As filed with the Securities and Exchange Commission on December 7, 1998
Registration No. 333-56087
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
to
FORM S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Hersha Hospitality Trust
(Exact name of registrant as specified in governing instruments)
148 Sheraton Drive, Box A
New Cumberland, Pennsylvania 17070
(717) 770-2405
(Address of principal executive offices)
Jay H. Shah, Esq.
The Lafayette Building
437 Chestnut Street, Suite 615
Philadelphia, Pennsylvania 19106
(215) 238-1045
(Name and address of agent for service)
---------------
Copies to:
Cameron N. Cosby, Esq. James J. Wheaton, Esq.
Hunton & Williams Willcox & Savage, P.C.
Riverfront Plaza, East Tower 1800 NationsBank Center
951 East Byrd Street One Commercial Place
Richmond, Virginia 23219-4074 Norfolk, Virginia 23510
(804) 788-8604 (757) 628-5619
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement. If
this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If the Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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================================================================================================================================
Proposed Proposed Maximum
Amount Being Maximum Offering Aggregate Offering Amount of
Title of Securities Being Registered Registered(1) Price Per Share (2) Price (2) Registration Fee(3)
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Priority Class A Common Shares,
$0.01 par value per share.............. 2,275,000 $6.00 $13,650,000 $4,026.75
================================================================================================================================
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(1) Includes 275,000 shares that may be purchased pursuant to an
over-allotment option granted to the Underwriter.
(2) Estimated solely for the purpose of determining the registration
fee.
(3) A registration fee of $4,720 was paid in connection with the
Registrant's initial filing on June 5, 1998.
---------------
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>
Subject to completion, dated __________, 1998
PROSPECTUS
2,000,000 Shares
Hersha Hospitality Trust
Priority Class A Common Shares of Beneficial Interest
---------------
Hersha Hospitality Trust, formed in May 1998 (the "Company"), has been
established to own initially ten hotels (the "Initial Hotels") and to continue
the hotel acquisition and development strategies of Hasu P. Shah, the Chairman
of the Board of Trustees and Chief Executive Officer of the Company. Mr. Shah
and certain of his affiliates (together, the "Hersha Affiliates") purchased or
developed all of the Initial Hotels, which will be contributed to the principal
operating subsidiary of the Company, Hersha Hospitality Limited Partnership (the
"Partnership"), by a group of affiliated partnerships, a corporation and
individuals (the "Combined Entities") in exchange for interests in the
Partnership and assumption of debt. Following the completion of this offering
(the "Offering") and the use of Offering proceeds as described herein, the
Company will own approximately a 32% general partnership interest in the
Partnership. The Company is a self-advised Maryland real estate investment trust
that intends to qualify as a real estate investment trust ("REIT") for federal
income tax purposes.
The Initial Hotels are located in Pennsylvania and include three
Holiday Inn Express(R) hotels, two Hampton Inn(R) hotels, two Holiday Inn(R)
hotels, two Comfort Inn(R) hotels and one Clarion Suites(R) hotel with an
aggregate of 989 rooms. The Partnership will own, directly or through subsidiary
partnerships, 100% of the equity interests in the Initial Hotels and will lease
them to Hersha Hospitality Management, L.P. (the "Lessee"), a limited
partnership wholly-owned by certain of the Hersha Affiliates. The Hersha
Affiliates have managed all of the Initial Hotels since their acquisition or
construction. Upon the closing of the Offering of the Company's Priority Class A
common shares of beneficial interest, par value $.01 per share (the "Priority
Common Shares"), and the use of the Offering proceeds as set forth herein, the
Partnership will have approximately $17.4 million of fixed-rate debt
outstanding, which will be secured by some of the Initial Hotels.
See "Risk Factors" beginning on page 15 for a discussion of
material risks that should be considered by prospective purchasers of the
Priority Common Shares offered hereby, including the following risks:
o Conflicts of interest between the Company and the Hersha Affiliates,
including conflicts regarding the sale, leasing or refinancing of the
Initial Hotels, may have resulted, or may in the future result, in the
interests of the shareholders not being reflected fully in all decisions
made or actions taken by officers and Trustees of the Company.
o The purchase prices to be paid for the six Initial Hotels that have little
operating history or have been newly renovated are based upon projections by
management as to the expected operating results of such hotels, subjecting
the Company to the risk that these hotels may not achieve anticipated
operating results and the rent received by the Company from such hotels
after the First Adjustment Date or Second Adjustment Date (as herein
defined) could be less than anticipated, which could adversely affect the
amount of cash available for distribution to the shareholders of the
Company.
o The holders of at least two-thirds of the interests in the Partnership,
including the Company, which initially will own approximately only a 32%
interest in the Partnership, must approve, subject to certain conditions, a
sale of all or substantially all of the assets of the Partnership or a
merger or consolidation of the Partnership, which could result in the
disapproval of a transaction that would be beneficial to the shareholders of
the Company.
<PAGE>
o Risks associated with distributing 100% of estimated cash available for
distribution, including the risk that, after the Priority Period (as herein
defined), actual cash available for distribution will be insufficient to
allow the Company to maintain its proposed initial distribution rate.
o The Company's lack of control over the daily operations of the Initial
Hotels could, in the event that the Lessee fails to effectively operate the
Initial Hotels, make the Company's business strategy more difficult to
achieve, which could adversely affect the amount of cash available for
distribution to the shareholders of the Company.
o The dependence of the Company on the Lessee's ability to make payments under
the Percentage Leases in order to generate revenues may, in the event that
there is a reduction in revenues at the Initial Hotels, adversely affect the
amount of cash available for distribution to the shareholders of the
Company.
o The Company and the Partnership were recently formed, and the Company has no
experience operating as a REIT or a public company.
o The Company will initially own only ten hotels, all located in Pennsylvania.
Thus, adverse changes in the operations of any one Initial Hotel could
adversely affect the amount of cash available for distribution to the
shareholders of the Company.
o Mr. Shah and the partners of the Combined Entities personally guarantee all
of the indebtedness secured by the Initial Hotels, and the personal
bankruptcy of any of the guarantors would constitute a default under the
related loan documents, which default would cause such indebtedness to
become immediately due and payable and could adversely affect the Company's
cash available for distribution.
o Purchasers of the Priority Common Shares sold in the Offering will
experience immediate and substantial dilution of $2.14, or 35.6% of
the Offering Price, in the net tangible book value per Priority Common
Share. In addition, in the event that any of the purchase prices of the
Initial Hotels are increased pursuant to the repricing described herein,
owners of the Priority Common Shares at such time will experience further
dilution.
o Risk of taxation of the Company as a regular corporation if it fails to
qualify as a REIT, which would adversely affect the amount of cash available
for distribution to the shareholders of the Company.
---------------
All of the Priority Common Shares offered hereby are being sold by the
Company. The Company proposes to sell 166,666 of the Priority Common Shares
offered hereby directly to certain Hersha Affiliates at the initial public
offering price, with the remainder of the Priority Common Shares offered hereby
being sold through Anderson & Strudwick, Incorporated (the "Underwriter"). The
Company intends to make regular quarterly distributions to holders of the
Priority Common Shares initially equal to $0.18 per share, which on an
annualized basis would be equal to $0.72 per share or 12.0% of the Offering
Price. The holders of the Priority Common Shares will be entitled to a priority,
as described herein, with respect to distributions and amounts payable upon
liquidation (the "Priority Rights") for a period (the "Priority Period")
beginning on the date of the closing of the Offering and ending on the earlier
of: (i) the date that is 15 trading days after the Company sends notice to the
record holders of the Priority Common Shares that their Priority Rights will
terminate in 15 trading days, provided that the closing bid price of the
Priority Common Shares is at least $7.00 on each trading day during such 15-day
period, or (ii) the fifth anniversary of the closing of the Offering.
Notwithstanding the foregoing, the Priority Period shall not end until the
holders of the Priority Common Shares have received any accrued, but unpaid,
Priority Distributions. During the Priority Period, the holders of the Priority
Common Shares will be entitled to receive, prior to any distributions either to
the holders of units of limited partnership interest in the Partnership
("Units") that received Units (the "Subordinated Units") in exchange for the
Initial Hotels or to the holders of the Company's Class B common shares of
beneficial interest, $.01 par value per share (the "Class B Common Shares"),
cumulative dividends in an amount per Priority Common Share equal to $0.18 per
quarter (the "Priority Distribution"). After the holders of the Subordinated
Units and the Class B Common Shares have received an amount per Subordinated
Unit or per Class B Common Share equal to the Priority Distribution, the holders
of the Priority Common Shares will be entitled to receive any further
distributions on a pro rata basis with the holders of the Subordinated Units and
the Class B Common Shares. As of the closing of the Offering, no Class B Common
Shares will be outstanding. In the future, the Company may issue additional
Priority Common Shares, and the Partnership may issue Units that are not
subordinated to the Priority Common Shares. See "Description of Shares of
Beneficial Interest" and "Partnership Agreement."
The Company's Declaration of Trust generally prohibits direct or
indirect ownership of more than 9.9% of the outstanding shares of any class of
the Company's securities, including the Priority Common Shares, by any
<PAGE>
person. Prior to the Offering, there has been no public market for the Priority
Common Shares. The Priority Common Shares have been approved for listing,
subject to final notice of issuance, on the American Stock Exchange under the
symbol "HT." The initial public offering price of the Priority Common Shares
will be $6.00 per share (the "Offering Price"). See "Underwriting" for a
discussion of factors considered in determining the Offering Price.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Selling Proceeds to
Public Commission(1) Company(2)
- ----------------------------------------------------------------------------------------------------------------------------
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Per Priority Common Share................ $6.00 $.48 $5.52
Total(3)................................. $12,000,000 $880,000 $11,120,000
============================================================================================================================
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(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters. As stated above, the Company proposes to sell
166,666 of the Priority Common Shares offered hereby directly to certain Hersha
Affiliates at the Offering Price. The Underwriter will not receive any selling
commission with respect to such shares. Does not reflect the Underwriter
Warrants granted by the Company to the Underwriter to purchase 183,333 Priority
Common Shares for a period of five years at a price per share equal to 165% of
the Offering Price. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $650,000.
(3) The Company has granted the Underwriter an option for 30 days to
purchase an additional 275,000 shares at the public offering price per
share, less the underwriting discount, solely to cover over-allotments.
If such option is exercised in full, the total Price to Public, Selling
Commission and Proceeds to Company will be $13,650,000, $1,012,000 and
$12,638,000, respectively. See "Underwriting."
-----------
The Priority Common Shares, other than the 166,666 Priority Common
Shares offered directly by the Company to certain Hersha Affiliates, are being
offered by the Company to Anderson & Strudwick, Incorporated (the "Underwriter")
as and if delivered to and accepted by it, subject to the right of the
Underwriter to reject any order in whole or in part. It is expected that the
delivery of the Priority Common Shares will be made in New York, New York on or
about December ___, 1998.
Anderson & Strudwick
Incorporated
The date of this Prospectus is ____________, 1998.
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.
<PAGE>
[COLOR PHOTOS AND ART WORK TO COME]
<PAGE>
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PROSPECTUS SUMMARY.......................................................................................... 1
The Company............................................................................................... 1
Summary Risk Factors...................................................................................... 1
The Partnership........................................................................................... 3
The Lessee................................................................................................ 4
The Initial Hotels........................................................................................ 5
Growth Strategy........................................................................................... 6
Acquisition Strategy...................................................................................... 6
Internal Growth Strategy.................................................................................. 7
Formation Transactions.................................................................................... 7
Benefits to the Hersha Affiliates......................................................................... 10
Conflicts of Interest..................................................................................... 11
Distribution Policy....................................................................................... 11
Tax Status................................................................................................ 12
The Offering.............................................................................................. 12
Summary Financial Data.................................................................................... 13
RISK FACTORS................................................................................................ 15
Conflicts of Interest..................................................................................... 15
Conflicts Relating to Sales or Refinancing of Initial
Hotels............................................................................................ 15
No Arm's-Length Bargaining on Percentage Leases,
Contribution Agreements, the Administrative Services
Agreement and Option Agreement..................................................................... 15
Competing Hotels Owned or to be Acquired by the
Hersha Affiliates.................................................................................. 15
Acquisition of Hotels with Limited Operating History...................................................... 16
Need for Certain Consents from the Limited Partners....................................................... 16
Inability to Operate the Properties....................................................................... 16
Dependence on the Lessee.................................................................................. 16
Newly-Organized Entities.................................................................................... 16
Limited Numbers of Initial Hotels......................................................................... 17
Guarantors of Assumed Indebtedness........................................................................ 17
Substantial Dilution...................................................................................... 17
Tax Risks................................................................................................. 17
Failure to Qualify as a REIT....................................................................... 17
REIT Minimum Distribution Requirements............................................................. 17
Potential Adverse Effects of Leverage and Lack of Limits
on Indebtedness........................................................................................ 18
The Price Being Paid for the Initial Hotels May Exceed
Their Value............................................................................................ 18
Emphasis on Franchise Hotels................................................................................ 18
Concentration of Investments in Pennsylvania.............................................................. 19
Hotel Industry Risks...................................................................................... 19
Operating Risks.................................................................................... 19
Competition for Guests............................................................................. 19
Investment Concentration in Single Industry........................................................ 19
Seasonality of Hotel Business and the Initial Hotels............................................... 19
Risks of Operating Hotels under Franchise Licenses................................................. 20
Operating Costs and Capital Expenditures; Hotel
Renovation........................................................................................ 20
Real Estate Investment Risks.............................................................................. 20
General Risks of Investing in Real Estate.......................................................... 20
Illiquidity of Real Estate......................................................................... 20
Uninsured and Underinsured Losses.................................................................. 21
Property Taxes..................................................................................... 21
Environmental Matters.............................................................................. 21
Compliance with Americans with Disabilities Act and
other Changes in Governmental Rules and Regulations.............................................. 21
Market for Priority Common Shares......................................................................... 21
Effect of Market Interest Rates on Price of Priority
Common Shares.......................................................................................... 22
Anti-takeover Effect of Ownership Limit, Limited Partner
Consents, Staggered Board, Power to Issue Additional
Shares and Certain Provisions of Maryland Law.......................................................... 22
Ownership Limitation............................................................................... 22
Limited Partner Consents........................................................................... 22
Staggered Board........................................................................................... 22
Issuance of Additional Shares...................................................................... 22
Maryland Business Combination Law.................................................................. 23
Dependence Upon External Financing........................................................................ 23
Assumption of Contingent Liabilities of Combined Entities................................................ 23
Year 2000 Risks........................................................................................... 23
Ability of Board of Trustees to Change Certain Policies..................................................... 24
Growth Strategy........................................................................................... 24
Competition for Acquisitions....................................................................... 24
Acquisition Risks.................................................................................. 24
Reliance on Trustees and Management....................................................................... 24
Possible Adverse Effect of Shares Available for Future Sale
on Price of Priority Common Shares..................................................................... 25
THE COMPANY................................................................................................. 25
GROWTH STRATEGY............................................................................................. 27
Acquisition Strategy...................................................................................... 27
Internal Growth Strategy.................................................................................. 28
USE OF PROCEEDS............................................................................................. 29
DISTRIBUTION POLICY......................................................................................... 30
PRO FORMA CAPITALIZATION.................................................................................... 36
DILUTION.................................................................................................... 37
SELECTED FINANCIAL INFORMATION.............................................................................. 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................................. 40
Overview.................................................................................................. 40
Results of Operations of the Initial Hotels............................................................... 40
Liquidity and Capital Resources........................................................................... 40
Inflation................................................................................................. 41
Seasonality............................................................................................... 41
Year 2000 Compliance...................................................................................... 42
BUSINESS AND PROPERTIES..................................................................................... 43
The Initial Hotels........................................................................................ 43
The Percentage Leases..................................................................................... 46
Franchise Licenses........................................................................................ 50
Operating Practices....................................................................................... 52
Employees................................................................................................. 52
Environmental Matters..................................................................................... 52
Competition............................................................................................... 52
Insurance................................................................................................. 53
Depreciation.............................................................................................. 53
Legal Proceedings......................................................................................... 53
Hersha Affiliates' Hotel Assets Not Acquired By The
Company................................................................................................ 53
Ground Leases............................................................................................. 53
POLICIES AND OBJECTIVES WITH RESPECT TO
CERTAIN ACTIVITIES........................................................................................ 54
Investment Policies....................................................................................... 54
Financing................................................................................................. 54
Conflict of Interest Policies............................................................................. 55
Policies with Respect to Other Activities................................................................. 56
Working Capital Reserves.................................................................................. 56
FORMATION TRANSACTIONS...................................................................................... 57
Benefits to the Hersha Affiliates......................................................................... 57
MANAGEMENT.................................................................................................. 59
Trustees and Executive Officers........................................................................... 59
Audit Committee........................................................................................... 60
Compensation Committee.................................................................................... 61
Compensation.............................................................................................. 61
Exculpation and Indemnification........................................................................... 61
The Option Plan........................................................................................... 62
The Trustees' Plan........................................................................................ 63
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CERTAIN RELATIONSHIPS AND TRANSACTIONS...................................................................... 64
Repayment of Indebtedness and Guarantees by Mr. Shah and the
Hersha Affiliates........................................................................................... 64
Hotel Ownership and Management............................................................................ 64
Option Agreement.......................................................................................... 64
Payment of Franchise Transfer Fees by the Company......................................................... 64
THE LESSEE.................................................................................................. 65
Management of the Lessee.................................................................................. 65
PRINCIPAL SHAREHOLDERS...................................................................................... 67
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST................................................................ 68
General................................................................................................... 68
The Class B Common Shares................................................................................. 70
Voting Rights of Priority Common Shares and Class B
Common Shares.......................................................................................... 71
Preferred Shares.......................................................................................... 72
Classification or Reclassification of Common Shares or
Preferred Shares....................................................................................... 72
Restrictions on Ownership and Transfer.................................................................... 72
Other Matters............................................................................................. 74
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S DECLARATION
OF TRUST AND BYLAWS......................................................................................... 75
Classification of the Board of Trustees................................................................... 75
Removal of Trustees....................................................................................... 75
Business Combinations..................................................................................... 75
Control Share Acquisitions................................................................................ 76
Amendment................................................................................................. 76
Limitation of Liability and Indemnification............................................................... 77
Operations................................................................................................ 77
Dissolution of the Company................................................................................ 78
Advance Notice of Trustees Nominations and New Business................................................... 78
Possible Anti-takeover Effect of Certain Provisions of
Maryland Law and of the Declaration of Trust and
Bylaws................................................................................................. 78
Maryland Asset Requirements............................................................................... 78
SHARES AVAILABLE FOR FUTURE SALE............................................................................ 79
PARTNERSHIP AGREEMENT....................................................................................... 81
Management................................................................................................ 81
Transferability of Interests................................................................................ 81
Capital Contribution........................................................................................ 81
Redemption Rights......................................................................................... 82
Operations................................................................................................ 82
Distributions............................................................................................. 83
Allocations............................................................................................... 83
Term...................................................................................................... 83
Tax Matters............................................................................................... 83
FEDERAL INCOME TAX CONSEQUENCES............................................................................. 84
Taxation of the Company................................................................................... 84
Requirements for Qualification............................................................................ 85
Failure to Qualify........................................................................................ 91
Taxation of Taxable U.S. Shareholders..................................................................... 92
Taxation of Shareholders on the Disposition of the Common
Shares................................................................................................. 92
Capital Gains and Losses.................................................................................. 93
Information Reporting Requirements and Backup
Withholding........................................................................................... 93
Taxation of Tax-Exempt Shareholders....................................................................... 93
Taxation of Non-U.S. Shareholders......................................................................... 94
Other Tax Consequences.................................................................................... 95
Tax Aspects of the Partnership............................................................................ 95
Sale of the Company's or the Partnership's Property....................................................... 97
UNDERWRITING................................................................................................ 99
EXPERTS.....................................................................................................101
REPORTS TO SHAREHOLDERS.....................................................................................101
LEGAL MATTERS...............................................................................................101
ADDITIONAL INFORMATION......................................................................................101
GLOSSARY....................................................................................................102
INDEX TO FINANCIAL STATEMENTS...............................................................................F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. Unless the context otherwise indicates, all references
herein to the "Company" include Hersha Hospitality Trust and Hersha Hospitality
Limited Partnership and its subsidiaries. The Company is offering 2,000,000
Priority Common Shares pursuant to this Prospectus, 1,833,334 of which are being
offered to the Underwriter and 166,666 of which are being offered to the Hersha
Affiliates (as herein defined). Unless otherwise indicated, the information
contained herein assumes that (i) only the 1,833,334 Priority Common Shares
being offered to the Underwriter are sold and (ii) the Underwriter's
over-allotment option is not exercised. The offering of 1,833,334 Priority
Common Shares to the Underwriter is referred to herein as the "Offering." See
"Glossary" beginning on page 102 for the definitions of certain additional
terms used in this Prospectus.
The Company
Hersha Hospitality Trust (the "Company") has been established to own
initially interests in ten hotels (the "Initial Hotels") and to continue the
hotel acquisition and development strategies of Hasu P. Shah, Chairman of the
Board of Trustees and Chief Executive Officer of the Company. The Company,
formed in May 1998, is a self-advised Maryland real estate investment trust that
intends to qualify as a real estate investment trust ("REIT") for federal income
tax purposes. The Initial Hotels include three Holiday Inn Express(R) hotels,
two Hampton Inn(R) hotels, two Holiday Inn(R) hotels, two Comfort Inn(R) hotels
and one Clarion Suites(R) hotel. The Initial Hotels are located in Pennsylvania
and contain an aggregate of 989 rooms. The Holiday Inn Express(R) hotels in
Hershey, Pennsylvania and New Columbia, Pennsylvania, the Hampton Inn(R) hotel
in Carlisle, Pennsylvania and the Comfort Inn(R) hotel in Harrisburg,
Pennsylvania (the "Newly-Developed Hotels") are newly constructed and therefore
have limited operating history. The Holiday Inn Express(R) hotel in Harrisburg,
Pennsylvania, the Holiday Inn(R) hotel in Milesburg, Pennsylvania and the
Comfort Inn(R) hotel in Denver, Pennsylvania (the "Newly-Renovated Hotels") have
been newly renovated and, as a result, the Company believes that such hotels'
future performance will improve significantly over such hotels' prior operating
histories. The remaining hotels, the Hampton Inn(R) hotel in Selinsgrove,
Pennsylvania, the Holiday Inn(R) hotel and conference center in Harrisburg,
Pennsylvania and the Clarion Suites(R) hotel in Philadelphia, Pennsylvania are
referred to herein as the "Stabilized Hotels."
Summary Risk Factors
An investment in the Priority Common Shares involves various risks, and
investors should carefully consider the matters discussed under "Risk Factors,"
including, among others, the following:
o Conflicts of interest between the Company, the Hersha
Affiliates and the Lessee that may have resulted, or may in
the future result, in the interests of the shareholders not
being reflected fully in all decisions made or actions taken
by officers and Trustees of the Company, including:
o conflicts related to the adverse tax consequences to
the Hersha Affiliates upon a sale of any of the
Initial Hotels or the refinancing or prepayment of
principal on certain of the Assumed Indebtedness, and
the related risk that the Hersha Affiliates' personal
interests with regard to a sale or refinancing of an
Initial Hotel or repayment of certain of the Assumed
Indebtedness could be adverse to those of the
Company;
o lack of arm's-length negotiations with respect to the
terms of the Percentage Leases, the contribution
agreements for the Initial Hotels, the Option
Agreement (as herein defined), the Administrative
Services Agreement (as herein defined) and the Hersha
Affiliates' conflicts relating to enforcing those
agreements;
o conflicts relating to ownership and operation of
other hotels by the Hersha Affiliates; and
o conflicts relating to competing demands on Mr. Shah's
time.
o The purchase prices for the Newly-Developed Hotels and the
Newly-Renovated Hotels are based upon projections by
management as to the expected operating results of such
hotels, subjecting the
1
<PAGE>
Company to risks that those hotels may not achieve anticipated
operating results and the rent received by the Company from
such hotels after the First Adjustment Date or Second
Adjustment Date, as applicable, could be less than
anticipated, which could adversely affect the amount of cash
available for distribution to the shareholders of the Company.
o The holders of at least two-thirds of the interests in the
Partnership, including the Company, which initially will own
approximately only a 32% interest in the Partnership, must
approve, subject to certain conditions, a sale of all or
substantially all of the assets of the Partnership or a merger
or consolidation of the Partnership, which could result in the
disapproval of a transaction that would be beneficial to the
shareholders of the Company.
o Risks associated with distributing 100% of estimated cash
available for distribution, including the risk that, after the
Priority Period, actual cash available for distribution will
be insufficient to allow the Company to maintain its proposed
initial distribution rate.
o The Company's lack of control over the daily operations of the
Initial Hotels could, in the event that the Lessee fails to
effectively operate the Initial Hotels, make the Company's
business strategy more difficult to achieve, which could
adversely affect the amount of cash available for distribution
to the shareholders of the Company.
o The dependence of the Company on the Lessee's ability to make
payments under the Percentage Leases in order to generate
revenues may, in the event that there is a reduction in
revenues at the Initial Hotels, adversely affect the amount of
cash available for distribution to the shareholders of the
Company. The Lessee has nominal net worth and must generate
sufficient operating income from the Initial Hotels to fund
its rent payment obligations under the Percentage Leases.
o The Company and the Partnership were recently formed, and the
Company has no experience operating as a REIT or a public
company.
o The Company initially will own only ten hotels. Thus,
adverse changes in the operations of any of the ten Initial
Hotels could adversely affect the amount of cash available for
distribution to the shareholders of the Company.
o Mr. Shah and the partners of the Combined Entities personally
guarantee all of the Assumed Indebtedness, and the personal
bankruptcy of any of the guarantors would constitute a default
under the related loan documents, which default would cause
the Assumed Indebtedness to become immediately due and
payable. This accelerated payment could adversely affect the
Company's cash available for distribution. If the Company is
unable to make such payment, the Company may be forced to sell
the Initial Hotels that serve as collateral for such Assumed
Indebtedness in order to make such payment.
o The Offering Price exceeds the net tangible book
value per share. Therefore, purchasers of Priority
Common Shares in the Offering will realize an
immediate and substantial dilution of $2.14, or 35.6%
of the Offering Price, in the net tangible book
value of their shares. In addition, in the event that
any of the purchase prices of the Newly-Renovated
Hotels or the Newly-Developed Hotels are increased
on the First Adjustment Date or the Second Adjustment
Date, as applicable, owners of the Priority Common
Shares at such time will experience further
dilution.
o Risk of taxation of the Company as a regular corporation if it
fails to qualify as a REIT and the Company's liability for
federal and state taxes on its income in such event, which
would adversely affect the amount of cash available for
distribution to the shareholders of the Company.
o The Assumed Indebtedness will represent approximately 37%
of the total purchase prices paid by the Company for the
Initial Hotels. Although the Company's policy is to limit
consolidated indebtedness to less than 67% of the total
purchase prices paid by the Company for the hotels in which it
has invested, there is no limit on the Company's ability to
incur debt contained in the
2
<PAGE>
Declaration of Trust or Bylaws. If the Company is unable to
meet its debt service obligations or repay (or refinance) its
debt when due, one or more of the Initial Hotels may be lost
to foreclosure.
o The price to be paid by the Company for the Initial Hotels may
exceed the fair market value as determined by a third-party
appraisal of the Initial Hotels.
o Five of the Initial Hotels are licensed under one franchise
brand, Holiday Inn/Holiday Inn Express, and any adverse
developments to that franchise brand could adversely affect
the amount of cash available for distribution to the
shareholders of the Company.
o The geographic concentration in Pennsylvania of the Initial
Hotels may expose the Company to regional economic
fluctuations that could have a significant negative effect on
the operation of the Initial Hotels, and ultimately on cash
available for distribution to the shareholders of the Company.
o Risks affecting the real estate or hospitality industries
generally, including economic and other 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, competition, uninsured or
underinsured losses, and the potential liability for unknown
or future environmental liabilities, any of which could
adversely affect the amount of cash available for distribution
to the shareholders of the Company.
o The absence of a prior market for the Priority Common Shares,
the lack of assurance that an active trading market will
develop or that the Priority Common Shares will trade at or
above the Offering Price, and the potential negative effect of
an increase in interest rates on the market price of the
Priority Common Shares.
o The restrictions on ownership of Priority Common Shares and
certain other provisions in the Company's declaration of trust
(the "Declaration of Trust") or the Company's Bylaws (the
"Bylaws") could have the effect of inhibiting a change of
control of the Company, even when a change of control would
be beneficial to the Company's shareholders.
The Partnership
The Company will contribute substantially all of the net proceeds from
the Offering to Hersha Hospitality Limited Partnership (the "Partnership") in
exchange for approximately a 32% partnership interest in the Partnership. The
Company will be the sole general partner of the Partnership. Shortly after the
closing of the Offering, the Partnership will acquire, directly or through
subsidiary partnerships, 100% of the equity interests in the Initial Hotels. Mr.
Shah and certain affiliates (the "Hersha Affiliates") own the partnerships that
currently own all of the Initial Hotels (collectively, the "Combined Entities").
Ownership of the land underlying two of the Initial Hotels will be retained by
certain Hersha Affiliates and will be leased to the Partnership pursuant to
separate ground leases, each with a 99-year term, and collectively providing for
rent of $21,000 per year. See "Certain Relationships and Transactions."
The Partnership will acquire the Initial Hotels in exchange for (i)
Subordinated Units that will be redeemable, subject to certain limitations,
for an aggregate of approximately 4 million Class B Common Shares, with a
value of approximately $23.8 million based on the Offering Price, and (ii)
the assumption of approximately $23.8 million of indebtedness related to
the Initial Hotels, approximately $17.4 million of which (the "Assumed
Indebtedness") will remain outstanding and approximately $6.4 million of
which will be repaid immediately after the acquisition of the Initial Hotels
using the net proceeds of the Offering. See "Formation Transactions." The
purchase prices of the Newly-Renovated Hotels will be adjusted as soon as the
Company's and the Lessee's audited financial statements for the year ended
December 31, 1999 (the "First Adjustment Date") become available. The purchase
prices of the Newly-Developed Hotels will be adjusted as soon as the Company's
and the Lessee's audited financial statements for the year ended December 31,
2000 (the "Second Adjustment Date") become available. The adjustments will be
calculated by applying the initial pricing methodology to such hotels' cash
flows as shown on the Company's and the Lessee's audited financial statements
for the year ended on the First Adjustment Date or the Second Adjustment Date,
as applicable, and the adjustments must be
3
<PAGE>
approved a majority of the Independent Trustees (as herein defined). If the
repricing produces a higher aggregate value for such hotels, the Hersha
Affiliates will receive an additional number of Subordinated Units that, when
multiplied by the Offering Price, equals the increase in value plus the value of
any distributions that would have been made with respect to such Subordinated
Units if such Subordinated Units had been issued at the time of acquisition of
such hotels. If, however, the repricing produces a lower aggregate value for
such hotels, the Hersha Affiliates will forfeit to the Partnership that number
of Subordinated Units that, when multiplied by the Offering Price, equals the
decrease in value plus the value of any distributions made with respect to such
Subordinated Units.
The Lessee
In order for the Company to qualify as a REIT, neither the Company nor
the Partnership may operate hotels. Therefore, the Initial Hotels will be leased
to Hersha Hospitality Management, L.P., a Pennsylvania limited partnership
wholly-owned by certain of the Hersha Affiliates (the "Lessee"), pursuant to
leases (the "Percentage Leases") that are designed to allow the Company to
participate in growth in revenues of the Initial Hotels by providing that
percentages of such revenues be paid by the Lessee as rent. Each Percentage
Lease has been structured to provide anticipated rents at least equal to 12% of
the purchase price paid for the hotel, net of (i) property and casualty
insurance premiums, (ii) real estate and personal property taxes, and (iii) a
reserve for furniture, fixtures and equipment equal to 4% (6% for the Holiday
Inn, Harrisburg, PA and the Holiday Inn, Milesburg, PA) of gross revenues per
quarter at the hotel. This pro forma return is based on certain assumptions and
historical revenues for the Initial Hotels (including projected revenues for the
Newly-Developed Hotels and the Newly-Renovated 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--Acquisition of Hotels with
Limited Operating History." The rent on the Newly-Developed Hotels and the
Newly-Renovated Hotels until the First Adjustment Date or Second Adjustment
Date, as applicable, will be fixed (the "Initial Fixed Rent"). After the First
Adjustment Date or the Second Adjustment Date, as applicable, rent will be
computed with respect to the Newly-Developed Hotels and the Newly-Renovated
Hotels based on the percentage rent formulas described herein. The Initial
Hotels will be operated by the Lessee. The Percentage Leases will have initial
terms of five years and may be extended for two additional five-year terms at
the option of the Lessee. See "Business and Properties--The Percentage Leases."
4
<PAGE>
The Initial Hotels
The following table sets forth certain information with
respect to the Initial Hotels:
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1997
----------------------------------------------------
Average
Number of Room Other Daily
Initial Hotels Rooms Revenue Revenue(1) Occupancy Rate REVPAR(2)
- -------------- --------- ------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Newly-Developed
Holiday Inn Express
Hershey, PA(3)................. 85 $210,612 $4,877 38.8% $75.62 $29.35
New Columbia, PA(4)............ 81 $13,369 $253 9.0% $59.68 $5.39
Hampton Inn:
Carlisle, PA(5)................ 95 659,861 8,421 53.5% $65.33 $34.93
Comfort Inn:
Harrisburg, PA(6).............. 81
Newly-Renovated
Holiday Inn Express:
Harrisburg, PA(7).............. 117 1,357,241 176,868 56.4% $56.33 $31.78
Holiday Inn:
Milesburg, PA................... 118 1,254,070 220,684 52.0% $56.07 $29.13
Comfort Inn:
Denver, PA (8).................. 45 658,285 0 54.7% $73.26 $40.08
Stabilized
Holiday Inn Hotel and Conference
Center:
Harrisburg, PA.................. 196 3,103,820 1,787,958 63.3% $68.22 $43.17
Hampton Inn:
Selinsgrove, PA (9)............. 75 1,271,943 46,148 71.9% $65.29 $46.96
Clarion Suites:
Philadelphia, PA................ 96 2,350,702 319,950 73.7% $91.02 $ 67.09
--- --------- ---------- ------ ------- -------
Total/weighted average........... 989 $10,879,903 $2,565,159 60.2% $68.27 $ 41.09
=== =========== ========== ====== ======= =======
</TABLE>
- ----------------------------------
(1) Represents restaurant revenue, telephone revenue and other revenue.
(2) Revenue per available room ("REVPAR") is determined by
dividing room revenue by available rooms for the applicable
period.
(3) This hotel opened in October 1997 and, thus, the data shown
represent operations from the date of opening through December
31, 1997.
(4) This hotel opened in December 1997 and, thus, the data shown
represent operations from the date of opening through December
31, 1997.
(5) This hotel opened in June 1997 and, thus, the data shown
represent operations from the date of opening through December
31, 1997.
(6) This hotel opened in May 1998.
(7) The land underlying this hotel will be leased to the
Partnership by certain Hersha Affiliates for rent of $15,000
per year for 99 years.
(8) The land underlying this hotel will be leased to the
Partnership by certain Hersha Affiliates for rent of $6,000
per year for 99 years.
(9) A portion of the land adjacent to this hotel, which is not
currently used for hotel operations, will be leased to a
Hersha Affiliate for $1 per year for 99 years.
For further information regarding the Initial Hotels, see "Business and
Properties - The Initial Hotels" and " - The Percentage Leases."
5
<PAGE>
Growth Strategy
The Company will seek to enhance shareholder value by increasing
amounts available for distribution to shareholders by (i) acquiring additional
hotels that meet the Company's investment criteria as described below and (ii)
participating in any increased revenue from the Initial Hotels through the
Percentage Leases.
Acquisition Strategy
The Company intends to acquire additional hotels that meet its
investment criteria as described below. See "The Company--Growth
Strategy--Acquisition Strategy." The Company will emphasize limited service and
full service hotels with strong, national franchise affiliations in the
upper-economy and mid-scale market segments, or hotels with the potential to
obtain such franchises. In particular, the Company will consider acquiring
limited service hotels such as Comfort Inn(R), Best Western(R), Days Inn(R),
Fairfield Inn(R), Hampton Inn(R), Holiday Inn(R) and Holiday Inn Express(R)
hotels, and limited service extended-stay hotels such as Hampton Inn and
Suites(R), Homewood Suites(R), Main Stay Suites(R) and Residence Inn by
Marriott(R) hotels. Under the Bylaws, any transaction involving the Company,
including the purchase, sale, lease or mortgage of any real estate asset, in
which a Trustee or officer of the Company, or any Affiliate (as herein
defined) thereof, has an interest (other than solely as a result of his status
as a Trustee, officer or shareholder of the Company) must be approved by a
majority of the members of the Company's Board of Trustees (the "Trustees"),
including a majority of the members of the Board of Trustees who do not have an
interest in such transaction and who are not officers, directors or employees of
the Company, any lessee of the Company's or the Partnership's properties or any
underwriter or placement agent of the shares of beneficial interest of the
Company that has been engaged by the Company within the past three years, or any
Affiliate thereof (the "Independent Trustees").
The Company intends to focus predominately on investments in hotels in the
eastern United States. Such investments may include hotels newly developed by
the Hersha Affiliates. Pursuant to an agreement among Hasu P. Shah, Jay H. Shah,
Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P.
Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, each a Hersha
Affiliate, the Partnership will have an option to acquire any hotels owned or
developed in the future by the Hersha Affiliates within 15 miles of any of the
Initial Hotels or any hotel subsequently acquired by the Partnership for two
years after acquisition or development (the "Option Agreement"). See "Certain
Relationships and Transactions--Option Agreement." The Company's initial policy
with respect to acquisitions of hotels (the "Acquisition Policy") is to acquire
hotels for which it expects to receive rents at least equal to 12% of the
purchase price paid for each hotel, net of (i) property and casualty insurance
premiums, (ii) real estate and personal property taxes, and (iii) a reserve for
furniture, fixtures and equipment equal to 4% (6% in the case of a full-service
hotel) of gross revenues per quarter at each hotel. The Trustees, however, may
change the Acquisition Policy at any time without the approval of the Company's
shareholders.
The Company intends to lease hotels that it acquires in the future
to operators, including the Lessee as well as operators unaffiliated with
the Lessee. Future leases with the Lessee generally will be similar to the
Percentage Leases. See "Business and Properties --The Percentage Leases."
Future leases with operators unaffiliated with the Lessee may or may not be
similar to the Percentage Leases. The Trustees will negotiate the terms and
provisions of each future lease, depending on the purchase price paid, economic
conditions and other factors deemed relevant at the time.
The Company's additional investments in hotels may be financed, in
whole or in part, with undistributed cash, subsequent issuances of Priority
Common Shares or other securities, or borrowings. The Company is currently
pursuing with lenders a $10 million line of credit (the "Line of Credit"). A
failure to obtain the Line of Credit could adversely affect the Company's
ability to finance its growth strategy. See "Risk Factors --Dependence Upon
External Financing." The Company's initial policy is to limit consolidated
indebtedness to less than 67% of the aggregate purchase prices for the hotels in
which it has invested (the "Debt Policy"). The Trustees, however, may change the
Debt Policy without the approval of the Company's shareholders. The aggregate
purchase prices paid by the Company for the Initial Hotels is approximately
$47.3 million. After the Formation Transactions, the Company's indebtedness will
be approximately $17.4 million (consisting of the Assumed Indebtedness),
which represents approximately 37% of the aggregate purchase price to be paid
by the Company. Because of the Debt Policy and the amount of the Assumed
Indebtedness, the success of the Company's acquisition strategy will depend in
the future on its ability to access additional capital through issuances of
equity securities. See "The
6
<PAGE>
Company--Growth Strategy--Investment Criteria and Financing," "Risk
Factors--Risks of Leverage" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Internal Growth Strategy
The Percentage Leases are designed to allow the Company to participate
in growth in revenues at the Initial Hotels. See "Business and Properties--The
Percentage Leases." The Percentage Leases generally provide for the Lessee to
pay in each calendar quarter the greater of base rent ("Base Rent") or
percentage rent ("Percentage Rent"). The Percentage Rent for each Initial Hotel
is comprised of (i) a percentage of room revenues up to a certain threshold
amount (the "Threshold"), (ii) a percentage of room revenues in excess of the
Threshold but not more than an incentive threshold amount (the "Incentive
Threshold"), (iii) a percentage of room revenues in excess of the Incentive
Threshold and (iv) a percentage of revenues other than room revenues. The
Incentive Threshold is designed to provide incentive to the Lessee to generate
higher revenues at each hotel by lowering the percentage of revenue paid as
Percentage Rent once room revenues reach certain levels. In the case of the
Newly-Developed Hotels and the Newly-Renovated Hotels, the Lessee will pay the
Initial Fixed Rent until the First Adjustment Date or the Second Adjustment
Date, as applicable, after which the Lessee will pay the greater of Base Rent or
Percentage Rent. See "Business and Properties--The Initial Hotels" and "--The
Percentage Leases--Amounts Payable Under the Percentage Leases." The Initial
Fixed Rent, the Base Rent and Percentage Rent are hereinafter referred to
collectively as "Rent."
Formation Transactions
The principal transactions in connection with the formation of the
Company and the acquisition of interests in the Initial Hotels (the "Formation
Transactions") are as follows:
o The Company will sell 1,833,334 Priority Common Shares
to the Underwriter at the Offering Price. The net proceeds to
the Company from the Offering will be contributed to the
Partnership in exchange for approximately a 32% general
partnership interest in the Partnership. In addition, the
Company will offer 166,666 Priority Common Shares to the
Hersha Affiliates at the Offering Price. The information
contained herein assumes that none of these 166,666 Priority
Common Shares are sold.
o The Partnership will acquire the Initial Hotels by
acquiring either all of the partnership interests in
the Combined Entities or the Initial Hotels in
exchange for (i) Subordinated Units that will be
redeemable, subject to certain limitations, for an
aggregate of approximately 4 million Class B Common
Shares, with a value of approximately $23.8 million
based on the Offering Price and (ii) the assumption of
approximately $23.8 million in indebtedness secured
by all of the Initial Hotels, approximately $6.4
million of which will be repaid with the proceeds of
the Offering. The purchase prices of the
Newly-Developed Hotels and the Newly-Renovated Hotels
will be adjusted on the First Adjustment Date or the
Second Adjustment Date, as applicable, as described in
"--The Company."
o The land underlying the Holiday Inn Express, Harrisburg,
Pennsylvania and the Comfort Inn, Denver, Pennsylvania each
will be leased to the Partnership by certain Hersha Affiliates
for aggregate rent of $21,000 per year for 99 years. Also, a
portion of the land adjacent to the Hampton Inn, Selinsgrove,
Pennsylvania will be leased to a Hersha Affiliate for $1 per
year for 99 years.
o Each Initial Hotel will be leased to the Lessee pursuant to a
Percentage Lease. The Percentage Leases will have an initial
non-cancelable term of five years. All, but not less than all,
of the Percentage Leases may be extended for an additional
five-year term. At the end of the first extended term, the
Lessee, at its option, may extend some or all of the
Percentage Leases for the Initial Hotels for an additional
five-year term. The Percentage Leases generally provide for
the Lessee to pay in each calendar quarter the greater of the
Base Rent or Percentage Rent. The Percentage Rent for each
Initial Hotel is comprised of (i) a percentage of room
revenues up to the Threshold, (ii) a percentage of room
revenues in excess of the Threshold but less than the
7
<PAGE>
Incentive Threshold, (iii) a percentage of room revenues in
excess of the Incentive Threshold and (iv) a percentage of
revenues other than room revenues. The Incentive Threshold is
designed to provide an incentive to the Lessee to generate
higher revenues at each hotel. Until the First Adjustment Date
or the Second Adjustment Date, as applicable, the rent on the
Newly-Developed Hotels and the Newly-Renovated Hotels will be
the Initial Fixed Rents applicable to those hotels. After the
First Adjustment Date or the Second Adjustment Date, as
applicable, rent will be computed with respect to the
Newly-Developed Hotels and the Newly-Renovated Hotels based on
the percentage rent formulas described herein. The Lessee will
hold the franchise license (the "Franchise License") for each
Initial Hotel. See "Business and Properties--The Percentage
Leases."
o The Partnership and certain of the Hersha Affiliates have
entered into the Option Agreement, pursuant to which the
Hersha Affiliates will agree that, if they develop or own any
hotels in the future that are located within 15 miles of any
Initial Hotel or hotel subsequently acquired by the
Partnership, the Hersha Affiliates will give the Partnership
the option to purchase such hotels for two years after
acquisition or development. See "Risk Factors--Conflicts of
Interest--Competing Hotels Owned or to be Acquired by the
Hersha Affiliates" and "Policies and Objectives with Respect
to Certain Activities--Conflict of Interest Policies--The
Option Agreement."
o The Company and the Lessee will enter into the Administrative
Services Agreement, pursuant to which the Lessee will provide
certain administrative services in exchange for an annual fee
equal to $55,000, plus $10,000 for each hotel owned by the
Company.
o The Company has granted the Underwriter warrants to purchase
183,333 Priority Common Shares (the "Underwriter Warrants")
for a period of five years at a price per share equal to 165%
of the Offering Price.
o The Partnership has granted 2744 Associates, L.P., which is a
Hersha Affiliate, warrants to purchase 250,000 Units (the
"Hersha Warrants") for a period of five years at a price per
Unit equal to 165% of the Offering Price.
8
<PAGE>
Following consummation of the Formation Transactions, the structure and
relationships of the Company, the Partnership, the Initial Hotels and the Lessee
will be as follows:
[Flow chart describing the organization of the
Company after completion of the Offering appears here]
9
<PAGE>
(1) Four of the Initial Hotels will be held directly by the Partnership and
the remaining six Initial Hotels will be held by subsidiary
partnerships of the Partnership. The Company will lease the land
underlying the Holiday Inn Express, Harrisburg, Pennsylvania and the
Comfort Inn, Denver, Pennsylvania from certain Hersha Affiliates
pursuant to separate leases, each with a term of 99 years, and
collectively providing for annual rent of $21,000.
Benefits to the Hersha Affiliates
As a result of the Formation Transactions, the Hersha Affiliates will
receive significant benefits, including but not limited to the following:
o The Hersha Affiliates will receive approximately 4 million
Subordinated Units in exchange for their interests in the
Initial Hotels, which will have a value of approximately
$23.8 million based on the Offering Price. The Subordinated
Units held by the Hersha Affiliates will be more liquid than
their current interests in the Combined Entities if a public
trading market for the Class B Common Shares commences or when
such shares are converted into Priority Common Shares and
after the applicable holding periods expire.
o The Lessee, which is owned by the Hersha Affiliates, will hold
the Franchise Licenses for the Initial Hotels and will be
entitled to all revenues from the Initial Hotels after payment
of Rent under the Percentage Leases and other operating
expenses. The Company will pay certain expenses in connection
with the transfer of the Franchise Licenses to the Lessee. See
"The Lessee."
o Approximately $6.4 million of indebtedness owed by the
Combined Entities will be repaid with a portion of the
proceeds of the Offering. Approximately $4 million of such
indebtedness is owed to entities controlled by the Hersha
Affiliates and relates principally to hotel development
expenses in connection with the Initial Hotels. Certain of the
Assumed Indebtedness is and will remain guaranteed by the
Hersha Affiliates. Upon the repayment of such indebtedness,
the Hersha Affiliates will be released from the related
guarantees. The Hersha Affiliates may receive increased cash
distributions from the operations of the Initial Hotels as a
result of the reduction of indebtedness on the Initial Hotels.
o If the repricing on the First Adjustment Date or the Second
Adjustment Date, as applicable, produces a higher value for
the Newly-Developed Hotels or the Newly-Renovated Hotels, the
Hersha Affiliates will receive an additional number of
Subordinated Units that, when multiplied by the Offering
Price, equals the increase in value plus the value of any
distributions that would have been made in connection with
such Subordinated Units if such Subordinated Units had been
issued in connection with the acquisition of such hotels.
o The Lessee, which is owned by the Hersha Affiliates, will
receive an annual fee equal to $55,000, plus $10,000 for each
hotel owned by the Company for providing certain
administrative services to the Company.
o Certain tax consequences to the Hersha Affiliates from the
transfer of equity interests in the Initial Hotels will be
deferred.
o Messrs. Hasu P. Shah, K.D. Patel and Bharat C. Mehta will
receive $7,500 per year for serving as Trustees. Mr. Shah
shall also be entitled to receive a salary of not more than
$100,000 per year provided that the Priority Common Shares
have a closing price of $9.00 per share or higher
for 20 consecutive trading days and remain at or above $9.00
per share.
o The Partnership has granted 2744 Associates, L.P., which is a
Hersha Affiliate, the Hersha Warrants to purchase 250,000
Units for a period of five years at a price per share equal to
165% of the Offering Price.
10
<PAGE>
o Certain of the Hersha Affiliates will receive a total of
$21,000 per year pursuant to 99-year ground leases with
respect to the Holiday Inn Express, Harrisburg, Pennsylvania
and the Comfort Inn, Denver, Pennsylvania.
o A portion of the land adjacent to the Hampton Inn,
Selinsgrove, Pennsylvania will be leased to a Hersha Affiliate
for $1 per year for 99 years.
Conflicts of Interest
The Company will be subject to certain conflicts of interest resulting
from its relationship with the Lessee. Specifically, certain of the senior
officers of the Company will also be senior officers of the Lessee and will thus
be subject to conflicting fiduciary duties when negotiating between those
entities. In addition, certain senior officers and Trustees of the Company
collectively own approximately 35% of the Lessee, and their fiduciary duties to
the Company may be in conflict with their pecuniary interest in the Lessee. As a
result, the terms of negotiations and agreements between the Company and the
Lessee may not solely reflect the interests of the Company's shareholders.
The Company has adopted certain policies in its governing instruments,
has entered into certain agreements and is subject to certain provision of
Maryland law, all of which are designed to minimize the effects of potential
conflicts of interest. The Declaration of Trust, with limited exceptions,
requires that three of the Company's Trustees be Independent Trustees. Such
Independent Trustee requirement 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 (and the affirmative vote of the holders of not less than two-thirds
of the outstanding shares of beneficial interest of the Company entitled to vote
thereon). In addition, the Partnership has entered into the Option Agreement
with certain of the Hersha Affiliates pursuant to which the Hersha Affiliates
will agree that if they develop or own any hotels in the future that are located
within 15 miles of any Initial Hotel or hotel subsequently acquired by the
Partnership, the Hersha Affiliates will give the Partnership the option to
purchase such hotels for two years. See "Risk Factors--Conflicts of
Interest--Competing Hotels Owned or to be Acquired by the Hersha Affiliates" and
"Policies and Objectives with Respect to Certain Activities--Conflict of
Interest Policies--The Option Agreement." The Trustees also are subject to
certain provisions of Maryland law, which are designed to eliminate or minimize
certain potential conflicts of interest. See "Policies and Objectives with
Respect to Certain Activities--Conflict of Interest Policies--Provisions of
Maryland Law." However, there can be no assurance that these policies always
will be successful in eliminating the influence of such conflicts, and if they
are not successful, decisions could be made that might fail to reflect fully the
interests of all shareholders.
Distribution Policy
The Company intends to make regular quarterly distributions to holders
of the Priority Common Shares initially equal to $0.18 per share, which on an
annualized basis would be equal to $0.72 per share or 12.0% of the
Offering Price. The first distribution will cover the period from the closing
of the Offering to March 31, 1999. The Trustees will determine the actual
distribution rate based on the Company's actual results of operations, economic
conditions and other factors. See "Partnership Agreement" and "Distribution
Policy."
During the Priority Period, the holders of the Priority Common Shares
will be entitled to receive, prior to any distributions either to the holders of
the Subordinated Units or to the holders of the Class B Common Shares,
cumulative dividends in an amount per Priority Common Share equal to $0.18
per quarter. After the holders of the Subordinated Units and the Class B Common
Share have received an amount per Unit or per Class B Common Share equal to the
Priority Distribution, the holders of the Priority Common Shares will be
entitled to receive any further distributions on a pro rata basis with the
holders of the Subordinated Units and the Class B Common Shares. As of the
closing of the Offering, no Class B Common Shares will be outstanding. Thus, the
Priority Common Shares initially will have Priority Rights only with respect to
the outstanding Subordinated Units. In the future, the Company may issue
additional Priority Common Shares, and the Partnership may issue Units that are
not subordinated to the Priority Common Shares. See "Description of Shares of
Beneficial Interest" and "Partnership Agreement."
11
<PAGE>
Tax Status
The Company intends to make an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its initial taxable year ending December 31, 1998. If
the Company qualifies for taxation as a REIT, then with certain exceptions, the
Company will not be taxed at the corporate level on its taxable income that is
distributed to its shareholders. 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, excluding net capital gains.
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") as 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 Consequences," that the Company has been organized in
conformity with the requirements for qualification as a REIT beginning with its
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 or the Partnership 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 Declaration of
Trust imposes restrictions on the ownership and transfer of Priority Common
Shares. The Company intends to adopt the calendar year as its taxable year. See
"Risk Factors--Tax Risks," "--Ownership Limitation," "Federal Income Tax
Consequences--Taxation of the Company" and "Description of Shares of Beneficial
Interest - Declaration of Trust and Bylaw Provisions--Restrictions on Transfer."
The Offering
<TABLE>
<S> <C>
Priority Common Shares offered by the Company
to the Underwriter.................................... 1,833,334(1)
Priority Common Shares and Subordinated Units to be
outstanding after the Offering........................ 5,797,442(1)
Use of Proceeds........................................... To repay debt incurred in the acquisition of the
Initial Hotels, to pay certain expenses of the
Offering, to pay certain expenses associated with
the acquisition of the Initial Hotels and for
working capital purposes.
Symbol on the American Stock
Exchange.................................................. "HT"
</TABLE>
- ---------------
(1) Excludes 166,666 Priority Common Shares offered to the Hersha
Affiliates.
(2) Excludes 166,666 Priority Common Shares offered to the Hersha
Affiliates, 183,333 Priority Common Shares issuable upon
exercise of the Underwriter Warrants, 250,000 Class B Common
Shares issuable upon the redemption of 250,000 Units issuable
upon exercise of the Hersha Warrants, 650,000 Class B Common
Shares reserved for issuance pursuant to the Option Plan (as
herein defined) and 200,000 Class B Common Shares reserved for
issuance pursuant to the Trustees' Plan (as herein defined).
The Class B Common Shares will be converted into Priority
Common Shares on a one-for-one basis after the expiration of
the Priority Period. See "Description of Shares of Beneficial
Interest--Class B Common Shares," "Formation Transactions,"
"Management--Option Plan" and "Underwriting."
12
<PAGE>
Summary Financial Data
The following tables set forth unaudited summary balance sheet data for the
Company, unaudited pro forma condensed combined statements of operations for the
Lessee and summary combined historical operating and financial data for the
Combined Entities--Initial Hotels. Such data should be read in conjunction with
the financial statements and notes thereto, which are contained elsewhere in
this Prospectus. The pro forma condensed combined statements of operations for
the Lessee are presented as if the consummation of the Formation Transactions
had occurred on January 1, 1997 and carried forward through the interim period
presented. The balance sheet data for the Company is presented as if the
consummation of the Formation Transactions had occurred on September 30, 1998.
Hersha Hospitality Trust
Unaudited Summary Balance Sheet Data
(In thousands)
September 30, 1998
----------------------
Historical Pro Forma
---------- ---------
Balance Sheet Data:
Net investment in hotel properties................. -- $40,489
Minority interest in Partnership................... -- $18,355
Shareholders' equity............................... -- $ 8,488
Total assets....................................... -- $44,243
Total debt......................................... -- $17,400
Hersha Hospitality Management, L.P.
Unaudited Pro Forma Condensed Combined Statements of Operations(1)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Room revenue.......................... $ 11,824 $10,880
Other revenue (2)..................... 2,111 2,565
Total revenue......................... $ 13,935 $13,445
Hotel operating expenses (3).......... 8,506 9,214
Percentage Lease payments (4)......... 5,108 5,129
-------- -------
Net income (loss)..................... $ 321 $ (898)
======== =======
</TABLE>
- ------------------
(notes on following page)
13
<PAGE>
Combined Entities - Initial Hotels
Summary Combined Historical Operating and Financial Data
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30 Year Ended December 31
--------------------------- -----------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Room revenue $11,824 $ 7,750 $10,880 $7,273 $5,262
Other revenue (2) 2,111 1,942 2,565 2,716 1,957
------- ------- ------- ------ ------
Total revenue $13,935 $9,692 $13,445 $9,989 $7,219
Hotel operating expenses (3) 8,839 6,510 9,173 8,172 6,250
Interest 1,497 831 1,354 921 634
Depreciation and amortization 1,161 799 1,189 924 711
-------- ------- ------- ------ ------
Net income (loss) (5) $ 2,438 $ 1,552 $1,729 $ (28) $ (376)
======== ======= ======= ====== ======
</TABLE>
- -------------------------
(1) The estimated information does not purport to represent what the Lessee's
financial position or results of operations would actually
have been if consummation of the Formation Transactions had, in fact,
occurred on such date or at the beginning of the periods indicated, or to
project the Lessee's financial position or results of
operations at any future date or for any future period. Represents pro
forma revenue and expenses as if (i) 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, and (ii) the
Formation Transactions occurred as of the beginning of the periods
indicated.
(2) Represents restaurant revenue, telephone revenue and other revenue.
(3) 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 and management fees.
Real estate and personal property taxes, property and casualty insurance
and ground leases are the responsibility of the Partnership under the
Percentage Leases.
(4) Represents lease payments calculated on a pro forma basis using the rent
provisions in the Percentage Leases. The rent provisions in the Percentage
Leases are based upon an agreement between the Partnership and the Lessee
in which the parties have agreed to the lease terms and the form of lease
to be signed at the closing of the Offering. Lease payments are calculated
under two methods depending upon whether the Initial Hotel is a Stabilized
Hotel with an established operating history or a Newly-Developed Hotel or a
Newly-Renovated Hotel. The Rents for the Stabilized Hotels are calculated
by applying the percentage rent formulas to the historical room revenues
and other revenues of those hotels for the periods presented. Because the
Newly-Developed Hotels and the Newly-Renovated Hotels pay Initial Fixed
Rent for at least the first twelve months of operation, the Rent for those
hotels is based on the Initial Fixed Rents, recognized on a straight-line
basis over the period presented. In the case of the Newly-Developed Hotels,
the Initial Fixed Rents have been prorated for the periods the hotels were
in operation because the hotels have not been in operation for the full
periods presented.
(5) The Combined Entities are not subject to income tax, except Hersha
Enterprises, Ltd., which had no tax liability for the periods presented.
14
<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
In evaluating the Company's business, prospective investors should
carefully consider the following risk factors in addition to the other
information contained in this Prospectus.
Conflicts of Interest
Because of the Hersha Affiliates' ownership in and/or positions with
the Company, the Partnership, the Lessee and the Combined Entities, there are
inherent conflicts of interest in the Formation Transactions and in the ongoing
lease, acquisition, disposition and operation of the Initial Hotels.
Consequently, the interests of shareholders may not have been, and in the future
may not be, reflected fully in all decisions made or actions taken by officers
and Trustees of the Company. See "The Company--Formation Transactions" and
"Policies and Objectives with Respect to Certain Activities--Conflict of
Interest Policies."
Conflicts Relating to Sales or Refinancing of Initial Hotels
The Hersha Affiliates have unrealized gain associated with their
interests in the Initial Hotels and, as a result, any sale of the Initial Hotels
or refinancing or prepayment of principal on the Assumed Indebtedness by the
Company may cause adverse tax consequences to the Hersha Affiliates. Therefore,
the interests of the Company and the Hersha Affiliates could be different in
connection with the disposition or refinancing of an Initial Hotel. Decisions in
connection with any transaction involving the Company, including the disposition
of an Initial Hotel or refinancing of or prepayment of principal on the Assumed
Indebtedness, in which a Trustee or officer of the Company, or any Affiliate
thereof, has an interest (other than solely as a result of his status as a
Trustee, officer or shareholder of the Company) must be made by a majority of
the Trustees, including a majority of the Independent Trustees.
No Arm's-Length Bargaining on Percentage Leases, Contribution
Agreements, the Administrative Services Agreement and Option Agreement
The terms of the Percentage Leases, the agreements pursuant to which the
Company and the Partnership will acquire, directly or indirectly, the Initial
Hotels, the Administrative Services Agreement and the Option Agreement were not
negotiated on an arm's-length basis. See "Business and Properties--The
Percentage Leases" and "Certain Transactions--The Percentage Leases." The
Company will not own any interest in the Lessee. Messrs. Hasu P. Shah, K.D.
Patel, and Bharat C. Mehta are Trustees of the Company and collectively own
approximately 35% of the Lessee. Consequently, they have a conflict of interest
regarding the negotiation and enforcement of the Percentage Leases, the
Administrative Services Agreement and the Option Agreement. See "The Lessee."
Competing Hotels Owned or to be Acquired by the Hersha Affiliates
The Hersha Affiliates may develop or acquire new hotels, subject to
certain limitations. While it is anticipated that Mr. Shah will devote
substantially all of his time to the business of the Company, such development
or acquisition by the Hersha Affiliates may materially affect the amount of time
Mr. Shah has to devote to the affairs of the Company. The Lessee and its
affiliates may operate hotels that are not owned by the Company, subject to
certain restrictions, which may materially affect the amount of time that the
Lessee has to devote to managing the Initial Hotels. See "Policies and
Objectives with Respect to Certain Activities--Conflict of Interest
Policies--The Option Agreement."
15
<PAGE>
Acquisition of Hotels with Limited Operating History
The Newly-Developed Hotels have little operating history and the
Newly-Renovated Hotels have been newly renovated. The purchase prices of such
hotels are based upon projections by management as to the expected operating
results of such hotels, subjecting the Company to risks that such hotels may not
achieve anticipated operating results or may not achieve such results within
anticipated time frames. As a result, the Lessee may not generate enough net
operating income from such hotels to make the Initial Fixed Rent payments or,
after the First Adjustment Date or the Second Adjustment Date, as applicable, to
make the Base Rent payments. In addition, after the First Adjustment Date or
Second Adjustment Date, as applicable, room revenues may be less than required
to result in the payment of Percentage Rent at levels at a particular hotel that
provide the Company with its anticipated return on investment. In either case,
the amounts available for distribution to shareholders could be reduced.
Need for Certain Consents from the Limited Partners
Under the partnership agreement of the Partnership, as amended and
restated (the "Partnership Agreement"), the holders of at least two-thirds of
the interests in the Partnership, including the Company, which initially will
own approximately only a 32% interest in the Partnership, must approve a sale of
all or substantially all of the assets of the Partnership or a merger or
consolidation of the Partnership, provided, however, that such approval shall no
longer be required if the Company ever fails to pay a distribution of $.72 per
share to the holders of the Priority Common Shares for any 12-month period. The
Hersha Affiliates initially will own approximately a 68% interest in the
Partnership and thus initially will effectively hold veto power over such
extraordinary transactions, which could result in the disapproval of a
transaction that would be beneficial to the shareholders of the Company. See
"Partnership Agreement--Management."
Risks Related to the Company's Initial Distribution Policy
Based on the Company's estimated revenues and expenses for the twelve
months ended September 30, 1998, the Company estimates that it will distribute
100% of its estimated cash available for distribution and that the holders of
Subordinated Units will be entitled to receive an amount per Subordinated Unit
less than the Priority Distribution paid to the holders of the Priority Common
Shares. See "Distribution Policy." If actual cash available for distribution
falls short of estimated cash available for distribution, the Company may not be
able to maintain its proposed initial distribution rate. In addition, if the
Company's actual cash available for distribution after the Priority Period does
not increase above its estimated cash available for distribution, the Company
will not be able to maintain its proposed initial distribution rate after the
Priority Period. Distribution of substantially all of the Company's cash
available for distribution will limit the funds available to the Company for
capital expenditures to maintain its properties or to finance acquisitions of
future hotels.
Inability to Operate the Properties
As a result of its status as a REIT, the Company will not be able to
operate any hotels. The Company will be unable to make and implement strategic
business decisions with respect to its properties, such as decisions with
respect to the repositioning of a franchise, repositioning of food and beverage
operations and other similar decisions, even if such decisions are in the best
interests of a particular property. Accordingly, there can be no assurance that
the Lessee will operate the Initial Hotels in a manner that is in the best
interests of the Company.
Dependence on the Lessee
In order to generate revenues to enable it to make distributions to
shareholders, the Company will rely on the Lessee to make Rent payments. The
Lessee's obligations under the Percentage Leases, including the obligation to
make Rent payments, are unsecured. Reductions in revenues from the Initial
Hotels or in the net operating income of the Lessee may adversely affect the
ability of the Lessee to make such Rent payments and thus the Company's ability
to make anticipated distributions to its shareholders. Although failure on the
part of the Lessee to comply materially with the terms of a Percentage Lease
would give the Company the right to terminate any or all of the Percentage
Leases, to repossess the applicable properties and to enforce the payment
obligations under the Percentage Leases, the Company then would be required to
find another lessee. 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 lease on favorable terms.
16
<PAGE>
Newly-Organized Entities
The Company, the Partnership and the Lessee all have been recently
organized and have no operating histories. Although the officers and Trustees of
the Company have experience in developing, financing and operating hotels, most
of them have no experience in operating a REIT or a public company. See
"Management--Trustees and Officers."
Limited Numbers of Initial Hotels
The Company will own initially only ten hotels, three of which will be
operated as Holiday Inn Express(R) hotels, two as Hampton Inn(R) hotels, two as
Holiday Inn(R) hotels, two as a Comfort Inn(R) hotels and one as a Clarion
Suites(R) hotel. Significant adverse changes in the operations of any Initial
Hotel could have a material adverse effect on the Lessee's ability to make Rent
payments and, accordingly, on the Company's ability to make expected
distributions to its shareholders.
Guarantors of Assumed Indebtedness
Mr. Shah and the partners of the Combined Entities personally guarantee
all of the indebtedness secured by the Initial Hotels, and the personal
bankruptcy of any of the guarantors would constitute a default under the related
loan documents, which default would cause the Assumed Indebtedness to become
immediately due and payable. In the event that the lender accelerates the
payment, such acceleration could adversely affect the Company's cash available
for distribution. If the Company is unable to make such payment, the Company may
be forced to sell the Initial Hotels that serve as collateral for such Assumed
Indebtedness in order to make such payment.
Substantial Dilution
Purchasers of Priority Common Shares sold in the Offering will
experience immediate and substantial dilution of $2.14, or 35.6% of the
Offering Price, in the net tangible book value per Priority Common Share. See
"Dilution." In addition, in the event that any of the purchase prices of the
Newly-Renovated Hotels or the Newly-Developed Hotels are increased on the First
Adjustment Date or the Second Adjustment Date, as applicable, owners of the
Priority Common Shares at such time will experience further dilution.
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, the Company
has received an opinion of its counsel, Hunton & Williams, that, based on
certain assumptions and representations, it will so qualify. 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 of beneficial interest, the nature of
its assets, the sources of its income, and the amount of its distributions to
its shareholders. See "Federal Income Tax Consequences--Taxation of the
Company."
If the Company were to fail to qualify as a REIT in any taxable year,
the Company would not be allowed a deduction for distributions to its
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, amounts available for distribution to 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 Trustees,
with the consent of two-thirds of the shareholders, to revoke the REIT election.
See "Federal Income Tax Consequences."
17
<PAGE>
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 that 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 long-term capital gains, 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, except with respect to the Company's
short taxable year ended December 31, 1998, 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 to
shareholders will consist primarily of its share of cash distributions from the
Partnership. Differences in timing between the recognition of taxable income and
the receipt of amounts available for distribution due to the seasonality of the
hotel 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. See "Risk Factors--Risk of Leverage." 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 Trustees and
will be dependent on a number of factors, including the amount of the
Partnership's distributable cash, the Partnership's financial condition, any
decision by the 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 Trustees
deem relevant. See "Federal Income Tax Consequences--Requirements for
Qualification - Distribution Requirements."
Potential Adverse Effects of Leverage and Lack of Limits on Indebtedness
Upon completion of the Offering and the completion of the Formation
Transactions, the Company will assume the Assumed Indebtedness (in the aggregate
principal amount of approximately $17.4 million), which will be secured by
some of the Initial Hotels. 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 the Hotels. 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."
There can be no assurance 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. Although the Company's policy is to limit consolidated indebtedness
to less than 67% of the total purchase prices paid by the Company for the hotels
in which it has invested, there is no limit on the Company's ability to incur
debt contained in the Declaration of Trust or Bylaws. The Assumed Indebtedness
will represent approximately 37% of the total purchase prices paid by the
Company for the Initial Hotels. The Assumed Indebtedness will limit the
Company's ability to acquire additional hotels without issuing equity
securities. See "--Growth Strategy--Competition for Acquisitions" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Price Being Paid for the Initial Hotels May Exceed Their Value
No arm's-length negotiations were conducted and no independent
appraisals were obtained in connection with the Formation Transactions. There
can be no assurance that the price to be paid by the Company, which is
approximately $47.3 million in the aggregate, will not exceed the fair market
value of the Initial Hotels acquired by the Company. The initial valuation of
the Company is based on a valuation of the Initial Hotels and the rent to be
paid by the Lessee under the Percentage Leases. The Subordinated Units were
allocated among the Hersha Affiliates based upon their respective interests in
the Combined Entities.
18
<PAGE>
Emphasis on Franchise Hotels
The Company intends to place particular emphasis in its acquisition
strategy on hotels similar to the Initial Hotels. The Company initially will own
five hotels licensed under the Holiday Inn/Holiday Inn Express franchise brand
and thus will be subject to risks inherent in concentrating investments in a
particular franchise brand, which could have an adverse effect on the Company's
lease revenues and amounts available for distribution to shareholders. These
risks include, among others, the risk of a reduction in hotel revenues following
any adverse publicity related to the franchise brand. See "Business and
Properties--Franchise Licenses."
Concentration of Investments in Pennsylvania
All of the Initial Hotels are located in Pennsylvania. As a result,
localized adverse events or conditions, such as an economic recession, could
have a significant adverse effect on the operations of the Initial Hotels, and
ultimately on the amounts available for distribution to shareholders.
Hotel Industry Risks
Operating Risks
The Initial Hotels are subject to all operating risks common to the
hotel industry. The hotel industry has experienced volatility in the past, as
have the Initial Hotels, and there can be no assurance that such volatility will
not occur in the future. These risks include, among other things, competition
from other hotels; over-building in the hotel industry that could adversely
affect hotel revenues; increases in operating costs due to inflation and other
factors, which increases may not be offset by increased room rates; dependence
on business and commercial travelers and tourism; strikes and other labor
disturbances of hotel employees; increases in energy costs and other expenses of
travel; and adverse effects of general and local economic conditions. These
factors could reduce revenues of the Initial Hotels and adversely affect the
Lessee's ability to make Rent payments, and therefore, the Company's ability to
make distributions to its shareholders.
Competition for Guests
The hotel industry is highly competitive. The Initial Hotels will
compete with other existing and new hotels in their geographic markets. Many of
the Company's competitors have substantially greater marketing and financial
resources than the Company and the Lessee. See "Business and
Properties--Competition."
Investment Concentration in Single Industry
The Company's current growth strategy is to acquire hotels primarily in
the upper-economy and mid-scale segments of the hotel industry. The Company will
not seek to invest in assets selected to reduce the risks associated with an
investment in that segment of the hotel industry, and, therefore, is subject to
risks inherent in concentrating investments in a single industry and in specific
market segments within that industry. The adverse effect on Rent under the
Percentage Leases and amounts available for distribution to shareholders
resulting from a downturn in the hotel industry in general or the upper-economy
and mid-scale segments in particular would be more pronounced than if the
Company had diversified its investments outside of the hotel industry or in
additional hotel market segments.
Seasonality of Hotel Business and the Initial Hotels
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.
The Initial Hotels' operations historically reflect this trend. The Company
believes that it will be able to make its expected distributions during its
initial year of operation through cash flow from operations. See "Distribution
Policy" and "Management's Discussion and Analysis of Financial Condition and
Result of Operations--Seasonality."
19
<PAGE>
Risks of Operating Hotels under Franchise Licenses
The continuation of the Franchise Licenses is subject to specified
operating standards and other terms and conditions. Holiday Inn Express(R),
Holiday Inn(R), Hampton Inn(R), and Choice Hotels International, Inc.(R)
("Choice Hotels"), the franchisor of Comfort Inns(R) and Clarion Suites(R),
periodically inspect their licensed properties to confirm adherence to their
operating standards. The failure of the Partnership or the Lessee to maintain
such standards respecting the Initial Hotels or to adhere to such other terms
and conditions could result in the loss or cancellation of the applicable
Franchise License. It is possible that a franchisor could condition the
continuation of a Franchise License on the completion of capital improvements
which the Trustees determine are too expensive or otherwise not economically
feasible in light of general economic conditions or the operating results or
prospects of the affected Initial Hotel. In that event, the Trustees may elect
to allow the Franchise License to lapse or be terminated. The franchisors have
agreed to amend the existing Franchise Licenses to substitute the Lessee as the
franchisee.
There can be no assurance that a franchisor will renew a Franchise
License at each option period. If a Franchise License is terminated, the
Partnership 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 related Initial Hotel because of the loss of
associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. Although the Percentage Leases require the
Lessee to maintain the Franchise Licenses for each Initial Hotel, the Lessee's
loss of a Franchise License for one or more of the Initial Hotels could have a
material adverse effect on the Partnership's revenues under the Percentage
Leases and the Company's amounts available for distribution to shareholders. See
"Business and Properties--Franchise Licenses."
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels, including the Initial Hotels, generally have an ongoing need
for renovations and other capital improvements, particularly in older
structures, including periodic replacement of furniture, fixtures and equipment.
Under the terms of the Percentage Leases, the Partnership is obligated to pay
the cost of expenditures for items that are classified as capital items under
generally accepted accounting principles that are necessary for the continued
operation of the Initial Hotels. If these expenses exceed the Company's
estimate, the additional cost could have an adverse effect on amounts available
for distribution to shareholders. In addition, the Company may acquire hotels in
the future that require significant renovation. Renovation of hotels involves
certain risks, including the possibility of environmental problems, construction
cost overruns and delays, uncertainties as to market demand or deterioration in
market demand after commencement of renovation and the emergence of
unanticipated competition from hotels. See "Business and the Properties--The
Percentage Leases."
Real Estate Investment Risks
General Risks of Investing in Real Estate
The Initial Hotels will be subject to varying degrees of risk generally
incident to the ownership of real property. The underlying value of the Initial
Hotels and the Company's income and ability to make distributions to its
shareholders are dependent upon the ability of the Lessee to operate the Initial
Hotels in a manner sufficient to maintain or increase revenues in excess of
operating expenses to enable the Lessee to make Rent payments. Hotel revenues
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
hotels, 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, hurricanes and other natural
disasters (which may result in uninsured losses), acts of war, adverse changes
in zoning laws, and other factors that 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. No assurances can be given that the fair market
value of any of the Initial Hotels will not decrease in the future.
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<PAGE>
Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be
maintained on each of the Initial Hotels, including liability and fire and
extended coverage in amounts sufficient to permit the replacement of the Initial
Hotels in the event of a total loss, subject to applicable deductibles.
Management of the Company believes that such specified coverage is of the type
and amount customarily obtained by owners of hotels similar to the Initial
Hotels. Percentage Leases for hotels subsequently acquired by the Company will
contain similar provisions. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, floods and hurricanes,
that may be uninsurable or not economically insurable. Inflation, changes in
building codes and ordinances, environmental considerations, and other factors
also might make it infeasible to use insurance proceeds to replace the
applicable hotel after such applicable hotel 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 the applicable
hotel.
Property Taxes
Each Initial Hotel is subject to real and personal property taxes. The
real and personal 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. If property taxes
increase, the Company's ability to make expected distributions to its
shareholders could be adversely affected.
Environmental Matters
Operating costs may be affected by the obligation to pay for the cost
of complying with existing environmental laws, ordinances and regulations, as
well as the cost of future legislation. 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. The cost of
complying with environmental laws could materially adversely affect amounts
available for distribution to shareholders. Recent Phase I environmental
assessments have been obtained on all of the Initial Hotels. The purpose of
Phase I environmental assessments is to identify potential environmental
contamination that is made apparent from historical reviews of the Initial
Hotels, reviews of certain public records, preliminary investigations of the
sites and surrounding properties, and screening for the presence of hazardous
substances, toxic substances and underground storage tanks. The Phase I
environmental assessment reports have not revealed any environmental
contamination that the Company believes would have a material adverse effect on
the Company's business, assets, results of operations or liquidity, nor is the
Company aware of any such liability. Nevertheless, it is possible that these
reports do not reveal all environmental liabilities or that there are material
environmental liabilities of which the Company is unaware.
Compliance with Americans with Disabilities Act and other Changes in
Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1993 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. While the Company believes that the
Initial Hotels are substantially in compliance with these requirements, 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. In addition,
changes in governmental rules and regulations or enforcement policies affecting
the use and operation of the Hotels, including changes to building codes and
fire and life-safety codes, may occur. If the Company were required to make
substantial modifications at the Initial Hotels to comply with the ADA or other
changes in governmental rules and regulations, the Company's ability to make
expected distributions to its shareholders could be adversely affected.
Market for Priority Common Shares
Prior to the Offering, there has been no public market for the Priority
Common Shares. The Priority Common Shares have been approved for listing,
subject to final notice of issuance, on The American Stock Exchange. The
Offering Price may not be indicative of the market price for the Priority Common
Shares after the Offering. There can be no assurance that an active public
market for the Priority Common Shares will develop or continue after the
Offering. See "Underwriting" for a discussion of factors to be considered in
establishing the
21
<PAGE>
Offering Price. If accepted for listing, there can be no assurances that the
Company will continue to meet the criteria for continued listing of the Priority
Common Shares on The American Stock Exchange.
Effect of Market Interest Rates on Price of Priority Common Shares
One of the factors that may influence the price of the Priority Common
Shares in public trading markets will be the annual yield from distributions by
the Company on the Priority 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 Priority Common Shares.
Anti-takeover Effect of Ownership Limit, Limited Partner Consents, Staggered
Board, Power to Issue Additional Shares and Certain Provisions of Maryland Law
Ownership Limitation
The Declaration of Trust generally prohibits direct or indirect
ownership of more than 9.9% of the number of outstanding shares of any class of
securities of the Company, including the Priority Common Shares, by any person
(the "Ownership Limitation"). Generally, Priority Common Shares owned by
affiliated owners will be aggregated for purposes of the Ownership Limitation.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a change in control or other transaction in which holders of some, or
a majority, of Priority Common Shares might receive a premium for their Priority
Common Shares over the then prevailing market price or which such holders might
believe to be otherwise in their best interests. See "Description of Shares of
Beneficial Interest - Restrictions on Transfer" and "Federal Income Tax
Consequences--Requirements for Qualification."
Limited Partner Consents
The holders of at least two-thirds of the interests in the Partnership,
including the Company, which initially will own approximately only a 32%
interest in the Partnership, must approve, subject to certain conditions, a sale
of all or substantially all of the assets of the Partnership or a merger or
consolidation of the Partnership, which could result in the disapproval of a
transaction that would be beneficial to the shareholders of the Company. See
"--Need for Certain Consents from the Limited Partners."
Staggered Board
The Company's Board of Trustees is divided into two classes. The
initial terms of the first and second classes will expire in 1999 and 2000,
respectively. Beginning at the annual meeting of shareholders in 1999, Trustees
of each class will be chosen for two-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 delay, defer or prevent a
tender offer, a change in control of the Company or other transaction, even
though such a transaction 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."
Issuance of Additional Shares
The Company's Declaration of Trust authorizes the Board of Trustees,
without shareholder approval, to (i) amend the Declaration of Trust to increase
or decrease the aggregate number of shares of beneficial interest or the number
of shares of beneficial interest of any class that the Company has the authority
to issue, (ii) cause the Company to issue additional authorized but unissued
Priority Common, Class B Common or Preferred 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 reclassified shares, including the
issuance of additional Priority Common Shares or preferred shares that have
preference rights over the Priority Common Shares with respect to dividends,
liquidation, voting and other matters. See "Description of Shares of Beneficial
Interest--Preferred Shares." Future equity offerings may cause the purchasers of
the Priority Common Shares sold in the Offering to experience further dilution.
The Company has no current plans for future equity offerings. Although the Board
of Trustees has no such intention at the present time, it could establish a
series of Preferred Shares 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 Priority 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
22
<PAGE>
for the Priority 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," "--Control Share
Acquisitions" and "--Advance Notice of Trustees Nominations and New Business."
Maryland Business Combination Law
Under the Maryland General Corporation Law, as amended ("MGCL"), as
applicable to real estate investment trusts, certain "business combinations"
(including certain issuances of equity securities) between a Maryland real
estate investment trust and any person who beneficially owns ten percent or more
of the voting power of the trust's shares (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 approved by two super-majority shareholder
votes unless, among other conditions, the trust's common shareholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Shareholder for its common shares. See "Certain Provisions of Maryland Law and
the Company's Declaration of Trust and Bylaws--Business Combinations."
Dependence Upon External Financing
The Company anticipates that its growth and acquisition strategies will
be largely financed through externally generated funds such as borrowings under
the Line of Credit and other secured and unsecured debt financing and from
issuance of equity securities. Because the Company must distribute 95% of its
taxable income to maintain its qualification as a REIT, the Company's ability to
rely upon income from operations or cash flow from operations to finance its
growth and acquisition activities will be limited. Accordingly, were the Company
unable to obtain the Line of Credit or other funds from borrowings or to access
the capital markets to finance its growth and acquisition activities, the
Company's ability to grow could be curtailed, cash available for distribution to
shareholders of the Company could be adversely affected and the Company could be
required to reduce distributions.
Assumption of Contingent Liabilities of Combined Entities
Because the Partnership is acquiring partnership interests in certain
of the Combined Entities, the Partnership will assume all contingent liabilities
of those Combined Entities. Certain of the Hersha Affiliates are managing
partners of the Combined Entities and have made representations and warranties
that the Combined Entities have no liabilities, debts or obligations except for
liabilities arising under operating agreements, equipment leases, loan
agreements or proration credits on the Closing Date. There is, however, a risk
that unforeseen liabilities could exist and could adversely affect amounts
available for distribution to shareholders.
Possible Increase in Ground Lease Payments for Comfort Inn, Denver, Pennsylvania
The Company will lease the land under the Comfort Inn, Denver,
Pennsylvania from Hasu P. Shah and Bharat C. Mehta for $6,000 per year for 99
years. Messrs. Shah and Mehta have pledged their interests in the land to a
lender to secure a loan from the lender. Pursuant to the terms of the loan
agreement, in the event of a default on the loan, the ground lease with the
Company will not terminate, but the lender has the option to adjust the payments
to fair rental value at the time of the loan default based on a third-party
appraisal. Accordingly, in the event of a default by Messrs. Shah and Mehta on
the loan that is secured by the land, the Company's rental obligations under the
ground lease may increase.
Year 2000 Risks
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"). There can be no assurance that
the computer systems and operations of the Company or its third party vendors or
other service providers will be Year 2000 compliant. The failure of the Company
or its third party vendors or other services providers to have Year 2000
compliant systems could have a material adverse effect on the Company and its
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Year 2000 Compliance."
23
<PAGE>
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 limitation and
distributions, will be determined by the Trustees. The Trustees may amend or
revise these and other policies from time to time without a vote of the holders
of the Priority Common Shares. Although three of the Trustees are required to be
Independent Trustees, a majority of the initial Board of Trustees will not be
Independent Trustees and thus such policies may be changed by the
non-Independent Trustees. The effect of any such changes may be positive or
negative. Under the Declaration of Trust, the Company cannot change its policy
of seeking to maintain its qualification as a REIT without the approval of the
holders of two-thirds of the outstanding Priority Common Shares. See "Policies
and Objectives with Respect to Certain Activities" and "Certain Provisions of
Maryland Law and the Company's Declaration of Trust and Bylaws."
Growth Strategy
Competition for Acquisitions
There will be competition for investment opportunities in upper-economy
and mid-scale hotels from entities organized for purposes substantially similar
to the Company's objectives, as well as other purchasers of hotels. The Company
will be competing for such investment opportunities with entities that have
substantially greater financial resources than the Company, including access to
capital or better relationships with franchisors, sellers or lenders. The
Company's policy is to limit consolidated indebtedness to less than 67% of the
total purchase prices paid by the Company for the hotels in which it has
invested. See "Risk Factors--The Price Being Paid for the Initial Hotels May
Exceed Their Value." Because of the amount of the Assumed Indebtedness, the
success of the Company's acquisition strategy will depend primarily on its
ability to access additional capital through issuances 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. See "Business and Properties--Competition."
Acquisition Risks
The Company intends to pursue acquisitions of additional hotel
properties. 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 properties will prove inaccurate, as well as
general investment risks associated with any new real estate investment. The
Company anticipates that its growth and acquisition strategies will be largely
financed through externally generated funds such as borrowings under credit
facilities and other secured and unsecured debt financing and from issuance of
equity securities. Because the Company must distribute 95% of its taxable income
to maintain its qualification as a REIT, the Company's ability to rely upon
income from operations or cash flow from operations to finance its growth and
acquisition activities will be limited. Accordingly, were the Company unable to
obtain funds from borrowings or the capital markets to finance its growth and
acquisition activities, the Company's ability to grow could be curtailed,
amounts available for distribution to shareholders could be adversely affected
and the Company could be required to reduce distributions.
Reliance on Trustees and Management
Common 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. See "Description of Shares of Beneficial
Interest--Common Shares" and "Certain Provisions of Maryland Law and of the
Company's Declaration of Trust and Bylaws." The Trustees will be responsible for
managing the Company. The Company will rely upon the services and expertise of
its Trustees for strategic business direction.
In addition, there may be conflicting demands on Mr. Shah caused by his
overlapping management of the Company and Hersha Enterprises Ltd. Hersha
Enterprises Ltd. owns and operates properties other than the Initial Hotels, and
Mr. Shah, who serves as Chairman of the Board and Chief Executive Officer of the
Company and President of Hersha Enterprises, Ltd., may experience a conflict in
allocating his time between such entities.
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<PAGE>
Possible Adverse Effect of Shares Available for Future Sale on Price of Priority
Common Shares
After termination of the Priority Period, the Class B Common Shares
will automatically be converted into Priority Common Shares on a one-for-one
basis. Sales of a substantial number of Priority or Class B Common Shares, or
the perception that such sales could occur, could adversely affect prevailing
market prices of the Priority Common Shares. In the Formation Transactions,
approximately 4 million Subordinated Units will be issued to the Hersha
Affiliates in addition to the Priority Common Shares offered by the Company in
the Offering. See "Formation Transactions." In general, one year after the
closing of the Offering, the Subordinated Units will be redeemable for cash or,
at the option of the Company, Class B Common Shares. In the event the Class B
Common Shares are converted into Priority Common Shares prior to redemption of
the Subordinated Units, such outstanding Subordinated Units will become
redeemable for Priority Common Shares. See "Shares Available for Future Sale"
and "Underwriting." At the conclusion of such periods and upon the subsequent
redemption of Units, the Class B Common Shares or Priority Common Shares
received therefor may be sold in the public market pursuant to shelf
registration statements that the Company is obligated to file on behalf of
limited partners of the Partnership, or pursuant to any available exemptions
from registration.
THE COMPANY
The Company has been established to own initially the ten Initial
Hotels and to continue the hotel acquisition and development strategies of Hasu
P. Shah, Chairman of the Board of Trustees and Chief Executive Officer of the
Company. The Company, formed in May 1998, is a self-advised Maryland real estate
investment trust that intends to qualify as a REIT for federal income tax
purposes. The Initial Hotels include three Holiday Inn Express(R) hotels, two
Hampton Inn(R) hotels, two Holiday Inn(R) hotels, two Comfort Inn(R) hotels and
one Clarion Suites(R) hotel. The Initial Hotels are located in Pennsylvania and
contain an aggregate of 989 rooms. The Newly-Developed Hotels are newly
constructed and therefore have limited operating history. The Newly-Renovated
Hotels have been newly renovated and, as a result, the Company believes that
such hotels' future performance will improve significantly over such hotels'
prior operating histories.
The Company will contribute substantially all of the net proceeds from
the Offering to the Partnership in exchange for approximately a 32%
partnership interest in the Partnership. The Company will be the sole general
partner of the Partnership. Shortly after the closing of the Offering, the
Partnership will acquire, directly or through the partnerships that currently
own the hotels, 100% of the equity interests in the Initial Hotels. Mr. Shah and
the Hersha Affiliates own the Combined Entities. Ownership of the land
underlying two of the Initial Hotels will be retained by certain Hersha
Affiliates and will be leased to the Partnership pursuant to separate ground
leases, each with a 99-year term, and collectively providing for rent of $21,000
per year. See "Certain Relationships and Transactions."
The Partnership will acquire the Initial Hotels in exchange for (i)
Subordinated Units that will be redeemable, subject to certain limitations,
for an aggregate of approximately 4 million Class B Common Shares, with a
value of approximately $23.8 million based on the Offering Price, and (ii)
the assumption of approximately $23.8 million of indebtedness related to the
Initial Hotels, including the Assumed Indebtedness and approximately $6.4
million that will be repaid immediately after the acquisition of the Initial
Hotels. See "Formation Transactions." The purchase prices of the Newly-Renovated
Hotels will be adjusted on the First Adjustment Date. The purchase prices of the
Newly-Developed Hotels will be adjusted on the Second Adjustment Date. The
adjustments will be calculated by applying the initial pricing methodology to
such hotels' cash flows as shown on the Company's and the Lessee's audited
financial statements for the year ended on the First Adjustment Date or the
Second Adjustment Date, as applicable, and the adjustments must be approved by a
majority of the Independent Trustees. If the repricing produces a higher
aggregate value for such hotels, the Hersha Affiliates will receive an
additional number of Subordinated Units that, when multiplied by the Offering
Price, equals the increase in value plus the value of any distributions that
would have been made with respect to such Subordinated Units if such
Subordinated Units had been issued at the time of the acquisition of such
hotels. If, however, the repricing produces a lower aggregate value for such
hotels, the Hersha Affiliates will forfeit to the Partnership that number of
Subordinated Units that, when multiplied by the Offering Price, equals the
decrease in value plus the value of any distributions made with respect to such
Subordinated Units.
In order for the Company to qualify as a REIT, neither the Company nor
the Partnership may operate hotels. Therefore, the Initial Hotels will be leased
to the Lessee pursuant to the Percentage Leases. Each Percentage Lease has been
structured to provide anticipated rents at least equal to 12% of the purchase
price paid
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for the hotel, net of (i) property and casualty insurance premiums, (ii) real
estate and personal property taxes, and (iii) a reserve for furniture, fixtures
and equipment equal to 4% (6% for the Holiday Inn, Harrisburg, PA and the
Holiday Inn, Milesburg, PA) of gross revenues per quarter at the hotel. This pro
forma return is based on certain assumptions and historical revenues for the
Initial Hotels (including projected revenues for the Newly-Developed Hotels and
the Newly-Renovated 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--Acquisition of Hotels with Limited Operating
History." Until the First Adjustment Date or the Second Adjustment Date, as
applicable, the rent on the Newly-Developed Hotels and the Newly-Renovated
Hotels will be the Initial Fixed Rents applicable to those hotels. After the
First Adjustment Date or the Second Adjustment Date, as applicable, rent will be
computed with respect to the Newly-Developed Hotels and the Newly-Renovated
Hotels based on the percentage rent formulas described herein. The Initial
Hotels will be operated by the Lessee. The Percentage Leases will have initial
terms of five years and may be extended for two additional five-year terms at
the option of the Lessee. See "Business and Properties--The Percentage Leases."
The following table sets forth certain information with respect to the
Initial Hotels:
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1997
-----------------------------------------------------------------------
Average
Number of Room Other Daily
Initial Hotels Rooms Revenue Revenue(1) Occupancy Rate REVPAR(2)
- -------------- --------- ------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Newly-Developed
Holiday Inn Express
Hershey, PA(3)........................ 85 210,612 $4,877 38.8% $75.62 $29.35
New Columbia, PA(4)................... 81 13,369 $253 9.0% $59.68 $5.39
Hampton Inn:
Carlisle, PA(5)....................... 95 659,861 8,421 53.5% $65.33 $34.93
Comfort Inn:
Harrisburg, PA(6)..................... 81
Newly-Renovated
Holiday Inn Express:
Harrisburg, PA(7)..................... 117 1,357,241 176,868 56.4% $56.33 $31.78
Holiday Inn:
Milesburg, PA.......................... 118 1,254,070 220,684 52.0% $56.07 $29.13
Comfort Inn:
Denver, PA (8)......................... 45 658,285 0 54.7% $73.26 $40.08
Stabilized
Holiday Inn Hotel and Conference Center:
Harrisburg, PA......................... 196 3,103,820 1,787,958 63.3% $68.22 $43.17
Hampton Inn:
Selinsgrove, PA (9).................... 75 1,271,943 46,148 71.9% $65.29 $46.96
Clarion Suites:
Philadelphia, PA....................... 96 2,350,702 319,950 73.7% $91.02 $67.09
--- ---------- --------- -------- -------- ------
Total/weighted average.................. 989 $10,879,903 $2,565,159 60.2% $68.27 $41.09
=== =========== ========== ======== ======== ======
</TABLE>
- -------------------------
(1) Represents restaurant revenue, telephone revenue and other revenue.
(2) REVPAR is determined by dividing room revenue by available rooms
for the applicable period.
(3) This hotel opened in October 1997 and, thus, the data shown
represent operations from the date of opening through December 31,
1997.
(4) This hotel opened in December 1997 and, thus, the data shown
represent operations from the date of opening through December 31,
1997.
(5) This hotel opened in June 1997 and, thus, the data shown represent
operations from the date of opening through December 31, 1997.
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<PAGE>
(6) This hotel opened in May 1998.
(7) The land underlying this hotel will be leased to the Partnership by
certain Hersha Affiliates for rent of $15,000 per year for 99 years.
(8) The land underlying this hotel will be leased to the Partnership by
certain Hersha Affiliates for rent of $6,000 per year for 99 years.
(9) A portion of the land adjacent to this hotel, which is not
currently used for hotel operations, will be leased to a Hersha
Affiliate for $1 per year for 99 years.
For further information regarding the Initial Hotels, see "Business and
Properties - The Initial Hotels" and " -The Percentage Leases."
GROWTH STRATEGY
The Company will seek to enhance shareholder value by increasing
amounts available for distribution to shareholders by (i) acquiring additional
hotels that meet the Company's investment criteria as described below and (ii)
participating in any increased revenue from the Initial Hotels through the
Percentage Leases.
Acquisition Strategy
The Company will emphasize limited service and full service hotels with
strong, national franchise affiliations in the upper-economy and mid-scale
market segments, or hotels with the potential to obtain such franchises. In
particular, the Company will consider acquiring limited service hotels such as
Comfort Inn(R), Best Western(R), Days Inn(R), Fairfield Inn(R), Hampton Inn(R),
Holiday Inn(R) and Holiday Inn Express(R) hotels, and limited service
extended-stay hotels such as Hampton Inn and Suites(R), Homewood Suites(R), Main
Stay Suites(R) and Residence Inn by Marriott(R) hotels. Under the Bylaws, any
transaction involving the Company, including the purchase, sale, lease or
mortgage of any real estate asset, in which a Trustee or officer of the Company,
or any Affiliate thereof, has an interest (other than solely as a result of his
status as a Trustee, officer or shareholder of the Company) must be approved by
a majority of the Trustees, including a majority of the Independent Trustees.
Investment Criteria
The Company intends to focus predominantly on investments in hotels in
the eastern United States. Such investments may include hotels newly developed
by certain of the Hersha Affiliates. Pursuant to the Option Agreement, the
Partnership will have an option to acquire any hotels owned or developed
in the future by the Hersha Affiliates within 15 miles of any of the Initial
Hotels or any hotel subsequently acquired by the Partnership for two years
after acquisition or development. See "Certain Relationships and
Transactions--Option Agreement." The Company's initial policy with respect to
acquisitions of hotels (the "Acquisition Policy") is to acquire hotels for which
it expects to receive rents at least equal to 12% of the purchase price paid for
each hotel, net of (i) property and casualty insurance premiums, (ii) real
estate and personal property taxes, and (iii) a reserve for furniture, fixtures
and equipment equal to 4% (6% in the case of full-service hotels) of annual
gross revenues at each hotel. The Trustees, however, may change the Acquisition
Policy at any time without the approval of the Company's shareholders. The
Company expects to acquire hotels that meet one or more of the following
criteria:
o nationally-franchised hotels in locations with a relatively
high demand for rooms, with a relatively low supply of
competing hotels and with significant barriers to entry into
the hotel business, such as a scarcity of suitable hotel sites
or zoning restrictions;
o poorly managed hotels, which could benefit from new
management, new marketing strategy and association
with a national franchisor;
o hotels in a deteriorated physical condition that could
benefit significantly from renovations; and
o hotels in attractive locations that the Company
believes could benefit significantly by changing
franchises to a brand the Company believes is
superior.
The Company intends to lease hotels that it acquires in the future
to operators, including the Lessee as well as operators unaffiliated with
the Lessee. Future leases with the Lessee generally will be similar to the
27
<PAGE>
Percentage Leases. See "Business and Properties --The Percentage Leases."
Future leases with operators unaffiliated with the Lessee may or may not be
similar to the Percentage Leases. The Trustees will negotiate the terms and
provisions of each future lease, depending on the purchase price paid, economic
conditions and other factors deemed relevant at the time.
Financing
The Company's additional investments in hotels may be financed, in
whole or in part, with undistributed cash, subsequent issuances of Priority
Common Shares or other securities, or borrowings. The Company is currently
pursuing with lenders the Line of Credit. A failure to obtain the Line of Credit
could adversely affect the Company's ability to finance its growth strategy. See
"Risk Factors--Dependence Upon External Financing." The Company's Debt Policy is
to limit consolidated indebtedness to less than 67% of the aggregate purchase
prices paid by the Company for the hotels in which it has invested. The
Trustees, however, may change the Debt Policy without the approval of the
Company's shareholders. The aggregate purchase prices paid by the Company for
the Initial Hotels is approximately $47.3 million. After the Formation
Transactions, the Company's indebtedness will be approximately $17.4 million
(consisting of the Assumed Indebtedness), which represents approximately 37%
of the aggregate purchase price to be paid by the Company for the Initial
Hotels. Because of the Debt Policy and the amount of the Assumed Indebtedness,
the success of the Company's acquisition strategy will depend primarily on its
ability to access additional capital through issuances of equity securities. See
"Risk Factors--Risks of Leverage" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Internal Growth Strategy
The Percentage Leases are designed to allow the Company to participate
in growth in revenues at the Initial Hotels. See "Business and Properties--The
Percentage Leases." The Percentage Leases generally provide for the Lessee to
pay in each calendar quarter the greater of Base Rent or Percentage Rent. The
Percentage Rent for each Initial Hotel is comprised of (i) a percentage of room
revenues up to the Threshold, (ii) a percentage of room revenues in excess of
the Threshold but not more than the Incentive Threshold, (iii) a percentage of
room revenues in excess of the Incentive Threshold and (iv) a percentage of
revenues other than room revenues. The Incentive Threshold is designed to
provide incentive to the Lessee to generate higher revenues at each hotel by
lowering the percentage of revenue paid as Percentage Rent once room revenues
reach certain levels. In the case of the Newly-Developed Hotels and the
Newly-Renovated Hotels, the Lessee will pay the Initial Fixed Rent until the
First Adjustment Date or the Second Adjustment Date, as applicable, after which
the Lessee will pay the greater of Base Rent or Percentage Rent. See "Business
and Properties--The Initial Hotels" and "--The Percentage Leases-- Amounts
Payable Under the Percentage Leases."
28
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,833,334 Priority
Common Shares to the Underwriter are estimated to be approximately $9.5
million (based on the Offering Price), after deducting underwriting discounts
and estimated offering expenses of approximately $1.5 million. The Company
will contribute the net proceeds of the Offering to the Partnership in exchange
for approximately a 32% interest in the Partnership. The Partnership will use
the net proceeds as follows: (i) approximately $6.4 million to repay certain
of the outstanding indebtedness related to the Initial Hotels, including
approximately $4 million in debt owed to certain Hersha Affiliates and
related principally to the hotel development expenses in connection with the
Initial Hotels , (ii) approximately $0.7 million for costs associated with the
acquisition of the Initial Hotels and (iii) approximately $2.4 million for
working capital purposes. In addition, the Company will offer 166,666 Priority
Common Shares to the Hersha Affiliates at the Offering Price and no selling
commission will be payable to the Underwriter with respect to such shares. The
information contained herein assumes that none of the 166,666 Priority Common
Shares are sold. While the Company has the option to purchase certain hotels
under the Option Agreement, the Company currently has no agreement or
understanding to invest in any specific hotel other than the Initial Hotels. See
"Certain Relationships and Related Transactions--Option Agreement."
Pending the use of proceeds referenced above, the net proceeds will be
invested in interest-bearing, short-term, investment grade securities or money
market accounts, 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 indebtedness to be repaid with the net proceeds of the Offering
includes debt secured by some of the Initial Hotels as follows (in thousands):
<TABLE>
<CAPTION>
Mortgages payable secured by Annual
the following Initial Hotels: Amount(1) Maturity Date Interest Rate
<S> <C> <C> <C>
Holiday Inn, Milesburg, PA $ 860 1999 8.00%
Clarion Suites, Philadelphia, PA $1,540 2002/2010 9.50%
Amounts Due to Hersha Affiliates (2) $3,982 (3) 9.00%
-------
Total $6,382
======
</TABLE>
- --------------
(1) Based on balances at September 30, 1998.
(2) Loans advanced by the Hersha Affiliates principally
to fund hotel development expenses in connection
with the Initial Hotels.
(3) Payable on demand.
29
<PAGE>
DISTRIBUTION POLICY
After the Offering, the Company intends to make regular quarterly
distributions to holders of the Priority Common Shares initially equal to
$0.18 per share, which on an annualized basis would be equal to $0.72 per
share or 12.0% of the Offering Price. The first distribution will cover the
period from the closing of the Offering to March 31, 1999. The Company does
not expect to change its estimated initial distribution per Priority Common
Share if the Underwriter's over-allotment option is exercised.
Distributions made by the Company will be determined by the Trustees
and will depend on a number of factors, including the amount of funds from
operations, 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 Trustees
deem relevant. 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.
During the Priority Period, the holders of the Priority Common Shares
will be entitled to receive, prior to any distributions either to the holders of
the Subordinated Units or to the holders of the Class B Common Shares, the
Priority Distribution (i.e., cumulative dividends in an amount per Priority
Common Share equal to $0.18 per quarter). After the holders of the Priority
Common Shares have received the Priority Distribution, the holders of the
Subordinated Units and the Class B Common Shares will be entitled to receive
an amount per Subordinated Unit or per Class B Common Share equal to the
Priority Distribution paid to the holders of the Priority Common Shares.
Thereafter, the holders of the Priority Common Shares will be entitled to
receive any further distributions on a pro rata basis with the holders of the
Subordinated Units and the Class B Common Shares. As of the closing of the
Offering, no Class B Common Shares will be outstanding. Thus, the Priority
Common Shares initially will have Priority Rights only with respect to the
outstanding Subordinated Units. In the future, the Company may issue
additional Priority Common Shares, and the Partnership may issue Units that are
not subordinated to the Priority Common Shares. See "Description of Shares of
Beneficial Interest" and "Partnership Agreement."
The hotel business is seasonal in nature and, therefore, revenues of
the Initial Hotels in the first and fourth quarters are traditionally lower than
those in the second and third quarters. The Company believes that it will be
able to make its expected distributions for the first and fourth quarters of its
initial year of operation by drawing on the Line of Credit to fund any
shortfalls between cash available for distribution to common shareholders for
those quarters and the expected quarterly distributions for those quarters. See
"Risk Factors--Risk of Leverage" and "--Dependence Upon External Financing."
Thereafter, the Company expects to use excess cash flow from the second and
third quarters to fund any such shortfalls in the first and fourth quarters.
There are no assurances that cash available for distribution to the common
shareholders will be sufficient for the Company to make expected distributions
to common shareholders.
Based on the Company's estimated revenues and expenses for the
twelve months ended September 30, 1998, the Company estimates that 16% of the
estimated initial annual distribution to the holders of Priority Common Shares
will represent a return of capital for federal income tax purposes. If actual
funds from operations or taxable income vary from the estimated amounts, the
percentage of distributions that will represent a return of capital may vary
substantially. For a discussion of the tax treatment of distributions to the
holders of Priority Common Shares, see "Federal Income Tax Consequences." In
order to qualify to be taxed as a REIT, the Company must make annual
distributions to shareholders of at least 95% of its REIT taxable income
(determined by excluding any net capital gain). 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 a case, the Company may find it necessary to arrange for short-term
(or possibly long-term) borrowings, to sell assets or to raise funds through the
issuance of additional shares of beneficial interest.
The following table describes the Company's calculation of estimated
cash available for distribution and estimated initial distributions to holders
of the Priority Common Shares for the twelve months ended September 30, 1998.
The Company's calculation of estimated cash available for distribution is being
made solely for the purpose of calculating the expected initial distribution to
the Priority Common Shares and is not intended to be a projection or forecast of
the Company's results of operations or its liquidity, nor is the methodology
upon which such computations were made necessarily intended to be a basis for
determining future distributions.
30
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended
September 30, 1998
(In thousands)
<S> <C>
Estimated lease revenue (1).............................................................. 7,175
Estimated depreciation and amortization (2).............................................. 2,081
Estimated interest expense (3)........................................................... 1,501
Estimated real estate and personal property
taxes and property and casualty insurance (4)................................... 605
Estimated general and administrative (5)................................................. 335
Estimated ground lease (6)............................................................... 21
-----
Total estimated expenses................................................................. 4,543
Estimated net income before minority
interest........................................................................ 2,632
Estimated minority interest (7).......................................................... (1,520)
-------
Estimated net income applicable to
holders of Priority Common Shares............................................... 1,112
Add: Estimated depreciation and amortization, net of minority interest (8).............. 658
--------
Estimated funds from operations applicable to
holders of Priority Common Shares (9) .......................................... 1,770
Estimated cash provided by operating activities applicable to
holders of Priority Common Shares (10).......................................... 1,770
Subtract: Estimated cash used in investing activities:
Estimated additions to capital expenditure reserves,
net of minority interest (11)................................................... 268
Subtract: Estimated cash used in financing activities:
Estimated principal payments on debt, net of
minority interest (12).......................................................... 182
-------
Estimated cash available for distribution to holders of Priority Common Shares........... 1,320
Estimated cash available for distribution to holders of Subordinated Units (13).......... 1,971
Estimated initial distribution (14)...................................................... 1,320
Estimated dividend yield based on Offering Price (15).................................... 12%
</TABLE>
- -------------------------
(1) Estimated lease revenue is based on an agreement between the Partnership
and the Lessee in which the parties have agreed to the lease terms and the
form of lease to be signed at the closing of the Offering. Estimated lease
revenue is calculated under one of two methods depending upon whether the
Initial Hotel is a Stabilized Hotel with an established operating history
or a Newly-Developed or a Newly-Renovated Hotel. Because the Lessee is
required to pay Initial Fixed Rents on the Newly-Developed Hotels and the
Newly-Renovated Hotels for at least the first twelve months of operation,
the estimated lease revenue for those hotels for the twelve months ended
September 30, 1998 is based on the Initial Fixed Rents. The estimated lease
revenue for the Stabilized Hotels for the twelve months ended September 30,
1998 is calculated by applying the percentage rent formulas to the
historical room revenues and other revenues of those hotels for that
period. Estimated lease revenue for the twelve months ended September 30,
1998 is computed as follows:
31
<PAGE>
<TABLE>
<CAPTION>
Estimated Lease
Revenue for the 12
Initial Percentage Months Ended
Initial Hotel Fixed Rent Rent Formula September 30, 1998
------------- ---------- ------------ ------------------
<S> <C> <C> <C>
Newly-Developed Hotels
Holiday Inn Express,
Hershey, PA................. $795 $795
Holiday Inn Express,
New Columbia, PA............ 498 498
Hampton Inn, Carlisle, PA...... 699 699
Comfort Inn, Harrisburg, PA.... 514 514
Newly-Renovated Hotels
Holiday Inn Express,
Harrisburg, PA.............. 504 504
Holiday Inn, Milesburg, PA..... 525 525
Comfort Inn, Denver, PA........ 262 262
Stabilized Hotels
Holiday Inn Hotel and Conference
Center, Harrisburg, PA...... 44.3% of room revenue up to 1,670
$2,638,247, plus 65.0% of room revenue
in excess of $2,638,247 but less than
$3,103,820, plus 31.0% of room revenue
in excess of $3,103,820, plus 8.0% of all
non-room revenue.
Hampton Inn,
Selinsgrove, PA............. 49.0% of room revenue up to 690
$1,081,152, plus 65.0% of room revenue
in excess of $1,081,152 but less than
$1,271,943, plus 29.0% of room revenue
in excess of $1,271,943, plus 8.0% of all
non-room revenue.
Clarion Suites,
Philadelphia, PA............ 36.1% of room revenue up to 1,018
$1,998,097, plus 65.0% of room revenue
in excess of $1,998,097 but less than
$2,350,702, plus 29.0% of room revenue
in excess of $2,350,702, plus 8.0% of all
non-room revenue.
------
Total $7,175
</TABLE>
(2) Estimated depreciation and amortization is based on the actual
historical amounts for the Initial Hotels, adjusted for (i)
management's estimate of the depreciation and amortization for the
Newly-Developed Hotels for the period prior to opening, (ii)
management's estimate of depreciation and amortization for the assets
acquired with offering proceeds, and (iii) management's estimate of
depreciation and amortization associated with purchase accounting
adjustments. Estimated depreciation and amortization is computed as
follows:
32
<PAGE>
Actual historical depreciation and amortization..................$1,478
Add: Management's estimate of depreciation and amortization for
the Newly-Developed Hotels for the period prior to opening. 91
Add: Management's estimate of depreciation and amortization
for the assets acquired with offering proceeds............. 75
Add: Management's estimate of depreciation and amortization
associated with purchase accounting adjustments............ 437
Estimated depreciation and amortization..........................$2,081
(3) Reflects the weighted average interest rate of 8.32% per annum on the
Assumed Indebtedness. Calculated as the average indebtedness during the
year ended September 30, 1998, reduced by the anticipated debt
repayments from the proceeds of the Offering.
(4) Estimated real estate and personal property taxes and property and
casualty insurance is based on the actual historical amounts for the
Initial Hotels, adjusted for management's estimate of the real and
personal property taxes and property and casualty insurance for the
Newly-Developed Hotels for the period prior to opening. Estimated real
estate and personal property taxes and property and casualty insurance
is computed as follows:
Actual historical real estate and personal property
taxes and property and casualty insurance..........$574
Add: Management's estimate of real estate and personal
property taxes and property and casualty insurance
for the Newly-Developed Hotels for the period
prior to opening .................................. 31
----
Estimated real estate and personal property taxes
and property and casualty insurance................$605
(5) Represents management's estimate of fees payable under the
Administrative Services Agreement ($155), legal and audit fees ($100),
Trustees' fees ($60) and other expenses ($20).
(6) Represents management's estimate of ground lease payments with respect
to the Holiday Inn Express, Harrisburg, PA and the Comfort Inn, Denver,
PA pursuant to lease agreements.
(7) The Partnership Agreement provides that depreciation and amortization
deductions of the Partnership for each fiscal year will be allocated to
the Company and the Limited Partners in accordance with their
respective percentage interests in the Partnership. Profit of the
Partnership (excluding depreciation and amortization deductions) for
each year will be allocated in the following order of priority:
(i) first, to the Company until the aggregate amount of profit
allocated to the Company under this clause (i) for the current
and all prior years equals the aggregate amount of Preferred Return
(as herein defined) distributed to the Company for the current and all
prior years, (ii) second, to the Limited Partners in accordance with
their respective percentage interests in the Partnership until the
aggregate amount of profit allocated to the Limited Partners under this
clause second for the current and all prior years equals the aggregate
amount of Preferred Return distributed to the Limited Partners for the
current and all prior years, and (iii) finally, to the Company and the
Limited Partners in accordance with their respective percentage
interests in the Partnership. Accordingly, estimated minority interest
is computed as follows:
Distributable Cash:
Estimated net income................................$ 2,632
Add: Estimated depreciation and amortization....... 2,081
Estimated net cash from operations.................. 4,713
Less: Estimated FF&E reserves and debt repayments..(1,422)
-------
Estimated distributable cash........................$ 3,291
33
<PAGE>
Allocations:
<TABLE>
<S> <C>
Estimated depreciation and amortization (68.38% minority interest)....$(1,423)
Estimated net income (before depreciation and amortization) up to
distributable cash ($3,291 - $1,320 priority distribution)...... 1,971
Estimated remaining net income (before depreciation and amortization)
($2,632 + $2,081 - $3,291 x 68.38% minority interest)........... 972
-----
Estimated minority interest........................................... $ 1,520
</TABLE>
(8) Estimated depreciation and amortization, net of minority interest, for
the twelve months ended September 30, 1998 is computed as follows:
Estimated depreciation and amortization......................$ 2,081
Subtract: Estimated minority interest in estimated
depreciation and amortization (68.38%)................. 1,423
-----
Estimated depreciation and amortization, net of minority
interest...................................................$ 658
(9) In accordance with the resolution adopted by the Board of Governors of
the National Association of Real Estate Investment Trusts ("NAREIT"),
funds from operations represents 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. Funds from operations should not be
considered an alternative to net income or other measurements under
generally accepted accounting principles as an indicator of operating
performance or to cash flows from operating, investing or financing
activities as a measure of liquidity. The Company considers funds from
operations to be an appropriate measure of the performance of an equity
REIT in that such calculation is a measure used by the Company to
measure 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 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 working capital changes, cash
expenditures for capital improvements or debt service with respect to
the Initial Hotels and, therefore, does not represent cash available
for distribution to the shareholders of the Company.
(10) 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.
(11) Under the Percentage Leases, the Company has an obligation to pay the
costs of certain capital improvements and to make available to the
Lessee certain amounts for the replacement or refurbishment of
furniture, fixtures and equipment at the Initial Hotels. The Company
anticipates that cash flow from operations, borrowing capacity and
reserves will be sufficient to fund such obligation. Estimated
additions to capital expenditure reserves, net of minority interest,
for the twelve months ended September 30, 1998 is computed as follows:
Management's estimate of additions to capital expenditure reserves.$847
Subtract: Estimated minority interest in estimated
additions to capital expenditure reserves (68.38%)........... 579
---
Estimated additions to capital expenditure reserves,
net of minority interest.....................................$268
(12) Computed as follows:
Management's estimate of principal payments on debt................$575
Subtract: Estimated minority interest in estimated
principal payments on debt (68.38%).......................... 393
---
Estimated principal payments on debt, net of
minority interest............................................$182
34
<PAGE>
(13) Estimated cash available for distribution to holders of
Subordinated Units is computed as follows:
Estimated distributable cash (see footnote 7 above).....$3,291
Subtract: Estimated cash available for distribution to
holder of Priority Common Shares.................. 1,320
-----
Estimated cash available for distribution to
holders of Subordinated Units.....................$1,971
As a result, based on the 3,964,108 Subordinated Units estimated to be
outstanding upon completion of the Formation Transactions, the holders
of the Subordinated Units would be entitled to a distribution of
approximately $.50 per Subordinated Unit.
(14) Represents estimated initial annual distribution per Priority Common
Share ($0.72) multiplied by the 1,833,334 Priority Common Shares to be
outstanding upon completion of the Offering. The information contained
herein assumes that none of the 166,666 Priority Common Shares offered
to the Hersha Affiliates are sold. If the 166,666 Priority Common
Shares are sold, the estimated initial annual distribution would
be $1,440,000 and the estimated amount available for distribution to
holders of Subordinated Units would be $1,851,000, or approximately
$.47 per Subordinated Unit. The proceeds from the sale of such shares
would be used for working capital.
(15) Represents estimated initial annual distribution per Priority Common
Share ($0.72) divided by Offering Price ($6.00).
35
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the pro forma short-term debt and
capitalization of the Company as of September 30, 1998, as adjusted to give
effect to the sale on such date by the Company of the Priority Common Shares in
the Offering and the use of the net proceeds therefrom as described under "Use
of Proceeds."
Pro Forma
September 30, 1998
------------------
(In thousands)
Mortgage debt......................................... $17,400
=======
Minority interest..................................... $18,355
=======
Shareholders' Equity:
Preferred Shares, $.01 par value,
10,000,000 shares authorized,
no shares issued and outstanding................... --
Common Shares, $.01 par value,
50,000,000 Priority Class A Common
Shares and 50,000,000 Class B Common
Shares authorized, 1,833,334
Priority Class A Common Shares
issued and outstanding(1).......................... 18
Additional paid-in capital........................... 8,470
-------
Total shareholders' equity....................... $ 8,488
-------
Total capitalization.......................... $44,243
=======
- ---------------------
(1) Excludes 166,666 Priority Common Shares offered to the Hersha Affiliates,
approximately 4 million Class B Common Shares issuable upon redemption of
Subordinated Units issued in the Formation Transactions, 183,333 Priority
Common Shares issuable upon exercise of the Underwriter Warrants, 250,000
Class B Common Shares issuable upon the redemption of 250,000 Units issuable
upon exercise of the Hersha Warrants, 650,000 Class B Common Shares reserved
for issuance pursuant to the Option Plan and 200,000 Class B Common Shares
reserved for issuance pursuant to the Trustees' Plan. The Class B Common
Shares will be converted into Priority Common Share on a one-for-one basis
at a future date. See "Description of Shares of Beneficial Interest--Class
B Common Shares," "Formation Transactions," "Management--The Option Plan"
and "Underwriting."
37
<PAGE>
DILUTION
At September 30, 1998, the Offering Price exceeded the pro forma net
tangible book value per Priority Common Share. The pro forma net tangible book
value prior to the Offering represents the owners' equity from the Selling
Entities Combined Balance Sheet of $6,475,000 less intangible assets of
$1,382,000 resulting in $5,093,000 or $1.28 per share based upon approximately
3.96 million Subordinated Units issuable in the Formation Transactions.
Therefore, the holders of Subordinated Units issued in connection with the
Formation Transactions will realize an immediate increase in the net book value
of their Subordinated Units, while purchasers of Priority Common Shares in the
Offering will realize an immediate dilution in the net book value of their
Priority Common Shares. The pro forma net tangible book value after the Offering
is based upon the pro forma consolidated shareholders' equity of $8,488,000 less
intangibles of $1,404,000 (included in the pro forma financial statements
included herein) resulting in pro forma book value of $7,084,000 or $3.86 per
share based on 1,833,334 shares outstanding immediately following the Offering.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1).............................. $ 6.00
Pro forma tangible net book value per share prior to the Offering..........$ 1.28
Increase attributable to purchase of Priority Common Share................. 2.58
Pro forma net tangible book value per share after the Offering.................. 3.86
------
Dilution per share.............................................................. $ 2.14
======
</TABLE>
- ----------
(1) Before deducting underwriting discounts and estimated expenses of the
Offering.
The following table sets forth the number of Priority Common Shares to
be sold by the Company in the Offering, the total contributions to be paid to
the Company by purchasers of Priority Common Shares in the Offering (assuming an
Offering Price of $6.00 per share), the number of Priority Common Shares and
Subordinated Units previously outstanding or to be issued in connection with the
Formation Transactions, the net tangible book value as of September 30, 1998
of the assets contributed to the Company and the Partnership and the net
tangible book value of the average contribution per Priority Common Share and
Subordinated Unit based on total contributions.
<TABLE>
<CAPTION>
Purchase Price/
Shares Issued by the Company Book Value of Total
and Units Issued by the Tangible Contributions to Purchase Price/
Partnership (1) the Company (1) Tangible Book
---------------------------- ------------------------- Value of Contribution Per
Number Percent Amount Percent Priority Share/Unit (1)
------ ------- ------ ------- ------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Priority Common Shares Issued to the Under-
writer by the Company in the Offering.... 1,833,334 31.62% $11,000 68.35% $6.00
Subordinated Units Issued by the Partner-
ship in the Formation Transactions....... 3,964,108 68.38% $ 5,093 31.65% $1.28
Total Priority Common Shares and
Subordinated Units....................... 5,797,442 100.00% $16,093 100.00%
</TABLE>
- ------------
(1) Does not include 166,666 Priority Common Shares offered to the Hersha
Affiliates.
38
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth: (i) unaudited summary balance sheet data
for the Company at September 30, 1998; (ii) unaudited pro forma condensed
combined statement of operations for the Lessee for the nine months ended
September 30, 1998 and for the year ended December 31, 1997; and (iii) summary
combined historical operating and financial data for the Combined
Entities--Initial Hotels for each of the years in the three-year period ended
December 31, 1997. The summary combined historical operating and financial data
for the Combined Entities-- Initial Hotels for the three years ended December
31, 1997, have been derived from the historical combined financial statements of
the Combined Entities--Initial Hotels audited by Moore Stephens, P.C.,
independent public accountants, whose report with respect thereto is included
elsewhere in this Prospectus. In the opinion of management, the unaudited
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein.
The summary pro forma condensed combined statement of operations are
presented as if the Formation Transactions had occurred as of January 1, 1997
and carried forward through each interim period presented, and therefore
incorporates certain assumptions that are included in the Notes to the Pro Forma
Condensed Combined Statement of Operations included elsewhere in this
Prospectus. The pro forma balance sheet data is presented as if the Formation
Transactions had occurred on September 30, 1998. The pro forma information does
not purport to represent what the Company's financial position or the Company's
or the Combined Entities--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 Entities--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.
Hersha Hospitality Trust
Unaudited Summary Balance Sheet Data
(In thousands)
September 30, 1998
-------------------------
Historical Pro Forma
Balance Sheet Data:
Net investment in hotel properties................. -- $ 40,489
Minority interest in Partnership................... -- $ 18,355
Shareholders' equity............................... -- $ 8,488
Total assets....................................... -- $ 44,243
Total debt......................................... -- $ 17,400
- ------------------
39
<PAGE>
Hersha Hospitality Management, L.P.
Unaudited Pro Forma Condensed Combined Statements of Operations(1)
(In thousands)
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
Room revenue.......................... $ 11,824 $10,880
Other revenue (2)..................... 2,111 2,565
-------- -------
Total revenue......................... $ 13,935 $13,445
-------- -------
Hotel operating expenses (3).......... 8,506 9,214
Percentage Lease payments (4)......... 5,108 5,129
-------- -------
Net income (loss) (5)................. $ 321 $ (898)
======== =======
Combined Entities - Initial Hotels
Summary Combined Historical Operating and Financial Data
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30 Year Ended December 31
-------------------- ----------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Room revenue $11,824 $ 7,750 $10,880 $7,273 $5,262
Other revenue (2) 2,111 1,942 2,565 2,716 1,957
-------- ------- ------- ------- ------
Total revenue $13,935 $ 9,692 $13,445 $9,989 $7,219
Hotel operating expenses (3) 8,839 6,510 9,173 8,172 6,250
Interest 1,497 831 1,354 921 634
Depreciation and amortization 1,161 799 1,189 924 711
-------- ------- ------- ------- ------
Net income (loss) (5) $ 2,438 $ 1,552 $ 1,729 $ (28) $ (376)
======== ======= ====== ======= ======
</TABLE>
- -------------------------
(1) The estimated information does not purport to represent what the
Lessee's financial position or results of operations would actually have
been if consummation of the Formation Transactions had, in fact, occurred
on such date or at the beginning of the periods indicated, or to project
the Lessee's financial position or results of operations at any future
date or for any future period. Represents pro forma revenue and expenses
as if (i) 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, and (ii) the Formation Transactions
occurred as of the beginning of the periods indicated.
(2) Represents restaurant revenue, telephone revenue and other revenue.
(3) 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 and management fees.
Real estate and personal property taxes, property and casualty insurance
and ground leases are the responsibility of the Partnership under the
Percentage Leases.
(4) Represents lease payments calculated on a pro forma basis using the rent
provisions in the Percentage Leases. The rent provisions in the Percentage
Leases are based upon an agreement between the Partnership and the Lessee
in which the parties have agreed to the lease terms and the form of lease
to be signed at the closing of the Offering. Lease payments are calculated
under two methods depending upon whether the Initial Hotel is a Stabilized
Hotel with an established operating history or a Newly-Developed Hotel or a
Newly-Renovated Hotel. The Rents for the Stabilized Hotels are calculated
by applying the percentage rent formulas to the historical room revenues
and other revenues of those hotels for the periods presented. Because the
Newly-Developed Hotels and the Newly-Renovated Hotels pay Initial Fixed
Rent for at least the first twelve months of operation, the Rent for those
hotels is based on the Initial Fixed Rents, recognized on a straight-line
basis over the period presented. In the case of the Newly-Developed Hotels,
40
<PAGE>
the Initial Fixed Rents have been prorated for the periods the hotels were
in operation because the hotels have not been in operation for the full
periods presented.
(5) The Combined Entities are not subject to income tax, except Hersha
Enterprises, Ltd., which had no tax liability for the periods presented.
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
approximately a 32% general 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 Initial Hotels will be leased 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 "Business and
Properties--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.
Results of Operations of the Initial Hotels
Comparison of Nine Months Ended September 30, 1998 to the Nine Months
Ended September 30, 1997
Room revenue for the Initial Hotels increased $4,074,000 or 53% to
$11,824,000 for the first nine months of 1998 from $7,750,000 in the comparable
period in 1997. This increase came through an addition of 82,980 available
room-nights with an overall increase of 59,039 room-nights sold. The increase in
room-nights available was a result of the opening of three hotels, which were
not opened as of September 30, 1997. In addition, there was a 2% increase in ADR
to $66.95 from $65.92. REVPAR increased 6% to $43.82 from $41.48.
Hotel operating expenses increased by $2,233,000 to $8,533,000, but
decreased as a percentage of total revenue to 61% from 65%. Operating income
before interest expense, depreciation and amortization increased by 61% to
$5,472,000 from $3,392,000.
Comparison of year ended December 31, 1997 to year ended December 31, 1996
Room revenue increased by $3,607,000 or 50% to $10,880,000 in 1997 from
$7,273,000 in 1996. The increase in revenue came through the addition of four
new hotels opening in 1997 and one hotel which was only open during half of 1996
being open for the entire 1997 period. These new properties added additional
available room-nights of 43,171. In addition, a 7% increase in occupancy to 60%
from 53% in 1996 as well as a 9% increase in ADR to $69.31 compared to $63.51 in
1996 augmented the available room-nights. REVPAR increased 25% to $41.78 from
$33.48.
Hotel operating expenses increased by $1,001,000 or 12% to $9,173,000
but decreased as a percentage of total revenue to 68% from 82%. Operating income
before interest expense, depreciation and amortization increased by 135% to
$4,272,000 from $1,817,000.
Comparison of year ended December 31, 1996 to year ended December 31, 1995
Room revenue increased $2,011,000 or 38% to $7,273,000 in 1996 from
$5,262,000 in 1995. The increase in revenue came through the opening of two
hotels in 1996 adding additional room-nights available of 41,168. In addition,
an overall increase in occupancy of 10% to 53% from 48% in 1995 as well as a 2%
increase in ADR to $63.51 compared to $62.40 in 1995 augmented the available
room-nights. REVPAR increased 12% to $33.48 from $29.89.
Hotel operating expenses increased by $1,922,000 or 31% to $8,172,000
but decreased as a percentage of total revenue to 82% from 87%. Operating income
before interest expense, depreciation and amortization increased by 87% to
$1,817,000 from $969,000.
Liquidity and Capital Resources
The Company expects to meet its short-term liquidity requirement
generally through net cash provided by operations, existing cash balances and,
if necessary, short-term borrowings under the Line of Credit. The Company
42
<PAGE>
believes that its net cash provided by operations will be adequate to fund both
operating requirements and payment of dividends by the Company in accordance
with REIT requirements. The Company expects to meet its long-term liquidity
requirements, such as scheduled debt maturities and property acquisitions,
through long-term secured and unsecured borrowings, the issuance of additional
equity securities of the Company or, in connection with acquisitions of hotel
properties, issuance of Units.
The Company is currently pursuing with various lenders a $10 million
Line of Credit. The Line of Credit will be used to fund future acquisitions and
for working capital. A failure to obtain the Line of Credit could adversely
affect the Company's ability to finance its growth strategy. See "Risk
Factors-Dependence Upon External Financing." The Line of Credit may be secured
by certain of the Initial Hotels. The Company in the future may seek to increase
the amount of the Line of Credit, 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 Trustees deem prudent.
The Trustees will adopt the Debt Policy that limits consolidated
indebtedness of the Company to less than 67% of the aggregate purchase prices
paid by the Company for the hotels in which it has invested. However, the
Company's organizational documents do not limit the amount of indebtedness that
the Company may incur and the Trustees may modify the Debt Policy at any time
without shareholder approval. The Company intends to repay indebtedness incurred
under the Line of Credit from time to time, for acquisitions or otherwise, out
of cash flow and from the proceeds of issuances of Priority Common Shares and
other securities of the Company. See "Risk Factors-Risks of Leverage" and
"Policies and Objectives with Respect to Certain Activities-Investment Policies"
and "-Financing."
The Company will invest in additional hotels only as suitable
opportunities arise. The Company will not undertake investments in such hotels
unless adequate sources of financing are available. The Bylaws require the
approval of a majority of the Trustees, including a majority of the Independent
Trustees, to acquire any additional hotel in which a Trustee or officer of the
Company, or any Affiliate thereof, has an interest (other than solely as a
result of his status as a Trustee, officer or shareholder of the Company). It is
expected that future investments in hotels will be dependent on and financed by,
in whole or in part, the proceeds from additional issuances of Priority Common
Shares or other securities or borrowings. Because of the level of the Assumed
Indebtedness, the success of the Company's acquisition strategy will depend
primarily on its ability to access additional capital through issuances of
equity securities. The Company currently has no agreement or understanding to
invest in any hotel other than the Initial Hotels and there can be no assurance
that the Company will make any investments in any other hotels that meet its
investment criteria. See "Growth Strategy--Acquisition Strategy."
Pursuant to the Percentage Leases, the Partnership will be required to
make available to the Lessee 4% (6% for the Holiday Inn, Harrisburg, PA and the
Holiday Inn, Milesburg, PA) of gross revenues per quarter, on a cumulative
basis, for periodic replacement or refurbishment of furniture, fixtures and
equipment at each of the Initial Hotels. The Company believes that a 4% (6% for
the Holiday Inn, Harrisburg, PA and the Holiday Inn, Milesburg, PA) percentage
set-aside is a prudent estimate for future capital expenditure requirements. The
Company intends to cause the Partnership to spend amounts in excess of the
obligated amounts if necessary to comply with the reasonable requirements of any
Franchise License and otherwise to the extent that the Company deems such
expenditures to be in the best interests of the Company. The Company will also
be obligated to fund the cost of certain capital improvements to the hotels.
Based on its experience in managing hotels, management of the Company believes
that amounts required to be set aside in the Percentage Leases will be
sufficient to meet required expenditures for furniture, fixtures and equipment
during the term of the Percentage Leases. The Company will use undistributed
cash or borrowings under credit facilities to pay for the cost of capital
improvements and any furniture, fixture and equipment requirements in excess of
the set aside referenced above . See "Business and Properties--The Percentage
Leases."
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 have failed to
keep pace with inflation.
Seasonality
43
<PAGE>
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. Like other organizations, the Company could be adversely affected if the
computer systems used by it or its 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. The Company's plan to respond to the Year 2000 Problem consists
of three phases that address the state of readiness, Year 2000 costs, risks and
contingency plans.
Phase I includes a plan to respond to the Year 2000 Problem, which
includes the following areas (the "Focus Areas"): (i) telephone and call
accounting systems; (ii) credit card readers; (iii) sprinkler systems and fire
suppression system; (iv) security systems; (v) card entry systems; (vi) elevator
systems; (vii) computer systems and vendor contracts (hardware); (viii) fax
machines and laundry equipment; (ix) HVAC (heating and air conditioning systems)
and utility companies; and (x) computer software systems. The Company has
created a task force and procedures to survey, test and report results for
management's review. The Company believes that the cost to remediate its Year
2000 problems will be minimal and has allocated funds of $25,000 to cover such
costs. The Holiday Inn hotel and conference center, Harrisburg, PA has been
used as an example for the other Initial Hotels. This hotel was reviewed for
Year 2000 compliance, and the review resulted in hardware and software
compliance. The credit card readers, card entry system and computers have been
tested and are compliant. Based on the results experienced for the Holiday Inn
hotel and conference center, Harrisburg, PA, management believes that the
$25,000 allocation for funding will be adequate.
The Company is currently proceeding with Phase II of its assessment of
the Year 2000 Problem. Phase II involves initiating a survey and checklist to
each hotel manager for completion and return to management. The survey was
customized for the Initial Hotels to include (i) the current vendor list with a
column for a listing of current product usage and (ii) a vendor address log and
telephone number listing. Each hotel checklist included the front desk, business
center, housekeeping/back office, beverage and guest rooms. Phase II also
involves the testing of the Company's computer systems. A test computer
disk-copy was sent to the Company for reproduction to test each computer in the
Company. All written tests and written confirmation that relate to the Initial
Hotel products, equipment and software are logged to monitor the Company's
progress towards Year 2000 compliance. The Company is in the process of
conducting such testing and has yet to encounter any material Year 2000
compliance problems.
Phase III of the Company's assessment of the Year 2000 Problem includes
the results of testing, action plans, reporting of results and contingency plans
to remediate any Year 2000 Problems. The risks and contingency plans include a
"reasonably likely worst case Year 2000 scenario." The Company believes that the
consequences of a worst case scenario rest almost exclusively with outside
vendors and not in systems within the Initial Hotels. The contingency plan,
which the Company is currently initiating, is to replace non-compliant vendors
with new compliant vendors. A thorough review of all vendors will continue to be
an ongoing Year 2000 strategy for the Company. However, the Company's
contingency plan has back-up support to address each of the Focus Areas.
The franchisors of the Initial Hotels have provided compliance guides
to assist in the Company's response to the Year 2000 Problem. Promus Hotel
Corporation (Hampton Inn Hotels), Holiday Hospitality/Bass Hotels & Resorts
(Holiday Inn and Holiday Inn Express Hotels) and Choice Hotels International
(Comfort Inn and Clarion Suites Hotels) have completed third party vendor
checks, reviewed computer systems and provided for reference a preferred
compliant vendor list. A checklist for Year 2000 issues, a work plan and a
sample vendor letter was provided to help the Company complete its assessment of
the Year 2000 Problem.
The Company is in the process of mailing a questionnaire to third party
vendors to assess third party risks. The results of this risk assessment will be
completed by March 31, 1999. 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. There can be no assurance
that the systems of such third parties will be Year 2000 compliant or that any
third party's failure to have Year 2000 compliant systems would not have a
material adverse effect on the Company's systems and operations.
44
<PAGE>
BUSINESS AND PROPERTIES
The Initial Hotels
Set forth below is certain descriptive information regarding the
Initial Hotels, each of which is currently managed by a Hersha Affiliate and
owned by a partnership in which one or more of the Hersha Affiliates own
interests.
Holiday Inn Express (Riverfront), Harrisburg, Pennsylvania
Description. The Holiday Inn Express Riverfront, Harrisburg,
Pennsylvania, is located at 525 South Front Street. The hotel was opened in
1968, was purchased in 1984 and was fully renovated in 1996. It is a 117-room,
limited service hotel with non-smoking units available with an adjacent
restaurant and lounge. Amenities include a fitness center and adjacent banquet
and meeting facilities with a 200-person capacity.
Guest Profile and Local Competition. Approximately 25% of the hotel's
business is related to business from the Commonwealth of Pennsylvania. The
remainder of the hotel's business consists of tourists, overnight travelers and
people visiting local residents. The Company considers its primary competition
to be the Ramada Hotel on Second Street in Harrisburg, Pennsylvania.
Holiday Inn Express, Hershey, Pennsylvania
Description. The Holiday Inn Express, Hershey, Pennsylvania is located
on Walton Avenue, one and one half miles from Hershey Park. The hotel, which
opened in October 1997, is an 85-room limited service hotel. Amenities include
an indoor pool, hot tub, fitness center, business service center, meeting
facility, complimentary continental breakfast and 24-hour coffee. All rooms have
one king bed or two queen beds and some rooms have refrigerators, coffee makers
and microwaves.
Guest Profile and Local Competition. Approximately 30% of the hotel's
business is related to commercial activity from local business. The hotel's
group business, which accounts for approximately 5% of its business, is
generated from area institutions, local weddings and local social and sporting
events. The remainder of the hotel's business consists of transient guests,
visitors to area residents and demand generated by the hotel's proximity to
Hershey Park. The Company considers its primary competition to be the Comfort
Inn in Hershey, Pennsylvania.
Holiday Inn Express, New Columbia, Pennsylvania
Description. The Holiday Inn Express, New Columbia, Pennsylvania is
located at the intersection of Interstate 80 and Route 15. The hotel, which
opened in December 1997, is an 81-room limited service hotel. Amenities include
an indoor pool, hot tub, fitness center, meeting facility, complimentary
continental breakfast and 24-hour coffee. All rooms have one king bed or two
queen beds, some Jacuzzi suites are available and some rooms have refrigerators,
coffee makers and microwaves. The Holiday Inn Express in New Columbia,
Pennsylvania was ranked number one in its region for GSTS (Guest Satisfaction
Tracking System), for February and March of 1998. This award recognizes the
Holiday Inn Express in New Columbia as the leader in guest satisfaction and
product service out of 32 other Holiday Inns and Holiday Inns Express in the
Eastern region.
Guest Profile and Local Competition. Approximately 80% of the hotel's
business is related to commercial activity from local business. As a result of
its proximity to ski resorts and nearby tourist attractions, recreational
travelers generate approximately 10% of the hotel's business. The remainder of
the hotel's business consists of overnight travelers and visitors to area
residents. The Company considers its primary competition to be the Comfort Inn
in New Columbia, Pennsylvania.
Hampton Inn, Carlisle, Pennsylvania
Description. The Hampton Inn, Carlisle, Pennsylvania is located at the
intersection of Route 11 and exit 16 off the Pennsylvania Turnpike. The hotel,
which opened in June 1997, is a 95-room limited service hotel. Amenities include
an indoor pool, hot tub, fitness center, meeting facilities, complimentary
continental breakfast and 24-hour coffee. All rooms have one king bed or two
queen beds, some Jacuzzi suites are available and some rooms have refrigerators,
coffee makers and microwaves.
45
<PAGE>
Guest Profile and Local Competition. Approximately 50% of the hotel's
business is related to commercial activity from local businesses. The remainder
of the hotel's business consists of overnight travelers and general demand
generated by the hotel's proximity to the Carlisle Fairgrounds and the Army War
College. The Company considers its primary competition to be the Holiday Inn in
Carlisle, Pennsylvania.
Hampton Inn, Selinsgrove, Pennsylvania
Description. The Hampton Inn, Selinsgrove, Pennsylvania is located on
Pennsylvania Routes 11 and 15. The hotel, which opened in September 1996, is a
75-room, three story, limited service hotel. Amenities include an indoor pool,
hot tub, fitness center, meeting facilities, complimentary continental breakfast
and 24-hour coffee. All rooms have one king bed or two queen beds, some Jacuzzi
suites are available and some rooms have refrigerators, coffee makers and
microwaves. The Hampton Inn in Selinsgrove was recently named one of the top
hotels in the entire Hampton Inn system, receiving the hotel chain's Circle of
Excellence Award. The award recognizes superior quality and guest satisfaction
and is the highest distinction a Hampton Inn hotel can receive.
Guest Profile and Local Competition. Approximately 80% of the hotel's
business is related to commercial activity from local businesses. The remainder
of the hotel's business consists of pleasure travelers, transient guests and
demand generated by the hotel's proximity to area universities and Knoebels
Amusement Park. The Company considers its primary competition to be the Best
Western near Selinsgrove, Pennsylvania.
Holiday Inn Hotel and Conference Center, Harrisburg, Pennsylvania
Description. The Holiday Inn Hotel and Conference Center, Harrisburg,
Pennsylvania is located at the intersection of the Pennsylvania Turnpike exit 18
and Interstate 83, ten minutes from downtown, Harrisburg International Airport
and Hershey Park. The hotel opened in 1970 as a Sheraton Inn and was converted
to a Ramada Inn in 1984. It was completely renovated and converted to a Holiday
Inn in September 1995. This hotel has 196 deluxe guest units and is a full
service hotel, including a full service restaurant as well as a nightclub.
Amenities include an indoor tropical courtyard with a pool and Jacuzzi as well
as a banquet and conference facility for up to 700 people.
Guest Profile and Local Competition. Approximately 40% of the hotel's
business is related to commercial activity from local businesses. The remainder
of the hotel's business consists of overnight travelers visiting Hershey and
Harrisburg. The Company considers its primary competition to be the Radisson
Penn Harris in Camp Hill, Pennsylvania.
Holiday Inn, Milesburg, Pennsylvania
Description. The Holiday Inn, Milesburg/State College, Pennsylvania is
located at Exit 23, I-80 and US 50 North. The hotel opened in 1977 as a Sheraton
and was completely renovated in 1992. In 1996, the hotel was converted into a
Holiday Inn. It is a 118-room, full service hotel with a full service restaurant
and cocktail lounge. Amenities include an outdoor pool as well as banquet and
meeting facilities for 220 people.
Guest Profile and Local Competition. Approximately 20% of the hotel's
business is related to commercial activity from local businesses and demand
generated by local businesses. Approximately 80% of the hotel's business
consists of leisure travelers visiting the many tourist attractions around State
College and I-80. The Company considers its primary competition to be the Best
Western in Milesburg, Pennsylvania.
Comfort Inn, Denver, Pennsylvania
Description. The Comfort Inn, Denver, Pennsylvania is located at 2015
North Reading Road. This 45-room limited service hotel was constructed in 1990
and renovated in 1995. All rooms have one king bed or two queen beds and
non-smoking units are available. Amenities include hairdryers in all rooms, a
fitness center and a complimentary continental breakfast.
Guest Profile and Local Competition. Approximately 75% of the hotel's
business is comprised of leisure travelers and transient guests related to its
location at the crossroads of two major interstate highways. The remainder of
the hotel's business is due to commercial activity from local businesses and
people visiting area residents. The Company considers its primary competition to
be the Holiday Inn in Denver, Pennsylvania.
46
<PAGE>
Comfort Inn, Harrisburg, Pennsylvania
Description. The Comfort Inn, Harrisburg, Pennsylvania is located 8
miles north of Hershey, Pennsylvania at 7744 Linglestown Road off exit 27 of
Interstate 81. The hotel opened in May 1998. It is an 81-room limited service
hotel. Amenities include an indoor pool, hot tub, fitness center, meeting
facilities, complimentary continental breakfast and 24-hour coffee. All rooms
have one king bed or two queen beds and some Jacuzzi suites are available.
Guest Profile and Local Competition. Approximately 25% of the hotel's
business is related to commercial activity from local businesses. The hotel's
group business, which accounts for approximately 5% of its business, is
generated from area institutions, local weddings and local social and sporting
events. The remainder of the hotel's business consists of transient and
recreational travelers generated by its proximity to Hershey, Pennsylvania. The
Company considers its primary competition to be the Holiday Inn in Grantville,
Pennsylvania.
Clarion Suites, Philadelphia, Pennsylvania
Description. The Clarion Suites, Philadelphia, Pennsylvania is located
at 1010 Race Street, one half block from the newly-built Philadelphia convention
center and six blocks from the Independence Hall historic district and the
Liberty Bell. The hotel is located in the historic Bentwood Rocking Chair
Company building, which was constructed in 1896 and converted to a Quality
Suites hotel in the 1980s. The hotel was purchased by a Hersha Affiliate as a
Ramada Suites in 1995 and substantially rehabilitated. The Hersha Affiliate
later converted the hotel to a Clarion Suites. The hotel has 96 executive suites
with fully-equipped kitchens and an eight-story interior corridor with Victorian
style architecture. The hotel has a lounge featuring light fare and a comedy
cabaret. Amenities include two large meeting rooms, boardrooms, a fitness room
and a complimentary continental breakfast.
Guest Profile and Local Competition. Approximately 20% of the hotel's
business is comprised of leisure travelers and transient guests related to its
close proximity to the historic district. The remainder of the hotel's business
is due to commercial activity from local businesses and people visiting area
residents. The Company considers its primary competition to be all Center City,
Philadelphia hotels.
The following table sets forth certain information with respect to each
Initial Hotel:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Holiday Inn Express - Harrisburg, PA
Occupancy 56.4% 40.7% 43.2% 44.9% 46.2%
ADR $56.33 $52.77 $48.05 $48.34 $45.72
REVPAR $31.78 $21.50 $20.74 $21.70 $21.13
Holiday Inn Express - Hershey, PA (1)
Occupancy 38.8%
ADR $75.62
REVPAR $29.35
Holiday Inn Express - New Columbia, PA (2)
Occupancy 9.0%
ADR $59.68
REVPAR $5.39
Hampton Inn - Carlisle, PA (3)
Occupancy 53.5%
ADR $65.33
REVPAR $34.93
Hampton Inn - Selinsgrove, PA (4)
Occupancy 71.9% 50.1%
ADR $65.29 $60.76
REVPAR $46.96 $30.43
Holiday Inn Hotel and Conference Center - Harrisburg, PA (5)
Occupancy 63.3% 58.9% 46.2%
ADR $68.22 $61.36 $56.97
REVPAR $43.17 $36.13 $26.31
47
<PAGE>
Holiday Inn - Milesburg, PA
Occupancy 52.0% 48.4% 51.0% 55.3% 56.9%
ADR $56.07 $52.31 $51.59 $48.64 $42.27
REVPAR $29.13 $25.31 $26.29 $26.88 $24.02
Comfort Inn - Denver, PA
Occupancy 54.7% 53.5% 60.4% 60.4% 59.6%
ADR $73.26 $61.04 $50.68 $49.72 $48.79
REVPAR $40.08 $32.63 $30.60 $30.01 $29.06
Comfort Inn - Harrisburg, PA (6)
Occupancy
ADR
REVPAR
Clarion Suites, Philadelphia, PA
Occupancy 73.7% 60.2%
ADR $91.02 $86.10
REVPAR $67.09 $51.83
</TABLE>
- ---------------
(1) This hotel opened in October 1997 and, thus, the data shown represent
approximately three months of operations.
(2) This hotel opened in December 1997 and, thus, the data shown represent
approximately one month of operations.
(3) This hotel opened in June 1997 and, thus, the data shown represent
approximately seven months of operations.
(4) This hotel opened in September 1996 and, thus, the data shown for 1996
represent approximately four months of operations.
(5) This hotel was converted to a Holiday Inn in September 1995 and, thus, the
data shown for 1995 represent approximately four months of operations.
(6) This hotel opened in May 1998 and, thus, there are no data shown.
The Percentage Leases
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.
The Initial Hotels will be operated by the Lessee pursuant to the
Percentage Leases. The Company intends to lease its future acquired hotels to
operators, including both the Lessee and operators unaffiliated with the Lessee.
Future leases with the Lessee generally will be similar to the Percentage
Leases. Future leases with operators unaffiliated with the Lessee may or may not
be similar to the Percentage Leases. The Trustees will negotiate the terms and
provisions of each future lease, depending on the purchase price paid, economic
conditions and other factors deemed relevant at the time.
Percentage Lease Terms. Each Percentage Lease will have an initial
non-cancelable term of five years. All, but not less than all, of the Percentage
Leases for the Initial Hotels may be extended for an additional five-year term
at the Lessee's option. At the end of the first extended term, the Lessee, at
its option, may extend some or all of the Percentage Leases for the Initial
Hotels for an additional five-year term. The Percentage Leases are subject to
earlier termination upon the occurrence of defaults thereunder and certain other
events described therein (including, particularly, the provisions described
herein under "--Damage to Hotels," "--Condemnation of Hotel" and "--Termination
of Percentage Leases on Disposition of the Initial Hotels").
Amounts Payable Under the Percentage Leases. The Percentage Leases
generally provide for the Lessee to pay in each calendar quarter the greater of
the Base Rent or Percentage Rent. The Percentage Rent for each Initial Hotel is
comprised of (i) a percentage of room revenues up to the Threshold, (ii) a
percentage of room revenues in excess of the Threshold but less than the
Incentive Threshold, (iii) a percentage of room revenues in excess of the
Incentive Threshold and (iv) a percentage of revenues other than room revenues.
The Incentive Threshold is designed to provide an incentive to the Lessee to
generate higher revenues at each hotel. Until the First Adjustment Date or the
Second Adjustment Date, as applicable, the rent on the Newly-Developed Hotels
and the Newly-Renovated Hotels will be the Initial Fixed Rents applicable to
those hotels. After the First Adjustment Date or the Second Adjustment Date, as
applicable, rent will be computed with respect to the Newly-Developed Hotels and
the Newly-Renovated Hotels based on the percentage rent formulas described
herein. The Lessee also will be obligated to pay certain other amounts,
including interest accrued on any late payments or charges (the "Additional
Charges"). Rent is payable quarterly in arrears.
48
<PAGE>
The following table sets forth (i) the Initial Fixed Rent, if
applicable, (i) the annual Base Rent and (ii) the Percentage Rent formulas:
<TABLE>
<CAPTION>
Initial Annual Percentage
Initial Hotel Fixed Rent(1) Base Rent(1) Rent Formula
------------- ------------- ------------ ------------
<S> <C> <C> <C>
Newly-Developed
Holiday Inn Express
Hershey, PA............. $794,686 $364,000 42.1% of room revenue up to $1,479,523,
plus 65.0% of room revenue in excess of
$1,479,523 but less than $1,740,615, plus
29.0% of room revenue in excess of
$1,740,615, plus 8.0% of all non-room
revenue.
New Columbia, PA........ 498,198 227,500 46.7% of room revenue up to $850,986,
plus 65.0% of room revenue in excess of
$850,986 but less than $1,001,160, plus
29.0% of room revenue in excess of
$1,001,160, plus 8.0% of all non-room
revenue.
Hampton Inn:
Carlisle, PA............ 699,062 325,000 42.3% of room revenue up to $1,293,906,
plus 65.0% of room revenue in excess of
$1,293,906 but less than $1,522,242, plus
29.0% of room revenue in excess of
$1,522,242, plus 8.0% of all non-room
revenue.
Comfort Inn:
Harrisburg, PA........... 514,171 234,000 40.7% of room revenue up to $980,050,
plus 65.0% of room revenue in excess of
$980,050 but less than $1,153,000, plus
29.0% of room revenue in excess of
$1,153,000, plus 8.0% of all non-room
revenue.
Newly-Renovated
Holiday Inn Express:
Harrisburg, PA.......... 504,406 195,000 31.0% of room revenue up to $1,153,655,
plus 65.0% of room revenue in excess of
$1,153,655 but less than $1,357,241, plus
29.0% of room revenue in excess of
$1,357,241, plus 8.0% of all non-room
revenue.
Holiday Inn:
Milesburg, PA............ 524,750 214,500 36.1% of room revenue up to $1,065,960,
plus 65.0% of room revenue in excess of
$1,065,960 but less than $1,254,070, plus
31.0% of room revenue in excess of
$1,254,070, plus 8.0% of all non-room
revenue.
Comfort Inn: 262,234 112,288 35.4% of room revenue up to $559,542,
Denver, PA.............. plus 65.0% of room revenue in excess of
$559,542 but less than $658,285, plus
29.0% of room revenue in excess of
$658,285, plus 8.0% of all non-room
revenue.
Stabilized
Holiday Inn Hotel and
Conference Center:
Harrisburg, PA.......... n/a 675,921 44.3% of room revenue up to $2,638,247,
plus 65.0% of room revenue in excess of
$2,638,247 but less than $3,103,820, plus
31.0% of room revenue in excess of
$3,103,820, plus 8.0% of all non-room
revenue.
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<PAGE>
Hampton Inn:
Selinsgrove, PA.......... n/a 308,469 49.0% of room revenue up to $1,081,152,
plus 65.0% of room revenue in excess of
$1,081,152 but less than $1,271,943, plus
29.0% of room revenue in excess of
$1,271,943, plus 8.0% of all non-room
revenue.
Clarion Suites:
Philadelphia, PA......... n/a 418,593 36.1% of room revenue up to $1,998,097,
plus 65.0% of room revenue in excess of
$1,998,097 but less than $2,350,702, plus
29.0% of room revenue in excess of
$2,350,702, plus 8.0% of all non-room
revenue.
</TABLE>
(1) The Initial Fixed Rent and Base Rent will accrue pro rata during each
quarter of each lease year. The Lessee, however, will pay the Initial Fixed
Rent and the Base Rent for each calendar quarter in each lease year based
on the ratio of budgeted gross revenues for such calendar quarter to
budgeted gross revenues for such lease year.
Other than real estate and personal property taxes, ground lease rent
(where applicable), the cost of certain furniture, fixtures and equipment, and
certain capital expenditures, and property and casualty insurance premiums, all
of which are obligations of the Company, the Percentage Leases require the
Lessee to pay the operating expenses of the Initial Hotels (including insurance
other than property and casualty insurance, all costs and expenses and all
utility and other charges incurred in the operation of the Initial Hotels)
during the term of the Percentage Leases. The Percentage Leases also provide for
rent reductions and abatements in certain cases in the event of damage or
destruction or a partial taking of any Initial Hotel as described under
"--Damage to Hotels" and "--Condemnation of Hotel."
Maintenance and Modifications. Under the Percentage Leases, the Company
will make available to the Lessee for the replacement and refurbishment of
furniture, fixtures and equipment and other capital improvements determined in
accordance with generally accepted accounting principles in the Initial Hotels,
when and as deemed necessary by the Lessee, an amount equal to 4% (6% for the
Holiday Inn, Harrisburg, PA and the Holiday Inn, Milesburg, PA) of gross
revenues per quarter on a cumulative basis. The Company's obligation will be
carried forward to the extent that the Lessee has not expended such amount, and
any unexpended amounts will remain the property of the Company upon termination
of the Percentage Leases. Other than as described above, the Lessee is
responsible for all repair and maintenance of the Initial Hotels and any capital
improvements to the Initial Hotels.
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, linens and
other nondepreciable personal property) not affixed to, or deemed a part of, the
real estate or improvements on the Initial Hotels, except to the extent that
ownership of such personal property would cause the Rent under a Percentage
Lease not to qualify as "rents from real property" for REIT income test
purposes. See "Federal Income Tax Consequences--Requirements for
Qualification--Income Tests."
Insurance and Property Taxes. The Company is responsible for paying or
reimbursing the Lessee for real estate and personal property taxes on the
Initial Hotels (except to the extent that personal property associated with the
Initial Hotels is owned by the Lessee), and all premiums for property and
casualty insurance. The Lessee is required to pay for all other insurance on the
Initial Hotels, including comprehensive general public liability, workers'
compensation and other insurance appropriate and customary for properties
similar to the Initial Hotels and naming the Company as an additional named
insured.
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<PAGE>
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 without the prior written consent of the Company. No
assignment or subletting will release the Lessee from any of its obligations
under the Percentage Leases.
Damage to Hotels. In the event of damage to or destruction of any
Initial Hotel covered by insurance that renders the Initial Hotel unsuitable for
its primary intended use, the Percentage Lease will terminate as of the date of
the casualty, neither the Company nor the Lessee shall have any further
liability under the Percentage Lease, and the Company will retain all insurance
proceeds. In the event of damage to or destruction of any Initial Hotel covered
by insurance that does not render the Initial Hotel unsuitable for its primary
intended use, the Company (or, at the election of the Company, the Lessee) will
restore the Initial Hotel, the Percentage Lease will not terminate, and the
Company will retain all insurance proceeds (if, however, the Lessee restores the
Initial Hotel, the insurance proceeds will be paid out by the Company to the
Lessee). If the cost of restoration exceeds the amount of insurance proceeds
received by the Company, the Company will contribute any excess amounts prior to
requiring the Lessee to commence work. In the event of damage to or destruction
of any Initial Hotel not covered by insurance, whether or not such damage or
destruction renders the Initial Hotel unsuitable for its primary intended use,
the Company at its option either (i) will restore the Initial Hotel at its cost
and expense and the Percentage Lease will not terminate or (ii) will terminate
the Percentage Lease and neither the Company nor the Lessee shall have any
further liability under the Percentage Lease. Any damage or destruction
notwithstanding, and provided the Percentage Lease has not been terminated, the
Lessee's obligation to pay Rent will remain unabated by any damage or
destruction that does not result in a reduction of gross revenues at the Initial
Hotel. If any damage or destruction results in a reduction of such gross
revenues, the Company will receive all loss of income insurance and the Lessee
will not have an obligation to pay Rent in excess of the amount of Percentage
Rent, if any, realizable from gross revenues generated by the operation of the
Initial Hotel during the existence of such damage or destruction.
Condemnation of Hotel. In the event of a total condemnation of any
Initial Hotel, or in the event of a partial taking that renders the Initial
Hotel unsuitable for its primary intended use, either the Company or the Lessee
will have the option to terminate the relevant Percentage Lease as of the date
of taking, and the Company and the Lessee will be entitled to their shares of
the condemnation award in accordance with the provisions of the Percentage
Lease. In the event of a partial taking that does not render the Initial Hotel
unsuitable for its primary intended use, the Company (or, at the Company's
option, the Lessee) will restore the untaken portion of the Initial Hotel to a
complete architectural unit and the Company shall contribute the cost of such
restoration in accordance with the provisions of the Percentage Lease. In the
event of a partial taking, the Base Rent will be abated taking into
consideration, among other factors, the number of usable rooms, the amount of
square footage, or the revenues affected by the partial taking.
Events of Default. Events of Default under the Percentage Leases
include, among others, the following:
(i) the failure by the Lessee to pay Initial Fixed Rent, Base
Rent, Percentage Rent or Additional Charges when due and the
continuation of such failure for a period of 10 days after receipt by
the Lessee of notice from the Company that the same has become due and
payable, provided that the Company shall not be required to give any
such notice more than twice in any lease year and that any third or
subsequent failure by the Lessee during such lease year to make any
payment of Initial Fixed Rent, Base Rent or Percentage Rent on the date
the same becomes due and payable shall constitute an immediate Event of
Default;
(ii) 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: (A) such failure cannot be cured within such
period and the Lessee commences appropriate action to cure such failure
within such 30 day period and thereafter acts, with diligence, to
correct such failure within such time as is necessary, provided in no
event shall such period exceed 120 days, which 120-day period shall
cease to run during any period that a cure of such failure is prevented
by any of certain "unavoidable delays" and shall resume running upon
the cessation of such "unavoidable delay;" and (B) such failure does
not result in a notice or declaration of default under any material
contract or agreement to which the Company or any affiliate thereof is
a party or by which any of its assets are bound;
(iii) 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
51
<PAGE>
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 Lessee or of the whole 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;
(iv) if the Lessee is liquidated or dissolved, or begins
proceedings toward such liquidation or dissolution, or in any manner
ceases to do business or permits the sale or divestiture of
substantially all of its assets;
(v) if the estate or interest of the Lessee in the Percentage
Lease or any part thereof is voluntarily or involuntarily transferred,
assigned, conveyed, levied upon or attached in any proceeding (for this
purpose, a change in control of the Lessee constitutes an assignment of
the lease);
(vi) if the Lessee voluntarily discontinues operations of any
Initial Hotel except as a result of damage, destruction or
condemnation;
(vii) if the Franchise License 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, other than the failure to
complete improvements required by a franchisor because the Partnership
fails to pay the costs of such improvements; or
(viii) the occurrence of an Event of Default occurs under any
other Percentage Lease between the Company and the Lessee.
If an Event of Default occurs and continues beyond any curative period,
the Company will have the option of terminating the Percentage Lease and any or
all other Percentage Leases by giving the Lessee 10 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 such notice, the Percentage
Leases shall terminate on the date specified in the Company's notice and the
Lessee shall be required to surrender possession of the affected Initial Hotel.
Termination of Percentage Leases on Disposition of the Initial Hotels.
In the event the Company enters into an agreement to sell or otherwise transfer
an Initial Hotel to a third party, the Company will have the right to terminate
the Percentage Lease with respect to such Initial Hotel if within six months
after the closing of such sale it either (i) pays 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) offers to lease to the Lessee one or more
substitute hotels on terms that would create a leasehold interest in such hotels
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. See "Business and Properties--Franchise
Licenses."
Breach by the Company. Upon notice from the Lessee that the Company has
breached the Lease, the Company will have 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 fair market value upon termination of the Percentage Lease for that
Initial Hotel.
Franchise Licenses
Holiday Inn Express and Holiday Inn are registered trademarks of
Holiday Hospitality Corporation, Hampton Inn is a registered trademark of Promus
Hotels, and Comfort Inn and Clarion Suites are registered Trademarks of Choice
Hotels. The Company expects that the registered owners of the trademarks will
approve the
52
<PAGE>
change of the Franchise Licenses to the Lessee upon acquisition of the Initial
Hotels by the Partnership and will confirm that with respect to the Initial
Hotels the owner thereof is a licensee in good standing.
The Company anticipates that most of the additional hotels 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 specify certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the franchisee must comply. The Franchise Licenses
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 signage, and the type, quality
and age of furniture, fixtures and equipment included in guest rooms, lobbies
and other common areas and to pay the franchise fees described below.
The following table sets forth certain information in connection with
the Franchise Licenses:
<TABLE>
<CAPTION>
Hotel Effective Date Expiration Date Franchise Fee(1)
----- -------------- ---------------- ----------------
<S> <C> <C> <C>
Holiday Inn Express, Harrisburg, PA May 2, 1996 May 2, 2006 8.00%
Holiday Inn Express, Hershey, PA September 30, 1997 September 30, 2007 8.00%
Holiday Inn Express, New Columbia, PA December 3, 1997 December 3, 2007 8.00%
Holiday Inn, Milesburg, PA February 25, 1997 February 25, 2007 8.00%
Holiday Inn Hotel and Conference Center,
Harrisburg, PA September 29, 1995 September 29, 2005 7.50%
Hampton Inn, Carlisle, PA June 16, 1997 June 16, 2017 8.00%
Hampton Inn, Selinsgrove, PA September 9, 1996 September 9, 2016 8.00%
Comfort Inn, Denver, PA August 4, 1995 August 4, 2015 8.05%
Comfort Inn, Harrisburg, PA March 27, 1996 March 27, 2016 8.05%
Clarion Suites, Philadelphia, PA August 4, 1995 August 4, 2015 5.30%
</TABLE>
(1) Percentage of room revenues payable to the franchisors.
HOLIDAY INN EXPRESS(R) AND HOLIDAY INN(R) ARE REGISTERED TRADEMARKS OF
HOLIDAY HOSPITALITY CORPORATION. HOLIDAY HOSPITALITY CORPORATION HAS NOT
ENDORSED OR APPROVED THE OFFERING. A GRANT OF A HOLIDAY INN EXPRESS OR HOLIDAY
INN FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY
HOLIDAY HOSPITALITY CORPORATION (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR
DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR THE PRIORITY COMMON SHARES
OFFERED HEREBY.
HAMPTON INN(R) IS A REGISTERED TRADEMARK OF PROMUS HOTELS. PROMUS
HOTELS HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF A HAMPTON INN
FRANCHISE LICENSE FOR CERTAIN OF THE INITIAL HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY
PROMUS HOTELS (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE
COMPANY, THE PARTNERSHIP OR THE PRIORITY COMMON SHARES OFFERED HEREBY.
COMFORT INN(R) AND CLARION SUITES(R) ARE REGISTERED TRADEMARKS OF
CHOICE HOTELS INTERNATIONAL. CHOICE HOTELS INTERNATIONAL HAS NOT ENDORSED OR
APPROVED THE OFFERING. A GRANT OF A COMFORT INN FRANCHISE LICENSE FOR CERTAIN OF
THE INITIAL HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY CHOICE HOTELS INTERNATIONAL (OR
ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE
PARTNERSHIP OR THE PRIORITY COMMON SHARES OFFERED HEREBY.
53
<PAGE>
Operating Practices
The Company's management recognizes the need for aggressive, market
driven, creative management given the competition in the hospitality industry.
Each of the Initial Hotels will be managed by the Lessee under separate
Percentage Leases with the Partnership. The Lessee intends to continue the
management systems developed by the Hersha Affiliates. See "The Lessee."
Employees
The Company intends to be self-advised and thus will utilize the
services of its officers rather than retain an advisor. Initially, the Company
will have no employees other than its officers. See "Management--Trustees and
Executive Officers." The Lessee will employ approximately 350 people in
operating the Initial Hotels on behalf of the Lessee.
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 a property owned by another 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 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 may be potentially liable for any such costs.
Recent Phase I environmental assessments have been obtained on all of
the Initial Hotels. The Phase I environmental assessments were intended to
identify potential environmental contamination for which the Initial Hotels may
be responsible. The Phase I environmental assessments included historical
reviews of the Initial Hotels, reviews of certain public records, preliminary
investigations of the sites and surrounding properties, screening for the
presence of hazardous substances, toxic substances and underground storage
tanks, and the preparation and issuance of a written report. The Phase I
environmental assessments did not include invasive procedures, such as soil
sampling or ground water analysis.
The Phase I environmental assessments have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets, results of operations or liquidity,
nor is the Company aware of any such liability. Nevertheless, it is possible
that these environmental assessments 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 Company, the Partnership or the Lessee.
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 have been notified by any governmental authority of any
material noncompliance, liability or claim relating to hazardous or toxic
substances or other environmental matter 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 "Business and
Properties--The Initial Hotels."
54
<PAGE>
There will be competition for investment opportunities in upper-economy
and mid-scale hotels from entities organized for purposes substantially similar
to the Company's objectives as well as other purchasers of hotels. The Company
will be competing 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 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. See "Risk Factors--Conflicts of
Interest--Competing Hotels Owned or to be Acquired by the Hersha Affiliates."
Insurance
The Company will keep in force comprehensive insurance, including
liability, fire, workers' compensation, extended coverage, rental loss 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 require such
substantial premiums that the cost of maintaining such insurance is economically
infeasible. 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. See "Risk
Factors--Real Estate Investment Risks--Uninsured and Underinsured Losses." The
Company believes, however, that the Properties are adequately insured in
accordance with industry standards.
Depreciation
To the extent that the Partnership acquires the Initial Hotels or the
partnership interests in the Combined Entities in exchange for Subordinated
Units, the Partnership's initial basis in each Initial Hotel for federal income
tax purposes should be the same as the Combined Entities' basis in such Initial
Hotel on the date of acquisition. Although the law is not entirely clear, the
Partnership intends 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 Combined Entities. 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 larger
share of such deductions). Because the Partnership's initial basis in the
Initial Hotels will be less than the fair market value of those hotels on the
date of acquisition, the Company's depreciation deductions may be less than they
otherwise would have been if the Partnership had purchased the Initial Hotels or
the partnership interests in the Combined Entities entirely for cash.
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 or any of the
Initial Hotels. The Lessee has advised the Company that it currently is not
involved in any litigation. The Combined Entities have represented to the
Partnership that there is no material litigation pending, threatened against or
affecting the Initial Hotels.
Hersha Affiliates' Hotel Assets Not Acquired By The Company
The Hersha Affiliates own the following hotels, which are not being
acquired by the Company and are not subject to the Option Agreement: (i) Best
Western, Indiana, Pennsylvania (107) rooms and (ii) Comfort Inn, McHenry,
Maryland (76 rooms). In addition, the Hersha Affiliates own land in Carlisle,
Pennsylvania, Valley Forge, Pennsylvania and Frederick, Maryland that could be
used for hotel development. The Hampton Inn, Danville, Pennsylvania, the
Harrisburg Inn, Harrisburg, Pennsylvania, the Sleep Inn, Pittsburgh,
Pennsylvania, and the land owned by Hersha Affiliates in Carlisle, Pennsylvania
are subject to the Option Agreement. See "Certain Relationships and
Transactions--Option Agreement."
Ground Leases
55
<PAGE>
The land underlying the Holiday Inn Express in Harrisburg, Pennsylvania
and the Comfort Inn in Denver, Pennsylvania each will be leased to the
Partnership by certain Hersha Affiliates for aggregate rent of $21,000 per year
for 99 years. See "Risk Factors--Possible Increase in Ground Lease Payments for
Comfort Inn, Denver, Pennsylvania." Also, a portion of the land adjacent to the
Hampton Inn, Selinsgrove, Pennsylvania will be leased to a Hersha Affiliate for
$1 per year for 99 years.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflicts of interest and certain other activities that
have not been discussed elsewhere. The policies with respect to these activities
have been determined by the Trustees and may be amended or revised from time to
time at the discretion of the 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 two-thirds of the outstanding Priority Common
Shares.
Investment Policies
The Company's principal investment policy is to acquire hotels that
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's business is focused solely on hotels. The Company's
Acquisition Policy is to acquire a hotel for which it expects to receive rents
at least equal to 12% of the purchase price paid for the hotel, net of (i)
property and casualty insurance premiums, (ii) real estate and personal property
taxes, and (iii) a reserve for furniture, fixtures and equipment equal to 4% (6%
for full-service hotels) of gross revenues per quarter at the hotel. In the case
of hotels with limited operating history or that have been newly renovated, the
Company intends to institute a mechanism similar to the mechanism used for the
Newly-Developed Hotels and Newly-Renovated Hotels for establishing a minimum
initial fixed rent and adjusting the purchase price for each such hotel based
upon the first two years of operating history of such hotel after opening or
completion of renovation. The Trustees, however, may change the Acquisition
Policy at any time without the approval of the Company's shareholders. See
"--Growth Strategy--Acquisition Strategy" and "Risk Factors--Growth Strategy."
The Company has not developed a policy in connection with a limit on the number
or amount of mortgages that may be placed on any one piece of property owned by
the Company. Although the Company intends primarily to acquire hotels, it 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 that may have priority over
the equity interest of the Company.
The Company intends to lease hotels that it acquires in the future to
operators, including both the Lessee and operators unaffiliated with the Lessee.
Future leases with the Lessee generally will be similar to the Percentage
Leases. See "Business and Properties--The Percentage Leases." Future leases
with operators unaffiliated with the Lessee may or may not be similar to the
Percentage Leases. The Trustees will negotiate the terms and provisions of each
future lease, depending on the purchase price paid, economic conditions and
other factors deemed relevant at the time.
While the Company will emphasize equity investments in hotels, it may,
in its discretion, invest in mortgages and other real estate interests,
including securities of other REITs. The Company may invest in participating,
convertible or other types of 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 ownership interest. The
Company does not presently intend to invest in mortgages or real estate
interests other than hotels.
Financing
The Company's additional investments in hotels may be financed, in
whole or in part, with undistributed cash, subsequent issuances of Priority
Common Shares or other securities, or borrowings. The Company is currently
pursuing with lenders the Line of Credit. A failure to obtain the Line of Credit
could adversely affect the Company's ability to finance its growth strategy. See
"Risk Factors-Dependence Upon External Financing." The Debt Policy will limit
consolidated indebtedness to less than 67% of the aggregate purchase prices paid
by the Company for the hotels in which it has invested. The Trustees, however,
may change the Debt Policy at any time
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without the approval of the Company's shareholders. The aggregate purchase
prices for the Initial Hotels is approximately $47.3 million. After the
Formation Transactions, the Assumed Indebtedness will be approximately $17.4
million. Because of the Debt Policy and the amount of the Assumed Indebtedness,
the success of the Company's acquisition strategy will depend primarily on its
ability to access additional capital through issuances of equity securities. See
"Risk Factors--Risks of Leverage" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company will invest in additional hotels only as suitable
opportunities arise. The Company will not undertake investments in such hotels
unless adequate sources of financing are available. The Bylaws require the
approval of a majority of the Trustees, including a majority of the Independent
Trustees, to acquire any additional hotel in which a Trustee or officer of the
Company, or any Affiliate thereof, has any interest (other than solely as a
result of his status as a Trustee, officer or shareholder of the Company). It is
expected that future investments in hotels will be dependent on and financed by
the proceeds from additional equity capital. The Trustees have the authority,
without shareholder approval, to issue additional Priority Common Shares,
preferred shares or other capital shares of the Company in any manner (and on
such terms and for such consideration) as it deems appropriate, including in
exchange for property. Existing shareholders have no preemptive right to
purchase shares issued in any offering, and any such offering might cause a
dilution of a shareholder's investment in the Company.
Conflict of Interest Policies
The Company has adopted certain policies designed to minimize the
effects of potential conflicts of interest. In addition, the Partnership has
entered into the Option Agreement with certain of the Hersha Affiliates. The
Trustees are subject to certain provisions of Maryland law, which are designed
to eliminate or minimize certain potential conflicts of interest. However, there
can be no assurance that these policies always will be successful in eliminating
the influence of such conflicts, and if they are not successful, decisions could
be made that might fail to reflect fully the interests of all shareholders.
Declaration of Trust and Bylaw Provisions
The Company's Declaration of Trust, with limited exceptions, requires
that three of the Company's Trustees be 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 at least a majority
of the members of the Trustees and the affirmative vote of the holders of not
less than two-thirds of the outstanding Priority Common Shares (and other shares
of beneficial interest of the Company entitled to vote, if any exist). The
Bylaws require that any action pertaining to any transaction involving the
Company, including the purchase, sale, lease or mortgage of any real estate
asset, in which a Trustee or an officer of the Company, or any Affiliate
thereof, has an interest (other than solely as a result of his status as a
trustee, officer or shareholder of the Company, must be approved by a majority
of the Trustees, including a majority of the Independent Trustees.
The Option Agreement
Pursuant to the Option Agreement among Hasu P. Shah, Jay H. Shah, Neil
H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel,
David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, each a Hersha Affiliate,
and the Partnership, the Partnership will have an option to acquire any hotels
owned or developed in the future by the Hersha Affiliates within 15 miles of any
of the Initial Hotels or any hotel subsequently acquired by the Partnership for
two years after acquisition or development.
The Partnership
A conflict of interest may arise between the Company, as General
Partner of the Partnership, and the Hersha Affiliates as limited partners of the
Partnership, due to the differing potential tax liability to the Company and the
Hersha Affiliates from the sale of an Initial Hotel or refinancing or prepayment
of principal on any of the Assumed Indebtedness resulting from the differing tax
bases in the Initial Hotels of the Company, on the one hand, and the Hersha
Affiliates, on the other hand. The Bylaws provide that the Company's decisions
with respect to any transaction, including the disposition of an Initial Hotel
or refinancing or prepayment of principal on the Assumed Indebtedness, in which
a Trustee or officer of the Company, or any Affiliate thereof, has any interest
(other than solely as a result of his status as a Trustee, officer or
shareholder of the Company) must be approved by a majority of the Trustees,
including a majority of the Independent Trustees. The Partnership Agreement
gives the Company,
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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.
Provisions of Maryland Law
Under Maryland law (the jurisdiction under which the Company is
organized), the Trustees or shareholders of the Company are not personally
liable for the obligations of the Company. The Trustees are not, however,
relieved from liability to the Company or its shareholders for any act that
constitutes bad faith, willful misfeasance, gross negligence or reckless
disregard of the Trustee's duties. Maryland law permits a Maryland REIT to
include in its Declaration of Trust a provision limiting the liability of its
trustees 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 and that is material to the cause of action. The Declaration
of Trust of the Company contains such a provision limiting such liability to the
maximum extent permitted by Maryland law.
There is no Maryland statutory provision governing transactions between
the Company and any of its Trustees. The Maryland General Corporation Law,
however, provides that a transaction involving a director of a Maryland
corporation or a corporation, firm or other entity in which such director is a
director or has a material financial interest is not void or voidable solely
because of the director's directorship or the director'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 directors, 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 director or corporation, firm or other
entity, or (ii) the transaction is fair and reasonable to the Company. In the
absence of statutory provisions governing such transactions with respect to
Maryland REITs, it is possible, though not certain, that the Maryland courts
would look, by analogy, to the corporate provisions for guidance.
Policies with Respect to Other Activities
The Company has authority to offer shares of beneficial interest or
other securities and to repurchase or otherwise reacquire its shares or any
other securities and may engage in such activities in the future. As described
under "Shares Available for Future Sale," the Company may issue Class B Common
Shares or Priority Common Shares to holders of Units upon exercise of their
Redemption Rights (as herein defined). The Company has not issued Class B Common
Shares or Priority 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 Trustees, with the consent of the holders of
two-thirds of the outstanding Class B Common Shares or Priority Common Shares,
determine that it is no longer in the best interests of the Company to qualify
as a REIT.
Working Capital Reserves
The Company initially will have approximately $2.4 million in working
capital reserves. In the future, the Company intends to set aside undistributed
cash in amounts that the Trustees determine to be adequate to meet normal
contingencies in connection with the operation of the Company's business and
investments. The Company expects to obtain the Line of Credit, which may assist
the Company in meeting its distribution and working capital needs. A failure to
obtain the Line of Credit could adversely affect the Company's ability to
finance its growth strategy. See "Risk Factors-Dependence Upon External
Financing."
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FORMATION TRANSACTIONS
The Formation Transactions will be as follows:
o The Company will sell 1,833,334 Priority Common Shares to the
Underwriter at the Offering Price. The net proceeds to the
Company from the Offering will be contributed to the
Partnership in exchange for approximately a 32% general
partnership interest in the Partnership. In addition, the
Company will offer 166,666 Priority Common Shares to the
Hersha Affiliates at the Offering Price. The information
contained herein assumes that none of the 166,666 Priority
Common Shares are sold.
o The Partnership will acquire the Initial Hotels by acquiring
either all of the partnership interests in the Combined
Entities or the Initial Hotels in exchange for (i)
Subordinated Units that will be redeemable, subject to certain
limitations, for an aggregate of approximately 4 million Class
B Common Shares, with a value of approximately $23.8 million
based on the Offering Price and (ii) the assumption of
approximately $23.8 million in indebtedness secured by all of
the Initial Hotels, approximately $6.4 million of which will
be repaid with the proceeds of the Offering. The purchase
prices of the Newly-Developed Hotels and the Newly-Renovated
Hotels will be adjusted on the First Adjustment Date or the
Second Adjustment Date, as applicable, as described in "The
Company."
o The land underlying the Holiday Inn Express, Harrisburg,
Pennsylvania and the Comfort Inn, Denver, Pennsylvania each
will be leased to the Partnership by certain Hersha Affiliates
for aggregate rent of $21,000 per year for 99 years. Also, a
portion of the land adjacent to the Hampton Inn, Selinsgrove,
Pennsylvania will be leased to a Hersha Affiliate for $1 per
year for 99 years.
o Each Initial Hotel will be leased to the Lessee pursuant to a
Percentage Lease. The Percentage Leases will have an initial
non-cancelable term of five years. All, but not less than all,
of the Percentage Leases may be extended for an additional
five-year term. At the end of the first extended term, the
Lessee, at its option, may extend some or all of the
Percentage Leases for the Initial Hotels. The Lessee will hold
the Franchise License for each Initial Hotel. See "Business
and Properties--The Percentage Leases."
o The Partnership and certain of the Hersha Affiliates has
entered into the Option Agreement, pursuant to which the
Hersha Affiliates will agree that, if they develop or own any
hotels in the future that are located within 15 miles of any
Initial Hotel or subsequently acquired hotel, the Hersha
Affiliates will give the Partnership the option to purchase
such hotels for two years. See "Risk Factors--Conflicts of
Interest--Competing Hotels Owned or to be Acquired by the
Hersha Affiliates" and "Policies and Objectives with Respect
to Certain Activities--Conflict of Interest Policies--The
Option Agreement."
o The Company and the Lessee will enter into the Administrative
Services Agreement, pursuant to which the Lessee will provide
certain administrative services in exchange for an annual fee
equal to $55,000, plus $10,000 for each hotel owned by the
Company.
o The Company has granted the Underwriter the Underwriter
Warrants to purchase 183,333 Priority Common Shares for a
period of five years at a price per share equal to 165% of the
Offering Price.
o The Partnership has granted 2744 Associates, L.P., which is a
Hersha Affiliate, the Hersha Warrants to purchase 250,000
Units for a period of five years at a price per Unit equal to
165% of the Offering Price.
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Benefits to the Hersha Affiliates
As a result of the Formation Transactions, the Hersha Affiliates will
receive the following benefits:
o The Hersha Affiliates will receive approximately 4 million
Subordinated Units in exchange for their interests in the
Initial Hotels, which will have a value of approximately $23.8
million based on the Offering Price. The Subordinated Units
held by the Hersha Affiliates will be more liquid than their
current interests in the Selling Entities if a public trading
market for the Class B Common Shares commences or when such
shares are converted into Priority Common Shares and after the
applicable holding periods expire.
o The Lessee, which is owned by the Hersha Affiliates, will hold
the Franchise Licenses for the Initial Hotels and will be
entitled to all revenues from the Initial Hotels after payment
of Rent under the Percentage Leases and other operating
expenses. The Company will pay certain expenses in connection
with the transfer of the Franchise Licenses to the Lessee. See
"The Lessee."
o Approximately $6.4 million of indebtedness owed by the
Combined Entities will be repaid with a portion of the
proceeds of the Offering. Approximately $4 million of such
indebtedness is owed to entities controlled by the Hersha
Affiliates and relates principally to hotel development
expenses in connection with the Initial Hotels. Certain of the
Assumed Indebtedness is and will remain guaranteed by the
Hersha Affiliates. Upon the repayment of such indebtedness,
the Hersha Affiliates will be released from the related
guarantees. The Hersha Affiliates may receive increased cash
distributions from the operations of the Initial Hotels as a
result of the reduction of indebtedness on the Initial Hotels.
o If the repricing on the First Adjustment Date or the Second
Adjustment Date, as applicable, produces a higher value for
the Newly-Developed Hotels or the Newly-Renovated Hotels, the
Hersha Affiliates will receive an additional number of
Subordinated Units that, when multiplied by the Offering
Price, equals the increase in value plus the value of any
distributions that would have been made in connection with
such Subordinated Units if such Subordinated Units had been
issued in connection with the acquisition of such hotels.
o The Lessee, which is owned by the Hersha Affiliates, will
receive an annual fee equal to $55,000, plus $10,000 for each
hotel owned by the Company for providing certain
administrative services to the Company.
o Certain tax consequences to the Hersha Affiliates from the
transfer of equity interests in the Initial Hotels will be
deferred.
o Messrs. Hasu P. Shah, K.D. Patel and Bharat C. Mehta will
receive $7,500 per year for serving as Trustees. Mr. Shah
shall also be entitled to receive a salary of not more than
$100,000 per year provided that the Priority Common Shares
have a closing price of $9.00 per share or higher for 20
consecutive trading days and remain at or above $9.00 per
share.
o The Partnership has granted to 2744 Associates, L.P., which is
a Hersha Affiliate, the Hersha Warrants to purchase 250,000
Units for a period of five years at a price per share equal to
165% of the Offering Price.
o Certain of the Hersha Affiliates will receive a total of
$21,000 per year pursuant to 99-year ground leases with
respect to the Holiday Inn Express, Harrisburg, Pennsylvania
and the Comfort Inn, Denver, Pennsylvania.
o A portion of the land adjacent to the Hampton Inn,
Selinsgrove, Pennsylvania will be leased to a Hersha Affiliate
for $1 per year for 99 years.
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MANAGEMENT
Trustees and Executive Officers
Initially, the Trustees will consist of seven members, three of whom
are Independent Trustees. All of the Trustees will serve staggered terms of two
years and the Trustees will be divided into two classes. Each Trustee in Class I
will hold office initially for a term expiring at the first annual meeting of
shareholders (1999) and each Trustee in Class II will hold office initially for
a term expiring at the second annual meeting of shareholders (2000). Certain
information regarding the Trustees and executive officers of the Company is set
forth below.
Name Age Position
---- --- --------
Hasu P. Shah (Class II) 53 Chairman of the Board, Chief
Executive Officer and Trustee
Kiran P. Patel 48 Chief Financial Officer, Treasurer
and Secretary
Bharat C. Mehta (Class II)* 53 Trustee
K.D. Patel (Class II)* 54 Trustee
L. McCarthy Downs, III (Class I)* 45 Trustee
Everette G. Allen, Jr. (Class I)* 58 Independent Trustee
Thomas S. Capello (Class II)* 55 Independent Trustee
Mark R. Parthemer (Class I)* 38 Independent Trustee
* Has agreed to become a Trustee upon or immediately before the
consummation of the Offering.
Hasu P. Shah is the President and CEO of Hersha Enterprises, Ltd. and
has held that position since its inception in 1984. He started Hersha
Enterprises, Ltd. with the purchase of the 125-room Quality Inn Riverfront in
Harrisburg, Pennsylvania which he converted to a 117-room Holiday Inn Express.
Recently the "Central Penn Business Journal" honored Hersha Enterprises, Ltd. as
one of the Fifty Fastest Growing Companies in 1997 in central Pennsylvania. His
interest in construction and renovations of hotels initiated the development of
Hersha Construction Company for the construction and renovation of new
properties and Hersha Hotel Supply Company to supply furniture, fixtures and
equipment supplies to the properties. Mr. Shah and his wife, Hersha, are active
members of the community. Mr. Shah serves on the Board of Directors of several
organizations including the Pennsylvania State University Capital Campus in
Harrisburg, Pennsylvania, the Harrisburg Foundation, Human Enrichment by Love
and Peace (H.E.L.P.), the Capital Region Chamber of Commerce and the Vraj Hindu
Temple. Mr. Shah received a Bachelors of Science degree in Chemical Engineering
from Tennessee Technical University and obtained a Masters degree in
Administration from Pennsylvania State University.
K.D. Patel has been a principal of Hersha Enterprises, Ltd. since 1989.
Mr. Patel currently serves as the President of the Lessee. He has received
national recognition from Holiday Inn Worldwide for the successful management of
Hersha's Holiday Inn Express Hotels. In 1996, Mr. Patel was appointed by Holiday
Inn Worldwide to serve as an advisor on its Sales and Marketing Committee. Prior
to joining Hersha Enterprises, Ltd., Mr. Patel was employed by Dupont
Electronics in New Cumberland, Pennsylvania from 1973 to 1990. He is a member of
the Board of Directors of a regional chapter of the American Red Cross and
serves on the Advisory Board of Taneytown Bank and Trust. Mr. Patel received a
Bachelor of Science degree in Mechanical Engineering from the M.S. University of
India and a Professional Engineering License from the Commonwealth of
Pennsylvania in 1982.
Bharat C. Mehta has been a principal of Hersha Enterprises, Ltd. since
1985. Mr. Mehta currently serves as President of Hersha Health Care Management
Division of Hersha Enterprises, Ltd. Mr. Mehta worked as a chemical engineer
from 1967 to 1984 for Lever Brothers Corporation (UniLever, a multinational
company). He also worked for the Pennsylvania Department of Environmental
Services in the Bureau of Water Quality
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Management as Chief of the Program Planning and Evaluation Section. He is a
member of his local chapter of the Rotary Club. Mr. Mehta received a Bachelor of
Science degree in Chemical Engineering from the Worcester Polytechnic Institute
in Massachusetts and earned a Masters degree from Pennsylvania State University.
Kiran P. Patel has been a principal of Hersha Enterprises, Ltd. since
1993. Mr. Patel is currently the partner in charge of Hersha's Land Development
and Business Services Divisions. Prior to joining Hersha Enterprises, Ltd., Mr.
Patel was employed by AMP Incorporated, in Harrisburg, Pennsylvania. Mr. Patel
serves on various Boards for community service organizations. Mr. Patel received
a Bachelor of Science degree in Mechanical Engineering from M.S. University of
India and obtained a Masters of Science degree in Industrial Engineering from
the University of Texas in Arlington.
L. McCarthy Downs, III, is the Senior Vice President and Manager of the
Corporate Finance Department of the Underwriter. He has held the position since
1990 and has been involved in several public and private financings for REITs.
Prior to 1990, Mr. Downs was employed by another investment banking and
brokerage firm for seven years. Mr. Downs received a Bachelor of Science degree
in Business Administration from The Citadel and obtained an M.B.A. from The
College of William and Mary.
Everette G. Allen, Jr. is chairman of and a senior partner in the law
firm of Hirschler, Fleischer, Weinberg, Cox & Allen, P.C. in Richmond, Virginia.
Mr. Allen concentrates his practice in litigation, real estate development,
commercial disputes law, finance and debt restructuring and has been practicing
at Hirschler, Fleischer since 1970. Mr. Allen was admitted to the Virginia State
Bar in 1965. He served as Executive Editor of the Virginia Law Review from 1964
to 1965 and served as a Law Clerk to Fourth Circuit Judge Albert V. Bryan of the
U.S. Court of Appeals during 1965 and 1966. He was a member of the Board of
Trustees of Randolph-Macon College from 1988 to 1992. Mr. Allen currently serves
as a member of the American College of Trial Lawyers, a member of the Board of
Directors of Virginia Gas Company and as a Trustee of the Virginia Student Aid
Foundation. Mr. Allen received his B.A. degree from Randolph Macon College in
1962 and his law degree from University of Virginia in 1965.
Thomas S. Capello is President, Chief Executive Officer and Director of
First Capitol Bank in York, Pennsylvania and has held these positions since its
founding in 1988. First Capitol Bank specializes in small business lending and
has expanded into three branches with assets of almost $105,000,000. From 1983
to 1988 Mr. Capello served as Vice President and Manager of the Loan Production
Office of The First National Bank of Maryland. Prior to his service at the First
National Bank of Maryland, Mr. Capello served as Vice President and Senior
Regional Lending Officer at Commonwealth National Bank and worked at the
Pennsylvania Development Credit Corporation. Mr. Capello is an active member of
the board of the Central Pennsylvania Venture Capital Forum, Farm and National
Lands Trust, Better York, WITF, Martin Library, Motter Printing Company, 19th
District, Second Mile and Shadofax. Mr. Capello is a graduate of the Stonier
Graduate School of Banking at Rutgers University and holds an undergraduate
degree with a major in Economics from Pennsylvania State University.
Mark R. Parthemer has served as Special Counsel at Saul, Ewing, Remick
& Saul LLP in the Harrisburg, Pennsylvania office since January, 1998. Mr.
Parthemer concentrates his practice in general business, tax and estates law.
Prior to joining Saul, Ewing, Remick & Saul LLP, Mr. Parthemer worked at Coopers
& Lybrand LLP as a tax specialist from 1985 to October 1989. From October 1989
to January 1998 he worked at, and became a partner of, Boswell, Tintner, Piccola
& Wickersham, another law firm located in Harrisburg, Pennsylvania. Mr.
Parthemer is the current First Assistant Solicitor of Dauphin County where he
advises the County Commissioners on legal matters, including tax, business and
finance. He has recently been appointed to the Board of Keystone Area Council,
Boy Scouts of America and the Board of The Vision Foundation. Mr. Parthemer
received his B.A. and B.S. degrees from Franklin and Marshall College and his
law degree from The Dickinson School of Law. He is admitted to practice law in
Pennsylvania and before the United States Tax Court.
Audit Committee
The Audit Committee will consist of the 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. The Audit
Committee will
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establish procedures to monitor compliance with the REIT provisions of the Code
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
such other laws and regulations applicable to the Company.
Compensation Committee
The Compensation Committee will consist of the three Independent
Trustees. The Compensation Committee will determine compensation for the
Company's executive officers and administer the Hersha Hospitality Trust Option
Plan (the "Option Plan").
Compensation
Each Trustee will initially be paid $10,000 per year for those residing
outside the State of Pennsylvania and $7,500 per year for those residing in the
State of Pennsylvania, payable in quarterly installments. In addition, the
Company will reimburse all Trustees for reasonable out-of-pocket expenses
incurred in connection with their services on the Board of Trustees. No officers
of the Company initially shall receive any cash compensation from the Company
other than the Trustee's fees for those officers who are Trustees, provided,
however, that the Chairman of the Board of Trustees shall be entitled to receive
a salary of not more than $100,000 per year provided that the Priority Common
Shares have a bid price of $9.00 per share or higher for 20 consecutive trading
days and remains at or above $9.00 per share. The Independent Trustees who are
members of the Board on the effective date of the Offering will receive on that
date options to purchase the following Class B Common Shares at the Offering
Price: Mr. Allen, 30,000; Mr. Capello, 10,000; and Mr. Parthemer, 1,000. The
options will be granted under the Hersha Hospitality Trust Non-Employee
Trustees' Option Plan (the "Trustees' Plan"), which may be amended by the Board
to provide for other awards, including awards to future Independent Trustees.
The options granted on the effective date of the Offering will become
exercisable as described below under "The Trustees' Plan."
Exculpation and Indemnification
The Maryland REIT Law permits a Maryland real estate investment trust
to include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment and that is 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 shareholder, 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 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
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: (a)
any present or former Trustee, officer or shareholder (including any individual
who, while a Trustee, officer or shareholder and at the express request of the
Company, serves another entity as a director, officer, shareholder, partner or
trustee of such entity) 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) subject to certain limitations under Maryland law, any
present or former Trustee or officer against any claim or liability to which he
may become subject by reason of such status; and (c) each present or former
shareholder against any claim or liability to which he may become subject by
reason of such status. In addition, the Bylaws obligate the Company, subject to
certain provisions of Maryland law, to pay or reimburse, in advance of final
disposition of a proceeding, reasonable expenses incurred by a present or former
Trustee, officer or shareholder made a party to a proceeding by reason of such
status. The Company may, with the approval of its Trustees, provide such
indemnification or payment or reimbursement of expenses to any present or former
Trustee, officer or shareholder of the Company or any predecessor of the Company
and to any employee or agent of the Company or predecessor of the Company.
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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 or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. 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 undertaking by him or
on his behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
The Option Plan
The Board of Trustees has adopted, and the current sole shareholder of
the Company has approved, the Option Plan for the purpose of attracting and
retaining executive officers and employees. The Option Plan will be administered
by the Board of Trustees prior to the Offering and by the Compensation Committee
of the Board of Trustees, or its delegate, following the Offering. The
Compensation Committee may not delegate its authority with respect to option
awards 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 its delegate, as appropriate.
Officers and other employees of the Company are eligible to participate
in the Option Plan. The Administrator selects the individuals who will
participate in the Option Plan ("Participants").
The Option Plan authorizes the issuance of options to purchase up to
650,000 Class B Common Shares. The Option Plan provides for, in the event Class
B Common Shares are converted into another security of the Company, the issuance
of equivalent amounts of such security and options to purchase such security
into which the Class B Common Shares are converted. The Plan provides for the
grant of (i) options intended to qualify as incentive stock options ("ISOs")
under Section 422 of the Code, and (ii) options not intended to so qualify
("nonqualified options"). Code Section 422 imposes various requirements in order
for an option to qualify as an ISO, including allowing a maximum ten-year term
of the option and an 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 Class B or Priority 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 Class B or Priority Common
Shares in excess of the $100,000 Limit, they will be treated as nonqualified
options.
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
at the time the Participant disposes of shares acquired under the ISO. 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. The employer may claim a federal
income tax deduction on account of certain dispositions of shares acquired upon
the exercise of an ISO.
Options under the Option Plan may be awarded by the Administrator, and
the Administrator will determine the option exercise period and any conditions
on exercisability. The options granted under the Option Plan will be exercisable
only if (i) the Company obtains a per share closing price on the Priority Common
Shares of $9.00 or higher for 20 consecutive trading days and (ii) the closing
price on the Priority Common Shares for the prior trading day was $9.00 or
higher. In addition, no option granted under the Option Plan may be exercised
more than five
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years after the date of grant. The exercise price for options granted under the
Option Plan will be determined by the Compensation Committee at the time of
grant, but will not be less than the fair market value of the Class B Common
Shares on the date of grant. No Participant may be granted, in any calendar
year, options for more than ______ Class B Common Shares.
An option may be exercised for any number of Class B Common Shares up
to the full number for which the option could be exercised. A Participant will
have no rights as a shareholder with respect to Class B Common Shares subject to
an option until the option is exercised. Any Class B Common Shares subject to
options which are forfeited (or expire without exercise) pursuant to the terms
established at the time of grant will again be available for grant under the
Option Plan. Payment of the exercise price of an option granted under the Option
Plan may be made in cash, cash equivalents acceptable to the Compensation
Committee or, if permitted by the option agreement, by exchanging Class B Common
Shares having a fair market value equal to the option exercise price.
No option award may be granted under the Option Plan more than 10 years
after the earlier of the date that the Board of Trustees adopted, or the
shareholder of the Company approved, the Plan. The Board may amend or terminate
the Option Plan at any time, but an amendment will not become effective without
shareholder approval if the amendment increases the number of shares that may be
issued under the Option Plan (other than equitable adjustments upon certain
corporate transactions). No amendment will affect a Participant's outstanding
award without the Participant's consent.
On the effective date of the Offering, the Company will grant options
under the Option Plan for an aggregate of _______ Class B Common Shares,
including options [description of awards to officers].
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 Independent Trustees. The Trustees' Plan
authorizes the issuance of up to 200,000 Class B Common Shares. The Trustees'
Plan provides for, in the event the Class B Common Shares are converted into
another security of the Company, the issuance of equivalent amounts of such
security and options to purchase such security into which the Class B Common
Shares are converted.
The Trustees' Plan provides for the grant of nonqualified options for
the following Class B Common Shares to the Independent Trustees of the Company
who are members of the Board on the effective date of the Offering: Mr. Allen,
30,000; Mr. Capello, 10,000; and Mr. Parthemer, 1,000. The exercise price of
each such option will be equal to the Offering Price. Each such option shall
become exercisable over the particular Trustee's initial term, provided that the
Trustee is a member of the Board on the applicable date. Thus, all of Mr.
Allen's and Mr. Parthemer's options will become exercisable as of the first
anniversary of the date of grant and one-half of Mr. Capello's options will
become exercisable on the first anniversary of the date of grant and the
remaining options will become exercisable on the second anniversary of the date
of grant. Notwithstanding the foregoing, an option granted under the Trustees'
Plan will be exercisable only if (i) the Company obtains a per share closing
price on the Priority Common Shares of $9.00 for 20 consecutive trading days and
(ii) the per share closing price on the Priority Common Shares for the prior
trading day was $9.00 or higher. Options issued under the Trustees' Plan are
exercisable for five years from the date of grant.
A Trustee's outstanding options will become fully exercisable if the
Trustee ceases to serve on the Board due to death or disability. All awards
granted under the Trustees' Plan shall be subject to Board or other approval
sufficient to provide exempt status for such grants under Section 16 of the
Exchange Act, as that section and Rules thereunder are in effect from time to
time. No option may be granted under the Trustees' Plan more than 10 years after
the date that the Board of Trustees approved the Plan. The Board may amend or
terminate the Trustees' Plan at any time but an amendment will not become
effective without shareholder approval if the amendment increases the number of
shares that may be issued under the Trustees' Plan (other than equitable
adjustments upon certain corporate transactions).
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company and the Partnership have entered into a number of
transactions with the Hersha Affiliates in connection with the organization of
the Company and the acquisition of the Initial Hotels. The officers and Trustees
of the Company collectively own 35% of the Lessee. The Lessee is entitled to all
income from the hotels after payment of operating expenses and lease payments.
There are no assurances that the terms of these transactions are as favorable as
those that the Company could have received from third parties. See "Risk Factors
- --Conflicts of Interest" and "Formation Transactions."
Repayment of Indebtedness and Guarantees by Mr. Shah and the Hersha Affiliates
Approximately $6.4 million of indebtedness owed by the Combined
Entities will be repaid with a portion of the proceeds of the Offering.
Approximately $4 million of such indebtedness is owed to entities controlled by
the Hersha Affiliates and relates principally to hotel development expenses in
connection with the Initial Hotels. Certain of the Assumed Indebtedness is and
will remain guaranteed by the Hersha Affiliates. Upon the repayment of such
indebtedness, the Hersha Affiliates will be released from the related
guarantees. The Hersha Affiliates may receive increased cash distributions from
the operations of the Initial Hotels as a result of the reduction of
indebtedness on the Initial Hotels. Mr. Shah and the partners of the Combined
Entities guarantee all of the Assumed Indebtedness, and the personal bankruptcy
of any of the guarantors would constitute a default under the related loan
documents.
Hotel Ownership and Management
Subject to the terms of the Option Agreement, the Hersha Affiliates
could acquire additional hotels that may not be acquired subsequently by the
Partnership. See "Policies and Objectives with Respect to Certain
Activities--Conflict of Interest Policies--The Option Agreement" and "Risk
Factors--Conflicts of Interest--Competing Hotels Owned or to be Acquired by the
Hersha Affiliates."
Option Agreement
Hasu P. Shah, Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti D.
Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I. Patni
and Manhar Gandhi, each a Hersha Affiliate, and the Partnership have entered
into the Option Agreement. Pursuant to the Option Agreement, the Partnership
will have a two-year option to acquire any hotels acquired or developed by the
Hersha Affiliates within 15 miles of any of the Initial Hotels or any
subsequently acquired hotel, including the Hampton Inn, Danville, Pennsylvania,
the Harrisburg Inn, Harrisburg, Pennsylvania, the Sleep Inn, Pittsburgh,
Pennsylvania and the land owned by Hersha Affiliates in Carlisle, Pennsylvania.
With respect to the Hampton Inn, Danville, Pennsylvania and the Sleep Inn,
Pittsburgh, Pennsylvania, the Partnership and the Hersha Affiliate that owns the
hotel have agreed that if the option is exercised by the Partnership, they will
use a purchase price methodology similar to the methodology used for the
Newly-Developed Hotels and have agreed to fix the rent until the hotel has two
years of operating history. In addition, the Partnership has agreed that, if the
option is exercised by the Partnership, it will issue Units valued at $6.00 per
Unit as consideration for the purchase of the hotel. See "Policies and
Objectives with Respect to Certain Activities--Conflict of Interest
Policies--The Option Agreement." The rights granted to the Partnership under the
Option Agreement commenced as of the date of the Option Agreement and shall
terminate one year after the later of: (i) the date upon which Hasu P. Shah
ceases to be a trustee, officer, partner or employee of the Company; (ii) the
date on which Hasu P. Shah ceases to be an employee, officer, trustee or
director of a consultant to the Company; (iii) the date on which Hasu P. Shah
and the Hersha Affiliates cease to own, in the aggregate, assuming a complete
conversion of all Units into shares of beneficial interest in the Company,
greater than 50% of shares of beneficial interest in the Company; or (iv) the
date on which the Company's Board of Trustees has less than three members that
are Hersha Affiliates.
Payment of Franchise Transfer Fees by the Company
The Company will pay certain expenses in connection with the transfer
of the Franchise Licenses to the Lessee. See "Formation Transactions--Benefits
to the Hersha Affiliates."
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THE LESSEE
The Lessee is a recently-formed Pennsylvania limited partnership. The
Lessee will lease each Initial Hotel pursuant to a separate Percentage Lease.
The Partnership intends to lease to the Lessee additional hotels acquired by the
Partnership on terms and conditions substantially similar to the Percentage
Leases applicable to the Initial Hotels. The Lessee's ability to perform its
obligations, including making Rent payments under the Percentage Leases, will be
dependent on the Lessee's ability to generate sufficient net cash flow from the
operation of the Initial Hotels and any other hotels leased to the Lessee. The
Lessee's obligations under the Percentage Leases are unsecured. Mr. Shah will
not guarantee the Lessee's obligations under the Percentage Leases, but the
Percentage Leases will contain cross-default provisions. Accordingly, the
Lessee's failure to make required payments under any of the Percentage Leases
will allow the Company to terminate any or all of the Percentage Leases. The
Hersha Affiliates own 100% of the Lessee and certain Hersha Affiliates serve as
officers of the Company. Consequently, they have a conflict of interest
regarding the enforcement of the Percentage Leases. See "Risk Factors--Conflicts
of Interest--No Arm's-Length Bargaining on Percentage Leases, Contribution
Agreements, Administrative Services Agreement and Option Agreement" and
"Business and Properties."
The Lessee will provide all employees and perform all marketing,
accounting and management functions necessary to operate the Initial Hotels
pursuant to the Percentage Leases. The Lessee has in-house programs for
accounting and the management and marketing of the Initial Hotels. The Lessee
intends to utilize its sales management program to coordinate, direct and manage
the sales activities of personnel located at the hotels.
Management of the Lessee
Certain information regarding the management of the Lessee is set forth
below:
Name Age Position
---- --- --------
K.D. Patel 54 President
Jay H. Shah 30 Vice President, General Counsel
and Secretary
Rajendra O. Gandhi 49 Vice President
David L. Desfor 37 Controller
Tracy L. Kundey 37 Director of Operations
K.D. Patel, biographical information for whom is set forth under
"Management--Trustees and Executive Officers," will serve as President of the
Lessee.
Jay H. Shah will serve as Vice President, Secretary and General Counsel
of the Lessee. Mr. Shah is a principal and general counsel for Hersha
Enterprises, Ltd. Mr. Shah also takes an active role in the firm's development
and construction activities. He also serves on the Choice Hotels International
Franchise Board. Mr. Shah was employed by Coopers & Lybrand LLP as a tax
consultant in 1995 and 1996 and previously served the late Senator John Heinz as
a Legislative Assistant. He also was employed by the Philadelphia District
Attorney's office and two Philadelphia-based law firms. Mr. Shah received a
Bachelor of Science degree from the Cornell University School of Hotel
Administration, a Masters degree from the Temple University School of Business
Management and a Law degree from Temple University School of Law. Mr. Shah is
the son of Hasu P. Shah, the Company's Chairman and Chief Executive Officer.
Rajendra O. Gandhi will serve as Vice President of the Lessee. Mr.
Gandhi has been a principal of Hersha Enterprises, Ltd. since 1986. Mr. Gandhi
currently serves as President of Hersha Hotel Supply, Inc., which provides
furnishings, case goods and interior furnishing materials to hotels and nursing
homes in several states. Mr. Gandhi is a graduate of the University of Bombay,
India and obtained an MBA degree from the University of West Palm Beach,
Florida.
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David L. Desfor will serve as Vice President of the Lessee. Mr. Desfor
has been a principal of Hersha Enterprises, Ltd. since 1991. Mr. Desfor is
currently the Controller of Hersha Enterprises, Ltd. Mr. Desfor is a graduate of
East Stroudsburg University with a Bachelor of Science degree in Hotel
Management.
Tracy L. Kundey will serve as the Director of Operations of the Lessee.
Mr. Kundey was previously with Wellsprings Management Group, Inc., a company
that he founded with a partner. He held the position of President responsible
for all aspects of a hospitality management company. Mr. Kundey has 19 years of
experience in the hospitality industry ranging from front desk attendant to
Corporate Rooms Division Manager. He is a Certified Hotel Administrator and
Certified Rooms Division Executive. Mr. Kundey has a Bachelors of Science Degree
from Eastern Washington University.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Priority and Class B 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 Priority Common Shares into
which Subordinated Units expected to be held by the person may be redeemed in
certain circumstances.
Number of Shares Percent of
Name of Beneficial Owner Beneficially Owned Class
- ------------------------ ------------------ ----------
Hasu P. Shah(1) 623,000(2) 22.8%
K.D. Patel 451,900(2) 16.1%
Bharat C. Mehta 736,200(2) 25.8%
Kiran P. Patel 309,400(2) 12.0%
L. McCarthy Downs 0 0%
Everette G. Allen, Jr. 30,000 ____
Thomas S. Capello 10,000 ____
Mark R. Parthemer 1,000 ____
Total for all officers and Trustees 2,161,500(3) 49.3%
- ---------------------
(1) Prior to the Offering, the Company will repurchase 100 Class B Common
Shares currently owned by Mr. Shah at his cost of $100.
(2) Represents Subordinated Units to be owned by such person upon completion of
the Formation Transactions and assumes (i) that all Subordinated Units held
by such person are redeemed for Class B Common Shares and (ii) conversion
of the Class B Common Shares into Priority Common Shares on a one-for-one
basis. The total number of shares outstanding used in calculating the
percentage assumes that none of the Subordinated Units held by other
persons are redeemed for Class B Common Shares. Such Subordinated Units
generally are not redeemable for Class B Common Shares until at least one
year following the acquisition of the Initial Hotels. Does not include any
Priority Common Shares that such person may purchase from the Company is
the offering of 166,666 shares to Hersha Affiliates.
(3) Assumes (i) that all Subordinated Units held by such persons are redeemed
for Class B Common Shares and (ii) conversion of the Class B Common Shares
into Priority Common Shares on a one-for-one basis. The total number of
shares outstanding used in calculating the percentage assumes that none of
the Subordinated Units held by other persons are redeemed for Class B
Common Shares. Such Subordinated Units generally are not redeemable for
Class B Common Shares until at least one year following the acquisition of
the Initial Hotels.
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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. See "Additional Information."
General
The Declaration of Trust of the Company provides that the Company may
issue up to 50,000,000 priority Class A common shares of beneficial interest,
$0.01 par value per share ("Priority Common Shares"), 50,000,000 Class B common
shares of beneficial interest, $0.01 par value per share ("Class B Common
Shares"), and 10,000,000 preferred shares of beneficial interest, $0.01 par
value per share ("Preferred Shares"). Upon completion of this Offering and the
related transactions, 2,000,000 Priority Common Shares will be issued and
outstanding and no Class B Common or Preferred Shares will be issued and
outstanding. Upon the termination of the Priority Period (as herein defined),
the outstanding Class B Common Shares will be automatically converted into
Priority Common Shares on a one-for-one basis. As permitted by the Maryland
statute governing real estate investment trusts formed under the laws of that
state (the "Maryland REIT Law"), the Declaration of Trust contains a provision
permitting the Board of Trustees, without any action by the shareholders of the
Company, 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 Company 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, subject to certain limitations, 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.
The Priority Common Shares
General
The holders of the Priority Common Shares shall be entitled to the
Priority Rights for the Priority Period. The Priority Period is the period
beginning on the date of the closing of the Offering and ending on the earlier
of: (i) the date that is 15 trading days after the Company sends notice to the
holders of the Priority Common Shares that their Priority Rights will terminate
in 15 trading days, provided that the closing bid price of the Priority Common
Shares is at least $7.00 on each trading day during such 15-day period; or (ii)
the fifth anniversary of the closing of the Offering. Notwithstanding the
foregoing, the Priority Period shall not end until the holders of the Priority
Common Shares have received any accrued, but unpaid, Priority Distributions.
Upon termination of the Priority Period: (i) the holders of the
Priority and Class B Common Shares will be entitled to their pro rata share of
the Company's dividends and amounts payable upon liquidation; and (ii) the Class
B Common Shares automatically will be converted into Priority Common Shares on a
one-for-one basis. See "--The Class B Common Shares."
The Priority Rights consist of the dividend priority and the
liquidation priority.
The Dividend Priority
The holders of the Priority Common Shares are entitled to receive
dividends, when and as declared by the Board of Trustees, out of assets legally
available for the payment of dividends. During the Priority Period, the holders
of the Priority Common Shares shall be entitled to receive, prior to any
distributions to either the holders of the Subordinated Units or to the holders
of the Class B Common Shares, cumulative dividends in an amount per Priority
Common Share equal to $0.18 per quarter (the "Priority Distribution"). After the
holders of the Subordinated Units and the Class B Common Shares have received an
amount per Subordinated Unit or per Class
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B Common Share equal to the Priority Distribution, the holders of the Priority
Common Shares shall be entitled to receive any further distributions on a pro
rata basis with the holders of the Subordinated Units and the Class B Common
Shares. After the Priority Period, the holders of the Priority Common Shares
shall be entitled to receive any further distributions on a pro rata basis with
the holders of the Subordinated Units and the Class B Common Shares. The
dividends paid to the holders of the Priority Common Shares will be subject to
the rights of any class or series of Preferred Shares.
Dividends will accrue from the date of the original issuance of the
Priority Common Shares, resulting in a partial dividend for the quarter in which
they are issued. The initial dividend for the quarter in which the closing of
the Offering occurs will be prorated based on the number of days in the quarter
following the closing of the Offering and will be paid with the dividend payable
to holders of record on March 31, 1999. Such dividend and any other dividends
payable on the Priority Common Shares for any period greater or less than a full
dividend period will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Dividends on the Priority Common Shares are cumulative
from the most recent dividend payment date to which full dividends have been
paid and will accrue whether or not the Company has earnings, whether or not
there are funds legally available for the payment of such distributions and
whether or not such distributions are authorized. Accrued but unpaid
distributions on the Priority Common Shares will not bear interest and holders
of the Priority Common Shares will not be entitled to any distributions in
excess of full cumulative distributions as described above.
The Company intends to contribute the net proceeds of the sale of the
Priority Common Shares to the Partnership in exchange for an equal number of
Priority Class A Common Units in the Partnership, the economic terms of which
will be substantially identical to those of the Priority Common Shares. See
"Partnership Agreement."
During the Priority Period, no dividend may be declared or paid or
other distribution of cash or other property declared or made directly by the
Company or any person acting on behalf of the Company on any shares of
beneficial interest that rank junior to the Priority Common Shares as to the
payment of dividends or amounts upon liquidation, dissolution and winding up
("Junior Shares") unless full cumulative dividends have been declared and paid
or are contemporaneously declared and funds sufficient for payment set aside on
the Priority Common Shares for all prior and contemporaneous dividend periods;
provided, however, that if accumulated and accrued dividends on the Priority
Common Shares for all prior and contemporaneous dividend periods have not been
paid in full then any dividend declared on the Priority Common Shares for any
dividend period and on any shares of beneficial interest of the Company that
rank on parity with the Priority Common Shares as to the payment of dividends or
amounts upon liquidation, dissolution and winding up ("Parity Shares") will be
declared ratably in proportion to accumulated, accrued and unpaid dividends on
the Priority Common Shares and such Parity Shares.
No distributions on the Priority Common Shares shall be authorized by
the Board of Trustees or paid or set apart for payment by the Company at such
time as the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such authorization, payment or
setting apart for payment or provides that such authorization, payment or
setting apart for payment would constitute a breach thereof or a default
thereunder, or if such authorization or payment shall be restricted or
prohibited by law.
Any distribution payment made on the Priority Common Shares shall first
be credited against the earliest accrued but unpaid distribution due with
respect to such shares which remains payable.
If, for any taxable year, the Company elects to designate as "capital
gain distributions" (as defined in Section 857 of the Code) any portion (the
"Capital Gains Amount") of the distributions paid or made available for the year
to the holders of all classes of shares (the "Total Distributions"), then the
portion of the Capital Gains Amount that will be allocable to the holders of
Priority Common Shares will be the Capital Gains Amount multiplied by a
fraction, the numerator of which will be the total distributions (within the
meaning of the Code) paid or made available to the holders of the Priority
Common Shares for the year and the denominator of which shall be the Total
Distributions.
As used herein, the term "dividend" does not include dividends payable
solely in Junior Shares on Junior Shares, or in options, warrants or rights to
holders of Junior Shares to subscribe for or purchase any Junior Shares.
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The Liquidation Priority
In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, during the Priority Period, the
holders of the Priority Common Shares shall be entitled to receive, prior to any
liquidating payments to the holders of the Class B Common Shares, $6.00 per
Priority Common Share (the "Liquidation Preference"), plus any accumulated and
unpaid Priority Distributions (whether or not declared) on the Priority Common
Shares to the date of distribution. After the holders of the Class B Common
Shares have received an amount equal to the Liquidation Preference plus any
accumulated and unpaid Priority Distributions (whether or not declared) on the
Class B Common Shares to the date of distribution, the holders of the Priority
Common Shares shall share ratably with the holders of the Class B Common Shares
in the assets of the Company. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, after the Priority
Period, the holders of the Priority Common Shares shall share ratably with the
holders of the Class B Common Shares in the assets of the Company. The rights of
the holders of the Priority Common Shares to liquidating payments shall be
subject to rights of any class or series of Preferred Shares.
If, upon any liquidation, dissolution or winding up of the Company, the
assets of the Company, or proceeds thereof, distributable among the holders of
the Priority Common Shares are insufficient to pay in full the Liquidation
Preference and all accumulated and unpaid dividends with respect to any of the
Parity Shares, then such assets or the proceeds thereof will be distributed
among the holders of the Priority Common Shares and any such Parity Shares
ratably in accordance with the respective amounts that would be payable
on the Priority Common Shares and such Parity Shares if all amounts payable
thereon were paid in full. None of (i) a consolidation or merger of the
Company with another corporation, (ii) a statutory share exchange by the
Company or (iii) a sale or transfer of all or substantially all of the
Company's assets will be considered a liquidation, dissolution or
winding up, voluntary or involuntary, of the Company.
The Class B Common Shares
General
Subject to the preferential rights of the Priority Common Shares during
the Priority Period or of any other shares or series of beneficial interest and
to the provisions of the Company's Declaration of Trust regarding the
restriction on the transfer of shares of beneficial interest, holders of Class B
Common Shares are entitled to receive dividends on shares if, when and as
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. See "-- Voting Rights of
Priority Common Shares and Class B Common Shares." In the event that during the
Priority period the Company at any time is unable to pay to the holders of the
Class B Common Shares an amount per Class B Common Share equal to the Priority
Distribution, the holders of the Class B Common Shares shall be entitled to
receive such amounts from time to time to the effect that the cumulative
distributions received per Class B Common Share are equal to the cumulative
Priority Distribution received per Priority Common Share. The Company shall pay
such amounts at such subsequent dividend payment dates, if any, that the Company
has cash available for distribution to shareholders to pay such dividends.
Holders of Class B Common Shares have no preference, 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,
the Class B Common Shares have equal voting, dividend, distribution, liquidation
and other rights.
Conversion
The Class B Common Shares will be converted automatically upon the
termination of the Priority Period into authorized but previously unissued
Priority Common Shares on a one-for-one basis, subject to adjustment as
described below (the "Conversion Ratio"). See " --Conversion Ratio Adjustments."
A notice informing holders of the Class B Common Shares of such conversion will
be mailed by the Company to the holders of record of the Class B Common Shares
as of the dividend payment record date for the next dividend payable after the
expiration of the Priority Period, together with the dividend payable on such
shares, at their respective addresses as they appear on the share transfer
records of the Company. No fewer than all of the outstanding Class B Common
Shares shall be converted.
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If the expiration of the Priority Period falls after a dividend payment
record date and prior to the related payment date, the holders of the Class B
Common Shares at the close of business on such record date will be entitled to
receive the dividend payable on such shares on the corresponding dividend
payment date, notwithstanding the conversion of such shares prior to such
dividend payment date.
Upon expiration of the Priority Period, each holder of Class B Common
Shares will be, without any further action, deemed a holder of the number of
Priority Common Shares, as the case may be, into which such Class B Common
Shares are convertible. Fractional Priority Common Shares will not be issued
upon conversion of the Class B Common Shares.
Conversion Ratio Adjustments
The Conversion Ratio is subject to adjustment upon certain events,
including (i) the payment of dividends (and other distributions) payable in
Priority Common Shares on any class of shares of beneficial interest of the
Company, (ii) subdivisions, combinations and reclassifications of Priority
Common Shares and (iii) distributions to all holders of Priority Common Shares
of evidences of indebtedness of the Company or assets (including securities, but
excluding those dividends, rights, warrants and distributions referred to in
clause (i) or (ii) above and dividends and distributions paid in cash). In
addition to the foregoing adjustments, the Company will be permitted to make
such reductions in the Conversion Ratio as it considers to be advisable in order
that any event treated for Federal income tax purposes as a dividend of Shares
or share rights will not be taxable to the holders of the Class B Common Shares
or, if that is not possible, to diminish any income taxes that are otherwise
payable because of such event.
No adjustment of the Conversion Ratio is required to be made in any
case until cumulative adjustments amount to 1% or more of the Conversion Ratio.
Any adjustments not so required to be made will be carried forward and taken
into account in subsequent adjustments.
Voting Rights of Priority Common Shares and Class B Common Shares
The holders of the Priority Common Shares and the Class B Common Shares
(the "Common Shares") have identical voting rights and will vote together as a
single class.
Subject to the provisions of the Declaration of Trust regarding the
restriction of the transfer of shares of beneficial interest, each outstanding
Common Share entitles the holder to one vote on all matters submitted to a vote
of shareholders, including the election of trustees, and, except as provided
with respect to any other class or series of shares of beneficial interest, the
holders of 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, voting as a single class, 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.
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 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 for approval by a majority of
all the votes entitled to be cast on the matter in all situations permitting or
requiring action by the shareholders 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 two-thirds of the outstanding voting shares
of the Company); (d) the amendment or repeal of certain designated sections of
the Declaration of Trust (which require the affirmative vote of two-thirds of
the outstanding shares entitled to vote on such matters); (e) the 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); and (f)
the termination 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
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Declaration of Trust permits such action by a majority vote of the Trustees. As
permitted by the Maryland REIT Law, the Declaration of Trust contains a
provision permitting the 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 Company 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 Board of 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
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 of any class or series of Common Shares or (ii) the
number of outstanding Preferred Shares of any class or series of Preferred
Shares (the "Ownership Limitation"). For this purpose, a person includes a
"group" and a "beneficial owner" as those terms are used for purposes of Section
13(d)(3) of the Exchange Act. 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 Limitation, (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, any Common Shares or
Preferred Shares the purported transfer of which would (i) result in any person
owning, directly or indirectly, Common Shares or Preferred Shares in excess of
the Ownership Limitation, (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 be 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
of the Common 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
"Record Holder"). 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.
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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-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
Prices (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 sale price as reported by The American Stock Exchange. "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 December 31
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 Limitation.
The Ownership Limitation 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 Trustees, upon receipt of advice of
counsel or other evidence satisfactory to the Trustees, in their sole and
absolute discretion, may, in their sole and absolute discretion, exempt a person
from the Ownership Limitation under certain circumstances. The foregoing
restrictions will continue to apply until (i) the 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.
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The Ownership Limitation could have the effect of delaying, deferring
or preventing a change in control 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 over the then prevailing market price or which such
holders might believe to be otherwise in their best interest.
Other Matters
The transfer agent and registrar for the Company's Priority Common
Shares will be First Union National Bank of North Carolina, Charlotte, North
Carolina.
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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, copies of which are included as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
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 or, if
no Trustees remain, by a majority of the shareholders.
Pursuant to the Declaration of Trust, the Board of Trustees is divided
into two classes of Trustees with initial terms expiring in 1999 and 2000,
respectively. Beginning in 1999, Trustees of each class are chosen for two-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
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. The
staggered terms of Trustees may delay, defer or prevent 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
in control or other transaction might be in the best interest of the
shareholders.
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. Absent removal of all of the
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 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 or
associate of the trust who, at any time within the two-year period prior to the
date in question, was the beneficial owner of 10% or more of the voting power
(an "Interested Shareholder") or an affiliate thereof are prohibited for five
years after the most recent date on which the 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 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, or by an affiliate or associate of the
Interested Shareholder, voting together as a single group, 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
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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 intends to adopt a
resolution opting out of the business combination provisions prior to the
Closing Date.
Control Share Acquisitions
The MGCL contains control share acquisition provisions. The Bylaws of
the Company contain a provision opting out of these provisions, but there can be
no assurance that such Bylaw provision will not be amended or eliminated at any
time in the future.
The MGCL, as applicable to Maryland REITs that have not opted out of
the provisions, 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 prior to such acquisition.
Amendment
The Declaration of Trust provides that it may be amended with the
approval of at least a majority of all of the votes entitled to be cast on the
matter, but that certain provisions of the Declaration of Trust regarding (i)
the Company's Board of Trustees, including the provisions regarding Independent
Trustee requirements, (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-thirds of all of the votes entitled to be cast on these matters. In
addition, the Declaration of Trust provides that it may be amended by the Board
of Trustees, without shareholder approval to (a) increase or decrease the
aggregate number of shares of beneficial interest or the number of shares of any
class of beneficial interest that the Trust has authority to issue or (b)
qualify as a REIT under the Code or under the Maryland REIT law. The Company's
Bylaws may be amended or altered exclusively by the Board of Trustees.
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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 and that is 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 real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer, partner of such 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 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: (a) any present or former Trustee, officer or shareholder (including
any individual who, while a Trustee, officer or shareholder and at the express
request of the Company, serves another entity as a director, officer,
shareholder, partner or trustee of such entity) 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) subject to certain limitations under
Maryland law, any present or former Trustee or officer against any claim or
liability to which he may become subject by reason of such status; and (c) each
present or former shareholder against any claim or liability to which he may
become subject by reason of such status. In addition, the Bylaws obligate the
Company, subject to certain provisions of Maryland law, to pay or reimburse, in
advance of final disposition of a proceeding, reasonable expenses incurred by a
present or former Trustee, officer or shareholder made a party to a proceeding
by reason of such status. The Company may, with the approval of its Trustees,
provide such indemnification or payment or reimbursement of expenses to any
present or former Trustee, officer or shareholder of the Company or any
predecessor of the Company and to any employee or agent of the Company or
predecessor of the Company.
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 or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. 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 undertaking by him 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.
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.
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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 terminate the Company by the affirmative vote of two-thirds of all
of the votes entitled to be cast on the matter after the authorization, advice
and approval thereof by a majority of the Board of Trustees.
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 was a shareholder of record both at
the time of the provision of notice and at the time of the meeting 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 was a shareholder of record both at the time of the
provision of notice and at the time of the meeting 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 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 transfer of shares
of beneficial interest and the advance notice provisions of the Bylaws could
have the effect of delaying, deferring or preventing a transaction or a change
in control of the Company that might involve a premium price for holders of
Common Shares or otherwise be in their best interest.
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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SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering and the related transactions, the
Company will have 1,833,334 Priority Common Shares outstanding and approximately
4 million Class B Common Shares and Priority Common Shares reserved for issuance
upon redemption of Subordinated Units. In addition, the Company will offer
166,666 Priority Common Shares to the Hersha Affiliates at the Offering Price.
The information contained herein assumes that none of the 166,666 Priority
Common Shares are sold. As described herein, the Class B Common Shares will be
converted into Priority Common Shares upon the termination of the Priority
Period on a one-for-one basis. The Priority Common Shares issued in the Offering
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. See "Description of Shares of
Beneficial Interest--Restrictions on Transfer."
Pursuant to the Partnership Agreement, the Hersha Affiliates that own
the Combined Entities (collectively, the "Limited Partners") will receive the
right to redeem their Subordinated Units (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, Class B
Common Shares on a one-for-one basis. In the event that the Class B Common
Shares are converted into Priority Common Shares prior to redemption of the
Subordinated Units, such outstanding Subordinated Units will be redeemable for
Priority Common Shares. If the Company does not exercise its option to redeem
such interests for Class B Common Shares or Priority Common Shares, then the
Limited Partner may make a written demand that the Company redeem such interests
for Class B Common Shares or Priority Common Shares, to the extent that the
issuance of such shares would not result in the violation of the Ownership
Limitation. The Redemption Rights generally may be exercised by the Limited
Partners at any time after one year following the acquisition of the Initial
Hotels with respect to the Subordinated Units issued in connection with the
Stabilized Hotels and at any time after the First Adjustment Date or Second
Adjustment Date, as applicable, with respect to the Subordinated Units issued in
connection with the Newly-Developed Hotels and the Newly-Renovated Hotels, in
whole or in part. See "The Partnership Agreement--Redemption Rights." Any
amendment to the Partnership Agreement that would affect the Redemption Rights
would require the consent of Limited Partners holding more than 50% of the Units
held by Limited Partners (except the Company).
Common Shares issued to holders of Units upon exercise of the
Redemption Rights will be "restricted" securities under the meaning of Rule 144
promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Shares or the average weekly
trading volume of the Common Shares during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission (the "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 acquiror or subsequent holder thereof is deemed not to have
been an "affiliate" of the Company at any time during the three months 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.
Under certain circumstances, the Company has agreed to file a
registration statement with the Commission covering the resale of any Common
Shares issued to a Limited Partner upon redemption of Units. The Limited
Partners may request such a registration if the Limited Partners, as a group,
request registration of at least 250,000 Common Shares; provided however, that
only two such registrations may occur each year. Upon such request, the Company
will use its best efforts to have the registration statement declared effective.
In addition, the Limited Partners will have "piggyback" registration rights,
subject to certain volume and marketing limitations imposed by the Underwriter.
If, during the prior two years there has not been an opportunity for a piggyback
registration, the Limited Partners holding Units redeemable for at least 50,000
Common Shares may request a registration of those shares. 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,
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except that such expenses shall not include any selling commissions, Commission
or state securities registration fees, transfer taxes or certain other fees or
taxes relating to such shares. Registration rights may be granted to future
sellers of hotels to the Partnership who may 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. Listing of the Common Shares on the American Stock
Exchange 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, may affect adversely prevailing
market prices of the Common Shares. See "Risk Factors--Market for Priority
Common Shares" and "The Partnership Agreement--Transferability of Interests."
For a description of certain restrictions on transfers of Common Shares
held by certain shareholders of the Company, 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.
Management
The Partnership has been organized as a Virginia limited partnership
pursuant to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Partnership, will
have, subject to certain protective rights of Limited Partners described below,
full, exclusive and complete responsibility and discretion in the management and
control of the Partnership, including the ability to cause the Partnership to
enter into certain major transactions including acquisitions, dispositions,
refinancings and selection of lessees and to cause changes in the Partnership's
line of business and distribution policies. However, any amendment to the
Partnership Agreement that would affect the Redemption Rights will require the
consent of Limited Partners holding more than 50% of the Units held by such
partners.
The affirmative vote of Limited Partners holding at least two-thirds of
the general partnership interests in the Partnership, including the Company,
which will initially own approximately only a 32% interest in the Partnership,
is required for a sale of all or substantially all of the assets of the
Partnership, or to approve a merger or consolidation of the Partnership,
provided, however, that such approval shall no longer be required if the Company
fails to pay a distribution of $.72 per share to the holders of the Priority
Common Shares for any 12-month period.
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 a general partnership 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 to the Partnership substantially all the
net proceeds of the Offering as its initial capital contribution in exchange for
approximately a 32% general 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
underwriting discount and other expenses paid or incurred in connection with the
Offering. The Hersha Affiliates will make contributions to the Partnership and
will become Limited Partners in the Partnership and collectively will own
approximately a 68% limited partnership interest in the Partnership. The value
of each Limited Partner's capital contribution shall equal its pro rata share of
the value of the interests received by the Partnership. 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 an offering of shares of beneficial interest 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 and the value of the Partnership at the time of such
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
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additional capital to the Partnership, the Company will revalue the property of
the Partnership to its 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 will
receive 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, Class B Common Shares on a one-for-one basis. In the
event that the Class B Common Shares are converted into Priority Common Shares
prior to redemption of the Subordinated Units, such outstanding Subordinated
Units will be redeemable for Priority Common Shares. If the Company does not
exercise its option to redeem such interests for Class B Common Shares, then the
Limited Partner may make a written demand that the Company redeem such interests
for Class B Common Shares. Notwithstanding the foregoing, a Limited Partner
shall not be entitled to exercise its Redemption Rights to the extent 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 Limitation, (ii) result in the 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. With respect
to the Subordinated Units issued in connection with the acquisition of the
Stabilized Hotels, the Redemption Rights may be exercised by the Limited
Partners at any time after one year following the acquisition of the Stabilized
Hotels. With respect to the Subordinated Units issued in connection with the
acquisition of the Newly-Developed Hotels and the Newly-Renovated Hotels, the
Redemption Rights may not be exercised by the Limited Partners until after the
First Adjustment Date or Second Adjustment Date, as applicable. In all cases,
however, (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, (ii) each Limited Partner may not
exercise the Redemption Right for more than the number of Units that would, upon
redemption, result in such Limited Partner or any other person owning, directly
or indirectly, Common Shares in excess of the Ownership Limitation and (iii)
each Limited Partner may not exercise the Redemption Right more than two times
annually. The aggregate number of Common Shares initially issuable upon exercise
of the Redemption Rights will be approximately 4.0 million. The number of Common
Shares issuable upon exercise of the Redemption Rights will be adjusted upon the
revaluation on the First Adjustment Date and the Second Adjustment Date or 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 (A) all expenses relating to the formation and continuity of
existence of the Company, (B) all expenses relating to the public offering and
registration of securities by the Company, (C) all expenses associated with the
preparation and filing of any periodic reports by the Company under federal,
state or local laws or regulations, (D) all expenses associated with compliance
by the Company with laws, rules and regulations promulgated by any regulatory
body and (E) 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 initially will not own any hotel
directly.
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Distributions
The Partnership Agreement provides that, during the Priority Period,
the Partnership will distribute cash available for distribution (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, in
amounts determined by the Company in its sole discretion, in the following order
of priority: (i) first, to the Company until the Company has received, on a
cumulative basis, $0.18 per quarter per Unit held by the Company (the "Preferred
Return"), (ii) second, to the Limited Partners in accordance with their
respective percentage interests in the Partnership until each Limited Partner
has received an amount equal to the Preferred Return, and (iii) finally, to the
Company and the Limited Partners in accordance with their respective percentage
interests in the Partnership. After the Priority Period, 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, in amounts determined by the Company in its
sole discretion, to the Company and the Limited Partners in accordance with
their respective percentage interests in the Partnership.
Upon liquidation of the Partnership during the Priority Period, 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 in the following order of priority: (i) first, to the Company until
the Company has received any unpaid Preferred Return plus an amount equal to
$6.00 per Unit held by the Company, (ii) second, to the Limited Partners in
accordance with their respective percentage interests in the Partnership until
each Limited Partner has received an amount equal to any unpaid Preferred Return
plus $6.00 per Unit held by the such Limited Partner, and (iii) finally, to the
Company and the Limited Partners with positive capital accounts in accordance
with their respective positive capital account balances. Upon liquidation of the
Partnership after the Priority Period, 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 the Company and the
Limited 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
Depreciation and amortization deductions of the Partnership for each
fiscal year will be allocated to the Company and the Limited Partners in
accordance with their respective percentage interests in the Partnership. Profit
of the Partnership (excluding depreciation and amortization deductions) for each
fiscal year will be allocated in the following order of priority: (i) first, to
the Company until the aggregate amount of profit allocated to the Company under
this clause (i) for the current and all prior years equals the aggregate amount
of Preferred Return distributed to the Company for the current and all prior
years, (ii) second, to the Limited Partners in accordance with their respective
percentage interests in the Partnership until the aggregate amount of profit
allocated to the Limited Partners under this clause (ii) for the current and all
prior years equals the aggregate amount of Preferred Return distributed to the
Limited Partners for the current and all prior years, and (iii) finally, to the
Company and the Limited Partners in accordance with their respective percentage
interests in the Partnership. Losses of the Partnership (excluding depreciation
and amortization deductions) for each fiscal year generally will be allocated to
the Company and the Limited Partners in accordance with their respective
percentage interests in the Partnership. All of the foregoing allocations will
be 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 Units (other than those held by the Company, if any)
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 CONSEQUENCES
The following is a summary of material federal income tax consequences
that may be relevant to a prospective holder of Common Shares. Hunton & Williams
has acted as counsel to the Company and has reviewed this summary and is of the
opinion that the discussion contained herein fairly summarizes the federal
income tax consequences 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, and 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
ending December 31, 1998, and assuming that the elections and other procedural
steps described in this discussion of "Federal Income Tax Consequences" 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
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 Consequences" 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
"--Failure to Qualify."
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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 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. 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.
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 shares of beneficial interest of which
is owned, directly or indirectly, by five or fewer individuals (as 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 (or has made such
election for a previous taxable year) 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 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
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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 does not currently have any corporate subsidiaries, nor
will it have any corporate subsidiaries immediately after completion of the
Offering, although it may have 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.
Pursuant to Treasury Regulations effective January 1, 1997 relating to
entity classification (the "Check-the-Box Regulations"), an unincorporated
entity that has a single owner is disregarded as an entity separate from its
owner for federal income tax purposes. Some of the hotels will be owned by
partnerships ("Subsidiary Partnerships") that are owned 99% by the Partnership
and 1% by a limited liability company (the "Subsidiary LLC") that is owned 100%
by the Partnership. Under the Check-the-Box Regulations, because the Partnership
will be deemed to own 100% of the interests in the Subsidiary LLC and the
Subsidiary Partnerships, both the Subsidiary LLC and the Subsidiary Partnerships
will be disregarded as entities separate from the Partnership for federal income
tax purposes. The Subsidiary LLC and the Subsidiary Partnerships, however, 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. Thus, 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 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."
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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 five-year period. The Percentage Leases
provide that the Lessee will be obligated to pay to the Partnership (i) either
the Initial Fixed Rents (for the Newly-Developed Hotels and the Newly-Renovated
Hotels) or the greater of Base Rent and Percentage Rent, with respect to the
other Initial Hotels and (ii) certain other Additional Charges. The Percentage
Rent is calculated by multiplying fixed percentages by the gross room and other
revenues for each of the Initial Hotels. The Rent accrues and is required to be
paid quarterly. Until the First Adjustment Date or the Second Adjustment Date,
as applicable, the rent on the Newly-Developed Hotels and the Newly-Renovated
Hotels will be the Initial Fixed Rents applicable to those hotels. After the
First Adjustment Date or the Second Adjustment Date, as applicable, rent will be
computed with respect to the Newly-Developed Hotels and the Newly-Renovated
Hotels based on the Percentage Rent formulas described herein.
In order for the 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 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, other
than the cost of capital expenditures that are classified as capital items under
generally accepted accounting principles which are necessary for the continued
operation of the Initial Hotels and 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, ground lease rent (where
applicable)), property and casualty insurance, the cost of replacement or
refurbishment of furniture, fixtures and equipment, and other capital
improvements, 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 either (A) to restore the property to its prior condition, in
which event it will bear all costs of such restoration in excess of any
insurance proceeds or (B) to purchase the Initial Hotel for an amount generally
equal to the fair market value of the property, less any insurance proceeds,
(vii) the Lessee will indemnify the Partnership 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,
(viii) the Lessee is
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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 Rent to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rent
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
Rent received under the Percentage Lease. The Rent 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"). With respect to
each Initial Hotel, the initial adjusted bases of the personal property in such
hotel will be less than 15% of the initial adjusted bases of both the real and
personal property comprising such Hotel. Furthermore, 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 Rent 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, 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 per quarter 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 per quarter, as
described above).
A third requirement for qualification of the Rent 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 beneficial
interest in the Company are 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. The Limited Partners of the
Partnership, including Mr. Shah, who is a partner of the Lessee, may acquire
Common Shares by exercising their Redemption Rights. The Partnership Agreement,
however, provides that a redeeming Limited Partner will receive cash, rather
than Common Shares, at the election of the Company or if the acquisition of
Common Shares by such partner would 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. The Declaration of Trust likewise prohibits a
shareholder of the Company from 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 or the Partnership's real
property, within the meaning of section 856(d)(2)(B) of the Code. Thus, the
Company should never own,
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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 Rent 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 revenue from the Initial Hotel. For
that purpose, the amount attributable to the Company's noncustomary services
will 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
services other than customary ones 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 Rent 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 Rent does not qualify as "rents from real property" because the
rents attributable to personal property exceed 15% of the total Rent from an
Initial Hotel for a taxable year, the portion of the Rent that is attributable
to personal property will not be qualifying income for purposes of either the
75% or 95% gross income test. Thus, if the Rent attributable to personal
property, plus any other non-qualifying income, during the taxable year exceeds
5% of the Company's gross income during the year, the Company would lose its
REIT status. If, however, the Rent does 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 Rent 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 Rent, 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 Rent 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 and 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."
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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 a 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.
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 or 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 Consequences--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
interests in the Partnership or any 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
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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 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 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 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. The Company intends to make timely distributions sufficient to satisfy all
annual distribution requirements.
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 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
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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 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 (and not designated as capital gain dividends or 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 long-term capital gains (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 included in income as
long-term capital gain (or short-term capital gain if the Common Shares have
been held for one year or less) 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 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
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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 20% for sales and exchanges of assets held for more
than one year. The maximum tax rate on long-term capital gain from the sale or
exchange of "section 1250 property" (i.e., depreciable real property) held for
more than one year 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% or 25% 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.
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 are effective for distributions made after December
31, 1999. See "--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 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 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 of beneficial interest 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 of beneficial interest 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 the pension trust to be treated as holding
shares of beneficial interest of the Company
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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 of beneficial interest or (B) a group of pension trusts individually
holding more than 10% of the value of the Company's shares of beneficial
interest collectively owns more than 50% of the value of the Company's shares of
beneficial interest.
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.
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 gains 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
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times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. However, because the Common
Shares will be publicly traded, no assurance can be given that the Company will
be a "domestically controlled REIT." 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. 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).
Other Tax Consequences
The Company, 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 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
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 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
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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.
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, which is to a great extent the
result of administrative and judicial interpretation. No assurance can be given
that administrative or judicial changes would not modify the conclusions
expressed in the opinion.
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 "--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 "--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.
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.
Under the Partnership Agreement, depreciation or amortization
deductions of the Partnership generally 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 tax depreciation deductions attributable to the Initial
Hotels or other contributed properties that results in the Company receiving a
disproportionately large share of such deductions. In addition, gain on the sale
of an Initial Hotel will be specially
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allocated to the Limited Partners to the extent of any "built-in" gain with
respect to such Initial Hotel for federal income tax purposes. Depending on the
allocation method elected under Code section 704(c), it is possible that the
Company (i) may be allocated lower amounts of depreciation deductions for tax
purposes with respect to contributed hotels than would be allocated to the
Company if such hotels were to have a tax basis equal to their fair market value
at the time of contribution and (ii) may be allocated taxable gain in the event
of a sale of such contributed hotels in excess of the economic profit allocated
to the Company as a result of such sale. These allocations may cause the Company
to recognize taxable income in excess of cash proceeds, which might adversely
affect the Company's ability to comply with the 95% distribution requirement,
although the Company does not anticipate that this event will occur. The
foregoing principles also will affect the calculation of the Company's earnings
and profits for purposes of determining which portion of the Company's
distributions is taxable as a dividend. The allocations described in this
paragraph may result in a higher portion of the Company's distributions being
taxed as a dividend than would have occurred had the Company purchased the
Initial Hotels for cash.
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 each Initial Hotel for federal income tax purposes should be
the same as the Combined Entity's basis in that hotel on the date of
acquisition. Although the law is not entirely clear, the Partnership intends 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 Combined
Entities. 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). To the extent
the Partnership acquires additional hotel properties for cash, the Partnership's
initial basis in the properties 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 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.
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 on the disposition of the Initial Hotels
will be allocated first to the Limited Partners under section 704(c) of the Code
to the extent of their "built-in gain" on those hotels for federal income tax
purposes. The Limited Partners' "built-in gain" on the Initial Hotels sold will
equal the excess of the Limited Partners' proportionate share of the book value
of the Initial Hotels over the Limited Partners' tax basis allocable to the
Initial Hotels at the time of the sale. Any remaining gain recognized by the
Partnership on the disposition
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of the Initial Hotels will be allocated among the partners in accordance with
their respective percentage interests in the Partnership. The Board of Trustees
has adopted a policy that any decision in connection with any transaction
involving the Company, including the purchase, sale lease or mortgage of any
real estate asset, in which a Trustee or officer of the Company, or any
Affiliate thereof, has any interest (other than solely as a result of his status
as a Trustee, officer or shareholder of the Company) must be approved by a
majority of the Trustees, including a majority of the Independent Trustees. See
"Risk Factors--Conflicts of Interest--Conflicts Relating to Sales or Refinancing
of Initial Hotels."
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 "--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
"--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 the Underwriter, and the Underwriter has agreed to
take and pay for, 1,833,334 Priority Common Shares, if any are taken. The
Company intends to sell 166,666 Priority Common Shares directly to certain
Hersha Affiliates at the Offering Price and no selling commission will be
payable to the Underwriter with respect to such shares.
The Underwriter proposes to offer the Priority Common Shares in part
directly to the public at the Offering Price set forth on the cover page of the
Prospectus and in part to certain securities dealers at such price less a
concession of $________ per share. After the Priority 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 Underwriter.
The Company has granted the Underwriter an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 275,000
additional Priority Common Shares solely to cover over-allotments, if any.
Pursuant to the Underwriting Agreement, the obligations of the
Underwriter to purchase the Common Shares are subject to approval of certain
legal matters by counsel to the Underwriter and to various other conditions
which are customary in transactions of this type, including that, as of the
closing date of the Offering, there shall not have occurred (i) a suspension or
material limitation in trading in securities generally on the New York Stock
Exchange or The American Stock Exchange; (ii) a general moratorium on commercial
banking activities in Virginia or New York, (iii) the engagement by the United
States in hostilities which have resulted in the declaration of a national
emergency or war if any such event would have such a materially adverse effect,
in the Underwriter's reasonable judgment, as to make it impracticable or
inadvisable to proceed with the purchase of shares on the terms and in the
manner contemplated herein; or (iv) such a material adverse change in general
economic, political, financial or international conditions affecting financial
markets in the United States having a material adverse impact on trading prices
of securities in general, as, in the Underwriter's reasonable judgment, makes it
inadvisable to proceed with the solicitation of offers to purchase the shares or
to consummate the offering with respect to investors solicited by the
Underwriter on the terms and conditions contemplated herein. The Company has
agreed to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act.
The Company will issue to the Underwriter the Underwriter Warrants
to purchase 183,333 Priority Common Shares exercisable for a period of five
years after the effective date of the Offering at a price per share equal to
165% of the Offering Price. Until December ___, 2003, the Company has agreed
to file with the Commission a shelf registration statement covering the resale
of the Underwriter Warrants and all of the Priority Common Shares that may be
issued upon exercise of the Underwriter Warrants ("Warrant Shares") in the event
that the holders of at least 50,000 Underwriter Warrants (or Warrant Shares)
request such registration. The first such registration shall be at the Company's
expense. The holders of Underwriter Warrants and/or Warrant Shares may also
request piggyback registration of the Underwriter Warrants and Warrant Shares at
the Company's expense for a period ending December ___, 2005. Upon any of
such requests, the Company will use its best efforts to have such registration
statement declared effective .
The Company has granted the Underwriter a right of first refusal, for a
period of three years following consummation of the Offering, to act as
underwriter or sales agent with respect to any future offering by the Company or
the Partnership of any debt or equity securities. This right of first refusal,
by limiting the ability of the Company and the Partnership to use other
potential underwriters or selling agents, might have the effect of limiting the
access of the Company and the Partnership to capital markets.
Pursuant to the Underwriter's right to designate two Trustees to serve
on the Board of Trustees of the Company, L. McCarthy Downs, III and Everette G.
Allen, Jr. have agreed to serve as Trustees. Messrs. Downs and Allen each will
receive $10,000 per year for serving as a Trustee of the Company.
The Underwriter does not intend to sell the Priority Common Shares to
any accounts over which it exercises discretionary authority.
Prior to the Offering, there has been no public market for the Priority
Common Shares. The initial public offering price is anticipated to be $6.00 per
share. See "Risk Factors--Market for Common Shares."
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The Company and the Limited Partners have agreed, subject to certain
limited exceptions, not to offer, sell, contract to sell or otherwise dispose of
any Priority Common Shares (or any securities convertible into, or exercisable
or exchangeable for shares in the Company) for a period of 90 days after the
date of this Prospectus, without the prior written consent of the Underwriter.
The Underwriter will receive, along with the holders of the Priority
Common Shares, notice from the Company that the Priority Rights will terminate
in 15 trading days from the date the Company sends such notice, provided that
the closing bid price of the Priority Common Shares is at least $7.00 on each
trading day during such 15-day period.
The Underwriter has agreed to pay $25,000 of the legal fees incurred by
the Company in connection with the Offering.
The Priority Common Shares have been approved for listing, subject to
final notice of issuance, on The American Stock Exchange under the trading
symbol "HT."
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EXPERTS
The balance sheet of the Company as of May 27, 1998 and of the Lessee
as of May 27, 1998 included in this Prospectus, and the Combined Financial
Statements and financial statement schedule of the Combined Entities-- Initial
Hotels as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997 included in this Prospectus, have been audited by
Moore Stephens, P.C., independent certified public accountants, as set forth in
their reports thereon included elsewhere herein and in the Registration
Statement. Such Balance Sheets, Combined Financial Statements and financial
statement schedule are included in reliance upon such reports given on their
authority as experts in accounting and auditing.
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 Priority 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 Consequences" is based on the opinion of Hunton &
Williams. Certain legal matters related to this Offering will be passed upon for
the Underwriter by Willcox & Savage, P.C. Hunton & Williams and Willcox &
Savage, P.C. will rely on the opinion of Ballard Spahr Andrews & Ingersoll, LLP
as to all matters of Maryland law.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-11 (of which this Prospectus is a part) under the Securities Act with
respect to the securities offered hereby. This Prospectus does not contain all
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
Commission. Statements contained in this Prospectus as to the content of any
contract or other document are not necessarily complete. 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 Registration Statement and the exhibits and schedules forming a
part thereof filed by the Company with the Commission 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. The Commission also maintains a website that
contains reports, proxy and information statements and other information
regarding registrants that file documents with the Commission, including the
Company, and the address is http://www.sec.gov.
103
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus.
"5/50 Rule" means the requirement in the Code that not more than 50% in
value of the outstanding shares of beneficial interest of the Company be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of each taxable year.
"Acquisition Policy" means the Company's initial policy to acquire a
hotel for which it expects to receive rents at least equal to 12% of the
purchase price paid for the hotel, not of (i) property and casualty insurance
premiums, (ii) real estate and personal property taxes, and (iii) a reserve for
furniture, fixtures and equipment equal to 4% of gross revenues per quarter at
the hotel.
"ADA" means the Americans with Disabilities Act of 1990.
"Additional Charges" means certain amounts payable by the Lessee in
connection with Percentage Leases, including interest accrued on any late
payments or charges.
"ADR" means average daily room rate.
"Affiliate" means (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling, controlled by, or under common control with
such other person, (iv) any executive officer, director, trustee or general
partner of such other person, and (v) any legal entity for which such person
acts as an executive officer, director, trustee or general partner. The term
"person" means and includes any natural person, corporation, partnership,
association, limited liability company or any other legal entity. An indirect
relationship shall include circumstances in which a person's spouse, children,
parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has
been associated with a person.
"Assumed Indebtedness" means that certain indebtedness in the aggregate
principal amount of approximately $17.4 million secured by Initial Hotels, to be
assumed by the Partnership in the Formation Transactions and to remain
outstanding after the application of the net proceeds of the Offering.
"Base Rent" means the fixed obligation of the Lessee to pay a minimum
sum certain in quarterly 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.
"Choice Hotels" means Choice Hotels International, Inc.
"Class B Common Shares" means the Company's Class B common shares of
beneficial interest, par value $0.01 per share.
"Closing Date" means the closing date of the Offering.
"Closing Price" means the last sale price quoted on the American Stock
Exchange.
"Code" means the Internal Revenue Code of 1986, as amended.
"Combined Entities" means Hasu P. Shah; Neil H. Shah; Bharat C. Mehta;
David L. Desfor; Madhusudan I. Patni; Manhar Gandhi; Shree Associates; JSK
Associates; Shanti Associates; Shreeji Associates; Kunj Associates; Devi
Associates; Shreenathji Enterprises, Ltd.; 2144 Associates; and 144 Associates,
344 Associates, 544 Associates
104
<PAGE>
and 644 Associates, joint tenants doing business as 2544 Associates,
collectively the limited partnerships, corporation and individuals that, prior
to the Formation Transactions, own the Initial Hotels.
"Commission" means the United States Securities and Exchange
Commission.
"Common Shares" means the Priority Common Shares and the Class B Common
Shares.
"Company" means Hersha Hospitality Trust, a Maryland real estate
investment trust.
"Conversion Ratio" means the ratio representing the number of Priority
Common Shares into which one Class B Common Share is convertible.
"Debt Policy" means the Company's initial policy to limit
consolidated indebtedness to less than 67% of the aggregate purchase price
paid by the Company for the hotels in which it has invested.
"Declaration of Trust" means the Declaration of Trust of the Company,
as amended and restated.
"FIRPTA" means Foreign Investment in Real Property Tax Act of 1980, as
amended.
"First Adjustment Date" means December 31, 1999.
"Formation Transactions" means the principal transactions in connection
with the formation of the Company as a REIT, the Offering and the acquisition of
the Initial Hotels.
"Franchise Licenses" means the franchise licenses held by the Lessee
for the Initial Hotels.
"Funds From Operations" means net income, (computed in accordance with
generally accepted accounting principles), excluding gains, or losses, from debt
restructuring or sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures.
"General Partner" means Hersha Hospitality Trust, as the sole general
partner of the Partnership.
"Hersha Affiliates" means Hasu P. Shah; Jay H. Shah; Neil H. Shah;
Bharat C. Mehta; Kanti D. Patel; Rajendra O. Gandhi; Kiran P. Patel; David L.
Desfor; Madhusudan I. Patni; Manhar Gandhi; Shree Associates; JSK Associates;
Shanti Associates; Shreeji Associates; Kunj Associates; Devi Associates;
Shreenathji Enterprises, Ltd.; 2144 Associates; 144 Associates, 344 Associates,
544 Associates and 644 Associates, joint tenants doing business as 2544
Associates; the Lessee and their Affiliates, collectively owning 100% of the
interests of the Combined Entities.
"Hersha Warrants" means warrants that the Partnership has granted to
2744 Associates, L.P., which is a Hersha Affiliate, to purchase 250,000 Units
for a period of five years at a price per Unit equal to 165% of the Offering
Price.
"Incentive Threshold" means a certain amount for each Initial Hotel in
excess of the Threshold up to which the Company receives a certain percentage of
the room revenues in excess of the Threshold as a component of Percentage Rent.
"Independent Trustee" means a Trustee of the Company who is not an
officer, director or employee of the Company, any lessee of the Company's or the
Partnership's properties or any underwriter or placement agent of the shares of
beneficial interest of the Company that has been engaged by the Company within
the past three years, or any Affiliate thereof.
"Initial Hotels" means ten hotels to be owned by the Partnership after
the Formation Transactions are completed, which hotels include three Holiday Inn
Express hotels, two Hampton Inn hotels, two Holiday Inn hotels, two Comfort Inn
hotels and one Clarion Suites hotel.
"Initial Fixed Rent" means the fixed rent payable by the Lessee with
respect to the Newly-Developed Hotels and the Newly-Renovated Hotels until the
First Adjustment Date or the Second Adjustment Date, as applicable.
105
<PAGE>
"Interested Shareholder" means any person who beneficially owns 10% or
more of a company's voting shares, or an Affiliate or associate of a company
that, at any time within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of a company's voting
shares.
"Junior Shares" means any class or series of the Company's shares of
beneficial interest ranking junior to the Priority Common Shares with respect to
payment of dividends or amounts upon liquidation, dissolution or winding up.
"Lessee" means Hersha Hospitality Management, LP, a Pennsylvania
limited partnership, which will lease from the Partnership and operate the
Initial Hotels pursuant to the Percentage Leases.
"Limited Partners" means the limited partners of the Partnership.
"Line of Credit" means a $10 million line of credit facility that the
Company is currently pursuing from various lenders.
"Market Price" means, on a given day, the average of the Closing
Prices for the five consecutive Trading Days ending on such date.
"NAREIT" means the National Association of Real Estate Investment
Trusts, Inc.
"Newly-Developed Hotels" means the Holiday Inn Express(R) hotels
located in Hershey, Pennsylvania and New Columbia, Pennsylvania, the Hampton
Inn(R) hotel located in Carlisle, Pennsylvania and the Comfort Inn(R) hotel
located in Harrisburg, Pennsylvania.
"Newly-Renovated Hotels" means the Holiday Inn Express(R) hotel located
in Harrisburg, Pennsylvania, the Holiday Inn(R) hotel located in Milesburg,
Pennsylvania and the Comfort Inn located in Denver, Pennsylvania.
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
"Offering" means the offering of Priority Common Shares hereby.
"Offering Price" means the initial public offering price of the
Priority Common Shares in the Offering of $6.00 per share.
"Option Agreement" means the option agreement to be executed by the
Partnership and Hasu P. Shah, Jay H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti
D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor, Madhusudan I.
Patni and Manhar Gandhi, each a Hersha Affiliate, granting the Partnership
certain rights to acquire certain hotels developed or acquired by the Hersha
Affiliates.
"Option Plan" means the Hersha Hospitality Trust Option Plan.
"Ownership Limitation" means the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of more than 9.9%
of the number of outstanding Common Shares or the number of outstanding
Preferred Shares of any series.
"Parity Shares" means any class or series of the Company's shares of
beneficial interest ranking in parity with the Priority Common Shares with
respect to payment of dividends or amounts upon liquidation, dissolution or
winding up.
"Partnership" means Hersha Hospitality Limited Partnership, a limited
partnership organized under the laws of the Commonwealth of Virginia.
"Partnership Agreement" means the partnership agreement of the
Partnership, as amended and restated.
"Percentage Leases" mean operating leases between the Lessee and the
Partnership pursuant to which the Lessee will lease the ten Initial Hotels from
the Partnership and any additional hotels acquired by the Company after the date
of the Offering.
106
<PAGE>
"Percentage Rents" means Rent payable by the Lessee pursuant to the
Percentage Leases that is based on percentages of gross revenues per quarter
from the Initial Hotels.
"Preferred Shares" means the preferred shares of beneficial interest,
par value $.01 per share, of the Company.
"Priority Common Shares" means the Company's Priority Class A common
shares of beneficial interest, par value $0.01 per share.
"Priority Distribution" means cumulative dividends in an amount per
Priority Common Share of $0.18 per quarter, to which holders of the Priority
Common Shares are entitled during the Priority Period prior to distributions to
any Junior Shares.
"Priority Period" means the period beginning on the date of the closing
of the Offering and ending on the earlier of: (i) the date that is 15 trading
days after the Company sends notice to the holders of the Priority Common Shares
that their Priority Rights will terminate in 15 trading days, provided that the
closing bid price of the Priority Common Shares is at least $7.00 on each
trading day during such 15-day period, or (ii) the fifth anniversary of the
closing of the Offering.
"Priority Rights" means the priority rights with respect to dividends
and amounts payable upon liquidation, dissolution or winding up to which holders
of the Priority Common Shares are entitled.
"Prohibited Owner" means the record owner of Shares-in-Trust.
"Redemption Right" means the right of the persons receiving
Subordinated Units in the Formation Transactions to cause the redemption of
Subordinated Units 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, as defined in section 856 of
the Code.
"Rent" means the Initial Fixed Rent, the Base Rent and the Percentage
Rents.
"REVPAR" means revenue per available room for the applicable period,
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.
"Securities Act" means the Securities Act of 1933, as amended.
"Second Adjustment Date" means December 31, 2000.
"Service" means the United States Internal Revenue Service.
"Shares-in-Trust" means any Common Shares or Preferred Shares the
purported transfer of which would (i) result in any person owning, directly or
indirectly, Common Shares or Preferred Shares in excess of the Ownership
Limitation, (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.
"Stabilized Hotels" means the Hampton Inn(R) hotel located in
Selinsgrove, Pennsylvania, the Holiday Inn(R) hotel and conference center
located in Harrisburg, Pennsylvania and the Clarion Suites(R) hotel located in
Philadelphia, Pennsylvania.
"Subordinated Units" means Units received by the Hersha Affiliates in
exchange for the Initial Hotels.
107
<PAGE>
"Threshold" means a certain amount for each Initial Hotel up to which
the Company receives a certain percentage of room revenues as a component of
Percentage Rent.
"Trading Day" means a trading day on the American Stock Exchange.
"Treasury Regulations" means the income tax regulations promulgated
under the Code.
"Trust" means a trust established to hold Shares-in-Trust.
"Trustee" means a member of the Company's Board of Trustees.
"Trustees' Plan" means the Hersha Hospitality Trust Non-Employee
Trustees' Option Plan.
"Underwriter" means Anderson & Strudwick, Incorporated.
"Underwriter Warrants" means the warrants that the Company has granted
the Underwriter to purchase 183,333 Priority Common Shares for a period of five
years at a price per Priority Common Share equal to 165% of the Offering Price.
"Units" means units of limited partnership interest in the Partnership.
108
<PAGE>
INDEX TO PRO FORMA CONDENSED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Hersha Hospitality Trust
Pro Forma Condensed Combined Balance Sheet as of September 30, 1998............................... F-2
Independent Auditors' Report...................................................................... F-6
Balance Sheet as of May 27, 1998.................................................................. F-7
Notes to Balance Sheet............................................................................ F-8
Hersha Hospitality Limited Partnership
Financial statements are not presented as the Partnership is not active and when
active will be consolidated with the financial results of Hersha Hospitality
Trust.
Hersha Hospitality Management, L.P.
Independent Auditors' Report...................................................................... F-11
Balance Sheet as of May 27, 1998.................................................................. F-12
Notes to Balance Sheet............................................................................ F-13
Combined Entities - Initial Hotels
Pro Forma Condensed Combined Statement of Operations
for the nine months ended September 30, 1998 ..................................................... F-14
Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1997.............................................................. F-16
Independent Auditors' Report...................................................................... F-18
Combined Financial Statements
Balance Sheets as of September 30, 1998 [Unaudited] and December 31, 1997
and 1996........................................................................................ F-19
Statements of Operations for the nine months ended September 30, 1998 and 1997
[Unaudited] and for the years ended December 31, 1997, 1996, and 1995........................... F-20
Statement of Owners' Equity for the nine months ended September 30, 1998
[Unaudited] and for the years ended December 31, 1997, 1996, and 1995........................... F-21
Statements of Cash Flows for the nine months ended September 30, 1998 and 1997
[Unaudited] and for the years ended December 31, 1997, 1996, and 1995........................... F-22
Notes to Combined Financial Statements.......................................................... F-23
Schedule XI - Real Estate and Accumulated Depreciation............................................ F-32
</TABLE>
. . . . . . . . .
F-1
<PAGE>
HERSHA HOSPITALITY TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998.
[UNAUDITED, IN THOUSANDS]
This unaudited pro forma Condensed Combined Balance Sheet is presented as if the
acquisition of the Initial Hotels and the consummation of the Offering
contemplated by this prospectus had occurred on September 30, 1998. Such pro
forma information is based upon the Combined Balance Sheets of the Combined
Entities - Initial Hotels as adjusted for the application of the proceeds of the
Offering as set forth under the caption "Use of Proceeds"and assumes the
issuance of 3,964,108 Units to the Hersha Affiliates which give rise to a
minority interest percentage of 68.38%. It should be read in conjunction with
the Combined Financial Statements of the Combined Entities - Initial Hotels and
the Notes thereto included at pages F-24 through F-31 of this Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of this
transaction have been made.
This 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 September 30, 1998, nor does it purport to
represent the future financial position of the Company.
F-2
<PAGE>
HERSHA HOSPITALITY TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998.
[UNAUDITED, IN THOUSANDS]
<TABLE>
<CAPTION>
Historical Adjustments
Combined and
Entities Proceeds of Pro Forma Use of Pro Forma
Initial Hotels Offering Company Proceeds Company
-------------- -------------- ------------- ----------------- ------------
[A] [B] [C]
<S> <C> <C> <C> <C> <C>
Assets:
Net Investment in Hotel
Properties $ 26,904 $ -- $ 26,904 $ 250 [D] $ 40,489
(552) [E]
(150) [E]
14,037 [F]
Cash 1,258 9,470 10,728 (8,378) [D] 2,350
Other Assets 1,536 -- 1,536 (1,536) [E] --
Intangibles 1,382 -- 1,382 488 [D] 1,404
(466) [E]
-------------- ----------- -------------- ------------ -----------
Total Assets $ 31,080 $ 9,470 $ 40,550 $ 3,693 $ 44,243
============== =========== ============== ============ ===========
Liabilities:
Mortgages $ 19,800 $ -- $ 19,800 $ (2,400) [D] $ 17,400
Due to Related Parties 3,982 -- 3,982 (3,982) [D] --
Accounts Payable, Accrued
Expenses and Other
Liabilities 823 -- 823 (823) [E] --
-------------- ----------- -------------- ------------ -----------
Total Liabilities 24,605 -- 24,605 (7,205) 17,400
-------------- ----------- -------------- ------------ -----------
Minority Interest in
Partnership -- -- -- 18,355 [G] 18,355
-------------- ----------- -------------- ------------ -----------
Shareholders' Equity:
Common Shares -- 18 18 -- 18
Additional Paid-in Capital -- 9,452 9,452 (982) [H] 8,470
Net Combined Equity 6,475 -- 6,475 14,037 [F]
(20,512)[G,H] --
-------------- ----------- -------------- ------------ -----------
Total Shareholders' Equity 6,475 9,470 15,945 (7,457) 8,488
-------------- ----------- -------------- ------------ -----------
Total Liabilities and
Shareholders' Equity $ 31,080 $ 9,470 $ 40,550 $ 3,693 $ 44,243
============== =========== ============== ============ ===========
</TABLE>
F-3
<PAGE>
HERSHA HOSPITALITY TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998.
[UNAUDITED, IN THOUSANDS]
<TABLE>
<CAPTION>
<S> <C>
[A] Represents proceeds of the Offering ($11,000) less estimated expenses of
the Offering ($1,530) which excludes $1,000 of proceeds from sales of
common shares to Hersha affiliates.
[B] Represents the combined interests of the Initial Hotels and the Company
after the proceeds of the Offering, but before the use of proceeds.
[C] Represents the combined interests of the Company after the use of the
proceeds of the offering.
[D] Net decrease reflects the following proposed transactions:
Cash Not Being Purchased $ 1,258
Repayment of Amounts Payable to Affiliates and Partners 3,982
Repayment of Mortgage Indebtedness 2,400
Payment of Franchise License Transfer Fees ($145) Transfer Taxes ($233)
Improvements ($250) and Other ($110) 738
---------------
Net Decrease in Cash $ 8,378
===============
[E] Assets and liabilities; not being purchased consist of:
Cash $ (1,258)
Land and Building (552)
Personal Property (150)
Other Assets (1,536)
Initial Franchise License Fees and Loan Acquisition Costs (466)
Accounts Payable, Accrued Expenses and Other Liabilities 823
---------------
Net Assets and Liabilities Not Purchased $ (3,139)
===============
[F] Where a number of businesses combine prior to or contemporaneously with
an initial public offering Securities and Exchange Commission Staff
Accounting Bulletin ["SAB"] 97 requires that purchase accounting be
applied. SAB 97 requires that, unless there is persuasive evidence to the
contrary, the accounting acquiror is the ownership group receiving the
largest ownership interest in the combined entity. Of the twelve entities
being combined, eight are limited partnerships ["LP's"] with the same one
percent general partner [the "Related Entities"], three are limited
partnerships with different general partners than the other eight and one
is a corporation [the "Unrelated Entities"]. Based on an analysis of
ownership interests, the partners of 1244 Associates [one of the eight
LP's with the same general partner] received approximately 29 percent of
the ownership interest in the combined entity and 1244 Associates was
deemed to be the acquiror. Therefor, the transaction was accounted for as
a purchase and purchase accounting adjustments were made to the other
eleven entities to adjust the assets to fair market value measured by the
number of partnership units allocated to each entity multiplied by $6 per
unit. Management feels that the purchase price as measured by the units
approximates fair market value. Where common ownership existed by virtue
of the same one percent general partner purchase accounting adjustments
were only made to the extent of the 99 percent non-common ownership. The
purchase accounting adjustments are as follows:
Partnership Units Distributed to Unrelated Entities Acquired $ 500
99% of Partnership Units Issued to Limited Partners of Related Entities Acquired 2,392
---------------
2,892
Purchase Price Per Unit $ 6
---------------
Total Purchase Price 17,352
Book Value of Assets Purchased 3,315
Excess Purchase Price $ 14,037
===============
</TABLE>
F-4
<PAGE>
HERSHA HOSPITALITY TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998.
[UNAUDITED, IN THOUSANDS]
[Continued]
<TABLE>
<CAPTION>
<S> <C>
[F] [Continued]
Excess purchase price is allocated as follows:
Land $ 1,355
Buildings and Improvements 12,682
---------------
Total Addition to Net Investment in Hotel Properties $ 14,037
===============
[G] Represents the recognition of the interest in the Partnership that will not
be owned by the Company determined as follows:
Net Proceeds of Offering $ 9,470
Net Combined Equity 6,475
Excess Purchase Price 14,037
Net Assets Not Acquired (3,139)
---------------
26,843
Minority Interest Percentage .6838
---------------
Minority Interest $ 18,355
===============
[H] Net decrease reflects the following proposed transactions:
Elimination of Net Combined Equity $ 6,475
Excess Purchase Price 14,037
Assets and Liabilities of Initial Hotels Not Purchased (3,139)
Recognition of Minority Interest in Partnership (18,355)
---------------
$ (982)
===============
</TABLE>
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
Hersha Hospitality Trust
We have audited the accompanying balance sheet of Hersha
Hospitality Trust as of May 27, 1998. This balance sheet is the responsibility
of the Company's management. Our responsibility is to express an opinion on the
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test bases, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents
fairly, in all material respects, the financial position of Hersha Hospitality
Trust as of May 27, 1998, in conformity with generally accepted accounting
principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 27, 1998 [Except as to
the Notes to the Financial Statements
as to which the Date is December 4, 1998]
F-6
<PAGE>
HERSHA HOSPITALITY TRUST
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, May 27,
1998 1998
----------------- ---------------
[Unaudited]
<S> <C> <C>
Assets $ -- $ --
================= ===============
Liabilities and Shareholders' Equity:
Liabilities -- --
Commitments and Contingencies -- --
Shareholders' Equity:
Common Shares, $.01 par value, 1,000 shares authorized, 100
shares issued and outstanding 1 1
Additional paid-in capital 99 99
Subscription Receivable (100) (100)
----------------- ---------------
Total Liabilities and Shareholders' Equity $ -- $ --
================= ===============
</TABLE>
The Accompanying Notes Are an Integral Part of This Financial Statement.
F-7
<PAGE>
HERSHA HOSPITALITY TRUST
NOTES TO BALANCE SHEET AS OF MAY 27, 1998
[1] Organization and Basis of Financial Presentation
Hersha Hospitality Trust [the "Company"] was formed in May, 1998 to acquire
equity interests in ten existing hotel properties. The Company is a
self-administered, Maryland real estate investment trust ["REIT"] and expects to
qualify as a REIT for Federal income tax purposes. As such, the Company is
subject to a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its taxable income. The
Company intends to offer for sale 2,000,000 [See Note 3] Priority Class A Common
Shares of beneficial interest of which 1,833,334 shares will be offered to the
public and 166,666 shares will be offered to Mr. Hasu P. Shah and certain
affiliates [the "Hersha Affiliates"] in an initial public offering [the
"Offering"] and Hersha Hospitality Limited Partnership [the "Partnership"] will
issue approximately 3,960,000 Units of partnership interest ["Units"] to the
Hersha Affiliates owning 100% of the ownership interest in the ten existing
hotel properties [the "Initial Hotels"], which are redeemable under certain
circumstances beginning after one year from the closing of the Offering. The
number of Units issued is subject to adjustment based on the performance of
certain Initial Hotels which as of the date of the Offering do not have
established operating histories.
Upon completion of the offering, the Company will contribute substantially all
of the net proceeds of the Offering to the Partnership in exchange for an
approximate 32% general partnership interest in the Partnership. The Partnership
will use the proceeds from the Company to acquire the Initial Hotels. The
Partnership will acquire the Initial Hotels in exchange for (i) Units, which
will be redeemable, subject to certain limitations, for an aggregate of
approximately 3,960,000 Common Shares of the Company valued at approximately $24
million based on an offering price of $6.00 per Common Share [the "Offering
Price"] , and (ii) the assumption of approximately $26 million of outstanding
indebtedness as of December 31, 1997. The Hersha Affiliates have agreed that
they will (i) exchange all their interests in the Initial Hotels for Units in
the Partnership, and (ii) grant an option to the Company to acquire any hotels
acquired or developed by the Hersha Affiliates within 15 miles of any of the
Initial Hotels or any hotel subsequently acquired by the Company.
After consummation of the Offering, (a) the Company will own approximately 32%
of the Partnership, (b) the Hersha Affiliates will own approximately 68% of the
Partnership, and (c) the Partnership will own 100% of the equity interest in the
Initial Hotels.
[2] Summary of Significant Accounting Policies
Distributions - The Company intends to pay regular quarterly dividends which are
initially dependent upon receipt of distributions from the Partnership.
[3] Commitments and Contingencies
The Company, in conjunction with the Offering, intends to amend its Declaration
of Trust to provide for the issuance of up to 50,000,000, $.01 par value,
Priority Class A Common Shares of beneficial interest, 50,000,000, $.01 par
value, Class B Common Shares of beneficial interest and 10,000,000, $.01 par
value, Preferred Shares of beneficial interest.
The Priority Class A Common Shares have priority as to the payment of dividends
until dividends equal $.72 per share on a cumulative basis and shares equally in
additional dividends after the Class B Common Shares have received $.72 per
share in each annual period. The Priority Class A Common Shares carry a
liquidation preference of $6.00 per share plus unpaid dividends and votes with
the Class B Common Shares on a one vote per share basis. The Priority period of
the Class A Shares will commence on the date of the closing of the initial
public offering and end on the earlier of (i) five years after the initial
public offering of the Priority Common Shares, or (ii) the date that is 15
trading days after the Company sends notice to the holders of the Priority
Common Shares, provided that the closing bid price of the Priority Common Shares
is at least $7 on each trading day during such 15-day period.
F-8
<PAGE>
HERSHA HOSPITALITY TRUST
NOTES TO BALANCE SHEET AS OF MAY 27, 1998, Sheet #2
[3] Commitments and Contingencies [Continued]
In conjunction with the offering, the Partnership will acquire the ten Initial
Hotels and will enter into percentage lease agreements with Hersha Hospitality
Management L.P. [the "Lessee"]. Under the Percentage Leases, the Partnership is
obligated to pay the costs of certain capital improvements, real estate and
personal property taxes and property insurance, and to make available to the
Lessee an amount equal to 4% [6% for some hotels] of room revenues per quarter,
on a cumulative basis, for the periodic replacement or refurbishment of
furniture, fixtures and equipment at the Initial Hotels.
Pursuant to the Partnership Agreement, the Hersha Affiliates will receive
Redemption Rights, which will enable them to cause the Partnership to redeem
their interests in the Partnership in exchange for cash or, at the election of
the Company, Class B Common Shares on a one-for-one basis. The Redemption Rights
may be exercised by the Hersha Affiliates commencing one year following the
closing of the Offering depending on the length of time the hotel has been in
operation. The number of Common Shares initially issuable to the Hersha
Affiliates upon exercise of the Redemption Rights is approximately 3,960,000 and
has been determined based on the value of their interests in the Combined
Entities divided by the expected offering price of $6.00 per share. The number
of shares issuable upon exercise of the Redemption Rights will be adjusted upon
the occurrence of stock splits, mergers, consolidations or similar pro rata
share transactions which otherwise would have the effect of diluting the
ownership interests of the Hersha Affiliates or the shareholders of the Company.
The Company acts as the general partner in the Partnership and as such, is
liable for all recourse debt of the Partnership to the extent not paid by the
Partnership. In the opinion of management, the Company does not anticipate any
losses as a result of its general partner obligations.
The Company expects to incur expenses of approximately $275,000 related to the
transfer of ownership of the franchise licenses from the existing owners to the
Lessee.
Summary operating results for the Initial Hotels [in thousands] are as follows:
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C> <C>
Total Revenue $ 13,935 $ 9,692 $ 13,445 $ 9,989 $ 7,219
Total Expenses 11,497 8,140 11,716 10,017 7,595
---------- ----------- ---------- ---------- -----------
Net Income [Loss] $ 2,438 $ 1,552 $ 1,729 $ (28) $ (376)
========== =========== ========== ========== ===========
</TABLE>
[4] Subsequent Events [Unaudited]
[A] Prior to the Offering, the Company will adopt the Company's "Option Plan".
The Option Plan will be administered by the Compensation Committee of the Board
of Trustees, or its delegate [the "Administrator"].
Officers and other employees of the Company generally will be eligible to
participate in the Option Plan. The Administrator will select the individuals
who will participate in the Option Plan ["Participants"].
F-9
<PAGE>
HERSHA HOSPITALITY TRUST
NOTES TO BALANCE SHEET AS OF MAY 27, 1998, Sheet #3
[4] Subsequent Event [Unaudited]
[A] [Continued] The Option Plan will authorize the issuance of options to
purchase up to 650,000 Class B Common Shares. The Plan provides for the grant of
(i) options intended to qualify as incentive stock options under Section 422 of
the Code, and (ii) options not intended to so qualify. Options under the Option
Plan may be awarded by the Administrator, and the Administrator will determine
the option exercise period and any vesting requirements. The options granted
under the Option Plan will be exercisable only if (i) the Company obtains a per
share closing price on the Common Shares of $9.00 or higher for 20 consecutive
trading days and (ii) the closing price per Common Share for the prior trading
day was $9.00 or higher. In addition, no option granted under the Option Plan
may be exercised more than five years after the date of grant. The exercise
price for options granted under the Option Plan will be determined by the
Compensation Committee at the time of grant.
No option award may be granted under the Option Plan more than ten years after
the date the Board of Trustees approved such Plan. The Board may amend or
terminate the Option Plan at any time, but an amendment will not become
effective without shareholder approval if the amendment (i) increases the number
of shares that may be issued under the Option Plan, (ii) materially changes the
eligibility requirements or (iii) extends the length of the Option Plan. No
amendment will affect a Participant's outstanding award without the
Participant's consent.
No options have been granted under the Option Plan.
[B] 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 Independent Trustees. The Trustees' Plan
authorizes the issuance of up to 200,000 Class B Common Shares. The Trustees'
Plan provides for, in the event the Class B Common Shares are converted into
another security of the Company, the issuance of equivalent amounts of such
security and options to purchase such security into which the Class B Common
Shares are converted.
The Trustees' Plan provides for the grant of a nonqualified option for Class B
Common Shares to the Independent Trustees of the Company who are members of the
Board on the effective date of the Offering. The exercise price of each such
option will be equal to the Offering Price. Each such option shall become
exercisable for over the particular Trustee's initial term, provided that the
Trustee is a member of the Board on the applicable date. An option granted under
the Trustees' Plan will be exercisable only if (i) the Company obtains a per
share closing price on the Priority Common Shares of $9.00 for 20 consecutive
trading days and (ii) the per share closing price on the Priority Common Shares
for the prior trading day was $9.00 or higher. Options issued under the
Trustees' Plan are exercisable for five years from the date of grant.
A Trustee's outstanding options will become fully exercisable if the Trustee
ceases to serve on the Board due to death or disability. All awards granted
under the Trustees' Plan shall be subject to Board or other approval sufficient
to provide exempt status for such grants under Section 16 of the Exchange Act,
as that section and Rules thereunder are in effect from time to time. No option
may be granted under the Trustees' Plan more than 10 years after the date that
the Board of Trustees approved the Plan. The Board may amend or terminate the
Trustees' Plan at any time but an amendment will not become effective without
shareholder approval if the amendment increases the number of shares that may be
issued under the Trustees' Plan (other than equitable adjustments upon certain
corporate transactions).
No options have been granted under the Trustees' Plan.
. . . . . . . .
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Hersha Hospitality Management, L.P.
We have audited the accompanying balance sheet of Hersha
Hospitality Management, L.P. as of May 27, 1998. This balance sheet is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards, Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents
fairly, in all material respects, the financial position of Hersha Hospitality
Management, L.P. as of May 27, 1998, in conformity with generally accepted
accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 27, 1998
F-11
<PAGE>
HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEETS
September 30, May 27,
1998 1998
---- ----
[Unaudited]
Assets $ -- $ --
============= ============
Liabilities and Partners' Capital:
Liabilities -- --
Commitments and Contingencies -- --
Partners' Capital -- --
------------- ------------
Total Liabilities and Partners' Capital $ -- $ --
============= ============
The Accompanying Notes Are an Integral Part of This Financial Statement.
F-12
<PAGE>
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO BALANCE SHEET AS OF MAY 27, 1998.
[1] Organization
Hersha Hospitality Management, L.P. [the "Lessee"] was organized under the laws
of the State of Pennsylvania in May, 1998 to lease and operate ten existing
hotel properties from Hersha Hospitality Limited Partnership [the "Partnership"]
[collectively the "Initial Hotels"]. The Lessee is owned by Mr. Hasu P. Shah and
certain affiliates some of whom have ownership interests in the Initial Hotels.
[2] Commitments
The Lessee will enter into Percentage Leases, each with an initial term of 5
years with two 5 year renewal options, relating to each of the Initial Hotels.
Pursuant to the terms of the Percentage Leases, the Lessee is required to pay
the greater of the Base Rent or the Percentage Rent for hotels with established
operating histories. The Base Rent is 6.5 percent of the purchase price assigned
to each Initial Hotel. The Percentage Rent for each Initial Hotel is comprised
of (i) a percentage of room revenues up to the Threshold, (ii) a percentage of
room revenues in excess of the Threshold, but not more than the Incentive
Threshold, (iii) a percentage of room revenues in excess of the Incentive
Threshold and (iv) a percentage of revenues other than room revenues. For hotels
with limited operating histories, the leases provide for the payment of Initial
Fixed Rent for certain periods as specified in the leases and the greater of
Base Rent or Percentage Rent thereafter. The Lessee also will be obligated to
pay certain other amounts, including interest accrued on any late payments or
charges. The Lessee is entitled to all profits from the operations of the
Initial Hotels after the payment of certain specified operating expenses.
The Lessee will assume the rights and obligations under the terms of existing
franchise licenses relating to the Initial Hotels upon acquisition of the hotels
by the Partnership. The franchise licenses generally specify certain management,
operational, accounting, reporting and marketing standards and procedures with
which the franchisee must comply and provide for annual franchise fees based
upon percentages of gross room revenue.
The Lessee will provide certain administrative services to the Partnership for
an annual fee of $55,000 plus $10,000 per hotel.
. . . . . . . .
F-13
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
[UNAUDITED IN THOUSANDS]
This unaudited pro forma Condensed Combined Statement of Operations is presented
as if the sale of the Initial Hotels and the consummation of the Offering
contemplated by this prospectus had occurred on January 1, 1997. Such pro forma
information is based in part upon the Combined Statements of Operations of the
Combined Entities Initial Hotels and the application of the proceeds of the
Offering as set forth under the caption "Use of Proceeds." It is meant to
represent the pro forma operations of Hersha Hospitality Management, L.P. [the
"Lessee"] and successor to the operations of the Combined Entities - Initial
Hotels. The separate operations of the Lessee are inconsequential. This pro
forma information should be read in conjunction with the Combined Financial
Statements and Notes thereto of the Combined Entities - Initial Hotels included
at pages F-24 through F-31 of this Prospectus. In management's opinion, all
adjustments necessary to reflect the effects of this transaction have been made.
This unaudited pro forma Condensed Combined Statement of Operations is not
necessarily indicative of what actual results of operations of the Lessee would
have been assuming such transactions had been completed as of January 1, 1997,
nor does it purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
----------------------------------------------------
Historical
Combined
Entities -
Initial Hotels Adjustments Pro Forma
-------------- -------------- -------------
<S> <C> <C> <C>
Total Revenue $ 13,935 $ -- $ 13,935
Expenses:
Initial Hotel Operating
Costs and Expenses 6,806 (417) [A] 6,389
Advertising and Marketing 388 -- 388
Depreciation and Amortization 1,161 (1,135) [B] 26
Interest Expense 1,497 (1,497) [C] --
General and Administrative 1,645 (112) [D] 1,703
170 [E]
Percentage Lease Payments -- 5,108 [F] 5,108
----------- -------------- ------------
Lessee Operating Income $ 2,438 $ (2,117) $ 321
----------------------- =========== ============== ============
</TABLE>
[A] Decrease reflects personal property, real estate taxes and casualty
insurance to be paid by the Partnership.
[B] Decrease reflects elimination of amortization expense excluding franchise
fee amortization and the elimination of depreciation expense at the
Combined Entity level.
[C] Decrease reflects reduction of interest costs due to the expected
repayment of certain of the related party and mortgage indebtedness and
the elimination of the remaining interest to be paid by the Partnership.
[D] Decrease reflects the elimination of certain expenses to be paid by the
Partnership as required by the Administrative Services Agreement.
[E] To eliminate related party management fees of $288 and replace with
anticipated salaries of $458 based on salary agreements.
F-14
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
[UNAUDITED IN THOUSANDS]
[Continued]
[F] Represents lease payments calculated on a pro forma basis using the rent
provisions in the Percentage Lease Agreements. Percentage rents under the
lease agreements are calculated under two methods depending on whether
the hotel is a stabilized hotel with an established operating history or
a newly-developed or newly-renovated hotel. Stabilized hotels pay
percentage rent based on a percentage of room revenue which changes at
various thresholds as described on pages 46 and 47 of this prospectus
plus a percentage of all non-room revenue. Newly-developed or
newly-renovated hotels pay initial fixed rent for the first two years of
operation and percentage rent thereafter with such initial fixed rent
being recognized on a straight-line basis over the course of the period
presented. Certain newly developed or newly-renovated hotels have not
been in operation for the full period presented and in those cases
percentage rent payments are recognized on a straight-line basis prorated
for the period the hotel was in operation. Pro forma percentage rent
payments for stabilized hotels has been calculated using the terms of the
percentage lease agreement applied to historical room revenue and other
revenue for the period presented. For the nine months ended September 30,
1998 percentage lease payments consist of $2,431 of percentage rent and
$2,677 of initial fixed rent calculated as follows:
Hotels Under Percentage Lease Agreements:
Holiday Inn - Harrisburg, PA $ 1,203
Hampton Inn - Selinsgrove, PA 528
Clarion Suites - Philadelphia, PA 700
--------------
Total $ 2,431
==============
Hotels Under Initial Fixed Rent Agreements:
Holiday Inn Express - Hershey, PA $ 596
Holiday Inn Express - New Columbia, PA 374
Holiday Inn Express - Harrisburg, PA 378
Hampton Inn - Carlisle, PA 524
Comfort Inn - Denver, PA 197
Comfort Inn - West Hanover, PA (Open 5 months) 214
Holiday Inn - Milesburg, PA 394
--------------
Total $ 2,677
==============
F-15
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997.
[UNAUDITED IN THOUSANDS]
This unaudited pro forma Condensed Combined Statement of Operations is presented
as if the sale of the Initial Hotels and the consummation of the Offering
contemplated by this prospectus had occurred on January 1, 1997. Such pro forma
information is based in part upon the Combined Statements of Operations of the
Combined Entities Initial Hotels and the application of the proceeds of the
Offering as set forth under the caption "Use of Proceeds." It is meant to
represent the pro forma operations of Hersha Hospitality Management, L.P. [the
"Lessee"] and successor to the operations of the Combined Entities - Initial
Hotels. The separate operations of the Lessee are inconsequential. This pro
forma information should be read in conjunction with the Combined Financial
Statements and Notes thereto of the Combined Entities - Initial Hotels included
at pages F-24 through F-31 of this Prospectus. In management's opinion, all
adjustments necessary to reflect the effects of this transaction have been made.
This unaudited pro forma Condensed Combined Statement of Operations is not
necessarily indicative of what actual results of operations of the Lessee would
have been assuming such transactions had been completed as of January 1, 1997,
nor does it purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
Year ended December 31, 1997
-----------------------------------------------------
Historical
Combined
Entities -
Initial Hotels Adjustments Pro Forma
-------------- ----------------- -------------
<S> <C> <C> <C>
Total Revenue $ 13,445 $ $ 13,445
Expenses:
Initial Hotel Operating
Costs and Expenses 7,088 (375) [A] 6,713
Advertising and Marketing 370 -- 370
Depreciation and Amortization 1,189 (988) [B] 201
Interest Expense 1,354 (1,354) [C] --
General and Administrative 1,701 (123) [D] 1,916
338 [E]
Other 14 -- 14
Percentage Lease Payments -- 5,129 [F] 5,129
----------- -------------- ------------
Lessee Operating Income $ 1,729 $ (2,627) $ (898)
----------------------- =========== ============== ============
</TABLE>
[A] Decrease reflects personal property, real estate taxes and casualty
insurance to be paid by the Partnership.
[B] Decrease reflects elimination of amortization expense excluding franchise
fee amortization, write-off of loan acquisition fees upon transfer of
mortgage indebtedness to the Company and the elimination of depreciation
expense at the Combined Entity level.
[C] Decrease reflects reduction of interest costs due to the expected
repayment of certain of the related party and mortgage indebtedness and
the elimination of the remaining interest to be paid by the Partnership.
[D] Decrease reflects the elimination of certain expenses to be paid by the
Partnership as required by the Administrative Services Agreement.
[E] To eliminate related party management fees of $272 and replace with
anticipated salaries of $610 based on salary agreements.
F-16
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1997.
[UNAUDITED IN THOUSANDS]
[Continued]
[F] Represents lease payments calculated on a pro forma basis using the rent
provisions in the Percentage Lease Agreements. Percentage rents under the
lease agreements are calculated under two methods depending on whether
the hotel is a stabilized hotel with an established operating history or
a newly-developed or newly-renovated hotel. Stabilized hotels pay
percentage rent based on a percentage of room revenue which changes at
various thresholds as described on pages 46 and 47 of this prospectus
plus a percentage of all non-room revenue. Newly-developed or
newly-renovated hotels pay initial fixed rent for the first two years of
operation and percentage rent thereafter with such initial fixed rent
being recognized on a straight-line basis over the course of the period
presented. Certain newly developed or newly-renovated hotels have not
been in operation for the full period presented and in those cases
percentage rent payments are recognized on a straight-line basis prorated
for the period the hotel was in operation. Pro forma percentage rent
payments for stabilized hotels has been calculated using the terms of the
percentage lease agreement applied to historical room revenue and other
revenue for the period presented. For the year ended December 31, 1997
percentage lease payments consist of $3,248 of percentage rent and $1,881
of initial fixed rent calculated as follows:
Hotels Under Percentage Lease Agreements:
Holiday Inn - Harrisburg, PA $ 1,614
Hampton Inn - Selinsgrove, PA 658
Clarion Suites - Philadelphia, PA 976
--------------
Total $ 3,248
==============
Hotels Under Initial Fixed Rent Agreements:
Holiday Inn Express - Hershey, PA (Open 3 months) $ 199
Holiday Inn Express - New Columbia, PA (Open 1 month) 42
Holiday Inn Express - Harrisburg, PA 504
Hampton Inn - Carlisle, PA (Open 7 months) 349
Comfort Inn - Denver, PA 262
Holiday Inn - Milesburg, PA 525
--------------
Total $ 1,881
==============
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder
Hersha Hospitality Trust
We have audited the accompanying combined balance sheets of
the Combined Entities - Initial Hotels as of December 31, 1997 and 1996, and the
related combined statements of operations, owners' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the combined financial statement schedule included on pages F-29 and
F-30 of the accompanying Prospectus. These Combined financial statements and the
combined financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements and the combined 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 combined financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
combined 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
Combined Entities - Initial Hotels as of December 31, 1997 and 1996, 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 combined
financial statement schedule referred to above, when considered in relationship
to the basic combined financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein as of
December 31, 1997.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 21, 1998
F-18
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
COMBINED BALANCE SHEETS
[IN THOUSANDS]
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1998 1997 1996
---- ---- ----
[Unaudited]
<S> <C> <C> <C>
Assets:
Investment in Hotel Properties:
Land $ 2,099 $ 2,099 $ 1,843
Buildings and Improvements 22,274 19,276 9,950
Furniture, Equipment and Other 6,977 6,056 3,682
------------------ -------------- ---------------
Totals 31,350 27,431 15,475
Less: Accumulated Depreciation 4,446 3,356 2,533
------------------ -------------- ---------------
Totals 26,904 24,075 12,942
Construction in Progress -- 1,412 857
------------------ -------------- ---------------
Net Investment in Hotel Properties 26,904 25,487 13,799
Cash and Cash Equivalents 1,258 694 237
Accounts Receivable 626 394 191
Prepaid Expenses and Other Assets 339 182 154
Due from Related Parties 571 268 107
Intangible Assets 1,382 1,427 1,418
------------------ -------------- ---------------
Total Assets $ 31,080 $ 28,452 $ 15,906
================== ============== ===============
Liabilities and Owners' Equity:
Mortgages Payable $ 19,800 $ 14,713 $ 8,571
Accounts Payable and Accrued Expenses 493 1,092 649
Accrued Expenses - Related Parties 116 153 11
Due to Related Parties 3,982 9,169 4,236
Other Liabilities 214 172 250
------------------ -------------- ---------------
Total Liabilities 24,605 25,299 13,717
Commitments -- -- --
Owners' Equity:
Net Combined Equity 6,475 3,153 2,189
------------------ -------------- ---------------
Total Liabilities and Owners' Equity $ 31,080 $ 28,452 $ 15,906
================== ============== ===============
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-19
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
[IN THOUSANDS]
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C> <C>
Revenues from Hotel Operations:
Room Revenue $ 11,824 $ 7,750 $ 10,880 $ 7,273 $ 5,262
Restaurant Revenue 1,497 1,377 1,744 2,106 1,515
Other Revenue 614 565 821 610 442
-------------- ------------- ------------- ------------- --------------
Total Revenue 13,935 9,692 13,445 9,989 7,219
-------------- ------------- ------------- ------------- --------------
Expenses:
Hotel Operating Expenses 5,732 4,284 5,906 4,887 3,789
Restaurant Operating Expenses 1,074 850 1,182 1,406 961
Advertising and Marketing 388 281 370 418 185
Depreciation and Amortization 1,161 799 1,189 924 711
Interest Expense 1,138 710 821 605 434
Interest Expense - Related Parties 359 121 533 316 200
General and Administrative 1,357 939 1,381 1,085 779
General and Administrative -
Related Parties 288 142 320 364 102
Loss on Asset Disposals -- -- -- 12 284
Liquidation Damages -- 14 14 -- 150
-------------- ------------- ------------- ------------- --------------
Total Expenses 11,497 8,140 11,716 10,017 7,595
-------------- ------------- ------------- ------------- --------------
Net Income [Loss] $ 2,438 $ 1,552 $ 1,729 $ (28) $ (376)
============== ============= ============= ============= ==============
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-20
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF OWNERS' EQUITY
[IN THOUSANDS]
Net Combined
Owners' Equity
------------------
Balance - December 31, 1994 $ 772
Net [Loss] (376)
Capital Contributions 2,287
Cash Distributions (466)
------------------
Balance - December 31, 1995 2,217
Net [Loss] (28)
Capital Contributions 470
Cash Distributions (470)
------------------
Balance - December 31, 1996 2,189
Net Income 1,729
Capital Contributions 59
Cash Distributions (824)
------------------
Balance - December 31, 1997 3,153
Net Income 2,438
Capital Contributions 1,156
Cash Distributions (272)
------------------
Balance - September 30, 1998 [Unaudited] $ 6,475
==================
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-21
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
[IN THOUSANDS]
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income [Loss] $ 2,438 $ 1,552 $ 1,729 $ (28) $ (376)
Adjustments to Reconcile Net
Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization
Expense 1,181 834 1,246 966 751
Loss on Disposal of Assets -- -- -- 12 284
Writeoff of Financing Fees -- -- 44 -- --
Changes in Assets and Liabilities:
Accounts Receivable (238) (385) (203) 105 (226)
Prepaid Expenses and Other
Assets (45) (79) (28) (28) 39
Accounts Payable and Accrued
Expenses (499) 84 584 241 293
Other Liabilities (97) (199) (78) 79 129
--------------- ------------- ------------- ------------- --------------
Net Cash - Operating Activities 2,740 1,807 3,294 1,347 894
--------------- ------------- ------------- ------------- --------------
Investing Activities:
Improvements and Additions to
Hotel Properties (2,553) (9,748) (12,821) (5,601) (5,086)
Payment for Intangibles -- (156) (166) (117) (925)
Advances to Related Parties (501) (50) (268) (99) (576)
Repayment of Advances to
Related Parties 198 107 107 584 62
Proceeds from Sale of Assets -- -- -- 129 --
--------------- ------------- ------------- ------------- --------------
Net Cash - Investing Activities (2,856) (9,847) (13,148) (5,104) (6,525)
--------------- ------------- ------------- ------------- --------------
Financing Activities:
Proceeds from Mortgages and
Notes Payable 5,639 6,409 9,526 3,631 4,615
Principal Payments on Mortgages
and Notes Payable (552) (3,304) (3,383) (612) (1,143)
Advances from Related Parties 2,420 10,356 14,378 2,756 809
Repayments of Advances from
Related Parties (7,711) (4,950) (9,445) (1,915) (1,065)
Capital Contributions 1,156 9 59 470 2,287
Distributions Paid (272) (341) (824) (470) (466)
--------------- ------------- ------------- ------------- --------------
Net Cash - Financing Activities 680 8,179 10,311 3,860 5,037
--------------- ------------- ------------- ------------- --------------
Net Increase in Cash and Cash
Equivalents - Forward $ 564 $ 139 $ 457 $ 103 $ (594)
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-22
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
[IN THOUSANDS]
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C> <C>
Net Increase in Cash and Cash
Equivalents - Forwarded $ 564 $ 139 $ 457 $ 103 $ (594)
Cash and Cash Equivalents at
Beginning of Periods 694 237 237 134 728
-------------- ------------- ------------- ------------- --------------
Cash and Cash Equivalents at
End of Periods $ 1,258 $ 376 $ 694 $ 237 $ 134
============== ============= ============= ============= ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest [Net of Amounts
Capitalized] $ 1,497 $ 953 $ 1,133 $ 903 $ 591
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-23
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[1] Organization, Proposed Initial Public Offering and Basis of Presentation
Organization - Hersha Hospitality Trust [the "Company"] has been established to
own initially ten existing hotels [collectively the "Initial Hotels"] and to
continue the hotel acquisition and operating strategies of Mr. Hasu P. Shah,
Chairman of the Board of Trustees and President of the Company. The Company
intends to qualify as a real estate investment trust [REIT] under the Internal
Revenue Code of 1986, as amended, [the "Code"] . The Initial Hotels include
three hotels operated as Holiday Inn Express(R) hotels, two Hampton Inn(R)
hotels, two Holiday Inn(R) hotels, two Comfort Inn(R) hotels, one of which is
under construction, and one Clarion Suites(R) hotel with an aggregate of 989
rooms and are located in Pennsylvania. Upon completion of the proposed initial
public offering [see below], the Company will own an approximate 32% general
partnership interest in Hersha Hospitality Limited Partnership, a Pennsylvania
limited partnership [the "Partnership"]. The Company will be the sole general
partner of the Partnership. The Partnership will own the Initial Hotels and
lease them to Hersha Hospitality Management, L.P. ["Lessee"] under Percentage
Leases, each having a 5 year term with two 5 year renewals, which shall provide
for rent equal to the greater of (i) fixed base rent, or (ii) percentage rents
based upon specific percentages of room and other revenue of each of the Initial
Hotels. The Company will enter into management agreements with the Lessee
whereby the Lessee will be required to perform all management functions
necessary to operate the Initial Hotels. Under the administrative services
agreement, the Lessee will be paid a fee equal to $55 plus $10 per hotel or $155
per year based on the ten initial hotels.
Basis of Presentation - The combined financial statements include the accounts
of various partnerships, individuals, certain other corporations and Subchapter
S corporations which perform property management services and own property
improvements and furniture and fixtures [collectively the "Combined Entities"]
[See Note 5] using their historical cost basis. No adjustments have been
reflected in these combined financial statements to give effect to the purchase
of the Initial Hotels by the Partnership.
The Combined Entities are owned by Mr. Hasu P. Shah his wife, two sons and seven
other unrelated individuals for all periods presented [the individuals and
Combined Entities are collectively referred to as the "Hersha Affiliates"]. The
aforementioned eleven individuals in their capacities as owners, partners and
stockholders have delegated management of all of the entities to a management
control group consisting of seven of the eleven individuals. The management
control group has complete day to day administrative and managerial authority
and responsibility over the portfolio of hotels. Due to common management of the
Combined Entities, the historical combined financial statements have been
accounted for as a group of entities under common control. All significant
intercompany transactions and balances have been eliminated in the combined
presentation.
Proposed Initial Public Offering - The Company expects to file a registration
statement with the Securities and Exchange Commission pursuant to which the
Company expects to offer 1,833,334 Class A Common Shares of beneficial interest
to the public and 166,666 Class A Common Shares of beneficial interest to Mr.
Hasu P. Shah and certain affiliates of Mr. Hasu P. Shah [the "Offering"]. The
Company expects to qualify as a real estate investment trust under Sections
856-860 of the Code. Under the proposed structure, the Company will become the
sole general partner in the Partnership and the Hersha Affiliates will be the
limited partners.
Upon completion of the Offering, the Company will contribute substantially all
of the net proceeds of the offering to the Partnership in exchange for an
approximate 32% general partnership interest in the Partnership. The Partnership
will use the proceeds from the Company to acquire the Initial Hotels from the
Combined Entities and to repay certain outstanding indebtedness. Rather than
receiving cash for their interests in the Combined Entities upon the sale of the
Initial Hotels, the Hersha Affiliates have elected to receive limited
partnership interests in the Partnership aggregating an approximate 68%
ownership interest in the Partnership.
F-24
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[1] Organization, Proposed Initial Public Offering and Basis of Presentation
[Continued]
Proposed Initial Public Offering [Continued] - After consummation of the
Offering, the Company's acquisition of an interest in the Partnership and the
Partnership's acquisition of the Initial Hotels, (a) the Company will own
approximately 32% of the Partnership, (b) the Hersha Affiliates will own an
aggregate of approximately 68% of the Partnership, and (c) the Partnership will
own 100% of the equity interest in the Initial Hotels.
[2] Summary of Significant Accounting Policies
Nature of Operations - Operations consist of hotel room rental, conferences room
rental and the associated sales of food and beverages principally in the
Harrisburg and central Pennsylvania area.
Investment in Hotel Properties - Investment in hotel properties are stated at
cost. Depreciation for financial reporting purposes is principally based upon
the straight-line method for buildings and improvements and accelerated methods
for furniture and equipment acquired prior to the year ended December 31, 1997
and the straight-line method thereafter.
The estimated lives used to depreciate the Initial Hotel properties are as
follows:
Years
-----
Building and Improvements 15 to 40
Furniture and Equipment 5 to 7
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 accumulated depreciation are removed from the accounts,
and the gain or loss is included in income from operations.
Depreciation expense was $1,076, $819 and $624 for the years ended December 31,
1997, 1996 and 1995, respectively.
Room linens and restaurant supplies are capitalized and amortized utilizing the
straight-line method over periods of three and two years, respectively, and are
charged to Hotel Operating Expenses. Amortization expense was $57, $42 and $40
for the years ended December 31, 1997, 1996 and 1995, respectively.
Impairment of Long-Lived Assets - Long-lived assets are reviewed for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable. The Company performs
undiscounted cash flow analyses to determine if an impairment exists. If an
impairment is determined to exist, any related impairment loss is calculated
based on fair value.
Cash and Cash Equivalents - Cash and cash equivalents are comprised of certain
highly liquid investments with a maturity of three months or less when
purchased.
Inventories - Inventories, consisting primarily of food and beverages and which
are included in prepaid expenses and other assets, are stated at the lower of
cost [generally, first-in, first-out] or market.
Deferred Offering Cost - Costs of $106 at September 30, 1998 associated with the
anticipated public offering are deferred and will be charged against the
proceeds of the Offering. If the Offering is not consummated, the costs will be
charged to operations.
F-25
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[2] Summary of Significant Accounting Policies [Continued]
Intangible Assets - Intangible assets are carried at cost and consist of initial
franchise fees, loan acquisition costs and goodwill. Amortization is computed
using the straight-line method based upon the terms of the franchise and loan
agreements which range from 5 to 30 years, and over a 15 year period for
goodwill.
Income Taxes - The Combined Entities are not a legal entity subject to income
taxes. Hersha Enterprises, Ltd., an entity included in these combined financial
statements, is a taxable corporate entity [See Note 5]. Income taxes are
provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes resulting from
temporary differences. Such temporary differences result from differences in the
carrying value of assets and liabilities for tax and financial reporting
purposes. The deferred tax assets and liabilities represent the future tax
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Deferred taxes are
also recognized for operating losses that are available to offset future taxable
income. Valuation allowances are established to reduce deferred tax assets to
the amount expected to be realized. The Combined Partnerships and S corporations
are not subject to federal or state income taxes; however, they must file
informational income tax returns and the partners must take income or loss of
the Combined Entities into consideration when filing their respective tax
returns. The cumulative difference between the book basis and tax basis of the
Combined Entities' assets and liabilities is approximately $3.8 million due
primarily to depreciation and amortization expense on the tax basis in excess of
the book basis.
Revenue Recognition - Revenue is recognized as earned which is generally when a
guest occupies a room and utilizes the hotel's services.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentrations of credit risk include cash and cash equivalents
and accounts receivable arising from its normal business activities. The Company
places its cash with high credit quality financial institutions. The Company
does not require collateral to support its financial instruments.
The Company periodically has money in financial institutions that is subject to
normal credit risk beyond insured amounts. This credit risk, representing the
excess of the bank's deposit liabilities reported by the bank over the amounts
that would have been covered by federal insurance, amounted to approximately $71
and $-0- at December 31, 1997 and 1996, respectively.
The Company's extension of credit to its customers results in accounts
receivable arising from its normal business activities. The Company does not
require collateral from its customers, but routinely assesses the financial
strength of its customers. Based upon factors surrounding the credit risk of its
customers and the Company's historical collection experience, no allowance for
uncollectible accounts has been established at December 31, 1997 and 1996,
respectively. The Company believes that its accounts receivable credit risk
exposure is limited. Such assessment may be subject to change in the near term.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-26
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[2] Summary of Significant Accounting Policies [Continued]
Advertising and Marketing - Advertising costs are expensed as incurred and
totaled $370, $418 and $185 for the years ended December 31, 1997, 1996 and
1995, respectively. In connection with its franchise agreements, a portion of
the franchise fees paid is for marketing services. Payments under these
agreements related to marketing services amounted to $201, $114 and $78 for the
years ended December 31, 1997, 1996 and 1995, respectively, and are included in
Hotel Operating Expenses.
[3] Intangible Assets
At December 31, 1997 and 1996, intangibles consisted of the following:
Accumulated
December 31, 1997: Cost Amortization Net
Goodwill $ 1,168 $ 216 $ 952
Franchise Fees 342 46 296
Loan Acquisition Fees 196 17 179
------------ ------------ ------------
Totals $ 1,706 $ 279 $ 1,427
------ ============ ============ ============
Accumulated
December 31, 1996: Cost Amortization Net
Goodwill $ 1,168 $ 138 $ 1,030
Franchise Fees 296 56 240
Loan Acquisition Fees 166 18 148
------------ ------------ ------------
Totals $ 1,630 $ 212 $ 1,418
------ ============ ============ ============
Amortization expense was $113, $105 and $87 for the years ended December 31,
1997, 1996 and 1995, respectively.
[4] Mortgages Payable
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Holiday Inn, Harrisburg, Pennsylvania:
Note payable to bank dated August 19, 1997 with monthly payments of $34
including interest at 8.45% until November 1, 2002. Thereafter the rate is
negotiated or the bank's prime rate plus 1/4%. Final payment is due November
1, 2012. The property previously was financed by a bank with a note payable
with monthly payments of $27 including interest at the prime rate plus 1-1/2%
maturing March 2, 2010 and another note payable with monthly payments of $7
plus interest at 8-1/2% maturing January 5, 2001. $ 3,500 $ 3,096
Holiday Inn, Milesburg, Pennsylvania:
Note payable to bank dated June 2, 1977 with monthly payments of
$11 including interest at 8% until June 6, 1999 914 970
------------ ------------
Totals - Forward $ 4,414 $ 4,066
</TABLE>
F-27
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[4] Mortgages Payable [Continued]
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Totals - Forwarded $ 4,414 $ 4,066
Clarion Suites, Philadelphia, Pennsylvania:
Note payable to a bank dated June 21, 1995 with monthly payments of
$16 as adjusted for interest at the prime rate plus 1.25% until
July 1, 2010. Guaranteed by PIDC Local Development Corporation
and the Small Business Administration. 1,195 1,245
Note payable to a bank dated June 21, 1995 with monthly payments of $3 plus
interest at the prime rate plus .5%. Principal balance is
due July 1, 2002. 419 453
Hampton Inn, Selinsgrove, Pennsylvania:
Note payable to a bank dated April 3, 1996 with monthly payments of $24
including interest at 8-1/4% until October 3, 2011, includes
personal guarantees. 2,385 2,476
Hampton Inn, Carlisle, Pennsylvania:
Note payable to a bank dated September 6, 1996 with monthly payments of $28
including interest at 8% until March 6, 2001. Thereafter, the rate is
negotiated or prime rate plus 1%. Final payment is due June 6, 2012. 2,848 331
Holiday Inn Express, New Columbia, Pennsylvania:
Note payable to a bank dated August 28, 1997 with monthly payments
of $27 including interest at 8-1/2% until February 1, 2003.
Thereafter interest will be at the prime rate plus 1/4% as of January 1,
2003 and January 1, 2008. Final payment is due January 1, 2013. 1,000 --
Holiday Inn Express, Harrisburg, Pennsylvania:
Note payable to a bank dated September 26, 1997 with monthly payments
of $11 including interest at 8.35% until October 1, 2000.
Thereafter, the rate is as negotiated or at prime plus 1%. Final
payment is due October 1, 2012. 1,110 --
Holiday Inn Express, Hershey, Pennsylvania:
Note payable to a bank dated December 30, 1996 with monthly
payments of $27 including interest at 8.15% until December 31, 2001.
Thereafter, the rate is as negotiated or prime plus 3/4%.
Final payment is due January 1, 2013. 1,342 --
------------ ------------
Totals $ 14,713 $ 8,571
------ ============ ============
</TABLE>
Substantially all the Combined Entities' mortgage indebtedness is collateralized
by property and equipment and is personally guaranteed by the partners and
stockholders of the Combined Entities. One of the hotel properties also
collateralizes a $500 line of credit of a related party.
At December 31, 1997, the prime rate was 8.5%.
F-28
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[4] Mortgages Payable [Continued]
As of December 31, 1997, aggregate annual principal payments for the five years
following December 31, 1997, and thereafter are as follows:
Year ending
December 31,
- ------------
1998 $ 730
1999 1,572
2000 787
2001 856
2002 932
Thereafter 9,836
----------------
Total $ 14,713
----- ================
[5] Owners' Equity
The owners' equity [deficit] of the Combined Entities by entity is as follows:
December 31,
1997 1996
---- ----
Hasu P. Shah/Bharat C. Mehta $ -- $ 269
244 Associates 542 --
844 Associates 285 27
944 Associates 29 75
1244 Associates 373 196
1444 Associates 829 432
1644 Associates (72) --
2144 Associates 833 863
2244 Associates (54) --
2544 Associates (60) --
Colonial Care Inns, Ltd. -- 308
Hersha Enterprises 267 (57)
Harrisburg Lodging, Inc. -- (21)
MEPS Associates 170 (32)
Philadelphia Lodging, Inc. -- 2
Sajneim Motel, Inc. -- 127
Shree Associates 11 --
----------- -----------
Totals $ 3,153 $ 2,189
------ =========== ===========
F-29
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[6] Income Taxes
Included in the Combined Entities for the years ended December 31, 1997, 1996
and 1995 is a corporation which computed its income taxes pursuant to Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Deferred income taxes at December 31, 1997 and 1996 was comprised of deferred
tax assets of $-0- and $56, respectively, representing financial reporting to
tax basis differences, and $20 and $8, respectively, representing net operating
loss carryforwards, offset by full valuation allowances of $20 and $64,
respectively. Under the transaction contemplated in connection with the proposed
initial public offering, the net operating loss carryforwards will not be
available to the Company.
The Combined Entities neither incurred nor paid any income taxes during the
periods presented.
[7] Related Party Transactions
At December 31, 1997 and 1996, the Combined Entities are indebted to various
related entities, partners, and stockholders in the amount of $9,169 and $4,236,
respectively. The loans carry interest ranging from 8.5% on short-term loans to
10.5% on longer term loans. Accrued interest payable was $153 and $11 at
December 31, 1997 and 1996, respectively, and interest expense was $533, $316
and $200 for the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, various related entities, partners and
stockholders are indebted to the Combined Entities in the amount of $268 and
$107, respectively. The loans carry interest ranging from 0% on short-term loans
to 9% on longer term loans. Accrued interest receivable was $1 and $1 at
December 31, 1997 and 1996, respectively, and interest income was $9, $1 and $1
for the years ended December 31, 1997, 1996 and 1995, respectively.
The Combined Entities have paid or accrued $9,433, $856 and $-0- during the
years ended December 31, 1997, 1996 and 1995 to related entities for various
hotel construction projects and interest costs during construction. Capitalized
interest amounted to $183, $10 and $-0- for the years ended December 31, 1997,
1996 and 1995, respectively.
Certain properties are managed by individual partners or related entities.
Management fees paid to these individuals or related entities were $272, $97 and
$72 during the years ended December 31, 1997, 1996 and 1995, respectively.
A related entity rents office space in a hotel owned by the Combined Entities on
a month to month basis. The Combined Entities received rent of $30 for the year
ended December 31, 1997. The rent amount includes an allocation of certain
related expenses.
During the year ended December 31, 1996, the Combined Entities sold for
$129, the book value of the assets, certain leasehold improvements to Mr. Hasu
P. Shah.
On September 26, 1997, the Combined Entities acquired from Mr. Hasu P. Shah, the
Holiday Inn Express in Harrisburg, Pennsylvania by paying off the $1,106
indebtedness on the property. Prior to the sale, the Combined Entities had
rented the property from Mr. Hasu P. Shah under an informal rent arrangement.
Rent paid to Mr. Hasu P. Shah was $48, $267 and $70 for the years ended December
31, 1997, 1996 and 1995, respectively. Mr. Hasu P. Shah owns a parcel of land on
which a hotel is situated for which no land rent is charged.
F-30
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[Information relating to September 30, 1998 and throughout 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[8] Commitments
Franchise Agreements - The Initial Hotels have executed franchise agreements
that have initial lives ranging from 10 to 20 years but may be terminated by
either party on certain anniversary dates specified in the agreements. In
addition to initial fees totaling $342, which are being amortized over the
franchise lives, the agreements require annual payments for franchise royalties,
reservation, and advertising services which are based upon percentages of gross
room revenue. Such fees were approximately $779, $524 and $368 for the years
ended December 31, 1997, 1996 and 1995, respectively. The Initial Hotels will
continue to be operated under the franchise agreements.
Construction in Progress - At December 31, 1997, the Combined Entities had
future obligations under various hotel construction project in the amount of
$255. Through December 31, 1997, the Combined Entities had incurred expenses of
$1,412 in connection with the construction of a hotel property in West Hanover,
Pennsylvania. The construction is being contracted and funded through a related
party and the total construction cost is expected to be approximately $3,100.
The Combined Entities have obtained a construction/term loan in the amount of
$2,500 under which no borrowings are outstanding at December 31, 1997. The loan
bears interest at 8% for 5 years and 9 months and the Wall Street Journal prime
rate thereafter through maturity 10 years and 9 months from inception. The loan
is collateralized by the property and is guaranteed by certain partners,
stockholders, Combined Entities and related parties.
[9] Fair Value of Financial Instruments
At December 31, 1997 and 1996 financial instruments include cash and cash
equivalents, accounts receivable, accounts payable, loans to and from related
parties and mortgage payables. The fair values of cash, accounts receivable and
accounts payable approximate carrying value because of the short-term nature of
these instruments. Loans to and from related parties carry interest at rates
that approximate the Combined Entities' borrowing cost. The fair value of
mortgages payable approximates carrying value since the interest rates
approximate the interest rates currently offered for similar debt with similar
maturities.
[10] Unaudited Interim Statements
The financial statements as of September 30, 1998 and for the nine months ended
September 30, 1998 and 1997 are unaudited; however, in the opinion of management
all adjustments [consisting solely of normal recurring adjustments] necessary
for a fair presentation of the financial statements for the interim period have
been made. The results of the interim periods are not necessarily indicative of
the results to be obtained for a full fiscal year.
. . . . . . . .
F-31
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997.
[IN THOUSANDS]
<TABLE>
<CAPTION>
Cost Capitalized Gross Amounts at
Subsequent to Which Carried at
Initial Cost Acquisition Close of Period
---------------------- ---------------------- ---------------------------
Buildings and Buildings and Buildings and
------------- ------------- -------------
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
----------- ------------ ---- ------------ ---- ------------ ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn,
Harrisburg, PA $ 3,500 $ 412 $ 1,234 $ -- $ 1,518 $ 412 $ 2,752 $ 3,164
Holiday Inn,
Milesburg, PA 914 42 1,158 -- 681 42 1,839 1,881
Holiday Inn Express,
New Columbia, PA 1,000 94 2,510 -- -- 94 2,510 2,604
Holiday Inn Express,
Harrisburg, PA 1,110 256 850 -- 120 256 970 1,226
Holiday Inn Express,
Hershey, PA 1,342 426 2,645 -- -- 426 2,645 3,071
Clarion Suites,
Philadelphia, PA 1,614 262 1,049 150 776 412 1,825 2,237
Comfort Inn,
Denver, PA 434 -- 782 -- 327 -- 1,109 1,109
Hampton Inn,
Selinsgrove, PA 2,385 157 2,511 -- 6 157 2,517 2,674
Hampton Inn,
Carlisle, PA 2,848 300 3,109 -- -- 300 3,109 3,409
--------- --------- --------- --------- --------- --------- --------- ---------
$ 15,147 $ 1,949 $ 15,848 $ 150 $ 3,428 $ 2,099 $ 19,276 $ 21,375
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Life
Accumulated Net Upon Which
Depreciation Book Value Latest Income
------------ ---------- -------------
Buildings and Buildings and Date of Statement is
------------- ------------- ------- ------------
Description Improvements Improvements Acquisition Computed
----------- ------------ ------------ ----------- --------
Holiday Inn,
Harrisburg, PA $ 204 $ 2,960 12/15/94 15 to 40
Holiday Inn,
Milesburg, PA 439 1,442 08/15/85 15 to 40
Holiday Inn Express,
New Columbia, PA 6 2,598 12/01/97 15 to 40
Holiday Inn Express,
Harrisburg, PA 9 1,217 06/15/85 15 to 40
Holiday Inn Express,
Hershey, PA 17 3,054 10/01/97 15 to 40
Clarion Suites,
Philadelphia, PA 135 2,102 06/30/95 15 to 40
Comfort Inn,
Denver, PA 200 909 01/01/88 15 to 40
Hampton Inn,
Selinsgrove, PA 86 2,588 09/12/96 15 to 40
Hampton Inn,
Carlisle, PA 45 3,364 06/01/97 15 to 40
-------- ---------
$ 1,141 $ 20,234
======== =========
F-32
<PAGE>
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO SCHEDULE XI
[IN THOUSANDS]
<TABLE>
<CAPTION>
[A] Reconciliation of Real Estate:
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at Beginning of Year $ 9,950 $ 6,354 $ 3,785
Additions During Year 9,369 3,725 2,907
Deletions During Year (43) (129) (338)
------------ ----------- -----------
Balance at End of Year $ 19,276 $ 9,950 $ 6,354
============ =========== ===========
[B] Reconciliation of Accumulated Depreciation:
Balance at Beginning of Year $ 834 $ 614 $ 546
Depreciation for the Year 307 220 139
Accumulated Depreciation on Deletions -- -- (71)
------------ ----------- -----------
Balance at End of Year $ 1,141 $ 834 $ 614
============ =========== ===========
</TABLE>
[C] The aggregate cost of land, buildings and improvements for federal income
tax purposes is approximately $19,758.
[D] Depreciation is computed based upon the following useful lives:
Buildings and Improvements 15 to 40 years
F-33
<PAGE>
================================================================================
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
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 or that information contained herein is correct as of any
time subsequent to the date hereof.
TABLE OF CONTENTS
page
PROSPECTUS SUMMARY.......................................................... 1
RISK FACTORS................................................................ 15
THE COMPANY................................................................. 25
GROWTH STRATEGY............................................................. 27
USE OF PROCEEDS............................................................. 29
DISTRIBUTION POLICY......................................................... 30
PRO FORMA CAPITALIZATION.................................................... 36
DILUTION.................................................................... 37
SELECTED FINANCIAL INFORMATION.............................................. 38
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................. 40
BUSINESS AND PROPERTIES..................................................... 43
POLICIES AND OBJECTIVES WITH RESPECT
TO CERTAIN ACTIVITIES..................................................... 54
FORMATION TRANSACTIONS...................................................... 57
MANAGEMENT.................................................................. 59
CERTAIN RELATIONSHIPS AND TRANSACTIONS...................................... 64
THE LESSEE.................................................................. 65
PRINCIPAL SHAREHOLDERS...................................................... 67
DESCRIPTION OF SHARES OF BENEFICIAL
INTEREST.................................................................. 68
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S DECLARATION OF
TRUST AND BYLAWS.......................................................... 75
SHARES AVAILABLE FOR FUTURE SALE............................................ 79
PARTNERSHIP AGREEMENT....................................................... 81
FEDERAL INCOME TAX CONSEQUENCES............................................. 84
UNDERWRITING................................................................ 99
EXPERTS.....................................................................101
REPORTS TO SHAREHOLDERS.....................................................101
LEGAL MATTERS...............................................................101
ADDITIONAL INFORMATION......................................................101
GLOSSARY....................................................................102
INDEX TO FINANCIAL STATEMENTS ..............................................F-1
Until January ___, 1999 (25 days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotment or
subscriptions.
================================================================================
================================================================================
2,000,000 Shares
HERSHA HOSPITALITY
TRUST
Priority Class A Common Shares
of Beneficial Interest
--------------
PROSPECTUS
--------------
ANDERSON & STRUDWICK
INCORPORATED
____________, 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 sales commissions) payable by the Registrant in
connection with the issuance and distribution of the Common Shares.
Securities and Exchange Commission, registration fee.......... $ 4,720
NASD filing fee............................................... 2,100
American Stock Exchange listing fee........................... 30,000
Printing and mailing.......................................... 45,000
Accountant's fees and expenses................................ 140,000
Counsel fees and expenses..................................... 410,000
Miscellaneous................................................. 18,180
---------
Total..................................................... $ 650,000
========
Item 32. Sales to Special Parties
None.
Item 33. Recent Sales of Unregistered Securities
On May 27, 1998, the Company was capitalized with a subscription by
Hasu P. Shah for 100 Class B Common Shares for a purchase price of $1 per share
for an aggregate purchase price of $100. The Class B 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. Shah's 100 Class B Common Shares
will be redeemed at his purchase price concurrently with the closing of the
Offering.
Item 34. Indemnification of Trustees 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 and that is 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 shareholder, 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 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
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. The Bylaws of the Company obligate it, to the maximum extent
permitted by Maryland law, to indemnify: (a) any present or former Trustee,
officer or shareholder (including any individual who, while a Trustee, officer
or shareholder and at the express request of the Company, serves another entity
as a director, officer, shareholder, partner or trustee of such entity) 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)
subject to certain limitations under Maryland law, any present or former Trustee
or officer against any claim or liability to which he may become subject by
reason of such status; and (c) each present or former
II-1
<PAGE>
shareholder against any claim or liability to which he may become subject by
reason of such status. In addition, the Bylaws obligate the Company, subject to
certain provisions of Maryland law, to pay or reimburse, in advance of final
disposition of a proceeding, reasonable expenses incurred by a present or former
Trustee, officer or shareholder made a party to a proceeding by reason of such
status. The Company may, with the approval of its Trustees, provide such
indemnification or payment or reimbursement of expenses to any present or former
Trustee, officer or shareholder of the Company or any predecessor of the Company
and to any employee or agent of the Company or predecessor of the Company.
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 or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. 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 undertaking by him 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 Shares Being Registered
None.
Item 36. Financial Statements and Exhibits
(a) Financial Statements
All other schedules are omitted because the required information
is not applicable or the information required has been disclosed in the
financial statements and related notes included in the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
1.1* Form of Underwriting Agreement
1.2* Form of Selected Dealer Agreement
3.1** Amended and Restated Declaration of Trust of the Registrant
3.2* Bylaws of the Registrant
4.1* Form of Common Share Certificate
5.1 Opinion of Hunton & Williams
8.1** Opinion of Hunton & Williams as to Tax Matters
10.1** Form of First Amended and Restated Agreement of Limited Partnership of Hersha
Hospitality Limited Partnership
10.2* Contribution Agreement, dated as of June 3, 1998,
between Hasu P. Shah and Bharat C. Mehta, as
Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror.
II-2
<PAGE>
10.3* Contribution Agreement, dated as of June 3, 1998, between Shree Associates, JSK
Associates, Shanti Associates, Shreeji Associates, Kunj Associates, Devi Associates, Neil
H. Shah, David L. Desfor, Madhusudan I. Patni, Manhar Gandhi and Shreenathji
Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror.
10.4* Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti
Associates, Shreeji Associates, Kunj Associates, Devi Associates, Neil H. Shah, David
L. Desfor and Shreenathji Enterprises, Ltd. as Contributor, and Hersha Hospitality
Limited Partnership, as Acquiror.
10.5* Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.6* Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti
Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L. Desfor,
Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd., as Contributor,
and Hersha Hospitality Limited Partnership, as Acquiror.
10.7* Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti
Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, Madhusudan I. Patni and
Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror.
10.8* Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.9* Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti
Associates, Shreeji Associates, Kunj Associates, Neil H. Shah, David L. Desfor and
Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror.
10.10* Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.11* Contribution Agreement, dated as of June 3, 1998, between 144 Associates, 344
Associates, 544 Associates and 644 Associates, Joint Tenants Doing Business as 2544
Associates, as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.12* Contribution Agreement dated June 3, 1998, between
Shree Associates, as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror.
10.13* Contribution Agreement dated June 3, 1998, between
2144 Associates, as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror.
10.14* Contribution Agreement dated June 3, 1998, between 144 Associates, 344 Associates,
544 Associates and 644 Associates, Joint Tenants Doing Business as 2544 Associates, as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.15* Contribution Agreement, dated June 3, 1998, between Shree Associates, Devi Associates,
Shreeji Associates, Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.16* Contribution Agreement, dated June 3, 1998, between
Shree Associates, as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror.
10.17* Form of Ground Lease
10.18** Form of Percentage Lease
10.19* Option Agreement, dated June 3, 1998, between Hasu P. Shah, Jay H. Shah, Neil H.
Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L.
Desfor, Madhusudan I. Patni and Manhar Gandhi, and Hersha Hospitality Limited
Partnership.
10.19(a)** Amendment to Option Agreement, dated December 4, 1998, between Hasu P. Shah, Jay
H. Shah, Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran
P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar Gandhi, and Hersha
Hospitality Limited Partnership.
10.20* Administrative Services Agreement, dated
_____________, 1998, between Hersha Hospitality Trust
and Hersha Hospitality Management, L.P.
II-3
<PAGE>
10.21* Warrant Agreement, dated ____________, 1998, between Anderson & Strudwick, Inc.
and Hersha Hospitality Trust.
10.22* Warrant Agreement, dated June 3, 1998, between 2744 Associates, L.P. and Hersha
Hospitality Limited Partnership.
10.23* Hersha Hospitality Trust Option Plan
10.24* Hersha Hospitality Trust Non-Employee Trustees' Option Plan
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2** Consent of Moore Stephens, P.C.
24.1 Power of Attorney (included on signature page)
99.1* Consent of Bharat C. Mehta to be named as a Trustee nominee
99.2* Consent of K. D. Patel to be named as a Trustee nominee
99.3* Consent of L. McCarthy Downs, III to be named as a Trustee nominee
99.4* Consent of Everette G. Allen, Jr. to be named as a Trustee nominee
99.5* Consent of Mark R. Parthemer to be named as a Trustee nominee
</TABLE>
- ------------
* Previously filed.
**Filed herewith.
Item 37. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 34 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:
(1) For the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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;
(2) For purposes of determining any liability under the Securities Act
of 1933, 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 Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Harrisburg,
State of Pennsylvania, on the 7th day of December, 1998.
Hersha Hospitality Trust,
a Maryland real estate investment trust
(Registrant)
By: /s/ Hasu P. Shah
----------------------------------
Hasu P. Shah
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 7th day
of December, 1998 in the capacities indicated.
Signature Title
/s/ Hasu P. Shah Chairman of the Board of Trustees, Chief
- ----------------------- Executive Officer and Trustee
Hasu P. Shah (Principal Executive Officer)
/s/ Kiran P. Patel Chief Financial Officer and Treasurer
- ----------------------- (Principal Financial and Accounting Officer)
Kiran P. Patel
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Document Numbered Page
- ------- -------- -------------
<S> <C> <C>
1.1* Form of Underwriting Agreement
1.2* Form of Selected Dealer Agreement
3.1** Amended and Restated Declaration of Trust of the Registrant
3.2* Bylaws of the Registrant
4.1* Form of Common Share Certificate
5.1 Opinion of Hunton & Williams
8.1** Opinion of Hunton & Williams as to Tax Matters
10.1** Form of First Amended and Restated Agreement of Limited Partnership of Hersha Hospitality
Limited Partnership
10.2* Contribution Agreement, dated as of June 3, 1998, between Hasu
P. Shah and Bharat C. Mehta, as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror.
10.3* Contribution Agreement, dated as of June 3, 1998, between Shree Associates, JSK Associates,
Shanti Associates, Shreeji Associates, Kunj Associates, Devi Associates, Neil H. Shah, David L.
Desfor, Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd., as Contributor,
and Hersha Hospitality Limited Partnership, as Acquiror.
10.4* Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates,
Shreeji Associates, Kunj Associates, Devi Associates, Neil H. Shah, David L. Desfor and
Shreenathji Enterprises, Ltd. as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror.
10.5* Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror.
10.6* Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates,
Shreeji Associates, Kunj Associates, Neil H. Shah, David L. Desfor, Madhusudan I. Patni,
Manhar Gandhi and Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror.
10.7* Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates,
Shreeji Associates, Kunj Associates, Neil H. Shah, Madhusudan I. Patni and Shreenathji
Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.8* Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror.
10.9* Contribution Agreement, dated as of June 3, 1998, between JSK Associates, Shanti Associates,
Shreeji Associates, Kunj Associates, Neil H. Shah, David L. Desfor and Shreenathji Enterprises,
Ltd., as Contributor, and Hersha Hospitality Limited Partnership, as Acquiror.
10.10* Contribution Agreement, dated as of June 3, 1998, between 2144 Associates, as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror.
10.11* Contribution Agreement, dated as of June 3, 1998, between 144 Associates, 344 Associates, 544
Associates and 644 Associates, Joint Tenants Doing Business as 2544 Associates, as Contributor,
and Hersha Hospitality Limited Partnership, as Acquiror.
10.12* Contribution Agreement dated June 3, 1998, between Shree Associates, as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror.
10.13* Contribution Agreement dated June 3, 1998, between 2144 Associates, as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror.
10.14* Contribution Agreement dated June 3, 1998, between 144 Associates, 344 Associates, 544
Associates and 644 Associates, Joint Tenants Doing Business as 2544 Associates, as Contributor,
and Hersha Hospitality Limited Partnership, as Acquiror.
10.15* Contribution Agreement, dated June 3, 1998, between Shree Associates, Devi Associates, Shreeji
Associates, Madhusudan I. Patni and Shreenathji Enterprises, Ltd., as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror.
10.16* Contribution Agreement, dated June 3, 1998, between Shree
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror.
II-6
<PAGE>
10.17* Form of Ground Lease
10.18** Form of Percentage Lease
10.19* Option Agreement, dated June 3, 1998, between Hasu P. Shah, Jay H. Shah, Neil H. Shah,
Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L. Desfor,
Madhusudan I. Patni and Manhar Gandhi, and Hersha Hospitality Limited Partnership.
10.19(a)** Amendment to Option Agreement, dated December 4, 1998, between Hasu P. Shah, Jay H. Shah,
Neil H. Shah, Bharat C. Mehta, Kanti D. Patel, Rajendra O. Gandhi, Kiran P. Patel, David L.
Desfor, Madhusudan I. Patni and Manhar Gandhi, and Hersha Hospitality Limited Partnership.
10.20* Administrative Services Agreement, dated ______________, 1998, between Hersha Hospitality
Trust and Hersha Hospitality Management, L.P.
10.21* Warrant Agreement, dated _____________, 1998, between Anderson & Strudwick, Inc. and
Hersha Hospitality Trust.
10.22* Warrant Agreement, dated June 3, 1998, between 2744 Associates, L.P. and Hersha Hospitality
Limited Partnership.
10.23* Hersha Hospitality Trust Option Plan
10.24* Hersha Hospitality Trust Non-Employee Trustees' Option Plan
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2** Consent of Moore Stephens, P.C.
24.1 Power of Attorney (included on signature page)
99.1* Consent of Bharat C. Mehta to be named as a Trustee nominee
99.2* Consent of K. D. Patel to be named as a Trustee nominee
99.3* Consent of L. McCarthy Downs, III to be named as a Trustee nominee
99.4* Consent of Everette G. Allen, Jr. to be named as a Trustee nominee
99.5* Consent of Mark R. Parthemer to be named as a Trustee nominee
</TABLE>
- ---------------------
* Previously filed.
**Filed herewith.
II-7
Exhibit 3.1
HERSHA HOSPITALITY TRUST
ARTICLES OF AMENDMENT AND RESTATEMENT
Hersha Hospitality Trust, a Maryland real estate investment trust (the
"Trust") formed 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 as hereinafter amended.
FIRST: The following provisions are all of the provisions of the
Declaration of Trust currently in effect and as hereinafter 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 Internal Revenue Code of 1986, as amended (the "Code").
ARTICLE II
NAME
The name of the Trust is:
Hersha Hospitality 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
property and interests in property, including, without limitation or obligation,
engaging in business as a REIT under 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 Declaration of Trust as
filed for record with the State Department of Assessment and Taxation of
Maryland, and any amendments or supplements thereto (the "Declaration of Trust")
that are not inconsistent with law and are appropriate to promote and attain the
purposes set forth in the Declaration of Trust.
ARTICLE IV
RESIDENT AGENT
The name of the resident agent of the Trust in the State of Maryland is
James J. Hanks, Jr., 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.
-2-
<PAGE>
ARTICLE V
BOARD OF TRUSTEES
Section 1. Powers.
(A) Subject to any express limitations contained in the
Declaration of Trust or in the Bylaws of the Trust ("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 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 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 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 use any
and all commercially
-3-
<PAGE>
reasonable efforts 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 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 two 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 (1999)
and another class ("Class II") to hold office initially for a term expiring at
the second succeeding annual meeting of shareholders (2000), with the Trustees
of each class to hold office until their successors are duly elected and
qualified. 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 second
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 pursuant to the Bylaws. The name, address
and class of the Trustees who shall serve until their successors are duly
elected and qualified are:
-4-
<PAGE>
Name Address Class
- ---- ------- -----
Hasu P. Shah 148 Sheraton Drive Class II
Box A
New Cumberland, PA 17070
Bharat C. Mehta 148 Sheraton Drive Class II
Box A
New Cumberland, PA 17070
K.D. Patel 148 Sheraton Drive Class II
Box A
New Cumberland, PA 17070
L. McCarthy Downs, III 707 E. Main Street Class I
20th Floor
Richmond, VA 23219
Everette G. Allen, Jr. The Federal Reserve Bank Building Class I
701 East Byrd Street
Richmond, Virginia 23219
Thomas S. Capello 2951 Whiteford Road Class II
York, Pennsylvania 17402
Mark R. Parthemer Penn National Insurance Tower Class I
2 North Second Street, 7th Floor
Harrisburg, Pennsylvania 17101
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 in the manner provided in the Bylaws. The Independent Trustees (as
hereinafter defined) shall nominate replacements for vacancies among the
Independent Trustees' positions. In the event that, after the closing of the
Initial Public Offering (as hereinafter defined), three members 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, it shall be a qualification for any individual elected to fill
such vacancy that he satisfy the requirements of Section 4 of this Article V for
being an Independent Trustee. It shall not be necessary to list in the
Declaration of Trust the names and addresses of any Trustees hereinafter
elected.
Section 3. Resignation or Removal. 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
or remove 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), three members of the Board
of Trustees shall be comprised of persons who are not officers, directors or
employees of the Trust, any lessee of the Trust's or the Partnership's
properties or any underwriter or placement agent of the shares of beneficial
interest of the Trust that has been engaged by the Trust within the past three
years, or any "Affiliates" thereof (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
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common control with such person, (ii) any other person that owns, beneficially,
directly or indirectly, five percent (5%) or more of the outstanding capital
shares, shares or equity interests 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, real
estate investment 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.
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 : (i) one hundred million (100,000,000) common shares of
beneficial interest, $.01 par value per share ("Common Shares"), of which fifty
million (50,000,000) will be Priority Class A Common Shares (the "Priority
Common Shares") and fifty million (50,000,000) will be Class B Common Shares
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(the "Class B Common Shares"); and (ii) ten million (10,000,000) preferred
shares of beneficial interest, $.01 par value per share ("Preferred Shares"). If
Shares of one class are classified or reclassified into Shares of another class
pursuant to this Article VI, the number of authorized Shares of the former class
shall be automatically decreased and the number of Shares of the latter class
shall be automatically increased, in each case by the number of Shares so
classified or reclassified, so that the aggregate number of Shares of all
classes that the Trust has the authority to issue shall not be more than the
total number of Shares set forth in the second sentence of this paragraph. The
Board of Trustees, without any action by the shareholders of the Trust, may
amend the Declaration of Trust from time to time to increase or decrease the
aggregate number of Shares or the number of Shares of any class that the 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 holders of the
Priority Common Shares and the Class B Common Shares shall vote together as a
single class. The Board of Trustees may reclassify any unissued Common Shares
from time to time in one or more classes or series of Shares.
(a) Priority Class A Common Shares. The holders of the Priority Common
Shares shall be entitled to the following rights (the "Priority Rights") during
the period beginning on the date of the closing of the initial public offering
of the Priority Common Shares (the "Offering"), and ending on the earlier of:
(i) the date that is 15 trading days after the Company sends notice to the
record holders of the Priority Common Shares that their Priority
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Rights will terminate in 15 trading days, provided that the closing bid
price of the Priority Common Shares is at least $7.00 on each trading
day during such 15-day period; or (ii) the fifth anniversary of the
closing of the Offering (the "Priority Period"). A "trading day" shall
mean a day on which the principal national securities exchange on which
the Priority Common Shares are listed or admitted to trading is open for
the transaction of business or, if the Priority Common 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.
Notwithstanding the foregoing, the Priority Period shall not end until
the holders of the Priority Common Shares have received any accrued, but
unpaid, Priority Distributions.
(i) The Dividend Priority. The holders of the
Priority Common Shares shall be entitled to receive, prior to
any distributions to the holders of the Class B Common Shares,
cumulative dividends in an amount per Priority Common Share
equal to $.18 per quarter (the "Priority Distribution"). After
the holders of the Class B Common Shares have received an
amount per Class B Common Share equal to the Priority
Distribution, the holders of the Priority Common
Shares shall be entitled to receive any further
distributions on a pro rata basis with the holders of
the Class B Common Shares. After the Priority Period,
the holders of the Priority Common Shares shall be
entitled to receive any further distributions on a pro
rata basis with the holders of the Class B Common
Shares. The dividends paid to the holders of the
Priority Common Shares will be subject to the rights
of any class or series of Preferred Shares.
No dividend will be declared or paid or other
distribution of cash or other property declared or made
directly by the Company or any person acting on behalf of the
Company on any shares of beneficial interest that rank junior
to the Priority Common Shares as to the payment of dividends
or
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amounts upon liquidation, dissolution and winding up ("Junior
Shares") unless full cumulative dividends have been declared
and paid or are contemporaneously declared and funds
sufficient for payment set aside on the Priority Common Shares
for all prior and contemporaneous dividend periods; provided,
however, that if accumulated and accrued dividends on the
Priority Common Shares for all prior and contemporaneous
dividend periods have not been paid in full then any dividend
declared on the Priority Common Shares for any dividend period
and on any shares of beneficial interest of the Company that
rank on parity with the Priority Common Shares as to the
payment of dividends or amounts upon liquidation, dissolution
and winding up ("Parity Shares") will be declared ratably in
proportion to accumulated, accrued and unpaid dividends on the
Priority Common Shares and such Parity Shares.
No distributions on the Priority Common Shares shall
be authorized by the Board of Trustees or paid or set apart
for payment by the Company at such time as the terms and
provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such
authorization, payment or setting apart for payment or
provides that such authorization, payment or setting apart for
payment would constitute a breach thereof or a default
thereunder, or if such authorization or payment shall be
restricted or prohibited by law. Any distribution payment made
on
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the Priority Common Shares shall first be credited against
the earliest accrued but unpaid distribution due with respect
to such shares which remains payable.
(ii) Liquidation Preference. In the event of any
liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, during the Priority Period, the
holders of the Priority Common Shares shall be entitled to
receive, prior to any liquidating payments to the holders of
the Class B Common Shares, $6.00 per Priority Common Share (the
"Liquidation Preference"), plus any accumulated and unpaid
Priority Distributions (whether or not declared) on the
Priority Common Shares to the date of distribution. After the
holders of the Class B Common Shares have received an amount
equal to the Liquidation Preference plus any accumulated and
unpaid Priority Distributions (whether or not declared) on the
Class B Common Shares to the date of distribution, the holders
of the Priority Common Shares shall share ratably with the
holders of the Class B Common Shares in the assets of the
Company. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary,
after the Priority Period, the holders of the Priority Common
Shares shall share ratably with the holders of the Class B
Common Shares in the assets of the Company. The rights of the
holders of the Priority Common Shares to liquidating payments
shall be subject to rights of any class or series of
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Preferred Shares.
If, upon any liquidation, dissolution or winding up
of the Company, the assets of the Company, or proceeds
thereof, distributable among the holders of the Priority
Common Shares are insufficient to pay in full the Liquidation
Preference and all accumulated and unpaid dividends with
respect to any of the Parity Shares, then such assets or the
proceeds thereof will be distributed among the holders of the
Priority Common Shares and any such Parity Shares ratably in
accordance with the respective amounts that would be payable
on the Priority Common Shares and such Parity Shares if all
amounts payable thereon were paid in full. None of (i) a
consolidation or merger of the Company with another
corporation, (ii) a statutory share exchange by the Company or
(iii) a sale or transfer of all or substantially all of the
Company's assets will be considered a liquidation, dissolution
or winding up, voluntary or involuntary, of the Company.
(b) The Class B Common Shares
(i) Dividends. Subject to the preferential
rights of the Priority Common Shares during the Priority
Period or of any other shares or series of beneficial interest
and to the provisions of this Declaration of Trust
regarding the restriction on the transfer of shares of
beneficial interest, holders of Class B Common Shares are
entitled to receive dividends on shares if, as and when
authorized and declared by the Board of
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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. In the event that the Company at
any time is unable to pay to the holders of the Class B Common
Shares an amount per Class B Common Share equal to the
Priority Distribution, during the Priority Period the holders
of the Class B Common Shares shall be entitled to receive an
amount such that the cumulative amount received per Class B
Common Share is equal to the cumulative Priority Distribution
received per Priority Common Share. The Company shall pay such
amounts at such subsequent dividend payment dates that the
Company has cash available for distribution to shareholders to
pay such dividends.
(ii) Conversion. Upon termination of the Priority
Period, the Class B Common Shares automatically will be
converted into Priority Common Shares on a one-for-one basis,
subject to adjustment as described in this Article VI, Section
2(b)(ii) (the "Conversion Ratio"). A notice informing holders
of the Class B Common Shares of such conversion will be mailed
by the Company to the holders of record of the Class B Common
Shares as of the dividend payment record date for the next
dividend payable after the expiration of the Priority Period,
together with the dividend payable on such
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shares, at their respective addresses as they appear on the
share transfer records of the Company. No fewer than all of
the outstanding Class B Common Shares shall be converted.
If the expiration of the Priority Period falls after
a dividend payment record date and prior to the related
payment date, the holders of the Class B Common Shares at the
close of business on such record date will be entitled to
receive the dividend payable on such shares on the
corresponding dividend payment date, notwithstanding the
conversion of such shares prior to such dividend payment date.
Upon expiration of the Priority Period, each holder
of Class B Common Shares (unless the Company defaults in the
delivery of the Priority Common Shares) will be, without any
further action, deemed a holder of the amount of Priority
Common Shares, as the case may be, for which such Class B
Common Shares are convertible. Fractional Priority Common
Shares will not be issued upon conversion of the Class B
Common Shares.
(iii) Conversion Ratio Adjustments. The Conversion
Ratio is subject to adjustment upon certain events, including
(i) the payment of dividends (and other distributions) payable
in Priority Common Shares on any class of shares of beneficial
interest of the Company, (ii) subdivisions, combinations and
reclassifications of Priority Common Shares and (iii)
distributions to all holders of Priority Common Shares of
evidences of indebtedness of the
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Company or assets (including securities, but excluding those
dividends, rights, warrants and distributions referred to in
clause (i) or (ii) above and dividends and distributions paid
in cash). In addition to the foregoing adjustments, the
Company will be permitted to make such reductions in the
Conversion Ratio as it considers to be advisable in order that
any event treated for Federal income tax purposes as a
dividend of Shares or share rights will not be taxable to the
holders of the Class B Common Shares or, if that is not
possible, to diminish any income taxes that are otherwise
payable because of such event.
No adjustment of the Conversion Ratio is required to
be made in any case until cumulative adjustments amount to 1%
or more of the Conversion Ratio. Any adjustments not so
required to be made will be carried forward and taken into
account in subsequent adjustments.
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 class or series from time to time, in one or more
classes or 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,
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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 3 may be made dependent upon facts or events
ascertainable outside the Declaration of Trust (including the occurrence of any
event, including a determination by the Trust or any other person or body) 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 Declaration of Trust or the Bylaws. Notwithstanding any other
provision in the 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
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the Code.
Section 6. Dividends and Distributions. The Board of Trustees may from
time to time authorize to shareholders 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 authorize the Trust to 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 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.
Notwithstanding any other provision in the 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 not to constitute
"transferable shares" or "transferable certificates of beneficial interest"
under Section 856(a)(2) of the Code or that would cause any distribution to
constitute a preferential dividend as described in Section 562(c) of the Code.
Section 7. General Nature of Shares. All Shares shall be personal
property entitling the shareholders only to those rights provided in the
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.
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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. Declaration of Trust and Bylaws. All shareholders are
subject to the provisions of the Declaration of Trust and the Bylaws of the
Trust.
Section 10. Divisions and Combinations of Shares. Subject to an express
provision to the contrary in the terms of any class or series of beneficial
interest hereafter authorized, the Board of Trustees shall have the power to
divide or combine the outstanding shares of any class or series of beneficial
interest, without a vote of the shareholders, so long as the number of shares
combined into one share in any such combination or series of combinations within
any period of twelve months is not greater than four.
ARTICLE VII
RESTRICTIONS ON TRANSFER AND SHARES-IN-TRUST
Section 1. Restrictions on Transfer.
(A) Definitions. For the purpose of this Article VII, the
following terms shall have the following meanings:
(i) "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 (a) directly (including through
a nominee or similar arrangement) or (b) indirectly through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the
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Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned"
shall have correlative meanings.
(ii) "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.
(iii) "Board of Trustees" shall mean the Board of
Trustees of the Trust.
(iv) "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
(v) "Constructive Ownership" shall mean ownership of
Equity Shares (or options to acquire Equity Shares) by a Person , whether the
interest in the Equity Shares is held directly or indirectly (including a
nominee or similar arrangement), and shall include interests that would be
treated as owned through the application of Section 318 of the Code, as modified
by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have correlative
meanings.
(vi) "Equity Shares" shall mean Shares of all classes
or series, including without limitation 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.
(vii) "Hersha Hospitality Partnership Agreement"
shall mean the
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agreement of limited partnership of Hersha Hospitality Limited Partnership, a
Virginia limited partnership, as amended and restated.
(viii) "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.
(ix) "Market Price" on any date shall mean, with
respect to any class or series of outstanding Equity Shares, 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 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 or, in the
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event that no trading price is available for such Equity Shares, the fair market
value of the Equity Shares, as determined in good faith 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.
(x) "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.
(xi) "Ownership Limit" shall mean 9.9% of the
aggregate number of outstanding Common Shares and 9.9% of the aggregate number
of outstanding shares of any class or series of Preferred Shares, in each case
considered separately on a class by class or series by series basis.
(xii) "Partnership" shall mean Hersha Hospitality
Limited Partnership, a Virginia limited partnership.
(xiii) "Partnership Unit" shall mean a fractional,
undivided share of the partnership interests of Hersha Hospitality Limited
Partnership, a Virginia limited partnership.
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(xiv) "Permitted Transferee" shall mean any Person
designated as a Permitted Transferee in accordance with the provisions of
Section 2(E) hereof.
(xv) "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.
(xvi) "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.
(xvii) "Redemption Rights" shall mean the rights
granted under the Hersha Hospitality Partnership Agreement to the limited
partners to redeem, under certain circumstances, their Partnership Units for
cash (or, at the option of the Trust, Common Shares).
(xviii) "REIT" shall mean a real estate investment
trust under Section 856 of the Code.
(xix) "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 Declaration of Trust to terminate the
provisions of this Article VII.
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(xx) "Shares-in-Trust" shall mean any Equity
Shares designated Shares-in-Trust pursuant to Section 1(C) hereof.
(xxi) "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.
(xxii) "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.
(xxiii) "Transfer" (as a noun) shall mean any
issuance, 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
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Owned by such Person in excess of the Ownership Limit and the intended
transferee shall acquire no rights in such excess Equity Shares.
(3) 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 the Equity Shares being beneficially owned by fewer than 100
Persons (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.
(4) Subject to Section 1(G) and 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; provided, however, that this Section 1(B)(4) shall not apply to
the Transfer of Equity Shares from the Trust to the underwriters of the Initial
Public Offering.
(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,
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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 or the Partnership'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.
(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
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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) result in the Trust being
"closely held" within the meaning of Section 856(h) of the Code, or (iii) 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, 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) result in the Equity Shares being beneficially owned by
fewer than 100 Persons (determined without reference to any rules of
attribution), (B) result in the Trust being "closely held" within the meaning of
Section 856(h) of the Code or (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 the Share Trust to
be held in accordance with that Section 2 and (z) the Prohibited Owner
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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 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
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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.
(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. In addition, the
Board of Trustees, upon receipt of advice of counsel or other evidence
satisfactory to the Board of Trustees, in its sole and absolute discretion, 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
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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 Declaration of Trust
shall preclude the settlement of any transaction entered into through the
facilities of the New York Stock Exchange. The fact that the settlement of any
transaction occurs shall not negate the effect of any other provision of this
Article VII and any transferee in such a transaction shall be subject to all of
the provisions and limitations set forth in this Article VII.
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
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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 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;
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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.
(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 Maryland 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; provided, however, that
if the Trust has already taken irreversible trust action, the Share Trustee
shall not have the authority to rescind and recast such vote.
(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
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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 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
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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 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
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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
substantially the following legend:
"The [Common or Preferred] Shares evidenced by this certificate are
subject to restrictions on transfer. Subject to certain further restrictions and
except as provided in the 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
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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 evidenced 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 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."
In place of the foregoing legend, the certificate may state that the
Trust will furnish a full statement about certain restrictions or
transferability to a shareholder on request and without charge.
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.
Section 7. Non-Waiver. No delay or failure on the part of the Trust or
the Board of Trustees in exercising any right hereunder shall operate as a
waiver of any right of the Trust or
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the Board of Trustees, as the case may be, except to the extent specifically
waived in writing.
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. 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 Declaration of Trust as provided in Article X; (d)
termination of the Trust as provided in Article XII, Section 2; (e) merger or
consolidation of the Trust, or the sale or disposition of substantially all of
the Trust Property (as hereinafter defined), 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
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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 or as otherwise may be provided by
contract, 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) and 3, Article X, Section 3 and Article XII, Section 2
of this Declaration of Trust, notwithstanding any provision of law permitting or
requiring action to be taken or authorized by the affirmative vote of the
holders of a greater number of votes, any such action shall be effective and
valid if taken or approved by the affirmative vote of holders of Shares entitled
to cast a majority of all of the votes entitled to be cast on the matter.
Section 5. Board Approval. The submission of any action to the
shareholders for their consideration shall first be approved as advised by the
Board of Trustees.
Section 6. Action By Shareholders Without a Meeting. The Bylaws 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 Declaration of Trust or the Bylaws, as the case may be.
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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 Declaration of Trust or Bylaws 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 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
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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 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 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, real estate
investment 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
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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 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.
ARTICLE X
AMENDMENTS
Section 1. General. The Trust reserves the right from time to time to
make any amendment to the Declaration of Trust, now or hereafter authorized by
law, including any amendment altering the terms or contract rights, as expressly
set forth in the Declaration of Trust, of any Shares. All rights and powers
conferred by this Declaration of Trust on shareholders, Trustees and officers
are granted subject to this reservation. An amendment to the 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
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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
Declaration of Trust shall include all amendments thereto.
Section 2. By Trustees. The Trustees by a majority vote may amend the
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 and Section 1 of Article VI, 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 of this 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; but in each case only after due authorization, advice and approval of
the Board of Trustees.
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 as advised 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, except where approval of the shareholders is not
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required by Title 8 or would not be required by the Maryland General Corporation
Law if the Trust were a Maryland corporation.
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, after due authorization, advice and approval thereof by a
majority of the entire Board of Trustees. Upon the termination of the Trust:
(i) The Trust shall carry on no business
except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the
affairs of the Trust and all of the powers of the Trustees under the Declaration
of Trust shall continue, including the powers to fulfill or discharge the
Trust's contracts, collect its assets, sell, convey, assign, exchange, transfer
or otherwise dispose of all or any part of the remaining 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.
(iii) After paying or adequately providing for the
payment of all
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<PAGE>
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
Section 1. Governing Law. The 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
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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 Declaration of Trust or of
the Bylaws as a true and complete copy as then in force; (e) an amendment to the
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 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 Declaration of Trust, even without any amendment
of the Declaration of Trust pursuant to Article X and without affecting or
impairing any of the remaining provisions of the 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 Declaration of Trust in the manner provided in Article
X, Section 2.
(B) If any provision of the 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
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<PAGE>
such provision in any other jurisdiction or any other provision of the
Declaration of Trust in any jurisdiction.
Section 4. Construction. In the 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 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, 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 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 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 Declaration of Trust or any part thereof. 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.
SECOND: These Articles of Amendment and Restatement have been duly
adopted by
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the Board of Trustees and approved by the Shareholders of the Trust as required
by law.
THIRD: The total number of shares of beneficial interest which the
Trust had authority to issue immediately prior to the filing of these Articles
of Amendment and Restatement was 1,000, all of which were common shares of
beneficial interest, par value $.01 per share. The aggregate par value of all
shares of beneficial interest having par value was $10.00.
The total number of shares of beneficial interest which the
Trust has authority to issue pursuant to these Articles of Amendment and
Restatement is 110,000,000, consisting of 100,000,000 common shares of
beneficial interest, par value $.01 per share and 10,000,000 of
preferred shares of beneficial interest, par value $.01 per share. The
aggregate par value of all authorized shares of beneficial interest
having par value is $110,000,000.
FOURTH: The undersigned Chairman of the Board of Trustees and Chief
Executive Officer acknowledges these Articles of Amendment and Restatement to be
the trust act of the Trust and, as to all matters or facts required to be
verified under oath, the undersigned Chairman of the Board of Trustees and Chief
Executive Officer acknowledges that, to the best of his knowledge, information
and belief, these matters are true in all material respects and that this
statement is made under the penalties for perjury.
IN WITNESS WHEREOF, the Trust has caused these Articles of Amendment
and Restatement to be signed in its name and on its behalf by its Chairman of
the Board of Trustees and Chief Executive Officer, and attest to by its
Secretary, on this ____ day of _________, 1998.
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HERSHA HOSPITALITY TRUST
ATTEST:
______________________________ ____________________________________
Secretary Hasu P. Shah
Chairman of the Board of Trustees
and Chief Executive Officer
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December 7, 1998
Hersha Hospitality Trust
148 Sheraton Drive, Box A
New Cumberland, Pennsylvania 17070
Hersha Hospitality Trust
Qualification as
Real Estate Investment Trust
Ladies and Gentlemen:
We have acted as counsel to Hersha Hospitality Trust, a
Maryland real estate investment trust (the "Company"), in connection with (i)
the preparation of a Form S-11 registration statement (the "Registration
Statement") filed with the Securities and Exchange Commission ("SEC") on June 4,
1998 (No. 333-56087), as amended through the date hereof, with respect to the
offering and sale (the "Offering") of 2,275,000 Priority Class A common shares
of beneficial interest, par value $0.01 per share, of the Company (the "Priority
Common Shares") and (ii) the Company's contribution of the net proceeds of the
Offering to Hersha Hospitality Limited Partnership, L.P., a Virginia limited
partnership (the "Operating Partnership"), in exchange for a general partnership
interest in the Operating Partnership. You have requested our opinion regarding
certain U.S. federal income tax matters in connection with the Offering.
The Company has contracted to acquire, through the Operating
Partnership, interests in ten hotels and associated personal property (the
"Hotels"). Upon the acquisition of the Hotels, four of the Hotels will be owned
by the Operating Partnership and eight of the Hotels will be owned by the
following subsidiary partnerships (the "Subsidiary Partnerships"): (i) 1244
Associates, a Pennsylvania limited partnership, (ii) 1444 Associates, a
Pennsylvania limited partnership, (iii) 1644 Associates, a Pennsylvania limited
partnership, (iv) 844 Associates, a Pennsylvania limited partnership, (v) 944
Associates, a Pennsylvania limited partnership, and (vi) MEPS Associates, a
Pennsylvania limited partnership. Hersha Hospitality, LLC, a wholly-owned
subsidiary of the Operating Partnership ("Hersha LLC"), is the general partner,
and the Operating Partnership is the limited partner, of each Subsidiary
Partnership. The Operating Partnership and the Subsidiary Partnerships plan to
lease the Hotels to Hersha Hospitality Management, L.P., a Pennsylvania limited
partnership (the "Lessee"), pursuant to substantially similar operating lease
agreements (the "Leases").
In giving this opinion letter, we have examined the following:
1. the Company's Amended and Restated Declaration of Trust, in the form filed as
an exhibit to the Registration Statement;
2. the Company's Bylaws, in the form filed as an exhibit to the Registration
Statement;
3. the Registration Statement, including the prospectus contained as part
thereof (the "Prospectus");
4. the Agreement of Limited Partnership of the Operating Partnership, dated May
27, 1998, between the Company, as general partner, and Hasu P. Shah, as limited
partner;
5. the Amended and Restated Agreement of Limited Partnership of the Operating
Partnership (the "Operating Partnership Agreement") among the Company, as
general partner, and several limited partners, in the form filed as an exhibit
to the Registration Statement;
6. the Amended and Restated Limited Partnership Agreement of 1244 Associates
between Hersha LLC, as general partner, and the Operating Partnership, as
limited partner, in the form to be executed at closing;
7. the Amended and Restated Limited Partnership Agreement of 1444 Associates
between Hersha LLC, as general partner, and the Operating Partnership, as
limited partner, in the form to be executed at closing;
8. the Amended and Restated Limited Partnership Agreement of 1644 Associates
between Hersha LLC, as general partner, and the Operating Partnership, as
limited partner, in the form to be executed at closing;
9. the Amended and Restated Limited Partnership Agreement of 844 Associates
between Hersha LLC, as general partner, and the Operating Partnership, as
limited partner, in the form to be executed at closing;
10. the Amended and Restated Limited Partnership Agreement of 944 Associates
between Hersha LLC, as general partner, and the Operating Partnership, as
limited partner, in the form to be executed at closing;
11. the Amended and Restated Limited Partnership Agreement of MEPS Associates
between Hersha LLC, as general partner, and the Operating Partnership, as
limited partner, in the form to be executed at closing;
12. the Form of Lease between the Operating Partnership and the Lessee, in the
form filed as an exhibit to the Registration Statement;
13. the Form of Administrative Services Agreement between the Company and the
Lessee in the form filed as an exhibit to the Registration Statement; and
14. such other documents as we have deemed necessary or appropriate for purposes
of this opinion.
In connection with the opinions rendered below, we have
assumed, with your consent, that:
1. each of the documents referred to above has been duly authorized, executed,
and delivered; is authentic, if an original, or is accurate, if a copy; and has
not been amended;
2. during its short taxable year ending December 31, 1998 and future taxable
years, the Company will operate in a manner that will make the representations
contained in a certificate, dated November 30, 1998 and executed by a duly
appointed officer of the Company (the "Officer's Certificate"), true for such
years;
3. the Company will not make any amendments to its organizational documents, the
Operating Partnership Agreement, or the partnership agreements of the Subsidiary
Partnerships (the "Subsidiary Partnership Agreements") after the date of this
opinion that would affect its qualification as a real estate investment trust (a
"REIT") for any taxable year;
4. each partner of the Operating Partnership (a "Partner") that is a corporation
or other entity has a valid legal existence;
5. each Partner has full power, authority, and legal right to enter into and to
perform the terms of the Operating Partnership Agreement and the transactions
contemplated thereby; and
6. no action will be taken by the Company, the Operating Partnership, the
Subsidiary Partnerships, or the Partners after the date hereof that would have
the effect of altering the facts upon which the opinions set forth below are
based.
In connection with the opinions rendered below, we also have
relied upon the correctness of the representations contained in the Officer's
Certificate. Furthermore, where such factual representations involve matters of
law, we have explained to the Company's representatives the relevant and
material sections of the Internal Revenue Code of 1986, as amended (the "Code"),
the Treasury regulations thereunder (the "Regulations"), published rulings of
the Internal Revenue Service (the "Service"), and other relevant authority to
which such representations relate and are satisfied that the Company's
representatives understand such provisions and are capable of making such
representations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Consequences" (which is
incorporated herein by reference), we are of the opinion that:
(a) commencing with the Company's short taxable year beginning
on the day before the closing of the Offering and ending December 31,
1998, the Company will qualify to be taxed as a REIT pursuant to
sections 856 through 860 of the Code, and the Company's organization
and proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code;
(b) the descriptions of the law and the legal conclusions
contained in the Prospectus under the caption "Federal Income Tax
Consequences" are correct in all material respects, and the discussion
thereunder fairly summarizes the federal income tax considerations that
are likely to be material to a holder of the Priority Common Shares;
and
(c) the Operating Partnership will be treated for federal
income tax purposes as a partnership and not as a corporation or an
association taxable as a corporation or as a publicly traded
partnership.
We will not review on a continuing basis the Company's
compliance with the documents or assumptions set forth above, or the
representations set forth in the Officer's Certificate. Accordingly, no
assurance can be given that the actual results of the Company's operations for
any given taxable year will satisfy the requirements for qualification and
taxation as a REIT.
The foregoing opinions are based on current provisions of the
Code and the Regulations, published administrative interpretations thereof, and
published court decisions. The Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will not
change in a way that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement. We also consent to the references to Hunton &
Williams under the captions "Tax Status," "Tax Risks," "Federal Income Tax
Consequences," and "Legal Matters" in the Prospectus. In giving this consent, we
do not admit that we are in the category of persons whose consent is required by
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal income
tax matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion letter
is solely for the information and use of the addressee and the purchasers of the
Priority Common Shares pursuant to the Prospectus, and it speaks only as of the
date hereof. This opinion letter may not be distributed, relied upon for any
purpose by any other person, quoted in whole or in part or otherwise reproduced
in any document, or filed with any governmental agency without our express
written consent.
Very truly yours,
Hunton & Williams
EXHIBIT 10.1
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HERSHA HOSPITALITY LIMITED PARTNERSHIP
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
ARTICLE I
DEFINED TERMS................................................................................................... 1
ARTICLE II
FORMATION OF PARTNERSHIP........................................................................................ 8
2.01 Name, Office and Registered Agent.................................................... 8
2.02 Partners............................................................................. 9
2.03 Term and Dissolution................................................................. 9
2.04 Filing of Certificate and Perfection of Limited Partnership.......................... 10
2.05 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....................................................... 19
5.07 Substantial Economic Effect.......................................................... 19
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
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....................................... 23
6.04 Liability of the General Partner..................................................... 24
6.05 Partnership Obligations.............................................................. 25
6.06 Outside Activities................................................................... 26
6.07 Employment or Retention of Affiliates................................................ 26
6.08 General Partner Participation........................................................ 26
6.09 Title to Partnership Assets.......................................................... 27
6.10 Miscellaneous........................................................................ 27
ARTICLE VII
CHANGES IN GENERAL PARTNER...................................................................................... 27
7.01 Transfer of the General Partner's Partnership Interest............................... 27
7.02 Admission of a Substitute or Additional General...................................... 29
7.03 Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General
Partner.............................................................................. 30
7.04 Removal of a General Partner......................................................... 31
ARTICLE VIII
RIGHTS AND OBLIGATIONS
OF THE LIMITED PARTNERS......................................................................................... 32
8.01 Management of the Partnership........................................................ 32
8.02 Power of Attorney.................................................................... 32
8.03 Limitation on Liability of Limited Partners.......................................... 32
8.04 Ownership by Limited Partner of Corporate General Partner or
Affiliate............................................................................ 32
8.05 Redemption Right..................................................................... 33
ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP INTERESTS...................................................................... 39
9.01 Purchase for Investment.............................................................. 39
9.02 Restrictions on Transfer of Limited Partnership Interests............................ 40
9.03 Admission of Substitute Limited Partner.............................................. 41
9.04 Rights of Assignees of Partnership Interests......................................... 42
9.05 Effect of Bankruptcy, Death, Incompetence or Termination of a
Limited Partner...................................................................... 43
9.06 Joint Ownership of Interests......................................................... 43
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS...................................................................... 43
10.01 Books and Records...................................................................... 43
10.02 Custody of Partnership Funds; Bank Accounts............................................ 44
10.03 Fiscal and Taxable Year................................................................ 44
10.04 Annual Tax Information and Report...................................................... 44
10.05 Tax Matters Partner; Tax Elections; Special Basis Adjustments.......................... 44
10.06 Reports to Limited Partners............................................................ 45
ARTICLE XI
AMENDMENT OF AGREEMENT; MERGER.................................................................................. 45
ARTICLE XII
GENERAL PROVISIONS.............................................................................................. 46
12.01 Notices................................................................................ 46
12.02 Survival of Rights..................................................................... 46
12.03 Additional Documents................................................................... 46
12.04 Severability........................................................................... 46
12.05 Entire Agreement....................................................................... 47
12.06 Pronouns and Plurals................................................................... 47
12.07 Headings............................................................................... 47
12.08 Counterparts........................................................................... 47
12.09 Governing Law.......................................................................... 47
EXHIBITS
EXHIBIT A - Partners, Capital Contributions and Percentage Interests
EXHIBIT B - Notice of Exercise of Redemption Right
EXHIBIT C - Certification of Non-Foreign Status
</TABLE>
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AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HERSHA HOSPITALITY LIMITED PARTNERSHIP
RECITALS
Hersha Hospitality Limited Partnership (the "Partnership") was formed
as a limited partnership under the laws of the Commonwealth of Virginia,
pursuant to a Certificate of Limited Partnership filed with the Virginia State
Corporation Commission effective as of _____________, 1998. This Amended and
Restated Agreement of Limited Partnership is entered into this ___ day of
_______, 1998 among Hersha Hospitality 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
Agreement of Limited Partnership.
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 Agreement of Limited Partnership 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 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 other than
in its role as General Partner.
"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, member, manager 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 such Partner
and the General Partner. 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.
"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 Redemption.
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"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.
"Class A Common Share" means one Priority Class A common share of
beneficial interest in the Company.
"Class B Common Share" means one Class B common share of beneficial
interest in the Company. At the end of the Priority Period, all Class B Common
Shares will be automatically converted into Class A Common Shares.
"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.
"Company" means Hersha Hospitality Trust, a Maryland real estate
investment trust.
"Consent Period" means the period beginning on the date of the closing
of the Offering and ending on the last day of the first twelve calendar month
period after the date of the closing of the Offering in which the Company fails
to declare aggregate distributions to holders of the Class A Common Shares of
at least $0.72 per Class A Common Share in that twelve calendar month period.
"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 and, provided further, that in the event
that an entity other than an Affiliate of the Company shall become General
Partner pursuant to any merger, consolidation or combination of the Company with
or into another entity (the "Successor Entity"), the Conversion Factor shall be
adjusted by multiplying the Conversion Factor by the number of shares of the
Successor Entity into which one REIT Share is converted pursuant to such merger,
consolidation or combination, determined as of the date of such merger,
consolidation or combination. 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 Redemption 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 Redemption immediately prior to the record date for such dividend,
distribution, subdivision or combination.
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<PAGE>
"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.
"General Partner" means the Company 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.
"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 Trustee" shall have the same meaning ascribed to it in the
Declaration of Trust.
"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.
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"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(g) hereof.
"Minimum Limited Partnership Interest" means the lesser of (i) 1% or
(ii) if the total Capital Contributions to the Partnership exceed $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 Redemption" means the Notice of Exercise of Redemption Right
substantially in the form attached as Exhibit B hereto.
"NYSE" means the New York Stock Exchange.
"Offer" has the meaning set forth in Section 7.01(c) hereof.
"Offering" means the initial offer and sale by the Company and the
purchase by the Underwriters (as defined in the Prospectus) of Class A Common
Shares for sale to the public.
"Original Limited Partners" means the Limited Partners designated as
"Original Limited Partners" on Exhibit A hereto.
"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).
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"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, limited
liability company, joint venture, trust or other entity.
"Preference Value per Unit" means, during the Priority Period, the
preference value of $6 per Partnership Unit.
"Preferred Return" means, during the Priority Period, a fixed quarterly
rate of $0.18 per Partnership Unit. The Preferred Return (i) shall be
cumulative, (ii) if unpaid, shall not accrue interest, and (iii) shall be
prorated for any partial calendar quarter.
"Priority Period" means the period beginning on the date of the closing
of the Offering and ending on the earlier of: (i) the date that is 15 Trading
Days after the date that the Company mails notice to the holders of the Class A
Common Shares stating that their Priority Rights will terminate in 15 Trading
Days, provided that the closing bid price of the Class A Common Shares is at
least $7.00 on each Trading Day during such 15-day period, or (ii) the fifth
anniversary of the closing of the Offering. Notwithstanding the foregoing, the
Priority Period shall not end until the General Partner has received any
accrued, but unpaid, Preferred Return for the period described in the preceding
sentence.
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"Priority Rights" means the priority to which holders of the REIT
Shares are entitled with respect to distributions and amounts payable upon
liquidation during the Priority Period.
"Profit" has the meaning provided in Section 5.01(g) hereof.
"Property" means any hotel property or other investment in which the
Partnership holds an ownership interest.
"Prospectus" means the final prospectus delivered to purchasers of REIT
Shares in the Offering.
"Redemption Amount" means either the Cash Amount or the REIT Shares
Amount, as selected by the General Partner or as directed by the Redeeming
Partner pursuant to Section 8.05(b) hereof.
"Redemption Right" has the meaning provided in Section 8.05(a) hereof.
"Redeeming Partner" has the meaning provided in Section 8.05(a) hereof.
"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 any public
offering and registration of securities by the Company and all statements,
reports, fees and expenses incidental thereto, including, without limitation,
underwriting discounts and selling commissions applicable to any such offering
of securities, and any costs and expenses associated with any claims made by any
holders of such securities or any underwriters or placement agents thereof,
(iii) costs and expenses associated with any repurchase of any securities by the
Company, (iv) costs and expenses associated with the preparation and filing of
any periodic or other reports and communications by the Company under federal,
state or local laws or regulations, including filings with the Commission, (v)
costs and expenses associated with compliance by the Company with laws, rules
and regulations promulgated by any regulatory body, including the Commission and
any securities exchange, (vi) costs and expenses associated with any 401(k)
plan, incentive plan, bonus plan or other plan providing for compensation for
the employees of the Company, (vii) costs and expenses incurred by the Company
relating to any issuing or redemption of Partnership Interests and (viii) 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.
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"REIT Share" means a Class A Common Share or a Class B Common Share of
the Company (or Successor Entity, as the case may be).
"REIT Shares Amount" means a number of REIT Shares equal to the product
of the number of Partnership Units offered for redemption by a Redeeming
Partner, multiplied by the Conversion Factor as adjusted to and including the
Specified Redemption 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 Redemption Date, then the REIT Shares Amount
shall also include the rights issuable to a holder of the REIT Shares Amount on
the record date fixed for purposes of determining the holders of REIT Shares
entitled to rights. During the Priority Period, the REIT Shares Amount will be
determined with respect to the Class B Common Shares, and after the Priority
Period, the REIT Shares Amount will be determined with respect to the Class A
Common Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"Specified Redemption Date" means the first business day of the month
that is at least 60 calendar days after the receipt by the Company of a Notice
of Redemption.
"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 in which the Company, a
wholly-owned subsidiary of the Company or the Partnership owns a partnership
interest.
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"Substitute Limited Partner" means any Person admitted to the
Partnership as a Limited Partner pursuant to Section 9.03 hereof.
"Successor Entity" has the meaning provided in the definition of
"Conversion Factor" contained herein.
"Surviving General Partner" has the meaning set forth in Section
7.01(d) hereof.
"Trading Day" means a day on which the principal national securities
exchange on which a security is listed or admitted to trading is open for the
transaction of business or, if a security is 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.
"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 ______________________.
"Value" means, with respect to any security, the average of the daily
market price of such security 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 security is 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 security is 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 security is 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 security
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; and provided that the Value of a Class B Common Share shall be
deemed to be equal to the Value of a Class A Common Share. In the event the
security includes any additional rights, 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.
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ARTICLE II
FORMATION OF PARTNERSHIP
2.01 Name, Office and Registered Agent. The name of the Partnership is
Hersha Hospitality Limited Partnership. The specified office and place of
business of the Partnership shall be 148 Sheraton Drive, Box A, New Cumberland,
Pennsylvania 17070. 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
_________________________________________. 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.
2.02 Partners.
(a) The General Partner of the Partnership is Hersha
Hospitality Trust, a Maryland real estate investment trust. Its principal place
of business is the same as that of the Partnership.
(b) The Limited Partners are those Persons identified as
Limited Partners on Exhibit A hereto, as amended from time to time.
2.03 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);
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(iii) The redemption of all Limited Partnership
Interests (other than any of such interests held by the
General Partner or Affiliates of the General Partner); 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.
2.04 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.
2.05 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
Agreement of Limited Partnership of Hersha Hospitality Limited
Partnership, as amended from time to time.
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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 and absolute discretion to
cease qualifying as a REIT, the Partners acknowledge that the Company's current
status as a REIT and the avoidance of income and excise taxes on the Company
inures to the benefit of all the Partners and not solely to the Company.
Notwithstanding the foregoing, the Limited Partners agree that the Company may
terminate its status as a REIT under the Code at any time to the full extent
permitted under the Declaration of Trust. 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.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01 Capital Contributions. The General Partner and the Limited
Partners have made capital contributions to the Partnership in exchange for the
Partnership Interests set forth opposite their names on Exhibit A, as amended
from time to time.
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4.02 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) 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 unless:
(1)(A) the additional Partnership Interests are issued in
connection with an issuance of REIT Shares of or other interests in the
General Partner, 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
by the Partnership in accordance with this Section 4.02 and (B) the
General Partner 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 General Partner;
(2) the additional Partnership Interests are issued in
exchange for property owned by the General Partner with a fair market
value, as determined by the General Partner, in good faith, equal to
the value of the Partnership Interests; or
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(3) 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. The
General Partner 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 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 General Partner contributes the proceeds from the
issuance of such Additional Securities and from any exercise of rights contained
in such Additional Securities to the Partnership; provided, however, that the
General Partner is allowed to issue Additional Securities in connection with an
acquisition of a property to be held directly by the General Partner, but if and
only if, such direct acquisition and issuance of Additional Securities have been
approved and determined to be in the best interests of the General Partner 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 General Partner is expressly authorized to issue Additional
Securities for less than fair market value, and to cause the Partnership to
issue to the General Partner 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 and the Partnership, including without
limitation, the issuance of REIT Shares and corresponding Partnership Units
pursuant to an employee share 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
General Partner contributes all proceeds from such issuance to the Partnership.
For example, in the event the General Partner issues REIT Shares for a cash
purchase price and contributes all of the proceeds of such issuance to the
Partnership as required hereunder, the General Partner shall be issued a number
of additional Partnership Units equal to the product of (A) the number of such
REIT Shares issued by the General Partner, 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.
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(b) Certain Contributions of Proceeds of Issuance of REIT
Shares. In connection with any and all issuances of REIT Shares, the General
Partner shall make Capital Contributions to the Partnership of the proceeds
therefrom, provided that if the proceeds actually received and contributed by
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 shall make a Capital
Contribution of such net proceeds to the Partnership but shall receive
additional Partnership Units with a value equal to the aggregate amount of the
gross proceeds of such issuance pursuant to Section 4.02(a) hereof. Upon any
such Capital Contribution by the General Partner, the General Partner's Capital
Account shall be increased by the actual amount of its Capital Contribution
pursuant to Section 4.04 hereof.
(c) Minimum Limited Partnership Interest. In the event that
either a redemption pursuant to Section 8.05 hereof or additional Capital
Contributions by the General Partner would result in the Limited Partners (other
than the General Partner), in the aggregate, owning less than the Minimum
Limited Partnership Interest, the General Partner 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 General Partner) of such partnership own at least the Minimum Limited
Partnership Interest.
(d) If the General Partner shall repurchase shares of any
class of the General Partner's capital stock, the purchase price thereof and all
costs incurred in connection with such repurchase shall be reimbursed to the
General Partner by the Partnership pursuant to Section 6.05 hereof and the
General Partner shall cause the Partnership to cancel a number of Partnership
Interests of the appropriate class held by the General Partner equal to the
quotient of the number of such shares of the General Partner's capital stock
divided by the Conversion Factor.
4.03 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 any of its Affiliates provide such
Additional Funds to the Partnership through loans or otherwise.
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4.04 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 and absolute 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 and
absolute discretion, and taking into account Section 7701(g) of the Code) on the
date of the revaluation.
4.05 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 and absolute 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 No Interest on Contributions. No Partner shall be entitled to
interest on its Capital Contribution.
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4.07 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 any Partner or withdrawn Partner any part of such
Partner's Capital Contribution for so long as the Partnership continues in
existence.
4.08 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 Allocation of Profit and Loss.
(a) Profit . Profit of the Partnership for each fiscal year of
the Partnership shall be allocated as follows:
(i) First, to the General Partner until the aggregate
amount of profit allocated to the General Partner under this
Section 5.01(a)(i) for the current and all prior years equals
the aggregate Preferred Return distributed to the General
Partner under Section 5.02(a)(i) for the current and all prior
years;
(ii) Second, to the Limited Partners in accordance
with their respective Percentage Interests until the aggregate
amount of Profit allocated to the Limited Partners under this
Section 5.01(a)(ii) for the current and all prior years equals
the aggregate Preferred Return distributed to the Limited
Partners for the current and all prior years; and
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(iii) Thereafter, to the Partners in accordance with
their respective Percentage Interests.
(b) Loss. Loss of the Partnership for each fiscal year of the
Partnership shall be allocated to the Partners in accordance with their
respective Percentage Interests.
(c) 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 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.
(d) 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(d), 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(d).
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(e) Capital Account Deficits. Loss shall not be allocated to a
Limited 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
General Partner. After the occurrence of an allocation of Loss to the General
Partner in accordance with this Section 5.01(e), 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 each Partner under
this Section 5.01(e).
(f) 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 and absolute 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.
(g) 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 Sections 5.01(c) , 5.01(d) or 5.01(e). All allocations of 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 Partnership shall use the
traditional method for allocating items of income, gain and expense as required
by Section 704(c) of the Code with respect to the properties acquired by the
Partnership in connection with the Offering. With respect to other properties
acquired by the Partnership, 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 with respect to such
properties, and such election shall be binding on all Partners.
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5.02 Distribution of Cash.
(a) Subject to Section 5.02(c) hereof, during the Priority
Period, 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 and absolute discretion, to the Partners who
are Partners on the Partnership Record Date with respect to such quarter (or
other distribution period), as follows:
(i) First, to the General Partner until the General
Partner has received an amount equal to the excess, if any, of
(A) its cumulative Preferred Return for the current and all
prior years over (B) the sum of all prior distributions to the
General Partner pursuant to this Section 5.02(a)(i);
(ii) Second, to the Limited Partners in accordance
with their respective Percentage Interests on the Partnership
Record Date until each Limited Partner has received an amount
equal to the excess, if any, of (A) its cumulative Preferred
Return for the current and all prior years over (B) the sum of
all prior distributions to the Limited Partner pursuant to
this Section 5.02(a)(ii); and
(iii) Thereafter, to the Partners in accordance with
their respective Percentage Interests on the Partnership
Record Date.
(b) Subject to Section 5.02(c) hereof, after the Priority
Period, 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 and absolute 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.
(c) If a new or 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.
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(d) 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 a Partner or assignee (including by reason of Section
1446 of the Code), either (i) if the actual amount to be distributed to the
Partner (the "Distributable Amount") equals or exceeds the amount required to be
withheld by the Partnership (the "Withheld Amount"), the entire Distributable
Amount shall be treated as a distribution of cash to such Partner, or (ii) if
the Distributable Amount is less than the Withheld Amount, the excess of the
Withheld Amount over the Distributable Amount 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 and absolute 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 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(d) 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.
(e) 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 redeemed.
5.03 REIT Distribution Requirements. The General Partner shall use its
reasonable efforts to cause the Partnership to distribute amounts sufficient to
enable the General Partner to pay shareholder dividends that will allow the
General Partner 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, other than to the extent the
General Partner elects to retain and pay income tax on its net capital gain.
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5.04 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 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 Distributions Upon Liquidation. (a) During the Priority Period,
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 in the following order
of priority:
(i) First, to the General Partner until the General
Partner has received an amount equal to the sum of (A) the
excess of (I) its cumulative Preferred Return for the current
and all prior years over (II) the sum of all prior
distributions to the General Partner pursuant to Section
5.02(a)(i) hereof plus (B) an amount equal to the Preference
Value per Unit;
(ii) Second, to the Limited Partners in accordance
with their respective Percentage Interests until each Limited
Partner has received an amount equal to (A) the excess of (I)
its cumulative Preferred Return for the current and all prior
years over (II) the sum of all prior distributions to the
Limited Partner pursuant to Section 5.02(a)(ii) hereof plus
(B) an amount equal to the Preference Value per Unit; and
(iii) Thereafter, to all Partners with positive
Capital Accounts in accordance with their respective positive
Capital Account balances.
(b) After the Priority Period, 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.
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(c) For purposes of Sections 5.06(a)(iii) and 5.06(b), the
Capital Account of each Partner shall be determined after the following
adjustments: (i) 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, and (ii) allocating to the General
Partner an amount equal to the excess of (A) the value of the Partnership Units
it received in exchange for Capital Contributions of the proceeds of an issuance
of REIT Shares pursuant to Section 4.02(b) hereof over (B) the actual amount of
its Capital Contributions pursuant to Section 4.02(b) hereof (i.e., as a result
of any underwriters' discount or other expenses paid or incurred in connection
with such issuance).
(d) Any distributions pursuant to this Section 5.06 shall be
made by the end of the Partnership's taxable year in which the liquidation
occurs (or, if later, within 90 days after the date of the liquidation). To the
extent deemed advisable by the 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 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 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;
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(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,
any such indebtedness, and secure such indebtedness by
mortgage, deed of trust, pledge or other lien on the
Partnership's assets;
(v) to pay, either directly or by reimbursement, for
all operating costs and general administrative expenses of the
Partnership to third parties or to the General Partner or its
Affiliates as set forth in this Agreement;
(vi) to guarantee or become a comaker of indebtedness
of any Subsidiary of the Company, 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;
(vii) 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 General Partner,
the Partnership or any Subsidiary of either, to third parties
or to the General Partner as set forth in this Agreement;
(viii) 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;
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(ix) 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; provided, however,
that the General Partner may not, without the consent of all
of the Partners, confess a judgment against the Partnership
that is in excess of $20,000 or is not covered by insurance;
(x) 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;
(xi) to make or revoke any election permitted or
required of the Partnership by any taxing authority;
(xii) 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;
(xiii) to determine whether or not to apply any
insurance proceeds for any property to the restoration of such
property or to distribute the same;
(xiv) 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;
(xv) 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;
(xvi) 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;
(xvii) to maintain accurate accounting records and to
file promptly all federal, state and local income tax returns
on behalf of the Partnership;
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(xviii) to distribute Partnership cash or other
Partnership assets in accordance with this Agreement;
(xix) 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);
(xx) to establish Partnership reserves for working
capital, capital expenditures, contingent liabilities or any
other valid Partnership purpose;
(xxi) to merge, consolidate or combine the
Partnership with or into another person;
(xxii) 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; and
(xxiii) 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 General Partner at all
times to qualify as a REIT unless the General Partner
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.
6.02 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.
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6.03 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 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.
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(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 that 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.
(i) Any amendment, modification or repeal of this Section 6.03
or any provision hereof shall be prospective only and shall not in any way
affect the indemnification of an Indemnitee by the Partnership under this
Section 6.03 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.
6.04 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.
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(b) The Limited Partners expressly acknowledge that the
General Partner is acting on behalf of the Partnership and the General Partner's
shareholders collectively, that the General Partner is under no obligation to
consider the separate interests of the Limited Partners (including, without
limitation, the tax consequences to Limited Partners or the tax consequences of
some, 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 General Partner 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 General Partner or the Limited Partners; provided, however, that for so
long as the General Partner owns a controlling interest in the Partnership, any
such conflict that the General Partner, in its sole and absolute discretion,
determines cannot be resolved in a manner not adverse to either the shareholders
of the General Partner 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.
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6.05 Partnership Obligations.
(a) Except as provided in this Section 6.05 and elsewhere in
this Agreement (including the provisions of Articles 5 and 6 regarding
distributions, payments and allocations to which it may be entitled), the
General Partner shall not be compensated for its services as general partner of
the Partnership.
(b) All REIT Expenses and Administrative Expenses shall be
obligations of the Partnership, and the General Partner shall be entitled to
reimbursement by the Partnership for any expenditure (including REIT Expenses
and Administrative Expenses) incurred by it on behalf of the Partnership that
shall be made other than out of the funds of the Partnership.
6.06 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 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 that, if presented to the Partnership or any Limited Partner,
could be taken by such Person.
6.07 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 that 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.
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(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.
6.08 General Partner Participation. The General Partner agrees that all
business activities of the General Partner, including activities pertaining to
the acquisition, development or ownership of hotel property or other property,
shall be conducted through the Partnership or one or more Subsidiary
Partnerships; provided, however, that the General Partner is allowed to make a
direct acquisition, but if and only if, such acquisition is made in connection
with the issuance of Additional Securities, which direct acquisition and
issuance have been approved and determined to be in the best interests of the
General Partner and the Partnership by a majority of the Independent Trustees.
6.09 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.
6.10 Miscellaneous. In the event the General Partner redeems any REIT
Shares, then the General Partner shall cause the Partnership to purchase from
the General Partner a number of Partnership Units as determined based on the
application of the Conversion Factor on the same terms that the General Partner
redeemed such REIT Shares. Moreover, if the General Partner 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 to
acquire an equal number of Partnership Units held by the General Partner. In the
event any REIT Shares are redeemed by the General Partner pursuant to such
offer, the Partnership shall redeem an equivalent number of the General
Partner's Partnership Units for an equivalent purchase price based on the
application of the Conversion Factor.
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ARTICLE VII
CHANGES IN GENERAL PARTNER
7.01 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 or in connection with a transaction contemplated by Section 7.01(c),
(d) or (e).
(b) The General Partner agrees that its Percentage Interest
will at all times be in the aggregate at least 1%.
(c) Except as otherwise provided in Section 7.01(d) or (e)
hereof, the General Partner 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 (other than in connection with a change in the General
Partner's state of incorporation or organizational form), in each case which
results in a change of control of the General Partner (a "Transaction"), unless:
(i) the consent of Limited Partners (other than the
General Partner or any Subsidiary) holding more than 50% of
the Percentage Interests of the Limited Partners (other than
those held by the General Partner or any Subsidiary) is
obtained;
(ii) 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 that a Limited
Partner would have received had it (A) exercised its
Redemption Right and (B) sold, tendered or exchanged pursuant
to the Offer the REIT Shares received upon exercise of the
Redemption Right immediately prior to the expiration of the
Offer; or
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(iii) the General Partner is the surviving entity in
the Transaction and either (A) the holders of REIT Shares do
not receive cash, securities or other property in the
Transaction or (B) all Limited Partners (other than the
General Partner or any Subsidiary) receive an amount of cash,
securities or other property (expressed as an amount per REIT
Share) that is no less than the product of the Conversion
Factor and the greatest amount of cash, securities or other
property (expressed as an amount per REIT Share) received in
the Transaction by any holder of REIT Shares.
(d) Notwithstanding Section 7.01(c), 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
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 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.
In respect of any transaction described in the preceding
Paragraph, the General Partner is required to use its commercially reasonable
efforts to structure such transaction to avoid causing the Limited Partners to
recognize a gain for federal income tax purposes by virtue of the occurrence of
or their participation in such transaction, provided such efforts are consistent
with the exercise of the Board of Trustees' fiduciary duties to the shareholders
of the General Partner under applicable law.
(e) Notwithstanding Section 7.01(c),
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(i) a General Partner may transfer all or any portion
of its General Partnership Interest to (A) a wholly-owned
Subsidiary of such General Partner or (B) the owner of all of
the ownership interests of such General Partner, and following
a transfer of all of its General Partnership Interest, may
withdraw as General Partner; and
(ii) the General Partner may engage in a transaction
required by law or by the rules of any national securities
exchange on which the REIT Shares are listed to be submitted
to the vote of the holders of the REIT Shares.
7.02 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:
(a) 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;
(b) 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
(c) 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.
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7.03 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. The merger of the General Partner with or into any entity that is
admitted as a substitute or successor General Partner pursuant to Section 7.02
hereof shall not be deemed to be the withdrawal, dissolution or removal of the
General Partner.
(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 continue the business of the Partnership for the
balance of the term specified 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 consent of a majority in interest of the Limited Partners. If
the Limited Partners elect to continue the business of 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 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. The Limited Partners
may not remove the General Partner, with or without cause.
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(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 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.
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ARTICLE VIII
RIGHTS AND OBLIGATIONS
OF THE LIMITED PARTNERS
8.01 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 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 or 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 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.
8.04 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.
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8.05 Redemption Right.
(a) Subject to Sections 8.05(b), 8.05(c), 8.05(d), 8.05(e) and
8.05(f) and the provisions of any agreements between the Partnership and one or
more Limited Partners with respect to Partnership Units held by them, each
Limited Partner, other than the Company, shall have the right (the "Redemption
Right") to require the Partnership to redeem on a Specified Redemption Date all
or a portion of the Partnership Units held by such Limited Partner at a
redemption price equal to and in the form of the Cash Amount to be paid by the
Partnership, provided that such Partnership Units shall have been outstanding
for at least one year, except that such Partnership Units issued in connection
with the exercise of the warrants granted in connection with the initial public
offering of the General Partner shall be immediately redeemable. The Redemption
Right shall be exercised pursuant to a Notice of Redemption delivered to the
Partnership (with a copy to the General Partner) by the Limited Partner who is
exercising the Redemption Right (the "Redeeming Partner"); provided, however,
that the Partnership shall not be obligated to satisfy such Redemption Right if
the General Partner elects to purchase the Partnership Units subject to the
Notice of Redemption or the Redeeming Partner requires the General Partner to
purchase the Partnership Units for the REIT Shares Amount pursuant to Section
8.05(b); and provided, further, that no Limited Partner may deliver more than
two Notices of Redemption during each calendar year. A Limited Partner may not
exercise the Redemption 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 Redeeming Partner shall have no right, with
respect to any Partnership Units so redeemed, to receive any distribution paid
with respect to Partnership Units if the record date for such distribution is on
or after the Specified Redemption Date.
(b) Notwithstanding the provisions of Section 8.05(a), a
Limited Partner that exercises the Redemption Right shall be deemed to have
offered to sell the Partnership Units described in the Notice of Redemption to
the General Partner, and the General Partner may, in its sole and absolute
discretion, elect to purchase directly and acquire such Partnership Units by
paying to the Redeeming Partner either the Cash Amount or the REIT Shares
Amount, as elected by the General Partner (in its sole and absolute discretion),
on the Specified Redemption Date, whereupon the General Partner shall acquire
the Partnership Units offered for redemption by the Redeeming Partner and shall
be treated for all purposes of this Agreement as the owner of such Partnership
Units. If the General Partner shall elect to exercise its right to purchase
Partnership Units under this Section 8.05(b) with respect to a Notice of
Redemption, it shall so notify the Redeeming Partner within five Business Days
after the receipt by the General Partner of such Notice of Redemption. If the
General Partner elects to purchase Partnership Units for the REIT Shares Amount
during the Priority Period, the REIT Shares Amount shall consist of Class B
Common Shares. If the General Partner elects to purchase Partnership Units for
the REIT Shares Amount after the Priority Period, the REIT Shares Amount shall
consist of Class A Common Shares.
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Subject to Section 8.05(c) hereof, if the General Partner
either (i) does not exercise its right to purchase Partnership Units under this
Section 8.05(b) with respect to a Notice of Redemption or (ii) elects to
purchase such Partnership Units by paying to the Redeeming Partner the Cash
Amount instead of the REIT Shares Amount, then the Redeeming Partner may make a
written demand upon the General Partner that the General Partner purchase its
Partnership Units for the REIT Shares Amount. In the event the General Partner
shall exercise its right to purchase Partnership Units with respect to the
exercise of a Redemption Right in the manner described in the first sentence of
this Section 8.05(b) or a Redeeming Partner shall make a written demand that the
General Partner purchase its Partnership Units for the REIT Shares Amount in the
manner described in the preceding sentence, the Partnership shall have no
obligation to pay any amount to the Redeeming Partner with respect to such
Redeeming Partner's exercise of such Redemption Right, and each of the Redeeming
Partner, the Partnership and the General Partner shall treat the transaction
between the General Partner and the Redeeming Partner for federal income tax
purposes as a sale of the Redeeming Partner's Partnership Units to the General
Partner. Each Redeeming 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 Redemption Right.
(c) Notwithstanding the provisions of Section 8.05(a) and
8.05(b), a Limited Partner shall not be entitled to exercise the Redemption
Right if the delivery of REIT Shares to such Partner on the Specified Redemption
Date by the General Partner pursuant to Section 8.05(b) (regardless of whether
or not the General Partner 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 Declaration of Trust) 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), (iii) result in the General Partner being "closely held" within
the meaning of Section 856(h) of the Code, (iv) cause the General Partner 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, in its sole and absolute discretion, may
waive the restriction on redemption set forth in this Section 8.05(c); provided,
however, that in the event such restriction is waived, the Redeeming Partner
shall be paid the Cash Amount.
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(d) Any Cash Amount to be paid to a Redeeming Partner pursuant
to this Section 8.05 shall be paid on the Specified Redemption Date; provided,
however, that the General Partner may elect to cause the Specified Redemption
Date to be delayed for up to an additional 90 days to the extent required for
the General Partner 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 General Partner agrees to use its best efforts to cause the
closing of the acquisition of redeemed Partnership Units hereunder to occur as
quickly as reasonably possible.
(e) 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
that apply upon a Redeeming Partner's exercise of the Redemption Right. If a
Redeeming Partner believes that it is exempt from such withholding upon the
exercise of the Redemption Right, such Partner must furnish the General Partner
with a FIRPTA Certificate in the form attached hereto as Exhibit C. If the
Partnership or the General Partner is required to withhold and pay over to any
taxing authority any amount upon a Redeeming Partner's exercise of the
Redemption Right and if the Redemption Amount equals or exceeds the Withheld
Amount, the Withheld Amount shall be treated as an amount received by such
Partner in redemption of its Partnership Units. If, however, the Redemption
Amount is less than the Withheld Amount, the Redeeming Partner shall not receive
any portion of the Redemption Amount, the Redemption Amount shall be treated as
an amount received by such Partner in redemption of its Partnership Units, and
the Partner shall contribute the excess of the Withheld Amount over the
Redemption Amount to the Partnership to the Partner before the Partnership is
required to pay over such excess to a taxing authority.
(f) Notwithstanding any other provision of this Agreement, the
General Partner shall place appropriate restrictions on the ability of the
Limited Partners to exercise their Redemption Rights as and if deemed necessary
to ensure that the Partnership does not constitute a "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 that 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 Registration. Subject to the terms of any agreement between the
General Partner and one or more Limited Partners with respect to Partnership
Units held by them:
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(a) Shelf Registration of the Common Stock. The General
Partner agrees to file with the Securities and Exchange Commission (the
"Commission") a shelf registration statement under Rule 415 of the Securities
Act (a "Registration Statement"), or any similar rule that may be adopted by the
Commission, covering the resale of all of the Common Shares that may be issued
upon redemption of such Partnership Units pursuant to Section 8.05 hereof
("Redemption Shares") in the event that the Limited Partners, as a group,
request registration covering the resale of at least 250,000 Common Shares;
provided however, that only two such registrations may occur each year. The
Limited Partners may request "piggyback" registration of their Redemption
Shares. If, during the prior two years there has not been an opportunity for a
piggyback registration, the Limited Partners holding Units redeemable for at
least 50,000 Common Shares may request a registration of those shares. Upon any
of such requests, the Company will:
(i) provide written notice (the "Notice") of such
request within 10 days of the receipt of such request to the Limited Partners
not a party to the request;
(ii) use its best efforts to have such Registration
Statement declared effective and to keep it effective for a period of 180 days
(the "Effective Period");
(iii) give each holder of Redemption Shares, their
underwriters, if any, and their counsel and accountants a reasonable opportunity
to participate in the preparation of the Registration Statement and give such
persons reasonable access to its books, records, officers and independent public
accountants;
(iv) furnish to each holder of Redemption Shares such
numbers of copies of prospectuses, and supplements or amendments thereto, and
such other documents as such holder reasonably requests;
(v) register or qualify the securities covered by the
Registration Statement under the securities or blue sky laws of such
jurisdictions within the United States as any holder of Redemption Shares shall
reasonably request, and do such other reasonable acts and things as may be
required of it to enable such holders to consummate the sale or other
disposition in such jurisdictions of the Redemption Shares; provided, however,
that the General Partner shall not be required to (i) qualify as a foreign
corporation or consent to a general or unlimited service or process in any
jurisdictions in which it would not otherwise be required to be qualified or so
consent or (ii) qualify as a dealer in securities;
(vi) furnish, at the request of the holders of
Redemption Shares, on the date Redemption Shares are delivered to the
Underwriters for sale pursuant to such registration, or, if such Redemption
Shares are not being sold through underwriters, on the date the Registration
Statement with respect to such Redemption Shares becomes effective, (A) a
securities opinion of counsel representing the General Partner for the purposes
of such registration covering such legal matters as are customarily included in
such opinions and (B) letters of the firm of independent public accountants that
certified the financial statements included in the Registration Statement,
addressed to the underwriters, covering substantially the same matters as are
customarily covered in accountants' letters delivered to underwriters in
underwritten public offerings of securities and such other financial matters as
such holders (or the underwriters, if any) may reasonably request;
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(vii) otherwise use its best efforts to comply with
all applicable rules and regulations of the Commission;
(viii) enter into and perform an underwriting
agreement with the managing underwriter, if any, selected as provided herein,
containing customary (A) terms of offer and sale of the securities, payment
provisions, underwriting discounts and commissions and (B) representations,
warranties, covenants, indemnities, terms and conditions; and
(ix) keep the holders of the Redemption Shares
advised as to the initiation and progress of the registration.
The General Partner 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 General Partner
or by the Securities Act or rules and regulations thereunder for such
Registration Statement. Notwithstanding the foregoing, if for any reason the
effectiveness of a Registration Statement is delayed or suspended or it ceases
to be available for sales of Redemption Shares thereunder, the Effective Period
shall be extended by the aggregate number of days of such delay, suspension or
unavailability.
(b) Listing on Securities Exchange. If the General Partner
shall list or maintain the listing of any Common Shares on any securities
exchange or national market system, it will at its expense and as necessary to
permit the registration and sale of the Redemption Shares hereunder, list
thereon, maintain and, when necessary, increase such listing to include such
Redemption Shares.
(c) Registration Not Required. Notwithstanding the foregoing,
the General Partner shall not be required to file or maintain the effectiveness
of a registration statement relating to Redemption Shares after the first date
upon which, in the opinion of counsel to the General Partner, all of the
Redemption Shares covered thereby could be sold by the holders thereof in any
period of three months pursuant to Rule 144 under the Securities Act, or any
successor rule thereto.
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(d) Allocation of Expenses. The Partnership shall pay all
expenses in connection with the Registration Statement, including without
limitation (i) all expenses incident to filing with the National Association of
Securities Dealers, Inc., (ii) registration fees, (iii) printing expenses, (iv)
accounting and legal fees and expenses, except to the extent holders of
Redemption Shares elect to engage accountants or attorneys in addition to the
accountants and attorneys engaged by the General Partner or the Partnership, (v)
accounting expenses incident to or required by any such registration or
qualification and (vi) expenses of complying with the securities or blue sky
laws of any jurisdictions in connection with such registration or qualification;
provided, however, the Partnership shall not be liable for (A) any discounts or
commissions to any underwriter or broker attributable to the sale of Redemption
Shares, or (B) any fees or expenses incurred by holders of Redemption Shares in
connection with such registration that, according to the written instructions of
any regulatory authority, the Partnership is not permitted to pay.
(e) Indemnification.
(i) In connection with the Registration Statement,
the General Partner and the Partnership agree to indemnify holders of Redemption
Shares within the meaning of Section 15 of the Securities Act, against all
losses, claims, damages, liabilities and expenses (including reasonable costs of
investigation) caused by any untrue, or alleged untrue, statement of a material
fact contained in the Registration Statement, preliminary prospectus or
prospectus (as amended or supplemented if the General Partner shall have
furnished any amendments or supplements thereto) or caused by any omission or
alleged omission, to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or expenses are caused by any untrue
statement, alleged untrue statement, omission, or alleged omission based upon
information furnished to the General Partner expressly for use therein. The
General Partner and each officer, director and controlling person of the General
Partner shall be indemnified by each holder of Redemption Shares covered by the
Registration Statement for all such losses, claims, damages, liabilities and
expenses (including reasonable costs of investigation) caused by any such
untrue, or alleged untrue, statement or any such omission, or alleged omission,
based upon information furnished to the General Partner expressly for use
therein in a writing signed by the holder.
(ii) Promptly upon receipt by a party indemnified
under this Section 8.06(e) of notice of the commencement of any action against
such indemnified party in respect of which indemnity or reimbursement may be
sought against any indemnifying party under this Section 8.06(e), such
indemnified party shall notify the General Partner in writing of the
commencement of such action, but the failure to so notify the General Partner
shall not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 8.06(e) unless such failure shall materially
adversely affect the defense of such action. In case notice of commencement of
any such action shall be given to the General Partner as above provided, the
General Partner shall be entitled to participate in and, to the extent it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense of such action at its own expense, with counsel chosen by it and
reasonably satisfactory to such indemnified party. The indemnified party shall
have the right to employ separate counsel in any such action and participate in
the defense thereof, but the fees and expenses of such counsel (other than
reasonable costs of investigation) shall be paid by the indemnified party unless
(i) the General Partner or the Partnership agrees to pay the same, (ii) the
General Partner fails to assume the defense of such action with counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) have been advised by such
counsel that representation of such indemnified party and the General Partner by
the same counsel would be inappropriate under applicable standards of
professional conduct (in which case the General Partner shall not have the right
to assume the defense of such action on behalf of such indemnified party). No
indemnifying party shall be liable for any settlement entered into without its
consent.
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(f) Contribution.
(i) If for any reason the indemnification provisions
contemplated by Section 8.06(e) are either unavailable or insufficient to hold
harmless an indemnified party in respect of any losses, claims, damages or
liabilities referred to therein, then the party that would otherwise be required
to provide indemnification or the indemnifying party (in either case, for
purposes of this Section 8.06(f), the "Indemnifying Party") in respect of such
losses, claims, damages or liabilities, shall contribute to the amount paid or
payable by the party that would otherwise be entitled to indemnification or the
indemnified party (in either case, for purposes of this Section 8.06(f), the
"Indemnified Party") as a result of such losses, claims, damages, liabilities or
expense, in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party and the Indemnified Party, as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact related to information supplied by the
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party. In no event shall any holder of Redemption Shares covered by the
Registration Statement be required to contribute an amount greater than the
dollar amount of the proceeds received by such holder from the sale of
Redemption Shares pursuant to the registration giving rise to the liability.
(ii) The parties hereto agree that it would not be
just and equitable if contribution pursuant to this Section 8.06(f) were
determined by pro rata allocation (even if the holders or any underwriters or
all of them were treated as one entity for such purpose) or by any other method
of allocation that does not take account of the equitable considerations
referred to in the immediately preceding paragraph. No person or entity
determined to have committed a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person or entity who was not guilty of such fraudulent misrepresentation.
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(iii) The contribution provided for in this Section
8.06(f) shall survive the termination of this Agreement and shall remain in full
force and effect regardless of any investigation made by or on behalf of any
Indemnified Party.
ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP INTERESTS
9.01 Purchase for Investment.
(a) Each Limited Partner hereby represents and warrants to the
General Partner 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 Restrictions on Transfer of Limited Partnership Interests.
(a) Subject to the provisions of Sections 9.02(b), (c) and
(d), 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 Original 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.
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<PAGE>
(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
Section 9.05 below) of all of his Partnership Units pursuant to this Article IX
or pursuant to a redemption of all of his Partnership Units pursuant to Section
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 Sections 9.02(d), (e) and (f) below, 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
person(s) is a trustee, (ii) a corporation, partnership or limited liability
company controlled by a Person or Persons named in (i) above or (iii) 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.
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<PAGE>
(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 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:
(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 legal fees and
other expenses of the Partnership and the General Partner and
filing and publication costs in connection with its
substitution as a Limited Partner.
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<PAGE>
(vii) The assignee has obtained the prior written
consent of the General Partner to its admission as a
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.
9.04 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.
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<PAGE>
9.05 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 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.
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ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.01 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 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 Fiscal and Taxable Year. The fiscal and taxable year of the
Partnership shall be the calendar year.
10.04 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.
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10.05 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 and absolute 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 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 General Partner if such
statements are prepared solely on a consolidated basis with the General Partner,
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
General Partner if such statements are prepared solely on a consolidated basis
with the General Partner, 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.
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(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.
ARTICLE XI
AMENDMENT OF AGREEMENT; MERGER
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 General Partner or any Subsidiary) holding more than 50% of the Percentage
Interests of the Limited Partners (other than the General Partner or any
Subsidiary):
(a) any amendment affecting the operation of the Conversion
Factor or the Redemption Right (except as provided in Section 8.05(d) 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;
(d) any amendment that would impose on the Limited Partners
any obligation to make additional Capital Contributions to the Partnership; or
(e) any amendment to this Article XI.
The General Partner, without the consent of the Limited Partners, may
(i) merge or consolidate the Partnership with or into any other domestic or
foreign partnership, limited partnership, limited liability company or
corporation in a transaction pursuant to Section 7.01(c), (d) or (e) hereof, or
(ii) sell the assets of the Partnership; provided, however, that, during the
Consent Period, any merger, consolidation, or sale of all or substantially all
of the assets of the Partnership shall require the consent of Partners holding
at least 67% of the Partnership Interests.
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ARTICLE XII
GENERAL PROVISIONS
12.01 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 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.
12.03 Additional Documents. Each Partner agrees to perform all further
acts and execute, swear to, acknowledge and deliver all further documents that
may be reasonable, necessary, appropriate or desirable to carry out the
provisions of this Agreement or the Act.
12.04 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 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 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 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.
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12.08 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 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Virginia.
<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 __________, 1998.
GENERAL PARTNER
HERSHA HOSPITALITY TRUST
By: _______________________________
Name:______________________
Title: ____________________
LIMITED PARTNERS
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EXHIBIT A
<TABLE>
<CAPTION>
Agreed
Value of
Cash Capital Partnership Percentage
Partner Contribution Contribution Units Interest
- -------- ------------- ------------ ----- --------
<S> <C> <C> <C> <C> <C>
General Partner:
Hersha Hospitality Trust
148 Sheraton Drive, Box A
New Cumberland, PA 17070
Limited Partners:
</TABLE>
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF REDEMPTION RIGHT
In accordance with Section 8.05 of the Amended and Restated Agreement
of Limited Partnership (the "Agreement") of Hersha Hospitality Limited
Partnership, the undersigned hereby irrevocably (i) presents for redemption
________ Partnership Units in Hersha Hospitality Limited Partnership in
accordance with the terms of the Agreement and the Redemption 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 Redemption 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:
<PAGE>
REQUEST TO RECEIVE REIT SHARES AMOUNT
In accordance with Section 8.05(b) of the Amended and Restated
Agreement of Limited Partnership (the "Agreement") of Hersha Hospitality Limited
Partnership, the undersigned hereby demands that Hersha Hospitality Trust
purchase ________ Partnership Units in Hersha Hospitality Limited Partnership in
accordance with the terms of the Agreement and the Redemption Right referred to
in Section 8.05 thereof. In connection with this demand, the undersigned hereby
surrenders such Partnership Units and all right, title and interest therein and
directs that the REIT Shares Amount (as defined in the Agreement) as determined
by the General Partner deliverable upon exercise of the Redemption Right be
delivered to the address specified below, and that 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:
<PAGE>
EXHIBIT C
For Redeeming Partners that are entities:
CERTIFICATION OF NON-FOREIGN STATUS
Under section 1445(e) of the Internal Revenue Code of 1986, as amended
(the "Code"), in the event of a disposition by a non-U.S. person of a
partnership interest in a partnership in which (i) 50% or more of the value of
the gross assets consists of United States real property interests ("USRPIs"),
as defined in section 897(c) of the Code, and (ii) 90% or more of the value of
the gross assets consists of USRPIs, cash, and cash equivalents, the transferee
will be required to withhold 10% of the amount realized by the non-U.S. person
upon the disposition. To inform Innkeepers USA Trust (the "Company") and
Innkeepers USA Limited Partnership (the "Partnership") that no withholding is
required with respect to the redemption by ____________ ("Partner") of its units
of limited partnership interest in the Partnership, the undersigned hereby
certifies the following on behalf of Partner:
1. Partner is not a foreign corporation, foreign partnership, foreign trust,
or foreign estate, as those terms are defined in the Code and the Treasury
regulations thereunder.
2. The U.S. employer identification number of Partner is _____________.
3. The principal business address of Partner is:
_____________________________________ __________________________ and
Partner's place of incorporation is __________.
4. Partner agrees to inform the Company if it becomes a foreign person at any
time during the three-year period immediately following the date of this
notice.
5. Partner understands that this certification may be disclosed to the
Internal Revenue Service by the Company and that any false statement
contained herein could be punished by fine, imprisonment, or both.
PARTNER
By: _______________________________
Name: _____________________________
Its: ______________________________
Under penalties of perjury, I declare that I have examined this certification
and, to the best of my knowledge and belief, it is true, correct, and complete,
and I further declare that I have authority to sign this document on behalf of
Partner.
Date: _________________ [NAME]
-------------------------------
Title
<PAGE>
For Redeeming Partners that are individuals:
CERTIFICATION OF NON-FOREIGN STATUS
Under section 1445(e) of the Internal Revenue Code of 1986, as amended
(the "Code"), in the event of a disposition by a non-U.S. person of a
partnership interest in a partnership in which (i) 50% or more of the value of
the gross assets consists of United States real property interests ("USRPIs"),
as defined in section 897(c) of the Code, and (ii) 90% or more of the value of
the gross assets consists of USRPIs, cash, and cash equivalents, the transferee
will be required to withhold 10% of the amount realized by the non-U.S. person
upon the disposition. To inform Innkeepers USA Trust (the "Company") and
Innkeepers USA Limited Partnership (the "Partnership") that no withholding is
required with respect to my redemption of my units of limited partnership
interest in the Partnership, I, ___________, hereby certify the following:
1. I am not a nonresident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (social security number) is
_____________.
3. My home address is: _____________________________________________________ .
4. I agree to inform the Company promptly if I become a nonresident alien at
any time during the three-year period immediately following the date of
this notice.
5. I understand that this certification may be disclosed to the Internal
Revenue Service by the Company and that any false statement contained
herein could be punished by fine, imprisonment, or both.
_______________________________
Name:
Under penalties of perjury, I declare that I have examined this certification
and, to the best of my knowledge and belief, it is true, correct, and complete.
Date: _________________ ________________________________
Name:
Exhibit 10.18
LEASE AGREEMENT
DATED AS OF _________ __, 1998
BETWEEN
[HERSHA HOSPITALITY LIMITED PARTNERSHIP]
AS LESSOR
AND
HERSHA HOSPITALITY MANAGEMENT, L.P.
AS LESSEE
IN CONNECTION WITH THE
_______________ HOTEL
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE 1...................................................................................................... 1
1.1. Leased Property.................................................................................. 1
1.2. Term............................................................................................. 2
1.3. Initial Transition............................................................................... 3
ARTICLE 2...................................................................................................... 3
2.1. Definitions...................................................................................... 3
ARTICLE 3...................................................................................................... 12
3.1. Rent............................................................................................. 12
3.2. Confirmation of Percentage Rent.................................................................. 14
3.3. Additional Charges............................................................................... 15
3.4. No Set Off....................................................................................... 15
3.5. Books and Records................................................................................ 15
3.6. Changes in Operations............................................................................ 16
ARTICLE 4...................................................................................................... 16
4.1. Payment of Impositions........................................................................... 16
4.2. Notice of Impositions............................................................................ 17
4.3. Adjustment of Impositions........................................................................ 17
4.4. Utility Charges.................................................................................. 17
ARTICLE 5...................................................................................................... 17
5.1. No Termination, Abatement, etc................................................................... 17
ARTICLE 6...................................................................................................... 18
6.1. Ownership of the Leased Property................................................................. 18
6.2. Lessee's Personal Property....................................................................... 18
6.3. Lessor's Lien.................................................................................... 19
ARTICLE 7...................................................................................................... 19
7.1. Condition of the Leased Property................................................................. 19
7.2. Use of the Leased Property....................................................................... 20
ARTICLE 8...................................................................................................... 21
8.1. Compliance with Legal and Insurance Requirements, etc.......................................... 21
8.2. Legal Requirement Covenants...................................................................... 21
8.3. Environmental Covenants.......................................................................... 22
ARTICLE 9...................................................................................................... 24
9.1. Maintenance and Repair; Capital Expenditures..................................................... 24
9.2. Encroachments, Restrictions, Etc................................................................. 25
ARTICLE 10..................................................................................................... 26
10.1. Alterations..................................................................................... 26
10.2. Salvage......................................................................................... 26
10.3. Lessor Alterations.............................................................................. 27
ARTICLE 11..................................................................................................... 27
11.1. Liens........................................................................................... 27
ARTICLE 12..................................................................................................... 27
12.1. Permitted Contests.............................................................................. 27
ARTICLE 13..................................................................................................... 28
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
13.1. General Insurance Requirements.................................................................. 28
13.2. Replacement Cost................................................................................ 30
13.3. (Intentionally omitted)......................................................................... 30
13.4. Waiver of Subrogation........................................................................... 30
13.5. Form Satisfactory, etc.......................................................................... 31
13.6. Increase in Limits.............................................................................. 31
13.7. Blanket Policy.................................................................................. 31
13.8. Separate Insurance.............................................................................. 31
13.9. Reports On Insurance Claims..................................................................... 32
ARTICLE 14..................................................................................................... 32
14.1. Insurance Proceeds.............................................................................. 32
14.2.Reconstruction in the Event of Damage or Destruction Covered by Insurance........................ 32
14.3.Reconstruction in the Event of Damage or Destruction Not Covered by Insurance or When Holder Will
Not Release Insurance Proceeds............................................................... 33
14.4.Lessee's Property and Business Interruption Insurance............................................ 33
14.5.Abatement of Rent................................................................................ 34
ARTICLE 15..................................................................................................... 34
15.1. Definition...................................................................................... 34
15.2. Parties' Rights and Obligations................................................................. 34
15.3. Total Taking.................................................................................... 34
15.4. Allocation of Award............................................................................. 35
15.5. Partial Taking.................................................................................. 35
15.6. Temporary Taking................................................................................ 36
ARTICLE 16..................................................................................................... 36
16.1. Events of Default............................................................................... 36
16.2. Remedies........................................................................................ 38
16.3. Waiver.......................................................................................... 39
16.4. Application of Funds............................................................................ 39
ARTICLE 17..................................................................................................... 39
17.1. Lessor's Right to Cure Lessee's Default......................................................... 39
ARTICLE 18..................................................................................................... 40
18.1. Personal Property Limitation.................................................................... 40
18.2. Sublease Rent Limitation........................................................................ 40
18.3. Sublease Lessee Limitation...................................................................... 40
18.4. Lessee Ownership Limitation..................................................................... 41
18.5. Director, Officer and Employee Limitation....................................................... 41
ARTICLE 19..................................................................................................... 41
19.1. Holding Over.................................................................................... 41
ARTICLE 20..................................................................................................... 42
20.1. Indemnification................................................................................. 42
ARTICLE 21..................................................................................................... 43
21.1. Subletting and Assignment....................................................................... 43
21.2. Attornment...................................................................................... 43
21.3. Management Agreement............................................................................ 43
ARTICLE 22..................................................................................................... 44
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
22.1. Officer's Certificates; Financial Statements; Lessor's Estoppel Certificates and Covenants...... 44
ARTICLE 23..................................................................................................... 46
23.1. Regular Meetings; Lessor's Right to Inspect..................................................... 46
ARTICLE 24..................................................................................................... 46
24.1. No Waiver....................................................................................... 46
ARTICLE 25..................................................................................................... 47
25.1. Remedies Cumulative............................................................................. 47
ARTICLE 26..................................................................................................... 47
26.1. Acceptance of Surrender......................................................................... 47
ARTICLE 27..................................................................................................... 47
27.1. No Merger of Title.............................................................................. 47
ARTICLE 28..................................................................................................... 47
28.1. Conveyance by Lessor............................................................................ 47
28.2. Lessor May Grant Liens.......................................................................... 48
ARTICLE 29..................................................................................................... 50
29.1. Quiet Enjoyment................................................................................. 50
ARTICLE 30..................................................................................................... 50
30.1. Notices......................................................................................... 50
ARTICLE 31..................................................................................................... 50
31.1. Appraisers...................................................................................... 50
ARTICLE 32..................................................................................................... 51
32.1. Lessee's Right to Cure.......................................................................... 51
ARTICLE 33..................................................................................................... 52
33.1. Miscellaneous................................................................................... 52
33.2. Transition Procedures........................................................................... 52
33.3. Waiver of Presentment, etc...................................................................... 53
33.4. Standard of Discretion.......................................................................... 54
33.5. Action for Damages.............................................................................. 54
33.6. Lease Assumption in Bankruptcy Proceeding....................................................... 54
33.7. Intra-Family Transfers.......................................................................... 54
ARTICLE 34..................................................................................................... 55
34.1. Memorandum of Lease............................................................................. 55
ARTICLE 35..................................................................................................... 55
ARTICLE 36..................................................................................................... 55
36.1. Lessor's Option to Terminate Lease.............................................................. 55
ARTICLE 37..................................................................................................... 57
37.1. Compliance with Franchise Agreement............................................................. 57
ARTICLE 38..................................................................................................... 57
38.1. Capital Expenditures............................................................................ 57
ARTICLE 39..................................................................................................... 58
39.1. Lessor's Default................................................................................ 58
ARTICLE 40..................................................................................................... 58
40.1. Arbitration..................................................................................... 58
40.2. Alternative Arbitration......................................................................... 59
40.3. Arbitration Procedures.......................................................................... 59
</TABLE>
iii
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit A - Property Description
Exhibit B - Other Properties
Exhibit C - Percentage Rent Provisions
iv
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (hereinafter called "Lease"), made as of the ___
day of ___________, 1998, by and between [HERSHA HOSPITALITY LIMITED
PARTNERSHIP, a Virginia limited partnership] (hereinafter called "Lessor"), and
HERSHA HOSPITALITY MANAGEMENT, L.P., a Pennsylvania limited partnership
(hereinafter called "Lessee"), provides as follows.
W I T N E S S E T H:
--------------------
Contemporaneously with the execution hereof, Lessor acquired (i) the
Leased Property (as hereinafter defined) and certain Other Properties, and (ii)
Lessor is entering with Lessee into the Other Leases; and
Lessor and Lessee now wish to enter into this Lease.
NOW, THEREFORE, Lessor, in consideration of the payment of rent by
Lessee to Lessor, the covenants and agreements to be performed by Lessee, and
upon the terms and conditions hereinafter stated, does hereby rent and lease
unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased
Property.
ARTICLE
-------
1
1.1. Leased Property.
----------------
The leased property (the "Leased Property") is comprised of
Lessor's interest in the following:
(a) [delete this section for the Holiday Inn Express,
Harrisburg, PA and the Comfort Inn, Denver, PA] the land 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, 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 for 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,
<PAGE>
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 Lessee)
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 the Leased Property (including any
security deposits or collateral held by Lessor pursuant thereto).
THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION
OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR 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 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.
-----
(a) The term of the Lease (the "Term") shall commence on the
date hereof (the "Commencement Date") and shall end on the fifth anniversary of
the last day of the month in which the Commencement Date occurs, unless sooner
terminated in accordance with the provisions hereof. Lessor and Lessee
acknowledge that the Commencement Date is the date of Lessor's acquisition of
the Leased Property.
(b) Lessee may elect to extend this Lease and all of the Other
Leases for an additional five-year term and, at the end of the first extended
term, may elect to extend this Lease for an additional five-year term (each such
extension, a "Renewal Term") by providing written Notice (a "Renewal Notice") to
Lessor no sooner than 30 months and no later than 6 months prior to the end of
the Term or Renewal Term, as applicable. A Renewal Notice, if given, shall be
irrevocable, but it shall not preclude Lessor from exercising any of its rights
to terminate this Lease in accordance with the provisions hereof. Lessee
acknowledges that Lessor will rely on any Renewal Notice received from Lessee
and not pursue opportunities to select another lessee for the Facility and will
be materially damaged if Lessee fails subsequently to act as lessee for the
Renewal Term for any reason other than Lessor's termination of the Lease in
accordance herewith. No Renewal Notice may be given or shall be effective if an
Event of Default shall have occurred and, if curable hereunder, shall not have
been cured. The terms of the Lease during a Renewal Term shall be the same as
the terms hereof.
2
<PAGE>
1.3. Initial Transition.
-------------------
Simultaneously with the execution of this Lease, Lessee shall
acquire for fair market value from the contributor of the Leased Property to
Lessor all deposits, prepaid revenue and similar accounts, and Inventory
existing at or with respect to the Leased Property as of the Commencement Date.
ARTICLE
-------
2
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 Article 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 GAAP, (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 Charge(s): As defined in Section 3.3.
Affiliate: 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, ten percent or more of the outstanding capital stock, shares or
equity interests of such Person, or (c) any officer, director, employee,
partner, manager, member 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,
partnership interests or other equity interests, by contract or otherwise.
Award: As defined in Section 15.1(c).
Base Rate: The prime rate (or base rate) reported in the Money Rates
column or comparable section of The Wall Street Journal, Eastern Edition, as the
rate then in effect for corporate loans at large U.S. money center commercial
banks, whether or not such rate has actually been charged by any such bank. If
no such rate is reported in The Wall Street Journal, Eastern Edition or if such
rate is discontinued, then Base Rate shall mean such other successor or
comparable rate as Lessor may reasonably designate.
3
<PAGE>
Base Rent: As defined in Article 3.
Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that
is not a day on which national banks in the City of Philadelphia, Pennsylvania,
or in the municipality wherein the Leased Property is located are closed.
Capital Expenditures: Amounts advanced to pay the costs of Capital
Improvements.
Capital Expenditures Allowance: As defined in Article 38.
Capital Impositions: Taxes, assessments or similar charges imposed upon
or levied against the Leased Property for the costs of public improvements,
including, without limitation, roads, sidewalks, public lighting fixtures,
utility lines, storm sewers drainage facilities, and similar improvements.
Capital Improvements: Improvements to the Leased Property and
replacement or refurbishing of Fixtures and of Furniture and Equipment, all as
designated as capital improvements by and determined in accordance with GAAP.
CERCLA: The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
Change of Control: (i) The issuance or sale by the Lessee or the sale
by any partner of the Lessee of a Controlling interest in Lessee; (ii) the sale,
conveyance or other transfer of all or substantially all of the assets of the
Lessee (whether by operation of law or otherwise); (iii) any transaction, or
series of transactions, pursuant to which the Lessee is merged with or
consolidated into another entity and either (A) the Lessee is not the surviving
entity or (B) the Lessee is the surviving entity but the previous partners of
the Lessee do not maintain a Controlling interest in the Lessee.
Code: The Internal Revenue Code of 1986, as amended.
Commencement Date: As defined in Section 1.2.
Company: Hersha Hospitality Trust, a Maryland real estate investment
trust.
Condemnation, Condemnor: As defined in Section 15.1.
Consolidated Financials: For any fiscal year or other accounting period
for (i) Lessee and (ii) Lessee and Lessee's Affiliates, if any, that lease hotel
properties from Lessor or its Affiliates, a balance sheet and statements of
operations, partners' capital and cash flow (or, in the case of a corporation,
statements of operations, retained earnings and cash flow) 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 to any such yearly
4
<PAGE>
statement, all in such detail as may be required by the SEC with respect to
filings made by the Company or Lessor, and setting forth in comparative form the
corresponding figures for the corresponding period in the preceding fiscal year,
and prepared in accordance with GAAP and audited annually (and quarterly if
required by the SEC) by a firm of independent certified public accountants
selected by Lessor. Consolidated Financials shall be prepared on the basis of a
fiscal year ending on December 31.
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 or voting securities, by
contract or otherwise. The terms "Controlling" and "Controlled by" shall have
correlative meanings.
Date of Taking: As defined in Section 15.1(b).
Emergency Expenditures: Expenditures required to take necessary or
appropriate actions to respond to Emergency Situations.
Emergency Situations: Fire, any other casualty, or any other events,
circumstances or conditions which threaten the safety or physical well-being of
the Facility's guests or employees or which involve the risk of material
property damage or material loss to the Facility.
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 actual or potential 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
5
<PAGE>
be or have been asserted against or imposed upon Lessor, Lessee, any
Predecessor, the Leased Property or any property used therein and arising out
of:
(a) the failure to comply at any time with all Environmental
Laws applicable to the Leased Property;
(b) the presence of any Hazardous Materials on, in, under, at
or in any way affecting the Leased Property;
(c) a Release or threatened Release of any Hazardous Materials
on, in, at, under or in any way affecting the Leased Property;
(d) the identification of Lessee, Lessor or any Predecessor as
a potentially responsible party under CERCLA or under any other Environmental
Law;
(e) the 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.
Facility: The hotel and/or other facility offering lodging and other
services or amenities being operated or proposed to be operated on the Leased
Property.
FIFRA: The Federal Insecticide, Fungicide, and Rodenticide Act, as
amended.
First Annual Room Revenues Break Point: The amount of Room Revenues for
the applicable Lease Year corresponding to such term as set forth on Exhibit C.
First Tier Room Revenue Percentage: The percentage corresponding to
such term as set forth on Exhibit C.
Fixtures: As defined in Section 1.1.
Franchise Agreement: The franchise agreement or license agreement with
_____________ or any other franchisor under which the Facility is operated.
Furniture and Equipment: The terms "furniture and equipment" shall mean
collectively all furniture, furnishings, wall coverings, Fixtures and hotel
equipment and systems located at, or used in connection with, the Facility,
together with all replacements therefor and additions thereto, including,
without limitation, (i) all equipment and systems required for the operation of
6
<PAGE>
kitchens, bars and restaurants, and laundry and dry cleaning facilities, (ii)
office equipment (excluding any office equipment used by the Lessee for its own
operations, rather than hotel operations), (iii) dining room wagons, materials
handling equipment, and cleaning and engineering equipment, (iv) telephone and
computerized accounting systems, and (v) vehicles (excluding any vehicles used
by the Lessee for its own operations, rather than hotel operations).
GAAP: Generally accepted accounting principles as are at the time
applicable and otherwise consistently applied.
Government: The United States of America, any city, county, state,
district or territory thereof, any foreign nation, any city, county, state,
district, department, territory or other political division thereof, or any
political subdivision of any of the foregoing.
Gross Revenues: The sum of Room Revenues and Other Revenues.
Hazardous Materials: All chemicals, pollutants, contaminants, wastes
and toxic substances, including without limitation:
(a) Solid or hazardous waste, as defined in RCRA or in any
Environmental Law;
(b) Hazardous substances, as defined in CERCLA or in any
Environmental Law;
(c) Toxic substances, as defined in TSCA or in any
Environmental Law;
(d) Insecticides, fungicides, or rodenticides, as defined in
FIFRA or in any Environmental Law;
(e) Gasoline or any other petroleum product or byproduct,
polychlorinated biphenols, asbestos and urea formaldehyde;
(f) Asbestos or asbestos containing materials;
(g) Urea Formaldehyde foam insulation; and
(h) Radon gas.
Holder: Any holder of a Mortgage, any purchaser of the Leased Property
or any portion thereof at a foreclosure sale or any sale in lieu thereof, or any
designee of any of the foregoing.
Impositions: Collectively, all taxes (including, without limitation,
all ad valorem, sales and use, occupancy, single business, gross receipts,
transaction privilege, rent or similar taxes as the same relate to or are
imposed upon Lessee or Lessor or Lessee's business conducted upon the Leased
Property), assessments (including, without limitation, all private property
association
7
<PAGE>
assessments and 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), ground rents, 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 Lessee (including all
interest and penalties thereon caused by any failure in payment by Lessee),
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) Lessor'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 the leasing or use of the
Leased Property or any part thereof by Lessee. Nothing contained in this
definition of Impositions shall be construed to require Lessee to pay (1) any
tax based on net income (whether denominated as a franchise or capital stock or
other tax) imposed on Lessor or any other person, or (2) any net or gross
revenue tax of Lessor or any other person, or (3) any tax imposed with respect
to the sale, exchange or other disposition by Lessor of any Leased Property or
the proceeds thereof.
Indemnified Party: Either of a Lessee Indemnified Party or a Lessor
Indemnified Party.
Indemnifying Party: Any party obligated to indemnify an Indemnified
Party pursuant to any provision of this Lease.
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, including, but not limited to,
linens, china, silver, glassware and other non-depreciable personal property,
and any property of the type described in Section 1221(1) of the Code.
Land: As defined in Article 1.
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 the end of the Term.
Leased Improvements: As defined in Article 1.
Leased Property: As defined in Section 1.1.
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, operation or alteration thereof
8
<PAGE>
(whether by Lessee 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
necessary or appropriate to operate the Leased Property for its Primary Intended
Use and all covenants, agreements, restrictions and encumbrances contained in
any instruments, either of record or known to Lessee (other than encumbrances
hereafter created by Lessor without the consent of Lessee), at any time in force
affecting the Leased Property.
Lessee: The Lessee designated on this Lease and its permitted
successors and assigns.
Lessee Indemnified Party: Lessee, any Affiliate of Lessee, any other
Person against whom any claim for indemnification may be asserted hereunder as a
result of a direct or indirect ownership interest in Lessee, the officers,
directors, stockholders, partners, members, employees, agents and
representatives of any of the foregoing Persons and any corporate stockholder,
agent, or representative of any of the foregoing Persons, and the respective
heirs, personal representatives, successors and assigns of any such officer,
director, partner, member, stockholder, employee, agent or representative.
Lessee's Personal Property: As defined in Section 6.2.
Lessor: The Lessor designated on this Lease and its respective
successors and assigns.
Lessor Indemnified Party: Lessor, any Affiliate of Lessor, including
the Company, any other Person against whom any claim for indemnification may be
asserted hereunder as a result of a direct or indirect ownership interest in
Lessor, the officers, trustees, directors, stockholders, partners, members,
employees, agents and representatives of any of the foregoing Persons and of any
stockholder, partner, member, agent, or representative of any of the foregoing
Persons, and the respective heirs, personal representatives, successors and
assigns of any such officer, trustee, director, partner, member, stockholder,
employee, agent or representative.
Lessor's Audit: An audit by Lessor's independent certified public
accountants of the operation of the Leased Property during any Lease Year, which
audit may, at Lessor's election, be either a complete audit of the Leased
Property's operations or an audit of Room Revenues realized from the operation
of the Leased Property during such Lease Year.
Management Agreement: As defined in Section 21.3.
Manager: As defined in Section 21.3.
Mortgage: As defined in Section 28.2.
Notice: A notice given pursuant to Article 30.
9
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Officer's Certificate: A certificate of Lessee reasonably acceptable to
Lessor, signed by the chief financial officer or another officer duly authorized
so to sign by Lessee or a general partner of Lessee, or any other person whose
power and authority to act has been authorized by delegation in writing by any
such officer.
Other Leases: The leases of the Other Properties.
Other Properties:The properties described on Exhibit B attached hereto.
Other Revenues: All revenues, receipts and income of any kind derived
directly or indirectly from or in connection with the Facility other than Room
Revenues.
Other Revenue Percentage: The percentage corresponding to such term as
set forth on Exhibit C.
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 Rent.
Percentage Rent: As defined in Article 3.
Person: The term "Person" means and includes individuals, corporations,
general and limited partnerships, limited liability companies, stock companies
or associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts, or other entities and any Government
and agencies and political subdivisions thereof.
Personal Property Taxes: All personal property taxes imposed on the
furniture, furnishings or other items of personal property located on, and used
in connection with, the operation of the Leased Improvements as a hotel (other
than Inventory and other personal property owned by the Lessee), together with
all replacements, modifications, alterations and additions thereto.
Predecessor: Any Person whose liabilities arising under any
Environmental Law have or may have been retained or assumed by Lessor or Lessee
pursuant to the provisions of this Lease.
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.
10
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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.
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 or Percentage Rent, and Additional
Charges.
Room Revenues: Gross revenue from the rental of guest rooms, whether to
individuals, groups or transients, at the Facility, determined in a manner
consistent with the Uniform System and excluding the following:
(a) The amount of all credits, bad debt write-off rebates or
refunds to customers, guests or patrons; and
(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.
SEC: The U.S. Securities and Exchange Commission or any successor
agency.
Second Annual Room Revenues Break Point: The amount of Room Revenues
for the applicable Lease Year corresponding to such term as set forth on Exhibit
C.
Second Tier Room Revenue Percentage: The percentage corresponding to
such term as set forth on Exhibit C.
State: The State or Commonwealth of the United States in which the
Leased Property is located.
Subsidiaries: Corporations or other entities in which Lessee owns,
directly or indirectly, 50% or more of the voting rights or control, as
applicable (individually, a "Subsidiary").
Taking: A permanent or temporary 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.
11
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Term: As defined in Section 1.2.
Termination Fee: As defined in Section 36.1(c).
Third Tier Room Revenue Percentage: The percentage corresponding to
such term as set forth on Exhibit C.
TSCA: The Toxic Substances Control Act, as amended.
Unavoidable Delay: Delay 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,
condemnation or other similar causes beyond the reasonable control of the party
responsible for performing an obligation hereunder, provided that lack of funds
shall not be deemed a cause beyond the reasonable control of either party hereto
unless such lack of funds is caused by the breach of the other party's
obligation to perform any obligations of such other party under this Lease.
Uneconomic for its Primary Intended Use: A state or condition of the
Facility such that in the reasonable judgment of Lessor the Facility cannot be
operated on a commercially practicable basis for its Primary Intended Use, such
that Lessor intends to, and shall, cease operation of the Facility.
Uniform System: Shall mean the Uniform System of Accounts for Hotels
(9th Revised Edition, 1996) as published by the Hotel Association of New York
City, Inc., as the same may hereafter be revised, and as the same is interpreted
and applied by the Lessor's independent certified public accountants in
connection with any audit.
Unsuitable for its Primary Intended Use: A state or condition of the
Facility such that in the reasonable judgment of Lessor the Facility (i) cannot
function as an integrated hotel facility consistent with standards applicable to
a well maintained and operated hotel comparable in quality and function to that
of the Facility prior to the damage or loss and, (ii) notwithstanding the
application of insurance proceeds that may occur under Section 14.1, will remain
unsuitable for its Primary Intended Use for a period of 90 days or more.
ARTICLE
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3
3.1. Rent.
-----
Lessee will pay to Lessor, by wire transfer, in lawful money
of the United States of America which shall be legal tender for the payment of
public and private debts, at Lessor's address set forth in Article 30 hereof or
at such other place or to such other Person as Lessor
12
<PAGE>
from time to time may designate in a Notice, all [Initial Fixed Rent,] Base
Rent, Percentage Rent and Additional Charges, during the Term, as follows:
[insert for Newly-Developed Hotels and Newly-Renovated Hotels:
(a) The Rent payable from the Commencement Date until the
calendar quarter ending December 31, ___ shall equal the annual amount of
Initial Fixed Rent set forth on Exhibit C and shall be payable quarterly in
arrears on or before the first business day of the subsequent calendar quarter;
provided, however, that Initial Fixed Rent shall be prorated as to any Lease
Year which is less than four calendar quarters and as to any partial calendar
quarter;]
(a) The Rent payable in each calendar quarter [insert for
Newly-Developed Hotels and Newly-Renovated Hotels: from January 1, ___ until the
end of the Lease Term] shall equal the greater of :
(i) the annual amount of Base Rent set forth on
Exhibit C, which shall be payable quarterly in arrears on or before the first
business day of the subsequent calendar quarter; provided, however, that Base
Rent shall be prorated as to any Lease Year which is less than four calendar
quarters and as to any partial calendar quarter; plus
(ii) an amount of percentage rent ("Percentage
Rent"), calculated for each calendar quarter, equal to the Period Revenues
Computation through the end of such calendar quarter for the applicable Lease
Year, which amount shall be payable on or before the fifteenth (15th) day of the
following calendar quarter.
The Period Revenues Computation shall be an amount equal to
the sum of, for the applicable Lease Year, (i) an amount equal to the First Tier
Room Revenue Percentage of all Lease Year to date Room Revenues up to (but not
exceeding) the First Annual Room Revenues Break Point, (ii) an amount equal to
the Second Tier Room Revenue Percentage of all Lease Year to date Room Revenues
in excess of the First Annual Room Revenues Break Point but not exceeding the
Second Annual Room Revenues Break Point, (iii) an amount equal to the Third Tier
Room Revenue Percentage of all Lease Year to date Room Revenues in excess of the
Second Annual Room Revenues Break Point, and (iv) an amount equal to the Other
Revenue Percentage of all Lease Year to date Other Revenues.
The [Initial Fixed Rent and the] Base Rent shall accrue pro
rata during each calendar quarter of a Lease Year. However, the amount of
[Initial Fixed Rent or] Base Rent payable for the first three calendar quarters
of a Lease Year shall equal the annual amount of [Initial Fixed Rent or] Base
Rent multiplied by a fraction, the numerator of which is the amount of the
Lessee's budgeted Gross Revenues for such calendar quarter and the denominator
of which is the amount of the Lessee's budgeted Gross Revenues for such Lease
Year. The amount of [Initial Fixed Rent or] Base Rent payable for the fourth
calendar quarter of such Lease Year shall equal the annual amount of [Initial
Fixed Rent or] Base Rent, less the aggregate
13
<PAGE>
amount of [Initial Fixed Rent or] Base Rent payments made by the Lessee for the
first three calendar quarters of such Lease Year. There shall be no reduction in
Base Rent regardless of the result of the Period Revenues Computation.
If the Term begins or ends in the middle of a calendar year,
then the number of calendar quarters falling within the Term during such
calendar year shall constitute a separate Lease Year. In that event, the First
Annual Room Revenues Break Point and the Second Annual Room Revenues Break Point
shall be multiplied by a fraction equal to (x) the number of calendar quarters
(including partial calendar quarters) in the Lease Year divided by (y) four.
(b) Officer's Certificates. An Officer's Certificate shall be
delivered to Lessor with each Percentage Rent payment setting forth the
calculation of the Percentage Rent payment for the most recently completed
calendar quarter of each Lease Year in the Term. Percentage Rent shall be
subject to confirmation and adjustment, if applicable, as set forth in Section
3.2.
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, shall be made not later
than 60 days after such expiration or termination date.
3.2. Confirmation of Percentage Rent.
--------------------------------
Lessee 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 Lessee
shall retain, for at least five years after the expiration of each Lease Year,
reasonably adequate records conforming to such accounting system showing all
data necessary to conduct Lessor's Audit and to compute Percentage Rent for the
applicable Lease Years. Lessor shall have the right, for a period of two years
following each Lease Year, from time to time, by its accountants or
representatives, to audit such information in connection with Lessor's Audit,
and to examine all Lessee's records (including supporting data and sales and
excise tax returns) reasonably required to complete Lessor's Audit and to verify
Percentage Rent, subject to any prohibitions or limitations on disclosure of any
such data under Legal Requirements. If any Lessor's Audit discloses a deficiency
in the payment of Percentage Rent, and either Lessee agrees with the result of
Lessor's Audit or the matter is otherwise determined or compromised, Lessee
shall forthwith pay to Lessor 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. If any Lessor's
Audit discloses a deficiency in the determination or reporting of Room Revenue
which, as finally agreed or determined, exceeds 3%, Lessee shall pay the costs
of the portion of Lessor's Audit allocable to the determination of Room Revenues
(the "Revenue Audit"). Any proprietary information obtained by Lessor 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 or arbitration between the parties and except further that
Lessor may disclose such information to
14
<PAGE>
prospective lenders, investors and underwriters and to any other persons to whom
disclosure is necessary to comply with applicable laws, regulations and
government requirements. The obligations of Lessee contained in this Section
shall survive the expiration or earlier termination of this Lease. Any dispute
as to the existence or amount of any deficiency in the payment of Percentage
Rent as disclosed by Lessor's Audit shall, if not otherwise settled by the
parties, be submitted to arbitration pursuant to the provisions of Section 40.2.
3.3. Additional Charges.
-------------------
In addition to the Base Rent and Percentage Rent, (a) Lessee
also will pay and discharge as and when due and payable all other amounts,
liabilities, obligations and Impositions that Lessee assumes or agrees to pay
under this Lease, and (b) in the event of any failure on the part of Lessee to
pay any of those items referred to in clause (a) of this Section 3.3, Lessee
also will promptly pay and discharge every fine, penalty, interest and cost that
may be added for 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 Charge(s)"), and
Lessor 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. If any installment of Base Rent, Percentage Rent or Additional Charges
(but only as to those Additional Charges that are payable directly to Lessor)
shall not be paid on its due date, Lessee will pay Lessor within ten days of
demand, as Additional Charges, an amount equal to the interest 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 Lessee pays any
Additional Charges to Lessor pursuant to any requirement of this Lease, Lessee
shall be relieved of its obligation to pay such Additional Charges to the entity
to which they would otherwise be due and Lessor shall pay the same from monies
received from Lessee.
3.4. No Set Off.
-----------
Rent shall be paid to Lessor without set off, deduction or
counterclaim, subject to Lessee's right to assert any claim or mandatory
counterclaim in any action brought by either party under this Lease.
3.5. Books and Records.
------------------
Lessee shall keep full and adequate books of account and other
records reflecting the results of operation of the Facility on an accrual basis,
all in accordance with the Uniform System and GAAP and the obligations of Lessee
under this Lease. Lessee agrees that bad-debt expenses will be recorded in a
manner which is consistent with the past practice of the current operator of the
Facility for bad debt writeoffs. The books of account and all other records
relating to or reflecting the operation of the Facility (whether maintained by
Lessee or Manager) shall be kept either at the Facility or at 148 Sheraton
Drive, New Cumberland, Pennsylvania 17070, and shall be available to Lessor and
its representatives and its auditors or accountants, at all reasonable times for
examination, audit, inspection, and transcription. All of such books and
15
<PAGE>
records pertaining to the Facility (whether maintained by Lessee or Manager)
including, without limitation, books of account, guest records and front office
records, at all times shall be the property of Lessor and shall not be removed
from the Facility or Lessee's offices without Lessor's prior written approval.
Lessee shall be entitled to make copies of any or all such books and records for
its own files. Lessee's obligations under this Section 3.5 shall survive
termination of this Lease for any reason.
3.6. Changes in Operations.
----------------------
Without Lessor's prior written consent, which shall not be
unreasonably withheld, Lessee shall not (i) provide food and/or beverage
operations at the Facility if not presently provided, (ii) discontinue any food
and/or beverage operations which are presently provided, or (iii) convert a
subtenant, licensee or concessionaire to an operating department of the Facility
or vice-versa.
ARTICLE
-------
4
4.1. Payment of Impositions.
-----------------------
Lessor shall pay, or cause to be paid, all Real Estate Taxes
and Personal Property Taxes. Subject to Article 12 relating to permitted
contests, Lessee will pay, or cause to be paid, all Impositions (other than Real
Estate Taxes and Personal Property Taxes) before any fine, penalty, interest or
cost may be added for nonpayment, such payments to be made directly to the
taxing or other authorities where feasible, and will promptly furnish to Lessor
copies of official receipts or other satisfactory proof evidencing such
payments. Lessee'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), Lessee 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 (subject to Lessee's
right of contest pursuant to the provisions of Article 12) as the same
respectively become due and before any fine, penalty, premium, further interest
or cost may be added thereto. If an Imposition becomes fixed during the Term
hereof and the Lessee elects to pay such Imposition in installments that
continue after the Term hereof, the Lessee's obligation to pay such installments
shall survive the termination of this Lease. Lessor, at its expense, shall, to
the extent required or permitted by applicable law, prepare and file all tax
returns in respect of Lessor's net income, gross receipts, sales and use, single
business, transaction privilege, rent, ad valorem, franchise taxes, and taxes on
its capital stock, and Lessee, 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. Lessee shall submit copies of Real Estate Taxes and
Personal Property Tax invoices to Lessor promptly upon Lessee's receipt of such
invoices. If any refund shall be due from any taxing authority in respect of any
Imposition paid by Lessee, the same shall be paid over to or retained by Lessee
if no Event of Default shall have occurred hereunder and be
16
<PAGE>
continuing. If an Event of Default shall have been declared by Lessor and be
continuing, any such refund shall be paid over to or retained by Lessor. Any
such funds retained by Lessor due to an Event of Default shall be applied as
provided in Article 16. Any refund for Real Estate Taxes and Personal Property
Taxes shall be promptly remitted to Lessor. Lessor and Lessee shall, upon
request of the other, cooperate with the other party and otherwise 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. Lessor, to the extent it possesses the same, and Lessee, 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 classified as
personal property. Lessor may, upon notice to Lessee, at Lessor's option and at
Lessor's sole expense, protest, appeal, or institute such other proceedings (in
its or Lessee's name) as Lessor may deem appropriate to effect a reduction of
real estate assessments, and Lessee, at Lessor's expense as aforesaid, shall
fully cooperate with Lessor in such protest, appeal, or other action. Lessor
hereby agrees to indemnify, defend, and hold harmless Lessee from and against
any claims, obligations, and liabilities against or incurred by Lessee in
connection with such cooperation. Lessor, however, reserves the right to effect
any such protest, appeal or other action and, upon notice to Lessee, shall
control any such activity, which shall then proceed at Lessor's sole expense.
Upon such notice, Lessee, at Lessor's expense, shall cooperate fully with such
activities. To the extent received by it, Lessee shall furnish Lessor with
copies of all assessment notices for Real Estate Taxes in sufficient time for
Lessor to file any protest with respect to such tax must be made and pay such
taxes without penalty.
4.2. Notice of Impositions.
----------------------
Lessor shall give prompt Notice to Lessee of all Impositions
payable by Lessee hereunder of which Lessor at any time has knowledge, provided
that Lessor's failure to give any such Notice shall in no way diminish Lessee's
obligations hereunder to pay such Impositions, but if Lessee did not otherwise
have knowledge of such Imposition sufficient to permit it to pay same, such
failure shall obviate any default hereunder for a reasonable time after Lessee
receives Notice of any Imposition which it is obligated to pay during the first
taxing period applicable thereto.
4.3. Adjustment of Impositions.
--------------------------
Impositions payable by Lessee which are imposed in respect of
the tax-fiscal period during which the Term terminates shall be adjusted and
prorated between Lessor and Lessee, whether or not such Imposition is imposed
before or after such termination, and Lessee's obligation to pay its prorated
share thereof after termination shall survive such termination.
4.4. Utility Charges.
----------------
Lessee 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 in the Leased Property during the Term.
17
<PAGE>
ARTICLE
-------
5
5.1. No Termination, Abatement, etc.
-------------------------------
Except as otherwise specifically provided in this Lease,
Lessee, 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 Lessor 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 Lessee 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) any bankruptcy, insolvency, reorganization,
composition, readjustment, liquidation, dissolution, winding up or other
proceedings affecting Lessor or any assignee or transferee of Lessor, or (c) for
any other cause whether similar or dissimilar to any of the foregoing other than
a discharge of Lessee from any such obligations as a matter of law. Lessee
hereby specifically waives all rights, arising from any default under this Lease
by Lessor, 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 Lessee to any abatement, reduction,
suspension or deferment of or set off against the Rent or other sums payable by
Lessee hereunder, except as otherwise specifically provided in this Lease. The
obligations of Lessee hereunder shall be separate and independent covenants and
agreements and the Rent and all other sums payable by Lessee 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.
ARTICLE
-------
6
6.1. Ownership of the Leased Property.
---------------------------------
Lessee acknowledges that the Leased Property is the property
of Lessor and that Lessee has only the right to the possession and use of the
Leased Property upon the terms and conditions of this Lease.
6.2. Lessee's Personal Property.
---------------------------
At commencement of the Term, Lessee shall purchase for fair
market value from Lessor or the Contributor of the Leased Property to Lessor all
Inventory at the Leased Property. At all times during the Term, Lessee shall
maintain Inventory consistent with the amount of inventory which is customarily
maintained in a hotel of the type and character of the Facility and is otherwise
required to operate the Leased Property in the manner contemplated by this Lease
and in compliance with the Franchise Agreement and all Legal Requirements. All
Inventory shall be the property of Lessee. Lessee 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
18
<PAGE>
Improvements, any items of personal property (including Inventory) owned by
Lessee (collectively, the "Lessee's Personal Property"). Lessee may, subject to
the following sentence of this Section 6.2, remove any of Lessee's Personal
Property at any time during the Term or upon the expiration or any prior
termination of the Term. All of Lessee's Personal Property not removed by Lessee
within 30 days following the expiration or earlier termination of the Term shall
be considered abandoned by Lessee and may be appropriated, sold, destroyed or
otherwise disposed of by Lessor without first giving Notice thereof to Lessee,
without any payment to Lessee and without any obligation to account therefor.
Lessee 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 Lessee's Personal Property, whether effected
by Lessee or Lessor.
6.3. Lessor's Lien.
--------------
To the fullest extent permitted by applicable law, Lessor is
granted a lien and security interest on all Lessee's Personal Property now or
hereinafter placed in or upon the Leased Property, and such lien and security
interest shall remain attached to such Lessee's Personal Property until payment
in full of all Rent and satisfaction of all of Lessee's obligations hereunder;
provided, however, Lessor shall subordinate its lien and security interest only
to that of any non-Affiliate of Lessee which finances such Lessee's Personal
Property or any non-Affiliate conditional seller of such Lessee's Personal
Property, the terms and conditions of such subordination to be satisfactory to
Lessor in the exercise of reasonable discretion. Lessee shall, upon the request
of Lessor, execute such financing statements or other documents or instruments
reasonably requested by Lessor to perfect the lien and security interests herein
granted.
ARTICLE
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7
7.1. Condition of the Leased Property.
---------------------------------
Lessee acknowledges receipt and delivery of possession of the
Leased Property. Lessee 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. Lessee is leasing the Leased Property "as is", "with all
faults", and in its present condition. Except as otherwise specifically provided
herein, Lessee waives any claim or action against Lessor in respect of the
condition of the Leased Property. LESSOR 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 LESSEE.
LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS
SATISFACTORY TO IT. Lessee shall have the right to proceed against any
predecessor in title for breaches of warranties or representations or for latent
defects in the Leased Property, and Lessor shall, if requested by Lessee, assign
any such right to Lessee (other than claims against
19
<PAGE>
Affiliates of Lessee). If either party determines to exercise such right, the
other party shall fully cooperate in the prosecution of any such claim, in
Lessor's or Lessee's name, all at the cost and expense of the prosecuting party,
who hereby agrees to indemnify, defend and hold harmless the other party from
and against any claims, obligations and liabilities against or incurred by such
other party in connection with such cooperation, and who further agrees to apply
all amounts realized from the prosecution of such claim, less its expenses in
connection therewith, to remedy such breach or cure such defect.
7.2. Use of the Leased Property.
---------------------------
(a) Lessee 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
applicable local, state and federal law.
(b) Lessee 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 Lessor (the
"Primary Intended Use"). Lessee shall not use the Leased Property or any portion
thereof for any other use without the prior written consent of Lessor. No use
other than the Primary Intended Use shall be made or permitted to be made of the
Leased Property, and no acts shall be done other than the Primary Intended Use,
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 Lessor is available and Lessee pays any premium
increase), nor shall Lessee sell or permit to be kept, used or sold in or about
the Leased Property any article which is prohibited by law or fire underwriter's
regulations. Lessee shall 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 Lessee's Personal Property, which compliance shall be
performed at Lessee's sole cost.
(c) Subject to the provisions of Articles 14 and 15, Lessee
covenants and agrees that during the Term it will either directly or through an
approved Manager (1) operate continuously the Leased Property as a hotel
facility, (2) keep in full force and effect and comply in all material respects
with all the provisions of the Franchise Agreement, (3) not terminate or amend
in any respect the Franchise Agreement without the consent of Lessor, (4)
maintain appropriate certifications and licenses for such use and (5) keep
Lessor advised of the status of any material litigation affecting the Leased
Property.
(d) Lessee shall not commit or suffer to be committed any
waste on the Leased Property, or in the Facility, nor shall Lessee cause or
permit any nuisance thereon.
(e) Lessee shall neither suffer nor permit the Leased Property
or any portion thereof, or Lessee's Personal Property, to be used in such a
manner as (1) might reasonably tend to impair Lessor's (or Lessee'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.
20
<PAGE>
(f) Lessee shall comply with all of the Lessor's covenants, in
any loan agreement or other financing arrangement, applicable to this Lease or
the operation of the Leased Property. Notwithstanding the foregoing, Lessee
shall not be obligated to comply with Lessor's covenants in any loan agreements
which (A) (i) are not customary, (ii) are not otherwise contemplated by this
Lease Agreement or any agreement or instrument executed by Lessee in connection
herewith for the benefit of Lessor, and (iii)(x) materially and adversely affect
the operations at the Facility or (y) materially increase Lessee's costs of
doing business or decrease revenues, unless in cases where Subsection (iii)(y)
is relied upon by Lessee the additional cost thereof is borne by Lessor, or (B)
obligate Lessee to guarantee repayment of any debt of Lessor, or (C) require any
indemnification undertakings other than customary undertakings with respect to
servicing agents or similar administrative agents which administer escrow
accounts into which Lessee may deposit Rent payments as required by Lessor's
lenders or other servicing agents. Lessor will provide Lessee with not less than
15, and will attempt in good faith to provide not less than 30, days prior
written notice of the terms of such covenants, and if Lessee is relying upon
Subsection (iii)(y), Lessee shall within five days of receipt of such notice,
notify Lessor in writing of any anticipated material additional costs which
Lessee may incur. Lessor shall then notify Lessee in writing whether it agrees
to pay or reimburse Lessee for the material additional cost thereof as incurred
by Lessee, and Lessee's receipt of such notice shall be a condition precedent to
Lessee's obligation to comply with such covenants. Lessor shall have the right
to dispute Lessee's reliance on Subsections (A)-(C) or Lessee's estimates of
additional costs pursuant to Subsection (A)(iii)(y), and either party may submit
any such disputes to arbitration under the provisions of Section 40.2.
ARTICLE
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8
8.1. Compliance with Legal and Insurance Requirements, etc.
------------------------------------------------------
Subject to Section 8.2, 8.3(b) below and Article 12 relating
to permitted contests, Lessee, at its expense, will promptly (a) comply with all
applicable Legal 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 Lessee'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 Requirement Covenants.
----------------------------
(a) Subject to Section 8.3(b) below, Lessee covenants and
agrees that the Leased Property and Lessee's Personal Property shall not be used
by anyone other than Lessor for any unlawful purpose, and that Lessee shall use
all commercially reasonable efforts not to permit or suffer to exist any
unlawful use of the Leased Property by others. Lessee shall acquire and maintain
all licenses, certifications, permits and other authorizations and approvals
required to operate the Leased Property in its customary manner for the Primary
Intended Use, and any other
21
<PAGE>
lawful use conducted on the Leased Property as may be permitted from time to
time hereunder. Lessee further covenants and agrees that Lessee'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, unless the
same are finally determined by a court of competent jurisdiction to be unlawful
(and Lessee shall cause all its sub-tenants, invitees or others to so comply
with all Legal Requirements).
(b) As between Lessor and Lessee, Lessee is solely responsible
for all liabilities or obligations of any kind with respect to employees at the
Leased Property during the Term. Without limiting the generality of the
foregoing sentence, Lessee is solely responsible for any required compliance
with the Worker Adjustment, Retraining and Notification Act of 1988 (WARN) or
any similar state law applicable to the Leased Property; any required compliance
with the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
(COBRA); and all alleged and actual obligations and claims arising from or
relating to any employment agreement, collective bargaining agreement or
employee benefit plans, any grievances, arbitrations, or unfair labor practice
charges, and relating to compliance with any applicable state or federal labor
employment law, including but not limited to all laws pertaining to
discrimination, workers' compensation, unemployment compensation, occupational
safety and health, unfair labor practices, family and medical leave, and wages,
hours or employee benefits. Lessee agrees to indemnify and defend and hold
harmless Lessor from and against any claims relating to any of the foregoing
matters. Lessee further agrees to reimburse Lessor for any and all losses,
damages, costs, expenses, liabilities and obligations of any kind, including
without limitation reasonable attorney's fees and other legal costs and
expenses, incurred by Lessor in connection with any of the foregoing matters.
Notwithstanding the Lessee's obligations under Section 8.1 to obtain
and maintain all permits and licenses required for the use of the Leased
Property, and without limiting any obligations of Lessee hereunder, if (i)
applicable law requires that the owner (rather than a lessee) of a hotel be the
licensee under the required liquor license for the Facility or (ii) the former
owner of the Facility is holding the liquor license and continuing to exercise
management and supervision of the liquor services at the Facility pending
transfer of the license to Lessor or Lessee, the Lessee shall indemnify and hold
the Lessor harmless from any liability, damages or claims (a) arising in
connection with liquor operations at the Facility during such period of time,
except for the Lessor's gross negligence or willful misconduct or (b) made by or
through the former owner with respect to liquor operations at the Facility.
8.3. Environmental Covenants.
------------------------
Lessor and Lessee (in addition to, and not in diminution of,
Lessee's covenants and undertakings in Sections 8.1 and 8.2 hereof) covenant and
agree as follows:
(a) At all times hereafter until Lessee completely vacates the
Leased Property and surrenders possession of the same to Lessor, Lessee shall
fully comply with all Environmental Laws applicable to the Leased Property and
the operations thereon, except to the extent that such compliance would require
the remediation of Environmental Liabilities for
22
<PAGE>
which Lessee has no indemnity obligations under Section 8.3(b). Lessee agrees to
give Lessor prompt written notice of (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; and (3) all Releases at, on, in,
under or in any way affecting the Leased Property, or any Release known by
Lessee at, on, in or under any property adjacent to the Leased Property; in each
case as to which it has actual knowledge.
(b) Lessee hereby agrees to defend, indemnify and save
harmless any and all Lessor Indemnified Parties from and against any and all
Environmental Liabilities except to the extent that the same (i) are caused by
the intentionally wrongful acts or grossly negligent failures to act of Lessor,
or (ii) result from Releases or other violations of Environmental Laws
originating on adjacent property but affecting the Leased Property (a
"Migration"), provided that such exclusions shall not apply to the extent that
the Migration has been exacerbated by Lessee's act or negligent failure to act.
(c) Lessor hereby agrees to defend, indemnify and save
harmless any and all Lessee Indemnified Parties from and against any and all
Environmental Liabilities to the extent that the same were caused by the
intentionally wrongful acts or grossly negligent failures to act of Lessor.
(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 Indemnifying Party and approved by the Indemnified Party,
which approval shall not be unreasonably withheld; provided, however, that such
approval shall not be required in the case of defense by counsel designated by
any insurance company undertaking such defense pursuant to any applicable policy
of insurance. Each Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel will be at the sole expense of such
Indemnified Party unless a conflict of interest prevents representation of such
Indemnified Party by the counsel selected by the Indemnifying Party and such
separate counsel has been approved by the Indemnifying Party, which approval
shall not be unreasonably withheld. The Indemnifying Party shall not be liable
for any settlement of any such Proceeding made without its consent, which shall
not be unreasonably withheld, but if settled with the consent of the
Indemnifying Party, or if settled without its consent (if its consent shall be
unreasonably withheld), or if there be a final, nonappealable judgment for an
adversary party in any such Proceeding, the Indemnifying Party shall indemnify
and hold harmless the Indemnified Parties from and against any liabilities
incurred by such Indemnified Parties by reason of such settlement or judgment.
(e) At any time any Indemnified Party has reason to believe
circumstances exist which could reasonably result in an Environmental Liability,
upon reasonable prior written notice to the Lessee and the Lessor stating such
Indemnified Party's basis for such belief, an Indemnified Party shall be given
immediate access to the Leased Property (including, but not
23
<PAGE>
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), Manager and Lessee's or Manager'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 8 shall be in addition to any indemnification rights and
obligations provided for elsewhere in this Lease, provided that in the event of
a conflict between the provisions of this Section 8.3 and Article 20, the
provisions of this Section 8.3 shall control.
(g) The indemnification rights and obligations provided for in
this Article 8 shall survive the termination of this Lease.
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 Lessee or Lessor, as the case
may be, any claims or rights it may have against any third party which would
materially reduce the amount of damages otherwise incurred by such Indemnified
Party.
ARTICLE
-------
9
9.1. Maintenance and Repair; Capital Expenditures.
---------------------------------------------
(a) Lessee will keep the Leased Property and all private
roadways, sidewalks and curbs appurtenant thereto that are under Lessee's
control, including windows and plate glass, parking lots, HVAC, mechanical,
electrical and plumbing systems and equipment (including conduit and ductwork),
and non-load bearing interior walls, in good order and repair, except for
ordinary wear and tear (whether or not the need for such repairs occurred as a
result of Lessee's use, any prior use, the elements or the age of the Leased
Property, or any portion thereof but subject to the obligation to make necessary
and appropriate repairs and replacements as provided in this Section 9.1(a)),
and, except as otherwise provided in Article 14 or Article 15, with reasonable
promptness, make all necessary and appropriate repairs, replacements and
improvements thereto of every kind and nature, whether interior or exterior,
ordinary or
24
<PAGE>
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 governmental agency having jurisdiction over the
Leased Property. Lessee, however, shall be permitted to prosecute claims against
Lessor's predecessors in title for breach of any representation or warranty or
for any latent defects in the Leased Property to be maintained by Lessee unless
Lessor 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. Lessee 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 Lessee fails to make any
required repairs or replacements after 30 days notice from Lessor, or after such
longer period as may be reasonably required provided that Lessee at all times
diligently proceeds with such repair or replacement, then Lessor shall have the
right, but shall not be obligated, to make such repairs or replacements on
behalf of and for the account of Lessee. In such event, such work shall be paid
for in full by Lessee as Additional Charges.
(b) Subject to Lessor's obligation to make available to the
Lessee amounts for Capital Expenditures as set forth in Article 38, Lessee shall
be required to make all Capital Expenditures required in connection with (i)
Emergency Situations, (ii) Legal Requirements, (iii) maintenance of the
Franchise Agreement, (iv) the performance by Lessee of its obligations under
this Lease, and (v) other additions to the Leased Property as it may reasonably
deem appropriate and that are permitted hereunder during the Term. Lessee hereby
waives, to the extent permitted by law, the right to make repairs at the expense
of Lessor pursuant to any law in effect at the time of the execution of this
Lease or hereafter enacted. Lessor shall have the right to give, record and
post, as appropriate, notices of non-responsibility under any mechanic's lien
laws now or hereafter existing.
(c) Nothing contained in this Lease and no action or inaction
by Lessor shall be construed as (1) constituting the request of Lessor,
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 Lessee 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 Lessor
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 Lessor in the Leased Property, or any portion thereof.
(d) Lessee will, upon the expiration or prior termination of
the Term, vacate and surrender the Leased Property to Lessor in the condition in
which the Leased Property was originally received from Lessor, 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 Lessee to maintain the Leased Property in good order and repair in
accordance with Section 9.1(a) above, as would a prudent owner of comparable
property, during the entire Term) or damage by casualty or Condemnation (subject
to the obligation of Lessee to restore or repair as set forth in this Lease.)
25
<PAGE>
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 a Leased
Property, or violate the agreements or conditions contained in any lawful
restrictive covenant or other agreement affecting a Leased Property, or any part
thereof, or impair the rights of others under any easement or right of way to
which said Leased Property is subject, then promptly upon the request of Lessor
or at the behest of any person affected by any such encroachment, violation or
impairment, Lessee shall, at its expense, 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
Lessor or Lessee or (b) make such changes in the Leased Improvements, and take
such other actions, as Lessee 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 10. Lessee'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
Lessor.
ARTICLE
-------
10
10.1. Alterations.
------------
After first obtaining the written approval of Lessor, which
shall not be unreasonably withheld, Lessee shall have the right, but not the
obligation, to make such additions, modifications or improvements to the Leased
Property from time to time as Lessee deems desirable for its permitted uses and
purposes, provided that such action will not alter the character or purposes of
the Leased Property or detract from the value or operating efficiency thereof
and will not impair the revenue-producing capability of the Leased Property or
adversely affect the ability of the Lessee to comply with the provisions of this
Lease. All such work shall be performed in a first class manner in accordance
with all applicable governmental rules and regulations and after receipt of all
required permits and licenses. The cost of such additions, modifications or
improvements to the Leased Property shall be paid by Lessee, and all such
additions, modifications and improvements shall, without payment by Lessor 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
Lessor.
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10.2. Salvage.
--------
All materials which are scrapped or removed in connection with
the making of repairs required by Articles 9 or 10 shall be or become the
property of Lessor or Lessee depending on which party is paying for or providing
the financing for such work.
10.3. Lessor Alterations.
-------------------
Lessor shall have the right, but not the obligation, to make
such other additions to the Leased Property as it may reasonably deem
appropriate during the Term, subject to the Lessee's approval which shall not be
unreasonably withheld. All such work shall be done after reasonable notice to
and coordination with Lessee, so as to minimize any disruptions or interference
with the operation of the Facility.
ARTICLE
-------
11
11.1. Liens.
------
Subject to the provision of Article 12 relating to permitted
contests, Lessee 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 resulting from the action
or inaction of Lessee, or any attachment, levy, claim or encumbrance in respect
of the Rent, excluding, however, (a) this Lease, (b) the matters, if any,
included as exceptions or insured against in the title policy insuring Lessor's
interest in the Leased Property,(c) restrictions, liens and other encumbrances
which are consented to in writing by Lessor, (d) liens for those taxes which
Lessee is not required to pay hereunder, (e) subleases permitted by Article 21
hereof, (f) liens for Impositions or for sums resulting from noncompliance with
Legal Requirements so long as (1) the same are not yet delinquent or (2) such
liens are in the process of being contested as permitted by Article 12, (g)
liens of mechanics, laborers, suppliers or vendors for sums either disputed or
not yet due provided that any such liens for disputed sums are in the process of
being contested as permitted by Article 12 hereof, and (h) any liens which are
the responsibility of Lessor pursuant to the provisions of Article 32 of this
Lease.
ARTICLE
-------
12
12.1. Permitted Contests.
-------------------
Lessee shall have the right to contest the amount or validity
of any Imposition to be paid by Lessee or any Legal Requirement or any lien,
attachment, levy, encumbrance, charge or claim (any such Imposition, Legal
Requirement, lien, attachment, levy, encumbrance, charge or claim herein
referred to as "Claims") not otherwise permitted by Article 11, by appropriate
legal proceedings in good faith and with due diligence (but this shall not be
deemed or construed
27
<PAGE>
in any way to relieve, modify or extend Lessee'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 Lessee from its obligations hereunder and shall not
cause the sale or risk the loss of any portion of the Leased Property, or any
part thereof, or cause Lessor or Lessee to be in default under any mortgage,
deed of trust, security deed or other agreement encumbering the Leased Property
or any interest therein. Upon the request of Lessor, Lessee shall either (a)
provide a bond or other assurance reasonably satisfactory to Lessor that all
Claims which may be assessed against the Leased Property together with interest
and penalties, if any, thereon and legal fees anticipated to be incurred in
connection therewith 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 Lessor, as security for the payment of such Claims,
money in an amount sufficient to pay the same, together with interest and
penalties thereon and legal fees anticipated to be incurred 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. Lessee
shall furnish Lessor and any lender of Lessor with reasonable evidence of such
deposit within five days of the same. Lessor 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 Lessor shall not thereby be
subjected to any liability for the payment of any costs or expenses in
connection with any proceedings brought by Lessee; and Lessee covenants to
indemnify and save harmless Lessor from any such costs or expenses. Lessee shall
be entitled to any refund of any Claims and such charges and penalties or
interest thereon which have been paid by Lessee or paid by Lessor and for which
Lessor has been fully reimbursed. In the event that Lessee 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, Lessor may, upon
ten days advance Notice to Lessee, pay such charges together with any interest
and penalties and the same shall be repayable by Lessee to Lessor as Additional
Charges at the next Payment Date provided for in this Lease. Provided, however,
that should Lessor reasonably determine that the giving of such Notice would
risk loss to the Leased Property or cause damage to Lessor, then Lessor shall
only give such Notice as is practical under the circumstances. Lessor reserves
the right to contest any of the Claims at its expense not pursued by Lessee.
Lessor and Lessee agree to cooperate in coordinating the contest of any Claims.
ARTICLE
-------
13
13.1. General Insurance Requirements.
-------------------------------
(a) Coverages. During the Term of this Lease, the Leased
Property shall at all times be insured with the kinds and amounts of insurance
described below. This insurance shall be written by companies authorized to
issue insurance in the State. The policies must name the Lessor as an additional
named insured, and the Manager shall also be named as an additional insured
under the coverages described in Sections 13.1(a) (iv) through (xi). Losses
shall be payable to Lessor or Lessee as provided in this Lease. Any loss
adjustment for coverages insuring both parties shall require the written consent
of Lessor and Lessee, each acting reasonably and in good faith. Evidence of
insurance shall be deposited with Lessor. The policies
28
<PAGE>
on the Leased Property, including the Leased Improvements, Fixtures and Lessee's
Personal Property, shall satisfy the requirements of the Franchise Agreement and
of any ground lease, mortgage, security agreement or other financing lien
affecting the Leased Property and at a minimum shall include:
(i) Building insurance on the "Special Form" (formerly
"All Risk" form) (including earthquake and flood in reasonable amounts
if and as determined by Lessor, in the exercise of its reasonable
discretion, or Lessor's underwriters or lenders) in an amount not less
than 100% of the then full replacement cost thereof (as defined in
Section 13.2) or such other amount which is acceptable to Lessor, and
personal property insurance on the "Special Form" in the full amount of
the replacement cost thereof;
(ii) Insurance for loss or damage (direct and indirect)
from steam boilers, pressure vessels or similar apparatus, air
conditioning systems, piping and machinery, and sprinklers, if any, 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 Lessor from time to time;
(iii) Loss of income insurance on the "Special Form", in
the amount of 18 months of the sum of [Initial Fixed Rent or] Base Rent
plus Percentage Rent (based on the last Lease Year of operation or, to
the extent the Leased Property has not been operated for an entire
18-month Lease Year, based on prorated Percentage Rent) for the benefit
of Lessor, and business interruption insurance on the "Special Form" in
the amount of 18 months of gross profit, for the benefit of Lessee;
(iv) Commercial general liability insurance, with amounts
not less than $1,000,000 combined single limit for each occurrence and
$2,000,000 for the aggregate of all occurrences within each policy
year, as well as excess liability (umbrella) insurance with limits of
at least $50,000,000 per occurrence, 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 Lessor, 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
Lessor and Lessee;
(v) Fidelity bonds or blanket crime policies with limits
and deductibles as may be reasonably determined by Lessor, covering
Lessee's and/or Manager's employees in job classifications normally
bonded under prudent hotel management practices in the United States or
otherwise required by law;
(vi) Workers' compensation insurance to the extent
necessary to protect Lessor, Lessee and the Leased Property against
Lessee's and/or Manager's workman's compensation claims to the extent
required by applicable state laws;
(vii) Comprehensive form vehicle liability insurance for
owned, non-owned, and hired vehicles, in the amount of $1,000,000;
29
<PAGE>
(viii) Garagekeeper's legal liability insurance covering
both comprehensive and collision-type losses with a limit of liability
of $3,000,000 for any one occurrence, of which coverage in excess of
$1,000,000 may be provided by way of an excess liability policy;
(ix) Innkeeper's legal liability insurance covering
property of guests while on the Leased Property for which Lessor is
legally responsible with a limit of not less than $2,000 per guest and
$50,000 in any one occurrence or $25,000 annual aggregate;
(x) Safe deposit box legal liability insurance covering
property of guests while in a safe deposit box on the Leased Property
for which Lessor is legally responsible with a limit of not less than
$50,000 in any one occurrence; and
(xi) Insurance covering such other hazards (such as plate
glass or other common risks) and in such amounts as may be (A) required
by a Holder, or (B) 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 determined by
Lessor.
(b) Responsibility for Insurance. Lessor shall obtain the
insurance and pay the premiums for the coverages described in Section 13.1(a)(i)
- - (iii) above (excluding the business interruption insurance for the benefit of
the Lessee in Section 13.1(a)(iii)). Lessee shall obtain the insurance and pay
the premiums for the coverages described in Section 13.1(a)(iii) - (xi) above
(excluding the loss of income insurance for the benefit of the Lessor in Section
13.1(a)(iii)). The Lessee shall also be responsible for any and all deductibles
in connection with such coverages. In the event that Lessor can obtain
comparable insurance coverage required to be carried by Lessee from comparable
insurers and at a cost significantly less than that at which Lessee can obtain
such coverage, the parties shall cooperate in good faith to obtain such coverage
at the lower cost and the Lessee 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 requiring replacement from time
to time 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 has increased or decreased at any time during the Term, it
shall have the right to have such full replacement cost redetermined.
13.3. (Intentionally omitted)
-----------------------
30
<PAGE>
13.4. Waiver of Subrogation.
----------------------
All insurance policies covering the Leased Property, the
Fixtures, the Facility or Lessee'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. Each
party agrees to seek recovery from any applicable insurance coverage prior to
seeking recovery against the other party.
13.5. Form Satisfactory, etc.
-----------------------
All of the policies of insurance referred to in this Article
13 that are the responsibility of the Lessee shall be written in a form, with
deductibles and by insurance companies satisfactory to Lessor and shall satisfy
the requirements of any ground lease, mortgage, security agreement or other
financing lien on the Leased Property and of the Franchise Agreement. The Lessee
shall pay all of the premiums therefor, and deliver copies of such policies or
certificates thereof to the Lessor 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 the Lessee either to effect such
insurance as herein called for or to pay the premiums therefor, or to deliver
such policies or certificates thereof to the Lessor at the times required, the
Lessor shall be entitled, but shall have no obligation, after 10 days' Notice to
Lessee (or after less than 10 days' Notice if required to prevent the expiration
of any existing policy), to effect such insurance and pay the premiums therefor,
and to be reimbursed by Lessee for any such premiums upon written demand
therefor. Each insurer mentioned in this Article 13 shall agree, by endorsement
to the policy or policies issued by it, or by independent instrument furnished
to the Lessor that it will give to Lessor 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 Lessor or Lessee 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, Lessor and Lessee
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. If the parties fail to agree on such limits, the matter shall be
referred to arbitration as provided for in Section 40.2.
13.7. Blanket Policy.
---------------
Notwithstanding anything to the contrary contained in this
Article 13, Lessee may bring the insurance provided for herein within the
coverage of a so-called blanket policy or policies of insurance carried and
maintained by Lessee; provided, however, that the coverage afforded to Lessor
and Lessee 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
31
<PAGE>
reason of the use of such blanket policy of insurance, and provided further that
the requirements of this Article 13 are otherwise satisfied.
13.8. Separate Insurance.
-------------------
Neither Lessor nor Lessee shall on its 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 Lessor, 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. Each party shall
immediately notify the other party that it has obtained any such separate
insurance or of the increasing of any of the amounts of the then existing
insurance.
13.9. Reports On Insurance Claims.
----------------------------
Lessee shall promptly investigate and make a complete and
timely written report to the appropriate insurance company as to all accidents,
all claims for damage relating to the ownership, operation, and maintenance of
the Facility, and any damage or destruction to the Facility and the estimated
cost of repair thereof and shall prepare any and all reports required by any
insurance company in connection therewith. All such reports shall be timely
filed with the insurance company as required under the terms of the insurance
policy involved, and a copy of all such reports shall be furnished to Lessor.
Lessee shall be authorized to adjust, settle or compromise any insurable loss,
or to execute proofs of such losses, in the aggregate, of $10,000 or less, with
respect to any single casualty or other event.
ARTICLE
-------
14
14.1. Insurance Proceeds.
-------------------
Subject to the provision of Section 13.9, all proceeds of the
insurance contemplated by Sections 13.1(a) (i) and (ii) 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 13 of this Lease shall be paid to
Lessor and held in trust in an interest bearing account and made available, if
applicable, for reconstruction or repair, as the case may be, of any damage to
or destruction of the Leased Property or any portion thereof, and, if
applicable, shall be paid out by Lessor from time to time for the reasonable
costs of such reconstruction or repair upon satisfaction of reasonable terms and
conditions specified by Lessor. Any excess proceeds of insurance remaining after
the completion of the restoration or reconstruction of the Leased Property shall
be paid to Lessor. If neither Lessor nor Lessee is required or elects to repair
and restore, and the Lease is terminated as described in Section 14.2, all such
insurance proceeds shall be retained by Lessor except for any amount thereof
paid with respect to Lessee's Personal
32
<PAGE>
Property. All salvage resulting from any risk covered by insurance shall belong
to Lessor, except to the extent of salvage relating to Lessee's Personal
Property.
14.2. Reconstruction in the Event of Damage or Destruction Covered by
Insurance.
----------
(a) If during the Term the Leased Property is totally or
partially destroyed by a risk covered by the insurance described in Article 13
and the Facility thereby is rendered Unsuitable for its Primary Intended Use,
the Lease shall terminate as of the date of the casualty and neither Lessor nor
Lessee shall have any further liability hereunder except for any liabilities
which have arisen prior to or which survive such termination, and Lessor shall
be entitled to retain all insurance proceeds except for any amount thereof paid
with respect to Lessee's Personal Property.
(b) If during the Term the Leased Property is partially
destroyed by a risk covered by the insurance described in Article 13, but the
Facility is not thereby rendered Unsuitable for its Primary Intended Use, Lessor
or, at the election of Lessor, Lessee shall 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. Such damage
or destruction shall not terminate this Lease. If Lessee restores the Facility,
the insurance proceeds shall be paid out by Lessor from time to time for the
reasonable costs of such restoration upon satisfaction of terms and conditions
specified by Lessor, and any excess proceeds remaining after such restoration
shall be paid to Lessor except for any amount thereof paid with respect to
Lessee's Personal Property.
(c) If the cost of the repair or restoration exceeds the
amount of proceeds received by Lessor from the insurance required under Article
13, Lessor shall agree to contribute any excess amounts needed to restore the
Facility prior to requiring Lessee to commence such work. Such difference shall
be made available by Lessor, together with any other insurance proceeds, for
application to the cost of repair and restoration in accordance with the
provisions of Section 14.2(b).
14.3. Reconstruction in the Event of Damage or Destruction Not Covered by
Insurance or When Holder Will Not Release Insurance Proceeds.
-------------------------------------------------------------
If during the Term the Facility is totally or materially
damaged or destroyed by a risk not covered by the insurance described in Article
13, or, notwithstanding the provisions of Section 14.2(b), if the Holder will
not make the proceeds of such insurance available to Lessor for restoration of
the Facility, whether or not in either event such damage or destruction renders
the Facility Unsuitable for its Primary Intended Use, Lessor, at its option,
shall either, (a) at Lessor's sole cost and expense, restore the Facility to
substantially the same condition it was in immediately before such damage or
destruction and such damage or destruction shall not terminate this Lease, or
(b) terminate the Lease and neither Lessor nor Lessee shall have any further
liability thereunder except for any liabilities which have arisen or occurred
prior to such termination and those which expressly survive termination of this
Lease. If such damage or destruction is determined by Lessor not to be material,
Lessor may, at Lessor's sole cost and
33
<PAGE>
expense, 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, and such damage or destruction shall not terminate the
Lease.
14.4. Lessee's Property and Business Interruption Insurance.
------------------------------------------------------
All insurance proceeds payable by reason of any loss of or
damage to any of Lessee's Personal Property and the business interruption
insurance maintained for the benefit of Lessee shall be paid to Lessee;
provided, however, no such payments shall diminish or reduce the insurance
payments otherwise payable to or for the benefit of Lessor hereunder.
14.5. Abatement of Rent.
------------------
Any damage or destruction due to casualty notwithstanding, and
provided the Lease has not otherwise been terminated, this Lease shall remain in
full force and effect and Lessee's obligation to pay Rent required by this Lease
shall remain unabated by any damage or destruction which does not result in a
reduction of Gross Revenues. If and to the extent that any damage or destruction
results in a reduction of Gross Revenues which would otherwise be realizable
from the operation of the Facility, then Lessor shall receive all loss of income
insurance and Lessee shall have no obligation to pay Rent in excess of the
amount of Percentage Rent, if any, realizable from Gross Revenues generated by
the operation of the Leased Property during the existence of such damage or
destruction.
ARTICLE
-------
15
15.1. Definition.
-----------
(a) "Condemnation" means 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 Lessor to any Condemnor,
either under threat of condemnation or while legal proceedings for condemnation
are pending.
(b) "Date of Taking" means the date the Condemnor has the
right to possession of the property being condemned.
(c) "Award" means all compensation, sums or anything of value
awarded, paid or received on a total or partial Condemnation.
(d) "Condemnor" means any public or quasi-public authority, or
private corporation or individual, having the power of Condemnation.
34
<PAGE>
15.2. Parties' Rights and Obligations.
--------------------------------
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 Lessor and Lessee shall be determined by this Article 15.
15.3. 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. 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, then either Lessee or Lessor shall 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 Lessee hereunder shall be apportioned as
of the Date of Taking, and Lessee shall promptly pay Lessor such amounts.
15.4. Allocation of Award.
--------------------
The total Award made with respect to the Leased Property or
for loss of rent, or for Lessor's loss of business beyond the Term, shall be
solely the property of and payable to Lessor. Any Award made for loss of
Lessee's business during the remaining Term, if any, for the taking of Lessee's
Personal Property, or for removal and relocation expenses of Lessee in any such
proceedings shall be the sole property of and payable to Lessee. In any
Condemnation proceedings Lessor and Lessee shall each seek its Award in
conformity herewith, at its respective expense; provided, however, neither
Lessor nor Lessee shall initiate, prosecute or acquiesce in any proceedings that
may result in a diminution of any Award payable to the other.
15.5. Partial Taking.
---------------
(a) 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 or Uneconomic for its Primary Intended Use, or if Lessor is entitled but
elects not to terminate this Lease as provided in Section 15.3, then Lessor or,
at Lessor's election, Lessee shall, with all reasonable dispatch and to the
extent that the Holder permits the application of the Award therefor and the
Award is sufficient therefor, 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. Lessor and Lessee shall each contribute
to the cost of restoration that part of its Award specifically allocated to such
restoration, if any, together with severance and other damages awarded for the
taken Leased Improvements; provided, however, that the amount of such
contribution shall not exceed such cost.
35
<PAGE>
(b) In the event of a partial Taking as described in Section
15.5(a), which does not result in a termination of this Lease by Lessor, the
Base Rent shall be abated in the manner and to the extent that is fair, just and
equitable to both Lessee and Lessor, 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 Lessor and Lessee are unable to
agree upon the amount of such abatement within 30 days after such partial
Taking, the matter shall be submitted to Arbitration as provided for in Section
40.2 hereof.
15.6. Temporary Taking.
-----------------
If the whole or any part of the Leased Property or of Lessee'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 Lessee shall
continue to pay, in the manner and at the times herein specified, the full
amounts of Base Rent and Additional Charges, but only to the extent of the Award
made to Lessee for such Condemnation allocable to the Term. In addition, to the
extent of the remaining balance, if any, of the Award made for such Condemnation
allocable to the Term (after payment of Base Rent and Additional Charges),
Lessee shall pay Percentage Rent at a rate equal to the average Percentage Rent
during the last three preceding full Lease Years (or if three full Lease Years
shall not have elapsed, the average during the preceding full Lease Years).
Except only to the extent that Lessee may be prevented from so doing pursuant to
the terms of the order of the Condemnor, Lessee shall continue to perform and
observe all of the other terms, covenants, conditions and obligations hereof on
the part of the Lessee to be performed and observed, as though such Condemnation
had not occurred. In the event of any Condemnation as in this Section 15.6
described, 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 Lessee. Lessee covenants that upon the termination of any such
period of temporary use or occupancy it will, to the extent that its Award is
sufficient therefor and subject to Lessor'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
such period of temporary use or occupancy extends beyond the expiration of the
Term, in which case Lessee shall not be required to make such restoration. If
restoration is required hereunder, Lessor 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.
ARTICLE
-------
16
16.1. Events of Default.
------------------
Any one or more of the following events shall constitute an
Event of Default hereunder:
(a) if Lessee fails to make any payment of [Initial Fixed
Rent,] Base Rent or Percentage Rent or Additional Charges within ten days after
receipt by Lessee of Notice from
36
<PAGE>
Lessor that the same has become due and payable, provided that Lessor shall not
be required to give any such Notice more than twice in any Lease Year and that
any third or subsequent failure by Lessee during such Lease Year to make any
payment of [Initial Fixed Rent,] Base Rent or Percentage Rent on the date the
same becomes due and payable shall constitute an immediate Event of Default; or
(b) if Lessee fails to observe or perform any other term,
covenant or condition of this Lease and such failure is not curable, or if
curable is not cured by Lessee within a period of 30 days after receipt by the
Lessee of Notice thereof from Lessor, unless such failure is curable but 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 (i) Lessee, within such 30 day period,
proceeds with due diligence to cure the failure and thereafter diligently
completes the curing thereof within 120 days of Lessor's Notice to Lessee, which
120-day period shall cease to run during any period that a cure of such failure
is prevented by an Unavoidable Delay and shall resume running upon the cessation
of such Unavoidable Delay, and (ii) the failure does not result in a notice or
declaration of default under any material contract or agreement to which Lessor,
the Company, or any Affiliate of either of them is a party or by which any of
their assets are bound; or
(c) if Lessee or Manager shall (i) be generally not paying its
debts as they become due, (ii) file, or consent by answer or otherwise to the
filing against it of, a petition for relief or reorganization or arrangement or
any other petition in bankruptcy, for liquidation or to take advantage of any
bankruptcy or insolvency law of any jurisdiction, (iii) make an assignment for
the benefit of its creditors, (iv) consent to the appointment of a custodian,
receiver, trustee or other officer with similar powers with respect to it or
with respect to any substantial part of its assets, (v) be adjudicated insolvent
or (vi) take corporate action for the purpose of any of the foregoing; or if a
court or governmental authority of competent jurisdiction shall enter an order
appointing, without consent by Lessee, a custodian, receiver, trustee or other
officer with similar powers with respect to it or with respect to any
substantial part of its assets, or if an order for relief shall be entered in
any case or proceeding for liquidation or reorganization or otherwise to take
advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering
the dissolution, winding-up or liquidation of Lessee, or if any petition for any
such relief shall be filed against Lessee and such petition shall not be
dismissed within 60 days; or
(d) if Lessee or Manager is liquidated or dissolved, or begins
proceedings toward such liquidation or dissolution, or, in any manner, ceases to
do business or permits the sale or divestiture of substantially all of its
assets; or
(e) if the estate or interest of Lessee in the Leased Property
or any part thereof is voluntarily or involuntarily transferred, assigned,
conveyed, levied upon or attached in any Proceeding (for purposes of this
Section 16.1(e), a Change of Control shall constitute an assignment of this
Lease); or
(f) if, except as a result of and to the extent required by
damage, destruction, Condemnation, Lessee ceases operations on the Leased
Property; or
37
<PAGE>
(g) if the Franchise Agreement with respect to the Facility on
the Leased Property is terminated by the franchisor as a result of any action or
failure to act by the Lessee or its agents, other than the failure to complete
improvements required by the franchisor because the Lessor fails to pay the
costs of such improvements; or
(h) if an Event of Default occurs under any of the Other
Leases.
If litigation or arbitration 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.
16.2. Remedies.
---------
Upon the occurrence of an Event of Default, Lessor shall have the
right, at Lessor's option, to elect to do any one or more of the following
without further notice or demand to Lessee: (a) terminate this Lease, in which
event Lessee shall immediately surrender the Leased Property to Lessor, and, if
Lessee fails to so surrender, Lessor shall have the right, without notice, to
enter upon and take possession of the Leased Property and to expel or remove
Lessee and its effects without being liable for prosecution or any claim for
damages therefor; and Lessee shall, and hereby agrees to, indemnify Lessor for
all loss and damage which Lessor suffers by reason of such termination,
including without limitation, damages in an amount equal to the total of (1) the
reasonable costs of recovering the Leased Property in the event that Lessee does
not promptly surrender the Leased Property, and all other reasonable expenses
incurred by Lessor in connection with Lessee's default; and (2) the unpaid Rent
earned as of the date of termination, plus interest at the Overdue Rate accruing
after the due date; (3) the total Rent (including Percentage Rent as determined
below) which Lessor would have received under this Lease for the remainder of
the Term, but discounted to the then present value at a rate of 12% per annum,
less the fair market rental value of the balance of the Term as of the time of
such default discounted to the then present value at a rate of 12% per annum;
and (4) all other sums of money and damages owing by Lessee to Lessor; or (b)
enter upon and take possession of the Leased Property without terminating this
Lease and without being liable to prosecution or any claim for damages therefor,
and, if Lessor elects, relet the Leased Property on such terms as Lessor deems
advisable, in which event Lessee shall pay to Lessor on demand the reasonable
cost of repossessing the Leased Property and any deficiency between the Rent
payable hereunder (including Percentage Rent as determined below) and the rent
paid under such reletting; provided, however, that Lessee shall not be entitled
to any excess payments received by Lessor from such reletting (Lessor's failure
to relet the Leased Property shall not release or affect Lessee's liability for
Rent or for damages); or (c) enter the Leased Property without terminating this
Lease and without being liable for prosecution or any claim for damages therefor
and maintain the Leased Property and repair or replace any damage thereto or do
anything for which Lessee is responsible hereunder. Lessee shall reimburse
Lessor immediately upon demand for any expense which Lessor incurs in thus
effecting Lessee's compliance under this Lease, and Lessor shall not be liable
to Lessee for any damages with respect thereto. Notwithstanding
38
<PAGE>
anything herein to the contrary, Lessee shall not be liable to Lessor for
consequential, punitive or exemplary damages.
The rights granted to Lessor in this Section 16.2 shall be
cumulative of every other right or remedy provided in this Lease or which Lessor
may otherwise have at law or in equity or by statute, and the exercise of one or
more rights or remedies shall not prejudice or impair the concurrent or
subsequent exercise of other rights or remedies or constitute a forfeiture or
waiver of Rent or damages accruing to Lessor by reason of any Event of Default
under this Lease.
Percentage Rent for the purposes of this Section 16.2 shall be
a sum equal to (i) the average of the annual amounts of the Percentage Rent for
the three full Lease Years immediately preceding the Lease Year in which the
termination, re-entry or repossession takes place, or (ii) if three full Lease
Years shall not have elapsed, the average of the Percentage Rent during the
preceding full Lease Years during which the Lease was in effect, or (iii) if one
full Lease Year has not elapsed, the amount derived by annualizing the
Percentage Rent from the effective date of this Lease.
16.3. Waiver.
-------
Each party waives, to the extent permitted by applicable law,
any right to a trial by jury in any proceedings brought by either party to
enforce the provisions of this Lease, including, without limitation, proceedings
to enforce the remedies set forth in this Article 16, and Lessee waives the
benefit of any laws now or hereafter in force exempting property from liability
for rent or for debt. Lessor waives any right to "pierce the corporate veil" of
Lessee other than to the extent funds shall have been paid to any Affiliate of
Lessee following a default leading to any Event of Default, and then only to the
extent of such payments.
16.4. Application of Funds.
---------------------
Any payments received by Lessor under any of the provisions of
this Lease during the existence or continuance of any Event of Default shall be
applied to Lessee's obligations in the order that Lessor may determine or as may
be prescribed by the laws of the State.
ARTICLE
-------
17
17.1. Lessor's Right to Cure Lessee's Default.
----------------------------------------
If Lessee fails to make any payment or to perform any act
required to be made or performed under this Lease including, without limitation,
Lessee'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,
Lessor, without waiving or releasing any obligation of Lessee, and without
waiving or releasing any obligation or default, may (but shall be under no
obligation to) at any time thereafter upon Notice to Lessee make such payment or
perform such act for the
39
<PAGE>
account and at the expense of Lessee, and may, to the extent permitted by law,
enter upon the Leased Property for such purpose and, subject to Section 16.2,
take all such action thereon as, in Lessor's opinion, may be necessary or
appropriate therefor. No such entry shall be deemed an eviction of Lessee. All
sums so paid by Lessor 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 Lessor, shall be paid by Lessee to Lessor on
demand. The obligations of Lessee and rights of Lessor contained in this Article
shall survive the expiration or earlier termination of this Lease.
ARTICLE
-------
18
18.1. Personal Property Limitation.
-----------------------------
(a) Anything contained in this Lease to the contrary
notwithstanding, the average of the adjusted tax bases of the items of Lessor's
personal property that are leased to Lessee under this Lease at the beginning
and at the end of any Lease Year shall not exceed 15% of the average of the
aggregate adjusted tax bases of the real and personal property contained in the
Leased Property at the beginning and at the end of such Lease Year (the
"Personal Property Limitation"). If Lessor reasonably anticipates that the
Personal Property Limitation will be exceeded with respect to the Leased
Property for any Lease Year, Lessor shall notify Lessee, and Lessee shall
purchase items of personal property anticipated by Lessor to be in excess of the
Personal Property Limitation ("Excess Personal Property Items") either from
Lessor or a third party. If the Excess Personal Property Items are purchased
from Lessor, the purchase prices of such Excess Personal Property Items shall be
equal to the adjusted tax bases of such Excess Personal Property Items in the
hands of Lessor as of the closing of the purchase.
(b) If Lessee purchases Excess Personal Property Items, the
Rent shall be reduced for the calendar quarter in which such purchase occurs and
each of four succeeding calendar quarters by an amount each calendar quarter
equal to 20% of the aggregate purchase prices of such Excess Personal Property
Items.
(c) If Lessee purchases Excess Personal Property Items, the
amount required by Lessor to be deposited in the Capital Expenditure Reserve
pursuant to Article 38 hereof shall be reduced for the Lease Year during which
such purchase occurs by an amount equal to the aggregate purchase prices of such
Excess Personal Property Items.
18.2. Sublease Rent Limitation.
-------------------------
Anything contained in this Lease to the contrary
notwithstanding, Lessee shall not sublet the Leased Property or enter into any
similar arrangement on any basis such that the rental or other amounts to be
paid by the sublessee thereunder would be based, in whole or in part, on either
(a) the net income or profits derived by the business activities of the
sublessee, or (b) any
40
<PAGE>
other formula such that any portion of the Rent would fail to qualify as "rents
from real property" within the meaning of Section 856(d) of the Code, or any
similar or successor provision thereto.
18.3. Sublease Lessee Limitation.
---------------------------
Anything contained in this Lease to the contrary
notwithstanding, Lessee shall not sublease the Leased Property to, or enter into
any similar arrangement with, any Person in which the Company owns, directly or
indirectly, a 10% or greater interest, within the meaning of Section 856(d) (2)
(B) of the Code, or any similar or successor provisions thereto.
18.4. Lessee Ownership Limitation.
----------------------------
Anything contained in this Lease to the contrary
notwithstanding, neither party shall take, or permit to take, any action that
would cause the Company to own, directly or indirectly, a 10% or greater
interest in the Lessee within the meaning of Section 856(d) (2) (B) of the Code,
or any similar or successor provision thereto.
18.5. Director, Officer and Employee Limitation.
------------------------------------------
Anything contained in this Lease to the contrary
notwithstanding, Lessor and Lessee shall cooperate to ensure that (i) no
officers or employees of Lessor or the Company shall be officers or employees
of, or own any ownership interest in, any Person who furnishes or renders
services to the tenants of the Leased Property, or manages or operates the
Leased Property, other than the Lessee and (ii) no officers or employees of any
Person who furnishes or renders services to the tenants of the Leased Property,
or manages or operates the Leased Property, other than the Lessee shall be
officers or employees of Lessor or the Company. Furthermore, if a Person serves
as both (a) a director or trustee of Lessor, the Company or any other Affiliate
of Lessor and (b) a director and officer (or employee) of the any Person who
furnishes or renders services to the tenants of the Leased Property, or manages
or operates the Leased Property, other than the Lessee, that Person shall not
receive any compensation (excluding reimbursement for expenses) for serving as a
trustee of the Lessor, the Company or the other Affiliate of Lessor.
ARTICLE
-------
19
19.1. Holding Over.
-------------
If Lessee 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 Lessee shall pay
as rental each month the aggregate of (a) one-twelfth of the aggregate Base Rent
and Percentage Rent payable with respect to the last Lease Year of the Term,
(b)all Additional Charges accruing during the applicable month and (c) all other
sums, if any, payable by Lessee under this Lease with respect to the Leased
Property. During such period, Lessee shall be obligated to perform and observe
all of the terms, covenants and conditions of
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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 Lessor to the holding over of Lessee after the
expiration or earlier termination of this Lease.
ARTICLE
-------
20
20.1. Indemnification.
----------------
Subject to the last sentence of Section 13.4, Lessee will
protect, indemnify, hold harmless and defend Lessor Indemnified Parties 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, including those resulting
from a Lessor Indemnified Party's own negligence but excluding those resulting
from a Lessor Indemnified Party's gross negligence or willful misconduct,
imposed upon or incurred by or asserted against Lessor Indemnified Parties by
reason of: (a) any accident, injury to or death of persons or loss of or damage
to property occurring on or about the Leased Property or adjoining sidewalks,
including without limitation any claims under liquor liability, "dram shop" or
similar laws, (b) any past, present or future use, misuse, non-use, condition,
management, maintenance or repair by Lessee or any of its agents, employees or
invitees of the Leased Property or Lessee's Personal Property or any litigation,
proceeding or claim by governmental entities or other third parties to which a
Lessor Indemnified Party is made a party or participant related to such use,
misuse, non-use, condition, management, maintenance, or repair thereof by Lessee
or any of its agents, employees or invitees, including any failure of Lessee or
any of its agents, employees or invitees to perform any obligations under this
Lease or imposed by applicable law (other than arising out of Condemnation
proceedings), (c) any Impositions, other than any portion of Real Estate Taxes
that the Lessor is obligated to pay under this Lease, (d) any failure on the
part of Lessee to perform or comply with any of the terms of this Lease, and (e)
the nonperformance 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.
Subject to the last sentence of Section 13.4, Lessor shall
indemnify, save harmless and defend Lessee 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 Lessee
Indemnified Parties as a result of (a) the gross negligence or willful
misconduct of Lessor arising in connection with this Lease or (b) any failure on
the part of Lessor 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. Any
such amounts shall be reduced by insurance proceeds received and any other
recovery (net of costs) obtained by the Indemnified Party. An Indemnifying
Party, at its expense,
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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. Nothing herein shall be construed as indemnifying a
Lessor Indemnified Party against its own grossly negligent acts or omissions or
willful misconduct.
Lessee's or Lessor's liability for a breach of the provisions
of this Article shall survive any termination of this Lease.
ARTICLE
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21
21.1. Subletting and Assignment.
--------------------------
In addition to the provisions of Article 18 and Sections 21.2,
21.3 and any other express consents, conditions, limitations or other provisions
set forth herein and in the Lease Master Agreement, Lessee shall not assign this
Lease or hereafter sublease all or any part of the Leased Property without first
obtaining the written consent of Lessor. In the case of a permitted subletting,
the sublessee shall comply with the provisions of Section 21.2 and 21.3, and in
the case of a permitted assignment, the assignee shall assume in writing and
agree to keep and perform all of the terms of this Lease on the part of Lessee
to be kept and performed and shall be, and become, jointly and severally liable
with Lessee for the performance thereof. In case of either an assignment or
subletting made during the Term, Lessee 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 Lessee hereunder. An original counterpart of each such sublease and
assignment and assumption, duly executed by Lessee and such sublessee or
assignee, as the case may be, in form and substance satisfactory to Lessor,
shall be delivered promptly to Lessor.
21.2. Attornment.
-----------
Lessee shall insert in each future sublease permitted under
Section 21.1 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 Lessor hereunder, (b) if this Lease terminates before the expiration of such
sublease, the sublessee thereunder will, at Lessor's option, attorn to Lessor
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 Lessor or Lessor's
assignees, if any, stating that an uncured Event of Default exists under this
Lease, the sublessee shall thereafter be obligated to pay all rentals accruing
under said sublease directly to the party giving such Notice, or as such party
may direct. All rentals received from the sublessee by Lessor or Lessor's
assignees, if any, as the case may be, shall be credited against the amounts
owing by Lessee under this Lease.
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21.3. Management Agreement.
---------------------
If the Lessee decides to enter into a management or agency
agreement relating to the management or operation of the Facility (collectively,
the "Management Agreement"), Lessor shall have the right to approve the
Management Agreement , any modifications to the Management Agreement affecting
the fees, costs or expenses payable or collectible thereunder, and any other
material modification to the Management Agreement. Lessor's approval shall not
be unreasonably withheld. The Management Agreement shall provide, among other
things, that (i) upon termination of this Lease or termination of Lessee's right
to possession of the Leased Property for any reason whatsoever, the Management
Agreement may be terminated by Lessor without liability for any payment due or
to become due to the manager of the Facility (the "Manager"), and (ii) all fees
and other amounts payable by Lessee to the Manager shall be subordinate on a
month to month basis to Rent and other amounts payable by Lessee to Lessor
hereunder prior to the existence of an Event of Default, and shall be at all
times subordinate to Rent and such other amounts after the occurrence of an
Event of Default
ARTICLE
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22
22.1. Officer's Certificates; Financial Statements; Lessor's Estoppel
Certificates and Covenants.
---------------------------
(a) At any time and from time to time upon not less than 10
days Notice by Lessor, Lessee will furnish to Lessor 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 Lessee there is any existing default or Event of Default hereunder
by Lessor or Lessee, and such other information as may be reasonably requested
by Lessor. Any such certificate furnished pursuant to this Section may be relied
upon by Lessor, any lender, any underwriter and any prospective purchaser of the
Leased Property.
(b) Lessee will furnish, at Lessee's cost and expense, the
following statements and operating information to Lessor, each in a form
satisfactory to Lessor:
(i) Consolidated Financials of Lessee for each
calendar quarter of each Lease Year, and for each calendar quarter in
the Lease Year-to-date, within 20 days after the end of such calendar
quarter;
(ii) Consolidated Financials of Lessee and each
Affiliate of Lessee, if any, that leases hotel properties from Lessor
or its Affiliates, for each calendar quarter of each Lease Year, and
for each calendar quarter in the Lease Year to date, within 20 days
after the end of such calendar quarter;
(iii) audited Consolidated Financials of Lessee for
each Lease Year, including the auditor's report thereon, within 60 days
after the end of such year;
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(iv) audited Consolidated Financials of Lessee and
each Affiliate of Lessee that leases hotel properties from Lessor or
its Affiliates, if any, for each Lease Year, including the auditor's
report thereon, within 60 days after the end of such year. The fees and
expenses of the auditor incurred in connection with conducting such
audits and delivering such reports shall be paid by Lessor;
(v) with reasonable promptness, such other
information respecting the financial condition and affairs of Lessee
(A) as Lessor or the Company may require or may deem desirable in its
discretion to file with or provide to the SEC or any other governmental
agency or any other Person, all in the form, and either audited or
unaudited, as Lessor may request in Lessor's reasonable discretion, and
(B) as may be reasonably necessary to confirm compliance by Lessee and
its Affiliates with the requirements of this Lease;
(vi) on or before the 20th day of each calendar
quarter, a balance sheet, and detailed profit and loss and cash flow
statements showing the financial position of the Facility as at the end
of the preceding calendar quarter, the results of operation of the
Facility for such preceding calendar quarter and the Lease Year-to-date
and the average daily rate, occupancy and revenue-per-available room of
the Facility in such preceding calendar quarter;
(vii) within five (5) days of Lessee's receipt
thereof, any inspection reports received from the franchisor under the
Franchise Agreement; and
(viii) such other information as Lessor may
reasonably request and that Lessee can provide without unreasonable
expense.
(c) At any time and from time to time upon not less than 10
days notice by Lessee, Lessor will furnish to Lessee or to any person designated
by Lessee 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 Lessor there is any existing default or Event
of Default on Lessee's part hereunder, and such other information as may be
reasonably requested by Lessee. Any such certificate furnished pursuant to this
Section may be relied upon by Lessee, any lender, any underwriter and any
purchaser of the assets of Lessee.
(d) If Company or Lessor proposes to include in any submission
or filing with its lender, stock exchange or the SEC, Consolidated Financials of
Lessee delivered or required to be delivered hereunder and the consent of
Lessee's auditor is required for such inclusion, Lessee shall use commercially
reasonable efforts to cause its auditor to deliver promptly to Lessor the
auditor's consent, in the form required, to the inclusion in the submission or
filing of the Consolidated Financials (including the report of the auditor, if
the Consolidated Financials to be included are audited). Lessee shall reasonably
cooperate with Lessor regarding Lessee's auditor's compliance with such requests
with the purpose of minimizing costs and delays. Lessee shall
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<PAGE>
reasonably cooperate with all requests made by its auditor, Lessor or the SEC to
promptly provide to the auditor, Lessor or SEC such information or documents,
including consents and representation letters, as may be necessary or desirable
in connection with the preparation, delivery, audit or inclusion in SEC filings,
submissions or other public documents, of information, including financial
information, related to the Leased Property, the operation and financial results
of the Leased Property, and the financial results and condition of the Lessee.
Without limiting the foregoing, the information shall be sufficient to permit
the preparation of a Management's Discussion and Analysis of Results of
Operations and Financial Condition with respect to the Lessee as may be required
to be included in reports and documents filed by the Company with the SEC.
Lessee shall not be obligated to incur material additional expense to prepare
any reports or information not specifically provided for herein that Lessor or
Company may be required or elect to file with the SEC, and such material
additional third-party costs shall be paid or reimbursed by Lessor.
ARTICLE
-------
23
23.1. Regular Meetings; Lessor's Right to Inspect.
--------------------------------------------
(a) Lessee agrees that the regional manager, the general
manager, the director of marketing/sales, and the chief engineer for the
Facility will meet with Lessor and its representatives on a monthly basis at the
Facility throughout each Lease Year in order to discuss all aspects of the
management, maintenance and operation of the Facility. If agreed upon by Lessor
and Lessee, such meetings may be held by conference call.
(b) Lessee shall permit Lessor and its authorized
representatives, which may include auditors, underwriters and rating agencies,
as frequently as reasonably requested by Lessor to (i) inspect the Leased
Property and Lessee's accounts and records pertaining thereto, including general
accounting records, corporate records and agreements relating to the operations
of the Leased Property and Lessee's financial condition, and make copies
thereof, and (ii) conduct audits, all during usual business hours upon
reasonable advance notice, subject only to any business confidentiality
requirements reasonably requested by Lessee. In conducting such inspections
Lessor shall not unreasonably interfere with the conduct of Lessee's business at
the Leased Property.
(c) Lessee will, on a space available basis, provide customary
gratuitous accommodations to Lessor and its representatives in connection with
all such meetings and inspections.
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ARTICLE
-------
24
24.1. No Waiver.
----------
No failure by Lessor or Lessee 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
-------
25
25.1. Remedies Cumulative.
--------------------
To the extent permitted by law but subject to Article 39 and
any other provisions of this Lease expressly limiting the rights, powers and
remedies of either Lessor or Lessee, each legal, equitable or contractual right,
power and remedy of Lessor or Lessee 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 Lessor or Lessee of any one or more of such rights,
powers and remedies shall not preclude the simultaneous or subsequent exercise
by Lessor or Lessee of any or all of such other rights, powers and remedies.
ARTICLE
-------
26
26.1. Acceptance of Surrender.
------------------------
No surrender to Lessor 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 Lessor and no act by Lessor or any
representative or agent of Lessor, other than such a written acceptance by
Lessor, shall constitute an acceptance of any such surrender.
ARTICLE
-------
27
27.1. 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.
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ARTICLE
-------
28
28.1. Conveyance by Lessor.
---------------------
Lessor shall have the unrestricted right to mortgage or
otherwise convey the Leased Property to a Holder. If Lessor conveys the Leased
Property in accordance with the terms hereof other than to a Holder, and the
grantee or transferee of the Leased Property expressly assumes in writing all
obligations of Lessor hereunder arising or accruing from and after the date of
such conveyance or transfer, Lessor shall thereupon be released from all future
liabilities and obligations of Lessor 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. If Lessee is not reasonably satisfied that the new
owner is a capable, reliable and qualified Person of good reputation and
character, Lessee may terminate this Lease upon 60-days Notice to Lessor given
within 30 days after Lessee receives Notice of such conveyance.
28.2. Lessor May Grant Liens.
-----------------------
(a) Subject to Section 7.2, without the consent of Lessee,
Lessor may from time to time, directly or indirectly, create or otherwise cause
to exist any lien, encumbrance or title retention agreement upon the Leased
Property, or any portion thereof or interest therein, or upon Lessor's interest
in this Lease, whether to secure any borrowing or other means of financing or
refinancing. This Lease and Lessee's interest hereunder shall at all times be
subject and subordinate to the lien and security title of any deeds to secure
debt, deeds of trust, mortgages, or other interests heretofore or hereafter
granted by Lessor or which otherwise encumber or affect the Leased Property and
to any and all advances to be made thereunder and to all renewals,
modifications, consolidations, replacements, substitutions, and extensions
thereof (all of which are herein called the "Mortgage"), provided that the
Mortgage and all security agreements delivered by Lessor in connection therewith
shall be subject to Lessee's rights under this Lease to receive all Gross
Revenues of the Facility prior to the earlier of the occurrence of an Event of
Default or the date that this Lease is terminated by the Holder of the Mortgage
in the exercise of its remedies thereunder. In confirmation of such
subordination, Lessee shall, at Lessor's request, promptly execute, acknowledge
and deliver any instrument which may be required to evidence subordination to
any Mortgage and attornment to the Holder thereof and its successors and
assigns, provided Lessee receives customary and reasonable non-disturbance
protection while it is not in default hereunder. The Lessee shall comply with
any material covenants with respect to the Lessee contained in such instrument
of subordination. In the event of Lessee's failure to deliver such subordination
and if the Mortgage does not change any term of the Lease, Lessor may, in
addition to any other remedies for breach of covenant hereunder, execute,
acknowledge, and deliver the instrument as the agent or attorney-in-fact of
Lessee, and Lessee hereby irrevocably constitutes Lessor its attorney-in-fact
for such purpose, Lessee acknowledging that the appointment is coupled with an
interest and is irrevocable.
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(b) Lessee shall, upon the request of Lessor or any existing
or future Holder, (i) provide Holder with copies of all licenses, permits,
occupancy agreements, operating agreements, leases, contracts and similar
agreements reasonably requested in connection with any existing or proposed
financing of the Leased Property, and (ii) execute, or cause the Manager or any
relevant Affiliate to execute, such estoppel agreements and collateral
assignments with respect to the Facility's liquor license and any of the other
aforementioned agreements as Holder may reasonably request in connection with
any such financing, provided that no such estoppel agreement or collateral
assignment shall in any way affect the Term or affect adversely in any material
respect any rights of Lessee under this Lease.
(c) No act or failure to act on the part of Lessor which would
entitle Lessee under the terms of this Lease, or by law, to be relieved of any
of Lessee's obligations hereunder (including, without limitation, its obligation
to pay Rent) or to terminate this Lease, shall result in a release or
termination of such obligations of Lessee or a termination of this Lease unless:
(i) Lessee shall have first given written notice of Lessor's act or failure to
act to the Holder, specifying the act or failure to act on the part of Lessor
which would give basis to Lessee's rights; and (ii) the Holder, after receipt of
such notice, shall have failed or refused to correct or cure the condition
complained of within a reasonable time thereafter (in no event less than 60
days), which shall include a reasonable time for such Holder to obtain
possession of the Leased Property, if possession is reasonably necessary for the
Holder to correct or cure the condition, or to foreclose such Mortgage, and if
the Holder notifies the Lessee of its intention to take possession of the Leased
Property or to foreclosure such Mortgage, and correct or cure such condition. If
such Holder is prohibited by any process or injunction issued by any court or by
reason of any action by any court having jurisdiction or any bankruptcy, debtor
rehabilitation or insolvency proceedings involving Lessor from commencing or
prosecuting foreclosure or other appropriate proceedings in the nature thereof,
provided, however, that the Lease shall continue to be in full force and effect,
the times for commencing or prosecuting such foreclosure or other proceedings
shall be extended for the period of such prohibition.
(d) Lessee shall deliver by notice delivered in the manner
provided in Article 30 to any Holder who gives Lessee written notice of its
status as a Holder, at such Holder's address stated in the Holder's written
notice or at such other address as the Holder may designate by later written
notice to Lessee, a duplicate copy of any and all notices regarding any default
which Lessee may from time to time give or serve upon Lessor pursuant to the
provisions of this Lease. Copies of such notices given by Lessee to Lessor shall
be delivered to such Holder simultaneously with delivery to Lessor. No such
notice by Lessee to Lessor hereunder shall be deemed to have been given unless
and until a copy thereof has been mailed to such Holder.
(e) At any time, and from time to time, upon not less than ten
(10) days' notice by a Holder to Lessee, Lessee shall deliver to such Holder an
estoppel certificate certifying as to the information required in paragraph (c)
of Article 22, and such other information as may be reasonably requested by such
Holder. Any such certificate may be relied upon by such Holder.
(f) Lessee shall cooperate in all reasonable respects, and as
generally described in Section 33.2 of this Lease, with any transfer of the
Leased Property to a Holder that
49
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succeeds to the interest of Lessor in the Leased Property (including, without
limitation, in connection with the transfer of any franchise, license, lease,
permit, contract, agreement, or similar item to such Holder or such Holder's
designee necessary or appropriate to operate the Leased Property). Lessor and
Lessee shall cooperate in (i) including in this Lease by suitable amendment from
time to time any provision which may be requested by any proposed Holder, or may
otherwise be reasonably necessary, to implement the provisions of this Article
and (ii) entering into any further agreement with or at the request of any
Holder which may be reasonably requested or required by such Holder in
furtherance or confirmation of the provisions of this Article; provided,
however, that any such amendment or agreement shall not in any way affect the
Term nor affect adversely in any material respect any rights of Lessor or Lessee
under this Lease.
ARTICLE
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29
29.1. Quiet Enjoyment.
----------------
So long as Lessee 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 and/or cure periods, if any,
Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for
the Term hereof, free of any claim or other action by Lessor or anyone claiming
by, through or under Lessor and not claiming by, through or under Lessee, but
subject to all liens and encumbrances subject to which the Leased Property was
conveyed to Lessor or hereafter consented to by Lessee in writing or provided
for herein. Lessee shall have the right by separate and independent action to
pursue any claim it may have against Lessor as a result of a breach by Lessor of
the covenant of quiet enjoyment contained in this Section.
ARTICLE
-------
30
30.1. Notices.
--------
All notices, demands, requests, consents, approvals and other
communications ("Notice" or "Notices") hereunder shall be in writing and
personally served or mailed (by express or overnight mail, courier, or
registered or certified mail, return receipt requested and postage prepaid), (i)
if to Lessor at 148 Sheraton Drive, Box A, New Cumberland, Pennsylvania 17070,
Attention: _________________, and (ii) if to Lessee at 148 Sheraton Drive, Box
A, New Cumberland, Pennsylvania 17070, Attention: _______________, or to such
other address or addresses as either party may hereafter designate. Personally
delivered Notices shall be effective upon receipt, and Notice given by mail
shall be deemed received at the time of deposit in the U.S. Mail system or with
a recognized overnight mail courier, but any prescribed period of Notice and any
right or duty to do any act or make any response within any prescribed period or
on a date certain after the service of such Notice given by mail shall be
extended five days.
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ARTICLE
-------
31
31.1. Appraisers.
-----------
If it becomes necessary to determine the fair market value or
fair market rental of the Leased Property for any purpose of this Lease, then,
except as otherwise expressly provided in 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, Lessor (or Lessee, as the case may be) shall by Notice to
Lessee (or Lessor, 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 10 days after the date of the
Notice appointing the second appraiser, proceed to appraise the Leased Property
to determine the fair market value or fair market rental thereof 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 or fair market rental 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 10 days to appoint a third
appraiser. If no such appraiser shall have been appointed within such 10 days or
within 60 days of the original request for a determination of fair market value
or fair market rental, whichever is earlier, either Lessor or Lessee 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 or fair market rental within 30
days after appointment of such appraiser. The determination of the appraiser
which differs most in 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 Lessor and Lessee as the fair
market value or fair market rental of the Leased Property, as the case may be.
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. Lessor and Lessee 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.
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ARTICLE
-------
32
32.1. Lessee's Right to Cure.
-----------------------
Subject to the provisions of Article 39, if Lessor breaches
any covenant to be performed by it under this Lease, Lessee, after Notice to and
demand upon Lessor as provided in Article 39, without waiving or releasing any
obligation hereunder, 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 Lessor. All sums so paid by Lessee 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 Lessee, shall be paid by Lessor to
Lessee on demand. The rights of Lessee hereunder to cure and to secure payment
from Lessor in accordance with this Article 32 shall survive the termination of
this Lease with respect to the Leased Property.
ARTICLE
-------
33
33.1. Miscellaneous.
--------------
Anything contained in this Lease to the contrary
notwithstanding, all claims against, and liabilities of, Lessee or Lessor
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 is
based upon a rate in excess of the maximum rate permitted by applicable law, the
parties agree that such charges shall be fixed at and limited to 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 Lessor and Lessee. 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 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.
33.2. Transition Procedures.
----------------------
Upon any expiration or termination of the Term, Lessor and
Lessee shall do the following and, in general, shall cooperate in good faith to
effect an orderly transition of the management or lease of the Facility. The
provisions of this Section 33.2 shall survive the expiration or termination of
this Lease until they have been fully performed. Nothing contained herein shall
limit Lessor's rights and remedies under this Lease if such termination occurs
as the result of an Event of Default.
52
<PAGE>
(a) Transfer of Franchise Agreement. The Franchise Agreement
shall be assigned, at Lessor's option, effective on the termination date,
without fee, cost, or penalty payable to the Lessee, and without the imposition
by Lessee of a product improvement (or similar) plan, to (i) Lessor, or (ii) a
designee of Lessor of good reputation and with experience in operating hotels.
(b) Transfer of Licenses. Upon the expiration or earlier
termination of the Term, Lessee shall use its best efforts (i) to transfer to
Lessor or Lessor's nominee all 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"), or (ii) if such transfer
is prohibited by law or Lessor otherwise elects, to cooperate with Lessor or
Lessor's nominee in connection with the processing by Lessor or Lessor's nominee
of any applications for all Licenses, including Lessee (or its Affiliate)
continuing to operate the liquor operations under its licenses with Lessor
agreeing to indemnify and hold Lessee (or its Affiliate) harmless as a result
thereof except for the gross negligence or willful misconduct of Lessee;
provided, in either case, that the costs and expenses of any such transfer or
the processing of any such application shall be paid by Lessor or Lessor's
nominee.
(c) Leases and Concessions. Lessee shall assign to Lessor or
Lessor's nominee simultaneously with the termination of this Agreement, and the
assignee shall assume, all leases, contracts, concession agreements and
agreements in effect with respect to the Facility then in Lessee's name which
are designated by Lessor.
(d) Books and Records. To the extent that Lessor has not
already received copies thereof, all books and records (including computer and
computer-generated records) for the Facility kept by Lessee pursuant to Section
3.6 (or copies thereof) shall be delivered simultaneously with the termination
of this Agreement to Lessor or Lessor's nominee.
(e) Receivables and Payables, etc. Lessee shall be entitled to
retain all cash, bank accounts and house banks, and to collect all Gross
Revenues and accounts receivable accrued through the termination date. Lessee
shall be responsible for the payment of Rent, all operating expenses of the
Facility and all other obligations of Lessee accrued under this Lease as of the
termination date, and Lessor shall be responsible for all operating expenses of
the Facility accruing after the termination date.
(f) Final Accounting. Lessee shall, within forty five (45)
days after the expiration or termination of the Term, prepare and deliver to
Lessor a final accounting statement, dated as of the date of the expiration or
termination, as more particularly described in Article 22, along with a
statement of any sums due from Lessee to Lessor pursuant hereto and payment of
such funds.
(g) Inventory. Lessee shall insure that the Leased Property,
at the date of such termination or expiration, has Inventory of a substantially
equivalent nature and amount as exists at the Leased Property on the
Commencement Date, and Lessor shall acquire such Inventory from Lessee by paying
Lessee the fair market value thereof, calculated on the same basis as the
53
<PAGE>
parties determined the fair market value of the Inventory purchased by Lessee on
the Commencement Date.
(i) Option to Purchase Lessee's Personal Property. Upon the
expiration or termination of the Term, Lessor shall have the option to purchase
Lessee's Personal Property related to the Leased Property at fair market value.
(h) Surrender. Lessee shall peacefully and immediately vacate
and surrender the Leased Property to Lessor or Lessor's designee, shall turn
over all keys to Lessor and Lessor's designee and shall not interfere with
Lessor or any new Lessee or Manager.
33.3. Waiver of Presentment, etc.
---------------------------
Lessee 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.
33.4. Standard of Discretion.
-----------------------
In any provision of this Lease requiring or permitting the
exercise by Lessor or Lessee of such party's approval, election, decision,
consent, judgment, determination or words of similar import (collectively, an
"Approval"), such Approval may, unless otherwise expressly specified in such
provision, be given or withheld in such party's sole, absolute and unreviewable
discretion. Any Approval which by the terms of this Lease may not be
unreasonably withheld shall also not be unreasonably delayed.
33.5. Action for Damages.
-------------------
In any suit or other claim brought by either party seeking
damages against the other party for breach of its obligations under this Lease,
the party against whom such claim is made shall be liable to the other party
only for actual damages and not for consequential, punitive or exemplary
damages.
33.6. Lease Assumption in Bankruptcy Proceeding.
------------------------------------------
If an Event of Default occurs and Lessee has filed or has had
filed against it a petition in bankruptcy or for reorganization or other relief
pursuant to the federal bankruptcy code, Lessee shall promptly move the court
presiding over the proceeding to assume the Lease pursuant to 11 U.S.C. ss.365,
without seeking an extension of the time to file said motion.
33.7. Intra-Family Transfers.
-----------------------
Lessee acknowledges that Lessor may transfer legal title to
the Leased Property one or more times to Affiliates of the Lessor in which
Lessor or the Company owns a majority
54
<PAGE>
interest (each, an "Affiliated Lessor"). Lessee hereby consents to such
transfers provided that, in each case, this Lease is assumed by the Affiliated
Lessor in its entirety and without modification, except to the extent that
Lessor, or the Affiliated Lessor that then owns the Leased Property,
specifically retains any obligations accrued through the date of transfer
hereunder. Lessee covenants that in connection with such transfers, Lessee will
execute and deliver to Lessor, the Affiliated Lessor and/or their
representatives appropriate estoppels and other documentation requested by them,
including an amendment to this Lease, for the purposes of reflecting and
acknowledging the Affiliated Lessor's interests as lessor hereunder.
ARTICLE
-------
34
34.1. Memorandum of Lease.
--------------------
Lessor and Lessee 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. Lessee shall pay all costs and expenses of
recording such memorandum of this Lease.
ARTICLE
-------
35
(Intentionally Omitted)
ARTICLE
-------
36
36.1. Lessor's Option to Terminate.
-----------------------------
(a) In the event Lessor enters into a bona fide contract to
sell the Leased Property to a non-Affiliate other than Lessee or an Affiliate of
Lessee, Lessor may terminate the Lease by giving not less than 60-days prior
Notice to Lessee of Lessor's election to terminate the Lease upon the closing
under such contract. Effective upon such date, 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 and all Rent
including Percentage Rent and Additional Charges shall be adjusted as of the
termination date.
(b) As compensation for the early termination of its leasehold
estate under this Article 36 because of a sale of the Leased Property, Lessor
shall within six months after of the closing of such sale, either (i) pay to
Lessee the "Termination Fee" (as defined below) or (ii) offer to lease to Lessee
one or more substitute suite hotel facilities pursuant to one or more leases
that would create for the Lessee leasehold estates that have an aggregate fair
market value of no less than the fair market value of the original leasehold
estate (a "Comparable Lease"), such value to be determined as of the closing of
the sale of the Leased Property. Lessee's acceptance of the
55
<PAGE>
Comparable Lease shall not be unreasonably withheld. If Lessee rejects the
Comparable Lease, Lessor shall pay the Termination Fee to Lessee. In the event
Lessor and Lessee are unable to agree upon the fair market value of an original
or replacement leasehold estate, it shall be determined by appraisal using the
appraisal procedure set forth in Article 31.
(c) (i) For the purposes of this Section, fair market value of
the leasehold estate means, as applicable, an amount equal to the price that a
willing buyer not compelled to buy would pay a willing seller not compelled to
sell for Lessee's leasehold estate under this Lease or an offered replacement
leasehold estate. In computing fair market value of a leasehold estate, the
appraiser shall discount all future income and fees to the then present value at
a rate equal to the Prime Rate plus 2% per annum.
(ii) The Termination Fee shall equal the "Net Present
Value" (as defined below) of the "Lessee Leakage" (as defined below) for (a) the
remaining Lease Years of the Term or, (b) if the termination occurs less than
five Lease Years from the end of the Term, the remaining Lease Years in the Term
plus one year (the "Determination Period"). "Lessee Leakage" for any Lease Year
is defined as the net operating income of the Facility, determined in accordance
with GAAP and as if no Management Agreement existed, less Rent paid and payable
hereunder. The "Net Present Value" of the Lessee Leakage for the Determination
Period shall be determined by (A) averaging the Lessee Leakage actually realized
by Lessee for the three most recently ended Lease Years (or all full Lease Years
if less than three full Lease Years have elapsed since the Commencement Date)
(the "Valuation Period"), (B) assuming that Lessee Leakage in the first Lease
Year of the Determination Period is the average Lessee Leakage (as determined
under subsection (A) above) and that the Lessee Leakage in each subsequent Lease
Year in the Determination Period is the deemed Lessee Leakage for the previous
Lease Year, (C) discounting the deemed Lessee Leakage in each Lease Year of the
Determination Period to then-present value at a rate of twelve percent (12%) per
annum and (D) aggregating the sum of such present values.
(d) In the event that Lessor terminates this Lease upon less
than 60-days written notice pursuant to the provisions of this Article 36 or
pursuant to any other provisions of this Lease except for the provisions
allowing Lessor to terminate this Lease under Articles 14 or 15 or upon the
occurrence of an Event of Default, the parties agree that on and after the
effective date of such termination, hotel personnel employed by Lessee
immediately prior to the effective date of termination will either be employed
by Lessor or its designee, or Lessor or its designee will take such other action
with respect to their employment, which may include notification of the
prospective termination of their employment, so as, in any case, to insure that
Lessee does not incur any liability pursuant to the WARN Act. In that event,
Lessor hereby agrees to defend, indemnify
56
<PAGE>
and hold harmless Lessee from and against any and all manner of claims, actions,
liabilities, costs and expenses (including, without limitation, reasonable
attorneys' fees and disbursements) relating to or arising from Lessor's breach
of this covenant, including, without limitation, any liability, costs and
expenses arising out of asserted or actual violation of the requirements of the
WARN Act. Further, Lessor or its designee shall assume all COBRA liabilities and
COBRA obligations to the Facility's personnel, which Lessee shall or may incur
in connection with such termination of this Lease, and Lessor hereby agrees to
defend, indemnify and hold harmless Lessee from and against any and all manner
of claims, actions, liabilities, costs and expenses (including, without
limitation, reasonable attorneys' fees and disbursements) relating to or
resulting from Lessor's breach of the foregoing covenant with respect to COBRA
matters, including, without limitation, any liability, costs and expenses
arising out of any asserted or actual violation of the requirements of the COBRA
any legislation. Upon Lessor's written request to Lessee, Lessee shall take all
action that is reasonable to notify, advise and cooperate with Lessor in order
to assist Lessor in complying with the WARN Act or COBRA legislation and to
mitigate Lessor's expense or liability with respect to the WARN Act and COBRA
legislation.
ARTICLE
-------
37
37.1. Compliance with Franchise Agreement.
------------------------------------
To the extent any of the provisions of the Franchise Agreement
impose a greater obligation on Lessee than the corresponding provisions of the
Lease, then Lessee shall be obligated to comply with, and to take all reasonable
actions necessary to prevent breaches or defaults under, the provisions of the
Franchise Agreement, except to the extent that Lessee is prevented from
complying with the Franchise Agreement because of Lessor's breach of its
obligations to comply with Article 38. It is the intent of the parties hereto
that Lessee shall comply in every respect with the provisions of the Franchise
Agreement so as to avoid any default thereunder during the Term. Lessee shall
not terminate or enter into any modification of the Franchise Agreement without
in each instance first obtaining Lessor's written consent. Lessor and Lessee
agree to cooperate fully 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 Lessor or any
designee thereof or any other successor to Lessee upon the termination of this
Lease.
ARTICLE
-------
38
38.1. Capital Expenditures.
---------------------
(a) Lessor shall be obligated to make available to Lessee an
amount equal to [4][6]% of Room Revenues from the Facility during each Lease
Year ("Capital Expenditures Allowance"). Upon written request by Lessee to
Lessor stating the specific use to be made and subject to the approval thereof
by Lessor, which approval shall not be unreasonably withheld, such funds shall
be made available by Lessor for Capital Expenditures; 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 Lessor to recognize income other than
"rents from real property" as defined in Section 856(d) of the Code. Lessor'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. Lessee shall have no interest in
any accrued obligation of Lessor
57
<PAGE>
hereunder after the termination of this Lease. All Capital Improvements shall be
owned by Lessor subject to the provisions of this Lease.
(b) Lessor's obligation with respect to Capital Expenditures
shall be limited to amounts available in the Capital Expenditures Allowance.
ARTICLE
-------
39
39.1. Lessor's Default.
-----------------
It shall be a breach of this Lease if Lessor 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 Lessee, unless such failure cannot with due diligence be cured
within a period of 30 days, in which case such failure shall not be deemed a
breach if Lessor proceeds within such 30-day period, with due diligence, to cure
the failure and thereafter diligently completes the curing thereof. The time
within which Lessor 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
Lessor does not cure any such failure within the applicable time period as
aforesaid, Lessee may declare the existence of a "Lessor Default" by a second
Notice to Lessor. Thereafter, Lessee may forthwith cure the same in accordance
with the provisions of Article 32, subject to the provisions of the following
paragraph. Lessee shall have no right to terminate this Lease for any Lessor
Default and no right, for any such Lessor Default, to offset or counterclaim
against any Rent or other charges due hereunder.
If Lessor shall in good faith dispute the occurrence of any
Lessor Default and Lessor, before the expiration of the applicable cure period,
shall give Notice thereof to Lessee, setting forth, in reasonable detail, the
basis therefor, no Lessor Default shall be deemed to have occurred and Lessor
shall have no obligation with respect thereto until final adverse determination
thereof, whether through arbitration or otherwise; provided, however, that in
the event of any such adverse determination, Lessor shall pay to Lessee interest
on any disputed funds at the Base Rate, from the date demand for such funds was
made by Lessee until the date of final adverse determination and, thereafter, at
the Overdue Rate until paid. If Lessee and Lessor shall fail, in good faith, to
resolve any such dispute within ten (10) days after Lessor's Notice of dispute,
either may submit the matter for determination by arbitration, but only if such
matter is required to be submitted to arbitration pursuant to any provision of
this Lease, or otherwise by a court of competent jurisdiction.
ARTICLE
-------
40
40.1. Arbitration.
------------
Except as set forth in Section 40.2, in each case specified in
this Lease in which it shall become necessary to resort to arbitration, such
arbitration shall be determined as provided
58
<PAGE>
in this Section 40.1. The party desiring such arbitration shall give Notice to
that effect to the other party, and an arbitrator shall be selected by mutual
agreement of the parties, or if they cannot agree within 30 days of such notice,
by appointment made by the American Arbitration Association ("AAA") from among
the members of its panels who are qualified and who have experience in resolving
matters of a nature similar to the matter to be resolved by arbitration.
40.2. Alternative Arbitration.
------------------------
In each case specified in this Lease for a matter to be
submitted to arbitration pursuant to the provisions of this Section 40.2, Lessor
shall be entitled to designate any nationally recognized accounting firm with a
hospitality division of which Lessor or an Affiliate of Lessor is not a
significant client to serve as arbitrator of such dispute within 15 days after
written demand for arbitration is received or sent by Lessor. In the event
Lessor fails to make such designation within such 15-day period, Lessee shall be
entitled to designate any nationally recognized accounting firm with a
hospitality division of which Lessee or an Affiliate of Lessee is not a
significant client to serve as arbitrator of such dispute within 15 days after
Lessor fails to timely make such designation. In the event no nationally
recognized accounting firm satisfying such qualifications is available and
willing to serve as arbitrator, the arbitration shall instead be administered as
set forth in Section 40.1.
40.3. Arbitration Procedures.
-----------------------
In any arbitration commenced pursuant to Sections 40.1 or
40.2, a single arbitrator shall be designated and shall resolve the dispute. The
arbitrator's decision shall be binding on all parties and shall not be subject
to further review or appeal except as otherwise allowed by applicable law. Upon
the failure of either party (the "non-complying party") to comply with his
decision, the arbitrator shall be empowered, at the request of the other party,
to order such compliance by the non-complying party and to supervise or arrange
for the supervision of the non-complying party's obligation to comply with the
arbitrator's decision, all at the expense of the non-complying party. To the
maximum extent practicable, the arbitrator and the parties, and the AAA if
applicable, shall take any action necessary to insure that the arbitration shall
be concluded within 90 days of the filing of such dispute. The fees and expenses
of the arbitrator shall be shared equally by Lessor and Lessee except as
otherwise specified above in this Section 40.3. Unless otherwise agreed in
writing by the parties or required by the arbitrator or AAA, if applicable,
arbitration proceedings hereunder shall be conducted in the State.
Notwithstanding formal rules of evidence, each party may submit such evidence as
each party deems appropriate to support its position and the arbitrator shall
have access to and right to examine all books and records of Lessee and Lessor
regarding the Facility during the arbitration.
[Signature Page follows]
59
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease by their duly
authorized representatives as of the date first above written.
LESSOR:
-------
[HERSHA HOSPITALITY LIMITED
PARTNERSHIP, a Virginia limited partnership
By: HERSHA HOSPITALITY TRUST, a Maryland real
estate investment trust, its General Partner]
By: __________________________
Name: ___________________
Title: ___________________
LESSEE:
-------
HERSHA HOSPITALITY MANAGEMENT, L.P., a
Pennsylvania limited partnership
By: ________________, a Pennsylvania corporation, its
General Partner
By: __________________________
Name: ___________________
Title: ___________________
60
<PAGE>
Exhibit A
PROPERTY DESCRIPTION
A-1
<PAGE>
Exhibit B
OTHER PROPERTIES
The following hotels (excluding the Leased Property):
B-1
<PAGE>
Exhibit C
PERCENTAGE RENT PROVISIONS
_______________ Hotel
[INITIAL FIXED RENT: $__________]
BASE RENT: $__________
PERCENTAGE RENT:
FIRST TIER
ROOM REVENUE PERCENTAGE: __%
FIRST ANNUAL ROOM
REVENUES BREAK POINT: $__________
SECOND TIER
ROOM REVENUE PERCENTAGE: __%
SECOND ANNUAL ROOM
REVENUES BREAK POINT: $__________
THIRD TIER
ROOM REVENUE PERCENTAGE: __%
OTHER REVENUE PERCENTAGE: __%
C-1
Exhibit 10.19(a)
AMENDMENT TO OPTION AGREEMENT
THIS AMENDMENT to the Option Agreement, dated June 3, 1998 (the "Option
Agreement"), by and between HERSHA HOSPITALITY LIMITED PARTNERSHIP, a Virginia
limited partnership (the "Partnership"), and the individuals listed on Exhibit A
attached hereto (the "Hersha Partners") is entered into as of the 4th day of
December, 1998.
The Partnership and the Hersha Partners desire to amend the Option
Agreement as follows:
1. Paragraph 1.g. of the Option Agreement is hereby deleted and the
following paragraph is substituted therefor:
g. "Hotel Property" means any Property that is used
in whole or in part for hotel purposes, including, without
limitation, motels, motor inns, extended-stay hotels and the
like, whether in fee or leasehold, that is acquired or
developed by Hersha within 15 miles of any of the Initial
Hotels or any hotel subsequently acquired by the Partnership,
including the Hampton Inn, Danville, Pennsylvania, the
Harrisburg Inn, Harrisburg, Pennsylvania, the Sleep Inn,
Pittsburgh, Pennsylvania and the land owned by Hersha
Affiliates in Carlisle, Pennsylvania, together with all
improvements and fixtures now or hereafter located thereon,
all rights, privileges and easements appurtenant thereto, and
all tangible and intangible personal property owned by Hersha
Affiliates and used in connection therewith.
2. Paragraph 3.b.(1) of the Option Agreement is hereby deleted and the
following paragraph is substituted therefor:
(1) The purchase price of the subject Hotel Property
pursuant to the Option shall be the greater of the Fair Market
Value or the Minimum Option Price, except in the case of the
Hampton Inn, Danville, Pennsylvania or the Sleep Inn,
Pittsburgh, Pennsylvania, in which case if the Option is
exercised by the Partnership, the Partnership and the Hersha
Affiliate that owns the hotel will use a purchase price
methodology similar to the methodology used for the Holiday
Inn Express hotels in Hershey, Pennsylvania and New Columbia,
Pennsylvania, the Hampton Inn hotel in Carlisle, Pennsylvania
and the Comfort Inn hotel in Harrisburg, Pennsylvania and fix
the rent until the hotel has two years of operating history.
In addition, if the Option is exercised by the Partnership
with respect to the Hampton Inn, Danville, Pennsylvania or the
Sleep Inn, Pittsburgh, Pennsylvania, it will issue units of
limited partnership interest in the Partnership ("Units")
valued at $6.00 per Unit as consideration for the purchase of
the hotel. With respect to each Hotel Property other than the
Hampton Inn, Danville, Pennsylvania and the Sleep Inn,
Pittsburgh, Pennsylvania, if the Minimum Option Price exceeds
the Fair Market Value, the Partnership shall have the right to
terminate the Acquisition Agreement within ten (10) days
following receipt by the Partnership of the determination of
Fair Market Value.
<PAGE>
3. The Partnership and the Hersha Partners hereby agree that all
remaining terms of the Option Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first written above.
HASU P. SHAH
/s/ HASU P. SHAH
------------------------------------
JAY H. SHAH
/s/ JAY H. SHAH
------------------------------------
NEIL H. SHAH
/s/ NEIL H. SHAH
------------------------------------
BHARAT C. MEHTA
/s/ BHARAT C. MEHTA
------------------------------------
KANTI D. PATEL
/s/ KANTI D. PATEL
------------------------------------
<PAGE>
RAJENDRA O. GANDHI
/s/ RAJENDRA O. GANDHI
------------------------------------
KIRAN P. PATEL
/s/ KIRAN P. PATEL
------------------------------------
DAVID L. DESFOR
/s/ DAVID L. DESFOR
------------------------------------
MADHUSUDAN I. PATNI
/s/ MADHUSUDAN I. PATNI
------------------------------------
MANAHAR GANDHI
/s/ MANAHAR GANDHI
------------------------------------
<PAGE>
Hersha HOSPITALITY LIMITED PARTNERSHIP
By: Hersha Hospitality Trust
Its General Partner
By: /s/ Hasu P. Shah
--------------------
Its: President
----------
<PAGE>
EXHIBIT A
Hersha Partners
Hasu P. Shah
Jay H. Shah
Neil H. Shah
Bharat C. Mehta
Kanti D. Patel
Rajendra O. Gandhi
Kiran P. Patel
David L. Desfor
Madhusudan I. Patni
Manahar Gandhi
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the heading "Experts"
and "Selected Financial Information" and to the use of our report
dated May 27, 1998, except as to the Notes to the Financial Statements as
to which the date is December 4, 1998, on our audit of Hersha Hospitality
Trust, our report dated May 27, 1998, on our audit of Hersha Hospitality
Management, L.P., and our report dated March 21, 1998, on our audit of
the Combined Entities - Initial Hotels in this Registration Statement
and related prospectus of Hersha Hospitality Trust.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
December 7, 1998
