels under various brand names, including Marriott, Hilton,
Sheraton, Holiday Inn, Hawthorn Suites, Residence Inn, Courtyard Inn by
Marriott, Hampton Inn and Best Western. From 1995 to 1997, Mr. George served
as Senior Vice President of Operations for Capstar Hotels Company located in
Washington, D.C. From 1990 to 1995, Mr. George served as Vice President of
Operations and ultimately as Chief Operating Officer for Devon Hotels Ltd. in
Montreal. Prior to that time, Mr. George served in various capacities with
Radisson Hotels, Hilton Hotels and Sheraton Hotels. In addition, for various
durations over the last six years Mr. George has served on franchise
operations boards for the national hotel chains Marriott, Westin and Hilton.
Mr. George graduated from the Purdue Hotel and Restaurant Management School in
1981.
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Taras M. Kolcio will serve as the Company's and Strategic Partner's Vice
President and Controller. Mr. Kolcio joined the Strategic Partner as its
Controller in June 1993, and in November 1996 was named Chief Financial
Officer, a position he held until May 1998. Prior to that he was a senior
accountant at Deloitte & Touche for six years. Mr. Kolcio received his
Bachelor of Science degree in Business Administration from the University of
Buffalo, and is licensed as a certified public accountant in the State of New
York. Mr. Kolcio is a member of the New York State Society of Certified Public
Accountants.
AUDIT COMMITTEE
The Audit Committee of the Board of Trustees (the "Audit Committee") will
consist of three Independent Trustees. The Audit Committee will make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.
ACQUISITION COMMITTEE
The Board of Trustees will appoint an Acquisition Committee of the Board of
Trustees (the "Acquisition Committee") to consist of three Trustees two of
which will be Independent Trustees. The Acquisition Committee will review
potential hotel acquisitions, review the terms of proposed Percentage Leases
for proposed hotel acquisitions and make recommendations to the full Board of
Trustees with respect to proposed hotel acquisitions.
COMPENSATION COMMITTEE
The Board of Trustees will also establish a Compensation Committee of (the
"Compensation Committee") comprised of two or more of the Independent Trustees
to determine compensation for the Company's executive officers and administer
the Company's Share Incentive Plan.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated
by the Board of Trustees.
EXECUTIVE COMPENSATION
The Company was organized as a Maryland real estate investment trust in
April 1998, and paid no cash compensation to its executive officers for the
year ended December 31, 1997. The following table sets forth the base
compensation payable to each of the executive officers of the Company during
the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL AWARDS AND
NAME AND PRINCIPAL POSITION SALARY(1) OPTIONS(2)
- --------------------------- --------- ------------
<S> <C> <C>
E. Anthony Wilson
Chairman of the Board of
Trustees and Chief Executive
Officer........................ $217,500 15,000 Common Shares/500,000 Options
John M. Sabin
President, Chief Operating
Officer, Chief Financial
Officer and Trustee............ $217,500 10,000 Common Shares/500,000 Options
Michael George
Executive Vice President....... $ 78,750 10,000 Common Shares/500,000 Options
Ralph L. Peek
Vice President, Treasurer and
Trustee........................ $ 20,000 5,000 Common Shares/50,000 Options
Taras M. Kolcio
Vice President and Controller.. $ 20,000 5,000 Common Shares/50,000 Options
</TABLE>
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- --------
(1) Amounts given are annualized salaries for the year ending December 31,
1998. Includes the Company's portion of the guaranteed bonus to be paid to
each individual pursuant to their employment agreements with the Company
on January 1, 1999, as described in "--Employment Agreements" below. Does
not include salary or bonuses paid to the above individuals by the
Strategic Partner. For the year ending December 31, 1998, the Strategic
Partner will pay annualized salaries of $180,000, $60,000, $180,000,
$80,000 and $80,000 to Messrs. Wilson, Sabin, George, Peek and Kolcio,
respectively. See "--Employment Agreements."
(2) Twenty percent of the Common Shares granted to the indicated officers will
vest as of the closing of the offering and on each of the second, third,
fourth and fifth anniversaries of the closing of the Offering. Twenty
percent of the options to purchase Common Shares at the Offering Price
granted to the indicated officers will vest immediately and the remaining
options will vest upon the Company's achievement of certain annual rates
of growth in FFO per share. See "--Share Incentive Plan." In addition, the
above named officers also receive shares of common stock and/or options to
purchase shares of common stock of the Strategic Partner as compensation
from the Strategic Partner.
EMPLOYMENT AGREEMENTS
Mr. Wilson, Mr. Sabin and Mr. George each has entered into a five year
employment agreement (each, an "Employment Agreement") with the Company and
the Strategic Partner which provides for each officer's employment by both the
Company and the Strategic Partner. The Employment Agreements provide that (i)
50% of Mr. Wilson's base salary of $360,000, bonus and benefits will be paid
by the Company and 50% will be paid by the Strategic Partner, (ii) 75% of Mr.
Sabin's base salary of $240,000, bonus and benefits will be paid by the
Company and 25% will be paid by the Strategic Partner, and (iii) 25% of Mr.
George's base salary of $240,000, bonus and benefits will be paid by the
Company and 75% will be paid by the Strategic Partner. The Employment
Agreements provide that Messrs. Wilson, Sabin and George will be eligible for
participation in bonus pools for each of the Company and the Strategic
Partner. The annual bonus pool is based on annual increases in FFO per share
for the Company and increases in pre-tax earnings per share for the Strategic
Partner. Messrs. Wilson, Sabin and George are entitled to receive guaranteed
bonuses of $75,000, $50,000 and $50,000, respectively on January 1, 1999,
payable by the Company and the Strategic Partner in the proportions described
above. The Employment Agreements provide for the grants to Messrs. Wilson,
Sabin and George of stock options by the Company and the Strategic Partner and
deferred stock grants by the Company as described above. The Employment
Agreements also provide for compensation upon termination of employment,
including termination of employment following a change in control of the
Company.
COMPENSATION OF TRUSTEES
Upon commencement of service on the Board of Trustees, each Independent
Trustee will receive 3,500 Common Shares, which will vest at a rate of 700
shares per year, and 15,000 options to purchase Common Shares at the Offering
Price, which will vest at a rate of 3,000 shares per year, in each case
beginning on the first anniversary of the date of grant. The Company will also
pay the Independent Trustees $500 for attendance at any committee meeting of
the Board of Trustees and will reimburse Independent Trustees for reasonable
out-of-pocket expenses incurred in connection with their services on the Board
of Trustees. No officers or employees of the Company or the Strategic Partner
shall be entitled to receive any additional salary or bonus for serving as a
Trustee.
EXCULPATION AND INDEMNIFICATION
The Declaration of Trust contains a provision which, subject to certain
exceptions described below, eliminates the liability of a Trustee or officer
to the Company or its shareholders for monetary damages for any breach of duty
as a Trustee or officer. This provision does not eliminate such liability to
the extent that it is proved that the Trustee or officer engaged in willful
misconduct or a knowing violation of criminal law or of any federal or state
securities law.
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The Company's Declaration of Trust also requires the Company to indemnify
any Trustee or officer who is or was a party to a proceeding, including a
proceeding by or in the right of the Company, by reason of the fact that he is
or was such a Trustee or officer or is or was serving at the request of the
Company as a director, officer, employee or agent of another entity provided
that the Board of Trustees determines that the conduct in question was in the
best interest of the Company and such person was acting on behalf of the
Company. A Trustee or officer of the Company is entitled to be indemnified
against all liabilities and expenses incurred by the Trustee or officer in the
proceeding, except such liabilities and expenses as are incurred (i) if such
person is an Independent Trustee or officer, because of his or her gross
negligence, willful misconduct or knowing violation of the criminal law or
(ii) in the case of the Trustee other than the Independent Trustees, because
of his or her negligence or misconduct. Unless a determination has been made
that indemnification is not permissible, a Trustee or officer also is entitled
to have the Company make advances and reimbursement for expenses prior to
final disposition of the proceeding upon receipt of a written undertaking from
the Trustee or officer to repay the amounts advanced or reimbursed if it is
ultimately determined that he or she is not entitled to indemnification. Such
advance shall be permissible when the proceeding has been initiated by a
shareholder of the Company only if such advance is approved by a court of
competent jurisdiction. The Board of Trustees of the Company also has the
authority to extend to any person who is an employee or agent of the Company,
or who is or was serving at the request of the Company as a Trustee, officer,
employee or agent of another entity, the same indemnification rights held by
trustees and officers, subject to all of the accompanying conditions and
obligations.
1998 SHARE INCENTIVE PLAN
Prior to the Offering, the Board of Trustees will adopt, and the sole
shareholder of the Company will approve, the Share Incentive Plan. The Share
Incentive Plan will be administered by the Board of Trustees prior to the
Offering and by the Compensation Committee or its delegate following the
Offering. The Compensation Committee may not delegate its authority with
respect to individuals subject to Section 16 of the Exchange Act. As used in
this summary, the term "Administrator" means the Board of Trustees, the
Compensation Committee or the Compensation Committee's delegate, as
appropriate.
Officers and other employees of the Company and "parent" and "subsidiary"
corporations (within the meaning of Code Section 424) of the Company are
eligible to participate in the Share Incentive Plan. Under Code Section 424, a
"parent" corporation generally is a corporation possessing at least 50 percent
of the total combined voting power of all classes of shares of the Company (or
of any other "parent" corporation), and a "subsidiary" corporation generally
is a corporation of which the Company (or any other "subsidiary" of the
Company) owns at least 50 percent of the total combined voting power of all
classes of stock. The Administrator will select the individuals who will
participate in the Share Incentive Plan ("Participants"). Under the Share
Incentive Plan, the Administrator may, from time to time, grant (i) share
options, which may include associated performance based dividend equivalent
rights; (ii) share appreciation rights ("SARs"); (iii) Share Awards; (iv)
Performance Shares; and (v) cash incentive awards. The Share Incentive Plan
authorizes the issuance of up to 1,786,000 Common Shares, no more than 500,000
of which may be issued pursuant to Share Awards and in settlement of
Performance Shares.
Options. The Share Incentive Plan provides for the grant of (i) share
options intended to qualify as incentive share options under Section 422 of
the Code ("ISOs") and (ii) options not so qualifying ("nonqualified options").
Code Section 422 imposes various requirements in order for an option to
qualify as an ISO e.g., maximum ten year term of the option, option price not
less than the fair market value of the underlying shares on the date of grant.
In addition, under Code Section 422, no Participant may receive ISOs (under
all incentive share option plans of the Company and its parent or subsidiary
corporations) that are first exercisable in any calendar year for Common
Shares having an aggregate fair market value (determined as of the date the
ISO is granted) that exceeds $100,000 (the "$100,000 Limit"). To the extent
options first become exercisable by a Participant in any calendar year for a
number of Shares in excess of the $100,000 Limit, they will be treated as
nonqualified options.
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The principal difference between options qualifying as ISOs under Code
Section 422 and nonqualified options is that a Participant generally will not
recognize ordinary income at the time an ISO is granted or exercised, but
rather will have a capital gain at the time the Participant disposes of shares
acquired under the ISO; provided the Participant disposes of the shares
subsequent to two years following the date of grant of the option and one year
following the date of exercise of the option (the "Holding Period"). In
contrast, the exercise of a nonqualified option generally is a taxable event
that requires the Participant to recognize, as ordinary income, the difference
between the shares' fair market value and the option price. The employer will
not be entitled to a federal income tax deduction on account of the grant or
the exercise of an ISO, whereas the employer is entitled to a federal income
tax deduction on account of the exercise of a nonqualified option equal to the
ordinary income recognized by the Participant. If the Participant disposes of
shares acquired under the ISO within the Holding Period, the Participant
generally will recognize ordinary income equal to the lesser of (i) the excess
of the amount realized on the disposition over the option price or (ii) the
spread between the fair market value of the shares transferred upon exercise
of the option over the option price, and the employer may claim a
corresponding federal income tax deduction equal to the ordinary income
recognized by the Participant. No Participant may be granted, in any calendar
year, options for more than 500,000 Common Shares. For purposes of the
preceding sentence, an option and Corresponding SAR (defined below) shall be
treated as a single award. The Administrator may also grant performance based
dividend equivalent rights in tandem with Options, which entitle the
Participant to a cash payment for dividends that would have been paid on each
Common Share for which the related Option is exercised had the Common Share
been outstanding prior to exercise. A Participant will recognize ordinary
income, and an employer will be entitled to a corresponding deduction, equal
to the amount of the cash payment.
SARs. SARs entitle the Participant to receive, with respect to each Common
Share encompassed by such SAR, a payment based on a formula determined by the
Administrator and set forth in the agreement with the Participant, which can
be no less than the fair market value of the Common Shares on the date of
grant. In the absence of such a determination, the Participant will be
entitled to receive the excess of the fair market value of a Common Share on
the date of exercise over the initial value of the SAR. The initial value of
the SAR is the fair market value of a Common Share on the date of grant or, in
the case of a corresponding SAR, the option price of the related option. The
amount payable upon the exercise of an SAR may be paid in cash, Common Shares,
or a combination of the two. No Participant may be granted, in any calendar
year, SARs covering more than 500,000 Common Shares.
SARs may be granted in relation to option grants ("Corresponding SARs") or
independently of option grants. The difference between these two type of SARs
is that to exercise a Corresponding SAR, the Participant must surrender
unexercised that portion of the option to which the Corresponding SAR relates.
No income is recognized upon the grant of an SAR. The exercise of an SAR
generally is a taxable event. A Participant generally must recognize income
equal to any cash that is paid and the fair market value of Common Shares (on
the date the Common Shares are first transferable or not subject to a
substantial risk of forfeiture) received in settlement of the award. The
employer is entitled to a corresponding deduction equal to the amount of
income recognized by the Participant.
Share Awards. Participants may also be issued Common Shares pursuant to a
Share Award. The Administrator, in its discretion, may prescribe that a
Participant's rights in Common Shares subject to a Share Award will be
nontransferable or forfeitable or both unless certain conditions are
satisfied. Those conditions may include, for example, a requirement that the
Participant continue employment for a specified period or the satisfaction of
performance objectives stated with respect to the Company's, a parent's or
subsidiary's, or an operating unit's FFO per share, return on equity, earnings
per share, total earnings, earnings growth, return on capital, or return on
assets; the fair market value of the Common Shares; or other criteria
specified by the Administrator. No Participant may be granted, in any calendar
year, a Share Award for more than 115,000 Common Shares. A Participant
recognizes income with respect to Common Shares subject to a Share Award (and
a deduction may be taken by the employer) as of the first date that those
Common Shares are transferable
73
<PAGE>
or not subject to a substantial risk of forfeiture, in an amount equal to the
fair market value of such Common Shares on that date.
Performance Shares. An award of Performance Shares entitles the Participant
to receive a payment equal to the fair market value of a specified number of
Common Shares if certain performance standards specified by the Administrator
are met during a performance period of at least one year. The performance
standards may be stated with respect to a Company's, a parent's or
subsidiary's, or an operating unit's FFO per share, return on equity, earnings
per share, total earnings, earnings growth, return on capital, or return on
assets; the fair market value of the Common Shares; or other criteria
specified by the Administrator. To the extent that Performance Shares are
earned, the obligation may be settled in cash, Common Shares, or a combination
of the two. No Participant may be granted, in any calendar year, a Performance
Share award for more than 115,000 Common Shares. A Participant must recognize
income equal to any cash that is paid and the fair market value of Common
Shares, on the date the Common Shares are first transferable or not subject to
a substantial risk of forfeiture, received by the Participant in settlement of
the award of a Performance Share award. The employer is entitled to a
corresponding deduction equal to the amount of income recognized by the
Participant.
Cash Incentive Awards. The Administrator shall prescribe the terms and
conditions under which a cash incentive award may be earned. Those conditions
may include may include, for example, a requirement that the Participant
continue employment for a specified period or the satisfaction of performance
objectives stated with respect to a Company's, a parent's or subsidiary's, or
an operating unit's FFO per share, return on equity, earnings per share, total
earnings, earnings growth, return on capital, or return on assets; the fair
market value of the Common Shares; or other criteria specified by the
Administrator. No Participant may receive a cash incentive award payment in
any calendar year that exceeds $1 million. A Participant will recognize income
equal to the value of any cash incentive award paid, and the employer will be
entitled to a deduction for that amount.
On, or upon certain events leading to, a Change in Control of the Company
(as defined in the Share Incentive Plan), all Share Awards will vest, all
Performance Shares and cash incentive awards will be earned, and all options
and SARs will become exercisable. Any such accelerated vesting or
exercisability shall be limited, however, to the extent that a limitation will
permit the Participant to retain greater net after-tax receipts than he would
retain absent such a limitation, taking into account federal and state income
taxes, federal employment taxes and the excise tax imposed under Code Section
4999 on certain payments made in connection with a change of control of a
company.
On the effective date of the Offering, the Company will grant options for an
aggregate of 1,600,000 Common Shares, including options for 500,000 Common
Shares each to Messrs. Wilson, Sabin and George, at an exercise price equal to
the Offering Price. See "--Executive Compensation." All such Options will be
exercisable on the date of grant for 20% of the Common Shares subject to the
Option. Such Options may become exercisable for up to an additional 20% of
such Common Shares on December 31 in each of 1999-2002 (each an "Eligible
Vesting Date") if certain growth rates in the Company's FFO per share are
achieved. If the Company experiences a compound growth in FFO per share of 10%
per annum as of each Eligible Vesting Date, 50% of the options eligible for
vesting for that year and prior years (the "Eligible Options") will vest. For
each additional percent (above 10%) of growth in FFO per share, an additional
5% of the Eligible Options will vest, such that 100% of the Eligible Options
will vest upon the Company's achievement of a 20% compound growth rate of FFO
per share. All Options will have a term of ten years, and will be granted as
ISOs to the maximum extent permitted by the $100,000 Limit of Code Section
422, described above, given the period over which the Options will become
exercisable. The balance of each Option will take the form of a nonqualified
option. In addition, Share Awards for 45,000 Common Shares will be granted on
the effective date of the Offering, including Share Awards for 15,000 Common
Shares to Mr. Wilson and 10,000 Common Shares each to Messrs. Sabin and
George. All such Share Awards will become vested for 20% of the Common Shares
subject thereto on the date of grant, and for an additional 20% of such Common
Shares on each December 31 for the years 1999 through 2002, assuming
employment through such date.
74
<PAGE>
THE TRUSTEES' PLAN
Prior to the Offering, the Board of Trustees will also adopt, and the
Company's sole shareholder will approve, the Trustees' Plan to provide
incentives to attract and retain non-employee Trustees.
The Trustees' Plan provides for the grant of nonqualified options and Share
Awards to each eligible Trustee of the Company. No Trustee who is an employee
of the Company or a "parent" or "subsidiary" corporation (within the meaning
of Code Section 424 and defined above) of the Company is eligible to
participate in the Trustees' Plan.
The Trustees' Plan authorizes the issuance of up to 114,000 Common Shares
and provides that each eligible Trustee who is a member of the Board of
Trustees on the effective date of the Offering (a "Founding Trustee") will be
granted on that date a nonqualified option for 15,000 Common Shares at an
exercise price equal to the Offering Price and a Share Award for 3,500 Common
Shares. Each eligible Trustee who is not a Founding Trustee will receive, on
the date such Trustee is first elected or appointed to the Board, a
nonqualified option for 15,000 Common Shares at an exercise price equal to the
fair market value of the Common Shares on the date of grant, and a Share Award
for 3,500 Common Shares.
An option granted under the Trustees' Plan shall become exercisable for
3,000 Common Shares on each of the first through fifth anniversaries of the
date of grant, provided that the Trustee is a member of the Board on the
applicable anniversary. Options issued under the Trustees' Plan are
exercisable for ten years from the date of grant. A Share Award granted under
the Trustees' Plan will become vested for 700 Common Shares on each of the
first through fifth anniversaries of the date of grant, provided that the
Trustee is a member of the Board on the applicable anniversary.
A Trustee's outstanding options will become fully exercisable and his or her
outstanding Share Awards will become fully vested if the Trustee ceases to
serve on the Board due to death or disability or on, or upon certain events
leading to, a Change in Control of the Company (as defined in the Trustees'
Plan). Any accelerated exercisability or vesting in connection with a Change
in Control of the Company shall be limited, however, to the extent that a
limitation will permit the Trustee to retain greater net after-tax receipts
than he would retain absent such a limitation, taking into account federal and
state income taxes, federal self-employment taxes and the excise tax imposed
under Code Section 4999 on certain payments made in connection with a change
of control of a company.
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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company and the Partnership have entered into a number of transactions
with the Strategic Partner and Lessee in connection with the organization of
the Company and the acquisition and operation of the Initial Hotels. Messrs.
Wilson, Sabin, George, Peek and Kolcio, officers of the Company, also serve as
officers of the Strategic Partner and are deemed to collectively beneficially
own approximately 35% of the Strategic Partner. Mr. Wilson and Mr. Peek are
deemed to beneficially own, on a fully diluted basis, approximately 20% and
10%, respectively, of the Strategic Partner. In addition, Messrs. Wilson and
Peek, Trustees of the Company, also serve as directors of the Strategic
Partner. There can be no assurances that the terms of the transactions with
the Strategic Partner and Lessee are as favorable as those which the Company
could have received from third parties. See "Formation Transactions" and "Risk
Factors--Conflicts of Interest."
THE STRATEGIC PARTNER
Concurrently with the closing of the Offering, the Company will enter into
the Strategic Alliance with the Strategic Partner. Pursuant to the Strategic
Alliance, the Company will have an option, for a term of two years from the
closing of the Offering, and right of first refusal to acquire the 25 Option
Hotels owned by the Strategic Partner. In addition, the Company will have an
option to buy any hotel property developed by the Strategic Partner within two
years of the opening of such property, and a right of first refusal to buy any
property owned, directly or indirectly, by the Strategic Partner during the
term of the Strategic Alliance. The option permits the Company to purchase the
hotel property at a price equal to 105% of the Strategic Partner's total cost
associated with the property. The Company does not expect to exercise the
option to buy any hotel property if the purchase price would exceed the
property's fair market value. The right of first refusal requires that before
a property is sold to a person or entity other than the Company, the Strategic
Partner first must offer the property to the Company on the same terms and
conditions as a proposed sale to a third party. The Company currently
anticipates that a property would have achieved stabilized operating
statistics and cash flows prior to the Company considering the purchase of
such property. All investment decisions relating to transactions with the
Strategic Partner must be approved by a majority of the Independent Trustees.
RECEIPT OF UNITS BY THE STRATEGIC PARTNER
Prior to the Offering, the Strategic Partner received 67,742 Units in
consideration for assigning to the Partnership its option to purchase the
three Other Initial Hotels. These Units represent approximately 0.5% of the
equity interest in the Company on a consolidated basis and will have a total
value of approximately $677,420, based on the Offering Price, as compared to
the $630,000 that the Strategic Partner actually paid for such option.
Beginning on the first anniversary of the completion of the Offering, these
Units are redeemable at the option of the Strategic Partner for Common Shares
in accordance with the terms of the Partnership Agreement. See "Partnership
Agreement--Redemption Rights."
REPAYMENT OF INDEBTEDNESS
The Company will utilize approximately $5.2 million of the net proceeds of
the Offering to repay the Strategic Partner Loan and the Pre-Offering Debt,
which were incurred in connection with the Offering and the acquisition of the
Initial Hotels.
PAYMENT TO THE STRATEGIC PARTNER
Prior to the Offering, the Strategic Partner incurred various costs related
to warrants issued by the Strategic Partner in connection with the Pre-
Offering Debt, which was incurred to fund expenses associated with the
Offering and the Company's acquisition of the Initial Hotels. The Company will
pay the Strategic Partner $850,000 from the proceeds of the Offering as
reimbursement for such expenses.
76
<PAGE>
ISSUANCE OF SHARES AND GRANTS OF OPTIONS TO OFFICERS AND TRUSTEES
Concurrently with the closing of the Offering, Messrs. Wilson, Sabin,
George, Peek and Kolcio will receive 15,000, 10,000, 10,000, 5,000 and 5,000
Common Shares, valued at $150,000, $100,000, $100,000, $50,000 and $50,000
respectively, based on the Offering Price. In addition, those individuals will
receive options to purchase 500,000, 500,000, 500,000, 50,000 and 50,000
Common Shares at the Offering Price, respectively. Twenty percent of such
Common Shares and options will vest immediately and the remainder will vest at
various times during the next five years.
ACCOUNTING SERVICES AND FEES
The Strategic Partner has agreed to reimburse the Company for the Company's
general and administrative expenses in excess of $150,000 per quarter through
the end of 1998. The Strategic Partner has also agreed to provide accounting
and bookkeeping services to the Company during the term of the Strategic
Alliance. Beginning January 1, 1999, the Company has agreed to pay the
Strategic Partner an annual amount, payable in quarterly installments, of
$100,000 for the 29 Initial Hotels and $2,500 for each subsequently acquired
hotel, for such accounting services. The Company may terminate such services
at any time upon 30 days notice to the Strategic Partner. The Company expects
that the Strategic Partner will provide the accounting services to the Company
for the foreseeable future.
THE PERCENTAGE LEASES
The Company and the Lessee will enter into the Percentage Leases, each with
an initial term of seven years, relating to the Initial Hotels. The Company
anticipates that a similar Percentage Lease will be executed with respect to
any additional hotel properties acquired by the Company in the future. See
"Business and Properties--The Percentage Leases." Pursuant to the terms of the
Percentage Leases, the Lessee is required to pay the greater of Base Rent or
Percentage Rent and certain other additional charges and is entitled to all
profits from the operation of the Initial Hotels after the payment of
operating and other expenses.
FRANCHISE LICENSES
The Lessee will hold all of the franchise licenses for the Initial Hotels.
The Company will pay all costs associated with the transfer of the franchise
licenses for the Initial Hotels to the Lessee and will guarantee the Lessee's
payment of the franchise fees to Marriott.
FINANCIAL ADVISORY FEE
John W. Stokes, who has agreed to become a Trustee of the Company upon
completion of the Offering and the Formation Transactions, is Vice Chairman of
Morgan Keegan & Company, Inc., a representative of the several underwriters in
the Offering. The Company has agreed to pay Morgan Keegan & Company, Inc. a
financial advisory fee of $637,500 in connection with the Offering.
77
<PAGE>
THE STRATEGIC PARTNER AND THE LESSEE
GENERAL
The Company believes its operating and growth strategies will benefit from
its alliance with the Strategic Partner. The Strategic Partner is an owner and
operator of hotel properties and its common stock is traded on the Nasdaq
Stock Market under the symbol "HUDS." Hudson Hotels Corp. was organized in
1987 to develop and franchise a national chain of economy, limited service
lodging facilities operating under the name Microtel(R), which offer downsized
rooms with high quality furnishings at rates below those available at
competing national budget chains. In 1992, the Strategic Partner acquired
Hudson Hotels Corp., a hotel management and development company. In 1995, the
Strategic Partner signed an exclusive Joint Venture Agreement with U.S.
Franchise Systems, Inc., pursuant to which U.S. Franchise Systems, Inc.
purchased worldwide franchising and administration rights for the Microtel
franchise chain. Since entering the Joint Venture Agreement, the Strategic
Partner has focused its efforts on acquiring, managing and developing various
hotel properties, including Microtels.
During 1996, the Strategic Partner began a significant expansion program,
which included the acquisition of the Option Hotels and development of six
Microtel Inns. As of July 1, 1998, the Strategic Partner managed 40 hotel
properties with 4,474 rooms primarily in the northeastern and southeastern
United States, including Fairfield Inn, Hampton Inn, Comfort Inn and Microtel
Inn hotels. Of the 40 hotel properties that the Strategic Partner manages, 25
are owned by the Strategic Partner. After the completion of the Formation
Transactions, the Strategic Partner and its subsidiaries will manage 69 hotel
properties, including the 29 Initial Hotels owned by the Company. The
Strategic Partner is discussing entering into an agreement with the current
manager of the 26 Initial Fairfield Inns, pursuant to which such manager would
provide transitional management services with respect to some or all of the
Initial Fairfield Inns on an interim basis which is not expected to extend
beyond December 31, 1998.
The Lessee will lease and operate each of the Initial Hotels, the Option
Hotels, if acquired, and any other hotels acquired by the Company from the
Strategic Partner, under the Percentage Leases. The Company's rights to
purchase the Option Hotels and other hotels from the Strategic Partner are
subject to entering into satisfactory lease agreements with the Lessee. Under
the Percentage Leases, the Lessee will be responsible for managing all of the
operations of the Initial Hotels. Under the Percentage Leases, the Lessee
generally will be required to perform all operational and management functions
necessary to operate the Initial Hotels. Such functions include accounting,
periodic reporting, front-desk management, guest services, ordering supplies,
advertising and marketing, maid service, laundry, and maintenance. The Lessee
will be entitled to all profits and cash flow from the Initial Hotels after
payment of rent under the Percentage Leases and other operating expenses. The
Lessee or its Affiliates may manage other hotel properties in addition to the
Initial Hotels and the Lessee is not required to devote all of its time and
efforts to the Initial Hotels. The Lessee will hold the franchise licenses
pursuant to which the Initial Hotels are operated.
The Company must rely on the Lessee to generate sufficient cash flow from
the operation of the Initial Hotels to enable the Lessee to meet the rent
obligations under the Percentage Leases. The obligations of the Lessee under
the Percentage Leases are guaranteed by the Strategic Partner. The Strategic
Partner's guarantee of the Lessee's obligations under the Percentage Lease
will be subordinated to the Strategic Partner's $35 million of existing
indebtedness owed to an affiliate of Capital America.
The following table contains the summarized financial information of the
Strategic Partner as of December 31, 1997 and March 31, 1998 and for the year
ended December 31, 1997 and the three months ended March 31, 1998 follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data:
Current assets........................................ $ 6,411 $ 6,818
Non current assets.................................... 145,707 144,985
Current liabilities................................... 9,136 9,389
Non current liabilities............................... 128,744 128,744
Minority interest..................................... 1,099 1,099
Shareholders' equity.................................. 13,139 12,571
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------
<S> <C> <C>
Statement of Operations Data:
-----------------------------
Gross revenues........................ $38,731 $12,007
Income from operations................ 5,983 2,303
Net loss.............................. (1,892) (545)
Cash flow data:
---------------
Cash provided by operating activities
..................................... $ 2,462 $ 27
Cash used in investing activities..... (51,578) (619)
Cash provided by financing activi-
ties................................. 48,729 266
</TABLE>
MANAGEMENT TEAM
Certain information with respect to key personnel of the Strategic Partner
is set forth below.
E. Anthony Wilson, biographical information for whom is set forth in
"Management--Trustees and Executive Officers," serves as Chairman of the Board
and Chief Executive Officer of the Strategic Partner.
Michael T. George, biographical information for whom is set forth in
"Management--Trustees and Executive Officers," will serve as the Strategic
Partner's President and Chief Operating Officer.
John M. Sabin, biographical information for whom is set forth in
"Management--Trustees and Executive Officers," will serve as the Strategic
Partner's Executive Vice President and Chief Financial Officer.
Ralph L. Peek, biographical information for whom is set forth in
"Management--Trustees and Executive Officers," will serve as the Strategic
Partner's Vice President and Treasurer.
Christopher B. Burns, age 41, serves as the Strategic Partner's Vice
President for Development. Mr. Burns is responsible for real estate
acquisition, hotel development and the acquisition and renovation of existing
hotel facilities. Mr. Burns has worked in the hospitality industry for over 24
years, holding the positions of Director of Franchise Sales, Vice President of
Hotel Operations, Food and Beverage Manager and General Manager for various
hotel companies. He holds an Associates and Bachelor of Science degree in
Hotel/Business Administration from the Rochester Institute of Technology.
Dawn M. Richenberg, age 40, serves as the Strategic Partner's Vice President
for Hotel Operations. Ms. Richenberg is responsible for overseeing the
operations of all the Strategic Partner's managed properties. Her
responsibilities include insuring that property maintenance and operations
quality standards are met. Ms. Richenberg received her degree in education at
the State University of New York College at Buffalo and brings 13 years of
hotel operations and management experience to the Strategic Partner. She has
worked for the Strategic Partner for 8 years and is a member of the New York
State Hotel and Tourism Association and the American Hotel and Motel
Association.
Bruce A. Sahs, age 52, participated in the organization of the Strategic
Partner and has served as Chief Financial Officer from its inception through
December 1996. At various times from January 1993 to June 1998, Mr. Sahs has
served as Executive Vice President, Chief Operating Officer, Treasurer and a
Director of the Strategic Partner. Since June 1998, Mr. Sahs has served as
Executive Vice President--Operations. Prior to his employment with the
Strategic Partner, Mr. Sahs was a partner in a Rochester based Certified
Public Accounting firm, practicing public accounting since 1967, specializing
in hotel and restaurant auditing controls and management services. Mr. Sahs
received his degree from the Rochester Institute of Technology, is a Certified
Public Accountant, as well as a Certified Hotel Administrator. He is also a
member of the New York State Society of Certified Public Accountants.
Taras M. Kolcio, biographical information for whom is set forth in
"Management--Trustees and Executive Officers," has served as the Strategic
Partner's Chief Financial Officer. Mr. Kolcio will serve as the Strategic
Partner's Vice President and Controller.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Shares by (i) each Trustee of the Company, (ii) each
executive officer of the Company, and (iii) by all Trustees and executive
officers of the Company as a group immediately following completion of the
Formation Transactions. Unless otherwise indicated, all shares are owned
directly and the indicated person has sole voting and investment power. The
number of shares represents the number of Common Shares the person is expected
to hold.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------------ ------------------ --------
<S> <C> <C>
E. Anthony Wilson(1).............................. 115,000 *
John M. Sabin(2).................................. 110,000 *
Michael T. George(3).............................. 110,000 *
Ralph L. Peek(4).................................. 15,000 *
John W. Stokes(5)................................. 6,500 *
E. Philip Saunders(6)............................. 6,500 *
Richard C. Fox(7)................................. 6,500 *
Richard E. Sands(8)............................... 6,500 *
Taras M. Kolcio(9)................................ 15,000 *
------- ---
Executive officers and trustees as a group (9
persons)......................................... 391,000 3.0%
======= ===
</TABLE>
* Represents less than 1%.
- --------
(1) Includes 15,000 restricted Common Shares, 12,000 of which are subject to
forfeiture if Mr. Wilson's employment by the Company ceases, and 100,000
Common Shares issuable upon exercise of stock options granted to Mr.
Wilson which option shares Mr. Wilson has the right to acquire within 60
days. Does not include 400,000 Common Shares issuable upon exercise of
options which have not yet vested.
(2) Includes 10,000 restricted Common Shares, 8,000 of which are subject to
forfeiture if Mr. Sabin's employment by the Company ceases, and 100,000
Common Shares issuable upon exercise of stock options granted to Mr. Sabin
which option shares Mr. Sabin has the right to acquire within 60 days.
Does not include 400,000 Common Shares issuable upon exercise of options
which have not yet vested.
(3) Includes 10,000 restricted Common Shares, 8,000 of which are subject to
forfeiture if Mr. George's employment by the Company ceases, and 100,000
Common Shares issuable upon exercise of stock options granted to Mr.
George which options Mr. George has the right to acquire within 60 days.
Does not include 400,000 Common Shares issuable upon exercise of the
options, which have not yet vested.
(4) Includes 5,000 restricted Common Shares, 4,000 of which are subject to
forfeiture if Mr. Peek's employment by the Company ceases, and 10,000
Common Shares issuable upon exercise of stock options granted to Mr. Peek
which option shares Mr. Peek has the right to acquire within 60 days. Does
not include 40,000 Common Shares issuable upon exercise of options which
have not yet vested.
(5) Includes 3,500 restricted Common Shares, 2,800 of which are subject to
forfeiture if Mr. Stokes's service as a Trustee ceases, and 3,000 Common
Shares issuable upon exercise of stock options granted to Mr. Stokes which
option shares Mr. Stokes has the right to acquire within 60 days. Does not
include 12,000 Common Shares issuable upon exercise of options which have
not yet vested.
(6) Includes 3,500 restricted Common Shares, 2,800 of which are subject to
forfeiture if Mr. Saunders' service as a Trustee ceases, and 3,000 Common
Shares issuable upon exercise of stock options granted to Mr. Saunders
which option shares Mr. Saunders has the right to acquire within 60 days.
Does not include 12,000 Common Shares issuable upon exercise of options
which have not yet vested.
(7) Includes 3,500 restricted Common Shares, 2,800 of which are subject to
forfeiture if Mr. Fox's service as a Trustee ceases, and 3,000 Common
Shares issuable upon exercise of stock options granted to Mr. Fox which
option shares Mr. Fox has the right to acquire within 60 days. Does not
include 12,000 Common Shares issuable upon exercise of options which have
not yet vested.
(8) Includes 3,500 restricted Common Shares, 2,800 of which are subject to
forfeiture if Mr. Sands' service as a Trustee ceases, and 3,000 Common
Shares issuable upon exercise of stock options granted to Mr. Sands which
option shares Mr. Sands has the right to acquire within 60 days. Does not
include 12,000 Common Shares 10,000 issuable upon exercise of options
which have not yet vested.
(9) Includes 5,000 restricted Common Shares, 4,000 of which are subject to
forfeiture if Mr. Kolcio's employment by the Company ceases, and 10,000
Common Shares issuable upon exercise of stock options granted to Mr.
Kolcio which option shares Mr. Kolcio has the right to acquire within 60
days. Does not include 40,000 Common Shares issuable upon exercise of
options which have not yet vested.
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<PAGE>
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the terms of the shares of beneficial interest of
the Company does not purport to be complete and is subject to and qualified in
its entirety by reference to the Declaration of Trust and Bylaws of the
Company, copies of which are exhibits to the Registration Statement of which
this Prospectus is a part, and the Maryland REIT Law (as defined below). See
"Additional Information."
GENERAL
The Declaration of Trust of the Company provides that the Company may issue
up to 100,000,000 Common Shares of beneficial interest, $0.01 par value per
share ("Common Shares"), and 20,000,000 preferred shares of beneficial
interest, $0.01 par value per share ("Preferred Shares"). Upon completion of
this Offering and the related transactions, 12,559,000 Common Shares will be
issued and outstanding and no Preferred Shares will be issued and outstanding.
As permitted by Title 8 of the Maryland General Corporation Law (the "Maryland
REIT Law"), the Declaration of Trust contains a provision permitting the Board
of Trustees, without any action by the shareholders of the Trust, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of shares of
beneficial interest that the Trust has authority to issue.
Both the Maryland REIT Law and the Company's Declaration of Trust provide
that no shareholder of the Company will be personally liable for any
obligation of the Company solely as a result of his status as a shareholder of
the Company. The Company's Bylaws further provide that the Company shall
indemnify each shareholder against any claim or liability to which the
shareholder may become subject by reason of his being or having been a
shareholder or former shareholder and that the Company shall pay or reimburse
each shareholder or former shareholder for all legal and other expenses
reasonably incurred by him in connection with any claim or liability. Inasmuch
as the Company carries public liability insurance which it considers adequate,
any risk of personal liability to shareholders is limited to situations in
which the Company's assets plus its insurance coverage would be insufficient
to satisfy the claims against the Company and its shareholders.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or
series of beneficial interest and to the provisions of the Company's
Declaration of Trust regarding the restriction of the transfer of shares of
beneficial interest, holders of Common Shares are entitled to receive
dividends on shares if, as and when authorized and declared by the Board of
Trustees of the Company out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
shareholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the
Company.
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 such Common Shares 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 will not be able to elect any trustees.
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of shares of beneficial interest,
Common Shares have equal dividend, distribution, liquidation and other rights.
Under the Maryland REIT Law, a Maryland REIT generally cannot amend its
declaration of trust or merge unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote
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on the matter unless a lesser percentage (but not less than a majority of all
the votes entitled to be cast on the matter) is set forth in the REIT's
Declaration of Trust. The Company's Declaration of Trust provides that,
notwithstanding a provision of law requiring such action to be taken or
authorized by the holders of a greater number of votes, any such action shall
be effective and valid if taken or authorized by the affirmative vote of a
majority of all the votes entitled to be cast on the matter, except with
respect to: (a) the intentional disqualification of the Company as a REIT or
revocation of its election to be taxed as a REIT (which requires the
affirmative vote of two-thirds of the number of Common Shares entitled to vote
on such matter at a meeting of the shareholders of the Company); (b) the
election of trustees (which requires a plurality of all the votes cast at a
meeting of shareholders of the Company at which a quorum is present); (c) the
removal of trustees (which requires the affirmative vote of the holders of at
least two-thirds of the votes entitled to be cast in the elections of
Trustees); (d) the amendment or repeal of the Independent Trustee provision in
the Declaration of Trust (or any other portion of Article V thereof relating
to Trustees) (which requires the affirmative vote of two-thirds of the
Trustees or two-thirds of the outstanding shares entitled to vote on the
matter); (e) the approval of any amendment of the Declaration of Trust by
shareholders (which requires the affirmative vote of a majority of votes
entitled to be cast on the matter, except under certain circumstances
specified in the Declaration of Trust that require the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter) or that permit
the amendment without any action by the shareholders, as described below; and
(f) the dissolution of the Company (which requires the affirmative vote of
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 of trust from time to time to qualify as
a REIT under the Code or the Maryland REIT Law without the affirmative vote or
written consent of the shareholders. The Company's Declaration of Trust
permits such action by the Board of Trustees. As permitted by the Maryland
REIT Law, the Declaration of Trust contains a provision permitting the Board
of Trustees, without any action by the shareholders of the Trust, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of shares of
beneficial interest that the Trust has authority to issue.
PREFERRED SHARES
The Declaration of Trust authorizes the Board of Trustees to classify any
unissued Preferred Shares and to reclassify any previously classified but
unissued Preferred Shares of any series from time to time in one or more
series, as authorized by the Board of Trustees. Prior to issuance of shares of
each series, the Board of Trustees is required by the Maryland REIT Law and
the Company's Declaration of Trust to set for each such series, subject to the
provisions of the Company's Declaration of Trust regarding the restriction on
transfer of shares of beneficial interest, the terms, the 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 the Company that might involve a premium price for holders of
Common Shares or otherwise might be in their best interest. As of the date
hereof, no Preferred Shares are outstanding and the Company has no present
plans to issue any Preferred Shares.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
The Company's Declaration of Trust authorizes the Trustees to classify or
reclassify any unissued Common Shares or Preferred Shares into one or more
classes or series of shares of beneficial interest 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 such new class or series of shares of beneficial
interest.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of beneficial
interest. Specifically, not more than 50% in value of the
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Company's outstanding shares of beneficial interest may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than its first
REIT taxable year), and the Company must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year (other than its first REIT
taxable year). See "Federal Income Tax Considerations--Requirements for
Qualification." In addition, the Company must meet certain requirements
regarding the nature of its gross income in order to qualify as a REIT. One
such requirement is that at least 75% of the Company's gross income for each
year must consist of rents from real property and income from certain other
real property investments. The rents received by the Partnership from the
Lessee will not qualify as rents from real property, which likely would result
in loss of REIT status for the Company, if the Company were to own, actually
or constructively, 10% or more of the ownership interests in the Lessee within
the meaning of Section 856(d)(2)(B) of the Code. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests."
Because the Board of Trustees believes it is essential for the Company to
qualify and continue to qualify as a REIT and for other corporate purposes,
the Declaration of Trust, subject to certain exceptions described below,
provides that no person may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.9% of (i) the number of
outstanding Common Shares or (ii) the number of outstanding Preferred Shares
of any class or series of Preferred Shares (the "Ownership Limit"). The
Declaration of Trust provides that, subject to certain exceptions described
below, any transfer of Common or Preferred Shares that would (i) result in any
person owning, directly or indirectly, Common or Preferred Shares in excess of
the Ownership Limit, (ii) result in the Common and Preferred Shares being
owned by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 10% or more of the ownership interests in a tenant
of the Company's or the Partnership's real property, within the meaning of
Section 856(d)(2)(B) of the Code, will be null and void, and the intended
transferee will acquire no rights in such Common or Preferred Shares.
Subject to certain exceptions described below, the Declaration of Trust
provides that any purported transfer of Common Shares or Preferred Shares or
other event that would (i) result in any person owning, directly or
indirectly, Common Shares or Preferred Shares in excess of the Ownership
Limit, (ii) result in the Common Shares and Preferred Shares being owned by
fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 10% or more of the ownership interests in a tenant
of the Company's or the Partnership's real property, within the meaning of
Section 856(d)(2)(B) of the Code, will result in such shares being designated
as "Shares-in-Trust" and transferred automatically to a trust (a "Trust")
effective on the day before the purported transfer of such Common Shares or
Preferred Shares. The record holder (the "Record Holder") of the Common Shares
or Preferred Shares that are designated as Shares-in-Trust (the "Prohibited
Owner") will be required to submit such number of Common Shares or Preferred
Shares to the Company for registration in the name of the Trust. The Trustee
will be designated by the Company, but will not be affiliated with the
Company. The beneficiary of a Trust (the "Beneficiary") will be one or more
charitable organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding Common Shares or
Preferred Shares and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Record Holder will receive all
dividends and distributions on the Shares-in-Trust and will hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Record Holder will vote all Shares-in-Trust. The Record Holder will designate
a permitted transferee of the Shares-in-Trust, provided that the permitted
transferee (i) purchases such Shares-in-Trust for valuable consideration and
(ii) acquires such Shares-in-Trust without such acquisition resulting in a
transfer to another Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Record Holder the amount of any dividends or distributions
received by the Prohibited Owner (i) that are attributable to any Shares-
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in-Trust and (ii) the record date of which was on or after the date that such
shares became Shares-in-Trust. The Prohibited Owner generally will receive
from the Record Holder the lesser of (i) the price per share such Prohibited
Owner paid for the Common Shares or Preferred Shares that were designated as
Shares-in-Trust (or, in the case of a gift or devise, the Market Price (as
defined below) per share on the date of such transfer) or (ii) the price per
share received by the Record Holder from the sale of such Shares-in-Trust. Any
amounts received by the Record Holder in excess of the amounts to be paid to
the Prohibited Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in
the case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept
such offer for a period of 90 days after the later of (i) the date of the
purported transfer which resulted in such Shares-in-Trust or (ii) the date the
Company determines in good faith that a transfer resulting in such Shares-in-
Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the last quoted price
as reported by NYSE or other exchange on which the Common or Preferred Shares
are then traded. "Trading Day" shall mean a day on which the principal
national securities exchange on which the Common or Preferred Shares are
listed or admitted to trading is open for the transaction of business or, if
the Common or Preferred Shares are not listed or admitted to trading on any
national securities exchange, shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
Any person who acquires or attempts to acquire Common or Preferred Shares in
violation of the foregoing restrictions, or any person who owned Common or
Preferred Shares that were transferred to a Trust, will be required (i) to
give immediately written notice to the Company of such event and (ii) to
provide to the Company such other information as the Company may request in
order to determine the effect, if any, of such transfer on the Company's
status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding Common and Preferred Shares must, within 30 days after January 1
of each year, provide to the Company a written statement or affidavit stating
the name and address of such direct or indirect owner, the number of Common
and Preferred Shares owned directly or indirectly, and a description of how
such shares are held. In addition, each direct or indirect shareholder shall
provide to the Company such additional information as the Company may request
in order to determine the effect, if any, of such ownership on the Company's
status as a REIT and to ensure compliance with the Ownership Limit.
The Ownership Limit generally will not apply to the acquisition of Common or
Preferred Shares by an underwriter that participates in a public offering of
such shares. In addition, the Board of Trustees, upon receipt of a ruling from
the Service or an opinion of counsel and upon such other conditions as the
Board of Trustees may direct, may exempt a person from the Ownership Limit
under certain circumstances. The foregoing restrictions will continue to apply
until (i) the Board of Trustees determines that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as
a REIT and (ii) there is an affirmative vote of two-thirds of the number of
Common and Preferred Shares entitled to vote on such matter at a regular or
special meeting of the shareholders of the Company.
All certificates representing Common or Preferred Shares will bear a legend
referring to the restrictions described above.
The Ownership Limit could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of shares of Common
Shares might receive a premium for their shares of Common Shares
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over the then prevailing market price or which such holders might believe to
be otherwise in their best interest. See "Risk Factors--Anti-takeover Effect
of Ownership Limit, Staggered Board, Power to Issue Additional Shares and
Certain Provisions of Maryland Law."
OTHER MATTERS
The transfer agent and registrar for the Company's Common Shares will be
American Stock Transfer and Trust Company.
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CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S DECLARATION
OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws of the Company is subject to and qualified in
its entirety by reference to Maryland law and to the Declaration of Trust and
Bylaws of the Company.
CLASSIFICATION OF THE BOARD OF TRUSTEES
The Bylaws provide that the number of Trustees of the Company may be
established by the Board of Trustees but may not be fewer than three nor more
than nine. At the closing of the Offering, there will be seven Trustees. The
Trustees may increase or decrease the number of Trustees by a vote of at least
80% of the members of the Board of Trustees, provided that the number of
Trustees shall never be less than the number required by Maryland law and that
the tenure of office of a Trustee shall not be affected by any decrease in the
number of Trustees. Any vacancy will be filled, including a vacancy created by
an increase in the number of Trustees, at any regular meeting or at any
special meeting called for that purpose, by a majority of the remaining
Trustees.
Pursuant to the Declaration of Trust, the Board of Trustees is divided into
three classes of Trustees, with initial terms expiring in 1999, 2000 and 2001,
respectively. Beginning in 1999, Trustees of each class are chosen for three-
year terms upon the expiration of their current terms and each year one class
of trustees will be elected by the shareholders. The Company believes that
classification of the Board of Trustees will help to assure the continuity and
stability of the Company's business strategies and policies as determined by
the Board of Trustees. Holders of Common Shares will have no right to
cumulative voting in the election of Trustees. Consequently, at each annual
meeting of shareholders, the holders of a majority of the Common Shares will
be able to elect all of the successors of the class of Trustees whose terms
expire at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent trustees more time consuming and difficult. More than
one annual meeting will generally be required to effect a change in a majority
of the Board of Trustees. The staggered terms of Trustees may reduce the
possibility of a tender offer or an attempt to change control of the Company
or other transaction that might involve a premium price for holders of Common
Shares, even though a tender offer, change of control or other transaction
might be in the best interest of the shareholders. See "Risk Factors--Anti-
takeover Effect of Ownership Limit, Staggered Board, Power to Issue Additional
Shares and Certain Provisions of Maryland Law."
REMOVAL OF TRUSTEES
The Declaration of Trust provides that a Trustee may be removed with or
without cause upon the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of Trustees. This provision, when coupled
with the provision in the Bylaws authorizing the Board of Trustees to fill
vacant trusteeships, precludes shareholders from removing incumbent Trustees,
except upon a substantial affirmative vote, and filling the vacancies created
by such removal with their own nominees.
BUSINESS COMBINATIONS
Under the Maryland General Corporation Law ("MGCL"), as applicable to
Maryland REITs, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland REIT
and any person who beneficially owns ten percent or more of the voting power
of the trust's shares or an affiliate of the trust who, at any time within the
two-year period prior to the date in question, was an Interested Shareholder
or an affiliate thereof are prohibited for five years after the most recent
date on which the Interested Shareholder becomes an Interested Shareholder.
Thereafter, any such business combination must be recommended by the board of
trustees of such trust and approved by the affirmative vote of at least (a)
80% of the votes entitled to be cast by holders
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of outstanding voting shares of beneficial interest of the trust and (b) two-
thirds of the votes entitled to be cast by holders of voting shares of the
trust other than shares held by the Interested Shareholder with whom (or with
whose affiliate) the business combination is to be effected, 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 shares. These provisions of Maryland law do not apply, however, to
business combinations that are approved or exempted by the board of trustees
of the trust prior to the time that the Interested Shareholder becomes an
Interested Shareholder. The Company's Board of Trustees intends to resolve to
opt out of the business combination provisions of the MGCL.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland REITs, provides that control shares (as
defined below) of a Maryland REIT 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 of beneficial
interest owned by the acquiror, by officers or by trustees who are employees
of the trust. "Control Shares" are voting shares of beneficial interest which,
if aggregated with all other such shares of beneficial interest previously
acquired by the acquiror or in respect of which the acquiror is able to
exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing trustees within one of the following ranges of voting power: (i) one-
fifth or more but less than one-third, (ii) one-third or more but less than a
majority, or (iii) a majority or more of all voting power. Control Shares do
not include shares the acquiring person is then entitled to vote as a result
of having previously obtained shareholder approval. A "control share
acquisition" means the acquisition of Control Shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of trustees of the trust to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself
present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the trust may redeem any
or all of the Control Shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the Control Shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for Control Shares are approved at a shareholders meeting and
the acquiror becomes entitled to vote a majority of the shares entitled to
vote, all other shareholders may exercise appraisal rights. The fair value of
the shares as determined for purposes of such appraisal rights may not be less
than the highest price per share paid by the acquiror in the control share
acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by the declaration of
trust or bylaws of the trust.
The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's Common or Preferred Shares. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
AMENDMENT
The Declaration of Trust may be amended with the approval of at least a
majority of all of the votes entitled to be cast on the matter, provided, that
certain provisions of the Declaration of Trust regarding (i) the Company's
Board of Trustees, (ii) the restrictions on transfer of the Common Shares and
the Preferred Shares, (iii) amendments to the Declaration of Trust by the
Trustees and the shareholders of the Company and (iv) the termination of the
Company may not be amended, altered, changed or repealed without the approval
of two-
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thirds of all of the votes entitled to be cast on these matters. In addition,
the Declaration of Trust may be amended by the Board of Trustees, without
shareholder approval to conform the Declaration of Trust to the Maryland REIT
law. The Company's Bylaws may be amended or altered exclusively by the Board
of Trustees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland REIT to include in its Declaration
of Trust a provision limiting the liability of its trustees and officers to
the trust and its shareholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Declaration of
Trust of the Company contains such a provision which limits such liability to
the maximum extent permitted by Maryland law.
The Declaration of Trust of the Company authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to (a) any present or former Trustee or officer or (b) any individual who,
while a Trustee of the Company and at the request of the Company, serves or
has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer, partner,
employee or agent of such 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 from and
against any claim or liability to which such person may become subject or
which such person may incur by reason of his status as a present or former
shareholder, Trustee or officer of the Company. The Bylaws of the Company
obligate it, to the maximum extent permitted by Maryland law, to indemnify and
to pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former Trustee or officer who is made a party
to the proceeding by reason of his service in that capacity, or (b) any
individual who, while a Trustee of the Company and at the request of the
Company, serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise and who is made a party to the
proceeding by reason of his service in that capacity against any claim or
liability to which he may become subject by reason of such status. The
Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any
of the capacities described above and to any employee or agent of the Company
or a predecessor of the Company. The Bylaws require the Company to indemnify a
Trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity.
The Maryland REIT Law permits a Maryland REIT 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, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the director or officer of his good faith belief that
he has met the standard of conduct necessary for indemnification by the
Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
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OPERATIONS
The Company is generally prohibited from engaging in certain activities,
including acquiring or holding property or engaging in any activity that would
cause the Company to fail to qualify as a REIT.
DISSOLUTION OF THE COMPANY
Pursuant to the Company's Declaration of Trust, and subject to the
provisions of any class or series of shares of beneficial interest of the
Company then outstanding, the shareholders of the Company, at any meeting
thereof, may dissolve the Company by the affirmative vote of two-thirds of all
of the votes entitled to be cast on the matter.
ADVANCE NOTICE OF TRUSTEES NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) 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
(i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Trustees or (iii) 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
(b) with respect to special meetings of shareholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of shareholders and nominations of persons for election to the Board of
Trustees may be made only (i) pursuant to the Company's notice of the meeting,
(ii) by the Board of Trustees or (iii) 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.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
The business combination provisions (of which the Company's Board of
Trustees intends to resolve to opt out) and, if the applicable provision in
the Bylaws is rescinded, the control share acquisition provisions of the MGCL,
the provisions of the Declaration of Trust on classification of the Board of
Trustees, the removal of Trustees and the restrictions on the ownership and
transfer of shares of beneficial interest and the advance notice provisions of
the Bylaws could have the affect of delaying, deferring or preventing a
transaction or a change in control of the Company that might involve a premium
price for holders of Common Shares or otherwise be in their best interest.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland REIT, the Maryland REIT Law
requires at least 75% of the value of the Company's assets to be held,
directly or indirectly, 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 the Company from using or applying land for farming, agricultural,
horticultural or similar purposes.
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POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflict of interest and certain other activities. The
policies with respect to these activities have been determined by the Board of
Trustees of the Company and may be amended or revised from time to time at the
discretion of the Board of Trustees without a vote of the shareholders of the
Company, except that (i) changes in certain policies with respect to conflicts
of interest must be consistent with legal requirements and (ii) the Company
cannot take any action intended to terminate its qualification as a REIT
without the approval of the holders of a majority of the outstanding Common
Shares.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate
The Company intends to acquire additional existing hotel properties
throughout the United States that the Company believes are undervalued in
current market conditions and that have achieved stabilized occupancy and ADR.
The Company's principal investment policy is to acquire properties which offer
the potential for high current rates of return to the Company, a substantial
dividend to the Company's shareholders and long term increases in value. The
Company initially intends to focus on the acquisition of limited service hotel
properties with stabilized revenue streams that can be acquired at prices that
are accretive to FFO per share and operate under strong, national franchise
affiliations, such as the Fairfield Inn by Marriott and Hampton Inn brands. In
addition, the Company may also consider acquiring limited service hotels such
as Marriott Courtyard, Comfort Suites, Comfort Inn, Holiday Inn Express, Red
Roof Inn, Econo Lodge and Microtel brands. The Company believes that a
substantial number of existing hotel properties that meet its investment
criteria are available at attractive prices. The Company may fund property
acquisitions with cash, borrowings incurred under the Credit Facility or other
indebtedness, or by using Units in the Partnership as consideration for such
acquisitions.
The Company also believes that the development experience of the officers of
the Company and the Strategic Partner will enable it to identify
underperforming and underdeveloped hotel properties or hotels that would
benefit substantially from rebranding and quality management. The Company will
have a right of first opportunity to acquire any hotel identified for
acquisition by the Strategic Partner and an option and right of first refusal
to acquire the Option Hotels and any hotel property developed by the Strategic
Partner. The Company has not developed any policy as to the amount or
percentage of assets that will be invested in any specific property.
Development by the Strategic Partner
The Strategic Partner intends to continue to pursue hotel development
opportunities, and the Company intends to consider the acquisition of hotels
developed by the Strategic Partner. The Company believes that new development
of hotels by the Strategic Partner will provide opportunities to acquire well
constructed, well positioned and competitively priced hotels. For as long as
the Strategic Alliance is in effect, the Company will have an option to
acquire any hotel properties developed by the Strategic Partner. The purchase
price for a developed hotel will be equal to the Strategic Partner's
development costs, plus a development fee of 5% of the development costs, for
a total purchase price not to exceed the property's fair market value. The
Company does not expect to exercise an option to purchase a development hotel
from the Strategic Partner if the purchase price exceeds fair market value.
The option will arise on the date such development hotel is opened and last
for two years. In addition, the Company will have a right of first refusal to
acquire any hotel property owned, directly or indirectly, by the Strategic
Partner during the term of the Strategic Alliance. The right of first refusal
will obligate the Strategic Partner to permit the Company to match any offer
received from a third party to buy the developed hotel property. The Company
currently anticipates that a property developed by the Strategic Partner will
have achieved stabilized operations and cash flows before the Company would
consider purchasing such property. All transactions with the Strategic Partner
must be approved by a majority of the Independent Trustees. See "Management."
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Investments in Other Entities
The Company also may participate with other entities in property ownership,
through joint ventures or other types of co-ownership. Equity investments may
be subject to existing mortgage financing and other indebtedness which may
have priority over the equity interest of the Company.
Investments in Real Estate Mortgages
While the Company will emphasize equity real estate investments, it may, in
its discretion, invest in mortgage and other real estate interests, including
securities of other REITs. The Company does not presently intend to invest in
mortgages or securities of other REITs. The Company may invest in
participating or convertible mortgages if it concludes that by doing so it may
benefit from the cash flow or any appreciation in the value of the subject
property. Such mortgages are similar to equity participation, because they
permit the lender to either participate in increasing revenues from the
property or convert some or all of that mortgage to equity.
FINANCING
The Company has received commitments from Capital America for the $125
million Credit Facility which consists of the $100 million Line of Credit and
the $50-75 million Permanent Financing. Concurrently with the closing of the
Offering, the Company expects to incur approximately $42.6 million of
indebtedness (representing approximately 27% of the Company's investment in
the Initial Hotels, at cost) to fund, in part, the acquisition of the Initial
Hotels. In addition, the Company intends to make additional investments in
hotel properties and may incur additional indebtedness to make such
investments or to meet the distribution requirements imposed by the REIT
provisions of the Code, to the extent that cash flow from the Company's
investments and working capital is insufficient. The Board of Trustees intends
to limit the consolidated indebtedness of the Company to 50% of the Company's
investment in hotel properties, valued at undepreciated total cost (the "Debt
Policy"). However, the Company's organizational documents do not limit the
amount of indebtedness the Company may incur, and the Company may modify the
Debt Policy at any time.
Borrowings may be incurred through the Partnership or the Company.
Indebtedness incurred by the Company may be in the form of bank borrowings,
secured and unsecured, and publicly and privately placed debt instruments.
Indebtedness incurred by the Partnership may be in the form of purchase money
obligations to the sellers of properties, publicly or privately placed debt
instruments, financing from banks, institutional investors or other lenders,
any of which indebtedness may be unsecured or may be secured by mortgages or
other interests in the property owned by the Partnership. Such indebtedness
may be recourse to all or any part of the property of the Company or the
Partnership, or may be limited to the particular property to which the
indebtedness relates. The proceeds from any borrowings by the Company or the
Partnership may be used for the payment of distributions or dividends, working
capital, to refinance existing indebtedness or to finance acquisitions,
expansions, additions or renovations of hotel properties. See "Federal Income
Tax Considerations--Requirements for Qualification--Distribution
Requirements."
If the Board of Trustees determines that the Company needs to raise
additional equity capital, the Board has the authority, without shareholder
approval, to issue additional Common Shares, Preferred Shares or other shares
of beneficial interest of the Company in any manner (and on such terms and for
such consideration) as it deems appropriate, including in exchange for
property. Existing shareholders have no preemptive right to purchase shares
issued in any offering, and any such offering might cause a dilution of a
shareholder's investment in the Company.
The Company may make investments other than as previously described,
although it does not currently intend to do so.
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CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into certain agreements
designed to address potential conflicts of interest. In addition, the Company
is subject to provisions of its governing instruments and of Maryland law,
which address conflicts of interest. However, there can be no assurance that
these policies, agreements and provisions will be successful in eliminating
the influence of such conflicts, and if they are not successful, decisions
could be made that might fail to reflect fully the interests of all
shareholders. Except as set forth below, the Company's officers and Trustees
are not prohibited from engaging for their own account in business activities
of the types conducted or to be conducted by the Company.
Declaration of Trust and Bylaw Provisions
The Company's Declaration of Trust, with limited exceptions, requires that a
majority of the Company's Board of Trustees be comprised of persons who are
not officers, directors or employees of the Company, the Strategic Partner,
the Lessee or an Affiliate of those entities. Such persons making up a
majority of the Board of Trustees are referred to as "Independent Trustees."
The Declaration of Trust provides that such Independent Trustee requirement
may not be amended, altered, changed or repealed without the affirmative vote
of not less than two-thirds of the outstanding Common Shares (and other shares
of beneficial interest of the Company entitled to vote, if any exist). The
Bylaws provide that any action pertaining to any transaction in which the
Company is purchasing, selling, leasing or mortgaging any real estate asset or
engaging in any other transaction in which the Strategic Partner or any
advisor, Trustee or officer of the Company, the Strategic Partner, any lessee
or contract manager of any property of the Company or any Affiliate of the
foregoing has any direct or indirect interest, must be approved by a majority
of the Trustees, including a majority of the Independent Trustees. This
provision of the Bylaws may not be amended, altered, changed or repealed
without the affirmative vote of at least a majority of the members of the
Board of Trustees including a majority of the Independent Trustees or the
affirmative vote of the holders of not less than two-thirds of the outstanding
Common Shares (and other shares of beneficial interest of the Company entitled
to vote, if any exist).
Provisions of the Percentage Leases and the Strategic Alliance
The Strategic Partner may not own, build, develop, lease, operate, manage,
franchise or have any interest in any hotel properties within 3 miles of any
hotel property in which the Company or the Partnership has invested, unless
approved in advance by the Company. The Company will have a right of first
refusal to acquire on the same terms proposed by any bona fide offer any new
hotel properties developed by the Strategic Partner and will also have an
option to acquire such hotel developments at any time within two years after
the development hotel opens for business. The option price will be an amount
equal to 105% of the Strategic Partner's development cost. If the option price
exceeds the property's fair market value, the Company does not expect to
acquire the development property. In addition, the Strategic Partner has
agreed that neither it nor any of its Affiliates will receive any brokerage
commissions with respect to hotel properties purchased by the Company. The
Strategic Alliance may be amended only upon the consent in writing of the
parties thereto.
The Partnership
Although HHT Ltd. and the Strategic Partner will be the sole initial limited
partners of the Partnership upon completion of the Offering, the Partnership
may issue Units in the Partnership in exchange for properties subsequent to
the Offering, thus creating additional limited partners in the Partnership. A
conflict of interest may arise between the Company, as general partner of the
Partnership, and any future limited partners of the Partnership, due to the
differing potential tax liability to the Company and the limited partners from
the sale of a hotel resulting from the differing tax bases of the Company and
the limited partners in such hotel. In an effort to address this conflict of
interest, the Company's Bylaws provide that the Company's decisions with
respect to the sale of a hotel will be made by the Independent Trustees. The
Partnership Agreement gives the Company, as General Partner of the
Partnership, full, complete and exclusive discretion in managing and
controlling the business of the Partnership and in making all decisions
affecting the business and assets of the Partnership.
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Provisions of Maryland Law
Pursuant to Maryland law (the jurisdiction under which the Company is
organized), each Trustee is required to discharge his duties in good faith,
with the care an ordinarily prudent person in a like position would exercise
under similar circumstances and in a manner he reasonably believes to be in
the best interest of the Company. In addition, under Maryland law, a
transaction between the Company and any of its Trustees or between the Company
and a corporation, firm or other entity in which a Trustee is a director or
has a material financial interest is not void or voidable solely because of
the Trustee's directorship or the Trustee's interest in the transaction if (i)
the transaction is authorized, approved or ratified, after disclosure of the
interest, by the affirmative vote of a majority of the disinterested Trustees,
or by the affirmative vote of a majority of the votes cast by shareholders
entitled to vote other than the votes of shares owned of record or
beneficially by the interested Trustee or corporation, firm or other entity,
or (ii) the transaction is fair and reasonable to the Company.
OTHER ACTIVITIES
At the present time, the Company does not propose to engage in the making of
loans to other persons; the investment in securities of issuers other than its
wholly-owned subsidiaries, for the purpose of exercising control; or the
underwriting of securities of other issuers. The Company has authority to
offer shares of beneficial interest or other securities, which may rank senior
to the Common Shares, and to repurchase or otherwise reacquire its shares or
any other securities and may engage in such activities in the future. The
Company has not issued Common Shares, interests or any other securities to
date, except in connection with the formation of the Company. The Company has
no outstanding loans to other entities or persons, including its officers and
Trustees. The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers, nor has the Company
invested in the securities of other issuers other than the Partnership for the
purpose of exercising control. The Company intends to make investments in such
a way that it will not be treated as an investment company under the
Investment Company Act of 1940, as amended.
At all times, the Company intends to make investments in such a manner
consistent with the requirements of the Code for the Company to qualify as a
REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Company's Board of Trustees, with the consent of
the holders of two-thirds of the outstanding Common Shares, determines that it
is no longer in the best interests of the Company to qualify as a REIT.
WORKING CAPITAL RESERVES
The Company will initially have minimal working capital reserves. In the
future, the Company intends to set aside undistributed cash in amounts that
the Board of Trustees determines to be adequate to meet normal contingencies
in connection with the operation of the Company's business and investments.
The Company anticipates that it will obtain the Line of Credit, which may
assist the Company in meeting its distribution and working capital needs
during its initial year of operation.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding (or
reserved for issuance upon redemption of Units) 12,626,742 Common Shares. The
Common Shares issued in the Offering and the Common Shares issuable upon
redemption will be freely tradeable by persons other than Affiliates of the
Company without restriction under the Securities Act, subject to certain
limitations on ownership set forth in the Declaration of Trust. Common Shares
issued to executive officers and key employees pursuant to the Share Incentive
Plan, Common Shares issued to the Independent Trustees directly by the Company
or pursuant to the Trustees' Plan and Common Shares issuable to the Strategic
Partner upon conversion of Units are "restricted" securities under the meaning
of Rule 144 promulgated under the Securities Act ("Rule 144") and may not be
sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemptions contained
in Rule 144.
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In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restrticted shares from the
Company or any "Affiliate" of the Company, as that term is defined under the
Securities Act, the acquirer or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then-outstanding shares or of the average weekly trading
volume of the shares during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 also are subject to certain manner of sale provisions,
notice requirements and the availability of current public information about
the Company. If two years have elapsed since the date of acquisition of
restricted shares from the Company or from any "Affiliate" of the Company, and
the acquirer or subsequent holder thereof is deemed not to have been an
"Affiliate" of the Company at any time during the 90 days preceding a sale,
such person would be entitled to sell such shares in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
The Company has agreed to file, as soon as practicable after the later of
(i) the first anniversary of the closing of the Offering or (ii) the request
of any holder of Units, a registration statement with the Securities and
Exchange Commission for the purpose of registering the sale of Common Shares
issuable to holders of Units upon redemption thereof. The Company will use its
best efforts to have the registration statement declared effective and to keep
it effective for a period of two years. Upon effectiveness of such
registration statement, those persons who receive Common Shares upon
redemption of Units may sell such shares in the secondary market without being
subject to the volume limitations or other requirements of Rule 144. The
Company will bear expenses incident to its registration requirements, except
that such expenses shall not include any underwriting discounts or
commissions, Securities and Exchange Commission or state securities
registration fees or transfer taxes relating to such shares. Registration
rights may be granted to future sellers of hotel properties to the Partnership
who elect to receive in lieu of cash, Common Shares, Units, or other
securities convertible into Common Shares.
Prior to the date of this Prospectus, there has been no public market for
the Common Shares. Trading of the Common Shares on the NYSE is expected to
commence following the completion of the Offering. No prediction can be made
as to the effect, if any, that future sales of shares, or the availability of
shares for future sale, will have on the market price prevailing from time to
time. Sales of substantial amounts of Common Shares, or the perception that
such sales could occur, could adversely affect prevailing market prices of the
Common Shares.
For a description of certain restrictions on transfers of Common Shares held
by certain Shareholders, see "Underwriting."
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PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the descriptions of
certain provisions thereof set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Partnership Agreement, which is
filed as an exhibit to the Registration Statement of which this Prospectus is
a part. Although the Company, through HHT Ltd., and the Strategic Partner will
be the sole limited partners of the Partnership upon completion of the
Offering, the Partnership may issue Units in exchange for properties
subsequent to the Offering, thus creating additional limited partners in the
Partnership.
MANAGEMENT
The Partnership has been organized as a Virginia limited partnership
pursuant to the terms of the Amended and Restated Agreement of Limited
Partnership (the "Partnership Agreement"). Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Partnership, will
have full, exclusive and complete responsibility and discretion in the
management and control of the Partnership, and the limited partners will have
no authority in their capacity as limited partners to transact business for,
or participate in the management activities or decisions of, the Partnership.
However, any amendment to the Partnership Agreement that would affect the
Redemption Rights (as defined herein) would require the consent of limited
partners (other than HHT Ltd.) holding more than 50% of the Units held by such
partners.
TRANSFERABILITY OF INTERESTS
The Company may not voluntarily withdraw from the Partnership or transfer or
assign its interest in the Partnership unless the transaction in which such
withdrawal or transfer occurs results in the limited partners receiving
property in an amount equal to the amount they would have received had they
exercised their Redemption Rights immediately prior to such transaction, or
unless the successor to the Company contributes substantially all of its
assets to the Partnership in return for an interest in the Partnership. With
certain limited exceptions, the limited partners may not transfer their
interests in the Partnership, in whole or in part, without the written consent
of the Company, which consent the Company may withhold in its sole discretion.
The Company may not consent to any transfer that would cause the Partnership
to be treated as a corporation for federal income tax purposes.
CAPITAL CONTRIBUTION
The Company will contribute, directly and through HHT Ltd., to the
Partnership substantially all the net proceeds of the Offering as its initial
capital contribution in exchange for a 1% general partnership interest and
98.5% limited partnership interest in the Partnership. Although the
Partnership will receive substantially all the net proceeds of the Offering,
the Company will be deemed to have made a capital contribution to the
Partnership in the amount of substantially all the gross proceeds of the
Offering and the Partnership will be deemed simultaneously to have paid the
Underwriter's selling commissions and other expenses paid or incurred in
connection with the Offering. The Partnership Agreement provides that if the
Partnership requires additional funds at any time or from time to time in
excess of funds available to the Partnership from borrowing or capital
contributions, the Company may borrow such funds from a financial institution
or other lender and lend such funds to the Partnership on the same terms and
conditions as are applicable to the Company's borrowing of such funds. Under
the Partnership Agreement, the Company generally is obligated to contribute
the proceeds of a securities offering as additional capital to the
Partnership. Moreover, the Company is authorized to cause the Partnership to
issue partnership interests for less than fair market value if the Company has
concluded in good faith that such issuance is in the best interests of the
Company and the Partnership. If the Company so contributes additional capital
to the Partnership, the Company will receive additional Units and the
Company's percentage interest in the Partnership will be increased on a
proportionate basis based upon the amount of such additional capital
contributions. Conversely, the percentage interests of the limited partners
will be decreased on a proportionate basis in the event of additional capital
contributions by the Company. In addition, if the Company contributes
additional capital to the Partnership, the Company will revalue the property
of the Partnership to its
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fair market value (as determined by the Company) and the capital accounts of
the partners will be adjusted to reflect the manner in which the unrealized
gain or loss inherent in such property (that has not been reflected in the
capital accounts previously) would be allocated among the partners under the
terms of the Partnership Agreement if there were a taxable disposition of such
property for such fair market value on the date of the revaluation.
REDEMPTION RIGHTS
Pursuant to the Partnership Agreement, the limited partners (other than HHT
Ltd.) will receive the Redemption Rights (the "Redemption Rights"), which will
enable them to cause the Partnership to redeem their interests in the
Partnership in exchange for cash or, at the option of the Company, to cause
the Company to buy their interests in the Partnership in exchange for Common
Shares on a one-for-one basis. The redemption price will be paid in cash at
the discretion of the Company or in the event that the issuance of Common
Shares to the redeeming Limited Partner would (i) result in any person owning,
directly or indirectly, Common Shares in excess of the Ownership Limit, (ii)
result in shares of beneficial interest of the Company being owned by fewer
than 100 persons (determined without reference to any rules of attribution),
(iii) result in the Company being "closely held" within the meaning of Section
856(h) of the Code, (iv) cause the Company to own, actually or constructively,
10% or more of the ownership interests in a tenant of the Company's or the
Partnership's real property, within the meaning of Section 856(d)(2)(B) of the
Code, or (v) cause the acquisition of Common Shares by such redeeming Limited
Partner to be "integrated" with any other distribution of Common Shares for
purposes of complying with the Securities Act. The Redemption Rights may be
exercised by the limited partners, at any time after one year following the
Closing Date, provided that (i) each Limited Partner may not exercise the
Redemption Right for fewer than 1,000 Units or, if such Limited Partner holds
fewer than 1,000 Units, all of the Units held by such Limited Partner and (ii)
each Limited Partner may not exercise the Redemption Right more than two times
annually. The number of Common Shares issuable upon exercise of the Redemption
Rights will be adjusted upon the occurrence of share splits, mergers,
consolidations or similar pro rata share transactions, which otherwise would
have the effect of diluting or increasing the ownership interests of the
limited partners or the shareholders of the Company.
OPERATIONS
The Partnership Agreement requires that the Partnership be operated in a
manner that will enable the Company to satisfy the requirements for being
classified as a REIT, to avoid any federal income or excise tax liability
imposed by the Code (other than any federal income tax liability associated
with the Company's retained capital gains), and to ensure that the Partnership
will not be classified as a "publicly traded partnership" for purposes of
Section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Partnership, the Partnership will pay all administrative costs and
expenses of the Company (the "Company Expenses") and the Company Expenses will
be treated as expenses of the Partnership. The Company Expenses generally will
include (i) all expenses relating to the formation and continuity of existence
of the Company, (ii) all expenses relating to the public offering and
registration of securities by the Company, (iii) all expenses associated with
the preparation and filing of any periodic reports by the Company under
federal, state or local laws or regulations, (iv) all expenses associated with
compliance by the Company with laws, rules and regulations promulgated by any
regulatory body and (v) all other operating or administrative costs of the
Company incurred in the ordinary course of its business on behalf of the
Partnership. The Company Expenses, however, will not include any
administrative and operating costs and expenses incurred by the Company that
are attributable to hotel properties that are owned by the Company directly.
The Company currently does not own any hotel directly.
DISTRIBUTIONS
The Partnership Agreement provides that the Partnership will distribute cash
from operations (including net sale or refinancing proceeds, but excluding net
proceeds from the sale of the Partnership's property in connection with the
liquidation of the Partnership) on a quarterly (or, at the election of the
Company, more frequent) basis,
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in amounts determined by the Company in its sole discretion, to the partners
in accordance with their respective percentage interests in the Partnership.
Upon liquidation of the Partnership, after payment of, or adequate provision
for, debts and obligations of the Partnership, including any partner loans,
any remaining assets of the Partnership will be distributed to all partners
with positive capital accounts in accordance with their respective positive
capital account balances. If the Company has a negative balance in its capital
account following a liquidation of the Partnership, it will be obligated to
contribute cash to the Partnership equal to the negative balance in its
capital account.
ALLOCATIONS
Income, gain and loss of the Partnership for each fiscal year generally will
be allocated among the partners in accordance with their respective interests
in the Partnership, subject to compliance with the provisions of Code Sections
704(b) and 704(c) and Treasury Regulations promulgated thereunder.
TERM
The Partnership will continue until December 31, 2050, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company
(unless the limited partners elect to continue the Partnership), (ii) the sale
or other disposition of all or substantially all the assets of the
Partnership, (iii) the redemption of all the outstanding Units, or (iv) an
election by the General Partner.
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be the tax matters
partner of the Partnership and, as such, will have authority to handle tax
audits and to make tax elections under the Code on behalf of the Partnership.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Shares. Hunton &
Williams has acted as counsel to the Company, has reviewed this summary, and
is of the opinion that the discussion contained herein fairly summarizes the
federal income tax considerations that are likely to be material to a holder
of the Common Shares. The discussion does not address all aspects of taxation
that may be relevant to particular shareholders in light of their personal
investment or tax circumstances, or to certain types of shareholders
(including insurance companies, tax-exempt organizations (except as discussed
below), financial institutions or broker-dealers, and, except as discussed
below, foreign corporations and persons who are not citizens or residents of
the United States) subject to special treatment under the federal income tax
laws.
The statements in this discussion and the opinion of Hunton & Williams are
based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations, the legislative history of the Code, existing
administrative rulings and practices of the Service, and judicial decisions.
No assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus with respect to the transactions
entered into or contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company currently has in effect an election to be taxed as a pass-
through entity under subchapter S of the Code, but intends to revoke its S
election on the day prior to the closing of the Offering. The Company plans to
make an election to be taxed as a REIT under sections 856 through 860 of the
Code, effective for its short taxable year beginning on the date of revocation
of its S election and ending on December 31, 1998. The Company believes that,
commencing with such taxable year, it will be organized and will operate in
such a manner as to qualify for taxation as a REIT under the Code. The Company
intends to continue to operate in such a manner, but no assurance can be given
that the Company will operate in a manner so as to qualify or remain qualified
as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retrospectively.
Hunton & Williams has acted as counsel to the Company in connection with the
Offering and the Company's election to be taxed as a REIT. In the opinion of
Hunton & Williams, commencing with the Company's short taxable year beginning
on the day prior to the closing of the Offering and ending December 31, 1998,
and assuming that the elections and other procedural steps described in this
discussion of "Federal Income Tax Considerations" are completed by the Company
in a timely fashion, the Company 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. Investors should be aware, however, that opinions of
counsel are not binding upon the Service or any court. It must be emphasized
that Hunton & Williams' opinion is based on various assumptions and is
conditioned upon certain representations made by the Company as to factual
matters, including representations regarding the nature of the Company's
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properties, the Percentage Leases, and the future conduct of the Company's
business. Such factual assumptions and representations are described below in
this discussion of "Federal Income Tax Considerations" and are set out in the
federal income tax opinion that will be delivered by Hunton & Williams at the
closing of the Offering. Moreover, such qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis, through
actual annual operating results, distribution levels, and share ownership, the
various qualification tests imposed under the Code discussed below. Hunton &
Williams will not review the Company's compliance with those tests on a
continuing basis. Accordingly, no assurance can be given that the actual
results of the Company's operation for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "Federal Income Tax Considerations--Failure to
Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder
levels) that generally results from an investment in a corporation. However,
the Company will be subject to federal income tax in the following
circumstances. First, the Company will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains. Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its undistributed items of tax preference. Third,
if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate
on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property (other than foreclosure property) held primarily for sale to
customers in the ordinary course of business), such income will be subject to
a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on the product of (a) the gross
income attributable to the greater of the amount by which the Company fails
the 75% or 95% gross income test, and (b) a fraction intended to reflect the
Company's profitability. Sixth, if the Company 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, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. To the extent that the
Company elects to retain and pay income tax on its net long-term capital gain,
such retained amounts will be treated as having been distributed for purposes
of the 4% excise tax. Seventh, if the Company acquires any asset from a C
corporation (i.e., a corporation generally subject to full corporate-level
tax) in a transaction in which the basis of the asset in the Company's hands
is determined by reference to the basis of the asset (or any other asset) in
the hands of the C corporation and the Company recognizes gain on the
disposition of such asset during the 10-year period beginning on the date on
which such asset was acquired by the Company, then to the extent of such
asset's "built-in gain" (i.e., the excess of the fair market value of such
asset at the time of acquisition by the Company over the adjusted basis in
such asset at such time), such gain will be subject to tax at the highest
regular corporate rate applicable (as provided in Treasury Regulations that
have not yet been promulgated). The results described above with respect to
the recognition of "built-in gain" assume that the Company would make an
election pursuant to IRS Notice 88-19 if it were to make any such acquisition.
The Company has never been a C corporation and has no assets the sale of which
would be subject to corporate-level tax under the regulations announced in
I.R.S. Notice 88-19.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as
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defined in the Code to include certain entities) during the last half of each
taxable year (the "5/50 Rule"); (vii) that makes an election to be a REIT and
satisfies all relevant filing and other administrative requirements
established by the Service that must be met in order to elect and to maintain
REIT status; (viii) that uses a calendar year for federal income tax purposes
and complies with the recordkeeping requirements of the Code and Treasury
Regulations; and (ix) that 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 12 months, or during a proportionate part of a taxable year of less than 12
months. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made by the Company to be taxed as a REIT. The
Company anticipates issuing sufficient Common Shares with sufficient diversity
of ownership pursuant to the Offering to allow it to satisfy requirements (v)
and (vi). In addition, the Company's Declaration of Trust provides for
restrictions regarding ownership and transfer of the Common Shares that are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above. Such transfer restrictions are
described in "Description of Shares of Beneficial Interest--Restrictions on
Ownership and Transfer."
For purposes of determining share ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or
a portion of a trust permanently set aside or used exclusively for charitable
purposes is considered an individual, although a trust that is a qualified
trust under Code section 401(a) is not considered an individual and the
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in the trust for purposes of the 5/50
Rule.
The Company currently has one corporate subsidiary, HHT Ltd., and may have
additional corporate subsidiaries in the future. Code section 856(i) provides
that a corporation that is a "qualified REIT subsidiary" shall not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of
which is owned by the REIT. Thus, in applying the requirements described
herein, any "qualified REIT subsidiaries" acquired or formed by the Company
will be ignored, and all assets, liabilities, and items of income, deduction,
and credit of such subsidiaries will be treated as assets, liabilities and
items of income, deduction, and credit of the Company. HHT Ltd. is a
"qualified REIT subsidiary." Therefore, HHT Ltd. will not be subject to
federal corporate income taxation, although it may be subject to state and
local taxation.
In the case of a REIT that 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 gross income of the partnership attributable to such share. In addition,
the assets and gross income of the partnership will retain the same character
in the hands of the REIT for purposes of section 856 of the Code, including
satisfying the gross income and asset tests, described below. The Company's
proportionate share of the assets, liabilities and items of income of the
Partnership will be treated as assets and gross income of the Company for
purposes of applying the requirements described herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, there are
two requirements relating to the Company's gross income that must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income 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 temporary
investment income. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property or temporary investments, and from
dividends, other types of interest, and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. The specific
application of these tests to the Company is discussed below.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not
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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, the Code provides that
rents received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the Company, or an owner of 10% or more
of the Company, directly 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."
Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
revenue. The "independent contractor" requirement, however, does not apply
with respect to certain de minimis services or to the extent the services
provided by the Company are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant."
Pursuant to the Percentage Leases, the Lessee will lease from the
Partnership the land, buildings, improvements, furnishings and equipment
comprising the Initial Hotels for a seven-year period. The Percentage Leases
provide that the Lessee will be obligated to pay to the Partnership (i) the
greater of Base Rent and Percentage Rent (collectively, the "Rents") and (ii)
certain other Additional Charges. The Percentage Rent is calculated by
multiplying fixed percentages by the gross room revenues for each of the
Initial Hotels. The Base Rent accrues and is required to be paid monthly and
the Percentage Rent accrues and is required to be paid quarterly.
In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement,
(iii) the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the operation of
the property or whether the lessee was required simply to use its best efforts
to perform its obligations under the agreement), and (iv) the extent to which
the property owner retains the risk of loss with respect to the property
(e.g., whether the lessee bears the risk of increases in operating expenses or
the risk of damage to the property).
In addition, Code section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a
lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of
the useful life of the property, the recipient shares the risk that the
property will decline in value, the recipient shares in any appreciation in
the value of the property, the recipient shares in savings in the property's
operating costs, or the recipient bears the risk of damage to or loss of the
property), (iv) the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if there is
nonperformance under the contract, (v) the service provider does not use the
property concurrently to provide significant services to entities unrelated to
the service recipient, and (vi) the total contract price does not
substantially exceed the rental value of the property for the contract period.
Since the determination whether a service contract should be treated as a
lease is inherently factual, the presence or absence of any single factor may
not be dispositive in every case.
The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes. Such belief is based, in part, on the
following facts: (i) the Partnership and the Lessee intend for their
relationship to be that of a lessor and lessee and such relationship will be
documented by lease agreements, (ii) the Lessee will have the right to
exclusive possession and use and quiet enjoyment of the Initial Hotels during
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the term of the Percentage Leases, (iii) the Lessee will bear the cost of, and
be responsible for, day-to-day maintenance and repair of the Initial Hotels
which are necessary for the continued operation of the Initial Hotels and the
Lessee will dictate how the Initial Hotels are operated, maintained, and
improved, (iv) the Lessee will bear all of the costs and expenses of operating
the Initial Hotels (including the cost of any inventory used in their
operation) during the term of the Percentage Leases (other than real and
personal property taxes, casualty insurance, the cost of capital improvements,
and the cost of replacement or refurbishment of FF&E, to the extent such costs
do not exceed the allowance for such costs provided by the Partnership under
each Percentage Lease), (v) the Lessee will benefit from any savings in the
costs of operating the Initial Hotels during the term of the Percentage
Leases, (vi) in the event of damage or destruction to an Initial Hotel, the
Lessee will be at economic risk because it will be obligated to restore the
property to its prior condition, in which event it will bear all costs of such
restoration in excess of any insurance proceeds, (vii) the Lessee will
indemnify the Partnership, as applicable, against all liabilities imposed on
the Partnership during the term of the Percentage Leases by reason of (a)
injury to persons or damage to property occurring at the Initial Hotels or (b)
the Lessee's use, management, maintenance or repair of the Initial Hotels and
such rents are fully guaranteed by the Strategic Partner, and (viii) the
Lessee is obligated to pay substantial fixed rent for the period of use of the
Initial Hotels, and (ix) the Lessee stands to incur substantial losses (or
reap substantial gains) depending on how successfully it operates the Initial
Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether
such leases constitute true leases for federal income tax purposes. If the
Percentage Leases are recharacterized as service contracts or partnership
agreements, rather than true leases, part or all of the payments that the
Partnership receives from the Lessee may not be considered rent or may not
otherwise satisfy the various requirements for qualification as "rents from
real property." In that case, the Company likely would not be able to satisfy
either the 75% or 95% gross income test and, as a result, would lose its REIT
status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising an Initial Hotel must not be greater than 15% of the
Rents received under the Percentage Lease. The portion of the Rents
attributable to the personal property in an Initial Hotel is the amount that
bears the same ratio to total rent for the taxable year as the average of the
adjusted bases of the personal property associated with the Initial Hotel at
the beginning and at the end of the taxable year bears to the average of the
aggregate adjusted bases of both the real and personal property comprising the
Initial Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). Because the Partnership will acquire the Initial
Hotels for cash, the initial adjusted bases of the real and personal property
in each such hotel will be equal to the portion of the purchase price properly
allowable thereto. Such purchase price generally will be allocated among the
real and personal property in the hotel based on their relative fair market
values and will be contractually agreed to with the sellers of the Initial
Hotels. With respect to any hotel that the Partnership acquires in the future
in exchange for Units, the initial adjusted basis of the real and personal
property in such hotel will be equal to the seller's adjusted basis in the
real and personal property comprising such Hotel at the time of the
acquisition by the Partnership. The Company anticipates that the initial
Adjusted Basis Ratio for each Initial Hotel will be less than 15%. The
Partnership will not acquire additional personal property for an Initial Hotel
to the extent that such acquisition would cause the Adjusted Basis Ratio for
that hotel to exceed 15%. There can be no assurance, however, that the Service
would not assert that the adjusted basis of the personal property acquired by
the Partnership exceeded the adjusted basis claimed by the Partnership, or
that a court would not uphold such assertion. If such a challenge were
successfully asserted, the Company could fail the Adjusted Basis Ratio as to
one or more of the Initial Hotels, which in turn potentially could cause it to
fail to satisfy the 95% or 75% gross income test and thus lose its REIT
status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however,
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will qualify as "rents from real property" if it is based on percentages of
receipts or sales and the percentages (i) are fixed at the time the Percentage
Leases are entered into, (ii) are not renegotiated during the term of the
Percentage Leases in a manner that has the effect of basing Percentage Rent on
income or profits, and (iii) conform with normal business practice. More
generally, the Percentage Rent will not qualify as "rents from real property"
if, considering the Percentage Leases and all the surrounding circumstances,
the arrangement does not conform with normal business practice, but is in
reality used as a means of basing the Percentage Rent on income or profits.
Since the Percentage Rent is based on fixed percentages of the gross revenues
from the Initial Hotels that are established in the Percentage Leases, and the
Company has represented that the percentages (i) will not be renegotiated
during the terms of the Percentage Leases in a manner that has the effect of
basing the Percentage Rent on income or profits and (ii) conform with normal
business practice, the Percentage Rent should not be considered based in whole
or in part on the income or profits of any person. Furthermore, the Company
has represented that, with respect to other hotels that it acquires in the
future, it will not charge rent for any property that is based in whole or in
part on the income or profits of any person (except by reason of being based
on a fixed percentage of gross revenues, as described above).
A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, actually or constructively, 10% or
more of the ownership interests in the Lessee. The constructive ownership
rules generally provide that, if 10% or more in value of the shares of the
Company is owned, directly or indirectly, by or for any person, the Company is
considered as owning the shares owned, directly or indirectly, by or for such
person. The Company initially will not own, actually or constructively, any
interest in the Lessee or the Strategic Partner, which owns 100% of the stock
of the Lessee. The Strategic Partner will own Units, which are redeemable for
cash or Common Shares. The Common Shares into which such Units are convertible
will represent substantially less than 10% of the Company's outstanding Common
Shares. Further, the redemption price for such Units will be paid in cash at
the Company's option and is required to be paid in cash in the event the
issuance of Common Shares to the Strategic Partner would cause the Company to
own 10% or more of the Lessee. Thus, the Strategic Partner, for so long as it
holds Units, will not be treated as constructively owning Common Shares. In
addition, the Declaration of Trust prohibits a shareholder of the Company from
acquiring or owning Common or Preferred Shares that would cause the Company to
own, actually or constructively, 10% or more of the ownership interests in a
tenant of the Company's real property, within the meaning of section
856(d)(2)(B) of the Code. Thus, the Company should never own, actually or
constructively, 10% of more of the Lessee. Furthermore, the Company has
represented that, with respect to other hotels that it acquires in the future,
it will not rent any property to a Related Party Tenant.
A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render noncustomary services
to the tenants of the Initial Hotels, or manage or operate the Initial Hotels,
other than through an independent contractor who is adequately compensated and
from whom the Company itself does not derive or receive any income. However,
the Company may furnish or render a de minimis amount of "noncustomary
services" to the tenants of an Initial Hotel other than through an independent
contractor as long as the amount that the Company receives that is
attributable to such services does not exceed 1% of its total receipts from
the Initial Hotel. For that purpose, the amount attributable to the Company's
noncustomary services will be deemed to be at least equal to 150% of the
Company's cost of providing the services. Provided that the Percentage Leases
are respected as true leases, the Company should satisfy that requirement
because the Partnership will not perform any noncustomary services for the
Lessee. Furthermore, the Company has represented that, with respect to other
hotels that it acquires in the future, it will not perform noncustomary
services with respect to the tenant of the property. As described above,
however, if the Percentage Leases are recharacterized as service contracts or
partnership agreements, the Rents likely would be disqualified as "rents from
real property" because the Company would be considered to furnish or render
services to the occupants of the Initial Hotels and to manage or operate the
Initial Hotels other than through an independent contractor who is adequately
compensated and from whom the Company derives or receives no income.
If the Rents do not qualify as "rents from real property" because the rents
attributable to personal property exceed 15% of the total Rents from an
Initial Hotel for a taxable year, the portion of the Rents that is
attributable
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to personal property will not be qualifying income for purposes of either the
75% or 95% gross income test. Thus, if the Rents attributable to personal
property, plus any other non-qualifying income, during the taxable year exceed
5% of the Company's gross income during the year, the Company would lose its
REIT status. If, however, the Rents do not qualify as "rents from real
property" because either (i) the Percentage Rent is considered based on income
or profits of the Lessee, (ii) the Company owns, actually or constructively,
10% or more of the Lessee, or (iii) the Company furnishes noncustomary
services (other than certain de minimis services) to the tenants of the
Initial Hotels, or manages or operates the Initial Hotels, other than through
a qualifying independent contractor, none of the Rents would qualify as "rents
from real property." In that case, the Company likely would lose its REIT
status because it would be unable to satisfy either the 75% or 95% gross
income test.
In addition to the Rents, the Lessee is required to pay to the Partnership
the Additional Charges. To the extent that the Additional Charges represent
either (i) reimbursements of amounts that the Lessee is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such
amounts, the Additional Charges should qualify as "rents from real property."
To the extent, however, that the Additional Charges represent interest that is
accrued on the late payment of the Rents or the Additional Charges, the
Additional Charges should not qualify as "rents from real property," but
instead should be treated as interest that qualifies for the 95% gross income
test.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends
in whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales.
The net income derived from any prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held
primarily for sale to customers in the ordinary course of a trade or business.
All inventory required in the operation of the Initial Hotels will be
purchased by the Lessee or its designee as required by the terms of the
Percentage Leases. Accordingly, the Company believes that no asset owned by
the Company or the Partnership will be held for sale to customers and that a
sale of any such asset will not be in the ordinary course of business of the
Company or the Partnership. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those
related to a particular property. Nevertheless, the Company and the
Partnership will attempt to comply with the terms of safe-harbor provisions in
the Code prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company or
the Partnership can comply with the safe-harbor provisions of the Code or
avoid owning property that may be characterized as property held "primarily
for sale to customers in the ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will be qualifying income for purposes of the 75% and 95% gross
income tests. "Foreclosure property" is defined as any real property
(including interests in real property) and any personal property incident to
such real property (i) that is acquired by a REIT as the result of such REIT
having bid in such property at foreclosure, or having otherwise reduced such
property to ownership or possession by agreement or process of law, after
there was a default (or default was imminent) on a lease of such property or
on an indebtedness that such property secured and (ii) for which such REIT
makes a proper election to treat such property as foreclosure property. As a
result of the rules with respect to foreclosure property, if the Lessee
defaults on its obligations under a Percentage Lease for an Initial Hotel, the
Company terminates the Lessee's leasehold interest, and the Company is unable
to find a replacement lessee for such Hotel within 90 days of such
foreclosure, gross income from hotel operations conducted by the Company from
such Hotel would cease to qualify for the 75% and 95% gross income tests. In
such event, the Company likely would be unable to satisfy the 75% and 95%
gross income tests and, thus, would fail to qualify as a REIT.
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It is possible that, from time to time, the Company or the Partnership will
enter into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company or
the Partnership enters into an interest rate swap or cap contract, option,
futures contract, forward rate agreement or similar financial instrument to
reduce its interest rate risk with respect to indebtedness incurred to be
incurred to acquire or carry real estate assets, any periodic income or gain
from the disposition of such contract should be qualifying income for purposes
of the 95% gross income test, but not the 75% gross income test. To the extent
that the Company or the Partnership hedges with other types of financial
instruments or in other situations, it may not be entirely clear how the
income from those transactions will be treated for purposes of the various
income tests that apply to REITs under the Code. The Company intends to
structure any hedging transactions in a manner that does not jeopardize its
status as a REIT.
If the Company fails to satisfy one or both of the 75% and 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. Those
relief provisions will be generally available if the Company's failure to meet
such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and
any incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations--Taxation of the
Company," even if those relief provisions apply, a 100% tax would be imposed
with respect to the gross income attributable to the greater of the amount by
which the Company fails the 75% or 95% gross income test, multiplied by a
fraction intended to reflect the Company's profitability.
Asset Tests
The Company, at the close of each quarter of its taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through share or
long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the principal
balance of the mortgage does not exceed the value of the associated real
property, and shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold in real property, and an option to acquire real property (or a
leasehold in real property). Second, of the investments not included in the
75% asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the value of the Company's total assets and the Company
may not own more than 10% of any one issuer's outstanding voting securities
(except for its ownership interest in the Partnership, HHT Ltd., or any other
qualified REIT subsidiary).
For purposes of the asset tests, the Company will be deemed to own its
proportionate share of the assets of the Partnership, rather than its
partnership interest in the Partnership. The Company has represented that, as
of the date of the Offering, (i) at least 75% of the value of its total assets
will be represented by real estate assets, cash and cash items (including
receivables), and government securities and (ii) it will not own any
securities that do not satisfy the 75% asset test. In addition, the Company
has represented that it will not acquire or dispose, or cause the Partnership
to acquire or dispose, of assets in the future in a way that would cause it to
violate either asset test.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence
were not satisfied, the
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Company still could avoid disqualification by eliminating any discrepancy
within 30 days after the close of the quarter in which it arose.
Distribution Requirements
The Company, 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 its "REIT taxable income"
(computed without regard to the dividends paid deduction and its net capital
gain) and (B) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to
tax thereon at regular ordinary and capital gains corporate tax rates.
Furthermore, if the Company 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, the Company would be subject
to a 4% nondeductible excise tax on the excess of such required distribution
over the amounts actually distributed. The Company intends to make timely
distributions sufficient to satisfy all annual distribution requirements. The
Company may elect to retain and pay income tax on its net long-term capital
gains, as described in "--Taxation of Taxable U.S. Shareholders." Any such
retained amount would be treated as having been distributed by the Company for
purposes of the 4% excise tax described above.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, it is
possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property that exceeds its
allocable share of cash attributable to that sale. Therefore, the Company may
have less cash available for distribution to shareholders than is necessary to
meet its annual 95% distribution requirement or to avoid corporate income tax
or the excise tax imposed on certain undistributed income. In such a
situation, the Company may find it necessary to arrange for short-term (or
possibly long-term) borrowings or to raise funds through the issuance of
additional common or preferred shares.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the Service interest based upon the amount of any
deduction taken for deficiency dividends.
Recordkeeping Requirement
Pursuant to applicable Treasury Regulations, the Company must maintain
certain records and request on an annual basis certain information from its
shareholders designed to disclose the actual ownership of its outstanding
shares. The Company intends to comply with such requirements.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income 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, the Company
also will be
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disqualified from taxation as a REIT for the four taxable years following the
year during which the Company ceased to qualify as a REIT. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (not including distributions designated as capital gain dividends or
deemed distributions attributable to retained capital gains) will be taken
into account by such U.S. shareholders as ordinary income and will not be
eligible for the dividends received deduction generally available to
corporations. As used herein, the term "U.S. shareholder" means a holder of
Common Shares that for U.S. 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 whose income from sources
without the United States is includible in gross income for U.S. federal
income tax purposes regardless of its connection with the conduct of a trade
or business within the United States or (iv) any trust with respect to which
(A) a U.S. court is able to exercise primary supervision over the
administration of such trust and (B) one or more U.S. persons have the
authority to control all substantial decisions of the trust. Distributions
that are designated as capital gain dividends will be taxed as described in
"--Capital Gains and Losses" (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the shareholder has held his Common Shares. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. The Company may elect to retain and pay income
tax on its net long-term capital gains. In that case, the Company's
shareholders would include in income their proportionate share of the
Company's undistributed long-term capital gains. In addition, the shareholders
would be deemed to have paid their proportionate share of the tax paid by the
Company, which would be credited or refunded to the shareholders. Each
shareholder's basis in his shares would be increased by the amount of the
undistributed long-term capital gain included in the shareholder's income,
less the shareholder's share of the tax paid by the Company.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Shares, but rather will reduce the
adjusted basis of such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
shareholder's Common Shares, such distributions will be taxed as described in
"--Capital Gains and Losses" assuming the Common Shares are capital assets in
the hands of the shareholder. In addition, any distribution declared by the
Company 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 the Company and received by the shareholder on December 31 of
such year, provided that the distribution is actually paid by the Company
during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Shares will not be treated as passive
activity income and, therefore, shareholders generally will not be able to
apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which the shareholder is a limited partner) against
such income. In addition, taxable distributions from the Company and gain from
the disposition of Common Shares generally will be treated as investment
income for purposes of the investment interest limitations. The Company will
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute
ordinary income, return of capital, and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Common Shares by a shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Shares have
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been held for more than one year and otherwise as short-term capital gain or
loss. However, any loss upon a sale or exchange of Common Shares by a
shareholder who has held such shares for six months or less (after applying
certain holding period rules), will be treated as a long-term capital loss to
the extent of distributions from the Company required to be treated by such
shareholder as long-term capital gain. All or a portion of any loss realized
upon a taxable disposition of the Common Shares may be disallowed if other
Common Shares are purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The maximum tax rate on net capital gains applicable to
noncorporate taxpayers is 28% for sales and exchanges of assets held for more
than one year but not more than 18 months, and 20% for sales and exchanges of
assets held for more than 18 months. The maximum tax rate on long-term capital
gain from the sale or exchange of "section 1250 property" (i.e., depreciable
real property) is 25% to the extent that such gain would have been treated as
ordinary income if the property were "section 1245 property." With respect to
distributions designated by the Company as capital gain dividends and any
retained capital gains that the Company is deemed to distribute, the Company
may designate (subject to certain limits) whether such a dividend or
distribution is taxable to its noncorporate stockholders at a 20%, 25% or 28%
rate. Thus, the tax rate differential between capital gain and ordinary income
for noncorporate taxpayers may be significant. In addition, the
characterization of income as capital or ordinary may affect the deductibility
of capital losses. Capital losses not offset by capital gains may be deducted
against a noncorporate taxpayer's ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward. All net
capital gain of a corporate taxpayer is subject to tax at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
Legislation is pending in the U.S. Congress that, if enacted, would provide
a 20% long-term capital gains rate for sales and exchanges of capital assets
held for more than one year.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and the Service the amount
of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A shareholder who does not provide the Company
with his correct taxpayer identification number also may be subject to
penalties imposed by the Service. Any amount paid as backup withholding will
be creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their nonforeign status to the Company.
The Service has issued final regulations regarding the backup withholding
rules as applied to non-U.S. Shareholders. Those regulations alter the current
system of backup withholding compliance and, according to Notice 98-16, will
be effective for distributions made after December 31, 1999. See "Federal
Income Tax Considerations--Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has issued a published ruling that
dividend distributions by a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used
in
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an unrelated trade or business of the exempt employee pension trust. Based on
that ruling, amounts distributed by the Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Shares with debt, a portion of its
income from the Company will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions
from the Company as UBTI. In addition, in certain circumstances, a pension
trust that owns more than 10% of the Company's shares is required to treat a
percentage of the dividends from the Company as UBTI (the "UBTI Percentage").
The UBTI Percentage is the gross income derived from an unrelated trade or
business (determined as if the Company were a pension trust) divided by the
gross income of the Company for the year in which the dividends are paid. The
UBTI rule applies to a pension trust holding more than 10% of the Company's
shares only if (i) the UBTI Percentage is at least 5%, (ii) the Company
qualifies as a REIT by reason of the modification of the 5/50 Rule that allows
the beneficiaries of a pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust, and
(iii) either (A) one pension trust owns more than 25% of the value of the
Company's shares or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's shares collectively owns more than 50%
of the value of the Company's shares.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no
attempt will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH
REGARD TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends or retained capital
gains will be treated as dividends of ordinary income to the extent that they
are made out of current or accumulated earnings and profits of the Company.
Such distributions ordinarily will be subject to a withholding tax equal to
30% of the gross amount of the distribution unless an applicable tax treaty
reduces or eliminates that tax. However, if income from the investment in the
Common Shares is treated as effectively connected with the Non-U.S.
Shareholder's conduct of a U.S. trade or business, the Non-U.S. Shareholder
generally will be subject to federal income tax at graduated rates, in the
same manner as U.S. Shareholders are taxed with respect to such distributions
(and also may be subject to the 30% branch profits tax in the case of a Non-
U.S. Shareholder that is a foreign corporation). The Company expects to
withhold U.S. income tax at the rate of 30% on the gross amount of any such
distributions made to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with the Company or (ii) the Non-U.S. Shareholder files an IRS Form 4224
with the Company claiming that the distribution is effectively connected
income. (The Service has issued final regulations that modify the manner in
which the Company complies with the withholding requirements. Those
regulations are effective for distributions made after December 31, 1999.)
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such shares. To the
extent that distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's Common Shares,
such distributions will give rise to tax liability if the Non-U.S. Shareholder
would otherwise be subject to tax on any gain from the sale or disposition of
his Common Shares, as described below. Because it generally cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the entire
amount of any distribution normally will be subject to withholding at the same
rate as a dividend. However, amounts so withheld are refundable to the extent
it is determined subsequently that such distribution was, in fact, in excess
of current and accumulated earnings and profits of the Company.
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The Company is required to withhold 10% of any distribution in excess of the
Company's current and accumulated earnings and profits. Consequently, although
the Company intends to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that the Company does not do so, any portion of a
distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Shareholder as if such
gain were effectively connected with a U.S. business. Non-U.S. Shareholders
thus would be taxed at the normal capital gain rates applicable to U.S.
shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to a 30% branch profits
tax in the hands of a foreign corporate shareholder not entitled to treaty
relief or exemption. The Company is required to withhold 35% of any
distribution that could be designated by the Company as a capital gain
dividend. The amount withheld is creditable against the Non-U.S. Shareholder's
FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. Because the Common Shares will be publicly
traded, no assurance can be given that the Company will be a "domestically
controlled REIT." However, a Non-U.S. Shareholder that owned, actually or
constructively, 5% or less of the Common Shares at all times during a
specified testing period will not be subject to tax under FIRPTA if the Common
Shares are "regularly traded" on an established securities market. If the gain
on the sale of the Common Shares were to be subject to taxation under FIRPTA,
the Non-U.S. Shareholder would be subject to the same treatment as U.S.
shareholders with respect to such gain (subject to 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). Furthermore, gain not subject to FIRPTA
will be taxable to a Non-U.S. Shareholder if (i) investment in the Common
Shares is effectively connected with the Non-U.S. Shareholder's U.S. trade or
business, in which case the Non-U.S. Shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain, or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and certain other
conditions apply, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains.
OTHER TAX CONSEQUENCES
The Company, HHT Ltd., the Partnership, or the Company's shareholders may be
subject to state or local taxation in various state or local jurisdictions,
including those in which it or they own property, transact business, or
reside. The state and local tax treatment of the Company and its shareholders
may not conform to the federal income tax consequences discussed above.
CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS
REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN THE
COMPANY.
TAX ASPECTS OF THE PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in
the Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification as a Partnership
The Company will be entitled to include in its income its distributive share
of the Partnership's income and to deduct its distributive share of the
Partnership's losses only if the Partnership is classified for federal income
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tax purposes as a partnership rather than as an association taxable as a
corporation. An entity will be classified as a partnership rather than as a
corporation for federal income tax purposes if the entity (i) is treated as a
partnership under Treasury regulations relating to entity classification (the
"Check-the-Box Regulations") and (ii) is not a "publicly traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make
an election, it generally will be treated as a partnership for federal income
tax purposes. The Partnership intends to be classified as a partnership and
the Company has represented that the Partnership will not elect to be treated
as an association taxable as a corporation for federal income tax purposes
under the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are traded on
an established securities market or are readily tradable on a secondary market
(or the substantial equivalent thereof). A publicly traded partnership will be
treated as a corporation for federal income tax purposes unless at least 90%
of such partnership's gross income for a taxable year consists of "qualifying
income" under section 7704(d) of the Code, which generally includes any income
that is qualifying income for purposes of the 95% gross income test applicable
to REITs (the "90% Passive-Type Income Exception"). See "--Requirements for
Qualification--Income Tests." The U.S. Treasury Department has issued
regulations (the "PTP Regulations") that provide limited safe harbors from the
definition of a publicly traded partnership. Pursuant to one of those safe
harbors (the "Private Placement Exclusion"), interests in a partnership will
not be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all interests in the partnership were issued in a
transaction (or transactions) that was not required to be registered under the
Securities Act, and (ii) the partnership does not have more than 100 partners
at any time during the partnership's taxable year. In determining the number
of partners in a partnership, a person owning an interest in a flow-through
entity (i.e., a partnership, grantor trust or S corporation) that owns an
interest in the partnership is treated as a partner in such partnership only
if (a) substantially all of the value of the owner's interest in the flow-
through entity is attributable to the flow-through entity's interest (direct
or indirect) in the partnership and (b) a principal purpose of the use of the
flow-through entity is to permit the partnership to satisfy the 100-partner
limitation. The Partnership qualifies for the Private Placement Exclusion.
However, if the Partnership were considered to be a publicly traded
partnership under the PTP Regulations because it is deemed to have more than
100 partners, the Partnership should not be treated as a corporation because
it should be eligible for the 90% Passive-Type Income Exception.
The Partnership has not requested, and does not intend to request, a ruling
from the Service that it will be classified as a partnership for federal
income tax purposes. Instead, at the closing of the Offering, Hunton &
Williams will deliver its opinion that the Partnership will be treated for
federal income tax purposes as a partnership and not as an association taxable
as a corporation. Unlike a tax ruling, an opinion of counsel is not binding
upon the Service, and no assurance can be given that the Service will not
challenge the status of the Partnership as a partnership for federal income
tax purposes. If such challenge were sustained by a court, the Partnership
would be treated as a corporation for federal income tax purposes, as
described below. The opinion of Hunton & Williams will be based on existing
law.
If for any reason the Partnership was taxable as a corporation, rather than
as a partnership, for federal income tax purposes, the Company would not be
able to qualify as a REIT. See "Federal Income Tax Considerations--
Requirements for Qualification--Income Tests" and "--Requirements for
Qualification--Asset Tests." In addition, any change in the Partnership's
status for tax purposes might be treated as a taxable event, in which case the
Company might incur a tax liability without any related cash distribution. See
"Federal Income Tax Considerations--Requirements for Qualification--
Distribution Requirements." Further, items of income and deduction of the
Partnership would not pass through to its partners, and its partners would be
treated as shareholders for tax purposes. Consequently, the Partnership would
be required to pay income tax at corporate tax rates on its net income, and
distributions to its partners would constitute dividends that would not be
deductible in computing the Partnership's taxable income.
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INCOME TAXATION OF THE PARTNERSHIP AND ITS PARTNERS
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company will be
required to take into account its allocable share of the Partnership's income,
gains, losses, deductions, and credits for any taxable year of the Partnership
ending within or with the taxable year of the Company, without regard to
whether the Company has received or will receive any distribution from the
Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704(b) of the Code if they
do not comply with the provisions of section 704(b) of the Code and the
Treasury Regulations promulgated thereunder. 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 Partnership's allocations of taxable income, gain
and loss 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 Contributed Properties. 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 in
exchange for an interest in the 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 the contribution. The amount of such unrealized gain
or unrealized loss is generally equal to the difference between the fair
market value of the contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution. The Treasury
Department has issued regulations requiring partnerships to use a "reasonable
method" for allocating items affected by section 704(c) of the Code and
outlining several reasonable allocation methods. The Partnership generally
will elect to use the traditional method for allocating Code section 704(c)
items with respect to the hotels it acquires in exchange for Units.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally will be equal to (i) the
amount of cash and the basis of any other property contributed to the
Partnership by the Company, (ii) increased by (A) its allocable share of the
Partnership's income and (B) its allocable share of indebtedness of the
Partnership, and (iii) reduced, but not below zero, by (A) the Company's
allocable share of the Partnership's loss and (B) the amount of cash
distributed to the Company, including constructive cash distributions
resulting from a reduction in the Company's share of indebtedness of the
Partnership.
If the allocation of the Company's distributive share of the Partnership's
loss would reduce the adjusted tax basis of the Company's partnership interest
in the Partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce the Company's
adjusted tax basis below zero. To the extent that the Partnership's
distributions, or any decrease in the Company's share of the indebtedness of
the Partnership (such decrease being considered a constructive cash
distribution to the partners), would reduce the Company's adjusted tax basis
below zero, such distributions (including such constructive distributions)
will constitute taxable income to the Company. Such distributions and
constructive distributions normally will be characterized as capital gain,
and, if the Company's partnership interest in the Partnership has been held
for longer than the long-term capital gain holding period (currently one
year), the distributions and constructive distributions will constitute long-
term capital gain.
Depreciation Deductions Available to the Partnership. Immediately after the
Offering, the Company will make a cash contribution to the Partnership in
exchange for a partnership interest in the Partnership. The Partnership's
initial basis in the Initial Hotels for federal income tax purposes generally
will be equal to the purchase price paid by the Partnership. The Partnership
plans to depreciate such depreciable hotel property for federal income tax
purposes under MACRS. Under MACRS, the Partnership generally will depreciate
such
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furnishings and equipment over a seven-year recovery period using a 200%
declining balance method and a half-year convention. If, however, the
Partnership places more than 40% of its furnishings and equipment in service
during the last three months of a taxable year, a mid-quarter depreciation
convention must be used for the furnishings and equipment placed in service
during that year. Under MACRS, the Partnership generally will depreciate
buildings and improvements over a 39-year recovery period using a straight
line method and a mid-month convention. To the extent that the Partnership
acquires properties in exchange for Units in the future, the Partnership's
initial basis in each property for federal income tax purposes should be the
same as the transferor's basis in that property on the date of acquisition.
Depending on the circumstances, the Partnership may be required to depreciate
such depreciable hotel property for federal income tax purposes over the same
remaining useful lives and under the same methods used by the transferors. The
Partnership's tax depreciation deductions will be allocated among the partners
in accordance with their respective interests in the Partnership (except to
the extent that the Partnership is required under Code section 704(c) to use a
method for allocating depreciation deductions attributable to the Initial
Hotels or other contributed properties that results in the Company receiving a
disproportionately large share of such deductions).
SALE OF THE COMPANY'S OR THE PARTNERSHIP'S PROPERTY
Generally, any gain realized by the Company or the Partnership on the sale
of property held for more than one year will be long-term capital gain, except
for any portion of such gain that is treated as depreciation or cost recovery
recapture. Any gain recognized by the Partnership on the disposition of the
Initial Hotels will be allocated among the partners in accordance with their
respective percentage interests in the Partnership.
Any gain realized on the sale of any property held by the Company or the
Partnership as inventory or other property held primarily for sale to
customers in the ordinary course of the Company's or the Partnership's trade
or business will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "Federal Income Tax Considerations--
Requirements for Qualification--Income Tests." Such prohibited transaction
income also may have an adverse effect upon the Company's ability to satisfy
the income tests for REIT status. See "Federal Income Tax Considerations--
Requirements For Qualification--Income Tests" above. The Company, however,
does not presently intend to acquire or hold or to allow the Partnership to
acquire or hold any property that represents inventory or other property held
primarily for sale to customers in the ordinary course of the Company's or the
Partnership's trade or business.
113
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, for whom Morgan Keegan & Company, Inc. ("Morgan
Keegan"), Credit Lyonnais Securities (USA) Inc., Crowell, Weedon & Co.,
Interstate/Johnson Lane Corporation, Sutro & Co. Incorporated, Tucker Anthony
Incorporated, and Wheat First Union, a division of Wheat First Securities,
Inc. are acting as Representatives, has severally agreed to purchase from the
Company, the respective number of Common Shares set forth opposite its name
below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF COMMON SHARES
----------- ------------------------
<S> <C>
Morgan Keegan & Company, Inc. ...................
Credit Lyonnais Securities (USA) Inc. ...........
Crowell, Weedon & Co. ...........................
Interstate/Johnson Lane Corporation..............
Sutro & Co. Incorporated.........................
Tucker Anthony Incorporated......................
Wheat First Securities, Inc. ....................
----------
Total........................................ 12,500,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Common Shares
offered hereby, if any are taken.
The Underwriters propose to offer the Common Shares in part directly to the
public at the Offering Price set forth on the cover page of this Prospectus,
and in part to certain securities dealers at such price less a concession of
$ per share. The Underwriters may allow, and such dealers may allow, a
concession not in excess of $ per share to certain brokers and dealers.
After the Common Shares are released for sale to the public, the Offering
Price and other selling terms may from time to time be varied by the
Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 1,875,000
Common Shares, solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of Common Shares to be purchased by each of them, as
shown in the table above, bears to the 12,500,000 Common Shares.
The Company and its officers and Trustees have agreed, during the period
beginning from the date of this Prospectus and continuing to and including the
date 180 days after the date of the Prospectus, not to offer, sell, contract
to sell or otherwise dispose of any Common Shares or any securities of the
Company (other than, with respect to the Company, pursuant to employee stock
option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the Common Shares or which are convertible or
exchangeable into securities which are substantially similar to the Common
Shares without the prior consent of Morgan Keegan.
114
<PAGE>
The Representatives have informed the Company that the Underwriters do not
expect sales to accounts over which the Underwriters exercise discretionary
authority to exceed five percent of the total number of Common Shares offered
by them.
Prior to this Offering, there has been no public market for the Common
Shares. The Offering Price of the Common Shares will be negotiated between the
Company and the Representatives. Among the factors to be considered in
determining the Offering Price of the Common Shares, in addition to prevailing
market conditions, will be dividend yields and certain financial
characteristics of publicly traded REITs that the Company and the
Representatives believe to be comparable to the Company, the expected
operations of the Company, the current state of the hotel industry and an
assessment of the Company's management.
To facilitate the Offering of the Common Shares, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price
of the Common Shares. Specifically, the Underwriters may over-allot Common
Shares in connection with the Offering, thereby creating a short position in
the Underwriters' syndicate account. Additionally, to cover such over-
allotments or to stabilize the market price of the Common Shares, the
Underwriters may bid for, and purchase, Common Shares in the open market. Any
of these activities may maintain the market price of the Common Shares at a
level above that which might otherwise prevail in the open market. The
Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the syndicate of Underwriters, also may reclaim
selling concessions allowed to an Underwriter or dealer, if the syndicate
repurchases shares distributed by that Underwriter or dealer.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has been advised by the Representatives that each presently
intends to make a market in the Common Shares offered hereby; however, the
Representatives are not obligated to do so, and any market making activity may
be discontinued at any time. There can be no assurance that an active public
market for the Common Shares will develop and continue after the Offering.
The Company has agreed to pay Morgan Keegan in its individual capacity, a
financial advisory fee equal to $637,500 in connection with the Offering. Such
fee will be payable upon consummation of the closing of the Offering. In
addition, Morgan Keegan has a right of refusal to lead manage any offering of
the Company's securities initiated within 18 months of the closing of this
Offering.
John W. Stokes, Jr., who will be a Trustee of the Company upon completion of
the Formation Transactions, is the Vice Chairman of Morgan Keegan and is a
director of Morgan Keegan, Inc., a NYSE listed company and the parent company
of Morgan Keegan.
An affiliate of Credit Lyonnais Securities (USA), Inc., one of the
Representatives, made a $75 million mortgage loan to the seller of the Initial
Fairfield Inns. Upon the completion of the Company's acquisition of the
Initial Fairfield Inns using the proceeds of the Offering, the seller of the
Initial Fairfield Inns will repay the outstanding balance of such mortgage
loan (approximately $69 million as of June 30, 1998).
Morgan Keegan has advised the NYSE that the Underwriters will undertake to
distribute the Common Shares such that the Company will have not less than
2,000 shareholders, each holding not less than 100 Common Shares.
115
<PAGE>
EXPERTS
The balance sheet of Hudson Hotels Trust as of May 12, 1998 included in this
Prospectus and the Combined Financial Statements of the Other Initial Hotels
as of December 31, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997 included in this Prospectus and the related financial
statement schedule have been included herein in reliance on the reports of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that Firm as experts in accounting and auditing.
The financial statements and schedule included in this Prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included in reliance upon the authority of said firm
as experts in giving said reports.
REPORTS TO SHAREHOLDERS
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three
quarters of each fiscal year.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for the
Company by Hunton & Williams. In addition, the description of federal income
tax consequences contained in the section of the Prospectus entitled "Federal
Income Tax Considerations" is based on the opinion of Hunton & Williams. The
validity of the Common Shares offered hereby will be passed upon for the
Underwriters by King & Spalding, Atlanta, Georgia. Hunton & Williams and King
& Spalding will rely on the opinion of Ballard Spahr Andrews & Ingersoll, LLP
as to certain matters of Maryland law.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-11 (of
which this Prospectus is a part) under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the SEC.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules hereto. For further information
regarding the Company and the Common Shares offered hereby, reference is
hereby made to the Registration Statement and such exhibits and schedules. The
Strategic Partner is subject to the information requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the SEC.
The Registration Statement and the exhibits and schedules forming a part
thereof filed by the Company with the Commission and the reports, proxy and
information statements and other information filed by the Strategic Partner
with the SEC can be inspected and copies obtained from the Commission at Room
1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
can be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company, the Strategic Partner
and other registrants that have been filed electronically with the Commission.
The address of such site is http://www.sec.gov.
116
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus.
"ACMs" means asbestos-containing materials.
"Acquisition Committee" means the Acquisition Committee of the Board of
Trustees.
"ADA" means Americans with Disabilities Act of 1990.
"Administrator" means the Board of Trustees, the Compensation Committee, or
the Board's delegate, as appropriate.
"ADR" means average daily room rate.
"ADS" means the alternative depreciation system of depreciation.
"Affiliate" means (i) any person that, directly or indirectly, controls or
is controlled by or is under common control with such person, (ii) any other
person that owns, beneficially, directly or indirectly, ten percent (10%) or
more of the outstanding capital stock, shares or equity interests of such
person, or (iii) any officer, director, employee, partner or trustee of such
person or any person controlling, controlled by or under common control with
such person (excluding trustees and persons serving in similar capacities who
are not otherwise an Affiliate of such person). The term "person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations, companies, trusts,
banks, trust companies, land trusts, business trusts, or other entities and
governments and agencies and political subdivisions thereof. For the purposes
of this definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
"Audit Committee" means the Audit Committee of the Board of Trustees.
"Base Rent" means the fixed obligation of the Lessee to pay a sum certain in
monthly rent under each of the Percentage Leases.
"Beneficiary" means the beneficiary of a Trust.
"Board of Trustees" means the Board of Trustees of the Company.
"Bylaws" means the Bylaws of the Company.
"Capital America" means The Capital Company of America LLC.
"Choice" means Choice Hotels International, Inc.
"CMBS Debt" means the collateralized mortgage backed securities financing
currently encumbering the Option Hotels.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the Company's common shares of beneficial interest,
par value $.01 per share.
"Company" means Hudson Hotels Trust, a Maryland real estate investment
trust.
"Company Expenses" means the administrative costs and expenses of the
Company.
117
<PAGE>
"Compensation Committee" means the Compensation Committee of the Board of
Trustees.
"Control Shares" means voting shares of beneficial interest which, if
aggregated with all other such shares of beneficial interest 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.
"control share acquisition" means the acquisition of Control Shares, subject
to certain exceptions.
"Credit Facility" means a combination of the $100 million Line of Credit and
the $25 to $50 million Permanent Financing for which the Company has a
commitment letter from Capital America.
"CPI" means the United States Consumer Price Index.
"Debt Policy" means the Board of Trustees' policy to limit the consolidated
indebtedness of the Company to approximately 50% of the Company's investment
in hotel properties, valued at undepreciated total cost. However, the
Company's organizational documents do not limit the amount of indebtedness
that the Company may incur, and the Company's Board of Trustees may modify the
Debt Policy at any time without the approval of the shareholders.
"Declaration of Trust" means the Declaration of Trust of the Company.
"Eligible Vesting Date" means December 31 for each year from 1999 to 2002 on
which certain options granted to the Company's executive officers may vest.
"Eligible Options" means the options granted to certain of the Company's
executive officers that are eligible for vesting on December 31 for each year
from 1999 to 2002.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" means entities that generally are exempt from federal
income tax (other than the tax on unrelated business taxable income under
Section 511 of the Code).
"FF&E" means furniture, fixtures and equipment.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Formation Transactions" means the principal transactions in connection with
the formation of the Company as a REIT and the acquisition of the Initial
Hotels by the Company or the Partnership.
"Founding Trustee" means a Trustee who is a member of the Board of Trustees
on the effective date of the Offering.
"Funds From Operations" or "FFO" means net income (computed in accordance
with generally accepted accounting principles), excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures.
"HHT Ltd" means HHT, Ltd. Inc. a wholly owned subsidiary of Hudson Hotels
Trust.
"Holding Period" means two years following the date of grant of an option
and one year following the date of exercise of the option, as that term is
used in "Management and Trustees--1998 Share Incentive Plan."
"Holiday" means Holiday Hospitality Franchising, Inc.
"Independent Trustee" means a Trustee of the Company who is not, and who
within the last two years has not been, (i) an officer, director or employee
of the Company, the Strategic Partner or an Affiliate of the Company or (ii)
an owner of greater than a 10% interest in the Strategic Partner or any
affiliate of the Company.
118
<PAGE>
"Initial Fairfield Inns" means the 26 Fairfield Inn(R) by Marriott hotels
the Company will own upon completion of the Formation Transactions.
"Initial Hotels" means the 29 hotel properties to be acquired by the Company
in the Formation Transactions as described herein.
"ISO" means an incentive share option under Section 422 of the Code.
"Joint Venture Agreement" means the 1995 Joint Venture Agreement between the
Strategic Partner and U.S. Franchise Systems, Inc.
"Lessee" means HHC Management Corp., a New York corporation, which will
lease the Initial Hotels from the Company pursuant to the Percentage Leases.
The Lessee is also referred to herein as a wholly-owned subsidiary of the
Strategic Partner.
"LIBOR" means the London Interbank Offered Rate.
"Limited Partners" means the limited partners of the Partnership.
"Line of Credit" means a $100 million line of credit facility for which the
Company has a commitment letter from Capital America.
"MACRS" means modified accelerated cost recovery system of depreciation.
"Marriott" means Marriott International, Inc.
"Maryland REIT Law" means Title 8 of the Maryland General Corporation Law.
"MGCL" means the Maryland General Corporation Law.
"Morgan Keegan" means the Morgan Keegan & Company, Inc.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and foreign trusts and estates.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of Common Shares hereby.
"Offering Price" means the initial public offering price of the Common
Shares offered hereby of $10.00 per share.
"Option Hotels" means the 25 existing hotels currently owned by the
Strategic Partner.
"Other Initial Hotels" means the three Initial Hotels operated as a Hampton
Inn, a Comfort Suites and a Holiday Inn.
"Ownership Limit" means the direct or indirect ownership of more than 9.9%
of the number of outstanding Common Shares or the number of outstanding
Preferred Shares of any series of the Company.
"Participants" means the individuals who will participate in the Share
Incentive Plan.
"Partnership" means Hudson Hotels Limited Partnership, L.P., a limited
partnership organized under the laws of the State of Virginia.
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"Partnership Agreement" means the partnership agreement of the Partnership
as amended and restated.
"Percentage Leases" mean the operating leases between the Lessee and the
Partnership pursuant to which the Lessee will lease the Initial Hotels from
the Partnership.
"Percentage Rent" means rent based on percentages of revenue payable by the
Lessee pursuant to the Percentage Leases.
"Permanent Financing" means the Company's $50-75 million long term credit
facility for which the Company has a commitment letter from Capital America.
"PIPs" means property improvement programs that may be required by the
various franchisors of the Initial Hotels.
"Preferred Shares" means the preferred shares of beneficial interest, par
value $.01 per share, of the Company.
"Pre-Offering Debt" means the Company's loans from two individuals in an
aggregate amount of $4 million, which accrues interest at a rate of 12% per
annum, which debt was incurred in May 1998 and will be paid in full with the
proceeds of the Offering.
"Prohibited Owner" means the record holder of Common or Preferred Shares
that are designated as Shares-in-Trust.
"Promus" means Promus Hotels, Inc.
"Record Holder" means the Prohibited Owner.
"Redemption Right" means the right of the persons receiving Units in the
Formation Transactions to cause the redemption of Units in exchange for Common
Shares of the Company or, at the option of the Company, cash.
"Redemption rights" means the rights the limited partners of the Partnership
(other than HHT Ltd.) will have to cause the Partnership to redeem their
interests in the Partnership in exchange for cash or, at the option of the
Company, Common Shares on a one-for-one basis.
"REIT" means real estate investment trust.
"Rent Break Points" means the dollar amounts of room revenue at which a
percentage of room revenues begins to be paid to the Partnership as Percentage
Rent and at which the percent of room revenue paid as percentage rent changes,
as the case may be.
"Representatives" means Morgan Keegan & Company, Inc., Credit Lyonnais
Securities (USA) Inc., Crowell, Weedon & Co., Interstate/Johnson Lane
Corporation, Sutro & Co. Incorporated, Tucker Anthony Incorporated and Wheat
First Union.
"REVPAR" means revenue per available room, determined by dividing room
revenue by available rooms.
"Rule 144" means the rule promulgated under the Securities Act that permits
holders of restricted securities as well as Affiliates of an issuer of the
securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"Sands Partnership" means the partnership in which Richard Sands, who will
become a Trustee of the Company upon completion of the Offering, is a general
partner. The Sands Partnership loaned the Company approximately $2 million of
the Pre-Offering Debt.
"SEC" means the United States Securities and Exchange Commission.
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"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the U.S. Internal Revenue Service.
"Share Incentive Plan" means the plan for the purpose of attracting and
retaining executive officers and employees.
"Shares-in-Trust" means Common Shares or Preferred Shares transferred
automatically to the Trust as a result of a purported transfer of Common
Shares or Preferred Shares that would (i) result in any person owning,
directly or indirectly, Common Shares or Preferred Shares in excess of the
Ownership Limit, (ii) result in the Common Shares and Preferred Shares being
owned by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, or (iv) cause the Company to own,
actually or constructively, 10% or more of the ownership interests in a tenant
of the Company's or the Partnership's real property, within the meaning of
Section 856(d)(2)(B) of the Code.
"Strategic Alliance" means the strategic alliance agreement between the
Company and the Strategic Partner.
"Strategic Partner" means Hudson Hotels Corporation, a New York corporation.
"Strategic Partner Loan" means the Company's indebtedness to the Strategic
Partner in the amount of $1.2 million, which debt was incurred to fund certain
deposits in connection with the acquisition of the Initial Hotels.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Trust" means the trust into which the Shares-in-Trust are transferred.
"Trustee" means a member of the Board of Trustees.
"Trustees Plan" means the plan adopted by the Board of Trustees to attract
and retain Independent Trustees.
"Underwriters" means the Underwriters named in this Prospectus.
"Underwriting Agreement" means the underwriting agreement between the
Company and the Representatives pursuant to which the Shares will be sold.
"Units" means units of partnership interest in the Partnership.
"Voting Shares" means, at any time, all of the then outstanding shares of
beneficial interest of the Company entitled to vote generally in the election
of trustees.
121
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INDEX TO PRO FORMA CONDENSED COMBINED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
HUDSON HOTELS TRUST:
Pro Forma Condensed Statements of Operations for the Year Ended
December 31, 1997 and the Three Months Ended March 31, 1997 and
1998................................................................ F-2
Pro Forma Condensed Combined Balance Sheet as of March 31, 1998...... F-3
Notes to Pro Forma Condensed Combined Balance Sheet.................. F-4
COMBINED INITIAL HOTELS:
Pro Forma Condensed Combined Statement of Operations for the Year
Ended December 31, 1997, and the Three Months Ended March 31, 1998
and 1997............................................................ F-5
Pro Forma Condensed Combined Statement of Operations for the Year
Ended December 31, 1997 and the Three Months Ended March 31, 1997... F-6
Pro Forma Condensed Combined Statement of Operations for the Three
Months Ended March 31, 1998......................................... F-7
HUDSON HOTELS TRUST:
Report of Independent Accountants.................................... F-8
Balance Sheet as of May 12, 1998..................................... F-9
Notes to Balance Sheet............................................... F-10
OTHER INITIAL HOTELS COMBINED FINANCIAL STATEMENTS:
Report of Independent Accountants.................................... F-11
Combined Balance Sheets as of December 31, 1996 and 1997............. F-12
Combined Statements of Operations and Accumulated Deficit for the
Years Ended December 31, 1995, 1996 and 1997........................ F-13
Combined Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997................................................. F-14
Notes to Combined Financial Statements............................... F-15
Schedule III--Real Estate and Accumulated Depreciation............... F-17
MFI PARTNERS, LIMITED PARTNERSHIP:
Report of Independent Public Accountants............................. F-18
Balance Sheets as of December 31, 1996, and 1997..................... F-19
Balance Sheets as of December 31, 1996, and 1997..................... F-20
Statements of Operations for the Years Ended December 31, 1995, 1996
and 1997............................................................ F-21
Statements of Changes in Partners' Capital for the Years Ending
December 31, 1995, 1996 and 1997.................................... F-22
Statements of Cash Flows............................................. F-23
Notes to Financial Statements........................................ F-24
Schedule III--Real Estate and Accumulated Depreciation............... F-30
</TABLE>
F-1
<PAGE>
HUDSON HOTELS TRUST
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED, IN THOUSANDS)
The following unaudited Pro Forma Condensed Statements of Operations of
Hudson Hotels Trust are presented as if the consummation of the Formation
Transactions had occurred at the beginning of the periods presented. Such pro
forma information is based in part upon the pro forma Condensed Combined
Statements of Operations of the Combined Initial Hotels and the application of
the net proceeds of the Offering as set forth under the caption "Use of
Proceeds". Such information should be read in conjunction with the Pro Forma
Condensed Combined Statements of Operations of the Combined Initial Hotels and
the Financial Statements and notes thereto of MFI Partners, Limited
Partnership, and the Financial Statements and notes thereto of the Other
Initial Hotels included at Pages F-11 through F-18 of this Prospectus.
In management's opinion, all adjustments necessary to reflect the effects of
the Formation Transactions have been made.
The following unaudited Pro Forma Condensed Statements of Operations are not
necessarily indicative of what actual results of operations of the Company
would have been assuming such transactions had been completed as of the
beginning of the periods presented, nor does it purport to represent the
results of operations for future periods.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
----------------- ------------------ ------------------
<S> <C> <C> <C>
Operating Data(1):
Percentage lease
revenue(2)............ $22,869 $5,236 $5,540
Depreciation and
amortization(3)....... 5,341 1,335 1,335
Real Estate and
personal property
taxes
and insurance(4)...... 2,646 662 628
General and
administrative(5)..... 600 150 150
Interest expense(6).... 3,193 798 798
Ground lease........... 323 81 81
Minority interest...... 54 11 13
------- ------ ------
Net income applicable
to
common shareholders.. $10,712 $2,199 $2,535
======= ====== ======
Net income per common
share(7)............ $ 0.85 $ 0.18 $ 0.20
======= ====== ======
</TABLE>
- --------
(1) The pro forma financial statements do not include a material non-recurring
charge of $850 paid to the Strategic Partner to cover expenses incurred by
the Strategic Partner in connection with the Pre-Offering Debt. The
Company intends that such payment will be repaid and expensed out of
Offering proceeds.
(2) Represents lease payments from the Lessee to the Company and is calculated
on a pro forma basis by applying the rent provisions in the Percentage
Leases to the historical room revenue of the Initial Hotels for the period
indicated.
(3) Represents depreciation on the Initial Hotels, amortization of capitalized
franchise fees and amortization of stock compensation expense.
Depreciation is computed based upon estimated useful lives of 39.5 and 7
years for buildings and improvements and furniture and equipment,
respectively. Franchise fees are amortized over 10 years. Stock
compensation is amortized over the five year vesting period. These
estimated useful lives are based on management's knowledge of the
properties and the hotel industry in general.
(4) Represents real estate and personal property taxes and casualty insurance
to be paid by the Company.
(5) Estimated at $150,000 per quarter for compensation, legal, audit and other
expenses.
(6) Reflects the interest rate on the line of credit based on an assumed rate
of 7.5% for each period presented.
(7) Pro forma earnings per Common Share is computed by dividing net income
applicable to the holders of Common Shares by the pro forma weighted
average number of Common Shares outstanding. The exchange of Units for
Common Shares will have no effect on diluted pro forma earnings per Common
Share as Unit holders and Shareholders effectively share equally in the
net income of the Partnership.
F-2
<PAGE>
HUDSON HOTELS TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
The following unaudited Pro Forma Condensed Combined Balance Sheet is
presented as if the consummation of the Formation Transactions had occurred on
March 31, 1998. Such pro forma information is based upon the combined balance
sheets of MFI Partners, Limited Partnership and the Other Initial Hotels,
which will be collectively referred to as "Initial Hotels", as adjusted for
assets not acquired and liabilities not assumed and the application of the net
proceeds of the Offering and Private Placement as set forth under the caption
"Use of Proceeds". Such information should be read in conjunction with the
Combined Financial Statements of the Initial Hotels and the Notes thereto
included at pages F-11 through F-31 of this Prospectus. In management's
opinion, all adjustments necessary to reflect the effects of the Formation
Transactions have been made. The following unaudited Pro Forma Condensed
Combined Balance Sheet is not necessarily indicative of what the actual
financial position would have been assuming such transactions had been
completed as of March 31, 1998, nor does it purport to represent the future
financial position of the Company.
<TABLE>
<CAPTION>
MFI PARTNERS OTHER
LIMITED INITIAL COMBINED PRO FORMA
PARTNERSHIP(A) HOTELS(B) HISTORICAL ADJUSTMENTS PRO FORMA
-------------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in hotel
properties, at cost.... $126,020 $13,477 $139,497 $ 16,273 (C) $155,770
Less accumulated
depreciation........... (16,239) (5,227) (21,466) 21,466
-------- ------- -------- --------
Investments in hotel
properties............. 109,781 8,250 118,031 155,770
Cash and cash
equivalents............ 3,943 439 4,382 (3,320)(D) 1,062
Accounts receivable..... 731 279 1,010 (1,010)(F)
Deferred expenses....... 2,870 162 3,032 (2,459)(E) 573
Prepaid and other
assets................. 225 303 528 (528)(F)
-------- ------- -------- --------
Total Assets........ $117,550 $ 9,433 $126,983 $157,405
======== ======= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
Debt.................... $ 98,276 $ 6,697 $104,973 $(62,398)(G) $ 42,575
Accounts payable, trade
and other liabilities.. 4,452 3,974 8,426 (8,426)(H)
300 (E) 300
Minority interest....... 630 (L) 630
Shareholders' equity
(deficit):
Common stock.......... 126 (I) 126
Additional paid-in
capital.............. 115,214 (J) 115,214
Unamortized stock
compensation......... (590)(M) (590)
Retained earning
(deficit)............ 14,822 (1,238) 13,584 (14,434)(K) (850)
-------- ------- -------- --------
Total shareholders'
equity (deficit)... 14,822 (1,238) 13,584 113,900
-------- ------- -------- --------
Total Liabilities and
Shareholders' Equity... $117,550 $ 9,433 $126,983 $157,405
======== ======= ======== ========
</TABLE>
See Notes to the Pro Forma Condensed Combined Balance Sheet.
F-3
<PAGE>
HUDSON HOTELS TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
(A) Reflects the MFI Partners historical combined balance sheet at March 31,
1998.
(B) Reflects the Other Initial Hotels' historical combined balance sheet at
March 31, 1998.
(C) Increase reflects the basis increase resulting from the purchase of the
Initial Hotels for (i) $155.1 million cash (exclusive of the $630,000 in
option payments paid by the Strategic Partner for the Other Initial
Hotels) and (ii) 67,742 Units issued to the Strategic Partner in exchange
for the assignment to the Company of an option to purchase the Initial
Hotels for $630,000.
(D) Net decrease reflects the following proposed transactions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Proceeds of the offering.................................... $ 125,000
Proceeds from Credit Facility............................... 42,575
Proceeds from Pre-Offering Debt............................. 4,000
Advance from Strategic Partner.............................. 1,200
Expenses of the Offering.................................... (10,250)
Payments to acquire the Initial Hotels...................... (155,140)
Payment of franchise fees for the Initial Hotels............ (273)
Repayment of Pre-Offering Debt.............................. (4,000)
Reimbursement to the Strategic Partner for deposit on
Initial Hotels............................................. (1,200)
Payment to the Strategic Partner related to warrants issued
by the Strategic Partner in connection with Pre-Offering
Debt....................................................... (850)
Cash and cash equivalents not being purchased............... (4,382)
---------
$ (3,320)
=========
</TABLE>
(E) Net decrease represents cash paid for the transfer of franchises for the
Initial Hotels ($273,000) plus an additional $300,000 to be paid over the
next two years less the deferred expenses not being acquired.
(F) Decrease reflects assets of the Initial Hotels which are not being
purchased.
(G) Net decrease represents the difference between the Company's $42,575
indebtedness under the Credit Facility used for the acquisition of the
Initial Hotels less the $104,973 long-term debt of the Initial Hotels not
assumed.
(H) Decrease reflects liabilities of the Initial Hotels which are not being
assumed.
(I) Increase represents the par value of Common Shares expected to be sold in
the Offering (12,500,000 shares), and Common Shares issued to officers and
Trustees (59,000 shares). The 100 Common Shares issued upon incorporation
will be redeemed from the Offering proceeds and are netted in this
presentation.
(J) Net increase reflects the proceeds of the Offering ($125 million), less
the par value of the Common Shares issued ($126) and the estimated
expenses of the Offering ($10.2 million), plus $590,000 related to 59,000
shares of Common Shares granted to officers and Trustees.
(K) Represents the elimination of the net deficit of the Initial Hotels and
the $850,000 payment to the Strategic Partner related to warrant issued by
the Strategic Partner in connection with the Pre-Offering Debt.
(L) Represents an adjustment to arrive at the interest in the partnership that
will not be owned by the Company as a result of issuing 67,742 units to
the Strategic Partner in exchange for the assignment to the Company of an
option to purchase the Initial Hotels $630,000.
(M) Represents 59,000 Common Shares granted to officers and Trustees which
will be amortized over the five year vesting period.
F-4
<PAGE>
COMBINED INITIAL HOTELS
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, AND THE THREE MONTHS ENDED MARCH 31, 1998 AND
1997
The following unaudited Pro Forma Condensed Combined Statements of
Operations are intended to represent the proforma operations of the lessee as
if the completion of the Formation Transactions had occurred at the beginning
of the periods presented. Such pro forma information is based upon the
combined statements of operations of the Initial Hotels and the application of
the net proceeds of the Offering as set forth under the caption "Use of
Proceeds". Such information should be read in conjunction with the Financial
Statements and Notes thereto of MFI Partners, Limited Partnership, and the
Other Initial Hotels included at pages F-11 through F-30 of this Prospectus.
In management's opinion, all adjustments necessary to reflect the effects of
the Formation Transactions have been made.
The following unaudited Pro Forma Condensed Combined Statements of
Operations are not necessarily indicative of what actual results of operations
of the Combined Initial Hotels would have been assuming such transactions had
been completed as of the beginning of the periods presented, nor does it
purport to represent the results of operations for future periods.
F-5
<PAGE>
COMBINED INITIAL HOTELS
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
INITIAL COMBINED PRO FORMA
MFI HOTELS(A) HOTELS(B) HISTORICAL ADJUSTMENTS PRO FORMA
------------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Room revenue.......... $44,880 $8,033 $52,913 $52,913
Other revenue......... 2,108 1,314 3,422 3,422
------- ------ ------- -------
Total revenue....... 46,988 9,347 56,335 56,335
------- ------ ------- -------
Expenses:
Property operating
costs and expenses... 14,268 2,794 17,062 17,062
General and
administrative....... 6,867 888 7,755 (2,227)(C) 5,528
Franchise costs....... 2,914 674 3,588 3,588
Advertising and
promotion............ 538 214 752 752
Utilities............. 2,407 533 2,940 2,940
Repairs and
maintenance.......... 3,310 509 3,819 3,819
Real estate, personal
property taxes
and insurance........ 2,271 350 2,621 (2,621)(D)
Interest expense...... 9,026 892 9,918 (9,918)(E)
Depreciation and
amortization......... 5,202 768 5,970 (5,970)(F)
Other................. 521 137 658 (435)(D) 223
Percentage lease
payments............. 22,869 (G) 22,869
------- ------ ------- -------
Hotel operating income
(loss)................. $ (336) $1,588 $ 1,252 $ (446)
======= ====== ======= =======
</TABLE>
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
INITIAL COMBINED PRO FORMA
MFI HOTELS(A) HOTELS(B) HISTORICAL ADJUSTMENTS PRO FORMA
------------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Room revenue.......... $10,024 $1,736 $11,760 $11,760
Other revenue......... 510 340 850 850
------- ------ ------- -------
Total revenue....... 10,534 2,076 12,610 12,610
------- ------ ------- -------
Expenses:
Property operating
costs and expenses... 3,211 651 3,862 3,862
General and
administrative....... 1,692 190 1,882 (460)(C) 1,422
Franchise costs....... 651 150 801 801
Advertising and
promotion............ 147 95 242 242
Utilities............. 672 146 818 818
Repairs and
maintenance.......... 559 110 669 669
Real estate, personal
property taxes
and insurance........ 580 86 666 (666)(D)
Interest expense...... 2,285 266 2,551 (2,551)(E)
Depreciation and
amortization......... 1,214 189 1,403 (1,403)(F)
Other................. 100 43 143 (92)(D) 51
Percentage lease
payments............. 5,236 (G) 5,236
------- ------ ------- -------
Hotel operating income
(loss)................. $ (577) $ 150 $ (427) $ (491)
======= ====== ======= =======
</TABLE>
F-6
<PAGE>
COMBINED INITIAL HOTELS
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
INITIAL COMBINED PRO FORMA
MFI HOTELS(A) HOTELS(B) HISTORICAL ADJUSTMENTS PRO FORMA
------------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Room revenue.......... $10,698 $1,738 $12,436 $12,436
Other revenue......... 543 346 889 889
------- ------ ------- -------
Total revenue....... 11,241 2,084 13,325 13,325
------- ------ ------- -------
Expenses:
Property operating
costs and expenses... 3,571 736 4,307 4,307
General and
administrative....... 1,574 182 1,756 (337)(C) 1,419
Franchise costs....... 695 146 841 841
Advertising and
promotion............ 155 41 196 196
Utilities............. 648 132 780 780
Repairs and
maintenance.......... 621 76 697 697
Real estate, personal
property taxes
and insurance........ 574 87 661 (661)(D)
Interest expense...... 2,095 180 2,275 (2,275)(E)
Depreciation and
amortization......... 1,334 189 1,523 (1,523)(F)
Other................. 199 44 243 (92)(D) 151
Percentage lease
payments............. 5,540 (G) 5,540
------- ------ ------- -------
Hotel operating income
(loss)................. $ (225) $ 271 $ 46 $ (606)
======= ====== ======= =======
</TABLE>
- --------
(A) Reflects the MFI Partners historical statements of operations for the
periods presented.
(B) Reflects the Other Initial Hotels' historical combined statements of
operations for the periods presented.
(C) Reflects the elimination of management fees for contracts that terminate
upon sale of the hotels to the Company.
(D) Reflects real estate and personal property taxes, property and casualty
insurance and ground rents to be paid by the Partnership.
(E) Decrease reflects reduction of interest expenses due to the debt not being
assumed by the Company.
(F) Reflects elimination of depreciation and amortization expense which is to
be expensed by the Partnership.
(G) Represents lease payment calculated on a pro forma basis by applying the
rent provisions in the Percentage Leases to the historical room revenue of
the Initial Hotels. Due to the seasonality of the hotel business and the
Percentage Rent provisions of the Percentage Leases, pro forma results for
the three months are not indicative of the pro forma results for the full
year.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Hudson Hotels Trust
We have audited the accompanying balance sheet of Hudson Hotels Trust as of
May 12, 1998. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this 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 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 balance sheet referred to above presents fairly, in all
material respects, the financial position of Hudson Hotels Trust, as of May
12, 1998 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Rochester, New York
May 12, 1998
F-8
<PAGE>
HUDSON HOTELS TRUST
MAY 12, 1998
BALANCE SHEET
<TABLE>
<S> <C>
ASSETS
Cash............................................................. $1,000
======
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 50,000,000 shares authorized, no
shares issued and outstanding...................................
Common stock, $.01 par value, 100,000,000 shares authorized, 100
shares issued and outstanding................................... $ 1
Additional paid in capital....................................... 999
------
Total Shareholders' Equity..................................... $1,000
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-9
<PAGE>
HUDSON HOTELS TRUST
NOTES TO BALANCE SHEET
1. ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
Hudson Hotels Trust (the "Company") is a recently organized Maryland real
estate investment trust which has been established to acquire equity interests
in existing hotel properties and to own a 1% general partnership interest and
98.5% limited partnership interest in Hudson Hotels Limited Partnership, L.P.
(the "Partnership"). Upon consummation of the proposed initial public offering
("Offering"), twenty-nine hotel properties will be acquired from unrelated
third parties (the "Initial Hotels") for cash and the use of an acquisition
line of credit.
The Company expects to file its registration statement with the Securities
and Exchange Commission pursuant to which the Company expects to offer
12,500,000 shares of its common stock to the public. The Partnership also
intends to issue 67,742 units to Hudson Hotels Corporation ("the Strategic
Partner") in connection with the transfer to the Company of an option to
acquire three of the initial hotels. The Company expects to qualify as a real
estate investment trust under sections 856-860 of the Internal Revenue Code.
Upon consummation of the Offering and Private Placement, the Company will
contribute all of the net proceeds of the Offering to the Partnership in
exchange for an approximately 1% general partnership interest and a 98.5%
limited partnership interest in the Partnership. The Partnership will use such
funds to acquire the Initial Hotels and for working capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Distributions
The Company intends to make regular quarterly distributions which are
dependent upon receipt of distributions from the Partnership.
3. COMMITMENTS
In conjunction with the aforementioned Offering and Private Placement, the
Partnership will enter into purchase and sale agreements for the Initial
Hotels. The Company will enter into a strategic alliance for management
services to be provided to the Company by the Strategic Partner.
The Company will also issue 59,000 restricted shares to its five officers
and to its four initial independent directors in lieu of director fees. All
shares will vest over a five year period beginning in 1998; the shares are
subject to forfeiture if an officer or director does not remain an officer or
director of the Company for the specified vesting period.
F-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Hudson Hotels Trust
We have audited the accompanying combined balance sheets of the Other
Initial Hotels (described in Note 1) as of December 31, 1996 and 1997, and the
related combined statements of operations and accumulated deficit and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule include on page F-17 of
this Prospectus. These combined financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule 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 combined financial position of the Other Initial
Hotels as of December 31, 1996 and 1997, and the combined 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. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relationship to the basic financial
statements taken as a whole, represent fairly, in all material respects, the
information required to be included therein.
/s/ Coopers & Lybrand LLP
Rochester, New York
May 11, 1998
F-11
<PAGE>
OTHER INITIAL HOTELS
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Investment in hotel property:
Land................................................ $ 1,625,942 $ 1,625,942
Buildings........................................... 7,448,539 7,490,297
Furniture and equipment............................. 4,104,251 4,427,995
----------- -----------
13,178,732 13,544,234
Accumulated depreciation.......................... 4,331,992 5,060,782
----------- -----------
8,846,740 8,483,452
Cash.................................................. 346,440 401,359
Accounts receivable, net.............................. 212,312 226,964
Inventory............................................. 25,889 28,713
Prepaid expenses...................................... 44,756 56,631
Other assets, net..................................... 308,240 187,878
----------- -----------
Total assets...................................... $ 9,784,377 $ 9,384,997
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Mortgages payable................................... $ 7,148,225 $ 6,772,618
Notes payable related parties....................... 3,892,589 3,553,248
Accounts payable.................................... 145,986 245,418
Accrued liabilities................................. 474,033 322,217
----------- -----------
Total liabilities................................. 11,660,833 10,893,501
Shareholders' deficit:
Common stock........................................ 100 100
Accumulated deficit................................. (1,118,556) (530,431)
Notes receivable shareholders'...................... (758,000) (978,173)
----------- -----------
Total shareholders' deficit........................... (1,876,456) (1,508,504)
----------- -----------
Total liabilities and shareholders' deficit....... $ 9,784,377 $ 9,384,997
=========== ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-12
<PAGE>
OTHER INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Room revenues......................... $ 6,507,426 $ 7,649,374 $ 8,032,906
Other revenues........................ 1,386,255 1,340,288 1,314,156
----------- ----------- -----------
Total revenues...................... 7,893,681 8,989,662 9,347,062
----------- ----------- -----------
Expenses:
Property operating costs and
expenses............................. 2,590,427 2,776,008 2,794,274
General and administrative............ 857,494 914,340 887,774
Franchise costs....................... 346,871 419,455 673,778
Advertising and promotions............ 380,531 397,273 213,748
Utilities............................. 481,363 533,451 533,191
Repairs and maintenance............... 501,417 581,550 509,156
Real estate, property taxes and
insurance............................ 217,915 352,541 350,167
Interest expense, net................. 1,176,349 1,069,745 891,850
Depreciation and amortization......... 833,479 991,865 767,978
Other................................. 214,733 149,935 137,021
----------- ----------- -----------
Total expenses...................... 7,600,579 8,186,163 7,758,937
----------- ----------- -----------
Net income.............................. 293,102 803,499 1,588,125
Accumulated deficit--beginning of year.. (2,515,157) (1,922,055) (1,118,556)
Contributions........................... 300,000
Distributions........................... (1,000,000)
----------- ----------- -----------
Accumulated deficit--end of year........ $(1,922,055) $(1,118,556) $ (530,431)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-13
<PAGE>
OTHER INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 293,102 $ 803,499 $ 1,588,125
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 833,479 991,865 767,978
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable, net........ (55,269) 52,014 (14,652)
Prepaid expenses................ (52,116) 20,844 (11,875)
Inventory....................... 389 (1,553) (2,824)
Other assets.................... 115,764 81,174
Increase (decrease) in
liabilities:
Accounts payable................ 7,266 (139,031) 99,432
Accrued liabilities............. (77,651) 191,589 (151,816)
Unpaid interest--related
parties, net................... 553,629 337,827 123,376
----------- ----------- -----------
Total adjustments................. 1,325,491 1,453,555 890,793
----------- ----------- -----------
Net cash provided by operating
activities..................... 1,618,593 2,257,054 2,478,918
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures.................. (3,052,486) (133,430) (365,502)
Proceeds from the sale of land........ 70,309
----------- ----------- -----------
Net cash used in investing
activities..................... (3,052,486) (63,121) (365,502)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from mortgages............... 4,686,674
Payments on mortgages................. (285,669) (330,830) (375,607)
Payments on notes..................... (2,736,570) (1,800,512) (682,890)
Acquisition of intangibles............ (117,963)
Distributions......................... (1,000,000)
----------- ----------- -----------
Net cash provided by (used in)
financing activities........... 1,546,472 (2,131,342) (2,058,497)
----------- ----------- -----------
Net increase in cash.................... 112,579 62,591 54,919
Cash--beginning year.................... 171,270 283,849 346,440
----------- ----------- -----------
Cash--end of year....................... $ 283,849 $ 346,440 $ 401,359
=========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest............................ $ 802,386 $ 771,124 $ 580,271
=========== =========== ===========
Income taxes........................ $ 553 $ 674 $ 301
=========== =========== ===========
Supplemental disclosures of noncash
financing activities:
Noncash capital contribution recorded
as a due from affiliate.............. $ 300,000
===========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-14
<PAGE>
OTHER INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC OFFERING
Hudson Hotels Trust (the "Company") is a recently organized Maryland real
estate investment trust which has been established to acquire equity interests
in existing hotel properties and to own approximately a 99.5% interest in
Hudson Hotels Limited Partnership, L.P. (the "Partnership"). Upon consummation
of the proposed initial public offering ("Offering") a portion of the proceeds
will be used to acquire three hotel properties (a Holiday Inn, a Comfort
Suites and a Hampton Inn) from unrelated parties (the "Other Initial Hotels").
Basis of Presentation
The accompanying combined financial statements of the Other Initial Hotels
have been presented on a combined basis due to common ownership and
management. All significant intercompany balances and transactions have been
eliminated.
Proposed Initial Public Offering
The Company expects to file its registration statement with the Securities
and Exchange Commission pursuant to which the Company expects to offer
12,500,000 shares of its common stock to the public. The Company expects to
qualify as a real estate investment trust under sections 856-860 of the
Internal Revenue Code. Upon consummation of the offering, the Company will
contribute all of the net proceeds of the Offering to the Partnership in
exchange for approximately a 99.5% interest in the Partnership. The
Partnership will use such funds to acquire hotel properties, including the
Other Initial Hotels, fund renovations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
All highly liquid investments with an original maturity date of three months
or less when purchased are considered to be cash equivalents.
Inventories
Inventories, consisting predominately of room linens, food and beverage are
stated at the lower of cost (first-in, first-out) or market.
Investments in Hotel Properties
The hotel properties are stated at cost. Depreciation is computed using the
straight-line and accelerated methods based upon the following estimated
useful lives:
<TABLE>
<S> <C>
Building and improvements....................................... 39.5 Years
Furniture and equipment......................................... 3 to 7 Years
</TABLE>
Properties are written down to net realizable value when management believes
that the unamortized cost cannot be recovered through operations.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulation of depreciation are removed
from the accounts, and the gain or loss is included in operations.
Other Assets
Other assets primarily consist of franchise fees and deferred loan costs.
Amortization is computed using the straight-line method based upon the terms
of the franchise and loan agreements which range from 5 years to 10 years.
F-15
<PAGE>
OTHER INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Other Initial Hotels are S Corporations and are thus not subject to
federal or state income taxes. Accordingly, no provision for federal and state
income taxes has been made in these financial statements.
Revenue Recognition
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. MORTGAGES PAYABLE
Mortgages payable consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Mortgage payable in monthly installments of $14,550
plus interest at LIBOR plus 2.6% (8.38% at December
31, 1997) through July 2002 when a balloon payment
of $1,754,000 is due................................ $2,728,850 $2,554,250
Mortgage payable in monthly installments of $46,158
including interest at LIBOR plus 2.5% (8.94% at
December 31, 1997) through May 2002 when a balloon
payment of $3,206,721 is due........................ 4,419,375 4,218,368
---------- ----------
$7,148,225 $6,772,618
========== ==========
</TABLE>
The mortgages are guaranteed by certain shareholders and related entities.
Annual maturities for the mortgage payable subsequent to December 31, 1997 are
as follows:
<TABLE>
<S> <C>
1998.............................. $ 373,893
1999.............................. 391,853
2000.............................. 411,432
2001.............................. 413,210
2002.............................. 5,182,230
----------
$6,772,618
==========
</TABLE>
4. COMMITMENTS
One of the hotels is located on land owned by a related party. The related
lease requires annual payments of $100,000, or 4%, of gross revenues,
whichever is greater, and expires in 2014 with two 10 year renewal options.
Rents paid amounted to $200,000, $103,563 and $110,619 for 1995, 1996, and
1997, respectively. The year ended 1995 included a catch up payment for the
period prior to the hotels opening in 1995.
The hotels are required to remit monthly royalty fees of 4% of gross room
revenues, plus additional fees for marketing assessments and reservation fees
to its franchisors based on franchise agreements which extend from ten to
twenty years. These agreements contain restrictions on the transferability of
the franchise subject to approval by the franchisor. Total payments were
approximately $346,871, $419,455 and $673,778 for 1995, 1996 and 1997,
respectively.
F-16
<PAGE>
ACQUISITION PROPERTIES
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS OF WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST ACQUISITION PERIOD
------------------------------------- ----------------------- ------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL(A)
----------- ------------ ---------- ------------- -------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hampton Inn--
Buffalo, NY..... $4,218,368 $ 902,479 $2,715,670 $(46,537) $ 12,881 $ 855,942 $2,728,551 $3,584,493
Comfort Suites--
Buffalo, NY..... 2,554,250 600,000 2,628,759 -- 27,916 600,000 2,656,675 3,256,675
Holiday Inn--
Cleveland, OH... 170,000 1,530,000 -- 575,071 170,000 2,105,071 2,275,071
---------- ---------- ---------- -------- -------- ---------- ---------- ----------
$6,772,618 $1,672,479 $6,874,429 $(46,537) $615,868 $1,625,942 $7,490,297 $9,116,239
========== ========== ========== ======== ======== ========== ========== ==========
<CAPTION>
LIFE UPON
WHICH
DEPRECIATION
ACCUMULATED IN LATEST
DEPRECIATION NET BOOK VALUE INCOME
BUILDINGS AND BUILDINGS AND DATE OF DATE OF STATEMENT IS
DESCRIPTION IMPROVEMENTS(B) IMPROVEMENTS CONSTRUCTION ACQUISITION COMPUTED
----------- --------------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Hampton Inn--
Buffalo, NY..... $ 202,832 $3,381,661 1994 39.5
Comfort Suites--
Buffalo, NY..... 652,683 2,603,992 1991 39.5
Holiday Inn--
Cleveland, OH... 487,205 1,787,866 1989 39.5
--------------- --------------
$1,342,720 $7,773,519
=============== ==============
</TABLE>
- -----
<TABLE>
<CAPTION>
(a) Reconciliation of Land and Buildings and Improvements:
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance............................. $6,451,399 $9,061,601 $9,074,481
Additions during year or period:
Improvements................................. 2,610,202 12,880 41,758
---------- ---------- ----------
Ending balance................................ $9,061,601 $9,074,481 $9,116,239
(b) Reconciliation of Accumulated Depreciation:
Beginning balance............................. $ 662,912 $ 888,342 $1,114,833
Depreciation for the year or period.......... 225,430 226,491 227,887
---------- ---------- ----------
Ending balance................................ $ 888,342 $1,114,833 $1,342,720
========== ========== ==========
</TABLE>
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
MFI Partners, Limited Partnership:
We have audited the accompanying balance sheets of MFI Partners, Limited
Partnership (the "Partnership"), a Delaware limited partnership, as of
December 31, 1996 and 1997, and the related statements of operations, changes
in partners' capital, and cash flows for the three years ended December 31,
1995, 1996 and 1997. These financial statements and the schedule referred to
below are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 the Partnership as of
December 31, 1996 and 1997 and the results of its operations and its cash
flows for each of the three years ended December 31, 1995, 1996 and 1997 in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule is presented
for purposes of additional analysis and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
March 13, 1998
F-18
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Investment in real estate, at cost
Land...................................................... $ 26,505 $ 26,505
Buildings and improvements................................ 86,277 86,529
Furniture, fixtures and equipment......................... 9,680 12,691
-------- --------
122,462 125,725
Less-Accumulated depreciation........................... (10,618) (15,088)
-------- --------
Net investment in real estate, at cost 111,844 110,637
Deferred charges, net....................................... 4,380 3,170
Cash and cash equivalents................................... 3,132 2,943
Cash-Restricted............................................. 1,934 171
Accounts receivable, trade.................................. 674 527
Accounts receivable, credit card............................ 145 168
Prepaid expenses and other assets........................... 306 345
-------- --------
Total assets.......................................... $122,415 $117,961
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
BALANCE SHEET
AS OF DECEMBER 31, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
MORTGAGE NOTES PAYABLE:
First mortgage note payable, including 1996 and 1997
current
portions of $1,689 and $1,852, respectively............... $ 71,615 $ 69,926
Subordinated mortgage note payable, including 1996 and 1997
deferred interest of $2,083 and $2,254, respectively...... 28,583 28,754
-------- --------
Total mortgage notes payable............................. 100,198 98,680
-------- --------
ACCOUNTS PAYABLE............................................. 513 749
ACCRUED OPERATING EXPENSES................................... 1,224 1,308
ACCRUED PROPERTY TAXES....................................... 821 826
OTHER ACCRUED EXPENSES....................................... 1,437 1,195
DUE TO PARTNERS.............................................. 7 46
OTHER LIABILITIES............................................ 220 111
-------- --------
Total liabilities........................................ 104,420 102,915
-------- --------
GENERAL...................................................... 585 489
LIMITED...................................................... 17,410 14,557
-------- --------
Total partners' capital.................................. 17,995 15,046
-------- --------
Total liabilities and partners' capital.................. $122,415 $117,961
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDING DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Rooms.............................................. $41,793 $43,603 $44,880
Telephone.......................................... 1,098 977 1,001
Other.............................................. 844 1,166 1,107
------- ------- -------
Total revenues................................... 43,735 45,746 46,988
------- ------- -------
COST OF SALES:
Rooms.............................................. 11,171 12,209 13,137
Telephone.......................................... 544 466 510
Other.............................................. 326 642 621
------- ------- -------
Total cost of sales.............................. 12,041 13,317 14,268
------- ------- -------
Gross operating income........................... 31,694 32,429 32,720
------- ------- -------
OPERATING EXPENSES:
General and administrative......................... 4,627 5,003 5,198
Advertising and promotion.......................... 321 430 538
Utilities.......................................... 2,324 2,372 2,407
Repairs and maintenance............................ 1,962 2,301 3,310
Franchise fees..................................... 2,716 2,831 2,914
Real estate, personal property taxes, and
insurance......................................... 2,244 2,255 2,271
Management fees.................................... 2,094 1,903 1,669
Depreciation and amortization...................... 5,355 4,879 5,202
Ground rent........................................ 324 324 324
Other.............................................. 318 312 193
------- ------- -------
Total operating expenses......................... 22,285 22,610 24,026
------- ------- -------
Operating income................................. 9,409 9,819 8,694
------- ------- -------
NON-OPERATING EXPENSES:
Interest expense, net.............................. 9,155 9,136 9,026
Other.............................................. 2 (13) 4
------- ------- -------
Net (loss)/income................................ $ 252 $ 696 $ (336)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDING DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- -------
<S> <C> <C> <C>
Balance, December 31, 1994....................... $834 $24,751 $25,585
Capital distributions.......................... (140) (4,157) (4,297)
Net income..................................... 9 243 252
---- ------- -------
Balance, December 31, 1995....................... 703 20,837 21,540
---- ------- -------
Capital distributions.......................... (139) (4,102) (4,241)
Net income..................................... 21 675 696
---- ------- -------
Balance, December 31, 1996....................... 585 17,410 17,995
---- ------- -------
Capital distributions.......................... (85) (2,528) (2,613)
Net loss....................................... (11) (325) (336)
---- ------- -------
Balance, December 31, 1997....................... $489 $14,557 $15,046
==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................. $ 252 $ 696 $ (336)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities--
Depreciation and amortization..................... 5,355 4,879 5,202
Operating expenses paid by the property
improvement fund................................. 176 406 1,213
Interest income earned by the property improvement
fund............................................. (64) (79) (27)
Amortization of finance costs reflected as
interest expense................................. 546 487 478
Interest deferred on subordinated mortgage note
payable.......................................... 1,064 457 171
Changes in assets and liabilities affecting cash
flows from
operations:
Decrease (increase) in accounts receivable...... (105) 118 124
Decrease in due from partners................... 144 -- --
(Increase) decrease in prepaid expenses and
other assets .................................. 72 (45) (39)
Decrease in tax and insurance reserve fund...... 701 173 12
Increase (decrease) in accounts payable......... (104) 337 236
(Decrease) increase in accrued expenses......... 1,038 (203) (153)
Increase (Decrease) in due to partners.......... (5) (18) 39
(Decrease) increase in other current
liabilities.................................... 10 (16) (109)
------- ------- -------
Total adjustments.............................. 8,828 6,496 7,147
------- ------- -------
Net cash provided by operating activities...... 9,080 7,192 6,811
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements and additions to properties.......... (20) (1,358) (2,591)
Additions to the property improvement fund........ (1,638) (1,832) (107)
Organization and franchise agreements cost........ (24) -- --
------- ------- -------
Net cash used in investing activities.......... (1,682) (3,190) (2,698)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of first mortgage note payable......... (1,293) (1,540) (1,689)
Distributions to partners......................... (4,297) (4,241) (2,613)
------- ------- -------
Net cash used in financing activities.......... (5,590) (5,781) (4,302)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS............. 1,808 (1,779) (189)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 3,103 4,911 3,132
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 4,911 $ 3,132 $ 2,943
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Capital additions funded from the property
improvement fund................................. $ 696 $ 1,673 $ 1,885
Cash paid during the year for interest............ $ 7,057 $ 8,268 $ 8,580
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996, AND 1997
1. THE PARTNERSHIP:
MFI Partners, Limited Partnership (the "Partnership"), a Delaware limited
partnership, was formed to acquire, own and operate 26 Fairfield Inn by
Marriott properties (the "Inns") located throughout the United States, and the
land on which 23 of the Inns are situated. The Partnership entered into ground
leases relative to the land underlying three of the Inns (the "Ground
Leases"). The Partnership was formed on August 4, 1994, and operations
commenced on August 5, 1994 (the "Closing Date"). On the Closing Date, the
Partnership executed a purchase agreement with Host Marriott Corporation, HMH
Properties Inc., and New Orleans Marriott Hotel Ventures L.P. to acquire the
Inns and land for approximately $119,000,000. The total purchase price was
paid from proceeds of a first mortgage note payable of $75,000,000 (the "First
Mortgage," Note 3), a subordinated mortgage note payable of $26,500,000
retained by one of the sellers (the "Subordinate Mortgage," Note 3), and the
initial capitalization of the Partnership, by $25,536,000. The remaining
proceeds above the purchase price were used to pay for transaction costs and
as initial operating capital. The Partnership is owned by three separate
partnerships. Distributions are made based on the relative ownership
percentages of the partners and upon cash flow priority guideline included in
the First Mortgage agreement and the Subordinate Mortgage agreement. The
guideline provides that net operating cash flow, as defined, after base
management fees, franchise fees, property taxes, insurance, and ground lease
payments be allocated in the following order:
(1) Monthly interest and principal on the First Mortgage
(2) Mandatory additional principal payment of the First Mortgage, as
required
(3) Quarterly interest on the Subordinated Mortgage
(4) Payment of deferred and accrued management fees (see Note 6)
(5) Available for distribution to equity holders
Equity holders received cash distributions of approximately $4,297,000,
$4,241,000 and $2,613,000 during 1995, 1996 and 1997 respectively.
2. BASIS OF PRESENTATION AND 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.
Real Estate
Real estate is recorded at cost and reported at the lower of its carrying
amount or fair value in accordance with Statement of Financial Accounting
Standards No. 121. A write down to fair value results when an impairment of
the asset has occurred and management believes that its carrying amount cannot
be recovered through future operations. No assets were written down in 1995,
1996 and 1997. Allocations of the purchase price of the real estate were based
on relative market values at the date of purchase. Repairs and maintenance are
charged to operations as incurred; major renewals and betterments are
capitalized. Upon the sale or disposition of a fixed asset, the asset and
related accumulated depreciation are removed from the accounts, and the gain
or loss is included in operations. Depreciation is computed using the
following methods over the useful lives of the assets:
Building and Improvements Straight-Line Method over 39 years
Furniture, Fixtures, and Equipment Double-Declining Balance Method over
5 years
All property and equipment is pledged as security for the debt described in
Note 3.
F-24
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred Charges, Net
Deferred charges, net, consist of organization costs, initial franchise
costs and financing costs and are presented net of any accumulated
amortization. Organization costs incurred in the formation of the partnership
are being amortized using the straight-line method over 60 months.
Amortization of the franchise costs incurred in obtaining the franchise
agreements is computed using the straight-line method with a useful life of
approximately 20 years, the term of the franchise agreement. Amortization of
financing costs incurred in obtaining the long-term debt or related financial
instruments is computed using the effective interest method over the terms of
the loan agreements. This amortization is included in the interest expense in
the accompanying statements of operations.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents, except the
contractually restricted property improvement fund and tax and insurance
reserve fund.
Cash--Restricted
Restricted cash consists of funds established for property improvements and
the payment of taxes and insurance, as required under the various agreements
into which the Partnership has entered.
Revenue Recognition and Accounts Receivable
Revenue is recognized as earned and all receivable deemed uncollectible are
written off. The Partnership accounts for credit card revenues as receivables
until paid in cash.
Income Taxes
Provisions for Federal or state income taxes have not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates profits and losses to the individual partners.
Significant differences may exist between the net loss for financial reporting
purposes and the net loss as reported in the Partnership's tax return.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. MORTGAGE NOTES PAYABLE AND FINANCIAL INSTRUMENTS:
On August 5, 1994, the Partnership borrowed $75,000,000 pursuant to the
terms of a seven-year nonrecourse mortgage loan agreement (the "First
Mortgage") with Credit Lyonnais to partially finance the purchase of the Inns.
The debt is split into two tranches. The first tranche is secured by two Inns
located in California, and the second tranche is secured by the remaining
properties. All debt terms relate to both tranches. The mortgage currently
requires monthly principal and interest payments. The mortgage bears interest
at the Prime Rate plus 1.5 percent or LIBOR plus 2.5 percent, at the
discretion of the borrower. For the purpose of interest payments, the
outstanding principal amount may be split into a maximum of three different
portions, each at a different interest rate with maturities ranging from 30 to
180 days. Principal payments are made to
F-25
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
amortize the outstanding balance over 20 years at an interest rate of 9.25
percent per annum, with the full unpaid balance due on August 5, 2001. An
additional annual principal payment of $1,400,000, payable in quarterly
installments, is required based on the operating results of the Partnership
not meeting minimum cash flow threshold requirements, as defined in the First
Mortgage, of $14,250,000 and $15,000,000 effective August 5, 1996 and August
5, 1997, respectively. However, the Partnership has received a proposal from
Credit Lyonnais to reduce the minimum cash flow threshold requirement to
$13,500,000, effective August 5, 1997, in exchange for an amendment fee of
approximately $70,000 and an additional, one-time, contribution of $1,400,000
to the Property Improvement Fund. The Partnership plans to fund this payment
out of existing available cash. Among other restrictions, distributions and
other uses of cash are determined based on a cash flow priority schedule
contained in the First Mortgage agreement. The loan also includes a clause
which permits the lender to call the loan if there is a material adverse
change in the business. The partnership paid approximately $1,293,000,
$1,540,000 and $1,689,000 in principal and approximately $6,384,000,
$6,304,000 and $6,162,000 in interest relating to the First Mortgage during
1995, 1996, and 1997, respectively. The outstanding loan balance at
December 31, 1996 and 1997 is $71,615,000 and $69,926,000 respectively. During
1995, 1996 and 1997 the interest rates in effect varied from 7.94 percent to
8.69 percent, 7.81 percent to 8.47 percent and 7.88 percent to 8.47 percent
respectively, and the weighted average interest rate was approximately 8.6
percent, 8.1 percent and 8.2 percent respectively.
In conjunction with the First Mortgage, the Partnership purchased an
interest rate cap (the "Cap") from The Bank of Tokyo, the hedge against a rise
in interest rates, and sold an interest rate floor (the "Floor") to Credit
Lyonnais, the lender of the First Mortgage, to offset the cost of the Cap. The
Cap and Floor are agreements whereby the Partnership has paid or received a
one-time "Premium" payment to or from another party in exchange for the right
to receive or pay interest payments based on a particular notional amount and
the difference between the agreed-upon Cap or Floor rate and the specified
index. The notional amount of the Cap is $52,500,000 and amortizes under the
same terms as the First Mortgage. The Cap matures on August 5, 2001. The Cap
provides that the Partnership shall not bear the burden of interest cost in
excess of 10.5 percent. Should the variable rate exceed 10.5 percent, the
partnership would be reimbursed by The Bank of Tokyo for the incremental
interest costs above 10.5 percent. The Partnership is subject to credit risk
should the counterparty not perform under the Cap agreement. The total credit
risk to the Partnership is the replacement cost of the Cap at current market
interest rates. The Floor has the same notional amount as the Cap and has as
three-year term which expired on August 1, 1997. The floor amortized under the
same terms as the First Mortgage. The Floor rate increases throughout the life
of the floor from 4.5 percent to 6.5 percent. Should LIBOR drop below the
Floor rate, the Partnership has agreed to pay interest based upon the Floor
rate plus 2.5 percent. On August 5, 1995 and 1996, the Floor rate increased to
6 percent and 6.5 percent respectively. As a result of this increase in the
Floor rate and decreasing interest rates during 1995, 1996 and 1997, the
Partnership made payments of approximately $24,000, $344,000 and $305,000
respectively, to Credit Lyonnais. No receipts relating to the Cap have been
received in 1995, 1996 and 1997. The net cost of these financial instruments
was $1,749,000, which has been capitalized as deferred charges and is being
amortized as an adjustment to interest expense as described in Note 2. This
amortization amounted to approximately $546,000, $487,000 and $478,000 in
1995, 1996 and 1997 respectively.
On August 5, 1994, the Partnership also borrowed $26,500,000 pursuant to the
terms of the purchase price mortgage (the "Subordinate Mortgage") from one of
the sellers, Host Marriott Corporation, the partially finance the purchase of
the Inns. The Subordinate Mortgage is subordinate to the First Mortgage. The
Subordinate Mortgage is split into two tranches. The first tranche is secured
by two Inns located in California, and the second tranche is secured by the
remaining properties. All debt terms relate to both tranches. The mortgage
currently requires quarterly interest payments, and no principal payments are
required until maturity. The mortgage bears interest at LIBOR plus 4.5 percent
and is capped at incrementally increasing rates during the term of the loan.
Interest is paid quarterly based on an incrementally increasing pay rate. The
pay rate is lower than the capped rate and the predicted variable rate of the
Subordinate Mortgage. The difference between the amount accrued and the amount
paid is deferred until the maturity of the Subordinate Mortgage. The debt
matures on the later of
F-26
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
one year from the date that the First Mortgage is paid in full or on August 4,
2001. In no event shall the maturity date be later than August 4, 2004. With
respect to the Subordinate Mortgage, the Partnership incurred interest expense
of approximately $2,470,000, $2,565,000 and $2,583,000 during 1995, 1996 and
1997 respectively, of which approximately $457,000 and $171,000 was deferred
during 1996 and 1997 respectively. Accrued interest of approximately $616,000
and $610,000 was outstanding at December 31, 1996 and 1997 respectively.
During 1995, 1996 and 1997 the Partnership paid interest of approximately
$1,205,000, $1,966,000 and $2,418,000 respectively, in connection with the
Subordinate Mortgage. The outstanding loan balance, including deferred
interest, was approximately $28,583,000 and $28,754,000 at December 31, 1996
and 1997 respectively. As of December 31, 1996 and 1997, the interest rate and
the pay rate were 9 percent.
Aggregate annual minimum principal payments for outstanding debt at December
31, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1998.......................................................... $ 1,852
1999.......................................................... 2,031
2000.......................................................... 2,227
2001.......................................................... 90,316
-------
$96,426
=======
</TABLE>
4. DEFERRED CHARGES, NET
Deferred charges consist of the following as of December 31, (Amounts in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Organization costs......................................... $ 3,544 $ 3,544
Franchise costs............................................ 524 524
Financing costs............................................ 3,269 3,269
------- -------
7,337 7,337
Less--Accumulated amortization........................... (2,957) (4,167)
------- -------
Deferred charges, net...................................... $ 4,380 $ 3,170
======= =======
</TABLE>
5. RELATED-PARTY TRANSACTIONS
According to the partnership agreement, the general partner of the
Partnership is to be reimbursed for certain costs incurred, as defined by the
partnership agreement. At December 31, 1996 and 1997 approximately $7,000 and
$46,000 respectively, are accrued and included in due to partners.
6. COMMITMENTS AND CONTINGENCIES
Management Agreement
The Inns are managed under a long-term management agreement (the "Management
Agreement") which expires on December 31, 2004, and contains two five-year
extension periods. The owners of the management company that operates the Inns
are affiliated with owners of the Partnership by virtue of common ownership.
The Management Agreement calls for base management fees of four percent of
gross revenues, one percent of which shall be deferred and paid based on
available cash flow, as defined in the First Mortgage Agreement. An additional
incentive management fee of 15 percent of operating profit, as defined by the
Management Agreement,
F-27
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
may be earned if the properties exceed certain distribution levels. The
manager also earns accounting fees in the amount of $18,000 per property per
year and is reimbursed for certain out-of-pocket expenses, as defined by the
Management Agreement. During 1997, the Partnership amended the Management
Agreement to eliminate the 1% additional management fee and the accounting
fee.
During 1995, 1996 and 1997, the manager earned approximately $335,000,
$61,400 and $2,100, respectively, in incentive management fees, of which
$19,700 and $0, respectively, was accrued for at year-end 1996 and 1997. In
1995, 1996 and 1997, the management company earned approximately $1,759,000,
$1,842,000 and 1,667,000, respectively, of base management fees and
approximately $468,000, $468,000 and $262,000, respectively, of accounting
fees. As of December 31, 1996 and 1997 approximately $106,000 and $0
respectively, of base management fees were deferred, and approximately
$267,000 and $85,000 respectively, of management and accounting fees were
accrued. Expenses related to the accounting fees have been included in general
and administrative expenses in the accompanying statement of operations.
Franchise agreement
Franchise fees represent the expense for franchise royalties under the terms
of the franchise agreements with Fairfield FMC Corporation (the "Franchise
Agreement"), an affiliate of Marriott International. The Franchise Agreement
expires on December 31, 2014. As part of the Franchise Agreement, the
franchisor provides certain goods and services to the Partnership including
training, advertising, reservation services, certain operational systems and
tools, and certain trademarks and trade names. The initial cost of the
Franchise Agreement was approximately $524,000, which was capitalized and is
included in deferred charges on the accompanying balance sheets. The Franchise
Agreement requires a fee of four percent of gross room revenues for franchise
fees, a fee of 2.5 percent of gross rooms revenues for reimbursement of
franchisor marketing costs, and a reservation fee of one percent of gross room
revenue plus $2.15 per reservation placed through the franchisor's central
reservation system. The franchise fees and franchisor marketing fees are
included in franchise fees in the accompanying statements of operations, and
the reservation fees are included in cost of sales in the accompanying
statements of operation. During 1995, 1996 and 1997, the Partnership incurred
approximately $2,716,000, $2,831,000 and $2,914,000, respectively, in
franchise fees and approximately $836,000, $843,000 and $944,000,
respectively, in reservation fees. As of December 31, 1996 and 1997,
approximately $199,000 and $209,000, respectively, of franchise fees were
accrued.
Property Improvement Fund
The First Mortgage requires the Partnership to make contributions to a
property improvement fund in the amount of four percent of gross revenues.
These funds are to be used exclusively for property improvement projects, and
their release is at the discretion of the lender. Funds related to these
contributions are reflected as restricted cash on the accompanying balance
sheets. The fund was initially established with $241,000 received at closing.
During 1995, 1996 and 1997 the Partnership remitted approximately an
additional $1,648,000, $1,832,000 and $107,000, the former of which is net of
$121,000 released by the lender, respectively, to the fund. Of such additions,
approximately $872,000, $1,673,000 and $1,885,000 were refunded to the
Partnership for amounts spent on property improvement projects, during 1995,
1996 and 1997, respectively. As of December 31, 1996 and 1997, the Partnership
held approximately $1,922,000 and $170,000, respectively, in the fund.
Tax and Insurance Reserve Fund
The First Mortgage requires the Partnership to escrow amounts to be used to
pay for taxes and insurance. These funds are reflected as restricted cash on
the accompanying balance sheets. As of December 31, 1996 and 1997 the
Partnership held approximately $12,500 and $300, respectively, in the fund.
The fund was established with approximately $696,000 which was received from
the seller at closing. During 1995, 1996 and 1997 the Partnership escrowed
$2,447,000, $2,655,000 and $2,527,000, respectively of which approximately
$3,195,000, $2,858,000, and $2,567,000, respectively was refunded to the
Partnership for amounts spent on taxes and insurance.
F-28
<PAGE>
MFI PARTNERS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Ground Leases
Three of the Inns are encumbered by ground leases held by various parties.
The initial terms of these leases vary from 25 to 30 years and may be extended
at the discretion of the lessee to vary from 50 to 75 years. The payments
increase during the terms of the lease based upon fluctuating variable
economic indicators. The Partnership incurred ground rent of approximately
$324,000 in 1995, 1996 and 1997. The annual minimum ground lease payments in
the future are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------------
(IN THOUSANDS)
<S> <C>
1998.......................................................... $ 318
1999.......................................................... 343
2000.......................................................... 343
2001.......................................................... 343
2002.......................................................... 343
Thereafter.................................................... 6,710
------
$8,400
======
</TABLE>
Legal Matters
The Partnership has been named as a defendant in various legal actions
arising from the normal operation of its properties. The Partnership has
proper and sufficient liability insurance to cover such claims and is
vigorously defending all actions against it. Management of the Partnership,
after consultation with its legal counsel, firmly believes that disposition of
those claims will not result in any material liability.
7. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of financial instruments at December 31, 1997, are
summarized as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------------ ------------
<S> <C> <C>
Interest Rate Cap................................ $ 1,018,000 $ 106,000
Long-Term Debt................................... (96,426,000) (96,426,000)
</TABLE>
The following methods and assumptions were used to estimate fair value.
LONG-TERM DEBT--The carrying amount of long-term debt approximates fair
value as interest rates on these instruments are either variable or the
contractually fixed rate approximates the current interest rate being offered
on similar instruments.
INTEREST RATE CAP--The fair value of the Interest Rate Cap is based on
quoted market prices for similar instruments with similar terms or on a
discounted cash flow analysis.
F-29
<PAGE>
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
COST CAPITALIZED GROSS AMOUNTS OF WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST ACQUISITION PERIOD ACCUMULATED
------------------------- ------------------- ------------------------- DEPRECIATION
BUILDINGS AND BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL(A)(C) IMPROVEMENTS(B)
----------- ----------- ------------- ----- ------------- ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fairfield Inn--
Akron, OH....... $ -- $ 3,187,825 $ -- $ 3,546 $ -- $ 3,191,371 $ 3,191,371 $ 275,866
Fairfield Inn--
Buffalo, NY..... 697,282 3,709,523 -- 34,724 697,282 3,744,247 4,441,529 322,100
Fairfield Inn--
Cedar Rapids,
IA.............. 421,437 3,276,058 -- 22,498 421,437 3,298,556 3,719,993 284,172
Fairfield Inn--
Chattanooga,
TN.............. 1,021,202 3,113,103 -- 19,881 1,021,202 3,132,984 4,154,186 269,983
Fairfield Inn--
Columbus, OH.... 561,520 3,048,521 -- 36,095 561,520 3,084,616 3,646,136 264,974
Fairfield Inn--
Flagstaff, AZ... 1,568,633 3,546,508 -- 91,681 1,568,633 3,638,189 5,206,822 310,024
Fairfield Inn--
Florence, KY.... 1,047,755 3,803,515 -- 43,988 1,047,755 3,847,503 4,895,258 330,560
Fairfield Inn--
Ft. Wayne, IN... 525,837 2,491,564 -- 14,832 525,837 2,506,396 3,032,233 216,042
Fairfield Inn--
Glenview, IL.... 18,190 3,355,918 -- 44,043 18,190 3,399,961 3,418,151 291,846
Fairfield Inn--
Harrisburg, PA.. 658,591 2,015,224 -- 7,700 658,591 2,022,924 2,681,515 174,586
Fairfield Inn--
Hartford, CT.... 865,102 2,862,672 -- 13,635 865,102 2,876,307 3,741,409 248,100
Fairfield Inn--
Las Vegas, NV... 2,712,439 6,378,283 -- 15,564 2,712,439 6,393,847 9,106,286 552,261
Fairfield Inn--
Louisville, KY.. 2,013,709 3,819,178 -- 13,460 2,013,709 3,832,638 5,846,347 330,829
Fairfield Inn--
Ontario, CA..... 576,670 1,460,543 -- 13,433 576,670 1,473,976 2,050,646 126,811
Fairfield Inn--
Phoenix, AZ..... 799,495 2,508,875 -- 5,574 799,495 2,514,449 3,313,944 217,211
Fairfield Inn--
Portland, ME 1,156,064 2,495,511 -- 55,694 1,156,064 2,551,205 3,707,269 217,835
Fairfield Inn--
Rancho Cordova,
CA.............. 1,000,980 2,796,045 -- 17,979 1,000,980 2,814,024 3,815,004 242,491
Fairfield Inn--
Rocky Mount,
NC.............. 716,822 2,933,606 -- -- 716,822 2,933,606 3,650,428 253,751
Fairfield Inn--
Scottsdale, AZ.. 2,690,061 3,850,153 -- 169,111 2,690,061 4,019,264 6,709,325 339,041
Fairfield Inn--
Sharonville,
OH.............. 868,045 2,990,124 -- 36,249 868,045 3,026,373 3,894,418 259,928
Fairfield Inn--
Syracuse, NY.... 49,952 3,220,648 -- 7,700 49,952 3,228,348 3,278,300 278,853
Fairfield Inn--
Warrendale, PA.. 1,597,435 4,184,943 -- 10,822 1,597,435 4,195,765 5,793,200 362,373
Fairfield Inn--
Willoughby, OH.. 1,207,675 3,163,224 -- 6,857 1,207,675 3,170,081 4,377,756 273,856
Fairfield Inn--
Willowbrook,
IL.............. 912,601 4,265,755 -- 19,268 912,601 4,285,023 5,197,624 369,664
Fairfield Inn--
Wilmington, DE.. 1,816,521 4,153,051 -- 30,543 1,816,521 4,183,594 6,000,115 360,315
Fairfield Inn--
Winter Park,
FL.............. 1,001,034 3,150,545 -- 13,272 1,001,034 3,163,817 4,164,851 272,987
----------- ----------- ----- -------- ----------- ----------- ------------ ----------
$26,505,052 $85,780,915 $ -- $748,149 $26,505,052 $86,529,064 $113,034,116 $7,446,459
=========== =========== ===== ======== =========== =========== ============ ==========
<CAPTION>
LIFE UPON
WHICH
DEPRECIATION
IN LATEST
NET BOOK VALUE INCOME
BUILDINGS AND DATE OF STATEMENT IS
DESCRIPTION IMPROVEMENTS ACQUISITION COMPUTED
----------- -------------- ----------- ------------
<S> <C> <C> <C>
Fairfield Inn--
Akron, OH....... $ 2,915,505 1994 39.5
Fairfield Inn--
Buffalo, NY..... 4,119,429 1994 39.5
Fairfield Inn--
Cedar Rapids,
IA.............. 3,435,821 1994 39.5
Fairfield Inn--
Chattanooga,
TN.............. 3,884,203 1994 39.5
Fairfield Inn--
Columbus, OH.... 3,381,162 1994 39.5
Fairfield Inn--
Flagstaff, AZ... 4,896,798 1994 39.5
Fairfield Inn--
Florence, KY.... 4,564,698 1994 39.5
Fairfield Inn--
Ft. Wayne, IN... 2,816,191 1994 39.5
Fairfield Inn--
Glenview, IL.... 3,126,305 1994 39.5
Fairfield Inn--
Harrisburg, PA.. 2,506,929 1994 39.5
Fairfield Inn--
Hartford, CT.... 3,493,309 1994 39.5
Fairfield Inn--
Las Vegas, NV... 8,554,025 1994 39.5
Fairfield Inn--
Louisville, KY.. 5,515,518 1994 39.5
Fairfield Inn--
Ontario, CA..... 1,923,835 1994 39.5
Fairfield Inn--
Phoenix, AZ..... 3,096,733 1994 39.5
Fairfield Inn--
Portland, ME 3,489,434 1994 39.5
Fairfield Inn--
Rancho Cordova,
CA.............. 3,572,513 1994 39.5
Fairfield Inn--
Rocky Mount,
NC.............. 3,396,677 1994 39.5
Fairfield Inn--
Scottsdale, AZ.. 6,370,284 1994 39.5
Fairfield Inn--
Sharonville,
OH.............. 3,634,490 1994 39.5
Fairfield Inn--
Syracuse, NY.... 2,999,447 1994 39.5
Fairfield Inn--
Warrendale, PA.. 5,430,827 1994 39.5
Fairfield Inn--
Willoughby, OH.. 4,103,900 1994 39.5
Fairfield Inn--
Willowbrook,
IL.............. 4,827,960 1994 39.5
Fairfield Inn--
Wilmington, DE.. 5,639,800 1994 39.5
Fairfield Inn--
Winter Park,
FL.............. 3,891,864 1994 39.5
--------------
$105,587,657
==============
</TABLE>
- -----
<TABLE>
<CAPTION>
(a) Reconciliation of Land and Buildings and Improvements:
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Beginning balance................... $112,301,165 $112,454,782 $112,782,015
Additions during year or period:
Improvements........................ 153,617 327,233 252,101
------------ ------------ ------------
Ending balance...................... $112,454,782 $112,782,015 $113,034,116
(b) Reconciliation of Accumulated Depreciation:
Beginning balance................... $ 904,862 $ 3,078,880 $ 5,258,945
Depreciation for the year or
period.............................. 2,173,998 2,180,085 2,187,514
------------ ------------ ------------
Ending balance...................... $ 3,078,860 $ 5,258,945 $ 7,446,459
============ ============ ============
(c)The aggregate cost for federal income tax purposes is $113,034,116.
</TABLE>
F-30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COM-
MON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 16
The Company.............................................................. 26
Business and Properties.................................................. 29
Use of Proceeds.......................................................... 34
Distribution Policy...................................................... 35
Pro Forma Capitalization................................................. 37
Selected Financial Information........................................... 38
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 42
The Initial Hotels....................................................... 45
Formation Transactions................................................... 64
Management............................................................... 67
Certain Relationships and Transactions................................... 75
The Strategic Partner and the Lessee..................................... 77
Principal Shareholders................................................... 79
Description of Shares of Beneficial Interest............................. 80
Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws........................................................ 85
Policies and Objectives with Respect to Certain Activities............... 89
Shares Available for Future Sale......................................... 92
Partnership Agreement.................................................... 94
Federal Income Tax Considerations........................................ 97
Underwriting............................................................. 113
Experts.................................................................. 114
Reports to Shareholders.................................................. 115
Legal Matters............................................................ 115
Additional Information................................................... 115
Glossary................................................................. 116
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12,500,000 SHARES
[LOGO OF HUDSON HOTELS TRUST APPEARS HERE]
HUDSON HOTELS TRUST
COMMON SHARES
---------------
PROSPECTUS
---------------
MORGAN KEEGAN & COMPANY, INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
CROWELL, WEEDON & CO.
INTERSTATE/JOHNSON LANE
CORPORATION
SUTRO & CO. INCORPORATED
TUCKER ANTHONY
INCORPORATED
WHEAT FIRST UNION
JULY , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the Shares.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee............. $ 43,467
NASD filing fee.................................................. 15,000
NYSE Listing Fee................................................. 119,208
Financial Advisory Fee........................................... 637,500
Printing and mailing............................................. 200,000
Accountant's fees and expenses................................... 100,000
Blue Sky fees and expenses....................................... 1,000
Counsel fees and expenses........................................ 350,000
Miscellaneous.................................................... 33,825
----------
Total.......................................................... $1,500,000
==========
</TABLE>
- --------
*To be supplied by amendment.
ITEM 32. SALES TO SPECIAL PARTIES
None.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On May 1, 1998, the Company was capitalized with the issuance to Alan S.
Lockwood of 100 Common Shares for a purchase price of $10 per share for an
aggregate purchase price of $1,000. The Common Shares were purchased for
investment and for the purpose of organizing the Company. The Company issued
these Common Shares in reliance on an exemption from registration under
Section 4(2) of the Securities Act. Mr. Lockwood's Common Shares will be
redeemed concurrently with the Offering.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit
or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. The Declaration of Trust of the Company contains such a provision
which eliminates such liability to the maximum extent permitted by the
Maryland REIT Law.
The Declaration of Trust of the Company authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to (a) any present or former Trustee or officer or (b) any individual who,
while a Trustee of the Company and at the request of the Company, serves or
has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer,
employee, agent or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or 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 status as a present or
former shareholder, Trustee or officer of the Company. The Bylaws of the
Company obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former
II-1
<PAGE>
Trustee or officer who is made a party to the proceeding by reason of his
service in that capacity or (b) any individual who, while a Trustee of the
Company and at the request of the Company, serves or has served another real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a 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. The
Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any
of the capacities described above and to any employee or agent of the Company
or a predecessor of the Company. The Bylaws require the Company to indemnify a
Trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnity 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, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of
the Company require it, as a condition to 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 the Company
as authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
None.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
1.1* Form of Underwriting Agreement
3.1** Form of Amended and Restated Declaration of Trust of the Registrant
3.2** Form of By-Laws of the Registrant
4.1 Form of Share Certificate (incorporated by reference to the Company's
registration statement on form 8-A, filed with the Commission on July
21, 1998)
5.1 Opinion of Hunton & Williams
8.1 Opinion of Hunton & Williams as to Tax Matters
10.1** Form of First Amended and Restated Agreement of Limited Partnership of
Hudson Hotels Limited Partnership, L.P.
10.2** Purchase and Sale Agreement by and among MFI Partners, L.P., and
Hudson Hotels Limited Partnership, L.P.
10.3** Agreement of Purchase and Sale by and among Hudson Hotels Corporation
and various sellers named therein with respect to the Other Initial
Hotels.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.4 Form of Percentage Lease
10.5** Form of the Strategic Alliance Agreement between Hudson Hotels
Corporation, Hudson Hotels Properties I, Hudson Hotels Properties II,
HHC Management Co., Hudson Hotels Trust, and Hudson Hotels Limited
Partnership, L.P.
10.6** Commitment Letter for Credit Facility
10.7** The 1998 Share Incentive Plan
10.8** The Trustees Plan
10.9** Form of Lease Guarantee
21.1** List of Subsidiaries of the Registrant
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2** Consent of PricewaterhouseCoopers LLP
23.3** Consent of Arthur Andersen LLP
24.1 Powers of Attorney (Included on Signature Page)
</TABLE>
- --------
*To be filed by amendment
** Previously filed.
ITEM 37. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions referred to
in Item 33 of this Registration Statement, 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 director, officer, or controlling person of the
Registrant in the successful defense of any action, suit, or proceeding) is
asserted by such director, 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 as to 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 provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF ROCHESTER, STATE OF NEW YORK ON THE 23RD DAY OF
JULY, 1998.
Hudson Hotels Trust
a Maryland real estate investment
trust
(Registrant)
By /s/ E. Anthony Wilson
-----------------------------------
E. ANTHONY WILSON
CHAIRMAN OF THE BOARD OF TRUSTEES
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints E.
Anthony Wilson and John M. Sabin and each or either of them, his true and
lawful attorney-in-fact with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, and to cause the same to be filed, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby granting to said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act
and thing whatsoever requisite or desirable to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all acts and things that
said attorneys-in-fact and agents, or either of them, or their substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
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.
SIGNATURE TITLE DATE
/s/ E. Anthony Wilson Chairman of the
- ------------------------------------- Board of Trustees July 23, 1998
E. ANTHONY WILSON and Chief Executive
Officer (Principal
Executive Officer)
/s/ John M. Sabin* President, Chief
- ------------------------------------- Operating Officer, July 23, 1998
JOHN M. SABIN Chief Financial
Officer and Trustee
(Principal
Financial Officer)
/s/ Ralph L. Peek * Vice President,
- ------------------------------------- Treasurer and July 23, 1998
RALPH L. PEEK Trustee
/s/ Taras M. Kolcio * Vice President and
- ------------------------------------- Controller July 23, 1998
TARAS M. KOLCIO (Principal
Accounting Officer)
* By E. Anthony Wilson, attorney-in-fact.
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE
------- ------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1** Form of Amended and Restated Declaration of Trust of the
Registrant
3.2** Form of By-Laws of the Registrant
4.1 Form of Share Certificate (incorporated by reference to the
Company's registration statement on form 8-A, filed with the
Commission on July 21, 1998)
5.1 Opinion of Hunton & Williams
8.1 Opinion of Hunton & Williams as to Tax Matters
10.1** Form of First Amended and Restated Agreement of Limited
Partnership of Hudson Hotels Limited Partnership, L.P.
10.2** Purchase and Sale Agreement by and among MFI Partners, L.P.,
and Hudson Hotels Limited Partnership, L.P.
10.3** Agreement of Purchase and Sale by and among Hudson Hotels
Corporation and various sellers named therein with respect to
the Other Initial Hotels.
10.4 Form of Percentage Lease
10.5** Form of the Strategic Alliance Agreement between Hudson Hotels
Corporation, Hudson Hotels Properties I, Hudson Hotels
Properties II, HHC Management Co., Hudson Hotels Trust, and
Hudson Hotels Limited Partnership, L.P.
10.6** Commitment Letter for Credit Facility
10.7** The 1998 Share Incentive Plan
10.8** The Trustees Plan
10.9** Form of Lease Guarantee
21.1** List of Subsidiaries of the Registrant
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2** Consent of PricewaterhouseCoopers LLP
23.3** Consent of Arthur Andersen LLP
24.1 Powers of Attorney (Included on Signature Page)
</TABLE>
- --------
*To be filed by amendment
** Previously filed.
<PAGE>
Exhibit 5.1
-----------
[Hunton & Williams Letterhead]
July 27, 1998
Hudson Hotels Trust
One Airport Way, Suite 200
Rochester, New York 14624
Gentlemen:
We have acted as counsel for Hudson Hotels Trust, a Maryland real estate
investment trust (the "Company"), in connection with the Registration Statement
on Form S-11 (the "Registration Statement"), filed under the Securities Act of
1933, as amended, with respect to the registration of 14,375,000 common shares
of beneficial interest, $0.01 par value (the "Shares"), being offered by the
Company as described in the Registration Statement.
In connection therewith, we have relied upon, among other things, our
examination of such documents, records of the Company, certificates of its
officers and public officials, as we have deemed necessary for purposes of the
opinion expressed below.
Based upon the foregoing, and having regard for such legal considerations
as we have deemed relevant, we are of the opinion that the issuance of the
Shares as described in the Registration Statement has been validly authorized
and, upon issuance of the Shares as described in the Registration Statement, the
Shares will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the Registration
Statement and to the reference to this firm under the heading "Legal Matters"
therein.
Very truly yours,
HUNTON & WILLIAMS
<PAGE>
EXHIBIT 8.1
July 23, 1998
Hudson Hotels Trust
One Airport Way, Suite 200
Rochester, New York 14624
Hudson Hotels Trust
-------------------
Qualification as
----------------
Real Estate Investment Trust
----------------------------
Ladies and Gentlemen:
We have acted as counsel to Hudson Hotels Trust, a Maryland real estate
investment trust (the "Company"), in connection with (i) the preparation of a
Form S-11 registration statement (the "Registration Statement") filed with the
Securities and Exchange Commission ("SEC") on July 7, 1997 (No. 333-53281), as
amended through the date hereof, with respect to the offering and sale (the
"Offering") of 14,375,000 common shares of beneficial interest, par value $0.01
per share, of the Company (the "Common Shares") and (ii) the Company's
contribution of the net proceeds of the Offering to Hudson Hotels Limited
Partnership, L.P., a Virginia limited partnership (the "Operating Partnership"),
in exchange for a general partnership interest in the Operating Partnership.
You have requested our opinion regarding certain U.S. federal income tax matters
in connection with the Offering.
The Company has contracted to acquire, through the Operating Partnership, HH
Bridge, L.P., a Virginia limited partnership ("Bridge LP"), and HH Perm-I, L.P.,
a Virginia limited partnership ("Perm I LP" and, together with Bridge LP, the
"Subsidiary Partnerships"), 29 hotels and associated personal property (the
"Hotels"). Upon the acquisition of the Hotels, the Operating Partnership and
the Subsidiary Partnerships plan to lease the Hotels to HHC Management Corp., a
wholly-owned subsidiary of Hudson Hotels Corporation ("HHC"), and its
<PAGE>
Hudson Hotels Trust
July 23, 1998
Page 2
subsidiaries (together, the "Lessee") pursuant to substantially similar
operating lease agreements (the "Leases").
In giving this opinion letter, we have examined the following:
1. the Company's Amended and Restated Declaration of Trust, in the form filed
as an exhibit to the Registration Statement;
2. the Company's Bylaws, in the form filed as an exhibit to the Registration
Statement;
3. the Registration Statement, including the prospectus contained as part of
the Registration Statement (the "Prospectus");
4. the Amended and Restated Agreement of Limited Partnership of the Operating
Partnership (the "Operating Partnership Agreement") among the Company, as
general partner, and HHT, Ltd. Inc., a wholly-owned subsidiary of the Company,
and HHC, as limited partners, in the form filed as an exhibit to the
Registration Statement;
5. the Limited Partnership Agreement of Bridge LP, dated as of July __, 1998,
between HH Bridge G.P., Inc., a wholly-owned subsidiary of the Company, as
general partner, and the Operating Partnership, as limited partner;
6. the Limited Partnership Agreement of Perm I LP, dated as of July __, 1998,
between HH Perm-I G.P., Inc., a wholly-owned subsidiary of the Company, as
general partner, and the Operating Partnership, as limited partner;
7. the Form of Lease between the Operating Partnership and the Lessee, in the
form filed as an exhibit to the Registration Statement;
8. the Strategic Alliance Agreement among HHC, the Company, the Operating
Partnership, the Lessee, Hudson Hotels Properties I, Inc., an indirect wholly-
owned subsidiary of HHC, and Hudson Hotels Properties II, Inc., an indirect
wholly-owned subsidiary of HHC, in the form filed as an exhibit to the
Registration Statement; and
9. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
<PAGE>
Hudson Hotels Trust
July 23, 1998
Page 3
In connection with the opinions rendered below, we have assumed, with your
consent, that:
1. each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy; and has not been amended;
2. during its short taxable year ending December 31, 1998 and future taxable
years, the Company will operate in a manner that will make the representations
contained in a certificate, dated the date hereof and executed by a duly
appointed officer of the Company (the "Officer's Certificate"), true for such
years;
3. the Company will not make any amendments to its organizational documents,
the Operating Partnership Agreement, or the partnership agreements of the
Subsidiary Partnerships (the "Subsidiary Partnership Agreements") after the date
of this opinion that would affect its qualification as a real estate investment
trust (a "REIT") for any taxable year;
4. each partner of the Operating Partnership and the Subsidiary Partnerships
(a "Partner") that is a corporation or other entity has a valid legal existence;
5. each Partner has full power, authority, and legal right to enter into and
to perform the terms of the Operating Partnership Agreement and the Subsidiary
Partnership Agreements and the transactions contemplated thereby; and
6. no action will be taken by the Company, the Operating Partnership, the
Subsidiary Partnerships, or the Partners after the date hereof that would have
the effect of altering the facts upon which the opinions set forth below are
based.
In connection with the opinions rendered below, we also have relied upon the
correctness of the representations contained in the Officer's Certificate.
After reasonable inquiry, we are not aware of any facts inconsistent with the
representations set forth in the Officer's Certificate. Furthermore, where such
factual representations involve matters of law, we have explained to the
Company's representatives the relevant and material sections of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
thereunder (the "Regulations"), published rulings of the Internal Revenue
Service (the "Service"), and other relevant authority to which such
<PAGE>
Hudson Hotels Trust
July 23, 1998
Page 4
representations relate and are satisfied that the Company's representatives
understand such provisions and are capable of making such representations.
Based on the documents and assumptions set forth above, the representations
set forth in the Officer's Certificate, and the discussion in the Prospectus
under the caption "Federal Income Tax Considerations" (which is incorporated
herein by reference), we are of the opinion that:
(a) commencing with the Company's short taxable year beginning on the day
before the closing of the Offering and ending December 31, 1998, the
Company will qualify to be taxed as a REIT pursuant to sections 856
through 860 of the Code, and the Company's organization and proposed
method of operation will enable it to continue to meet the requirements
for qualification and taxation as a REIT under the Code;
(b) the descriptions of the law and the legal conclusions contained in the
Prospectus under the caption "Federal Income Tax Considerations" are
correct in all material respects, and the discussion thereunder fairly
summarizes the federal income tax considerations that are likely to be
material to a holder of the Common Shares; and
(c) the Operating Partnership and the Subsidiary Partnerships will be treated
for federal income tax purposes as partnerships and not as corporations
or associations taxable as corporations or as publicly-traded
partnerships.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and the
Regulations, published administrative interpretations thereof, and published
court decisions. The Service has not issued Regulations or administrative
interpretations with respect to various provisions of the Code relating to REIT
qualification. No assurance can be given that the law will not change in a way
that will prevent the Company from qualifying as a REIT.
<PAGE>
Hudson Hotels Trust
July 23, 1998
Page 5
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the captions "Tax Risks--Failure to Qualify as a REIT," "Federal Income
Tax Considerations" and "Legal Matters" in the Prospectus. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required by Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations promulgated thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax matters or to any issues arising under the tax laws of any other
country, or any state or locality. We undertake no obligation to update the
opinions expressed herein after the date of this letter. This opinion letter is
solely for the information and use of the addressee and the purchasers of the
Common Shares pursuant to the Prospectus, and it may not be distributed, relied
upon for any purpose by any other person, quoted in whole or in part or
otherwise reproduced in any document, or filed with any governmental agency
without our express written consent.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
Exhibit 10.9
FORM OF
LEASE AGREEMENT
DATED AS OF _______________, 199
BETWEEN
HH PERM-I, L.P.
AS LANDLORD
AND
HHC PERM-I, INC.
AS TENANT
[PROPERTY]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I.........................................................................................................1
1.1 Leased Property......................................................................................1
1.2 Term.................................................................................................2
ARTICLE II........................................................................................................2
2.1 Definitions..........................................................................................2
ARTICLE III......................................................................................................12
3.1 Rent................................................................................................12
3.2 Confirmation of Percentage Rent.....................................................................15
3.3 Additional Charges..................................................................................15
3.4 Net Lease Provision.................................................................................16
3.5 Conversion of Property..............................................................................16
3.6 Tenant Requirements.................................................................................16
ARTICLE IV.......................................................................................................18
4.1 Payment of Impositions..............................................................................18
4.2 Notice of Impositions...............................................................................19
4.3 Adjustment of Impositions...........................................................................19
4.4 Utility Charges.....................................................................................19
4.5 Insurance Premiums..................................................................................19
ARTICLE V........................................................................................................19
5.1 No Termination Abatement, etc.......................................................................19
5.2 Abatement Procedures for Partial Takings............................................................19
ARTICLE VI.......................................................................................................20
6.1 Ownership of the Leased Property....................................................................20
6.2 Tenant's Personal Property..........................................................................20
6.3 Landlord's Lien.....................................................................................20
ARTICLE VII......................................................................................................20
7.1 Condition of the Leased Property....................................................................20
7.2 Use of the Leased Property..........................................................................21
7.3 Landlord to Grant Easements, etc....................................................................22
ARTICLE VIII.....................................................................................................22
8.1 Compliance with Legal and Insurance Requirements, etc...............................................22
8.2 Legal Requirements and Land Use Requirements Covenants..............................................22
8.3 Environmental Covenants.............................................................................23
ARTICLE IX.......................................................................................................24
9.1 Maintenance and Repair..............................................................................24
9.2 Encroachments, Restrictions, Etc....................................................................25
ARTICLE X........................................................................................................26
10.1 Alterations........................................................................................26
10.2 Salvage............................................................................................26
10.3 Joint Use Agreements...............................................................................26
ARTICLE XI..............................................................................................26
Lien...............................................................................................26
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
ARTICLE XII......................................................................................................27
Permitted Contests......................................................................................27
ARTICLE XIII.....................................................................................................27
13.8 No Separate Insurance.............................................................................29
ARTICLE XIV......................................................................................................29
14.1 Insurance Proceeds.................................................................................29
14.2 Reconstruction in the Event of Damage or Destruction Covered by Insurance..........................30
14.3 Reconstruction in the Event of Damage or Destruction Not Covered by Insurance......................30
14.4 Tenant's Property..................................................................................30
14.5 Abatement of Rent..................................................................................30
14.7 Waiver.............................................................................................30
ARTICLE XV.......................................................................................................31
15.1 Parties' Right and Obligations Upon Condemnation...................................................31
15.2 Total Taking.......................................................................................31
15.3 Allocation of Award................................................................................31
15.4 Partial Taking.....................................................................................31
15.5 Temporary Taking...................................................................................31
ARTICLE XVI......................................................................................................32
16.1 Events of Default..................................................................................32
16.2 Surrender..........................................................................................34
16.3 Damages............................................................................................34
16.4 Waiver.............................................................................................34
16.5 Application of Funds...............................................................................35
ARTICLE XVII.....................................................................................................35
Landlord's Right to Cure Tenant's Default...............................................................35
ARTICLE XVIII....................................................................................................35
18.1 Performance Standards..............................................................................35
18.2 Operating Standards................................................................................36
ARTICLE XIX......................................................................................................36
19.1 REIT Requirements..................................................................................36
19.3 Management Agreement...............................................................................37
19.4 Payments to Affiliates of Tenant...................................................................37
ARTICLE XX.......................................................................................................37
Holding Over............................................................................................37
ARTICLE XXI......................................................................................................38
Risk of Loss............................................................................................38
ARTICLE XXII.....................................................................................................38
22.1 Indemnification....................................................................................38
ARTICLE XXIII....................................................................................................39
23.1 Subletting and Assignment..........................................................................39
23.2 Attornment.........................................................................................39
ARTICLE XXIV.....................................................................................................39
24.1 Officer's Certificates; Financial Statements; Budgets; Landlord's Estoppel Certificates............39
24.2 Operating Budget...................................................................................41
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
24.3 Marketing Plan.....................................................................................41
24.4 Capital Budget.....................................................................................41
24.5 Budget Approval and Disputes.......................................................................42
24.6 Capital Expenditure Reserve........................................................................42
ARTICLE XXV......................................................................................................42
No Waiver...............................................................................................43
ARTICLE XXVII....................................................................................................43
Remedies Cumulative.....................................................................................43
ARTICLE XXVIII...................................................................................................43
Acceptance of Surrender.................................................................................43
ARTICLE XXIX.....................................................................................................43
Conveyance by Landlord..................................................................................43
ARTICLE XXXI.....................................................................................................44
Quiet Enjoyment.........................................................................................44
ARTICLE XXXII....................................................................................................44
Notices.................................................................................................44
ARTICLE XXXIII...................................................................................................45
Appraisers..............................................................................................45
ARTICLE XXXIV....................................................................................................45
34.1 Landlord May Grant Liens...........................................................................45
34.2 Tenant's Right to Cure.............................................................................45
34.3 Breach of Landlord.................................................................................46
ARTICLE XXXV.....................................................................................................46
35.1 Miscellaneous......................................................................................46
35.2 Transfer of Licenses...............................................................................46
35.3 Waiver of Presentment, etc.........................................................................46
ARTICLE XXXVI....................................................................................................46
Memorandum of Lease.....................................................................................46
ARTICLE XXXVII...................................................................................................47
Landlord's Option to Purchase Assets of Tenant..........................................................47
ARTICLE XXXVIII..................................................................................................47
Landlord's Option to Terminate Lease....................................................................47
ARTICLE XXXIX....................................................................................................47
39.1 Compliance with Franchise Agreement................................................................47
39.2 Change of Franchise................................................................................48
39.3 Termination of Franchise Agreement.................................................................48
40.1 Landlord Approval of Capital Expenditures..........................................................48
40.2 Inventory..........................................................................................48
ARTICLE XLI......................................................................................................48
41.1 Central Cash Management............................................................................48
ARTICLE XLII.....................................................................................................49
42.1 Additional Covenants...............................................................................49
42.2 Negative Covenants.................................................................................50
Negative Covenants......................................................................................50
</TABLE>
(iii)
<PAGE>
LEASE AGREEMENT
---------------
THIS LEASE AGREEMENT (as amended, modified and in effect from time to
time, this "Lease") is made as of the ____ day of ___________, 199 , by and
between HH PERM-I, L.P., a Virginia limited partnership (together with its
successors and assigns "Landlord"), and HHC PERM-I, INC., a New York corporation
(together with its permitted successors and assigns "Tenant") on the following
Terms.
RECITALS
--------
A. Landlord owns the Leased Property (as defined below);
B. Landlord and Tenant desire to enter this Lease Agreement with
respect to the Leased Property.
TERMS
-----
NOW, THEREFORE, intending to be legally bound, Landlord, in
consideration of the payment of rent by Tenant to Landlord, the covenants and
agreements to be performed by Tenant, and upon the terms and conditions
hereinafter stated, does hereby rent and lease unto Tenant, and Tenant does
hereby rent and lease from Landlord, the Leased Property.
ARTICLE I
---------
1.1 Leased Property. The Leased Property is comprised of Landlord's
---------------
interest in the following:
(a) the land or ground leasehold interest described in Exhibit "A"
-----------
attached hereto and by reference incorporated herein (the "Land");
(b) all buildings, structures and other improvements of every kind
including, but not limited to, the Facility, alleyways and connecting tunnels,
sidewalks, utility pipes, conduits and lines (on-site and off-site), parking
areas and roadways appurtenant to such buildings and structures presently
situated upon the Land (collectively, the "Leased Improvements");
(c) all easements, rights and appurtenances relating to the Land and
the Leased Improvements;
(d) all equipment, machinery, fixtures, and other items of property
required or incidental to the use of the Leased Improvements as a hotel,
including all components thereof, now and hereafter permanently affixed to or
incorporated into the Leased Improvements, including, without limitation, all
furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting,
ventilating, refrigerating, incineration, air and water pollution control, waste
disposal, air-cooling and air-conditioning systems and apparatus, sprinkler
systems and fire and theft protection equipment, all of which to the greatest
extent permitted by law are hereby deemed by the parties hereto to constitute
real estate, together with all replacements, modifications, alterations and
additions thereto (collectively, the "Fixtures");
(e) all furniture and furnishings and all other items of personal
property (excluding Inventory and personal property owned by Tenant) located on,
and used in connection with, the operation of the Leased Improvements as a
hotel, together with all replacements, modifications, alterations and additions
thereto; and
(f) all existing leases of space within the Leased Property (including
any security deposits or collateral held by Landlord pursuant thereto).
THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION
OR WARRANTY (EXPRESSED OR IMPLIED) BY LANDLORD AND SUBJECT TO THE RIGHTS OF
PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL
COVENANTS,
<PAGE>
CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD INCLUDING ALL
APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS, MORTGAGES,
DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH WOULD BE
DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY
THEREOF.
1.2 Term. The term of the Lease (the "Term") shall commence on the
----
Commencement Date and shall end on the Expiration Date, unless sooner terminated
in accordance with the provisions hereof.
ARTICLE II
----------
2.1 Definitions. For all purposes of this Lease, except as otherwise
-----------
expressly provided or unless the context otherwise requires, (a) the terms
defined in this Lease have the meanings assigned to them in this Lease and
include the plural as well as the singular, (b) all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
generally accepted accounting principles as are at the time applicable, (c) all
references in this Lease to designated "Articles," "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Lease and (d) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Lease as a whole and not to any particular
Article, Section or other subdivision.
Additional Charges: As defined in Section 3.3.
------------------
Affiliate: As used in this Lease the term "Affiliate" of a Person shall
---------
mean (a) any Person that, directly or indirectly, Controls or is Controlled by
or is under common Control with such Person, (b) any other Person that owns,
beneficially, directly or indirectly, fifty percent or more of the outstanding
capital stock, shares or equity interests of such Person, or (c) any officer,
director, employee, partner or trustee of such Person or any Person Controlling,
Controlled by or under common Control with such person (excluding trustees and
persons serving in similar capacities who are not otherwise an Affiliate of such
person).
Annual Revenues Computation: As defined in Exhibit "C", which is
--------------------------- -----------
attached hereto and incorporated herein.
Average Daily Rate: Total daily Room Revenues divided by occupied rooms
------------------
at the Facility.
Award: All compensation, sums or anything of value awarded, paid or
-----
received on a total or partial Condemnation.
Base Rate: The rate of interest published as the "Prime Rate" in the
---------
Money Rates section of The Wall Street Journal, a publication of Dow Jones &
Company, Inc., or if such Prime Rate is no longer published the rate of interest
announced publicly by a banking institution., in New York, New York, and
designated by the Landlord, from time to time, as such bank's base rate. If no
such rates are announced or become discontinued, then such other rate as
Landlord may reasonably designate.
Base Rent: As defined in Article III.
---------
Business Day: Means any day other than (i) a Saturday or a Sunday, and
------------
(ii) a day on which federally insured depository institutions in Rochester, New
York, New York, Illinois and any State in which any Collection Account or Cash
Collateral Account is located are authorized or obligated by law, regulation,
governmental decree or executive order to be closed.
Capital Budget: As defined in Section 24.4.
--------------
Capital Expenditures: Amounts advanced to pay the costs of Capital
--------------------
Improvements.
Capital Expenditures Reserve: As defined in Section 24.6.
----------------------------
-2-
<PAGE>
Capital Improvements: Improvements to (A) the external walls and
--------------------
internal load bearing walls (other than windows and plate glass), (B) the roof
of the Facility, (C) private roadways, parking areas, sidewalks and curbs
appurtenant thereto that are under Tenant's control (other than cleaning,
patching and striping), (D) mechanical, electrical and plumbing systems that
service common areas, entire wings of the Facility or the entire Facility,
including conduit and ductware connected thereto, and (E) items of the types
described on Exhibit "B" attached hereto as "capital".
-----------
CCA: The Capital Company of America LLC, a Delaware limited liability
---
company.
Cash Collateral Account: Has the meaning set forth in the Loan
-----------------------
Agreement.
Cash Management Agreement: Has the meaning set forth in the Loan
-------------------------
Agreement.
CERCLA: The Comprehensive Environmental Response, Compensation and
------
Liability Act of 1980, as amended.
Change of Control: Means (i) the issuance or sale by the Tenant or the
-----------------
sale by any partner of the Tenant of a Controlling interest in Tenant; (ii) the
sale, conveyance or other transfer of all or substantially all of the assets of
the Tenant (whether by operation of law or otherwise); (iii) any transaction, or
series of transactions, pursuant to which Tenant is merged with or consolidated
into another entity and Tenant is not the surviving entity.
Credit Card Company: Shall mean the credit card companies defined in
-------------------
the payment direction letter attached to the Collection Account Agreement.
Code: The Internal Revenue Code of 1986, as amended.
----
Collection Account: Has the meaning set forth in Article 41.
------------------
Collection Account Agreement: Has the meaning set forth in Article 41.
----------------------------
Collection Account Bank: Has the meaning set forth in Article 41.
-----------------------
Commencement Date: _______________________, 19__.
-----------------
Condemnation: A Taking resulting from (1) the exercise of any
------------
governmental power, whether by legal proceedings or otherwise, by a Condemnor,
and (2) a voluntary sale or transfer by Landlord to any Condemnor, either under
threat of condemnation or while legal proceedings for condemnation are pending.
Condemnor: Any public or quasi-public authority, or private corporation
---------
or individual, having the power of condemnation or other power of eminent
domain.
Consolidated Financials: For any fiscal year or other accounting period
-----------------------
for Tenant statements of earnings and retained earnings and of changes in
financial position for such period and for the period from the beginning of the
respective fiscal year to the end of such period and the related balance sheet
as at the end of such period, together with the notes thereto, all in reasonable
detail and setting forth in comparative form the corresponding figures for the
corresponding period in the preceding fiscal year, and prepared in accordance
with GAAP.
Consumer Price Index: Consumer Price Index, all Items for all Urban
--------------------
Consumers (1981-83=100), published by the Bureau of Labor Statistics of the
United States Department of Labor, as reported in The Wall Street Journal.
Control: As applied to any Person, the possession, directly or
-------
indirectly, of the power to direct or cause the direction of the management and
policies of that Person, whether through the ownership of voting securities,
-3-
<PAGE>
partnership interests or other equity interests, by contract or otherwise. The
terms "Controlling" and "Controlled by" shall have correlative meanings.
CPI Adjustment Year: The calendar year next following the year in which
-------------------
the Commencement Date occurs, if the Commencement Date occurs between January 1
and June 30, or the second calendar year following the year in which the
Commencement Date occurs, if the Commencement Date occurs between July 1 and
December 31.
Date of Taking: The date the Condemnor has the right to possession of
--------------
the property being condemned.
Encumbrance: As defined in Article XXXIV.
-----------
Environmental Authority: Any department, agency or other body or
-----------------------
component of any Government that exercises any form of jurisdiction or authority
under any Environmental Law.
Environmental Authorization: Any license, permit, order, approval,
---------------------------
consent, notice, registration, filing or other form of permission or
authorization required under any Environmental Law.
Environmental Laws: All applicable federal, state, local and foreign
------------------
laws and regulations relating to pollution of the environment (including without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata), including without limitation laws and regulations relating to
emissions, discharges, Releases or threatened Releases of Hazardous Materials or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials. Environmental
Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA and TSCA.
Environmental Liabilities: Any and all obligations to pay the amount of
-------------------------
any judgment or settlement, the cost of complying with any settlement, judgment
or order for injunctive or other equitable relief, the cost of compliance or
corrective action in response to any notice, demand or request from an
Environmental Authority, the amount of any civil penalty or criminal fine, and
any court costs and reasonable amounts for attorney's fees, fees for witnesses
and experts, and costs of investigation and preparation for defense of any claim
or any Proceeding, regardless of whether such Proceeding is threatened, pending
or completed, that may be or have been asserted against or imposed upon
Landlord, Tenant, any Predecessor, the Leased Property or any property used
therein and arising out of:
(a) Failure of Tenant, Landlord, any Predecessor or the Leased Property
to comply at any time with all Environmental Laws;
(b) Presence of any Hazardous Materials on, in, under, at or in any way
affecting the Leased Property;
(c) A Release at any time of any Hazardous Materials on, in, at, under
or in any way affecting the Leased Property;
(d) Identification of Tenant, Landlord or any Predecessor as a
potentially responsible party under CERCLA or under any Environmental Law
similar to CERCLA;
(e) Presence at any time of any above-ground and/or underground storage
tanks, as defined in RCRA or in any applicable Environmental Law on, in, at or
under the Leased Property or any adjacent site or facility; or
(f) Any and all claims for injury or damage to persons or property
arising out of exposure to Hazardous Materials originating or located at the
Leased Property, or resulting from operation thereof or any adjoining property.
Equipment Leases: Means leases of fixtures, appliances, machinery,
----------------
furniture, furnishings, decorations, tools and supplies, by Tenant.
Event of Default: As defined in Section 16.1.
----------------
-4-
<PAGE>
Expiration Date: The expiration date for this Lease with respect to the
---------------
Facility, which is seven (7) years after the Commencement Date.
Facility: The hotel and/or other facility offering lodging and other
--------
services or amenities being operated or proposed to be operated on or as a part
of the Leased Property.
Fair Market Value: The fair market value of the Leased Property means
-----------------
an amount equal to the price that a willing buyer not compelled to buy would pay
a willing seller not compelled to sell for such Leased Property, (a) assuming
the same is unencumbered by this Lease, (b) determined in accordance with the
appraisal procedures set forth in Article XXXIII or in such other manner as
shall be mutually acceptable to Landlord and Tenant, (c) assuming that such
seller must pay customary closing costs and title premiums, and (d) taking into
account the positive or negative effect on the value of the Leased Property
attributable to the interest rate, amortization schedule, maturity date,
prepayment penalty and other terms and conditions of any encumbrance that is
assumed by the transferee. In addition, in determining the Fair Market Value
with respect to damaged or destroyed Leased Property such value shall be
determined as if such Leased Property had not been so damaged or destroyed.
FIFRA: The Federal Insecticide, Fungicide, and Rodenticide Act, as
-----
amended.
Fiscal Year: The 12-month period from January 1 to December 31.
-----------
Fixtures: As defined in Section 1.1.
--------
Franchise Agreement: Any franchise license agreement with a national
-------------------
franchisor under which the Facility is operated.
GAAP: As of any date of determination, accounting principles (a) set
----
forth as generally accepted in then currently effective Opinions of the
Accounting Principles Board of the American Institute of Certified Public
Accountants, (b) set forth as generally accepted in then currently effective
Statements of the Financial Accounting Standards Board or (c) that are then
approved by such other entity as may be approved by a significant segment of the
accounting profession in the United States of America. The term "consistently
applied," as used in connection therewith, means that the accounting principles
applied are consistent in all material respects to those applied at prior dates
or for prior periods.
Guaranty: The guaranty of Tenant's obligations under this Lease by
--------
Hudson Hotels Corporation, as evidenced in the Guaranty among Hudson, Landlord
and Hudson Hotels Corporation, dated ____ __, 1998.
Government: The United States of America, any state, district or
----------
territory thereof, any foreign nation, any state, district, department,
territory or other political division thereof, or any political subdivision of
any of the foregoing.
Governmental Authority: Means the federal government, any state,
----------------------
regional, local or other political subdivision thereof with jurisdiction and any
Person with jurisdiction exercising executive, legislative, judicial, regulatory
or administrative functions of or pertaining to government.
Gross Revenues: All revenues, receipts, and income of any kind derived
--------------
directly or indirectly by Tenant from or in connection with the Facility
(including rentals or other payments from tenants, lessees, licensees or
concessionaires but not including their gross receipts) whether on a cash basis
or credit, paid or collected, determined in accordance with GAAP and the Uniform
System, excluding, however: (i) funds furnished by Landlord, (ii) federal, state
and municipal excise, sales, and use taxes collected directly from patrons and
guests or as a part of the sales price of any goods, services or displays, such
as gross receipts, admissions, cabaret or similar or equivalent taxes and paid
over to federal, state or municipal governments, (iii) gratuities paid to
employees, (iv) proceeds of insurance (excluding business interruption
insurance) and condemnation, (v) proceeds from sales other than sales in the
ordinary course of business, (vi) all loan proceeds from financing or
refinancings of the Facility or interests therein or components thereof,
-5-
<PAGE>
(vii) judgments and awards, except any portion thereof arising from normal
business operations of the Facility, and (viii) items constituting "allowances"
under the Uniform Systems.
Hazardous Materials: All chemicals, pollutants, contaminants, wastes
-------------------
and toxic substances, including without limitation:
(a) Solid or hazardous waste, as defined in RCRA or in any
Environmental Law;
(b) Hazardous substances, as defined in CERCLA or in any Environmental
Law;
(c) Toxic substances, as defined in TSCA or in any Environmental Law;
(d) Insecticides, fungicides, or rodenticides, as defined in FIFRA or
in any Environmental Law; and
(e) Gasoline or any other petroleum product or byproduct,
polychlorinated biphenols, asbestos and urea formaldehyde.
Hudson: Hudson Hotels Trust, a Maryland real estate investment trust.
------
Impositions: Collectively, all taxes (including, without limitation,
-----------
all ad valorem, sales and use, single business, gross receipts, transaction
privilege, rent or similar taxes as the same relate to or are imposed upon
Tenant or its business conducted upon the Leased Property), assessments
(including, without limitation, all assessments for public improvements or
benefit, whether or not commenced or completed prior to the date hereof and
whether or not to be completed within the Term), water, sewer or other rents and
charges, excises, tax inspection, authorization and similar fees and all other
governmental charges, in each case whether general or special, ordinary or
extraordinary, or foreseen or unforeseen, of every character in respect of the
Leased Property or the business conducted thereon by Tenant (including all
interest and penalties thereon caused by any failure in payment by Tenant),
which at any time prior to, during or with respect to the Term hereof may be
assessed or imposed on or with respect to or be a lien upon (a) Landlord's
interest in the Leased Property, (b) the Leased Property, or any part thereof or
any rent therefrom or any estate, right, title or interest therein, or (c) any
occupancy, operation, use or possession of, or sales from, or activity conducted
on or in connection with the Leased Property or Tenant's personal property, or
the leasing or use of the Leased Property or Tenant's personal property or any
part thereof by Tenant. Nothing contained in this definition of Impositions
shall be construed to require Tenant to pay (1) any tax based on net income
(whether denominated as a franchise or capital stock or other tax) imposed on
Landlord or any other person, or (2) any net revenue tax of Landlord or any
other person, or (3) any tax imposed with respect to the sale, exchange or other
disposition by Landlord of any Leased Property or the proceeds thereof, or (4)
any single business, gross receipts (other than a tax on any rent received by
Landlord from Tenant), transaction, privilege or similar taxes as the same
relate to or are imposed upon Landlord, except to the extent that any tax,
assessment, tax levy or charge that Tenant is obligated to pay pursuant to the
first sentence of this definition and that is in effect at any time during the
Term hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (1) or (2) is levied, assessed or imposed expressly
in lieu thereof.
Indemnified Party: Either of a Tenant Indemnified Party or a Landlord
-----------------
Indemnified Party.
Indemnifying Party: Any party obligated to indemnify an Indemnified
------------------
Party pursuant to Sections 8.3 or 22.1.
Independent Director: Means a duly appointed member of the board of
--------------------
directors of the relevant entity who shall not have been, at the time of such
appointment or at any time in the preceding five (5) years, (a) a direct or
indirect legal or beneficial owner in such entity or any of its affiliates, (b)
a creditor, supplier, employee, officer, director, manager or contractor of such
entity or any of its affiliates, (c) a person who controls such entity or any of
its affiliates, or (d) a member of the immediate family of a person defined in
(a), (b) or (c) above.
- --- --- ---
Insurance Proceeds: Has the meaning set forth in Section 14.1.
------------------
-6-
<PAGE>
Insurance Requirements: All terms of any insurance policy required by
----------------------
this Lease and all requirements of the issuer of any such policy.
Inventory: All "Inventories of Merchandise" and "Inventories of
---------
Supplies" as defined in the Uniform System and including any non-depreciable
personal property and any property of the type described in Section 1221(1) of
the Code.
Land: As defined in Section 1.1.
----
Landlord: As defined in the first paragraph of this Lease.
--------
Landlord Indemnified Party: Landlord, any Affiliate of Landlord, any
--------------------------
other Person against whom any claim for indemnification may be asserted
hereunder as a result of a direct or indirect ownership interest (including a
stockholder's or partnership interest) in Landlord, the officers, directors,
stockholders, employees, agents and representatives of the general partner of
Landlord and any partner, agent, or representative of Landlord, and the
respective heirs, personal representatives, successors and assigns of any such
officer, director, partner, stockholder, employee, agent or representative.
Landlord's Collection Account: Means the "Collection Account Bank"
-----------------------------
established by Landlord pursuant to the Loan Agreement.
Land Use Requirements: All obligations arising from any easement
---------------------
agreements, covenants running with the land, subleases and licenses under the
Lease, agreements recorded on the land records and similar agreements binding on
the owner of the Leased Property.
Lease: As defined in the first paragraph.
-----
Lease Year: Any 12-month period from January 1 through December 31
----------
during the Term, or any shorter period at the beginning or end of the Term.
Leased Improvements; Leased Property: Each as defined in Article I.
------------------------------------
Leasehold Value: The fair market value of the leasehold estate
---------------
hereunder, or for a Substitute Facility, shall be an amount equal to the net
income from the Facility (or for the facilities under a Substitute Facility) for
the most recent twelve (12) month period, discounted over the then remaining
term of the Lease at the Discount Rate. For purposes of this definition, the
"Discount Rate" shall be determined at the time of payment and shall be equal to
three hundred (300) basis points over the U.S. Treasury Note rate for the then
remaining term of the Lease.
Legal Requirements: All federal, state, county, municipal and other
------------------
governmental statutes, laws, rules, orders, regulations, ordinances, judgments,
decrees and injunctions affecting Tenant or the Leased Property or the
maintenance, construction, use or alteration thereof (whether by Tenant or
otherwise), whether or not hereafter enacted and in force, including (a) all
laws, rules or regulations pertaining to the environment, occupational health
and safety and public health, safety or welfare, and (b) any laws, rules or
regulations that may (1) require repairs, modifications or alterations in or to
the Leased Property or (2) in any way adversely affect the use and enjoyment
thereof; and all permits, licenses and authorizations and regulations relating
thereto and all covenants, agreements, restrictions and encumbrances contained
in any instruments, either of record or known to Tenant (other than encumbrances
created by Landlord without the consent of Tenant), at any time in force
affecting the Leased Property.
Lending Institution: Any insurance company, credit company, federally
-------------------
insured commercial or savings bank, national banking association, savings and
loan association, employees welfare, pension or retirement fund or system,
corporate profit sharing or pension trust, college or university, or real estate
investment trust, including any corporation qualified to be treated for federal
tax purposes as a real estate investment trust, such trust having a net worth of
at least $10,000,000; provided, however, notwithstanding the foregoing, CCA
together with its successors and assigns,
-7-
<PAGE>
including but not limited to, a trustee in a Securitization (as defined in the
Loan Agreement) shall constitute a "Lending Institution".
Lien: Means any mortgage, deed of trust, deed to secure debt, lien
----
(statutory or other), pledge, easement, restrictive covenant, hypothecation,
assignment, preference, priority, security interest, or any other encumbrance or
charge on or affecting the Leased Property, any Other Facility (if applicable)
or any portion thereof or any Collateral (as defined in the Security Agreement)
or Tenant, or any interest therein, including, without limitation, any
conditional sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, the filing of
any financing statement or similar instrument under the applicable Uniform
Commercial Code or comparable law of any other jurisdiction, domestic or
foreign, and mechanic's, materialmen's and other similar liens and encumbrances.
Loan Agreement: Means that certain Loan Agreement by and between CCA
--------------
and Landlord dated on or about the date hereof and any other loan agreement
pursuant to which a loan is made by CCA to Landlord or an Affiliate of Landlord
secured by, inter alia, such entity's fee interest in the Leased Property.
----- ----
Marketing Plan: As defined in Section 24.3.
--------------
Material Adverse Effect: Means a material adverse effect upon (i) the
-----------------------
business or the financial position or results of operation of Tenant, (ii) the
ability of any Tenant to perform, or of Landlord to enforce, any of the this
Lease or the Security Agreement or (iii) the value of (x) the Collateral (as
defined in the Security Agreement) taken as a whole or (y) the Lease Property
and, if applicable, any Other Facility.
Merchant Agreement: Shall have the meaning set forth in each payment
------------------
direction letter attached to the Collection Account Agreement.
Notice: A notice given pursuant to Article XXXII.
------
Officer's Certificate: A certificate of Tenant signed by the chief
---------------------
financial officer or another officer authorized so to sign by the board of
directors or by-laws of Tenant, or any other person whose power and authority to
act has been authorized by delegation in writing by any such officer.
Operating Budget: As defined in Section 24.2.
----------------
Operating Standards: Has the meaning set forth in Section 18.2.
------------------- ------------
Other Facility: Means any other hotel and/or facility offering lodging
--------------
and other services or amenities which is security under the applicable Loan
Agreement and "Other Facilities" mean all such facilities collectively.
----------------
Other Income: All revenues, receipts, and income of any kind derived
------------
directly or indirectly from or in connection with the Facility and included in
Gross Revenues, other than Room Revenues.
Overdue Rate: On any date, a rate equal to the Base Rate plus 5% per
------------
annum, but in no event greater than the maximum rate then permitted under
applicable law.
Payment Date: The tenth day of each calendar month of the Term.
------------
Percentage Rent: As defined in Section 3.1(b).
---------------
Performance Failure: As defined in Section 18.1.
-------------------
Person: Any Government, individuals, corporations, general and limited
------
partnerships, stock companies or associations, joint ventures, associations,
companies, limited liability companies, trusts, banks, trust companies, land
trusts, business trusts, or other entities.
-8-
<PAGE>
Predecessor: Any Person whose liabilities arising under any
-----------
Environmental Law relating to the Leased Property have or may have been retained
or assumed by Tenant, either contractually or by operation of law.
Primary Intended Use: As defined in Section 7.2(b).
--------------------
Proceeding: Any judicial action, suit or proceeding (whether civil or
----------
criminal), any administrative proceeding (whether formal or informal), any
investigation by a governmental authority or entity (including a grand jury),
and any arbitration, mediation or other non-judicial process for dispute
resolution.
Quarterly Revenue Computations: As defined in Exhibit "C", which is
------------------------------ -----------
attached hereto and incorporated herein.
Rating Agencies: Means Fitch Investors Service, Inc., Moody's Investors
---------------
Service, Inc., Duff & Phelps Credit Rating Co. and Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), or any
successor thereto, and any other nationally recognized statistical rating
organization to the extent that any of the foregoing have been or will be
engaged by CCA or its designees in connection with or in anticipation of a
Securitization (as defined in the Loan Agreement) (each, individually a "Rating
------
Agency").
- -------
RCRA: The Resource Conservation and Recovery Act, as amended.
----
Real Estate Taxes: All real estate taxes, including general and special
-----------------
assessments, if any, which are imposed upon the Land, and any improvements
thereon.
Receipts: Means all rents, receipts, issues, income, accounts,
--------
royalties, profits, revenues, proceeds, bonuses, deposits (whether denoted as
security deposits or otherwise), lease termination fees or payments, rejection
damages, buy-out fees and any other fees made or to be made in lieu of rent, any
award made hereafter to Tenant in any court proceeding involving any tenant,
lessee, licensee or concessionaire under any subleases in any bankruptcy,
insolvency or reorganization proceedings in any state or federal court, and all
other payments, rights and benefits of whatever nature, including, without
limitation, (i) all other rights to payment earned by Tenant with respect to the
Leased Property and (ii) all other income, consideration, issues, accounts,
profits or benefits of any nature arising from the ownership, possession, use or
operation of such Facility, including, without limitation, all revenues,
receipts, income, receivables and accounts relating to or arising from rentals,
rent, equivalent income, income and profits from guest rooms, meeting rooms,
food and beverage facilities, vending machines, telephone and television
systems, guest laundry, and the provision or sale of other goods and services,
as well as all room rents, accounts, accounts receivable and motel receivables
and all other payments and rights to payment of any nature whatsoever made for
or with respect to motel room occupancy by any person, which includes any
payment or monies received or to be received in whole or in part, whether actual
or deemed to be, for the sale of services or products in connection with such
occupancy, advance registration fees by motel guests, tour or junket proceeds or
deposits, deposits for convention and/or party reservations, and other benefits,
and all rights to payment with respect to conference facilities, dining or bar
facilities or other facilities in any way connected with the Leased Property all
rights to payment from any consumer credit charge card organization or entity
including, without limitation, payments arising from the use of the American
Express Card, Discover Card, the Visa Card, the Carte Blanche Card, the
MasterCard or any other credit card, including those now existing or hereafter
created, substitutions therefor, and proceeds thereof (whether cash or non-cash,
movable or immovable, tangible or intangible) received from the sale, exchange,
transfer, collection or other disposition or substitution thereof and any other
items of revenue, receipts or other income as identified in the Uniform System
of Accounts for Hotels, 8th Edition, International Association of Hospitality
Accountants (1986), as amended from time to time.
REIT Requirements: As defined in Section 19.1.
-----------------
Release: A "Release" as defined in CERCLA or in any Environmental Law,
-------
unless such Release has been properly authorized and permitted in writing by all
applicable Environmental Authorities or is allowed by such Environmental Law
without authorizations or permits.
-9-
<PAGE>
Rent: Collectively, the Base Rent, Percentage Rent, and Additional
----
Charges.
Room Revenues: Gross revenue from the rental of guest rooms (including,
-------------
but not limited to, bedrooms suites, banquet rooms, meeting rooms and other
similar rooms), whether to individuals, groups or transients, but excluding the
following:
(a) The amount of all credits, rebates or refunds to customers, guests
or patrons;
(b) All sales taxes or any other taxes imposed on the rental of such
guest rooms; and
(c) Any fees collected for amenities including, but not limited to:
telephone, laundry, movies or concessions.
SARA: The Superfund Amendments and Reauthorization Act of 1986, as
----
amended.
Security Agreement: Means that certain Operator Security and Pledge
------------------
Agreement of even date herewith from Tenant to Landlord, as amended, modified
and in effect from time to time.
Single-Purpose Entity: Means a corporation, limited partnership, or
---------------------
limited liability company which, at all times since its formation and thereafter
(i) was organized solely for the purpose of (x) operating the Leased Property
and, if applicable, one or more Other Facility or (y) acting as the managing
member of the limited liability company which operates the Leased Property and,
if applicable, one or more Other Facilities or (z) acting as the general partner
of a limited partnership which operates the Leased Property and, if applicable,
one or more Other Facilities, (ii) has not and will not engage in any business
unrelated to the (x) the operation of the Leased Property and, if applicable,
one or more Other Facilities or (y) acting as a member of a limited liability
company which operates the Leased Property and one or more Other Facilities or
(z) acting as a general partner of a limited partnership which operates the
Leased Property and, if applicable, one or more Other Facilities, (iii) has not
and will not have any assets other than (x) those related to the operation of
the Leased Property and, if applicable, one or more Other Facilities or (y) its
member interest in the limited liability company which operates the Leased
Property and one or more Other Facilities or (z) its general partnership
interest in the limited partnership which operates the Leased Facility and, if
applicable, one or more Other Facilities, as applicable, (iv) except as
otherwise expressly permitted by this Lease, has not and will not engage in,
seek or consent to any dissolution, winding up, liquidation, consolidation,
merger, asset sale, transfer of partnership, membership or shareholder
interests, or amendment of its limited partnership agreement, articles of
incorporation, articles of organization, certificate of formation or operating
agreement (as applicable), (v) if such entity is a limited partnership, has as
its only general partners, general partners which are Single-Purpose Entities
which are corporations, (vi) if such entity is a corporation, at all relevant
times will have at least one Independent Director, (vii) the board of directors
of such entity has not taken and will not take any action requiring the
unanimous affirmative vote of 100% of the members of the board of directors
unless all of the directors, including without limitation all Independent
Directors shall have participated in such vote, (viii) has not and will not fail
to correct any known misunderstanding regarding the separate identity of such
entity, (ix) if such entity is a limited liability company, has at least one
member that is a Single-Purpose Entity which is a corporation, and such
corporation is the managing member of such limited liability company, (x)
without the unanimous consent of all of the partners, directors (including
without limitation all Independent Directors) or members, as applicable, has not
and will not with respect to itself or to any other entity in which it has a
direct or indirect legal or beneficial ownership interest (a) file a bankruptcy,
insolvency or reorganization petition or otherwise institute insolvency
proceedings or otherwise seek any relief under any laws relating to the relief
from debts or the protection of debtors generally; (b) seek or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator,
custodian or any similar official for such entity or all or any portion of such
entity's properties; (c) make any assignment for the benefit of such entity's
creditors; or (d) take any action that might cause such entity to become
insolvent, (xi) has maintained and will maintain its accounts, books and records
separate from any other person or entity, (xii) has maintained and will maintain
its books, records, resolutions and agreements as official records, (xiii) has
not and will not commingle its funds or assets with those of any other entity,
(xiv) has held and will hold its assets in its own name, (xv) has conducted and
will conduct its business in its name, (xvi) has
-10-
<PAGE>
maintained and will maintain its financial statements, accounting records and
other entity documents separate from any other person or entity, (xvii) has paid
and will pay its own liabilities out of its own funds and assets, (xviii) has
observed and will observe all partnership, corporate or limited liability
company formalities as applicable, (xix) has maintained and will maintain an
arms-length relationship with its Affiliates, (xx) (a) intentionally deleted,
(b) if such entity operates the Leased Property and, if applicable, one or more
Other Facilities and will have no indebtedness other than Equipment Leases and
unsecured trade payables incurred in the ordinary course of business relating to
the operation of the Leased Property and, if applicable, one or more Other
Facilities, which Equipment Leases and trade payables do not exceed, at any
time, a maximum aggregate amount of $100,000 per Leased Property/Other Facility
operated by such entity and a maximum aggregate amount of $[____________] for
the Leased Property, and if applicable, the Other Facilities, and, in the case
of trade payables, are paid within forty-five (45) days of the date incurred, or
(c) if such entity acts as the general partner of a limited partnership which
operates the Leased Property and, if applicable, one or more Other Facilities,
has no indebtedness other than unsecured trade payables in the ordinary course
of business relating to acting as general partner of the limited partnership
which operates the Leased Property and, if applicable, one or more Other
Facilities which (1) do not exceed, at any time, $10,000 and (2) are paid within
thirty (30) days of the date incurred, or (d) if such entity acts as a member of
a limited liability company which operates the Leased Property and, if
applicable, one or more Other Facilities, has no indebtedness other than
unsecured trade payables in the ordinary course of business relating to acting
as a member of the limited liability company which operates the Leased Property
and, if applicable, one or more Other Facilities which (1) do not exceed, at any
time, $10,000 and (2) are paid within thirty (30) days of the date incurred,
(xxi) has not and will not assume or guarantee or become obligated for the debts
of any other entity or hold out its credit as being available to satisfy the
obligations of any other entity, (xxii) has not acquired and will not acquire
obligations or securities of its partners, members or shareholders, (xxiii) has
allocated and will allocate fairly and reasonably shared expenses, including,
without limitation, shared office space and uses separate stationary, invoices
and checks, (xxiv) except as described herein, has not and will not pledge its
assets for the benefit of any other person or entity, (xxv) has held and
identified itself and will hold itself out and identify itself as a separate and
distinct entity under its own name and not as a division or part of any other
person or entity, (xxvi) has not made and will not make loans to any person or
entity, (xxvii) has not and will not identify its partners, members or
shareholders, or any affiliates of any of them as a division or part of it,
(xxviii) if such entity is a limited liability company, its articles of
organization, certificate of formation and/or operating agreement, as
applicable, shall provide that such entity will dissolve only upon the
bankruptcy of the managing member, (xxix) has not entered and will not enter
into or be a party to, any transaction with its partners, members, shareholders
or its affiliates except in the ordinary course of its business and on terms
which are intrinsically fair and are no less favorable to it than would be
obtained in a comparable arms-length transaction with an unrelated third party,
(xxx) has paid and will pay the salaries of its own employees from its own
funds, (i) has maintained and will maintain adequate capital in light of its
contemplated business operations and (ii) if such entity is a limited liability
company or limited partnership, and such entity has one or more managing members
or general partners, as applicable, then such entity's organizational documents
shall provide that such entity shall continue (and not dissolve) for so long as
a solvent managing member or general partner, as applicable, exists.
State: The State or Commonwealth of the United States in which the
-----
Leased Property is located.
Substitute Facility: A lease to Tenant of one or more substitute hotel
-------------------
facilities pursuant to one or more leases that would create for the Tenant
leasehold estates that have an aggregate Leasehold Value of no less than the
Leasehold Value of the leasehold estate hereunder, such values being determined
as of the closing of the sale of the Leased Property or as of the date of
termination of this Lease.
Taking: A taking or voluntary conveyance during the Term hereof of all
------
or part of the Leased Property, or any interest therein or right accruing
thereto or use thereof, as the result of, or in settlement of, any condemnation
or other eminent domain proceeding by any Condemnor affecting the Leased
Property.
Tenant: The Tenant designated on this Lease and its permitted
------
successors and assigns.
Tenant Indemnified Party: Tenant, any Affiliate of Tenant, any other
------------------------
Person against whom any claim for indemnification may be asserted hereunder as a
result of a direct or indirect ownership interest (including a
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stockholder's interest) in Tenant, the officers, directors, stockholders,
employees, agents and representatives of Tenant and any corporate stockholder,
agent, or representative of Tenant, and the respective heirs, personal
representatives, successors and assigns of any such officer, director,
stockholder, employee, agent or representative.
Tenant's Personal Property: As defined in Section 6.2.
--------------------------
Term: As defined in Section 1.2.
----
TSCA: The Toxic Substances Control Act, as amended.
----
Unavoidable Delays: Delays due to strikes, lock-outs, labor unrest,
------------------
inability to procure materials, power failure, acts of God, governmental
restrictions, enemy action, civil commotion, fire, unavoidable casualty or other
causes beyond the control of the party responsible for performing an obligation
hereunder, provided that lack of funds shall not be deemed a cause beyond the
control of either party hereto unless such lack of funds is caused by the
failure of the other party hereto to perform any obligations of such party under
this Lease or any guaranty of this Lease.
Uneconomic for its Primary Intended Use: A state or condition of the
---------------------------------------
Facility such that, in the good faith judgment of Tenant, reasonably exercised
and evidenced by the resolution of the board of directors or other governing
body of Tenant, the Facility cannot be operated on a commercially practicable
basis for its Primary Intended Use, taking into account, among other relevant
factors, the number of usable rooms and projected revenues, such that Tenant
intends to, and shall, complete the cessation of operations at the Leased
Facility.
Uniform System: The Uniform System of Accounts for Hotels (8th Revised
--------------
Edition, 1986) as published by the Hotel Association of New York City, Inc., as
same may hereafter be revised.
Unsuitable for its Primary Intended Use: A state or condition of the
---------------------------------------
Facility such that, in the good faith judgment of Tenant, reasonably exercised
and evidenced by the resolution of the board of directors or other governing
body of Tenant, due to casualty damage or loss through Condemnation, the
Facility cannot function as an integrated hotel facility consistent with
standards applicable to a well maintained and operated hotel or standards set
forth in a Franchise Agreement.
ARTICLE III
-----------
3.1 Rent. Tenant will pay to Landlord in lawful money of the United
----
States of America which shall be legal tender for the payment of public and
private debts, in immediately available funds: (i) by wire transfer, or (ii) at
Landlord's address set forth in Article XXXII hereof (or at such other place or
to such other Person, all as Landlord from time to time may designate in a
Notice), all Base Rent, Percentage Rent and Additional Charges, during the Term,
as follows:
(a) Base Rent: An annual sum in the amount set forth on Exhibit "C"
--------- -----------
hereto as the "Base Rent" for the Leased Property, payable in arrears in equal,
consecutive monthly installments, on the Payment Date of each calendar month of
the Term ("Base Rent"); the first and last monthly payments of Base Rent shall
be pro rated as to any partial month (subject to adjustment as provided in
Sections 5.2, 14.5, 15.2, 15.4, and 15.5); and
(b) Percentage Rent: For each Fiscal Year during the Term
----------------
commencing with the Fiscal Year in which the Commencement Date occurs, Tenant
shall pay percentage rent quarterly, on or before the thirtieth day following
the end of each of the first three calendar quarters in each Fiscal Year, and on
or before February 10 of the next year, with respect to the fourth calendar
quarter of each Fiscal Year, in an amount calculated by the following formula
(with such calculated amount being the "Percentage Rent"):
The amount equal to the Quarterly Revenues Computation
less
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<PAGE>
an amount equal to the Base Rent paid year-to-date for the
applicable Fiscal Year
less
an amount equal to Percentage Rent paid year-to-date for the
applicable Fiscal Year
equals
Percentage Rent for the applicable quarter.
Notwithstanding the amounts of Percentage Rent paid quarterly
pursuant to the formula set forth above, for any Fiscal Year during the Term
commencing with the Fiscal Year in which the Commencement Date occurs, the
Percentage Rent payable under this Lease shall be no less than or greater than
the amount calculated by the following formula:
The amount equal to the Annual Revenues Computation for
the applicable Fiscal Year
less
an amount equal to the Base Rent paid year-to-date for
the applicable Fiscal Year
equals
Percentage Rent for the applicable Fiscal Year.
Set forth on Exhibit "D" attached hereto is an example of the
-----------
Calculation of Percentage Rent. There shall be no reduction in the Base Rent
regardless of the result of the Monthly Revenues Computations or Annual Revenues
Computations.
(c) Officer's Certificates. Additionally, an Officer's Certificate
----------------------
in form reasonably acceptable to Landlord shall be delivered to Landlord
quarterly, together with such quarterly Percentage Rent payment, setting forth
the calculation of such rent payment for such quarter within twenty (20) days
after each of the first three quarters of each Fiscal Year (or part thereof) in
the Term. Such payments shall be based on the formula set forth in Section
3.1(b).
In addition, on or before February 10 of each year, commencing with the
February 10 first following the end of the Fiscal Year in which the Commencement
Date occurs, Tenant shall deliver to Landlord an Officer's Certificate
reasonably acceptable to Landlord setting forth the computation of the actual
Percentage Rent that accrued for the last quarter of the Fiscal Year that ended
on the immediately preceding December 31 and shall pay to Landlord Percentage
Rent, if due and payable, for the last quarter of the applicable Fiscal Year.
The Officer's Certificate shall also set forth the computation of the Percentage
Rent accrued and paid during the Fiscal Year that ended on the immediately
preceding December 31. If the annual Percentage Rent due and payable for any
Fiscal Year (as shown in the applicable Officer's Certificate) exceeds the
amount actually paid as Percentage Rent by Tenant for such year, Tenant also
shall pay such excess to Landlord at the time such certificate is delivered. If
the Percentage Rent actually due and payable for such Fiscal Year is shown by
such Officer's Certificate to be less than the amount actually paid as
Percentage Rent for the applicable Fiscal Year, Landlord shall reimburse such
amount to Tenant. Any such credit to Base Rent shall not be applied for purposes
of calculating Percentage Rent payable for any subsequent quarter.
Any difference between the annual Percentage Rent due and payable for
any Fiscal Year (as shown in the applicable Officer's Certificate or as adjusted
pursuant to Section 3.3) and the total amount of quarterly payments for such
Fiscal Year actually paid by Tenant as Percentage Rent, whether in favor of
Landlord or Tenant, shall bear interest at the Overdue Rate, which interest
shall accrue from the due date of the last quarterly payment for the Fiscal Year
until
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<PAGE>
the amount of such difference shall be paid or otherwise discharged. Any such
interest payable to Landlord shall be deemed to be and shall be payable as
Additional Charges.
The obligation to pay Percentage Rent shall survive the expiration or
earlier termination of the Term, and a final reconciliation, taking into
account, among other relevant adjustments, any adjustments which are accrued
after such expiration or termination date but which related to Percentage Rent
accrued prior to such termination date, and Tenant's good faith best estimate of
the amount of any unresolved contractual allowances, shall be made not later
than 60 days after such expiration or termination date, but Tenant shall advise
Landlord within 60 days after such expiration or termination date of Tenant's
best estimate at that time of the approximate amount of such adjustments, which
estimate shall not be binding on Tenant or have any legal effect whatsoever.
(d) CPI Adjustments to Rent. For each Fiscal Year of the Term
-----------------------
beginning with the CPI Adjustment Year, the Base Rent then in effect, and the
threshold Room Revenues then included in the Quarterly Revenues Computations and
Annual Revenues Computations set forth in Section 3.1(b) shall be adjusted,
upward only, from time to time beginning in the CPI Adjustment Year as follows:
(1) The Consumer Price Index on the last date of the most recently
ended Fiscal Year shall be divided by the Consumer Price Index on the last date
of the Fiscal Year immediately preceding the most recently ended Fiscal Year
(but in no event shall the quotient be less than 1).
(A) The new Base Rent for the then current Fiscal Year shall be
the adjusted amount obtained by multiplying the Base Rent for the immediately
preceding Fiscal Year by the quotient obtained in subparagraph (d)(1) above.
(B) The new threshold dollar amount in the Quarterly Revenues
Computations and Annual Revenues Computations described in Section 3.1(b) above
for the then current Fiscal Year shall be the product of the threshold dollar
amount of Room Revenues in effect in the most recently ended Fiscal Year and the
quotient obtained in subparagraph (d)(1) above.
By way of example, if the CPI Adjustment Year were 2000, the amount
of Base Rent and the threshold Room Revenues amounts (and Food Sales and
Beverage Sales amounts, if applicable) in the Quarterly Revenues Computations
and Annual Revenues Computations for the Fiscal Year commencing January 1, 2000
would be adjusted to reflect any change in the Consumer Price Index from the
Fiscal Year ended December 31, 1998 as compared to the Fiscal Year ended
December 31, 1999. Base Rent and the threshold Room Revenues amounts (and Food
Sales and Beverage Sales amounts, if applicable) in the Quarterly Revenues
Computations and Annual Revenues Computations for the Fiscal Year commencing
January 1, 2001 would be the Base Rent and threshold Room Revenues amounts (and
Food Sales and Beverage Sales amounts, if applicable) applicable for the Fiscal
Year ended December 31, 2000 as further adjusted to reflect any change in the
Consumer Price Index from December 31, 1999 as compared to December 31, 2000.
Landlord shall calculate the annual adjustments as soon as
reasonably possible after the Consumer Price Index becomes available and shall
notify Tenant in writing of the amount of the annual adjustment, together with a
copy of the computation showing the adjustment amount. Adjustments calculated as
set forth above in the Base Rent and threshold Room Revenues amounts (and Food
Sales and Beverage Sales amounts, if applicable) shall be effective on January 1
of the Fiscal Year to which such adjusted amounts apply. If rent is paid in any
Fiscal Year prior to the determination of the amount of any adjustment to Base
Rent or the threshold Room Revenues (and Food Sales and Beverage Sales amounts,
if applicable) applicable for such Fiscal Year, payment adjustments for any
shortfall of rent paid shall be made with the first Base Rent payment due after
the amount of the adjustments are determined.
In no event shall any adjustment made pursuant to this Section
3.1(d), or any decrease in the Consumer Price Index during any Fiscal Year, ever
result in a decrease in the Base Rent or threshold computed under subparagraph
d(1)(B) for any Fiscal Year below the then current Base Rent and threshold. In
that event, the existing Base Rent and threshold shall continue in effect until
the next adjustment hereunder.
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<PAGE>
(2) If (i) a significant change is made in the number or nature (or
both) of items used in determining the Consumer Price Index, or (ii) the
Consumer Price Index shall be discontinued for any reason, the Bureau of Labor
Statistics shall be requested to furnish a new index comparable to the Consumer
Price Index, together with information which will make possible a conversion to
the new index in computing the adjusted Base Rent hereunder. If for any reason
the Bureau of Labor Statistics does not furnish such an index and such
information, the parties will instead mutually select, accept and use such other
index or comparable statistics on the cost of living in Washington, D.C. that is
computed and published by an agency of the United States or a responsible
financial periodical of recognized authority.
3.2 Confirmation of Percentage Rent. Tenant shall utilize, or cause to
-------------------------------
be utilized, an accounting system for the Leased Property in accordance with its
usual and customary practices, and in accordance with GAAP and the Uniform
System, that will accurately record all data necessary to compute Percentage
Rent, and Tenant shall retain, for at least four years after the expiration of
each Fiscal Year (and in any event until the reconciliation described in Section
3.1(c) for such Fiscal Year has been made), reasonably adequate records
conforming to such accounting system showing all data necessary to compute
Percentage Rent for the applicable Fiscal Years. Landlord shall have the right
to audit the information that formed the basis for the data set forth in any
Officer's Certificate provided under Section 3.1(c) (i) from time to time by
Landlord's accountants or representatives at Landlord's expense (except as
provided hereinbelow), or (ii) no more frequently than twice per Fiscal Year, by
the accountants of Tenant, with at least thirty (30) days notice, and shall
reimburse Tenant for costs related to an audit performed by Tenant's accountants
(except as provided hereinbelow) within sixty (60) days of Landlord's receipt of
an invoice from Tenant for these costs. In addition, upon reasonable notice and
at its expense, Landlord shall have the right, without limitation, to examine
all of Tenant's records (including, but not limited to, supporting data,
franchisor reports and sales and excise tax returns) reasonably required to
verify Percentage Rent. If any such audit or examination discloses a deficiency
in the payment of Percentage Rent, and either Tenant agrees with the result of
such audit or the matter is otherwise determined or compromised, Tenant shall
forthwith pay to Landlord the amount of the deficiency, as finally agreed or
determined, together with interest at the Overdue Rate from the date when said
payment should have been made to the date of payment thereof; provided, however,
that as to any audit that is commenced more than two years after the date
Percentage Rent for any Fiscal Year is reported by Tenant to Landlord, the
deficiency, if any, with respect to such Percentage Rent shall bear interest at
the Overdue Rate only from the date such determination of deficiency is made
unless such deficiency is the result of gross negligence or willful misconduct
on the part of Tenant, in which case interest at the Overdue Rate will accrue
from the date such payment should have been made to the date of payment thereof.
If any such audit or examination discloses that the Percentage Rent actually due
from Tenant for any Fiscal Year exceed those reported and paid by Tenant by more
than 3%, Tenant shall pay the cost of such audit and examination. The audits and
examinations contemplated herein are subject to any prohibitions or limitations
on disclosure of any such data under Legal Requirements. Any proprietary
information obtained by Landlord pursuant to the provisions of this Section
shall be treated as confidential, except that such information may be used,
subject to appropriate confidentiality safeguards, in any litigation between the
parties and except further that Landlord may disclose such information to
prospective lenders. The obligations of Tenant contained in this Section shall
survive the expiration or earlier termination of this Lease.
3.3 Additional Charges. In addition to the Base Rent and Percentage
------------------
Rent, (a) Tenant also will pay and discharge as and when due and payable all
other amounts, liabilities, obligations and Impositions that Tenant is required
to pay under this Lease, and (b) in the event of any failure on the part of
Tenant to pay any of those items referred to in clause (a) of this Section 3.3,
Tenant also will promptly pay and discharge every fine, penalty, interest,
expense and cost that may be added for or related to non-payment or late payment
of such items (the items referred to in clauses (a) and (b) of this Section 3.3
being additional rent hereunder and being referred to herein collectively as the
"Additional Charges"), and Landlord shall have all legal, equitable and
contractual rights, powers and remedies provided either in this Lease or by
statute or otherwise in the case of non-payment of the Additional Charges as in
the case of non-payment of the Base Rent, including, but not limited to, the
right, but not the obligation to pay such Additional Changes on behalf of the
Tenant and to require reimbursement thereof by Tenant, together with interest
thereon at the Overdue Rate. If any installment of Base Rent, Percentage Rent or
Additional Charges (but only as to those Additional Charges that are payable
directly to Landlord) shall not be paid on its due date, Tenant will pay
Landlord on demand, as Additional Charges, a late charge (to the extent
permitted by law) computed at the Overdue Rate on the amount of such
installment, from the due date of such installment to the date of payment
thereof. To the extent that Tenant pays any
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<PAGE>
Additional Charges to Landlord pursuant to any requirement of this Lease, Tenant
shall be relieved of its obligation to pay such Additional Charges to the entity
to which they would otherwise be due and Landlord shall pay same from monies
received from Tenant. The payment of any Additional Charges by Landlord shall
not relieve Tenant of any of its obligations under this Lease or of its
responsibility to pay other such Additional Charges, and such payment shall not
be deemed to be a waiver of any of Landlord's rights under this Lease or
otherwise.
3.4 Net Lease Provision. The Rent shall be paid absolutely net to
-------------------
Landlord, without setoff, deduction or counterclaim, so that this Lease shall
yield to Landlord the full amount of the installments of Base Rent, Percentage
Rent and Additional Charges throughout the Term, all as more fully set forth in
Article V, but subject to any other provisions of this Lease that expressly
provide for adjustment or abatement of Rent or other charges or expressly
provide that certain expenses or maintenance shall be paid or performed by
Landlord.
3.5 Conversion of Property. If, during the Term, Tenant wishes to cease
----------------------
food and beverage operations (other than complimentary breakfast or
complimentary food and beverage, which Tenant may cease without Landlord's
consent) or institute food and beverage operations at the Facility (all in
accordance with the requirements of any applicable Franchise Agreement), Tenant
shall give notice of such desire to Landlord. If, during the Term, Landlord
wishes Tenant to cease food and beverage operations or to institute food and
beverage operations at the Facility (all in accordance with the requirements of
any applicable Franchise Agreement), Landlord shall give notice of such desire
to Tenant. Landlord and Tenant shall then commence negotiations to adjust Rent
to reflect the proposed change to the operation of the Facility, each acting
reasonably and in good faith, and subject to Landlord's reasonable satisfaction
that any Rent adjustment will not adversely affect Hudson's or its Affiliate's
status as a real estate investment trust under the Code. All other terms of this
Lease will remain substantially the same. During negotiations, which shall not
extend beyond sixty (60) days, Tenant shall not "convert" the Facility and shall
continue fulfilling its obligations under the existing terms of this Lease. If
no agreement is reached after such 60-day period, Tenant or Landlord, as
appropriate, shall withdraw such notice and this Lease shall continue in full
force.
3.6 Tenant Requirements.
-------------------
(a) Guaranty. Tenant's obligations under this lease shall be
--------
guaranteed pursuant to the Guaranty, or another form of guaranty that is
acceptable to Landlord.
(b) Special Purpose Tenant. [CONFORM TO LOAN AGREEMENT] (i) Tenant
----------------------
shall upon request provide through Tenant's counsel an opinion of counsel
reasonably acceptable to Landlord's counsel and the counsel of the Rating
Agencies that Tenant shall not be "substantively consolidated" with any related
entity under Section 105 of the Bankruptcy Code and (ii) Tenant hereby
represents and warrants as of the date hereof, that:
(A) Organization. Tenant (i) is a duly organized and validly
------------
existing corporation in good standing under the laws of the State of
its formation, (ii) is duly qualified as a foreign corporation in each
jurisdiction in which the nature of its business, the Leased Property
and, if applicable, any Other Facility makes such qualification
necessary or desirable, (iii) has the requisite corporate power and
authority to carry on its business as now being conducted, and (iv) has
the requisite corporate power to execute and deliver, and perform its
obligations under, this Lease and the Security Agreement.
(B) Authorization. The execution and delivery by Tenant of this
-------------
Lease and the Security Agreement, Tenant's performance of its
obligations thereunder and the creation of the security interests and
liens provided for in this Lease and the Security documents (i) have
been duly authorized by all requisite corporate action on the part of
Tenant, (ii) will not violate any provision of any applicable Legal
Requirements, any order, writ, decree, injunction or demand of any
court or other Governmental Authority, any organizational document of
Tenant or any indenture or agreement or other instrument to which
Tenant is a party or by which Tenant is bound, (iii) will not be in
conflict with, result in a breach of, or constitute (with due notice or
lapse of time or both) a default under, or result in the creation or
imposition of any Lien of any nature whatsoever upon any of the
property or assets of Tenant pursuant to, any such indenture or
agreement or instrument and (iv) have been duly executed and delivered
by Tenant. Other than those obtained or filed on or prior to the
Commencement Date, Borrower is not required to obtain any consent,
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<PAGE>
approval or authorization from, or to file any declaration or statement
with, any Governmental Authority or other agency in connection with or
as a condition to the execution, delivery or performance of this Lease
or the Security Agreement.
(C) Single-Purpose Entity.
---------------------
(i) Tenant has been, and will continue to be, a duly
formed and existing corporation and a Single-Purpose Entity.
(ii) Tenant at all times since its formation has
complied, and will continue to comply, with the provisions of all of
its organizational documents, and the laws of the state in which Tenant
was formed relating to its corporate status.
(iv) All customary formalities regarding the corporate
existence of Tenant have been observed at all times since its formation
and will continue to be observed.
(v) Tenant have been at all times since their respective
formation and will continue to be adequately capitalized in light of
the nature of its business.
(D) Litigation. There are no actions, suits or proceedings at
----------
law or in equity by or before any Governmental Authority or other
agency now pending and served or, to the knowledge of Tenant,
threatened against Tenant.
(E) Agreements. Tenant is not is a party to any agreement or
----------
instrument or subject to any restriction which is likely to have a
Material Adverse Effect. Tenant is not in default in any respect in the
performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any agreement or instrument to
which it is a party or by which Tenant is bound.
(F) No Bankruptcy Filing. Tenant is not contemplating either
--------------------
the filing of a petition by it under any state or federal bankruptcy or
insolvency laws or the liquidation of all or a major portion of
Tenant's assets or property, and Tenant has no knowledge of any Person
contemplating the filing of any such petition against it.
(G) Location of Chief Executive Offices. The location of
-----------------------------------
Tenant's principal place of business and the location of Tenant's chief
executive office is 300 Bausch & Lomb Place, Rochester, New York 14604.
(H) Other Debt and Obligations. Tenant has no financial
--------------------------
obligation under any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which Tenant is a party, or by
which Tenant is bound, other than obligations under the Lease and the
Security Agreement. Tenant has not borrowed or received other debt
financing that has not been heretofore repaid in full and Tenant has no
known material contingent liabilities.
(I) Solvency. Tenant (i) has not entered into this Lease or any
--------
Security Document with the actual intent to hinder, delay, or defraud
any creditor, and (ii) has received reasonably equivalent value in
exchange for its obligations under the Lease and the Security
Agreement. Giving effect to the transactions contemplated hereby, the
fair saleable value of Tenant's assets exceeds and will, immediately
following the execution and delivery of this Lease and the Security
Agreement exceed Tenant's total liabilities, including, without
limitation, subordinated, unliquidated, or disputed liabilities or
contingent obligations. The fair saleable value of Tenant's assets is
and will, immediately following the execution and delivery of this
Lease, be greater than Tenant's probable liabilities, including the
maximum amount of its contingent obligations or its debts as such debts
become absolute and matured. Tenant's assets do not and, immediately
following the execution and delivery of this Lease, will not,
constitute unreasonably small capital to carry out its business as
conducted or as proposed to be conducted. Tenant does not intend to,
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<PAGE>
and does not believe that it will, incur debts and liabilities
(including, without limitation, contingent obligations and other
commitments) beyond its ability to pay such debts as they mature
(taking into account the timing and amounts to be payable on or in
respect of obligations of Tenant).
(J) Enforceability. This Lease and the Security Agreement are
--------------
the legal, valid and binding obligations of Tenant, enforceable against
Tenant in accordance with their terms, subject to bankruptcy,
insolvency and other limitations on creditors' rights generally and to
equitable principles.
(K) Other Debt. Tenant has not borrowed or received other debt
----------
financing whether unsecured or secured by the Leased Property or, if
applicable, any Other Facility or any part thereof.
(L) No Liabilities. Tenant has no liabilities or obligations
--------------
including without limitation Contingent Obligations, (and including,
without limitation, liabilities or obligations in tort, in contract, at
law, in equity, pursuant to a statute or regulation, or otherwise)
other than those liabilities and obligations expressly permitted by
this Lease and the Security Agreement.
(M) Management Agreements. There are no management agreements
---------------------
in effect with respect to the Leased Property or, if applicable, any
Other Facility, other than the Interim Operations Advisory Agreement,
between Tenant and Sage Management Resources, Inc.
(N) Conduct of Business. Tenant does not conduct its business
-------------------
"also known as", "doing business as" or under any other name.
ARTICLE IV
----------
4.1 Payment of Impositions. Subject to Article XII relating to
----------------------
permitted contests, Tenant will pay, or cause to be paid, all Impositions (other
than Real Estate Taxes, which shall be paid by Landlord) before any fine,
penalty, interest or cost may be added for non-payment, such payments to be made
directly to the taxing or other authorities where feasible, and will promptly
furnish to Landlord copies of official receipts or other satisfactory proof
evidencing such payments. Tenant's obligation to pay such Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon the
Leased Property or any part thereof. If any such Imposition may, at the option
of the taxpayer, lawfully be paid in installments (whether or not interest shall
accrue on the unpaid balance of such Imposition), Tenant may exercise the option
to pay the same (and any accrued interest on the unpaid balance of such
Imposition) in installments and in such event, shall pay such installments
during the Term hereof (subject to Tenant's right of contest pursuant to the
provisions of Article XII) as the same respectively become due and before any
fine, penalty, premium, further interest or cost may be added thereto. Landlord,
at its expense, shall, to the extent required or permitted by applicable law,
prepare and file all tax returns in respect of Landlord's net income, gross
receipts, sales and use, single business, transaction privilege, rent, ad
valorem, franchise taxes, Real Estate Taxes and taxes on its capital stock, and
Tenant, at its expense, shall, to the extent required or permitted by applicable
laws and regulations, prepare and file all other tax returns and reports in
respect of any Imposition as may be required by governmental authorities. If any
refund shall be due from any taxing authority in respect of any Imposition paid
by Tenant, the same shall be paid over to or retained by Tenant if no Event of
Default shall have occurred hereunder and be continuing. If an Event of Default
shall have occurred and be continuing, any such refund shall be paid over to or
retained by Landlord. Any such funds retained by Landlord due to an Event of
Default shall be applied as provided in Article XVI. Landlord and Tenant shall,
upon request of the other, provide such data as is maintained by the party to
whom the request is made with respect to the Leased Property as may be necessary
to prepare any required returns and reports. Tenant shall file all personal
property tax returns in such jurisdictions where it is legally required to so
file. Landlord, to the extent it possesses the same, and Tenant, to the extent
it possesses the same, will provide the other party, upon request, with cost and
depreciation records necessary for filing returns for any property so classified
as personal property. Where Landlord is legally required to file personal
property tax returns, Landlord shall provide Tenant with copies of assessment
notices in sufficient time for Tenant to file a protest. Tenant may, upon notice
to Landlord, at Tenant's option and at Tenant's sole expense, protest, appeal,
or institute such other proceedings (in its or Landlord's name) as Tenant may
deem appropriate to effect a reduction of personal property assessments for
those Impositions to be paid by
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<PAGE>
Tenant, and Landlord, at Tenant's expense as aforesaid, shall fully cooperate
with Tenant in such protest, appeal, or other action. Tenant hereby agrees to
indemnify, defend, and hold harmless Landlord from and against any claims,
obligations, and liabilities against or incurred by Landlord in connection with
such cooperation. Billings for reimbursement of personal property taxes by
Tenant to Landlord shall be accompanied by copies of a bill therefor and
payments thereof which identify the personal property with respect to which such
payments are made. Landlord, however, reserves the right to effect any such
protest, appeal or other action and, upon notice to Tenant, shall control any
such activity, which shall then go forward at Landlord's sole expense. Upon such
notice, Tenant, at Landlord's expense, shall cooperate fully with such
activities.
4.2 Notice of Impositions. To the extent Landlord is notified of
---------------------
any Impositions, Landlord shall give prompt Notice to Tenant of such Impositions
payable by Tenant hereunder, provided that Landlord's failure to give any such
Notice shall in no way diminish Tenant's obligations hereunder to pay such
Impositions, but such failure shall obviate any default hereunder for a
reasonable time after Tenant receives Notice of any Imposition which it is
obligated to pay during the first taxing period applicable thereto.
4.3 Adjustment of Impositions. Impositions imposed in respect of
-------------------------
the tax-fiscal period during which the Term terminates shall be adjusted and
prorated between Landlord and Tenant, whether or not such Imposition is imposed
before or after such termination, and Tenant's obligation to pay its prorated
share thereof after termination shall survive such termination.
4.4 Utility Charges. Tenant will be solely responsible for
---------------
obtaining and maintaining utility services to the Leased Property and will pay
or cause to be paid all charges for electricity, gas, oil, water, sewer and
other utilities used on the Leased Property during the Term.
4.5 Insurance Premiums. Tenant will pay or cause to be paid all
------------------
premiums for the insurance coverages required to be maintained by Tenant under
Article XIII.
ARTICLE V
---------
5.1 No Termination Abatement, etc. Except as otherwise
-----------------------------
specifically provided in this Lease, Tenant, to the extent permitted by law,
shall remain bound by this Lease in accordance with its terms and shall neither
take any action without the written consent of Landlord to modify, surrender or
terminate the same, nor seek nor be entitled to any abatement, deduction,
deferment or reduction of the Rent, or setoff against the Rent, nor shall the
obligations of Tenant be otherwise affected by reason of (a) any damage to, or
destruction of, any Leased Property or any portion thereof from whatever cause
or any Taking of the Leased Property or any portion thereof, (b) the lawful or
unlawful prohibition of, or restriction upon, Tenant's use of the Leased
Property, or any portion thereof, or the interference with such use by any
Person, corporation, partnership or other entity, or by reason of eviction by
paramount title, (c) any claim which Tenant has or might have against Landlord
by reason of any default or breach of any warranty by Landlord under this Lease
or any other agreement between Landlord and Tenant, or to which Landlord and
Tenant are parties, (d) any bankruptcy, insolvency, reorganization, composition,
readjustment, liquidation, dissolution, winding up or other proceedings
affecting Landlord or any assignee or transferee of Landlord, or (e) for any
other cause whether similar or dissimilar to any of the foregoing other than a
discharge of Tenant from any such obligations as a matter of law. Tenant hereby
specifically waives all rights, arising from any occurrence whatsoever, which
may now or hereafter be conferred upon it by law to (1) modify, surrender or
terminate this Lease or quit or surrender the Leased Property or any portion
thereof, or (2) entitle Tenant to any abatement, reduction, suspension or
deferment of the Rent or other sums payable by Tenant hereunder, except as
otherwise specifically provided in this Lease. The obligations of Tenant
hereunder shall be separate and independent covenants and agreements and the
Rent and all other sums payable by Tenant hereunder shall continue to be payable
in all events unless the obligations to pay the same shall be terminated
pursuant to the express provisions of this Lease or by termination of this Lease
other than by reason of an Event of Default.
5.2 Abatement Procedures for Partial Takings. In the event of a
----------------------------------------
partial Taking as described in Section 15.4, the Lease shall not terminate, but
the Base Rent shall be abated in the manner and to the extent that is fair, just
and equitable to both Tenant and Landlord, taking into consideration, among
other relevant factors, the number of
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usable rooms, the amount of square footage, or the revenues affected by such
partial Taking. If Landlord and Tenant are unable to agree upon the amount of
such abatement within 30 days after such partial Taking, the matter may be
submitted by either party to a court of competent jurisdiction for resolution.
ARTICLE VI
----------
6.1 Ownership of the Leased Property. Tenant acknowledges that the
--------------------------------
Leased Property is the property of Landlord and that Tenant has only the right
to the possession and use of the Leased Property upon the terms and conditions
of this Lease.
6.2 Tenant's Personal Property. Tenant will acquire and maintain
--------------------------
throughout the Term such Inventory as is required to operate the Leased Property
in the manner contemplated by this Lease. Tenant may (and shall as provided
hereinbelow), at its expense, install, affix or assemble or place on any parcels
of the Land or in any of the Leased Improvements, any items of personal property
(including Inventory) owned by Tenant. Tenant, at the commencement of the Term,
and from time to time thereafter, shall provide Landlord with an accurate list
of all such items of Tenant's personal property (collectively, "Tenant's
Personal Property"). Tenant may, subject to the first sentence of this Section
6.2 and the conditions set forth below, remove any of Tenant's Personal Property
set forth on such list at any time during the Term or upon the expiration or any
prior termination of the Term. All of Tenant's Personal Property, other than
Inventory, not removed by Tenant within ten days following the expiration or
earlier termination of the Term shall be considered abandoned by Tenant and may
be appropriated, sold, destroyed or otherwise disposed of by Landlord without
first giving Notice thereof to Tenant, without any payment to Tenant and without
any obligation to account therefor. Tenant will, at its expense, restore the
Leased Property to the condition required by Section 9.1(d), including repair of
all damage to the Leased Property caused by the removal of Tenant's Personal
Property, whether effected by Tenant or Landlord. Upon the expiration or earlier
termination of the Term, Landlord or its designee shall have the option to
purchase all Inventory on hand at the Leased Property at the time of such
expiration or termination for a sale price equal to the fair market value of
such Inventory. Tenant may make such financing arrangements, title retention
agreements, leases or other agreements with respect to the Tenant's Personal
Property as it sees fit provided that Tenant first advises Landlord of any such
arrangement and such arrangement expressly provides that in the event of
Tenant's default thereunder, Landlord (or its designee) may assume Tenant's
obligations and rights under such arrangement.
6.3 Landlord's Lien. To the fullest extent permitted by applicable
---------------
law, Landlord is granted a lien and security interest on all of Tenant's
personal property (including Tenant's Personal Property) now or hereinafter
placed in or upon the Leased Property, and such lien and security interest shall
remain attached to such Tenant's personal property until payment in full of all
Rent and satisfaction of all of Tenant's obligations hereunder; provided,
however, Landlord shall subordinate its lien and security interest to that of
any non-Affiliate of Tenant which finances such Tenant's personal property or
any non-Affiliate conditional seller of such Tenant's personal property, the
terms and conditions of such subordination to be satisfactory to Landlord in the
exercise of reasonable discretion. Tenant shall, upon the request of Landlord,
execute such financing statements or other documents or instruments reasonably
requested by Landlord to perfect the lien and security interests herein granted.
Notwithstanding the foregoing, Tenant hereby acknowledges and agrees that
pursuant to the Security Agreement Tenant is granting to Landlord a first
priority security interest in the Collateral (as defined therein) as security
for Tenant's obligations hereunder.
ARTICLE VII
-----------
7.1 Condition of the Leased Property. Tenant acknowledges receipt
--------------------------------
and delivery of possession of the Leased Property. Tenant has examined and
otherwise has knowledge of the condition of the Leased Property and has found
the same to be satisfactory for its purposes hereunder. Tenant is leasing the
Leased Property "as is" in its present condition. Tenant waives any claim or
action against Landlord in respect of the condition of the Leased Property.
LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF
THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE,
DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE
QUALITY OF THE
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MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH
RISKS ARE TO BE BORNE BY TENANT. TENANT ACKNOWLEDGES THAT THE LEASED PROPERTY
HAS BEEN INSPECTED BY TENANT AND IS SATISFACTORY TO IT. Provided, however, to
the extent permitted by law, Landlord hereby assigns to Tenant all of Landlord's
rights to proceed against any predecessor in title other than Tenant (or an
Affiliate of Tenant which conveyed the Property to Landlord) for breaches of
warranties or representations or for latent defects in the Leased Property.
Landlord shall fully cooperate with Tenant in the prosecution of any such claim,
in Landlord's or Tenant's name, all at Tenant's sole cost and expense. Tenant
hereby agrees to indemnify, defend and hold harmless Landlord from and against
any costs, claims, obligations and liabilities against or incurred by Landlord
in connection with such cooperation.
7.2 Use of the Leased Property.
--------------------------
(a) Tenant covenants that it will proceed with all due
diligence and will exercise its best efforts to obtain and to maintain all
approvals needed to use and operate the Leased Property and the Facility under
all Legal Requirements and Land Use Requirements.
(b) Tenant shall use or cause to be used the Leased
Property only as a hotel facility, and for such other uses as may be necessary
or incidental to such use or such other use as otherwise approved by Landlord
(the "Primary Intended Use"). Tenant shall not use the Leased Property or any
portion thereof for any other use without the prior written consent of Landlord,
which consent may be granted, denied or conditioned in Landlord's sole
discretion. No use shall be made or permitted to be made of the Leased Property,
and no acts shall be done, which will cause the cancellation or increase the
premium of any insurance policy covering the Leased Property or any part thereof
(unless another adequate policy satisfactory to Landlord is available and Tenant
pays any premium increase), nor shall Tenant sell or permit to be kept, used or
sold in or about the Leased Property any article which may be prohibited by law
or fire underwriter's regulations. Tenant shall, at its sole cost, comply with
all of the requirements pertaining to the Leased Property of any insurance
board, association, organization or company necessary for the maintenance of
insurance, as herein provided, covering the Leased Property and Tenant's
Personal Property.
(c) Subject to the provisions of Articles XIV, XV, XXI and
XXII, Tenant covenants and agrees that during the Term it will (1) operate
continuously the Leased Property as a hotel facility, (2) keep in full force and
effect and comply with all the provisions of the Franchise Agreement (other than
requirements with respect to Capital Improvements), (3) not terminate or amend
the Franchise Agreement without the consent of Landlord, (4) maintain
appropriate certifications, permits and licenses for such use and (5) will seek
to maximize the gross revenues generated therefrom consistent with sound
business practices.
(d) Tenant shall not commit or suffer to be committed any
waste on the Leased Property, or in the Facility, nor shall Tenant cause or
permit any nuisance thereon.
(e) Tenant shall neither suffer nor permit the Leased
Property or any portion thereof, or Tenant's Personal Property, to be used in
such a manner as (1) might reasonably tend to impair Landlord's (or Tenant's, as
the case may be) title thereto or to any portion thereof, or (2) may reasonably
make possible a claim or claims of adverse usage or adverse possession by the
public, as such, or of implied dedication of the Leased Property or any portion
thereof, except as necessary in the ordinary and prudent operation of the
Facility on the Leased Property.
(f) Unless consented to in writing by Landlord and except
with respect to the Other Facilities, throughout the Term neither Tenant nor any
Affiliate of Tenant shall own, build, develop, lease, operate, manage, franchise
or have any interest in any hotel or motel property that is within a three (3)
mile radius of any hotel or motel property in which Landlord or an Affiliate of
Landlord has an interest on the date Tenant or its Affiliate would otherwise
commence owning, operating or managing such property, other than pursuant to
this Lease or another lease, agreement or arrangement with Landlord or an
Affiliate of Landlord. Tenant agrees to notify Landlord, from time to time at
the request of Landlord, of the location of any hotel or motel property the
Tenant or any Affiliate owns, leases, operates, manages or has an interest in.
Landlord agrees to notify Tenant, from time to time at the request of Tenant, of
the location of any hotel or motel property in which Landlord or an Affiliate of
Landlord has an interest.
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7.3 Landlord to Grant Easements, etc. Landlord will, from time to
--------------------------------
time, so long as no Event of Default has occurred and is continuing, at the
request of Tenant and at Tenant's cost and expense (but subject to the approval
of Landlord, which approval shall not be unreasonably withheld or delayed), (a)
grant easements and other rights in the nature of easements with respect to the
Leased Property to third parties, (b) release existing easements or other rights
in the nature of easements which are for the benefit of the Leased Property, (c)
dedicate or transfer unimproved portions of the Leased Property for road,
highway or other public purposes, (d) execute petitions to have the Leased
Property annexed to any municipal corporation or utility district, (e) execute
amendments to any covenants and restrictions affecting the Leased Property and
(f) execute and deliver to any person any instrument appropriate to confirm or
effect such grants, releases, dedications, transfers, petitions and amendments
(to the extent of its interests in the Leased Property), but only upon delivery
to Landlord of an Officer's Certificate stating that such grant, release,
dedication, transfer, petition or amendment does not materially and adversely
affect (A) the ability of the relevant Tenant to pay any of its obligations to
any Person as and when due, (B) the marketability of title to the Leased
Property, (C) the fair market value of the Leased Property or (D) the use or
operation of the Leased Property.
ARTICLE VIII
------------
8.1 Compliance with Legal and Insurance Requirements, etc. Subject
-----------------------------------------------------
to Section 8.3(b) below and Article XII relating to permitted contests, and
subject further to the obligations of Landlord with respect to Capital
Improvements as set forth in Section 9.1(b), Tenant, at its expense, will
promptly (a) comply with all applicable Legal Requirements, Land Use
Requirements and Insurance Requirements in respect of the use, operation,
maintenance, repair and restoration of the Leased Property, and (b) procure,
maintain and comply with all appropriate licenses and other authorizations
required for any use of the Leased Property and Tenant's Personal Property then
being made, and for the proper erection, installation, operation and maintenance
of the Leased Property or any part thereof.
8.2 Legal Requirements and Land Use Requirements Covenants.
------------------------------------------------------
Subject to Section 8.3(b) below, Tenant covenants and agrees that the Leased
Property and Tenant's Personal Property shall not be used for any unlawful
purpose, and that Tenant shall not permit or suffer to exist any unlawful use of
the Leased Property by others. Tenant shall acquire and maintain all appropriate
licenses, certifications, permits and other authorizations and approvals needed
to operate the Leased Property in its customary manner for the Primary Intended
Use, and any other lawful use conducted on the Leased Property as may be
permitted from time to time hereunder. Tenant further covenants and agrees that
Tenant's use of the Leased Property and maintenance, alteration, and operation
of the same, and all parts thereof, shall at all times conform to all Legal
Requirements and Land Use Requirements, unless the same are finally determined
by a court of competent jurisdiction to be unlawful (and Tenant shall cause all
such sub-tenants, invitees or others to so comply with all Legal Requirements
and Land Use Requirements). Tenant may, however, upon prior Notice to Landlord,
contest the legality or applicability of any such Legal Requirement and Land Use
Requirement or any licensure or certification decision if Tenant maintains such
action in good faith, with due diligence, without prejudice to Landlord's rights
hereunder, and at Tenant's sole expense. If by the terms of any such Legal
Requirement and Land Use Requirement compliance therewith pending the
prosecution of any such proceeding may legally be delayed without the incurrence
of any lien, charge or liability of any kind against the Facility or Tenant's
leasehold interest therein and without subjecting Tenant or Landlord to any
liability, civil or criminal, for failure so to comply therewith, Tenant may
delay compliance therewith until the final determination of such proceeding. If
any lien, charge or civil or criminal liability would be incurred by reason of
any such delay, Tenant shall be responsible for discharging the same; provided,
Tenant, on the prior written consent of Landlord, which consent shall not be
unreasonably withheld, may nonetheless contest as aforesaid and delay as
aforesaid provided that such delay would not subject Landlord to criminal
liability and Tenant both (a) furnishes to Landlord security reasonably
satisfactory to Landlord against any loss or injury by reason of such contest or
delay and (b) prosecutes the contest with due diligence and in good faith.
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8.3 Environmental Covenants. Landlord and Tenant (in addition to,
-----------------------
and not in diminution of, Tenant's covenants and undertakings in Sections 8.1
and 8.2 hereof) covenant and agree as follows:
(a) Tenant agrees that at all times hereafter until the
later of (i) such time as all liabilities, duties or obligations of Tenant to
the Landlord under the Lease have been satisfied in full, and (ii) such time as
Tenant has completely vacated the Leased Property and surrendered possession of
the same to Landlord, Tenant shall fully comply with all Environmental Laws
applicable to the Leased Property and the operations thereon. Tenant agrees to
give Landlord written notice of the following, promptly after Tenant receives
knowledge thereof: (1) all Environmental Liabilities; (2) all pending,
threatened or anticipated Proceedings, and all notices, demands, requests or
investigations, relating to any Environmental Liability or relating to the
issuance, revocation or change in any Environmental Authorization required for
operation of the Leased Property; (3) all Releases at, on, in, under or in any
way affecting the Leased Property, or any Release at, on, in or under any
property adjacent to the Leased Property; and (4) all facts, events or
conditions that could reasonably lead to the occurrence of any of the above-
referenced matters.
(b) Tenant hereby agrees to defend, indemnify and save
harmless any and all Landlord Indemnified Parties from and against any and all
Environmental Liabilities other than (i) Environmental Liabilities which are
caused by the acts or grossly negligent failures to act of Landlord, or (ii)
unless Tenant owned or controlled the Leased Property prior to the date of this
Lease, Environmental Liabilities that result from conditions existing at the
Leased Property at the date of this Lease or from Releases or other violations
of Environmental Laws originating on adjacent property but affecting or
migrating to the Leased Property; provided that in either case such exclusions
shall not apply to the extent that the existing condition or migration has been
exacerbated by Tenant's act or negligent failure to act.
(c) Landlord hereby agrees to defend, indemnify and save
harmless any and all Tenant Indemnified Parties from and against any and all
Environmental Liabilities caused by the acts or grossly negligent failures to
act of Landlord and for those that existed on the Leased Property prior to the
date of this Lease if Landlord owned or controlled the Leased Property prior to
the date of this Lease.
(d) If any Proceeding is brought against any Indemnified
Party in respect of an Environmental Liability with respect to which such
Indemnified Party may claim indemnification under either Section 8.3(b) or (c),
the Indemnifying Party, upon request, shall at its sole expense resist and
defend such Proceeding, or cause the same to be resisted and defended by counsel
designated by the Indemnified Party and approved by the Indemnifying Party,
which approval shall not be unreasonably withheld; provided, however, that such
approval shall not be required in the case of defense by counsel designated by
any insurance company undertaking such defense pursuant to any applicable policy
of insurance. Each Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel will be at the sole expense of such
Indemnified Party unless such counsel has been approved by the Indemnifying
Party, which approval shall not be unreasonably withheld. The Indemnifying Party
shall not be liable for any settlement of any such Proceeding made without its
consent, which shall not be unreasonably withheld, but if settled with the
consent of the Indemnifying Party, or if settled without its consent (if its
consent shall be unreasonably withheld), or if there be a final, nonappealable
judgment for an adversary party in any such Proceeding, the Indemnifying Party
shall indemnify and hold harmless the Indemnified Parties from and against any
liabilities incurred by such Indemnified Parties by reason of such settlement or
judgment.
(e) At any time any Indemnified Party has reason to
believe circumstances exist which could reasonably result in an Environmental
Liability, upon reasonable prior written notice to Tenant stating such
Indemnified Party's basis for such belief, an Indemnified Party shall be given
immediate access to the Leased Property (including, but not limited to, the
right to enter upon, investigate, drill wells, take soil borings, excavate,
monitor, test, cap and use available land for the testing of remedial
technologies), Tenant's employees, and to all relevant documents and records
regarding the matter as to which a responsibility, liability or obligation is
asserted or which is the subject of any Proceeding; provided that such access
may be conditioned or restricted as may be reasonably necessary to ensure
compliance with law and the safety of personnel and facilities or to protect
confidential or privileged information. All Indemnified Parties requesting such
immediate access and cooperation shall endeavor to coordinate such efforts to
result in as minimal interruption of the operation of the Leased Property as
practicable.
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(f) The indemnification rights and obligations provided for in this
Article VIII shall be in addition to any indemnification rights and obligations
provided for elsewhere in this Lease.
(g) The indemnification rights and obligations provided for in this
Article VIII shall survive the termination of this Agreement.
For purposes of this Section 8.3, all amounts for which any
Indemnified Party seeks indemnification shall be computed net of (a) any actual
income tax benefit resulting therefrom to such Indemnified Party, (b) any
insurance proceeds received (net of tax effects) with respect thereto, and (c)
any amounts recovered (net of tax effects) from any third parties based on
claims the Indemnified Party has against such third parties which reduce the
damages that would otherwise be sustained; provided that in all cases, the
timing of the receipt or realization of insurance proceeds or income tax
benefits or recoveries from third parties shall be taken into account in
determining the amount of reduction of damages. Each Indemnified Party agrees to
use its reasonable efforts to pursue, or assign to Tenant or Landlord, as the
case may be, any claims or rights it may have against any third party which
would materially reduce the amount of damages otherwise incurred by such
Indemnified Party.
ARTICLE IX
----------
9.1 Maintenance and Repair.
----------------------
(a) Except as provided in Section 9.1(b) or Article XIV, Tenant, at
its sole expense, will keep the Leased Property and all means of access thereto
in first-class condition and repair except for ordinary wear and tear (whether
or not the need for such repairs occurred as a result of Tenant's use, any prior
use, the elements or the age of the Leased Property, or any portion thereof),
and, with reasonable promptness, make all necessary and appropriate repairs,
replacements, and improvements thereto of every kind and nature, whether
interior or exterior, structural or non-structural, ordinary or extraordinary,
foreseen or unforeseen or arising by reason of a condition existing prior to the
commencement of the Term of this Lease (concealed or otherwise), or required by
any Government agency having jurisdiction over the Leased Property. Tenant,
however, shall be permitted to prosecute claims against Landlord's predecessors
in title for breach of any representation or warranty or for any latent defects
in the Leased Property to be maintained by Tenant unless Landlord is already
diligently pursuing such a claim. All repairs shall, to the extent reasonably
achievable, be at least equivalent in quality to the original work. Tenant will
not take or omit to take any action, the taking or omission of which might
materially impair the value or the usefulness of the Leased Property or any part
thereof for its Primary Intended Use. If Tenant fails to make any required
repairs or replacements after fifteen (15) days notice from Landlord (or after
such longer period as may be reasonably required provided that Tenant at all
time diligently proceeds with such repair or replacement), then Landlord shall
have the right, but shall not be obligated, to make such repairs or replacements
on behalf of and for the account of Tenant. In such event, such work shall be
paid for in full by Tenant as Additional Charges, together with a late charge
thereon at the Overdue Rate from the date on which such sums or expenses are
paid or incurred by Landlord.
(b) Notwithstanding Tenant's obligations under Section 9.1(a) above
or elsewhere in this Lease, unless caused by Tenant's negligence or willful
misconduct or that of its employees or agents, Tenant shall not be responsible
for any Capital Improvements, including (without limitation) Capital
Improvements required by the Franchisor under the Franchise Agreement. Landlord
shall be responsible for all Capital Improvements, subject to (i) Landlord's
right to approve the Capital Budget pursuant to Section 24.5 and Article XL,
(ii) Landlord's obligation to make available to Tenant amounts for Capital
Expenditures as set forth in Section 24.6, and (iii) Landlord's right in its
sole discretion to refuse to make any Capital Expenditure required by the
Franchisor; [provided that, if such refusal results in a default under or
termination of the Franchise Agreement, Landlord shall be responsible for all
damages and termination payments payable by Tenant under the terms of the
Franchise Agreement, application fees for a new franchise license approved by
Landlord, increased royalty fees and other costs arising out of such refusal or
out of the resulting need to apply for and enter into a substitute franchise
license agreement]. Except as set forth in the preceding sentence, Landlord
shall not under any circumstances be required to build or rebuild any
improvement on the Leased Property, or to make any repairs, replacements,
alterations, restorations or renewals of any nature or description to the
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Leased Property, whether ordinary or extraordinary, foreseen or unforeseen, or
to make any expenditure whatsoever with respect thereto, in connection with this
Lease, or to maintain the Leased Property in any way. Tenant hereby waives, to
the extent permitted by law, the right to make repairs at the expense of
Landlord pursuant to any law in effect at the time of the execution of this
Lease or hereafter enacted. Landlord shall have the right to give, record and
post, as appropriate, notices of nonresponsibility under any mechanic's lien
laws now or hereafter existing.
(c) Nothing contained in this Lease and no action or inaction by
Landlord shall be construed as (1) constituting the request of Landlord,
expressed or implied, to any contractor, subcontractor, laborer, materialman or
vendor to or for the performance of any labor or services or the furnishing of
any materials or other property for the construction, alteration, addition,
repair or demolition of or to the Leased Property or any part thereof, or (2)
giving Tenant any right, power or permission to contract for or permit the
performance of any labor or services or the furnishing of any materials or other
property in such fashion as would permit the making of any claim against
Landlord in respect thereof or to make any agreement that may create, or in any
way be the basis for any right, title, interest, lien, claim or other
encumbrance upon the estate of Landlord in the Leased Property, or any portion
thereof.
(d) Tenant will, upon the expiration or prior termination of the
Term, vacate and surrender the Leased Property to Landlord in the condition in
which the Leased Property was originally received from Landlord, except as
repaired, rebuilt, restored, altered or added to as permitted or required by the
provisions of this Lease and except for ordinary wear and tear (subject to the
obligation of Tenant to maintain the Leased Property in good order and repair,
as would a prudent owner, during the entire Term of the Lease, to the extent
required in Section 9.1(a)), or damage by casualty or Condemnation (subject to
the obligations of Tenant to restore or repair as set forth in the Lease.)
9.2 Encroachments, Restrictions, Etc. If any of the Leased
--------------------------------
Improvements, at any time, materially encroach upon any property, street or
right-of-way adjacent to the Leased Property, or violate the agreements or
conditions contained in any lawful restrictive covenant or other agreement
affecting the Leased Property, or any part thereof, or impair the rights of
others under any easement or right-of-way to which the Leased Property is
subject, then promptly upon the request of Landlord or at the behest of any
person affected by any such encroachment, violation or impairment, Tenant shall,
at Landlord's expense, unless the circumstance giving rise to such encroachment,
violation or impairment was caused by Tenant, subject to its right to contest
the existence of any encroachment, violation or impairment and in such case, in
the event of an adverse final determination, either (a) obtain valid and
effective waivers or settlements of all claims, liabilities and damages
resulting from each such encroachment, violation or impairment, whether the same
shall affect Landlord or Tenant or (b) make such changes in the Leased
Improvements, and take such other actions, as Tenant in the good faith exercise
of its judgment deems reasonably practicable to remove such encroachment, and to
end such violation or impairment, including, if necessary, the alteration of any
of the Leased Improvements, and in any event take all such actions as may be
necessary in order to be able to continue the operation of the Leased
Improvements for the Primary Intended Use substantially in the manner and to the
extent the Leased Improvements were operated prior to the assertion of such
violation, impairment or encroachment. Any such alteration shall be made in
conformity with the applicable requirements of Article X. Tenant's obligations
under this Section 9.2 shall be in addition to and shall in no way discharge or
diminish any obligation of any insurer under any policy of title or other
insurance held by Landlord.
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ARTICLE X
---------
10.1 Alterations. After receiving the prior written approval of
-----------
Landlord (which approval shall not be unreasonably withheld, but which shall be
subject to reasonable conditions including the conditions set forth in the Loan
Agreement and any Loan Document (as defined in the Loan Agreement) and Tenant's
payment of the reasonable expenses of Landlord and its agents, Tenant shall have
the right to make additions, modifications or improvements to the Leased
Property from time to time as Tenant may deem to be desirable for its permitted
uses and purposes, provided that such action will not significantly alter the
character or purposes or significantly detract from the value or operating
efficiency thereof and will not significantly impair the revenue-producing
capability of the Leased Property or adversely affect the ability of the Tenant
to comply with the provisions of this Lease. The cost of such additions,
modifications or improvements to the Leased Property shall be paid by Tenant
(except to the extent that they are Capital Improvements), and all such
additions, modifications and improvements shall, without payment by Landlord at
any time, be included under the terms of this Lease and upon expiration or
earlier termination of this Lease shall pass to and become the property of
Landlord.
10.2 Salvage. All materials which are scrapped or removed in connection
-------
with the making of repairs required by Articles IX or X shall be or become the
property of Landlord or Tenant depending on which party is paying for or
providing the financing for such work.
10.3 Joint Use Agreements. If Tenant constructs additional improvements
--------------------
that are connected to the Leased Property or share maintenance facilities, HVAC,
electrical, plumbing or other systems, utilities, parking or other amenities,
the parties shall enter into a mutually agreeable cross-easement or joint use
agreement to make available necessary services and facilities in connection with
such additional improvements, to protect each of their respective interests in
the properties affected, and to provide for separate ownership, use, and/or
financing of such improvements.
ARTICLE XI
----------
Lien. Subject to the provision of Article XII relating to permitted
----
contests, Tenant will not directly or indirectly create or allow to remain and
will promptly discharge at its expense any lien, encumbrance, attachment, title
retention agreement or claim upon the Leased Property or any attachment, levy,
claim or encumbrance in respect of the Rent, not including, however, (a) this
Lease, (b) the matters, if any, included as exceptions in the title policy
insuring Landlord's interest in the Leased Property, (c) restrictions, liens and
other encumbrances which are consented to in writing by Landlord or any
easements granted pursuant to the provisions of Section 7.3 of this Lease, (d)
liens for those taxes upon Landlord which Tenant is not required to pay
hereunder, (e) subleases permitted by Article XXIII hereof, (f) liens for
Impositions or for sums resulting from noncompliance with Legal Requirements so
long as (1) the same are not yet payable or are payable without the addition of
any fine or penalty or (2) such liens are in the process of being contested as
permitted by Article XII, (g) liens of mechanics, laborers, materialmen,
suppliers or vendors for sums either disputed or not yet due provided that (1)
the payment of such sums shall not be postponed under any related contract for
more than 60 days after the completion of the action giving rise to such lien
and such reserve or other appropriate provisions as shall be required by law or
GAAP shall have been made therefor or (2) any such liens are in the process of
being contested as permitted by Article XII hereof, and (h) any liens which are
the responsibility of Landlord pursuant to the provisions of Article XXXIV of
this Lease.
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ARTICLE XII
-----------
Permitted Contests. Tenant shall have the right to contest the amount
------------------
or validity of any Imposition to be paid by Tenant or any Legal Requirement or
Insurance Requirement or any lien, attachment, levy, encumbrance, charge or
claim ("Claims") not otherwise permitted by Article XI, by appropriate legal
proceedings in good faith and with due diligence (but this shall not be deemed
or construed in any way to relieve, modify or extend Tenant's covenants to pay
or its covenants to cause to be paid any such charges at the time and in the
manner as in this Article provided), on condition, however, that such legal
proceedings shall not operate to relieve Tenant from its obligations hereunder
and shall not cause the sale or risk the loss of the Leased Property, or any
part thereof, or cause Landlord or Tenant to be in default under any mortgage,
deed of trust or security deed encumbering the Leased Property or any interest
therein. Upon the request of Landlord, Tenant shall either (a) provide a bond or
other assurance reasonably satisfactory to Landlord that all Claims which may be
assessed against the Leased Property together with interest and penalties, if
any, thereon will be paid, or (b) deposit within the time otherwise required for
payment with a bank or trust company as trustee upon terms reasonably
satisfactory to Landlord, as security for the payment of such Claims, money in
an amount sufficient to pay the same, together with interest and penalties in
connection therewith, as to all Claims which may be assessed against or become a
Claim on the Leased Property, or any part thereof, in said legal proceedings.
Tenant shall furnish Landlord and any lender of Landlord with reasonable
evidence of such deposit within five days of the same. Landlord agrees to join
in any such proceedings if the same be required to legally prosecute such
contest of the validity of such Claims; provided, however, that Landlord shall
not thereby be subjected to any liability for the payment of any costs or
expenses in connection with any proceedings brought by Tenant; and Tenant
covenants to indemnify and save harmless Landlord from any such costs or
expenses. Tenant shall be entitled to any refund of any Claims and such charges
and penalties or interest thereon which have been paid by Tenant or paid by
Landlord and for which Landlord has been fully reimbursed. In the event that
Tenant fails to pay any Claims when due or to provide the security therefor as
provided in this paragraph and to diligently prosecute any contest of the same,
Landlord may, upon ten days advance Notice to Tenant, pay such charges together
with any interest and penalties and the same shall be repayable by Tenant to
Landlord as Additional Charges at the next Payment Date provided for in this
Lease. Provided, however, that should Landlord reasonably determine that the
giving of such Notice would risk loss to the Leased Property or cause damage to
Landlord, then Landlord shall give such Notice as is practical under the
circumstances. Landlord reserves the right to contest any of the Claims at its
expense not pursued by Tenant. Landlord and Tenant agree to cooperate in
coordinating the contest of any claims.
ARTICLE XIII
------------
13.1 (A) At all times while the Lease is outstanding, Tenant
shall maintain (at its expense unless otherwise specified herein) the following
insurance:
(i) During any period of repair or restoration, builder's "all
risk" insurance in an amount equal to not less than the full insurable
value of the Leased Property and Fixtures against such risks
(including, without limitation, fire and extended coverage and collapse
of the Leased Improvements to agreed limits) as Landlord may request,
in form and substance acceptable to Landlord (at Landlord's expense).
(ii) Insurance with respect to the Leased Improvements,
Fixtures, and Inventory against any peril included within the
classification "All Risks of Physical Loss" with extended coverage in
amounts at all times sufficient to prevent Tenant from becoming a
co-insurer within the terms of the applicable policies, but in any
event such insurance shall be maintained in an amount equal to the full
insurable value of the Leased Improvements, Fixtures and Inventory
located on the Leased Property, the term "full insurable value" to mean
the actual replacement cost of the Leased Improvements, Fixtures and
Inventory (without taking into account any depreciation), determined
annually by an insurer or by Tenant or, at the request of Landlord, by
an independent insurance broker (subject to Landlord's reasonable
approval) including an endorsement covering acts of municipal
authorities including increased cost of construction and demolition (at
Landlord's expense, except for the insurance provided for in this
Section 13.1(A)(ii) with respect to Inventory, which shall be at
Tenant's expense);
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(iii) Comprehensive general liability insurance, including
contractual injury, bodily injury, broad form death and property damage
liability, and umbrella liability insurance against any and all claims,
including all legal liability to the extent insurable imposed upon
Tenant and all court costs and attorneys' fees and expenses, arising
out of or connected with the possession, use, leasing, operation,
maintenance or condition of the Leased Property in such amounts as are
generally required by institutional lenders for properties comparable
to the Leased Property but in no event with limits for the Leased
Property of less than $1,000,000 per occurrence with combined single
limit coverage for bodily injury or property damage and excess
(umbrella) liability coverage for the Leased Property of no less than
$30,000,000 per occurrence;
(iv) Statutory workers' compensation insurance (to the extent
the risks to be covered thereby are not already covered by other
policies of insurance maintained by Tenant), with respect to any work
on or about the Leased Property;
(v) Loss of Income insurance on the "Special Form," in the
amount of eighteen (18) month's of Base Rent for the benefit and at the
expense of Landlord, and business interruption insurance on the
"Special Form" in the amount of eighteen (18) month's of gross profit
for the benefit and at the expense of Tenant;
(vi) If all or any portion of the Improvements, or any
portion of the Land is located within a federally designated flood
hazard zone, flood insurance in an amount equal to the lesser of the
full insurable value of the Leased Property or the maximum amount
available;
(vii) Insurance against loss or damage from (A) leakage of
sprinkler systems and (B) explosion of steam boilers, air conditioning
equipment, pressure vessels or similar apparatus now or hereafter
installed at the Leased Property, in such amounts as Landlord may from
time to time require and which are customarily required by
institutional mortgagees with respect to similar properties similarly
situated (at Landlord's expense); and
(viii) Such other insurance with respect to the Leased
Improvements, Fixtures and Inventory located on the Leased Property
against loss or damage as is requested by Landlord (including without
limitation liquor/dram insurance, earthquake insurance and wind and
wind driven water insurance) provided such insurance is of the kind
from time to time customarily insured against and in such amounts as
are generally required by institutional lenders for properties
comparable to the Leased Property or which Landlord may deem necessary
in its reasonable discretion.
(B) Tenant will maintain the insurance coverage described in this
Section with companies acceptable to Landlord and with a claims paying ability
- -------
of not less than "AA" by S&P and AA or its equivalent by any one of the other
Rating Agencies. All insurers providing insurance required by this Lease shall
be authorized to issue insurance in the state where the Leased Property is
located.
The insurance coverage required under this Section may be effected
-------
under a blanket policy or policies covering the Leased Property and other
property and assets not constituting a part of the Leased Property; provided
that any such blanket policy shall specify, except in the case of public
liability insurance, the portion of the total coverage of such policy that is
allocated to the Leased Property and Fixtures and Inventory located thereon, and
any sublimits in such blanket policy applicable to the Leased Property, which
amounts shall not be less than the amounts required pursuant to this Section and
-------
which shall in any case comply in all other respects with the requirements of
this Section.
-------
(C) All insurance policies shall be in such form and with such
endorsements and in such amounts as shall be satisfactory to Landlord (and
Landlord shall be entitled to approve amounts, form, risk coverage, deductibles,
loss payees and insureds). The policy referred to in Section 13.1(A)(ii) shall
------- -----------
contain a replacement cost endorsement and a waiver of depreciation. Certified
copies of all of the above-mentioned insurance policies have
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been delivered to and shall be held by Landlord. All such policies shall name
Landlord and CCA as an additional insured/loss payee, shall provide that all
Insurance Proceeds be payable to CCA and shall contain: (i) "Non Contributory
Standard Lender Clause" and a Lender's Loss Payable Endorsement (Form 438 BFUNS)
or their equivalents naming CCA as the person to which all payments shall be
paid and a provision that payment of Insurance Proceeds in excess of $100,000
shall be made by a check payable only to CCA and Insurance Proceeds of up to
$100,000 shall be payable to Landlord; (ii) a waiver of subrogation endorsement
as to Landlord, CCA and their respective assigns providing that no policy shall
be impaired or invalidated by virtue of any act, failure to act, negligence of,
or violation of declarations, warranties or conditions contained in such policy
by Tenant, Landlord, CCA or any other named insured, additional insured or loss
payee, except for the willful misconduct of Landlord or CCA knowingly in
violation of the conditions of such policy; (iii) an endorsement indicating that
neither Landlord, CCA nor Tenant shall be or be deemed to be a co-insurer with
respect to any risk insured by such policies and shall provide for a deductible
per loss of an amount not more than that which is customarily maintained by
prudent owners of property of the same type and quality as the Leased Property,
but in no event in excess of $100,000; provided, however, with respect to the
policy referred in Section 13.1(A)(ii), the deductible may be in an amount equal
------- -----------
to (but in no event in excess of) five percent (5%) of the full insurable value
of the Leased Improvements, Fixtures and Inventory located on the Leased
Property; (iv) a provision that such policies shall not be canceled or amended,
including, without limitation, any amendment reducing the scope or limits of
coverage, without at least thirty (30) days' prior written notice to Landlord
and CCA in each instance; and (v) include effective waivers by the insurer of
all claims for insurance premiums against any loss payees, additional insureds
and named insureds (other than Tenant). Certificates of insurance with respect
to all renewal and replacement policies shall be delivered to Landlord and CCA
not less than ten (10) days prior to the expiration date of any of the insurance
policies required to be maintained hereunder which certificates shall bear
notations evidencing payment of applicable premiums and certified copies of such
insurance policies shall be delivered to Landlord and CCA promptly after
Tenant's receipt thereof. If Tenant fails to maintain and deliver to Landlord
the certified copies of the original policies or certificates of insurance
required by this Lease, Landlord may, at its option, after written notice to
Tenant, procure such insurance, and Tenant shall reimburse Landlord for the
amount of all premiums paid by Landlord (unless such premiums are an expense of
the Landlord hereunder) thereon promptly, after demand by Landlord, with
interest thereon at the Overdue Rate from the date paid by Landlord to the date
of repayment, and such sum shall be a part of the obligations secured by the
Security Agreement.
Landlord shall not by the fact of approving, disapproving,
accepting, preventing, obtaining or failing to obtain any insurance, incur any
liability for or with respect to the amount of insurance carried, the form or
legal sufficiency of insurance contracts, solvency of insurance companies, or
the carriers' or Tenant's payment or defense of lawsuits, and Tenant hereby
expressly assumes full responsibility therefor and all liability, if any, with
respect thereto.
13.2 No Separate Insurance. Tenant shall not on Tenant's own initiative
---------------------
or pursuant to the request or requirement of any third party, take out separate
insurance concurrent in form or contributing in the event of loss with that
required in this Article to be furnished, or increase the amount of any then
existing insurance by securing an additional policy or additional policies,
unless all parties having an insurable interest in the subject matter of the
insurance, including in all cases Landlord, are included therein as additional
insureds, and the loss is payable under such additional separate insurance in
the same manner as losses are payable under this Lease. Tenant shall immediately
notify Landlord that Tenant has obtained any such separate insurance or of the
increasing of any of the amounts of the then existing insurance.
ARTICLE XIV
-----------
14.1 Insurance Proceeds. Subject to the provisions of Section 14.6, all
------------------
proceeds payable by reason of any loss or damage to the Leased Property
("Insurance Proceeds"), or any portion thereof, and insured under any policy of
------------------
insurance required by Article XIII of this Lease shall be paid to Landlord and
held by Landlord in an interest-bearing account, shall be made available, if
applicable, for reconstruction or repair, as the case may be, of any damage to
or destruction of the Leased Property, or any portion thereof, and, if
applicable, shall be paid out by Landlord from time to time for the reasonable
costs of such reconstruction or repair upon satisfaction of reasonable terms and
conditions
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<PAGE>
specified by Landlord. Any excess proceeds of insurance remaining after the
completion of the restoration or reconstruction of the Leased Property shall be
paid to Landlord. If neither Landlord nor Tenant is required or elects to repair
and restore, all such insurance proceeds shall be retained by Landlord. All
salvage resulting from any risk covered by insurance shall belong to Landlord.
Notwithstanding anything in this Lease to the contrary, Tenant hereby
subordinates its interest in and rights to receive any Insurance Proceeds to CCA
and agrees that all Insurance Proceeds shall be payable to CCA as loss payee to
be applied by CCA in accordance with the terms of the Mortgage (as defined in
the Loan Agreement) and the Loan Agreement.
14.2 Reconstruction in the Event of Damage or Destruction Covered by
---------------------------------------------------------------
Insurance.
- ---------
(a) Except as provided in Section 14.6, if during the Term the
Leased Property is totally or partially destroyed by a risk covered by the
insurance described in Article XIII, whether or not such damage or destruction
renders the Facility Unsuitable for its Primary Intended Use, Tenant shall be
obligated, but only to the extent of any insurance proceeds made available to
Tenant and any other sums advanced by Landlord pursuant to the next sentence, to
restore the Facility to substantially the same condition as existed immediately
before the damage or destruction and otherwise in accordance with the terms of
the Lease. If the insurance proceeds are not adequate to restore the Facility to
that condition, each of Landlord and Tenant shall have the right to terminate
this Lease, without in any way affecting any other leases in effect between
Landlord and Tenant, by giving Notice to the other and all insurance proceeds
shall be retained by Landlord; provided, however that, if such termination is by
Tenant, Landlord shall have the right, in its sole discretion, to nullify the
termination and keep this Lease in full force by providing, within thirty (30)
days after Tenant's Notice of termination, a Notice to Tenant of Landlord's
unconditional, legally binding obligation to be responsible for all restoration
costs in excess of the insurance proceeds. If this Lease is not terminated and
Tenant restores the Facility, the insurance proceeds, and any other sums made
available by Landlord as aforesaid, shall be paid out by Landlord from time to
time for the reasonable costs of such restoration upon satisfaction of
reasonable terms and conditions, and any excess proceeds remaining after such
restoration shall be retained by Landlord.
(b) Notwithstanding the provisions of Section 14.2(a) above, if
Tenant cannot within a reasonable time obtain all necessary government
approvals, including building permits, licenses and conditional use permits,
after diligent efforts to do so, to perform all required repair and restoration
work and to operate the Facility for its Primary Intended Use in substantially
the same manner as that existing immediately prior to such damage or destruction
and otherwise in accordance with the terms of the Lease, either Landlord or
Tenant may terminate this Lease by providing Notice to the other party, without
in any way affecting any other Leases then in effect between Landlord and
Tenant.
14.3 Reconstruction in the Event of Damage or Destruction Not Covered
----------------------------------------------------------------
by Insurance. Except as provided in Section 14.6, if during the Term the
- ------------
Facility is totally or materially destroyed by a risk not covered by the
insurance described in Article XIII, whether or not such damage or destruction
renders the Facility Unsuitable for its Primary Intended Use, the provisions of
Section 14.2 applicable to casualties for which insurance proceeds are
inadequate shall govern.
14.4 Tenant's Property. All insurance proceeds payable by reason of any
-----------------
loss of or damage to any of Tenant's Personal Property shall be paid to Tenant;
provided, however, no such payments shall diminish or reduce the insurance
payments otherwise payable to or for the benefit of Landlord hereunder.
14.5 Abatement of Rent. Any damage or destruction due to casualty
-----------------
notwithstanding, this Lease shall remain in full force and effect and Tenant's
obligation to make rental payments and to pay all other charges required by this
Lease shall remain unabated.
14.6 Waiver. Tenant hereby waives any statutory rights of termination
------
that may arise by reason of any damage or destruction of the Facility that
Landlord is obligated to restore or may restore under any of the provisions of
this Lease.
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ARTICLE XV
----------
15.1 Parties' Right and Obligations Upon Condemnation. If during the
------------------------------------------------
Term there is any Condemnation of all or any part of the Leased Property or any
interest in this Lease, the rights and obligations of Landlord and Tenant shall
be determined by this Article XV.
15.2 Total Taking. If title to the fee of the whole of the Leased
------------
Property is condemned by any Condemnor, this Lease shall cease and terminate as
of the Date of Taking by the Condemnor, without in any way affecting any other
Leases then in effect between Landlord and Tenant. If title to the fee of less
than the whole of the Leased Property is so taken or condemned, which
nevertheless renders the Leased Property Unsuitable for its Primary Intended Use
or Uneconomic for its Primary Intended Use, Tenant and Landlord shall each have
the option, by notice to the other, at any time prior to the Date of Taking, to
terminate this Lease as of the Date of Taking. Upon such date, if such Notice
has been given, this Lease shall thereupon cease and terminate. All Base Rent,
Percentage Rent and Additional Charges paid or payable by Tenant hereunder shall
be apportioned as of the Date of Taking, and Tenant shall promptly pay Landlord
such amounts.
15.3 Allocation of Award. The total Award made with respect to the
-------------------
Leased Property in connection with a Total Taking shall be equitably apportioned
between Landlord and Tenant in proportion to the then fair market values of the
respective estates and interests of Landlord and Tenant in and to the Leased
Property and under this Lease.
15.4 Partial Taking. If title to less than the whole of the Leased
--------------
Property is condemned, and the Leased Property is not Unsuitable for its Primary
Intended Use, and not Uneconomic for its Primary Intended Use, or if Tenant or
Landlord is entitled but neither elects to terminate this Lease as provided in
Section 15.2, Tenant at its cost shall with all reasonable dispatch, but only to
the extent of any condemnation awards made available to Tenant and any other
sums advanced by Landlord pursuant to the next sentence, restore the untaken
portion of any Leased Improvements so that such Leased Improvements constitute a
complete architectural unit of the same general character and condition (as
nearly as may be possible under the circumstances) as the Leased Improvements
existing immediately prior to the Condemnation. If the condemnation Awards are
not adequate to restore the Facility to that condition, each of Landlord and
Tenant shall have the right to terminate this Lease, without in any way
affecting any other leases in effect between Landlord and Tenant, by giving
Notice to the other; provided, however that, if such termination is by Tenant,
Landlord shall have the right, in its sole discretion, to nullify the
termination and keep this Lease in full force by providing, within thirty (30)
days after Tenant's Notice of termination, a Notice to Tenant of Landlord's
unconditional, legally binding obligation to be responsible for all restoration
costs in excess of the condemnation Awards. If this Lease is not terminated and
Tenant restores the Facility, the condemnation awards, and any other sums made
available by Landlord as aforesaid, shall be held in trust by Landlord and paid
out by Landlord from time to time for the reasonable costs of such restoration
upon satisfaction of reasonable terms and conditions, and any excess awards
remaining after such restoration shall be retained by Landlord unless the
partial condemnation materially impairs the operations or financial performance
of the Facility, in which latter event the Award shall be equitably apportioned
between Landlord and Tenant in proportion to the then fair market values of the
respective estates and interests of Landlord and Tenant in and to the Leased
Property and under this Lease.
15.5 Temporary Taking. If the whole or any part of the Leased Property
----------------
or of Tenant's interest under this Lease is condemned by any Condemnor for its
temporary use or occupancy, this Lease shall not terminate by reason thereof,
and Tenant shall continue to pay, in the manner and at the terms herein
specified, the full amounts of Base Rent and Additional Charges. In addition,
the entire amount of any Award made for such Condemnation allocable to the Term
of this Lease, whether paid by way of damages, rent or otherwise, shall be paid
to Tenant and, except for any portion thereof utilized for restoration, shall be
deemed to be Room Revenues for the purpose of calculating the Percentage Rent
payable hereunder during such temporary taking. Except only to the extent that
Tenant may be prevented from so doing pursuant to the terms of the order of the
Condemnor, Tenant shall continue to perform and observe all of the other terms,
covenants, conditions and obligations hereof on the part of the Tenant to be
performed and observed, as though such Condemnation had not occurred. Tenant
covenants that upon the termination of any such period of temporary use or
occupancy it will, at its sole cost and expense (subject to Landlord's
contribution as set forth below), restore the Leased Property as nearly as may
be reasonably possible to the condition in which the same was
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immediately prior to such Condemnation, unless (a) such period of temporary use
or occupancy extends beyond the expiration of the Term, in which case Tenant
shall not be required to make such restoration, or (b) the condemnation award is
inadequate to cover the costs of such restoration, in which case the provisions
of Section 15.4 applicable to inadequate awards shall govern. If restoration is
required in connection with such temporary taking and the condemnation award
(together with any other sums Landlord elects, in its sole discretion, to
advance) is adequate to pay the costs thereof, the provisions of Section 15.4
shall govern the disbursement of the awards (and other sums, if applicable) and
the disposition of any awards in excess of restoration costs. If restoration is
required hereunder, Landlord shall contribute to the cost of such restoration
that portion of its entire Award that is specifically allocated to such
restoration in the judgment or order of the court, if any, and Tenant shall fund
the balance of such costs in advance of restoration in a manner reasonably
satisfactory to Landlord. Notwithstanding anything in this Lease to the
contrary, CCA shall be entitled to make a claim for the value of the Leased
Property and the Leased Improvements and shall have the sole and absolute right
to settle any claim with respect thereto, provided that Tenant shall be entitled
to make an independent claim for the value of the remaining Leasehold Interest
and CCA shall have the right to apply its portion of the condemnation proceeds
in accordance with the terms of the Mortgage (as defined in the Loan Agreement)
and the Loan Agreement.
ARTICLE XVI
-----------
16.1 Events of Default. If any one or more of the following events
-----------------
(individually, an "Event of Default") occurs:
(a) if Tenant fails to make payment of the Base Rent on the
Payment Date;
(b) if Tenant fails to make payment of the quarterly Percentage
Rent or payments for Additional Charges when the same becomes due and payable
and such condition continues for a period of ten days after receipt by the
Tenant of Notice from the Landlord thereof;
(c) if Tenant fails to observe or perform any term, requirement
covenant or condition of this Lease, other than the payment of Rent, and such
failure is not cured by Tenant within a period of 30 days after receipt by the
Tenant of Notice thereof from Landlord, unless such failure cannot with due
diligence be cured within a period of 30 days, in which case it shall not be
deemed an Event of Default if Tenant proceeds promptly and with due diligence to
cure the failure and diligently completes the curing thereof (provided, however,
in no event shall such cure period extend beyond 90 days after such Notice); or
(d) if Tenant shall file a petition in bankruptcy or
reorganization for an arrangement pursuant to any federal or state bankruptcy
law or any similar federal or state law, or shall be adjudicated a bankrupt or
shall make an assignment for the benefit of creditors or shall admit in writing
its inability to pay its debts generally as they become due, or if a petition or
answer proposing the adjudication of the Tenant as a bankrupt or its
reorganization pursuant to any federal or state bankruptcy law or any similar
federal or state law shall be filed in any court and the Tenant shall be
adjudicated a bankrupt and such adjudication shall not be vacated or set aside
or stayed within 60 days after the entry of an order in respect thereof, or if a
receiver of the Tenant or of the whole or substantially all of the assets of the
Tenant shall be appointed in any proceeding brought by the Tenant or if any such
receiver, trustee or liquidator shall be appointed in any proceeding brought
against the Tenant and shall not be vacated or set aside or stayed within 60
days after such appointment; or
(e) if Tenant is liquidated or dissolved, or begins proceedings
toward such liquidation or dissolution, or, in any manner, permits the sale or
divestiture of substantially all of its assets; or
(f) if the estate or interest of Tenant in the Leased Property or
any part thereof is voluntarily or involuntarily transferred, assigned,
conveyed, levied upon or attached in any proceeding, unless Tenant is contesting
such lien or attachment in good faith in accordance with Article XII hereof (for
purposes of this Section 16.1(f), a Change of Control of the Tenant shall
constitute an assignment of this Lease); or
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(g) if, except as a result of damage, destruction or a partial or
complete Condemnation, Tenant voluntarily ceases operations on the Leased
Property for a period in excess of 30 days; or
(h) if: (A) an event of default has been declared by the
Franchisor under the Franchise Agreement with respect to the Facility on the
Leased Premises as a result of any action or failure to act by Tenant or any
Person with whom Tenant contracts for management services at the Facility, other
than a failure to complete a Capital Improvement required by the Franchisor
resulting from Landlord's failure to fund the Capital Expenditure therefor
pursuant to Section 9.1(b), and (B) Tenant has failed, within 30 days
thereafter, to cure such default by either (1) curing the underlying default
under the Franchise Agreement and paying all costs and expenses associated
therewith, or (2) obtaining at Tenant's sole cost and expense a substitute
franchise license agreement with a substitute franchisor acceptable to Landlord,
on terms and conditions acceptable to Landlord; provided, however, that if
Tenant is in good faith disputing an assertion of default by the Franchisor or
is proceeding diligently to cure such default, the 30-day period shall be
extended for such period of time as Tenant continues to dispute such default in
good faith or diligently proceeds to cure such default, so long as there is no
period during which the Facility is not operated pursuant to a Franchise
Agreement approved by Landlord; or
(i) if a Performance Failure has occurred and has not been cured
in accordance with this Lease; or
(j) if Tenant or any of its Affiliates defaults under any other
lease with Landlord or an Affiliate of Landlord; or
(k) if there is a Change in Control of Tenant; or
(l) if there is a default under the Guaranty, if applicable, by
the Person acting as guarantor for Tenant; or
(m) if any representation or warranty made herein by Tenant or in
the Security Agreement, or in any report, certificate, financial statement or
other Instrument, agreement or document furnished by any Tenant in connection
with this Lease shall be false in any material respect as of the date such
representation or warranty was made or remade; or
(n) if Tenant attempts to delegate its obligations or assign its
rights under this Lease or the Security Agreement or any interest herein or
therein, except as expressly permitted in this Lease or in the event Landlord's
prior written consent has been previously obtained; or
(o) if any provision of any organizational document of Tenant is
amended or modified in any respect which may adversely affect Landlord or if
Tenant fails to perform or enforce the provisions of such organizational
documents or attempts to dissolve Tenant; or
(p) Tenant's failure to meet the Operating Standards as described
in Section 18.2
then, and in any such event, Landlord may exercise one or more
remedies available to it herein or at law or in equity, including but not
limited to its right to terminate this Lease by giving Tenant not less than ten
days' Notice of such termination.
If litigation is commenced with respect to any alleged default
under this Lease, the prevailing party in such litigation shall receive, in
addition to its damages incurred, such sum as the court shall determine as its
reasonable attorneys' fees, and all costs and expenses incurred in connection
therewith.
No Event of Default (other than a failure to make a payment of
money) shall be deemed to exist under clause (c) during any time the curing
thereof is prevented by an Unavoidable Delay, provided that upon the cessation
of such Unavoidable Delay, Tenant remedies such default or Event of Default
without further delay.
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16.2 Surrender. If an Event of Default occurs (and the event giving
---------
rise to such Event of Default has not been cured within the curative period
relating thereto as set forth in Section 16.1) and is continuing, whether or not
this Lease has been terminated pursuant to Section 16.1, Tenant shall, if
requested by Landlord so to do, immediately surrender to Landlord the Leased
Property including, without limitation, any and all books, records, files,
licenses, permits and keys relating thereto, and quit the same and Landlord may
enter upon and repossess the Leased Property by reasonable force, summary
proceedings, ejectment or otherwise, and may remove Tenant and all other persons
and any and all personal property from the Leased Property, subject to rights of
any hotel guests and to any requirement of law. Tenant hereby waives any and all
requirements of applicable laws for service of notice to re-enter the Leased
Property. Landlord shall be under no obligation to, but may if it so chooses,
relet the Leased Property or otherwise mitigate Landlord's damages, except
unless otherwise required by applicable law.
16.3 Damages. Neither (a) the termination of this Lease, (b) the
-------
repossession of the Leased Property, (c) the failure of Landlord to relet the
Leased Property, nor (d) the reletting of all or any portion thereof, shall
relieve Tenant of its liability and obligations hereunder, all of which shall
survive any such termination, repossession or reletting. In the event of any
such termination, Tenant shall forthwith pay to Landlord all Rent due and
payable with respect to the Leased Property to and including the date of such
termination.
Tenant shall forthwith pay to Landlord, at Landlord's option, as
and for liquidated and agreed current damages for Tenant's default, either:
(1) Without termination of Tenant's right to possession of the
Leased Property, each installment of Rent and other sums payable by Tenant to
Landlord under the Lease as the same becomes due and payable, which Rent and
other sums shall bear interest at the Overdue Rate, and Landlord may enforce, by
action or otherwise, any other term or covenant of this Lease; or
(2) the sum of:
(A) the unpaid Rent which had been earned at
the time of termination, repossession or reletting,
and
(B) the worth at the time of termination,
repossession or reletting of the amount by which the
unpaid Rent for the balance of the Term after the
time of termination, repossession or reletting,
exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided, and
(C) any other amount necessary to compensate
Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under
this Lease or which in the ordinary course of things,
would be likely to result therefrom. The worth at the
time of termination, repossession or reletting of the
amount referred to in subparagraph (B) is computed by
discounting such amount at the discount rate of the
Federal Reserve Bank of New York at the time of award
plus 1%.
Rent for the purposes of this Section 16.3 shall be a sum equal to (i) the
average of the annual amounts of the Rent for the three Fiscal Years immediately
preceding the Fiscal Year in which the termination, re-entry or repossession
takes place, or (ii) if three Fiscal Years shall not have elapsed, the average
of the Rent during the preceding Fiscal Years during which the Lease was in
effect, or (iii) if one Fiscal Year has not elapsed, the amount derived by
annualizing the Rent from the effective date of this Lease.
16.4 Waiver. If this Lease is terminated pursuant to Section 16.1,
------
Tenant waives, to the extent permitted by applicable law, (a) any right to a
trial by jury in the event of summary proceedings to enforce the remedies set
forth in this Article XVI, and (b) the benefit of any laws now or hereafter in
force exempting property from liability for rent or for debt and Landlord waives
any right to "pierce the corporate veil" of Tenant other than to the extent
funds shall have been inappropriately paid any Affiliate of Tenant following a
default resulting in an Event of Default.
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16.5 Application of Funds. Any payments received by Landlord under any
--------------------
of the provisions of this Lease during the existence or continuance of any Event
of Default shall be applied to Tenant's obligations in the order that Landlord
may determine or as may be prescribed by the laws of the State.
ARTICLE XVII
------------
Landlord's Right to Cure Tenant's Default. If Tenant fails to make any
-----------------------------------------
payment or to perform any act required to be made or performed under this Lease
including, without limitation, Tenant's failure to comply with the terms of any
Franchise Agreement, and fails to cure the same within the relevant time periods
provided in Section 16.1, Landlord, without waiving or releasing any obligation
of Tenant, and without waiving or releasing any obligation or default, may (but
shall be under no obligation to) at any time thereafter make such payment or
perform such act for the account and at the expense of Tenant, and may, to the
extent permitted by law, enter upon the Leased Property for such purpose and,
subject to Section 16.4, take all such action thereon as, in Landlord's opinion,
may be necessary or appropriate therefor. No such entry shall be deemed an
eviction of Tenant. All sums so paid by Landlord and all costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses, in each
case to the extent permitted by law) so incurred, together with a late charge
thereon (to the extent permitted by law) at the Overdue Rate from the date on
which such sums or expenses are paid or incurred by Landlord, shall be paid by
Tenant to Landlord on demand. The obligations of Tenant and rights of Landlord
contained in this Article shall survive the expiration or earlier termination of
this Lease.
ARTICLE XVIII
-------------
18.1 Operational Standards. Upon Tenant's failure to comply with any of
---------------------
the standards set forth in Sections 18.1(a)-(c) below (a "Performance Failure"),
Landlord shall have the right, subject to subsection (d) of this Section 18.1,
at Landlord's option, to terminate this Lease upon thirty (30) days' Notice (the
"Notice Period") to Tenant.
(a) Leased Property. The Tenant, at its expense, shall maintain
---------------
and operate the Leased Property and all means of access in a first class manner,
at a minimum comparable to other first class hotels [charging comparable rates
and] [including, without limitation, those identified on Schedule 18.1(a)]
sharing a primary trade area with the Leased Property with respect to
appearance, maintenance of furniture, fixtures and equipment, soft goods,
cleanliness, signage, lobby appearance, service and health and safety standards.
Landlord shall be permitted to inspect the Leased Property for these purposes as
set forth in Article XXV.
(b) Intentionally omitted.
(c) Approval of Advertising and Marketing Programs. If there is no
----------------------------------------------
Franchise Agreement applicable to the Facility, Tenant shall comply with the
provisions of this Section 18.1(c) (which are in addition to those set forth in
Section 24.3). In such a case, the Marketing Plan shall be subject to Landlord's
approval in its reasonable discretion. The Marketing Plan shall set forth the
Tenant's marketing and advertising strategy for the forthcoming Lease Year. The
Marketing Plan shall include a comparison of the actual marketing and
advertising implemented for the previous Lease Year (and the costs thereof) with
those proposed for the current Lease Year. Along with the Marketing Plan, Tenant
shall submit copies of any print advertising or other marketing materials to
Landlord for its approval. Tenant shall follow the strategy set forth in the
Marketing Plan, and all marketing and advertising shall have been approved by
Landlord, unless Tenant obtains Landlord's approval otherwise, which approval
shall not be unreasonably withheld, conditioned or delayed. At any point during
the Lease Year, should Landlord determine that Tenant's marketing and
advertising activities have failed to comply with those set forth in an approved
Marketing Plan, Landlord may instruct Tenant to implement additional marketing
or advertising activities, at Tenant's sole expense.
(d) Landlord's right to terminate the Lease for a Performance
Failure under this Section 18.1 shall be subject to Tenant's right to cure as
follows:
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(1) For Performance Failures pursuant to
subsections (a) and (c) above, Tenant shall have the right to cure the
Performance Failure occurring thereunder within the Notice Period; provided that
with respect to subsection (a) if Tenant shall commence the cure during the
Notice Period and thereafter prosecute such cure diligently, the cure period
shall be extended up to an additional 60 days after the expiration of the Notice
Period; and
(2) Intentionally omitted.
If Landlord chooses to terminate the Lease as provided herein, Tenant
shall immediately surrender the Leased Property to Landlord. If Tenant fails to
so surrender, Landlord shall have the right, without notice, to enter upon and
take possession of the Leased Property and to expel or remove Tenant and its
effects without being liable for prosecution or any claim for damages therefor,
and Tenant shall, and hereby agrees to, indemnify Landlord for the total of (i)
in the event that Tenant does not promptly surrender the Leased Property, the
reasonable costs of recovering the Leased Property and all other losses,
liabilities and reasonable expenses incurred by Landlord in connection with
Tenant's failure to surrender; (ii) the unpaid Rent earned as of the date of
termination, plus interest at the Overdue Rate accruing after the due date; and
(iii) all other sums of money then owing by Tenant to Landlord.
18.2 Operating Standards. Tenant hereby covenants and agrees that it
-------------------
shall operate the Leased Facilities such that (a) as of the last day of each
calendar quarter while the Loan Agreement is in effect, the Debt Service
Coverage Ratio (as defined in the Loan Agreement) for the Leased Property and,
if applicable, the Other Facilities, computed on the basis of the prior twelve
(12) calendar months, is not less than 1.10 and (b) as of the last day of each
calendar quarter while the Loan Agreement is in effect, the Adjusted Net
Operating Income (as defined in the Loan Agreement) for the Leased Property and,
if applicable, the Other Facilities, computed on the basis of the prior twelve
(12) calendar months, is not less than sixty-five percent (65%) of the Base
Adjusted NOI (as defined in the Loan Agreement). Failure to satisfy the
foregoing standards (the "Operating Standards") shall constitute an immediate
-------------------
Event of Default; provided, however, that any failure to satisfy the foregoing
standards shall not constitute an Event of Default if the reduction in the Debt
Service Coverage Ratio is due, as determined by Lender in its sole discretion,
is attributable primarily to (a) an overall decline in the hospitality industry
in the jurisdictions in which the Leased Property and the Other Facilities are
located such as a decline attributable to the effect of a natural disaster in
such jurisdictions or a similar event or (b) specific economic conditions
affecting the Leased Property and the Other Facilities which are beyond the
Tenant's control, such as the bankruptcy of a major contract customer of the
Leased Property and the Other Facilities and similar events. If Landlord
declares such Event of Default and seeks to terminate the Lease, Tenant may
avoid such termination if within five (5) days of Landlord's request that this
Lease be terminated, Tenant remits to Landlord cash to be applied in accordance
with and subject to the terms of Section 2.7 of the Loan Agreement in an amount
-----------
sufficient to cause the Debt Service Coverage Ratio (as defined in the Loan
Agreement) for the Leased Property and the Other Facilities computed on the
basis of the prior twelve (12) calendar months to be greater than or equal to
1.50 (calculated as if such amount was actually applied to reduce the Principal
Indebtedness (as defined in the Loan Agreement) upon which Debt Service (as
defined in the Loan Agreement) was paid and calculated as if the Principal
Indebtedness (as defined in the Loan Agreement) was reamortized on a
straight-line basis (as if the reduction had occurred) over the remaining number
of months until the Maturity Date (as defined in the Loan Agreement)). In the
event that this Lease is terminated pursuant hereto (or for any other reason),
Tenant shall cooperate with Landlord to secure a replacement tenant or manager
so as not to adversely affect Hudson's status as a REIT.
ARTICLE XIX
-----------
19.1 REIT Requirements. [CONFORM WITH STRATEGIC ALLIANCE AGREEMENT]
-----------------
(a) Tenant understands that, in order for Hudson to qualify as a
REIT, the following requirements (the "REIT Requirements") must be satisfied:
(i) The average of the adjusted tax bases of the
personal property that is leased to Tenant with respect to the Leased Property
at the beginning and end of a calendar year cannot exceed 15% of the average of
the aggregate adjusted tax bases of the real and personal property comprising
such Leased Property that is
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<PAGE>
leased to Tenant under such lease at the beginning and end of such calendar year
(the "Personal Property Limitation"). If Landlord reasonably anticipates that
the Personal Property Limitation will be exceeded with respect to a Leased
Property for any calendar year, Landlord shall notify Tenant, and Tenant agrees
to lease or purchase the personal property anticipated to be in excess of the
Personal Property Limitation (the "Excess Personal Property") from a third party
on terms mutually agreeable to Tenant and such third-party. Tenant shall pay all
sums required to be paid to purchase or under the leases of Excess Personal
Property. In the event that Tenant enters into such a lease or purchases such
Excess Personal Property, Tenant's Rent obligation shall be reduced, dollar for
dollar, for the amount paid by Tenant to lease or purchase the Excess Personal
Property. If Tenant purchases Excess Personal Property, the amount required by
Landlord to be made available under the Capital Expenditure Reserve pursuant to
Section 24.6 hereof shall be reduced for the Lease Year during which such
purchase or lease occurs by an amount equal to the aggregate purchase price or
leasing costs of such Excess Personal Property. Both Landlord and Tenant agree
to fully cooperate in obtaining and implementing the leasing or purchase of the
Excess Personal Property.
(ii) Tenant cannot sublet the property that is
leased to it by Landlord, or enter into any similar arrangement, on any basis
such that the rental or other amounts paid by the sublessee thereunder would be
based, in whole or in part, on either (i) the net income or profits derived by
the business activities of the sublessee or (ii) any other formula such that any
portion of the rent paid by Tenant to Landlord would fail to qualify as "rents
from real property" within the meaning of Section 856(d) of the Code.
(iii) Tenant cannot sublease the property leased
to it by Landlord to, or enter into any similar arrangement with, any person in
which Hudson owns, directly or indirectly, a 10% or more interest, within the
meaning of Section 856(d)(2)(B) of the Code.
(iv) Hudson cannot own, directly or indirectly, a
10% or more interest in Tenant, within the meaning of Section 856(d)(2)(B) of
the Code.
(v) No person can own, directly or directly,
capital stock of Hudson that exceeds the "Limit" (as defined in Hudson's
Charter, as amended and restated).
(b) Tenant agrees, and agrees to use reasonable efforts to cause
its Affiliates, to use its best efforts to permit the REIT Requirements to be
satisfied. Tenant agrees, and agrees to use reasonable efforts to cause its
Affiliates, to cooperate in good faith with Hudson and Landlord to ensure that
the REIT Requirements are satisfied, including but not limited to, providing
Hudson with information about the ownership of Tenant, and its Affiliates to the
extent that such information is reasonably available. Tenant agrees, and agrees
to use reasonable efforts to cause its Affiliates, upon request by Hudson, and
where appropriate, at Hudson's expense, to take reasonable action necessary to
ensure compliance with the REIT Requirements. Immediately after becoming aware
that the REIT Requirements are not, or will not be, satisfied, Tenant shall
notify, or use reasonable efforts to cause its Affiliates to notify, Hudson of
such noncompliance.
19.2 Intentionally Deleted
19.3 Management Agreement. Tenant agrees that it will not enter into
--------------------
any management or agency agreement relating to the management or operation of
the Facility without the prior written consent of Landlord and the approval of
the franchisor under the Franchise Agreement.
19.4 Payments to Affiliates of Tenant. During the Term, Tenant shall
--------------------------------
not pay any fees to any Affiliate of Tenant in connection with the Facility,
except as approved in writing in advance by Landlord and as are consistent with
the Tenant's status as a single purpose Entity.
ARTICLE XX
----------
Holding Over. If Tenant for any reason remains in possession of the
------------
Leased Property after the expiration or earlier termination of the Term, such
possession shall be as a tenant at sufferance during which time Tenant shall pay
as
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<PAGE>
rental each month two times the aggregate of (a) one-twelfth of the aggregate
Base Rent and Percentage Rent payable with respect to the last Fiscal Year of
the Term, (b) all Additional Charges accruing during the applicable month and
(c) all other sums, if any, payable by Tenant under this Lease with respect to
the Leased Property. During such period, Tenant shall be obligated to perform
and observe all of the terms, covenants and conditions of this Lease, but shall
have no rights hereunder other than the right, to the extent given by law to
tenancies at sufferance, to continue its occupancy and use of the Leased
Property. Nothing contained herein shall constitute the consent, express or
implied, of Landlord to the holding over of Tenant after the expiration or
earlier termination of this Lease.
ARTICLE XXI
-----------
Risk of Loss. During the Term, the risk of loss or of decrease in the
------------
enjoyment and beneficial use of the Leased Property in consequence of the damage
or destruction thereof by fire, the elements, casualties, thefts, riots, wars or
otherwise, or in consequence of foreclosures, attachments, levies or executions
(other than those caused by Landlord and those claiming from, through or under
Landlord) is assumed by Tenant except as specifically provided in this Lease,
and, in the absence of gross negligence, willful misconduct or breach of this
Lease by Landlord pursuant to Section 34.3, Landlord shall in no event be
answerable or accountable therefor, nor shall any of the events mentioned in
this Section entitle Tenant to any abatement of Rent except as specifically
provided in this Lease.
ARTICLE XXII
------------
22.1 Indemnification. Notwithstanding the existence of any insurance,
---------------
and without regard to the policy limits of any such insurance or self-insurance,
but subject to Section 16.4 and Article VIII, Tenant will protect, indemnify,
hold harmless and defend Landlord from and against all liabilities, obligations,
claims, damages, penalties, causes of action, costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses), to the extent
permitted by law, imposed upon or incurred by or asserted against Landlord
Indemnified Parties by reason of: (a) any accident, injury to or death of
persons or loss of or damage to property occurring on or about the Leased
Property or adjoining sidewalks, including without limitation any claims under
liquor liability, "dram shop" or similar laws, (b) any past, present or future
use, misuse, non-use, condition, management, maintenance or repair by Tenant or
any of its agents, employees or invitees of the Leased Property or Tenant's
Personal Property or any litigation, proceeding or claim by governmental
entities or other third parties to which a Landlord Indemnified Party is made a
party or participant related to such use, misuse, non-use, condition,
management, maintenance, or repair thereof by Tenant or any of its agents,
employees or invitees, including any failure of Tenant or any of its agents,
employees or invitees to perform any obligations under this Lease or imposed by
applicable law, (c) any Impositions that are the obligations of Tenant pursuant
to the applicable provisions of this Lease, (d) any failure on the part of
Tenant to perform or comply with any of the terms of this Lease, and (e) the
non-performance of any of the terms and provisions of any and all existing and
future subleases of the Leased Property to be performed by the landlord
thereunder.
Landlord shall indemnify, save harmless and defend Tenant Indemnified
Parties from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses imposed upon or incurred by or
asserted against Tenant Indemnified Parties as a result of (a) the gross
negligence or willful misconduct of Landlord arising in connection with this
Lease or (b) any failure on the part of Landlord to perform or comply with any
of the terms of this Lease.
Any amounts that become payable by an Indemnifying Party under this
Section shall be paid within ten days after liability therefor on the part of
the Indemnifying Party is determined by litigation or otherwise, and if not
timely paid, shall bear a late charge (to the extent permitted by law) at the
Overdue Rate from the date of such determination to the date of payment. An
Indemnifying Party, at its expense, shall contest, resist and defend any such
claim, action or proceeding asserted or instituted against the Indemnified
Party. The Indemnified Party, at its expense, shall be entitled to participate
in any such claim, action, or proceeding, and the Indemnifying Party may not
compromise or otherwise dispose of the same without the consent of the
Indemnified Party, which may not be unreasonably withheld.
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<PAGE>
Tenant's or Landlord's liability for a breach of the provisions of this
Article shall survive any termination of this Lease.
ARTICLE XXIII
-------------
23.1 Subletting and Assignment. Subject to the provisions of Article
-------------------------
XIX and Section 23.2 and any other conditions (or limitations set forth herein),
Tenant may, but only with the prior written consent of Landlord, (a) assign this
Lease or sublet all or any part of the Leased Property to an Affiliate of
Tenant, or (b) sublet any retail or restaurant portion of the Leased
Improvements in the normal course of the Primary Intended Use; provided, Tenant
warrants that any subletting to any party other than an Affiliate of Tenant
shall not individually as to any one such subletting, or in the aggregate,
materially diminish the actual or potential Percentage Rent payable under this
Lease. In the case of a subletting, the sublessee shall comply with the
provisions of Section 23.2, and in the case of an assignment, the assignee shall
assume in writing and agree to keep and perform all of the terms of this Lease
on the part of Tenant to be kept and performed and shall be, and become, jointly
and severally liable with Tenant for the performance thereof. Notwithstanding
the above, Tenant may assign the Lease to an Affiliate without the consent of
Landlord; provided that the organizational documents of such assignee are
acceptable to Landlord and the Rating Agencies and such replacement tenant has
delivered to Tenant and the Rating Agencies a nonconsolidation opinion in form
acceptable to such parties any such assignee assumes in writing and agrees to
keep and perform all of the terms of the Lease on the part of the Tenant to be
kept and performed and shall be and become jointly and severally liable with
Tenant for the performance thereof. In case of either an assignment or
subletting made during the Term, Tenant shall remain primarily liable, as
principal rather than as surety, for the prompt payment of the Rent and for the
performance and observance of all of the covenants and conditions to be
performed by Tenant hereunder. An original counterpart of each such sublease and
assignment and assumption, duly executed by Tenant and such sublessee or
assignee, as the case may be, in form and substance satisfactory to Landlord,
shall be delivered promptly to Landlord.
23.2 Attornment. Tenant shall insert in each sublease permitted under
----------
Section 23.1 provisions to the effect that (a) such sublease is subject and
subordinate to all of the terms and provisions of this Lease and to the rights
of Landlord hereunder, (b) if this Lease terminates before the expiration of
such sublease, the sublessee thereunder will, at Landlord's option, attorn to
Landlord and waive any right the sublessee may have to terminate the sublease or
to surrender possession thereunder as a result of the termination of this Lease,
and (c) if the sublessee receives a written Notice from Landlord or Landlord's
assignees, if any, stating that an uncured Event of Default exists under this
Lease, the sublessee shall thereafter be obligated to pay all rentals accruing
under said sublease directly to the party giving such Notice, or as such party
may direct. All rentals received from the sublessee by Landlord or Landlord's
assignees, if any, as the case may be, shall be credited against the amounts
owing by Tenant under this Lease.
ARTICLE XXIV
------------
24.1 Officer's Certificates; Financial Statements; Budgets; Landlord's
-----------------------------------------------------------------
Estoppel Certificates.
- ---------------------
(a) At any time and from time to time upon not less than 20
days Notice by Landlord, Tenant will furnish to Landlord an Officer's
Certificate certifying that this Lease is unmodified and in full force and
effect (or that this Lease is in full force and effect as modified and setting
forth the modifications), the date to which the Rent has been paid, whether to
the knowledge of Tenant there is any existing default or Event of Default exists
thereunder by Landlord or Tenant, and such other information as may be
reasonably requested by Landlord. Any such certificate furnished pursuant to
this Section may be relied upon by Landlord, any lender and any prospective
purchaser of the Leased Property.
(b) Financial Reporting. (i) Tenant shall keep and maintain or
-------------------
shall cause to be kept and maintained on a Fiscal Year basis, in accordance with
GAAP, books, records and accounts reflecting in reasonable detail all of the
financial affairs of Tenant and all items of income and expense in connection
with the operation of the Leased Property and in connection with any services,
equipment or furnishings provided in connection with the operation of the Leased
Property. Landlord, at Landlord's cost and expense, whether such income or
expense may
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<PAGE>
be realized by Tenant or by any other Person whatsoever, shall have the right
from time to time and at all times during normal business hours upon reasonable
prior written notice to Tenant to examine such books, records and accounts at
the office of Tenant or other Person maintaining such books, records and
accounts and to make such copies or extracts thereof as Landlord shall desire.
After the occurrence of an Event of Default, Tenant shall pay any costs and
expenses incurred by Landlord to examine any and all of Tenant's books, records
and accounts as Landlord shall determine in Landlord's sole discretion to be
necessary or appropriate in the protection of Landlord's interest.
(ii) Tenant shall furnish to Landlord annually
within ninety (90) days following the end of each Fiscal Year, a true, complete,
correct and accurate copy of Tenant's respective financial statements audited by
a Big Six Accounting Firm or other firm acceptable to Landlord in Landlord's
sole discretion which shall (a) be presented on a consolidated basis, provided,
however, that said consolidated financials are accompanied by a statement of
written procedures acceptable to Landlord regarding the relationship between and
the use of the relevant unaudited Leased Property level financial statements
(described more fully in subparagraph iii below) in the preparation of the
audited financial statements described in this subparagraph, (b) be in form and
substance acceptable to Landlord in Landlord's sole discretion, (c) be prepared
in accordance with GAAP, (d) include, without limitation, a statement of
operations (profit and loss), a statement of cash flows, a calculation of Gross
Revenues, net operating income, a consolidated balance sheet, an aged accounts
receivable report and such other information or reports as shall be reasonably
requested by Landlord or any applicable Rating Agency, (e) be accompanied by an
Officer's Certificate from a senior executive of Tenant respectively, certifying
as of the date thereof (x) that such statement is true, correct, complete and
accurate and fairly reflects the results of operations and financial condition
of Tenant for the relevant period, and (y) notice of whether there exists an
Event of Default or default, and if such Event of Default or default exists, the
nature thereof, the period of time it has existed and the action then being
taken to remedy same and (f) be accompanied by an opinion from an Independent
certified public accountant acceptable to Landlord in Landlord's sole
discretion.
(iii) Tenant shall furnish or shall cause to be
furnished to Landlord annually within forty (40) days following the end of each
Fiscal Year, a true, complete, correct and accurate copy of Tenant's unaudited
financial statement which shall (a) be presented on a consolidated as well as an
individual Leased Property and Other Facility basis, (b) be in form and
substance acceptable to Landlord in Landlord's sole discretion, (c) be prepared
in accordance with GAAP, (d) include, without limitation, a statement of
operations (profit and loss), a statement of cash flows, a calculation of Gross
Revenues and adjusted net operating income, a consolidated balance sheet, an
aged accounts receivable report and such other information or reports as shall
be reasonably requested by Landlord or any applicable Rating Agency and (e) be
accompanied by an Officer's Certificate from a senior executive of Tenant
certifying as of the date thereof (x) that such statement is true, correct,
complete and accurate and fairly reflects the results of operations and
financial condition of Tenant for the relevant period, and (y) notice of whether
there exists an Event of Default or default, and if such Event of Default or
default exists, the nature thereof, the period of time it has existed and the
action then being taken to remedy same.
(iv) Tenant shall furnish to Landlord within
twenty (20) days following the end of each calendar month, a true, correct,
complete and accurate monthly unaudited financial statement for Tenant which
shall (a) be presented on a consolidated as well as an individual Leased
Property and Other Facility basis (b) be in form and substance acceptable to
Landlord in Landlord's sole discretion, (c) be prepared in accordance with GAAP,
(d) include, without limitation, a statement of operations (profit and loss), a
statement of cash flows, a calculation of net operating income, a consolidated
balance sheet, an aged accounts receivable report and such other information or
reports as shall be reasonably requested by Landlord or any applicable Rating
Agency and (e) be accompanied by an Officer's Certificate from a senior
executive of Tenant certifying as of the date thereof (x) that such statement is
true, correct, complete and accurate and fairly reflects the results of
operations and financial condition of Tenant for the relevant period, and (y)
notice of whether there exists an Event of Default or default, and if such Event
of Default or default exists, the nature thereof, the period of time it has
existed and the action then being taken to remedy same.
(v) Tenant shall furnish to Landlord, within
twenty (20) days following the end of each calendar month, and with respect to
the Leased Property and each Other Facility, a true, complete, correct and
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accurate rent roll and occupancy report and such other occupancy and rate
statistics as Landlord shall request in Landlord's discretion. Each such
document shall (a) be presented on a consolidated as well as a facility by
facility basis, (b) be in form and substance acceptable to Landlord in
Landlord's sole discretion, and (c) be accompanied by an Officer's Certificate
from a senior executive of Tenant certifying as of the date thereof (x) that
such statement is true, correct, complete and accurate and (y) notice of whether
there exists an Event of Default or default, and if such Event of Default or
default exists, the nature thereof, the period of time it has existed and the
action then being taken to remedy same.
(vi) Tenant shall furnish to Landlord, within ten (10)
Business Days after request, such further information with respect to the
operation of the Leased Property or Other Facilities or any of them, and the
financial affairs of Tenant as may be reasonably requested by Landlord,
including without limitation all business plans prepared for Tenant or for the
operation of the Leased Property or the Other Facilities.
(vii) Intentionally deleted.
(viii) Tenant shall, concurrently with Tenant's delivery
to Landlord, provide a copy of the items required to be delivered to Landlord
under this Section to the Rating Agencies and CCA.
(ix) Tenant shall furnish to Landlord such other
financial information with respect to Tenant as Landlord may reasonably request
from time to time.
(c) At any time and from time to time upon not less than 20
days notice by Tenant, Landlord will furnish to Tenant or to any person
designated by Tenant an estoppel certificate certifying that this Lease is
unmodified and in full force and effect (or that this Lease is in full force and
effect as modified and setting forth the modifications), the date to which Rent
has been paid, whether to the knowledge of Landlord there is any existing
default or Event of Default on Tenant's part hereunder, and such other
information as may be reasonably requested by Tenant.
24.2 Operating Budget. Not later than sixty (60) days prior to the
----------------
commencement of each Lease Year, Tenant shall prepare and submit to Landlord an
operating budget (the "Operating Budget") in substantially the form attached
hereto as Exhibit "F", prepared in accordance with the requirements of this
-----------
Section 24.2. The Operating Budget shall be prepared in accordance with the
Uniform System to the extent applicable and show by month and quarter and for
the year as a whole in the degree of detail specified by the Uniform System for
monthly statements, and in accordance with the detail level of monthly financial
statements, the following:
(a) Tenant's reasonable estimate of Gross Revenues, Room Revenues,
Food Sales and Beverage Sales (including room rates) for the Facility for the
forthcoming Lease Year itemized on schedules on a monthly and quarterly basis as
approved by Landlord, together with the assumptions, in narrative form, forming
the basis of such schedules.
(b) A cash flow projection.
(c) Tenant's reasonable estimate for each quarter of the Lease
Year of Percentage Rent.
24.3 Marketing Plan. Not later than sixty (60) days prior to the
--------------
commencement of each Lease Year, Tenant will prepare and submit to Landlord a
narrative description of the program for advertising and marketing the Facility
for the forthcoming Lease Year (the "Marketing Plan") containing a detailed
budget itemization of the proposed advertising expenditures by category and the
assumptions, in narrative form, forming the basis of such budget itemization.
24.4 Capital Budget. Not later than sixty (60) days prior to the
--------------
commencement of each Lease Year, Tenant shall prepare and submit to Landlord a
capital budget (the "Capital Budget") prepared in accordance with this Section
24.4. The Capital Budget shall be prepared in accordance with the Uniform System
to the extent applicable and
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shall set forth Tenant's proposed Capital Expenditures for the ensuing Lease
Year and the next five (5) Lease Years, including a project-by-project schedule
of estimated start and completion dates.
24.5 Budget Approval and Disputes. Landlord shall have the right to
----------------------------
approve the Operating Budget, Marketing Plan and Capital Budget prepared by
Tenant for each Lease Year, which approval shall not be unreasonably withheld.
In the event of any dispute between Landlord and Tenant as to the Operating
Budget, the Marketing Plan or the Capital Budget, Landlord and Tenant shall act
promptly, reasonably and in good faith in seeking to resolve such disputes and
in arriving at a mutually acceptable Operating Budget, Marketing Plan and
Capital Budget; provided, however, that disputes regarding the Marketing Plan
shall be controlled by Section 18 if Section 18(c) is applicable to this Lease.
24.6 Capital Expenditure Reserve.
---------------------------
(a) Landlord shall be obligated to make available to Tenant an
amount equal to 5% of Room Revenues from the Facility during each Lease Year
("Capital Expenditures Reserve"). Upon written request by Tenant to Landlord
stating the specific use to be made and subject to the approval thereof by
Landlord, which approval shall not be unreasonably withheld, such funds shall be
made available by Landlord for Capital Expenditures set forth in the Capital
Budget; provided, however, that no Capital Expenditures shall be made to
purchase property (other than "real property" within the meaning of Treasury
Regulations Section 1.856-3(d)), to the extent that doing so would cause the
Landlord to recognize income other than "rents from real property" as defined in
Section 856(d) of the Code. Landlord's obligation shall be cumulative, but not
compounded, and any amounts that have accrued hereunder shall be payable in
future periods for such uses and in accordance with the procedure set forth
herein. Tenant shall have no interest in any accrued obligation of Landlord
hereunder after the termination of this Lease. All Capital Improvements shall be
owned by Landlord subject to the provisions of this Lease.
(b) Landlord's obligation with respect to Capital Expenditures
shall be limited to amounts available in the Capital Expenditures Reserve. No
arbitration resulting from the failure of Landlord and Tenant to agree on the
Capital Budget shall increase Landlord's obligation for Capital Expenditures
beyond the amount set forth in the immediately preceding sentence.
ARTICLE XXV
-----------
Landlord's Right to Inspect. Tenant shall permit Landlord and its
---------------------------
authorized representatives as frequently as reasonably requested by Landlord to
inspect the Leased Property and Tenant's accounts and records pertaining thereto
and make copies thereof, during usual business hours upon reasonable advance
notice, subject only to any business confidentiality requirements reasonably
requested by Tenant.
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ARTICLE XXVI
------------
No Waiver. No failure by Landlord or Tenant to insist upon the strict
---------
performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial payment
of Rent during the continuance of any such breach, shall constitute a waiver of
any such breach or of any such term. To the extent permitted by law, no waiver
of any breach shall affect or alter this Lease, which shall continue in full
force and effect with respect to any other then existing or subsequent breach.
ARTICLE XXVII
-------------
Remedies Cumulative. To the extent permitted by law, each legal,
-------------------
equitable or contractual right, power and remedy of Landlord or Tenant now or
hereafter provided either in this Lease or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right, power
and remedy and the exercise or beginning of the exercise by Landlord or Tenant
of any one or more of such rights, powers and remedies shall not preclude the
simultaneous or subsequent exercise by Landlord or Tenant of any or all of such
other rights, powers and remedies.
ARTICLE XXVIII
--------------
Acceptance of Surrender. No surrender to Landlord of this Lease or of
-----------------------
the Leased Property or any part thereof, or of any interest therein, shall be
valid or effective unless agreed to and accepted in writing by Landlord and no
act by Landlord or any representative or agent of Landlord, other than such a
written acceptance by Landlord, shall constitute an acceptance of any such
surrender.
ARTICLE XXIX
------------
No Merger of Title. There shall be no merger of this Lease or of the
------------------
leasehold estate created hereby by reason of the fact that the same person or
entity may acquire, own or hold, directly or indirectly: (a) this Lease or the
leasehold estate created hereby or any interest in this Lease or such leasehold
estate and (b) the fee estate in the Leased Property.
ARTICLE XXX
-----------
Conveyance by Landlord. If Landlord or any successor owner of the
----------------------
Leased Property conveys the Leased Property to a Person other than an Affiliate
of Landlord in accordance with the terms hereof other than as security for a
debt, and the grantee or transferee of the Leased Property expressly assumes all
obligations of Landlord hereunder arising or accruing from and after the date of
such conveyance or transfer, Landlord or such successor owner, as the case may
be, shall thereupon be released from all future liabilities and obligations of
Landlord under this Lease arising or accruing from and after the date of such
conveyance or other transfer as to the Leased Property and all such future
liabilities and obligations shall thereupon be binding upon the new owner.
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ARTICLE XXXI
------------
Quiet Enjoyment. So long as Tenant pays all Rent as the same becomes
---------------
due and complies with all of the terms of this Lease and performs its
obligations hereunder, in each case within the applicable grace periods, if any,
Tenant shall peaceably and quietly have, hold and enjoy the Leased Property for
the Term hereof, free of any claim or other action by Landlord or anyone
claiming by, through or under Landlord, but subject to all liens and
encumbrances subject to which the Leased Property was conveyed to Landlord or
hereafter consented to by Tenant or provided for herein. Notwithstanding the
foregoing, Tenant shall have the right by separate and independent action to
pursue any claim it may have against Landlord as a result of a breach by
Landlord of the covenant of quiet enjoyment contained in this Section.
ARTICLE XXXII
-------------
Notices. All notices, demands, requests, consents approvals and other
-------
communications ("Notice" or "Notices") hereunder shall be in writing and
personally served, delivered overnight by a reputable overnight express delivery
service (e.g., UPS, Federal Express), mailed (by registered or certified mail,
return receipt requested and postage prepaid) or sent by facsimile, addressed to
the following address or to such other address or addresses as either party may
hereafter designate:
LANDLORD: HH Perm-I, L.P.
c/o Hudson Hotels Trust
300 Bausch & Lomb Place
Rochester, New York 14604
Facsimile: (716) 454-1865
Attention:__________________
TENANT: HHC Perm-I, Inc.
c/o Hudson Hotels Corporation
300 Bausch & Lomb Place
Rochester, New York 14604
Facsimile: (716) 454-1865
Attention:__________________
Personally or express overnight delivered Notice shall be effective
upon receipt, and Notice given by mail shall be complete at the time of deposit
in the U.S. Mail system, but any prescribed period of Notice and any right or
duty to do any act or make any response within any prescribed period or on a
date certain after the service of such Notice given by mail shall be extended
five days.
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ARTICLE XXXIII
--------------
Appraisers. If it becomes necessary to determine the Fair Market Value
----------
of the Leased Property for any purpose of this Lease, the party required or
permitted to give Notice of such required determination shall include in the
Notice the name of a person selected to act as appraiser on its behalf. Within
10 days after Notice, Landlord (or Tenant, as the case may be) shall by Notice
to Tenant (or Landlord, as the case may be) appoint a second person as appraiser
on its behalf. The appraisers thus appointed, each of whom must be a member of
the American Institute of Real Estate Appraisers (or any successor organization
thereto) with at least five years experience in the State appraising property
similar to the Leased Property, shall, within 45 days after the date of the
Notice appointing the first appraiser, proceed to determine the Fair Market
Value as of the relevant date (giving effect to the impact, if any, of inflation
from the date of their decision to the relevant date); provided, however, that
if only one appraiser shall have been so appointed, then the determination of
such appraiser shall be final and binding upon the parties. If two appraisers
are appointed and if the difference between the amounts so determined does not
exceed 5% of the lesser of such amounts, then the Fair Market Value shall be an
amount equal to 50% of the sum of the amounts so determined. If the difference
between the amounts so determined exceeds 5% of the lesser of such amounts, then
such two appraisers shall have 20 days to appoint a third appraiser. If no such
appraiser shall have been appointed within such 20 days or within 90 days of the
original request for a determination of Fair Market Value, whichever is earlier,
either Landlord or Tenant may apply to any court having jurisdiction to have
such appointment made by such court. Any appraiser appointed by the original
appraisers or by such court shall be instructed to determine the Fair Market
Value within 45 days after appointment of such appraiser. The determination of
the appraiser which differs most in the terms of dollar amount from the
determinations of the other two appraisers shall be excluded, and 50% of the sum
of the remaining two determinations shall be final and binding upon Landlord and
Tenant as the Fair Market Value hereunder. This provision for determining by
appraisal shall be specifically enforceable to the extent such remedy is
available under applicable law, and any determination hereunder shall be final
and binding upon the parties except as otherwise provided by applicable law.
Landlord and Tenant shall each pay the fees and expenses of the appraiser
appointed by it and each shall pay one-half of the fees and expenses of the
third appraiser and one-half of all other costs and expenses incurred in
connection with each appraisal.
ARTICLE XXXIV
-------------
34.1 Landlord May Grant Liens. Without the consent of Tenant, Landlord
------------------------
may, subject to the terms and conditions set forth below in this Section 34.1,
from time to time, directly or indirectly, create or otherwise cause to exist
any lien, encumbrance or title retention agreement ("Encumbrance") upon the
Leased Property, or any portion thereof or interest therein, whether to secure
any borrowing or other means of financing or refinancing. Any such Encumbrance
shall contain the agreement by the holder of the Encumbrance that it will (1)
give Tenant the same notice, if any, given to Landlord of any default or
acceleration of any obligation underlying any such Encumbrance or any sale in
foreclosure under such Encumbrance, (2) permit Tenant to cure any such default
on Landlord's behalf within any applicable cure period, and Tenant shall be
reimbursed by Landlord for any and all costs incurred in effecting such cure,
including without limitation out-of-pocket costs incurred to effect any such
cure (including reasonable attorneys' fees) and (3) permit Tenant to appear by
its representative and to bid at any sale in foreclosure made with respect to
any such Encumbrance. Upon the request of Landlord, Tenant shall subordinate
this Lease to the lien of a new mortgage on the Leased Property.
34.2 Tenant's Right to Cure. Subject to the provisions of Section 34.3,
----------------------
if Landlord breaches any covenant to be performed by it under this Lease,
Tenant, after Notice to and demand upon Landlord, without waiving or releasing
any obligation hereunder, and in addition to all other remedies available to
Tenant, may (but shall be under no obligation at any time thereafter to) make
such payment or perform such act for the account and at the expense of Landlord.
All sums so paid by Tenant and all costs and expenses (including, without
limitation, reasonable attorneys' fees) so incurred, together with interest
thereon at the Overdue Rate from the date on which such sums or expenses are
paid or incurred by Tenant, shall be paid by Landlord to Tenant on demand or,
following entry of a final, nonappealable judgment against Landlord for such
sums, may be offset by Tenant against the Base Rent payments next accruing or
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coming due. The rights of Tenant hereunder to cure and to secure payment from
Landlord in accordance with this Section 34.2 shall survive the termination of
this Lease with respect to the Leased Property.
34.3 Breach of Landlord. It shall be a breach of this Lease if Landlord
------------------
fails to observe or perform any term, covenant or condition of this Lease on its
part to be performed and such failure continues for a period of 30 days after
Notice thereof from Tenant, unless such failure cannot with due diligence be
cured within a period of 30 days, in which case such failure shall not be deemed
to continue if Landlord, within such 30-day period, proceeds promptly and with
due diligence to cure the failure and diligently completes the curing thereof.
The time within which Landlord shall be obligated to cure any such failure also
shall be subject to extension of time due to the occurrence of any Unavoidable
Delay.
ARTICLE XXXV
------------
35.1 Miscellaneous. Anything contained in this Lease to the contrary
-------------
notwithstanding, all claims against, and liabilities of, Tenant or Landlord
arising prior to any date of termination of this Lease shall survive such
termination. If any term or provision of this Lease or any application thereof
is invalid or unenforceable, the remainder of this Lease and any other
application of such term or provisions shall not be affected thereby. If any
late charges or any interest rate provided for in any provision of this Lease
are based upon a rate in excess of the maximum rate permitted by applicable law,
the parties agree that such charges shall be fixed at the maximum permissible
rate. Neither this Lease nor any provision hereof may be changed, waived,
discharged or terminated except by a written instrument in recordable form
signed by Landlord and Tenant. All the terms and provisions of this Lease shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. The headings in this Lease are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Lease shall be governed by and construed in accordance with
the laws of the State, but not including its conflicts of laws rules.
35.2 Transfer of Licenses. Upon the expiration or earlier termination
--------------------
of the Term, Tenant shall use its best efforts (i) to transfer to Landlord or
Landlord's nominee all Franchise Agreements, licenses, operating permits and
other governmental authorizations and all contracts, including contracts with
governmental or quasi-governmental entities, that may be necessary for the
operation of the Facility (collectively, "Licenses"), and (ii) if any such
transfer is prohibited by law or Landlord otherwise elects, to cooperate with
Landlord or Landlord's nominee in connection with the processing by Landlord or
Landlord's nominee of any applications for all Licenses; provided, in either
case, that the reasonable costs and expenses of any such transfer or the
processing of any such application shall be paid by Landlord or Landlord's
nominee.
35.3 Waiver of Presentment, etc. Tenant waives all presentments,
--------------------------
demands for payment and for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance and waives
all notices of the existence, creation, or incurring of new or additional
obligations, except as expressly granted herein.
35.4 No Change in Control. Tenant covenants that throughout the Term
--------------------
there will be no Change in Control with regard to Tenant without the prior
written consent of Landlord.
ARTICLE XXXVI
-------------
Memorandum of Lease. Landlord and Tenant shall promptly upon the
-------------------
request of either enter into a short form memorandum of this Lease, in form
suitable for recording under the laws of the State in which reference to this
Lease, and all options contained herein, shall be made. The requesting party
shall pay all costs and expenses of recording such memorandum of this Lease.
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ARTICLE XXXVII
--------------
Landlord's Option to Purchase Assets of Tenant. Effective on not less
----------------------------------------------
than 90 days prior Notice given at any time within 180 days before the
expiration of the Term, but not later than 90 days prior to such expiration, or
upon such shorter Notice period as shall be appropriate if this Lease is
terminated prior to its expiration date, Landlord shall have the option to
purchase all (but not less than all) of the assets of Tenant, tangible and
intangible, relating to the Leased Property (other than this Lease), at the
expiration or termination of this Lease for an amount (payable in cash on the
expiration date of this Lease) equal to the fair market value thereof as
appraised in conformity with Article XXXIII, except that the appraisers need not
be members of the American Institute of Real Estate Appraisers, but rather shall
be appraisers having at least ten years experience in valuing similar assets.
Notwithstanding any such purchase, Landlord shall obtain no rights to any trade
name or logo used in connection with the Franchise unless separate agreement as
to such use is reached with the applicable franchisor.
ARTICLE XXXVIII
---------------
Landlord's Option to Terminate Lease. In the event (a) Landlord enters
------------------------------------
into a bona fide contract to sell the Leased Property to a non-Affiliate, or (b)
Landlord determines that because of a change in the tax laws or for any other
reason in Landlord's sole discretion, it wishes to terminate the Lease, Landlord
may terminate this Lease effective upon the closing under such contract or the
date determined by Landlord, provided that no such termination shall be
effective unless and until (i) Landlord shall have given not less than thirty
(30) days prior Notice to Tenant of Landlord's election to terminate this Lease
(or such longer notice as may be required to comply with the WARN Act or other
similar or successor federal or state laws), and (ii) the Leasehold Value
hereunder shall have been determined. Effective upon such termination, provided
that the above conditions are met, this Lease shall terminate and be of no
further force and effect except as to any obligations of the parties existing as
of such date that survive termination of this Lease. As compensation for the
early termination of its leasehold estate under this Article XXXVIII, Landlord
or its Affiliates may within one year before or after the date of such
termination, at its option either (a) pay to Tenant the Leasehold Value as of
the closing of the sale of the Leased Property (b) offer to lease to Tenant or
its Affiliates a Substitute Facility or (c) offer to both lease to Tenant or its
Affiliates a Substitute Facility and to pay the difference between the Leasehold
Value and the value of the Substitute Facility. If the Landlord elects to offer
Tenant or its Affiliates a Substitute Facility for the Leased Property and the
Substitute Facility is one that was leased to Tenant or its Affiliates before
the termination of this Lease, the Substitute Facility has to be identified at
the time it is leased to Tenant or its Affiliates as a substitute for up to
three specified existing leases for which terminations are contemplated and
termination of such existing leases have to occur within one year after entering
into the new lease for the Substitute Facility. If Landlord elects and complies
with the options described in (b) or (c) above, regardless of whether Tenant
enters into the lease(s) for a Substitute Facility described therein, Landlord
shall have no further obligations to Tenant with respect to compensation for the
early termination of this Lease, except for the obligation to pay fees and costs
as aforesaid. Notwithstanding anything in this Section to the contrary, the
terms of this Section shall not be applicable in connection with a termination
due to an Event of Default.
ARTICLE XXXIX
-------------
39.1 Compliance with Franchise Agreement. To the extent any of the
-----------------------------------
provisions of the Franchise Agreement impose a greater obligation on Tenant than
the corresponding provisions of this Lease, then Tenant shall be obligated to
comply with the provisions of the Franchise Agreement (other than requirements
with respect to Capital Improvements). It is the intent of the parties hereto
that Tenant shall comply in every respect with the provisions of the Franchise
Agreement so as to avoid any default thereunder during the term of this Lease.
Tenant shall not terminate, extend or enter into any modification of the
Franchise Agreement without in each instance first obtaining Landlord's prior
written consent. Landlord and Tenant agree to cooperate with each other in the
event it becomes necessary to obtain a franchise extension or modification or a
new franchise for the Leased Property, and in any transfer of the Franchise
Agreement to Landlord or, any designee of Landlord or any successor to Tenant
upon the termination of this
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Lease. In the event of expiration or termination of a Franchise Agreement, for
whatever reason, the Landlord will have the right, in its sole discretion, to
approve any new Franchise Agreement for the Facility. If, upon any expiration or
earlier termination of this Lease (other than upon an Event of Default by
Tenant), a Franchise Agreement remains in effect, or would but for such
expiration or termination remain in effect, Landlord shall indemnify, defend and
hold Tenant harmless with respect to the obligations and liabilities arising
thereunder after the date of expiration or termination of this Lease.
39.2 Change of Franchise. Tenant shall not alter, amend or terminate
-------------------
the Franchise Agreement without Landlord's prior written consent.
Notwithstanding anything else in this Lease, Landlord may, in its sole
discretion, change the Franchise Agreement for the Facility upon sixty (60) days
Notice to Tenant. Landlord shall be responsible for the payment of any
termination fees under the Franchise Agreement. If the franchise fees under the
new Franchise Agreement materially differ from those in the prior Franchise
Agreement, the parties shall negotiate in good faith new Lease terms to account
for the increase or decrease, as the case may be, in franchise fees.
39.3 Termination of Franchise Agreement. The parties hereto
----------------------------------
acknowledge that an uncured default caused by Tenant under the Franchise
Agreement which leads to termination under the terms and conditions of the
Franchise Agreement will constitute a default under the terms and conditions of
this Lease, and, in such event, this Lease must be terminated if the Leased
Property is to continue in the Fairfield Inn System upon cure of the default by
Landlord or its agents. If (i) Landlord demonstrates to the reasonable
satisfaction of franchisor under the Franchise Agreement that the default will
be cured in a timely manner (or if the default will be cured by the mere
replacement of Tenant) and (ii) Landlord promptly engages an interim tenant and
such interim tenant assumes in writing the obligation of franchisee under the
Franchise Agreement, then in such event, franchisor under the Franchise
Agreement shall recognize such interim tenant as franchisee and the Franchise
Agreement shall remain in effect for ninety (90) days to enable Landlord to
engage a substitute tenant.
39.4 Landlord Approval of Capital Expenditures. All Capital
-----------------------------------------
Expenditures whether pursuant to the Capital Budget or otherwise shall be
subject to the approval of Landlord, which approval shall extend both to the
plans and specifications (including matters of design and decor) and to the
contracting and purchasing of all labor, services and materials. Landlord shall
have the right to require competitive bidding of contracts for Capital
Improvements, review all bids and monitor costs, time, quality and performance.
The foregoing restrictions shall not apply to emergency Capital Expenditures
made by Tenant in amounts not to exceed $25,000, and with prior notice to
Landlord (if possible under the circumstances).
39.5 Inventory. On the Commencement Date, Tenant agrees to purchase
---------
from Landlord, for cash, the fair market value of any Inventory at the Facility.
ARTICLE XL
----------
40.1 Central Cash Management. [CONFORM TO LOAN AGREEMENT]
-----------------------
(a) Collection Accounts. Operator shall open and maintain at a
-------------------
bank acceptable to Landlord (the "Collection Account Bank") a trust account (the
-----------------------
"Collection Account"), and such Collection Account Bank shall not commingle the
------------------
amounts in such account with any other amounts held on behalf of any other
Person. The Collection Account shall be assigned an identification number by the
relevant Collection Account Bank and shall be opened and maintained in the name
" [Landlord's Name] as Secured Party of ____________________." Tenant shall not
have any right of withdrawal from any Collection Account. Pursuant to a payment
direction letter in the form attached to the Collection Account Agreement,
Tenant shall direct each Credit Card Company to pay all amounts payable to
Tenant pursuant to each Merchant Agreement between Tenant and each Credit Card
Company directly into the Collection Account. In addition, Tenant shall deposit
all Receipts, money or other items of Gross Revenues payable to Tenant with
respect to the Leased Property directly into the Collection Account within on
Business Day after receipt thereof.
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(b) Sweeps. On a daily basis, prior to Landlord's written
------
notification to the Collection Account Bank that a Cash Management Event has
occurred, the Collection Account Bank shall transfer amounts constituting
collected funds on deposit in the Collection Account to such account as may be
designated by Tenant from time to time in writing by Tenant to Collection
Account Bank. On a daily basis, on and after Landlord's written notice to
Collection Account Bank that a Cash Management Event has occurred, the
Collection Account Bank shall transfer by wire transfer or via the ACH system
amounts constituting collected funds on deposit in the Collection Account to an
account identified in writing by Landlord.
(c) Payments. Prior to the occurrence of a Cash Management Event,
--------
Tenant shall pay to Landlord by depositing in the Landlord's Collection Account
on or prior to each Payment Date, the Basic Rent and the Percentage Rent. After
the occurrence of a Cash Management Event, pursuant to the Collection Account
Agreements among the respective Collection Account Banks, Borrowers and Lender
(each a "Collection Account Agreement"), Landlord will authorize and direct the
----------------------------
Collection Account Bank to transfer on a daily basis, all funds deposited in the
Collection Account to Landlord's Collection Account. The sums in Landlord's
Collection Account will be swept to the Cash Collateral Account. Such sums will
be allocated to the Sub-Accounts (as defined in the Loan Agreement) of the Cash
Collateral Account. Upon Landlord's receipt of Excess Cash (as defined in the
Loan Agreement), Landlord will remit to Tenant an amount equal to the (1) the
sums swept to the Cash Collateral Account (as defined in the Loan Agreement)
less (2) the Base Rent and monthly Percentage Rent payable by Tenant under the
Lease.
(d) Exercise of Landlord's Rights. Tenant hereby acknowledges and
-----------------------------
agrees that Landlord will be assigning to CCA Landlord's rights under this
Section as well as under the other terms of this lease as collateral security
for the loan evidenced by the Loan Agreement.
ARTICLE XLI
-----------
41.1 Additional Covenants.
(A) Existence; Compliance with Legal Requirements; Insurance.
--------------------------------------------------------
Tenant shall do or cause to be done all things necessary to preserve, renew and
keep in full force and effect its corporate existence, rights, licenses, permits
and franchises necessary for the conduct of its business and comply in all
respects with all applicable Legal Requirements and Insurance Requirements
applicable to it and any the Leased Facility. Tenant shall notify Landlord
promptly of any written notice or order that Tenant receives from any
Governmental Authority relating to Tenant's failure to comply with such
applicable Legal Requirements relating to the Leased Property.
(B) Litigation. Tenant shall give prompt written notice to
----------
Landlord of any litigation or governmental proceedings pending or threatened
against Tenant which is reasonably likely to have a Material Adverse Effect.
(C) Single Purpose Entity.
---------------------
(i) Tenant shall at all times be a duly formed and
existing corporation and a Single Purpose Entity.
(ii) Tenant will continue to comply with the
provisions of all of its organizational documents, and the laws of the
state in which Tenant was formed relating to its corporate status.
(iii) All customary formalities regarding the
corporate existence of Tenant will continue to be observed.
(iv) Tenant will continue to be adequately
capitalized in light of the nature of its business.
-49-
<PAGE>
(D) Collection Account Agreement. Tenant shall observe, perform
----------------------------
and satisfy all of the terms, provisions covenants and conditions of the
Collection Account Agreement applicable to Tenant.
(E) Security Agreement. Tenant shall observe, perform and satisfy
------------------
all of the terms, provisions, covenants and conditions of the Security Agreement
applicable to Tenant.
41.2 Negative Covenants. Tenant covenants and agrees that during the
------------------
term of this Lease, it will not do, directly or indirectly, any of the following
unless Landlord consents thereto in writing:
(A) Liens on the Leased Property. Incur, create, assume, become or
----------------------------
be liable in any manner with respect to, or permit to exist, any Lien with
respect to the Leased Property, except: (i) Liens in favor of Landlord and (ii)
the Permitted Encumbrances (as defined in the Loan Agreement).
(B) Intentionally deleted.
---------------------
(C) Other Borrowings. Except as permitted pursuant to this Lease,
----------------
incur, create, assume, become or be liable in any manner with respect to any
indebtedness.
(D) Intentionally Omitted.
---------------------
(E) Change In Business. Cease to be a Single-Purpose Entity or
------------------
make any material change in the scope or nature of its business objectives,
purposes or operations, or undertake or participate in activities other than the
continuance of its present business.
(F) Debt Cancellation. Cancel or otherwise forgive or release any
-----------------
material claim or debt owed to Tenant, Person, except for adequate consideration
or in the ordinary course of Tenant's business.
(G) Affiliate Transactions. Enter into, or be a party to, any
----------------------
transaction with an Affiliate of Tenant, except in the ordinary course of
business and on terms which are no less favorable to Tenant or such Affiliate
than would be obtained in a comparable arm's length transaction with an
unrelated third party, and, if the amount to be paid to the Affiliate pursuant
to the transaction or series of related transactions is greater than $50,000
(determined annually on an aggregate basis) fully disclosed to Landlord in
advance.
(H) Creation of Easements. Create, or permit the Leased Property
---------------------
or any part thereof to become subject to, any easement, license or restrictive
covenant, other than a Permitted Encumbrance (as defined in the Loan Agreement).
(I) Misapplication of Funds. Distribute any Receipts or Money
-----------------------
received in violation of the provisions of Article 41 and the Collection Account
Agreement.
(J) Intentionally deleted.
---------------------
(K) Issuance of Equity Interests. Issue or allow to be created any
----------------------------
stocks or shares or shareholder, partnership or membership interests, as
applicable, or other ownership interests other than the stocks, shares,
shareholder, partnership or membership interests and other ownership interests
which are outstanding or exist on the Commencement Date or any security or other
instrument which by its terms is convertible into or exercisable or exchangeable
for Tenant's ownership interests in Tenant.
(L) Assignment of Licenses and Permits. Assign or transfer any of
----------------------------------
its interest in any permits pertaining to the Leased Property, or assign,
transfer or remove or permit any other Person to assign, transfer or remove any
records pertaining to the Leased Property without Landlord's prior written
consent which consent may be granted or refused in Landlord's sole discretion.
-50-
<PAGE>
(M) Place of Business. Change its chief executive office or its
-----------------
principal place of business or place where its books and records are kept
without giving Landlord at least thirty (30) days' prior written notice thereof
and promptly providing Landlord such information as Landlord may reasonably
request in connection therewith.
(N) Franchise Agreements. Enter into any Franchise Agreements
--------------------
other than those existing on the Commencement Date without the prior written
consent of Landlord.
(O) Collection Account Agreement. Amend, modify or terminate the
----------------------------
terms of the Collection Account Agreement, or enter into any new Collection
Account Agreement except for the one existing on the Commencement Date without
the prior written consent of the Landlord and the confirmation by the Rating
Agencies that such amendment, modification or termination or new agreement will
not result in the withdrawal, downgrade or qualification of the then applicable
ratings assigned to any securities issued in any Securitization (as defined in
the Loan Agreement).
(P) Security Agreement. Amend, modify or terminate the Security
------------------
Agreement, or enter into a new Security Agreement except for the on existing on
the Commencement Date without the prior written consent of the Landlord and the
confirmation by the Rating Agencies that such amendment, modification or
termination or new agreement will not result in the withdrawal, downgrade or
qualification of the then applicable ratings assigned to any securities issued
in any Securitization (as defined in the Loan Agreement).
-51-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease by their duly
authorized officers as of the date first above written.
"LANDLORD"
HH PERM-I, L.P.
By: Hudson Hotels Trust, its General Partner
By:
---------------------------------
Title:
---------------------------------
"TENANT"
HHC PERM-I, INC.
By:
-------------------------------------
Title:
-------------------------------------
-52-
<PAGE>
Exhibit A
PROPERTY DESCRIPTION
A-1
<PAGE>
Exhibit B
CAPITAL EXPENDITURES POLICY
CAPITAL EXPENDITURES
[Alternative Policy (Nomura) to be Supplied]
A capital expenditure is defined as an investment in a readily identifiable
facility which (1) is held for use or income rather than for sale or conversion
into goods or cash and (2) has a useful service life in excess of one year.
Nonrecurring expenses directly associated with the investment should be included
as part of the total expenditure for evaluation purposes, this includes
pre-opening expenses.
Capitalization Policy
- ---------------------
If the cost of the capital addition is $10,000 or greater and the items acquired
have an expected service life of more than one year, the expenditure is
capitalized. See "Maintenance and Repairs" for those expenditures which are
expensed without regard to the $10,000 guideline. If the item(s) acquired meet
the more invoice cost is less than $10,000, the expenditure is considered an
expense item except as provided below.
Replacement - Component Parts
- -----------------------------
If the estimated job or total invoice cost (including parts and labor) of any
particular item or series of items acquired with respect to one particular job
for replacement of the following major building components is over $5,000, the
expenditure should be capitalized:
Heating Equipment - Pumps, boilers, heat exchangers, thermostats,
pressure gauges, alarm devices, piping.
Plumbing Equipment - Pumps, meters, sprinkler and fire alarm system,
piping.
Air Conditioning Equipment - Compressors, condensers, motors, cooling
towers, evaporative coolers, piping.
Fire Prevention Equipment - Major fire system sprinklers, smoke
detectors.
Power - Transformer, conduits and boxes, panel boards, switches and
outlets.
Betterments
- -----------
If the estimated job or total invoice cost is $5,000 or above, and the
expenditure(s) will extend the useful life of an asset previously capitalized,
then the expenditure should be capitalized.
B-1
<PAGE>
CAPITAL EXPENDITURES POLICY
Maintenance and Repairs
- -----------------------
The following replacement expenditures are considered maintenance and repairs
and are not subject to the total invoice cost guideline of $5,000.
Repainting of Buildings Pools, Park Areas (5)
Refinishing of Furniture (1)
Glass Replacement
Maintenance Service Contracts, such- Yard, Television, Elevator, Swimming Pool
Wall Paper Vinyl (1)
Reupholstery of Furniture (1)
Replastering (1)
Replacement of Chain Locks, Key Blanks, Keys, Locks, Locksets. Locks
and locksets installed in new doors or offering substantial security
improvements should be capitalized if the invoice is over $5,000.
Patching Parking Lot (2)
Roof Repairs (3)
Waterproofing of Lamp Globes & Lightbulbs
Section Replacement for Neon Signs
Caulking and Sealing (6)
Chrome Fittings such as Faucets, Towel Bars, etc.(1)
Toilet and Toilet Seats
Stolen or Damaged Television
Small Parts for Equipment
Landscaping/Plants (4)
Clocks, Clock-Radios or Similar Small Items
1. Expenditures for interior painting, wall paper, refinishing of furniture,
replastering, or reupholstering may be capitalized if:
1) these expenditures are part of a major refurbishment project, or
2) the cost of these expenditures exceed $5,000 with
respect to any particular item or series of items
related to one particular job and extend the useful
life of the asset.
2. Repairing of parking lots, including resealing and resurfacing, will be
capitalized if the expenditures exceed $10,000.
3. Replacement of the complete roof or complete section of the roof (including
laying a roof over an existing roof) will be capitalized if total expenditures
exceed $5,000.
4. If the landscaping is new or replacement of existing interior or exterior
landscaping and exceeds $10,000, the cost of the landscaping can be capitalized.
B-2
<PAGE>
CAPITAL EXPENDITURES POLICY
5. Major overhauls to the pool which exceed $10,000 in cost and extend the
useful life of the asset will be capitalized.
6. If the complete exterior of the building is repainted, including caulking
and sealing of the building, those costs will be capitalized.
All expense items will be expensed to M&R expense line items above GOP.
B-3
<PAGE>
EXHIBIT C
Schedule of Lease Terms
[UNDER REVIEW]
Quarterly Revenues Computation and Annual Revenues Computation
Base Rent: $_________________ per annum payable in monthly installments of
$____________ each.
For the purposes of the Percentage Rent formula:
The Quarterly Revenues Computation is equal to the amount obtained by
------------------------------
adding, for the applicable Fiscal Year, amounts equal to:
1. The First Room Revenue Threshold Percentage multiplied by all
year to date Room Revenues up to the year to date First Room
Revenue Threshold. The year to date First Room Revenue
Threshold is obtained by adding each of the Quarterly First
Room Revenue Threshold amounts from the beginning of the
Fiscal Year to the end of the current month. The Quarterly
First Room Revenue Threshold amounts effective for the Fiscal
Year ended December 31, 19__ for all current leases are
scheduled in this Exhibit.
2. If applicable, the Second Room Revenue Threshold Percentage
multiplied by all year to date Room Revenues which are (x) in
excess of the First Room Revenue Threshold but (y) less than
the year to date Second Room Revenue Threshold. The year to
date Second Room Revenue Threshold is obtained by adding each
of the Quarterly Second Room Revenue Threshold amounts from
the beginning of the Fiscal Year to the end of the current
month. The Quarterly Second Room Revenue Threshold amounts
effective for the Fiscal Year ended December 31, 19__ for all
current leases are scheduled in this Exhibit.
3. The Third Room Revenue Threshold Percentage multiplied by the
difference between (x) all year to date Room Revenue less (y)
the threshold amounts calculated pursuant to clauses (1) and
(2) above.
4. The Other Income Percentage multiplied by the year to date
Other Income for the current Fiscal Year.
C-1
<PAGE>
Quarterly Revenues Computation and Annual Revenues Computation
For the purposes of the Percentage Rent formula:
The Annual Revenues Computation is equal to the amount obtained by
---------------------------
adding, for the applicable Fiscal Year, amounts equal to:
1. The First Room Revenue Threshold Percentage multiplied by
annual Room Revenues up to the Annual First Room Revenue
Threshold. The Annual First Room Revenue Threshold amounts
effective for the Fiscal Year ended December 31, 19__ for all
current leases are scheduled in this Exhibit.
2. If applicable, the Second Room Revenue Threshold Percentage
multiplied by the annual Room Revenues which are (x) in excess
of the Annual First Room Revenue Threshold but (y) less than
the Annual Second Room Revenue Threshold. The Annual Second
Room Revenue Threshold amounts effective for the Fiscal Year
ended December 31, 19__ for all current leases are scheduled
in this Exhibit.
3. The Third Room Revenue Threshold Percentage multiplied by the
difference between (x) the annual Room Revenue less (y) the
threshold amounts calculated pursuant to clauses (1) and (2)
above.
4. The Other Income Percentage multiplied by the annual Other
Income for the current Fiscal Year.
C-2
<PAGE>
Schedule of Lease Terms
Base Rent: $__________
First Room Revenue Threshold Percentage: _________%
Quarterly First Room Revenue Threshold: $__________
Annual First Room Revenue Threshold: $__________
Second Room Revenue Threshold Percentage: _________%
Quarterly Second Room Revenue Threshold: $__________
Annual Second Room Revenue Threshold: $__________
Third Room Revenue Threshold Percentage: _________%
Other Income Percentage: 20%
C-3
