<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1998
REGISTRATION NO. 333-53287
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
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)
ONE AIRPORT WAY, SUITE 200
ROCHESTER, NEW YORK 14624
(716) 436-1700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
E. ANTHONY WILSON
ONE AIRPORT WAY, SUITE 200
ROCHESTER, NEW YORK 14624
(716) 436-1700
(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.
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest,
par value $.01 per
share................ 14,375,000 shares $10.50 $150,937,500 $44,527
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 1,875,000 shares that may be purchased pursuant to an over-
allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of determining the registration fee.
(3) A filing fee of $43,424 was paid in connection with the Registrant's
original filing. The registrant has paid an additional $1,103 in
connection with this filing.
----------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 7, 1998
PROSPECTUS
12,500,000 SHARES
[LOGO OF HUDSON HOTELS
APPEARS HERE]
HUDSON HOTELS TRUST
COMMON SHARES OF BENEFICIAL INTEREST
----------
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 a wholly-owned subsidiary (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."
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 16 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
- --------------------------------------------------------------------------------
Total(3)..................................... $ $ $
</TABLE>
================================================================================
(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
LOGO
[MAP APPEARS HERE]
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
THE INITIAL HOTELS
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............................................................... 16
Lack of Control Over Operations of the Hotels............................ 16
Dependence on Lessee and Payments Under the Percentage Leases............ 16
Potential Adverse Impact of Increased Hotel Management by the Strategic
Partner................................................................. 16
Newly Organized Company and Partnership, Limited Financial Data and
Company's Lack of Experience as a REIT or as a Public Company........... 17
Emphasis on Fairfield Inn by Marriott Hotels............................. 17
Requirements of the Franchise Agreements................................. 17
Conflicts of Interest.................................................... 17
Tax Risks................................................................ 18
Hotel Industry Risks..................................................... 19
Real Estate Investment Risks............................................. 20
Potential Adverse Effects of Leverage and Lack of Limits on
Indebtedness............................................................ 23
No Prior Market for Common Shares........................................ 23
Effect of Market Interest Rates on Price of Common Shares................ 24
Reliance on Board of Trustees and Key Personnel.......................... 24
Ability of Board of Trustees to Change Certain Policies.................. 24
Anti-takeover Effect of Ownership Limit, Staggered Board, Power to Issue
Additional Shares and Certain Provisions of Maryland Law................ 24
THE COMPANY................................................................ 26
General.................................................................. 26
The Strategic Alliance................................................... 27
BUSINESS AND PROPERTIES.................................................... 29
Business and Investment Strategy......................................... 29
The Hotel Industry....................................................... 29
Growth Strategy.......................................................... 32
Acquisition Strategy..................................................... 32
Internal Growth Strategy................................................. 33
Fairfield Inn Hotels..................................................... 33
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
Overview................................................................. 42
Results of Operations of the Initial Hotels.............................. 42
Liquidity and Capital Resources.......................................... 43
Inflation................................................................ 44
Seasonality.............................................................. 44
Year 2000 Compliance..................................................... 44
THE INITIAL HOTELS......................................................... 45
Descriptions of Initial Hotels........................................... 46
The Percentage Leases.................................................... 52
Franchise Agreements..................................................... 59
Operating Practices...................................................... 60
Employees................................................................ 61
Environmental Matters.................................................... 61
Competition.............................................................. 61
Depreciation............................................................. 62
Insurance................................................................ 62
Legal Proceedings........................................................ 63
FORMATION TRANSACTIONS..................................................... 64
Benefits to Related Parties.............................................. 65
MANAGEMENT................................................................. 67
Trustees and Executive Officers.......................................... 67
Audit Committee.......................................................... 69
Acquisition Committee.................................................... 69
Compensation Committee................................................... 69
</TABLE>
<TABLE>
<S> <C>
Executive Compensation................................................... 69
Employment Agreements.................................................... 70
Compensation of Trustees................................................. 70
Exculpation and Indemnification.......................................... 70
1998 Share Incentive Plan................................................ 71
The Trustees' Plan....................................................... 74
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 75
The Strategic Partner.................................................... 75
Receipt of Units by the Strategic Partner................................ 75
Repayment of Indebtedness................................................ 75
Payment to the Strategic Partner......................................... 75
Issuance of Shares and Grants of Options to Officers and Trustees........ 76
The Percentage Leases.................................................... 76
Franchise Licenses....................................................... 76
Financial Advisory Fee................................................... 76
THE STRATEGIC PARTNER AND THE LESSEE....................................... 77
General.................................................................. 77
Management Team.......................................................... 78
PRINCIPAL SHAREHOLDERS..................................................... 79
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST............................... 80
General.................................................................. 80
Common Shares............................................................ 80
Preferred Shares......................................................... 81
Classification or Reclassification of Common Shares or Preferred Shares.. 81
Restrictions on Ownership and Transfer................................... 81
Other Matters............................................................ 84
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF
TRUST AND BYLAWS.......................................................... 85
Classification of the Board of Trustees.................................. 85
Removal of Trustees...................................................... 85
Business Combinations.................................................... 85
Control Share Acquisitions............................................... 86
Amendment................................................................ 86
Limitation of Liability and Indemnification.............................. 87
Operations............................................................... 88
Dissolution of the Company............................................... 88
Advance Notice of Trustees Nominations and New Business.................. 88
Possible Anti-takeover Effect of Certain Provisions of Maryland Law and
of the Declaration of Trust and Bylaws.................................. 88
Maryland Asset Requirements.............................................. 88
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES................. 89
Investment Policies...................................................... 89
Financing................................................................ 90
Conflict of Interest Policies............................................ 90
Other Activities......................................................... 92
Working Capital Reserves................................................. 92
SHARES AVAILABLE FOR FUTURE SALE........................................... 92
PARTNERSHIP AGREEMENT...................................................... 94
Management............................................................... 94
Transferability of Interests............................................. 94
Capital Contribution..................................................... 94
Redemption Rights........................................................ 95
Operations............................................................... 95
Distributions............................................................ 95
Allocations.............................................................. 96
Term..................................................................... 96
Tax Matters.............................................................. 96
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 97
Taxation of the Company.................................................. 97
Requirements for Qualification........................................... 98
Failure to Qualify....................................................... 105
Taxation of Taxable U.S. Shareholders.................................... 106
Taxation of Shareholders on the Disposition of the Common Shares......... 106
Capital Gains and Losses................................................. 107
Information Reporting Requirements and Backup Withholding................ 107
Taxation of Tax-Exempt Shareholders...................................... 107
Taxation of Non-U.S. Shareholders........................................ 108
Other Tax Consequences................................................... 109
Tax Aspects of the Partnership........................................... 109
Income Taxation of the Partnership and its Partners...................... 111
Sale of the Company's or the Partnership's Property...................... 112
UNDERWRITING............................................................... 113
EXPERTS.................................................................... 114
REPORTS TO SHAREHOLDERS.................................................... 115
LEGAL MATTERS.............................................................. 115
ADDITIONAL INFORMATION..................................................... 115
GLOSSARY................................................................... 116
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"). 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 a
wholly-owned subsidiary (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 $22,423,107 $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 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 of the Offering.
. In May 1998, the Company 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, including its
overlapping management team with the Strategic Partner. See "The Strategic
Partner and the Lessee." 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
<PAGE>
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
12,626,742 Common
Common Shares and Units to be outstanding after the Offering.. 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."
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<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,
----------------------------------- -----------------------------------
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 33,912 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.
15
<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. The Company disclaims any obligation to update any
such 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. 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
16
<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
17
<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
18
<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
19
<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 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.
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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
"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.
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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 Lessee, a wholly-owned subsidiary of
the Strategic Partner. 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.
28
<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
29
<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.
30
<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 GRAPH SHOWING MARKET SHARE GROWTH OF LIMITED SERVICE AND FULL SERVICE
HOTELS APPEARS 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
31
<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."
32
<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.
33
<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."
34
<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."
35
<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)
-------
Estimated cash available for distribution............ $13,766
=======
Expected initial annual distribution (4)............. $11,995
-------
Company's share of expected initial annual
distribution (5).................................... $11,931
=======
Estimate initial annual distribution per share....... $ 0.95
Estimated payout ratio of estimated cash available
for distribution (6)................................ 87.1%
</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) Based on 12,626,742 Common Shares and Units to be outstanding upon
completion of the Formation Transactions.
(5) Represents the Company's approximately 99.5% share of the initial annual
distribution from the Partnership.
(6) Represents the anticipated initial aggregate annual distribution divided
by estimated cash available for distribution.
36
<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.
37
<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.
38
<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)
39
<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,
----------------------------------- -----------------------------------
(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.
40
<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 $ 3,510
======= ========= =========
</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.
41
<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,
42
<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 total 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 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 the Initial Hotels, at cost)
under the Credit Facility. 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. 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 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
43
<PAGE>
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.
44
<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 $22,423,107 $22,869,215 76.2% $53.46 $40.75
</TABLE>
45
<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.
46
<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.
47
<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.
48
<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.
49
<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>
50
<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>
51
<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." 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.
52
<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.
53
<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>
54
<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>
55
<PAGE>
<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.
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Total............... $11,482,500 $22,869,215
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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.
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 make
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available to the Lessee an amount equal to 5% of room revenues from the
Initial Hotels each lease year to fund 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. 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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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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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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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.
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 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.
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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.
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."
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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).
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.
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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:
[CHART SHOWING THE 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 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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<PAGE>
- --------
(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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<PAGE>
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
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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.
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<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.
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<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.
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.
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.
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<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 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>
77
<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
80
<PAGE>
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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<PAGE>
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 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.
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
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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 Company may
issue Units 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
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.
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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 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.
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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.
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.
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.
114
<PAGE>
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.
115
<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.
116
<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.
117
<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.
118
<PAGE>
"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.
119
<PAGE>
"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.
120
<PAGE>
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 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.
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>
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
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>
- -----
(a) Reconciliation of Land and Buildings and Improvements:
(b) Reconciliation of Accumulated Depreciation:
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 in accounts receivable................. (105) 118 124
Decrease in due from partners................... 144 -- --
Increase in prepaid expenses and other assets .. 72 (45) (39)
Decrease in tax and insurance reserve fund...... 701 173 12
Increase in accounts payable.................... (104) 337 236
Decrease in accrued expenses.................... 1,038 (203) (153)
Increase (Decrease) in due to partners.......... (5) (18) 39
Decrease 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 DECREASE 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
6.5 percent and 6 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 $435,000, $843,000 and $843,000,
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 latter 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>
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
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
============ ============ ============
- -----
(a) Reconciliation of Land and Buildings and Improvements:
(b) Reconciliation of Accumulated Depreciation:
</TABLE>
(c) The aggregate cost for federal income tax purposes is $113,034,116.
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
5.1* Opinion of Hunton & Williams
8.1* Opinion of Hunton & Williams as to Tax Matters
10.1 Form of 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 Corp., Hudson Hotels Trust, and Hudson Hotels Limited
Partnership, L.P.
10.6 Commitment Letter for Credit Facility
10.7 Form of the 1998 Share Incentive Plan
10.8 Form of 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
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 7th 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ E. Anthony Wilson Chairman of the July 7, 1998
- ------------------------------------- Board of Trustees
E. ANTHONY WILSON and Chief Executive
Officer (Principal
Executive Officer)
/s/ John M. Sabin* President, Chief July 7, 1998
- ------------------------------------- Operating Officer,
JOHN M. SABIN Chief Financial
Officer and Trustee
(Principal
Financial Officer)
/s/ Ralph L. Peek Vice President, July 7, 1998
- ------------------------------------- Treasurer and
RALPH L. PEEK Trustee
/s/ Taras M. Kolcio * Vice President and
- ------------------------------------- Controller July 7, 1998
TARAS M. KOLCIO (Principal
Accounting Officer)
</TABLE>
* 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
5.1* Opinion of Hunton & Williams
8.1* Opinion of Hunton & Williams as to Tax Matters
10.1 Form of 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 Form of The 1998 Share Incentive Plan
10.8 Form of 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
<PAGE>
Exhibit 3.1
FORM OF
-------
HUDSON HOTELS TRUST
-------------------
AMENDED AND RESTATED
DECLARATION OF TRUST
Dated as of July __, 1998
Hudson Hotels Trust, a Maryland real estate investment trust (the
"Trust") under Title 8 of the Corporation and Associations Article of the
Annotated Code of Maryland ("Title 8"), desires to amend and restate its
Declaration of Trust as currently in effect and as hereafter amended.
The following provisions are all the provisions of the Declaration of
Trust currently in effect and as hereafter amended:
ARTICLE I
FORMATION
The Trust is a real estate investment trust (a "REIT") within the
meaning of Title 8. The Trust shall not be deemed to be a general partnership,
limited partnership, joint venture, joint stock company or a corporation (but
nothing herein shall preclude the Trust from being treated for tax purposes as
an association under the Code).
ARTICLE II
NAME
The name of the Trust is: Hudson Hotels Trust.
Under circumstances in which the Board of Trustees of the Trust (the
"Board of Trustees" or "Board") determines that the use of the name of the Trust
is not practicable, the Trust may use any other designation or name for the
Trust.
<PAGE>
ARTICLE III
PURPOSES AND POWERS
Section 1. Purposes. The purposes for which the Trust is formed are to
--------
invest in and to acquire, hold, manage, administer, control and dispose of real
property and interests in real property, including, without limitation or
obligation, engaging in business as a REIT under the Internal Revenue Code of
1986, as amended (the "Code").
Section 2. Powers. The Trust shall have all of the powers granted to
------
REITs by Title 8 and all other powers set forth in the Amended and Restated
Declaration of Trust that are not inconsistent with law and are appropriate to
promote and attain the purposes set forth in the Amended and Restated
Declaration of Trust.
ARTICLE IV
RESIDENT AGENT
The name of the resident agent of the Trust in the State of Maryland is
Douglas M. Fox, c/o Ballard Spahr Andrews & Ingersoll, whose post office address
is 300 East Lombard Street, Baltimore, Maryland 21202. The resident agent is a
citizen of and resides in the State of Maryland. The Trust may have such offices
or places of business within or outside the State of Maryland as the Board of
Trustees of the Trust may from time to time determine.
ARTICLE V
BOARD OF TRUSTEES
Section 1. Powers.
------
-2-
<PAGE>
(A) Subject to any express limitations contained in the
Amended and Restated Declaration of Trust or in the Bylaws, (i) the business and
affairs of the Trust shall be managed under the direction of the Board of
Trustees and (ii) the Board shall have full, exclusive and absolute power,
control and authority over any and all property of the Trust. The Board may take
any action as it, in its sole judgment and discretion, deems necessary or
appropriate to conduct the business and affairs of the Trust. The Amended and
Restated Declaration of Trust shall be construed with a presumption in favor of
the grant of power and authority to the Board. Any construction of the Amended
and Restated Declaration of Trust or determination made in good faith by the
Board concerning its powers and authority hereunder shall be conclusive. The
enumeration and definition of particular powers of the Trustees included in the
Amended and Restated Declaration of Trust or in the Bylaws shall in no way be
construed or deemed by inference or otherwise in any manner to exclude or limit
the powers conferred upon the Board of Trustees under the general laws of the
State of Maryland or any other applicable laws.
(B) Except as otherwise provided in the Bylaws, the Board,
without any action by the shareholders of the Trust, shall have and may
exercise, on behalf of the Trust, without limitation, the power to adopt, amend
and repeal Bylaws; to elect officers in the manner prescribed in the Bylaws; to
solicit proxies from holders of shares of beneficial interest of the Trust; and
to do any other acts and deliver any other documents necessary or appropriate to
the foregoing powers.
(C) It shall be the duty of the Board of Trustees to ensure
that the Trust satisfies the requirements for qualification as a REIT under the
Code, including, but not limited to, the ownership of outstanding shares of its
beneficial interest, the nature of its assets, the
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sources of its income, and the amount and timing of its distributions to its
shareholders. The Board of Trustees shall take no action to disqualify the Trust
as a REIT or to otherwise revoke the Trust's election to be taxed as a REIT
without the affirmative vote of two-thirds of the number of Common Shares
entitled to vote on such matter at a meeting of the shareholders.
Section 2. Classification and Number.
-------------------------
(A) The Trustees of the Trust (hereinafter the "Trustees")
(other than any Trustee elected solely by holders of one or more classes or
series of Preferred Shares) shall be classified, with respect to the terms for
which they severally hold office, into three classes, as nearly equal in number
as possible, one class ("Class I") to hold office initially for a term expiring
at the first annual meeting of shareholders, a second class ("Class II") to hold
office initially for a term expiring at the second succeeding annual meeting of
shareholders, and a third class ("Class III") to hold office initially for a
term expiring at the third succeeding annual meeting of shareholders, with the
Trustees of each class to hold office until their successors are duly elected
and qualified. Any vacancy will be filled, including a vacancy created by an
increase in the number of Trustees, at a regular meeting or at any special
meeting called for that purpose, by a majority of the remaining Trustees. At
each annual meeting of shareholders, the successors to the class of Trustees
whose term expires at such meeting shall be elected to hold office for a term
expiring at the annual meeting of shareholders held in the third year following
the year of their election. Shareholder votes to elect Trustees shall be
conducted in the manner provided in the Bylaws.
(B) The number of Trustees initially shall be seven, which
number may be increased or decreased by a vote of at least 80% of the members of
the Board of Trustees,
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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. The number of Trustees may
not be fewer than three nor more than nine. The name, address and class of the
Trustees who shall serve until their successors are duly elected and qualified
are:
Name Address Class
- ---- ------- -----
E. Anthony Wilson 300 Bausch & Lomb Class III
Rochester, New York 14604
John M. Sabin 14709 Lancroft Court Class II
Darnestown, MD 20874
Ralph L. Peek 300 Bausch & Lomb Class I
Rochester, New York 14604
Richard C. Fox 20 North Union Street Class II
Rochester, New York 14607
Richard E. Sands 300 Willowbrook Office Park Class III
Fairport, New York 14450
E. Philip Saunders 760 Brooks Avenue Class I
Rochester, New York 14619
John W. Stokes 50 N. Front Street, 21st Floor Class I
Memphis, TN 38103
The Trustees may increase the number of Trustees and fill any vacancy, whether
resulting from an increase in the number of Trustees or otherwise, on the Board
of Trustees prior to the first annual meeting of shareholders in the manner
provided in the Bylaws. Independent Trustees shall nominate replacements for
vacancies among the Independent Trustees' positions. In the event that, after
the closing of the Initial Public Offering, a majority of the Board of Trustees
are not Independent Trustees by reason of the resignation or removal of one or
more Independent Trustees
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or otherwise, the remaining Independent Trustees (or, if there are no
Independent Trustees, the remaining members of the Board of Trustees) shall
promptly elect that number of Independent Trustees necessary to cause the Board
of Trustees to include a majority of Independent Trustees. It shall not be
necessary to list in the Amended and Restated Declaration of Trust the names and
addresses of any Trustees hereinafter elected.
Section 3. Resignation, Removal or Death. Any Trustee may resign by
-----------------------------
written notice to the Board, effective upon execution and delivery to the Trust
of such written notice or upon any future date specified in the notice. Subject
to the rights of holders of one or more classes or series of Preferred Shares to
elect one or more Trustees, a Trustee may be removed at any time, with or
without cause, at a meeting of the shareholders, by the affirmative vote of the
holders of not less than two-thirds of the Shares then outstanding and entitled
to vote generally in the election of Trustees.
Section 4. Independent Trustees. Notwithstanding anything herein to
--------------------
the contrary, at all times (except during a period not to exceed sixty (60) days
following the death, resignation, incapacity or removal from office of a Trustee
prior to expiration of the Trustee's term of office), a majority of the Board of
Trustees shall be comprised of persons who are not officers or employees of the
(i) Trust or any Affiliate or (ii) any Lessee of the Trust's properties (each
such person serving on the Board of Trustees being an "Independent Trustee").
Section 5. Definition of Affiliate. For purposes of Section 4 above,
-----------------------
"Affiliate" of a person shall mean (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 shares, shares or equity interests
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of such person, or (iii) any officer, director, employee, partner or trustee
(including any family member of the foregoing) of such person or of 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 purpose 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.
Section 6. Business Activities by Trustees. Unless otherwise agreed
-------------------------------
between the Trust and the Trustees, each individual Trustee, including each
Independent Trustee, may engage in other business activities of the type
conducted by the Trust and is not required to present to the Trust any
investment opportunities presented to them even though the investment
opportunities may be within the scope of the Trust's investment policies.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 1. Authorized Shares. The beneficial interest of the Trust
-----------------
shall be divided into shares of beneficial interest (the "Shares"). The Trust
has authority to issue one hundred million (100,000,000) common shares of
beneficial interest, $.01 par value per share ("Common
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Shares"), and twenty million (20,000,000) preferred shares of beneficial
interest, $.01 par value per share ("Preferred Shares"). The Board of Trustees,
without any action by the shareholders of the Trust, may amend the Amended and
Restated Declaration of Trust from time to time to increase or decrease the
aggregate number of Shares or the number of Shares of any class that the Trust
has authority to issue.
Section 2. Common Shares. Subject to the provisions of Article VII,
-------------
each Common Share shall entitle the holder thereof to one vote on each matter
upon which holders of Common Shares are entitled to vote. The Board of Trustees
may reclassify any unissued Common Shares from time to time in one or more
classes or series of Shares.
Section 3. Preferred Shares. The Board of Trustees may classify any
----------------
unissued Preferred Shares and reclassify any previously classified but unissued
Preferred Shares of any series from time to time, in one or more series of
Shares.
Section 4. Classified or Reclassified Shares. Prior to issuance of
---------------------------------
classified or reclassified Shares of any class or series, the Board of Trustees
by resolution shall (a) designate that class or series to distinguish it from
all other classes and series of Shares; (b) specify the number of Shares to be
included in the class or series; (c) set, subject to the provisions of Article
VII and subject to the express terms of any class or series of Shares
outstanding at the time, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption for each series; and (d)
cause the Trust to file articles supplementary with the State Department of
Assessments and Taxation of Maryland ("SDAT"). Any of the terms of any class or
series of Shares set pursuant to clause (c) of this Section 4 may be made
dependent upon facts or events
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ascertainable outside the Amended and Restated Declaration of Trust (including
determinations by the Board of Trustees or other facts or events within the
control of the Trust) and may vary among holders thereof, provided that the
manner in which such facts, events or variations shall operate upon the terms of
such class or series of Shares is clearly and expressly set forth in articles
supplementary filed with the SDAT.
Section 5. Authorization by Board of Share Issuance. The Board of
----------------------------------------
Trustees may authorize the issuance from time to time of Shares of any class or
series, whether now or hereafter authorized, or securities or rights convertible
into Shares of any class or series, whether now or hereafter authorized, for
such consideration (whether in cash, property, past or future services,
obligation for future payment or otherwise) as the Board of Trustees may deem
advisable (or without consideration in the case of a Share split or Share
dividend), subject to such restrictions or limitations, if any, as may be set
forth in the Amended and Restated Declaration of Trust or the Bylaws of the
Trust. Notwithstanding any other provision in the Amended and Restated
Declaration of Trust, no determination shall be made by the Board of Trustees
nor shall any transaction be entered into by the Trust that would cause any
Shares or other beneficial interest in the Trust not to constitute "transferable
shares" or "transferable certificates of beneficial interest" under Section
856(a)(2) of the Code or which would cause any distribution to constitute a
preferential dividend as described in Section 562(c) of the Code.
Section 6. Dividends and Distributions. The holders of all Common
---------------------------
Shares will participate equally in dividends payable to holders of Common Shares
when and as authorized and declared by the Board of Trustees and in net assets
available for distribution to holders of Common Shares upon liquidation or
dissolution. The Board of Trustees may from time to time
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authorize and declare to shareholders such dividends or distributions, in cash
or other assets of the Trust or in securities of the Trust or from any other
source as the Board of Trustees in its discretion shall determine. The Board of
Trustees shall endeavor to declare and pay such dividends and distributions as
shall be necessary for the Trust to qualify as a REIT under the Code; however,
shareholders shall have no right to any dividend or distribution unless and
until authorized and declared by the Board. The exercise of the powers and
rights of the Board of Trustees pursuant to this Section shall be subject to the
provisions of any class or series of Shares at the time outstanding.
Section 7. General Nature of Shares. All Shares shall be personal
------------------------
property entitling the shareholders only to those rights provided in the Amended
and Restated Declaration of Trust. The shareholders shall have no interest in
the property of the Trust and shall have no right to compel any partition,
division, dividend or distribution of the Trust or of the property of the Trust.
The death of a shareholder shall not terminate the Trust. The Trust is entitled
to treat as shareholders only those persons in whose names Shares are registered
as holders of Shares on the beneficial interest ledger of the Trust.
Section 8. Fractional Shares. The Trust may, without the consent or
-----------------
approval of any shareholder, issue fractional Shares, eliminate a fraction of a
Share by rounding up or down to a full Share, arrange for the disposition of a
fraction of a Share by the person entitled to it, or pay cash for the fair value
of a fraction of a Share.
Section 9. Amended and Restated Declaration of Trust and Bylaws. All
----------------------------------------------------
shareholders are subject to the provisions of the Amended and Restated
Declaration of Trust and the Bylaws of the Trust.
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ARTICLE VII
RESTRICTIONS ON TRANSFER AND SHARES-IN-TRUST
Section 1. Restrictions on Transfer.
------------------------
(A) Definitions. The following terms shall have the
-----------
following meanings:
(1) "Beneficial Ownership" shall mean ownership of
Equity Shares (or options to acquire Equity Shares) by a Person who would be
treated as an owner of such Equity Shares either (i) directly (including through
a nominee or similar arrangement) or (ii) indirectly through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The
terms "Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall
have correlative meanings.
(2) "Beneficiary" shall mean, with respect to any
Share Trust, one or more organizations described in each of Section 170(b)(1)(A)
(other than clause (vii) or (viii) thereof) and Section 170(c)(2) of the Code
that are named by the Share Trust as the beneficiary or beneficiaries of such
Share Trust, in accordance with the provisions of Section 2(A) hereof.
(3) "Board of Trustees" shall mean the Board of
Trustees of the Trust.
(4) "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
(5) "Constructive Ownership" shall mean ownership of
Equity Shares (or options to acquire Equity Shares) by a Person who would be
treated as an owner of such Equity Shares either directly or indirectly through
the application of Section 318 of the
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<PAGE>
Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive
Owner," "Constructively Owns," and "Constructively Owned" shall have correlative
meanings.
(6) "Equity Shares" shall mean shares that are either
Preferred Shares or Common Shares. The term "Equity Shares" shall include all
Preferred Shares and Common Shares that are held as Shares-in-Trust in
accordance with the provisions of Section 2(A) hereof.
(7) "Initial Public Offering" means the sale of Common
Shares pursuant to the Trust's first effective registration statement for such
Common Shares filed under the Securities Act of 1933, as amended.
(8) "Market Price" on any date shall mean the average
of the Closing Price for the five consecutive Trading Days ending on such date.
The "Closing Price" on any date shall mean the last sale price, regular way, or,
in case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Equity Shares are
not listed or admitted to trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Equity Shares are listed or admitted to trading or, if the Equity Shares are not
listed or admitted to trading on any national securities exchange, the last
quoted price, or if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in use, the principal other automated quotations system that may then
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be in use or, if the Equity Shares are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Equity Shares selected by the Board of
Trustees. "Trading Day" shall mean a day on which the principal national
securities exchange on which the Equity Shares are listed or admitted to trading
is open for the transaction of business or, if the Equity 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.
(9) "Non-Transfer Event" shall mean an event (other
than a purported Transfer) that would result in a change in Beneficial or
Constructive Ownership of the Equity Shares, including, but not limited to, the
granting of any option or entering into any agreement for the sale, transfer or
other disposition of Equity Shares or the sale, transfer, assignment or other
disposition of any securities or rights convertible into or exchangeable for
Equity Shares.
(10) "Ownership Limit" shall mean 9.9% of the number of
outstanding Common Shares and 9.9% of the number of outstanding shares of any
class or series of Preferred Shares.
(11) "Partnership" shall mean Hudson Hotels Limited
Partnership, L.P., a Virginia limited partnership.
(12) "Permitted Transferee" shall mean any Person
designated as a Permitted Transferee in accordance with the provisions of
Section 2(E) hereof.
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(13) "Person" shall mean an individual, corporation,
partnership, estate, trust, a portion of a trust permanently set aside for or to
be used exclusively for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity and also includes a "group" as that
term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended.
(14) "Prohibited Owner" shall mean, with respect to any
purported Transfer or Non-Transfer Event, any Person who, but for the provisions
of Section 1(C) hereof, would own record title to Equity Shares.
(15) "REIT" shall mean a real estate investment trust
under Section 856 of the Code.
(16) "Restriction Termination Date" shall mean the
first day after the date of the Initial Public Offering on which the Board of
Trustees and the shareholders of the Trust determine, pursuant to Article V,
Section 1(C), that it is no longer in the best interests of the Trust to attempt
to, or continue to, qualify as a REIT or for any other reason, the Board of
Trustees and the shareholders amend the Amended and Restated Declaration of
Trust to terminate the provisions of this Article VII.
(17) "Shares-in-Trust" shall mean any Equity Shares
designated Shares-in-Trust pursuant to Section 1(C) hereof.
(18) "Share Trust" shall mean any separate trust
created pursuant to Section 1(C) hereof and administered in accordance with the
terms of Section 2 hereof, for the exclusive benefit of any Beneficiary.
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(19) "Share Trustee" shall mean any person or entity
unaffiliated with both the Trust and any Prohibited Owner designated by the
Trust to act as trustee of any Share Trust, or any successor trustee thereof.
(20) "Transfer" (as a noun) shall mean any sale,
transfer, gift, assignment, devise or other disposition of Equity Shares,
whether voluntary or involuntary, whether of record, constructively or
beneficially and whether by operation of law or otherwise. "Transfer" (as a
verb) shall have the correlative meaning.
(B) Restriction on Transfers.
(1) Except as provided in Section 1(G) hereof, from the
date of the Initial Public Offering and prior to the Restriction Termination
Date, no Person shall Beneficially Own or Constructively Own outstanding Equity
Shares in excess of the Ownership Limit.
(2) Except as provided in Section 1(G) hereof and
subject to Section 1(H) hereof, from the date of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer that, if effective,
would result in any Person Beneficially Owning or Constructively Owning Equity
Shares in excess of the Ownership Limit shall be void ab initio as to the
-- ------
Transfer of that number of Equity Shares that would be otherwise Beneficially
Owned or Constructively Owned by such Person in excess of the Ownership Limit
and the intended transferee shall acquire no rights in such excess Equity
Shares.
(3) Subject to Section 1(H) hereof, from the date of
the Initial Public Offering and prior to the Restriction Termination Date, any
Transfer that, if effective, would result in the Equity Shares being
beneficially owned by fewer than 100 Persons
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(determined without reference to any rules of attribution) shall be void ab
--
initio as to the Transfer of that number of shares that would be otherwise
- ------
beneficially owned (determined without reference to any rules of attribution) by
the transferee, and the intended transferee shall acquire no rights in such
excess Equity Shares; provided, however, that this Section 1(B)(3) shall not
apply to the Transfer of Equity Shares from the Trust to the underwriters of the
Initial Public Offering.
(4) Subject to Section 1(H) hereof, from the date
of the Initial Public Offering and prior to the Restriction Termination Date,
any Transfer of Equity Shares that, if effective, would result in the Trust
being "closely held" within the meaning of Section 856(h) of the Code shall be
void ab initio as to the Transfer of that number of Equity Shares that would
-- ------
cause the Trust to be "closely held" within the meaning of Section 856(h) of the
Code, and the intended transferee shall acquire no rights in such excess Equity
Shares.
(5) Except as provided in Section 1(G) hereof and
subject to Section 1(H) hereof, from the date of the Initial Public Offering and
prior to the Restriction Termination Date, any Transfer of Equity Shares that,
if effective, would cause the Trust to Constructively Own 10% or more of the
ownership interests in a tenant of the Trust's or the Partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, shall be void
ab initio as to the Transfer of that number of Equity Shares that would cause
- -- ------
the Trust to Constructively Own 10% or more of the ownership interests in a
tenant of the Trust's real property, within the meaning of Section 856(d)(2)(B)
of the Code, and the intended transferee shall acquire no rights in such excess
Equity Shares.
(C) Transfer to Share Trust.
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<PAGE>
(1) If, notwithstanding the other provisions contained
in this Section 1, at any time after the date of the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event such that any Person would either Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit, then (x)
except as otherwise provided in Section 1(G) hereof, the purported transferee
shall acquire no right or interest (or, in the case of a Non-Transfer Event, the
person holding record title to the Equity Shares Beneficially Owned or
Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease
to own any right or interest) in such number of Equity Shares that would cause
such Beneficial Owner or Constructive Owner to Beneficially Own or
Constructively Own Equity Shares in excess of the Ownership Limit, (y) such
number of Equity Shares in excess of the Ownership Limit (rounded up to the
nearest whole share) shall be designated Shares-in-Trust and, in accordance with
the provisions of Section 2 hereof, transferred automatically and by operation
of law to a Share Trust to be held in accordance with that Section 2 and (z) the
Prohibited Owner shall submit such number of Equity Shares to the Trust for
registration in the name of the Share Trust. Such transfer to a Share Trust and
the designation of shares as Shares-in-Trust shall be effective as of the close
of business on the business day prior to the date of the Transfer or
Non-Transfer Event, as the case may be.
(2) If, notwithstanding the other provisions contained
in this Section 1, at any time after the date of the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would (i) result in the Equity Shares
being beneficially owned by fewer than 100 Persons (determined without reference
to any rules of attribution), ii)" (ii) result in the Trust being "closely held"
within
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the meaning of Section 856(h) of the Code, or iii)" (iii) cause the Trust to
Constructively Own 10% or more of the ownership interests in a tenant of the
Trust's or Partnership's real property, within the meaning of Section
856(d)(2)(B) of the Code, then (x) the purported transferee shall not acquire
any right or interest (or, in the case of a Non-Transfer Event, the person
holding record title of the Equity Shares with respect to which such Non-
Transfer Event occurred, shall cease to own any right or interest) in such
number of Equity Shares, the ownership of which by such purported transferee or
record holder would A)" (A) result in the Equity Shares being beneficially owned
by fewer than 100 Persons (determined without reference to any rules of
attribution), B)" (B) result in the Trust being "closely held" within the
meaning of Section 856(h) of the Code or C)" (C) cause the Trust to
Constructively Own 10% or more of the ownership interests in a tenant of the
Trust's or the Partnership's real property, within the meaning of Section
856(d)(2)(B) of the Code, (y) such number of Equity Shares (rounded up to the
nearest whole share) shall be designated Shares-in-Trust and, in accordance with
the provisions of Section 2 hereof, transferred automatically and by operation
of law to a Share Trust to be held in accordance with that Section 2 and (z) the
Prohibited Owner shall submit such number of Equity Shares to the Trust for
registration in the name of the Share Trust. Such transfer to a Share Trust and
the designation of shares as Shares-in-Trust shall be effective as of the close
of business on the business day prior to the date of the Transfer or Non-
Transfer Event, as the case may be.
(D) Remedies For Breach. If the Trust, or its designees,
-------------------
shall at any time determine in good faith that a Transfer has taken place in
violation of Section 1(B) hereof or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
Equity Shares in violation of Section 1(B) hereof, the Trust shall take such
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action as it deems advisable to refuse to give effect to or to prevent such
Transfer or acquisition, including, but not limited to, refusing to give effect
to such Transfer on the books of the Trust or instituting proceedings to enjoin
such Transfer or acquisition.
(E) Notice of Restricted Transfer. Any Person who
-----------------------------
acquires or attempts to acquire Equity Shares in violation of Section 1(B)
hereof, or any Person who owned Equity Shares that were transferred to the Share
Trust pursuant to the provisions of Section 1(C) hereof, shall immediately give
written notice to the Trust of such event and shall provide to the Trust such
other information as the Trust may request in order to determine the effect, if
any, of such Transfer or Non-Transfer Event, as the case may be, on the Trust's
status as a REIT.
(F) Owners Required To Provide Information. From the
--------------------------------------
date of the Initial Public Offering and prior to the Restriction Termination
Date:
(1) Every Beneficial Owner or Constructive Owner of more
than 5%, or such lower percentages as required pursuant to regulations under the
Code, of the outstanding Equity Shares of the Trust shall, within 30 days after
December 31 of each year, provide to the Trust a written statement or affidavit
stating the name and address of such Beneficial Owner or Constructive Owner, the
number of Equity Shares Beneficially Owned or Constructively Owned, and a
description of how such shares are held. Each such Beneficial Owner or
Constructive Owner shall provide to the Trust such additional information as the
Trust may request in order to determine the effect, if any, of such Beneficial
Ownership or Constructive Ownership on the Trust's status as a REIT and to
ensure compliance with the Ownership Limit.
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(2) Each Person who is a Beneficial Owner or
Constructive Owner of Equity Shares and each Person (including the shareholder
of record) who is holding Equity Shares for a Beneficial Owner or Constructive
Owner shall provide to the Trust a written statement or affidavit stating such
information as the Trust may request in order to determine the Trust's status as
a REIT and to ensure compliance with the Ownership Limit.
(G) Exception to Ownership Limit. The Ownership Limit
----------------------------
shall not apply to the acquisition of Equity Shares by an underwriter that
participates in a public offering of such shares, for a period of 90 days
following the purchase by such underwriter of such shares provided that the
restrictions contained in Section 1(B) hereof will not be violated following the
distribution by such underwriter of such shares. In addition, the Board of
Trustees, upon receipt of advice or evidence satisfactory to the Board of
Trustees in its sole and absolute discretion of counsel in each case to the
effect that the restrictions contained in Sections 1(B)(3), (4) and (5) hereof
will not be violated and that REIT status will not otherwise be lost, may, in
its sole and absolute discretion, exempt a Person from the Ownership Limit if
such Person is not an individual for purposes of Section 542(a)(2) of the Code,
provided that (i) the Board of Trustees obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that no
individual's Beneficial Ownership or Constructive Ownership of Equity Shares
will violate the Ownership Limit as a result of the exemption and (ii) such
Person agrees that any violation or attempted violation of the terms of the
exemption will result in a transfer to the Share Trust of Equity Shares pursuant
to Section 1(C) hereof.
(H) New York Stock Exchange Transactions.
------------------------------------
Notwithstanding any provision contained herein to the contrary, nothing in this
Amended and Restated Declaration of
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Trust shall preclude the settlement of any transaction entered into through the
facilities of the New York Stock Exchange.
Section 2. Shares-in-Trust.
(A) Share Trust. Any Equity Shares transferred to a
-----------
Share Trust and designated Shares-in-Trust pursuant to Section 1(C) hereof shall
be held for the exclusive benefit of a Beneficiary. The Trust shall name a
beneficiary of each Share Trust within five days after discovery of the
existence thereof. Any transfer to a Share Trust, and subsequent designation of
Equity Shares as Shares-in-Trust, pursuant to Section 1(C) hereof shall be
effective as of the close of business on the business day prior to the date of
the Transfer or Non-Transfer Event that results in the transfer to the Share
Trust. Shares-in-Trust shall remain issued and outstanding Equity Shares of the
Trust and shall be entitled to the same rights and privileges on identical terms
and conditions as are all other issued and outstanding Equity Shares of the same
class and series. When transferred to a Permitted Transferee in accordance with
the provisions of Section 2(E) hereof, such Shares-in-Trust shall cease to be
designated as Shares-in-Trust.
(B) Dividend Rights. The Share Trust, as record holder
---------------
of Shares-in-Trust, shall be entitled to receive all dividends and distributions
as may be declared by the Board of Trustees on such Equity Shares and shall hold
such dividends or distributions in trust for the benefit of the Beneficiary. The
Prohibited Owner with respect to Shares-in-Trust shall repay to the Share Trust
the amount of any dividends or distributions received by it that (i) are
attributable to any Equity Shares designated Shares-in-Trust and (ii) the record
date for which was on or after the date that such shares became Shares-in-Trust.
The Trust shall take all measures that it determines reasonably necessary to
recover the amount of any such dividend or distribution paid
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<PAGE>
to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on Equity Shares Beneficially Owned or
Constructively Owned by the Person who, but for the provisions of Section 1(C)
hereof, would Constructively Own or Beneficially Own the Shares-in-Trust; and,
as soon as reasonably practicable following the Trust's receipt or withholding
thereof, shall pay over to the Share Trust for the benefit of the Beneficiary
the dividends so received or withheld, as the case may be.
(C) Rights Upon Liquidation. In the event of any voluntary
-----------------------
or involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Trust, each holder of Shares-in-Trust shall be entitled to
receive, ratably with each other holder of Equity Shares of the same class or
series, that portion of the assets of the Trust that is available for
distribution to the holders of such class and series of Equity Shares. The Share
Trust shall distribute to the Prohibited Owner the amounts received upon such
liquidation, dissolution or winding up, or distribution; provided, however, that
the Prohibited Owner shall not be entitled to receive amounts pursuant to this
Section 2(C) in excess of (i) in the case of a purported Transfer in which the
Prohibited Owner gave value for Equity Shares and which Transfer resulted in the
transfer of the shares to the Share Trust, the price per share, if any, such
Prohibited Owner paid for the Equity Shares and (ii) in the case of a Non-
Transfer Event or Transfer in which the Prohibited Owner did not give value for
such shares (e.g., if the shares were received through a gift or devise) and
---
which Non-Transfer Event or Transfer, as the case may be, resulted in the
transfer of shares to the Share Trust, the price per share equal to the Market
Price on the date of such Non-Transfer Event or Transfer. Any remaining amount
in such Share Trust shall be distributed to the Beneficiary.
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<PAGE>
(D) Voting Rights. The Share Trustee shall be entitled to
-------------
vote all Shares-in-Trust. Any vote by a Prohibited Owner as a holder of Equity
Shares prior to the discovery by the Trust that the Equity Shares are Shares-in-
Trust shall, subject to applicable law, be rescinded and shall be void ab initio
-- ------
with respect to such Shares-in-Trust and the Prohibited Owner shall be deemed to
have given, as of the close of business on the business day prior to the date of
the purported Transfer or Non-Transfer Event that results in the transfer to the
Share Trust of Equity Shares under Section 1(C) hereof, an irrevocable proxy to
the Share Trustee to vote the Shares-in-Trust in the manner in which the Share
Trustee, in its sole and absolute discretion, desires.
(E) Designation of Permitted Transferee. The Share Trustee
-----------------------------------
shall have the exclusive and absolute right to designate a Permitted Transferee
of any and all Shares-in-Trust. In an orderly fashion so as not to materially
adversely affect the Market Price of the Shares-in-Trust, the Share Trustee
shall designate any Person as Permitted Transferee, provided, however, that (i)
-------- -------
the Permitted Transferee so designated purchases for valuable consideration
(whether in a public or private sale), at a price as set forth in Section 2(G)
hereof, the Shares-in-Trust and (ii) the Permitted Transferee so designated may
acquire such Shares-in-Trust without such acquisition resulting in a transfer to
a Share Trust and the redesignation of such Equity Shares so acquired as Shares-
in-Trust under Section 1(C) hereof. Upon the designation by the Share Trustee of
a Permitted Transferee in accordance with the provisions of this Section 2(E),
the Share Trustee shall (i) cause to be transferred to the Permitted Transferee
that number of Shares-in-Trust acquired by the Permitted Transferee, (ii) cause
to be recorded on the books of the Trust that the Permitted Transferee is the
holder of record of such number of Equity Shares, (iii) cause the Shares-in-
Trust to be canceled and (iv) distribute to the Beneficiary any and all
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amounts held with respect to the Shares-in-Trust after making the payment to the
Prohibited Owner pursuant to Section 2(F) hereof.
(F) Compensation to Record Holder of Equity Shares
----------------------------------------------
that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
- ---------------------------
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 2(E) hereof or following the acceptance of
the offer to purchase such shares in accordance with Section 2(G) hereof) to
receive from the Share Trustee following the sale or other disposition of such
Shares-in-Trust the lesser of (i) in the case of (a) a purported Transfer in
which the Prohibited Owner gave value for Equity Shares and which Transfer
resulted in the transfer of the shares to the Share Trust, the price per share,
if any, such Prohibited Owner paid for the Equity Shares, or (b) a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
-----
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Share Trust, the price per share equal to the Market Price on the
date of such Non-Transfer Event or Transfer and (ii) the price per share
received by the Share Trustee from the sale or other disposition of such Shares-
in-Trust in accordance with Section 2(E) hereof. Any amounts received by the
Share Trustee in respect of such Shares-in-Trust and in excess of such amounts
to be paid the Prohibited Owner pursuant to this Section 2(F) shall be
distributed to the Beneficiary in accordance with the provisions of Section 2(E)
hereof. Each Beneficiary and Prohibited Owner waive any and all claims that they
may have against the Share Trustee and the Share Trust arising out of the
disposition of Shares-in-Trust, except for claims arising out of the gross
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<PAGE>
negligence or willful misconduct of, or any failure to make payments in
accordance with this Section 2 by, such Share Trustee or the Trust.
(G) Purchase Right in Shares-in-Trust. Shares-in-Trust
---------------------------------
shall be deemed to have been offered for sale to the Trust, 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 devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or Non-
Transfer Event) and (ii) the Market Price on the date the Trust, or its
designee, accepts such offer. The Trust shall have the right to accept such
offer for a period of ninety days after the later of (i) the date of the Non-
Transfer Event or purported Transfer that resulted in such Shares-in-Trust and
(ii) the date the Trust determines in good faith that a Transfer or Non-Transfer
Event resulting in Shares-in-Trust has occurred, if the Trust does not receive a
notice of such Transfer or Non-Transfer Event pursuant to Section 1(E) hereof.
Section 3. Remedies Not Limited. Subject to Section 1(H) hereof,
--------------------
nothing contained in this Article VII shall limit the authority of the Trust to
take such other action as it deems necessary or advisable to protect the Trust
and the interests of its shareholders by preservation of the Trust's status as a
REIT and to ensure compliance with the Ownership Limit.
Section 4. Ambiguity. In the case of an ambiguity in the
---------
application of any of the provisions of Article VII, including any definition
contained in Section 1(A) hereof, the Board of Trustees shall have the power to
determine the application of the provisions of this Article VII with respect to
any situation based on the facts known to it.
Section 5. Legend. Each certificate for Equity Shares shall bear
------
the following legend: "The [Common or Preferred] Shares represented by this
certificate are subject to restrictions on
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<PAGE>
transfer. Subject to certain further restrictions and except as provided in the
Amended and Restated Declaration of Trust of the Trust, no Person may (i)
Beneficially or Constructively Own Common Shares in excess of 9.9% of the number
of outstanding Common Shares, (ii) Beneficially or Constructively Own Preferred
Shares of any class or series of Preferred Shares in excess of 9.9% of the
number of outstanding Preferred Shares of such class or series, (iii)
Beneficially Own Equity Shares that would result in the Equity Shares being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution), (iv) Beneficially Own Equity Shares that would result
in the Trust being "closely held" under Section 856(h) of the Internal Revenue
Code of 1986 as amended (the "Code") or (v) Constructively Own Equity Shares
that would cause the Trust to Constructively Own 10% or more of the ownership
interests in a tenant of the Trust's or the Partnership's real property, within
the meaning of Section 856(d)(2)(B) of the Code. Any Person who attempts to
Beneficially or Constructively Own shares of Equity Shares in excess of the
above limitations must immediately notify the Trust in writing. If any
restrictions above are violated, the Equity Shares represented hereby will be
transferred automatically to a Share Trust and shall be designated Shares-in-
Trust to a trustee of a trust for the benefit of one or more charitable
beneficiaries. In addition, upon the occurrence of certain events, attempted
transfers in violation of the restrictions described above may be void ab
--
initio. All capitalized terms in this legend have the meanings defined in the
- ------
Trust's Amended and Restated Declaration of Trust, as the same may be further
amended from time to time, a copy of which, including the restrictions on
transfer, will be sent without charge to each shareholder who so requests. Such
requests must be made to the Secretary of the Trust at its principal office or
to the transfer agent."
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<PAGE>
Section 6. Severability. If any provision of this Article VII or
------------
any application of any such provision is determined to be invalid by any federal
or state court having jurisdiction over the issues, the validity of the
remaining provisions shall not be affected and other applications of such
provision shall be affected only to the extent necessary to comply with the
determination of such court.
ARTICLE VIII
SHAREHOLDERS
Section 1. Meetings. There shall be an annual meeting of the
--------
shareholders, to be held on proper notice at such time (after the delivery of
the annual report) and convenient location as shall be determined by or in the
manner prescribed in the Bylaws, for the election of the Trustees, if required,
and for the transaction of any other business within the powers of the Trust.
Except as otherwise provided in this Amended and Restated Declaration of Trust,
special meetings of shareholders may be called in the manner provided in the
Bylaws. If there are no Trustees, the officers of the Trust shall promptly call
a special meeting of the shareholders entitled to vote for the election of
successor Trustees. Any meeting may be adjourned and reconvened as the Trustees
determine or as provided in the Bylaws.
Section 2. Voting Rights. Subject to the provisions of any class
-------------
or series of Shares then outstanding, the shareholders shall be entitled to vote
only on the following matters: (a) termination of REIT status as provided in
Article V, Section (1)(C), (b) election of Trustees as provided in Article V,
Section 2(A) and the removal of Trustees as provided in Article V, Section 3;
(c) amendment of the Amended and Restated Declaration of Trust as provided in
Article X; (d) termination of the Trust as provided in Article XII, Section 2;
(e) merger or
-27-
<PAGE>
consolidation of the Trust, or the sale or disposition of substantially all of
the Trust Property, as provided in Article XI; and (f) such other matters with
respect to which a vote of the shareholders is required by applicable law or the
Board of Trustees has adopted a resolution declaring that a proposed action is
advisable and directing that the matter be submitted to the shareholders for
approval or ratification. Except with respect to the foregoing matters, no
action taken by the shareholders at any meeting shall in any way bind the Board
of Trustees.
Section 3. Preemptive and Appraisal Rights. Except as may be
-------------------------------
provided by the Board of Trustees in setting the terms of classified or
reclassified Shares pursuant to Article VI, Section 4, no holder of Shares
shall, as such holder, (a) have any preemptive or preferential right to purchase
or subscribe for any additional Shares of the Trust or any other security of the
Trust that it may issue or sell or (b) except as expressly required by Title 8,
have any right to require the Trust to pay him the fair value of his Shares in
an appraisal or similar proceeding.
Section 4. Extraordinary Actions. Except as specifically provided
---------------------
in Article V, Sections 1(C), 2(A) and 3, Article X, Sections 2 and 3, and
Article XII, Section 2 of this Amended and Restated Declaration of Trust, if the
provisions of applicable law require a vote of holders of Shares entitled to be
cast on a matter or action which is greater than a majority but such law permits
the Amended and Restated Declaration of Trust to reduce such voting requirement,
any such matter or action shall be effective and valid if taken or authorized by
the affirmative vote of holders of Shares entitled to cast a majority of all the
votes entitled to be cast on the matter or action.
Section 5. Board Approval. The submission of any action to the
--------------
shareholders for their consideration shall first be approved by the Board of
Trustees.
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<PAGE>
Section 6. Action By Shareholders Without a Meeting. The Bylaws of
----------------------------------------
the Trust may provide that any action required or permitted to be taken by the
shareholders may be taken without a meeting by the written consent of the
shareholders entitled to cast a sufficient number of votes to approve the matter
as required by statute, the Amended and Restated Declaration of Trust or the
Bylaws of the Trust, as the case may be.
ARTICLE IX
LIABILITY LIMITATION, INDEMNIFICATION
AND TRANSACTIONS WITH THE TRUST
Section 1. Limitation of Shareholder Liability. No shareholder
-----------------------------------
shall be liable for any debt, claim, demand, judgment or obligation of any kind
of, against or with respect to the Trust by reason of his being a shareholder,
nor shall any shareholder be subject to any personal liability whatsoever, in
tort, contract or otherwise, to any person in connection with the property or
the affairs of the Trust by reason of his being a shareholder.
Section 2. Limitation of Trustee and Officer Liability. To the
-------------------------------------------
maximum extent that Maryland law in effect from time to time permits limitation
of the liability of trustees and officers of a REIT, no Trustee or officer of
the Trust shall be liable to the Trust or to any shareholder for money damages.
Neither the amendment nor repeal of this Section, nor the adoption or amendment
of any other provision of the Amended and Restated Declaration of Trust or
Bylaws of the Trust inconsistent with this section, shall apply to or affect in
any respect the applicability of the preceding sentence with respect to any act
or failure to act that occurred prior to such amendment, repeal or adoption. In
the absence of any Maryland statute limiting the liability of trustees and
officers of a Maryland REIT for money damages in a suit by or on behalf
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<PAGE>
of the Trust or by any shareholder, no Trustee or officer of the Trust shall be
liable to the Trust or to any shareholder for money damages except to the extent
that (a) the Trustee or officer actually received an improper benefit or profit
in money, property or services, for the amount of the benefit or profit in
money, property or services actually received; or (b) a judgment or other final
adjudication adverse to the Trustee or officer is entered in a proceeding based
on a finding in the proceeding that the Trustee's or officer's action or failure
to act was the result of active and deliberate dishonesty and was material to
the cause of action adjudicated in the proceeding.
Section 3. Express Exculpatory Clauses in Instruments. Neither the
------------------------------------------
shareholders nor the Trustees, officers, employees or agents of the Trust shall
be liable under any written instrument creating an obligation of the Trust, and
all Persons shall look solely to the Trust Property for the payment of any claim
under or for the performance of that instrument. The omission of the foregoing
exculpatory language from any instrument shall not affect the validity or
enforceability of such instrument and shall not render any Shareholder, Trustee,
officer, employee or agent liable thereunder to any third party, nor shall the
Trustees or any officer, employee or agent of the Trust be liable to anyone for
such omission. As used in this Amended and Restated Declaration of Trust, "Trust
Property" means any and all property, real, personal or otherwise, tangible or
intangible, which is transferred or conveyed to the Trust or the Trustees
(including all rents, income, profits and gains therefrom), which is owned or
held by, or for the account of, the Trust or the Trustees.
Section 4. Indemnification. The Trust shall have the power, to the
---------------
maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any
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<PAGE>
individual who is a present or former shareholder, Trustee or officer of the
Trust or (b) any individual who, while a Trustee of the Trust and at the request
of the Trust, serves or has served as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or 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 Trust. The Trust shall have the power, with the approval of its Board of
Trustees, to provide such indemnification and advancement of expenses to a
person who served as a predecessor of the Trust in any of the capacities
described in (a) or (b) above, and to any employee or agent of the Trust or a
predecessor of the Trust.
Section 5. Transactions Between the Trust and its Trustees, Officers,
----------------------------------------------------------
Employees and Agents. Subject to any express restrictions in the Amended and
- --------------------
Restated Declaration of Trust or adopted by the Trustees in the Bylaws or by
resolution, the Trust may enter into any contract or transaction of any kind
with any person, including any Trustee, officer, employee or agent of the Trust
or any person affiliated with a Trustee, officer, employee or agent of the
Trust, whether or not any of them has a financial interest in such transaction.
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<PAGE>
ARTICLE X
AMENDMENTS
Section 1. General. The Trust reserves the right from time to time to
-------
make any amendment to the Amended and Restated Declaration of Trust, now or
hereafter authorized by law, including any amendment altering the terms or
contract rights, as expressly set forth in the Amended and Restated Declaration
of Trust, of any Shares. All rights and powers conferred by this Amended and
Restated Declaration of Trust on shareholders, Trustees and officers are granted
subject to this reservation. An amendment to the Amended and Restated
Declaration of Trust (a) shall be signed and acknowledged by at least a majority
of the Trustees or an officer duly authorized by at least a majority of the
Trustees, (b) shall be filed for record with SDAT as provided in Article XIII,
Section 5 and (c) shall become effective as of the later of the time the SDAT
accepts the amendment for record or the time established in the amendment, not
to exceed 30 days after the amendment is accepted for record. All references to
the Amended and Restated Declaration of Trust shall include all amendments
thereto.
Section 2. By Trustees. The Trustees by a two-thirds vote may amend the
-----------
Amended and Restated Declaration of Trust from time to time, in the manner
provided by Title 8, without any action by the shareholders, to qualify as a
REIT under the Code or under Title 8.
Section 3. By Shareholders. Other than amendments pursuant to Section 2
---------------
of this Article X, any amendment to the Declaration of Trust shall be valid only
if approved by the affirmative vote of at least a majority of all the votes
entitled to be cast on the matter, except that any amendment to Article V,
Article VII, Article X, Sections 2 and 3, and Article XII, Section 2
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<PAGE>
of this Amended and Restated Declaration of Trust shall be valid only if
approved by the affirmative vote of two-thirds of all the votes entitled to be
cast on the matter.
ARTICLE XI
MERGER, CONSOLIDATION OR SALE OF TRUST PROPERTY
Subject to the provisions of any class or series of Shares at the time
outstanding, the Trust may (a) merge the Trust into another entity, (b)
consolidate the Trust with one or more other entities into a new entity or (c)
sell, lease, exchange or otherwise transfer all or substantially all of the
Trust Property. Any such action must be approved by the Board of Trustees and,
after notice to all shareholders entitled to vote on the matter, by the
affirmative vote of a majority of all the votes entitled to be cast on the
matter.
ARTICLE XII
DURATION AND TERMINATION OF TRUST
Section 1. Duration. The Trust shall continue perpetually unless
--------
terminated pursuant to Section 2 of this Article XII or pursuant to any
applicable provision of Title 8.
Section 2. Termination.
-----------
(A) Subject to the provision of any class or series of Shares
at the time outstanding, the Trust may be terminated at any meeting of
shareholders, by the affirmative vote of two thirds of all the votes entitled to
be cast on the matter. Upon the termination of the Trust:
(1) The Trust shall carry on no business except for the
purpose of winding up its affairs.
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<PAGE>
(2) The Trustees shall proceed to wind up the affairs
of the Trust and all of the powers of the Trustees under the Amended and
Restated Declaration of Trust shall continue, including the powers to fulfill or
discharge the Trust's contracts, collect its assets, sell, convey, assign,
exchange, transfer or otherwise dispose of all or any part of the remaining
Trust Property to one or more persons at public or private sale for
consideration that may consist in whole or in part of cash, securities or other
property of any kind, discharge or pay its liabilities and do all other acts
appropriate to liquidate its business.
(3) After paying or adequately providing for the
payment of all liabilities, and upon receipt of such releases, indemnities and
agreements as it deems necessary for its protection, the Trust may distribute
the remaining Trust Property among the shareholders so that after payment in
full or the setting apart for payment of such preferential amounts, if any, to
which the holders of any Shares at the time outstanding shall be entitled, the
remaining Trust Property shall, subject to any participating or similar rights
of Shares at the time outstanding, be distributed ratably among the holders of
Common Shares at the time outstanding.
(B) After termination of the Trust, the liquidation of its
business and the distribution to the shareholders as herein provided, a majority
of the Trustees shall execute and file with the Trust's records a document
certifying that the Trust has been duly terminated, and the Trustees shall be
discharged from all liabilities and duties hereunder, and the rights and
interests of all shareholders shall cease.
ARTICLE XIII
MISCELLANEOUS
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<PAGE>
Section 1. Governing Law. The Amended and Restated Declaration of Trust
-------------
is executed by the undersigned Trustees and delivered in the State of Maryland
with reference to the laws thereof, and the rights of all parties and the
validity, construction and effect of every provision hereof shall be subject to
and construed according to the laws of the State of Maryland without regard to
conflicts of laws provisions thereof.
Section 2. Reliance by Third Parties. Any certificate shall be final and
-------------------------
conclusive as to any person dealing with the Trust if executed by the Secretary
or an Assistant Secretary of the Trust or a Trustee, and if certifying to: (a)
the number or identity of Trustees, officers of the Trust or shareholders; (b)
the due authorization of the execution of any document; (c) the action or vote
taken, and the existence of a quorum, at a meeting of the Board of Trustees or
shareholders; (d) a copy of the Amended and Restated Declaration of Trust or of
the Bylaws as a true and complete copy as then in force; (e) an amendment to the
Amended and Restated Declaration of Trust; (f) the termination of the Trust; or
(g) the existence of any fact relating to the affairs of the Trust. No
purchaser, lender, transfer agent or other person shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made by the
Trust on its behalf or by any officer, employee or agent of the Trust.
Section 3. Severability.
------------
(A) The provisions of the Amended and Restated Declaration of
Trust are severable, and if the Board of Trustees shall determine, with the
advice of counsel, that any one or more of such provisions (the "Conflicting
Provisions") are in conflict with the Code, Title 8 or other applicable federal
or state laws, the Conflicting Provisions, to the extent of the conflict, shall
be deemed never to have constituted a part of the Amended and Restated
Declaration of
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<PAGE>
Trust, even without any amendment of the Amended and Restated Declaration of
Trust pursuant to Article X and without affecting or impairing any of the
remaining provisions of the Amended and Restated Declaration of Trust or
rendering invalid or improper any action taken or omitted prior to such
determination. No Trustee shall be liable for making or failing to make such a
determination. In the event of any such determination by the Board of Trustees,
the Board shall amend the Amended and Restated Declaration of Trust in the
manner provided in Article X, Section 2.
(B) If any provision of the Amended and Restated Declaration
of Trust shall be held invalid or unenforceable in any jurisdiction, such
holding shall apply only to the extent of any such invalidity or
unenforceability and shall not in any manner affect, impair or render invalid or
unenforceable such provision in any other jurisdiction or any other provision of
the Amended and Restated Declaration of Trust in any jurisdiction.
Section 4. Construction. In the Amended and Restated Declaration of
------------
Trust, unless the context otherwise requires, words used in the singular or in
the plural include both the plural and singular and words denoting any gender
include all genders. The title and headings of different parts are inserted for
convenience and shall not affect the meaning, construction or effect of the
Amended and Restated Declaration of Trust. In defining or interpreting the
powers and duties of the Trust and its Trustees and officers, reference may be
made by the Trustees or officers, to the extent appropriate and not inconsistent
with the Code or Title 8, to Titles 1 through 3 of the Corporations and
Associations Article of the Annotated Code of Maryland. In furtherance and not
in limitation of the foregoing, in accordance with the provisions of Title 3,
Subtitles 6 and 7,
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<PAGE>
of the Corporations and Associations Article of the Annotated Code of Maryland,
the Trust shall be included within the definition of "corporation" for purposes
of such provisions.
Section 5. Recordation. The Amended and Restated Declaration of Trust and
-----------
any amendment hereto shall be filed for record with the SDAT and may also be
filed or recorded in such other places as the Trustees deem appropriate, but
failure to file for record the Amended and Restated Declaration of Trust or any
amendment hereto in any office other than in the State of Maryland shall not
affect or impair the validity or effectiveness of the Amended and Restated
Declaration of Trust or any amendment hereto. A restated Declaration of Trust
shall, upon filing, be conclusive evidence of all amendments contained therein
and may thereafter be referred to in lieu of the original Declaration of Trust
and the various amendments thereto.
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<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has been
signed on this ______ day of July, 1998, by the undersigned Chairman of the
Board and Chief Executive Officer of the Trust and witnessed by the undersigned
Secretary of the Trust, each of whom acknowledges that this document is his free
act and deed, and that to the best of his knowledge, information and belief, the
matters and facts set forth herein are true in all material respects and that
the statement is made under the penalties for perjury.
HUDSON HOTELS TRUST
ATTEST:
--------------------------------------
E. Anthony Wilson
Chairman of the Board and Chief
Executive Officer
IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has been
signed on this _____ day of July, 1998, by the Trustees of the Trust who
acknowledge that this document is their free act and deed, and that to the best
of their knowledge, information and belief, the matters and facts set forth
herein are true in all material respects and that the statement is made under
the penalties for perjury.
(SEAL)
----------------------------------
E. Anthony Wilson, Trustee
(SEAL)
----------------------------------
John M. Sabin, Trustee
(SEAL)
----------------------------------
Ralph L. Peek, Trustee
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<PAGE>
Exhibit 3.2
FORM OF
-------
HUDSON HOTELS TRUST
-------------------
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Trust shall
----------------
be located at such place or places as the Trustees may designate.
Section 2. ADDITIONAL OFFICES. The Trust may have additional offices
------------------
at such places as the Board of Trustees may from time to time determine or the
business of the Trust may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE. All meetings of shareholders shall be held at the
-----
principal office of the Trust or at such other place within the United States as
shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the shareholders for
--------------
the election of Trustees and the transaction of any business within the powers
of the Trust shall be held during the month of June of each year, or at such
other time determined by the Board of Trustees after the delivery of the annual
report, referred to in Section 12 of this Article II, at a convenient location
and on proper notice, on a date and at the time set by the Trustees, beginning
with the year 1999. Failure to hold an annual meeting does not invalidate the
Trust's existence or affect any otherwise valid acts of the Trust.
Section 3. SPECIAL MEETINGS. The chairman of the board or the
----------------
president or one-third of the Trustees may call special meetings of the
shareholders. Special meetings of shareholders shall also be called by the
secretary upon the written request of the holders of shares entitled to cast not
less than a majority of all the votes entitled to be cast at such meeting. Such
request shall state the purpose of such meeting and the matters proposed to be
acted on at such meeting. The secretary shall inform such shareholders of the
reasonably estimated cost of preparing and mailing notice of the meeting and,
upon payment by such shareholders to the Trust of such costs, the secretary
shall give notice to each shareholder entitled to notice of the meeting. Unless
requested by shareholders entitled to cast a majority of all the votes entitled
to be cast at such meeting, a special meeting need not be called to consider any
matter which is substantially the same as a matter voted on at any meeting of
the shareholders held during the preceding twelve months.
Section 4. NOTICE. Not less than ten nor more than 90 days before
------
each meeting of shareholders, the secretary shall give to each shareholder
entitled to vote at such meeting and to each shareholder not entitled to vote
who is entitled to notice of the meeting written or printed notice stating the
time and place of the meeting and, in the case of a special meeting or as
otherwise may be required by any statute, the purpose for which the meeting is
called, either by mail or by presenting it to such shareholder personally or by
leaving it at his residence or usual place of business. If mailed, such notice
shall be deemed to be given when deposited in the United States mail addressed
to the shareholder at his post office address as it appears on the records of
the Trust, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Trust may be
---------------
transacted at an annual meeting of shareholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of shareholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of the shareholders, the
------------
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated: the
Vice Chairman of the Board, if
<PAGE>
there be one, the President, the Vice Presidents in their order of rank and
seniority; or a Chairman chosen by the shareholders entitled to cast a majority
of the votes which all shareholders present in person or by proxy are entitled
to cast, shall act as Chairman; and the Secretary, or, in his absence, an
assistant secretary, or in the absence of both the Secretary and assistant
secretaries, a person appointed by the Chairman shall act as Secretary.
Section 7. QUORUM. At any meeting of shareholders, the presence in
-----
person or by proxy of shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the Declaration of Trust
for the vote necessary for the adoption of any measure. If, however, such
quorum shall not be present at any meeting of the shareholders, the shareholders
entitled to vote at such meeting, present in person or by proxy, shall have the
power to adjourn the meeting from time to time to a date not more than 120 days
after the original record date without notice other than announcement at the
meeting. At such adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting as
originally notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting of
------
shareholders duly called and at which a quorum is present shall be sufficient to
elect a Trustee. Each share may be voted for as many individuals as there are
Trustees to be elected and for whose election the share is entitled to be voted.
A majority of the votes cast at a meeting of shareholders duly called and at
which a quorum is present shall be sufficient to approve any other matter which
may properly come before the meeting, unless more than a majority of the votes
cast is required herein or by statute or by the Declaration of Trust. Unless
otherwise provided in the Declaration of Trust, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote at a meeting of shareholders.
Section 9. PROXIES. A shareholder may cast the votes entitled to
-------
be cast by the shares owned of record by him either in person or by proxy
executed in writing by the shareholder or by his duly authorized attorney in
fact. Such proxy shall be filed with the secretary of the Trust before or at
the time of the meeting. No proxy shall be valid after eleven months from the
date of its execution, unless otherwise provided in the proxy.
Section 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of the
-----------------------------------
Trust registered in the name of a corporation, partnership, trust or other
entity, if entitled to be voted, may be voted by the president or a vice
president, a general partner or trustee thereof, as the case may be, or a proxy
appointed by any of the foregoing individuals, unless some other person who has
been appointed to vote such shares pursuant to a bylaw or a resolution of the
governing board of such corporation or other entity or agreement of the partners
of the partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such shares. Any trustee or other
fiduciary may vote shares registered in his name as such fiduciary, either in
person or by proxy.
Shares of the Trust directly or indirectly owned by it shall not be
voted at any meeting and shall not be counted in determining the total number of
outstanding shares entitled to be voted at any given time, unless they are held
by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
The Trustees may adopt by resolution a procedure by which a
shareholder may certify in writing to the Trust that any shares registered in
the name of the shareholder are held for the account of a specified person other
than the shareholder. The resolution shall set forth the class of shareholders
who may make the certification, the purpose for which the certification may be
made, the form of certification and the information to be contained in it; if
the certification is with respect to a record date or closing of the share
transfer books, the time after the record date or closing of the share transfer
books within which the certification must be received by the Trust; and any
other provisions with respect to the procedure which the Trustees consider
necessary or desirable. On receipt of such certification, the person specified
in the certification shall be regarded as, for the purposes set forth in the
certification, the shareholder of record of the specified shares in place of the
shareholder who makes the certification.
Notwithstanding any other provision contained herein or in the
Declaration of Trust or these Bylaws, Title 3, Subtitle 7 of the Corporations
and Associations Article of the Annotated Code of Maryland (or any successor
-2-
<PAGE>
statute) shall not apply to any acquisition by any person of shares of
beneficial interest of the Trust. This section may be repealed, in whole or in
part, at any time, whether before or after an acquisition of control shares and,
upon such repeal, may, to the extent provided by any successor bylaw, apply to
any prior or subsequent control share acquisition.
Section 11. INSPECTORS. At any meeting of shareholders, the
----------
chairman of the meeting may appoint one or more persons as inspectors for such
meeting. Such inspectors shall ascertain and report the number of shares
represented at the meeting based upon their determination of the validity and
effect of proxies, count all votes, report the results and perform such other
acts as are proper to conduct the election and voting with impartiality and
fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by him or
by a majority of them if there is more than one inspector acting at such
meeting. If there is more than one inspector, the report of a majority shall be
the report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
----- -----
Section 12. REPORTS TO SHAREHOLDERS.
-----------------------
The Trustees shall submit to the shareholders at or before the annual
meeting of shareholders a report of the business and operations of the Trust
during such fiscal year, containing a balance sheet and a statement of income
and surplus of the Trust, accompanied by the certification of an independent
certified public accountant, and such further information as the Trustees may
determine is required pursuant to any law or regulation to which the Trust is
subject. Within the earlier of 20 days after the annual meeting of shareholders
or 120 days after the end of the fiscal year of the Trust, the Trustees shall
place the annual report on file at the principal office of the Trust and with
any governmental agencies as may be required by law and as the Trustees may deem
appropriate.
Section 13. NOMINATIONS AND PROPOSALS BY SHAREHOLDERS.
-----------------------------------------
(a) Annual Meetings of Shareholders. (1) Nominations of persons for
-------------------------------
election to the Board of Trustees and the proposal of business to be considered
by the shareholders may be made at an annual meeting of shareholders (i)
pursuant to the Trust's notice of meeting, (ii) by or at the direction of the
Trustees or (iii) by any shareholder of the Trust who was a shareholder of
record both at the time of giving of notice provided for in this Section 13(a)
and at the time of the annual meeting, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in this Section 13(a).
(2) For nominations or other business to be properly brought
before an annual meeting by a shareholder pursuant to clause (iii) of paragraph
(a) (1) of this Section 13, the shareholder must have given timely notice
thereof in writing to the secretary of the Trust and such other business must
otherwise be a proper matter for action by shareholders. To be timely, a
shareholder's notice shall be delivered to the secretary at the principal
executive offices of the Trust not later than the close of business on the 60th
day nor earlier than the close of business on the 90th day prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date or if the Trust has
not previously held an annual meeting, notice by the shareholder to be timely
must be so delivered not earlier than the close of business on the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting is first made
by the Trust. In no event shall the public announcement of a postponement or
adjournment of an annual meeting to a later date or time commence a new time
period for the giving of a shareholder's notice as described above. Such
shareholder's notice shall set forth (i) as to each person whom the shareholder
proposes to nominate for election or reelection as a Trustee all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of Trustees in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
Trustee if elected); (ii) as to any other business that the shareholder proposes
to bring before the meeting, a brief description of the business desired to be
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<PAGE>
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such shareholder and of
the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as
to the shareholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (x) the name and address of such
shareholder, as they appear on the Trust's books, and of such beneficial owner
and (y) the number of each class of shares of the Trust which are owned
beneficially and of record by such shareholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (a)
(2) of this Section 13 to the contrary, in the event that the number of Trustees
to be elected to the Board of Trustees is increased and there is no public
announcement by the Trust naming all of the nominees for Trustee or specifying
the size of the increased Board of Trustees at least 70 days prior to the first
anniversary of the preceding year's annual meeting, a shareholder's notice
required by this Section 13(a) shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if it shall
be delivered to the secretary at the principal executive offices of the Trust
not later than the close of business on the tenth day following the day on which
such public announcement is first made by the Trust.
(b) Special Meetings of Shareholders. Only such business shall be
--------------------------------
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the Trust's notice of meeting. Nominations of persons
for election to the Board of Trustees may be made at a special meeting of
shareholders at which Trustees are to be elected (i) pursuant to the Trust's
notice of meeting (ii) by or at the direction of the Board of Trustees or (iii)
provided that the Board of Trustees has determined that Trustees shall be
elected at such special meeting, by any shareholder of the Trust who was a
shareholder of record both at the time of giving of notice provided for in this
Section 13(b) and at the time of the special meeting, who is entitled to vote at
the meeting and who complied with the notice procedures set forth in this
Section 13(b). In the event the Trust calls a special meeting of shareholders
for the purpose of electing one or more Trustees to the Board of Trustees, any
such shareholder may nominate a person or persons (as the case may be) for
election to such position as specified in the Trust's notice of meeting, if the
shareholder's notice containing the information required by paragraph (a) (2) of
this Section 13 shall be delivered to the secretary at the principal executive
offices of the Trust not earlier than the close of business on the 90th day
prior to such special meeting and not later than the close of business on the
later of the 60th day prior to such special meeting or the tenth day following
the day on which public announcement is first made of the date of the special
meeting and of the nominees proposed by the Trustees to be elected at such
meeting. In no event shall the public announcement of a postponement or
adjournment of a special meeting to a later date or time commence a new time
period for the giving of a shareholder's notice as described above.
(c) General. (1) Only such persons who are nominated in accordance
-------
with the procedures set forth in this Section 13 shall be eligible to serve as
Trustees and only such business shall be conducted at a meeting of shareholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 13. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 13 and, if any proposed
nomination or business is not in compliance with this Section 13, to declare
that such nomination or proposal shall be disregarded.
(2) For purposes of this Section 13, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable news service or in a document publicly filed by the Trust
with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d)
of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 13, a
shareholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 13. Nothing in this Section 13 shall be
deemed to affect any rights of shareholders to request inclusion of proposals in
the Trust's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
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<PAGE>
Section 14. INFORMAL ACTION BY SHAREHOLDERS. Any action required
-------------------------------
or permitted to be taken at a meeting of shareholders may be taken without a
meeting if a consent in writing, setting forth such action, is signed by 100% of
the shareholders entitled to vote on the matter and any other shareholder
entitled to notice of a meeting of shareholders (but not to vote thereat) has
waived in writing any right to dissent from such action, and such consent and
waiver are filed with the minutes of proceedings of the shareholders.
Section 15. VOTING BY BALLOT. Voting on any question or in any
----------------
election may be viva voce unless the presiding officer shall order or any
---------
shareholder shall demand that voting be by ballot.
ARTICLE III
TRUSTEES
Section 1. GENERAL POWERS; QUALIFICATIONS; TRUSTEES HOLDING OVER.
-----------------------------------------------------
The business and affairs of the Trust shall be managed under the direction of
its Board of Trustees. A Trustee shall be an individual at least 21 years of
age who is not under legal disability. Trustees need not be shareholders of the
Trust. In case of failure to elect Trustees at an annual meeting of the
shareholders, the Trustees holding over shall continue to direct the management
of the business and affairs of the Trust until their successors are elected and
qualify.
Section 2. ANNUAL AND REGULAR MEETINGS. An annual meeting of the
---------------------------
Trustees shall be held immediately after and at the same place as the annual
meeting of shareholders, no notice other than this Bylaw being necessary. The
Trustees may provide, by resolution, the time and place, either within or
without the State of Maryland, for the holding of regular meetings of the
Trustees without other notice than such resolution.
Section 3. SPECIAL MEETINGS. Special meetings of the Trustees may be
----------------
called by or at the request of the chairman of the board or the president or by
a majority of the Trustees then in office. The person or persons authorized to
call special meetings of the Trustees may fix any place, either within or
without the State of Maryland, as the place for holding any special meeting of
the Trustees called by them.
Section 4. NOTICE. Notice of any special meeting shall be given by
------
written notice delivered personally, telegraphed, facsimile-transmitted or
mailed to each Trustee at his business or residence address, or by telephone.
Personally delivered or telegraphed notices shall be given at least two days
prior to the meeting. Notice by mail shall be given at least five days prior to
the meeting. Telephone or facsimile-transmission notice shall be given at least
24 hours prior to the meeting. If mailed, such notice shall be deemed to be
given when deposited in the United States mail properly addressed, with postage
thereon prepaid. If given by telegram, such notice shall be deemed to be given
when the telegram is delivered to the telegraph company. Telephone notice
shall be deemed given when the Trustee is personally given such notice in a
telephone call to which he is a party. Facsimile-transmission notice shall be
deemed given upon completion of the transmission of the message to the number
given to the Trust by the Trustee and receipt of a completed answer-back
indicating receipt. Neither the business to be transacted at, nor the purpose
of, any annual, regular or special meeting of the Trustees need be stated in the
notice, unless specifically required by statute or these Bylaws.
Section 5. QUORUM. A majority of the Trustees shall constitute a
------
quorum for transaction of business at any meeting of the Trustees, provided
that, if less than a majority of such Trustees are present at said meeting, a
majority of the Trustees present may adjourn the meeting from time to time
without further notice, and provided further that if, pursuant to the
Declaration of Trust or these Bylaws, the vote of a majority of a particular
group of Trustees is required for action, a quorum must also include a majority
of such group.
The Trustees present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough Trustees to leave less than a quorum.
-5-
<PAGE>
Section 6. VOTING. (a) Except as provided in subsection (b) of this
------
Section 6, the action of the majority of the Trustees present at a meeting at
which a quorum is initially present shall be the action of the Trustees, unless
the concurrence of a greater proportion is required for such action by
applicable statute.
(b) Notwithstanding anything in these Bylaws to the contrary,
any action pertaining to any transaction involving the Trust, including the
purchase, sale, lease, or mortgage of any real estate asset or any other
transaction, in which a Trustee or officer of the Trust, or any Affiliate (as
defined in the Declaration of Trust of the Trust) of any of the foregoing
persons, has any direct or indirect interest other than solely as a result of
his status as a Trustee, officer, or shareholder of the Trust, must be approved
by a majority of the Trustees, including a majority of the Independent Trustees
(as defined in the Declaration of Trust), even if the Independent Trustees
constitute less than a quorum.
Section 7. TELEPHONE MEETINGS. Trustees may participate in a
------------------
meeting by means of a conference telephone or similar communications equipment
if all persons participating in the meeting can hear each other at the same
time. Participation in a meeting by these means shall constitute presence in
person at the meeting.
Section 8. INFORMAL ACTION BY TRUSTEES. Any action required or
---------------------------
permitted to be taken at any meeting of the Trustees may be taken without a
meeting, if a consent in writing to such action is signed by each Trustee and
such written consent is filed with the minutes of proceedings of the Trustees.
Section 9. VACANCIES. If for any reason any or all the Trustees
---------
cease to be Trustees, such event shall not terminate the Trust or affect these
Bylaws or the powers of the remaining Trustees hereunder (even if fewer than two
Trustees remain). Any vacancy (including a vacancy created by an increase in the
number of Trustees) shall be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the Trustees. Any individual
so elected as Trustee shall hold office for the unexpired term of the Trustee he
is replacing.
Section 10. COMPENSATION; FINANCIAL ASSISTANCE.
----------------------------------
(a) Compensation. Trustees shall not receive any stated salary for
------------
their services as Trustees but, by resolution of the Trustees, may receive
compensation per year and/or per meeting and/or per visit to real property owned
or to be acquired by the Trust and for any service or activity they performed or
engaged in as Trustees. Trustees may be reimbursed for expenses of attendance,
if any, at each annual, regular or special meeting of the Trustees or of any
committee thereof; and for their expenses, if any, in connection with each
property visit and any other service or activity performed or engaged in as
Trustees; but nothing herein contained shall be construed to preclude any
Trustees from serving the Trust in any other capacity and receiving compensation
therefor.
(b) Financial Assistance to Trustees. The Trust may lend money to,
--------------------------------
guarantee an obligation of or otherwise assist a Trustee or a trustee of its
direct or indirect subsidiary. The loan, guarantee or other assistance may be
with or without interest, unsecured, or secured in any manner that the Board of
Trustees approves, including a pledge of Shares.
Section 11. REMOVAL OF TRUSTEES. The shareholders may, at any time,
-------------------
remove any Trustee in the manner provided in the Declaration of Trust.
Section 12. LOSS OF DEPOSITS. No Trustee shall be liable for any
----------------
loss which may occur by reason of the failure of the bank, trust company,
savings and loan association, or other institution with whom moneys or shares
have been deposited.
Section 13. SURETY BONDS. Unless required by law, no Trustee shall
------------
be obligated to give any bond or surety or other security for the performance of
any of his duties.
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<PAGE>
Section 14. RELIANCE. Each Trustee, officer, employee and agent of
--------
the Trust shall, in the performance of his duties with respect to the Trust, be
fully justified and protected with regard to any act or failure to act in
reliance in good faith upon the books of account or other records of the Trust,
upon an opinion of counsel or upon reports made to the Trust by any of its
officers or employees or by the adviser, accountants, appraisers or other
experts or consultants selected by the Trustees or officers of the Trust,
regardless of whether such counsel or expert may also be a Trustee.
Section 15. NUMBER AND CLASSIFICATION. The number of Trustees of
-------------------------
the Trust shall not be less than three (3) nor more than nine (9). The Trustees
shall be classified, with respect to the terms for which they severally hold
office, into separate classes, if and in the manner prescribed in the Trust's
Declaration of Trust. At any regular meeting or at any special meeting called
for that purpose, at least 80% of the members of the Board of Trustees shall
establish, increase or decrease the number of Trustees, provided that the number
thereof shall never be less than required by Maryland law and further provided
that the tenure of office of a Trustee shall not be affected by any decrease in
the number of Trustees.
Section 16. INTERESTED TRUSTEE TRANSACTIONS. Section 2-419 of the
-------------------------------
Maryland General Corporation Law (the "MGCL") shall be available for and apply
to any contract or other transaction between the Trust and any of its Trustees
or between the Trust and any other trust, corporation, firm or other entity in
which any of its Trustees is a trustee or director or has a material financial
interest.
Section 17. CERTAIN RIGHTS OF TRUSTEES, OFFICERS, EMPLOYEES AND
---------------------------------------------------
AGENTS. The Trustees shall have no responsibility to devote their full time to
- ------
the affairs of the Trust. Any Trustee or officer, employee or agent of the
Trust (other than a full-time officer, employee or agent of the Trust), in his
personal capacity or in a capacity as an affiliate, employee, or agent of any
other person, or otherwise, may have business interests and engage in business
activities similar or in addition to those of or relating to the Trust.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Trustees shall
---------------------------------
appoint from among its members an Audit Committee, a Compensation Committee and
an Acquisition Committee and may appoint an Executive Committee and other
committees, composed of one or more Trustees, to serve at the pleasure of the
Trustees.
(a) Audit Committee. 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.
(b) Acquisition Committee. The Acquisition Committee will consist of
---------------------
three Trustees, two of which will be Independent Trustees. The Acquisition
Committee will review potential hotel acquisitions, review the terms of the
proposed Percentage Leases for proposed hotel acquisitions and make
recommendations to the full Board of Trustees with respect to proposed hotel
acquisitions.
(c) Compensation Committee. The Compensation Committee will consist
----------------------
of two or more Independent Trustees. The Compensation Committee shall determine
compensation for the Company's executive officers and administer the Company's
Share Incentive Plan.
Section 2. POWERS. The Trustees may delegate to committees
------
appointed under Section 1 of this Article any of the powers of the Trustees,
except as prohibited by law.
-7-
<PAGE>
Section 3. MEETINGS. In the absence of any member of any such
--------
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another Trustee to act in the place of such
absent member. Notice of committee meetings shall be given in the same manner
as notice for special meetings of the Board of Trustees.
One-third, but not less than two, of the members of any committee
shall be present in person at any meeting of such committee in order to
constitute a quorum for the transaction of business at such meeting, and the act
of a majority present shall be the act of such committee. The Board of Trustees
may designate a chairman of any committee, and such chairman or any two members
of any committee may fix the time and place of its meetings unless the Board
shall otherwise provide. In the absence or disqualification of any member of
any such committee, the members thereof present at any meeting and not
disqualified from voting, whether or not they constitute a quorum, may
unanimously appoint another Trustee to act at the meeting in the place of such
absent or disqualified members.
Each committee shall keep minutes of its proceedings and shall report
the same to the Board of Trustees at the next succeeding meeting, and any action
by the committee shall be subject to revision and alteration by the Board of
Trustees, provided that no rights of third persons shall be affected by any such
revision or alteration.
Section 4. TELEPHONE MEETINGS. Members of a committee of the
------------------
Trustees may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
-----------------------------
permitted to be taken at any meeting of a committee of the Trustees may be taken
without a meeting, if a consent in writing to such action is signed by each
member of the committee and such written consent is filed with the minutes of
proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
---------
Trustees shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust shall
------------------
include a president, a secretary and a treasurer and may include a chairman of
the board, a vice chairman of the board, a chief executive officer, a chief
operating officer, a chief financial officer, one or more vice presidents, one
or more assistant secretaries and one or more assistant treasurers. In
addition, the Trustees may from time to time appoint such other officers with
such powers and duties as they shall deem necessary or desirable. The officers
of the Trust shall be elected annually by the Trustees at the first meeting of
the Trustees held after each annual meeting of shareholders. If the election of
officers shall not be held at such meeting, such election shall be held as soon
thereafter as may be convenient. Each officer shall hold office until his
successor is elected and qualifies or until his death, resignation or removal in
the manner hereinafter provided. Any two or more offices except president and
vice president may be held by the same person. In their discretion, the
Trustees may leave unfilled any office except that of president and secretary.
Election of an officer or agent shall not of itself create contract rights
between the Trust and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
-----------------------
Trust may be removed by the Trustees if in their judgment the best interests of
the Trust would be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed. Any officer of the
Trust may resign at any time by giving written notice of his resignation to the
Trustees, the chairman of the board, the president or the secretary. Any
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<PAGE>
resignation shall take effect at any time subsequent to the time specified
therein or, if the time when it shall become effective is not specified therein,
immediately upon its receipt. The acceptance of a resignation shall not be
necessary to make it effective unless otherwise stated in the resignation. Such
resignation shall be without prejudice to the contract rights, if any, of the
Trust.
Section 3. VACANCIES. A vacancy in any office may be filled by the
---------
Trustees for the balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER. The Trustees may designate a
-----------------------
chief executive officer from among the elected officers. The chief executive
officer shall have responsibility for implementation of the policies of the
Trust, as determined by the Trustees, and for the administration of the business
affairs of the Trust. In the absence of both the chairman and vice chairman of
the board, the chief executive officer shall preside over the meetings of the
Trustees and of the shareholders at which he shall be present.
Section 5. CHIEF OPERATING OFFICER. The Trustees may designate a
-----------------------
chief operating officer from among the elected officers. Said officer will have
the responsibilities and duties as set forth by the Trustees or the chief
executive officer.
Section 6. CHIEF FINANCIAL OFFICER. The Trustees may designate a
-----------------------
chief financial officer from among the elected officers. Said officer will have
the responsibilities and duties as set forth by the Trustees or the chief
executive officer.
Section 7. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The chairman of
---------------------------------------
the board shall preside over the meetings of the Trustees and of the
shareholders at which he shall be present and shall in general oversee all of
the business and affairs of the Trust and shall be an ex-officio member of all
committees of the Board of Trustees. In the absence of the chairman of the
board, the vice chairman of the board shall preside at such meetings at which he
shall be present. The chairman and the vice chairman of the board may execute
any deed, mortgage, bond, contract or other instrument, except in cases where
the execution thereof shall be expressly delegated by the Trustees or by these
Bylaws to some other officer or agent of the Trust or shall be required by law
to be otherwise executed. The chairman of the board and the vice chairman of
the board shall perform such other duties as may be assigned to him or them by
the Trustees.
Section 8. PRESIDENT. In the absence of the chairman, the vice
---------
chairman of the board and the chief executive officer, the president shall
preside over the meetings of the Trustees and of the shareholders at which he
shall be present. In the absence of a designation of a chief executive officer
by the Trustees, the president shall be the chief executive officer and shall be
an ex officio member of all committees that may, from time to time, be
constituted by the Trustees. The president may execute any deed, mortgage,
bond, contract or other instrument, except in cases where the execution thereof
shall be expressly delegated by the Trustees or by these Bylaws to some other
officer or agent of the Trust or shall be required by law to be otherwise
executed; and in general shall perform all duties incident to the office of
president and such other duties as may be prescribed by the Trustees from time
to time.
Section 9. VICE PRESIDENTS. In the absence of the president or in
---------------
the event of a vacancy in such office, the vice president (or in the event there
be more than one vice president, the vice presidents in the order designated at
the time of their election or, in the absence of any designation, then in the
order of their election) shall perform the duties of the president and when so
acting shall have all the powers of and be subject to all the restrictions upon
the president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Trustees. The Trustees may designate
one or more vice presidents as executive vice president or as vice president for
particular areas of responsibility.
Section 10. SECRETARY. The secretary shall (a) keep the minutes of
---------
the proceedings of the shareholders, the Trustees and committees of the Trustees
in one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provisions of these Bylaws or as required by
law; (c) be custodian of the
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trust records and of the seal of the Trust; (d) keep a register of the post
office address of each shareholder which shall be furnished to the secretary by
such shareholder; (e) have general charge of the share transfer books of the
Trust; and (f) in general perform such other duties as from time to time may be
assigned to him by the chief executive officer, the president or by the
Trustees.
Section 11. TREASURER. The treasurer shall have the custody of the
---------
funds and securities of the Trust and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit all
moneys and other valuable effects in the name and to the credit of the Trust in
such depositories as may be designated by the Trustees.
He shall disburse the funds of the Trust as may be ordered by the
Trustees, taking proper vouchers for such disbursements, and shall render to the
president and Trustees, at the regular meetings of the Trustees or whenever they
may require it, an account of all his transactions as treasurer and of the
financial condition of the Trust.
If required by the Trustees, he shall give the Trust a bond in such
sum and with such surety or sureties as shall be satisfactory to the Trustees
for the faithful performance of the duties of his office and for the restoration
to the Trust, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, moneys and other property of whatever
kind in his possession or under his control belonging to the Trust.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
----------------------------------------------
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be assigned to them by the secretary or treasurer, respectively,
or by the president or the Trustees. The assistant treasurers shall, if
required by the Trustees, give bonds for the faithful performance of their
duties in such sums and with such surety or sureties as shall be satisfactory to
the Trustees.
Section 13. SALARIES. The salaries and other compensation of the
--------
officers shall be fixed from time to time by the Trustees and no officer shall
be prevented from receiving such salary or other compensation by reason of the
fact that he is also a Trustee.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Trustees may authorize any officer or
---------
agent to enter into any contract or to execute and deliver any instrument in the
name of and on behalf of the Trust and such authority may be general or confined
to specific instances. Any agreement, deed, mortgage, lease or other document
executed by one or more of the Trustees or by an authorized person shall be
valid and binding upon the Trustees and upon the Trust when authorized or
ratified by action of the Trustees.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders
-----------------
for the payment of money, notes or other evidences of indebtedness issued in the
name of the Trust shall be signed by such officer or agent of the Trust in such
manner as shall from time to time be determined by the Trustees.
Section 3. DEPOSITS. All funds of the Trust not otherwise employed
--------
shall be deposited from time to time to the credit of the Trust in such banks,
trust companies or other depositories as the Trustees may designate.
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ARTICLE VII
SHARES
Section 1. CERTIFICATES. Each shareholder shall be entitled to a
------------
certificate or certificates which shall represent and certify the number of
shares of each class of beneficial interests held by him in the Trust. Each
certificate shall be signed by the chief executive officer, the president or a
vice president and countersigned by the secretary or an assistant secretary or
the treasurer or an assistant treasurer and may be sealed with the seal, if any,
of the Trust. The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the Trust shall, from time to time,
issue several classes of shares, each class may have its own number series. A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued. Each certificate representing shares
which are restricted as to their transferability or voting powers, which are
preferred or limited as to their dividends or as to their allocable portion of
the assets upon liquidation or which are redeemable at the option of the Trust,
shall have a statement of such restriction, limitation, preference or redemption
provision, or a summary thereof, plainly stated on the certificate. In lieu of
such statement or summary, the Trust may set forth upon the face or back of the
certificate a statement that the Trust will furnish to any shareholder, upon
request and without charge, a full statement of such information.
Section 2. TRANSFERS. Certificates shall be treated as negotiable,
---------
and title thereto and to the shares they represent shall be transferred by
delivery thereof to the same extent as those of a Maryland stock corporation.
No transfers of shares of the Trust shall be made if (i) void ab initio pursuant
-- ------
to any provision of the Declaration of Trust or (ii) the Board of Trustees,
pursuant to any provision of the Declaration of Trust, shall have refused to
permit the transfer of such shares. Permitted transfers of shares of the Trust
shall be made on the share records of the Trust only upon the instruction of the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and upon surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
share transfer power and the payment of all taxes thereon. Upon surrender to
the Trust or the transfer agent of the Trust of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, as to any transfers not prohibited by any provision of
the Declaration of Trust or by action of the Board of Trustees thereunder, it
shall be the duty of the Trust to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
The Trust shall be entitled to treat the holder of record of any share
or shares as the holder in fact thereof and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of beneficial
interest of the Trust will be subject in all respects to the Declaration of
Trust and all of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the
-----------------------
Trustees may direct a new certificate to be issued in place of any certificate
previously issued by the Trust alleged to have been lost, stolen or destroyed
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost, stolen or destroyed. When authorizing the issuance of a
new certificate, an officer designated by the Trustees may, in his discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or the owner's legal representative to
advertise the same in such manner as he shall require and/or to give bond, with
sufficient surety, to the Trust to indemnify it against any loss or claim which
may arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
--------------------------------------------------
Trustees may set, in advance, a record date for the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
determining shareholders entitled to receive payment of any dividend or the
allotment of any
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other rights, or in order to make a determination of shareholders for any other
proper purpose. Such date, in any case, shall not be prior to the close of
business on the day the record date is fixed and shall be not more than 90 days
and, in the case of a meeting of shareholders not less than ten days, before the
date on which the meeting or particular action requiring such determination of
shareholders of record is to be held or taken.
In lieu of fixing a record date, the Trustees may provide that the
share transfer books shall be closed for a stated period but not longer than 20
days. If the share transfer books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the share transfer books are not closed
for the determination of shareholders, (a) the record date for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of shareholders entitled
to receive payment of a dividend or an allotment of any other rights shall be
the close of business on the day on which the resolution of the Trustees,
declaring the dividend or allotment of rights, is adopted.
When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, except when (i) the determination has
been made through the closing of the transfer books and the stated period of
closing has expired or (ii) the meeting is adjourned to a date more than 120
days after the record date fixed for the original meeting, in either of which
case a new record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Trust shall maintain at its principal
------------
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
shareholder and the number of shares of each class held by such shareholder.
Section 6. FRACTIONAL SHARES; ISSUANCE OF UNITS. The Trustees may
------------------------------------
issue fractional shares or provide for the issuance of scrip, all on such terms
and under such conditions as they may determine. Notwithstanding any other
provision of the Declaration of Trust or these Bylaws, the Trustees may issue
units consisting of different securities of the Trust. Any security issued in a
unit shall have the same characteristics as any identical securities issued by
the Trust, except that the Trustees may provide that for a specified period
securities of the Trust issued in such unit may be transferred on the books of
the Trust only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Trustees shall have the power, from time to time, to fix the
fiscal year of the Trust by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
-------------
shares of beneficial interest of the Trust may be authorized and declared by the
Trustees, subject to the provisions of law and the Declaration of Trust.
Dividends and other distributions may be paid in cash, property or shares of the
Trust, subject to the provisions of law and the Declaration of Trust.
Section 2. CONTINGENCIES. Before payment of any dividends or other
-------------
distributions, there may be set aside out of any funds of the Trust available
for dividends or other distributions such sum or sums as the Trustees
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may from time to time, in their absolute discretion, think proper as a reserve
fund for contingencies, for equalizing dividends or other distributions, for
repairing or maintaining any property of the Trust or for such other purpose as
the Trustees shall determine to be in the best interest of the Trust, and the
Trustees may modify or abolish any such reserve in the manner in which it was
created.
ARTICLE X
SEAL
Section 1. SEAL. The Trustees may authorize the adoption of a seal
----
by the Trust. The seal shall have inscribed thereon the name of the Trust and
the year of its formation. The Trustees may authorize one or more duplicate
seals and provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Trust is permitted or
-------------
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Trust.
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<PAGE>
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland law in effect from time to
time, the Trust shall indemnify (a) any Trustee, officer or shareholder or any
former Trustee, officer or shareholder (including among the foregoing, for all
purposes of this Article XII and without limitation, any individual who, while a
Trustee, officer or shareholder and at the express request of the Trust, serves
or has served another real estate investment trust, corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, shareholder, partner or trustee of such real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise) who has been successful, on the merits or
otherwise, in the defense of a proceeding to which he was made a party by reason
of service in such capacity, against reasonable expenses incurred by him in
connection with the proceeding, (b) any Trustee or officer or any former Trustee
or officer against any claim or liability to which he may become subject by
reason of such status unless it is established that (i) his act or omission was
material to the matter giving rise to the proceeding and was committed in bad
faith or was the result of active and deliberate dishonesty, (ii) he actually
received an improper personal benefit in money, property or services or (iii) in
the case of a criminal proceeding, he had reasonable cause to believe that his
act or omission was unlawful and (c) each shareholder or former shareholder
against any claim or liability to which he may become subject by reason of such
status. In addition, the Trust shall, without requiring a preliminary
determination of the ultimate entitlement to indemnification, pay or reimburse,
in advance of final disposition of a proceeding, reasonable expenses incurred by
a Trustee, officer or shareholder or former Trustee, officer or shareholder made
a party to a proceeding by reason such status, provided that, in the case of a
Trustee or officer, the Trust shall have received (i) a written affirmation by
the Trustee or officer of his good faith belief that he has met the applicable
standard of conduct necessary for indemnification by the Trust as authorized by
these Bylaws and (ii) a written undertaking by or on his behalf to repay the
amount paid or reimbursed by the Trust if it shall ultimately be determined that
the applicable standard of conduct was not met. The Trust may, with the
approval of its Trustees, provide such indemnification or payment or
reimbursement of expenses to any Trustee, officer or shareholder or any former
Trustee, officer or shareholder who served a predecessor of the Trust and to any
employee or agent of the Trust or a predecessor of the Trust. Neither the
amendment nor repeal of this Article, nor the adoption or amendment of any other
provision of the Declaration of Trust or these Bylaws inconsistent with this
Article, shall apply to or affect in any respect the applicability of this
Article with respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption.
Any indemnification or payment or reimbursement of the expenses
permitted by these Bylaws shall be furnished in accordance with the procedures
provided for indemnification or payment or reimbursement of expenses, as the
case may be, under Section 2-418 of the MGCL for directors of Maryland
corporations. The Trust may provide to Trustees, officers and shareholders such
other and further indemnification or payment or reimbursement of expenses, as
the case may be, to the fullest extent permitted by the MGCL, as in effect from
time to time, for directors of Maryland corporations.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the
Declaration of Trust or Bylaws or pursuant to applicable law, a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose
of any meeting need be set forth in the waiver of notice, unless specifically
required by statute. The attendance of any person at any meeting shall
constitute a waiver of notice of such meeting, except where such person attends
a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
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ARTICLE XIV
AMENDMENT OF BYLAWS
The Trustees shall have the exclusive power to adopt, alter or repeal any
provision of these Bylaws and to make new Bylaws; provided, however, that any
amendment to Article III, Section 6(b) and to the provisions of Article IV
relating to requirements that Independent Trustees serve on certain committees
shall require affirmative vote of at least a majority of shareholders entitled
to vote thereon.
ARTICLE XV
MISCELLANEOUS
All references to the Declaration of Trust shall include any
amendments thereto.
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<PAGE>
Exhibit 10.1
FORM OF
AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
HUDSON HOTELS LIMITED PARTNERSHIP, L.P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINED TERMS...................................................... 1
ARTICLE II PARTNERSHIP CONTINUATION AND IDENTIFICATION....................... 8
2.01. Continuation...................................................... 8
2.02. Name, Office and Registered Agent................................. 8
2.03. Partners.......................................................... 8
2.04. Term and Dissolution.............................................. 9
2.05. Filing of Certificate and Perfection of Limited Partnership....... 10
2.06. Certificates Describing Partnership Units......................... 10
ARTICLE III BUSINESS OF THE PARTNERSHIP...................................... 10
ARTICLE IV CAPITAL CONTRIBUTIONS AND ACCOUNTS................................ 11
4.01. Capital Contributions............................................. 11
4.02. Additional Capital Contributions and Issuances of Additional
Partnership Interests............................................ 11
4.03. Additional Funding................................................ 13
4.04. Capital Accounts.................................................. 14
4.05. Percentage Interests.............................................. 14
4.06. No Interest on Contributions...................................... 14
4.07. Return of Capital Contributions................................... 14
4.08. No Third Party Beneficiary........................................ 15
ARTICLE V PROFITS AND LOSSES; DISTRIBUTIONS.................................. 15
5.01. Allocation of Profit and Loss..................................... 15
5.02. Distribution of Cash.............................................. 17
5.03. REIT Distribution Requirements.................................... 18
5.04. No Right to Distributions in Kind................................. 18
5.05. Limitations on Return of Capital Contributions.................... 18
5.06. Distributions Upon Liquidation.................................... 18
5.07. Substantial Economic Effect....................................... 19
ARTICLE VI RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER............. 19
6.01. Management of the Partnership..................................... 19
6.02. Delegation of Authority........................................... 22
6.03. Indemnification and Exculpation of Indemnitees.................... 22
6.04. Liability of the General Partner.................................. 23
6.05. Reimbursement..................................................... 24
6.06. Outside Activities................................................ 24
6.07. Employment or Retention of Affiliates............................. 25
</TABLE>
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<TABLE>
<S> <C>
6.08. Title to Partnership Assets....................................... 26
6.09. Miscellaneous..................................................... 26
ARTICLE VII CHANGES IN GENERAL PARTNER....................................... 26
7.01. Transfer of the General Partner's Partnership Interest............ 26
7.02. Admission of a Substitute or Additional General Partner........... 27
7.03. Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General
Partner.......................................................... 28
7.04. Removal of a General Partner...................................... 29
ARTICLE VIII RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS.................. 30
8.01. Management of the Partnership..................................... 30
8.02. Power of Attorney................................................. 30
8.03. Limitation on Liability of Limited Partners....................... 30
8.04. Ownership by Limited Partner of Corporate General Partner or
Affiliate........................................................ 31
8.05. Exchange Right.................................................... 31
8.06. Registration...................................................... 33
ARTICLE IX TRANSFERS OF LIMITED PARTNERSHIP INTERESTS........................ 34
9.01. Purchase for Investment........................................... 34
9.02. Restrictions on Transfer of Limited Partnership Interests......... 34
9.03. Admission of Substitute Limited Partner........................... 35
9.04. Rights of Assignees of Partnership Interests...................... 37
9.05. Effect of Bankruptcy, Death, Incompetence or Termination of a
Limited Partner.................................................. 37
9.06. Joint Ownership of Interests...................................... 37
ARTICLE X BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS......................... 38
10.01. Books and Records................................................. 38
10.02. Custody of Partnership Funds; Bank Accounts....................... 38
10.03. Fiscal and Taxable Year........................................... 38
10.04. Annual Tax Information and Report................................. 38
10.05. Tax Matters Partner; Tax Elections; Special Basis Adjustments..... 39
10.06. Reports to Limited Partners....................................... 39
ARTICLE XI AMENDMENT OF AGREEMENT............................................ 40
ARTICLE XII GENERAL PROVISIONS............................................... 40
12.01. Notices........................................................... 40
12.02. Survival of Rights................................................ 40
12.03. Additional Documents.............................................. 41
12.04. Severability...................................................... 41
12.05. Entire Agreement.................................................. 41
12.06. Pronouns and Plurals.............................................. 41
</TABLE>
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<TABLE>
<S> <C>
12.07. Headings.......................................................... 41
12.08. Counterparts...................................................... 41
12.09. Governing Law..................................................... 41
</TABLE>
EXHIBITS
EXHIBIT A - Partners, Capital Contributions and Percentage Interests
EXHIBIT B - List of Initial Properties
EXHIBIT C - Notice of Exercise of Exchange Right
-iii-
<PAGE>
AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
HUDSON HOTELS LIMITED PARTNERSHIP, L.P.
RECITALS
Hudson Hotels Limited Partnership, L.P. (the "Partnership") was formed as a
limited partnership under the laws of the Commonwealth of Virginia, pursuant to
an Agreement of Limited Partnership dated as of April 21, 1998 (the "Original
Agreement") and a Certificate of Limited Partnership filed with the Virginia
State Corporation Commission effective as of April 21, 1998. This Amended and
Restated Agreement of Limited Partnership Agreements is entered into this ____
day of July, 1998, among Hudson Hotels Trust, a Maryland real estate investment
trust (the "General Partner" or the "Company") and the limited partners set
forth on Exhibit A hereto, for the purpose of amending and restating the
Original Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing, of mutual covenants
between the parties hereto, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree to amend the Original Agreement to read in its entirety as follows:
ARTICLE I
DEFINED TERMS
-------------
The following defined terms used in this Agreement shall have the meanings
specified below:
"ACT" means the Virginia Revised Uniform Limited Partnership Act, as it may
be amended from time to time.
"ADDITIONAL FUNDS" has the meaning set forth in Section 4.03 hereof.
"ADDITIONAL LIMITED PARTNER" means a Person admitted to this Partnership as
a Limited Partner pursuant to Section 4.02 hereof.
"ADDITIONAL SECURITIES" means any additional REIT Shares (other than REIT
Shares issued in connection with an exchange pursuant to Section 8.05 hereof) or
rights, options, warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase REIT Shares, as set forth in Section
4.02(a)(ii).
<PAGE>
"ADMINISTRATIVE EXPENSES" means (i) all administrative and operating costs
and expenses incurred by the Partnership, (ii) those administrative costs and
expenses of the General Partner, including any salaries or other payments to
directors, officers or employees of the General Partner, and any accounting and
legal expenses of the General Partner, which expenses, the Partners have agreed,
are expenses of the Partnership and not the General Partner, and (iii) to the
extent not included in clause (ii) above, REIT Expenses; provided, however, that
-------- -------
Administrative Expenses shall not include any administrative costs and expenses
incurred by the Company that are attributable to Properties or partnership
interests in a Subsidiary Partnership that are owned by the Company directly.
"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, 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). 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 or partnership interests or otherwise.
"AGREED VALUE" means the fair market value of a Partner's non-cash Capital
Contribution as of the date of contribution as agreed to by the Partners. For
purposes of this Partnership Agreement, the Agreed Value of a Partner's non-cash
Capital Contribution shall be equal to the number of Partnership Units received
by such Partner in exchange for Property or an interest therein or in connection
with the merger of a partnership of which such person is a partner with and into
the Partnership, or for any other non-cash asset so contributed, multiplied by
the Public Offering Price or, if the contribution is made after the date hereof,
the "Market Price" calculated in accordance with the second and third sentences
of the definition of "Cash Amount." The names and addresses of the Partners,
number of Partnership Units issued to each Partner, and the Agreed Value of non-
cash Capital Contributions as of the date of contribution is set forth on
Exhibit A.
- ---------
"AGREEMENT" means this Amended and Restated Agreement of Limited
Partnership.
"CAPITAL ACCOUNT" has the meaning provided in Section 4.04 hereof.
"CAPITAL CONTRIBUTION" means the total amount of cash, cash equivalents,
and the Agreed Value of any Property or other asset contributed or agreed to be
contributed, as the context requires, to the Partnership by each Partner
pursuant to the terms of the Agreement. Any reference to the Capital
Contribution of a Partner shall include the Capital Contribution made by a
predecessor holder of the Partnership Interest of such Partner.
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<PAGE>
"CAPITAL TRANSACTION" means the refinancing, sale, exchange, condemnation,
recovery of a damage award or insurance proceeds (other than business or rental
interruption insurance proceeds not reinvested in the repair or reconstruction
of Properties), or other disposition of any Property (or the Partnership's
interest therein).
"CASH AMOUNT" means an amount of cash per Partnership Unit equal to the
value of the REIT Shares Amount on the date of receipt by the Company of a
Notice of Exchange. The value of the REIT Shares Amount shall be based on the
average of the daily market price of REIT Shares for the ten consecutive trading
days immediately preceding the date of such valuation. The market price for each
such trading day shall be: (i) if the REIT Shares are listed or admitted to
trading on any securities exchange or the NYSE, the sale price, regular way, on
such day, or if no such sale takes place on such day, the average of the closing
bid and asked prices, regular way, on such day, (ii) if the REIT Shares are not
listed or admitted to trading on any securities exchange or the NYSE, the last
reported sale price on such day or, if no sale takes place on such day, the
average of the closing bid and asked prices on such day, as reported by a
reliable quotation source designated by the Company, or (iii) if the REIT Shares
are not listed or admitted to trading on any securities exchange or the NYSE and
no such last reported sale price or closing bid and asked prices are available,
the average of the reported high bid and low asked prices on such day, as
reported by a reliable quotation source designated by the Company, or if there
shall be no bid and asked prices on such day, the average of the high bid and
low asked prices, as so reported, on the most recent day (not more than ten days
prior to the date in question) for which prices have been so reported; provided
that if there are no bid and asked prices reported during the ten days prior to
the date in question, the value of the REIT Shares shall be determined by the
Company acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment, appropriate. In the
event the REIT Shares Amount includes rights that a holder of REIT Shares would
be entitled to receive, then the value of such rights shall be determined by the
Company acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment, appropriate.
"CERTIFICATE" means any instrument or document that is required under the
laws of the Commonwealth of Virginia, or any other jurisdiction in which the
Partnership conducts business, to be signed and sworn to by the Partners of the
Partnership (either by themselves or pursuant to the power-of-attorney granted
to the General Partner in Section 8.02 hereof) and filed for recording in the
appropriate public offices within the Commonwealth of Virginia or such other
jurisdiction to perfect or maintain the Partnership as a limited partnership, to
effect the admission, withdrawal, or substitution of any Partner of the
Partnership, or to protect the limited liability of the Limited Partners as
limited partners under the laws of the Commonwealth of Virginia or such other
jurisdiction.
"CODE" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision in the Code at the date hereof and any
successor provision of the Code.
"COMMISSION" means the U.S. Securities and Exchange Commission.
-3-
<PAGE>
"COMPANY" means Hudson Hotels Trust, a Maryland real estate investment
trust.
"CONVERSION FACTOR" means 1.0, provided that in the event that the Company
(i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or
makes a distribution to all holders of its outstanding REIT Shares in REIT
Shares, (ii) subdivides its outstanding REIT Shares, or (iii) combines its
outstanding REIT Shares into a smaller number of REIT Shares, the Conversion
Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the
numerator of which shall be the number of REIT Shares issued and outstanding on
the record date for such dividend, distribution, subdivision or combination
(assuming for such purposes that such dividend, distribution, subdivision or
combination has occurred as of such time), and the denominator of which shall be
the actual number of REIT Shares (determined without the above assumption)
issued and outstanding on such date. Any adjustment to the Conversion Factor
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event; provided, however, that
-------- -------
if the Company receives a Notice of Exchange after the record date, but prior to
the effective date of such dividend, distribution, subdivision or combination,
the Conversion Factor shall be determined as if the Company had received the
Notice of Exchange immediately prior to the record date for such dividend,
distribution, subdivision or combination.
"DECLARATION OF TRUST" means the Declaration of Trust of the Company filed
with the Maryland State Department of Assessments and Taxation, as amended or
restated from time to time.
"EVENT OF BANKRUPTCY" as to any Person means the filing of a petition for
relief as to such Person as debtor or bankrupt under the Bankruptcy Code of 1978
or similar provision of law of any jurisdiction (except if such petition is
contested by such Person and has been dismissed within 90 days); insolvency or
bankruptcy of such Person as finally determined by a court proceeding; filing by
such Person of a petition or application to accomplish the same or for the
appointment of a receiver or a trustee for such Person or a substantial part of
his assets; commencement of any proceedings relating to such Person as a debtor
under any other reorganization, arrangement, insolvency, adjustment of debt or
liquidation law of any jurisdiction, whether now in existence or hereinafter in
effect, either by such Person or by another, provided that if such proceeding is
commenced by another, such Person indicates his approval of such proceeding,
consents thereto or acquiesces therein, or such proceeding is contested by such
Person and has not been finally dismissed within 90 days.
"EXCHANGE AMOUNT" means either the Cash Amount or the REIT Shares Amount,
as selected by the General Partner or the Company in its sole discretion
pursuant to Section 8.05(b) hereof.
"EXCHANGE RIGHT" has the meaning provided in Section 8.05(a) hereof.
"EXCHANGING PARTNER" has the meaning provided in Section 8.05(a) hereof.
-4-
<PAGE>
"GENERAL PARTNER" means Hudson Hotels Trust, a Maryland real estate
investment trust, and any Person who becomes a substitute or additional General
Partner as provided herein, and any of their successors as General Partner.
"GENERAL PARTNERSHIP INTEREST" means a Partnership Interest held by the
General Partner that is a general partnership interest.
"INCENTIVE RIGHTS" has the meaning set forth in Section 4.09 hereof.
"INDEMNITEE" means (i) any Person made a party to a proceeding by reason of
its status as the Company, the General Partner or a director, officer or
employee of the Company, the Partnership or the General Partner, and (ii) such
other Persons (including Affiliates of the Company, General Partner or the
Partnership) as the General Partner may designate from time to time, in its sole
and absolute discretion.
"INDEPENDENT DIRECTORS" means a director of the Company who is not an
officer or employee of the Company, any Affiliate of an officer or employee or
any Affiliate of (i) any lessee of any property of the Company or any Subsidiary
of the Company, (ii) any Subsidiary of the Company, or (iii) any partnership
that is an Affiliate of the Company.
"INITIAL PROPERTIES" means those properties listed on Exhibit B hereto.
---------
"LIMITED PARTNER" means any Person named as a Limited Partner on
Exhibit A attached hereto, and any Person who becomes a Substitute or Additional
- ---------
Limited Partner, in such Person's capacity as a Limited Partner in the
Partnership.
"LIMITED PARTNERSHIP INTEREST" means the ownership interest of a Limited
Partner in the Partnership at any particular time, including the right of such
Limited Partner to any and all benefits to which such Limited Partner may be
entitled as provided in this Agreement and in the Act, together with the
obligations of such Limited Partner to comply with all the provisions of this
Agreement and of such Act.
"LOSS" has the meaning provided in Section 5.01(f) hereof.
"MINIMUM LIMITED PARTNERSHIP INTEREST" means the lesser of (i) 1% or (ii)
if the total Capital Contributions to the Partnership exceeds $50 million, 1%
divided by the ratio of the total Capital Contributions to the Partnership to
$50 million; provided, however, that the Minimum Limited Partnership Interest
-------- -------
shall not be less than 0.2% at any time.
"NOTICE OF EXCHANGE" means the Notice of Exercise of Exchange Right
substantially in the form attached as Exhibit C hereto.
---------
"NYSE" means the New York Stock Exchange.
"OFFER" has the meaning set forth in Section 7.01(c) hereof.
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<PAGE>
"OFFERING" means the initial offer and sale by the Company and the purchase
by the Underwriters (as defined in the Prospectus) of REIT Shares for sale to
the public.
"ORIGINAL AGREEMENT" means the Agreement of Limited Partnership of Hudson
Hotels Limited Partnership, L.P., dated April 21, 1998.
"PARTNER" means any General Partner or Limited Partner.
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in
Regulations Section 1.704-2(i). A Partner's share of Partner Nonrecourse Debt
Minimum Gain shall be determined in accordance with Regulations Section 1.704-
2(i)(5).
"PARTNERSHIP INTEREST" means an ownership interest in the Partnership held
by either a Limited Partner or the General Partner and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement.
"PARTNERSHIP MINIMUM GAIN" has the meaning set forth in Regulations Section
1.704-2(d). In accordance with Regulations Section 1.704-2(d), the amount of
Partnership Minimum Gain is determined by first computing, for each Partnership
nonrecourse liability, any gain the Partnership would realize if it disposed of
the property subject to that liability for no consideration other than full
satisfaction of the liability, and then aggregating the separately computed
gains. A Partner's share of Partnership Minimum Gain shall be determined in
accordance with Regulations Section 1.704-2(g)(1).
"PARTNERSHIP RECORD DATE" means the record date established by the General
Partner for the distribution of cash pursuant to Section 5.02 hereof, which
record date shall be the same as the record date established by the Company for
a distribution to its shareholders of some or all of its portion of such
distribution.
"PARTNERSHIP UNIT" means a fractional, undivided share of the Partnership
Interests of all Partners issued hereunder. The allocation of Partnership Units
among the Partners shall be as set forth on Exhibit A, as may be amended from
---------
time to time.
"PERCENTAGE INTEREST" means the percentage ownership interest in the
Partnership of each Partner, as determined by dividing the Partnership Units
owned by a Partner by the total number of Partnership Units then outstanding.
The Percentage Interest of each Partner shall be as set forth on Exhibit A, as
---------
may be amended from time to time.
"PERSON" means any individual, partnership, corporation, joint venture,
trust or other entity.
"PROFIT" has the meaning provided in Section 5.01(f) hereof.
"PROPERTY" means any hotel property or other investment in which the
Partnership holds an ownership interest.
-6-
<PAGE>
"PROSPECTUS" means the final prospectus delivered to purchasers of REIT
Shares in the Offering.
"PUBLIC OFFERING PRICE" shall mean the initial public offering price set
forth in the Prospectus.
"REGULATIONS" means the Federal Income Tax Regulations issued under the
Code, as amended and as hereafter amended from time to time. Reference to any
particular provision of the Regulations shall mean that provision of the
Regulations on the date hereof and any successor provision of the Regulations.
"REIT" means a real estate investment trust under Sections 856 through 860
of the Code.
"REIT EXPENSES" means (i) costs and expenses relating to the formation and
continuity of existence and operation of the Company and any Subsidiaries
thereof, (which Subsidiaries shall, for purposes hereof, be included within the
definition of Company), including taxes, fees and assessments associated
therewith, any and all costs, expenses or fees payable to any director, officer,
or employee of the Company, (ii) costs and expenses relating to the public
offering and registration of securities by the Company and all statements,
reports, fees and expenses incidental thereto, including underwriting discounts
and selling commissions applicable to any such offering of securities, (iii)
costs and expenses associated with the preparation and filing of any periodic
reports by the Company under federal, state or local laws or regulations,
including filings with the Commission, (iv) costs and expenses associated with
compliance by the Company with laws, rules and regulations promulgated by any
regulatory body, including the Commission, and (v) all other operating or
administrative costs of the Company incurred in the ordinary course of its
business on behalf of or in connection with the Partnership.
"REIT SHARE" means a common share of beneficial interest in the Company,
$.01 par value per share.
"REIT SHARES AMOUNT" shall mean a number of REIT Shares equal to the
product of the number of Partnership Units offered for exchange by an Exchanging
Partner, multiplied by the Conversion Factor as adjusted to and including the
Specified Exchange Date; provided that in the event the Company issues to all
holders of REIT Shares rights, options, warrants or convertible or exchangeable
securities entitling the shareholders to subscribe for or purchase REIT Shares,
or any other securities or property (collectively, the "rights"), and the rights
have not expired at the Specified Exchange Date, then the REIT Shares Amount
shall also include the rights issuable to a holder of the REIT Shares Amount of
REIT Shares on the record date fixed for purposes of determining the holders of
REIT Shares entitled to rights.
"SERVICE" means the Internal Revenue Service.
"SPECIFIED EXCHANGE DATE" means the first business day of the month that is
at least 60 business days after the receipt by the Company of the Notice of
Exchange.
-7-
<PAGE>
"SHARE INCENTIVE PLANS" means Hudson Hotels Trust 1998 Share Incentive
Plan, as may be amended from time to time, or any stock incentive plan adopted
by the Company in the future.
"SUBSIDIARY" means, with respect to any Person, any corporation or other
entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"SUBSIDIARY PARTNERSHIP" means any partnership of which the partnership
interests therein are owned by the Company or a wholly-owned subsidiary of the
Company.
"SUBSTITUTE LIMITED PARTNER" means any Person admitted to the Partnership
as a Limited Partner pursuant to Section 9.03 hereof.
"SURVIVING GENERAL PARTNER" has the meaning set forth in Section 7.01(d)
hereof.
"TRANSACTION" has the meaning set forth in Section 7.01(c) hereof.
"TRANSFER" has the meaning set forth in Section 9.02(a) hereof.
"TRANSFER RESTRICTION DATE" means July __, 1999[one year from closing of
the IPO].
ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION
-------------------------------------------
2.01.00 CONTINUATION.
------------
The Partners hereby agree to continue the Partnership pursuant to the Act
and upon the terms and conditions set forth in this Agreement.
2.02.00 NAME, OFFICE AND REGISTERED AGENT.
---------------------------------
The name of the Partnership is Hudson Hotels Limited Partnership, L.P. The
specified office and place of business of the Partnership shall be c/o Hudson
Hotels Trust, 300 Bausch & Lomb Place, Rochester, New York 14604. The General
Partner may at any time change the location of such office, provided the General
Partner gives notice to the Partners of any such change. The name and address of
the Partnership's registered agent is Cameron N. Cosby, Riverfront Plaza - East
Tower, 951 E. Byrd St., Richmond, Virginia 23219. The sole duty of the
registered agent as such is to forward to the Partnership any notice that is
served on him as registered agent.
2.03.00 PARTNERS.
--------
-8-
<PAGE>
(a) The General Partner of the Partnership is Hudson Hotels Trust, a
Maryland real estate investment trust. Its principal place of business shall be
the same as that of the Partnership.
(b) The General Partner hereby consents to admit those persons
identified on Exhibit A as Limited Partners as of the date hereof. The Limited
---------
Partners shall be those Persons identified as Limited Partners on Exhibit A
---------
hereto, as amended from time to time.
2.04.00 TERM AND DISSOLUTION.
--------------------
(a) The term of the Partnership shall continue in full force and
effect until December 31, 2050, except that the Partnership shall be dissolved
upon the first to occur of any of the following events:
(i) The occurrence of an Event of Bankruptcy as to a General
Partner or the dissolution, death, removal or withdrawal of a General
Partner unless the business of the Partnership is continued pursuant
to Section 7.03(b) hereof; provided that if a General Partner is on
the date of such occurrence a partnership, the dissolution of such
General Partner as a result of the dissolution, death, withdrawal,
removal or Event of Bankruptcy of a partner in such partnership shall
not be an event of dissolution of the Partnership if the business of
such General Partner is continued by the remaining partner or
partners, either alone or with additional partners, and such General
Partner and such partners comply with any other applicable
requirements of this Agreement;
(ii) The passage of 90 days after the sale or other disposition
of all or substantially all of the assets of the Partnership (provided
that if the Partnership receives an installment obligation as
consideration for such sale or other disposition, the Partnership
shall continue, unless sooner dissolved under the provisions of this
Agreement, until such time as such note or notes are paid in full);
[(iii) The exchange of all Limited Partnership Interests; or]
(iv) The election by the General Partner that the Partnership
should be dissolved.
(b) Upon dissolution of the Partnership (unless the business of the
Partnership is continued pursuant to Section 7.03(b) hereof), the General
Partner (or its trustee, receiver, successor or legal representative) shall
amend or cancel the Certificate and liquidate the Partnership's assets and
apply and distribute the proceeds thereof in accordance with Section 5.06
hereof. Notwithstanding the foregoing, the liquidating General Partner may
either (i) defer liquidation of, or withhold from distribution for a
reasonable time, any assets of the Partnership (including those necessary
to satisfy the Partnership's debts and obligations), or (ii) distribute the
assets to the Partners in kind.
-9-
<PAGE>
2.05.00 FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP.
-----------------------------------------------------------
The General Partner shall execute, acknowledge, record and file at the
expense of the Partnership, the Certificate and any and all amendments thereto
and all requisite fictitious name statements and notices in such places and
jurisdictions as may be necessary to cause the Partnership to be treated as a
limited partnership under, and otherwise to comply with, the laws of each state
or other jurisdiction in which the Partnership conducts business.
2.06.00 CERTIFICATES DESCRIBING PARTNERSHIP UNITS.
-----------------------------------------
At the request of a Limited Partner, the General Partner, at its option,
may issue a certificate summarizing the terms of such Limited Partner's interest
in the Partnership, including the number of Partnership Units owned and the
Percentage Interest represented by such Partnership Units as of the date of such
certificate. Any such certificate (i) shall be in form and substance as approved
by the General Partner, (ii) shall not be negotiable and (iii) shall bear a
legend to the following effect:
This certificate is not negotiable. The Partnership
Units represented by this certificate are governed
by and transferable only in accordance with the
provisions of the Amended and Restated Agreement of
Limited Partnership of Hudson Hotels Limited
Partnership, L.P., as amended and restated.
ARTICLE III
BUSINESS OF THE PARTNERSHIP
---------------------------
The purpose and nature of the business to be conducted by the Partnership
is (i) to conduct any business that may be lawfully conducted by a limited
partnership organized pursuant to the Act, provided, however, that such
-------- -------
business shall be limited to and conducted in such a manner as to permit the
Company at all times to qualify as a REIT, unless the Company otherwise ceases
to qualify as a REIT, (ii) to enter into any partnership, joint venture or other
similar arrangement to engage in any of the foregoing or the ownership of
interests in any entity engaged in any of the foregoing and (iii) to do anything
necessary or incidental to the foregoing. In connection with the foregoing, and
without limiting the Company's right in its sole discretion to cease qualifying
as a REIT, the Partners acknowledge that the Company's current status as a REIT
inures to the benefit of all the Partners and not solely to the Company. The
General Partner shall also be empowered to do any and all acts and things
necessary or prudent to ensure that the Partnership will not be classified as a
"publicly traded partnership" for purposes of Section 7704 of the Code.
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<PAGE>
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
----------------------------------
4.01.00 CAPITAL CONTRIBUTIONS.
---------------------
The General Partner shall contribute to the capital of the Partnership
cash in an amount set forth opposite its name on Exhibit A. The Limited
---------
Partners shall contribute to the capital of the Partnership interests in one or
more of the Properties or the partnerships owning such Properties, or interests
in certain property management and related assets, each with values as set forth
opposite their names on Exhibit A. The Agreed Values of such Limited Partners'
---------
ownership interests in the Properties that are contributed to the Partnership
are as set forth opposite their names on Exhibit A.
---------
4.02.00 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL
------------------------------------------------------------
PARTNERSHIP INTERESTS.
---------------------
Except as provided in this Section 4.02 or in Section 4.03, the
Partners shall have no right or obligation to make any additional Capital
Contributions or loans to the Partnership. The General Partner may contribute
additional capital to the Partnership, from time to time, and receive additional
Partnership Interests in respect thereof, in the manner contemplated in this
Section 4.02.
(a) Issuances of Additional Partnership Interests.
---------------------------------------------
(i) General. The General Partner is hereby authorized to cause
-------
the Partnership to issue such additional Partnership Interests in the
form of Partnership Units for any Partnership purpose at any time or
from time to time, to the Partners (including the General Partner and
the Company) or to other Persons for such consideration and on such
terms and conditions as shall be established by the General Partner in
its sole and absolute discretion, all without the approval of any
Limited Partners. Any additional Partnership Interests issued thereby
may be issued in one or more classes, or one or more series of any of
such classes, with such designations, preferences and relative,
participating, optional or other special rights, powers and duties,
including rights, powers and duties senior to Limited Partnership
Interests, all as shall be determined by the General Partner in its
sole and absolute discretion and without the approval of any Limited
Partner, subject to Virginia law, including, without limitation, (i)
the allocations of items of Partnership income, gain, loss, deduction
and credit to each such class or series of Partnership Interests; (ii)
the right of each such class or series of Partnership Interests to
share in Partnership distributions; and (iii) the rights of each such
class or series of Partnership Interests upon dissolution and
liquidation of the Partnership; provided, however, that no additional
-------- -------
Partnership Interests shall be issued to the General Partner or the
Company unless either:
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<PAGE>
(1) (A) the additional Partnership Interests are issued in
connection with an issuance of REIT Shares of or other interests in
the Company, which shares or interests have designations, preferences
and other rights, all such that the economic interests are
substantially similar to the designations, preferences and other
rights of the additional Partnership Interests issued to the General
Partner or the Company by the Partnership in accordance with this
Section 4.02 and (B) the General Partner or the Company shall make a
Capital Contribution to the Partnership in an amount equal to the
proceeds raised in connection with the issuance of such shares of
stock of or other interests in the Company, or
(2) the additional Partnership Interests are issued to all
Partners in proportion to their respective Percentage Interests.
Without limiting the foregoing, the General Partner is expressly authorized to
cause the Partnership to issue Partnership Units for less than fair market
value, so long as the General Partner concludes in good faith that such issuance
is in the best interests of the General Partner and the Partnership.
(ii) Upon Issuance of Additional Securities. After the Offering,
--------------------------------------
the Company shall not issue any additional REIT Shares (other than
REIT Shares issued in connection with an exchange pursuant to Section
8.05 hereof) or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or
purchase REIT Shares (collectively, "Additional Securities") other
than to all holders of REIT Shares, unless (A) the General Partner
shall cause the Partnership to issue to the General Partner and the
Company, as the Company may designate, Partnership Interests or
rights, options, warrants or convertible or exchangeable securities of
the Partnership having designations, preferences and other rights, all
such that the economic interests are substantially similar to those of
the Additional Securities, and (B) the Company contributes the
proceeds from the issuance of such Additional Securities and from any
exercise of rights contained in such Additional Securities, directly
and through the General Partner, to the Partnership; provided,
--------
however, that the Company is allowed to issue Additional Securities
-------
without complying with the provisions of (A) and (B) above if such
issuance of Additional Securities has been approved and determined to
be in the best interests of the Company and the Partnership by a
majority of the Independent Trustees (as defined in the Company's
Amended and Restated Declaration of Trust). Without limiting the
foregoing, the Company is expressly authorized to issue Additional
Securities for less than fair market value, and to cause the
Partnership to issue to the General Partner and the Company
corresponding Partnership Interests, so long as (x) the General
Partner concludes in good faith that such issuance is in the best
interests of the General Partner, the Company and the Partnership,
including without limitation, the issuance of REIT Shares and
corresponding Partnership Units pursuant to an employee share
-12-
<PAGE>
purchase plan providing for employee purchases of REIT Shares at a
discount from fair market value or employee stock options that have an
exercise price that is less than the fair market value of the REIT
Shares, either at the time of issuance or at the time of exercise, and
(y) the Company contributes all proceeds from such issuance, directly
or through the General Partner, to the Partnership. For example, in
the event the Company issues REIT Shares for a cash purchase price and
contributes all of the proceeds of such issuance to the Partnership,
directly and through the General Partner, the General Partner and the
Company, as the Company may so designate, shall be issued a number of
additional Partnership Units equal to the product of (A) the number of
such REIT Shares issued by the Company, the proceeds of which were so
contributed, multiplied by (B) a fraction, the numerator of which is
100%, and the denominator of which is the Conversion Factor in effect
on the date of such contribution.
(b) Certain Deemed Contributions of Proceeds of Issuance of REIT
------------------------------------------------------------
Shares. In connection with any and all issuances of REIT Shares, the Company and
- ------
the General Partner, as the Company determines, shall make Capital Contributions
to the Partnership of the proceeds therefrom, provided that if the proceeds
actually received and contributed by the Company, directly or through the
General Partner, are less than the gross proceeds of such issuance as a result
of any underwriter's discount or other expenses paid or incurred in connection
with such issuance, then the General Partner and the Company shall be deemed to
have made Capital Contributions to the Partnership in the aggregate amount of
the gross proceeds of such issuance and the Partnership shall be deemed
simultaneously to have paid such offering expenses in accordance with Section
6.05 hereof and in connection with the required issuance of additional
Partnership Units to the General Partner and the Company for such Capital
Contributions pursuant to Section 4.02(a) hereof.
(c) Minimum Limited Partnership Interest. In the event that either an
------------------------------------
exchange pursuant to Section 8.05 hereof or additional Capital Contributions by
the General Partner and the Company would result in the Limited Partners (other
than the Company), in the aggregate, owning less than the Minimum Limited
Partnership Interest, the General Partner and/or the Company and the Limited
Partners shall form another partnership and contribute sufficient Limited
Partnership Interests together with such other Limited Partners so that the
limited partners (other than the Company) of such partnership own at least the
Minimum Limited Partnership Interest.
4.03.00 ADDITIONAL FUNDING.
------------------
If the General Partner determines that it is in the best interests of the
Partnership to provide for additional Partnership funds ("Additional Funds") for
any Partnership purpose, the General Partner may (i) cause the Partnership to
obtain such funds from outside borrowings, or (ii) elect to have the General
Partner or the Company provide such Additional Funds to the Partnership through
loans or otherwise.
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<PAGE>
4.04.00 CAPITAL ACCOUNTS.
----------------
A separate capital account (a "Capital Account") shall be established and
maintained for each Partner in accordance with Regulations Section 1.704-
1(b)(2)(iv). If (i) a new or existing Partner acquires an additional Partnership
Interest in exchange for more than a de minimis Capital Contribution, (ii) the
Partnership distributes to a Partner more than a de minimis amount of
Partnership property as consideration for a Partnership Interest, or (iii) the
Partnership is liquidated within the meaning of Regulation Section 1.704-
1(b)(2)(ii)(g), the General Partner shall revalue the property of the
Partnership to its fair market value (as determined by the General Partner, in
its sole discretion, and taking into account Section 7701(g) of the Code) in
accordance with Regulations Section 1.704-1(b)(2)(iv)(f). When the Partnership's
property is revalued by the General Partner, the Capital Accounts of the
Partners shall be adjusted in accordance with Regulations Sections 1.704-
1(b)(2)(iv)(f) and (g), which generally require such Capital Accounts to 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 pursuant to Section 5.01 if there were a
taxable disposition of such property for its fair market value (as determined by
the General Partner, in its sole discretion, and taking into account Section
7701(g) of the Code) on the date of the revaluation.
4.05.00 PERCENTAGE INTERESTS.
--------------------
If the number of outstanding Partnership Units increases or decreases
during a taxable year, each Partner's Percentage Interest shall be adjusted by
the General Partner effective as of the effective date of each such increase or
decrease to a percentage equal to the number of Partnership Units held by such
Partner divided by the aggregate number of Partnership Units outstanding after
giving effect to such increase or decrease. If the Partners' Percentage
Interests are adjusted pursuant to this Section 4.05, the Profits and Losses for
the taxable year in which the adjustment occurs shall be allocated between the
part of the year ending on the day when the Partnership's property is revalued
by the General Partner and the part of the year beginning on the following day
either (i) as if the taxable year had ended on the date of the adjustment or
(ii) based on the number of days in each part. The General Partner, in its sole
discretion, shall determine which method shall be used to allocate Profits and
Losses for the taxable year in which the adjustment occurs. The allocation of
Profits and Losses for the earlier part of the year shall be based on the
Percentage Interests before adjustment, and the allocation of Profits and Losses
for the later part shall be based on the adjusted Percentage Interests.
4.06.00 NO INTEREST ON CONTRIBUTIONS.
----------------------------
No Partner shall be entitled to interest on its Capital Contribution.
4.07.00 RETURN OF CAPITAL CONTRIBUTIONS.
-------------------------------
No Partner shall be entitled to withdraw any part of its Capital
Contribution or its Capital Account or to receive any distribution from the
Partnership, except as specifically provided in this Agreement. Except as
otherwise provided herein, there shall be no obligation to return to
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<PAGE>
any Partner or withdrawn Partner any part of such Partner's Capital Contribution
for so long as the Partnership continues in existence.
4.08.00 NO THIRD PARTY BENEFICIARY.
--------------------------
No creditor or other third party having dealings with the Partnership shall
have the right to enforce the right or obligation of any Partner to make Capital
Contributions or loans or to pursue any other right or remedy hereunder or at
law or in equity, it being understood and agreed that the provisions of this
Agreement shall be solely for the benefit of, and may be enforced solely by, the
parties hereto and their respective successors and assigns. None of the rights
or obligations of the Partners herein set forth to make Capital Contributions or
loans to the Partnership shall be deemed an asset of the Partnership for any
purpose by any creditor or other third party, nor may such rights or obligations
be sold, transferred or assigned by the Partnership or pledged or encumbered by
the Partnership to secure any debt or other obligation of the Partnership or of
any of the Partners. In addition, it is the intent of the parties hereto that no
distribution to any Limited Partner shall be deemed a return of money or other
property in violation of the Act. However, if any court of competent
jurisdiction holds that, notwithstanding the provisions of this Agreement, any
Limited Partner is obligated to return such money or property, such obligation
shall be the obligation of such Limited Partner and not of the General Partner.
Without limiting the generality of the foregoing, a deficit Capital Account of a
Partner shall not be deemed to be a liability of such Partner nor an asset or
property of the Partnership.
ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS
---------------------------------
5.01.00 ALLOCATION OF PROFIT AND LOSS.
-----------------------------
(a) General. Profit and Loss of the Partnership for each fiscal
-------
year of the Partnership shall be allocated among the Partners in accordance with
their respective Percentage Interests.
(b) Minimum Gain Chargeback. Notwithstanding any provision to
-----------------------
the contrary, (i) any expense of the Partnership that is a "nonrecourse
deduction" within the meaning of Regulations Section 1.704-2(b)(1) shall be
allocated in accordance with the Partners' respective Percentage Interests, (ii)
any expense of the Partnership that is a "partner nonrecourse deduction" within
the meaning of Regulations Section 1.704-2(i)(2) shall be allocated to the
Partner that bears the "economic risk of loss" of such deduction in accordance
with Regulations Section 1.704-2(i)(1), (iii) if there is a net decrease in
Partnership Minimum Gain within the meaning of Regulations Section 1.704-2(f)(1)
for any Partnership taxable year, then, subject to the exceptions set forth in
Regulations Section 1.704-2(f)(2),(3), (4) and (5), items of gain and income
shall be allocated among the Partners in accordance with Regulations Section
1.704-2(f) and the ordering rules contained in Regulations Section 1.704-2(j),
and (iv) if there is a net decrease in Partner Nonrecourse Debt Minimum Gain
within the meaning of Regulations Section
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1.704-2(i)(4) for any Partnership taxable year, then, subject to the exceptions
set forth in Regulations Section 1.704(2)(g), items of gain and income shall be
allocated among the Partners in accordance with Regulations Section 1.704-
2(i)(4) and the ordering rules contained in Regulations Section 1.704-2(j). A
Partner's "interest in partnership profits" for purposes of determining its
share of the nonrecourse liabilities of the Partnership within the meaning of
Regulations Section 1.752-3(a)(3) shall be such Partner's Percentage Interest.
(c) Qualified Income Offset. If a Partner receives in any taxable
-----------------------
year an adjustment, allocation, or distribution described in subparagraphs (4),
(5), or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that causes or increases
a deficit balance in such Partner's Capital Account that exceeds the sum of such
Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt
Minimum Gain, as determined in accordance with Regulations Sections 1.704-2(g)
and 1.704-2(i), such Partner shall be allocated specially for such taxable year
(and, if necessary, later taxable years) items of income and gain in an amount
and manner sufficient to eliminate such deficit Capital Account balance as
quickly as possible as provided in Regulations Section 1.704-1(b)(2)(ii)(d).
After the occurrence of an allocation of income or gain to a Partner in
accordance with this Section 5.01(c), to the extent permitted by Regulations
Section 1.704-1(b), items of expense or loss shall be allocated to such Partner
in an amount necessary to offset the income or gain previously allocated to such
Partner under this Section 5.01(c).
(d) Capital Account Deficits. Loss shall not be allocated to a
------------------------
Partner to the extent that such allocation would cause a deficit in such
Partner's Capital Account (after reduction to reflect the items described in
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of
such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt
Minimum Gain. Any Loss in excess of that limitation shall be allocated to the
other Partners in accordance with their respective Percentage Interests. After
the occurrence of an allocation of Loss to a Partner in accordance with this
Section 5.01(d), to the extent permitted by Regulations Section 1.704-1(b),
Profit shall be allocated to such Partner in an amount necessary to offset the
Loss previously allocated to such Partner under this Section 5.01(d).
(e) Allocations Between Transferor and Transferee. If a Partner
---------------------------------------------
transfers any part or all of its Partnership Interest, the distributive shares
of the various items of Profit and Loss allocable among the Partners during such
fiscal year of the Partnership shall be allocated between the transferor and the
transferee Partner either (i) as if the Partnership's fiscal year had ended on
the date of the transfer, or (ii) based on the number of days of such fiscal
year that each was a Partner without regard to the results of Partnership
activities in the respective portions of such fiscal year in which the
transferor and the transferee were Partners. The General Partner, in its sole
discretion, shall determine which method shall be used to allocate the
distributive shares of the various items of Profit and Loss between the
transferor and the transferee Partner.
(f) Definition of Profit and Loss. "Profit" and "Loss" and any items
-----------------------------
of income, gain, expense, or loss referred to in this Agreement shall be
determined in accordance with federal income tax accounting principles, as
modified by Regulations Section 1.704-1(b)(2)(iv), except that Profit and Loss
shall not include items of income, gain and expense that are specially allocated
pursuant to Section 5.01(b), 5.01(c), or 5.01(d). All allocations of
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income, Profit, gain, Loss, and expense (and all items contained therein) for
federal income tax purposes shall be identical to all allocations of such items
set forth in this Section 5.01, except as otherwise required by Section 704(c)
of the Code and Regulations Section 1.704-1(b)(4). The General Partner shall
have the authority to elect the method to be used by the Partnership for
allocating items of income, gain, and expense as required by Section 704(c) of
the Code and such election shall be binding on all Partners.
5.02.00 DISTRIBUTION OF CASH.
--------------------
(a) The Partnership shall distribute cash on a quarterly (or, at
the election of the General Partner, more frequent) basis, in an amount
determined by the General Partner in its sole discretion, to the Partners who
are Partners on the Partnership Record Date with respect to such quarter (or
other distribution period) in accordance with their respective Percentage
Interests on the Partnership Record Date; provided, however, that if a new or
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existing Partner acquires an additional Partnership Interest in exchange for a
Capital Contribution on any date other than a Partnership Record Date, the cash
distribution attributable to such additional Partnership Interest relating to
the Partnership Record Date next following the issuance of such additional
Partnership Interest shall be reduced in the proportion to (i) the number of
days that such additional Partnership Interest is held by such Partner bears to
(ii) the number of days between such Partnership Record Date and the immediately
preceding Partnership Record Date.
(b) Notwithstanding any other provision of this Agreement, the
General Partner is authorized to take any action that it determines to be
necessary or appropriate to cause the Partnership to comply with any withholding
requirements established under the Code or any other federal, state or local law
including, without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of
the Code. To the extent that the Partnership is required to withhold and pay
over to any taxing authority any amount resulting from the allocation or
distribution of income to the Partner or assignee (including by reason of
Section 1446 of the Code), either (i) if the actual amount to be distributed to
the Partner equals or exceeds the amount required to be withheld by the
Partnership, the amount withheld shall be treated as a distribution of cash in
the amount of such withholding to such Partner, or (ii) if the actual amount to
be distributed to the Partner is less than the amount required to be withheld by
the Partnership, the amount required to be withheld shall be treated as a loan
(a "Partnership Loan") from the Partnership to the Partner on the day the
Partnership pays over such amount to a taxing authority. A Partnership Loan
shall be repaid through withholding by the Partnership with respect to
subsequent distributions to the applicable Partner or assignee. In the event
that a Limited Partner (a "Defaulting Limited Partner") fails to pay any amount
owed to the Partnership with respect to the Partnership Loan within 15 days
after demand for payment thereof is made by the Partnership on the Limited
Partner, the General Partner, in its sole discretion, may elect to make the
payment to the Partnership on behalf of such Defaulting Limited Partner. In such
event, on the date of payment, the General Partner shall be deemed to have
extended a loan (a "General Partner Loan") to the Defaulting Limited Partner in
the amount of the payment made by the General Partner and shall succeed to all
rights and remedies of the Partnership against the Defaulting Limited Partner as
to that amount. Without limitation, the General Partner shall have the right to
receive any distributions that otherwise would be made by the Partnership to the
Defaulting Limited Partner
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until such time as the General Partner Loan has been paid in full, and any such
distributions so received by the General Partner shall be treated as having been
received by the Defaulting Limited Partner and immediately paid to the General
Partner.
Any amounts treated as a Partnership Loan or a General Partner Loan
pursuant to this Section 5.02(b) shall bear interest at the lesser of (i) the
base rate on corporate loans at large United States money center commercial
banks, as published from time to time in The Wall Street Journal, or (ii) the
maximum lawful rate of interest on such obligation, such interest to accrue from
the date the Partnership or the General Partner, as applicable, is deemed to
extend the loan until such loan is repaid in full.
(c) In no event may a Partner receive a distribution of cash with
respect to a Partnership Unit if such Partner is entitled to receive a cash
dividend as the holder of record of a REIT Share for which all or part of such
Partnership Unit has been or will be exchanged.
5.03.00 REIT DISTRIBUTION REQUIREMENTS.
------------------------------
The General Partner shall use its reasonable efforts to cause the
Partnership to distribute amounts sufficient to enable the Company to pay
shareholder dividends that will allow the Company to (i) meet its distribution
requirement for qualification as a REIT as set forth in Section 857 of the Code
and (ii) avoid any federal income or excise tax liability imposed by the Code.
5.04.00 NO RIGHT TO DISTRIBUTIONS IN KIND.
---------------------------------
No Partner shall be entitled to demand property other than cash in
connection with any distributions by the Partnership.
5.05.00 LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS.
----------------------------------------------
Notwithstanding any of the provisions of this Article V, no Partner shall
have the right to receive and the General Partner shall not have the right to
make, a distribution that includes a return of all or part of a Partner's
Capital Contributions, unless after giving effect to the return of a Capital
Contribution, the sum of all Partnership liabilities, other than the liabilities
to a Partner for the return of his Capital Contribution, does not exceed the
fair market value of the Partnership's assets.
5.06.00 DISTRIBUTIONS UPON LIQUIDATION.
------------------------------
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 shall be distributed to all
Partners with positive Capital Accounts in accordance with their respective
positive Capital Account balances. For purposes of the preceding sentence, the
Capital Account of each Partner shall be determined after all adjustments made
in accordance with Sections 5.01 and 5.02 resulting from Partnership operations
and from all sales and dispositions of all or any part of the Partnership's
assets. To the extent deemed advisable by the
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General Partner, appropriate arrangements (including the use of a liquidating
trust) may be made to assure that adequate funds are available to pay any
contingent debts or obligations.
5.07.00 SUBSTANTIAL ECONOMIC EFFECT.
---------------------------
It is the intent of the Partners that the allocations of Profit and Loss
under the Agreement have substantial economic effect (or be consistent with the
Partners' interests in the Partnership in the case of the allocation of losses
attributable to nonrecourse debt) within the meaning of Section 704(b) of the
Code as interpreted by the Regulations promulgated pursuant thereto. Article V
and other relevant provisions of this Agreement shall be interpreted in a manner
consistent with such intent.
ARTICLE VI
RIGHTS, OBLIGATIONS AND
POWERS OF THE GENERAL PARTNER
-----------------------------
6.01.00 MANAGEMENT OF THE PARTNERSHIP.
-----------------------------
(a) Except as otherwise expressly provided in this Agreement,
the General Partner shall have full, complete and exclusive discretion to manage
and control the business of the Partnership for the purposes herein stated, and
shall make all decisions affecting the business and assets of the Partnership.
Subject to the restrictions specifically contained in this Agreement, the powers
of the General Partner shall include, without limitation, the authority to take
the following actions on behalf of the Partnership:
(i) to acquire, purchase, own, operate, lease and dispose
of any real property and any other property or assets including, but
not limited to notes and mortgages, that the General Partner
determines are necessary or appropriate or in the best interests of
the business of the Partnership;
(ii) to construct buildings and make other improvements on
the properties owned or leased by the Partnership;
(iii) to authorize, issue, sell, redeem or otherwise
purchase any Partnership Interests or any securities (including
secured and unsecured debt obligations of the Partnership, debt
obligations of the Partnership convertible into any class or series
of Partnership Interests, or options, rights, warrants or
appreciation rights relating to any Partnership Interests) of the
Partnership;
(iv) to borrow or lend money for the Partnership, issue or
receive evidences of indebtedness in connection therewith,
refinance, increase the amount of, modify, amend or change the terms
of, or extend the time for the payment of,
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any such indebtedness, and secure such indebtedness by mortgage,
deed of trust, pledge or other lien on the Partnership's assets;
(v) to guarantee or become a comaker of indebtedness of
the Company or any Subsidiary thereof, refinance, increase the
amount of, modify, amend or change the terms of, or extend the time
for the payment of, any such guarantee or indebtedness, and secure
such guarantee or indebtedness by mortgage, deed of trust, pledge or
other lien on the Partnership's assets;
(vi) to use assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with this
Agreement, including, without limitation, payment, either directly
or by reimbursement, of all operating costs and general
administrative expenses of the Company, the General Partner, the
Partnership or any Subsidiary of either, to third parties or to the
General Partner as set forth in this Agreement;
(vii) to lease all or any portion of any of the
Partnership's assets, whether or not the terms of such leases extend
beyond the termination date of the Partnership and whether or not
any portion of the Partnership's assets so leased are to be occupied
by the lessee, or, in turn, subleased in whole or in part to others,
for such consideration and on such terms as the General Partner may
determine;
(viii) to prosecute, defend, arbitrate, or compromise any
and all claims or liabilities in favor of or against the
Partnership, on such terms and in such manner as the General Partner
may reasonably determine, and similarly to prosecute, settle or
defend litigation with respect to the Partners, the Partnership, or
the Partnership's assets;
(ix) to file applications, communicate, and otherwise deal
with any and all governmental agencies having jurisdiction over, or
in any way affecting, the Partnership's assets or any other aspect
of the Partnership business;
(x) to make or revoke any election permitted or required
of the Partnership by any taxing authority;
(xi) to maintain such insurance coverage for public
liability, fire and casualty, and any and all other insurance for
the protection of the Partnership, for the conservation of
Partnership assets, or for any other purpose convenient or
beneficial to the Partnership, in such amounts and such types, as it
shall determine from time to time;
(xii) to determine whether or not to apply any insurance
proceeds for any property to the restoration of such property or to
distribute the same;
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<PAGE>
(xiii) to establish one or more divisions of the
Partnership, to hire and dismiss employees of the Partnership or any
division of the Partnership, and to retain legal counsel, accountants,
consultants, real estate brokers, and such other persons, as the
General Partner may deem necessary or appropriate in connection with
the Partnership business and to pay therefor such reasonable
remuneration as the General Partner may deem reasonable and proper;
(xiv) to retain other services of any kind or nature
in connection with the Partnership business, and to pay therefor such
remuneration as the General Partner may deem reasonable and proper;
(xv) to negotiate and conclude agreements on behalf
of the Partnership with respect to any of the rights, powers and
authority conferred upon the General Partner;
(xvi) to maintain accurate accounting records and to
file promptly all federal, state and local income tax returns on
behalf of the Partnership;
(xvii) to distribute Partnership cash or other
Partnership assets in accordance with this Agreement;
(xviii) to form or acquire an interest in, and
contribute property to, any further limited or general partnerships,
joint ventures or other relationships that it deems desirable
(including, without limitation, the acquisition of interests in, and
the contributions of property to, its Subsidiaries and any other
Person in which it has an equity interest from time to time);
(xix) to establish Partnership reserves for working
capital, capital expenditures, contingent liabilities, or any other
valid Partnership purpose; and
(xx) to take such other action, execute,
acknowledge, swear to or deliver such other documents and instruments,
and perform any and all other acts that the General Partner deems
necessary or appropriate for the formation, continuation and conduct
of the business and affairs of the Partnership (including, without
limitation, all actions consistent with allowing the Company at all
times to qualify as a REIT unless the Company voluntarily terminates
its REIT status) and to possess and enjoy all of the rights and powers
of a general partner as provided by the Act.
(b) Except as otherwise provided herein, to the extent the
duties of the General Partner require expenditures of funds to be paid to third
parties, the General Partner shall not have any obligations hereunder except to
the extent that partnership funds are reasonably available to it for the
performance of such duties, and nothing herein contained shall be deemed to
authorize or require the General Partner, in its capacity as such, to expend its
individual funds for payment to third parties or to undertake any individual
liability or obligation on behalf of the Partnership.
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6.02.00 DELEGATION OF AUTHORITY.
-----------------------
The General Partner may delegate any or all of its powers, rights and
obligations hereunder, and may appoint, employ, contract or otherwise deal with
any Person for the transaction of the business of the Partnership, which Person
may, under supervision of the General Partner, perform any acts or services for
the Partnership as the General Partner may approve.
6.03.00 INDEMNIFICATION AND EXCULPATION OF INDEMNITEES.
----------------------------------------------
(a) The Partnership shall indemnify an Indemnitee from and
against any and all losses, claims, damages, liabilities, joint or several,
expenses (including reasonable legal fees and expenses), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative or investigative,
that relate to the operations of the Partnership as set forth in this Agreement
in which any Indemnitee may be involved, or is threatened to be involved, as a
party or otherwise, unless it is established that: (i) the act or omission of
the Indemnitee was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the Indemnitee actually received an improper personal benefit
in money, property or services; or (iii) in the case of any criminal proceeding,
the Indemnitee had reasonable cause to believe that the act or omission was
unlawful. The termination of any proceeding by judgment, order or settlement
does not create a presumption that the Indemnitee did not meet the requisite
standard of conduct set forth in this Section 6.03(a). The termination of any
proceeding by conviction or upon a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, creates a rebuttable
presumption that the Indemnitee acted in a manner contrary to that specified in
this Section 6.03(a). Any indemnification pursuant to this Section 6.03 shall be
made only out of the assets of the Partnership.
(b) The Partnership shall reimburse an Indemnitee for
reasonable expenses incurred by an Indemnitee who is a party to a proceeding in
advance of the final disposition of the proceeding upon receipt by the
Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's
good faith belief that the standard of conduct necessary for indemnification by
the Partnership as authorized in this Section 6.03 has been met, and (ii) a
written undertaking by or on behalf of the Indemnitee to repay the amount if it
shall ultimately be determined that the standard of conduct has not been met.
(c) The indemnification provided by this Section 6.03 shall
be in addition to any other rights to which an Indemnitee or any other Person
may be entitled under any agreement, pursuant to any vote of the Partners, as a
matter of law or otherwise, and shall continue as to an Indemnitee who has
ceased to serve in such capacity.
(d) The Partnership may purchase and maintain insurance, on
behalf of the Indemnitees and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expenses that
may be incurred by such Person in connection with
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the Partnership's activities, regardless of whether the Partnership would have
the power to indemnify such Person against such liability under the provisions
of this Agreement.
(e) For purposes of this Section 6.03, the Partnership shall
be deemed to have requested an Indemnitee to serve as fiduciary of an employee
benefit plan whenever the performance by it of its duties to the Partnership
also imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute fines within the meaning of this Section 6.03; and actions
taken or omitted by the Indemnitee with respect to an employee benefit plan in
the performance of its duties for a purpose reasonably believed by it to be in
the interest of the participants and beneficiaries of the plan shall be deemed
to be for a purpose which is not opposed to the best interests of the
Partnership.
(f) In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the indemnification provisions set
forth in this Agreement.
(g) An Indemnitee shall not be denied indemnification in
whole or in part under this Section 6.03 because the Indemnitee had an interest
in the transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.03 are for the benefit
of the Indemnitees, their heirs, successors, assigns and administrators and
shall not be deemed to create any rights for the benefit of any other Persons.
6.04.00 LIABILITY OF THE GENERAL PARTNER.
--------------------------------
(a) Notwithstanding anything to the contrary set forth in
this Agreement, the General Partner shall not be liable for monetary damages to
the Partnership or any Partners for losses sustained or liabilities incurred as
a result of errors in judgment or of any act or omission if the General Partner
acted in good faith. The General Partner shall not be in breach of any duty that
the General Partner may owe to the Limited Partners or the Partnership or any
other Persons under this Agreement or of any duty stated or implied by law or
equity provided the General Partner, acting in good faith, abides by the terms
of this Agreement.
(b) The Limited Partners expressly acknowledge that the
General Partner is acting on behalf of the Partnership, the Company and the
Company's shareholders collectively, that the General Partner is under no
obligation to consider the separate interests of the Limited Partners
(including, without limitation, the tax consequences to Limited Partners or the
tax consequences of same, but not all, of the Limited Partners) in deciding
whether to cause the Partnership to take (or decline to take) any actions. In
the event of a conflict between the interests of the shareholders of the Company
on one hand and the Limited Partners on the other, the General Partner shall
endeavor in good faith to resolve the conflict in a manner not adverse to either
the shareholders of the Company or the Limited Partners; provided, however, that
-------- -------
for so long as the Company, directly or the General Partner owns a controlling
interest in the
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Partnership, any such conflict that cannot be resolved in a manner not adverse
to either the shareholders of the Company or the Limited Partners shall be
resolved in favor of the shareholders. The General Partner shall not be liable
for monetary damages for losses sustained, liabilities incurred, or benefits not
derived by Limited Partners in connection with such decisions, provided that the
General Partner has acted in good faith.
(c) Subject to its obligations and duties as General Partner
set forth in Section 6.01 hereof, the General Partner may exercise any of the
powers granted to it under this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agents. The General
Partner shall not be responsible for any misconduct or negligence on the part of
any such agent appointed by it in good faith.
(d) Notwithstanding any other provisions of this Agreement
or the Act, any action of the General Partner on behalf of the Partnership or
any decision of the General Partner to refrain from acting on behalf of the
Partnership, undertaken in the good faith belief that such action or omission is
necessary or advisable in order (i) to protect the ability of the Company to
continue to qualify as a REIT or (ii) to prevent the Company from incurring any
taxes under Section 857, Section 4981, or any other provision of the Code, is
expressly authorized under this Agreement and is deemed approved by all of the
Limited Partners.
(e) Any amendment, modification or repeal of this Section
6.04 or any provision hereof shall be prospective only and shall not in any way
affect the limitations on the General Partner's liability to the Partnership and
the Limited Partners under this Section 6.04 as in effect immediately prior to
such amendment, modification or repeal with respect to matters occurring, in
whole or in part, prior to such amendment, modification or repeal, regardless of
when claims relating to such matters may arise or be asserted.
6.05.00 REIMBURSEMENT.
-------------
The General Partner is hereby authorized to pay compensation for
accounting, administrative, legal, technical, management and other services
rendered to the Partnership. All of the aforesaid expenditures (including
Administrative Expenses) shall be obligations of the Partnership, and the
General Partner shall be entitled to reimbursement by the Partnership for any
expenditure (including Administrative Expenses) incurred by it on behalf of the
Partnership which shall be made other than out of the funds of the Partnership.
6.06.00 OUTSIDE ACTIVITIES.
------------------
Subject to Section 6.08 hereof, the Declaration of Trust and any
agreements entered into by the General Partner or its Affiliates with the
Partnership or a Subsidiary, any officer, director, employee, agent, trustee,
Affiliate or shareholder of the General Partner, the General Partner shall be
entitled to and may have business interests and engage in business activities in
addition to those relating to the Partnership, including business interests and
activities substantially similar or identical to those of the Partnership.
Neither the Partnership nor any of the Limited Partners shall have any rights by
virtue of this Agreement in any such business ventures, interest
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or activities. None of the Limited Partners nor any other Person shall have any
rights by virtue of this Agreement or the partnership relationship established
hereby in any such business ventures, interests or activities, and the General
Partner shall have no obligation pursuant to this Agreement to offer any
interest in any such business ventures, interests and activities to the
Partnership or any Limited Partner, even if such opportunity is of a character
which, if presented to the Partnership or any Limited Partner, could be taken by
such Person.
6.07.00 EMPLOYMENT OR RETENTION OF AFFILIATES.
-------------------------------------
(a) Any Affiliate of the General Partner may be employed or retained
by the Partnership and may otherwise deal with the Partnership (whether as a
buyer, lessor, lessee, manager, furnisher of goods or services, broker, agent,
lender or otherwise) and may receive from the Partnership any compensation,
price, or other payment therefor which the General Partner determines to be fair
and reasonable.
(b) The Partnership may lend or contribute to its Subsidiaries or
other Persons in which it has an equity investment, and such Persons may borrow
funds from the Partnership, on terms and conditions established in the sole and
absolute discretion of the General Partner. The foregoing authority shall not
create any right or benefit in favor of any Subsidiary or any other Person.
(c) The Partnership may transfer assets to joint ventures, other
partnerships, corporations or other business entities in which it is or thereby
becomes a participant upon such terms and subject to such conditions as the
General Partner deems are consistent with this Agreement and applicable law.
(d) Except as expressly permitted by this Agreement, neither the
General Partner nor any of its Affiliates shall sell, transfer or convey any
property to, or purchase any property from, the Partnership, directly or
indirectly, except pursuant to transactions that are on terms that are fair and
reasonable to the Partnership.
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6.08.00 TITLE TO PARTNERSHIP ASSETS.
---------------------------
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner, individually or collectively, shall have any ownership
interest in such Partnership assets or any portion thereof. Title to any or all
of the Partnership assets may be held in the name of the Partnership, the
General Partner or one or more nominees, as the General Partner may determine,
including Affiliates of the General Partner. The General Partner hereby declares
and warrants that any Partnership assets for which legal title is held in the
name of the General Partner or any nominee or Affiliate of the General Partner
shall be held by the General Partner for the use and benefit of the Partnership
in accordance with the provisions of this Agreement; provided, however, that the
-------- -------
General Partner shall use its best efforts to cause beneficial and record title
to such assets to be vested in the Partnership as soon as reasonably
practicable. All Partnership assets shall be recorded as the property of the
Partnership in its books and records, irrespective of the name in which legal
title to such Partnership assets is held.
6.09.00 MISCELLANEOUS.
-------------
In the event the Company redeems any REIT Shares, then the General
Partner shall cause the Partnership to purchase from the General Partner and the
Company a number of Partnership Units as determined based on the application of
the Conversion Factor on the same terms that the Company exchanged such REIT
Shares. Moreover, if the Company makes a cash tender offer or other offer to
acquire REIT Shares, then the General Partner shall cause the Partnership to
make a corresponding offer to the General Partner and the Company to acquire an
equal number of Partnership Units held by the General Partner and the Company.
In the event any REIT Shares are exchanged by the Company pursuant to such
offer, the Partnership shall redeem an equivalent number of the General
Partner's and the Company Partnership Units for an equivalent purchase price
based on the application of the Conversion Factor.
ARTICLE VII
CHANGES IN GENERAL PARTNER
--------------------------
7.01.00 TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST.
------------------------------------------------------
(a) The General Partner shall not transfer all or any portion of its
General Partnership Interest or withdraw as General Partner except as provided
in Section 7.01(c) or in connection with a transaction described in Section
7.01(d).
(b) The General Partner agrees that the Percentage Interest for it
and the Company will at all times be in the aggregate, at least 20%.
(c) Except as otherwise provided herein, in Section 6.04(b) or
Section 7.01(d) hereof, the Company shall not engage in any merger,
consolidation or other combination with or into another Person or sale of all or
substantially all of its assets, or any reclassification, or any
recapitalization or change of
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outstanding REIT Shares (other than a change in par value, or from par value to
no par value, or as a result of a subdivision or combination of REIT Shares), in
each case which results in a change of control of the Company (a "Transaction"),
unless as a result of such Transaction all Limited Partners will receive for
each Partnership Unit an amount of cash, securities, or other property equal to
the product of the Conversion Factor and the greatest amount of cash, securities
or other property paid in the Transaction to a holder of one REIT Share in
consideration of one REIT Share, provided that if, in connection with the
Transaction, a purchase, tender or exchange offer ("Offer") shall have been made
to and accepted by the holders of more than 50% of the outstanding REIT Shares,
each holder of Partnership Units shall be given the option to exchange its
Partnership Units for the greatest amount of cash, securities, or other property
which a Limited Partner would have received had it (A) exercised its Exchange
Right and (B) sold, tendered or exchanged pursuant to the Offer the REIT Shares
received upon exercise of the Exchange Right immediately prior to the expiration
of the Offer.
(d) Notwithstanding Section 7.01(c), the Company or the General
Partner may merge with or into or consolidate with another entity if immediately
after such merger or consolidation (i) substantially all of the assets of the
successor or surviving entity (the "Survivor"), other than Partnership Units
held by the Company or the General Partner, are contributed, directly or
indirectly, to the Partnership as a Capital Contribution in exchange for
Partnership Units with a fair market value equal to the value of the assets so
contributed as determined by the Survivor in good faith and (ii) the Survivor
expressly agrees to assume all obligations of the General Partner or the
Company, as appropriate, hereunder. Upon such contribution and assumption, the
Survivor shall have the right and duty to amend this Agreement as set forth in
this Section 7.01(d). The Survivor shall in good faith arrive at a new method
for the calculation of the Cash Amount, the REIT Shares Amount and Conversion
Factor for a Partnership Unit after any such merger or consolidation so as to
approximate the existing method for such calculation as closely as reasonably
possible. Such calculation shall take into account, among other things, the kind
and amount of securities, cash and other property that was receivable upon such
merger or consolidation by a holder of REIT Shares or options, warrants or other
rights relating thereto, and to which a holder of Partnership Units could have
acquired had such Partnership Units been exchanged immediately prior to such
merger or consolidation. Such amendment to this Agreement shall provide for
adjustment to such method of calculation, which shall be as nearly equivalent as
may be practicable to the adjustments provided for with respect to the
Conversion Factor. The Survivor also shall in good faith modify the definition
of REIT Shares and make such amendments to Section 8.05 hereof so as to
approximate the existing rights and obligations set forth in Section 8.05 as
closely as reasonably possible. The above provisions of this Section 7.01(d)
shall similarly apply to successive mergers or consolidations permitted
hereunder.
7.02.00 ADMISSION OF A SUBSTITUTE OR ADDITIONAL GENERAL PARTNER.
-------------------------------------------------------
A Person shall be admitted as a substitute or additional General Partner of
the Partnership only if the following terms and conditions are satisfied:
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(a) a majority in interest of the Limited Partners (other than the
Company) shall have consented in writing to the admission of the substitute or
additional General Partner, which consent may be withheld in the sole discretion
of such Limited Partners;
(b) the Person to be admitted as a substitute or additional General
Partner shall have accepted and agreed to be bound by all the terms and
provisions of this Agreement by executing a counterpart thereof and such other
documents or instruments as may be required or appropriate in order to effect
the admission of such Person as a General Partner, and a certificate evidencing
the admission of such Person as a General Partner shall have been filed for
recordation and all other actions required by Section 2.05 hereof in connection
with such admission shall have been performed;
(c) if the Person to be admitted as a substitute or additional
General Partner is a corporation or a partnership it shall have provided the
Partnership with evidence satisfactory to counsel for the Partnership of such
Person's authority to become a General Partner and to be bound by the terms and
provisions of this Agreement; and
(d) counsel for the Partnership shall have rendered an opinion
(relying on such opinions from other counsel and the state or any other
jurisdiction as may be necessary) that the admission of the person to be
admitted as a substitute or additional General Partner is in conformity with the
Act, that none of the actions taken in connection with the admission of such
Person as a substitute or additional General Partner will cause (i) the
Partnership to be classified other than as a partnership for federal income tax
purposes, or (ii) the loss of any Limited Partner's limited liability.
7.03.00 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A
-----------------------------------------------------------
GENERAL PARTNER.
---------------
(a) Upon the occurrence of an Event of Bankruptcy as to a General
Partner (and its removal pursuant to Section 7.04(a) hereof) or the death,
withdrawal, removal or dissolution of a General Partner (except that, if a
General Partner is on the date of such occurrence a partnership, the withdrawal,
death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such
partnership shall be deemed not to be a dissolution of such General Partner if
the business of such General Partner is continued by the remaining partner or
partners), the Partnership shall be dissolved and terminated unless the
Partnership is continued pursuant to Section 7.03(b) hereof.
(b) Following the occurrence of an Event of Bankruptcy as to a
General Partner (and its removal pursuant to Section 7.04(a) hereof) or the
death, withdrawal, removal or dissolution of a General Partner (except that, if
a General Partner is on the date of such occurrence a partnership, the
withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a
partner in, such partnership shall be deemed not to be a dissolution of such
General Partner if the business of such General Partner is continued by the
remaining partner or partners), the Limited Partners, within 90 days after such
occurrence, may elect to reconstitute the Partnership and continue the business
of the Partnership for the balance of the term specified
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in Section 2.04 hereof by selecting, subject to Section 7.02 hereof and any
other provisions of this Agreement, a substitute General Partner by unanimous
consent of the Limited Partners. If the Limited Partners elect to reconstitute
the Partnership and admit a substitute General Partner, the relationship with
the Partners and of any Person who has acquired an interest of a Partner in the
Partnership shall be governed by this Agreement.
7.04.00 REMOVAL OF A GENERAL PARTNER.
----------------------------
(a) Upon the occurrence of an Event of Bankruptcy as to, or the
dissolution of, a General Partner, such General Partner shall be deemed to be
removed automatically; provided, however, that if a General Partner is on the
-------- -------
date of such occurrence a partnership, the withdrawal, death, dissolution, Event
of Bankruptcy as to or removal of a partner in such partnership shall be deemed
not to be a dissolution of the General Partner if the business of such General
Partner is continued by the remaining partner or partners.
(b) If a General Partner has been removed pursuant to this Section
7.04 and the Partnership is continued pursuant to Section 7.03 hereof, such
General Partner shall promptly transfer and assign its General Partnership
Interest in the Partnership to the substitute General Partner approved by a
majority in interest of the Limited Partners in accordance with Section 7.03(b)
hereof and otherwise admitted to the Partnership in accordance with Section 7.02
hereof. At the time of assignment, the removed General Partner shall be entitled
to receive from the substitute General Partner the fair market value of the
General Partnership Interest of such removed General Partner as reduced by any
damages caused to the Partnership by such General Partner. Such fair market
value shall be determined by an appraiser mutually agreed upon by the General
Partner and a majority in interest of the Limited Partners within 10 days
following the removal of the General Partner. In the event that the parties are
unable to agree upon an appraiser, the removed General Partner and a majority in
interest of the Limited Partners each shall select an appraiser. Each such
appraiser shall complete an appraisal of the fair market value of the removed
General Partner's General Partnership Interest within 30 days of the General
Partner's removal, and the fair market value of the removed General Partner's
General Partnership Interest shall be the average of the two appraisals;
provided, however, that if the higher appraisal exceeds the lower appraisal by
- -------- -------
more than 20% of the amount of the lower appraisal, the two appraisers, no later
than 40 days after the removal of the General Partner, shall select a third
appraiser who shall complete an appraisal of the fair market value of the
removed General Partner's General Partnership Interest no later than 60 days
after the removal of the General Partner. In such case, the fair market value of
the removed General Partner's General Partnership Interest shall be the average
of the two appraisals closest in value.
(c) The General Partnership Interest of a removed General Partner,
during the time after default until transfer under Section 7.04(b), shall be
converted to that of a special Limited Partner; provided, however, such removed
-------- -------
General Partner shall not have any rights to participate in the management and
affairs of the Partnership, and shall not be entitled to any portion of the
income, expense, profit, gain or loss allocations or cash distributions
allocable or payable, as the case may be, to the Limited Partners. Instead, such
removed General Partner shall receive and be entitled only to retain
distributions or allocations of such items that it would
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have been entitled to receive in its capacity as General Partner, until the
transfer is effective pursuant to Section 7.04(b).
(d) All Partners shall have given and hereby do give such consents,
shall take such actions and shall execute such documents as shall be legally
necessary and sufficient to effect all the foregoing provisions of this Section.
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
----------------------------------------------
8.01.00 MANAGEMENT OF THE PARTNERSHIP.
-----------------------------
The Limited Partners shall not participate in the management or control of
Partnership business nor shall they transact any business for the Partnership,
nor shall they have the power to sign for or bind the Partnership, such powers
being vested solely and exclusively in the General Partner.
8.02.00 POWER OF ATTORNEY.
-----------------
Each Limited Partner hereby irrevocably appoints the General Partner its
true and lawful attorney-in-fact, who may act for each Limited Partner and in
its name, place and stead, and for its use and benefit, to sign, acknowledge,
swear to, deliver, file and record, at the appropriate public offices, any and
all documents, certificates, and instruments as may be deemed necessary or
desirable by the General Partner to carry out fully the provisions of this
Agreement and the Act in accordance with their terms, which power of attorney is
coupled with an interest and shall survive the death, dissolution or legal
incapacity of the Limited Partner, or the transfer by the Limited Partner of any
part or all of its Partnership Interest.
8.03.00 LIMITATION ON LIABILITY OF LIMITED PARTNERS.
-------------------------------------------
No Limited Partner shall be liable for any debts, liabilities, contracts or
obligations of the Partnership. A Limited Partner shall be liable to the
Partnership only to make payments of its Capital Contribution, if any, as and
when due hereunder. After its Capital Contribution is fully paid, no Limited
Partner shall, except as otherwise required by the Act, be required to make any
further Capital Contributions or other payments or lend any funds to the
Partnership.
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8.04.00 OWNERSHIP BY LIMITED PARTNER OF CORPORATE GENERAL PARTNER OR
------------------------------------------------------------
AFFILIATE.
---------
No Limited Partner shall at any time, either directly or indirectly, own
any stock or other interest in the General Partner or in any Affiliate thereof,
if such ownership by itself or in conjunction with other stock or other
interests owned by other Limited Partners would, in the opinion of counsel for
the Partnership, jeopardize the classification of the Partnership as a
partnership for federal income tax purposes. The General Partner shall be
entitled to make such reasonable inquiry of the Limited Partners as is required
to establish compliance by the Limited Partners with the provisions of this
Section.
8.05.00 EXCHANGE RIGHT.
--------------
(a) Subject to the provisions of this Section 8.05 and the terms of
an agreement between the Partnership or the General Partner and a Limited
Partner, each Limited Partner, other than the HHT, Ltd. Inc., the General
Partner, or any wholly owned subsidiaries of the Company, shall have the right
(the "Exchange Right") to require the Partnership to redeem on a Specified
Exchange Date all or a portion of the Partnership Units held by such Limited
Partner at an exchange price equal to and in the form of the Cash Amount to be
paid by the Partnership. The Exchange Right shall be exercised pursuant to a
Notice of Exchange delivered to the Partnership (with a copy to the General
Partner) by the Limited Partner who is exercising the Exchange Right (the
"Exchanging Partner"); provided, however, that the Partnership shall not be
-------- -------
obligated to satisfy such Exchange Right if the Company and/or the General
Partner elects to purchase the Partnership Units subject to the Notice of
Exchange pursuant to Section 8.05(b); and provided, further, that no Limited
-------- -------
Partner may deliver more than two Notices of Exchange during each calendar year.
A Limited Partner may not exercise the Exchange Right for less than 1,000
Partnership Units or, if such Limited Partner holds less than 1,000 Partnership
Units, all of the Partnership Units held by such Partner. The Exchanging Partner
shall have no right, with respect to any Partnership Units so exchanged, to
receive any distribution paid with respect to Partnership Units if the record
date for such distribution is on or after the Specified Exchange Date.
(b) Notwithstanding the provisions of Section 8.05(a), a Limited
Partner that exercises the Exchange Right shall be deemed to have offered to
sell the Partnership Units described in the Notice of Exchange to the General
Partner and the Company, and either of the General Partner or the Company (or
both) may, in its sole and absolute discretion, elect to purchase directly and
acquire such Partnership Units by paying to the Exchanging Partner either the
Cash Amount or the REIT Shares Amount, as elected by the General Partner or the
Company (in their sole and absolute discretion), on the Specified Exchange Date,
whereupon the General Partner or the Company shall acquire the Partnership Units
offered for exchange by the exchanging Partner and shall be treated for all
purposes of this Agreement as the owner of such Partnership Units. If the
General Partner or the Company shall elect to exercise its right to purchase
Partnership Units under this Section 8.05(b) with respect to a Notice of
Exchange, it shall so notify the Exchanging Partner within five Business Days
after the receipt by the General Partner of such Notice of Exchange. Unless the
General Partner and/or the Company (in its sole
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and absolute discretion) shall exercise its right to purchase Partnership Units
from the Exchanging Partner pursuant to this Section 8.05(b), neither the
General Partner nor the Company shall have any obligation to the Exchanging
Partner or the Partnership with respect to the Exchanging Partner's exercise of
the Exchange Right. In the event the General Partner or the Company shall
exercise its right to purchase Partnership Units with respect to the exercise of
a Exchange Right in the manner described in the first sentence of this Section
8.05(b), the Partnership shall have no obligation to pay any amount to the
Exchanging Partner with respect to such Exchanging Partner's exercise of such
Exchange Right, and each of the Exchanging Partner, the Partnership, and the
General Partner or the Company, as the case may be, shall treat the transaction
between the General Partner or the Company, as the case may be, and the
Exchanging Partner for federal income tax purposes as a sale of the Exchanging
Partner's Partnership Units to the General Partner or the Company, as the case
may be. Each Exchanging Partner agrees to execute such documents as the General
Partner may reasonably require in connection with the issuance of REIT Shares
upon exercise of the Exchange Right.
(c) Notwithstanding the provisions of Section 8.05(a) and 8.05(b), a
Limited Partner shall not be entitled to exercise the Exchange Right if the
delivery of REIT Shares to such Partner on the Specified Exchange Date by the
General Partner or the Company pursuant to Section 8.05(b) (regardless of
whether or not the General Partner or the Company would in fact exercise its
rights under Section 8.05(b)) would (i) result in such Partner or any other
person owning, directly or indirectly, REIT Shares in excess of the Ownership
Limitation (as defined in the Articles of Incorporation) and calculated in
accordance therewith, except as provided in the Declaration of Trust, (ii)
result in REIT Shares being owned by fewer than 100 persons (determined without
reference to any rules of attribution), except as provided in the Declaration of
Trust, (iii) result in the Company being "closely held" within the meaning of
Section 856(h) of the Code, (iv) cause the Company to own, directly or
constructively, 10% or more of the ownership interests in a tenant of the
General Partner's, the Partnership's, or a Subsidiary Partnership's, real
property, within the meaning of Section 856(d)(2)(B) of the Code, or (v) cause
the acquisition of REIT Shares by such Partner to be "integrated" with any other
distribution of REIT Shares for purposes of complying with the registration
provisions of the Securities Act of 1933, as amended (the "Securities Act"). The
General Partner or the Company, in their sole discretion, may waive the
restriction on exchange set forth in this Section 8.05(c).
(d) Any Cash Amount to be paid to an Exchanging Partner pursuant to
this Section 8.05 shall be paid on the Specified Exchange Date; provided,
--------
however, that the Company or the General Partner may elect to cause the
- -------
Specified Exchange Date to be delayed for up to an additional 180 days to the
extent required for the Company to cause additional REIT Shares to be issued to
provide financing to be used to make such payment of the Cash Amount.
Notwithstanding the foregoing, the Company and the General Partner agree to use
their best efforts to cause the closing of the acquisition of exchanged
Partnership Units hereunder to occur as quickly as reasonably possible.
(e) Notwithstanding any other provision of this Agreement, the
General Partner shall place appropriate restrictions on the ability of the
Limited Partners to exercise their Exchange Rights as and if deemed necessary to
ensure that the Partnership does not constitute a
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"publicly traded partnership" under section 7704 of the Code. If and when the
General Partner determines that imposing such restrictions is necessary, the
General Partner shall give prompt written notice thereof (a "Restriction
Notice") to each of the Limited Partners, which notice shall be accompanied by a
copy of an opinion of counsel to the Partnership which states that, in the
opinion of such counsel, restrictions are necessary in order to avoid the
Partnership being treated as a "publicly traded partnership" under section 7704
of the Code.
8.06.00 REGISTRATION.
------------
(a) Shelf Registration of the Common Stock. Prior to or on the first
--------------------------------------
date upon which the Partnership Units owned by any Limited Partner may be
exchanged (or such other date as may be required under applicable provisions of
the Securities Act), the Company agrees to file with the Securities and Exchange
Commission (the "Commission"), a shelf registration statement on Form S-3 under
Rule 415 of the Securities Act (a "Registration Statement"), or any similar rule
that may be adopted by the Commission, with respect to all of the Reit Shares
that may be issued upon exchange of such Partnership Units pursuant to Section
8.05 hereof ("Exchange Shares"). The Company will use its best efforts to have
the Registration Statement declared effective under the Securities Act. The
Company need not file a separate Registration Statement, but may file one
Registration Statement covering Exchange Shares issuable to more than one
Limited Partner. The Company further agrees to supplement or make amendments to
each Registration Statement, if required by the rules, regulations or
instructions applicable to the registration form utilized by the Company or by
the Securities Act or rules and regulations thereunder for such Registration
Statement.
(b) If a Registration Statement under subsection (a) above is not
available under the securities laws or the rules of the Commission, or if
required to permit the resale of Exchange Shares by "Affiliates" (as defined in
the Securities Act), the Company agrees to file with the Commission a
Registration Statement covering the resale of Exchange Shares by Affiliates or
others whose Exchange Shares are not covered by a Registration Statement filed
pursuant to subsection (a) above, provided that the Company is furnished all
information with respect to holders of Exchange Shares required to complete such
Registration Statement and have it declared effective by the Commission. The
Company will use its best efforts to have the Registration Statement declared
effective under the Securities Act. The Company need not file a separate
Registration Statement, but may file one Registration Statement covering
Exchange Shares issuable to more than one Limited Partner. The Company further
agrees to supplement or make amendments to each Registration Statement, if
required by the rules, regulations or instructions applicable to the
registration form utilized by the Company or by the Securities Act or rules and
regulations thereunder for such Registration Statement.
(c) Listing on Securities Exchange. If the Company shall list or
------------------------------
maintain the listing of Reit Shares of on any securities exchange or national
market system, it will at its expense and as necessary to permit the
registration and sale of the Exchange Shares hereunder, list thereon, maintain
and, when necessary, increase such listing to include such Exchange Shares.
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ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP INTERESTS
------------------------------------------
9.01.00 PURCHASE FOR INVESTMENT.
-----------------------
(a) Each Limited Partner hereby represents and warrants to the
General Partner, to the Company and to the Partnership that the acquisition of
his Partnership Interests is made as a principal for his account for investment
purposes only and not with a view to the resale or distribution of such
Partnership Interest.
(b) Each Limited Partner agrees that he will not sell, assign or
otherwise transfer his Partnership Interest or any fraction thereof, whether
voluntarily or by operation of law or at judicial sale or otherwise, to any
Person who does not make the representations and warranties to the General
Partner set forth in Section 9.01(a) above and similarly agree not to sell,
assign or transfer such Partnership Interest or fraction thereof to any Person
who does not similarly represent, warrant and agree.
9.02.00 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS.
---------------------------------------------------------
(a) Subject to the provisions of this Article IX, no Limited Partner
may offer, sell, assign, hypothecate, pledge or otherwise transfer all or any
portion of his Limited Partnership Interest, or any of such Limited Partner's
economic rights as a Limited Partner, whether voluntarily or by operation of law
or at judicial sale or otherwise (collectively, a "Transfer") without the
consent of the General Partner, which consent may be granted or withheld in its
sole and absolute discretion. Any such purported transfer undertaken without
such consent shall be considered to be null and void ab initio and shall not be
given effect. Each Limited Partner acknowledges that the General Partner has
agreed not to grant any such consent prior to the Transfer Restriction Date. The
General Partner may require, as a condition of any Transfer to which it
consents, that the transferor assume all costs incurred by the Partnership in
connection therewith.
(b) No Limited Partner may withdraw from the Partnership other than
as a result of a permitted Transfer (i.e., a Transfer consented to as
contemplated by clause (a) above or clause (c) below or a Transfer pursuant to
9.05 below) of all of his Partnership Units pursuant to this Article IX or
pursuant to an exchange of all of his Partnership Units pursuant to 8.05. Upon
the permitted Transfer or redemption of all of a Limited Partner's Partnership
Units, such Limited Partner shall cease to be a Limited Partner.
(c) Subject to the provisions of this Article IX, a Limited Partner
may Transfer, with the consent of the General Partner, all or a portion of his
Partnership Units to (i) a parent or parent's spouse, natural or adopted
descendant or descendants, spouse of such descendant, or brother or sister, or a
trust created by such Limited Partner for the benefit of such Limited Partner
and/or any such person(s), of which trust such Limited Partner or any such
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person(s) is a trustee, (ii) a corporation controlled by a Person or Persons
named in (i) above, or (ii) if the Limited Partner is an entity, its beneficial
owners.
(d) No Limited Partner may effect a Transfer of its Limited
Partnership Interest, in whole or in part, if, in the opinion of legal counsel
for the Partnership, such proposed Transfer would require the registration of
the Limited Partnership Interest under the Securities Act, or would otherwise
violate any applicable federal or state securities or blue sky law (including
investment suitability standards).
(e) No Transfer by a Limited Partner of its Partnership Units, in
whole or in part, may be made to any Person if (i) in the opinion of legal
counsel for the Partnership, the transfer would result in the Partnership's
being treated as an association taxable as a corporation (other than a qualified
REIT subsidiary within the meaning of Section 856(i) of the Code), (ii) in the
opinion of legal counsel for the Partnership, it would adversely affect the
ability of the Company to continue to qualify as a REIT or subject the Company
to any additional taxes under Section 857 or Section 4981 of the Code, or (iii)
such transfer is effectuated through an "established securities market" or a
"secondary market (or the substantial equivalent thereof)" within the meaning of
Section 7704 of the Code.
(f) No transfer of any Partnership Units may be made to a lender to
the Partnership or any Person who is related (within the meaning of Regulations
Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes a
nonrecourse liability (within the meaning of Regulations Section 1.752-1(a)(2)),
without the consent of the General Partner, which may be withheld in its sole
and absolute discretion, provided that as a condition to such consent the lender
will be required to enter into an arrangement with the Partnership and the
General Partner to exchange or redeem for the Cash Amount any Partnership Units
in which a security interest is held simultaneously with the time at which such
lender would be deemed to be a partner in the Partnership for purposes of
allocating liabilities to such lender under Section 752 of the Code.
(g) Any Transfer in contravention of any of the provisions of this
Article IX shall be void and ineffectual and shall not be binding upon, or
recognized by, the Partnership.
(h) Prior to the consummation of any Transfer under this Article IX,
the transferor and/or the transferee shall deliver to the General Partner such
opinions, certificates and other documents as the General Partner shall request
in connection with such Transfer.
9.03.00 ADMISSION OF SUBSTITUTE LIMITED PARTNER.
---------------------------------------
(a) Subject to the other provisions of this Article IX, an assignee
of the Limited Partnership Interest of a Limited Partner (which shall be
understood to include any purchaser, transferee, donee, or other recipient of
any disposition of such Limited Partnership Interest) shall be deemed admitted
as a Limited Partner of the Partnership only with the consent of the General
Partner and upon the satisfactory completion of the following:
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(i) The assignee shall have accepted and agreed to be bound by
the terms and provisions of this Agreement by executing a counterpart
or an amendment thereof, including a revised Exhibit A, and such other
---------
documents or instruments as the General Partner may require in order
to effect the admission of such Person as a Limited Partner.
(ii) To the extent required, an amended Certificate evidencing
the admission of such Person as a Limited Partner shall have been
signed, acknowledged and filed for record in accordance with the Act.
(iii) The assignee shall have delivered a letter containing the
representation set forth in Section 9.01(a) hereof and the agreement
set forth in Section 9.01(b) hereof.
(iv) If the assignee is a corporation, partnership or trust,
the assignee shall have provided the General Partner with evidence
satisfactory to counsel for the Partnership of the assignee's
authority to become a Limited Partner under the terms and provisions
of this Agreement.
(v) The assignee shall have executed a power of attorney
containing the terms and provisions set forth in Section 8.02 hereof.
(vi) The assignee shall have paid all reasonable legal fees of
the Partnership and the General Partner and filing and publication
costs in connection with its substitution as a Limited Partner.
(vii) The assignee has obtained the prior written consent of the
General Partner to its admission as a Substitute Limited Partner,
which consent may be given or denied in the exercise of the General
Partner's sole and absolute discretion.
(b) For the purpose of allocating Profits and Losses and distributing
cash received by the Partnership, a Substitute Limited Partner shall be treated
as having become, and appearing in the records of the Partnership as, a Partner
upon the filing of the Certificate described in Section 9.03(a)(ii) hereof or,
if no such filing is required, the later of the date specified in the transfer
documents or the date on which the General Partner has received all necessary
instruments of transfer and substitution.
(c) The General Partner shall cooperate with the Person seeking to
become a Substitute Limited Partner by preparing the documentation required by
this Section and making all official filings and publications. The Partnership
shall take all such action as promptly as practicable after the satisfaction of
the conditions in this Article IX to the admission of such Person as a Limited
Partner of the Partnership.
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9.04.00 RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS.
--------------------------------------------
(a) Subject to the provisions of Sections 9.01 and 9.02 hereof,
except as required by operation of law, the Partnership shall not be obligated
for any purposes whatsoever to recognize the assignment by any Limited Partner
of its Partnership Interest until the Partnership has received notice thereof.
(b) Any Person who is the assignee of all or any portion of a Limited
Partner's Limited Partnership Interest, but does not become a Substitute Limited
Partner and desires to make a further assignment of such Limited Partnership
Interest, shall be subject to all the provisions of this Article IX to the same
extent and in the same manner as any Limited Partner desiring to make an
assignment of its Limited Partnership Interest.
9.05.00 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A
-------------------------------------------------------------
LIMITED PARTNER.
---------------
The occurrence of an Event of Bankruptcy as to a Limited Partner, the death
of a Limited Partner or a final adjudication that a Limited Partner is
incompetent (which term shall include, but not be limited to, insanity) shall
not cause the termination or dissolution of the Partnership, and the business of
the Partnership shall continue if an order for relief in a bankruptcy proceeding
is entered against a Limited Partner, the trustee or receiver of his estate or,
if he dies, his executor, administrator or trustee, or, if he is finally
adjudicated incompetent, his committee, guardian or conservator, shall have the
rights of such Limited Partner for the purpose of settling or managing his
estate property and such power as the bankrupt, deceased or incompetent Limited
Partner possessed to assign all or any part of his Partnership Interest and to
join with the assignee in satisfying conditions precedent to the admission of
the assignee as a Substitute Limited Partner.
9.06.00 JOINT OWNERSHIP OF INTERESTS.
----------------------------
A Partnership Interest may be acquired by two individuals as joint tenants
with right of survivorship, provided that such individuals either are married or
are related and share the same home as tenants in common. The written consent or
vote of both owners of any such jointly held Partnership Interest shall be
required to constitute the action of the owners of such Partnership Interest;
provided, however, that the written consent of only one joint owner will be
- -------- -------
required if the Partnership has been provided with evidence satisfactory to the
counsel for the Partnership that the actions of a single joint owner can bind
both owners under the applicable laws of the state of residence of such joint
owners. Upon the death of one owner of a Partnership Interest held in a joint
tenancy with a right of survivorship, the Partnership Interest shall become
owned solely by the survivor as a Limited Partner and not as an assignee. The
Partnership need not recognize the death of one of the owners of a jointly-held
Partnership Interest until it shall have received notice of such death. Upon
notice to the General Partner from either owner, the General Partner shall cause
the Partnership Interest to be divided into two equal Partnership Interests,
which shall thereafter be owned separately by each of the former owners.
-37-
<PAGE>
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
------------------------------------------
10.01.00 BOOKS AND RECORDS.
-----------------
At all times during the continuance of the Partnership, the Partners shall
keep or cause to be kept at the Partnership's specified office true and complete
books of account in accordance with generally accepted accounting principles,
including: (a) a current list of the full name and last known business address
of each Partner, (b) a copy of the Certificate of Limited Partnership and all
certificates of amendment thereto, (c) copies of the Partnership's federal,
state and local income tax returns and reports, (d) copies of the Agreement and
any financial statements of the Partnership for the three most recent years and
(e) all documents and information required under the Act. Any Partner or its
duly authorized representative, upon paying the costs of collection, duplication
and mailing, shall be entitled to inspect or copy such records during ordinary
business hours.
10.02.00 CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS.
-------------------------------------------
(a) All funds of the Partnership not otherwise invested shall be
deposited in one or more accounts maintained in such banking or brokerage
institutions as the General Partner shall determine, and withdrawals shall be
made only on such signature or signatures as the General Partner may, from time
to time, determine.
(b) All deposits and other funds not needed in the operation of the
business of the Partnership may be invested by the General Partner in investment
grade instruments (or investment companies whose portfolio consists primarily
thereof), government obligations, certificates of deposit, bankers' acceptances
and municipal notes and bonds. The funds of the Partnership shall not be
commingled with the funds of any other Person except for such commingling as may
necessarily result from an investment in those investment companies permitted by
this Section 10.02(b).
10.03.00 FISCAL AND TAXABLE YEAR.
-----------------------
The fiscal and taxable year of the Partnership shall be the calendar year.
10.04.00 ANNUAL TAX INFORMATION AND REPORT.
---------------------------------
Within 75 days after the end of each fiscal year of the Partnership, the
General Partner shall furnish to each person who was a Limited Partner at any
time during such year the tax information necessary to file such Limited
Partner's individual tax returns as shall be reasonably required by law.
-38-
<PAGE>
10.05.00 TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS.
-------------------------------------------------------------
(a) The General Partner shall be the Tax Matters Partner of the
Partnership within the meaning of Section 6231(a)(7) of the Code. As Tax Matters
Partner, the General Partner shall have the right and obligation to take all
actions authorized and required, respectively, by the Code for the Tax Matters
Partner. The General Partner shall have the right to retain professional
assistance in respect of any audit of the Partnership by the Service and all
out-of-pocket expenses and fees incurred by the General Partner on behalf of the
Partnership as Tax Matters Partner shall constitute Partnership expenses. In the
event the General Partner receives notice of a final Partnership adjustment
under Section 6223(a)(2) of the Code, the General Partner shall either (i) file
a court petition for judicial review of such final adjustment within the period
provided under Section 6226(a) of the Code, a copy of which petition shall be
mailed to all Limited Partners on the date such petition is filed, or (ii) mail
a written notice to all Limited Partners, within such period, that describes the
General Partner's reasons for determining not to file such a petition.
(b) All elections required or permitted to be made by the Partnership
under the Code or any applicable state or local tax law shall be made by the
General Partner in its sole discretion.
(c) In the event of a transfer of all or any part of the Partnership
Interest of any Partner, the Partnership, at the option of the General Partner,
may elect pursuant to Section 754 of the Code to adjust the basis of the
Properties. Notwithstanding anything contained in Article V of this Agreement,
any adjustments made pursuant to Section 754 shall affect only the successor in
interest to the transferring Partner and in no event shall be taken into account
in establishing, maintaining or computing Capital Accounts for the other
Partners for any purpose under this Agreement. Each Partner will furnish the
Partnership with all information necessary to give effect to such election.
10.06.00 REPORTS TO LIMITED PARTNERS.
---------------------------
(a) As soon as practicable after the close of each fiscal quarter
(other than the last quarter of the fiscal year), the General Partner shall
cause to be mailed to each Limited Partner a quarterly report containing
financial statements of the Partnership, or of the Company if such statements
are prepared solely on a consolidated basis with the Company, for such fiscal
quarter, presented in accordance with generally accepted accounting principles.
As soon as practicable after the close of each fiscal year, the General Partner
shall cause to be mailed to each Limited Partner an annual report containing
financial statements of the Partnership, or of the Company if such statements
are prepared solely on a consolidated basis with the Company, for such fiscal
year, presented in accordance with generally accepted accounting principles. The
annual financial statements shall be audited by accountants selected by the
General Partner.
(b) Any Partner shall further have the right to a private audit of
the books and records of the Partnership, provided such audit is made for
Partnership purposes, at the expense of the Partner desiring it and is made
during normal business hours.
-39-
<PAGE>
ARTICLE XI
AMENDMENT OF AGREEMENT
----------------------
The General Partner's consent shall be required for any amendment to this
Agreement. The General Partner, without the consent of the Limited Partners, may
amend this Agreement in any respect; provided, however, that the following
-------- -------
amendments shall require the consent of Limited Partners (other than the
Company) holding more than 50% of the Percentage Interests of the Limited
Partners (other than the Company):
(a) any amendment affecting the operation of the Conversion Factor or
the Exchange Right (except as provided in Section 8.05(d) or 7.01(c) or 7.01(d)
hereof) in a manner adverse to the Limited Partners;
(b) any amendment that would adversely affect the rights of the
Limited Partners to receive the distributions payable to them hereunder, other
than with respect to the issuance of additional Partnership Units pursuant to
Section 4.02 hereof;
(c) any amendment that would alter the Partnership's allocations of
Profit and Loss to the Limited Partners, other than with respect to the issuance
of additional Partnership Units pursuant to Section 4.02 hereof; or
(d) any amendment that would impose on the Limited Partners any
obligation to make additional Capital Contributions to the Partnership.
ARTICLE XII
GENERAL PROVISIONS
------------------
12.01.00 NOTICES.
-------
All communications required or permitted under this Agreement shall be in
writing and shall be deemed to have been given when delivered personally or upon
deposit in the United States mail, registered, postage prepaid return receipt
requested, to the Partners at the addresses set forth in Exhibit A attached
---------
hereto; provided, however, that any Partner may specify a different address by
-------- -------
notifying the General Partner in writing of such different address. Notices to
the Partnership shall be delivered at or mailed to its specified office.
12.02.00 SURVIVAL OF RIGHTS.
------------------
Subject to the provisions hereof limiting transfers, this Agreement shall
be binding upon and inure to the benefit of the Partners and the Partnership and
their respective legal representatives, successors, transferees and assigns.
-40-
<PAGE>
12.03.00 ADDITIONAL DOCUMENTS.
--------------------
Each Partner agrees to perform all further acts and execute, swear to,
acknowledge and deliver all further documents which may be reasonable,
necessary, appropriate or desirable to carry out the provisions of this
Agreement or the Act.
12.04.00 SEVERABILITY.
------------
If any provision of this Agreement shall be declared illegal, invalid, or
unenforceable in any jurisdiction, then such provision shall be deemed to be
severable from this Agreement (to the extent permitted by law) and in any event
such illegality, invalidity or unenforceability shall not affect the remainder
hereof.
12.05.00 ENTIRE AGREEMENT.
----------------
This Agreement and exhibits attached hereto constitute the entire Agreement
of the Partners and supersede all prior written agreements and prior and
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
12.06.00 PRONOUNS AND PLURALS.
--------------------
When the context in which words are used in the Agreement indicates that
such is the intent, words in the singular number shall include the plural and
the masculine gender shall include the neuter or female gender as the context
may require.
12.07.00 HEADINGS.
--------
The Article headings or sections in this Agreement are for convenience only
and shall not be used in construing the scope of this Agreement or any
particular Article.
12.08.00 COUNTERPARTS.
------------
This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original copy and all of which together shall constitute one
and the same instrument binding on all parties hereto, notwithstanding that all
parties shall not have signed the same counterpart.
12.09.00 GOVERNING LAW.
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Virginia.
-41-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Amended and Restated Agreement of Limited Partnership, all as
of the ____ day of July, 1998.
GENERAL PARTNER:
HUDSON HOTELS TRUST, a Maryland real estate
investment trust
By: ___________________________________________
Name:
Title:
LIMITED PARTNERS:
HHT, LTD. INC., a Virginia corporation
By: ___________________________________________
Name:
Title:
HUDSON HOTELS CORPORATION, a New York corporation
By: ___________________________________________
Name:
Title:
-42-
<PAGE>
EXHIBIT A
---------
AS OF JULY __, 1998
<TABLE>
<CAPTION>
Agreed Value of
Cash Capital Partnership Percentage
Partner Contribution Contribution Units Interest
------------ ------------ ----------- --------
<S> <C> <C> <C> <C>
GENERAL PARTNER:
HUDSON HOTELS TRUST $
One Airport Way, Suite 200
Rochester International Airport
Rochester, New York 14624
LIMITED PARTNERS:
HHT, LTD. INC. $
One Airport Way, Suite 200
Rochester International Airport
Rochester, New York 14624
HUDSON HOTELS CORPORATION
One Airport Way, Suite 200
Rochester International Airport
Rochester, New York 14624
</TABLE>
-43-
<PAGE>
EXHIBIT B
---------
LIST OF INITIAL PROPERTIES
NAME ADDRESS
- ---- -------
FAIRFIELD INNS:
Hartford, CT
Wilmington, DE
Portland, ME
Buffalo, NY
Syracuse, NY
Harrisburg, PA
Warrendale (Metropolitan Pittsburgh), PA
Winter Park (Orlando), FL
Rocky Mount, NC
Chattanooga, TN
Glenview (Metropolitan Chicago), IL
Willowbrook (Metropolitan Chicago), IL
Fort Wayne, IN
Cedar Rapids, IA
Florence (Metropolitan Cincinnati), KY
Louisville, KY
Akron, OH
Sharonville (Metropolitan Cincinnati), OH
Columbus, OH
Willoughby (Metropolitan Cleveland), OH
Flagstaff, AZ
Phoenix West, AZ (5)
Scottsdale, AZ
Ontario, CA
Rancho Cordova, CA
Las Vegas, NV (6)
COMFORT SUITES:
Metropolitan Buffalo, NY
HAMPTON INN:
Metropolitan Buffalo, NY
HOLIDAY INN:
Cleveland, OH
-44-
<PAGE>
EXHIBIT C
---------
NOTICE OF EXERCISE OF EXCHANGE RIGHT
In accordance with Section 8.05 of the First Amended and Restated Agreement
of Limited Partnership (the "Agreement") of Hudson Hotels Limited Partnership,
L.P., the undersigned hereby irrevocably (i) presents for exchange ________
Partnership Units in Hudson Hotels Limited Partnership, L.P. in accordance with
the terms of the Agreement and the Exchange Right referred to in Section 8.05
thereof, (ii) surrenders such Partnership Units and all right, title and
interest therein, and (iii) directs that the Cash Amount or REIT Shares Amount
(as defined in the Agreement) as determined by the General Partner deliverable
upon exercise of the Exchange Right be delivered to the address specified below,
and if REIT Shares (as defined in the Agreement) are to be delivered, such REIT
Shares be registered or placed in the name(s) and at the address(es) specified
below.
Dated:________ __, _____
Name of Limited Partner:
______________________________________
(Signature of Limited Partner)
______________________________________
(Mailing Address)
______________________________________
(City) (State) (Zip Code)
Signature Guaranteed by:
______________________________________
If REIT Shares are to be issued, issue to:
Please insert social security or identifying number:
Name:
-45-
<PAGE>
Exhibit 10.2
------------
AGREEMENT OF PURCHASE AND SALE
------------------------------
THIS AGREEMENT OF PURCHASE AND SALE (this "Agreement"), dated as of May 19,
1998 (the "Agreement Date") between MFI PARTNERS, L.P, a Delaware limited
partnership ("Seller"), and HUDSON HOTELS LIMITED PARTNERSHIP, L.P., a Virginia
limited partnership ("Purchaser"), provides:
1. DEFINITIONS: RULES OF CONSTRUCTION
---------------------------------------
1.1. DEFINITIONS.
-----------
The following terms shall have the indicated meanings:
"Accounts Payable" means, to the extent related to the period prior to the
----------------
Closing, amounts payable by Seller (or by the Existing Manager, as manager on
behalf of Seller), to trade creditors and the like for goods, materials or
services provided at or to any of the Inns, including any prepayment of same for
goods, materials or services not yet received.
"Accounts Receivable" means, to the extent related to the period prior to
-------------------
the Closing, any and all rents, deposits, guest room and other charges, and
other sums owing to Seller that are in any way attributable to any of the Inns,
including, without limitation, (a) amounts receivable in connection with the
letting of rooms or the provision of services by Seller (or by the Existing
Manager, as manager on behalf of Seller) at any of the Inns and (b) credit card
charges to the extent they have not been submitted to the applicable credit card
company.
"Act of Bankruptcy" shall mean if a party hereto or any general partner
-----------------
thereof shall (a) apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of all
or a substantial part of its Properties, (b) admit in writing its inability to
pay its debts as they become due, (c) make a general assignment for the benefit
of its creditors, (d) file a voluntary petition or commence a voluntary case or
proceeding under the Federal Bankruptcy Code (as now or hereafter in effect),
(e) be adjudicated a bankrupt or insolvent, (f) file a petition seeking to take
advantage of any other law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts, (g) fail to controvert in a
timely and appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case or proceeding under the Federal Bankruptcy
Code (as now or hereafter in effect), or (h) take any corporate or partnership
action for the purpose of effecting any of the foregoing; or if a proceeding or
case shall be commenced, without the application or consent of a party hereto or
any general partner thereof, in any court of competent jurisdiction seeking (1)
the liquidation, reorganization, dissolution or winding-up, or the composition
or readjustment of debts, of such party or general partner, (2) the appointment
of a receiver, custodian, trustee or liquidator of such party or general partner
or all or any substantial part of its
<PAGE>
assets, or (3) other similar relief under any law relating to bankruptcy,
insolvency, reorganization, winding-up or composition or adjustment of debts,
and such proceeding or case shall continue undismissed; or an order (including
an order for relief entered in an involuntary case under the Federal Bankruptcy
Code, as now or hereafter in effect) judgment or decree approving or ordering
any of the foregoing shall be entered and continue unstayed and in effect, for a
period of 60 consecutive days.
"Assignment and Assumption Agreements" shall mean collectively, those
------------------------------------
certain assignment and assumption agreements whereby Seller (a) assigns and
Purchaser assumes the Operating Agreements that have not been canceled at
Purchaser's request and (b) assigns all of Seller's right, title and interest in
and to the Intangible Personal Property (other than any Excluded Items) for each
of the Properties, subject to the terms and conditions set forth hereinafter,
which shall be without representation or warranty by Seller, except as provided
in this Agreement.
"Authorizations" shall mean, to the extent transferable by Seller, all
--------------
licenses, franchises, certificates of occupancy, and other permits and approvals
issued by any Governmental Body or third party and required for the ownership,
operation and use of the Properties.
"Bills of Sale" shall mean, collectively, those certain bills of sale
-------------
conveying title to the Inventory, Tangible Personal Property, Intangible
Personal Property and the Reservation System (other than any Excluded Items) to
Purchaser or its designee for each of the Inns, which shall be without
representation or warranty by Seller, except as provided in this Agreement.
"Broker" shall mean The Plasencia Group.
------
"Business Day" means any day other than a Saturday, Sunday or United States
------------
federal holiday.
"Closing" shall mean the Closing of the purchase and sale of the Properties
-------
pursuant to this Agreement.
"Closing Date" shall mean the date on which the Closing occurs as set forth
------------
in Section 6.1 of this Agreement.
-----------
"Deed" shall mean, collectively, those certain special or limited warranty
----
deeds conveying good, marketable and insurable title to the Real Properties from
Seller to Purchaser, subject only to Permitted Title Exceptions for each of the
Properties.
"Deposit" shall mean each and all of the following which will be held by
-------
the Escrow Agent and distributed in accordance with this Agreement: (i) One
Million Two Hundred Thousand Dollars ($1,200,000) in cash which shall be
deposited with the Escrow Agent upon the full execution hereof in accordance
with Section 2.3 hereof (the "Initial Deposit") and (ii) Three Hundred Thousand
-----------
($300,000) which will be deposited with Escrow Agent on or before the end
<PAGE>
of the Study Period in accordance with Section 2.3 hereof if this Agreement is
-----------
not earlier terminated (the "Second Deposit").
"Equipment Leases" means the leases of equipment and other personal
----------------
Properties located at, or used in the operation of, one or more of the Inns.
"Escrow Agent" shall mean the Title Company.
------------
"Excluded Items" shall have the meaning set forth in Section 2.2.
-------------- -----------
"Existing Franchise Agreements" means each of the franchise agreements
-----------------------------
between any Seller and Marriott International relating to the operation of the
Inns (or any of them) as a Fairfield Inn by Marriott hotel, together with any
and all amendments thereto.
"Existing Management Agreement" means each of the management agreements
-----------------------------
between Seller and the Existing Manager related to the management of the Inns
(or any of them), together with any and all amendments thereto.
"Existing Manager" means Sage Hospitality Resources, L.L.C., a Delaware
----------------
limited partnership.
"FIRPTA Certificate" shall mean the affidavit of Seller under Section 1445
------------------
of the Internal Revenue Code certifying that Seller is not a foreign
corporation, foreign partnership, foreign trust, foreign estate or foreign
person (as those terms are defined in the Internal Revenue Code and the Income
Tax Regulations), in form and substance satisfactory to Purchaser and Title
Company.
"Governmental Body" means any federal, state, municipal or other
-----------------
governmental department, commission, board, bureau, agency or instrumentality.
"Ground Leases" means all those certain ground leases listed on the
-------------
attached and incorporated Exhibit A.
---------
"Improvements" shall mean all buildings, improvements, fixtures and real
------------
estate on the Sites, as to each of the Inns.
"Inn" or "Inns" means, individually or collectively, as the context may
--- ----
require, the twenty six (26) Fairfield Inn by Marriott hotels listed on Exhibit
-------
B.
- -
"Intangible Personal Property" shall mean, to the extent transferrable by
----------------------------
Seller, all intangible personal property owned by Seller and used in connection
with the ownership, operation or maintenance of the Properties including books
and records, the Authorizations, any unpaid award for taking by condemnation and
the share of the Room Ledger for the Inns determined under Section 6.6, but
-----------
excluding: (a) any of the aforesaid rights Purchaser elects not to acquire or
(b) the Excluded Items.
<PAGE>
"Inventory" shall mean all "inventories of merchandise" and "inventories of
---------
supplies" (as defined in the Uniform System of Accounts, 8th Revised Edition,
1986) and similar consumable supplies for the Properties, which are owned by
Seller and which shall be conveyed to Purchaser's designee, subject to the terms
and conditions of this Agreement.
"License" shall mean the Existing Franchise Agreements.
-------
"Marriott International" means Marriott International, Inc., a Delaware
----------------------
corporation, or Fairfield FMC Corporation, a Delaware corporation which is an
affiliate or predecessor, as applicable, of Marriott International, Inc.
"Marriott Consents" has the meaning set forth in Section 2.5(a).
----------------- --------------
"Operating Agreements" shall mean the management agreements, service
--------------------
contracts, supply contracts, leases (including Equipment Leases) and other
agreements with respect to the ownership, operation or maintenance of the
Properties.
"Owner's Title Policies" shall mean extended coverage owner's policies of
----------------------
title insurance issued to Purchaser by the Title Company in accordance with the
Title Commitments; and when used in the singular, any of the Owner's Title
Policies, as permitted or required by the context.
"Permitted Title Exceptions" shall have the meaning set forth in Section
-------------------------- -------
2.4(d).
- ------
"Properties" shall mean collectively, the Inns, together with the Real
----------
Properties, the Inventory, the Tangible Personal Property, and the Intangible
Personal Property.
"Purchase Price" shall mean One Hundred Twenty Seven Million Five Hundred
--------------
Thousand Dollars ($127,500,000), payable in the manner described in Section 6.3.
-----------
"Real Property" shall mean, collectively, all of the Sites and all of the
-------------
Improvements.
"REIT" shall mean Hudson Hotels Trust, a Maryland real estate investment
----
trust.
"Reservation System" shall mean Seller's reservation terminal and
------------------
reservation system equipment and software located at each of the Properties.
"Room Ledger" shall mean the final night's room revenue (revenue from rooms
-----------
occupied as of 12:01 a.m. on the Closing Date), including any sales taxes, room
taxes or other taxes thereon for each of the Properties.
"Seller's Security Documents" means all mortgages, deeds of trust, deeds to
---------------------------
secure debt, assignments, security agreements, financing statements and other
documents securing any purchase money indebtedness of any Seller used to acquire
one or more of the Inns or securing any other debt financing of any Seller.
<PAGE>
"Site" or "Sites" means, individually or collectively, as the context may
---- -----
require, the parcels of land on which the Inns are located identified on the
attached and incorporated Exhibit C, including all right, title and interest of
---------
Seller, if any, in and to all easements, rights and other interests appurtenant
thereto. "Sites" do not include any of the Improvements.
-----
"Study Period" shall mean the period commencing at 9:00 a.m. on April 21,
------------
1998 and terminating at 5:00 p.m. on May 26, 1998.
"Tangible Personal Property" shall mean all appliances, machinery, devices,
--------------------------
fixtures, appurtenances, equipment, furniture, furnishings and articles of
tangible personal property of every kind and nature whatsoever owned by Seller
and located in or at, or used in connection with the ownership, operation or
maintenance of, all or any of the Inns, except Excluded Items.
"Title Company" shall mean Chicago Title Insurance Company c/o Mr.
-------------
Christopher Clark.
"Utilities" shall mean public sanitary and storm sewers, natural gas, cable
---------
television, telephone, public water facilities and electrical facilities
necessary for the operation and occupancy of each of the Properties as Inns.
1.2. RULES OF CONSTRUCTION.
---------------------
The following rules shall apply to the construction and interpretation of
this Agreement:
(a) Singular words shall connote the plural number as well as the singular
and vice versa, and the masculine shall include the feminine and the neuter.
(b) All references herein to particular articles, sections, subsections,
clauses or exhibits are references to articles, sections, subsections, clauses
or exhibits of this Agreement.
(c) The table of contents and headings contained herein are solely for
convenience of reference and shall not constitute a part of this Agreement nor
shall they affect its meaning, construction or effect.
(d) Each party hereto and its counsel have reviewed and revised (or
requested revisions of) this Agreement, and therefore any usual rules of
construction requiring that ambiguities are to be resolved against a particular
party shall not be applicable in the construction and interpretation of this
Agreement or any exhibits hereto.
<PAGE>
2. PURCHASE AND SALE
----------------------
2.1. PURCHASE AND SALE.
-----------------
Seller agrees to sell and Purchaser agrees to purchase the Properties for
the Purchase Price in accordance with the other terms and conditions set forth
herein.
2.2. EXCLUDED ITEMS.
--------------
Seller shall not be obligated to sell to Purchaser, and Purchaser shall not
be entitled or obligated to purchase, any of the following, all of which shall
remain the sole and exclusive property of Seller, or the Existing Manager, as
the case may be (collectively, the "Excluded Items"):
--------------
(a) Any right, title or interest in the name or signage containing
the name "Marriott," "Fairfield Inn," "Fairfield Inn by Marriott," or "Marriott
Fairfield Inns" and/or other marks used by Marriott International or their
affiliates in their marketing, operations and systems programs in connection
with the Marriott Fairfield Inns or other Marriott hotel systems and any and all
goodwill related specifically thereto; provided, however, that nothing contained
-------- -------
herein shall limit the right of Hudson Hotels Corporation or Purchaser to use
such name, signage or marks to the extent permitted under any of the Existing
Franchise Agreements from and after the date that Hudson Hotels Corporation or
its subsidiary has become a permitted successor or assignee of Seller's rights
thereunder and, in such case, Seller will convey such signage and other
materials containing such marks to Hudson Hotels Corporation or its subsidiary.
(b) Subject to Section 6.6 hereof, Accounts Payable or Accounts
Receivable.
(c) Cash, and all balances on deposit in the name of or to the
credit of Seller (or Existing Manager for the benefit of Seller), and all cash
equivalent investments; provided, however, that the foregoing shall not include
-------- -------
any cash held at any of the Inns in so-called "house banks" and\or as petty cash
and\or any vending machine receipts relating to any of the Inns (together and
singly House Banks"); and provided, further, that, in addition to the Purchase
----- ----- -------- -------
Price, Purchaser shall pay Seller in cash, at the Closing, an amount equal to
all sums held in such House Banks and all vending machine receipts as of the
Closing Date.
(d) All deposits including without limitation, utility deposits.
(e) All property owned by Seller, that is not normally located at
the Inns and is used, but not used exclusively, in connection with the Inns, as
set forth on Exhibit D.
---------
(f) Insurance policies covering any of the Inns.
<PAGE>
(g) Existing Franchise Agreements together with any marketing material
or other property containing the name "Marriott", "Fairfield Inn" or any
combination thereof, or specifically licensed to Seller as a Fairfield Inn
licensee of Licensor, unless Hudson Hotels Corporation or its subsidiary becomes
a licensee of Licensor pursuant to the License or a new license for a Fairfield
Inn issued by Licensor in which case Seller will assign the Existing Franchise
Agreement to Hudson Hotels Corporation or its subsidiary and will convey such
marketing material and other property containing such marks to Hudson Hotels
Corporation or its subsidiary.
(h) The Existing Management Agreement which Seller shall terminate at
or prior to Closing, and all property of the Existing Manager dedicated to the
Inns used at the Properties as set forth in Exhibit G attached hereto and made a
---------
part hereof.
(i) Any confidential information of Seller or the Existing Manager, as
identified by Seller and agreed to in writing by the parties to this Agreement
prior to two (2) days after the expiration of the Review Period, but excepting
any confidential information related to or reasonably necessary for Purchaser's
ownership, operation or maintenance of the Properties or the business conducted
on the Properties.
(j) Books and records of Seller or the Existing Manager that do not
pertain solely to the operation and management of one or more of the Inns.
(k) Refunds, rebates or other claims, or any interest thereon, for
periods or events occurring prior to the Closing Date.
(l) prepaid insurance or other prepaid items including prepaid license
and permit fees unless paid for by Purchaser.
(m) any employee or personnel records maintained by the Existing
Manager.
(n) Any other information or materials that are reasonably considered
by Seller, the Existing Manager, Marriott International or any of their
affiliates to be proprietary (including, without limitation, business plans and
reports, training manuals, legal manuals, security and loss prevention
materials, and the like).
2.3. DEPOSIT.
-------
Purchaser shall deliver the Initial Deposit to the Escrow Agent upon the
full execution of this Agreement. Purchaser will deliver the Second Deposit to
the Escrow Agent on or before the expiration of the Study Period, unless this
Agreement is sooner terminated. The Deposit shall be placed into an interest
bearing account and will be returned by the Escrow Agent to Purchaser (i) upon
expiration of the Study Period, if Purchaser fails to notify Seller in writing
pursuant to Section 2.4, that Purchaser elects to proceed to Closing, or (ii) in
-----------
the event of a default by Seller
<PAGE>
in accordance with Section 8.3. In the event of a default by Purchaser, the
-----------
Deposit shall, in accordance with Section 8.4 hereof, be delivered to Seller. At
-----------
Closing the cash portion of the Deposit and any interest earned thereon will be
paid to Seller and credited toward the Purchase Price.
2.4. STUDY PERIOD.
------------
(a) Documents to be Delivered by Seller. Seller has previously
-----------------------------------
delivered to Purchaser true and complete copies of the documents listed on the
attached and incorporated Exhibit E.
(b) Purchaser shall have the right, until the expiration of the Study
Period, and thereafter if Purchaser notifies Seller that Purchaser has elected
to proceed to Closing in the manner described below, to enter upon the Real
Properties and to perform, at Purchaser's expense, such economic, surveying,
engineering, environmental, topographic and marketing tests, studies and
investigations as Purchaser may deem appropriate. If such tests, studies and
investigations warrant, in Purchaser's sole, absolute and unreviewable
discretion, the purchase of the Properties for the purposes contemplated by
Purchaser, then Purchaser may elect to proceed to Closing and shall so notify
Seller before the expiration of the Study Period. If for any reason Purchaser
does not so notify Seller of its determination to proceed to Closing before the
expiration of the Study Period, or if Purchaser notifies Seller, in writing,
before the expiration of the Study Period that it has determined not to proceed
to Closing, this Agreement automatically shall terminate, the Deposit shall be
returned to Purchaser and upon return of the Deposit, Purchaser shall be
released from any further liability or obligation under this Agreement.
(c) Purchaser shall indemnify and defend Seller against any loss,
damage or claim arising from entry upon the Real Properties by Purchaser or any
agents, contractors or employees of Purchaser. Purchaser, at its own expense,
shall restore any damage to the Real Properties caused by any of the tests or
studies made by Purchaser. Purchaser has furnished Seller a certificate of
general liability and property damage insurance maintained by Purchaser, and
acceptable to Seller. In conducting any interview, inspection, Survey or Study,
Purchaser and its agents agree to cooperate with the Existing Manager in all
reasonable respects to eliminate any avoidable interference with guests or
duties of employees at the Inns. Purchaser's obligations under this Section
2.2(c) will survive the termination or earlier expiration of this Agreement
and/or settlement hereunder and will not be merged into the Deed.
(d) During the Study Period, Purchaser shall cause an examination of
title to the Properties to be made, and, before the expiration of the Study
Period, shall notify Seller of any defects in title shown by such examination
that Purchaser is unwilling to accept. Within ten days after such notification,
Seller shall notify Purchaser whether Seller is willing to cure such defects. If
Seller is willing to cure such defects, Seller shall so notify Purchaser in
writing specifying with particularity which defects Seller will cure and
thereafter Seller shall act
<PAGE>
promptly and diligently to cure at its expense the defects Seller agrees to cure
in such notice. If such defects consist of Seller's Security Documents,
mechanics' liens, tax liens or other liens or charges for work, materials or
obligations incurred by Seller in a fixed sum or capable of computation as a
fixed sum, Seller shall pay and discharge (and the Title Company is authorized
to pay and discharge at Closing) such defects at Closing. Except as provided in
the immediately preceding sentence, if Seller is unwilling or unable to cure any
such defects by Closing as disclosed to Purchaser in Seller's notice aforesaid,
Purchaser shall within five (5) days after receipt of Seller's notice elect in
writing to Seller to (1) to waive such defects and proceed to Closing without
any abatement in the Purchase Price or (2) to terminate this Agreement and
receive a full refund of the Deposit. Purchaser's failure to notify Seller of
its election of (1) or (2) above shall be deemed to be Purchaser's election of
(1). Seller shall not, after the date of this Agreement, subject the Properties
to any liens, encumbrances, covenants, conditions, restrictions, easements or
other title matters which can not be removed prior to Closing or seek any zoning
changes or take any other action which may affect or modify the status of title
without Purchaser's prior written consent. All title matters revealed by
Purchaser's title examination and not objected to or waived by Purchaser as
provided above shall be deemed "Permitted Title Exceptions". If Purchaser shall
fail to examine title and notify Seller of any such title objections by the end
of the Study Period, all such title exceptions (other than those rendering title
unmarketable and those that are to be paid at Closing as provided above) shall
be deemed Permitted Title Exceptions.
(e) Except for the representations and warranties specifically set
forth in Article 3 hereof, Purchaser is relying solely upon Purchaser's own
inspection, investigation, and analysis in purchasing the Properties and, except
as otherwise specifically set forth in Article 3 hereof, Purchaser is not
relying in any way upon any representation, statements, agreements, studies,
plans, reports, descriptions, guidelines or other information or material
furnished by Seller or its representatives whether oral or written, express or
implied, of any nature whatsoever.
2.5. CONSENTS.
--------
(a) Marriott International Consents. During the Study Period,
Purchaser and Seller shall negotiate with Marriott International to obtain the
consent of Marriott International to (i) the transfer of the Inns to the
Purchaser, (ii) the leasing of the Inns by Purchaser to Hudson Hotels
Corporation or its wholly owned subsidiary and (iii) the assignment of the
Existing Franchise Agreements from the respective Seller to Purchaser on the
Closing Date (or to entering into new franchise agreements with Purchaser on
terms substantially similar to the Existing Franchise Agreements) and to the
release of such Seller from any further liability under the applicable Existing
Franchise Agreement and to the management of the Properties by Hudson Hotels
Corporation or its wholly owned subsidiary (all the foregoing being referred to
as the "Marriott Consents"). Purchaser and Seller agree to use commercially
-----------------
reasonable efforts to obtain the Marriott Consents prior to the end of the Study
Period, and if not so obtained, by Closing. Purchaser shall pay, on or before
Closing, any fees payable to Marriott International in connection with the
transfer of the Properties to Purchaser.
<PAGE>
(b) Ground Lessors. During the Study Period, Seller shall commence to
--------------
obtain, at its sole expense, the consent of the lessors under the Ground Leases
to (i) the assignment of the Seller's interest under the Ground Leases to
Purchaser (ii) to the leasing of the Inns to Hudson Hotels Corporation, subject
to the Ground Leases and, (iii) to the release of the Seller from any liability
under the Ground Leases (together the "Ground Lessor Consents and Releases").
Seller shall notify Purchaser in writing when and if such consent is obtained.
Purchaser will cooperate with Seller in obtaining such consents and releases by
delivering to such ground lessors such information as may be reasonably
requested by the ground lessors, including without limitation, current financial
information, and cooperate by executing and delivering such assignment and
assumption agreements as may be deemed reasonably required by such ground
lessors as a condition of granting such consent and release, but will have no
obligation to expend any funds in order to obtain any such consents without
agreement by the Seller to reimburse Purchaser for such expenditures.
2.6. PAYMENT OF PURCHASE PRICE.
-------------------------
Purchaser shall pay the Purchase Price, as adjusted pursuant to the terms
of this Agreement, to Seller at Closing as provided in Section 6.3 hereof.
-----------
2.7. ALLOCATION OF PURCHASE PRICE.
----------------------------
The Purchase Price shall be allocated to each (i) Site, (ii) Improvements
and (iii) Tangible Personal Property for each Inn in accordance with the
proportions set forth on Exhibit F attached hereto. Seller and Purchaser agree
---------
to file all federal income tax returns and reports necessary in connection with
the Closing, including, without limitation, any filings contemplated by Section
1060 of the Internal Revenue Code of 1986, as amended, and the regulations
issued thereunder (the "Code"), consistent with the allocations reflected on
Exhibit F.
- ---------
3. SELLER'S REPRESENTATIONS, WARRANTIES AND COVENANTS
-------------------------------------------------------
A. To induce Purchaser to enter into this Agreement and to purchase the
Properties, Seller hereby makes the representations set forth below upon each of
which Seller acknowledges and agrees that Purchaser is entitled to rely and has
relied. Notwithstanding the foregoing the warranties and representations set
forth below are expressly conditioned by the matters and issues disclosed by
Seller on the schedule attached and incorporated as Exhibit G, and with respect
---------
to warranties and representations with regard to the Existing Manager, are based
upon the certificate of the Existing Manager to Seller dated _____________ a
copy of which is attached here to as Exhibit H.
---------
<PAGE>
3.1. ORGANIZATION AND POWER.
----------------------
Seller is a limited partnership duly formed, validly existing and in good
standing under the laws of the State of Delaware and has all requisite powers
and authority to carry on its business as now conducted and to enter into and
perform its obligations hereunder and under any document or instrument required
to be executed and delivered on behalf of Seller hereunder.
3.2. AUTHORIZATION AND EXECUTION.
---------------------------
This Agreement has been duly authorized by all necessary action on the part
of Seller, has been duly executed and delivered by Seller, constitutes the valid
and binding agreement of Seller and is enforceable in accordance with its terms.
There is no other person or entity who has an ownership interest in the
Properties or whose consent is required in connection with Seller's performance
of its obligations hereunder, other than the lessors under the Ground Leases as
specified in Section 2.5(b) hereof.
3.3. NONCONTRAVENTION.
----------------
The execution and delivery of, and the performance by Seller of its
obligations under, this Agreement do not and will not contravene, or constitute
a default under, any provision of applicable law or regulation, Seller's
organizational documents or any agreement, judgment, injunction, order, decree
or other instrument binding upon Seller. There are no outstanding agreements
(written or oral) pursuant to which Seller (or any predecessor to or
representative of Seller) has agreed to sell or has granted an option or right
of first refusal to purchase the Properties or any part thereof.
3.4. NO SPECIAL TAXES.
----------------
Neither Seller nor the Existing Manager have received any written notice of
any special taxes or assessments relating to the Properties nor of any part
thereof nor of any planned public improvements that may result in a special tax
or assessment against the Properties.
3.5. COMPLIANCE WITH EXISTING LAWS.
-----------------------------
Seller has not received any written notice that any of the Authorizations
have been breached or violated. Seller has not received notice in writing from
applicable governmental authorities within the past three years, of any existing
or threatened violation of any provision of any applicable building, zoning,
subdivision, environmental or other governmental ordinance,
<PAGE>
resolution, statute, rule, order or regulation with respect to the ownership,
operation, use, maintenance or condition of the Properties or any part thereof,
or requiring any repairs or alterations other than those that have been made
prior to the date hereof.
3.6. OPERATING AGREEMENTS.
--------------------
Seller has performed all of its obligations under each of the Operating
Agreements and no fact or circumstance has occurred which, by itself or with the
passage of time or the giving of notice or both, would constitute a default by
Seller under any of the Operating Agreements. To the best of Seller's
knowledge, all Operating Agreements in effect on the date hereof are listed in
Exhibit I attached hereto. If, notwithstanding the foregoing, an Operating
- ---------
Agreement other than as disclosed on Exhibit I is determined to exist, Seller
---------
will, if so requested by Purchaser, terminate such an Operating Agreement on or
before the Closing Date.
3.7. CONDEMNATION PROCEEDINGS; ROADWAYS.
----------------------------------
Neither Seller nor the Existing Manager have has received notice in writing
from applicable governmental authorities of any condemnation or eminent domain
proceeding pending or threatened against the Properties or any part thereof.
Neither Seller nor the Existing Manager have received notice in writing from
applicable governmental authorities of any change or proposed change in the
route, grade or width of, or otherwise affecting, any street or road adjacent to
or serving the Real Properties.
3.8. LITIGATION.
----------
There is no action, suit or proceeding pending against Seller or to the
best of Seller's knowledge, known to be threatened against Seller in any court,
before any arbitrator or before or by any Governmental Body which (a) in any
manner raises any question affecting the validity or enforceability of this
Agreement, (b) could materially and adversely affect the business, financial
position or results of operations of Seller, (c) could materially and adversely
affect the ability of Seller to perform its obligations hereunder, or under any
document to be delivered pursuant hereto, (d) could create a lien on any of the
Properties, any part thereof or any interest therein, which lien will not be
released prior to closing hereunder (e) the subject matter of which concerns any
past or present employee of Seller or its managing agent or (f) could otherwise
adversely affect any of the Properties, any part thereof or any interest therein
or the use, operation, condition or occupancy thereof.
3.9. LABOR MATTERS.
-------------
<PAGE>
(a) Seller has no employees and the Existing Manager operates the Inns
under a Management Agreement dated August 3, 1994.
(b) To the best of Seller's knowledge, based upon Exhibit H hereto: (i)
---------
all of the employment contracts with the Existing Manager for Existing Manager's
general managers and employees engaged in the operation of the Inns are oral, at
will employment contracts; (ii) there are no collective bargaining agreements
with respect to such employees and\or general managers and (iii) there exists
with respect to such employees and general managers, no contractual plan or
agreement which binds or purports to bind a successor employer.
3.10. FINANCIAL INFORMATION AND STUDY PERIOD DOCUMENTS.
------------------------------------------------
(a) To Seller's knowledge, based upon financial information provided to
it by its Existing Manager, Sage Hospitality Resources, L.P., and by its CPA,
Arthur Andersen, L.L.P., all of Seller's financial information relating to the
Properties, that is identified on Exhibit J ("Financial Information") is correct
---------
and complete in all material respects and presents accurately the results of the
operations of the Properties for the periods indicated. Since the date of the
last financial statement included in Seller's Financial Information, in the
reasonable opinion of Seller there has been no material adverse change in the
financial condition or in the operations of the Properties. Except as
specifically provided in this Section 3.10, all financial information disclosed
------------
by Seller or its agents to Purchaser or its agents under any provision in this
Agreement is provided without warranty or representation, express or implied of
any kind whatsoever.
(b) To the best of Seller's knowledge, Seller delivered to Purchaser true
and complete copies of the documents listed on the attached and incorporated
Exhibit E.
- ---------
3.11. PERSONAL PROPERTIES.
-------------------
All of the Tangible Personal Property, Intangible Personal Property and
Inventory being conveyed by Seller to Purchaser or to Purchaser's managing
agent, lessee or designee, are free and clear of all liens, leases and other
encumbrances or will be so on the date of Closing and Seller has good,
merchantable title thereto and the right to convey same in accordance with the
terms of this Agreement.
3.12. BANKRUPTCY.
----------
No Act of Bankruptcy has occurred with respect to Seller or any general
partner of Seller.
3.13. BROKERS.
-------
<PAGE>
Seller has not engaged the services of, nor is it or will it become liable
to, any real estate agent, broker, finder or any other person or entity for any
brokerage or finder's fee, commission or other amount with respect to the
transactions described herein other than Broker.
3.14. HAZARDOUS SUBSTANCES.
--------------------
Neither Seller nor the Existing Manager have received notice in writing
from applicable governmental authorities: (a) of the presence of any "Hazardous
Substances" (as defined below) on the Properties, or any portion thereof, or,
(b) of any spills, releases, discharges, or disposal of Hazardous Substances
that have occurred or are presently occurring on or onto the Properties, or any
portion thereof, or (c) of the presence of any PCB transformers serving, or
stored on, the Properties, or any portion thereof. Neither Seller nor the
Existing Manager have receive notice in writing from applicable governmental
authorities giving notice of any failure to comply with any applicable local,
state and federal environmental laws, regulations, ordinances and administrative
and judicial orders relating to the generation, recycling, reuse, sale, storage,
handling, transport and disposal of any Hazardous Substances (as used herein,
"Hazardous Substances" shall mean any substance or material whose presence,
nature, quantity or intensity of existence, use, manufacture, disposal,
transportation, spill, release or effect, either by itself or in combination
with other materials is either: (1) potentially injurious to the public health,
safety or welfare, the environment or the Properties, (2) regulated, monitored
or defined as a hazardous or toxic substance or waste by any environmental
authority, or (3) a basis for liability of the owner of the Properties to any
environmental authority or third party, and Hazardous Substances shall include,
but not be limited to, hydrocarbons, petroleum, gasoline, crude oil, or any
products, by-products or components thereof, and asbestos).
3.15. PIP'S AND LICENSE AGREEMENTS.
----------------------------
(a) Except as disclosed in the Preliminary Scope of Work transmitted to
Seller under cover dated February 18, 1998 from Joseph A. Carillo of Marriott
International, Inc., (a copy of which has been provided to the Buyer) (the
"Scope of Work"), Seller has not received notice in writing from Marriott
International that there are any "Product Improvement Plans" outstanding with
respect to any of the Inns.
(b) To the best of Seller's knowledge, neither Seller nor the Existing
Manager have received notice in writing from Marriott International stating that
Seller is in default of the Existing Franchise Agreements.
B. Seller agrees to the following covenants which shall be complied with
by Seller during the term of this Agreement:
<PAGE>
3.16. OPERATING AGREEMENTS.
--------------------
Seller shall not enter into any new management agreement, maintenance or
repair contract, supply contract, lease in which it is lessee or other
agreements with respect to the Properties, nor shall Seller enter into any
agreements modifying the Operating Agreements, unless (a) any such agreement or
modification will not bind Purchaser or the Properties after the date of Closing
or (b) Seller has obtained Purchaser's prior written consent to such agreement
or modification. On or before May 22, 1998, Seller will specify to Purchaser in
writing the Operating Agreements Seller will, if so requested by Purchaser,
terminate on or before the Closing Date. Within ten (10) days after the receipt
of such notice from Seller, Purchaser will send written notice to Seller
specifying which of such Operating Agreements Purchaser wishes to have
terminated and on or before the Closing Date, Seller will terminate, at Seller's
cost and expense, the Operating Agreements specified in Purchaser's notice.
3.17. WARRANTIES AND GUARANTIES.
-------------------------
Seller shall not before or after Closing, release or modify any warranties
or guarantees, if any, of manufacturers, suppliers and installers relating to
the Improvements and the Tangible Personal Property or any part thereof, except
with the prior written consent of Purchaser. A complete list of all such
warranties and guaranties in effect as of this date is attached hereto as
Exhibit K.
- ---------
3.18. OPERATION OF PROPERTIES.
-----------------------
Seller covenants, that between the date hereof and the date of Closing, it
will cause the Existing Manager to: (a) operate the Properties only in the
usual, regular and ordinary manner consistent with Seller's prior practice, (b)
maintain its books of account and records in the usual, regular and ordinary
manner, in accordance with sound accounting principles applied on a basis
consistent with the basis used in keeping its books in prior years and (c) use
all reasonable efforts to preserve intact its present business organization,
keep available the services of its present officers, partners and employees and
preserve its relationships with suppliers and others having business dealings
with it. Seller shall cause the Existing Manager to continue to use its best
efforts to take guest room reservations and to book functions and meetings and
otherwise to promote the business of the Properties in generally the same manner
as the Existing Manager did prior to the execution of this Agreement. All
advance room bookings and reservations and all meetings and function bookings
shall continue to be booked at rates, prices and charges heretofore customarily
charged by Existing Manager for such purposes, and in accordance with the
Existing Manager's published rate schedules. Except as otherwise permitted
hereby, from the date hereof until Closing, Seller shall not knowingly cause or
suffer the Existing Manager to take any action or fail to take action the result
of which (i) would have a material adverse effect on the Properties or
Purchaser's ability to continue the operation thereof after the date of Closing
in substantially the same manner as presently conducted, (ii) reduce or cause to
be reduced any
<PAGE>
room rents or any other charges over which the Existing Manager has operational
control, or (iii) would cause any of the representations and warranties
contained in this Article 3 to be materially untrue as of Closing. Seller shall
---------
deliver to Purchaser monthly reports showing the income and expenses of the
Inns, together with such periodic information with respect to room reservations
and other bookings, as Seller customarily keeps internally for its own use.
3.19 Tangible Personal Property; Inventory.
-------------------------------------
(a) The Properties contain not less than: (i) a sufficient amount of
furniture, furnishings, color television sets, carpets, drapes, rugs, floor
coverings, mattresses, pillows, bedspreads and the like, to furnish each guest
room, so that each such guest room is, in fact, fully furnished; and (ii) a
sufficient amount of towels, washcloths and bed linens, together with a
sufficient supply of paper goods, soaps, cleaning supplies and other such
supplies and materials, as are reasonably adequate for the current operation of
the Inns.
(b) Seller will cause the Existing Manger to replace as needed, lost,
stolen or depleted Tangible Personal Property so that, in the aggregate, the
value of the Inventory between the date hereof and the Date of Closing is not
reduced by more than $150,000, as reasonably estimated by the Existing Manager.
3.20 Independent Audit.
-----------------
At no cost to Seller, Seller shall provide access by Purchaser's
representatives to Seller's accountants and to all financial and other
information relating to the Properties in its possession, in each case as would
be reasonably required to evaluate and/or prepare audited financial statements
in conformity with Regulation S-X of the Securities and Exchange Commission (the
"SEC") and to prepare a registration statement, report or disclosure statement
for filing with the SEC. Seller shall, if requested, authorize and direct
Seller's accountants, at Purchaser's sole expense, to deliver to Purchaser a
consent to the filing of such accountant's audit report on the financial
statements for the Properties in registration statements and other reports filed
by Purchaser or the REIT or either of their affiliates with the Securities and
Exchange Commission. If requested by the Purchaser from time to time prior to
or after the Closing, Seller agrees to request that its independent public
accountants, at no cost to Seller, execute and deliver to the Underwriters of
the Purchaser's, the REIT's or either of their affiliates' public or private
financing transaction, a "comfort" letter, in customary form and substance, with
respect to financial statements (and information derived therefrom) of Seller or
its Properties included in offering documents or prospectuses with respect to
such financings.
3.21 Bulk Sale Compliance.
--------------------
Seller shall comply with and shall indemnify Purchaser against any claim,
loss or liability arising under the bulk sales law in connection with the
transaction contemplated herein.
3.22 Employees of Existing Manager.
-----------------------------
<PAGE>
Seller will provide Purchaser, during the Study Period, with a schedule
prepared by the Existing Manager of the Existing Manager's employees and general
managers engaged in the operation of the Inns, showing salaries and duties and
length of service of each such manager or employee. Seller will assist Purchaser
in scheduling, with the Existing Manager, interviews of the general managers of
the Inns during the period following the Study Period but prior to the Closing
Date.
C. For purposes of this Article 3, the term "Seller's Knowledge" shall
mean the actual knowledge of Mark Schoenfeld after reasonable inquiry of the
Existing Manager. The representations and warranties set forth in this Article 3
shall survive the Closing for a period of twelve (12) months except for any
representations or warranties as to which Purchaser shall have filed a bill of
complaint alleging a breach thereof by Seller prior to the expiration of said
twelve (12) month period.
4. PURCHASER'S REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------------------
To induce Seller to enter into this Agreement and to sell the Properties,
Purchaser hereby makes the following representations, warranties and covenants:
4.1. ORGANIZATION AND POWER.
----------------------
Purchaser is a duly formed, validly existing limited partnership in good
standing under the laws of Virginia. This Agreement has been duly authorized by
all necessary action on the part of Purchaser and is enforceable against
Purchaser in accordance with its terms subject to Purchaser's equitable rights.
The execution and delivery of, and the performance by Purchaser of its
obligations under this Agreement do not and will not contravene, or constitute a
default under, any provision of applicable law or regulation, Purchaser's
organizational documents or any agreement, judgment, injunction, order, decree
or other instrument binding upon Purchaser.
4.2. AUTHORIZATION AND EXECUTION.
---------------------------
This Agreement has been duly authorized by all necessary action on the part
of Purchaser.
4.3. INVESTIGATION OF THE PROPERTIES.
-------------------------------
Purchaser is, or as of the expiration of the Study Period will be, familiar
with the Properties and has made, or will have made, such independent
investigations as Purchaser deems necessary, advisable or material concerning
all aspects of the Properties, including, but not limited to, the condition,
use, sale, development or suitability of the Properties for Purchaser's intended
purposes.
<PAGE>
4.4 "AS IS" Purchase.
Purchaser acknowledges that Purchaser is a sophisticated purchaser who is
familiar with assets and businesses like the Properties. Purchaser is acquiring
the Properties "AS IS", "WHERE IS" and "WITH ALL FAULTS", in its present state
and condition, without representation or warranty by Seller or any of its
representatives or agents as to any matters whatsoever except as otherwise
specifically set forth in this Agreement. Except as otherwise specifically set
forth in this Agreement, no patent or latent condition affecting the Properties
in any way, whether or not known or discoverable or hereafter discovered, shall
affect Purchaser's obligations hereunder, nor shall any such condition give rise
to any right of damages, rescission or otherwise against Seller.
4.5 Purchaser's Disclaimer.
----------------------
Except as expressly set forth in this Agreement, Purchaser acknowledges and
agrees that Seller has not made, does not make and specifically negates and
disclaims any representations, warranties, promises, covenants, agreements or
guaranties of any kind or character whatsoever, whether express or implied, oral
or written, past, present or future, of, as to, concerning or with respect to
(a) the value, nature, quality or condition of the Properties, including,
without limitation, the water, soil and geology, (b) the income to be derived
from the Properties, (c) the suitability of the Properties for any and all
activities and uses which Purchaser may conduct thereon, (d) the compliance of
or by the Properties or its operation with any laws, rules, ordinances or
regulations of any applicable governmental authority or body, (e) the
habitability, merchantability, marketability, profitability or fitness for a
particular purpose of the Properties, (f) the manner or quality of the
construction or materials, if any, incorporated into the Properties, (g) the
manner, quality, state of repair or lack thereof, (h) pollution or land use
laws, rules, regulations, orders or requirements, including the existence in or
on the Properties of hazardous materials or Hazardous Substances, or (i) any
other matter with respect to the Properties. Additionally, no person acting on
behalf of Seller is authorized to make, and by execution hereof Purchaser
acknowledges that no person has made, any representation, agreement, statement,
warranty, guaranty or promise regarding the Properties or the transaction
contemplated herein, and no such representation, warranty, agreement, guaranty,
statement or promise, if any, made by any person acting on behalf of Seller
shall be valid or binding upon Seller unless expressly set forth in this
Agreement.
The representations set forth in this Article 4 shall survive the Closing
---------
for a period of twelve (12) months except for any representations, warranties or
covenants as to which Seller shall have filed a bill of complaint alleging a
breach thereof by Purchaser prior to the expiration of said twelve (12) month
period.
5. CONDITIONS
---------------
<PAGE>
The parties' obligations hereunder are subject to the satisfaction of the
following conditions precedent:
5.1. SELLER'S DELIVERIES.
-------------------
Seller shall have delivered to Escrow Agent or Purchaser, as the case may
be, on or before the date of Closing, all of the documents and other information
required of Seller pursuant to Section 6.2 and Section 6.4.
5.2. REPRESENTATIONS, WARRANTIES AND COVENANTS; OBLIGATIONS OF SELLER;
-----------------------------------------------------------------
CERTIFICATE.
- -----------
All of Seller's representations and warranties made in this Agreement shall
be true and correct as of the date hereof and as of the Closing Date in all
material respects as if then made, there shall have occurred no material adverse
change in the financial condition of the Properties since the date hereof,
Seller shall have performed all of its covenants and other obligations under
this Agreement, and Seller shall have executed and delivered to Purchaser at
Closing a certificate to the foregoing effect.
5.3. REPRESENTATIONS, WARRANTIES AND COVENANTS; OBLIGATIONS OF PURCHASER.
-------------------------------------------------------------------
All of Purchaser's representations and warranties made in this Agreement
shall be true and correct as of the date hereof and as of the Closing Date in
all material respects as if then made. Purchaser shall have performed all of its
covenants and other obligations under this Agreement.
5.4. TITLE INSURANCE.
---------------
The Title Company shall be prepared to issue the Owner's Title Policies
insuring good and marketable fee simple title to the Real Properties subject
only to the Permitted Title Exceptions.
5.5. TITLE TO TANGIBLE PERSONAL PROPERTY.
-----------------------------------
Seller shall be prepared to convey to Purchaser the Tangible Personal
Property free and clear of all liens or encumbrances.
5.6. CONDITION OF IMPROVEMENTS.
-------------------------
<PAGE>
The Improvements and the Tangible Personal Property (including but not
limited to the mechanical systems, plumbing, electrical, wiring, appliances,
fixtures, heating, air conditioning and ventilating equipment, elevators,
boilers, equipment, roofs, structural members and furnaces) shall be in
substantially the same condition at Closing as they are as of the date hereof,
reasonable wear and tear excepted. Except as provided in Section 3.19 hereof,
------------
Seller shall not have removed or caused or permitted to be removed any material
part or portion of the Tangible Personal Property unless the same is replaced,
prior to Closing, with similar items of at least equal quality and acceptable to
Purchaser.
5.7. UTILITIES.
---------
Subject to the provisions of Section 6.6 hereof, all of the Utilities shall
be installed in and operating at the Properties, and service shall be available
for the removal of garbage and other waste from the Properties.
5.8. PRODUCT IMPROVEMENT PLANS .
--------------------------
Purchaser will pay any costs or expenses for work, materials, furniture,
fixtures and equipment under any Product Improvement Plans ("PIPs") for the Inns
required by Marriott International in connection with the sale contemplated
hereby, including the Scope of Work; provided however that nothing contained
herein will be deemed to obligate the Purchaser to reimburse Seller for costs
and expenses incurred by Seller prior to Closing with respect to any such PIPs.
This Section 5.8 shall survive the Closing and delivery of the Deed and shall
not be merged therein.
5.9. SELLERS' DUTIES.
---------------
From the date hereof to and including the Closing Date, Seller shall comply
with and perform all of the duties and obligations of licensee under the
Licenses, subject to the fact Seller will not be responsible for compliance with
any "Product Improvement Plans" that may issue from Licensor, following the
Agreement Date, nor will Seller be responsible for performance of matters
specified in the Scope of Work.
5.10. BROKER'S COMMISSION.
-------------------
Purchaser and Seller hereby acknowledge and agree that Seller shall pay
Broker the real estate commission due to Broker for the transaction contemplated
in this Agreement at Closing. Seller covenants and warrants that Seller has not
used any other broker in connection with the sale and purchase of the
Properties, other than the Broker, and further shall indemnify and hold
<PAGE>
harmless Purchaser against the claim of any other broker or real estate agent
claiming a commission for the sale of the Properties through Seller. The terms
of this paragraph shall survive the execution and delivery of the Deed or the
earlier termination of this Agreement.
5.11. TERMINATION OF MANAGEMENT AGREEMENTS AND EXISTING MANAGER'S
-----------------------------------------------------------
EMPLOYEES.
- ---------
Seller shall have: (a) cancelled all management agreements with Existing
Manager effective on or before the Closing Date, (b) paid any termination fees
required thereunder and (c) received confirmation in writing (a copy of which
will be given to Purchaser) that the Existing Manager's Employees engaged in
operation of the Inns have been terminated on or before the Closing Date.
5.12 Ground Lessor Consents and Releases
-----------------------------------
On or before the Closing date, Seller shall have obtained the Ground Lessor
Consents and Releases.
5.13 Marriott Consents
-----------------
On or before the Closing date, Seller shall have obtained the Marriott
Consents.
6. CLOSING
-----------
6.1. CLOSING.
-------
(a) Closing shall be held at 1:00 p.m. Washington, D.C. local time at the
offices of Hunton & Williams, 1900 K Street, N.W., Suite 1200, Washington, D.C.
20006 or at another location mutually acceptable to the parties on or before
ninety (90) days after the end of the Study Period. Possession of the Properties
shall be delivered to Purchaser at Closing. Notwithstanding the foregoing,
Purchaser shall have the right to extend the Closing Date for up to three (3)
consecutive thirty (30) day periods by delivering to Seller notice in writing of
such election (the "Extension Notice") at least five (5) Business Days prior to
the then current Closing Date. Simultaneously with the delivery of each such
Extension Notice to Seller, Purchaser shall deposit with the Escrow Agent an
additional $1,000,000 in cash to be held and distributed by the Escrow Agent in
the same manner as the balance of the Deposit.
(b) Seller agrees to reasonably cooperate with Purchaser in timing the
Closing to coincide with the funding of proceeds from the initial public
offering of the REIT. In that regard,
<PAGE>
Purchaser agrees that it will endeavor to have all of its deliveries hereunder
placed in escrow, pursuant to mutually agreeable escrow instructions, at least
four (4) business days prior to the scheduled Closing Date.
6.2. SELLER'S DELIVERIES.
-------------------
At Closing, Seller shall deliver to Purchaser all of the following
instruments to the extent not previously delivered to Purchaser prior to
Closing, and except for any Excluded Items, each of which shall have been duly
executed and, where applicable, acknowledged on behalf of Seller and shall be
dated as of the Closing Date.
(a) The certificate required by Section.
(b) The Deeds.
(c) The Bills of Sale.
(d) Certificate(s)/Registration of Title for any vehicle owned by
Seller and used in connection with the Properties.
(e) Such agreements, affidavits or other documents as may be
required by the Title Company to issue the Owner's Title Policy with affirmative
coverage over mechanics' and materialmen's liens for work or materials provided
to the Seller.
(f) The FIRPTA Certificate.
(g) True, correct and complete copies of all warranties in Seller's
possession, if any, of manufacturers, suppliers and installers possessed by
Seller and relating to the Improvements and the Tangible Personal Property, or
any part thereof.
(h) Appropriate resolutions of the partners of Seller, together with
all other necessary approvals and consents of Seller, authorizing (A) the
execution on behalf of Seller of this Agreement and the documents to be executed
and delivered by Seller prior to, at or otherwise in connection with Closing,
and (B) the performance by Seller of its obligations hereunder and under such
documents.
(i) If Purchaser is assuming Seller's obligations under any or all
of the Operating Agreements, the originals of such agreements, duly assigned to
Purchaser and with such assignment acknowledged and approved by the other
parties to such Operating Agreements.
(j) A written instrument executed by Seller, conveying and
transferring to Purchaser all of Seller's right, title and interest in any
telephone numbers and facsimile numbers
<PAGE>
relating to the Properties, and, if Seller maintains a post office box,
conveying to Purchaser all of its interest in and to such post office box and
the number associated therewith, so as to assure a continuity in operation and
communication.
(k) All current real estate and personal property tax bills (or
copies thereof) in Seller's possession or under its control.
(l) An affidavit from the Existing Manager (which employs all
personnel at each of the Properties) stating that all employees have been
terminated prior to or as of the date of Closing, that all employees have been
paid through midnight on the date prior to Closing and setting forth and
describing, in detail, as to each employee, all accrued but unpaid vacation pay
and other fringe benefits.
(m) A complete set of all guest registration cards, guest
transcripts, guest histories, and all other available guest information.
(n) An updated schedule of the Existing Manager's employees and
general managers engaged in the operation of the Inns, showing salaries and
duties with a statement of the length of service of each such manager or
employee, brought current to a date not more than 48 hours prior to the Closing.
(o) A complete list of all advance room reservations, functions and
the like, in reasonable detail so as to enable Purchaser to honor Seller's
commitments in that regard.
(p) A list of Seller's outstanding accounts receivable as of
midnight on the date prior to the Closing, specifying the name of each account
and the amount due Seller.
(q) Written notice executed by Seller notifying all interested
parties, including all tenants under any leases of the Properties, that the
Properties has been conveyed to Purchaser and directing that all payments,
inquiries and the like relating to matters arising after Closing be forwarded to
Purchaser at the address to be provided by Purchaser.
(r) All books, records, operating reports, files and other materials
in Seller's possession or control which are necessary in Purchaser's discretion
to maintain continuity of operation of the Properties.
(s) To the extent permitted under applicable law, documents of
transfer necessary to transfer to Purchaser Seller's employment rating for
workmens' compensation and state unemployment tax purposes.
(t) Complete set of "as-built" drawings for the Improvements to the
extent such drawings are in the Seller's or the Existing Manager's possession.
(u) All keys for the Properties, which shall be deemed delivered at
Closing if provided to Purchaser at the Properties.
<PAGE>
(v) Valid, final and unconditional certificate(s) of occupancy for
the Inns, issued by the appropriate governmental authority, but only to the
extent such certificates are in the possession of Seller or the Existing
Manager.
(w) Such agreements, affidavits or other documents as may reasonably
be required by the Title Company, to obtain standard coverage at standard rates.
6.3. PURCHASER'S DELIVERIES.
----------------------
At Closing:
(a) Purchaser shall deposit or cause to deposit funds in the amount
of the Purchase Price (less the amount of the cash portion of the Deposit and
----
interest earned thereon) plus sufficient additional cash to pay: (i) Purchaser's
----
share of all escrow costs and closing expenses as provided in Section 6.5 hereof
-----------
and (ii) the amounts payable by Purchaser in accordance with Sections 6.6
------------
hereof; and
(b) Any other document or instrument reasonably required by the
Title Company.
6.4. MUTUAL DELIVERIES.
-----------------
At Closing, Purchaser and Seller shall mutually execute and deliver each to
the other:
(a) The Assignment and Assumption Agreements, excluding therefrom
any Excluded Items and any Authorizations for any of the Properties which are
nontransferable by applicable law.
(b) A closing statement reflecting the Purchase Price and the
adjustment and prorations required hereunder and the allocation of income and
expenses required hereby.
(c) Such transfer forms, if any, as may be required by Licensor, to
the extent not theretofore executed.
(d) Such other and further documents, papers and instruments as may
be reasonably requested by either party hereto or Title Company.
6.5. CLOSING COSTS.
-------------
<PAGE>
(a) Seller shall pay the following: Seller's attorney's fees and
costs, the costs of preparation of: (i) the documents to be delivered by Seller
hereunder and (ii) the releases of any deeds of trust, mortgages and other
financing encumbering the Properties and any costs associated with any
corrective instruments required to correct errors in the documents specified in
(i) and (ii) above. Purchaser and Seller shall split on a 50\50 basis the search
fees and premium for basic owners policies of title insurance from the Title
Company (Seller shall not be responsible for fees and premiums for endorsements,
specialized coverages or lender's policies); document, transfer and recordation
taxes and fees for recordation of the Deeds and Bill of Sale assessed by the
States or Counties where the Properties are located in connection with the
transfer of the Properties from Seller to Purchaser as well as any Sales or use
taxes determined to be payable in connection with this transaction (excluding
those imposed under any Bulk Sales laws, which shall be the sole responsibility
of the Seller). All other fees and costs incurred in connection with the
transfer of the Properties to Purchaser shall be paid for by the Purchaser,
including, without limitation, fees and costs for the preparation of surveys and
recordation and transfer taxes for any mortgages or deeds of trust.
(b) At Closing, in addition to the Purchase Price, Purchaser will
pay, Seller $2,000,000 to compensate Seller for the costs and expenses incurred
by Seller in connection with the transaction contemplated by this Agreement.
6.6. INCOME AND EXPENSE ALLOCATIONS.
------------------------------
All income and expenses with respect to the Properties, applicable to the
period of time before and after Closing shall be prorated between Seller and
Purchaser as of the Closing Date. Seller shall be entitled to all income and
shall be responsible for all expenses for the period of time up to but not
including the Closing Date, and Purchaser shall be entitled to all income and
shall be responsible for all expenses for the period of time from, after and
including the Closing Date. Without limiting the generality of the foregoing,
the following items of income and expense shall be prorated at Closing:
(a) Current and prepaid rents, including, without limitation,
prepaid room receipts, function receipts and other reservation receipts.
(b) Real estate and personal property taxes.
(c) Amounts under Operating Agreements including advertising
contracts to be assigned to and assumed by Purchaser; provided however, Seller
will pay all fees and costs incurred in connection with the termination of any
Operating Agreement in accordance with Section 3.16 hereof.
------------
(d) Utility charges (including but not limited to charges for water,
sewer and electricity).
<PAGE>
(e) All prepaid reservations and contracts for rooms confirmed by
Seller prior to Closing Date, for dates after the Closing Date.
(f) The Room Ledger [(less one and eight-tenths percent (1.8%)
credit card discounts),] if any, shall be divided equally between the parties.
(g) Except to the extent such Accounts Receivable have been
accounted for between the parties under Section 6.6(f) above, the Guest Ledger
--------------
will be prorated as of the Closing Date with Seller receiving payment at closing
for all Accounts Receivable from guests of the Inns staying at the Inns on the
Closing Date but who checked into the Inns prior to the Closing Date.
(h) Such other items as are usually and customarily prorated between
purchasers and sellers of hotel properties in the areas where each of the
Properties are located.
Purchaser shall use reasonable good faith efforts to collect any accounts
receivable or revenues accrued prior to the Closing Date for Seller, and if
Purchaser collects same, such amounts will be promptly remitted to Seller. In
the event that Seller, rather than Purchaser, collects accounts receivable or
revenues that have accrued prior to the Closing Date, Seller will promptly
notify Purchaser of the account upon which payment was made and the amount
received. In the event that Seller, rather than Purchaser, collects accounts
receivable or revenues that have accrued after the Closing Date, such amounts
-----
will be promptly forwarded to Purchaser. Seller agrees that it will not
institute any proceedings to collect past due accounts receivable during a
period of three (3) months following Closing. If accurate prorations cannot be
made at Closing because current bills are not obtainable, the parties shall
prorate such income or expenses at Closing on the best available information,
subject to re-proration upon receipt of the final bill or other evidence of the
applicable income or expense.
Any income received or expense incurred by Seller or Purchaser with respect
to the Properties after the date of Closing shall be promptly allocated in the
manner described herein and the parties shall promptly pay or reimburse any
amount due and shall continue to do so after Closing without limitation.
The obligation to make the proration shall survive the Closing.
<PAGE>
7. RISK OF LOSS; CONDEMNATION
------------------------------
7.1. RISK OF LOSS.
------------
Risk of loss as a result of fire or other casualty to each Inn shall be on
Seller up until the Closing and shall be on Purchaser thereafter. If, at any
time on or before the Closing Date, any Inn has suffered damage, destruction, or
casualty (each, a "Casualty Loss") that is "material" (as defined below),
-------------
Purchaser, at its option, may delete such Inn (a "Damaged Inn") from this
-----------
Agreement, in which event the Purchase Price shall be reduced by the amount
allocated to such Damaged Inn as shown on Exhibit F. For purposes of this
---------
Section 7.1, a Casualty Loss to an Inn shall be considered "material" if either
- -----------
(a) the cost of repairing such Casualty Loss (either singularly or when added to
the cost of repairing Casualty Losses with respect to such Damaged Inn) may
reasonably be expected to exceed $250,000, or (b) such Casualty Loss is of a
nature which precludes in any material respect the normal operation of such Inn
and such Casualty Loss cannot reasonably be expected to be repaired within six
(6) months after the date of such Casualty Loss. If, in the event of a
material Casualty Loss, Purchaser does not elect to terminate its obligation to
purchase a Damaged Inn pursuant to this Section 7.1, Seller shall, at
-----------
Purchaser's election, either (a) promptly and fully repair the damage so as to
restore the Damaged Inn to a condition substantially equivalent to its condition
immediately before the occurrence of such Casualty Loss or Casualty Losses or
(b) pay Purchaser the full amount of any casualty insurance proceeds collected
by Seller with respect thereto plus the amount of any deductible, or deductibles
related to such Casualty Loss or Losses. In the event of any Casualty Loss that
does not result in the termination of Purchaser's obligation to acquire the Inn
so damaged, Seller shall pay or assign to Purchaser: (a) the proceeds of all
casualty insurance for casualties occurring prior to the Closing (to the extent
the damage to which such proceeds are related has not previously been repaired),
including an amount equal to any deductibles, and (b) the proceeds of all
business interruption and similar insurance for the period after the Closing.
7.2. CONDEMNATION OF INNS.
--------------------
If, before the Closing Date, part or all of any Inn is condemned or
threatened with condemnation to such an extent as would materially impair such
Inn's economic viability as a "Fairfield Inn by Marriott" hotel, Purchaser, at
its option, may delete such Inn from this Agreement, in which event the Purchase
Price shall be reduced by the amount allocated to such Inn as shown on Exhibit
-------
F. Without limiting the generality of the foregoing, an actual or threatened
- -
condemnation shall be deemed materially to impair an Inn's economic viability as
a "Fairfield Inn by Marriott" hotel if it involves an actual or threatened
condemnation of: (i) a number of guest rooms at such Inn such that the number
of guest rooms remaining after such condemnation would be less than eighty
percent (80%) of the number of guest rooms in existence on the date hereof, (ii)
a portion of the lobby, meeting room, parking facilities, or other
<PAGE>
public areas of such Inn with the result that any remaining areas can no longer
reasonably serve their intended purposes and the required portion of such area
condemned or to be condemned cannot reasonably be replaced, or (iii) a principal
means of ingress or egress to any Site which cannot reasonably be replaced. If
Purchaser does not elect to terminate its obligation to purchase the condemned
Inn pursuant to this Section 7.2, or if the condemnation or threatened
------------
condemnation would not materially impair the affected Inn's economic viability
as a "Fairfield Inn by Marriott" hotel, Seller shall assign to Purchaser at the
applicable Closing, by written instrument, the proceeds of any condemnation
award arising out of an actual or threatened condemnation or otherwise, and
Seller will turn over to Purchaser any such proceeds upon Seller's receipt
thereof. For the purposes of the foregoing, a "threat" of condemnation shall not
be deemed to have arisen unless and until Seller shall have received an official
notice disclosing a potential condemnation from an applicable public authority.
8. LIABILITY OF PURCHASER; INDEMNIFICATION BY SELLER; TERMINATION
-------------------------------------------------------------------
RIGHTS
- ------
8.1. LIABILITY OF PURCHASER AND SELLER.
---------------------------------
Except for any obligation expressly assumed or agreed to be assumed by
Purchaser hereunder, Purchaser does not assume any obligation of Seller or any
liability for claims arising out of any occurrence prior to Closing. Except for
any obligation expressly assumed or agreed to be assumed by Seller hereunder,
Seller does not assume any obligation of Purchaser for claims arising out of any
occurrence after Closing.
8.2. INDEMNIFICATION BY SELLER AND PURCHASER.
---------------------------------------
Seller hereby indemnifies and holds Purchaser, and its agents, employees
and partners harmless from and against any and all claims, costs, penalties,
damages, losses, liabilities and expenses (including reasonable attorneys'
fees), that may at any time be incurred by Purchaser, whether before or after
Closing, as a result of: (i) any material breach by Seller of any of its
representations, warranties, covenants or obligations set forth herein or (ii)
Seller's ownership or operation of the Properties prior to Closing.
Purchaser hereby indemnifies and holds Seller and its agents, employees and
partners harmless from and against any and all claims, costs, penalties,
damages, losses, liabilities and expenses (including reasonable attorneys' fees)
that may at any time be incurred by Seller, whether before or after Closing, as
a result of (i) any material breach by Purchaser of any of its representations,
warranties, covenants or obligations set forth herein or (ii) Purchaser's
ownership and operation of the Properties after Closing. The provisions of this
Section shall survive the Closing for a period of one (1) year.
<PAGE>
8.3. TERMINATION BY PURCHASER.
------------------------
If any condition precedent to Closing set forth in Sections 5.1, 5.2, 5.5,
5.6, 5.11, 5.12 or 5.13 cannot or will not be satisfied prior to Closing, and
Seller fails to cure any such matter within ten (10) business days after notice
thereof from Purchaser (or within such other time period specified in this
Agreement), Purchaser, at its option, may elect either (a) to terminate this
Agreement, in which event the Deposit shall be forthwith returned to Purchaser
and all other rights and obligations of Seller and Purchaser hereunder shall
terminate immediately, or (b) to waive its right to terminate and, instead, to
proceed to Closing. If a condition precedent to Closing set forth in Sections
5.3 and/or 5.8 of this Agreement cannot or will not be satisfied prior to
Closing, Seller may, at its option, elect to waive its rights under Sections 5.3
and/or 5.8 and, instead, proceed to Closing. Notwithstanding any termination
hereof, the parties shall nevertheless remain liable under provisions of this
Agreement which expressly survive termination of this Agreement. If Purchaser
terminates this Agreement as a consequence of a misrepresentation or breach of a
warranty or covenant by Seller, or a failure by Seller to perform its
obligations hereunder, Purchaser shall retain right to specific performance of
this Agreement; furthermore, if Seller willfully fails to proceed to Closing,
Purchaser may seek reimbursement of the costs and expenses actually paid by
Purchaser to unrelated third parties in connection with the negotiation of this
Agreement and the conduct of its tests, studies and investigations during the
Study Period, however, in no event will Purchaser be entitled to seek any other
damages, including without limitation, incidental or consequential damages, in
connection with this Agreement or the transaction contemplated hereby.
8.4. TERMINATION BY SELLER.
---------------------
If any condition precedent to Closing set forth in Sections 5.3, 5.12 or
5.13 hereof cannot or will not be satisfied prior to Closing, Seller at its
option, may elect either (a) to terminate this Agreement, in which event the
Deposit shall be forthwith returned to Purchaser and all other rights and
obligations of Seller and Purchaser hereunder shall terminate immediately, or
(b) to waive its right to terminate and, instead, to proceed to Closing. If,
prior to Closing, Purchaser defaults in the performance of any of its
obligations under this Agreement (including its obligation to purchase the
Properties), and Purchaser fails to cure any such default within ten (10) days
after notice thereof from Seller, then Seller's sole remedy for such default
shall be to terminate this Agreement and retain the Deposit. Seller and
Purchaser agree that, in the event of such a default, the damages that Seller
would sustain as a result thereof would be difficult if not impossible to
ascertain. Therefore, Seller and Purchaser agree that Seller shall retain the
Deposit as full and complete liquidated damages and as Seller's sole remedy.
<PAGE>
9. MISCELLANEOUS PROVISIONS
----------------------------
9.1. COMPLETENESS; MODIFICATION.
--------------------------
This Agreement constitutes the entire agreement between the parties hereto
with respect to the transactions contemplated hereby and supersedes all prior
discussions, understandings, agreements and negotiations. This Agreement may be
modified only by a written instrument duly executed by the parties hereto.
Singular words shall connote the plural number as well as the singular and vice
versa, and the masculine shall include the feminine and the neuter. Each party
hereto and its counsel have reviewed this Agreement, and therefore any usual
rules of construction requiring that ambiguities are to be resolved against a
particular party shall not be applicable in the construction and interpretation
of this Agreement.
9.2. ASSIGNMENTS.
-----------
Purchaser may freely assign its rights hereunder to any affiliate of
Purchaser or the REIT, without the consent of Seller but in such event Purchaser
shall remain liable under the terms of this Agreement. Except as otherwise set
forth in this section, neither Seller nor Purchaser shall have the right to
assign all or any part of its interest in this Agreement without the prior
written consent of the other party.
9.3. SUCCESSORS AND ASSIGNS.
----------------------
This Agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
9.4. DAYS.
----
If any action is required to be performed, or if any notice, consent or
other communication is given, on a day that is a Saturday or Sunday, such
performance shall be deemed to be required, and such notice, consent or other
communication shall be deemed to be given, on the first Business Day following
such Saturday, Sunday or legal holiday.
9.5. SAFES AND BAGGAGE.
-----------------
(a) On the Closing Date, Seller shall cause the delivery to
Purchaser of all of Seller's keys to all safe deposit boxes (the "Safes") at the
Properties. On or prior to the Closing Date, Seller shall give written notices
to those persons who have deposited items in such Safes, advising them of the
sale of the Properties to Purchaser and requesting the removal or
<PAGE>
verification of their contents in the Safes on the Closing Date. All such
removals or verifications on the Closing Date shall be under the supervision of
Seller's and Purchaser's respective representatives. All contents which are to
remain in the Safes shall be recorded. Safes containing items belonging to
guests who have not responded to such written notice by so removing or verifying
their Safe contents by the end of the day and which cannot be opened without the
key in the possession of such guest shall be sealed until such time as the guest
appears, at which time the Safe shall be opened and the contents recorded in the
presence of the respective representatives. Until that time, Purchaser shall
indemnify, defend and hold Seller harmless from and against any liability for
loss or theft of such contents and Seller shall assign to Purchaser its rights
to any insurance proceeds covering such Safes. Any such contents so verified or
recorded and thereafter remaining in the hands of Purchaser shall be the
responsibility of Purchaser and Purchaser hereby agrees to indemnify, defend and
hold Seller harmless from any liability therefor.
(b) On the Closing Date representatives of Purchaser and Seller shall
take an inventory of all baggage, valises, trunks and packages checked or left
in the care of Seller at the Properties. From and after the Closing Date,
Purchaser shall be responsible for all baggage listed in said inventory and
Purchaser hereby indemnifies and agrees to hold Seller harmless from and against
any liability therefor.
(c) The provisions of this Section 9.5 shall survive the Closing Date
-----------
for a period of six (6) months.
9.6. GOVERNING LAW.
-------------
This Agreement and all documents referred to herein shall be governed by
and construed and interpreted in accordance with the laws of the District of
Columbia.
9.7. COUNTERPARTS.
------------
This Agreement may be executed in multiple counterparts and counterparts
hereof shall collectively constitute a single agreement. It shall not be
necessary that the signature on behalf of both parties hereto appear on each
counterpart.
9.8. SEVERABILITY.
------------
If any term, covenant or condition of this Agreement, or the application
thereof to any person or circumstance, shall to any extent be held invalid or
unenforceable, the remainder of this Agreement, or the application of such term,
covenant or condition to other persons or circumstances, shall not be affected
thereby, and each term, covenant or condition of this Agreement shall be valid
and enforceable to the fullest extent permitted by law.
<PAGE>
9.9. NOTICES.
-------
All notices, requests, demands and other communications hereunder shall be
in writing and shall be delivered by hand, transmitted by facsimile
transmission, sent prepaid by Federal Express (or a comparable overnight
delivery service) or sent by the United States mail, certified, postage prepaid,
return receipt requested, at the addresses and with such copies as designated
below. Any notice, request, demand or other communication delivered or sent in
the manner aforesaid shall be deemed given or made (as the case may be) when
actually delivered to the intended recipient.
If to Seller: With a copy to:
c/o The Carlyle Group KATTEN MUCHIN & ZAVIS
1001 Pennsylvania Avenue, NW 1025 Thomas Jefferson Street, N.W.
Suite 220 South East Lobby, Suite 700
Washington, DC 20004 Washington, DC. 20007-5201
Mark J. Schoenfeld and Att.: David Schwinger, Esq.
Gary Block, Esq. Telephone: (202) 625-3600
Telephone: (202) 347-2626 Fax: (202) 298-7570
Fax: (202) 639-9389
If to Purchaser: With a copy to:
c/o Hudson Hotels Corporation Boylan, Brown, Code, Fowler,
One Airport Way, Suite 200 Vigdor & Wilson, LLP
Rochester, New York 14624-3160 2400 Chase Square
Att.: E. Anthony Wilson, President Rochester, New York 14610
Telephone: (716) 436-1700 Att.: Alan S. Lockwood, Esq.
Fax: (716) 436-1865 Telephone: (716) 232-5300
Fax: (716) 232-3528
And a copy to:
Hunton & Williams
1900 K Street, N.W.
Washington, D.C. 20006
Att.: John M. Ratino, Esq.
Telephone: (202) 778-2221
Fax: (202) 778-2201
<PAGE>
Or to such other address as the intended recipient may have specified in a
notice to the other party. Any party hereto may change its address or designate
different or other persons or entities to receive copies by notifying the other
party and the Escrow Agent in a manner described in this Section.
9.10. INCORPORATION BY REFERENCE.
--------------------------
All of the Exhibits attached hereto are by this reference incorporated
herein and made a part hereof.
<PAGE>
9.11. SURVIVAL.
--------
The representations, warranties, covenants and agreements of Seller and
Purchaser made in, or pursuant to, this Agreement shall survive the Closing for
a period of twelve (12) months, except for any representations warranties,
covenants and covenants as to which one party will have given the other written
notice of a breach thereof prior to the expiration of said twelve (12) month
period.
9.12. FURTHER ASSURANCES.
------------------
Seller and Purchaser each covenant and agree to sign, execute and deliver,
or cause to be signed, executed and delivered, and to do or make, or cause to be
done or made, upon the written request of the other party, any and all
agreements, instruments, papers, deeds, acts or things, supplemental,
confirmatory or otherwise, as may be reasonably required by either party hereto
for the purpose of or in connection with consummating the transactions described
herein.
9.13. TIME OF ESSENCE.
---------------
Time is of the essence with respect to every provision hereof.
9.14 Third Parties.
-------------
None of the provisions of this Agreement shall be for the benefit of, or be
enforceable by, any person or entity other than Seller or Purchaser.
WITNESS THE FOLLOWING SIGNATURES AND SEALS:
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
<PAGE>
ATTEST: MFI PARTNERS, L.P.
a Delaware limited partnership
/s/ [SIGNATURE APPEARS HERE]
- -----------------------------
By: TGC/MFI L.P., a Delaware
Title: limited partnership, its
----------------------- general partner
By: TCG/MFI GENPAR CORP.,
a Delaware corporation, its
general partner
By: /s/ [SIGNATURE APPEARS HERE]
---------------------------
Name:
-------------------------
Title:
-------------------------
ATTEST: HUDSON HOTELS LIMITED
PARTNERSHIP, L.P., a Virginia
limited partnership
/s/ John M. Sabin
- -----------------------------
By: HUDSON HOTEL TRUST, a
Title: President Maryland real estate investment
----------------------- trust, its general partner
By: /s/ E. Anthony Wilson
---------------------------
Name: E. Anthony Wilson
-------------------------
Title: Chief Executive Officer
-------------------------
<PAGE>
AMENDMENT TO AGREEMENT OF PURCHASE AND SALE
-------------------------------------------
THIS AMENDMENT TO AGREEMENT OF PURCHASE AND SALE (this "Agreement"), dated
as of May 27, 1998 (the "Agreement Date") between MFI PARTNERS, L.P, a Delaware
limited partnership ("Seller"), and HUDSON HOTELS LIMITED PARTNERSHIP, L.P., a
Virginia limited partnership ("Purchaser"), provides:
RECITALS:
R-1. By that certain Agreement of Purchase and Sale dated as of May 19, 1998,
Seller agreed to sell and Purchaser agreed to purchase certain Fairfield
Inns by Marriott , all as more particularly set forth therein (the
"Contract").
R-2. In the course of conducting tests, studies and investigations during the
Study Period (as defined in the Contract) Purchaser has identified certain
matters of concern and Seller and Purchaser have agreed to address such
matters as set forth below.
R-3. Purchaser and Seller wish to amend the Contract in accordance herewith.
NOW THEREFORE WITNESSETH: that for and in consideration of Ten Dollars
($10.00), cash in hand paid, the receipt and sufficiency of which are hereby
acknowledged, Seller and Purchaser agree as follows, notwithstanding any
provision to the contrary contained in the Contract:
1. The foregoing recitals are restated in their entirety. Capitalized
terms not otherwise defined herein shall have the meaning given in the Contract.
2. The definition of Study Period set forth in the Contract is hereby
deleted and replaced with the following:
"Study Period" shall mean the period commencing at 9:00 a.m. on April 21,
------------
1998 and terminating at 5:00 p.m. on May 27, 1998.
3. Purchaser hereby notifies Seller that, subject to the terms and
conditions hereof, Purchaser is satisfied with the tests, studies and
investigations undertaken in connection with the Properties and has elected to
proceed to Closing.
4. Purchaser hereby confirms to Seller that Purchaser has deposited the
Second Deposit with the Escrow Agent.
5. Seller will satisfy the Title Company with respect to the issues
raised in paragraph I of the attached and incorporated Schedule 1; provided
----------
that with respect to paragraph I (3) of Schedule 1, Seller will not be required
----------
to deliver utility letters.
<PAGE>
6. Seller will satisfy the Title Company with respect to the lien issues
raised under paragraph II of the attached and incorporated Schedule 1 in
----------
accordance with the Section 2.4 (D) of the Contract which provides in part:
If such defects consist of Seller's Security Documents, mechanics' liens,
tax liens or other liens or charges for work, materials or obligations
incurred by Seller in a fixed sum or capable of computation as a fixed sum,
Seller shall pay and discharge (and the Title Company is authorized to pay
and discharge at Closing) such defects at Closing.
7. Seller has notified Purchaser that Seller does not elect to terminate
any of the Operating Agreements. Accordingly, the second sentence of Section
3.16 of the Contract is hereby deleted and replaced with the following:
On or before May 27, 1998, Seller will specify to Purchaser in writing the
Operating Agreements Seller will, if so requested by Purchaser, terminate
on or before the Closing Date.
8. The first sentence of Section 3.22 is hereby deleted and replaced with
the following:
Seller will provide Purchaser, by the date that is five (5) days after the
Study Period, with a schedule prepared by the Existing Manager of the
Existing Manager's employees and general managers engaged in the operation
of the Inns, showing salaries and duties and length of service of each such
manager or employee.
9. Exhibit B to the Contract is hereby deleted and replaced with the
---------
attached and incorporated Exhibit B.
---------
10. Exhibit C to the Contract is hereby deleted and replaced with the
---------
attached and incorporated Exhibit C.
---------
11. Section 3.17 of the Contract is hereby modified by adding the
following at the end of such Section:
Seller will convey at Closing all of its right, title and interest in and
to any and all warranties or guarantees, if any, of manufacturers,
suppliers and installers relating to the Improvements and the Tangible
Personal Property or any part thereof.
<PAGE>
12. All other terms and conditions of the Contract, except as specifically
modified herein will remain unchanged and in full force and effect. The parties
hereto fully ratify and reaffirm the Contract as amended hereby.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
<PAGE>
WITNESS THE FOLLOWING SIGNATURES AND SEALS:
ATTEST: MFI PARTNERS, L.P.
a Delaware limited partnership
/s/ [SIGNATURE APPEARS HERE]
- ------------------------------
Title: By: TGC/MFI L.P., a Delaware
----------------------- limited partnership, its general
partner
By: TCG/MFI GENPAR CORP.,
a Delaware corporation, its
general partner
By: /s/ [SIGNATURE APPEARS HERE]
---------------------------
Name:
-------------------------
Title:
-------------------------
ATTEST: HUDSON HOTELS LIMITED
PARTNERSHIP, L.P., a Virginia
limited partnership
/s/ John M. Sabin
- -----------------------------
Title: President By: HUDSON HOTEL TRUST, a
---------------------- Maryland real estate investment
trust, its general partner
By: /s/ E. Anthony Wilson
---------------------------
Name: E. Anthony Wilson
-------------------------
Title: Chief Executive Officer
-------------------------
<PAGE>
Exhibit 10.3
AGREEMENT OF PURCHASE AND SALE
dated as of June 2, 1998
between
WALDEN AVENUE-BLEND-ALL HOTEL DEVELOPMENT, INC.,
a New York corporation;
DICK ROAD-BLEND-ALL HOTEL DEVELOPMENT, INC.,
a New York corporation;
BLEND-ALL HOTEL DEVELOPMENT, INC.
a New York corporation; and
LETOM LAND LEASE PARTNERS,
a New York general partnership
collectively, as Seller,
and
HUDSON HOTELS TRUST
a Maryland real estate investment trust
as Purchaser
HAMPTON INN (Erie County, New York)
COMFORT SUITES (Erie County, New York)
HOLIDAY-INN-CLEVELAND AIRPORT (Cuyahoga County, Ohio)
<PAGE>
AGREEMENT OF PURCHASE AND SALE
------------------------------
THIS AGREEMENT (the "Agreement"), dated as of the 1st day of June, 1998
between WALDEN AVENUE-BLEND-ALL HOTEL DEVELOPMENT, INC., a New York corporation;
DICK ROAD-BLEND-ALL HOTEL DEVELOPMENT, INC., a New York corporation; BLEND-ALL
HOTEL DEVELOPMENT, INC., a New York corporation; and LETOM LAND LEASE PARTNERS,
a general partnership (individually and collectively, the "Seller") and HUDSON
HOTELS TRUST, a Maryland real estate investment trust (the "Purchaser"),
provides:
ARTICLE I
---------
DEFINITIONS; RULES OF CONSTRUCTION
----------------------------------
1. Definitions. The following terms shall have the indicated meanings:
------------
"Assignment and Assumption Agreement" shall mean that certain assignment
-------------------------------------
and assumption agreement whereby the Seller (a) assigns and the Purchaser
assumes the Operating Agreements that have not been canceled at Purchaser's
request and (b) assigns all of the Seller's right, title and interest in and to
the Intangible Personal Property, to the extent assignable.
"Authorizations" shall mean all licenses, permits and approvals required by
----------------
any governmental or quasi-governmental agency, body or officer for the
ownership, operation and use of the Property or any part thereof.
"Bill of Sale [Inventory]" shall mean that certain bill of sale conveying
--------------------------
title to the Inventory to the Purchaser's property manager, lessee or designee.
"Bill of Sale [Personal Property]" shall mean that certain bill of sale
----------------------------------
conveying title to the Tangible Personal Property, Intangible Personal Property
and the Reservation system from the Seller to the Purchaser.
"Choice" shall mean Choice Hotel, Inc., licenser of the Comfort Suites
--------
Hotel.
"Closing" shall mean the closing of the purchase and sale of the Property
---------
pursuant to this Agreement.
"Closing Date" shall mean on or before August 14, 1998.
--------------
"Comfort Suites Hotel" shall mean the 100-suite Comfort Suites Hotel and
----------------------
related amenities located on the Comfort Suites Land.
-2-
<PAGE>
"Comfort Suites Land" shall mean that certain parcel of real estate lying
---------------------
and being in Erie County, New York as more particularly described on Exhibit A
---------
attached hereto, together with all easements, rights, privileges, remainders,
reversions and appurtenances thereunto belonging or in any way appertaining, and
all of the estate, right, title, interest, claim or demand whatsoever of the
Seller therein, in the streets and ways adjacent thereto and in the beds
thereof, either at law or in equity, in possession or expectancy, now or
hereafter acquired.
"Deposit" shall mean all amounts deposited from time to time with the
---------
Escrow Agent by the Purchaser pursuant to Section 2.2, plus all interest accrued
-----------
thereon, which shall be allocated among each Property as shown on Exhibit B.
----------
The Deposit shall be invested by the Escrow Agent in a manner acceptable to the
Seller and the Purchaser and shall be held and disbursed by the Escrow Agent in
strict accordance with the terms and provisions of this Agreement.
"Employment Agreements" shall mean all employment agreements, written or
-----------------------
oral, between the Seller or its managing agent and the persons employed with
respect to the Property.
"Escrow Agent" shall mean Ticor Title Guarantee Company, 110 Franklin
--------------
Street, Buffalo, New York 14202.
"FIRPTA Certificate" shall mean the affidavit of the Seller under Section
-------------------
1445 of the Internal Revenue Code.
"Governmental Body" means any federal, state, municipal or other
-------------------
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign.
"Hampton Inn Hotel" shall mean the 133-room Hampton Inn Hotel and related
-------------------
amenities located on the Hampton Inn Land.
"Hampton Inn Land" shall mean that certain parcel of real estate lying and
------------------
being in Erie County, New York as more particularly described on Exhibit A
---------
attached hereto, together with all easements, rights, privileges, remainders,
reversions and appurtenances thereunto belonging or in any way appertaining, and
all of the estate, right, title, interest, claim or demand whatsoever of the
Seller therein, in the streets and ways adjacent thereto and in the beds
thereof, either at law or in equity, in possession or expectancy, now or
hereafter acquired.
"Holiday" shall mean Holiday Inn Worldwide, licensor of the Holiday Inn
---------
Hotel.
"Holiday Inn Hotel" shall mean the 146-room Holiday Inn Hotel and related
-------------------
amenities located on the Holiday Inn Land.
"Holiday Inn Land" shall mean that certain parcel of real estate lying and
------------------
being in the County of Cuyahoga, Ohio as more particularly described on Exhibit
-------
A attached
- -
-3-
<PAGE>
hereto, together with all easements, rights, privileges, remainders, reversions
and appurtenances thereunto belonging or in any way appertaining, and all of the
estate, right, title, interest, claim or demand whatsoever of the Seller
therein, in the streets and ways adjacent thereto and in the beds thereof,
either at law or in equity, in possession or expectancy, now or hereafter
acquired.
"Hotel" or "Hotels" shall mean the Comfort Suites Hotel, the Hampton Inn
-------------------
Hotel and the Holiday Inn Hotel.
"Improvements" shall mean the Hotel and all other buildings, improvements,
--------------
fixtures and other items of real estate located on the Land.
"Intangible Personal Property" shall mean all intangible personal property
------------------------------
owned or possessed by the Seller and used in connection with the ownership,
operation, leasing occupancy or maintenance of the Property, including, without
limitation, general intangibles, business records, plans and specifications,
surveys pertaining to the Real Property and the Personal Property, all licenses,
permits and approvals with respect to the construction, ownership, operation,
leasing, occupancy or maintenance of the Property, any unpaid award for taking
by condemnation or any damage to the Land by reason of a change of grade or
location of or access to any street or highway, and the share of the Tray Ledger
determined under Section 7.5, excluding (a) any of the aforesaid rights the
-----------
Purchaser elects not to acquire, (b) the Seller' cash on hand, in bank accounts
and invested with financial institutions and (c) accounts receivable except for
the above described share of the Tray Ledger.
"Inventory" shall mean all inventory located at the Hotel, including
-----------
without limitation, all mattresses, pillows, bed linens, towels, paper goods,
soaps, cleaning supplies and other such supplies.
"Land" shall mean the Comfort Suites Land, the Hampton Inn Land and the
------
Holiday Inn Land.
"Licensor" shall mean Promus, Choice and Holiday.
----------
"Operating Agreements" shall mean the management agreements, service
----------------------
contracts and other agreements, if any, in effect with respect to the
construction, ownership, operation, occupancy or maintenance of the Property.
"Owner's Title Policy" shall mean an owner's policy of title insurance
----------------------
issued to the Purchaser by the Title Company.
"Permitted Title Exceptions" shall mean those exceptions to title to the
----------------------------
Real Property that are satisfactory to the Purchaser as determined pursuant to
Section 2.3(d).
- --------------
"Promus" shall mean Promus Hotels, Inc., licensor of the Hampton Inn Hotel.
--------
-4-
<PAGE>
"Property" shall mean collectively the Real Property, the Inventory, the
----------
Tangible Personal Property and the Intangible Personal Property.
"Purchase Price" shall mean $25,770.000 payable in the manner described in
----------------
Section 3.1 and allocable to each Hotel as set forth on Exhibit B.
- ----------- ----------
"Real Property" shall mean the Land and the Improvements.
---------------
"Reservation System" shall mean the Seller's Reservation Terminal and
--------------------
Reservation System equipment and software for the Existing Hotels, if any.
"Seller's Organizational Documents" shall mean the current organizational
-----------------------------------
documents pertaining to each Seller.
"Study Period" shall mean the thirty (30) day period commencing at 9:00
--------------
a.m. on the date hereof, and continuing through 5:00 p.m. July 2, 1998.
"Survey" shall mean the surveys prepared pursuant to Section 2.3(e).
-------- ---------------
"Tangible Personal Property" shall mean the items of Tangible Personal
----------------------------
Property consisting of all furniture, fixtures and equipment situated on,
attached to, or used in the operation of the Hotel including all applicable
Licensor signage used thereon, and all furniture, furnishings, equipment,
machinery, and other personal property of every kind located on or used in the
operation of the Hotel and owned by the Seller.
"Title Commitment" shall mean the commitment by the Title Company to issue
------------------
the Owner's Title Policy.
"Title Company" shall mean Ticor Title Guarantee Company.
---------------
"Tray Ledger" shall mean the final night's room revenue for the Existing
-------------
Hotels (revenue from rooms occupied as of 12:01 a.m. on the Closing Date,
exclusive of food, beverage, telephone and similar charges which shall be
retained by the Seller), including any sales taxes, room taxes or other taxes
thereon.
"Utilities" shall mean public sanitary and storm sewers, natural gas,
-----------
telephone, public water facilities, electrical facilities and all other utility
facilities and services necessary for the operation and occupancy of the
Property as a hotel.
1.2 Rules of Construction. The following rules shall apply to the
----------------------
construction and interpretation of this Agreement:
(a) Singular words shall connote the plural number as well as the
singular and vice versa, and the masculine shall include the feminine and the
neuter.
-5-
<PAGE>
(b) All references herein to particular articles, sections,
subsections, clauses or exhibits are references to articles, sections,
subsections, clauses or exhibits of this Agreement.
(c) The headings contained herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, constructions or effect.
(d) Each party hereto and its counsel have reviewed and revised (or
requested revisions of) this Agreement, and therefore any usual rules of
construction requiring that ambiguities are to be resolved against a particular
party shall not be applicable in the construction and interpretation of this
Agreement or any exhibits hereto.
ARTICLE II
----------
PURCHASE AND SALE; STUDY PERIOD
-------------------------------
2.1 Purchase and Sale. The Seller agrees to sell and the Purchaser agrees
------------------
to purchase the Property for the Purchase Price and in accordance with the other
terms and conditions set forth herein.
2.2 Deposit. The Purchaser, upon execution of this Agreement, shall make
--------
a deposit of $2,000,000 with the Escrow Agent (the "Deposit"). The Deposit
shall be (a) refunded to Purchaser or delivered to Seller pursuant to Section
-------
2.3 (b) applied at the Closing against the Purchase Price, (c) returned to the
- -------
Purchaser pursuant to Section 9.4, or (d) paid to the Seller pursuant to Section
----------- -------
9.5. All interest on the Deposit shall accrue in favor of the Purchaser.
- ----
2.3 Study Period. (a) Upon written notice to Seller, the Purchaser shall
-------------
have the right, until 5:00 p.m. on the last day of the Study Period, and
thereafter if the Purchaser has not terminated this Agreement, to enter upon the
Real Property and to perform, at the Purchaser's expense, such economic,
surveying, engineering, environmental, topographic and marketing tests, studies
and investigations as the Purchaser may deem appropriate. If such tests,
studies and investigations do not warrant, in the Purchaser's sole, absolute and
unreviewable discretion, the purchase of the Property for the purposes
contemplated by the Purchaser, then the Purchaser shall so notify the Seller
prior to the expiration of the Study Period and receive a refund of the Deposit
and this Agreement shall be terminated. If for any reason the Purchaser does
not so notify the Seller of its determination to terminate this Agreement prior
to the expiration of the Study Period, the Deposit shall be delivered to Seller
and this Agreement shall remain in full force and effect, and the Purchaser
shall be deemed to have waived any rights to terminate this Agreement pursuant
to this Section 2.3.
-----------
(b) During the Study Period, the Seller shall make available to the
Purchaser, its agents, auditors, engineers, attorneys and other designees, for
inspection
-6-
<PAGE>
copies of all existing architectural and engineering studies, surveys, title
insurance policies, zoning and site plan materials, correspondence,
environmental audits and other related materials or information if any, relating
to the Property which are in, or come into, the Seller's possession or control.
(c) The Purchaser shall indemnify and defend the Seller against any
loss, damage or claim arising from entry upon the Real Property by the Purchaser
or any agents, contractors or employees of the Purchaser. The Purchaser, at its
own expense, shall restore any damage to the Real Property caused by any of the
tests or studies made by the Purchaser.
(d) Within two (2) business days of the date hereof, the Seller, at
its expense, shall provide to the Purchaser the following title documents (the
"Title Documents"): Comfort Suites, Abstract of Title; Hampton Inn - copies of
fee and mortgagee policies dated April 28, 1995; Holiday Inn - copy of fee
policy dated October 25, 1989 and mortgagee policy dated December 20, 1991.
Within ten (10) days after receiving the Title Documents, Purchaser shall notify
the Seller of any defects in title shown by such examination that render title
unmarketable. Within ten (10) days after such notification, the Seller shall
notify the Purchaser whether the Seller is willing to cure such defects. If the
Seller is willing to cure such defects, the Seller shall act promptly and
diligently to cure such defects at its expense. If such defects consist of deeds
of trust, mechanics' liens, tax liens or other liens or charges in a fixed sum
or capable of computation as a fixed sum, the Seller shall pay and discharge or
shall bond off with a bonding company acceptable to the Purchaser (and the
Escrow Agent is authorized to pay and discharge at Closing) such defects at
Closing. If Purchaser's title commitments disclose title defects affecting
marketability of title or adversely affecting access to or use of the Property
as hotels, which defects are (i) not capable of computation as a fixed sum but
which are (ii) reasonably determined to be capable of being cured at a cost not
to exceed $100,000, then Sellers shall use their best efforts to cure such
defect. If the Seller is unwilling or unable to cure any other such defects by
Closing, the Purchaser shall elect (1) to waive such defects and proceed to
Closing without any abatement in the Purchase Price or (2) to terminate this
Agreement and receive a full refund of the Deposit. The Seller shall not, after
the date of this Agreement, subject the Property to any liens, encumbrances,
covenants, conditions, restrictions, easements or other title matters or seek
any zoning changes or take any other action which may affect or modify the
status of title without the Purchaser's prior written consent. All title matters
revealed by the Purchaser's title examination and not objected to by the
Purchaser as provided above shall be deemed Permitted Title Exceptions. If
Purchaser shall fail to examine title and notify the Seller of any such title
objections as set forth herein, all such title exceptions (other than those
rendering title unmarketable and those that are to be paid at Closing as
provided above) shall be deemed Permitted Title Exceptions.
(e) Within ten (10) days after the date hereof, the Seller, at its
expense, shall deliver to the Purchaser boundary surveys in its possession for
the Properties and boundary surveys of the easements areas located on the
Comfort Suites Land and the Hampton Inn Land across which the Seller retain
ingress/egress parking easements.
-7-
<PAGE>
(f) The Seller and Purchaser acknowledge and agree that the Comfort
Suites Land and the Hampton Inn Land are owned by the Erie County Industrial
Development Agency (the "Agency") and the Agency leases the Comfort Suites Land
and the Hampton Inn Land to Seller pursuant to Lease Agreements and related
lease and bond documents (the "Agency Documents"). During the Study Period,
Purchaser will determine, in its sole discretion, the acceptability of the
Agency Documents and whether Purchaser desires to lease or purchase from the
Agency the Comfort Suites Land and/or the Hampton Inn Land.
(g) Seller will cooperate, where possible, in permitting the
assignment of existing mortgages on the Hotels in New York for purposes of
saving mortgage tax, provided (i) Seller is fully released of liability under
any such mortgage and (ii) Seller incurred no cost in doing so.
ARTICLE III
-----------
PURCHASE AND SALE;
------------------
PAYMENT OF PURCHASE PRICE
-------------------------
3.1 Payment of Purchase Price. On the Closing Date, the Purchase Price
--------------------------
shall be paid to the Seller in the following manner:
(a) The Purchaser shall receive a credit against the Purchase Price
for an amount equal to the Deposit for the applicable Property.
(b) the Seller or other applicable party as specified in writing by
the Seller. If required by Purchaser's lending institution, Seller shall accept
payment by a single wire transfer to a designated account or escrow agent.
3.2 Allocation of Purchase Price. The parties agree that the Purchase
-----------------------------
Price shall be allocated among the various components of the Property in the
manner indicated on Exhibit B attached hereto.
---------
3.3 Cumulative Purchase. If upon the expiration of the Study Period the
--------------------
Purchaser has given to the Seller a notice that Purchaser intends to proceed to
Closing, then Purchaser acknowledges that so long as Seller has complied with
all conditions precedent to Purchaser's obligations to purchase each Property,
has tendered performance, and has not committed a default for which notice has
been given and which has not been cured within the applicable cure period, the
Purchaser shall be obligated to acquire each Property.
-8-
<PAGE>
ARTICLE IV
----------
SELLER'S REPRESENTATIONS, WARRANTIES AND COVENANTS
--------------------------------------------------
To induce the Purchaser to enter into this Agreement and to purchase the
Property, each Seller hereby makes the following representations, warranties and
covenants with respect to such Seller only and with respect to the applicable
Property of each such Seller, upon each of which the Seller acknowledges and
agrees that the Purchaser is entitled to rely and has relied:
4.1 Organization and Power. Each Seller is duly organized and in good
-----------------------
standing and has the requisite power and authority to enter into the
transactions contemplated herein.
4.2 Authorization and Execution. This Agreement has been duly authorized
----------------------------
by all necessary action on the part of the Seller, has been duly executed and
delivered by the Seller, constitutes the valid and binding agreement of the
Seller and is enforceable in accordance with its terms. There is no other
person or entity who has an ownership interest in the Property or whose consent
is required in connection with the Seller's performance of its obligations
hereunder.
4.3 Noncontravention. The execution and delivery of, and the performance
-----------------
by the Seller of its obligations under, this Agreement do not and will not
contravene, or constitute a default under, any provision of applicable law or
regulation, the Seller's Organizational Documents or any agreement, judgment,
injunction, order, decree or other instrument binding upon the Seller, or result
in the creation of any lien or other encumbrance on any asset of the Seller.
Notwithstanding the foregoing, Seller represents there is a right of first
refusal held by Bob Evans Restaurant on the Hampton Inn Hotel (the "Bob Evans
Right of First Refusal").
4.4 No Special Taxes. Other than the special district taxes for the
-----------------
Comfort Suites and Hampton Inn Hotels payable to the Town of Cheektowaga for
garbage, drainage, fire, sanitary sewer, fire hydrant and general light
services, the Seller has no knowledge of, nor has it received any notice of, any
special taxes or assessments relating to the Property or any part thereof or any
planned public improvements that may result in a special tax or assessment
against the Property.
4.5 Compliance with Existing Laws. To the best of the Seller's knowledge,
------------------------------
the Seller possesses all Authorizations, each of which is valid and in full
force and effect, and no provision, condition or limitation of any of the
authorizations has been breached or violated.
4.6 Operating Agreements. Except for the hotel management system at the
---------------------
Hampton Inn Hotel and a telephone lease at the Holiday Inn Hotel, each of the
Operating Agreements may be terminated by the Seller or the Purchaser upon not
more than thirty (30) days prior written notice and without the payment of any
penalty, fee,
-9-
<PAGE>
premium or other amount. The Seller has performed all of its obligations under
each of the Operating Agreements and no fact or circumstance has occurred which,
by itself or with the passage of time or the giving of notice or both, would
constitute a default under any of the Operating Agreements. The Seller shall not
enter into any new management agreement, maintenance or repair contract, supply
contract, lease in which its lessee or other agreements with respect to the
Property, nor shall the Seller enter into any agreements modifying the Operating
Agreements, unless (a) any such agreement or modification will not bind the
Purchaser or the Property after the Closing Date or (b) the Seller has obtained
the Purchaser's prior written consent to such agreement or modification. The
Seller agrees to cancel and terminate any Operating Agreements the Purchaser
requests in writing prior to Closing.
4.7 Condemnation Proceedings; Roadways. The Seller has received no notice
-----------------------------------
of any condemnation or eminent domain proceeding pending or threatened against
the Property or any part thereof. The Seller has no knowledge of any change or
proposed change in the route, grade or width of, or otherwise affecting, any
street or road adjacent to or serving the Real Property.
4.8 Litigation. Except for a claim against Amerail Construction regarding
-----------
its construction facade work on the Holiday Inn Hotel (which Seller shall retain
all right, title and interest to) and an offsetting mechanics' lien (which has
been bonded off) filed in connection therewith, there is no action, suit or
proceeding pending or known to be threatened against or affecting the Seller in
any court, before any arbitrator or before or by any Governmental body which (a)
in any manner raises any question affecting the validity or enforceability of
this Agreement or any other agreement or instrument to which the Seller is a
party or by which it is bound and that is or is to be used in connection with,
or is contemplated by, this Agreement, (b) could materially and adversely affect
the business, financial position or results of operations of the Seller, (c)
could materially and adversely affect the ability of the Seller to perform its
obligations hereunder, or under any document to be delivered pursuant hereto,
(d) could create a lien on the Property, any part thereof or any interest
therein, (e) the subject matter of which concerns any past or present employee
of the Seller or its managing agent or (f) could otherwise adversely affect the
Property, any part thereof or any interest therein or the use, operation,
condition or occupancy thereof.
4.9 Financial Information. All of the Seller's financial information,
----------------------
including, without limitation, all books and records and financial statements
("Financial Information") is correct and complete in all respects and presents
accurately the results of the operations of the Property for the periods
indicated.
4.10 Organizational Documents. The Seller's Organizational Documents are
-------------------------
in full force and effect and have not been modified or supplemented, and no fact
or circumstance has occurred that, by itself or with the giving of notice or the
passage of time or both, would constitute a default thereunder.
-10-
<PAGE>
4.11 Operation of Property. The Seller covenants that between the date
----------------------
hereof and the date of Closing, it will (a) operate the Property only in the
usual, regular and ordinary manner consistent with the Seller's prior practice,
(b) maintain its books of account and records in the usual, regular and ordinary
manner, in accordance with sound accounting principles applied on a basis
consistent with the basis used in keeping its books in prior years and (c) use
all reasonable efforts to preserve intact its present business organization,
keep available the services of its present officers, partners and employees and
preserve its relationships with suppliers and others having business dealing
with it. The Seller shall continue to use its best efforts to take guest room
reservations and to book functions and meetings and otherwise to promote the
business of the Hotels in generally the same manner as the Seller did prior to
the execution of this Agreement. All advance room bookings and reservations and
all meetings and function bookings shall continue to be booked at rates, prices
and charges heretofore customarily charged by the Seller for such purposes, and
in accordance with the Seller's published rate schedules. Seller shall not
deplete inventories below customary levels. Except as otherwise permitted
hereby, from the date hereof until the Closing Date, the Seller shall not take
any action or fail to take action the result of which (i) would have a material
adverse effect on the Property or the Purchaser's ability to continue the
operation thereof after the Closing Date in substantially the same manner as
presently conducted, (ii) outside of the normal course of business reduce or
cause to be reduced any room rents or any other charges over which the Seller
has operational control, or (iii) would cause any of the representations and
warranties contained in this Article IV to be untrue as of Closing Date.
----------
4.12 Personal Property. All of the Tangible Personal Property, Intangible
------------------
Personal Property and Inventory being conveyed by the Seller to the Purchaser or
to the Purchaser's managing agent, lessee or designee, are free and clear of all
liens and encumbrances and will be so on the Closing Date and the Seller has
good, merchantable title thereto and the right to convey same in accordance with
the terms of the Agreement.
4.13 Bankruptcy. No Act of Bankruptcy has occurred with respect to the
-----------
Seller.
4.14 Zoning. The current use and occupancy of the Property for hotel
------
and restaurant purposes are permitted as a matter of right as a principal use
under all laws applicable thereto without the necessity of any special use
permit, special exception or other special permit, permission or consent.
4.15 Brokers. Seller has not engaged the services of, nor is it or
-------
will it become liable to, any real estate agent, broker, finder or any other
person or entity or any brokerage or finder's fee, commission or other amount
with respect to the transactions described herein. The Seller shall indemnify,
defend and hold the Purchaser harmless against all loss, liability and expense,
including reasonable attorneys' fees and costs, suffered by the Purchaser due to
a breach of the foregoing representation and warranty.
-11-
<PAGE>
4.16 Room Furnishings. All public spaces, lobbies, meeting rooms, and
-----------------
each room in the Hotel available for guest rental is furnished in accordance
with the applicable Licensor's standards for the hotel and room type.
4.17 License. The licenses from the applicable Licensor (together, the
--------
"License") for the Hotel is, and as of the Closing Date will be, valid and in
full force and effect, and Seller is not and will not be in default with respect
thereto (with or without the giving of any required notice and/or lapse of
time). Each Hotel will, at the time of closing, meet the current requirements
and standards of the respective Licensor for operation as an existing franchise.
Seller shall cooperate with Purchaser in arranging an inspection of each Hotel
by the pertinent Licensor during the Study Period to confirm such compliance.
4.18 Bulk Sale Compliance. The Seller shall indemnify the Purchaser
---------------------
against any claim, loss or liability arising under the bulk sales law in
connection with the transaction contemplated herein.
4.19 Sufficiency of Certain Items. The Property contains, as of the
-----------------------------
Closing Date, not less than:
(a) a sufficient amount of furniture, furnishings, color television
sets, carpets, drapes, rugs, floor coverings, mattresses, pillows, bedspreads
and the like, to furnish each guest room, so that each such guest room is, in
fact, fully furnished; and
(b) a sufficient amount of towels, washcloths and bed linens, so that
there are three sets of towels, washcloths and lines for each guest room (one on
the beds, one on the shelves, and one in the laundry), together with a
sufficient supply of paper goods, soaps, cleaning supplies and other such
supplies and materials, as are reasonably adequate for the current operations of
the Hotel.
4.20 New York and Ohio Tax Law Compliance. The Seller shall cooperate
-------------------------------------
with the Purchaser in connection with compliance with all taxation laws of New
York State and Ohio State that pertain to the transfer of the applicable Hotel
including, without limitation, the filing of all forms for the tentative
assessments within the applicable time frame such that transfer of the Property
and disbursements of sales proceeds therefrom shall occur on the Closing Date.
Notwithstanding the foregoing, the Purchaser shall be obligated to pay the New
York State and Ohio State sales taxes on the Tangible and Intangible Personal
Property.
4.21 As-Is. The Purchaser acknowledges, represents and warrants that: (i)
------
any information ("Information") supplied or made available by the Seller or any
other party, whether before or after the date of this Agreement, whether written
or oral, or in the form of maps, surveys, plats, soil reports, engineering
studies, environmental studies (including Seller's Phase I Report), inspection
reports, plans, specifications, or projections or any other information
whatsoever, without exception, pertaining to the Property, is furnished to the
Seller solely as a courtesy, and except to the extent disclosure is required by
-12-
<PAGE>
applicable law, will be kept strictly confidential by the Purchaser and will be
returned to the Seller in the event this Agreement is terminated for any reason;
(ii) the Information is provided, and the Property is purchased, on an as-is-
where-is basis and the Seller makes no representation, express or implied, or
arising by merchantiability, or fitness for a particular purpose as to the
Information for the Property, other than as set forth herein; and (iii) no
representations, whether written or oral, have been made by the Seller or its
agents or employees in order to induce Purchaser to enter into this Agreement,
other than those specifically set forth herein. Except as specifically provided
herein, Seller makes no representations or warranties and specifically disclaims
any representation, warranty, or guaranty, oral or written, past, present or
future with respect to the applicable zoning, permitting or building code
requirement.
4.22 Environmental To Seller's actual knowledge, except as set forth in
---------------------------------------------------------------------
any environmental reports which may be delivered to Purchaser by Sellers during
- -------------------------------------------------------------------------------
the Study Period (the "Environmental Reports"), Seller and the Property are not
- -----------------------
under investigation or threatened investigation for failure to comply with any
statutes, laws, ordinances, rules, regulations, orders and directives of any
governmental agency pertaining to the use, generation, dumping, releasing,
burying or disposing of or emitting of any materials or substances now or
heretofore defined as "hazardous substances," "hazardous materials," "hazardous
waste," "toxic substances," or other similar designations under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. (S)9601, et seq., the Resource Conservation and Recovery Act,
42 U.S.C. (S) 6901, et seq., the Hazardous Materials Transportation Act, 49
U.S.C. (S) 1801, et seq. and other laws, whether or not of a similar nature,
applicable to the Property and dopted by, enacted in or applicable to the states
where the Property is located. To Sellers' knowledge, except as may be set
forth in the Environmental Reports, the Property has never appeared on any
federal or state registry of active or inactive hazardous waste disposal sites.
Sellers have never received any notice of claim from a governmental agency
concerning the alleged release of threatened release of hazardous Materials at
the Property.
Each of the representations, warranties and covenants contained in this Article
-------
IV and its various subparagraphs are intended for the benefit of the Purchaser
- --
and may be waived in whole or in part, by the Purchaser, but only by an
instrument in writing signed by the Purchaser. Each of said representations,
warranties and covenants shall survive the closing of the transaction
contemplated hereby for a period of one hundred twenty (120) days.
ARTICLE V
---------
PURCHASER'S REPRESENTATIONS, WARRANTIES AND COVENANTS
-----------------------------------------------------
To induce the Seller to enter into this Agreement and to sell the Property,
the Purchaser hereby makes the following representations, warranties and
covenants with
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<PAGE>
respect to the Property, upon each of which the Purchaser acknowledges and
agrees that the Seller is entitled to rely and has relied:
5.1 Organization and Power. The Purchaser is a real estate investment
-----------------------
trust duly organized, validly existing and in good standing under the laws of
the State of Maryland and has all powers and all governmental licenses,
authorizations, consents and approvals to carry on its business as now conducted
and to enter into and perform its obligations under this Agreement and any
document or instrument required to be executed and delivered on behalf of the
Purchaser hereunder.
5.2 Noncontravention. The execution and delivery of this Agreement and
-----------------
the performance by the Purchaser of its obligations hereunder do not and will
not contravene, or constitute a default under, any provisions of applicable law
or regulation, the Purchaser's partnership agreement or any agreement, judgment,
injunction, order, decree or other instrument binding upon the Purchaser or
result in the creation of any lien or other encumbrance on any asset of the
Purchaser.
5.3 Litigation. There is no action, suit or proceeding, pending or known
-----------
to be threatened, against or affecting the Purchaser in any court or before any
arbitrator or before any Governmental Body which (a) in any manner raises any
questions affecting the validity or enforceability of this Agreement or any
other amount with respect to the transaction described herein. The Purchaser
shall indemnify, defend and hold the Seller harmless against all loss, liability
and expense, including reasonable attorneys' fees and costs, suffered by Seller
due to a breach of the foregoing representation and warranty.
5.4 Bankruptcy. No Act of Bankruptcy has occurred with respect to the
-----------
Purchaser.
5.5 Brokerage Commission. The Purchaser has not engaged the services of,
---------------------
nor is it or will it become liable to, any real estate agent, broker, finder or
any other person or entity for any brokerage or finder's fee, commission or
other amount with respect to the transaction described herein. The Purchaser
shall indemnify, defend and hold the Seller harmless against all loss, liability
and expense, including reasonable attorneys' fees and costs, suffered by Seller
due to a breach of the foregoing representation and warranty.
5.6 New York and Ohio Tax Law Compliance. The Purchaser shall cooperate
-------------------------------------
with the Seller in connection with compliance with all taxation's laws of New
York State and Ohio State that pertain to the transfer of the applicable Hotel
including, without limitation, the filing of all forms for the tentative
assessments within the applicable time frame such that transfer of the Property
and disbursement of sales proceeds therefrom shall occur on the Closing Date.
ARTICLE VI
----------
CONDITIONS AND ADDITIONAL COVENANTS
-----------------------------------
-14-
<PAGE>
The Purchaser's obligations hereunder are subject to the satisfaction of
the following conditions precedent and the compliance by the Seller with the
following covenants:
6.1 Seller's Deliveries. The Seller shall have delivered to the Escrow
--------------------
Agent or the Purchaser, as the case may be, on or before the Closing Date, all
of the documents and other information required of Seller pursuant to Section
-------
7.2.
- ----
6.2 Title to Property. The Purchaser shall have determined that the
------------------
Seller is the sole owner of good and marketable fee simple title to the Real
Property and to the Tangible Personal Property free and clear of all liens,
encumbrances, restrictions, conditions and agreements except for Permitted Title
Exceptions. The Seller shall not have taken any action from the date hereof and
through and including the Closing Date that would adversely affect the status of
title to the Real Property.
6.3 Ingress/Egress Easements. Seller and Purchaser shall agree to a form
-------------------------
of easement agreement in favor of Seller for ingress, egress and parking (the
"Easement Agreement") to the Comfort Suites and the Hampton Inn Land. The
Easement Agreement to the Comfort Suites Land shall provide that the Seller
shall pay one-half of the maintenance costs in connection with such easement
once the pad for the improvements to be build thereon has been constructed. The
Easement Agreement to the Hampton Inn Land shall provide access from Dick Road
only and shall provide that the Seller shall pay one-quarter of the maintenance
costs once the pad for the improvements to be built thereon has been
constructed.
6.4 Bob Evans Right of First Refusal. Bob Evans Restaurant shall have
---------------------------------
waived in writing the Bob Evans Right of Refusal during the Study Period.
6.5 Agency Documents. The Agency shall have either (i) consented to the
-----------------
assignment by the Seller of the lease(s) between the Agency and Seller for the
Comfort Suites Land and/or the Hampton Inn Land, or have conveyed to Purchaser
by appropriate instrument the Comfort Suites Land and/or the Hampton Inn Land.
The Agency shall also provide customary ground lessor's estoppel and
certificates.
ARTICLE VII
-----------
CLOSING
-------
7.1 Closing. Unless otherwise required by the Agency, closing on the
--------
Properties shall be held at a location that is mutually acceptable to the
parties, on or before (insert date when option exercised) Possession of the
Property shall be delivered to the Purchaser on the Closing Date, subject only
to Permitted Title Exceptions.
7.2 Seller's Deliveries. On the Closing Date, the Seller shall deliver to
--------------------
Purchaser all of the following instruments with respect to the applicable
Property, each of
-15-
<PAGE>
which shall have been duly executed and, where applicable, acknowledged on
behalf of the Seller and shall be dated as of the Closing Date:
(a) the Deed;
(b) the Bill of Sale [Inventory].
(c) the Bill of Sale [Personal Property].
(d) the Assignment and Assumption Agreement.
(e) Easement Agreements for the Comfort Suites Land and the Hampton Inn
Land.
(f) Certificates of Title for the 1992 Ford Van used in connection with the
Comfort Suites Hotel and the 1995 Ford Van used in connection with the Hampton
Inn Hotel and the 1992 Ford Van used in connection with the Holiday Inn Hotel
(or any replacements for such vehicles).
(g) such agreements, affidavits or other documents as may be required by
the Title Company to issue the Owner's Title Policy.
(h) the FIRPTA Certificate.
(i) true, correct and complete copies of all warranties, if any, of
manufacturers, supplies and installers possessed by the Seller and relating to
the Improvements and the Personal Property, or any part thereof.
(j) Appropriate resolutions of the board of directors or partners, as
applicable of the Seller, certified by the secretary or an assistant secretary
of the Seller if such Seller is a corporation, together with all other necessary
approvals and consents of the Seller, authorizing (A) the execution on behalf of
the Seller of this Agreement and the documents to be executed and delivered by
the Seller prior to, at or otherwise in connection with the Closing of the
applicable Property, and (B) the performance by the Seller of its obligations
hereunder and under such documents. Also, current good standing certificates
(or comparable official documentation for each Seller entity).
(k) a valid, final and unconditional certificate of occupancy for the Real
Property and Improvements, issued by the appropriate governmental authority.
(l) If the Purchaser is assuming the Seller's obligations under any or all
of the Operating Agreements, the originals of such agreements, duly assigned to
the Purchaser and with such assignment acknowledged and approved by the other
parties to such Operating Agreements.
-16-
<PAGE>
(m) such proof as the Purchaser may reasonably require with respect to
Seller's compliance with the bulk sales laws or similar statutes.
(n) all current real estate and personal property tax bills in the
Seller's possession or under its control.
(o) Evidence that all employees of each Hotel have had their
employment terminated as of the closing date, including an affidavit from the
chief executive officer of the Seller setting forth the date through which all
employees have been paid and setting forth and describing, in detail, as to each
employee, all accrued but unpaid vacation pay and other fringe benefits.
(p) a complete set of all guest registration cards, guest transcripts,
guest histories, and all other available guest information.
(q) an updated schedule of employees, showing salaries and duties with
a statement of the length of service of each such employee, brought current to a
date not more that 48 hours prior to the Closing Date.
(r) a complete list of all advance room reservations, functions and
the like, in reasonable detail so as to enable the Purchaser to honor the
Seller's commitments in that regard.
(s) a list of the Seller's outstanding accounts receivable as of
midnight on the date prior to the Closing Date, specifying the name of each
account and the amount due the Seller.
(t) all keys for the Property.
(u) all books, records, operating reports, appraisal reports, files
and other materials in the Seller's possession or control which are necessary in
the Purchaser's reasonable discretion to maintain continuity of operation of the
Property.
(v) written notice executed by Seller notifying all interested
parties, including all tenants under any leases of the Property, that the
Property has been conveyed to the Purchaser and directing that all payments,
inquiries and the like be forwarded to the Purchaser at the address to be
provided by the Purchaser.
(w) to the extent permitted under applicable law, documents of
transfer necessary to transfer to the Purchaser the Seller's employment rating
for workers' compensation and state unemployment tax purposes.
(x) any other document or instrument reasonably requested by the
Purchaser or required hereby.
-17-
<PAGE>
(y) standard "comfort letters" from each Licensor and Ground lessor's
estoppel certificates, if possible.
7.3 Purchaser's Deliveries. On the Closing Date, the Purchaser shall pay
-----------------------
or deliver to the Seller the following:
(a) the portion of the Purchase Price described in Section 3.1(b).
---------------
(b) the Assignment and Assumption Agreement.
(c) Easement Agreements for the Comfort Suites Land and the Hampton
Inn Land.
(e) any other document or instrument reasonably requested by the
Seller or required hereby, including an acknowledgment that Seller has retained
all rights to any amounts recovered in connection with the Amerail claim set
forth herein.
7.4 Closing Costs. Except as is otherwise provided in Article VIII,
-------------- -------------
each party hereto shall pay its own legal fees and expenses. All filing fees
for the Deed shall be paid in accordance with local custom in the jurisdiction
in which the Property is located. The Seller shall pay any transfer taxes or
document stamps in accordance with local custom. The Seller shall pay for
preparation of the Documents to be delivered by the Seller hereunder, and for
the releases of any deeds of trust, mortgages and other financing encumbering
the Property and for any costs (except any costs incurred by the Seller for its
own account) in carrying out the transactions contemplated hereunder. This
Section 7.4 is subject to the other provisions of this Agreement dealing with
- -----------
costs and expenses and the allocation thereof.
7.5 Income and Expense Allocations. All income, except any Intangible
-------------------------------
Personal Property, and expenses with respect to the Property, and applicable to
the period of time before and after the Closing Date, determined in accordance
with sound accounting principles consistently applied, shall be allocated
between the Seller and the Purchaser. The Seller shall be entitled to all
income and responsible for all expenses for the period of time up to but not
including the Closing Date, and the Purchaser shall be entitled to all income
and responsible for all expenses for a period of time from, after and including
the Closing Date. Without limiting the generality of the foregoing, the
following items of income and expense shall be allocated at Closing:
(a) current and prepaid rents, including, without limitation, prepaid
room receipts, function receipts and other reservation receipts.
(b) real estate and personal property taxes.
(c) amounts under the Operating Agreements to be assigned to and
assumed by the Purchaser.
-18-
<PAGE>
(d) utility charges (including but not limited to charges for water,
sewer and electricity) and deposits if assumed by the Purchaser.
(e) wages, vacation pay, pension and welfare benefits and other fringe
benefits of all persons employed at the Property who the Purchaser elects to
employ.
(f) value of fuel stored on the Property at the price paid for such
fuel by the Seller, including any taxes.
(g) all prepaid reservations and contracts for rooms confirmed by
Seller prior to the Closing Date for dates after the Closing Date, all of which
Purchaser shall honor.
(h) the Tray Ledger, which shall be divided equally between the
parties.
The Seller shall be required to pay all sales taxes and similar impositions
currently through the Closing Date.
Purchaser shall not be obligated to collect any accounts receivable or
revenues accrued prior to the applicable Closing Date for Seller, but if
Purchaser collects same, such amounts will be promptly remitted to Seller in the
form received.
If accurate allocations cannot be made at Closing because current bills are
not obtainable (as, for example, in the case of utility bill or tax bills), the
parties shall allocate such income or expenses at Closing on the best available
information. Seller shall use its best efforts to deliver final bills for all
utilities at Closing.
Seller shall pay any costs imposed by Licensors to terminate the Licenses
and Purchaser shall pay the costs imposed by the Licensors to enter into new
Licenses.
ARTICLE VIII
------------
CONDEMNATION; RISK OF LOSS
--------------------------
8.1 Casualty Loss. In the event of damage to or destruction of all or any
--------------
part of the Project prior to the Closing Date, it is agreed as follows:
(a) Damage. If the amount of the casualty loss to any of the Real
Property is not more than Two Hundred Thousand Dollars ($200,000), this
Agreement will continue, all insurance proceeds collectively by reason of such
damage will be absolutely payable to the Purchaser and the Purchase Price will
be paid without reduction.
(b) Destruction. If the amount of casualty loss is more than Two
Hundred Thousand Dollars ($200,000), the Purchaser will have the option for ten
(10) days after receipt of notice of such destruction to cancel this Agreement
by service of
-19-
<PAGE>
written notice of cancellation. On the exercise of such option, this Agreement
will thereupon become null and void, and the Deposit will be returned to the
Purchaser. If the Purchaser fails to exercise the option to cancel this
Agreement, such option will lapse, the Purchaser will be entitled to receive all
insurance proceeds collectible by reason of such destruction and the Purchase
Price will be paid without reduction.
8.2 Condemnation. In the event all or a significant portion of the Real
-------------
Property is taken through Condemnation by a governmental authority prior to the
Closing Date set forth herein, Purchaser may elect to cancel this Agreement and
receive an immediate refund of the Deposit. In the alternative, the Purchase
Price hereunder may be adjusted or the proceeds of any Condemnation proceeding
awarded to the Purchaser.
ARTICLE IX
----------
LIABILITY OF PURCHASER; INDEMNIFICATION BY SELLER;
--------------------------------------------------
TERMINATION RIGHTS
------------------
9.1 Liability of Purchaser and Seller. Except for any obligation
----------------------------------
expressly assumed or agreed to be assumed by the Purchaser hereunder, the
Purchaser does not assume any obligation of the Seller or any liability for
claims arising out of any occurrence prior to the Closing Date. The Seller
shall not have any liability for claims arising out of any occurrence on or
subsequent to the Closing Date.
9.2 Indemnification by Seller. The Seller hereby indemnifies and holds
--------------------------
the Purchaser harmless from and against any and all claims, costs, penalties,
damages, losses, liabilities and expenses (including reasonable attorneys' fees)
subject to Section 10.11 that may at any time be incurred by the Purchaser,
-------------
whether before or after Closing, as a result of any breach by the Seller of any
of its representations, warranties, covenants or obligations set forth herein or
in any other document delivered by the Seller pursuant hereto.
9.3 Indemnification by Purchaser. The Purchaser hereby indemnifies and
-----------------------------
holds the Seller harmless from and against any and all claims, costs, penalties,
damages, losses, liabilities and expenses (including reasonable attorneys' fees)
subject to Section 10.11 that may at any time be incurred by the Seller, whether
-------------
before or after Closing, as a result of any breach by the Purchaser of any of
its representations, warranties, covenants or obligations set forth herein or in
any other document delivered by the Purchaser pursuant hereto.
9.4 Termination by Purchaser. If any condition set forth herein cannot or
-------------------------
will not be satisfied prior to the Closing Date, or upon the occurrence of any
other event that would entitle the Purchaser to terminate this Agreement and its
obligations hereunder, and the Seller fails to cure any such a matter within ten
(10) business days after notice thereof from the Purchaser, the Purchaser, at
its option, may elect either (a) to terminate this Agreement, in which event the
Deposit shall be forthwith returned to the Purchaser and all other rights and
obligations of the Seller and the Purchaser hereunder
-20-
<PAGE>
shall terminate immediately; the return of the Deposit being considered
liquidated damages; or (b) to waive its rights to terminate and, instead, to
proceed to Closing. Notwithstanding any termination hereof, the parties shall
nevertheless remain liable under Section 5.5; subject to Section 10.11.
----------- -------------
9.5 Termination by Seller. If, prior to the Closing Date, the Purchaser
----------------------
defaults in performing any of its obligations under this Agreement (including
its obligation to purchase the Property), and the Purchaser fails to cure any
such default with ten (10) business days after notice thereto from the Seller,
then the Seller's sole remedy for such default shall be to terminate this
Agreement and retain the Deposit. The Seller and the Purchaser agree that, in
the event of such a default, the damages that the Seller would sustain as a
result thereof would be difficult if not impossible to ascertain. Therefore,
the Seller and the Purchaser agree that, the Seller retain the Deposit as full
and complete liquidated damages and as the Seller's sole remedy.
ARTICLE X
---------
MISCELLANEOUS PROVISIONS
------------------------
10.1 Completeness; Modification. This Agreement constitutes the entire
---------------------------
Agreement between the parties hereto with respect to the transactions
contemplated hereby and supersedes all prior discussions, understandings,
agreements and negotiations between the parties hereto. This Agreement may be
modified only by a written instrument duly executed by the parties hereto.
10.2 Assignments. The Purchaser may assign its rights hereunder without
------------
the consent of the Seller; provided that the Purchaser gives notice to the
Seller in accordance with Section 10.9.
------------
10.3 Successors and Assigns. This Agreement shall bind and inure to the
-----------------------
benefit of the parties hereto and their respective successors and assigns.
10.4 Days. If any action is required to be performed, or if any notice,
-----
consent or other communication is given, on a day that is a Saturday or Sunday
or a legal holiday in the jurisdiction in which the action is required to be
performed or in which is located the intended recipient of such notice, consent
or other communication, such performance shall be deemed to be required, and
such notice, consent or other communication shall be deemed to be given, on the
first business day following such Saturday, Sunday or legal holiday. Unless
otherwise specified herein, all references to a "day" or "days" shall refer to
calendar days and not business days.
10.5 Governing Law. This Agreement and all documents referred to herein
--------------
shall be governed by and construed and interpreted in accordance with the laws
of the State of New York, including New York State conflicts of laws principals.
-21-
<PAGE>
10.6 Counterparts. To facilitate execution, this Agreement may be
-------------
executed in as many counterparts as may be required. It shall not be necessary
that the signature on behalf of both parties hereto appear on each counterpart
hereof. All counterparts hereof shall collectively constitutes a single
agreement.
10.7 Severability. If any term, covenant or condition of this Agreement,
-------------
or the application thereof to any person or circumstance, shall to any extent be
invalid or unenforceable, the remainder of this Agreement, or the application of
such term, covenant or condition to other persons or circumstances, shall not be
affected thereby, and each term, covenant or condition of this Agreement shall
be valid and enforceable to the fullest extent permitted by law.
10.8 Costs. Regardless of whether Closing occurs hereunder, and except as
------
otherwise expressly provided herein, each party hereto shall be responsible for
its own costs in connection with this Agreement and the transactions
contemplated hereby, including without limitation fees of attorneys' engineers
and accountants.
10.9 Notices. All notices, requests, demands and other communications
--------
hereunder shall be in writing and shall be delivered by hand, transmitted by
receipted facsimile transmission, sent prepaid by Federal Express (or a
comparable overnight delivery service) or sent by the Untied States mail,
certified, postage prepaid, return receipt request, at the addresses and with
such copies as designated below. Any notice, request, demand or other
communication delivered or sent in the manner aforesaid shall be deemed given or
made (as the case may be) when actually delivered to the intended recipient.
If to the Seller: Benderson Development Company
570 Delaware Avenue
Buffalo, New York 14202
Attn: Blaine S. Schwartz, Esq.
Fax: (716) 886-2269
If to the Purchaser: Hudson Hotels Trust
1 Airport Way
Rochester, New York 14624
Attn: E. Anthony Wilson, Chairman and CEO
Fax: (716) 436-1865
Or to such other address as the intended recipient may have specified in a
notice to the other party. Any party hereto may change its address or designate
different or other persons or entitles to receive copies by notifying the other
party and the Escrow Agent in a manner described in this Section.
10.10 Incorporation by Reference. All of the exhibits attached hereto are
---------------------------
by this reference incorporated herein and made a part hereof.
-22-
<PAGE>
10.11 Survival. All of the representations, warranties, covenants and
---------
agreements of the Seller and the Purchaser made in, or pursuant to, this
Agreement shall survive Closing for a period of one year and shall not merge
into the Deed or any other document or instrument executed and delivered in
connection herewith.
10.12 No Partnership. This Agreement does not and shall not be construed
---------------
to create a partnership, joint venture or any other relationship between the
parties hereto except the relationship of Seller and Purchaser specifically
established hereby.
10.13 Recordation. This Agreement shall not be recorded. Each party
------------
hereto agrees to execute and deliver, at the request of another party hereto, a
Memorandum of Agreement in a form acceptable for recordation in the Clerk's
Office of the Circuit Court wherein the Property is located. The party
requesting recordation shall be responsible for all recording taxes and fees
incurred in recording such Memorandum.
10.14 Time of Essence. Time is of the essence with respect to every
----------------
provision hereof.
10.15 Confidentiality. Seller and its representatives, including any
----------------
brokers or other professionals representing Seller, shall keep the existence and
terms of this Agreement strictly confidential, except to the extent disclosure
is compelled by law, and then only to the extent of such compulsion.
10.16 Like-Kind Exchange. The Purchaser agrees, subject to the conditions
-------------------
set forth below, to cooperate with the Seller if the Seller attempts to effect
alike-kind exchange in connection with the sale of the Property.
Notwithstanding anything to the contrary contained herein, the Seller shall have
the right to assign the Seller's rights, but not its obligations, under this
Agreement without the Purchaser's consent for the sole purpose of enabling the
Seller to effect all like-kind exchange; provided, however; that notwithstanding
any such assignment, the Seller shall not be released from any of its
liabilities, obligations, or indemnities under this Agreement; (b) the Seller
shall pay all costs and expenses (including attorneys' fees) incurred by the
Purchaser in connection with such like-kind exchange; (c) the like-kind exchange
shall not increase the Purchase Price or any other amount payable hereunder by
the Purchaser, nor shall it change the manner of payment of such sums; and (d)
the Seller shall indemnify and hold the Purchaser harmless for and from any
loss, cost, damage or expense (including attorneys' fees) incurred by the
Purchaser as a result of the cooperation of the Purchaser with an actual or
contemplated like-kind exchange.
10.17 Expiration. This Agreement shall be void and of no effect unless
-----------
signed by all parties within ten (10) days from the date first set forth above.
IN WITNESS WHEREOF, the Seller and Purchaser have caused this Agreement to
be executed in their names by their respective duly authorized representatives.
-23-
<PAGE>
SELLER:
-------
WALDEN AVENUE-BLEND-ALL HOTEL
DEVELOPMENT, Inc., a New York corporation
By: /s/ David H. Baldauf
--------------------------------------
Name: David H. Baldauf
------------------------------------
Title: Vice President
-----------------------------------
DICK ROAD-BLEND-ALL HOTEL DEVELOPMENT,
INC., a New York corporation
By: /s/ David H. Baldauf
--------------------------------------
Name: David H. Baldauf
------------------------------------
Title: Vice President
-----------------------------------
BLEND-ALL HOTEL DEVELOPMENT, INC.,
a New York corporation
By: /s/ David H. Baldauf
--------------------------------------
Name: David H. Baldauf
------------------------------------
Title: Vice President
-----------------------------------
LETOM LAND LEASE PARTNERS,
a New York general partnership
By: Randall Benderson 1993-1 Trust,
General Partner
By: /s/ SIGNATURE APPEARS HERE, Trustee
--------------------------
By: /s/ SIGNATURE APPEARS HERE, Trustee
--------------------------
PURCHASER:
----------
HUDSON HOTELS Trust,
a Maryland real estate investment trust.
By: /s/ E. Anthony Wilson
--------------------------------------
Name: E. Anthony Wilson
---------------------
Title: Chairman and CEO
-----------------------------------
-24-
<PAGE>
Exhibit 10.4
FORM OF
LEASE AGREEMENT
DATED AS OF _______________, 199
BETWEEN
HUDSON HOTELS LIMITED PARTNERSHIP, L.P.
AS LANDLORD
AND
HHC MANAGEMENT CORP.
AS TENANT
[PROPERTY]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I........................................................................................................ 1
1.1 Leased Property..................................................................................... 1
1.2 Term................................................................................................ 2
ARTICLE II....................................................................................................... 2
2.1 Definitions......................................................................................... 2
ARTICLE III...................................................................................................... 9
3.1 Rent................................................................................................ 9
3.2 Confirmation of Percentage Rent.................................................................... 12
3.3 Additional Charges................................................................................. 13
3.4 Net Lease Provision................................................................................ 13
3.5 Conversion of Property............................................................................. 13
3.6 Tenant Requirements................................................................................ 13
ARTICLE IV...................................................................................................... 14
4.1 Payment of Impositions............................................................................. 14
4.2 Notice of Impositions.............................................................................. 14
4.3 Adjustment of Impositions.......................................................................... 14
4.4 Utility Charges.................................................................................... 14
4.5 Insurance Premiums................................................................................. 15
ARTICLE V....................................................................................................... 15
5.1 No Termination Abatement, etc...................................................................... 15
5.2 Abatement Procedures for Partial Takings........................................................... 15
ARTICLE VI...................................................................................................... 15
6.1 Ownership of the Leased Property................................................................... 15
6.2 Tenant's Personal Property......................................................................... 15
6.3 Landlord's Lien.................................................................................... 16
ARTICLE VII..................................................................................................... 16
7.1 Condition of the Leased Property................................................................... 16
7.2 Use of the Leased Property......................................................................... 16
7.3 Landlord to Grant Easements, etc................................................................... 17
ARTICLE VIII.................................................................................................... 17
8.1 Compliance with Legal and Insurance Requirements, etc.............................................. 17
8.2 Legal Requirements and Land Use Requirements Covenants............................................. 17
8.3 Environmental Covenants............................................................................ 18
ARTICLE IX...................................................................................................... 19
9.1 Maintenance and Repair............................................................................. 19
9.2 Encroachments, Restrictions, Etc................................................................... 21
ARTICLE X....................................................................................................... 21
10.1 Alterations....................................................................................... 21
10.2 Salvage........................................................................................... 21
10.3 Joint Use Agreements.............................................................................. 21
ARTICLE XI...................................................................................................... 21
Lien................................................................................................... 21
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE XII..................................................................................................... 22
Permitted Contests..................................................................................... 22
ARTICLE XIII.................................................................................................... 22
13.1 General Insurance Requirements.................................................................... 22
13.2 Replacement Cost.................................................................................. 23
13.3 Worker's Compensation............................................................................. 24
13.4 Waiver of Subrogation............................................................................. 24
13.5 Form Satisfactory, etc............................................................................ 24
13.6 Increase in Limits................................................................................ 24
13.7 Blanket Policy.................................................................................... 24
13.8 No Separate Insurance............................................................................. 24
ARTICLE XIV..................................................................................................... 24
14.1 Insurance Proceeds................................................................................ 24
14.2 Reconstruction in the Event of Damage or Destruction Covered by Insurance......................... 25
14.3 Reconstruction in the Event of Damage or Destruction Not Covered by Insurance..................... 25
14.4 Tenant's Property................................................................................. 25
14.5 Abatement of Rent................................................................................. 25
14.6 Damage Near End of Term........................................................................... 25
14.7 Waiver............................................................................................ 26
ARTICLE XV...................................................................................................... 26
15.1 Parties' Right and Obligations Upon Condemnation.................................................. 26
15.2 Total Taking...................................................................................... 26
15.3 Allocation of Award............................................................................... 26
15.4 Partial Taking.................................................................................... 26
15.5 Temporary Taking.................................................................................. 26
ARTICLE XVI..................................................................................................... 27
16.1 Events of Default................................................................................. 27
16.2 Surrender......................................................................................... 28
16.3 Damages........................................................................................... 28
16.4 Waiver............................................................................................ 29
16.5 Application of Funds.............................................................................. 29
ARTICLE XVII.................................................................................................... 30
Landlord's Right to Cure Tenant's Default.............................................................. 30
ARTICLE XVIII................................................................................................... 30
18.1 Performance Standards............................................................................. 30
ARTICLE XIX..................................................................................................... 31
19.1 REIT Requirements................................................................................. 31
19.2 Tenant Officer and Employee Limitation..........................................Intentionally Deleted
19.3 Management Agreement.............................................................................. 32
19.4 Payments to Affiliates of Tenant.................................................................. 32
ARTICLE XX...................................................................................................... 32
Holding Over........................................................................................... 32
ARTICLE XXI..................................................................................................... 32
Risk of Loss........................................................................................... 32
ARTICLE XXII.................................................................................................... 32
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C> <C>
22.1 Indemnification................................................................................... 32
ARTICLE XXIII................................................................................................... 33
23.1 Subletting and Assignment......................................................................... 33
3323.2 Attornment...................................................................................... 33
ARTICLE XXIV.................................................................................................... 33
24.1 Officer's Certificates; Financial Statements; Budgets; Landlord's Estoppel Certificates........... 33
24.2 Operating Budget.................................................................................. 34
24.3 Marketing Plan.................................................................................... 35
24.4 Capital Budget.................................................................................... 35
24.5 Budget Approval and Disputes...................................................................... 35
24.6 Capital Expenditure Reserve....................................................................... 35
ARTICLE XXV..................................................................................................... 35
No Waiver.............................................................................................. 36
ARTICLE XXVII................................................................................................... 36
Remedies Cumulative.................................................................................... 36
ARTICLE XXVIII.................................................................................................. 36
Acceptance of Surrender................................................................................ 36
ARTICLE XXIX.................................................................................................... 36
Conveyance by Landlord................................................................................. 36
ARTICLE XXXI.................................................................................................... 37
Quiet Enjoyment........................................................................................ 37
ARTICLE XXXII................................................................................................... 37
Notices................................................................................................ 37
ARTICLE XXXIII.................................................................................................. 38
Appraisers............................................................................................. 38
ARTICLE XXXIV................................................................................................... 38
34.1 Landlord May Grant Liens.......................................................................... 38
34.2 Tenant's Right to Cure............................................................................ 38
34.3 Breach of Landlord................................................................................ 39
ARTICLE XXXV.................................................................................................... 39
35.1 Miscellaneous..................................................................................... 39
35.2 Transfer of Licenses.............................................................................. 39
35.3 Waiver of Presentment, etc........................................................................ 39
ARTICLE XXXVI................................................................................................... 39
Memorandum of Lease.................................................................................... 39
ARTICLE XXXVII.................................................................................................. 40
Landlord's Option to Purchase Assets of Tenant......................................................... 40
ARTICLE XXXVIII................................................................................................. 40
Landlord's Option to Terminate Lease................................................................... 40
ARTICLE XXXIX................................................................................................... 40
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C> <C>
39.1 Compliance with Franchise Agreement............................................................... 40
39.2 Change of Franchise............................................................................... 41
ARTICLE XL...................................................................................................... 41
40.1 Landlord Approval of Capital Expenditures......................................................... 41
40.2 Inventory......................................................................................... 41
</TABLE>
(iv)
<PAGE>
LEASE AGREEMENT
---------------
THIS LEASE AGREEMENT (hereinafter called "Lease") is made as of the
____ day of ___________, 199_, by and between HUDSON HOTELS LIMITED PARTNERSHIP,
L.P., a Virginia limited partnership (hereinafter called "Landlord"), and HHC
MANAGEMENT CORP., a New York corporation (hereinafter called "Tenant") on the
following Terms.
RECITALS
--------
A. Landlord owns fee title to 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, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD
INCLUDING ALL
<PAGE>
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.
---------
Beverage Sales: Shall mean gross revenue from (i) the sale of wine,
--------------
beer, liquor or other alcoholic beverages, whether sold in the bar or lounge,
delivered to a guest room, sold for off-premises consumption, sold at meetings
or banquets or at any other location at the Leased Property, or (ii)
non-alcoholic beverages sold in the bar or lounge. Such revenues shall not
include the following:
(a) Any gratuity or service charge added to a customer's bill or
statement in lieu of a gratuity which is paid to an employee;
(b) Any revenues that are subsequently credited, rebated or refunded in
the ordinary course of business; and
(c) Sales taxes or taxes of any other kind imposed on the sale of
alcoholic or other beverages.
-2-
<PAGE>
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that
------------
is not a day on which national banks in the City of New York, New York, or in
the municipality wherein the Leased Property is located are 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.
----------------------------
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".
-----------
CERCLA: The Comprehensive Environmental Response, Compensation and
------
Liability Act of 1980, as amended.
Change of Control: [TO BE SUPPLIED]
-----------------
Code: The Internal Revenue Code of 1986, as amended.
----
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.
Consolidated Financials: For any fiscal year or other accounting period
-----------------------
for Tenant and its consolidated subsidiaries, 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,
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.
-----------
-3-
<PAGE>
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.
Event of Default: As defined in Section 16.1.
----------------
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.
-4-
<PAGE>
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.
--------
Food Sales: Shall mean gross revenue from the sale, for both on-site
----------
and off-site consumption, of food and non-alcohol beverages sold at the Leased
Property, including in respect to guest rooms, banquet rooms, meeting rooms and
other similar rooms. Such revenues shall not include the following:
(a) Vending machine sales;
(b) Any gratuities or service charges added to a customer's bill or
statement in lieu of a gratuity which is paid to an employee;
(c) Non-alcoholic beverages sold from the bar or lounge;
(d) Sales taxes or taxes of any other kind imposed on the sale of food
or non-alcoholic beverages; and
(e) Any revenues that are subsequently credited, refunded or rebated in
the ordinary course of business.
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 between Hudson Hotels
Limited Partnership, L.P. 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.
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 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, (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:
-5-
<PAGE>
(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.
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: The Landlord designated on this Lease and its successors and
--------
assigns.
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
-6-
<PAGE>
respective heirs, personal representatives, successors and assigns of any such
officer, director, partner, stockholder, employee, agent or representative.
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: This Lease.
-----
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 either 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.
Management Agreement: As defined in Section 19.3.
--------------------
Manager: The manager of the Facility, which shall be Tenant or its
-------
Affiliate designee, pursuant to the Management Agreement.
Marketing Plan: As defined in Section 24.3.
--------------
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 24.1.
----------------
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, Food Sales and Beverage Sales.
-7-
<PAGE>
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: Any due date for the payment of any installment of Base
------------
Rent.
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.
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.
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.
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.
Rent: Collectively, the Base Rent, Percentage Rent, and Additional
----
Charges.
Room Revenues: Gross revenue from the rental of guest 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.
State: The State or Commonwealth of the United States in which the
-----
Leased Property is located.
Subsidiaries: Corporations in which Tenant owns, directly or
------------
indirectly, more than 50% of the voting stock or control, as applicable
(individually, a "Subsidiary").
-8-
<PAGE>
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 affecting the Leased Property whether or not
the same shall have actually been commenced.
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 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 or before the tenth day
of each calendar month of the Term ("Base Rent");
-9-
<PAGE>
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
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
-10-
<PAGE>
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, at its option, shall
reimburse such amount to Tenant or credit such amount against the following
months' Base Rent and, to the extent necessary, the next quarter's Percentage
Rent payments. 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 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 and Other 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, 1998 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
-11-
<PAGE>
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.
Notwithstanding the foregoing, the highest (but only the
highest) threshold dollar amount of Room Revenues shall be adjusted each Fiscal
Year to an amount equal to the greater of (i) the amount obtained pursuant to
Section 3.1(d)(1)(B) above or (ii) the amount of the highest threshold dollar
amount of Room Revenues then in effect multiplied by 80% of the quotient
obtained by dividing revenue per available room ("REVPAR") at the Facility for
the most recently ended Fiscal Year by REVPAR at the Facility for the
immediately preceding Fiscal Year.
(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
-12-
<PAGE>
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 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. If requested by Landlord, Tenant
----------------------
agrees to take actions necessary to become a special purpose entity that meets
all criteria set forth for special purpose entities by national statistical
rating agencies, including without limitation, the requirement for an
"independent" director. Tenant shall upon request provide through Tenant's
counsel an opinion of counsel reasonably acceptable to Landlord's counsel and
the counsel of a national statistical rating agency that Tenant shall not be
"substantively consolidated" with any related entity under Section 105 of the
Bankruptcy Code.
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ARTICLE IV
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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 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.
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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, and except for termination of the Franchise Agreement
solely by reason of any action or inaction by Landlord, 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 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
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<PAGE>
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.
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 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.
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<PAGE>
(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 otherwise agreed by Landlord, and except with
respect to its interests in for those properties that exist as of the Date
hereof, 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.
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 is not detrimental to the proper
conduct of the business of Tenant on the Leased Property and does not materially
reduce the value 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
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<PAGE>
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.
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 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
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<PAGE>
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
judgement.
(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.
(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.
Notwithstanding anything to the contrary contained in this
Agreement, if Landlord shall become entitled to the possession of the Leased
Property by virtue of the termination of the Lease or repossession of the Leased
Property, then Landlord may assign its indemnification rights under Section 8.3
of this Agreement (but not any other rights hereunder) to any Person to whom the
Landlord subsequently transfers the Leased Property, subject to the following
conditions and limitations, each of which shall be deemed to be incorporated
into the terms of such assignment, whether or not specifically referred to
therein:
(1) The indemnification rights referred to in this
section may be assigned only if a known Environmental
Liability then exists or if a Proceeding is then pending or,
to the knowledge of Tenant or Landlord, then threatened with
respect to the Leased Property; and
(2) Such indemnification rights shall be limited to
Environmental Liabilities relating to or specifically
affecting the Leased Property.
ARTICLE IX
----------
9.1 Maintenance and Repair.
----------------------
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(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 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.)
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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 circumstances 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.
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) 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
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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
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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.
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 General Insurance Requirements. During the Term of this Lease,
------------------------------
Tenant shall at all times keep the Leased Property insured with the kinds and
amounts of insurance described below, at its expense, except for those set forth
in Sections 13.1(a) and (b), which shall be paid for by Landlord. This insurance
shall be written by companies authorized to issue insurance in the State and
shall have a rating by A.M. Best of at least B+. The policies must name Landlord
(as well as any lenders identified by Landlord) as the insured or as an
additional named insured, as the case may be. Losses shall be payable to
Landlord or Tenant as provided in this Lease. Any loss adjustment shall require
the written consent of Landlord and Tenant, each acting reasonably and in good
faith. Tenant shall provide Landlord with evidence that it has obtained the
required insurance. The policies on the Leased Property, including the Leased
Improvements, Fixtures and Tenant's Personal Property, shall include:
(a) Building insurance on the "Special Form" (formerly "All
Risk" form) (including earthquake and flood in reasonable amounts as determined
by Landlord) in an amount not less than 100% of the then full
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replacement cost thereof (as defined in Section 13.2) or such other amount which
is acceptable to Landlord, and personal property insurance on the "Special Form"
in the full amount of the replacement cost thereof;
(b) Insurance for loss or damage (direct and indirect) from
steam boilers, pressure vessels or similar apparatus, now or hereafter installed
in the Facility, in the minimum amount of $5,000,000 or in such greater amounts
as are then customary or as may be reasonably requested by Landlord from time to
time;
(c) Loss of income insurance on the "Special Form", in the
amount of one year of Base Rent for the benefit of Landlord, and business
interruption insurance on the "Special Form" in the amount of one year of gross
profit, for the benefit of Tenant;
(d) Commercial general liability insurance, with amounts not
less than $10,000,000 covering each of the following: bodily injury, death, or
property damage liability per occurrence, personal and advertising injury,
general aggregate, products and completed operations, with respect to Landlord,
and "all risk legal liability" (including liquor law or "dram shop" liability if
liquor or alcoholic beverages are served on the Leased Property) with respect to
Landlord and Tenant;
(e) Insurance covering such other hazards and in such amounts
as may be customary for comparable properties in the area of the Leased Property
and is available from insurance companies, insurance pools or other appropriate
companies authorized to do business in the State at rates which are economically
practicable in relation to the risks covered as may be reasonably requested by
Landlord;
(f) Fidelity bonds with limits and deductibles as may be
reasonably requested by Landlord, covering Tenant's employees in job
classifications normally bonded under prudent hotel management practices in the
United States or otherwise required by law;
(g) Workers' compensation insurance to the extent necessary
to protect Landlord and the Leased Property against Tenant's workers'
compensation claims;
(h) Vehicle liability insurance for owned, non-owned, and
hired vehicles, in the amount of not less than $1,000,000;
(i) Such other insurance as Landlord may reasonably request
for facilities such as the Leased Property and the operation thereof and in all
events Landlord shall have the right to require that all insurance and insurance
carriers fulfill the terms and conditions that may be required in connection
with financing the Leased Property pursuant to any "conduit" or other capital
market loan program; and
(j) Other insurance in such forms and amounts as would
reasonably be carried by a prudent owner of a similarly situated property.
Except for the coverages described in Sections 13.1(a) and
(b), which will be obtained by Landlord, Tenant shall obtain the insurance and
pay the premiums for the remainder of the foregoing coverages described in this
Section 13.1. The Tenant shall also be responsible for any and all deductibles
in connection with such coverages. In the event that Landlord can obtain
comparable insurance coverage required to be carried by Tenant from comparable
insurers and at a cost significantly less than that at which Tenant can obtain
such coverage, the parties shall cooperate in good faith to obtain such coverage
at the lower cost and the Tenant shall pay the premiums therefor.
13.2 Replacement Cost. The term "full replacement cost" as used
----------------
herein shall mean the actual replacement cost of the Leased Property including
an increased cost of construction endorsement, if available, and the cost of
debris removal. In the event either party believes that full replacement cost
(the then-replacement cost less such exclusions) has increased or decreased at
any time during the Term, it shall have the right to have such full replacement
cost re-determined.
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13.3 Worker's Compensation. Tenant, at its sole cost, shall at all
---------------------
times maintain adequate worker's compensation insurance coverage for all persons
employed by Tenant on the Leased Property. Such worker's compensation insurance
shall be in accordance with the requirements of applicable local, state and
federal law.
13.4 Waiver of Subrogation. All insurance policies carried by Landlord
---------------------
or Tenant covering the Leased Property, the Fixtures, the Facility or Tenant's
Personal Property, including, without limitation, contents, fire and casualty
insurance, shall expressly waive any right of subrogation on the part of the
insurer against the other party. The parties hereto agree that their policies
will include such waiver clause or endorsement so long as the same are
obtainable without extra cost, and in the event of such an extra charge the
other party, at its election, may pay the same, but shall not be obligated to do
so.
13.5 Form Satisfactory, etc. All of the policies of insurance referred
----------------------
to in this Article XIII that are to be obtained by Tenant shall be written in a
form, with deductibles and by insurance companies satisfactory to Landlord.
Tenant shall pay all of the premiums therefor, and deliver such policies or
certificates thereof to Landlord prior to their effective date (and, with
respect to any renewal policy, 30 days prior to the expiration of the existing
policy), and in the event of the failure of Tenant either to effect such
insurance as herein called for or to pay the premiums therefor, or to deliver
such policies or certificates thereof to Landlord at the times required,
Landlord shall be entitled, but shall have no obligation, to effect such
insurance and pay the premiums therefor, and Tenant shall reimburse Landlord for
any premium or premiums paid by Landlord for the coverages required under this
Article XIII upon written demand therefor, and Tenant's failure to repay the
same within 30 days after Notice of such failure from Landlord shall constitute
an Event of Default within the meaning of Section 16.1(b). Each insurer
providing the insurance mentioned in this Article XIII shall agree, by
endorsement to the policy or policies issued by it, or by independent instrument
furnished to Landlord, that it will give to Landlord 30 days' written notice
before the policy or policies in question shall be materially altered, allowed
to expire or canceled.
13.6 Increase in Limits. If either Landlord or Tenant at any time
------------------
deems the limits of the personal injury or property damage under the
comprehensive public liability insurance then carried to be either excessive or
insufficient, Landlord or Tenant shall endeavor in good faith to agree on the
proper and reasonable limits for such insurance to be carried and such insurance
shall thereafter be carried with the limits thus agreed on until further change
pursuant to the provisions of this Section; provided, however, that if required
by a lender the limits may be increased as so reasonably required.
13.7 Blanket Policy. Notwithstanding anything to the contrary
--------------
contained in this Article XIII, Tenant or Landlord may bring the insurance
provided for herein within the coverage of a so-called blanket policy or
policies of insurance carried and maintained by Tenant or Landlord; provided,
however, that the coverage afforded to Landlord and Tenant will not be reduced
or diminished or otherwise be different from that which would exist under a
separate policy meeting all other requirements of this Lease by reason of the
use of such blanket policy of insurance, and provided further that the
requirements of this Article XIII are otherwise satisfied.
13.8 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
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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, 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
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<PAGE>
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 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.
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 during the first twelve (12) months of any period
required for the applicable repair and restoration. Thereafter, Base Rent shall
be equitably abated.
14.6 Damage Near End of Term. Notwithstanding any provisions of
-----------------------
Section 14.2 or 14.3 appearing to the contrary, if damage to or destruction of
the Facility occurs during the last 24 months of the Term which renders it
Unsuitable for its Primary Intended Use, then Tenant shall have the right to
terminate this Lease by giving written notice to Landlord within 30 days after
the date of damage or destruction, whereupon all accrued Rent shall be paid
immediately, and this Lease shall automatically terminate five days after the
date of such notice.
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14.7 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.
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
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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 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.
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 when the
same becomes due and payable for a period of ten days after receipt by the
Tenant of Notice from the Landlord thereof;
(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
(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
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(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;
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.
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.
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<PAGE>
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.
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.
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<PAGE>
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:
(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.
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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.
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 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
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<PAGE>
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 immediately upon
--------------------
entering into any management or agency agreement relating to the management or
operation of the Facility (a "Management Agreement"), Tenant shall provide
Landlord with a copy thereof. Tenant shall also provide Landlord with copies of
any amendments or modifications of a Management Agreement which are entered into
from time to time. Any Management Agreement shall provide that (i) upon
termination of this Lease or termination of Tenant's right to possession of the
Leased Property for any reason other than a termination by Landlord pursuant to
Article XXXVIII, the Management Agreement may be terminated by Landlord without
liability for any payment due or to become due to the Manager, and (ii) any
management fees payable to any Affiliate of Tenant shall be subordinated to the
payments of Rent to lessor hereunder, and no fees or other amounts payable by
Tenant to the Manager shall excuse Tenant from its obligations to pay Rent and
other amounts payable by Tenant to Landlord hereunder. Landlord shall have the
right to approve in advance any Manager.
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.
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 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
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<PAGE>
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.
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 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,
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<PAGE>
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) [Conform with Strategic Alliance Agreement] Throughout the
Term, Tenant and its consolidated subsidiaries will furnish to Landlord at the
times and in the forms indicated herein, all financial statements, schedules and
financial information (the "Financial Statements"), and permit access to
Tenant's books and records as are required to permit Landlord and its Affiliates
to comply with all Legal Requirements, including without limitation the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder. The Financial Statements shall include a balance sheet, statement of
operations, statement of shareholders' equity, statement of cash flows and
related schedules, 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, all of which shall be
furnished (i) quarterly unaudited, for the most recently ended quarter in draft
form within 30 days and final form within 40 days following the end of each of
the first three Fiscal Year quarters, accompanied by an Officer's Certificate
addressed to Landlord certifying to correctness of such statements in all
material respects and, (ii) annually, audited by nationally recognized
independent certified public accountants, for the most recently ended Fiscal
Year in draft form within 70 days and final form within 80 days of the end of
the Fiscal Year. In addition, during the time periods set forth in (i) and (ii)
above, the required Financial Statements shall include any historical financial
information necessary to restate historical financial information of the
Tenant's audited and unaudited Financial Statements at any future time. All of
the Financial Statements shall be prepared in accordance with GAAP. Tenant shall
use its reasonable best efforts to cause the independent certified public
accountants preparing audits of Tenant to provide Landlord and its Affiliates
with all consents of such accountants required for Landlord or its Affiliates'
filings or statements required to comply with all Legal Requirements, including
without limitation the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder. If requested by Landlord, Tenant will permit
Landlord and its independent certified public accountants, financial advisors,
underwriters, underwriters' counsel, rating agencies and lenders to continue to
have access (during normal business hours and upon three business days notice)
to review (i) the financial records of the Facility and perform procedures in
accordance with GAAP with respect to Tenant and the Facility and (ii) such other
records and documents with respect to the Facility as Landlord may reasonably
request.
(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:
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<PAGE>
(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 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
-35-
<PAGE>
and make copies thereof, during usual business hours upon reasonable advance
notice, subject only to any business confidentiality requirements reasonably
requested by Tenant.
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.
-36-
<PAGE>
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: Hudson Hotels Limited Partnership, L.P.
____________________________________
____________________________________
Facsimile:__________________________
Attention:__________________________
TENANT: ____________________________________
____________________________________
Facsimile:__________________________
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.
-37-
<PAGE>
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 (a) contain the right to prepay (whether or not subject to a prepayment
penalty); (b) provide that it is subject to the rights of Tenant under this
Lease, (c) 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, on the
condition that the proposed mortgagee executes a non-disturbance agreement
recognizing this Lease, and agreeing, for itself and its successors and assigns,
to comply with the provisions of this Article XXXIV.
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
-38-
<PAGE>
judgment against Landlord for such sums, may be offset by Tenant against the
Base Rent payments next accruing or 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. [If Landlord has breached this Lease, and failed to cure
such breach as set forth herein, Tenant shall have the right to: (i) terminate
this Lease, (ii) cure the default by the Landlord and Landlord shall reimburse
Tenant for the costs and expenses it has incurred, or (iii) setoff the amount of
any such costs against any other amounts due by Tenant to Landlord.]
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.
-39-
<PAGE>
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 or merge with 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 the Landlord's
general partner or its ultimate parent determines to terminate its status as a
real estate investment trust for federal income tax purposes, Landlord may
terminate this Lease effective upon the closing under such contract or the date
otherwise 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
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 a Substitute Facility or (c)
offer to both lease to Tenant a Substitute Facility and to pay the difference
between the Leasehold Value of the Leasehold estate hereunder and the Leasehold
Value of 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.
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 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
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<PAGE>
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.
ARTICLE XL
----------
40.1 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).
40.2 Inventory. On the Commencement Date, Tenant agrees to purchase
---------
from Landlord, for cash, the fair market value of any Inventory at the Facility.
-41-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease by their duly
authorized officers as of the date first above written.
"LANDLORD"
HUDSON HOTELS LIMITED PARTNERSHIP, L.P.
By: Hudson Hotels Trust, its General Partner
By:
---------------------------------------
Title:
------------------------------------
"TENANT"
HHC MANAGEMENT CORP.
By:
------------------------------------------
Title:
---------------------------------------
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<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 (l) 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 $20,000 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 $20,000 guideline. If the item(s) acquired meet
the more than one-year life criterion, but the total invoice cost is less than
$20,000, the expenditure is considered an expense item.
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 under $20,000, the
expenditure is to be expensed to maintenance and repairs:
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 $20,000 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 $20,000.
Repainting of Buildings Pools, Park Areas (1)(6)
Refinishing of Furniture (2)
Glass Replacement
Maintenance Service Contracts, such- Yard, Television, Elevator,
Swimming Pool
Wall Paper Vinyl (2)
Reupholstery of Furniture (2)
Replastering (2)
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 $10,000.
Patching Parking Lot (3)
Roof Repairs (4)
Waterproofing of Lamp Globes & Lightbulbs
Section Replacement for Neon Signs
Caulking and Sealing Chrome Fittings such as Faucets, Towel Bars,
etc. (2)
Toilet and Toilet Seats
Stolen or Damaged Television
Small Parts for Equipment
Landscaping/Plants (5)
Clocks, Clock-Radios or Similar Small Items
I. If the complete exterior of the building is repainted, including
caulking and sealing of the building, those costs will be capitalized.
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 $20,000 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 $20,000.
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 $20,000.
B-2
<PAGE>
CAPITAL EXPENDITURES POLICY
4. If the landscaping is new or replacement of existing interior or
exterior landscaping and exceeds $20,000, the cost of the landscaping can be
capitalized.
5. Major overhauls to the pool which exceed $20,000 in cost and extend
the useful life of the asset 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
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. If applicable, the Food Revenue Percentage multiplied by the
year to date Food Sales for the current Fiscal Year.
5. If applicable, the Beverage Revenue Percentage multiplied by
the year to date Beverage Sales for the current Fiscal Year.
6. If applicable, the Telephone Revenue Percentage multiplied by
the year to date Telephone Sales for the current Fiscal Year.
7. If applicable, the Restaurant/Bar Lease Revenue Percentage
multiplied by the year to date Restaurant/Bar Lease Revenue
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. If applicable, the Food Revenue Percentage multiplied by the
annual Food Sales for the current Fiscal Year.
5. If applicable, the Beverage Revenue Percentage multiplied by
the annual Beverage Sales for the current Fiscal Year.
6. If applicable, the Telephone Revenue Percentage multiplied by
the year to date Telephone Sales for the current Fiscal Year.
7. If applicable, the Restaurant/Bar Lease Revenue Percentage
multiplied by the year to date Restaurant/Bar Lease Revenue
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: _________%
Food Revenue Percentage: _________%
Beverage Revenue Percentage: _________%
Telephone Revenue Percentage: _________%
Restaurant/Bar Lease Revenue Percentage: _________%
C-3
<PAGE>
Exhibit 10.5
FORM OF
STRATEGIC ALLIANCE AGREEMENT
By And Among
HUDSON HOTELS CORPORATION,
HUDSON HOTELS PROPERTIES I, INC.,
HUDSON HOTELS PROPERTIES II, INC.,
HHC MANAGEMENT CORP.,
HUDSON HOTELS TRUST
and
HUDSON HOTELS LIMITED PARTNERSHIP, L.P.
dated as of
July, 1998
<PAGE>
Exhibit F - Subordination Agreement
SCHEDULES
Schedule 1.2(d) -- Forms of Daily Operating and Financial Reports for
Leased Hotels
Schedule 2.1 -- Initial Hotels and Lease Terms
Schedule 4.1(a) -- The Option Hotels
Schedule 5.1.3 -- HHT and OP Approvals, Consents for Transfer
Schedule 5.2.3 -- HUDS and Lessee Approvals, Consents for Transfer
iii
<PAGE>
HUDSON HOTELS LIMITED PARTNERSHIP, L.P.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
47
<PAGE>
Exhibit 10.6
July 1, 1998
LINE OF CREDIT
---------------
Hudson Hotels Trust
One Airport Way
Suite 200
Rochester, NY 14624
Attention: Tony Wilson
John Sabin
Re: $100,000,000 Limited Service Hotel Line of Credit
Loan No. 24140
Dear Tony and John:
This Commitment Letter is intended to set forth the results of discussions
between The Capital Company of America LLC ("Capital America") and Hudson
Hotels Trust ("Borrower Sponsor") relating to the financing facility (the
"Financing") proposed by Borrower Sponsor to several bankruptcy remote,
special purpose subsidiary entities (such special purpose entities are
hereinafter referred to as the "Borrower or Borrowers"). The assets (the
"Properties") to be owned by the Borrowers and to be financed pursuant to our
commitment set forth herein are as described in the Summary of Terms (the "Term
Sheet") which is attached hereto and incorporated herein by reference. All
capitalized terms used in this Commitment Letter and not otherwise defined
herein shall have the meanings ascribed to such terms in the Term Sheet.
1. General Understanding
---------------------
As described more fully in the Term Sheet, our obligations under this
Commitment Letter are subject in their entirety to among other things, (a)
the absence of any material development occurring prior to the date of the
consummation of the Financing which could, in Capital America's sole
opinion, adversely affect the transactions contemplated hereby, (b) Capital
America's undertaking of and completion of due diligence on the Properties
and the Borrower Sponsor with results satisfactory to Capital America in
its sole discretion and (c) the execution and delivery of definitive
agreements and other documentation relating to the Financing satisfactory
to Capital America in its sole discretion. Borrower Sponsor expressly
acknowledges and agrees that Capital America has set forth in the Term
Sheet the terms and conditions upon which it is willing to make the
Financing based upon Borrower Sponsor's oral or written representations
regarding the Properties and prior to the commencement of its own due
diligence investigation. In such investigation, Capital America will need
to be satisfied in
1
<PAGE>
its judgment, among other things, with the level of the net operating
income which has been and is expected to be generated by the Properties,
the value of the Properties, environmental and structural matters relating
to the Properties and the structure and ownership of the Borrowers. If
Capital America's findings with respect to the foregoing are inconsistent
with Borrower Sponsor's oral or written representations regarding the
Properties, Capital America may, in its sole discretion, terminate its
obligations under this Commitment Letter or modify any of the terms set
forth in the Term Sheet to be consistent with its findings.
2. Covenants of Borrower Sponsor
-----------------------------
Borrower Sponsor will, and will cause Borrowers to, cooperate and use best
efforts to promptly supply Capital America with all due diligence materials
requested by Capital America; prepare or cause to be prepared documents
relating to the Financing; cause its legal counsel to deliver various
opinion letters customarily required in Financing transactions of this
type, all in form and substance satisfactory to Capital America; and act in
good faith to do all things reasonably required to consummate the closing
of the Financing. Borrower Sponsor represents that (i) the proposed finance
transaction described herein is not the subject of a commitment from
another lender and (ii) no other party has a right of refusal or any other
option which could cause the transaction contemplated herein not to be
consummated.
Prior to the closing of the Financing, Borrower Sponsor will not, and will
cause Borrowers and Borrowers' affiliates not to, sell, assign or otherwise
dispose of the Properties to any person or entity without Capital America's
consent provided, however, Borrower Sponsor or Borrowers may transfer the
Properties to an affiliate which becomes bound by the terms of this
Commitment Letter. In addition, prior to the Commitment Termination Date
(as defined in Section 6 hereof), the Borrower Sponsor will not, and will
cause its affiliates not to, obtain, or attempt to obtain, the Financing or
any other debt financing with respect to the Properties with any party
other than Capital America. Borrower Sponsor acknowledges that, by
commencing the due diligence investigation contemplated by this Commitment
Letter, Capital America is devoting time and resources to the Borrower
Sponsor that it otherwise could be devoting to other projects. Therefore,
if Borrower Sponsor breaches its obligations pursuant to this Section 2 or
Section 5, Borrower Sponsor agrees to pay Capital America, in addition to
its obligations to pay fees and expenses described in the Term Sheet, a
termination fee equal to 2% of the proposed Financing amount. Receipt of
such payment by Capital America shall not constitute a waiver of any rights
or remedies Capital America may have either at law or equity.
The obligations of Borrower Sponsor and Borrowers pursuant to this Section
2 shall be terminated on the Commitment Termination Date (as it may be
extended by Capital America) or such earlier date that Capital America
notifies the Borrower Sponsor that based on its due diligence investigation
it does not intend to proceed with the consummation of the Financing.
3. Brokers Fee
-----------
The Borrower Sponsor represents and warrants to Capital America that no
broker(s), agent(s) or finder(s) brought about this Commitment Letter or
was otherwise involved in any manner in the Financing or any aspect
thereof.
2
<PAGE>
4. Authorization
-------------
Borrower Sponsor hereby represents that it has the power and authority to
enter into this Commitment Letter on behalf of itself and, upon the
formation of the Borrowers, to bind the Borrowers hereunder.
5. Confidentiality
---------------
From the date hereof through the date immediately prior to the date on
which any document regarding the Borrower Sponsor which must disclose the
terms of this Commitment Letter and accompanying term sheet is filed with
the Securities and Exchange Commission, each of the parties hereto agrees
not to disclose, and to cause Related Parties (hereinafter defined) not to
disclose, either the fact that discussions or negotiations are taking place
concerning the Financing or any of the terms, conditions, or other facts
relating to the Financing, including the status thereof, except that
information may be disclosed to employees or agents (all of whom are
collectively referred to as "Related Parties") who, in each party's
considered judgment, need to know such information for the purpose of
causing the consummation of the transactions contemplated hereby. Capital
America acknowledges that Morgan Keegan Company, Inc. is a Related Party in
its capacity as agent for the Borrower Sponsor. Related Parties shall be
informed of the confidential nature of the information and material and
shall be directed to keep the information and material in the strictest
confidence and to use the information and material only for the purpose of
causing the consummation of the transactions contemplated hereby. The terms
set forth in this Commitment Letter and the attached Term Sheet are
proprietary to Capital America and are made available to Borrower Sponsor
solely for the evaluation of the transaction contemplated hereby. Oral or
written disclosure of the Term Sheet to any competitor of Capital America
shall be detrimental to Capital America and shall be an explicit violation
of this section.
6. Miscellaneous
-------------
If this Commitment Letter shall not have been executed by Borrower Sponsor
on or prior to July 1, 1998, this Commitment Letter shall expire, unless
extended in writing by Capital America in its sole discretion. If Capital
America has not received the Good Faith Deposit and the Expense Deposit
described in the Term Sheet within two business days of execution of this
Commitment Letter, Capital America's obligations hereunder will be
terminated. In addition, if the Financing does not close on or prior to
September 1, 1998, or such later date selected by Capital America (the
"Commitment Termination Date"), Capital America may, at its option,
terminate this Commitment Letter and its obligations hereunder. Each of
Capital America and the Borrower Sponsor agrees that notwithstanding the
expiration or termination of this Commitment Letter, its existence and the
contents hereof are and shall remain subject to the provisions of
Confidentiality set forth in Section 5. If the Financing is not consummated
by the Commitment Termination Date and such date has not been extended in
writing by Capital America, or if any other event whereby Capital America's
obligations hereunder have terminated has occurred, yet discussions or
negotiations between the parties shall continue, Capital America's
continued negotiations with respect to the Financing shall be nothing more
than a good faith effort to consummate the Financing, shall not be
construed in any way to extend its commitment described herein, but shall
not relieve the Borrower Sponsor of its obligations hereunder. Borrower
Sponsor and Borrowers hereby waive any claim or cause of
3
<PAGE>
action with respect to negotiations which take place after Capital
America's commitment has been terminated.
THIS COMMITMENT LETTER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. EACH PARTY
HERETO HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE
STATE OF NEW YORK FOR ANY LEGAL ACTION OR PROCEEDING RESULTING FROM THE
TRANSACTION CONTEMPLATED HEREIN. EACH PARTY HERETO HEREBY WAIVES ITS RIGHT
TO A TRIAL BY JURY. THIS COMMITMENT LETTER IS INTENDED FOR THE BENEFIT OF
THE PARTIES HERETO AND THEIR RESPECTIVE AFFILIATES AND NOT FOR THE BENEFIT
OF ANY THIRD PARTIES.
Please indicate your agreement to the above by executing a copy of this
Commitment Letter in the place provided below and returning a fully executed
copy to the undersigned.
Very truly yours,
THE CAPITAL COMPANY OF AMERICA LLC
By: /s/ Michael L. Brody
----------------------------------------
Name: Michael L. Brody
Title: Managing Director
Agreed and Accepted as of
this 1st day of July, 1998
HUDSON HOTELS TRUST
By: /s/ E. Anthony Wilson
------------------------------------------
Name: E. Anthony Wilson
Title: CEO - Trustee
4
<PAGE>
JULY 1, 1998
THE CAPITAL COMPANY OF AMERICA LLC
$100,000,000 LINE OF CREDIT
SUMMARY OF TERMS
(Incorporated by Reference in Commitment Letter dated July 1, 1998)
GENERAL: Subject to the satisfaction of the conditions set forth in the
Commitment Letter between The Capital Company of America LLC
("Capital America") and Hudson Hotels Trust ("Borrower
Sponsor") and subject to the satisfaction of the conditions set
forth in this Summary of Terms, Capital America will provide a
line of credit for first priority mortgage loans (each, a
"Loan"), in the aggregate amount of up to $100,000,000 (the
"Facility"), to be made to a limited liability entity (the
"Borrower") controlled by Borrower Sponsor. The proceeds of
each mortgage loan will be used to fund the Borrower's
acquisition of various properties approved by Capital America
(each, a "Property") or for any working capital purposes, and
to provide permanent long term financing for a portion of those
Properties, as further described herein. The Properties shall
not include any of the properties from the Benderson Portfolio.
Capital America shall have no approval rights over Borrower
Sponsor's acquisition of any properties which do not secure the
Facility. The closing of the Facility shall be conditioned upon
the closing of the Permanent Loan described in a permanent loan
term sheet dated July 1, 1998, between Capital America and
Borrower Sponsor.
LINE OF CREDIT
- --------------
BORROWER: The Borrower for the Properties shall be a bankruptcy remote,
special purpose entity, whose activities will be limited to
owning and operating the Properties and whose form, structure
and organizational documents shall be acceptable to Capital
America in its sole discretion. The Borrower will be controlled
by the Borrower Sponsor. The Borrower shall have at least one
independent director (or the functional equivalent), whose
responsibility will be limited solely to matters involving
insolvency and bankruptcy issues and whose vote will be
required to approve any election by the Borrower to voluntarily
seek protection from creditors under any applicable bankruptcy
or insolvency laws or the Borrower's dissolution. Capital
America shall have the right to approve such director. The
Borrower shall be a limited partnership or a limited liability
company, and a bankruptcy remote, special purpose entity in
form and substance acceptable to Capital America will be
required to act as the General Partner or the Managing Member
of the Borrower, as the case may be. Notwithstanding the
foregoing, Capital America agrees to restructure the Borrower,
so long as it continues to satisfy Rating Agency requirements,
in order to accommodate an operating lease structure which
Borrower Sponsor may elect to use in connection with its REIT
formation.
5
<PAGE>
CROSS-
COLLATERALIZATION: Each of the Advances under the Facility and all of the
collateral securing the Facility shall be cross-
collateralized and cross-defaulted.
LINE OF CREDIT
ADVANCE PERIOD: Capital America will agree to make Advances under the
Facility, subject to the terms and conditions described
herein, for a period of 18 months, unless Borrower exercises
the Extension Option described below, in which case Capital
America will agree to make Advances under the Facility for a
period of 24 months.
LINE OF CREDIT
EXTENSION OPTION: At Borrower's option, the Line of Credit Advance Period will
be extended by 6 months for a total term of 24 months (the
"Extension Option"). In the event that Borrower exercises
such Extension Option, the Permanent Loan Commitment Amount
(as defined below) will increase to $75 million.
LINE OF CREDIT
AMOUNT: The maximum amount of any Advance under the Line of Credit
for any Property shall be that amount which results in a
debt service coverage ratio ("DSCR") of at least 1.50:1,
based upon the underwritten net operating income ("UNOI") of
the Property (as defined below), the calculation of which is
described below, and an assumed debt service constant of
11.33%.
LINE OF CREDIT
INTEREST RATE: One-month LIBOR + 1.85% per annum, reset monthly two
eurodollar business days prior to each payment date. The
Line of Credit Interest Rate is inclusive of Capital
America's servicing and administrative expenses associated
with the Facility.
INTEREST RATE
PROTECTION: At any time when the 10 year US Treasury security then being
used by Capital America to price loans exceeds 6.25%, the
Borrower will be required to forward rate lock, for the
Remaining Permanent Loan Commitment Amount (as defined
below), (the "Locked Amount"), such 10 year US Treasury
Security, pursuant to Capital America's standard interest
rate management arrangement. If the Permanent Loan
Commitment Amount has been met, at any time when the 10 year
US Treasury security then being used by Capital America to
price loans exceeds 7.00%, the Borrower will be required to
forward rate lock, for the outstanding balance of the
Facility, (the "Locked Amount"), such 10 year US Treasury
Security, pursuant to Capital America's standard interest
rate management arrangement. The cost of this hedge will be
4 basis points per month on the Locked Amount. The Borrower
and the Borrower Sponsor shall guarantee the payment of any
hedging losses and breakage amounts associated with such
rate lock.
MONTHLY PAYMENTS: The Facility will require payments, in arrears, of interest
only, and monthly payments of escrows and reserves. All
payments on the Facility will be required to be made on the
eleventh (11th) day of every calendar month (except if the
11th day is not a business day, then payment shall be
required on the first business day following the 11th)
(each, a "Payment Date"). All payments shall be made in
arrears and shall be for the period beginning on the 11th
calendar day of the
6
<PAGE>
preceding month through and including the 10th calendar day
of the month when payment is due. The Facility will require
no amortization.
FEES/DEPOSITS: Within two business days of signing the Commitment Letter,
Borrower Sponsor will pay to Capital America an "Expense
Deposit" of $100,000. The Expense Deposit shall be applied
by Capital America to the payment of Capital America's
expenses hereunder, as more fully described below in the
section entitled "Expenses". Expenses incurred in connection
with the Facility which are in excess of the Expense
Deposit, will be withheld from the first Advance proceeds to
the extent not already paid. If actual expenses are less
than the Expense Deposit, Borrower Sponsor shall be remitted
the difference at closing.
In addition, Capital America may be paid a Draw Fee equal to
0.25% on the amount of each Advance under the Facility,
based upon the funding date of such Advance under the
Facility, according to the following schedule:
<TABLE>
<S> <C>
From Facility Closing Date through September 10, 1998: 0.0% Draw Fee
From August 11 through September 10 of any year: 0.0% Draw Fee
From February 11 through March 10 of any year: 0.0% Draw Fee
During any other period of the Facility: 0.25% Draw Fee
</TABLE>
In addition, Capital America may be paid an Exit Fee equal
to 0.25% on the amount of any full or partial prepayment of
the Facility, based upon the date of such prepayment,
according to the following schedule:
<TABLE>
<S> <C>
From Facility Closing Date through September 10, 1998: 0.0% Exit Fee
From August 11 through September 10 of any year: 0.0% Exit Fee
From February 11 through March 10 of any year: 0.0% Exit Fee
At the Maturity Date of the Facility: 0.0% Exit Fee
During any other period of the Facility: 0.25% Exit Fee
</TABLE>
LINE OF CREDIT
MATURITY DATE: The Facility shall mature eighteen months following the
first Line of Credit Payment Date (the "Line of Credit
Maturity Date"), unless Borrower exercises the Extension
Option, in which case Capital America will agree to make
Advances under the Facility for a period of 24 months.
PREPAYMENT: The Facility is prepayable at any time prior to the Line of
Credit Maturity Date, subject to at least 60 days notice
from the Borrower and subject to the Exit Fee schedule
described above under "Fees/Deposits".
APPROVAL PROCESS: Borrower Sponsor will provide Capital America, no later than
45 days prior to the expected date on which Capital America
will place a mortgage on the Property, all documentation,
reports and other information required by Capital America in
accordance with Capital America's Line of Credit due
diligence and underwriting standards (each, a "Loan
Package") with respect to each Property proposed to be
financed hereunder which shall be approved by Capital
America in its sole discretion. Capital America will provide
Borrower Sponsor with written notice when it has completed
its review of a Loan Package.
7
<PAGE>
DOCUMENTS: The Advances under the Facility shall be evidenced by
documentation customary for similar transactions, and in form
and substance acceptable to Capital America in its sole and
absolute discretion, which documentation shall be consistent
in all material respects with the terms and provisions hereof.
Such documentation shall include customary representations and
warranties from the Borrower to Capital America and customary
events of default. In addition, all relevant ancillary
documents relating to the Borrower, including without
limitation any applicable management agreements and franchise
agreements, shall be satisfactory to Capital America in its
sole discretion.
LEGAL OPINIONS: As a condition to the closing, the Borrower's counsel shall
render all customary legal opinions regarding the Borrower and
the Facility. Such opinions shall include an opinion of
Borrower's counsel, which counsel shall be reasonably
acceptable to Capital America, including, without limitation,
a usury opinion and an opinion as to the enforceability of the
Facility under New York law. In the event that Capital America
desires to have the Facility, or any securities representing
interests in the Facility, rated by any Rating Agency, the
Borrower's counsel shall render a substantive non-
consolidation opinion and such other opinions as may be
requested by the applicable Rating Agency, all in form and
substance customary or required for rated transactions.
DUE DILIGENCE/ADDITIONAL
CONDITIONS PRECEDENT TO
FUNDING/CLOSING: The obligation of Capital America to make the Advances under
the Facility is subject to the completion by Capital America
to Capital America's satisfaction of Capital America's due
diligence with respect to the Properties and the Borrower,
including, without limitation, the receipt by and reasonable
approval of Capital America of the following prior to the
funding of any Advance:
(i) Perfected first mortgage on the Properties;
(ii) Title insurance policies issued by a national company
reasonably acceptable to Capital America showing
indefeasible title to the Properties vested in the
Borrower, insuring the first priority of the lien
arising under the applicable mortgage in an amount
acceptable to Capital America, excepting from coverage
thereunder only such matters as are approved by
Capital America, and including such co-insurance
and/or reinsurance as is required by Capital America;
(iii) Market studies with respect to the Properties' markets
by a firm approved by Capital America, which studies
shall be commissioned by Capital America for its own
use and Borrower Sponsor shall reimburse Capital
America for the cost of such market studies;
(iv) Environmental audits (i.e. Phase I surveys and, if
deemed necessary or appropriate by Capital America,
Phase II surveys) of the Properties, acceptable to
Capital America from a firm approved by Capital
America;
(v) Structural engineering reports acceptable to Capital
America from a firm approved by Capital America,
identifying, among other things, a
8
<PAGE>
schedule of anticipated capital expenditures and the
per annum cost thereof;
(vi) Probable maximum loss analysis acceptable to Capital
America from a firm approved by Capital America
delivered prior to closing for any Property located in
the states of California, Oregon, Washington or
Hawaii;
(vii) Insurance policies (including earthquake insurance, if
applicable) in such form, with such carriers, and in
such amounts as are required pursuant to the Loan
Documents and deemed acceptable to Capital America;
(viii) Three years of historical operating statements of the
Properties (verified by a certified public accounting
firm acceptable to Capital America), trailing 12 month
operating statements of the Properties and operating
budgets for the Properties for the then current
operating year;
(ix) Smith Travel reports for each of the Properties from
1994 to the present;
(x) Surveys (or, if reasonably acceptable to Capital
America, updated and recertified surveys) meeting
Capital America's specifications (including with
respect to the surveyor's certification) and legal
description of the Properties;
(xi) Certificates of occupancy for each Property and
reasonable evidence of compliance with all applicable
zoning, building, environmental and other laws
applicable to the Properties. Zoning letters or the
like from applicable governmental authorities are
acceptable for the purposes hereof;
(xii) Copies of all leases, material contracts and permits
affecting the Properties;
(xiii) Evidence that any ground lease allows for first
mortgage financing on the Properties and confirmation
that all terms and conditions of the ground lease are
acceptable to Capital America (including delivery of
estoppel certificates acceptable to Capital America);
and
(xiv) Other information reasonably required by Capital
America.
PERMANENT LOANS
- ---------------
CONVERSION TO
PERMANENT LOANS: Borrower Sponsor shall be required to close $50,000,000 of
Permanent Loans with Capital America subject to the following
terms (the "Permanent Loan Commitment Amount") by February 11,
1999. Borrower Sponsor may elect which Properties shall be
released with the proceeds of the Permanent Loan, subject to
Capital America's approval in its sole discretion. Any
Permanent Loans closed between Borrower Sponsor and Capital
America by February 11, 1999 shall reduce the Permanent Loan
Commitment Amount, regardless of
9
<PAGE>
whether such Permanent Loans were used to refinance Properties
securing the Facility. If Borrower exercises the Extension
Option, the Permanent Loan Commitment Amount shall increase to
$75,000,000.
BORROWER: The Borrower for the Permanent Loan shall be a bankruptcy
remote, special purpose entity, whose activities will be
limited to owning and operating the Properties and whose form,
structure and organizational documents shall be acceptable to
Capital America in its sole discretion. The Borrower will be
controlled by the Borrower Sponsor. The Borrower shall have at
least one independent director (or the functional equivalent),
whose responsibility will be limited solely to matters
involving insolvency and bankruptcy issues and whose vote will
be required to approve any election by the Borrower to
voluntarily seek protection from creditors under any
applicable bankruptcy or insolvency laws or the Borrower's
dissolution. Capital America shall have the right to approve
such director. The Borrower shall be a limited partnership or
a limited liability company, and a bankruptcy remote, special
purpose entity in form and substance acceptable to Capital
America will be required to act as the General Partner or the
Managing Member, as the case may be. Notwithstanding the
foregoing, Capital America agrees to restructure the Borrower,
so long as it continues to satisfy Rating Agency requirements,
in order to accommodate an operating lease structure which
Borrower Sponsor may elect to use in connection with its REIT
formation.
PERMANENT LOAN
FUNDING DATE: The Permanent Loan Commitment Amount shall be funded by
February 11, 1999, unless the Extension Option is exercised,
in which case the final $25,000,000 of Permanent Loan
Commitment Amount shall be funded at any time during the
Facility.
PERMANENT LOAN
FEES: A structuring fee equal to 2.0% of the amount of any Permanent
Loan shall be paid to Capital America on the closing date of
such Permanent Loan to reimburse it for the payment of
structuring and placement services related to the Permanent
Loan.
PERMANENT
LOAN AMOUNT: The Permanent Loan shall be made in an amount no less than
$50,000,000, and shall be collateralized by a pool of
Properties such that the DSCR on the Permanent Loan is no less
than 1.40:1, based upon Capital America's determination of
UNOI (as defined below) and a debt service constant equal to
the greater of (a) the actual constant using a 25 year
amortization and (b) 10.48%, and subject to a loan to value
not to exceed 65% based upon an MAI appraisal approved by
Capital America. Actual Loan proceeds are also dependent upon
prevailing interest rates at the closing of the Loan (unless
Borrower Sponsor has entered into Capital America's standard
Rate Lock Agreement, as described above under "Interest Rate
Protection").
PERMANENT LOAN
INTEREST RATE: For the Permanent Loan, the locked yield on the 10 year US
Treasury Security, plus the applicable Spread and Forward
Premium:
DSCR Spot Spread Forward Premium
---- ----------- ---------------
10
<PAGE>
1.40:1 - 1.69:1 2.15% 1.5 basis points per
month following
Facility Closing
1.70:1+ 1.75% 1.5 basis points per
month following
Facility Closing
Interest shall be calculated based on a 360-day year and
actual days elapsed.
MONTHLY PAYMENTS: The Permanent Loan will require level monthly payments of
interest and principal, and monthly payments of escrows and
reserves. All payments on the Loan will be required to be made
on the eleventh (11th) day of every calendar month (except if
the 11th day is not a business day, then payment shall be
required on the first business day following the 11th) (each,
a "Payment Date"). All payments shall be made in arrears and
shall be for the period beginning on the 11th calendar day of
the preceding month through and including the 10th calendar
day of the month when payment is due. The Permanent Loan will
require equal payments consisting of principal and interest
sufficient to fully amortize the face amount thereof over 300
months.
PERMANENT LOAN
MATURITY DATE: The effective maturity date of the Permanent Loan shall be the
date no later than 120 months after the first Permanent Loan
Payment Date (the "Effective Maturity Date"). The actual
maturity date of each Loan shall be no later than 300 months
after first Permanent Loan Payment Date (the "Actual Maturity
Date").
PAYMENTS AFTER
EFFECTIVE MATURITY
DATE: Provided no other default exists, from the Effective Maturity
Date through the earlier of (i) repayment of all Borrower's
obligations under the Permanent Loan or (ii) the Actual
Maturity Date, the Interest Rate payable on the Permanent Loan
will increase to 500 basis points plus the greater of: (a) the
Interest Rate at the time of maturity (the "Maturity Interest
Rate") or (b) the sum of (i) the then prevailing yield on US
Treasury Constant Maturities with terms most nearly
approximating those non callable US Treasury obligations
having maturities as close as possible to the Actual Maturity
Date of the Permanent Loan and (ii) the lower of 200 basis
points or the Spread (rounded down to nearest 1/8th) (the
greater of (a) or (b), the "Reset Note Rate"). The difference
between interest accrued on the principal balance at the
Maturity Interest Rate and interest accrued on the principal
balance at the Reset Note Rate shall be defined as "Additional
Interest". Following the Effective Maturity Date, and until
all Borrowers' obligations under the Loan Agreement have been
fully satisfied, 100% of the cash flow shall be allocated in
the following order of priority: (i) ground rent, if
applicable, (ii) tax and insurance escrow, (iii) interest at
the Maturity Interest Rate, (iv) principal based on the
original 300-month amortization schedule, (v) operating
expenses, (vi) reserves, (vii) prepayment of principal until
reduced to zero and (viii) the balance, if any, to Additional
Interest and interest accrued thereon. Non-payment of any
portion of the Additional Interest to the extent sufficient
cash flow was not available, will not be a default under the
Permanent Loan. Unpaid Additional Interest shall be deferred
and shall accrue interest at the Reset Note Rate and shall be
payable in
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full no later than the Actual Maturity Date. Notwithstanding
the above, failure at any time to make payments in amounts at
least equal to those required under (i) through (vi) above
shall constitute a default under the Permanent Loan.
Notwithstanding the foregoing, if Borrower repays the Loan
within the first 60 days following the Effective Maturity
Date, including interest through the next Payment Date, the
Additional Interest accrued since the Effective Maturity Date
shall be forgiven and any excess cash flow held in reserve
shall be refunded to the Borrower.
TOTAL RELEASE OF
COLLATERAL: The Permanent Loan may not be prepaid prior to the Effective
Maturity Date. However, two years after Capital America sells
the Permanent Loan into a securitization (the "Lockout
Period"), all Properties may be released as security for the
Permanent Loan by payment to Capital America or its assignee
of (i) all accrued but unpaid interest and other payments due
under the Permanent Loan; (ii) the entire principal balance of
the Permanent Loan then outstanding; and (iii) Capital
America's standard yield maintenance premium derived from a US
Treasury benchmark (the "Total Release Payment").
PARTIAL RELEASE OF
COLLATERAL: After the Lockout Period but prior to the maturity of the
Permanent Loan, provided that no Event of Default has occurred
or is continuing, less than all the Properties securing the
Permanent Loan may be released upon payment to Capital America
or its assignee of (i) all accrued and unpaid interest on the
Permanent Loan, (ii) 125% of the Allocated Loan Amount for the
Properties requested to be released and (iii) Capital
America's standard yield maintenance on such amount (the
"Partial Release Payment"). Notwithstanding the foregoing, a
partial release of Properties will only be permitted if the
DSCR for the remaining Properties is greater than both (i) the
DSCR for the Loan at the Closing Date and (ii) the DSCR for
the Loan immediately prior to the release.
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CONDITIONS TO RELEASE
OF COLLATERAL: Total or partial releases are subject to at least 30 days
written notice to Capital America or its assignee, which
notice must include the Properties proposed to be released,
and may only occur on a regularly scheduled payment date. Any
release is subject to Capital America's or its assignee's
receipt of a legal opinion of outside counsel acceptable to
Capital America or its assignee which states without
qualification that Capital America or its assignee will have,
upon the release, a first priority perfected security interest
in the US Treasury Securities referred to below. Borrower may
be relieved of its obligations under the Loan after payment of
the Total Release Payment or the Partial Release Payment, as
the case may be, in an amount equal to the Loan Amount, in the
case of a total release or 125% of the Allocated Loan Amount
in the case of a partial release, provided that it assigns to
a special purpose corporation acceptable to Capital America or
its assignee that portion of the Permanent Loan equal to the
Permanent Loan Amount, in the case of a total release, or 125%
of the Allocated Loan Amount, in the case of a partial
release; and provided further that, in the case a partial
release, Borrower shall remain liable for the remaining
balance of the Permanent Loan.
"Allocated Loan Amount" shall be determined at the closing of
the Permanent Loan by Capital America in its sole discretion,
and will be the portion of the original principal amount of
the Permanent Loan allocated among the Properties relative to
its UNOI. The sum of the Allocated Loan Amounts for all the
Properties securing the Permanent Loan shall equal the
original principal amount of the Permanent Loan. Capital
America's standard yield maintenance premium shall be an
amount that, together with the Allocated Loan Amount being
paid, will be sufficient to purchase non-callable US Treasury
Securities whose cash flows are equal to and occur as close as
possible before the successive remaining scheduled interest
and principal payments required under the Permanent Loan
during the Term. Capital America's standard yield maintenance
premium shall also apply due to any prepayment resulting from
an acceleration of the Permanent Loan following an Event of
Default.
DOCUMENTS: The Permanent Loan shall be evidenced by documentation
customary for similar transactions, and in form and substance
acceptable to Capital America in its sole and absolute
discretion, which documentation shall be consistent in all
material respects with the terms and provisions hereof. Such
documentation shall include customary representations and
warranties from the Borrower to Capital America and customary
events of default. In addition, all relevant ancillary
documents relating to the Borrower, including without
limitation any applicable management agreements and franchise
agreements, shall be satisfactory to Capital America in its
sole discretion.
LEGAL OPINIONS: As a condition to the closing, the Borrower's counsel shall
render all customary legal opinions regarding the Borrower and
the Loan. Such opinions shall include an opinion of Borrower's
counsel, which counsel shall be reasonably acceptable to
Capital America, including, without limitation, a usury
opinion and an opinion as to the enforceability of the Loan
transaction under New York law. In addition, the Borrower's
counsel shall render a substantive non-consolidation opinion
and such other opinions as may be requested by the applicable
Rating Agency, all in form and substance customary or required
for rated transactions.
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DUE DILIGENCE/ADDITIONAL
CONDITIONS PRECEDENT TO
FUNDING/CLOSING: The obligation of Capital America to make the Permanent Loan
is subject to the completion by Capital America to Capital
America's satisfaction of Capital America's due diligence with
respect to the Properties and the Borrower, including, without
limitation, the receipt by and reasonable approval of Capital
America of the following prior to the funding of the Permanent
Loan:
(i) Perfected first mortgage on the Properties;
(ii) Title insurance policies issued by a national company
reasonably acceptable to Capital America showing
indefeasible title to the Properties vested in the
Borrower, insuring the first priority of the lien
arising under the applicable mortgage in an amount
acceptable to Capital America, excepting from coverage
thereunder only such matters as are approved by
Capital America, and including such co-insurance
and/or reinsurance as is required by Capital America;
(iii) MAI appraisals (prepared in compliance with FIRREA)
with respect to the Properties by a firm approved by
Capital America;
(iv) Environmental audits (i.e. Phase I surveys and, if
deemed necessary or appropriate by Capital America,
Phase II surveys) of the Properties, acceptable to
Capital America from a firm approved by Capital
America;
(v) Structural engineering reports acceptable to Capital
America from a firm approved by Capital America,
identifying, among other things, a schedule of
anticipated capital expenditures and the per annum
cost thereof;
(vi) Probable maximum loss analysis acceptable to Capital
America from a firm approved by Capital America
delivered prior to closing for any Property located in
the states of California, Oregon, Washington or
Hawaii;
(vii) Insurance policies (including earthquake insurance, if
applicable) in such form, with such carriers, and in
such amounts as are required pursuant to the Loan
Documents and deemed acceptable to Capital America;
(viii) Three years of historical operating statements of the
Properties (verified by a certified public accounting
firm acceptable to Capital America), trailing 12 month
operating statements of the Properties and operating
budgets for the Properties for the then current
operating year;
(ix) Smith Travel reports for each of the Properties from
1994 to the present;
(x) Surveys (or, if reasonably acceptable to Capital
America, updated and recertified surveys) meeting
Capital America's specifications (including
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with respect to the surveyor's certification) and
legal description of the Properties;
(xi) Certificates of occupancy for each Property and
reasonable evidence of compliance with all applicable
zoning, building, environmental and other laws
applicable to the Properties. Zoning letters or the
like from applicable governmental authorities are
acceptable for the purposes hereof;
(xii) Copies of all leases, material contracts and permits
affecting the Properties;
(xiii) Evidence that any ground lease allows for first
mortgage financing on the Properties and confirmation
that all terms and conditions of the ground lease are
acceptable to Capital America (including delivery of
estoppel certificates acceptable to Capital America);
and
(xv) Other information reasonably required by Capital
America.
GENERAL TERMS
- -------------
The following terms are applicable to both the Line of Credit
and the Permanent Loan.
UNDERWRITTEN NOI: At all times during the Facility, and upon the funding of the
Permanent Loan, each of the Properties must demonstrate UNOI
(as determined in accordance with the terms hereof) on a
trailing 12-month basis (based on the consecutive 12-month
period ending in the month immediately preceding the closing
date for which detailed financial information is available)
in an amount sufficient to generate the minimum DSCR for
either the Facility or Permanent Loan, as the case may be.
UNOI shall be calculated by determining the actual net income
of the Properties before interest, depreciation and income
taxes during the most recent 12-month period immediately
prior to the closing of the Loan. Capital America will make
adjustments, in its sole discretion, based on underwriting
criteria which will include, but not be limited to, the
following (i) supply and demand dynamics in the specific
market for each Property and the effect of new construction
on occupancy and rate; (ii) the growth or decline, as the
case may be, in occupancy, average daily rate, gross revenue,
departmental profit and gross operating profit for each
Property; (iii) the operating performance of Properties which
have been recently renovated; and (iv) expense and other
operating ratios of each Property compared to those ratios
achieved for a comparable asset in the hotel industry at
large. In addition, Capital America will analyze the
management contract and franchise agreement for each Property
and adjust the fees currently paid on those contracts, when
necessary, to reflect minimum standards in the hotel industry
for either full-service or limited-service hotels that have
both a national franchise and management affiliation.
Furthermore, Capital America's determination of the
appropriate FF&E reserve will be based upon third-party
reports and other due diligence, but in no event will the
adjustment be less than 5% of gross revenues. In determining
UNOI, all pro forma adjustments to revenue and
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expenses shall be approved by Capital America in its sole
discretion and shall be subject to Capital America's full
due diligence. The above underwriting assumes that there is
no material adverse change anticipated in the operations of
the Properties or in the UNOI of the Properties from the
execution of the Commitment Letter to the closing of the
Loan.
GROUND LEASE: The terms of any ground lease must provide that the payments
thereunder are subordinate to the lien of the mortgage or
deed of trust, must have a remaining term of at least 10
years later than the Final Maturity Date, and must otherwise
be acceptable to Capital America in its sole discretion. Any
ground lease must be financeable as determined by Capital
America in its sole discretion (e.g., Capital America or its
assignee must be given notice of, and an opportunity to
cure, defaults, and otherwise be adequately protected in the
event the ground lessee disaffirms the ground lease in
connection with a bankruptcy. The ground lease must not be
cancelable in the event a lender forecloses on the leasehold
estate.). In addition, Borrower shall deliver to Capital
America prior to closing a ground landlord's estoppel
certificate, signed by the Borrower's ground landlord
containing, among other things, leasehold mortgagee
protections as shall be acceptable to Capital America in its
sole discretion.
COLLATERAL: The Borrowers shall grant to Capital America a first
mortgage lien on the land and improvement as built and a
first priority perfected security interest in all contracts,
agreements, trademarks, licenses, goods, equipment,
accounts, fixtures and all other tangible and intangible
personal property located on or used in connection with each
Property, and other collateral and assurances customary in
similar financings by Capital America. The mortgage liens
and the priority thereof shall be the subject of title
insurance in favor of Capital America and its successors
and/or assigns, which insurance shall be issued and
underwritten by a title insurance carrier acceptable to
Capital America in its sole discretion. Capital America
reserves the right to require co-insurance or evidence of
reinsurance. Capital America shall use its best efforts to
assume the existing Credit Lyonnaise mortgages and deeds of
trust on the Properties, subject to Capital America's
standard mortgage/deed of trust requirements.
INITIAL RESERVES: Each Borrower will establish sufficient initial reserves (i)
for taxes and insurance, which reserves shall be funded at
closing in an amount sufficient, as determined by Capital
America, inclusive of the ongoing reserves described below,
to make the next due real estate tax and insurance premium
payments, (ii) for deferred maintenance items as set forth
in the property condition reports, if any, and (iii)
environmental remediation amounts as set forth in the
environmental reports.
ONGOING RESERVES: At all times during the term of the Facility or any
Permanent Loan, the Borrowers shall fund reserves in the
following amounts on a monthly basis:
taxes and insurance premiums -- monthly deposit of one-
twelfth of the budgeted annual real estate taxes and
insurance premiums;
capital expenditures -- one-twelfth of the amount estimated
by Capital America at its discretion which shall generally
be computed at 5% of gross revenues, (or such higher amount
as may be indicated by Capital America's due diligence);
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debt service -- deposit equal to the monthly debt service
amount;
ground rent -- deposit equal to the ground rent payment, if
applicable; and
seasonality reserves -- deposit determined by Nomura
sufficient to cover the debt service on the Loans in months
with low cash flow due to the seasonality of the Properties,
if applicable.
CASH MANAGEMENT: Each Borrower will establish a separate "A" account and "B"
account with a bank designated by Borrower (the "Clearing
Bank") through which all property receipts will be cleared.
Borrower will be required to cause its credit card clearing
banks and any space tenants to send directly to the Clearing
Bank for deposit into an "A" account the applicable payments
required to be made on account of the Property on a daily
basis and Borrower shall be required to deposit directly into
the "A" account all other proceeds from the operation of each
Property on a daily basis. Until the earlier to occur of (a)
the Effective Maturity Date and (b) a default or event of
default under the loan documents (each, a "Cash Trap Event"),
as such receipts are cleared, the Clearing Bank will transfer
them daily from the "A" account to the "B" account, which "B"
account is an account not subject to any restriction and is
under the sole control of Borrower. Upon a Cash Trap Event, as
such receipts are cleared, the Clearing Bank, upon notice from
Capital America, will transfer them daily during such transfer
period, commencing on the 12th day of each month, from the "A"
account to an account owned and controlled by Capital America
at a bank selected by Capital America (the "Deposit Bank").
Upon a Cash Trap Event, the Deposit Bank will establish sub-
accounts for certain items including ongoing taxes and
insurance premiums, ongoing capital expenditures, debt
service, seasonality reserves, ground rent and such other
reserves as may be required by Capital America based on its
due diligence review. The amounts of such reserves are
described below in the section entitled "Ongoing Reserves".
Once the monthly required amount of each such reserve is on
deposit in each subaccount, transfers to the Deposit Bank from
the Clearing Bank will stop and cleared funds (other than
insurance proceeds and condemnation awards, security deposits
and any rent that is paid for more than one month in advance
all of which will be transferred to the Deposit Bank, subject
to legal and lease requirements in the case of security
deposits) will instead be transferred into a "B" account at
the Clearing Bank. Prior to the Effective Maturity Date, and
provided that there has been no election to accelerate the
indebtedness, any funds transferred to the Deposit Bank in
excess of the monthly requirement shall be immediately
remitted back to the Borrower.
Capital America will have a senior security interest in the
aforementioned accounts and subaccounts. The up front and
ongoing expenses of maintaining such accounts and subaccounts,
and any other accounts maintained pursuant to the Loan
Documents, shall be the responsibility of the Borrowers.
12 months after the beginning of a Cash Trap Event, provided
that no default has occurred or is continuing and provided
that there has been no election to accelerate the indebtedness
under the Loan, if the DSCR for the Loan is at least as high
as the DSCR at the time of the closing of the Loan, the Cash
Trap Event
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shall cease until the earlier of the Effective Maturity
Date or the occurrence of another Cash Trap Event.
Notwithstanding the foregoing, Capital America agrees to
restructure the Cash Management System, so long as it
continues to satisfy Rating Agency requirements, in order
to accommodate an operating lease structure which Borrower
Sponsor may elect to use in connection with its REIT
formation.
DEFAULT: During the continuance of an Event of Default by the
Borrower (after the lapsing of applicable cure/grace
periods), all cash flow on the Properties and cash in the
reserve accounts will be applied, at Capital America's
option, to interest payments and principal repayments.
In addition, if the Loan is accelerated upon an Event of
Default, the Borrower shall owe the current outstanding
balance of the Loan, all accrued interest (including any
default interest), Capital America's standard yield
maintenance payment and any other amounts due and payable.
PROPERTY
MANAGEMENT: The Properties will be managed by a manager acceptable to
Capital America and pursuant to a written management
agreement approved by Capital America. The management
agreement and all management fees shall be subordinated to
debt service. The management agreement will terminate upon
an event of default under the Loan. The management
agreement shall have a term ending on the Effective
Maturity Date and may have renewal rights thereafter. If
the Loan remains outstanding after the Effective Maturity
Date, Capital America will have approval rights over
renewal of the manager or substitution of a new property
manager.
CHANGE IN
MANAGEMENT: The manager of a Property may be replaced by the holder of
the Loan in the event that, as of the last day of a
calendar quarter, (i) the UNOI on a trailing twelve (12)
month basis decreases to less than 65% of the original
UNOI, (ii) the DSCR on a trailing twelve (12) month basis
on the remaining outstanding balance of the Loan shall fall
below 1.10:1 and/or (iii) upon an Event of Default.
Notwithstanding the preceding sentence, management will be
permitted to remain in place by prepaying the Loan
(including all applicable yield maintenance premiums and
accrued interest) to a level such that the DSCR on a
trailing twelve (12) month basis on the remaining
outstanding balance of the Loan is restored to a level of
at least 1.50:1. If either (i) or (ii) above is true,
Capital America shall take into consideration, prior to the
removal of the manager: a) both the manager's and the
hotel's performance relative to the competitive set and b)
forces outside the manger's control. At such time as the
property manager is removed, a replacement property
manager, acceptable to Capital America (or its assignee)
and any applicable rating agency in their respective
discretion, will assume the management of the Properties
and will receive a property management fee that will not
exceed then market rates.
FINANCIAL REPORTING: During the term of the Facility and the Permanent Loan, the
Borrowers shall provide to Capital America on each of the
individual Properties (i) annual (a) unaudited financial
statements within 40 days and (b) audited financial
statements within 90 days following the close of the
Borrower's fiscal year, (ii)
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monthly unaudited financial statements within 20 days
following the end of each calendar month and (iii) monthly
occupancy statistics within 20 days following the end of each
calendar month. Audited statements prepared on a combined
basis for the Properties will be acceptable provided such
statements are accompanied by an agreed-upon procedures
report demonstrating that the unaudited property level
statements on the individual Properties tie to the combined
audited statements. Audited financial statements (including
those audited financial statements to be delivered as a
condition to closing) shall be accompanied by an unqualified
opinion from a "Big Six" accounting firm or other certified
public accounting firm acceptable to Capital America.
Unaudited statements and occupancy statistics shall include a
certification (a "Certificate") by a senior executive of the
Borrower stating that the relevant financial information
fairly reflects the financial condition and operations of the
Borrower for the relevant period. All financial statements
(including those to be delivered as a condition to closing)
(i) shall be prepared in accordance with generally accepted
accounting principles ("GAAP"), (ii) shall be presented in a
format acceptable to Capital America, and (iii) shall include
a statement of operations (profit and loss), a statement of
cash flows, a calculation of UNOI, and such other information
or reports as shall be reasonably requested by Capital
America or any applicable Rating Agency. In addition,
Borrower shall be required to deliver regulatory surveys and
related plans of correction within 15 days of receipt or
filing and regulatory cost reports within 15 days of receipt
or filing.
INSURANCE: Each Property will be covered by fire and casualty, machine
and boiler, business interruption and liability insurance
(general, employer and workers' compensation insurance),
along with flood, hurricane or earthquake insurance if any of
the Properties are located in a flood, hurricane or
earthquake zone, as applicable. In general, the amount of the
coverage relating to damage to the Property shall be in an
amount not less than the full replacement cost of the
Property, shall contain deductibles not in excess of $100,000
and shall be written by carriers having a Standard & Poor's
rating of at least "AA" and a Best Rating of at least "AVII".
Business interruption insurance shall cover a period of not
less than 18 months. Capital America and its affiliates will
be named as additional insured, mortgagee and loss payees on
all policies insuring the Properties, and all such policies
will otherwise be in a form acceptable to Capital America.
SUBORDINATE DEBT: The Borrowers may not incur any indebtedness other than the
Facility or the Permanent Loan during the term thereof. No
secured or unsecured debt, including subordinate debt, shall
be permitted on the Properties during the term of the
Facility or Permanent Loan. In addition, owners of the
Borrower shall be prohibited from pledging their interests in
the Borrower to secure any financing during the term of the
Facility and the Permanent Loan.
SUBORDINATION OF
LEASES: The leases for any space tenants at the Properties shall be
subordinate to the lien of the mortgage and Borrower Sponsor
will use its best efforts to provide any subordination, non-
disturbance and attornment agreement in form and substance
acceptable to Capital America
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SUBORDINATION: Borrower Sponsor and its affiliates will be required to
subordinate to Capital America and its assignees the
right to receive any fees (including management fees),
distributions or other payments from the Borrower.
ESTOPPEL CERTIFICATES: Borrower will provide to Capital America prior to
closing estoppel certificates, in form and substance
acceptable to Capital America, from any space tenants at
the Properties.
SERVICER: The Loan will be serviced by a third-party servicer (the
"Servicer") to be selected by Capital America, which
servicer may be an affiliate of Capital America.
RECOURSE: The Facility and Permanent Loan will be non-recourse,
except for Capital America's standard carve-outs
including, but not limited to, indemnification for
environmental liability, misappropriation of funds,
material or intentional misrepresentation, fraud,
physical waste of the Properties and removal or disposal
of any portion of the Properties.
SUBSTITUTION OF
COLLATERAL: At any time during the Facility or the Permanent Loan,
collateral may be substituted provided that (a) all such
Properties substituted during the term of the Loans do
not represent more than the lesser of (i) the greatest
of (A) 30% of the trailing 12-month Net Operating Income
of the Properties as of the date of substitution and (B)
40% of the trailing 12-month Net Operating Income of the
Properties as of the closing date, and (ii) the greatest
of (A) 30% of the value of the Properties (as determined
by Capital America) as of the date of substitution and
(B) 40% of the value of the Properties (as determined by
Capital America) as of the closing date, (b) such
substitutions shall not be allowed more than three times
during the term of the Loans, and (c) all of the
following conditions are satisfied: (1) the new
property(ies) to be substituted in are satisfactory to
Capital America in all respects (after Capital America's
due diligence investigation), (2) as a result of the
substitution, the overall DSCR for the Loans is not less
than the greater of (x) the overall DSCR at the initial
closing of the Loans and (y) the overall DSCR for the
Loans immediately prior to the substitution, (3) as a
result of the substitution, the overall LTV for the
Loans is not greater than the lesser of (x) the overall
LTV at the initial closing of the Loans and (y) the
overall LTV for the Loans immediately prior to the
substitution, (4) the trailing 12-month Net Operating
Income for the new property(ies) may not show a downward
trend for any of the preceding three years and shall be
adjusted, if necessary, to cap the growth of
departmental profits at 10% from each of the previous
three year's, (5) confirmation that no downgrade in
ratings on the securities backed by the Loans will
result from the substitution is obtained or would result
if this Loans were a stand alone securitization, and any
fees associated with such confirmation are paid by the
Borrower, (6) all of Capital America's due diligence and
other costs and expenses are paid by the Borrower and
(7) an opinion is obtained from reputable counsel
approved by Capital America stating that the
substitution does not violate the REMIC rules.
ASSUMABILITY: The equity interests in the Borrowers will be
transferable with the consent of Capital America. If all
of the Properties securing the Facility or the Permanent
Loans are transferred to one purchaser, such Loans may
be assumed by the
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purchaser if the purchaser assumes the Borrower's obligations
under such Loans and, if any of the Loans have been sold into
a securitization, the Rating Agencies confirm that such
transfer will not result in a downgrade in the securities
issued in connection with such Loans, all pursuant to
documentation which is acceptable Capital America and any
applicable Rating Agencies (if the Loans are sold into a
securitization). Such transfer provisions will apply to a
change in control of the Borrower. Upon the transfer of the
equity interests or sale of the Properties, Borrower will pay
all reasonable expenses in connection with the assumption of
the Loan capped at 1% of the outstanding principal amount of
the Loans. In addition, Capital America shall use its best
efforts to coordinate with the servicers of past deals closed
with affiliates of Borrower Sponsor to facilitate the
assumption of such loans by Borrower Sponsor.
EXPENSES: By executing the Commitment Letter, Borrower Sponsor agrees to
pay or to reimburse, and to cause the Borrower to pay or
reimburse, Capital America and its affiliates, upon demand and
whether or not the Facility is consummated in whole or in
part, the reasonable fees and out of pocket expenses incurred
by Capital America and the outside counsel and auditors
retained by Capital America in connection with the matters and
transactions contemplated hereby which fees and expenses shall
also include, but not be limited to, the fees of all third
parties relating to the due diligence review to be undertaken
by Capital America and its third party consultants, title
insurance, insurance review costs, the cost of an appraisal,
environmental reports, engineering and structural reports, and
all expenses associated with engaging a servicer and a trustee
(each of which shall be selected by Capital America in its
sole discretion), setting up and pre-funding a cash management
account and structuring the Facility.
INDEMNIFICATION: Borrower Sponsor agrees that it and the Borrower (if a
separate entity) will indemnify and hold Capital America and
each of its affiliates (including its officers, directors,
partners, employees and agents) (each, an "Indemnified Party")
harmless against any and all losses, claims, damages, costs,
expenses or liabilities ("Losses") in connection with, arising
out of or resulting from the transactions and matters referred
to or contemplated hereby, except to the extent that it is
finally judicially determined that any losses resulted solely
from the gross negligence or bad faith of an Indemnified
Party. In the event that Capital America or its affiliates
becomes involved in any action, proceeding or investigation in
connection with any transaction or matter referred to or
contemplated hereby, Borrower Sponsor and the Borrower (if a
separate entity) shall periodically reimburse Capital America
or its affiliates upon demand therefore in an amount equal to
the reasonable legal and other expenses (including the costs
of any investigation and preparation) incurred in connection
therewith to the extent such legal or other expenses are the
subject of indemnification hereunder. The obligations of the
Borrower Sponsor and Borrower pursuant to this paragraph shall
survive in the event a Loan is not consummated for any reason.
ASSIGNMENT: The Facility and the Permanent Loan (but not the Commitment
Letter or this Summary of Terms) may be assigned by Capital
America at any time in its sole discretion. All references to
Capital America in this Summary of Terms or in the
accompanying Commitment Letter (as reflected in the Loan
documents) shall be deemed to refer to Capital America and its
successors and assigns.
21
<PAGE>
SECONDARY MARKET
TRANSACTIONS: Borrower Sponsor understands that Capital America will close
the Loans described herein as principal. Nevertheless, after
the closing of the Facility or a Permanent Loan, Capital
America may engage in a secondary market transaction by either
selling a Loan to an affiliate in order to enable such
affiliate to complete a securitization by way of either a
public or private securities offering which is rated by one or
more rating agencies, syndicating the loan or engaging in some
other transaction (each, a "Secondary Market Transaction").
Therefore, the loan documentation will require the Borrower
Sponsor and Borrower to, among other things, assist Capital
America and its affiliates in the preparation of a disclosure
document describing the Secondary Market Transaction and
provide Capital America all information and materials
reasonably required (including an updated appraisal and
environmental report and financial and operating statements)
in a manner that satisfies the requirements of any applicable
federal laws and applicable state laws, and use its best
efforts to help facilitate the consummation of the Secondary
Market Transaction. Borrower Sponsor and Borrower agree to act
reasonably and promptly in connection with their review of the
relevant portions of the offering documents.
In connection with a Secondary Market Transaction, each Loan
Agreement will require Borrower Sponsor and Borrower to
indemnify and hold Capital America and its controlling persons
and affiliates harmless against all costs, expenses and
damages incurred by Capital America and its controlling
persons and affiliates (including, without limitation, all
liabilities under all applicable federal and state securities
laws) as a direct result of any untrue statement of a material
fact contained in such offering documents based on information
provided by Borrower Sponsor or the Borrower (if a separate
entity), which describes Borrower Sponsor, the Borrower (if a
separate entity), the Properties, the property manager or any
aspect of the subject financing or the parties directly
involved therein, or as a result of any untrue statement of
material fact in any of the financial statements of Borrower
Sponsor or the Borrower incorporated into the offering
documents or the failure to include in such financial
statements or in such offering documents any material fact
relating to Borrower Sponsor, the Borrower, the Properties,
the property manager and any aspect of the subject financing
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading;
provided that the Borrower shall have had an opportunity to
review and comment upon the relevant portions of the offering
documents.
PUBLICITY: In the event the Facility contemplated herein is made, Capital
America shall have the right to issue press releases,
advertisements and other promotional materials describing
Capital America's participation in the origination of any Loan
or of any Loan's inclusion in any Secondary Market Transaction
effectuated by Capital America. Capital America recognizes
that Borrower Sponsor will disclose and publicize certain
details of this transaction in connection with its public
offering.
GOVERNING LAW: The Loan transaction and each of the documents with respect
thereto (other than the mortgages or deeds of trust which
shall be governed by the laws of the States in which the
Properties are located) shall be governed by the internal laws
of the
22
<PAGE>
State of New York. The Borrower agrees that all actions
relating to this Summary of Terms, the Commitment Letter, or
each Loan (other than actions by Capital America, its
successors and assigns in connection with the enforcement of
any Loan document) shall be brought exclusively in the federal
or state courts located in the State of New York and that trial
by jury is hereby waived for all actions relating to this
Summary of Terms, the Commitment Letter or any Loan.
NO MATERIAL
ADVERSE CHANGE: Except as may be expressly otherwise provided herein, on the
closing date, the income and expenses of the Properties, the
financial statements of the Borrower and all other features of
the transaction shall be as represented in this Summary of
Terms, and all other documents and communications presented to
Capital America in order to induce Capital America to make a
Loan, shall be without material change or Capital America shall
have no obligation to close and fund a Loan under the
Commitment Letter. At closing, the Borrower shall certify that
no material changes shall have occurred as may be requested by
Capital America.
In addition, if, on or before the date of the closing of a
Loan, any of the following shall have occurred, Capital America
shall have no obligation to close and fund the Loan under the
Commitment Letter; (i) any of the Properties shall have been
(a) damaged and not repaired to Capital America's satisfaction
or (b) taken in condemnation or other similar proceeding, or
any such proceeding shall be pending; (ii) a structural change
in the physical condition of any portion of the Properties;
(iii) Borrower or any partners, members, principal shareholders
or officers of Borrower or any tenant under any lease deemed by
Capital America to be material to Capital America's security or
any guarantor of any such lease shall be the subject of any
bankruptcy, reorganization or insolvency proceeding; (iv) any
default shall have occurred and be continuing in the
performance of any obligation of Borrower or an affiliate of
Borrower in the instruments evidencing, securing or
guaranteeing another loan of Borrower or such affiliate; and
(v) discovery of any asbestos, toxic waste, or other hazardous
substance on the Properties which discovery would be materially
adverse to Capital America. Borrower Sponsor hereby represents
and warrants to Capital America that it has received no notice
of, and has no other knowledge of or basis upon which to
believe that it or any partner is or may become the subject of
any bankruptcy, reorganization or insolvency proceeding.
23
<PAGE>
July 1, 1998
Hudson Hotels Trust
One Airport Way
Suite 200
Rochester, NY 14624
Attention: Tony Wilson
John Sabin
Re: Loan No. 24139
Dear Tony and John:
This Commitment Letter is intended to set forth the results of discussions
between The Capital Company of America LLC ("Capital America") and Hudson
Hotels Trust ("Borrower Sponsor") relating to the financing (the
"Financing") proposed by Borrower Sponsor to a to-be-formed special purpose
subsidiary entity (such special purpose entity, as the case may be, is
hereinafter referred to as the "Borrower"). The assets (the "Properties")
to be owned by the Borrower and to be financed pursuant to our commitment set
forth herein are as described in the Summary of Terms (the "Term Sheet") which
is attached hereto and incorporated herein by reference. All capitalized terms
used in this Commitment Letter and not otherwise defined herein shall have the
meanings ascribed to such terms in the Term Sheet.
1. General Understanding
---------------------
As described more fully in the Term Sheet, our obligations under this
Commitment Letter are subject in their entirety to among other things, (a)
the absence of any material development occurring prior to the date of the
consummation of the Financing which could, in Capital America's sole
opinion, adversely affect the transactions contemplated hereby, (b) Capital
America's undertaking of and completion of due diligence on the Properties
and the Borrower Sponsor with results satisfactory to Capital America in
its sole discretion and (c) the execution and delivery of definitive
agreements and other documentation relating to the Financing satisfactory
to Capital America in its sole discretion. Borrower Sponsor expressly
acknowledges and agrees that Capital America has set forth in the Term
Sheet the terms and conditions upon which it is willing to make the
Financing based upon Borrower Sponsor's oral or written representations
regarding the Properties and prior to the commencement of its own due
diligence investigation. In such investigation, Capital America will need
to be satisfied in its judgment, among other things, with the level of the
net operating income which has been and is expected to be generated by the
Properties, the value of the Properties, environmental
<PAGE>
Hudson Hotels Trust
Page 2
July 1, 1998
and structural matters relating to the Properties and the structure and
ownership of the Borrower. If Capital America's findings with respect to
the foregoing are inconsistent with Borrower Sponsor's oral or written
representations regarding the Properties, Capital America may, in its sole
discretion, terminate its obligations under this Commitment Letter or
modify any of the terms set forth in the Term Sheet to be consistent with
its findings.
2. Covenants of Borrower Sponsor
-----------------------------
Borrower Sponsor will, and will cause Borrower to, cooperate and use best
efforts to promptly supply Capital America with all due diligence materials
requested by Capital America; prepare or cause to be prepared documents
relating to the Financing; cause its legal counsel to deliver various
opinion letters customarily required in Financing transactions of this
type, all in form and substance satisfactory to Capital America; and act in
good faith to do all things reasonably required to consummate the closing
of the Financing. Borrower Sponsor represents that (i) the proposed finance
transaction described herein is not the subject of a commitment from
another lender and (ii) no other party has a right of refusal or any other
option which could cause the transaction contemplated herein not to be
consummated.
Prior to the closing of the Financing, Borrower Sponsor will not, and will
cause Borrower and its affiliates not to, sell, assign or otherwise dispose
of the Properties to any person or entity without Capital America's consent
provided, however, Borrower Sponsor or Borrower may transfer the Properties
to an affiliate which becomes bound by the terms of this Commitment Letter.
In addition, prior to the Commitment Termination Date (as defined in
Section 6 hereof), the Borrower Sponsor will not, and will cause its
affiliates not to, obtain, or attempt to obtain, the Financing or any other
debt financing with respect to the Properties with any party other than
Capital America. Borrower Sponsor acknowledges that, by commencing the due
diligence investigation contemplated by this Commitment Letter, Capital
America is devoting time and resources to the Borrower Sponsor that it
otherwise could be devoting to other projects. Therefore, if Borrower
Sponsor breaches its obligations pursuant to this Section 2 or Section 5,
Borrower Sponsor agrees to pay Capital America, in addition to its
obligations to pay fees and expenses described in the Term Sheet, a
termination fee equal to 2% of the proposed Financing amount. Receipt of
such payment by Capital America shall not constitute a waiver of any rights
or remedies Capital America may have either at law or equity.
The obligations of Borrower Sponsor and Borrower pursuant to this Section 2
shall be terminated on the Commitment Termination Date (as it may be
extended by Capital America) or such earlier date that Capital America
notifies the Borrower Sponsor that based on its due diligence investigation
it does not intend to proceed with the consummation of the Financing.
3. Brokers Fee
-----------
The Borrower Sponsor represents and warrants to Capital America that no
broker(s), agent(s) or finder(s) brought about this Commitment Letter or
was otherwise involved in any manner in the Financing or any aspect
thereof.
<PAGE>
Hudson Hotels Trust
Page 3
July 1, 1998
4. Authorization
-------------
Borrower Sponsor hereby represents that it has the power and authority to
enter into this Commitment Letter on behalf of itself and, upon the
formation of the Borrower, to bind the Borrower hereunder.
5. Confidentiality
---------------
From the date hereof through the date immediately prior to the date on
which any document regarding the Borrower Sponsor which must disclose the
terms of this Commitment Letter and accompanying term sheet is filed with
the Securities and Exchange Commission, each of the parties hereto agrees
not to disclose, and to cause Related Parties (hereinafter defined) not to
disclose, either the fact that discussions or negotiations are taking place
concerning the Financing or any of the terms, conditions, or other facts
relating to the Financing, including the status thereof, except that
information may be disclosed to employees or agents (all of whom are
collectively referred to as "Related Parties") who, in each party's
considered judgment, need to know such information for the purpose of
causing the consummation of the transactions contemplated hereby. Capital
America acknowledges that Morgan Keegan Company, Inc. is a Related Party in
its capacity as agent for the Borrower Sponsor. Related Parties shall be
informed of the confidential nature of the information and material and
shall be directed to keep the information and material in the strictest
confidence and to use the information and material only for the purpose of
causing the consummation of the transactions contemplated hereby. The terms
set forth in this Commitment Letter and the attached Term Sheet are
proprietary to Capital America and are made available to Borrower Sponsor
solely for the evaluation of the transaction contemplated hereby. Oral or
written disclosure of the Term Sheet to any competitor of Capital America
shall be detrimental to Capital America and shall be an explicit violation
of this section.
6. Miscellaneous
-------------
If this Commitment Letter shall not have been executed by Borrower Sponsor
on or prior to July 1, 1998 this Commitment Letter shall expire, unless
extended in writing by Capital America in its sole discretion. If Capital
America has not received the Good Faith Deposit and the Expense Deposit
described in the Term Sheet within two business days of execution of this
Commitment Letter, Capital America's obligations hereunder will be
terminated. In addition, if the Financing does not close on or prior to
September 1, 1998 or such later date selected by Capital America (the
"Commitment Termination Date"), Capital America may, at its option,
terminate this Commitment Letter and its obligations hereunder. Each of
Capital America and the Borrower Sponsor agrees that notwithstanding the
expiration or termination of this Commitment Letter, its existence and the
contents hereof are and shall remain subject to the provisions of
Confidentiality set forth in Section 5. If the Financing is not consummated
by the Commitment Termination Date and such date has not been extended in
writing by Capital America, or if any other event whereby Capital America's
obligations hereunder have terminated has occurred, yet discussions or
negotiations between the parties shall continue, Capital America's
continued negotiations with respect to the Financing shall be nothing more
than a good faith effort to consummate the Financing, shall not be
construed in any way to
<PAGE>
Hudson Hotels Trust
Page 4
July 1, 1998
extend its commitment described herein, but shall not relieve the Borrower
Sponsor of its obligations hereunder. Borrower Sponsor and Borrower hereby
waive any claim or cause of action with respect to negotiations which take
place after Capital America's commitment has been terminated.
THIS COMMITMENT LETTER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. EACH PARTY
HERETO HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE
STATE OF NEW YORK FOR ANY LEGAL ACTION OR PROCEEDING RESULTING FROM THE
TRANSACTION CONTEMPLATED HEREIN. EACH PARTY HERETO HEREBY WAIVES ITS RIGHT
TO A TRIAL BY JURY. THIS COMMITMENT LETTER IS INTENDED FOR THE BENEFIT OF
THE PARTIES HERETO AND THEIR RESPECTIVE AFFILIATES AND NOT FOR THE BENEFIT
OF ANY THIRD PARTIES.
Please indicate your agreement to the above by executing a copy of this
Commitment Letter in the place provided below and returning a fully executed
copy to the undersigned.
Very truly yours,
THE CAPITAL COMPANY OF AMERICA LLC
By: /s/ Michael L. Brody
----------------------------------------
Name: Michael L. Brody
Title: Managing Director
Agreed and Accepted as of
this 1st day of July, 1998
HUDSON HOTELS TRUST
By: /s/ E. Anthony Wilson
--------------------------------------------
Name: E. Anthony Wilson
Title: CEO - Trustee
<PAGE>
THE CAPITAL COMPANY OF AMERICA LLC
$50,000,000 FINANCING FACILITY
SUMMARY OF TERMS
(Incorporated by Reference in Commitment Letter dated July 1, 1998)
GENERAL: Subject to the satisfaction of the conditions set forth in the
Commitment Letter between The Capital Company of America LLC
("Capital America") and Hudson Hotels Trust ("Borrower
Sponsor") and subject to the satisfaction of the conditions set
forth in this Summary of Terms, Capital America will provide a
10-year first mortgage loan (the "Loan"), in the aggregate
amount of up to $50,000,000 to a to-be-formed limited liability
entity (the "Borrower"), which Loan Borrower Sponsor, on behalf
of the Borrower, commits to borrow. The Loan will be secured by,
among other things, certain properties from the Fairfield
Portfolio listed on Exhibit A (the "Properties") attached
---------
hereto, which properties shall be approved by Capital America.
The Properties shall not include any of the properties from the
Benderson Portfolio.
TERMS OF THE LOAN
- -----------------
BORROWER: The Borrower shall be a bankruptcy remote, special purpose
entity, whose activities will be limited to owning and operating
the Properties and whose form, structure and organizational
documents shall be acceptable to Capital America in its sole
discretion. The Borrower shall be controlled by the Borrower
Sponsor. The Borrower shall have at least one independent
director (or the functional equivalent), whose responsibility
will be limited solely to matters involving insolvency and
bankruptcy issues and whose vote will be required to approve any
election by the Borrower to voluntarily seek protection from
creditors under any applicable bankruptcy or insolvency laws or
the Borrower's dissolution. Capital America shall have the right
to approve such director. The Borrower shall be a limited
partnership or a limited liability company. A bankruptcy-remote
special purpose entity in form and substance acceptable to
Capital America will be required to act as the General Partner or
Managing Member of the Borrower, as the case may be.
Notwithstanding the foregoing, Capital America agrees to
restructure the Borrower, so long as it continues to satisfy
Rating Agency requirements, in order to accommodate an operating
lease structure which Borrower Sponsor may elect to use in
connection with its REIT formation.
PROPERTIES: The Loan will be secured by first lien mortgages or deeds of
trust on the Properties. All the Properties are owned in fee
simple or are subject to a leasehold interest except for
________. The Properties and their respective locations are set
forth on Exhibit A attached hereto.
---------
<PAGE>
LOAN AMOUNT: The maximum aggregate principal amount of the Loan will be
based upon a 1.70:1 debt service coverage ratio ("DSCR"),
Capital America's determination of net operating income (as
defined below) and a Debt Service Constant equal to the
greater of (a) the actual constant using a 25 year
amortization and (b) 10.48%, and subject to a loan to value
not to exceed 60% based upon MAI appraisals approved by
Capital America. Actual Loan proceeds are also dependent upon
prevailing interest rates at the closing of the Loan (unless
Borrower Sponsor enters into Capital America's standard Rate
Lock Agreement; see "Interest Rate" and "Rate Lock" below).
Borrower shall Borrow up to $50,000,000 by February 11, 1999,
and in no event shall borrow less than $25,000,000 by
September 1, 1998. At Borrower's option, Borrower may elect to
borrow at a DSCR of at least 1.40:1, but less than 1.70:1,
subject to all of the terms described herein, at the Alternate
Spread described below (the "Alternate Loan Structure").
Capital America reserves the right in its discretion at or
prior to closing to allocate the amount of the Loan between a
lower original principal amount (at an interest rate greater
than the Interest Rate, as defined below) and a premium
amount; provided that the scheduled monthly payments of
principal and interest payable with respect to such allocated
principal amount shall be substantially the same as the
monthly payments calculated pursuant to this Term Sheet prior
to the election described in this paragraph, and shall be
adjusted only to the extent necessary such that the projected
unpaid principal amount of the Loan at the Effective Maturity
Date shall be the same as that projected prior to the election
described in this paragraph.
Capital America also reserves the right in its discretion to
split the Loan into a senior loan and mezzanine financing
(which may be preferred equity), provided that the amount of
the combined financing, as well as the interest rate, payment
obligations and other terms are no different to Borrower than
before such split.
USE OF PROCEEDS: The Loan proceeds will be applied toward the total transaction
costs, which will include, among other allowed items, the
purchase of the Properties.
FEES/DEPOSITS: A structuring fee equal to 2.0% shall be paid to Capital
America on the closing date of each Loan or Loans to reimburse
it for the payment of structuring and placement services
related to the Loan. Within two business days of signing the
Commitment Letter, Borrower Sponsor will pay to Capital
America a "Good Faith Deposit" of $50,000 and an "Expense
Deposit" of $50,000. The Good Faith Deposit is non-refundable
(except in the case of a default by Capital America under the
terms of the Commitment Letter); is deemed earned upon the
execution of the Commitment Letter; and shall be applied by
Capital America to the structuring fee upon the closing dates
of each of the Loans. The Expense Deposit shall be applied by
Capital America to the payment of Capital America's expenses
hereunder, as more fully described below in the section
entitled "Expenses". Expenses incurred in connection with the
Loan which are in excess of the Expense Deposit, will be
withheld from the loan proceeds to the extent not already
paid. If actual expenses are less than the Expense Deposit,
Borrower Sponsor shall be remitted the difference at closing.
2
<PAGE>
INTEREST RATE: The interest rate ("Interest Rate") will be fixed for the
entire term of the Loan at a rate equal to (i) 1.75% (the
"Spread") plus (ii) the yield on the 5.50% U.S. Treasury Note
maturing on February 15, 2008, determined at or prior to the
closing or pursuant to Capital America's standard Interest
Rate Lock Agreement. If the Borrower elects to take the
Alternate Loan Structure, the Interest Rate will be fixed for
the entire term of the Loan at a rate equal to (i) 2.15% (the
"Alternate Spread") plus (ii) the yield on the 5.50% U.S.
Treasury Note maturing on February 15, 2008, determined at or
prior to the closing or pursuant to Capital America's
standard Interest Rate Lock Agreement. Interest shall be
calculated based on a 360-day year and actual days elapsed in
the related accrual period.
RATE LOCK: Borrower Sponsor shall have the option, simultaneous with the
execution of the Commitment Letter, or at any time up to the
closing of the Loan, to lock in the Interest Rate, upon the
terms and conditions set forth in Capital America's standard
Interest Rate Lock Agreement. If Borrower Sponsor has not
previously locked the Interest Rate at any time, Capital
America shall have the option in its sole discretion to lock
the Interest Rate within the 3-days prior to and including
the day of closing of the Loan.
MONTHLY PAYMENTS: All payments on the Loan will be required to be made on the
eleventh (11th) day of every calendar month (except if the
11th day is not a Business Day, then payment shall be
required on the first Business Day following the 11th) (each,
a "Payment Date"). All payments shall be made in arrears and
shall be for the period beginning on the 11th calendar day of
the preceding month through and including the 10th calendar
day of the month when payment is due. The Loan will require
equal payments consisting of principal and interest
calculated to fully amortize the face amount thereof over 300
months.
MATURITY DATE: The effective maturity date of the Loan shall be the eleventh
day of the 120th month following the closing of the Loan (the
"Effective Maturity Date"). The actual maturity date of the
Loan shall be the eleventh day of the 300th month following
the closing of the Loan (the "Actual Maturity Date").
PAYMENT AFTER
EFFECTIVE MATURITY
DATE: Provided no other default exists, from the Effective Maturity
Date through the earlier of (i) repayment of all Borrower's
obligations under the Loan or (ii) the Actual Maturity Date,
the Interest Rate payable on the Loan will increase to 500
basis points plus the greater of: (a) the Interest Rate at
the time of maturity (the "Maturity Interest Rate") or (b)
the sum of (i) the then prevailing yield on U.S. Treasury
Constant Maturities with terms most nearly approximating
those non callable U.S. Treasury obligations having
maturities as close as possible to the Actual Maturity Date
of the Loan and (ii) the lower of 200 basis points or the
Spread (rounded down to nearest 1/8th) (the greater of (a) or
(b), the "Reset Note Rate"). The difference between interest
accrued on the principal balance at the Maturity Interest
Rate and interest accrued on the principal balance at the
Reset Note Rate shall be defined as "Additional Interest".
Following the Effective Maturity Date, and until all
Borrowers' obligations under the Loan Agreement have been
fully satisfied, 100% of the cash flow shall be allocated in
the
3
<PAGE>
following order of priority: (i) ground rent, (ii) tax and
insurance escrow, (iii) interest at the Maturity Interest
Rate, (iv) principal based on the original 300-month
amortization schedule, (v) operating expenses, (vi) reserves,
(vii) prepayment of principal until reduced to zero and
(viii) the balance, if any, to Additional Interest and
interest accrued thereon. Non-payment of any portion of the
Additional Interest to the extent sufficient cash flow was
not available, will not be a default under the Loan. Unpaid
Additional Interest shall be deferred and shall accrue
interest at the Reset Note Rate and shall be payable in full
no later than the Actual Maturity Date. Notwithstanding the
above, failure at any time to make payments in amounts at
least equal to those required under (i) through (vi) above
shall constitute a default under the Loan. Notwithstanding
the foregoing, if Borrower repays the Loan within the first
60 days following the Effective Maturity Date, including
interest through the next Payment Date, the Additional
Interest accrued since the Effective Maturity Date shall be
forgiven and any excess cash flow held in reserve shall be
refunded to the Borrower.
CALCULATION OF
UNDERWRITTEN NOI: As a condition to closing the Loan, the Properties must
demonstrate UNOI (as determined in accordance with the terms
hereof) on a trailing 12-month basis (based on the
consecutive 12-month period ending in the month immediately
preceding the closing date for which detailed financial
information is available) in an amount sufficient to generate
the minimum DSCR for the Loan. UNOI shall be calculated by
determining the actual net income of the Properties before
interest, depreciation and income taxes during the most
recent 12-month period immediately prior to the closing of
the Loan. Capital America will make adjustments, in its sole
discretion, based on underwriting criteria which will
include, but not be limited to, the following (i) supply and
demand dynamics in the specific market for each Property and
the effect of new construction on occupancy and rate; (ii)
the growth or decline, as the case may be, in occupancy,
average daily rate, gross revenue, departmental profit and
gross operating profit for each Property; (iii) the operating
performance of Properties which have been recently renovated;
and (iv) expense and other operating ratios of each Property
compared to those ratios achieved for a comparable asset in
the hotel industry at large. In addition, Capital America
will analyze the management contract and franchise agreement
for each Property and adjust the fees currently paid on those
contracts, when necessary, to reflect minimum standards in
the hotel industry for either full-service or limited-service
hotels that have both a national franchise and management
affiliation. Furthermore, Capital America's determination of
the appropriate FF&E reserve will be based upon third-party
reports and other due diligence, but in no event will the
adjustment be less than 5% of gross revenues. Borrower
Sponsor acknowledges that the UNOI will be determined by
Capital America upon completion of its due diligence. In
determining UNOI, all pro forma adjustments to revenue and
expenses shall be approved by Capital America in its sole
discretion and shall be subject to Capital America's full due
diligence. The above underwriting assumes that there is no
material adverse change anticipated in the operations of the
Properties or in the UNOI of the Properties from the
execution of the Commitment Letter to the closing of the
Loan.
GROUND LEASE: The terms of any ground lease must provide that the payments
thereunder are subordinate to the lien of the mortgage or
deed of trust, must have a remaining
4
<PAGE>
term of at least 10 years later than the Final Maturity Date,
and must otherwise be acceptable to Capital America in its
sole discretion. Any ground lease must be financeable as
determined by Capital America in its sole discretion. Capital
America or its assignee must be given notice of, and an
opportunity to cure, defaults, and otherwise be adequately
protected in the event the ground lessee disaffirms the
ground lease in connection with a bankruptcy. The ground
lease must not be cancelable in the event a lender forecloses
on the leasehold estate. The ground lessor must agree to
enter into a new lease with Capital America in the event of a
bankruptcy by the Borrower or a foreclosure by Capital
America. In addition, Borrower shall deliver to Capital
America prior to closing a ground landlord's estoppel
certificate, signed by the Borrower's ground landlord
containing, among other things, leasehold mortgagee
protections as shall be acceptable to Capital America in its
sole discretion.
COLLATERAL: Perfected first mortgage liens on the Properties and a first
priority perfected security interest in all contracts,
agreements, trademarks, licenses, goods, equipment, accounts,
fixtures and all other tangible and intangible personal
property located on or used in connection with the
Properties, and other collateral and assurances customary in
similar financings by Capital America. All the mortgages will
be cross collateralized and cross defaulted. The mortgage
liens and the priority thereof shall be the subject of title
insurance in favor of Capital America and its successors
and/or assigns, which insurance shall be issued and
underwritten by a title insurance carrier acceptable to
Capital America in its discretion. Capital America reserves
the right to require co-insurance or evidence of reinsurance.
Capital America shall use its best efforts to assume the
existing Credit Lyonnaise mortgages and deeds of trust on the
Properties, subject to Capital America's standard
mortgage/deed of trust requirements.
TOTAL RELEASE OF
COLLATERAL: The Loan may not be prepaid prior to the Effective Maturity
Date. However, two years after Capital America sells the Loan
into a "conduit-type" securitization (the "Lockout Period"),
all Properties may be released as security for the Loan by
payment to Capital America or its assignee of (i) all accrued
but unpaid interest and other payments due under the Loan;
(ii) the entire principal balance of the Loan then
outstanding; and (iii) Capital America's standard yield
maintenance payment derived from a U.S. Treasury benchmark
(the "Total Release Payment").
5
<PAGE>
PARTIAL RELEASE OF
COLLATERAL: After the Lockout Period but prior to the maturity of the
Loan, provided that no Event of Default has occurred or is
continuing, less than all the Properties may be released upon
payment to Capital America or its assignee of (i) all accrued
and unpaid interest on the Loan, (ii) 125% of the Allocated
Loan Amount for the Properties requested to be released and
(iii) Capital America's standard yield maintenance payment on
such amount (the "Partial Release Payment"). Notwithstanding
the foregoing, a partial release of Properties will only be
permitted if the DSCR for the remaining Properties is greater
than both (i) the original DSCR for the Loan and (ii) the
DSCR for the Loan immediately prior to the release.
CONDITIONS TO
RELEASE: Total or partial releases are subject to at least 30 days
written notice to Capital America or its assignee, which
notice must include the Properties proposed to be released,
and may only occur on a regularly scheduled payment date. Any
release prior to the Effective Maturity Date is subject to
Capital America's or its assignee's receipt of a legal
opinion of outside counsel acceptable to Capital America or
its assignee which states without qualification that Capital
America or its assignee will have, upon the release, a first
priority perfected security interest in the U.S. Treasury
Securities referred to below. Borrower may be relieved of its
obligations under the Loan, after payment of the Total
Release Payment or the Partial Release Payment, as the case
may be, in an amount equal to the Loan Amount, in the case of
a total release, or 125% of the Allocated Loan Amount in the
case of a partial release, provided that it assigns to a
special purpose corporation acceptable to Capital America or
its assignee that portion of the Loan equal to the Loan
Amount, in the case of a total release, or 125% of the
Allocated Loan Amount, in the case of a partial release; and
provided further that, in the case a partial release,
Borrower shall remain liable for the remaining balance of the
Loan.
The "Allocated Loan Amount" shall be determined at the
closing of the Loan by Capital America in its sole
discretion, and will be the portion of the original principal
amount of the Loan allocated among the Properties relative to
its UNOI. The sum of the Allocated Loan Amounts for all the
Properties shall equal the original principal amount of the
Loan. Capital America's standard yield maintenance payment
shall be an amount that, together with the Allocated Loan
Amount being paid, will be sufficient to purchase non-
callable U.S. Treasury Securities whose cash flows are equal
to and occur as close as possible before the successive
remaining scheduled interest and principal payments required
under the Loan through the Effective Maturity Date. Capital
America's standard yield maintenance payment shall also apply
due to any prepayment resulting from an acceleration of the
Loan following an Event of Default. The Borrower will be
responsible for all costs and expenses incurred in connection
with the release of the lien and the purchase of the U.S.
Treasury securities.
PREPAYMENT
WITHOUT RELEASE OF
COLLATERAL: After the Lockout Period, the Loan may be prepaid in whole or
in part, provided that the Borrower gives at least 30 days
written notice to Capital America, the prepayment occurs on a
regularly scheduled payment date and Borrower pays
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Capital America an amount sufficient to purchase non-callable
U.S. Treasury Securities whose cash flows are equal to and
occur as close as possible before the successive remaining
scheduled interest and principal payments required under the
Loan through the Effective Maturity Date with respect to the
amount being prepaid. Borrower may be relieved of its
obligations under the Loan in an amount equal to the amount
being prepaid, provided that it assigns to a special purpose
corporation acceptable to Capital America or its assignee
that portion of the Loan equal to such amount; and provided
further that Borrower shall remain liable for the remaining
balance of the Loan.
INITIAL RESERVES: The Borrower will establish a reserve for existing deferred
maintenance. The deferred maintenance reserve will be funded
at closing. The amount required to be funded therein will be
125% of the amount specified in the property condition
reports obtained during Capital America's due diligence
review, as the amount of deferred maintenance required to be
completed within the first year following closing. Borrower
may draw on the deferred maintenance reserve by presenting
Officer's Certificates indicating a completion of and cost of
completion of each item of deferred maintenance listed in the
property condition report. All remaining funds in such
reserve will be paid to Borrower when the last item on the
list is completed and appropriate documentation is provided.
The deferred maintenance reserve will be maintained by the
servicer/trustee in accounts established by the
servicer/trustee, and funds therein will be invested in
permitted investments for the benefit of the Borrower.
Borrower will also establish sufficient initial reserves for
taxes and insurance, which reserves shall be funded at
closing. The amount of such reserves will be determined by
Capital America in amount sufficient, inclusive on ongoing
reserves described below, to make the next due tax and
insurance payments.
ONGOING RESERVES: At all times during the term of the Loan, the Borrower shall
fund reserves in the following amounts on a monthly basis:
taxes and insurance premiums -- monthly deposit of one-
twelfth of the budgeted annual real estate taxes and
insurance premiums;
capital expenditures -- one-twelfth of the amount estimated
by Capital America at its discretion which shall generally be
computed at 5% of gross revenues (or such higher amount as
may be indicated by Capital America's due diligence);
seasonality reserve -- a working capital reserve, in an
amount to be determined by Capital America, to provide some
protection for the payment of operating expenses and debt
service during seasonal periods when gross income may be
reduced (if necessary); and
ground rent -- one twelfth of the yearly ground rental due to
the fee owner.
CASH MANAGEMENT: The Borrower will establish a separate "A" account and "B"
account with a bank designated by Borrower (the "Clearing
Bank") through which all property receipts will be cleared.
Borrower will be required to cause its credit card clearing
banks and any space tenants to send directly to the Clearing
Bank for
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deposit into an "A" account the applicable payments required
to be made on account of the Properties on a daily basis and
Borrower shall be required to deposit directly into the "A"
account all other proceeds from the operation of the
Properties on a daily basis. Until the earlier to occur of
(a) the Effective Maturity Date and (b) a default or event of
default under the loan documents (each, a "Cash Trap Event"),
as such receipts are cleared, the Clearing Bank will transfer
them daily from the "A" account to the "B" account, which "B"
account is an account not subject to any restriction and is
under the sole control of Borrower. Upon a Cash Trap Event,
as such receipts are cleared, the Clearing Bank, upon notice
from Capital America, will transfer them daily during such
transfer period, commencing on the 12th day of each month,
from the "A" account to an account owned and controlled by
Capital America at a bank selected by Capital America (the
"Deposit Bank"). Upon a Cash Trap Event, the Deposit Bank
will establish sub-accounts for certain items including
ongoing taxes and insurance premiums, ongoing capital
expenditures, debt service, seasonality reserves, ground rent
and such other reserves as may be required by Capital America
based on its due diligence review. The amounts of such
reserves are described below in the section entitled "Ongoing
Reserves". Once the monthly required amount of each such
reserve is on deposit in each subaccount, transfers to the
Deposit Bank from the Clearing Bank will stop and cleared
funds (other than insurance proceeds and condemnation awards,
security deposits and any rent that is paid for more than one
month in advance all of which will be transferred to the
Deposit Bank, subject to legal and lease requirements in the
case of security deposits) will instead be transferred into a
"B" account at the Clearing Bank. Prior to the Effective
Maturity Date, and provided that there has been no election
to accelerate the indebtedness, any funds transferred to the
Deposit Bank in excess of the monthly requirement shall be
immediately remitted back to the Borrower.
Capital America will have a senior security interest in the
aforementioned accounts and subaccounts. The upfront and
ongoing expenses of maintaining such accounts and
subaccounts, and any other accounts maintained pursuant to
the Loan Documents, shall be the responsibility of the
Borrower.
12 months after the beginning of a Cash Trap Event, provided
that no default has occurred or is continuing and provided
that there has been no election to accelerate the
indebtedness under the Loan, if the DSCR for the Loan is at
least as high as the DSCR at the time of the closing of the
Loan, the Cash Trap Event shall cease until the earlier of
the Effective Maturity Date or the occurrence of another Cash
Trap Event.
Notwithstanding the foregoing, Capital America agrees to
restructure the Cash Management System, so long as it
continues to satisfy Rating Agency requirements, in order to
accommodate an operating lease structure which Borrower
Sponsor may elect to use in connection with its REIT
formation.
DEFAULT: During the continuance of an Event of Default by the Borrower
(after the lapsing of applicable cure/grace periods), all
cash flow on the Properties and cash in the reserve accounts
will be applied, at Capital America's option, to interest
payments and principal repayments.
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In addition, if the Loan is accelerated upon an Event of
Default, the Borrower shall owe the current outstanding
balance of the Loan, all accrued interest (including any
default interest), Capital America's standard yield
maintenance payment and any other amounts due and payable.
CHANGE IN
MANAGEMENT: The manager of the Properties may be replaced by the holder
of the Loan in the event that, as of the last day of a
calendar quarter, (i) the UNOI on a trailing twelve (12)
month basis decreases to less than 65% of the original UNOI,
(ii) the DSCR on a trailing twelve (12) month basis on the
remaining outstanding balance of the Loan shall fall below
1.10:1 and/or (iii) upon an Event of Default. Notwithstanding
the preceding sentence, management will be permitted to
remain in place by prepaying the Loan (including all
applicable yield maintenance premiums and accrued interest)
to a level such that the DSCR on a trailing twelve (12) month
basis on the remaining outstanding balance of the Loan is
restored to a level of at least 1.75:1. If either (i) or (ii)
above is true, Capital America shall take into consideration,
prior to the removal of the manager: a) both the manager's
and the hotel's performance relative to the competitive set
and b) forces outside the manager's control. At such time as
the Property Manager is removed, a replacement property
manager, acceptable to Capital America (or its assignee) and
any applicable rating agency in their respective discretion,
will assume the management of the Properties and will receive
a property management fee that will not exceed then market
rates.
FINANCIAL
REPORTING: During the term of the Loan, the Borrower shall provide to
Capital America on each of the individual Properties (i)
annual (a) unaudited financial statements within 40 days and
(b) audited financial statements within 90 days following the
close of the Borrower's fiscal year, (ii) monthly unaudited
financial statements within 20 days following the end of each
calendar month and (iii) monthly occupancy and room rate
statistics within 20 days following the end of each calendar
month. Audited statements prepared on a combined basis for
the Properties will be acceptable provided such statements
are accompanied by an agreed-upon procedures report
demonstrating that the unaudited property level statements on
the individual Properties tie to the combined audited
statements. Audited financial statements (including those
audited financial statements to be delivered as a condition
to closing) shall be accompanied by an unqualified opinion
from a "Big Six" accounting firm or other certified public
accounting firm acceptable to Capital America. Unaudited
statements, occupancy and room rate statistics shall include
a certification (a "Certificate") by a senior executive of
the Borrower stating that the relevant financial information
fairly reflects the financial condition and operations of the
Borrower for the relevant period. All financial statements
(including those to be delivered as a condition to closing)
(i) shall be prepared in accordance with generally accepted
accounting principles ("GAAP"), (ii) shall be presented in a
format acceptable to Capital America, and (iii) shall include
a statement of operations (profit and loss), a statement of
cash flows, a calculation of UNOI, and such other information
or reports as shall be reasonably requested by Capital
America or any applicable Rating Agency. If audited
financials of the Borrower indicate that less than 90% of
actual receipts have been deposited in Account "A" described
under the Cash Management Section of the Term Sheet, a Cash
Trap Event shall be deemed to have occurred.
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INSURANCE: Each of the Properties will be covered by fire and casualty,
machine and boiler, business interruption and liability insurance
(general, employer and workers' compensation insurance), along
with flood, hurricane or earthquake insurance if any of the
Properties are located in a flood, hurricane or earthquake zone,
as applicable. Additional insurance may be required by Capital
America in its reasonable discretion. In general, the amount of
the coverage relating to damage to the Properties shall be in an
amount not less than the full replacement cost of the Properties,
shall contain deductibles not in excess of $100,000 and shall be
written by carriers having a Standard & Poor's rating of at least
"AA" and a Best rating of at least "AVII". Business interruption
insurance shall cover a period of not less than 18 months.
Capital America and its affiliates will be named as additional
insured, mortgagee and loss payee on all policies insuring the
Properties, and all such policies will otherwise be in a form
acceptable to Capital America.
SUBORDINATE
DEBT: The Borrower may not incur any indebtedness other than the
Loan during the term thereof. No secured or unsecured debt,
including subordinate debt, shall be permitted on the Properties
during the term of the Loan. In addition, owners of the Borrower
shall be prohibited from pledging their interests in the Borrower
to secure any financing during the term of the Loan.
SUBORDINATION
OF LEASES: The leases for any space tenants at the Properties shall be
subordinate to the lien of the mortgage and Borrower Sponsor will
use its best efforts to provide any subordination, non-
disturbance and attornment agreement in form and substance
acceptable to Capital America.
SUBORDINATION: Borrower Sponsor and its affiliates will be required to
subordinate to Capital America and its assignees the right to
receive any fees (including management fees), distributions or
other payments from the Borrower.
ESTOPPEL
CERTIFICATES: Borrower will provide to Capital America prior to closing
estoppel certificates, in form and substance acceptable to
Capital America, from any space tenants at the Properties.
SERVICER: The Loan will be serviced by a third-party servicer (the
"Servicer") to be selected by Capital America, which Servicer may
be an affiliate of Capital America.
NON-RECOURSE: The Loan will be non-recourse, except for Capital America's
standard carve-outs including, but not limited to,
indemnification for environmental liability, misappropriation of
funds, material or intentional misrepresentation, fraud, physical
waste of the Properties and removal or disposal of any portion of
the Properties.
SUBSTITUTION
OF COLLATERAL: At any time during the Loan, collateral may be substituted
provided that (a) all such Properties substituted during the term
of the Loan do not represent more than the lesser of (i) the
greatest of (A) 30% of the trailing 12-month Net Operating Income
of the Properties as of the date of substitution and (B) 40% of
the trailing 12-month Net Operating Income of the Properties as
of the closing
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date, and (ii) the greatest of (A) 30% of the value of the
Properties (as determined by Capital America) as of the date of
substitution and (B) 40% of the value of the Properties (as
determined by Capital America) as of the closing date, (b) such
substitutions shall not be allowed more than three times during
the term of the Loan, and (c) all of the following conditions are
satisfied: (1) the new property(ies) to be substituted in are
satisfactory to Capital America in all respects (after Capital
America's due diligence investigation), (2) as a result of the
substitution, the overall DSCR for the Loan is not less than the
greater of (x) the overall DSCR at the initial closing of the
Loan and (y) the overall DSCR for the Loan immediately prior to
the substitution, (3) as a result of the substitution, the
overall LTV for the Loan is not greater than the lesser of (x)
the overall LTV at the initial closing of the Loan and (y) the
overall LTV for the Loan immediately prior to the substitution,
(4) the trailing 12-month Net Operating Income for the new
property(ies) may not show a downward trend for any of the
preceding three years and shall be adjusted, if necessary, to cap
the growth of departmental profits at 10% from each of the
previous three year's, (5) confirmation that no downgrade in
ratings on the securities backed by the Loan will result from the
substitution is obtained or would result if this Loan were a
stand alone securitization, and any fees associated with such
confirmation are paid by the Borrower, (6) all of Capital
America's due diligence and other costs and expenses are paid by
the Borrower and (7) an opinion is obtained from reputable
counsel approved by Capital America stating that the substitution
does not violate the REMIC rules.
ASSUMABILITY: The equity interests in Borrower will be transferable with
the consent of Capital America. If all of the Properties are
transferred to one purchaser, the Loan may be assumed by the
purchaser provided that the Rating Agencies confirm that such
transfer will not result in a downgrade in the securities issued
in connection with the Loan and the purchaser assumes the
Borrower's obligations under the Loan pursuant to documentation
which is acceptable to the Rating Agencies and Capital America.
Such transfer provisions will apply to a change in control of the
Borrower. Upon the transfer of the equity interests or sale of
the Properties, Borrower will pay all reasonable expenses in
connection with the assumption of the Loan capped at 1% of the
outstanding principal amount of the Loan.
DOCUMENTS: The Loan shall be evidenced by documentation customary for
similar transactions, and in form and substance acceptable to
Capital America in its sole and absolute discretion, which
documentation shall be consistent in all material respects with
the terms and provisions hereof. Such documentation shall
include customary representations and warranties from the
Borrower to Capital America and customary events of default. In
addition, all relevant ancillary documents relating to the
Borrower, including without limitation any applicable management
agreements and franchise agreements, shall be satisfactory to
Capital America in its sole discretion.
LEGAL
OPINIONS: As a condition to the closing, the Borrower's counsel shall
render all customary legal opinions regarding the Borrower and
the Loan. Such opinions shall include an opinion of Borrower's
counsel, which counsel shall be reasonably acceptable to Capital
America, including, without limitation, a usury opinion and an
opinion as to the enforceability of the Loan transaction under
New York law. The Borrower's counsel shall render a substantive
non-consolidation opinion
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and such other opinions as may be requested by the applicable
Rating Agency, all in form and substance customary or required
for rated transactions.
DUE DILIGENCE/ADDITIONAL
CONDITIONS PRECEDENT TO
FUNDING/
CLOSING: The obligation of Capital America to make the Loan is subject
to the completion by Capital America to Capital America's
satisfaction of Capital America's due diligence with respect to
the Properties and the Borrower, including, without limitation,
the receipt by and reasonable approval of Capital America of the
following:
(i) Perfected first mortgage or deed of trust on the
Properties;
(ii) Title insurance policies issued by a national company
reasonably acceptable to Capital America showing
indefeasible title to the Properties vested in the
Borrower, insuring the first priority of the lien arising
under the applicable mortgage in an amount acceptable to
Capital America, excepting from coverage thereunder only
such matters as are approved by Capital America, and
including such co-insurance and/or reinsurance as is
required by Capital America;
(iii) MAI appraisals (prepared in compliance with FIRREA) with
respect to the Properties by a firm approved by Capital
America, which appraisals shall be completed after the
Borrower Sponsor completes its REIT IPO, but prior to
August 11, 1998. In the event that the appraisals are
completed after August 11, 1998, but prior to February 11,
1999, then the Spread (as defined above) shall increase by
9 basis points;
(iv) Environmental audits (i.e. Phase I surveys and, if deemed
necessary or appropriate by Capital America, Phase II
surveys) of the Properties, acceptable to Capital America
from a firm approved by Capital America;
(v) Structural engineering report acceptable to Capital America
from a firm approved by Capital America, identifying, among
other things, (a) deferred maintenance for the Properties
and the cost thereof and (b) a 10 year schedule of
anticipated capital expenditures and the per annum cost
thereof;
(vi) Insurance policies (including, without limitation,
earthquake, hurricane and/or flood insurance, as
applicable) in such form, with such carriers, and in such
amounts as are required pursuant to the Loan Documents and
deemed acceptable to Capital America;
(vii) Three year historical operating statements of the
Properties (verified by a certified public accounting firm
acceptable to Capital America), trailing 12 month operating
statements of the Properties and operating budgets for the
Properties for the year ending December 31, 1998.
(viii) Surveys (or, if reasonably acceptable to Capital America,
updated and recertified surveys) meeting Capital America's
reasonable specifications
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(including with respect to the surveyor's certification)
and legal description of the Properties;
(ix) Certificates of occupancy for each Property and
reasonable evidence of compliance with all applicable
zoning, building, environmental and other laws applicable
to the Properties. Zoning letters or the like from
applicable governmental authorities are acceptable for
the purposes hereof;
(x) Copies of all leases, material contracts and permits
affecting the Properties;
(xi) Evidence that all utility services required for the
Properties are available and that the Properties are
subject to separate tax assessment;
(xii) Opinions of counsel and local counsel to Borrower and
Borrower Sponsor in form and substance reasonably
satisfactory to Capital America (including, without
limitation, a substantive non-consolidation opinion);
(xiii) Copy of the current occupancy statistics and room rates
for the Properties;
(xiv) Evidence that the ground lease allows for first mortgage
financing on the Properties and confirmation that all
terms and conditions of the ground lease are acceptable
to Capital America; and
(xv) Other information reasonably required by Capital America.
EXPENSES: By executing the Commitment Letter, Borrower Sponsor agrees to
pay or to reimburse, and to cause the Borrower to pay or
reimburse, Capital America and its affiliates, upon demand and
whether or not the Loan is consummated in whole or in part, the
reasonable fees and out of pocket expenses incurred by Capital
America and the outside counsel and auditors retained by
Capital America in connection with the matters and transactions
contemplated hereby which fees and expenses shall also include,
but not be limited to, the fees of all third parties relating
to the due diligence review to be undertaken by Capital America
and its third party consultants, title insurance, insurance
review costs, the cost of an appraisal, environmental reports,
engineering and structural reports, and all expenses associated
with engaging a servicer and a trustee (each of which shall be
selected by Capital America in its sole discretion), setting up
and pre-funding a cash management account and structuring the
Loan.
INDEMNIFICATION: Borrower Sponsor agrees that it and the Borrower (if a separate
entity) will indemnify and hold Capital America and each of its
affiliates (including its officers, directors, partners,
employees and agents) (each, an "Indemnified Party") harmless
against any and all losses, claims, damages, costs, expenses or
liabilities ("Losses") in connection with, arising out of or
resulting from the transactions and matters referred to or
contemplated hereby, except to the extent that it is finally
judicially determined that any losses resulted solely from the
gross negligence or bad faith of an Indemnified Party. In the
event that Capital
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America or its affiliates becomes involved in any
action, proceeding or investigation in connection with any
transaction or matter referred to or contemplated hereby,
borrower sponsor and the borrower (if a separate entity) shall
periodically reimburse capital america or its affiliates upon
demand therefore in an amount equal to the reasonable legal and
other expenses (including the costs of any investigation and
preparation) incurred in connection therewith to the extent
such legal or other expenses are the subject of indemnification
hereunder. the obligations of the borrower sponsor and borrower
pursuant to this paragraph shall survive in the event the loan
is not consummated for any reason.
ASSIGNMENT: The Loan may be assigned by Capital America at any time in its
sole discretion. The Commitment Letter and this Summary of
Terms may be assigned by Capital America at any time to The
Capital Company of America LLC. All references to Capital
America in this Summary of Terms or in the accompanying
Commitment Letter (as reflected in the Loan documents) shall be
deemed to refer to Capital America and its successors and
assigns. Neither the Loan nor the Commitment Letter nor this
Summary of Terms may be assigned by Borrower Sponsor.
SECONDARY MARKET
TRANSACTIONS: Borrower Sponsor understands that Capital America will close
the Loan described herein as principal. Nevertheless, after the
closing of the Loan, Capital America may engage in a secondary
market transaction by either selling the Loan to an affiliate
in order to enable such affiliate to complete a securitization
by way of either a public or private securities offering which
is rated by one or more rating agencies or engaging in some
other transaction (each, a "Secondary Market Transaction").
Therefore, the loan documentation will require the Borrower
Sponsor and Borrower to, among other things, assist Capital
America and its affiliates in the preparation of a disclosure
document describing the Secondary Market Transaction and
provide Capital America all information and materials
reasonably required (including an updated appraisal and
environmental report and financial and operating statements) in
a manner that satisfies the requirements of any applicable
federal laws and applicable state laws, and use its best
efforts to help facilitate the consummation of the Secondary
Market Transaction. Borrower Sponsor and Borrower agree to act
reasonably and promptly in connection with their review of the
relevant portions of the offering documents.
In connection with a Secondary Market Transaction, the Loan
Agreement will require Borrower Sponsor and Borrower to
indemnify and hold Capital America and its controlling persons
and affiliates harmless against all costs, expenses and damages
incurred by Capital America and its controlling persons and
affiliates (including, without limitation, all liabilities
under all applicable federal and state securities laws) as a
direct result of any material omission or untrue statement of a
material fact contained in such offering documents based on
information provided by Borrower Sponsor or the Borrower (if a
separate entity), which describes Borrower Sponsor, the
Borrower (if a separate entity), the Properties, the property
manager or any aspect of the subject financing or the parties
directly involved therein, or as a result of any material
omission or untrue statement of material fact in any of the
financial statements of Borrower Sponsor
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or the Borrower incorporated into the offering documents or the
failure to include in such financial statements or in such
offering documents any material fact relating to Borrower
Sponsor, the Borrower, the Properties, the property manager and
any aspect of the subject financing necessary in order to make
the statements therein, in light of the circumstances under
which they were made, not misleading; provided that the Borrower
shall have had an opportunity to review and comment upon the
relevant portions of the offering documents.
PUBLICITY: In the event the Loan contemplated herein is made, Capital
America shall have the right to issue press releases,
advertisements and other promotional materials describing
Capital America's participation in the origination of the Loan
or the Loan's inclusion in any Secondary Market Transaction
effectuated by Capital America. Capital America recognizes that
Borrower Sponsor will disclose and publicize certain details of
this transaction in connection with its public offering.
GOVERNING LAW: The Loan transaction and each of the documents with respect
thereto (other than the mortgages or deeds of trust which shall
be governed by the laws of the States in which the Properties
are located) shall be governed by the internal laws of the State
of New York. The Borrower agrees that all actions relating to
this Summary of Terms, the Commitment Letter, or the Loan (other
than actions by Capital America, its successors and assigns in
connection with the enforcement of any Loan document) shall be
brought exclusively in the federal or state courts located in
the State of New York and that trial by jury is hereby waived
for all actions relating to this Summary of Terms, the
Commitment Letter or the Loan.
NO MATERIAL
ADVERSE CHANGE: Except as may be expressly otherwise provided herein, on the
closing date, the income and expenses of the Properties, the
financial statements of the Borrower and all other features of
the transaction shall be as represented in this Summary of
Terms, and all other documents and communications presented to
Capital America in order to induce Capital America to make the
Loan, shall be without material change or Capital America shall
have no obligation to close and fund the Loan under the
Commitment Letter. At closing, the Borrower shall certify that
no material changes shall have occurred as may be requested by
Capital America.
In addition, if, on or before the date of the closing of the
Loan, any of the following shall have occurred, Capital America
shall have no obligation to close and fund the Loan under the
Commitment Letter; (i) any of the Properties shall have been (a)
damaged and not repaired to Capital America's satisfaction or
(b) taken in condemnation or other similar proceeding, or any
such proceeding shall be pending; (ii) a structural change in
the physical condition of any portion of the Properties; (iii)
Borrower or any partners, members, principal shareholders or
officers of Borrower or any tenant under any lease deemed by
Capital America to be material to Capital America's security or
any guarantor of any such lease shall be the subject of any
bankruptcy, reorganization or insolvency proceeding; (iv) any
default shall have occurred and be continuing in the performance
of any obligation of Borrower or an affiliate of Borrower in the
instruments evidencing, securing or guaranteeing another loan of
Borrower or such affiliate; and (v) discovery of any asbestos,
toxic waste, or other hazardous substance on the Properties
which discovery would be materially adverse to
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Capital America. Borrower Sponsor hereby represents and warrants
to Capital America that it has received no notice of, and has no
other knowledge of or basis upon which to believe that it or any
partner is or may become the subject of any bankruptcy,
reorganization or insolvency proceeding.
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EXHIBIT 10.7
FORM OF
HUDSON HOTELS TRUST
1998 INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I DEFINITIONS
1.01. Acceleration Date............................................ 1
1.02. Acquiring Person............................................. 1
1.03. Administrator................................................ 1
1.04. Affiliate.................................................... 1
1.05. Agreement.................................................... 2
1.06. Associate.................................................... 2
1.07. Board........................................................ 2
1.08. Change in Control............................................ 2
1.09. Code......................................................... 2
1.10. Committee.................................................... 3
1.11. Common Shares................................................ 3
1.12. Company...................................................... 3
1.13. Continuing Trustee........................................... 3
1.14. Control Affiliate............................................ 3
1.15. Control Change Date.......................................... 3
1.16. Corresponding SAR............................................ 3
1.17. Exchange Act................................................. 4
1.18. Fair Market Value............................................ 4
1.19. Initial Value................................................ 5
1.20. Incentive Award.............................................. 5
1.21. Option....................................................... 5
1.22. Participant.................................................. 5
1.23. Performance Based Dividend Equivalent Right.................. 5
1.24. Performance Shares........................................... 6
1.25. Person....................................................... 6
1.26. Plan......................................................... 6
1.27. Related Entity............................................... 7
1.28. SAR.......................................................... 7
1.29. Share Award.................................................. 7
ARTICLE II PURPOSES..................................................... 7
ARTICLE III ADMINISTRATION.............................................. 8
ARTICLE IV ELIGIBILITY.................................................. 9
ARTICLE V SHARES SUBJECT TO PLAN
5.01. Shares Issued................................................ 9
5.02. Aggregate Limit.............................................. 10
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5.03. Reallocation of Shares....................................... 10
ARTICLE VI OPTIONS
6.01. Award........................................................ 11
6.02. Option Price................................................. 11
6.03. Maximum Option Period........................................ 11
6.04. Nontransferability........................................... 12
6.05. Transferable Options......................................... 12
6.06. Employee Status.............................................. 12
6.07. Exercise..................................................... 13
6.08. Performance Based Dividend Equivalent Rights................. 14
6.09. Payment...................................................... 14
6.10. Shareholder Rights........................................... 14
6.11. Disposition of Shares........................................ 15
ARTICLE VII SARS
7.01. Award........................................................ 15
7.02. Maximum SAR Period........................................... 15
7.03. Nontransferability........................................... 16
7.04. Transferable SARs............................................ 16
7.05. Exercise..................................................... 17
7.06. Employee Status.............................................. 17
7.07. Settlement................................................... 18
7.08. Shareholder Rights........................................... 18
ARTICLE VIII SHARE AWARDS
8.01. Award........................................................ 18
8.02. Vesting...................................................... 18
8.03. Performance Objectives....................................... 18
8.04. Employee Status.............................................. 19
8.05. Change in Control............................................ 19
8.06. Shareholder Rights........................................... 19
ARTICLE IX PERFORMANCE SHARE AWARDS
9.01. Award........................................................ 20
9.02. Earning the Award............................................ 20
9.03. Payment...................................................... 21
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9.04. Shareholder Rights........................................... 21
9.05. Nontransferability........................................... 21
9.06. Transferable Performance Shares.............................. 21
9.07. Employee Status.............................................. 22
9.08. Change In Control............................................ 22
ARTICLE X INCENTIVE AWARDS
10.01. Award....................................................... 22
10.02. Terms and Conditions........................................ 22
10.03. Nontransferability.......................................... 23
10.04. Transferable Incentive Awards............................... 23
10.05. Employee Status............................................. 24
10.06. Change in Control........................................... 24
10.07. Shareholder Rights.......................................... 24
ARTICLE XI ADJUSTMENT UPON CHANGE IN COMMON SHARES...................... 24
ARTICLE XII COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES....... 25
ARTICLE XIII GENERAL PROVISIONS
13.01. Effect on Employment and Service............................ 26
13.02. Unfunded Plan............................................... 26
13.03. Rules of Construction....................................... 27
13.04. Certain Reduction of Parachute Payments..................... 27
ARTICLE XIV AMENDMENT................................................... 28
ARTICLE XV DURATION OF PLAN............................................. 28
ARTICLE XVI EFFECTIVE DATE OF PLAN...................................... 28
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ARTICLE I
DEFINITIONS
1.01. ACCELERATION DATE
-----------------
Acceleration Date means the earlier of (i) the date that the Board
approves a transaction or series of transactions which, if consummated,
would result in a Change in Control or (ii) the date that an agreement is
entered into with respect to a transaction or series of transactions which,
if consummated, would result in a Change in Control.
1.02. ACQUIRING PERSON
----------------
Acquiring Person means that a Person, considered alone or together
with all Control Affiliates and Associates of that Person, is or becomes
directly or indirectly the beneficial owner of securities representing at
least thirty percent (30%) of the Company's then outstanding securities
entitled to vote generally in the election of the Board.
1.03. ADMINISTRATOR
-------------
Administrator means (i) while the Company is a Non-Public Company (as
defined in Section 1.18), the Board, and (ii) while the Company is a Public
Company (as defined in Section 1.18), the Committee and any delegate of the
Committee that is appointed in accordance with Article III.
1.04. AFFILIATE
---------
Affiliate means any "subsidiary" or "parent" corporation (within the
meaning of Section 424 of the Code) of the Company.
1
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1.05. AGREEMENT
---------
Agreement means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying the
terms and conditions of a Share Award, an award of Performance Shares, an
Incentive Award or an Option or SAR granted to such Participant.
1.06. ASSOCIATE
---------
Associate, with respect to any Person, is defined in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act, as amended as of
January 1, 1990. An Associate does not include the Company or a majority-
owned subsidiary of the Company.
1.07. BOARD
-----
Board means the Board of Trustees of the Company.
1.08. CHANGE IN CONTROL
-----------------
Change in Control means (i) a Person is or becomes an Acquiring
Person; (ii) a Person enters into an agreement that would result in that
Person's becoming an Acquiring Person; (iii) at least fifty percent (50%) of
the Company's total assets on a consolidated basis, as reported in the
Company's consolidated financial statements filed with the Securities and
Exchange Commission, is sold or transferred (in a single transaction or
series of transactions) to one or more Persons; (iv) the Company is merged,
consolidated or reorganized into or with, or effects a statutory share
exchange with, another Person, regardless of whether the Company is the
surviving or resulting entity after the merger, consolidation, or statutory
share exchange; or (v) the Continuing Trustees cease for any reason to
constitute a majority of the Board.
1.09. CODE
----
Code means the Internal Revenue Code of 1986, and any amendments
thereto.
2
<PAGE>
1.10. COMMITTEE
---------
Committee means the Compensation Committee of the Board.
1.11. COMMON SHARES
-------------
Common Shares means the common shares of the Company.
1.12. COMPANY
-------
Company means Hudson Hotels Trust.
1.13. CONTINUING TRUSTEE
------------------
Continuing Trustee means any member of the Board, while a member of
the Board and (i) who was a member of the Board immediately following the
Company's initial public offering of Common Shares, or (ii) whose nomination
for or election to the Board was recommended or approved by a majority of
the Continuing Trustees.
1.14. CONTROL AFFILIATE
-----------------
Control Affiliate, with respect to any Person, means an affiliate as
defined in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act, as amended as of January 1, 1990.
1.15. CONTROL CHANGE DATE
-------------------
Control Change Date means the date on which a Change in Control
occurs. If a Change in Control occurs on account of a series of
transactions, the "Control Change Date" is the date of the last of such
transactions.
1.16. CORRESPONDING SAR
-----------------
Corresponding SAR means an SAR that is granted in relation to a
particular Option and that can be exercised only upon the surrender to the
Company, unexercised, of that portion of the Option to which the SAR
relates.
3
<PAGE>
1.17. EXCHANGE ACT
------------
Exchange Act means the Securities Exchange Act of 1934, as amended.
1.18. FAIR MARKET VALUE
-----------------
Fair Market Value means, on any given date, the current fair market
value of a Common Share as determined pursuant to subsection (a), (b) or (c)
below.
(a) While the Company is a Non-Public Company, Fair Market Value
shall be determined by the Committee using any reasonable method in good
faith.
(b) While the Company is a Public Company, Fair Market Value shall be
determined as follows: if the Common Shares are not listed on an established
stock exchange, Fair Market Value shall be the average of the final bid and
asked quotations on the over-the-counter market in which the Common Shares
are traded or, if applicable, the reported "closing" price of a Common Share
in the New York over-the-counter market as reported by the National
Association of Securities Dealers, Inc. If the Common Shares are listed on
an established stock exchange or exchanges, Fair Market Value shall be
deemed to be the highest closing price of a Common Share reported on that
stock exchange or exchanges. In any case, if no sale of Common Shares is
made on any stock exchange or over-the-counter market on that date, then
Fair Market Value shall be determined as of the next preceding day on which
there was a sale. For purposes of this definition, the term "Public
Company" means an entity that has sold securities pursuant to an effective
registration statement on Form S-11 filed pursuant to the Securities Act of
1933, as amended, and the term "Non-Public Company" means an entity that has
never sold securities pursuant to an effective registration statement on
Form S-11 filed pursuant to the Securities Act of 1933, as amended.
4
<PAGE>
(c) Notwithstanding the foregoing, Fair Market Value on the effective
date of the registration statement relating to the initial public offering
of the Company shall be the initial public offering price of the Common
Shares.
1.19. INITIAL VALUE
-------------
Initial Value means, with respect to an SAR, the Fair Market Value of
one Common Share on the date of grant.
1.20. INCENTIVE AWARD
---------------
Incentive Award means an award which, subject to such terms and
conditions as may be prescribed by the Administrator, entitles the
Participant to receive a cash payment from the Company or an Affiliate.
1.21. OPTION
------
Option means a share option that entitles the holder to purchase from
the Company a stated number of Common Shares at the price set forth in an
Agreement. In the discretion of the Administrator and if provided in an
Agreement, an Option may include a Performance Based Dividend Equivalent
Right.
1.22. PARTICIPANT
-----------
Participant means an employee of the Company or an Affiliate,
including an employee who is a member of the Board, who satisfies the
requirements of Article IV and is selected by the Administrator to receive a
Share Award, an award of Performance Shares, an Option, an SAR, an Incentive
Award or a combination thereof.
1.23. PERFORMANCE BASED DIVIDEND EQUIVALENT RIGHT
-------------------------------------------
Performance Based Dividend Equivalent Right means the right, awarded
in tandem with a newly granted or outstanding Option, to receive a cash
payment for all dividends that would
5
<PAGE>
have been paid on each Share for which the related Option is exercised,
without interest or compounding, during the period from the date of grant of
the Option (or, if later, the date of grant of the Performance Based
Dividend Equivalent Right) through the date that the Option is exercised for
such Share, had such Share been outstanding throughout that period. A
Performance Based Dividend Equivalent Right will be earned only if the
performance objectives and other conditions specified by the Administrator
in an Agreement have been satisfied.
1.24. PERFORMANCE SHARES
------------------
Performance Shares means an award, in the amount determined by the
Administrator and specified in an Agreement, stated with reference to a
specified number of Common Shares, that in accordance with the terms of an
Agreement entitles the holder to receive a payment for each specified share
equal to the Fair Market Value of a Common Share on the date of payment.
1.25. PERSON
------
Person means any human being, firm, corporation, partnership, or
other entity. Person also includes any human being, firm, corporation,
partnership, or other entity as defined in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act, as amended as of January 1, 1990. The term Person does not
include the Company or any Related Entity, and the term Person does not
include any employee-benefit plan maintained by the Company or by any
Related Entity, and any person or entity organized, appointed, or
established by the Company or by any subsidiary for or pursuant to the terms
of any such employee-benefit plan, unless the Board determines that such an
employee-benefit plan or such person or entity is a Person.
1.26. PLAN
----
Plan means the Hudson Hotels Trust 1998 Incentive Plan.
6
<PAGE>
1.27. RELATED ENTITY
--------------
Related Entity means any entity that is part of a controlled group of
corporations or is under common control with the Company within the meaning
of Code Section 1563(a), 414(b) or 414(c).
1.28. SAR
---
SAR means a share appreciation right that in accordance with the
terms of an Agreement entitles the holder to receive, with respect to each
Common Share encompassed by the exercise of such SAR, the amount determined
by the Administrator and specified in an Agreement, which amount shall be
based on an increase price of such SAR that is not less than the Initial
Value. In the absence of such a determination, the holder shall be entitled
to receive, with respect to each Common Share encompassed by the exercise of
such SAR, the excess of the Fair Market Value on the date of exercise over
the Initial Value. References to "SARs" include both Corresponding SARs and
SARs granted independently of Options, unless the context requires
otherwise.
1.29. SHARE AWARD
-----------
Share Award means Common Shares awarded to a Participant under
Article VIII.
ARTICLE II
PURPOSES
--------
The Plan is intended to assist the Company and its Affiliates in
recruiting and retaining individuals with ability and initiative by enabling
such persons to participate in the future success of the Company and its
Affiliates and to associate their interests with those of the Company and
its shareholders. The Plan is intended to permit the grant of both Options
qualifying under Section 422 of the Code ("incentive share options") and
Options not so qualifying (either type of which may include Performance
Based Dividend Equivalent Rights), and the grant of SARs, Share Awards,
Performance Shares and Incentive Awards. No Option
7
<PAGE>
that is intended to be an incentive share option shall be invalid for
failure to qualify as an incentive share option. The proceeds received by
the Company from the sale of Common Shares pursuant to this Plan shall be
used for general corporate purposes.
ARTICLE III
ADMINISTRATION
--------------
The Plan shall be administered by the Administrator. The
Administrator shall have authority to grant Share Awards, Performance
Shares, Incentive Awards, Options (including associated Performance Based
Dividend Equivalent Rights), and SARs upon such terms (not inconsistent with
the provisions of this Plan), as the Administrator may consider appropriate.
Such terms may include conditions (in addition to those contained in this
Plan), on the exercisability of all or any part of an Option or SAR or on
the transferability or forfeitability of a Share Award, an award of
Performance Shares or an Incentive Award. Notwithstanding any such
conditions, the Administrator may, in its discretion, accelerate the time at
which any Option or SAR may be exercised, or the time at which a Share Award
may become transferable or nonforfeitable or the time at which an Incentive
Award, award of Performance Shares or Performance Based Dividend Equivalent
Right may be settled or earned. In addition, the Administrator shall have
complete authority to interpret all provisions of this Plan; to prescribe
the form of Agreements; to adopt, amend, and rescind rules and regulations
pertaining to the administration of the Plan; and to make all other
determinations necessary or advisable for the administration of this Plan.
The express grant in the Plan of any specific power to the Administrator
shall not be construed as limiting any power or authority of the
Administrator. Any decision made, or action taken, by the Administrator or
in connection with the administration of this Plan shall be final and
conclusive. Neither the Administrator nor any
8
<PAGE>
member of the Committee shall be liable for any act done in good faith with
respect to this Plan or any Agreement, Option, SAR, Share Award or Incentive
Award or award of Performance Shares. All expenses of administering this
Plan shall be borne by the Company.
The Committee, in its discretion, may delegate to one or more
officers of the Company all or part of the Committee's authority and duties
with respect to grants and awards to individuals who are not subject to the
reporting and other provisions of Section 16 of the Exchange Act. The
Committee may revoke or amend the terms of a delegation at any time but such
action shall not invalidate any prior actions of the Committee's delegate or
delegates that were consistent with the terms of the Plan.
ARTICLE IV
ELIGIBILITY
-----------
Any employee of the Company or an Affiliate (including a corporation
that becomes an Affiliate after the adoption of this Plan), is eligible to
participate in this Plan if the Administrator, in its sole discretion,
determines that such person has contributed significantly or can be expected
to contribute significantly to the profits or growth of the Company or an
Affiliate. Trustees of the Company who are employees of the Company or an
Affiliate may be selected to participate in this Plan.
ARTICLE V
SHARES SUBJECT TO PLAN
----------------------
5.01. SHARES ISSUED
-------------
Upon the award of Common Shares pursuant to a Share Award or in
settlement of an award of Performance Shares, the Company may issue Common
Shares from its authorized but
9
<PAGE>
unissued Common Shares. Upon the exercise of any Option or SAR, the Company
may deliver to the Participant (or the Participant's broker if the
Participant so directs) Common Shares from its authorized but unissued
Common Shares.
5.02. AGGREGATE LIMIT
---------------
The maximum aggregate number of Common Shares that may be issued
under this Plan pursuant to the exercise of SARs and Options and the grant
of Share Awards and the settlement of Performance Shares is 1,786,000
shares. The maximum aggregate number of Common Shares that may be issued
under this Plan as Share Awards and in settlement of Performance Shares is
500,000 shares. The maximum aggregate number of Common Shares that may be
issued under this Plan and the maximum number of Common Shares that may be
issued as Share Awards and in settlement of Performance Shares shall be
subject to adjustment as provided in Article XI.
5.03. REALLOCATION OF SHARES
----------------------
If an Option is terminated, in whole or in part, for any reason other
than its exercise or the exercise of a Corresponding SAR that is settled
with Common Shares, the number of Common Shares allocated to the Option or
portion thereof may be reallocated to other Options, SARs, Performance
Shares and Share Awards to be granted under this Plan. If an SAR is
terminated, in whole or in part, for any reason other than its exercise that
is settled with Common Shares or the exercise of a related Option, the
number of Common Shares allocated to the SAR or portion thereof may be
reallocated to other Options, SARs, Performance Shares and Share Awards to
be granted under this Plan. If an award of Performance Shares is
terminated, in whole or in part, for any reason other than its settlement
with Common Shares, the number of Common Shares allocated to the Performance
Shares or portion thereof may be reallocated to
10
<PAGE>
other Options, SARs, Performance Shares and Share Awards to be granted under
this Plan. If a Share Award is forfeited, in whole or in part, for any
reason, the number of Common Shares allocated to the Share Award or portion
thereof may be reallocated to other Options, SARs, Performance Shares and
Share Awards to be granted under this Plan.
ARTICLE VI
OPTIONS
-------
6.01. AWARD
-----
In accordance with the provisions of Article IV, the Administrator
will designate each individual to whom an Option is to be granted and will
specify the number of Common Shares covered by such awards; provided,
however, that no individual may be granted Options in any calendar year
covering more than 500,000 Common Shares. For purposes of the preceding
sentence, an Option and Corresponding SAR shall be treated as a single
award.
6.02. OPTION PRICE
------------
The price per share for Common Shares purchased on the exercise of an
Option shall be determined by the Administrator on the date of grant, but
shall not be less than the Fair Market Value on the date the Option is
granted.
6.03. MAXIMUM OPTION PERIOD
---------------------
The maximum period in which an Option may be exercised shall be
determined by the Administrator on the date of grant, except that no Option
that is an incentive share option shall be exercisable after the expiration
of ten years from the date such Option was granted. The terms of any Option
that is an incentive share option may provide that it is exercisable for a
period less than such maximum period.
11
<PAGE>
6.04. NONTRANSFERABILITY
------------------
Except as provided in Section 6.05, each Option granted under this
Plan shall be nontransferable except by will or by the laws of descent and
distribution. In the event of any transfer of an Option (by the Participant
or his transferee), the Option and any Corresponding SAR that relates to
such Option must be transferred to the same person or persons or entity or
entities. During the lifetime of the Participant to whom the Option is
granted, the Option may be exercised only by the Participant. No right or
interest of a Participant in any Option shall be liable for, or subject to,
any lien, obligation, or liability of such Participant.
6.05. TRANSFERABLE OPTIONS
--------------------
Section 6.04 to the contrary notwithstanding, if the Agreement
provides, an Option that is not an incentive share option may be transferred
by a Participant to the Participant's children, grandchildren, spouse, one
or more trusts for the benefit of such family members or a partnership in
which such family members are the only partners, on such terms and
conditions as may be permitted under Securities and Exchange Commission Rule
16b-3 as in effect from time to time. The holder of an Option transferred
pursuant to this section shall be bound by the same terms and conditions
that governed the Option during the period that it was held by the
Participant; provided, however, that such transferee may not transfer the
Option except by will or the laws of descent and distribution. In the event
of any transfer of an Option (by the Participant or his transferee), the
Option and any Corresponding SAR that relates to such Option must be
transferred to the same person or persons or entity or entities.
6.06. EMPLOYEE STATUS
---------------
For purposes of determining the applicability of Section 422 of the
Code (relating to incentive share options), or in the event that the terms
of any Option provide that it may be
12
<PAGE>
exercised only during employment or within a specified period of time after
termination of employment, the Administrator may decide to what extent
leaves of absence for governmental or military service, illness, temporary
disability, or other reasons shall not be deemed interruptions of continuous
employment.
6.07. EXERCISE
--------
All outstanding Options previously granted under the Plan shall be
exercisable, in whole or in part, on a Control Change Date or, if sooner, an
Acceleration Date and shall remain exercisable thereafter in accordance with
the terms of this Plan and the applicable Agreement. Subject to the
preceding sentence and the other provisions of this Plan and the applicable
Agreement, an Option may be exercised in whole at any time or in part from
time to time at such times and in compliance with such requirements as the
Administrator shall determine; provided, however, that incentive share
options (granted under the Plan and all plans of the Company and its
Affiliates) may not be first exercisable in a calendar year for shares
having a Fair Market Value (determined as of the date an Option is granted)
exceeding the amount prescribed by the Code (currently $100,000). An Option
granted under this Plan may be exercised with respect to any number of whole
shares less than the full number for which the Option could be exercised. A
partial exercise of an Option shall not affect the right to exercise the
Option from time to time in accordance with this Plan and the applicable
Agreement with respect to the remaining shares subject to the Option. The
exercise of an Option shall result in the termination of any Corresponding
SAR to the extent of the number of shares with respect to which the Option
is exercised.
13
<PAGE>
6.08. PERFORMANCE BASED DIVIDEND EQUIVALENT RIGHTS
--------------------------------------------
If an Option Agreement includes a Performance Based Dividend
Equivalent Right, the Participant shall be entitled to the payment (if any)
that is due thereunder at the time or times specified in the Agreement. An
Agreement may provide that such payment will be made only upon satisfaction
of performance objectives stated with respect to the Company's, an
Affiliate's or an operating unit's funds from operations per share, return
on equity, earnings per share, total earnings, earnings growth, return on
capital, return on assets, Fair Market Value, or such other measures as may
be selected by the Administrator. If the Administrator, on the date of
award, prescribes that a Performance Based Dividend Equivalent Right will be
earned only upon the attainment of performance objectives stated with
respect to one or more of the criteria set forth above, any payment
thereunder shall be made only to the extent that the Administrator certifies
that such objectives have been achieved.
6.09. PAYMENT
-------
Unless otherwise provided by the Agreement, payment of the Option
price shall be made in cash or a cash equivalent acceptable to the
Administrator, or by the surrender to the Company or attestation of
ownership of Common Shares. If Common Shares are used to pay all or part of
the Option price, the sum of the cash and cash equivalent and the Fair
Market Value (determined as of the day preceding the date of exercise) of
the shares that are surrendered or that are the subject of attestation must
not be less than the Option price of the shares for which the Option is
being exercised.
6.10. SHAREHOLDER RIGHTS
------------------
No Participant shall have any rights as a shareholder with respect to
shares subject to his Option until the date of exercise of such Option.
14
<PAGE>
6.11. DISPOSITION OF SHARES
---------------------
A Participant shall notify the Company of any sale or other
disposition of Common Shares acquired pursuant to an Option that was an
incentive share option if such sale or disposition occurs (i) within two
years of the grant of an Option or (ii) within one year of the issuance of
the Common Shares to the Participant. Such notice shall be in writing and
directed to the Secretary of the Company.
ARTICLE VII
SARS
----
7.01. AWARD
-----
In accordance with the provisions of Article IV, the Administrator
will designate each individual to whom SARs are to be granted and will
specify the number of shares covered by such awards; provided, however, that
no individual may be granted SARs in any calendar year covering more than
500,000 shares. For purposes of the preceding sentence, an Option and
Corresponding SAR shall be treated as a single award. In addition no
Participant may be granted Corresponding SARs (under all incentive share
option plans of the Company and its Affiliates) that are related to
incentive share options which are first exercisable in any calendar year for
shares having an aggregate Fair Market Value (determined as of the date the
related Option is granted) that exceeds the amount prescribed by the Code
(currently $100,000).
7.02. MAXIMUM SAR PERIOD
------------------
The term of each SAR shall be determined by the Administrator on the
date of grant, except that no Corresponding SAR that is related to an
incentive share option shall have a term of more than ten years from the
date such related Option was granted. The terms of any
15
<PAGE>
Corresponding SAR that is related to an incentive share option may provide
that it has a term that is less than such maximum period.
7.03. NONTRANSFERABILITY
------------------
Except as provided in Section 7.04, each SAR granted under this Plan
shall be nontransferable except by will or by the laws of descent and
distribution. In the event of any such transfer, a Corresponding SAR and the
related Option must be transferred to the same person or persons or entity
or entities. During the lifetime of the Participant to whom the SAR is
granted, the SAR may be exercised only by the Participant. No right or
interest of a Participant in any SAR shall be liable for, or subject to, any
lien, obligation, or liability of such Participant.
7.04. TRANSFERABLE SARS
-----------------
Section 7.03 to the contrary notwithstanding, if the Agreement
provides, an SAR, other than a Corresponding SAR that is related to an
incentive share option, may be transferred by a Participant to the
Participant's children, grandchildren, spouse, one or more trusts for the
benefit of such family members or a partnership in which such family members
are the only partners, on such terms and conditions as may be permitted
under Securities and Exchange Commission Rule 16b-3 as in effect from time
to time. The holder of an SAR transferred pursuant to this section shall be
bound by the same terms and conditions that governed the SAR during the
period that it was held by the Participant; provided, however, that such
transferee may not transfer the SAR except by will or the laws of descent
and distribution. In the event of any transfer of a Corresponding SAR (by
the Participant or his transferee), the Corresponding SAR and the related
Option must be transferred to the same person or person or entity or
entities.
16
<PAGE>
7.05. EXERCISE
--------
All outstanding SARs previously granted under the Plan shall be
exercisable, in whole or in part, on a Control Change Date or, if sooner, an
Acceleration Date and shall remain exercisable thereafter in accordance with
the terms of the Plan and the applicable Agreement. Subject to the
preceding sentence and the other provisions of this Plan and the applicable
Agreement, an SAR may be exercised in whole at any time or in part from time
to time at such times and in compliance with such requirements as the
Administrator shall determine; provided, however, that a Corresponding SAR
that is related to an incentive share option may be exercised only to the
extent that the related Option is exercisable and only when the Fair Market
Value exceeds the option price of the related Option. An SAR granted under
this Plan may be exercised with respect to any number of whole shares less
than the full number for which the SAR could be exercised. A partial
exercise of an SAR shall not affect the right to exercise the SAR from time
to time in accordance with this Plan and the applicable Agreement with
respect to the remaining shares subject to the SAR. The exercise of a
Corresponding SAR shall result in the termination of the related Option to
the extent of the number of shares with respect to which the SAR is
exercised.
7.06. EMPLOYEE STATUS
---------------
If the terms of any SAR provide that it may be exercised only during
employment or within a specified period of time after termination of
employment, the Administrator may decide to what extent leaves of absence
for governmental or military service, illness, temporary disability or other
reasons shall not be deemed interruptions of continuous employment.
17
<PAGE>
7.07. SETTLEMENT
----------
At the Administrator's discretion, the amount payable as a result of
the exercise of an SAR may be settled in cash, Common Shares, or a
combination of cash and Common Shares. No fractional share will be
deliverable upon the exercise of an SAR but a cash payment will be made in
lieu thereof.
7.08. SHAREHOLDER RIGHTS
------------------
No Participant shall, as a result of receiving an SAR award, have any
rights as a shareholder of the Company or any Affiliate until the date that
the SAR is exercised and then only to the extent that the SAR is settled by
the issuance of Common Shares.
ARTICLE VIII
SHARE AWARDS
------------
8.01. AWARD
-----
In accordance with the provisions of Article IV, the Administrator
will designate each individual to whom a Share Award is to be made and will
specify the number of Common Shares covered by such awards; provided,
however, that no Participant may receive Share Awards in any calendar year
for more than 115,000 Common Shares.
8.02. VESTING
-------
A Participant's rights in a Share Award may be forfeitable or
otherwise restricted for a period of time or subject to such conditions as
may be set forth in the Agreement.
8.03. PERFORMANCE OBJECTIVES
----------------------
In accordance with Section 8.02, the Administrator may prescribe that
Share Awards will become vested or transferable or both based on objectives
stated with respect to the Company's,
18
<PAGE>
an Affiliate's or an operating unit's funds from operations per share,
return on equity, earnings per share, total earnings, earnings growth,
return on capital, or return on assets, Fair Market Value, or such other
measures as may be selected by the Administrator. If the Administrator, on
the date of award, prescribes that a Share Award shall become nonforfeitable
and transferable only upon the attainment of performance objectives stated
with respect to one or more of the criteria set forth above, the shares
subject to such Share Award shall become nonforfeitable and transferable
only to the extent that the Administrator certifies that such objectives
have been achieved.
8.04. EMPLOYEE STATUS
---------------
In the event that the terms of any Share Award provide that shares
may become transferable and nonforfeitable thereunder only after completion
of a specified period of employment, the Administrator may decide in each
case to what extent leaves of absence for governmental or military service,
illness, temporary disability, or other reasons shall not be deemed
interruptions of continuous employment.
8.05. CHANGE IN CONTROL
-----------------
Sections 8.02 and 8.03 to the contrary notwithstanding, each
outstanding Share Award shall be transferable and nonforfeitable as of a
Control Change Date.
8.06. SHAREHOLDER RIGHTS
------------------
Prior to their forfeiture (in accordance with the applicable
Agreement and while the Common Shares granted pursuant to the Share Award
may be forfeited or are nontransferable), a Participant will have all rights
of a shareholder with respect to a Share Award, including the right to
receive dividends and vote the shares; provided, however, that during such
period (i) a Participant may not sell, transfer, pledge, exchange,
hypothecate, or otherwise dispose of
19
<PAGE>
Common Shares granted pursuant to a Share Award, (ii) the Company shall
retain custody of the certificates evidencing Common Shares granted pursuant
to a Share Award, and (iii) the Participant will deliver to the Company a
share power, endorsed in blank, with respect to each Share Award. The
limitations set forth in the preceding sentence shall not apply after the
Common Shares granted under the Share Award are transferable and are no
longer forfeitable.
ARTICLE IX
PERFORMANCE SHARE AWARDS
------------------------
9.01. AWARD
-----
In accordance with the provisions of Article IV, the Administrator
will designate each individual to whom an award of Performance Shares is to
be made and will specify the number of Common Shares covered by such awards;
provided, however, that no Participant may receive an award of Performance
Shares in any calendar year for more than 115,000 Common Shares.
9.02. EARNING THE AWARD
-----------------
The Administrator, on the date of the grant of an award, shall
prescribe that the Performance Shares, or portion thereof, will be earned,
and the Participant will be entitled to receive payment pursuant to the
award of Performance Shares, only upon the satisfaction of performance
objectives and such other criteria as may be prescribed by the Administrator
during a performance measurement period of at least one year. The
performance objectives may be stated with respect to the Company's, an
Affiliate's, or an operating unit's funds from operations per share, return
on equity, earnings per share, total earnings, earnings growth, return on
capital, return on assets, Fair Market Value, or such other measures as may
be selected by the Administrator. No payments will be made with respect to
Performance Shares unless, and then only to the extent that, the
Administrator certifies that such objectives have been achieved.
20
<PAGE>
9.03. PAYMENT
-------
In the discretion of the Administrator, the amount payable when an
award of Performance Shares is earned may be settled in cash, by the
issuance of Common Shares or a combination of cash and Common Shares. A
fractional share shall not be deliverable when an award of Performance
Shares is earned, but a cash payment will be made in lieu thereof.
9.04. SHAREHOLDER RIGHTS
------------------
No Participant shall, as a result of receiving an award of
Performance Shares, have any rights as a shareholder until and then only to
the extent that the award of Performance Shares is earned and settled by the
issuance of Common Shares. After an award of Performance Shares is earned,
if settled completely or partially in Common Shares, a Participant will have
all the rights of a shareholder with respect to such Common Shares.
9.05. NONTRANSFERABILITY
------------------
Except as provided in Section 9.06, Performance Shares granted under
this Plan shall be nontransferable except by will or by the laws of descent
and distribution. No right or interest of a Participant in any Performance
Shares shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
9.06. TRANSFERABLE PERFORMANCE SHARES
-------------------------------
Section 9.05 to the contrary notwithstanding, if the Agreement
provides, an award of Performance Shares may be transferred by a Participant
to the Participant's children, grandchildren, spouse, one or more trusts for
the benefit of such family members or a partnership in which such family
members are the only partners, on such terms and conditions as may be
permitted under Securities and Exchange Commission Rule 16b-3 as in effect
from time to time. The holder of Performance Shares transferred pursuant to
this section shall be bound by the same
21
<PAGE>
terms and conditions that governed the Performance Shares during the period
that they were held by the Participant; provided, however that such
transferee may not transfer Performance Shares except by will or the laws of
descent and distribution.
9.07. EMPLOYEE STATUS
---------------
In the event that the terms of any Performance Share award provide
that no payment will be made unless the Participant completes a stated
period of employment, the Administrator may decide to what extent leaves of
absence for government or military service, illness, temporary disability,
or other reasons shall not be deemed interruptions of continuous employment.
9.08. CHANGE IN CONTROL
-----------------
Section 9.02 to the contrary notwithstanding, each outstanding
Performance Share shall be earned in its entirety as of a Control Change
Date.
ARTICLE X
INCENTIVE AWARDS
----------------
10.01. AWARD
-----
The Administrator shall designate Participants to whom Incentive
Awards are made. All Incentive Awards shall be finally determined
exclusively by the Administrator under the procedures established by the
Administrator; provided, however, that no Participant may receive an
Incentive Award payment in any calendar year that exceeds $500,000.
10.02. TERMS AND CONDITIONS
--------------------
The Administrator, at the time an Incentive Award is made, shall
specify the terms and conditions which govern the award. Such terms and
conditions shall prescribe that the Incentive Award shall be earned only
upon, and to the extent that, performance objectives are satisfied. The
performance objectives may be stated with respect to the Company's, an
Affiliate's or an
22
<PAGE>
operating unit's funds from operations per share, return on equity, earnings
per share, total earnings, earnings growth, return on capital, return on
assets, Fair Market Value or such other measures as may be selected by the
Administrator. Such terms and conditions also may include other limitations
on the payment of Incentive Awards including, by way of example and not of
limitation, requirements that the Participant complete a specified period of
employment with the Company or an Affiliate. The Administrator, at the time
an Incentive Award is made, shall also specify when amounts shall be payable
under the Incentive Award and whether amounts shall be payable in the event
of the Participant's death, disability, or retirement.
10.03. NONTRANSFERABILITY
------------------
Except as provided in Section 10.04, Incentive Awards granted under
this Plan shall be nontransferable except by will or by the laws of descent
and distribution. No right or interest of a Participant in an Incentive
Award shall be liable for, or subject to, any lien, obligation, or liability
of such Participant.
10.04. TRANSFERABLE INCENTIVE AWARDS
-----------------------------
Section 10.03 to the contrary notwithstanding, if the Agreement
provides, an Incentive Award may be transferred by a Participant to the
Participant's children, grandchildren, spouse, one or more trusts for the
benefit of such family members or to a partnership in which such family
members are the only partners, on such terms and conditions as may be
permitted by Securities and Exchange Commission Rule 16b-3 as in effect from
time to time. The holder of an Incentive Award transferred pursuant to this
section shall be bound by the same terms and conditions that governed the
Incentive Award during the period that it was held by the Participant;
provided, however, that such transferee may not transfer the Incentive Award
except by will or the laws of descent and distribution.
23
<PAGE>
10.05. EMPLOYEE STATUS
---------------
If the terms of an Incentive Award provide that a payment will be
made thereunder only if the Participant completes a stated period of
employment, the Administrator may decide to what extent leaves of absence
for governmental or military service, illness, temporary disability or other
reasons shall not be deemed interruptions of continuous employment.
10.06. CHANGE IN CONTROL
-----------------
Section 10.02 to the contrary notwithstanding, each Incentive Award
shall be earned in its entirety as of a Control Change Date.
10.07. SHAREHOLDER RIGHTS
------------------
No Participant shall, as a result of receiving an Incentive Award,
have any rights as a shareholder of the Company or any Affiliate on account
of such award.
ARTICLE XI
ADJUSTMENT UPON CHANGE IN COMMON SHARES
---------------------------------------
The maximum number of shares as to which Options, SARs, Performance
Shares and Share Awards may be granted under this Plan, the terms of
outstanding Share Awards, Options (including associated Performance Based
Dividend Equivalent Rights), Performance Shares, Incentive Awards, and SARs,
and the per individual limitations on the number of shares or for which
Options, SARs, Performance Shares, and Share Awards may be granted shall be
adjusted as the Committee shall determine to be equitably required in the
event that (i) the Company (a) effects one or more share dividends, share
split-ups, subdivisions or consolidations of shares or (b) engages in a
transaction to which Section 424 of the Code applies or (ii) there occurs
any other event which, in the judgment of the Committee necessitates such
action. Any determination made under this Article XI by the Committee shall
be final and conclusive.
24
<PAGE>
The issuance by the Company of shares of any class, or securities
convertible into shares of any class, for cash or property, or for labor or
services, either upon direct sale or upon the exercise of rights or warrants
to subscribe therefor, or upon conversion of shares or obligations of the
Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the
maximum number of shares as to which Options, SARs, Performance Shares and
Share Awards may be granted, the per individual limitations on the number of
shares for which Options, SARs, Performance Shares and Share Awards may be
granted or the terms of outstanding Share Awards, Options, Performance
Shares, Incentive Awards or SARs.
The Committee may make Share Awards and may grant Options, SARs,
Performance Shares, and Incentive Awards in substitution for performance
shares, phantom shares, stock awards, stock options, stock appreciation
rights, or similar awards held by an individual who becomes an employee of
the Company or an Affiliate in connection with a transaction described in
the first paragraph of this Article XII. Notwithstanding any provision of
the Plan (other than the limitation of Section 5.02), the terms of such
substituted Share Awards or Option, SAR, Performance Shares or Incentive
Award grants shall be as the Committee, in its discretion, determines is
appropriate.
ARTICLE XII
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
-----------------------------------------------------
No Option or SAR shall be exercisable, no Common Shares shall be
issued, no certificates for Common Shares shall be delivered, and no payment
shall be made under this Plan except in compliance with all applicable
federal and state laws and regulations (including, without limitation,
withholding tax requirements), any listing agreement to which the Company
25
<PAGE>
is a party, and the rules of all domestic stock exchanges on which the
Company's shares may be listed. The Company shall have the right to rely on
an opinion of its counsel as to such compliance. Any share certificate
issued to evidence Common Shares when a Share Award is granted, a
Performance Share is settled or for which an Option or SAR is exercised may
bear such legends and statements as the Administrator may deem advisable to
assure compliance with federal and state laws and regulations. No Option or
SAR shall be exercisable, no Share Award or Performance Share shall be
granted, no Common Share shall be issued, no certificate for shares shall be
delivered, and no payment shall be made under this Plan until the Company
has obtained such consent or approval as the Administrator may deem
advisable from regulatory bodies having jurisdiction over such matters.
ARTICLE XIII
GENERAL PROVISIONS
------------------
13.01. EFFECT ON EMPLOYMENT AND SERVICE
--------------------------------
Neither the adoption of this Plan, its operation, nor any documents
describing or referring to this Plan (or any part thereof), shall confer
upon any individual any right to continue in the employ or service of the
Company or an Affiliate or in any way affect any right and power of the
Company or an Affiliate to terminate the employment or service of any
individual at any time with or without assigning a reason therefor.
13.02. UNFUNDED PLAN
-------------
The Plan, insofar as it provides for grants, shall be unfunded, and
the Company shall not be required to segregate any assets that may at any
time be represented by grants under this Plan. Any liability of the Company
to any person with respect to any grant under this Plan shall be based
solely upon any contractual obligations that may be created pursuant to this
Plan. No such
26
<PAGE>
obligation of the Company shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of the Company.
13.03. RULES OF CONSTRUCTION
---------------------
Headings are given to the articles and sections of this Plan solely
as a convenience to facilitate reference. The reference to any statute,
regulation, or other provision of law shall be construed to refer to any
amendment to or successor of such provision of law.
13.04. CERTAIN REDUCTION OF PARACHUTE PAYMENTS
---------------------------------------
Any benefit, payment, accelerated vesting or other right under this
Plan may constitute a "parachute payment" (as defined in Code Section
280G(b)(2)(A), but without regard to Code Section 280G(b)(2)(A)(ii)), with
respect to which a Participant may incur a liability under Code Section
4999. In accordance with the terms of an Agreement, the Company shall
reduce any such parachute payments if, and only to the extent that, a
reduction will allow the Participant to receive a greater "net after-tax
amount" than such Participant would receive absent a reduction. For
purposes of this Section 13.04, "net after-tax amount" means the amount of
any parachute payments, net of taxes imposed under Code Sections 1, 3101(b)
and 4999 and any state or local income taxes applicable to the Participant.
The determination of the net after-tax amount shall be calculated by using
the top marginal rates of federal, state and local income taxes and
employment taxes applicable to the Participant's taxable income in effect
for the year in which the determination is made. The determination of any
reduction pursuant to this Section 13.04 must be made by the Company in good
faith, before any amount is due and payable to the Participant.
27
<PAGE>
ARTICLE XIV
AMENDMENT
---------
The Board may amend or terminate this Plan from time to time;
provided, however, that no amendment may become effective until shareholder
approval is obtained if the amendment increases the aggregate number of
Common Shares that may be issued under the Plan. No amendment shall, without
a Participant's consent, adversely affect any rights of such Participant
under any outstanding Share Award, Performance Share award, Option, SAR or
Incentive Award outstanding at the time such amendment is made.
ARTICLE XV
DURATION OF PLAN
----------------
No Share Award, Performance Share award, Option, SAR or Incentive
Award may be granted under this Plan more than ten years after the earlier
of the date that the Plan is adopted by the Board or is approved by the
Company's shareholders as provided in Article XVII. Share Awards,
Performance Shares, Options, SARs and Incentive Awards granted before that
date shall remain valid in accordance with their terms.
ARTICLE XVI
EFFECTIVE DATE OF PLAN
----------------------
Options (including associates Performance Based Dividend Equivalent
Rights), SARs, Performance Shares and Incentive Awards may be granted under
this Plan upon its adoption by the Board, provided that no Option, SAR,
Performance Shares or Incentive Award shall be effective or exercisable
unless this Plan is approved by a majority of the votes cast by the
Company's shareholders, voting either in person or by proxy, at a duly held
shareholders'
28
<PAGE>
meeting at which a quorum is present. Share Awards may be granted under this
Plan upon the later of its adoption by the Board or its approval by
shareholders in accordance with the preceding sentence.
29
<PAGE>
EXHIBIT 10.8
FORM OF
HUDSON HOTELS TRUST
TRUSTEES' SHARE INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS............................................... 1
1.01. Acceleration Date........................................ 1
1.02. Acquiring Person......................................... 1
1.03. Administrator............................................ 1
1.04. Affiliate................................................ 1
1.05. Associate................................................ 1
1.06. Board.................................................... 2
1.07. Change in Control........................................ 2
1.08. Code..................................................... 2
1.09. Common Shares............................................ 2
1.10. Company.................................................. 2
1.11. Continuing Trustee....................................... 2
1.12. Control Affiliate........................................ 3
1.13. Control Change Date...................................... 3
1.14. Disabled................................................. 3
1.15. Exchange Act............................................. 3
1.16. Fair Market Value........................................ 3
1.17. First Award Date......................................... 4
1.18. Founding Trustee......................................... 4
1.19. Option................................................... 4
1.20. Participant.............................................. 4
1.21. Person................................................... 5
1.22. Plan..................................................... 5
1.23. Related Entity........................................... 5
1.24. Share Award.............................................. 5
1.25. Trustee.................................................. 5
ARTICLE II PURPOSES................................................. 6
ARTICLE III ADMINISTRATION.......................................... 6
ARTICLE IV SHARES SUBJECT TO PLAN................................... 7
4.01. Aggregate Limit.......................................... 7
4.02. Reallocation of Shares................................... 7
ARTICLE V OPTIONS................................................... 7
5.01. Grants................................................... 7
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.02. Option Price and Payment................................. 7
5.03. Exercise................................................. 8
5.04. Maximum Option Period.................................... 9
5.05. Limited Transferability.................................. 9
5.06. Shareholder Rights....................................... 10
5.07. Shares Subject to Options................................ 10
ARTICLE VI SHARE AWARDS............................................. 10
6.01. Grants................................................... 10
6.02. Vesting.................................................. 10
6.03. Transferability.......................................... 11
6.04. Shareholder Rights....................................... 11
6.05. Common Shares Subject to Awards.......................... 12
ARTICLE VII ADJUSTMENT UPON CHANGE IN COMMON SHARES................. 12
ARTICLE VIII COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY
BODIES................................................ 13
ARTICLE IX GENERAL PROVISIONS....................................... 13
9.01. Unfunded Plan............................................ 13
9.02. Rules of Construction.................................... 14
9.03. Notice................................................... 14
9.04. Certain Reduction of Parachute Payments.................. 14
ARTICLE X AMENDMENT................................................. 15
ARTICLE XI DURATION OF PLAN......................................... 15
ARTICLE XII EFFECTIVE DATE OF PLAN.................................. 15
</TABLE>
ii
<PAGE>
ARTICLE I
DEFINITIONS
-----------
1.01. ACCELERATION DATE
-----------------
Acceleration Date means the earlier of (i) the date that the Board
approves a transaction or series of transactions which, if consummated, would
result in a Change in Control or (ii) the date that an agreement is entered into
with respect to a transaction or series of transactions which, if consummated,
would result in a Change in Control.
1.02. ACQUIRING PERSON
----------------
Acquiring Person means that a Person, considered alone or together with
all Control Affiliates and Associates of that Person, is or becomes directly or
indirectly the beneficial owner of securities representing at least thirty
percent (30%) of the Company's then outstanding securities entitled to vote
generally in the election of the Board.
1.03. ADMINISTRATOR
-------------
Administrator means the Trustee or Trustees who are appointed by the
Board to administer the Plan, none of whom may be Participants.
1.04. AFFILIATE
---------
Affiliate means any "subsidiary" or "parent" corporation (within the
meaning of Section 424 of the Code) of the Company, including an entity that
becomes an Affiliate after the adoption of this Plan.
1.05. ASSOCIATE
---------
Associate, with respect to any Person, is defined in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act, as amended as of January
1, 1990. An Associate does not include the Company or a majority-owned
subsidiary of the Company.
1
<PAGE>
1.06. BOARD
-----
Board means the Board of Trustees of the Company.
1.07. CHANGE IN CONTROL
-----------------
Change in Control means (i) a Person is or becomes an Acquiring Person;
(ii) a Person enters into an agreement that would result in that Person's
becoming an Acquiring Person; (iii) at least fifty percent (50%) of the
Company's total assets on a consolidated basis, as reported in the Company's
consolidated financial statements filed with the Securities and Exchange
Commission, is sold or transferred (in a single transaction or series of related
transactions) to one or more Persons; (iv) the Company is merged, consolidated
or reorganized into or with, or effects a statutory share exchange with, another
Person, regardless of whether the Company is the surviving or resulting entity
after the merger, consolidation, reorganization or statutory share exchange; or
(v) the Continuing Trustees cease for any reason to constitute a majority of the
Board.
1.08. CODE
----
Code means the Internal Revenue Code of 1986, as amended.
1.09. COMMON SHARES
-------------
Common Shares means the common shares of the Company.
1.10. COMPANY
-------
Company means Hudson Hotels Trust.
1.11. CONTINUING TRUSTEE
------------------
Continuing Trustee means any member of the Board, while a member of the
Board and (i) who was a member of the Board immediately following the Company's
initial public offering of Common Shares, or (ii) whose nomination for or
election to the Board was recommended or approved by a majority of the
Continuing Trustees.
2
<PAGE>
1.12. CONTROL AFFILIATE
-----------------
Control Affiliate, with respect to any Person, means an affiliate as
defined in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act, as amended as of January 1, 1990.
1.13. CONTROL CHANGE DATE
-------------------
Control Change Date means the date on which a Change in Control occurs.
If a Change in Control occurs on account of a series of transactions, the
"Control Change Date" is the date of the last of such transactions.
1.14. DISABLED
--------
Disabled means permanently and totally disabled within the meaning of
Code Section 22(e)(3).
1.15. EXCHANGE ACT
------------
Exchange Act means the Securities Exchange Act of 1934, as amended and as
in effect from time to time.
1.16. FAIR MARKET VALUE
-----------------
Fair Market Value means, on any given date, the current fair market value
of a Common Share as determined pursuant to subsection (a), (b) or (c) below.
(a) While the Company is a Non-Public Company, Fair Market Value shall
be determined by the Administrator using any reasonable method in good faith.
(b) While the Company is a Public Company, Fair Market Value shall be
determined as follows: if the Common Shares are not listed on an established
stock exchange, the Fair Market Value shall be the reported "closing" price of a
Common Share in the New York over-the-counter market as reported by the National
Association of Securities Dealers, Inc. If the Common Shares are listed on an
established stock exchange or exchanges, Fair Market Value
3
<PAGE>
shall be deemed to be the highest closing price of a Common Share reported on
that stock exchange or exchanges or, if no sale of Common Shares shall be made
on any stock exchange on that day, then the next preceding day on which there
was a sale. For purposes of this definition, the term "Public Company" means an
entity that has sold securities pursuant to an effective registration statement
on Form S-11 filed pursuant to the Securities Act of 1933, as amended and the
term "Non-Public Company" means an entity that has never sold securities
pursuant to an effective registration statement on Form S-11 filed pursuant to
the Securities Act of 1933, as amended.
(c) Notwithstanding the foregoing, Fair Market Value on the First Award
Date shall be the initial public offering price of the Common Shares.
1.17. FIRST AWARD DATE
----------------
First Award Date means the date that the registration statement relating
to the Company's initial public offering of Common Shares is declared effective
by the Securities and Exchange Commission.
1.18. FOUNDING TRUSTEE
----------------
Founding Trustee means a Participant who is a member of the Board on the
First Award Date.
1.19. OPTION
------
Option means an option that entitles the holder to purchase Common Shares
from the Company on the terms set forth in Article V of this Plan.
1.20. PARTICIPANT
-----------
Participant means a member of the Board who is not an employee of the
Company or an Affiliate.
4
<PAGE>
1.21. PERSON
------
Person means any human being, firm, corporation, partnership, or other
entity. Person also includes any human being, firm, corporation, partnership,
or other entity as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act, as amended as of January 1, 1990. The term Person does not include the
Company or any Related Entity, and the term Person does not include any
employee-benefit plan maintained by the Company or by any Related Entity, and
any person or entity organized, appointed, or established by the Company or by
any subsidiary for or pursuant to the terms of any such employee-benefit plan,
unless the Board determines that such an employee-benefit plan or such person or
entity is a Person.
1.22. PLAN
----
Plan means the Hudson Hotels Trust Trustees' Share Incentive Plan.
1.23. RELATED ENTITY
--------------
Related Entity means any entity that is part of a controlled group of
corporations or is under common control with the Company within the meaning of
Code Section 1563(a), 414(b) or 414(c).
1.24. SHARE AWARD
-----------
Share Award means an award of Common Shares granted pursuant to Article
VI.
1.25. TRUSTEE
-------
Trustee means a member of the Board of Trustees of the Company.
5
<PAGE>
ARTICLE II
PURPOSES
--------
The Plan is intended (i) to assist the Company in recruiting and
retaining non-employee Trustees and (ii) to promote a greater identity of
interest between Participants and shareholders by enabling Participants to
participate in the Company's future success.
ARTICLE III
ADMINISTRATION
--------------
The Plan shall be administered by the Administrator. The Administrator
shall have authority to grant Options and Share Awards upon such terms (not
inconsistent with the provisions of the Plan) as the Administrator may consider
appropriate. In addition, the Administrator shall have complete authority to
interpret all provisions of the Plan; to adopt, amend, and rescind rules and
regulations pertaining to the administration of the Plan; and to make all other
determinations necessary or advisable for the administration of the Plan. The
express grant in the Plan of any specific power to the Administrator shall not
be construed as limiting any power or authority of the Administrator. Any
decision made, or action taken, by the Administrator or in connection with the
administration of the Plan shall be final and conclusive. No Trustee serving as
Administrator shall be liable for any act done in good faith with respect to the
Plan. All expenses of administering the Plan shall be borne by the Company.
6
<PAGE>
ARTICLE IV
SHARES SUBJECT TO PLAN
----------------------
4.01. AGGREGATE LIMIT
---------------
The maximum aggregate number of Common Shares that may be issued under
this Plan pursuant to the exercise of Options and the grant of Share Awards is
114,000 shares, subject to adjustment as provided in Article VII.
4.02. REALLOCATION OF SHARES
----------------------
If an Option is terminated, in whole or in part, for any reason other
than its exercise, the number of Common Shares allocated to that Option or
portion thereof may be reallocated to other Options and Share Awards to be
granted under this Plan. If a Share Award is forfeited, in whole or in part, for
any reason, the number of Common Shares allocated to the Share Award or portion
thereof may be reallocated to other Options and Share Awards to be granted under
this Plan.
ARTICLE V
OPTIONS
-------
5.01. GRANTS
------
Each Founding Trustee shall be granted an Option for 15,000 Common
Shares on the First Award Date. Each other Participant shall be granted, on the
date that he or she is first elected or appointed to the Board, an Option for
15,000 Common Shares.
5.02. OPTION PRICE AND PAYMENT
------------------------
The price per share for Common Shares purchased on the exercise of an
Option shall be the Fair Market Value on the date that the Option is granted.
Payment of the Option price shall be made in cash, cash equivalent acceptable to
the Administrator, by the surrender to the
7
<PAGE>
Company or attestation of ownership of Common Shares or a combination thereof.
If Common Shares are used in payment of the Option price, the Common Shares that
are surrendered or that are the subject of attestation must have an aggregate
Fair Market Value (determined as of the day preceding the exercise date) that,
together with any cash or cash equivalent paid, is not less than the Option
price for the number of Common Shares for which the Option is being exercised.
5.03. EXERCISE
--------
(a) Subject to the provisions of Article VII and Section 5.03(b), an
Option granted under Section 5.01 shall be exercisable with respect to three
thousand (3,000) Common Shares on the first anniversary of the date on which
such Option was granted, provided that the Participant is then a member of the
Board, and with respect to an additional three thousand (3,000) Common Shares
subject to such Option on each of the next four successive anniversaries of the
date such Option was granted, provided that the Participant is a member of the
Board on the applicable anniversary. Except as provided in Section 5.03(b), a
Participant shall forfeit his or her Option to the extent it is not exercisable
under the preceding sentence when he or she ceases to serve on the Board.
(b) Notwithstanding Section 5.03(a), all outstanding Options
previously granted under the Plan shall be exercisable, in whole or in part, on
a Control Change Date or, if sooner, an Acceleration Date and shall remain
exercisable thereafter in accordance with the terms of this Plan and the
applicable Agreement; and an Option held by a Participant who ceases to serve on
the Board on account of his or her death or becoming Disabled will become
exercisable, in whole or in part, as of the date Participant ceases to serve on
the Board. To the extent that an Option has become exercisable in accordance
with this Section 5.03(b) or Section 5.03(a), as applicable, it may be exercised
whether or not the Participant is a member of the Board on the date or dates of
exercise. An Option may be exercised with respect to any number of whole
8
<PAGE>
Common Shares less than the full number for which the Option could be exercised.
A partial exercise of an Option shall not affect the right to exercise the
Option from time to time in accordance with this Plan with respect to the
remaining Common Shares subject to the Option. All Options shall be evidenced by
agreements that shall be subject to the applicable provisions of this Plan and
to such other provisions as the Administrator may adopt.
5.04. MAXIMUM OPTION PERIOD
---------------------
The period during which an Option may be exercised shall be ten years
from the date of grant. In the event of the Participant's death, the Option may
be exercised by the Participant's estate, or by such person or persons who
succeed to the Participant's rights by will or the laws of descent and
distribution or to whom the Option is transferred pursuant to Section 5.05,
following the Participant's death until the expiration of the Option period.
Participant's estate or such person or persons may exercise the Option with
respect to all or part of the number of Common Shares for which Participant
could have exercised the Option on the date of his or her death.
5.05. LIMITED TRANSFERABILITY
-----------------------
If requested by a Participant and agreed to by the Administrator, an
Option granted under this Plan may be transferred by a Participant to the
Participant's children, grandchildren, spouse, one or more trusts for the
benefit of such family members or partnerships in which such family members are
the only partners (each person or entity, a "Permitted Transferee"), on such
terms and conditions as may be permitted under Securities and Exchange
Commission Rule 16b-3 as in effect from time to time. The holder of an Option
transferred pursuant to this Section shall be bound by the same terms and
conditions that governed the Option during the period that it was held by the
Participant; provided, however, that a Permitted Transferee may not transfer the
Option except by will or the laws of descent and distribution. Except for other
transfers expressly permitted under this Section 5.05, an Option granted under
this Plan may be
9
<PAGE>
transferred only by will or by the laws of descent and distribution. No right or
interest of a Participant in any Option shall be liable for, or subject to, any
lien, obligation, or liability of such Participant.
5.06. SHAREHOLDER RIGHTS
------------------
No Participant shall have any rights as a shareholder with respect to
Common Shares subject to his or her Option until the date of exercise of such
Option.
5.07. SHARES SUBJECT TO OPTIONS
-------------------------
Upon the exercise of any Option, the Company may deliver to the
Participant (or the Participant's broker if the Participant so directs), Common
Shares from its previously authorized but unissued Common Shares.
ARTICLE VI
SHARE AWARDS
------------
6.01. GRANTS
------
Each Founding Trustee shall be granted an Share Award for 3,500 Common
Shares on the First Award Date. Each other Participant shall be granted, on the
date that he or she is first elected or appointed to the Board, an Option for
3,500 Common Shares.
6.02. VESTING
-------
(a) Seven hundred (700) of the Common Shares issued to a Participant
under Section 6.01 shall become fully vested on the first anniversary of the
date the Share Award is granted if the Participant, if Participant is then a
member of the Board, and an additional seven hundred (700) Common Shares subject
to the Share Award shall become vested on each of the next four successive
anniversaries of the date such Share Award was granted, provided that the
Participant is a member of the Board on the applicable anniversary. Except as
provided in Section 6.02(b), a
10
<PAGE>
Participant shall forfeit any Common Shares that have not vested under the
preceding sentence when he or she ceases to serve on the Board.
(b) Notwithstanding Section 6.02(a), all Common Shares subject to
outstanding Share Awards previously granted under the Plan shall become fully
vested a Control Change Date or, if sooner, an Acceleration Date; and all Common
Shares subject to a Share Award held by a Participant who ceases to serve on the
Board on account of his or her death or becoming Disabled will become fully
vested as of the date Participant ceases to serve on the Board. All Share Awards
shall be evidenced by agreements that shall be subject to the applicable
provisions of this Plan and to such other provisions as the Administrator may
adopt.
6.03. TRANSFERABILITY
---------------
A Participant may not pledge, exchange, hypothecate, bequeath, or
otherwise transfer any Common Shares issued to such Participant under the Plan
until such Common Shares are vested pursuant to Section 6.02(a) or 6.02(b), as
applicable. Any transfer of Common Shares permitted under this Plan is subject
to restrictions imposed by federal and state securities and other laws.
6.04. SHAREHOLDER RIGHTS
------------------
Until such time as a Common Share issued to a Participant under this Plan
is vested pursuant to Section 6.02(a) or Section 6.02(b), as applicable, the
Company shall retain custody of the certificate evidencing such Common Share and
shall hold a stock power endorsed in blank with respect to such Common Share,
which stock power is to be provided to the Company by the Participant as soon as
reasonably possible after the date on which Common Shares are issued to him. A
Participant will have the right to vote all Common Shares issued to him under
this Plan and to receive all dividends thereon, for as long as the Participant
continues to serve as a member of the Board, notwithstanding that a portion of
the Common Shares issued to the Participant is not vested pursuant to Section
6.02(a) or Section 6.02(b), as applicable. On the
11
<PAGE>
date that the Participant ceases to be a member of the Board, all voting rights
and all rights to receive dividends with respect to any Shares not yet vested
pursuant to Section 6.02(a) or 6.02(b), as applicable, shall immediately
terminate.
6.05. COMMON SHARES SUBJECT TO AWARDS
-------------------------------
Upon the award of Common Shares in accordance with this Article VI, the
Company may issue Common Shares from its authorized but unissued Common Shares.
ARTICLE VII
ADJUSTMENT UPON CHANGE IN COMMON SHARES
---------------------------------------
The maximum number of shares as to which Options and Share Awards may be
granted under this Plan and the terms of outstanding Options and Share Awards
shall be revised as the Administrator shall determine to be equitably required
in the event that (a) the Company (i) effects one or more share dividends, share
split-ups, subdivisions or consolidation of shares or (ii) engages in a
transaction to which Section 424 of the Code applies or (b) there occurs any
other event which, in the judgment of the Administrator, necessitates such
action. Any determination made under this Article VII by the Administrator shall
be final and conclusive.
The issuance by the Company of shares of any class, or securities
convertible into shares of any class, for cash or property, or for labor or
services, either upon direct sale or upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number of shares
that will be issued as of any date of grant specified in this Plan.
12
<PAGE>
ARTICLE VIII
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
-----------------------------------------------------
No Common Shares shall be issued and no certificates for Common Shares
shall be delivered under the Plan except in compliance with all applicable
federal and state laws and regulations (including, without limitation,
withholding tax requirements), any listing agreement to which the Company is a
party, and the rules of all domestic stock exchanges on which the Company's
Common Shares may be listed. The Company shall have the right to rely on an
opinion of its counsel as to such compliance. Any certificate issued to evidence
Common Shares issued under the Plan may bear such legends and statements as the
Administrator may deem advisable to assure compliance with federal and state
laws and regulations. No Common Shares shall be issued and no certificate for
Common Shares shall be delivered under the Plan until the Company has obtained
such consent or approval as the Administrator may deem advisable from regulatory
bodies having jurisdiction over such matters.
ARTICLE IX
GENERAL PROVISIONS
------------------
9.01. UNFUNDED PLAN
-------------
The Plan, insofar as it provides for awards, shall be unfunded, and the
Company shall not be required to segregate any assets that may at any time be
represented by awards under the Plan. Any liability of the Company to any person
with respect to any award to be made under the Plan shall be based solely upon
any contractual obligations that may be created pursuant to the Plan. No such
obligation of the Company shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of the Company.
13
<PAGE>
9.02. RULES OF CONSTRUCTION
---------------------
Headings are given to the articles and sections of the Plan solely as a
convenience to facilitate reference. The reference to any statute, regulation,
or other provision of law shall be construed to refer to any amendment to or
successor of such provision of law.
9.03. NOTICE
------
Unless specifically required by the terms of this Plan, notice to the
Company's shareholders, the Participants, or any other person or entity of an
action by the Board or the Administrator with respect to the Plan is not
required before or after such action occurs.
9.04. CERTAIN REDUCTION OF PARACHUTE PAYMENTS
---------------------------------------
Any benefit, payment, accelerated vesting or other right under this Plan
may constitute a "parachute payment" (as defined in Code Section 280G(b)(2)(A),
but without regard to Code Section 280G(b)(2)(A)(ii)), with respect to which a
Participant may incur a liability under Code Section 4999. In accordance with
the terms of an Agreement, the Company shall reduce any such parachute payments
if, and only to the extent that, a reduction will allow the Participant to
receive a greater "net after-tax amount" than such Participant would receive
absent a reduction. For purposes of this Section 8.04, "net after- tax amount"
means the amount of any parachute payments, net of taxes imposed under Code
Sections 1, 1401 and 4999 and any state or local income taxes applicable to the
Participant. The determination of the net after-tax amount shall be calculated
by using the top marginal rates of federal, state and local income taxes and
self-employment taxes applicable to the Participant's taxable income in effect
for the year in which the determination is made. The determination of any
reduction pursuant to this Section 9.04 must be made by the Company in good
faith, before any amount is due and payable to the Participant.
14
<PAGE>
ARTICLE X
AMENDMENT
---------
The Board may amend from time to time or terminate the Plan at any time;
provided, however, that no amendment may become effective until shareholder
approval is obtained if the amendment increases the aggregate number of Common
Shares that may be issued under the Plan. No amendment shall, without a
Participant's consent, adversely affect any rights of such Participant under any
Options granted under this Plan outstanding at the time such amendment is made.
ARTICLE XI
DURATION OF PLAN
----------------
No Options or Share Awards may be granted under the Plan after December
31, 2008. Options and Share Awards granted during the term of the Plan shall
remain in effect in accordance with their terms notwithstanding the expiration
or earlier termination of the Plan.
ARTICLE XII
EFFECTIVE DATE OF PLAN
----------------------
Common Shares may be issued under the Plan on the First Award Date,
provided that the Plan has been approved (at a duly held shareholders' meeting
at which a quorum is present) by a majority of the votes cast by the Company's
shareholders, voting either in person or by proxy, or by unanimous consent of
the Company's shareholders. Options may be granted under this Plan upon its
adoption by the Board, but no Option will be effective or exercisable unless
this Plan is approved by shareholders in accordance with the preceding sentence.
15
<PAGE>
EXHIBIT 10.9
FORM OF
-------
GUARANTY OF LEASE
-----------------
THIS GUARANTY, dated as of __________________ __, 1998, by and among
HUDSON HOTELS TRUST, a Maryland real estate investment trust (the "REIT") and
----
HUDSON HOTELS CORPORATION (the "Guarantor"), and HUDSON HOTELS LIMITED
---------
PARTNERSHIP, L.P., a Virginia limited partnership (the "Lessor"), recites and
------
provides.
RECITALS
- --------
Simultaneously with the execution hereof, the Lessor and HHC
Management Corp., a New York corporation, and wholly-owned subsidiary of
Guarantor (the "Lessee"), have executed the Lease Agreements of even date
------
herewith listed on the attached Schedule A, and, together with any future leases
that may be entered into between the Lessor or its Affiliates (as herein
defined), as lessor, and the Lessee or other Affiliates (as herein defined) of
the Guarantor, as lessee, (collectively the "Leases", and individually, a
------
"Lease") for the lease of parcels of land, together with all appurtenances
thereto, improvements thereon and intangible and tangible personal property
related thereto as described in each Lease (the "Leased Premises").
As a condition to executing the Leases, as well as any future leases
which may be entered into between the Lessor or its Affiliates(as defined
herein), as lessor, and the Lessee or other Affiliates (as herein defined) of
the Guarantor, as lessee, the Lessor has required the Guarantor to guarantee the
prompt and full payment of rent and all other amounts payable to the Lessor
under each Lease, and the prompt and complete performance of all covenants
contained in each Lease on the Lessee's part to be performed. Because of the
substantial economic benefits accruing to the Guarantor by virtue of the Lessor
leasing the Leased Premises to the Lessee, the Guarantor desires to guarantee
such payment and performance, all on the following terms and conditions.
GUARANTY
- --------
NOW, THEREFORE, for and in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor hereby represents, warrants and agrees as follows,
intending to be legally bound:
1
<PAGE>
ARTICLE I
REPRESENTATION
AND WARRANTIES OF THE GUARANTOR
The Guarantor makes the following representations and warranties, upon
each of which the Lessor, its successors and assigns are entitled to rely and
have relied, and the Guarantor will endeavor in good faith to cause such
representations and warranties to remain true and correct at all times during
the term of this Guaranty as if then made.
Section 1.1. No Conflicts; Defaults. The execution and delivery of
----------------------
this Guaranty and the performance by the Guarantor of its obligations hereunder
and the consummation of the transactions contemplated herein are within the
corporate powers of the Guarantor and will not conflict with or constitute a
breach of the Guarantor's articles of incorporation or by-laws. Except for
consents and approvals obtained by the Guarantor, true, correct and complete
copies of which have been delivered by the Guarantor to the Lessor prior to the
execution and delivery of this Guaranty, neither the execution, acknowledgment
and delivery of, nor the performance of its obligations under, this Guaranty,
will conflict with or violate, or constitute a default or require any consent or
waiver under, any material provision of any mortgage, deed of trust, evidence of
indebtedness, order, decree or agreement to which the Guarantor is a party or by
which the Guarantor or any substantial part of the property of the Guarantor is
bound.
Section 1.2. Authorization; Enforceability. This Guaranty has been
-----------------------------
duly authorized by all necessary corporate action on behalf of the Guarantor and
has been duly executed and delivered by Guarantor and is a legal, valid and
binding instrument enforceable against the Guarantor in accordance with its
terms, as the same may be limited by applicable bankruptcy, insolvency,
reorganization and similar laws of general application relating to or affecting
creditors' rights generally and general remedies of equity.
Section 1.3. Representations and Warranties. The Guarantor has made
------------------------------
its own independent investigation of the financial condition and affairs of the
Lessee and has reviewed the Leases, including the rent terms thereof, prior to
entering into this Guaranty and will continue to make its appraisal of the
creditworthiness of the Lessee, and in entering into this Guaranty the Guarantor
has not relied upon any representation of the Lessor as to the financial
condition, operation or creditworthiness of the Lessee or with respect to any
other matter. The Guarantor agrees that the Lessor shall have no duty or
responsibility now or hereafter to make any investigation or appraisal of the
Lessee on behalf of the Guarantor or to provide the Guarantor with any credit or
other information which may come to the Lessor's attention.
Section 1.4. Litigation; Violations of Law. Except as disclosed in
-----------------------------
the Guarantor's Annual Report on Form 10-KSB for the year ended December 31,
1997, filed with the Securities and Exchange Commission, there are no actions,
suits or proceedings of a material nature pending or overtly threatened against
or affecting the Guarantor, and no event has occurred
2
<PAGE>
(including, without limitation, the execution, acknowledgment and delivery of
this Guaranty and the consummation of the transactions contemplated hereby)
which will violate, be in conflict with, result in the breach of or constitute
(with or without notice or the passage of time, or both) a default under any
judicial decision, statute, ruling, direction, rule, regulation, permit,
certificate or ordinance of any governmental authority in any way applicable to
the Guarantor. The Guarantor is not in default with respect to any judgment,
order, writ, injunction, decree or demand of any court, arbitrator,
administrative agency or other governmental or quasi-governmental authority.
Section 1.5. Information. All information either (i) filed by
-----------
Guarantor with the Securities and Exchange Commission or (ii) provided by
Guarantor to Lessor, is true and complete in all respects and fully and
accurately presents the financial condition of the Guarantor as of the dates
thereof; such information does not omit any statement of material fact that
would make such information misleading; and no material adverse change has
occurred in the financial condition reflected therein or the Guarantor's
business since the dates thereof.
Section 1.6. Insolvency Matters. No bankruptcy, reorganization,
------------------
arrangement, readjustment of debt, insolvency or other proceeding has been
commenced or threatened by or against the Guarantor or consented to or
acquiesced in by the Guarantor, and no judgment has been entered against the
Guarantor which has not been satisfied or otherwise discharged.
Section 1.7. Organization. The Guarantor is a corporation duly
------------
organized, validly existing and in good standing subsisting under the laws of
the state of New York and qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the ownership of its assets or
the conduct of its business requires such qualification and has the power to
enter into this Guaranty and to perform its obligations hereunder and by proper
corporate action has duly authorized the execution and delivery of this Guaranty
and the performance of its obligations hereunder.
Section 1.8. Taxes. All material tax returns and reports required by
-----
law to be filed by the Guarantor have been duly filed, and no taxes,
assessments, contributions, fees or other governmental charges upon it or any of
its assets or income which are due and payable thereon are delinquent, except to
the extent such taxes, assessments, contributions, fees or charges are being
contested in good faith and by proper proceedings and against which appropriate
reserves are being maintained.
Section 1.9. Cross Default. The Guarantor acknowledges and agrees
-------------
that the Lease is cross defaulted with other leases guaranteed by the Guarantor.
3
<PAGE>
ARTICLE II
COVENANTS OF THE GUARANTOR
Section 2.1. Definitions.
-----------
(a) The term "Indebtedness" shall include all amounts due and to
become due from the Lessee to the Lessor under the Leases, whether such amounts
are direct or indirect, fixed or contingent, or liquidated or unliquidated
obligations of the Lessee including, without limitation, base rent, percentage
rent, additional charges, indemnification payments, damages, interest, service,
finance and other charges, the Lessor's fees, impositions required to be paid by
the Lessee, and other sums, charges, costs of collection, attorneys' fees and
expenses, other expenses of the Lessor due it under the Leases and amounts
advanced by the Lessor to discharge obligations of the Lessee, whether such
amounts are from time to time reduced, thereafter increased or entirely
extinguished and thereafter reincurred.
(b) The term "Obligations" shall mean all obligations, agreements,
covenants, conditions and liabilities of the Lessee set forth in each Lease.
(c) The term "Lessee", as used herein, shall mean any successor in
interest, assignee, or transferee of Lessee's interest under each Lease and any
Affiliate (as herein defined) of the Guarantor which is a lessee under any lease
with the lessor or any Affiliate (as herein defined) of the Lessor.
(d) The term "Lessor", as used herein shall include any Affiliate (as
herein defined) of the Lessor.
Section 2.2. Guaranty of Payment and Performance. The Guarantor hereby
-----------------------------------
unconditionally and absolutely guarantees to the Lessor the prompt and full
payment of all Indebtedness and the prompt and complete performance of all
Obligations of the Lessee to the Lessor, under and in accordance with the terms
and conditions hereof.
Section 2.3. Nature of Guaranty. This is a guaranty of payment and not
------------------
merely of collection.
Section 2.4. Enforcement of Guaranty in First Instance. The Lessor may
-----------------------------------------
collect the Indebtedness, or any part thereof, from the Guarantor without first
exercising its rights against the Lessee, any other guarantor or any collateral
that the Lessor may hold or have access to, and the Guarantor hereby waives any
right to require the Lessor to attempt, by bringing any action or proceeding
against Lessee or otherwise, to collect the Indebtedness or any part thereof
from the Lessee or any other guarantor or to attempt to realize upon any
collateral that the Lessor may hold or have access to before enforcing the
obligations of the Guarantor hereunder.
4
<PAGE>
Section 2.5. Lessor's Election to Perform Obligations. After a default by
----------------------------------------
the Lessee in the performance of one or more of the Obligations and the
expiration of any notice and cure period expressly provided for in the Leases,
the Lessor, at its option, may elect to perform or cause to be performed any or
all of the Obligations without first exercising its rights against the Lessee,
any other guarantor or any collateral that the Lessor may hold or have access
to, and the Guarantor hereby waives any right to require the Lessor to attempt,
by bringing any action or proceeding against Lessee or otherwise, to collect the
Indebtedness or any part thereof from the Lessee or any other guarantor or to
attempt to realize upon any collateral that the Lessor may hold or have access
to before performing or causing the performance of any of the Obligations or
enforcing the obligations of the Guarantor hereunder.
Section 2.6. No Subrogation or Contribution. Until all of the Indebtedness
------------------------------
has been paid in full and all of the Obligations have been duly and punctually
performed to the satisfaction of the Lessor, the Guarantor shall not be
subrogated to any right of the Lessor against the Lessee, any other guarantor or
any collateral, and any moneys, property or other consideration received, after
a default by the Lessee under the Lease s, by the Guarantor from the Lessee
prior to payment in full of the Indebtedness and prior to the performance by the
Lessee of all of the Obligations shall be held in trust for the Lessor and shall
be paid or transferred to the Lessor upon demand therefor. The Guarantor agrees
that it will not assert any right of contribution against any other guarantor of
the Indebtedness, whether the obligations of such other guarantor are evidenced
by this Guaranty or other agreement, until such time as all of the Indebtedness
has been paid in full to the Lessor and all of the Obligations have been
performed.
Section 2.7. Waiver of Defenses.
------------------
(a) The Guarantor hereby: (i) waives notice of acceptance of this
Guaranty; (ii) waives presentment, demand, notice of dishonor, protest and
notice of protest; (iii) agrees that the Indebtedness or any part thereof may be
renewed, extended, accelerated, modified or compromised and the Obligations may
be modified or delegated and that any collateral or other security held for the
payment of the Indebtedness or the performance of the Obligations may be
released, exchanged, sold, applied or otherwise dealt with by the Lessor without
notice to the Guarantor and without thereby releasing the Guarantor from any
obligation under this Guaranty; (iv) waives notice of the financial condition or
other status of the Lessee and any other party obligated for the payment of the
Indebtedness or the performance of the Obligations; and (v) waives the benefit
of the homestead exemption as to its obligations set forth herein. This
Guaranty is intended to be a full, complete and perfect guaranty and indemnity
to the Lessor to the extent of and for any Indebtedness and Obligations and to
be valid and enforceable without other or further notice to the Guarantor. The
liability of the Guarantor is absolute and unconditional and is not conditioned
or contingent upon any other party signing this Guaranty or the obtaining of any
security upon any of the Indebtedness or the obtaining of the guaranty of any
other party upon any of the Indebtedness, Obligations or any other matter.
5
<PAGE>
(b) The Guarantor further acknowledges that this Guaranty and the
Guarantor's obligations under this Guaranty are and shall at all times be valid
and enforceable irrespective of (i) any assignment of sublease of any Lease,
(ii) any other agreements or circumstances of any nature whatsoever which might
otherwise constitute a defense (other than a defense of payment) to this
Guaranty and the obligations of the Guarantor under this Guaranty or the
obligations of the Lessee or any other person or party relating to this Guaranty
or the obligations of Guarantor hereunder or otherwise with respect to the
Leases, or (iii) the filing of a petition or the commencement of a case with
respect to the Lessee or the Guarantor under Title 11 of the United States Code,
as now constituted or hereafter amended (the "Bankruptcy Code"), or under any
other applicable Federal or state bankruptcy, insolvency or similar law, or any
modification, impairment, abatement, reduction, release, limitation,
restructure, reinstatement or cure, in whole or in part, of the Obligations
pursuant to an order by a bankruptcy court or other court of competent
jurisdiction in any action, case or proceeding brought under the Bankruptcy Code
or under any other applicable Federal or state bankruptcy, insolvency or similar
law (including, but not limited to any stay imposed pursuant to section 362 of
the Bankruptcy Code), it being expressly acknowledged and agreed by the
Guarantor that if any such modification, impairment, abatement, reduction,
release, limitation, restructure, reinstatement or cure, in whole or part, is so
ordered in any such action, case or proceeding, the Guarantor's obligations
under this Guaranty will nevertheless continue to be determined as if such order
had not been issued (i.e., as if the Lessee were still obligated to pay the
----
Indebtedness and to perform and observe the Obligations strictly in accordance
with the terms, covenants and provisions of the Leases as in existence prior to
the issuance of any such order).
(c) The Guarantor absolutely, unconditionally and irrevocably waives
any and all right to assert any defense, setoff, counterclaim or crossclaim of
any nature whatsoever with respect to this Guaranty or the obligations of the
Lessee or any other person or party relating to this Guaranty or the obligations
of the Guarantor hereunder or otherwise with respect to the Leases in any
action, case or proceeding brought by the Lessor to enforce the obligations of
the Guarantor under this Guaranty (provided, however, that the foregoing
provisions of this sentence shall not be deemed a waiver of the right of the
Guarantor to assert any compulsory counterclaim in any such action, case or
proceeding brought by the Lessor in any state court if such counterclaim is
compelled under local law or rule or procedure, or in a court of the United
States, nor shall the foregoing provisions of this sentence be deemed a waiver
of the right of the Guarantor to assert any claim which would otherwise
constitute a defense, setoff, counterclaim or crossclaim of any nature
whatsoever against the Lessor in any separate action, case or proceeding brought
by the Guarantor against the Lessor).
(d) The Guarantor acknowledges that no oral or other agreements,
understandings, representations or warranties exist with respect to this
Guaranty or with respect to the obligations of the Guarantor under this
Guaranty, except those specifically set forth in this Guaranty, and that this
Guaranty sets forth the entire agreement and understanding of the Guarantor and
the Lessor.
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Section 2.8. Releases. The Lessor shall have the right to waive its rights
--------
against and to release any guarantor or other person or entity that is liable
for payment of the Indebtedness or performance of the Obligations without
affecting (a) the enforceability of this Guaranty against the Guarantor or (b)
any other right or remedy that the Lessor may have against the Guarantor.
Section 2.9. Costs and Expenses.
------------------
(a) The Guarantor hereby agrees to pay to the Lessor all costs and
expenses, including court costs and reasonable attorneys' fees and expenses,
incurred by the Lessor in seeking advice with regard to, or in seeking to
enforce, any of the obligations of the Guarantor hereunder.
(b) The Guarantor will defend, indemnify and hold harmless the Lessor
and its employees, agents, officers and directors, from and against any and all
claims, demands, penalties, causes of action, fines, liabilities, settlements,
damages, costs or expenses of whatever kind or nature, known or unknown,
foreseen or unforeseen, contingent or otherwise (including, without limitation,
reasonable attorneys' fees and expenses, court costs and litigation expenses)
arising out of or in any way related to any failure by the Lessee to promptly
and fully pay the Indebtedness or fully perform, observe and comply with any of
the Obligations.
Section 2.10. Bankruptcy. In the event that any part of the Indebtedness is
----------
collected by the Lessor and because of bankruptcy or other laws relating to
debtors' relief such payment is set aside as a voidable preference or fraudulent
conveyance or the Lessor is otherwise required to repay all or any portion of
the amount so collected to the Lessee or to any trustee, receiver or otherwise,
then this Guaranty shall continue in full force and effect with regard to such
sums or, if previously terminated, shall be reinstated without further act or
instrument and shall thereafter remain in full force and effect, as though such
payment had not been made or such termination had not occurred (as the case may
be), and the amount or amounts so repaid shall become part of the Indebtedness
and shall be guaranteed hereby. In the event an action, case or proceeding is
filed or commenced under the Bankruptcy Code or under any other applicable
Federal or state bankruptcy, insolvency or similar law in regard to the Lessee
or an action, case or proceeding is otherwise commenced for the benefit of the
creditors of the Lessee, this Guaranty shall at all times thereafter remain
effective in regard to any payments or other transfers of assets to the Lessor
received from or on behalf of the Lessee under or in respect of the Indebtedness
which are held voidable on the grounds of preference, fraudulent conveyance or
otherwise, whether or not the Indebtedness has been paid in full or whether or
not any or all of the Obligations have been discharged or released.
Section 2.11. Application of Proceeds. All payments, whether voluntary or
-----------------------
involuntary, received from the Lessee or on account of the Indebtedness from any
other source, including income from and amounts realized on security and
appropriated bank balances, may be applied
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by the Lessor toward the payment of the Indebtedness and in such order of
application as the Lessor may from time to time elect. All payments shall be
conclusively presumed to have been made by the Lessee and no payments shall
operate to reduce the liability of the Guarantor hereunder, unless at the time
such payments are made, express written notice is served upon the Lessor that
such payments are made by the Guarantor in reduction of the liability hereunder.
Section 2.12. Required Notifications. The Guarantor will promptly
----------------------
inform the Lessor in writing upon the commencement of any proceedings by or
against the Guarantor under any applicable bankruptcy, reorganization,
liquidation, insolvency or other similar law now or hereafter in effect or of
any proceeding in which a receiver, liquidator, trustee or other similar
official is sought to be appointed for the Guarantor or any of its assets.
Section 2.13. Survivability. The obligations of the Guarantor
-------------
contained herein shall survive the expiration or earlier termination of the
Lease or any future lease between the Lessor and the Lessee until payment in
full of the Indebtedness and complete performance of all of the Obligations.
Further, no expiration or termination of any Lease, by operation of law or
otherwise, and no re-entry, repossession or removal pursuant to any Lease or
otherwise, and no re-letting of the premises under any Lease shall relieve the
Guarantor of its liabilities and obligations which arise during the terms of the
Leases, all of which shall survive such expiration, termination, re-entry,
repossession, removal or re-letting. The obligations of the Guarantor contained
herein shall survive any assignment of any Lease or sublease of the Leased
Premises and any changes in control of the Lessee or Lessor.
Section 2.14. Guarantor's Assumption of Lessee's Obligations. In the
----------------------------------------------
event of the rejection or disaffirmance of any Lease by the Lessee or the
Lessee's receiver or trustee pursuant to any law affecting creditor's rights,
the Guarantor will, and does hereby (without the necessity of any further
agreement or act), assume all obligations and liabilities of the Lessee under or
arising out of the Leases, to the same extent as if the Guarantor had been
originally named the lessee under the Leases, and there had been no such
rejection or disaffirmance; the Guarantor will confirm such assumption in
writing at the request of the Lessor, upon or after such rejection or
disaffirmance. The Guarantor, upon such assumption, shall have all rights of
the Lessee under the Leases and shall be entitled to a new lease on all of the
terms and conditions of the Leases with respect to the unexpired portion of any
Lease (to the extent permitted by law). The Guarantor will execute and deliver
such documents, as the Lessor may from time to time reasonably require to
evidence such assumption, to confirm this Guaranty and to certify that the
Guarantor are not in default hereunder.
Section 2.15. Existence, etc. So long as any Indebtedness or
--------------
Obligations are outstanding, the Guarantor: (a) shall maintain its corporate
existence and shall not dissolve; (b) shall not sell all or substantially all of
its assets unless it shall receive reasonably equivalent value therefor; and (c)
shall not merge with or into another corporation or entity unless such surviving
corporation or entity is obligated to perform the obligations of the Guarantor
hereunder, assumes
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such obligations in a writing reasonably satisfactory to Lessor and has a net
worth at least equal to that of the Guarantor immediately prior to the merger.
ARTICLE III
EVENTS OF DEFAULT; REMEDIES
Section 3.1. Events of Default. Any of the following occurrences or acts
-----------------
shall constitute an "Event of Default" under this Guaranty:
(a) If the Guarantor shall fail to pay any sum, as and when required
to be paid hereunder following any applicable grace period.
(b) If any representation or warranty made by the Guarantor contained
in this Guaranty or any officer's certificate, notice, certificate, demand or
request delivered hereunder or in connection herewith shall be false or
misleading in any material respect as of the date made or deemed to have been
made.
(c) If the Guarantor fails to perform or observe in any material
respect any covenant, term or condition contained in this Guaranty (other than a
failure described in subparagraphs 3.1(a) or (b) above or an Event of Default
described below) and such failure continues for more than 30 days after the
Guarantor's receipt of notice thereof from the Lessor; provided, however, that
-------- -------
in the case of any such failure which is susceptible of cure but not within the
applicable time period, provided any delay in exercising the Lessor's remedies
hereunder beyond such applicable time period could not have a material adverse
effect on the rights of the Lessor hereunder, no Event of Default shall be
deemed to occur so long as the Guarantor promptly commences to cure such default
within the applicable time period and thereafter diligently and continuously
pursues such cure to completion within 120 days.
(d) If any Guarantor or the Lessee shall file a petition in bankruptcy
or for reorganization or for an arrangement pursuant to any federal or state
law, or shall be adjudicated a bankrupt or become insolvent or shall make a
general 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
proposing the adjudication of the Guarantor or 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 Guarantor or the Lessee
shall consent to or acquiesce in the filing thereof or such petition shall not
be discharged within 60 days after the filing thereof.
(e) If a receiver, trustee or liquidator of the Guarantor or the
Lessee, or of all or substantially all of the assets of the Guarantor or the
Lessee, shall be appointed in any proceeding brought by the Guarantor or the
Lessee, or if any such receiver, trustee or liquidator shall be appointed in any
proceeding brought against the Guarantor or the Lessee and shall not be
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discharged within 60 days after such appointment, or if the Guarantor or the
Lessee shall consent to or acquiesce in such appointment.
Section 3.2. Remedies. Upon the occurrence of an Event of Default,
--------
the Lessor shall have all the rights and remedies available at law or in equity
for purposes of enforcing its rights under this Guaranty.
ARTICLE IV
MISCELLANEOUS PROVISIONS
Section 4.1. Governing Law. This Guaranty, the rights of the Lessor
-------------
and the obligations of the Guarantors shall be governed by and construed in
accordance with the laws of the State of New York (excluding, however, those
dealing with conflicts of law) except to the extent that such laws are preempted
by United States federal law, in which case such federal law shall govern.
Section 4.2. Successors and Assigns. The representations,
----------------------
warranties, covenants and conditions set forth herein shall be binding upon the
administrators, representatives and permitted successors and assigns of the
Guarantor and shall inure to the benefit of the Lessor, its successors and
assigns.
Section 4.3. Notices. All notices, requests, demands and other
-------
communications with respect hereto shall be in writing and shall be delivered by
hand, sent prepaid by Federal Express (or a comparable overnight delivery
service) sent by facsimile or sent by United States mail, certified, postage
prepaid, return receipt requested, at the following addresses:
If to the Lessor, to -
Hudson Hotels Limited Partnership, L.P.
c/o Hudson Hotels Trust
300 Bausch & Lomb Place
Rochester, New York 14604
Attention: Chairman of the Board
Fax No. (716) 454-1865
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With a copy to -
Hunton & Williams
Riverfront Plaza, East Tower
951 E. Byrd Street
Richmond, Virginia 23219
Attention: David C. Wright, Esquire
Fax No. (804) 788-8218
If to the Guarantor, to -
Hudson Hotels Corporation
300 Bausch & Lomb Place
Rochester, New York 14604
Attention: Chairman of the Board
Fax No. (716) 454-1865
With a copy to -
Boylan, Brown, Code,Fowler, Vigdor & Wilson, LLP
2400 Chase Square
Rochester, New York 14604
Fax No. (716) 232-3528
Attention: Alan S. Lockwood, Esquire
Any notice, request, demand or other communication delivered or sent in the
manner aforesaid shall be deemed given or made, as the case may be, upon the
earlier of the date it is actually received or (a) on the business day after the
day on which it is delivered by hand, (b) on the business day after the day on
which it is properly delivered to Federal Express (or a comparable overnight
delivery service), (c) on the third business day after the day on which it is
deposited in the United States mail or (d) on the business day on which it is
sent by facsimile with confirmed transmision. Any addressee may change its
address by notifying the other addressees of the new address in any manner
permitted by this Section.
Section 4.4. Captions; Gender; Number. The captions hereof are for
------------------------
convenience of reference only and shall neither limit nor enlarge the provisions
hereof. All pronouns used herein, whether used in the masculine, feminine or
neuter gender, shall include all other genders. The singular shall include the
plural and vice versa unless the context requires otherwise.
Section 4.5. Severability. If any provision of this Guaranty, or the
------------
application thereof to any person or circumstance, shall to any extent be
invalid or unenforceable, the remainder of
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the provisions hereof, or the application thereof to other persons or
circumstances, shall not be affected thereby, and each provision hereof shall be
valid and enforceable to the fullest extent permitted by law.
Section 4.6. Amendments. No provision of this Guaranty may be
----------
amended, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the amendment, waiver,
discharge or termination is sought. No subsequent guaranty by the Guarantor or
any other person with respect to the Indebtedness or the Obligations shall be
deemed in lieu of or to supersede this Guaranty, but such guaranty shall be
construed as an additional or supplementary guaranty unless otherwise expressly
provided for in such subsequent guaranty. Furthermore, this Guaranty shall be
construed to be an additional or supplementary guaranty to any guaranty
previously executed by the Guarantor or any other guarantor of the Indebtedness
or the Obligations and shall not terminate any prior guaranty unless such
termination is expressly provided for herein.
Section 4.7. Service of Process. The Guarantor hereby agrees that
------------------
any suit, action or proceeding arising out of or relating to this Guaranty may
be instituted in the United States District Court for the Western District of
New York, at the option of the Lessor; and the Guarantor hereby waives any
objection which it may have to the laying of the venue of any such suit, action
or proceeding and irrevocably submits to the jurisdiction of either such court
in any such suit, action or proceeding.
Section 4.8. Third Party Beneficiary. Hudson Hotels Trust, a
-----------------------
Maryland real estate investment trust, the general partner of the Lessor, shall
be a third party beneficiary of this Guaranty and shall have the right to
enforce the terms of this Guaranty to the same extent as the Lessor.
Section 4.9 Affiliate. As used herein, the term "Affiliate" shall
---------
have the meaning given to such term in Rule 1-02 of Regulation S-X promulgated
by the Securities and Exchange Commission.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the Guarantor has executed this Guaranty as of the date
first above written.
HUDSON HOTELS CORPORATION
By:______________________
Name:____________________
Title:___________________
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EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Hudson Hotels Limited Partnership, L.P., a Virginia limited partnership
HHT Ltd., Inc., a Virginia corporation
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11
Amendment No. 1 (File No. 333-53287) of our reports, (1) dated May 12, 1998 on
our audit of the balance sheet of Hudson Hotels Trust as of May 12, 1998, (2)
dated May 11, 1998 on our audit of the combined financial statements and
financial statement schedule of the Other Initial Hotels. We also consent to
the references to our Firm under the captions "Experts" and "Selected
Financial Data."
/s/ PricewaterhouseCoopers LLP
Rochester, New York
July 1, 1998
<PAGE>
EXHIBIT 23.3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Washington, D.C.
July 1, 1998
