As filed with the Securities and Exchange Commission on June 4, 1998
Registration No. 333-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 23226 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
<TABLE>
<CAPTION>
Title of Securities Being Registered Proposed Proposed Maximum
Amount Being Maximum Offering Aggregate Offering Amount of
Registered Price Per Share (1) Price (1) Registration Fee
<S> <C>
Common Shares,
$0.01 par value per share.............. 2,666,667 $6.00 $16,000,002 $4,720
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee.
---------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to
said Section 8(a), may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to completion, dated ______, 1998
PROSPECTUS
2,666,667 Shares
Hersha Hospitality Trust
Common Shares of Beneficial Interest
---------------
Hersha Hospitality Trust (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 and individuals (the
"Selling Partnerships") 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 43% general partnership interest in the Partnership. 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 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 common shares of beneficial
interest of the Company, par value $.01 per share (the "Common Shares"), and the
use of the Offering proceeds as set forth herein, the Partnership will have
approximately $12.1 million of fixed-rate debt outstanding, which will be
secured by some of the Initial Hotels.
All of the Common Shares offered hereby are being sold by the Company.
The Company proposes to sell 166,667 of the Common Shares offered hereby
directly to certain Hersha Affiliates at the initial public offering price, with
the remainder of the Common Shares offered hereby being sold through Anderson &
Strudwick, Incorporated (the "Underwriter"). The Company's Declaration of Trust
generally prohibits direct or indirect ownership of more than 9.9% of the
outstanding Common Shares by any person. Prior to the Offering, there has been
no public market for the Common Shares. The Company will apply for listing of
the Common Shares on the American Stock Exchange under the symbol "___." The
initial public offering price of the Common Shares will be $6.00 per share (the
"Offering Price"). See "Underwriting" for a discussion of factors considered in
determining the Offering Price. The Company intends to make regular quarterly
distributions to its shareholders initially equal to $0.12 per share, which on
an annualized basis would be equal to $0.48 per share or 8.0% of the Offering
Price.
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Common Shares offered hereby,
including the following risks:
o Conflicts of interest between the Company and the Hersha Affiliates,
including the risk that the Hersha Affiliates' interests regarding the sale
or refinancing of an Initial Hotel may be adverse to the Company's
interests.
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
could be less than anticipated.
o Risks associated with the Company's lack of control over the daily
operations of the Initial Hotels.
o Risks associated with the dependence of the Company on the Lessee's ability
to make payments 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 number of the Initial Hotels is limited and therefore adverse changes in
the operations of any Initial Hotel could reduce the amounts available for
distribution to shareholders.
o Mr. Shah and the partners of the Selling Partnerships 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.
o Risk of taxation of the Company as a regular corporation if it fails to
qualify as a REIT, which would reduce materially amounts available for
distribution to shareholders.
---------------
<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.
<TABLE>
<caption
Price to Selling Proceeds to
Public Commission(1) Company(2)
<S> <C>
Per Common Share......................... $6.00 $.48 $5.52
Total.................................... $16,000,002 $1,200,000 $14,800,002
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters. As stated above, the Company proposes to sell
166,667 of the Common Shares offered hereby directly to certain Hersha
Affiliates at the Offering Price. No selling commission will be paid to the
Underwriter with respect to such shares.
(2) Before deducting expenses payable by the Company, estimated at $400,000.
Does not reflect the Underwriter Warrants granted by the Company to the
Underwriter to purchase 250,000 Common Shares for a period of five years at a
price per share equal to 165% of the Offering Price. See "Underwriting."
-----------
The Common Shares, other than the 166,667 Common Shares offered
directly by the Company to certain Hersha Affiliates, are being offered by the
Company through the Underwriter on a best efforts all-or-none basis, when, as
and if issued and subject to approval of certain legal matters by counsel for
the Underwriter and certain other conditions. Unless sooner withdrawn or
canceled, the Offering will continue until the earlier of the date on which all
the Common Shares offered hereby are sold or ___________, 1998 (the "Offering
Termination Date"). Until the closing date of the Offering (the "Closing Date"),
all proceeds from the sale of the Common Shares will be deposited in escrow with
First Union National Bank of North Carolina, Charlotte, North Carolina (the
"Escrow Agent"). If the Offering is withdrawn or canceled or if all of the
Common Shares offered hereby are not sold and all proceeds therefrom received by
the Company on or prior to the Offering Termination Date, all proceeds will be
returned by the Escrow Agent to the persons from which they are received
promptly after such termination or withdrawal.
Anderson & Strudwick
Incorporated
The date of this Prospectus is , 1998.
<PAGE>
[COLOR PHOTOS AND ART WORK TO COME]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PROSPECTUS SUMMARY........................................................................................................ 1
The Company............................................................................................................. 1
Risk Factors............................................................................................................ 3
Growth Strategy......................................................................................................... 5
Acquisition Strategy.................................................................................................... 5
Internal Growth Strategy................................................................................................ 5
Formation Transactions.................................................................................................. 6
Benefits to the Hersha Affiliates....................................................................................... 9
Distribution Policy..................................................................................................... 11
Tax Status.............................................................................................................. 11
The Offering............................................................................................................ 11
Summary Financial Data.................................................................................................. 12
RISK FACTORS.............................................................................................................. 16
Conflicts of Interest................................................................................................... 16
Acquisition of Hotels with Limited Operating History.................................................................... 17
Inability to Operate the Properties..................................................................................... 17
Dependence on the Lessee................................................................................................ 17
Newly-Organized Entities................................................................................................ 17
Limited Numbers of Initial Hotels....................................................................................... 17
Guarantors of Assumed Indebtedness...................................................................................... 17
Tax Risks............................................................................................................... 17
The Price Being Paid for the Initial Hotels May Exceed Their
Value................................................................................................................ 18
Emphasis on Franchise Hotels............................................................................................ 19
Concentration of Investments in Pennsylvania............................................................................ 19
Hotel Industry Risks.................................................................................................... 19
Real Estate Investment Risks............................................................................................ 20
Market for Common Shares................................................................................................ 22
Effect of Market Interest Rates on Price of Common Shares............................................................... 22
Anti-takeover Effect of Ownership Limit, Staggered Board,
Power to Issue Additional Shares and Certain Provisions
of Maryland Law...................................................................................................... 23
Dilution................................................................................................................ 23
Risks of Leverage....................................................................................................... 23
Assumption of Contingent Liabilities of Selling Partnerships............................................................ 23
Ability of Board of Trustees to Change Certain Policies................................................................. 23
Growth Strategy......................................................................................................... 24
Reliance on Trustees and Management..................................................................................... 24
Possible Adverse Effect of Shares Available for Future Sale
on Price of Common Shares............................................................................................ 24
THE COMPANY............................................................................................................... 25
GROWTH STRATEGY........................................................................................................... 28
Acquisition Strategy.................................................................................................... 28
Internal Growth Strategy................................................................................................ 29
USE OF PROCEEDS........................................................................................................... 29
DISTRIBUTION POLICY....................................................................................................... 30
PRO FORMA CAPITALIZATION.................................................................................................. 32
DILUTION.................................................................................................................. 33
SELECTED FINANCIAL INFORMATION............................................................................................ 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................................................... 38
Overview................................................................................................................ 38
Results of Operations of the Initial Hotels............................................................................. 38
Liquidity and Capital Resources......................................................................................... 38
Inflation................................................................................................................. 39
Seasonality............................................................................................................. 39
Year 2000 Compliance.................................................................................................... 39
BUSINESS AND PROPERTIES................................................................................................... 40
The Initial Hotels...................................................................................................... 40
The Percentage Leases................................................................................................... 44
Franchise Licenses...................................................................................................... 48
Operating Practices..................................................................................................... 49
Employees............................................................................................................... 50
Environmental Matters................................................................................................... 50
Competition............................................................................................................. 50
Insurance............................................................................................................... 51
Depreciation............................................................................................................ 51
Legal Proceedings....................................................................................................... 51
Hersha Affiliates' Hotel Assets Not Acquired By The Company............................................................. 51
Ground Lease............................................................................................................ 51
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN
ACTIVITIES.............................................................................................................. 52
Investment Policies..................................................................................................... 52
Financing............................................................................................................... 52
Conflict of Interest Policies........................................................................................... 53
Policies with Respect to Other Activities............................................................................... 53
Working Capital Reserves................................................................................................ 54
FORMATION TRANSACTIONS.................................................................................................... 54
Benefits to the Hersha Affiliates....................................................................................... 55
MANAGEMENT................................................................................................................ 56
Trustees and Executive Officers......................................................................................... 56
Audit Committee......................................................................................................... 57
Compensation Committee.................................................................................................. 57
Compensation............................................................................................................ 57
Exculpation and Indemnification......................................................................................... 57
The Option Plan......................................................................................................... 58
CERTAIN RELATIONSHIPS AND TRANSACTIONS.................................................................................... 59
Repayment of Indebtedness and Guarantees by Mr. Shah and
the Hersha Affiliates................................................................................................ 59
Hotel Ownership and Management.......................................................................................... 59
Option Agreement........................................................................................................ 59
THE LESSEE................................................................................................................ 59
Management of the Lessee................................................................................................ 60
PRINCIPAL SHAREHOLDERS.................................................................................................... 61
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST.............................................................................. 61
General................................................................................................................. 61
Common Shares........................................................................................................... 62
Preferred Shares........................................................................................................ 63
Classification or Reclassification of Common Shares or
Preferred Shares..................................................................................................... 63
Restrictions on Transfer................................................................................................ 63
Other Matters........................................................................................................... 65
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S DECLARATION
OF TRUST AND BYLAWS....................................................................................................... 65
Classification of the Board of Trustees................................................................................. 65
Removal of Trustees..................................................................................................... 66
Business Combinations................................................................................................... 66
Control Share Acquisitions.............................................................................................. 66
Amendment............................................................................................................... 67
Limitation of Liability and Indemnification............................................................................. 67
Operations.............................................................................................................. 68
Dissolution of the Company.............................................................................................. 68
Advance Notice of Trustees Nominations and New Business................................................................. 68
Possible Anti-takeover Effect of Certain Provisions of
Maryland Law and of the Declaration of Trust and Bylaws.............................................................. 68
Maryland Asset Requirements............................................................................................. 68
SHARES AVAILABLE FOR FUTURE SALE.......................................................................................... 69
PARTNERSHIP AGREEMENT..................................................................................................... 70
Management.............................................................................................................. 70
Transferability of Interests............................................................................................ 70
Capital Contribution.................................................................................................... 70
Redemption Rights....................................................................................................... 71
Operations.............................................................................................................. 71
Distributions........................................................................................................... 72
Allocations............................................................................................................. 72
Term.................................................................................................................... 72
Tax Matters............................................................................................................. 72
FEDERAL INCOME TAX CONSIDERATIONS......................................................................................... 72
Taxation of the Company................................................................................................. 73
Requirements for Qualification.......................................................................................... 74
Failure to Qualify...................................................................................................... 81
Taxation of Taxable U.S. Shareholders................................................................................... 81
Taxation of Shareholders on the Disposition of the Common
Shares............................................................................................................... 82
Capital Gains and Losses................................................................................................ 82
Information Reporting Requirements and Backup Withholding............................................................... 82
Taxation of Tax-Exempt Shareholders..................................................................................... 82
Taxation of Non-U.S. Shareholders....................................................................................... 83
Other Tax Consequences.................................................................................................. 84
Tax Aspects of the Partnership.......................................................................................... 84
Sale of the Company's or the Partnership's Property..................................................................... 87
UNDERWRITING.............................................................................................................. 87
EXPERTS................................................................................................................... 89
REPORTS TO SHAREHOLDERS................................................................................................... 89
LEGAL MATTERS............................................................................................................. 89
ADDITIONAL INFORMATION.................................................................................................... 89
GLOSSARY.................................................................................................................. 90
INDEX TO FINANCIAL STATEMENTS.............................................................................................F-1
</TABLE>
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 subsidiary partnerships. The offering of 2,666,667
Common Shares pursuant to this Prospectus is referred to herein as the
"Offering." See "Glossary" 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 and the Holiday Inn(R) hotel in Milesburg,
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 in Harrisburg, Pennsylvania, the Comfort Inn(R) hotel in Denver,
Pennsylvania and the Clarion Suites(R) hotel in Philadelphia, Pennsylvania
are referred to herein as the "Stabilized Hotels."
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 43% 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 "Selling
Partnerships"). Ownership of the land underlying one of the Initial Hotels will
be retained by Mr. Shah and will be leased to the Company pursuant to a ground
lease with a 99-year term and providing for rent of $15,000 per year. See
"Certain Relationships and Transactions."
The Partnership will acquire the Initial Hotels in exchange for (i)
units of limited partnership interest in the Partnership ("Units"), which will
be redeemable, subject to certain limitations, for an aggregate of approximately
3.5 million Common Shares, with a value of approximately $21 million based on
the Offering Price, and (ii) the assumption of approximately $25.2 million of
the indebtedness related to the Initial Hotels, approximately $12.1 million of
which (the "Assumed Indebtedness") will remain outstanding and approximately
$13.1 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 approved a
majority of the Independent Trustees (as defined herein). If the repricing
produces a higher aggregate value for such hotels, the Hersha Affiliates will
receive an additional number of 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 Units if such 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 Units that, when multiplied by the Offering Price,
equals the decrease in value plus the value of any distributions made with
respect to such Units.
<PAGE>
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 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.
The following table sets forth certain information with respect to the
Initial Hotels:
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1997
-------------------------------------------------------------------------------
Estimated
Lessee
Income Before Estimated Average
Number of Room Other Lease Lease Daily
Initial Hotels Rooms Revenue Revenue(1) Payments(2) Payments(3)(4) Occupancy Rate REVPAR(5)
- -------------- ----- ------- ---------- ----------- -------------- --------- ---- ---------
<S> <C>
Newly-Developed
Holiday Inn Express
Hershey, PA(6)....... 85 $210,612 $4,877 $80,985 $97,336 38.8% $75.62 $29.35
New Columbia, PA(7)....... 81 $13,369 $253 (48,535) 6,619 9.0% $59.68 $5.39
Hampton Inn:
Carlisle, PA(8)........... 95 659,861 8,421 293,368 303,385 53.5% $65.33 $34.93
Comfort Inn:
Harrisburg, PA(9) ........ 81
Newly-Renovated
Holiday Inn Express:
Harrisburg, PA(10)........ 117 1,357,241 176,868 550,639 516,804 56.4% $56.33 $31.78
Holiday Inn:
Milesburg, PA............. 118 1,254,070 220,684 579,756 549,255 52.0% $56.07 $29.13
Stabilized
Comfort Inn:
Denver, PA................ 45 658,285 0 271,167 257,784 54.7% $73.26 $40.08
Holiday Inn:
Harrisburg, PA............ 196 3,103,820 1,787,958 1,738,713 1,640,785 63.3% $68.22 $43.17
Hampton Inn:
Selinsgrove, PA (11)...... 75 1,271,943 46,148 705,488 679,094 71.9% $65.29 $46.96
Clarion Suites:
Philadelphia, PA.......... 96 2,350,702 319,950 1,026,785 974,104 73.7% $91.02 $ 67.09
--- ---------- --------- ---------- ---------- --------- ------- -------
Total/weighted average..... 989$10,879,903 $2,565,159 $5,198,366 $5,025,166 60.2% $68.27 $ 41.09
============== ========== ========== ========== ========= ======= =======
</TABLE>
2
<PAGE>
- -------------------------
(1) Represents restaurant revenue, telephone revenue and other revenue.
(2) Represents total revenue less the Lessee's expenses, including hotel
operating expenses but excluding lease payments. See "Selected
Financial Information."
(3) Had the Newly-Developed Hotels been open for the entire twelve months
ended December 31, 1997, the estimated lease payments would have been
approximately $7.1 million.
(4) Represents payments of Rent by the Lessee calculated by applying the
rent provisions in the Percentage Leases using historical revenues of
the Initial Hotels as if January 1, 1997 was the beginning of the lease
year. In the case of the Newly-Developed Hotels and the Newly-Renovated
Hotels, the estimated lease payments reflect the Initial Fixed Rents
for such hotels pro-rated for the period in which each hotel was open.
(5) Revenue per available room ("REVPAR") is determined by dividing room
revenue by available rooms for the applicable period.
(6) This hotel opened in October 1997 and, thus, the data shown represent
approximately three months of operations.
(7) This hotel opened in December 1997 and, thus, the data shown represent
approximately one month of operations.
(8) This hotel opened in June 1997 and, thus, the data shown represent
approximately seven months of operations.
(9) This hotel opened in May 1998 and, thus, there are no data shown.
(10) The land underlying this hotel will be leased to the Company by Mr.
Shah for rent of $15,000 per year for 99 years.
(11) A portion of the land adjacent to this hotel 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."
Risk Factors
An investment in the 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, 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
3
<PAGE>
Company to risks that those hotels may not achieve anticipated
operating results and the rent received by the Company from
such hotels could be less than anticipated.
o Risks associated with the Company's lack of control over the
daily operation of the Initial Hotels due to federal income
tax law prohibitions on a REIT operating hotels.
o Risks associated with the dependence of the Company on the
Lessee's ability to make payments 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 number of the Initial Hotels is limited and therefore
adverse changes in the operations of any Initial Hotel could
reduce amounts available for distribution to shareholders.
o Mr. Shah and the partners of the Selling Partnerships
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.
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 reduce materially amounts available for distribution to
shareholders.
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 and any adverse developments to that franchise brand
could reduce amounts available for distribution to
shareholders.
o The geographic concentration in Pennsylvania of the Initial
Hotels may expose the Company to regional economic
fluctuations.
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, uninsured or underinsured
losses, and the potential liability for unknown or future
environmental liabilities.
o The absence of a prior market for the Common Shares, the lack
of assurance that an active trading market will develop or
that the Common Shares will trade at or above the Offering
Price, and the potential negative effect of an increase in
interest rates on the market price of the Common Shares.
o The restriction on ownership of Common Shares intended to
insure compliance with certain requirements related to
continued qualification of the Company as a REIT, and certain
other provisions in the Company's declaration of trust (the
"Declaration of Trust") or the Company's Bylaws (the
"Bylaws"), may have the effect of inhibiting a change of
control of the Company, even when a change of control may be
beneficial to the Company's shareholders.
o The Offering Price exceeds the net tangible book value per
share. Therefore, purchasers of Common Shares in the Offering
will realize an immediate and substantial dilution in the net
tangible book value of their shares.
4
<PAGE>
Growth Strategy
The Company will seek to enhance shareholder value by increasing
amounts available for distribution to shareholders by acquiring additional
hotels that meet the Company's investment criteria as described below and by
participating in 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 to acquire any additional
properties must be approved by a majority of members of the Company's Board of
Trustees (the "Trustees"), including a majority of the Trustees who are not
officers, directors or employees of the Company, the Lessee, the Underwriter or
any affiliates 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 with the Hersha Affiliates,
the Company 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 hotel subsequently acquired by the Company (the "Option Agreement"). See
"Certain Relationships and Transactions--Option Agreement." The Company's 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 at each hotel. The Trustees, however, may change the
Acquisition Policy at any time without the approval of the Company's
shareholders.
The Company's additional investments in hotels may be financed, in
whole or in part, with undistributed cash, subsequent issuances of Common Shares
or other securities, or borrowings. The Company is currently negotiating with
lenders to obtain a $10 million line of credit (the "Line of Credit"). The
Company's initial policy is to limit consolidated indebtedness to less than 55%
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 $12.1
million, which represents approximately 26% 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 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 the greater of a monthly 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 revenue 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
5
<PAGE>
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 2,666,667 Common Shares in the Offering,
including 166,667 Common Shares to be sold to the Hersha
Affiliates, at the Offering Price. The net proceeds to the
Company from the Offering will be contributed to the
Partnership in exchange for approximately a 43% general
partnership interest in the Partnership.
o The Partnership will acquire the Initial Hotels by acquiring
either all of the partnership interests in the Selling
Partnerships or the Initial Hotels in exchange for (i) Units
that will be redeemable, subject to certain limitations, for
an aggregate of approximately 3.5 million Common Shares, with
a value of approximately $21 million based on the Offering
Price and (ii) the assumption of approximately $25.2 million
in indebtedness secured by all of the Initial Hotels,
approximately $13.1 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 will be leased to the Partnership by Mr. Shah for
rent of $15,000 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
term of five years and may be extended for two additional
five-year terms at the option of the Lessee. 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 the Hersha Affiliates will enter 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 Company, 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--Conflicts of Interest Policies--The
Option Agreement."
o The Company and a Hersha Affiliate will enter into the
Administrative Services Agreement, pursuant to which the
Hersha Affiliate 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
250,000 Common Shares (the "Underwriter Warrants") for a
period of five years at a price per share equal to 165% of the
Offering Price.
6
<PAGE>
o The Partnership has granted 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.
7
<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 at the Company
after completion of the Offering appears here]
8
<PAGE>
(1) The Company will sell 166,667 Common Shares directly to certain Hersha
Affiliates at the Offering Price.
(2) Some of the Initial Hotels will be held directly by the Partnership and
the remaining Initial Hotels will be held by subsidiary partnerships of
the Partnership. The Company will lease the land underlying the Holiday
Inn Express, Harrisburg, Pennsylvania from Mr. Shah pursuant to a lease
with a term of 99 years and providing for annual rent of $15,000.
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 3.5 million
Units in exchange for their interests in the Initial Hotels,
which will have a value of approximately $21 million based on
the Offering Price. The Units held by the Hersha Affiliates
will be more liquid than their current interests in the
Selling Partnerships once a public trading market for the
Common Shares commences 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 $13.1 million of indebtedness owed by the
Selling Partnerships will be repaid with a portion of the
proceeds of the Offering. Approximately $7.5 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 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 Units if such
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 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 the Hersha Affiliates 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.
9
<PAGE>
o Mr. Shah will receive $15,000 per year pursuant to a 99-year
ground lease with respect to the Holiday Inn Express,
Harrisburg, 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.
10
<PAGE>
Distribution Policy
The Company intends to make regular quarterly distributions to holders
of the Common Shares initially equal to $0.12 per share, which on an annualized
basis would be equal to $0.48 per share or 8.0% of the Offering Price of $6.00
per share. The first distribution, for the period from the closing of the
Offering to September 30, 1998, is expected to be a pro rata distribution of the
anticipated regular quarterly distribution. See "Distribution Policy" for
information regarding the basis for determining the initial distribution rate.
The Company believes that the pro forma financial information constitutes a
reasonable basis for setting the initial distribution rate. The 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."
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 common 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 will obtain the opinion of its legal counsel as to its
REIT status, which opinion will be based on certain assumptions and
representations and will not be 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 Common Shares. The
Company intends to adopt the calendar year as its taxable year. See "Risk
Factors--Tax Risks," "--Ownership Limitation," "Federal Income Tax
Considerations--Taxation of the Company" and "Description of Capital Stock -
Declaration of Trust and Bylaw Provisions--Restrictions on Transfer."
The Offering
<TABLE>
<S> <C>
Common Shares offered by the Company...................... 2,666,667
Common Shares and Units to be outstanding after
the Offering.............................................. 6,117,500(1)
Use of Proceeds........................................... To purchase the Initial Hotels, to repay certain
indebtedness of the Selling Partnerships, to pay
certain expenses of the Offering and for working
capital purposes.
Symbol on the American Stock
Exchange.................................................. ___
</TABLE>
- ---------------
(1) Excludes 250,000 Common Shares issuable upon exercise of the
Underwriter Warrants, 250,000 Common Shares issuable upon the
redemption of 250,000 Units issuable upon exercise of the Hersha
Warrants and 650,000 Common Shares reserved for issuance pursuant to
the Option Plan (as herein defined). See "Formation Transactions,"
"Management--Option Plan" and "Underwriting."
11
<PAGE>
Summary Financial Data
The following tables set forth unaudited estimated revenue and expenses
and financial data for the Company, unaudited summary estimated revenue and
expenses and financial data for the Lessee and combined historical financial
data for the Initial Hotels. Such data should be read in conjunction with the
financial statements and notes thereto, which are contained elsewhere in this
Prospectus. The estimated revenue and expenses for the Company and the Lessee
are presented as if the consummation of the Formation Transactions had occurred
as of the beginning of the respective period presented. The balance sheet data
is presented as if the consummation of the Formation Transactions had occurred
on March 31, 1998.
12
<PAGE>
Hersha Hospitality Trust
Unaudited Summary Estimated Revenue and Expenses and Financial Data(1)
(In thousands, except per share data and number of Common Shares)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C>
Estimated Revenue and Expenses:
Percentage Lease revenue (2) ...................... $1,202 $5,025
Depreciation and amortization ..................... 387 1,163
Interest expense (3) .............................. 254 961
Real estate and personal property
taxes and property and casualty insurance ....... 125 476
General and administrative ....................... 85 340
Ground lease....................................... 4 15
---- ------
Total expenses .................................... $855 $2,955
Estimated income before minority
interest ........................................ 347 2,070
Minority interest (4) ............................. 195 1,167
---- -------
Net income applicable to holders
of Common Shares ................................ $152 $ 903
==== ======
Earnings per Common Share ......................... $.06 $ .34
==== ======
Weighted average number of Common
Shares outstanding .............................. 2,666,667 2,666,667
Other Data:
Funds from operations applicable to
holders of Common Shares (5).................... $321 $1,410
Funds from operations (5).......................... $734 $3,233
Net cash used in investing activities (6).......... $155 $ 665
Net cash used in financing activities (7).......... $792 $3,073
March 31, 1998
-----------------------------
Historical Pro Forma
---------- ---------
Balance Sheet Data:
Net investment in hotel properties ................ -- $ 25,909
Minority interest in Partnership................... -- $ 9,132
Shareholders' equity............................... -- $ 7,056
Total assets....................................... -- $ 28,291
Total debt ........................................ -- $ 12,103
</TABLE>
- ------------------
(notes on page 15)
13
<PAGE>
Hersha Hospitality Management, L.P.
Unaudited Summary Estimated Revenue and Expenses and Financial Data (1)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
Estimated Revenue and Expenses: March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C>
Room revenue ...................................... $2,572 $10,880
Other revenue(8) .................................. 571 2,565
------ -------
Total revenue...................................... $3,143 $13,445
------ -------
Hotel operating expenses (9) ...................... 2,017 8,381
Percentage Lease payments (2)...................... $1,202 $ 5,025
------ -------
Net (loss) income.................................. $ (76) $ 39
====== =======
</TABLE>
Combined Selling Partnerships - Initial Hotels
Summary Combined Historical Operating and Financial Data
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31 Year Ended December 31
---------------------------------- ------------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C>
Statement of Operations Data:
Room revenue $2,572 $ 1,659 $10,880 $7,273 $5,262
Other revenue (8) 571 627 2,565 2,716 1,957
------- ------- ------- ------- -------
Total revenue $3,143 $2,286 $13,445 $9,989 $7,219
Hotel operating expenses (9) 2,236 1,830 9,173 8,172 6,250
------- ------- ------- ------- -------
Operating income before interest, $ 907 $ 456 $ 4,272 $1,817 $ 969
depreciation and amortization
Interest 397 198 1,354 921 634
Depreciation and amortization 389 233 1,189 924 711
-------- -------- ------- ------- -------
Net income (loss) $ 121 $ 25 $1,729 $ (28) $ (376)
====== ====== ====== ======= =======
</TABLE>
- -------------------------
(notes on following page)
14
<PAGE>
(1) The estimated information does not purport to represent what the
Company's or 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 Company's or the Lessee's financial
position or results of operations at any future date or for any future
period. Represents estimated 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 Rent paid by the Lessee pursuant to the Percentage Leases,
which payments are calculated by applying the rent provisions in the
Percentage Leases to the historical revenues of the Stabilized Hotels.
In the case of the Newly-Developed Hotels and the Newly-Renovated
Hotels, the Percentage Lease revenues (or payments) equal the Initial
Fixed Rents with respect to those hotels pro-rated for the period in
which each hotel was open. There is no assurance that such revenues
will reflect the actual revenues of such hotels.
(3) Reflects the average weighted interest rate on the Assumed Indebtedness
of 8.38% and 8.39% for the three months ended March 31, 1998 and the
year ended December 31, 1997, respectively.
(4) Calculated as 56.41% of estimated income before minority interest.
(5) In accordance with the resolution adopted by the Board of Governors of
the National Association of Real Estate Investment Trusts, Inc.
("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. For the periods presented, estimated
depreciation and amortization and minority interest would have been the
only adjustments to estimated net income necessary to arrive at funds
from operation. 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. 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. 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 the Holiday Inn, Harrisburg, PA and the Holiday Inn, Milesburg,
PA) of gross revenues per quarter, on a cumulative basis, for the
periodic replacement or refurbishment of furniture, fixtures and
equipment at the Initial Hotels. The Company intends to cause the
Partnership to spend amounts in excess of the obligated amounts if
necessary to maintain the Franchise Licenses for the Initial Hotels and
otherwise to the extent that the Company deems such expenditures to be
in the best interests of the Company. See "Business and
Properties--The Percentage Leases."
(6) Represents improvements and additions to the Initial Hotels from funds
to be made available to the Lessee as provided in Note (6) above.
(7) Represents estimated initial distributions to be paid based on the
estimated initial annual distribution rate of $0.48 per share and
2,666,667 Common Shares and 3,450,833 Units outstanding plus the
estimated debt service on the Assumed Indebtedness.
(8) Represents restaurant revenue, telephone revenue and other revenue.
(9) 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.
15
<PAGE>
This Prospectus may contain forward-looking statements including,
without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import. Such forward-looking statements relate to
future events and the future financial performance of the Company, and involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company or industry to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Prospective investors
should specifically consider the various factors identified in this prospectus
which could cause actual results to differ, including particularly those
discussed in the section entitled "Risk Factors" beginning on this page. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any forward-looking statements to
reflect future events or developments.
RISK FACTORS
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 Selling Partnerships, 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--Conflicts 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
with respect to the disposition of the Initial Hotels or refinancing of or
prepayment of principal on the Assumed Indebtedness will 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 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, which may materially affect the amount of time Mr. Shah has
to devote to the affairs of the Company. The Lessee 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."
16
<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. Consequently, the Company will be subject to risks that
these hotels will not achieve anticipated operating results or may not achieve
such results within anticipated time frames and the Rent received by the Company
from such hotels could be less than anticipated. 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, which
could reduce the amounts available for distribution to shareholders.
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.
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.
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 Selling Partnerships 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.
Tax Risks
Failure to Qualify as a REIT
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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
will receive an opinion of its counsel 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, the nature of its assets, the sources of
its income, and the amount of its distributions to its shareholders. See
"Federal Income Tax Considerations--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 Considerations."
REIT Minimum Distribution Requirements
In order to qualify as a REIT, the Company generally will be required
each year to distribute to its shareholders at least 95% of its net taxable
income (excluding any net capital gain). In addition, the Company will be
subject to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of (i) 85% of its ordinary income for 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 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 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 Considerations--Requirements for
Qualification - Distribution Requirements."
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. The Units were
allocated among the Hersha Affiliates based upon their respective interests in
the Selling Partnerships.
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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 one 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."
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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.
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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.
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.
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Market for Common Shares
Prior to the Offering, there has been no public market for the Common
Shares. The Company will apply for listing of the Common Shares on The American
Stock Exchange. The Offering Price may not be indicative of the market price for
the Common Shares after the Offering. There can be no assurance that an active
public market for the Common Shares will develop or continue after the Offering.
See "Underwriting" for a discussion of factors to be considered in establishing
the 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 Common
Shares on The American Stock Exchange.
Effect of Market Interest Rates on Price of Common Shares
One of the factors that may influence the price of the Common Shares in
public trading markets will be the annual yield from distributions by the
Company on the Common Shares as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of the Common Stock.
Anti-takeover Effect of Ownership Limit, Staggered Board, Power to Issue
Additional Shares and Certain Provisions of Maryland Law
Ownership Limitation
In order for the Company to maintain its qualification as a REIT, not
more than 50% in value of its outstanding shares of beneficial interest may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities). Furthermore, if the Company owns, actually or
constructively, 10% or more of the ownership interests in the Lessee, the Rents
received by the Partnership from the Lessee will not qualify as rents from real
property, which would result in loss of REIT status for the Company. For the
purpose of preserving the Company's REIT qualification, the Declaration of Trust
generally prohibits direct or indirect ownership of more than 9.9% of the number
of outstanding Common Shares or of any other class of outstanding shares by any
person (the "Ownership Limitation"). Generally, Common Shares owned by
affiliated owners will be aggregated for purposes of the Ownership Limitation.
The Ownership Limitation could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of Common Shares
might receive a premium for their Common Shares over the then prevailing market
price or which such holders might believe to be otherwise in their best
interests. See "Description of Capital Stock - Restrictions on Transfer" and
"Federal Income Tax Considerations--Requirements for Qualification."
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 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 reduce the possibility of a tender offer or an attempt to change
control of the Company, even though a tender offer or change in control might be
in the best interest of the shareholders. See "Certain Provisions of Maryland
Law and of the Company's Declaration of Trust and Bylaws--Classification of the
Board of Trustees."
Issuance of Additional Shares
The Company's Declaration of Trust authorizes the Trustees 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 Common or Preferred Shares and (iii)
classify or reclassify any unissued Common Shares and Preferred Shares and to
set the preferences, rights and other terms of such classified or unclassified
shares. See "Description of Shares of Beneficial Interest--Preferred Shares."
Although the Trustees have 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 Common Shares or otherwise be
in the best interest of the shareholders. The Declaration of Trust and Bylaws
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of the Company also contain other provisions that may have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for the Common Shares or otherwise be
in the best interest of the shareholders. See "Certain Provisions of Maryland
Law and of the Company's Declaration of Trust and Bylaws--Removal of Trustees,"
"--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."
Dilution
Purchasers of Common Shares sold in the Offering will experience
immediate and substantial dilution of $3.87, or 64.5% of the Offering Price, in
the net tangible book value per Common Share. See "Dilution."
Risks of Leverage
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 $12.1 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 also 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 55% 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 26% 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." See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Assumption of Contingent Liabilities of Selling Partnerships
Because the Partnership is acquiring partnership interests in certain
of the Selling Partnerships, the Partnership will assume all contingent
liabilities of those Selling Partnerships. Certain of the Hersha Affiliates are
managing partners of the Selling Partnerships and have made representations and
warranties as to the extent of such contingent liabilities. There is, however, a
risk that unforeseen liabilities could exist and could adversely affect amounts
available for distribution to shareholders.
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 Common Shares. The effect of any such changes may be positive or
negative. Under the Declaration of Trust, Company cannot change its policy of
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seeking to maintain its qualification as a REIT without the approval of the
holders of two-thirds of the outstanding 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 55% 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 Capital Stock--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.
Possible Adverse Effect of Shares Available for Future Sale on Price of Common
Shares
Sales of a substantial number of Common Shares, or the perception that
such sales could occur, could adversely affect prevailing market prices of the
Common Shares. In connection with the formation of the Company, approximately
3.5 million Units will be issued to the Hersha Affiliates in addition to Common
Shares offered by the Company in the Offering. See "Formation Transactions." The
holders of Units generally will not be permitted to offer, sell, contract to
sell or otherwise dispose of Common Shares, except in certain circumstances, for
one year after the closing of the Offering. See "Shares Available for Future
Sale" and "Underwriting." At the conclusion of such periods and upon the
subsequent redemption of Units, the Common Shares received therefor may be sold
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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 43% 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 Selling Partnerships. Ownership of the land underlying one of
the Initial Hotels will be retained by Mr. Shah and will be leased to the
Company pursuant to a ground lease with a 99-year term and providing for rent of
$15,000 per year. See "Certain Relationships and Transactions."
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 3.5 million Common Shares, with a value of
approximately $21 million based on the Offering Price, and (ii) the assumption
of approximately $25.2 million of indebtedness related to the Initial Hotels,
including the Assumed Indebtedness and approximately $13.1 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 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 Units if such 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 Units that, when multiplied by the Offering Price,
equals the decrease in value plus the value of any distributions made with
respect to such 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 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 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.
25
<PAGE>
The following table sets forth certain information with respect to the
Initial Hotels:
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1997
----------------------------------------------------------------------------------
Estimated
Lessee
Income Before Estimated Average
Number of Room Other Lease Lease Daily
Initial Hotels Rooms Revenue Revenue(1) Payments(2) Payments(3)(4) Occupancy Rate REVPAR(5)
- ------------- ----- ------- ---------- ----------- -------------- --------- ---- ---------
<S> <C>
Newly-Developed
Holiday Inn Express
Hershey, PA(6)....... 85 210,612 $4,877 $80,985 $97,336 38.8% $75.62 $29.35
New Columbia, PA(7)....... 81 13,369 $253 (48,535) 6,619 9.0% $59.68 $5.39
Hampton Inn:
Carlisle, PA(8)........... 95 659,861 8,421 293,368 303,385 53.5% $65.33 $34.93
Comfort Inn:
Harrisburg, PA(9) ........ 81
Newly-Renovated
Holiday Inn Express:
Harrisburg, PA(10)........ 117 1,357,241 176,868 550,639 516,804 56.4% $56.33 $31.78
Holiday Inn:
Milesburg, PA............. 118 1,254,070 220,684 579,756 549,255 52.0% $56.07 $29.13
Stabilized
Comfort Inn:
Denver, PA................ 45 658,285 0 271,167 257,784 54.7% $73.26 $40.08
Holiday Inn:
Harrisburg, PA............ 196 3,103,820 1,787,958 $1,738,713 1,640,785 63.3% $68.22 $43.17
Hampton Inn:
Selinsgrove, PA (11)...... 75 1,271,943 46,148 705,488 679,094 71.9% $65.29 $46.96
Clarion Suites:
Philadelphia, PA.......... 96 2,350,702 319,950 1,026,785 974,104 73.7% $91.02 $ 67.09
--- ---------- --------- ---------- ---------- ---------- -------- -------
Total/weighted average..... 989 $10,879,903 $2,565,159 $5,198,366 $5,025,166 60.2% $68.27 $ 41.09
=== ========== ========== ========== ========== =========== ====== =======
</TABLE>
- -------------------------
(1) Represents restaurant revenue, telephone revenue and other revenue.
(2) Represents total revenue less the Lessee's expenses, including hotel
operating expenses but excluding lease payments. See "Selected
Financial Information--Lessee."
(3) Had the Newly-Developed Hotels been open for the entire twelve months
ended December 31, 1997, the estimated lease payments would have been
approximately $7.1 million.
(4) Represents payments of Rent by the Lessee calculated by applying the
rent provisions in the Percentage Leases using historical revenues of
the Initial Hotels as if January 1, 1997 was the beginning of the lease
year. In the case of the Newly-Developed Hotels and the Newly-Renovated
Hotels, the estimated lease payments reflect the Initial Fixed Rents
for such hotels pro-rated for the period in which each hotel was open.
(5) REVPAR is determined by dividing room revenue by available rooms
for the applicable period.
(6) This hotel opened in October 1997 and, thus, the data shown represent
approximately three months of operations.
(7) This hotel opened in December 1997 and, thus, the data shown represent
approximately one month of operations.
(8) This hotel opened in June 1997 and, thus, the data shown represent
approximately seven months of operations.
(9) This hotel opened in May 1998 and, thus, there are no data shown.
(10) The land underlying this hotel will be leased to the Company by Mr.
Shah for rent of $15,000 per year for 99 years.
26
<PAGE>
(11) A portion of the land adjacent to this hotel 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."
27
<PAGE>
GROWTH STRATEGY
The Company will seek to enhance shareholder value by increasing
amounts available for distribution to shareholders by acquiring additional
hotels that meet the Company's investment criteria as described below and by
participating in 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 to acquire any additional properties 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
Company 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. See "Certain Relationships and Transactions--Option
Agreement." The Company's 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 relatively high
demand for rooms, with 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.
Financing
The Company's additional investments in hotels may be financed, in
whole or in part, with undistributed cash, subsequent issuances of Common Shares
or other securities, or borrowings. The Company is currently negotiating with
lenders to obtain the Line of Credit. The Company's Debt Policy is to limit
consolidated indebtedness to less than 55% 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 $12.1 million, which represents approximately
26% 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."
28
<PAGE>
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 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 not
more than the Incentive Threshold, (iii) a percentage of room revenue 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."
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $14.4 million (based on the Offering Price), after deducting
selling commissions and estimated offering expenses of $1.6 million. The Company
will contribute the net proceeds of the Offering to the Partnership in exchange
for approximately a 43% interest in the Partnership. The Partnership will use
the net proceeds as follows: (i) approximately $13.1 million to repay certain of
the outstanding indebtedness related to the Initial Hotels, including
approximately $7.5 million in debt owed to certain Hersha Affiliates and related
principally to the hotel development expenses in connection with the Initial
Hotels and (ii) approximately $1.3 million for costs associated with the
acquisition of the Initial Hotels and for working capital. The Company currently
has no agreement or understanding to invest in any specific hotel other than the
Initial Hotels.
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 Formation
Transactions includes debt secured by some of the Initial Hotels as follows (in
thousands):
<TABLE>
<CAPTION>
Estimated
Mortgages payable secured by Annual
the following Initial Hotels: Amount Maturity Date Interest Rate
------ ------------- -------------
<S> <C>
Holiday Inn, Milesburg, PA $ 899 1999 8.00%
Clarion Suites, Philadelphia, PA $ 1,593 2002/2010 9.50%
Holiday Inn, Harrisburg, PA $ 2,700 2013 8.45%
Holiday Inn Express, Harrisburg, PA $ 373 2012 8.35%
Amounts Due to Hersha Affiliates (1) $ 7,561 (2) 9.00%
-------
Total $13,125
=======
</TABLE>
(1) Loans advanced by the Hersha Affiliates principally to fund hotel
development expenses in connection with the Initial Hotels.
(2) Payable on demand.
29
<PAGE>
DISTRIBUTION POLICY
After the Offering, the Company intends to make regular quarterly
distributions to its shareholders. The Company's ability to make distributions
will be dependent on the receipt of distributions from the Partnership and lease
payments from the Lessee with respect to the Initial Hotels. Initially, the
Partnership's sole source of revenue will be rent payments under the Percentage
Leases for the Initial Hotels. The Company must rely on the Lessee to generate
sufficient cash flow from the operation of the Initial Hotels to meet the
Lessee's rent obligations under the Percentage Leases. The Company intends to
make regular quarterly distributions to holders of the Common Shares initially
equal to $0.12 per share, which on an annualized basis would be equal to $0.48
per share or 8.0% of the Offering Price of $6.00 per share. The first
distribution, for the period from the closing of the Offering to September 30,
1998, is expected to be a pro rata distribution of the anticipated regular
quarterly distribution. Based on the Company's pro forma revenues less expenses
for the year ended December 31, 1997, such distributions would represent
approximately 71% of the Company's cash available for distribution, and
none of such distributions would represent a return of capital for federal
income tax purposes.
The Company believes that its basis for setting the initial distribution,
which is based on the Company's pro forma funds from operations per share for
the year ended December 31, 1997, is reasonable. Industry analysts generally
consider funds from operations to be an appropriate measure of the performance
of an equity REIT. Funds from operations, however, should not be considered an
alternative to net income or other measurements under generally accepted
accounting principles as an indicator of the Company's operating performance or
to cash flows from operating, investing or financing activities as a measure of
liquidity. The Company expects to maintain its initial distribution rate for the
remainder of 1998 unless actual results of operations, economic conditions or
other factors differ from the pro forma results for the year ended December 31,
1997. The Company's actual funds from operations will be affected by a number of
factors, including changes in occupancy or average daily rate ("ADR") at the
Initial Hotels.
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." 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.
In order to maintain its qualification as a REIT, the Company must
distribute to its shareholders each year at least 95% of its taxable income
(which does not include net capital gains). Under certain circumstances, the
Company may be required to make distributions in excess of cash available for
distribution in order to meet such distribution requirements. In such event, the
Company would seek to borrow the amount of the deficiency or sell assets to
obtain the cash necessary to make distributions to retain its qualification as a
REIT for federal income tax purposes.
Distributions 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. For a discussion of the tax treatment of distributions to holders
of Common Shares, see "Federal Income Tax Considerations."
30
<PAGE>
The following table sets forth certain pro forma financial information
applicable to common shareholders for the Company (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
----------------------------------------------------------------------
Adjustment for
Partial Year and Pro Forma
Pro Forma Unopened Hotels(1) As Adjusted
--------- --------------- -----------
<S> <C>
Pro forma net income ............................ $ 903 494 $1,397
Depreciation and amortization, net of
minority interest portion........................ 507 260 767
Pro forma funds from operations.................. 1,410 754 2,164
Less: Additions to capital expenditure
reserves (2)..................................... (290) (81) (371)
------ ---- -------
Estimated cash available for distribution........ $1,120 673 $1,793
====== === ======
Common Shares outstanding........................ 2,666,667
Estimated cash available for distribution per
share............................................ $ .67
Estimated initial annual distribution ........... $1,280
Estimated initial annual distribution per
share............................................ $ .48
Estimated dividend yield based upon
Offering Price................................... 8%
Estimated payout ratio of cash available for
distribution (3)................................. 71%
</TABLE>
- ---------------------
(1) To give full year effect in the pro forma information (which is based
on historical operations) for hotels that are included in historical
operations for only a portion of the year or were not included because
the hotel did not commence operations until 1998. The adjustments are
based on the Company's estimates of full year operating results.
(2) Represents the Company's obligation under the Percentage Leases
(adjusted to exclude the minority interest obligation and to reflect
the Company's ownership percentage in the Partnership of approximately
43%) to reserve and pay for capital improvements (including the
replacement or refurbishment of furniture, fixtures and equipment) on a
pro forma basis for the 12 months ended December 31, 1997. The Company
anticipates that cash flow from operations, borrowing capacity and
reserves will be sufficient to fund such obligation.
(3) Represents the anticipated initial aggregate annual distribution
divided by estimated cash available for distribution.
31
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the pro forma short-term debt and
capitalization of the Company as of March 31, 1998, as adjusted to give effect
to the sale on such date by the Company of the Common Shares in the Offering and
the use of the net proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
Pro Forma
March 31, 1998
--------------
(In thousands)
<S> <C>
Short-term debt.......................................................................... --
Long-term debt........................................................................... $12,103
Minority interest........................................................................ $ 9,132
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 shares authorized, 2,666,667 shares
issued and outstanding(1)............................................................. 27
Additional paid-in capital.............................................................. 7,029
-------
Total shareholders' equity.......................................................... $ 7,056
-------
Total capitalization............................................................. $28,291
=======
</TABLE>
- ---------------------
(1) Excludes approximately 3.5 million Common Shares issuable upon
redemption of Units issued in the Formation Transactions, 250,000
Common Shares issuable upon exercise of the Underwriter Warrants,
250,000 Common Shares issuable upon the redemption of 250,000 Units
issuable upon exercise of the Hersha Warrants and 650,000 Common Shares
reserved for issuance pursuant to the Option Plan. See "Formation
Transactions," "Management--The Option Plan" and "Underwriting."
32
<PAGE>
DILUTION
At March 31, 1998, the Offering Price exceeded the pro forma net
tangible book value per 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 $3,314,088 (including a pro forma land adjustment of
$57,000) less intangible assets of $1,397,000, resulting in $1,917,000 or $.56
per share based upon approximately 3.5 million Units issuable in the Formation
Transactions. Therefore, the holders of Units issued in connection with the
Formation Transactions will realize an immediate increase in the net book value
of their Units, while purchasers of Common Shares in the Offering will realize
an immediate dilution in the net book value of their Common Shares. The pro
forma net tangible book value after the Offering is based upon the pro forma
consolidated shareholders' equity of $7,056,000 less intangibles of $1,382,000
(included in the pro forma financial statements included herein) resulting in
pro forma book value of $5,674,000 or $2.13 per share based on 2,666,667 shares
outstanding immediately following the Offering.
<TABLE>
<S> <C>
Assumed initial public offering price per share(1).............................. $ 6.00
Pro forma tangible net book value per share prior to the Offering.......... $ .56
Increase attributable to purchase of Common Share.......................... 1.57
------
Pro forma net tangible book value per share after the Offering.................. 2.13
------
Dilution per share.............................................................. $ 3.87
======
</TABLE>
- ----------
(1) Before deducting selling commissions and estimated expenses of the Offering.
The following table sets forth the number of Common Shares to be sold
by the Company in the Offering, the total contributions to be paid to the
Company by purchasers of Common Shares in the Offering (assuming an Offering
Price of $6.00 per share), the number of Common Shares and Units previously
outstanding or to be issued in connection with the Formation Transactions, the
net tangible book value as of March 31, 1998 of the assets contributed to the
Company and the Partnership and the net tangible book value of the average
contribution per Common Share and Unit based on total contributions.
<TABLE>
<CAPTION>
Purchase Price/
Shares Issued by the Company Book Value of Total Purchase Price/
and Units Issued by the Tangible Contributions to Tangible Book
Partnership the Company Value of Contribution
----------------------- ----------------------
Number Percent Amount Percent Per Share/Unit
------ ------- ------ ------- ---------------
(in thousands)
<S> <C>
Common Shares Issued by the Company
in the Offering................... 2,666,667 43.59% $16,000 89.3% $6.00
Units Issued by the Partnership
in the Formation Transactions..... 3,450,833 56.41% $ 1,917 10.7% $ .56
--------- ------ ------- -----
Total Common Shares and Units... 6,117,500 100.00% $17,917 100.00%
========= ======= ======== =======
</TABLE>
33
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth (i) unaudited selected estimated revenue
and expenses and financial data for the Company and the Lessee for the years
ended December 31, 1997 and 1996, (ii) selected combined historical operating
and financial data for the Initial Hotels for each of the years in the five-year
period ended December 31, 1997. The selected combined historical operating and
financial data for the Initial Hotels for the five years ended December 31,
1997, have been derived from the historical combined financial statements of the
Selling Partnerships - Initial Hotels audited by Moore Stephens, P.C.,
independent public accountants, whose report with respect thereto is included
elsewhere in this Prospectus. The selected combined historical financial data
for each of the two years in the period ended December 31, 1997 are derived from
the audited statements of operations for each of these years. 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 selected estimated revenue and expenses and financial data are
presented as if the Formation Transactions had occurred as of January 1, 1997,
and therefore incorporates certain assumptions that are included in the Notes to
the Condensed Statements of Estimated Revenue and Expenses included elsewhere in
this Prospectus. The estimated and pro forma balance sheet data is presented as
if the Formation Transactions had occurred on March 31, 1998. The pro forma
information does not purport to represent what the Company's financial position
or the Company's or the combined Initial Hotels' results of operations would
actually have been if the Formation Transactions had, in fact, occurred on such
date or at the beginning of the year indicated, or to project the Company's or
the combined Initial Hotels' financial position or results of operations at any
future date or for any future period.
The historical financial information includes the ten Initial Hotels.
The Selling Partnerships have generated operating income before interest,
depreciation and amortization in each of the last five years; however, operating
income should not be considered as an alternative to net income as an indicator
of the Selling Partnerships - Initial Hotels' performance or to cash flow as to
a measure of liquidity.
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.
34
<PAGE>
Hersha Hospitality Trust
Unaudited Summary Estimated Revenue and Expenses and Financial Data(1)
(In thousands, except per share data and number of Common Shares)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
-------------- ------------------
<S> <C>
Estimated Revenue and Expenses:
Percentage Lease revenue (2) ...................... $1,202 $5,025
Depreciation and amortization ..................... 387 1,163
Interest expense (3) .............................. 254 961
Real estate and personal property
taxes and property and casualty insurance ....... 125 476
General and administrative ....................... 85 340
Ground lease....................................... 4 15
---- ------
Total expenses .................................... $855 $2,955
Estimated income before minority
interest ........................................ 347 2,070
Minority interest (4) ............................. 195 1,167
---- -------
Net income applicable to holders
of Common Shares ................................ $152 $ 903
==== ======
Earnings per Common Share ......................... $.06 $ .34
==== ======
Weighted average number of Common
Shares outstanding .............................. 2,666,667 2,666,667
Other Data:
Funds from operations applicable to
holders of Common Shares (5).................... $321 $1,410
Funds from operations (5).......................... $734 $3,233
Net cash used in investing activities (6).......... $155 $ 665
Net cash used in financing activities (7).......... $792 $3,073
March 31, 1998
--------------
Historical Pro Forma
---------- ----------
Balance Sheet Data:
Net investment in hotel properties ................ -- $25,909
Minority interest in Partnership................... -- $ 9,132
Shareholders' equity............................... -- $ 7,056
Total assets....................................... -- $28,291
Total debt ........................................ -- $12,103
</TABLE>
- ------------------
(notes on page 37)
35
<PAGE>
Hersha Hospitality Management, L.P.
Unaudited Summary Estimated Revenue and Expenses and Financial Data (1)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
Estimated Revenue and Expenses: March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C>
Room revenue . . . . . . . . . . . . . . . . . . . . . . . $ 2,572 $10,880
Other revenue (8). . . . . . . . . . . . . . . . . . . . . . 571 2,565
------ -------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . $ 3,143 $13,445
------ -------
Hotel operating expenses (9). . . . . . . . . . . . . . 2,017 8,381
Percentage Lease payments (2). . . . . . . . . . . . . . $1,202 $ 5,025
------ -------
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . . $ (76) $ 39
====== =======
</TABLE>
Combined Selling Partnerships - Initial Hotels
Summary Combined Historical Operating and Financial Data
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31 Year Ended December 31
---------------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C>
Statement of Operations Data:
Room revenue $2,572 $ 1,659 $10,880 $7,273 $5,262
Other revenue (8) 571 627 2,565 2,716 1,957
------- ------- ------- ------- -------
Total revenue $3,143 $2,286 $13,445 $9,989 $7,219
Hotel operating expenses (9) 2,236 1,830 9,173 8,172 6,250
------- ------- ------- ------- -------
Operating income before interest, $ 907 $ 456 $ 4,272 $1,817 $ 969
depreciation and amortization
Interest 397 198 1,354 921 634
Depreciation and amortization 389 233 1,189 924 711
-------- -------- ------- ------- -------
Net income (loss) $ 121 $ 25 $1,729 $ (28) $ (376)
====== ====== ====== ======= =======
</TABLE>
- -------------------------
(notes on following page)
36
<PAGE>
(1) The estimated information does not purport to represent what the
Company's or 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 Company's or the Lessee's financial
position or results of operations at any future date or for any future
period. Represents estimated 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 Rent paid by the Lessee pursuant to the Percentage Leases,
which payments are calculated by applying the rent provisions in the
Percentage Leases to the historical revenues of the Stabilized Hotels.
In the case of the Newly-Developed Hotels and the Newly-Renovated
Hotels, the Percentage Lease revenues (or payments) equal the Initial
Fixed Rents with respect to those hotels pro-rated for the period in
which each hotel was open. There is no assurance that such revenues
will reflect the actual revenues of such hotels.
(3) Reflects the average weighted interest rate on the Assumed Indebtedness
of 8.38% and 8.39% for the three months ended March 31, 1998 and the
year ended December 31, 1997, respectively.
(4) Calculated as 56.41% of estimated income before minority interest.
(5) In accordance with the resolution adopted by the Board of Governors of
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. For the periods presented, estimated
depreciation and amortization and minority interest would have been the
only adjustments to estimated net income necessary to arrive at funds
from operation. 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. 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. 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 the Holiday Inn, Harrisburg, PA and the Holiday Inn, Milesburg,
PA) of gross revenues per quarter, on a cumulative basis, for the
periodic replacement or refurbishment of furniture, fixtures and
equipment at the Initial Hotels. The Company intends to cause the
Partnership to spend amounts in excess of the obligated amounts if
necessary to maintain the Franchise Licenses for the Initial Hotels and
otherwise to the extent that the Company deems such expenditures to be
in the best interests of the Company. See "Business and
Properties--The Percentage Leases."
(6) Represents improvements and additions to the Initial Hotels from funds
to be made available to the Lessee as provided in Note (6) above.
(7) Represents estimated initial distributions to be paid based on the
estimated initial annual distribution rate of $0.48 per share and
2,666,667 Common Shares and 3,450,833 Units outstanding plus the
estimated debt service on the Assumed Indebtedness.
(8) Represents restaurant revenue, telephone revenue and other revenue.
(9) 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.
37
<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 43% 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 Three Months Ended March 31, 1998 to the Three Months Ended
March 31, 1997
Room revenue for the Initial Hotels increased $912,376 or 55% to
$2,557,735 for the first quarter of 1998 from $1,659,359 in the comparable
period in 1997. This increase came through an addition of 22,860 available
room-nights with an overall increase of 13,029 room-nights sold. The increase in
room-nights available was a result of the opening of three hotels, which were
not opened in the first quarter of 1997. In addition, there was a 5% increase in
ADR to $63.75 from $60.75. REVPAR increased 11% to $31.68 from $28.45.
Hotel operating expenses increased by $456,126 or 25% to $2,284,925 but
decreased as a percentage of total revenue to 72% from 80%. Operating income
before interest expense, depreciation, and amortization increased by 99% to
$907,781 from $457,175.
Comparison of year ended December 31, 1997 to year ended December 31, 1996
Room revenue increased by $3,067,232 or 50% to $10,879,902 in 1997 from
$7,272,670 in 1996. The increase in revenue came through the addition of four
new hotels opening in 1997 and one hotel which was only open 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 $1,001,043 or 12% to $9,173,647
but decreased as a percentage of total revenue to 68% from 82%. Operating income
before interest expense, depreciation and amortization increased by 135% to
$4,271,414 from $1,816,537.
Comparison of year ended December 31, 1996 to year ended December 31, 1995
Room revenue increased $2,011,044 or 38% to $7,272,670 in 1996 from
$5,261,626 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 $1,923,208 or 31% to $8,712,604
but decreased as a percentage of total revenue to 82% from 87%. Operating income
before interest expense, depreciation and amortization increased by 87% to
$1,816,537 from $969,769.
Liquidity and Capital Resources
The Company is currently negotiating with various lenders to obtain a
$10 million Line of Credit. The Line of Credit will be used to fund future
acquisitions and for working capital. The Line of Credit may be secured
38
<PAGE>
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 55% 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 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. 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 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 to pay for the cost of capital improvements and any furniture, fixture and
equipment requirements in excess of the set aside referenced above from
undistributed cash. The Company anticipates entering into an arrangement similar
to the Percentage Leases with respect to future hotels in which it may invest.
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
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.
<PAGE>
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
900 (commonly known as the "Year 2000 Problem"). Like
39
<PAGE>
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. In
addition, the Company has sought assurances from the Lessee and other service
providers that they are taking all necessary steps to ensure that their computer
systems will accurately reflect the year 2000, and the Company will continue to
monitor the situation. At this time, however, no assurance can be given that the
Company's service providers have anticipated every step necessary to avoid any
adverse effects on the Company attributable to the Year 2000 Problem.
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,
full service hotel with non-smoking units available and with a lounge and
adjacent 24-hour restaurant. Amenities include an outdoor pool, fitness center
and 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, 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 Inn 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
40
<PAGE>
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.
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
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<PAGE>
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 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. The hotel is a full service hotel with a restaurant and cocktail
lounge. 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.
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, 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. The hotel was purchased as a
Ramada Suites in 1995 and immediately converted to 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.
42
<PAGE>
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>
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 - Harrisburg, PA (5)
Occupancy 63.3% 58.9% 46.2%
ADR $68.22 $61.36 $56.97
REVPAR $43.17 $36.13 $26.31
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 $30.66 $30.61 $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 $67.04 $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.
43
<PAGE>
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 that future leases with respect to
additional hotels it may acquire will be similar to the Percentage Leases. The
Trustees, however, in their discretion, may alter any of these provisions with
respect to any proposed percentage 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 a
non-cancelable term of five years, which may be extended for two additional
five-year terms at the Lessee's option, 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 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 revenue 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 monthly
in arrears.
The following table sets forth (i) the Initial Fixed Rent, if
applicable, (ii) the annual Base Rent, (ii) the annual Percentage Rents formulas
and (iv) the pro forma rent that would have been paid for each Initial Hotel
pursuant to the terms of the Percentage Leases based on historical revenues, as
if the Company had owned the Initial Hotels and the Percentage Leases had been
in effect since January 1, 1997 (or, if the hotel was not open on January 1,
1997, since the date the hotel opened).
44
<PAGE>
<TABLE>
<CAPTION>
Annual Pro Forma Lease
Initial Annual Percentage Payment for Year Ended
Initial Hotel Fixed Rent Base Rent Rent Formula December 31, 1997
------------- ---------- --------- ------------ -----------------
<S> <C>
Newly-Developed
Holiday Inn Express
Hershey, PA................ $804,689 $364,000 42.7% of room revenue up to $1,479,523, $ 97,336
plus 65.0% 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........... 496,967 227,500 46.6% of room revenue up to $850,986, 6,619
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............... 700,983 325,000 42.5% of room revenue up to 303,385
$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............. 521,772 234,000 41.5% 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............. 516,960 195,000 32.1% of room revenue up to 516,804
$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.............. 549,486 214,500 38.4% of room revenue up to 549,255
$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.
Stabilized
Comfort Inn:
Denver, PA................. n/a 112,288 34.6% of room revenue up to $559,542, 257,784
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.
Holiday Inn:
Harrisburg, PA............. n/a 675,921 45.3% of room revenue up to 1,640,785
$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.
45
<PAGE>
Hampton Inn:
Selinsgrove, PA............ n/a 308,469 51.0% of room revenue up to 679,094
$1,081,151, plus 65.0% of room revenue
in excess of $1,081,151 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 36.0% of room revenue up to 974,104
$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.
--------- -----------
Totals $3,075,271 $5,025,166
</TABLE>
Other than real estate and personal property taxes, ground lease rent
(where applicable), the cost of certain furniture, fixtures and equipment, and
expenditures for items that are classified as capital items under generally
accepted accounting principles, which are necessary for the continued operation
of the Initial Hotels, and property and casualty insurance premiums, all of
which are obligations of the Partnership, 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
Partnership is required to maintain structural elements and underground
utilities, and to pay for certain expenditures for items that are classified as
capital items under generally accepted accounting principles, which are
necessary for the continued operation of the Initial Hotels. In addition, the
Partnership will make available to the Lessee for the replacement and
refurbishment of furniture, fixtures and equipment 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 Partnership'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 Partnership upon termination
of the Percentage Leases. Other than as described above, the Lessee is
responsible for all repair and maintenance of 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 Partnership upon termination of the Percentage Leases. The
Partnership 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 Considerations--Requirements for
Qualification--Income Tests."
Insurance and Property Taxes. The Partnership 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,
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<PAGE>
workers' compensation and other insurance appropriate and customary for
properties similar to the Initial Hotels and naming the Partnership as an
additional named insured.
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 Partnership. 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
the Lessee's use and occupancy, the Lessee will be obligated to repair, rebuild,
or restore the Initial Hotel, except as to structural elements of such hotel and
underground utilities, or offer to acquire the Initial Hotel on the terms set
forth in the applicable Percentage Lease. If the Lessee rebuilds the Initial
Hotel, the Partnership is obligated to disburse to the Lessee, from time to time
and upon satisfaction of certain conditions, any insurance proceeds actually
received by the Partnership as a result of such damage or destruction, and any
excess costs of repair or restoration will be paid by the Lessee. If the Lessee
decides not to rebuild and the Partnership exercises its right to reject the
Lessee's mandatory offer to purchase the Initial Hotel on the terms set forth in
the Percentage Lease, the Percentage Lease will terminate and the insurance
proceeds will be retained by the Partnership. If the Partnership accepts the
Lessee's offer to purchase the Initial Hotel, the Percentage Lease will
terminate and the Lessee will be entitled to the insurance proceeds. In the
event that damage to or destruction of a Initial Hotel that is covered by
insurance does not render the Initial Hotel wholly unsuitable for the Lessee's
use and occupancy, the Lessee generally will be obligated to repair or restore
the Initial Hotel. The Percentage Lease shall remain in full force and effect
during any period required for repair or restoration of any damaged or destroyed
Initial Hotel except that if damage to the hotel renders the Initial Hotel
wholly unsuitable for Lessee's use and occupancy within the final 24 months of
the term of the Percentage Lease, either the Partnership or the Lessee may
terminate the Percentage Lease on the terms set forth therein.
Condemnation of Hotel. In the event of a total condemnation of any
Initial Hotel, the relevant Percentage Lease will terminate with respect to such
Initial Hotel as of the date of taking, and the Partnership 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 the Lessee's use, the Lessee will
restore the untaken portion of the Initial Hotel to a complete architectural
unit and the Partnership shall contribute the cost of such restoration in
accordance with the provisions of the Percentage Lease.
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 thereafter;
(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
Partnership thereof, unless 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;
(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 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;
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<PAGE>
(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 of control if 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 based on failure
to pay Rent when due occurs under any other Percentage Lease between
the Partnership and the Lessee.
If an Event of Default occurs and continues beyond any curative period,
the Partnership 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 Partnership'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 Partnership enters into an agreement to sell or otherwise
transfer an Initial Hotel, the Partnership will have the right to terminate the
Percentage Lease with respect to such Initial Hotel if within six months of the
termination the Partnership 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 Partnership. Upon notice from the Lessee that the Partnership
has breached the Lease, the Partnership 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 Partnership
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 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.
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<PAGE>
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.
The following table sets forth certain information in connection with
the Franchise Licenses:
<TABLE>
<CAPTION>
Franchise
Hotel Effective Date Expiration Date Fee(1)
----- -------------- ---------------- ----------
<S><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, 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 May 5, 1998 May 5, 2018 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 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 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 COMMON SHARES OFFERED HEREBY.
Operating Practices
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<PAGE>
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. 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."
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
50
<PAGE>
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 are not
economically insurable. Certain types of losses, such as those arising from
subsidence activity, are insurable only to the extent that certain standard
policy exceptions to insurability are waived by agreement with the insurer. 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 Selling Partnerships in exchange for Units, the
Partnership's initial basis in each Initial Hotel for federal income tax
purposes should be the same as the Selling Partnerships' 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 Selling Partnerships. 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 Selling Partnerships 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 Selling Partnerships 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 and the land owned by Hersha Affiliates
in Carlisle, Pennsylvania are subject to the Option Agreement. See "Certain
Relationships and Transactions--Option Agreement."
Ground Lease
The land underlying the Holiday Inn Express in Harrisburg, Pennsylvania
will be leased to the Company by Mr. Shah for rent of $15,000 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.
51
<PAGE>
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 Common Shares.
Investment Policies
The Company's investment objectives are to acquire hotels that meet its
investment criteria. 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 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." 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.
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 Common Shares
or other securities, or borrowings. The Company is currently negotiating with
lenders to obtain the Line of Credit. The Debt Policy will limit consolidated
indebtedness to less than 55% 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 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 $12.1 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. 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 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
52
<PAGE>
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 and entered into certain
agreements designed to minimize the effects of potential conflicts of interest.
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 at least three of the Company's Trustees be persons who are not officers,
directors or employees of the Company, the Lessee, the Underwriter or any
affiliates thereof. Such persons are referred to as "Independent Trustees." The
Declaration of Trust provides that such Independent Trustee requirement may not
be amended, altered, changed or repealed without the affirmative vote of at
least two-thirds of the members of the Trustees or the affirmative vote of the
holders of not less than two-thirds of the outstanding Common Shares (and other
shares of capital stock of the Company entitled to vote, if any exist).
The Option Agreement
Pursuant to the Option Agreement among certain Hersha Affiliates and
the Partnership, 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.
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 the sale of an Initial Hotel must be approved by a majority of
the Trustees, including a majority of the Independent Trustees. The Partnership
Agreement gives the Company, as General Partner of the Partnership, full,
complete and exclusive discretion in managing and controlling the business of
the Partnership and in making all decisions affecting the business and assets of
the Partnership.
Provisions of Maryland Law
Pursuant to Maryland law (the jurisdiction under which the Company is
organized), each Trustee is required to discharge his duties in good faith, with
the care an ordinarily prudent person in a like position would exercise under
similar circumstances and in a manner he reasonably believes to be in the best
interest of the Company. In addition, under Maryland law, a transaction between
the Company and any of its Trustees or between the Company and a corporation,
firm or other entity in which a Trustee is a director or has a material
financial interest is not void or voidable solely because of the Trustee's
directorship or the Trustee's interest in the transaction if (i) the transaction
is authorized, approved or ratified, after disclosure of the interest, by the
affirmative vote of a majority of the disinterested Trustees, or by the
affirmative vote of a majority of the votes cast by shareholders entitled to
vote other than the votes of shares owned of record or beneficially by the
interested Trustee or corporation, firm or other entity, or (ii) the transaction
is fair and reasonable to the Company.
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 Common Shares to
holders of Units upon
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<PAGE>
exercise of their Redemption Rights (as defined herein). The Company has not
issued Common Shares, interests or any other securities to date, except in
connection with the formation of the Company. The Company has no outstanding
loans to other entities or persons, including its officers and Trustees. The
Company has not engaged in trading, underwriting or agency distribution or sale
of securities of other issuers, nor has the Company invested in the securities
of other issuers other than the Partnership for the purpose of exercising
control. The Company intends to make investments in such a way that it will not
be treated as an investment company under the Investment Company Act of 1940, as
amended.
At all times, the Company intends to make investments in such a manner
consistent with the requirements of the Code for the Company to qualify as a
REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Trustees, with the consent of the holders of
two-thirds of the outstanding 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 minimal 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.
FORMATION TRANSACTIONS
The Formation Transactions will be as follows:
o The Company will sell 2,666,667 Common Shares in the Offering,
including 166,667 Common Shares to be sold to the Hersha
Affiliates, at the Offering Price. The net proceeds to the
Company from the Offering will be contributed to the
Partnership in exchange for approximately a 43% general
partnership interest in the Partnership.
o The Partnership will acquire the Initial Hotels by acquiring
either all of the partnership interests in the Selling
Partnerships or the Initial Hotels in exchange for (i) Units
that will be redeemable, subject to certain limitations, for
an aggregate of approximately 3.5 million Common Shares, with
a value of approximately $21 million based on the Offering
Price and (ii) the assumption of approximately $25.2 million
in indebtedness secured by all of the Initial Hotels,
approximately $13.1 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 will be leased to the Partnership by Mr. Shah for
rent of $15,000 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
term of five years and may be extended for two additional
five-year terms at the option of the Lessee. The Lessee will
hold the Franchise License for each Initial Hotel. See
"Business and Properties--The Percentage Leases."
o The Partnership and the Hersha Affiliates will enter 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 Company, 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."
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<PAGE>
o The Company and a Hersha Affiliate will enter into the
Administrative Services Agreement, pursuant to which the
Hersha Affiliate 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 250,000 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 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.
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 3.5 million
Units in exchange for their interests in the Initial Hotels,
which will have a value of approximately $21 million based on
the Offering Price. The Units held by the Hersha Affiliates
will be more liquid than their current interests in the
Selling Partnerships once a public trading market for the
Common Shares commences 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 $13.1 million of indebtedness owed by the
Selling Partnerships will be repaid with a portion of the
proceeds of the Offering. Approximately $7.5 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 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 Units if such
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 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.
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<PAGE>
o The Partnership has granted a Hersha Affiliates 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 Mr. Shah will receive $15,000 per year pursuant to a 99-year
ground lease with respect to the Holiday Inn Express,
Harrisburg, 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.
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 and the
Trustees will be divided into two classes. Certain information regarding the
Trustees and executive officers of the Company is set forth below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S><C>
Hasu P. Shah (Class II) 53 Chairman of the Board, Chief Executive
Officer and Trustee
Kiran P. Patel 48 Chief Financial Officer and Treasurer
Bharat C. Mehta (Class II)* 53 Trustee
K.D. Patel (Class II)* 54 Trustee
L. McCarthy Downs, III (Class I)* 45 Trustee
_______________ (Class II)* __ Independent Trustee
_______________ (Class I)* __ Independent Trustee
_______________ (Class I)* __ Independent Trustee
</TABLE>
* 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
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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 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 offerings, including
offerings for Humphrey Hospitality Trust, Inc. and Independent Property
Operators of America, LLC. 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.
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, with advice from the Company's attorneys and independent public
accountants, will establish procedures to monitor compliance with the REIT
provisions of the Code and the Securities Exchange Act of 1934, as amended, and
such other laws and regulations applicable to the Company. The Company will
engage its independent public accountants for a period of two years following
the Offering to monitor compliance with the REIT provisions of the Code.
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 $15,000 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 shall be entitled to receive any additional salary or bonus for
serving as a Trustee except 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 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.
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Exculpation and Indemnification
The Declaration of Trust contains a provision that, subject to certain
exceptions described below, eliminates the liability of a Trustee or officer to
the Company or its shareholders for monetary damages for any breach of duty as a
Trustee or officer. This provision does not eliminate such liability to the
extent that it is proved that the Trustee or officer engaged in willful
misconduct or a knowing violation of criminal law or of any federal or state
securities law.
The Declaration of Trust also requires the Company to indemnify any
Trustee or officer who is or was a party to a proceeding, including a proceeding
by or in the right of the Company, by reason of the fact that he is or was such
a Trustee or officer or is or was serving at the request of the Company as a
director, officer, employee or agent of another entity provided that the
Trustees determine that the conduct in question was in the best interest of the
Company and such person was acting on behalf of the Company. A Trustee or
officer of the Company is entitled to be indemnified against all liabilities and
expenses incurred by the Trustee or officer in the proceeding, except such
liabilities and expenses as are incurred (i) if such person is an Independent
Trustee or officer, because of his or her gross negligence, willful misconduct
or knowing violation of the criminal law or (ii) in the case of the Trustee
other than the Independent Trustees, because of his or her negligence or
misconduct. Unless a determination has been made that indemnification is not
permissible, a Trustee or officer also is entitled to have the Company make
advances and reimbursement for expenses prior to final disposition of the
proceeding upon receipt of a written undertaking from the Trustee or officer to
repay the amounts advanced or reimbursed if it is ultimately determined that he
or she is not entitled to indemnification. Such advance shall be permissible
when the proceeding has been initiated by a shareholder of the Company only if
such advance is approved by a court of competent jurisdiction. The Trustees also
have the authority to extend to any person who is an employee or agent of the
Company, or who is or was serving at the request of the Company as a Trustee,
officer, employee or agent of another entity, the same indemnification rights
held by trustees and officers, subject to all of the accompanying conditions and
obligations.
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 trustees, executive officers and employees. The Option Plan is
administered by the Compensation Committee of the Board of Trustees, or its
delegate. 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 Compensation Committee
or its delegate, as appropriate.
Officers and other employees of the Company generally 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 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.
An option may be exercised for any number of 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 Common Shares subject to an option until
the option is exercised. To the extent an option has not become exercisable at
the time of a Participant's termination of employment, it will be forfeited
unless the Administrator exercises its discretion to accelerate vesting for the
Participant. If a Participant is terminated due to dishonesty or similar
reasons, all unexercised options, whether vested or unvested, will be forfeited.
Any Common Shares subject to options which are forfeited (or expire without
exercise) pursuant to the vesting requirement or other terms established at the
time of grant will again be available for grant under the Option Plan. The
exercise price of options granted under the Option Plan may not be less than the
fair market value of the Common Shares on the date of grant. Payment of the
exercise price of an option granted under the Option Plan may be made in cash,
cash equivalents
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<PAGE>
acceptable to the Compensation Committee or, if permitted by the option
agreement, by exchanging 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 date that 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 (other than an adjustment or
automatic increase described above), (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.
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 $13.1 million of indebtedness owed by the Selling
Partnerships will be repaid with a portion of the proceeds of the Offering.
Approximately $7.5 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 Selling
Partnerships 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
Company. 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
The Hersha Affiliates and the Company will enter into the Option
Agreement. Pursuant to the Option Agreement among certain Hersha Affiliates and
the Partnership, the Partnership will have an 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 and the
land owned by Hersha Affiliates in Carlisle, Pennsylvania. With respect to the
Hampton Inn, Danville, 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 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
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<PAGE>
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.
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.
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.
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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.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Shares by (i) each Trustee of the Company, (ii)
each executive officer of the Company and (iii) by all Trustees and executive
officers of the Company as a group immediately following completion of the
Formation Transactions. Unless otherwise indicated, all shares are owned
directly and the indicated person has sole voting and investment power. The
number of shares represents the number of Common Shares the person is expected
to hold plus the number of Common Shares into which Units expected to be held by
the person may be redeemed in certain circumstances.
Number of Shares Percent of
Name of Beneficial Beneficially Owned(1) Class(1)
- ------------------ --------------------- -----------
Hasu P. Shah (2) 638,867(3) 19.3%
K.D. Patel 369,300 12.2%
Bharat C. Mehta 670,400 20.1%
Kiran Patel 256,600(3) 8.8%
---------- ----
Total for all officers
and Trustees 1,935,167 42.1%
--------- -----
- ---------------------
(1) Assumes that all Units held by the person are redeemed for Common
Shares. The total number of shares outstanding used in calculating the
percentage assumes that none of the Units held by other persons are
redeemed for Common Shares. Such Units generally are not redeemable for
Common Shares until at least one year following the acquisition of the
Initial Hotels.
(2) Prior to the Offering, the Company will repurchase 100 Common Shares
currently owned by Mr. Shah at his cost of $100.
(3) Includes 49,667 Common Shares expected to be purchased in the Offering.
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 Common Shares of beneficial interest, $0.01 par value per
share ("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, 2,666,667 Common Shares will be issued and
outstanding and no Preferred Shares will be issued and outstanding. 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 Trust, to amend the Declaration of Trust to increase or
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decrease the aggregate number of shares of beneficial interest or the number of
shares of any class of shares of beneficial interest that the Trust has
authority to issue.
Both the Maryland REIT Law and the Company's Declaration of Trust
provide that no shareholder of the Company will be personally liable for any
obligation of the Company solely as a result of his status as a shareholder of
the Company. The Company's Bylaws further provide that the Company shall
indemnify each shareholder against any claim or liability to which the
shareholder may become subject by reason of his being or having been a
shareholder or former shareholder and that the Company shall pay or reimburse
each shareholder or former shareholder for all legal and other expenses
reasonably incurred by him in connection with any claim or liability. Inasmuch
as the Company carries public liability insurance which it considers adequate,
any risk of personal liability to shareholders is limited to situations in which
the Company's assets plus its insurance coverage would be insufficient to
satisfy the claims against the Company and its shareholders.
Common Shares
All Common Shares offered hereby will be duly authorized, fully paid
and nonassessable. Subject to the preferential rights of any other shares or
series of beneficial interest and to the provisions of the Company's Declaration
of Trust regarding the restriction of the transfer of shares of beneficial
interest, holders of Common Shares are entitled to receive dividends on shares
if, as and when authorized and declared by the Trustees of the Company out of
assets legally available therefor and to share ratably in the assets of the
Company legally available for distribution to its shareholders in the event of
its liquidation, dissolution or winding-up after payment of, or adequate
provision for, all known debts and liabilities of the Company.
Each outstanding Common Share entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the election of trustees,
and, except as provided with respect to any other class or series of shares of
beneficial interest, the holders of such Common Shares possess the exclusive
voting power. There is no cumulative voting in the election of trustees, which
means that the holders of a majority of the outstanding Common Shares can elect
all of the trustees then standing for election and the holders of the remaining
shares will not be able to elect any trustees.
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of Shares of beneficial interest,
Common Shares have equal dividend, distribution, liquidation and other rights.
Under the Maryland REIT Law, a Maryland REIT generally cannot dissolve,
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 a majority the outstanding
voting shares of the Company); (d) the amendment or repeal of the Independent
Trustee provision in the Declaration of Trust (which requires the affirmative
vote of two-thirds of the Trustees or two-thirds of the outstanding shares
entitled to vote on the matter); (e) the 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 dissolution of the
Company (which requires the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter). Under the Maryland REIT Law, a declaration
of trust may permit the trustees by a two-thirds vote to amend the declaration
of trust from time to time to qualify as a REIT under the Code or the Maryland
REIT Law without the affirmative vote or written consent of the shareholders.
The Company's Declaration of Trust permits such action by the Trustees. As
permitted by the Maryland REIT Law, the Declaration of Trust contains a
provision permitting the Trustees, without any action by the shareholders
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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 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 Trustees. Prior to issuance of shares of each series, the
Trustees are 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 Trustees could authorize the issuance of Preferred Shares with terms and
conditions which could have the effect of delaying, deferring or preventing a
transaction or a change in control of the Company that might involve a premium
price for holders of Common Shares or otherwise might be in their best interest.
As of the date hereof, no Preferred Shares are outstanding and the Company has
no present plans to issue any Preferred Shares.
Classification or Reclassification of Common Shares or Preferred Shares
The Company's Declaration of Trust authorizes the Trustees to classify
or reclassify any unissued Common Shares or Preferred Shares into one or more
classes or series of shares of beneficial interest by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or distributions, qualifications or terms or
conditions of redemption of such new class or series of shares of beneficial
interest.
Restrictions on Transfer
For the Company to qualify as a REIT under the Code, it must meet
certain requirements concerning the ownership of its outstanding shares of
beneficial interest. Specifically, not more than 50% in value of the Company's
outstanding shares of beneficial interest may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year, and the Company must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year. See
"Federal Income Tax Considerations--Requirements for Qualification." In
addition, the Company must meet certain requirements regarding the nature of its
gross income in order to qualify as a REIT. One such requirement is that at
least 75% of the Company's gross income for each year must consist of rents from
real property and income from certain other real property investments. The rents
received by the Partnership from the Lessee will not qualify as rents from real
property, which would result in loss of REIT status for the Company, if the
Company were to own, actually or constructively, 10% or more of the ownership
interests in the Lessee within the meaning of Section 856(d)(2)(B) of the Code.
See "Federal Income Tax Considerations--Requirements for Qualification--Income
Tests."
Because the Trustees believe it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to own
by virtue of the attribution provisions of the Code, more than 9.9% of (i) the
number of outstanding Common Shares or (ii) the number of outstanding Preferred
Shares of any class or series of Preferred Shares (the "Ownership Limitation").
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
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"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.
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 Price
(as defined below) for the five consecutive Trading Days (as defined below)
ending on such date. The "Closing Price" on any date shall mean the last quoted
price as reported by 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 January 1 of
each year, provide to the Company a written statement or affidavit stating the
name and address of such direct or indirect owner, the number of Common and
Preferred Shares owned directly or indirectly, and a description of how such
shares are held. In addition, each direct or indirect shareholder shall provide
to the Company such additional information as the Company may request in order
to determine the effect, if any, of such ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Limitation.
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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 a ruling
from the Service or an opinion of counsel and upon such other conditions as the
Trustees may direct, may 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.
The Ownership Limitation could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of shares
of Common Shares might receive a premium for their shares of Common Shares 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 Common Shares will
be First Union National Bank of North Carolina, Charlotte, North Carolina.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S DECLARATION
OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws of the Company is subject to and qualified in
its entirety by reference to Maryland law and to the Declaration of Trust and
Bylaws of the Company.
Classification of the Board of Trustees
The Bylaws provide that the number of trustees of the Company may be
established by the Board of Trustees but may not be fewer than three nor more
than seven. At the closing of the Offering, there will be seven Trustees. The
Trustees may 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. The Trustees may increase the number of Trustees by a vote of at least
80% of the members of the Board of Trustees, including 80% of the Independent
Trustees. Any vacancy will be filled, including a vacancy created by an increase
in the number of Trustees, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining Trustees.
Pursuant to the Declaration of Trust, the Board of Trustees is divided
into two classes of Trustees. The 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. More than
one annual meeting will generally be required to effect a change in a majority
of the Board of Trustees. The staggered terms of Trustees may reduce the
possibility of a tender offer or an attempt to change control of the Company or
other transaction that might involve a premium price for holders
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of Common Shares, even though a tender offer, change of 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. 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 of the
trust who, at any time within the two-year period prior to the date in question,
was an Interested Shareholder or an affiliate thereof are prohibited for five
years after the most recent date on which the Interested Shareholder becomes an
Interested Shareholder. Thereafter, any such business combination must be
recommended by the board of trustees of such trust and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding voting shares of beneficial interest of the trust and (b)
two-thirds of the votes entitled to be cast by holders of voting shares of the
trust other than shares held by the Interested Shareholder with whom (or with
whose affiliate) the business combination is to be effected, unless, among other
conditions, the trust's common shareholders receive a minimum price (as defined
in the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Shareholder for its shares.
These provisions of Maryland law do not apply, however, to business combinations
that are approved or exempted by the board of trustees of the trust prior to the
time that the Interested Shareholder becomes an Interested Shareholder.
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
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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.
Amendment
The Declaration of Trust may be amended with the approval of at least a
majority of all of the votes entitled to be cast on the matter, provided, that
certain provisions of the Declaration of Trust regarding (i) the Company's Board
of Trustees, (ii) the restrictions on transfer of the Common Shares and the
Preferred Shares, (iii) amendments to the Declaration of Trust by the Trustees
and the shareholders of the Company and (iv) the termination of the Company may
not be amended, altered, changed or repealed without the approval of two-thirds
of all of the votes entitled to be cast on these matters. In addition, the
Declaration of Trust may be amended by the Board of Trustees, without
shareholder approval to conform the Declaration of Trust to the Maryland REIT
law. The Company's Bylaws may be amended or altered exclusively by the Board of
Trustees.
Limitation of Liability and Indemnification
The Maryland REIT Law permits a Maryland REIT to include in its
Declaration of Trust a provision limiting the liability of its trustees and
officers to the trust and its shareholders for money damages except for
liability resulting from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty established
by a final judgment as being material to the cause of action. The Declaration of
Trust of the Company contains such a provision which limits such liability to
the maximum extent permitted by Maryland law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another 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 and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former Trustee or officer who
is made a party to the proceeding by reason of his service in that capacity, or
(b) any individual who, while a Trustee of the Company and at the request of the
Company, serves or has served another REIT corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a trustee,
director, officer or partner of such REIT corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise and who is made a
party to the proceeding by reason of his service in that capacity against any
claim or liability to which he may become subject by reason of such status. The
Declaration of Trust and Bylaws also permit the Company to indemnify and advance
expenses to any person who served a predecessor of the Company in any of the
capacities described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to indemnify Trustee
or officer who has been successful, on the merits or otherwise, in the defense
of any proceeding to which he is made a party by reason of his service in that
capacity.
The Maryland REIT Law permits a Maryland REIT to indemnify and advance
expenses to its trustees, officers, employees and agents to the same extent as
permitted by the MGCL for directors and officers of Maryland corporations. The
MGCL permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
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capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
accordance with the MGCL, the Bylaws of the Company require it, as a condition
to advancing expenses, to obtain (a) a written affirmation by the director or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the Bylaws and (b)
a written statement by or on his behalf to repay the amount paid or reimbursed
by the Company if it shall ultimately be determined that the standard of conduct
was not met.
Operations
The Company is generally prohibited from engaging in certain
activities, including acquiring or holding property or engaging in any activity
that would cause the Company to fail to qualify as a REIT.
Dissolution of the Company
Pursuant to the Company's Declaration of Trust, and subject to the
provisions of any class or series of shares of beneficial interest of the
Company then outstanding, the shareholders of the Company, at any meeting
thereof, may dissolve the Company by the affirmative vote of two-thirds of all
of the votes entitled to be cast on the matter.
Advance Notice of Trustees Nominations and New Business
The Bylaws of the Company provide that (a) with respect to an annual
meeting of shareholders, nominations of persons for election to the Board of
Trustees and the proposal of business to be considered by shareholders may be
made only (i) pursuant to the Company's notice of the meeting, (ii) by the Board
of Trustees or (iii) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and (b)
with respect to special meetings of shareholders, only the business specified in
the Company's notice of meeting may be brought before the meeting of
shareholders and nominations of persons for election to the Board of Trustees
may be made only (i) pursuant to the Company's notice of the meeting, (ii) by
the Board of Trustees or (iii) provided that the Board of Trustees has
determined that Trustees shall be elected at such meeting, by a shareholder who
is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
Possible Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Declaration of Trust and Bylaws
The business combination provisions 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 affect of delaying, deferring or preventing a transaction or a change
in control of the Company that might involve a premium price for holders of
Common Shares or otherwise be in their best interest.
Maryland Asset Requirements
To maintain its qualification as a Maryland REIT, the Maryland REIT Law
requires at least 75% of the value of the Company's assets to be held, directly
or indirectly, in real estate assets, mortgages or mortgage related securities,
government securities, cash and cash equivalent items, including high-grade
short term securities and receivables. The Maryland REIT Law also prohibits the
Company from using or applying land for farming, agricultural, horticultural or
similar purposes.
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SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have 2,666,667
Common Shares outstanding and approximately 3.5 million Shares reserved for
issuance upon redemption of Units. The 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 Selling Partnerships (collectively, the "Limited Partners") will receive the
right to redeem their Units (the "Redemption Right") in exchange for cash or, at
the election of the Company, Common Shares on a one-for-one basis. 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 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 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. 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
and to keep it effective for a period of 90 days. 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, except that such expenses shall not
include any selling commissions, Securities and Exchange 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
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Shares. See "Risk Factors--Market for 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."
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 full, exclusive and complete responsibility and discretion in the
management and control of the Partnership, and the Limited Partners will have no
authority in their capacity as Limited Partners to transact business for, or
participate in the management activities or decisions of, the Partnership.
However, any amendment to the Partnership Agreement that would affect the
Redemption Rights will require the consent of Limited Partners holding more than
50% of the Units held by such partners.
Transferability of Interests
The Company may not voluntarily withdraw from the Partnership or
transfer or assign its interest in the Partnership unless the transaction in
which such withdrawal or transfer occurs results in the Limited Partners
receiving property in an amount equal to the amount they would have received had
they exercised their Redemption Rights immediately prior to such transaction, or
unless the successor to the Company contributes substantially all of its assets
to the Partnership in return for 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 43% 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
Underwriter's selling commissions and other expenses paid or incurred in
connection with the Offering. The Hersha Affiliates will become Limited Partners
in the Partnership and collectively will own approximately a 57% 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 additional capital to
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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, Common Shares on a one-for-one basis. The redemption
price will be paid in cash in the discretion of the Company or in the event that
the issuance of Common Shares to the redeeming Limited Partner would (i) result
in any person owning, directly or indirectly, Common Shares in excess of the
Ownership 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 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
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 3.5 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 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 partners in accordance with their respective percentage
interests in the Partnership. Upon liquidation of the Partnership, after payment
of, or adequate provision for, debts and obligations of the Partnership,
including any partner loans, any remaining assets of the Partnership will be
distributed to all partners with positive capital accounts in accordance with
their respective positive capital account balances. If the Company has a
negative balance in its capital account following a liquidation of the
Partnership, it will be obligated to contribute cash to the Partnership equal to
the negative balance in its capital account.
Allocations
Income, gain and loss of the Partnership for each fiscal year generally
will be allocated among the partners in accordance with their respective
interests in the Partnership, subject to compliance with the provisions of Code
Sections 704(b) and 704(c) and Treasury Regulations promulgated thereunder.
Term
The Partnership will continue until December 31, 2050, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company
(unless the Limited Partners elect to continue the Partnership), (ii) the sale
or other disposition of all or substantially all the assets of the Partnership,
(iii) the redemption of all 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.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax
considerations that may be relevant to a prospective holder of Common Shares.
Hunton & Williams has acted as counsel to the Company and has reviewed this
summary and is of the opinion that the discussion contained herein fairly
summarizes the federal income tax considerations that are likely to be material
to a holder of the Common Shares. The discussion does not address all aspects of
taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
(including insurance companies, tax-exempt organizations (except as discussed
below), financial institutions or broker-dealers, and, except as discussed
below, foreign corporations and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of Hunton & Williams
are based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations, the legislative history of the Code, existing
administrative rulings and practices of the Service, and judicial decisions. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus with respect to the transactions
entered into or contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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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 Considerations" are
completed by the Company in a timely fashion, the Company will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. Investors should be aware, however, that
opinions of counsel are not binding upon the Service or any court. It must be
emphasized that Hunton & Williams' opinion is based on various assumptions and
is conditioned upon certain representations made by the Company as to factual
matters, including representations regarding the nature of the Company's
properties, the Percentage Leases, and the future conduct of the Company's
business. Such factual assumptions and representations are described below in
this discussion of "Federal Income Tax Considerations" and are set out in the
federal income tax opinion that will be delivered by Hunton & Williams at the
closing of the Offering. Moreover, such qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis, through actual
annual operating results, distribution levels, and share ownership, the various
qualification tests imposed under the Code discussed below. Hunton & Williams
will not review the Company's compliance with those tests on a continuing basis.
Accordingly, no assurance can be given that the actual results of the Company's
operation for any particular taxable year will satisfy such requirements. For a
discussion of the tax consequences of failure to qualify as a REIT, see "Federal
Income Tax Considerations--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from an investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its undistributed items of tax preference. Third, if the Company has (i) net
income from the sale or other disposition of "foreclosure property" that is held
primarily for sale to customers in the ordinary course of business or (ii) other
non-qualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the 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
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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 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.
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.
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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."
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) the Rent
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 monthly. 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
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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, property and casualty insurance,
and the cost of replacement or refurbishment of furniture, fixtures and
equipment, 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, as applicable, against all liabilities imposed on the
Partnership during the term of the Percentage Leases by reason of (A) injury to
persons or damage to property occurring at the Initial Hotels or (B) the
Lessee's use, management, maintenance or repair of the Initial Hotels, (viii)
the Lessee is obligated to pay substantial fixed rent for the period of use of
the Initial Hotels and (ix) the Lessee stands to incur substantial losses (or
reap substantial gains) depending on how successfully it operates the Initial
Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. If the Percentage
Leases are recharacterized as service contracts or partnership agreements,
rather than true leases, part or all of the payments that the Partnership
receives from the Lessee may not be considered rent or may not otherwise satisfy
the various requirements for qualification as "rents from real property." In
that case, the Company likely would not be able to satisfy either the 75% or 95%
gross income test and, as a result, would lose its REIT status.
In order for the 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.
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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 from the Initial Hotels that are
established in the Percentage Leases, and the Company has represented that the
percentages (i) will not be renegotiated during the terms of the Percentage
Leases in a manner that has the effect of basing the Percentage Rent on income
or profits and (ii) conform with normal business practice, the Percentage Rent
should not be considered based in whole or in part on the income or profits of
any person. Furthermore, the Company has represented that, with respect to other
hotels that it acquires in the future, it will not charge rent for any property
that is based in whole or in part on the income or profits of any person (except
by reason of being based on a fixed percentage of gross revenues, as described
above).
A third requirement for qualification of the 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 real property, within the
meaning of section 856(d)(2)(B) of the Code. Thus, the Company should never own,
actually or constructively, 10% of more of the Lessee. Furthermore, the Company
has represented that, with respect to other hotels that it acquires in the
future, it will not rent any property to a Related Party Tenant.
A fourth requirement for qualification of the 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
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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 or the Partnership can
comply with the safe-harbor provisions of the Code or avoid owning property that
may be characterized as property held "primarily for sale to customers in the
ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will be qualifying income for purposes of the 75% and 95% gross income
tests. "Foreclosure property" is defined as any real property (including
interests in real property) and any personal property incident to such real
property (i) that is acquired by a REIT as the result of such REIT having bid in
such property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default (or default was imminent) on a lease of such property or on an
indebtedness that such property secured and (ii) for which such REIT makes a
proper election to treat such property as foreclosure property. As a result of
the rules with respect to foreclosure property, if the Lessee defaults on its
obligations under a Percentage Lease for 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
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for purposes of the various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner that does not
jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions will be generally available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations--Taxation of the Company,"
even if those relief provisions apply, a 100% tax would be imposed with respect
to the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test, multiplied by a fraction
intended to reflect the Company's profitability.
Asset Tests
The Company, at the close of each quarter of its taxable year, also
must satisfy two tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through share or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of
the mortgage does not exceed the value of the associated real property, and
shares of other REITs. For purposes of the 75% asset test, the term "interest in
real property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold in real
property, and an option to acquire real property (or a leasehold in real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
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 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
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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.
Partnership Anti-Abuse Rule
The United States Treasury Department has issued a final regulation
(the "Anti-Abuse Rule"), under the partnership provisions of the Code (the
"Partnership Provisions") that authorizes the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) with a principal purpose
of substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects the
partners' economic agreement and clearly reflects the partners' income without
incurring any entity-level tax. The purposes for structuring a transaction
involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that
elects to be treated as a REIT contributes substantially all of the proceeds
from a public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners have
the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption. The
example concludes that the use of the partnership is not inconsistent with the
intent of the Partnership Provisions and, thus, cannot be recast by the Service.
The Company believes that the Anti-Abuse Rule will not have any adverse impact
on its ability to qualify as a REIT. However, the Redemption Rights do not
conform in all respects to the redemption rights described in
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the foregoing example. Moreover, the Anti-Abuse Rule is extraordinarily broad in
scope and is applied based on an analysis of all of the facts and circumstances.
As a result, there can be no assurance that the Service will not attempt to
apply the Anti-Abuse Rule to the Company. If the conditions of the Anti-Abuse
Rule are met, the Service is authorized to take appropriate enforcement action,
including disregarding the Partnership for federal tax purposes or treating one
or more of its partners as nonpartners. Any such action potentially could
jeopardize the Company's status as a REIT.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also will be
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 has 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
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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 Company required to be treated by such shareholder as long-term capital
gain. All or a portion of any loss realized upon a taxable disposition of the
Common Shares may be disallowed if other Common Shares are purchased within 30
days before or after the disposition.
Capital Gains and Losses
A capital asset generally must be held for more than one year in order
for gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The maximum tax rate on net capital gains applicable to
noncorporate taxpayers is 28% for sales and exchanges of assets held for more
than one year but not more than 18 months, and 20% for sales and exchanges of
assets held for more than 18 months. The maximum tax rate on long-term capital
gain from the sale or exchange of "section 1250 property" (i.e., depreciable
real property) held for more than 18 months is 25% to the extent that such gain
would have been treated as ordinary income if the property were "section 1245
property." With respect to distributions designated by the Company as capital
gain dividends and any retained capital gains that the Company is deemed to
distribute, the Company may designate (subject to certain limits) whether such a
dividend or distribution is taxable to its noncorporate stockholders at a 20%,
25% or 28% rate. Thus, the tax rate differential between capital gain and
ordinary income for noncorporate taxpayers may be significant. In addition, the
characterization of income as capital or ordinary may affect the deductibility
of capital losses. Capital losses not offset by capital gains may be deducted
against a noncorporate taxpayer's ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward. All net capital
gain of a corporate taxpayer is subject to tax at ordinary corporate rates. A
corporate taxpayer can deduct capital losses only to the extent of capital
gains, with unused losses being carried back three years and forward five years.
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 will be effective for distributions made after
December 31, 1999.
See "Federal Income Tax Considerations--Taxation of Non-U.S. Shareholders."
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject
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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 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.
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The Company is required to withhold 10% of any distribution in excess
of the Company's current and accumulated earnings and profits. Consequently,
although the Company intends to withhold at a rate of 30% on the entire amount
of any distribution, to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of U.S.
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with a U.S. business. Non-U.S. Shareholders thus would be
taxed at the normal capital gain rates applicable to U.S. shareholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that could be designated by the Company as a
capital 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
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 direct or indirect investment in the
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws. Because 100% of the interests in
the subsidiary partnerships of the Partnership are owned, directly and
indirectly, by the Partnership, the subsidiary partnerships will not be treated
as entities separate from the partnership for federal income tax purposes.
Accordingly, this discussion does not cover the classification of the subsidiary
partnerships as partnerships for federal income tax purposes.
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
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purposes as a partnership rather than as an association taxable as a
corporation. An entity will be classified as a partnership rather than as a
corporation for federal income tax purposes if the entity (i) is treated as a
partnership under Treasury regulations relating to entity classification (the
"Check-the-Box Regulations") and (ii) is not a "publicly traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated
entity with at least two members may elect to be classified either as an
association taxable as a corporation or as a partnership. If such an entity
fails to make an election, it generally will be treated as a partnership for
federal income tax purposes. The Partnership intends to be classified as a
partnership and the Company has represented that the Partnership will not elect
to be treated as an association taxable as a corporation for federal income tax
purposes under the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market (or the substantial equivalent thereof). A publicly traded
partnership will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for a taxable year
consists of "qualifying income" under section 7704(d) of the Code, which
generally includes any income that is qualifying income for purposes of the 95%
gross income test applicable to REITs (the "90% Passive-Type Income Exception").
See "--Requirements for Qualification--Income Tests." The U.S. Treasury
Department has issued regulations (the "PTP Regulations") that provide limited
safe harbors from the definition of a publicly traded partnership. Pursuant to
one of those safe harbors (the "Private Placement Exclusion"), interests in a
partnership will not be treated as readily tradable on a secondary market or the
substantial equivalent thereof if (i) all interests in the partnership were
issued in a transaction (or transactions) that was not required to be registered
under the Securities Act, and (ii) the partnership does not have more than 100
partners at any time during the partnership's taxable year. In determining the
number of partners in a partnership, a person owning an interest in a
flow-through entity (i.e., a partnership, grantor trust or S corporation) that
owns an interest in the partnership is treated as a partner in such partnership
only if (a) substantially all of the value of the owner's interest in the
flow-through entity is attributable to the flow-through entity's interest
(direct or indirect) in the partnership and (b) a principal purpose of the use
of the flow-through entity is to permit the partnership to satisfy the
100-partner limitation. The Partnership qualifies for the Private Placement
Exclusion. If the Partnership is considered a publicly traded partnership under
the PTP Regulations because it is deemed to have more than 100 partners, the
Partnership should not be treated as a corporation because it should be eligible
for the 90% Passive- Type Income Exception.
The Partnership has not requested, and does not intend to request, a
ruling from the Service that it will be classified as a partnership for federal
income tax purposes. Instead, at the closing of the Offering, Hunton & Williams
will deliver its opinion that the Partnership will be treated for federal income
tax purposes as a partnership and not as an association taxable as a
corporation. Unlike a tax ruling, an opinion of counsel is not binding upon the
Service, and no assurance can be given that the Service will not challenge the
status of the Partnership as a partnership for federal income tax purposes. If
such challenge were sustained by a court, the Partnership would be treated as a
corporation for federal income tax purposes, as described below. The opinion of
Hunton & Williams will be based on existing law, 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 "Federal Income Tax Considerations--Requirements
for Qualification--Income Tests" and "--Requirements for Qualification--Asset
Tests." In addition, any change in the Partnership's status for tax purposes
might be treated as a taxable event, in which case the Company might incur a tax
liability without any related cash distribution. See "Federal Income Tax
Considerations--Requirements for Qualification--Distribution Requirements."
Further, items of income and deduction of the Partnership would not pass through
to its partners, and its partners would be treated as shareholders for tax
purposes. Consequently, the Partnership would be required to pay income tax at
corporate tax rates on its net income, and distributions to its partners would
constitute dividends that would not be deductible in computing the Partnership's
taxable income.
Income Taxation of the Partnership and its Partners
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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 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
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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 Selling Partnership'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 Selling
Partnership. 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 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 to
sell an Initial Hotel will be made 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 "Federal Income Tax Considerations--Requirements for
Qualification--Income Tests." Such prohibited transaction income also may have
an adverse effect upon the Company's ability to satisfy the income tests for
REIT status. See "Federal Income Tax Considerations--Requirements For
Qualification--Income Tests" above. The Company, however, does not presently
intend to acquire or hold or to allow the Partnership to acquire or hold any
property that represents inventory or other property held primarily for sale to
customers in the ordinary course of the Company's or the Partnership's trade or
business.
UNDERWRITING
The Company has engaged the Underwriter exclusively to sell 2,500,000
Common Shares on a "best efforts all-or-none" basis. The Offering is being made
without a firm commitment by the Underwriter, which has no obligation or
commitment to purchase any of the Common Shares. The Company will pay the
Underwriter a selling commission of $0.48 per share. The Company intends to sell
166,667 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.
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Unless sooner withdrawn or canceled, the Offering will continue until
the earlier of the date on which all the Common Shares offered hereby are sold
or [__________________] (the "Offering Termination Date"). Until the Closing
Date, all proceeds from the sale of the Common Shares will be deposited in
escrow with First Union National Bank of North Carolina, Charlotte, North
Carolina (the "Escrow Agent"). Proceeds deposited in escrow with the Escrow
Agent may not be withdrawn prior to the Closing Date or the Offering Termination
Date. If the Offering is withdrawn or canceled or if all of the Common Shares
offered hereby are not sold and all proceeds therefrom are received by the
Company on or prior to the Offering Termination Date, all proceeds will be
returned by the Escrow Agent without interest to the persons from which they are
received promptly after such withdrawal or cancellation.
Pursuant to the Underwriting Agreement, the obligations of the
Underwriter to solicit offers to purchase the shares and of investors solicited
by 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 solicitation of offers to consummate the
offering 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 has granted the Underwriter the Underwriter Warrants to
purchase 250,000 Common Shares for a period of five years at a price per share
equal to 165% of the Offering Price. The Company also 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
________________ have agreed to serve as Trustees. __________________ and
________________ each will receive $15,000 per year for serving as a Trustee of
the Company.
The Underwriter may, at its election, employ other brokers, dealers or
underwriters in connection with the solicitation of subscriptions to purchase
Common Shares. The Underwriter may allow, and such dealers may allow, a
concession not in excess of $_______ per share to certain brokers and dealers.
The Underwriter does not intend to sell the Common Shares to any
accounts over which it exercises discretionary authority.
Prior to the Offering, there has been no public market for the Common
Shares. The initial public offering price is anticipated to be $6.00 per share.
See "Risk Factors--Market for Common Shares."
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 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 Company will apply for listing of the Common Shares on The American
Stock Exchange under the trading symbol "[___]."
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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 Selling Partnerships Initial
Hotels as of December 31, 1997 and 1996 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 Common Shares offered hereby will be passed upon
for the Company by Hunton & Williams. In addition, the description of federal
income tax consequences contained in the section of the Prospectus entitled
"Federal Income Tax Considerations" is based on the opinion of Hunton &
Williams. 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 Maryland counsel as to certain matters
of Maryland law.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form
S-11 (of which this Prospectus is a part) under the Securities Act with respect
to the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the SEC.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete. 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.
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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 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 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
approximate principal amount of approximately $12.1 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 sum
certain in monthly Rent under each of the Percentage Leases.
"Beneficiary" means the beneficiary of a Trust.
"Board of Trustees" means the Board of Trustees of the Company.
"Bylaws" means the Bylaws of the Company.
"Choice Hotels" means Choice Hotels International, Inc.
"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.
"Common Shares" means the common shares of beneficial interest, par
value $.01 per share, of the Company.
"Company" means Hersha Hospitality Trust, a Maryland real estate
investment trust.
90
<PAGE>
"Debt Policy" means the Company's policy to limit consolidated
indebtedness to less than 55% 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 Mr. Shah and certain affiliates owning 100%
of the interests of the Selling Partnerships.
"Hersha Warrants" means warrants that the Partnership has granted 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.
"Independent Trustee" means a Trustee of the Company who is not an
officer, director, or employee of the Company, the Lessee, the Underwriter 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.
"Interested Shareholder" means any holder of more than 10% of any class
of a company's voting shares.
"Lessee" means Hersha Hospitality Management, LP, a Pennsylvania
limited partnership, which will lease and operate the Initial Hotels from the
Partnership 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 negotiating to obtain from various lenders.
"Market Price" means, on a given day, the average Closing Price 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.
91
<PAGE>
"Newly-Renovated Hotels" means the Holiday Inn Express(R) hotel located
in Harrisburg, Pennsylvania and the Holiday Inn(R) hotel located in Milesburg,
Pennsylvania
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
"Offering" means the offering of Common Shares hereby.
"Offering Price" means the initial public offering price of the Common
Shares in the Offering of $6.00 per share.
"Offering Termination Date" means [_______________]
"Option Agreement" means the option agreement to be executed by the
Company and certain of the Hersha Affiliates granting the Company certain rights
to acquire certain hotels to be 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.
"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.
"Percentage Rents" means Rent based on percentages of revenues payable
by the Lessee pursuant to the Percentage Leases.
"Preferred Shares" means the preferred shares of beneficial interest,
par value $.01 per share, of the Company.
"Prohibited Owner" means the record owner of Shares-in-Trust.
"Redemption Right" means the right of the persons receiving Units in
the Formation Transactions to cause the redemption of 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.
"SEC" means the United States Securities and Exchange Commission.
92
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Second Adjustment Date" means December 31, 2000.
"Selling Partnerships" means the limited partnerships that, prior to
the Formation Transactions, own the Initial Hotels.
"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, 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 located in Harrisburg,
Pennsylvania, the Comfort Inn(R) hotel located in Denver, Pennsylvania and the
Clarion Suites(R) hotel located in Philadelphia, Pennsylvania.
"Threshold" means the amount of annual room revenues set out in each
Percentage Lease above which the Lessee will pay a Percentage Rent relating to
annual room revenues above that Threshold.
"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.
"Underwriter" means Anderson & Strudwick, Incorporated.
"Underwriter Warrants" means warrants that the Company has granted the
Underwriter to purchase 250,000 Common Shares for a period of five years at a
price per Unit equal to 165% of the Offering Price.
"Units" means units of limited partnership interest in the Partnership.
93
<PAGE>
INDEX TO PRO FORMA CONDENSED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Hersha Hospitality Trust
Condensed Statement of Estimated Revenues and Expenses for the
three months ended March 31, 1998 ................................................................ F-2
Condensed Statement of Estimated Revenues and Expenses for the
year ended December 31, 1997...................................................................... F-3
Pro Forma Condensed Combined Balance Sheet as of March 31, 1998................................... F-4
Independent Auditors' Report...................................................................... F-7
Balance Sheet as of May 27, 1998.................................................................. F-8
Notes to Balance Sheet............................................................................ F-9
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 Selling Entities - Initial Hotels
Pro Forma Condensed Combined Statement of Operations
for the three months ended March 31, 1998 ........................................................ F-14
Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 1997.............................................................. F-15
Independent Auditors' Report...................................................................... F-16
Combined Financial Statements
Balance Sheets as of March 31, 1998 [Unaudited] and December 31, 1997
and 1996........................................................................................ F-17
Statements of Operations for the three months ended March 31, 1998 and 1997
[Unaudited] and for the years ended December 31, 1997, 1996, and 1995........................... F-18
Statement of Owners' Equity for the three months ended March 31, 1998
[Unaudited] and for the years ended December 31, 1997, 1996, and 1995........................... F-19
Statements of Cash Flows for the three months ended March 31, 1998 and 1997
[Unaudited] and for the years ended December 31, 1997, 1996, and 1995........................... F-20
Notes to Combined Financial Statements.......................................................... F-22
Schedule XI - Real Estate and Accumulated Depreciation............................................ F-29
</TABLE>
F-1
<PAGE>
HERSHA HOSPITALITY TRUST
CONDENSED STATEMENT OF ESTIMATED REVENUES AND EXPENSES FOR THE THREE MONTHS
ENDED MARCH 31, 1998. [UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA]
This unaudited Condensed Statement of Estimated Revenues and Expenses of Hersha
Hospitality Trust is presented as if the acquisition of the Initial Hotels and
the consummation of the Offering contemplated by this prospectus had occurred on
January 1, 1997. Such estimated information is based in part upon the pro forma
Condensed Combined Statements of Operations of the Selling Entities - Initial
Hotels and the application of the proceeds of the offering as set forth under
the caption "Use of Proceeds"and assumes the issuance of 3,450,833 Units to the
Hersha Affiliates which give rise to a minority interest percentage of 56.41%.
It should be read in conjunction with the pro forma Condensed Combined
Statements of Operations and the Combined Financial Statements and Notes thereto
of the Selling Entities - Initial Hotels included at pages F-17 through F-28 of
this Prospectus. In management's opinion, all adjustments necessary to reflect
the effects of this transaction have been made.
The historical results of operations which provide the basis for the pro forma
information excludes any operations for a hotel opened in May 1998.
This unaudited Condensed Statement of Estimated Revenues and Expenses is not
necessarily indicative of what actual results of operations of the Company 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>
Three months ended
Historical Adjustments March 31, 1998
<S> <C> ---------- ----------- ------------------
Operating Data:
Percentage Lease Revenue $ -- $ 1,202 [A] $ 1,202
Depreciation and Amortization -- 382 [B] 387
5 [G]
Real Estate and Personal Property Taxes and
Property Insurance -- 125 [C] 125
Interest Expense -- 254 [D] 254
General and Administrative -- 85 [E] 85
Land Lease -- 4 [F] 4
Minority Interest -- 192 [H] 195
--------- -------- -------
Net Income Applicable to Common Shareholders $ -- $ 152 $ 152
-------------------------------------------- ========= ======== ==========
Weighted Average Number of Common Shares Outstanding $2,666,667
Basic Earnings Per Share $ .06
</TABLE>
[A] Represents lease payments from Hersha Hospitality Management, L.P. [the
"Lessee"] to Hersha Hospitality Limited Partnership [the "Partnership"]
calculated on a pro forma basis using the rent provisions in the
Percentage Leases and the historical revenue of the Initial Hotels.
[B] Represents depreciation on the Initial Hotel properties and renovations
thereto and amortization of intangibles excluding franchise fees.
Depreciation is computed based upon estimated useful lives of 15 to 40
years for buildings and improvements, 5 to 7 years for furniture and
equipment and 5 to 30 years for intangibles. These estimated useful lives
are based on management's' knowledge of the properties and the hotel
industry in general.
[C] Represents real estate and personal property taxes and property insurance
to be paid by the Partnership.
[D] Represents interest on approximately $12,103 of debt remaining after the
closing of the formation transactions assumed outstanding for the full
quarter at 8.38%.
[E] Estimated at $110 per quarter based on the administrative services
agreement, legal fees, audit fees, directors fees, salaries and related
expenses.
[F] Represents land lease payments to be paid to Mr. Hasu P. Shah.
[G] Represents amortization of franchise license transfer fees.
[H] Calculated at 56.41% of lease income minus depreciation and amortization,
real estate and personal property taxes, property insurance, interest
expense, land leases and general and administrative expenses.
F-2
<PAGE>
HERSHA HOSPITALITY TRUST
CONDENSED STATEMENT OF ESTIMATED REVENUES AND EXPENSES FOR THE YEAR ENDED
DECEMBER 31, 1997. [UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA]
This unaudited Condensed Statement of Estimated Revenues and Expenses of Hersha
Hospitality Trust is presented as if the acquisition of the Initial Hotels and
the consummation of the Offering contemplated by this prospectus had occurred on
January 1, 1997. Such estimated information is based in part upon the pro forma
Condensed Combined Statements of Operations of the Selling Entities - Initial
Hotels and the application of the proceeds of the offering as set forth under
the caption "Use of Proceeds"and assumes the issuance of 3,450,833 Units to the
Hersha Affiliates which give rise to a minority interest percentage of 56.41%.
It should be read in conjunction with the pro forma Condensed Combined
Statements of Operations and the Combined Financial Statements and Notes thereto
of the Selling Entities - Initial Hotels included at pages F-17 through F-28 of
this Prospectus. In management's opinion, all adjustments necessary to reflect
the effects of this transaction have been made.
The historical results of operations which provide the basis for the pro forma
information includes the operations of three hotel properties only from the date
they commenced operations in June, October and December 1997. The pro forma
information excludes any operations for a hotel opened in May 1998.
This unaudited Condensed Statement of Estimated Revenues and Expenses is not
necessarily indicative of what actual results of operations of the Company 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
Historical Adjustments December 31,1997
--------- ----------- -----------------
<S> <C>
Operating Data:
Percentage Lease Revenue $ -- $ 5,025 [A] $ 5,025
Depreciation and Amortization -- 1,143 [B] 1,163
20 [G]
Real Estate and Personal Property Taxes and
Property Insurance -- 476 [C] 476
Interest Expense -- 961 [D] 961
General and Administrative -- 340 [E] 340
Land Lease -- 15 [F] 15
Minority Interest -- 1,167 [H] 1,167
----------- ---------- ------------
Net Income Applicable to Common Shareholders $ -- $ 903 $ 903
-------------------------------------------- =========== =========== ============
Weighted Average Number of Common Shares Outstanding 2,666,667
===========
Basic Earnings Per Share $ .34
============
</TABLE>
[A] Represents lease payments from Hersha Hospitality Management, L.P. [the
"Lessee"] to Hersha Hospitality Limited Partnership [the "Partnership"]
calculated on a pro forma basis using the rent provisions in the
Percentage Leases and the historical revenue of the Initial Hotels.
[B] Represents depreciation on the Initial Hotel properties and renovations
thereto and amortization of intangibles excluding franchise fees.
Depreciation is computed based upon estimated useful lives of 15 to 40
years for buildings and improvements, 5 to 7 years for furniture and
equipment and 5 to 30 years for intangibles. These estimated useful lives
are based on management's' knowledge of the properties and the hotel
industry in general.
[C] Represents real estate and personal property taxes and property insurance
to be paid by the Partnership.
[D] Represents interest on approximately $11,451 of debt remaining after the
closing of the formation transactions assumed outstanding for the full
year at 8.39%.
[E] Estimated at $440 per year based on the administrative services
agreement, legal fees, audit fees, directors fees, salaries and related
expenses.
[F] Represents land lease payments to be paid to Mr. Hasu P. Shah.
[G] Represents amortization of franchise license transfer fees.
[H] Calculated at 56.41% of lease income minus depreciation and amortization,
real estate and personal property taxes, property insurance, interest
expense, land leases and general and administrative expenses.
F-3
<PAGE>
HERSHA HOSPITALITY TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 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 December 31, 1997. Such pro
forma information is based upon the Combined Balance Sheets of the Selling
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 3,450,833 Units to the Hersha Affiliates which give rise to a
minority interest percentage of 56.41%. It should be read in conjunction with
the Combined Financial Statements of the Selling Entities - Initial Hotels and
the Notes thereto included at pages F-17 through F-28 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 December 31, 1997, nor does it purport to
represent the future financial position of the Company.
F-4
<PAGE>
HERSHA HOSPITALITY TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 1998.
[UNAUDITED, IN THOUSANDS]
<TABLE>
<CAPTION>
Historical
Selling
Entities Proceeds of Pro Forma Use of Pro Forma
Initial Hotels Offering Company Proceeds Company
-------------- ----------- --------- -------- ----------
[A] [B] [C]
<S> <C>
Assets:
Net Investment in Hotel
Properties $ 26,108 $ -- $ 26,108 $ (256) [E] $ 25,909
57 [F]
Cash 442 14,400 14,842 (13,842) [D] 1,000
Other Assets 1,105 -- 1,105 (1,105) [E] --
Intangibles 1,397 -- 1,397 275 [D] 1,382
(290) [E]
Total Assets $ 29,052 $ 14,400 $ 43,452 $ (15,161) $ 28,291
============== =========== ============== ============ ===========
Liabilities:
Mortgages $ 17,667 $ -- $ 17,667 $ (5,564) [D] $ 12,103
Due to Related Parties 7,561 -- 7,561 (7,561) [D] --
Accounts Payable, Accrued
Expenses and Other
Liabilities 567 -- 567 (567) [E] --
-------------- ----------- -------------- ------------ -----------
Total Liabilities 25,795 -- 25,795 (13,692) 12,103
-------------- ----------- -------------- ------------ -----------
Minority Interest in
Partnership -- -- -- 9,132 [G] 9,132
-------------- ----------- -------------- ------------ -----------
Shareholders' Equity:
Common Shares -- 27 27 -- 27
Additional Paid-in Capital -- 14,373 14,373 (7,344) [H] 7,029
Net Combined Equity 3,257 -- 3,257 57 [F] --
(3,257) [G,H]
(57) [H]
-------------- ----------- -------------- ------------ -----------
Total Shareholders' Equity 3,257 14,400 17,657 (10,601) 7,056
-------------- ----------- -------------- ------------ -----------
Total Liabilities and
Shareholders' Equity $ 29,052 $ 14,400 $ 43,452 $ (15,161) $ 28,291
============== =========== ============== ============ ===========
</TABLE>
F-5
<PAGE>
HERSHA HOSPITALITY TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 1998.
[UNAUDITED, IN THOUSANDS]
<TABLE>
<CAPTION>
<S> <C>
[A] Represents proceeds of the Offering ($16,000) less expenses of the Offering ($1,600).
[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 $ 442
Repayment of Amounts Payable to Affiliates and Partners 7,561
Repayment of Mortgage Indebtedness 5,564
Payment of Franchise License Transfer Fees 275
---------------
Net Decrease in Cash $ 13,842
===============
[E] Assets and liabilities; not being purchased consist of:
Cash $ (442)
Land (256) (256)
Other Assets (1,105)
Initial Franchise License Fees (290)
Accounts Payable, Accrued Expenses and Other Liabilities 567
---------------
Net Assets and Liabilities Not Purchased $ (1,526)
===============
[F] Represents cost of subdivided land to be transferred to the Company $ 57
===============
[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 $ 14,400
Net Combined Equity 3,257
Additional Land 57
Net Assets Not Acquired (1,526)
--------------
16,188
Minority Interest Percentage .5641
---------------
Minority Interest $ 9,132
===============
[H] Net decrease reflects the following proposed transactions:
Elimination of Net Combined Equity $ 3,257
Additional Land 57
Assets and Liabilities of Initial Hotels Not Purchased (1,526)
Recognition of Minority Interest in Partnership (9,132)
---------------
$ 7,344
===============
</TABLE>
F-6
<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
F-7
<PAGE>
HERSHA HOSPITALITY TRUST
BALANCE SHEET AS OF MAY 27, 1998.
<TABLE>
<CAPTION>
<S> <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
Additional paid-in capital 99
Subscription Receivable (100)
Total Liabilities and Shareholders' Equity $ --
===============
</TABLE>
The Accompanying Notes Are an Integral Part of This Financial Statement.
F-8
<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 2,666,667 [See Note 3] common shares in an
initial public offering [the "Offering"] and Hersha Hospitality Limited
Partnership [the "Partnership"] will issue approximately 3,500,000 Units of
partnership interest ["Units"] to Mr. Hasu P. Shah and certain affiliates owning
100% of the ownership interest in the ten existing hotel properties [the "Hersha
Affiliates"], 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 Partnership in exchange for an
approximate 43% general partnership interest in the Partnership. The Partnership
will use the proceeds from the Company to acquire ten existing hotel properties
[collectively 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 3,500,000 Common Shares of the
Company valued at approximately $21 million based on an offering price of $6.00
per Common Share [the "Offering Price"] , and (ii) the assumption of
approximately $24 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 43%
of the Partnership, (b) the Hersha Affiliates will own approximately 57% 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, common
shares of beneficial interest and 10,000,000, $.01 par value, preferred shares
of beneficial interest.
In conjunction with the offering, the Partnership will enter into agreements for
the acquisition of 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.
F-9
<PAGE>
HERSHA HOSPITALITY TRUST
NOTES TO BALANCE SHEET AS OF MAY 27, 1998, Sheet #2
[3] Commitments and Contingencies [Continued]
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 Common Shares or for cash at
the election of the Company. 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 3,500,000 and has been determined based on
the value of their interests in the Selling 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.
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 SHEET AS OF MAY 27, 1998.
<TABLE>
<CAPTION>
<S> <C>
Assets $ --
===============
Liabilities and Partners' Capital:
Liabilities --
Commitments and Contingencies --
Partners' Capital --
Total Liabilities and Partners' Capital $ --
===============
</TABLE>
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 SELLING ENTITIES - INITIAL HOTELS
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 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 Selling Entities - Initial Hotels and the application of the proceeds
of the Offering as set forth under the caption "Use of Proceeds." It should be
read in conjunction with the Combined Financial Statements and Notes thereto of
the Combined Selling Entities - Initial Hotels included at pages F-17 through
F-28 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 Company 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.
Three months ended March 31, 1998
<TABLE>
<CAPTION>
Historical
Selling
Entities -
Initial Hotels Adjustments Pro Forma
-------------- ----------- ---------
<S> <C>
Total Revenue $ 3,143 $ -- $ 3,143
Expenses:
Initial Hotel Operating
Costs and Expenses 1,726 (125) [A] 1,601
Advertising and Marketing 100 100
Depreciation and Amortization 389 (382) [B] 7
Interest Expense 397 (397) [C] --
General and Administrative 410 (23) [D] 309
(78) [E]
Percentage Lease Payments -- 1,202 [F] 1,202
----------- ----------- ------------
Lessee Operating Income $ 121 $ (197) $ (76)
----------------------- =========== =========== ============
</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 Selling
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 an estimate of certain expenses to be
paid by the Partnership.
[E] To eliminate related party management fees.
[F] Represents lease payments calculated on a pro forma basis using the rent
provisions in the Percentage Lease Agreements.
F-14
<PAGE>
COMBINED SELLING 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 Selling Entities - Initial Hotels and the application of the proceeds
of the Offering as set forth under the caption "Use of Proceeds." It should be
read in conjunction with the Combined Financial Statements and Notes thereto of
the Combined Selling Entities - Initial Hotels included at pages F-17 through
F-28 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 Company 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
Selling
Entities -
Initial Hotels Adjustments Pro Forma
-------------- ------------ ----------
<S> <C>
Total Revenue $ 13,445 $ $ 13,445
Expenses:
Initial Hotel Operating
Costs and Expenses 7,088 (476) [A] 6,612
Advertising and Marketing 370 -- 370
Depreciation and Amortization 1,189 (1,143) [B] 46
Interest Expense 1,354 (1,354) [C] --
General and Administrative 1,701 (90) [D] 1,339
(272) [E]
Other 14 -- 14
Percentage Lease Payments -- 5,025 [F] 5,025
----------- ----------- ------------
Lessee Operating Income $ 1,729 $ 1,690 $ 39
----------------------- =========== =========== ============
</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 Selling
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 an estimate of certain expenses to be
paid by the Partnership.
[E] To eliminate related party management fees.
[F] Represents lease payments calculated on a pro forma basis using the rent
provisions in the Percentage Lease Agreements.
F-15
<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 Selling 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 Selling 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-16
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
COMBINED BALANCE SHEETS
[IN THOUSANDS]
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
[Unaudited]
-----------
<S> <C>
Assets:
Investment in Hotel Properties:
Land $ 2,099 $ 2,099 $ 1,843
Buildings and Improvements 19,396 19,276 9,950
Furniture, Equipment and Other 6,117 6,056 3,682
------------ ---------- ----------
Totals 27,612 27,431 15,475
Less: Accumulated Depreciation 3,735 3,356 2,533
------------ ---------- ----------
Totals 23,877 24,075 12,942
Construction in Progress 2,248 1,412 857
------------ ---------- ----------
Net Investment in Hotel Properties 26,125 25,487 13,799
Cash and Cash Equivalents 442 694 237
Accounts Receivable 562 394 191
Prepaid Expenses and Other Assets 226 182 154
Due from Related Parties 317 268 107
Intangible Assets 1,397 1,427 1,418
------------ ---------- ----------
Total Assets $ 29,069 $ 28,452 $ 15,906
============ ========== ==========
Liabilities and Owners' Equity:
Mortgages Payable $ 17,667 $ 14,713 $ 8,571
Accounts Payable and Accrued Expenses 306 1,092 649
Accrued Expenses - Related Parties 57 153 11
Due to Related Parties 7,561 9,169 4,236
Other Liabilities 204 172 250
------------ ---------- ----------
Total Liabilities 25,795 25,299 13,717
Commitments -- -- --
Owners' Equity:
Net Combined Equity 3,274 3,153 2,189
------------ ----------- ------------
Total Liabilities and Owners' Equity $ 29,069 $ 28,452 $ 15,906
============ =========== ============
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-17
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
[IN THOUSANDS]
<TABLE>
<CAPTION>
Three months ended Years ended
March 31, December 31,
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
[Unaudited] [Unaudited]
<S> <C>
Revenues from Hotel Operations:
Room Revenue $ 2,572 $ 1,659 $ 10,880 $ 7,273 $ 5,262
Restaurant Revenue 432 412 1,744 2,106 1,515
Other Revenue 139 215 821 610 442
-------------- ------------- ------------- ------------- --------------
Total Revenue 3,143 2,286 13,445 9,989 7,219
-------------- ------------- ------------- ------------- --------------
Expenses:
Hotel Operating Expenses 1,726 1,464 7,088 6,293 4,750
Advertising and Marketing 100 89 370 418 185
Depreciation and Amortization 389 233 1,189 924 711
Interest Expense 270 163 821 605 434
Interest Expense - Related Parties 127 35 533 316 200
General and Administrative 332 277 1,381 1,085 779
General and Administrative -
Related Parties 78 -- 320 364 102
Loss on Asset Disposals -- -- -- 12 284
Liquidation Damages -- -- 14 -- 150
-------------- ------------- ------------- ------------- --------------
Total Expenses 3,022 2,261 11,716 10,017 7,595
-------------- ------------- ------------- ------------- --------------
Net Income [Loss] $ 121 $ 25 $ 1,729 $ (28) $ (376)
============== ============= ============= ============= ==============
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-18
<PAGE>
COMBINED SELLING 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 284
Cash Distributions (1,049)
--------------
Balance - December 31, 1997 3,153
Net Income 121
Capital Contributions --
Cash Distributions --
--------------
Balance - March 31, 1998 [Unaudited] $ 3,274
==============
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-19
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
[IN THOUSANDS]
<TABLE>
<CAPTION>
Three months ended Years ended
March 31, December 31,
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
[Unaudited] [Unaudited]
<S> <C>
Operating Activities:
Net income [Loss] $ 121 $ 25 $ 1,729 $ (28) $ (376)
Adjustments to Reconcile Net
Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization
Expense 407 245 1,246 966 751
Loss on Disposal of Assets -- -- -- 12 284
Writeoff of Financing Fees -- -- 44 -- --
Changes in Assets and Liabilities:
Accounts Receivable (168) (100) (203) 105 (226)
Prepaid Expenses and Other
Assets (44) 6 (28) (28) 39
Accounts Payable and Accrued
Expenses (882) 434 584 241 293
Other Liabilities 32 (129) (78) 79 129
----------- --------- ---------- ---------- --------------
Net Cash - Operating Activities (534) 481 3,294 1,347 894
----------- --------- ---------- ---------- --------------
Investing Activities:
Improvements and Additions to
Hotel Properties (1,015) (5,261) (12,821) (5,601) (5,086)
Payment for Intangibles -- (67) (166) (117) (925)
Advances to Related Parties (152) (20) (268) (99) (576)
Repayment of Advances to
Related Parties 103 97 107 584 62
Proceeds from Sale of Assets -- -- -- 129 --
----------- --------- ---------- --------- --------------
Net Cash - Investing Activities (1,064) (5,251) (13,148) (5,104) (6,525)
----------- --------- ---------- --------- --------------
Financing Activities:
Proceeds from Mortgages and
Notes Payable 3,154 1,550 9,526 3,631 4,615
Principal Payments on Mortgages
and Notes Payable (195) (100) (3,383) (612) (1,143)
Advances from Related Parties 1,576 5,179 6,555 2,756 809
Repayments of Advances from
Related Parties (3,189) (1,452) (1,622) (1,915) (1,065)
Capital Contributions -- 97 284 470 2,287
Distributions Paid -- (445) (1,049) (470) (466)
----------- --------- ---------- --------- --------------
Net Cash - Financing Activities 1,346 4,829 10,311 3,860 5,037
----------- --------- ---------- --------- --------------
Net [Decrease] Increase in
Cash and Cash Equivalents -
Forward $ (252) $ 59 $ 457 $ 103 $ (594)
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-20
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
[IN THOUSANDS]
<TABLE>
<CAPTION>
Three months ended Years ended
March 31, December 31,
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
[Unaudited] [Unaudited]
<S> <C>
Net [Decrease] Increase in
Cash and Cash Equivalents -
Forwarded $ (252) $ 59 $ 457 $ 103 $ (594)
Cash and Cash Equivalents at
Beginning of Periods 694 237 237 134 728
---------- --------- --------- --------- ----------
Cash and Cash Equivalents at
End of Periods $ 442 $ 296 $ 694 $ 237 $ 134
========== ========= ========= ========= ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest [Net of Amounts
Capitalized] $ 339 $ 191 $ 1,133 $ 903 $ 591
</TABLE>
The Accompanying Notes Are an Integral Part of These Combined Financial
Statements.
F-21
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[Information relating to March 31, 1998 and 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 43% 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 $10 per hotel or $100 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 "Selling Entities"]
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 Selling Entities are owned by Mr. Hasu P. Shah and certain affiliates of Mr.
Hasu P. Shah [the "Hersha Affiliates"]. Due to common ownership and management
of the Selling 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 2,500,000 common shares to the public and 166,667
common shares 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 43% general partnership interest in the Partnership. The Partnership
will use the proceeds from the Company to acquire the Initial Hotels from the
Selling Entities and to repay certain outstanding indebtedness. Rather than
receiving cash for their interests in the Selling Entities upon the sale of the
Initial Hotels, the Hersha Affiliates have elected to receive limited
partnership interests in the Partnership aggregating an approximate 57%
ownership interest in the Partnership.
F-22
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[Information relating to March 31, 1998 and 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 43% of the Partnership, (b) the Hersha Affiliates will own an
aggregate of approximately 57% 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.
F-23
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[Information relating to March 31, 1998 and 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 Selling 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 Selling 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 Selling Entities into consideration when filing their respective tax
returns. The cumulative difference between the book basis and tax basis of the
Selling Entities' assets and liabilities is approximately $3.7 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-24
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[Information relating to March 31, 1998 and 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:
<TABLE>
<CAPTION>
Accumulated
December 31, 1997: Cost Amortization Net
---- ------------ ---
<S> <C>
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
------ ============ ============ ============
</TABLE>
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,
1 9 9 7 1 9 9 6
------- --------
<S> <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-25
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[Information relating to March 31, 1998 and 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[4] Mortgages Payable [Continued]
<TABLE>
<CAPTION>
December 31,
1 9 9 7 1 9 9 6
------- ---------
<S> <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 Selling Entities' mortgage indebtedness is collateralized
by property and equipment and is personally guaranteed by the partners and
stockholders of the Selling 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-26
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[Information relating to March 31, 1998 and 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] Income Taxes
Included in the Selling 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 Selling Entities neither incurred nor paid any income taxes during the
periods presented.
[6] Related Party Transactions
At December 31, 1997 and 1996, the Selling 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 Selling 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 Selling 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.
F-27
<PAGE>
COMBINED SELLING ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[Information relating to March 31, 1998 and 1997 is Unaudited]
[AMOUNTS IN THOUSANDS]
[6] Related Party Transactions [Continued]
A related entity rents office space in a hotel owned by the Selling Entities on
a month to month basis. The Selling 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 Selling Entities sold for $129,
the book value of the assets, certain leasehold improvements to Mr. Hasu P.
Shah.
On September 26, 1997, the Selling 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 Selling 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.
[7] 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, 1995, respectively. The Initial Hotels will
continue to be operated under the franchise agreements.
Construction in Progress - At December 31, 1997, the Selling Entities had future
obligations under various hotel construction project in the amount of $255.
Through December 31, 1997, the Selling 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 Selling 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, Selling Entities and related parties.
[8] 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 Selling 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.
[9] Unaudited Interim Statements
The financial statements as of March 31, 1998 and for the three months ended
March 31, 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-28
<PAGE>
HERSHA HOSPITALITY TRUST
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>
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>
<TABLE>
<CAPTION>
Life
Accumulated Net Upon Which
Depreciation Book Value Latest Income
------------ ---------- -------------
Buildings and Buildings and Date of Statement is
------------- ------------- ------- ------------
Description Improvements Improvements Acquisition Computed
----------- ------------ ------------ ----------- --------
<S> <C>
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
========= ==========
</TABLE>
F-29
<PAGE>
HERSHA HOSPITALITY TRUST
NOTES TO SCHEDULE XI
[IN THOUSANDS]
<TABLE>
<CAPTION>
<S> <C>
[A] Reconciliation of Real Estate:
1997 1996 1995
------- ------- -------
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 $19,284.
[D] Depreciation is computed based upon the following useful lives:
Buildings and Improvements 15 to 40 years
<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.................................................................16
THE COMPANY..................................................................28
GROWTH
STRATEGY.....................................................................28
USE OF PROCEEDS..............................................................29
DISTRIBUTION POLICY..........................................................30
PRO FORMA CAPITALIZATION.....................................................32
DILUTION.....................................................................33
SELECTED FINANCIAL INFORMATION...............................................34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................38
BUSINESS AND PROPERTIES......................................................40
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES...................52
FORMATION TRANSACTIONS.......................................................54
MANAGEMENT...................................................................56
CERTAIN RELATIONSHIPS AND TRANSACTIONS.......................................59
THE LESSEE...................................................................59
PRINCIPAL SHAREHOLDERS.......................................................61
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST.................................61
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION
OF TRUST AND BYLAWS.......................................................65
SHARES AVAILABLE FOR FUTURE SALE.............................................69
PARTNERSHIP AGREEMENT........................................................70
FEDERAL INCOME TAX CONSIDERATIONS............................................72
UNDERWRITING.................................................................87
EXPERTS......................................................................89
REPORTS TO SHAREHOLDERS......................................................89
LEGAL MATTERS................................................................89
ADDITIONAL INFORMATION.......................................................89
GLOSSARY.....................................................................90
INDEX TO FINANCIAL STATEMENTS................................................F-1
Until __________ __, 199_ (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.
<PAGE>
2,666,667 Shares
HERSHA HOSPITALITY
TRUST
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.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission, registration fee............................ $ 4,720
NASD filing fee................................................................. *
American Stock Exchange listing fee............................................. *
Printing and mailing............................................................ 30,000
Accountant's fees and expenses.................................................. 80,000
Blue Sky fees and expenses...................................................... *
Counsel fees and expenses....................................................... 250,000
Miscellaneous................................................................... 40,000
-------
Total....................................................................... $ *
========
</TABLE>
- ---------------
* To be supplied by amendment.
Item 32. Sales to Special Parties
None.
Item 33. Recent Sales of Unregistered Securities
On May 27, 1998, the Company was capitalized with subscription by Hasu
P. Shah for 100 Common Shares for a purchase price of $1 per share for an
aggregate purchase price of $100. The Common Shares were purchased for
investment and for the purpose of organizing the Company. The Company issued
these Common Shares in reliance on an exemption from registration under Section
4(2) of the Securities Act. Mr. Shah's 100 Common Shares will be redeemed
concurrently with the closing of the Offering.
Item 34. Indemnification of Trustees and Officers
The Declaration of Trust of the Company contains a provision that,
subject to certain exceptions described below, eliminates the liability of a
Trustee or officer to the Company or its shareholders for monetary damages for
any breach of duty as a Trustee or officer. This provision does not eliminate
such liability to the extent that it is proved that the Trustee or officer
engaged in willful misconduct or a knowing violation of criminal law or of any
federal or state securities law.
The Company's Declaration of Trust also requires the Company to
indemnify any Trustee or officer who is or was a party to a proceeding,
including a proceeding by or in the right of the Company, by reason of the fact
that he is or was such a Trustee or officer or is or was serving at the request
of the Company as a director, officer, employee or agent of another entity
provided that the Board of Trustees determines that the conduct in question was
in the best interest of the Company and such person was acting on behalf of the
Company. A Trustee or officer of the Company is entitled to be indemnified
against all liabilities and expenses incurred by the Trustee or officer in the
proceeding, except such liabilities and expenses as are incurred (i) if such
person is an Independent Trustee or officer, because of his or her gross
negligence, willful misconduct or knowing violation of the criminal law or (ii)
in the case of the Trustee other than the Independent Trustees, because of his
or her negligence or misconduct. Unless a determination has been made that
indemnification is not permissible, a director or officer also is entitled to
have the Company make advances and reimbursement for expenses prior to final
disposition of the proceeding upon receipt of a written undertaking from the
director or officer to repay the amounts advanced or reimbursed if it is
ultimately determined that he or she is not entitled to indemnification. Such
advance shall be permissible when the proceeding has been initiated by a
shareholder of the Company only if such advance is approved by a court of
competent jurisdiction. The Board of Trustees of the Company also has the
authority to extend to any person who is an employee or agent of the Company, or
who is or was serving at the request of the Company as a director, officer,
employee or agent of another entity, the same indemnification rights held by
directors and officers, subject to all of the accompanying conditions and
obligations.
II-1
<PAGE>
The Underwriting Agreement contains certain provisions pursuant to
which certain officers, directors and controlling persons may be entitled to be
indemnified by the underwriter named therein.
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
1.3 Form of Escrow Agreement
1.4 Executed Escrow 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 Shah, David Desfor, Madhusudan
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
Shah, David 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 Shah, David Desfor,
Madhusudan 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 Shah, Madhusudan
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 Shah, David 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
Hopsitality 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 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, dated June __, 1998, between
844 Associates and Hersha Hospitality Limited
Partnership.
10.18 Form of Ground Lease, dated June __, 1998, between
Hersha Hospitality Limited Partnership and Shree
Associates
10.19 Form of Percentage Lease
10.20 Option Agreement, dated June 3, 1998, between certain
individual and Hersha Hospitality Limited Partnership
10.21 Administrative Services Agreement, dated June 3,
1998, between Hersha Hospitality Trust and Hersha
Hospitality Management, L.P.
10.22 Warrant Agreement, dated June ___, 1998, between
Anderson & Strudwick, Inc. and Hersha Hospitality
Trust.
10.23 Warrant Agreement, dated June 3, 1998, between 2744
Associates, L.P. and Hersha Hospitality Limited
Partnership.
II-2
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
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 certain individuals to be named as Trustee
</TABLE>
*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 33 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question as to whether such indemnification by it is against public policy
as expressed in the Act, and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(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-3
<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 4th day of June, 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
Each person whose signature appears below hereby constitutes and
appoints Hasu P. Shah and Kiran P. Patel and each or either of them, his true
and lawful attorney-in-fact with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, or any Registration Statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
and to cause the same to be filed, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
granting to said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite or
desirable to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all acts and things that said attorneys-in-fact and agents, or either
of them, or their substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 4th day
of June, 1998 in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Hasu P. Shah
- ---------------------- Chairman of the Board of Trustees, Chief
Hasu P. Shah Executive Officer and Trustee
(Principal Executive Officer)
/s/ Kiran P. Patel
- ---------------------- Chief Financial Officer
Kiran P. Patel and Treasurer
(Principal Financial and Accounting Officer)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
--------------------------
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Selected Dealer Agreement
1.3 Form of Escrow Agreement
1.4 Executed Escrow 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 Shah, David Desfor, Madhusudan
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
Shah, David 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 Shah, David Desfor,
Madhusudan 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 Shah, Madhusudan
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 Shah, David 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
Hopsitality 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 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, dated June __, 1998, between
844 Associates and Hersha Hospitality Limited
Partnership.
10.18 Form of Ground Lease, dated June __, 1998, between
Hersha Hospitality Limited Partnership and Shree
Associates
10.19 Form of Percentage Lease
10.20 Option Agreement, dated June 3, 1998, between certain
individual and Hersha Hospitality Limited Partnership
10.21 Administrative Services Agreement, dated June 3,
1998, between Hersha Hospitality Trust and Hersha
Hospitality Management, L.P.
10.22 Warrant Agreement, dated June ___, 1998, between
Anderson & Strudwick, Inc. and Hersha Hospitality
Trust.
10.23 Warrant Agreement, dated June 3, 1998, between 2744
Associates, L.P. and Hersha Hospitality Limited
Partnership.
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 certain individuals to be named as Trustee
</TABLE>
*Filed herewith.
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, 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 Selling Entities - Initial Hotels in this
Registration Statement and related Prospectus of Hersha Hospitality Trust.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
June 4, 1998
