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As filed with the Securities and Exchange Commission on December 30, 1999
Registration No. 333-93157
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HOST MARRIOTT CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland 53-0085950
(State of Incorporation) (I.R.S. Employer Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
(Address, including zip code and telephone number, including
area code, of Registrant's principal executive offices)
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Christopher G. Townsend
General Counsel
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
J. Warren Gorrell, Jr., Esq.
Bruce W. Gilchrist, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
(202) 637-5600
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Approximate date of commencement of the proposed sale of the securities to
the public: From time to time after this Registration Statement becomes
effective, as determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
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 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. [_]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
PROSPECTUS
Subject to Completion dated December 30, 1999
16,859,003 Shares
Host Marriott Corporation
Common Stock
This prospectus relates to 16,859,003 shares of common stock that we may
elect to issue to the holders of 16,859,003 units of limited partnership
interest, or "OP Units," of Host Marriott, L.P., or the "operating
partnership," upon tender of such OP Units for redemption. These OP Units were
issued on December 30, 1998 in exchange for limited partnership interests in
various limited partnerships which Host Marriott, L.P. acquired as part of the
restructuring of our business operations so as to qualify as a real estate
investment trust beginning January 1, 1999.
We are registering the issuance of the common stock so that we will have the
option of acquiring OP Units tendered for redemption in exchange for our common
stock. Alternatively, the operating partnership may elect to pay cash for the
OP Units tendered rather than issue common stock. Although we will incur
expenses in connection with the registration of the 16,859,003 shares of common
stock covered by this prospectus, we will not receive any cash proceeds upon
their issuance.
Our common stock is listed on the New York Stock Exchange under the trading
symbol "HMT."
Consider carefully the risk factors beginning on page 8 in this prospectus
for certain factors relevant to an investment in the common stock, including
special considerations applicable to redeeming holders of OP Units.
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The information contained in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
relating to these securities has been declared effective by the Securities and
Exchange Commission. This prospectus is neither an offer to sell nor a
solicitation of an offer to buy these securities in any state where the offer
or sale is unlawful.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
December , 1999
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You should rely on the information provided or incorporated by reference in
this prospectus. We have not authorized any person to make a statement that
differs from what is in this prospectus. If any person does make a statement
that differs from what is in this prospectus, you should not rely on it. We are
not making an offer to sell, nor an offer to buy, the common stock in any state
where the offer or sale is not permitted. The information in this prospectus is
complete and accurate as of the date on the front cover, but the information
may change after that date.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary........................................................ 3
Forward-looking statements.............................................. 3
The company............................................................. 4
The stock offering...................................................... 4
Important risks in owning our common stock.............................. 5
Tax status of the company............................................... 5
Summary historical and pro forma financial data......................... 5
Risk Factors.............................................................. 8
Risks relating to redemption of OP Units................................ 8
Risks of ownership of our common stock.................................. 8
Risks of operation...................................................... 12
Federal income tax risks................................................ 18
Capitalization............................................................ 22
Pro Forma Financial Information........................................... 23
The REIT conversion..................................................... 23
Pro forma adjustments................................................... 26
Redemption of OP Units.................................................... 34
General................................................................. 34
Federal income tax consequences of redemption........................... 34
Comparison of Ownership of OP Units and Common Stock...................... 36
Federal Income Tax Consequences........................................... 47
Introduction............................................................ 47
Federal income taxation of Host Marriott................................ 47
Taxation of taxable U.S. stockholders generally......................... 60
Backup withholding for Host Marriott's distributions.................... 62
Taxation of tax-exempt stockholders..................................... 63
Taxation of non-U.S. stockholders....................................... 63
Tax aspects of Host Marriott's ownership of interests in the operating
partnership............................................................ 66
Other tax consequences for Host Marriott and its stockholders........... 69
Plan of Distribution...................................................... 70
Legal Matters............................................................. 70
Experts................................................................... 70
About This Prospectus .................................................... 70
Where You Can Find More Information....................................... 70
</TABLE>
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus
and incorporated by reference into this prospectus and may not contain all of
the information that is important to you. To understand this common stock
offering, you should read the entire prospectus and the information
incorporated by reference into this prospectus carefully, including the risk
factors and federal income tax consequences.
On December 29, 1998, we reincorporated in Maryland in connection with the
REIT conversion described below under "Pro Forma Financial Information--The
REIT conversion." As used in this prospectus, references to "we,", "our," the
"company" and "Host Marriott" and similar references are to Host Marriott
Corporation, a Maryland corporation, and its consolidated subsidiaries from and
after December 29, 1998 and to Host Marriott Corporation, a Delaware
corporation, and its consolidated subsidiaries before December 29, 1998, unless
otherwise expressly stated or the context otherwise requires.
Forward-looking statements
This prospectus and the information incorporated by reference into this
prospectus include forward-looking statements. We have based these forward-
looking statements on our current expectations and projections about future
events. We intend to identify forward-looking statements in this prospectus and
the information incorporated by reference into this prospectus by using words
or phrases such as "anticipate," "believe," "estimate," "expect," "intend,"
"may be," "objective," "plan," "predict," "project" and "will be" and similar
words or phrases, or the negative thereof.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by us in those statements include, among
others, the following:
. national and local economic and business conditions that will affect,
among other things, demand for products and services at our hotels and
other properties, the level of room rates and occupancy that can be
achieved by such properties and the availability and terms of financing;
. our ability to maintain the properties in a first-class manner, including
meeting capital expenditure requirements;
. our ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures;
. our ability to acquire or develop additional properties and the risk that
potential acquisitions or developments may not perform in accordance with
expectations;
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs;
. government approvals, actions and initiatives including the need for
compliance with environmental and safety requirements, and change in laws
and regulations or the interpretation thereof;
. the effects of tax legislative action, including the provisions of the
Work Incentives Improvement Act of 1999 relating to REITs as these
provisions were enacted on December 17, 1999 (we refer to these
provisions as the "REIT Modernization Act");
. the effect on us and our operations of the year 2000 issue;
. our ability to satisfy complex rules in order to qualify as a REIT for
federal income tax purposes and in order for the operating partnership to
qualify as a partnership for federal income tax purposes, and our ability
to operate effectively within the limitations imposed by these rules; and
. other factors discussed under the heading "Risk Factors" in this
prospectus and in our filings with the Securities and Exchange
Commission.
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Although we believe the expectations reflected in our forward-looking
statements are based upon reasonable assumptions, we can give no assurance that
we will attain these expectations or that any deviations will not be material.
We disclaim any obligation or undertaking to disseminate to you any updates or
revisions to any forward-looking statement contained in this prospectus and the
information incorporated by reference into this prospectus to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
The company
We are a self-managed and self-administered real estate investment trust, or
REIT, owning full-service hotel properties. Through our subsidiaries, we
currently own 121 hotels, representing approximately 57,000 rooms located
throughout the United States and in Toronto and Calgary, Canada. Most of our
hotels are operated under the Marriott brand name. In addition, we own hotels
operated under other major brands such as Ritz-Carlton, Four Seasons, Swissotel
and Hyatt. These brands are among the most respected and widely recognized
names in the lodging industry.
We were formed as a Maryland corporation in 1998, under the name HMC Merger
Corporation, as a wholly owned subsidiary of Host Marriott Corporation, a
Delaware corporation, in connection with Host Marriott's efforts to reorganize
its business operations to qualify as a REIT for federal income tax purposes.
As part of this reorganization, which we refer to as the REIT conversion, on
December 29, 1998 we merged with Host Marriott and changed our name to Host
Marriott Corporation. As a result, we have succeeded to the hotel ownership
business formerly conducted by Host Marriott, the Delaware corporation. We
conduct our business as an umbrella partnership REIT, or UPREIT, through Host
Marriott, L.P., a Delaware limited partnership, of which we are the sole
general partner and in which we hold approximately 78% of the partnership
interests. In this prospectus, we refer to Host Marriott, L.P. as the operating
partnership.
Under current federal income tax law, REITs are restricted in their ability
to derive revenues directly from the operation of hotels. Accordingly, we
currently lease substantially all of our hotels to certain entities we refer to
as the "lessees," which are principally subsidiaries of Crestline Capital
Corporation. The lessees operate the hotels pursuant to management agreements
with hotel managers such as Marriott International, Inc., who are responsible
for the day-to-day management of the hotels. However, we are responsible for,
among other things, decisions with respect to sales and purchases of hotels,
the financing of the hotels, the leasing of the hotels and capital expenditures
for the hotels, although some matters relating to capital expenditures are
addressed in the terms of the applicable leases and management agreements.
Effective November 15, 1999, we amended substantially all of our leases with
Crestline. Crestline and Marriott International are both publicly traded
companies, separate from Host Marriott. For more information regarding
Crestline's relationship with us and the lease amendments, please see "Pro
Forma Financial Information--The REIT conversion."
Under the REIT Modernization Act, beginning January 1, 2001, we could lease
our hotels to a subsidiary of the operating partnership that is a taxable
corporation and that elects to be treated as a "taxable REIT subsidiary." In
addition, as a result of passage of the REIT Modernization Act, we have the
right to purchase the leases from Crestline on or after January 1, 2001, for a
price equal to their fair market value (which could be significant). We intend
to evaluate our options regarding the Crestline leases and have not yet made a
decision whether or not to purchase those leases.
Our principal executive offices are located at 10400 Fernwood Road,
Bethesda, MD, 20817-1109, and our telephone number is (301) 380-9000.
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The stock offering
This prospectus relates to 16,859,003 shares of our common stock that we may
elect to issue to the holders of 16,859,003 OP Units upon tender of such OP
Units for redemption. These OP Units were issued on December 30, 1998 in
exchange for limited partnership interests in the following twelve limited
partnerships which the operating partnership acquired as part of the REIT
conversion:
. Atlanta Marriott Marquis II Limited Partnership
. Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
. Desert Springs Marriott Limited Partnership
. Hanover Marriott Limited Partnership
. Marriott Diversified American Hotels, L.P.
. Marriott Hotel Properties Limited Partnership
. Marriott Hotel Properties II Limited Partnership
. Potomac Hotel Limited Partnership
. Ivy Street Hotel Limited Partnership
. HMC/RGI Hartford, L.P.
. Times Square Marquis Hotel, L.P.
. HMC BN Limited Partnership
On December 30, 1999 (or the date of this prospectus, if later), holders of
OP Units will become eligible to redeem their OP Units for cash or, at our
election, shares of our common stock equal to the number of OP Units being
redeemed (subject to adjustment).
Important risks in owning our common stock
Before you decide to redeem your OP Units for cash or, at our election,
common stock, you should read the "Risk Factors" section, which begins on page
8 of this prospectus.
Tax status of the company
We believe that we have been organized and have operated in such a manner so
as to qualify as a REIT under the Internal Revenue Code, commencing with our
taxable year beginning January 1, 1999. A REIT generally is not taxed at the
corporate level on income it currently distributes to its shareholders as long
as it distributes currently at least 95% of its taxable income (excluding net
capital gain). For our taxable years beginning after December 31, 2000, this
requirement will be relaxed but we still will need to distribute 90% of this
amount. No assurance can be provided that we will qualify as a REIT or that new
legislation, Treasury Regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to our
qualification as a REIT or the federal income tax consequences of such
qualification. Even if we qualify as a REIT, we will be subject to corporate
level taxes on specified gains that we recognize within 10 years of becoming a
REIT, including significant deferred tax gains that are likely to be recognized
during that period without our receipt of any cash. In addition, some of our
subsidiaries, including any taxable REIT subsidiaries that we may form, are
subject to corporate income taxes. See "Federal Income Tax Consequences" for a
more detailed explanation.
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Summary historical and pro forma financial data
In the following table we set forth summary historical consolidated
financial data for us and our subsidiaries for the three fiscal years ended
December 31, 1998 and for the thirty-six weeks ended September 10, 1999
(our first three quarters of 1999) and September 11, 1998 (our first three
quarters of 1998). Effective December 31, 1998, we changed our fiscal year to
end on December 31. Previously, our fiscal year ended on the Friday closest to
December 31. The summary historical consolidated financial data as of and for
the three fiscal years ended December 31, 1998 have been derived from our
audited financial statements. The summary historical consolidated financial
data as of and for the first three quarters of 1998 and 1999 are unaudited but,
in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such data.
Interim results are not indicative of fiscal year performance because of the
impact of seasonal and short term variations.
Throughout 1998, we engaged in various transactions for the purposes of
qualifying as a REIT for federal income tax purposes. In order to qualify as a
REIT, we are restricted from operating hotels directly and, as part of the REIT
conversion, we have leased substantially all of our hotels to subsidiaries of
Crestline Capital Corporation. Accordingly, we do not believe that our results
of operations prior to the REIT conversion are comparable to our results of
operations following the REIT conversion.
The summary pro forma consolidated financial data set forth below reflect:
. our November 1999 issuance of Class B preferred stock;
. several hotel acquisitions and dispositions consummated by us and our
subsidiaries and various financing transactions; and
. various transactions effected as part of, or contemporaneously with, the
REIT conversion.
The summary pro forma statement of operations and other data reflects the
foregoing transactions as if the transactions had been completed at the
beginning of the periods presented. As discussed further in the "Pro Forma
Financial Information" beginning on page 23, certain of these transactions
occurred prior to September 10, 1999 and therefore were included in the
September 10, 1999 historical balance sheet. Consequently no pro forma
adjustments to the pro forma balance sheet data as of September 10, 1999 are
required for these transactions. Our pro forma statement of operations and
other data presented below include only income from continuing operations and,
therefore, they exclude the operations of the discontinued senior living
business.
The summary pro forma financial data set forth below are unaudited, are
based upon a number of assumptions and estimates and do not purport to be
indicative of the operating results or financial position that we would have
achieved had the transactions actually been consummated on the dates specified,
nor do they purport to be indicative of our operating results or financial
position for any future periods or dates.
The summary historical and pro forma financial data should be read in
conjunction with the audited and unaudited consolidated financial statements
which we incorporate by reference into this prospectus and the "Pro Forma
Financial Information" beginning on page 23. For additional details concerning
the transactions reflected in the pro forma financial data, investors should
carefully review the documents which we incorporate by reference.
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Summary Historical and Pro Forma Financial Data
<TABLE>
<CAPTION>
First Three Quarters(1) Fiscal Year(1)(2)
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Pro Forma Historical Pro Forma Historical
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1999(6)(9) 1999(9) 1998(3) 1998(6) 1998(3)(4) 1997(3)(4) 1996
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(unaudited) (unaudited)
(in millions, except ratio data)
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Statement of operations
data:
Revenues(5)............. $ 912 $ 937 $2,410 $1,283 $3,564 $2,875 $2,005
Income (loss) from
continuing operations.. 126 137 92 95 194 47 (13)
Income (loss) before
extraordinary items.... -- 137 100 -- 195 47 (13)
Net income (loss)....... -- 154 (48) -- 47 50 (13)
Other data:
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(7)........... 1.5x 1.6x 1.7x 1.3x 1.5x 1.3x 1.0x
Balance sheet data:
Total assets(8)......... $8,229 $8,330 $6,682 -- $8,268 $6,141 $5,152
Debt.................... 5,025 5,150 4,011 -- 5,131 3,466 2,647
</TABLE>
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(1) The Internal Revenue Code requires REITs to file their income tax return on
a calendar year basis. Accordingly, in 1998 we changed our fiscal year end
to December 31 for both financial and tax reporting requirements.
Previously, our fiscal year ended on the Friday nearest to December 31. As
a result of this change, the results of operations for 15 hotels not
managed by Marriott International were adjusted in 1998 to include 13
months of operations (December 1997 through December 1998) and therefore
are not comparable to fiscal years 1997 and 1996, each of which included 12
months of operations. The additional month of operations in 1998 increased
our revenues by $44 million. Additionally, the results of operations for
the first three quarters of 1999 are not comparable to the first three
quarters of 1998. In order to present comparable first three quarter
results of operations, the first three quarters of 1998 would have to be
adjusted to exclude December 1997 operations and to include August 1998
operations for the 15 hotels not managed by Marriott International.
(2) Fiscal year 1996 includes 53 weeks. Fiscal years 1997 and 1998 include 52
weeks.
(3) The historical financial data for fiscal years 1998 and 1997 and the first
three quarters of 1998 reflect as discontinued operations our senior living
business that we formerly conducted but disposed of in the spin-off of
Crestline as part of the REIT conversion. We recorded income from the
discontinued operations, net of taxes, of $6 million, $0 and $8 million in
fiscal years 1998 and 1997 and the first three quarters of 1998,
respectively.
(4) In 1998, we recognized a $148 million extraordinary loss, net of taxes, on
the early extinguishment of debt. In 1997, we recognized a $3 million
extraordinary gain, net of taxes, on the early extinguishment of debt. Also
in 1998, we recognized REIT conversion expenses of $64 million and recorded
a tax benefit of $106 million related to tax liabilities that we will not
recognize as a result of our conversion to a REIT.
(5) Historical revenue for the first three quarters of 1999 and pro forma
revenues for all periods primarily represent lease income generated by our
leases with Crestline. Periods prior to 1999 have been restated in
accordance with Emerging Issues Task Force 97-2 "Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management
Arrangements." EITF 97-2 addresses the circumstances in which a management
entity may include the revenues and expenses of a managed entity in its
financial statements. Application of EITF 97-2 for the first three quarters
of 1998 and fiscal years 1998, 1997 and 1996 increased both historical
revenues and historical operating expenses by approximately $1.4 billion,
$2.1 billion, $1.7 billion and $1.2 billion, respectively, and had no
impact on net income (loss). Revenues for fiscal years 1998, 1997 and 1996
and the first three quarters of 1998 have also been adjusted to reclassify
interest income as revenue (previously classified as other income from
operations) in order to be consistent with our 1999 statement of operations
presentation.
(6) The pro forma statement of operations does not include extraordinary items
and income from discontinued operations.
(7) The ratio of earnings to combined fixed charges and preferred stock
dividends is computed by dividing income from continuing operations before
income taxes, fixed charges and preferred stock dividends by total fixed
charges and preferred stock dividends. Fixed charges represent interest
expense (including capitalized interest), amortization of debt issuance
costs and the portion of rent expense that is deemed to represent interest.
(8) Total assets for fiscal year 1997 and as of the end of the third quarter
1998 include $236 million and $404 million, respectively, related to net
investment in discontinued operations.
(9) In December 1999, the Commission released Staff Accounting Bulletin (SAB)
101 which codifies the staff's position on revenue recognition.
Specifically, the portion of rental income based on percentage rent would
be deferred until all contingencies have been resolved. Adoption of this
SAB in 1999 would have resulted in a reduction of historical and pro forma
rental revenues recognized and income available to common shareholders from
continuing operations for third quarter 1999 by approximately $340 million.
Historical and pro forma earnings per share for the first three quarters
1999 would be reduced $1.49 and $1.53, respectively. The adoption of SAB
101 has no effect on full year results of operations. SAB 101 is effective
for the first fiscal quarter of the fiscal year beginning after December
15, 1999.
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RISK FACTORS
In addition to the other information contained or incorporated by reference
in this prospectus, you should consider carefully the following risk factors.
Risks relating to redemption of OP Units
A holder who redeems OP Units may have adverse tax effects. A holder of OP
Units who redeems OP Units will be treated for tax purposes as having sold the
OP Units. The sale will be taxable and the holder will be treated as realizing
an amount equal to the sum of the value of the common stock or cash the holder
receives plus the amount of operating partnership nonrecourse liabilities
allocable to the redeemed OP Units. It is possible that the amount of gain the
holder recognizes could exceed the value of the common stock the holder
receives. It is even possible that the tax liability resulting from this gain
could exceed the value of the common stock or cash the holder receives. See
"Redemption of OP Units--Federal income tax consequences of redemption."
If a holder of OP Units redeems OP Units, the original receipt of the OP
Units may be subject to tax. If a holder of OP Units redeems OP Units,
particularly within two years of receiving them, there is a risk that the
original receipt of the OP Units may be treated as a taxable sale under the
"disguised sale" rules of the Internal Revenue Code. Subject to several
exceptions, the tax law generally provides that a partner's contribution of
property to a partnership and a simultaneous or subsequent transfer of money or
other consideration from the partnership to the partner will be presumed to be
a taxable sale. In particular, if money or other consideration is transferred
by a partnership to a partner within two years of the partner's contribution of
property, the transactions are presumed to be a taxable sale of the contributed
property unless the facts and circumstances clearly establish that the
transfers are not a sale. On the other hand, if two years have passed between
the original contribution of property and the transfer of money or other
consideration, the transactions will not be presumed to be a taxable sale
unless the facts and circumstances clearly establish that they should be.
Differences between an investment in shares of common stock and OP Units may
affect redeeming holders of OP Units. If a holder of OP Units elects to redeem
OP Units, we will determine whether the holder receives cash or shares of our
common stock in exchange for the OP Units. Although an investment in shares of
our common stock is substantially similar to an investment in OP Units, there
are some differences between ownership of OP Units and ownership of common
stock. These differences include form of organization, management structure,
voting rights, liquidity and federal income taxation. These differences, some
of which may be material to investors, are discussed in "Comparison of
Ownership of OP Units and Common Stock."
There are possible differing fiduciary duties of Host Marriott, as the
general partner, and the Board of Directors of Host Marriott. Host Marriott, as
the general partner of the operating partnership, and the Board of Directors of
Host Marriott, respectively, owe fiduciary duties to their constituent owners.
Although some courts have interpreted the fiduciary duties of the Board of
Directors in the same way as the duties of a general partner in a limited
partnership, it is unclear whether, or to what extent, there are differences in
such fiduciary duties. It is possible that the fiduciary duties of the
directors of Host Marriott to the shareholders may be less than those of Host
Marriott, as the general partner of the operating partnership, to the limited
partners of the operating partnership.
Risks of ownership of our common stock
Limitations on acquisition of our common stock and change in control. Host
Marriott's charter and Host Marriott's bylaws, the partnership agreement of the
operating partnership, Host Marriott's shareholder rights plan and the Maryland
General Corporation Law contain a number of provisions that could delay, defer
8
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or prevent a transaction or a change of control in Host Marriott that might
involve a premium price for holders of our common stock or otherwise be in
their best interests, including the following:
Ownership limit. The 9.8% ownership limit described under "--Possible
adverse consequences of limits on ownership of our common stock" below may
have the effect of precluding a change in control of Host Marriott by a
third party without the consent of the Board of Directors, even if such
change in control would be in the interest of our shareholders (and even if
such change in control would not reasonably jeopardize the REIT status of
Host Marriott).
Staggered board. Host Marriott's charter provides that the Board of
Directors shall originally consist of eight members and may be thereafter
increased or decreased in accordance with Host Marriott's bylaws, provided
that the total number of directors may not be fewer than three nor more
than 13. Pursuant to Host Marriott's bylaws, the number of directors shall
be fixed by the Board of Directors within the limits set forth in Host
Marriott's charter. The Board of Directors of Host Marriott is divided into
three classes of directors. Directors for each class are chosen for a
three-year term upon the expiration of the then current class' term. The
staggered terms for directors may affect shareholders' ability to effect a
change in control of Host Marriott, even if a change in control would be in
the interest of shareholders of Host Marriott.
Removal of board of directors. Host Marriott's charter provides that,
except for any directors who may be elected by holders of a class or series
of shares of capital stock other than our common stock, directors may be
removed only for cause and only by the affirmative vote of shareholders
holding at least two-thirds of the shares then outstanding and entitled to
be cast for the election of directors. Vacancies on the Board of Directors
may be filled by the concurring vote of a majority of the remaining
directors and, in the case of a vacancy resulting from the removal of a
director, by the shareholders by at least two-thirds of all the votes
entitled to be cast in the election of directors.
Preferred shares; classification or reclassification of unissued shares
of capital stock without shareholder approval. Host Marriott's charter
provides that the total number of shares of stock of all classes which Host
Marriott has authority to issue is 800,000,000 shares of stock, initially
consisting of 750,000,000 shares of common stock and 50,000,000 shares of
preferred stock (of which 8,160,000 have been issued). The Board of
Directors is authorized, without a vote of shareholders, to classify or
reclassify any unissued shares of stock, including common stock into
preferred shares or vice versa, and to establish the preferences and rights
of any preferred or other class or series of shares to be issued. The
issuance of preferred shares or other shares having special preferences or
rights could have the effect of delaying or preventing a change in control
of Host Marriott even if a change in control would be in the interest of
the shareholders of Host Marriott. Because the Board of Directors has the
power to establish the preferences and rights of additional classes or
series of shares without a shareholder vote, the Board of Directors may
afford the holders of any such class or series preferences, powers and
rights, including voting rights, senior to the rights of holders of our
common stock.
Consent rights of the limited partners. Under the partnership agreement
of the operating partnership, Host Marriott generally will be able to merge
or consolidate with another entity with the consent of partners holding
percentage interests that are more than 50% of the aggregate percentage
interests of the outstanding partnership interests entitled to vote thereon
(including any such partnership interests held by Host Marriott) as long as
the holders of OP Units either will receive or will have the right to
receive the
same consideration as the holders of our common stock. Host Marriott, as
holder of a majority of the OP Units, would be able to control the outcome
of such vote. Under Host Marriott's charter, the approval of the holders of
at least two-thirds of the shares of outstanding common stock generally is
necessary to effectuate such merger or consolidation.
Maryland business combination law. Under the Maryland General
Corporation Law, certain "business combinations" (including certain
issuances of equity securities) between a Maryland corporation and any
person who owns 10% or more of the voting power of the corporation's then
outstanding shares (an "Interested Shareholder") or an affiliate of the
Interested Shareholder are prohibited for five years after the most recent
date in which the Interested Shareholder becomes an Interested Shareholder.
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Thereafter, any such business combination must be approved by a
supermajority (80%) of outstanding voting shares, and by two-thirds of
voting shares other than voting shares held by an Interested Shareholder
unless, among other conditions, the corporation's common shareholders
receive a minimum price (as defined in the Maryland General Corporation
Law) for their shares and the consideration is received in cash or in the
same form as previously paid by the Interested Shareholder. Host Marriott
is subject to the Maryland business combination statute.
Maryland control share acquisition law. Under the Maryland General
Corporation Law, "control shares" acquired in a "control share acquisition"
have no voting rights except to the extent approved by a vote of two-thirds
of the votes entitled to be cast on the matter, excluding shares owned by
the acquiror and by officers or directors who are employees of the
corporation. "Control shares" are voting shares which, if aggregated with
all other such shares previously acquired by the acquiror or in respect of
which the acquiror is able to exercise or direct the exercise of voting
power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-
third, (ii) one-third or more but less than a majority or (iii) a majority
or more of the voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions. Host Marriott
is subject to these control share provisions of Maryland law, subject to an
exemption for Marriott International pursuant to its purchase right. See
"--Marriott International purchase right."
Merger, consolidation, share exchange and transfer of assets of Host
Marriott. Pursuant to Host Marriott's charter, subject to the terms of any
class or series of capital stock at the time outstanding, Host Marriott may
merge with or into another entity, may consolidate with one or more other
entities, may participate in a share exchange or may transfer its assets
within the meaning of the Maryland General Corporation Law if approved (i)
by the Board of Directors in the manner provided in the Maryland General
Corporation Law and (ii) by shareholders by the affirmative vote of two-
thirds of all the votes entitled to be cast on the matter (except that any
merger of Host Marriott with or into a trust organized for the purpose of
changing Host Marriott's form of organization from a corporation to a trust
will require the approval of shareholders of Host Marriott by the
affirmative vote only of a majority of all the votes entitled to be cast on
the matter). Under the Maryland General Corporation Law, certain mergers
may be accomplished without a vote of shareholders and a share exchange
need be approved by a Maryland successor only by its Board of Directors. A
voluntary dissolution of Host Marriott also would require the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter.
Amendments to Host Marriott's charter and Host Marriott's bylaws. The
provisions contained in Host Marriott's charter relating to restrictions on
transferability of our common stock, the classified Board of Directors and
fixing the size of the Board of Directors within the range set forth in
Host Marriott's charter, as well as the provisions relating to removal of
directors and the filling of vacancies may be amended only by a resolution
adopted by the Board of Directors and approved by shareholders by the
affirmative vote of the holders of not less than two-thirds of the votes
entitled to be cast on the matter. As permitted under the Maryland General
Corporation Law, Host Marriott's charter and Host Marriott's bylaws provide
that directors have the exclusive right to amend Host Marriott's bylaws.
Amendments of
this provision of Host Marriott's charter also would require action of the
Board of Directors and approval by two-thirds of all votes entitled to be
cast on the matter.
Marriott International purchase right. In connection with our spin-off
of Marriott International in 1993, Marriott International obtained the
right to purchase up to 20% of each class of our outstanding voting shares
at the then fair market value upon the occurrence of certain change of
control events involving us, subject to certain limitations intended to
protect the REIT status of Host Marriott. The Marriott International
purchase right may have the effect of discouraging a takeover of Host
Marriott, because any person considering acquiring a substantial or
controlling block of our common stock will face
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the possibility that its ability to obtain or exercise control would be
impaired or made more expensive by the exercise of the Marriott
International purchase right.
Shareholder rights plan. Host Marriott adopted a shareholder rights plan
which provides, among other things, that upon the occurrence of certain
events, shareholders will be entitled to purchase from Host Marriott a
newly created series of junior preferred shares, subject to Host Marriott's
Ownership Limit. The preferred share purchase rights will be triggered by
the earlier to occur of (i) ten days following the date of a public
announcement that a person or group acting in concert has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of our common stock or (ii) ten business days following
the commencement of or announcement of an intention to make a tender or
exchange offer, the consummation of which would result in the acquiring
person becoming the beneficial owner of 20% or more of such outstanding
common stock. The preferred share purchase rights would cause substantial
dilution to a person or group that attempts to acquire Host Marriott on
terms not approved by the Board of Directors.
Possible adverse consequences of limits on ownership of our common stock. To
maintain our qualification as a REIT for federal income tax purposes, not more
than 50% in value of our outstanding shares of capital stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities). See "Federal Income Tax
Consequences--Federal income taxation of Host Marriott--Requirements for
qualification." In addition, a person who owns, directly or by attribution, 10%
or more of an interest in a tenant of ours (or a tenant of any partnership in
which we are a partner) cannot own, directly or by attribution, 10% or more of
our shares without jeopardizing our qualification as a REIT. Primarily to
facilitate maintenance of our qualification as a REIT for federal income tax
purposes, the ownership limit under our charter will prohibit ownership,
directly or by virtue of the attribution provisions of the Internal Revenue
Code, by any person or persons acting as a group of more than 9.8% of the
issued and outstanding shares of our common stock (subject to an exception for
shares of our common stock held prior to the REIT conversion so long as the
holder thereof would not own more than 9.9% in value of our outstanding shares)
and will prohibit ownership, directly or by virtue of the attribution
provisions of the Internal Revenue Code, by any person or persons acting as a
group of more than 9.8% of the issued and outstanding shares of any class or
series of our preferred shares (collectively, the "Ownership Limit"). The Board
of Directors, in its sole and absolute discretion, may waive or modify the
Ownership Limit with respect to one or more persons who would not be treated as
"individuals" for purposes of the Internal Revenue Code if it is satisfied,
based upon information required to be provided by the party seeking the waiver
and upon an opinion of counsel satisfactory to the Board of Directors, that
ownership in excess of this limit will not cause a person who is an individual
to be treated as owning shares in excess of the Ownership Limit, applying the
applicable constructive ownership rules, and will not otherwise jeopardize our
status as a REIT for federal income tax purposes (for example, by causing any
of our tenants or any of the partnerships (including, but not limited to,
Crestline and the lessees) to be considered a "related party tenant" for
purposes of the REIT qualification rules). Common stock acquired or held in
violation of the Ownership Limit will be transferred automatically to a trust
for the benefit of a designated charitable beneficiary, and the person who
acquired such common stock in violation of the Ownership Limit will not be
entitled to any distributions thereon, to vote such shares of common stock or
to receive any proceeds from the subsequent sale thereof in excess of the
lesser of the price paid therefor or the amount realized from such sale. A
transfer of shares of our common stock to a person who, as a result of the
transfer, violates the Ownership Limit may be void under certain circumstances,
and, in any event, would deny the transferee any of the economic benefits of
owning shares of our common stock in excess of the Ownership Limit. The
Ownership Limit may have the effect of delaying, deferring or preventing a
change in control and, therefore, could adversely affect the shareholders'
ability to realize a premium over the then-prevailing market price for our
common stock in connection with such transaction.
Dependence on external sources of capital. As with other REITs, but unlike
corporations generally, our ability to reduce our debt and finance our growth
largely must be funded by external sources of capital because we generally will
have to distribute to our shareholders 95% of our taxable income in order to
qualify as a REIT (including taxable income where we do not receive
corresponding cash). Our access to external capital
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will depend upon a number of factors, including general market conditions, the
market's perception of our growth potential, our current and potential future
earnings, cash distributions and the market price of our common stock.
Currently, our access to external capital has been limited to the extent that
our common stock is trading at what we believe is a significant discount to our
estimated net asset value.
Effect on price of shares of common stock available for future sale. Sales
of a substantial number of our shares of common stock, or the perception that
such sales could occur, could adversely affect prevailing market prices for our
common stock. Holders of OP Units who receive our common stock upon redemption
of such OP Units will be able to sell such shares after they are received
(unless held by a person deemed to be an affiliate of Host Marriott). As part
of the REIT conversion, the operating partnership, directly and through its
subsidiaries, acquired substantially all of the partnership interests in eight
publicly-traded limited partnerships and four private partnerships which it did
not already own in exchange for approximately 26 million OP Units. Through
December 1, 1999, approximately 8.5 million of these OP Units had been
converted into shares of our common stock. Additionally, approximately 0.3
million of these OP Units were exchanged for notes of the operating partnership
with an aggregate principal amount of approximately $3 million. In connection
with the operating partnership's issuance of OP Units to acquire the public and
private partnerships and the OP Units issued in the Blackstone acquisition, the
operating partnership issued to parties other than Host Marriott and its
subsidiaries a total of approximately 73.5 million common OP Units, of which
approximately 64.3 million were outstanding as of December 1, 1999. As of
December 1, 1999, 35.1 million of the outstanding OP Units were redeemable. On
or about January 1, 2000, substantially all of the remaining outstanding OP
Units become redeemable. Further, a substantial number of shares of our common
stock have been and will be, pursuant to employee benefit plans, issued or
reserved for issuance from time to time, including shares of our common stock
reserved for options, and these shares of common stock would be available for
sale in the public markets from time to time pursuant to exemptions from
registration or upon registration. Moreover, the issuance of additional shares
of our common stock by us in the future would be available for sale in the
public markets. No prediction can be made about the effect that future sales of
our common stock would have on the market price of our common stock.
Effect of market conditions on the price of shares of our common stock. As
with other publicly traded equity securities, the value of our common stock
will depend upon various market conditions, which may change from time to time.
Some, but not all, of the market conditions that may affect the value of our
common stock are the following:
. the extent of institutional investor interest in us;
. the general market perception of REITs in general and hotel REITs in
particular and the attractiveness of their equity securities in
comparison to other equity securities;
. our financial performance;
. changes in the tax laws affecting REITs, including the REIT Modernization
Act; and
. general stock and bond market conditions.
Effect of earnings and cash distributions on the price of shares of our
common stock. It is generally believed that the market value of the equity
securities of a REIT is primarily based upon the market's perception of the
growth potential of the REIT's core portfolio, the value of its real estate
portfolio and its prospects for accretive acquisitions and development. The
combination of these factors creates a market perception of a REIT's current
and potential future cash distributions, whether from operations, sales,
acquisitions, development or refinancings, and is secondarily based upon the
value of the underlying assets. For that reason, shares of our common stock may
trade at prices that are higher or lower than the net asset value per share. To
the extent we retain operating cash flow for investment purposes, working
capital reserves or other purposes rather than distributing such cash flow to
shareholders, these retained funds, while increasing the value of our
underlying assets, may not correspondingly increase the market price of our
common stock. Our failure to meet the market's expectation with regard to
future earnings and cash distributions would likely adversely affect the market
price of our common stock.
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Effect of market interest rates on the price of shares of our common
stock. One factor that will influence the price of our common stock will be its
yield (which is the dividend as a percentage of the price of our common stock)
relative to market interest rates. Thus, an increase in market interest rates
may lead prospective purchasers of our common stock to expect a higher dividend
yield, which would adversely affect the market price of our common stock.
Risks of operation
We do not control our hotel operations and are dependent on the managers and
lessees of our hotels. Because federal income tax laws currently restrict REITs
and "publicly traded" partnerships from deriving revenues directly from
operating a hotel, we operate none of our hotels. Instead, we lease virtually
all of our hotels to subsidiaries of Crestline which, in turn, retain managers
to manage our hotels pursuant to management agreements. Thus, we are dependent
on the lessees but, under the hotel leases, we have little influence over how
the lessees operate our hotels. Similarly, we are dependent on the managers,
principally Marriott International, but we have little influence over how the
managers manage our hotels. We have very limited recourse if we believe that
the hotel managers do not maximize the revenues from our hotels, which in turn
will maximize the rental payments we receive under the leases. We may seek
redress under most leases only if the lessee violates the terms of the lease
and then only to the extent of the remedies set forth in the lease.
Each lessee's ability to pay rent accrued under its lease depends to a large
extent on the ability of the hotel manager to operate the hotel effectively and
to generate gross sales in excess of its operating expenses. Our rental income
from the hotels may therefore be adversely affected if the managers fail to
provide quality services and amenities and competitive room rates at our hotels
or fail to maintain the quality of the hotel brand names. Although the lessees
have primary liability under the management agreements while the leases are in
effect, we remain liable under the management agreements for all obligations
that the lessees do not perform. We may terminate a lease if the lessee
defaults under a management agreement, but terminating the lease could, unless
another suitable lessee is found, impair our ability to qualify as a REIT for
federal income tax purposes and the operating partnership's ability to qualify
as a partnership for federal income tax purposes unless another suitable lessee
is found. As described below, our inability to qualify as a REIT or the
operating partnership's inability to qualify as a partnership for federal
income tax purposes would have a material adverse effect on us.
We do not control the assets held by the non-controlled subsidiaries. The
operating partnership owns economic interests in certain taxable corporations,
which we refer to as "non-controlled subsidiaries," that hold various assets
which, under our credit facility may not exceed, in the aggregate, 15% of the
value of our assets.
These assets consist primarily of interests in certain partnerships and hotels
which are not leased, certain FF&E used in our hotels and certain international
hotels. Ownership of these assets by the operating partnership could jeopardize
our REIT status and/or the status of the operating partnership as a partnership
for federal income tax purposes. Although the operating partnership owns
approximately 95% of the total economic interests of the non-controlled
subsidiaries, the Host Marriott Statutory Employee/Charitable Trust, the
beneficiaries of which are (i) a trust formed for the benefit of a number of
our employees and (ii) the J. Willard and Alice S. Marriott Foundation, owns
all of the voting common stock of the non-controlled subsidiaries representing
approximately 5% of the total economic interests in such non-controlled
subsidiaries. These voting stockholders elect the directors who are responsible
for overseeing the operations of the non-controlled subsidiaries. The directors
are currently our employees, although this is not required. As a result, we
have no control over the operation or management of the hotels or other assets
owned by the non-controlled subsidiaries, even though we depend upon the non-
controlled subsidiaries for a portion of our revenues. Also, the activities of
non-controlled subsidiaries could cause us to be in default under our principal
debt facilities.
We are dependent upon the ability of Crestline and the lessees to meet their
rent obligations. The lessees' rent payments are the primary source of our
revenues. Crestline guarantees the obligations of its subsidiaries under the
hotel leases, but Crestline's liability is limited to a relatively small
portion of the aggregate rent obligation of its subsidiaries. Crestline's and
each of its subsidiaries' ability to meet its
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obligations under the leases will determine the amount of our revenue and,
likewise, our ability to meet our obligations. We have no control over
Crestline or any of its subsidiaries and cannot assure you that Crestline or
any of its subsidiaries will have sufficient assets, income and access to
financing to enable them to satisfy their obligations under the leases or to
make payments of fees under the management agreements. Although the lessees
have primary liability under the management agreements while the leases are in
effect, we and our subsidiaries remain liable under the management agreements
for all obligations that the lessees do not perform. Because of our dependence
on Crestline, our credit rating will be affected by its creditworthiness.
Relationships with Marriott International and Crestline. Marriott
International, a public company in the business of hotel management, manages a
significant number of our hotels. In addition, Marriott International manages
hotels that compete with our hotels. As a result, Marriott International may
make decisions regarding competing lodging facilities which it manages that
would not necessarily be in our best interests. Further, J.W. Marriott, Jr., a
member of our Board of Directors, and Richard E. Marriott, our Chairman of the
Board and J.W. Marriott, Jr.'s brother, serve as directors, and, in the case of
J.W. Marriott, Jr., also as an officer, of Marriott International. J.W.
Marriott, Jr. and Richard E. Marriott also beneficially own (as determined for
securities law purposes), as of January 31, 1999, approximately 10.9% and
10.6%, respectively, of the outstanding shares of common stock of Marriott
International. In addition, J.W. Marriott, Jr. and Richard E. Marriott own, as
of March 1, 1999, approximately 5.6% and 5.9%, respectively, of the outstanding
shares of common stock of Crestline, but neither serves as an officer or
director of Crestline. As a result, J.W. Marriott, Jr. and/or Richard E.
Marriott have potential conflicts of interest as our directors when making
decisions regarding Marriott International, including decisions relating to the
management agreements involving the hotels, Marriott International's management
of competing lodging properties and Crestline's leasing and other businesses.
Both our Board of Directors and the Board of Directors of Marriott
International follow appropriate policies and procedures to limit the
involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott in conflict
situations, including requiring them to abstain from voting as directors of
either us or Marriott International or our or their subsidiaries on certain
matters which present a conflict between the companies. If appropriate, these
policies and procedures will apply to other directors and officers.
Expiration and termination of the leases and possible inability to find
other lessees. Our current hotel leases have terms generally ranging from seven
to ten years. There can be no assurance that upon expiration of our leases, our
hotels will be relet to the current lessees, or if relet, will be relet on
terms favorable to us. If our hotels are not relet, we will be required to find
other lessees who meet certain requirements of the management agreements and of
the federal income tax rules that govern REITs. We have received notices of
termination from Crestline on five leases, which terminations will be effective
in
the first quarter of 2000. We are in the process of finding new lessees for
these hotels. We cannot assure you that we would be able to find satisfactory
lessees or that the terms of any new leases would be favorable. Failure to find
satisfactory lessees could cause us to lose our REIT status, and the operating
partnership to be taxed as a "C" corporation if it is a "publicly traded
partnership," which would require it to pay substantial federal income taxes,
could require it to distribute more to us (and therefore other equity holders)
to enable us to meet our tax burden, and could adversely affect the operating
partnership's ability to raise additional capital. Failure to enter leases on
satisfactory terms could also result in reduced cash available for debt service
and distribution to shareholders.
Our substantial indebtedness. We have substantial indebtedness. Our degree
of leverage could affect our ability to:
. obtain financing in the future for working capital, capital expenditures,
acquisitions, development or other general business purposes;
. undertake financings on terms and conditions acceptable to us;
. pursue our acquisition strategy; or
. compete effectively or operate successfully under adverse economic
conditions.
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We have a policy of incurring debt only if, immediately following such
incurrence, our debt-to-total market capitalization ratio on a pro forma basis
would be 60% or less. Our debt-to-total market capitalization ratio was
approximately 65% as of December 1, 1999. Absent a change in our total market
capitalization, in the event we wish to incur additional indebtedness, we would
have to waive or change our debt policy. Our debt-to-total market
capitalization ratio has increased primarily because of a general decline in
the market valuation of the stock of lodging companies, including our stock. As
a result of this decline, our Board of Directors may reconsider whether our
debt incurrence policy should be linked to another measure of value instead of
total market capitalization.
If our cash flow and working capital is not sufficient to fund our
expenditures or service our indebtedness, we would have to raise additional
funds through:
. the sale of equity;
. the refinancing of all or part of our indebtedness;
. the incurrence of additional permitted indebtedness; or
. the sale of assets.
We cannot assure you that any of these sources of funds would be available
in amounts sufficient for us to meet our obligations or fulfill our business
plans.
No limitation on debt. There are no limitations in our or the operating
partnership's organizational documents that limit the amount of indebtedness
that we may incur, although our existing debt instruments contain certain
restrictions on the amount of indebtedness that we may incur. Accordingly, our
Board of Directors could alter or eliminate the 60% policy without shareholder
approval to the extent permitted by our debt agreements. If this policy were
changed, we could become more highly leveraged, resulting in an increase in
debt service payments that could adversely affect our cash flow and
consequently our ability to service our debt and make distributions to our
shareholders.
Leases and management agreements could impair the sale or other disposition
of our hotels. Under each lease with a subsidiary of Crestline, we generally
must purchase a lease for an amount equal to its fair market value if we want
to terminate the lease prior to the expiration of its term. We must make a
purchase price payment even if the reason we want to terminate a lease is a
change in the federal income tax laws (including the passage of the REIT
Modernization Act) that either would jeopardize our status as a REIT if we
continued the lease or would enable us to operate our hotels directly
ourselves. The purchase price generally is equal to the fair market value of
the lessee's leasehold interest in the remaining term of the lease, which could
be a significant amount. In addition, if we decide to sell a hotel, we may be
required to terminate its lease, and the payment of the purchase price under
such circumstances could impair our ability to sell the hotel and would reduce
the net proceeds of any sale.
Under the terms of the management agreements, we generally may not sell,
lease or otherwise transfer the hotels unless the transferee assumes the
related management agreements and meets certain other conditions.
Our ability to finance, refinance or effect a sale of any of the properties
managed by Marriott International or another manager may, depending upon the
structure of such transactions, require the manager's consent. If Marriott
International or any other manager did not consent, we would be prohibited from
consummating the financing, refinancing or sale without breaching the
management agreement.
Rental revenues from hotels subject to prior rights of lenders. The
mortgages on certain of our hotels require that rent payments under the leases
on such hotels be used first to pay the debt service on such mortgage loans.
Consequently, only the cash flow remaining after debt service will be available
to satisfy other obligations, including property taxes and insurance, FF&E
reserves for the hotels and capital improvements, and debt service on unsecured
debt, and to make distributions to our shareholders.
The acquisition contracts relating to certain hotels limit our ability to
sell or refinance such hotels. For reasons relating to federal income tax
considerations of the former owners of certain of our hotels, we have agreed to
restrictions on selling certain hotels or repaying or refinancing the mortgage
debt thereon for periods
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of time which vary depending on the hotel. We refer to these periods of time as
"lock-out periods." We anticipate that, in certain circumstances, we may agree
to similar restrictions in connection with future hotel acquisitions. As a
result, even if it were in our best interests to sell such hotels or refinance
their mortgage debt, it may be difficult or impossible to do so during their
respective lock-out periods.
A significant number of our hotels are subject to ground leases. As of
December 1, 1999, we leased 54 of our hotels pursuant to ground leases. These
ground leases generally require increases in ground rent payments every five
years. Our ability to make distributions to shareholders could be adversely
affected to the extent that the rents payable by the lessees under the leases
do not increase at the same or a greater rate as the increases under the ground
leases. In addition, if we were to sell a hotel encumbered by a ground lease,
the buyer would have to assume the ground lease, which could result in a lower
sales price.
New acquisitions may fail to perform as expected or we may be unable to make
acquisitions on favorable terms. We intend to acquire additional full-service
hotels. Newly acquired properties may fail to perform as expected, which could
adversely affect our financial condition. We may underestimate the costs
necessary to bring an acquired property up to standards established for its
intended market position. We expect to acquire hotels with cash from secured or
unsecured financings and proceeds from offerings of equity or debt, to the
extent available. We may not be in a position or have the opportunity in the
future to make suitable property acquisitions on favorable terms. Competition
for attractive investment opportunities may increase prices for hotel
properties, thereby decreasing the potential return on our investment. In
addition, in order to maintain our status as a REIT we must lease virtually all
of the properties we acquire. We cannot guarantee that the leases for newly
acquired hotels will be as favorable to us as the existing leases. Under the
REIT Modernization Act, however, we would be permitted to lease such newly
acquired hotels to a taxable REIT subsidiary after December 31, 2000.
The seasonality of the hotel industry may affect the ability of the lessees
to make timely rent payments. The seasonality of the hotel industry may, from
time to time, affect either the amount of rent that accrues under the hotel
leases or the ability of the lessees to make timely rent payments under the
leases. A
lessee's inability to make timely rent payments to us could adversely affect
our financial condition and our ability to make distributions to our
shareholders.
We may be unable to sell properties when appropriate because real estate
investments are illiquid. Real estate investments generally cannot be sold
quickly. We may not be able to vary our portfolio promptly in response to
economic or other conditions. This inability to respond promptly to changes in
the performance of our investments could adversely affect our financial
condition and ability to service debt and make distributions to shareholders.
In addition, sales of appreciated real property could generate material adverse
tax consequences to limited partners of the operating partnership, including
us, which may make it disadvantageous for us to sell hotels.
We are subject to conditions affecting the lodging industry. If our assets
do not generate income sufficient to pay our expenses, service our debt and
maintain our properties, we will be unable to make distributions to our
shareholders. Our revenues and the value of our properties are subject to
conditions affecting the lodging industry. These include:
. changes in the national, regional and local economic climate;
. local conditions such as an oversupply of hotel properties or a reduction
in demand for hotel rooms;
. the attractiveness of our hotels to consumers and competition from
comparable hotels;
. the quality, philosophy and performance of the managers of our hotels,
primarily Marriott International;
. the ability of any hotel lessee to maximize rental payments;
. changes in room rates and increases in operating costs due to inflation
and other factors; and
. the need to periodically repair and renovate our hotels.
Adverse changes in these conditions could adversely affect our financial
performance.
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Our expenses may remain constant even if our revenue drops. The expenses of
owning property are not necessarily reduced when circumstances such as market
factors and competition cause a reduction in income from the property. If a
property is mortgaged and we are unable to meet the mortgage payments, the
lender could foreclose and take the property. Our financial condition and
ability to service debt could be adversely affected by:
. interest rate levels;
. the availability of financing;
. the cost of compliance with government regulation, including zoning and
tax laws; and
. changes in governmental regulations, including those governing usage,
zoning and taxes.
We depend on our key personnel. We depend on the efforts of our executive
officers and other key personnel. While we believe that we could find
replacements for these key personnel, the loss of their services could have a
significant adverse effect on our operations. On November 3, 1999, Terence C.
Golden, our President and Chief Executive Officer, announced his resignation
effective in May 2000. Mr. Golden will remain on the Board of Directors. The
Board of Directors has appointed Christopher J. Nassetta, currently our
Executive Vice President and Chief Operating Officer, as our President and
Chief Executive Officer upon the effectiveness of Mr. Golden's resignation. Mr.
Nassetta also became a member of the Board of Directors at the time of the
announcement of Mr. Golden's resignation. We do not intend to obtain key-man
life insurance with respect to any of our personnel.
Partnership and other litigation judgments or settlements could have a
material adverse effect on our financial condition. We and the operating
partnership are parties to various lawsuits relating to previous partnership
transactions, including the REIT conversion. While we and the other defendants
to such lawsuits believe all of the lawsuits in which we are a defendant are
without merit and we are vigorously defending against such claims, we can give
no assurance as to the outcome of any of the lawsuits. In connection with the
REIT conversion, the operating partnership has assumed all liability arising
under legal proceedings filed against us and will indemnify us as to all such
matters. If any of the lawsuits were to be determined adversely to us or
settlement involving a payment of a material sum of money were to occur, there
could be a material adverse effect on our financial condition.
Joint venture investments have additional risks. Instead of purchasing hotel
properties directly, we may invest as a co-venturer. Joint venturers often
share control over the operation of the joint venture assets. Actions by a co-
venturer could subject such assets to additional risk. Our co-venturer in an
investment might have economic or business interests or goals that are
inconsistent with our interests or goals, or be in a position to take action
contrary to our instructions or requests or contrary to our policies or
objectives. Although we generally will seek to maintain sufficient control of
any joint venture to permit our objectives to be achieved, we might not be able
to take action without the approval of our joint venture partners. Also, our
joint venture partners could take actions binding on the joint venture without
our consent. Finally, a joint venture partner could go bankrupt, leaving us
liable for its share of joint venture liabilities.
Environmental problems are possible and can be costly. We believe that our
properties are in compliance in all material respects with applicable
environmental laws. Unidentified environmental liabilities could arise,
however, and could have a material adverse effect on our financial condition
and performance. Federal, state and local laws and regulations relating to the
protection of the environment may require a current or previous owner or
operator of real estate to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property. The owner or
operator may have to pay a governmental entity or third parties for property
damage and for investigation and clean-up costs incurred by such parties in
connection with the contamination. These laws typically impose clean-up
responsibility and liability without regard to whether the owner or operator
knew of or caused the presence of the contaminants. Even if more than one
person may have been responsible for the contamination, each person covered by
the environmental laws may be held responsible for all of the clean-up costs
incurred. In addition, third parties may sue the owner or operator of a site
for damages and costs resulting from environmental contamination emanating from
that site. Environmental laws also govern the presence, maintenance and removal
of asbestos. These laws require that owners or operators of buildings
containing asbestos properly manage and maintain the asbestos, that they notify
and train those who may come into contact with asbestos and that they undertake
special precautions,
17
<PAGE>
including removal or other abatement, if asbestos would be disturbed during
renovation or demolition of a building. These laws may impose fines and
penalties on building owners or operators who fail to comply with these
requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos fibers.
Compliance with other government regulations can also be costly. Our hotels
are subject to various forms of regulation, including Title III of the
Americans with Disabilities Act, building codes and regulations pertaining to
fire safety. Compliance with such laws and regulations could require
substantial capital expenditures. Such regulations may be changed from time to
time, or new regulations adopted, resulting in additional or unexpected costs
of compliance. Any such increased costs could reduce the cash available for
servicing debt and making distributions to our shareholders.
Some potential losses are not covered by insurance. We carry comprehensive
liability, fire, flood, extended coverage and rental loss (for rental losses
extending up to 12 months) insurance with respect to all of our hotels. We
believe the policy specifications and insured limits of these policies are of
the type customarily carried for similar hotels. Certain types of losses, such
as from earthquakes and environmental hazards, however, may be either
uninsurable or too expensive to justify insuring against. Should an uninsured
loss or a loss in excess of insured limits occur, we could lose all or a
portion of the capital we have invested in a hotel, as well as the anticipated
future revenue from the hotel. In such an event, we might nevertheless remain
obligated for any mortgage debt or other financial obligations related to the
property.
The year 2000 problem may adversely impact our business and financial
condition. Year 2000 issues have arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to
refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of the familiar "19." If not corrected, many computer
applications could fail or create erroneous results. Our potential year 2000
problems include issues relating to our in-house hardware and software computer
systems, as well as issues relating to third parties with which we have a
material relationship and upon whom we depend, such as Marriott International
and Crestline and their respective subsidiaries, or whose systems are material
to the operations of our hotels.
In-house systems. Since October of 1993, we have invested in the
implementation and maintenance of accounting and reporting systems and
equipment that are intended to enable us to provide adequately for our
information and reporting needs and which are also year 2000 compliant.
Substantially all of our in-house systems have already been certified as
year 2000 compliant through testing and other mechanisms. We have not
delayed any systems projects due to the year 2000 issue. We have engaged a
third party to review our year 2000 in-house compliance and found no
problems with any mission critical systems.
Third-party systems. We rely upon operational and accounting systems
provided by third parties, primarily the managers and lessees of our
hotels, to provide the appropriate property-specific operating systems,
including reservation, phone, elevator, security, HVAC and other systems,
and to provide us with financial information. We will continue to monitor
the efforts of these third parties to become year 2000 compliant and will
take appropriate steps to address any non-compliance issues. We have
received written and oral assurances that these parties will be year 2000
compliant on time.
Risks. Management believes that future costs associated with year 2000
issues for its in-house systems will be insignificant and therefore not
impact our business, financial condition and results of operations.
However, the actual effect that year 2000 issues will have on our business
will depend significantly on whether other companies and governmental
entities properly and timely address year 2000 issues and whether broad-
based or systemic failures occur. We cannot predict the severity or
duration of any such failures, which could include disruptions in passenger
transportation or transportation systems generally, loss of utility and/or
telecommunications services, the loss or disruption of hotel reservations
made on centralized reservation systems and error or failures in financial
transactions or payment processing systems such as credit cards.
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<PAGE>
Moreover, we are dependent upon Crestline to interface with third parties in
addressing year 2000 issues at our hotels leased to its subsidiaries. Due to
the general uncertainty inherent with respect to year 2000 issues and our
dependence on third parties, including Crestline, we are unable to determine at
this time whether the consequences of year 2000 failures will have a material
impact on us. Although our joint year 2000 compliance program with Crestline is
expected to significantly reduce uncertainties arising out of year 2000 issues
and the possibility of significant interruptions of normal operations, we
cannot assure you that this will be the case.
Federal income tax risks
General. We believe that we have been organized and have operated in such a
manner so as to qualify as a REIT under the Internal Revenue Code, commencing
with our taxable year beginning January 1, 1999. A REIT generally is not taxed
at the corporate level on income it currently distributes to its shareholders
as long as it distributes currently at least 95% of its taxable income
(excluding net capital gain). This requirement will be reduced to 90% in years
beginning after December 31, 2000. No assurance can be provided, however, that
we will qualify as a REIT or that new legislation, Treasury Regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to our qualification as a REIT or the federal income
tax consequences of such qualification.
Required distributions and payments. In order to continue to qualify as a
REIT, we currently are required each year to distribute to our shareholders at
least 95% of our taxable income (excluding net capital gain), and we will be
required to distribute 90% of this amount for years beginning after December
31, 2000. Due to certain transactions entered into in years prior to the REIT
conversion, we expect to recognize substantial amounts of "phantom income,"
which is taxable income that is not matched by cash flow or EBITDA to us. As
discussed below in "--Our earnings and profits attributable to our "C"
corporation taxable years," to qualify as a REIT, we are also required to
distribute to our shareholders not later than the end of our 1999 taxable year
an amount equal to the earnings and profits ("E&P") that were accumulated and
not distributed before or at the time of the REIT conversion (including any
increases in the E&P resulting from subsequent IRS audits of years prior to
1999). In addition, we will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions made by us with respect to the
calendar year are less than the sum of 85% of our ordinary income, 95% of our
capital gain net income for that year, and any undistributed taxable income
from prior periods. We intend to make distributions to our shareholders to
comply with the 95% distribution requirement and to avoid the nondeductible
excise tax and will rely for this purpose on distributions from the operating
partnership. However, differences in timing between taxable income and cash
available for distribution due to, among other things, the seasonality of the
lodging industry and the fact that some taxable income will be "phantom" income
could require us to borrow funds or to issue additional equity to enable us to
meet the 95% distribution requirement (and therefore to maintain our REIT
status) and to avoid the nondeductible excise tax. The operating partnership is
required to pay (or reimburse us, as its general partner, for) certain taxes
and other liabilities and expenses that we incur, including all taxes and
liabilities attributable to periods and events prior to the REIT conversion and
any taxes that we must pay in the event we were to fail to qualify as a REIT.
In addition, because we are unable to retain earnings (resulting from our
distribution requirements), we will generally be required to refinance debt
that matures with additional debt or equity. There can be no assurance that any
of these sources of funds, if available at all, would be available to meet our
distribution and tax obligations.
Adverse consequences of our failure to qualify as a REIT. If we fail to
qualify as a REIT, we will be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. In addition, unless entitled to relief under certain statutory
provisions, we will be disqualified from treatment as a REIT for the four
taxable years following the year during which REIT qualification is lost. The
additional tax burden on us would significantly reduce the cash available for
distribution by us to our shareholders. Our failure to qualify as a REIT could
reduce materially the value of our common stock and would cause all our
distributions to shareholders to be taxable as ordinary income to the extent of
our current and accumulated E&P (although, subject to certain limitations under
the Internal Revenue
19
<PAGE>
Code, corporate distributees may be eligible for the dividends received
deduction with respect to these distributions). See "Federal Income Tax
Consequences--Federal income taxation of Host Marriott--Failure of Host
Marriott to qualify as a REIT." Our failure to qualify as a REIT also would
result in a default under the senior notes and the credit facility.
Our earnings and profits attributable to our "C" corporation taxable
years. In order to qualify as a REIT, we cannot have at the end of any taxable
year any undistributed E&P that is attributable to one of our taxable years as
a "C" corporation. A REIT has until the close of its first taxable year as a
REIT in which it has non-REIT E&P to distribute such accumulated E&P. We will
be required to distribute this E&P prior to the end of 1999 (the first taxable
year for which our REIT election will be effective). If we fail to do this, we
will be disqualified as a REIT at least for taxable year 1999. We believe that
distributions of non-REIT E&P that we have made will be sufficient to
distribute all of the non-REIT E&P as of December 31, 1999, but there could be
uncertainties relating to the estimate of our non-REIT E&P and the value of the
Crestline stock that we distributed to our shareholders. Therefore, there can
be no assurance that we will meet this requirement. See "Federal Income Tax
Consequences--Federal income taxation of Host Marriott--Requirements for
qualification."
Treatment of leases. To qualify as a REIT, we must satisfy two tests based
on our gross income. Rent paid pursuant to the leases will constitute
substantially all of our gross income. For the rent paid pursuant to the leases
to constitute qualifying income for purposes of the gross income tests, the
leases must be respected as true leases for federal income tax purposes and not
be treated as service contracts, joint ventures or some other type of
arrangement. In addition, the lessees must not be regarded as "related party
tenants" (as defined in the Internal Revenue Code). We believe, taking into
account the terms of the leases and the expectations that we and the lessees
have with respect to the leases, the leases will be respected as leases for
federal income tax purposes. There can be no assurance, however, that the IRS
will agree with this view. If the leases were not respected as true leases for
federal income tax purposes or if the lessees were regarded as our "related
party tenants," we would not be able to satisfy either of the two gross income
tests applicable to REITs and, as a result, we would lose our REIT status.
Accordingly, we would be subject to corporate level income taxation, which
would significantly reduce the cash available for distribution to our
shareholders. See "Federal Income Tax Consequences--Federal income taxation of
Host Marriott--Income tests applicable to REITs."
Other tax liabilities; our substantial deferred and contingent tax
liabilities. Notwithstanding our status as a REIT, we are subject, through our
ownership interest in the operating partnership, to certain federal, state and
local taxes on our income and property. See "Federal Income Tax Consequences--
Federal income
taxation of Host Marriott--General." In addition, we will be subject to tax at
the regular corporate rate (currently 35%) upon our share of any gain
recognized as a result of any sale by the operating partnership (within the 10-
year period beginning on January 1, 1999) of assets, including the hotels, in
which interests were acquired by the operating partnership from our predecessor
and its subsidiaries as part of the REIT conversion to the extent that such
gain existed on January 1, 1999, the first day of our first taxable year as a
REIT. We have substantial deferred tax liabilities incurred before we qualified
as a REIT that likely will be recognized by us in the next ten years as "built-
in gain" under these rules (or by a non-controlled subsidiary), without any
corresponding receipt of cash by us from the operating partnership. The
operating partnership is obligated under its partnership agreement to pay all
such taxes incurred by us, as well as any liabilities that the IRS may assert
against us for corporate income taxes for taxable years prior to the time we
qualified as a REIT. The non-controlled subsidiaries are taxable "C"
corporations and will pay federal and state income tax on their net income at
the full applicable corporate rates.
The operating partnership's failure to qualify as a partnership. We believe
that the operating partnership qualifies to be treated as a partnership for
federal income tax purposes. No assurance can be provided, however, that the
IRS will not challenge its status as a partnership for federal income tax
purposes, or that a court would not sustain such a challenge. If the IRS were
to be successful in treating the operating
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<PAGE>
partnership as an entity that is taxable as a corporation, we would cease to
qualify as a REIT because the value of our ownership interest in the operating
partnership would exceed 5% of our assets and because we would be considered to
hold more than 10% of the voting securities of another corporation. See
"Federal Income Tax Consequences--Federal income taxation of Host Marriott--
Asset tests applicable to REITs." Also, the imposition of a corporate tax on
the operating partnership would reduce significantly the amount of cash
available for distribution to its limited partners. See "Federal Income Tax
Consequences--Tax status of the operating partnership" and "--Tax aspects of
Host Marriott's ownership of OP Units." Finally, the classification of the
operating partnership as a corporation would cause its limited partners to
recognize gain (upon the event that causes the operating partnership to be
classified as a corporation) at least equal to their "negative capital
accounts" (and possibly more, depending upon the circumstances).
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CAPITALIZATION
In the following table we set forth our capitalization as of September 10,
1999 on an historical basis and on a pro forma basis after giving effect to the
transactions described under "Pro Forma Financial Information" that occurred
subsequent to September 10, 1999, as if such transactions had occurred as of
September 10, 1999. The following table should be read in conjunction with our
condensed consolidated financial statements and the notes thereto as of
September 10, 1999 incorporated by reference in this prospectus and the
unaudited pro forma financial information beginning on page 23.
<TABLE>
<CAPTION>
As of September 10,
1999
-------------------
Pro
Historical Forma(1)
---------- --------
(unaudited, in
millions)
<S> <C> <C>
Debt:
Senior notes of the operating partnership
7 7/8% Series A Senior Notes due 2005.................... $ 500 $ 500
7 7/8% Series B Senior Notes due 2008(2)................. 1,193 1,193
8.45% Series C Senior Notes due 2008(3).................. 498 498
8 3/8% Series E Senior Notes due 2006.................... 300 300
Other senior notes....................................... 47 47
Mortgage debt............................................ 2,255 2,255
Bank credit facility(4).................................. 250 125
Other debt............................................... 107 107
------ ------
Total debt................................................ 5,150 5,025
------ ------
Minority interests(5)..................................... 527 529
Company-obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust whose sole
assets are the convertible subordinated debentures due
2026 (QUIPs)............................................. 550 496
Stockholders' equity:
Class A Cumulative Redeemable Preferred Stock
(liquidation preference
$25.00 per share), 4.16 million shares issued and
outstanding............................................. 100 100
Class B Cumulative Redeemable Preferred Stock (liquida-
tion preference
$25.00 per share), 0 shares and 4 million shares issued
and
outstanding, historical and pro forma, respectively..... -- 96
Common Stock, $.01 par value per share, 750 million
shares authorized;
228.7 million shares and 222.9 million shares issued and
outstanding, historical and pro forma, respectively..... 2 2
Additional paid-in capital............................... 1,875 1,839
Accumulated other comprehensive income................... 3 3
Retained deficit......................................... (498) (482)
------ ------
Total stockholders' equity................................ 1,482 1,558
------ ------
Total capitalization...................................... $7,709 $7,608
====== ======
</TABLE>
- --------
(1) Pro forma reflects the net proceeds to us from our issuance of Class B
preferred stock and acquisitions, dispositions, repurchases of common stock
and QUIPS, redemption of OP Units, a tender offer for partnership units and
other financing transactions that occurred subsequent to September 10,
1999. See "Pro Forma Financial Information" beginning on page 23 for
further details.
(2) Amount is net of a $7 million discount.
(3) Amount is net of a $2 million discount.
(4) Represents outstanding borrowings under our bank credit facility at
September 10, 1999. At that date, an additional $900 million was available
under the revolving portion of the bank credit facility subject to the
terms and conditions thereof. In the fourth quarter 1999, we repaid $125
million on the term loan portion of the bank credit facility.
(5) Represents (a) approximately 64.9 million and 64.7 million common and
preferred OP Units on a historical and pro forma basis, respectively, held
by unaffiliated parties which represents approximately 22% of the OP Units
outstanding on both a historical and pro forma basis and (b) minority
interests in consolidated investments of the operating partnership of $141
million on a historical and pro forma basis.
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<PAGE>
PRO FORMA FINANCIAL INFORMATION
In connection with the REIT conversion, substantially all of Host Marriott's
and its subsidiaries' assets and liabilities were contributed to and assumed by
the operating partnership. The pro forma financial information set forth below
is based on Host Marriott's audited consolidated financial statements for the
fiscal year ended December 31, 1998 and unaudited financial statements for the
thirty-six weeks ended September 10, 1999. We have included below a brief
discussion of our conversion to a REIT in order to provide background for some
of the adjustments made in the pro forma financial statements.
A more detailed description of matters related to the REIT conversion is
included in our filings that have been incorporated by reference in this
prospectus.
The REIT conversion
During 1998, Host Marriott and its subsidiaries and affiliates consummated a
series of transactions intended to enable us to qualify as a REIT for federal
income tax purposes. As a result of these transactions, the hotels formerly
owned by Host Marriott and its subsidiaries and other affiliates are now owned
by the operating partnership and its subsidiaries; the operating partnership
and its subsidiaries lease substantially all of these hotels to Crestline, and
Marriott International and other hotel operators conduct the day to day
management of the hotels pursuant to management agreements with Crestline. We
intend to elect to be treated as a REIT for federal income tax purposes
effective January 1, 1999. The important transactions comprising the REIT
conversion are summarized below.
Reorganization of lodging assets under the operating partnership. During
1998, Host Marriott reorganized its hotels and certain other assets so that
they were owned by the operating partnership and its subsidiaries. Host
Marriott and its subsidiaries received a number of OP Units equal to the number
of then outstanding shares of Host Marriott common stock, and the operating
partnership and its subsidiaries assumed substantially all of the liabilities
of Host Marriott and its subsidiaries. As a result of this reorganization and
the related transactions described below, we are the sole general partner in
the operating partnership and as of September 10, 1999 held approximately 78%
of the outstanding OP Units. The operating partnership and its subsidiaries
conduct our hotel ownership business. OP Units owned by holders other than us
are redeemable at the option of the holder, generally commencing one year after
the issuance of their OP Units. Upon redemption of an OP Unit, the holder would
receive from the operating partnership cash in an amount equal to the market
value of one share of our common stock. However, in lieu of a cash redemption
by the operating partnership, we have the right to acquire any OP Unit offered
for redemption directly from the holder thereof in exchange for either one
share of our common stock or cash in an amount equal to the market value of one
share of our common stock.
Host Marriott did not transfer to the operating partnership and, therefore,
the operating partnership does not own, other assets formerly held by Host
Marriott and its subsidiaries which principally consist of 31 retirement
communities and controlling interests in the entities that currently lease our
hotels. Most of these assets currently are owned by Crestline. Crestline became
a separate publicly traded company on December 29, 1998 as a result of the
spin-off discussed below.
Acquisitions by the operating partnership. Host Marriott and several of its
subsidiaries were the sole general partners of eight publicly-traded limited
partnerships and four private partnerships. We obtained ownership of
substantially all of the limited partnership interests in these partnerships
during 1998 and 1999. These partnerships owned or controlled 28 properties with
approximately 17,000 rooms. Prior to our acquisition of these partnerships, we
consolidated 15 of these 28 properties for financial accounting purposes.
As part of the REIT conversion, the operating partnership, directly and
through its subsidiaries, acquired substantially all of the partnership
interests in these public and private partnerships which it did not already own
in exchange for approximately 26 million OP Units. Through December 1, 1999,
approximately 8.5 million of these
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<PAGE>
OP Units had been converted into shares of our common stock. Additionally,
approximately 0.3 million of these OP Units were exchanged for notes of the
operating partnership with an aggregate principal amount of approximately $3
million. In connection with the operating partnership's issuance of OP Units to
acquire the public and private partnerships referred to above and the OP Units
issued in the Blackstone acquisition discussed below, the operating partnership
issued to parties other than Host Marriott and its subsidiaries a total of
approximately 73.5 million common OP Units, of which approximately 64.3 million
were outstanding as of December 1, 1999. As of December 1, 1999, 35.1 million
of the outstanding OP Units were redeemable. On or about January 1, 2000,
substantially all of the remaining outstanding OP Units become redeemable.
In addition to the partnerships discussed above, we own controlling
interests in private partnerships which we consolidate for financial accounting
purposes. Certain of the minority partners in these partnerships were granted
the right to exchange their interests in these partnerships for OP Units,
subject to certain conditions. We estimate that approximately 11 million OP
Units could be issued at various points in time in the event that all such
minority partners were to elect to exchange their partnership interests.
On December 30, 1998, the operating partnership acquired from The Blackstone
Group, a Delaware limited partnership, and a series of funds controlled by
affiliates of Blackstone Real Estate Partners, which we refer to together as
the Blackstone Entities, ownership of, or a controlling interest in, twelve
upscale and luxury full-service hotels in the U.S., a mortgage loan secured by
a thirteenth hotel and certain other assets. As of December 1, 1999, the
Blackstone Entities owned approximately 47.0 million OP Units which represented
16% of the OP Units outstanding as of that date. The Blackstone hotel portfolio
consisted of two Ritz-Carlton, two Four Seasons, one Grand Hyatt, three Hyatt
Regency and four Swissotel properties. John G. Schreiber, co-chairman of
Blackstone Real Estate Partners' investment committee, is a member of our board
of directors.
On June 29, 1999, the operating partnership completed a merger transaction
in which it acquired the general and limited partnership interests of two
private partnerships that owned the remaining 6.1% partnership interests in
Times Square Marquis Hotel, L.P. not already owned by the operating
partnership. In the merger transaction, the partners of the two private
partnerships received approximately 585,000 Series TS cumulative redeemable
preferred OP Units in exchange for their general and limited partnership
interests in the two private partnerships. The Series TS cumulative redeemable
preferred OP Units had a deemed aggregate value of approximately $7.4 million
as of the date of the merger transaction. One year from the date of issuance,
the cumulative redeemable preferred OP Units are convertible into common OP
Units which are in turn redeemable for cash or, at our option, for shares of
our common stock on the same terms as the common OP Units described above. In
addition, following the merger transaction, the operating partnership repaid a
total of approximately $5.9 million of indebtedness of the two private
partnerships that it assumed in the merger transaction.
In December 1999, the operating partnership completed a transaction in which
one of its subsidiaries acquired the general and limited partnership interests
of Hopewell Group, Ltd., a Georgia limited partnership, whose assets primarily
consist of the remaining 5.1% partnership interests in Ivy Street Hotel Limited
Partnership not currently owned by the operating partnership and its
subsidiaries. Ivy Street, indirectly through HMA Realty Limited Partnership,
owns the Atlanta Marriott Marquis hotel. In the transaction, the Hopewell Group
partners received in the aggregate approximately 26,000 Series AM cumulative
redeemable preferred OP Units and approximately $0.8 million in cash in
exchange for their general and limited partnership interests in the Hopewell
Group partnership. The Series AM preferred OP Units had a deemed aggregate
value of approximately $0.2 million as of the date of the transaction. One year
from the date of issuance, the Series AM preferred OP Units will be convertible
into common OP Units. The holder may redeem the common OP Units for cash or, at
our option, for shares of common stock on a one-for-one basis (subject to
adjustment).
Contribution of assets to non-controlled subsidiaries. In connection with
the REIT conversion, two taxable corporations were formed in which the
operating partnership owns approximately 95% of the economic interest but none
of the voting interest. We refer to these two subsidiaries as the non-
controlled subsidiaries.
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<PAGE>
The non-controlled subsidiaries hold various assets which were originally
contributed by Host Marriott and its subsidiaries to the operating partnership,
but whose direct ownership by the operating partnership or its other
subsidiaries would jeopardize our status as a REIT and the operating
partnership's status as a partnership for federal income tax purposes. These
assets primarily consist of interests in certain partnerships or other
interests in hotels which are not leased, and certain furniture, fixtures and
equipment--also known as FF&E--used in the hotels and certain international
hotels. The operating partnership has no control over the operation or
management of the hotels or other assets owned by the non-controlled
subsidiaries. The Host Marriott Statutory Employee/Charitable Trust acquired
all of the voting common stock of each non-controlled subsidiary, representing,
in each case, the remaining approximately 5% of the total economic interests in
each non-controlled subsidiary. The beneficiaries of the Employee/Charitable
Trust are a trust formed for the benefit of certain of our employees and the J.
Willard and Alice S. Marriott Foundation.
Leases of hotels. Under current federal income tax law, REITs are restricted
in their ability to derive revenues from the operation of hotels. However, they
can derive rental income by leasing hotels. Therefore, the operating
partnership and its subsidiaries lease virtually all of their hotel properties
to subsidiaries of Crestline. The lessees pay rent to the operating partnership
and its subsidiaries generally equal to the greater of (1) a specified minimum
rent or (2) rent based on specified percentages of different categories of
aggregate sales at the relevant hotels. Generally, there is a separate lessee
for each hotel property or there is a separate lessee for each group of hotel
properties that has separate mortgage financing or has owners in addition to
the operating partnership and its wholly owned subsidiaries. The lessees for
all but four of our hotels are wholly owned subsidiaries of Crestline, formed
as limited liability companies, each of whose purpose is limited to acting as
lessee under an applicable lease. The limited liability company agreement for
each Crestline lessee provides that Crestline will have full control over the
management of the business of the lessee, except with respect to certain
decisions for which the consent of other members or the hotel manager will be
required. In addition, although the Crestline lessees are wholly owned
subsidiaries of Crestline, Marriott International or its appropriate subsidiary
has a non-economic voting interest on certain matters pertaining to hotels
which are managed by Marriott International or its subsidiaries.
Our leases have remaining terms ranging from two to ten years, subject to
earlier termination upon the occurrence of contingencies that are specified in
the leases. We may elect to purchase each of the leases either upon a sale of a
hotel to a third party or upon the occurrence of certain changes in tax law
(including the tax law changes discussed in "Federal Income Tax Consequences"),
for a purchase price equal to the fair rental value of the lessee's interest in
the lease over the remaining term of such lease. Effective November 15, 1999,
we amended substantially all of our leases with Crestline to give Crestline the
right to renew each of these leases for up to four additional terms of seven
years each at a fair rental value, to be determined either by agreement between
us and Crestline or through arbitration at the time the renewal option is
exercised. Crestline is under no obligation to exercise these renewal options,
and we have the right to terminate the renewal options during certain time
periods specified in the amendments. In addition, the amendments provide that
the fair rental value payable by us to Crestline in connection with the
purchase of a lease as described above does not include any amounts relating to
any renewal period. Therefore, the fair rental value of a lease after
expiration of the initial term for such lease would be zero.
Prior to the REIT conversion, our hotels were managed by Marriott
International and other hotel operating companies pursuant to hotel management
agreements. In connection with the REIT conversion, these management agreements
were assigned to the lessees for the term of the applicable leases. Each of the
management agreements provides for base and incentive management fees, plus
reimbursement of certain costs. So long as the leases are in effect, such fees
and cost reimbursements are the primary obligation of the lessees and not the
operating partnership or its subsidiaries, although the operating partnership
or its subsidiaries remain liable under the management agreements to the extent
such fees and reimbursements are not paid by the lessees. The operating
partnership retains contingent liability under the management agreements for
all other obligations in the event that the lessees do not perform and also
remains primarily liable for certain obligations under the management
agreements.
25
<PAGE>
Crestline's spin-off and other stockholder distributions. As part of the
REIT conversion, Host Marriott made taxable distributions to its stockholders
in which they received, for each share of common stock, (1) one-tenth of one
share of common stock of Crestline and (2) either $1.00 in cash or 0.087 share
of our common stock, at the election of the stockholder. The aggregate value of
the Crestline common stock, our common stock and cash distributed to
stockholders of Host Marriott was approximately $510 million.
Pro forma adjustments
Our pro forma financial information reflects various transactions effected
as part of, or contemporaneously with, the REIT conversion and other 1999 and
1998 transactions, acquisitions and dispositions consummated by us and
financing transactions and other transactions relating to the REIT conversion.
Our unaudited pro forma statements of operations reflect the transactions
described below for the fiscal year ended December 31, 1998 and the first three
quarters 1999 as if those transactions had been completed at the beginning of
the periods presented. Our unaudited pro forma statements of operations which
we present below include only income from continuing operations and therefore
exclude the operations of the discontinued senior living business which were
included as part of the Crestline distribution.
The pro forma financial statements reflect the following acquisitions,
dispositions and other activities that are not related to the REIT conversion:
1999 transactions
. Fourth quarter repurchases of 5.8 million shares of our common stock and
1.1 million QUIPs (which are convertible into approximately 3.5 million
shares of our common stock) for an aggregate consideration of
approximately $86 million
. Fourth quarter repayment of $125 million on a term loan entered into as
part of our bank credit facility
. December acquisition of the outstanding interests in Hopewell Group, Ltd.
in exchange for preferred OP Units and cash
. November issuance of Class B preferred stock
. October redemption of approximately 233,000 OP Units for cash of
approximately $2 million
. Third quarter prepayment on mortgages of two hotels
. August issuance of Class A preferred stock
. July refinancing of the mortgages on eight hotels
. June acquisition of two private partnerships which owned minority
interests in the New York Marriott Marquis Hotel in exchange for
preferred OP Units and the assumption and repayment of certain
indebtedness of the two private partnerships
. April refinancing of the mortgage on the New York Marriott Marquis Hotel
. February issuance of Series D senior notes and their subsequent exchange
for Series E senior notes
. Disposition of five hotels
1998 transactions
. December acquisition of properties and other assets from the Blackstone
Entities
. December issuance of Series C senior notes
. August issuance of Series A senior notes and Series B senior notes and
retirement of previously outstanding senior notes
. Acquisition of, or purchase of controlling interests in, eleven hotels
. Purchase of minority interests in two hotels
. Disposition of two hotels
26
<PAGE>
All of the above transactions except for the issuance of Class B preferred
stock, the acquisition of Hopewell Group Ltd. and its corresponding indirect
interest in one hotel, the repurchase of common stock and QUIPs during the
fourth quarter of 1999, the repayment of the term loan, the redemption of OP
Units for cash and the disposition of three hotels are already reflected in our
consolidated balance sheet as of September 10, 1999 and, therefore, no pro
forma adjustments for these transactions were necessary in the unaudited pro
forma balance sheet.
The pro forma statements of operations reflect the following transactions
effected as part of, or contemporaneously with, the REIT conversion, all of
which are reflected in the historical balance sheet as of September 10, 1999:
. 1998 contribution of assets and liabilities to the non-controlled
subsidiaries, including the sale of certain FF&E to the non-controlled
subsidiaries
. 1998 acquisitions of eight publicly-traded partnerships in exchange for
OP Units
. 1998 acquisition of minority interests in four private partnerships in
exchange for OP Units
. 1998 lease of substantially all of our hotel properties to Crestline and
conversion of revenues and certain operating expenses to rental income
. 1998 adjustment to remove deferred taxes and the impact on the tax
provision resulting from the change in tax status related to the REIT
conversion
. 1999 special dividend to our shareholders of either 0.087 share of our
common stock or $1.00 in cash per share of our common stock, at the
election of each shareholder
. l998 sale of an investment in a subsidiary to Crestline
Our unaudited pro forma financial statements do not purport to represent
what our results of operations or financial condition would actually have been
if these transactions had in fact occurred at the beginning of the periods
presented, or to project our results of operations or financial condition for
any future period.
Our unaudited pro forma financial statements are based upon available
information and upon assumptions and estimates, some of which are set forth in
the notes to the unaudited pro forma financial statements, that we believe are
reasonable under the circumstances. The unaudited pro forma financial
statements and accompanying notes should be read in conjunction with the
financial statements and notes thereto incorporated by reference in this
prospectus.
27
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
September 10, 1999
(in millions, except share amounts)
<TABLE>
<CAPTION>
A B C D E
Host Preferred
Marriott Stock Debt Stock/QUIPs Pro
Historical Offering Repayment Acquisition Dispositions Repurchases Forma
---------- --------- --------- ----------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $7,221 $-- $ -- $ 1 $(132) -- $7,090
Notes and other
receivables, net....... 244 -- -- -- -- -- 244
Rent receivable......... 63 -- -- -- -- -- 63
Investments in
affiliates............. 48 -- -- -- -- -- 48
Other assets............ 464 -- -- -- (3) -- 461
Cash and cash
equivalents............ 290 96 (125) (1) 151 (88) 323
------ ---- ----- ---- ----- ---- ------
$8,330 $ 96 $(125) $-- $ 16 $(88) $8,229
====== ==== ===== ==== ===== ==== ======
LIABILITIES AND EQUITY
Debt.................... $5,150 $-- $(125) $-- $ -- -- $5,025
Accounts payable and
accrued expenses....... 143 -- -- -- -- -- 143
Deferred income taxes... 96 -- -- -- -- -- 96
Other liabilities....... 382 -- -- -- -- -- 382
------ ---- ----- ---- ----- ---- ------
Total liabilities....... 5,771 -- (125) -- -- -- 5,646
Minority interests...... 527 -- -- -- -- 2 529
Convertible preferred
securities of
subsidiary trust
(QUIPs)................ 550 -- -- -- -- (54) 496
Equity
Class A preferred
stock.................. 100 -- -- -- -- -- 100
Class B preferred
stock.................. -- 96 -- -- -- -- 96
Common stock............ 2 -- -- -- -- -- 2
Additional paid-in
capital................ 1,875 -- -- -- -- (36) 1,839
Accumulated other
comprehensive income... 3 -- -- -- -- -- 3
Retained deficit........ (498) -- -- -- 16 -- (482)
------ ---- ----- ---- ----- ---- ------
$8,330 $ 96 $(125) $-- $ 16 $(88) $8,229
====== ==== ===== ==== ===== ==== ======
</TABLE>
See Notes to the Unaudited Pro Forma Financial Statements.
28
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
Fiscal Year 1998
(in millions, except per share amounts)
<TABLE>
<CAPTION>
F G H I/U J L M N P/R K/O Q
Debt
Issuance, Non-
Host Black- Repay- Con- Public Earnings Other Income
Marriott stone 1998 ment & trolled Partner- Private & Profits REIT Lease Tax
Histor- Acqui- Acqui- Dispo- Refin- Subsid- ship Part- Distrib- Activ- Conver- Adjust- Pro
ical sition sitions sitions ancing iaries Mergers nerships ution ities sion ment Forma
-------- ------ ------- ------- --------- ------- -------- -------- --------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $-- $ -- $-- $-- $ -- $-- $-- $-- $ 1,240 $-- $1,240
Hotel sales..... 3,442 459 116 (116) -- (73) 223 -- -- -- (4,051) -- --
Net gains
(losses) on
property
transactions... 57 -- -- (53) -- -- -- -- -- -- -- -- 4
Interest
income......... 51 (13) (16) (1) -- 4 1 -- (4) -- 6 -- 28
Other revenues.. 14 -- -- -- -- (3) -- -- -- -- -- -- 11
------- ----- ---- ----- ---- ---- ----- ---- ---- ---- ------- ---- ------
Total revenues.. 3,564 446 100 (170) -- (72) 224 -- (4) -- (2,805) -- 1,283
------- ----- ---- ----- ---- ---- ----- ---- ---- ---- ------- ---- ------
EXPENSES
Hotels.......... (2,824) (382) (98) 95 -- 55 (194) (2) -- -- 2,761 -- (589)
Minority
interest....... (52) -- (1) -- -- 4 26 1 -- (29) -- -- (51)
Corporate
expenses....... (50) -- -- (1) -- 1 -- -- -- -- -- -- (50)
REIT conversion
expenses....... (64) -- -- -- -- -- -- -- -- 64 -- -- --
Interest
expense........ (335) (39) (1) -- (37) 7 (29) -- -- -- -- -- (434)
Dividends on
QUIPs.......... (37) -- -- -- 4 -- -- -- -- -- -- -- (33)
Other........... (28) -- -- -- -- 2 -- -- -- -- -- -- (26)
------- ----- ---- ----- ---- ---- ----- ---- ---- ---- ------- ---- ------
Income (loss)
before income
taxes.......... 174 25 -- (76) (33) (3) 27 (1) (4) 35 (44) -- 100
Benefit
(provision) for
income taxes... 20 (10) -- 30 13 3 (11) -- 1 (14) 18 (55) (5)
------- ----- ---- ----- ---- ---- ----- ---- ---- ---- ------- ---- ------
Income from
continuing
operations..... 194 $ 15 $-- $ (46) $(20) $-- $ 16 $ (1) $ (3) $ 21 $ (26) $(55) $ 95
===== ==== ===== ==== ==== ===== ==== ==== ==== ======= ==== ======
Less:
Dividends on
Class A
preferred
stock(S)....... -- (10)
Dividends on
Class B
preferred
stock(S)....... -- (10)
------- ------
Income from
continuing
operations
available
to common
shareholders(S).. $ 194 $ 75
======= ======
Basic earnings
per share from
continuing
operations
available
to common
shareholders(T).. $ 0.90 $ 0.34
======= ======
</TABLE>
See Notes to the Unaudited Pro Forma Financial Statements
29
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the thirty-six weeks ended September 10, 1999
(in millions, except per share amounts)
<TABLE>
<CAPTION>
H I/U
Host Marriott Debt Pro
Historical Dispositions Refinancing Forma
------------- ------------ ----------- -----
<S> <C> <C> <C> <C>
REVENUE
Rental revenues.................. $ 885 $(12) $-- $ 873
Net gains on property
transactions.................... 16 (13) -- 3
Interest income.................. 26 -- -- 26
Other revenues................... 10 -- -- 10
----- ---- ---- -----
Total revenues................... 937 (25) -- 912
----- ---- ---- -----
EXPENSES
Hotels........................... (383) 5 -- (378)
Minority interest................ (61) -- -- (61)
Corporate expenses............... (22) -- -- (22)
Interest expense................. (298) -- 6 (292)
Dividends on QUIPs............... (26) -- 3 (23)
Other............................ (10) -- -- (10)
----- ---- ---- -----
Income (loss) from continuing
operations...................... 137 $(20) $ 9 126
==== ====
Less:
Dividends on Class A preferred
stock (S)....................... (1) (7)
Dividends on Class B preferred
stock (S)....................... -- (7)
----- -----
Income from continuing operations
available to common shareholders
(S)............................. $ 136 $ 112
===== =====
Basic earnings per share from
continuing operations available
to common shareholders (T)...... $0.60 $0.50
===== =====
</TABLE>
See Notes to the Unaudited Pro Forma Financial Statements
30
<PAGE>
Notes To Unaudited Pro Forma Financial Statements
A. Represents the adjustment to record the issuance of 4 million shares of
Class B preferred stock.
. Record net cash proceeds of $96 million
. Record preferred stock of $100 million, net of $4 million of
transaction costs
B. Represents the adjustment to pay down $125 million in the fourth quarter
1999 of the outstanding balance on the term loan entered into as a part of our
bank credit facility with the proceeds from the issuance of the Class A
preferred stock and proceeds from the sale of The Boston Ritz-Carlton.
C. Represents the adjustment to record the December acquisition of the
minority partners' interest in the Atlanta Marriott Marquis, with an increase
in property of approximately $1 million, and the payment of approximately $0.8
million in cash and the issuance of approximately 26,000 preferred OP Units.
D. Represents the adjustment to record the fourth quarter sales of
Marriott's Grand Hotel and Golf Resort, The Boston Ritz-Carlton and the El Paso
Marriott.
. Record the decrease in property and equipment of $132 million
. Record the decrease in other assets of $3 million
. Record the increase in cash for the sale proceeds of $151 million
. Record the increase in equity of $16 million from the gain on
disposition
E. Represents the adjustment to record the fourth quarter repurchases of 5.8
million of the outstanding shares of our common stock and 1.1 million QUIPs
convertible into approximately 3.5 million shares of common stock for an
aggregate cost of approximately $86 million as well as the fourth quarter
redemption of approximately 233,000 OP Units issued in connection with the
Blackstone acquisition for $2 million.
F. Represents the adjustment to record the historical revenues, operating
expenses, interest expense, and income taxes and to reduce interest income
associated with the Blackstone acquisition.
G. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense and to reduce interest income
associated with the 1998 acquisition of, or purchase of controlling interests
in, 11 full-service hotels.
H. Represents the adjustment to reduce the historical revenues, operating
expenses and income taxes and to reduce interest income for the 1998 sale of
the New York Marriott East Side and the Napa Valley Marriott, and the 1999 sale
of the Minneapolis/Bloomington Airport Marriott, the Saddle Brook Marriott,
Marriott's Grand Hotel and Golf Resort, The Boston Ritz-Carlton and the El Paso
Marriott, including the elimination of the non-recurring gains on the sales
totalling $50 million and related taxes of $20 million in fiscal year 1998 and
the $13 million net gain in the first three quarters of 1999.
I. Represents the adjustment to record interest expense and related
amortization of deferred financing fees, reduce interest income, and to record
income taxes as a result of the issuance of the Series A senior notes, the
Series B senior notes, the Series C senior notes, the Series D senior notes
(subsequently exchanged for Series E senior notes), the refinancing of the New
York Marriott Marquis and the repayment or refinancing of the various
mortgages, the old Host Marriott credit facility, the new credit facility and
subsequent paydowns thereof, and outstanding senior notes. The adjustment
excludes the extraordinary loss of $148 million, net of taxes, resulting from
the write-off of deferred financing fees and the payment of bond tender and
consent fees related to the outstanding senior notes which were repurchased.
31
<PAGE>
The following table represents the adjustment to interest expense, including
amortization of deferred financing fees, for the following periods:
<TABLE>
<CAPTION>
First Three
Fiscal Year Quarters
1998 1999
----------- -----------
<S> <C> <C>
Series A and Series B senior notes.................... $(86) $--
New bank credit facility.............................. 2 12
Series C senior notes................................. (40) --
Series D senior notes................................. (26) --
Old senior notes...................................... 72 --
Old credit facility................................... 2 --
Debt repaid, refinanced or acquired with proceeds of
Series C senior notes................................ 17 --
Debt repaid, refinanced, or acquired with proceeds of
Series D senior notes................................ 24 --
New York Marriott Marquis refinancing................. 4 (4)
Debt refinanced for eight hotel properties............ (8) (6)
Prepayments on mortgages for two hotel properties..... 2 4
---- ----
$(37) $ 6
==== ====
</TABLE>
J. Represents the adjustment to eliminate revenues, operating expenses,
minority interest, interest expense, corporate expenses, income taxes and
interest income of the non-controlled subsidiaries and to include our share of
their income as equity in earnings of affiliates.
K. Represents the adjustment to reduce depreciation expense by $8 million
for fiscal year 1998 related to certain furniture and equipment sold to the
non-controlled subsidiaries, record interest income of approximately $1 million
for fiscal year 1998 earned on the $15 million of 8.75% notes issued to us by
the non-controlled subsidiaries and as a result of the sale of the furniture
and equipment reduce lease payments to us from the lessees.
L. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, interest income and income taxes
associated with the publicly-traded partnerships, including three partnerships
not previously consolidated.
M. Represents the adjustment to record additional depreciation expense and
the decrease in minority interest expense related to the purchase of the
remaining minority interests in the private partnerships.
N. Represents the adjustment to reduce interest income and related income
tax expense for the $73 million cash payment made as part of the Special
Dividend to shareholders of Host Marriott.
O. Represents the adjustment to remove hotel revenues of $4,051 million and
management fees and other expenses of $2,753 million for fiscal year 1998, and
to record rental revenues associated with the leasing of substantially all of
our hotel properties to Crestline and interest income of $6 million for fiscal
year 1998 earned on the $95 million in 5.12% notes issued to us by Crestline
and one of the non-controlled subsidiaries. Rental revenues under the leases
are based on the greater of percentage rent or minimum rent. Total rent in the
pro forma statements of operations is calculated based on the historical gross
sales of the property and the negotiated rental rates and thresholds by
property as if the leases were entered into on the first day of fiscal year
1998. There are generally three sales categories utilized in the rent
calculation: rooms, food and beverage, and other. For rooms and food and
beverage, there generally are three tiers of rent with two thresholds, while
the other category generally has one tier of rent with no threshold. The
percentage rent thresholds are increased annually on the first day of each year
after the initial lease year based on a blended increase of the consumer price
index and a wage and benefit index. In December 1999, the Commission released
Staff Accounting Bulletin (SAB) 101 which codifies the staff's position on
revenue recognition. Specifically, the portion of rental
32
<PAGE>
income based on percentage rent would be deferred until all contingencies have
been resolved. Adoption of this SAB in 1999 would have resulted in a reduction
of historical and pro forma rental revenues recognized and income available to
common shareholders from continuing operations for third quarter 1999 by
approximately $340 million. Historical and pro forma earnings per share for the
first three quarters 1999 would be reduced $1.49 and $1.53, respectively. The
adoption of SAB 101 has no effect on full year results of operations. SAB 101
is effective for the first fiscal quarter of the fiscal year beginning after
December 15, 1999.
P. Represents the adjustment to record minority interest expense related to
amendments made to partnership agreements and the minority interest expense
related to the 22% outside limited partner interests in the operating
partnership in connection with the REIT conversion.
Q. Represents the adjustment to the income tax provision to reflect the REIT
conversion.
R. Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT conversion of $64 million.
S. The historical income (loss) from continuing operations available to
common shareholders was $194 million and $136 million for fiscal year 1998 and
through the third quarter of 1999, respectively. On a pro forma basis, income
(loss) from continuing operations available to common shareholders would be $75
million and $112 million for fiscal year 1998 and through the third quarter of
1999, respectively (reflecting the adjustment to record dividends on the Class
A preferred stock and the Class B preferred stock).
T. The historical weighted average common shares outstanding was 216.3
million and 227.7 million for fiscal year 1998 and first three quarters of
1999, respectively. On a pro forma basis weighted average common shares
outstanding for fiscal year 1998 and first three quarters of 1999 would be
219.0 and 221.9 million, respectively, to reflect shares issued in conjunction
with the REIT conversion.
U. Represents the adjustment to reduce the dividends on the QUIPs of $4
million for fiscal year 1998 and $3 million for first three quarters 1999
related to the repurchase of 1.1 million QUIPs, referred to in footnote E.
33
<PAGE>
REDEMPTION OF OP UNITS
General
Each holder of OP Units issued in connection with the acquisitions of the
limited partnerships described under the heading "Prospectus Summary--The stock
offering" may, subject to specified limitations, require that the operating
partnership redeem units held by such holder. If we do not assume the operating
partnership's obligation to redeem the OP Units, upon redemption the holder of
OP Units will receive cash from the operating partnership in an amount equal to
the market value of the OP Units to be redeemed. The market value of an OP Unit
for this purpose will be equal to the average of the closing prices, regular
way (or, if no sale takes place, the average of the closing bid and asked
prices) of a share of our common stock for the ten consecutive trading days
before the day on which the redemption notice was received by the operating
partnership. The partnership agreement of the operating partnership provides
that if trading information is not available, the market value of an OP Unit
will be determined based on the amount that a holder of one OP Unit would
receive if the assets of the operating partnership were sold, its liabilities
were then satisfied, and the remainder was then distributed to the holders of
OP Units in accordance with the partnership agreement.
We have the right, however, to assume directly and satisfy the redemption
right of a holder of OP Units by issuing our common stock or cash in exchange
for any OP Units tendered for redemption. We will make the determination
whether to pay cash or issue common stock each time OP Units are tendered for
redemption. With each redemption, our interest in the operating partnership
will increase. Upon redemption, the holder of OP Units will no longer be
entitled to receive distributions with respect to the OP Units redeemed. If OP
Units are redeemed for common stock, the holder of OP Units will have rights as
a shareholder from the time the common stock is acquired.
A holder of OP Units must notify the operating partnership and us of the
holder's desire to require the operating partnership to redeem OP Units by
sending a notice in the form attached as an exhibit to the operating
partnership's partnership agreement, a copy of which we can provide to you upon
request. The holder must request the redemption of at least 1,000 OP Units or
all of the OP Units held by such holder, if less. The redemption generally will
occur on the tenth business day after the notice is delivered by the holder,
except that no redemption or exchange can occur if the delivery of common stock
upon redemption would be prohibited under the provisions of our charter
designed to protect our REIT qualification or under applicable federal or state
securities laws.
Federal income tax consequences of redemption
The following discussion summarizes the material federal income tax
consequences that may be relevant to a holder of OP Units who desires to have
OP Units redeemed.
Tax treatment of a redemption of OP Units. If we assume and perform the
operating partnership's redemption obligation, the redemption will be treated
as a sale of OP Units by the holder at the time of the redemption. The sale
will be fully taxable to the holder in an amount equal to the sum of the cash
or the value of the common stock received in the exchange plus the amount of
the operating partnership nonrecourse liabilities allocable to the redeemed OP
Units at the time of the redemption.
If we do not elect to assume the obligation to redeem OP Units, the
operating partnership will redeem the OP Units for cash. If the operating
partnership redeems OP Units for cash that we contribute to the operating
partnership to effect the redemption, the redemption likely would be treated
for tax purposes as a sale of the OP Units in a fully taxable transaction,
although the matter is not free from doubt. In that event, the holder would be
treated as realizing an amount equal to the sum of the cash received in the
exchange plus the amount of the operating partnership's nonrecourse liabilities
allocable to the redeemed OP Units at the time of the redemption.
If the operating partnership redeems all of a holder's OP Units for cash
that is not contributed by us to effect the redemption, the tax consequences
would be the same as described in the previous paragraph. If the operating
partnership redeems less than all of a holder's OP Units, however, the holder
would not be permitted to recognize any loss occurring on the transaction and
would recognize taxable gain only to the extent that the cash, plus the share
of the operating partnership's nonrecourse liabilities allocable to the
redeemed OP Units, exceeded the holder's adjusted basis in all of the holder's
OP Units immediately before the redemption.
34
<PAGE>
Tax treatment of a sale of OP Units. If an OP Unit redemption is treated as
a sale of OP Units, the determination of gain or loss will be based on the
difference between the amount realized for tax purposes and the tax basis in
the OP Units. See "Basis of OP Units" below. The "amount realized" will be
measured by the sum of the cash and fair market value of common stock or other
property received plus the portion of the operating partnership's nonrecourse
liabilities allocable to the OP Units sold. To the extent that this amount
exceeds the holder's basis in the OP Units, the holder will recognize gain. It
is possible that the amount of gain recognized or even the tax liability
resulting from the gain could exceed the amount of cash and the value of common
stock or any other property received upon the disposition.
Except as described below, any gain recognized upon a sale or other
disposition of OP Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount
realized attributable to a holder's share of "unrealized receivables" of the
operating partnership exceeds the holder's basis attributable to those assets,
the excess will be treated as ordinary income. Unrealized receivables include,
to the extent not previously included in the operating partnership's income,
any rights to payment for services rendered or to be rendered. Unrealized
receivables also include amounts that would be subject to recapture as ordinary
income if the operating partnership had sold its assets at their fair market
value at the time of the transfer of OP Units.
For individuals, trusts and estates, the maximum rate of tax on the net
capital gain from a sale or exchange of an asset held for more than 12 months
is 20%. Net capital gain from the sale of an asset held 12 months or less is
subject to tax at the applicable rate for ordinary income. It should be noted
that the maximum rate for net capital gains attributable to the sale of
depreciable real property held for more than 12 months is 25% to the extent of
the prior depreciation deductions not otherwise recaptured as ordinary income
under existing depreciation recapture rules. Although this rule does not
currently apply to a redemption of OP Units, the IRS has proposed regulations
that, if finalized, would apply this rule to a redemption of OP Units,
effective on the date the regulations become final. If the proposed regulations
are finalized, any gain on the disposition of an OP Unit held for more than 12
months would be treated partly as gain from the sale of a long-term capital
asset and partly as gain from the sale of depreciable real property. This
potential new rule would not apply to the disposition of OP Units held 12
months or less.
Basis of OP Units. In general, a holder who received OP Units in exchange
for a contribution of property had an initial tax basis in the OP Units equal
to the holder's basis in the contributed property. A holder's initial basis
generally is increased by the holder's share of the operating partnership's
taxable income and increases in the holder's share of the liabilities of the
operating partnership, including any increase in the holder's share of
nonrecourse liabilities. A holder's initial basis generally is decreased, but
not below zero, by the holder's share of the operating partnership's
distributions, decreases in the holder's share of liabilities of the operating
partnership, including nonrecourse liabilities, the holder's share of losses of
the operating partnership, and the holder's share of nondeductible expenditures
of the operating partnership that are not chargeable to capital.
Potential application of the disguised sale rules to a redemption of OP
Units. There is a risk that if OP Units are redeemed, particularly if they are
redeemed within two years of when they were issued, the IRS might contend that
the original transaction pursuant to which the OP Units were issued should be
treated as a "disguised sale" of property. Under the IRS's disguised sale
rules, unless an exception applies, a partner's contribution of property to a
partnership and a simultaneous or subsequent transfer of money or other
consideration, including the assumption of or taking subject to a liability,
from the partnership to the partner may be treated as a sale, in whole or in
part, of the property by the partner to the partnership. If money or other
consideration is transferred by a partnership to a partner within two years of
the partner's contribution of property, the transactions are presumed to be a
sale of the contributed property unless the facts and circumstances clearly
establish that the transfers do not constitute a sale. If two years have passed
between the transfer of money or other consideration and the contribution of
property, the transactions will not be presumed to be a sale unless the facts
and circumstances clearly establish that the transfers constitute a sale.
35
<PAGE>
COMPARISON OF OWNERSHIP OF OP UNITS AND COMMON STOCK
The information below highlights a number of the significant differences
between the operating partnership and Host Marriott, and differences in certain
legal rights associated with the ownership of OP Units and shares of common
stock. This discussion is intended to assist holders of OP Units in
understanding how their investment will be changed if they receive shares of
common stock in connection with a redemption of OP Units. This discussion is
summary in nature and does not constitute a complete discussion of these
matters.
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ----------------------------------------------------------------------------------------
<S> <C>
Form of Organization, Purpose and Assets
The operating partnership is a Delaware Host Marriott is a Maryland corporation and
limited partnership. The sole general is the sole general partner of the
partner of the operating partnership is operating partnership. The purpose of Host
Host Marriott. The purpose of the operating Marriott is to engage in any lawful act or
partnership is to conduct any business that activity for which corporations may be
may be lawfully conducted by a limited organized under the Maryland General
partnership under the Delaware Revised Corporation Law. However, Host Marriott
Limited Partnership Act, provided that such will make an election to be taxed as a REIT
business is conducted in such a manner as under the Internal Revenue Code effective
to permit Host Marriott at all times to be for 1999 and intends to maintain its
qualified as a REIT under the Internal qualification as a REIT. Host Marriott's
Revenue Code. The operating partnership and only significant asset is its interest in
its subsidiaries own 121 full-service the operating partnership and consequently
hotels operating primarily under the an indirect investment in the hotels owned
Marriott, Ritz-Carlton, Four Seasons, by the operating partnership and its
Swissotel and Hyatt brand names. The subsidiaries.
operating partnership seeks to invest in a
real estate portfolio primarily consisting
of upscale and luxury full-service hotels.
</TABLE>
The operating partnership is a Delaware limited partnership formed to own a
portfolio of upscale and luxury full-service hotels currently comprised of 121
hotels. Host Marriott is a Maryland corporation formed to hold general and
limited partner interests in the operating partnership and to serve as its
general partner.
36
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ----------------------------------------------------------------------------------------
<S> <C>
Length and Type of Investment
The operating partnership was formed on Host Marriott has a perpetual term and
April 15, 1998 and its term will expire on intends to continue its operations for an
December 31, 2098, unless dissolved earlier indefinite time period. To the extent Host
as provided in its partnership agreement. Marriott sells or refinances its assets,
Events which cause the dissolution of the the net proceeds therefrom will generally
operating partnership include: (i) the be retained by Host Marriott (through the
withdrawal of Host Marriott as general operating partnership) for working capital
partner without the permitted transfer of and other general purposes, including new
Host Marriott's interest to a successor investments, rather than being distributed,
general partner (except in specified except to the extent distributions thereof
limited circumstances); (ii) the entry of a must be made to permit Host Marriott to
decree of judicial dissolution of the qualify as a REIT for tax purposes.
operating partnership pursuant to the
provisions of the Delaware Revised Limited
Partnership Act; (iii) the entry of a
final, non-appealable order for relief in a
bankruptcy proceeding of the general
partner, or the entry of a final non-
appealable judgment ruling that the general
partner is bankrupt or insolvent (except
that, in either such case, in specified
circumstances the limited partners (other
than Host Marriott) may vote to continue
the operating partnership and substitute a
new general partner in place of Host
Marriott); or (iv) on or after December 31,
2058, on election by Host Marriott, in its
sole and absolute discretion. The operating
partnership has no specific plans for
disposition of the assets it currently
holds or that may be subsequently acquired.
To the extent the operating partnership
sells or refinances its assets, the net
proceeds therefrom will generally be
retained by the operating partnership for
working capital and other general purposes,
including new investments, rather than
being distributed to its partners
(including Host Marriott), except to the
extent distributions thereof must be made
to permit Host Marriott to qualify as a
REIT for tax purposes.
</TABLE>
The operating partnership is a finite life entity and was formed as an
operating company to hold ownership interests in many hotels and to acquire
additional hotels and reinvest its cash from operations to the extent it is not
required to be distributed to permit Host Marriott to qualify as a REIT for tax
purposes. Host Marriott is an infinite life entity formed to hold general and
limited partnership interests in the operating partnership and function as the
sole general partner of the operating partnership.
<TABLE>
<S> <C>
Liquidity
Each holder of OP Units has the right to The shares of common stock received in
redeem such OP Units. Upon redemption, such connection with the redemption of OP Units
holder of OP Units will receive either will be freely transferable, except for
shares of common stock or the cash shares of common stock held by our
equivalent thereof in exchange for such OP affiliates. The shares of common stock are
Units, at our election. A holder of OP listed on the New York Stock Exchange. A
Units may, in specified circumstances, public market currently exists for the
transfer his OP Units. shares of common stock. The breadth and
strength of the market for shares of common
stock will depend upon, among other things,
the number of shares of common stock
outstanding, our financial results and
prospects and the general interest in our
dividend yield compared to that of other
debt and equity securities.
</TABLE>
Each holder of OP Units will be able to redeem such OP Units and receive
either cash or shares of common stock on a one-for-one basis (subject to
adjustment), at Host Marriott's election. The shares of common stock received
in connection with the redemption of OP Units will be freely transferable,
except for shares of common stock held by Host Marriott's affiliates.
37
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ----------------------------------------------------------------------------------------
<S> <C>
Nature of Investment
The OP Units constitute equity interests The shares of common stock constitute
entitling each holder of OP Units to his equity interests in Host Marriott. Host
pro rata share of cash distributions made Marriott is entitled to receive its pro
to the partners of the operating rata share of distributions made by the
partnership. The operating partnership operating partnership with respect to the
intends to use proceeds of the sale of OP Units it holds, and each shareholder
property or excess refinancing proceeds for will be entitled to his pro rata share of
various purposes, including investment in any dividends or distributions paid with
new properties, repurchase of common stock respect to the shares of common stock. The
or OP Units, and distributions to dividends payable to the shareholders are
shareholders. not fixed in amount and are only paid if,
when and as declared by the Board of
Directors of Host Marriott. In order to
qualify as a REIT, Host Marriott currently
must distribute at least 95% of its taxable
income (excluding capital gains), and will
have to distribute 90% of this amount in
years beginning after December 31, 2000.
Any taxable income (including capital
gains) not distributed will be subject to
corporate income tax.
</TABLE>
The OP Units and the shares of common stock constitute common equity
interests in the operating partnership and Host Marriott, respectively. Such
common equity interests entitle the holder thereof to a pro rata share of any
cash distributions made by the operating partnership or Host Marriott,
respectively.
<TABLE>
<S> <C>
Properties and Diversification
The operating partnership currently owns a Host Marriott is the sole general partner
portfolio of 121 hotels. The ownership of and a substantial limited partner of the
these hotels, along with future hotel operating partnership, which currently owns
acquisitions by the operating partnership, a portfolio of 121 hotels.
will diversify the investment risks to
limited partners over a broader and more
varied group of hotels and geographic
locations and will reduce the dependence of
an investment upon the performance of, and
the exposure to the risks associated with,
any one or more hotels.
</TABLE>
Host Marriott and the operating partnership together hold an investment
portfolio that consists of 121 hotels.
<TABLE>
<S> <C>
Additional Equity/Potential Dilution
The operating partnership is authorized to Host Marriott may issue additional equity
issue additional OP Units and other securities, including shares of capital
partnership interests (including stock which may be classified as one or
partnership interests of different series more classes or series of common or
or classes that may be senior to OP Units) preferred or other shares and contain
as determined by Host Marriott, in its sole certain preferences, in the discretion of
discretion, including in connection with the Board of Directors of Host Marriott.
acquisitions of properties. The operating Any proceeds from the issuance of equity
partnership may issue OP Units and other securities by Host Marriott must be
partnership interests to Host Marriott, as contributed to the operating partnership in
long as such interests are issued in exchange for OP Units or corresponding
connection with a comparable issuance of equity interests in the operating
shares of common stock or other equity partnership. The issuance of additional
interests of Host Marriott and proceeds equity securities by Host Marriott may
raised in connection with the issuance of result in the dilution of the interests of
such shares are contributed to the the shareholders of Host Marriott.
operating partnership. In addition, the
operating partnership may issue additional
OP Units upon exercise of the options
granted pursuant to option plans or
restricted shares issued under restricted
share plans or other employee benefit plans
adopted by Host Marriott and the operating
partnership. The issuance of additional
equity securities by Host Marriott or the
operating partnership may result in the
dilution of the interests of holders of OP
Units in the operating partnership.
</TABLE>
Each of the operating partnership and Host Marriott is authorized to issue
additional equity interests. Accordingly, holders of OP Units and holders of
shares of common stock are subject to potential dilution.
38
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ----------------------------------------------------------------------------------------
<S> <C>
Financing Policies
The operating partnership may incur debt or Host Marriott is not restricted under Host
enter into similar credit, guarantee, Marriott's charter from incurring debt.
financing or refinancing arrangements for However, under the partnership agreement of
any purpose with any person upon such terms the operating partnership, Host Marriott,
as Host Marriott, as the sole general as general partner of the operating
partner, determines appropriate. partnership, may not incur any debts except
those for which it may be liable as general
partner of the operating partnership and
specified other limited circumstances.
Therefore, all indebtedness incurred by
Host Marriott is through the operating
partnership. Host Marriott has a policy of
incurring debt only if immediately
following such incurrence the debt-to-total
market capitalization ratio would be 60% or
less. The Board of Directors of Host
Marriott could waive, alter or eliminate
this policy without a shareholder vote. See
"Risk Factors--Risks of operation--Our
substantial indebtedness."
</TABLE>
In conducting its business, the operating partnership and Host Marriott may
incur indebtedness to the extent deemed appropriate by Host Marriot, as the
general partner of the operation partnership, or Board of Directors of Host
Marriott, respectively. In the case of Host Marriott, such indebtedness must be
incurred through the operating partnership.
<TABLE>
<S> <C>
Other Investment Restrictions
There are no restrictions upon the Neither Host Marriott's charter nor Host
operating partnership's authority to enter Marriott's bylaws impose any restrictions
into certain transactions, including among upon the types of investments that may be
others, making investments, lending made by Host Marriott. Under the Maryland
operating partnership funds or reinvesting General Corporation Law, a contract or
the operating partnership's cash flow and other transaction between Host Marriott and
net sale or refinancing proceeds except (i) a director or between Host Marriott and any
restrictions precluding investments by the other corporation or other entity in which
operating partnership that would adversely a director of Host Marriott is a director
affect Host Marriott's status as a REIT, or has a material financial interest is not
(ii) general restrictions on transactions void or voidable solely on the grounds of
with affiliates and (iii) the non- such interest, the presence of the director
competition agreements. at the meeting at which the contract or
transaction is approved or the director's
vote in favor thereof if (i) the fact of
the common directorship or interest is
disclosed or known to (A) the board of
directors or committee, and the board or
committee authorizes, approves or ratifies
the contract or transaction by the
affirmative vote of a majority of
disinterested directors, even if the
disinterested directors constitute less
than a quorum, or (B) the shareholders
entitled to vote, and the transaction or
contract is authorized, approved or
ratified by a majority of the votes cast by
the shareholders entitled to vote other
than the votes of shares owned of record or
beneficially by the interested director or
corporation, firm or other entity, or (ii)
the transaction or contract is fair and
reasonable to Host Marriott. Host Marriott
also has adopted a policy which requires
that all material contracts and
transactions between Host Marriott, the
operating partnership or any of its
subsidiaries, on the one hand, and a
director or executive officer of Host
Marriott or any entity in which such
director or executive officer is a director
or has a material financial interest, on
the other hand, must be approved by the
affirmative vote of a majority of the
disinterested directors. Host Marriott must
conduct its investment activities through
the operating partnership for so long as
the operating partnership exists.
Accordingly, it is subject to the same
restrictions on investments and lending as
the operating partnership.
</TABLE>
The operating partnership's partnership agreement permits the operating
partnership wide latitude in choosing the type of investments to pursue.
However, the operating partnership is required to make distributions to
preserve Host Marriott's status as a REIT. Because Host Marriott must conduct
its activities through the operating partnership, it is subject to the same
restrictions on investments and lending as the operating partnership.
39
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ----------------------------------------------------------------------------------------
<S> <C>
Management Control
All management powers over the business and The Board of Directors of Host Marriott
affairs of the operating partnership are directs the management of Host Marriott's
vested in Host Marriott, as sole general business and affairs. The Board of
partner, and no limited partner of the Directors is classified into three classes
operating partnership has any right to of directors. A majority of the directors
participate in or exercise control or are independent. At each annual meeting of
management power over the business and the shareholders, the successors of the
affairs of the operating partnership, class of directors whose terms expire at
except (i) Host Marriott, as sole general that meeting are elected. The policies
partner, may not, without written consent adopted by the Board of Directors may be
of all the limited partners or such lower altered or eliminated without a vote of the
percentage of OP Units as may be shareholders. Accordingly, except for their
specifically provided for in the vote in the elections of directors and
partnership agreement of the operating their vote in specified major transactions,
partnership or the Delaware Revised Limited shareholders have no control over the
Partnership Act, take any action in ordinary business policies of Host
contravention of the partnership agreement Marriott.
of the operating partnership; (ii) Host
Marriott, as sole general partner, may not
dispose of all or substantially all of the
operating partnership's assets without the
consent of the holders of a majority of the
outstanding OP Units (including OP Units
held by Host Marriott); and (iii) until
December 31, 2058, Host Marriott may not
cause or permit the operating partnership
to dissolve (except in connection with a
sale of all or substantially all of the
operating partnership's assets, with the
approval described above) if more than 10%
of the limited partners object to such
dissolution. Host Marriott may not be
removed as general partner by the limited
partners with or without cause unless Host
Marriott ceases to be a "public company,"
and then Host Marriott could be removed as
general partner with or without cause by
limited partners holding percentage
interests in the operating partnership that
are more than 50% of the aggregate
percentage interests of the outstanding
limited partnership interests entitled to
vote thereon, including any such interests
held by the general partner.
</TABLE>
The operating partnership's partnership agreement does not permit removal of
Host Marriott as general partner by the limited partners with or without cause
unless Host Marriott ceases to be a "public company,"and then Host Marriott
could be removed as general partner with or without cause. Under Host
Marriott's charter and Host Marriott's bylaws, the Board of Directors of Host
Marriott direct the management of Host Marriott. Except for their vote in the
elections of directors and their vote in specified major transactions,
shareholders have no control over the management of Host Marriott.
<TABLE>
<S> <C>
Fiduciary Duties
Under the Delaware Revised Limited Under the Maryland General Corporation Law,
Partnership Act, Host Marriott, as general the directors must perform their duties in
partner of the operating partnership, is good faith, in a manner that they
accountable to the operating partnership as reasonably believe to be in the best
a fiduciary and, consequently, is required interests of Host Marriott and with the
to exercise good faith and integrity in all care of an ordinary prudent person in a
of its dealings with respect to partnership like position. Directors of Host Marriott
affairs. However, under the partnership who act in such a manner generally have no
agreement of the operating partnership, liability by reason of being or having been
Host Marriott, as general partner, is under directors.
no obligation to consider the separate
interests of the limited partners in
deciding whether to cause us to take (or
decline to take) any actions, and Host
Marriott, as general partner, is not liable
for monetary damages for losses sustained,
liabilities incurred, or benefits not
derived by limited partners in connection
with such decision, provided that Host
Marriott, as general partner, has acted in
good faith and pursuant to its authority
under the partnership agreement of the
operating partnership.
</TABLE>
Host Marriott, as general partner of the operating partnership, and the Board
of Directors of Host Marriott each owe fiduciary duties to their constituent
parties. Although some courts have interpreted the fiduciary duties of the
Board of Directors in the same way as the duties of a general partner in a
limited partnership, it is unclear whether, or to what extent, there are
differences in such fiduciary duties. It is possible that the fiduciary duties
of the directors of Host Marriott to the shareholders may be less than those of
Host Marriott to the limited partners of the operating partnership.
40
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ----------------------------------------------------------------------------------------
<S> <C>
Management Liability and Indemnification
Under the Delaware Revised Limited The Maryland General Corporation Law
Partnership Act, Host Marriott, as general permits a Maryland corporation to include
partner of the operating partnership, is in its charter a provision limiting the
liable for the payment of the obligations liability of its directors and officers to
and debts of the operating partnership the corporation and its shareholders for
unless limitations upon such liability are money damages except for liability
stated in the document or instrument resulting from (i) actual receipt of an
evidencing the obligation or debt. Under improper benefit or profit in money,
the partnership agreement of the operating property or services or (ii) acts committed
partnership, the operating partnership is in bad faith or active and deliberate
required to indemnify Host Marriott or any dishonesty established by a final judgment
director or officer of Host Marriott from as being material to the cause of action.
and against all losses, claims, damages, Host Marriott's charter contains such a
liabilities, joint or several, expenses provision. As permitted by the Maryland
(including legal fees), fines, settlements General Corporation Law, Host Marriott's
and other amounts incurred in connection charter also provides broad indemnification
with any actions relating to the operations to directors and officers, whether serving
of the operating partnership as set forth Host Marriott or, at its request, any other
in its partnership agreement in which Host entity, to the fullest extent permitted
Marriott or any such director or officer is under the Maryland General Corporation Law.
involved, unless: (i) the act or omission Host Marriott will indemnify its present
of Host Marriott was material to the matter and former directors and officers, among
giving rise to the proceeding and either others, against judgments, penalties,
was committed in bad faith or was the fines, settlements and reasonable expenses
result of active and deliberate dishonesty; actually incurred by them in connection
(ii) Host Marriott or the other person to with any proceeding to which they may be
be indemnified actually received an made a party by reason of their service in
improper personal benefit in money, those or other capacities unless it is
property or services; or (iii) in the case established that: (i) the act or omission
of any criminal proceeding, Host Marriott of the director or officer was material to
or the other person to be indemnified had the matter giving rise to the proceeding
reasonable cause to believe the act or and (a) was committed in bad faith or (b)
omission was unlawful. The reasonable was the result of active and deliberate
expenses incurred by Host Marriott may be dishonesty; (ii) the director or officer
reimbursed by the operating partnership in actually received an improper personal
advance of the final disposition of the benefit in money, property or services; or
proceeding upon receipt by the operating (iii) in the case of any criminal
partnership of an affirmation by Host proceeding, the director or officer had
Marriott or the other person to be reasonable cause to believe that the act or
indemnified of its good faith belief that omission was unlawful. However, under the
the standard of conduct necessary for Maryland General Corporation Law, Host
indemnification has been met and an Marriott may not indemnify for an adverse
undertaking by Host Marriott to repay the judgment in a suit by or in the right of
amount if it is determined that such Host Marriott. Host Marriott's bylaws
standard was not met. require it, as a condition to advancing
expenses, to obtain (i) 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 Host Marriott as
authorized by Host Marriott's bylaws and
(ii) a written statement by or on his
behalf to repay the amount paid or
reimbursed by Host Marriott if it shall
ultimately be determined that the standard
of conduct was not met. Host Marriott also
intends to enter into indemnification
agreements indemnifying each of its
directors and officers to the fullest
extent permitted by the Maryland General
Corporation Law and advance to its
directors and officers all related expenses
subject to reimbursement if it is
subsequently determined that
indemnification is not permitted.
</TABLE>
While Host Marriott, as general partner of the operating partnership, is
generally liable for the payment of the obligations and debts of the operating
partnership, the operating partnership generally agrees to indemnify Host
Marriott, except regarding certain unauthorized acts of Host Marriott. The
liability of Host Marriott's directors and officers is limited to the fullest
extent permitted under Maryland law and such directors and officers are
indemnified by Host Marriott to the fullest extent permitted by the Maryland
General Corporation Law.
<TABLE>
<S> <C>
Liability of Investors
Under the operating partnership's Under Maryland law, shareholders are not
partnership agreement and the Delaware personally liable for the debts and
Revised Limited Partnership Act, the obligations of Host Marriott.
liability of limited partners for the
operating partnership's debts and
obligations is generally limited to the
amount of their investment in the operating
partnership, together with their interest
in undistributed income, if any.
</TABLE>
A limited partner's liability with respect to debts and obligations of the
operating partnership is limited to the amount of his investment and any
interest in undistributed income. Shareholders of Host Marriott generally have
no liability under the Maryland General Corporation Law for the debts and
obligations of Host Marriott.
41
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ----------------------------------------------------------------------------------------
<S> <C>
Anti-takeover Provisions
Host Marriott may not be removed as general Applicable Maryland law and Host Marriott's
partner of the operating partnership by the charter and Host Marriott's bylaws contain
limited partners with or without cause a number of provisions that may have the
(unless Host Marriott is no longer a effect of delaying or discouraging a change
"public company," in which case the general in control of Host Marriott that might be
partner may be removed with or without in the best interests of shareholders.
cause by limited partners holding These provisions include, among others, (i)
percentage interests in the operating a Board of Directors with three-year
partnership that are more than 50% of the staggered terms whose size is fixed within
aggregate percentage interests of the a range; (ii) authorized capital stock that
outstanding limited partnership interests may be classified and issued as a variety
entitled to vote thereon, including any of equity securities, in the discretion of
such interests held by the general the Board of Directors, including
partner). Under the operating partnership's securities having superior voting rights to
partnership agreement, Host Marriott may, the shares of common stock; (iii)
in its sole and absolute discretion, restrictions on business combinations with
prevent a limited partner from transferring persons who acquire more than a certain
his interest or any rights as a limited percentage of the outstanding voting
partner except in certain limited securities of Host Marriott; (iv) a
circumstances. Host Marriott may exercise requirement that shareholders approve
this right of approval to deter, delay or voting rights for "control shares" acquired
hamper attempts by persons to acquire a in "control share" acquisitions; (v) a
majority interest in the operating provision that only the Board of Directors
partnership. In addition, Host Marriott has may amend Host Marriott's bylaws; (vi)
the power to impose limits on transfers if, advance notice provisions for shareholders
and to the extent, necessary to cause the to submit new business or nominate
operating partnership not to be a "publicly candidates for director; (vii) limitations
traded partnership" that would be taxed as on the ability of shareholders to call
a corporation, including the prohibition special meetings; (viii) a requirement that
contained in the operating partnership's directors be removed only for cause and
partnership agreement restricting the only by a vote of shareholders holding at
ownership, actually or constructively, of least two-thirds of all the shares entitled
more than 4.9% by value of any class of to be cast for the election of directors;
interests in the operating partnership. (ix) a requirement of an affirmative vote
of two-thirds of all votes entitled to be
cast to approve certain amendments to the
Host Marriott's charter; and (x) certain
ownership limitations which are designed to
protect Host Marriott's status as a REIT
under the Internal Revenue Code. In
addition, Host Marriott has adopted a
shareholder rights plan whereby
shareholders are entitled to preferred
share purchase rights in specified
situations involving a change of control of
Host Marriott.
</TABLE>
Certain provisions of the governing documents of the operating partnership
and Host Marriott could be used to deter attempts to obtain control of the
operating partnership and Host Marriott in transactions not approved by Host
Marriott, as general partner of the operating partnership, or the Board of
Directors, respectively.
<TABLE>
<S> <C>
Limited Partner/Shareholder Voting Rights
The limited partners have voting rights At each annual meeting of shareholders, the
under the operating partnership's shareholders elect successors to the class
partnership agreement only as to the sale of directors whose term expires at such
of substantially all of our assets, meeting for terms of three years. In
specified consolidations and mergers and addition, the Maryland General Corporation
amendments of the partnership agreement. Law requires that specified major
transactions, including most amendments to
Host Marriott's charter, may not be
consummated without the approval of
shareholders. Each share of common stock
will have one vote and Host Marriott's
charter permits the Board of Directors of
Host Marriott to classify and issue shares
of capital stock in one or more series
having voting power which may differ from
that of the shares of common stock.
</TABLE>
Host Marriott, as the general partner of the operating partnership, has the
authority to manage the affairs of the operating partnership, and the limited
partners of the operating partnership only have voting rights in respect of
specified major transactions. The shareholders of Host Marriott only have
voting rights that permit them to elect the Board of Directors of Host Marriott
and to approve or disapprove specified major transactions.
42
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ----------------------------------------------------------------------------------------
<S> <C>
Sale Other Than to an Affiliate
Under the operating partnership's Under Host Marriott's charter, subject to
partnership agreement, Host Marriott, as the terms of any class or series of shares
general partner, generally has the at the time outstanding, Host Marriott may
exclusive authority to determine whether, transfer its assets within the meaning of
when and on what terms the operating the Maryland General Corporation Law, but
partnership's assets (including its hotels) any such merger, consolidation, share
will be sold. However, Host Marriott exchange or transfer of assets must be
generally may not sell, exchange, transfer approved (i) by the Board of Directors of
or otherwise dispose of all or Host Marriott in the manner provided in the
substantially all of the operating Maryland General Corporation Law and (ii)
partnership's assets in a single by shareholders to the extent required
transaction or a series of related under the Maryland General Corporation Law.
transactions (including by way of merger, In general, such transactions by a Maryland
consolidation or other combination with any corporation, such as Host Marriott, must
other persons or entities), without the first be approved by a majority of the
consent of more than 50% of the outstanding entire Board of Directors and thereafter
limited partnership interests, including approved by shareholders by the affirmative
any limited partnership interests held by vote of two-thirds of all the votes
Host Marriott. entitled to be cast on the matter (unless
the charter provides for a greater or
lesser shareholder vote, but not less than
a majority of the number of votes entitled
to be cast on the matter). Host Marriott's
charter provides for shareholder approval
of such transactions by a two-thirds vote
of all the votes entitled to be cast. Under
the Maryland General Corporation Law, a
"transfer of assets" is defined to mean any
sale, lease, exchange or other transfer of
all or substantially all of the assets of
the corporation, but does not include: (i)
a transfer of assets by a corporation in
the ordinary course of business actually
conducted by it; (ii) a mortgage, pledge or
creation of any other security interest in
any or all of the assets of the
corporation, whether or not in the ordinary
course of its business; (iii) an exchange
of shares of stock through voluntary action
under any agreement with the shareholders;
or (iv) a transfer of assets to one or more
persons if all the equity interests of the
person or persons are owned, directly or
indirectly, by the corporation.
</TABLE>
The operating partnership's partnership agreement requires the approval of
the holders of 50% of the outstanding limited partnership interests for a sale,
exchange, transfer or other disposition of all or substantially all of its
assets. Host Marriott's charter requires the affirmative vote of the holders of
two-thirds of all of the votes entitled to be cast on the matter in order to
approve a transfer of all or substantially all of the assets of Host Marriott.
No consent of limited partners or shareholders is required if the sale or other
disposition of assets does not amount to all or substantially all of the assets
of the operating partnership or Host Marriott.
<TABLE>
<S> <C>
Sale to the General Partner or its Affiliates
The operating partnership may not, directly Neither Host Marriott's charter nor Host
or indirectly, sell, transfer or convey any Marriott's bylaws has any specified
property to any affiliate of Host Marriott additional requirements for sales of assets
that is not also a subsidiary of the to affiliates of Host Marriott.
operating partnership, except as expressly
permitted in the operating partnership's
partnership agreement or except on terms
that are fair and reasonable and no less
favorable to the operating partnership than
would be obtained from an unaffiliated
third party.
</TABLE>
The operating partnership's partnership agreement prohibits the sale of
assets by us to affiliates of Host Marriott that are not also subsidiaries of
the operating partnership, except under specified circumstances. Neither Host
Marriott's charter nor Host Marriott's bylaws contains any provisions
restricting the sale of assets to an affiliate of Host Marriott.
43
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ---------------------------------------------------------------------------------------
<S> <C>
Merger
Under the operating partnership's Pursuant to Host Marriott's charter,
partnership agreement, Host Marriott subject to the terms of any class or series
generally may not cause a merger or of shares at the time outstanding, Host
consolidation of the operating partnership Marriott may merge with or into another
without the consent of a majority of the entity, but any such merger must be
outstanding partnership interests approved (i) by the Board of Directors of
(including the partnership interests held Host Marriott in the manner provided in the
by Host Marriott) and the general partner. Maryland General Corporation Law and (ii)
by shareholders to the extent required
under the Maryland General Corporation Law.
Under the Maryland General Corporation Law,
mergers of a Maryland corporation, such as
Host Marriott, with or into another entity
must first be approved by a majority of the
entire Board of Directors and thereafter
approved by shareholders by the affirmative
vote of two-thirds of all the votes
entitled to be cast on the matter (unless
Host Marriott's charter provides for a
lesser shareholder vote but not less than a
majority of the number of votes entitled to
be cast on the matter). Host Marriott's
charter generally provides for shareholder
approval of such transactions by a two-
thirds vote of all the votes entitled to be
cast, except that any merger of Host
Marriott with or into a trust organized for
the purpose of changing Host Marriott's
form of organization from a corporation to
a trust will require the approval of
shareholders of Host Marriott by the
affirmative vote only of a majority of all
the votes entitled to be cast on the
matter. Under the Maryland General
Corporation Law, specified mergers may be
accomplished without a vote of
shareholders. For example, no shareholder
vote is required for a merger of a
subsidiary of a Maryland corporation into
its parent, provided the parent owns at
least 90% of the subsidiary. In addition, a
merger need not be approved by shareholders
if the merger does not reclassify or change
the outstanding shares or otherwise amend
Host Marriott's charter, and the number of
shares to be issued or delivered in the
merger is not more than 20% of the number
of its shares of the same class or series
outstanding immediately before the merger
becomes effective. Subject to the terms of
any class or series of shares at the time
outstanding, under Host Marriott's charter,
Host Marriott also may to the extent
permitted by law, consolidate Host Marriott
with one or more other entities into a new
entity or effect a share exchange, but any
such action must be approved by the Board
of Directors and, after notice to all
shareholders entitled to vote on the
matter, by the affirmative vote of two-
thirds of all the votes entitled to be cast
on the matter. Under the Maryland General
Corporation Law, a share exchange by a
Maryland successor corporation needs to be
approved only by its board of directors.
</TABLE>
Pursuant to applicable law and/or the governing documents of the entity, the
ability of each of the operating partnership and Host Marriott to effect a
merger is subject to the approval of Host Marriott, as general partner, in the
case of the operating partnership, or the Board of Directors, in the case of
Host Marriott, and specified levels of limited partner or shareholder approval,
as applicable.
44
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- ---------------------------------------------------------------------------------------
<S> <C>
Dissolution
The operating partnership will continue Under Host Marriott's charter, subject to
until December 31, 2098, unless sooner the provisions of any class or series of
dissolved. The operating partnership will shares at the time outstanding, the Board
be dissolved prior to the expiration of its of Directors of Host Marriott must obtain
term, and its affairs wound up, (i) until approval of holders of at least two-thirds
December 31, 2058 with the consent of the of all of the votes entitled to be cast on
limited partners who hold 90% of the OP the matter in order to dissolve Host
Units (including OP Units held by Host Marriott.
Marriott) or (ii) upon a decision to
dissolve the operating partnership made by
Host Marriott on or after December 31, 2058
in its sole and absolute discretion, or
(iii) upon a decision, with the consent of
a majority of the partners holding at least
a majority of the outstanding partnership
interests, to sell all or substantially all
of the operating partnership's assets and
properties. Upon dissolution, Host
Marriott, as general partner, or any
liquidator will proceed to liquidate the
assets of the operating partnership and
apply the proceeds therefrom in the order
of priority set forth in the operating
partnership's partnership agreement.
</TABLE>
Pursuant to the operating partnership's partnership agreement and Host
Marriott's charter, each of the respective entities may be dissolved with the
consent of a specified percentage of the outstanding equity interests.
<TABLE>
<S> <C>
Amendments
Amendments to the operating partnership's Under the Maryland General Corporation Law,
partnership agreement may be proposed by in order to amend Host Marriott's charter,
Host Marriott, as general partner, or any the Board of Directors of Host Marriott
limited partner holding 25% or more of the first must adopt a resolution setting forth
limited partnership interests. Subject to the proposed amendment and declaring its
specified exceptions, such proposed advisability and direct that the proposed
amendment must be approved by the vote of amendment be submitted to shareholders for
Host Marriott, as general partner, and their consideration either at an annual or
limited partners holding percentage special meeting of shareholders.
interests that are more than 50% of the Thereafter, the proposed amendment must be
aggregate percentage interests of the approved by shareholders by the affirmative
outstanding limited partnership interests vote of two-thirds of all votes entitled to
entitled to vote thereon, including any be cast on the matter, unless a greater or
such limited partnership interests held by lesser proportion of votes (but not less
Host Marriott. In addition, Host Marriott, than a majority of all votes entitled to be
as general partner, has broad discretion, cast) is specified in Host Marriott's
with certain exceptions, to amend the charter. The provisions contained in the
operating partnership's partnership Host Marriott's charter relating to
agreement without the consent of the restrictions on transferability of the
limited partners. shares of common stock, the classified
Board of Directors and fixing the size of
the Board of Directors within the range set
forth in the Host Marriott's charter, as
well as the provisions relating to removal
of directors, the filling of Board of
Directors vacancies and the provisions
relating to the exclusive authority of the
Board of Directors to amend the Host
Marriott's bylaws may be amended only by a
resolution adopted by the Board of
Directors and approved at an annual or
special meeting of the shareholders by the
affirmative vote of the holders of not less
than two-thirds of the votes entitled to be
cast on the matter. Other amendments to
Host Marriott's charter generally may be
effected by requisite action of the Board
of Directors and approval by shareholders
by the affirmative vote of not less than a
majority of the votes entitled to be cast
on the matter. As permitted under the
Maryland General Corporation Law, Host
Marriott's charter and Host Marriott's
bylaws provide that directors have the
exclusive right to amend Host Marriott's
bylaws.
</TABLE>
Under the operating partnership's partnership agreement, amendments may be
made with the consent of the general partner and a specified level of approval
of the limited partners. However, under the operating partnership's partnership
agreement, Host Marriott, as general partner of the operating partnership, also
has broad discretion to make amendments without the consent of the limited
partners, with specified exceptions. Amendment of Host Marriott's charter
generally requires the approval of both the Board of Directors of Host Marriott
and the shareholders by either a majority or two-thirds of all votes entitled
to be cast depending upon the type of amendment.
45
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
- -----------------------------------------------------------------------------------
<S> <C>
Compensation, Fees and Distributions
The operating partnership's partnership The directors of Host Marriott receive
agreement provides that Host Marriott, as compensation for their services.
general partner, will receive no
compensation for services as such, but that
the operating partnership will pay (or
reimburse Host Marriott for) all expenses
that Host Marriott incurs (subject to
specified limited exceptions), including
expenses incurred relating to the ongoing
operation of Host Marriott and any other
offering of additional OP Units or shares
of common stock, including all expenses,
damages and other payments resulting from
or arising in connection with litigation
related to any of the foregoing, and
expenses for federal, state and local
income taxes incurred by Host Marriott.
</TABLE>
Host Marriott, as general partner of the operating partnership, does not
receive compensation in exchange for its services as general partner. The
directors of Host Marriott, however, do receive compensation for their services
as directors.
46
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
Introduction
The following discussion describes the federal income tax consequences
reasonably anticipated to be material to a stockholder in connection with the
purchase, ownership and disposition of common stock. The following discussion
is intended to address only those federal income tax consequences that are
generally relevant to all stockholders. Accordingly, it does not discuss all
aspects of federal income taxation that might be relevant to a specific
stockholder in light of his particular investment or tax circumstances.
Therefore, it is imperative that a stockholder review the following discussion
and consult with his own tax advisors to determine the interaction of his
individual tax situation with the tax consequences associated with the
purchase, ownership and disposition of common stock.
The following discussion provides general information only, is not
exhaustive of all possible tax consequences and is not tax advice. For example,
it does not give a detailed description of any state, local or foreign tax
consequences. In addition, the discussion does not purport to deal with all
aspects of taxation that may be relevant to a stockholder subject to special
treatment under the federal income tax laws, including, without limitation,
insurance companies, financial institutions or broker-dealers, tax-exempt
organizations or foreign corporations and persons who are not citizens or
residents of the United States.
The information in this section is based on the Internal Revenue Code,
current, temporary and proposed regulations thereunder, the legislative history
of the Internal Revenue Code, current administrative interpretations and
practices of the IRS, including its practices and policies as endorsed in
private letter rulings, which are not binding on the IRS, and court decisions,
all as of the date hereof. No assurance can be given that future legislation,
regulations, administrative interpretations and court decisions will not
significantly change the current law or adversely affect existing
interpretations of current law. Any such change could apply retroactively to
transactions preceding the date of the change. No assurance can be provided
that the statements set forth herein will not be challenged by the IRS or will
be sustained by a court if so challenged.
Hogan & Hartson L.L.P. has given Host Marriott an opinion to the effect that
the discussion under the heading "Federal Income Tax Consequences," to the
extent that it contains descriptions of applicable federal income tax law, is
correct in all material respects. The opinion, however, does not purport to
address the actual tax consequences of the purchase, ownership and disposition
of common stock to any particular stockholder. The opinion is based on the
Internal Revenue Code and regulations in effect on the date hereof, current
administrative interpretations and positions of the IRS and existing court
decisions. No assurance can be given that future legislation, regulations,
administrative interpretations and court decisions will not significantly
change the law on which the above opinion is based. Any such change could
adversely affect the opinion. In addition, any such change could apply
retroactively. Moreover, opinions of counsel merely represent counsel's best
judgment with respect to the probable outcome on the merits and are not binding
on the IRS or the courts. Accordingly, even if there is no change in applicable
law, no assurance can be provided that such opinion, which does not bind the
IRS or the courts, will not be challenged by the IRS or will be sustained by a
court if so challenged.
The specific tax attributes of a particular stockholder could have a
material impact on the tax consequences associated with the purchase, ownership
and disposition of common stock. Therefore, it is essential that each
prospective stockholder consult with his own tax advisors with regard to the
application of the federal income tax laws to such stockholder's personal tax
situation, as well as any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.
Federal income taxation of Host Marriott
General. Host Marriott plans to make an election to be taxed as a REIT under
the Internal Revenue Code, effective for the taxable year beginning January 1,
1999. Host Marriott believes that it is organized and has operated in a manner
that will permit it to qualify as a REIT for 1999 and Host Marriott intends to
continue to operate as a REIT for future years. No assurance, however, can be
given that it in fact will qualify or remain qualified as a REIT.
47
<PAGE>
The sections of the Internal Revenue Code and the corresponding regulations
that govern the federal income tax treatment of a REIT and its stockholders are
highly technical and complex. The following discussion is qualified in its
entirety by the applicable Internal Revenue Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
Hogan & Hartson L.L.P. has provided to Host Marriott an opinion to the
effect that Host Marriott is organized in conformity with the requirements for
qualification as a REIT, and its current method of operation will enable it to
meet the requirements for qualification and taxation as a REIT under the
Internal Revenue Code. It must be emphasized that this opinion is conditioned
upon certain assumptions and representations made by Host Marriott and the
operating partnership as to factual matters relating to the organization and
operation of Host Marriott and its subsidiaries, the operating partnership and
its subsidiaries, the non-controlled subsidiaries, the Host Employee/Charitable
Trust and Crestline and its subsidiaries, including the economic and other
terms of each lease and the expectations of Host Marriott and the lessees with
respect thereto.
In addition, this opinion is based upon the factual representations of Host
Marriott concerning its business and properties as described in, or
incorporated by reference into, this prospectus. Moreover, qualification and
taxation as a REIT depends upon Host Marriott's ability to meet the various
qualification tests imposed under the Internal Revenue Code discussed below.
Hogan & Hartson L.L.P. will not review Host Marriott's operating results.
Accordingly, no assurance can be given that the actual results of Host
Marriott's operations for any particular taxable year will satisfy such
requirements. Further, the anticipated income tax treatment described below may
be changed, perhaps retroactively, by legislative, administrative or judicial
action at any time. See "--Failure of Host Marriott to qualify as a REIT"
below.
If Host Marriott qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that it currently
distributes to its stockholders. This treatment substantially eliminates the
"double taxation" at the corporate and stockholder levels that generally
results from an investment in a regular corporation. However, Host Marriott
will be subject to federal income tax as follows:
1. Host Marriott will be taxed at regular corporate rates on any
undistributed "REIT taxable income," including undistributed net capital
gains; provided, however, that properly designated undistributed capital
gains will effectively avoid taxation at the stockholder level. A REIT's
"REIT taxable income" is the otherwise taxable income of the REIT subject
to certain adjustments, including a deduction for dividends paid.
2. Under certain circumstances, Host Marriott may be subject to the
"alternative minimum tax" on its items of tax preference.
3. If Host Marriott has net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income.
4. Host Marriott's net income from "prohibited transactions" will be
subject to a 100% tax. In general, "prohibited transactions" are certain
sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure
property.
5. If Host Marriott fails to satisfy the 75% gross income test or the
95% gross income test discussed below, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
be subject to a tax equal to the following:
(1) the gross income attributable to the greater of the amount by
which Host Marriott fails the 75% or 95% test; multiplied by
(2) a fraction intended to reflect its profitability.
6. If Host Marriott fails to distribute during each calendar year at
least the sum of (1) 85% of its REIT ordinary income for such year, (2) 95%
of its REIT capital gain net income for such year and (3) any undistributed
taxable income from prior periods, Host Marriott will be subject to a 4%
excise tax on the excess of such required distribution over the sum of
amounts actually distributed and amounts retained but with respect to which
federal income tax was paid.
48
<PAGE>
7. If Host Marriott acquires any asset from a taxable "C" corporation in
a transaction in which the basis of the asset in the hands of Host Marriott
is determined by reference to the basis of the asset in the hands of the
"C" corporation, and Host Marriott recognizes gain on the disposition of
such asset during the ten-year period beginning on the date on which such
asset was acquired by Host Marriott, then, to the extent of the asset's
"built-in gain," such gain will be subject to tax at the highest regular
corporate rate applicable. Built-in gain is the excess of the fair market
value of an asset over Host Marriott's adjusted basis in the asset,
determined when Host Marriott acquired the asset.
Host Marriott owns an indirect interest in appreciated assets that its
predecessors held before the REIT conversion. Such appreciated assets have a
"carryover" basis and thus have built-in gain with respect to Host Marriott. If
such appreciated property is sold within the ten-year period following the REIT
conversion, Host Marriott generally will be subject to regular corporate tax on
that gain to the extent of the built-in gain in that property at the time of
the REIT conversion. The total amount of gain on which Host Marriott can be
taxed is limited to the excess of the aggregate fair market value of its assets
on January 1, 1999 over the adjusted tax bases of those assets at that time.
This tax could be very material. As a result, the operating partnership and
Host Marriott may seek to avoid a taxable disposition of any significant asset
owned by Host Marriott's predecessors at the time of the REIT conversion for
the ten taxable years following the REIT conversion. This could be true with
respect to a particular disposition even though the disposition might otherwise
be in the best interests of Host Marriott.
Notwithstanding Host Marriott's status as a REIT, it is likely that
substantial deferred liabilities of its predecessors will be recognized over
the next ten years. Deferred liabilities include, but are not limited to, tax
liabilities attributable to built-in gain assets and deferred tax liabilities
attributable to taxable income for which neither Host Marriott nor the
operating partnership will receive corresponding cash. In addition, the IRS
could assert substantial additional liabilities for taxes against Host
Marriott's predecessors for taxable years prior to the time Host Marriott
qualifies as a REIT. Under the terms of the REIT conversion and the partnership
agreement of the operating partnership, the operating partnership will be
responsible for paying, or reimbursing Host Marriott for the payment of all
such tax liabilities as well as any other liabilities, including contingent
liabilities and liabilities attributable to litigation that Host Marriott may
incur, whether such liabilities are incurred by reason of activities prior to
the REIT conversion or activities subsequent thereto.
The operating partnership will pay, or reimburse Host Marriott for the
payment of all taxes incurred by Host Marriott, except for taxes imposed on
Host Marriott by reason of its failure to qualify as a REIT or to distribute to
its stockholders an amount equal to its "REIT taxable income," including net
capital gains. This obligation by the operating partnership includes any
federal corporate income tax imposed on built-in gain.
Requirements for qualification. The Internal Revenue Code defines a REIT as
a corporation, trust or association
(1) which is managed by one or more directors or trustees;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation, but for Sections
856 through 859 of the Internal Revenue Code;
(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year, not more than 50% in
value of the outstanding stock of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Internal
Revenue Code to include certain entities); and
(7) which meets certain other tests, described below, regarding the
nature of its income and assets.
49
<PAGE>
Conditions (1) to (4) must be met during the entire taxable year and
condition (5) must be met during at least 335 days of a taxable year of twelve
months, or during a proportionate part of a taxable year of less than twelve
months. Conditions (5) and (6) will not apply until after the first taxable
year for which Host Marriott makes the election to be taxed is a REIT. For
purposes of conditions (5) and (6), pension funds and certain other tax-exempt
entities are treated as individuals, subject to a "look-through" exception in
the case of condition (6). Compliance with condition (5) shall be determined
by disregarding the ownership of shares of stock of Host Marriott by any
person(s) who:
(a) acquired such shares of stock as a gift or bequest or pursuant to a
legal separation or divorce;
(b) is the estate of any person making such transfer to the estate; or
(c) is a company established exclusively for the benefit of, or wholly
owned by, either the person making such transfer or a person described in
(a) or (b).
In connection with condition (6), Host Marriott is required to send annual
letters to its stockholders requesting information regarding the actual
ownership of its shares of stock. If Host Marriott complies with this
requirement, and it does not know, or exercising reasonable diligence would
not have known, whether it failed to meet condition (6), then it will be
treated as having met condition (6). If Host Marriott fails to send such
annual letters, it will be required to pay either a $25,000 penalty or, if the
failure is intentional, a $50,000 penalty. The IRS may require Host Marriott,
under those circumstances, to take further action to ascertain actual
ownership of its shares of stock, and failure to comply with such an
additional requirement would result in an additional $25,000 (or $50,000)
penalty. No penalty would be assessed in the first instance, however, if the
failure to send the letters is due to reasonable cause and not to willful
neglect.
Host Marriott believes that it meets and will continue to meet conditions
(1) through (4). In addition, Host Marriott believes that it has outstanding
(commencing with its first taxable year as a REIT) common stock with
sufficient diversity of ownership to allow it to satisfy conditions (5) and
(6). With respect to condition (6), Host Marriott intends to comply with the
requirement that it send annual letters to its stockholders requesting
information regarding the actual ownership of its shares of stock. In
addition, Host Marriott's charter contains an ownership limit, which is
intended to assist Host Marriott in continuing to satisfy the share ownership
requirements described in (5) and (6) above. See "Risk Factors--Risks of
ownership of our common stock--Possible adverse consequences of limits on
ownership of our common stock." The ownership limit, together with compliance
with the annual stockholder letter requirement described above, however, may
not ensure that Host Marriott will, in all cases, be able to satisfy the share
ownership requirements described above. If Host Marriott fails to satisfy such
share ownership requirements, Host Marriott will not qualify as a REIT. See
"--Failure of Host Marriott to qualify as a REIT."
A corporation may not elect to become a REIT unless its taxable year is the
calendar year. Although Host Marriott previously had a 52-53 week year ending
on the Friday closest to January 1, it adopted a calendar year taxable year in
connection with the REIT conversion.
Distribution of "earnings and profits" attributable to "C" corporation
taxable years. A REIT cannot have at the end of any taxable year any
undistributed earnings and profits ("E&P") that are attributable to a "C"
corporation taxable year, which includes all undistributed E&P of Host
Marriott's predecessors. Accordingly, Host Marriott has until December 31,
1999 to distribute such E&P. In connection with the REIT conversion, Host
Marriott declared dividends intended to eliminate the substantial majority, if
not all, of such E&P. To the extent, however, that any such E&P remains (the
"Acquired Earnings"), Host Marriott is required to distribute such E&P prior
to the end of 1999. Failure to do so would result in disqualification of Host
Marriott as a REIT at least for 1999. If Host Marriott should be so
disqualified for 1999, subject to the satisfaction by Host Marriott of certain
"deficiency dividend" procedures described below in "--Annual distribution
requirements applicable to REITs" and assuming that Host Marriott otherwise
satisfies the requirements for qualification as a REIT, Host Marriott should
qualify as a REIT for 2000 and thereafter. Host Marriott believes that the
dividends it has already declared will be sufficient to distribute all of the
Acquired Earnings as of December 31, 1999. However, there are substantial
uncertainties relating to both the estimate of
50
<PAGE>
the Acquired Earnings, as described below, and the value of noncash
consideration that Host Marriott has distributed or will distribute.
Accordingly, there can be no assurance this requirement will be met.
The estimated amount of the Acquired Earnings is based on the allocated
consolidated E&P of Host Marriott's predecessors accumulated from 1929 through
and including 1998 and takes into account the allocation, as a matter of law,
of 81% of Host Marriott's predecessors' accumulated E&P to Marriott
International on October 8, 1993 in connection with the spin-off of Marriott
International. The estimate was determined based on the available tax returns
and certain assumptions with respect to both such returns and other matters.
The calculation of the Acquired Earnings, however, depends upon a number of
factual and legal interpretations related to the activities and operations of
Host Marriott's predecessors during their entire corporate existence and is
subject to review and challenge by the IRS. There can be no assurance that the
IRS will not examine the tax returns of Host Marriott's predecessors and
propose adjustments to increase their taxable income. The impact of such
proposed adjustments, if any, may be material. If the IRS examines Host
Marriott's calculation of its E&P, the IRS can consider all taxable years of
Host Marriott's predecessors as open for review for purposes of such
determination.
Hogan & Hartson L.L.P. has expressed no opinion as to the amount of E&P of
Host Marriott and Host Marriott's predecessors. Accordingly, for purposes of
its opinion as to the qualification of Host Marriott as a REIT, Hogan & Hartson
L.L.P. is relying upon a representation from Host Marriott that by the end of
1999 it will have eliminated all Acquired Earnings.
Qualified REIT subsidiary. If a REIT owns a corporate subsidiary that is a
"qualified REIT subsidiary," that subsidiary will be disregarded for federal
income tax purposes, and all assets, liabilities and items of income, deduction
and credit of the subsidiary will be treated as assets, liabilities and items
of the REIT itself. Generally, a qualified REIT subsidiary is a corporation all
of the capital stock of which is owned by one REIT and that is not a taxable
REIT subsidiary. Host Marriott holds several qualified REIT subsidiaries that
hold de minimis indirect interests in the partnerships that own hotels. These
entities will not be subject to federal corporate income taxation, although
they may be subject to state and local taxation in certain jurisdictions.
Ownership of partnership interests by a REIT. A REIT which is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership shall retain the same character in the hands of the
REIT for purposes of Section 856 of the Internal Revenue Code, including
satisfying the gross income tests and the asset tests. Thus, Host Marriott's
proportionate share of the assets and items of income of the operating
partnership, including the operating partnership's share of such items of any
subsidiaries that are partnerships or LLCs, are treated as assets and items of
income of Host Marriott for purposes of applying the requirements described
herein. A summary of the rules governing the federal income taxation of
partnerships and their partners is provided below in "--Tax aspects of
ownership of interests in the operating partnership." As the sole general
partner of the operating partnership, Host Marriott has direct control over the
operating partnership and indirect control over the subsidiaries in which the
operating partnership or a subsidiary has a controlling interest. Host Marriott
intends to operate these entities consistent with the requirements for
qualification of Host Marriott as a REIT.
Income tests applicable to REITs. In order to maintain qualification as a
REIT, Host Marriott must satisfy the following two gross income requirements:
. At least 75% of Host Marriott's gross income, excluding gross income from
"prohibited transactions," for each taxable year must be derived directly
or indirectly from investments relating to real property or mortgages on
real property, including "rents from real property" and, in certain
circumstances, interest, or from certain types of temporary investments.
. At least 95% of Host Marriott's gross income, excluding gross income from
"prohibited transactions," for each taxable year must be derived from any
combination of such real property investments, dividends, interest,
certain hedging instruments and gain from the sale or disposition of
stock or securities, including certain hedging instruments.
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Rents paid pursuant to Host Marriott's leases, together with gain on the
disposition of assets and dividends and interest received from the non-
controlled subsidiaries, will constitute substantially all of the gross income
of Host Marriott. Several conditions must be satisfied in order for rents
received by Host Marriott, including the rents received pursuant to the leases,
to qualify as "rents from real property." First, the amount of rent must not be
based in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales.
Second, rents received from a tenant will not qualify as "rents from real
property" if Host
Marriott, or an actual or constructive owner of 10% or more of Host Marriott,
actually or constructively owns 10% or more of the tenant. This type of tenant
will be referred to below as a related party tenant. As a result of the passage
of the REIT Modernization Act, however, for taxable years beginning after
December 31, 2000, Host Marriott will be able to lease its hotel properties to
a taxable REIT subsidiary and the rents received from that subsidiary will not
be disqualified from being "rents from real property" by reason of Host
Marriott's ownership interest in the subsidiary so long as the property is
operated on behalf of the taxable REIT subsidiary by an "eligible independent
contractor." A taxable REIT subsidiary is a corporation other than a REIT in
which a REIT directly or indirectly holds stock and that has made a joint
election with the REIT to be treated as a taxable REIT subsidiary. A taxable
REIT subsidiary will be subject to federal income tax. Host Marriott has not
made a decision regarding which, if any, of its subsidiaries will make an
election to be treated as a taxable REIT subsidiary, or whether it will seek to
lease any of its hotels to a taxable REIT subsidiary. In any event, Host
Marriott believes that each of the managers of its hotel properties would
qualify as an eligible independent contractor.
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." Under currently effective law, this 15%
test is based on relative adjusted tax bases. As a result of the passage of the
REIT Modernization Act, however, for taxable years beginning after December 31,
2000, the test will be based on relative fair market values.
Fourth, if Host Marriott operates or manages a property or furnishes or
renders certain "impermissible services" to the tenants at the property, and
the income derived from the services exceeds one percent of the total amount
received by Host Marriott with respect to the property, then no amount received
by Host Marriott with respect to the property will qualify as "rents from real
property." Impermissible services are services other than services "usually or
customarily rendered" in connection with the rental of real property and not
otherwise considered "rendered to the occupant." For these purposes, the income
that Host Marriott is considered to receive from the provision of
"impermissible services" will not be less than 150% of the cost of providing
the service. If the amount so received is one percent or less of the total
amount received by the REIT with respect to the property, then only the income
from the impermissible services will not qualify as "rents from real property."
There are two exceptions to this rule. First, impermissible services can be
provided to tenants through an independent contractor from whom Host Marriott
derives no income. To the extent that impermissible services are provided by an
independent contractor, the cost of the services must be borne by the
independent contractor. Second, for Host Marriott's taxable years beginning
after December 31, 2000, impermissible services can be provided to tenants at a
property by a taxable REIT subsidiary.
The operating partnership and each subsidiary that owns hotels have entered
into leases with subsidiaries of Crestline, pursuant to which the hotels are
leased for a term ranging generally from seven to ten years commencing on
January 1, 1999. Each lease provides for thirteen payments per annum of a
specified base rent plus, to the extent that it exceeds the base rent,
additional rent which is calculated based upon the gross sales of the hotels
subject to the lease, plus certain other amounts.
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Under the REIT Modernization Act, for taxable years beginning after December
31, 2000, Host Marriott should be permitted to lease its hotel properties to a
taxable REIT subsidiary so long as the property is operated by an eligible
independent contractor. Host Marriott believes that each of the managers of its
hotel properties will qualify as an eligible independent contractor. A taxable
REIT subsidiary is a corporation other than a REIT in which the REIT directly
or indirectly holds stock and that has made a joint election with the REIT to
be treated as a taxable REIT subsidiary. Under the REIT Modernization Act,
however, Host Marriott's taxable REIT subsidiaries will be precluded from
managing hotel properties. Host Marriott does not currently manage any hotel
properties. As a result of the enactment of the REIT Modernization Act, Host
Marriott has the right under the leases with Crestline beginning on January 1,
2001 to purchase, or have a taxable REIT subsidiary purchase, the leases for a
purchase price equal to the fair market value of Crestline's interests in the
leases, excluding any renewal period provided for in the leases. If Host
Marriott were to elect to purchase the leases from Crestline, it would have to
make a significant payment to Crestline. No decision has yet been made
regarding whether Host Marriott will purchase the leases from Crestline or
whether any Host Marriott hotel property will be leased to a taxable REIT
subsidiary.
Neither Host Marriott nor the operating partnership intends to do any of the
following:
. provide any services to the lessees with respect to the operation of the
hotels;
. charge rent to any hotel that is based in whole or in part on the income
or profits of any person, except for the Harbor Beach Resort, where the
lease provides for rent based upon net profits, but which Host Marriott
currently believes will not jeopardize Host Marriott's status as a REIT;
. rent any hotel to a related party tenant (except for leases to a taxable
REIT subsidiary after December 31, 2000), unless the Board of Directors
determines in its discretion that the rent received from the related
party tenant is not material and will not jeopardize Host Marriott's
status as a REIT; or
. derive rental income attributable to personal property other than
personal property leased in connection with the lease of real property,
the amount of which is less than 15% of the total rent received under the
lease, unless the Board of Directors determines in its discretion that
the amount of such rent attributable to personal property is not material
and will not jeopardize Host Marriott's status as a REIT.
In order for the rent paid pursuant to the leases to constitute "rents from
real property," the lessees must not be regarded as related party tenants, and
the leases must be respected as true leases for federal income tax purposes.
Accordingly the leases cannot be treated as service contracts, joint ventures
or some other type of arrangement. A lessee will be regarded as a related party
tenant only if Host Marriott and/or one or more actual or constructive owners
of 10% or more of Host Marriott, actually or constructively, own 10% or more of
such lessee through an ownership interest in Crestline. In order to help
preclude the lessees from being regarded as related party tenants, the
following organizational documents contain the following ownership limits:
. the articles of incorporation of Crestline expressly prohibit any person
or persons acting as a group, including Host Marriott and/or any 10% or
greater stockholder of Host Marriott, from owning more than 9.8% of the
lesser of the number or value of the shares of capital stock of
Crestline;
. Host Marriott's charter expressly prohibits any person or persons acting
as a group or entity from owning, actually and/or constructively, more
than 9.8% of the lesser of the number or value of capital stock of Host
Marriott (subject to a limited exception for a holder of shares of
capital stock of Host Marriott solely by reason of the merger of Host
Marriott's predecessor corporation into Host Marriott in excess of the
ownership limit so long as the holder thereof did not own, directly or by
attribution under the Internal Revenue Code, more than 9.9% in value of
the outstanding shares of capital stock of Host Marriott) or any other
class or series of shares of stock of Host Marriott; and
. the operating partnership's partnership agreement expressly prohibits any
person, or persons acting as a group, or entity, other than Host Marriott
and an affiliate of The Blackstone Group and a series of related funds
controlled by Blackstone Real Estate Partners (the "Blackstone
Entities"), from owning more than 4.9% by value of any class of interests
in the operating partnership.
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Each of these prohibitions contains self-executing enforcement mechanisms.
Assuming that these prohibitions are enforced at all times and no waivers
thereto are granted, the lessees should not be regarded as related party
tenants. There can be no assurance, however, that these ownership restrictions
will be enforced in accordance with their terms in all circumstances or
otherwise will ensure that the lessees will not be regarded as related party
tenants.
The determination of whether the leases are true leases depends upon an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following:
. the intent of the parties;
. the form of the agreement;
. 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
. the extent to which the property owner retains the risk of loss with
respect to the property (e.g., whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property) or
the
potential for economic gain (e.g., appreciation) with respect to the
property.
In addition, Section 7701 (e) of the Internal Revenue Code provides that a
contract that purports to be a service contract or a partnership agreement is
treated instead as a lease of property if the contract is properly treated as
such, taking into account all relevant factors. Since the determination of
whether a service contract should be treated as a lease is inherently factual,
the presence or absence of any single factor may not be dispositive in every
case. Some of the relevant factors include whether:
. the service recipient is in physical possession of the property;
. the service recipient controls the property;
. the service recipient has a significant economic or possessory interest
in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in
value, the recipient shares in any appreciation in the value of the
property, the recipient shares in savings in the property's operating
costs or the recipient bears the risk of damage to or loss of the
property);
. the service provider does not bear any risk of substantially diminished
receipts or substantially increased expenditures if there is
nonperformance under the contract;
. the service provider does not use the property concurrently to provide
significant services to entities unrelated to the service recipient; and
. the total contract price does not substantially exceed the rental value
of the property for the contract period.
Host Marriott's leases have been structured with the intent to qualify as
true leases for federal income tax purposes. For example, with respect to each
lease:
. the operating partnership or the applicable subsidiary or other lessor
entity and the lessee intend for their relationship to be that of a
lessor and lessee and such relationship is documented by a lease
agreement;
. the lessee has the right to exclusive possession and use and quiet
enjoyment of the hotels covered by the lease during the term of the
lease;
. the lessee bears the cost of, and will be responsible for, day-to-day
maintenance and repair of the hotels other than the cost of certain
capital expenditures, and will dictate through the hotel managers, who
work for the lessees during the terms of the leases, how the hotels are
operated and maintained;
. the lessee bears all of the costs and expenses of operating the hotels,
including the cost of any inventory used in their operation, during the
term of the lease, other than the cost of certain furniture, fixtures and
equipment, and certain capital expenditures;
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. the lessee benefits from any savings and bears the burdens of any
increases in the costs of operating the hotels during the term of the
lease;
. in the event of damage or destruction to a hotel, the lessee is at
economic risk because it will bear the economic burden of the loss in
income from operation of the hotels subject to the right, in certain
circumstances, to terminate the lease if the lessor does not restore the
hotel to its prior condition;
. the lessee has indemnified the operating partnership or the applicable
subsidiary against all liabilities imposed on the operating partnership
or the applicable subsidiary during the term of the lease by reason of
(A) injury to persons or damage to property occurring at the hotels or
(B) the lessee's use, management, maintenance or repair of the hotels;
. the lessee is obligated to pay, at a minimum, substantial base rent for
the period of use of the hotels under the lease;
. the lessee stands to incur substantial losses or reap substantial gains
depending on how successfully it, through the hotel managers, who work
for the lessees during the terms of the leases, operates the hotels;
. Host Marriott and the operating partnership believe that each lessee
reasonably expected at the time the leases were entered into to derive a
meaningful profit, after expenses and taking into account the risks
associated with the lease, from the operation of the hotels during the
term of its leases; and
. upon termination of each lease, the applicable hotel is expected to have
a remaining useful life equal to at least 20% of its expected useful life
on the date of the consummation of the REIT conversion, and a fair market
value equal to at least 20% of its fair market value on the date of the
consummation of the REIT conversion.
If, however, the leases were recharacterized as service contracts or
partnership agreements, rather than true leases, or disregarded altogether for
tax purposes, all or part of the payments that the operating partnership
receives from the lessees would not be considered rent or would not otherwise
satisfy the various requirements for qualification as "rents from real
property." In that case, Host Marriott very likely would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
As indicated above, "rents from real property" must not be based in whole or
in part on the income or profits of any person. Payments made pursuant to Host
Marriott's leases should qualify as "rents from real property" since they are
based on either fixed dollar amounts or on specified percentages of gross sales
fixed at the time the leases were entered into, except for the Harbor Beach
Resort, which lease provides for rents based upon net profits. The foregoing
assumes that the leases are not renegotiated during their term in a manner that
has the effect of basing either the percentage rent or base rent on income or
profits. The foregoing also assumes that the leases are not in reality used as
a means of basing rent on income or profits. More generally, the rent payable
under the leases will not qualify as "rents from real property" if, considering
the leases and all the surrounding circumstances, the arrangement does not
conform with normal business practice. Host Marriott intends that it will not
renegotiate the percentages used to determine the percentage rent during the
terms of the leases in a manner that has the effect of basing rent on income or
profits. In addition, Host Marriott believes that the rental provisions and
other terms of the leases conform with normal business practice and, other than
the Harbor Beach Resort lease, were not intended to be used as a means of
basing rent on income or profits. Furthermore, Host Marriott intends that, with
respect to other properties that it acquires in the future, it will not charge
rent for any property that is based in whole or in part on the income or
profits of any person, except by reason of being based on a fixed percentage of
gross revenues, as described above.
Host Marriott leases certain items of personal property to the lessees in
connection with its leases. Under the Internal Revenue Code, if a lease
provides for the rental of both real and personal property and the portion of
the rent attributable to personal property is 15% or less of the total rent due
under the lease, then all rent paid pursuant to such lease qualifies as "rent
from real property." If, however, a lease provides for the rental of both real
and personal property, and the portion of the rent attributable to personal
property exceeds 15% of the total rent due under the lease, then the portion of
the rent that is attributable to personal property does not
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qualify as "rent from real property." Under the law that is currently
effective, the amount of rent attributable to personal property is that amount
which bears the same ratio to total rent for the taxable year as the average of
the adjusted tax bases of the personal property at the beginning and end of the
year bears to the average of the aggregate adjusted tax bases of both the real
and personal property at the beginning and end of such year. Host Marriott has
represented that, with respect to each of its leases that includes a lease of
items of personal property, the amount of rent attributable to personal
property with respect to such lease, determined as set forth above, will not
exceed 15% of the total rent due under the lease (except for a relatively small
group of leases where the rent attributable to personal property, which would
constitute non-qualifying income for purposes of the 75% and 95% gross income
tests, would not be material relative to the overall gross income of Host
Marriott). For Host Marriott's taxable years beginning after December 31, 2000,
the personal property test will be based on fair market value as opposed to
adjusted tax basis.
Each lease permits the operating partnership to take certain measures,
including requiring the lessee to purchase certain furniture, fixtures and
equipment or to lease such property from a third party, including a non-
controlled subsidiary, if necessary to ensure that all of the rent attributable
to personal property with respect to such lease will qualify as "rent from real
property." In order to protect Host Marriott's ability to qualify as a REIT,
the operating partnership sold substantial personal property associated with a
number of hotels acquired in connection with the REIT conversion to a non-
controlled subsidiary. The non-controlled subsidiary separately leases all such
personal property directly to the applicable lessee and receives rental
payments which Host Marriott believes represent the fair rental value of such
personal property directly from the lessees. If such arrangements are not
respected for federal income tax purposes, Host Marriott likely would not
qualify as a REIT.
Under the law that is currently in effect, if any of the hotels were to be
operated directly by the operating partnership or a subsidiary as a result of a
default by a lessee under the applicable lease, such hotel would constitute
foreclosure property until the close of the third tax year following the tax
year in which it was acquired, or for up to an additional three years if an
extension is granted by the IRS, provided that:
(1) the operating entity conducts operations through an independent
contractor, which might, but would not necessarily in all circumstances,
include Marriott International and its subsidiaries, within 90 days after
the date the hotel is acquired as the result of a default by a lessee;
(2) the operating entity does not undertake any construction on the
foreclosed property other than completion of improvements that were more
than 10% complete before default became imminent; and
(3) foreclosure was not regarded as foreseeable at the time the
applicable partnership entered into such lease.
For as long as such hotel constitutes foreclosure property, the income from the
hotel would be subject to tax at the maximum corporate rates, but it would
qualify under the 75% and 95% gross income tests. However, if such hotel does
not constitute foreclosure property at any time in the future, income earned
from the disposition or operation of such hotel will not qualify under the 75%
and 95% gross income tests.
These provisions of the law are largely unaffected by the REIT Modernization
Act. However, under this legislation, for Host Marriott's taxable years
beginning after December 31, 2000, if a lessee defaults under a lease, the
operating partnership would be permitted to lease the hotel to a taxable REIT
subsidiary and the hotel would not become foreclosure property.
"Interest" generally will not qualify under the 75% or 95% gross income
tests if it depends in whole or in part on the income or profits of any person.
However, interest will not fail to so qualify solely by reason of being based
upon a fixed percentage or percentages of receipts or sales. Host Marriott does
not expect to derive significant amounts of interest that will not qualify
under the 75% and 95% gross income tests.
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The non-controlled subsidiaries hold various assets, the ownership of which
by the operating partnership might jeopardize Host Marriott's status as a REIT.
These assets primarily consist of partnership or other interests in hotels that
are not leased, certain foreign hotels, and approximately $75 million in value
of personal property associated with certain hotels. The operating partnership
owns 100% of the nonvoting stock of each non-controlled subsidiary but none of
the voting stock or control of any non-controlled subsidiary. Each non-
controlled subsidiary is taxable as a regular "C" corporation. The operating
partnership's share of any dividends received from a non-controlled subsidiary
should qualify for purposes of the 95% gross income test, but not for purposes
of the 75% gross income test. The operating partnership does not anticipate
that it will receive sufficient dividends from the non-controlled subsidiaries
to cause it to fail the 75% gross income test. It is possible that after
December 31, 2000, one or both of the non-controlled subsidiaries may make an
election to be treated as taxable REIT subsidiaries. If they do so, the
operating partnership would not be restricted from acquiring their voting
securities.
Host Marriott inevitably will have some gross income from various sources
that fails to constitute qualifying income for purposes of one or both of the
75% or 95% gross income tests. These include, but are not limited to, the
following:
. ""safe harbor" leases;
. the lease of the Harbor Beach Resort, which provides for rent based upon
net profits;
. the operation of the hotel that is located in Sacramento;
. minority partnership interests in partnerships that own hotels that are
not leased under leases that produce rents qualifying as "rents from real
property"; and
. rent attributable to personal property at a relatively small group of
hotels that does not satisfy the 15% personal property test.
Host Marriott, however, believes that, even taking into account the
anticipated sources of non-qualifying income, its aggregate gross income from
all sources will satisfy the 75% and 95% gross income tests applicable to REITs
for each taxable year commencing subsequent to the date of the REIT conversion.
If Host Marriott fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Internal Revenue
Code. These relief provisions will be generally available if Host Marriott's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, Host Marriott attaches a schedule of the sources of its income to its
federal income tax return and any incorrect information on the schedule was not
due to fraud with intent to evade tax. It is not possible, however, to state
whether in all circumstances Host Marriott would be entitled to the benefit of
these relief provisions. For example, if Host Marriott fails to satisfy the
gross income tests because nonqualifying income that Host Marriott
intentionally incurs exceeds the limits on such income, the IRS could conclude
that Host Marriott's failure to satisfy the tests was not due to reasonable
cause, If these relief provisions are inapplicable to a particular set of
circumstances involving Host Marriott, Host Marriott will not qualify as a
REIT. As discussed above in "--General," even if these relief provisions apply,
a tax would be imposed with respect to the excess net income.
Any gain realized by Host Marriott on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business, including Host Marriott's share of any such gain
realized by the operating partnership, will be treated as income from a
"prohibited transaction" that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon Host Marriott's ability
to satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends upon
all the facts and circumstances with respect to the particular transaction. The
operating partnership intends that both it and its subsidiaries will hold
hotels for investment with a view to long-term appreciation, to engage in the
business of acquiring and owning hotels and to make such occasional sales of
hotels as are consistent with the operating partnership's investment
objectives. There can be no assurance, however, that the IRS might not contend
that one or more of such sales is subject to the 100% penalty tax, particularly
if the hotels that are sold have been held for a relatively short period of
time.
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Asset tests applicable to REITs. Under the law that is currently in effect,
Host Marriott, at the close of each quarter of its taxable year, must satisfy
three tests relating to the nature of its assets. For its taxable years
beginning after December 31, 2000, the third of these tests will be modified.
In addition, Host Marriott will become subject to a fourth test. The three
tests that Host Marriott is currently subject to are the following:
. First, at least 75% of the value of Host Marriott's total assets must be
represented by real estate assets. Host Marriott's real estate assets
include, for this purpose, its allocable share of real estate assets held
by the operating partnership and the non-corporate subsidiaries of the
operating partnership, as well as stock or debt instruments held for less
than one year purchased with the proceeds of a stock offering, or long-
term (at least five years) debt offering of Host Marriott, cash, cash
items and government securities.
. Second, no more than 25% of Host Marriott's total assets may be
represented by securities other than those in the 75% asset class.
. Third, of the investments included in the 25% asset class, the value of
any one issuer's
securities owned by Host Marriott may not exceed 5% of the value of Host
Marriott's total assets and Host Marriott may not own more than 10% of any
one issuer's outstanding voting securities.
The operating partnership does not own any of the voting stock of any of
non-controlled subsidiaries but it does own 100% of the nonvoting stock of each
non-controlled subsidiary. The operating partnership may also own nonvoting
stock, representing substantially all of the equity, in other corporate
entities that serve as partners or members in the various entities that hold
title to the hotels. Neither Host Marriott, the operating partnership, nor any
of the non-corporate subsidiaries of the operating partnership, own more than
10% of the voting securities of any entity that is treated as a corporation for
federal income tax purposes. In addition, Host Marriott believes that the
securities of any one issuer owned by Host Marriott, the operating partnership,
or any of the non-corporate subsidiaries of the operating partnership,
including Host Marriott's pro rata share of the value of the securities of each
non-controlled subsidiary do not exceed 5% of the total value of Host
Marriott's assets. There can be no assurance, however, that the IRS might not
contend that the value of such securities exceeds the 5% value limitation or
that nonvoting stock of a non-controlled subsidiary or another corporate entity
owned by Host Marriott. L.P. should be considered "voting stock" for this
purpose.
After initially meeting the asset tests at the close of any quarter, Host
Marriott will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. An example of such an acquisition would be an increase in Host
Marriott's interest in the operating partnership as a result of the exercise of
a limited partner's unit redemption right or an additional capital contribution
of proceeds from an offering of capital stock by Host Marriott. Host Marriott
to maintains adequate records of the value of its assets to ensure compliance
with the asset tests and to take such other actions within 30 days after the
close of any quarter as may be required to cure any noncompliance. If Host
Marriott fails to cure noncompliance with the asset tests within such time
period, Host Marriott would cease to qualify as a REIT.
As a result of the REIT Modernization Act, for taxable years beginning after
December 31, 2000, the 5% value test and the 10% voting security test will be
modified in two respects. First, the 10% voting securities test will be
expanded so that Host Marriott also will be prohibited from owning more than
10% of the value of the outstanding securities of any one issuer. Second, an
exception to these tests will be created so that Host Marriott will be
permitted to own securities of a subsidiary that exceed the 5% value test and
the new 10% vote or value test if the subsidiary elects to be a taxable REIT
subsidiary. The operating partnership currently own more than 10% of the total
value of the outstanding securities of each of the non-controlled subsidiaries.
The expanded 10% vote or value test, however, will not apply to a subsidiary
unless either of the following occurs:
. the subsidiary engages in a substantial new line of business or acquires
any substantial asset after July 12, 1999; or
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. Host Marriott has acquired, or acquires, additional securities of the
subsidiary after July 12, 1999.
At the present time, a final decision has not been made regarding which non-
controlled subsidiaries, if any, will elect to be treated as taxable REIT
subsidiaries. For taxable years beginning after December 31, 2000, not more
than 20% of the value of Host Marriott's total assets will be permitted to be
represented by securities of taxable REIT subsidiaries.
It should be noted that the REIT Modernization Act contains two provisions
that will ensure that taxable REIT subsidiaries will be subject to an
appropriate level of federal income taxation. First, taxable REIT subsidiaries
will be limited in their ability to deduct interest payments made to an
affiliated REIT. Second, if a taxable REIT subsidiary pays an amount to a REIT
that exceeds the amount that would be paid to an unrelated party in an arm's
length transaction, the REIT generally will be subject to an excise tax equal
to 100% of such excess.
Annual distribution requirements applicable to REITs. Host Marriott, in
order to qualify as a REIT, is required to distribute dividends, other than
capital gain dividends, to its stockholders in an amount at least equal to
(i) the sum of (a) 95% (90% for taxable years beginning after December
31, 2000) of REIT taxable income, computed without regard to the dividends
paid deduction and Host Marriott's net capital gain, and (b) 95% (90% for
taxable years beginning after December 31, 2000) of the net income, after
tax, if any, from foreclosure property, minus
(ii) the sum of certain items of noncash income.
In addition, if Host Marriott disposes of any built-in gain asset during the
ten-year period beginning when Host Marriott acquired the asset, Host Marriott
is required, pursuant to Treasury Regulations which have not yet been
promulgated, to distribute at least 95% (90% for taxable years beginning after
December 31, 2000) of the built-in gain, after tax, if any, recognized on the
disposition of such asset. See "--General" above for a discussion of built-in
gain assets. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before Host Marriott
timely files its tax return for such year and if paid on or before the first
regular dividend payment date after such declaration. Host Marriott intends to
make timely distributions sufficient to satisfy these annual distribution
requirements. In this regard, the operating partnership's partnership agreement
authorizes Host Marriott, as general partner, to take such steps as may be
necessary to cause the operating partnership to distribute to its partners an
amount sufficient to permit Host Marriott to meet these distribution
requirements.
To the extent that Host Marriott does not distribute all of its net capital
gain or distributes at least 95% (90% for taxable years beginning after
December 31, 2000), but less than 100%, of its REIT taxable income, as
adjusted, it is subject to tax thereon at regular ordinary and capital gain
corporate tax rates. Host Marriott, however, may designate some or all of its
retained net capital gain, so that, although the designated amount will not be
treated as distributed for purposes of this tax, a stockholder would include
its proportionate share of such amount in income, as capital gain, and would be
treated as having paid its proportionate share of the tax paid Host Marriott
with respect to such amount. The stockholder's basis in its capital stock of
Host Marriott would be increased by the amount the stockholder included in
income and decreased by the amount of the tax the stockholder is treated as
having paid. Host Marriott would make an appropriate adjustment to its earnings
and profits. For a more detailed description of the federal income tax
consequences to a stockholder of such a designation, see "--Taxation of taxable
U.S. stockholders generally."
There is a significant possibility that Host Marriott's REIT taxable income
will exceed its cash flow, due in part to certain "non-cash" or "phantom"
income expected to be taken into account in computing Host Marriott's REIT
taxable income. Host Marriott anticipates, however, that it will generally have
sufficient cash or liquid assets to enable it to satisfy the distribution
requirements described above. It is possible, however, that Host Marriott, from
time to time, may not have sufficient cash or other liquid assets to meet these
distribution requirements. In such event, in order to meet the distribution
requirements, Host Marriott may find it necessary to arrange for short-term, or
possibly long-term, borrowings to fund required distributions and/or to pay
dividends in the form of taxable stock dividends.
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Host Marriott calculates its REIT taxable income based upon the conclusion
that the non-corporate subsidiaries of the operating partnership or the
operating partnership itself, as applicable, is the owner of the hotels for
federal income tax purposes. As a result, Host Marriott expects that the
depreciation deductions with respect to the hotels will reduce its REIT taxable
income. This conclusion is consistent with the conclusion above that the leases
entered into with the Crestline subsidiaries will be treated as true leases for
federal income tax purposes. If the IRS were to challenge successfully this
position, in addition to failing in all likelihood the 75% and 95% gross income
tests described above, Host Marriott also might be deemed retroactively to have
failed to meet the REIT distribution requirements and would have to rely on the
payment of a "deficiency dividend" in order to retain its REIT status.
Under certain circumstances, Host Marriott may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Host
Marriott's deduction for dividends paid for the earlier year. Thus, Host
Marriott may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Host Marriott would be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
Furthermore, if Host Marriott should fail to distribute during each calendar
year at least the sum of 85% of its REIT ordinary income for such year, 95% of
its REIT capital gain income for such year, and any undistributed taxable
income from prior periods, it would be subject to an excise tax. The excise tax
would equal 4% of the excess of such required distribution over the sum of
amounts actually distributed and amounts retained with respect to which the
REIT pays federal income tax.
Failure of Host Marriott to qualify as a REIT. If Host Marriott fails to
qualify for taxation as a REIT in any taxable year, and if the relief
provisions do not apply, Host Marriott will be subject to tax, including any
applicable alternative minimum tax, on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which Host Marriott fails
to qualify will not be deductible by Host Marriott nor will they be required to
be made. As a result, Host Marriott's failure to qualify as a REIT would
significantly reduce the cash available for distribution by Host Marriott to
its stockholders and could materially reduce the value of its capital stock. In
addition, if Host Marriott fails to qualify as a REIT, all distributions to
stockholders will be taxable as ordinary income, to the extent of Host
Marriott's current and accumulated E&P, although, subject to certain
limitations of the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to these
distributions. Unless entitled to relief under specific statutory provisions.
Host Marriott also will be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances Host Marriott would be entitled
to such statutory relief.
Taxation of taxable U.S. stockholders generally
Distributions by Host Marriott. As long as Host Marriott qualifies as a
REIT, distributions made by Host Marriott out of its current or accumulated
E&P, and not designated as capital gain dividends constitute dividends taxable
to its taxable U.S. stockholders as ordinary income. Such distributions are not
eligible for the dividends received deduction in the case of U.S. stockholders
that are corporations. To the extent that Host Marriott makes distribution not
designated as capital gain dividends in excess of its current and accumulated
E&P, such distributions are treated first as a tax-free return of capital to
each U.S. stockholder, reducing the adjusted basis which such U.S. stockholder
has in its common stock for tax purposes by the amount of such distribution but
not below zero, with distributions in excess of a U.S. stockholder's adjusted
basis in its common stock taxable as capital gains, provided that the common
stock has been held as a capital asset.
Dividends declared by Host Marriott in October, November or December of any
year and payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by Host Marriott and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by Host Marriott on or before January 31 of the following year.
Distributions made by Host Marriott that are properly designated by Host
Marriott as capital gain dividends are taxable to taxable non-corporate U.S.
stockholders, i.e., individuals, estates or trusts. They are
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taxed as gain from the sale or exchange of a capital asset held for more than
one year to the extent that they do not exceed Host Marriott's actual net
capital gain for the taxable year, without regard to the period for which such
non-corporate U.S. stockholder has held his common stock. In the event that
Host Marriott designates any portion of a dividend as a "capital gain
dividend," a U.S. stockholder's share of such capital gain dividend would be an
amount which bears the same ratio to the total amount of dividends paid to such
U.S. stockholder for the year as the aggregate amount designated as a capital
gain dividend bears to the aggregate amount of all dividends paid on all
classes of shares of stock for the year.
On November 10, 1997, the IRS issued Notice 97-64, which provides generally
that Host Marriott may classify portions of its designated capital gain
dividend as either a 20% gain distribution, which would be taxable to
noncorporate U.S. stockholders at a maximum rate of 20%, an unrecaptured
Section 1250 gain distribution, which would be taxable to non-corporate U.S.
stockholders at a maximum rate of 25%, or a 28% rate gain distribution, which
would be taxable to non-corporate U.S. stockholders at a maximum rate of 28%.
If no designation is made, the entire designated capital gain dividend will be
treated as a 28% rate gain distribution. Notice 97-64 provides that a REIT must
determine the maximum amounts that it may designate as 20% and 25% rate capital
gain dividends by performing the computation required by the Internal Revenue
Code as if the REIT were an individual whose ordinary income were subject to a
marginal tax rate of at least 28%. Notice 97-64 further provides that
designations made by the REIT only will be effective to the extent that they
comply with Revenue Ruling 89-81, which requires that distributions made to
different classes of shares of stock be composed proportionately of dividends
of a particular type. On July 22, 1998, as part of the IRS Restructuring Act,
the holding period requirement for the application of the 20% and 25% capital
gain tax rates was reduced to 12 months from 18 months for sales of capital
gain assets on or after January 1, 1998. Although Notice 97-64 will apply to
sales of capital gain assets after July 28, 1997 and before January 1, 1998, it
is expected that the IRS will issue clarifying guidance, most likely applying
the same principles set forth in Notice 97-64, regarding a REIT's designation
of capital gain dividends in light of the new holding period requirements. For
a discussion of the capital gain tax rates applicable to non-corporate U.S.
stockholders, see "--Taxpayer Relief Act and IRS Restructuring Act changes to
capital gain taxation" below.
Distributions made by Host Marriott that are properly designated by Host
Marriott as capital gain dividends will be taxable to taxable corporate U.S.
stockholders as long-term gain to the extent that they do not exceed Host
Marriott's actual net capital gain for the taxable year at a maximum rate of
35% without regard to the period for which such corporate U.S. stockholder has
held its common stock. Such U.S. stockholders may, however, be required to
treat up to 20% of certain capital gain dividends as ordinary income.
U.S. stockholders may not include in their individual income tax returns any
net operating losses or capital losses of Host Marriott. Instead, such losses
would be carried over by Host Marriott for potential offset against future
income, subject to certain limitations. Distributions made by Host Marriott and
gain arising from the sale or exchange by a U.S. stockholder of common stock
will not be treated as passive activity income, and, as a result. U.S.
stockholders generally will not be able to apply any "passive losses" against
such income or gain. In addition, taxable distributions from Host Marriott
generally will be treated as investment income for purposes of the investment
interest limitation. Capital gain dividends and capital gains from the
disposition of shares of stock, including distributions treated as such,
however, will be treated as investment income only if the U.S. stockholder so
elects, in which case such capital gains will be taxed at ordinary income
rates.
Host Marriott will notify stockholders after the close of its taxable year
as to the portions of distributions attributable to that year that constitute
ordinary income, return of capital and capital gain. Host Marriott may
designate, by written notice to its stockholders, its net capital gain so that
with respect to retained net capital gains, a U.S. stockholder would include
its proportionate share of such gain in income, as long-term capital gain, and
would be treated as having paid its proportionate share of the tax paid by Host
Marriott with respect to the gain. The U.S. stockholder's basis in its common
stock would be increased by its share of such gain and decreased by its share
of such tax. With respect to such long-term capital gain of a U.S. stockholder
that is an individual or an estate or trust, the IRS, as described above in
this section, has authority to issue regulations
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that could apply the special tax rate applicable generally to the portion of
the long-term capital gains of an individual or an estate or trust attributable
to deductions for depreciation taken with respect to depreciable real property.
IRS Notice 97-64, described above in this section, did not address the taxation
of non-corporate REIT stockholders with respect to retained net capital gains.
Sales of common stock. Upon any sale or other disposition of common stock, a
U.S. stockholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and
(ii) the holder's adjusted basis in such common stock for tax purposes. Such
gain or loss will be capital gain or loss if the common stock has been held by
the U.S. stockholder as a capital asset. In the case of a U.S. stockholder who
is an individual or an estate or trust, such gain or loss will be long-term
capital gain or loss, and any such long-term capital gain shall be subject to
the maximum capital gain rate of 20%. In the case of a U.S. stockholder that is
a corporation, such gain or loss will be long-term capital gain or loss if such
shares of stock have been held for more than one year, and any such capital
gain shall be subject to the maximum capital gain rate of 35%. In general, any
loss recognized by a U.S. stockholder upon the sale or other disposition of
common stock that has been held 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 received by such U.S. stockholder from Host Marriott
that were required to be treated as long-term capital gains.
Taxpayer Relief Act and IRS Restructuring Act changes to capital gain
taxation. The Taxpayer Relief Act of 1997 altered the taxation of capital gain
income. Under the Act, individuals, trusts and estates that hold certain
investments for more than 18 months may be taxed at a maximum long-term capital
gain rate of 20% on the sale or exchange of those investments. Individuals,
trusts and estates that hold certain assets for more than one year but not more
than 18 months may be taxed at a maximum long-term capital gain rate of 28% on
the sale or exchange of those investments. The Taxpayer Relief Act also
provides a maximum rate of 25% for "unrecaptured Section 1250 gain" for
individuals, trusts and estates, special rules for "qualified 5-year gain" and
other changes to prior law. The recently enacted IRS Restructuring Act of 1998,
however, reduced the holding period requirement established by the Taxpayer
Relief Act for the application of the 20% and 25% capital gain tax rates to 12
months from 18 months for sales of capital gain assets after December 31, 1997.
The Taxpayer Relief Act allows the IRS to prescribe regulations on how the
Taxpayer Relief Act's capital gain rates will apply to sales of capital assets
by "pass-through entities," including REITs, such as Host Marriott, and to
sales of interests in "pass-through entities." The IRS has proposed regulations
under this authority, but the proposed regulations do not apply to sales of
assets by REITs or to sales of interests in REITs. For a discussion of the
rules under the Taxpayer Relief Act that apply to the taxation of distributions
by Host Marriott to its stockholders that are designated by Host Marriott as
"capital gain dividends," see "--Distributions by Host Marriott" above.
Stockholders are urged to consult with their own tax advisors with respect to
the rules contained in the Taxpayer Relief Act and the IRS Restructuring Act.
Backup withholding for Host Marriott's distributions
Host Marriott reports to its U.S. stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a U.S. stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder either is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. stockholder that does not provide Host Marriott with
a correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding is creditable against
the stockholder's income tax liability. In addition, Host Marriott may be
required to withhold a portion of its capital gain distributions to any U.S.
stockholders who fail to certify their non-foreign status to Host Marriott. See
"--Taxation of non-U.S. stockholders."
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Taxation of tax-exempt stockholders
Provided that a tax-exempt stockholder has not held its common stock as
"debt financed property" within the meaning of the Internal Revenue Code and
such common stock are not otherwise used in a trade or business, the dividend
income from Host Marriott will not be unrelated business taxable income
("UBTI") to a tax-exempt stockholder. Similarly, income from the sale of common
stock will not constitute UBTI unless such tax-exempt stockholder has held such
common stock as "debt financed property" within the meaning of the Internal
Revenue Code or has used the common stock in a trade or business.
However, for a tax-exempt stockholder that is a social club, voluntary
employee benefit association. supplemental unemployment benefit trust or
qualified group legal services plan exempt from federal income taxation under
Internal Revenue Code Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20),
respectively, income from an investment in Host Marriott will constitute UBTI
unless the organization is property able to deduct amounts set aside or placed
in reserve for certain purposes so as to offset the income generated by its
investment in Host Marriott. Such a prospective stockholder should consult its
own tax advisors concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of
1993 provides that, effective for taxable years beginning in 1994, a portion of
the dividends paid by a "pension held REIT" shall be treated as UBTI as to any
trust which is described in Section 401(a) of the Internal Revenue Code, is
tax- exempt under Section 501(a) of the Internal Revenue Code and holds more
than 10%, by value, of the interests in the REIT. Tax-exempt pension funds that
are described in Section 401(a) of the Internal Revenue Code are referred to
below as "qualified trusts." A REIT is a "pension held REIT" if it meets the
following two tests:
. The REIT would not have qualified as a REIT but for the fact that Section
856(h)(3) of the Internal Revenue Code, added by the 1993 Act, provides
that stock owned by qualified trusts shall be treated, for purposes of
the "not closely held" requirement, as owned by the beneficiaries of the
trust rather than by the trust itself.
. Either at least one such qualified trust holds more than 25% by value, of
the interests in the REIT, or one or more such qualified trusts, each of
which owns more than 10%, by value, of the interests in the REIT, hold in
the aggregate more than 50%, by value, of the interests in the REIT.
The percentage of any REIT dividend treated as UBTI is equal to the ratio of
the UBTI earned by the REIT, treating the REIT as if it were a qualified trust
and therefore subject to tax on UBTI, to the total gross income of the REIT. A
de minimis exception applies where the percentage is less than 5% for any year.
The provisions requiring qualified trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the "not
closely held" requirement without relying upon the "look-through" exception
with respect to qualified trusts. Based on the current estimated ownership of
Host Marriott common stock and as a result of certain limitations on transfer
and ownership of common stock contained in the Host Marriott's charter, Host
Marriott should not be classified as a "pension held REIT."
Taxation of non-U.S. stockholders
The rules governing federal income taxation of the ownership and disposition
of common stock by non-U.S. stockholders are complex and no attempt is made
herein to provide more than a brief summary of such rules. Accordingly, the
discussion does not address all aspects of federal income tax and does not
address state, local or foreign tax consequences that may be relevant to a non-
U.S. stockholder in light of its particular circumstances. In addition, this
discussion is based on current law, which is subject to change, and assumes
that Host Marriott qualifies for taxation as a REIT. Prospective non-U.S.
stockholders should consult with their own tax advisers to determine the impact
of federal, state, local and foreign income tax laws with regard to an
investment in common stock, including any reporting requirements.
Distributions by Host Marriott. Distributions by Host Marriott to a non-U.S.
stockholder that are neither attributable to gain from sales or exchanges by
Host Marriott of United States real property interests nor
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designated by Host Marriott as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated E&P of Host Marriott. Such distributions ordinarily will be subject
to withholding of United States federal income tax on a gross basis (that is,
without allowance of deductions) at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless the dividends are treated
as effectively connected with the conduct by the non-U.S. stockholder of a
United States trade or business. Under certain treaties, however, lower
withholding rates generally applicable to dividends do not apply to dividends
from a REIT, such as Host Marriott. Certain certification and disclosure
requirements must be satisfied to be exempt from withholding under the
effectively connected income exemption. Dividends that are effectively
connected with such a trade or business will be subject to tax on a net basis
(that is, after allowance of deductions) at graduated rates, in the same manner
as U.S. stockholders are taxed with respect to such dividends and are generally
not subject to withholding. Any such dividends received by a non-U.S.
stockholder that is a corporation may also be subject to an additional branch
profits tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Host Marriott expects to withhold United States
income tax at the rate of 30% on any distribution made to a non-U.S.
stockholder unless (i) a lower treaty rate applies and any required form or
certification evidencing eligibility for that lower rate is filed with Host
Marriott or (ii) a non-U.S. stockholder files an IRS Form 4224 with Host
Marriott claiming that the distribution is effectively connected income.
Distributions in excess of the current or accumulated E&P of Host Marriott
will not be taxable to a non-U.S. stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that such
distributions exceed the adjusted basis of a non-U.S. stockholder's common
stock, they will give rise to gain from the sale or exchange of its common
stock, the tax treatment of which is described below.
As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that Host Marriott will be required to
withhold 10% of any distribution in excess of its current and accumulated E&P.
Consequently, although Host Marriott intends to withhold at a rate of 30%, or a
lower applicable treaty rate, on the entire amount of any distribution, to the
extent that Host Marriott does not do so, any portion of a distribution not
subject to withholding at a rate of 30%, or lower applicable treaty rate, would
be subject to withholding at a rate of 10%. However, a non-U.S. stockholder may
seek a refund of such amounts from the IRS if it subsequently determined that
such distribution was, in fact, in excess of current or accumulated E&P of Host
Marriott, and the amount withheld exceeded the non-U.S. stockholder's United
States tax liability, if any, with respect to the distribution.
Distributions to a non-U.S. stockholder that are designated by Host Marriott
at the time of distribution as capital gain dividends, other than those arising
from the disposition of a United States real property interest, generally
should not be subject to United States federal income taxation, unless:
(i) the investment in the common stock is effectively connected with the
non-U.S. stockholder's United States trade or business, in which case the
non-U.S. stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain, except that a stockholder that is a
foreign corporation may also be subject to the 30% branch profits tax, as
discussed above, or
(ii) the non-U.S. stockholder is a nonresident alien individual who is
present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital
gains.
Host Marriott will be required to withhold and to remit to the IRS 35% of any
distribution to non-U.S. stockholders that is designated as a capital gain
dividend or, if greater, 35% of a distribution to non-U.S. stockholders that
could have been designated by Host Marriott as a capital gain dividend.
Pursuant to the federal law known as FIRPTA, distributions to a non-U.S.
stockholder that are attributable to gain from sales or exchanges by Host
Marriott of United States real property interests, whether or not designated as
capital gain dividends, will cause the non-U.S. stockholder to be treated as
recognizing such gain as income effectively connected with a United States
trade or business. Non-U.S. stockholders would thus generally be taxed at the
same rates applicable to U.S. stockholders, subject to a special alternative
minimum tax in the case of nonresident alien individuals. Also, such gain may
be subject to a 30% branch profits tax in
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the hands of a non-U.S. stockholder that is a corporation, as discussed above.
Host Marriott is required to withhold 35% of any such distribution. That amount
is creditable against the non-U.S. stockholder's federal income tax liability.
Although the law is not clear on the matter, it appears that amounts
designated by Host Marriott pursuant to the Taxpayer Relief Act as
undistributed capital gains in respect of the common stock held by U.S.
Stockholders (see "--Annual distribution requirements applicable to REITs"
above) generally should be treated with respect to non-U.S. stockholders in the
same manner as actual distributions by Host Marriott of capital gain dividends.
Under that approach, the non-U.S. stockholders would be able to offset as a
credit against their United States federal income tax liability resulting
therefrom their proportionate share of the tax paid by Host Marriott on such
undistributed capital gains and to receive from the IRS a refund to the extent
their proportionate share of such tax paid by Host Marriott were to exceed
their actual United States federal income tax liability.
Sales of common stock. Gain recognized by a non-U.S. stockholder upon the
sale or exchange of common stock generally will not be subject to United States
taxation unless such shares of stock constitute a "United States real property
interest" within the meaning of FIRPTA. The common stock will not constitute a
"United States real property interest" so long as Host Marriott is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its stock is held directly or indirectly by non-U.S. stockholders. Host
Marriott believes, but cannot guarantee, that it is a "domestically controlled
REIT." Moreover, even if Host Marriott is a "domestically controlled REIT,"
because the common stock is publicly traded, no assurance can be given that
Host Marriott will continue to be a "domestically controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of common stock
not otherwise subject to FIRPTA will be taxable to a non-U.S. stockholder if
the non-U.S. stockholder is a nonresident alien individual who is present in
the United States for 183 days or more during the taxable year and has a "tax
home" in the United States. In such case, the nonresident alien individual will
be subject to a 30% United States withholding tax on the amount of such
individual's gain.
Even if Host Marriott does not qualify as or ceases to be a "domestically
controlled REIT," gain arising from the sale or exchange by a non-U.S.
stockholder of common stock would not be subject to United States taxation
under FIRPTA as a sale of a "limited States real property interest" if:
(i) the common stock is "regularly traded," as defined by applicable
regulations, on an established securities market such as the NYSE; and
(ii) such non-U.S. stockholder owned 5% or less of the common stock
throughout the five-year period ending on the date of the sale or exchange.
If gain on the sale or exchange of common stock were subject to taxation
under FIRPTA, the non-U.S. stockholder would be subject to regular United
States income tax with respect to such gain in the same manner as a taxable
U.S. stockholder (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of the common stock would be required to withhold and remit
to the IRS 10% of the purchase price.
Backup withholding tax and information reporting. Backup withholding tax
generally is a withholding tax imposed at the rate of 31% on certain payments
to persons that fail to furnish certain information under the United States
information reporting requirements. Backup withholding and information
reporting will generally not apply to distributions paid to non-U.S.
stockholders outside the United States that are treated as dividends subject to
the 30% (or lower treaty rate) withholding tax discussed above, capital gain
dividends or distributions attributable to gain from the sale or exchange by
Host Marriott of United States real property interests. As a general matter,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a foreign
broker.
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Generally, information reporting (but not backup withholding) will apply,
however, to a payment of the proceeds of a sale of common stock by a foreign
office of a broker that:
(a) is a United States person;
(b) derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States; or
(c) is a "controlled foreign corporation," which is, generally, a
foreign corporation controlled by United States stockholders.
If, however, the broker has documentary evidence in its records that the
holder is a non-U.S. stockholder and certain other conditions are met or the
stockholder otherwise establishes an exemption information reporting will not
apply. Payment to or through a United States office of a broker of the proceeds
of a sale of common stock is subject to both backup withholding and information
reporting unless the stockholder certifies under penalty of perjury that the
stockholder is a non-U.S. stockholder, or otherwise establishes an exemption. A
non-U.S. stockholder may obtain a refund of any amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.
The IRS has recently finalized regulations regarding the withholding and
information reporting rules discussed above. In general, these regulations do
not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. These regulations generally are effective for payments made after
December 31, 2000, subject to certain transition rules. Valid withholding
certificates that are held on December 31, 1999, will remain valid until the
earlier of December 31, 2000 or the date of expiration of the certificate under
rules currently in effect, unless otherwise invalidated due to changes in the
circumstances of the person whose name is on such certificate. A non-U.S.
stockholder should consult its own advisor regarding the effect of the new
regulations.
Tax aspects of Host Marriott's ownership of interests in the operating
partnership
General. Substantially all of Host Marriott's investments are held through
the operating partnership, which will hold the hotels either directly or
through certain subsidiaries. In general, partnerships are "pass- through"
entities that are not subject to federal income tax. Rather, partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. Host Marriott includes in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of
the REIT asset tests, Host Marriott includes its proportionate share of assets
held through the operating partnership and certain of its subsidiaries. See "--
Federal income taxation of Host Marriott--Ownership of partnership interests by
a REIT."
Entity classification. If the operating partnership or any non-corporate
subsidiary other than a subsidiary held through an entity treated for federal
income tax purposes as a corporation were treated as an association, the entity
would be taxable as a corporation and therefore would be subject to an entity
level tax on its income. In such a situation, the character of Host Marriott's
assets and items of gross income would change and could preclude Host Marriott
from qualifying as a REIT (see "--Federal income taxation of Host Marriott--
Asset tests applicable to REITs" and "--Income tests applicable to REITs").
The entire discussion of the federal income tax consequences of the
ownership of common stock is based on the operating partnership and all of its
non-corporate subsidiaries, other than a subsidiary held by an entity treated
as a corporation for federal income tax purposes, being classified as
partnerships for federal income tax purposes. Pursuant to regulations under
Section 7701 of the Internal Revenue Code, a partnership will be treated as a
partnership for federal income tax purposes unless it elects to be treated as a
corporation or would be treated as a corporation because it is a "publicly
traded partnership." Neither the operating partnership nor any of the non-
corporate subsidiaries have elected or will elect to be treated as a
corporation, and therefore, subject to the disclosure below, each will be
treated as a partnership for federal income tax purposes (or if it has only one
partner or member disregarded entirely for federal income tax purposes).
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Pursuant to Section 7704 of the Internal Revenue Code, however, a
partnership that does not elect to be treated as a corporation nevertheless
will be treated as a corporation for federal income tax purposes if it is a
"publicly traded partnership," unless at least ninety percent (90%) of its
income consists of "qualifying income" within the meaning of that section. A
"publicly traded partnership" is any partnership (i) the interests in which are
traded on an established securities market or (ii) the interests in which are
readily tradable on a "secondary market or the substantial equivalent thereof."
OP Units will not be traded on an established securities market. There is a
significant risk, however, that after the right to redeem the OP Units becomes
exercisable, such interests would be considered readily tradable on the
substantial equivalent of a secondary market. In this regard, the income
requirements generally applicable to REITs and the definition of "qualifying
income" under Section 7704 of the Internal Revenue Code are similar in most key
respects. There is one significant difference, however, that is relevant to the
operating partnership. For a REIT, rent from a tenant does not qualify as
"rents from real property" if the REIT and/or one or more actual or
constructive owners of 10% or more of the REIT actually or constructively own
10% or more of the tenant; under Section 7704 of the Internal Revenue Code,
rent from a tenant is not qualifying income if a partnership and/or one or more
actual or constructive owners of 5% or more of the partnership actually or
constructively own 10% or more of the tenant.
As described above, as a result of the passage of the REIT Modernization
Act, for taxable years beginning after December 31, 2000, the operating
partnership should be able to lease its hotel properties to a taxable REIT
subsidiary and the rents received from that subsidiary would not be
disqualified from being "rents from real property" under the REIT rules by
reason of the operating partnership's ownership interest in the subsidiary. See
"--Federal income taxation of Host Marriott--Income tests applicable to REITs."
Host Marriott and the operating partnership have not made a decision whether or
not to lease any properties to taxable REIT subsidiaries in the future. It
should be noted, though, that as a further result of the passage of the REIT
Modernization Act, rent received from a taxable REIT subsidiary also would not
be disqualified from being "qualifying income" under Section 7704 of the
Internal Revenue Code because of the operating partnership's ownership of the
taxable REIT subsidiary. Accordingly, Host Marriott could lease its hotel
properties to one or more taxable REIT subsidiaries without, by virtue of that
act, causing the operating partnership to be treated as a corporation for
federal income tax purposes.
A substantial majority of the operating partnership's income comes from rent
payments by subsidiaries of Crestline. Accordingly, because the Blackstone
Entities, Host Marriott and any owner of 10% or more of Host Marriott will own
or be deemed to own 5% or more of the operating partnership, if the Blackstone
Entities, Host Marriott and/or any owner of 10% or more of Host Marriott were
to own or be deemed to own collectively 10% or more of Crestline, none of the
rent from the lessees of Host Marriott's hotels would be qualifying income for
purposes of determining whether the operating partnership should be taxed as a
corporation. In order to avoid this result, the Crestline articles of
incorporation expressly provide that no person (or persons acting as a group),
including the Blackstone Entities, Host Marriott and any owner of 10% or more
of Host Marriott, may own, actually and/or constructively, more than 9.8% by
value of the equity in Crestline and the Crestline articles of incorporation
contain self-executing mechanisms intended to enforce this prohibition. In
addition, the operating partnership's partnership agreement prohibits any
person, or persons acting as a group, or entity, other than an affiliate of the
Blackstone Entities and Host Marriott, from owning, actually and/or
constructively, more than 4.9% of the value of the operating partnership, and
the Host Marriott charter prohibits any person, or persons acting as a group,
or entity, including the Blackstone Entities and the Marriott family and their
affiliated entities as a group, from, subject to certain limited exceptions,
owning, actually and/or constructively, more than 9.8% of the lesser of the
number or value of the total outstanding shares of common stock of Host
Marriott. Assuming that all of these prohibitions are enforced at all times in
accordance with their terms, then so long as the operating partnership's income
is such that Host Marriott could meet the gross income tests applicable to
REITs (see "--Federal income taxation of Host Marriott--Income tests applicable
to REITs" and "--Ownership of partnership interests by a REIT"), the operating
partnership's "qualifying income" should be sufficient for it to avoid being
classified as a corporation even if it were considered a publicly traded
partnership.
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If the operating partnership were taxable as a corporation, most, if not
all, of the tax consequences described herein would be inapplicable. In
particular, Host Marriott would not qualify as a REIT because the value of Host
Marriott's ownership interest in the operating partnership would exceed 5% of
Host Marriott's assets and Host Marriott would be considered to hold more than
10% of the voting securities of another corporation (see "--Federal income
taxation of Host Marriott--Asset tests applicable to REITs"), which would
adversely affect the value of the common stock (see "--Federal income taxation
of Host Marriott--Failure of Host Marriott to qualify as a REIT").
Allocations of operating partnership income, gain, loss and deduction. The
partnership agreement of the operating partnership provides that if the
operating partnership operates at a net loss, net losses shall be allocated to
Host Marriott and the limited partners in proportion to their respective
percentage ownership interests in the operating partnership, provided that net
losses that would have the effect of creating a deficit balance in a limited
partner's capital account as specially adjusted for such purpose ("Excess
Losses") will be reallocated to Host Marriott, as general partner of the
operating partnership. The partnership agreement also provides that, if the
operating partnership operates at a net profit, net income shall be allocated
first to Host Marriott to the extent of Excess Losses with respect to which
Host Marriott has not previously been allocated net income. Any remaining net
income shall be allocated in proportion to the respective percentage ownership
interests of Host Marriott and the limited partners. Finally, the partnership
agreement provides that if the operating partnership has preferred OP Units
outstanding, income will first be allocated to such preferred OP Units to the
extent necessary to reflect and preserve the economic rights associated with
such preferred OP Units.
Although a partnership agreement will generally determine the allocation of
income and loss among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) of the
Internal Revenue Code and the applicable regulations. Generally, Section 704(b)
and the applicable regulations require that partnership allocations respect the
economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The allocations of taxable income and loss
provided for in the operating partnership partnership agreement and the
partnership agreements and operating agreements of the non-corporate
subsidiaries are intended to comply with the requirements of Section 704(b) of
the Internal Revenue Code and the regulations promulgated thereunder.
Tax allocations with respect to the hotels. Pursuant to Section 704(c) of
the Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated property, such as the hotels, that is contributed to
a partnership in exchange for an interest in the partnership must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, the difference between the adjusted tax basis and the fair
market value of such property at the time of contribution associated with the
property at the time of the contribution. This difference is know as built-in
gain. The operating partnership agreement requires that such allocations be
made in a manner consistent with Section 704(c) of the Internal Revenue Code.
In general, the partners of the operating partnership, including Host Marriott,
who contributed depreciated assets having built-in gain are allocated
depreciation deductions for tax purposes that are lower than such deductions
would be if determined on a pro rata basis. Thus, the carryover basis of the
contributed assets in the hands of the operating partnership may cause Host
Marriott to be allocated lower depreciation and other deductions, and therefore
to be effectively allocated more income, which might adversely affect Host
Marriott's ability to comply with the REIT distribution requirements. See "--
Federal income taxation of Host Marriott--Annual distribution requirements
applicable to REITs."
In addition, in the event of the disposition of any of the contributed
assets which have built-in gain, all income attributable to the built-in gain
generally will be allocated to the contributing partners, even though the
proceeds of such sale would be allocated proportionately among all the partners
and likely would be retained
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by the operating partnership, rather than distributed. Thus, if the operating
partnership were to sell a hotel with built-in gain that was contributed to the
operating partnership by Host Marriott's predecessors or Host Marriott, Host
Marriott generally would be allocated all of the income attributable to the
built-in gain, which could exceed the economic or book income allocated to it
as a result of such sale. Such an allocation might cause Host Marriott to
recognize taxable income in excess of cash proceeds, which might adversely
affect Host Marriott's ability to comply with the REIT distribution
requirements. In addition, Host Marriott will be subject to a corporate level
tax on such gain to the extent the gain is recognized within the 10-year period
after the first day of Host Marriott's first taxable year as a REIT). See "--
Federal Income Taxation of Host Marriott--Annual distribution requirements
applicable to REITs" and "--Federal income taxation of Host Marriott--General."
It should be noted in this regard that as the general partner of the operating
partnership, Host Marriott will determine whether or not to sell a hotel
contributed to the operating partnership by Host Marriott.
The operating partnership and Host Marriott generally use the traditional
method, with a provision for a curative allocation of gain on sale to the
extent prior allocations of depreciation with respect to a specific hotel were
limited by the "ceiling rule" applicable under the traditional method, to
account for built-in gain with respect to the hotels contributed to the
operating partnership in connection with the REIT conversion. This method is
generally a more favorable method for accounting for built-in gain from the
perspective of those partners, including Host Marriott, who received OP Units
of limited partnership interest in the operating partnership in exchange for
property with a low basis relative to value at the time of the REIT conversion
and is a less favorable method from the perspective of those partners who
contributed cash or "high basis" assets to the operating partnership, including
Host Marriott, to the extent it contributes cash to the operating partnership.
Any property purchased by the operating partnership subsequent to the REIT
conversion will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Internal Revenue Code will not apply.
Other tax consequences for Host Marriott and its stockholders
Host Marriott and its stockholders are subject to state or local taxation in
various state or local jurisdictions, including those in which the operating
partnership or they transact business or reside. The state and local tax
treatment of Host Marriott and its stockholders may not conform to the federal
income tax consequences discussed above. Consequently, prospective stockholders
of Host Marriott should consult their own tax advisors regarding the effect of
state and local tax laws on an investment in Host Marriott.
A portion of the cash to be used by Host Marriott to fund distributions
comes from each non-controlled subsidiary through payments of dividends on the
shares of stock of such corporation held by the operating partnership and, in
some cases, interest on notes held by the operating partnership. Each non-
controlled subsidiary pays federal and state income tax at the full applicable
corporate rates on its taxable income computed without regard to any deduction
for dividends. To the extent that a non-controlled subsidiary is required to
pay federal, state or local taxes, the cash otherwise available for
distribution by Host Marriott to its stockholders will be reduced accordingly.
As described above in "--Federal income taxation of Host Marriott--Income
tests applicable to REITs" and "--Asset tests applicable to REITs," one or both
of the non-controlled subsidiaries may elect to be treated as a taxable REIT
subsidiary for years commencing after December 31, 2000. The non-controlled
subsidiaries that make this election will be restrained in their ability to
reduce their tax liability for two reasons. First, taxable REIT subsidiaries
will be limited in their ability to deduct interest payments made to an
affiliated REIT. Accordingly, if a non-controlled subsidiary elects to be
treated as a taxable REIT subsidiary, it will be limited significantly in its
ability to deduct interest payments on notes issued to the operating
partnership. Second, if a taxable REIT subsidiary pays an amount to a REIT that
exceeds the amount that would be paid in an arm's length transaction, the REIT
generally will be subject to an excise tax equal to 100% of the excess. This
rule generally will apply to amounts paid to the operating partnership by a
non-controlled subsidiary that elects to be treated as a taxable REIT
subsidiary.
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PLAN OF DISTRIBUTION
We may issue the shares of common stock covered by this prospectus to
holders of OP Units issued in connection with the acquisitions of the limited
partnerships described under the heading "Prospectus Summary--The stock
offering," if such holders request redemption of their OP Units. A redeeming
holder of OP Units who receives any shares of common stock covered by this
prospectus will be entitled to sell such shares without restriction in the open
market or otherwise.
We will acquire one OP Unit from a redeeming holder of OP Units in exchange
for each share of common stock that we issue. Thus, with each redemption, our
interest in the operating partnership will increase.
LEGAL MATTERS
In connection with this prospectus, Hogan & Hartson L.L.P., Washington, D.C.
has provided its opinion as to the validity of the issuance of the common stock
offered by this prospectus and the discussion of tax matters in this
prospectus.
EXPERTS
The financial statements and schedules incorporated by reference in this
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included therein in reliance upon the authority of said firm as experts in
giving said reports.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Commission under the Securities Act of 1933.
This prospectus does not contain all of the information included in the
registration statement. We have omitted parts of the registration statement in
accordance with the rules and regulations of the Commission. For further
information, we refer you to the registration statement on Form S-3, including
its exhibits. Statements contained in this prospectus about the provisions or
contents of any agreement or other document are not necessarily complete. If
the Commission rules and regulations require that such agreement or document be
filed as an exhibit to the registration statement, please see such agreement or
document for a complete description of these matters. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front cover of this prospectus. You should read this prospectus
together with additional information described under the heading "Where You Can
Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You may read and copy materials that we have
filed with the Commission, including the registration statement, at the
following Commission public reference rooms:
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<C> <C> <S>
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
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Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms.
Our Commission filings can also be read at the following address:
New York Stock Exchange
20 Broad Street
New York, New York 10005
Our Commission filings are also available to the public on the Commission's
Web Site at http://www.sec.gov.
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is an important part of this prospectus, and information that we file later
with the Commission will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future filings
made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until we have sold all of the offered
securities to which this prospectus relates or the offering is otherwise
terminated.
1. Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
2. Quarterly Reports on Form 10-Q for the quarters ended March 26, 1999,
June 18, 1999 and September 10, 1999.
3. Current Reports on Form 8-K dated:
. December 30, 1998 (filed on December 30, 1999)
. December 30, 1998 (filed on January 14, 1999), as amended by Form 8-
K/A dated December 30, 1998 (filed on March 15, 1999);
. December 30, 1998 (filed on January 15, 1999);
. January 12, 1999 (filed on January 14, 1999);
. January 21, 1999 (filed on January 22, 1999);
. May 3, 1999 (filed on May 3, 1999);
. July 27, 1999 (filed on August 2, 1999);
. November 3, 1999 (filed on November 3, 1999); and
. November 19, 1999 (filed on November 23, 1999).
4. Proxy Statement on Schedule 14A dated April 15, 1999.
5. Description of our common stock included in a Registration Statement on
Form 8-A filed on November 18, 1998 (as amended on December 28, 1998).
6. Description of our Rights included in a Registration Statement on Form 8-
A filed on December 11, 1998 (as amended on December 24, 1998).
You may request a copy of these filings, at no cost, by writing us at the
following address or contacting us by telephone at (301) 380-2070 between the
hours of 9:00 a.m. and 4:00 p.m., Eastern Time:
Corporate Secretary
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth those expenses for distribution to be
incurred in connection with the issuance and distribution of the securities
being registered.
<TABLE>
<S> <C>
Registration Fee.................................................... $ 6,584.00
Printing and Duplicating Expenses................................... 10,000.00
Legal Fees and Expenses............................................. 50,000.00
Accounting Fees and Expenses........................................ 5,000.00
Miscellaneous....................................................... 5,000.00
----------
Total............................................................. $76,584.00
==========
</TABLE>
Item 15. Indemnification of Directors and Officers
The Registrant's Articles of Amendment and Restatement of Articles of
Incorporation authorize the Registrant, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (i) any
present or former director or officer or (ii) any individual who, while a
director of the Registrant and at the request of the Registrant, serves or has
served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or any other enterprise from and against
any claim or liability to which such person may become subject or which such
person may incur by reason of his or her status as a present or former director
or officer of the Registrant. The Registrant's Bylaws 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 director 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
director of the Registrant and at the request of the Registrant, serves or has
served another corportion, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise as a director,
trustee, officer or partner of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise
and who is made a party to the proceeding by reason of his service in that
capacity, against any claim or liability to which he may become subject by
reason of such status. The Registrant's Articles of Incorporation and Bylaws
also permit the Registrant to indemnify and advance expenses to any person who
served a predecessor of the Registrant in any of the capacities described above
and to any employee or agent of the Registrant or a predecessor of the
Registrant. The Registrant's Bylaws require the Registrant to indemnify a
director 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 General Corporation Law, as amended, permits a Maryland
corporation to indemnify and advance expenses to its directors, officers,
employees and agents, and permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under the Maryland General Corporation Law, a Maryland corporation may not
indemnify a director or officer in a suit by or in the right of the corporation
if such director or officer has been adjudged to be liable to the corporation.
In accordance with the Maryland General Corporation Law, the Registrant's
Bylaws require it, as a condition to advancing expenses, to obtain (1) 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 Registrant
as authorized by the
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Registrant's Bylaws and (2) a written statement by or on his behalf to repay
the amount paid or reimbursed by the Registrant if it shall ultimately be
determined that the standard of conduct was not met.
The Registrant has entered into indemnification agreements with each of its
directors and officers. The indemnification agreements require, among other
things, that the Registrant indemnify its directors and officers to the fullest
extent permitted by law and advance to its directors and officers all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted.
The Second Amended and Restated Agreement of Limited Partnership of Host
Marriott, L.P., as amended, also provides for indemnification of the Registrant
and its officers and directors to the same extent that indemnification is
provided to officers and directors of the Registrant in its Articles of
Incorporation, and limits the liability of the Registrant and its officers and
directors to Host Marriott, L.P. and its respective partners to the same extent
that the liability of the officers and directors of the Registrant to the
Registrant and its stockholders is limited under the Articles of Incorporation.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Item 16. Exhibits
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<C> <S>
3.1* Bylaws of the Registrant dated December 29, 1998
3.2** Articles of Amendment and Restatement of Articles of Incorporation
of the Registrant
3.3*** Articles Supplementary of the Registrant Classifying and Designating
a Series of Preferred Stock as Series A Junior Participating
Preferred Stock and Fixing Distribution and Other Preferences and
Rights of Such Series
4.1**** Articles Supplementary of the Registrant Classifying and Designating
Preferred Stock of the Registrant as 10% Class A Cumulative
Redeemable Preferred Stock
4.2***** Articles Supplementary of the Registrant Classifying and Designating
Preferred Stock of the Registrant as 10% Class B Cumulative
Redeemable Preferred Stock
5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
securities being registered
8.1 Opinion of Hogan & Hartson L.L.P. regarding specified tax matters
12.1 Ratio of earnings to combined fixed charges and preferred stock
dividends
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP, independent public accountants
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)
24.1# Power of Attorney (included in signature page)
</TABLE>
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* Incorporated herein by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K (Registration No. 001-14625) filed with the
Commission on December 30, 1999
** Incorporated herein by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-64793)
*** Incorporated herein by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form 8-A (Registration No. 001-14625) filed
with the Commission on December 11, 1998
**** Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A (Registration No. 001-14625) filed with the
Commission on July 30, 1999
***** Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A (Registration No. 001-14625) filed with the
Commission on November 23, 1999
# Previously filed.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
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(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in this registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in this registration statement.
(2) That, 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 herein, and the
offering of such Securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby further undertakes that, for the purposes
of determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the Securities offered herein, and the offering of such Securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
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 described under Item 15 of this
registration statement, or otherwise (other than insurance), the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such 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 whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the
final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Bethesda, Maryland, on December 30, 1999.
HOST MARRIOTT CORPORATION
/s/ Robert E. Parsons, Jr.
By: _________________________________
Robert E. Parsons, Jr.
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated as of December 30, 1999:
<TABLE>
<S> <C>
* President, Chief Executive Officer and
___________________________________________ Director (principal executive officer)
Terence C. Golden
* Executive Vice President and Chief
___________________________________________ Financial Officer (principal financial
Robert E. Parsons, Jr. officer)
* Senior Vice President and Corporate
___________________________________________ Controller (principal accounting officer)
Donald D. Olinger
* Chairman of the Board of Directors
___________________________________________
Richard E. Marriott
* Director
___________________________________________
R. Theodore Ammon
* Director
___________________________________________
Robert M. Baylis
* Director
___________________________________________
J.W. Marriott, Jr.
* Director
______________________________________
Ann Dore McLaughlin
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
* Director
______________________________________
Christopher J. Nassetta
* Director
______________________________________
John G. Schreiber
* Director
______________________________________
Harry L. Vincent, Jr.
</TABLE>
/s/ Christopher G. Townsend
*By: _______________________
Christopher G. Townsend
Attorney-in-fact
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
3.1* Bylaws of the Registrant dated December 29, 1998
3.2** Articles of Amendment and Restatement of Articles of Incorporation
of the Registrant
3.3*** Articles Supplementary of the Registrant Classifying and Designating
a Series of Preferred Stock as Series A Junior Participating
Preferred Stock and Fixing Distribution and Other Preferences and
Rights of Such Series
4.1**** Articles Supplementary of the Registrant Classifying and Designating
Preferred Stock of the Registrant as 10% Class A Cumulative
Redeemable Preferred Stock
4.2***** Articles Supplementary of the Registrant Classifying and Designating
Preferred Stock of the Registrant as 10% Class B Cumulative
Redeemable Preferred Stock
5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
securities being registered
8.1 Opinion of Hogan & Hartson L.L.P. regarding specified tax matters
12.1 Ratio of earnings to combined fixed charges and preferred stock
dividends
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP, independent public accountants
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)
24.1# Power of Attorney (included in signature page)
</TABLE>
- --------
* Incorporated herein by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K (Registration No. 001-14625) filed with the
Commission on December 30, 1999
** Incorporated herein by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-64793)
*** Incorporated herein by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form 8-A (Registration No. 001-14625) filed
with the Commission on December 11, 1998
**** Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A (Registration No. 001-14625) filed with the
Commission on July 30, 1999
***** Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A (Registration No. 001-14625) filed with the
Commission on November 23, 1999
# Previously filed.
<PAGE>
Exhibit 5.1
[HOGAN & HARTSON L.L.P. LETTERHEAD]
December 30, 1999
Board of Directors
Host Marriott Corporation
10400 Fernwood Drive
Bethesda, Maryland 20814
Ladies and Gentlemen:
We are acting as counsel to Host Marriott Corporation, a Maryland
corporation (the "Company"), in connection with its registration statement on
Form S-3, as amended (the "Registration Statement"), filed with the Securities
and Exchange Commission and relating to the issuance of up to 16,859,003 shares
of the Company's common stock, par value $.01 per share (together with the
Rights (as defined below), the "Shares"), and up to 16,859,003 associated
preferred stock purchase rights (the "Rights") to be issued pursuant to the
Rights Agreement (as defined below), which may occur, at the election of the
Company, in connection with the redemption of up to 16,859,003 units of limited
partnership interest ("OP Units") of Host Marriott, L.P., a Delaware limited
partnership (the "Partnership"), pursuant to the terms of the Partnership
Agreement (as defined below). This opinion letter is furnished to you at your
request to enable you to fulfill the requirements of Item 601(b)(5) of
Regulation S-K, 17 C.F.R. (S) 229.601(b)(5), in connection with the Registration
Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. The Articles of Amendment and Restatement of Articles of
Incorporation of the Company (together with the Articles
Supplementary (as defined below), the "Articles of
Incorporation"), as certified by the Maryland State Department of
Assessments and Taxation ("SDAT") on December 27, 1999 and the
Assistant Secretary of the Company on the date hereof as being
complete, accurate and in effect.
<PAGE>
Board of Directors
Host Marriott Corporation
December 30, 1999
Page 2
3. Articles Supplementary to the Articles of Amendment and
Restatement of Articles of Incorporation of the Company (the
"Articles Supplementary"), as certified by the SDAT on December
27, 1999 and the Assistant Secretary of the Company on the date
hereof as being complete, accurate and in effect.
4. The Certificate of Limited Partnership of the Partnership, as
amended, as certified by the Secretary of State of the State of
Delaware on December 28, 1999 and the Assistant Secretary of the
Company, as general partner of the Partnership, on the date
hereof, as being complete, accurate and in effect.
5. The Bylaws of the Company dated as of December 29, 1998, as
certified by the Secretary of the Company on the date hereof as
being complete, accurate and in effect.
6. An executed copy of the Second Amended and Restated Agreement of
Limited Partnership of the Partnership dated as of December 30,
1998, as amended (the "Partnership Agreement"), as certified by
the Assistant Secretary of the Company, as general partner of the
Partnership, on the date hereof, as being complete, accurate and
in effect.
7. An executed copy of the Rights Agreement dated as of November 23,
1998 between the Company and Bank of New York, as rights agent
(the "Rights Agent"), and Amendment No. 1 to Rights Agreement
dated as of December 18, 1998 between the Company and the Rights
Agent (collectively, the "Rights Agreement").
8. Certain resolutions of the Board of Directors of the Company
adopted by unanimous written consent on September 28, 1998, as
certified by the Assistant Secretary of the Company on the date
hereof as being complete, accurate and in effect, relating to,
among other things, the authorization for the issuance of the
Shares (other than for the issuance to the former limited
partners of the Private Partnerships (as defined below) or their
transferees) and
2
<PAGE>
Board of Directors
Host Marriott Corporation
December 30, 1999
Page 3
arrangements in connection therewith.
9. Certain resolutions of the Board of Directors of the Company
adopted at a special meeting of the Board held on November 23,
1998, as certified by the Assistant Secretary of the Company on
the date hereof as being complete, accurate and in effect
relating to, among other things, the execution of the Rights
Agreement.
10. Certain resolutions of the Board of Directors of the Company
adopted at a special meeting of the Board held on December 18,
1998, as certified by the Assistant Secretary of the Company on
the date hereof as being complete, accurate and in effect
relating to, among other things, approval of the execution of
Amendment No. 1 to the Rights Agreement.
In our examination of the aforesaid certificates, documents and
agreements, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the accuracy and completeness of all documents
submitted to us, the authenticity of all original documents, and the conformity
to authentic original documents of all documents submitted to us as copies
(including telecopies). We have assumed that (i) the Rights Agent has all
requisite power and authority under all applicable laws, regulations and
governing documents to execute, deliver and perform its obligations under the
Rights Agreement, (ii) the Rights Agent has duly authorized, executed and
delivered the Rights Agreement, (iii) the Rights Agent is validly existing and
in good standing in all necessary jurisdictions, (iv) the Rights Agreement
constitutes a valid and binding obligation, enforceable against the Rights Agent
in accordance with its terms, (v) there has been no material mutual mistake of
fact or misunderstanding or fraud, duress or undue influence in connection with
the negotiation, execution or delivery of the Rights Agreement and (vi) the
Rights will be issued in accordance with the Rights Agreement. In addition, we
further have assumed that (i) the Board of Directors of the Company will have
approved the issuance of the Shares upon redemption of the OP Units held by
former limited partners of Ivy Street Hotel Limited Partnership, HMC/RGI
Hartford, L.P., Times Square Marquis Hotel, L.P. and HMC BN Limited Partnership
(the "Private Partnerships") or their transferees prior to the issuance of any
such Shares to such former limited partners or transferees and (ii) none of the
Shares are issued in violation of the ownership limit contained in the Articles
of
3
<PAGE>
Board of Directors
Host Marriott Corporation
December 30, 1999
Page 4
Incorporation. This opinion letter is given in the context of the foregoing.
This opinion letter is based as to matters of law solely on the
Maryland General Corporation Law, as amended. We express no opinion herein as
to any other laws, statutes, ordinances, rules or regulations. As used herein,
the term "Maryland General Corporation Law, as amended" includes the statutory
provisions contained therein, all applicable provisions of the Maryland
Constitution and reported judicial decisions interpreting these laws.
Based upon, subject to and limited by the foregoing, we are of the
opinion that, assuming that the Shares are issued in accordance with the
Partnership Agreement, the Shares will be validly issued, fully paid and
nonassessable.
The opinion set forth above, insofar as it relates to the Rights, is
limited to the valid issuance of the Rights under Maryland law.
This opinion letter has been prepared for your use in connection with
the Registration Statement and speaks as of the date hereof. We assume no
obligation to advise you of any changes in the foregoing subsequent to the
delivery of this opinion letter.
We hereby consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
HOGAN & HARTSON L.L.P.
4
<PAGE>
Exhibit 8.1
[HOGAN & HARTSON L.L.P. LETTERHEAD]
December 30, 1999
Host Marriott Corporation
10400 Fernwood Road
Bethesda, MD 20817
Ladies and Gentlemen:
We have acted as special tax counsel to Host Marriott Corporation, a
Maryland corporation ("Host REIT"), and Host Marriott, L.P., a Delaware limited
partnership (the "Operating Partnership"), in connection with the registration
by Host REIT of 16,859,003 shares of its common stock, par value $0.01, as
described more fully in the Registration Statement on Form S-3 (Registration No.
333-93157) filed with the Securities and Exchange Commission (the "Registration
Statement," which includes the "Prospectus" of Host REIT) on December 21, 1999.
In connection with such registration, you have requested our opinion as to
certain federal income tax matters set forth in this letter. Capitalized terms
used in this letter, unless otherwise defined herein, shall have the same
meaning as set forth in the Prospectus.
Bases for Opinions
The opinions set forth in this letter are based on relevant current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including proposed and temporary Treasury
Regulations), and interpretations of the foregoing as expressed in court
decisions, applicable legislative history, and the administrative rulings and
practices of the Internal Revenue Service (the "IRS"), including its practices
and policies in issuing private letter rulings, which are not binding on the IRS
except with respect to a taxpayer that receives such a ruling, all as of the
date hereof. These provisions and interpretations are subject to change, which
may or may not be retroactive in effect, that might result in material
modifications of our opinions. Our opinions do not foreclose the possibility of
a contrary determination by the IRS or a court of competent jurisdiction, or of
a contrary position taken by the IRS or the Treasury Department in regulations
or rulings issued in the future. In this regard, an opinion of counsel with
respect to an issue merely represents counsel's best judgment with respect to
the outcome on the merits with respect to such issue, is not binding on the IRS
or the courts, and is not a guarantee that the IRS will not assert a contrary
<PAGE>
Host Marriott Corporation
December 30, 1999
Page 2
position with respect to such issue or that a court will not sustain such a
position asserted by the IRS.
In rendering the following opinions, we have examined such statutes,
regulations, records, agreements, certificates and other documents as we have
considered necessary or appropriate as a basis for the opinions, including the
following:
(1) the Registration Statement and the Prospectus;
(2) the Second Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated as of December 30, 1998, as amended through the
date hereof;
(3) the Articles of Amendment and Restatement of Articles of Incorporation
of Host REIT, filed with the State Department of Assessments and Taxation of
Maryland on December 29, 1998, and the Bylaws of Host REIT, as amended;
(4) the Articles of Incorporation of Crestline Capital Corporation, a
Maryland corporation ("Crestline"), dated November 9, 1998, and the Bylaws of
Crestline;
(5) the partnership agreement of each partnership and the operating
agreement of each limited liability company in which either Host REIT or the
Operating Partnership has a direct or indirect interest;
(6) all real estate leases on the hotels in which the Operating Partnership
has a direct or, through a Subsidiary Partnership (as such term is defined
herein), an indirect interest (the "Hotels") and pursuant to which the Operating
Partnership or a Subsidiary Partnership, as lessor or sub-lessor, leases a hotel
to a lessee or sub-lessee, respectively, the majority of which Hotels are leased
to subsidiaries of Crestline (the "Lessees") (collectively, the "Leases," which
term includes, without limitation, the lease of the Marriott Harbor Beach Resort
from Lauderdale Beach Association to Marriott Hotel Services, Inc. (the "Harbor
Beach Lease")), and the term sheet for each Lease (for purposes of this letter,
"Subsidiary Partnership" means each partnership, limited liability company or
other entity treated as a partnership for federal income tax purposes in which
either Host REIT or the Operating Partnership has a direct or indirect
interest);
<PAGE>
Host Marriott Corporation
December 30, 1999
Page 3
(7) the Certificate of Incorporation, dated December 3, 1998, and the
Bylaws, dated December 14, 1998, of Fernwood Hotel Assets, Inc. ("Fernwood"),
and the Amended and Restated Certificate of Incorporation, dated December 3,
1998, and the Bylaws, dated December 14, 1998, of Rockledge Hotel Properties,
Inc. ("Rockledge," and together with Fernwood and any other similarly structured
corporation, the "Non-Controlled Subsidiaries");
(8) the Declaration of Trust for the Host Marriott Statutory
Employee/Charitable Trust, a Delaware business trust (the "Host
Employee/Charitable Trust"), dated December 30, 1998, and the Declaration of
Trust for the Host Marriott Employees' Trust, a common law trust formed under
Maryland law, dated December 30, 1998;
(9) the Consent, Assignment, Assumption and Amendment of Management
Agreement entered into by and among the owner of each Hotel, the lessee under
the applicable Lease (other than the Harbor Beach Lease), and the manager of the
Hotel, which agreement relates to the impact of the applicable Lease and
management agreement on the relationship among the parties to the agreement (the
"Owners Agreement");
(10) with respect to each class or series of preferred stock of Host REIT,
the Articles Supplementary to the Articles of Amendment and Restatement of
Articles of Incorporation of Host REIT establishing and fixing the rights and
preferences of such class or series of preferred stock; and
(11) any other documents as we deemed necessary or appropriate.
The opinions set forth in this letter also are premised on certain written
factual representations of Host REIT and the Operating Partnership regarding the
organization, ownership and operations (including the income, assets,
businesses, liabilities, properties and accumulated undistributed earnings and
profits) of Host REIT, the Operating Partnership, the Subsidiary Partnerships,
the Non-Controlled Subsidiaries, the Host Employee/Charitable Trust, and
Crestline and the Lessees contained in a letter to us dated November 29, 1999,
(the "Representation Letter") which representations were confirmed as true and
accurate, as of December 30,1999, in a letter from Host REIT and the Operating
Partnership to us dated December 30,1999.
<PAGE>
Host Marriott Corporation
December 30, 1999
Page 4
For purposes of rendering our opinions, we have not made an independent
investigation or audit of the facts set forth in any of the above-referenced
documents, including the Registration Statement, the Prospectus or the
Representation Letter. We consequently have relied upon representations in the
Representation Letter and upon the assumption that the information presented in
such documents or otherwise furnished to us is accurate and complete in all
material respects. We are not aware, however, of any material facts or
circumstances contrary to, or inconsistent with, the representations we have
relied upon as described herein, or other assumptions set forth herein.
In this regard, we have assumed with your consent the following:
(i) that all of the representations and statements set forth in the
documents that we reviewed (including the Representation Letter) (collectively,
the "Reviewed Documents") are true and correct and will continue to be true and
correct, that any representation or statement made as a belief or made "to the
knowledge of" or similarly qualified is correct and accurate and will continue
to be correct and accurate without such qualification, each of the Reviewed
Documents that constitutes an agreement is valid and binding in accordance with
its terms, and that all of the obligations imposed by the Reviewed Documents on
the parties thereto have been and will continue to be performed or satisfied in
accordance with their terms;
(ii) the genuineness of all signatures, the proper execution of all
documents, the authenticity of all documents submitted to us as originals, the
conformity to originals of documents submitted to us as copies, and the
authenticity of the originals from which any copies were made;
(iii) that any documents as to which we have reviewed only a form were or
will be duly executed without material changes from the form reviewed by us;
(iv) that each of Host REIT, the Operating Partnership, the Subsidiary
Partnerships, Crestline, the Non-Controlled Subsidiaries, and the Lessees has
been and will continue to be operated in the manner described in the relevant
partnership agreement, limited liability company operating agreement, articles
of incorporation or other organizational documents and in the Prospectus, and
that the Host Employee/Charitable Trust has been and will continue to be
operated in the manner described in its declaration of trust and in the
Prospectus;
<PAGE>
Host Marriott Corporation
December 30, 1999
Page 5
(v) that each of Host REIT, the Operating Partnership, the Subsidiary
Partnerships, Crestline, the Non-Controlled Subsidiaries, the Lessees, and the
Host Employee/Charitable Trust was duly incorporated or organized and is and
will continue to be validly existing under the applicable law;
(vi) as represented by Host REIT and the Operating Partnership, that each
of the Leases has been and will continue to be enforced at all times in
accordance with its terms, and that each of the lessors and lessees under the
Leases has acted and will continue to act at all times in accordance with the
terms thereof;
(vii) that the lessor and lessee under each Lease have not entered and
will not enter into any agreement with a secured lender that would have the
effect of negating their respective rights and responsibilities as landlord and
tenant pursuant to such Lease;
(viii) as represented by Host REIT and the Operating Partnership, that
there are and will be no agreements or understandings between Host REIT or the
Operating Partnership, on the one hand, and the Host Employee/Charitable Trust,
which owns 100% of the voting stock of each Non-Controlled Subsidiary, or either
of the Non-Controlled Subsidiaries themselves, on the other hand, that are
inconsistent with the Host Employee/Charitable Trust being considered to be both
the record and beneficial owner of more than 90% of the outstanding voting stock
of each of the Non-Controlled Subsidiaries; and
(ix) as represented by Host REIT and the Operating Partnership, no member
of the Marriott family, or any entity in which any member of the Marriott family
owns an interest, nor any other shareholder of Host REIT owns or will own
(determined by taking into account the attribution rules under Section 318(a) of
the Code, as modified by Section 856(d)(5) of the Code) more than 9.9% by value
of Host REIT.
Any variation or difference in the facts from those set forth in the
documents that we have reviewed and upon which we have relied (including, in
particular, the Registration Statement, the Prospectus and the Representation
Letter) may adversely affect the conclusions stated herein.
<PAGE>
Host Marriott Corporation
December 30, 1999
Page 6
Opinions
Based upon, subject to, and limited by the assumptions and qualifications
set forth herein (including those set forth below), we are of the opinion that:
1. Host REIT is organized in conformity with the requirements for
qualification and taxation as a REIT under the Code, effective for its taxable
year beginning January 1, 1999, and Host REIT's current and proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code for taxable year 1999 and thereafter.
2. The Leases will be respected as leases for federal income tax purposes.
3. The discussion in the Prospectus under the heading "Federal Income Tax
Consequences," to the extent that it describes provisions of federal income tax
law, is correct in all material respects.
* * * * *
Host REIT's ability to qualify as a REIT depends in particular upon whether
each of the Leases is respected as a lease for federal income tax purposes. If
one or more Leases are not respected as leases for federal income tax purposes,
Host REIT may fail to qualify as a REIT. The determination of whether the Leases
are leases for federal income tax purposes is highly dependent on specific facts
and circumstances. In addition, for the rents payable under a Lease to qualify
as "rents from real property" under the Code, the rental provisions of the
Leases and the other terms thereof must conform with normal business practice
and not be used as a means to base the rent paid on the income or profits of the
lessees. In delivering the opinions set forth above that Host REIT's current and
proposed method of operation (as described in the Representation Letter) will
enable Host REIT to meet the requirements for qualification and taxation as a
REIT for its taxable year commencing January 1, 1999 and subsequent taxable
years, and that the Leases will be respected as leases for federal income tax
purposes, we expressly rely upon, among other things, Host REIT's
representations as to various factual matters with respect to the Leases,
including representations as to the commercial reasonableness of the economic
and other terms of the Leases, the intent and economic expectations of the
parties to the Leases, the allocation of various economic risks between the
parties to the Leases, taking into account all
<PAGE>
Host Marriott Corporation
December 30, 1999
Page 7
surrounding facts and circumstances, the conformity of the rental provisions and
other terms of the Leases with normal business practice, the conduct of the
parties to the Leases, and the conclusion that, except in connection with the
Harbor Beach Lease and any other leases that Host REIT acknowledges will not
qualify as producing "rent from real property" under the Code, such terms are
not being used as a means to base the rent paid on the income or profits of the
lessees. We express no opinion as to any of the economic terms of the Leases,
the commercial reasonableness thereof, or whether the actual economic
relationships created thereby are such that the Leases will be respected for
federal income tax purposes or whether the rental and other terms of the Leases
conform with normal business practice (and are not being used as a means to base
the rent paid on the income or profits of the lessees).
Host REIT's ability to qualify as a REIT for its taxable year commencing
January 1, 1999 also depends upon Host REIT not having as of December 31, 1999
any "earnings and profits" accumulated in any prior taxable year of Host REIT or
any of its predecessors or subsidiaries (which would be based on the
consolidated earnings and profits of Host REIT (including each of its
predecessors) accumulated from 1929, the first year that a predecessor of Host
REIT was a "C" corporation, through and including 1998). The calculation of
"earnings and profits" depends upon a number of factual and legal
interpretations related to the activities and operations of Host REIT's
predecessors and their corporate affiliates during their entire corporate
existence and is subject to review and challenge by the IRS. Host REIT has
represented to us for purposes of our opinions that Host REIT will have
distributed by the close of its taxable year commencing January 1, 1999 any
"earnings and profits" accumulated in any prior taxable year of Host REIT or any
of its predecessors or subsidiaries. There can be no assurance, however, that
the IRS will not examine the tax returns of Host REIT's predecessors and their
affiliates for all years prior to 1999 and propose adjustments to increase their
taxable income, which could result in Host REIT being considered to have
undistributed "earnings and profits" at the close of its taxable year commencing
January 1, 1999, in which event Host REIT would not qualify as a REIT for such
year. We express no opinion as to Host REIT's current and accumulated "earnings
and profits" or whether Host REIT will be considered to have undistributed
"earnings and profits" at the close of 1999.
Host REIT's qualification and taxation as a REIT depends upon Host REIT's
ability to meet on an ongoing basis (through actual annual operating results,
distribution levels, diversity of share ownership and otherwise) the various
<PAGE>
Host Marriott Corporation
December 30, 1999
Page 8
qualification tests imposed under the Code and described in Prospectus. We have
relied upon representations of Host REIT and the Operating Partnership with
respect to these matters (including those set forth in the Registration
Statement, the Prospectus and the Representation Letter) and will not review
Host REIT's compliance with these requirements on a continuing basis.
Accordingly, no assurance can be given that the actual results of Host REIT's
operations, the sources of its income, the nature of its assets, the level of
its distributions to shareholders and the diversity of its share ownership for
any given taxable year will satisfy the requirements under the Code for
qualification and taxation as a REIT.
For a discussion relating the law to the facts, and the legal analysis
underlying the opinions set forth in this letter, we incorporate by reference
the discussion of federal income tax issues in the section of the Prospectus
under the heading "Federal Income Tax Consequences."
We assume no obligation to advise you of any changes in our opinions
subsequent to the delivery of this opinion letter.
This opinion letter addresses only the specific federal income tax matters
set forth above and does not address any other federal, state, local or foreign
tax issues. This opinion letter has been prepared for your benefit in
connection with the filing of the Registration Statement. This opinion letter
may not be used or relied upon by any other person or for any other purpose and
may not be disclosed, quoted, filed with any governmental agency or otherwise
referred to without our prior written consent. We hereby consent to the filing
of this opinion letter as an exhibit to the Registration Statement and to the
references to Hogan & Hartson L.L.P. under the captions "Legal Matters" and
"Federal Income Tax Consequences" in the Registration Statement. In giving this
consent, we do not thereby admit that we are an expert within the meaning of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
EXHIBIT 12.1
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(in millions, except ratio amounts)
<TABLE>
<CAPTION>
Pro Forma Historical
-------------- ------------------------------------
Third Fiscal Third Fiscal Year
Quarter Year Quarter ----------------------------
1999 1998 1999 1998 1997 1996 1995 1994
------- ------ ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from operations
before income taxes...... $126 $100 $137 $174 $ 83 $ (8) $(75) $(16)
Add (deduct):
Fixed charges........... 359 530 355 415 364 283 206 184
Capitalized interest.... (4) (4) (4) (4) (1) (3) (5) (10)
Amortization of
capitalized interest... 4 6 4 6 5 7 6 8
Net gains (losses)
related to certain 50%
or less owned
affiliate.............. 2 (1) 2 (1) (1) 1 2 5
Minority interest in
consolidated
affiliates............. 61 51 61 52 31 6 2 1
---- ---- ----- ---- ---- ---- ---- ----
Adjusted earnings....... $548 $682 $555 $642 $481 $286 $136 $172
==== ==== ===== ==== ==== ==== ==== ====
Fixed charges:
Interest on indebtedness
and amortization of
deferred financing
costs.................. $292 $434 $298 $335 $288 $237 $178 $165
Dividends on preferred
stock
Class A............... 7 10 1 -- -- -- -- --
Class B............... 7 10 -- -- -- -- -- --
Dividends on convertible
preferred securities of
subsidiary trust....... 23 33 26 37 37 3 -- --
Portion of rents
representative of the
interest factor........ 30 43 30 43 39 33 17 11
Debt service guarantee
interest expense of
unconsolidated
affiliates............. -- -- -- -- -- 10 11 8
---- ---- ----- ---- ---- ---- ---- ----
Total fixed charges and
preferred stock
dividends.............. $359 $530 $355 $415 $364 $283 $206 $184
==== ==== ===== ==== ==== ==== ==== ====
Ratio of earnings to
combined fixed charges
and preferred stock
dividends................ 1.53x 1.29x 1.56x 1.55x 1.32x 1.01x -- --
Deficiency of earnings to
combined fixed charges
and preferred stock
dividends................ -- -- -- -- -- -- 70 12
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated March 5, 1999
included in Host Marriott Corporation's Form 10-K for the year ended December
31, 1998 and to all references to our Firm included in this registration
statement.
Arthur Andersen LLP
Vienna, VA
December 29, 1999
