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As filed with the Securities and Exchange Commission on December 15, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 governing instrument)
Maryland 53-0085950
(State of Organization) (I.R.S. Employer
Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817-1109
301-380-9000
(Address and telephone number of principal executive offices)
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Christopher G. Townsend, Esq.
Senior Vice President and General Counsel
10400 Fernwood Road
Bethesda, Maryland 20817-1109
301-380-9000
(Name, address and telephone number 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 proposed sale to the public: From time
to time after this registration statement becomes effective.
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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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Class of Aggregate Price Aggregate Amount of
Securities Being Amounts to be per Common Offering Registration
Registered Registered Stock(1) Price(1) Fee(1)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share(2)..... 26,235 $11.8125 $309,901 $82
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</TABLE>
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(1) Determined pursuant to Rule 457(f) under the Securities Act of 1933.
(2) Includes associated rights to purchase shares of Series A Junior
Participating Preferred Stock of the Registrant.
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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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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. This +
+prospectus is not an offer to sell the common stock and is not soliciting an +
+offer to buy the stock in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 15, 2000
PROSPECTUS
26,235 Shares
Host Marriott Corporation
Common Stock
This prospectus relates to 26,235 shares of common stock that we may elect to
issue to the holders of 26,235 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 will be issued to holders of
Series AM Preferred OP Units if they elect to convert their Series AM Preferred
OP Units into OP Units. On December 23, 1999, the partners in Hopewell Group,
Ltd. received Series AM Preferred OP Units in exchange for their partnership
interests in Hopewell in a transaction in which one of our wholly owned
subsidiaries acquired all of the outstanding partnership interests in Hopewell.
The Series AM Preferred OP Units are convertible into OP Units on a one-for-one
basis and the OP Units are redeemable beginning on December 23, 2000.
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 26,235 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 4 in this prospectus
and those incorporated by reference from our Form 10-K for factors relevant to
an investment in the common stock, including special considerations applicable
to redeeming holders of OP Units.
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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 , 2000
<PAGE>
You should rely on the information provided in or incorporated by reference
into 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>
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Page
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Prospectus Summary........................................................ 1
Forward-looking statements.............................................. 1
The company............................................................. 2
The offering............................................................ 3
Important risks in owning our common stock.............................. 3
Tax status of the company............................................... 3
Risk Factors.............................................................. 4
Risks relating to redemption of OP Units................................ 4
Redemption of OP Units.................................................... 5
General................................................................. 5
Federal income tax consequences of redemption........................... 5
Comparison of Ownership of OP Units and Common Stock...................... 7
Federal Income Tax Consequences........................................... 19
Introduction............................................................ 19
Federal income taxation of Host Marriott................................ 19
Taxation of taxable U.S. stockholders generally......................... 33
Backup withholding for Host Marriott's distributions.................... 34
Taxation of tax-exempt stockholders..................................... 35
Taxation of non-U.S. stockholders....................................... 35
Tax aspects of Host Marriott's ownership of interests in the operating
partnership............................................................ 38
Other tax consequences for Host Marriott and its stockholders........... 41
Plan of Distribution...................................................... 42
Legal Matters............................................................. 42
Experts................................................................... 42
About This Prospectus..................................................... 42
Where You Can Find More Information....................................... 43
</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 our
conversion to a real estate investment trust, or REIT. 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 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 degree of leverage which may affect our ability to obtain financing
in the future or maintain compliance with current debt covenants;
. 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");
. 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
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. other factors discussed under the heading "Risk Factors" in this
prospectus and in our filings with the Securities and Exchange
Commission.
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 122 hotels, containing approximately 58,000 rooms located
throughout the United States and in Toronto and Calgary, Canada. These hotels
are generally operated under the Marriott, Ritz-Carlton, Four Seasons,
Swissotel, Hyatt and Hilton brand names. 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.
Crestline and Marriott International are both publicly traded companies,
separate from Host Marriott.
Under the REIT Modernization Act, beginning January 1, 2001, we will be
permitted to 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." On November 13, 2000, the operating partnership and Crestline
announced the execution of a definitive agreement for the purchase and sale of
the entities owning the leasehold interest with respect to 117 full-service
hotel properties owned by us. Under the terms of the transaction, a wholly
owned subsidiary of the operating partnership, which will elect to be treated
as a taxable REIT subsidiary, will purchase the Crestline subsidiaries, whose
primary assets are the leasehold interests, for approximately $205 million, of
which approximately $120 million, net of income taxes, will be recorded as a
non-recurring loss on the acquisition.
Our principal executive offices are located at 10400 Fernwood Road,
Bethesda, Maryland 20817-1109, and our telephone number is (301) 380-9000.
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The offering
This prospectus relates to 26,235 shares of our common stock that we may
elect to issue to the holders of 26,235 OP Units upon tender of such OP Units
for redemption. These OP Units will be issued to holders of Series AM Preferred
OP Units if they elect to convert their Series AM Preferred OP Units into OP
Units. On December 23, 1999, the partners in Hopewell Group, Ltd. received
Series AM Preferred OP Units in exchange for their partnership interests in
Hopewell in a transaction in which a wholly owned subsidiary of ours acquired
all of the outstanding partnership interests in Hopewell.
On December 23, 2000, holders of Series AM Preferred OP Units issued in
connection with the exchange offer will become eligible to convert their Series
AM Preferred OP Units into OP Units, which OP Units can be redeemed 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
4 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 our
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 are subject to corporate income taxes, and any taxable
REIT subsidiaries that we form also will be subject to corporate income taxes.
See "Federal Income Tax Consequences" for a more detailed explanation.
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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 risks relating
to redemption of OP Units. For risks relating to (1) ownership of our common
stock, including change in control provisions and limitations on ownership of
our common stock; (2) risks of operation, including our dependence on the
lessees and managers of our hotels, our lack of control of assets held by the
non-controlled subsidiaries, our substantial indebtedness and specific
restrictions on selling or refinancing some of our hotels; and (3) federal
income tax risks, including making required distributions and payments, adverse
consequences of failure to qualify as a REIT, treatment of our leases and our
other tax liabilities, see "Risk Factors" in our Form 10-K.
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 or cash 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 disguised sale rules generally provide 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
constitute a taxable sale of the contributed property unless the facts and
circumstances clearly establish that the transfers do not constitute a sale. On
the other hand, if two years have passed between the original contribution of
property to the partnership and the transfer of money or other consideration
from the partnership to the partner, the transactions will not be presumed to
constitute a taxable sale unless the facts and circumstances clearly establish
that they should be treated in such a manner.
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."
Our fiduciary duties, as the general partner, and our Board of Directors are
possibly different. We, as the general partner of the operating partnership,
and our Board of Directors, respectively, owe fiduciary duties to our
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 our directors to our shareholders may be less than ours, as the general
partner of the operating partnership, to the limited partners of the operating
partnership.
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REDEMPTION OF OP UNITS
General
Each holder of OP Units issued in connection with the exchange offer
described under "Prospectus Summary--The 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 fair market value of the OP
Units to be redeemed. The fair 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 fair 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 satisfied, and the
remainder was 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 to the extent 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 exceeds the holder's adjusted
tax basis in his OP Units.
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
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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.
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.
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, subject to the exception with regard to
"unrecaptured Section 1250 gain" described herein, 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 ("unrecaptured Section 1250 gain").
A holder of OP Units who has held his OP Units for more than one year prior to
the disposition of those OP Units will be subject to the 25% capital gain tax
rate on his share of the Partnership's "unrecaptured section 1250 gain." The
amount of "unrecaptured Section 1250 gain" that a partner must recognize upon
the disposition of his partnership interest is his share of the amount that
would result if his partnership had transferred all of its Section 1250
property in a fully taxable transaction immediately prior to the disposition of
his partnership interest.
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.
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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.
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OPERATING PARTNERSHIP HOST MARRIOTT
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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
Uniform Limited Partnership Act, provided made an election to be taxed as a REIT
that such business is conducted in such a under the Internal Revenue Code effective
manner as to permit Host Marriott at all for 1999 and intends to maintain its
times to be qualified as a REIT under the qualification as a REIT. Host Marriott's
Internal Revenue Code. The operating only significant asset is its interest in
partnership and its subsidiaries own 122 the operating partnership and consequently
full-service hotels operating primarily an indirect investment in the hotels owned
under the Marriott, Ritz-Carlton, Four by the operating partnership and its
Seasons, Swissotel, Hyatt and Hilton brand subsidiaries.
names. The 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 122
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.
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<TABLE>
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OPERATING PARTNERSHIP HOST MARRIOTT
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<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 Uniform
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.
8
<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. Generally, the operating not fixed in amount and are only paid if,
partnership is not subject to federal when and as declared by the Board of
income tax; instead, each holder of OP Directors of Host Marriott. In order to
Units is allocated, and will be subject to qualify as a REIT, Host Marriott currently
tax on, his share of each item of the must distribute at least 95% of its taxable
operating partnership's income, gain, loss, income (excluding capital gains), and will
deduction or credit, whether or not the have to distribute 90% of this amount in
holder receives a cash distribution from years beginning after December 31, 2000.
the operating partnership. A sale by the Any taxable income (including capital
holder of his OP Units will generally gains) not distributed will be subject to
result in a capital gain or capital loss to corporate income tax. Generally, a holder
the holder if he has held his OP Units as a of Host Marriott shares will be subject to
capital asset, except to the extent that a federal income tax only to the extent he
portion of the holder's OP Units is deemed receives, or is deemed to receive, ordinary
attributable to the holder's share of and capital gain dividends from Host
certain ordinary income items of the Marriott. A holder of Host Marriott shares
operating partnership. may not include in his individual income
tax return any net operating losses or
capital losses of Host Marriott, which
losses may be utilized by Host Marriott,
subject to certain limitations, to offset
its future taxable income. A sale by the
holder of his Host Marriott shares will
result in a capital gain or capital loss to
the holder if he has held his shares as a
capital asset.
</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 122 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 122 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 122 hotels.
9
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
----------------------------------------------------------------------------------------
<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.
<TABLE>
<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. See "Risk Factors" in our Form
10-K for risks related to our substantial
indebtedness.
</TABLE>
In conducting its business, each of the operating partnership and Host
Marriott may incur indebtedness to the extent deemed appropriate by Host
Marriott, as the general partner of the operating partnership, or Board of
Directors of Host Marriott, respectively. In the case of Host Marriott, such
indebtedness must be incurred through the operating partnership.
10
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
----------------------------------------------------------------------------------------
<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.
11
<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 Uniform shareholders have no control over the
Limited 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 Uniform 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.
12
<PAGE>
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP HOST MARRIOTT
----------------------------------------------------------------------------------------
<S> <C>
Management Liability and Indemnification
Under the Delaware Revised Uniform 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.
Liability of Investors
<TABLE>
<S> <C>
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.
13
<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.
14
<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.
15
<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.
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<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.
17
<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.
18
<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 made 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 2000, 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.
19
<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" due to its items of tax preference and
alternative minimum tax adjustments.
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
20
<PAGE>
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.
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
qualified 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);
21
<PAGE>
(7) which makes an election to be taxable as a REIT, or has made this
election for a previous taxable year which has not been revoked or
terminated, and satisfies all relevant filing and other administrative
requirements established by the Internal Revenue Service that must be met
to elect and maintain REIT status;
(8) which uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the Internal Revenue Code
and regulations promulgated thereunder; and
(9) which meets certain other tests, described below, regarding the
nature of its income and assets.
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) did not apply to the 1999 taxable year. For
purposes of condition (6), pension funds and certain other tax-exempt entities
are treated as individuals, subject to a "look-through" exception. 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 had and
continues to have outstanding common stock with sufficient diversity of
ownership to allow it to satisfy conditions (5) and (6). With respect to
condition (6), Host Marriott has complied and intends to continue 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" in our Form 10-K for the
year ended December 31, 1999 for risks related to 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" below.
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 had until December 31, 1999
to distribute such E&P. In connection with the REIT
22
<PAGE>
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 remained (the "Acquired Earnings") and Host Marriott failed to
distribute such Acquired Earnings prior to the end of 1999, Host Marriott would
be disqualified 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 paid prior to December 31, 1999 were sufficient to distribute all
of the Acquired Earnings as of December 31, 1999. However, there are
substantial uncertainties relating to both the estimate of the Acquired
Earnings, as described below, and the value of noncash consideration that Host
Marriott distributed. Accordingly, there can be no assurance this requirement
was 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. relied upon a representation from Host Marriott that as of the end of
1999 it had 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 Host
Marriott's 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.
23
<PAGE>
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 income qualifying under the 75% test, dividends, interest,
certain hedging instruments and gain from the sale or disposition of
stock or securities, including certain hedging instruments.
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, which is subject to federal
income tax, 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. In any event, Host Marriott believes that
each of the managers of its hotel properties would qualify as an eligible
independent contractor. Pursuant to the terms of the leases with Crestline,
Host Marriott has the right, and on November 13, 2000 a wholly owned subsidiary
of Host Marriott that will elect to be taxed as a taxable REIT subsidiary
agreed, to purchase from Crestline the entities owning the leasehold interests
with respect to 117 of our hotels for approximately $205 million.
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 (1) "usually
or customarily rendered" in connection with the rental of real property and (2)
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
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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 an initial 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. 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.
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. Host Marriott's leases with Crestline provide that, as a result of
the enactment of the REIT Modernization Act, Host Marriott has the right under
those 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. On November 13, 2000, a wholly owned
subsidiary of Host Marriott that will elect to be taxed as a taxable REIT
subsidiary agreed to purchase from Crestline the entities owning the leasehold
interests in 117 of our hotels for approximately $205 million.
Neither Host Marriott nor the operating partnership has done or intends to
do any of the following:
. provide any services to the lessees with respect to the operation of the
hotels;
. charge rent to the lessee of any hotel that is based in whole or in part
on the income or profits of any person, except for the lease of the
Harbor Beach Resort, where the lease provides for rent based upon net
profits (but which rent 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.
As discussed above, 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
of Host Marriott (including a Crestline 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 (including, with
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regard to a Crestline 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 the shares 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.
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;
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. 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;
. 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
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the time the leases were entered into, except for the lease of 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 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, under current law, 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
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(3) foreclosure was not regarded as foreseeable at the time the
applicable lessor 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.
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
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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.
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 a 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 owns 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
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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
maintains adequate records of the value of its assets to ensure compliance with
the asset tests and intends 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 owns 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 an existing
subsidiary unless either of the following occurs:
. the subsidiary has engaged in, or engages in, a substantial new line of
business or has acquired, or acquires any substantial asset after July
12, 1999; or
. Host Marriott has acquired, or acquires, additional securities of the
subsidiary after July 12, 1999.
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. At the present time, Host Marriott
has not made a final decision regarding which non-controlled subsidiaries, if
any, will elect to be treated as 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 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
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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 capital gain and ordinary
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" below.
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.
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
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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
which are 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 distributions 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 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. In 1998, Congress enacted legislation reducing the
holding period requirement for the application of the 20% and 25% capital gain
tax rates to 12 months from 18 months for sales of capital gain assets on or
after January 1, 1998. Although Notice 97-64 applied 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 holding period requirements enacted in 1998.
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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 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, if such shares of stock have been held for more than one
year, and any such long-term capital gain shall be subject to the maximum
capital gain rate of 20%. However, a maximum rate of 25% will apply to capital
gain that is treated as "unrecaptured Section 1250 gain" for individuals,
trusts and estates. The IRS has the authority to prescribe, but has not yet
prescribed, regulations on how the capital gain rates will apply to sales of
shares of REITs. Stockholders are urged to consult with their own tax advisors
with respect to their capital gain liability. In the case of a U.S. stockholder
that is a corporation, gain or loss from the sale of shares of Host Marriott
common stock 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.
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
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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" below.
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 shares of 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 properly 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, 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
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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 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. Such distributions, however,
will be subject to U.S. withholding tax as described below. 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.
Host Marriott will be required to withhold 10% of any distribution in excess
of its current and accumulated E&P, even if a lower treaty rate applies and the
non-U.S. stockholder is not liable for tax on receipt of that distribution.
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 determines 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
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(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. The
amount withheld is creditable against the non-U.S. shareholder's United States
federal income tax liability.
Pursuant to the Federal Investment in Real Property Tax Act, which is
referred to 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 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 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
either (a) the investment in Host Marriott common stock is effectively
connected with the non-U.S. stockholder's U.S. trade or business, in which case
the non-U.S. stockholder will be subject to the same treatment as domestic
stockholders with respect to any gain or (b) 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% 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 "United 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, actually or constructively, 5% or
less of the common stock throughout the five-year period ending on the date
of the sale or exchange.
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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. 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" above.
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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"
above).
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 has 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).
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 (subject to an exception, applicable for taxable
years beginning after December 31, 2000, for rents from a tenant that is a
taxable REIT subsidiary); 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"
above. On November 13, 2000, a wholly owned subsidiary of Host Marriott that
will elect to be treated as a taxable REIT subsidiary agreed to purchase from
Crestline the entities owning the leasehold interests in 117 of Host Marriott's
hotels. It is unclear at this time whether the change in law pursuant to the
REIT Modernization Act that permits a REIT to treat as "rents from real
property" rents received from a related party tenant if such tenant is a
taxable REIT subsidiary applies to such rents received by a partnership for
purposes of determining "qualifying income." Host Marriott will take such
actions, if any, that are necessary to prevent the operating partnership from
being treated as a publicly traded partnership, including exercising its
authority, as general partner, under the partnership agreement to impose
limitations on the exercise of the right to redeem OP Units so that the
operating partnership may qualify for certain safe harbors regarding transfers
provided in the "publicly traded partnership" regulations.
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,
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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" above), 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.
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" above), 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" above).
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.
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<PAGE>
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 known 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" above.
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 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" above. 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
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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" above, 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 may 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.
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 exchange offer 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 accuracy of the discussion of federal
income tax matters in this prospectus.
EXPERTS
The audited financial statements and schedules incorporated by reference in
this prospectus and elsewhere in this registration statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports 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."
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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:
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
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 year ended December 31, 1999.
2. Quarterly Reports on Form 10-Q for the quarters ended March 24, 2000,
June 16, 2000 and September 8, 2000.
3. Proxy Statement on Schedule 14A dated April 17, 2000.
4. Current Report on Form 8-K dated November 28, 2000, as amended by Current
Report on Form 8-K/A.
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.................................................... $ 82
Printing and Duplicating Expenses................................... 5,000
Legal Fees and Expenses............................................. 50,000
Accounting Fees and Expenses........................................ 5,000
Miscellaneous....................................................... 5,000
-------
Total........................................................... $65,082
=======
</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 corporation, 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
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has met the standard of conduct necessary for indemnification by the Registrant
as authorized by the 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
<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 herein 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 herein 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
****** Incorporated herein by reference to Exhibit 12.1 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999
(Registration No. 001-14625)
# To be filed by amendment.
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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;
(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
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(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-4
<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 15, 2000.
Host Marriott Corporation
/s/ Robert E. Parsons, Jr.
By: _________________________________
Robert E. Parsons, Jr.
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Host Marriott Corporation, a
Maryland corporation, do hereby constitute and appoint Christopher G. Townsend
our true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, to do any and all acts and things in our names and on our
behalf in our capacities as directors and officers and to execute any and all
instruments for us and in our name in the capacities indicated below, which
said attorney and agent may deem necessary or advisable to enable said
corporation to comply with the Securities Act of 1933 and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with this registration statement, or any registration statement for
this offering that is to be effective upon filing pursuant to Rule 462(b) under
the Securities Act of 1933, including specifically, but without limitation, any
and all amendments (including post-effective amendments) hereto; and we hereby
ratify and confirm all that said attorney and agent shall do or cause to be
done by virtue thereof.
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 15, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Christopher J. Nassetta President, Chief Executive Officer and Director
______________________________________ (principal executive officer)
Christopher J. Nassetta
/s/ Robert E. Parsons, Jr. Executive Vice President and Chief Financial
______________________________________ Officer (principal financial officer)
Robert E. Parsons, Jr.
/s/ Donald D. Olinger Senior Vice President and Corporate Controller
______________________________________ (principal accounting officer)
Donald D. Olinger
/s/ Richard E. Marriott Chairman of the Board of Directors
______________________________________
Richard E. Marriott
/s/ R. Theodore Ammon Director
______________________________________
R. Theodore Ammon
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Robert M. Baylis Director
______________________________________
Robert M. Baylis
/s/ J.W. Marriott, Jr. Director
______________________________________
J.W. Marriott, Jr.
/s/ Ann Dore McLaughlin Director
______________________________________
Ann Dore McLaughlin
/s/ Terence C. Golden Director
______________________________________
Terence C. Golden
/s/ John G. Schreiber Director
______________________________________
John G. Schreiber
/s/ Harry L. Vincent, Jr. Director
______________________________________
Harry L. Vincent, Jr.
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
3.1* Bylaws of the Registrant dated December 29, 1998
Articles of Amendment and Restatement of Articles of Incorporation
3.2** 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
Opinion of Hogan & Hartson L.L.P. regarding the legality of the
5.1# securities being registered
8.1# Opinion of Hogan & Hartson L.L.P. regarding specified tax matters
Ratio of earnings to combined fixed charges and preferred stock
12.1****** 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 herein 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 herein 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
****** Incorporated herein by reference to Exhibit 12.1 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999
(Registration No. 001-14625)
# To be filed by amendment.
II-7
