<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1998
REGISTRATION NO. 333-64657
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CRESTLINE CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
---------------
MARYLAND 7011 52-2039044
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
---------------
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
TELEPHONE: (301) 380-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
TRACY M. J. COLDEN
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
CRESTLINE CAPITAL CORPORATION
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
TELEPHONE: (301) 380-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPY TO:
J. WARREN GORRELL, JR., ESQ.
GEORGE P. BARSNESS, ESQ.
HOGAN & HARTSON L.L.P.
555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004-1109
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
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, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
HOST MARRIOTT CORPORATION
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817-1109
(301) 380-9000
November , 1998
Dear Fellow Stockholder:
As described in the enclosed Proxy Statement/Prospectus dated November ,
1998, Host Marriott Corporation, a Delaware corporation ("Host"), has adopted
an overall plan to restructure its business operations in a manner intended to
permit it to qualify as a real estate investment trust ("REIT") for federal
income tax purposes.
In order to help satisfy the REIT requirements, Host proposes to make an
initial taxable distribution to its stockholders (the "Distribution")
consisting, among other things, of shares of common stock of Crestline Capital
Corporation, a Maryland corporation (the "Company") and currently a wholly
owned subsidiary of Host. The Company currently owns Host's 31 senior living
communities and, following the proposed Distribution also will be engaged in
the business of leasing and subleasing full-service and limited-service hotels
from Host (or the REIT being formed by Host) and asset management of hotels.
The proposed Distribution has not yet been declared by the Board of Directors
of the Company.
Details of the proposed Distribution and of the Company's business and
management are contained in the attached Prospectus relating to the Company
dated November , 1998.
Sincerely,
Richard E. Marriott
Chairman of the Board
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1998
PROSPECTUS
CRESTLINE CAPITAL CORPORATION
COMMON STOCK
-----------
This Prospectus is being furnished to the common stockholders of Host
Marriott Corporation, a Delaware corporation ("Host"), in connection with the
proposed distribution (the "Distribution") by Host to its common stockholders
("Host Stockholders") of approximately 82% of the outstanding shares of common
stock, par value $0.01 per share (the "Common Stock"), of Crestline Capital
Corporation, a Maryland corporation (the "Company"). In the event the
Distribution is declared by the Board of Directors of Host but the proposed
acquisition by Host of certain hotels from The Blackstone Group and certain
affiliated funds is not consummated, the shares of Common Stock of the Company
distributed to Host Stockholders will represent 100% of the outstanding Common
Stock of the Company. The Distribution is part of a series of transactions
pursuant to which Host intends to convert into a real estate investment trust
("REIT") for federal income tax purposes (the "REIT Conversion"). As part of
the REIT Conversion, Host also intends to reincorporate from the State of
Delaware to the State of Maryland by means of a merger (the "Merger") of Host
with and into HMC Merger Corporation, a Maryland corporation ("Host REIT"),
pursuant to an Agreement and Plan of Merger (the "Merger Agreement") and to
effect certain other transactions relating to its conversion into a REIT.
Upon completion of the Distribution, the Company and its subsidiaries will be
engaged in the business of leasing and subleasing full-service and limited-
service hotels from Host REIT, asset management of hotels and owning
independent living, assisted living and healthcare communities. The Company's
leased or subleased hotel properties and senior living communities will be
managed by Marriott International, Inc. or its subsidiaries and certain other
third party managers.
The Distribution is subject to declaration by the Board of Directors of Host,
which is expected to occur on or about December 18, 1998. The Board of
Directors of Host does not intend to declare the Distribution unless the Merger
Agreement is approved by Host Stockholders at a special meeting of Host
Stockholders to be held on or about December 15, 1998 and the other
transactions comprising the REIT Conversion have occurred or are reasonably
likely to occur after the Merger. If declared by the Board of Directors of
Host, Host Stockholders will receive one share of Common Stock of the Company
for each ten shares of common stock, par value $1.00 per share, of Host held of
record on the record date fixed for the Distribution (currently expected to be
5:00 p.m. (Eastern Standard Time) on December 28, 1998). Cash will be paid in
lieu of fractional shares. The distribution date for the Distribution is
expected to occur not later than December 31, 1998.
The Company's amended and restated articles of incorporation will prohibit
any person (including Host REIT and/or any 10% or greater stockholder of Host
REIT) from owning (directly or by attribution under the applicable provisions
of the Internal Revenue Code of 1986, as amended) more than 9.8% of the lesser
of the number or value of any class or series of capital stock of the Company
(subject to an exception for shares in excess of such limit owned solely by
reason of the Distribution). See "Description of Capital Stock--Restrictions on
Ownership and Transfer."
The Company has applied to list the Common Stock on the New York Stock
Exchange under the symbol "CLJ."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF MATERIAL RISKS
RELEVANT TO THE DISTRIBUTION OF THE COMMON STOCK OF THE COMPANY.
-----------
NO SEPARATE VOTE OF HOST STOCKHOLDERS IS REQUIRED WITH RESPECT TO THE
DISTRIBUTION, AND NO HOST STOCKHOLDER WILL BE REQUIRED TO MAKE ANY PAYMENT OR
EXCHANGE ANY HOST COMMON STOCK IN ORDER TO RECEIVE COMMON STOCK OF THE COMPANY
OR CASH IN LIEU OF FRACTIONAL SHARES IN THE DISTRIBUTION.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY........................................................ 1
RISK FACTORS.............................................................. 6
Dependence on Marriott International.................................... 8
Competition with Marriott International................................. 8
Conflicts of Interest in Establishing the Terms of the Hotel Leases..... 8
Dependence of Hotel Revenues on Continuation of the Hotel Leases........ 8
No Rights of First Refusal or Other Contractual Commitments Enabling the
Company to Lease Additional Hotels from Host REIT...................... 9
Potential Adverse Impact on the Company's Profitability of Declines in
Operating Margins of Leased Hotels..................................... 9
Inability of the Company to Terminate the Hotel Leases and the Manage-
ment Agreements........................................................ 10
Inability of the Company to Obtain Financing Secured by the Hotel Leases
without Host REIT's Consent; Other Financing Restrictions.............. 10
Risks of Leverage....................................................... 10
Guaranty of the Hotel Leases and Related Pooling Agreements............. 11
Restrictions on Sales and Other Transfers of Hotel Leasehold Interests
and Communities........................................................ 11
Fraudulent Conveyance Considerations.................................... 11
Restrictions on the Company's Business and Future Opportunities......... 12
Competition in the Lodging and Senior Living Industries................. 13
Overbuilding in the Assisted Living Industry ........................... 14
Risks Associated with Investments in Real Estate........................ 14
Seasonality............................................................. 15
Staffing and Labor Costs................................................ 15
Regulations of the Healthcare Industry.................................. 15
Liability and Insurance................................................. 16
Possible Liability for Environmental Matters............................ 16
Absence of a Prior Public Market; Possible Volatility of Stock Price.... 16
Absence of Dividends on Common Stock.................................... 17
Shares Eligible for Future Sale......................................... 17
Anti-Takeover Effect of Certain Provisions of the Company's Charter and
Bylaws and Maryland Law................................................ 18
Restriction on Ownership and Transfer................................... 18
Dependence on Key Personnel............................................. 19
Year 2000 Problem ...................................................... 19
THE DISTRIBUTION.......................................................... 21
Background of and Reasons for the Distribution.......................... 21
Conditions to the Distribution ......................................... 21
Manner of Effecting the Distribution.................................... 22
Federal Income Tax Consequences......................................... 23
Restriction on Ownership and Transfer .................................. 23
DIVIDEND POLICY........................................................... 24
CAPITALIZATION............................................................ 25
PRO FORMA FINANCIAL STATEMENTS............................................ 26
SELECTED HISTORICAL FINANCIAL DATA........................................ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 46
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
BUSINESS AND PROPERTIES................................................... 60
General................................................................. 60
Business of the Company................................................. 60
Business Strategy....................................................... 62
Hotel Lodging Industry.................................................. 64
Leased and Subleased Hotel Properties................................... 65
Blackstone Acquisition.................................................. 70
Hotel Properties to be Leased or Subleased by the Company under the
Hotel Leases........................................................... 71
Senior Living Industry.................................................. 73
Senior Living Communities............................................... 74
Marketing............................................................... 77
Competition............................................................. 78
Relationship with Host after the Distribution........................... 79
Relationship with Marriott International................................ 81
Description of the Hotel Leases for Full-Service Hotels Managed by
Marriott International................................................. 81
Description of the Subleases for Limited-Service Hotels Managed by
Marriott International................................................. 88
FF&E Leases............................................................. 90
Description of the Hotel Leases for Hotels Managed by Other Management
Companies.............................................................. 92
Description of Blackstone Hotel Leases.................................. 93
Description of Franchise Agreements with Marriott International......... 93
Description of Marriott International Hotel Management Agreements for
Full-Service Hotels.................................................... 94
Description of Marriott International Hotel Management Agreements for
Limited-Service Hotels................................................. 98
Description of Other Hotel Management Agreements........................ 99
Description of Hotel Management Agreements for Blackstone Hotels........ 99
Description of the Operating Agreements for the Communities............. 99
Description of Other Agreements for the Communities..................... 101
Non-Competition Agreements.............................................. 102
Staffing and Labor Costs................................................ 104
Regulation of the Healthcare Industry................................... 104
Environmental Matters................................................... 105
Employees............................................................... 106
Legal Proceedings....................................................... 106
MANAGEMENT................................................................ 107
Directors and Executive Officers........................................ 107
Committees of the Board of Directors.................................... 109
Executive Compensation.................................................. 110
Compensation of Directors............................................... 110
Employee Benefit Plans.................................................. 110
Limitation of Liability and Indemnification............................. 113
Indemnification Agreements.............................................. 114
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AFTER THE
DISTRIBUTION............................................................. 115
CERTAIN RELATIONSHIPS..................................................... 119
DESCRIPTION OF CAPITAL STOCK.............................................. 120
General................................................................. 120
Common Stock............................................................ 120
Preferred Stock......................................................... 120
Power to Issue Additional Common Stock and Preferred Stock.............. 121
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Certain Anti-Takeover Provisions......................................... 121
Restrictions on Ownership and Transfer................................... 126
Registration Rights Agreement............................................ 127
Transfer Agent and Registrar............................................. 128
SHARES ELIGIBLE FOR FUTURE SALE............................................ 129
FEDERAL INCOME TAX CONSEQUENCES............................................ 130
Introduction............................................................. 130
Federal Income Tax Consequences of the Distribution...................... 131
LEGAL MATTERS.............................................................. 134
EXPERTS.................................................................... 134
AVAILABLE INFORMATION...................................................... 135
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
iii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information set forth elsewhere in this Prospectus, including the discussion of
certain factors set forth under "Risk Factors." Unless the context requires
otherwise: (i) all references to the "Company" in this Prospectus refer to
Crestline Capital Corporation and its consolidated subsidiaries; (ii) all
references to "Host" in this Prospectus refer to Host Marriott Corporation and
its consolidated subsidiaries prior to the Merger of Host with and into Host
REIT and the Distribution; (iii) all references to "Host REIT" in this
Prospectus refer to HMC Merger Corporation and its consolidated subsidiaries
following the Merger, including Host Marriott, L.P., a Delaware limited
partnership, through which HMC Merger Corporation will conduct its business,
and subsidiaries of Host Marriott, L.P.; and (iv) all references to "Marriott
International" in this Prospectus refer to Marriott International, Inc. and its
subsidiaries. HMC Merger Corporation, as the successor and surviving
corporation to Host in the Merger, will change its name to Host Marriott
Corporation as part of the Merger. All references in this Prospectus to Host
REIT, as lessor, shall be deemed to refer to Host in the event the Merger of
Host with and into Host REIT is for any reason not consummated. The discussion
in this Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business and Properties," as well as those discussed elsewhere
in this Prospectus.
THE DISTRIBUTION
Distributing Company........ Host Marriott Corporation, a Delaware corporation
("Host"). It is presently contemplated that the
Merger will occur on or about December 29, 1998,
assuming the conditions to the Merger, including
approval by Host Stockholders of the Agreement
and Plan of Merger by and among Host, HMC Merger
Corporation, a Maryland corporation ("Host REIT")
and Host Marriott, L.P. (the "Merger Agreement"),
are satisfied or waived (to the extent legally
permitted) by that date. If the Merger is
consummated, Host REIT will be the successor to
Host and the surviving corporation in the Merger.
Distributed Company......... Crestline Capital Corporation, a Maryland
corporation (the "Company"), which currently is a
wholly owned subsidiary of Host but will become a
separate public company as a result of the
Distribution.
Shares to be Distributed.... Approximately 20,450,000 shares of Common Stock
of the Company, representing approximately 82% of
the Common Stock of the Company to be outstanding
at the time of the Distribution. The remaining
approximately 18% of the then outstanding Common
Stock of the Company is expected to be
transferred by Host REIT as part of the
consideration in connection with Host REIT's
proposed acquisition of certain hotel properties
from The Blackstone Group and a series of funds
controlled by Blackstone Real Estate Partners
(collectively, the "Blackstone Entities;" such
acquisition being referred to herein as the
"Blackstone Acquisition"). In the event the
Distribution is declared by the Board of
Directors of Host but the Blackstone Acquisition
does not occur, the shares of Common Stock of the
Company distributed to Host Stockholders in the
Distribution will represent 100% of the
outstanding Common Stock of the Company. See
"Business and Properties--Blackstone
Acquisition."
1
<PAGE>
Distribution Ratio.......... One share of Common Stock of the Company for each
ten shares of Host common stock held of record on
the Record Date (defined below) fixed by the
Board of Directors of Host for the Distribution.
Cash will be paid in lieu of fractional shares.
Record Date................. Currently expected to be 5:00 p.m. (Eastern
Standard Time) on December 28, 1998 (the "Record
Date").
Distribution Date........... Currently expected to occur not later than
December 31, 1998.
No Payment or Other Action
Required................... No separate vote of Host Stockholders is required
with respect to the Distribution, and no Host
Stockholders will be required to make any payment
or exchange any Host common stock in order to
receive Common Stock of the Company (or cash in
lieu of fractional shares) in the Distribution.
Background of and Reasons
for the Distribution....... The Distribution and the Merger are part of a
series of transactions pursuant to which Host
intends to convert into a real estate investment
trust ("REIT") for federal income tax purposes.
Assuming the Merger and the other transactions
necessary to restructure Host's business
operations so that it will qualify as a REIT are
completed on or prior to December 31, 1998, Host
expects to qualify as a REIT beginning with its
first full taxable year commencing after the REIT
Conversion is completed, which is currently
expected to be the year commencing January 1,
1999 (but which might not be until the year
commencing January 1, 2000).
Because REITs are not permitted under current
federal income tax law to derive revenues
directly from the operation of hotels, Host REIT
will be required to lease and sublease
substantially all of the hotels currently owned
and leased by Host (as well as those acquired in
the Blackstone Acquisition if such transaction is
consummated) to an unrelated party. In addition,
in order for Host REIT to qualify as a REIT for
federal income tax purposes, Host or Host REIT
will be required to distribute to its
stockholders all accumulated "earnings and
profits" ("E&P"), as determined for tax purposes,
of Host prior to the end of the first full
taxable year for which the REIT election of Host
REIT is effective. As a result of these
requirements, Host has determined, as part of the
REIT Conversion, that (i) Host REIT will lease
and sublease substantially all of the hotels
currently owned and leased by Host (as well as
those acquired in the Blackstone Acquisition if
such transaction is consummated) to subsidiaries
of the Company, which will lease or sublease such
hotels under their existing brand names pursuant
to their existing management agreements with
Marriott International and certain other third
party managers (the "Non-MI Managers"), and (ii)
Host will make the Distribution to help
accomplish the requisite distribution of the E&P
of Host, subject to approval of the Merger
Agreement at the special meeting of Host
Stockholders to be held on December 15, 1998 (the
"Special Meeting") and certain
2
<PAGE>
other conditions. See "Conditions to the
Distribution." In addition to facilitating Host's
conversion into a REIT for federal income tax
purposes, Host believes that there may be greater
opportunities to expand the Company's ownership
of senior living communities if such business is
owned by a separate public company whose senior
management has a greater focus on that business.
In connection with the Distribution, subsidiaries
of the Company will lease or sublease
substantially all of the hotels then owned or
leased by Host. The leases and subleases are
expected to be for a term of years (ranging
generally from seven to ten years, depending on
the particular hotel) effective January 1, 1999
(assuming the Merger occurs prior to that date;
otherwise, as soon as practicable following the
Distribution Date). Concurrently with entering
into these leases and subleases, the Company will
assume certain of the rights and obligations
under the existing management and franchise
agreements between Host and Marriott
International or the Non-MI Managers, pursuant to
which Marriott International or the Non-MI
Managers will continue to manage the hotels on
behalf of the Company. Marriott International
also will continue to manage the 31 senior living
communities currently owned by the Company
(collectively, the "Communities").
Conditions to the
Distribution.......... Although a number of the transactions comprising
the REIT Conversion are expected to be
consummated immediately prior to, or in certain
instances immediately following, the Merger, the
Merger will not be consummated unless Host
Stockholders have approved the Merger Agreement
and the other conditions to the Merger have been
satisfied or waived. In particular, Host's Board
of Directors will have determined, among other
things, that the transactions constituting the
REIT Conversion which impact Host REIT's status
as a REIT for federal income tax purposes have
occurred or are reasonably likely to occur, and
based on advice of counsel, that Host REIT can
elect to be treated as a REIT for federal income
tax purposes effective no later than the first
full taxable year commencing after the REIT
Conversion is completed (which might not be until
the year commencing January 1, 2000 if the REIT
Conversion is not completed prior to January 1,
1999). Consistent with the foregoing, Host
intends to pursue the transactions constituting
the REIT Conversion at least through the date of
the Special Meeting. If the Merger Agreement is
approved by Host Stockholders at the Special
Meeting, Host intends to continue pursuing those
transactions constituting the REIT Conversion
which have not yet been completed, including the
Blackstone Acquisition (which is not expected to
be consummated any earlier than December 29,
1998), and, if Host's Board of Directors has
determined that the conditions to the Merger have
been or likely will be satisfied or waived,
declare the Distribution and enter into the
leases and subleases of hotels with subsidiaries
of the Company, even though there is no assurance
that the Merger and the other
3
<PAGE>
transactions comprising the REIT Conversion might
not be delayed or possibly might never be
consummated. If, however, the Merger Agreement is
not approved by the Host Stockholders at the
Special Meeting or the Host Board does not make
the determinations described above, Host's Board
does not intend to declare the Distribution or
enter into the leases and subleases of hotels
with subsidiaries of the Company.
Assuming the Merger Agreement is approved by Host
Stockholders at the Special Meeting and the Host
Board of Directors makes the determinations
described above, it is currently contemplated
that (i) the Host Board of Directors would
declare the Distribution on or about December 18,
1998 payable no later than December 31, 1998 to
Host Stockholders of record on December 28, 1998
and (ii) the Merger would be consummated on or
about December 29, 1998, subject to satisfaction
or waiver of the remaining conditions. Even under
circumstances where the Distribution is made but
the Merger or other transactions comprising the
REIT Conversion are delayed or possibly never
consummated, the Host Board believes that having
the leasing arrangements in place with the
Company could facilitate any subsequent efforts
by Host to qualify as a REIT for federal income
tax purposes (including efforts to pursue a
merger with another entity or another transaction
that would permit it to commence a new taxable
year and elect REIT status prior to January 1,
2000).
Relationship with Host
after the Distribution..... For purposes of governing certain ongoing
relationships between the Company and Host after
the Distribution and to provide for an orderly
transition, the Company and Host have entered
into or will enter into certain agreements. Such
agreements include: (i) a Distribution Agreement,
providing for, among other things, the
Distribution and the division between the Company
and Host of certain assets and liabilities; (ii)
a Tax Sharing Agreement, pursuant to which the
Company and Host would agree to allocate tax
liabilities that relate to periods prior to the
Distribution Date; (iii) an Employee Benefits and
Other Employment Matters Allocation Agreement,
providing for certain allocations of
responsibilities with respect to employee
compensation, benefit and labor matters; (iv) an
Asset Management Agreement, pursuant to which the
Company would provide to Host asset management
services related to Host's rights and
responsibilities as owner of the hotels; (v) a
Non-Competition Agreement, pursuant to which the
Company and Host would agree not to engage in
certain businesses; (vi) Guaranty Agreements,
pursuant to which the Company and certain
subsidiaries would guarantee a certain amount of
the lease and related management agreement
obligations of the Company's subsidiaries that
will lease or sublease the hotels from Host REIT;
(vii) a Pooling Agreement, pursuant to which all
leased full- service
4
<PAGE>
hotels would be separated into four identified
"pools" of hotels for purposes of calculating the
amount of each guaranty; and (viii) a Corporate
Transitional Services Agreement, pursuant to
which Host would provide certain limited
administrative services to the Company; See
"Business and Properties--Relationship with Host
after the Distribution."
Relationship with Marriott
International.............. Marriott International will serve as the manager
for a substantial majority of the full-service
and limited-service hotels leased and subleased
by the Company. In addition, Marriott
International is the manager for all 31
Communities. The Company will be bound by certain
existing non-competition agreements with Marriott
International, pursuant to which the Company's
business opportunities will be restricted. See
"Business and Properties--Non-Competition
Agreements" and "--Description of Other
Agreements for the Communities."
Distribution Agent.......... Bank of New York will be the distribution agent
(the "Distribution Agent") for the Distribution.
Transfer Agent and
Registrar.................. Bank of New York will be the Transfer Agent and
Registrar for the Common Stock of the Company.
Federal Income Tax
Consequences............... The Distribution will be a taxable dividend to a
Host Stockholder in an amount equal to the fair
market value of the Common Stock (plus any cash
in lieu of fractional shares) received in the
Distribution (to the extent that the Distribution
is made out of the Host Stockholder's share of
the portion of the E&P of Host and Host REIT
allocable to the Distribution). Host and Host
REIT currently believe that the entire
Distribution (the fair market value of which Host
currently estimates will be approximately $1.30
per share of Host common stock) will be made out
of such E&P, and thus will be a taxable dividend
to Host Stockholders who receive shares of Common
Stock of the Company in the Distribution. See
"Federal Income Tax Consequences."
Trading Market.............. There is currently no public market for the
Common Stock of the Company. The Company has
applied to list the Common Stock on the New York
Stock Exchange ("NYSE") under the symbol "CLJ."
There can be no assurance that an active trading
market will develop. See "Risk Factors--Absence
of a Prior Public Market; Possible Volatility of
Stock Price."
5
<PAGE>
THE COMPANY
General..................... In June 1997, the Company acquired all of the
outstanding stock of Forum Group, Inc. ("Forum")
from Marriott International. As a result, the
Company currently owns, through Forum and its
wholly or majority owned subsidiaries, 31
Communities located in 13 states. In connection
with the Distribution, the Company expects to
lease from Host REIT approximately 125 full-
service hotels, representing substantially all of
the full-service hotels owned by Host REIT, the
substantial majority of which are operated by
Marriott International under "Marriott" brand
names. In addition, the Company will sublease
from Host REIT 71 limited-service hotels, which
are currently leased by Host from Hospitality
Properties Trust, a separate publicly traded REIT
("HPT"). Substantially all of the leased or
subleased hotels and the Communities will be
managed by Marriott International. If the
Blackstone Acquisition is consummated, the
Company also will acquire from Host REIT a 25%
interest in Swissotel Management (USA) L.L.C., a
management company that operates five Swissotel
hotels in the United States.
The Company's executive offices are located at
10400 Fernwood Road, Bethesda, Maryland 20817,
and its telephone number is (301) 380-9000.
The Company's activities are and will be limited
for certain specified periods by certain
agreements with Host REIT and Marriott
International to which the Company is or will
become a party. See "Business and Properties--
Non-Competition Agreements."
Management of the Company... Following the Distribution, none of the members
of the Company's senior management, including
Bruce D. Wardinski, Chairman of the Board,
President and Chief Executive Officer, and James
L. Francis, Executive Vice President and Chief
Financial Officer, will be a director, officer or
employee of Host REIT, and none of the Company's
directors will be a director, officer or employee
of Host REIT (other than Christopher J. Nassetta,
who is an officer but not a director of Host
REIT).
Dividend Policy............. The Company does not anticipate paying any cash
dividends on the Common Stock in the foreseeable
future. See "Dividend Policy."
RISK FACTORS
Host Stockholders should carefully consider, in addition to the other
information contained in this Prospectus, the matters set forth under the
caption "Risk Factors."
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary historical consolidated financial data
derived from the Company's audited consolidated financial statements and
summary pro forma financial information derived from the Company's unaudited
pro forma financial statements included elsewhere herein. The Company was
formed in 1997 as a subsidiary of Host to own its senior living communities.
Although the Company currently owns 31 Communities, none of these properties
were owned by the Company or Host prior to June 21, 1997. The historical
financial data reflect the operating results of the acquired senior living
communities for the periods during which the properties have been owned by the
Company and do not reflect the leases and subleases to be entered into by the
Company and Host REIT at the time of the Distribution. See "Selected Historical
Financial Data" for a summary of historical information of the Company and its
predecessors. The pro forma financial data set forth below may not necessarily
be indicative of the results that would have been achieved had the transactions
been consummated as of the dates indicated or that may be achieved in the
future. The information in the table should be read in conjunction with
"Selected Historical Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Pro Forma Financial
Statements," the consolidated financial statements of the Company and the
financial statements of certain acquired senior living communities included
elsewhere herein. The Company's fiscal year ends on the Friday closest to
December 31.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------------- ---------------------------------------------
WITH BLACKSTONE WITHOUT BLACKSTONE
---------------------- ----------------------
PERIOD FROM
JUNE 21, 1997
FIRST THREE THROUGH FIRST THREE FIRST THREE
QUARTERS JANUARY 2, QUARTERS FISCAL QUARTERS FISCAL
1998 1998 1998 YEAR 1997 1998 YEAR 1997
----------- ------------- ----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $57,800 $36,900 $3,041,031 $4,088,093 $2,713,146 $3,683,593
Total operating costs
and expenses.......... 29,803 20,929 2,982,467 4,015,071 2,657,882 3,608,071
Operating profit....... 27,997 15,971 58,564 73,022 55,264 75,522
Corporate expenses..... 2,937 2,304 10,885 13,500 10,885 13,500
Interest expense....... 17,560 13,396 16,302 22,932 16,094 22,633
Interest and dividend
income................ 1,120 336 1,518 1,501 1,518 1,501
Net income............. 5,086 358 19,408 22,474 17,584 24,125
OTHER OPERATING DATA:
Cash provided by
operations............ 19,024 25,376
Cash used in investing
activities............ (7,529) (33,412)
Cash provided by (used
in) financing
activities............ (2,635) 25,680
Depreciation and
amortization.......... 14,759 10,635 14,787 22,687 14,787 22,687
EBITDA(2).............. 40,939 24,638 66,753 87,710 63,453 90,210
Cash interest
expense(3)............ 18,633 14,231 17,375 23,584 17,167 23,284
RATIO DATA:
Ratio of earnings to
fixed charges(4)...... 1.5x 1.1x 1.1x 1.1x 1.1x 1.1x
EBITDA to cash interest
expense............... 2.2x 1.7x 3.8x 3.7x 3.7x 3.9x
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 11, 1998
---------------------------------------------
PRO FORMA(1)
----------------------------------
HISTORICAL WITH BLACKSTONE WITHOUT BLACKSTONE
---------- --------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................... $694,419 $800,901 $795,901
Total debt........................ 213,034 213,034(5) 213,034(5)
Stockholder's equity.............. 392,071 413,553 413,553
</TABLE>
- --------
(1) See "Pro Forma Financial Statements." Amounts assume all Partnerships as
defined herein participate in the REIT Conversion.
(2) Earnings before interest expense, taxes, depreciation, amortization and
certain other non-cash items ("EBITDA"). There are no non-cash items, other
than depreciation and amortization, included in EBITDA for the periods
presented. EBITDA data is presented because such data is used by certain
investors to determine the Company's ability to meet debt service
requirements. The Company considers EBITDA to be an indicative measure of
the Company's operating performance due to the significance of the
Company's long-lived assets and because EBITDA can be used to measure the
Company's ability to service debt, fund capital expenditures and expand its
business; however, such information should not be considered as an
alternative to net income, operating profit, cash flows from operations, or
any other operating or liquidity performance measure prescribed by
generally accepted accounting principles ("GAAP"). In addition, EBITDA as
calculated by the Company may not be comparable to similarly titled
measures reported by other companies. Cash expenditures for various long-
term assets, interest expense and income taxes have been, and will be,
incurred which are not reflected in the EBITDA presentation.
(3) Cash interest expense is calculated as GAAP interest expense less
amortization of deferred financing costs and the amortization of debt fair
value adjustments.
(4) The ratio of earnings to fixed charges is computed by dividing income
before taxes, interest expense and other fixed charges by total fixed
charges, including interest expense, amortization of debt issuance costs
and the portion of rent expense that is deemed to represent interest.
(5) Amount excludes approximately $85 million due to Host to pay for hotel
working capital purchased from Host.
7
<PAGE>
RISK FACTORS
Host Stockholders should carefully consider and evaluate all of the
information set forth in this Prospectus, including the risk factors listed
below.
DEPENDENCE ON MARRIOTT INTERNATIONAL
Marriott International will manage substantially all of the hotels to be
leased or subleased by the Company from Host REIT and all of the Communities
owned by the Company under long-term management agreements. Therefore, the
Company's revenue, profitability and ability to make lease payments to Host
REIT will depend upon the ability of Marriott International to effectively
manage such hotels and the Communities. Factors that may affect Marriott
International's performance and the Company's results of operations include
the following: the general economic climate; local market conditions (such as
an oversupply of, or a reduction in demand for, hotel space and senior living
communities); the attractiveness of the hotels and the Communities to
consumers; the quality, philosophy and performance of management; competition
from comparable hotels and senior living communities; changes in room rates;
increases in operating costs or reductions in operating margins due to
inflation, market conditions and other factors, which increases may not
necessarily be passed through fully to guests of the hotels or residents of
the Communities.
COMPETITION WITH MARRIOTT INTERNATIONAL
As of the date hereof, Marriott International operates or franchises
approximately 1,600 hotel properties, approximately 175 of which are owned or
leased by Host and will be leased or subleased to the Company, and owns or
operates approximately 100 senior living communities, 31 of which are owned by
the Company. Because Marriott International may operate hotels and senior
living communities that compete with the hotels to be leased or subleased by
the Company from Host or Host REIT and the senior living communities owned by
the Company, certain situations could arise where actions taken by Marriott
International, in its capacity as manager of competing hotels and senior
living communities, would not be in the best interest of the Company.
CONFLICTS OF INTEREST IN ESTABLISHING THE TERMS OF THE HOTEL LEASES
The terms of the hotel leases and subleases (collectively, the "Hotel
Leases") to be entered into by subsidiaries of the Company with subsidiaries
of Host REIT were negotiated by the Company with Host, but because the Company
was a wholly owned subsidiary of Host at such time, such negotiation may not
necessarily have been on an arms-length basis and, accordingly, may not
necessarily reflect fair market value or terms. The rental payments required
to be made by the subsidiaries of the Company under the Hotel Leases were
negotiated based upon historical and projected operating and financial
performance of the hotels. There can be no assurance, however, that the
projected operating and financial performance of the hotels used in
negotiating the lease payments will be met, and any failure to do so could
have a material adverse effect on the Company's financial condition and
results of operations.
DEPENDENCE OF HOTEL REVENUES ON CONTINUATION OF THE HOTEL LEASES
Revenues from operation of the hotels will comprise a substantial portion of
the Company's revenues, and the Company will be able to continue to earn such
revenues only as long as the Hotel Leases remain in effect. On a pro forma
basis after giving effect to the Hotel Leases, hotel revenues comprised
approximately 95% of the Company's revenues for the First Three Quarters 1998
and for Fiscal Year 1997. The Hotel Leases generally have terms ranging from
seven to ten years and do not provide the Company with any renewal rights.
Upon an event of default under a Hotel Lease (which includes a default under
any other Hotel Lease in the same "pool" of hotels and a default under certain
other agreements), Host REIT may, among other remedies, terminate the Hotel
Lease without penalty. Host REIT also may terminate the Hotel Leases in a pool
of leases without penalty at any time after the Company's guaranty of the
Hotel Leases in such pool has been exhausted and the Company elects to
terminate the pooling arrangements with respect to that pool. In addition,
Host or Host REIT may
8
<PAGE>
terminate a Hotel Lease upon payment to the Company of a termination fee equal
to the fair market value of the Company's leasehold interest for the remaining
term of the lease if Host REIT enters into an agreement to sell or otherwise
transfer the particular hotel free and clear of the lease and in certain other
circumstances. Host REIT also may elect to terminate the Hotel Leases upon a
"Change in Control" of the Company or any of its subsidiaries that will lease
the hotels from Host REIT. Host REIT would be required to pay a termination
fee equal to the previous year's operating profit of the lessee in connection
with any such lease termination unless an "Adverse Party" is the acquiring
person, in which event no termination fee would be payable by Host REIT. A
"Change in Control" includes (i) a change of a majority of the Board of
Directors of the Company during the longer of any twelve month period and the
period during which two consecutive annual meetings of the stockholders of the
Company at which directors are elected have been held, (ii) the accumulation
of more than 35% of the Company's voting stock and (iii) the merger or
consolidation of the Company resulting in a change in ownership or more than
35% of the Company's voting stock or any change of ownership of a lessee, and
an "Adverse Party" includes, among other persons, any hotel ownership,
management or franchisor company. Moreover, if Host REIT does not elect to
terminate the Hotel Lease upon a "Change in Control," Marriott International
may require Host REIT to exercise its termination rights if, as a result of
such Change in Control, the hotel lessee is in control or is controlled by
persons who are convicted felons or who are engaged (or affiliated with
persons who are engaged) in operating a branded hotel chain having 5,000 or
more guest rooms in competition with Marriott International. In addition, in
the event that changes in the federal income tax laws allow Host REIT, or
subsidiaries or affiliates of Host REIT, to directly operate the hotels
without jeopardizing Host REIT's status as a REIT, Host REIT will have the
right to terminate the Hotel Leases in return for paying the Company the fair
market value of the Company's leasehold interests for the remaining terms of
such leases. The payment would be payable in cash or shares of Host REIT, at
the election of Host REIT. (Host has been pursuing the enactment of
legislation that would allow such operation for more than one year, but there
is no bill currently pending in Congress and no reliable prediction can be
made as to whether any such legislation will be enacted in the future.) Host
REIT and the Company also will each have the right to terminate up to 12 Hotel
Leases without being required to pay any fee or other compensation as a result
of such termination, but Host REIT will be permitted to exercise such right
only in connection with a sale of a hotel to an unrelated third party or the
transfer of a hotel to a joint venture in which Host Marriott, L.P., Host
REIT's operating subsidiary, does not have a two-thirds or greater interest.
See "Business and Properties--Description of the Hotel Leases for Full-Service
Hotels Managed by Marriott International." The Company's financial condition
and results of operations would be materially and adversely affected by
termination of a substantial number of the Hotel Leases.
NO RIGHTS OF FIRST REFUSAL OR OTHER CONTRACTUAL COMMITMENTS ENABLING THE
COMPANY TO LEASE ADDITIONAL HOTELS FROM HOST REIT
There are no rights of first refusal or other contractual arrangements
enabling the Company to lease any hotels acquired by Host REIT in the future.
In the absence of such commitments, there can be no assurance that Host REIT
will lease any additional hotels to the Company, which could adversely affect
the Company's ability to expand its leasing business.
POTENTIAL ADVERSE IMPACT ON COMPANY'S PROFITABILITY OF DECLINES IN OPERATING
MARGINS OF LEASED HOTELS
At the time of the Distribution, the Company expects to lease approximately
125 full-service hotels and to sublease 71 limited-service hotels from Host
REIT. Substantially all of the hotels to be leased or subleased from Host REIT
will be managed for the Company by Marriott International. On a pro forma
basis after giving effect to the Hotel Leases, the Company would have had
total hotel revenues of $3,865 million and total hotel operating costs and
expenses, including pro forma lease payments payable to Host REIT and pro
forma management fees payable to Marriott International, of $3,826 million for
Fiscal Year 1997, or an operating margin of $39 million. For the First Three
Quarters 1998, on a pro forma basis after giving effect to the leases and
subleases, total hotel revenues would have been $2,875 million and total hotel
operating costs and expenses would have been $2,844 million, or an operating
margin of $31 million. In view of the size of the portfolio to be leased and
the magnitude of the lease payments due to Host REIT, the management fees
payable to Marriott International and the other
9
<PAGE>
costs and expenses associated with the Hotel Leases, any material increase in
hotel operating costs and expenses that is not offset by a corresponding
increase in hotel revenues, or a material decline in hotel revenues which is
not offset by a corresponding decrease in hotel operating costs and expenses,
would have a material adverse impact on the Company's financial condition and
results of operations.
INABILITY OF THE COMPANY TO TERMINATE THE HOTEL LEASES AND THE MANAGEMENT
AGREEMENTS
A substantial amount of the Company's operating expenses will consist of
lease payments to Host REIT, management and hotel franchise fees payable to
Marriott International in connection with its management of the hotels and
management fees payable to Marriott International and Non-MI Managers in
connection with its management of the Communities. On a pro forma basis, lease
payments to Host REIT totaled $887 million and $1,175 million for the First
Three Quarters 1998 and for Fiscal Year 1997, respectively. Management fees
payable to Marriott International and Non-MI Managers for these periods
totaled approximately $156 million and approximately $202 million,
respectively, on a pro forma basis. Under the Hotel Leases and the management
agreements for the hotels, the Company will be responsible for paying all the
expenses of operating the hotels, including all personnel costs, utility costs
and general repair and maintenance (other than capital expenditures,
furniture, fixtures and equipment expenditures (with certain exceptions),
property and casualty insurance, real estate taxes and other assessments and
ground lease rent payments, for which Host REIT will be responsible). The
Company will be solely responsible for the expenses of operating the
Communities. Except in certain events specified therein, the Company will not
be able to terminate the Hotel Leases or the management agreements prior to
the expiration of their respective terms.
INABILITY OF THE COMPANY TO OBTAIN FINANCING SECURED BY THE HOTEL LEASES
WITHOUT HOST REIT'S CONSENT; OTHER FINANCING RESTRICTIONS
Pursuant to the terms of the Hotel Leases, the Company will not be entitled
to obtain financing secured by its leasehold interests in the hotels without
the consent of Host REIT, which may be withheld in its sole discretion. Even
if Host REIT were to consent to the Company obtaining financing secured by its
leasehold interests, a number of hotels have pre-existing third-party
financing that prohibits any additional secured financing. The management
agreements with Marriott International and the Non-MI Managers typically
require a secured lender to keep the management agreement in effect following
a foreclosure. The rights of each lessee will be expressly subordinate to
qualifying mortgage debt and any refinancing of property level debt of the
hotel. A default under the loan documents may result in the termination of the
Hotel Lease by the lender. The lender will not be required to provide a non-
disturbance agreement to the lessee.
RISKS OF LEVERAGE
The Company will have substantial indebtedness. As of September 11, 1998, on
a pro forma basis assuming the Distribution, the Company had outstanding
indebtedness, excluding the amount due to Host to pay for hotel working
capital purchased from Host of approximately $85 million, totaling
approximately $213 million. Giving effect to the Hotel Leases with Host REIT
and the management agreements with Marriott International and the Non-MI
Managers, pro forma interest, lease and hotel management fee expenses would
have been $1,060 million and $1,400 million for the First Three Quarters 1998
and Fiscal Year 1997, respectively. The Company's existing leverage, together
with its obligation to make lease and management fee payments under the Hotel
Leases and related management agreements, could affect its ability to obtain
financing in the future or undertake refinancings on terms and subject to
conditions favorable to the Company. In addition, two of the Company's
subsidiaries that own a total of eight Communities are parties to a loan
agreement in the original principal amount of approximately $125 million. The
lender has a security interest in all eight Communities. The loan agreement
contains cross-default provisions so that a default by one subsidiary can
result in the acceleration of the entire amount of the indebtedness.
10
<PAGE>
GUARANTEES OF THE HOTEL LEASES AND RELATED POOLING AGREEMENTS
The Company and certain subsidiaries will enter into certain limited
guaranty agreements of the obligations of the Lessees under the Hotel Leases.
For each of four identified "pools" of full-service hotels, the cumulative
limit of the Company's guaranty at any time will be the greater of 10% of the
aggregate rents paid in the immediately preceding Fiscal Year under all Hotel
Leases in the pool or 10% of the aggregate rents paid under all Hotel Leases
in the pool in 1999.
As a result of these guaranty arrangements, the Company will be required to
apply excess cash flow from profitable Hotel Leases in a pool (and potentially
assets from outside a Hotel Lease pool) to meet rent shortfalls on other Hotel
Leases in the same pool, subject to the specified limits. In addition, the
agreements require that reserves be maintained within a Hotel Lease pool in
certain circumstances, which would restrict the availability of excess cash to
the Company for payment of operating expenses and other purposes.
RESTRICTIONS ON SALES AND OTHER TRANSFERS OF HOTEL LEASEHOLD INTERESTS AND
COMMUNITIES
The Hotel Leases and the management agreements with Marriott International
and the Non-MI Managers of the hotels and the Communities impose certain
conditions and restrictions on sales, leases and other transfers of the Hotel
Leases and the Communities. These conditions and restrictions, or the
Company's inability to obtain a consent, modification or waiver from Host
REIT, Marriott International or the Non-MI Managers, could adversely affect
the Company's ability to consummate such sale, lease or other transfer.
FRAUDULENT CONVEYANCE CONSIDERATIONS
It is a condition to the consummation of the Distribution that the Board of
Directors of Host shall have received a satisfactory opinion regarding the
solvency of Host. There is no certainty, however, that a court would find the
solvency opinion rendered by Host's financial advisor to be binding on
creditors of Host or that a court would reach the same conclusions set forth
in such opinion in determining whether Host was insolvent at the time of, or
after giving effect to, the Distribution.
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time Host
effected the Distribution, Host (i) was insolvent; (ii) was rendered insolvent
by
11
<PAGE>
reason of the Distribution; (iii) was engaged in a business or transaction for
which Host's remaining assets constituted unreasonably small capital; or (iv)
intended to incur, or believed it would incur, debts beyond its ability to pay
as such debts matured, such court may be asked to void the Distribution (in
whole or in part) as a fraudulent conveyance and require, among other possible
remedies, that the stockholders return the Distribution or the value thereof
(in whole or in part) to Host. The measure of insolvency for purposes of the
foregoing will vary depending upon the jurisdiction whose law is being
applied. Generally, however, Host would be considered insolvent if the fair
value of its assets were less than the amount of its liabilities or if it
incurred debt beyond its ability to repay such debt as it matures. No
assurance can be given as to what standard a court would apply in determining
insolvency. In addition, under Section 170 of the Delaware General Corporation
Law (the "DGCL") (which is applicable to the Distribution), a corporation
generally may make distributions to its stockholders only out of its surplus
(net assets minus capital) and not out of capital.
Host's Board of Directors and management believe that Host will be solvent
at the time of the Distribution (in accordance with the foregoing
definitions), will be able to repay its debts as they mature following the
Distribution and will have sufficient capital to carry on its businesses, and
the Distribution will be made entirely out of surplus, as provided under
Section 170 of the DGCL.
RESTRICTIONS ON THE COMPANY'S BUSINESS AND FUTURE OPPORTUNITIES
The Company's activities are and will be limited by certain non-competition
agreements with Marriott International and Host REIT to which it is or will
become a party. In general, these non-competition agreements restrict the
Company for prescribed periods described below from (i) competing with the
hotel management business of Marriott International (but not from leasing
hotel properties or contracting with third parties to manage leased hotel
properties, subject to certain limitations for hotel properties operated under
a common name), (ii) operating or managing assisted living communities (but
not owning or leasing such communities) and (iii) owning or acquiring full-
service hotels that are not leased from Host REIT.
NON-COMPETITION AGREEMENT WITH MARRIOTT INTERNATIONAL REGARDING THE
HOTELS. Host and Marriott International entered into a non-competition
agreement (the "Hotel Non-Competition Agreement") in 1993 when Host and
Marriott International became separate public companies, as amended and
restated in March 1998. The Company is currently bound by the Hotel Non-
Competition Agreement as a subsidiary of Host and will continue to be bound by
it following the Distribution. Under the Hotel Non-Competition Agreement, the
Company and its subsidiaries generally are prohibited prior to October 8,
2000, subject to certain limited exceptions, from entering into or acquiring
any business that competes with the hotel management business (i.e., managing,
operating or franchising full-service and limited service hotels) of Marriott
International. Under the Hotel Non-Competition Agreement, certain activities
are permitted, however, including (i) the operation by the Company of an
unlimited number of hotel properties so long as the Company does not operate
more than ten such properties under a common name, (ii) contracting by the
Company with a third party manager for operation of an unlimited number of
hotel properties, so long as the number of properties under such third party
management is not more than the greater of (a) ten such properties operated
under a common name or (b) 25% of the system operated by such third party
manager under a common name, and (iii) franchising by the Company of an
unlimited number of hotel properties so long as the Company is not franchisor
for more than ten such properties under a common name.
NON-COMPETITION AGREEMENT WITH HOST OR HOST REIT REGARDING THE HOTELS. The
Company, Host REIT and the non-controlled subsidiaries of Host REIT, which
will lease to the Company certain excess furniture, fixtures and equipment
(collectively, the "Initial FF&E Lessors"), will enter into a non-competition
agreement in connection with the Distribution. Pursuant to this non-
competition agreement, the Company will agree, among other things, that until
the earlier of December 31, 2008 or the date upon which the Company is not the
lessee of more than 25% of the number of hotels owned by Host on the
Distribution Date, the Company may not: (i) own, acquire, develop or construct
for ownership any full-service hotel (except for (a) investments which
represent an immaterial portion of a merger or similar transaction, (b) a
minimal portfolio investment or (c) the provision of limited financing); (ii)
without the consent of Host or Host REIT in its sole discretion, manage or
operate (other
12
<PAGE>
than through a third party manager) any limited-service or full-service hotel
properties owned by Host or Host REIT; or (iii) conduct, participate in,
engage in or have a financial interest in any person that engages in the
ownership or operation of any single or multiple full-service hotel franchise
system operating under one or more common brand names. The restrictions
described in (i) and (iii) above do not apply to any activities of the Company
related to limited-service hotels, and none of these restrictions preclude the
Company from acting as a lessee or third party manager with respect to full-
service hotels owned by others.
Until the earlier of December 31, 2008 or the date upon which the Company is
not the lessee of more than 25% of the number of hotels owned by Host on the
Distribution Date, Host or Host REIT and the FF&E Lessors have agreed that
they will not conduct, participate in, engage in or have a financial interest
in any person that engages in the business of leasing, operating or
franchising limited-service or full-service hotel properties; provided,
however, that this restriction does not prevent Host or Host REIT or the FF&E
Lessors from (i) managing, operating or franchising limited-service or full-
service hotels with respect to matters incident to the operation of such
properties (e.g., management services with respect to food and beverages,
plant and equipment operation and maintenance, reservations, sales and
marketing) on behalf of third parties or (ii) leasing full-service or limited-
service hotels to and from each other or (iii) in the case of Host or Host
REIT, leasing full-service and limited-service hotels from certain other
related parties. Until December 31, 2003, Host or Host REIT and the FF&E
Lessors also have agreed that they may not conduct, participate in, engage in
or have a financial interest in any person that engages in the ownership,
acquisition or operation of senior living communities (except for (a)
investments which represent an immaterial portion of a merger or similar
transaction, (b) a minimal portfolio investment or (c) the provision of
limited financing). In addition, both the Company and Host REIT will agree not
to hire or attempt to hire any of the other company's senior employees at any
time prior to December 31, 2000. See "Business and Properties--Relationship
with Host after the Distribution--Non-Competition Agreement" and "Business and
Properties--Non-Competition Agreements."
NON-COMPETITION AGREEMENT WITH MARRIOTT INTERNATIONAL REGARDING SENIOR
LIVING COMMUNITIES. In connection with the Company's acquisition of Forum from
Marriott International in 1997, Host and Marriott International entered into a
non-competition agreement (the "Community Non-Competition Agreement"), as
amended and restated. The Company, as the owner of all of Host's senior living
communities, is currently bound by the Community Non-Competition Agreement and
will continue to be bound by it following the Distribution. Under the
Community Non-Competition Agreement, the Company and its subsidiaries
generally are prohibited prior to June 21, 2010, subject to certain limited
exceptions, from competing with Marriott International in the continental
United States by (i) financing, conducting, participating or engaging in the
business of operating, managing or franchising senior living communities or
(ii) providing operational or managerial services relating thereto with
respect to health care, therapy, home health care, assisted living, nursing
and related medical, residential, supportive and personal care services (but
are not prohibited from owning or leasing senior living communities or
contracting with third parties to manage such communities for the Company).
Until the Community Non-Competition Agreement expires on June 21, 2010, the
Company also is prohibited from entering into a transaction or a series of
transactions whereby ten or more Communities or a controlling interest therein
would be transferred to another party unless such party agrees to be bound by
the Community Non-Competition Agreement.
COMPETITION IN THE LODGING AND SENIOR LIVING INDUSTRIES
The profitability of the hotels leased and subleased by the Company and the
profitability of the Communities are subject to general economic conditions,
the management abilities of Marriott International and the Non-MI Managers (in
the case of certain hotels), competition, the desirability of particular
locations and other factors relating to their operation. The full-service
segment of the lodging industry, in which the hotels primarily operate, is
highly competitive, and the hotels generally operate in geographical markets
that contain numerous competitors. The success of the hotels will be
dependent, in large part, upon the ability to compete in such areas as access,
location, quality of accommodations, room rate structure, the quality and
scope of food and beverage facilities and other services and amenities.
Further, competing properties may be built or existing projects enhanced. The
lodging industry, including the hotels to be leased or subleased by the
Company, also may be adversely affected in the future by (i) national and
regional economic conditions, (ii) changes in travel patterns,
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(iii) taxes and government regulations which influence or determine wages,
prices, interest rates, construction procedures and costs, (iv) the
availability of credit and (v) other factors beyond the control of the
Company.
The long-term care industry, including the senior living segment, also is
highly competitive. The Company competes with numerous other companies
providing long-term care alternatives to the elderly, such as home health care
agencies, facility-based service programs, retirement communities,
convalescent centers, nursing home operators and other assisted living
companies. In general, regulatory and other barriers to competitive entry in
the senior living industry are not substantial. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than the Company. Consequently, there can be no
assurance that the Company will not encounter increased competition that could
limit its ability to attract residents or expand its senior living business in
the future. See "Business and Properties--Competition--Lodging" and "--Senior
Living."
OVERBUILDING IN THE ASSISTED LIVING INDUSTRY
The Company believes that many assisted living markets have become or are on
the verge of becoming overbuilt. Approximately 23% of the Company's senior
living units are assisted living units. Overbuilding in the assisted living
market could cause the Company's assisted living units to experience decreased
occupancy, depressed margins and lower operating results.
RISKS ASSOCIATED WITH INVESTMENTS IN REAL ESTATE
The stockholders of the Company will bear risks associated with real estate
investments. Real estate investments are relatively illiquid and, therefore,
will tend to limit the ability of the Company to sell and purchase
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senior living communities promptly in response to changes in economic or other
conditions. This could make it difficult for the Company to sell any of its
Communities, even if a sale were in the interest of the stockholders.
SEASONALITY
The hotel industry is seasonal in nature. The seasonality of the hotel
industry may, from time to time, affect the ability of the Company to make
timely rent payments under the Hotel Leases. The failure of subsidiaries of
the Company to pay rent within 10 days of the date it is due is an event of
default and Host REIT may terminate the applicable full-service Hotel Lease or
exercise any other remedy available to it as a result of any such default. The
full-service Hotel Leases also contain cross-default provisions with respect
to defaults by the Company or its subsidiaries under the hotel management
agreements between Marriott International and Host that will be assigned to
the Company, the Company's limited guaranty of the Hotel Leases, the non-
competition agreement to be entered into between the Company and Host REIT and
certain other related agreements between the parties or their affiliates.
STAFFING AND LABOR COSTS
Marriott International competes with various other lodging companies in
attracting and retaining qualified and skilled personnel to operate the hotels
managed by it. Marriott International also competes with various health care
services providers, including other elderly care providers, in attracting and
retaining qualified personnel for the Communities. A shortage of such
personnel or general inflationary pressure may require Marriott International
to enhance its wage and benefits package to compete effectively for personnel
necessary to operate the hotels and the Communities, which could adversely
affect the Company's net income attributable to the hotels and the
Communities.
REGULATION OF THE HEALTHCARE INDUSTRY
The long-term care segment of the healthcare industry is highly regulated.
Operators of skilled nursing facilities, including some of the healthcare
facilities operated as a part of the Company's Communities, are subject to
federal, state and local laws relating, among other things, to licensure and
Certificates of Need, the delivery and adequacy of medical care, fraud and
abuse, distribution of pharmaceuticals, operating policies and rate-setting
and reimbursement. Such facilities also are subject to periodic inspection by
governmental and other authorities to assure continued compliance with various
standards. The failure of an operator of a Company Community to obtain or
maintain any required regulatory approvals or licenses could prevent an
operator from offering services or adversely affect its ability to receive
reimbursement for services and could result in the denial of reimbursement,
temporary suspension of admission of new patients, suspension or
decertification from Medicaid, Medicare or other federal healthcare programs,
fines, restrictions on the ability to acquire new facilities or expand
existing facilities and, in extreme cases, revocation of the facility's
license or closure of a facility. On a historical basis, Medicare/Medicaid
reimbursements have accounted for approximately 7% of the Company's total
senior living community revenues.
Although not currently regulated at the federal level (except under laws of
general applicability to businesses, such as work place safety and income tax
requirements), assisted living communities are increasingly becoming subject
to more stringent regulation and licensing by state and local health and
social service agencies and other regulatory authorities. Like skilled nursing
facilities, assisted living communities are subject to periodic inspection by
government authorities. In most states, assisted living communities, as well
as skilled nursing facilities also are subject to state or local building
code, fire code and food service licensure or certification requirements. Any
failure by the managers of the Company's Communities to meet applicable
regulatory requirements may result in the imposition of fines, imposition of a
provisional or conditional license or suspension or revocation of a license or
other sanctions or adverse consequences, including delays in expanding a
community. Any failure by the managers of the Company's Communities to comply
with such requirements could have a material adverse effect on the Company's
financial condition and results of operations.
Operators of the Company's Communities also are subject to federal and state
anti-remuneration laws and regulations, such as the Federal Health Care
Programs anti-kickback law, which govern certain financial arrangements among
healthcare providers and others who may be in a position to refer or recommend
patients to such providers. These laws prohibit, among other things, the
offer, payment, solicitation or receipt of any form
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of remuneration in return for the referral of Federal Health Care Program
patients or the purchasing, leasing, ordering or arranging for any goods,
facilities, services or items for which payment can be made under a Federal
Health Care Program (such as Medicare or Medicaid). A violation of the federal
anti-kickback law could result in the loss of a provider's eligibility to
participate in a Federal Health Care Program or in civil or criminal penalties
on the provider or other entity. The federal government, private insurers and
various state enforcement agencies are devoting increased resources to
enforcing compliance with these laws. Furthermore, some states restrict
certain business corporations from providing, or holding themselves out as a
provider of, medical care. State laws vary from state to state, are often
vague and have seldom been interpreted by the courts or regulatory agencies.
There can be no assurance that these federal and state laws will ultimately be
interpreted in a manner consistent with the Company's practices. See
"Business--Government Regulation."
LIABILITY AND INSURANCE
The provision of personal and healthcare services entails an inherent risk
of liability. In recent years, participants in the long-term care industry
have become subject to an increasing number of lawsuits alleging malpractice
or related legal theories, many of which have involved large claims and
resulted in the incurrence of significant defense costs. In addition, compared
to more institutional long-term care facilities, assisted living communities
of the type operated by the Company offer residents a greater degree of
independence in their daily lives. This increased level of independence,
however, may subject the resident and the Company to certain risks that would
be reduced in more institutionalized settings. The Company currently maintains
liability insurance intended to cover such claims, which it believes is
adequate based on the nature of the risks, historical experience and industry
standards.
As lessee of the hotels, the Company also will carry comprehensive general
liability insurance with policy specifications and insured limits required
under the leases. There can be no assurance, however, that claims in excess of
such insurance or claims not covered by insurance will not arise. A successful
claim against the Company not covered by, or in excess of, its insurance could
have a material adverse effect upon the Company's financial condition and
results of operations.
POSSIBLE LIABILITY FOR ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations,
owners or operators of real estate may be required to investigate and clean up
certain hazardous substances released at a property, and may be held liable to
a governmental entity or to third parties for property damage or personal
injuries and for investigation and clean-up costs incurred by the parties in
connection with any contamination. In addition, some environmental laws create
a lien on a contaminated site in favor of the government for damages and costs
it incurs in connection with the contamination. The presence of contamination
or the failure to remediate contamination may adversely affect the owner's
ability to sell or lease real estate or to borrow using the real estate as
collateral. No assurances can be given that (i) a prior owner, operator or
occupant, such as a tenant, did not create a material environmental condition
not known to the Company, (ii) a material environmental condition with respect
to any leased hotel or community owned by the Company does not exist or (iii)
future uses or conditions (including, without limitation, changes in
applicable environmental laws and regulations) will not result in the
imposition of environmental liability.
No assurances can be given that all potential environmental liabilities have
been identified or properly quantified or that no prior owner, operator or
past or current guest or occupant has created an environmental condition not
known to the Company. Moreover, no assurances can be given that (i) future
laws, ordinances, or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the leased hotels or
the Communities will not be affected by the condition of land or operations in
the vicinity of the leased hotels or the Communities (such as the presence of
underground storage tanks) or by third parties unrelated to the Company.
ABSENCE OF A PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There is currently no public market for the Common Stock. The Company has
applied to list the Common Stock on the New York Stock Exchange under the
symbol "CLJ." Until the Common Stock is fully distributed
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and an orderly trading market develops, the prices at which trading in such
stock occurs may fluctuate significantly. There can be no assurance that an
active trading market in the Common Stock will develop or be sustained in the
future. In the event no active trading market develops for the Common Stock,
holders of shares of Common Stock may not be able to sell their shares
promptly at a reasonable price. Accordingly, holders of Common Stock should
consider the Common Stock a long-term investment.
The prices at which the Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
the Company's performance and prospects, the depth and liquidity of the market
for the Common Stock, investor perception of the Company and of the industries
in which the Company operates and economic conditions in general, changes in
earnings estimates by securities analysts or the Company's ability to meet
those estimates, the Company's dividend policy and general financial and other
market conditions. In addition, financial markets have experienced extreme
price and volume fluctuations that have affected the market price of the
stocks of many companies and that, at times, could be viewed as unrelated or
disproportionate to the operating performance of such companies. Such
fluctuations have also affected the share prices of many newly public issuers.
Such volatility and other factors may materially adversely affect the market
price of the Common Stock.
ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company does not expect to pay cash dividends in the foreseeable future.
See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Distribution could adversely affect the prevailing market price of the
Common Stock and the Company's ability to raise capital in the future. Upon
completion of the Distribution, the Company will have a total of approximately
24,820,000 shares of Common Stock outstanding assuming the Blackstone
Acquisition is consummated (approximately 20,450,000 shares if the Blackstone
Acquisition is not consummated), of which approximately 20,375,000 shares will
be freely tradable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), by persons other than "affiliates" of the
Company, as defined under the Securities Act. The remaining approximately
4,370,000 shares of Common Stock to be outstanding, representing shares held
by affiliates and the shares to be transferred by Host REIT to the Blackstone
Entities if the Blackstone Acquisition is consummated, will be "restricted
securities" as that term is defined by Rule 144 promulgated under the
Securities Act.
If the Blackstone Acquisition is consummated by Host REIT, the Blackstone
Entities will have certain registration rights with respect to approximately
18% of the outstanding shares of Common Stock of the Company. If such holders
cause a large number of shares to be sold in the public market, such sales
could have an adverse effect on the trading price of the Common Stock. In
addition, if the Company is required, pursuant to such registration rights, to
include shares held by such persons in any registration statement that the
Company files to raise additional capital, the inclusion of such shares could
have an adverse effect on the Company's ability to raise needed capital.
Following the Distribution, the Company intends to register on one or more
registration statements on Form S-8 under the Securities Act the shares of
Common Stock issuable under the Company's stock option and other benefit plans
for directors, officers and employees of the Company and its subsidiaries. Of
the 4,537,000 shares to be reserved for issuance under these plans,
approximately 630,000 shares will be subject to stock options or restricted
stock expected to be granted by the Company concurrently upon completion of
the Distribution. Officers and employees of Host who become officers and
employees of the Company at the time of the Distribution also will have their
existing awards held under the Host stock option and other benefit plans
converted into awards for Common Stock in accordance with the terms of the
Employee Benefits and Other Employment Matters Allocation Agreement to be
entered into by Host and the Company. See "Description of Capital Stock--
Registration Rights Agreement," "Management--Employee Benefit Plans" and
"Shares Eligible for Future Sale."
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ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
AND MARYLAND LAW
The Company's amended and restated articles of incorporation (the "Charter")
and Bylaws, as well as Maryland law, contain certain provisions that could
have the effect of delaying, deferring or preventing a change in control of
the Company. These provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. Certain
of these provisions provide for a staggered board and allow the Company to
issue, without stockholder approval, preferred stock having rights senior to
those of the Common Stock. Other provisions include: fixing the size of the
Board of Directors within a range set forth in the Company's Charter; removal
of directors by stockholders only for cause upon the affirmative vote of at
least two-thirds of all of the votes entitled to be cast; approval by
stockholders of mergers, consolidations, share exchanges and transfers of
assets by the affirmative vote of at least two-thirds of all of the votes
entitled to be cast, to the extent a stockholder vote is required for a
particular transaction under Maryland law; the ability of the Board of
Directors, without a stockholder vote, to classify or reclassify unissued
shares of capital stock, including Common Stock into Preferred Stock and vice
versa; the exclusive authority of the Board of Directors to amend the Bylaws;
advance notice provisions for stockholders to nominate directors or propose
new business; a limitation on the ability of stockholders to call special
meetings; and a two-thirds stockholder vote required to amend certain
provisions of the Charter. These provisions could make it difficult for
stockholders to effect certain corporate actions. The Company also intends to
adopt a Stockholder Rights Plan, pursuant to which stockholders would be
entitled to purchase from the Company a newly created series of junior
preferred stock upon the occurrence of certain events.
Under the Maryland General Corporation Law (the "MGCL"), unless an exemption
is available, certain "business combinations" (including certain issuances of
equity securities) between a Maryland corporation and any person who
beneficially owns 10% or more of the voting power of the corporation's then
outstanding shares (an "Interested Stockholder") or an affiliate of the
Interested Stockholder are prohibited for five years after the most recent
date on which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be approved by (i) 80% of the
outstanding voting shares and (ii) two-thirds of the voting shares (other than
voting shares held by the Interested Stockholder), unless certain conditions
are satisfied. A business combination that is approved by the board of
directors of a Maryland corporation at any time before an Interested
Stockholder first becomes an Interested Stockholder is not subject to the
special voting requirements. The Company has not "opted-out" of the business
combination provisions of the MGCL, and, accordingly, will be subject to such
provisions although the Company may elect to opt-out of these provisions in
the future. The Board of Directors has adopted a resolution exempting from the
operation of the "business combination" statute transactions involving Host
REIT and Marriott International; provided that any such transaction with
Marriott International that is not in the ordinary course of business must be
approved by a majority of the directors of the Company present at a meeting at
which a quorum is present, including a majority of the disinterested
directors, in addition to any vote of stockholders required by other
provisions of the MGCL.
In addition, under the MGCL, unless the corporation elects not to be subject
thereto, "control shares" acquired in a "control share acquisition" have no
voting rights except to the extent approved by stockholders by a vote of two-
thirds of the votes entitled to be cast, excluding shares owned by the
acquiror, by officers or by directors who are employees of the corporation.
"Control shares" are voting shares which, if aggregated with all other such
shares previously acquired by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third; (ii) one-third or more
but less than a majority; or (iii) a majority or more of all voting power. The
Company has not opted out of the "control share acquisition" provisions of the
MGCL, and, accordingly, will be subject to such provisions although the
Company may elect to opt-out of these provisions in the future. See
"Description of Capital Stock--Certain Anti-Takeover Provisions."
RESTRICTION ON OWNERSHIP AND TRANSFER
For Host REIT to qualify as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), Host REIT cannot own, either directly or by
attribution from one or more actual or constructive owners (actually
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or constructively) of 10% or more of Host REIT, 10% or more of the Company or
any other tenant of Host REIT. In order to assist Host REIT in meeting this
requirement, the Company's Charter includes a restriction on transfer and
ownership (the "Ownership Limit"), which provides that no person or persons
acting as a group may own, or be deemed to own by virtue of certain
attribution rules of the Code, more than (i) 9.8% of the lesser of the number
or value of the issued and outstanding shares of Common Stock of the Company
or (ii) 9.8% of the lesser of the number or value of the issued and
outstanding preferred shares of any class or series of Company capital stock.
The ownership attribution rules under the Code are complex and may cause the
Common Stock of the Company owned actually or constructively by a group of
related individuals and/or entities to be owned constructively by one
individual entity. As a result, the acquisition of less than 9.8% of the
Common Stock of the Company (or the acquisition or ownership of an interest in
an entity that owns, actually or constructively, the Common Stock of the
Company) by an individual or entity could, nevertheless, cause that individual
or entity, or another individual or entity, to own constructively in excess of
9.8% of the outstanding Common Stock of the Company and thus subject such
Common Stock of the Company to the Ownership Limit.
Pursuant to the terms of the Charter, the Ownership Limit will become
effective as to all stockholders of the Company as of the Distribution Date,
with an exception for a person who would exceed the Ownership Limit solely by
reason of the receipt of shares of the Common Stock of the Company in the
Distribution. The Board of Directors of the Company also may grant an
exemption from the Ownership Limit with respect to a person if it is satisfied
that such ownership will not cause the Company or a subsidiary of the Company
that is a tenant of Host REIT to be considered a "related tenant" for purposes
of the REIT qualification rules and Host REIT concurs with such determination.
The Ownership Limit also will not apply if Host REIT no longer qualifies as a
REIT, if the Board of Directors of Host REIT determines that it is no longer
in the best interests of Host REIT to attempt to qualify, or to continue to
qualify, as a REIT, or if the Company determines, and Host REIT concurs, that
Host REIT derives less than 1% of its gross income pursuant to the Hotel
leases. The Ownership Limit could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of Common Stock of the Company might receive a premium for their
Common Stock over the then prevailing market price or which such holders might
believe to be otherwise in their best interest. See "Description of Capital
Stock--Restrictions on Ownership and Transfer."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts of its executive officers, most of
whom previously served as officers of Host. While the Company believes that it
could find replacements for these key personnel, the loss of their services
could have an adverse effect on the operations of the Company.
YEAR 2000 PROBLEM
The "Year 2000 Problem" has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to
refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results.
Following the Distribution, the Company, as the lessee of Host REIT's
hotels, will deal directly with Year 2000 matters material to the operation of
the hotels, and the Company has agreed to adopt and implement the Host
compliance program outlined below with respect to third-party systems for all
hotels for which it is the lessee. Host adopted its Year 2000 compliance
program because it recognized the importance of minimizing the number and
seriousness of any disruptions that may occur as a result of the Year 2000
issue. There can be no assurances that Year 2000 remediation by Host (and
following the Distribution, the Company) or third parties will be properly and
timely completed, and failure to do so could have a material adverse effect on
the Company, its business and its financial condition. The Company cannot
predict the actual effects of the Year 2000 problem, which depends on numerous
uncertainties such as: (i) whether significant third parties properly and
timely address the Year 2000 issue; and (ii) whether broad-based or systematic
economic failures may occur. The Company also is unable to predict the
severity and duration of any such failures, which could include disruptions
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in passenger transportation or transportation systems generally, loss of
utility and/or telecommunications services, the loss or disruption of hotel
reservations made on centralized reservation services and errors or failures
in financial transactions or payment processing systems such as credit cards.
Due to the general uncertainty inherent in the Year 2000 problem and the
Company's dependence on third parties, the Company is unable to determine at
this time whether the consequences of Year 2000 failure will have a material
impact on the Company. Although the Company efforts to work with Host in
pursuit of its Year 2000 compliance program are expected to significantly
reduce the level of uncertainty concerning Year 2000 issues and management
believes that the possibility of significant interruptions of normal
operations should be reduced; there is no assurance that this will be the
case.
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THE DISTRIBUTION
BACKGROUND OF AND REASONS FOR THE DISTRIBUTION
The Distribution and the Merger are part of a series of transactions
pursuant to which Host intends to convert into a REIT for federal income tax
purposes. Assuming the Merger and the other transactions necessary to
restructure Host's business operations so that it will qualify as a REIT are
completed on or prior to December 31, 1998, Host expects to qualify as a REIT
beginning with its first full taxable year commencing after the REIT
Conversion is completed, which is currently expected to be the year commencing
January 1, 1999 (but which might not be until the year commencing January 1,
2000).
Because REITs are not permitted under current federal income tax law to
derive revenues directly from the operation of hotels, Host REIT will lease
and sublease the hotels currently owned and leased by Host (as well as those
acquired in the Blackstone Acquisition if such transaction is consummated) to
an unrelated party. In addition, in order for Host REIT to qualify as a REIT
for federal income tax purposes, Host or Host REIT will be required to have
distributed to its stockholders all E&P, as determined for tax purposes, of
Host prior to the end of the first full taxable year for which the REIT
election of Host REIT is effective. As a result of these requirements, Host
has determined, as part of the REIT Conversion, that (i) Host REIT will lease
and sublease substantially all of the hotels currently owned and leased by
Host (as well as those acquired in the Blackstone Acquisition if such
transaction is consummated) to subsidiaries of the Company, which will lease
from Host REIT the hotels under their existing brand name pursuant to their
existing management agreements with Marriott International and the Non-MI
Managers, and (ii) Host will, subject to approval of the Merger Agreement by
Host Stockholders and declaration of the Distribution by the Board of
Directors of Host after the date of the Special Meeting, make the Distribution
to help accomplish the requisite distributions of E&P of Host. In addition to
facilitating Host's conversion into a REIT for federal income tax purposes,
Host believes that there may be greater opportunities to expand the Company's
ownership of senior living communities if such business is owned by a separate
public company whose senior management has a greater focus on that business.
In connection with the Distribution, subsidiaries of the Company will lease
and sublease substantially all of the hotels then owned and leased by Host.
The Hotel Leases are expected to be for a term of years (ranging generally
from seven to ten years, depending on the particular hotel) commencing on or
before January 1, 1999 (assuming the Merger occurs prior to that date;
otherwise, as soon as practicable following the Distribution Date).
Concurrently with entering into the Hotel Leases, the Company will assume
certain of the rights and obligations under the existing management and
franchise agreements between Host and Marriott International or the Non-MI
Managers, pursuant to which Marriott International or the Non-MI Managers will
continue to manage the hotels on behalf of the Company. Marriott International
also will continue to manage the 31 Communities currently owned by the
Company.
CONDITIONS TO THE DISTRIBUTION
Although a number of the transactions comprising the REIT Conversion are
expected to be consummated immediately prior to, or in certain instances
immediately following, the Merger, the Merger will not be consummated unless
Host Stockholders have approved the Merger Agreement and the other conditions
to the Merger have been satisfied or waived. In particular, Host's Board of
Directors will have determined, among other things, that the transactions
constituting the REIT Conversion which impact Host REIT's status as a REIT for
federal income tax purposes have occurred or are reasonably likely to occur,
and based on advice of counsel, that Host REIT can elect to be treated as a
REIT for federal income tax purposes effective no later than the first full
taxable year commencing after the REIT Conversion is completed (which might
not be until the year commencing January 1, 2000 if the REIT Conversion is not
completed prior to January 1, 1999). Consistent with the foregoing, Host
intends to pursue the transactions constituting the REIT Conversion at least
through the date of the Special Meeting. If the Merger Agreement is approved
by Host Stockholders at the Special Meeting, Host intends to continue pursuing
those transactions constituting the REIT Conversion which have not yet been
completed, including the Blackstone Acquisition (which is not expected to be
consummated any earlier than
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December 29, 1998), and, if Host's Board of Directors has determined that the
conditions to the Merger have been or likely will be satisfied or waived,
declare the Distribution and enter into the leases and subleases of hotels
with subsidiaries of the Company, even though there is no assurance that the
Merger and the other transactions comprising the REIT Conversion might not be
delayed or possibly might never be consummated. If, however, the Merger
Agreement is not approved by the Host Stockholders at the Special Meeting or
the Host Board does not make the determinations described above, Host's Board
does not intend to declare the Distribution or enter into the leases and
subleases of hotels with subsidiaries of the Company.
Assuming the Merger Agreement is approved by Host Stockholders at the
Special Meeting and the Host Board of Directors makes the determinations
described above, it is currently contemplated that (i) the Host Board of
Directors would declare the Distribution on or about December 18, 1998 payable
no later than December 31, 1998 to Host stockholders of record on December 28,
1998 and (ii) the Merger would be consummated on or about December 29, 1998,
subject to satisfaction or waiver of the remaining conditions. Even under
circumstances where the Distribution is made but the Merger or other
transactions comprising the REIT Conversion are delayed or possibly never
consummated, the Host Board believes that having the leasing arrangements in
place with the Company could facilitate any subsequent efforts by Host to
qualify as a REIT for federal income tax purposes (including efforts to pursue
a merger with another entity or other transaction that would permit it to
commence a new taxable year and elect REIT status prior to January 1, 2000).
MANNER OF EFFECTING THE DISTRIBUTION
On the Distribution Date, Host will make the Distribution to Host
Stockholders pro rata in accordance with their respective interests in Host
held of record as of 5:00 p.m. (Eastern Standard Time) on the Record Date, and
will cause the Distribution Agent to mail certificates representing shares of
Common Stock of the Company to the Host Stockholders entitled thereto. Cash
will be paid in lieu of fractional shares. The Common Stock distributed in the
Distribution will represent approximately 82% of the then outstanding Common
Stock of the Company. The remaining approximately 18% of the then outstanding
Common Stock of the Company will be transferred by Host REIT to the Blackstone
Entities in connection with the Blackstone Acquisition. (If the Blackstone
Acquisition does not occur, the shares of Common Stock of the Company
distributed in the Distribution will represent 100% of the then outstanding
Common Stock of the Company and the remaining approximately 18% of the Common
Stock will be repurchased by the Company from Host at a purchase price of
$0.01 per share.) See "Business and Properties--Blackstone Acquisition."
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Inquiries relating to the Distribution should be directed to the
Distribution Agent, at Bank of New York, 101 Barclay Street, New York, New
York 10286, Attention: Ralph Chianese; or by telephone at 212-495-1784, Monday
through Friday, 9:00 a.m. to 5:00 p.m. (Eastern Standard Time).
NO SEPARATE VOTE OF HOST STOCKHOLDERS IS REQUIRED WITH RESPECT TO THE
DISTRIBUTION, AND NO HOST STOCKHOLDER WILL BE REQUIRED TO MAKE ANY PAYMENT OR
EXCHANGE ANY HOST COMMON STOCK IN ORDER TO RECEIVE COMMON STOCK OF THE COMPANY
OR CASH IN LIEU OF FRACTIONAL SHARES IN THE DISTRIBUTION.
The Company expects to have approximately 48,206 stockholders of record
immediately following the Distribution, based on the number of record holders
of Host common stock as of September 30, 1998. The Transfer Agent and
Registrar and the Distribution Agent for the Common Stock will be Bank of New
York.
FEDERAL INCOME TAX CONSEQUENCES
The Distribution will be a taxable dividend to a Host Stockholder in an
amount equal to the fair market value of the Common Stock (plus any cash in
lieu of fractional shares) received in the Distribution (to the extent that
the Distribution is made out of the Host Stockholder's share of the portion of
the E&P of Host through the end of 1998 allocable to the Distribution). Host
and Host REIT currently believe that the entire Distribution (the fair market
value of which Host currently estimates will be approximately $1.30 per share
of Host common stock) will be made out of such E&P and will be a taxable
dividend. There can be no assurance, however, that Host and Host REIT's
calculation of such E&P or Host's estimate of the fair market value of the
Distribution will be respected by the Internal Revenue Service (the "IRS") or
that a challenge by the IRS to either such calculation or such estimate would
not be sustained by a court. To the extent that the fair market value of a
Host Stockholder's share of the Distribution exceeds his or her share of the
portion of the E&P of Host and Host REIT through the end of 1998 allocable to
the Distribution, the Distribution would be treated first as a tax-free return
of capital to such Host Stockholder, reducing the adjusted basis in his or her
Host common stock by the amount of such excess (but not below zero) and then,
if such basis is reduced to zero and there is remaining excess, as capital
gain to the extent of such remaining excess (provided that such Host
Stockholder has held the Host common stock as a capital asset). A Host
Stockholder's initial tax basis in the Common Stock received in the
Distribution will equal the fair market value of such stock on the
Distribution Date, and its holding period in the Common Stock will begin on
the date after the Distribution Date. THE SPECIFIC TAX ATTRIBUTES OF A
PARTICULAR HOST STOCKHOLDER COULD HAVE A MATERIAL IMPACT ON THE TAX
CONSEQUENCES TO THAT HOST STOCKHOLDER OF THE DISTRIBUTION. THEREFORE, IT IS
ESSENTIAL THAT EACH HOST STOCKHOLDER CONSULT WITH HIS OR HER OWN TAX ADVISORS
WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH
STOCKHOLDER'S PARTICULAR TAX SITUATION, AS WELL AS ANY TAX CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. For
a more detailed discussion of the federal income tax consequences reasonably
anticipated by Host to be material to a Host Stockholder in connection with
the Distribution, see "Federal Income Tax Consequences."
RESTRICTION ON OWNERSHIP AND TRANSFER
For Host REIT to qualify as a REIT under the Code, Host REIT cannot own,
either directly or by attribution from one or more actual or constructive
owners (actually or constructively) of 10% or more of Host REIT, 10% or more
of the Company or any other tenant of Host REIT. In order to assist Host REIT
in meeting this requirement, the Charter includes an Ownership Limit, which
provides that no person or persons acting as a group may own, or be deemed to
own by virtue of certain attribution rules of the Code, more than (i) 9.8% of
the lesser of the number or value of shares of the outstanding Common Stock of
the Company or (ii) 9.8% of the lesser of the number or value of the issued
and outstanding preferred shares of any class or series of Company capital
stock. Pursuant to the terms of the Charter, the Ownership Limit will become
effective to all stockholders of the Company as of the Distribution Date. A
person who would exceed the Ownership Limit solely by reason
23
<PAGE>
of the receipt of shares of the Common Stock of the Company in the
Distribution is excepted from the Ownership Limit to the extent such person
holds such shares. The Board of Directors of the Company may grant an
exemption from the Ownership Limit with respect to a person if it is satisfied
that such ownership will not cause the Company or a subsidiary of the Company
that is a tenant of Host REIT to be considered a "related party tenant" for
purposes of the REIT qualification rules. The Ownership Limit also will not
apply if (i) Host REIT no longer qualifies as a REIT, (ii) the Board of
Directors of Host REIT determines that it is no longer in the best interests
of Host REIT to attempt to qualify, or continue to qualify, as a REIT or (iii)
the Company determines, and Host REIT concurs, that Host REIT derives less
than 1% of its gross income pursuant to the Hotel Leases. See "Description of
Capital Stock--Restrictions on Ownership and Transfer."
DIVIDEND POLICY
The Company intends to use its available funds to pursue investment and
business opportunities and, therefore, does not anticipate the payment of any
cash dividends on the Common Stock in the foreseeable future. The declaration
of any cash dividends in the future will be subject to the discretion of the
Company's Board of Directors.
24
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 11, 1998, and pro forma capitalization as of September 11, 1998,
after giving effect to the transactions described in the "Pro Forma Financial
Statements." The capitalization of the Company should be read in conjunction
with the Company's consolidated financial statements and the notes thereto,
the "Pro Forma Financial Statements" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," each contained elsewhere
herein.
<TABLE>
<CAPTION>
AS OF SEPTEMBER
11, 1998
-------------------
PRO
HISTORICAL FORMA(1)
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Debt.................................................. $213,034 $213,034(2)
Equity................................................ 392,071 413,553
-------- --------
Total capitalization................................ $605,105 $626,587
======== ========
</TABLE>
- --------
(1) See "Pro Forma Financial Statements." Amounts assume all Partnerships (as
defined herein) participate in the REIT Conversion.
(2) Amount excludes approximately $85 million due to Host to pay for working
capital purchased from Host.
25
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The REIT Conversion involves a complex series of transactions not all of
which necessarily have to occur in order for the REIT Conversion to be
consummated. For example, there is no requirement that any of the eight public
partnerships (the "Partnerships") and the private partnerships proposed to be
acquired in the REIT Conversion (the Partnerships and such private
partnerships collectively, the "Hotel Partnerships") actually participate in
order for the REIT Conversion to be consummated (but if a Hotel Partnership
does not participate in the REIT Conversion, its hotel properties would not be
leased to the Company), nor is there a requirement that the Blackstone
Acquisition occur in order for the REIT Conversion to be consummated. In
addition, the consent of a number of lenders and several outside partners in
certain key Hotel Partnerships are required in order for certain hotel
properties owned by Host to be leased to the Company, and there can be no
assurance that all such consents will be obtained. Accordingly, the number of
hotel properties that will be leased by the Company may vary, perhaps
substantially.
In light of the number of possible variations, the Company is not able to
describe all possible combinations of Hotels that could be leased. However, to
assist in analyzing the Distribution, the Company has prepared two separate
sets of unaudited pro forma financial statements to show the impact of the
Distribution assuming that all Partnerships participate in the REIT Conversion
("All Partnerships Participate"), the Blackstone Acquisition is consummated,
and all required lender and outside partner consents are obtained and a second
scenario showing no Partnerships participate in the REIT Conversion (but that
the Blackstone Acquisition is consummated and all required lender and outside
partner consents (other than for the Partnerships) are obtained) ("No
Partnership Participation").
The unaudited pro forma condensed consolidated statements of operations of
the Company reflect the following transactions for the First Three Quarters
1998 and for the fiscal year ended January 2, 1998, as if such transactions
had been completed at the beginning of the fiscal year:
. 1997 acquisition of Forum (the "Forum Acquisition") and one additional
senior living community;
. 1998 retirement of $26 million of debt through a capital contribution
from Host;
. 1998 repayment and forgiveness of $92 million of unsecured debt and a
$14.8 million intercompany note treated as a capital contribution by
Host;
. 1998 acquisition of one senior living community;
. 1998 acquisition of minority interests in certain consolidated
subsidiaries of the Company through contributions from Host;
. 1998 spin-off of the Company by Host and the concurrent lease or sublease
of hotels from Host REIT;
. 1998 adoption of Emerging Issues Task Force ("EITF") 97-2, "Application
of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual
Management Arrangements." to reflect the change in presentation to
present property-level sales and operating expenses;
. Contribution to the Company from Host of a 5% interest in a joint venture
which holds an approximate $130 million mortgage note from a consolidated
subsidiary of Host in connection with the Distribution; and
. Adjustment to corporate expenses as if the Company were operated on a
stand-alone basis, partially offset by the asset management fee to be
charged to Host REIT.
The adjustments to the unaudited pro forma balance sheet of the Company
reflect the lease and sublease of substantially all of Host's owned or leased
hotels and certain other transactions as described herein in conjunction with
the Distribution.
In 1998, the Company acquired one senior living community for $21 million.
Also, during 1998, Host prepaid approximately $26 million of the Company's
mortgage debt and repaid $92 million of unsecured debt to Marriott
International. The prepayment was recorded as a capital contribution to the
Company and the $92 million was repaid in exchange for a $92 million note due
to Host with similar terms. The $92 million note and an additional $14.8
million intercompany note were forgiven by Host and treated as a capital
contribution in the First Three Quarters 1998.
26
<PAGE>
In 1997, Host acquired 29 senior living communities from Marriott
International and concurrently contributed all of the assets and liabilities
obtained in the Forum Acquisition to the Company. In addition, during 1997,
the Company acquired 49% of the remaining 50% interest in Leisure Park Venture
Limited Partnership which owns a 418-unit retirement community in New Jersey
for approximately $23 million, including the assumption of approximately $15
million in debt. The Company currently owns 99% of the partnership.
If all components of Host's conversion to a REIT are not completed prior to
January 1, 1999, Host REIT may be precluded from electing REIT status until
January 1, 2000 and the Blackstone Acquisition may not be consummated.
Accordingly, a separate column ("Pro Forma without Blackstone") has been
included in the pro forma financial statements that assumes that the
Blackstone Acquisition does not occur.
27
<PAGE>
The unaudited pro forma financial statements present the financial position
and the results of operations of the Company as if the transactions described
above were completed. These presentations do not purport to represent what the
Company's results of operations would actually have been if the transactions
described above had in fact occurred on such date or at the beginning of such
period or to project the Company's results of operations for any future date
or period.
The unaudited pro forma financial statements are based upon certain
assumptions, as set forth in the notes to the unaudited pro forma financial
statements, that the Company believes are reasonable under the circumstances
and should be read in conjunction with the consolidated financial statements
and notes thereto of the Company included elsewhere herein.
28
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 11, 1998
ALL PARTNERSHIPS PARTICIPATE
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WITHOUT
HISTORICAL ADJUSTMENTS PRO FORMA BLACKSTONE (I)
---------- ----------- --------- --------------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment,
net........................ $649,528 $ -- $649,528 $649,528
Amounts due from Marriott
International.............. 4,097 -- 4,097 4,097
Other assets................ 14,290 85,000(A) 105,772 100,772
6,482(B)
Cash and cash equivalents... 26,504 15,000(B) 41,504 41,504
-------- -------- -------- --------
Total assets.............. $694,419 $106,482 $800,901 $795,901
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Debt........................ $213,034 $ -- $213,034 $213,034
Deferred income taxes....... 61,376 -- 61,376 61,376
Due to Host Marriott Corpo-
ration, net................ 12,989 85,000(A) 97,989 92,989
Accounts payable and other
accrued liabilities........ 13,639 -- 13,639 13,639
Deferred revenue............ 1,310 -- 1,310 1,310
-------- -------- -------- --------
Total liabilities......... 302,348 85,000 387,348 382,348
-------- -------- -------- --------
Stockholder's equity
Common stock, 100 shares
authorized, issued and
outstanding (on a pro-forma
basis 75 million shares of
common stock authorized;
24.8 million issued and
outstanding)(1)............ -- -- -- --
Additional paid-in capital.. 386,627 15,000(B) 408,109 408,109
6,482(B)
Retained earnings........... 5,444 -- 5,444 5,444
-------- -------- -------- --------
Total stockholder's equi-
ty....................... 392,071 21,482 413,553 413,553
-------- -------- -------- --------
Total liabilities and
stockholder's equity..... $694,419 $106,482 $800,901 $795,901
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
29
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
ALL PARTNERSHIPS PARTICIPATE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
D E F G H I
DEBT HOTEL PRO FORMA
REFINANCING/ COMMUNITY CORPORATE LEASES AND ADOPTION OF WITHOUT
HISTORICAL REPAYMENTS ACQUISITIONS EXPENSES SUBLEASES EITF 97-2 PRO FORMA BLACKSTONE
---------- ------------ ------------ --------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Rooms............... $ -- $ -- $ -- $ -- $ -- $1,847,650 $1,847,650 $1,636,922
Food and beverage... -- -- -- -- -- 863,953 863,953 765,417
Other............... -- -- -- -- -- 163,268 163,268 144,647
House profit........ -- -- -- -- 1,123,100 (1,123,100) -- --
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total hotels........ -- -- -- -- 1,123,100 1,751,771 2,874,871 2,546,986
-------- ------- ----- ------- --------- ---------- ---------- ----------
Senior living
communities
Routine............. 54,872 -- 84 -- -- 94,792 149,748 149,748
Ancillary........... 2,928 -- 1 -- -- 13,483 16,412 16,412
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total senior living
communities........ 57,800 -- 85 -- -- 108,275 166,160 166,160
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total revenues...... 57,800 -- 85 -- 1,123,100 1,860,046 3,041,031 2,713,146
-------- ------- ----- ------- --------- ---------- ---------- ----------
OPERATING COSTS AND
EXPENSES
Hotels
Property-level costs
and expenses
Rooms............... -- -- -- -- -- 729,475 729,475 647,105
Food and beverage... -- -- -- -- -- 766,688 766,688 680,116
Other department
costs and
deductions......... -- -- -- -- -- 255,608 255,608 226,746
Management fees and
other.............. -- -- -- -- 205,169 -- 205,169 193,888
Lease expense....... -- -- -- -- 887,400 -- 887,400 771,900
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total hotels....... -- -- -- -- 1,092,569 1,751,771 2,844,340 2,519,755
-------- ------- ----- ------- --------- ---------- ---------- ----------
Senior living
communities
Property-level costs
and expenses
Routine............. -- -- -- -- -- 94,792 94,792 94,792
Ancillary........... -- -- -- -- -- 13,483 13,483 13,483
Other operating
costs and
expenses........... 29,803 -- 49 -- -- -- 29,852 29,852
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total senior living
communities....... 29,803 -- 49 -- -- 108,275 138,127 138,127
-------- ------- ----- ------- --------- ---------- ---------- ----------
Total operating
costs and
expenses.......... 29,803 -- 49 -- 1,092,569 1,860,046 2,982,467 2,657,882
-------- ------- ----- ------- --------- ---------- ---------- ----------
Operating profit .... 27,997 -- 36 -- 30,531 -- 58,564 55,264
Corporate expenses... (2,937) -- -- (7,948) -- -- (10,885) (10,885)
Interest expense..... (17,560) 4,789 -- -- (3,531) -- (16,302) (16,094)
Interest and dividend
income.............. 1,120 -- 6 -- 392 -- 1,518 1,518
-------- ------- ----- ------- --------- ---------- ---------- ----------
Income (loss) before
income taxes........ 8,620 4,789 42 (7,948) 27,392 -- 32,895 29,803
Benefit (provision)
for income taxes.... (3,534) (1,963) (18) 3,259 (11,231) -- (13,487) (12,219)
-------- ------- ----- ------- --------- ---------- ---------- ----------
Income (loss) before
extraordinary item.. $ 5,086 $ 2,826 $ 24 $(4,689) $ 16,161 $ -- $ 19,408 $ 17,584
======== ======= ===== ======= ========= ========== ========== ==========
Pro forma earnings
per share........... $ .21(2) $ .78(2) $ 0.86(3)
======== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
30
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1998
ALL PARTNERSHIPS PARTICIPATE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
C D E F G H
HOTEL
DEBT LEASES
FORUM REFINANCING/ COMMUNITY CORPORATE AND ADOPTION OF PRO
HISTORICAL ACQUISITION REPAYMENT ACQUISITIONS EXPENSES SUBLEASES EITF 97-2 FORMA
---------- ----------- ------------ ------------ --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Room............. $ -- $ -- $ -- $ -- $ -- $ -- $ 2,460,816 $2,460,816
Food and
beverage........ -- -- -- -- -- -- 1,156,017 1,156,017
Other............ -- -- -- -- -- -- 248,471 248,471
House profit..... -- -- -- -- -- 1,475,300 (1,475,300) --
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total hotels.... -- -- -- -- -- 1,475,300 2,390,004 3,865,304
-------- ------- ------- ------- ------- ---------- ----------- ----------
Senior living
communities......
Routine.......... 35,473 30,859 -- 7,031 -- -- 127,135 200,498
Ancillary........ 1,427 1,983 -- 188 -- -- 18,693 22,291
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total senior
living
communities.... 36,900 32,842 -- 7,219 -- -- 145,828 222,789
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total revenues.. 36,900 32,842 -- 7,219 -- 1,475,300 2,535,832 4,088,093
-------- ------- ------- ------- ------- ---------- ----------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ -- -- -- -- -- -- 993,374 993,374
Food and
beverage........ -- -- -- -- -- -- 1,047,903 1,047,903
Other department
costs and
deductions...... -- -- -- -- -- -- 348,727 348,727
Management fees
and other....... -- -- -- -- -- 260,500 -- 260,500
Lease expense.... -- -- -- -- -- 1,175,100 -- 1,175,100
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total hotels.... -- -- -- -- -- 1,435,600 2,390,004 3,825,604
-------- ------- ------- ------- ------- ---------- ----------- ----------
Senior living
communities
Property-level costs and expenses --
Routine.......... -- -- -- -- -- -- 127,135 127,135
Ancillary........ -- -- -- -- -- -- 18,693 18,693
Other operating
costs and
expenses........ 20,929 17,977 -- 4,733 -- -- -- 43,639
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total senior
living
communities.... 20,929 17,977 -- 4,733 -- -- 145,828 189,467
-------- ------- ------- ------- ------- ---------- ----------- ----------
Total operating
costs and
expenses....... 20,929 17,977 -- 4,733 -- 1,435,600 2,535,832 4,015,071
-------- ------- ------- ------- ------- ---------- ----------- ----------
Operating profit
................. 15,971 14,865 -- 2,486 -- 39,700 -- 73,022
Corporate
expenses......... (2,304) (5,115) -- 745 (6,826) -- -- (13,500)
Interest expense.. (13,396) (9,630) 7,312 (2,118) -- (5,100) -- (22,932)
Interest and
dividend income.. 336 598 -- -- -- 567 -- 1,501
-------- ------- ------- ------- ------- ---------- ----------- ----------
Income (loss)
before income
taxes............ 607 718 7,312 1,113 (6,826) 35,167 -- 38,091
Benefit
(provision) for
income taxes..... (249) (294) (2,998) (456) 2,799 (14,419) -- (15,617)
-------- ------- ------- ------- ------- ---------- ----------- ----------
Income (loss)
before
extraordinary
item............. $ 358 $ 424 $ 4,314 $ 657 $(4,027) $ 20,748 $ -- $ 22,474
======== ======= ======= ======= ======= ========== =========== ==========
Pro forma earnings
per share........ $ .01(2) $ .91(2)
======== ==========
<CAPTION>
I
PRO
FORMA
WITHOUT
BLACKSTONE
-------------
<S> <C>
REVENUES
Hotels
Room............. $2,203,294
Food and
beverage........ 1,035,041
Other............ 222,469
House profit..... --
-------------
Total hotels.... 3,460,804
-------------
Senior living
communities......
Routine.......... 200,498
Ancillary........ 22,291
-------------
Total senior
living
communities.... 222,789
-------------
Total revenues.. 3,683,593
-------------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ 886,763
Food and
beverage........ 935,440
Other department
costs and
deductions...... 311,301
Management fees
and other....... 246,500
Lease expense.... 1,038,600
-------------
Total hotels.... 3,418,604
-------------
Senior living
communities
Property-level costs and e-- xpenses
Routine.......... 127,135
Ancillary........ 18,693
Other operating
costs and
expenses........ 43,639
-------------
Total senior
living
communities.... 189,467
-------------
Total operating
costs and
expenses....... 3,608,071
-------------
Operating profit
................. 75,522
Corporate
expenses......... (13,500)
Interest expense.. (22,633)
Interest and
dividend income.. 1,501
-------------
Income (loss)
before income
taxes............ 40,890
Benefit
(provision) for
income taxes..... (16,765)
-------------
Income (loss)
before
extraordinary
item............. $ 24,125
=============
Pro forma earnings
per share........ $ 1.18(3)
=============
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
ALL PARTNERSHIPS PARTICIPATE
A. Represents the adjustment to increase working capital and record a loan
payable to Host of $85 million to record the transfer of hotel working capital
to the Company related to the leasing of Host's hotels.
B. Represents the following transactions in connection with the
Distribution:
. Host's contribution of $15 million in cash to the Company.
. Host's contribution of a 5% limited partner interest in a joint
venture with Host that owns an approximate $130 million note
receivable from a consolidated subsidiary of Host.
C. Represents the adjustment to reflect the historical revenues, operating
expenses, corporate expenses, interest expense and interest income for the
Forum Acquisition as if such acquisition occurred at the beginning of 1997
(actual acquisition date was June 21, 1997).
D. Represents the adjustment to eliminate interest expense on $133 million
of debt repaid during 1998 by Host on behalf of the Company and treated as a
capital contribution by Host.
E. Represents the adjustment to record the historical revenues, operating
expenses, corporate expenses and interest income related to the acquisition of
one senior living community in 1998 and the acquisition of one senior living
community in 1997. The adjustment also includes the elimination of $745,000 of
minority interest expense included in corporate expenses related to the
purchase of minority interests in certain consolidated subsidiaries of the
Company in 1997.
F. Represents the adjustment to record additional corporate expenses
anticipated to be incurred when the Company is operated on a stand-alone basis
subsequent to the Distribution, net of the asset management contract of $4.5
million per annum. The adjustment includes the following (in thousands):
<TABLE>
<CAPTION>
FIRST THREE FISCAL YEAR
QUARTERS 1998 1997
------------- -----------
<S> <C> <C>
Payroll costs......................................... $ 6,748 $ 6,894
Rent and insurance.................................... 1,218 1,267
Other general and administrative costs................ 3,097 3,165
------- -------
11,063 11,326
Less: asset management fee............................ (3,115) (4,500)
------- -------
Net corporate expense adjustment.................... $ 7,948 $ 6,826
======= =======
</TABLE>
G. Represents the adjustment to record the historical hotel revenues and
hotel expenses and pro forma lease expense associated with the leasing of
certain hotel properties from Host, interest expense on the $85 million
working capital loan at 6%, and income from the 5% investment in the joint
venture with Host that owns a $130 million note receivable from a consolidated
subsidiary of Host.
Rental revenues under the leases are based on the greater of Percentage Rent
or Minimum Rent. Total rent in the pro forma statement of operations is
calculated based on the historical gross sales of the property and the
negotiated rental rates and thresholds by property as if the leases were
entered into on the first day of fiscal year 1997. There are generally three
sales categories utilized in the rent calculation: rooms, food and beverage
and other. For rooms and food and beverage, there are three tiers of rent with
two thresholds, while the other category generally has two tiers of rent and
one threshold. The percentage rent thresholds are increased annually on the
first day of each year after the initial lease year based on a blended
increase of the Consumer Price Index ("CPI") and a wage and benefit index. For
purposes of the pro formas, 1997 is the assumed initial lease year
32
<PAGE>
and the blended increase applied to the thresholds at January 3, 1998 is
assumed to be 3%. Minimum rent is expressed as a fixed dollar amount that
increases annually on the first day of each year after the initial lease year
at 50% of the CPI increase. Accordingly, the 1998 rent thresholds and minimum
rent included in the pro formas were adjusted as of January 3, 1998 for the
1997 increases in the indices. Rental revenues are recognized only for leases
to be executed with Host REIT at or prior to completion of the Distribution.
The execution of the leases is dependent upon the consummation of the
Distribution, which is subject to contingencies that are outside the control
of the Company, including approval of the Merger Agreement by Host
Stockholders and consent to certain aspects of the REIT Conversion by lenders,
debt holders, partners and ground lessors of Host. The Company believes that
negotiations by Host with third parties to complete the REIT Conversion will
not result in any material change to the leases. The table below details gross
sales, minimum rent and total rent for all full-service properties to be
leased and summarized amounts for the limited-service properties to be
subleased:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
-------------------- --------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- ------ ------- ----- ------ ------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Grand Hotel Resort and
Golf Club.............. $ 23.4 $ 2.8 $ 4.2 $ 18.0 $ 2.0 $ 3.7
Scottsdale Suites....... 11.9 3.0 5.0 8.2 2.1 3.4
The Ritz-Carlton,
Phoenix................ 23.3 4.6 7.2 17.3 3.2 5.5
Coronado Island Resort.. 22.0 2.1 2.1 16.2 1.5 3.6
Costa Mesa Suites....... 9.7 1.9 3.3 7.2 1.3 2.3
Desert Springs Resort
and Spa................ 103.3 21.3 30.3 80.3 15.0 22.6
Manhattan Beach......... 16.3 2.4 4.8 12.2 1.7 3.6
Marina Beach ........... 21.1 4.6 7.1 16.9 3.2 6.2
Newport Beach........... 33.5 5.5 8.7 24.0 3.9 6.8
Newport Beach Suites.... 11.0 2.6 4.1 8.0 1.8 3.0
Ontario Airport......... 12.1 1.8 3.4 8.3 1.3 2.2
San Diego Marriott Hotel
and Marina............. 103.3 38.0 39.6 78.6 26.7 31.1
San Diego Mission
Valley................. 16.7 3.4 5.1 12.6 2.4 5.6
San Francisco Airport... 43.8 8.2 13.2 32.2 5.8 9.5
San Francisco
Fisherman's Wharf...... 17.8 4.0 6.4 12.1 2.8 4.3
San Francisco Moscone
Center................. 120.2 20.7 37.9 90.5 14.6 28.5
San Ramon............... 19.7 4.4 5.1 14.4 3.1 4.0
Santa Clara............. 47.3 7.8 16.5 37.2 5.5 13.5
The Ritz-Carlton, Marina
del Rey................ 32.4 5.5 10.8 23.4 3.9 7.9
The Ritz-Carlton, San
Francisco.............. 50.1 9.6 14.7 34.2 6.7 10.3
Torrance................ 20.5 2.3 3.5 15.0 1.6 5.1
Denver Southeast........ 21.5 3.0 6.2 14.9 2.1 4.1
Denver Tech Center...... 26.8 5.1 8.3 20.1 3.6 6.0
Denver West............. 13.7 1.8 4.0 9.6 1.2 2.7
Marriott's Mountain
Resort at Vail......... 17.6 3.0 5.1 14.1 2.1 4.5
Hartford/Farmington..... 18.4 3.5 4.7 13.4 2.4 3.5
Hartford/Rocky Hill..... 11.6 1.5 2.7 8.5 1.1 2.0
Fort Lauderdale Marina.. 28.5 4.3 7.9 20.4 3.0 5.7
Harbor Beach Resort..... 58.1 16.5 19.3 43.2 11.6 14.0
Jacksonville............ 11.8 1.8 3.6 8.0 1.2 2.4
Miami Airport........... 29.7 3.9 8.4 21.6 2.8 6.1
Orlando World Center.... 128.2 23.5 39.6 98.7 16.5 30.4
Palm Beach Gardens...... 11.8 1.9 3.7 8.5 1.4 3.0
Singer Island (Holiday
Inn)................... 6.6 1.4 2.5 5.2 1.0 2.1
Tampa Airport........... 17.1 1.6 3.5 13.1 1.1 2.7
Tampa Westshore......... 15.0 1.8 3.6 10.8 1.3 2.6
The Ritz-Carlton,
Naples................. 66.4 18.1 23.3 53.1 12.7 18.0
Atlanta Marriott
Marquis................ 85.4 21.3 33.3 58.6 15.0 25.6
Atlanta Midtown Suites.. 10.5 1.8 3.5 7.8 1.3 2.6
Atlanta Norcross........ 7.6 1.0 1.7 5.6 0.7 1.2
Atlanta Northwest....... 14.9 2.7 4.3 11.3 1.9 3.3
Atlanta Perimeter....... 16.6 2.5 4.5 12.6 1.7 3.5
JW Marriott Hotel at
Lenox.................. 24.8 3.7 6.8 17.7 2.6 5.0
The Ritz-Carlton,
Atlanta................ 30.2 5.8 8.8 21.7 4.1 6.8
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
The Ritz-Carlton, Buckhead.. $ 49.3 $ 13.1 $ 16.3 $ 35.8 $ 9.2 $ 11.7
Chicago/Deerfield Suites.... 10.2 1.8 3.1 7.4 1.3 2.3
Chicago/Downers Grove
Suites..................... 9.0 1.8 2.9 6.7 1.3 2.2
Chicago/Downtown Courtyard.. 16.3 3.1 4.9 12.2 2.2 3.9
Chicago O'Hare.............. 40.0 5.5 11.5 28.8 3.9 8.2
South Bend.................. 9.9 1.1 2.1 7.0 0.8 1.5
New Orleans ................ 66.4 17.5 21.8 47.6 12.3 15.8
Bethesda.................... 23.2 3.2 5.6 17.3 2.2 4.1
Gaithersburg/Washingtonian
Center..................... 13.2 2.4 3.8 9.7 1.7 2.8
Boston/Newton............... 27.4 4.8 7.8 19.1 3.4 5.5
Detroit Romulus............. 8.8 1.1 1.8 6.6 0.8 1.4
The Ritz-Carlton, Dearborn.. 25.7 3.6 5.5 17.7 2.5 4.0
Minneapolis/Bloomington..... 20.2 3.3 6.5 13.8 2.3 4.7
Minneapolis City Center..... 27.5 3.7 7.5 20.4 2.4 5.2
Minneapolis Southwest....... 14.9 2.7 4.8 10.1 1.9 4.0
Kansas City Airport......... 14.3 1.7 3.7 9.9 1.2 2.5
St. Louis Pavilion.......... 27.5 6.1 6.5 18.5 4.3 4.3
Nashua...................... 7.5 0.8 1.3 5.3 0.5 0.9
Hanover..................... 22.5 4.7 6.6 15.1 3.3 4.3
Newark Airport.............. 39.4 6.5 11.8 29.2 4.6 8.6
Park Ridge.................. 16.0 2.5 4.0 11.9 1.7 4.2
Saddle Brook................ 10.7 1.3 2.1 7.8 0.9 1.7
Albany...................... 18.5 3.5 6.1 12.4 2.5 5.2
New York Marriott Financial
Center..................... 39.6 7.7 13.2 29.1 5.4 10.1
New York Marriott Marquis... 210.3 40.0 60.8 155.4 29.7 47.6
Marriott World Trade
Center..................... 65.4 12.2 19.4 49.1 8.6 14.9
Charlotte Executive Park.... 14.0 2.3 3.7 9.8 1.6 2.6
Raleigh Crabtree Valley..... 14.9 2.4 3.9 10.9 1.7 2.8
Oklahoma City............... 15.6 2.0 3.8 10.4 1.4 2.4
Oklahoma City Waterford..... 9.1 1.5 2.7 6.1 1.0 1.7
Portland.................... 26.4 4.1 7.5 17.6 2.9 4.8
Philadelphia (Convention
Center).................... 80.7 14.2 25.0 58.2 10.0 17.8
Philadelphia Airport........ 25.0 4.1 7.6 18.6 2.9 5.6
Pittsburgh City Center...... 16.4 1.9 3.0 11.1 1.3 2.2
Memphis..................... 10.6 1.5 3.2 5.7 1.0 1.8
Dallas/Fort Worth........... 28.9 5.9 9.3 21.9 4.1 7.0
Dallas Quorum............... 25.7 4.2 8.2 18.3 3.0 5.8
El Paso..................... 11.6 0.9 2.3 7.8 0.6 1.4
Houston Airport ............ 21.6 2.8 6.0 16.9 2.0 4.6
JW Marriott Houston......... 27.2 5.0 8.0 20.1 3.5 5.9
Plaza San Antonio........... 13.8 2.9 4.6 9.7 2.0 3.3
San Antonio Rivercenter..... 68.9 17.5 24.5 49.3 12.3 17.8
San Antonio Riverwalk....... 29.3 6.1 10.3 21.7 4.3 7.6
Salt Lake City.............. 28.5 5.6 9.5 21.1 3.9 7.2
Dulles Airport.............. 14.6 1.8 4.0 10.9 1.2 3.0
Key Bridge.................. 29.4 5.6 10.2 21.2 3.9 7.4
Norfolk Waterside........... 18.1 3.3 5.4 12.8 2.4 3.8
Pentagon City Residence
Inn........................ 11.7 3.5 5.5 8.7 2.5 4.2
The Ritz-Carlton, Tysons
Corner..................... 34.4 5.9 9.8 24.9 4.1 7.3
Washington Dulles Suites.... 10.3 2.5 4.0 7.8 1.8 3.0
Westfields.................. 28.0 4.7 7.4 20.3 3.3 5.4
Williamsburg................ 12.6 1.8 2.8 9.3 1.3 2.1
Washington Metro Center..... 25.2 4.5 7.3 19.2 3.2 5.3
Calgary..................... 13.4 1.7 1.7 9.8 1.2 2.3
Toronto Airport............. 17.1 2.9 5.6 13.0 2.0 4.2
Toronto Eaton Centre........ 21.1 6.1 7.1 16.0 4.3 5.6
Toronto Delta Meadowvale.... 16.1 2.6 4.9 10.6 1.9 3.1
Fairview Park............... 22.5 3.9 7.3 16.3 2.8 5.2
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Dayton....................... $ 18.2 $ 3.2 $ 6.0 $ 13.4 $ 2.3 $ 4.3
Research Triangle Park....... 9.1 1.4 2.9 6.8 1.0 2.3
Detroit Marriott Southfield.. 8.8 1.2 2.1 6.9 0.9 1.7
Detroit Marriott Livonia..... 10.0 1.4 2.6 7.4 1.0 1.9
Fullerton.................... 6.8 1.2 1.8 5.0 0.8 1.3
Marriott O'Hare Suites....... 14.4 2.7 4.9 10.8 1.9 4.0
Albuquerque.................. 16.4 3.6 3.6 11.1 2.5 2.6
Greensboro-High Point........ 13.6 3.3 3.3 10.2 2.3 2.4
Houston Medical Center....... 16.5 4.0 4.0 12.2 2.8 2.9
Miami Biscayne Bay........... 26.8 6.5 6.6 20.5 4.5 5.1
Marriott Mountain Shadows
Resort...................... 24.1 4.4 4.5 16.9 3.1 3.1
Seattle SeaTac Airport....... 23.1 6.7 6.7 17.5 4.7 5.1
Four Seasons, Atlanta(4)..... 15.6 5.8 5.9 14.2 4.1 4.5
Four Seasons,
Philadelphia(4)............. 41.1 7.9 12.4 30.6 5.6 10.1
Grand Hyatt, Atlanta(4)...... 25.3 10.0 10.0 22.6 7.0 8.2
Hyatt Regency,
Burlingame(4)............... 47.9 8.8 17.6 39.5 6.2 15.1
Hyatt Regency, Cambridge(4).. 32.4 6.7 11.9 26.8 4.7 10.4
Hyatt Regency, Reston(4)..... 30.5 6.5 11.3 24.2 4.5 9.2
Swissotel, Atlanta(4)........ 22.2 5.0 6.3 17.2 3.5 5.8
Swissotel, Boston(4)......... 26.8 6.4 8.5 20.5 4.5 6.9
Swissotel, Chicago(4)........ 38.1 10.9 15.1 28.9 7.7 12.0
The Drake (Swissotel), New
York(4)..................... 38.8 11.6 13.6 34.2 8.2 13.4
The Ritz-Carlton, Amelia
Island(4)................... 45.7 10.3 13.4 37.4 7.2 11.1
The Ritz-Carlton, Boston(4).. 40.1 6.9 10.5 31.4 4.8 8.8
-------- ------ -------- -------- ------ ------
Total Full-service
Properties.................. 3,600.8 715.9 1095.6 2,671.0 504.5 838.3
Total Courtyard Properties... 212.0 50.6 59.2 159.2 35.0 36.8
Total Residence Inns......... 69.9 17.2 20.3 50.6 12.0 12.3
-------- ------ -------- -------- ------ ------
Total...................... $3,882.7 $783.7 $1175.1 $2,880.8 $551.5 $887.4
======== ====== ======== ======== ====== ======
</TABLE>
35
<PAGE>
Although a number of the transactions comprising the REIT Conversion are
expected to be consummated immediately prior to, or in certain instances
immediately following, the Merger, the Merger will not be consummated unless
Host Stockholders have approved the Merger Agreement and the other conditions
to the Merger have been satisfied or waived. In particular, Host's Board of
Directors will have determined, among other things, that the transactions
constituting the REIT Conversion which impact Host REIT's status as a REIT for
federal income tax purposes have occurred or are reasonably likely to occur,
and based on advice of counsel, that Host REIT can elect to be treated as a
REIT for federal income tax purposes effective no later than the first full
taxable year commencing after the REIT Conversion is completed (which might
not be until the year commencing January 1, 2000 if the REIT Conversion is not
completed prior to January 1, 1999). Consistent with the foregoing, Host
intends to pursue the transactions constituting the REIT Conversion at least
through the date of the Special Meeting. If the Merger Agreement is approved
by Host Stockholders at the Special Meeting, Host intends to continue pursuing
those transactions constituting the REIT Conversion which have not yet been
completed, including the Blackstone Acquisition (which is not expected to be
consummated any earlier than December 29, 1998), and, if Host's Board of
Directors has determined that the conditions to the Merger have been or likely
will be satisfied or waived, declare the Distribution and enter into the
leases and subleases of hotels with subsidiaries of the Company, even though
there is no assurance that the Merger and the other transactions comprising
the REIT Conversion might be delayed or possibly might never be consummated.
If, however, the Merger Agreement is not approved by the Host Stockholders at
the Special Meeting or the Host Board does not make the determinations
described above, Host's Board does not intend to declare the Distribution or
enter into the leases and subleases of hotels with subsidiaries of the
Company. Assuming the Merger Agreement is approved by Host Stockholders at the
Special Meeting and the Host Board of Directors makes the determinations
described above, it is currently contemplated that (i) the Host Board of
Directors would declare the Distribution on or about December 18, 1998 payable
no later than December 31, 1998 to Host Stockholders of record on December 28,
1998 and (ii) the Merger would be consummated on or about December 29, 1998,
subject to satisfaction or waiver of the remaining conditions. Even under
circumstances where the Distribution is made but the Merger or other
transactions comprising the REIT Conversion are delayed or possibly never
consummated, the Host Board believes that having the leasing arrangements in
place with the Company could facilitate any subsequent efforts by Host to
qualify as a REIT for federal income tax purposes (including efforts to pursue
a merger with another entity or other transaction that would permit it to
commence a new taxable year and elect REIT status prior to January 1, 2000).
H. Represents the adjustment to reflect the Company's anticipated adoption
of EITF 97-2 in the fourth quarter of 1998 by recording property-level sales
and operating expenses. The adjustment has no impact on operating profit or
net income.
I. The "Pro Forma without Blackstone" column reflects the adjustment to
eliminate the revenues, operating expenses and working capital relating to the
Blackstone hotel properties assuming that the Blackstone Acquisition does not
occur.
- --------
(1) On a pro forma basis as of September 11, 1998, the Company had 75
million shares of common stock, $.01 par value, authorized with 24.8 million
shares issued and outstanding. In addition, on a pro forma basis, 10 million
shares of preferred stock, $.01 par value, are authorized with none issued or
outstanding.
(2) Reflects the pro forma earnings per share based on 24.8 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and the issuance of shares to
the Blackstone Entities.
(3) Reflects the pro forma earnings per share based on 20.4 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and assumes that the Blackstone
acquisition does not occur.
(4) Represent the Blackstone hotel properties.
36
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 11, 1998
NO PARTNERSHIP PARTICIPATION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WITHOUT
HISTORICAL ADJUSTMENTS PRO FORMA BLACKSTONE
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment, net....... $649,528 $ -- $649,528 $649,528
Amounts due from Marriott Interna-
tional........................... 4,097 -- 4,097 4,097
Other assets...................... 14,290 67,000(A) 87,772 82,772
6,482(B)
Cash and cash equivalents......... 26,504 15,000(B) 41,504 41,504
-------- ------- -------- --------
Total assets.................... $694,419 $88,482 $782,901 $777,901
======== ======= ======== ========
LIABILITIES AND STOCKHOLDER'S EQ-
UITY
Debt.............................. $213,034 $ -- $213,034 $213,034
Deferred income taxes............. 61,376 -- 61,376 61,376
Due to Host Marriott Corporation,
net.............................. 12,989 67,000(A) 79,989 74,989
Accounts payable and other accrued
liabilities...................... 13,639 -- 13,639 13,639
Deferred revenue.................. 1,310 -- 1,310 1,310
-------- ------- -------- --------
Total liabilities............... 302,348 67,000 369,348 364,348
-------- ------- -------- --------
Stockholder's equity
Common stock, 100 shares
authorized, issued and
outstanding (on a pro forma basis
75 million shares of common stock
authorized; 24.8 million issued
and outstanding)(1).............. -- -- -- --
Additional paid-in capital........ 386,627 15,000(B) 408,109 408,109
6,482(B)
Retained earnings................. 5,444 -- 5,444 5,444
-------- ------- -------- --------
Total stockholder's equity...... 392,071 21,482 413,553 413,553
-------- ------- -------- --------
Total liabilities and stockhold-
er's equity.................... $694,419 $88,482 $782,901 $777,901
======== ======= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
37
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST THREE QUARTERS 1998
NO PARTNERSHIP PARTICIPATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
D E F G H I
DEBT PRO FORMA
REFINANCING/ COMMUNITY CORPORATE HOTEL LEASES ADOPTION OF WITHOUT
HISTORICAL REPAYMENTS ACQUISITIONS EXPENSES AND SUBLEASES EITF 97-2 PRO FORMA BLACKSTONE
---------- ------------ ------------ --------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Rooms............ $ -- $ -- $ -- $ -- $ -- $1,507,687 $1,507,687 $1,292,185
Food and
beverage........ -- -- -- -- -- 675,831 675,831 579,231
Other............ -- -- -- -- -- 110,423 110,423 94,640
House profit..... -- -- -- -- 896,321 (896,321) -- --
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total hotels..... -- -- -- -- 896,321 1,397,620 2,293,941 1,966,056
-------- ------- ----- ------- -------- ---------- ---------- ----------
Senior living
communities
Routine.......... 54,872 -- 84 -- -- 94,792 149,748 149,748
Ancillary........ 2,928 -- 1 -- -- 13,483 16,412 16,412
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total senior
living
communities..... 57,800 -- 85 -- -- 108,275 166,160 166,160
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total revenues... 57,800 -- 85 -- 896,321 1,505,895 2,460,101 2,132,216
-------- ------- ----- ------- -------- ---------- ---------- ----------
OPERATING COSTS
AND EXPENSES
Hotels
Property-level
costs and
expenses
Rooms............ -- -- -- -- -- 651,662 651,662 569,292
Food and
beverage........ -- -- -- -- -- 632,750 632,750 546,178
Other department
costs and
deductions...... -- -- -- -- -- 113,208 113,208 105,846
Management fees
and other....... -- -- -- -- 177,521 -- 177,521 166,240
Lease expense.... -- -- -- -- 697,500 -- 697,500 554,500
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total hotels.... -- -- -- -- 875,021 1,397,620 2,272,641 1,942,056
-------- ------- ----- ------- -------- ---------- ---------- ----------
Senior living
communities
Property-level
costs and
expenses
Routine.......... -- -- -- -- -- 94,792 94,792 94,792
Ancillary........ -- -- -- -- -- 13,483 13,483 13,483
Other operating
costs and
expenses........ 29,803 -- 49 -- -- -- 29,852 29,852
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total senior
living
communities.... 29,803 -- 49 -- -- 108,275 138,127 138,127
-------- ------- ----- ------- -------- ---------- ---------- ----------
Total operating
costs and
expenses....... 29,803 -- 49 -- 875,021 1,505,895 2,410,768 2,080,183
-------- ------- ----- ------- -------- ---------- ---------- ----------
Operating profit
................. 27,997 -- 36 -- 21,300 49,333 52,033
Corporate ex-
penses........... (2,937) -- -- (7,948) -- -- (10,885) (10,885)
Interest expense.. (17,560) 4,789 -- -- (2,949) -- (15,720) (15,513)
Interest and
dividend income.. 1,120 -- 6 -- 392 -- 1,518 1,518
-------- ------- ----- ------- -------- ---------- ---------- ----------
Income (loss)
before income
taxes............ 8,620 4,789 42 (7,948) 18,743 -- 24,246 27,153
Benefit
(provision) for
income taxes..... (3,534) (1,963) (18) 3,259 (7,685) -- (9,941) (11,133)
-------- ------- ----- ------- -------- ---------- ---------- ----------
Income (loss)
before
extraordinary
item............. $ 5,086 $ 2,826 $ 24 $(4,689) $ 11,058 $ -- $ 14,305 $ 16,020
======== ======= ===== ======= ======== ========== ========== ==========
Pro forma earnings
per share........ $ .21(2) $ .58(2) $ .78(3)
======== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
38
<PAGE>
CRESTLINE CAPITAL CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1998
NO PARTNERSHIP PARTICIPATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
C D E F G H
DEBT
FORUM REFINANCING/ COMMUNITY CORPORATE HOTEL LEASES ADOPTION OF PRO
HISTORICAL ACQUISITION REPAYMENT ACQUISITIONS EXPENSES AND SUBLEASES EITF 97-2 FORMA
---------- ----------- ------------ ------------ --------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Room............. $ -- $ -- $ -- $ -- $ -- $ -- $1,984,659 $1,984,659
Food and bever-
age............. -- -- -- -- -- -- 874,761 874,761
Other............ -- -- -- -- -- -- 167,322 167,322
House profit..... -- -- -- -- -- 1,163,628 (1,163,628) --
-------- ------- ------- ------- ------- --------- ---------- ----------
Total hotels.... -- -- -- -- -- 1,163,628 1,863,114 3,026,742
-------- ------- ------- ------- ------- --------- ---------- ----------
Senior living
communities......
Routine.......... 35,473 30,859 -- 7,031 -- -- 127,135 200,498
Ancillary........ 1,427 1,983 -- 188 -- -- 18,693 22,291
-------- ------- ------- ------- ------- --------- ---------- ----------
Total senior
living
communities.... 36,900 32,842 -- 7,219 -- -- 145,828 222,789
-------- ------- ------- ------- ------- --------- ---------- ----------
Total revenues.. 36,900 32,842 -- 7,219 -- 1,163,628 2,008,942 3,249,531
-------- ------- ------- ------- ------- --------- ---------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ -- -- -- -- -- -- 889,525 889,525
Food and bever-
age............. -- -- -- -- -- -- 852,701 852,701
Other department
costs and
deductions...... -- -- -- -- -- -- 120,888 120,888
Management fees
and other....... -- -- -- -- -- 214,128 -- 214,128
Lease expense.... -- -- -- -- -- 921,800 -- 921,800
-------- ------- ------- ------- ------- --------- ---------- ----------
Total hotels.... -- -- -- -- -- 1,135,928 1,863,114 2,999,042
-------- ------- ------- ------- ------- --------- ---------- ----------
Senior living com-
munities
Property-level costs and expenses
Routine.......... -- -- -- -- -- -- 127,135 127,135
Ancillary........ -- -- -- -- -- -- 18,693 18,693
Other operating
costs and
expenses......... 20,929 17,977 -- 4,733 -- -- -- 43,639
-------- ------- ------- ------- ------- --------- ---------- ----------
Total senior
living
communities.... 20,929 17,977 -- 4,733 -- -- 145,828 189,467
-------- ------- ------- ------- ------- --------- ---------- ----------
Total operating
costs and
expenses....... 20,929 17,977 -- 4,733 -- 1,135,928 2,008,942 3,188,509
-------- ------- ------- ------- ------- --------- ---------- ----------
Operating profit
................. 15,971 14,865 -- 2,486 -- 27,700 -- 61,022
Corporate
expenses......... (2,304) (5,115) -- 745 (6,826) -- -- (13,500)
Interest expense.. (13,396) (9,630) 7,312 (2,118) -- (4,261) -- (22,093)
Interest and
dividend income.. 336 598 -- -- -- 567 -- 1,501
-------- ------- ------- ------- ------- --------- ---------- ----------
Income (loss)
before income
taxes............ 607 718 7,312 1,113 (6,826) 24,006 -- 26,930
Benefit
(provision) for
income taxes..... (249) (294) (2,998) (456) 2,799 (9,843) -- (11,041)
-------- ------- ------- ------- ------- --------- ---------- ----------
Income (loss)
before
extraordinary
item............. $ 358 $ 424 $ 4,314 $ 657 $(4,027) $ 14,163 $ -- $ 15,889
======== ======= ======= ======= ======= ========= ========== ==========
Pro forma earnings
per share........ $ .01(2) $ .64(2)
======== ==========
<CAPTION>
I
PRO
FORMA
WITHOUT
BLACKSTONE
-------------
<S> <C>
REVENUES
Hotels
Room............. $1,719,425
Food and bever-
age............. 757,856
Other............ 144,961
House profit..... --
-------------
Total hotels.... 2,622,242
-------------
Senior living
communities......
Routine.......... 200,498
Ancillary........ 22,291
-------------
Total senior
living
communities.... 222,789
-------------
Total revenues.. 2,845,031
-------------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms............ 782,914
Food and bever-
age............. 740,238
Other department
costs and
deductions...... 83,462
Management fees
and other....... 200,128
Lease expense.... 785,300
-------------
Total hotels.... 2,592,042
-------------
Senior living com-
munities
Property-level costs and expenses
Routine.......... 127,135
Ancillary........ 18,693
Other operating
costs and
expenses......... 43,639
-------------
Total senior
living
communities.... 189,467
-------------
Total operating
costs and
expenses....... 2,781,509
-------------
Operating profit
................. 63,522
Corporate
expenses......... (13,500)
Interest expense.. (21,793)
Interest and
dividend income.. 1,501
-------------
Income (loss)
before income
taxes............ 29,730
Benefit
(provision) for
income taxes..... (12,189)
-------------
Income (loss)
before
extraordinary
item............. $ 17,541
=============
Pro forma earnings
per share........ $ .86(3)
=============
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
39
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NO PARTNERSHIP PARTICIPATION
A. Represents the adjustment to increase working capital and record a loan
payable to Host of $67 million to record the transfer of hotel working capital
to the Company related to the leasing of Host's hotels.
B. Represents the following transactions in connection with the
Distribution:
. Host's contribution of $15 million in cash to the Company.
. Host's contribution of a 5% limited partner interest in a joint
venture with Host that owns an approximate $130 million note
receivable from a consolidated subsidiary of Host.
C. Represents the adjustment to reflect the historical revenues, operating
expenses, corporate expenses, interest expense and interest income for the
Forum Acquisition as if such acquisition occurred at the beginning of 1997
(actual acquisition date was June 21, 1997).
D. Represents the adjustment to eliminate interest expense on $133 million
of debt repaid during 1998 by Host on behalf of the Company and treated as a
capital contribution by Host.
E. Represents the adjustment to record the historical revenues, operating
expenses, corporate expenses and interest income related to the acquisition of
one senior living community in 1998 and the acquisition of one senior living
community in 1997. The adjustment also includes the elimination of $745,000 of
minority interest expense included in corporate expenses related to the
purchase of minority interests in certain consolidated subsidiaries of the
Company in 1997.
F. Represents the adjustment to record additional corporate expenses
anticipated to be incurred when the Company is operated on a stand-alone basis
subsequent to the Distribution, net of the asset management contract of $4.5
million per annum. The adjustment includes the following (in thousands):
<TABLE>
<CAPTION>
FIRST THREE FISCAL YEAR
QUARTERS 1998 1997
------------- -----------
<S> <C> <C>
Payroll costs......................................... $6,748 $6,894
Rent and insurance.................................... 1,218 1,267
Other general and administrative costs................ 3,097 3,165
------ ------
11,063 11,326
Less: asset management fee............................ (3,115) (4,500)
------ ------
Net corporate expense adjustment.................... $7,948 $6,826
====== ======
</TABLE>
G. Represents the adjustment to record the historical hotel revenues and
hotel expenses and pro forma lease expense associated with the leasing of
certain hotel properties from Host, interest expense on the $67 million
working capital loan at 6%, and income from the 5% investment in the joint
venture with Host that owns a $130 million note receivable from a consolidated
subsidiary of Host.
Rental revenues under the leases are based on the greater of Percentage Rent
or Minimum Rent. Total rent in the pro forma statement of operations is
calculated based on the historical gross sales of the property and the
negotiated rental rates and thresholds by property as if the leases were
entered into on the first day of fiscal year 1997. There are generally three
sales categories utilized in the rent calculation: rooms, food and beverage
and other. For rooms and food and beverage, there are three tiers of rent with
two thresholds, while the other category generally has two tiers of rent and
one threshold. The percentage rent thresholds are increased annually on the
first day of each year after the initial lease year based on a blended
increase of CPI and a wage and benefit index. For purposes of the pro formas,
1997 is the assumed initial lease year and the blended increase applied to the
thresholds at January 3, 1998 is assumed to be 3%. Minimum rent is
40
<PAGE>
expressed as a fixed dollar amount that increases annually on the first day of
each year after the initial lease year at 50% of the CPI increase.
Accordingly, the 1998 rent thresholds and minimum rent included in the pro
formas were adjusted as of January 3, 1998 for the 1997 increases in the
indices. Rental revenues are recognized only for leases to be executed with
Host REIT at or prior to completion of the Distribution. The execution of the
leases is dependent upon the consummation of the Distribution, which is
subject to contingencies that are outside the control of the Company,
including approval of the Merger Agreement by Host Stockholders and consent to
certain aspects of the REIT Conversion by lenders, debt holders, partners and
ground lessors of Host. The Company believes that negotiations by Host with
third parties to complete the REIT Conversion will not result in any material
change to the leases. The table below details gross sales, minimum rent and
total rent for all full-service properties to be leased and summarized amounts
for the limited-service properties to be subleased:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Grand Hotel Resort and Golf
Club....................... $ 23.4 $ 2.8 $ 4.2 $ 18.0 $ 2.0 $ 3.7
Scottsdale Suites........... 11.9 3.0 5.0 8.2 2.1 3.4
The Ritz-Carlton, Phoenix... 23.3 4.6 7.2 17.3 3.2 5.5
Coronado Island Resort...... 22.0 2.1 2.1 16.2 1.5 3.6
Costa Mesa Suites........... 9.7 1.9 3.3 7.2 1.3 2.3
Manhattan Beach............. 16.3 2.4 4.8 12.2 1.7 3.6
Marina Beach ............... 21.1 4.6 7.1 16.9 3.2 6.2
Newport Beach............... 33.5 5.5 8.7 24.0 3.9 6.8
Newport Beach Suites........ 11.0 2.6 4.1 8.0 1.8 3.0
Ontario Airport............. 12.1 1.8 3.4 8.3 1.3 2.2
San Diego Marriott Hotel and
Marina..................... 103.3 38.0 39.6 78.6 26.7 31.1
San Diego Mission Valley.... 16.7 3.4 5.1 12.6 2.4 5.6
San Francisco Airport....... 43.8 8.2 13.2 32.2 5.8 9.5
San Francisco Fisherman's
Wharf...................... 17.8 4.0 6.4 12.1 2.8 4.3
San Francisco Moscone
Center..................... 120.2 20.7 37.9 90.5 14.6 28.5
The Ritz-Carlton, Marina del
Rey........................ 32.4 5.5 10.8 23.4 3.9 7.9
The Ritz-Carlton, San
Francisco.................. 50.1 9.6 14.7 34.2 6.7 10.3
Torrance.................... 20.5 2.3 3.5 15.0 1.6 5.1
Denver Southeast............ 21.5 3.0 6.2 14.9 2.1 4.1
Denver Tech Center.......... 26.8 5.1 8.3 20.1 3.6 6.0
Denver West................. 13.7 1.8 4.0 9.6 1.2 2.7
Marriott's Mountain Resort
at Vail.................... 17.6 3.0 5.1 14.1 2.1 4.5
Hartford/Farmington......... 18.4 3.5 4.7 13.4 2.4 3.5
Hartford/Rocky Hill......... 11.6 1.5 2.7 8.5 1.1 2.0
Fort Lauderdale Marina...... 28.5 4.3 7.9 20.4 3.0 5.7
Jacksonville................ 11.8 1.8 3.6 8.0 1.2 2.4
Miami Airport............... 29.7 3.9 8.4 21.6 2.8 6.1
Palm Beach Gardens.......... 11.8 1.9 3.7 8.5 1.4 3.0
Singer Island (Holiday
Inn)....................... 6.6 1.4 2.5 5.2 1.0 2.1
Tampa Airport............... 17.1 1.6 3.5 13.1 1.1 2.7
Tampa Westshore............. 15.0 1.8 3.6 10.8 1.3 2.6
The Ritz-Carlton, Naples.... 66.4 18.1 23.3 53.1 12.7 18.0
Atlanta Midtown Suites...... 10.5 1.8 3.5 7.8 1.3 2.6
Atlanta Norcross............ 7.6 1.0 1.7 5.6 0.7 1.2
Atlanta Northwest........... 14.9 2.7 4.3 11.3 1.9 3.3
Atlanta Perimeter........... 16.6 2.5 4.5 12.6 1.7 3.5
JW Marriott Hotel at Lenox.. 24.8 3.7 6.8 17.7 2.6 5.0
The Ritz-Carlton, Atlanta... 30.2 5.8 8.8 21.7 4.1 6.8
The Ritz-Carlton, Buckhead.. 49.3 13.1 16.3 35.8 9.2 11.7
Chicago/Deerfield Suites.... 10.2 1.8 3.1 7.4 1.3 2.3
Chicago/Downers Grove
Suites..................... 9.0 1.8 2.9 6.7 1.3 2.2
Chicago/Downtown Courtyard.. 16.3 3.1 4.9 12.2 2.2 3.9
Chicago O'Hare.............. 40.0 5.5 11.5 28.8 3.9 8.2
South Bend.................. 9.9 1.1 2.1 7.0 0.8 1.5
Bethesda.................... 23.2 3.2 5.6 17.3 2.2 4.1
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
------------------------- ----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- -------- ------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Gaithersburg/Washingtonian
Center...................... $ 13.2 $ 2.4 $ 3.8 $ 9.7 $ 1.7 $ 2.8
Boston/Newton................ 27.4 4.8 7.8 19.1 3.4 5.5
Detroit Romulus.............. 8.8 1.1 1.8 6.6 0.8 1.4
The Ritz-Carlton, Dearborn... 25.7 3.6 5.5 17.7 2.5 4.0
Minneapolis/Bloomington...... 20.2 3.3 6.5 13.8 2.3 4.7
Minneapolis City Center...... 27.5 3.7 7.5 20.4 2.4 5.2
Minneapolis Southwest........ 14.9 2.7 4.8 10.1 1.9 4.0
Kansas City Airport.......... 14.3 1.7 3.7 9.9 1.2 2.5
St. Louis Pavilion........... 27.5 6.1 6.5 18.5 4.3 4.3
Nashua....................... 7.5 0.8 1.3 5.3 0.5 0.9
Newark Airport............... 39.4 6.5 11.8 29.2 4.6 8.6
Park Ridge................... 16.0 2.5 4.0 11.9 1.7 4.2
Saddle Brook................. 10.7 1.3 2.1 7.8 0.9 1.7
Albany....................... 18.5 3.5 6.1 12.4 2.5 5.2
New York Marriott Financial
Center...................... 39.6 7.7 13.2 29.1 5.4 10.1
New York Marriott Marquis.... 210.3 40.0 60.8 155.4 29.7 47.6
Marriott World Trade Center.. 65.4 12.2 19.4 49.1 8.6 14.9
Charlotte Executive Park..... 14.0 2.3 3.7 9.8 1.6 2.6
Raleigh Crabtree Valley...... 14.9 2.4 3.9 10.9 1.7 2.8
Oklahoma City................ 15.6 2.0 3.8 10.4 1.4 2.4
Oklahoma City Waterford...... 9.1 1.5 2.7 6.1 1.0 1.7
Portland..................... 26.4 4.1 7.5 17.6 2.9 4.8
Philadelphia (Convention
Center)..................... 80.7 14.2 25.0 58.2 10.0 17.8
Philadelphia Airport......... 25.0 4.1 7.6 18.6 2.9 5.6
Pittsburgh City Center....... 16.4 1.9 3.0 11.1 1.3 2.2
Memphis...................... 10.6 1.5 3.2 5.7 1.0 1.8
Dallas/Fort Worth............ 28.9 5.9 9.3 21.9 4.1 7.0
Dallas Quorum................ 25.7 4.2 8.2 18.3 3.0 5.8
El Paso...................... 11.6 0.9 2.3 7.8 0.6 1.4
Houston Airport ............. 21.6 2.8 6.0 16.9 2.0 4.6
JW Marriott Houston.......... 27.2 5.0 8.0 20.1 3.5 5.9
Plaza San Antonio............ 13.8 2.9 4.6 9.7 2.0 3.3
San Antonio Riverwalk........ 29.3 6.1 10.3 21.7 4.3 7.6
Salt Lake City............... 28.5 5.6 9.5 21.1 3.9 7.2
Dulles Airport............... 14.6 1.8 4.0 10.9 1.2 3.0
Key Bridge................... 29.4 5.6 10.2 21.2 3.9 7.4
Norfolk Waterside............ 18.1 3.3 5.4 12.8 2.4 3.8
Pentagon City Residence Inn.. 11.7 3.5 5.5 8.7 2.5 4.2
The Ritz-Carlton, Tysons
Corner...................... 34.4 5.9 9.8 24.9 4.1 7.3
Washington Dulles Suites..... 10.3 2.5 4.0 7.8 1.8 3.0
Westfields................... 28.0 4.7 7.4 20.3 3.3 5.4
Williamsburg................. 12.6 1.8 2.8 9.3 1.3 2.1
Washington Metro Center...... 25.2 4.5 7.3 19.2 3.2 5.3
Calgary...................... 13.4 1.7 1.7 9.8 1.2 2.3
Toronto Airport.............. 17.1 2.9 5.6 13.0 2.0 4.2
Toronto Eaton Centre......... 21.1 6.1 7.1 16.0 4.3 5.6
Toronto Delta Meadowvale..... 16.1 2.6 4.9 10.6 1.9 3.1
Four Seasons, Atlanta(4)..... 15.6 5.8 5.9 14.2 4.1 4.5
Four Seasons,
Philadelphia(4)............. 41.1 7.9 12.4 30.6 5.6 10.1
Grand Hyatt, Atlanta(4)...... 25.3 10.0 10.0 22.6 7.0 8.2
Hyatt Regency,
Burlingame(4)............... 47.9 8.8 17.6 39.5 6.2 15.1
Hyatt Regency, Cambridge(4).. 32.4 6.7 11.9 26.8 4.7 10.4
Hyatt Regency, Reston(4)..... 30.5 6.5 11.3 24.2 4.5 9.2
Swissotel, Atlanta(4)........ 22.2 5.0 6.3 17.2 3.5 5.8
Swissotel, Boston(4)......... 26.8 6.4 8.5 20.5 4.5 6.9
Swissotel, Chicago(4)........ 38.1 10.9 15.1 28.9 7.7 12.0
The Drake (Swissotel), New
York(4)..................... 38.8 11.6 13.6 34.2 8.2 13.4
The Ritz-Carlton, Amelia
Island(4)................... 45.7 10.3 13.4 37.4 7.2 11.1
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
FISCAL YEAR 1997 1998
----------------------- -----------------------
GROSS MINIMUM TOTAL GROSS MINIMUM TOTAL
PROPERTY SALES RENT RENT SALES RENT RENT
- -------- -------- ------- ------ -------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
The Ritz-Carlton, Boston(4).... $ 40.1 $ 6.9 $ 10.5 $ 31.4 $ 4.8 $ 8.8
-------- ------ ------ -------- ------ ------
Total Full-service Properties.. 2,790.7 537.9 842.3 2,071.7 379.4 648.4
Total Courtyard Properties..... 212.0 50.6 59.2 159.2 35.0 36.8
Total Residence Inns........... 69.9 17.2 20.3 50.6 12.0 12.3
-------- ------ ------ -------- ------ ------
Total........................ $3,072.6 $605.7 $921.8 $2,281.6 $426.4 $697.5
======== ====== ====== ======== ====== ======
</TABLE>
Although a number of the transactions comprising the REIT Conversion are
expected to be consummated immediately prior to, or in certain instances
immediately following, the Merger, the Merger will not be consummated unless
Host Stockholders have approved the Merger Agreement and the other conditions
to the Merger have been satisfied or waived. In particular, Host's Board of
Directors will have determined, among other things, that the transactions
constituting the REIT Conversion which impact Host REIT's status as a REIT for
federal income tax purposes have occurred or are reasonably likely to occur,
and based on advice of counsel, that Host REIT can elect to be treated as a
REIT for federal income tax purposes effective no later than the first full
taxable year commencing after the REIT Conversion is completed (which might
not be until the year commencing January 1, 2000 if the REIT Conversion is not
completed prior to January 1, 1999). Consistent with the foregoing, Host
intends to pursue the transactions constituting the REIT Conversion at least
through the date of the Special Meeting. If the Merger Agreement is approved
by Host Stockholders at the Special Meeting, Host intends to continue pursuing
those transactions constituting the REIT Conversion which have not yet been
completed, including the Blackstone Acquisition (which is not expected to be
consummated any earlier than December 29, 1998), and, if Host's Board of
Directors has determined that the conditions to the Merger have been or likely
will be satisfied or waived, declare the Distribution and enter into the
leases and subleases of hotels with subsidiaries of the Company, even though
there is no assurance that the Merger and the other transactions comprising
the REIT Conversion might be delayed or possibly might never be consummated.
If, however, the Merger Agreement is not approved by the Host Stockholders at
the Special Meeting or the Host Board does not make the determinations
described above, Host's Board does not intend to declare the Distribution or
enter into the leases and subleases of hotels with subsidiaries of the
Company. Assuming the Merger Agreement is approved by Host Stockholders at the
Special Meeting and the Host Board of Directors makes the determination
described above, it is currently contemplated that (i) the Host Board of
Directors would declare the Distribution on or about December 18, 1998 payable
no later than December 31, 1998 to Host Stockholders of record on December 28,
1998 and (ii) the Merger would be consummated on or about December 29, 1998,
subject to satisfaction or waiver of the remaining conditions. Even under
circumstances where the Distribution is made but the Merger or other
transactions comprising the REIT Conversion are delayed or possibly never
consummated, the Host Board believes that having the leasing arrangements in
place with the Company could facilitate any subsequent efforts by Host to
qualify as a REIT for federal income tax purposes (including efforts to pursue
a merger with another entity or other transaction that would permit it to
commence a new taxable year and elect REIT status prior to January 1, 2000).
H. Represents the adjustment to reflect the Company's anticipated adoption
of EITF 97-2 in the fourth quarter of 1998 by recording property-level sales
and operating expenses. The adjustment has no impact on operating profit or
net income.
I. The "Pro Forma without Blackstone" column reflects the adjustment to
eliminate the revenues, operating expenses and working capital relating to the
Blackstone hotel properties assuming that the Blackstone Acquisition does not
occur.
- --------
(1) On a pro forma basis as of September 11, 1998, the Company had 75
million shares of common stock, $.01 par value, authorized with 24.8 million
shares issued and outstanding. In addition, on a pro forma basis, 10 million
shares of preferred stock, $.01 par value, are authorized with none issued or
outstanding.
43
<PAGE>
(2) Reflects the pro forma earnings per share based on 24.8 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted average shares outstanding,
adjusted for a one-for-ten share distribution, and the issuance of shares to
the Blackstone Entities.
(3) Reflects the pro forma earnings per share based on 20.4 million weighted
average shares outstanding subsequent to the Distribution. Pro forma weighted
average shares are based on Host's weighted shares shares outstanding,
adjusted for a one-for-ten share distribution, and assumes that the Blackstone
acquisition does not occur.
(4) Represent the Blackstone hotel properties.
44
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical consolidated financial
statement data derived from the Company's consolidated financial statements
for the period from June 21, 1997 through January 2, 1998 and the First Three
Quarters 1998. The historical data reflects only operations of the
Communities. The leases and subleases of hotels from Host will be entered into
concurrently with the Distribution and will be effective January 1, 1999
(assuming the Merger occurs prior to that date; otherwise, as soon as
practicable following the Distribution Date). The financial statement data for
periods prior to June 21, 1997 is the data for the predecessor business of the
Company which was owned by Marriott International for the period from April 1,
1996 through June 20, 1997 and by Forum for periods prior to April 1, 1996.
The following data should be read in conjunction with the Company's
consolidated financial statements and the notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
HOST MARRIOTT INTERNATIONAL FORUM
------------------------------------ ----------------------------- ------------------
YEAR ENDED
MARCH 31,
------------------
PERIOD
FROM JUNE
TWELVE WEEKS 21, 1997 TWENTY-FOUR
FIRST THREE ENDED THROUGH WEEK PERIOD FORTY WEEK
QUARTERS SEPTEMBER 12, JANUARY 2, ENDED PERIOD ENDED
1998 1997 1998 JUNE 20, 1997 JANUARY 3, 1997 1996 1995
----------- ------------- ---------- ------------- --------------- -------- --------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $ 57,800 $ 16,036 $ 36,900 $ 33,570 $ 55,987 $ 59,525 $ 48,055
Operating costs and
expenses............. 29,803 9,738 20,929 15,595 20,646 20,772 16,693
Operating profit...... 27,997 6,298 15,971 17,975 35,341 38,753 31,362
Corporate expenses.... 2,937 954 2,304 4,519 6,380 915 431
Interest expense...... 17,560 6,035 13,396 9,141 14,283 29,119 23,018
Interest income....... 1,120 240 336 598 1,111 2,321 1,743
Net income (loss)
(1).................. 5,086 (266) 358 2,628 9,334 5,717 6,714
Pro forma earnings
(loss) per
share (2)............ .21 (.01) .01 .11 .38 .23 .27
OTHER DATA:
Depreciation and
amortization......... 14,759 4,866 10,635 6,698 8,494 10,172 8,360
Cash provided by (used
in) operating
activities........... 19,024 21,488 25,376 (479) 26,870 26,327 21,518
Cash used in investing
activities........... (7,529) (18,022) (33,412) (16,407) (159,586) (43,253) (34,269)
Cash provided by (used
in) financing
activities........... (2,635) 21,396 25,680 12,673 132,650 5,896 24,184
BALANCE SHEET DATA:
Total assets.......... $694,419 $607,922 $663,502 $ -- $565,094 $417,436 $379,127
Total debt............ 213,034 317,940 349,934 -- 244,318 325,756 267,228
Total stockholder's
equity............... 392,071 210,766 227,064 -- 284,665 49,496 60,636
</TABLE>
- --------
(1) Net income for the fiscal years ended March 31, 1996 and 1995 includes
$2,078,000 and $253,000, respectively, from an extraordinary loss on the
extinguishment of debt. Net income for the fiscal year ended March 31,
1996 includes a $666,000 gain from the cumulative effect of an accounting
charge.
(2) Pro forma earnings per share reflects historical net income divided by the
pro forma weighted average shares outstanding subsequent to the
Distribution. Pro forma weighted average shares of 24.8 million are based
on Host's weighted average shares outstanding, adjusted for a one-for-ten
share distribution and the issuance of shares to the Blackstone Entities.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LACK OF COMPARABILITY FOLLOWING THE DISTRIBUTION
Because the Company will lease and sublease substantially all of Host's
hotels following the Distribution and because prior to the Distribution the
Company's business consisted only of owning the Communities acquired since the
Company's inception in June 1997, the Company does not believe that the
historical results of operations will be comparable to its results of
operations following the Distribution. For pro forma information giving effect
to the Hotel Leases to be entered into with Host REIT effective January 1,
1999 (assuming the Merger occurs prior to that date; otherwise, as soon as
practicable following the Distribution Date). See "Pro Forma Financial
Statements."
HISTORICAL RESULTS OF OPERATIONS
Revenues primarily represent house profit from the Communities. House profit
reflects the net revenues flowing to the Company as property owner and
represents gross community operating sales less property-level expenses
excluding depreciation and amortization, management fees, property taxes,
insurance and certain other costs which are classified as operating costs and
expenses included in the accompanying financial statements.
FIRST THREE QUARTERS 1998 COMPARED TO THE TWELVE WEEKS ENDED SEPTEMBER 12,
1997 (HISTORICAL)
Revenues. Revenues represent gross property routine and ancillary sales less
property-level expenses. Routine service revenues are generated from monthly
charges for independent living units and daily charges for assisted living
suites and nursing beds which are recognized monthly based on the terms of the
residents' agreements. Ancillary service revenues are generated on a "fee for
service" basis for supplementary items requested by residents and are
recognized as the services are provided. Revenue per available unit ("REVPAU")
is a commonly used indicator of market performance for senior living
communities which represents the combination of the average daily rate charged
and the average occupancy achieved. REVPAU does not include food and beverage
or other ancillary revenues generated by the community.
Revenues generated from the Communities totaled $57.8 million for the First
Three Quarters 1998, and $16.0 million for the twelve weeks ended September
12, 1997. During the First Three Quarters 1998, average occupancy of the
Communities was 92% compared to 91% for the twelve weeks ended September 12,
1997. The average per diem rate for the First Three Quarters 1998 was $88
compared to $84 for the twelve weeks ended September 12, 1997. This resulted
in REVPAU for the First Three Quarters 1998 and the twelve weeks ended
September 12, 1997 of $81 and $76, respectively. Overall occupancies were
lower than the historical occupancies due to the significant number of
expansion units added during the year, the overall disruption to the
Communities as a result of the construction and the time required to fill the
expansion units. Senior living communities' gross sales totaled $166 million
for the First Three Quarters 1998 and $47 million for the twelve weeks ended
September 12, 1997.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation and amortization, management fees, property taxes,
insurance and certain other costs. The Company's operating costs and expenses
were $29.8 million (52% of revenues) for the First Three Quarters 1998, and
$9.7 million (61% of revenues) for the twelve weeks ended September 12, 1997.
Operating Profit. The Company's operating profit was $28.0 million (48% of
revenues) for the First Three Quarters 1998 and $6.3 million (39% of revenues)
for the twelve weeks ended September 12, 1997.
Corporate Expenses. Corporate expenses were $2.9 million (5.1% of revenues)
for the First Three Quarters 1998, and $1.0 million (5.9% of revenues) for the
twelve weeks ended September 12, 1997.
Interest Expense. Interest expense was $17.6 million for the First Three
Quarters 1998 and $6.0 million for the twelve weeks ended September 12, 1997.
46
<PAGE>
Interest Income. Interest income was $1.1 million for the First Three
Quarters 1998, and $.2 million for the twelve weeks ended September 12, 1997
primarily reflecting interest earned on cash and certain escrow accounts.
Net Income. Net income for the First Three Quarters 1998 was $5.0 million
compared to a net loss of $.3 million for the twelve weeks ended September 12,
1997.
PERIOD FROM JUNE 21, 1997 THROUGH JANUARY 2, 1998 (HISTORICAL)
Revenues. Revenues generated from the 1997 third quarter acquisition of 29
senior living communities totaled $36.9 million. During the period from June
21, 1997 through January 2, 1998, average occupancy of the Communities was 92%
and the average per diem rate was $84, which resulted in REVPAU of $77.
Overall occupancies were lower than the historical occupancies due to the
significant number of expansion units added during the year, the overall
disruption to the communities as a result of the construction and the time
required to fill the expansion units. Senior living communities' gross sales
totaled $111 million.
Operating Costs and Expenses. The Company's operating costs and expenses
were $20.9 million (57% of revenues).
Operating Profit. The Company's operating profit was $16.0 million (43% of
revenues).
Corporate Expenses. Corporate expenses were $2.3 million. As a percentage
of revenues, corporate expenses were 6.2% of revenues.
Interest Expense. Interest expense was $13.4 million.
Net Income. The Company's net income was $0.4 million.
PRO FORMA RESULTS OF OPERATIONS
Because the Company will lease or sublease substantially all the hotels
owned or leased by Host following the Distribution, the Company does not
believe that the historical results of operations will be comparable to the
results of operations of the Company following the Distribution. Accordingly,
a comparison of the Company's pro forma results of operations for the First
Three Quarters 1998 to First Three Quarters 1997 and fiscal year 1997 to
fiscal year 1996 have been included below. The following discussion and
analysis should be read in conjunction with the Company's combined
consolidated financial statements and the Company's unaudited pro forma
financial statements and related notes thereto included elsewhere in this
Prospectus. The following discussion and analysis has been prepared assuming
that Host's acquisition of a 100% ownership interest in 13 hotels, in which
Host currently serves as general partner in the entities that currently own
the hotels, together with the acquisition of 12 hotels from the Blackstone
Entities promptly following the Distribution. The following pro forma
financial information includes the Company's anticipated fourth quarter 1998
adoption of EITF 97-2. EITF 97-2 requires the Company to include property-
level sales and operating expenses of the leased hotels and owned senior
living communities in its statement of operations.
Under the Hotel Leases, the Company will participate directly in the results
of the operations of the leased hotels (and thus trends in the hotel industry
are likely to directly bear on the Company's economic performance). Under the
typical hotel lease (or sublease) that the Company enters into, the Company
will be obligated to pay to the lessor rent based upon the greater of a fixed
dollar amount of rent or fixed percentages of various categories of gross
revenues derived from the operation of the leased hotels. See "Description of
the Hotel Leases for Full-Service Hotels Managed by Marriott International,"
"Description of the Hotel Leases for Limited-Service Hotels Managed by
Marriott International," "Description of Hotel Leases for the Hotels Managed
by Other Management Companies," and "Description of Blackstone Hotel Leases."
The Company in turn will contract with a third party manager (typically, but
not in all cases, Marriott International) to operate the hotels on behalf of
the Company. Under these management agreements, the Company typically pays the
manager a base
47
<PAGE>
management fee equal to a fixed percentage of hotel revenues, plus in many
cases an incentive management fee based upon the operating profit of the hotel
above certain specified levels. Under these management agreements, the Company
receives all revenues from the operations of the hotels, subject to its
obligation to pay the managers their management fees, and the Company is
typically responsible for all expenses of operation of the hotels, including
costs incurred by the managers. See "Description of Marriott International
Hotel Management Agreements for Full-Service Hotels," "Description of Marriott
International Hotel Management Agreements for Limited-Service Hotels,"
"Description of Other Hotel Management Agreements," and "Description of Hotel
Management Agreements for Blackstone Hotels." Thus, the Company receives the
operating profit from its leased hotels after paying the managers their
management fees and the lessors their rent (which is not based upon operating
profit but rather upon fixed percentages of gross revenues). Accordingly, the
Company derives the benefit of (and bears the risks associated with) the
operating profits from the hotels. To the extent that such profits (after the
payment of management fees) exceeds the rent due under the leases, the Company
will profit (and its rate of profitability will increase to the extent that
the rate at which operating profits increase exceeds the rate at which the
rents payable under the leases increase). Conversely, the Company will incur a
loss to the extent that such profit is less than the rent due under the leases
(and the Company's profitability will decline to the extent that the rate at
which operating profit increases is less than the rate at which the rent
payable under the leases increases). The Company's asset management team will
continue to work with the managers to improve the operating profit of the
leased hotels to attempt to increase operating profit for the Company.
The following table sets forth certain historical and pro forma information
regarding management fees paid or payable to Marriott International and rent
payable under the leases and subleases to be entered into with Host REIT in
connection with the Distribution.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
---------------------- -----------------
PERIOD FROM
FIRST JUNE 21, 1997 FIRST
THREE THROUGH THREE FISCAL
QUARTERS JANUARY 2, QUARTERS YEAR
1998 1998 1998 1997
-------- ------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HOTELS:
Management fees to Marriott
International:
Base management fees(2)............ $ -- $ -- $ 77,206 $104,999
Incentive management fees(2)....... -- -- 73,697 87,599
Rent to Host REIT:
Base rent(4)....................... -- -- 551,500 783,700
Percentage rent(4)................. -- -- 335,900 391,400
SENIOR LIVING COMMUNITIES:
Management fees to Marriott
International:
Base management fees(3)............ 9,408 6,481 9,416 12,888
Incentive management fees(3)....... 0 0 0 0
</TABLE>
- --------
(1) See "Pro Forma Financial Statements" amounts assume all Partnerships
participate and that the Blackstone Acquisition is consummated.
(2) The hotel management agreements generally provide for base management fees
equal to two to four percent of gross revenues and incentive management
fees generally equal to 20% to 50% of hotel operating profits (as defined)
over a priority return (as defined) to the owner, with total incentive
management fees not to exceed 20% of operating profits, or 20% of current
year operating profit. In the event of early termination of a management
agreement, Marriott International will receive additional fees based on
the unexpired term and expected future base and incentive management fees.
Marriott International is required to furnish the hotels with certain
services ("Chain Services") which are generally provided on a central or
regional basis to all hotels in the Marriott International hotel system.
Chain Services include central training, advertising and promotion, a
national reservation system, computerized payroll and accounting services,
and such additional services as needed which may be more efficiently
performed on a centralized basis. Costs and expenses incurred in providing
such services are allocated among all domestic hotels managed, owned or
48
<PAGE>
leased by Marriott International or its subsidiaries. Similar services and
expenses are incurred and allocated at foreign hotels. In addition, the
hotels also participate in the Marriott Rewards program. The amounts in the
table do not include any costs of these programs because they are charged
to all hotels in the respective hotel system.
(3) The Communities are subject to operating agreements that provide for the
payment of base management fees generally equal to five to eight percent
of gross revenues and incentive management fees, generally equal to zero
to 20% of operating profit (as defined) over a priority return to the
Company. In the event of early termination of the agreements, Marriott
International will receive additional fees based on the unexpired term and
expected future base and incentive management fees. Marriott International
is required to furnish the Communities with certain services ("Central
Administrative Services") which are provided on a central or regional
basis to all properties in the Marriott Retirement Community System. These
services include the development and operation of computer systems,
computer payroll and accounting services, marketing and public relations
services, and such additional services as may from time-to-time be
performed more efficiently on a central or regional level. The operating
agreements require payment of Central Administrative Services fees equal
to 2% of gross revenues beginning in the third quarter of 1998. The
amounts in the table do not include any costs of Central Administrative
Services.
(4) Includes amounts paid to the Initial FF&E Lessors.
The unaudited pro forma financial statements do not purport to represent
what the Company's results of operations or cash flows would actually have
been if the Distribution and Host's conversion to a REIT had in fact occurred
on such date or at the beginning of such period or to project the Company's
results of operations for any future date or period.
49
<PAGE>
FIRST THREE QUARTERS 1998 COMPARED TO FIRST THREE QUARTERS 1997 (PRO FORMA)(1)
The following table presents the results of operations for the First Three
Quarters 1998 and the First Three Quarters 1997 on the pro forma basis
discussed above:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Hotel revenues................................ $2,874,871 $2,669,857
Senior living community revenues.............. 166,160 152,694
Total revenues................................ 3,041,031 2,822,551
Hotel operating costs and lease expenses...... 2,844,340 2,645,657
Senior living community operating costs and
expenses..................................... 138,127 129,600
Operating costs and expenses.................. 2,982,467 2,775,257
Operating profit before minority interest,
corporate expenses and interest expense...... 58,564 47,294
Corporate expenses............................ (10,885) (9,838)
Interest expense.............................. (16,302) (16,509)
Interest and dividend income.................. 1,518 1,230
---------- ----------
Income before income taxes.................... 32,895 22,177
Provision for income taxes.................... (13,487) (9,093)
---------- ----------
Net income.................................... $ 19,408 $ 13,084
========== ==========
</TABLE>
- --------
(1) Assumes all Partnerships participate and the Blackstone Acquisition is
consummated.
Revenues. Revenues primarily represent gross sales from leased and subleased
hotels and owned senior living communities. Revenues increased by $218
million, or 7.7%, to $3,041 million for the First Three Quarters 1998 from
$2,823 million for the First Three Quarters 1997.
Hotel revenues increased $205 million, or 7.7%, to $2,875 million in the
First Three Quarters 1998, reflecting the REVPAR increases for the Company's
leased hotels. Improved results for the Company's leased full-service hotels
were driven by strong increases in REVPAR of 8.3% to $113.67 for the First
Three Quarters 1998. Average room rates increased 9%, while average occupancy
decreased slightly to 77.8% for the full-service properties. REVPAR for the
Company's subleased Courtyard by Marriott hotel properties increased 7.9% to
$74.28 due to an increase in average room rates of nearly 10%, while average
occupancy decreased more than one percentage point to 80.5%. REVPAR for the
Company's 18 subleased Residence Inn properties increased 6.4% to $87.82 due
to an increase in average room rates of 5%, while average occupancy increased
one percentage point to 84.4%.
Senior living community revenues increased by $13 million, or 8.8%, to $166
million. For the First Three Quarters 1998, REVPAU increased 4.4% to $81.05.
The average per diem increased 6.2% to $88.19 while average occupancy
decreased 1.5 percentage points to 91.9%.
Operating Costs and Expenses. Hotel operating costs and expenses principally
consist of hotel property-level operating costs and expenses plus hotel
management fees and lease expenses. Senior living community operating costs
and expenses consist of property-level expenses plus depreciation, property
taxes, ground rent, insurance and certain other costs. Operating costs and
expenses increased $207 million, or 7.5%, to $2,982 million in the First Three
Quarters 1998. Overall hotel operating costs and expenses increased $199
million, or 7.5%, to $2,844 million. Hotel property-level operating costs and
expenses increased $100 million, or 6.1%, to $1,752 million. Hotel management
fees increased $16 million to $205 million, while lease expense increased $82
million, or 10.2%, to $887 million. Senior living community property-level
operating costs and expenses increased $9 million, or 9.3%, to $108 million,
while other operating costs and expenses decreased $1 million to $30 million
for the First Three Quarters 1998.
50
<PAGE>
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $11.3
million, or 23.8%, to $58 million for the First Three Quarters 1998. Hotel
operating profit increased $6.3 million, or 26.2%, to $31 million for the
First Three Quarters 1998 from $24 million for the First Three Quarters 1997.
The Company's leased hotels recorded significant improvements in comparable
operating results. Specifically, hotels in New York City, Boston, Toronto and
Atlanta reported significant improvements for the First Two Quarters 1998.
Properties in Florida reported some temporary declines in operating results
due to exceptionally poor weather in 1998.
Senior living community operating profit increased $4.9 million, or 21.4%,
to $28 million. The Communities' increase in operating profit is primarily due
to increases in residency fees and charges in the independent living, assisted
living and healthcare revenue components, the favorable impact of new
expansion units offset by increased healthcare expenses and a reduction in
food service cost. The Company experienced the most improvement in the
Delaware, Texas and Florida properties. As a percentage of total senior living
revenues, operating profit increased to 16.9% in the First Three Quarters 1998
as compared to 15.1% for the First Three Quarters 1997.
Corporate Expenses. Corporate expenses increased $1 million to $10.9 million
for the First Three Quarters 1998. As a percentage of total revenues,
corporate expenses remained unchanged at 0.4% for the First Three Quarters
1998 and the First Three Quarters 1997.
Interest Expense. Interest expense decreased slightly to $16.3 million in
the First Three Quarters 1998.
Interest and Dividend Income. Interest and dividend income increased
slightly to $1.5 million for the First Three Quarters 1998.
Net Income. Net income for the First Three Quarters 1998 was $19 million,
compared to nearly $13 million for the First Three Quarters 1997.
1997 COMPARED TO 1996 (PRO FORMA)(1)
The following table presents the results of operations 1997 and 1996 on a
pro forma basis:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Hotel revenues........................................ $3,865,304 $3,572,033
Senior living community revenues...................... 222,789 220,272
Total revenues........................................ 4,088,093 3,792,305
Hotel operating costs and lease expenses.............. 3,825,604 3,547,033
Senior living community operating costs and expenses.. 189,467 183,205
Operating costs and expenses.......................... 4,015,071 3,730,238
Operating profit before minority interest, corporate
expenses and interest expense........................ 73,022 62,067
Corporate expenses.................................... (13,500) (11,500)
Interest expense...................................... (22,932) (23,341)
Interest and dividend income.......................... 1,501 2,058
---------- ----------
Income before income taxes............................ 38,091 29,284
Provision for income taxes............................ (15,617) (12,006)
---------- ----------
Net income ........................................... $ 22,474 $ 17,278
========== ==========
</TABLE>
- --------
(1) Assumes all Partnerships participate and the Blackstone Acquisition is
consummated.
Revenues. Revenues increased $296 million, or 7.8%, to $4,088 million for
1997 from $3,792 million in 1996. The 1997 results included 52 weeks versus 53
weeks in 1996.
51
<PAGE>
Hotel sales increased $293 million, or 8.2%, to $3,865 million in 1997,
reflecting the increases in REVPAR. Improved results for the Company's leased
full-service hotels were driven by strong increases in REVPAR of 9.8% to
$103.30 in 1997. Average room rates increased 9%, while average occupancy
increased slightly to 77.7% for the leased full-service properties. REVPAR for
the Company's subleased Courtyard by Marriott hotels properties increased 9.6%
to $68.38 due to an increase in average room rate of 8%, while average
occupancy increased one percentage point to 81.1%. REVPAR for the Company's
subleased Residence Inn properties increased 7.7% to $83.27 due to an increase
in average room rates of 10%, while average occupancy decreased nearly two
percentage points to 83.3%.
Senior living community revenues increased $2.5 million, or 1.1%, to $223
million. For 1997, REVPAU increased one percent from $76.93 to $77.45. The
average per diem increased one percent from $82.72 to $83.28, while average
occupancy decreased one and one half percentage points to 93%.
Operating Costs and Expenses. Operating costs and expenses increased $285
million to $4,015 million for 1997. Overall hotel operating costs and expenses
increased $279 million, or 7.9%, to $3,826 million. Hotel property-level
operating costs and expenses increased $127 million, or 5.6%, to $2,390
million. Hotel management fees increased $67 million to $261 million, while
lease expense increased $85 million, or 7.8%, to $1,175 million. Senior living
community property-level operating costs and expenses increased $3 million, or
2.0%, to $146 million, while other operating costs and expenses increased $3
million to $44 million.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, the Company's operating profit increased
$11 million, or 17.7%, to $73 million in 1997. Hotel operating profit
increased $14.7 million, or 58.8%, to $39.7 million for 1997 compared to $25
million for 1996. In nearly all markets, the Company's leased full-service
hotels recorded improvements in comparable operating results. In particular,
the Company's leased full-service hotels in the Northeast, Mid-Atlantic and
Pacific coast regions benefited from the upscale and luxury full-service room
supply and demand imbalance. Hotels in New York City, Philadelphia, San
Francisco/Silicon Valley and in Southern California performed particularly
well. In 1998, the Company expects results to be strong in these markets and
other gateway cities in which the Company owns hotels. In 1997, the Company's
suburban Atlanta properties (three properties totaling 1,022 rooms) generally
reported decreased results due to higher activity in 1996 related to the
Summer Olympics and the impact of the additional supply added to the suburban
areas. However, the majority of the Company's leased full-service hotel rooms
in Atlanta are in the core business districts in downtown and Buckhead where
they realized strong year-over-year results and were only marginally impacted
by the additional supply.
Senior living community operating profit decreased $3.7 million, or 10.1%,
to $33 million.
Corporate Expenses. Corporate expenses increased $2 million to $14 million
in 1997. As a percentage of total revenues, corporate expenses remained
unchanged at 0.3% for 1997.
Interest Expense. Interest expense remained unchanged at approximately $23
million for 1997.
Interest and Dividend Income. Interest and dividend income remained
unchanged at approximately $2 million for 1997.
Net Income. Net income for 1997 was $22 million, compared to net income of
$17 million for 1996.
PRO FORMA RESULTS IF NO PARTNERSHIPS PARTICIPATE IN THE REIT CONVERSION
There is no requirement that any of the Partnerships participate in the REIT
Conversion in order for the REIT Conversion to be consummated. Accordingly,
the following discussion has been included assuming that no Partnerships
participate in the REIT Conversion and compares the "No Partnerships
Participate" scenario to the "All Partnerships Participate" scenario with both
scenarios assuming the Blackstone Acquisition occurs.
52
<PAGE>
Revenues for the First Three Quarters 1998 and fiscal 1997 would have been
lower by $581 million and $838 million, respectively, due to the revenues
generated by the 24 hotel properties owned by the Partnerships. Operating
profit would have been lower by $9 million and $12 million, respectively, with
income before extraordinary items lower by $5 million and $7 million,
respectively.
PRO FORMA RESULTS WITHOUT BLACKSTONE ACQUISITION
Host intends to use its best efforts to cause the REIT Conversion to be
completed as soon as possible, but there is no assurance that it will be
completed during 1998 in time for Host REIT to elect REIT status effective
January 1, 1999. If the REIT Conversion does not occur in 1998, the
effectiveness of Host REIT's election could be delayed to January 1, 2000,
which could cause the Blackstone Acquisition (which is conditioned, among
other things, on consummation of the REIT Conversion by March 31, 1999 and
Host REIT qualifying as a REIT for 1999) not to be consummated. Accordingly,
the following discussion compares the scenario where all Partnerships
participate and the Blackstone Acquisition occurs to one in which all
Partnerships participate and the Blackstone Acquisition does not occur.
Revenues for the First Three Quarters 1998 and fiscal year 1997 would have
been lower by $328 million and $405 million, respectively, due to the revenues
related to the Blackstone properties. Operating profit for the First Three
Quarters 1998 and fiscal year 1997 would have been lower by $3 million and
higher by $3 million, respectively, and income before extraordinary items
would have been approximately $2 million lower and $2 million higher,
respectively. On a per share basis, income before extraordinary items would
have been higher by $.12 and $.27, respectively, due to the impact of the 4.37
million shares to be issued to the Blackstone Entities.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, Host acquired all of the outstanding common stock of Forum from
Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott
International. Host purchased Forum, which consisted of a portfolio of 29
senior living communities, for approximately $460 million, including
approximately $270 million in assumed debt. The Communities will continue to
be operated by MSLS. In addition, the Company plans to add approximately 865
units to these Communities for approximately $89 million through an expansion
plan which
53
<PAGE>
will be completed in 2000. In 1997, approximately $56 million (549 units) of
the expansion plan had been completed (including $33 million of debt financing
provided by Marriott International). Through September 11, 1998, the Company
completed 591 units of the expansion plan for a total of approximately $60
million to date. The expansion plan has been funded through a combination of
operating cash flow and contributions by Host. During the remainder of 1998,
the Company expects to complete additional units at a cost of approximately
$20 million which will be funded using cash flow from operations and
contributions from Host. During 1999 and 2000, the Company expects to complete
the expansion at a cost of approximately $9 million using available cash and
cash flow from operations. The Company also acquired 49% of the remaining 50%
interest in the venture which owned the 418-unit Leisure Park senior living
community from Marriott International for approximately $23 million, including
approximately $15 million in assumed debt.
During the first quarter of 1998, the Company acquired the Gables at
Winchester in suburban Boston, a 124-unit senior living community, for $21
million and entered into conditional purchase agreements to acquire two
Marriott Brighton Gardens assisted living communities from the Summit
Companies of Denver, Colorado. After the anticipated completion of
construction in the first quarter of 1999, the Company may acquire these two
160-unit properties located in Denver and Colorado Springs, Colorado, for $35
million, if they achieve certain operating performance criteria. All three of
these communities will be operated by MSLS under long-term operating
agreements.
Under the terms of its senior living communities' management agreements, the
Company is generally required to spend a specified amount of gross revenues to
cover certain routine repairs and maintenance and replacements and renewals to
the communities' property and improvements. The amount Host is required to
spend will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003
through 2007, and 3.5% thereafter. The Company anticipates spending
approximately $6 million in 1998.
Cash provided by operations was approximately $25 million for the period
from June 21, 1997 through January 2, 1998 and approximately $19 million for
the First Three Quarters 1998. Cash used in investing activities was
approximately $33 million for the period June 21, 1997 through January 2, 1998
and approximately $8 million for the First Three Quarters 1998. The cash used
in investing activities principally consists of capital expenditures for
renewals and replacements and expansions. Cash provided by financing
activities was approximately $26 million for the period from June 21, 1997
through January 2, 1998, while cash used in financing activities was
approximately $3 million for the First Three Quarters 1998. The Company's cash
from financing activities consists primarily of the issuance of debt related
to the expansions and debt principal repayments.
During the first quarter of 1998, Host prepaid $26.4 million in mortgage
debt which was treated as a capital contribution to the Company. In the second
quarter of 1998, Host prepaid $92 million of unsecured debt provided by
Marriott International. The $92 million unsecured note upon repayment by Host
became payable by the Company to Host. During the third quarter of 1998, Host
forgave the $92 million note as well as a $14.8 million note due to Host, both
of which were treated as a capital contribution to the Company. As of
September 11, 1998, the Company has $213 million of debt outstanding at an
average rate of 9.5%. All of the Company's debt is fixed rate. Debt maturities
of the Company's debt as of September 11, 1998 are as follows, excluding
unamortized fair value adjustments of approximately $18 million (in millions):
<TABLE>
<S> <C>
1999.................................................................. $ 4.2
2000.................................................................. 47.1
2001.................................................................. 3.2
2002.................................................................. 2.5
Thereafter............................................................ 137.2
------
$194.2
======
</TABLE>
The Company expects to have sufficient cash flow from operations to meet its
debt obligations and expansion plans. The Company is also currently
negotiating to put in place a credit facility to meet its long term financing
and capital requirements.
54
<PAGE>
At September 11, 1998, property level debt included the following:
FRP Financing Limited, L.P. FRP Financing Limited, L.P. ("FRP"), a
subsidiary of Forum, owns nine Communities which are subject to a mortgage
pursuant to a loan agreement between FRP and Nomura Asset Capital Corporation
("NACC"). The original principal amount of the loan is approximately $50
million and it matures on January 2001 unless earlier repaid. Any changes to
the management agreement or the replacement of the manager are subject to
NACC's consent. Other extraordinary events, such as a transfer of partnership
interest in FRP and entering into other financing arrangements, are also
subject to NACC's consent. As of September 11, 1998, the remaining balance of
the loan is $46 million. NACC's consent is not required for the Distribution.
FGI Financing I Corporation and Forum Ohio Healthcare, Inc. FGI Financing I
Corporation ("FGI") and Forum Ohio Healthcare, Inc. ("FOH") are subsidiaries
of Forum that own seven Communities and one Community, respectively. Both FGI
and FOH are subject to a single loan agreement, dated September 1, 1995, with
NACC in the original amount of $124.6 million. The loans are supported by two
promissory notes for the amount of $104.4 million and $20.2 million, which
mature on September 2003 and September 2018, respectively. The loan agreement
contains cross-default provisions so that a default by one subsidiary can
result in acceleration of the entire amount of the indebtedness. Consent of
NACC is necessary for any (i) amendments to the management agreements, (ii)
replacement of the manager, (iii) transfer of a Community which secures the
loan, (iv) other financing, (v) changes to existing leases, including ground
leases or (vi) transfers of FGI and FOH stock. As of September 11, 1998, $122
million remains outstanding. NACC's consent is not required for the
Distribution.
Leisure Park Joint Venture Limited Partnership. Leisure Park Joint Venture
Limited Partnership ("Leisure Park"), a subsidiary of the Company, owns one
Community. Leisure Park has outstanding $14.7 million in tax free bonds held
by outside bondholders (the "Leisure Park Bonds"). Host is the guarantor of
the Leisure Park Bonds.
EBITDA
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") on a historical
basis was $40.9 million in the First Three Quarters 1998 and $24.6 million for
the period from June 21, 1997 through January 2, 1998.
The following is a reconciliation of historical EBITDA to the Company's
income before extraordinary item:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 21, 1997
FIRST THREE QUARTERS THROUGH
1998 JANUARY 2, 1998
-------------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
EBITDA..................................... $ 40,939 $ 24,638
Interest expense........................... (17,560) (13,396)
Depreciation and amortization.............. (14,759) (10,635)
Income taxes............................... (3,534) (249)
-------- --------
Income before extraordinary item......... $ 5,086 $ 358
======== ========
</TABLE>
The Company's interest coverage, defined as EBITDA divided by cash interest
expense, was 2.2 times for the First Three Quarters 1998 compared to 1.7 times
for the period from June 21, 1997 through January 2, 1998. The ratio of
earnings to fixed charges was 1.5 to 1.0 for the First Three Quarters of 1998
and 1.1 to 1.0 for the period from June 21, 1997 through January 2, 1998.
The Company's pro forma EBITDA increased $9.7 million, or 17.0%, to $66.8
million in the First Three Quarters 1998 as compared to First Three Quarters
1997 and increased $9.9 million, or 12.8%, to $87.7 million for fiscal year
1997 as compared to fiscal year 1996.
55
<PAGE>
The following is a reconciliation of pro forma EBITDA to the Company's
income before extraordinary item(1):
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEARS
---------------------- ------------------
1998 1997 1997 1996
---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA.................... $ 66,753 $ 57,050 $ 87,710 $ 77,793
Interest expense.......... (16,302) (16,509) (22,932) (23,341)
Depreciation and
amortization............. (14,787) (15,595) (22,687) (21,168)
Income taxes.............. (13,487) (9,093) (15,617) (12,006)
Other non-cash charges,
net...................... (2,769) (2,769) (4,000) (4,000)
---------- ---------- -------- --------
Income before
extraordinary item..... $ 19,408 $ 13,084 $ 22,474 $ 17,278
========== ========== ======== ========
</TABLE>
- --------
(1) Assumes all Partnerships participate and the Blackstone Acquisition is
consummated.
Cash Flows. Cash flow from operations for the First Three Quarters 1998 and
the period from June 21, 1997 through January 2, 1998 totaled $19 million and
$25 million, respectively. Cash used in investing activities was $8 million
and $33 million for the First Two Quarters 1998 and the period from June 21,
1997 through January 2, 1998, respectively. Cash from investing activities
primarily consists of the acquisition of expansion units and renewals and
replacements.
Cash used in financing activities was $3 million for the First Three
Quarters 1998, while cash from financing activities was $26 million for the
period from June 21, 1997 through January 2, 1998. Cash from financing
activities primarily consists of the proceeds from debt offerings, offset by
prepayments on certain debt and other scheduled principal payments.
INFLATION
The hotel lodging properties expected to be leased or subleased by the
Company from Host REIT and owned Communities are impacted by inflation through
its effect on increasing costs and on the managers' ability to increase rates.
Unlike other real estate, the Company believes that hotels have the ability to
change room rates on a daily basis, so the impact of higher inflation
generally can be passed on to customers. The rates charged for the delivery of
services at the Company's Communities are highly dependent upon local market
conditions and the competitive environment in which the Communities operate.
Although resident agreements are for short terms, and thus may enable the
Company to seek increases in daily fees at the time of renewal in response to
inflation or other factors, any such increases would be subject to market and
competitive conditions.
YEAR 2000 PROBLEM
The "Year 2000 Problem" has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to
refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of the familiar "19." If not corrected, many computer
applications could fail or create erroneous results. Following the
Distribution, the Company, as the lessee of Host REIT's hotels, will deal
directly with Year 2000 matters material to the operation of the hotels, and
the Company has agreed to adopt and implement the Host compliance program
outlined below with respect to third-party systems for all hotels for which it
is the lessee. The following disclosure provides information regarding the
current status of Host's Year 2000 compliance program.
Host has adopted the compliance program because it recognized the importance
of minimizing the number and seriousness of any disruptions that may occur as
a result of the Year 2000 issue. Host's compliance program includes an
assessment of Host's hardware and software computer systems and
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embedded systems, as well as an assessment of the Year 2000 issues relating to
third parties with which Host has a material relationship or whose systems are
material to the operations of Host's hotel or senior living properties. Host's
efforts to ensure that its computer systems are Year 2000 compliant have been
segregated into two separate phases: in-house systems and third-party systems.
In-House Systems. Since October 1993, Host has invested in the
implementation and maintenance of accounting and reporting systems and
equipment that are intended to enable Host to provide adequately for its
information and reporting needs and which are also Year 2000 compliant.
Substantially all of Host's in-house systems have already been certified as
Year 2000 compliant through testing and other mechanisms and Host has not
delayed any systems projects due to the Year 2000 issue. Host is in the
process of engaging a third party to review its Year 2000 in-house compliance.
Management of Host believes that future costs associated with Year 2000 issues
for its in-house systems will be insignificant and therefore not impact Host's
or the Company's business, financial condition and results of operations. Host
has not developed, and does not plan to develop, a separate contingency plan
for its in-house systems due to their current Year 2000 compliance. However,
Host does have detailed contingency plans for its in-house systems covering a
variety of possible events, including natural disasters, interruption of
utility service and similar events.
Third-Party Systems. Host relies upon operational and accounting systems
provided by third parties, primarily the managers and operators of its hotel
and senior living properties, to provide the appropriate property-specific
operating systems (including reservation, phone, elevator, security, HVAC and
other systems) and to provide it with financial information. Based on
discussions with the third parties that are critical to Host's business,
including the managers and operators of its hotels and senior living
properties, Host believes that these parties are in the process of studying
their systems and the systems of their respective vendors and service
providers and, in many cases, have begun to implement changes, to ensure that
they are Year 2000 compliant. To the extent these changes impact property-
level systems, Host may be required to fund capital expenditures for upgraded
equipment and software. Host does not expect these charges to be material, but
is committed to making these investments as required. To the extent that these
changes relate to a third party managers' centralized systems (including
reservations, accounting, purchasing, inventory, personnel and other systems),
Host's management agreements generally provide for these costs to be charged
to Host's properties subject to annual limitations which costs will be borne
by the Company following the Distribution. Host expects that the third party
managers will incur Year 2000 costs for its centralized systems in lieu of
costs related to system projects that otherwise would have been pursued and
therefore its overall level of centralized system charges allocated to the
properties will not materially increase as a result of the Year 2000
compliance effort. Host and the Company believe that this deferral of certain
system projects will not have a material impact on their respective future
results of operations, although it may delay certain productivity enhancements
at its properties. The Company will continue to monitor the efforts of these
third parties to become Year 2000 compliant and will take appropriate steps to
address any non-compliance issues. Host (and following the Distribution, the
Company) believes that in the event of material Year 2000 non-compliance
caused by a breach of the manager's duties, Host will have the right to seek
recourse against the manager under its third party management agreements. The
management agreements, however, generally do not specifically address the Year
2000 compliance issue. Therefore, the amount of any recovery in the event of
Year 2000 non-compliance at a property, if any, is not determinable at this
time. If the Distribution occurs, such recovery would accrue to Crestline,
with only a portion accruing to Host through increased lease payments from the
Company.
Host (and following the Distribution, the Company) will work with the third
parties to ensure that appropriate contingency plans will be developed to
address the most reasonably likely worst case Year 2000 scenarios, which may
not have been identified fully. In particular, Host has had extensive
discussions regarding the Year 2000 problem with Marriott International, the
manager of a substantial majority of its leased and subleased hotel properties
and all of its senior living communities. Due to the significance of Marriott
International to Host business, a detailed description of Marriott
International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks;
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(ii) Inventory: identifying and locating systems and technology components
that may be affected; (iii) Assessment: reviewing these components for Year
2000 compliance, and assessing the scope of Year 2000 issues; (iv) Planning:
defining the technical solutions and labor and work plans necessary for each
particular system; (v) Remediation/Replacement: completing the programming to
renovate or replace the problem software or hardware; (vi) Testing and
Compliance Validation: conducting testing, followed by independent validation
by a separate internal verification team; (vii) Implementation: placing the
corrected systems and technology back into the business environment; and
(viii) Quality Assurance: utilizing a dedicated audit team to review and test
significant projects for adherence to quality standards and program
methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology ("IT Applications")--enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated systems ("BIS")--systems that
have been initiated by an individual business unit, and that are not supported
by Marriott International's IR organization; and (iii) Building Systems--non-
IT equipment at properties that use embedded computer chips, such as
elevators, automated room key systems and HVAC equipment. Marriott
International is prioritizing its efforts based on how severe an effect
noncompliance would have on customer service, core business processes or
revenues, and whether there are viable, non-automated fallback procedures
("System Criticality").
Marriott International measures the completion of each phase based on
documented and quantified results, weighted for System Criticality. As of the
end of the 1998 third quarter, the awareness and inventory phases were
complete for IT Applications and nearly complete for BIS and Building Systems.
For IT Applications, the Assessment, Planning and Remediation/Replacement
phases were each over 80% complete, and Testing and Compliance Validation had
been completed for a number of key systems, with most of the remaining work in
its final stage. For BIS and Building Systems, Assessment and Planning were in
the mid- to upper-range of completion, with a substantial amount of work in
process, while the progress level for Remediation/Replacement and Testing and
Compliance Validation had not yet been documented and quantified. Quality
Assurance is also in progress for IT Applications and is scheduled to begin
for BIS and Building Systems in the near future. Marriott International's goal
is to substantially complete the Remediation/Replacement and Testing phases
for its System Critical IT Applications by the end of 1998, with 1999 reserved
for unplanned contingencies and for Compliance Validation and Quality
Assurance. For System Critical BIS and Building Systems, the same level of
completion is targeted for June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications
with its significant third party suppliers, vendors and business partners,
including its franchisees. Marriott International is focusing its efforts on
the business interfaces most critical to its customer service and revenues,
including those third parties that support the most critical enterprise-wide
IT Applications, franchisees generating the most revenues, suppliers of the
most widely used Building Systems and BIS, the top 100 suppliers, by dollar
value, of non-IT products, and financial institutions providing the most
critical payment processing functions. Responses have been received from a
majority of the firms in this group.
Marriott International is also establishing a common approach for testing
and addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-
practices sharing system.
Risks. There can be no assurances that Year 2000 remediation by Host (or the
Company following the Distribution) or third parties will be properly and
timely completed, and failure to do so could have a material adverse effect on
the Company, its business and its financial condition since, following the
Distribution, the Company will be responsible for interfacing with third
parties in addressing Year 2000 issues at the hotels, leased or subleased by
the Company. The Company cannot predict the actual effects to it of the Year
2000 problem, which depends on numerous uncertainties such as: (i) whether
significant third parties, properly and timely address the Year 2000 issue;
and (ii) whether broad-based or systemic economic failures may occur. The
Company is also unable to predict the severity and duration of any such
failures, which could include disruptions
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in passenger transportation or transportation systems generally, loss of
utility and/or telecommunications services, the loss or disruption of hotel
reservations made on centralized reservation systems and errors or failures in
financial transactions or payment processing systems such as credit cards. Due
to the general uncertainty inherent in the Year 2000 problem and the Company's
responsibilities to Host and dependence upon third parties, the Company is
unable to determine at this time whether the consequences of Year 2000 failure
will have a material impact on the Company. Although the Company's efforts to
coordinate with Host in implenting their Year 2000 compliance programs are
expected to significantly reduce the level of uncertainty concerning Year 2000
issues and management believes that the possibility of significant
interruptions of normal operations should be reduced, there is no assurance
that this will be the case.
IMPACT OF FINANCIAL ACCOUNTING STANDARDS
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," SFAS
No. 129, "Disclosure of Information About Capital Structure" and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
adoption of these statements did not have a material effect on the Company's
consolidated financial statements and the appropriate disclosures required by
these statements have been incorporated herein.
In the First Quarter 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in financial statements.
The objective of SFAS No. 130 is to report a measure of all changes in equity
of an enterprise that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive income is the
total of net income and all other nonowner changes in equity. For all periods
presented, the Company had no items of other comprehensive income.
Consequently, comprehensive income equals net income and the Company has no
accumulated other comprehensive income for all periods presented.
On November 20, 1997, the EITF of the Financial Accounting Standards Board
reached a consensus on EITF 97-2. EITF 97-2 addresses the circumstances in
which a management entity may include the revenues and expenses of a managed
entity in its financial statements.
The Company has considered the impact of EITF 97-2 on its financial
statements and has determined that EITF 97-2 requires the Company to include
property-level sales and operating expenses of its leased and subleased hotels
and owned senior living communities in its statements of operations. The
Company will adopt EITF 97-2 in the fourth quarter of 1998, with retroactive
effect in prior periods to conform to the new presentation. Application of
EITF 97-2 to the consolidated financial statements for the First Three
Quarters 1998, and the twelve weeks ended September 12, 1997 and the period
from June 21, 1997 through January 2, 1998 would have increased both revenues
and operating expenses by approximately $108 million, $30 million and $74
million, respectively, and would have had no impact on operating profit, net
income or earnings per share.
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BUSINESS AND PROPERTIES
GENERAL
Following the Distribution, the Company and its subsidiaries will be engaged
in the business of leasing and subleasing full-service and limited-service
hotels, asset management of hotels and owning senior living communities. In
June 1997, the Company's predecessor acquired all of the outstanding stock of
Forum from Marriott International. The Company currently owns 31 Communities
located in 13 states. The Company expects to lease from Host REIT
approximately 125 full-service hotels, representing substantially all of the
hotels owned by Host REIT. In addition, the Company expects to sublease from
Host REIT 71 limited-service hotels. Concurrently with entering into the Hotel
Leases, the Company will assume the existing management agreements between
Host and Marriott International and the Non-MI Managers, pursuant to which
Marriott International and the Non-MI Managers will continue to manage the
hotels that are leased or subleased by the Company from Host and subsidiaries
of HPT. Marriott International also will continue to manage the Communities.
The Company's activities are and will be limited for certain specified periods
by certain agreements with Host REIT and Marriott International to which the
Company is or will become a party. See "Business and Properties--Non-
Competition Agreements."
The Company was incorporated in Maryland on November 9, 1998, as a wholly
owned subsidiary of Host, to facilitate the reincorporation of its
predecessor, Crestline Capital Corporation, a Delaware corporation
("Crestline--Delaware"), from Delaware into Maryland. The Company's name was
changed from "CCC Merger Corporation" to "Crestline Capital Corporation," the
name of its predecessor, upon the reincorporation. Crestline--Delaware was
incorporated in Delaware on May 15, 1997 as a wholly owned subsidiary of Host,
for the purpose of acquiring all of the outstanding stock of Forum from
Marriott International. The principal executive offices of the Company are
located at 10400 Fernwood Road, Bethesda, Maryland 20817, and its telephone
number at that location is (301) 380-9000.
BUSINESS OF THE COMPANY
Lodging and Asset Management Services. Upon completion of the Distribution,
the Company will lease approximately 125 full-service hotels and sublease 71
limited-service hotels from Host REIT. The full-service hotel portfolio will
be managed by Marriott International and the Non-MI Managers under the
"Marriott," "Ritz-Carlton," "Four Seasons," "Swissotel," "Hyatt," "Holiday
Inn" and "Delta" brand names, and the limited-service hotels will be managed
by Marriott International under the "Courtyard by Marriott" and "Residence
Inn" brand names. The Company also will enter into a contract with Host REIT
to provide asset management services for substantially all of Host REIT's
hotel portfolio.
The full-service hotels to be leased by the Company from Host REIT are in
the upscale and luxury segments of the lodging industry. Based on data
provided by Smith Travel Research, the upscale and luxury segments achieved an
average occupancy of 71.1% for 1997. The Company's full-service hotel lease
portfolio achieved a 78.4% occupancy and 12.6% REVPAR increase in 1997, which
significantly outperformed the competitive set. The Company believes this is
due to the quality and positioning of the hotel properties, as well as the
strength of the brand names and management companies in the portfolio.
The Company believes that there are significant barriers to entry,
particularly in urban and airport locations, that have limited supply
increases in the upscale and luxury segments of the full-service hotel
industry to an average of approximately 1% from 1992 through 1997. These
barriers to entry have included: the affordability, availability and location
of quality land; the lead time for the development of a comparable hotel which
can now range from three to five years or more from conception to completion
of construction; the limited availability of financing for new hotel
construction; and the availability of existing comparable hotels that have
sold at a discount to their replacement cost.
The Company does not believe, however, that the limited-service hotel sector
has the same barriers to entry for new supply limitations that exist in the
full-service sector. For 1998, room supply within the moderate-price
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and extended-stay segments has exceeded room demand. The Company believes that
this trend will have an effect on the feasibility of additional new limited-
service construction starts and certain of the supply/demand imbalances may
create acquisition and leasing opportunities for the Company.
Under the Hotel Leases, the Company will participate directly in the results
of the operations of the leased hotels (and thus trends in the hotel industry
are likely to directly bear on the Company's economic performance). Under the
typical hotel lease (or sublease) that the Company enters into, the Company
will be obligated to pay to the lessor rent based upon the greater of a fixed
dollar amount of rent or fixed percentages of various categories of gross
revenues derived from the operation of the leased hotels. See "Description of
the Hotel Leases for Full-Service Hotels Managed by Marriott International,"
"Description of Hotel Leases for Limited-Service Hotels Managed by Marriott
International," "Description of Hotel Leases for Hotels Managed by Other
Management Companies," and "Description of Blackstone Hotel Leases." The
Company in turn will contract with a third party manager (typically, but not
in all cases, Marriott International) to operate the hotels on behalf of the
Company. Under these management agreements, the Company typically pays the
manager a base management fee equal to a fixed percentage of hotel revenues,
plus in many cases an incentive management fee based upon the operating profit
of the hotel above certain specified levels. Under these management
agreements, the Company receives all revenues from the operations of the
hotels, subject to its obligation to pay the managers their management fees,
and the Company is typically responsible for all expenses of operation of the
hotels, including costs incurred by the managers. See "Description of Marriott
International Hotel Management Agreements for Full-Service Hotels,"
"Description of Marriott International Hotel Management Agreements for
Limited-Service Hotels," "Description of Other Hotel Management Agreements,"
and "Description of Hotel Management Agreements for Blackstone Hotels." Thus,
the Company receives the operating profit from its leased and subleased hotels
after it pays the managers their management fees and the lessors their rent
(which is not based upon operating profit but rather upon fixed percentages of
gross revenues). Accordingly, the Company derives the benefit of (and bears
the risks associated with) the operating profits from the hotels. To the
extent that such profits (after the payment of management fees) exceeds the
rent due under the leases, the Company will profit (and its rate of
profitability will increase to the extent that the rate at which operating
profits increases exceeds the rate at which the rents payable under the leases
increase). Conversely, the Company will incur a loss to the extent that such
profit is less than the rent due under the leases (and the Company's
profitability will decline to the extent that the rate at which operating
profit increases is less than the rate at which the rent payable under the
leases increases). The Company's asset management team will continue to work
with the managers to improve the operating profit of the leased hotels to
attempt to increase operating profit for the Company.
Pursuant to the terms of the Hotel Non-Competition Agreement entered into by
Host with Marriott International in 1993 and a non-competition agreement to be
entered into by the Company with Host in connection with the Distribution, the
Company generally will be precluded (i) until October 8, 2000, from operating
or managing (but not leasing) full-service or limited-service hotels and (ii)
until the earlier of December 31, 2008 or the date when the Company no longer
leases at least 25% of the hotels leased from Host REIT at the time of the
Distribution from owning or acquiring any full-service hotels not leased from
Host REIT. See "--Non-Competition Agreements--Non-Competition Agreement with
Marriott International Regarding Hotels" and "--Non-Competition Agreement with
Host or Host REIT Regarding Hotels."
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Senior Living. At the time of the Distribution, the Company will own a
portfolio of 31 Communities that contains over 7,200 units located in 13
states. These assets were acquired by the Company in 1997 and 1998 and are
managed by MSLS, a subsidiary of Marriott International, under long-term
operating agreements. This portfolio is positioned in the quality tier segment
of the senior living industry. (The quality tier segment of the market focuses
on the private pay customer who is targeted demographically as a senior who is
75 years or older with annual income of $25,000 or greater). The Communities
generally offer the residents the full continuum of care: independent living;
assisted living; and healthcare units. The Company believes that few
competitors offer this continuum which allows residents to age in place over
time.
The senior living industry encompasses the independent living, assisted
living and healthcare segments. In general, residents in independent living
units participate in a community's dining plan and other social functions and
may utilize other services such as housekeeping, laundry or transportation. In
general, these residents do not need assistance with activities of daily
living ("ADLs") such as eating, bathing, grooming, dressing or medicine
reminders. Assisted living residents typically require some assistance with
some or all of these ADLs. Certain assisted living communities may also
provide personal assistance with Alzheimer's disease or other forms of
dementia. Residents who develop further physical or cognitive frailties that
require more intensive medical attention often reside in healthcare units. In
general, there are few barriers to entry in the independent and assisted
living segments of the senior living industry.
Pursuant to the terms of the Community Non-Competition Agreement entered
into by Host with Marriott International in 1997, as amended, until June 21,
2010, the Company generally is precluded from operating or managing (but not
owning or leasing) senior living communities. See "--Non-Competition
Agreements--Non-Competition Agreement with Marriott International Regarding
the Senior Living Communities."
BUSINESS STRATEGY
The Company's primary business strategy is to take advantage of
opportunities to enhance the profitability of its three strategic business
units: lodging; asset management; and senior living.
Lodging. Based on the number of hotels to be leased or subleased from Host
REIT, the Company will be one of the largest leasing companies in the lodging
industry. The Company intends to expand its full-service hotel lease portfolio
through additional lease transactions with Host REIT that may arise from Host
REIT's own growth through acquisition. Since 1994, Host has acquired 79 full-
service hotels for an aggregate purchase price of approximately $3.9 billion
and Host believes its acquisition opportunities remain significant with both
Marriott and non-Marriott brand name opportunities. However, there are no
rights of first refusal or other contractual arrangements enabling the Company
to lease any additional hotels acquired by Host REIT in the future. The
Company may also pursue the acquisition and/or leasing of limited-service
hotels from Host and its affiliates, which currently hold interests in
partnerships owning 120 Courtyard by Marriott and 50 Residence Inn hotels. The
Company also expects to pursue the acquisition and/or leasing of other
limited-service hotels as the effects of overbuilding in this sector may
create opportunities in markets with strong long-term fundamentals.
The Company also plans to seek to establish strategic relationships with
hotel REITs other than Host REIT. Current federal income tax law does not
allow REIT's to derive revenues directly from the operations of hotels. As a
result, hotel REITs generally enter into leases with lessees who agree to pay
a base rent plus a percentage
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rent based on increases in gross revenues of a hotel. The Company, therefore,
believes that there will be leasing opportunities with some hotel REITs other
than Host REIT that have been unable to pursue acquisition opportunities
because certain hotel management companies have been unwilling to enter into
such leases. The Company intends to pursue these leasing opportunities for
both full-service and limited-service hotels, subject to the terms of the Non-
Competition agreement with Marriott International and Host REIT.
In addition, many hotel REITs have established related-party hotel leasing
companies that are generally small and privately held. The Company believes
that some of these REITs, in an effort to reduce conflicts of interest, may
seek to establish independent leasing relationships which could create an
opportunity for the Company to act as a consolidator of these leasing
companies.
The Company also intends to explore the feasibility of other lodging-related
business opportunities, such as timeshare investments and, after October 8,
2000, when the restrictions under the Hotel Non-Competition Agreement expire,
third-party hotel management.
Asset Management. The Company's asset management team (which will be
transferred from Host to the Company in connection with the Distribution) is
experienced in managing one of the largest and highest quality hotel and
senior living community portfolios in the industry. This team, consisting of
approximately 30 employees, has developed significant expertise in enhancing
the value of lodging and senior living real estate. The asset management
function encompasses overseeing the life cycle of a lodging property or senior
living community. A key element to the function is the development of a
strategic plan and identifying specific objectives designed to achieve that
plan. Asset management is responsible for developing the strategic objectives
for a property consistent with the owner's goals and then performing
activities which focus on the achievement of those objectives. A strategic
plan may differ from property to property, however, the general objectives
associated with the asset management function include:
. Maximizing the cash return on investment through cost reduction and
revenue enhancement opportunities;
. Enhancing, preserving and maximizing the long-term value and life of the
assets; and
. Ensuring optimal positioning of each property.
The asset management group functions as the intermediary between Host, as
owner, and the Company, as lessee and the managers of the lodging properties
and senior living communities. The managers are typically responsible for the
day-to-day operations of the properties. The asset management group oversees
the managers' activities to insure that the objectives of the owner and the
lessee receive the appropriate level of priority and attention. There is a
broad spectrum of activities encompassed by the asset management function
including, among others:
. Reviewing periodic operating results, budgets and forecasts and
providing managers with feedback and direction;
. Reviewing, approving and overseeing capital expenditures;
. Dealing with regulatory, property tax, lender and ground lessor issues,
as applicable;
. Assessing performance against competition in a particular market;
. Ensuring that the property is maintained;
. Understanding market conditions, competitor initiatives, and changes
impacting on supply and demand;
. Performing due diligence in connection with an acquisition or
disposition;
. Exploring and initiating opportunities to increase revenues and
profitability, including, for example, expansions, renovations and
additional guest amenities and services; and
. Performing property inspections.
In connection with the Distribution, the Company will enter into a contracts
with Host REIT non-controlled subsidiaries for a term of two years (with one
automatic renewal) to continue to provide asset management services to Host
REIT and subsidiaries for the
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Host hotel portfolio. These services will include: (i) monitoring
property/brand performance; (ii) pursuing expansion and repositioning
opportunities; (iii) overseeing capital expenditure budgets and forecasts;
(iv) assessing return on investment expenditure opportunities; and (v)
analyzing competitive supply conditions in each market. The Company will be
paid an aggregate annual fee of $4.5 million for services rendered under this
contract.
The Company intends to utilize the asset management team's industry
expertise to expand its customer base to include new third-party asset
management contracts with entities such as hotel REITs, pension funds, life
insurance companies, opportunity funds and offshore owners. In addition, the
Company's asset management team may expand the range of services it provides
to include feasibility analyses, valuations, acquisition/disposition due
diligence and similar services. The method of charging for these services will
be determined on a case-by-case basis. Potential alternatives include a fixed
fee, a fixed fee coupled with a performance or incentive fee, a fee based on
hourly rates, or a fee determined based on a percentage of revenues generated
by a property. The Company does not have employment agreements with any of the
employees in its asset management group.
Senior Living. The Company owns a premier portfolio of senior living
communities and was ranked as the fourth largest owner of senior living
communities by The American Senior Housing Association in 1997. The portfolio
encompasses the full continuum of care by offering a combination of
independent living (55% of units), assisted living (20% of units) and
healthcare accommodations (25% of units). During 1997, the portfolio achieved
an average occupancy of approximately 92% and an average daily rate of $84 for
the period in which Host owned the properties.
In 1999, the Company expects to complete the final phase of an $88 million
expansion program that will result in the addition of 864 units at its
Communities. Upon completion, this expansion program will bring the total
number of units in the Company's portfolio to 7,540. The Company's objective
in completing the expansion program has been to further solidify the
competitive position of its Communities through the provision of a continuum
of housing accommodations on one campus. These expansions have typically
involved the addition of assisted living units to a community which offered
only independent living units or to a community which offered only independent
living and healthcare units. The Company believes that its portfolio will
continue to enjoy a competitive advantage as the result of its emphasis on the
provision of multiple levels of care.
The Company expects to continue selectively pursuing the acquisition of
upscale senior living communities and to engage premier operators to manage
these communities. The Company expects to continue to target primarily assets
which offer at least two levels of care and which are located in established
neighborhoods where land for development is scarce and where community groups
and local authorities are less likely to encourage the development of
additional senior living communities.
The Company has entered into a conditional purchase agreement in connection
with the acquisition of two Brighton Gardens senior living communities in
Denver and Colorado Springs, Colorado. Both of these communities are under
construction and are expected to be completed in the second quarter of 1999.
Under the terms of the agreement, the Company can elect to acquire these
communities for approximately $35 million on the first anniversary of their
opening. The communities will be managed by MSLS under long-term operating
agreements.
In addition to pursuing single asset and portfolio acquisitions, the Company
may also pursue the acquisition of senior living companies to the extent that
the real estate assets of these companies complement its own. The senior
living industry is currently highly fragmented and many markets are dominated
by two or three regional companies. The Company believes that as this industry
consolidates, some of these regional companies will seek to align themselves
with larger companies in an effort to solidify their growth. The Company may
be a logical partner for one or more of these companies.
HOTEL LODGING INDUSTRY
The upscale and luxury full-service segments of the lodging industry
continue to benefit from a favorable cyclical imbalance in the supply/demand
relationship in which room demand growth has exceeded supply
64
<PAGE>
growth, which has remained fairly limited. The lodging industry posted strong
gains in revenues and profits in 1997, as demand growth continued to outpace
additions to supply. The Company believes that upscale and luxury full-service
hotel room supply growth will remain limited through at least year 2000.
Accordingly, the Company believes this supply/demand imbalance will result in
improving occupancy and room rates which should result in improved REVPAR and
operating profit.
Following a period of significant overbuilding in the mid-to-late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction, excluding casino-related construction, has been modest and
largely offset by the number of rooms taken out of service each year. Due to
an increase in travel and an improving economy, hotel occupancy has grown
steadily over the past several years and room rates have improved. The Company
believes that room demand for upscale and luxury full-service properties will
continue to grow at approximately the rate of the Gross Domestic Product
("GDP"). Increased room demand should result in increased hotel occupancy and
room rates. According to Smith Travel Research, upscale and luxury full-
service occupancy for the Company and its competitive set grew in 1997 to
72.5% from 72.2% in 1996, while room rate growth continued to exceed
inflation. While room demand has been rising, new hotel supply growth has been
minimal. Smith Travel Research data shows that upscale and luxury full-service
room supply increased an average of only 1% annually from 1991 through 1997.
According to PricewaterhouseCoopers LLP, hotel supply in the upscale and
luxury full-service segment is expected to grow annually at 1.8% to 1.9%
through 1998. The increase in room demand and minimal growth in new hotel
supply has also led to increased room rates. The Company believes that these
recent trends will continue, with overall occupancy changing slightly and room
rates increasing at more than one and one-half times the rate of inflation in
1998.
While the supply/demand relationship has generally remained favorable in the
upper upscale and luxury markets in which the Company's properties operate, a
number of new construction projects have been announced or commenced in 1998,
particularly in suburban and smaller metropolitan markets where the Company
does not have a significant presence. This growth in new supply, together with
slowing demand growth, have served to reduce the rate of REVPAR growth at the
Company's properties from year earlier growth rates. In part, as a reaction to
a concern regarding the potential for lodging industry overbuilding as well as
general economic concerns which have been heightened by the Asian crisis and
other factors, the availability of capital to the lodging industry has
diminished greatly in the second half of 1998. While this condition is having
a favorable effect by curtailing construction of a number of potentially
competing hotel projects, it is also limiting the Company's ability to grow
through acquisitions.
The lodging industry is cyclical with operating results correlated highly to
the GDP. During recent months, a number of investment banks and economists
have substantially reduced their estimates of growth in GDP through 1999.
Should such estimates of diminished GDP growth prove accurate, the Company
believes that REVPAR growth would be substantially reduced at its properties.
LEASED AND SUBLEASED HOTEL PROPERTIES
The full-service hotel lodging properties expected to be leased from Host
represent quality assets in the upscale and luxury full-service lodging
segments and substantially all of the full-service hotel properties are
currently operated under the Marriott or Ritz-Carlton brand names. In
addition, the Company will sublease limited-service hotels from Host REIT,
including Courtyard by Marriott (moderate-price) and Residence Inn (extended-
stay) hotel properties, all of which are managed by Marriott International.
65
<PAGE>
The following tables set forth certain information with respect to the
operations of the hotels to be leased or subleased by the Company following
the Distribution on a historical and pro forma basis for fiscal year 1997 and
for the First Three Quarters 1998.
<TABLE>
<CAPTION>
FISCAL YEAR 1997
-------------------------------------------
NUMBER NUMBER AVERAGE
OF HOTELS OF ROOMS HOTEL REVENUES OCCUPANCY DAILY RATE REVPAR(1)
--------- -------- -------------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Full-service (histori-
cal)................... 92 45,029 $ 930,648 78.8% $134.00 $105.56
Full-service (pro
forma)(2) ............. 126 59,026 1,329,997 77.7 132.73 103.09
Moderate-price (histori-
cal)................... 53 7,606 116,236 81.1 84.30 68.38
Extended-stay (histori-
cal)................... 18 2,178 39,670 83.3 99.96 83.27
<CAPTION>
FIRST THREE QUARTERS 1998
-------------------------------------------
NUMBER NUMBER AVERAGE
OF HOTELS OF ROOMS HOTEL REVENUES OCCUPANCY DAILY RATE REVPAR(1)
--------- -------- -------------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Full-service (histori-
cal)................... 101 49,068 $ 797,971 79.2% $139.79 $110.76
Full-service (pro
forma)(2) ............. 126 59,026 1,013,199 78.4 141.61 111.05
Moderate-price (histori-
cal)................... 53 7,606 82,856 81.6 91.67 74.82
Extended-stay (histori-
cal)................... 18 2,178 27,387 85.1 102.97 87.61
</TABLE>
- --------
(1) REVPAR measures daily room revenues generated on a per room basis. REVPAR
does not include food and beverage or other ancillary revenues generated
by the property. REVPAR represents the combination of the average daily
room rate charged and the average daily occupancy achieved.
(2) Includes the hotels owned by all hotel partnerships which Host proposes to
acquire in connection with the REIT Conversion and the Blackstone Hotels,
assuming all such hotel partnerships participate in the mergers.
Full-Service. The Company's leased full-service hotels average nearly 500
rooms. Twelve of the hotels to be leased by the Company have more than 750
rooms. Hotel properties typically include meeting and banquet facilities, a
variety of restaurants and lounges, swimming pools, gift shops and parking
facilities. The full-service hotels to be leased by the Company primarily
serve business and pleasure travelers and group meetings at locations in
downtown and suburban areas, near airports and at resort convention locations
throughout the United States. The properties are generally well situated in
locations where there are significant barriers to entry by competitors,
including downtown areas of major metropolitan cities, at airports and at
resort/convention locations where there are limited or no development sites.
Marriott International serves as the manager for 86 of the 100 full-service
hotels currently owned by Host and to be leased by the Company from Host REIT
and all but three are part of Marriott International's full-service hotel
system. The average age of the properties is 15 years.
The chart below sets forth performance information for the full-service
hotels expected to be leased by the Company from Host REIT on a comparable
basis:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- ----------------
1998 1997 1997 1996
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
Comparable Full-Service
Hotels(1)
-----------------------
Number of properties.... 75 75 53 53
Number of rooms......... 37,675 37,675 26,959 26,959
Average daily rate...... $ 142.11 $ 131.74 $134.49 $121.58
Occupancy percentage.... 80.1% 80.4% 79.4% 78.0%
REVPAR.................. $ 113.87 $ 105.86 $106.76 $ 94.84
REVPAR % change......... 7.6% -- 12.6% --
</TABLE>
- --------
(1) Consists of the 75 full-service properties owned by Host for the entire
First Three Quarters 1998 and First Three Quarters 1997, respectively, and
the 53 properties owned by Host for the entire 1997 and 1996 fiscal years,
respectively, except for four hotel properties which will not be leased
from Host. These properties, for the respective periods, represent the
"comparable properties." Properties held for less than all of the periods
discussed above, respectively, are not considered comparable.
66
<PAGE>
The chart below sets forth certain performance information for the full-
service hotels expected to be leased by the Company from Host REIT in
connection with the Distribution and were owned by Host prior to September 11,
1998:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- ----------------
1998 1997 1997 1996
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
Number of properties.............. 101 83 92 75
Number of rooms................... 49,068 40,257 45,029 35,725
Average daily rate................ $139.79 $132.37 $134.00 $120.66
Occupancy percentage.............. 79.2% 80.4% 78.8% 77.8%
REVPAR............................ $110.76 $106.40 $105.56 $ 93.83
</TABLE>
Revenues in 1997 for nearly all of the full-service hotels to be leased by
the Company from Host REIT were improved or comparable to 1996. This
improvement was achieved through steady increases in customer demand, as well
as yield management techniques applied by the manager to maximize REVPAR on a
property-by-property basis. REVPAR for comparable properties increased 12.6%
for fiscal year 1997 as average room rates increased almost 11% and average
occupancy increased over one percentage point. Overall, this resulted in
strong sales growth. Sales expanded at a 9% rate for comparable hotels and
house profit margins increased by over two percentage points. REVPAR in 1997
for all such leased full-service properties (including both comparable and
non-comparable properties) increased 12.8% as average room rates increased
over 11% and average occupancy increased over one percentage point. For the
First Three Quarters 1998, REVPAR for comparable properties increased 7.6% as
average room rates increased nearly 8% and average occupancy decreased
slightly. Sales for the First Three Quarters 1998 expanded at an 8% rate for
comparable hotels and the house profit margin increased by one percentage
point. REVPAR for the First Three Quarters 1998 for full-service expected to
be leased by the Company from Host REIT properties increased 4.1% as average
room rates increased nearly 6% and average occupancy decreased over one
percentage point. The Company believes that the full-service hotels expected
to be leased by the Company from Host REIT have outperformed the industry's
average REVPAR growth rates. The relatively high occupancy rates of the
hotels, along with increased demand for upscale and luxury full-service hotel
rooms, allowed the managers of the hotels to increase average room rates by
selectively raising room rates and replacing certain discounted group business
with higher-rate group and transient business. The Company believes that these
favorable REVPAR growth trends should continue due to the limited new
construction of full-service properties and the expected improvements from the
conversion of eight properties to the "Marriott" brand names in 1996, 1997 and
1998.
Following the REIT Conversion, the Company and the managers will continue to
focus on cost control in an attempt to ensure that hotel sales increases serve
to maximize house and operating profit. While control of fixed costs serves to
improve profit margins as hotel sales increase, it also results in more hotel
properties reaching financial performance levels that allow the managers to
share in the growth of profits in the form of incentive management fees. The
Company believes this is a positive development as it strengthens the
alignment of the Company's interests, as lessee, and the managers' interests.
67
<PAGE>
The following table presents certain information for the full-service hotels
expected to be leased by the Company from Host REIT by geographic region for
fiscal year 1997:
<TABLE>
<CAPTION>
AVERAGE
NUMBER AVERAGE
NUMBER OF GUEST AVERAGE DAILY
GEOGRAPHIC REGION OF HOTELS ROOMS OCCUPANCY RATE REVPAR
----------------- --------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Atlanta......................... 7 441 76.5% $131.69 $100.74
Florida......................... 11 511 80.9 131.78 106.64
Mid-Atlantic.................... 12 364 76.1 111.71 85.00
Midwest......................... 10 418 74.3 107.65 79.99
New York........................ 10 708 84.7 173.85 147.22
Northeast....................... 7 367 75.2 96.75 72.72
South Central................... 15 525 76.5 120.81 92.39
Western......................... 21 519 79.5 140.07 111.39
Average-all regions........... -- 485 78.8 134.00 105.56
</TABLE>
Limited-Service -- Courtyard by Marriott Hotels. The Courtyard by Marriott
hotels to be subleased by the Company are moderate-priced, limited-service
hotels aimed at individual business and pleasure travelers, as well as
families. Courtyard by Marriott hotels typically have approximately 150 rooms
at locations in suburban areas or near airports throughout the United States.
The Courtyard by Marriott hotels include well-landscaped grounds, a courtyard
with a pool and socializing areas. Each hotel to be subleased by the Company
features meeting rooms and a restaurant and lounge with approximately 80
seats. The Courtyard by Marriott hotels to be leased by the Company average
only eight years of age, have substantially matured and are operating at high
occupancy rates. The Company believes this competitive position will enable
the manager to continue to improve profitability by adjusting the mix of
business to increase room rates. The table below sets forth comparable
performance information for the Courtyard by Marriott hotels to be subleased
by the Company:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- --------------
1998 1997 1997 1996
---------- ---------- ------ ------
<S> <C> <C> <C> <C>
Number of properties................. 53 53 53 53
Number of rooms...................... 7,606 7,606 7,606 7,606
Average daily rate................... $91.67 $84.27 $84.30 $77.80
Occupancy percentage................. 81.6% 82.9% 81.1% 80.2%
REVPAR............................... $74.82 $69.86 $68.38 $62.40
REVPAR % change...................... 7.1% -- 9.6% 7.0%
</TABLE>
The Courtyard by Marriott hotels to be subleased by the Company benefited in
1997 from higher demand, REVPAR increased 9.6% due to increases in room rates
of nearly 8.4% and an increase in occupancy of one percentage point. House
profit margins also increased by almost one percentage point, reflecting the
operating leverage inherent in properties already running at close to
capacity. For the First Three Quarters 1998, REVPAR increased 7.1% due to
increases in room rates of nearly 9%, while average occupancy decreased over
one percentage point. The Courtyard by Marriott hotels to be subleased by the
Company were generally fully occupied during the business week and enjoyed
high occupancies during the weekends. The Company believes this competitive
position will enable the manager to continue to improve profitability through
yield management and selective room rate increases. However, there can be no
assurance that profitability will continue to improve.
68
<PAGE>
The following table presents limited-service properties information by
geographic region for fiscal year 1997:
<TABLE>
<CAPTION>
AVERAGE
NUMBER AVERAGE
NUMBER OF GUEST AVERAGE DAILY
GEOGRAPHIC REGION OF HOTELS ROOMS OCCUPANCY RATE REVPAR
----------------- --------- -------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
Southeast........................ 9 140 78.9% $78.61 $62.02
Mid-Atlantic..................... 11 144 82.8% 85.32 70.60
Midwest.......................... 6 142 75.9% 78.28 59.39
Northeast........................ 15 142 82.3% 86.77 71.38
South Central.................... 3 153 76.3% 77.66 59.22
Western.......................... 9 141 84.6% 90.06 76.21
Average-all-regions............ -- 144 81.1% 84.30 68.38
</TABLE>
Limited-Service -- Residence Inns. The Residence Inns to be subleased by the
Company are extended-stay, limited-service hotels which cater primarily to
business and family travelers who stay more than five consecutive nights.
Residence Inns typically have 80 to 130 studio and two-story penthouse suites.
Residence Inns generally are located in suburban settings throughout the
United States and feature a series of residential style buildings with
landscaped walkways, courtyards and recreational areas. Residence Inns do not
have restaurants, but offer complimentary continental breakfast. In addition,
most Residence Inns provide a complimentary evening hospitality hour. Each
suite contains a fully equipped kitchen, and many suites have woodburning
fireplaces. The 18 Residence Inns to be subleased by the Company average eight
years of age.
The table below sets forth comparable performance information for the
Residence Inns expected to be subleased by the Company from Host REIT.
<TABLE>
<CAPTION>
FIRST THREE
QUARTERS FISCAL YEAR
--------------- --------------
1998 1997 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
Number of properties........................ 18 18 18 18
Number of rooms............................. 2,178 2,178 2,178 2,178
Average daily rate.......................... $102.97 $99.50 $99.96 $90.82
Occupancy %................................. 85.1% 84.7% 83.3% 85.1%
REVPAR...................................... $ 87.61 $84.28 $83.27 $77.29
REVPAR % change............................. 3.9% -- 7.7% 4.9%
</TABLE>
For 1997, the Residence Inns expected to be subleased by the Company from
Host REIT performed well with REVPAR increasing 7.7% due to increase in room
rates of 10% although occupancy decreased by over one percentage point.
Continued popularity of this product with customers combined with increasing
business travel resulted in strong performance for 1997. At an average
occupancy rate of 83.3% for 1997, these properties were near full occupancy
during the business week and enjoyed high occupancies during the weekends.
Given this strong demand, the manager of the Residence Inns was able to
improve room rates through managing the mix of business. For the First Three
Quarters 1998, REVPAR increased 3.9% due to increase in average room rates of
over 3% and a slight increase in occupancy.
69
<PAGE>
The following table presents certain information for Residence Inn extended-
stay properties expected to be subleased by the Company from Host REIT by
geographic region for fiscal year 1997:
<TABLE>
<CAPTION>
AVERAGE
NUMBER AVERAGE
NUMBER OF GUEST AVERAGE DAILY
GEOGRAPHIC REGION OF HOTELS ROOMS OCCUPANCY RATE REVPAR
----------------- --------- -------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
Southeast........................ 2 107 80.8% $ 94.70 $76.47
Mid-Atlantic..................... 2 112 84.0% 96.35 80.91
Midwest.......................... 3 153 81.0% 114.85 92.97
Northeast........................ 3 110 86.3% 97.60 84.21
South Central.................... 3 119 82.1% 89.34 73.33
Western.......................... 5 119 84.8% 99.62 84.51
Average-all-regions............ -- 120 83.0% 99.96 83.27
</TABLE>
BLACKSTONE ACQUISITION
In April 1998, Host entered into a definitive agreement with the Blackstone
Entities to acquire ownership of, or controlling interests in, twelve hotels
and two mortgage loans, one secured by one of the acquired hotels and one
secured by an additional hotel. In addition, Host will acquire a 25% interest
in Swissotel Management (USA) L.L.C., which operates five Swissotel hotels in
the United States, from the Blackstone Entities, which Host REIT will transfer
to the Company. If the Blackstone Acquisition is consummated, Host REIT, among
other things, will transfer to the Blackstone Entities approximately 4,370,000
shares of Common Stock of the Company then owned by Host REIT. The Blackstone
Acquisition is expected to occur promptly following the Merger. Consequently,
the Blackstone Entities will own approximately 18% of the Common Stock of the
Company to be issued and outstanding following the Distribution, assuming the
Blackstone Acquisition is consummated. In connection with the Blackstone
Acquisition, the Company has granted to the Blackstone Entities certain
registration rights with respect to such shares of Common Stock of the
Company. See "Description of Capital Stock--Registration Rights Agreement." At
the closing of the Blackstone Acquisition, the Blackstone portfolio will be
contributed to Host REIT and its hotels will be leased to subsidiaries of the
Company and will continue to be managed on behalf of such subsidiaries of the
Company under the Blackstone Entities' existing management agreements. The
Blackstone Acquisition is subject to certain conditions, including the Merger
being consummated by March 31, 1999. In the event the Distribution is declared
by the Board of Directors of Host but the Blackstone Acquisition does not
occur, the shares of Common Stock of the Company distributed to Host
Stockholders in the Distribution will represent 100% of the outstanding Common
Stock of the Company as of the Distribution.
The Blackstone portfolio is one of the premier collections of hotel
properties. It includes: The Ritz-Carlton, Amelia Island; The Ritz-Carlton,
Boston; Hyatt Regency Burlingame at San Francisco Airport; Hyatt Regency
Cambridge, Boston; Hyatt Regency Reston, Virginia; Grand Hyatt Atlanta; Four
Seasons Philadelphia; Four Seasons Atlanta; The Drake (Swissotel) New York;
Swissotel Chicago; Swissotel Boston; and Swissotel Atlanta.
70
<PAGE>
HOTEL PROPERTIES TO BE LEASED OR SUBLEASED BY THE COMPANY UNDER THE HOTEL
LEASES
The following table sets forth, as of the date hereof, the location and
number of rooms relating to each of the hotels to be leased or subleased to
the Company by Host REIT. All of the full-service hotel properties are
operated under either "Marriott" or "Ritz-Carlton" brand names by Marriott
International, unless otherwise indicated. All of the limited-service hotel
properties are operated under either the "Courtyard by Marriott" or "Residence
Inn" brand names by Marriott International.
Full-Service:
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Alabama
Grand Hotel Resort and Golf Club......................................... 306
Arizona
Scottsdale Suites........................................................ 251
The Ritz-Carlton, Phoenix (1)............................................ 281
California
Coronado Island Resort................................................... 300
Costa Mesa Suites........................................................ 253
Desert Springs Resort and Spa............................................ 884
Manhattan Beach (2)...................................................... 380
Marina Beach ............................................................ 368
Newport Beach............................................................ 570
Newport Beach Suites..................................................... 250
Ontario Airport (2)...................................................... 299
San Diego Marriott Hotel and Marina...................................... 1,355
San Diego Mission Valley (2)............................................. 350
San Francisco Airport.................................................... 684
San Francisco Fisherman's Wharf (2)...................................... 285
San Francisco Moscone Center............................................. 1,498
San Ramon................................................................ 368
Santa Clara.............................................................. 754
The Ritz-Carlton, Marina del Rey (1)..................................... 306
The Ritz-Carlton, San Francisco (1)...................................... 336
Torrance................................................................. 487
Colorado
Denver Southeast......................................................... 595
Denver Tech Center....................................................... 625
Denver West.............................................................. 307
Marriott's Mountain Resort at Vail....................................... 349
Connecticut
Hartford/Farmington...................................................... 380
Hartford/Rocky Hill...................................................... 251
Florida
Fort Lauderdale Marina................................................... 580
Harbor Beach Resort...................................................... 624
Jacksonville (2)......................................................... 256
Miami Airport............................................................ 782
Orlando World Center..................................................... 1,503
Palm Beach Gardens (2)................................................... 279
Singer Island (Holiday Inn) (3).......................................... 222
Tampa Airport............................................................ 295
Tampa Westshore.......................................................... 309
The Ritz-Carlton, Naples (1)............................................. 463
Georgia
Atlanta Marriott Marquis................................................. 1,671
Atlanta Midtown Suites................................................... 254
Atlanta Norcross......................................................... 222
Atlanta Northwest........................................................ 400
Atlanta Perimeter........................................................ 400
JW Marriott Hotel at Lenox............................................... 371
The Ritz-Carlton, Atlanta (1)............................................ 447
The Ritz-Carlton, Buckhead (1)........................................... 553
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Illinois
Chicago/Deerfield Suites................................................. 248
Chicago/Downers Grove Suites............................................. 254
Chicago/Downtown Courtyard............................................... 334
Chicago O'Hare........................................................... 681
Indiana
South Bend............................................................... 300
Louisiana
New Orleans ............................................................. 1,290
Maryland
Bethesda................................................................. 407
Gaithersburg/Washingtonian Center........................................ 284
Massachusetts
Boston/Newton............................................................ 430
Michigan
Detroit Romulus.......................................................... 245
The Ritz-Carlton, Dearborn (1)........................................... 308
Minnesota
Minneapolis/Bloomington.................................................. 479
Minneapolis City Center.................................................. 583
Minneapolis Southwest (2)................................................ 320
Missouri
Kansas City Airport...................................................... 382
St. Louis Pavilion....................................................... 672
New Hampshire
Nashua................................................................... 251
New Jersey
Hanover.................................................................. 353
Newark Airport........................................................... 590
Park Ridge............................................................... 289
Saddle Brook............................................................. 221
New York
Albany (2)............................................................... 359
New York Marriott Financial Center....................................... 504
New York Marriott Marquis................................................ 1,911
Marriott World Trade Center.............................................. 820
North Carolina
Charlotte Executive Park (2)............................................. 298
Raleigh Crabtree Valley.................................................. 375
Oklahoma
Oklahoma City............................................................ 354
Oklahoma City Waterford (2).............................................. 197
Oregon
Portland................................................................. 503
Pennsylvania
Philadelphia (Convention Center)......................................... 1,200
Philadelphia Airport..................................................... 419
Pittsburgh City Center (2)............................................... 400
Tennesee
Memphis.................................................................. 404
Texas
Dallas/Fort Worth........................................................ 492
Dallas Quorum............................................................ 547
El Paso.................................................................. 296
Houston Airport ......................................................... 566
</TABLE>
71
<PAGE>
HOTEL PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- ------
<S> <C>
JW Marriott Houston.................................................... 503
Plaza San Antonio (2).................................................. 252
San Antonio Rivercenter................................................ 999
San Antonio Riverwalk.................................................. 500
Utah
Salt Lake City......................................................... 510
Virginia
Dulles Airport......................................................... 370
Key Bridge............................................................. 588
Norfolk Waterside (2).................................................. 404
Pentagon City Residence Inn............................................ 300
The Ritz-Carlton, Tysons Corner (1).................................... 397
Washington Dulles Suites............................................... 254
Westfields............................................................. 335
Williamsburg........................................................... 295
Washington, D.C.
Washington Metro Center................................................ 456
Canada
Calgary................................................................ 380
Toronto Airport........................................................ 423
Toronto Eaton Centre................................................... 459
Toronto Delta Meadowvale (3)........................................... 374
------
Total.................................................................. 49,068
======
</TABLE>
Full-service hotel properties that are currently not consolidated by Host
but in which Host REIT intends to acquire a 100% ownership interest promptly
following the Distribution:
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Marriott Diversified American
Hotels, L.P.
Fairview Park............................................. Virginia 395
Dayton.................................................... Ohio 399
Research Triangle Park.................................... North Carolina 224
Detroit Marriott Southfield............................... Michigan 226
Detroit Marriott Livonia.................................. Michigan 224
Fullerton................................................. California 224
-----
1,692
-----
</TABLE>
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Marriott O'Hare Suites.................................... Illinois 256
-----
Potomac Hotel Limited Partnership
Albuquerque............................................... New Mexico 411
Greensboro-High Point..................................... North Carolina 299
Houston Medical Center.................................... Texas 386
Miami Biscayne Bay........................................ Florida 605
Marriott Mountain Shadows Resort.......................... Arizona 337
Seattle SeaTac Airport.................................... Washington 459
-----
2,497
-----
Total.................................................................... 4,445
=====
</TABLE>
Full-service hotel properties that are included in the Blackstone portfolio
to be acquired by Host REIT are as follows:
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Four Seasons, Atlanta (3).................................. Georgia 246
Four Seasons, Philadelphia (3)............................. Pennsylvania 365
Grand Hyatt, Atlanta (3)................................... Georgia 439
Hyatt Regency, Burlingame (3).............................. California 793
Hyatt Regency, Cambridge (3)............................... Massachusetts 469
Hyatt Regency, Reston (3).................................. Virginia 514
Swissotel, Atlanta (3)..................................... Georgia 348
Swissotel, Boston (3)...................................... Massachusetts 498
Swissotel, Chicago (3)..................................... Illinois 630
The Drake (Swissotel), New York (3)........................ New York 494
The Ritz-Carlton, Amelia Island (1)........................ Florida 449
The Ritz-Carlton, Boston (1)............................... Massachusetts 275
-----
Total................................................................... 5,520
=====
</TABLE>
Limited-Service -- Courtyard by Marriott Hotels:
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Arizona
Phoenix Camelback........................................................ 155
Scottsdale Mayo.......................................................... 100
California
Camarillo................................................................ 130
Fountain Valley.......................................................... 150
Los Angeles Airport...................................................... 146
Laguna Hills............................................................. 137
San Jose Airport......................................................... 151
Torrance................................................................. 151
Delaware
Wilmington............................................................... 152
Florida
Boca Raton............................................................... 152
Jacksonville............................................................. 146
Miami Lakes.............................................................. 151
Georgia
Atlanta Airport.......................................................... 152
Atlanta Cumberland....................................................... 182
Atlanta Jimmy Carte Blvd................................................. 121
Atlanta Midtown.......................................................... 168
Macon.................................................................... 108
Illinois
Arlington Heights........................................................ 152
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Indiana
Indianapolis Carmel...................................................... 149
Iowa
Quad Cities.............................................................. 113
Kansas
Kansas City South........................................................ 149
Maryland
Columbia................................................................. 152
Greenbelt................................................................ 152
Massachusetts
Boston Danvers........................................................... 121
Boston Foxborough........................................................ 149
Boston Lowell............................................................ 121
Boston Milford........................................................... 151
Boston Stoughton......................................................... 152
Norwood.................................................................. 148
Woburn................................................................... 125
Michigan
Detroit Auburn Hills..................................................... 148
Minnesota
Minneapolis/Eden Prarie.................................................. 149
Missouri
Kansas City Airport...................................................... 149
</TABLE>
72
<PAGE>
Limited-Service -- Courtyard by Marriott Hotels (Continued):
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
New Jersey
Hanover................................................................ 149
Mahwah................................................................. 146
Tinton Falls........................................................... 121
New York
Fishkill............................................................... 152
Syracuse............................................................... 149
North Carolina
Charlotte.............................................................. 152
Fayetteville........................................................... 108
Raleigh Durham......................................................... 151
Pennsylvania
Philadelphia Airport................................................... 152
Pittsburgh Airport..................................................... 148
Willow Grove........................................................... 149
Rhode Island
Middletown............................................................. 148
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
South Carolina
Spartanburg............................................................ 113
Tennessee
Chattanooga............................................................ 114
Texas
Dallas Central......................................................... 160
Virginia
Arlington/Rosslyn...................................................... 162
Dulles Fairfax......................................................... 149
Williamsburg........................................................... 151
Washington
Seattle Bellevue....................................................... 152
Wisconsin
Brookfield (Milwaukee)................................................. 148
-----
Total.................................................................. 7,606
=====
</TABLE>
Limited-Service -- Residence Inns:
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Arizona
Flagstaff.............................................................. 102
Scottsdale............................................................. 122
Tempe.................................................................. 126
California
Fountain Valley........................................................ 122
Rancho Bernardo........................................................ 123
Georgia
Atlanta Alpharetta..................................................... 103
Illinois
Chicago................................................................ 221
Maryland
Annapolis.............................................................. 102
Massachusetts
Westborough............................................................ 109
Michigan
Warren................................................................. 133
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
New Mexico
Albuquerque............................................................ 112
New York
Syracuse............................................................... 102
North Carolina
Durham................................................................. 122
Ohio
Columbus............................................................... 106
Pennsylvania
Willow Grove........................................................... 118
Tennessee
Nashville.............................................................. 110
Texas
Dallas Northpark....................................................... 103
Dallas Market Center................................................... 142
-----
Total.................................................................. 2,178
=====
</TABLE>
- --------
(1) Property is operated as a Ritz-Carlton. The Ritz-Carlton Hotel Company,
L.L.C. manages the property and is wholly owned by Marriott International.
(2) Property is operated as a Marriott franchised property and is not managed
by Marriott International.
(3) Property is not operated under a Marriott brand name and is not managed by
Marriott International.
SENIOR LIVING INDUSTRY
The Company believes that the senior living industry is supported by strong
long-term fundamentals. The aging of the American population should increase
demand for senior living housing and services across the full continuum of
care. The U.S. Bureau of Census estimates that the number of seniors 85 years
and older will increase by approximately 100% from 3.0 million in 1990 to 6.0
million in 2010. The traditional alternative of family-based care also is
disappearing as the prevalence of dual income families and increased
geographic mobility has reduced the potential role of family caregivers. In
addition, the affordability of senior housing has improved as seniors are
becoming increasingly affluent with the number of wealthy senior households
(households over age 65 with net worth above $500,000) increasing at a rate of
14% per annum from 1983 to 1992. Finally, a supply/demand imbalance is being
created as the supply of skilled nursing beds per thousand persons age 85 and
older has declined from 690 per thousand in 1976 to an estimated 350 per
thousand in the year 2000.
73
<PAGE>
The Company believes, however, that many assisted living markets have become
or are on the verge of becoming overbuilt. The rapid development of assisted
living may cause some supply/demand imbalances which the Company believes
could create acquisition and/or leasing opportunities in markets that possess
strong long-term fundamentals. However, overbuilding in markets in which the
Company's assisted living units are located could cause the Company's assisted
living units to experience decrease occupancy, depressed operating margins and
lower operating results. See "Risk Factors--Overbuilding in the Assisted
Living Industry."
SENIOR LIVING COMMUNITIES
As of the date hereof, the Company's senior living communities portfolio
consists of 31 upscale properties with over 7,200 units. The Communities
represent high quality assets in the senior living lodging segment. The
Communities offer a combination of independent living, assisted living and
healthcare components that differ mostly by the level of senior care services
provided.
Independent living components, which represent 55% of the Company's senior
living units, contain a variety of accommodations, together with amenities
such as dining facilities, lounges, and game and craft rooms. All residents of
the independent living components are provided security, meals, housekeeping
and scheduled transportation from on-site staff is available upon demand 24
hours a day, and each independent living unit is equipped with an emergency
call system to assist with emergency situations. The independent living
components
74
<PAGE>
of the properties generally consist of apartments or villas. Each resident
enters into a residency agreement that may be terminated by the resident on
short notice. Although there can be no assurance that available independent
living units will be reoccupied as residency agreements expire or are
terminated, since 1988 at least 80% of the residents of the apartments and
villas managed by Marriott International have renewed their residency
agreements from year to year.
Assisted living components, which represent 20% of the Company's senior
living units, provide a supportive environment that encourages independent
living. Residents have private or semi-private units, eat meals in a separate
dining room, and are provided the added services of scheduled activities,
housekeeping and linen service, preventive health surveillance, periodic
health monitoring, assistance with activities of daily living and emergency
care. Certain of the Company's Communities also provide personal assistance
with Alzheimer's disease and other forms of dementia.
Healthcare components, which represent 25% of the Company's senior living
units, provide residents a full range of healthcare. Residents have private or
semi-private rooms and share communal dining and social facilities. In most
instances, each resident of the independent living component of a property is
entitled to priority admission in the assisted living (if any) or healthcare
component.
Some Communities also provide ancillary healthcare services, including
physical occupational and speech and learning therapy, respite care and adult
daycare centers on the premises of some Communities. All Communities are
managed by Marriott International under long-term management agreements. The
average age of the Communities is 14 years.
Similar to the hotel segment, one commonly used indicator of market
performance for senior living communities is REVPAU, which measures charges
for independent living units and assisted living suites and nursing beds on a
per unit basis. This does not include any ancillary revenues from the
properties, which are generated on a "fee for service" basis for supplementary
items requested by residents. REVPAU represents the combination of the average
daily unit rate charged and the average daily occupancy achieved.
The chart below sets forth performance information for the Company's senior
living communities for the First Three Quarters and the period from June 21,
1997 through January 2, 1998:
<TABLE>
<CAPTION>
PERIOD FROM
TWELVE WEEKS JUNE 21, 1997
FIRST THREE ENDED THROUGH
QUARTERS 1998 SEPTEMBER 12, 1997 JANUARY 2, 1998
------------- ------------------ ---------------
<S> <C> <C> <C>
Number of properties..... 31 29 30
Number of units (1)...... 7,259 6,546 7,094
Average daily rate....... $88.19 $83.60 $83.88
Occupancy percentage..... 91.9% 91.2% 91.7%
REVPAU (2)............... $81.05 $76.24 $76.92
</TABLE>
--------
(1) Number of units is based on the number of rooms.
(2) Revenue per available unit ("REVPAU") is a commonly used indicator of
market performance for senior living communities which represents the
combination of the average daily rate charged and the average occupancy
achieved. REVPAU does not include food and beverage or other ancillary
revenues generated by the community.
During 1997, the average occupancy at the Communities was approximately 92%
and the average daily rate was $84, resulting in REVPAU of $77. Overall
occupancies for 1997 were lower than the historical occupancies due to the
significant number of expansion units added during the year and the time
required to fill the expansion units. For the First Three Quarters of 1998 and
the 12 weeks ended September 12, 1997, average occupancy was approximately 92%
and 91% and the average daily rate was $88 and $84 resulting in REVPAU of $81
and $76, respectively. Occupancy and average daily rates increased for the
First Three Quarters in 1998 as compared to the 12 weeks ended September 12,
1997 as a result of the stabilization of expansion units which were opened in
1997, increases in monthly rates in certain markets and implementation of
marketing campaigns.
75
<PAGE>
The Company is an active owner of its senior living communities portfolio.
The Company focuses on maximizing profitability throughout the portfolio. The
Company's asset management department works closely with Marriott
International to identify and evaluate opportunities to increase profitability
by making selective investments where favorable incremental returns are
expected, including the expansion of certain properties, or implementing new
cost control programs. Aggregate completed renovation expenditures for the
Communities totalled approximately $3 million for the period from June 21,
1997 through January 2, 1998.
76
<PAGE>
The following table sets forth certain information as of the date hereof,
relating to each of the Communities. The Company holds the fee interest in
each of the Communities, except as otherwise indicated. All of the properties
are operated under Marriott brand names by Marriott International.
<TABLE>
<CAPTION>
LOCATION UNITS
- -------- -----
<S> <C>
Arizona
The Forum at Desert Harbor(1).. 240
The Forum--Pueblo Norte........ 296
The Forum at Tucson(1)......... 327
California
The Remington Club I........... 205
The Remington Club II.......... 200
Delaware
Forwood Manor.................. 212
Foulk Manor North(1)........... 115
Foulk Manor South(1)........... 106
Millcroft(1)................... 198
Shipley Manor(1)............... 159
Florida
Coral Oaks..................... 254
The Forum at Deer Creek(1)..... 292
Fountainview................... 343
Park Summit(1)................. 281
Springwood Court............... 100
Tiffany House.................. 123
Indiana
The Forum at the Crossing...... 221
</TABLE>
<TABLE>
<CAPTION>
LOCATION UNITS
- -------- -----
<S> <C>
Kansas
The Forum at Overland Park(1)..... 205
Kentucky
The Forum at Brookside(1)......... 324
The Lafayette at Country
Place(2)......................... 149
The Lexington at Country
Place(2)......................... 133
Massachusetts
Gables at Winchester.............. 124
New Jersey
Leisure Park(3)................... 418
New Mexico
The Montebello on Academy(1)...... 209
Ohio
The Forum at Knightsbridge(1)(2).. 316
South Carolina
Myrtle Beach Manor(1)............. 164
Texas
The Forum at Lincoln Heights(1)... 241
The Forum at Memorial Woods(1).... 431
The Montevista at Coronado(1)..... 251
The Forum at Park Lane(1)......... 318
The Forum at The Woodlands........ 304
-----
Total.......................... 7,259
=====
</TABLE>
- --------
(1) Property is encumbered by secured debt.
(2) The land on which the community is built is leased by the Company under a
long-term ground lease agreement.
(3) A subsidiary of Marriott International holds a 1% limited partnership
interest in this property.
In the first quarter of 1998, LTJ Senior Living Communities Corporation, a
wholly owned subsidiary of the Company, entered into conditional purchase
agreements for two communities located in Colorado with Summit Companies of
Denver, Colorado. After the anticipated completion of construction in the
first quarter of 1999, the Company may acquire these two communities located
in Denver and Colorado Springs, Colorado, for approximately $35 million, if
the communities achieve certain operating performance criteria. Both
communities will be managed by Marriott International under long-term
operating agreements.
MARKETING
As of the date hereof, 114 of the 126 full-service hotels expected to be
leased by the Company are managed or franchised by Marriott International as
Marriott or Ritz-Carlton brand name hotels. All 71 of the subleased Courtyard
by Marriott and Residence Inn hotels and all 31 of the Communities are managed
by Marriott International. The Company believes that these Marriott
International-managed and franchised hotels will continue to enjoy competitive
advantages arising from their participation in the Marriott International
hotel system. Marriott International's nationwide marketing programs and
reservation systems as well as the advantage of the strong customer preference
for "Marriott" brands should also help these properties to maintain or
increase their premium over competitors in both occupancy and room rates.
Repeat guest business in the Marriott hotel system is enhanced by the Marriott
Rewards program, which expanded the previous Marriott Honored Guest Awards
program. Marriott Rewards membership includes more than 7.5 million members.
The Marriott reservation system provides Marriott reservation agents
complete descriptions of the rooms available for sale and up-to-date rate
information from the hotels. The reservation system also features
77
<PAGE>
connectivity to airline reservation systems, providing travel agents with
access to available rooms inventory for all Marriott and Ritz-Carlton brand
name hotels. In addition, software at Marriott's centralized reservations
centers enables agents to immediately identify the nearest Marriott or Ritz-
Carlton brand hotel with available rooms when a caller's first choice is fully
occupied.
COMPETITION
Lodging. The United States lodging industry generally is comprised of two
broad segments: full-service hotels and limited-service hotels. Full-service
hotels generally offer restaurant and lounge facilities and meeting spaces, as
well as a wide range of services, typically including bell service and room
service. Limited-service hotels generally offer accommodations with limited or
no services and amenities. The lodging industry, in general, is highly
competitive, but the degree of competition varies from location to location
and over time. The hotels' success will be dependent, in large part, upon the
ability to compete in such areas as access, location, quality of
accommodations, room rates, structure, the quality and scope of food and
beverage facilities and other service amenities. The Company's leased hotels
compete with several other major lodging brands in each segment in which they
operate. Competition in the industry is based primarily on the level of
service, quality of accommodations, convenience of locations and room rates.
Further, competing properties may be built or existing projects enhanced. The
lodging industry, including the hotels, also may be adversely affected in the
future by (i) national and regional economic conditions, (ii) changes in
travel patterns, (iii) taxes and government regulations which influence or
determine wages, prices, interest rates, construction procedures and costs,
(iv) the availability of credit and (v) other factors beyond the control of
the Company. Although the competitive position of each of the hotel properties
differs from market to market, the Company believes that its leased properties
will compare favorably to their competitive set in the markets in which they
operate on the basis of these factors. The following table presents key
participants in segments of the lodging industry in which the Company
competes:
<TABLE>
<CAPTION>
SEGMENT REPRESENTATIVE PARTICIPANTS
- ------- ---------------------------
<S> <C>
Luxury Full-Service..... Ritz-Carlton; Four Seasons
Upscale Full-Service.... Marriott Hotels, Resorts and Suites; Crowne Plaza; Doubletree; Hyatt;
Hilton; Radisson; Red Lion; Sheraton; Swissotel; Westin; Wyndham
Moderate-priced......... Courtyard by Marriott; Hampton Inn and Suites; Hilton Inn; Holiday Inn;
Ramada Inn; Sheraton Four Points; Wyndham Garden
Extended-stay........... Residence Inn; AmeriSuites; Hawthorne Suites; Homewood Suites;
Summerfield Suites
</TABLE>
Senior Living. The Company's senior living communities compete with
facilities of varying similarity in the respective geographical market areas
in which the communities are located. Competing facilities are generally
operated on a regional and local basis by religious groups and other nonprofit
organizations, as well as by public and private operators. There are a limited
number of operators on a national basis. The independent living components of
the communities face competition from various types of residential
opportunities available to the elderly. However, the number of communities
that offer on-premises healthcare services is limited. The assisted living and
healthcare components of the Communities compete with other assisted living
and healthcare communities.
Significant competitive factors for attracting residents to the independent
living components of the Communities include price, physical appearance and
amenities and services offered. Additional competitive factors for attracting
residents to the assisted living and healthcare components of the Communities
include quality of care, reputation, physician and nursing services available
and family preferences. The Company believes that its senior living
communities rate high in each of these categories, except that its senior
living communities are generally more expensive than competing communities.
78
<PAGE>
Some of the Company's present and potential competitors are significantly
larger and have, or may obtain, greater financial resources than the Company.
Consequently, there can be no assurance that the Company will not encounter
increased competition that could limit its ability to attract residents or
expand its senior living care business in the future. The Company believes
that many assisted living markets have become or are on the verge of becoming
over built. Approximately 20% of the Company's senior living units are
assisted living units. Overbuilding in the assisted living market could cause
the Company's assisted living units to experience decreased occupancy,
depressed margins and lower operating results.
RELATIONSHIP WITH HOST AFTER THE DISTRIBUTION
For the purposes of governing certain of the ongoing relationships between
the Company and Host after the Distribution and to provide mechanisms for an
orderly transition, the Company and Host will enter into various agreements,
in addition to the Hotel Leases as described below. The descriptions of such
agreements (other than the Corporate Transitional Services Agreement) are
qualified in their entirety by reference to the agreements, the forms of which
are included as exhibits to the Registration Statement of which this
Prospectus is a part.
Distribution Agreement. Prior to the Distribution Date, the Company and Host
will enter into a distribution agreement (the "Distribution Agreement"), which
provides for, among other things, (i) the Distribution; (ii) the division
between the Company and Host of certain assets and liabilities; (iii) the
contribution to the Company of Host's 3% general partnership interest in
Boynton Beach Limited Partnership, which owns a Community located in Boynton
Beach; (iv) the transfer to the Company of the 25% interest in the Swisshotel
management company to be acquired in the Blackstone Acquisition; (v) the
return to the Company of those shares of Common Stock held for delivery to the
Blackstone entities in the Blackstone Acquisition if that transaction does not
occur; and (vi) certain other agreements governing the relationship between
the Company and Host following the Distribution.
Subject to certain exceptions, the Distribution Agreement will provide for,
among other things, assumptions of liabilities and cross-indemnities designed
to allocate to the Company, effective as of the Distribution Date, financial
responsibilities for liabilities arising out of or in connection with the
business of the Communities.
Tax Sharing Agreement. The Company and Host will enter into a tax sharing
agreement which will define each party's rights and obligations with respect
to deficiencies and refunds of federal, state and other income or franchise
taxes relating to the Company's business for taxable years prior to the
Distribution and with respect to certain tax attributes of the Company after
the Distribution. Generally, Host will be responsible for filing consolidated
returns and paying taxes for periods through the date of the Distribution, and
the Company will be responsible for filing returns and paying taxes for
subsequent periods.
Asset Management Agreement. The Company, Host and at least one of the non-
controlled subsidiaries will enter into an asset management agreement (the
"Asset Management Agreement"), pursuant to which the Company will agree to
provide review and advice on the management and operation of the hotels.
Generally, the Company will provide the following consulting services: (i)
review of operating and financial results (including site visits) and meet
with Host and the non-controlled subsidiaries as applicable, at least
quarterly, to review such results of the hotels; (ii) review of financial
statements and budgets, including periodic accounting statements, annual
operating budgets, FF&E budgets and management analysis reports; (iii) review
of revenue and capital spending projections; (iv) administration of hotel
mortgages; (v) advice relating to any changes to the hotel management
agreements; (vi) review of market conditions and competition for each of the
hotels; and (vii) monitoring and negotiating with governmental agencies in
connection with any condemnation proceedings against the hotels; and (viii)
monitoring and negotiating with insurance companies and contractors following
a casualty at a hotel. The Company will be paid a fee not to exceed $4.5
million for each fiscal year for its consulting services under the Asset
Management Agreement, which will be allocated between Host REIT and the non-
controlled subsidiary. The Asset Management Agreement will have a term of two
years with an automatic one year renewal, unless earlier terminated by either
party in accordance with the terms thereof. This contract will prohibit the
Company from providing similar services, except where the Company is the
lessee with respect to full-service hotels (but not limited-service hotels)
that are in the same geographic vicinity as the Host REIT hotels that are
leased to the Company.
79
<PAGE>
Corporate Transitional Services Agreement. The Company and Host will, prior
to the Distribution Date, enter into a transitional services agreement,
pursuant to which the Company and Host will provide certain limited services
to each other for a fee. Among other things, Host will provide centralized
administrative and computer systems services to the Company. Such services
will be provided, as needed, at cost (including a reasonable overhead
allocation) on a time and materials basis. The charges associated with such
services are not expected to be material.
Non-Competition Agreement. The Company and Host will enter into a non-
competition agreement that limits the respective parties' future business
opportunities. See "Business and Properties--Non-Competition Agreements."
80
<PAGE>
Employee Benefits and Other Employment Matters Allocation Agreement. As part
of the REIT Conversion, the Company, Host and Host Marriott, L.P. expect to
enter into an employee benefits agreement which will govern the allocation of
responsibilities relating to various compensation, benefits and labor matters.
See "Management--Employee Benefit Plans."
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
Marriott International will serve as the manager for substantially all of
the full-service and limited-service hotels to be leased and subleased by the
Company. In addition, Marriott International is the manager for all 31
Communities. The Company will be bound by certain non-competition agreements
with Marriott International whereby the Company's business opportunities will
be restricted. See "Business and Properties--Non-Competition Agreements" and
"--Description of Other Agreements for the Communities."
DESCRIPTION OF THE HOTEL LEASES FOR FULL-SERVICE HOTELS MANAGED BY MARRIOTT
INTERNATIONAL
In order for Host REIT to qualify as a REIT, Host REIT may not operate the
hotels or related properties. Accordingly, subsidiaries of Host REIT (the
"Host REIT Lessor") will lease substantially all of the full-service hotels
owned by Host REIT to subsidiaries of the Company. The following summary of
the principal terms of the Hotel Leases between subsidiaries of the Company
and subsidiaries of Host REIT and the related guaranty and pooling agreements
are qualified in their entirety by reference to the full-service Hotel Leases
and such other agreements, the forms of which are included as exhibits to the
Registration Statement of which this Prospectus is a part. All references
herein to Host REIT or its subsidiaries, as Lessor, shall be deemed to refer
to Host in the event the Merger of Host with and into Host REIT for any reason
is not consummated.
Lessees. There generally will be a separate lessee, which will be an
indirect subsidiary of the Company (the "Lessee"), for each hotel or group of
hotels that is owned by a separate subsidiary of Host REIT. Each Lessee will
be a Delaware limited liability company, whose purpose will be limited to
acting as lessee under the applicable Hotel Lease(s). For those hotels where
it is the manager, Marriott International or a subsidiary will
81
<PAGE>
have a noneconomic membership interest in the Lessee entitling it to certain
voting rights but no economic rights. The operating agreements for such
Lessees will provide that the Company member of the Lessee will have full
control over the management of the business of the Lessee, except with respect
to certain decisions which will require the consent of both members. These
decisions are: (i) dissolving, liquidating, consolidating, merging, selling or
leasing all or substantially all of the assets of the Lessee; (ii) engaging in
any other business or acquiring any assets or incurring any liabilities not
reasonably related to the conduct of the Lessee's business; (iii) instituting
voluntary bankruptcy or similar proceedings or consenting to involuntary
bankruptcy or similar proceedings; (iv) terminating the management agreement
relating to the Lessee's hotel, other than by reason of a breach by the
manager or upon exercise of express termination rights in the management
agreement; (v) challenging the status or rights of the manager or the
enforceability of the membership rights; or (vi) incurring debt in excess of
certain limits. Upon any termination of the applicable management agreement,
these special voting rights of Marriott International (or its subsidiary) will
cease.
Full-Service Hotel Lease Terms. Each full-service Hotel Lease will have a
fixed term generally ranging from seven to ten years (depending upon the Hotel
Lease), subject to earlier termination upon the occurrence of certain
contingencies described in the Hotel Leases (including, particularly, the
provisions described herein under
82
<PAGE>
"--Damage or Destruction," "--Termination of the Hotel Leases upon Disposition
of Full-Service Hotels" and "--Termination of the Hotel Leases upon Changes in
Tax Laws").
Minimum Rent; Percentage Rent; Additional Charges. Each Hotel Lease will
require the Lessee to pay (i) Minimum Rent (as defined below) in a fixed
dollar amount per annum plus (ii) to the extent it exceeds Minimum Rent,
Percentage Rent based upon specified percentages of aggregate sales from the
applicable hotel, including room sales, food and beverage sales, and other
income ("Gross Revenues"), in excess of specified thresholds. "Minimum Rent"
will be a fixed dollar amount specified in each Hotel Lease less the FF&E
Adjustment (which is described under "Personal Property Limitation" below).
Any amounts other than Minimum Rent and Percentage Rent due to the Host REIT
lessor under the Hotel Leases are deemed to be "Additional Charges." The
amount of Minimum Rent and the Percentage Rent thresholds will be adjusted
each year (the "Annual Adjustment") based upon any increases in the Consumer
Price Index and the Employment Cost Index during the previous 12 months.
Neither Minimum Rent nor Percentage Rent thresholds will be decreased because
of the Annual Adjustment.
Rental payments will be made on a Fiscal Year basis. The "Fiscal Year" shall
mean the fiscal year used by the hotel manager. Payments of Rent (defined
herein) will be made within two business days after the required payment date
under the management agreement for each Accounting Period. "Accounting Period"
shall mean for those hotels where Marriott International is the manager, any
of the thirteen four-week accounting periods which are used in the hotel
manager's accounting system. Rent payable for each Accounting Period will be
the sum of (i) the excess (if any) of (x) the greater of cumulative Minimum
Rent year-to-date due and payable or cumulative Percentage Rent due and
payable year-to-date over (y) the total amount of Minimum Rent and Percentage
Rent actually paid year-to-date plus (ii) any Additional Charges due ("Rent").
If the total amount of Minimum Rent and Percentage Rent actually paid year-to-
date, as of any rent payment date, is greater than both cumulative Minimum
Rent due and payable year-to-date and cumulative Percentage Rent due and
payable year-to-date, then the Host REIT Lessor will remit the difference to
the Lessee.
The full-service Hotel Leases will generally provide for a Rent adjustment
in the event of damage, destruction, partial taking, certain capital
expenditures or an FF&E Adjustment.
Lessee Expenses. Each Lessee will be responsible for paying all of the
expenses of operating the applicable hotel(s), including all personnel costs,
utility costs and general repair and maintenance of the hotels. The Lessee
also will be responsible for all fees payable to the applicable manager,
including base and incentive management fees, chain services payments and
franchise or system fees, with respect to periods covered by the term of the
Hotel Lease. The Lessee will not be obligated to bear the cost of any capital
improvements or capital repairs to the hotels or the other expenses borne by
the Host REIT Lessor, as described below.
Host REIT Lessor Expenses. The Host REIT Lessor will be responsible for the
following expenses: real estate taxes, personal property taxes (to the extent
the Host REIT Lessor owns the personal property), casualty insurance on the
structures, ground lease rent payments, required expenditures for FF&E
(including maintaining the FF&E Reserve, to the extent such is required by the
applicable manager) and capital expenditures.
The consent of the Host REIT Lessor will be required for any capital
expenditures funded by the Lessor (except in an emergency or where the owner's
consent is not required under the management agreement) or a change in the
amount of the FF&E Reserve payment.
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Security. The obligations of the Lessee will be secured by a pledge of all
personal property (tangible and intangible) of the Lessee related to or used
in connection with the operation of the hotels (including any cash and
receivables from the manager or others held by the Lessee as part of "working
capital").
Working Capital. Each Host REIT Lessor will sell the existing working
capital (including Inventory and fixed asset supplies (which principally
consist of linen and similar items) and net receivables due from the manager,
net of accounts payable and accrued expenses) to the applicable Lessee upon
the commencement of the Hotel Lease at a price equal to the fair market value
of such assets (which shall be deemed to be book value). The purchase price
will be represented by a note evidencing a loan that bears interest at a rate
per annum equal to the "long-term applicable federal rate" in effect on the
commencement of the Hotel Lease. Interest accrued on the working capital loan
will be due simultaneously with each periodic Rent payment and the amount of
each payment of interest will be credited against such Rent payment. The
principal amount of the working capital loan will be payable upon termination
of the Hotel Lease. At the termination or expiration of the Hotel Lease, the
Lessee will sell to the Host REIT Lessor the then existing working capital at
a price equal to the value of such assets at that time. The Host REIT Lessor
will pay the purchase price of the working capital by offsetting against the
outstanding principal balance of the working capital loan. To the extent that
the value of the working capital delivered to the Host REIT Lessor exceeds or
is less than the value of the working capital delivered by the Host REIT
Lessor to the Lessee at the commencement of the Hotel Lease, the Host REIT
Lessor or the Lessee, as appropriate, shall pay to the other party an amount
equal to the difference in cash.
Termination of the Hotel Leases upon Disposition of Full-Service Hotels. In
the event the applicable Host REIT Lessor enters into an agreement to sell or
otherwise transfer any full-service hotel free and clear of the applicable
Hotel Lease, the Host REIT Lessor must pay the Lessee a termination fee equal
to the fair market value of the Lessee's leasehold interest in the remaining
term of the Hotel Lease using a discount rate of 12%. Alternatively, the Host
REIT Lessor will be entitled to (i) substitute a comparable hotel or hotels
(in terms of economics and quality for the Host REIT Lessor and the Lessee as
agreed to by the Lessee) for any hotel that is sold or (ii) sell the hotel
subject to the Hotel Lease (subject to the Lessee's reasonable approval if the
sale is to an entity that does not have sufficient financial resources and
liquidity to fulfill the "owner's" obligations under the management agreement
and the Host REIT Lessor's obligations under the Hotel Lease, or is or
controls or is controlled by a person convicted of a felony involving moral
turpitude), without being required to pay a termination fee. Pursuant to the
Hotel Lease, the Host REIT Lessor and the Lessee will each have the right to
terminate the Lease without being required to pay any fee or other
compensation as a result of such termination, provided that the termination
rights of both the Host REIT Lessor and the Lessee may only be exercised if
the Host REIT Lessor and the Lessees under 12 of the other Hotel Leases have
not already exercised their respective rights to terminate, and the Host REIT
Lessor will only be permitted to exercise such right in connection with a sale
of a hotel to an unrelated third party or the transfer of a hotel to a joint
venture in which Host Marriott, L.P. does not have a two-thirds or greater
interest.
Termination of the Hotel Leases upon Changes in Tax Laws. In the event that
changes in the federal income tax laws allow the Host REIT Lessors, or
subsidiaries or affiliates of the Host REIT Lessors, to directly operate the
hotels without jeopardizing Host REIT's status as a REIT, the Host REIT
Lessors will have the right to terminate all, but not less than all, of the
full-service Hotel Leases (excluding Hotel Leases for hotels that must
continue to be leased following the tax law change) in return for paying the
Lessees the fair market value of the remaining terms of the full-service Hotel
Leases, valued in the same manner as provided above under "--Termination of
the Hotel Leases upon Disposition of Full-Service Hotels." The payment will be
payable in cash or, subject to certain conditions, shares of Host REIT common
stock, at the election of Host REIT and the Host REIT Lessor. Host has been
pursuing the enactment of such legislation for more than one year, but there
is no such bill pending in Congress, and there can be no prediction as to
whether such legislation would be enacted in the future.
Damage or Destruction. If a hotel is partially or totally destroyed and is
no longer suitable for use as a hotel (as reasonably determined by the Host
REIT Lessor), the Hotel Lease of such hotel shall automatically
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terminate and the insurance proceeds shall be retained by the Host REIT
Lessor, except to the extent of any personal property owned by the Lessee. In
this event, no termination fee shall be owed to the Lessee. If a hotel is
partially destroyed but is still suitable for use as a hotel (as reasonably
determined by the Host REIT Lessor), the Lessee, subject to the Host REIT
Lessor agreeing to release the insurance proceeds and to fund any shortfall in
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the insurance proceeds, shall apply the insurance proceeds to restore the
hotel to its preexisting condition. The Host REIT Lessor shall fund any
shortfall in insurance proceeds less than or equal to 5% of the estimated cost
of repair. The Host REIT Lessor may fund, in its sole discretion, any
shortfall in insurance proceeds greater than 5% of the estimated cost of the
repair, provided that if the Host REIT Lessor elects not to fund such
shortfall, the Lessee may terminate the Hotel Lease and the Host REIT Lessor
shall pay to the Lessee a termination fee equal to the Lessee's operating
profit for the immediately preceding Fiscal Year.
Events of Default. Except as otherwise provided below, and subject to the
notice and, in some cases, cure periods in the Hotel Lease, the Hotel Lease
may be terminated without penalty by the applicable Host REIT Lessor and
various other remedies may be exercised if any of the following Events of
Default, among others, occur:
. Failure to pay Rent within ten days after the due date;
. Failure to comply with, or observe any of, the terms of the Hotel Lease
(other than the failure to pay Rent) for 30 days after notice from the
Host REIT Lessor, including failure to properly maintain the hotel
(other than by reason of the failure of the Host REIT Lessor to perform
its obligations under the Hotel Lease), such period to be extended for
up to an additional 90 days if such default cannot be cured with due
diligence within 30 days;
. Acceleration of maturity of certain indebtedness of the Lessee with a
principal amount in excess of $1,000,000;
. Failure of the Company for three consecutive Accounting Periods to
maintain (i) a minimum net worth at least equal to the maximum liability
under the guaranty agreements from time to time (less amounts held in
cash collateral accounts), and (ii) debt service coverage ratio of at
least 1.2 to 1.0;
. Filing of any petition for relief, bankruptcy or liquidation by or
against the Lessee or any parent company of the Lessee;
. The Lessee voluntarily ceases to operate the hotel for 30 consecutive
days, except as a result of a casualty, condemnation or emergency
situation;
. A change in control of the Company, the Lessee or any subsidiary of the
Company that is a direct or indirect parent of the Lessee (unless the
change in control involves an "Adverse Party," which would include a
competitor in the hotel business, a party without adequate financial
resources, a party that has been convicted of a felony (or controlled by
a person) or a party who would jeopardize Host REIT's qualification as a
REIT, the Host REIT Lessor must pay a termination fee equal to the
Lessee's operating profit from the hotel for the immediately preceeding
Fiscal Year if the lease is terminated following such a change in
control);
. Default in payment or performance of certain covenants (after applicable
cure periods) under any other Hotel Lease in the same "pool" of hotels
as described below; or
. The Lessee, the Company or the Lessee's Pool Parent (as defined herein)
defaults under the assignment of the management agreement, the
guarantees described below, the non-competition agreement described
below and certain other related agreements between the parties or their
affiliates.
Assignment of the Hotel Lease. A Lessee will be permitted to sublet all or
part of the hotel or assign its interest under its Hotel Lease, without the
consent of the Host REIT Lessor, to any wholly owned and controlled single-
purpose subsidiary of the Company, provided that the Company continues to meet
the minimum net worth test and all other requirements of the Hotel Lease.
Transfers to other parties will be permitted if approved by the Host REIT
Lessor.
Subordination to Qualifying Mortgage Debt. The rights of each Lessee will be
expressly subordinate to qualifying mortgage debt (which totaled approximately
$2.9 billion on a pro forma basis at September 11, 1998 assuming all
Partnerships participate and the Blackstone Acquisition is consummated) and
any refinancing thereof. A default under the loan documents may result in the
termination of the Hotel Lease by the lender. The lender will not be required
to provide a non-disturbance agreement to the Lessee.
The Host REIT Lessor will be obligated to compensate the Lessee, on a basis
equal to the lease termination provision described in "Termination of the
Hotel Leases upon Disposition of Full-Service Hotels" above, if the
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full-service Hotel Lease is terminated because of a non-monetary default under
the terms of a loan that occurs because of an action or omission by the Host
REIT Lessor (or its affiliates) or a monetary default where there is not an
uncured monetary Event of Default of the Lessee. In addition, if any loan is
not refinanced in a timely manner, and the loan amortization schedule is
converted to a cash flow sweep structure, the Lessee has the right to
terminate the Hotel Lease after a twelve-month cure period and the Host REIT
Lessor will owe a termination fee as provided above. During any period of time
that a cash flow sweep structure (or other similar cash management procedure)
is in effect, the Host REIT Lessor will compensate the Lessee for any lost
revenue resulting from such cash flow sweep. Host Marriott, L.P. will
guarantee these obligations.
Personal Property Limitation. If a Host REIT Lessor reasonably anticipates
that the average tax basis of the items of the Host REIT Lessor's FF&E and
other personal property that are leased to the applicable Lessee will exceed
15% of the aggregate average tax basis of the real and personal property
subject to the applicable Hotel Lease, the following procedures will apply,
subject to obtaining lender consent where required:
. The Host REIT Lessor will acquire any replacement FF&E that would cause
the applicable limits to be exceeded (the "Excess FF&E"), and
immediately thereafter the Lessee would be obligated either to acquire
such Excess FF&E from the Host REIT Lessor or to cause a third party to
purchase such FF&E.
. The Lessee would agree to give a right of first opportunity to a non-
controlled subsidiary of Host REIT to acquire the Excess FF&E and to
lease the Excess FF&E to the Lessee at an annual rental equal to the
market leasing factor times the cost of the Excess FF&E. If such non-
controlled subsidiary does not agree to acquire the Excess FF&E and to
such lease, then the Lessee may either acquire the Excess FF&E itself or
arrange for another third party to acquire such Excess FF&E and to lease
the same to Lessee.
. The annual Rent under the applicable Hotel Lease would be reduced in
accordance with a fomula based on market recovery rates.
Certain Actions under the Hotel Leases. The leases prohibit the Lessee from
taking the following actions with respect to the management agreement without
notice to the Host REIT Lessor and, if the action would have a material
adverse effect on the Host REIT Lessor, the consent of the Host REIT Lessor:
(i) terminate the management agreement prior to the expiration of the term
thereof; (ii) amend, modify or assign the management agreement; (iii) waive
(or fail to enforce) any right of the "owner" under the management agreement;
(iv) waive any breach or default by the manager under the management agreement
(or fail to enforce any right of the "owner" in connection therewith);
(v) agree to any change in the manager or consent to any assignment by the
manager; or (vi) take any other action which reasonably could be expected to
materially adversely affect the Host REIT Lessor's rights or obligations under
the management agreement for periods following the termination of the Hotel
Lease (whether upon the expiration of its term or upon earlier termination as
provided for therein).
Change in Manager. A Lessee will be permitted to change the manager or the
brand affiliation of a hotel only with the approval of the applicable Host
REIT Lessor, which approval may not be unreasonably withheld. The replacement
manager must be a nationally recognized manager with substantial experience in
managing hotels of comparable quality. No such replacement can extend beyond
the term of the Hotel Lease without the consent of the Host REIT Lessor, which
consent may be withheld in the Host REIT Lessor's sole discretion.
Company Guaranty and Related Pooling Agreements. The Company and certain of
its subsidiaries will enter into guarantees of the Hotel Lease obligations of
each Lessee. For each of four identified "pools" of hotels (determined on the
basis of the term of the particular Hotel Lease, with all leases having
generally the same lease term placed in the same "pool"), the cumulative limit
of the Company's guaranty obligation will be the greater of 10% of the
aggregate Rent for the immediately preceding Fiscal Year under all Hotel
Leases in the pool or 10% of the aggregate Rent under all Hotel Leases in the
pool for 1999 (with an agreed estimate of the 1999 Rent serving as the limit
during 1999). For each pool, the subsidiary of the Company that is the parent
of the Lessees in the pool (a "Pool Parent") also will be a party to the
guaranty of the Hotel Lease obligations for that pool. The obligations of the
Pool Parent will not be limited in this manner.
The obligations of the Pool Parent under each guaranty will be secured by
all funds received by the applicable Pool Parent from the Lessees in the pool,
and the Lessees in the pool will be required to distribute
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their excess cash flow to the Pool Parent each Accounting Period, in certain
events. These events include a decline in Crestline's tangible net worth or
consolidated interest coverage ratio below specified levels, a payment default
under any Hotel Lease in the same pool or any other Hotel Lease, with respect
to which a guaranty by the Company is in effect, or a reduction in the
Company's obligation under a pool guaranty to zero. Funds received from the
Lessees will be deposited in a cash collateral account and applied, to the
extent of available funds, to pay any shortfalls in payment of Rent under any
Hotel Lease in the pool. If certain conditions are satisfied, any remaining
funds will then be released to the Pool Parent. Otherwise, the remaining funds
will be applied to make a payment to the Pool Parent in a specified amount for
overhead expenses and to maintain a reserve equal to the amount of the
Company's liability under the applicable guaranty (subject to a specified
minimum amount), and, if certain conditions are satisfied, any remaining funds
will be released to the Pool Parent.
In the event that the Company's obligation under a guaranty is reduced to
zero, the applicable Pool Parent can elect to terminate its guaranty and the
pooling agreement for that pool by giving notice to Host Marriott, L.P. In
that event, the Pool Parent's guaranty and the pooling agreement for that pool
will terminate six months after such notice, subject to reinstatement in
certain limited circumstances. At any time after such notice, Host REIT will
be entitled to terminate the Hotel Leases in such pool without penalty.
DESCRIPTION OF THE SUBLEASES FOR LIMITED-SERVICE HOTELS MANAGED BY MARRIOTT
INTERNATIONAL
Subsidiaries of HPT (the "HPT Lessors") own 71 limited-service hotels under
the "Residence Inn" and "Courtyard by Marriott" brands (the "HPT Hotels") that
it leases to subsidiaries of Host (the "HPT Lessees"). The HPT Hotels are
subject to substantially similar leases (the "HPT Leases"). In connection with
the REIT Conversion, the applicable Host subsidiary will sublease the HPT
Hotels (the "Sublease") to a subsidiary of the Company subject to the terms of
the HPT Leases. The descriptions of the Sublease and the HPT Lease set forth
below are qualified in their entirety by reference to the agreements, copies
of the form of which are included as exhibits to the Registration Statement of
which this Prospectus is a part.
The Sublessees. There generally will be a separate sublessee, which will be
an indirect subsidiary of the Company (the "Sublessee"), for each hotel or
group of hotels that is owned by a separate subsidiary of HPT. Each Sublessee
will be a Delaware limited liability company, whose purpose will be limited to
acting as sublessee under the applicable sublease(s). Marriott International
or a subsidiary will have a noneconomic
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membership interest in the Sublessee entitling it to certain voting rights but
no economic rights. The operating agreements for such Sublessees will provide
that the Company member of the Sublessee will have full control over the
management of the business of the Sublessee, except with respect to certain
decisions for which the consent of both members will be required. These
decisions are: (i) dissolving, liquidating, consolidating, merging, selling,
or leasing all or substantially all of the assets of the Sublessee; (ii)
engaging in any other business or acquiring any assets or incurring any
liabilities not reasonably related to the conduct of the Sublessee's business
or (iii) instituting voluntary bankruptcy or similar proceedings or consenting
to involuntary bankruptcy or similar proceedings. Upon any termination of the
applicable management agreement, these special voting rights of Marriott
International (or its subsidiary) will cease.
Sublease Terms. The term of each Sublease shall expire simultaneously with
the expiration of the initial term of the HPT Lease to which it relates. Each
Sublease provides that generally all of the terms of the HPT Lease will apply
to the HPT Lessees and the Sublessees as if they were, respectively, lessor
and lessee under the HPT Lease. Sublessees will not, however, be required to
provide a security deposit, and will not have the right to extend the term of
the Sublease. The Sublessees will pay rent in accordance with the terms of the
Subleases.
HPT Lease Terms. The initial terms of the HPT Leases expire within seven to
12 years. The HPT Leases will be automatically extended subject to certain
conditions. The HPT Lessee may not elect to renew less than all of the HPT
Leases for the Residence Inn properties or the Courtyard by Marriott
properties.
Minimum Rent; Additional Rent; Additional Charges. Each HPT Lease requires
the HPT Lessee to pay (i) Minimum Rent (as defined below) in a fixed dollar
amount per annum plus (ii) Additional Rent based upon a specified percentage
of collective gross revenues from the HPT Hotels to the extent they exceed the
gross revenues for a specified fiscal year. "Minimum Rent" will be a fixed
dollar amount specified in each HPT Lease less the cost of any repairs,
maintenance, renovations or replacements of the hotel or the personal
property. Minimum Rent payments are due in advance on the first business day
of each Accounting Period. "Accounting Period" means each of the 13 four-week
accounting periods which are used in the hotel manager's accounting system.
Additional Rent payments are calculated quarterly for each fiscal year or
portion thereof and are paid quarterly in arrears on the same date as the
Minimum Rent for the next Accounting Period. A final adjustment of the
Additional Rent for each fiscal year will be made after financial statements
are available. The amount of Additional Rent due on any payment date will not
be less than zero.
In addition to the Minimum Rent and Additional Rent, the HPT Lessee is
required to pay Impositions, utility charges, insurance premiums and all
amounts payable under the HPT management agreements, equipment leases and
agreements to indemnify the HPT Lessor. "Impositions" means, collectively, all
taxes, assessments, water, sewer or other rents and charges, excises, tax
levies, fees and all other governmental charges levied in respect of the HPT
Hotels and the business conducted by the HPT Lessee in connection therewith.
HPT Lessee Expenses. The HPT Lessee is responsible for all repairs and
replacements to the HPT Hotels and the personal property, except in limited
circumstances where damage to the property exceeds insurance proceeds
received.
HPT Lessor Expenses. In the event that the HPT management agreement or the
HPT Leases require that funds be disbursed for repairs, maintenance,
renovations or replacements at or to the HPT Hotels, and the FF&E Reserve is
insufficient to handle such disbursements, the HPT Lessor is required to
disburse such required funds to the HPT Lessee or the manager, as the case may
be. The consent of the HPT Lessor is required for all capital expenditures
(except in an emergency) and for amendment, termination or assignment of the
HPT management agreement.
Security. The obligations of the HPT Lessee are secured by a pledge of all
personal property (except motor vehicles) and all records of the HPT Lessee
related to the operation of the HPT Hotels and all proceeds therefrom.
Damage or Destruction. If an HPT Hotel is partially or totally destroyed,
and is no longer suitable for use as a hotel (as determined in good faith by
the HPT Lessee or the manager), either the HPT Lessee or the HPT Lessor may
terminate the HPT Lease and the HPT Lessor shall be entitled to retain the
insurance proceeds, except to the extent of any personal property owned by the
HPT Lessee. If an HPT Hotel is partially destroyed but is still suitable for
use as a hotel (as determined in good faith by the HPT Lessee or the manager),
the HPT
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Lessee shall promptly restore the HPT Hotel using the insurance proceeds. If
there is a shortfall in the amount of insurance proceeds, the HPT Lessee shall
decide in its sole discretion whether it will assume the amount of the
deficiency. If the HPT Lessee elects not to assume the deficiency, the HPT
Lessor in its sole discretion may elect to cover the shortfall. If neither the
HPT Lessee nor the HPT Lessor elects to assume the deficiency required for
restoration of the HPT Hotel, either party may terminate the HPT Lease.
Events of Default. Subject to notice and some cure periods in the HPT Lease,
the HPT Lease may be terminated without penalty by the HPT Lessor if, among
other things, any of the following Events of Default occur:
. Failure to pay rent or any other amount payable under the HPT Lease when
due and such failure shall continue for ten days after notice thereof;
. Failure to observe or perform any term, covenant or agreement contained
in the HPT Lease and such failure shall continue for 30 days after
notice thereof;
. Any obligation in respect of Indebtedness for money borrowed or retained
funds of any material property or services shall be declared due and
payable prior to the stated maturity date thereof, or an event of
default shall occur and be continuing under any instrument evidencing or
securing the same;
. An event of default shall occur and be continuing under any other HPT
Lease;
. Filing of any petition for relief, bankruptcy or liquidation by the HPT
Lessee;
. Commencement by the HPT Lessee of any proceeding for its dissolution or
termination;
. Occurrence and continuation of an event of default under any mortgage
which is secured by the HPT Lessee's leasehold interest under the HPT
Lease; or
. An event of default by the HPT Lessee shall occur under the HPT
management agreement and continue beyond the expiration of any
applicable cure period.
Assignment of the HPT Lease. The HPT Lessee may not assign, mortgage,
pledge, hypothecate, encumber or otherwise transfer the HPT Lease or sublease
all or any part of the HPT Hotel without the HPT Lessor's prior written
consent.
Subordination to Mortgage Debt. The rights of the HPT Lessee are subject and
subordinate to mortgage debt.
Certain Actions Under the HPT Leases. Except as otherwise provided in the
HPT management agreement, the HPT Lease prohibits the HPT Lessee from agreeing
to the following without the prior written consent of the HPT Lessor: (i) any
change in the manager; (ii) any change in the HPT management agreement; (iii)
termination of the HPT management agreement; or (iv) assignment of the HPT
management agreement. Further, the HPT Lessee may not take any action, grant
any consent or, except as provided in the HPT management agreement, permit any
action under the HPT management agreement which might have a material adverse
affect on the HPT Lessor, without the HPT Lessor's prior written consent.
FF&E LEASES
With respect to certain of the full-service hotels which are leased by
Lessees, each Lessee will lease the Excess FF&E from an affiliate of Host REIT
(the "Initial FF&E Leases"). The Company currently anticipates that
approximately $180 million of Excess FF&E will be leased pursuant to the
Initial FF&E Leases as of January 1, 1999. The Excess FF&E to be leased under
the Initial FF&E Leases will be acquired by an affiliate of Host REIT (the
"FF&E Lessor"), which in turn will lease the Excess FF&E to the applicable
Lessee. The specific types of FF&E which will be leased will vary from hotel
to hotel. The following summary of the principal terms of the FF&E Leases
between subsidiaries of the Company and the FF&E Lessors is qualified in its
entirety by reference to the FF&E Lease, the form of which is included as an
exhibit to the Registration Statement of which this Prospectus is a part.
Term. The term of each Initial FF&E Lease will generally range from two to
four years depending on the estimated remaining useful life of the Excess FF&E
under such Initial FF&E Lease.
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Rent. Rent will be paid in arrears in equal monthly payments at the end of
each Accounting Period and will be determined on the basis of the cost to the
FF&E Lessor of the Excess FF&E and the Market Leasing Factor.
End of Term Options. Each Lessee will have the option at the end of the
applicable term to purchase the Excess FF&E for the fair market value. Each
Lessee will also have the option to renew the Initial FF&E Lease for
consecutive one year renewal terms at a fair market rental rate.
Return Requirements. If Lessee does not exercise the purchase option or the
renewal option at the end of the term (or any renewal term), Lessee will pay
FF&E Lessor a return fee equal to one Accounting Period payment of rent, and
the Excess FF&E will be returned to a location within 2,000 miles of the hotel
at Lessee's cost and risk. All Excess FF&E will be returned in as good
condition as when delivered at the commencement of the Initial FF&E Lease,
ordinary wear and tear excepted.
Early Termination Right. For so long as no default under the applicable
Initial FF&E Lease exists, each Lessee will have the option to terminate the
Initial FF&E Lease at any time and purchase the Excess FF&E by paying an
amount equal to the greater of the fair market value of the Excess FF&E or the
stipulated loss value (as set forth in such Initial FF&E Lease). Upon the
exercise of such early termination option, the FF&E Lessor will transfer the
Excess FF&E to Lessee on an "as is, where is" basis.
Damage or Destruction. In the event that any item of equipment shall become
lost, stolen, damaged or destroyed for any reason whatsoever, Lessee is
obligated to either (i) replace such equipment with like property having the
same value and operating capabilities and a useful life at least equal to the
replaced equipment or (ii) pay FF&E Lessor the stipulated loss value of such
equipment. Any insurance proceeds paid to FF&E Lessor from such loss, theft,
damage or destruction will be applied to reimburse Lessee for its expenses
related to such loss, theft, damage or destruction. Lessee is responsible for
maintaining casualty insurance on the Excess FF&E during the lease term.
Events of Default. Subject to applicable notice and cure periods in the
Initial FF&E Lease, the Initial FF&E Lease provides the FF&E Lessor with the
right, among other things, to terminate the Initial FF&E Lease, repossess the
Excess FF&E and seek liquidated damages equal to the stipulated loss value of
the Excess FF&E if, among other things, any of the following Events of Default
occur:
.Failure to pay rent or any other amount payable under the Initial FF&E
Lease within ten days after the due date;
.Failure to maintain required insurance coverages;
.Failure to perform the other covenants of the Initial FF&E Lease;
.Filing of any petition for relief, bankruptcy or liquidation by or against
Lessee;
.Lessee causes or institutes any proceeding for its dissolution or
termination;
.An event of default shall occur under the Hotel Lease where the Excess
FF&E is located;
.An event of default shall occur under any lease to which Lessee is a
party or a guarantor which results in the exercise of possessory
remedies or legal proceedings by such lessor, provided that the
aggregate future payments under such lease exceed certain thresholds; or
.Acceleration of maturity of any indebtedness of Lessee with a principal
amount in excess of certain thresholds.
Assignment. Lessee will not have the right to assign the Initial FF&E Lease
or to sublease the Excess FF&E without the prior written consent of Lessor,
which consent will not be unreasonably withheld, except that Lessee will have
the right to assign its rights in the Initial FF&E Lease without the consent
of Lessor to (i) an assignee of Lessee's rights in the Hotel Lease, (ii) in
the event of the termination of the Hotel Lease, to the Host REIT Lessor or a
new lessee or purchaser of the hotel or (iii) to a holder of qualifying
mortgage debt upon a default under such debt.
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Subordination to Mortgage Debt. The rights of each Lessee under the Initial
FF&E Lease will be expressly subordinate to qualifying mortgage debt on the
applicable hotel and any refinancing thereof. A default under the mortgage
debt may result in a termination of the Initial FF&E Lease and a loss of
Lessee's right to possession of the Excess FF&E.
DESCRIPTION OF THE HOTEL LEASES FOR HOTELS MANAGED BY OTHER MANAGEMENT
COMPANIES
Of 104 hotel properties currently owned by Host (excluding the Blackstone
hotels), 15 hotels (the "Non-MI Hotels") that are expected to be leased by the
Company are, and will continue to be, managed by the Non-MI Managers. See "--
Description of Other Hotel Management Agreements." Host REIT will lease these
hotels to the lessees, most of which will be indirect majority owned
subsidiaries of the Company. Generally, there will be a separate lessee for
each hotel or group of hotels that has a separate manager. The terms of these
leases will be substantially similar to the leases of hotels that are managed
by Marriott International. See "--Description of the Hotel Leases for Full-
Service Hotels Managed by Marriott International."
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DESCRIPTION OF BLACKSTONE HOTEL LEASES
Subsidiaries of the Company, which will be wholly owned Delaware limited
liability companies formed to lease the hotels, will lease from Host REIT the
12 hotels to be contributed by the Blackstone Entities to Host REIT pursuant
to Host REIT's acquisition of these hotels from the Blackstone Entities (the
"Blackstone Hotels"). The Blackstone Hotels will continue to be managed by the
existing hotel management companies. See "--Description of Hotel Management
Agreements for Blackstone Hotels." Generally, there will be a separate lessee
and a separate lease (the "Blackstone Leases") for each hotel. The terms of
the Blackstone Leases will be substantially similar to leases of hotels
managed by Marriott International. See "--Description of the Hotel Leases for
Full-Service Hotels Managed by Marriott International." In addition, the
Company will acquire a 25% interest in Swissotel Management (USA) L.L.C.,
which operates five Swissotel hotels in the United States.
DESCRIPTION OF FRANCHISE AGREEMENTS WITH MARRIOTT INTERNATIONAL
As of September 11, 1998, 13 of the 15 Non-MI Hotels (excluding the
Blackstone hotels) expected to be leased by the Company are operated or
managed under franchise agreements between either the owner or the Non-MI
Manager and Marriott International. See "Business and Properties--Description
of Other Hotel Management Agreements." The franchise agreements permit Host
REIT and the Non-MI Managers to use the "Marriott" brand name, associated
trademarks, reservation systems and other related items (collectively, the
"Marriott Franchise") in connection with the operation of the hotels. The
remaining two hotels are managed by Non-MI Managers under "Holiday Inn" or
"Delta" brand names. The Company will assume the franchise agreements with
respect to the hotels it leases from Host REIT and will be the franchisee
during the term of the Hotel Leases.
Franchise and Other Fees. As consideration for the use of the Marriott
Franchise, Marriott International is paid franchise fees. Generally, Marriott
International receives a fixed non-refundable initial fee. In addition,
Marriott International has a right to receive franchise fees, equal to (i) the
applicable percentage of gross room sales plus (ii) the applicable percentage
of gross food and beverage sales. The percentages used to calculate the
franchise fees vary, although they are generally 3% to 6% of the gross room
sales, and gross food and beverage sales, as the case may be. In addition to
franchise fees, Marriott International is entitled to receive monthly fees in
connection with advertising, promotional, sales and marketing, generally equal
to 1% of gross room sales for the previous month.
Marketing. The franchisee is responsible, at its own cost and expense, for
all local advertising, marketing, promotional and public relations programs
and activities for the hotel. All such advertising and promotional activities
are required to be in accordance with the Marriott standard and shall conform
to specifications as Marriott International may from time to time prescribe.
In addition, such advertising and marketing materials must be submitted to
Marriott International for prior approval.
As part of the Marriott Franchise, Marriott International makes available
specifications and/or all required application software for the Marriott
property system. The franchisee, at its own expense, purchases, installs, and
uses the Marriott property system hardware and software. As long as the
franchisee is in compliance with the franchise agreement, Marriott
International also makes available for use the Marriott Hotel Reservation
System.
Financing of the Hotels. Under the franchise agreements, the franchisee is
not permitted to incur or replace any indebtedness which is secured by a lien
on the applicable hotel without the prior written consent of Marriott
International, which consent may not be unreasonably withheld. In some
instances, the franchisee may replace any indebtedness which is secured by a
lien on the applicable hotel without the prior written consent of Marriott
International, if (i) the franchisee provides written notice of such
indebtedness and the terms thereof to Marriott International, (ii) the terms
of such indebtedness are commercially reasonable, (iii) the maximum loan
amount will not exceed 75% of the appraised value of the hotel and (iv) the
debt coverage ratio is equal to or greater than 1.3.
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Alteration, Renovation and Refurbishment of the Hotels. If the applicable
hotel requires significant renovations or refurbishment of the hotel affecting
the design, character or appearance, any such renovation or refurbishment
shall be subject to the prior written approval of Marriott International. Any
such renovation or refurbishment must be completed in accordance with the
Marriott International criteria.
FF&E Reserves. The franchisee is required to establish an escrow account
("FF&E Reserve") and fund it monthly in an amount generally equal to 3% to 5%
of gross revenue. The FF&E Reserve is be used to fund significant renovations
and other necessary replacement and renewals of FF&E. Under the Hotel Leases,
Host REIT will remain responsible for the FF&E Reserve.
Non-Competition. During the term of the franchise agreements, the franchisee
and its affiliates generally may not, without the prior written consent of
Marriott International, directly or indirectly own any interest in or in any
manner be connected or associated with any full-service hotel located within
five miles of the applicable hotel other than a hotel operated by Marriott
International or its affiliates. In addition, in the event of termination of
the franchise agreement due to a default by the franchisee, the franchisee and
its affiliates may not operate the applicable hotel as part of any first-class
hotel brand, including, but not limited to Hilton, Sheraton, Hyatt, Radisson
and Westin, for a period of 24 months after the date the franchise agreement
is terminated.
Events of Default. The franchisee is deemed to be in default under the
franchise agreement upon occurrence of one or more of the following events:
(i) the franchisee becomes insolvent or makes a general assignment for the
benefit of creditors; (ii) the franchisee files a voluntary petition in
bankruptcy or insolvency or a petition for reorganization under any bankruptcy
law; (iii) the franchisee consents to an involuntary petition in bankruptcy
filed against it or an order approving an involuntary petition in a bankruptcy
filed against the franchisee shall remain unvacated 90 days after the date of
entry thereof; (iv) a court enters an order or judgment adjudicating the
franchisee as bankrupt; (v) proceedings for a compromise with creditors is
instituted and not vacated within 90 days after being instituted; (vi)
execution is levied against the hotel or any real or personal property
comprising the hotel; or (vii) a suit to foreclose any lien or mortgage
against the hotel or any real or personal property which is a party of the
hotel is initiated and not vacated within 60 days.
In addition, the franchisee is deemed in default of the franchise agreement
if: (i) immediate closing of the hotel is deemed necessary by Marriott
International to avoid substantial liability arising out of dangerous or
unsafe condition of the property; (ii) the franchisee or any owner of officers
of the franchisee is convicted of a
felony or other crime or offense; (iii) the franchisee divulges any
confidential information in violation of the franchise agreement; (iv) the
hotel is no longer operated by the franchisee as a "Marriott" brand hotel; (v)
the franchisee purports to transfer any rights or obligations arising out of
the franchise agreement without complying with the terms therein; (vi) the
franchisee fails to repair and maintain the premises, or fails to replace
FF&E, as required; or (vii) the franchisee fails to perform in accordance with
any of the provisions of the franchise agreement.
DESCRIPTION OF MARRIOTT INTERNATIONAL HOTEL MANAGEMENT AGREEMENTS FOR FULL-
SERVICE HOTELS
Marriott International or its subsidiaries serve as the managers for 88 of
Host's 104 hotels excluding the Blackstone hotels) which are expected to be
leased to the Lessees. In addition, for those hotels which are managed by
managers other than Marriott International, Host has the right to use the
"Marriott" brand name through franchise agreements with Marriott International
or its subsidiaries. Marriott International and its subsidiaries also provide
various other services to the Company and Host and its affiliates. The hotel
management agreements applicable to each hotel will be assigned to the
applicable Lessee for the term of the Hotel Lease of such hotel. The
description of the management agreements set forth below is qualified in its
entirety by reference to such agreements, a copy of the form of which is
included as an exhibit to the Registration Statement of which the Prospectus
is a part.
Assignment of Management Agreements. The Lessee will be obligated to perform
all of the obligations of the Host REIT Lessor under the hotel management
agreement during the term of its Hotel Lease including payment of fees due
under the management agreement, other than certain retained obligations
including, without
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limitation, payment of property taxes, property casualty insurance and ground
lease rent, maintaining a reserve fund for FF&E replacements, and capital
expenditures, for which the Host REIT Lessor will retain responsibility.
Although the Lessee will assume certain obligations of the Host REIT Lessor
under the hotel management agreement, the Host REIT Lessor will not be
released from its obligations and, if the Lessee fails to perform any such
obligations, the manager will be entitled to seek performance by or damages
from the Host REIT Lessor. If the Hotel Lease is terminated for any reason,
any new or successor Lessee must meet certain requirements for an "Approved
Lessee" or otherwise be acceptable to Marriott International. The requirements
for an "Approved Lessee" include that the entity (i) has sufficient financial
resources and liquidity to fill the obligations under the Management
Agreement, (ii) is not in control of or controlled by persons who have been
convicted of felonies, (iii) is not engaged, or affiliated with any person or
entity engaged, in the business of operating a branded hotel chain having
5,000 or more guest rooms in competition with Marriott International, and (iv)
must be a single purpose entity in which Marriott International has a
noneconomic membership interest with the same rights as it has in Lessee.
Other provisions of the management agreements for the full-service hotels to
be leased by the Company from Host REIT include the following:
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Operational Services. The managers have sole responsibility and exclusive
authority for all activities necessary for the day-to-day operation of the
hotels, including establishment of all room rates, the processing of
reservations, procurement of inventories, supplies and services, periodic
inspection and consultation visits to the hotels by the managers' technical
and operational experts, and promotion and publicity of the hotels. The
manager will receive compensation from the Lessee in the form of a Base
Management Fee and an Incentive Management Fee, which are normally calculated
as percentages of gross revenues and operating profits, respectively.
Executive Supervision and Management Services. The managers generally
provide all managerial and other employees for the hotels; review the
operation and maintenance of the hotels; prepare reports, budgets and
projections; provide other administrative and accounting support services,
such as planning and policy services, financial planning, divisional financial
services, risk planning services, product planning and development, employee
planning, corporate executive management, legislative and governmental
representation and certain in-house legal services; and protect the "Marriott"
trademark and other tradenames and service marks. The manager also will
provide a national reservations system.
Chain Services. The hotel management agreements require the manager to
furnish certain services that are furnished generally on a central or regional
basis to hotels in the Marriott hotel system. Such services include the
following: (i) the development and operation of computer systems and
reservation services, (ii) regional management and administrative services,
regional marketing and sales services, regional training services, manpower
development and relocation costs of regional personnel and (iii) such
additional central or regional services as may from time to time be more
efficiently performed on a regional or group level. Costs and expenses
incurred in providing such services are allocated among all hotels in the
Marriott hotel system managed by the manager or its affiliates and each
applicable Lessee will be required to reimburse the manager for its allocable
share of such costs and expenses.
Working Capital and Fixed Asset Supplies. The Lessee will be required to
maintain working capital for each hotel and fund the cost of fixed asset
supplies, which principally consist of linen and similar items. The applicable
Lessee will also be responsible for providing funds to meet the cash needs for
the operations of the hotels if at any time the funds available from
operations are insufficient to meet the financial requirements of the hotels.
Use of Affiliates. The manager employs the services of its affiliates to
provide certain services under the hotel management agreements. Certain of the
management agreements provide that the terms of any such employment must be no
less favorable to the applicable Lessee, in the reasonable judgment of the
manager, than those that would be available from the manager.
FF&E Replacements. The hotel management agreements generally provide that
once each year the manager will prepare a list of FF&E to be acquired and
certain routine repairs that are normally capitalized to be performed in the
next year ("FF&E Replacements") and an estimate of the funds necessary
therefor. Under the terms of the Hotel Leases, the Host REIT Lessor is
required to provide to the Lessee, all necessary FF&E for the operation of the
hotels (including funding any required FF&E Replacements). Under each full-
service Hotel Lease, Host REIT will be responsible for the costs of FF&E
Replacements and for decisions with respect thereto (subject to its
obligations to the Lessee under the Hotel Lease).
Building Alterations, Improvements and Renewals. The hotel management
agreements require the manager to prepare an annual estimate of the
expenditures necessary for major repairs, alterations, improvements, renewals
and replacements to the structural, mechanical, electrical, heating,
ventilating, air conditioning, plumbing and vertical transportation elements
of each hotel. Such estimate will be submitted to Host REIT and the Lessee for
their approval. In addition to the foregoing, the management agreements
generally provide that the manager may propose such changes, alterations and
improvements to the hotel as are required, in the manager's reasonable
judgment, to keep the hotel in a competitive, efficient and economical
operating condition
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or in accordance with Marriott standards. The cost of the foregoing generally
shall be paid from the FF&E Reserve Account; to the extent that there are
insufficient funds in such account, Host REIT is required to pay any
shortfall.
Service Marks. During the term of the hotel management agreements, the
service mark "Marriott" and other symbols, logos and service marks currently
used by the manager and its affiliates may be used in the operation of the
hotels. Marriott International (or its applicable affiliates) intends to
retain its legal ownership of these marks. Any right to use the service marks,
logo and symbols and related trademarks at a hotel will terminate with respect
to that hotel upon termination of the management agreement with respect to
such hotel.
Termination Fee. Certain of the hotel management agreements provide that if
the management agreement is terminated prior to its full term due to casualty,
condemnation or the sale of the hotel, the manager will receive a termination
fee as specified in the specific management agreement.
Termination for Failure to Perform. Substantially all of the hotel
management agreements may be terminated based upon a failure to meet certain
financial performance criteria, subject to the manager's right to prevent such
termination by making certain payments to the Lessee based upon the shortfall
in such criteria.
Events of Default. Events of default under the hotel management agreements
include, among others, the following: (i) the failure of either party to make
payments pursuant to the management agreement within ten days after written
notice of such nonpayment has been made, (ii) the failure of either party to
perform, keep or fulfill any of the covenants, undertakings, obligations or
conditions set forth in the management agreement and the continuance of such
default for a period of 30 days after notice of said failure or, if such
default is not susceptible of being cured within 30 days, the failure to
commence said cure within 30 days or thereafter the failure to diligently
pursue such efforts to completion, (iii) if either party files a voluntary
petition in bankruptcy or insolvency or a petition for reorganization under
any bankruptcy law or admits that it is unable to pay its debts as they become
due, (iv) if either party consents to an involuntary petition in bankruptcy or
fails to vacate, within 90 days from the date of entry thereof, any order
approving an involuntary petition by such party; or (v) if an order, judgment
or decree by any court of competent jurisdiction, on the application of a
creditor, adjudicating either party as bankrupt or insolvent or approving a
petition seeking reorganization or appointing a receiver, trustee or
liquidator of all or a substantial part of such party's assets is entered, and
such order, judgment or decree continues unstayed and in effect for any period
of 90 days.
As described above, all fees payable under the hotel management agreements
(excluding the termination fee, if any) will become obligations of the
Lessees, to be paid by the Lessees, for so long as the Leases remain in
effect. The Lessees' obligations to pay these fees, however, could adversely
affect the ability of one or more Lessees to pay Minimum Rent or Percentage
Rent payable under the full-service Hotel Leases, even though such amounts
otherwise are due and owing to Host or Host REIT.
Restrictions on Sales and Other Transfers of Interests in Hotels. The hotel
management agreements prohibit the hotel owner from selling, leasing or
otherwise transferring the hotels unless the transferees assume the management
agreements and satisfy certain criteria, including having sufficient financial
resources and liquidity to satisfy the owner's obligations under the hotel
management agreements, not being in control or controlled by persons who have
been convicted of felonies and not being engaged in operating a branded hotel
chain having 5,000 or more guest rooms in competition with Marriott
International. The management agreements also prohibit the Lessees from
subleasing all or any portion of the Hotel Leases and from assigning the Hotel
Leases except to entities which are wholly-owned by the Company and have
organizational documents which are the same as those of the Lessees, in each
case without the prior written consent of Marriott International.
Restrictions on Lease Amendments. The management agreements prohibit the
Lessees and the Host REIT hotel Lessors from entering in certain amendments of
the hotel Leases, including shortening the term of the Host REIT Hotel Leases
and modifying the parties' respective rights and obligations with respect to
FF&E, capital expenditures and approval of hotel budgets, in each case without
the prior written consent of Marriott International.
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Marriott International's Right to Cause Termination of Hotel Leases. The
management agreements provide that if the hotel lessors do not elect to
terminate the Hotel Lease upon a "Change in Control," Marriott International
may require the Host REIT Lessors to exercise their termination rights if, as
a result of such Change in Control, the Host REIT Lessee is in control of or
controlled by persons who are convicted felons or who are engaged (or
affiliated with persons who are engaged) in operating a branded hotel chain
having 5,000 or more guest rooms in competition with Marriott International.
DESCRIPTION OF MARRIOTT INTERNATIONAL HOTEL MANAGEMENT AGREEMENTS FOR LIMITED-
SERVICE HOTELS
Subsidiaries of Marriott International serve as the managers for the HPT
Hotels which will be subleased by Host REIT to the Sublessees. The management
agreements will be assigned to the Sublessees for the term of the HPT Lease of
each HPT Hotel. The Sublessees will be obligated to perform all of the
obligations of the HPT Lessor under the management agreement during the term
of the HPT Lease (including the payment of fees due under the management
agreement), other than the obligations including, without limitation, payment
of property taxes, property casualty insurance and ground lease rent,
maintaining a reserve fund for FF&E replacements, and capital expenditures,
for which the HPT Lessor will retain responsibility. Although the Sublessees
will assume certain obligations of the HPT Lessor under the management
agreement, the HPT Lessor will not be released from its obligations and, if a
Sublessee fails to perform any such obligations, the manager will be entitled
to seek performance by or damages from the HPT Lessor. The Sublessees'
obligation to pay the fees due under the management agreements, however, could
adversely affect the ability of a Sublessee to pay rent under the HPT Leases,
even though such amounts are otherwise due and owed to the HPT Lessor.
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Other provisions of the management agreements for the HPT Hotels to be
subleased by the Company from Host REIT are substantially the same as for the
full-service hotels. See "--Description of Marriott International Hotel
Management Agreements for Full-Service Hotels."
DESCRIPTION OF OTHER HOTEL MANAGEMENT AGREEMENTS
Of the approximately 104 hotels expected to be leased from Host or Host REIT
to the Company (excluding the Blackstone hotels), 15 hotels are, and will
continue to be, managed by the following four Non-MI Managers: (i) The Durbin
Companies, Inc.; (ii) Interstate Hotels Corporation; (iii) Outrigger Lodging
Services; and (iv) Stormont Trice Corporation. Thirteen of these 15 Non-MI
Managed Hotels operate under the "Marriott" brand name pursuant to existing
franchise agreements between either the hotel owner or the Non-MI Managers and
Marriott International, whereby Marriott International receives a franchise
fee for allowing the use of the "Marriott" brand name. See "Other
Relationships with Marriott International--Franchise Agreements." The
remaining two Non-MI Managed Hotels are operated as "Holiday Inn" and "Delta"
hotels.
Each management agreement has a fixed term ranging from three to 16 years
with some extension options. Under the management agreements, the Non-MI
Managers shall provide similar management and operating services which are
provided by Marriott International under its management agreements. In return
for these services, the Non-MI Managers generally receive a fixed base
management fee calculated as a percentage of gross revenue. In some instances,
the Non-MI Managers are also entitled to receive an incentive management fee
based on a percentage of the amount by which the operating profit for the
applicable hotel exceeds the owner's required minimum return.
The Lessees will assume the management agreements and will be obligated to
perform certain of the obligations of the Host REIT Lessor for the term of the
Hotel Lease of such hotel.
DESCRIPTION OF HOTEL MANAGEMENT AGREEMENTS FOR BLACKSTONE HOTELS
The Blackstone Hotels are, and will continue to be, managed by the existing
management companies. Except for the Ritz-Carlton Hotel Company, which manages
two Blackstone Hotels and is a majority owned subsidiary of Marriott
International, the managers for the Blackstone Hotels are not affiliated with
either the Company, Host or Marriott International. In addition, none of the
Blackstone Hotels are operated under the "Marriott" brand name. The managers
for the Blackstone Hotels provide substantially similar services as Marriott
International under its management agreements for the full-service hotels. In
addition, the Blackstone Hotels management agreements will impose
substantially similar liabilities and obligations on the Company as the
Marriott International management agreements as lessees of the hotels. For
management services provided, the managers of the Blackstone Hotels receive
basic management fees, generally calculated as a percentage of gross revenue,
and in most cases, incentive management fees, which are generally calculated
as a percentage of operating profits. In connection with the Blackstone
Acquisition, the Blackstone Entities' 25% ownership interest in Swissotel
Management (USA) L.L.C. will be contributed to the Company.
DESCRIPTION OF THE OPERATING AGREEMENTS FOR THE COMMUNITIES
The Communities are managed by MSLS pursuant to operating agreements entered
into with the subsidiaries of the Company that own the applicable Community.
Management Services Provided by MSLS under the Operating Agreements. Under
each of the operating agreements, MSLS provides complete management services
to the Company in connection with its management of such Communities.
Generally, each of the operating agreements have initial terms of 30 years
with one five-year renewal option. The services provided by MSLS include the
following:
Operational Services. MSLS has the sole responsibility and exclusive
authority for all activities for the day-to-day operation and management of
the Communities, including obtaining all licenses necessary for the
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operation, establishing resident care and healthcare policies and procedures,
carrying out and supervising all necessary repairs and maintenance, procuring
food stuff, supplies, equipment, furniture and fixtures, and establishing
prices, rates and charges for services provided. MSLS recruits, employs,
supervises, directs and discharges all of the employees, and provides all
managerial and other employees for the Communities. In addition, MSLS has
exclusive supervision and control in all matters relating to the management
and operation of the Communities, including the following: fees and charges
for providing accommodations, food, health care and related services to
residents and their guests; supervision of resident care; health care
policies; credit policies; food and beverage services; employment policies;
executing, modifying and terminating leases, licenses and concessions and
agreements for commercial space within the Communities; receipt, holding and
reimbursement of funds; maintenance of bank accounts; and procurement of
inventories, supplies and services; and promotion and publicity. In return for
these services, MSLS will receive compensation from the Company in the form of
(i) a non-cumulative base fee calculated as a percentage of revenue and (ii)
an incentive fee calculated as 20% of operating profit in excess of the
owner's priority.
Central Administrative Services. The operating agreements require MSLS to
furnish certain central administrative services ("Central Administrative
Services") which are generally furnished on a central or regional basis to
other senior living communities in the Marriott retirement community system.
Such services will include the following: (i) marketing and public relations
services; (ii) human resources program development; (iii) information systems
support and development; and (iv) centralized computer payroll and accounting
services. In lieu of reimbursement for such services, MSLS is paid an amount
equal to 2% of gross revenues. Generally, through the earlier of (i) the end
of the seventh year of the operating agreement or (ii) the date upon which
certain performance criteria have been met, 50% of the Central Administrative
Services fee is payable only to the extent that operating profit exceeds the
owner's priority. However, the payment of fees for the Central Administrative
Services is waived for the first year of the operating agreement with the
exception of one Community in which it is waived for the first two years of
the operating agreement.
Working Capital. The Company is required to maintain certain working capital
for each Community, and from time to time advance, at the request of MSLS, any
additional funds necessary to maintain working capital at levels generally
consistent with the Marriott senior living community system standard.
FF&E Replacements and Reserves. MSLS establishes a reserve account (the
"FF&E Reserve") to cover the cost of (i) replacements and renewals to the
furniture, furnishing, fixtures, soft goods, case goods, vehicles and
equipment, and for routine building repairs and maintenance which are normally
capitalized. Generally, throughout the term, MSLS is required to transfer into
the FF&E Reserve an amount equal to (i) 2.65% of gross revenue until the end
of fiscal year 2002, (ii) 2.85% of gross revenue during the period from fiscal
year 2003 until the end of fiscal year 2007 and (iii) 3.5% of gross revenue
during the period from fiscal year 2008 until the end of the term. Each year,
MSLS will provide an estimate of the expenditures necessary for such
replacement of FF&E and repairs to the Communities. In replacing the FF&E and
making routine repairs, MSLS may not expend more than the balance in the FF&E
Reserve, except in certain circumstances.
Major Building Alteration, Improvements and Renewals. The operating
agreements require MSLS to prepare an annual estimate of the expenditures
necessary for major repairs, alterations, improvements, renewals and
replacements to the structural, mechanical, electrical, heating, ventilating,
air conditioning, plumbing and vertical transportation elements of each
Community (the "Capital Expenditures"). Such estimate of the Capital
Expenditures will be submitted to the Company for its approval. Except in
certain circumstances, MSLS may not make any Capital Expenditures without the
prior written consent of the Company not to be unreasonably withheld. The
costs of these Capital Expenditures are paid by the Company.
Events of Default. Events of default under the operating agreements ("Events
of Default") include, among others, the following: (i) the failure of either
party to make prompt payments pursuant to the operating agreement, (ii) the
failure of either party to perform, keep or fulfill any of the covenants,
undertakings, obligations or
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conditions set forth in the operating agreement, (iii) if either party
commences any proceeding under any bankruptcy, reorganization, readjustment of
debt, dissolution or liquidation law or statute or an assignment for the
benefit of creditors or application for the appointment of at a trustee or
receiver for a substantial part of the assets, (iv) if either party consents
to an involuntary petition in bankruptcy or fails to vacate, within 90 days
from the date of entry thereof, any order approving an involuntary petition by
such party; or (v) if an order, judgment or decree by any court of competent
jurisdiction, on the application of a creditor, adjudicating either party as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets is entered, and such order, judgment or decree continues
unstayed and in effect for any period of 90 days.
Termination. Upon the occurrence of an Event of Default, the non-defaulting
party shall have the right to terminate the operating agreement with 30 days'
notice, if such default is a material breach by the defaulting party of its
obligations under the operating agreement. MSLS also is entitled to terminate
the operating agreement if the Community owner fails to approve certain
repairs which arise out of legal requirements.
DESCRIPTION OF OTHER AGREEMENTS FOR THE COMMUNITIES
The Communities also are subject to the following agreements:
The Indemnity Agreement. In connection with the Forum Acquisition, Host, the
Company, Marriott International and MSLS entered into an indemnity agreement
which defines the parties' rights and obligations for indemnification with
respect to liabilities arising prior to and after June 21, 1997 (the "Forum
Acquisition Date"). Together with Host, the Company will indemnify and hold
harmless Marriott International, MSLS and their affiliates against certain
liabilities that arise after the date of the agreement, including any costs
and expenses incurred as a result of defending such claims. In addition,
together with Host, the Company will agree to pay or reimburse Marriott
International and MSLS for all environmental liabilities arising subsequent to
the Forum Acquisition Date which, under the applicable environmental laws,
would be the responsibility of the Company and Host had the Company acquired
title to the Communities on the Forum Acquisition Date, rather than acquiring
the common stock of Forum.
Tax Matters Agreement. Host, the Company, Forum, Marriott International and
MSLS entered into a tax matters agreement which defines the parties' rights
and obligations with respect to certain tax matters, including deficiencies,
assessments and refunds of federal, state, local or foreign income or other
taxes relating to the Community business for tax years prior to and after the
Forum Acquisition Date (the "Tax Matters Agreement"). Together with Host, the
Company will indemnify and hold harmless Marriott International, MSLS and
their affiliates from and against tax liabilities relating to the business of
the Communities which accrue or are attributable or allocable to any taxable
year beginning after the Forum Acquisition Date. In addition, the parties have
agreed to cooperate and consult with each other in preparing tax returns or
dealing in any tax matters.
The Tax Matters Agreement will be in effect until all the obligations of the
respective parties have been carried out and until the expiration of any
applicable statute of limitations relating to tax matters covered by the Tax
Matters Agreement. In connection with the Distribution, the Company will
assume all of Host's obligation under the Tax Matters Agreement relating to
periods subsequent to the Distribution Date and indemnify Host with respect to
any claims made with respect thereto.
The Expansion Agreements. The Company entered into expansion agreements with
MSLS the ("Expansion Agreements"), pursuant to which the parties agreed that
MSLS would construct additional independent living, assisted living and
healthcare units to some of the existing Communities. The Expansion Agreements
require MSLS to provide all services related to such construction of
additional units, including all labor, materials, equipment, tools,
construction equipment and machinery, water, heat, utilities, transportation
and other facilities and services necessary for proper execution and
completion of the work necessary to expand the Community to include additional
units. In providing these services, it is contemplated that MSLS would retain
the services of its affiliate, Marriott International Design & Construction
Services, Inc.
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As of September 11, 1998, the Company and MSLS have entered into eight
separate expansions for projects. The construction for six of these projects
is in progress and is expected to be completed by 1999. The number of units
for the remaining two projects have been partially completed with the
construction of the remaining units for these two projects to be determined
after a feasibility analysis. The determination to proceed with the
construction of these remaining units is at the sole option of MSLS.
The Company will pay MSLS a predetermined fixed price for each expansion
project upon completion of the project. The fixed price for each expansion
project has been agreed upon in each project's respective Expansion Agreement.
The expansion payment may be payable either in all cash or (i) up to 35% of
such amount by cash and (ii) 65% of such amount by expansion notes. These
notes are obligations of the Company and are guaranteed by Host.
The Pooling Agreements. As of September 11, 1998, 29 of the Communities are
subject to pooling agreements between the Company and MSLS (the "Pooling
Agreements"). The Pooling Agreements aggregate the Communities into five
distinct "pools." At the date of the Forum Acquisition, Host and MSLS, as the
manager of the Communities, agreed that for the limited purposes of
calculating certain fees and exercising certain termination and manager
replacement rights under the operating and related agreements, such fees and
rights should be considered and determined in the aggregate rather than on a
Community-by-Community basis. Generally, the method of selecting which
Communities would go into which of the five "pools" (Pools I, II, III, IV and
V) was based on whether the Communities were encumbered by mortgage
indebtedness at the time of the Forum Acquisition. The Communities which were
subject to one of the two loan agreements with NACC (the Communities owned by
FRP, FGI and FOH) were placed under Pools I, II, and IV. All other Communities
which were not subject to mortgage indebtedness or were, at the time of the
Forum Acquisition, subject to indebtedness with third party lenders other than
NACC were placed in Pools III and V.
The Ground Leases. The Company owns all of the Communities in fee simple,
except for the following Communities, which are subject to ground leases: (i)
the Knightbridge Community; (ii) the Lexington at Country Place Community; and
(iii) the Lafayette at Country Place Community. All three ground leases
generally provide for initial terms of 25 years with certain renewal options.
In the case of the Knightbridge Community, the Company has the option to
purchase the ground leased property after the death of the landlord for the
consideration provided in the lease. Under the Lexington and Lafayette ground
leases, the Company has the right of first refusal to purchase the land if the
landlord receives a bona fide offer from a third party to purchase the
underlying real property.
NON-COMPETITION AGREEMENTS
The Company's activities are and will be limited by certain non-competition
agreements with Marriott International and Host REIT to which it is or will
become a party. In general, these non-competition agreements restrict the
Company for prescribed periods described below from (i) competing with the
hotel management business of Marriott International (but not from leasing
hotel properties or contracting with third parties to manage leased hotel
properties), subject to certain limitations on hotel properties operated under
a common name, (ii) operating or managing assisted living communities (but not
owning or leasing such communities) and (iii) owning or acquiring full-service
hotels that are not leased from Host REIT. The description of the non-
competition agreements set forth below is qualified in its entirety by
reference to such agreements, a copy of the form of which is included as an
exhibit to the Registration Statement of which this Prospectus is a part.
Non-Competition Agreement with Marriott International Regarding the
Hotels. Host and Marriott International entered into the Hotel Non-Competition
Agreement in 1993 when Host and Marriott International became separate public
companies; the Hotel Non-Competition Agreement was subsequently, amended and
restated in March 1998. The Company is currently bound by the Hotel Non-
Competition Agreement as a subsidiary of Host, and will continue to be bound
by it following the Distribution. Under the Hotel Non-Competition Agreement,
the Company and its subsidiaries generally are prohibited prior to October 8,
2000, subject to certain limited exceptions, from entering into or acquiring
any business that competes with the hotel
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management business (i.e., managing, operating or franchising full-service and
limited-service hotels) of Marriott International. Under the Hotel Non-
Competition Agreement, certain activities are permitted, however, including
(i) the operation by the Company of an unlimited number of hotel properties as
long as the Company does not operate more than ten such properties under a
common name, (ii) contracting by the Company with a third party manager for
operation of an unlimited number of hotel properties, so long as the number of
properties under such third party management is not more than the greater of
(a) ten such properties operated under a common name or (b) 25% of the system
operated by such third party manager under a common name, and (iii)
franchising by the Company of an unlimited number of hotel properties so long
as the Company is not franchisor for more than ten such properties under a
common name.
Non-Competition Agreement with Marriott International Regarding Senior
Living Communities. In connection with the Company's acquisition of Forum from
Marriott International in 1997, Host and Marriott International entered into
the Community Non-Competition Agreement, as amended and restated. The Company,
as the owner of all of Host's senior living communities, is bound by the
Community Non-Competition Agreement, and will continue to be bound by it
following the Distribution. Under the Community Non-Competition Agreement, the
Company and its subsidiaries generally are prohibited prior to June 21, 2010,
subject to certain limited exceptions, from competing with Marriott
International in the continental United States by (i) financing, conducting,
participating or engaging in the business of operating, managing or
franchising senior living communities or (ii) providing operational or
managerial services relating thereto with respect to health care, therapy,
home health care, assisted living, nursing and related medical, residential,
supportive and personal care services (but are not prohibited from owning
senior living communities or contracting with third parties to manage such
communities for the Company). Until the term of the Community Non-Competition
Agreement expires on June 21, 2010, the Company also is prohibited from
entering into a transaction or a series of transactions whereby ten or more
Communities or a controlling interest therein would be transferred to another
party unless such party agrees to be bound by the Community Non-Competition
Agreement. The Community Non-Competition Agreement does not restrict the
Company's ability to own senior living communities.
Non-Competition Agreement with Host or Host REIT Regarding the Hotels. The
Company, Host REIT and the Initial FF&E Lessor will enter into a non-
competition agreement in connection with the Distribution. Pursuant to this
non-competition agreement, the Company will agree, among other things that
until the earlier of December 31, 2008 or the date upon which the Company is
not the lessee of more than 25% of the number of hotels owned by Host on the
Distribution Date, the Company may not: (i) own, acquire, develop or construct
for ownership any full-service hotel (except for (a) investments which
represent an immaterial portion of a merger or similar transaction, (b) a
minimal portfolio investment or (c) the provision of limited financing); (ii)
without the consent of Host or Host REIT in its sole discretion, manage or
operate (other than through a third party manager) any limited-service or
full-service hotel properties owned by Host or Host REIT; or (iii) conduct,
participate in, engage in or have a financial interest in any person that
engages in the ownership or operation of any single or multiple full-service
hotel franchise system operating under one or more common name brands. The
restrictions described in (i) and (iii) above do not apply to any activities
of the Company related to limited-service hotels, and none of these
restrictions preclude the Company from acting as a lessee or third party
manager with respect to full-service hotels owned by others.
Until the earlier of December 31, 2008 or the date upon which the Company is
not the lessee of more than 25% of the number of hotels owned by Host on the
Distribution Date, Host or Host REIT and the FF&E Lessors have agreed that
they will not conduct, participate in, engage in or have a financial interest
in any person that engages in the business of leasing, operating or
franchising limited-service or full-service hotel properties, provided,
however, that this restriction does not prevent Host or Host REIT or the FF&E
Lessors from (i) managing, operating or franchising limited-service or full-
service hotels with respect to matters incident to the operation of such
properties (e.g., management services with respect to food and beverages,
plant and equipment operation and maintenance, reservations, sales and
marketing) on behalf of third parties or (ii) leasing full-service or limited-
service hotels to and from each other or (iii) in the case of Host or Host
REIT, leasing full-service or limited-service hotels from certain other
related parties. Until December 31, 2003, Host or Host
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REIT and the FF&E Lessor have also agreed that they will not conduct,
participate in, engage in or have a financial interest in any person that
engages in the ownership, acquisition or operation of senior living
communities (except for (a) investments which represent an immaterial portion
of a merger or similar transaction, (b) a minimal portfolio investment or (c)
the provision of limited financing). In addition, both the Company and Host
REIT will agree not to hire or attempt to hire any of the other company's
other senior employees at any time prior to December 31, 2000. See "Business
and Properties--Relationship with Host after the Distribution--Non-Competition
Agreement."
STAFFING AND LABOR COSTS
Marriott International competes with various other lodging companies in
attracting and retaining qualified and skilled personnel to operate the hotels
managed by it. Marriott International also competes with various health care
services providers, including other care providers for the elderly, in
attracting and retaining qualified personnel for the Communities. A shortage
of such personnel or general inflationary pressure may require Marriott
International to enhance its wage and benefits package to compete effectively
for personnel necessary to operate the hotels and the Communities, which could
adversely affect the Company's net income attributable to the hotels and the
Communities.
REGULATION OF THE HEALTHCARE INDUSTRY
The long-term care segment of the healthcare industry is highly regulated.
Operators of skilled nursing facilities, including some of the healthcare
facilities operated as a part of the Company's Communities, are subject to
federal, state and local laws relating to the delivery and adequacy of medical
care, fraud and abuse, distribution of pharmaceuticals, equipment, personnel,
operating policies, fire prevention, rate-setting and reimbursement, and
compliance with safety codes and environmental laws. Such facilities also are
subject to periodic inspection by governmental and other authorities to assure
continued compliance with various standards, the continued licensing of the
facility under state law, certification under the Medicare, Medicaid or other
federal healthcare programs and the ability to participate in other third
party payment programs. Many states have adopted Certificate of Need or
similar laws which generally require that the appropriate state agency approve
certain acquisitions of such facilities and reimbursement, and determine that
need exists for certain bed additions, new services and capital expenditures
or other changes prior to beds and/or new services being added or capital
expenditures being undertaken. The failure of an operator of a Company
Community to obtain or maintain any required regulatory approvals or licenses
could prevent an operator from offering services or adversely affect its
ability to receive reimbursement for services and could result in the denial
of reimbursement, temporary suspension of admission of new patients,
suspension or decertification from Medicaid, Medicare or other Federal Health
Care Programs, fines, restrictions on the ability to acquire new facilities or
expand existing facilities and, in extreme cases, revocation of the facility's
license or closure of a facility. On a historical basis, Medicare/Medicaid
reimbursements have accounted for approximately 7% of the Company's total
senior living community revenues.
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Although not currently regulated at the federal level (except under laws of
general applicability to businesses, such as work place safety and income tax
requirements), assisted living communities are increasingly becoming subject
to more stringent regulation and licensing by state and local health and
social service agencies and other regulatory authorities. In general, these
requirements address, among other things: personnel education, training and
records; community services, including administration of medication,
assistance with self-administration of medication and limited nursing
services; monitoring of wellness; physical plant inspections; furnishing of
resident units; food and housekeeping services; emergency evacuation plans;
and resident rights and responsibilities, including in certain states the
right to receive certain healthcare services from providers of a resident's
choice. In several states, assisted living facilities also require a
Certificate of Need before the facility can be opened, expand or reduce its
resident capacity or make other significant capital expenditures. Like skilled
nursing facilities, assisted living communities are subject to periodic
inspection by government authorities. In most states, assisted living
communities, as well as skilled nursing facilities, also are subject to state
or local building code, fire code and food service licensure or certification
requirements. Any failure by the managers of the Company's Communities to meet
applicable regulatory requirements may result in the imposition of fines,
imposition of a provisional or conditional license or suspension or revocation
of a license or other sanctions or adverse consequences, including delays in
expanding a community. Any failure by the managers of the Company's
Communities to comply with such requirements could have a material adverse
effect on the Company's financial condition and results of operations.
Operators of the Company's Communities also are subject to federal and state
anti-remuneration laws and regulations, such as the Federal Health Care
Programs anti-kickback law, which govern certain financial arrangements among
healthcare providers (including physicians, hospitals and the Company's
nursing facilities) and others (including the Company's assisted living
communities) who may be in a position to refer or recommend patients to such
providers. These laws prohibit, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Federal Health Care Program patients or the purchasing, leasing, ordering
or arranging for any goods, facilities, services or items for which payment
can be made under a Federal Health Care Program (such as Medicare or
Medicaid). A violation of the federal anti-kickback law could result in the
loss of eligibility to participate in a Federal Health Care Program or in
civil or criminal penalties. The federal government, private insurers and
various state enforcement agencies have increased their scrutiny of providers,
other entities, business practices and claims in an effort to identify and
prosecute fraudulent and abusive practices. In addition, the federal
government has issued fraud alerts concerning nursing services, double
billing, home health services and the provision of medical supplies to nursing
facilities. Since some of these services may be furnished in or by some of the
Company's Communities, and since many of the Communities' residents will be
eligible for healthcare coverage under a Federal Health Care Program, these
areas may come under closer scrutiny by the government. Furthermore, some
states restrict certain business corporations from providing, or holding
themselves out as a provider of medical care. Possible sanctions for violation
of any of these restrictions or prohibitions include loss of licensure or
eligibility to participate in reimbursement programs and civil and criminal
penalties. State laws vary from state to state, are often vague and have
seldom been interpreted by the courts or regulatory agencies. There can be no
assurance that these federal and state laws will ultimately be interpreted in
a manner consistent with the Company's practices.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations,
owners or operators of real estate may be required to investigate and clean up
certain hazardous substances released at a property, and may be held liable to
a governmental entity or to third parties for property damage or personal
injuries and for investigation and clean-up costs incurred by the parties in
connection with any contamination. In addition, some environmental laws create
a lien on a contaminated site in favor of the government for damages and costs
it incurs in connection with the contamination. The presence of contamination
or the failure to remediate contamination may adversely affect the owner's
ability to sell or lease real estate or to borrow using the real estate as
collateral. No assurances can be given that (i) a prior owner, operator or
occupant, such as a tenant, did not create a material environmental
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condition not known to the Company, (ii) a material environmental condition
with respect to any hotel or community does not exist or (iii) future uses or
conditions (including, without limitation, changes in applicable environmental
laws and regulations) will not result in the imposition of environmental
liability.
No assurances can be given, that all potential environmental liabilities
have been identified or properly quantified or that no prior owner, operator
or past or current guest or occupant has created an environmental condition
not known to the Company. Moreover, no assurances can be given that (i) future
laws, ordinances, or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the hotels or the
Communities will not be affected by the condition of land or operations in the
vicinity of the hotels or the Communities (such as the presence of underground
storage tanks) or by third parties unrelated to the Company.
EMPLOYEES
Upon completion of the Distribution, the Company expects to have
approximately 80 employees.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of management of the Company, although the
outcomes of these suits and claims are uncertain, in the aggregate they should
not have a material adverse effect on the Company's business, financial
condition and results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to those
persons who have agreed to serve as the directors and executive officers of
the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Bruce D. Wardinski(1)... 38 Chairman of the Board, President and Chief Executive Officer
James L. Francis........ 36 Executive Vice President, Chief Financial Officer and Treasurer
Bruce F. Stemerman...... 43 Executive Vice President--Asset Management
Steven J. Fairbanks..... 34 Executive Vice President--Lodging Investments
Larry K. Harvey......... 34 Senior Vice President and Corporate Controller
Tracy M. J. Colden...... 37 Senior Vice President, General Counsel and Secretary
Christopher J.
Nassetta(1)............ 36 Director
Adam M. Aron(2)(3)...... 44 Director Nominee
Louise M. Crom-
well(2)(4)............. 53 Director Nominee
Kelvin L. Davis(1)(4)... 34 Director Nominee
John W. Marriott,
III(1)................. 37 Director Nominee
John B. Morse,
Jr.(3)(4).............. 52 Director Nominee
Michael A. Wild-
ish(2)(3).............. 38 Director Nominee
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Nominating and Corporate Governance Committee
(3) Member of Compensation Policy Committee.
(4) Member of Audit Committee.
Executive officers are appointed by and serve at the discretion of the Board
of Directors. The following is a biographical summary of the experience of the
directors, director nominees and executive officers of the Company:
Bruce D. Wardinski. Mr. Wardinski, Chairman of the Board, President and
Chief Executive Officer of the Company, joined Host in 1987 as a Senior
Financial Analyst of Financial Planning and Analysis and was named Manager in
June 1988. He was appointed Director of Financial Planning and Analysis of
Host in 1989, Director of Project Finance in January 1990, Senior Director of
Project Finance in June 1993, Vice President of Project Finance in June 1994
and Senior Vice President of International Development in October 1995. In
June 1996, Mr. Wardinski was elected Senior Vice President and Treasurer of
Host. Prior to joining Host, Mr. Wardinski was with the public accounting firm
of PricewaterhouseCoopers LLP.
James L. Francis. Mr. Francis, Executive Vice President and Chief Financial
Officer of the Company, joined Host in July 1997 as Vice President of Finance
and became Assistant Treasurer of Host in February 1998. He was Vice President
and Division Controller, Courtyard by Marriott/Fairfield Inn at Marriott
International from 1993 to 1994, served as Brand Executive, Courtyard by
Marriott at Marriott International from 1994 to 1995, served as Vice President
of Finance, Lodging-Reengineering Team Leader of Marriott International from
1995 to 1997 and was promoted to Vice President of Finance, Lodging-Asset
Management and Owner Relations of Marriott International in 1997 prior to his
joining Host in that year.
Bruce F. Stemerman. Mr. Stemerman, Executive Vice President--Asset
Management of the Company, joined Host in 1989 as Director--Partnership
Services. He was promoted to Vice President--Lodging Partnerships of Host in
1994 and became Senior Vice President--Asset Management of Host in 1996. Prior
to joining Host, Mr. Stemerman was with the public accounting firm of
PricewaterhouseCoopers LLP.
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Steven J. Fairbanks. Mr. Fairbanks, Executive Vice President, joined Host in
1996 as Vice President--Acquisitions. In 1997, he was elected Senior Vice
President--Acquisitions of Host. Prior to joining Host, he served as Vice
President of Capital Management and Development Corporation from 1992 until
1996. He had previously served as a principal with Eastbanc from 1988 to 1992.
Larry K. Harvey. Mr. Harvey, Senior Vice President and Corporate Controller
of the Company, joined Host in 1994 as Senior Manager--Corporate Accounting.
In 1995, Mr. Harvey was promoted to Director--Corporate Accounting of Host. He
was promoted to Senior Director--Corporate Accounting of Host in 1997 and Vice
President--Corporate Accounting of Host in 1998. Prior to joining Host, Mr.
Harvey was with the public accounting firm of PricewaterhouseCoopers LLP.
Tracy M. J. Colden. Ms. Colden, Senior Vice President, General Counsel and
Secretary of the Company, joined Host as an Attorney in 1996. She was promoted
to Senior Attorney of Host in June 1996 and became Assistant General Counsel
of Host in June 1997. Prior to joining Host, Ms. Colden was an attorney with
the law firm of Hogan & Hartson L.L.P.
Christopher J. Nassetta. Mr. Nassetta, a director of the Company, joined
Host in October 1995 as Executive Vice President and was elected Chief
Operating Officer of Host in 1997. Prior to joining Host, Mr. Nassetta served
as President of Bailey Realty Corporation from 1991 until 1995. He had
previously served as Chief Development Officer and in various other positions
with The Oliver Carr Company from 1984 through 1991.
Adam M. Aron. Mr. Aron, a director nominee of the Company, has held the
position of Chairman of the Board and Chief Executive Officer of Vail Resorts,
Inc. since July 1996. Prior to joining Vail Resorts, Inc., Mr. Aron served as
President and Chief Executive Officer of Norwegian Cruise Line Ltd. from 1993
until 1996. He had previously served as Senior Vice President--Marketing of
United Airlines from 1990 to 1993. Prior to joining United Airlines, Mr. Aron
was the Senior Vice President--Marketing for Hyatt Hotels Corporation from
1987 to 1990. Mr. Aron also currently serves on the Board of Directors of the
Sunterra Corporation and the Florsheim Group, Inc.
Louise M. Cromwell. Ms. Cromwell, a director nominee of the Company, has
served as Senior Counsel in the Real Estate Practice Group of Shaw, Pittman,
Potts & Trowbridge since January 1998. From April 1984 to December 1997, Ms.
Cromwell was a Partner at Shaw, Pittman. She currently acts as General Counsel
of Federal City Council. Ms. Cromwell is a member of the National Association
of Corporate Directors, The Greater Washington Board of Trade, Leadership
Washington and the Board of Directors of The Economic Club of Washington.
Kelvin L. Davis. Mr. Davis, a director nominee of the Company, has served as
President and Chief Operating Officer of Colony Capital, Inc. and Colony
Advisors, Inc., international real estate investment and management firms,
since August 1997, and has served in various other capacities with these
companies since 1991. Prior thereto, Mr. Davis served as a principal of RMB
Realty, Inc., the real estate development vehicle of Robert M. Bass. Prior to
his affiliation with RMB Realty, Inc., Mr. Davis worked at Goldman, Sachs &
Co. in New York City and with Trammell Crow Company in Dallas and Los Angeles.
John W. Marriott, III. Mr. Marriott, a director nominee of the Company,
became Senior Vice President of Marriott International's Mid Atlantic Region
in June 1996. Since 1993, Mr. Marriott has held successive positions as
Director of Finance in Marriott International's Treasury Department, Director
of Finance in Host's Finance and Development Department and Vice President,
Lodging Development for The Ritz-Carlton Hotel Company LLC. In 1989, Mr.
Marriott served as Executive Assistant to the Chairman of Host, J.W. Marriott,
Jr., who is his father. He has also held positions as Director of Corporate
Planning, Finance, Director of Marketing for a hotel and General Manager. He
joined Marriott Corporation in 1986 as a Sales Manager and subsequently served
as a Restaurant Manager and as Director of Food and Beverages. Mr. Marriott
serves on the Board of Directors of Sodexho Marriott Services, Inc.
John B. Morse, Jr. Mr. Morse, a director nominee of the Company, has held
the position of Vice President, Finance, and Chief Financial Officer of The
Washington Post Company since 1989. Prior to holding such position, Mr. Morse
served as Vice President and Controller of The Washington Post Company from
July 1989 to November 1989. Mr. Morse also currently serves as the President
of Washington Post
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Telecommunications, Inc. and Washington Post Productions, Inc., subsidiaries
of The Washington Post Company. Prior to joining The Washington Post Company,
Mr. Morse was a Partner with the public accounting firm of
PricewaterhouseCoopers LLP.
Michael A. Wildish. Mr. Wildish, a director nominee of the Company, has been
a Managing Director in the investment firm of Donaldson, Lufkin & Jenrette
since 1997. Prior to joining Donaldson, Lufkin & Jenrette, Mr. Wildish worked
in the investment firm of Lazard Freres & Co. LLC, where he served as a
General Partner from 1996 to 1997, as Vice President from 1992 to 1995 and as
an Associate from 1989 to 1991. Prior to joining Lazard Freres & Co. LLC, Mr.
Wildish served as an Associate with the firm of Goldman, Sachs & Co. from 1986
to 1989.
Upon completion of the Distribution, the Board of Directors will be divided
into three classes, each consisting of approximately one-third of the total
number of directors. At the Distribution Date, there will be eight directors.
Class I directors, consisting of Louise M. Cromwell, John W. Marriott, III and
Bruce D. Wardinski, will hold office until the 1999 annual meeting of
stockholders; Class II directors, consisting of Adam M. Aron, Christopher J.
Nassetta and Michael A. Wildish, will hold office until the 2000 annual
meeting of stockholders; and Class III directors, consisting of Kelvin L.
Davis and John B. Morse, will hold office until the 2001 annual meeting of
stockholders.
COMMITTEES OF THE BOARD OF DIRECTORS
Promptly following consummation of the Distribution, the Board of Directors
of the Company will establish the following committees:
Executive Committee. The Executive Committee will possess and may exercise
all the authority and powers of the Board in the management of the business
and affairs of the Company, except those reserved to the Board by the DGCL.
The Executive Committee will consist of four members: Messrs. Davis, Marriott,
Nassetta and Wardinski. Mr. Wardinski will be Chairman of the Executive
Committee.
Audit Committee. The Audit Committee will recommend to the Board of
Directors appointment of independent auditors; approve the scope of audits and
other services to be performed by the independent and internal auditors;
consider whether the performance of any professional service by the auditors
other than services provided in connection with the audit function could
impair the independence of the outside auditors; and review the results of
internal and external audits, the accounting principles applied in financial
reporting and financing and operational controls. The Audit Committee will
consist of three members: Messrs. Davis and Morse and Ms. Cromwell. Mr. Morse
will be the Chairman of the Audit Committee.
Compensation Policy Committee. The Compensation Policy Committee's functions
will include recommendations on policies and procedures relating to senior
officers' compensation and various stock plans, and approval of individual
salary adjustments and stock awards in those areas. The Compensation Policy
Committee will consist of three members, Messrs. Aron, Morse and Wildish. Mr.
Wildish will be the Chairman of the Compensation Policy Committee.
Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee will consider candidates for election as directors and
will be responsible for keeping abreast of, and making recommendations with
regard to, corporate governance. In addition, the Nominating and Corporate
Governance Committee will advise the Board of Directors on a range of matters
affecting the Board of Directors and its committees, including qualification
of director candidates, compensation of directors, selection of committee
chairs, committee assignments and related matters. The Nominating and
Corporate Governance Committee will consist of three members: Messrs. Aron and
Wildish and Ms. Cromwell. Ms. Cromwell will be the Chairperson of the
Nominating and Corporate Governance Committee.
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EXECUTIVE COMPENSATION
None of the Company's executive officers has received compensation from or
on behalf of the Company since its inception. The 1999 salaries expected to be
paid to the Company's Chief Executive Officer and each of the other four most
highly compensated executive officers whose salary and bonus is expected to
exceed $100,000 for that year are as follows: Mr. Wardinski--$450,000; Mr.
Francis--$275,000; Mr. Fairbanks--$200,000; Mr. Stemerman--$200,000; and Mr.
Harvey--$160,000. These executive officers also are expected to be eligible to
receive bonuses in 1999 under the Performance-Based Annual Incentive Bonus
Plan (described below) to be established by the Company in connection with the
Distribution of up to $337,500; $137,500; $100,000; $100,000; and $80,000,
respectively. In addition, concurrently with completion of the Distribution,
these executive officers are expected to receive restricted stock awards under
the 1998 Comprehensive Stock Incentive Plan to be established by the Company
in connection with the Distribution totaling 325,000 shares; 105,000 shares;
50,000 shares; 50,000 shares; and 40,000 shares, respectively. Approximately
30% of the restricted stock awards will vest over a three-year period. The
remaining 70% will be performance-based. See "Employee Benefit Plans."
COMPENSATION OF DIRECTORS
Directors who are also officers of the Company will receive no additional
compensation for their services as directors. Directors elected by the holders
of the Company's Common Stock who are not officers will receive an annual
retainer fee of $25,000 as well as an attendance fee of $1,250 for each
stockholders' meeting, meeting of the Board of Directors or meeting of a
committee of the Board of Directors, regardless of the number of meetings held
on a given day. The chair of each committee of the Board of Directors will
receive an annual additional retainer fee of $1,000. Any individual director
receiving these fees may elect to defer payment of all such fees or any
portion thereof pursuant to the Company's Executive Deferred Compensation Plan
and/or the Company's Non-Employee Directors' Deferred Stock Compensation Plan.
Under the Company's Non-Employee Directors' Deferred Stock Compensation Plan,
each non-employee director will receive an annual director stock award of 500
shares of Common Stock to the extent eligible for such award. Directors also
will be reimbursed for travel expenses and other out-of-pocket costs incurred
in attending meetings or in visiting Marriott or other hotel properties or
Communities controlled by the Company, Host REIT or Marriott International.
Non-Employee Directors' Plan. The Company will establish the Company Non-
Employee Directors' Deferred Stock Compensation Plan (the "Non-Employee
Directors' Plan") for purposes of attracting and retaining qualified non-
employee directors. The Company will reserve 70,000 shares of Common Stock for
issuance under the Non-Employee Directors' Plan. Under the terms of the Non-
Employee Directors' Plan, a non-employee director may elect to defer payment
of part or all of his director's fees from the Company until such individual
is no longer a member of the Board. In addition, the Non-Employee Directors'
Plan provides for annual grants of 500 shares of Common Stock, effective
following each annual meeting of the shareholders of the Company commencing
with the annual meeting in 1999. Non-employee directors may elect to receive
payment of their benefits under the Non-Employee Directors' Plan in Common
Stock paid in lump sum or annual installments.
EMPLOYEE BENEFIT PLANS
Employee Benefits and Other Employment Matters Allocation Agreement. Prior
to the Distribution Date, the Company and Host will enter into an Employee
Benefits and Other Employment Matters Allocation Agreement ("Benefits
Allocation Agreement"). The Benefits Allocation Agreement will govern the
allocation of responsibilities with respect to various compensation, benefits
and labor matters. The Benefits Allocation Agreement is expected to provide
that effective on the Distribution Date the Company (or one of its
subsidiaries) will assume from Host certain liabilities relating to covered
benefits and labor matters with respect to individuals who were employed by
Host (or one of its subsidiaries) before the Distribution Date who will be
employed by the Company (or one of its subsidiaries) on or after the
Distribution Date (the "Transferred Employees"). The Benefits Allocation
Agreement is expected to require Host to transfer, as soon as administratively
practicable after the Distribution, the account balances of Transferred
Employees under the Host Marriott Corporation
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(HMC) Retirement and Savings Plan to the Company Retirement and Savings Plan
(described below). The Benefits Allocation Agreement is expected to provide
that the Company will assume from Host, all liabilities and obligations of
Host for the accrued benefits of Transferred Employees under Host's Executive
Deferred Compensation Plan.
Additionally, the Benefits Allocation Agreement is expected to govern the
treatment of awards held by Transferred Employees under the Host Marriott
Corporation 1997 Comprehensive Stock Incentive Plan (the "Host Stock Plan").
The Benefits Allocation Agreement is expected to provide that all unexercised
options held by Transferred Employees under the Host Stock Plan as of the
Distribution Date will be converted into options for Common Stock of the
Company ("substituted options"). The exercise price and number of shares of
Common Stock of the Company covered by the converted options is expected to
preserve the Aggregate Spread (as defined in the Benefits Allocation
Agreement) immediately before the conversion. It is expected that under the
Benefits Allocation Agreement, Transferred Employees who hold restricted share
awards pursuant to the Host Stock Plan will receive, as part of the
Distribution and in accordance with the terms of the Host Stock Plan, one
restricted share of Common Stock for each 10 restricted shares of Host common
stock. Additionally, the Benefits Allocation Agreement is expected to provide
that the deferred stock awards of Transferred Employees will be converted into
awards of Common Stock with an Aggregate Value (determined under the Benefits
Allocation Agreement) equal to the value before the conversion.
Comprehensive Stock Incentive Plan. The Company will establish the 1998
Comprehensive Stock Incentive Plan for purposes of attracting and retaining
highly qualified employees. The terms of the 1998 Comprehensive Stock
Incentive Plan will be substantially similar to the Host Stock Plan, as in
effect before the Distribution Date. The Company will reserve 4,000,000 shares
of Common Stock for issuance under the Comprehensive Stock Incentive Plan. The
1998 Comprehensive Stock Incentive Plan will be administered by the
Compensation Policy Committee of the Board. The Compensation Policy
Committee's responsibilities in administering the 1998 Comprehensive Stock
Incentive Plan are to take actions authorized by the 1998 Comprehensive Stock
Incentive Plan or reasonably necessary to carry out its purposes. The
Compensation Policy Committee is also authorized to interpret the 1998
Comprehensive Stock Incentive Plan, and its decisions, determinations and
interpretations are final and binding.
Under the terms of the 1998 Comprehensive Stock Incentive Plan, the
Compensation Policy Committee may award eligible full-time employees (i)
options to purchase Common Stock, (ii) deferred Common Stock, (iii) restricted
Common Stock, (iv) stock appreciation rights ("SARs"), (v) special recognition
awards or (vi) other equity-based awards, including but not limited to phantom
Common Stock, performance-based Common Stock, bonus Common Stock or similar
securities or rights. All grants under the Comprehensive Stock Incentive Plan
will be for Common Stock.
Options (other than options covered by the Benefits Allocation Agreement)
granted to officers and key employees will have an exercise price of not less
than the fair market value on the date of grant. Incentive stock options
granted under the 1998 Comprehensive Stock Incentive Plan will expire no later
than ten years after the date of grant and non-qualified stock options will
expire no later than 15 years after the date of grant. Under the terms of the
Comprehensive Stock Incentive Plan, the Compensation Policy Committee may
award deferred Common Stock to eligible full-time employees. Deferred Common
Stock may be granted as part of a bonus award or deferred stock agreement.
Deferred Common Stock will generally vest over ten years in annual
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installments commencing one year after the date of grant. The 1998
Comprehensive Stock Incentive Plan also provides for the issuance of
restricted shares of Common Stock to officers and key executives to generally
be distributed over three or five years in annual installments based on
continued employment and the attainment of certain performance criteria.
Under the terms of the 1998 Comprehensive Stock Incentive Plan, the
Compensation Policy Committee may grant bonus awards to eligible full-time
employees. Bonus awards may be part of a management incentive program which
pays part of the annual performance bonus awarded to managers and other key
employees in shares of Common Stock. A bonus award entitles the holder to
receive a distribution of Common Stock in accordance with the underlying
agreement. Generally, holders of bonus awards vest in the shares covered by
their award over ten years in annual installments commencing one year after
grant. Unless the holder of a bonus award elects otherwise, vested shares are
distributed in ten consecutive, approximately equal, annual installments.
The 1998 Comprehensive Stock Incentive Plan authorizes the Compensation
Policy Committee to grant SARs to eligible full-time employees. SARs awarded
under the 1998 Comprehensive Stock Incentive Plan give the holder the right to
an amount equal to the appreciation in the value of the Common Stock over the
specified price. SARs may be paid in the Common Stock, cash or other form or
combination form of payout.
Under the 1998 Comprehensive Stock Incentive Plan, the Company also may
award an eligible full-time employee or officer a Special Recognition Award.
Special Recognition Awards may be paid in the form of Common Stock or an
option to purchase Common Stock at an amount not less than fair market value
on the date of grant.
Stock Purchase Plan. The Company will establish the Company Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Company will reserve 430,000
shares of Common Stock for issuance under the Stock Purchase Plan. The Stock
Purchase Plan will be available to any employee of the Company or a subsidiary
who: (i) is an active employee on January 1 of each calendar year, (ii) is
generally employed for more than five months in any calendar year, (iii) works
more than 20 or more hours per week and (iv) after the purchase of Common
Stock under the Stock Purchase Plan, would not own (or be deemed to own)
Common Stock possessing 5% or more of the total combined voting power or value
of all classes of stock of the Company or any subsidiary.
Executive Deferred Compensation Plan. Pursuant to the Benefits Allocation
Agreement, the Company is expected to establish the Company Executive Deferred
Compensation Plan (the "Executive Deferred Compensation Plan"). The following
individuals are eligible to participate in the Executive Deferred Compensation
Plan: (i) any employee of the Company who receives an annual compensation of
in excess of $120,000 or such other designated amount, (ii) any bonus eligible
employee with three years of service and annual compensation in excess of
$75,000, (iii) selected management employees of an acquired entity, (iv) any
employee of the Company whose benefits under the 401(k) Plan (described below)
for the prior plan year were reduced in accordance with the applicable limits,
(v) members of the Board or (vi) designated former participants. A participant
may generally elect to defer a portion of his compensation (or directors' fees
in the case of a member of the Board) under the Executive Deferred
Compensation Plan.
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Performance-Based Annual Incentive Bonus Plan. The Company intends to
establish a Performance-Based Annual Incentive Bonus Plan (the "Annual
Incentive Bonus Plan") to promote the Company's pay for performance philosophy
by providing executives with financial incentives to achieve key business and
individual performance objectives. The annual bonus payments for the Chief
Executive Officer and the other four most highly compensated executive
officers will be tied primarily to achievement of specific financial goals and
a smaller portion of the annual bonus is tied to the achievement of individual
and team objectives. All Annual Incentive Bonus Plan criteria will be set
annually and approved by the Compensation Policy Committee of the Board of
Directors.
Under the Annual Incentive Bonus Plan, goals and objectives will be
established for a minimum level, a target level and a maximum level of
performance. Actual performance will be measured relative to these levels for
each objective in order to determine the actual payout for each objective. No
payment will be made if performance fails to meet the minimum level for that
objective.
401(k) Plan. The Company will establish the Company Retirement and Saving
Plan (the "401(k) Plan"), in connection with the Distribution. The 401(k) Plan
will be available to all eligible employees. A participant may elect to
contribute from a portion of his or her compensation to the 401(k) Plan. The
Company may make a discretionary contribution (including a matching
contribution), in an amount, if any, determined annually by the Board, to the
401(k) Plan for the benefit of eligible employees. The 401(k) Plan is expected
to allow participants to elect to invest part or all of their 401(k) Plan
benefits in Common Stock. The Company has reserved 37,000 shares of Common
Stock for issuance under the 401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) acts committed in bad faith or active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The Company's Charter contains such a provision which
eliminates such liability to the maximum extent permitted by Maryland law.
In accordance with the MGCL, the Company's Charter and 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 party to the
proceeding by reason of his service in that capacity or (b) any individual
who, while a director or officer of the Company and at the request of the
Company, serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity, against any claim or
liability to which he may become subject by reason of such status. The MGCL
permits a corporation to indemnify its directors and officers, among others,
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceedings to which they may
be made a party by reason of their service in those or other capacities unless
it is established that (i) the act or omission of the director or officer was
material to the matter giving rise to the proceedings and (a) was committed in
bad faith or (b) was the result of active and deliberate dishonesty, (ii) the
director or officer actually received an improper personal benefit in money,
property or services or (iii) 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 MGCL, a Maryland corporation may not
indemnify for an adverse judgement in a suit by or in the right of the
corporation. In accordance with the MGCL, the Company's Bylaws 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 the Company as authorized by the
Company's Bylaws and (ii) a written statement by or on his behalf to repay the
amount paid or reimbursed by the Company if it shall ultimately be determined
that the standard of conduct was not met.
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INDEMNIFICATION AGREEMENTS
The Company intends to enter into separate indemnification agreements with
its directors and officers. The indemnification agreements will provide for,
among other things, that the Company 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.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AFTER THE DISTRIBUTION
Executive officers, directors and director nominees will receive shares of
Common Stock of the Company in the Distribution in respect of Host common
stock held by them on the Record Date. The Distribution will be made on the
basis of one share of Common Stock of the Company for every ten shares of Host
common stock held on the Record Date.
For purposes of providing an indication of the beneficial ownership of
certain persons following the Distribution, the following table sets forth the
number of shares of Common Stock of the Company that will be beneficially
owned immediately following the Distribution (assuming all outstanding Host
stock options are exercised prior to the Distribution), assuming a record date
of September 30, 1998 for this purpose, by (i) each person then serving as an
executive officer and director of the Company, (ii) all director nominees,
(iii) all directors, director nominees and executive officers of the Company
as a group and (iv) persons or entities owning 5% or more of the outstanding
shares of Host common stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF PERCENT
BENEFICIAL NUMBER OF OF
OWNER(1) SHARES(2) SHARES(3)
---------------- --------- ---------
<S> <C> <C>
Bruce D. Wardinski........................................ 16,172 *
James L. Francis.......................................... 11,136 *
Bruce F. Stemerman........................................ 4,389 *
Steven J. Fairbanks....................................... 1,159 *
Larry K. Harvey........................................... 592 *
Tracy M. J. Colden........................................ 221 *
Christopher J. Nassetta................................... 35,620 *
Adam M. Aron.............................................. 0 *
Louise M. Cromwell........................................ 0 *
Kelvin L. Davis........................................... 5,000 *
John W. Marriott, III(4).................................. 22,864 *
John B. Morse, Jr. ....................................... 0 *
Michael A. Wildish........................................ 0 *
J. W. Marriott, Jr. (5)................................... 1,327,501 5.3%
Richard E. Marriott(6).................................... 1,320,320 5.3
Blackstone Entities(7).................................... 4,370,000 17.6
Dresdner RCM Global Investors LLC(8)...................... 1,359,597 5.5
FMR Corp.(9).............................................. 2,253,257 9.1
Southeastern Asset Management, Inc.(10)................... 3,675,800 14.8
All Directors, Director Nominees and Executive Officers as
a Group (13 persons)..................................... 87,103 *
</TABLE>
- --------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is 10400
Fernwood Road, Bethesda, Maryland 20817.
(2) As of September 30, 1998, 204,602,476 shares of Host common stock were
outstanding. Assuming a record date of September 30, 1998 for purposes of
this table, such number of shares of Host common stock outstanding would
result in the distribution of approximately 20,450,000 shares of Common
Stock of the Company in the Distribution. An additional approximately
4,370,000 shares of Common Stock will be held by the Blackstone Entities
if the Blackstone Acquisition is consummated. The information in the table
assumes the Blackstone Acquisition is consummated. For purposes of this
table, a person is deemed to have "beneficial ownership" of the number of
shares of Common Stock of the Company that such person would have had the
right to acquire within 60 days of September 30, 1998 upon exercise of
options to purchase shares of Host common stock granted pursuant to Host's
stock incentive plans. The following number of Host shares can be acquired
by the named persons through the exercise of Host stock options
exercisable within 60 days of September 30, 1998: for
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Mr. Wardinski, 22,950; for Mr. Francis, 11,048; for Mr. Stemerman, 27,250;
for Mr. Fairbanks, 1,212; for Mr. Harvey, 4,450; for Ms. Colden, 1,200; for
J.W. Marriott, Jr., 810,447; and for Richard E. Marriott, 55,700.
(3) For purposes of computing the percentage of outstanding shares held by
each person, all shares of Host common stock that such person has the
right to acquire within 60 days pursuant to the exercise of options are
deemed to be outstanding, but are not deemed to be outstanding for the
purposes of computing the ownership percentage of any other person.
(4) Includes 1,442 shares held by Mr. Marriott as trustee for three trusts for
the benefit of his children, 1,917 shares owned by three trusts for the
benefit of his children in which his wife serves are co-trustee and 316
owned by his wife.
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(5) Includes: (i) 197,775 shares held in trust for which J.W. Marriott, Jr.
is the trustee or a co-trustee; (ii) 6,843 shares held by the wife of
J.W. Marriott, Jr.; (iii) 70,456 shares held in trust for which the wife
of J.W. Marriott, Jr. is the trustee or a co-trustee; (iv) 245,179 shares
held by the J. Willard Marriott Foundation of which J.W. Marriott, Jr. is
a co-trustee; (v) 270,759 shares held by a limited partnership whose
general partner is a corporation of which J.W. Marriott, Jr. is the
controlling stockholder; and (vi) 8,000 shares held by a limited
partnership whose general partner is J.W. Marriott, Jr.; does not include
shares held by the adult children of J.W. Marriott, Jr.; J.W. Marriott,
Jr. disclaims beneficial ownership of all such shares.
(6) Includes: (i) 187,471 shares held in trust for which Richard E. Marriott
is the trustee or a co-trustee; (ii) 6,822 shares held by the wife of
Richard E. Marriott; (iii) 60,383 shares held in trust for which the wife
of Richard E. Marriott is the trustee or a co-trustee; (iv) 245,179
shares held by the J. Willard Marriott Foundation of which Richard E.
Marriott is a co-trustee; and (v) 230,273 shares held by a corporation of
which Richard E. Marriott is the controlling stockholder; does not
include shares held by the adult children of Richard E. Marriott; Richard
E. Marriott disclaims beneficial ownership of all such shares.
(7) The Blackstone Entities constitute a series of affiliated partnerships.
Initially, a majority of the Common Stock received pursuant to the
Blackstone Acquisition will be held by such affiliated partnerships, but
it is expected that eventually they will be distributed by such
affiliated partnerships to their partners.
(8) Represents shares of Common Stock of the Company that would be held by
Dresdner RCM Global Investors LLC ("Dresdner RCM") and its affiliates,
RCM Limited L.P. ("RCM Limited") and RCM General Corporation ("RCM
General"), and by Dresdner Bank AG, of which Dresdner RCM is a wholly
owned subsidiary. Dresdner RCM has reported in a Schedule 13G under the
Exchange Act, filed with the Commission, sole dispositive power over
12,943,675 shares of Host common stock and shared dispositive power over
282,000 shares of Host common stock. Of these shares, Dresdner RCM has
reported sole voting power over 8,854,200 shares and does not share
voting power with respect to any shares. In addition, Dresdner Bank AG
has reported in a separate Schedule 13G under the Exchange Act, filed
with the Commission, sole dispositive and voting power over 370,300
shares of Host common stock, and such shares are included in the number
reported in this table. The principal business address of Dresdner RCM,
RCM Limited and RCM General is Four Embarcadero Center, San Francisco,
California 94111. The principal business address of Dresdner Bank AG is
Jurgen Ponto-Platz 1, 60301 Frankfurt, Germany.
(9) Represents the shares of Common Stock of the Company that would be held by
FMR Corp. ("FMR") and its subsidiaries, Fidelity Management Trust Company
("FMT") and Fidelity Management & Research Company ("FM&R"). FMR has
reported in a Schedule 13G under the Exchange Act filed with the
Commission, that FMR, through its control of FM&R and certain investment
funds for which FM&R acts as an investment adviser, has sole power to
dispose of 22,474,835 shares of Host common stock owned by such investment
funds, including the 15,610,500 shares of Host common stock (or 7.64% of
the total shares outstanding of Host common stock as of September 30,
1998) held by the Fidelity Magellen Fund. FMR has no power to vote or
direct the voting of the shares of Host common stock owned by the
investment funds, which power resides with the Board of Directors of such
investment funds. FMR, through its control of FMT and certain
institutional accounts for which FMT serves as investment manager, has
sole dispositive power over 57,739 shares, the sole power to vote or
direct the voting of 44,301 shares of Host common stock, and no power to
vote or direct the voting of 13,438 shares of Host common stock owned by
institutional accounts. The principal business address for FMR, FMT and
FM&R is 82 Devonshire Street, Boston, Massachusetts 02109.
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(10) Represents shares of Common Stock of the Company that are held by
Southeastern Asset Management, Inc. ("SAM"). SAM reported in a Schedule
13G under the Exchange Act, filed with the Commission, sole dispositive
power over 21,730,700 shares of Host common stock and shared dispositive
power over 14,968,300 shares of Host common stock. Of these shares, SAM
has reported sole voting power over 18,338,100 shares, shared voting
power over 14,968,300 and no power to vote 3,451,600 shares. The
principal business address of SAM is 6075 Poplar Avenue, Suite 900,
Memphis, Tennessee 38119.
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CERTAIN RELATIONSHIPS
In addition to entering into the Hotel Leases and related agreements, for
purposes of governing certain ongoing relationships between the Company and
Host after the Distribution and to provide for an orderly transition, the
Company and Host have entered into or will enter into: (i) a Distribution
Agreement, providing for, among other things, the Distribution and the
division between the Company and Host of certain assets and liabilities; (ii)
a Tax Sharing Agreement, pursuant to which the Company and Host would agree to
allocate tax liabilities that related to periods prior to the Distribution
Date; (iii) an Employee Benefits and Other Employment Matters Allocation
Agreement, providing for certain compensation, benefit and labor matters; (iv)
Asset Management Agreements, pursuant to which the Company would provide to
Host and its noncontrolled subsidiaries asset management services related to
Host's rights and responsibilities as owner of the hotels; (v) a Non-
Competition Agreement, pursuant to which the Company and Host would agree not
to engage in certain businesses; (vi) Guaranty Agreements, pursuant to which
the Company would guarantee a certain amount of the lease and related
management agreement obligations of the Company subsidiaries that will lease
or sublease hotels from Host REIT; (vii) a Pooling Agreement, pursuant to
which all leased full-service hotels would be separated into four identified
"pools" of hotels for purposes of calculating the amount of the guarantee; and
(viii) Corporate Transitional Services Agreement, pursuant to which Host would
provide certain limited administrative services to the Company. See "Business
and Properties--Relationship with Host after the Distribution." The terms of
the foregoing agreements were negotiated by the Company with Host, but because
the Company was a wholly owned subsidiary of Host at such time, such
negotiation may not necessarily have been on an arms-length basis and,
accordingly, may not necessarily reflect fair market terms.
Louise M. Cromwell, who is a director nominee and will become a director of
the Company in connection with the Distribution, is Senior Counsel in the Real
Estate Practice Group of Shaw, Pittman, Potts & Trowbridge in Washington, D.C.
Shaw, Pittman has been retained by the Company during 1998 to provide certain
real estate-related legal services to the Company for which the Company
expects to pay Shaw, Pittman legal fees totaling approximately $625,000.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of the Charter and Bylaws and by the provisions of
applicable law. Copies of the Charter and Bylaws are included as exhibits to
the Registration Statement of which this Prospectus is a part.
GENERAL
Upon completion of the Distribution, the Company's authorized capital stock
will consist of 85,000,000 shares, initially consisting of 75,000,000 shares
of Common Stock, par value $.01 per share (the "Common Stock"), and 10,000,000
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock").
The Board of Directors is authorized, without a vote of stockholders, to
classify or reclassify any unissued shares of capital stock and to establish
the preferences and rights of any preferred or other class or series of stock
to be issued. Upon completion of the Distribution, the Company will have
outstanding approximately 24,820,000 shares of Common Stock (assuming the
Blackstone Acquisition is consummated) and no outstanding shares of Preferred
Stock. All of the shares of Common Stock of the Company that will be
outstanding immediately following the Distribution will be validly issued,
fully paid and non-assessable.
COMMON STOCK
Subject to the provisions of the Charter regarding restrictions on the
transfer of shares of capital stock, each outstanding share of Common Stock of
the Company entitles the holder to one vote on all matters submitted to a vote
of stockholders, including the election of directors, and, except as provided
with respect to any other class or series of shares of capital stock, the
holders of shares of Common Stock of the Company will possess the exclusive
voting power. There is no cumulative voting in the election of directors,
which means that the holders of a majority of the outstanding Common Stock of
the Company can elect all of the directors then standing for election.
Subject to the preferential rights of any other classes or series of capital
stock and to the provisions of the Charter regarding restrictions on transfers
of shares of capital stock, holders of Common Stock of the Company are
entitled to receive distributions if, as and when authorized and declared by
the Board of Directors, out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the
Company.
Holders of shares of Common Stock of the Company have no preferences,
conversion, sinking fund, redemption rights or preemptive rights to subscribe
for any securities of the Company. Subject to the provisions of the Charter
regarding restrictions on transfer of shares of capital stock, shares of
Common Stock of the Company have equal distribution, liquidation and other
rights.
The Charter will authorize the Board of Directors to reclassify any unissued
shares of Common Stock of the Company into other classes or series of stock,
including preferred stock, and to establish the number of shares in each class
or series and to set the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption for each such class or
series.
PREFERRED STOCK
The Charter initially will authorize the Board of Directors to issue
10,000,000 shares of Preferred Stock and to classify or reclassify any
unissued preferred shares into one or more classes or series of stock,
including Common Stock of the Company. Prior to issuance of shares of any
class or series of stock other than Common Stock of the Company, the Board of
Directors is required, under the MGCL, to set, subject to the provisions of
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the Charter regarding the restriction on transfer of shares of capital stock,
the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such class or
series. Thus, the Board of Directors could authorize the issuance of Preferred
Stock or other stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of shares of Common
Stock of the Company or otherwise be in their best interest. As of the date
hereof, no shares other than Common Stock of the Company are outstanding, but
the Company may issue Preferred Stock or other stock in the future. Although
the Board of Directors has no intention at the present time of doing so (other
than in connection with the proposed Stockholders Rights Plan), it could
authorize the Company to issue a class or series of shares that could,
depending upon the terms of such class or series, delay, defer or prevent a
transaction or a change in control of the Company that might involve a premium
price for holders of shares of Common Stock of the Company or otherwise be in
their best interest.
POWER TO ISSUE ADDITIONAL COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock
and to classify or reclassify unissued Common Stock or Preferred Stock and
thereafter to cause the Company to issue such classified or reclassified
shares of stock in one or more classes or series will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the Common Stock of the Company, will be
available for issuance without further action by the Company's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may
be listed or traded.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Charter and the Bylaws contain, among other things, certain provisions
described below that may reduce the likelihood of a change in the Board of
Directors or voting control of the Company without the consent of the Board of
Directors. These provisions, together with certain provisions of Maryland law,
could have the effect of discouraging, delaying or preventing tender offers or
takeover attempts that some or a majority of the stockholders might consider
to be in the stockholders' best interest, including offers or attempts that
might result in a premium over the market price for the Common Stock.
Classified Board; Board Size Fixed Within a Range. The Charter will provide
that the Board of Directors initially will consist of eight members and may
thereafter be increased or decreased in accordance with the Bylaws, provided
that the total number of directors may not be fewer than three nor more than
thirteen. Pursuant to the Bylaws, the number of directors shall be fixed by
the Board of Directors within the limits set forth in the Charter. Further,
the Charter will provide that the Board of Directors will be divided into
three classes of directors, with each class to consist as nearly as possible
of an equal number of directors. At each annual meeting of stockholders, the
class of directors to be elected at such meeting will be elected for a three-
year term, and the directors in the other two classes will continue in office.
Because stockholders will have no right to cumulative voting for the election
of directors, at each annual meeting of stockholders of a majority of the
outstanding Common Stock will be able to elect all of the successors to the
class of directors whose term expires at that meeting.
Filling of Board Vacancies; Removal. Vacancies on the Board of Directors may
be filled by the concurring vote of a majority of the remaining directors and,
in the case of a vacancy resulting from the removal of a director by the
stockholders, by the stockholders by a least two-thirds of all the votes
entitled to be cast in the election of directors. Under Maryland law,
directors may fill any vacancy only until the next annual meeting of
stockholders. The Charter will provide that, except for any directors who may
be elected by holders of a class or series of stock other than the Common
Stock, directors may be removed only for cause and only by the affirmative
vote of stockholders holding at least two-thirds of all the votes entitled to
be cast for the election of directors.
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Stockholder Action by Unanimous Written Consent. Pursuant to the MGCL and
the Company's Bylaws, any action required or permitted to be taken by the
stockholders must be effected at a duly called annual or special meeting of
such holders, and may not be effected by any consent in writing by such
holders, unless such consent is unanimous.
Call of Special Meetings. The Company's Charter provides that special
meetings of the stockholders may be called by the President, the Board of
Directors of the Company or any other person specified in the Company's
Bylaws. The Company's Charter further provides that the Secretary of the
Company also is required to call a special meeting of the stockholders on the
written request of stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting. The Company's Bylaws contain similar
provisions to the Company's Charter regarding the calling of special
stockholder meetings. In addition, the Company's Bylaws provide that special
stockholder meetings may be called by the holders of any class or series of
stock having a preference over the Company's Common Stock as to dividends or
upon liquidation in the manner (if any) specified in articles supplementary
filed as part of the Company's Charter.
Advance Notice of Director Nominations and New Business. The Company's
Bylaws provide that (i) with respect to an annual meeting of stockholders,
nominations of persons for election to the Board of Directors and the proposal
of business to be considered by stockholders may be made only (a) pursuant to
the Company's notice of meeting, (b) by the Board of Directors or (c) by a
stockholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Company's Bylaws and (ii) with
respect to special meetings of the stockholders, only the business specified
in the Company's notice of meeting may be brought before the meeting of
stockholders and nominations of persons for election to the Board of Directors
may be made only (x) pursuant to the Company's notice of the meeting, (y) by
the Board of Directors or (z) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder
who is entitled to vote at the meeting and has complied with the advance
notice provisions set forth in the Bylaws. The advance notice provisions
contained in the Company's Bylaws generally require nominations and new
business proposals by stockholders to be delivered by the Secretary of the
Company not later than the close of business on the 60th day nor earlier than
the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting. Notwithstanding the foregoing, to be timely
for the 1999 annual meeting of stockholders, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th day prior to such
meeting or the tenth day following the day on which public announcement is
first made of the date of the 1999 annual meeting nor earlier than the close
of business on the 90th day before the date of such annual meeting.
Merger, Consolidation, Share Exchange and Transfer of Assets. Pursuant to
the Charter, subject to the terms of any class or series of stock at the time
outstanding, the Company may merge with or into another entity, may
consolidate with one or more other entities, may participate in a share
exchange or may transfer its assets within the meaning of the MGCL, but any
such merger, consolidation, share exchange or transfer of assets must be
approved (i) by the Board of Directors in the manner provided in the MGCL and
(ii) by the stockholders by the affirmative vote of two-thirds of all votes
entitled to be cast thereon to the extent a stockholder vote is required under
the MGCL to effect any such transaction. In general, such transactions by a
Maryland corporation, such as the Company, must first be approved by a
majority of the entire Board of Directors and thereafter approved by
stockholders by the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter (unless the charter provides for a greater or lesser
stockholder vote but not less than a majority of the number of votes entitled
to be cast on the matter). Under the MGCL, certain mergers may be accomplished
without a vote of stockholders. For example, no stockholder 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 stockholders of a Maryland successor corporation if
the merger does not reclassify or change the outstanding shares or otherwise
amend the 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. A share
exchange need be approved by a Maryland successor only by its Board of
Directors. Under the MGCL, a "transfer of assets" is defined to mean any sale,
lease, exchange or
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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 stockholders, 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. Pursuant to the MGCL, a voluntary dissolution
of the Company also would require the affirmative vote of two-thirds of al the
votes entitled to be cast on the matter.
Amendments to the Company's Charter and Bylaws. Under the MGCL, in order to
amend the charter, the board of directors first must adopt a resolution
setting forth the proposed amendment and declaring its
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advisability and direct that the proposed amendment be submitted to
stockholders for their consideration either at an annual or special meeting of
stockholders. Thereafter, the proposed amendment must be approved by
stockholders by the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter, unless a greater or lesser proportion of votes (but
not less than a majority of all votes entitled to be cast) is specified in the
charter. The provisions contained in the Company's Charter relating to
restrictions on transferability of shares of capital stock, the classified
Board and fixing the size of the Board within the range set forth in the
Charter, as well as the provisions relating to removal of directors and the
filling of Board vacancies may be amended only by a resolution adopted by the
Board of Directors and approved at an annual or special meeting of the
stockholders 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 the
Charter generally may be effected by requisite action of the Board of
Directors and approval by stockholders by the affirmative vote of not less
than a majority of the votes entitled to be cast on the matter. As permitted
under the MGCL, the Company's Bylaws provide that directors have the exclusive
right to amend the Bylaws. Amendment of this provision of the Charter also
would require Board action and approval by stockholders by not less than two-
thirds of all votes entitled to be cast on the matter.
Maryland Business Combination Law. Under the MGCL, unless an exemption is
available, certain "business combinations" (including certain issuances of
equity securities) between a Maryland corporation and any Interested
Stockholder or an affiliate of the Interested Stockholder are prohibited for
five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business combination
must be recommended by the Board of Directors and approved by the affirmative
vote of at least (i) 80% of all the votes entitled to be cast by holders of
the outstanding shares of voting stock and (ii) two-thirds of the votes
entitled to be cast by holders of voting stock other than voting stock held by
the Interested Stockholder who will (or whose affiliate will) be a party to
the business combination or any affiliate or associate of the Interested
Stockholder, voting together as a single voting group, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. A business combination that is approved by the board of directors
of a Maryland corporation at any time before an Interested Stockholder first
becomes an Interested Stockholder is not subject to the special voting
requirements. The Board of Directors of the Company has not opted out of the
business combination provisions of the MGCL. Consequently, the five-year
prohibition and the super-majority vote requirements will apply to a business
combination involving the Company (except as noted below); however, as
permitted by the MGCL, the Company's Board of Directors may elect to opt out
of these provisions in the future.
In connection with the Distribution, the Board of Directors has adopted a
resolution exempting from the operation of the "business combination" statute
transactions involving Host REIT and Marriott International, provided that any
such transaction with Marriott International that is not in the ordinary
course of business must be approved by a majority of the directors of the
Company present at a meeting at which a quorum is present, including a
majority of the disinterested directors, in addition to any vote of
stockholders required by other provisions of the MGCL.
Maryland Control Share Acquisition Law. Under the MGCL, "control shares"
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter, excluding shares owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares which, if aggregated with all other such shares previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power: (i) one-fifth or more but
less than one-third, (ii) one-third or more but less than a majority or (iii)
a majority or more of all voting power. Control shares do not include shares
the acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisitions of control shares, subject to certain exceptions.
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A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition.
The control share acquisition statute does not apply to (i) shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (ii) acquisitions or exempted by the charter or bylaws of
the corporation. The Board of Directors of the Company has not opted out of
the control share provisions of the MGCL but, as permitted by the MGCL, may
elect to opt out of these provisions in the future.
Stockholder Rights Plan. In connection with the Distribution, the Board of
Directors intends to adopt a Stockholder Rights Plan pursuant to a rights
agreement ("Rights Agreement") and declare a dividend of one preferred stock
purchase right (a "Right") for each outstanding share of Common Stock. All
Common Stock issued by the Company between the date of adoption of the Rights
Agreement and the Rights Distribution Date (as defined below), or the date, if
any, on which the Rights are redeemed will have Rights attached to them. It is
expected that the Rights will expire ten years after adoption of the Rights
Agreement, unless earlier redeemed or exchanged. Each Right, when exercisable,
would entitle the holder to purchase a fraction of a share of a newly created
series of junior preferred stock. Until a Right is exercised, the holder
thereof, as such, would have no rights as a stockholder of the Company
including, without limitation, the right to vote or to receive dividends.
The Rights Agreement is expected to provide that the Rights initially attach
to all certificates representing shares of Common Stock then outstanding. The
Rights will separate from the Common Stock and a distribution of Rights
certificates will occur (a "Rights Distribution Date") upon the earlier to
occur of (i) ten days following a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of Common Stock (the "Stock Acquisition Date") or (ii) ten
business days (or such later date as the Board of Directors may determine)
following the commencement of a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person of
20% or more of the outstanding shares Common Stock. Until the Rights
Distribution Date, the Rights would be evidenced by the Common Stock
certificates, and will be transferred with, and only with, the Common Stock
certificates.
It is expected that, if a person becomes the beneficial owner of 20% or more
of the then outstanding Common Stock (except pursuant to an offer for all
outstanding Common Stock which the directors by a two-thirds vote determine to
be fair to and otherwise in the best interests of the Company and its
stockholders), each holder of a Right would, after the end of a redemption
period, have the right to exercise the Right by purchasing Common Stock (or,
in certain circumstances, cash, property or other securities of the Company)
having a value equal to two times such amount.
If at any time following the Stock Acquisition Date, (i) the Company is
acquired in a merger or other business combination transaction in which it is
not the surviving corporation (other than a merger which follows an offer
described in the preceding paragraph), or (ii) 50% or more of the Company's
assets or earning power is sold or transferred, each holder of a Right would
have the right to receive, upon exercise, common shares of the
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acquiring company having a value equal to two times the purchase price of the
Right, subject to the Ownership Limit.
It is expected that, in general, the Board of Directors of the Company may
redeem the Rights at a normal price per Right at any time until ten days after
an Acquiring Person has been identified as such. If the decision to redeem the
Rights occurs after a person becomes an Acquiring Person, the decision would
require the concurrence of directors by a two-thirds vote.
The Rights will have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company. The Rights, however, will not interfere with any merger or other
business combination approved by the Board of Directors since the Board may,
at its option, at any time prior to any person becoming an Acquiring Person,
redeem all rights or amend the Rights Agreement to exempt the person from the
Rights Agreement.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For Host REIT to qualify as a REIT under the Code, Host REIT cannot own,
either directly or by attribution from one or more actual or constructive
owners of 10% or more of Host REIT, 10% or more of the Company or any other
tenant of Host REIT. In order to assist Host REIT in meeting this requirement,
the Company has adopted the Ownership Limit, which provides that no person or
persons acting as a group may own, or be deemed to own by virtue of certain
attribution provisions of the Code, more than (i) 9.8% of the lesser of the
number or value of shares of the Common Stock of the Company outstanding or
(ii) 9.8% of the lesser of the number or value of the issued and outstanding
preferred shares of any class or series of Company capital stock. The
ownership attribution rules under the Code are complex and may cause Common
Stock of the Company owned actually or constructively by a group of related
individuals and/or entities to be owned constructively by one individual or
entity. As a result, the acquisition of less than 9.8% of the Common Stock of
the Company (or the acquisition or ownership of an interest in an entity that
owns, actually or constructively, the Common Stock of the Company) by an
individual or entity, could, nevertheless, cause that individual or entity, or
another individual or entity, to own constructively in excess of 9.8% of the
outstanding Common Stock of the Company and thus subject such Common Stock of
the Company to the remedies' provisions under the Ownership Limit as described
below. The Board of Directors of the Company may grant an exemption from the
Ownership Limit with respect to a person if it determines that such ownership
will not cause the Company or any subsidiary of the Company that is a tenant
of Host REIT to be considered a "related party tenant" for purposes of the
REIT qualification rules, and Host REIT consents thereto. As a condition of a
waiver, the Board of Directors and Host REIT may require undertakings or
representations from the applicant with respect to such determination.
Pursuant to the terms of the Charter, the Ownership Limit will become
effective as of the Distribution Date. A person who would exceed the Ownership
Limit solely by reason of the receipt of shares of Common Stock of the Company
in the Distribution is excepted from the Ownership Limit to the extent that
such person holds such shares. Any person who acquires or attempts or intends
to acquire actual or constructive ownership of shares of Company capital stock
that will or may violate the Ownership Limit is required to give notice
immediately to the Company and Host REIT and provide the Company and Host REIT
with such other information as the Company and Host REIT may request in order
to determine the effect of such transfer on Host REIT's status as a REIT.
If any purported transfer of shares of Company capital stock or any other
event would otherwise result in any person violating the Ownership Limit, then
any such purported transfer will be void and of no force or effect with
respect to the purported transferee (the "Prohibited Transferee") as to that
number of shares that exceeds the Ownership Limit (referred to as "excess
shares") and the Prohibited Transferee shall acquire no right or interest (or,
in the case of any event other than a purported transfer, the person or entity
holding record title to any such shares in excess of the Ownership Limit (the
"Prohibited Owner") shall cease to own any right or interest) in such excess
shares. Any such excess shares described above will be transferred
automatically, by operation of law, to a trust, the beneficiary of which will
be a qualified charitable organization selected by the
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Company (the "Beneficiary"). Such automatic transfer shall be deemed to be
effective as of the close of business on the Business Day (as defined in the
Charter) prior to the date of such violating transfer. Within 20 days of
receiving notice from the Company of the transfer of shares to the trust, the
trustee of the trust (who shall be designated by the Company and be
unaffiliated with the Company or Host REIT and any Prohibited Transferee or
Prohibited Owner) will be required to sell such excess shares to a person or
entity who could own such shares without violating the Ownership Limit, and
distribute to the Prohibited Transferee an amount equal to the lesser of the
price paid by the Prohibited Transferee for such excess shares or the sales
proceeds received by the trust for such excess shares. In the case of any
excess shares resulting from any event other than a transfer, or from a
transfer for no consideration (such as a gift), the trustee will be required
to sell such excess shares to a qualified person or entity and distribute to
the Prohibited Owner an amount equal to the lesser of the fair market value of
such excess shares as of the date of such event or the sales proceeds received
by the trust for such excess shares. In either case, any proceeds in excess of
the amount distributable to the Prohibited Transferee or Prohibited Owner, as
applicable, will be distributed to the Beneficiary. Prior to a sale of any
such excess shares by the trust, the trustee will be entitled to receive, in
trust for the Beneficiary, all dividends and other distributions paid by the
Company with respect to such excess shares, and also will be entitled to
exercise all voting rights with respect to such excess shares. Subject to
Maryland law, effective as of the date that such shares are transferred to the
trust, the trustee shall have the authority (at the trustee's sole discretion
and subject to applicable law) (i) to rescind as void any vote cast by a
Prohibited Transferee prior to the discovery by the Company that such shares
have been transferred to the trust and (ii) to recast such vote in accordance
with the desires of the trustee acting for the benefit of the Beneficiary.
However, if the Company has already taken irreversible corporate action, then
the trustee shall not have the authority to rescind and recast such vote. Any
dividend or other distribution paid to the Prohibited Transferee or Prohibited
Owner (prior to the discovery by the Company that such shares had been
automatically transferred to a trust as described above) will be required to
be repaid to the trustee upon demand for distribution to the Beneficiary. The
Charter provides that if the transfer to the trust as described above is not
automatically effective (for any reason) to prevent violation of the Ownership
Limit, the transfer of the excess shares will be void. In addition, shares of
Company capital stock held in the trust shall be deemed to have been offered
for sale to the Company, or its designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in such
transfer to the trust (or, in the case of a devise or gift, the market value
at the time of such devise or gift) and (ii) the market value of such shares
on the date the Company, or its designee, accepts such offer. The Company will
have the right to accept such offer until the trustee has sold the shares held
in the trust. Upon such a sale to the Company, the interest of the Beneficiary
in the shares sold will terminate and the trustee will distribute the net
proceeds of the sale to the Prohibited Owner.
The Ownership Limit will not apply if (i) Host REIT no longer qualifies as a
REIT, (ii) Host REIT determines that it is no longer in the best interests of
Host REIT to attempt to qualify, or continue to qualify, as a REIT or (iii)
the Company determines, and Host REIT concurs, that Host REIT derives less
than 1% of its gross income pursuant to the Hotel Leases. All certificates
representing shares of Company capital stock shall bear a legend referring to
the restrictions described above. These ownership limitations could have the
effect of delaying, deferring or preventing a takeover or other transaction in
which holders of some, or a majority, of Common Stock of the Company might
receive a premium for their Common Stock over the then prevailing market price
or which such holders might believe to be otherwise in their best interest.
REGISTRATION RIGHTS AGREEMENT
The Company has granted the Blackstone Entities certain registration rights
with respect to the shares of the Common Stock of the Company to be
transferred to them by Host REIT as a portion of the consideration in the
Blackstone Acquisition. While these registration rights require the Company to
file a registration statement covering all such shares by April 30, 1999, the
Blackstone Entities may only offer for sale (i) up to 50% of such shares
beginning July 1, 1999, (ii) an additional 25% of the shares beginning October
1, 1999 and (iii) the remaining 25% of the shares beginning January 1, 2000.
In addition the Company has granted certain piggyback registration rights to
the Blackstone Entities allowing them to participate in registered offerings
by the Company or other shareholders. The Company will bear expenses incident
to its registration requirements under the
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registration rights agreement, except that such expenses shall not include any
underwriting discounts or commissions or transfer taxes, if any, relating to
such shares.
TRANSFER AGENT AND REGISTRAR
The Transfer agent and the Registrar for the Common Stock is Bank of New
York.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the Distribution could adversely affect the prevailing market price of the
Common Stock and the Company's ability to raise capital in the future. Upon
completion of the Distribution, the Company will have a total of approximately
24,820,000 shares of Common Stock outstanding assuming the Blackstone
Acquisition is consummated (approximately 20,450,000 shares if the Blackstone
Acquisition is not consummated), of which approximately 20,375,000 shares will
be freely tradable without restriction under the Securities Act by persons
other than "affiliates" of the Company, as defined under the Securities Act.
The remaining approximately 4,370,000 shares of Common Stock outstanding
representing the shares to be transferred by Host REIT to the Blackstone
Entities if the Blackstone Acquisition is consummated, will be "restricted
securities" as that term is defined by Rule 144 promulgated under the
Securities Act.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned restricted
shares for at least one year is entitled to sell, within any three-month
period, a number of such shares that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock or (ii) the average
weekly trading volume in the Common Stock on the NYSE during the four calendar
weeks preceding the date on which notice of such sale is filed, provided
certain requirements concerning availability of public information, manner of
sale and notice of sale are satisfied. In addition, affiliates must comply
with the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, in order to sell shares of Common Stock that are
not restricted securities. Under Rule 144(k), a person who is not an affiliate
and has not been an affiliate for at least three months prior to the sale and
who has beneficially owned restricted shares for at least two years may resell
such shares without compliance with the foregoing requirements. In meeting the
one-year and two-year holding periods described above, a holder of restricted
shares can include the holding periods of a prior owner who was not an
affiliate. The one-year and two-year holding periods described above do not
begin to run until the full purchase price or other consideration is paid by
the person acquiring the restricted shares from the issuer or an affiliate.
If the Blackstone Acquisition is consummated by Host REIT, the Blackstone
Entities will have certain registration rights with respect to approximately
18% of the outstanding shares of Common Stock of the Company. If such holders
cause a large number of shares to be sold in the public market, such sales
could have an adverse effect on the trading price of the Common Stock. In
addition, if the Company is required, pursuant to such registration rights, to
include shares held by such persons in any registration statement that the
Company files to raise additional capital, the inclusion of such shares could
have an adverse effect on the Company's ability to raise needed capital.
Following the Distribution, the Company intends to register on one or more
registration statements on Form S-8 under the Securities Act the shares of
Common Stock issuable under the Company's stock option and other employee
benefit plans for directors, officers and employees of the Company and its
subsidiaries. Of the 4,537,000 shares to be reserved for issuance under these
plans, approximately 630,000 shares will be subject to stock options or
restricted stock expected to be granted by the Company concurrently upon
completion of the Distribution. Officers and employees of Host who become
officers and employees of the Company at the time of the Distribution also
will have their existing awards held under the Host stock option and alter
benefit plans converted into awards for Common Stock in accordance with the
terms of the Employee Benefits and Other Employment Matters Allocation
Agreement to be entered into by Host and the Company. See "Management--
Employee Benefit Plans--Comprehensive Stock Incentive Plan" and "Description
of Capital Stock--Registration Rights Agreement."
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FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION
The following discussion summarizes the federal income tax consequences
reasonably anticipated to be material to Host Stockholders in connection with
the Distribution. The following discussion is intended to address only those
federal income tax consequences that are generally relevant to all Host
Stockholders. Accordingly, it does not discuss all aspects of federal income
taxation that might be relevant to a specific Host Stockholder in light of his
particular investment or tax circumstances. Therefore, it is imperative that a
common stockholder of Host review the following discussion and consult with
his or her own tax advisors to determine the interaction of his individual tax
situation with the anticipated tax consequences of the Distribution.
The following discussion provides general information only, is not
exhaustive of all possible tax considerations and is not intended to be (and
should not be construed as) tax advice. For example, this summary does not
give a detailed description of any state, local or foreign tax considerations.
In addition, the discussion does not purport to deal with all aspects of
taxation that may be relevant to a Host Stockholder subject to special
treatment under the federal income tax laws, including, without limitation,
insurance companies, financial institutions or broker-dealers, tax-exempt
organizations (except to the extent discussed under the heading "Tax
Consequences of the Distribution to Tax-Exempt Host Stockholders") or foreign
corporations and persons who are not citizens or residents of the United
States (except to the extent discussed under the heading "Tax Consequences of
the Distribution to Non-U.S. Host Stockholders").
The information in this section is based on the Code, current, temporary and
proposed Treasury Regulations thereunder, the legislative history of the 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, Treasury 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 (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged. Neither Host nor Host
REIT has requested or plans to request any rulings from the IRS concerning the
tax consequences of the Distribution.
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to Crestline and Host,
has delivered an opinion to Crestline that the discussion under the heading
"Federal Income Tax Consequences," to the extent that it contains descriptions
of federal income tax law, is correct in all material respects. A copy of the
opinion is included as an Exhibit to the Registration Statement of which this
Prospectus is a part. The opinion does not address the actual tax consequences
of the Distribution to the Host Stockholders. In particular, it does not
address the fair market value of the Distribution or the amount of the current
and accumulated earnings and profits of Host and Host REIT, both of which are
relevant to determining the actual tax consequences of the Distribution to the
Host Stockholders.
The opinion is based on the Code and Treasury 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, Treasury Regulations, administrative interpretations or court
decisions will not significantly change the law or the above conclusion
reached by counsel. Any such change could apply retroactively. In addition, an
opinion of counsel merely represents counsel's best judgement with respect to
the probable outcome on the merits and is not binding on the IRS or the
courts. Accordingly, even if there is no change in the applicable law, no
assurance can be provided that the above opinion will not be challenged by the
IRS or sustained by a court if so challenged.
130
<PAGE>
The following discussion is not intended to be, and should not be construed
by a Host Stockholder as, tax advice. THE SPECIFIC TAX ATTRIBUTES OF A
PARTICULAR HOST STOCKHOLDER COULD HAVE A MATERIAL IMPACT ON THE TAX
CONSEQUENCES OF THE DISTRIBUTION. THEREFORE, IT IS ESSENTIAL THAT EACH HOST
STOCKHOLDER CONSULT WITH HIS OR HER OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH STOCKHOLDER'S PARTICULAR
TAX SITUATION, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY
STATE, LOCAL OR FOREIGN TAXING JURISDICTION. THE FOLLOWING DISCUSSION IS NOT
INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Tax Consequences of the Distribution to U.S. Host Stockholders. As used
herein, the term "U.S. Host Stockholder" means a Host Stockholder who (for
United States federal income tax purposes) is (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source, or (iv) a
trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
A U.S. Host Stockholder will include the fair market value of his or her
share of the Distribution on the Distribution Date in gross income as ordinary
income (to the extent that the Distribution is considered made out
131
<PAGE>
of the U.S. Host Stockholder's share of the portion of the current and
accumulated E&P of Host and Host REIT through the end of 1998 allocable to the
Distribution). The fair market value of the Distribution will equal the sum of
(i) the fair market value (on the Distribution Date) of the Common Stock that
he or she receives in the Distribution, plus (ii) the amount of any cash he or
she receives in lieu of fractional shares of Common Stock. Host currently
estimates that the fair market value of the Distribution will be approximately
$ per share of Host common stock. No assurance can be provided that this
estimate will be accurate. If the fair market value of the Distribution on the
Distribution Date is greater than Host's current estimate, then a U.S. Host
Stockholder will include the additional amount in gross income as ordinary
income to the extent of the U.S. Host Stockholder's share of the portion of
the current and accumulated E&P of Host and Host REIT through the end of 1998
allocable to the Distribution. In this regard, it should be noted that federal
income tax law does not provide definitive guidance regarding the
determination of the fair market value of publicly traded securities (which
the Common Stock will be on the Distribution Date). Several courts have held
that the fair market value of such securities for federal income tax purposes
equals the average of the high and low sales prices of such securities on the
date of determination, and Host intends to take this position, but there can
be no assurance that the IRS would not seek to establish a different fair
market value for the Common Stock (e.g., the final sales price of the Common
Stock on the New York Stock Exchange on the Distribution Date).
Host and Host REIT currently believe that the entire Distribution will be
considered made out of the portion of Host and Host REIT's current and
accumulated E&P through the end of 1998 allocable to the Distribution. The
calculation of such earnings and profits, however, is very complex. The amount
will include (i) the allocated consolidated E&P of Host (including each of its
predecessors) accumulated from 1929, the first year that the predecessor of
Host was a "C" corporation, through and including Host's 1998 taxable year,
and (ii) the current E&P of Host and Host REIT in 1998. In addition, the
calculation depends upon a number of factual and legal interpretations related
to the activities and operations of Host and its corporate affiliates during
its entire corporate existence and is subject to review and challenge by the
IRS. There can be no assurance that Host and Host REIT's calculation of this
E&P will be respected by the IRS or that a challenge to such calculation by
the IRS would not be sustained by a court. Hogan & Hartson L.L.P. will express
no opinion as to the amount of the current and accumulated E&P of Host and
Host REIT.
In the event that the fair market value of the Distribution received by a
U.S. Host Stockholder exceeds his or her share of the portion of Host and Host
REIT's current and accumulated E&P through the end of 1998 allocable to the
Distribution, the Distribution will be treated first as a tax-free return of
capital to such U.S. Host Stockholder, reducing the adjusted basis in his or
her Host common stock by the amount of such excess (but not below zero) and
then, if such basis is reduced to zero and there is remaining excess, as
capital gain to the extent of such remaining excess (provided that such Host
Stockholder has held the Host common stock as a capital asset).
A U.S. Host Stockholder's initial tax basis in the Common Stock received in
the Distribution will equal the fair market value of such stock on the
Distribution Date. A U.S. Host Stockholder's holding period in the stock will
begin on the day after the Distribution Date.
Backup Withholding for the Distribution. Under the backup withholding rules,
a U.S. Host Stockholder may be subject to backup withholding at the rate of
31% with respect to the Distribution unless such stockholder (1) is a
corporation or comes within another exempt category and, when required,
demonstrates this fact or (2) 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.
Host Stockholder that does not provide Host with a correct taxpayer
identification number also may be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the U.S. Host
Stockholder's income tax liability. See "--Tax Consequences of the
Distribution to Non-U.S. Host Stockholders."
Tax Consequences of the Distribution to Tax-Exempt Host
Stockholders. Provided that a tax-exempt Host Stockholder (except certain tax-
exempt Host Stockholders) has not held its Host common stock as "debt financed
property" within the meaning of the Code and such Host common stock is not
otherwise used in a trade or
132
<PAGE>
business, the Distribution will not constitute unrelated business taxable
income ("UBTI"). For a tax-exempt Host 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 Code Sections 501 (c)(7), (c)(9), (c)(17) or (c)(20),
respectively, the Distribution 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. Such
Host Stockholders should consult their own tax advisors concerning these "set
aside" and reserve requirements.
Tax Consequences of the Distribution to Non-U.S. Host Stockholders. A Host
Stockholder that is a nonresident alien individual, foreign corporation,
foreign partnership or foreign estate or trust (collectively, a "Non-U.S. Host
Stockholder") will include the fair market value of his or her share of the
Distribution on the Distribution Date in gross income as ordinary income to
the extent that the Distribution is considered made out of the portion of the
current and accumulated E&P of Host and Host REIT through the end of 1998
allocable to the Distribution. For a discussion regarding the fair market
value of the Distribution and the extent to which the Distribution will be
attributable to such E&P, see "--Tax Consequences of the Distribution to U.S.
Host Stockholders" above.
For Non-U.S. Host Stockholders, the Distribution 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 it is treated as
effectively connected with the conduct by the Non-U.S. Host Stockholder of a
United States trade or business. Certain certification and disclosure
requirements must be satisfied to be exempt from withholding under the
effectively connected income exemption. If the Distribution is effectively
connected with a United States trade or business, a Non-U.S. Host Stockholder
will be subject to tax on the Distribution on a net basis (that is, after
allowance of deductions) at graduated rates, in the same manner as U.S. Host
Stockholders are taxed with respect to the Distribution and generally will not
be subject to withholding. A Non-U.S. Host Stockholder that is a corporation
also may be subject to an additional branch profits tax on the Distribution at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty. Host expects to withhold United States income tax at the rate of 30%
on any distribution made to a Non-U.S. Host Stockholder unless (i) a lower
treaty rate applies and any required form or certification evidencing
eligibility for that lower rate is filed with Host or (ii) a Non-U.S. Host
Stockholder files an IRS Form 4224 with Host claiming that the Distribution is
effectively connected income. The Company anticipates that any such
withholding taxes will have the effect of reducing the number of shares of
Common Stock (or any cash in lieu of fractional shares) that a Non-U.S. Host
Stockholder will receive in the Distribution.
In the event that the fair market value of the Distribution received by a
Non-U.S. Host Stockholder exceeds his or her share of the portion of Host and
Host REIT's current and accumulated E&P through the end of 1998 allocable to
the Distribution, the Distribution will be treated first as a tax-free return
of capital to such Non-U.S. Host Stockholder, reducing the adjusted basis in
his or her Host common stock by the amount of such excess (but not below
zero). If such basis is reduced to zero and there is remaining excess, the
Distribution would give rise to gain from a deemed sale or exchange of such
Host common stock.
Gain recognized upon a deemed sale or exchange of Host common stock pursuant
to the Distribution by a Non-U.S. Host Stockholder who owned more than 5% of
the Host common stock at any time during the five-year period ending on the
Distribution Date generally would be subject to United States taxation because
such stock constitutes a "United States real property interest" within the
meaning of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA").
Such gain would not be subject to United States taxation under FIRPTA as a
sale of a "United States real property interest" for a Non-U.S. Host
Stockholder who did not own more than 5% of the Host common stock at any time
during the five-year period ending on the Distribution Date because Host
common stock is "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the NYSE).
Notwithstanding the foregoing, gain from a deemed sale or exchange of Host
common stock pursuant to the Distribution not otherwise subject to FIRPTA
would be taxable to any Non-U.S. Host Stockholder who is a nonresident alien
individual who is present in the United States for
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<PAGE>
183 days or more during the taxable year and has a "tax home" in the United
States. In such case, the nonresident alien individual would be subject to a
30% United States withholding tax on the amount of the gain.
If gain on a deemed sale or exchange of Host common stock pursuant to the
Distribution were subject to taxation under FIRPTA, the Non-U.S. Host
Stockholder would be subject to regular United States income tax with respect
to such gain in the same manner as a taxable U.S. Host Stockholder (subject to
any applicable alternative minimum tax, a special alternative minimum tax in
the case of nonresident alien individuals and the possible application of the
30% branch profits tax in the case of foreign corporations).
As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that Host would be required to withhold 10%
of any distribution to a Non-U.S. Host Stockholder in excess of Host and Host
REIT's current and accumulated E&P through the end of 1998. Consequently,
although Host intends to withhold at a rate of 30% on the entire amount of any
distribution (or a lower applicable treaty rate), to the extent that Host does
not do so, any portion of the Distribution not subject to withholding at a
rate of 30% (or a lower applicable treaty rate) would be subject to
withholding at a rate of 10%. However, a Non-U.S. Host Stockholder may seek a
refund of such amounts from the IRS if it is subsequently determined that the
Distribution was, in fact, in excess of such E&P, and the amount withheld
exceeded the Non-U.S. Host Stockholder's United States tax liability, if any,
with respect to the Distribution.
To the extent that withholding tax is owed with respect to a Non-U.S. Host
Stockholder with respect to Common Stock received in the Distribution, the
Company anticipates that the transfer agent will sell in the market a portion
of the shares of Common Stock distributable to the Non-U.S. Host Stockholder
to pay the withholding taxes, and the actual number of shares of Common Stock
received pursuant to the Distribution will be net of the shares sold.
LEGAL MATTERS
The validity of the Common Stock to be distributed in the Distribution and
certain tax matters will be passed upon for the Company by Hogan & Hartson
L.L.P.
EXPERTS
The financial statements and schedule of HMC Senior Communities, Inc. as of
January 2, 1998 and for the period from June 21, 1997 (inception) through
January 2, 1998 and the financial statements of Forum Group, Inc. and
Subsidiaries, as Partitioned for Sale to Host Marriott Corporation, as of
January 3, 1997 and for the twenty-four week period ended June 20, 1997 and
the forty-week period ended January 3, 1997 included 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 herein in reliance upon the authority of said firm as experts in
giving said reports.
The combined financial statements of Forum Group, Inc. and subsidiaries, as
partitioned for sale to Host Marriott Corporation as of March 31, 1996 and
1995 and for the years then ended have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
134
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock of the Company described herein. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information, reference is made hereby to the Registration Statement, exhibits
and schedules. Statements contained herein concerning any documents are not
necessarily complete and, in each instance, reference is made to the copies of
such documents filed as exhibits to the Registration Statement. Each such
statement is qualified in its entirety by such reference. Copies of these
documents may be inspected without charge at the principal office of the
Commission at 450 5th Street, N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission at 7 World Trade Center, Suite 1300, New
York, New York 10048, at Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661, and at 5670 Wilshire Boulevard, Suite 1100, Los
Angeles, California 90036, and copies of all or any part thereof may be
obtained from the Commission upon payment of the charges prescribed by the
Commission. Copies of such material may also be obtained from the Commission's
Web Site (http://www.sec.gov).
Following the Distribution, the Company will be required to comply with the
reporting requirements of the Securities Exchange Act of 1934 (the "Exchange
Act") and will file annual, quarterly and other reports with the Commission.
The Company will also be subject to the proxy solicitation requirements of the
Exchange Act and, accordingly, will furnish audited financial statements to
its stockholders in connection with its annual meetings of stockholders.
135
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following financial information is included on the pages indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HMC SENIOR COMMUNITIES, INC., WHICH IS THE SENIOR LIVING COMMUNITIES'
BUSINESS OF
HOST MARRIOTT CORPORATION
Report of Independent Public Accountants............................. F-2
Consolidated Balance Sheet as of January 2, 1998..................... F-3
Consolidated Statement of Operations for the Period from June 21,
1997 (inception) through January 2, 1998............................ F-4
Consolidated Statement of Stockholders' Equity for the Period from
June 21, 1997 (inception) through January 2, 1998................... F-5
Consolidated Statement of Cash Flows for the Period from June 21,
1997 (inception) through January 2, 1998............................ F-6
Notes to Consolidated Financial Statements........................... F-7
Condensed Consolidated Balance Sheet as of September 11, 1998
(unaudited)......................................................... F-17
Condensed Consolidated Statement of Operations for the Thirty-six
Weeks Ended September 11, 1998 and the Twelve Weeks Ended September
12, 1997 (unaudited)................................................ F-18
Condensed Consolidated Statement of Cash Flows for the Thirty-six
Weeks Ended September 11, 1998 and the Twelve Weeks Ended September
12, 1997 (unaudited)................................................ F-19
Notes to Condensed Consolidated Financial Statements (unaudited)..... F-20
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED FOR SALE TO HOST
MARRIOTT CORPORATION
Report of Independent Public Accountants............................. F-22
Consolidated Balance Sheet as of January 3, 1997..................... F-23
Consolidated Statement of Operations for the twenty-four week period
ended June 20, 1997 and the forty-week period ended January 3,
1997................................................................ F-24
Consolidated Statement of Cash Flows for the twenty-four week period
ended June 20, 1997 and the forty-week period ended January 3,
1997................................................................ F-25
Notes to Consolidated Financial Statements........................... F-26
Independent Auditors' Report......................................... F-34
Combined Balance Sheets as of March 31, 1996 and 1995................ F-35
Combined Statements of Operations for the years ended March 31, 1996
and 1995............................................................ F-36
Combined Statements of Cash Flows for the years ended March 31, 1996
and 1995............................................................ F-37
Notes to Combined Financial Statements............................... F-38
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheet of HMC Senior
Communities, Inc. ("HMCSC"), which is the senior living communities' business
of Host Marriott Corporation, as defined in Note 1 to the consolidated
financial statements, as of January 2, 1998, and the related consolidated
statements of operations, stockholder's equity and cash flows for the period
from June 21, 1997 (inception) through January 2, 1998. These consolidated
financial statements are the responsibility of Host Marriott Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HMCSC as
of January 2, 1998 and the results of its operations and its cash flows for
the period from June 21, 1997 (inception) through January 2, 1998 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
May 1, 1998
F-2
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED BALANCE SHEET
JANUARY 2, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net.......................................... $633,840
Other assets......................................................... 1,332
Restricted cash...................................................... 10,686
Cash and cash equivalents............................................ 17,644
--------
Total assets....................................................... $663,502
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt................................................................. $349,934
Deferred income taxes................................................ 58,705
Accounts payable and other accrued liabilities....................... 15,543
Amounts due to Marriott International, net........................... 3,172
Accrued interest..................................................... 4,906
Due to Host Marriott Corporation..................................... 2,151
Deferred revenue..................................................... 2,027
--------
Total liabilities.................................................. 436,438
--------
Stockholder's equity:
Common stock, 100 shares authorized, issued and outstanding, no par
value............................................................... --
Additional paid-in capital........................................... 226,706
Retained earnings.................................................... 358
--------
Total stockholder's equity......................................... 227,064
--------
Total liabilities and stockholder's equity....................... $663,502
========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES.............................................................. $ 36,900
--------
OPERATING COSTS AND EXPENSES
Depreciation and amortization......................................... 10,635
Base management fees to Marriott International........................ 6,481
Property taxes........................................................ 3,626
Other................................................................. 187
--------
Total operating costs and expenses.................................. 20,929
--------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............... 15,971
Corporate expenses.................................................... (2,304)
Interest expense...................................................... (13,396)
Interest income....................................................... 336
--------
INCOME BEFORE INCOME TAXES............................................ 607
Provision for income taxes............................................ (249)
--------
NET INCOME............................................................ $ 358
========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Balance, June 21, 1997.............................. $-- $ -- $--
Common stock issued............................... -- -- --
Capital contributions by Host Marriott Corpora-
tion............................................. -- 226,706 --
Net income........................................ -- -- 358
---- -------- ----
Balance, January 2, 1998............................ $-- $226,706 $358
==== ======== ====
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 358
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization..................................... 10,635
Change in amounts due to Marriott International................... 10,073
Change in amounts due to Host Marriott............................ 2,151
Equity in earnings of affiliate................................... (997)
Change in other operating accounts................................ 3,156
---------
Cash provided by operating activities............................... 25,376
---------
INVESTING ACTIVITIES
Capital expenditures.............................................. (33,345)
Increase in capital improvement reserve........................... (67)
---------
Cash used in investing activities................................... (33,412)
---------
FINANCING ACTIVITIES
Contribution of cash.............................................. 7,319
Repayments of debt................................................ (2,142)
Issuances of debt................................................. 20,407
Change in financing reserves...................................... 96
---------
Cash provided by financing activities............................... 25,680
---------
Increase in cash and cash equivalents............................... 17,644
Cash and cash equivalents, beginning of period...................... --
---------
Cash and cash equivalents, end of period............................ $ 17,644
=========
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott Corporation:
Property and equipment............................................ $ 601,033
Other assets...................................................... 9,892
Debt assumed...................................................... (331,669)
Other liabilities................................................. (9,479)
Deferred revenue.................................................. (2,054)
Deferred income taxes............................................. 58,435
Expansion costs paid by Host Marriott Corporation, which have been
included in additional paid-in capital........................... 10,099
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On June 21, 1997, Host Marriott Corporation ("Host Marriott") acquired all
of the outstanding stock of Forum Group Inc. ("Forum Group") from Marriott
Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott International,
Inc. ("Marriott International") for $190 million of cash and the assumption of
$270 million of debt and concurrently contributed all of the assets and
liabilities of Forum Group to HMC Senior Communities, Inc. ("HMCSC"). In
connection with the acquisition, Forum Group assigned to Marriott
International its interest as manager under long-term operating agreements
(See Note 6). The acquisition of the Forum Group was accounted for under the
purchase method of accounting.
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spinning-off
HMCSC to the shareholders of Host Marriott, and contributing Host Marriott's
hotels and certain other assets and liabilities to a newly formed Delaware
limited partnership, Host Marriott, L.P., whose sole general partner will be
HMC Merger Corporation, a newly formed Maryland corporation which will be
renamed Host Marriott Corporation upon its merger with Host Marriott. After
the proposed reorganization, HMCSC will lease hotels from Host Marriott, L.P.
and Marriott International will continue to manage the hotels under long-term
management agreements.
Consummation of the reorganization is subject to significant contingencies,
including final Board approval and consent of stockholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates and
other third parties. Accordingly, there can be no assurance that the
reorganization will be completed.
The accompanying consolidated financial statements include the historical
accounts of HMCSC, representing 31 senior living communities (the
"Communities") located in 13 states, expected to be spun-off as part of the
reorganization described above.
HMCSC operates as a unit of Host Marriott utilizing Host Marriott's
employees, insurance and administrative services. HMCSC has no employees.
Periodically, certain operating expenses, capital expenditures and other cash
requirements of HMCSC are paid by Host Marriott and charged directly or
allocated to HMCSC. Certain general and administrative costs of Host Marriott
are allocated to HMCSC using a variety of methods, principally including Host
Marriott's specific identification of individual cost items and otherwise
through allocations based upon estimated levels of effort devoted by its
general and administrative departments to individual entities or relative
measures of size of the entities based on assets. In the opinion of
management, the methods for allocating corporate, general and administrative
expenses and other direct costs are reasonable. It is not practical to
estimate the costs that would have been incurred by HMCSC if it had been
operated on a stand-alone basis.
The consolidated financial statements present the financial position,
results of operations and cash flows of HMCSC beginning on June 21, 1997 (the
date Host Marriott acquired the stock of the Forum Group) through January 2,
1998. Host Marriott's basis in the assets and liabilities of HMCSC has been
carried over to these financial statements. All material intercompany
transactions and balances between HMCSC and its subsidiaries have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of HMCSC and its
subsidiaries and controlled affiliates. Investments in affiliates over which
HMCSC has the ability to exercise significant influence, but does not control,
are accounted for using the equity method. All material intercompany
transactions and balances have been eliminated.
F-7
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fiscal Year
HMCSC's fiscal year ends on the Friday nearest to December 31.
Revenues
Revenues represent house profit from the Communities. House profit reflects
the net revenues flowing to HMCSC as property owner and represents gross
community operating sales less property-level expenses excluding depreciation
and amortization, real and personal property taxes, insurance, management fees
and certain other costs which are classified as operating costs and expenses
in the accompanying statement of operations.
Resident fees and health care service revenues are generated primarily from
monthly charges for independent living units and daily charges for assisted
living suites and nursing beds, and are recognized monthly based on the terms
of the residents' agreements. Advance payments received for services are
deferred until the services are provided. Included in resident fees revenue is
ancillary revenue, which is generated on a "fee for service" basis for
supplemental items requested by residents and is recognized as the services
are provided.
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursements under these contractual arrangements are subject
to retroactive adjustments based on agency reviews. Revenues from health care
services are recorded net of estimated contractual allowances in the
accompanying consolidated financial statements. Management believes that
reserves recorded are adequate to cover any adjustments arising from
retroactive adjustments.
HMCSC has considered the impact of EITF 97-2 on its financial statements and
has determined that it requires HMCSC to include property-level revenues and
operating expenses of its senior living communities in its statements of
operations. HMCSC will adopt EITF 97-2 in the fourth quarter of 1998 with
retroactive effect in prior periods to conform to the new presentation. The
effect of this change will be to increase 1997 revenues and operating costs
and expenses by approximately $74.1 million and will have no impact on
operating profit or net income. See Note 3.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
date of purchase are considered cash equivalents.
Property and Equipment
Property and equipment is recorded at cost, or if contributed by Host
Marriott, is recorded at Host Marriott's basis. Replacements and improvements
that extend the useful life of property and equipment are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to 10
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.
In cases where management is holding for sale a particular Community, HMCSC
assesses impairment based on whether the estimated sales price less cost of
disposal of each individual property to be sold is less than the net book
value. A property is considered to be held for sale when a decision is made to
dispose of the Community. Otherwise, impairment is assessed based on whether
it is probable that undiscounted future cash flows from each Community will be
less than its net book value. If a Community is impaired, its basis is
adjusted to its fair value.
F-8
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk
Financial instruments that potentially subject HMCSC to significant
concentration of credit risk consist principally of cash and cash equivalents.
HMCSC maintains cash and cash equivalents with various high credit-quality
financial institutions and limits the amount of credit exposure with any
institution.
Working Capital
Pursuant to the terms of HMCSC's Operating Agreements (see Note 6), HMCSC is
required to provide Marriott International with working capital and supplies
to meet the operating needs of the Communities. Marriott International
converts cash advanced by HMCSC into other forms of working capital consisting
primarily of operating cash, inventories, resident deposits and trade
receivables and payables which are maintained and controlled by Marriott
International. Upon the termination of the Operating Agreements, Marriott
International is required to convert working capital and supplies into cash
and return it to HMCSC. As a result of these conditions, the individual
components of working capital and supplies controlled by Marriott
International are not reflected in the accompanying consolidated balance
sheet.
Deferred Revenue
Monthly fees deferred for the non-refundable portion of the entry fees are
included as deferred revenue in the accompanying balance sheet. These amounts
are recognized as revenue as health care services are performed over the
expected term of the residents' contracts.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards
In 1997, the Company adopted Statement of Financial Accounting Standards No.
129 "Disclosure of Information About Capital Structure." The adoption of this
statement did not have a material effect on these consolidated financial
statements.
F-9
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. REVENUES
House profit generated by the Communities consist of the following for the
period from June 21, 1997 (inception) through January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Community Sales
Routine.......................................................... $ 99,989
Ancillary........................................................ 10,980
--------
Total Community Sales.......................................... 110,969
--------
Department Costs
Routine.......................................................... 64,516
Ancillary........................................................ 9,553
--------
Total Department Costs......................................... 74,069
--------
Department Profit
Routine.......................................................... 35,473
Ancillary........................................................ 1,427
--------
Revenues....................................................... $ 36,900
========
</TABLE>
Community sales consist of routine and ancillary sales. Routine sales are
generated from monthly charges for independent living units and daily charges
for assisted living suites and nursing beds, and are recognized monthly based
on the terms of the residents' agreements. Advance payments received for
services are deferred until the services are provided. Ancillary sales are
generated on a "fee for service" basis for supplementary items requested by
residents, and are recognized as the services are provided.
Total sales include amounts estimated by management to be reimbursable
through Medicare, Medicaid and other third party payor agreements. Medicare
and Medicaid represented 11% and 3%, respectively, of sales for the period
from June 21, 1997 (inception) through January 2, 1998. Reimbursement
arrangements are subject to audit and retroactive adjustment. Provisions are
made for potential adjustments that may result. To the extent those provisions
vary from settlements, sales are charged or credited when the adjustments
become final. Changes in the estimate of amounts reimbursable by third party
payors from prior years resulted in the recognition of $1,689,000 of
additional sales for the period from June 21, 1997 (inception) through January
2, 1998. In management's opinion, any adjustments related to current and prior
years' operations will be immaterial to current and future financial
statements. Audits under the reimbursement agreements have been completed
through fiscal year 1996 and there were no material audit adjustments.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at January 2, 1998 (in
thousands):
<TABLE>
<S> <C>
Land and land improvements...................................... $102,714
Buildings and leasehold improvements............................ 518,056
Furniture and equipment......................................... 23,705
--------
644,475
Less accumulated depreciation and amortization.................. (10,635)
--------
$633,840
========
</TABLE>
F-10
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, LTJ Senior Communities Corporation ("LTJ"), a wholly owned
subsidiary of HMCSC, acquired 49% of the remaining 50% interest in Leisure
Park Venture Limited Partnership (the "Partnership") which owns a 418-unit
retirement community in New Jersey for approximately $23 million, including
the assumption of approximately $15 million of debt. Subsequent to this
acquisition, HMCSC indirectly owns a 99% interest in the Partnership. Marriott
International owns the remaining 1% limited partner interest.
In the first quarter of 1998, LTJ also acquired the Gables of Winchester in
suburban Boston, a 124-unit upscale senior living community, for $21 million
and entered into conditional purchase agreements for two Marriott Brighton
Gardens assisted living communities with the Summit Companies of Denver,
Colorado. After the anticipated completion of construction in the first
quarter of 1999, HMCSC may acquire these two 160-unit properties located in
Denver and Colorado Springs, Colorado, for approximately $35 million, if they
achieve certain operating performance criteria. All three of these communities
will be operated by Marriott International under long-term operating
agreements.
5. RESTRICTED CASH
Restricted cash consists of the following at January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Debt service reserve fund........................................ $ 1,528
Fixed asset reserve fund......................................... 4,300
Real estate tax reserve fund..................................... 3,590
Insurance reserve fund........................................... 1,268
-------
$10,686
=======
</TABLE>
The debt service, fixed asset, real estate tax and insurance reserve funds
consist of cash transferred into segregated escrow accounts out of sales
generated by the Communities, pursuant to HMCSC's secured debt agreements.
These funds are periodically disbursed by the collateral agent to pay for debt
service, capital expenditures, insurance premiums and real estate taxes
relating to the secured properties. In some cases, to ensure prompt payment,
HMCSC utilizes its unrestricted cash to pay for capital expenditures,
insurance premiums and real estate taxes and is subsequently reimbursed for
such payments out of funds held in the appropriate escrow account.
6. OPERATING AGREEMENTS
The Communities are subject to operating agreements (the "Operating
Agreements") which provide for Marriott International to operate the
Communities, generally for an initial term of 25 to 30 years with renewal
terms subject to certain performance criteria at the option of Marriott
International of up to an additional five to ten years. The Operating
Agreements provide for payment of base management fees generally equal to five
to eight percent of gross sales and incentive management fees generally equal
to zero to 20% of Operating Profit (as defined in the Operating Agreements)
over a priority return to HMCSC. In the event of early termination of the
Operating Agreements, Marriott International will receive additional fees
based on the unexpired term and expected future base and incentive management
fees. HMCSC has the option to terminate certain, but not all, management
agreements if specified performance thresholds are not satisfied. No Operating
Agreement with respect to a single Community is cross-collateralized or cross-
defaulted to any other Operating Agreement, and any single Operating Agreement
may be terminated following a default by HMCSC or Marriott International,
although such termination will not trigger the cancellation of any other
Operating Agreement.
F-11
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of the Operating Agreements, Marriott International is
required to furnish the Communities with certain services ("Central
Administrative Services") which are provided on a central or regional basis to
all properties in the Marriott Retirement Community System. These services
include the development and operation of computer systems, computer payroll
and accounting services, marketing and public relations services, and such
additional services as may from time-to-time be performed more efficiently on
a central or regional level. The Operating Agreements require payment of
Central Administrative Services fees equal to 2% of gross sales beginning in
the third quarter of 1998.
Marriott International is required under the Operating Agreements to deduct
an amount from gross sales and place the funds into an interest-bearing
reserve account to cover the cost of (a) certain routine repairs and
maintenance to the Communities which are normally capitalized and (b)
replacements and renewals to the Communities' property and improvements. The
annual payment amount (expressed as a percentage of gross sales) generally
will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through
2007, and 3.5% thereafter. The amount contributed for the period June 21, 1997
(inception) through January 2, 1998 was $2,025,000. The Operating Agreements
provide that HMCSC shall provide Marriott International with sufficient funds
to cover the cost of certain major or non-routine repairs, alterations,
improvements, renewals and replacements to the Communities which are required
to maintain a competitive, efficient and economical operating condition in
accordance with Marriott standards or for the continued safe and orderly
operation of the Communities.
7. AMOUNTS DUE TO MARRIOTT INTERNATIONAL
The components of the amounts due to Marriott International, net, at January
2, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Community operating expenses payable to Marriott International..... $ 7,648
Management fees payable to Marriott International.................. 1,262
Community working capital due to HMCSC............................. (6,093)
Other, net......................................................... 355
-------
Total............................................................ $ 3,172
=======
</TABLE>
F-12
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT
Debt consists of the following at January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Mortgage Debt:
Secured by eight Communities with $232 million of assets, with an
interest rate of 10.01%, maturing through 2020 (balance includes
fair value adjustment of $15.5 million)............................ $137,713
Secured by nine Communities with $110 million of assets, with an
interest rate of 9.93%, maturing through 2001 (balance includes
fair value adjustment of $2.6 million)............................. 49,353
Secured by one Community with $29 million of assets, with an average
rate of 7.45%, maturing through 1999 (repaid in 1998).............. 26,403
--------
213,469
--------
Notes payable to Marriott International, with a rate of 9%, maturing
through 2001 (repaid in 1998)........................................ 92,195
--------
Other notes:
Revenue Bonds with a rate of 5.875%, maturing through 2027.......... 14,700
Other notes, with an average rate of 6.6%, maturing through December
2027............................................................... 18,943
Capital lease obligations........................................... 10,627
--------
44,270
--------
Total debt........................................................ $349,934
========
</TABLE>
Debt maturities at January 2, 1998, excluding the unamortized fair value
adjustments of approximately $18 million resulting from recording the
mortgages at their fair value on June 21, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 54,515
1999............................................................. 30,197
2000............................................................. 4,503
2001............................................................. 88,043
2002............................................................. 2,504
Thereafter....................................................... 152,046
--------
$331,808
========
</TABLE>
In conjunction with the acquisition of Forum Group Inc., HMCSC recorded the
debt assumed at its fair value, which exceeded the face value by approximately
$19 million. HMCSC is amortizing this adjustment to interest expense over the
remaining life of the related debt. The amortization for the period from June
21, 1997 (inception) through January 2, 1998 totaled $834,000. Cash paid for
interest for the period from June 21, 1997 (inception) through January 2, 1998
totaled $8,183,000.
In conjunction with the June 21, 1997 acquisition of Forum Group Inc., HMCSC
assumed approximately $197 million in mortgage debt, $11 million in capital
lease obligations (see Note 9), as well as issued $72 million in notes payable
to Marriott International. Subsequent to the acquisition, HMCSC issued
additional notes payable to Marriott International for additional expansion
units totaling approximately $20 million. These notes were guaranteed by Host
Marriott. In the second quarter of 1998, Host Marriott repaid the $92 million
in notes payable to Marriott International.
F-13
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, in connection with the acquisition of the remaining 50%
interest in the Leisure Park Venture Limited Partnership (see Note 4), HMCSC
assumed approximately $15 million of debt.
The net assets of 17 of the Communities are subject to mortgage debt which
places restrictions on their assets. The net assets of the Communities totaled
approximately $150 million at January 2, 1998. The indentures governing these
mortgages contain covenants that, among other things, require maintenance of
segregated cash collection of all rents, separate cash reserves for debt
service, property improvements, real estate taxes and insurance, limit the
ability to incur additional indebtedness, issue stock or admit additional
partners, pay dividends or make certain distributions, enter into or cancel
leases, enter into certain transactions with affiliates or sell certain
assets.
During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of the debt was recorded as a
capital contribution to HMCSC, there was no gain or loss on the prepayment.
9. LEASES
HMCSC leases certain property under non-cancelable capital and operating
leases. Future minimum annual rental commitments for all non-cancelable leases
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998................................................... $ 1,274 $ 278
1999................................................... 1,287 278
2000................................................... 1,300 278
2001................................................... 1,320 278
2002................................................... 1,338 278
Thereafter............................................. 13,672 3,062
------- ------
Total minimum lease payments........................... 20,191 $4,452
======
Less amount representing interest...................... (9,564)
-------
Present value of minimum lease payments................ $10,627
=======
</TABLE>
HMCSC leases two communities under capital leases expiring in 2016. Upon the
expiration of the lease or anytime prior to lease expiration, HMCSC has the
first right of refusal (the "Option") to submit a counter offer to any
acceptable bona fide offer from a third party within 30 days of notice from
the lessor. If HMCSC fails to exercise its Option, then the lessor may proceed
with the sale of the leased property and all assets therein.
HMCSC also has one long-term operating ground lease which expires in 2013.
The operating lease includes three renewal options exercisable in five year
increments through the year 2028.
Rent expense for the period from June 21, 1997 (inception) through January
2, 1998 was $141,000.
F-14
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
Total deferred tax assets and liabilities as of January 2, 1998 were as
follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets................................................ $ 15,125
Deferred tax liabilities........................................... (73,830)
--------
Net deferred income tax liability................................ $(58,705)
========
</TABLE>
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of January 2, 1998 was as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment............................................. $(68,687)
Debt adjustment to fair value at acquisition....................... 7,591
Other, net......................................................... 2,391
--------
Net deferred income tax liability................................ $(58,705)
========
</TABLE>
The provision for income taxes consists of the following for the period from
June 21, 1997 (inception) through January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Current--Federal..................................................... $ (25)
--State........................................................... (5)
-----
(30)
-----
Deferred--Federal.................................................... 238
--State........................................................... 41
-----
279
-----
$249
=====
</TABLE>
A reconciliation of the statutory Federal tax rate to HMCSC's effective
income tax rate for the period from June 21, 1997 (inception) through January
2, 1998 follows:
<TABLE>
<S> <C>
Statutory federal tax rate............................................. 35.0%
State income taxes, net of federal tax benefit......................... 6.0
----
41.0%
====
</TABLE>
HMCSC is included in the consolidated federal income tax return of Host
Marriott and its affiliates (the "Group") for the period from June 21, 1997
(inception) through January 2, 1998. Tax expense is allocated to HMCSC as a
member of the Group based upon the relative contribution to the Group's
consolidated taxable income/loss and changes in temporary differences. This
allocation method results in federal and net state tax expense allocated for
all periods presented that is substantially equal to the expense that would
have been recognized if HMCSC had filed separate tax returns. HMCSC reimburses
Host Marriott for the allocable share of current taxes payable relating to the
period that HMCSC has been included in Host Marriott's consolidated federal
income tax return.
F-15
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court for the Southern
District of Indiana (the "Indiana Court") against the general partner of one
of HMCSC's subsidiary partnerships, Forum Retirement Partners, L.P. alleging
breach of the partnership agreement, breach of fiduciary duty, fraud, insider
trading and civil conspiracy/aiding and abetting. On February 4, 1998, the
Plaintiff, MSLS, the general partner, Forum Group and HMCSC entered into a
Settlement and Release Agreement (the "Settlement Agreement"), pursuant to
which Host Marriott agreed to purchase, at a price of $4.50 per unit, the
partnership units of each limited partner electing to join in the Settlement
Agreement. HMCSC held 79% of the outstanding limited partner units in the
partnership at that time. HMCSC also agreed to pay as much as an additional
$1.25 per unit to the settling limited partners, under certain conditions, in
the event that HMCSC within three years following the date of settlement
initiates a tender offer for the purchase of units not presently held by HMCSC
or the settling limited partners. On February 5, 1998, the Indiana Court
entered an order approving the dismissal of the Plaintiff's case.
In connection with the Settlement Agreement on March 25, 1998, HMCSC
acquired 1,000,894 limited partner unit shares for approximately $4,504,000.
The purchase price of the shares approximated fair value and accordingly, no
portion of the purchase price has been expensed. As a result of this purchase,
HMCSC's ownership interest in the partnership was increased to approximately
86%.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
HMCSC believes the carrying amount of its financial instruments (excluding
property indebtedness) approximates their fair value due to the relatively
short maturity of these instruments. There is no quoted market value available
for any of HMCSC's financial instruments.
Valuations of debt are determined based on expected future payments
discounted at risk-adjusted rates. The debt was adjusted to its fair value in
conjunction with Host Marriott's acquisition of the Communities on June 21,
1997. As of January 2, 1998, the fair value of debt approximated its carrying
value.
F-16
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 11, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net...................................... $649,528
Amounts due from Marriott International, net..................... 4,097
Other assets..................................................... 14,290
Cash and cash equivalents........................................ 26,504
--------
Total assets................................................... $694,419
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt............................................................. $213,034
Deferred income taxes............................................ 61,376
Due to Host Marriott Corporation, net............................ 12,989
Accounts payable and other accrued liabilities................... 13,639
Deferred revenue................................................. 1,310
--------
Total liabilities.............................................. 302,348
--------
Stockholder's equity:
Common stock, 100 shares authorized, issued and outstanding, no
par value....................................................... --
Additional paid-in capital....................................... 386,627
Retained earnings................................................ 5,444
--------
Total stockholder's equity..................................... 392,071
--------
Total liabilities and stockholder's equity..................... $694,419
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-17
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND TWELVE WEEKS ENDED
SEPTEMBER 12, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-SIX TWELVE
WEEKS ENDED WEEKS ENDED
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
REVENUES.......................................... $57,800 $16,036
------- -------
OPERATING COSTS AND EXPENSES
Depreciation and amortization..................... 14,759 4,866
Base management fees to Marriott International.... 9,408 3,159
Property taxes and insurance...................... 4,773 1,462
Other............................................. 863 251
------- -------
Total operating costs and expenses.............. 29,803 9,738
------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND
INTEREST......................................... 27,997 6,298
Corporate expenses................................ (2,937) (954)
Interest expense.................................. (17,560) (6,035)
Interest income................................... 1,120 240
------- -------
INCOME BEFORE INCOME TAXES........................ 8,620 (451)
Provision for income taxes........................ (3,534) 185
------- -------
NET INCOME........................................ $ 5,086 $ (266)
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-18
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1998 AND TWELVE WEEKS ENDED
SEPTEMBER 12, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-SIX TWELVE WEEKS
WEEKS ENDED ENDED
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ 5,086 $ (266)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 14,759 4,866
Change in amounts due to Marriott
International.................................. (5,353) 9,259
Change in amounts due to Host Marriott
Corporation.................................... 10,507 5,096
Equity in earnings of affiliate................. 51 (19)
Change in other operating accounts.............. (6,026) 2,551
------- --------
Cash provided by operating activities............. 19,024 21,488
------- --------
INVESTING ACTIVITIES
Capital expenditures............................ (8,007) (18,409)
Increase in capital improvement reserve......... 478 386
------- --------
Cash used in investing activities................. (7,529) (18,022)
------- --------
FINANCING ACTIVITIES
Issuances (repayments) of debt.................. (3,502) 19,191
Change in financing reserves.................... 867 2,205
------- --------
Cash used in financing activities................. (2,635) 21,396
------- --------
Increase in cash and cash equivalents............. 8,860 9,571
Cash and cash equivalents, beginning of period.... 17,644 6,401
------- --------
Cash and cash equivalents, end of period.......... $26,504 $ 15,972
======= ========
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott Corporation:
Property and equipment........................ $22,439 --
Other......................................... 4,084 --
Mortgage and other debt paid by Host
Marriott..................................... 133,203 --
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-19
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. On June 21, 1997, Host Marriott Corporation ("Host Marriott") acquired
all of the outstanding stock of Forum Group Inc. ("Forum Group"), from
Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott
International, Inc. ("Marriott International") for $190 million of cash and
the assumption of $270 million of debt and concurrently contributed all of the
assets and liabilities of Forum Group, Inc. to HMC Senior Communities, Inc.
("HMCSC"). In connection with the acquisition, Forum Group assigned to
Marriott International its interest as manager under long-term operating
agreements. The acquisition of the Forum Group was accounted for under the
purchase method of accounting.
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spinning-off Host
Marriott's senior living business ("Senior Living") into a separate
corporation, the Senior Living Communities Company and contributing Host
Marriott's hotels and certain other assets and liabilities to a newly formed
Delaware limited partnership, Host Marriott, L.P., whose sole general partner
will be HMC Merger Corporation, a newly formed Maryland corporation which will
be renamed Host Marriott Corporation upon its merger with Host Marriott (the
"REIT Conversion"). After the proposed REIT Conversion, HMCSC will lease
hotels from Host Marriott, L.P. and Marriott International will continue to
manage the hotels under long term management agreements.
Consummation of the REIT Conversion is subject to significant contingencies,
including final Board approval, consent of shareholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates and
other third parties. Accordingly, there can be no assurance that the REIT
Conversion will be completed.
The accompanying consolidated financial statements include the historical
accounts of HMCSC, representing 31 senior living communities (the
"Communities") located in 13 states, expected to be spun-off as part of the
REIT Conversion described above.
The accompanying condensed consolidated financial statements have been
prepared by HMCSC without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted. HMCSC
believes the disclosures made are adequate to make the information presented
not misleading. However, the condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's audited financial statements for the
period from June 21, 1997 (inception) through January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of September 11, 1998 and the
results of operations and cash flows for the thirty-six weeks ended September
11, 1998 and the twelve weeks ended September 12, 1997. Interim results are
not necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations.
2. Revenues represent house profit from the Communities. House profit
reflects the net revenues flowing to HMCSC as property owner and represents
gross community operating sales less property-level expenses excluding
depreciation and amortization, real and personal property taxes, insurance,
management fees and certain other costs which are classified as operating
costs and expenses.
Resident fees and health care service revenues are generated primarily from
monthly charges for independent living units and daily charges for assisted
living suites and nursing beds, and are recognized monthly based on the terms
of the residents' agreements. Advance payments received for services are
deferred until the services are provided. Included in resident fees revenue is
ancillary revenue, which is generated on a "fee for service" basis for
supplemental items requested by residents and is recognized as the services
are provided.
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursements under these contractual arrangements
F-20
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are subject to retroactive adjustments based on agency reviews. Revenues and
receivables from health care services are recorded net of estimated
contractual allowances in the accompanying consolidated financial statements.
Management believes that reserves recorded are adequate to cover any
adjustments arising from retroactive adjustments.
House profit generated by the Communities consist of the following for the
thirty-six weeks ended September 11, 1998 and twelve weeks ended September 12,
1997 (in thousands):
<TABLE>
<CAPTION>
THIRTY-SIX TWELVE WEEKS
WEEKS ENDED ENDED
SEPTEMBER 11, SEPTEMBER 12,
1998 1997
------------- -------------
<S> <C> <C>
Community Sales
Routine........................................... $149,581 $42,249
Ancillary......................................... 16,410 4,265
-------- -------
Total Community Sales........................... 165,991 46,514
-------- -------
Department Costs
Routine........................................... 94,709 26,821
Ancillary......................................... 13,482 3,658
-------- -------
Total Department Costs.......................... 108,191 30,479
-------- -------
Department Profit
Routine........................................... 54,872 15,428
Ancillary......................................... 2,928 607
-------- -------
Revenues........................................ $ 57,800 $16,035
======== =======
</TABLE>
HMCSC has considered the impact of EITF 97-2 on its financial statements and
has determined that it requires HMCSC to include property-level revenues and
operating expenses of its senior living communities in its statements of
operations. HMCSC will adopt EITF 97-2 in the fourth quarter of 1998 with
retroactive effect in prior periods to conform to the new presentation. The
effect of this change will be to increase revenues and operating costs and
expenses for the thirty-six weeks ended September 11, 1998 and the twelve
weeks ended September 12, 1997 by approximately $108 million and $30 million,
respectively, and will have no impact on operating profit or net income.
3. In the first quarter of 1998, HMCSC also acquired the Gables of
Winchester in suburban Boston, a 124-unit upscale senior living community, for
$21 million and entered into conditional purchase agreements for two Marriott
Brighton Gardens assisted living communities from the Summit Companies of
Denver, Colorado. After the anticipated completion of construction in the
first quarter of 1999, HMCSC may acquire these two 160-unit properties located
in Denver and Colorado Springs, Colorado, for approximately $35 million, if
they achieve certain operating performance criteria. All three of these
communities will be operated by Marriott International under long-term
operating agreements.
4. During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of debt was recorded as a capital
contribution to HMCSC. In the second quarter of 1998, Host Marriott prepaid
$92 million of 9% unsecured debt provided by Marriott International related to
the Communities. Host Marriott then held a $92 million, which was contributed
as capital to HMCSC in the third quarter of 1998. In the third quarter of
1998, Host Marriott also contributed $14.8 million in unsecured intercompany
notes.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Marriott Senior Living Services, Inc.:
We have audited the accompanying consolidated balance sheet of Forum Group,
Inc. (a business unit wholly-owned by Marriott Senior Living Services, Inc.
("MSLSI")) as partitioned for sale to Host Marriott Corporation (see Note 1),
as of January 3, 1997, and the related consolidated statements of operations
and cash flows for the 40-week period ended January 3, 1997, and the 24-week
period ended June 20, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Forum
Group, Inc., as Partitioned for Sale to Host Marriott Corporation as of
January 3, 1997, and the results of their operations and their cash flows for
the 40-week period ended January 3, 1997 and for the 24-week period ended June
20, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
September 28, 1998
F-22
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
CONSOLIDATED BALANCE SHEET
JANUARY 3, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Property and Equipment, net............................................ $507,325
Due from Manager....................................................... 18,908
Other Assets........................................................... 20,221
Cash and Cash Equivalents.............................................. 18,640
--------
Total Assets......................................................... $565,094
========
LIABILITIES AND EQUITY
Debt................................................................... $244,318
Other Liabilities...................................................... 36,111
--------
Total Liabilities.................................................... 280,429
Equity
Investments and Advances from Parent................................... 284,665
--------
Total Liabilities and Equity......................................... $565,094
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-23
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE 24-WEEK PERIOD ENDED JUNE 20, 1997 AND THE 40-WEEK PERIOD ENDED JANUARY
3, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
24-WEEK PERIOD 40-WEEK PERIOD
ENDED ENDED
JUNE 20, 1997 JANUARY 3, 1997
-------------- ---------------
<S> <C> <C>
REVENUES....................................... $33,570 $ 55,987
------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................. 6,698 8,494
Base management fees........................... 5,586 7,935
Property taxes................................. 2,920 3,616
Ground rent, insurance and other............... 391 601
------- --------
Total operating costs and expenses........... 15,595 20,646
------- --------
OPERATING PROFIT BEFORE INTEREST AND MINORITY
INTEREST...................................... 17,975 35,341
Corporate expenses............................. (4,519) (6,380)
Interest expense............................... (9,141) (14,283)
Interest income................................ 598 1,111
Minority interest expense...................... (596) (482)
------- --------
INCOME BEFORE INCOME TAXES..................... 4,317 15,307
Provision for income taxes..................... (1,689) (5,973)
------- --------
NET INCOME..................................... $ 2,628 $ 9,334
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 24-WEEK PERIOD ENDED JUNE 20, 1997 AND THE 40-WEEK PERIOD ENDED JANUARY
3, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
24-WEEK 40-WEEK
PERIOD ENDED PERIOD ENDED
JUNE 20, 1997 JANUARY 3, 1997
------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME.................. $ 2,628 $ 9,334
Adjustments to reconcile
cash from operations:
Depreciation and
amortization............. 6,698 8,494
Changes in operating
accounts:
Other assets............ (225) 2,891
Other liabilities....... (9,580) 6,151
-------- ---------
Cash (used in)/provided by
operating activities....... (479) 26,870
-------- ---------
INVESTING ACTIVITIES
Capital expenditures...... (16,407) (65,577)
Acquisition of Forum
Group, Inc. ............. -- (94,009)
-------- ---------
Cash used in investing
activities................. (16,407) (159,586)
-------- ---------
FINANCING ACTIVITIES
Repayment of debt......... (1,324) (2,281)
Debt prepayments.......... -- (92,111)
Other..................... -- 1,208
Advances from parent...... 13,997 225,834
-------- ---------
Cash provided by financing
activities................. 12,673 132,650
-------- ---------
DECREASE IN CASH AND CASH
EQUIVALENTS................ (4,213) (66)
CASH AND CASH EQUIVALENTS,
beginning of period........ 18,640 18,706
-------- ---------
CASH AND CASH EQUIVALENTS,
end of period.............. $ 14,427 $ 18,640
======== =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Noncash investing and
financing activities:
Property, Plant and
Equipment, net......... $ (3,977) --
Debt.................... 3,977 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On June 21, 1997, HMC Senior Communities, Inc., ("HMCSC") a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott"), acquired all of the
outstanding stock of Forum Group, Inc. and subsidiaries ("Forum") from
Marriott Senior Living Services, Inc. (MSLSI"), a subsidiary of Marriott
International, Inc. ("MI" or the Parent Company), pursuant to a Stock Purchase
Agreement (the "Agreement") dated June 21, 1997. Certain operations and other
assets and liabilities of Forum including seven communities, management fees
and Lifecare bonds, specifically excluded from the Agreement, are not included
in these financial statements. Accordingly, these financial statements include
only assets and liabilities, along with the results from operations generated
therefrom, included in the Agreement (the "Partitioned Business").
The primary operations of the Partitioned Business is the ownership of 29
retirement communities ("Communities"), located in 11 states, managed by a
subsidiary of MSLSI.
The Partitioned Business was an organizational unit of MSLSI and its
majority owned and controlled subsidiaries and affiliates. The Parent Company
is incorporated in the state of Delaware. Its subsidiaries and affiliates are
incorporated or registered in other jurisdictions in the U.S. and a number of
other countries. The Partitioned Business is not a distinct legal entity.
On March 25, 1996, FG Acquisition Corp. ("Acquisition"), an Indiana
corporation and wholly-owned indirect subsidiary of MI acquired approximately
99.1% of the outstanding shares of common stock of Forum. Acquisition paid
total cash consideration of $297 million for the common stock it acquired,
plus certain warrants to purchase common stock which includes $94 million of
cash consideration for the 29 communities sold to HMCSC.
The Securities and Exchange Commission, in Staff Accounting Bulletin Number
55 ("SAB" 55), requires that historical financial statements of a subsidiary,
division, or lesser business component of another entity include certain
expenses incurred by the parent on its behalf. These expenses include officer
and employee salaries, rent or depreciation, advertising, accounting and legal
services, other selling, general and administrative expenses and other such
expenses. Investments and advances from parent represents the net amount of
investments and advances made by MI as a result of the acquisition and
operation of the Partitioned Business. These financial statements include the
adjustments necessary to comply with SAB 55.
Historically, the Partitioned Business' results of operations have been
included in the consolidated U.S. federal income tax return of MI. For
operations that do not pay their own income tax, MI internally allocates
income tax expense at the statutory rate after adjustment for state income
taxes and several other items. The income tax expense and other tax related
information in these statements has been calculated as if the Partitioned
Business had not been eligible to be included in the consolidated tax returns
of MI. The calculation of tax provisions and deferred taxes required certain
assumptions, allocations and estimates, which management believes are
reasonable to accurately reflect the tax reporting for the Partitioned
Business as a stand-alone taxpayer.
These consolidated financial statements include the results of operations
and cash flows of the Partitioned Business previously included in the MI
consolidated financial statements. These consolidated financial statements
have been prepared by management in accordance with generally accepted
accounting principles and include such estimates and adjustments as deemed
necessary to present fairly the consolidated financial position as of January
3, 1997 and the results of operations and cash flows of the Partitioned
Business for the 24-week period ended June 20, 1997 and the 40-week period
ended January 3, 1997.
The Partitioned Business receives certain services and participates in
certain centralized MI activities, the allocated costs of which are included
in these financial statements.
F-26
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the
Partitioned Business after elimination of intercompany accounts and
transactions other than those with other units of MI.
Corporate Services
The Partitioned Business utilized the MI centralized systems for cash
management, payroll, purchasing and distribution, employee benefit plans,
insurance, administrative services and legal services. As a result, cash for
many communities was commingled with MI's general corporate funds. Similarly,
operating expenses, capital expenditures and other cash requirements of the
Partitioned Business were paid by MI and charged directly or allocated to the
Partitioned Business. Amounts are allocated to the Partitioned Business based
primarily on their use of the centralized systems. In the opinion of
management, MI's methods for allocating costs are reasonable; however, such
costs are not necessarily indicative of the costs that would have been
incurred if the Partitioned Business had been operated as an unaffiliated
entity. It is not practicable for the Partitioned Business to estimate what
those costs would have been had the Partitioned Business operated on a stand-
alone basis.
Property and Equipment
Property and equipment is recorded at cost, including interest, land rent
and real estate taxes capitalized during development and construction, net of
accumulated depreciation. Interest capitalized as a cost of property and
equipment for the twenty-four week period ended June 20, 1997 and the forty-
week period ended January 3, 1997 was approximately $252,000 and $440,000
respectively. Interest costs are paid to MI and computed using MI's borrowing
rate for construction expenditures of 9.08% for the twenty-four-week period
ended June 20, 1997 and 7.35% for the forty-week period ended January 3, 1997.
Property and equipment includes capitalized costs incurred in developing the
real estate, including construction in progress for ongoing expansion programs
at various Communities as of January 3, 1997, which will be conveyed to Host
Marriott upon completion. Replacements and improvements that extend the useful
life of property and equipment are capitalized. Depreciation is computed using
the straight-line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings..................... 40 years
Furniture and Equipment....... 4-10 years
</TABLE>
A provision for value impairment is recorded whenever the estimated
undiscounted future cash flows from the property are less than the property's
net carrying value. No such provision was necessary at January 3, 1997.
Due from Manager
The principal component of Due from Manager is working capital under the
control of and utilized by a subsidiary of MSLSI in conjunction with the
operation of Forum's retirement communities. Both majority-owned and wholly-
owned partnerships and corporations within the Partitioned Business have
management agreements in effect with Forum, which require fees of 5% to 8% of
gross operating revenues.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with an
original maturity of three months or less.
F-27
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Revenue from Non-refundable Fees
Monthly fees deferred for the non-refundable portion of the entry fees are a
component of other liabilities. These amounts are recognized as health care
services revenue as services are performed over the expected term of the
resident's contract. See Note 3 for further discussion of entry fees.
Liability for Future Health Care Services
Certain resident and admission agreements at the Communities entitled
residents to receive limited amounts of health care up to defined maximums.
The estimated liabilities associated with the health care obligation have been
accrued in the consolidated balance sheet.
Revenue Recognition
Revenues primarily represent house profit from the Partitioned Business'
Communities. House profit reflects the net revenues flowing to the Partitioned
Business as property owner and represents gross community operating results,
less property-level expenses, excluding depreciation and amortization, real
and personal property taxes, ground and equipment rent, insurance, management
fees and certain other costs, which are classified as operating costs and
expenses in the accompanying statement of operations.
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursement under these contractual arrangements are subject
to retroactive adjustments based on agency reviews. Revenues and receivables
from health care services are presented net of estimated contractual
allowances in the accompanying consolidated financial statements. Management
believes allowances recorded are adequate to cover any adjustments arising
from retroactive adjustments.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partitioned Business has considered the impact of EITF 97-2 on its
financial statements and has determined that it is preferable for it to
include property-level revenues and operating expenses of its senior living
communities in its statements of operations. The Partitioned Business will
adopt EITF 97-2 in the fourth quarter of 1998 and restate prior periods to
conform to the new presentation. The effect of this change will be to increase
1996 and 1997 revenues and operating costs and expenses by approximately $61.8
and $94.8 million for the 24-week period ended June 20, 1997 and the 40-week
period ended January 3, 1997, respectively, and would have no impact on
operating profit or net income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Accordingly, actual results could differ from those
estimates.
Reclassification
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
F-28
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fiscal Year
Forum's fiscal year ends on the Friday nearest to December 31st.
3. CONTINUING CARE AGREEMENTS
Residents of the Lifecare Communities (Brookside, Overland Park and Pueblo
Norte) are required to sign a continuing care agreement ("Care Agreement")
with Forum. The Care Agreements stipulate, among other things, the amount of
all entry fees and monthly fees, the type of residential unit being provided,
and Forum's obligations to provide both health care and non-health care
services. In addition, the Care Agreements provide Forum with the right to
increase future monthly fees. The Care Agreements are terminated upon the
receipt of written termination notice from the resident, or the death of the
resident.
When estimated costs to be incurred under continuing care agreements exceed
estimated revenues, excess costs are accrued currently. Based upon the
expected positive net cash flow, relating to the agreements no liability or
expense has been recorded in the accompanying financial statements.
The components of the entry fees are as follows:
(i) Lifecare Bonds--This component is refundable to the resident or the
resident's estate upon termination or cancellation of the Care Agreement.
Lifecare Bonds are substantially non-interest bearing and equal to either
100%, 90% or 50% initially, depending on the type of plan, of the total
entry fee less any Additional Occupant Lifecare Fee. Lifecare Bonds and
corresponding cash reserves at January 3, 1997 are excluded from the
consolidated balance sheet. Pursuant to the Agreement, MSLSI will retain
the liability for redemption of these bonds.
(ii) Additional Occupant Lifecare Fee--This is a non-refundable fee for
each additional occupant in a residential unit.
(iii) Lifecare Fee--This component is non-refundable and equals the total
entry fee less the two components described in (i) and (ii). These fees are
generally amortized over a 50 to 60 month period, depending on the
individual plan.
4. OTHER ASSETS
Security deposits, normally for one month's rent at the Community, are
recorded as a current liability because residents typically terminate their
rental agreement with a 30-day notice. The liability had a balance of
$5,148,000 at January 3, 1997. In addition, certain states require that
security deposits be placed in an escrow account. These escrow balances
amounted to $7,696,000 at January 3, 1997, and are classified as other assets
in the accompanying consolidated balance sheet. In some cases, to ensure
prompt payment to a resident, unrestricted cash is utilized to pay the
security deposits and is thereafter reimbursed out of funds held in the
appropriate escrow account. Other assets also consists of prepaid real estate
taxes and restricted cash accounts for property additions, debt service and
insurance.
5. DEBT
Debt at January 3, 1997 consisted of the following (in millions):
<TABLE>
<S> <C>
Secured debt, average interest rate 7.6% at
January 3, 1997 maturing through 2020..... $221
Debt due to related party.................. 15
Capital lease obligations.................. 8
----
$244
====
</TABLE>
F-29
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in debt due to related party is approximately $15.5 million of
secured bonds owed to MI.
Aggregate debt maturities, including capital lease obligations, are: 1997 -
$22.3 million; 1998 - $7.1 million; 1999 - $33.2 million; 2000 - $50.4
million, 2001 - $5.5 million and $125.7 million thereafter. Interest paid for
the 24-week period ended June 20, 1997, and the 40-week period ended January
3, 1997, was approximately $9.7 million and $14.3 million, respectively.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of current assets, current liabilities and amounts due to MI
are assumed to be equal to their reported carrying amounts. The fair value of
the Partitioned Business' debt instruments approximates the carrying amount,
with the exception of two fixed-rate debt instruments. These instruments,
which represent property indebtedness, have been calculated to have a fair
value, by discounting the scheduled loan payments to maturity using rates that
are believed to be currently available for debt of similar terms and
maturities. Due to restrictions of transferability and prepayment, previously
modified debt terms and other property specific competitive conditions, the
Partitioned Business may be unable to refinance the indebtedness to obtain
such calculated debt amounts reported. The carrying amount and fair value at
January 3, 1997 of these two fixed-rate debt instruments is $171,264,000 and
$180,979,000 respectively.
7. REVENUES
Revenues are comprised of the following (in thousands):
<TABLE>
<CAPTION>
24-WEEK PERIOD 40-WEEK PERIOD
ENDED ENDED
JUNE 20, 1997 JANUARY 3, 1997
-------------- ---------------
<S> <C> <C>
Community Sales
Routine.................................... $84,646 $136,910
Ancillary.................................. 10,757 13,872
------- --------
Total Community Sales.................... 95,403 150,782
------- --------
Department Costs
Routine.................................... 53,059 82,779
Ancillary.................................. 8,774 12,016
------- --------
Total Department Costs................... 61,833 94,795
------- --------
Department Profit
Routine.................................... 31,587 54,131
Ancillary.................................. 1,983 1,856
------- --------
Revenues................................. $33,570 $ 55,987
======= ========
</TABLE>
Community sales consist of routine and ancillary sales. Routine sales are
generated from monthly charges for independent living units and daily charges
for assisted living suites and nursing beds, and are recognized monthly based
on the terms of the residents' agreements. Advance payments received for
services are deferred until the services are provided. Ancillary sales are
generated on a "fee for service" basis for supplementary items required by
residents and are recognized as the services are provided.
8. INCOME TAXES
Income taxes are calculated under the basis described in Note 1. The
Partitioned Business adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), effective
F-30
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
January 2, 1993. The Partitioned Business' deferred tax assets or liabilities
are included in investments and advances from parent on the consolidated
balance sheet because those amounts are currently being paid to or accrued
from MI. The temporary differences that give rise to significant deferred tax
assets or liabilities are property and equipment, debt premiums and reserves.
The income tax provision (benefit) is determined as if the Partitioned
Business filed a separate income tax return. The provision (benefit) for
income taxes consists of (in thousands):
<TABLE>
<CAPTION>
24-WEEK PERIOD 40-WEEK PERIOD
ENDED ENDED
JUNE 20, 1997 JANUARY 3, 1997
-------------- ---------------
<S> <C> <C>
Current--Federal ............................. $(3,125) $ 617
--State................................... (357) 71
------- ------
(3,482) 688
------- ------
Deferred--Federal ............................ 4,641 4,743
--State................................... 530 542
------- ------
5,171 5,285
------- ------
$ 1,689 $5,973
======= ======
</TABLE>
A reconciliation of the statutory Federal tax rate to the Partitioned
Business' effective income tax rate for the 24-week period ended June 20, 1997
and the 40-week period ended January 3, 1997 follows:
<TABLE>
<S> <C>
Statutory federal tax rate........................................... 35.0%
State income taxes, net of federal tax benefit....................... 4.0%
----
39.0%
====
</TABLE>
The provision or benefit is not indicative of what should have been recorded
if the Partitioned Business had determined the tax provision or benefit based
on its share of MI's allocation of a tax provision or benefit to all entities
included in the consolidated return based on taxable income or loss. However,
the Partitioned Business will reimburse or be reimbursed by MI for its share
of the consolidated provision or benefit based on MI's allocation of the
provision or benefit to all entities included in the consolidated return based
on taxable income or loss. The difference between the liability to or the
receivable from MI and the tax provision or benefit determined as if the
Partitioned Business filed a separate tax return will be recorded as a capital
contribution or a dividend.
9. RELATED PARTY TRANSACTIONS
Due to Marriott International, Inc.
Cash from the Partitioned Business is deposited with MI's general corporate
funds. Similarly, operating expenses, capital expenditures, centralized
services and other cash requirements of the Partitioned Business are
F-31
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
paid by MI and charged directly or allocated to the Partitioned Business. The
intercompany rate for non-capitalization borrowings was 6% for the 24-week
period ended June 20, 1997 and the 40-week period ended January 3,1997. These
borrowings have no specific repayment term.
The Partitioned Business is insured through MI's self-insurance program for
property damage, general liability, workers' compensation and employee medical
coverage. MI charges the Partitioned Business on a per occurrence basis.
Costs Allocated from Marriott International, Inc.
The costs allocated to the Partitioned Business, contained in its
consolidated statements of operations, are approximately $4.7 million and $6.6
million for the 24-week period ended June 20, 1997 and the 40-week period
ended January 3, 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
Effective June 21, 1997, the management agreements between Forum, as
manager, and entities included in the Partitioned Business have either been
assigned to MSLSI or new agreements between MSLSI and those entities have been
executed.
11. LITIGATION
On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court of the Southern District
of Indiana (the "Indiana Court") against Forum Retirement Inc.,
("FRI") a wholly-owned subsidiary of Forum, and general partner of Forum
Retirement Partners L.P. (the "Partnership"), alleging breach of the
partnership agreement, breach of fiduciary duty, fraud, insider trading and
civil conspiracy/aiding and abetting. On February 4, 1998, the Plaintiff,
MSLSI, FRI, Forum and Host Marriott entered into a Settlement and Release
Agreement (the "Settlement Agreement"), pursuant to which Host Marriott agreed
to pay each limited partner electing to join in the Settlement Agreement $4.50
per unit in exchange for (i) the transfer of all Partnership units owned by a
settling limited partner; (ii) an agreement by each settling limited partner
not to purchase additional Partnership units; (iii) a release of all claims
asserted in the litigation; and (iv) a dismissal of the litigation. Because of
the derivative nature of the allegations contained in the Plaintiff's
complaint, the General Partner invited all limited partners, in their sole
discretion, to participate in the Settlement Agreement, and detailed the
requirements for participation in two notices to unitholders, dated March 27,
1998, and May 6, 1998, respectively. Initially, the period within which a
limited partner could elect to participate in the Settlement Agreement was
scheduled to expire on April 27, 1998. This period was extended to May 22,
1998. Host Marriott also agreed to pay as much as an additional $1.25 per unit
to the settling Limited Partners, under certain conditions, in the event that
Host Marriott within three years following the date of settlement initiates a
tender offer for the purchase of units not presently held by Host Marriott or
the settling Limited Partners. On February 5, 1998, the Indiana Court entered
an order approving the dismissal of the Plaintiff's case.
In connection with the Settlement Agreement, Host Marriott initially
acquired 1,000,894 limited partner units from the Plaintiff and related
parties for $4,504,023 on March 25, 1998. Host Marriott subsequently acquired
additional 1,140,901 limited partner units from other limited partners
electing to participate in the Settlement Agreement for $5,134,055. As a
result of these purchases, Host Marriott's current ownership interest in the
Partnership, directly or through affiliates, increased to approximately 93%.
F-32
<PAGE>
FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 21, 1998, Forum Retirement, Inc. announced that it had received a
proposal from Host Marriott to acquire all remaining outstanding Partnership
Units for $4.50 per Unit. Host Marriott currently owns 14,151,169 of the
15,285,248 outstanding Units of the Partnership. Completion of the proposed
transaction is contingent on several items including but not limited to, FRI
Board approval and approval of an advisory committee of the Board which will
consider the transaction from the perspective of the holders of the remaining
Units and the issuance of a fairness opinion with respect to the proposed
transaction by the financial advisors to such advisory committee.
On July 22, 1998, Harbor Finance Partners, LTD. ("Harbor Finance"), a
Partnership unitholder, filed a purported class action lawsuit relating to
Host Marriott's proposal in Delaware State Chancery Court against Host
Marriott, FRI, two of their affiliates, the Partnership, and FRI's directors.
Harbor Finance alleges in the complaint that these defendants breached their
fiduciary duties to the unitholders by offering an inadequate price for the
units, attempting to improperly influence the market price of the units, and
failing to provide for a mechanism that would establish a fair price for the
units. Harbor Finance is seeking certification of a class, an injunction to
prevent completion of the proposed transaction or, in the alternative,
rescission of the transaction, and compensatory damages. Punitive damages are
not sought in the action. FRI believes that there is no merit to the
allegations contained in the complaint, and that this litigation will not have
a material, adverse effect on the financial performance of the Partnership.
The appointment of the Board's advisory committee and the required fairness
opinion will ensure that an adequate price will be paid.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Forum Group, Inc.:
We have audited the accompanying combined balance sheets of Forum Group,
Inc. and subsidiaries, as partitioned for sale to Host Marriott Corporation as
of March 31, 1996 and 1995 and the related combined statements of operations
and cash flows for the years then ended. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Forum Group, Inc.
and subsidiaries, as partitioned for sale to Host Marriott Corporation as of
March 31, 1996 and 1995 and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in note 1 to the combined financial statements, the Company
changed its method of recognizing vacation expense in 1996.
KPMG Peat Marwick LLP
Indianapolis, Indiana
September 3, 1997
F-34
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
COMBINED BALANCE SHEETS
MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
ASSETS -------- --------
<S> <C> <C>
Property and equipment, net.................................. $343,278 $312,987
Cash and cash equivalents.................................... 18,706 29,736
Other assets................................................. 55,452 36,404
-------- --------
$417,436 379,127
======== ========
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C>
Long-term debt............................................... 325,756 267,228
Due to Community Manager..................................... 13,432 10,906
Other liabilities............................................ 28,752 40,357
-------- --------
Total liabilities........................................ 367,940 318,491
Equity
Investments and advances from parent....................... 49,496 60,636
-------- --------
$417,436 $379,127
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Revenues...................................................... $59,525 $48,055
------- -------
Operating costs and expenses:
Depreciation and amortization............................... 10,712 8,360
Management fees............................................. 10,060 8,333
------- -------
20,772 16,693
------- -------
Operating profit before minority interest, corporate expenses,
interest expense and investment income....................... 38,753 31,362
Minority interest............................................. 1,015 289
Corporate expenses............................................ 915 431
Interest expense.............................................. 29,119 23,018
Investment income............................................. 2,321 1,743
------- -------
Income before income taxes, extraordinary loss and cumulative
effect of accounting change.................................. 10,025 9,367
Income taxes.................................................. 1,564 2,400
------- -------
Income before extraordinary loss and cumulative effect of ac-
counting change.............................................. 8,461 6,967
Extraordinary loss on extinguishment of debt.................. 2,078 253
------- -------
Income before cumulative effect of accounting change.......... 6,383 6,714
Cumulative effect of accounting change........................ 666 --
------- -------
Net income.................................................... $ 5,717 $ 6,714
======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 5,717 $ 6,714
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization expense................. 10,172 8,360
Amortization of deferred financing costs.............. 1,775 2,383
Cumulative effect of accounting change, net........... 666 --
Net income of investors on equity method.............. -- (73)
Other owners' interest in operations of combined
companies............................................ 1,015 289
Income from interest rate cap agreement, net.......... (104) --
Loss on sale of facility.............................. 203 --
Tax benefit recorded as additional equity............. -- 4,000
Non-cash portion of extraordinary loss................ 1,887 241
Other accrued revenues and expenses, net.............. 4,996 (396)
--------- --------
Net cash provided by operating activities........... 26,327 21,518
--------- --------
Cash flows from investing activities:
Purchases of retirement communities..................... -- (22,681)
Additions to property and equipment..................... (21,792) (5,803)
Proceeds from facility sales and other investments...... 1,300 --
Purchase of mortgage loans.............................. (18,370) --
Proceeds from sale of interest rate cap................. 5,847 --
Additional investment in Forum Retirement Partners,
L.P., net of acquired cash of $4,872 in 1995........... (6,520) (3,374)
Other................................................... (3,718) (2,411)
--------- --------
Net cash used by investing activities............... (43,253) (34,269)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt............................ 151,907 21,441
Payments on long-term debt.............................. (108,829) (9,121)
Advances (to) from parent............................... (16,857) 15,146
Deferred financing costs................................ (7,951) (2,824)
Distributions to other partners......................... (324) (313)
Resident deposits and restricted cash................... (12,050) (145)
--------- --------
Net cash provided by financing activities........... 5,896 24,184
--------- --------
Net increase (decrease) in cash and cash equivalents...... (11,030) 11,433
Cash and cash equivalents at beginning of year............ 29,736 18,303
--------- --------
Cash and cash equivalents at end of year.................. $ 18,706 $ 29,736
========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-37
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Effective June 21, 1997, Host Marriott Corporation ("Host") acquired all of
the outstanding common stock of Forum Group, Inc. ("Forum"), pursuant to a
Stock Purchase Agreement (the "Agreement") dated June 21, 1997 with Marriott
International, Inc. ("Marriott"). Certain operations and related assets and
liabilities of Forum, including certain communities and management fees,
specifically excluded from the Agreement, are not included in these combined
financial statements. Accordingly, these combined financial statements include
only the assets and liabilities, along with results of operations, of the
communities included in the Agreement ("Partitioned Business").
The primary operations of the Partitioned Business is 29 retirement
communities ("RCs"), located in 11 states, managed by a subsidiary of Marriott
Senior Living Services, Inc. ("MSLSI"), a Marriott subsidiary.
On March 25, 1996, an acquiring subsidiary of Marriott completed a tender
offer for the shares of Forum and purchased over 99% of its outstanding common
stock at $13 per share, an aggregate of approximately $300 million. On June
12, 1996, the acquiring subsidiary merged into Forum, with Forum as the
surviving entity. Costs incurred by Forum to effect Marriott's acquisition
have been excluded from the accompanying combined financial statements.
Additionally, Forum changed its policy regarding the recognition of vacation
expense to conform with Marriott's policy, resulting in a cumulative
adjustment of $1,010,000 in the accompanying combined financial statements,
net of the related income tax benefit of $344,000.
The Securities and Exchange Commission, in Staff Accounting Bulletin Number
55, requires that historical financial statements of a subsidiary, division,
or lesser business component of another entity include certain expenses
incurred by the parent on its behalf. These expenses include officer and
employee salaries, rent or depreciation, advertising, accounting and legal
services, other selling, general and administrative expenses and other such
expenses. These financial statements include such adjustments.
For operations that do not pay income taxes, Marriott internally allocates
income tax expense at the statutory rate after adjustment for state income
taxes and several other items. The income tax expense and related tax
information in these financial statements has been calculated as if the
Partitioned Business had not been eligible to be included in Marriott's
consolidated tax returns. The calculation of tax expense and deferred taxes
necessarily required certain assumptions, allocations and estimates, which
management believes are reasonable to accurately reflect the tax reporting for
the Partitioned Business as a stand-alone taxpayer.
These combined financial statements include the historical financial
position, results of operations and cash flows of the Partitioned Business
previously included in the Forum consolidated financial statements. These
combined financial statements have been prepared by management in accordance
with generally accepted accounting principles and include such estimates and
adjustments as deemed necessary to present fairly the consolidated financial
position, results of operations and cash flows for the Partitioned Business as
of and for the years ended March 31, 1996 and 1995.
Revenues and Expenses
Revenues represent the operating profit from the RCs because Forum has
delegated substantially all of the operating decisions related to the
generation of operating profit from its RCs to the community manager.
Operating profit reflects the net operating revenues flowing to Forum as RC
owner and represents operating
F-38
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
results, less property-level expenses, excluding depreciation, management fees
and minority interests, which are classified as operating costs and expenses
in the accompanying financial statements.
Cash Equivalents
Cash equivalents represent commercial paper and other income-producing
securities having an original maturity of less than three months, are readily
convertible to cash and are stated at cost, which approximates market.
Property and Equipment
Property and equipment are carried at management's estimate of their value
as of March 31, 1992, the effective date of Forum's reorganization, with
subsequent additions recorded at cost. Capital leases are recorded at the
lower of the estimated market value of the assets leased or the present value
of the minimum lease payments. Depreciation is computed on a straight-line
method. The annual rate of depreciation is based on a composite lives of 40
years for buildings and primarily from seven years to ten years for furniture
and equipment. A provision for value impairment is recorded whenever the
estimated undiscounted future cash flows from a property are less than the
property's net carrying value.
Deferred Costs
Fees and other costs incurred to obtain long-term financing are amortized to
interest expense over the term of the related debt on a straight-line basis,
and are a component of other assets. Any unamortized costs are written off and
included with extraordinary charges upon extinguishment.
Costs incurred in the initial occupancy of RCs are amortized on the
straight-line method over the shorter of the life expectancy of the initial
residents or the term of the initial residency agreement, generally one year,
and are a component of other assets.
Due to Community Manager
The principal component of due to community manager is working capital
provided on the behalf of Forum by the community manager in conjunction with
the operation of Forum's retirement communities. The Partitioned Business has
management agreements in effect with Forum, which require fees of 5% to 8% of
gross operating revenues.
Income Taxes
Income taxes are provided to the extent expected to be payable for the
current year, plus or minus the change in deferred income tax liabilities or
assets established for expected future income tax consequences resulting from
differences between the book and tax bases of assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-39
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SIGNIFICANT TRANSACTIONS
In August 1994, Forum purchased additional limited partner units of Forum
Retirement Partners, L.P. ("Forum Partners") to reach a 57% equity ownership
interest, and consequently its operations are combined into Forum's combined
financial statements from that date. Forum Partners owns and operates nine
RCs. In September 1995, Forum made a tender offer for all outstanding limited
partner units at $2.83 per unit, and an additional 2,644,724 limited partner
units were acquired in December 1995, which increased Forum's ownership to 79%
of the limited partner units. Pro forma unaudited operating results for the
year ended March 31, 1995 as if Forum Partners" results were consolidated from
April 1, 1994 are as follows:
<TABLE>
<S> <C>
Total revenues..................................................... $160,553
Income before extraordinary charge................................. 8,519
Net income......................................................... 8,266
</TABLE>
Other income for 1995 includes Forum's share of Forum Partners' operating
income before extraordinary charge of $73,000 for the four months ended July
31, 1994.
During fiscal 1995, Forum commenced implementation of an approximate $60
million long-term growth plan which included the following transactions:
. In August 1994, acquired an 80% equity interest in Tiffany House
("Tiffany"), a 130-unit assisted living facility in Fort Lauderdale,
Florida,
. In January 1995, acquired a 100% equity interest in The Forum at
Fountainview, an RC in West Palm Beach, Florida with 276 independent
living units and 64 assisted living units,
. In May 1995, acquired an 80% interest in The Forum at the Woodlands, an
RC near Houston, Texas with 240 independent living units and 63 assisted
living units, and
. In June 1995, purchased two delinquent mortgage loans secured by RCs
located in southern Florida for $18,370,000, which was funded through a
$14,063,000 draw on a line of credit and $4,307,000 of working capital.
(On February 16, 1996, Forum foreclosed on the mortgage loan of one RC
containing 88 assisted living units, and subsequent operations of the RC
are included in the accompanying combined financial statements. The other
mortgage loan, which related to a RC containing 152 independent living
units and 102 assisted living units, was foreclosed in May 1996).
During fiscal 1996, Forum relocated its headquarters to Fairfax, Virginia
from Indianapolis, Indiana and costs incurred have been excluded from the
accompanying combined financial statements.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following at March 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land and land improvements................................ $ 52,573 $ 49,737
Buildings and leasehold improvements...................... 286,956 263,411
Furniture and equipment................................... 22,960 18,780
Construction in progress.................................. 10,992 879
-------- --------
373,481 332,807
Less accumulated depreciation............................. 30,203 19,820
-------- --------
$343,278 $312,987
======== ========
</TABLE>
F-40
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) OTHER ASSETS
At March 31, 1996 and 1995, other assets includes restricted cash of
$704,000 and $1,436,000, respectively, deposited by present and prospective
residents of lifecare RCs; $7,576,000 and $5,115,000, respectively, of
resident security deposits; and $13,569,000 and $5,343,000, respectively,
funded under long-term debt and restricted to specific purposes.
(5) LONG-TERM DEBT
Long-term debt is comprised of the following at March 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Mortgage loans:
Secured by eight Forum RCs requiring monthly payments
based on a 25-year term including interest at 10.01%
to maturity in 2003................................... $124,140 $ --
Secured by seven Forum RCs requiring monthly payments
based on a 25-year term including interest at LIBOR
plus 4.180%, not to exceed 8.805%, (8.805% at March
31, 1995) to maturity in 2001. Requires a prepayment
penalty until 1997 with a yield maintenance premium
thereafter and additional payments if debt service
coverage ratio is below specified levels.............. -- 92,146
Secured by nine Forum Partners RCs requiring monthly
payments based on a 20-year term including interest at
9.93% to maturity in 2001. Requires a prepayment
penalty until 1997 with a yield maintenance premium
thereafter and additional payments if debt service
coverage ratio is below specified levels.............. 48,760 49,711
Secured by one Forum RC requiring quarterly interest
payments at LIBOR plus 1.50% (7.40% and 7.81% at March
31, 1996 and 1995, respectively) with quarterly
principal payments based on a 30-year term to maturity
in 1999............................................... 25,653 25,832
Secured by three Forum RCs requiring quarterly interest
payments at LIBOR plus 1.30% (7.20% and 7.61% at March
31, 1996 and 1995, respectively) with quarterly
principal payments based on a 30-year term to maturity
in 1996............................................... 45,490 46,036
Secured by one Forum RC requiring monthly payments
based on a 30-year term including interest at 10.5% to
maturity in 1997...................................... -- 14,321
Other mortgages........................................ 2,845 3,139
-------- --------
246,888 231,185
Acquisition line of credit............................... 29,929 15,865
Bonds payable............................................ 15,450 --
Demand note.............................................. 11,500 --
Senior subordinated notes................................ 10,000 10,000
Working capital credit facility.......................... 2,500 --
Capitalized leases....................................... 7,859 8,171
Other.................................................... 1,630 2,007
-------- --------
$325,756 $267,228
======== ========
</TABLE>
F-41
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In September 1995, Forum obtained a new mortgage loan to retire two existing
mortgage loans totaling $106,000,000 and to pay fees and expenses of
approximately $3,000,000. As a result of the mortgage refinancing, Forum
wrote-off $3,148,000 of deferred financing costs related to the retired
mortgage loans, which was recognized as an extraordinary loss in the
accompanying combined statement of operations, net of the related income tax
benefit of $1,070,000. An interest rate cap agreement was retained as an
investment after the extinguishment of the related mortgage refinancing, and a
mark-to-market gain of $1,554,000, a loss upon subsequent sale of $1,450,000,
and other income of $485,000 was realized while the agreement was held as an
investment, all of which were recorded as components of investment income in
the accompanying combined statement of operations.
During September 1994, Forum Investments I, L.L.C. ("FII"), a wholly-owned
subsidiary of Forum, obtained a $70,000,000 line of credit to finance the
acquisition, rehabilitation and/or expansion of RCs, which are pledged to
secure the line of credit. Interest payments are due monthly at LIBOR plus
5.450% including service costs and other fees of 2.075%, (10.763% at March 31,
1996), and principal amounts borrowed must be paid or converted to a ten-year
term loan by December 7, 1996. Additional principal payments, $6,455,000 as of
March 31, 1996 are required if the debt service coverage ratio is below
specified levels. The lender waived the March 31, 1996 additional principal
payment in exchange for a guarantee of that portion of the mortgage loan by
Forum. Prepayment of amounts converted to long-term debt after October 1, 1999
require a yield maintenance premium.
Bonds payable require variable rate semi-annual interest payments, at 7.375%
at March 31, 1996 and mature in 2008. The bonds payable were purchased by
Marriott in July, 1996.
The demand note resulted from a cash advance from Marriott to help fund
working capital requirements and requires quarterly interest payments at LIBOR
plus 4.5% (9.813% at March 31, 1996).
The senior subordinated notes require interest semi-annually at 12.5% to
maturity in 2003 and a premium payment if prepaid or redeemed.
The working capital credit facility requires interest monthly at LIBOR plus
5.00% including a servicer's fee and a fixed rate fee of 1.55% (10.313% at
March 31, 1996).
Future minimum payments under capitalized leases approximate $1,200,000 for
each of the five years ended March 31, 2001, with approximately $7,200,000 due
thereafter, including imputed interest of approximately $5,300,000. Property
and equipment at March 31, 1996 and 1995 include $11,392,000 and $10,965,000,
respectively, of assets under capital leases, consisting principally of
buildings and leasehold improvements, and related accumulated depreciation was
$1,359,000 and $977,000, respectively. During fiscal 1995, a lease obligation
was refinanced, which resulted in a $253,000 extraordinary loss, net of income
tax benefit of $59,000, in the accompanying combined statement of operations.
At March 31, 1996, scheduled maturities of long-term debt during the next
five years (based on current interest rates) are $91,954,000 in 1997,
$3,906,000 in 1998, $29,690,000 in 1999, $3,648,000 in 2000 and $48,640,000 in
2001. Cash paid for interest was $27,447,000 and $20,005,000 in fiscal years
1996 and 1995.
F-42
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(6) INCOME TAXES
Income tax expense differs from the amount computed by applying the U.S.
federal income tax rate of 34% to income before income tax expense,
extraordinary loss and cumulative effect of accounting change as a result of
the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Computed "expected" tax expense.................... $ 1,995 3,079
Reduction of valuation allowance for deferred tax
assets............................................ (691) (4,946)
Tax benefit recorded as additional equity.......... -- 4,000
Amounts added to net deferred tax assets........... (757) --
Other.............................................. (397) 208
---------- ----------
150 2,341
Income taxes allocated to:
Extraordinary charge............................. 1,070 59
Cumulative effect of accounting change........... 344 --
---------- ----------
$ 1,564 2,400
========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at March 31 are as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Deferred tax assets:
Property and equipment, principally due to differences in
the bases of assets as a result of fresh-start
accounting and depreciation methods..................... $18,488 19,403
Net operating loss carryforwards......................... 13,730 11,290
Accrued expenses......................................... 862 818
Losses in consolidated taxable entities.................. -- 3,571
Deferred income.......................................... 958 1,136
Deferred compensation.................................... 699 667
Other.................................................... 826 151
------- ------
Total gross deferred tax assets........................ 35,563 37,036
Less valuation allowance............................... 33,841 34,532
------- ------
Net deferred tax assets................................ 1,722 2,504
------- ------
Deferred tax liabilities:
Gains on property sales.................................. (769) (1,542)
Deferred management fees................................. (593) (593)
Investments, principally due to differences in the bases
of assets as a result of fresh-start accounting......... (360) (369)
------- ------
Total gross deferred tax liabilities................... (1,722) (2,504)
------- ------
Net deferred tax liabilities........................... $ -- --
======= ======
</TABLE>
F-43
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Due to the utilization of net operating loss carryforwards and the
recognition of net deferred tax assets, Forum had no federal income tax
liability at March 31, 1996 and 1995. Other assets included federal income
taxes receivable of $1,250,000 at March 31, 1996 and 1995.
As of March 31, 1996, net operating loss carryforwards for income tax
purposes were estimated to be approximately $167 million before the
application of certain net operating loss carryforward limitations resulting
from changes in ownership. As a result of these limitations, Forum expects the
utilization of net operating loss carryforwards will be limited to
approximately $40 million. These net operating loss carryforwards will expire
in varying amounts through fiscal year 2010. For financial reporting purposes,
any future benefit of net operating loss carryforwards and net deferred tax
assets arising prior to Forum's reorganization will be reported as additional
equity. The maximum tax benefit to be recognized through equity was estimated
to be approximately $34 million at March 31, 1996.
(7) REVENUE
Revenue is comprised of the following for the year ended March 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net operating revenues.................................... $179,926 $142,527
Other income.............................................. 397 746
-------- --------
180,323 143,273
-------- --------
Property level expenses................................... 120,325 95,080
Other expenses............................................ 473 138
-------- --------
120,798 95,218
-------- --------
$ 59,525 $ 48,055
======== ========
</TABLE>
Net operating revenues include routine and ancillary service revenues and
amounts estimated by management to be reimbursable by Medicare and other cost-
based programs. Routine service revenues, generated by monthly charges for
independent living units and daily or monthly charges for assisted living
suites and nursing beds, are recognized based on the terms of the residency
and admission agreements. Ancillary service revenues, generated on a fee for
service basis for supplementary items requested by residents, are recognized
as the services are provided. Cost-based reimbursements are subject to audit
by agencies administering the programs, and estimates are recorded for
potential adjustments that may result. To the extent estimated amounts are
expected to be adjusted, revenues are charged or credited when the adjustments
become determinable.
Resident advance fees under lifecare residency agreements are recognized as
income over the estimated useful lives of the RCs.
(8) COMMITMENTS AND CONTINGENCIES
On January 24, 1994, the Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint (the "Iowa Complaint") in the United States District Court
for the Northern District of Iowa (the "Iowa Court") against Forum Retirement,
Inc. ("FRI"), the wholly-owned subsidiary of Forum which serves as general
partner of Forum Partners, alleging breach of the Partnership Agreement,
breach of fiduciary duty, fraud, insider trading, and civil conspiracy/aiding
and abetting. The Plaintiff subsequently amended the Iowa Complaint, adding
Forum as a defendant. The Iowa Complaint alleged, among other things, that the
Plaintiff holds a substantial number of Units, that the Board of Directors of
FRI is not comprised of a majority of independent directors as required by
F-44
<PAGE>
FORUM GROUP, INC. AND SUBSIDIARIES, AS PARTITIONED
FOR SALE TO HOST MARRIOTT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the Partnership Agreement and as allegedly represented in the Partnership's
1986 Prospectus for its initial public offering, and that FRI's Board of
Directors has approved and/or acquiesced to an 8% management fee charged by
Forum under the Management Agreement. The Iowa Complaint further alleged that
the "industry standard" for such fees is 4%, thereby resulting in an
"overcharge" to the Partnership estimated by the Plaintiff at $1.8 million per
annum beginning in 1994. The Plaintiff sought the restoration of certain
former directors to the Board of Directors of FRI and the removal of certain
other Directors from the Board, an injunction prohibiting the payment of an 8%
management fee, and unspecified compensatory and punitive damages. On April 3,
1995, the Iowa Court entered an order dismissing the Iowa Complaint on
jurisdictional grounds. Although the Plaintiff filed a notice of appeal of the
Iowa Court's ruling, it subsequently dismissed this appeal.
On June 15, 1995, the Plaintiff filed a complaint (the "Indiana Complaint")
in the United States District Court for the Southern District of Indiana (the
"Indiana Court") against FRI and Forum seeking essentially the same relief.
The defendants moved to dismiss the Indiana Complaint for failure to state a
claim for which relief could be granted and, in response, on December 11, 1995
the Plaintiff amended the Indiana Complaint.
The defendants moved to dismiss the amended complaint on similar grounds,
and on May 17, 1996, the Indiana Court ruled on the defendant's motion by
dismissing without prejudice two of the four counts contained in the amended
complaint, namely, the counts for alleged insider trading and civil
conspiracy/aiding and abetting. The litigation is currently in the discovery
stage. FRI intends to vigorously defend against this litigation.
Forum has retirement agreements with certain current and former officers
under which each officer is to be paid 50% of average annual compensation, as
defined, for a period of fifteen years upon reaching age 65. Upon disability
or death prior to retirement, benefits are to be paid for a period of ten
years based on compensation as calculated for retirement benefits. At March
31, 1996 and 1995, Forum had an accrued expense relating to these agreements
of $2,055,000 and $1,963,000, respectively.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the fair value of all
financial assets and liabilities for which it is practicable to estimate. Fair
value is defined in the Statement as the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Forum believes the carrying amount of its
financial instruments other than certain property indebtedness approximates
their fair value due to the relatively short maturity of these instruments.
There is no quoted market value available for any of Forum"s instruments.
Property indebtedness with a carrying amount of $198,350,000 and $166,178,000
has been calculated to have a fair value of $185,340,000 and $158,473,000 by
discounting the scheduled loan payments to maturity using rates that are
believed to be currently available for debt of similar terms and maturities at
March 31, 1996 and 1995, respectively. Due to restrictions of transferability
and prepayment, previously modified debt terms and other property specific
competitive conditions, Forum may be unable to refinance the indebtedness to
obtain such calculated debt amounts reported.
F-45
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESEN-
TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICI-
TATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECU-
RITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
The Distribution......................................................... 21
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Pro Forma Financial Statements........................................... 26
Selected Historical Financial Data....................................... 45
Management's Discussion and Analysis of Results of Operations and Finan-
cial Condition.......................................................... 46
Business and Properties.................................................. 60
Management............................................................... 107
Security Ownership of Certain Beneficial Owners and Management after the
Distribution............................................................ 115
Certain Relationships.................................................... 119
Description of Capital Stock............................................. 120
Shares Eligible for Future Sale.......................................... 129
Federal Income Tax Consequences.......................................... 130
Legal Matters............................................................ 134
Experts.................................................................. 134
Available Information.................................................... 135
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CRESTLINE CAPITAL
CORPORATION
COMMON STOCK
---------------
PROSPECTUS
---------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered. All of the amounts shown are estimates except for the SEC
registration fee and the NYSE listing fee:
<TABLE>
<S> <C>
SEC registration fee............................................. $ 68,703
NYSE listing fee................................................. 140,600
Legal fees and expenses (other than blue sky).................... 1,125,000
Accounting fees and expenses..................................... 225,000
Blue sky fees and expenses, including legal fees................. 5,000
Printing and engraving expenses.................................. 500,000
Distribution agent fees.......................................... 200,000
Miscellaneous fees and expenses.................................. 100,000
----------
Total.......................................................... $2,364,303
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) acts committed in bad faith or active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The Company's Charter contains such a provision which
eliminates such liability to the maximum extent permitted by Maryland law.
The Company's Charter and 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 party to the proceeding by reason of
his service in that capacity or (b) any individual who, while a director or
officer of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan
or any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service
in that capacity, against any claim or liability to which he may become
subject by reason of such status. The MGCL permits a corporation to indemnify
its directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceedings 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 proceedings 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
MGCL, a Maryland corporation may not indemnify for an adverse judgment in a
suit by or in the right of the corporation. In accordance with the MGCL, the
Company's Bylaws require it, as a condition to advancing expenses, to obtain
(1) a written affirmation by the director or officer of his good faith belief
that he has met the standard of conduct necessary for indemnification by the
Company as authorized by the Company's Bylaws and (2) a written statement by
or on his behalf to repay the amount paid or reimbursed by the Company if it
shall ultimately be determined that the standard of conduct was not met.
The Company intends to enter into indemnification agreements with each of
its directors and officers. The indemnification agreements will require, among
other things, that the Company indemnify its directors and
II-1
<PAGE>
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 directors and officers of the Company are insured under policies of
insurance maintained by the Company, subject to limits of the policies,
against certain losses arising from any claim made against them by reason of
being or having been such officers or directors, including with respect to
securities law claims.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company was incorporated in Maryland on November 9, 1998 as a wholly-
owned subsidiary of Host to facilitate the reincorporation of Crestline
Capital Corporation, a Delaware corporation and the predecessor to the Company
("Crestline-Delaware") from Delaware to Maryland. On that date, the Company
issued 100 shares of common stock to Host for an aggregate purchase price of
$100. In November 1998, Crestline-Delaware was merged with and into the
Company, and the Company's name was changed from "CCC Merger Corporation" to
"Crestline Capital Corporation" as part of the merger. The Company issued 100
shares of Common Stock to Host in the Merger. The issuance of these shares was
affected in reliance on an exemption from registration under Section 4(2) of
the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 --Articles of Incorporation
3.2 --Bylaws
3.3 --Form of Articles of Amendment and Restatement of Articles of
Incorporation
4.1 --Form of Specimen Stock Certificate
5.1** --Opinion of Hogan & Hartson L.L.P. regarding the legality of the
shares being registered
8.1 --Opinion of Hogan & Hartson L.L.P. regarding tax matters
#10.1** --Form of Hotel Lease Agreement between the Company and Host REIT
for Full-Service Hotels Managed by Marriott International
#10.2 --Form of Hotel Lease Agreement between a Subsidiary of Host REIT
and HPT for Limited-Service Hotels
10.3 --Form of Hotel Sublease Agreement between the Company and Host
REIT for Limited-Service Hotels
#10.4 --Form of Full-Service Hotel Management Agreement between the
Company and Marriott International
#10.5 --Form of Owner's Agreement between the Company, Host REIT and
Marriott International
#10.6 --Form of Limited-Service Hotel Management Agreement between the
Company and Marriott International
#10.7 --Form of Communities Operating Agreement between the Company and
Marriott International
10.8 --Form of First Amendment to Communities Operating Agreement
10.9 --Form of Non-Competition Agreement between the Company and Host
REIT
10.10 --Form of Amended and Restated Communities Non-Competition
Agreement
10.11 --Restated Hotel Non-Competition Agreement between Host and
Marriott International
10.12 --Form of First Amendment to Restated Non-Competition Agreement
10.13** --Form of Distribution Agreement between the Company and Host REIT
10.14** --Form of Tax Sharing Agreement between the Company and Host REIT
10.15** --Form of FF&E Lease between the Company and Non-Controlled
Subsidiaries of Host REIT
10.16** --Form of Guaranty Agreement between the Company, the Lessees and
Host REIT
10.17** --Form of Pooling Agreement between the Company and Host REIT
10.18 --Form of Employee Benefits and Other Employment Matters
Allocation Agreement between the Company and Host REIT
10.19 --Form of Asset Management Agreement between the Company and Host
REIT
10.20 --Form of Asset Management Agreement between the Company and Non-
Controlled Subsidiaries of Host REIT
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.21 --Registration Rights Agreement between the Company and Blackstone
10.22 --Tax Matters Agreement dated June 21, 1997 among the Company,
Host, Forum, Marriott International and MSLS
10.23 --Indemnity Agreement dated June 21, 1997 among the Company, Host,
Marriott International and MSLS
10.24 --Form of Working Capital Note and Agreement
12.1 --Computation of Ratio of Earnings to Fixed Charges
21.1 --Subsidiaries of the Company
23.1 --Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1 and
Exhibit 8.1)
23.2 --Consent of Arthur Andersen LLP
23.3 --Consent of KPMG Peat Marwick LLP
24.1* --Powers of attorney from officers and directors of the Company
signing by an attorney in fact (included on Signature Page)
27.1 --Financial Data Schedule
99.1 --Consents of Certain Persons Named as Directors
</TABLE>
- --------
*Included on signature page.
**To be filed by amendment.
#Agreement filed is illustrative of numerous other agreements to which the
Company will be a party.
(b) Financial Statement Schedules.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (PREVIOUSLY FILED)
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Bethesda, State of Maryland, on
November 10, 1998.
Crestline Capital Corporation
/s/ James L. Francis
By: __________________________________
James L. Francis
Executive Vice President, Chief
Financial Officer and Treasurer
Each person whose signatures below hereby constitutes and appoints Bruce D.
Wardinski and James L. Francis, or any of them, their true and lawful attorney-
in-fact and agents, with full power of substitution and resubstitution, for
them and in their name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as they might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Chairman of the
/s/ Bruce D. Wardinski Board, President November 10,
- ------------------------------------ and Chief 1998
Bruce D. Wardinski Executive Officer
(Principal
Executive Officer)
/s/ James L. Francis Executive Vice
- ------------------------------------ President, Chief November 10,
James L. Francis Financial Officer 1998
and Treasurer
(Principal
Financial Officer)
/s/ Larry K. Harvey Senior Vice
- ------------------------------------ President and November 10,
Larry K. Harvey Corporate 1998
Controller
(Principal
Accounting
Officer)
Director
/s/ Christopher J. Nassetta November 10,
- ------------------------------------ 1998
Christopher J. Nassetta
</TABLE>
II-4
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
CCC MERGER CORPORATION
ARTICLE I
Incorporator
------------
I, Tracy M.J. Colden, whose address is 10400 Fernwood Road, Bethesda,
Maryland 20817, being at least 18 years of age, am hereby serving as the
incorporator of and forming a corporation under and by virtue of the general
laws of the State of Maryland.
ARTICLE II
Name
----
The name of the corporation (which is hereinafter called the
"Corporation") is CCC Merger Corporation.
ARTICLE III
Purposes
--------
The purposes for which the Corporation is formed are to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Maryland (the "MGCL").
ARTICLE IV
Principal Office
----------------
The present address of the principal office of the Corporation in the
State of Maryland is 10400 Fernwood Road, Bethesda, Maryland 20817.
ARTICLE V
Registered Agent
----------------
The name and address of the resident agent of the Corporation in the
State of Maryland is The Prentice Hall Corporation System, Maryland, 11 East
Chase Street, Baltimore, Maryland 21202. Said resident agent is a Maryland
corporation.
ARTICLE VI
Capitalization
--------------
Section 6(a) Shares and Par Value. The total number of shares of
--------------------
stock of all classes ("Capital Stock") which the Corporation has authority to
issue is
<PAGE>
85,000,000 shares, 75,000,000 of which initially are classified as common stock,
par value of $.01 per share ("Common Stock"), and 10,000,000 of which initially
are classified as preferred stock, par value $.01 per share ("Preferred Stock").
The aggregate par value of all classes of stock that the Corporation shall have
authority to issue is $850,000. The Board of Directors may, by adopting a
resolution and filing articles supplementary with the State Department of
Assessments and Taxation of Maryland, classify and reclassify any unissued
shares of Capital Stock by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such shares of stock. The power of the Board of Directors under
this Section 6(a) to classify and reclassify any of the shares of Capital Stock
shall include, without limitation, authority to classify or reclassify any
unissued shares of such stock (including shares initially designated as Common
Stock or Preferred Stock above) into Common Stock, Preferred Stock, a class or
classes of preferred stock, preference stock, special stock or other stock
(including non-voting common stock), and to divide and classify shares of any
class into one or more series of such class. Unless otherwise specifically
provided for in the terms of any class or series of stock now or hereafter
created, the amount that would be needed, if the Corporation were to be
dissolved at the time of a distribution, to satisfy the preferential rights on
dissolution of stockholders whose preferential rights are superior to those
receiving the distribution, shall not limit the ability of the Corporation to
make any distribution or the amount thereof.
Section 6(b) Common Stock. The following is a description of the
------------
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption of the Common Stock of the Corporation:
(1) Voting Rights. Each share of Common Stock shall have one vote on
-------------
all actions to be taken by the stockholders of the Corporation, and, except as
otherwise provided in respect of any class of stock at any time classified or
reclassified, the exclusive voting power for all purposes shall be vested in the
holders of the Common Stock.
(2) Dividends. Subject to the provisions of law and any preferences
---------
of any class of Capital Stock, including any shares of Preferred Stock,
hereafter classified or reclassified, dividends, including dividends payable in
shares of another class of the Corporation's stock, may be paid on the Common
Stock of the Corporation at such time and in such amounts as the Board of
Directors may deem advisable and the holders of the Common Stock shall share
ratably in any such dividends, in proportion to the number of shares of Common
Stock held by them respectively, on a share for share basis.
-2-
<PAGE>
(3) Liquidation Rights. In the event of any liquidation, dissolution
------------------
or winding up of the Corporation, whether voluntary or involuntary, the holders
of the Common Stock shall be entitled, after payment or provision for payment of
the debts and other liabilities of the Corporation and the amount to which the
holders of any class of Capital Stock at any time classified or reclassified
having a preference on distributions in the liquidation, dissolution or winding
up of the Corporation are entitled, including any shares of Preferred Stock,
together with the holders of any other class of Capital Stock hereafter
classified or reclassified not having a preference on distributions in the
liquidation, dissolution or winding up of the Corporation, to share ratably in
the remaining net assets of the Corporation.
Section 6(c) Preferred Stock. The Board of Directors shall have the
---------------
authority to classify and reclassify any unissued shares of Preferred Stock from
time to time by setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption of such shares
of the Preferred Stock. Subject to the foregoing, the power of the Board of
Directors to classify and reclassify any of the shares of Preferred Stock shall
include, without limitation, subject to the provisions of the charter, authority
to classify or reclassify any of the shares of such stock into Common Stock, a
class or classes of preferred stock, preference stock, special stock or other
stock, and to divide and classify shares of any class into one or more series of
such class, by determining, fixing, or altering one or more of the following:
(1) The distinctive designation of such class or series and the number
of shares to constitute such class or series; provided that, unless otherwise
prohibited by the terms of such or any other class or series, the number of
shares of any class or series may be decreased by the Board of Directors in
connection with any classification or reclassification of unissued shares and
the number of shares of such class or series may be increased by the Board of
Directors in connection with any such classification or reclassification, and
any shares of any class or series which have been redeemed, purchased, otherwise
acquired or converted into shares of Common Stock or any other class or series
shall become part of the authorized class of stock so redeemed, purchased,
otherwise acquired or converted into shares of Common Stock and be subject to
classification and reclassification as provided in this Article VI.
(2) Whether or not and, if so, the rates, amounts and times at which,
and the conditions under which, dividends shall be payable on shares of such
class or series, whether any such dividends shall rank senior or junior to or on
a parity with the dividends payable on any other class or series of stock, and
the status of any such dividends as cumulative, cumulative to a limited extent
or non-cumulative and as participating or non-participating.
-3-
<PAGE>
(3) Whether or not shares of such class or series shall have voting
rights, in addition to any voting rights provided by law and, if so, the terms
of such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment of the conversion or exchange rate in such
events or at such times as the Board of Directors shall determine.
(5) Whether or not shares of such class or series shall be subject to
redemption and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not there shall be
any sinking fund or purchase account in respect thereof, and if so, the terms
thereof.
(6) The rights of the holders of shares of such class or series upon
the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary depending
upon whether such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class or series of stock.
(7) Whether or not there shall be any limitations applicable, while
shares of such class or series are outstanding, upon the payment of dividends or
making of distributions on, or the acquisition of, or the use of moneys for
purchase or redemption of, any stock of the Corporation, or upon any other
action of the Corporation, including action under this Section 6(c), and, if so,
the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class or
series, not inconsistent with law and the charter of the Corporation.
Section 6(d) Ranking of Classes or Series of Capital Stock. For the
---------------------------------------------
purposes hereof and of any articles supplementary to the charter providing for
the classification or reclassification of any shares of Capital Stock or of any
other charter document of the Corporation (unless otherwise provided in any such
articles or document), any class or series of stock of the Corporation shall be
deemed to rank:
(1) prior to another class or series either as to dividends or upon
liquidation, if the holders of such class or series shall be entitled to the
receipt of
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<PAGE>
dividends or of amounts distributable on liquidation, dissolution or winding up,
as the case may be, in preference or priority to holders of such other class or
series;
(2) on a parity with another class or series either as to dividends or
upon liquidation, whether or not the dividend rates, dividend payment dates or
redemption or liquidation price per share thereof be different from those of
such others, if the holders of such class or series of stock shall be entitled
to receipt of dividends or amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in proportion to their respective dividend
rates or redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
(3) junior to another class or series either as to dividends or upon
liquidation, if the rights of the holders of such class or series shall be
subject or subordinate to the rights of the holders of such other class or
series in respect of the receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may be.
ARTICLE VII
Board of Directors
------------------
The number of directors of the Corporation shall be two (2), which
number may be changed from time to time pursuant to the Bylaws of the
Corporation; provided, however, that if the Corporation has three (3) or more
-------- -------
stockholders, the number of directors may not be less than three (3). The names
of the persons who will serve as directors of the Corporation until the first
annual meeting of stockholders and until their successors are elected and
qualify are: Bruce D. Wardinski and Christopher J. Nasetta.
ARTICLE VIII
Restriction on Transfer and Ownership of Shares of Capital Stock
----------------------------------------------------------------
The Corporation reserves the right to amend its charter to include
restrictions on the transfer and ownership of shares of its Capital Stock.
ARTICLE IX
Merger, Consolidation, Share Exchange or Transfer of Assets
-----------------------------------------------------------
Subject to the terms of any class or series of Capital Stock at the
time outstanding, the Corporation may merge with or into another entity, may
consolidate with one or more other entities, may participate in a share exchange
or may transfer its assets within the meaning of the MGCL, but any such merger,
consolidation, share exchange or transfer of its assets must be approved (i) by
the
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<PAGE>
Board of Directors in the manner provided in the MGCL and (ii) by the
stockholders by the affirmative vote of two-thirds of all votes entitled to be
cast thereon to the extent a stockholder vote is required under the MGCL to
effect any such transaction. Notwithstanding any other provisions of the charter
or Bylaws of the Corporation, the affirmative vote of stockholders holding at
least two-thirds of all of the votes entitled to be cast thereon shall be
required to amend, alter, change, repeal, or adopt any provisions inconsistent
with, the provisions of this ARTICLE IX.
ARTICLE X
Miscellaneous Provisions
------------------------
Section 10(a) Additional Provisions. The following provisions are
---------------------
hereby adopted for the purpose of defining, limiting, and regulating the powers
of the Corporation and of the directors and stockholders of the Corporation:
(1) Authority to Issue Stock. The Board of Directors is hereby
------------------------
empowered to authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities convertible into shares of its stock of any class or classes, whether
now or hereafter authorized, for such consideration as may be deemed advisable
by the Board of Directors and without any action by the stockholders.
(2) No Preemptive Rights. No stockholder of the Corporation shall
---------------------
have preemptive rights to purchase, subscribe for, or otherwise acquire any
stock or other securities of the Corporation, and any and all preemptive rights
are hereby denied; other than such, if any, as the Board of Directors, in its
sole discretion, may determine and at such price or prices and upon such other
terms as the Board of Directors, in its sole discretion, may fix; and any stock
or other securities which the Board of Directors may determine to offer for
subscription may, as the Board of Directors in its sole discretion shall
determine, be offered to the holders of any class, series or type of stock or
other securities at the time outstanding to the exclusion of the holders of any
or all other classes, series or types of stock or other securities at the time
outstanding.
(3) Indemnification. The Corporation shall indemnify (A) its
---------------
directors and officers, whether serving the Corporation or at its request any
other entity, to the full extent required or permitted by the general laws of
the State of Maryland now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by law and (B)
other employees and agents to such extent as shall be authorized by the Board of
Directors or the Bylaws and be permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out
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<PAGE>
these indemnification provisions and is expressly empowered to adopt, approve
and amend from time to time such by-laws, resolutions or contracts implementing
such provisions or such further indemnification arrangements as may be permitted
by law. No amendment of the charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
(4) Liability of Directors and Officers. To the fullest extent
-----------------------------------
permitted by Maryland statutory or decisional law, as amended or interpreted, no
director or officer of this Corporation shall be personally liable to the
Corporation or its stockholders for money damages. No amendment of the charter
of the Corporation or repeal of any of its provisions shall limit or eliminate
the benefits provided to directors and officers under this provision with
respect to any act or omission which occurred prior to such amendment or repeal.
(5) Call of Special Meetings of Stockholders. A special meeting of
-----------------------------------------
the stockholders of the Corporation may be called by the President, the Board of
Directors or any other person specified in the Bylaws. The Secretary of the
Corporation shall also call a special meeting of the stockholders on the written
request of stockholders entitled to cast a majority of all the votes entitled to
be cast at the meeting.
(6) Bylaws. The power to adopt, alter and repeal the Bylaws of the
-------
Corporation is vested exclusively in the Board of Directors.
(7) Amendments. The Corporation reserves the right from time to time
----------
to make any amendments of its charter which may now or hereafter be authorized
by law, including without limitation any amendments changing the terms or
contract rights, as expressly set forth in the charter, of any of its
outstanding stock by classification, reclassification or otherwise. Except as
otherwise provided in the charter of the Corporation, any amendment to the
charter shall be valid only if approved by the affirmative vote of stockholders
of the Corporation holding not less than a majority of all the votes entitled to
be cast on the matter. Notwithstanding any other provisions of the charter or
Bylaws of the Corporation, the affirmative vote of stockholders holding at least
two-thirds of all of the votes entitled to be cast thereon shall be required to
amend, alter, change, repeal, or adopt any provisions inconsistent with, the
provisions of Section 10(a) of this ARTICLE X.
Section 10(b) No Limitation of Powers. The enumeration and
-----------------------
definition of particular powers of the Board of Directors included herein shall
in no way be limited or restricted by reference to or inference from the terms
of any other clause of this or any other Article or the charter of the
Corporation, or construed as or deemed by inference or otherwise in any manner
to exclude or limit any powers
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<PAGE>
conferred upon the Board of Directors under the general laws of the State of
Maryland now or hereinafter in force.
ARTICLE XI
Duration
--------
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation,
acknowledging the same to be my act, on November 9, 1998.
/s/ TRACY M.J. COLDEN
---------------------
Tracy M.J. Colden
-8-
<PAGE>
EXHIBIT 3.2
CCC MERGER CORPORATION
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of CCC Merger
----------------
Corporation (the "Corporation") shall be located at such place or places as the
directors may designate.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional
------------------
offices at such places as the directors may from time to time determine or the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the
-----
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders for
--------------
the election of directors and the transaction of any business within the powers
of the Corporation shall be held during the month of May of each year, after the
delivery of the annual report referred to in Section 12 of this Article II, at a
convenient location and on proper notice, on a date and at the time set by the
directors, beginning with the year 1999. Failure to hold an annual meeting does
not invalidate the Corporation's existence or affect any otherwise valid acts of
the Corporation.
Section 3. SPECIAL MEETINGS. A special meeting of the stockholders
----------------
of the Corporation may be called by the President or the Board of Directors or
by holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation in the manner specified in articles
supplementary filed as part of the charter of the corporation (the "Charter").
The Secretary of the Corporation shall also call a special meeting of the
stockholders on the written request of stockholders entitled to cast a majority
of all the votes entitled to be cast at the meeting. A special meeting need not
be called to consider any matter which is substantially the same as a matter
voted on at any meeting of the stockholders held during the preceding twelve
months.
<PAGE>
Section 4. NOTICE. Not less than 10 nor more than 90 days before
------
each meeting of stockholders, the Secretary shall give to each stockholder
entitled to vote at such meeting and to each stockholder not entitled to vote
who is entitled to notice of the meeting written or printed notice stating the
time and place of the meeting and, in the case of a special meeting or as
otherwise may be required by any statute, the purpose for which the meeting is
called, either by mail or by presenting it to such stockholder personally or by
leaving it at his or her residence or usual place of business. If mailed, such
notice shall be deemed to be given when deposited in the United States mail
addressed to the stockholder at his post office address as it appears on the
records of the Corporation, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
---------------
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of stockholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of the stockholders, the
------------
Chairman of the Board, if there is one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated: the
Vice Chairman of the Board, if there is one, the Chief Executive Officer, if
there is one, the President, the Vice Presidents in their order of rank and
seniority, or a Chairman chosen by the stockholders entitled to cast a majority
of the votes which all stockholders present in person or by proxy are entitled
to cast, shall act as Chairman, and the Secretary, or, in his absence, an
Assistant Secretary, or in the absence of both the Secretary and Assistant
Secretaries, a person appointed by the Chairman shall act as Secretary.
Section 7. QUORUM. At any meeting of stockholders, the presence in
------
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the Charter for the vote
necessary for the adoption of any measure. If, however, such quorum shall not
be present at any meeting of the stockholders, the stockholders entitled to vote
at such meeting, present in person or by proxy, shall have the power to adjourn
the meeting from time to time to a date not more than 120 days after the
original record date without notice other than announcement at the meeting. At
such adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 8. VOTING. Subject to the rights of the holders of any class
------
or series of stock (other than Common Stock) to elect additional directors under
2
<PAGE>
specified circumstances, a plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted. Unless otherwise provided in the Charter, a majority of the votes cast
at a meeting of stockholders duly called and at which a quorum is present shall
be sufficient to approve any other matter which may properly come before the
meeting, unless more than a majority of the votes cast is required herein or by
statute or by the Charter. Unless otherwise provided in the Charter, each
outstanding share, regardless of class, shall be entitled to one vote on each
matter submitted to a vote at a meeting of stockholders.
Section 9. PROXIES. A stockholder may cast the votes entitled to be
-------
cast by the shares owned of record by him or her either in person or by proxy
executed in writing by the stockholder or by his or her duly authorized attorney
in fact. Such proxy shall be filed with the Secretary of the Corporation before
or at the time of the meeting. No proxy shall be valid after 11 months from the
date of its execution, unless otherwise provided in the proxy.
Section 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of the
-----------------------------------
Corporation registered in the name of a corporation, partnership, trust,
limited liability company or other entity, if entitled to be voted, may be voted
by the president or a vice president, a general partner, trustee, manager or
member thereof, as the case may be, or a proxy appointed by any of the foregoing
individuals, unless some other person who has been appointed to vote such shares
pursuant to a bylaw or a resolution of the governing board of such corporation
or other entity or agreement of the partners of the partnership presents a
certified copy of such bylaw, resolution or agreement, in which case such person
may vote such shares. Any trustee or other fiduciary may vote shares registered
in his or her name as such fiduciary, either in person or by proxy.
Shares of the Corporation directly or indirectly owned by it shall not
be voted at any meeting and shall not be counted in determining the total number
of outstanding shares entitled to be voted at any given time, unless they are
held by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
The directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the share transfer books, the time after the record date or closing
of the share transfer books within which the certification
3
<PAGE>
must be received by the Corporation; and any other provisions with respect to
the procedure which the directors consider necessary or desirable. On receipt of
such certification, the person specified in the certification shall be regarded
as, for the purposes set forth in the certification, the stockholder of record
of the specified shares in place of the stockholder who makes the certification.
Section 11. INSPECTORS. At any meeting of stockholders, the chairman
----------
of the meeting may appoint one or more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares represented at
the meeting based upon their determination of the validity and effect of
proxies, count all votes, report the results and perform such other acts as are
proper to conduct the election and voting with impartiality and fairness to all
the stockholders.
Each report of an inspector shall be in writing and signed by him or
her or by a majority of them if there is more than one inspector acting at such
meeting. If there is more than one inspector, the report of a majority shall be
the report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
----- -----
Section 12. REPORTS TO STOCKHOLDERS. The directors shall submit to
-----------------------
the stockholders at or before the annual meeting of stockholders a report of the
business and operations of the Corporation during the prior fiscal year,
containing a balance sheet and a statement of income and surplus of the
Corporation, accompanied by the certification of an independent certified public
accountant, and such further information as the directors may determine is
required pursuant to any law or regulation to which the Corporation is subject.
Within the earlier of 20 days after the annual meeting of stockholders or 120
days after the end of the fiscal year of the Corporation, the directors shall
place the annual report on file at the principal office of the Corporation and
with any governmental agencies as may be required by law and as the directors
may deem appropriate.
Section 13. NOMINATIONS AND PROPOSALS BY
STOCKHOLDERS
----------------------------
(a) Annual Meetings of Stockholders. (1) Except as otherwise
-------------------------------
provided for or fixed by or pursuant to the provisions of the Charter of the
Corporation relating to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, nominations of
persons for election to the Board of Directors and the proposal of business to
be considered by the stockholders may be made at an annual meeting of
stockholders (i) pursuant to the
4
<PAGE>
Corporation's notice of meeting, (ii) by or at the direction of the directors or
(iii) by any stockholder of the Corporation who was a stockholder of record both
at the time of giving of notice provided for in this Section 13(a) and at the
time of the annual meeting, who is entitled to vote at the meeting and who
complied with the notice procedures set forth in this Section 13(a).
(2) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a) (1)
of this Section 13, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for action by stockholders. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day before the date
on which the Corporation first mailed its proxy materials for the prior year's
annual meeting of stockholders. Notwithstanding the foregoing, to be timely for
the 1999 annual meeting of stockholders, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the 60th day prior to such meeting or
the tenth day following the day on which public announcement is first made of
the date of the 1999 annual meeting nor earlier than the close of business on
the 90th day before the date of such annual meeting. In no event shall the
public announcement of a postponement or adjournment of an annual meeting to a
later date or time commence a new time period for the giving of a stockholder's
notice as described above. Such stockholder's notice shall set forth as to each
person whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); (ii) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and of the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made, (x) the name
and address of such stockholder, as they appear on the Corporation's books, and
of such beneficial owner and (y) the number of each class of shares of the
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.
(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Except as
otherwise
5
<PAGE>
provided for or fixed by or pursuant to the provisions of the Charter of the
Corporation relating to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who was a stockholder of record both at the time of giving of notice
provided for in this Section 13(b) and at the time of the special meeting, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 13(b). Except as otherwise provided for or fixed by or
pursuant to the provisions of the Charter of the Corporation relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, in addition to the foregoing requirements, for
nominations or other business to be properly brought before a special meeting by
a stockholder, such stockholder's notice containing the information required by
paragraph (a)(2) of this Section 13 must be delivered to the Secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such special meeting or
the tenth day following the day on which public announcement is first made of
the date of the special meeting. In no event shall the public announcement of a
postponement or adjournment of a special meeting to a later date or time
commence a new time period for the giving of a stockholder's notice as described
above.
(c) General. (1) Except as otherwise provided for or fixed by or
-------
pursuant to the provisions of the Charter of the Corporation relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, only such persons who are nominated in accordance with
the procedures set forth in this Section 13 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 13. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 13 and, if any proposed
nomination or business is not in compliance with this Section 13, to declare
that such nomination or proposal shall be disregarded.
(2) For purposes of this Section 13, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
6
<PAGE>
Associated Press or comparable news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section
13, a stockholder shall also comply with all applicable requirements of state
law and of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this Section 13.
Section 14. INFORMAL ACTION BY STOCKHOLDERS. Subject to the rights
-------------------------------
of the holders of any class or series of stock (other than Common Stock) to
elect additional directors under specified circumstances and notwithstanding the
provisions of Section 13 of this Article II, any action required or permitted to
be taken at a meeting of stockholders may be taken without a meeting if a
consent in writing, setting forth such action, is signed by all stockholders
entitled to vote on such matter.
Section 15. VOTING BY BALLOT. Voting on any question or in any
----------------
election at a meeting of stockholders may be viva voce unless the presiding
---------
officer shall order or any stockholder present at such meeting in person or by
proxy shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS; QUALIFICATIONS; TRUSTEES HOLDING OVER.
-----------------------------------------------------
The business and affairs of the Corporation shall be managed under the direction
of its Board of Directors. A director shall be an individual at least 21 years
of age but less than 66 years of age who is not under legal disability. In case
of failure to elect directors at an annual meeting of the stockholders, the
directors holding over shall continue to direct the management of the business
and affairs of the Corporation until their successors are elected and qualify.
Section 2. NUMBER. At any regular meeting or at any special meeting
------
called for that purpose, a majority of the entire Board of Directors may
establish, increase or decrease the number of directors, subject to any
limitations on the number of directors set forth in the Charter.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the
---------------------------
directors shall be held immediately after and at the same place as the annual
meeting of stockholders, no notice other than this Bylaw being necessary. The
directors may provide, by resolution, the time and place, either within or
without the State of Maryland, for the holding of regular meetings of the
directors without other notice than such resolution.
7
<PAGE>
Section 4. SPECIAL MEETINGS. Special meetings of the directors may
----------------
be called by or at the request of the Chairman of the Board or the President or
by a majority of the directors then in office. The person or persons authorized
to call special meetings of the directors may fix any place, either within or
without the State of Maryland, as the place for holding any special meeting of
the directors called by them.
Section 5. NOTICE. Notice of any special meeting shall be given by
------
written notice delivered personally, telegraphed, facsimile-transmitted or
mailed to each director at his or her business or residence address. Personally
delivered or telegraphed notices shall be given at least two days prior to the
meeting. Notice by mail shall be given at least five days prior to the meeting.
Telephone or facsimile-transmission notice shall be given at least 24 hours
prior to the meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail properly addressed, with postage thereon
prepaid. If given by telegram, such notice shall be deemed to be given when the
telegram is delivered to the telegraph company. Telephone notice shall be
deemed given when the director is personally given such notice in a telephone
call to which he or she is a party. Facsimile-transmission notice shall be
deemed given upon completion of the transmission of the message to the number
given to the Corporation by the director and receipt of a completed answer-back
indicating receipt. Neither the business to be transacted at, nor the purpose
of, any annual, regular or special meeting of the directors need be stated in
the notice, unless specifically required by statute or these Bylaws.
Section 6. QUORUM. A majority of the directors shall constitute a
------
quorum for convening any meeting of the directors, provided that, if less than a
-------- ----
majority of such directors are present at said meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice, and provided further that if, pursuant to the Charter or these Bylaws,
the vote of a majority of a particular group of directors is required for
action, a quorum must also include a majority of such group.
The directors present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough directors to leave less than a quorum.
Section 7. VOTING. The action of the majority of the directors
------
present at a meeting at which a quorum is present when such meeting is convened
shall be the action of the directors, unless the concurrence of a greater
proportion is required for such action by applicable statute, the Charter or
these Bylaws.
Section 8. TELEPHONE MEETINGS. The directors may participate in a
------------------
meeting by means of a conference telephone or similar communications
8
<PAGE>
equipment if all persons participating in the meeting can hear each other at the
same time. Participation in a meeting by these means shall constitute presence
in person at the meeting.
Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or
----------------------------
permitted to be taken at any meeting of the directors may be taken without a
meeting, if a consent in writing to such action is signed by each director and
such written consent is filed with the minutes of proceedings of the directors.
Section 10. VACANCIES. If for any reason any or all of the directors
---------
cease to be directors, such event shall not terminate the Corporation or affect
these Bylaws or the powers of the remaining directors hereunder. Subject to the
rights of holders of any class or series of stock having a preference over the
Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, any vacancy on the Board of Directors may be filled by
a majority of the remaining directors (except that a vacancy which results from
an increase in the number of directors may be filled by a majority of the entire
Board of Directors) and, in the case of a vacancy resulting from removal of a
director, by the stockholders by the affirmative vote of two-thirds of the votes
eligible to be cast for the election of directors. Any individual so elected as
director shall hold office until the next annual meeting of stockholders and
until his or her successor is elected and qualified.
Section 11. COMPENSATION. (a) The directors shall not receive any
------------
stated salary for their services as directors but, by resolution of the
directors, may receive fixed sums per year and/or per meeting and/or per visit
to real property owned, operated or leased or to be acquired, operated or leased
by the Corporation and for any service or activity they perform or engage in as
directors. Such fixed sums may be paid either in cash or in shares of the
Corporation. Directors may be reimbursed for expenses of attendance, if any, at
each annual, regular or special meeting of the directors or of any committee
thereof; and for their expenses, if any, in connection with each property visit
and any other service or activity performed or engaged in as directors; but
nothing herein contained shall be construed to preclude any directors from
serving the Corporation in any other capacity and receiving compensation
therefor.
(b) The Corporation may lend money to, guarantee an obligation of or
otherwise assist a director or a trustee or director of a direct or indirect
subsidiary of the Corporation; provided, however, that such director or other
person is also an executive officer of the Corporation or of such subsidiary, or
the loan, guarantee or other assistance is in connection with the purchase of
shares of capital stock of the Corporation. The loan, guarantee or other
assistance may be with or without interest, unsecured, or secured in any manner
that the Board of Directors approves, including a pledge of shares.
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Section 12. REMOVAL OF DIRECTORS. The stockholders may, at any time,
--------------------
remove any director in the manner provided in the Charter.
Section 13. LOSS OF DEPOSITS. No director shall be liable for any
----------------
loss which may occur by reason of the failure of the bank, trust company,
savings and loan association, or other institution with whom moneys or shares
have been deposited.
Section 14. SURETY BONDS. Unless required by law, no director shall
------------
be obligated to give any bond or surety or other security for the performance of
any of his or her duties.
Section 15. RELIANCE. Each director, officer, employee and agent of
--------
the Corporation shall, in the performance of his or her duties with respect to
the Corporation, be fully justified and protected with regard to any act or
failure to act in reliance in good faith upon the books of account or other
records of the Corporation, upon an opinion of counsel or upon reports made to
the Corporation by any of its officers or employees or by the advisers,
accountants, appraisers or other experts or consultants selected by the
directors or officers of the Corporation, regardless of whether such counsel or
expert may also be a director.
Section 16. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND
----------------------------------------------------
AGENTS. The directors shall have no responsibility to devote their full time to
- ------
the affairs of the Corporation. Any director or officer, employee or agent of
the Corporation (other than a full-time officer, employee or agent of the
Corporation), in his or her personal capacity or in a capacity as an affiliate,
employee or agent of any other person, or otherwise, may have business interests
and engage in business activities similar or in addition to those of or relating
to the Corporation.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATION. The directors may
--------------------------------
appoint from among its members an Executive Committee, an Audit Committee and a
Compensation Policy Committee, each composed of at least three directors, and
other committees, each composed of one or more directors, to serve at the
pleasure of the directors; provided, that the membership of the Compensation
--------
Policy Committee shall consist of a majority of Independent Directors and the
membership of the Audit Committee shall consist only of Independent Directors.
An individual shall be deemed to be an "Independent Director" hereunder if such
individual is not an affiliate of the Corporation and is not an employee of the
Corporation.
10
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Section 2. POWERS. The directors may delegate to committees
------
appointed under Section 1 of this Article IV any of the powers of the directors,
except as prohibited by law.
Section 3. MEETINGS. Notice of committee meetings shall be given in
--------
the same manner as notice for special meetings of the Board of Directors. One-
third, but not less than two (except for one-member committees), of the members
of any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
of Directors may designate a chairman of any committee, and such chairman or any
two members of any committee (except for one-member committees) may fix the time
and place of its meetings unless the Board shall otherwise provide. In the
absence or disqualification of any member of any such committee, the members
thereof present at any meeting and not disqualified from voting, whether or not
they constitute a quorum, may unanimously appoint another director to act at the
meeting in the place of such absent or disqualified members.
Each committee shall keep minutes of its proceedings and shall report
the same to the Board of Directors at the next succeeding meeting, and any
action by the committee shall be subject to revision and alteration by the Board
of Directors, provided that no rights of third persons shall be affected by any
such revision or alteration.
Section 4. TELEPHONE MEETINGS. Members of a committee of the
-------------------
directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
-----------------------------
permitted to be taken at any meeting of a committee of the directors may be
taken without a meeting, if a consent in writing to such action is signed by
each member of the committee and such written consent is filed with the minutes
of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
---------
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
Section 7. EMERGENCY. In the event of a state of disaster of
---------
sufficient severity to prevent the conduct and management of the affairs and
11
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business of the Corporation by its directors and officers as contemplated by the
Charter and these Bylaws, any two or more available members of the then
incumbent Executive Committee shall constitute a quorum of that Committee for
the full conduct and management of the affairs and business of the Corporation
in accordance with the provisions of this Article IV. In the event of the
unavailability, at such time, of a minimum of two members of the then incumbent
Executive Committee, the available directors shall elect an Executive Committee
composed of any two members of the Board of Directors, whether or not they be
officers of the Corporation, which two members shall constitute the Executive
Committee for the full conduct and management of the affairs of the Corporation
in accordance with the foregoing provisions of this Section 7. This Section 7
shall be subject to implementation by resolution of the Board of Directors
passed from time to time for that purpose, and any provisions of the Bylaws
(other than this Section 7) and any resolutions which are contrary to the
provisions of this Section 7 or to the provisions of any such implementing
resolutions shall be suspended until it shall be determined by any interim
Executive Committee acting under this Section 7 that it shall be to the
advantage of the Corporation to resume the conduct and management of its affairs
and business under all the other provisions of these Bylaws.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall
------------------
include a President, a Secretary and a Treasurer and may include a Chairman of
the Board, a Vice Chairman of the Board, a Chief Executive Officer, a Chief
Operating Officer, a Chief Financial Officer, a General Counsel, one or more
Vice Presidents, one or more Assistant Secretaries and one or more Assistant
Treasurers. In addition, the directors may from time to time appoint such other
officers with such powers and duties as they shall deem necessary or desirable.
The officers of the Corporation shall be elected annually by the directors at
the first meeting of the directors held after each annual meeting of
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as may be convenient. Each
officer shall hold office until his or her successor is elected and qualifies or
until his or her death, resignation or removal in the manner hereinafter
provided. Any two or more offices except President and Vice President may be
held by the same person. In their discretion, the directors may leave unfilled
any office except that of President, Treasurer and Secretary which they shall
fill as promptly as practicable. Election of an officer or agent shall not of
itself create contract rights between the Corporation and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
-----------------------
Corporation may be removed at any time by the directors if in their judgment
12
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the best interests of the Corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Any officer of the Corporation may resign at any time by giving written
notice of his or her resignation to the directors, the Chairman of the Board,
the President or the Secretary. Any resignation shall take effect at any time
subsequent to the time specified therein or, if the time when it shall become
effective is not specified therein, immediately upon its receipt. The acceptance
of a resignation shall not be necessary to make it effective unless otherwise
stated in the resignation. Such resignation shall be without prejudice to the
contract rights, if any, of the Corporation.
Section 3. VACANCIES. A vacancy in any office may be filled by the
---------
directors for the balance of the term.
Section 4. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The directors
---------------------------------------
may from time to time appoint a Chairman of the Board and a Vice Chairman of the
Board. The Chairman of the Board shall preside over the meetings of the
directors and of the stockholders at which he or she shall be present and shall
in general oversee all of the business and affairs of the Corporation. In the
absence of the Chairman of the Board, the Vice Chairman of the Board shall
preside at such meetings at which he shall be present. The Chairman and the
Vice Chairman of the Board may execute any deed, mortgage, bond, contract or
other instrument, except in cases where the execution thereof shall be expressly
delegated by the directors or by these Bylaws to an officer or some other agent
of the Corporation or shall be required by law to be otherwise executed. The
Chairman of the Board and the Vice Chairman of the Board shall perform such
other duties as may be assigned to him or her or them by the directors.
Section 5. CHIEF EXECUTIVE OFFICER. The directors may designate a
-----------------------
Chief Executive Officer from among the elected officers. The Chief Executive
Officer shall have responsibility for implementation of the policies of the
Corporation, as determined by the directors, and for the administration of the
business affairs of the Corporation. In the absence of both the Chairman and
Vice Chairman of the Board, the Chief Executive Officer shall preside over the
meetings of the directors and of the stockholders at which he shall be present.
Section 6. CHIEF OPERATING OFFICER. The directors may designate a
-----------------------
Chief Operating Officer from among the elected officers. Said officer will have
the responsibilities and duties as set forth by the Chief Executive Officer, the
President or the directors.
Section 7. CHIEF FINANCIAL OFFICER. The directors may designate a
-----------------------
Chief Financial Officer from among the elected officers. Said officer will
13
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have the responsibilities and duties as set forth by the Chief Executive
Officer, the President or the directors.
Section 8. GENERAL COUNSEL. The directors may designate a General
---------------
Counsel from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President or the directors.
Section 9. PRESIDENT. In the absence of the Chairman, the Vice
---------
Chairman of the Board and the Chief Executive Officer, the President shall
preside over the meetings of the directors and of the stockholders at which he
shall be present. In the absence of a designation of a Chief Executive Officer
by the directors, the President shall be the Chief Executive Officer and shall
be ex officio a member of all committees that may, from time to time, be
-- -------
constituted by the directors. The President shall perform all duties incident
to the office of president and such other duties as may be prescribed by the
Chief Executive Officer or the directors from time to time.
Section 10. VICE PRESIDENTS. In the absence of the President or in
---------------
the event of a vacancy in such office, the Vice President (or in the event there
be more than one Vice President, the Vice Presidents in the order of their
seniority) shall perform the duties of the President and when so acting shall
have all the powers of and be subject to all the restrictions upon the
President; and shall perform such other duties as from time to time may be
assigned to him or her by the Chief Executive Officer, the President or the
directors. The directors may designate one or more Vice Presidents as Executive
Vice President, Senior Vice President or as Vice President for particular areas
of responsibility.
Section 11. TREASURER. The Treasurer shall have the custody of the
---------
funds and securities of the Corporation and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the
directors.
The Treasurer shall disburse the funds of the Corporation as may be
ordered by the directors, taking proper vouchers for such disbursements, and
shall render to the Chief Executive Officer, the President and the directors, at
the regular meetings of the directors or whenever they may require it, an
account of all his or her transactions as Treasurer and of the financial
condition of the Corporation.
If required by the directors, the Treasurer shall give the Corporation
a bond in such sum and with such surety or sureties as shall be satisfactory to
the directors for the faithful performance of the duties of his or her office
and for the restoration to the Corporation, in case of his or her death,
resignation, retirement or
14
<PAGE>
removal from office, of all books, papers, vouchers, moneys and other property
of whatever kind in his or her possession or under his or her control belonging
to the Corporation.
Section 12. SECRETARY. The Secretary shall (a) keep the minutes of
---------
the proceedings of the stockholders, the directors and committees of the
directors in one or more books provided for that purpose; (b) see that all
notices are duly given in accordance with the provisions of these Bylaws or as
required by law; (c) be custodian of the trust records and of the seal of the
Corporation; (d) keep a register of the post office address of each stockholder
which shall be furnished to the Secretary by such stockholder; (e) have general
charge of the share transfer books of the Corporation; and (f) in general
perform such other duties as from time to time may be assigned to him or her by
the Chief Executive Officer, the President or the directors.
Section 13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
----------------------------------------------
Assistant Secretaries and Assistant Treasurers, in general, shall perform such
duties as shall be assigned to them by the Secretary or Treasurer, respectively,
or by the Chief Executive Officer, the President or the directors. The
Assistant Treasurers shall, if required by the directors, give bonds for the
faithful performance of their duties in such sums and with such surety or
sureties as shall be satisfactory to the directors.
Section 14. SALARIES. The salaries and other compensation of the
--------
officers shall be fixed from time to time by the directors and no officer shall
be prevented from receiving such salary or other compensation by reason of the
fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The directors may authorize any officer or
---------
agent to enter into any contract or to execute and deliver any instrument in the
name of and on behalf of the Corporation and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by a person authorized by the directors shall be valid and
binding upon the Corporation when authorized or ratified by action of the
directors. Each of the Chief Executive Officer, the Chief Operating Officer,
the Chief Financial Officer and the President may execute any deed, mortgage,
bond, contract or other instrument, except in cases where the execution thereof
shall be expressly delegated by the directors or by these Bylaws to some other
officer or agent of the Corporation or shall be required by law to be otherwise
executed.
15
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Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for
-----------------
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or agent of the
Corporation in such manner as shall from time to time be determined by the
directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the directors may
designate.
ARTICLE VII
SHARES
Section 1. CERTIFICATES; UNCERTIFICATED SHARES. Unless the Board of
-----------------------------------
Directors of the Corporation authorizes the issue of some or all of the shares
of any or all of its classes or series without certificates, each stockholder
shall be entitled to a certificate or certificates which shall represent and
certify the number of shares of each class or series of stock held by him or her
in the Corporation. Each certificate shall be signed by the Chief Executive
Officer, the President or a Vice President and countersigned by the Secretary or
an Assistant Secretary or the Treasurer or an Assistant Treasurer and may be
sealed with the seal, if any, of the Corporation. The signatures may be either
manual or facsimile. Certificates shall be consecutively numbered; and if the
Corporation shall, from time to time, issue several classes or series of shares,
each class or series may have its own number series. A certificate is valid and
may be issued whether or not an officer who signed it is still an officer when
it is issued. Each certificate representing shares which are restricted as to
their transferability or voting powers, which are preferred or limited as to
their dividends or as to their allocable portion of the assets of the
Corporation upon liquidation or which are redeemable at the option of the
Corporation, shall have a statement of such restriction, limitation, preference
or redemption provision, or a summary thereof, plainly stated on the
certificate. In lieu of such statement or summary, the Corporation may set
forth upon the face or back of the certificate a statement that the Corporation
will furnish to any stockholder, upon request and without charge, a full
statement of such information. At the time of issue or transfer of shares
without certificates, the Corporation shall send the stockholder a written
statement of the information required on certificates by Section 2-211 of the
Maryland General Corporation Law ("MGCL").
Section 2. TRANSFERS. Certificates shall be treated as negotiable
---------
and title thereto and to the shares they represent shall be transferred by
delivery thereof duly endorsed or with proper evidence of transfer. Upon
surrender to the Corporation or the transfer agent of the Corporation of a share
certificate or uncertificated security duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, the Corporation
shall issue a new
16
<PAGE>
certificate or uncertificated security to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share or shares as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of stock of the
Corporation will be subject in all respects to the Charter and all of the terms
and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the
-----------------------
directors may direct a new certificate to be issued in place of any certificate
previously issued by the Corporation alleged to have been lost, stolen or
destroyed upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen or destroyed. When authorizing the issuance
of a new certificate, an officer designated by the directors may, in his or her
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or the owner's legal
representative to advertise the same in such manner as he or she shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
--------------------------------------------------
directors may set, in advance, a record date for the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
determining stockholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days and, in the case of a meeting of stockholders not less
than ten days, before the date on which the meeting or particular action
requiring such determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the directors may provide that the
share transfer books shall be closed for a stated period but not longer than 20
days. If the share transfer books are closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders, such
books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the share transfer books are not closed
for the determination of stockholders, (a) the record date for the determination
of
17
<PAGE>
stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of stockholders entitled
to receive payment of a dividend or an allotment of any other rights shall be
the close of business on the day on which the resolution of the directors,
declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting
of stockholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, except when (i) the determination has
been made through the closing of the transfer books and the stated period of
closing has expired or (ii) the meeting is adjourned to a date more than 120
days after the record date fixed for the original meeting, in either of which
case a new record date shall be determined as set forth herein.
Section 5. SHARE LEDGER. The Corporation shall maintain at its
------------
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL SHARES; ISSUANCE OF UNITS. The directors may
------------------------------------
issue fractional shares or provide for the issuance of scrip, all on such terms
and under such conditions as they may determine. Notwithstanding any other
provision of the Charter or these Bylaws, the directors may issue units
consisting of different securities of the Corporation. Any security issued in a
unit shall have the same characteristics as any identical securities issued by
the Corporation, except that the directors may provide that for a specified
period securities of the Corporation issued in such unit may be transferred on
the books of the Corporation only in such unit.
ARTICLE VIII
FISCAL YEAR
The directors shall have the power, from time to time, to fix the
fiscal year of the Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
-------------
shares of stock of the Corporation may be authorized and declared by the
directors, subject to the provisions of law and the Charter. Dividends and
other
18
<PAGE>
distributions may be paid in cash, property or shares of the Corporation,
subject to the provisions of law and the Charter.
Section 2. CONTINGENCIES. Before payment of any dividends or other
-------------
distributions, there may be set aside out of any funds of the Corporation
available for dividends or other distributions such sum or sums as the directors
may from time to time, in their absolute discretion, think proper as a reserve
fund for contingencies, for equalizing dividends or other distributions, for
repairing or maintaining any property of the Corporation or for such other
purpose as the directors shall determine to be in the best interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ARTICLE X
INVESTMENT POLICIES
Subject to the provisions of the Charter, the Board of Directors may
from time to time adopt, amend, revise or terminate any policy or policies with
respect to investments by the Corporation as it shall deem appropriate in its
sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The directors may authorize the adoption of a seal
----
by the Corporation. The seal shall have inscribed thereon the name of the
Corporation and the year of its formation. The directors may authorize one or
more duplicate seals and provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
-------------
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation shall indemnify (a) any director or officer or any former
director or officer (including among the foregoing, for all purposes of this
Article XII and without limitation, any individual who, while a director or
officer and at the express request of the Corporation, serves or has served
another corporation, partnership, limited liability company, joint venture,
trust, employee benefit plan or
19
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any other enterprise as a director, officer, partner, manager, member or trustee
of such corporation, partnership, limited liability company, joint venture,
trust, employee benefit plan or other enterprise) who has been successful, on
the merits or otherwise, in the defense of a proceeding to which he or she was
made a party by reason of service in such capacity, against reasonable expenses
incurred by him or her in connection with the proceeding, and (b) any director
or officer or any former director or officer against any claim or liability to
which he or she may become subject by reason of such status unless it is
established that (i) his or her act or omission was material to the matter
giving rise to the proceeding and was committed in bad faith or was the result
of active and deliberate dishonesty, (ii) he or she actually received an
improper personal benefit in money, property or services or (iii) in the case of
a criminal proceeding, he or she had reasonable cause to believe that his or her
act or omission was unlawful. In addition, the Corporation shall, without
requiring a preliminary determination of the ultimate entitlement to
indemnification, pay or reimburse, in advance of final disposition of a
proceeding, reasonable expenses incurred by a director or officer or former
director or officer made a party to a proceeding by reason of such status,
provided that, in the case of a director or officer, the Corporation shall have
received (i) a written affirmation by the director or officer of his or her good
faith belief that he or she has met the applicable standard of conduct necessary
for indemnification by the Corporation as authorized by these Bylaws and (ii) a
written undertaking by or on his or her behalf to repay the amount paid or
reimbursed by the Corporation if it shall ultimately be determined that the
applicable standard of conduct was not met. The Corporation may, with the
approval of its directors, provide such indemnification or payment or
reimbursement of expenses to any director or officer or any former director or
officer who served a predecessor of the Corporation and to any employee or agent
of the Corporation or a predecessor of the Corporation. Neither the amendment
nor repeal of this Article, nor the adoption or amendment of any other provision
of the Charter or these Bylaws inconsistent with this Article, shall apply to or
affect in any respect the applicability of this Article with respect to any act
or failure to act which occurred prior to such amendment, repeal or adoption.
Any indemnification or payment or reimbursement of the expenses
permitted by these Bylaws shall be furnished in accordance with the procedures
provided for indemnification or payment or reimbursement of expenses, as the
case may be, under Section 2-418 of the MGCL for directors of Maryland
corporations. The Corporation may provide to directors and officers such other
and further indemnification or payment or reimbursement of expenses, as the case
may be, to the fullest extent permitted by the MGCL, as in effect from time to
time, for directors of Maryland corporations.
20
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ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Charter or
Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice.
Neither the business to be transacted at nor the purpose of any meeting need be
set forth in the waiver of notice, unless specifically required by statute. The
attendance of any person at any meeting shall constitute a waiver of notice of
such meeting, except where such person attends a meeting for the express purpose
of objecting to the transaction of any business on the ground that the meeting
is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
The directors shall have the exclusive power to adopt, alter or repeal
any provision of these Bylaws and to make new Bylaws.
ARTICLE XV
MISCELLANEOUS
All references to the Charter shall include any amendments thereto.
In these Bylaws, unless the context otherwise requires, words used in the
singular or in the plural include both the plural and singular and words
denoting any gender include all genders.
* * * *
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Exhibit 3.3
FORM OF ARTICLES OF AMENDMENT AND RESTATEMENT
OF
ARTICLES OF INCORPORATION
OF
CRESTLINE CAPITAL CORPORATION
Crestline Capital Corporation, a Maryland corporation having its
principal office in Maryland in Bethesda, Maryland, and having CSC-Lawyers
Incorporating Service Company as its resident agent, located at 11 East Chase
Street, Baltimore, Maryland 21202, hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Articles of Incorporation of the Corporation, filed with
the State Department of Assessments and Taxation of Maryland on November 9,
1998, as amended on ____________, 1998, are hereby amended and restated in full
as follows:
ARTICLE I
Name
----
The name of the corporation (which is hereinafter called the
"Corporation") is Crestline Capital Corporation.
ARTICLE II
Purposes
--------
The purposes for which the Corporation is formed are to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Maryland (the "MGCL").
ARTICLE III
Principal Office
----------------
The present address of the principal office of the Corporation in the
State of Maryland is 10400 Fernwood Road, Bethesda, Maryland 20817.
ARTICLE IV
Registered Agent
----------------
The name and address of the resident agent of the Corporation in the
State of Maryland is The Prentice Hall Corporation System, Maryland, 11 East
Chase Street, Baltimore, Maryland 21202. Said resident agent is a Maryland
corporation.
<PAGE>
ARTICLE V
Duration
--------
The duration of the Corporation shall be perpetual.
ARTICLE VI
Capitalization
--------------
Section 6(a) Shares and Par Value. The total number of shares of
--------------------
stock of all classes ("Capital Stock") which the Corporation has authority to
issue is 85,000,000 shares, 75,000,000 of which initially are classified as
common stock, par value of $.01 per share ("Common Stock"), and 10,000,000 of
which initially are classified as preferred stock, par value $.01 per share
("Preferred Stock"). The aggregate par value of all classes of stock that the
Corporation shall have authority to issue is $850,000. The Board of Directors
may, by adopting a resolution and filing articles supplementary with the State
Department of Assessments and Taxation of Maryland, classify and reclassify any
unissued shares of Capital Stock by setting or changing in any one or more
respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such shares of stock. The power of the Board of
Directors under this Section 6(a) to classify and reclassify any of the shares
of Capital Stock shall include, without limitation, authority to classify or
reclassify any unissued shares of such stock (including shares initially
designated as Common Stock or Preferred Stock above) into Common Stock,
Preferred Stock, a class or classes of preferred stock, preference stock,
special stock or other stock (including non-voting common stock), and to divide
and classify shares of any class into one or more series of such class. Unless
otherwise specifically provided for in the terms of any class or series of stock
now or hereafter created, the amount that would be needed, if the Corporation
were to be dissolved at the time of a distribution, to satisfy the preferential
rights on dissolution of stockholders whose preferential rights are superior to
those receiving the distribution, shall not limit the ability of the Corporation
to make any distribution or the amount thereof.
Section 6(b) Common Stock. The following is a description of the
------------
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption of the Common Stock of the Corporation:
(1) Voting Rights. Each share of Common Stock shall have one vote on
-------------
all actions to be taken by the stockholders of the Corporation, and, except as
otherwise provided in respect of any class of stock at any time classified or
reclassified, the exclusive voting power for all purposes shall be vested in the
holders of the Common Stock.
(2) Dividends. Subject to the provisions of law and any preferences
---------
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<PAGE>
of any class of Capital Stock, including any shares of Preferred Stock,
hereafter classified or reclassified, dividends, including dividends payable in
shares of another class of the Corporation's stock, may be paid on the Common
Stock of the Corporation at such time and in such amounts as the Board of
Directors may deem advisable and the holders of the Common Stock shall share
ratably in any such dividends, in proportion to the number of shares of Common
Stock held by them respectively, on a share for share basis.
(3) Liquidation Rights. In the event of any liquidation, dissolution
------------------
or winding up of the Corporation, whether voluntary or involuntary, the holders
of the Common Stock shall be entitled, after payment or provision for payment of
the debts and other liabilities of the Corporation and the amount to which the
holders of any class of Capital Stock at any time classified or reclassified
having a preference on distributions in the liquidation, dissolution or winding
up of the Corporation are entitled, including any shares of Preferred Stock,
together with the holders of any other class of Capital Stock hereafter
classified or reclassified not having a preference on distributions in the
liquidation, dissolution or winding up of the Corporation, to share ratably in
the remaining net assets of the Corporation.
Section 6(c) Preferred Stock. The Board of Directors shall have the
---------------
authority to classify and reclassify any unissued shares of Preferred Stock from
time to time by setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of redemption of such shares
of the Preferred Stock. Subject to the foregoing, the power of the Board of
Directors to classify and reclassify any of the shares of Preferred Stock shall
include, without limitation, subject to the provisions of the charter, authority
to classify or reclassify any of the shares of such stock into Common Stock, a
class or classes of preferred stock, preference stock, special stock or other
stock, and to divide and classify shares of any class into one or more series of
such class, by determining, fixing, or altering one or more of the following:
(1) The distinctive designation of such class or series and the
number of shares to constitute such class or series; provided that, unless
otherwise prohibited by the terms of such or any other class or series, the
number of shares of any class or series may be decreased by the Board of
Directors in connection with any classification or reclassification of unissued
shares and the number of shares of such class or series may be increased by the
Board of Directors in connection with any such classification or
reclassification, and any shares of any class or series which have been
redeemed, purchased, otherwise acquired or converted into shares of Common Stock
or any other class or series shall become part of the authorized class of stock
so redeemed, purchased, otherwise acquired or converted into shares of Common
Stock and be subject to classification and reclassification as provided in this
Article VI.
- 3 -
<PAGE>
(2) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on shares of
such class or series, whether any such dividends shall rank senior or junior to
or on a parity with the dividends payable on any other class or series of stock,
and the status of any such dividends as cumulative, cumulative to a limited
extent or non-cumulative and as participating or non-participating.
(3) Whether or not shares of such class or series shall have voting
rights, in addition to any voting rights provided by law and, if so, the terms
of such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions thereof,
including provision for adjustment of the conversion or exchange rate in such
events or at such times as the Board of Directors shall determine.
(5) Whether or not shares of such class or series shall be subject
to redemption and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates; and whether or not there shall be
any sinking fund or purchase account in respect thereof, and if so, the terms
thereof.
(6) The rights of the holders of shares of such class or series upon
the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary depending
upon whether such liquidation, dissolution or winding up is voluntary or
involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class or series of stock.
(7) Whether or not there shall be any limitations applicable, while
shares of such class or series are outstanding, upon the payment of dividends or
making of distributions on, or the acquisition of, or the use of moneys for
purchase or redemption of, any stock of the Corporation, or upon any other
action of the Corporation, including action under this Section 6(c), and, if so,
the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class or
series, not inconsistent with law and the charter of the Corporation.
Section 6(d) Ranking of Classes or Series of Capital Stock. For the
---------------------------------------------
purposes hereof and of any articles supplementary to the charter providing for
the classification or reclassification of any shares of Capital Stock or of any
other charter document of the Corporation (unless otherwise provided in any such
articles or document), any class or series of stock of the Corporation shall be
deemed to
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<PAGE>
rank:
(1) prior to another class or series either as to dividends or upon
liquidation, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable on liquidation, dissolution or
winding up, as the case may be, in preference or priority to holders of such
other class or series;
(2) on a parity with another class or series either as to dividends
or upon liquidation, whether or not the dividend rates, dividend payment dates
or redemption or liquidation price per share thereof be different from those of
such others, if the holders of such class or series of stock shall be entitled
to receipt of dividends or amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in proportion to their respective dividend
rates or redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
(3) junior to another class or series either as to dividends or upon
liquidation, if the rights of the holders of such class or series shall be
subject or subordinate to the rights of the holders of such other class or
series in respect of the receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may be.
ARTICLE VII
Board of Directors
------------------
Section 7(a) Number of Directors; Classification. Effective upon the
-----------------------------------
filing of these Articles of Amendment and Restatement with the State Department
of Assessments and Taxation of Maryland, the number of directors shall be
increased from two (2) to eight (8). Except as otherwise fixed by or pursuant
to the provisions of Article VI hereof relating to the rights of the holders of
any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation to elect additional directors under specified
circumstances, the number of directors may thereafter be increased or decreased
pursuant to the Bylaws of the Corporation; provided such number established in
accordance with the Bylaws is not decreased to less than three (3) nor increased
to more than thirteen (13). The directors, other than those who may be elected
by the holders of any class or series of stock having a preference over the
Common Stock as to dividends or upon liquidation, shall be divided into three
classes as nearly equal in number as possible, with the term of office of one
class expiring each year. One class of directors, consisting initially of three
members, shall hold office initially for a term expiring at the annual meeting
of stockholders in 1999 (Class I); another class, consisting initially of three
members, shall hold office initially for a term expiring at the annual meeting
of stockholders in 2000 (Class II); and the third class, consisting initially of
two members, shall hold office initially for a term expiring at the annual
meeting of shareholders in 2001 (Class III). In the event of any increase or
decrease in the number of directors,
- 5 -
<PAGE>
other than resulting from the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect additional directors pursuant to the provisions of Article
VI hereof, the newly created or eliminated directorships resulting from such
increase or decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to maintain such classes as nearly equal in
number as possible. The names and classes of the directors upon the filing of
these Articles of Amendment and Restatement with the State Department of
Assessments and Taxation of Maryland who will serve until their successors are
elected and qualify are:
Class of Director Name
----------------- ----
Class I: Louise M. Cromwell
Bruce D. Wardinski
John W. Marriott, III
Class II: Adam M. Aron
Christopher J. Nassetta
Michael A. Wildish
Class III: Kelvin L. Davis
John B. Morse
Section 7(b) Removal of Directors. Subject to the rights of holders
--------------------
of one or more classes or series of Capital Stock other than Common Stock to
elect one or more directors, any director may be removed only for cause and only
by the affirmative vote of stockholders holding at least two thirds of all the
votes entitled to be cast for the election of directors.
Section 7(c) Vacancies. Except in the case of a vacancy on the Board
---------
of Directors among the directors elected by a class or series of Capital Stock
other than Common Stock, any vacancy on the Board of Directors may be filled by
the affirmative vote of a majority of the remaining directors (except that a
vacancy which results from an increase in the number of directors may be filled
by a majority of the entire Board of Directors) and, in the case of a vacancy
resulting from the removal of a director, by the stockholders by the affirmative
vote of two-thirds of the votes entitled to be cast for the election of
directors. Any vacancy on the Board of Directors among the directors elected by
a class or series of Capital Stock other than Common Stock may be filled by a
majority of the remaining directors elected by that class or series or by the
sole remaining director elected by that class or series, or by the stockholders
of that class or series unless otherwise provided in the articles supplementary
for that class or series.
Section 7(d) Amendments. Notwithstanding any other provisions of
----------
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<PAGE>
the charter or Bylaws of the Corporation, the affirmative vote of stockholders
holding at least two-thirds of all of the votes entitled to be cast thereon
shall be required to amend, alter, change, repeal, or adopt any provisions
inconsistent with, the provisions of this ARTICLE VII.
ARTICLE VIII
Restriction on Transfer and Ownership of Shares of Capital Stock
----------------------------------------------------------------
Section 8.1 Definitions. For the purpose of this Article VIII, the
-----------
following terms shall have the following meanings:
Blackstone Acquisition. The term "Blackstone Acquisition" shall
----------------------
mean the acquisition by Host Marriott L.P., a Delaware limited partnership, of
direct or indirect interests in certain hotel properties owned by various
partnerships affiliated with The Blackstone Group.
Business Day. The term "Business Day" shall mean any day, other
------------
than a Saturday or Sunday, that is neither a legal holiday nor a day on which
banking institutions in the state of Maryland or in the state of New York are
authorized or required by law, regulation or executive order to close.
Charitable Beneficiary. The term "Charitable Beneficiary" shall
----------------------
mean one or more beneficiaries of the Charitable Trust as determined pursuant to
Section 8.3.7, provided that each such organization must be described in
Sections 501(c)(3), 170(b)(1)(A) (other than clause (vii) or (viii) thereof) and
170(c)(2) of the Code and contributions to each such organization must be
eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the
Code.
Charitable Trust. The term "Charitable Trust" shall mean any
----------------
trust provided for in Section 8.2.1(b)(i) and Section 8.3.1.
Charitable Trustee. The term "Charitable Trustee" shall mean the
------------------
Person, unaffiliated with the Corporation and a Prohibited Owner, that is
appointed by the Corporation from time to time to serve as trustee of the
Charitable Trust. In the absence of such designation, the Charitable Trustee
shall be _____________________.
Closing Price. The "Closing Price" on any date shall mean the
-------------
last sale price for such shares of Capital Stock, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, for such shares of Capital Stock, in either case as
reported on the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the NYSE or, if such shares of
Capital Stock are not listed or admitted to trading on the NYSE, as reported on
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities
- 7 -
<PAGE>
exchange on which such shares of Capital Stock are listed or admitted to trading
or, if such shares of Capital Stock are not listed or admitted to trading on any
national securities exchange, the last quoted price, or, if not so quoted, the
average of the high bid and low asked prices, in the over-the-counter market, as
reported by the Nasdaq Stock Market or, if such system is no longer in use, the
principal other automated quotation system that may then be in use or, if such
shares of Capital Stock are not quoted by any such organization, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in such shares of Capital Stock selected by the Board of
Directors or, in the event that no trading price is available for such shares of
Capital Stock, the fair market value of such shares, as determined in good faith
by the Board of Directors.
Code. The term "Code" means the Internal Revenue Code of 1986, as
-----
amended.
Constructive Ownership. The term "Constructive Ownership" shall mean
----------------------
ownership of shares of Capital Stock by a Person, whether the interest in shares
of Capital Stock is held directly or indirectly (including by a nominee), and
shall include any interests that would be treated as owned through the
application of Section 318(a) of the Code, as modified by Section 856(d)(5) of
the Code. The terms "Constructive Owner," "Constructively Owns" and
"Constructively Owned" shall have the correlative meanings.
Distribution. The term "Distribution" shall mean the distribution by
------------
Host Marriott Corporation, a Delaware corporation, to the holders of its common
stock of shares of Capital Stock of the Corporation. The term "Distribution"
shall not include the Blackstone Acquisition.
Effective Date. The term "Effective Date" shall mean the date on
--------------
which the Distribution occurs.
Excepted Holder. The term "Excepted Holder" shall mean a stockholder
---------------
of the Corporation for whom an Excepted Holder Limit is created by the Board of
Directors pursuant to Section 8.2.7.
Excepted Holder Limit. The term "Excepted Holder Limit" shall mean,
---------------------
provided that (and only so long as) the affected Excepted Holder complies with
all of the requirements established by the Board of Directors pursuant to
Section 8.2.7, and subject to adjustment pursuant to Section 8.2.8, the
percentage limit established by the Board of Directors pursuant to Section
8.2.7.
Excluded Holder. The term "Excluded Holder" shall mean any Person who
---------------
acquires Constructive Ownership of shares of Common Stock solely by reason of
the Transfer of Common Stock in the Distribution and who, immediately following
the Distribution, Constructively Owns shares of Common Stock in excess
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<PAGE>
of the Ownership Limit solely by reason of such Transfer of Common Stock in the
Distribution. The term "Excluded Holder" shall not include The Blackstone Group
or any other person or entity who acquires Constructive Ownership of shares of
Capital Stock in connection with the Blackstone Acquisition.
Excluded Holder Limit. The term "Excluded Holder Limit" shall mean,
---------------------
with respect to any Excluded Holder, the shares of Capital Stock that such
Excluded Holder was considered to Constructively Own immediately following the
Distribution solely by reason of the Distribution (taking into account only such
shares of Capital Stock and no other shares as to which such Person may
thereafter become, for any reason, the Constructive Owner); provided, however,
-----------------
that if at any time the Excluded Holder Limit for any Excluded Holder would be
less than the Ownership Limit, such Excluded Holder shall cease to be an
Excluded Holder and the Ownership Limit shall thereafter apply to such Person.
Host REIT. The term "Host REIT" shall mean Host Marriott Corporation,
---------
a Maryland corporation, the successor by merger to Host Marriott Corporation, a
Delaware corporation, and its successors and assigns.
Market Price. The term "Market Price" on any date shall mean, with
------------
respect to any class or series of outstanding shares of Capital Stock, the
Closing Price for such shares of Capital Stock on such date.
NYSE. The term "NYSE" shall mean the New York Stock Exchange, Inc.
----
Ownership Limit. The term "Ownership Limit" shall mean (i) with
---------------
respect to shares of Common Stock, 9.8% (in value or number of shares, whichever
is more restrictive) of the outstanding Common Stock of the Corporation; and
(ii) with respect to any class or series of shares of Preferred Stock or other
stock, 9.8% (in value or number of shares, whichever is more restrictive) of the
outstanding shares of such class or series of Preferred Stock or other stock of
the Corporation.
Person. The term "Person" shall mean an individual, corporation,
------
partnership, estate, trust (including a trust qualified under Sections 401(a) or
501(c)(17) of the Code), portion of a trust permanently set aside for or to be
used exclusively for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company, limited liability company, or other entity and also
includes a group as that term is used for purposes of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended; provided, however, that the term
------------------
"Person" shall not include any "group" as that term is used for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, if such
"group" either (i) would be an Excluded Holder or (ii) would include The
Blackstone Group (but, in either such case, any Person that is a member of such
"group" shall still be considered to be a "Person" for purposes hereof).
- 9 -
<PAGE>
Prohibited Owner. The term "Prohibited Owner" shall mean any Person
----------------
who, but for the provisions of Section 8.2.1, would Constructively Own shares of
Capital Stock, and if appropriate in the context, shall also mean any Person who
would have been the record owner of shares of Capital Stock that the Prohibited
Owner would have so owned.
REIT. The term "REIT" shall mean a real estate investment trust
----
within the meaning of Section 856 of the Code.
Restriction Termination Date. The term "Restriction Termination Date"
----------------------------
shall mean the first day after the Effective Date on which any of the following
are applicable: (i) there shall have been a "final determination" within the
meaning of Section 1313 of the Code, or Host REIT has publicly announced, that
Host REIT no longer qualifies as a REIT; or (ii) Host REIT notifies the
Corporation that Host REIT's board of directors has determined that it is no
longer in the best interests of the Host REIT to attempt to, or continue to,
qualify as a REIT or that compliance with the restrictions and limitations on
Constructive Ownership and Transfers of shares of Capital Stock set forth herein
is no longer required in order for Host REIT to qualify as a REIT; or (iii) the
Corporation determines (and Host REIT concurs, in writing), that Host REIT
derives less than one percent (1%) of its gross income (as determined for
purposes of Section 856(c)(2) of the Code) pursuant to leases with the
Corporation and other persons in which the Corporation owns (as determined under
Section 856(d)(5) of the Code) an interest described in Section 856(d)(2)(B) of
the Code.
Transfer. The term "Transfer" shall mean any issuance, sale,
--------
transfer, gift, assignment, devise or other disposition, as well as any other
event (or any agreement to take any such actions or cause any such events) that
causes any Person to acquire Constructive Ownership of shares of Capital Stock
or the right to vote or receive dividends on shares of Capital Stock, including
without limitation, (a) the transfer of shares of Capital Stock to holders of
shares of Host Marriott Corporation, a Delaware corporation, in the
Distribution, (b) any change in the capital structure of the Corporation which
has the effect of increasing the total equity interest of any Person in the
Corporation, (c) a change in the relationship between two or more Persons which
causes a change in ownership of shares of Capital Stock by application of
Section 318(a) of the Code, as modified by Section 856(d)(5), (d) the grant or
exercise of any option or warrant (or any disposition of any option or warrant,
or any event that causes any option or warrant not theretofore exercisable to
become exercisable), pledge, security interest or similar right to acquire
shares of Capital Stock, (e) any disposition of any securities or rights
convertible into or exchangeable for shares of Capital Stock or any interest in
shares of Capital Stock or any exercise of any such conversion or exchange
right, (f) transfers of interests in other entities that result in changes in
Constructive Ownership of shares of Capital Stock, and (g) the transfer of
shares of Capital Stock in connection with the
- 10 -
<PAGE>
Blackstone Acquisition, in each case, whether voluntary or involuntary, whether
owned of record or Constructively Owned, and whether by operation of law or
otherwise. The terms "Transferring" and "Transferred" shall have the correlative
meanings.
Section 8.2 Restrictions on Ownership and Transfer of Shares.
------------------------------------------------
Section 8.2.1 Ownership Limitations. During the period commencing
---------------------
on the Effective Date and ending at the close of business on the Restriction
Termination Date:
(a) Basic Restrictions. (i) No Person, other than an Excepted
------------------
Holder or an Excluded Holder, shall Constructively Own shares of Capital Stock
in excess of the Ownership Limit, (ii) no Excepted Holder shall Constructively
Own shares of Capital Stock in excess of the Excepted Holder Limit for such
Excepted Holder, and (iii) no Excluded Holder shall Constructively Own shares of
Capital Stock in excess of the Excluded Holder Limit for such Excluded Holder.
The foregoing restrictions shall not apply to Host Marriott Corporation, a
Delaware corporation, and its subsidiaries (or Host REIT and its subsidiaries)
for periods prior to the first day of the first taxable year for which the
election of Host REIT to be taxed as a REIT will be effective with respect to
shares of Capital Stock of the Corporation held by Host Marriott Corporation, a
Delaware corporation, and its subsidiaries (or Host REIT and its subsidiaries)
for delivery as part consideration in the Blackstone Acquisition.
(b) Transfer in Trust. If any Transfer of shares of Capital
-----------------
Stock occurs (whether or not such Transfer is the result of a transaction
entered into through the facilities of the NYSE or any other national securities
exchange or automated inter-dealer quotation system) which, if effective, would
result in any Person Constructively Owning shares of Capital Stock in violation
of Section 8.2.1(a)(i) or 8.2.1(a)(ii) or 8.2.1(a)(iii), as applicable;
(i) then that number of shares of Capital Stock the
Constructive Ownership of which otherwise would cause such Person to violate
Section 8.2.1(a)(i) or 8.2.1(a)(ii) or 8.2.1(a)(iii) (rounded upward to the
nearest whole share) shall be automatically transferred to a Charitable Trust
for the benefit of a Charitable Beneficiary, as described in Section 8.3,
effective as of the close of business on the Business Day prior to the date of
such Transfer (or as of the close of business on the Effective Date as to any
such Transfer that occurs on the Effective Date), and such Person shall acquire
no rights in such shares of Capital Stock; or
(ii) if the transfer to the Charitable Trust described in
clause (i) of this sentence would not be effective for any reason to prevent the
violation of Section 8.2.1(a)(i) or 8.2.1(a)(ii) or 8.2.1(a)(iii), as
applicable, then the Transfer of that number of shares of Capital Stock that
otherwise would cause any
- 11 -
<PAGE>
Person to violate Section 8.2.1(a)(i) or 8.2.1(a)(ii) or 8.2.1(a)(iii), as
applicable, shall be void ab initio, and the intended transferee shall acquire
-- ------
no rights in such shares of Capital Stock.
Section 8.2.2 Remedies for Breach. If the Board of Directors or any
-------------------
duly authorized committee thereof shall at any time determine in good faith that
a Transfer or other event has taken place that results in a violation of Section
8.2.1(a) or that a Person intends to acquire or has attempted to acquire
Constructive Ownership of any shares of Capital Stock in violation of Section
8.2.1(a) (whether or not such violation is intended), the Board of Directors or
a committee thereof shall take such action as it deems advisable to refuse to
give effect to or to prevent such Transfer or other event, including, without
limitation, causing the Corporation to redeem shares of Capital Stock, refusing
to give effect to such Transfer on the books of the Corporation or instituting
proceedings to enjoin such Transfer or other event; provided, however, that any
-------- -------
Transfer or attempted Transfer or other event in violation of Section 8.2.1(a)
shall automatically result in the transfer to the Charitable Trust described
above, and, where applicable under Section 8.2.1(b)(ii), such Transfer (or other
event) shall be void ab initio as provided above irrespective of any action (or
-- ------
non-action) by the Board of Directors or a committee thereof.
Section 8.2.3 Notice of Restricted Transfer. Any Person who acquires
-----------------------------
or attempts or intends to acquire Constructive Ownership of shares of Capital
Stock that will or may violate Section 8.2.1(a), or any Person who would have
owned shares of Capital Stock that resulted in a transfer to the Charitable
Trust pursuant to the provisions of Section 8.2.1(b), shall immediately give
written notice to the Corporation of such event, or in the case of such a
proposed or attempted transaction, give at least 15 days prior written notice,
and shall provide to the Corporation such other information as the Corporation
may request in order to determine the effect, if any, of such acquisition or
ownership on Host REIT's status as a REIT and the Corporation's compliance of
its covenants with Host REIT with respect thereto.
Section 8.2.4 Owners Required To Provide Information. During the
--------------------------------------
period commencing at the Effective Time and ending at the close of business on
the Restriction Termination Date:
(a) Every stockholder of record of more than five percent of the
outstanding shares of Capital Stock, within 30 days after the end of each
taxable year, shall give written notice to the Corporation stating the name and
address of such owner, the number of shares owned, and a description of the
manner in which such shares of Capital Stock are held; provided that a
stockholder of record who holds outstanding shares of Capital Stock as nominee
for another Person, which other Person is required to include in gross income
the dividends received on such shares (an "Actual Owner"), shall give written
notice to the Corporation stating the name and address of such Actual Owner and
the number of shares of Capital Stock of such
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<PAGE>
Actual Owner with respect to which the stockholder of record is nominee. Each
such stockholder of record and each Actual Owner shall provide to the
Corporation such additional information as the Corporation may request in order
to determine the effect, if any, of such ownership on Host REIT's status as a
REIT and to ensure compliance with the Ownership Limit and the Corporations
compliance of its covenants with Host REIT with respect thereto.
(b) Each Person who is a Constructive Owner of shares of Capital Stock
and each Person (including the stockholder of record) who is holding shares of
Capital Stock for a Constructive Owner shall provide to the Corporation such
information as the Corporation may request, in good faith, in order to help
determine Host REIT's status as a REIT and the Corporations compliance of its
covenants with Host REIT with respect thereto.
Section 8.2.5 Remedies Not Limited. Subject to Section 8.4, nothing
--------------------
contained in this Section 8.2 shall limit the authority of the Board of
Directors to take such other action as it deems necessary or advisable to
protect the Corporation and the interests of its stockholders in preserving Host
REIT's status as a REIT.
Section 8.2.6 Ambiguity. In the case of an ambiguity in the
---------
application of any of the provisions of this Section 8.2, Section 8.3 or any
definition contained in Section 8.1, the Board of Directors shall have the power
to determine the application of the provisions of this Section 8.2 or Section
8.3 with respect to any situation based upon the facts known to it. If Section
8.2 or 8.3 requires an action by the Board of Directors and the charter of the
Corporation fails to provide specific guidance with respect to such action, the
Board of Directors shall have the power to determine the action to be taken so
long as such action is not contrary to the provisions of Sections 8.1, 8.2 or
8.3.
Section 8.2.7 Exceptions.
----------
(a) The Board of Directors, in its sole and absolute discretion, may
grant to any Person who makes a request therefor (a "Requesting Person") an
exception to the Ownership Limit (or one or more elements thereof) with respect
to the ownership of any series or class of Capital Stock of the Corporation,
subject to the following conditions and limitations: (i) (A) the Board of
Directors shall have determined, in its sole and absolute discretion, that the
Requesting Person's ownership of shares of Capital Stock in excess of the
Ownership Limit pursuant to the exception requested hereunder (together with the
ownership of shares of Capital Stock by all other Persons as permitted under
this Article VIII, taking into account any previously granted exceptions
pursuant hereto) would not cause the Corporation or any Person in which the
Corporation owns, directly or indirectly, any equity interest and which is a
tenant of Host REIT or any entity in which Host REIT owns any equity interest,
to be considered a "related party tenant" with respect to Host
- 13 -
<PAGE>
REIT for purposes of Section 856(d)(2)(B) of the Code, and (B) Host REIT shall
have consented, in writing, to such determination; and (ii) such Requesting
Person provides to the Board of Directors, for the benefit of both the
Corporation and Host REIT, such representations and undertakings, if any, as the
Board of Directors may, in its sole and absolute discretion, determine to be
necessary in order for it to make the determination that the conditions set
forth in clause (A) above of this Section 8.2.7(a) have been and/or will
continue to be satisfied (including, without limitation, an agreement as to a
reduced Ownership Limit or Excepted Holder Limit for such Requesting Person with
respect to the Constructive Ownership of one or more other classes or series of
shares of Capital Stock not subject to the exception), and such Requesting
Person agrees that any violation of such representations and undertakings or any
attempted violation thereof will result in the application of the remedies set
forth in Section 8.2 with respect to shares of Capital Stock held in excess of
the Ownership Limit or the Excepted Holder Limit (as may be applicable) with
respect to such Requesting Person (determined without regard to the exception
granted such Requesting Person under this subparagraph (a)). If a member of the
Board of Directors requests that the Board of Directors grant an exception
pursuant to this subparagraph (a) with respect to such member, or with respect
to any other Person if such Board member would be considered to be the
Constructive Owner of shares of Capital Stock owned by such other Person, such
member of the Board of Directors shall not participate in the decision of the
Board of Directors as to whether to grant any such exception.
(b) Prior to granting any exception or exemption pursuant to
subparagraph (a) or (b), the Board of Directors may require a ruling from the
IRS or an opinion of counsel, in either case in form and substance satisfactory
to the Board of Directors, in its sole and absolute discretion as it may deem
necessary or advisable in order to determine or ensure Host REIT's status as a
REIT; provided, however, that the Board of Directors shall not be obligated to
-------- -------
require obtaining a favorable ruling or opinion in order to grant an exception
hereunder.
(c) An underwriter that participates in a public offering or a private
placement of shares of Capital Stock (or securities convertible into or
exchangeable for shares of Capital Stock) may Constructively Own shares of
Capital Stock (or securities convertible into or exchangeable for shares of
Capital Stock) in excess of the Ownership Limit, but only to the extent
necessary to facilitate such public offering or private placement; and provided,
that the ownership of shares of Capital Stock by such underwriter would not
result in the Corporation or any Person in which the Corporation owns, directly
or indirectly, any equity interest and which is a tenant of Host REIT or any
entity in which Host REIT owns any equity interest, to be considered a "related
party tenant" with respect to Host REIT for purposes of Section 856(d)(2)(B) of
the Code.
(d) The Board of Directors may only reduce the Excepted Holder Limit
for an Excepted Holder: (1) with the written consent of such Excepted
- 14 -
<PAGE>
Holder at any time or (2) pursuant to the terms and conditions of the agreements
and undertakings entered into with such Excepted Holder in connection with the
establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted
Holder Limit shall be reduced to a percentage that is less than the Ownership
Limit.
Section 8.2.8 Increase or Decrease in Ownership Limit. The Board of
---------------------------------------
Directors may from time to time increase or decrease the Ownership Limit,
subject to the limitations provided in this Section 8.2.8.
(a) Any decrease may be made only prospectively as to subsequent
holders (other than a decrease as a result of a retroactive change in existing
law, in which case such change shall be effective immediately).
(b) Prior to the Restriction Termination Date, the Ownership Limit may
not be increased without the written consent of Host REIT.
Section 8.2.9 Legend. Each certificate for shares of Capital Stock
------
(or securities exercisable for or convertible into shares of Capital Stock)
shall bear substantially the following legend:
The shares of Capital Stock represented by this certificate are
subject to restrictions on Constructive Ownership and Transfer
primarily for the purpose of assisting Host Marriott Corporation, a
Maryland corporation, in maintaining its status as a real estate
investment trust (a "REIT") under the Internal Revenue Code of 1986,
as amended (the "Code"). Except as expressly provided in the
Corporation's charter, (i) no Person may Constructively Own shares of
Common Stock of the Corporation in excess of 9.8 percent (in value or
number of shares, whichever is more restrictive) of the outstanding
Common Stock of the Corporation unless such Person is an Excepted
Holder (in which case the Excepted Holder Limit shall be applicable)
or an Excluded Holder (in which case the Excluded Holder Limit shall
be applicable); and (ii) with respect to any class or series of shares
of Capital Stock other than Common Stock, no Person may Constructively
Own more than 9.8 percent (in value or number of shares, whichever is
more restrictive) of the outstanding shares of such class or series of
such stock of the Corporation (collectively, (i) and (ii) are referred
to herein as the "Ownership Limit"), unless such Person is an Excepted
Holder (in which case the Excepted Holder Limit shall be applicable)
or an Excluded Holder (in which case the Excluded Holder Limit shall
be applicable). Notwithstanding the foregoing, commencing at the time
at
- 15 -
<PAGE>
which the distribution by Host Marriott Corporation, a Delaware
corporation, of the Capital Stock of the Corporation (the
"Distribution") is effective, no Excluded Holder shall Constructively
Own shares of Capital Stock in excess of the Excluded Holder Limit for
such Excluded Holder. An "Excepted Holder" means a stockholder of the
Corporation for whom an Excepted Holder Limit is created by the Board
of Directors. An "Excluded Holder" means any Person who acquires
Constructive Ownership of shares of Common Stock solely by reason of
the Transfer of Common Stock in the Distribution and who, immediately
following the Distribution, Constructively Owns shares of Common Stock
in excess of the Ownership Limit solely by reason of the Transfer of
Common Stock in the Distribution. The "Excluded Holder Limit" means,
with respect to any Excluded Holder, the shares of Capital Stock that
such Excluded Holder was considered to Constructively Own immediately
following the Distribution solely by reason of the Distribution
(taking into account only such shares of Capital Stock and no other
shares as to which such Person may thereafter become, for any reason,
the Constructive Owner), provided, however, that if at any time the
-----------------
Excluded Holder Limit for any Excluded Holder would be less than the
Ownership Limit, such Excluded Holder shall cease to be an Excluded
Holder and the Ownership Limit shall thereafter apply to such Person.
Any Person who Constructively Owns or attempts to Constructively Own
shares of Capital Stock which cause or will cause a Person to
Constructively Own shares of Capital Stock in excess or in violation
of the above limitations must immediately notify the Corporation. If
any of the restrictions on Transfer are violated, the shares of
Capital Stock represented hereby will be automatically transferred to
a Charitable Trustee of a Charitable Trust for the benefit (except as
otherwise provided in the charter of the Corporation) of one or more
Charitable Beneficiaries. In addition, upon the occurrence of certain
events, attempted Transfers in violation of the restrictions described
above may be void ab initio. A Person who attempts to Constructively
-- ------
Own shares of Capital Stock in violation of the Transfer restrictions
described above shall have no claim, cause of action or any recourse
whatsoever against a transferor of such shares of Capital Stock. All
capitalized terms in this legend have the meanings defined in the
- 16 -
<PAGE>
Corporation's charter, as the same may be amended from time to time, a
copy of which, including the restrictions on Transfer, will be
furnished to each holder of shares of Capital Stock of the Corporation
on request and without charge.
Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability to a stockholder on request and without charge.
Section 8.3 Transfer of Shares of Capital Stock in the Corporation.
------------------------------------------------------
Section 8.3.1 Ownership in Trust. Upon any purported Transfer or
------------------
other event described in Section 8.2.1(b) that would result in a transfer of
shares of Capital Stock to a Charitable Trust, such shares of Capital Stock
shall be deemed to have been transferred to the Charitable Trustee as trustee of
a Charitable Trust for the exclusive benefit of one or more Charitable
Beneficiaries (except to the extent otherwise provided in Section 8.3.5). Such
transfer to the Charitable Trustee shall be deemed to be effective as of the
close of business on the Business Day prior to any other purported Transfer or
other event that otherwise results in the transfer to the Charitable Trust
pursuant to Section 8.2.1(b) (or as of the close of business on the Effective
Date if such other purported Transfer or other event occurs on that date). The
Charitable Trustee shall be appointed by the Corporation and shall be a Person
unaffiliated with the Corporation and any Prohibited Owner. Each Charitable
Beneficiary shall be designated by the Corporation as provided in Section 8.3.7.
Section 8.3.2 Status of Shares of Capital Stock Held by the
---------------------------------------------
Charitable Trustee. Shares of Capital Stock held by the Charitable Trustee
- ------------------
shall be issued and outstanding shares of Capital Stock of the Corporation. The
Prohibited Owner shall have no rights in the shares of Capital Stock held by the
Charitable Trustee. The Prohibited Owner shall not benefit economically from
ownership of any shares of Capital Stock held in trust by the Charitable Trustee
(except to the extent otherwise provided in Section 8.3.5), shall have no rights
to dividends or other distributions, and shall not possess any rights to vote or
other rights attributable to the shares of Capital Stock held in the Charitable
Trust. The Prohibited Owner shall have no claim, cause of action or other
recourse whatsoever against the purported transferor of such shares of Capital
Stock.
Section 8.3.3 Dividend and Voting Rights. The Charitable Trustee
--------------------------
shall have all voting rights and rights to dividends or other distributions with
respect to shares of Capital Stock held in the Charitable Trust, which rights
shall be exercised for the exclusive benefit of the Charitable Beneficiary
(except to the extent otherwise provided in Section 8.3.5). Any dividend or
other distribution paid prior to the discovery by the Corporation that shares of
Capital Stock have been transferred to the Charitable Trustee shall be paid with
respect to such shares of Capital Stock to
- 17 -
<PAGE>
the Charitable Trustee upon demand and any dividend or other distribution
authorized but unpaid shall be paid when due to the Charitable Trustee. Any
dividends or distributions so paid over to the Charitable Trustee shall be held
in trust for the Charitable Beneficiary. The Prohibited Owner shall have no
voting rights with respect to shares of Capital Stock held in the Charitable
Trust and, subject to Maryland law, effective as of the date that shares of
Capital Stock have been transferred to the Charitable Trustee, the Charitable
Trustee shall have the authority (at the Charitable Trustee's sole discretion)
(i) to rescind as void any vote cast by a Prohibited Owner prior to the
discovery by the Corporation that shares of Capital Stock have been transferred
to the Charitable Trustee and (ii) to recast such vote in accordance with the
desires of the Charitable Trustee acting for the benefit of the Charitable
Beneficiary; provided, however, that if the Corporation has already taken
-------- -------
irreversible action, then the Charitable Trustee shall not have the power to
rescind and recast such vote. Notwithstanding the provisions of this Article
VIII, until the Corporation has received notification that shares of Capital
Stock have been transferred into a Charitable Trust, the Corporation shall be
entitled to rely on its share transfer and other shareholder records for
purposes of preparing lists of stockholders entitled to vote at meetings,
determining the validity and authority of proxies, and otherwise conducting
votes of stockholders.
Section 8.3.4 Rights Upon Liquidation. Upon any voluntary or
-----------------------
involuntary liquidation, dissolution or winding up of or any distribution of the
assets of the Corporation, the Charitable Trustee shall be entitled to receive,
ratably with each other holder of shares of Capital Stock of the class or series
of shares of Capital Stock that is held in the Charitable Trust, that portion of
the assets of the Corporation available for distribution to the holders of such
class or series (determined based upon the ratio that the number of shares of
such class or series of shares of Capital Stock held by the Charitable Trustee
bears to the total number of shares of Capital Stock of such class or series of
shares of Capital Stock then outstanding). The Charitable Trustee shall
distribute any such assets received in respect of the shares of Capital Stock
held in the Charitable Trust in any liquidation, dissolution or winding up or
distribution of the assets of the Corporation, in accordance with Section 8.3.5.
Section 8.3.5 Sale of Shares by Charitable Trustee.
------------------------------------
(a) Within 20 days of receiving notice from the Corporation that
shares of Capital Stock have been transferred to the Charitable Trust, the
Charitable Trustee of the Charitable Trust shall sell the shares of Capital
Stock held in the Charitable Trust (together with the right to receive dividends
or other distributions with respect to such shares of Capital Stock as to any
shares of Capital Stock transferred to the Charitable Trustee as a result of the
operation of Section 8.2.1(b)) to a person, designated by the Charitable
Trustee, whose ownership of the shares of Capital Stock will not violate the
ownership limitations set forth in Section 8.2.1(a). Upon such sale, the
interest of the Charitable Beneficiary in the shares of Capital
- 18 -
<PAGE>
Stock sold shall terminate and the Charitable Trustee shall distribute the net
proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary
as provided in this Section 8.3.5.
(b) A Prohibited Owner shall receive the lesser of (1) the net price
paid by the Prohibited Owner for the shares of Capital Stock or, if the
Prohibited Owner did not give value for the shares of Capital Stock in
connection with the event causing the shares of Capital Stock to be held in the
Charitable Trust (e.g., in the case of a gift, devise or other such
transaction), the Market Price of the shares of Capital Stock on the day of the
event causing the shares of Capital Stock to be held in the Charitable Trust,
and (2) the net sales proceeds per share received by the Charitable Trustee from
the sale or other disposition of the shares of Capital Stock held in the
Charitable Trust. Any net sales proceeds in excess of the amount payable to the
Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If,
prior to the discovery by the Corporation that shares of Capital Stock have been
transferred to the Charitable Trustee, such shares of Capital Stock are sold by
a Prohibited Owner, then (i) such shares of Capital Stock shall be deemed to
have been sold on behalf of the Charitable Trust and (ii) to the extent that the
Prohibited Owner received an amount for such shares of Capital Stock that
exceeds the amount that such Prohibited Owner was entitled to receive pursuant
to this Section 8.3.5, such excess shall be paid to the Charitable Trustee upon
demand.
Section 8.3.6 Purchase Right in Shares of Capital Stock Transferred
-----------------------------------------------------
to the Charitable Trustee. Shares of Capital Stock transferred to the
- -------------------------
Charitable Trustee shall be deemed to have been offered for sale to the
Corporation, or its designee, at a price per share equal to the lesser of (i)
the price per share in the transaction that resulted in such transfer to the
Charitable Trust (or, in the case of a devise, gift or other such transaction,
the Market Price of the shares of Capital Stock on the day of the event causing
the shares of Capital Stock to be held in the Charitable Trust) and (ii) the
Market Price on the date the Corporation, or its designee, accepts such offer.
The Corporation shall have the right to accept such offer until the Charitable
Trustee has sold the shares of Capital Stock held in the Charitable Trust
pursuant to Section 8.3.5. Upon such a sale to the Corporation, the interest of
the Charitable Beneficiary in the shares of Capital Stock sold shall terminate
and the Charitable Trustee shall distribute the net proceeds of the sale to the
Prohibited Owner.
Section 8.3.7 Designation of Charitable Beneficiaries. By written
---------------------------------------
notice to the Charitable Trustee, the Corporation shall designate from time to
time one or more nonprofit organizations to be the Charitable Beneficiary of the
interest in the Charitable Trust such that (i) shares of Capital Stock held in
the Charitable Trust would not violate the restrictions set forth in Section
8.2.1(a) in the hands of such Charitable Beneficiary and (ii) each such
organization must be described in Sections 501(c)(3), 170(b)(1)(A) or 170(c)(2)
of the Code and contributions to each such
- 19 -
<PAGE>
organization must be eligible for deduction under each of Sections 170(b)(1)(A),
2055 and 2522 of the Code. In the absence of any such determination by the
Corporation, the Charitable Beneficiary shall be ______________.
Section 8.4 NYSE Transactions. Nothing in this Article VIII shall
-----------------
preclude the settlement of any transaction entered into through the facilities
of the NYSE or any other national securities exchange or automated inter-dealer
quotation system. The fact that the settlement of any transaction takes place
shall not negate the effect of any other provision of this Article VIII and any
transferee in such a transaction shall be subject to all of the provisions and
limitations set forth in this Article VIII.
Section 8.5 Enforcement. The Corporation is authorized specifically
-----------
to seek equitable relief, including injunctive relief, to enforce the provisions
of this Article VIII.
Section 8.6 Non-Waiver. No delay or failure on the part of the
----------
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of Directors,
as the case may be, except to the extent specifically waived in writing.
Section 8.7 Enforceability. If any of the restrictions on transfer of
--------------
shares of Capital Stock contained in this Article VIII are determined to be
void, invalid or unenforceable by any court of competent jurisdiction, then the
Prohibited Owner may be deemed, at the option of the Corporation, to have acted
as an agent of the Corporation in acquiring such shares and to hold such shares
on behalf of the Corporation.
Section 8.8 Amendments. Notwithstanding any other provisions of the
-----------
charter or Bylaws of the Corporation, the affirmative vote of stockholders
holding at least two-thirds of all of the votes entitled to be cast thereon (and
prior to the Restriction Termination Date, the written consent of Host REIT)
shall be required to amend, alter, change, repeal, or adopt any provisions
inconsistent with, the provisions of this ARTICLE VIII.
ARTICLE IX
Merger, Consolidation, Share Exchange or Transfer of Assets
-----------------------------------------------------------
Subject to the terms of any class or series of Capital Stock at the
time outstanding, the Corporation may merge with or into another entity, may
consolidate with one or more other entities, may participate in a share exchange
or may transfer its assets within the meaning of the MGCL, but any such merger,
consolidation, share exchange or transfer of its assets must be approved (i) by
the Board of Directors in the manner provided in the MGCL and (ii) by the
stockholders by the affirmative vote of two-thirds of all votes entitled to be
cast thereon to the
- 20 -
<PAGE>
extent a stockholder vote is required under the MGCL to effect any such
transaction. Notwithstanding any other provisions of the charter or Bylaws of
the Corporation, the affirmative vote of stockholders holding at least two-
thirds of all of the votes entitled to be cast thereon shall be required to
amend, alter, change, repeal, or adopt any provisions inconsistent with, the
provisions of this ARTICLE IX.
ARTICLE X
Miscellaneous Provisions
------------------------
Section 10(a) Additional Provisions. The following provisions are
---------------------
hereby adopted for the purpose of defining, limiting, and regulating the powers
of the Corporation and of the directors and stockholders of the Corporation:
(1) Authority to Issue Stock. The Board of Directors is hereby
------------------------
empowered to authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities convertible into shares of its stock of any class or classes, whether
now or hereafter authorized, for such consideration as may be deemed advisable
by the Board of Directors and without any action by the stockholders.
(2) No Preemptive Rights. No stockholder of the Corporation shall
---------------------
have preemptive rights to purchase, subscribe for, or otherwise acquire any
stock or other securities of the Corporation, and any and all preemptive rights
are hereby denied; other than such, if any, as the Board of Directors, in its
sole discretion, may determine and at such price or prices and upon such other
terms as the Board of Directors, in its sole discretion, may fix; and any stock
or other securities which the Board of Directors may determine to offer for
subscription may, as the Board of Directors in its sole discretion shall
determine, be offered to the holders of any class, series or type of stock or
other securities at the time outstanding to the exclusion of the holders of any
or all other classes, series or types of stock or other securities at the time
outstanding.
(3) Indemnification. The Corporation shall indemnify (A) its
---------------
directors and officers, whether serving the Corporation or at its request any
other entity, to the full extent required or permitted by the general laws of
the State of Maryland now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by law and (B)
other employees and agents to such extent as shall be authorized by the Board of
Directors or the Bylaws and be permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time such by-laws,
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by
- 21 -
<PAGE>
law. No amendment of the charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
(4) Liability of Directors and Officers. To the fullest extent
-----------------------------------
permitted by Maryland statutory or decisional law, as amended or interpreted, no
director or officer of this Corporation shall be personally liable to the
Corporation or its stockholders for money damages. No amendment of the charter
of the Corporation or repeal of any of its provisions shall limit or eliminate
the benefits provided to directors and officers under this provision with
respect to any act or omission which occurred prior to such amendment or repeal.
(5) Call of Special Meetings of Stockholders. A special meeting of
-----------------------------------------
the stockholders of the Corporation may be called by the President, the Board of
Directors or any other person specified in the Bylaws. The Secretary of the
Corporation shall also call a special meeting of the stockholders on the written
request of stockholders entitled to cast a majority of all the votes entitled to
be cast at the meeting.
(6) Bylaws. The power to adopt, alter and repeal the Bylaws of the
-------
Corporation is vested exclusively in the Board of Directors.
(7) Amendments. The Corporation reserves the right from time to time
----------
to make any amendments of its charter which may now or hereafter be authorized
by law, including without limitation any amendments changing the terms or
contract rights, as expressly set forth in the charter, of any of its
outstanding stock by classification, reclassification or otherwise. Except as
otherwise provided in the charter of the Corporation, any amendment to the
charter shall be valid only if approved by the affirmative vote of stockholders
of the Corporation holding not less than a majority of all the votes entitled to
be cast on the matter. Notwithstanding any other provisions of the charter or
Bylaws of the Corporation, the affirmative vote of stockholders holding at least
two-thirds of all of the votes entitled to be cast thereon shall be required to
amend, alter, change, repeal, or adopt any provisions inconsistent with, the
provisions of Section 10(a) of this ARTICLE X.
Section 10(b) No Limitation of Powers. The enumeration and
-----------------------
definition of particular powers of the Board of Directors included herein shall
in no way be limited or restricted by reference to or inference from the terms
of any other clause of this or any other Article or the charter of the
Corporation, or construed as or deemed by inference or otherwise in any manner
to exclude or limit any powers conferred upon the Board of Directors under the
general laws of the State of Maryland now or hereinafter in force.
SECOND: Immediately before this amendment and restatement, the total
number of shares of stock of all classes which the Corporation had authority to
- 22 -
<PAGE>
issue was as set forth in Article VI.
THIRD: The board of directors of the Corporation, by a unanimous
consent in writing in lieu of a meeting under Section 2-408 of the MGCL, dated
____________ ___, 1998, adopted a resolution which sets forth the foregoing
amendment and restatement of the Articles of Incorporation, declaring that the
said amendment and restatement of the Articles of Incorporation was advisable
and directing that it be submitted for action thereon by the stockholders by a
unanimous consent in writing in lieu of a meeting under Section 2-505 of the
MGCL.
FOURTH: Notice of a meeting of stockholders to take action on the
amendment and restatement of the Articles of Incorporation was waived by all of
the stockholders of the Corporation.
FIFTH: The amendment and restatement of the Articles of Incorporation
of the Corporation as hereinabove set forth was approved by the unanimous
consent in writing of the stockholders on _______ __, 1998.
IN WITNESS WHEREOF, Crestline Capital Corporation has caused these
Articles of Amendment and Restatement to be signed in its name and on its behalf
by its Senior Vice President and attested by its Secretary on _______ __, 1998.
CRESTLINE CAPITAL
CORPORATION
By:
--------------------------
--------------------------
Senior Vice President
Attest:
---------------------
---------------------
Secretary
- 23 -
<PAGE>
I, _____________, Senior Vice President of Crestline Capital
Corporation hereby acknowledge the foregoing Articles of Amendment and
Restatement of Articles of Incorporation of Crestline Capital Corporation to be
the corporate act of Crestline Capital Corporation, and to the best of my
knowledge, information and belief, these matters and facts are true in all
material respects, and my statement is made under penalties of perjury.
--------------------------------------------
--------------------------------------------
Senior Vice President of Crestline
Capital Corporation
- 24 -
<PAGE>
Exhibit 4.1
COMMON STOCK SHARES
<TABLE>
<C> <S> <C>
- ---------
NUMBER THIS CERTIFICATE IS TRANSFERABLE REVERSE FOR CERTAIN DEFINITIONS
C IN NEW YORK, NEW YORK AND RESTRICTIONS ON TRANSFER
- ---------
CUSIP
---------
</TABLE>
CRESTLINE CAPITAL CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFIES THAT
SPECIMEN
IS THE RECORD HOLDER OF
CRESTLINE FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$.01 PAR VALUE, OF
CAPITAL
CORPORATION
Crestline Capital Corporation (the "Corporation"), transferable on
the books of the Corporation by the registered holder hereof in
person or by its duly authorized attorney, upon surrender of this
Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be held subject to all of
the provisions of the charter and bylaws of the Corporation and
any amendments thereto. This Certificate is not valid unless
countersigned by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED CRESTLINE CAPITAL CORPORATION
BANK OF NEW YORK Corporate
TRANSFER AGENT Seal
AND REGISTRAR 1998
MARYLAND
BY
---------------- ---------------
AUTHORIZED SIGNATURE Secretary President
<PAGE>
CRESTLINE CAPITAL CORPORATION
The shares of Common Stock represented by this Certificate are subject to
restrictions on Constructive Ownership and Transfer primarily for the purpose of
assisting Host Marriott Corporation, a Maryland corporation, in maintaining its
status as a real estate investment trust (a "REIT") under the Internal Revenue
Code of 1986, as amended (the "Code"). Except as expressly provided in the
Corporation's charter, (i) no Person may Constructively Own shares of Common
Stock of the Corporation in excess of 9.8 percent (in value or number of shares,
whichever is more restrictive) of the outstanding Common Stock of the
Corporation unless such Person is an Excepted Holder (in which case the Excepted
Holder Limit shall be applicable) or an Excluded Holder (in which case the
Excluded Holder Limit shall be applicable); and (ii) with respect to any class
or series of shares of Capital Stock other than Common Stock, no Person may
Constructively Own more than 9.8 percent (in value or number of shares,
whichever is more restrictive) of the outstanding shares of such class or series
of such stock of the Corporation (collectively, (i) and (ii) are referred to
herein as the "Ownership Limit"), unless such Person is an Excepted Holder (in
which case the Excepted Holder Limit shall be applicable) or an Excluded Holder
(in which case the Excluded Holder Limit shall be applicable). Notwithstanding
the foregoing, commencing at the time at which the distribution by Host Marriott
Corporation, a Delaware corporation, of the Capital Stock of the Corporation
(the "Distribution") is effective, no Excluded Holder shall Constructively Own
shares of Capital Stock in excess of the Excluded Holder Limit for such Excluded
Holder. An "Excepted Holder" means a stockholder of the Corporation for whom an
Excepted Holder Limit is created by the Board of Directors. An "Excluded Holder"
means any Person who acquires Constructive Ownership of shares of Common Stock
solely by reason of the Transfer of Common Stock in the Distribution and who,
immediately following the Distribution, Constructively Owns shares of Common
Stock in excess of the Ownership Limit solely by reason of the Transfer of
Common Stock in the Distribution. The "Excluded Holder Limit" means, with
respect to any Excluded Holder, the shares of Capital Stock that such Excluded
Holder was considered to Constructively Own immediately following the
Distribution solely by reason of the Distribution (taking into account only such
shares of Capital Stock and no other shares as to which such Person may
thereafter become, for any reason, the Constructive Owner), provided, however,
-----------------
that if at any time the Excluded Holder Limit for any Excluded Holder would be
less than the Ownership Limit, such Excluded Holder shall cease to be an
Excluded Holder and the Ownership Limit shall thereafter apply to such Person.
Any Person who Constructively Owns or attempts to Constructively Own shares of
Capital Stock which cause or will cause a Person to Constructively Own shares of
Capital Stock in excess or in violation of the above limitations must
immediately notify the Corporation. If any of the restrictions on Transfer are
violated, the shares of Capital Stock represented hereby will be automatically
transferred to a Charitable Trustee of a Charitable Trust for the benefit
(except as otherwise provided in the charter of the Corporation) of one or more
Charitable Beneficiaries. In addition, upon the occurrence of certain events,
attempted Transfers in violation of the restrictions described above may be void
ab initio. A Person who attempts to Constructively Own shares of Capital Stock
- -- ------
in violation of the Transfer restrictions described above shall have no claim,
cause of action or any recourse whatsoever against a transferor of such shares
of Capital Stock. All capitalized terms in this legend have the meanings defined
in the Corporation's charter, as the same may be amended from time to time, a
copy of which, including the restrictions on Transfer, will be furnished to each
holder of shares of Capital Stock of the Corporation on request and without
charge.
The Corporation has the authority to issue stock of more than one class. The
Corporation will furnish to any stockholder upon request in writing and without
charge a full statement of (1) the designations and any preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends or
distributions, qualifications and terms and conditions of redemption of the
shares of each class which the Corporation is authorized to issue and (2) with
respect to any preferred or special class of shares that may be issued in
series, (i) the differences in the relative rights and preferences between the
shares of each series to the extent they have been set and (ii) the authority of
the Board of Directors to set the relative rights and preferences of subsequent
series of such preferred or special class of stock.
------------------------------------
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws of regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT--......Custodian......
TEN ENT -- as tenants by the entirety (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship Act............................
(State)
Additional abbreviations may also be used though not in the above list.
For Value received,______________ hereby sell, assign, and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares of Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
----------------------------------------------
(Name of Transfer Agent)
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated
---------------
Signature:
------------------------------------------
Notice: The signature to this assignment must
correspond with the name as written upon the
face of the Certificate in every particular,
without alteration or enlargement or any
change whatever.
Signature guaranteed:
-------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
Exhbit 8.1
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
November 9, 1998
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, MD 20817
Ladies and Gentlemen:
We have acted as tax counsel to Crestline Capital Corporation, a Maryland
corporation ("Crestline"), and Host Marriott Corporation, a Delaware corporation
("Host"), in connection with the distribution by Host to its stockholders of
approximately 82% of the outstanding shares of common stock, par value $0.01 per
share, of Crestline (the "Distribution"), as more fully described in the
Prospectus which is part of the Registration Statement (the "Registration
Statement") filed with the Securities and Exchange Commission by Crestline on
Form S-1 (File No. 333-64657). In connection with the Distribution, we have
been asked to provide you with our opinion on the federal income tax matters set
forth in this letter. Capitalized terms used in this letter and not otherwise
defined herein have the meaning set forth in the Prospectus.
Bases for Opinion
The opinion set forth in this letter is based on relevant current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including proposed and temporary Treasury
Regulations), and interpretations of the foregoing as expressed in court
decisions, applicable legislative history, and the administrative rulings and
practices of the IRS, including its practices and policies in issuing private
letter rulings, which are not binding on the IRS except with respect to a
taxpayer that receives such a ruling, all as of the date hereof. These
provisions and interpretations are subject to change, which may or may not be
retroactive in effect, that might result in material modifications of our
opinion. Our opinion does not foreclose the possibility of a contrary
determination by the IRS or a court of competent jurisdiction, or of a contrary
position taken by the IRS or the Treasury Department in regulations or rulings
issued in the future. In this regard, an opinion of counsel with respect to an
issue merely represents counsel's best judgment with respect to the probable
outcome on the merits with respect to such issue, is not binding on the IRS or
the courts, and is not a guarantee that the IRS will not assert a contrary
position with
<PAGE>
Crestline Capital Corporation
November 9, 1998
Page 2
respect to such issue or that a court will not sustain such a position asserted
by the IRS.
In rendering the following opinion, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinion, including the following:
(1) the Prospectus, (2) the Articles of Incorporation of Crestline and the
Bylaws of Crestline, and (3) any other documents as we deem necessary or
appropriate. For purposes of rendering our opinion, we have not made an
independent investigation or audit of the facts set forth in any of these
documents. Instead, we have assumed that the information presented in these
documents or otherwise furnished to us is accurate and complete in all material
respects. We are not aware, however, of any material facts or circumstances
inconsistent with the information we have relied upon or the assumptions we have
made.
In rendering the following opinion, we have assumed that all of the
representations and statements set forth in the documents that we reviewed are
true and correct and will be true and correct at the time of the Distribution,
that any representation or statement made as a belief or made "to the knowledge
of" or similarly qualified is correct and accurate without such qualification,
and that all of the obligations imposed by any such documents on the parties
thereto have been and will continue to be performed or satisfied in accordance
with their terms. We also have assumed the genuineness of all signatures, the
proper execution of all documents, the authenticity of all documents submitted
to us as originals, the conformity to originals of documents submitted to us as
copies, the authenticity of the originals from which any copies were made and
that any documents as to which we have reviewed only in form will be duly
executed at the time of the Distribution without changes from the form reviewed
by us. Any variation or difference in the facts from those set forth in the
documents that we have reviewed and upon which we have relied may affect the
following opinion.
Opinion
Based upon, subject to, and limited by the assumptions and qualifications
set forth herein, we are of the opinion that:
The discussion in the Prospectus 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.
<PAGE>
Crestline Capital Corporation
November 9, 1998
Page 3
* * * * *
We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery of this opinion letter.
This opinion letter addresses only the specific federal income tax matters
set forth above and does not address any other federal, state, local or foreign
tax consequences that may result from the Distribution. In particular, but
without limiting the foregoing, we express no opinion as to either the fair
market value of the Distribution or the amount of the current and accumulated
earnings and profits of Host and Host REIT, both of which are relevant to
determining the actual tax consequences of the Distribution to the Host
Stockholders.
This opinion letter has been prepared for your use in connection with the
Distribution and should not be quoted in whole or in part or otherwise be
referred to, nor filed with or furnished to any governmental agency or other
person or entity, without the prior written consent of this firm. We do,
however, consent to the references to this opinion letter and to Hogan & Hartson
L.L.P. under the caption, "Legal Matters" and "Federal Income Tax Consequences"
in the Prospectus and to the inclusion of this opinion letter as an exhibit to
the Registration Statement. In giving this consent, we do not thereby admit
that we are an "expert" within the meaning of the Securities Act of 1933.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
Hogan & Hartson L.L.P.
<PAGE>
Exhibit 10.2
LEASE AGREEMENT
DATED AS OF __________, __ 1996
BY AND BETWEEN
HPTCY CORPORATION,
AS LANDLORD,
AND
HMH HPT COURTYARD, INC.,
AS TENANT
<PAGE>
TABLE OF CONTENTS
ARTICLE 1: DEFINITIONS.................................................... 1
1.1 Accounting Period............................................... 1
1.2 Additional Rent................................................. 1
1.3 Additional Charges.............................................. 1
1.4 Affiliated Person............................................... 2
1.5 Agreement....................................................... 2
1.6 Applicable Laws................................................. 2
1.7 Award........................................................... 2
1.8 Base Gross Revenues............................................. 2
1.9 Base Year....................................................... 3
1.10 Business Day.................................................... 3
1.11 Capital Addition................................................ 3
1.12 Capital Expenditure............................................. 3
1.13 Claim........................................................... 3
1.14 Code............................................................ 3
1.15 Collective Leased Properties.................................... 4
1.16 Commencement Date............................................... 4
1.17 Condemnation.................................................... 4
1.18 Condemnor....................................................... 4
1.19 Consolidated Financials......................................... 4
1.20 Date of Taking.................................................. 4
1.21 Default......................................................... 4
1.22 Distribution.................................................... 4
1.23 Encumbrance..................................................... 4
1.24 Entity.......................................................... 5
1.25 Environment..................................................... 5
1.26 Environmental Obligation........................................ 5
1.27 Environmental Notice............................................ 5
1.28 Event of Default................................................ 5
1.29 Excess Gross Revenues........................................... 5
1.30 Extended Terms.................................................. 5
1.31 FF&E Reserve.................................................... 5
1.32 Financial Officer's Certificate................................. 5
1.33 Fiscal Year..................................................... 5
1.34 Fixed Term...................................................... 5
1.35 Fixtures........................................................ 6
1.36 GAAP............................................................ 6
1.37 Government Agencies............................................. 6
1.38 Gross Revenues.................................................. 6
1.39 Hazardous Substances............................................ 6
1.40 Host............................................................ 7
1.41 Hotel........................................................... 7
<PAGE>
- ii -
1.42 Hotel Mortgage.................................................. 7
1.43 Hotel Mortgagee................................................. 7
1.44 Immediate Family................................................ 7
1.45 Impositions..................................................... 7
1.46 Incidental Documents............................................ 8
1.47 Indebtedness.................................................... 8
1.48 Insurance Requirements.......................................... 8
1.49 Interest Rate................................................... 8
1.50 Land............................................................ 8
1.51 Landlord........................................................ 8
1.52 Landlord Liens.................................................. 9
1.53 Lease Year...................................................... 9
1.54 Leased Improvements............................................. 9
1.55 Leased Intangible Property...................................... 9
1.56 Leased Personal Property........................................ 9
1.57 Leased Property................................................. 9
1.58 Legal Requirements.............................................. 9
1.59 Lending Institution............................................. 10
1.60 Lien............................................................ 10
1.61 Management Agreement............................................ 10
1.62 Manager......................................................... 10
1.63 Minimum Rent.................................................... 10
1.64 Notice.......................................................... 10
1.65 Officer's Certificate........................................... 10
1.66 Other Leases.................................................... 10
1.67 Overdue Rate.................................................... 10
1.68 Parent.......................................................... 11
1.69 Permitted Encumbrances.......................................... 11
1.70 Permitted Liens................................................. 11
1.71 Permitted Use................................................... 11
1.72 Person.......................................................... 11
1.73 Pledge and Security Agreement................................... 11
1.74 Purchase Agreement.............................................. 11
1.75 Records......................................................... 11
1.76 Rent............................................................ 11
1.77 Request Notice.................................................. 11
1.78 Response Notice................................................. 11
1.79 SEC............................................................. 11
1.80 State........................................................... 11
1.81 Subordinated Creditor........................................... 12
1.82 Subordination Agreement......................................... 12
1.83 Subsidiary...................................................... 12
1.84 Successor Landlord.............................................. 12
1.85 Tangible Net Worth.............................................. 12
1.86 Tenant.......................................................... 12
<PAGE>
- iii -
1.87 Tenant's Personal Property...................................... 12
1.88 Term............................................................ 13
1.89 Uniform System of Accounts...................................... 13
1.90 Unsuitable for Its Permitted Use................................ 13
1.91 Work............................................................ 13
ARTICLE 2: LEASED PROPERTY AND TERM....................................... 13
2.1 Leased Property................................................ 13
2.2 Condition of Leased Property................................... 14
2.3 Fixed Term..................................................... 15
2.4 Extended Term.................................................. 15
ARTICLE 3: RENT........................................................... 16
3.1 Rent........................................................... 16
3.1.1 Minimum Rent............................................ 16
3.1.2 Additional Rent......................................... 16
3.1.3 Additional Charges...................................... 19
3.2 Late Payment of Rent, Etc...................................... 20
3.3 Net Lease...................................................... 21
3.4 No Termination, Abatement, Etc................................. 21
3.5 Security for Tenant's Performance.............................. 22
ARTICLE 4: USE OF THE LEASED PROPERTY..................................... 22
4.1 Permitted Use.................................................. 22
4.1.1 Permitted Use........................................... 22
4.1.2 Necessary Approvals..................................... 23
4.1.3 Lawful Use, Etc......................................... 23
4.2 Compliance with Legal/Insurance Requirements, Etc.............. 23
4.3 Environmental Matters.......................................... 24
4.3.1 Restriction on Use, Etc................................. 24
4.3.2 Indemnification of Landlord............................. 25
4.3.3 Survival................................................ 25
ARTICLE 5: MAINTENANCE AND REPAIRS........................................ 26
5.1 Maintenance and Repairs........................................ 26
5.1.1 Tenant's Obligations.................................... 26
5.1.2 Landlord's Obligations.................................. 27
5.1.3 Nonresponsibility of Landlord, Etc...................... 27
5.2 Tenant's Personal Property..................................... 28
5.3 Yield Up....................................................... 28
5.4 Management Agreement........................................... 29
<PAGE>
- iv -
ARTICLE 6: IMPROVEMENTS, ETC.............................................. 29
6.1 Improvements to the Leased Property............................ 29
6.2 Salvage........................................................ 30
ARTICLE 7: LIENS.......................................................... 30
7.1 Liens.......................................................... 30
7.2 Landlord's Lien................................................ 31
ARTICLE 8: PERMITTED CONTESTS............................................. 31
ARTICLE 9: INSURANCE AND INDEMNIFICATION.................................. 32
9.1 General Insurance Requirements................................. 32
9.2 Replacement Cost............................................... 33
9.3 Waiver of Subrogation.......................................... 33
9.4 Form Satisfactory, Etc......................................... 34
9.5 Blanket Policy................................................. 34
9.6 No Separate Insurance.......................................... 35
9.7 Indemnification of Landlord.................................... 35
ARTICLE 10: CASUALTY....................................................... 36
10.1 Insurance Proceeds............................................. 36
10.2 Damage or Destruction.......................................... 36
10.2.1 Damage or Destruction of Leased Property............... 36
10.2.2 Partial Damage or Destruction.......................... 36
10.2.3 Insufficient Insurance Proceeds........................ 36
10.2.4 Disbursement of Proceeds............................... 37
10.3 Damage Near End of Term........................................ 38
10.4 Tenant's Property.............................................. 38
10.5 Restoration of Tenant's Property............................... 38
10.6 No Abatement of Rent........................................... 38
10.7 Waiver......................................................... 38
ARTICLE 11: CONDEMNATION................................................... 39
11.1 Total Condemnation, Etc........................................ 39
11.2 Partial Condemnation........................................... 39
11.3 Abatement of Rent.............................................. 40
11.4 Temporary Condemnation......................................... 40
11.5 Allocation of Award............................................ 40
<PAGE>
- v -
ARTICLE 12: DEFAULTS AND REMEDIES.......................................... 41
12.1 Events of Default.............................................. 41
12.2 Remedies....................................................... 44
12.3 Tenant's Waiver................................................ 45
12.4 Application of Funds........................................... 45
12.5 Landlord's Right to Cure Tenant's Default...................... 46
ARTICLE 13: HOLDING OVER................................................... 46
ARTICLE 14: LANDLORD'S NOTICE OBLIGATIONS; LANDLORD DEFAULT................ 46
14.1 Landlord Notice Obligation..................................... 46
14.2 Landlord's Default............................................. 47
ARTICLE 15: INTENTIONALLY DELETED.......................................... 47
ARTICLE 16: SUBLETTING AND ASSIGNMENT...................................... 47
16.1 Subletting and Assignment...................................... 47
16.2 Required Sublease Provisions................................... 49
16.3 Permitted Sublease............................................. 50
16.4 Sublease Limitation............................................ 50
ARTICLE 17: ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS................. 50
17.1 Estoppel Certificates.......................................... 50
17.2 Financial Statements........................................... 51
17.3 General Operations............................................. 52
ARTICLE 18: LANDLORD'S RIGHT TO INSPECT.................................... 52
ARTICLE 19: INTENTIONALLY DELETED.......................................... 53
ARTICLE 20: HOTEL MORTGAGES................................................ 53
20.1 Landlord May Grant Liens....................................... 53
20.2 Subordination of Lease......................................... 53
20.3 Notices........................................................ 55
20.4 Transfer of Leased Property.................................... 55
ARTICLE 21: ADDITIONAL COVENANTS OF TENANT................................. 55
21.1 Prompt Payment of Indebtedness................................. 55
21.2 Conduct of Business............................................ 56
<PAGE>
- vi -
21.3 Maintenance of Accounts and Records............................ 56
21.4 Notice of Litigation, Etc...................................... 56
21.5 Indebtedness of Tenant......................................... 56
21.6 Financial Condition of Tenant.................................. 57
21.7 Distributions, Payments to Affiliated Persons, Etc............. 57
21.8 Prohibited Transactions........................................ 57
21.9 Liens and Encumbrances......................................... 58
21.10 Merger; Sale of Assets; Etc.................................... 58
ARTICLE 22: MISCELLANEOUS.................................................. 58
22.1 Limitation on Payment of Rent.................................. 58
22.2 No Waiver...................................................... 59
22.3 Remedies Cumulative............................................ 59
22.4 Severability................................................... 59
22.5 Acceptance of Surrender........................................ 59
22.6 No Merger of Title............................................. 59
22.7 Conveyance by Landlord......................................... 59
22.8 Quiet Enjoyment................................................ 60
22.9 Memorandum of Lease............................................ 60
22.10 Notices........................................................ 60
22.11 Construction; Recourse......................................... 62
22.12 Counterparts; Headings......................................... 62
22.13 Applicable Law, Etc............................................ 62
22.14 Right to Make Agreement........................................ 63
EXHIBITS
- --------
A - Minimum Rent
B - Other Leases
C - The Land
<PAGE>
LEASE AGREEMENT
---------------
THIS LEASE AGREEMENT is entered into as of this day of
, 1995, by and between HPTCY CORPORATION, a Delaware corporation, as landlord
("Landlord"), and HMH HPT COURTYARD, INC., a Delaware corporation, as tenant
--------
("Tenant").
------
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Landlord owns fee simple title to the Leased Property (this and
other capitalized terms used and not otherwise defined herein having the
meanings ascribed to such terms in Article 1); and
---------
WHEREAS, Landlord wishes to lease the Leased Property to Tenant and Tenant
wishes to lease the Leased Property from Landlord, all subject to and upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the mutual receipt and legal
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:
ARTICLE 1
---------
DEFINITIONS
-----------
For all purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires, (i) the terms defined in this Article
shall have the meanings assigned to them in this Article and include the plural
as well as the singular, (ii) all accounting terms not otherwise defined herein
shall have the meanings assigned to them in accordance with GAAP, (iii) all
references in this Agreement to designated "Articles," "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Agreement, and (iv) the words "herein," "hereof," "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision.
1.1 "Accounting Period" shall have the meaning given such term in the
-----------------
Management Agreement.
1.2 "Additional Rent" shall have the meaning given such term in Section
--------------- -------
3.1.2(a).
- --------
1.3 "Additional Charges" shall have the meaning given such term in Section
------------------ -------
3.1.3.
- -----
<PAGE>
- 2 -
1.4 "Affiliated Person" shall mean, with respect to any Person, (a) in the
-----------------
case of any such Person which is a partnership, any partner in such partnership,
(b) in the case of any such Person which is a limited liability company, any
member of such company, (c) any other Person which is a Parent, a Subsidiary, or
a Subsidiary of a Parent with respect to such Person or to one or more of the
Persons referred to in the preceding clauses (a) and (b), (d) any other Person
who is an officer, director, trustee or employee of, or partner in, such Person
or any Person referred to in the preceding clauses (a), (b) and (c), and (e) any
other Person who is a member of the Immediate Family of such Person or of any
Person referred to in the preceding clauses (a) through (d).
1.5 "Agreement" shall mean this Lease Agreement, including Exhibits A to C
--------- ---------------
hereto, as it and they may be amended from time to time as herein provided.
1.6 "Applicable Laws" shall mean all applicable laws, statutes,
---------------
regulations, rules, ordinances, codes, licenses, permits and orders, from time
to time in existence, of all courts of competent jurisdiction and Government
Agencies, and all applicable judicial and administrative and regulatory decrees,
judgments and orders, including common law rulings and determinations, relating
to injury to, or the protection of, real or personal property or human health
(except those requirements which, by definition, are solely the responsibility
of employers) or the Environment, including, without limitation, all valid and
lawful requirements of courts and other Government Agencies pertaining to
reporting, licensing, permitting, investigation, remediation and removal of
underground improvements (including, without limitation, treatment or storage
tanks, or water, gas or oil wells), or emissions, discharges, releases or
threatened releases of Hazardous Substances, chemical substances, pesticides,
petroleum or petroleum products, pollutants, contaminants or hazardous or toxic
substances, materials or wastes whether solid, liquid or gaseous in nature, into
the Environment, or relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Substances,
underground improvements (including, without limitation, treatment or storage
tanks, or water, gas or oil wells), or pollutants, contaminants or hazardous or
toxic substances, materials or wastes, whether solid, liquid or gaseous in
nature.
1.7 "Award" shall mean all compensation, sums or other value awarded, paid
-----
or received by virtue of a total or partial Condemnation of the Leased Property
(after deduction of all reasonable legal fees and other reasonable costs and
expenses, including, without limitation, expert witness fees, incurred by
Landlord, in connection with obtaining any such award).
1.8 "Base Gross Revenues" shall mean Gross Revenues for the Base Year;
-------------------
provided, however, that in the event that, with respect to any Lease Year, or
- -------- -------
portion thereof, for any reason (including, without limitation, a casualty or
Condemnation)
<PAGE>
- 3 -
there shall be a reduction in the number of rooms at the Hotel or
any other Hotel (as defined in the Other Leases) or a change in the services
provided at the Hotel or such other Hotels (including, without limitation,
closing of restaurants) from the number of rooms or the services provided during
the Base Year, in determining Additional Rent payable with respect to such Lease
Year, Base Gross Revenues shall be reduced as follows: (a) in the event of the
termination of any of the Other Leases, all Gross Revenues attributable to the
Leased Property demised thereunder during the Base Year shall be subtracted from
Base Gross Revenues; (b) in the event of a complete closing of a Hotel, all
Gross Revenues attributable to such Hotel during the Base Year shall be
subtracted from Base Gross Revenues throughout the period of such closing; (c)
in the event of a partial closing of a Hotel affecting any number of guest rooms
in such Hotel, Gross Revenues attributable to guest room occupancy or guest room
services at such Hotel during the Base Year shall be ratably allocated among all
guest rooms in service at such Hotel during the Base Year and all such Gross
Revenues attributable to rooms no longer in service shall be subtracted from
Base Gross Revenues throughout the period of such closing; (d) in the event of a
closing of a restaurant, all Gross Revenues attributable to such restaurant
during the Base Year shall be subtracted from Base Gross Revenues throughout the
period of such closing; and (e) in the event of any other change in
circumstances affecting any Hotel, Base Gross Revenues shall be equitably
adjusted in such manner as Landlord and Tenant shall reasonably agree.
1.9 "Base Year" shall mean the 1995 Fiscal Year.
---------
1.10 "Business Day" shall mean any day other than Saturday, Sunday, or any
------------
other day on which banking institutions in The Commonwealth of Massachusetts or
the State of Maryland are authorized by law or executive action to close.
1.11 "Capital Addition" shall mean any renovation, repair or improvement
----------------
to the Leased Property (or portion thereof), the cost of which constitutes a
Capital Expenditure and the making or implementation of which requires "Owner's"
consent under the Management Agreement.
1.12 "Capital Expenditure" shall mean any expenditure treated as capital
-------------------
in nature in accordance with GAAP.
1.13 "Claim" shall have the meaning given such term in Article 8.
----- ---------
1.14 "Code" shall mean the Internal Revenue Code of 1986 and, to the
----
extent applicable, the Treasury Regulations promulgated thereunder, each as from
time to time amended.
<PAGE>
- 4 -
1.15 "Collective Leased Properties" shall mean, collectively, the Leased
----------------------------
Property and every other Leased Property (as defined therein) under the Other
Leases.
1.16 "Commencement Date" shall mean the date of this Agreement.
-----------------
1.17 "Condemnation" shall mean (a) the exercise of any governmental power
------------
with respect to the Leased Property, whether by legal proceedings or otherwise,
by a Condemnor of its power of condemnation, (b) a voluntary sale or transfer of
the Leased Property by Landlord to any Condemnor, either under threat of
condemnation or while legal proceedings for condemnation are pending, or (c) a
taking or voluntary conveyance of all or part of the Leased Property, or any
interest therein, or right accruing thereto or use thereof, as the result or in
settlement of any Condemnation or other eminent domain proceeding affecting the
Leased Property, whether or not the same shall have actually been commenced.
1.18 "Condemnor" shall mean any public or quasi-public authority, or
---------
private corporation or individual, having the power of Condemnation.
1.19 "Consolidated Financials" shall mean, for any Fiscal Year or other
-----------------------
accounting period of Tenant, annual audited and quarterly unaudited financial
statements of Host prepared on a consolidated basis, including Host's
consolidated balance sheet and the related statements of income and cash flows,
all in reasonable detail, and setting forth in comparative form the
corresponding figures for the corresponding period in the preceding Fiscal Year,
and prepared in accordance with GAAP throughout the periods reflected.
1.20 "Date of Taking" shall mean the date the Condemnor has the right to
--------------
possession of the Leased Property, or any portion thereof, in connection with a
Condemnation.
1.21 "Default" shall mean any event or condition which with the giving of
-------
notice and/or lapse of time may ripen into an Event of Default.
1.22 "Distribution" shall mean (a) any declaration or payment of any
------------
dividend (except dividends payable in common stock of Tenant) on or in respect
of any shares of any class of capital stock of Tenant, (b) any purchase,
redemption retirement or other acquisition of any shares of any class of capital
stock of a corporation, (c) any other distribution on or in respect of any
shares of any class of capital stock of a corporation, or (d) any return of
capital to shareholders.
1.23 "Encumbrance" shall have the meaning given such term in Section 20.1.
----------- ------------
<PAGE>
- 5 -
1.24 "Entity" shall mean any corporation, general or limited partnership,
------
limited liability company or partnership, stock company or association, joint
venture, association, company, trust, bank, trust company, land trust, business
trust, cooperative, any government or agency or political subdivision thereof or
any other entity.
1.25 "Environment" shall mean soil, surface waters, ground waters, land,
-----------
stream, sediments, surface or subsurface strata and ambient air.
1.26 "Environmental Obligation" shall have the meaning given such term in
------------------------
Section 4.3.1.
- -------------
1.27 "Environmental Notice" shall have the meaning given such term in
--------------------
Section 4.3.1.
- -------------
1.28 "Event of Default" shall have the meaning given such term in Section
---------------- -------
12.1.
- ----
1.29 "Excess Gross Revenues" shall mean, with respect to any Lease Year,
---------------------
or portion thereof, the amount of Gross Revenues for such Lease Year with
respect to the Collective Leased Properties, or portion thereof, in excess of
Base Gross Revenues with respect to the Collective Leased Properties for the
equivalent period.
1.30 "Extended Terms" shall have the meaning given such term in Section
-------------- -------
2.4.
- ---
1.31 "FF&E Reserve" shall have the meaning given such term in the
------------
Management Agreement.
1.32 "Financial Officer's Certificate" shall mean, as to any Person, a
-------------------------------
certificate of the chief financial officer or chief accounting officer (or such
officer's authorized designee) of such Person, duly authorized, accompanying the
financial statements required to be delivered by such Person pursuant to Section
-------
17.2, in which such officer shall certify (a) that such statements have been
- ----
properly prepared in accordance with GAAP and are true, correct and complete in
all material respects and fairly present the consolidated financial condition of
such Person at and as of the dates thereof and the results of its and their
operations for the periods covered thereby, and (b) certify that such officer
has reviewed this Agreement and has no knowledge of any Default or Event of
Default hereunder.
1.33 "Fiscal Year" shall have the meaning given such term in the
-----------
Management Agreement.
1.34 "Fixed Term" shall have the meaning given such term in Section 2.3.
---------- -----------
<PAGE>
- 6 -
1.35 "Fixtures" shall have the meaning given such term in Section 2.1(d).
-------- --------------
1.36 "GAAP" shall mean generally accepted accounting principles
----
consistently applied.
1.37 "Government Agencies" shall mean any court, agency, authority, board
-------------------
(including, without limitation, environmental protection, planning and zoning),
bureau, commission, department, office or instrumentality of any nature
whatsoever of any governmental or quasi-governmental unit of the United States
or the State or any county or any political subdivision of any of the foregoing,
whether now or hereafter in existence, having jurisdiction over Tenant or the
Leased Property or any portion thereof or the Hotel operated thereon.
1.38 "Gross Revenues" shall have the meaning given such term in the
--------------
Management Agreement.
1.39 "Hazardous Substances" shall mean any substance:
--------------------
(a) the presence of which requires or may hereafter require
notification, investigation or remediation under any federal, state or
local statute, regulation, rule, ordinance, order, action or policy; or
(b) which is or becomes defined as a "hazardous waste", "hazardous
material" or "hazardous substance" or "pollutant" or "contaminant" under
any present or future federal, state or local statute, regulation, rule or
ordinance or amendments thereto including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. et seq.) and the Resource Conservation and Recovery Act (42 U.S.C.
-- ---
section 6901 et seq.) and the regulations promulgated thereunder; or
-- ---
(c) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or
becomes regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, any
state of the United States, or any political subdivision thereof; or
(d) the presence of which on the Leased Property causes or
materially threatens to cause an unlawful nuisance upon the Leased Property
or to adjacent properties or poses or materially threatens to pose a hazard
to the Leased Property or to the health or safety of persons on or about
the Leased Property; or
(e) without limitation, which contains gasoline, diesel fuel or
other petroleum hydrocarbons or volatile organic compounds; or
<PAGE>
- 7 -
(f) without limitation, which contains polychlorinated biphenyls
(PCBs) or asbestos or urea formaldehyde foam insulation; or
(g) without limitation, which contains or emits radioactive
particles, waves or material; or
(h) without limitation, constitutes materials which are now or may
hereafter be subject to regulation pursuant to the Material Waste Tracking
Act of 1988, or any Applicable Laws promulgated by any Government Agencies.
1.40 "Host" shall mean Host Marriott Corporation, a Delaware corporation.
----
1.41 "Hotel" shall mean the Marriott Courtyard Hotel being operated on the
-----
Leased Property.
1.42 "Hotel Mortgage" shall mean any Encumbrance placed upon the Leased
--------------
Property in accordance with Article 20.
----------
1.43 "Hotel Mortgagee" shall mean the holder of any Hotel Mortgage.
---------------
1.44 "Immediate Family" shall mean, with respect to any individual, such
----------------
individual's spouse, parents, brothers, sisters, children (natural or adopted),
stepchildren, grandchildren, grandparents, parents-in-law, brothers-in-law,
sisters-in-law, nephews and nieces.
1.45 "Impositions" shall mean collectively, all taxes (including, without
-----------
limitation, all taxes imposed under the laws of the State, as such laws may be
amended from time to time, and all ad valorem, sales and use, single business,
gross receipts, transaction privilege, rent or similar taxes as the same relate
to or are imposed upon Landlord, Tenant or the business conducted upon the
Leased Property), assessments (including, without limitation, all assessments
for public improvements or benefit, whether or not commenced or completed prior
to the date hereof), water, sewer or other rents and charges, excises, tax
levies, fees (including, without limitation, license, permit, inspection,
authorization and similar fees), and all other governmental charges, in each
case whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, of every character in respect of the Leased Property or the business
conducted thereon by Tenant (including all interest and penalties thereon due to
any failure in payment by Tenant), which at any time prior to, during or in
respect of the Term hereof may be assessed or imposed on or in respect of or be
a lien upon (a) Landlord's interest in the Leased Property, (b) the Leased
Property or any part thereof or any rent therefrom or any estate, right, title
or interest therein, or (c) any occupancy, operation, use or possession of, or
sales from, or activity conducted on, or in connection with the Leased Property
or the leasing or use of the Leased Property or any part thereof by Tenant;
provided,
- --------
<PAGE>
- 8 -
however, that nothing contained herein shall be construed to require
- --------
Tenant to pay (i) any tax based on net income imposed on Landlord, (ii) any net
revenue tax of Landlord, (iii) any transfer fee or other tax imposed with
respect to the sale, exchange or other disposition by Landlord of the Leased
Property or the proceeds thereof (other than in connection with the sale,
exchange or other disposition to, or in connection with a transaction involving,
Tenant), (iv) any single business, gross receipts tax (other than a tax on any
rent received by Landlord from Tenant unless such gross receipts tax on such
rent is in lieu of any other tax, assessment, levy or charge otherwise excluded
from this definition of Impositions), transaction privilege, rent or similar
taxes as the same relate to or are imposed upon Landlord, except to the extent
that any tax, assessment, tax levy or charge which is in effect at any time
during the Term hereof is totally or partially repealed, and a tax, assessment,
tax levy or charge set forth in clause (i) or (ii) preceding is levied, assessed
or imposed expressly in lieu thereof, (v) any interest or penalties imposed on
Landlord as a result of the failure of Landlord to file any return or report
timely and in the form prescribed by law or to pay any tax or imposition, except
to the extent such failure is a result of a breach by Tenant of its obligations
pursuant to Section 3.1.3, (vi) any Impositions imposed on Landlord that are a
-------------
result of Landlord not being considered a "United States person" as defined in
Section 7701(a)(30) of the Code, (vii) any Impositions that are enacted or
adopted by their express terms as a substitute for any tax that would not have
been payable by Tenant pursuant to the terms of this Agreement or (viii) any
Impositions imposed as a result of a breach of covenant or representation by
Landlord in any agreement governing Landlord's conduct or operation or as a
result of the gross negligence or willful misconduct of Landlord.
1.46 "Incidental Documents" shall mean the Pledge and Security Agreement.
--------------------
1.47 "Indebtedness" shall mean all obligations, contingent or otherwise,
------------
which in accordance with GAAP should be reflected on the obligor's balance sheet
as liabilities.
1.48 "Insurance Requirements" shall mean all terms of any insurance policy
----------------------
required by this Agreement and all requirements of the issuer of any such policy
and all orders, rules and regulations and any other requirements of the National
Board of Fire Underwriters (or any other body exercising similar functions)
binding upon Landlord, Tenant or the Leased Property.
1.49 "Interest Rate" shall mean ten percent (10%) per annum.
-------------
1.50 "Land" shall have the meaning given such term in Section 2.1(a).
---- --------------
1.51 "Landlord" shall have the meaning given such term in the preambles to
--------
this Agreement.
<PAGE>
- 9 -
1.52 "Landlord Liens" shall mean liens on or against the Leased Property
--------------
or any payment of Rent (a) which result from any act of, or any claim against,
Landlord or any owner of a direct or indirect interest in the Leased Property,
or which result from any violation by Landlord of any terms of this Agreement or
the Purchase Agreement, or (b) which result from liens in favor of any taxing
authority by reason of any tax owed by Landlord or any fee owner of a direct or
indirect interest in the Leased Property; provided, however, that "Landlord
-------- ------- --------
Lien" shall not include any lien resulting from any tax for which Tenant is
- ----
obligated to pay or indemnify Landlord against until such time as Tenant shall
have already paid to or on behalf of Landlord the tax or the required indemnity
with respect to the same.
1.53 "Lease Year" shall mean any Fiscal Year or portion thereof,
----------
commencing with the 1995 Fiscal Year, during the Term.
1.54 "Leased Improvements" shall have the meaning given such term in
-------------------
Section 2.1(b).
- --------------
1.55 "Leased Intangible Property" shall mean all hotel licensing
--------------------------
agreements and other service contracts, equipment leases, booking agreements and
other arrangements or agreements affecting the ownership, repair, maintenance,
management, leasing or operation of the Leased Property to which Landlord is a
party; all books, records and files relating to the leasing, maintenance,
management or operation of the Leased Property belonging to Landlord; all
transferable or assignable permits, certificates of occupancy, operating
permits, sign permits, development rights and approvals, certificates, licenses,
warranties and guarantees, rights to deposits, trade names, service marks,
telephone exchange numbers identified with the Leased Property, and all other
transferable intangible property, miscellaneous rights, benefits and privileges
of any kind or character belonging to Landlord with respect to the Leased
Property.
1.56 "Leased Personal Property" shall have the meaning given such term in
------------------------
Section 2.1(e).
- --------------
1.57 "Leased Property" shall have the meaning given such term in Section
--------------- -------
2.1.
- ---
1.58 "Legal Requirements" shall mean all federal, state, county, municipal
------------------
and other governmental statutes, laws, rules, orders, regulations, ordinances,
judgments, decrees and injunctions affecting the Leased Property or the
maintenance, construction, alteration or operation thereof, whether now or
hereafter enacted or in existence, including, without limitation, (a) all
permits, licenses, authorizations, certificates and regulations necessary to
operate the Leased Property for its Permitted Use, and (b) all covenants,
agreements, restrictions and encumbrances contained in any instruments at any
time in force
<PAGE>
- 10 -
affecting the Leased Property, including those which may (i) require material
repairs, modifications or alterations in or to the Leased Property or (ii) in
any way materially and adversely affect the use and enjoyment thereof, but
excluding any requirements arising as a result of Landlord's status as a real
estate investment trust.
1.59 "Lending Institution" shall mean any United States insurance company,
-------------------
federally insured commercial or savings bank, national banking association,
United States savings and loan association, employees' welfare, pension or
retirement fund or system, corporate profit sharing or pension trust, college or
university, or real estate investment trust, including any corporation qualified
to be treated for federal tax purposes as a real estate investment trust, such
trust having a net worth of at least $100,000,000.
1.60 "Lien" shall mean any mortgage, security interest, pledge, collateral
----
assignment, or other encumbrance, lien or charge of any kind, or any transfer of
property or assets for the purpose of subjecting the same to the payment of
Indebtedness or performance of any other obligation in priority to payment of
its general creditors.
1.61 "Management Agreement" shall mean the Management Agreement between
--------------------
Tenant and the Manager with respect to the Leased Premises, dated September 25,
1993, together with all amendments, modifications and supplements thereto.
1.62 "Manager" shall mean Courtyard Management Corporation, a Delaware
-------
corporation.
1.63 "Minimum Rent" shall mean, with respect to each Accounting Period,
------------
the sum set forth on Exhibit A.
---------
1.64 "Notice" shall mean a notice given in accordance with Section 22.10.
------ -------------
1.65 "Officer's Certificate" shall mean a certificate signed by an officer
---------------------
of the certifying Entity duly authorized by the board of directors of the
certifying Entity.
1.66 "Other Leases" shall mean, collectively, the Lease Agreements between
------------
Landlord or Hospitality Properties Trust and Tenant described on Exhibit B.
---------
1.67 "Overdue Rate" shall mean, on any date, a per annum rate of interest
------------ --- -----
equal to the lesser of fifteen percent (15%) and the maximum rate then permitted
under applicable law.
<PAGE>
- 11 -
1.68 "Parent" shall mean, with respect to any Person, any Person which
------
owns directly, or indirectly through one or more Subsidiaries or Affiliated
Persons, five percent (5%) or more of the voting or beneficial interest in, or
otherwise has the right or power (whether by contract, through ownership of
securities or otherwise) to control, such Person.
1.69 "Permitted Encumbrances" shall mean all rights, restrictions, and
----------------------
easements of record set forth on Schedule B to the applicable owner's or
leasehold title insurance policy issued to Landlord on the date hereof, plus any
other such encumbrances as may have been consented to in writing by Landlord
from time to time.
1.70 "Permitted Liens" shall mean any Liens granted in accordance with
---------------
Section 21.9(a).
- ---------------
1.71 "Permitted Use" shall mean any use of the Leased Property permitted
-------------
pursuant to Section 4.1.1(a) or (b).
-----------------------
1.72 "Person" shall mean any individual or Entity, and the heirs,
------
executors, administrators, legal representatives, successors and assigns of such
Person where the context so admits.
1.73 "Pledge and Security Agreement" shall mean the Pledge and Security
-----------------------------
Agreement, dated as of the date hereof, made by Tenant for the benefit of
Landlord.
1.74 "Purchase Agreement" shall mean the Purchase-Sale and Option
------------------
Agreement, dated as of February 3, 1995, by and among Hospitality Properties
Trust, HMH Courtyard Properties, Inc., and HMH Properties, Inc., as amended.
1.75 "Records" shall have the meaning given such term in Section 7.2.
------- -----------
1.76 "Rent" shall mean, collectively, the Minimum Rent, Additional Rent
----
and Additional Charges.
1.77 "Request Notice" shall have the meaning given such term in Section
-------------- -------
16.1.
- ----
1.78 "Response Notice" shall mean the meaning given such term in Section
--------------- -------
16.1.
- ----
1.79 "SEC" shall mean the Securities and Exchange Commission.
---
1.80 "State" shall mean the state or commonwealth or district in which the
-----
Leased Property is located.
<PAGE>
- 12 -
1.81 "Subordinated Creditor" shall mean any creditor of Tenant which is a
---------------------
party to a Subordination Agreement in favor of Landlord.
1.82 "Subordination Agreement" shall mean any agreement executed by a
-----------------------
Subordinated Creditor pursuant to which the payment and performance of Tenant's
obligations to such Subordinated Creditor are subordinated to the payment and
performance of Tenant's obligations to Landlord under this Agreement.
1.83 "Subsidiary" shall mean, with respect to any Person, any Entity (a)
----------
in which such Person owns directly, or indirectly through one or more
Subsidiaries, fifty-one percent (51%) or more of the voting or beneficial
interest or (b) which such Person otherwise has the right or power to control
(whether by contract, through ownership of securities or otherwise).
1.84 "Successor Landlord" shall have the meaning given such term in
------------------
Section 20.2.
- ------------
1.85 "Tangible Net Worth" shall mean the excess of total assets over total
------------------
liabilities, total assets and total liabilities each to be determined in
accordance with GAAP, excluding, however, from the determination of total
assets: (a) goodwill, organizational expenses, research and development
expenses, trademarks, trade names, copyrights, patents, patent applications,
licenses and rights in any thereof, and other similar intangibles; (b) all
deferred charges or unamortized debt discount and expense; (c) all reserves
carried and not deducted from assets; (d) treasury stock and capital stock,
obligations or other securities of, or capital contributions to, or investments
in, any Subsidiary; (e) securities which are not readily marketable; (f) any
write-up in the book value of any asset resulting from a revaluation thereof
subsequent to the Commencement Date; (g) deferred gain; and (h) any items not
included in clauses (a) through (g) above that are treated as intangibles in
conformity with GAAP.
1.86 "Tenant" shall have the meaning given such term in the preambles to
------
this Agreement.
1.87 "Tenant's Personal Property" shall mean all motor vehicles and
--------------------------
consumable inventory and supplies, furniture, furnishings, movable walls and
partitions, equipment and machinery and all other personal property of Tenant,
if any, acquired by Tenant on and after the date hereof and located at the
Leased Property or used in Tenant's business at the Leased Property and all
modifications, replacements, alterations and additions to such personal property
installed at the expense of Tenant, other than any items included within the
definition of Fixtures or Leased Personal Property.
<PAGE>
- 13 -
1.88 "Term" shall mean, collectively, the Fixed Term and the Extended
----
Terms, to the extent properly exercised pursuant to the provisions of Section
-------
2.4, unless sooner terminated pursuant to the provisions of this Agreement.
- ---
1.89 "Uniform System of Accounts" shall mean A Uniform System of Accounts
-------------------------- ----------------------------
for Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association
- ----------
of New York City, as the same may be further revised from time to time.
1.90 "Unsuitable for Its Permitted Use" shall mean a state or condition of
--------------------------------
the Hotel such that (a) following any damage or destruction involving the Hotel,
the Hotel cannot be operated in the good faith judgment of Tenant or the Manager
on a commercially practicable basis for its Permitted Use and it cannot
reasonably be expected to be restored to substantially the same condition as
existed immediately before such damage or destruction, and as otherwise required
by Section 10.2.4, within six (6) months following such damage or destruction or
--------------
such shorter period of time as to which business interruption insurance is
available to cover Rent and other costs related to the Leased Property following
such damage or destruction, or (b) as the result of a partial taking by
Condemnation, the Hotel cannot be operated, in the good faith judgment of Tenant
or the Manager on a commercially practicable basis for its Permitted Use.
1.91 "Work" shall have the meaning given such term in Section 10.2.4.
---- --------------
ARTICLE 2
---------
LEASED PROPERTY AND TERM
------------------------
2.1 Leased Property. Upon and subject to the terms and conditions
---------------
hereinafter set forth, Landlord leases to Tenant and Tenant leases from Landlord
all of Landlord's right, title and interest in and to all of the following
(collectively, the "Leased Property"):
---------------
(a) those certain tracts, pieces and parcels of land, as more
particularly described in Exhibit C, attached hereto and made a part hereof
---------
(the "Land");
----
(b) all buildings, structures and other improvements of every kind
including, but not limited to, alleyways and connecting tunnels, sidewalks,
utility pipes, conduits and lines (on-site and off-site), parking areas and
roadways appurtenant to such buildings and structures presently situated
upon the Land (collectively, the "Leased Improvements");
-------------------
(c) all easements, rights and appurtenances relating to the Land and
the Leased Improvements;
<PAGE>
- 14 -
(d) all equipment, machinery, fixtures, and other items of property,
now or hereafter permanently affixed to or incorporated into the Leased
Improvements, including, without limitation, all furnaces, boilers,
heaters, electrical equipment, heating, plumbing, lighting, ventilating,
refrigerating, incineration, air and water pollution control, waste
disposal, air-cooling and air-conditioning systems and apparatus, sprinkler
systems and fire and theft protection equipment, all of which, to the
maximum extent permitted by law, are hereby deemed by the parties hereto to
constitute real estate, together with all replacements, modifications,
alterations and additions thereto, but specifically excluding all items
included within the category of Tenant's Personal Property (collectively,
the "Fixtures");
--------
(e) all machinery, equipment, furniture, furnishings, moveable walls
or partitions, computers or trade fixtures or other personal property of
any kind or description used or useful in Tenant's business on or in the
Leased Improvements, and located on or in the Leased Improvements, and all
modifications, replacements, alterations and additions to such personal
property, except items, if any, included within the category of Fixtures,
but specifically excluding all items included within the category of
Tenant's Personal Property (collectively, the "Leased Personal Property");
------------------------
(f) all of the Leased Intangible Property; and
(g) any and all leases of space (including any security deposits held
by Tenant or the Manager pursuant thereto) in the Leased Improvements to
tenants thereof.
2.2 Condition of Leased Property. Tenant acknowledges receipt and
----------------------------
delivery of possession of the Leased Property and Tenant accepts the Leased
Property in its "as is" condition, subject to the rights of parties in
possession, the existing state of title, including all covenants, conditions,
restrictions, reservations, mineral leases, easements and other matters of
record or that are visible or apparent on the Leased Property, all applicable
Legal Requirements, the lien of any financing instruments, mortgages and deeds
of trust existing prior to the Commencement Date or permitted by the terms of
this Agreement, and such other matters which would be disclosed by an inspection
of the Leased Property and the record title thereto or by an accurate survey
thereof. TENANT REPRESENTS THAT IT HAS INSPECTED THE LEASED PROPERTY AND ALL OF
THE FOREGOING AND HAS FOUND THE CONDITION THEREOF SATISFACTORY AND IS NOT
RELYING ON ANY REPRESENTATION OR WARRANTY OF LANDLORD OR LANDLORD'S AGENTS OR
EMPLOYEES WITH RESPECT THERETO AND TENANT WAIVES ANY CLAIM OR ACTION AGAINST
LANDLORD IN RESPECT OF THE CONDITION OF THE LEASED PROPERTY. LANDLORD MAKES NO
WARRANTY OR REPRESENTATION, EXPRESS OR
<PAGE>
- 15 -
IMPLIED, IN RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS
FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR
OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR
PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY TENANT. To the
maximum extent permitted by law, however, Landlord hereby assigns to Tenant all
of Landlord's rights to proceed against any predecessor in title for breaches of
warranties or representations or for latent defects in the Leased Property.
Landlord shall fully cooperate with Tenant in the prosecution of any such
claims, in Landlord's or Tenant's name, all at Tenant's sole cost and expense.
Tenant shall indemnify, defend, and hold harmless Landlord from and against any
loss, cost, damage or liability (including reasonable attorneys' fees) incurred
by Landlord in connection with such cooperation.
2.3 Fixed Term. The initial term of this Agreement (the "Fixed Term")
---------- ----------
shall commence on the Commencement Date and shall expire December 31, 2012.
2.4 Extended Term. Provided that no Event of Default shall have occurred
-------------
and be continuing, this Agreement shall be in full force and effect, and the
term of all of the Other Leases shall be simultaneously extended, the Term shall
be automatically extended for three (3) consecutive renewal terms of twelve (12)
years each (collectively, the "Extended Terms''), unless Tenant shall give
--------------
Landlord Notice, not later than two (2) years prior to the scheduled expiration
of the then current Term of this Agreement (Fixed or Extended, as the case may
be), that Tenant elects not so to extend the term of this Agreement (and time
shall be of the essence with respect to the giving of such Notice). It is
expressly understood and agreed that such Notice from Tenant shall be void and
of no effect and the Term shall be automatically extended unless Tenant shall
simultaneously elect not to extend the term of the Other Leases.
Each Extended Term shall commence on the day succeeding the expiration of
the Fixed Term or the preceding Extended Term, as the case may be. All of the
terms, covenants and provisions of this Agreement shall apply to each such
Extended Term, except that Tenant shall have no right to extend the Term beyond
the expiration of the Extended Terms. If Tenant shall give Notice that it
elects not to extend the Term in accordance with this Section 2.4, this
-----------
Agreement shall automatically terminate at the end of the Term then in effect
and Tenant shall have no further option to extend the Term of this Agreement.
Otherwise, the extension of this Agreement shall be automatically effected
without the execution of any additional documents; it being understood and
agreed, however, that Tenant and Landlord shall execute such documents and
agreements as either party shall reasonably require to evidence the same.
<PAGE>
- 16 -
ARTICLE 3
---------
RENT
----
3.1 Rent. Tenant shall pay, in lawful money of the United States of
----
America which shall be legal tender for the payment of public and private debts,
without offset, abatement, demand or deduction (unless otherwise expressly
provided in this Agreement), Minimum Rent and Additional Rent to Landlord and
Additional Charges to the party to whom such Additional Charges are payable,
during the Term. All payments to Landlord shall be made by wire transfer of
immediately available federal funds or by other means acceptable to Landlord in
its sole discretion. Rent for any partial Accounting Period shall be prorated
on a per diem basis.
3.1.1 Minimum Rent.
------------
(a) Minimum Rent shall be paid in advance on the first Business Day of
each Accounting Period; provided, however, that the first payment of
-------- -------
Minimum Rent shall be payable on the Commencement Date (and, if applicable,
such payment shall be prorated as provided in the last sentence of the
first paragraph of Section 3.1).
-----------
(b) Adjustments of Minimum Rent Following Disbursements Under Section
-----------------------------------------------------------------
5.1.2(b), 10.2.4 or 11.2. Effective on the date of each disbursement to
------------------------
pay for the cost of any repairs, maintenance, renovations or replacements
pursuant to Section 5.1.2(b), 10.2.4 or 11.2, the Minimum Rent shall be
--------------------------------
increased by a per annum amount equal to ten percent (10%) of the amount so
--- -----
disbursed. If any such disbursement is made during any Accounting Period
on a day other than the first day of an Accounting Period, Tenant shall pay
to Landlord on the first day of the immediately following Accounting Period
(in addition to the amount of Minimum Rent payable with respect to such
Accounting Period, as adjusted pursuant to this paragraph (b)) the amount
by which Minimum Rent for the preceding Accounting Period, as adjusted for
such disbursement on a per diem basis, exceeded the amount of Minimum Rent
paid by Tenant for such preceding Accounting Period.
3.1.2 Additional Rent.
---------------
(a) Amount. For each Lease Year or portion thereof, Tenant shall pay
------
an aggregate amount of additional rent ("Additional Rent") with respect to
---------------
such Lease Year, pursuant to this Agreement and the Other Leases, in an
amount, not less than zero, equal to five percent (5%) of Excess Gross
Revenues.
<PAGE>
- 17 -
(b) Quarterly Installments. Installments of Additional Rent for each
----------------------
Lease Year or portion thereof shall be calculated and paid quarterly in
arrears, together with an Officer's Certificate setting forth the
calculation of Additional Rent due and payable for such quarter. Copies of
each Accounting Period Statement (as defined in the Management Agreement)
delivered pursuant to Section 5.03 of the Management Agreement shall be
delivered to Landlord upon receipt by Tenant and each quarterly payment of
Additional Rent shall be due and payable and shall be delivered to Landlord
with the payment of the Minimum Rent next due after receipt of such
Accounting Period Statement, together with an Officer's Certificate setting
forth the calculation of Additional Rent due and payable for such quarter.
(c) Reconciliation of Additional Rent. In addition, on or before
---------------------------------
April 30, of each year, commencing April 30, 1996, Tenant shall deliver to
Landlord an Officer's Certificate setting forth the Gross Revenues for the
Collective Leased Properties for such preceding Lease Year, together with
an audit of Tenant's revenues for the preceding Lease Year, conducted by
Arthur Andersen and Co., or another "Big Six", so-called, firm of
independent certified public accountants proposed by Tenant and approved by
Landlord (which approval shall not be unreasonably withheld or delayed).
If the annual Additional Rent for such preceding Lease Year as shown
in the Officer's Certificate exceeds the amount previously paid with
respect thereto by Tenant, Tenant shall pay such excess to Landlord at such
time as the Officer's Certificate is delivered, together with interest at
the Interest Rate, which interest shall accrue from the close of such
preceding Lease Year until the date that such certificate is required to be
delivered and, thereafter, such interest shall accrue at the Overdue Rate,
until the amount of such difference shall be paid or otherwise discharged.
If the annual Additional Rent for such preceding Lease Year as shown in the
Officer's Certificate is less than the amount previously paid with respect
thereto by Tenant, provided that no Event of Default shall have occurred
and be continuing, Landlord shall grant Tenant a credit against Additional
Rent next coming due in the amount of such difference, together with
interest at the Interest Rate, which interest shall accrue from the date of
payment of Tenant until the date such credit is applied or paid, as the
case may be. If such credit cannot be made because the Term has expired
prior to application in full thereof, provided no Event of Default has
occurred and is continuing, Landlord shall pay the unapplied balance of
such credit to Tenant, together with interest at the Interest Rate, which
interest shall accrue from the date of payment by Tenant until the date of
payment by Landlord.
(d) Confirmation of Additional Rent. Tenant shall utilize, or cause
-------------------------------
to be utilized, an accounting system for the Collective Leased Properties
in accordance with its usual and customary practices and in accordance with
<PAGE>
- 18 -
GAAP, which will accurately record all Gross Revenues and Tenant shall
retain, for at least three (3) years after the expiration of each Lease
Year, reasonably adequate records conforming to such accounting system
showing all Gross Revenues for such Lease Year. Landlord, at its own
expense except as provided hereinbelow, shall have the right, exercisable
by Notice to Tenant within one (1) year after receipt of the applicable
Officer's Certificate, by its accountants or representatives to audit the
information set forth in the Officer's Certificate referred to in
subparagraph (c) above and, in connection with such audits, to examine
Tenant's and the Manager's books and records with respect thereto
(including supporting data and sales and excise tax returns). If any such
audit discloses a deficiency in the payment of Additional Rent, and either
Tenant agrees with the result of such audit or the matter is otherwise
compromised with Landlord, Tenant shall forthwith pay to Landlord the
amount of the deficiency, as finally agreed or determined, together with
interest at the Interest Rate, from the date such payment should have been
made to the date of payment thereof. If such deficiency, as agreed upon or
compromised as aforesaid, is more than three percent (3%) of the Gross
Revenues reported by Tenant for such Lease Year and, as a result, Landlord
did not receive at least ninety-five percent (95%) of the Additional Rent
payable with respect to such Lease Year, Tenant shall pay the reasonable
cost of such audit and examination. If any such audit discloses that
Tenant paid more Additional Rent for any Lease Year than was due hereunder,
and either Landlord agrees with the result of such audit or the matter is
otherwise determined, provided no Event of Default has occurred and is
continuing, Landlord shall grant Tenant a credit equal to the amount of
such overpayment against Additional Rent next coming due in the amount of
such difference, as finally agreed or determined, together with interest at
the Interest Rate, which interest shall accrue from the time of payment by
Tenant until the date such credit is applied or paid, as the case may be.
If such a credit cannot be made because the Term has expired before the
credit can be applied in full, provided no Event of Default has occurred
and is continuing, Landlord shall pay the unapplied balance of such credit
to Tenant, together with interest at the Interest Rate, which interest
shall accrue from the date of payment by Tenant until the date of payment
from Landlord.
Any proprietary information obtained by Landlord with respect to
Tenant or the Manager pursuant to the provisions of this Agreement shall be
treated as confidential, except that such information may be used, subject
to appropriate confidentiality safeguards, in any litigation between the
parties and except further that Landlord may disclose such information to
its prospective lenders, provided that Landlord shall direct and obtain the
agreement of such lenders to maintain such information as confidential.
The obligations of Tenant and Landlord contained in this Section 3.1.2
-------------
shall survive the expiration or earlier termination of this Agreement.
<PAGE>
- 19 -
3.1.3 Additional Charges. In addition to the Minimum Rent and
------------------
Additional Rent payable hereunder, Tenant shall pay to the appropriate parties
and discharge as and when due and payable the following (collectively,
"Additional Charges"):
---------- -------
(a) Impositions. Subject to Article 8 relating to permitted contests,
----------- ---------
Tenant shall pay, or cause to be paid, all Impositions before any fine,
penalty, interest or cost (other than any opportunity cost as a result of a
failure to take advantage of any discount for early payment) may be added
for non-payment, such payments to be made directly to the taxing
authorities where feasible, and shall promptly, upon request, furnish to
Landlord copies of official receipts or other reasonably satisfactory proof
evidencing such payments. If any such Imposition may, at the option of the
taxpayer, lawfully be paid in installments (whether or not interest shall
accrue on the unpaid balance of such Imposition), Tenant may exercise the
option to pay the same (and any accrued interest on the unpaid balance of
such Imposition) in installments and, in such event, shall pay such
installments during the Term as the same become due and before any fine,
penalty, premium, further interest or cost may be added thereto. Landlord,
at its expense, shall, to the extent required or permitted by Applicable
Law, prepare and file all tax returns and pay all taxes due in respect of
Landlord's net income, gross receipts, sales and use, single business,
transaction privilege, rent, ad valorem, franchise taxes and taxes on its
capital stock, and Tenant, at its expense, shall, to the extent required or
permitted by Applicable Laws and regulations, prepare and file all other
tax returns and reports in respect of any Imposition as may be required by
Government Agencies. Provided no Event of Default shall have occurred and
be continuing, if any refund shall be due from any taxing authority in
respect of any Imposition paid by Tenant, the same shall be paid over to or
retained by Tenant. Landlord and Tenant shall, upon request of the other,
provide such data as is maintained by the party to whom the request is made
with respect to the Leased Property as may be necessary to prepare any
required returns and reports. In the event Government Agencies classify
any property covered by this Agreement as personal property, Tenant shall
file all personal property tax returns in such jurisdictions where it may
legally so file. Each party shall, to the extent it possesses the same,
provide the other, upon request, with cost and depreciation records
necessary for filing returns for any property so classified as personal
property. Where Landlord is legally required to file personal property tax
returns for property covered by this Agreement, Landlord shall provide
Tenant with copies of assessment notices in sufficient time for Tenant to
file a protest. All Impositions assessed against such personal property
shall be (irrespective of whether Landlord or Tenant shall file the
relevant return) paid by Tenant not later than the last date on which the
same may be made without interest or penalty.
<PAGE>
- 20 -
Landlord shall give prompt Notice to Tenant and the Manager of all
Impositions payable by Tenant hereunder of which Landlord at any time has
knowledge; provided, however, that Landlord's failure to give any such
-------- -------
notice shall in no way diminish Tenant's obligation hereunder to pay such
Impositions (except that Landlord shall be responsible for any interest or
penalties incurred as a result of Landlord's failure promptly to forward
the same).
(b) Utility Charges. Tenant shall pay or cause to be paid all charges
---------------
for electricity, power, gas, oil, water and other utilities used in
connection with the Leased Property.
(c) Insurance Premiums. Tenant shall pay or cause to be paid all
------------------
premiums for the insurance coverage required to be maintained pursuant to
Article 9.
---------
(d) Other Charges. Tenant shall pay or cause to be paid all other
-------------
amounts, liabilities and obligations, including, without limitation, and
all amounts payable under or with respect to the Management Agreement
(except as expressly provided in Section 5.1.2(b)) and any equipment leases
----------------
and all agreements to indemnify Landlord under Sections 4.3.2 and 9.7.
----------------------
(e) Reimbursement for Additional Charges. If Tenant pays or causes to
------------------------------------
be paid property taxes or similar or other Additional Charges attributable
to periods after the end of the Term, whether upon expiration or sooner
termination of this Agreement (other than termination by reason of an Event
of Default), Tenant may, within a reasonable time after the end of the
Term, provide Notice to Landlord of its estimate of such amounts. Landlord
shall promptly reimburse Tenant for all payments of such taxes and other
similar Additional Charges that are attributable to any period after the
Term of this Agreement (unless this Agreement shall have been terminated
following an Event of Default).
3.2 Late Payment of Rent, Etc. If any installment of Minimum Rent,
-------------------------
Additional Rent or Additional Charges (but only as to those Additional Charges
which are payable directly to Landlord) shall not be paid within ten (10) days
after its due date, Tenant shall pay Landlord, on demand, as Additional Charges,
a late charge (to the extent permitted by law) computed at the Overdue Rate on
the amount of such installment, from the due date of such installment to the
date of payment thereof. To the extent that Tenant pays any Additional Charges
directly to Landlord or any Hotel Mortgagee pursuant to any requirement of this
Agreement, Tenant shall be relieved of its obligation to pay such Additional
Charges to the Entity to which they would otherwise be due. If any payments due
from Landlord to Tenant shall not be paid within ten (10) days after its due
date,
<PAGE>
- 21 -
Landlord shall pay to Tenant, on demand, a late charge (to the extent permitted
by law) computed at the Overdue Rate on the amount of such installment from the
due date of such installment to the date of payment thereof.
In the event of any failure by Tenant to pay any Additional Charges when
due, except as expressly provided in Section 3.1.3(a), Tenant shall promptly pay
----------------
and discharge, as Additional Charges, every fine, penalty, interest and cost
which may be added for non-payment or late payment of such items. Landlord
shall have all legal, equitable and contractual rights, powers and remedies
provided either in this Agreement or by statute or otherwise in the case of non-
payment of the Additional Charges as in the case of non-payment of the Minimum
Rent and Additional Rent.
3.3 Net Lease. The Rent shall be absolutely net to Landlord so that this
---------
Agreement shall yield to Landlord the full amount of the installments or amounts
of the Rent throughout the Term, subject to any other provisions of this
Agreement which expressly provide otherwise, including those provisions for
adjustment or abatement of such Rent.
3.4 No Termination Abatement, Etc. Except as otherwise specifically
------------------------------
provided in this Agreement, each of Landlord and Tenant, to the maximum extent
permitted by law, shall remain bound by this Agreement in accordance with its
terms and shall not take any action without the consent of the other to modify,
surrender or terminate this Agreement. In addition, except as otherwise
expressly provided in this Agreement, Tenant shall not seek, or be entitled to,
any abatement, deduction, deferment or reduction of the Rent, or set-off against
the Rent, nor shall the respective obligations of Landlord and Tenant be
otherwise affected by reason of (a) any damage to or destruction of the Leased
Property or any portion thereof from whatever cause or any Condemnation, (b) the
lawful or unlawful prohibition of, or restriction upon, Tenant's use of the
Leased Property, or any portion thereof, or the interference with such use by
any Person or by reason of eviction by paramount title; (c) any claim which
Tenant may have against Landlord by reason of any default (other than a monetary
default) or breach of any warranty by Landlord under this Agreement or any other
agreement between Landlord and Tenant, or to which Landlord and Tenant are
parties; (d) any bankruptcy, insolvency, reorganization, composition,
readjustment, liquidation, dissolution, winding up or other proceedings
affecting Landlord or any assignee or transferee of Landlord; or (e) for any
other cause whether similar or dissimilar to any of the foregoing (other than a
monetary default by Landlord); provided, however, that the foregoing shall not
-------- -------
apply or be construed to restrict Tenant's rights in the event of any act or
omission by Landlord constituting gross negligence or willful misconduct.
Except as otherwise specifically provided in this Agreement, Tenant hereby
waives all rights arising from any occurrence whatsoever, which may now or
hereafter be conferred upon it by law, to (a) modify, surrender or terminate
this Agreement or quit or surrender the Leased Property or any portion thereof,
or (b) entitle Tenant to any abatement, reduction, suspension or deferment of
the Rent or other sums payable or
<PAGE>
- 22 -
other obligations to be performed by Tenant hereunder. The obligations of each
party hereunder shall be separate and independent covenants and agreements, and
the Rent and all other sums payable by Tenant hereunder shall continue to be
payable in all events unless the obligations to pay the same shall be terminated
pursuant to the express provisions of this Agreement. In any instance where,
after the occurrence of an Event of Default, Landlord retains funds which, but
for the occurrence of such Event of Default, would be payable to Tenant,
Landlord shall refund such funds to Tenant to the extent the amount thereof
exceeds the amount necessary to compensate Landlord for any cost, loss or damage
incurred in connection with such Event of Default.
3.5 Security for Tenant's Performance. Tenant acknowledges that the
---------------------------------
Initial Retained Funds and the Option Retained Funds (as defined in the Purchase
Agreement) constitute security for the faithful observance and performance by
Tenant of all the terms, covenants and conditions of this Agreement by Tenant to
be observed and performed. If any Event of Default shall occur and be
continuing, Landlord may, at its option and without prejudice to any other
remedy which Landlord may have on account thereof, appropriate and apply the
entire amount of such Retained Funds or so much thereof as may be necessary to
compensate Landlord toward the payment of the Rent or other sums or loss or
damage sustained by Landlord due to such breach by Tenant. It is understood and
agreed that the amount of such Retained Funds is not to be considered as prepaid
rent, nor shall damages be limited to the amount of the amount of such Retained
Funds. Provided this Agreement shall not be terminated as a result of an Event
of Default, such Retained Funds shall be paid as provided in the Purchase
Agreement.
ARTICLE 4
---------
USE OF THE LEASED PROPERTY
--------------------------
4.1 Permitted Use.
-------------
4.1.1 Permitted Use.
-------------
(a) Except as otherwise provided in the Management Agreement, Tenant
shall, at all times during the Term and at any other time that Tenant shall
be in possession of the Leased Property, continuously use and operate, and
cause the Manager to use and operate, the Leased Property as a Marriott
Courtyard hotel and any uses incidental thereto. Subject to Section 16.3,
------------
Tenant shall not use (and shall direct the Manager not to use) the Leased
Property or any portion thereof for any other use without the prior written
consent of Landlord. No use shall be made or permitted to be made of the
Leased Property and no acts shall be done thereon which will cause the
cancellation of any insurance policy covering the Leased Property or any
part thereof (unless another adequate policy is available), nor shall
Tenant sell or
<PAGE>
- 23 -
otherwise provide or permit to be kept, used or sold in or about
the Leased Property any article which may be prohibited by law or by
the standard form of fire insurance policies, or any other insurance
policies required to be carried hereunder, or fire underwriter's
regulations. Tenant shall, at its sole cost (except as expressly provided
in Section 5.1.2(b)), comply (or direct the Manager to comply) with all
----------------
Insurance Requirements. Except as otherwise provided in the Management
Agreement, Tenant shall not take or omit to take (and Tenant shall direct
the Manager not to take or omit to take) any action, the taking or omission
of which materially impairs the value or the usefulness of the Leased
Property or any part thereof for its Permitted Use.
(b) In the event that, in the reasonable determination of Tenant, it
shall no longer be economically practical to operate the Leased Property as
a Marriott Courtyard hotel, Tenant shall give Landlord Notice thereof,
which Notice shall set forth in reasonable detail the reasons therefor.
Thereafter, Landlord and Tenant shall negotiate in good faith to agree on
an alternative use for the Leased Property, appropriate adjustments to the
Additional Rent and other related matters; provided, however, in no such
-------- -------
event shall the Minimum Rent be reduced or abated.
4.1.2 Necessary Approvals. Tenant shall proceed with all due
-------------------
diligence and exercise best efforts to obtain and maintain, and shall direct the
Manager to obtain and maintain, all approvals necessary to use and operate, for
its Permitted Use, the Leased Property and the Hotel located thereon under
applicable law.
4.1.3 Lawful Use. Etc. Tenant shall not, and shall direct the
-----------------
Manager not to, use or suffer or permit the use of the Leased Property or
Tenant's Personal Property, if any, for any unlawful purpose. Tenant shall not,
and shall direct the Manager not to, commit or suffer to be committed any waste
on the Leased Property, or in the Hotel, nor shall Tenant cause or permit any
unlawful nuisance thereon or therein. Tenant shall not, and shall direct the
Manager not to, suffer nor permit the Leased Property, or any portion thereof,
to be used in such a manner as (i) might reasonably impair Landlord's title
thereto or to any portion thereof, or (ii) may reasonably allow a claim or
claims for adverse usage or adverse possession by the public, as such, or of
implied dedication of the Leased Property or any portion thereof.
4.2 Compliance with Legal/Insurance Requirements, Etc. Except as
-------------------------------------------------
otherwise provided in the Management Agreement, subject to the provisions of
Article 8 and Section 5.1.2(b), Tenant, at its sole expense, shall (or shall
- -----------------------------
direct the Manager to) (i) comply with Legal Requirements and Insurance
Requirements in respect of the use, operation, maintenance, repair, alteration
and restoration of the Leased Property and with the terms and conditions of any
ground lease affecting the Leased Property, and (ii) and (iii) procure, maintain
and comply with all
<PAGE>
- 24 -
appropriate licenses, and other authorizations and agreements required for any
use of the Leased Property and Tenant's Personal Property, if any, then being
made, and for the proper erection, installation, operation and maintenance of
the Leased Property or any part thereof.
4.3 Environmental Matters.
---------------------
4.3.1 Restriction on Use, Etc. During the Term and any other time
------------------------
that Tenant shall be in possession of the Leased Property, Tenant shall not (and
shall direct the Manager not to) store, spill upon, dispose of or transfer to or
from the Leased Property any Hazardous Substance, except in compliance with all
Applicable Laws. During the Term and any other time that Tenant shall be in
possession of the Leased Property, Tenant shall maintain (and shall direct the
Manager to maintain) the Leased Property at all times free of any Hazardous
Substance (except in compliance with all Applicable Laws). Tenant shall
promptly: (a) upon receipt of notice or knowledge and shall direct the Manager
upon receipt of notice or knowledge promptly to, notify Landlord in writing of
any material change in the nature or extent of Hazardous Substances at the
Leased Property, (b) transmit to Landlord a copy of any Community Right to Know
report which is required to be filed by Tenant or the Manager with respect to
the Leased Property pursuant to SARA Title III or any other Applicable Law, (c)
transmit to Landlord copies of any citations, orders, notices or other
governmental communications received by Tenant or the Manager or their
respective agents or representatives with respect thereto (collectively,
"Environmental Notice"), which Environmental Notice requires a written response
--------------------
or any action to be taken and/or if such Environmental Notice gives notice of
and/or presents a material risk of any material violation of any Applicable Law
and/or presents a material risk of any material cost, expense, loss or damage
(an "Environmental Obligation"), (d) observe and comply (and direct the Manager
------------------------
to observe and comply) with all Applicable Laws relating to the use, maintenance
and disposal of Hazardous Substances and all orders or directives from any
official, court or agency of competent jurisdiction relating to the use or
maintenance or requiring the removal, treatment, containment or other
disposition thereof, and (e) pay or otherwise dispose of any fine, charge or
Imposition related thereto, unless Tenant or the Manager shall contest the same
in good faith and by appropriate proceedings and the right to use and the value
of the Leased Property is not materially and adversely affected thereby.
If, at any time prior to the termination of this Agreement, Hazardous
Substances (other than those maintained in accordance with Applicable Laws) are
discovered on the Leased Property, subject to Tenant's and the Manager's right
to contest the same in accordance with Article 8, Tenant shall take (and shall
---------
direct the Manager to take) all actions and incur any and all expenses, as may
be reasonably necessary and as may be required by any Government Agency, (i) to
clean up and remove from and about the Leased Property all Hazardous Substances
thereon, (ii) to contain and prevent any further release or threat of release of
<PAGE>
- 25 -
Hazardous Substances on or about the Leased Property and (iii) to use good faith
efforts to eliminate any further release or threat of release of Hazardous
Substances on or about the Leased Property.
4.3.2 Indemnification of Landlord. Tenant shall protect, indemnify
---------------------------
and hold harmless Landlord and each Hotel Mortgagee, their trustees, officers,
agents, employees and beneficiaries, and any of their respective successors or
assigns with respect to this Agreement (collectively, the "Indemnitees" and,
-----------
individually, an "Indemnitee") for, from and against any and all debts, liens,
----------
claims, causes of action, administrative orders or notices, costs, fines,
penalties or expenses (including, without limitation, reasonable attorney's fees
and expenses) imposed upon, incurred by or asserted against any Indemnitee
resulting from, either directly or indirectly, the presence during the Term (or
any other time Tenant shall be in possession of the Leased Property) in, upon or
under the soil or ground water of the Leased Property or any properties
surrounding the Leased Property of any Hazardous Substances in violation of any
Applicable Law or otherwise, provided that any of the foregoing arises by reason
of any failure by Tenant, the Manager or any Person claiming by, through or
under Tenant or the Manager to perform or comply with any of the terms of this
Section 4.3, except to the extent the same arise from the gross negligence or
- -----------
willful misconduct of Landlord or any other Indemnitee. Tenant's duty herein
includes, but is not limited to, costs associated with personal injury or
property damage claims as a result of the presence prior to the expiration or
sooner termination of the Term and the surrender of the Leased Property to
Landlord in accordance with the terms of this Agreement of Hazardous Substances
in, upon or under the soil or ground water of the Leased Property in violation
of any Applicable Law. Upon Notice from Landlord and any other of the
Indemnitees, Tenant shall undertake the defense, at Tenant's sole cost and
expense, of any indemnification duties set forth herein, in which event, Tenant
shall not be liable for payment of any duplicative attorneys' fees incurred by
any Indemnitee.
Tenant shall, upon demand, pay to Landlord, as an Additional Charge, any
cost, expense, loss or damage (including, without limitation, reasonable
attorneys' fees) incurred by Landlord and arising from a failure of Tenant
strictly to observe and perform the requirements of this Section 4.3, which
-----------
amounts shall bear interest from the date ten (10) days after written demand
therefor is given to Tenant until paid by Tenant to Landlord at the Overdue
Rate.
4.3.3 Survival. The provisions of this Section 4.3 shall survive the
-------- -----------
expiration or sooner termination of this Agreement.
<PAGE>
- 26 -
ARTICLE 5
---------
MAINTENANCE AND REPAIRS
-----------------------
5.1 Maintenance and Repairs.
-----------------------
5.1.1 Tenant's Obligations.
--------------------
(a) Tenant shall, at its sole cost and expense (except as expressly
provided in Section 5.1.2(b)), or shall direct the Manager to, keep the
----------------
Leased Property and all private roadways, sidewalks and curbs appurtenant
thereto (and Tenant's Personal Property, if any) in good order and repair,
reasonable wear and tear excepted (whether or not the need for such repairs
occurs as a result of Tenant's or the Manager's use, any prior use, the
elements or the age of the Leased Property or Tenant's Personal Property,
if any, or any portion thereof), and shall promptly make (or cause the
Manager to make) all necessary and appropriate repairs and replacements
thereto of every kind and nature, whether interior or exterior, structural
or nonstructural, ordinary or extraordinary, foreseen or unforeseen or
arising by reason of a condition existing prior to the commencement of the
Term (concealed or otherwise). All repairs shall be made in a good,
workmanlike manner, consistent with the Manager's and industry standards
for like hotels in like locales, in accordance with all applicable federal,
state and local statutes, ordinances, by-laws, codes, rules and regulations
relating to any such work. Tenant shall not take or omit to take (and
shall direct the Manager not to take or omit to take) any action, the
taking or omission of which would materially and adversely impair the value
or the usefulness of the Leased Property or any part thereof for its
Permitted Use. Tenant's obligations under this Section 5.1.1(a) shall be
---------------
limited in the event of any casualty or Condemnation as set forth in
Sections 10.2 and 11.2 and Tenant's obligations with respect to Hazardous
----------------------
Substances are as set forth in Section 4.3.
-----------
(b) In addition, notwithstanding anything in this Agreement to the
contrary, Tenant shall, with respect to each Lease Year, or portion
thereof, fund, or cause the Manager to fund, into the FF&E Reserve a cash
amount equal to not less than five percent (5%) of Gross Revenues from the
Leased Property for such Lease Year, or portion thereof, which amounts
shall be applied to the cost of repairs, maintenance, renovations and
replacements to and at the Leased Property in accordance with this
Agreement and the Management Agreement. Provided that Tenant shall comply
with the provisions of this paragraph (b) and any similar provisions of the
Management Agreement, any additional funds required for repairs,
maintenance, renovations and replacements to and at the Leased Property in
excess of those on deposit in the FF&E Reserve shall be advanced by
Landlord, subject to and in accordance with Section 5.1.2(b).
---------------
<PAGE>
- 27 -
5.1.2 Landlord's Obligations.
----------------------
(a) Except as otherwise expressly provided in this Agreement, Landlord
shall not, under any circumstances, be required to build or rebuild any
improvement on the Leased Property, or to make any repairs, replacements,
alterations, restorations or renewals of any nature or description to the
Leased Property, whether ordinary or extraordinary, structural or
nonstructural, foreseen or unforeseen, or, except as provided in Section
-------
5.1.2(b), to make any expenditure whatsoever with respect thereto, or to
--------
maintain the Leased Property in any way. Except as otherwise expressly
provided in this Agreement, Tenant hereby waives, to the maximum extent
permitted by law, the right to make repairs at the expense of Landlord
pursuant to any law in effect on the date hereof or hereafter enacted.
Landlord shall have the right to give, record and post, as appropriate,
notices of nonresponsibility under any mechanic's lien laws now or
hereafter existing.
(b) If, at any time, the Management Agreement requires that funds be
disbursed for repairs, maintenance, renovations or replacements at or to
the Leased Property (including, but not limited to, pursuant to Section
8.01 and 8.03 of the Management Agreement), or, pursuant to the terms of
this Agreement (including, without limitation, Section 4.3), Tenant is
-----------
required to make any expenditures in connection with any repair,
maintenance renovation with respect to the Leased Property and the amount
of such disbursements or expenditures exceeds the amount on deposit in the
FF&E Reserve, Tenant may, at its election, give Landlord Notice thereof,
which Notice shall set forth, in reasonable detail, the nature of the
required repair, renovation or replacement, the estimated cost thereof and
such other information with respect thereto as Landlord may reasonably
require. Provided that no Event of Default shall have occurred and be
continuing and Tenant shall otherwise comply with the applicable provisions
of Article 6, Landlord shall, within ten (10) Business Days after such
---------
Notice, subject to and in accordance with the applicable provisions of
Article 6, disburse such required funds to Tenant (or, if Tenant shall so
---------
elect, directly to the Manager or any other Person performing the required
work) and, upon such disbursement, the Minimum Rent shall be adjusted as
provided in Section 3.1.1(b).
----------------
5.1.3 Nonresponsibility of Landlord, Etc. All materialmen,
----------------------------------
contractors, artisans, mechanics and laborers and other persons contracting with
Tenant with respect to the Leased Property, or any part thereof, are hereby
charged with notice that liens on the Leased Property or on Landlord's interest
therein are expressly prohibited and that they must look solely to Tenant to
secure payment for
<PAGE>
- 28 -
any work done or material furnished by Tenant, the Manager or for any other
purpose during the term of this Agreement.
Nothing contained in this Agreement shall be deemed or construed in any way
as constituting the consent or request of Landlord, express or implied, by
inference or otherwise, to any contractor, subcontractor, laborer or materialmen
for the performance of any labor or the furnishing of any materials for any
alteration, addition, improvement or repair to the Leased Property or any part
thereof or as giving Tenant any right, power or authority to contract for or
permit the rendering of any services or the furnishing of any materials that
would give rise to the filing of any lien against the Leased Property or any
part thereof nor to subject Landlord's estate in the Leased Property or any part
thereof to liability under any Mechanic's Lien Law of the State in any way, it
being expressly understood Landlord's estate shall not be subject to any such
liability.
5.2 Tenant's Personal Property. Tenant shall provide and maintain
--------------------------
throughout the Term all such Tenant's Personal Property as shall be necessary in
order to operate in compliance with applicable Legal Requirements and Insurance
Requirements and otherwise in accordance with customary practice in the industry
for the Permitted Use and all of such Personal Property shall, upon the
expiration or earlier termination of this Agreement, shall become the property
of Landlord. If, from and after the Commencement Date, Tenant acquires an
interest in any item of tangible personal property (other than motor vehicles)
on, or in connection with, the Leased Property which belongs to anyone other
than Tenant, Tenant shall require the agreements permitting such use to provide
that Landlord or its designee may assume Tenant's rights and obligations under
such agreement upon the termination of this Agreement and the assumption of
management or operation of the Hotel by Landlord or its designee.
5.3 Yield Up. Upon the expiration or sooner termination of this
--------
Agreement, Tenant shall vacate and surrender the Leased Property to Landlord in
substantially the same condition in which the Leased Property was in on the
Commencement Date, except as repaired, rebuilt, restored, altered or added to as
permitted or required by the provisions of this Agreement, reasonable wear and
tear excepted (and casualty damage and Condemnation, in the event that this
Agreement is terminated following a casualty or total Condemnation in accordance
with Article 10 or Article 11).
---------- ----------
In addition, upon the expiration or earlier termination of this Agreement,
Tenant shall, at Landlord's sole cost and expense, use its good faith efforts to
transfer to and cooperate with Landlord or Landlord's nominee in connection with
the processing of all applications for licenses, operating permits and other
governmental authorizations and all contracts, including contracts with
governmental or quasi-governmental Entities which may be necessary for the use
and operation of the Hotel as then operated. Consistent with the terms of the
<PAGE>
- 29 -
Management Agreement, if requested by Landlord, Tenant will direct the Manager
to continue to manage the Hotel after the expiration of the Term and for up to
one hundred twenty (120) days, on such reasonable terms (which shall include an
agreement to reimburse the Manager for its reasonable out-of-pocket costs and
expenses, and reasonable administrative costs), as Landlord shall reasonably
request.
5.4 Management Agreement. Except as expressly provided in Section
-------------------- -------
5.1.2(b), Tenant shall, at its sole cost and expense, perform all of the
- -------
obligations of "Owner" under the Management Agreement, including, without
limitation, the funding of the FF&E Reserve and, upon the expiration or sooner
termination of this Agreement, the then existing balance of the FF&E Reserve
shall be paid to or as directed by Landlord. Tenant shall, at all times, direct
the Manager to perform all of the Manager's obligations under the Management
Agreement. Tenant shall not amend or modify the Management Agreement without
Landlord's prior written consent, which consent shall not be unreasonably
withheld, delayed or conditioned. Tenant shall not take any action, grant any
consent or, except as provided in the Management Agreement, permit any action
under the Management Agreement, which might have a material adverse effect on
Landlord, without the prior written consent of Landlord. Except as provided in
the Management Agreement, Tenant shall not agree to any change in the Manager,
to any change in the Management Agreement, terminate the Management Agreement or
permit the Manager to assign the Management Agreement without the prior written
approval of Landlord in each instance, which approval shall not be unreasonably
withheld, delayed or conditioned. If Landlord shall perform any obligations of
"Owner" under the Management Agreement (which Landlord may do subject to Section
-------
12.5), the cost of such performance shall be payable upon demand by Tenant to
- ----
Landlord with interest accruing from the demand date at the Overdue Rate and
Landlord shall have the same rights and remedies for failure to pay such costs
on demand as for Tenant's failure to pay Minimum Rent.
ARTICLE 6
---------
IMPROVEMENTS, ETC.
------------------
6.1 Improvements to the Leased Property. Tenant shall not make, construct
-----------------------------------
or install (and shall direct the Manager not to construct or install) any
Capital Additions without, in each instance, obtaining Landlord's prior written
consent, which consent shall not be unreasonably withheld, delayed or
conditioned provided that (a) construction or installation of the same would not
adversely affect or violate any Legal Requirement or Insurance Requirement
applicable to the Leased Property and (b) Landlord shall have received an
Officer's Certificate certifying as to the satisfaction of the conditions set
out in clause (a) above; provided, however, that no such consent shall be
-------- -------
required in the event immediate action is required to prevent imminent danger to
person or property. Prior to
<PAGE>
- 30 -
commencing construction of any Capital Addition, Tenant shall submit, or shall
direct the Manager to submit, to Landlord, in writing, a proposal setting forth,
in reasonable detail, any such proposed improvement and shall provide to
Landlord such plans and specifications, and such permits, licenses, contracts
and such other information concerning the same as Landlord may reasonably
request. Landlord shall have thirty (30) days to review all materials submitted
to Landlord in connection with any such proposal. Failure of Landlord to respond
to Tenant's or the Manager's proposal within thirty (30) days after receipt of
all information and materials requested by Landlord in connection with the
proposed improvement shall be deemed to constitute approval of the same. Without
limiting the generality of the foregoing, such proposal shall indicate the
approximate projected cost of constructing such proposed improvement and the use
or uses to which it will be put. No Capital Addition shall be made which would
tie in or connect any Leased Improvement with any other improvements on property
adjacent to the Leased Property (and not part of the Land) including, without
limitation, tie-ins of buildings or other structures or utilities. Tenant shall
not finance, and shall direct the Manager not to finance, the cost of any
construction of such improvement by the granting of a lien on or security
interest in the Leased Property or such improvement, or Tenant's interest
therein, without the prior written consent of Landlord, which consent may be
withheld by Landlord in Landlord's sole discretion. Any such improvements shall,
upon the expiration or sooner termination of this Agreement, remain or pass to
and become the property of Landlord, free and clear of all encumbrances other
than Permitted Encumbrances.
6.2 Salvage. All materials which are scrapped or removed in connection
-------
with the making of either Capital Additions or non-Capital Additions or repairs
required by Article 5 shall be or become the property of the party that paid for
---------
such work.
ARTICLE 7
---------
LIENS
-----
7.1 Liens. Subject to Article 8, Tenant shall not, directly or
----- ---------
indirectly, create or allow to remain and shall promptly discharge, at its
expense, any lien, encumbrance, attachment, title retention agreement or claim
upon the Leased Property or Tenant's leasehold interest therein or any
attachment, levy, claim or encumbrance in respect of the Rent, other than (a)
Permitted Encumbrances, (b) restrictions, liens and other encumbrances which are
consented to in writing by Landlord, (c) liens for those taxes of Landlord which
Tenant is not required to pay hereunder, (d) subleases permitted by Article 17,
----------
(e) liens for Impositions or for sums resulting from noncompliance with Legal
Requirements so long as (i) the same are not yet due and payable, or (ii) are
being contested in accordance with Article 8, (f) liens of mechanics, laborers,
---------
materialmen, suppliers or vendors incurred in the ordinary course of business
that are not yet due and payable or are
<PAGE>
- 31 -
for sums that are being contested in accordance with Article 8, (g) any Hotel
---------
Mortgages or other liens which are the responsibility of Landlord pursuant to
the provisions of Article 21 and (h) Landlord Liens.
----------
7.2 Landlord's Lien. In addition to any statutory landlord's lien and in
---------------
order to secure payment of the Rent and all other sums payable hereunder by
Tenant, and to secure payment of any loss, cost or damage which Landlord may
suffer by reason of Tenant's breach of this Agreement, Tenant hereby grants unto
Landlord a security interest in and an express contractual lien upon Tenant's
Personal Property (except motor vehicles), and all ledger sheets, files,
records, documents and instruments (including, without limitation, computer
programs, tapes and related electronic data processing) relating to the
operation of the Hotels (the "Records") and all proceeds therefrom, subject to
-------
any Permitted Encumbrances; and such Tenant's Personal Property shall not be
removed from the Leased Property at any time when a Default or an Event of
Default has occurred and is continuing.
Upon Landlord's request, Tenant shall execute and deliver to Landlord
financing statements in form sufficient to perfect the security interest of
Landlord in Tenant's Personal Property and the proceeds thereof in accordance
with the provisions of the applicable laws of the State. Tenant hereby grants
Landlord an irrevocable limited power of attorney, coupled with an interest, to
execute all such financing statements in Tenant's name, place and stead. The
security interest herein granted is in addition to any statutory lien for the
Rent.
ARTICLE 8
---------
PERMITTED CONTESTS
------------------
Tenant and the Manager shall have the right to contest the amount or
validity of any Imposition, Legal Requirement, Insurance Requirement,
Environmental Obligation, lien, attachment, levy, encumbrance, charge or claim
(collectively, "Claims") as to the Leased Property, by appropriate legal
------
proceedings, conducted in good faith and with due diligence, provided that (a)
the foregoing shall in no way be construed as relieving, modifying or extending
Tenant's obligation to pay any Claims as finally determined, (b) such contest
shall not cause Landlord or Tenant to be in default under any mortgage or deed
of trust encumbering the Leased Property (Landlord agreeing that any such
mortgage or deed of trust shall permit Tenant and the Manager to exercise the
rights granted pursuant to this Article 8) or any interest therein or result in
---------
or reasonably be expected to result in a lien attaching to the Leased Property,
(c) no part of the Leased Property nor any Rent therefrom shall be in any
immediate danger of sale, forfeiture, attachment or loss, and (d) Tenant shall
indemnify and hold harmless Landlord from and against any cost, claim, damage,
penalty or reasonable expense, including reasonable attorneys' fees, incurred by
Landlord in connection therewith or as a result thereof.
<PAGE>
- 32 -
Landlord agrees to join in any such proceedings if required legally to prosecute
such contest, provided that Landlord shall not thereby be subjected to any
liability therefor (including, without limitation, for the payment of any costs
or expenses in connection therewith) unless Tenant agrees by agreement in form
and substance reasonably satisfactory to Landlord, to assume and indemnify
Landlord with respect to the same. Tenant shall be entitled to any refund of any
Claims and such charges and penalties or interest thereon which have been paid
by Tenant or paid by Landlord to the extent that Landlord has been fully
reimbursed by Tenant. If Tenant shall fail (x) to pay or cause to be paid any
Claims when finally determined, (y) to provide reasonable security therefor, or
(z) to prosecute or cause to be prosecuted any such contest diligently and in
good faith, Landlord may, upon reasonable notice to Tenant (which notice may be
oral and shall not be required if Landlord shall reasonably determine that the
same is not practicable), pay such charges, together with interest and penalties
due with respect thereto, and Tenant shall reimburse Landlord therefor, upon
demand, as Additional Charges.
ARTICLE 9
---------
INSURANCE AND INDEMNIFICATION
-----------------------------
9.1 General Insurance Requirements. Tenant shall, at all times during the
------------------------------
Term and at any other time Tenant shall be in possession of the Leased Property,
keep (or direct the Manager to keep) the Leased Property and all property
located therein or thereon, insured against the risks and in the amounts as
follows and shall maintain the following insurance:
(a) "All-risk" property insurance, including insurance against loss or
damage by fire, vandalism and malicious mischief, explosion of
steamboilers, pressure vessels or other similar apparatus, now or hereafter
installed in the Hotel located at the Leased Property, with equivalent
coverage as that provided by the usual extended coverage endorsements, in
an amount equal to one hundred percent (100%) of the then full Replacement
Cost thereof (as defined in Section 9.2);
-----------
(b) Business interruption and blanket earnings plus extra expense
under a rental value insurance policy or endorsement covering risk of loss
during the lesser of the first twelve (12) months of reconstruction or the
actual reconstruction period necessitated by the occurrence of any of the
hazards described in subparagraph (a) above, in such amounts as may be
customary for comparable properties in the area and in an amount sufficient
to prevent Landlord or Tenant from becoming a co-insurer;
(c) Comprehensive general liability insurance, including bodily injury
and property damage (on an occurrence basis and on a 1973 or 1988 ISO CGL
form or on a form otherwise maintained by similarly situated
<PAGE>
- 33 -
tenants, including, without limitation, broad form contractual liability,
independent contractor's hazard and completed operations coverage) in an
amount not less than Two Million Dollars ($2,000,000) per occurrence and
umbrella coverage of all such claims in an amount not less than Twenty-
Three Million Dollars ($23,000,000);
(d) Flood (if the Leased Property is located in whole or in part
within an area identified as an area having special flood hazards and in
which flood insurance has been made available under the National Flood
Insurance Act of 1968, as amended, or the Flood Disaster Protection Act of
1973, as amended (or any successor acts thereto)), and such other hazards
and in such amounts as may be customary for comparable properties in the
area;
(e) Worker's compensation insurance coverage for all persons employed
by Tenant on the Leased Property with statutory limits and otherwise with
limits of and provisions in accordance with the requirements of applicable
local, State and federal law, and employer's liability insurance as is
customarily carried by similar employers; and
(f) Such additional insurance as may be reasonably required, from time
to time, by Landlord or any Hotel Mortgagee and which is customarily
carried by comparable lodging properties in the area.
9.2 Replacement Cost. "Replacement Cost," as used herein, shall mean the
---------------- ----------------
actual replacement cost of the property requiring replacement from time to time,
including an increased cost of construction endorsement, less exclusions
provided in the standard form of fire insurance policy. In the event either
party believes that the then full Replacement Cost has increased or decreased at
any time during the Term, such party, at its own cost, shall have the right to
have such full Replacement Cost redetermined by an independent accredited
appraiser approved by the other, which approval shall not be unreasonably
withheld or delayed. The party desiring to have the full Replacement Cost so
redetermined shall forthwith, on receipt of such determination by such
appraiser, give Notice thereof to the other. The determination of such
appraiser shall be final and binding on the parties hereto until any subsequent
determination under this Section 9.2, and Tenant shall forthwith conform the
-----------
amount of the insurance carried to the amount so determined by the appraiser.
9.3 Waiver of Subrogation. Landlord and Tenant agree that (insofar as and
---------------------
to the extent that such agreement may be effective without invalidating or
making it impossible to secure insurance coverage from responsible insurance
companies doing business in the State) with respect to any property loss which
is covered by insurance then being carried by Landlord or Tenant, respectively,
the party carrying such insurance and suffering said loss releases the other of
and from
<PAGE>
- 34 -
any and all claims with respect to such loss; and they further agree that their
respective insurance companies shall have no right of subrogation against the
other on account thereof, even though extra premium may result therefrom. In the
event that any extra premium is payable by Tenant as a result of this provision,
Landlord shall not be liable for reimbursement to Tenant for such extra premium.
9.4 Form Satisfactory, Etc. All insurance policies and endorsements
-----------------------
required pursuant to this Article 9 shall be fully paid for, nonassessable and,
---------
except for umbrella and flood coverage, be issued by insurance carriers
authorized to do business in the State, having a general policy holder's rating
of no less than B++ in Best's latest rating guide. All such policies described
in Sections 9.1(a) through (d)shall include no deductible in excess of Two
--------------------------
Hundred Fifty Thousand Dollars ($250,000) and, with the exception of the
insurance described in Section 9.1(e), shall name Landlord and any Hotel
-------------
Mortgagee as additional insureds, as their interests may appear. All loss
adjustments shall be payable as provided in Article 10. Tenant shall cause all
----------
insurance premiums to be paid and shall deliver policies or certificates thereof
to Landlord prior to their effective date (and, with respect to any renewal
policy, prior to the expiration of the existing policy). All such policies
shall provide Landlord (and any Hotel Mortgagee if required by the same) thirty
(30) days' prior written notice of any material change or cancellation of such
policy. In the event Tenant shall fail to effect such insurance as herein
required, to pay the premiums therefor or to deliver such policies or
certificates to Landlord or any Hotel Mortgagee at the times required, Landlord
shall have the right, but not the obligation, subject to the provisions of
Section 12.5, to acquire such insurance and pay the premiums therefor, which
amounts shall be payable to Landlord, upon demand, as Additional Charges,
together with interest accrued thereon at the Overdue Rate from the date such
payment is made until (but excluding) the date repaid.
9.5 Blanket Policy. Notwithstanding anything to the contrary contained in
--------------
this Article 9, Tenant's obligation to maintain the insurance herein required
---------
may be brought within the coverage of a so-called blanket policy or policies of
insurance carried and maintained by Tenant or the Manager, provided, that (a)
the coverage thereby afforded will not be reduced or diminished from that which
would exist under a separate policy meeting all other requirements of this
Agreement, and (b) the requirements of this Article 9 are otherwise satisfied.
---------
Without limiting the foregoing, the amounts of insurance that are required to be
maintained pursuant to Section 9.1 shall be on a Hotel by Hotel basis, and shall
-----------
not be subject to an aggregate limit, except for products, completed operations
and flood. Notwithstanding any other provisions of Article 9 or 10, Tenant may
---------------
permit the Manager to self insure or otherwise retain such workers' insurance
risks or portions thereof as the Manager does with respect to other similar
hotels the Manager owns, leases or manages under the Marriott name in the United
States pursuant to any established self insurance program of Marriott
International, Inc.
<PAGE>
- 35 -
9.6 No Separate Insurance. Tenant shall not take out separate insurance,
---------------------
concurrent in form or contributing in the event of loss with that required by
this Article 9, or increase the amount of any existing insurance by securing an
---------
additional policy or additional policies, unless all parties having an insurable
interest in the subject matter of such insurance, including Landlord and all
Hotel Mortgagees, are included therein as additional insureds and the loss is
payable under such insurance in the same manner as losses are payable under this
Agreement. In the event Tenant shall take out any such separate insurance or
increase any of the amounts of the then existing insurance, Tenant shall give
Landlord prompt Notice thereof.
9.7 Indemnification of Landlord. Notwithstanding the existence of any
---------------------------
insurance provided for herein and without regard to the policy limits of any
such insurance, Tenant shall protect, indemnify and hold harmless Landlord for,
from and against all liabilities, obligations, claims, damages, penalties,
causes of action, costs and reasonable expenses (including, without limitation,
reasonable attorneys' fees), to the maximum extent permitted by law, imposed
upon or incurred by or asserted against Landlord by reason of: (a) any
accident, injury to or death of persons or loss of or damage to property
occurring on or about the Leased Property or adjoining sidewalks or rights of
way, (b) any past, present or future use, misuse, non-use, condition,
management, maintenance or repair by Tenant or anyone claiming under Tenant of
the Leased Property or Tenant's Personal Property or any litigation, proceeding
or claim by governmental entities or other third parties to which Landlord is
made a party or participant relating to the Leased Property or Tenant's Personal
Property or such use, misuse, non-use, condition, management, maintenance, or
repair thereof including, failure to perform obligations (other than
Condemnation proceedings) to which Landlord is made a party, (c) any Impositions
that are the obligations of Tenant to pay pursuant to the applicable provisions
of this Agreement, and (d) any failure on the part of Tenant or anyone claiming
under Tenant to perform or comply with any of the terms of this Agreement.
Tenant, at its expense, shall contest, resist and defend any such claim, action
or proceeding asserted or instituted against Landlord (and shall not be
responsible for any duplicative attorneys' fees incurred by Landlord) or may
compromise or otherwise dispose of the same, with Landlord's prior written
consent (which consent may not be unreasonably withheld or delayed). In the
event Landlord shall unreasonably withhold or delay its consent, Tenant shall
not be liable pursuant to this Section 9.7 for any incremental increase in costs
-----------
or expenses resulting therefrom. The obligations of Tenant under this Section
-------
9.7 are in addition to the obligations set forth in Section 4.3 and shall
- --- -----------
survive the termination of this Agreement.
<PAGE>
- 36 -
ARTICLE 10
----------
CASUALTY
--------
10.1 Insurance Proceeds. Except as provided in the last clause of this
------------------
sentence, all proceeds payable by reason of any loss or damage to the Leased
Property, or any portion thereof, and insured under any policy of insurance
required by Article 9 (other than the proceeds of any business interruption
---------
insurance) shall be paid directly to Landlord (subject to the provisions of
Section 10.2) and all loss adjustments with respect to losses payable to
- ------------
Landlord shall require the prior written consent of Landlord; provided, however,
-------- -------
that, so long as no Event of Default shall have occurred and be continuing, all
such proceeds less than or equal to Two Hundred Fifty Thousand Dollars
($250,000) shall be paid directly to Tenant or the Manager and such losses may
be adjusted without Landlord's consent. If Tenant is required to reconstruct or
repair the Leased Property as provided herein, such proceeds shall be paid out
by Landlord from time to time for the reasonable costs of reconstruction or
repair of the Leased Property necessitated by such damage or destruction,
subject to and in accordance with the provisions of Section 10.2.4. Provided no
--------------
Default or Event of Default has occurred and is continuing, any excess proceeds
of insurance remaining after the completion of the restoration shall be paid to
Tenant or the Manager. In the event that the provisions of Section 10.2.1 are
---------------
applicable, the insurance proceeds shall be retained by the party entitled
thereto pursuant to Section 10.2.1. All salvage resulting from any risk covered
--------------
by insurance shall belong to Landlord, provided any rights to the same have been
waived by the insurer.
10.2 Damage or Destruction.
---------------------
10.2.1 Damage or Destruction of Leased Property. If, during the
----------------------------------------
Term, the Leased Property shall be totally or partially destroyed and the Hotel
located thereon is thereby rendered Unsuitable for Its Permitted Use, either
Landlord or Tenant may, by the giving of Notice thereof to the other, terminate
this Agreement, whereupon, this Agreement shall terminate and Landlord shall be
entitled to retain the insurance proceeds payable on account of such damage.
10.2.2 Partial Damage or Destruction. If, during the Term, the
-----------------------------
Leased Property shall be totally or partially destroyed but the Hotel is not
rendered Unsuitable for Its Permitted Use, Tenant shall, subject to Section
-------
10.2.3, promptly restore the Hotel as provided in Section 10.2.4.
- ------ --------------
10.2.3 Insufficient Insurance Proceeds. If the cost of the repair or
-------------------------------
restoration of the Leased Property exceeds the amount of insurance proceeds
received by Landlord and Tenant pursuant to Article 9(a), (c), (d) or, if
-----------------------------
applicable, (e), Tenant shall give Landlord Notice thereof which notice shall
- --------------
set forth in reasonable detail the nature of such deficiency and whether Tenant
shall pay and
<PAGE>
- 37 -
assume the amount of such deficiency (Tenant having no obligation to do so,
except that, if Tenant shall elect to make such funds available, the same
shall become an irrevocable obligation of Tenant pursuant to this Agreement).
In the event Tenant shall elect not to pay and assume the amount of such
deficiency, Landlord shall have the right (but not the obligation),
exercisable at Landlord's sole election by Notice to Tenant, given within sixty
(60) days after Tenant's notice of the deficiency, to elect to make available
for application to the cost of repair or restoration the amount of such
deficiency; provided, however, in such event, upon any disbursement by Landlord
-------- -------
thereof, the Minimum Rent shall be adjusted as provided in Section 3.1.1(b). In
----------------
the event that neither Landlord nor Tenant shall elect to make such deficiency
available for restoration, either Landlord or Tenant may terminate this
Agreement by Notice to the other, whereupon, this Agreement shall terminate as
provided in Section 10.2.1. It is expressly understood and agreed, however,
--------------
that, notwithstanding anything in this Agreement to the contrary, Tenant shall
be strictly liable and solely responsible for the amount of any deductible and
shall, upon any insurable loss, pay over the amount of such deductible to
Landlord at the time and in the manner herein provided for payment of the
applicable proceeds to Landlord.
10.2.4 Disbursement of Proceeds. In the event Tenant is required to
------------------------
restore the Leased Property pursuant to Section 10.2, Tenant shall (or shall
------------
direct the Manager to) commence promptly and continue diligently to perform the
repair and restoration of the Leased Property (hereinafter called the "Work"),
----
so as to restore the Leased Property in compliance with all Legal Requirements
and so that the Leased Property shall be, to the extent practicable,
substantially equivalent in value and general utility to its general utility and
value immediately prior to such damage or destruction. Subject to the terms
hereof, Landlord shall advance the insurance proceeds and any additional amounts
payable by Landlord pursuant to Section 10.2.3 to Tenant regularly during the
--------------
repair and restoration period so as to permit payment for the cost of any such
restoration and repair. Any such advances shall be made not more than monthly
within ten (10) Business Days after Tenant submits to Landlord a written
requisition and substantiation therefor on AIA Forms G702 and G703 (or on such
other form or forms as may be reasonably acceptable to Landlord). Landlord may,
at its option, condition advancement of said insurance proceeds and other
amounts on (i) the absence of any Event of Default, (ii) its approval of plans
and specifications of an architect satisfactory to Landlord (which approval
shall not be unreasonably withheld or delayed), (iii) general contractors'
estimates, (iv) architect's certificates, (v) unconditional lien waivers of
general contractors, if available, (vi) evidence of approval by all governmental
authorities and other regulatory bodies whose approval is required and (vii)
such other certificates as Landlord may, from time to time, reasonably require.
Landlord's obligation to disburse insurance proceeds under this Article 10
----------
shall be subject to the release of such proceeds by any Hotel Mortgagee to
Landlord.
<PAGE>
- 38 -
Tenant's obligation to restore the Leased Property pursuant to this Article
-------
10 shall be subject to the release of available insurance proceeds by the
- ---
applicable Hotel Mortgagee to Landlord or directly to Tenant or the Manager and,
in the event such proceeds are insufficient, Landlord electing to make such
deficiency available therefor (and disbursement of such deficiency).
10.3 Damage Near End of Term. Notwithstanding any provisions of Section
----------------------- -------
10.1 or 10.2 to the contrary, if damage to or destruction of the Leased Property
- ------------
occurs during the last twelve (12) months of the fourth Extended Term and if
such damage or destruction cannot reasonably be expected to be fully repaired
and restored prior to the date that is six (6) months prior to the end of such
Extended Term, the provisions of Section 10.2.1 shall apply as if the Leased
--------------
Property had been totally or partially destroyed and the Hotel rendered
Unsuitable for its Permitted Use.
10.4 Tenant's Property. All insurance proceeds payable by reason of any
-----------------
loss of or damage to any of Tenant's Personal Property shall be paid to Tenant
and, to the extent necessary to repair or replace Tenant's Personal Property in
accordance with Section 10.5, Tenant shall hold such proceeds in trust to pay
------------
the cost of repairing or replacing damaged Tenant's Personal Property.
10.5 Restoration of Tenant's Property. If Tenant is required to restore
--------------------------------
the Leased Property as hereinabove provided, Tenant shall either (a) restore all
alterations and improvements made by Tenant and Tenant's Personal Property, or
(b) replace such alterations and improvements and Tenant's Personal Property
with improvements or items of the same or better quality and utility in the
operation of the Leased Property.
10.6 No Abatement of Rent. This Agreement shall remain in full force and
--------------------
effect and Tenant's obligation to make all payments of Rent and to pay all other
charges as and when required under this Agreement shall remain unabated during
the Term notwithstanding any damage involving the Leased Property (provided that
Landlord shall credit against such payments any amounts paid to Landlord as a
consequence of such damage under any business interruption insurance obtained by
Tenant hereunder). The provisions of this Article 10 shall be considered an
----------
express agreement governing any cause of damage or destruction to the Leased
Property and, to the maximum extent permitted by law, no local or State statute,
laws, rules, regulation or ordinance in effect during the Term which provide for
such a contingency shall have any application in such case.
10.7 Waiver. Tenant hereby waives any statutory rights of termination
------
which may arise by reason of any damage or destruction of the Leased Property.
<PAGE>
- 39 -
ARTICLE 11
----------
CONDEMNATION
------------
11.1 Total Condemnation, Etc. If either (i) the whole of the Leased
------------------------
Property shall be taken by Condemnation or (ii) a Condemnation of less than the
whole of the Leased Property renders the Leased Property Unsuitable for Its
Permitted Use, this Agreement shall terminate and Tenant and Landlord shall seek
the Award for their interests in the Leased Property as provided in Section
-------
11.5.
- ----
11.2 Partial Condemnation. In the event of a Condemnation of less than the
--------------------
whole of the Leased Property such that the Leased Property is still suitable for
its Permitted Use, Tenant shall, or shall direct the Manager to, to the extent
of the Award and any additional amounts disbursed by Landlord as hereinafter
provided, commence promptly and continue diligently to restore the untaken
portion of the Leased Improvements so that such Leased Improvements shall
constitute a complete architectural unit of the same general character and
condition (as nearly as may be possible under the circumstances) as the Leased
Improvements existing immediately prior to such Condemnation, in full compliance
with all Legal Requirements, subject to the provisions of this Section 11.2. If
------------
the cost of the repair or restoration of the Leased Property exceeds the amount
of the Award, Tenant shall give Landlord Notice thereof which notice shall set
forth in reasonable detail the nature of such deficiency and whether Tenant
shall pay and assume the amount of such deficiency (Tenant having no obligation
to do so, except that if Tenant shall elect to make such funds available, the
same shall become an irrevocable obligation of Tenant pursuant to this
Agreement). In the event Tenant shall elect not to pay and assume the amount of
such deficiency, Landlord shall have the right (but not the obligation),
exercisable at Landlord's sole election by Notice to Tenant given within sixty
(60) days after Tenant's Notice of the deficiency, to elect to make available
for application to the cost of repair or restoration the amount of such
deficiency; provided, however, in such event, upon any disbursement by Landlord
-------- -------
thereof, the Minimum Rent shall be adjusted as provided in Section 3.1.1(b). In
----------------
the event that neither Landlord nor Tenant shall elect to make such deficiency
available for restoration, either Landlord or Tenant may terminate this
Agreement and the entire Award shall be retained by Landlord.
Subject to the terms hereof, Landlord shall contribute to the cost of
restoration that part of the Award necessary to complete such repair or
restoration, together with severance and other damages awarded for the taken
Leased Improvements and any deficiency Landlord has agreed to disburse, to
Tenant regularly during the restoration period so as to permit payment for the
cost of such repair or restoration. Landlord may, at its option, condition
advancement of such Award and other amounts on (i) the absence of any Event of
Default, (ii) its approval of plans and specifications of an architect
satisfactory to Landlord (which approval shall not be unreasonably withheld or
delayed), (iii) general contractors'
<PAGE>
- 40 -
estimates, (iv) architect's certificates, unconditional lien waivers of general
contractors, if available, (vi) evidence of approval by all governmental
authorities and other regulatory bodies whose approval is required and (vii)
such other certificates as Landlord may, from time to time, reasonably require.
Landlord's obligation under this Section 11.2 to disburse the Award and such
------------
other amounts shall be subject to (x) the collection thereof by Landlord and (y)
the satisfaction of any applicable requirements of any Hotel Mortgage, and the
release of such Award by the applicable Hotel Mortgagee. Tenant's obligation to
restore the Leased Property shall be subject to the release of the Award by the
applicable Hotel Mortgagee to Landlord.
11.3 Abatement of Rent. Other than as specifically provided in this
-----------------
Agreement, this Agreement shall remain in full force and effect and Tenant's
obligation to make all payments of Rent and to pay all other charges as and when
required under this Agreement shall remain unabated during the Term
notwithstanding any Condemnation involving the Leased Property. The provisions
of this Article 11 shall be considered an express agreement governing any
----------
Condemnation involving the Leased Property and, to the maximum extent permitted
by law, no local or State statute, law, rule, regulation or ordinance in effect
during the Term which provides for such a contingency shall have any application
in such case.
11.4 Temporary Condemnation. In the event of any temporary Condemnation of
----------------------
the Leased Property or Tenant's interest therein, this Agreement shall continue
in full force and effect and Tenant shall continue to pay, in the manner and on
the terms herein specified, the full amount of the Rent. Tenant shall continue
to perform and observe all of the other terms and conditions of this Agreement
on the part of the Tenant to be performed and observed. Provided no Event of
Default has occurred and is continuing, the entire amount of any Award made for
such temporary Condemnation allocable to the Term, whether paid by way of
damages, rent or otherwise, shall be paid to Tenant. Tenant shall, promptly
upon the termination of any such period of temporary Condemnation, at its sole
cost and expense, restore the Leased Property to the condition that existed
immediately prior to such Condemnation, in full compliance with all Legal
Requirements, unless such period of temporary Condemnation shall extend beyond
the expiration of the Term, in which event Tenant shall not be required to make
such restoration. For purposes of this Section 11.4, a Condemnation shall be
------------
deemed to be temporary if the period of such Condemnation is not expected to,
and does not, exceed twelve (12) months.
11.5 Allocation of Award. Except as provided in Section 11.4 and the
------------------- -------------
second sentence of this Section 11.5, the total Award shall be solely the
------------
property of and payable to Landlord. Any portion of the Award made for the
taking of Tenant's leasehold interest in the Leased Property, loss of business
during the remainder of the Term, the taking of Tenant's Personal Property, or
Tenant's removal and
<PAGE>
- 41 -
relocation expenses shall be the sole property of and payable to Tenant (subject
to the provisions of Section 11.2). In any condemnation proceedings, Landlord
and Tenant shall each seek its own Award in conformity herewith, at its own
expense.
ARTICLE 12
----------
DEFAULTS AND REMEDIES
---------------------
12.1 Events of Default. The occurrence of any one or more of the following
-----------------
events shall constitute an "Event of Default" hereunder:
----------------
(a) should Tenant fail to make any payment of the Rent or any other
sum (including, but not limited to, funding of the FF&E Reserve, payable
hereunder when due and such failure shall continue for a period of ten (10)
days after Notice thereof; or
(b) should Tenant or the Manager fail to maintain the insurance
coverages required under Article 9 and such failure shall continue for ten
---------
(10) days after Notice thereof (except that no Notice shall be required if
any such insurance coverages shall have lapsed); or
(c) should Tenant default in the due observance or performance of
any of the terms, covenants or agreements contained herein to be performed
or observed by it (other than as specified in clauses (a) and (b) above)
and such default shall continue for a period of thirty (30) days after
Notice thereof from Landlord to Tenant (provided that no such Notice shall
be required if Landlord shall reasonably determine immediate action is
necessary to protect person or property); provided, however, that if such
-------- -------
default is susceptible of cure but such cure cannot be accomplished with
due diligence within such period of time and if, in addition, Tenant
commences to cure or cause to be cured such default within fifteen (15)
days after Notice thereof from Landlord and thereafter prosecutes the
curing of such default with all due diligence, such period of time shall be
extended to such period of time (not to exceed an additional ninety (90)
days in the aggregate) as may be necessary to cure such default with all
due diligence; or
(d) should any obligation of Tenant in respect of any Indebtedness
for money borrowed or for the Retained Funds of any material property or
services, or any guaranty relating thereto, be declared to be or become due
and payable prior to the stated maturity thereof, or should there occur and
be continuing with respect to any such Indebtedness or Retained Funds any
event of default under any instrument or agreement evidencing or securing
the same, the effect of which is to permit the holder or holders of such
instrument or agreement or a trustee, agent or other representative on
behalf
<PAGE>
- 42 -
of such holder or holders, to cause any such obligations to become
due prior to its stated maturity; or
(e) should an event of default occur and be continuing beyond the
expiration of any applicable cure period under any of the Incidental
Documents, the Other Leases, or by Host or the Sellers (as defined therein)
under the Purchase Agreement; or
(f) should there occur a final unappealable determination by
applicable State authorities of the revocation or limitation of any
material license, permit, certification or approval required for the lawful
operation of the Hotel in accordance with its Permitted Use or the loss or
material limitation of any material license, permit, certification or
approval under any other circumstances under which Tenant or the Manager is
required to cease its operation of the Hotel in accordance with its
Permitted Use at the time of such loss or limitation; or
(g) should any material representation or warranty made by Tenant or
the Sellers (as defined in the Purchase Agreement) under or in connection
with this Agreement, any Incidental Document, the Other Leases or the
Purchase Agreement, or in any document, certificate or agreement delivered
in connection herewith or therewith prove to have been false or misleading
in any material respect on the date when made or deemed made; or
(h) should Tenant generally not be paying its debts as they become
due or should Tenant make a general assignment for the benefit of
creditors; or
(i) should any petition be filed by or against Tenant under the
Federal bankruptcy laws, or should any other proceeding be instituted by or
against Tenant seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, reorganization, arrangement, adjustment or composition of it
or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a receiver, trustee, custodian or other
similar official for Tenant or for any substantial part of the property of
Tenant and such proceeding is not dismissed within ninety (90) days after
institution thereof, or should Tenant take any action to authorize or
effect any of the actions set forth above in this paragraph; or
(j) should Tenant cause or institute any proceeding for its
dissolution or termination; or
<PAGE>
- 43 -
(k) should an event of default occur and be continuing under any
mortgage which is secured by Tenant's leasehold interest hereunder or
should the mortgagee under any such mortgage accelerate the indebtedness
secured thereby or commence a foreclosure action in connection with said
mortgage; or
(l) should the estate or interest of Tenant in the Leased Property
or any part thereof be levied upon or attached in any proceeding and the
same shall not be vacated or discharged within the later of (x) one hundred
and twenty (120) days after commencement thereof, unless the amount in
dispute is less than $250,000, in which case Tenant shall give notice to
Landlord of the dispute but Tenant may defend in any suitable way, and (y)
thirty (30) days after receipt by Tenant of Notice thereof from Landlord
(unless Tenant shall be contesting such lien or attachment in good faith in
accordance with Article 8); or
---------
(m) should any Event of Default (as defined in the Management
Agreement) by Tenant as "Owner" under the Management Agreement occur and be
continuing beyond the expiration of any applicable cure period under the
Management Agreement; or
(n) should Tenant at any time cease to be a direct or indirect
Subsidiary of Host;
then, and in any such event, Landlord, in addition to all other remedies
available to it, may terminate this Agreement by giving Notice thereof to Tenant
and upon the expiration of the time, if any, fixed in such Notice, this
Agreement shall terminate and all rights of Tenant under this Agreement shall
cease. Landlord shall have and may exercise all rights and remedies available
at law and in equity to Landlord as a result of Tenant's breach of this
Agreement.
Upon the occurrence of an Event of Default, subject to the rights of the
Manager under the Management Agreement, Landlord may, in addition to any other
remedies provided herein, enter upon the Leased Property or any portion thereof
and take possession of any and all of Tenant's Personal Property, if any, and
the Records, without liability for trespass or conversion (Tenant hereby waiving
any right to notice or hearing prior to such taking of possession by Landlord)
and sell the same at public or private sale, after giving Tenant reasonable
Notice of the time and place of any public or private sale, at which sale
Landlord or its assigns may purchase all or any portion of Tenant's Personal
Property, if any, unless otherwise prohibited by law. Unless otherwise provided
by law and without intending to exclude any other manner of giving Tenant
reasonable notice, the requirement of reasonable Notice shall be met if such
Notice is given at least five (5) days before the date of sale. The proceeds
from any such disposition, less all expenses incurred in connection with the
taking of possession, holding and selling of such property
<PAGE>
- 44 -
(including, reasonable attorneys' fees) shall be applied as a credit against the
indebtedness which is secured by the security interest granted in Section 7.2.
-----------
Any surplus shall be paid to Tenant or as otherwise required by law and Tenant
shall pay any deficiency to Landlord, as Additional Charges, upon demand.
12.2 Remedies. None of (a) the termination of this Agreement pursuant to
--------
Section 12.1, (b) the repossession of the Leased Property or any portion
- ------------
thereof, (c) the failure of Landlord to re-let the Leased Property or any
portion thereof, nor (d) the reletting of all or any of portion of the Leased
Property, shall relieve Tenant of its liability and obligations hereunder, all
of which shall survive any such termination, repossession or re-letting. In the
event of any such termination, Tenant shall forthwith pay to Landlord all Rent
due and payable with respect to the Leased Property through and including the
date of such termination. Thereafter, Tenant, until the end of what would have
been the Term of this Agreement in the absence of such termination, and whether
or not the Leased Property or any portion thereof shall have been re-let, shall
be liable to Landlord for, and shall pay to Landlord, as current damages, the
Rent and other charges which would be payable hereunder for the remainder of the
Term had such termination not occurred, less the net proceeds, if any, of any
re-letting of the Leased Property, after deducting all reasonable expenses in
connection with such reletting, including, without limitation, all repossession
costs, brokerage commissions, legal expenses, attorneys' fees, advertising,
expenses of employees, alteration costs and expenses of preparation for such
reletting. Tenant shall pay such current damages to Landlord monthly on the
days on which the Minimum Rent would have been payable hereunder if this
Agreement had not been so terminated with respect to such of the Leased
Property.
At any time after such termination, whether or not Landlord shall have
collected any such current damages, as liquidated final damages beyond the date
of such termination, at Landlord's election, Tenant shall pay to Landlord an
amount equal to the present value (discounted at the Interest Rate) of the
excess, if any, of the Rent and other charges which would be payable hereunder
from the date of such termination (assuming that, for the purposes of this
paragraph, annual payments by Tenant on account of Impositions and Additional
Rent would be the same as payments required for the immediately preceding twelve
calendar months, or if less than twelve calendar months have expired since the
Commencement Date, the payments required for such lesser period projected to an
annual amount) for what would be the then unexpired term of this Agreement if
the same remained in effect, over the fair market rental for the same period.
Nothing contained in this Agreement shall, however, limit or prejudice the right
of Landlord to prove and obtain in proceedings for bankruptcy or insolvency an
amount equal to the maximum allowed by any statute or rule of law in effect at
the time when, and governing the proceedings in which, the damages are to be
proved, whether or not the amount be greater than, equal to, or less than the
amount of the loss or damages referred to above.
<PAGE>
- 45 -
In case of any Event of Default, re-entry, expiration and dispossession by
summary proceedings or otherwise, Landlord may, subject to the rights of the
Manager under the Management Agreement, (a) relet the Leased Property or any
part or parts thereof, either in the name of Landlord or otherwise, for a term
or terms which may at Landlord's option, be equal to, less than or exceed the
period which would otherwise have constituted the balance of the Term and may
grant concessions or free rent to the extent that Landlord considers advisable
and necessary to relet the same, and (b) may make such reasonable alterations,
repairs and decorations in the Leased Property or any portion thereof as
Landlord, in its sole and absolute discretion, considers advisable and necessary
for the purpose of reletting the Leased Property; and the making of such
alterations, repairs and decorations shall not operate or be construed to
release Tenant from liability hereunder as aforesaid. Subject to the last
sentence of this paragraph, Landlord shall in no event be liable in any way
whatsoever for any failure to relet all or any portion of the Leased Property,
or, in the event that the Leased Property is relet, for failure to collect the
rent under such reletting. To the maximum extent permitted by law, Tenant
hereby expressly waives any and all rights of redemption granted under any
present or future laws in the event of Tenant being evicted or dispossessed, or
in the event of Landlord obtaining possession of the Leased Property, by reason
of the occurrence and continuation of an Event of Default hereunder. Landlord
covenants and agrees, in the event of any termination of this Agreement as a
result of an Event of Default, to use reasonable efforts to mitigate its
damages.
12.3 Tenant's Waiver. IF THIS AGREEMENT IS TERMINATED PURSUANT TO SECTION
--------------- -------
12.1 OR 12.2, TENANT WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY RIGHT TO A
- ------------
TRIAL BY JURY IN THE EVENT OF SUMMARY PROCEEDINGS TO ENFORCE THE REMEDIES SET
FORTH IN THIS ARTICLE 12, AND THE BENEFIT OF ANY LAWS NOW OR HEREAFTER IN FORCE
EXEMPTING PROPERTY FROM LIABILITY FOR RENT OR FOR DEBT. IN ADDITION, TENANT
UNDERSTANDS, ACKNOWLEDGES AND AGREES THAT, IN THE EVENT THIS AGREEMENT IS
TERMINATED PURSUANT TO SECTION 12.1 OR 12.2, NEITHER THE INITIAL RETAINED FUNDS
--------------------
NOR THE OPTION RETAINED FUNDS (AS SUCH TERMS ARE DEFINED IN THE PURCHASE
AGREEMENT) SHALL BE PAID OR PAYABLE (TENANT WAIVING, ON BEHALF OF ITSELF AND ITS
AFFILIATED PERSONS, ALL CLAIMS AND CAUSES OF ACTION WITH RESPECT THERETO).
12.4 Application of Funds. Any payments received by Landlord under any of
--------------------
the provisions of this Agreement during the existence or continuance of any
Event of Default (and any payment made to Landlord rather than Tenant due to the
existence of any Event of Default) shall be applied to Tenant's current and past
<PAGE>
- 46 -
due obligations under this Agreement in such order as Landlord may determine or
as may be prescribed by the laws of the State.
12.5 Landlord's Right to Cure Tenant's Default. If an Event of Default
-----------------------------------------
shall have occurred and be continuing, Landlord, after Notice to Tenant (which
Notice shall not be required if Landlord shall reasonably determine immediate
action is necessary to protect person or property), without waiving or releasing
any obligation of Tenant and without waiving or releasing any Event of Default,
may (but shall not be obligated to), at any time thereafter, make such payment
or perform such act for the account and at the expense of Tenant, and may, to
the maximum extent permitted by law, enter upon the Leased Property or any
portion thereof for such purpose and take all such action thereon as, in
Landlord's sole and absolute discretion, may be necessary or appropriate
therefor. No such entry shall be deemed an eviction of Tenant. All reasonable
costs and expenses (including, without limitation, reasonable attorneys' fees)
incurred by Landlord in connection therewith, together with interest thereon (to
the extent permitted by law) at the Overdue Rate from the date such sums are
paid by Landlord until repaid, shall be paid by Tenant to Landlord, on demand.
ARTICLE 13
----------
HOLDING OVER
------------
Any holding over by Tenant after the expiration or sooner termination of
this Agreement shall be treated as a daily tenancy at sufferance at a rate equal
to one and one-half (1.5) times the Rent and other charges herein provided
(prorated on a daily basis). Tenant shall also pay to Landlord all damages
(direct or indirect) sustained by reason of any such holding over. Otherwise,
such holding over shall be on the terms and conditions set forth in this
Agreement, to the extent applicable. Nothing contained herein shall constitute
the consent, express or implied, of Landlord to the holding over of Tenant after
the expiration or earlier termination of this Agreement.
ARTICLE 14
----------
LANDLORD'S NOTICE OBLIGATIONS; LANDLORD DEFAULT
-----------------------------------------------
14.1 Landlord Notice Obligation. Landlord shall give prompt Notice to
--------------------------
Tenant and the Manager of any matters affecting the Leased Property of which
Landlord receives written notice or actual knowledge and, to the extent Tenant
otherwise has no notice or actual knowledge thereof, Landlord shall be liable
for any liabilities arising from the failure to deliver such Notice to Tenant.
Landlord shall not amend the Management Agreement or any other agreement
affecting the Leased Property without Tenant's prior written consent, which
consent shall not be unreasonably withheld, conditioned or delayed.
<PAGE>
- 47 -
14.2 Landlord's Default. If Landlord shall default in the performance or
------------------
observance of any of its covenants or obligations set forth in this Agreement or
any obligation of Landlord, if any, under any agreement affecting the Leased
Property, the performance of which is not Tenant's obligation pursuant to this
Agreement, and any such default shall continue for a period of ten (10) days
after Notice thereof with respect to monetary defaults and thirty (30) days
after Notice thereof with respect to non-monetary defaults from Tenant to
Landlord and any applicable Hotel Mortgagee, or such additional period as may be
reasonably required to correct the same, Tenant may declare the occurrence of a
"Landlord Default" by a second Notice to Landlord and to such Hotel Mortgagee.
----------------
Thereafter, Tenant may forthwith cure the same and, subject to the provisions of
the following paragraph, invoice Landlord for costs and expenses (including
reasonable attorneys' fees and court costs) incurred by Tenant in curing the
same, together with interest thereon from the date Landlord receives Tenant's
invoice, at the Overdue Rate. Tenant shall have no right to terminate this
Agreement for any default by Landlord hereunder and no right, for any such
default, to offset or counterclaim against any Rent or other charges due
hereunder.
If Landlord shall in good faith dispute the occurrence of any Landlord
Default and Landlord, before the expiration of the applicable cure period, shall
give Notice thereof to Tenant, setting forth, in reasonable detail, the basis
therefor, no Landlord Default shall be deemed to have occurred and Landlord
shall have no obligation with respect thereto until final adverse determination
thereof; provided, however, that in the event of any such adverse determination,
-------- -------
Landlord shall pay to Tenant interest on any disputed funds at the Interest
Rate, from the date demand for such funds was made by Tenant until the date of
final adverse determination and, thereafter, at the Overdue Rate until paid. If
Tenant and Landlord shall fail, in good faith, to resolve any such dispute
within ten (10) days after Landlord's Notice of dispute, either may submit the
matter for resolution to a court of competent jurisdiction.
ARTICLE 15
----------
INTENTIONALLY DELETED
---------------------
ARTICLE 16
----------
SUBLETTING AND ASSIGNMENT
-------------------------
16.1 Subletting and Assignment. Except as provided in Section 16.3 below,
------------------------- ------------
Tenant shall not, without Landlord's prior written consent (which consent may be
given or withheld in Landlord's sole and absolute discretion), assign, mortgage,
pledge, hypothecate, encumber or otherwise transfer this Agreement or sublease
<PAGE>
- 48 -
(which term shall be deemed to include the granting of concessions, licenses and
the like), all or any part of the Leased Property or suffer or permit this
Agreement or the leasehold estate created hereby or any other rights arising
under this Agreement to be assigned, transferred, mortgaged, pledged,
hypothecated or encumbered, in whole or in part, whether voluntarily,
involuntarily or by operation of law, or permit the use or operation of the
Leased Property by anyone other than Tenant and the Manager, or the Leased
Property to be offered or advertised for assignment or subletting. For purposes
of this Section 16.1, an assignment of this Agreement shall be deemed to include
------------
any direct or indirect transfer of any interest in Tenant such that Tenant shall
cease to be a direct or indirect Subsidiary of Host or any transaction pursuant
to which Tenant is merged or consolidated with another Entity or pursuant to
which all or substantially all of Tenant's assets are transferred to any other
Entity, as if such change in control or transaction were an assignment of this
Agreement.
Notwithstanding the foregoing, Landlord agrees that Landlord shall not
unreasonably withhold, delay or condition Landlord's consent to an assignment of
this Agreement by Tenant provided that (i) Tenant shall simultaneously assign
its interest under all of the Other Leases to the same assignee on the same
terms and conditions, (ii) the Manager shall have granted its consent to such
transfer and the Management Agreement and all of the other Management Agreements
(as defined therein) under the Other Leases shall remain in full force and
effect, (iii) such assignee shall, in Landlord's reasonable determination, have
sufficient financial resources and liquidity to fulfill Tenant's obligations
under this Agreement and the Other Leases, and (iv) such assignee shall not be
under common control with or controlled by persons who have been convicted of
felonies involving moral turpitude in any state or federal court. If Tenant
wishes to assign this Agreement as provided in this paragraph, Tenant shall give
Landlord Notice thereof (the "Request Notice"), which Request Notice shall
--------------
identify the proposed assignee and the terms and conditions of the assignment
and shall include appropriate information relating to such assignee
demonstrating compliance with the provisions of this paragraph. Landlord shall,
within sixty (60) days after the giving the Request Notice, give Notice to
Tenant (the "Response Notice") as to whether Landlord consents to such transfer.
---------------
Landlord shall also have the right, exercisable by notice given in the Response
Notice, to require Tenant to assign this Agreement to a Person designated by
Landlord on the same terms and conditions as those described in the Request
Notice for transfer to Tenant's proposed assignee.
If this Agreement is assigned or if the Leased Property or any part thereof
is sublet (or occupied by anybody other than Tenant, the Manager and their
respective employees) Landlord may collect the rents from such assignee,
subtenant or occupant, as the case may be, and apply the net amount collected to
the Rent herein reserved, but no such collection shall be deemed a waiver of the
provisions set forth in the first paragraph of this Section 16.1, the acceptance
------------
by Landlord of such assignee, subtenant or occupant, as the case may be, as a
tenant, or a release of
<PAGE>
- 49 -
Tenant from the future performance by Tenant of its covenants, agreements or
obligations contained in this Agreement.
No subletting or assignment shall in any way impair the continuing primary
liability of Tenant hereunder (unless Landlord and Tenant expressly otherwise
agree that Tenant shall be released from all obligations hereunder), and no
consent to any subletting or assignment in a particular instance shall be deemed
to be a waiver of the prohibition set forth in this Section 16.1. No
------------
assignment, subletting or occupancy shall affect any Permitted Use. Any
subletting, assignment or other transfer of Tenant's interest under this
Agreement in contravention of this Section 16.1 shall be voidable at Landlord's
------------
option.
16.2 Required Sublease Provisions. Any sublease of all or any portion of
----------------------------
the Leased Property entered into on or after the date hereof shall be consistent
with any applicable terms and conditions of the Management Agreement and shall
provide (a) that it is subject and subordinate to this Agreement and to the
matters to which this Agreement is or shall be subject or subordinate; (b) that
in the event of termination of this Agreement or reentry or dispossession of
Tenant by Landlord under this Agreement, Landlord may, at its option, terminate
such sublease or take over all of the right, title and interest of Tenant, as
sublessor under such sublease, and such subtenant shall, at Landlord's option,
attorn to Landlord pursuant to the then executory provisions of such sublease,
except that neither Landlord nor any Hotel Mortgagee, as holder of a mortgage or
as Landlord under this Agreement, if such mortgagee succeeds to that position,
shall (i) be liable for any act or omission of Tenant under such sublease, (ii)
be subject to any credit, counterclaim, offset or defense which theretofore
accrued to such subtenant against Tenant, (iii) be bound by any previous
modification of such sublease not consented to in writing by Landlord or by any
previous prepayment of more than one (1) month's Rent, (iv) be bound by any
covenant of Tenant to undertake or complete any construction of the Leased
Property or any portion thereof, (v) be required to account for any security
deposit of the subtenant other than any security deposit actually delivered to
Landlord by Tenant, (vi) be bound by any obligation to make any payment to such
subtenant or grant any credits, except for services, repairs, maintenance and
restoration provided for under the sublease that are performed after the date of
such attornment, (vii) be responsible for any monies owing by Tenant to the
credit of such subtenant, or (viii) be required to remove any Person occupying
any portion of the Leased Property; and (c), in the event that such subtenant
receives a written Notice from Landlord or any Hotel Mortgagee stating that an
Event of Default has occurred and is continuing, such subtenant shall thereafter
be obligated to pay all rentals accruing under such sublease directly to the
party giving such Notice or as such party may direct. All rentals received from
such subtenant by Landlord or the Hotel Mortgagee, as the case may be, shall be
credited against the amounts owing by Tenant under this Agreement and such
sublease shall provide that the subtenant thereunder shall, at the request of
Landlord, execute a suitable instrument in confirmation of such agreement to
attorn. An original counterpart of
<PAGE>
- 50 -
each such sublease and assignment and assumption, duly executed by Tenant and
such subtenant or assignee, as the case may be, in form and substance reasonably
satisfactory to Landlord, shall be delivered promptly to Landlord and (a) in the
case of an assignment, the assignee shall assume in writing and agree to keep
and perform all of the terms of this Agreement on the part of Tenant to be kept
and performed and shall be, and become, jointly and severally liable with Tenant
for the performance thereof and (b) in case of either an assignment or
subletting, Tenant shall remain primarily liable, as principal rather than as
surety, for the prompt payment of the Rent and for the performance and
observance of all of the covenants and conditions to be performed by Tenant
hereunder.
The provisions of this Section 16.2 shall not be deemed a waiver of the
------------
provisions set forth in the first paragraph of Section 16.1.
------------
16.3 Permitted Sublease. Notwithstanding the foregoing, but subject to the
------------------
provisions of Section 16.4 and any other express conditions or limitations set
------------
forth herein, Tenant may, in each instance after Notice to Landlord (unless
otherwise provided in the Management Agreement), sublease space at the Leased
Property for newsstand, gift shop, parking garage, health club, restaurant, bar
or commissary purposes or similar concessions in furtherance of the Permitted
Use, so long as such subleases do not demise, in the aggregate, in excess of
three thousand (3,000) square feet, will not violate or affect any Legal
Requirement or Insurance Requirement, and Tenant shall provide such additional
insurance coverage applicable to the activities to be conducted in such
subleased space as Landlord and any Hotel Mortgagee may reasonably require.
16.4 Sublease Limitation. For so long as Landlord or any Affiliated Person
-------------------
as to Landlord shall seek to qualify as a real estate investment trust, anything
contained in this Agreement to the contrary notwithstanding, Tenant shall not
sublet the Leased Property on any basis such that the rental to be paid by any
sublessee thereunder would be based, in whole or in part, on either (a) the
income or profits derived by the business activities of such sublessee, or (b)
any other formula such that any portion of such sublease rental would fail to
qualify as "rents from real property" within the meaning of Section 856(d) of
the Code, or any similar or successor provision thereto.
ARTICLE 17
----------
ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS
----------------------------------------------
17.1 Estoppel Certificates. At any time and from time to time, upon not
---------------------
less than ten (10) Business Days prior Notice by either party, the party
receiving such Notice shall furnish to the other an Officer's Certificate
certifying that this Agreement is unmodified and in full force and effect (or
that this Agreement is in full force and effect as modified and setting forth
the modifications), the date to
<PAGE>
- 51 -
which the Rent has been paid, that no Default or an Event of Default has
occurred and is continuing or, if a Default or an Event of Default shall exist,
specifying in reasonable detail the nature thereof, and the steps being taken to
remedy the same, and such additional information as the requesting party may
reasonably request. Any such certificate furnished pursuant to this Section 17.1
------------
may be relied upon by the requesting party, its lenders and any prospective
purchaser or mortgagee of the Leased Property or the leasehold estate created
hereby.
17.2 Financial Statements. Tenant shall furnish the following statements
--------------------
to Landlord:
(a) within forty-five (45) days after each of the first three quarters
of any Fiscal Year, the most recent Consolidated Financials, accompanied by
the Financial Officer's Certificate;
(b) within ninety (90) days after the end of each Fiscal Year, the
most recent Consolidated Financials for such year, certified by an
independent certified public accountant reasonably satisfactory to Landlord
and accompanied by a Financial Officer's Certificate;
(c) within thirty (30) days after the end of each Accounting Period,
an unaudited operating statement prepared on a Hotel by Hotel basis,
including occupancy percentages and average rate, accompanied by a
Financial Officer's Certificate;
(d) promptly after the sending or filing thereof, copies of all
reports which Tenant, Host or Host Marriott Hospitality, Inc. sends to its
security holders generally, and copies of all periodic reports which
Tenant, Host or Host Marriott Hospitality, Inc. files with the SEC or any
stock exchange on which its shares are listed or traded;
(e) promptly after the delivery thereof to Tenant, a copy of any
management letter or written report prepared by the certified public
accountants with respect to the financial condition, operations, business
or prospects of Tenant;
(f) at any time and from time to time upon not less than forty-five
(45) days Notice from Landlord, any Consolidated Financials or any other
financial reporting information required to be filed by Landlord with any
securities and exchange commission, the SEC or any successor agency, or any
other governmental authority, or required pursuant to any order issued by
any court, governmental authority or arbitrator in any litigation to which
Landlord is a party, for purposes of compliance therewith, provided that
Landlord shall pay for any costs incurred by Tenant in connection with the
preparation of the same; and
<PAGE>
- 52 -
(g) promptly, upon Notice from Landlord, such other information
concerning the business, financial condition and affairs of Tenant as
Landlord reasonably may request from time to time.
Landlord may at any time, and from time to time, provide any Hotel Mortgagee
with copies of any of the foregoing statements.
In addition, Landlord shall have the right, from time to time at Landlord's
sole cost and expense, upon reasonable Notice, during Tenant's customary
business hours, to cause Tenant's books and records with respect to the Leased
Property to be audited by auditors selected by Landlord at the place where such
books and records are customarily kept.
17.3 General Operations. Tenant shall furnish to Landlord:
------------------
(a) Within thirty (30) days after receipt or modification thereof,
copies of all licenses authorizing Tenant and/or the Manager to operate the
Hotel for its Permitted Use;
(b) Not less than thirty (30) days after the commencement of any
Fiscal Year, proposed annual income and ordinary expense and capital
improvement budgets setting forth projected income and costs and expenses
projected to be incurred by Tenant in managing, owning, maintaining and
operating the Hotel during the next succeeding Fiscal Year; and
(c) Promptly after receipt or sending thereof, copies of all notices
given or received by Tenant under the Management Agreement.
ARTICLE 18
----------
LANDLORD'S RIGHT TO INSPECT
---------------------------
Tenant shall permit, and shall direct the Manager to permit, Landlord and
its authorized representatives to inspect the Leased Property during usual
business hours upon not less than twenty-four (24) hours' notice and to make
such repairs as Landlord is permitted or required to make pursuant to the terms
of this Agreement, provided that any inspection or repair by Landlord or its
representatives will not unreasonably interfere with Tenant's or the Manager's
use and operation of the Leased Property and further provided that in the event
of an emergency, as determined by Landlord in its reasonable discretion, prior
Notice shall not be necessary.
<PAGE>
- 53 -
ARTICLE 19
----------
INTENTIONALLY DELETED
---------------------
ARTICLE 20
----------
HOTEL MORTGAGES
---------------
20.1 Landlord May Grant Liens. Without the consent of Tenant, Landlord
------------------------
may, subject to the terms and conditions set forth in this Section 20.1, from
------------
time to time, directly or indirectly, create or otherwise cause to exist any
lien, encumbrance or title retention agreement ("Encumbrance") upon the Leased
-----------
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing, provided that any such
Encumbrance shall be consistent with the requirements of Article 6 of the
Management Agreement. Any such Encumbrance shall include the right to prepay
(whether or not subject to a prepayment penalty) and shall provide (subject to
Section 20.2) that it is subject to the rights of Tenant under this Agreement.
- ------------
20.2 Subordination of Lease. Subject to Section 20.1 and this Section
---------------------- ------------ -------
20.2, this Agreement, any and all rights of Tenant hereunder, are and shall be
subject and subordinate to any ground or master lease, and all renewals,
extensions, modifications and replacements thereof, and to all mortgages and
deeds of trust, which may now or hereafter affect the Leased Property or any
improvements thereon and/or any of such leases, whether or not such mortgages or
deeds of trust shall also cover other lands and/or buildings and/or leases, to
each and every advance made or hereafter to be made under such mortgages and
deeds of trust, and to all renewals, modifications, replacements and extensions
of such leases and such mortgages and deeds of trust and all consolidations of
such mortgages and deeds of trust. This section shall be self-operative and no
further instrument of subordination shall be required. In confirmation of such
subordination, Tenant shall promptly execute, acknowledge and deliver any
instrument that Landlord, the lessor under any such lease or the holder of any
such mortgage or the trustee or beneficiary of any deed of trust or any of their
respective successors in interest may reasonably request to evidence such
subordination. Any lease to which this Agreement is, at the time referred to,
subject and subordinate is herein called "Superior Lease" and the lessor of a
--------------
Superior Lease or its successor in interest at the time referred to, is herein
called "Superior Landlord" and any mortgage or deed of trust to which this
-----------------
Agreement is, at the time referred to, subject and subordinate, is herein called
"Superior Mortgage" and the holder, trustee or beneficiary of a Superior
-----------------
Mortgage is herein called "Superior Mortgagee". Tenant shall have no
------------------
obligations under any Superior Lease or Superior Mortgage other than those
expressly set forth in this Section 20.2.
------------
<PAGE>
- 54 -
If any Superior Landlord or Superior Mortgagee or the nominee or designee
of any Superior Landlord or Superior Mortgagee shall succeed to the rights of
Landlord under this Agreement (any such person, "Successor Landlord"), whether
------------------
through possession or foreclosure action or delivery of a new lease or deed, or
otherwise, such Successor Landlord shall recognize Tenant's rights under this
Agreement as herein provided and Tenant shall attorn to and recognize the
Successor Landlord as Tenant's landlord under this Agreement and Tenant shall
promptly execute and deliver any instrument that such Successor Landlord may
reasonably request to evidence such attornment (provided that such instrument
does not alter the terms of this Agreement), whereupon, this Agreement shall
continue in full force and effect as a direct lease between the Successor
Landlord and Tenant upon all of the terms, conditions and covenants as are set
forth in this Agreement, except that the Successor Landlord (unless formerly the
landlord under this Agreement or its nominee or designee) shall not be (a)
liable in any way to Tenant for any act or omission, neglect or default on the
part of any prior Landlord under this Agreement, (b) responsible for any monies
owing by or on deposit with any prior Landlord to the credit of Tenant (except
to the extent actually paid or delivered to the Successor Landlord), (c) subject
to any counterclaim or setoff which theretofore accrued to Tenant against any
prior Landlord, (d) bound by any modification of this Agreement subsequent to
such Superior Lease or Mortgage, or by any previous prepayment of Minimum Rent
or Additional Rent for more than one (1) month in advance of the date due
hereunder, which was not approved in writing by the Superior Landlord or the
Superior Mortgagee thereto, (e) liable to Tenant beyond the Successor Landlord's
interest in the Leased Property and the rents, income, receipts, revenues,
issues and profits issuing from the Leased Property, (f) responsible for the
performance of any work to be done by the Landlord under this Agreement to
render the Leased Property ready for occupancy by Tenant (subject to Landlord's
obligations under Section 5.1.2(b) or with respect to any insurance or
----------------
Condemnation proceeds), or (g) required to remove any Person occupying the
Leased Property or any part thereof, except if such person claims by, through or
under the Successor Landlord. Tenant agrees at any time and from time to time
to execute a suitable instrument in confirmation of Tenant's agreement to
attorn, as aforesaid and Landlord agrees to provide Tenant with an instrument of
nondisturbance and attornment from each such Superior Mortgagee and Superior
Landlord in form and substance reasonably satisfactory to Tenant.
Notwithstanding the foregoing, any Successor Landlord shall be liable (a) to
pay, as and when required by the Purchase Agreement, to Tenant a pro rata
portion of the Initial Retained Funds or Retained Funds (as such terms are
defined in the Purchase Agreement) in accordance with the terms of the Purchase
Agreement and this Agreement, including Article 15, if and to the extent that
----------
the rights of the Sellers under the Purchase Agreement with respect to such
Retained Funds shall have been assigned to Tenant, (b) to pay to Tenant any
amounts owed under Section 5.1.2(b), and (c) to pay to Tenant any portions of
----------------
insurance proceeds or Awards received by Landlord or the Successor Landlord
required to be paid to Tenant pursuant to the terms of this Agreement, and, as a
condition to any
<PAGE>
- 55 -
mortgage, lien or lease in respect of the Leased Property, and the subordination
of this Agreement thereto, the mortgagee, lienholder or lessor, as applicable,
shall expressly agree, for the benefit of Tenant, to make such payments, which
agreement shall be embodied in an instrument in form reasonably satisfactory to
Tenant.
20.3 Notices. Subsequent to the receipt by Tenant of Notice from Landlord
-------
as to the identity of any Hotel Mortgagee or ground lessor under a lease with
Landlord, as ground lessee, which includes the Leased Property as part of the
demised premises and which complies with Section 20.1 and 20.2 (which Notice
---------------------
shall be accompanied by a copy of the applicable mortgage or lease), no notice
from Tenant to Landlord as to the Leased Property shall be effective unless and
until a copy of the same is given to such Hotel Mortgagee or ground lessor at
the address set forth in the above described Notice, and the curing of any of
Landlord's defaults by such Hotel Mortgagee or ground lessor shall be treated as
performance by Landlord. Each Hotel Mortgagee shall provide to Tenant copies of
any notices of default given by such Hotel Mortgagee to Landlord.
20.4 Transfer of Leased Property. Landlord shall not, without the consent
---------------------------
of Tenant, transfer the Leased Property, or any interest therein to any Person
which: (i) does not have sufficient financial resources and liquidity to
fulfill "Owner's" obligations under the Management Agreement; (ii) is in control
of or controlled by Persons who have been convicted of felonies involving moral
turpitude in any state or federal court; or (iii) is engaged in the business of
operating or franchising (as distinguished from owning) a branded hotel chain
having fifteen hundred (1,500) or more guest rooms in competition with the
Manager. An individual or entity shall not be deemed to be in the business of
operating hotels in competition with the Manager solely by virtue of (x) the
ownership of such hotels, either directly or indirectly through subsidiaries,
affiliates and partnerships, or (y) holding a mortgage or mortgages secured by
one or more hotels. Landlord may transfer the Leased Property, or any interest
therein, to any other Person without the consent of Tenant.
ARTICLE 21
----------
ADDITIONAL COVENANTS OF TENANT
------------------------------
21.1 Prompt Payment of Indebtedness. Tenant shall (a) pay or cause to be
------------------------------
paid when due all payments of principal of and premium and interest on Tenant's
Indebtedness for money borrowed and shall not permit or suffer any such
Indebtedness to become or remain in default beyond any applicable grace or cure
period, (b) pay or cause to be paid when due all lawful claims for labor and
rents, (c) pay or cause to be paid when due all trade payables and (d) pay or
cause to be paid when due all other of Tenant's Indebtedness upon which it is or
becomes obligated, except, in each case, other than that referred to in clause
(a), to the extent payment is being contested in good faith by appropriate
proceedings in accordance with
<PAGE>
- 56 -
Article 8 and if Tenant shall have set aside on its books adequate reserves with
- ---------
respect thereto in accordance with GAAP, if appropriate, or unless and until
foreclosure, distraint sale or other similar proceedings shall have been
commenced.
21.2 Conduct of Business. Tenant shall not engage in any business other
-------------------
than the leasing and operation of the Collective Leased Properties and shall do
or cause to be done all things necessary to preserve, renew and keep in full
force and effect and in good standing its corporate existence and its rights and
licenses necessary to conduct such business.
21.3 Maintenance of Accounts and Records. Tenant shall keep true records
-----------------------------------
and books of account of Tenant in which full, true and correct entries will be
made of dealings and transactions in relation to the business and affairs of
Tenant in accordance with GAAP, where applicable, Tenant shall apply accounting
principles in the preparation of the financial statements of Tenant which, in
the judgment of and the opinion of its independent public accountants, are in
accordance with GAAP, where applicable, except for changes approved by such
independent public accountants. Tenant shall provide to Landlord either in a
footnote to the financial statements delivered under Section 17.2 which relate
-------------
to the period in which such change occurs, or in separate schedules to such
financial statements, information sufficient to show the effect of any such
changes on such financial statements.
21.4 Notice of Litigation, Etc. Tenant shall give prompt Notice to
--------------------------
Landlord of any litigation or any administrative proceeding to which it may
hereafter become a party of which Tenant has notice or actual knowledge which
involves a potential liability equal to or greater than Two Hundred Fifty
Thousand Dollars ($250,000) or which may otherwise result in any material
adverse change in the business, operations, property, prospects, results of
operation or condition, financial or other, of Tenant. Forthwith upon Tenant
obtaining knowledge of any Default, Event of Default or any default or event of
default under any agreement relating to Indebtedness for money borrowed in an
aggregate amount exceeding, at any one time, Two Hundred Fifty Thousand Dollars
($250,000), or any event or condition that would be required to be disclosed in
a current report filed by Tenant on Form 8-K or in Part II of a quarterly report
on Form 10-Q if Tenant were required to file such reports under the Securities
Exchange Act of 1934, as amended, Tenant shall furnish Notice thereof to
Landlord specifying the nature and period of existence thereof and what action
Tenant has taken or is taking or proposes to take with respect thereto.
21.5 Indebtedness of Tenant. Tenant shall not create, incur, assume or
----------------------
guarantee, or permit to exist, or become or remain liable directly or indirectly
upon, any Indebtedness except the following:
(a) Indebtedness of Tenant to Landlord;
<PAGE>
- 57 -
(b) Indebtedness of Tenant for Impositions, to the extent that payment
thereof shall not at the time be required to be made in accordance with the
provisions of Article 8;
---------
(c) Indebtedness of Tenant in respect of judgments or awards (i) which
have been in force for less than the applicable appeal period and in
respect of which execution thereof shall have been stayed pending such
appeal or review, or (ii) which are fully covered by insurance payable to
Tenant, or (iii) which are for an amount not in excess of $250,000 in the
aggregate at any one time outstanding and (x) which have been in force for
not longer than the applicable appeal period, so long as execution is not
levied thereunder or (y) in respect of which an appeal or proceedings for
review shall at the time be prosecuted in good faith in accordance with the
provisions of Article 8, and in respect of which execution thereof shall
---------
have been stayed pending such appeal or review;
(d) unsecured borrowings of Tenant from its Affiliated Persons which
are by their terms expressly subordinate pursuant to a Subordination
Agreement to the payment and performance of Tenant's obligations under this
Agreement; or
(e) Indebtedness for purchase money financing in accordance with
Section 21.9(a) and other operating liabilities incurred in the ordinary
---------------
course of Tenant's business.
21.6 Financial Condition of Tenant. Tenant shall at all times maintain
-----------------------------
Tangible Net Worth (except as provided in the last clause of this sentence) in
an amount at least equal to the aggregate of one year's Minimum Rent payable
pursuant to this Agreement and the Other Leases; it being expressly understood
and agreed that the sum of the Initial Retained Funds (as defined in the
Purchase Agreement) and, if Landlord shall acquire the Option Properties (as
defined in the Purchase Agreement), the Option Retained Funds (as defined in the
Purchase Agreement) may for such purpose be counted as equity at the full amount
thereof if such amounts are contributed to Tenant.
21.7 Distributions, Payments to Affiliated Persons, Etc. Tenant shall not
---------------------------------------------------
declare, order, pay or make, directly or indirectly, any Distributions or any
payment to any Affiliated Person of Tenant (including payments in the ordinary
course of business and payments pursuant to management agreements with any such
Affiliated Person) or set apart any sum or property therefor, or agree to do so,
if, at the time of such proposed action, or immediately after giving effect
thereto, any Event of Default shall exist.
21.8 Prohibited Transactions. Tenant shall not permit to exist or enter
-----------------------
into any agreement or arrangement whereby it engages in a transaction of any
kind
<PAGE>
- 58 -
with any Affiliated Person as to Tenant, except on terms and conditions which
are commercially reasonable.
21.9 Liens and Encumbrances. Except as permitted by Section 7.1, Tenant
---------------------- -----------
shall not create or incur or suffer to be created or incurred or to exist any
Lien on this Agreement or any of Tenant's assets, properties, rights or income,
or any of its interest therein, now or at any time hereafter owned, other than:
(a) Security interests securing the purchase price of equipment or
personal property whether acquired before or after the Commencement Date;
provided, however, that (i) such Lien shall at all times be confined solely
-------- -------
to the asset in question and (ii) the aggregate principal amount of
Indebtedness secured by any such Lien shall not exceed the cost of
acquisition or construction of the property subject thereto;
(b) Permitted Encumbrances; and
(c) As permitted pursuant to Section 21.5.
------------
21.10 Merger; Sale of Assets; Etc. Tenant shall not (i) sell, lease (as
---------------------------
lessor or sublessor), transfer or otherwise dispose of, or abandon, all or any
material portion of its assets (including capital stock) or business to any
Person, (ii) merge into or with or consolidate with any other Entity, or (iii)
sell, lease (as lessor or sublessor), transfer or otherwise dispose of, or
abandon, any personal property or fixtures or any real property; provided,
--------
however, that, notwithstanding the provisions of clause (iii) preceding, Tenant
- -------
may dispose of equipment or fixtures which have become inadequate, obsolete,
worn-out, unsuitable, undesirable or unnecessary, provided substitute equipment
or fixtures having equal or greater value and utility (but not necessarily
having the same function) have been provided.
ARTICLE 22
----------
MISCELLANEOUS
-------------
22.1 Limitation on Payment of Rent. All agreements between Landlord and
-----------------------------
Tenant herein are hereby expressly limited so that in no contingency or event
whatsoever, whether by reason of acceleration of Rent, or otherwise, shall the
Rent or any other amounts payable to Landlord under this Agreement exceed the
maximum permissible under applicable law, the benefit of which may be asserted
by Tenant as a defense, and if, from any circumstance whatsoever, fulfillment of
any provision of this Agreement, at the time performance of such provision shall
be due, shall involve transcending the limit of validity prescribed by law, or
if from any circumstances Landlord should ever receive as fulfillment of such
provision such an excessive amount, then, ipso facto, the amount which would be
---- -----
excessive shall be applied to the reduction of the installment(s) of Minimum
Rent next due and not to
<PAGE>
- 59 -
the payment of such excessive amount. This provision shall control every other
provision of this Agreement and any other agreements between Landlord and
Tenant.
22.2 No Waiver. No failure by Landlord or Tenant to insist upon the strict
---------
performance of any term hereof or to exercise any right, power or remedy
consequent upon a breach thereof, and no acceptance of full or partial payment
of Rent during the continuance of any such breach, shall constitute a waiver of
any such breach or of any such term. To the maximum extent permitted by law, no
waiver of any breach shall affect or alter this Agreement, which shall continue
in full force and effect with respect to any other then existing or subsequent
breach.
22.3 Remedies Cumulative. To the maximum extent permitted by law, each
-------------------
legal, equitable or contractual right, power and remedy of Landlord or Tenant,
now or hereafter provided either in this Agreement or by statute or otherwise,
shall be cumulative and concurrent and shall be in addition to every other
right, power and remedy and the exercise or beginning of the exercise by
Landlord or Tenant (as applicable) of any one or more of such rights, powers and
remedies shall not preclude the simultaneous or subsequent exercise by Landlord
of any or all of such other rights, powers and remedies.
22.4 Severability. Any clause, sentence, paragraph, section or provision
------------
of this Agreement held by a court of competent jurisdiction to be invalid,
illegal or ineffective shall not impair, invalidate or nullify the remainder of
this Agreement, but rather the effect thereof shall be confined to the clause,
sentence, paragraph, section or provision so held to be invalid, illegal or
ineffective, and this Agreement shall be construed as if such invalid, illegal
or ineffective provisions had never been contained therein.
22.5 Acceptance of Surrender. No surrender to Landlord of this Agreement
-----------------------
or of the Leased Property or any part thereof, or of any interest therein, shall
be valid or effective unless agreed to and accepted in writing by Landlord and
no act by Landlord or any representative or agent of Landlord, other than such a
written acceptance by Landlord, shall constitute an acceptance of any such
surrender.
22.6 No Merger of Title. It is expressly acknowledged and agreed that it
------------------
is the intent of the parties that there shall be no merger of this Agreement or
of the leasehold estate created hereby by reason of the fact that the same
Person may acquire, own or hold, directly or indirectly this Agreement or the
leasehold estate created hereby and the fee estate or ground landlord's interest
in the Leased Property.
22.7 Conveyance by Landlord. If Landlord or any successor owner of all or
----------------------
any portion of the Leased Property shall convey all or any portion of the Leased
Property in accordance with the terms hereof other than as security for a debt,
and
<PAGE>
- 60 -
the grantee or transferee of such of the Leased Property shall expressly assume
all obligations of Landlord hereunder arising or accruing from and after the
date of such conveyance or transfer, Landlord or such successor owner, as the
case may be, shall thereupon be released from all future liabilities and
obligations of Landlord under this Agreement with respect to such of the Leased
Property arising or accruing from and after the date of such conveyance or other
transfer and all such future liabilities and obligations shall thereupon be
binding upon the new owner.
22.8 Quiet Enjoyment. Provided that no Event of Default shall have
---------------
occurred and be continuing, Tenant shall peaceably and quietly have, hold and
enjoy the Leased Property for the Term, free of hindrance or molestation by
Landlord or anyone claiming by, through or under Landlord, but subject to (a)
any Encumbrance permitted under Article 20 or otherwise permitted to be created
----------
by Landlord hereunder, (b) all Permitted Encumbrances, (c) liens as to
obligations of Landlord that are either not yet due or which are being contested
in good faith and by proper proceedings, provided the same do not materially
interfere with Tenant's ability to operate the Hotel and (d) liens that have
been consented to in writing by Tenant. Except as otherwise provided in this
Agreement, no failure by Landlord to comply with the foregoing covenant shall
give Tenant any right to cancel or terminate this Agreement or abate, reduce or
make a deduction from or offset against the Rent or any other sum payable under
this Agreement, or to fail to perform any other obligation of Tenant hereunder.
22.9 Memorandum of Lease. Neither Landlord nor Tenant shall record this
-------------------
Agreement. However, Landlord and Tenant shall promptly, upon the request of the
other, enter into a short form memorandum of this Agreement, in form suitable
for recording under the laws of the State in which reference to this Agreement,
and all options contained herein, shall be made. The parties shall share
equally all costs and expenses of recording such memorandum.
22.10 Notices.
-------
(a) Any and all notices, demands, consents, approvals, offers,
elections and other communications required or permitted under this
Agreement shall be deemed adequately given if in writing and the same shall
be delivered either in hand, by telecopier with written acknowledgment of
receipt, or by mail or Federal Express or similar expedited commercial
carrier, addressed to the recipient of the notice, postpaid and registered
or certified with return receipt requested (if by mail), or with all
freight charges prepaid (if by Federal Express or similar carrier).
(b) All notices required or permitted to be sent hereunder shall be
deemed to have been given for all purposes of this Agreement upon the date
of acknowledged receipt, in the case of a notice by telecopier, and, in all
other cases, upon the date of receipt or refusal, except that whenever
under this
<PAGE>
- 61 -
Agreement a notice is either received on a day which is not a Business Day
or is required to be delivered on or before a specific day which is not a
Business Day, the day of receipt or required delivery shall automatically
be extended to the next Business Day.
(c) All such notices shall be addressed,
if to Landlord to:
c/o Hospitality Properties Trust
400 Centre Street
Newton, Massachusetts 02158
Attn: Mr. John G. Murray
[Telecopier No. (617) 332-2261]
with a copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Attn: Jennifer B. Clark, Esq.
[Telecopier No. (617) 338-2880]
if to Tenant to:
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Ms. Pamela J. Block, Asset Manager
Asset Management Department 909
[Telecopier No. (301)380-8608]
with a copy to:
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Pamela J. Murch, Esq.
Law Department 923
[Telecopier No. (301)380-6332 or -3588]
(d) By notice given as herein provided, the parties hereto and their
respective successor and assigns shall have the right from time to time and
at any time during the term of this Agreement to change their respective
addresses effective upon receipt by the other parties of such notice and
each
<PAGE>
- 62 -
shall have the right to specify as its address any other address within the
United States of America.
22.11 Construction; Nonrecourse. Anything contained in this Agreement to
-------------------------
the contrary notwithstanding, all claims against, and liabilities of, Tenant or
Landlord arising prior to any date of termination or expiration of this
Agreement with respect to the Leased Property shall survive such termination or
expiration. In no event shall Landlord be liable for any consequential damages
suffered by Tenant as the result of a breach of this Agreement by Landlord.
Neither this Agreement nor any provision hereof may be changed, waived,
discharged or terminated except by an instrument in writing signed by the party
to be charged. All the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Each term or provision of this Agreement to be
performed by Tenant shall be construed as an independent covenant and condition.
Time is of the essence with respect to the exercise of any rights of Tenant
under this Agreement. Except as otherwise set forth in this Agreement, any
obligations of Tenant (including without limitation, any monetary, repair and
indemnification obligations) and Landlord shall survive the expiration or sooner
termination of this Agreement. Whenever it is provided in this Agreement that
Tenant shall direct the Manager to take any action, Tenant shall not be deemed
to have satisfied such obligation unless Tenant shall have exhausted all
applicable rights and remedies of Tenant as "Owner" under the Management
Agreement. Except as otherwise expressly provided with respect to the Initial
Retained Funds and the Option Retained Funds (as such terms are defined in the
Purchase Agreement), nothing contained in this Agreement (including, without
limitation, Section 3.5) shall be construed to create or impose any liabilities
-----------
or obligations and no such liabilities or obligations shall be imposed on any of
the shareholders or beneficial owners, direct or indirect, of Landlord or Tenant
(including, but not limited, Host Marriott, Host Marriott Hospitality, Inc. and
HMH Properties, Inc.) for the payment or performance of the obligations or
liabilities of Landlord or Tenant hereunder.
22.12 Counterparts; Headings. This Agreement may be executed in two or
----------------------
more counterparts, each of which shall constitute an original, but which, when
taken together, shall constitute but one instrument and shall become effective
as of the date hereof when copies hereof, which, when taken together, bear the
signatures of each of the parties hereto shall have been signed. Headings in
this Agreement are for purposes of reference only and shall not limit or affect
the meaning of the provisions hereof.
22.13 Applicable Law, Etc. This Agreement shall be interpreted,
--------------------
construed, applied and enforced in accordance with the laws of the State
applicable to contracts between residents of the State which are to be performed
entirely within the State, regardless of (i) where this Agreement is executed or
delivered; or (ii) where any payment or other performance required by this
Agreement is made or
<PAGE>
- 63 -
required to be made; or (iii) where any breach of any provision of this
Agreement occurs, or any cause of action otherwise accrues; or (iv) where any
action or other proceeding is instituted or pending; or (v) the nationality,
citizenship, domicile, principal place of business, or jurisdiction of
organization or domestication of any party; or (vi) whether the laws of the
forum jurisdiction otherwise would apply the laws of a jurisdiction other than
the State; or (vii) any combination of the foregoing.
To the maximum extent permitted by applicable law, any action to enforce,
arising out of, or relating in any way to, any of the provisions of this
Agreement may be brought and prosecuted in such court or courts located in the
State as is provided by law; and the parties consent to the jurisdiction of said
court or courts located in the State and to service of process by registered
mail, return receipt requested, or by any other manner provided by law.
22.14 Right to Make Agreement. Each party warrants, with respect to
-----------------------
itself, that neither the execution of this Agreement, nor the consummation of
any transaction contemplated hereby, shall violate any provision of any law, or
any judgment, writ, injunction, order or decree of any court or governmental
authority having jurisdiction over it; nor result in or constitute a breach or
default under any indenture, contract, other commitment or restriction to which
it is a party or by which it is bound; nor require any consent, vote or approval
which has not been given or taken, or at the time of the transaction involved
shall not have been given or taken. Each party covenants that it has and will
continue to have throughout the term of this Agreement and any extensions
thereof, the full right to enter into this Agreement and perform its obligations
hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed
instrument as of the date above first written.
LANDLORD:
HPTCY CORPORATION
By:
---------------------------------------
Its:
-----------------------------------
TENANT:
HMH HPT COURTYARD, INC.
By:
---------------------------------------
Its (Vice) President
<PAGE>
EXHIBIT A
---------
Minimum Rent
------------
[See attached copy.]
<PAGE>
EXHIBIT B
---------
Other Leases
------------
[See attached copy.]
<PAGE>
EXHIBIT C
---------
The Land
--------
[See attached copy.]
<PAGE>
Exhibit 10.3
AGREEMENT OF SUBLEASE
---------------------
THIS AGREEMENT OF SUBLEASE ("SUBLEASE") is entered into this _____ day
of ____________, 1998, but effective for all purposes as of January 1, 1999, by
and between ________________, a ___________ having its principal office at
__________________________________ ("LANDLORD"), and _____________, a Delaware
limited liability company having its principal office at 10400 Fernwood Road,
Bethesda, Maryland 20817 ("TENANT").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Lease Agreement dated __________,
199_, by and between [Hospitality Properties Trust entity] ("PRIME LANDLORD")
and Landlord dated as of __________________ (the "PRIME LEASE"), a copy of which
is attached hereto as Exhibit A, Landlord has leased property commonly known as
---------
the Residence Inn Hotel located at ____________________________ (the "LEASED
PROPERTY");
WHEREAS, Tenant desires to sublease from Landlord and Landlord desires
to sublease to Tenant the Leased Property upon the terms and conditions set
forth herein;
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
1. Definitions. Capitalized terms not defined herein shall have the
-----------
meanings ascribed to such terms in the Prime Lease.
2. Leased Property. Subject to the written consent of the Prime
---------------
Landlord, Landlord hereby subleases to Tenant, and Tenant hereby subleases from
Landlord, for the term and upon the conditions hereinafter provided, the Leased
Property.
3. Term. The term of this Sublease shall be for a period commencing
----
January 1, 1999, provided that the Prime Landlord has given its consent to this
Sublease (the "COMMENCEMENT DATE"), and expiring on the day immediately prior to
the expiration date of the Prime Lease (the "EXPIRATION DATE"). If Landlord has
not notified Tenant on or before the Commencement Date that Prime Landlord has
given its consent, this Sublease shall automatically terminate and be of no
further force and effect.
4. Use. Tenant shall use and occupy the Leased Property solely as a
---
limited service hotel in accordance with Article 4 of the Prime Lease, and for
---------
no other purpose without the prior written consent of Landlord.
5. Rent. Tenant shall pay Rent in accordance with the terms and
----
conditions of Schedule 1 attached hereto and made a part hereof, and shall be
----------
prorated on a per diem basis for any partial month.
<PAGE>
6. Obligations Under the Prime Lease. Except as may be inconsistent
---------------------------------
with the terms hereof and except as set forth on Schedule 2 attached hereto and
----------
made a part hereof, the terms, provisions, covenants, and conditions of the
Prime Lease shall be applicable to the Sublease with the same force and effect
as if fully set forth herein at length, and as if Landlord were the lessor under
the Prime Lease and Tenant were the lessee thereunder. Tenant shall be
required, however, to pay only the Rent provided for on Schedule 1 hereto and
----------
not the amounts of rent, additional rent and other charges payable by the lessee
pursuant to the Prime Lease. As between the parties hereto, Tenant hereby
assumes all of the obligations of Landlord, as the lessee, under the Prime
Lease. Landlord shall have all of the rights of the lessor under the Prime
Lease as against Tenant and, as between the parties hereto, Landlord agrees to
observe and perform the terms, provisions, covenants and conditions on its part
to be observed and performed hereunder and to use its commercially reasonable
efforts to cause Prime Landlord to observe and perform those applicable terms,
provisions, covenants and conditions to be observed and performed by the lessor
under the Prime Lease.
7. Subordination. This Sublease is subject and subordinate to the
-------------
Prime Lease and to the matters to which the Prime Lease is or shall be subject
or subordinate.
8. Prime Landlord's Right to Enter into a Direct Lease with Tenant;
----------------------------------------------------------------
Prime Landlord's Right to Receive Rent Directly from Tenant. In the event of
- -----------------------------------------------------------
termination of the Prime Lease or reentry or dispossession of Landlord by Prime
Landlord under the Prime Lease, Prime Landlord may, at its option, terminate
this Sublease or take over and assume all of the right, title, interest and
obligations of Landlord hereunder, and Tenant shall, at Prime Landlord's option,
attorn to Prime Landlord, provided that neither Prime Landlord nor any Hotel
Mortgagee, as holder of a mortgage or as Prime Landlord under the Prime Lease,
if such mortgagee has succeeded to that position, shall (i) be liable for any
act or omission of Landlord under this Sublease, (ii) be subject to any credit,
counterclaim, offset or defense which theretofore accrued to Tenant against
Landlord, (iii) be bound by any previous modification of this Sublease not
consented to in writing by Prime Landlord or by any previous prepayment of more
than one (1) month's Rent, (iv) be bound by any covenant of Landlord to
undertake or complete any construction of the Leased Property or any portion
thereof, except to the extent required by the Prime Lease, (v) be required to
account for any security deposit of the Tenant other than any security deposit
actually delivered to Prime Landlord by Landlord, (vi) be bound by any
obligation to make any payment to Tenant or grant any credits, except for
services, repairs, maintenance and restoration provided for under this Sublease
or the Prime Lease that are performed after the date of such attornment, (vii)
be responsible for any monies owing by Landlord to the credit of Tenant, or
(viii) be required to remove any Person occupying any portion of the Leased
Property. In the event that Tenant receives a written Notice from Prime
Landlord or any Hotel Mortgagee stating that an Event of Default has occurred
and is continuing under the Prime Lease, Tenant shall thereafter be obligated to
pay all rentals accruing under this Sublease directly to the party giving such
Notice, or as such party may direct. All rentals received from Tenant by Prime
Landlord or the Hotel Mortgagee, as the case may be, shall be credited against
the amounts owing by Landlord under the Prime Lease. Tenant shall, at the
request of Prime Landlord, execute a suitable instrument in confirmation of such
agreement to attorn.
-2-
<PAGE>
9. Notices.
-------
(a) Any and all notices, demands, consents, approvals, offers,
elections and other communications required or permitted under this Sublease
shall be deemed adequately given if in writing and the same shall be delivered
either in hand, by telecopier with computer generated acknowledgment of receipt,
or by mail or Federal Express or similar expedited commercial carrier, addressed
to the recipient of the notice, postpaid and certified with return receipt
requested (if by mail), or with all freight charges prepaid (if by Federal
Express or similar carrier).
(b) All notices required or permitted to be sent hereunder shall be
deemed to have been given for all purposes of this Sublease upon the date of
acknowledged receipt, in the case of a notice by telecopier, and, in all other
cases, upon the date of receipt or refusal, except that whenever under this
Sublease a notice is either received on a day which is not a Business Day or is
required to be delivered on or before a specific day which is not a Business
Day, the day of receipt or required delivery shall automatically be extended to
the next Business Day.
(c) All such notices shall be addressed:
if to Landlord to:
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn:
--------------------------
with a copy (which shall not constitute notice) to:
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
If to Tenant to:
-------------------------------
c/o Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
with a copy (which shall not constitute notice) to:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Elizabeth R. Lieberman, Esq.
-3-
<PAGE>
(d) By notice given as herein provided, the parties hereto and
their respective successors and assigns shall have the right from time to time
and at any time during the term of this Sublease to change their respective
addresses effective upon receipt by the other parties of such notice and each
shall have the right to specify as its address any other address within the
United States of America.
10. Surrender. Upon the Expiration Date or the earlier termination
---------
of this Sublease, Tenant shall quit the Leased Property and surrender it to
Landlord in accordance with the terms of the Prime Lease.
11. Brokers. Landlord and Tenant warrant and represent to each other
-------
that no broker brought about this transaction or dealt with either party in
connection herewith.
12. General Provisions.
------------------
(a) Benefit and Burden. The covenants, conditions, agreements,
------------------
terms and provisions herein contained shall be binding upon, and shall inure to
the benefit of, the parties hereto and each of their respective personal
representatives, successors, heirs, executors, administrators and assigns.
(b) Governing Law. It is the intention of the parties hereto
-------------
that this Sublease (and the terms and provisions hereof) shall be construed and
enforced in accordance with the laws of the State of Maryland.
(c) Entire Agreement. This Sublease contains the final and
----------------
entire agreement between the parties hereto, and they shall not be bound by any
terms, statements, conditions or representations, oral or written, express or
implied, not herein contained.
(d) Conflicts Between this Sublease and the Prime Lease. With
---------------------------------------------------
respect to the relationship between Landlord and Tenant, the terms and
conditions of this Sublease shall take precedence with respect to any conflict
between the terms and conditions contained herein and the terms and conditions
of the Prime Lease. Nothing herein shall be construed in any way to affect the
rights and obligations of Landlord and the Prime Landlord under the Prime Lease.
(e) Captions. The captions throughout this Sublease are for
--------
convenience of reference only and the words contained therein shall in no way be
held or deemed to define, limit, describe, explain, modify, amplify or add to
the interpretation, construction or meaning of any provision of or the scope or
intent of this Sublease, nor in any way effect this Sublease.
(f) Singular and Plural. Wherever appropriate herein, the
-------------------
singular includes the plural and the plural includes the singular.
(g) Counterparts. This Sublease may be executed in several
------------
counterparts, but all counterparts shall constitute but one and the same
instrument.
-4-
<PAGE>
(h) No Recordation. Neither this Sublease nor any short-form
--------------
memorandum or version hereof shall be recorded by either party.
-5-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have each executed this
Sublease on the day and year first hereinabove written.
LANDLORD
--------
------------------------------------
By:
--------------------------------
Name:
-------------------------------
Title:
-----------------------------
TENANT:
------
------------------------------------
By:
--------------------------------
Name:
-------------------------------
Title:
-----------------------------
-6-
<PAGE>
EXHIBIT A
Prime Lease
-----------
(Attached hereto.)
-7-
<PAGE>
Schedule 1
----------
(Rental provisions)
-8-
<PAGE>
Schedule 2
----------
Provisions of Prime Lease not applicable to Tenant
1. Section 2.4: Extended Term
2. Section 3.5: Security for Tenant's Performance
[others to be agreed upon]
-9-
<PAGE>
Exhibit 10.4
"LGA" STANDARD FORM
MANAGEMENT AGREEMENT
(9/13/96)
MANAGEMENT AGREEMENT
between
HMC RETIREMENT PROPERTIES, INC.
("Owner")
and
MARRIOTT HOTEL SERVICES, INC.
("Management Company")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - DEFINITION OF TERMS
- -------------------------------
1.01 Definition of Terms
ARTICLE II - APPOINTMENT OF MANAGEMENT COMPANY
- ----------------------------------------------
2.01 Appointment
2.02 Delegation of Authority
2.03 Operational Standards
2.04 Limitations on Authority
2.05 Covenants, Conditions or Restrictions
2.06 Licenses and Permits
ARTICLE III - HOTEL
- -------------------
3.01 Ownership of Hotel
ARTICLE IV - TERM
- -----------------
4.01 Term
4.02 Actions to be Taken Upon Termination
4.03 Performance Termination
ARTICLE V - COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS
- -------------------------------------------------------------
5.01 Management Fees
5.02 Accounting and Interim Payments
ARTICLE VI - FINANCING OF THE HOTEL
- -----------------------------------
6.01 Amendments of Management Agreement
6.02 Notice and Opportunity to Cure
6.03 Assignment of Management Agreement
6.04 Subordination of Management Agreement
6.05 Non-Disturbance Agreement
6.06 Attornment
6.07 No Modification or Termination of Agreement
6.08 Owner's Right to Finance the Hotel
6.09 Sale/Leaseback Transactions
</TABLE>
<PAGE>
ARTICLE VII - WORKING CAPITAL AND FIXED ASSET SUPPLIES
- ------------------------------------------------------
7.01 Working Capital
7.02 Fixed Asset Supplies
ARTICLE VIII - REPAIRS, MAINTENANCE AND REPLACEMENTS
- ----------------------------------------------------
8.01 Routine Repairs and Maintenance
8.02 FF&E Reserve
8.03 Building Alterations, Improvements, Renewals,
and Replacements
8.04 Liens
8.05 Ownership of Replacements, Etc.
ARTICLE IX - BOOKKEEPING AND BANK ACCOUNTS
- ------------------------------------------
9.01 Books and Records
9.02 Hotel Accounts, Expenditures
9.03 Annual Operating Budget
9.04 Operating Losses; Credit
ARTICLE X - PROPRIETARY MARKS; INTELLECTUAL PROPERTY
- ----------------------------------------------------
10.01 Proprietary Marks
10.02 Purchase of Inventories and Fixed Asset Supplies
10.03 Computer Software and Equipment
10.04 Intellectual Property
10.05 Breach of Covenant
ARTICLE XI - POSSESSION AND USE OF HOTEL
- ----------------------------------------
11.01 Quiet Enjoyment
11.02 Use
11.03 Chain Services
11.04 Owner's Right to Inspect
11.05 Indemnity
ARTICLE XII - INSURANCE
- -----------------------
12.01 Interim Insurance
12.02 Property and Operational Insurance
12.03 General Insurance Provisions
<PAGE>
12.04 Cost and Expense
12.05 Owner's Option to Obtain Certain Insurance
ARTICLE XIII - TAXES
- --------------------
13.01 Real Estate and Personal Property Taxes
ARTICLE XIV - HOTEL EMPLOYEES
- -----------------------------
14.01 Employees
ARTICLE XV - DAMAGE, CONDEMNATION AND FORCE MAJEURE
- ---------------------------------------------------
15.01 Damage and Repair
15.02 Condemnation
15.03 Force Majeure
ARTICLE XVI - DEFAULTS
- ----------------------
16.01 Definition of "Default"
16.02 Definition of "Event of Default"
16.03 Remedies Upon an Event of Default
16.04 Owner's Estate
ARTICLE XVII - WAIVER AND PARTIAL INVALIDITY
- --------------------------------------------
17.01 Waiver
17.02 Partial Invalidity
ARTICLE XVIII - ASSIGNMENT
- --------------------------
18.01 Assignment
ARTICLE XIX - SALE OF THE HOTEL
- -------------------------------
19.01 Sale of the Hotel
ARTICLE XX - MISCELLANEOUS
- --------------------------
20.01 Right to Make Agreement
20.02 Consents
20.03 Agency
20.04 Confidentiality
20.05 Equity and Debt Offerings
<PAGE>
20.06 Applicable Law
20.07 Recordation
20.08 Headings
20.09 Notices
20.10 Environmental Matters
20.11 Estoppel Certificates
20.12 Trade Area Restriction
20.13 Arbitration
20.14 Affiliates.......................
20.15 Entire Agreement
Exhibit "A" - Location of Hotel; Legal Description
Exhibit "A-1" - Owner's Initial Cost; Chain Services Cap;
Contributions to FF&E Reserve pursuant to
Section 8.02 B; Initial Working Capital
Exhibit "B" - Form of Accounting Period Statement
Exhibit "C" - [Intentionally Deleted.]
Exhibit "D" - Narrative Description of Restricted Area
Exhibit "D-1" - Map of Restricted Area
Exhibit "E" - Existing Ground Lease (if applicable); Existing
Mortgages (if any)
Exhibit "F" - Proprietary Marks owned by Owner (if any)
Exhibit "G" - Title Insurance Policy
<PAGE>
MANAGEMENT AGREEMENT
--------------------
This Management Agreement ("Agreement") is executed as of the _____
day of___________________, 199__ ("Effective Date"), by HMC RETIREMENT
PROPERTIES, INC. ("Owner"), a Delaware corporation, with a mailing address at
10400 Fernwood Road, Bethesda, Maryland 20817 and MARRIOTT HOTEL SERVICES, INC.
("Management Company"), a Delaware corporation, with a mailing address at 10400
Fernwood Road, Bethesda, Maryland 20817.
R E C I T A L S :
A. Owner intends to purchase from ____________________ (the "Prior
Owner") the Hotel (as defined and more fully described in Section 1.01) which is
located as set forth on Exhibit "A" hereto; and
B. Owner desires to have Management Company manage and operate the
Hotel from and after the date on which the Hotel is purchased by Owner (or the
"Opening Date", as defined in Section 1.01, if later), and Management Company is
willing to perform such services for the account of Owner on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITION OF TERMS
-------------------
1.01 Definition of Terms
-------------------
The following terms when used in this Agreement shall have the
meanings indicated:
"Accounting Period" shall mean each of the four (4) week accounting
-----------------
periods which are used in Management Company's accounting system, except that an
Accounting Period may occasionally contain five (5) weeks when necessary to
conform Management Company's accounting system to the calendar.
"Accounting Period Statement" shall have the meaning set forth in
---------------------------
Section 5.02.
"Additional Invested Capital" shall mean the cumulative total, as of
---------------------------
any given date during the Term, of the following: (i) any contribution made by
Owner pursuant to Section 7.01 B (provided that Owner's Investment shall be
decreased by any return to Owner of excess Working Capital pursuant to Section
7.01 C); (ii) any expenditures made by Owner, pursuant to Section 8.03, and any
expenditures by Owner pursuant to Section 20.10 C; (iii) any contributions by
<PAGE>
Owner to the FF&E Reserve (beyond the funding described in Section 8.02 B),
other than those contributions which are reimbursed to Owner under Section 8.02
E; (iv) any payments by Owner with regard to special assessments or impact fees,
pursuant to Section 13.01 B(2) or (3); and (v) any expenditures by Owner under
clauses (v) or (vi) of Section 5.02 D which are made prior to one hundred eighty
(180) days after the Opening Date.
"Adjusted Owner's Investment" shall mean the amount, as of any given
---------------------------
date (the "Adjustment Date") during the Term, of Owner's Investment, after
adjustment thereof as follows: each separate expenditure by Owner which
comprises Owner's Investment shall be adjusted for inflation by using an amount
equal to seventy-five percent (75%) of the percentage change in the GDP Deflator
between the date of each such separate expenditure and the date in question.
"Adjustment Date" shall have the meaning set forth in the definition
---------------
of "Adjusted Owner's Investment".
"Affiliate" shall mean any individual or entity directly or indirectly
---------
through one or more intermediaries, controlling, controlled by or under common
control with a party. The term "control," as used in the immediately preceding
sentence, means, with respect to a corporation, the right to exercise, directly
or indirectly, fifty percent (50%) or more of the voting rights attributable to
the shares of the controlled corporation, and, with respect to an entity that is
not a corporation, the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of the controlled
entity.
"Agreement" shall have the meaning set forth in the Preamble.
---------
"Annual Operating Budget" shall have the meaning set forth in Section
-----------------------
9.03.
"Annual Operating Statement" shall have the meaning set forth in
--------------------------
Section 9.01.
"Available Cash Flow" shall mean an amount, with respect to each
-------------------
Fiscal Year or portion thereof, equal to the excess (if any) of the Operating
Profit for such Fiscal Year over the applicable Owner's Priority.
"Base Management Fee" shall mean an amount equal to three percent (3%)
-------------------
of Gross Revenues, which shall be paid to Management Company as compensation (in
addition to the Incentive Management Fee) for the services performed pursuant to
this Agreement.
"Building Estimate" shall have the meaning set forth in Section 8.03
-----------------
A.
"Capital Expenditures" shall have the meaning set forth in Section
--------------------
8.03 A.
"Capitalization Multiple" shall mean the number ten (10).
-----------------------
<PAGE>
"Case Goods" shall mean furniture and furnishings used in the Hotel,
----------
including, without limitation: chairs, beds, chests, headboards, desks, lamps,
tables, television sets, mirrors, pictures, wall decorations and similar items.
"CC&R's" shall have the meaning set forth in Section 2.05.
------
"Central Office Services" shall mean certain services which are
-----------------------
provided to the Hotel by personnel who are employees of Management Company or
one of its Affiliates and who are not normally located at the Hotel, including
the following: executive supervision; planning and policy making; corporate
finance; corporate personnel and employee relations; in-house legal services;
trademark protection relating to Proprietary Marks which are used generally by
the Marriott chain; certain product research and development; and the services
of Management Company's technical and operational experts making routine
periodic inspection and consultation visits to the Hotel (but not the services
of the personnel of the Architecture and Construction Division of Management
Company (or any of its Affiliates) providing architectural, technical or
procurement services for the Hotel, the costs and expenses of which shall be
paid pursuant to paragraph 6 of the definition of Operating Profit). Any service
which is defined as being included within the term "Chain Services" shall not
also be included within "Central Office Services". The Central Office Services
which are provided to the Hotel shall be generally consistent with those Central
Office Services which are provided to other comparable full-service hotels
within the Marriott Hotel System.
"Chain Services" shall have the meaning set forth in Section 11.03.
--------------
"Chain Services Cap" shall mean the percentage of Gross Revenues set
------------------
forth on Exhibit "A-1" hereto.
"Coverage Ratio" shall mean the number one and three-tenths (1.3).
--------------
"Cure Notice" shall have the meaning set forth in Section 4.03 B.
-----------
"Cure Period" shall have the meaning set forth in Section 4.03 B.
-----------
"Deductions" shall have the meaning set forth in the definition of
----------
Operating Profit.
"Default" shall have the meaning set forth in Section 16.01.
-------
"Effective Date" shall have the meaning set forth in the Preamble.
--------------
"Employee Claims" shall mean any and all claims (including all fines,
---------------
judgments, penalties, costs, Litigation and/or arbitration expenses, attorneys'
fees and expenses, and costs of settlement with respect to any such claim) by
any employee or employees of Management Company against Owner or Management
Company with respect to the employment at the Hotel
<PAGE>
of such employee or employees. "Employee Claims" shall include, without
limitation, the following: (i) claims which are eventually resolved by
arbitration, by Litigation or by settlement; (ii) claims which also involve
allegations that any applicable employment-related contracts affecting the
employees at the Hotel have been breached; and (iii) claims which involve
allegations that one or more of the Employment Laws has been violated; provided,
however, that "Employee Claims" shall not include claims for worker compensation
benefits (which shall be governed by Article XII hereof) or for unemployment
benefits.
"Employment Laws" shall mean any federal, state or local law
---------------
(including the common law), statute, ordinance, rule, regulation, order or
directive with respect to employment, conditions of employment, benefits,
compensation, or termination of employment that currently exists or may exist at
any time during the Term of this Agreement, including, but not limited to, Title
VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act,
the Workers Adjustment and Retraining Act, the Occupational Safety and Health
Act, the Immigration Reform and Control Act of 1986, the Polygraph Protection
Act of 1988 and the Americans With Disabilities Act of 1990.
"Environmental Laws" shall mean any federal, state or local law, rule
------------------
or regulation (both present and future) dealing with the use, generation,
treatment, storage, disposal or abatement of Hazardous Materials, including, but
not limited to, (i) the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601 et seq., as amended, and
-- ---
(ii) the regulations promulgated thereunder, from time to time.
"Event of Default" shall have the meaning set forth in Section 16.02.
----------------
"Existing CC&R's" shall have the meaning set forth in Section 2.05 A.
---------------
"Existing Ground Leases" shall mean the ground leases which are listed
----------------------
on Exhibit "E", but, for purposes of this Agreement, shall not include any
amendments or modifications thereof after the Effective Date, unless Management
Company consents to any such amendment or modification (which consent shall not
be unreasonably withheld, provided that (i) the proposed amendment or
modification would not materially affect the rights and/or obligations of
Management Company in a manner adverse to Management Company, and (ii) in any
event, such amendment or modification would have no adverse impact on the amount
of the Management Fees).
"Existing Mortgages" shall mean the Mortgages (if any) which are
------------------
listed on Exhibit "E", but, for purposes of this Agreement, shall not include
any amendments or modifications thereof after the Effective Date.
"Extension Threshold" shall mean, with respect to the most recent
-------------------
three (3) full Fiscal Years prior to the date in question, a dollar amount equal
to ten and seventy-five hundredths percent (10.75%) of the average balance of
the Adjusted Owner's Investment during such period
<PAGE>
of time.
"FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case
----
Goods, signage and equipment at the Hotel (including, without limitation,
facsimile machines, communication systems, audio-visual equipment, and all
computer and other equipment needed for the reservation system and the property
management system, and all other electronic systems needed for the Hotel, from
time to time, as well as similar systems based on other technologies which may
be developed in the future.
"FF&E Estimate" shall have the meaning set forth in Section 8.02 C.
-------------
"FF&E Reserve" shall have the meaning set forth in Section 8.02 A.
------------
"First Notice" shall have the meaning set forth in Section 6.02.
------------
"Fiscal Year" shall mean Management Company's Fiscal Year which now
-----------
ends at midnight on the Friday closest to December 31 in each calendar year; the
new Fiscal Year begins on the Saturday immediately following said Friday. Any
partial Fiscal Year between the Effective Date and the commencement of the first
full Fiscal Year, and any partial Fiscal Year between the end of the last full
Fiscal Year and the Termination of this Agreement, shall constitute a separate
Fiscal Year. If Management Company's Fiscal Year is changed in the future,
appropriate adjustment to this Agreement's reporting and accounting procedures
shall be made; provided, however, that no such change or adjustment shall alter
the Term of this Agreement, or in any way reduce the distributions of Operating
Profit or other payments due to Owner hereunder, or otherwise significantly and
adversely affect Owner's rights or obligations under this Agreement.
"Fixed Asset Supplies" shall mean supply items included within
--------------------
"Property and Equipment" under the Uniform System of Accounts, including linen,
china, glassware, silver, uniforms, and similar items.
"Force Majeure" shall mean acts of God, acts of war, civil
-------------
disturbance, governmental action (including the revocation or refusal to grant
licenses or permits, where such revocation or refusal is not due to the fault of
the party whose performance is to be excused for reasons of Force Majeure),
strikes, fire, unavoidable casualties or any other causes beyond the reasonable
control of either party (excluding, however, (i) lack of financing, or (ii)
general economic and/or market factors).
"Foreclosure" shall mean any exercise of the remedies available to a
-----------
Holder, upon a default under the Secured Loan held by such Holder, which results
in a transfer of title to or possession of the Hotel. The term "Foreclosure"
shall include, without limitation, any one or more of the following events, if
they occur in connection with a default under a Secured Loan: (i) a transfer by
judicial foreclosure; (ii) a transfer by deed in lieu of foreclosure; (iii) the
<PAGE>
appointment by a court of a receiver to assume possession of the Hotel; (iv) a
transfer of either ownership or control of the Owner, by exercise of a stock
pledge or otherwise; (v) if title to the Hotel is held by a tenant under a
ground lease, an assignment of the tenant's interest in such ground lease; or
(vi) any similar judicial or non-judicial exercise of the remedies held by the
Holder.
"Foreclosure Date" shall mean the date on which title to or possession
----------------
of the Hotel is transferred by means of a Foreclosure.
"Future CC&R's" shall have the meaning set forth in Section 2.05 B.
-------------
"GDP Deflator" shall mean the "Gross Domestic Product Implicit Price
------------
Deflator" issued from time to time by the United States Bureau of Economic
Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not
at such time so prepared and published, any comparable index selected by Owner
and reasonably satisfactory to Management Company (a "Substitute Index") then
prepared and published by an agency of the Government of the United States,
appropriately adjusted for changes in the manner in which such index is prepared
and/or year upon which such index is based. Any dispute regarding the selection
of the Substitute Index or the adjustments to be made thereto shall be settled
by arbitration in accordance with Section 20.13. Except as otherwise expressly
stated herein, whenever a number or amount is required to be "adjusted by the
GDP Deflator", or similar terminology, such adjustment shall be equal to the
percentage increase or decrease (except that, for purposes of this Agreement,
the GDP Deflator shall not be decreased below its level as of the Effective
Date) in the GDP Deflator which is issued for the month in which such adjustment
is to be made (or, if the GDP Deflator for such month is not yet publicly
available, the GDP Deflator for the most recent month for which the GDP Deflator
is publicly available) as compared to the GDP Deflator which was issued for the
month in which the Effective Date occurred.
"Gross Revenues" shall mean all revenues and receipts of every kind
--------------
derived from operating the Hotel and parts thereof, including, but not limited
to: income (from both cash and credit transactions), before commissions and
discounts for prompt or cash payments, from rental of rooms, stores, offices,
meeting, exhibit or sales space of every kind; license, lease and concession
fees and rentals (not including gross receipts of licensees, lessees and
concessionaires); income from vending machines; health club membership fees;
food and beverage sales; sales of merchandise (other than proceeds from the sale
of FF&E no longer necessary to the operation of the Hotel, which shall be
deposited in the FF&E Reserve as set forth in Section 8.02 D hereof); service
charges, to the extent not distributed to the employees at the Hotel as, or in
lieu of, gratuities; and proceeds, if any, from business interruption or other
loss of income insurance; provided, however, that Gross Revenues shall not
include the following: gratuities to Hotel employees; federal, state or
municipal excise, sales, use or similar taxes collected directly from patrons or
guests or included as part of the sales price of any goods or services;
insurance proceeds (other than proceeds from business interruption or other loss
of income insurance); condemnation proceeds (other than for a temporary taking);
any proceeds
<PAGE>
from any Sale of the Hotel or from the refinancing of any debt encumbering the
Hotel; proceeds from the disposition of FF&E no longer necessary for the
operation of the Hotel; interest which accrues on amounts deposited in either
the FF&E Reserve or any escrow accounts which are established in accordance with
Section 13.01 C; or Cure Payments.
"Ground Lease Rental" shall mean the annual rental, as of the
-------------------
Effective Date, under the Existing Ground Lease.
"Ground Lessor" shall mean the landlord under the Existing Ground
-------------
Lease.
"Hazardous Materials" shall mean any substance or material containing
-------------------
one or more of any of the following: "hazardous material", "hazardous waste",
"hazardous substance", "regulated substance", "petroleum", "pollutant",
"contaminant", or "asbestos", as such terms are defined in any applicable
Environmental Law, in such concentration(s) or amount(s) as may impose clean-up,
removal, monitoring or other responsibility under any applicable Environmental
Law, or which may present a significant risk of harm to guests, invitees or
employees of the Hotel.
"Holder" shall mean any holder, from time to time, of any Secured
------
Loan.
"Hotel" shall mean the hotel, containing approximately the number of
-----
guestrooms which is set forth on Exhibit "A-1" hereto, which Owner owns at the
location specified in Exhibit "A"; the term "Hotel" shall include the Site, the
improvements built thereon, and all FF&E, Fixed Asset Supplies and Inventories
installed therein.
"Hotel Retention" shall have the meaning set forth in Section 12.03
---------------
hereof.
"Impositions" shall mean all real estate and personal property taxes,
-----------
levies, assessments and similar charges (other than those which are specifically
excluded pursuant to Section 13.01 B) including, without limitation, the
following: all water, sewer or similar fees, rates, charges, excises or levies;
license fees; permit fees; inspection fees and other authorization fees and
other governmental charges of any kind or nature whatsoever, whether general or
special, ordinary or extraordinary, foreseen or unforeseen, or hereinafter
levied or assessed of every character (including all interest and penalties
thereon), which at any time during or in respect of the Term of this Agreement
may be assessed, levied, confirmed or imposed on Owner with respect to the Hotel
or otherwise in respect of or be a lien upon the Hotel. Impositions shall not
include any income or franchise taxes payable by Owner or Management Company.
Impositions shall include any taxes, levies, assessments and similar charges
which may be enacted by the applicable governmental authority in lieu of, or in
complete or partial substitution for, Impositions.
"Incentive Management Fee" shall mean the payments which shall be made
------------------------
to Management Company, as compensation (in addition to the Base Management Fee)
to Management Company for its services under this Agreement, in the amount of
twenty percent (20%) of the Available Cash Flow in each Fiscal Year (or portion
thereof).
<PAGE>
"Initial Term" shall have the meaning set forth in Section 4.01.
------------
"Intellectual Property" shall mean: (i) all Software; and (ii) all
---------------------
manuals, brochures and directives issued by Management Company to its employees
at the Hotel regarding the procedures and techniques to be used in operating the
Hotel.
"Interest Rate" shall mean an annual rate of interest equal to the
-------------
Prime Rate (as adjusted from time to time) plus three hundred (300) basis
points; provided, however, that in no event shall the Interest Rate exceed the
maximum rate which is permitted under applicable Legal Requirements.
"Inventories" shall mean "Inventories" as defined in the Uniform
-----------
System of Accounts, such as provisions in storerooms, refrigerators, pantries
and kitchens; beverages in wine cellars and bars; other merchandise intended for
sale; fuel; mechanical supplies; stationery; and other expensed supplies and
similar items.
"Legal Requirement" shall mean any federal, state or local law, code,
-----------------
rule, ordinance, regulation or order of any governmental authority or agency
having jurisdiction over the business or operation of the Hotel or the matters
which are the subject of this Agreement, including, without limitation, the
following: (i) any building, zoning or use laws, ordinances, regulations or
orders; and (ii) Environmental Laws.
"License" shall mean any license, permit, decree, act, order,
-------
authorization or other approval or instrument which is necessary in order to
operate the Hotel in accordance with Legal Requirements and pursuant to the
Marriott Standards and otherwise in accordance with this Agreement.
"Litigation" shall mean: (i) any cause of action commenced in a
----------
federal, state or local court; or (ii) any claim brought before an
administrative agency or body (for example, without limitation, employment
discrimination claims).
"Management Analysis Report" shall mean a narrative report on the
--------------------------
state of business and affairs of the Hotel, prepared on an annual basis by
Management Company and delivered to Owner at the time of the delivery of the
Annual Operating Statement, which shall include a narrative description
regarding the preceding Fiscal Year, of: (i) the Hotel's operating performance,
including significant variations from the Annual Operating Budget; (ii) an
analysis of any significant variation of the actual average daily rate and
occupancy from what was set forth in the Annual Operating Budget; (iii) a review
of the competitive hotel market; (iv) a description of any significant
promotional or other marketing programs in which the Hotel participated, which
were not included as part of the Annual Operating Budget for the preceding
Fiscal Year; and (v) such other supplementary information as Owner or Management
Company shall reasonably deem necessary to an understanding of the operation of
the Hotel.
<PAGE>
"Management Company" shall have the meaning set forth in the Preamble.
------------------
"Management Fees" shall mean the Base Management Fee plus the
---------------
Incentive Management Fee.
"Marriott" shall mean Marriott International, Inc., a Delaware
--------
corporation having an address at 10400 Fernwood Road, Bethesda, Maryland 20817.
"Marriott Hotel System" shall mean the full-service hotel system
---------------------
managed by Marriott (or one or more of its Affiliates) which is, as of the
Effective Date, operated under the trade name "Marriott Hotels, Resorts and
Suites".
"Marriott Standards" shall mean both the operational standards (for
------------------
example, staffing, amenities offered to guests, advertising, etc.) and the
physical standards (for example, the quality, condition, utility and age of the
FF&E, etc.) of comparable full-service hotels in the Marriott Hotel System, as
such operational and physical standards may fluctuate from time to time
(provided, however, that the Marriott Standards shall in no event be lower than
the operational and physical standards, as of the date in question, of
comparable "quality segment" (as such term was being used as of the Effective
Date) full-service hotels in other full-service hotel systems).
"Mortgage" shall mean any security instrument which encumbers the Site
--------
and/or the Hotel, including, without limitation, mortgages, deeds of trust,
security deeds and similar instruments.
"Non-Disturbance Agreement" shall mean an agreement, in recordable
-------------------------
form in the jurisdiction in which the Hotel is located, executed and delivered
by a Holder (which agreement shall by its terms be binding upon all assignees of
such Holder and upon all Subsequent Owners), for the benefit of Management
Company, pursuant to which, in the event such Holder (or its assignee) or any
Subsequent Owner comes into possession of or acquires title to the Hotel either
at or following a Foreclosure, such Holder (and its assignees) and all
Subsequent Owners shall (x) recognize Management Company's rights under this
Agreement, and (y) shall not name Management Company as a party in any
Foreclosure action or proceeding, and (z) shall not disturb Management Company
in its right to continue to manage the Hotel pursuant to this Agreement;
provided, however, that at such time, (i) this Agreement has not expired or
otherwise been earlier terminated in accordance with its terms, and (ii) there
are no outstanding Events of Default by Management Company, and (iii) no
material event has occurred and no material condition exists which, after notice
or the passage of time or both, would entitle Owner to terminate this Agreement
(excluding events which would constitute an Event of Default, which are to be
governed exclusively by clause (ii) hereof).
"Opening Date" shall mean the earliest date on which both of the
------------
following have occurred: (1) the Hotel is a member of the Marriott Hotel
System; and (ii) Management
<PAGE>
Company first allows paying guests to enter the Hotel.
"Operating Accounts" shall have the meaning set forth in Section 9.02.
------------------
"Operating Loss" shall mean a negative Operating Profit.
--------------
"Operating Profit" shall mean the excess of Gross Revenues over the
----------------
following deductions ("Deductions") incurred by Management Company in operating
the Hotel:
1. The cost of sales including salaries, wages, employee
benefits, Employee Claims (except to the extent specifically set forth to the
contrary in Section 14.01 C or D), payroll taxes and other costs related to
Hotel employees;
2. Departmental expenses; administrative and general expenses;
the cost of Hotel advertising and business promotion; the cost of heat, light,
power and water; and the cost of routine repairs, maintenance and minor
alterations which are treated as Deductions under Section 8.01;
3. The cost of Inventories and Fixed Asset Supplies consumed in
the operation of the Hotel;
4. A reasonable reserve for uncollectible accounts receivable as
determined by Management Company;
5. All reasonable costs and fees of independent professionals or
other third parties who are retained by Management Company to perform services
required or permitted hereunder; provided that Management Company will notify
Owner at least thirty (30) days in advance of any proposed expenditure under
this paragraph 5 which is in excess of Fifty Thousand Dollars ($50,000) (to be
adjusted by the GDP Deflator) and which was not specifically identified in the
Annual Operating Budget, and Management Company shall consider in good faith any
comments which Owner may have with respect to such proposed expenditure; and
provided, further, that if such expenditure involves immediately-needed repair
work to the Hotel or if immediate action is otherwise required, the above-
described requirement regarding thirty (30) days' prior notice shall be modified
to require whatever notice period is reasonable under the circumstances;
6. The reasonable cost and expense of technical consultants and
operational experts who are employees of Management Company or one of its
Affiliates, and who perform specialized services in connection with non-routine
Hotel work; provided, however, that the costs and expenses so incurred shall
only be Deductions to the extent such costs and expenses are reasonable and
competitively priced, as compared to similar work done by outside consultants or
experts; and provided, further, that Management Company will notify Owner at
least thirty (30) days in advance of any proposed expenditure under this
paragraph 6 which is in excess of Fifty Thousand Dollars ($50,000) (to be
adjusted by the GDP Deflator) and which was not specifically
<PAGE>
identified in the Annual Operating Budget, and Management Company shall consider
in good faith any comments which Owner may have with respect to such proposed
expenditure; and provided, further, that if such expenditure involves
immediately-needed repair work to the Hotel or if immediate action is otherwise
required, the above-described requirement regarding thirty (30) days' prior
notice shall be modified to require whatever notice period is reasonable under
the circumstances;
7. The Base Management Fee (unless, and to the extent that,
Management Company has elected to waive its Base Management Fee in accordance
with Section 4.03 B);
8. The Hotel's pro rata share of costs and expenses incurred by
Management Company (or its Affiliates) in providing Chain Services, subject to
the Chain Services Cap;
9. The Hotel's pro rata share of costs and expenses incurred in
connection with sales, advertising and/or promotional programs developed for or
within the Marriott Hotel System, such as (without limitation) the Honored Guest
Award Program, where such costs and expenses are not deducted as either
departmental expenses under paragraph 2 above or as Chain Services under
paragraph 8 above;
10. Insurance costs and expenses as provided in Section 12.04 B;
11. Taxes, if any, payable by or assessed against Management
Company related to this Agreement or to Management Company's operation of the
Hotel (exclusive of Management Company's income taxes or franchise taxes) and
all Impositions assessed against the Hotel;
12. Amounts which are transferred into the FF&E Reserve in
accordance with the provisions of Section 8.02;
13. Lease payments pursuant to leases of Telephones and
Miscellaneous Equipment;
14. The reimbursement to Owner of the amount of any Owner
Deductions; and
15. Such other costs and expenses incurred by Management Company
or its Affiliates (not including the costs and expenses of providing the Central
Office Services) as are specifically provided for elsewhere in this Agreement or
are otherwise reasonably necessary for the proper and efficient operation of the
Hotel (including, without limitation, the costs and expenses of all functions
described in Section 2.03, to the extent such costs and expenses are not already
treated as Deductions elsewhere in this definition of Operating Profit, unless,
and to the extent that, any such costs and expenses are specifically stated not
to be Deductions under any provision of this Agreement).
The term "Deductions" shall not include (i) debt service payments
pursuant to any Secured Loan, nor (ii) Ground Lease Rental or rental payments
pursuant to any ground lease of
<PAGE>
the Site, nor (iii) any expenditures which are included within the definition of
"Owner's Initial Cost"; all of which shall be paid by Owner from its own funds,
and not from Gross Revenues nor from the FF&E Reserve. In no event shall the
costs or expenses of providing the Central Office Services be treated as
Deductions, or otherwise be reimbursed out of Gross Revenues; it being the
intent of the parties that all such costs and expenses are to be paid by
Management Company (or its Affiliates) from its own funds.
"Owner" shall have the meaning set forth in the Preamble. Subject to
-----
compliance with Articles XVIII and XIX of this Agreement, the term "Owner" shall
include all successors and assigns of the entity identified as the "Owner" in
the Preamble.
"Owner Deductions" shall mean amounts paid by Owner with respect to:
----------------
(i) premiums for the insurance policies described in Section 12.05; (ii)
reasonable costs of any negotiations or Litigation with respect to any contest
of Impositions, as described in Section 13.01 A; (iii) fees and expenses of
technical consultants and operational experts which are retained by Owner, with
the approval of Management Company, to give advice with respect to the operation
of the Hotel; and (iv) any expenditures by Owner under clauses (i), (iii) or
(iv) of Section 5.02 D which are made prior to one hundred eighty (180) days
after the Opening Date; provided, however, that expenditures by Owner which have
been included within the definition of "Owner's Initial Cost" shall not be
treated as Owner Deductions. The amount of any Owner Deductions paid by Owner
shall be reimbursed to Owner (as a Deduction) in the Fiscal Year in which they
were paid.
"Owner's Distribution" shall mean, with respect to each Fiscal Year or
--------------------
portion thereof during the Term, Operating Profit less any Incentive Management
Fee due to Management Company.
"Owner's Initial Cost" shall mean the dollar amount set forth on
--------------------
Exhibit "A-1" hereto which amount shall include: (i) the purchase price paid by
Owner for the Hotel; (ii) Owner's initial contribution to Working Capital
pursuant to Section 7.01 A; (iii) Pre-Opening Expenses; (iv) Transaction Costs
relating to the purchase by Owner of the Hotel(which shall be subject to post-
closing adjustments to reflect actual costs incurred provided that such
adjustments are made no later than ninety (90) days after the Opening Date); and
(v) such other amounts as are requested by Management Company to bring the Hotel
up to Marriott Standards.
"Owner's Investment" shall mean the sum total, as of any given point
------------------
in time during the Term, of: (i) the Owner's Initial Cost; plus (ii) any
Additional Invested Capital expended by Owner; provided that each expenditure of
Additional Invested Capital shall be added to the Owner's Investment (with
respect to the Fiscal Year or Fiscal Years during which such expenditure(s)
occurred) on a pro rata basis, beginning with the first full Accounting Period
after such expenditures occurred, and thereafter over the remainder of the
current Fiscal Year.
"Owner's Priority" shall mean, with respect to each Fiscal Year
----------------
(prorated for any partial Fiscal Years) during the Term of this Agreement, a
dollar amount equal to ten and seventy-five
<PAGE>
hundredths percent (10.75%) of the Owner's Investment for that Fiscal Year. If
the Hotel has an Existing Ground Lease, the annual rental for such Fiscal Year
pursuant to such Existing Ground Lease shall be added to the Owner's Priority
(provided that such annual rental shall not include any payments made to the
Ground Lessor which are in excess of the rent owed to the Ground Lessor for the
use of the land comprising the Site).
"Performance Termination Threshold" shall mean, with respect to each
---------------------------------
full Fiscal Year during the Term of this Agreement, a dollar amount equal to
eight percent (8%) of Owner's Investment.
"Post-Foreclosure Decision Date" shall have the meaning set forth in
------------------------------
Section 6.06.
"Pre-Opening Activities" shall mean the following activities which
----------------------
shall be performed by Management Company prior to (or immediately after) the
Opening Date; (1) recruiting, training and employing the staff required for the
Hotel; (2) negotiating concession contracts (if any); (3) undertaking pre-
opening promotion and advertising, including opening celebrations; (4) testing
the operations of the Hotel; (5) providing, for a period to end not later than
sixty (60) days after the Opening Date, a task force of experts and personnel to
supervise and assist with certain pre-opening and opening operations; (6)
assisting Owner in applying for the Licenses (including transfers of Licenses
from Prior Manager to Management Company), where required for the operation of
the Hotel as contemplated by this Agreement; (7) in general, rendering such
other miscellaneous services incidental to the preparation and organization of
the Hotel's operations as may be required for the Hotel to be adequately staffed
and capable of operating on the Opening Date and thereafter.
"Pre-Opening Expenses" shall mean the expenses relating to Pre-Opening
--------------------
activities, which shall include, but not be limited to, salaries and wages
(including those of personnel of Management Company and its Affiliates), costs
of interim office space, professional fees, telephone expenses, staff hiring and
training costs, travel and moving expenses, costs of opening celebrations,
advertising and promotion expense, and miscellaneous expenses.
"Prime Rate" shall mean the "prime rate" as published in the "Money
----------
Rates" section of The Wall Street Journal; however, if such rate is, at any
--- ---- ------ -------
time during the Term, no longer so published, the term "Prime Rate" shall mean
the average of the prime interest rates which are announced, from time to time,
by the three (3) largest banks (by assets) headquartered in the United States
which publish a "prime rate."
"Prior Franchisor" shall mean the franchising company (if any) under
----------------
whose trademark and/or trade name the Hotel was operated immediately prior to
the Opening Date.
"Prior Manager" shall mean the management company (if any) which
-------------
managed the Hotel, on behalf of Prior Owner, immediately prior to the Opening
Date.
"Prior Owner" shall have the meaning set forth in the Recitals.
-----------
<PAGE>
"Proprietary Marks" shall mean all trademarks, trade names, symbols,
-----------------
logos, slogans, designs, insignia, emblems, devices, service marks and
distinctive designs of buildings and signs, or combinations thereof, which are
used to identify hotels in the Marriott Hotel System. The term "Proprietary
Marks" shall also include all trade names, trademarks, symbols, logos, designs,
etc. which are used in connection with the operation of the Hotel during the
Term (such as, without limitation, the names of the restaurants and lounges).
The term "Proprietary Marks" shall include all present and future Proprietary
Marks, whether they are now or hereafter owned by Management Company or one of
its Affiliates, and whether or not they are registered under the laws of the
United States or any other country. The names "Marriott", "Marriott Hotels" and
"Marriott Resorts", and any of the foregoing used in conjunction with other
words or names, are examples of Proprietary Marks. Notwithstanding the
foregoing, those trade names, trademarks, symbols, logos, designs, etc., which
are specifically set forth on Exhibit "F" hereto shall be deemed to be
"Proprietary Marks" only for so long as this Agreement is in effect, and such
Proprietary Marks shall revert to the exclusive control of Owner as of the date
of Termination.
"Proprietary Signage" shall mean any signage used in connection with
-------------------
the Hotel (including both interior and exterior signage, and including
billboards and other signage not located on the Site) which contains one or more
Proprietary Marks; any signage which contains the word "Marriott" shall
automatically be deemed to be Proprietary Signage.
"Prospectus" shall have the meaning set forth in Section 20.05.
----------
"Qualified Lender" shall mean any Holder, from time to time, of any
----------------
Qualified Loan with respect to which Management Company has received a written
notice (pursuant to Section 20.09 of this Agreement) stating: (i) the name and
address of such Holder; and (ii) that such Holder is a "Qualified Lender"
pursuant to the terms of this Agreement.
"Qualified Loan" shall mean any Secured Loan in which the initial
--------------
principal amount, as of the date such Secured Loan is incurred, when added to
the current principal balance of all existing Secured Loans as of that date, is
less than or equal to the greater of the following:
(i) Seventy percent (70%) of Owner's Investment; or
(ii) the result obtained by (a) dividing the Operating Profit for the
thirteen (13) most recent full Accounting Periods by the Coverage
Ratio; then, (b) multiplying the result of clause (a) by the
Capitalization Multiple; or
(iii) the existing balance of any Secured Loans encumbering the Hotel
immediately prior to the date of the incurrence of such Qualified
Loan, plus commercially reasonable Transaction Costs associated with
such refinancing up to an amount equal to four percent (4%) of the
principal amount of such Qualified Loan.
In addition, regardless of whether or not the above test set forth in clauses
(i), (ii) and (iii) is
<PAGE>
satisfied, (a) the existing (as of the Effective Date) balance of any Secured
Loan which is secured by an Existing Mortgage shall be deemed to be a "Qualified
Loan"; and (b) any Secured Loan which is secured by a Mortgage and with respect
to which Management Company, in it sole discretion, shall have given its written
approval shall be deemed to be a "Qualified Loan" (provided that an approval by
Management Company that a given Secured Loan shall be deemed to be a Qualified
Loan hereunder shall only apply to the specific hotel or hotels which are
described in such approval, and shall not be deemed to be an approval with
respect to other hotels, regardless of whether such Secured Loan by its terms
permits the substitution or addition of such other hotels as security for such
Secured Loan).
"Renewal Term" shall have the meaning set forth in Section 4.01 A.
------------
"Required Capital Expenditures" shall have the meaning set forth in
-----------------------------
Section 8.03 A.
"Restricted Area" shall mean that area which is described in the
---------------
narrative which is set forth in Exhibit "D" and which is shown on the map
attached hereto as Exhibit "D-1"; if there are conflicts between the narrative
description in Exhibit "D" and the map shown on Exhibit "D-1", the narrative
description shall govern.
"Restricted Hotel" shall mean any hotel whose size, facilities and
----------------
market positioning are such that, if such hotel had been operated by Management
Company or one of its Affiliates as of the Effective Date, it would have been
operated as a member of the Marriott Hotel System (that is, as a "full-service"
hotel, as opposed to one of the limited service brands also operated by
Affiliates of Marriott). The term "Restricted Hotel" shall not include any one
or more of the following: (i) any existing (as of the Effective Date) member of
the Marriott Hotel System which is within the Restricted Area; (ii) any
Courtyard by Marriott (or other similar moderate-price lodging product) or any
Residence Inn by Marriott (or other similar extended-stay lodging product) or
any Fairfield Inn (or other similar economy-price lodging product); (iii) any
hotel or hotels which are members of a chain of hotels (provided that such chain
has a minimum of four (4) or more hotels in operation), all or substantially all
(but in no event less than four (4) hotels) of which is acquired by, or merged
with, or franchised by or joined through marketing agreement with, Management
Company or one of its Affiliates (or the operation of which is transferred to
Management Company or one of its Affiliates); (iv) any hotel or hotels which are
members of a group of hotels which is (in a single transaction with a single
seller or transferor) acquired by, or merged with, or franchised by or joined
through marketing agreement with, Management Company or one of its Affiliates
(or the operation of which is transferred to Management Company or one of its
Affiliates), provided that such group of hotels contains no fewer than four (4)
hotels; (v) any future lodging product developed by Management Company or one of
its Affiliates which is not a lodging product which would have been included
within the Marriott Hotel System, as such system existed as of the Effective
Date; or (vi) any existing non-Marriott hotel within the Restricted Area which
is specifically designated on Exhibit "D" as not being a Restricted Hotel.
<PAGE>
"Revenue Data Publication" shall mean Smith's STAR Report, a monthly
------------------------
publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee,
or an alternative source, reasonably satisfactory to both parties, of data
regarding the Revenue Per Room of hotels in the general trade area of the Hotel.
The "competitive set" for the Hotel shall be determined (with periodic
adjustments) by Management Company, subject to Owner's approval (such approval
not to be unreasonably withheld). If such Smith's STAR Report is discontinued in
the future, or ceases (in the reasonable opinion of either Owner or Management
Company) to be a satisfactory source of data regarding the Revenue Per Room of
various hotels in the general trade area of the Hotel, Management Company shall
select an alternative source, subject to Owner's approval (such approval not to
be unreasonably withheld). If the parties fail to agree on either such
competitive set or such alternative source, as the case may be, within a
reasonable period of time, the matter shall be resolved by arbitration pursuant
to Section 20.13.
"Revenue Index" shall mean that fraction which is equal to (a) the
-------------
Revenue Per Room for the Hotel, divided by (b) the average Revenue Per Room for
the hotels in the Hotel's competitive set (including the Hotel), as set forth in
the Revenue Data Publication. Appropriate adjustments shall be made in the event
of a major renovation of the Hotel.
"Revenue Index Threshold" shall mean the fraction equal to ninety-five
-----------------------
(95) divided by one hundred (100), or .95 as a decimal. However, if the entry of
a new hotel into the Hotel's competitive set (or the removal of a hotel from
such competitive set) causes significant variations in the Revenue Index which
do not reflect the Hotel's true position in the relevant market, appropriate
adjustments shall be made to the Revenue Index Threshold by mutual consent of
Owner and Management Company (neither such consent to be unreasonably withheld).
"Revenue Per Room" shall mean (i) the term "revenue per room" as
----------------
defined by the Revenue Data Publication; or (ii) if the Revenue Data Publication
is no longer being used (as more particularly set forth in the definition of
"Revenue Data Publication"), the aggregate gross room revenues of the hotel in
question for a given period of time divided by the total room nights for such
period. If clause (ii) of the preceding sentence is being used, a "room" shall
be a hotel guestroom which is keyed as a single unit, and shall include rooms
which are temporarily unavailable due to (i) maintenance, or (ii) ongoing
renovation work.
"ROI Capital Expenditures" shall mean such Capital Expenditures as are
------------------------
required, in Management Company's reasonable judgment, to keep the Hotel in a
competitive, efficient and economical operating condition (which Management
Company shall substantiate by demonstrating a reasonable return on the proposed
investment to be made by Owner), in accordance with the Marriott Standards;
provided that the term "ROI Capital Expenditures" shall in no event include
expenditures which are within the definition of Required Capital Expenditures.
"Sale of the Hotel" shall mean any sale, assignment, transfer or other
-----------------
disposition, for value or otherwise, voluntary or involuntary, of Owner's title
to the Hotel or the Site (either fee or
<PAGE>
leasehold title, as the case may be), but shall not include a collateral
assignment intended to provide security for a loan. For purposes of this
Agreement, a "Sale of the Hotel" shall also include a lease (or sublease) of the
entire Hotel or Site. The phrase "Sale of the Hotel" shall also include any
sale, transfer, or other disposition, for value or otherwise, in a single
transaction or a series of related transactions, of the controlling interest in
Owner. If Owner is a corporation, the phrase "controlling interest" shall mean
the right to exercise, directly or indirectly, fifty percent (50%) or more of
the voting rights attributable to the shares of Owner (through ownership of such
shares or by contract). If Owner is not a corporation, the phrase "controlling
interest" shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of Owner.
Notwithstanding the foregoing, the term "Sale of the Hotel" shall not include
any sale, assignment, transfer or other disposition of the Hotel or the Site by
Owner to an Affiliate of Owner.
"Sale/leaseback Transaction" shall have the meaning set forth in
--------------------------
Section 6.09.
"Second Notice" shall have the meaning set forth in Section 6.02.
-------------
"Secured Loan" shall mean and include (a) any indebtedness secured by
------------
a Mortgage encumbering the Hotel or all or any part of Owner's interest therein;
and (b) all amendments, modifications, supplements and extensions of any such
Mortgage.
"Secured Loan Acceleration" shall mean the acceleration of the
-------------------------
indebtedness incurred pursuant to any Secured Loan, as a result of a default
under the terms and conditions of such Secured Loan.
"Seller" shall have the meaning set forth in Section 6.09.
-----
"Settlement Threshold Amount" shall mean the greater of (i) One
---------------------------
Hundred Thousand Dollars ($100,000) (as adjusted by the GDP Deflator); or (ii) a
dollar amount (to be re-determined whenever reasonably necessary) equal to the
highest amount paid in a representative sampling of Employee Claims which have
been settled within the preceding twelve (12) months, where each of such
settlements can be reasonably characterized as being (i) within the normal
course of business at the Hotel, and (ii) within the range of similar
settlements at other hotels comparable to the Hotel. Any dispute between the
parties as to the appropriate amount under clause (ii) of the preceding sentence
shall be submitted to arbitration under Section 20.13.
"Site" shall mean the parcel or parcels of land described in Exhibit
----
"A" attached hereto.
"Soft Goods" shall mean all fabric, textile and flexible plastic
----------
products (not including items which are classified as "Fixed Asset Supplies"
under the Uniform System of Accounts) which are used in furnishing the Hotel,
including, without limitation: carpeting, drapes, bedspreads, wall and floor
coverings, mats, shower curtains and similar items.
<PAGE>
"Software" shall mean all computer software and accompanying
--------
documentation (including all future upgrades, enhancements, additions,
substitutions and modifications thereof), other than computer software which is
commercially available, which are used by Management Company in connection with
the property management system, the reservation system and all future electronic
systems developed by Management Company for use in the Hotel.
"Subsequent Owner" shall mean any individual or entity which acquires
----------------
title to or possession of the Hotel at or through a Foreclosure.
"Telephones and Miscellaneous Equipment" shall mean the following
--------------------------------------
equipment used in the Hotel and all ancillary equipment: (i) telephones; (ii)
miscellaneous office equipment such as copiers, postage meters, etc.; (iii)
television sets; and (iv) audio-visual equipment.
"Term" shall mean the Initial Term plus all Renewal Terms.
----
"Termination" shall mean the expiration or sooner cessation of this
-----------
Agreement.
"Transaction Costs" shall mean, with respect to either (x) the
-----------------
incurring of any Secured Loan, or (y) the computation of Owner's Initial Cost,
as the case may be, all normal transaction costs (to the extent actually
incurred) including, without limitation, the following: state and local transfer
taxes; escrow fees; recording costs; Mortgage recording taxes; costs of any
survey; reasonable fees of the Holder's outside attorneys and accountants;
appraisal fees; title insurance premiums; financing costs (including "points");
reasonable attorneys' fees of Owner in connection with such Secured Loan or
Owner's Initial Cost, as the case may be; environmental inspection, testing and
reporting fees; and brokerage commissions (provided that no such brokerage
commissions shall be recognized as "Transaction Costs" hereunder if they are
made to a person or entity affiliated with Owner, to the extent (if any) that
such payments exceed the normal customary amounts).
"Uniform System of Accounts" shall mean the Uniform System of Accounts
--------------------------
for Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association
of New York City, Inc.
"Working Capital" shall mean assets which are used in the day-to-day
---------------
operation of the Hotel's business, including, without limitation, amounts kept
in petty cash funds, amounts deposited in operating bank accounts, receivables,
prepaid expenses and funds expended to purchase Inventories, less accounts
payable and accrued current liabilities.
END OF ARTICLE I
<PAGE>
ARTICLE II
APPOINTMENT OF MANAGEMENT COMPANY
---------------------------------
2.01 Appointment
-----------
Owner hereby appoints and employs Management Company as Owner's
exclusive agent to supervise, direct and control the management and operation of
the Hotel for the Term provided in Article IV. Management Company accepts said
appointment and agrees to manage the Hotel during the Term of this Agreement in
accordance with the terms and conditions hereinafter set forth. The performance
of all activities by Management Company hereunder shall be for the account of
Owner.
2.02 Delegation of Authority
-----------------------
Except as otherwise specifically set forth in this Agreement, Hotel
operations shall be under the exclusive supervision and control of Management
Company which, except as otherwise specifically provided in this Agreement,
shall be responsible for the proper and efficient operation of the Hotel.
Management Company shall have discretion and control, free from interference,
interruption or disturbance, but in all respects subject to the provisions of
this Agreement, in all matters relating to management and operation of the
Hotel, including, without limitation, the following: charges for rooms and
commercial space; credit policies; food and beverage services; employment
policies; granting of leases, licenses and concessions for shops and agencies
within the Hotel (provided that the term of any such lease, license or
concession shall not exceed the Term of this Agreement; and provided further
that Owner's consent shall be required prior to the execution by Management
Company of any such lease, license or concession which (i) has a term of more
than five (5) years, or (ii) involves more than one thousand (1,000) square feet
of space within the Hotel); receipt, holding and disbursement of funds;
maintenance of bank accounts; procurement of Inventories, supplies and services;
promotion and publicity; and, generally, all activities necessary for operation
of the Hotel.
2.03 Operational Standards
---------------------
In accordance with the Marriott Standards and the other terms of this
Agreement, Management Company shall, in connection with the Hotel, perform each
of the following functions (provided that in all cases, except as otherwise
specifically set forth in this Agreement, the costs and expenses of performing
such functions shall be Deductions):
A. Cooperate with Owner with respect to Owner's efforts to obtain the
initial Licenses necessary to commence operating the Hotel as of the Opening
Date; thereafter, Management Company shall obtain and keep in full force and
effect, either in its own name on behalf of Owner or in Owner's name, as may be
required by the Legal Requirements, any and all Licenses necessary for the
operation of the Hotel, to the extent the same is within the control of
Management Company (or, if same is not within the control of Management Company,
<PAGE>
Management Company shall use all due diligence and reasonable efforts to obtain
and keep same in full force and effect).
B. Recruit, employ, supervise, direct and (when appropriate)
discharge all of the employees at the Hotel.
C. Establish and revise, as necessary, administrative policies and
procedures, including policies and procedures for the control of revenue and
expenditures, for the purchasing of supplies and services, for the control of
credit, and for the scheduling of maintenance, and verify that the foregoing
procedures are operating in a sound manner.
D. Plan, execute, and supervise repairs and maintenance at the Hotel.
E. Procure (as agent for Owner) all Fixed Asset Supplies and
Inventories.
F. Maintain the Operating Accounts.
G. Prepare and deliver Accounting Period Statements, Annual Operating
Statements, Annual Operating Budgets, Building Estimates, FF&E Estimates, and
such other budgets and reports as are required by this Agreement.
H. Establish prices, rates and charges for services provided in the
Hotel, including room rates.
I. As agent for Owner, negotiate and enter into leases, concessions
and licenses for shops and other facilities within the Hotel; provided, however,
that notwithstanding any provision in this Agreement to the contrary, Management
Company shall not enter into any leases, licenses or concessions for shops or
other facilities or agencies at the Hotel for any "non-hotel use" (which shall
be defined as any use which is not ultimately for the benefit of the hotel
guest; permitting third parties to install cellular telephone and/or other
telecommunications antennas at the Hotel (other than to service Hotel equipment)
or entering into any lease, license or concession relating to conducting time-
share activities are examples of "non-hotel uses") without the prior written
consent of Owner, which consent may be withheld in Owner's sole discretion.
J. Administer the leases, concessions and licenses for shops and
other facilities within the Hotel (whether entered into pursuant to subsection
I, above, or otherwise).
K. Provide the Central Office Services and the
Chain Services.
L. Provide, or cause to be provided, risk management services
relating to the types of insurance required to be obtained or provided by
Management Company under this Agreement, provided that the costs and expenses of
providing such services are to be paid as described in Section 12.04 B.
<PAGE>
M. Reasonably cooperate with Owner concerning (i) disputes with any
Holder regarding the Hotel, (ii) contests of Impositions and Legal Requirements,
and (iii) adjustments of insurance claims and condemnation awards involving the
Hotel.
N. Reasonably cooperate (provided that Management Company shall not,
except as otherwise specifically set forth in Section 6.01, be obligated to
enter into any amendments of this Agreement) with Owner in any attempt(s) by
Owner to effectuate a Sale of the Hotel (provided that nothing herein shall
affect the provisions of Section 20.05), or to obtain any Secured Loan. Such
cooperation shall include, without limitation: (i) answering any reasonable
questions by prospective purchasers and Holders; (ii) preparing lists and
schedules of leases, concessions, FF&E, Fixed Asset Supplies, Inventories, and
similar items; and (iii) making such certifications and representations to
Owner, to such purchasers and to such Holders, regarding the Hotel and the
operation thereof, as Owner may reasonably request (taking into account the
extent of Management Company's control and responsibility provided for
hereunder). Owner shall promptly reimburse Management Company, from its own
funds and not as a Deduction, for the reasonable costs and expenses incurred by
Management Company in connection with any actions necessary to comply with the
requirements of this Section 2.03 N, provided that such actions are not
otherwise required under other provisions of this Agreement.
O. Arrange for and supervise public relations and advertising, and
prepare annual marketing plans.
P. Endeavor to manage the timing of expenditures to replenish
Inventories, Fixed Asset Supplies, payments on accounts payable and collections
of accounts receivable, so as to avoid or minimize any cash deficits with
respect to Hotel operations, which deficits would otherwise require additional
funding of Working Capital by Owner.
Q. Comply with all provisions in the Existing Ground Lease and in any
Existing Mortgages which are by their terms applicable to the operation of the
Hotel; provided, however, that all practices and procedures used by Management
Company in the operation of the Hotel as of the Effective Date shall be deemed
to be in compliance with the Existing Ground Lease and all Existing Mortgages;
but provided further, that if either the Ground Lessor or any Holder under an
Existing Mortgage shall, from time to time, notify Management Company that it
has determined that certain practices and procedures which are used by
Management Company in the operation of the Hotel are not in compliance with the
provisions of the Existing Ground Lease or such Existing Mortgage (as the case
may be), Management Company shall promptly alter such practices and procedures
to ensure such compliance; and provided further, that if such compliance would
require work by Management Company which is beyond the normal course of Hotel
operations, or would impose additional financial burdens on the Hotel which are
beyond the normal course of Hotel operations, Owner (from its own funds, not as
a Deduction) shall compensate Management Company for such work and such
additional burdens.
<PAGE>
2.04 Limitations on Authority
------------------------
Notwithstanding anything in Section 2.02 or elsewhere in this
Agreement to the contrary (unless otherwise stated in this Section 2.04), and in
addition to the various other provisions of this Agreement which prohibit
Management Company from taking certain actions or which allow certain actions
only if Owner's consent thereto has been obtained, Management Company shall not,
without the prior written approval of Owner, which approval Owner may withhold
in its sole discretion, perform any of the following actions in connection with
the Hotel and on behalf of or burdening Owner:
1. Acquiring any land or interest therein;
2. Acquiring any capital assets or interest therein except (i)
items in the approved Building Estimate, and (ii) FF&E, Fixed Asset Supplies and
Inventories (to the extent the same constitute capital assets) in the ordinary
course of business as expressly provided for in this Agreement;
3. Financing, refinancing or mortgaging of any portion of the
Hotel or the revenue due to Owner therefrom;
4. Selling (other than dispositions of FF&E, Fixed Asset
Supplies and Inventories in the ordinary course of business as expressly
provided for in this Agreement), leasing (other than as expressly provided for
in this Agreement), or other transferring of, or the pledging or placing of any
lien or encumbrance on, any part of the Hotel;
5. In the event of a total or partial condemnation, consenting
to any award or participating in any condemnation proceeding, except as
expressly provided for in this Agreement;
6. Entering into, modifying or terminating any lease, concession
or license, except to the extent permitted under Section 2.02;
7. Adjusting any claim or settling any Litigation which (a) is
not covered by any of the insurance policies described in Article XII and is not
an Employee Claim, and which would result in a Deduction or payment in excess of
Five Hundred Thousand Dollars ($500,000) in any Fiscal Year, as adjusted by the
GDP Deflator, or (b) would impose on Owner any material liability or obligation
other than the payment of money, or would require Owner to make any material
admission; or
8. Adjusting any claim, under the applicable property insurance
policies, regarding injury or damage to the Hotel or its contents, where the
estimated cost of restoration is in excess of One Million Dollars ($1,000,000),
as adjusted by the GDP Deflator.
2.05 Covenants, Conditions or Restrictions
-------------------------------------
A. As of the Effective Date, there are existing covenants,
conditions, restrictions and/or agreements, including reciprocal easements or
cost-sharing arrangements (all of the foregoing types of encumbrances on the
Hotel, or agreements relating to the Hotel, whether existing as of the Effective
Date or not, shall be collectively referred to as "CC&R's"; those CC&R's which
are in existence as of the Effective Date, and which are referenced in the title
insurance policy, a copy
<PAGE>
of which is attached hereto as Exhibit "G", shall be referred to in this
Agreement as "Existing CC&R's"). Management Company hereby gives its consent to
all Existing CC&R's. All costs, expenses and charges which are imposed on the
Hotel under the Existing CC&R's shall be paid from Gross Revenues as Deductions;
provided, however, that any such costs, expenses or changes which are treated
under generally-accepted accounting principles as "capital expenditures" (for
example, building a common roadway) shall be treated as expenditures under
Section 8.03 for purposes of this Agreement.
B. CC&R's which are entered into, or become encumbrances on the Hotel
and/or the Site, after the Effective Date shall be referred to in this Agreement
as "Future CC&R's." Owner agrees that it will give Management Company written
notice of its intention to execute any Future CC&R's, such notice to be
reasonably in advance of the execution thereof. Owner covenants that, during the
Term of this Agreement, there will not be (unless Management Company has given
its prior written consent thereto) any Future CC&R's affecting the Site or the
Hotel: (i) which purport to impose any material financial obligations on the
Hotel; (ii) which would prohibit or limit Management Company from operating the
Hotel, including cocktail lounges, restaurants and other facilities customarily
a part of or related to a first-class hotel, in accordance with the Marriott
Standards; or (iii) which would allow Hotel facilities (for example, parking
spaces) to be used by persons other than guests, invitees or employees of the
Hotel.
C. All financial obligations imposed on Owner or on Management
Company or on the Hotel pursuant to any Future CC&R's shall be paid by Owner
from its own funds, and not from Gross Revenues or from the FF&E Reserve, unless
Management Company has given its prior written consent to such Future CC&R's.
Management Company agrees that it will not unreasonably withhold its consent to
any such Future CC&R's; provided, however, that Management Company shall be
entitled to withhold its consent in its discretion if a proposed Future CC&R
would have a material impact on the operation of the Hotel, as described in
clauses (i), (ii) or (iii) of Section 2.05 B.
2.06 Licenses and Permits
--------------------
Owner agrees that, upon request by Management Company, it will sign
promptly and without charge applications for Licenses necessary for operation of
the Hotel.
END OF ARTICLE II
<PAGE>
ARTICLE III
HOTEL
-----
3.01 Ownership of Hotel
------------------
A. Owner hereby represents that: (i) it has no reason to believe
that title to the Site and the Hotel is other than as set forth in the title
policy, a copy of which is attached as Exhibit "G" hereto; and (ii) that it has
purchased title insurance with regard to such title, as described in said
Exhibit "G". If, notwithstanding the foregoing, the title to the Site and/or the
Hotel is other than as set forth in Exhibit "G", and, as a result, this
Agreement is terminated prior to the tenth (10th) anniversary of the Opening
Date, Owner shall (as of the date of such Termination) pay Management Company a
termination fee equal to twice the amount of the Base Management Fees and
Incentive Management Fees payable to Management Company with respect to the most
recent full Fiscal Year. Owner hereby covenants that, throughout the Term of
this Agreement, it will not change the status of title to the Site from that
which is in existence as of the Effective Date (as described on Exhibit "G"
hereto), except that Owner shall have the right either (i) to effectuate a Sale
of the Hotel in accordance with Article XIX, or (ii) to encumber the Site and
the Hotel with the following:
1. Mortgages which are given to secure any one or more
Qualified Loans;
2. Liens for Impositions or other public charges not yet due
or which are being contested in good faith; and
3. Easements or other encumbrances (not including those
described in subsection 1 or 2 above) which do not adversely affect the
operation of the Hotel by Management Company and which are not prohibited
pursuant to Section 2.05 B of this Agreement.
END OF ARTICLE III
<PAGE>
ARTICLE IV
TERM
----
4.01 Term
----
A. The initial term ("Initial Term") of this Agreement shall commence with
the Effective Date and, unless sooner terminated as herein provided, shall
continue until the expiration of the twentieth (20th) full Fiscal Year after the
Effective Date. The Term shall thereafter be automatically renewed for one
period of eleven (11) full Fiscal Years ("Renewal Term"), unless either: (i)
Management Company, at its option, notifies Owner, in accordance with Section
20.09, at any time within the period of eighteen (18) months prior to the
expiration of the Initial Term of its intention not to renew; or (ii) Management
Company has committed an Event of Default, and has been notified by Owner of
such Event of Default, under Article XVI of this Agreement, as of the date of
such renewal; or (iii) the average annual Operating Profit, computed with
respect to the most recent three (3) full Fiscal Years prior to the date of such
renewal, does not equal or exceed the Extension Threshold calculated for the
same period of time.
B. If Management Company so notifies Owner of its intention not to renew
pursuant to Section 4.01 A, Management Company shall continue to manage the
Hotel pursuant to this Agreement until the termination date set forth in such
notice, provided that such termination date shall be: (i) no less than twelve
(12) months after the date of such notice, and (ii) in no event earlier than the
expiration date of the Initial Term. Such termination date may be after the
expiration of the Initial Term, provided that the requirements of the preceding
sentence are satisfied. However, if Management Company has so notified Owner of
its intention not to renew, Owner may, at its option, by written notice to
Management Company at least ninety (90) days prior to the date on which Owner
desires Termination to occur, reduce the period of time prior to Termination to
any shorter period of time which Owner desires, provided that such shorter
period of time shall be at least the greater of: (a) ninety (90) days (beginning
as of the date of such notice from Owner), or (b) the minimum period (the
"Minimum Period") of time which Management Company reasonably decides is
prudent, given the requirements of the applicable Employment Laws regarding
employee discharges. If the Term of this Agreement is not renewed pursuant to
clause (iii) of Section 4.01 A (as opposed to clause (i) or (ii) thereof), the
Term shall be automatically extended for the Minimum Period (despite such non-
renewal). In no event shall the fact that Management Company may, pursuant to
either of the two (2) preceding sentences, be managing the Hotel after the
expiration of the Initial Term be construed as an election by Management Company
to renew the Term, if Management Company has elected (in accordance with this
Section 4.01) not to so renew.
C. If Owner has the right, under the provisions of the Existing Ground
Lease, to elect to renew or extend the term of the Existing Ground Lease, Owner
shall so notify Management Company at least one hundred eighty (180) days (but
no more than one (1) year) prior to the expiration of the period within which
Owner is obligated to notify the Ground Lessor of its election to renew or
extend the term of the Existing Ground Lease. Such notice from Owner shall
<PAGE>
contain all of the relevant facts about the impending election to renew or
extend, including the length of the period of renewal or extension. Unless
Management Company notifies Owner, within a period of ninety (90) days after
receipt of the foregoing notice from Owner, that Management Company disapproves
the renewal or extension of the term of the Existing Ground Lease, Owner will,
by proper notice to the Ground Lessor, within the applicable time period under
the Existing Ground Lease, elect to renew or extend the term of the Existing
Ground Lease.
D. If, after proper notice from Owner in accordance with Section 4.01 C,
Management Company fails to disapprove the renewal or extension of the term of
the Existing Ground Lease, the Term of this Agreement shall be deemed to be
automatically extended to the later of: (i) the expiration of the term of the
Existing Ground Lease, as renewed or extended in accordance with Section 4.01 C;
or (ii) the date on which the Term of this Agreement would otherwise have
expired absent this sentence. If, in order to comply with the preceding
sentence, it is necessary for Management Company to waive its option not to
renew with respect to one or more Renewal Terms, such waiver shall be deemed to
have been given; however, Management Company shall retain the right not to renew
(as more particularly described in Section 4.01 A) as to any portion of such
Renewal Term which would occur after the expiration of the term of the Existing
Ground Lease, as renewed or extended in accordance with Section 4.01 C.
E. If, after proper notice from Owner in accordance with Section 4.01 C,
Management Company disapproves the renewal or extension of the term of the
Existing Ground Lease, the Term of this Agreement shall be deemed to be
automatically reduced to the earlier of: (i) the expiration of the term of the
Existing Ground Lease; or (ii) the date on which the Term of this Agreement
would otherwise have expired absent this sentence.
4.02 Actions to be Taken Upon Termination
------------------------------------
Upon a Termination of this Agreement, the following shall be applicable:
A. Management Company shall, within sixty (60) days after Termination of
this Agreement, prepare and deliver to Owner a final accounting statement with
respect to the Hotel, as more particularly described in Section 9.01 hereof,
along with a statement of any sums due from Owner to Management Company pursuant
hereto, dated as of the date of Termination. Within thirty (30) days after the
receipt by Owner of such final accounting statement, the parties will make
whatever cash adjustments are necessary pursuant to such final statement. The
cost of preparing such final accounting statement shall be a Deduction, unless
the Termination occurs as a result of an Event of Default by either party, in
which case the defaulting party shall pay such cost. Management Company and
Owner acknowledge that there may be certain adjustments for which the necessary
information will not be available at the time of such final accounting, and the
parties agree to readjust such amounts and make the necessary cash adjustments
when such information becomes available; provided, however, that (unless there
are ongoing disputes of which each party has received notice) all accounts shall
be deemed final as of one hundred eighty (180) days after such Termination.
<PAGE>
B. As of the date of the final accounting referred to in subsection A
above, Management Company shall release and transfer to Owner any of Owner's
funds which are held or controlled by Management Company with respect to the
Hotel, with the exception of funds to be held in escrow pursuant to Section
12.04 and Section 14.01 F. During the period between the date of Termination and
the date of such final accounting, Management Company shall pay (or reserve
against) all Deductions which accrued (but were not paid) prior to the date of
Termination, using for such purpose any Gross Revenues which accrued prior to
the date of Termination.
C. Management Company shall make available to Owner such books and records
respecting the Hotel (including those from prior years, subject to Management
Company's reasonable records retention policies) as will be needed by Owner to
prepare the accounting statements, in accordance with the Uniform System of
Accounts, for the Hotel for the year in which the Termination occurs and for any
subsequent year. Such books and records shall not include: (i) employee records
which must remain confidential either under Legal Requirements or under
reasonable chain-wide corporate policies of Management Company; or (ii) any
Intellectual Property.
D. Management Company shall (to the extent permitted by Legal
Requirements) assign to Owner, or to any other manager employed by Owner to
operate and manage the Hotel, all operating Licenses for the Hotel which have
been issued in Management Company's name; provided that if Management Company
has expended any of its own funds in the acquisition of any of such Licenses,
Owner shall reimburse Management Company therefor if it has not done so already.
E. All Proprietary Signage shall be removed by Management Company from the
Hotel and from the Site (and from any locations other than the Site). The cost
of such removal shall be a Deduction, unless the Termination occurs either: (i)
as a result of an Event of Default by either party, in which case the defaulting
party shall pay the cost of such removal from its own funds, and not as a
Deduction; or (ii) as a result of Management Company's election not to renew the
Term, as of the expiration of either the Initial Term or any Renewal Term (as
the case may be), in which case Management Company shall pay the cost of such
removal from its own funds, and not as a Deduction.
F. Various other actions shall be taken, as described in this Agreement,
including, but not limited to, the actions described in Sections 7.01, 10.02,
10.03, 10.04, 12.04 B, and 14.01 F.
G. Management Company shall cooperate with the new operator of the Hotel
as to effect a smooth transition and shall peacefully vacate and surrender the
Hotel to Owner.
The provisions of this Section 4.02 shall survive any Termination.
<PAGE>
4.03 Performance Termination
-----------------------
A. Subject to the provisions of Section 4.03 B below, Owner shall have the
option to terminate this Agreement if:
1. With respect to any two (2) consecutive Fiscal Years (not
including any period of time prior to the third (3rd) anniversary of the
Effective Date), Operating Profit, less the amount of Ground Lease Rental, for
each of such two (2) Fiscal Years is less than the Performance Termination
Threshold; and
2. The Revenue Index of the Hotel during each of such two (2)
consecutive Fiscal Years is less than the Revenue Index Threshold (provided,
however, that if Management Company elects under Section 4.03 B to avoid
Termination by making a Cure Payment, this subclause (2) of Section 4.03 A shall
be deemed to be deleted from this Agreement with respect to any subsequent
election by Owner to terminate this Agreement pursuant to Section 4.03 A); and
3. The fact that the Hotel is not meeting the test set forth in
Section 4.03 A(1) is not the result of either (x) Force Majeure or (y) any major
renovation of the Hotel.
Such option to terminate shall be exercised by serving written notice thereof on
Management Company no later than sixty (60) days after the receipt by Owner of
the annual accounting under Section 9.01 hereof for the second (2nd) of the two
(2) Fiscal Years referred to in Section 4.03 A(1). If Management Company does
not elect to avoid such Termination pursuant to Section 4.03 B below, this
Agreement shall terminate as of the end of the fourth (4th) full Accounting
Period following the date on which Management Company receives Owner's written
notice of its intent to terminate this Agreement; provided that such period of
time shall be extended as required by applicable Legal Requirements pertaining
to the termination of the employment of the employees at the Hotel. Owner's
failure to exercise its right to terminate this Agreement pursuant to Section
4.03 A with respect to any given Fiscal Year shall not be deemed an estoppel or
waiver of Owner's right to terminate this Agreement with respect to subsequent
Fiscal Years to which this Section 4.03 A may apply.
B. Upon receipt of a written notice of Termination sent by Owner to
Management Company pursuant to Section 4.03 A, Management Company shall have the
option, subject to Section 4.03 C below, to be exercised by written notice (the
"Cure Notice") to Owner within sixty (60) days after receipt of said notice from
Owner, to avoid such Termination by making a Cure Payment (as defined below).
The term "Cure Payment" shall mean: (i) with respect to the first (1st) occasion
on which Owner elects to terminate this Agreement pursuant to Section 4.03A,
either of the following two (2) choices (whichever Management Company shall
elect): (x) the payment to Owner of the aggregate amount, with respect to each
of the two (2) consecutive Fiscal Years described in Section 4.03 A (1), by
which Operating Profit was less than the Performance Termination Threshold; or
(y) the waiver by Management Company of receipt of the Base Management Fees
during the Cure Period (as defined below); and (ii) with respect to the second
(2nd) occasion on which Owner elects to terminate this Agreement pursuant to
Section 4.03A, the
<PAGE>
waiver by Management Company of receipt of the Base Management Fees during the
Cure Period. The term "Cure Period" shall mean the period of two (2) consecutive
calendar years, beginning with the first full Accounting Period after the date
of the Cure Notice. In the event Management Company elects to avoid such
Termination pursuant to this Section 4.03 B, the two consecutive Fiscal Years
referred to in Section 4.03 A(1) with respect to which such election was made
shall thereafter not be treated, for purposes of subsequent elections by Owner
pursuant to Section 4.03 A, as Fiscal Years in which the circumstances described
in Section 4.03 A(1) have occurred. If Management Company exercises such option
to make a Cure Payment, then (i) the foregoing Owner's election to terminate
this Agreement under Section 4.03 A shall be canceled and of no force or effect
and this Agreement shall not terminate. In the event Management Company elects
to waive the Base Management Fee for the Cure Period, then Owner shall not be
entitled to send any subsequent written notice of Termination pursuant to
Section 4.03 until the expiration of the Cure Period. Management Company's
election to avoid a Termination (pursuant to this Section 4.03 B) shall not
affect the right of Owner, as to each subsequent Fiscal Year to which Section
4.03 A applies, to again elect to terminate this Agreement, pursuant to the
provisions of Section 4.03 A (provided that, in the case of an election by
Management Company to waive receipt of the Base Management Fee during the Cure
Period, such election by Owner to terminate shall be made only after the
expiration of the Cure Period). If Management Company does not exercise its
option to make a Cure Payment pursuant to this Section 4.03 B, then this
Agreement shall be terminated as of the date set forth in Section 4.03 A. An
election by Management Company to avoid a Termination pursuant to this Section
4.03 B shall only operate to cancel Owner's election to terminate this Agreement
under Section 4.03 A, and shall not operate to cure any outstanding Defaults by
Management Company under Article XVI.
C. Management Company shall be entitled to avoid Termination by exercise
of its rights pursuant to Section 4.03 B on only two (2) occasions during the
Term of this Agreement. In the event of a subsequent election by Owner to
terminate this Agreement pursuant to Section 4.03 A, after the expiration of the
Cure Period which follows the second (2nd) exercise by Management Company of its
right to avoid Termination pursuant to Section 4.03 B, Management Company shall
not again be entitled to avoid Termination under Section 4.03 B.
END OF ARTICLE IV
<PAGE>
ARTICLE V
COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS
-------------------------------------------------
5.01 Management Fees
---------------
In consideration of services to be performed during the Term of this
Agreement, Management Company shall retain the Management Fees.
5.02 Accounting and Interim Payments
-------------------------------
A. On or before the twentieth (20th) day after the close of each
Accounting Period, Management Company shall deliver to Owner a reasonably
detailed accounting statement (the "Accounting Period Statement") in
substantially the form set forth in Exhibit "B" hereto. Upon Owner's written
request therefor, Management Company shall forward copies of any such Accounting
Period Statement to any Holders or Ground Lessors, at the addresses specified by
Owner. Such Accounting Period Statement shall set forth the results of the
operations (by department) of the Hotel for the preceding Accounting Period and
for the Fiscal Year-to-date, all in accordance with generally accepted
accounting principles applied on a consistent basis. Each Accounting Period
Statement shall be accompanied by a statement, by either the controller of the
Hotel or Management Company's regional controller, that, to the best of his or
her knowledge and belief, and subject to routine year-end audit and adjustment,
such Accounting Period Statement is true and correct in all material respects.
Each Accounting Period Statement shall include: (i) calculations of Gross
Revenues, Deductions, Operating Profit, the Management Fees; and (ii)
comparisons with the applicable Annual Operating Budget. With each such
Accounting Period Statement, Management Company shall transfer any interim
Owner's Distribution due to Owner, and shall retain any interim Management Fees
due to Management Company.
B. Calculations and payments of the Management Fees and the Owner's
Distribution with respect to each Accounting Period within a Fiscal Year shall
be accounted for cumulatively. Within seventy-five (75) days after the close of
each Fiscal Year, Management Company shall submit an Annual Operating Statement,
as more fully described in Section 9.01, for such Fiscal Year to Owner, which
Annual Operating Statement shall be controlling over the interim Accounting
Period Statements. Any adjustments or payments required by any such Annual
Operating Statement shall be made promptly by the parties. Operating Losses
shall not be carried forward or backward to subsequent or prior Fiscal Years.
C. For purposes of calculating the Management Fees for any given Fiscal
Year, Operating Profit shall not include adjustments for either refunds or
additional payments of Impositions relating to any prior Fiscal Years. In the
event such refunds or additional payments occur, the Operating Profit with
respect to the prior Fiscal Years in which such Impositions accrued shall be
recalculated to show such refund or additional payment; if the Management Fees
with respect to such prior Fiscal Years are either increased or decreased as a
result of such recalculation of Operating Profit, the party which owes money to
the other party shall promptly pay the amount owed.
<PAGE>
D. All liabilities which accrued (or which stem from events which
occurred) prior to the Opening Date shall (as between Owner and Management
Company) be paid, or caused to be paid, by Owner (not from Gross Revenues nor
from the FF&E Reserve) and shall not be treated as Deductions. Owner shall
indemnify, defend and hold harmless Management Company (and its officers,
directors, employees and agents) against claims or demands relating to such
liabilities. Such liabilities shall include, without limitation, the following:
(i) payables which accrued prior to the Opening Date, or which are allocated to
the period prior to the Opening Date under generally-accepted accounting
principles; (ii) outstanding litigation as of the Opening Date (including
litigation commenced after the Opening Date which stems from events prior to the
Opening Date); (iii) claims relating to the termination of service contracts,
equipment leases or space leases entered into by Prior Owner (or one of its
agents), where Management Company has notified Owner prior to the Effective Date
that such service contract, equipment lease or space lease will not be a part of
the operation of the Hotel after the Opening Date; (iv) employment-related
claims (including, without limitation, accrued vacation, sick leave and other
benefits) stemming from periods of time prior to the Opening Date; such claims
shall include claims relating to wrongful termination, severance pay or
compliance with Legal Requirements regarding termination of employees (such as
the WARN Act), where such claims stem from the termination of any employee by
Prior Owner (or one of its agents); (v) costs relating to both remediation and
payment of fines, etc., stemming from any violation of any Legal Requirement
(including building codes or local fire codes) prior to the Opening Date
(including on-going violations which are in existence as of the Opening Date);
and (vi) any claims made by Prior Manager or Prior Franchisor involving the
termination of their contracts with the Prior Owner with respect to the Hotel,
or the operation of the Hotel pursuant to such contracts; and (vii) any
expenditures which are included within the definition of "Owner Investment".
With respect to clause (iv) above, if Owner assumes responsibility for the
payment after the Opening Date of deferred compensation which is owed with
respect to work performed prior to the Opening Date, and if such work has
created a direct benefit to the operation of the Hotel after the Opening Date
(e.g., commissions owed to sales staff for bookings after the Opening Date), the
payment of such deferred compensation as a Deduction shall be permitted if
treatment as a Deduction is in accordance with generally-accepted accounting
principles.
END OF ARTICLE V
<PAGE>
ARTICLE VI
FINANCING OF THE HOTEL
----------------------
6.01 Amendments of Management Agreement
----------------------------------
A. If requested by any Qualified Lender or prospective Qualified Lender,
Management Company agrees to execute and deliver any amendment of this Agreement
which is reasonably required by such Qualified Lender or prospective Qualified
Lender, provided that Management Company shall be under no obligation to amend
this Agreement if the result of such amendment would be: (i) to reduce, defer or
delay the amount of any payment to be made to Management Company hereunder; (ii)
to materially increase Management Company's obligations under this Agreement;
(iii) to change the Term of this Agreement; (iv) to cause the Hotel to be
operated other than pursuant to the Marriott Standards; (v) to amend materially
either Section 8.02 or Section 14.01; or (vi) to otherwise materially affect
Management Company's rights under this Agreement. Any such amendment shall take
effect as of the funding of such Qualified Loan.
B. In addition to the provisions of Section 6.01 A, if a Qualified Lender
or prospective Qualified Lender requests that Management Company enter into an
amendment of this Agreement, and if such amendment would impose additional
duties (for example, an increase in the reporting requirements or in the record-
keeping requirements, or adding the obligation to prepare parallel accounting
statements using a different fiscal year) on Management Company or would
otherwise adversely affect Management Company's rights under this Agreement, but
not to the degree described in clauses (i) through (vi) of Section 6.01 A,
Management Company hereby agrees that it will execute and deliver such requested
amendment of this Agreement, provided that Owner compensates Management Company
for the additional burden imposed by such amendment. It is understood that the
word "burden", as used in the preceding sentence, shall encompass not only
additional work to be performed by Management Company, but also the adverse
effect on the Incentive Management Fee which would be caused by requiring
increased services by third parties. Any dispute as to whether Management
Company is entitled to any compensation pursuant to this Section 6.01 B, or as
to the amount of such compensation, shall be resolved by arbitration pursuant to
Section 20.13.
C. Proposed amendments to this Agreement which are requested by any
Qualified Lender or prospective Qualified Lender, and which would affect the
insurance provisions set forth in Article XII, shall be governed exclusively by
Article XII.
6.02 Notice and Opportunity to Cure
------------------------------
A. In the event of (i) a Default by Owner in the performance or observance
of any of the terms and conditions of this Agreement, or (ii) any other
occurrence which entitles Management Company to terminate this Agreement, and in
the event that Management Company gives written notice thereof to Owner pursuant
to Article XVI of this Agreement, Management Company shall also give a duplicate
copy (herein referred to as the "First Notice") of such notice to each
<PAGE>
Qualified Lender, at the address previously provided to Management Company. Any
such notice will be sent in the manner described in Section 20.09 hereof. In
addition, in the event that such Default is not cured within the applicable cure
period under Article XVI of this Agreement, and Management Company intends to
exercise its remedy of terminating this Agreement, Management Company shall send
a second notice (the "Second Notice") to each Qualified Lender, to the same
address and in the same manner applicable to the First Notice, stating
Management Company's intention to terminate this Agreement. Management Company
shall forbear from taking any action to terminate this Agreement for a period of
thirty (30) days after the service of the First Notice, and for an additional
period of thirty (30) days after the service of the Second Notice (if such
Second Notice is required, as set forth above).
B. In the event of a Default by Owner under the provisions of this
Agreement, Management Company agrees to accept performance by any Qualified
Lender with the same force and effect as if same were performed by Owner, in
accordance with the provisions and within the cure periods prescribed in this
Agreement (except that each Qualified Lender shall have such additional cure
periods, not available to Owner, as are set forth in this Section 6.02).
C. No notice given by Management Company to Owner shall be effective as a
notice under Article XVI of this Agreement unless the applicable duplicate
notice to each Qualified Lender which is required under Section 6.02 A (either
the First Notice or the Second Notice, as the case may be) has been given. It is
understood that any failure by Management Company to give such a duplicate
notice (either the First Notice or the Second Notice, as the case may be) to any
Qualified Lender shall not itself be a Default by Management Company under this
Agreement, but rather shall operate only to void the effectiveness of any such
notice by Management Company to Owner under Article XVI of this Agreement.
D. Except as specifically limited by this Section 6.02, nothing herein
shall preclude Management Company from exercising any of its rights or remedies
against Owner with respect to any Default by Owner under this Agreement.
6.03 Assignment of Management Agreement
----------------------------------
Owner shall have the right to collaterally assign to any Qualified Lender,
as additional security for the indebtedness evidenced by a Qualified Loan, all
of Owner's right, title and interest in and to this Agreement, including the
right to distributions payable to Owner pursuant to Article V thereof. If,
pursuant to any such assignment (or subsequent loan documentation entered into
between Owner and a Qualified Lender with a similar purpose), and provided that
Management Company has previously received a copy of such assignment and such
subsequent documentation, Management Company may receive (from time to time) a
notice or notices from such Qualified Lender directing Management Company to pay
to such Qualified Lender subsequent distributions under Article V of this
Agreement which would otherwise be payable to Owner, Management Company shall
comply with any such notice. Management Company shall continue to make payments
in compliance with any such notice from such Qualified Lender until Management
<PAGE>
Company receives written instructions to the contrary from such Qualified
Lender. Owner hereby gives its consent to any such payments by Management
Company to such Qualified Lender which are in compliance with any such notice.
The foregoing consent by Owner shall be deemed to be irrevocable until the
entire Qualified Loan has been discharged, as evidenced either by the
recordation of a satisfaction or release executed by such Qualified Lender, or
by the delivery of a written statement to that effect from such Qualified Lender
to Management Company. Management Company shall comply with the direction set
forth in any such notice without any necessity to investigate why such Qualified
Lender sent such notice, or to confirm whether or not Owner is in fact in
default under the terms of such Qualified Loan. If Management Company receives
such notices from more than one Qualified Lender, Management Company shall (at
its option) either (i) comply with the provisions of the notice sent by the
Qualified Lender whose Qualified Loan has the senior lien priority, or (ii)
institute Litigation for a declaratory judgment to determine to whom payments
under this Agreement shall be made (in which case, the costs and expenses of
such Litigation, including attorneys' fees, shall be Deductions).
6.04 Subordination of Management Agreement
-------------------------------------
A. This Agreement, and Management Company's right to continue to manage
and operate the Hotel pursuant to this Agreement, are and shall be subject and
subordinate to the lien of any Qualified Loan (i.e., upon a Foreclosure of any
such Qualified Loan, such Qualified Lender, at its option, unless it has
otherwise agreed to the contrary in a Non-Disturbance Agreement, shall have the
right to terminate this Agreement). Notwithstanding the foregoing, during the
Term of this Agreement, all debt service (including increased or accelerated
payments after a default) payable with respect to any Qualified Loan shall be
paid exclusively from Owner's Distribution.
B. Section 6.04 A is intended to be, and is, fully effective and binding,
as between Management Company and any such Qualified Lender; however, Management
Company agrees to execute such confirmatory documentation (in recordable form in
the jurisdiction in which the Hotel is located) as such Qualified Lender shall
reasonably request.
C. Notwithstanding the possible termination of this Agreement which is set
forth in the foregoing provisions of this Section 6.04, it is understood that,
until such time as this Agreement is validly terminated either (i) pursuant to
the applicable provision of this Agreement, or (ii) pursuant to a court order in
connection with the Foreclosure of a Qualified Loan (assuming that such
termination does not breach any binding Non-Disturbance Agreement), the Holder
of each Qualified Loan will honor and recognize the right of Management Company
to operate the Hotel in accordance with this Agreement (including the right of
Management Company to collect all Gross Revenues and to make expenditures in
accordance with this Agreement).
6.05 Non-Disturbance Agreement
-------------------------
A. Owner agrees that, in connection with the obtaining by Owner of any
Secured Loan or Secured Loans, from time to time, Owner will use good faith
reasonable efforts to obtain a
<PAGE>
Non-Disturbance Agreement from each Holder or Holders. The phrase "good faith
reasonable efforts" shall be determined by reference to the following: (i)
normal loan underwriting procedures and practices (including those practices
relating to non-disturbance agreements) which are generally being implemented by
entities which are making loans similar to such Secured Loan, as of that point
in time; and (ii) the concessions which Management Company is, as of that point
in time, reasonably prepared to make in order to satisfy the objectives of
lenders in connection with the lender-manager relationship after a Foreclosure.
In no event, however, shall the failure of Owner to obtain such a Non-
Disturbance Agreement affect or modify any of the responsibilities of Management
Company toward Qualified Lenders which are contained elsewhere in this Article
VI.
B. Notwithstanding Section 6.05 A, Owner agrees that, prior to obtaining
any Qualified Loan, it will obtain from each prospective Holder or Holders
thereof a Non-Disturbance Agreement pursuant to which Management Company's
rights under this Agreement will not be disturbed as a result of a loan default
stemming from non-monetary factors which (i) relate to Owner and do not relate
solely to the Hotel, and (ii) are not Defaults by Management Company under
Article XVI of this Agreement. If Owner desires to obtain a Qualified Loan,
Management Company, on written request from Owner, shall promptly identify those
provisions in the proposed loan documents which fall within the categories
described in clauses (i) and (ii) above, and Management Company shall otherwise
assist in expediting the preparation of an agreement between the prospective
Holder and Management Company which will implement the provisions of this
Section 6.05 B.
6.06 Attornment
----------
A. Management Company agrees that, subject to the provisions of Section
6.06 B, upon a Foreclosure of any Qualified Loan, provided that this Agreement
has not expired or otherwise been earlier terminated in accordance with its
terms, Management Company shall attorn to any Subsequent Owner and shall remain
bound by all of the terms, covenants and conditions of this Agreement for the
balance of the remaining Term (including any Renewal Terms) with the same force
and effect as if such Subsequent Owner were the "Owner" under this Agreement;
provided, however, that Management Company shall be under no such obligation to
so attorn, and, to the contrary, shall thereupon have the right to terminate
this Agreement on thirty (30) days' prior written notice to both Owner and such
Subsequent Owner: (i) if such Subsequent Owner would not qualify as a permitted
transferee under Section 19.01 A of this Agreement; or (ii) unless such
Subsequent Owner, within twenty (20) days after the Foreclosure Date (or, in the
event such Subsequent Owner acquires title to the Hotel after the Foreclosure
Date, within twenty (20) days after the date of such acquisition of title to the
Hotel), assumes all of the obligations of the "Owner" under this Agreement which
arise from and after the Foreclosure Date (or such later date of acquisition of
title to the Hotel), pursuant to a written assumption agreement which shall be
delivered to Management Company. Upon the written request of any Qualified
Lender, Management Company shall periodically execute and deliver a statement,
in a form reasonably satisfactory to such Qualified Lender, reaffirming
Management Company's obligation to attorn as
<PAGE>
set forth in this Section 6.06 A.
B. It is understood by the parties that, in view of the fact that a
Qualified Lender will have the right to terminate this Agreement on a
Foreclosure under the provisions of Section 6.04, Management Company has an
interest in being informed, within a reasonable period of time after a Secured
Loan Acceleration, of whether or not such Qualified Lender intends to exercise
such right of termination. Accordingly, if, by no later than that date (the
"Post-Foreclosure Decision Date") which is ninety (90) days after the date of
any Secured Loan Acceleration, Management Company has not received a Non-
Disturbance Agreement executed by the Holder of such Secured Loan, Management
Company shall, as of the Post-Foreclosure Decision Date and thereafter, no
longer be under any obligation to attorn (pursuant to the provisions of Section
6.06 A) with respect to any Foreclosure of that Secured Loan, and Management
Company shall have the option to terminate this Agreement, by written notice to
both Owner and the Holder of each existing Qualified Loan, at any time within
the sixty (60) day period immediately following the Post-Foreclosure Decision
Date.
6.07 No Modification or Termination of Agreement
-------------------------------------------
If the documents evidencing and securing a Qualified Loan require the
consent of the Qualified Lender to any amendment or modification of this
Agreement which materially affects such Qualified Lender, no such amendment or
modification of this Agreement shall be binding or effective unless such
Qualified Lender shall have consented in writing thereto.
6.08 Owner's Right to Finance the Hotel
----------------------------------
Owner shall have the right, from time to time, without Management Company's
prior consent or approval, to obtain Qualified Loans, and to encumber the Hotel
with Mortgages securing such Qualified Loans. Owner shall not, without the
prior consent of Management Company, have the right to obtain Secured Loans
which are not Qualified Loans.
6.09 Sale/Leaseback Transactions
---------------------------
Any single transaction or related series of transactions in which (i)
Owner's interest in the Hotel is sold or transferred by the then Owner
("Seller") to a buyer ("Buyer"), and (ii) the Buyer (as "landlord") leases the
Hotel to the Seller (as "tenant"), is hereby defined as a "Sale/leaseback
Transaction". With respect to each Sale/leaseback Transaction during the Term of
this Agreement, the following provisions will apply: (a) the sale or transfer of
the Hotel will be considered a Sale of the Hotel; however, the Seller (as tenant
under the aforesaid lease), not the Buyer, shall thereafter be treated as the
"Owner" for purposes of this Agreement; (b) the purchase price will not be a
Secured Loan, but any mortgage financing placed (either at the time of the
transaction or later) on the Buyer's interest in the Hotel will be treated as a
Secured Loan, and the proceeds of each such Secured Loan will be aggregated with
all outstanding Secured Loans, which encumber either the Buyer's interest in the
Hotel or the Seller's leasehold interest in the
<PAGE>
Hotel, for purposes of determining whether a given Secured Loan qualifies as a
Qualified Loan; (c) payments pursuant to such lease shall not be treated as
Deductions, except for Impositions and similar items which would have been
treated as Deductions in the absence of such Sale/leaseback Transaction; and (d)
all subsequent sales, transfers or assignments of either Buyer's interest in the
Hotel or Seller's interest in the Hotel will be treated as Sales of the Hotel.
Owner will not enter into any Sale/leaseback Transaction unless Management
Company and the proposed Buyer have previously executed a mutually satisfactory
attornment agreement pursuant to which, as of the date of the termination of
Seller's leasehold interest, the provisions of this Agreement will (unless there
has been an Event of Default or other event entitling either party to terminate
this Agreement) be binding both on Management Company and on Buyer (as the
successor "Owner"); such attornment agreement will also contain an immediately-
effective provision which will incorporate the terms of Section 6.08 of this
Agreement, binding both on Management Company and on Buyer.
END OF ARTICLE VI
<PAGE>
ARTICLE VII
WORKING CAPITAL AND FIXED ASSET SUPPLIES
----------------------------------------
7.01 Working Capital
---------------
A. At or prior to the Opening Date, Owner shall provide Management Company
with the initial Working Capital for the Hotel in the amount set forth on
Exhibit "A-1". Owner shall have the right to satisfy all or a portion of the
obligation described in the preceding sentence through Owner's purchase of the
working capital (including receivables) of the Hotel from Prior Owner. The fair
market value (as reasonably determined by Management Company) of all Inventories
which are delivered into Management Company's control as of the Opening Date
shall be credited against Owner's obligation set forth in the preceding
sentence.
B. Owner shall, from time to time thereafter during the Term of this
Agreement, provide Management Company, within thirty (30) days after Owner's
receipt of written request therefor by Management Company, with the funds
necessary to maintain Working Capital at levels determined by Management Company
to be reasonably necessary to operate the Hotel in accordance with the Marriott
Standards. Any such request by Management Company shall be accompanied by a
detailed explanation of the reasons for the request. If Owner fails to respond
to any such request within thirty (30) days after Owner's receipt thereof,
Management Company shall be entitled, at its option, without affecting other
remedies which may be available pursuant to Article XVI, to lend Owner the
necessary additional Working Capital from Management Company's own funds, which
loan will bear interest at the Interest Rate (compounded annually), and will be
secured by a security interest (subordinated to any Qualified Loan) encumbering
all Working Capital previously or thereafter provided by either Owner or
Management Company, and will be repaid in accordance with such terms and
conditions as Management Company shall at that time reasonably determine.
C. Management Company will manage the Working Capital of the Hotel
prudently and in accordance with the Marriott Standards. Management Company
shall review and analyze the Working Capital needs of the Hotel on an annual
basis. If Management Company reasonably determines that there is excess Working
Capital, such excess shall be returned to Owner.
D. Working Capital provided by Owner pursuant to this Section 7.01 shall
remain the property of Owner throughout the Term of this Agreement. Upon
Termination, Owner shall retain any of its unused Working Capital, except for
Inventories purchased by Management Company pursuant to Section 10.02.
7.02 Fixed Asset Supplies
--------------------
At or prior to the Opening Date, Owner shall provide the Hotel with the
Fixed Asset Supplies which are necessary to operate the Hotel in accordance with
the Marriott Standards. Owner shall, from time to time thereafter during the
Term of this Agreement, provide
<PAGE>
Management Company, within thirty (30) days after Owner's receipt of written
request therefor by Management Company, with any additional funds necessary to
maintain Fixed Asset Supplies at levels determined by Management Company to be
necessary to operate the Hotel in accordance with the Marriott Standards. Fixed
Asset Supplies shall remain the property of Owner throughout the Term of this
Agreement, except for Fixed Asset Supplies purchased by Management Company
pursuant to Section 10.02.
END OF ARTICLE VII
<PAGE>
ARTICLE VIII
REPAIRS, MAINTENANCE AND REPLACEMENTS
-------------------------------------
8.01 Routine Repairs and Maintenance
-------------------------------
A. From and after the Opening Date, Management Company shall maintain the
Hotel in good repair and condition, and in conformity with applicable Legal
Requirements and the Marriott Standards, and shall make or cause to be made such
routine and preventative maintenance, repairs and minor alterations, the cost of
which can be expensed under generally accepted accounting principles, as it,
from time to time, deems reasonably necessary for such purposes. The cost of
such maintenance, repairs and alterations shall be paid from Gross Revenues and
shall be treated as a Deduction in determining Operating Profit.
B. Management Company shall (pursuant to a schedule which shall be subject
to the reasonable approval of both Owner and Management Company) arrange for and
coordinate routine and other appropriate inspections of the structure and
exterior facade of the Hotel, and of the mechanical, electrical, heating,
ventilating, air conditioning, plumbing, and vertical transportation elements of
the Hotel. The costs of such inspections shall be treated as Deductions.
C. Management Company shall submit to Owner (at the same time as the
submission of the Annual Operating Projection) a signed copy of an annual report
summarizing all preventative maintenance activities (including repairs,
alterations and inspections conducted at the Hotel) on all building components
of the Hotel during the previous twelve (12) calendar months.
8.02 FF&E Reserve
------------
A. Management Company shall establish a reserve account (the "FF&E
Reserve") in a bank designated by Management Company (and approved by Owner,
such approval not to be unreasonably withheld) to cover the cost of:
1. Replacements and renewals to the Hotel's FF&E and
2. Certain routine Capital Expenditures such as exterior and
interior repainting, resurfacing building walls, floors, roofs and parking
areas, and replacing folding walls and the like .
Management Company agrees that it will, from time to time, execute such
reasonable documentation as may be requested by any Qualified Lender to assist
such Qualified Lender in establishing or perfecting its security interest in the
funds which are in the FF&E Reserve; provided, however, that no such
documentation shall contain any amendment or modification of any of the
provisions of this Agreement, including this Section 8.02.
B. During the period of time from the Opening Date through the Termination
of this Agreement, subject to the provisions of Sections 8.02 E, Management
Company shall transfer (as
<PAGE>
of the end of each Accounting Period) into the FF&E Reserve an amount equal to
the applicable percentages of Gross Revenues which are set forth on Exhibit A-1
hereto. All such amounts transferred into the FF&E Reserve after the Opening
Date shall be paid from Gross Revenues and shall constitute Deductions in
determining Operating Profit.
C. Each year, at the same time as Management Company submits the Annual
Operating Budget described in Section 9.03, Management Company shall prepare an
estimate (the "FF&E Estimate") of the expenditures necessary for (i)
replacements and renewals to the Hotel's FF&E, and (ii) repairs to the Hotel
building of the nature described in Section 8.02 A 2, during the ensuing Fiscal
Year, and shall submit such FF&E Estimate to Owner for its review. Management
Company shall also, if Owner so elects, prepare tentative forecasts of such
expenditures with regard to the four (4) subsequent Fiscal Years. Management
Company will at all times give good faith consideration to Owner's suggestions
regarding any FF&E Estimate. In the event that Owner requests forecasts covering
the aforesaid subsequent Fiscal Years, and such forecasts project a deficit in
the FF&E Reserve at some point during the current Fiscal Year or during such
four (4) subsequent Fiscal Years, Owner and Management Company will work
together in good faith to prepare alternative forecasts for such Fiscal Years
which will reduce or eliminate such deficit, but also take into account the
needs of the Hotel during such periods of time. All expenditures from the FF&E
Reserve will be (as to both the amount of each such expenditure and the timing
thereof) both reasonable and necessary, given the objective that the Hotel will
be maintained and operated in accordance with the Marriott Standards.
D. Management Company shall from time to time make such (1) replacements
and renewals to the Hotel's FF&E, and (2) repairs to the Hotel building of the
nature described in Section 8.02 A 2, as it deems necessary, provided that
Management Company shall not expend more than the balance in the FF&E Reserve
without the prior approval of Owner. Management Company will endeavor to follow
the applicable FF&E Estimate, but shall be entitled to depart therefrom, in its
reasonable discretion, provided that: (A) such departures from the applicable
FF&E Estimate result from circumstances which could not reasonably have been
foreseen at the time of the submission of such FF&E Estimate; and (B) such
departures from the applicable FF&E Estimate result from circumstances which
require prompt repair and/or replacement; and (C) Management Company has
submitted to Owner a revised FF&E Estimate setting forth and explaining such
departures. At the end of each Fiscal Year, any amounts remaining in the FF&E
Reserve shall be retained in the FF&E Reserve, and shall be carried forward to
the next Fiscal Year. Upon a Sale of the Hotel, funds in the FF&E Reserve will
not be affected (or, if withdrawn, will be replaced as set forth in Section
19.01 D), and all dispositions of such funds (both before and after such Sale of
the Hotel) will continue to be made exclusively pursuant to the provisions of
this Agreement. Proceeds from the sale of FF&E no longer necessary to the
operation of the Hotel shall be deposited in the FF&E Reserve, as shall any
interest which accrues on amounts placed in the FF&E Reserve. Neither (i)
proceeds from the disposition of FF&E, nor (ii) interest which accrues on
amounts held in the FF&E Reserve, shall either (x) result in any reduction in
the required contributions to the FF&E Reserve set forth in subsection B above,
or (y) be included in
<PAGE>
Gross Revenues. The only items of FF&E which Management Company is authorized to
lease (rather than purchase) shall be (a) Telephones and Miscellaneous
Equipment; and (b) shuttle vans. If Management Company enters into a lease
described in the preceding sentence, Management Company shall give Owner notice
of such lease either prior to or promptly after entering into such lease. Lease
payments with respect to Telephones and Miscellaneous Equipment shall be
Deductions, as set forth in paragraph 13 of the definition of "Operating Profit"
in Section 1.01; lease payments with respect to shuttle vans shall be paid from
the FF&E Reserve. If Management Company proposes that items of FF&E other than
Telephones and Miscellaneous Equipment or shuttle vans should be leased rather
than purchased, Management Company shall submit such proposal (which proposal
shall include, without limitation, an indication as to whether the rental which
is owed under such lease will be treated as a Deduction or paid from the FF&E
Reserve) to Owner for Owner's approval (not to be unreasonably withheld). In
connection with the foregoing, it is understood that the failure of a Qualified
Lender to approve such leasing proposal shall justify Owner in withholding its
approval thereof, regardless of whether withholding such approval would
otherwise be deemed to be unreasonable.
E. The percentage contribution for the FF&E Reserve which is described in
Section 8.02 B is an estimate based upon Management Company's prior experience
with other comparable hotels. As the Hotel ages, this percentage may not be
sufficient to keep the FF&E Reserve at the levels necessary to make the
replacements and renewals to the Hotel's FF&E, or to make the repairs to the
Hotel building of the nature described in Section 8.02 A 2, which are required
to maintain the Hotel in accordance with the Marriott Standards. If any FF&E
Estimate which is prepared in accordance with Section 8.02 C would require
funding in excess of the applicable percentage of Gross Revenues which is set
forth on Exhibit A-1, Owner may either:
1. Agree to increase the percentages of Gross Revenues set forth
in Section 8.02 B up to the level set forth in such FF&E Estimate, in order to
provide the additional funds required, such increases to be treated as
Deductions under paragraph 12 of the definition of "Operating Profit", or
2. Make a lump-sum contribution to the FF&E Reserve in the
necessary amount (in which case such lump-sum contribution plus interest (at the
Prime Rate plus one percentage point (1%) per annum), shall be reimbursed to
Owner from Gross Revenues in equal installments over the period of the next five
(5) calendar years beginning as of the date of such contribution, and such
installment repayments shall be Deductions).
If Owner elects not to agree to either option 1 or option 2 above (or Owner
does not respond with respect to either option) within thirty (30) days after
the submission of such FF&E Estimate (or, if Owner has elected option 2, if
Owner fails to fund the required amount within a sixty (60) day period after the
date of such election), Management Company shall be entitled, at its option, to
terminate this Agreement upon ninety (90) days' written notice to Owner (with a
copy to each Qualified Lender); however, such failure by Owner shall not be
deemed a Default by Owner under Article XVI, and Management Company shall not be
entitled to any remedies with respect to such failure other than such
termination of this Agreement. If Management Company
<PAGE>
so elects to terminate this Agreement, it shall notify Owner of such election
within the sixty (60) day period following either: (x) the date of receipt of
Owner's election not to agree to either option 1 or option 2 above, or the
expiration of the aforesaid thirty (30) day period without Owner making an
election with respect to either option; or (y) if Owner has elected option 2,
the date of the expiration of the aforesaid sixty (60) day period without Owner
funding the required amount.
8.03 Building Alterations, Improvements, Renewals, and Replacements
--------------------------------------------------------------
A. Management Company shall prepare an annual estimate (the "Building
Estimate") of the expenditures necessary for major repairs, alterations,
improvements, renewals and replacements to the structure or exterior facade of
the Hotel, or to the mechanical, electrical, heating, ventilating, air
conditioning, plumbing, or vertical transportation elements of the Hotel
building (the foregoing expenditures, together with all other repair and
maintenance expenditures which are classified as capital expenditures under
generally-accepted accounting principles, shall be collectively referred to as
"Capital Expenditures"). Management Company shall submit each such Building
Estimate to Owner for its approval at the same time the Annual Operating Budget
is submitted. Except with respect to the items described in Section 8.02 A (2),
Management Company shall not make any Capital Expenditures without the prior
written consent of Owner. Owner shall not unreasonably withhold its consent with
respect to Capital Expenditures which are required by reason of any Legal
Requirement, or required under Management Company's current life-safety
standards (provided that, in order for any such life-safety standards to be
"required" within the meaning of this Section 8.03 A, such standards must be
both required and in the process of being implemented at a majority of the
hotels within the Marriott Hotel System which are comparable to the Hotel), or
otherwise required for the continued safety of guests or prevention of material
damage to property, including the removal of Hazardous Materials in compliance
with all Environmental Laws pursuant to Section 20.10. All Capital Expenditures
which are described in the preceding sentence shall be referred to in this
Agreement as "Required Capital Expenditures".
B. In the event of (x) an emergency threatening the Hotel, its guests,
invitees or employees, or (y) the receipt by Management Company of a
governmental order or other Legal Requirement regarding any Required Capital
Expenditures, Management Company shall give Owner notice thereof within five (5)
business days thereafter or sooner if circumstances reasonably warrant.
Management Company shall then be authorized (but not obligated) to take
appropriate remedial action without receiving Owner's prior consent as follows:
(i) in an emergency threatening the Hotel, its guests, invitees or employees; or
(ii) if the continuation of the given condition could (in Management Company's
reasonable judgment) subject Management Company and/or Owner to either criminal
or more than de minimis civil liability, and Owner has either failed to remedy
-- -------
the situation or has failed to take appropriate legal action to stay the
effectiveness of any applicable Legal Requirement. Management Company shall
cooperate with Owner in the pursuit of any such action and shall have the right
to participate therein. Owner shall reimburse Management Company for any costs
incurred by Management Company in
<PAGE>
connection with any such remedial action within thirty (30) days after Owner's
receipt of notice from Management Company of the amount of such costs.
C. The cost of all Capital Expenditures (including the expenses incurred
by either Owner or Management Company in connection with any civil or criminal
proceeding described above, but not including costs of those Capital
Expenditures which are described in Section 8.02 A(2) hereof) shall be borne
solely by Owner, and shall not be paid from Gross Revenues or from the FF&E
Reserve.
D. The failure of Owner to either (i) approve and provide funding for any
proposed Required Capital Expenditure, within seventy-five (75) days after
Management Company's request therefor, or (ii) in the case of any Legal
Requirement which is described in Section 8.03 B, to either comply therewith or
to stay the effectiveness of such Legal Requirement during the period of any
contesting thereof, shall be a Default by Owner. In such event, Management
Company shall be entitled (without affecting its other remedies under Article
XVI) to terminate this Agreement upon ninety (90) days' written notice to Owner
(with a copy to each Qualified Lender); provided, however, that Management
Company shall have the right to stipulate such shorter period of time as may be
appropriate, given the time periods which are mandated by Legal Requirements, as
described in Section 8.03 A or B, or given Management Company's good faith
concerns about its own civil and/or criminal liability.
E. Management Company shall have the right, from time to time, to set
forth in any Building Estimate the recommendations of Management Company
regarding proposed ROI Capital Expenditures. Notwithstanding the provisions of
Section 8.03 C to the contrary, the cost of all ROI Capital Expenditures shall
be paid, to the extent reasonably possible (given the requirement, set forth in
Section 8.02, that the balance in the FF&E Reserve be maintained in accordance
with the Marriott Standards) from the FF&E Reserve, and Owner shall pay such
costs from its own funds only to the extent there are not adequate funds for
such purpose in the FF&E Reserve. Expenditures which are, pursuant to the
preceding sentence, made from the FF&E Reserve shall not be treated as
Additional Invested Capital. Any failure of Owner to approve and provide funding
for any ROI Capital Expenditures, or any other Capital Expenditures (not
including those Capital Expenditures which are described in Section 8.02 A(2)
hereof) which are not Required Capital Expenditures, within sixty (60) days
after Management Company's request therefor, shall not be a Default by Owner but
shall entitle Management Company to terminate this Agreement. Such Termination
shall be evidenced by a written notice to Owner (with a copy to each Qualified
Lender), which notice shall be delivered to Owner no later than ninety (90) days
after the expiration of the sixty (60) day period described in the preceding
sentence. The effective date of such Termination shall be the date stated by
Management Company in such notice, provided that such effective date shall be no
less than one hundred eighty (180) days, and no more than three hundred sixty
(360) days, after the date of such notice.
F. It is understood that "alterations" and "improvements" which either (a)
increase or
<PAGE>
decrease the number of guestrooms in the Hotel, or (b) involve changing the
architectural footprint of the Hotel or involve other significant changes in the
structural design of the Hotel, in any case by more than a de minimis amount,
-- -------
are beyond the scope of this Article VIII, and would require an amendment of
this Agreement prior to implementation by either party.
8.04 Liens
-----
Management Company and Owner shall use their best efforts to prevent any
liens from being filed against the Hotel which arise from any maintenance,
repairs, alterations, improvements, renewals or replacements in or to the Hotel.
They shall cooperate fully in obtaining the release of any such liens, and the
cost thereof, if the lien was not occasioned by the fault of either party, shall
be treated the same as the cost of the matter to which it relates. If the lien
arises as a result of the fault of either party, then the party at fault shall
bear the cost of obtaining the lien release.
8.05 Ownership of Replacements, Etc.
-------------------------------
All repairs, alterations, improvements, renewals or replacements of the
Hotel which are made pursuant to Article VIII or otherwise shall be the property
of Owner. Subject to the provisions of Section 8.02, the funds in the FF&E
Reserve shall be the property of Owner.
END OF ARTICLE VIII
<PAGE>
ARTICLE IX
BOOKKEEPING AND BANK ACCOUNTS
-----------------------------
9.01 Books and Records
-----------------
A. Books of control and account shall be kept on the accrual basis and in
material respects in accordance with the Uniform System of Accounts, with the
exceptions provided in this Agreement. Owner may at reasonable intervals during
Management Company's normal business hours examine such records. Within seventy-
five (75) days following the close of each Fiscal Year, Management Company shall
furnish Owner a statement (the "Annual Operating Statement") in reasonable
detail summarizing the Hotel operations for such Fiscal Year and a certificate
of Management Company's chief accounting officer (or its controller or any vice-
president), certifying that such year-end Annual Operating Statement is true and
correct. Owner shall have sixty (60) days after receipt to examine or review (at
Owner's sole expense, and not as a Deduction) said Annual Operating Statement.
If Owner raises no objections within said sixty (60) day period, the Annual
Operating Statement shall be deemed to have been accepted by Owner as true and
correct, and Owner shall have no further right to question its accuracy. If
Owner does raise such an objection, by notice to Management Company, Owner shall
arrange for an independent audit to be commenced within sixty (60) days after
the date of such objection, and shall diligently cause such audit to be
completed within a reasonable period of time. Owner shall pay all costs and
expenses of such audit at its sole expense (and not as a Deduction); however, if
such audit establishes that Management Company has understated the Operating
Profit for that Fiscal Year by five percent (5%) or more, the reasonable costs
and expenses of such audit shall be paid as a Deduction.
B. Management Company shall, on an annual basis, at the time of the
delivery of the Annual Operating Statement, prepare and deliver to Owner the
Management Analysis Report. In addition, Management Company shall, in connection
with an impending Sale of the Hotel or commitment by a Qualified Lender to make
a Qualified Loan, within thirty (30) days after written request therefor from
Owner, prepare and deliver to Owner an updated Management Analysis Report
describing significant changes since the effective date of the most recent
Management Analysis Report. The costs and expenses of preparing the Management
Analysis Report shall be paid as Deductions.
C. Owner shall have the right to require that any given Annual Operating
Statement will include a reasonably detailed report setting forth the components
of Chain Services, the amounts billed for each such component during the Fiscal
Year in question and the method of allocation for each such component; provided,
however, that Owner must request Management Company to prepare such report by no
later than thirty (30) days prior to the date on which such Annual Operating
Statement is to be delivered to Owner.
9.02 Hotel Accounts, Expenditures
----------------------------
<PAGE>
A. All funds derived from operation of the Hotel shall be deposited by
Management Company in Hotel bank accounts (the "Operating Accounts") in a bank
or banks designated by Management Company and approved by Owner, which approval
shall not be unreasonably withheld. Withdrawals from said accounts shall be made
only by representatives of Management Company whose signatures have been
authorized. Reasonable petty cash funds shall be maintained at the Hotel.
B. All payments made by Management Company hereunder shall be made from
authorized bank accounts, petty cash funds, or from Working Capital provided by
Owner pursuant to Section 7.01. Management Company shall not be required to make
any advance or payment to or for the account of Owner except out of such funds,
and Management Company shall not be obligated to incur any liability or
obligation for Owner's account without assurances that necessary funds for the
discharge thereof will be provided by Owner. Debts and liabilities incurred by
Management Company as a result of its operation and management of the Hotel
pursuant to the terms hereof, whether asserted before or after the Termination
of this Agreement, will be paid by Owner to the extent funds are not available
to Management Company for that purpose from Gross Revenues.
9.03 Annual Operating Budget
-----------------------
A. Management Company shall submit to Owner for its approval (which shall
not be unreasonably withheld or delayed), at least thirty (30) days prior to the
beginning of each Fiscal Year which begins after the Effective Date, a
preliminary draft of the budget (the "Annual Operating Budget") of the estimated
financial results of the operation of the Hotel during the next Fiscal Year.
Owner's approval shall be deemed to have been given if Management Company has
received no notice from Owner to the contrary within thirty (30) days after
Owner's receipt of such preliminary draft of the Annual Operating Budget. Such
Annual Operating Budget shall project the estimated Gross Revenues, departmental
profits, Deductions, and Operating Profit for the forthcoming Fiscal Year for
the Hotel. In preparing the Annual Operating Budget for each Fiscal Year,
Management Company's goal will be the maximization of the long-term Operating
Profit of the Hotel, in keeping with the Marriott Standards and the general
standards of the hotel industry for similar properties. If there are material
items in any given Annual Operating Budget which have been budgeted at
significantly different amounts from the amounts actually experienced (or
projected) for the same items in the preceding Fiscal Year, Management Company
agrees to take reasonable steps to ensure that, at Owner's request, qualified
personnel from Management Company's staff are available to explain these
differences to Owner. A meeting (or meetings) for such purpose shall be held, at
Owner's request, within a reasonable period of time after the submission to
Owner of the preliminary draft of the Annual Operating Budget. Management
Company will at all times give good faith consideration to Owner's suggestions
regarding any Annual Operating Budget Management Company shall thereafter submit
to Owner, by no later than thirty (30) days after the beginning of such Fiscal
Year, the final Annual Operating Budget.
B. Owner shall not be entitled to withhold its approval of any Annual
Operating Budget
<PAGE>
based on its objection to: (i) Management Company's reasonable projections of
either Gross Revenues or the components thereof; (ii) projected costs and
expenses which are "system charges" ( that is, costs and expenses which are
generally uniform throughout the Marriott Hotel System, such as: the charges for
Chain Services; the costs of the Honored Guest Award Program and other chain-
wide marketing programs; employee benefits and other compensation programs);
(iii) costs and expenses which are not within the control of either Owner or
Management Company, such as Impositions and the cost of utilities; or (iv)
increases in projected costs and expenses of operating the Hotel, which
increases are primarily caused by projected increases in Gross Revenues. The
approval of Owner (as set forth in the first sentence of Section 9.03 A) shall
not be required if, and to the extent that, the proposed Annual Operating Budget
for a given Fiscal Year is, in all material respects, the same as the Annual
Operating Budget for the preceding Fiscal Year with adjustments for inflation.
If Owner and Management Company fail to mutually agree on the Annual Operating
Budget within forty-five (45) days after the submission to Owner of the
preliminary draft described in the first sentence of 9.01 A, either party shall
have the right to submit to arbitration (in accordance with Section 20.13) the
issue of whether or not Management Company's proposed Annual Operating Budget is
unreasonable, given the goals which are set forth in the fourth sentence of
Section 9.03 A. While such arbitration proceedings are pending, Management
Company shall operate the Hotel, in all material respects, based on the Annual
Operating Budget for the preceding Fiscal Year, with adjustments for inflation.
C. Each Annual Operating Budget will constitute a standard to which
Management Company shall use its reasonable best efforts to adhere. It is
understood, however, that the Annual Operating Budget is an estimate only and
that unforeseen circumstances such as, but not limited to, the costs of labor,
materials, services and supplies, casualty, operation of law, or economic and
market conditions may make adherence to the Annual Operating Budget
impracticable, and Management Company shall be entitled to depart therefrom for
such reasons; provided, however, that nothing herein shall be deemed to
authorize Management Company to take any action prohibited by this Agreement nor
to reduce Management Company's other rights or obligations hereunder.
D. Management Company shall notify Owner of any significant variations
from the Annual Operating Budget promptly after Management Company learns of the
same, but in no event later than the date on which Management Company is
required to give Owner the Accounting Period Statement covering the period in
which such variation occurs. Any such notice shall set forth in reasonable
detail the nature, extent and, if known by Management Company, the cause of such
variation, and recommendations of appropriate actions, either to correct the
variation or to prevent or minimize its occurrence or effect. Owner and
Management Company shall, at Owner's request, meet to review such variations and
to take appropriate action with respect thereto.
9.04 Operating Losses; Credit
------------------------
A. To the extent there is an Operating Loss, additional funds in the
amount of any such
<PAGE>
Operating Loss shall be provided by Owner within thirty (30) days after
Management Company has given written notice thereof to Owner; provided, however,
that if Owner has already received a request from Management Company for
additional Working Capital pursuant to Section 7.01 A, and if such request under
Section 7.01 A reflects fundamentally the same cash shortage which resulted in a
request under this Section 9.04 A, Owner and Management Company shall mutually
discuss the extent to which the requests under Section 7.01 A and Section 9.04 A
may overlap, and such requests shall be modified accordingly.
B. In no event shall either party borrow money in the name of or pledge
the credit of the other.
END OF ARTICLE IX
<PAGE>
ARTICLE X
PROPRIETARY MARKS; INTELLECTUAL PROPERTY
----------------------------------------
10.01 Proprietary Marks
-----------------
A. During the Term of this Agreement, the Hotel shall be known as a
Marriott Hotel, with such additional identification as may be agreed to by Owner
and Management Company to provide local identification. If the name of the
Marriott Hotel System is changed, Management Company shall have the right to
change the name of the Hotel to conform thereto.
B. The name "Marriott," whether used alone or in connection with another
word or words, and all other Proprietary Marks shall in all events remain the
exclusive property of Management Company and its Affiliates. Owner shall have no
right to use the Marriott name or any other Proprietary Mark; provided, however,
that Owner shall have the right, during the Term of this Agreement, to have
Proprietary Signage installed (in strict conformance with the specifications
provided by Management Company prior to the Effective Date, or subsequent
specifications provided by Management Company from time to time during the Term)
in the Hotel and on the Site.
C. Except as provided in Section 10.02, upon Termination, any use of or
right to use the Marriott name or any other Proprietary Mark by Owner under this
Agreement shall immediately cease. As of the date of Termination, Management
Company shall remove all Proprietary Signage from the Hotel and from the Site
(and from any locations other than the Site). The cost of such removal shall be
paid as set forth in Section 4.02 E.
D. Notwithstanding the foregoing, those trademarks, trade names, symbols,
logos and designs which are specifically listed on Exhibit "F" shall be deemed
"Proprietary Marks" only during the Term of this Agreement; upon a Termination,
the exclusive control of such Proprietary Marks shall revert to Owner.
10.02 Purchase of Inventories and Fixed Asset Supplies
------------------------------------------------
Upon Termination, Management Company shall have the option, to be exercised
by no later than thirty (30) days prior to Termination, to purchase, at their
then book value, any items of the Hotel's Inventories and Fixed Asset Supplies
as may be marked with the Marriott name or any other Proprietary Mark. In the
event Management Company does not exercise such option, Owner agrees that it
will use any such items not so purchased exclusively in connection with the
Hotel until they are consumed.
10.03 Computer Software and Equipment
-------------------------------
A. All Software is and shall remain the exclusive property of Management
Company or one of its Affiliates (or the licensor of such Software, as the case
may be), and Owner shall have
<PAGE>
no right to use, or to copy, any Software.
B. Upon Termination, Management Company shall have the right to remove
from the Hotel, without compensation to Owner, all Software. Furthermore, upon
Termination, Management Company shall be entitled to remove from the Hotel any
computer equipment which is utilized as part of a centralized reservation or
property management system or is otherwise considered proprietary by Management
Company. If any of such removed computer equipment is owned by Owner, Management
Company shall reimburse Owner for all previous expenditures made by Owner for
the purchase of such equipment, subject to a reasonable allowance for
depreciation.
10.04 Intellectual Property
---------------------
All Intellectual Property shall at all times be proprietary to Management
Company or its Affiliates, and shall be the exclusive property of Management
Company or its Affiliates. During the Term of this Agreement, Management Company
shall be entitled to take all reasonable steps to ensure that the Intellectual
Property remains confidential and is not disclosed to anyone other than
Management Company's employees at the Hotel. Upon Termination, all Intellectual
Property shall be removed from the Hotel by Management Company, without
compensation to Owner.
10.05 Breach of Covenant
------------------
Management Company and/or its Affiliates shall be entitled, in case of any
breach of the covenants of Article X by Owner or others claiming through it, to
injunctive relief and to any other right or remedy available at law. Article X
shall survive Termination.
END OF ARTICLE X
<PAGE>
ARTICLE XI
POSSESSION AND USE OF HOTEL
---------------------------
11.01 Quiet Enjoyment
---------------
Owner covenants that, so long as (i) an Event of Default by Management
Company has not occurred under Article XVI of this Agreement, and (ii) Owner
does not have the right to terminate this Agreement under any other Section of
this Agreement, Management Company shall quietly hold, occupy and enjoy the
Hotel throughout the Term hereof free from hindrance or ejection by Owner or
other party claiming under, through or by right of Owner (except as may be
otherwise set forth in Section 6.04). Owner agrees to pay and discharge any
payments and charges and, at its expense, to prosecute all appropriate actions,
judicial or otherwise, necessary to assure such free and quiet occupation.
Nothing set forth in the preceding sentence, however, shall be deemed to create
a recourse obligation by Owner to pay any payment or charge pursuant to a
contract which is non-recourse to Owner.
11.02 Use
---
A. Management Company shall use the Hotel solely for the operation of a
hotel pursuant to the Marriott Standards, and for all activities in connection
therewith which are customary and usual to such an operation.
B. Management Company shall comply with and abide by all Legal
Requirements pertaining to the operation of the Hotel, provided that: (i) all
costs and expenses (other than those which are specifically described in clauses
(ii) or (iii) of this Section 11.02 B) of such compliance shall be paid from
Gross Revenues as Deductions in the computation of Operating Profit; (ii) all
costs and expenses of compliance with Environmental Laws shall be paid as set
forth in Section 20.10; (iii) all costs and expenses of compliance with the
Legal Requirements which are described in Section 8.03 A shall be paid as set
forth in Section 8.03; and (iv) Management Company shall have the right, but not
the obligation, in its reasonable discretion, to contest or oppose, by
appropriate proceedings, any such Legal Requirements (provided that the consent
of Owner, not to be unreasonably withheld, shall be obtained prior to initiating
any such proceedings which involve Owner's ownership interest in the Hotel in a
material manner). The reasonable expenses of any such contest shall be paid
from Gross Revenues as Deductions.
11.03 Chain Services
--------------
A. Management Company shall, beginning with the Effective Date and
thereafter during the Term of this Agreement, cause to be furnished to the Hotel
certain services ("Chain Services") which are furnished generally on a central
or regional basis to other full service hotels in the Marriott chain. Chain
Services shall include: (i) national sales office services; central training
services; career development and relocation of management personnel; central
advertising and promotion (including direct and image media and advertising
administration); the Marriott
<PAGE>
national reservations system and the Marriott computer payroll and accounting
services; and (ii) such additional central or regional services as are or may
be, from time to time, furnished for the benefit of hotels in the Marriott chain
or in substitution for services now performed at individual hotels which may be
more efficiently performed on a group basis; provided, however, that services
shall only be added to "Chain Services" pursuant to clause (ii) above if, and to
the extent that, such services: (a) are not Central Office Services; (b) are not
services relating to non-routine work (it being understood that the cost and
expense of such non-routine services shall be Deductions as set forth in
paragraph 6 of the definition of Operating Profit); and (c) are either (x) new
services (i.e., not previously performed at or for the Hotel) or (y) services
which theretofore had been performed at the Hotel, but which can be performed
more efficiently and economically on a centralized or regional basis.
B. Costs and expenses incurred in the providing of Chain Services shall be
allocated on a fair and equitable basis among all Marriott hotels owned, leased
or managed by Management Company in the United States. Such allocation shall be
made without regard to any "caps" or other limitations on the amount which
Management Company or its Affiliates may charge to a given hotel, pursuant to
agreements which Management Company (or its Affiliates) may have with the owner
of such hotel. Any excess of that portion of such costs and expenses which is
fairly allocated to a given hotel over the "cap" which may be in effect with
regard to that hotel shall be paid by Management Company from its own funds.
Management Company shall make no profit from Chain Services. Upon Owner's
written request, an explanation of the current Chain Services will be given to
Owner, and the basis for the allocation of the charge for each Chain Service
will be explained to Owner, in reasonable detail, at the time of the submission
of the Annual Operating Statement (as more particularly set forth in Section
9.01). In no event will the total charge for all of the Chain Services which are
described in clause (i) of Section 11.03 A (exclusive of reservations), for any
given Fiscal Year, exceed the Chain Services Cap. The parties hereby stipulate
that the limitation set forth in the preceding sentence is intended to apply
only to the services which are currently listed (as of the Effective Date) in
Section 11.03 A(i); accordingly, if there are types of expenditures which were
originally treated as Deductions (other than pursuant to paragraph 8 of the
definition of "Operating Profit" in Section 1.01), but which are later
determined to be more properly treated as Chain Services, such expenditures
shall be treated as Deductions pursuant to said paragraph 8 of the definition of
"Operating Profit" without regard to the aforesaid limitation.
11.04 Owner's Right to Inspect
------------------------
Owner or its agents shall have access to the Hotel at any and all
reasonable times for the purpose of inspection or showing the Hotel to
prospective purchasers, tenants or Holders.
11.05 Indemnity
---------
A. Management Company shall indemnify and hold harmless Owner (and any
officer, director, employee, advisor, partner or shareholder of Owner) in
respect of, and, at Owner's
<PAGE>
request, shall defend any action, cause of action, suit, debt, cost, expense
(including, without limitation, reasonable attorneys' fees), claim or demand
whatsoever brought or asserted by any third person whomsoever, at law or in
equity, arising by reason of: (i) liabilities stemming from general corporate
matters of Management Company or its Affiliates, to the extent the same are not
directly and primarily related to the Hotel; (ii) infringement and other claims
relating to the Proprietary Marks; (iii) if Management Company fails to maintain
insurance coverage that it is required to maintain pursuant to this Agreement,
the excess of the amount of any liability or loss that would have been covered
over the amount of any applicable deductible; and (iv) the bad faith or willful
misconduct of Management Company or its Affiliates, or any of their employees,
servants or agents or other persons for whom they are responsible, resulting in
a claim for bodily injury, death or property damage occurring on, in or in
conjunction with the business of the Hotel, to the extent that such claim
exceeds the insurance proceeds (including Hotel Retentions) which are available
to pay such claim.
B. If any claim, action or proceeding is made or brought against Owner,
against which claim, action or proceeding Management Company shall be obligated
to indemnify pursuant to the terms of this Agreement, then, upon demand by
Owner, Management Company, at its sole cost and expense, shall resist or defend
such claim, action or proceeding (in Owner's name, if necessary), using such
attorneys as Owner shall approve, which approval shall not be unreasonably
withheld. If, in Owner's reasonable opinion, (i) there exists a conflict of
interest which would make it inadvisable to be represented by counsel for
Management Company, or (ii) there are legal defenses available to Management
Company that are different from or inconsistent with those available to Owner,
or (iii) there are claims at issue which are not covered by Management Company's
insurance, Owner shall be entitled to retain its own attorneys, and Management
Company shall pay the reasonable fees and disbursements of such attorneys.
C. Matters with respect to which Management Company has specifically
agreed to indemnify Owner under other provisions of this Agreement (for example,
Section 14.01 regarding "Employee Claims", and Section 20.11 regarding
environmental matters) are to be treated exclusively under such other provisions
and not under this Section 11.05.
END OF ARTICLE XI
<PAGE>
ARTICLE XII
INSURANCE
---------
12.01 Interim Insurance
-----------------
[Intentionally omitted]
12.02 Property and Operational Insurance
----------------------------------
Management Company shall, commencing with the Effective Date and thereafter
during the Term of this Agreement, procure and maintain, either with insurance
companies of recognized responsibility or by legally qualifying itself as a self
insurer, a minimum of the following insurance:
A. Property insurance on the Hotel building(s) and contents against loss
or damage by fire, lightning and all other risks covered by the usual extended
coverage endorsement, all in an amount not less than one hundred percent (100%)
of the replacement cost thereof (excluding the cost of foundations and
excavations);
B. Boiler and machinery insurance against loss or damage from explosion of
boilers or pressure vessels to the extent applicable to the Hotel;
C. Business interruption insurance covering loss of profits and necessary
continuing expenses for interruptions caused by any occurrence covered by the
insurance referred to in Section 12.02 A and B, which shall be of a type and in
such amounts (but such coverage shall in no event be for less than one (1) year)
as are generally established by Management Company at similar hotels it owns,
leases or manages under the Marriott name in the United States;
D. General liability insurance against claims for bodily injury, death or
property damage occurring on, in, or in conjunction with the business of the
Hotel, and automobile liability insurance on vehicles operated in conjunction
with the Hotel, with a combined single limit for each occurrence of not less
than One Hundred Million Dollars ($100,000,000); representatives of Management
Company and Owner shall meet, at Owner's request, at intervals of approximately
once every five (5) years, to review the adequacy of such limit;
E. Workers' compensation and employer's liability insurance as may be
required under applicable laws covering all of Management Company's employees at
the Hotel;
F. Fidelity bonds, with reasonable limits to be determined by Management
Company, covering its employees in job classifications normally bonded in other
similar hotels it leases or manages under the Marriott name in the United States
or as otherwise required by law, and comprehensive crime insurance to the extent
Management Company and Owner mutually agree it is necessary for the Hotel; and
<PAGE>
G. Such other insurance in amounts as Management Company and Owner, in
their reasonable judgment, mutually deem advisable for protection against
claims, liabilities and losses arising out of or connected with the operation of
the Hotel.
12.03 General Insurance Provisions
----------------------------
A. All insurance described in Section 12.02 may be obtained by Management
Company by endorsement or equivalent means under its blanket insurance policies,
provided that such blanket policies substantially fulfill the requirements
specified herein. Upon the request of either Owner or any Qualified Lender,
representatives of the requesting party shall be entitled to examine, at
Management Company's corporate headquarters, all insurance policies maintained
by Management Company regarding the Hotel.
B. Management Company may self insure or otherwise retain such risks or
portions thereof as it does with respect to other similar hotels it owns, leases
or manages under the Marriott name in the United States.
C. All policies of insurance required under Section 12.02 shall be carried
in the name of Management Company. The policies required under Sections 12.02 A,
B, C and D shall include the Owner as an additional insured. Upon notice by the
Owner, Management Company shall also have the policies required under Sections
12.02 A, B, C and D include any Qualified Lender as an additional insured. Any
property losses thereunder shall be payable to the respective parties as their
interests may appear. Any Mortgage on the Hotel shall contain provisions to the
effect that proceeds of the insurance policies required to be carried under
Section 12.02 A and B shall, with respect to any casualty involving less than
twenty-five percent (25%) of the replacement cost of the Hotel, be available for
repair and restoration of the Hotel.
D. Management Company shall deliver to the Owner certificates of insurance
with respect to all policies so procured and, in the case of insurance policies
about to expire, shall deliver certificates with respect to the renewal thereof.
E. All certificates of insurance provided for under Article XII shall, to
the extent obtainable, state that the insurance shall not be cancelled or
materially changed without at least thirty (30) days' prior written notice to
Owner.
F. The term "Hotel Retention" shall mean the amount of any loss or reserve
under Management Company's blanket insurance or self-insurance programs which is
allocated to the Hotel, not to exceed the higher of (a) the maximum per
occurrence limit established for similar hotels participating in such programs,
or (b) the insurance policy deductible on any loss which may fall within high
hazard classifications as mandated by the insurer (e.g., earthquake, flood,
windstorm on coastal properties, etc.). If the Hotel is not a participant under
Management Company's blanket insurance or self-insurance programs, "Hotel
Retention" shall mean the amount of any loss or reserve allocated to the Hotel,
not to exceed the insurance policy deductible.
<PAGE>
12.04 Cost and Expense
----------------
A. [Intentionally omitted]
B. Insurance premiums and any other costs or expenses with respect to the
insurance or self-insurance required under Section 12.02, including any Hotel
Retention, shall be paid from Gross Revenues as Deductions. To the extent that
such costs or expenses include reimbursement by Management Company of its own
costs or expenses, or those of one of its Affiliates, such costs or expenses
shall be generally competitive (as calculated over the Term of this Agreement)
with costs and expenses of non-affiliated entities providing similar services.
Such premiums and costs shall be allocated on an equitable basis to the hotels
participating under Management Company's blanket insurance or self-insurance
programs. Any reserves, losses, costs or expenses which are uninsured shall be
treated as a cost of insurance and shall be Deductions. Upon Termination, an
escrow fund in an amount reasonably acceptable to Management Company shall be
established from Gross Revenues (or, if Gross Revenues are not sufficient, with
funds provided by Owner) to cover the amount of any Hotel Retention and all
other costs which will eventually have to be paid by either Owner or Management
Company with respect to pending or contingent claims, including those which
arise after Termination for causes arising during the Term of this Agreement.
Upon the final disposition of all such pending or contingent claims, any
unexpended funds remaining in such escrow shall be paid to Owner.
12.05 Owner's Option to Obtain Certain Insurance
------------------------------------------
Owner may, at its option, by written notice to Management Company which
shall be delivered no later than ninety (90) days prior to the natural
expiration of the insurance policies which Management Company has obtained
pursuant to Section 12.02 A, B and C, procure and maintain the insurance
specified in Section 12.02 A, B and C (in which case Management Company shall
allow such policies obtained by it under Section 12.02 A, B, and C to expire),
subject to the following terms and conditions:
A. All such policies of insurance shall be carried in the name of Owner,
with Management Company as an additional insured. Any property losses thereunder
shall be payable to the respective parties as their interests may appear. The
documentation with respect to each Secured Loan shall contain provisions to the
effect that proceeds of the insurance policies required to be carried under
Section 12.01 A and B shall be available for repair and restoration of the
Hotel, to the extent required pursuant to Section 12.03 C. However, any Holder
of such Secured Loan shall be entitled to impose reasonable conditions on the
disbursement of insurance proceeds for the repair and/or restoration of the
Hotel, including a demonstration by Owner and/or Management Company that the
amount of such proceeds (together with other funds Owner agrees to make
available) is sufficient for such purpose.
B. Owner shall deliver to Management Company certificates of insurance
with respect to
<PAGE>
all policies so procured and, in the case of insurance policies about to expire,
shall deliver certificates with respect to the renewal thereof.
C. All such certificates of insurance shall, to the extent obtainable,
state that the insurance shall not be canceled or materially changed without at
least thirty (30) days' prior written notice to the certificate holder.
D. Premiums for such insurance coverage shall be treated as Deductions,
provided that if the cost of such insurance procured by Owner exceeds the cost
of Management Company's comparable coverage by more than ten percent (10%), all
such excess costs shall be the sole responsibility of Owner and shall not be a
Deduction.
E. Should Owner exercise its option to procure the insurance described in
this Section 12.05, Owner hereby waives its rights of recovery from Management
Company or any of its Affiliates (and their respective directors, officers,
shareholders, agents and employees) for loss or damage to the Hotel, and any
resultant interruption of business.
F. Should Owner exercise its right to obtain the insurance described in
this Section 12.05, Owner acknowledges that Management Company is under no
obligation to thereafter include the Hotel in its blanket insurance program
(with respect to the coverage described in Section 12.02 A, B and C) for the
balance of the Term of this Agreement. However, upon a Sale of the Hotel, a
successor Owner shall have the right, notwithstanding the fact that the previous
Owner may have obtained insurance in accordance with this Section 12.05, to have
the Hotel included in Management Company's blanket insurance program (provided
that the Hotel, as of that point in time, satisfies the applicable criteria for
admission to such program, as established by the program's insurance carriers)
by making a written request to Management Company for such inclusion not later
than thirty (30) days after the date on which such party becomes the Owner.
G. All insurance procured by Owner hereunder shall be obtained from
reputable insurance companies reasonably acceptable to Management Company.
END OF ARTICLE XII
<PAGE>
ARTICLE XIII
TAXES
-----
13.01 Real Estate and Personal Property Taxes
---------------------------------------
A. Except as specifically set forth in subsection B below, all Impositions
which accrue during the Term of this Agreement (or are properly allocable to
such Term under generally accepted accounting principles) shall be paid by
Management Company from Gross Revenues, as a Deduction, before any fine,
penalty, or interest is added thereto or lien placed upon the Hotel or the
Agreement, unless payment thereof is stayed. Owner shall within five (5)
business days after the receipt of any invoice, bill, assessment, notice or
other correspondence relating to any Imposition, furnish Management Company with
a copy thereof. Management Company shall, within the earlier of thirty (30) days
of payment or five (5) business days following written demand by Owner, furnish
Owner with copies of official tax bills and assessments which Management Company
has received, and evidence of payment or contest thereof. Either Owner or
Management Company (in which case each party agrees to sign the required
applications and otherwise cooperate with the other party in expediting the
matter) may initiate proceedings to contest any Imposition, and all reasonable
costs of any negotiations or proceedings with respect to any such contest shall
be paid from Gross Revenues and shall be a Deduction in determining Operating
Profit; provided, however, that neither party shall have the right to expend in
excess of Five Thousand Dollars ($5,000) (to be adjusted by the GDP Deflator)
with respect to any such negotiations or proceedings without the consent of the
other party.
B. The word "Impositions", as used in this Agreement, shall not include
the following, all of which shall be paid solely by Owner, not from Gross
Revenues nor from the FF&E Reserve:
1. Any franchise, corporate, estate, inheritance, succession, capital
levy or transfer tax imposed on Owner, or any income tax imposed on any income
of Owner (including distributions to Owner pursuant to Article V hereof);
2. Special assessments (regardless of when due or whether they are
paid as a lump sum or in installments over time) imposed because of facilities
which are constructed by or on behalf of the assessing jurisdiction (for
example, roads, sidewalks, sewers, culverts, etc.) which directly benefit the
Hotel (regardless of whether or not they also benefit other buildings), which
assessments shall not be treated as Deductions, but rather shall be added to the
Additional Invested Capital as of each payment by Owner with respect thereto;
3. "Impact Fees" (regardless of when due or whether they are paid as
a lump sum or in installments over time) which are required of Owner as a
condition to the issuance of site plan approval, zoning variances or building
permits, which impact fees shall not be treated as Deductions, but rather shall
be added to the Additional Invested Capital as of each payment by Owner with
respect thereto; and
4. "Tax-increment financing" or similar financing whereby the
municipality or other taxing authority has assisted in financing the
construction of the Hotel by temporarily reducing or abating normal Impositions
in return for substantially higher levels of Impositions at
<PAGE>
later dates.
C. Owner shall have the right to require Management Company to establish
an escrow account (with either any Qualified Lender or another entity reasonably
acceptable to both Owner and Management Company) from which Impositions will be
paid. Payments into such escrow account will be Deductions. Any interest which
accrues on amounts deposited in such escrow account shall be added to the
balance in such escrow account and used to pay Impositions.
END OF ARTICLE XIII
<PAGE>
ARTICLE XIV
HOTEL EMPLOYEES
---------------
14.01 Employees
---------
A. All personnel employed at the Hotel shall be the employees of
Management Company. Subject to the provisions of this Agreement, Management
Company shall have absolute discretion to hire, promote, supervise, direct,
train and discharge all employees at the Hotel, to fix their compensation and,
generally, establish and maintain all policies relating to employment; provided,
however, that (i) all of the foregoing shall be in accordance with the Marriott
Standards, and (ii) Management Company shall not enter into any written
employment agreements with any person which purport to bind the Owner and/or
purport to be effective regardless of a Termination, without obtaining Owner's
prior consent which may be withheld in Owner's sole discretion. Management
Company and Owner shall each comply with all Legal Requirements regarding labor
relations; if either Management Company or Owner shall be required, pursuant to
any such Legal Requirement, to recognize a labor union or to enter into
collective bargaining with a labor union, the party so required shall promptly
notify the other party pursuant to Section 20.09.
B. Management Company shall decide which, if any, of the Hotel's employees
shall reside at the Hotel (provided that Owner's prior approval shall be
obtained if more than two (2) such employees and their immediate families reside
at the Hotel), and shall be permitted to provide free accommodations and
amenities to its employees and representatives living at or visiting the Hotel
in connection with its management or operation. No person shall otherwise be
given gratuitous accommodations or services without prior joint approval of
Owner and Management Company except in accordance with usual practices of the
hotel and travel industry.
C. Any proposed settlement of any Employee Claim where the amount proposed
to be offered to the employee by Management Company is in excess of the
Settlement Threshold Amount shall be jointly approved by Management Company and
Owner. In addition, Management Company shall give Owner a written notice
(pursuant to Section 20.09) of any settlement of any Employee Claim where the
settlement amount is below the Settlement Threshold Amount, but is in excess of
Fifty Thousand Dollars ($50,000) (said dollar amount to be adjusted by the GDP
Deflator). Any dispute between Owner and Management Company as to whether
Management Company's settlement recommendation is reasonable, where such
proposed settlement is in excess of the Settlement Threshold Amount, shall be
resolved by arbitration under Section 20.13 hereof; provided that Management
Company shall have the right to settle any Employee Claim (prior to the
arbitration on the reasonableness of the settlement, as described in this
sentence) based on Management Company's recommendation, which shall be
Management Company's reasonable estimate, in good faith, by using: (i) funds
from Gross Revenues (as a Deduction) up to the amount of Owner's settlement
recommendation, which shall be Owner's reasonable estimate, in good faith, and
(ii) Management Company's own funds to the extent Management Company's
recommendation exceeds the amount described in subparagraph (i)
<PAGE>
above. Following the settlement of such Employee Claim, the parties will
arbitrate under Section 20.13 the issue of whether Management Company's
settlement recommendation was reasonable under the circumstances. If the
arbitrators decide that Management Company's recommendation was reasonable,
Management Company shall be entitled to reimburse itself from Gross Revenues (as
a Deduction) in the amount of the funds advanced under subparagraph (ii) above,
together with accrued interest thereon at the Prime Rate. If the arbitrators
decide that Management Company's settlement recommendation was not reasonable,
then Management Company shall not be entitled to any reimbursement of the
amounts advanced by it under subparagraph (ii) above, nor to accrued interest
thereon.
D. Management Company shall pay from its own funds, and not from Gross
Revenues, any Employee Claim where the basis of such Employee Claim is conduct
by Management Company which: (i) is a substantial violation of the standards of
responsible labor relations as generally practiced by prudent owners or
operators of similar hotel properties in the general geographic area of the
Hotel; and (ii) is not the isolated act of individual employees, but rather is a
direct result of corporate policies of Management Company which either encourage
or fail to discourage such conduct. In addition, Management Company shall
indemnify, defend and hold harmless Owner from and against any fines or
judgments arising out of such conduct, and all Litigation expenses (including
reasonable attorneys' fees and expenses) incurred in connection therewith. Any
dispute between Owner and Management Company as to whether or not certain
conduct by Management Company is not in accordance with the aforesaid standards
shall be resolved by arbitration under Section 20.13 hereof. The arbitration
proceedings described in the preceding sentence shall be conducted independently
of any arbitration proceedings with respect to such Employee Claim pursuant to
the applicable employment-related contract and/or pursuant to Section 14.01 C of
this Agreement.
E. With respect to all Litigation or arbitration involving Employee Claims
in which both Management Company and Owner are involved as actual or potential
defendants, Management Company shall have exclusive and complete responsibility
(subject to the rights of Owner to approve certain settlements, as set forth in
Section 14.01 C) for the resolution of such Employee Claims. In the event that
any Employee Claim is made against Owner, but not against Management Company,
Owner shall give notice to Management Company of the Employee Claim in a timely
manner so as to avoid any prejudice to the defense of the Employee Claim,
provided that Management Company shall in all events be so notified within
twenty (20) days after the date such Employee Claim is made against Owner.
Management Company will thereafter assume exclusive and complete responsibility
for the resolution of such Employee Claim.
F. At Termination, other than by reason of an Event of Default of
Management Company hereunder, an escrow fund shall be established from Gross
Revenues (or, if Gross Revenues are not sufficient, with funds provided by
Owner) to reimburse Management Company for all costs and expenses incurred by
Management Company which arise out of either the transfer or the termination of
employment of Management Company's employees at the Hotel, such as
<PAGE>
reasonable transfer costs, severance pay, unemployment compensation and other
employee liability costs.
G. Management Company (and not Owner) shall have the power to hire,
dismiss or transfer the general manager of the Hotel, provided, however, that
Management Company shall keep Owner reasonably informed and shall give Owner the
opportunity to participate in the process with respect to any such hiring,
dismissal or transfer, as follows:
1. Owner shall be given at least forty-five (45) days' prior notice of
any proposed hiring, dismissal or transfer of the general manager (except that
such notice period shall be appropriately shortened in the event that such
dismissal is the result of a violation of a Legal Requirement or of Management
Company's policies, or is the result of similar extraordinary circumstances
which, in the reasonable judgment of Management Company, necessitate such
shorter notice period).
2. Prior to any dismissal or transfer of the general manager, Owner
shall be notified and Owner shall be advised of the reason for such proposed
dismissal or transfer of the general manager and of the qualifications of any
proposed replacement manager. Owner shall be given a period of ten (10) days
within which to interview the proposed general manager. Owner shall be given the
opportunity to meet with the appropriate executive of Management Company to
discuss the advisability of effectuating any proposed hiring, dismissal or
transfer and any possible alternatives thereto. Management Company shall
consider in good faith the opinions and requests of Owner with respect to such
matters and, if Management Company elects not to implement any such request,
Management Company shall explain its decision to Owner in reasonable detail.
H. Management Company shall give Owner the opportunity to provide to
Management Company an evaluation of the performance of the general manager of
the Hotel, which shall be provided reasonably in advance of the date of
Management Company's annual review of the general manager. Management Company
shall consider such evaluation by Owner in good faith, and shall explain in
reasonable detail to Owner how Management Company's evaluation of the general
manager differs (if at all) from such evaluation by Owner.
END OF ARTICLE XIV
<PAGE>
ARTICLE XV
DAMAGE, CONDEMNATION AND FORCE MAJEURE
--------------------------------------
15.01 Damage and Repair
-----------------
A. If, during the Term hereof, the Hotel is damaged or destroyed by fire,
casualty or other cause, Owner shall, with all reasonable diligence, to the
extent that proceeds from the insurance described in Section 12.02 are available
(subject to the provisions of any Mortgage encumbering the Hotel, but with the
limitations described in Section 12.03 C) for such purpose, repair or replace
the damaged or destroyed portion of the Hotel to the same condition as existed
previously.
B. In the event damage or destruction to the Hotel from any cause
materially and adversely affects the operation of the Hotel and Owner fails to
timely (subject to Force Majeure, and subject to unreasonable delays caused by
Management Company, including unreasonable delays in adjusting the insurance
claim with the carriers which participate in Management Company's blanket
insurance program) commence and complete the repairing, rebuilding or
replacement of the same so that the Hotel shall be substantially the same as it
was prior to such damage or destruction, Management Company may, at its option,
elect to terminate this Agreement upon one hundred twenty (120) days' written
notice.
15.02 Condemnation
------------
A. In the event all or substantially all of the Hotel shall be taken in
any eminent domain, condemnation, compulsory acquisition, or similar proceeding
by any competent authority for any public or quasi-public use or purpose, or in
the event a portion of the Hotel shall be so taken, but the result is that it is
unreasonable to continue to operate the Hotel, this Agreement shall terminate.
B. In the event a portion of the Hotel shall be taken by the events
described in Section 15.02 A, or the entire Hotel is affected but on a temporary
basis, and the result is not to make it unreasonable to continue to operate the
Hotel, this Agreement shall not terminate. However, so much of any award for
any such partial taking or condemnation as shall be necessary to render the
Hotel equivalent to its condition prior to such event shall be used for such
purpose; the balance of such award, if any, shall be fairly and equitably
apportioned between Owner and Management Company in accordance with their
respective interests. The Owner's Investment shall be reduced by that portion
of the total amount (if any) received by Owner pursuant to this Section 15.02 B
which is not used to restore the Hotel; in addition, the Performance Termination
Threshold shall be reduced by an amount equal to eight percent (8%) of such
total amount (if any) received by Owner pursuant to this Section 15.02 B which
is not used to restore the Hotel.
C. In the event of any proceeding described in Section 15.02 A or B, Owner
and Management Company shall each have the right to initiate such proceedings as
they deem
<PAGE>
advisable to recover any damages to which they may be entitled; provided,
however, that Management Company shall be entitled to retain the award or
compensation it may obtain through proceedings which are conducted separately
from those of Owner only if such award or compensation does not reduce the award
or compensation otherwise available to Owner. For this purpose, any award or
compensation received by any Holder shall be deemed to be an award or
compensation received by Owner).
15.03 Force Majeure
-------------
A. The withdrawal or revocation of any License which is material to the
operation of the Hotel in accordance with the Marriott Standards, where such
withdrawal or revocation (i) is not due to the fault of either Management
Company or Owner, and (ii) is not otherwise within the reasonable control of
either Management Company or Owner, shall not be an Event of Default under
Article XVI of this Agreement. Management Company and Owner shall each, in good
faith, use all commercially reasonable efforts (including the diligent pursuit
of all available appeals), during the period of one hundred twenty (120) days
after the date of such withdrawal or revocation, to have such License
reinstated. If, notwithstanding such efforts, such License is not reinstated
prior to the expiration of the aforesaid period of one hundred twenty (120)
days, either Owner or Management Company shall have the right, at its option, to
terminate this Agreement upon no less than sixty (60) days' notice to the other
party; provided, however, that the terminating party must deliver such notice of
Termination to the other party by no later than ninety (90) days after the
expiration of such one hundred twenty (120) day period; and provided further,
that no such Termination shall be effective if, prior to the effective date of
such Termination, such License is reinstated or such withdrawal or revocation of
such License is stayed.
B. If an order, judgment or directive by a court or administrative body is
issued, in connection with any Litigation involving Owner, which restricts or
prevents Management Company, in a material adverse manner, from operating the
Hotel in accordance with the Marriott Standards, and which, in Management
Company's reasonable opinion, will have a significant adverse effect upon
operations of the Hotel, Management Company shall be entitled, at its option, to
terminate this Agreement upon sixty (60) days' written notice; provided,
however, that Management Company shall (if it so elects) deliver such notice of
Termination to Owner by no later than ninety (90) days after the issuance of
such order, judgment or directive (or, if such order, judgment or directive is
appealed, within ninety (90) days after the final disposition of such appeal).
END OF ARTICLE XV
<PAGE>
ARTICLE XVI
DEFAULTS
--------
16.01 Definition of "Default"
-----------------------
Any one or more of the following shall constitute a "Default," to the
extent permitted by applicable law:
A. The filing of a voluntary petition in bankruptcy or insolvency or a
petition for reorganization under any bankruptcy law by either party, or the
admission by either party that it is unable to pay its debts as they become due;
B. The consent to an involuntary petition in bankruptcy or the failure to
vacate, within ninety (90) days from the date of entry thereof, any order
approving an involuntary petition by either party;
C. The entering of an order, judgment or decree by any court of competent
jurisdiction, on the application of a creditor, adjudicating either party as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets, and such order, judgment or decree's continuing unstayed
and in effect for any period of ninety (90) days;
D. The failure of either party to make any payment required to be made in
accordance with the terms of this Agreement, as of the due date which is
specified in this Agreement;
E. The failure of either party to perform, keep or fulfill any of the
other covenants, undertakings, obligations or conditions set forth in this
Agreement.
16.02 Definition of "Event of Default"
--------------------------------
A. Upon the occurrence of any Default by either party hereto (hereinafter
referred to as the "defaulting party") under Section 16.01 A, B or C, such
Default shall immediately and automatically, without the necessity of any notice
to the defaulting party, constitute an "Event of Default" under this Agreement.
B. Upon the occurrence of any Default by a defaulting party under Section
16.01 D, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within ten (10)
days after written notice from the non-defaulting party specifying such Default
and demanding such cure.
C. Upon the occurrence of any Default by either party hereto under Section
16.01 E, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within thirty (30)
days after written notice from the non-defaulting party specifying such Default
and demanding such cure, or, if the Default is such that it cannot
<PAGE>
reasonably be cured within said thirty (30) day period of time, if the
defaulting party fails to commence the cure of such Default within said thirty
(30) day period of time or thereafter fails to diligently pursue such efforts to
completion.
16.03 Remedies Upon an Event of Default
---------------------------------
A. Upon the occurrence of an Event of Default under the provisions of
Section 16.02, the non-defaulting party shall have the right to pursue any one
or more of the following courses of action: (i) in the event of a material
breach by the defaulting party of its obligations under this Agreement, to
terminate this Agreement by written notice to the defaulting party, which
termination shall be effective as of the effective date which is set forth in
said notice, provided that said effective date shall be at least thirty (30)
days after the date of said notice; and provided further that, if the defaulting
party is the employer of all or a substantial portion of the employees at the
Hotel, the foregoing period of thirty (30) days shall be extended to seventy-
five (75) days (or such longer period of time as may be necessary under
applicable Legal Requirements pertaining to termination of employment); (ii) to
institute forthwith any and all proceedings permitted by law or equity,
including, without limitation, actions for specific performance and/or damages;
and (iii) to avail itself of any one or more of the other remedies described in
this Section 16.03.
B. Upon the occurrence of a Default by either party under the provisions
of Section 16.01 D, the amount owed to the non-defaulting party shall accrue
interest, at the Interest Rate, from and after the date on which such payment
was originally due to the non-defaulting party.
C. The rights granted hereunder are intended to be cumulative, and shall
not be in substitution for, but shall be in addition to, any and all rights and
remedies available to the non-defaulting party (including, without limitation,
injunctive relief and damages; provided that the satisfaction of damage awards
against Owner shall be limited by the provisions of Section 16.04) by reason of
applicable provisions of law or equity.
16.04 Owner's Estate
--------------
Notwithstanding any other provision of this Agreement, in the event of any
Event of Default by Owner pursuant to the terms of this Agreement, Management
Company shall look only to Owner's estate and interest in the Site and the Hotel
(which shall, for this purpose, include (i) amounts deposited in the Operating
Accounts and in the FF&E Reserve, and (ii) accounts receivable) for the
satisfaction of a money judgment against Owner resulting from such Event of
Default, and no other property or assets of Owner, or of its partners, officers,
directors, shareholders or principals, shall be subject to levy, execution or
other enforcement procedure for the satisfaction of such judgment. Management
Company's right to look to Owner's estate and interest in the Site and the Hotel
for satisfaction of such a money judgment against Owner shall survive
Termination and shall not be affected by any one or more Sales of the Hotel.
Nothing contained in this Section 16.04 shall be deemed to affect or diminish
Management Company's
<PAGE>
remedies under this Article XVI other than money damages against Owner
(including, without limitation, Termination of this Agreement).
END OF ARTICLE XVI
<PAGE>
ARTICLE XVII
WAIVER AND PARTIAL INVALIDITY
-----------------------------
17.01 Waiver
------
The failure of either party to insist upon a strict performance of any of
the terms or provisions of this Agreement, or to exercise any option, right or
remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
17.02 Partial Invalidity
------------------
If any portion of this Agreement shall be declared invalid by order, decree
or judgment of a court, this Agreement shall be construed as if such portion had
not been inserted herein except when such construction would operate as an undue
hardship on Management Company or Owner, or constitute a substantial deviation
from the general intent and purpose of said parties as reflected in this
Agreement.
END OF ARTICLE XVII
<PAGE>
ARTICLE XVIII
ASSIGNMENT
----------
18.01 Assignment
----------
A. Management Company shall not assign or transfer its management
responsibilities under this Agreement without the prior written consent of
Owner; provided, however, that Management Company shall have the right, without
such consent, to (1) assign its interest in this Agreement to any of its
Affiliates, and any such Affiliate shall be deemed to be the Management Company
for the purposes of this Agreement, and (2) sublease shops or grant licenses or
concessions at the Hotel so long as the terms of any such subleases, licenses or
concessions are consistent with the provisions of Section 2.02. In the event of
such an assignment by Management Company of its interest in this Agreement to an
Affiliate, the Management Company which is named in the Preamble to this
Agreement: (i) shall automatically be deemed to guarantee the performance of
such Affiliate under this Agreement; (ii) shall, at the request of Owner,
execute a guaranty, in form and substance reasonably satisfactory to both
parties, of the performance of such Affiliate under this Agreement (provided
that the failure of Owner to obtain an executed guaranty pursuant to this clause
(ii) shall not affect the validity or enforceability of the guaranty which is
automatically created pursuant to clause (i); and provided further, that, when
Owner does so receive an executed guaranty pursuant to this clause (ii), such
executed guaranty shall be deemed to have superseded the guaranty described in
clause (i) above); and (iii) shall make available to such Affiliate, in
connection with the performance by such Affiliate under this Agreement,
Management Company's skill, personnel, facilities and resources.
B. Owner shall not assign or transfer its interest in this Agreement other
than (i) in connection with a Sale of the Hotel which complies with the
provisions of Article XIX hereof, or (ii) as set forth in Section 18.01 C.
C. Nothing contained herein shall prevent (i) the collateral assignment of
this Agreement by Owner as security for any Mortgage which complies with the
provisions of Section 3.01; or (ii) the transfer of this Agreement in connection
with a merger or consolidation or a sale of all or substantially all of the
assets of either party, provided that (x) if such transfer is by Owner, the
provisions of Article XIX hereof shall be complied with, and (y) if such
transfer is by Management Company, such transfer is being done as a part of a
merger or consolidation or a sale of all or substantially all of the business
which consists of managing the Marriott Hotel System.
D. In the event either party consents to an assignment of this Agreement
by the other, no further assignment shall be made without the express consent in
writing of such party, unless such assignment may otherwise be made without such
consent pursuant to the terms of this Agreement.
E. An assignment (either voluntarily or by operation of law) by Owner of
its interest in this Agreement (in compliance with Article XVIII) shall not
relieve Owner from its obligations under this Agreement which accrued prior to
the date of such assignment, but shall relieve Owner of such obligations
accruing after such date, if the assignment complies with Section 18.01 B and
<PAGE>
if Management Company has received an assumption agreement executed by the
assignee (in form and substance reasonably satisfactory to Management Company).
An assignment (either voluntarily or by operation of law) by Management Company
of its interest in this Agreement shall not relieve Management Company from its
obligations under this Agreement, unless Owner so agrees in writing.
F. Subject to the provisions of this Article XVIII, the terms and
conditions of this Agreement shall inure to the benefit of, and be binding upon,
the respective successors, heirs, legal representatives, or assigns of each of
the parties hereto.
END OF ARTICLE XVIII
<PAGE>
ARTICLE XIX
SALE OF THE HOTEL
-----------------
19.01 Sale of the Hotel
-----------------
A. Owner shall not enter into any Sale of the Hotel to any individual or
entity which: (i) does not have sufficient financial resources and liquidity to
fulfill Owner's obligations under this Agreement; (ii) is in control of or
controlled by persons who have been convicted of felonies involving moral
turpitude in any state or federal court; or (iii) is engaged in the business of
operating (as distinguished from owning) a branded hotel chain having five
thousand (5,000) or more guestrooms in competition with Management Company. An
individual or entity shall not be deemed to be in the business of operating
hotels in competition with Management Company solely by virtue of (x) the
ownership of such hotels, either directly or indirectly through subsidiaries,
affiliates and partnerships, or (y) holding a Mortgage or Mortgages secured by
one or more hotels. Notwithstanding the foregoing, if Owner or an Affiliate of
Owner is a corporation whose shares are listed on a public stock exchange, and
if a Sale of the Hotel occurs as a result of purchases of such shares, through
such public stock exchange, in sufficient quantities to cause a transfer of the
"controlling interest" in Owner (as described in the definition of "Sale of the
Hotel"), and if such Sale of the Hotel is not in compliance with the provisions
of this Section 19.01 A, Management Company shall have the right, at its option,
to terminate this Agreement by written notice to Owner (as more particularly
described in Section 19.01 B), but such non-compliance with this Section 19.01 A
shall not be an Event of Default nor shall it subject Owner to claims for
damages by Management Company pursuant to Article XVI.
B. If Owner receives a bona fide written offer to enter into a Sale of the
Hotel, Owner shall give written notice thereof to Management Company, stating
the name of the prospective purchaser or tenant, as the case may be. Such
notice shall include appropriate information relating to such prospective
purchaser or tenant demonstrating compliance with the provisions of Section
19.01 A; if Management Company reasonably requests additional information, Owner
shall promptly furnish such information to Management Company. If Management
Company decides that a Sale of the Hotel to such prospective purchaser or tenant
would violate the provisions of Section 19.01 A, Management Company shall so
notify Owner by no later than thirty (30) days after receipt of such notice;
provided, however, that any decision by Management Company regarding any such
prospective purchaser or tenant shall not be binding if the information
furnished by Owner pursuant to the preceding sentence is inaccurate.
Concurrently with the finalization of such Sale of the Hotel, the purchaser or
tenant, as the case may be, shall, by appropriate instrument reasonably
satisfactory to Management Company, assume all of Owner's obligations hereunder.
An executed copy of such assumption agreement shall be delivered to Management
Company. If the proposed Sale of the Hotel would violate the provisions of
Section 19.01 A, Owner will not enter into any agreement relating to such Sale
of the Hotel. However, if Owner does enter into such an agreement, Management
Company shall have the right to terminate this Agreement by written notice to
Owner, which notice will set an effective date for such Termination not earlier
than thirty (30) days, nor more than one hundred
<PAGE>
twenty (120) days, following the date of the giving of such notice. Management
Company shall have the right to change such effective date of Termination to
coincide with the date of the finalization of the proposed Sale of the Hotel. At
Management Company's election, said notice of Termination shall not be effective
if such Sale of the Hotel is not finalized. If such Termination by Management
Company results from a Default by Owner under Section 19.01 A, such Termination
shall not relieve Owner (except as otherwise set forth to the contrary in the
last sentence of Section 19.01 A) of liability to Management Company for such
Default.
C. In connection with the possibility of a Sale of the Hotel achieved by
means of a transfer of the controlling interest in Owner, Owner, upon written
request of Management Company, shall (unless Owner is a publicly-traded
corporation which is registered under Section 12 or Section 15 of the Securities
Act of 1934) furnish Management Company with a list of the names and addresses
of the owners of the capital stock (but only those owners which hold an
ownership interest of thirty percent (30%) or more), or the partnership
interests (both (i) general partner, and (ii) any limited partner holding an
ownership interest of thirty percent (30%) or more), or other ownership
interests in Owner. In addition, Owner shall notify Management Company of any
transaction or series of transactions in which Owner reduces its ownership
interest in the Hotel below fifty percent (50%) or in which the former
controlling interest in Owner is reduced below fifty percent (50%). Management
Company agrees that it will treat all such lists confidential in accordance with
the provisions of Section 20.04.
D. It is understood that no Sale of the Hotel (which is otherwise in
compliance with the provisions of this Article XIX) shall reduce or otherwise
affect: (i) the current level of Working Capital; (ii) the current amount
deposited in the FF&E Reserve; or (iii) any of the Operating Accounts maintained
by Management Company pursuant to this Agreement. If, in connection with any
Sale of the Hotel, the selling Owner intends to withdraw, for its own use, any
of the cash deposits described in the preceding sentence, the selling Owner must
obtain the contractual obligation of the buying Owner to replenish those
deposits (in the identical amounts) simultaneously with such withdrawal. The
selling Owner is hereby contractually obligated to Management Company to ensure
that such replenishment in fact occurs. The obligations described in this
Section 19.01 D shall survive such Sale of the Hotel and shall survive
Termination.
E. Management Company shall have the right to terminate this Agreement, on
thirty (30) days' written notice, if title to or possession of the Hotel is
transferred by judicial or administrative process (including, without
limitation, a Foreclosure, or a sale pursuant to an order of a bankruptcy court,
or a sale by a court-appointed receiver) to an individual or entity which would
not qualify as a permitted transferee under clause (i), (ii) or (iii) of Section
19.01 A, regardless of whether or not such transfer is the voluntary action of
the transferring Owner, or whether (under applicable law) the Owner is in fact
the transferor; provided, however, that Management Company shall not have the
right to so terminate this Agreement based on the assertion that a Qualified
Lender fails to so qualify as a permitted transferee under said clauses (i),
(ii) or (iii) of Section 19.01 A.
<PAGE>
END OF ARTICLE XIX
<PAGE>
ARTICLE XX
MISCELLANEOUS
-------------
20.01 Right to Make Agreement
-----------------------
A. Each party warrants, with respect to itself, that neither the execution
of this Agreement nor the finalization of the transactions contemplated hereby
shall: (i) violate any provision of law or any judgment, writ, injunction,
order or decree of any court or governmental authority having jurisdiction over
it; (ii) result in or constitute a breach or default under any indenture,
contract, other commitment or restriction to which it is a party or by which it
is bound, to the extent that the remedies for such breach or default would have
a material adverse effect on such party's ability to perform under this
Agreement; or (iii) require any consent, vote or approval which has not been
taken, or at the time of the transaction involved shall not have been given or
taken. Each party covenants that it has and will continue to have throughout
the Term of this Agreement and any extensions thereof, the full right to enter
into this Agreement and perform its obligations hereunder.
B. Each party agrees that it will, as of the Effective Date, provide the
other party with: (i) certified copies of the applicable resolutions of its
board of directors (if it is a corporation), or written authorization by all
general partners (if it is a partnership) or other appropriate documentation
establishing its authority to execute this Agreement; and (ii) such opinions of
counsel as the other party shall reasonably request regarding the matters
described in this Section 20.01.
20.02 Consents
--------
Wherever in this Agreement the consent or approval of Owner or Management
Company is required, such consent or approval shall (except to the extent that
such consent or approval is specifically designated as being "within the
discretion" of a party, or words to that effect, in the applicable provision)
not be unreasonably withheld, shall be in writing and shall be executed by a
duly authorized officer or agent of the party granting such consent or approval.
If either Owner or Management Company fails to respond within thirty (30) days
to a request by the other party for a consent or approval, such consent or
approval shall be deemed to have been given.
20.03 Agency
------
A. The relationship of Owner and Management Company shall be that of
principal and agent, and nothing contained in this Agreement shall be construed
to create a partnership or joint venture between them or their successors in
interest. Management Company's agency established by this Agreement is coupled
with an interest and may not be terminated by Owner until the expiration of the
Term of this Agreement, except as provided in Section 4.03 and in Articles XV or
XVI. Notwithstanding the agency relationship created by this Agreement, except
to the extent specifically set forth to the contrary in Section 20.12, nothing
contained herein shall prohibit,
<PAGE>
limit or restrict Management Company or any of its Affiliates from developing,
owning, operating, leasing, managing or franchising hotels in the market area
where the Hotel is located, and Management Company and its Affiliates hereby
specifically reserve the right to do any of the foregoing.
B. The agency coupled with an interest herein was created by a complex,
single, integrated transaction. Among other considerations, Owner and Management
Company stipulate that their mutual decision to enter into this Agreement was
based on the following assumptions: (i) that one of the reasons why the Marriott
Hotel System has succeeded in gaining the loyalty of its customers is that
Marriott hotels are located in a large number of geographical markets; (ii) that
the success of many of Management Company's promotional efforts (such as the
Honored Guest Award program) depends on the expectation of its customers that
there will be a Marriott hotel in most destinations where they may choose to
travel; and (iii) by executing this Agreement, Management Company intends to
select this Hotel to represent the Marriott Hotel System in the Hotel's market
area, and, in so doing, Management Company has foregone the opportunity to
select other hotels in this market area. This agency is intended to provide
security for the covenants, promises and guarantees herein. The agency was
purchased for valuable consideration and is not terminable except as
specifically allowed by the express provisions of this Agreement. The parties
intend for this agency to be coupled with an interest, waive any right to claim
that it is terminable at will, and further agree to be equitably estopped from
asserting that the agency is not coupled with an interest.
20.04 Confidentiality
---------------
The parties hereto agree that the matters set forth in this Agreement are
strictly confidential and each party will make every effort to ensure that such
matters are not disclosed to any outside person or entities (including the
press) without the written consent of the other party; provided, however, that
such consent will not be required with respect to: (i) legally required filings
and other disclosures mandated by Legal Requirements; and (ii) in the case of
Owner, disclosure to any Qualified Lender or prospective Qualified Lender, or to
prospective purchasers of the Hotel (subject to the provisions of Section 20.05,
if applicable).
20.05 Equity and Debt Offerings
-------------------------
No reference to Management Company or to any of its Affiliates will be made
in any prospectus, private placement memorandum, offering circular or offering
documentation related thereto (herein collectively referred to as the
"Prospectus"), issued by Owner or one of its Affiliates, which is designed to
interest potential investors or lenders in the Hotel, unless Management Company
has previously received a copy of all such references. However, regardless of
whether Management Company does or does not so receive a copy of all such
references, neither Management Company nor any of its Affiliates will be deemed
a sponsor of the offering described in the Prospectus, nor will it have any
responsibility for the Prospectus, and the Prospectus will so state. Unless
Management Company agrees in advance, the Prospectus
<PAGE>
will not include: (i) any Proprietary Mark; or (ii) except as required by
applicable securities laws, the text of this Agreement. Owner shall be entitled,
however, to include in the Prospectus an accurate summary of this Agreement. If
there are no Legal Requirements pursuant to which such information must be
publicly disclosed, appropriate measures shall be taken to ensure that entities
or individuals receiving such Prospectus shall acknowledge the confidentiality
of such information. Owner shall indemnify, defend and hold Management Company
and its Affiliates (and their respective directors, officers, shareholders,
employees and agents) harmless from and against all loss, costs, liability and
damage (including attorneys' fees and expenses, and the cost of Litigation)
arising out of any Prospectus or the offering described therein.
20.06 Applicable Law
--------------
This Agreement shall be construed under and shall be governed by the laws
of the state where the Hotel is located.
20.07 Recordation
-----------
The terms and provisions of this Agreement shall run with the land
designated as the Site, and with Owner's interest therein, and shall be binding
upon all successors to such interest. At the request of either party, the
parties shall execute an appropriate memorandum of this Agreement in recordable
form and cause the same to be recorded in the jurisdiction where the Hotel is
located. Any cost of such recordation shall be borne by Management Company.
20.08 Headings
--------
Headings of Articles and Sections are inserted only for convenience and are
in no way to be construed as a limitation on the scope of the particular
Articles or Sections to which they refer.
20.09 Notices
-------
Notices, statements and other communications to be given under the terms of
this Agreement shall be in writing, and shall be either (i) delivered by hand
against receipt, or (ii) sent by certified or registered mail, postage prepaid,
return receipt requested or (iii) sent by either Federal Express or by "fax"
machine (provided that, in either case, a confirmatory copy is thereafter sent
by certified or registered mail):
To Owner:
--------
HMC Retirement Properties, Inc.
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department
<PAGE>
with a copy to:
--------------
HMC Retirement Properties, Inc.
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Asset Management Department
72-924.68
To Management Company:
---------------------
Marriott Hotel Services, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department
with a copy to:
--------------
Marriott Hotel Services, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Senior Vice President-Finance
Marriott Hotels, Resorts & Suites
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice which is properly mailed, as described
above, shall be deemed to have been served as of three (3) business days after
said posting.
20.10 Environmental Matters
---------------------
A. Management Company shall indemnify, defend and hold Owner and its
Affiliates (and their respective directors, officers, shareholders, employees
and agents) harmless from and against all loss, cost, liability and damage
(including, without limitation, engineers' and attorneys' fees and expenses, and
the cost of Litigation) arising from the placing, discharge, leakage, use or
storage of Hazardous Materials, in violation of applicable Environmental Laws,
on the Site or in the Hotel by Management Company's employees, representatives
or agents during the Term of this Agreement. Regardless of whether or not a
given Hazardous Material is permitted on the Site under applicable Environmental
Law, Management Company shall only bring on the Site such Hazardous Materials as
are needed in the normal course of business of the Hotel.
B. In the event of the discovery of Hazardous Materials on any portion of
the Site or in
<PAGE>
the Hotel during the Term of this Agreement, Owner shall (except to the extent
such removal is Management Company's responsibility pursuant to Section 20.10 A)
promptly remove (if required by applicable Environmental Law) such Hazardous
Materials, together with all contaminated soil and containers, and shall
otherwise remedy the problem in accordance with all Environmental Laws. Owner
shall (except to the extent that the removal of such Hazardous Materials is
Management Company's responsibility pursuant to Section 20.10 A) indemnify,
defend and hold Management Company and its Affiliates (and their respective
directors, officers, shareholders, employees and agents) harmless from and
against all loss, cost, liability and damage (including, without limitation,
engineers' and attorneys' fees and expenses, and the cost of Litigation) arising
from the presence of Hazardous Materials on the Site or in the Hotel.
C. All costs and expenses of the removal of Hazardous Materials from the
Site or the Hotel pursuant to Section 20.10 B, and of the aforesaid compliance
with all Environmental Laws, and any amounts paid to Management Company pursuant
to the indemnity set forth in the last sentence of Section 20.10 B, shall be
paid by Owner from its own funds, not as a Deduction nor from the FF&E Reserve,
and shall be treated as an expenditure by Owner pursuant to Section 8.03.
20.11 Estoppel Certificates
---------------------
Each party to this Agreement shall at any time and from time to time, upon
not less than thirty (30) days' prior notice from the other party, execute,
acknowledge and deliver to such other party, or to any third party specified by
such other party, a statement in writing: (a) certifying that this Agreement is
unmodified and in full force and effect (or if there have been modifications,
that the same, as modified, is in full force and effect and stating the
modifications); (b) stating whether or not to the best knowledge of the
certifying party (i) there is a continuing default by the non-certifying party
in the performance or observance of any covenant, agreement or condition
contained in this Agreement, or (ii) there shall have occurred any event which,
with the giving of notice or passage of time or both, would become such a
default, and, if so, specifying each such default or occurrence of which the
certifying party may have knowledge; and (c) stating such other information as
the non-certifying party may reasonably request. Such statement shall be binding
upon the certifying party and may be relied upon by the non-certifying party
and/or such third party specified by the non-certifying party as aforesaid. The
obligations set forth in this Section 21.11 shall survive Termination (that is,
each party shall, on request, within the time period described above, execute
and deliver to the non-certifying party and to any such third party a statement
certifying that this Agreement has been terminated).
20.12 Trade Area Restriction
----------------------
Neither Management Company nor any of its Affiliates shall own, build,
franchise, manage or operate any Restricted Hotel, under the "Marriott" brand
name, within the Restricted Area during the period from the Effective Date
through the seventh (7th) anniversary of the Effective Date.
<PAGE>
20.13 Arbitration
-----------
A. In the event of a dispute between Owner and Management Company with
respect to any issue of fact specifically mentioned herein as a matter to be
decided by arbitration, such dispute shall be determined by arbitration as
provided in this Section 20.13.
B. Disputes shall be resolved in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then pertaining. The
decision of the arbitrators shall be binding, final and conclusive on the
parties.
C. Owner and Management Company shall each appoint and pay all fees of a
fit and impartial person as arbitrator who shall have had at least ten (10)
years' recent professional experience in the general subject matter of the
dispute. Notice of such appointment shall be sent in writing by each party to
the other, and the arbitrators so appointed, in the event of their failure to
agree within thirty (30) days after the appointment of the second arbitrator
upon the matter so submitted, shall appoint a third arbitrator. If either Owner
or Management Company shall fail to appoint an arbitrator, as aforesaid, for a
period of twenty (20) days after written notice from the other party to make
such appointment, then the arbitrator appointed by the party having made such
appointment shall appoint a second arbitrator and the two so appointed shall, in
the event of their failure to agree upon any decision within thirty (30) days
thereafter, appoint a third arbitrator. If such arbitrators fail to agree upon a
third arbitrator within forty-five (45) days after the appointment of the second
arbitrator, then such third arbitrator shall be appointed by the American
Arbitration Association from its qualified panel of arbitrators, and shall be a
person having at least ten (10) years' recent professional experience as to the
subject matter in question. The fees of the third arbitrator and the expenses
incident to the proceedings shall be borne equally between Owner and Management
Company, unless the arbitrators decide otherwise. The fees of respective counsel
engaged by the parties, and the fees of expert witnesses and other witnesses
called for the parties, shall be paid by the respective party engaging such
counsel or calling or engaging such witnesses.
D. The decision of the arbitrators shall be rendered within thirty (30)
days after appointment of the third arbitrator. Such decision shall be in
writing and in duplicate, one counterpart thereof to be delivered to Owner and
one to Management Company. A judgment of a court of competent jurisdiction may
be entered upon the award of the arbitrators in accordance with the rules and
statutes applicable thereto then obtaining.
20.14 Affiliates
----------
Except as otherwise specifically set forth in this Agreement, Management
Company shall be entitled to contract with one or more of its Affiliates to
provide goods and/or services to the Hotel only if the prices and/or fees paid
to any such Affiliate are competitive with the prices and/or fees currently
being paid to reputable and qualified parties which are not Affiliates of
<PAGE>
Management Company. In determining, pursuant to the foregoing sentence, whether
such prices and/or fees are competitive, the goods and/or services which are
being purchased shall be grouped in reasonable categories, rather than being
compared item by item.
20.15 Entire Agreement
----------------
This Agreement, together with other writings signed by the parties which
are expressly stated to be supplemental hereto and together with any instruments
to be executed and delivered pursuant to this Agreement, constitutes the entire
agreement between the parties, and supersedes all prior written and oral
understandings. This Agreement may be amended only by a writing signed by both
parties hereto.
END OF ARTICLE XX
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
Attest: HMC RETIREMENT PROPERTIES, INC.
("Owner")
_________________________ By____________________________
Assistant Secretary Vice President
Attest: MARRIOTT HOTEL SERVICES, INC.
("Management Company")
_________________________ By____________________________
Secretary Assistant Vice President
<PAGE>
EXHIBIT "A" TO MANAGEMENT AGREEMENT
Location of Hotel; Legal Description of the Site
------------------------------------------------
<PAGE>
EXHIBIT "A-1" TO MANAGEMENT AGREEMENT
Owner's Initial Cost; Chain Services Cap;
-----------------------------------------
Contributions to FF&E Reserve pursuant to Section 8.02 B;
---------------------------------------------------------
Initial Working Capital
-----------------------
<PAGE>
EXHIBIT "B" TO MANAGEMENT AGREEMENT
Form of Accounting Period Statement
-----------------------------------
<PAGE>
EXHIBIT "C"
[Intentionally Deleted.]
<PAGE>
EXHIBIT "D" TO MANAGEMENT AGREEMENT
Narrative Description of Restricted Area
----------------------------------------
<PAGE>
EXHIBIT "D-1" TO MANAGEMENT AGREEMENT
Map of Restricted Area
----------------------
<PAGE>
EXHIBIT "E" TO MANAGEMENT AGREEMENT
Existing Ground Lease (if applicable);
Existing Mortgage (if any)
<PAGE>
EXHIBIT "F"
Proprietary Marks owned by Owner (if any)
<PAGE>
EXHIBIT "G"
Copy of Title Insurance Policy
------------------------------
<PAGE>
Exhibit 10.5
CONSENT, ASSIGNMENT AND ASSUMPTION
AND AMENDMENT OF MANAGEMENT AGREEMENT
-------------------------------------
THIS CONSENT, ASSIGNMENT AND ASSUMPTION AND AMENDMENT OF MANAGEMENT
AGREEMENT ("Agreement") is entered into this ___ day of __________, 1998, but
effective for all purposes [January 1, 1999] by and among, [Affiliated Entity
Wholly-Owned and Controlled by Host Marriott, L.P. or Host Marriott, L.P.]
("Owner")], [Crestline Capital Corporation Subsidiary], a Delaware limited
liability company having an address at 10400 Fernwood Road, Bethesda, Maryland
20817 ("Lessee"), and [Marriott International, Inc./Marriott Hotel Services,
Inc.], a Delaware corporation having an address at 10400 Fernwood Road,
Bethesda, Maryland 20817 ("Marriott").
WITNESSETH:
WHEREAS, Owner holds fee simple [or leasehold] title to the parcel of real
property described in the Lease (hereinafter defined) containing a hotel
building or buildings and certain related facilities (collectively, the
"Hotel");
Recitals for Hotels Currently owned by Host:
[WHEREAS, the Hotel was formerly owned by Host Marriott Corporation
("Host"), and Host and Marriott previously entered into the management agreement
described in Exhibit B attached hereto for the management of the Hotel by
---------
Marriott (the "Management Agreement"),]
[WHEREAS, the Hotel was transferred by deed from Host to Owner and the
Management Agreement was assigned to and assumed by Owner, and Owner and Lessee
have entered into a lease of the Hotel on _________, 1998, with a commencement
date specified therein (the "Lease"), a copy of which is attached hereto as
Exhibit A.]
- ----------
Recitals for Hotels Currently Owned by Wholly-Owned Subsidiaries of Host,
including HMH Properties, Inc.:
[WHEREAS, the Hotel was formerly owned by ______________ ("Former Owner"),
and Former Owner and Marriott previously entered into the management agreement
described on
<PAGE>
Exhibit B attached hereto, for the management of the Hotel by
- ---------
Marriott (the "Management Agreement")]
[WHEREAS, pursuant to Articles of Merger dated __________, 1998, Former
Owner was merged into Owner, and in such merger, by operation of law, the Hotel
was transferred to Owner and the Management Agreement was assigned to and
assumed by Owner;]
[WHEREAS, Owner and Lessee have entered into a lease of the Hotel on
__________, 1998, with a commencement date specified therein (the "Lease"), a
copy of which is attached hereto as Exhibit A;]
---------
Recitals for Hotels Currently Owned by Host Controlled Partnerships:
[WHEREAS, Owner and Marriott previously entered into the management
agreement described on Exhibit B attached hereto, for the management of the
---------
Hotel by Marriott (the "Management Agreement"),]
[WHEREAS, Owner and Lessee have entered into a lease of the Hotel on
_________, 1998, with a commencement date specified therein (the "Lease"), a
copy of which is attached hereto as Exhibit A;]
---------
Recitals Applicable to All Agreements:
WHEREAS, the management of the Hotel pursuant to the Management Agreement
is of material benefit to Lessee and Owner, and Lessee and Owner desire that the
Hotel continue to be managed thereunder, subject to the terms hereof; and
WHEREAS, Manager would not have consented to the lease of the Hotel
pursuant to the Lease or the assignment of the Management Agreement to Lessee
without Owner and Lessee entering into this Agreement, and Owner and Lessee
desire to so enter into this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, the parties hereto
agree as follows:
[N.B.:ALL OF THE FOLLOWING MUST ULTIMATELY BE CONSISTENT WITH THE LEASE TERMS.]
<PAGE>
1. Assignment and Assumption of Management Agreement. For and during the
-------------------------------------------------
term of the Lease (subject to early termination of the Lease in accordance with
its terms), but not thereafter, Owner assigns unto Lessee the Management
Agreement, and all Owner's right, title and interest as "Owner" thereunder, and
Lessee hereby accepts such assignment and hereby assumes and agrees to perform
all of Owner's obligations as "Owner" under the Management Agreement for and
during the term of the Lease as aforesaid; provided, however, that (a) the
-------- -------
specific obligations of "Owner" under the Management Agreement identified in
Exhibit C-1 attached hereto (the "Retained Obligations") shall at all times
- -----------
apply only to and remain the direct and sole obligations of Owner, subject to
enforcement by Marriott directly against Owner, (b) the specific rights of
"Owner" under the Management Agreement identified in Exhibit C-2 attached hereto
-----------
(the "Reserved Rights") are reserved to and shall be exclusive to and
exercisable only by Owner, (c) the specific rights of "Owner" under the
Management Agreement identified in Exhibit C-3 attached hereto shall be
-----------
exercisable during the term of the Lease by each of Owner and Lessee as to
itself only (as such rights apply to Owner, the "Continuing Rights"); and (d)
subject to the provisions of Section 2, the specific obligations of "Owner"
under the Management Agreement identified on Exhibit C-4 attached hereto (as
-----------
such obligations apply to Owner, the "Continuing Obligations") shall apply to
and be binding upon Lessee as to Lessee's own acts or omissions during the term
of the Lease and shall also continue to apply to and be binding upon Owner as to
Owner's own acts or omissions during the term of the Lease.
Subject to the foregoing provisions of this Section 1, all of Owner's
rights, benefits and privileges with respect to the Management Agreement shall
be vested in Lessee throughout the term of the Lease; provided, however, that
without limiting any of the obligations set forth in Section 5 hereof, upon
termination of the Lease, for whatever reason, all of Owner's rights, benefits
and privileges under the Management Agreement with respect to periods after such
termination shall automatically revert to Owner (and Lessee shall have no
obligation under the Management Agreement with respect to periods after such
termination), without the necessity of any action on the part of Owner, Lessee
or Marriott.
To the extent that any of the provisions of the Management Agreement impose
a greater or inconsistent obligation on Lessee than the corresponding provisions
of the Lease, then Lessee shall be obligated to comply with, and to take all
actions necessary to prevent breaches or defaults under, the relevant provisions
of the Management Agreement. Notwithstanding anything contained herein to the
contrary, Lessee shall perform and comply in every respect with the provisions
of the Management Agreement (except for the Retained Obligations and Continuing
Obligations which, as between Lessee and Owner, shall remain the sole
responsibility of Owner) so as to avoid any default thereunder during the term
of the Lease.
3
<PAGE>
2. No Release of Owner. Owner expressly agrees, for the benefit of
-------------------
Marriott, that, anything herein contained to the contrary notwithstanding: (a)
Owner shall at all times remain obligated to perform all the duties and
obligations of "Owner" under the Management Agreement to the same extent as if
the assignment to Lessee hereunder had not been made; and (b) the exercise by
Lessee of any of the rights assigned hereunder shall not release Owner from any
of its duties or obligations to Marriott under the Management Agreement except
to the extent that such exercise by Lessee constitutes full performance of such
duties and obligations; provided, however, that the foregoing shall not relieve
Lessee of its obligations to Owner under the Lease or Section 1 hereof in
connection with the assignment and assumption of the Management Agreement.
3. Consent by Marriott. Marriott hereby consents (a) to the assignment by
-------------------
Owner to Lessee of the Management Agreement and all of Owner's right, title and
interest as "Owner" thereunder and the acceptance and assumption thereof by
Lessee, in accordance with and subject to the terms of this Agreement, (b) to
the execution, delivery and performance by Owner and Lessee of the Lease and (c)
to the sale of Excess FF&E (as defined in the Lease) from Owner to Lessee or a
third party and to the sale of Working Capital (as defined in the Lease) from
Owner to Lessee, in each case in accordance with the Lease and (d) to the sale,
on the date hereof, of the FF&E listed on Exhibit D to [insert name of
---------
Non-Controlled Subsidiary].
Except as provided in Section 4 hereof, the Management Agreement is not
intended to be modified or amended hereby, and nothing in this Section 3 or any
other section herein, other than Section 4 hereof, shall be deemed to modify or
amend the Management Agreement.
4. Amendments to Management Agreement. The parties hereto do hereby
----------------------------------
consent and agree to the following amendments to the Management Agreement to be
effective as of the Commencement Date:
(a) Section 20.03 is hereby deleted in its entirety and the following is
inserted in lieu thereof:
"20.03 Manager As Independent Contractor
---------------------------------
A. Notwithstanding any other provisions of this Agreement, including,
without limitation, the provisions of Section 2.01, in the performance of
this Agreement, Management Company shall act solely as an independent
contractor, except that in the performance of this Agreement, Management
Company shall have all fiduciary duties of an agent to a principal under
applicable
4
<PAGE>
law and Owner shall have all fiduciary duties of a principal to
an agent under applicable law. Neither this Agreement nor any agreements,
instruments, documents or transactions contemplated hereby shall in any
respect be interpreted, deemed or construed as making Management Company a
partner, joint venturer with, or agent of, Owner, except that, in the
performance of this Agreement, the Management Company will have the
fiduciary duties of an agent and the Owner will have the fiduciary duties
of a principal. Owner and Management Company agree that neither party will
make any contrary assertion, claim or counterclaim in any action, suit,
arbitration or other legal proceedings involving Owner and Management
Company.
B. Owner and Management Company agree that the Hotel is a unique
property, that Management Company's and Owner's mutual agreement to
incorporate the Hotel into the Marriott Hotel System provides Owner and
Management Company with a unique opportunity, and that Management Company
and/or Owner shall be irreparably damaged in the event that this Agreement
is terminated for any reason other than a termination due to expiration of
the term or other termination expressly allowed under the terms hereof.
Accordingly, each party shall be entitled to equitable relief, including
specific performance and injunctive relief, to enforce the terms of this
Agreement. In addition, the parties agree that no asserted right of
termination by either party shall be effective against the other party
until the party asserting the right of termination has obtained either (i)
a judgment or order of a court of competent jurisdiction confirming the
right of such party to terminate this Agreement (which judgment or order
need not be final or nonappealable), or (ii) a consent of the other party
to such right of termination.
C. Notwithstanding the relationship created by this Agreement
(including but not limited to, the provisions of Section 20.03A), except to
the extent specifically set forth to the contrary in Section 20.12, nothing
contained herein shall prohibit, limit or restrict Management Company or
any of its Affiliates from developing, owning, operating, leasing, managing
or franchising hotels in the market area where the Hotel is located, and
Management Company and its Affiliates hereby specifically reserve the right
to do any of the foregoing."
(b) With respect to any future amendments of the Management Agreement, any
such amendments shall require the consent of Owner (unless otherwise permitted
by the Lease), Marriott, and, prior to the termination of the Lease, the Lessee.
5
<PAGE>
(c) Notwithstanding anything in the Management Agreement to the contrary,
subsequent to the date hereof, Management Company shall not knowingly or
intentionally (acting in good faith) enter into any leases or subleases with
respect to the Hotel or any part thereof (1) with any individual or entity in
which Owner, Host O.P. (as defined in the Lease) or Host REIT (as defined in the
Lease) owns, directly or indirectly, a ten percent (10%) or greater interest
within the meaning of Section 856(d)(2)(B) of the Code (as defined in the Lease)
or any similar or successor provision thereto, or (2) on any basis such that the
rental to be paid by the lessee or sublessee thereunder would be based (or
considered to be based), in whole or in part, on either (x) the income or
profits derived by the business activities of the lessee or sublessee, or (y)
any other formula such that any portion of the rent payable under the Lease
would or could to Management Company's actual knowledge (acting in good faith)
fail to qualify as "rents from real property" within the meaning of Section
856(d) of the Code, or any similar or successor provisions thereto. Management
Company shall take reasonable precautions in connection with each lease or
sublease (including providing Owner with prompt notice thereof) to ensure that
such lease or sublease will not result in violation of this Section 4(c).
Management Company may, in its sole and absolute discretion, provide Owner with
a copy of any lease or sublease which Management Company desires to execute, and
Owner shall have ten (10) business days to give written notice to Management
Company indicating whether such lease or sublease would result in a violation of
the terms of this subsection (c). If Owner shall fail to give Management Company
such written notice within such ten (10) business day period, Owner shall be
estopped from claiming that such lease or sublease violates the terms of this
subsection (c).
(d) Prior to the termination of the Lease, upon notice from Owner to
Management Company pursuant to Section 3.5 of the Lease, Management Company
shall, until further notice from Owner, deposit all revenues payable by
Management Company to Lessee directly into the [Lockbox Account] (as defined in
the Lease) for the account of Lessee.
(e) Management Company agrees that any security interest encumbering
Working Capital which is granted to Management Company to secure a loan of
Working Capital made by Management Company pursuant to Section 7.01B of the
Management Agreement in addition to being subordinated to a Qualified Loan,
shall be subordinated to the lien securing the Working Capital Note (as defined
in the Lease) so long as the Working Capital Note is assigned or pledged as
collateral for any Qualified Loan.
(f) If all or any portion of the FF&E at the Hotel is leased by Lessee
pursuant to an Excess FF&E Lease (as defined in the Lease), Lessee shall require
the FF&E lessor to provide Management Company (i) notice of any "Event of
Default" by Lessee thereunder,
6
<PAGE>
contemporaneously with the giving of notice to Lessee, and (ii) a reasonable
opportunity to cure such default. Management Company, at its option, may elect
to cure such default by paying, from Operating Profit otherwise distributable to
Owner under the Management Agreement (or from funds which Management Company
would otherwise pay into the FF&E Reserve if the Hotel is not then subject to
the lien of a Qualified Loan), amounts necessary to cure such default directly
to the lessors of the Excess FF&E Leases, unless prior to the date of making
such payment, Lessee gives written notice to Management Company that there is a
dispute concerning such payments, in which event Management Company shall place
the funds it otherwise would have paid such lessor(s) in an escrow account
pending resolution of such dispute. Notwithstanding the placement of such funds
in such escrow account, Management Company may use such funds as well as
Operating Profit otherwise distributable to Owner under the Management Agreement
(and such funds which Management Company would otherwise pay into the FF&E
Reserve if the Hotel is not then subject to the lien of a Qualified Loan) to
cure any such default if such lessor has initiated any action to obtain the
ownership or possession of the FF&E. [For those Hotels subject to CMBS debt and
certain other cash flow sweep Hotels, the foregoing right to cure Excess FF&E
Lease defaults shall not apply for so long as the Hotel is encumbered by the
currently existing debt].
(g) Section 20.04 is hereby deleted in its entirety and the following is
inserted in lieu thereof:
"20.04 Confidentiality
---------------
The parties hereto agree that the matters set forth in this
Agreement are strictly confidential and each party will make
every effort to ensure that such matters are not disclosed to any
outside person or entities (including the media) without the
written consent of the other party; provided, however, that such
consent will not be required with respect to (i) legally required
filings and other disclosures mandated by applicable law, (ii)
disclosure to any prospective and existing lenders, prospective
and existing ground lessors, or any prospective purchasers of the
Hotel, and (iii) disclosures to the parties' respective outside
legal counsel and financial advisors, provided that such persons
are informed of the confidential nature of such matters and
instructed to keep them confidential."
5. Termination of the Lease.
------------------------
The parties agree that the Management Agreement and the rights and benefits
of Marriott thereunder shall not be terminated or disturbed in any respect
except in accordance with the terms of the Management Agreement (or in
accordance with the terms of any other agreement or
7
<PAGE>
instrument binding on Marriott), and not as a result of any termination of the
Lease. Accordingly, if the Lease is terminated for any reason, including,
without limitation, expiration of the term thereof or the "rejection" thereof,
following Bankruptcy (as defined in Section 10 hereof) of Lessee (a "Lease
Termination"), Owner shall at the time of or prior to such Lease Termination
either (a) elect not to take either of the actions described in clause (b)
below, in which case all of "Owner's" rights, benefits, privileges and
obligations under the Management Agreement with respect to periods after such
Lease Termination shall automatically revert to Owner, or (b) cause an "Approved
Tenant" (as defined hereunder) to (i) succeed to and assume Lessee's rights and
obligations under the Lease, the Management Agreement and this Agreement, or
(ii) enter into a new lease with Owner in substantially the same form as the
Lease with such changes as may be negotiated between Owner and the Approved
Tenant, provided such changes do not materially and adversely restrict, limit or
interfere with the rights of Marriott hereunder or under the Management
Agreement, including without limitation (A) provide for a term which is less
than the unexpired portion of the Lease term, (B) limit or otherwise purport to
reduce, or modify in any manner adverse to Marriott, Owner's responsibility for
the Retained Obligations or Continuing Obligations or (C) amend or modify the
following provisions of the Lease: Section 132, Sections 3.16(a)-(f), Section
4.4, Section 5.1.2, Article 6, Section 17.3 and the definition of any terms used
in any such Sections or Articles (or which would otherwise be acceptable to
Marriott), and succeed to and assume the rights and obligations of Lessee under
the Management Agreement and this Agreement, the intent being that the
relationship between any successor lessee, Owner and Marriott be under the same
terms and conditions as the relationship between Lessee, Owner and Marriott
hereunder and under the Management Agreement, Operating Agreement (as defined
hereunder) and the Lease. The succession of the Lessee's interests as described
in clauses (a) and (b) above are herein referred to as a "Lease Succession."
Any successor to Lessee under clause (b) above shall be subject to
Marriott's prior written approval, which approval shall not be withheld or
delayed if such successor to Lessee meets the criteria set forth below for an
"Approved Tenant." An "Approved Tenant" is hereby defined as an entity which (i)
in Marriott's reasonable judgment, has sufficient financial resources and
liquidity to fulfill the obligations of "Owner" under the Management Agreement,
(ii) is not in control of or controlled by persons who have been convicted of
felonies in any state or federal court, (iii) is not engaged (or affiliated with
any person or entity engaged) in the business of operating (as distinguished
from owning) a branded hotel chain having five thousand (5,000) or more guest
rooms in competition with Marriott International, Inc. and its successors, (iv)
shall be a single purpose entity in which Marriott is a non-equity member with
rights which are no less favorable to Marriott than that which it has as a
non-equity member in Lessee, and which is organized and operated pursuant to an
operating agreement not substantially different from the Operating Agreement of
Lessee dated ___________, 1998 ("Operating Agreement"), or otherwise acceptable
to Marriott, and (v) which does not result in there being more than six (6)
separate, unrelated Business Entities being equity members in the single purpose
entities which are the lessees of hotels owned by Owner and managed by Marriott
International, Inc., or an affiliate thereof. As used herein, the term "Business
Entity" shall mean a business entity (the "Parent") and (a) all of the
subsidiaries which are, directly or indirectly, wholly owned by the Parent, and
(b) all of the Business Entities which directly or indirectly control the
Parent. Such approval or disapproval will be made within ten (10) business days
of request by Owner,
8
<PAGE>
provided Owner has previously provided to Marriott all information reasonably
necessary (or as reasonably requested by Marriott) in order for Marriott to make
its decision. Marriott's failure to approve or disapprove such successor Lessee
within ten (10) business days shall be deemed to constitute Marriott's approval
of such replacement to Lessee.
6. Option to Cure Default.
----------------------
(a) Subject to the provisions of this Agreement, including Section 5 above,
Owner shall have the option, following receipt by Owner of notice from Marriott
of a default by Lessee under the Management Agreement (including, without
limitation, any breach or default referred to in Section 15 hereof), to cure any
such breach or default of Lessee under the Management Agreement, including, if
necessary, the commencement and prosecution of eviction proceedings against
Lessee and the replacement of Lessee as tenant to the extent permitted under the
Lease and this Agreement, and Marriott agrees to accept the performance of Owner
in lieu of the performance of Lessee and to keep the Management Agreement in
full force and effect, subject to the terms thereof. Notwithstanding the
foregoing, no cure by Owner as provided above shall be effective unless
completed or commenced and pursued within the time periods and otherwise in
accordance with the provisions of [Section 16.02] of the Management Agreement;
provided, however, that any default which is, by its nature, susceptible of
being cured by Owner only by having possession of the Hotel shall be deemed
cured by Owner terminating the Lease to the extent permitted thereunder and
assuming all of the rights and obligations of Lessee hereunder and under the
Management Agreement. Marriott shall not exercise any right to terminate the
Management Agreement or any other rights or remedies available under the
Management Agreement or at law or in equity for breach of the Management
Agreement by Lessee unless and until Marriott has notified Owner of such breach
or default and given Owner the time described above to cure such breach or
default.
(b) Subject to the provisions of this Agreement, including Section 5 above,
Lessee shall have the option, following receipt by Lessee of notice from
Marriott of a default by Owner under the Management Agreement with respect to
any Retained Obligations or Continuing Obligations, to cure any such breach or
default of Owner under the Management Agreement, and Marriott agrees to accept
any such performance of Lessee in lieu of the performance of Owner and to keep
the Management Agreement in full force and effect, subject to the terms thereof.
Notwithstanding the foregoing, no cure by Lessee as provided above shall be
effective unless completed or commenced and pursued within the time periods and
otherwise in accordance with the provisions of [Section 16.02] of the Management
Agreement. Marriott shall not exercise any right to terminate the Management
Agreement or any other rights or remedies available under the Management
Agreement or at law or in equity for breach of the Management Agreement by
9
<PAGE>
Owner with respect to Retained Obligations or Continuing Obligations unless and
until Marriott has notified Lessee of such breach or default and given Lessee
the time described above to cure such breach or default.
7. Lease Modification/Consent.
--------------------------
(a) Neither Owner nor Lessee shall agree to any amendment or modification
of the Lease which would materially and adversely restrict, limit or interfere
with the rights of Marriott hereunder or under the Management Agreement without
the prior written consent of Marriott, and no amendment or modification shall be
effective if made in breach hereof. In no event shall any amendment or
modification of the Lease (i) result in a term of the Lease which would be
shorter than the then existing term of the Lease, (ii) limit or otherwise
purport to reduce, or modify in any manner adverse to Marriott, Owner's
responsibility for the Retained Obligations or Continuing Obligations, or (iii)
amend or modify of the following provisions of the Lease: Section 1.32, Section
3.1.6.(a)-(f), Section 4.4, Section 5.1.2, Article 6, Section 17.3 and the
definitions of any terms used in any such Sections or Articles, without the
prior written consent of Marriott. Lessee agrees to deliver copies of any
amendments or modifications of the Lease to Marriott promptly following the
execution and delivery thereof, and this Agreement shall continue in force and
effect as to the Lease as amended or modified in accordance with the provisions
hereof.
(b) Without the prior written consent of Marriott, in its sole and absolute
discretion, Lessee shall not sublease all or any portion of the Hotel, or assign
the Lease, directly or indirectly, except it may assign the Lease to a single
purpose limited liability company which is wholly owned, directly or indirectly,
by Crestline Capital Corporation and in which Marriott is a non-equity member
with rights which are no less favorable to Marriott than that which it has as a
non-equity member in Lessee and which is organized and operated pursuant to an
operating agreement not substantially different from the Operating Agreement
("Approved Affiliate"). Any sublease to any Person, or any assignment to any
Person other than an Approved Affiliate, without Marriott's prior written
consent, in its sole and absolute discretion, shall be null and void.
8. Approvals and Consents. Marriott shall seek all approvals and/or
----------------------
consents required from "Owner" under the Management Agreement, and elections to
be made by "Owner" under the Management Agreement, from Lessee, whether or not
such approvals, consents and elections fall within the Reserved Rights and/or
Continuing Rights. Marriott shall be entitled to rely and act on all approvals
and/or consents obtained or received from, or elections made by, Lessee under
any provisions or requirements of the Management Agreement, without any
obligation to confirm the granting of any approval or consent or the making of
such election by
10
<PAGE>
Owner which may be required under the Lease or to obtain the signature of any
representative of Owner, and Marriott shall not be required to grant any
additional time for Owner to instruct the Lessee with respect to such matters.
Notwithstanding anything set forth herein to the contrary, the foregoing shall
not release Lessee from any consent requirements or other obligations it may
have to Owner under the Lease with respect to granting such approvals and/or
consents or making such elections.
9. Change in Control of Lessee.
---------------------------
(a) As provided in the Lease, in the event of any Change in Control (as
defined in the Lease), Owner shall have the right to terminate the Lease, which
termination shall be a Lease Termination governed by the provisions of
Section 5.
(b) If a Change in Control occurs which results in Lessee being in control
of or controlled by persons who (i) have been convicted of felonies in any state
or federal court, or (ii) are engaged (or affiliated with any person or entity
engaged) in the business of operating (as distinguished from owning) a branded
hotel chain having five thousand (5,000) or more guest rooms in competition with
Marriott International, Inc., its successors and assigns, then Marriott shall
have the right, but not the obligation, in its sole and absolute discretion, to
require Owner to terminate the Lease. Upon such notice, Owner shall immediately
undertake such actions as may be necessary to terminate the Lease and must
within two hundred seventy (270) days after such written notice by Marriott (the
"Transition Period"), effect a Lease Termination and Lease Succession in
accordance with Section 5. The Transition Period may be extended for one (1)
additional period of ninety (90) days if Marriott does not approve a proposed
successor lessee designated by Owner or if, at the time of the expiration of the
initial term of the Transition Period, Owner is engaged actively in negotiations
with a proposed successor Lessee which Marriott has agreed in an Approved
Tenant. In the event that a Lease Succession has not occurred prior to the end
of the Transition Period, the Lease shall terminate at the end of the Transition
Period and all of "Owner's" rights, benefits, privileges and obligations under
the Management Agreement with respect to periods after such termination shall
automatically revert to Owner. With respect to Lessees not directly or
indirectly controlled by CCC, for purposes of this Section 9, the definition of
"Change of Control" shall include the acquisition by Lessee or any Affiliate
thereof of a branded hotel chain having five thousand (5,000) or more guest
rooms in competition with Marriott International, Inc. and its successors. [The
Change of Control definition in the Lease for future lessees that are not
controlled by CCC shall be modified to reflect this provision].
(c) At any time during the Transition Period, upon Marriott's prior written
instruction, which instruction Marriott shall have the right but not the
obligation to issue in its sole and absolute discretion, Owner shall terminate
the Lease immediately and enter into a new lease with Marriott or its affiliate
for the then remaining term of the Transition Period, which
11
<PAGE>
lease shall be identical to the Lease except that its term shall be for the then
remaining term of the Transition Period. In no event shall Marriott be liable or
responsible for any action or inaction of the Lessee occurring prior to the date
of the execution of such new lease.
10. Rejection of Lease Following Bankruptcy of Owner. In the event that a
------------------------------------------------
"Default" described in [Section 16.01 A, B or C] of the Management Agreement
("Bankruptcy") shall have occurred on the part of Owner, and thereafter the
Lease shall be rejected on behalf of Owner under Section 365 of the United
States Bankruptcy Code ("Code") or any other applicable law or authority
("Rejection"), Lessee shall promptly notify Marriott in writing of such
Rejection and Lessee shall, as directed by Marriott, either treat the Lease as
terminated by such Rejection or retain its rights under the Lease as permitted
by the Code or other applicable law or authority.
11. Rejection of Management Agreement Following Bankruptcy of Lessee. As
----------------------------------------------------------------
provided in the Lease, Owner shall have the right to terminate the Lease in the
event that the Management Agreement is terminated for any reason other than a
default thereunder by Marriott or by Owner. In the event that the Management
Agreement is terminated as the result of a Rejection by Lessee following
Bankruptcy of Lessee, the Management Agreement will remain effective with
respect to Owner and Owner shall, if so directed by Marriott (but only to the
extent such right may be exercised under the Code and other applicable law and
authority), terminate the Lease, subject to the provisions of Section 5 hereof.
12. Owner and Lessee Will Not Join in Involuntary Petitions. Owner and
-------------------------------------------------------
Lessee each agree that it will not join in any involuntary petition against the
other under the Code or any other similar federal or state law providing for
debtor relief without the consent, in writing, of Marriott.
13. Notice of Default. So long as the Management Agreement is in effect,
-----------------
(a) each of Owner and Lessee shall send a copy to Marriott of any notice of
default, or any notice of any intention to terminate the Lease, that either
gives under the Lease, and (b) Marriott shall send a copy of any notice of
default under the Management Agreement (including, without limitation, any
breach or default referred to in Section 15 hereof), or any notice of any
intention to cancel or terminate the Management Agreement, to Lessee and Owner;
any such notice shall be in accordance with the notice provisions set forth
herein, and any such notice shall not be effective until received by each of
Lessee and Owner.
14. Information for Owner. The parties agree that the following reports and
---------------------
electronic feeds of information currently provided to Owner shall be provided to
Owner and Lessee during the term of the Lease: (1) Project status reports from
"Architecture and
12
<PAGE>
Construction Projects" (at least once each Accounting Period); (2) "Architecture
and Construction Projects" feed detailing the billing and cost information for
the Hotel (at least once during each Accounting Period); and (3) "Authorized
Expenditure" feed which details all capital expenditures made by the Hotel (at
least once each week).
15. Defaults. The parties agree that during the term of the Lease
--------
(subject to early termination in accordance with its terms), an event with
respect to either Owner or Lessee described in Section [16.01 A, B or C] of the
Management Agreement shall constitute a Default with respect to "Owner" under
the Management Agreement, and a breach by Owner or Lessee of any covenants,
undertakings, obligations or conditions under this Agreement shall constitute a
Default with respect to "Owner" under Section [16.01 E] of the Management
Agreement.
16. General.
a. Multiple Counterparts. This Agreement may be executed in multiple
---------------------
counterparts, each of which shall be deemed an original.
b. Modification. This Agreement may not be modified orally or in any
------------
other manner other by an agreement in writing signed by the parties hereto.
c. Notices. Notices, statements and other communications to be given
-------
under the terms of this Agreement and the Management Agreement shall be in
writing, and shall be either (i) delivered by hand against receipt, or (ii) sent
by certified or registered mail, postage prepaid, return receipt requested, or
(iii) sent by either Airborne Express (or other nationally recognized commercial
delivery service) or by "fax" machine (provided that, in either case, a
confirmatory copy is thereafter sent by certified or registered mail):
If to Owner:
If to Lessee:
13
<PAGE>
If to Marriott: [Marriott International/Marriott Hotel Services, Inc.]
10400 Fernwood Road
Bethesda, MD 20817
Attn.: Law Department (Hotel Operations)
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice which is properly mailed, as described
above, shall be deemed to have been served as of three (3) business days after
said posting. The parties hereby agree that during the period in which Owner's
rights under the Management Agreement are assigned to Lessee under Section 1
hereof, the address for notices to "Owner" under the Management Agreement shall
be the address for Lessee under this Agreement.
d. Term. The term of this Agreement shall commence on the Commencement
----
Date (as defined in the Lease) and shall terminate on the date of termination of
the Management Agreement in accordance with its terms; provided, however, that
the rights and obligations of Lessee hereunder shall terminate on the earlier to
occur of the expiration or termination of the Lease or the Management Agreement.
e. No Waiver. No failure by any party hereto to exercise, and no delay
---------
in exercising, any right under the Management Agreement or this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right preclude any other or further exercise thereof or the exercise of any
other right.
f. Remedies Cumulative. The rights and remedies of any party hereto
-------------------
provided in the Management Agreement or this Agreement are cumulative and are in
addition to, and not exclusive of, any rights or remedies provided by law or
equity.
g. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the jurisdiction in which the Hotel is located.
h. Severability. The invalidity, illegality or unenforceability of any
------------
one or more phrases, sentences, clauses or sections contained in this Agreement
shall not affect the validity, legality or enforceability of the remaining
portions of this Agreement.
i. Recordation of Memorandum. The parties shall execute simultaneously
-------------------------
with this Agreement sufficient copies of a "Memorandum of Management Agreement"
in recordable
14
<PAGE>
form satisfactory to all parties. The Memorandum shall be recorded promptly
following the effective date of this Agreement in the jurisdiction in which the
Hotel is located. Any cost of such recordation shall be paid for by Owner. Upon
termination of the Management Agreement in accordance with its terms, the
parties agree to execute and deliver to each other a recordable form of
termination of the Memorandum in form reasonably satisfactory to each party.
j. Successors and Assigns. The rights and obligations hereunder of the
----------------------
parties hereto shall bind and inure to the benefit of their respective
successors and permitted assigns.
k. Captions. The captions and headings of the sections and subsections
--------
of this Agreement are for purposes of convenience and reference only and shall
not limit or otherwise affect the meaning hereof.
l. Time of the Essence. Time shall be of the essence in the performance
-------------------
of this Agreement.
m. Incorporation of Recitals. The recitals hereto are incorporated
-------------------------
herein as part of this Agreement.
n. Definitions. All capitalized terms used herein and not otherwise
-----------
defined herein shall have the meanings specified therefor in the Management
Agreement.
o. Confidentiality. The parties hereto agree that the matters set forth
---------------
in this Agreement are strictly confidential and each party will make every
effort to ensure that such matters are not disclosed to any outside person or
entities (including the media) without the written consent of the other party;
provided, however, that such consent will not be required with respect to (i)
legally required filings and other disclosures mandated by applicable law, (ii)
disclosure to any prospective and existing lenders, prospective and existing
ground lessors, or any prospective purchasers of the Hotel, and (iii)
disclosures to the parties' respective outside legal counsel and financial
advisors, provided that such persons are informed of the confidential nature of
such matters and instructed to keep them confidential.
[Continued on next page.]
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement as of the date first above written.
WITNESS: OWNER:
By:
-----------------------------------
Name:
---------------------------------
LESSEE:
By:
-----------------------------------
Name:
---------------------------------
MARRIOTT:
By:
-----------------------------------
Name:
---------------------------------
16
<PAGE>
EXHIBIT A
Lease
-----
17
<PAGE>
EXHIBIT B
Management Agreement
--------------------
18
<PAGE>
EXHIBIT C-1
Retained Obligations
--------------------
19
<PAGE>
EXHIBIT C-2
Reserved Rights
---------------
20
<PAGE>
EXHIBIT C-3
Continuing Rights
-----------------
21
<PAGE>
EXHIBIT C-4
Continuing Obligations
----------------------
22
<PAGE>
Exhibit 10.6
================================================================================
RESIDENCE INN
MANAGEMENT AGREEMENT
between
HMH PROPERTIES, INC.
("Owner")
and
RESIDENCE INN BY MARRIOTT, INC.
("Management Company")
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I - DEFINITION OF TERMS
- -------------------------------
<S> <C>
1.01 Definition of Terms.................................................. 2
ARTICLE II - APPOINTMENT OF MANAGEMENT COMPANY
- ----------------------------------------------
2.01 Appointment ......................................................... 37
2.02 Delegation of Authority.............................................. 37
2.03 Operational Standards................................................ 38
2.04 Limitations on Authority............................................. 42
2.05 Covenants, Conditions or Restrictions................................ 44
2.06 Licenses and Permits................................................. 46
ARTICLE III - OWNERSHIP OF THE INN
- ----------------------------------
3.01 Ownership of the Inn................................................. 47
ARTICLE IV - TERM
- -----------------
4.01 Term................................................................. 49
4.02 Actions to be Taken Upon Termination................................. 52
4.03 Performance Termination.............................................. 55
ARTICLE V - COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS
- -------------------------------------------------------------
5.01 Management Fees...................................................... 58
5.02 Distribution of Operating Profit..................................... 58
5.03 Accounting and Interim Payments...................................... 59
5.04 Accounting for Period Prior to Effective Date........................ 61
ARTICLE VI - FINANCING OF THE INN
- ---------------------------------
6.01 Amendments of Management Agreement................................... 62
6.02 Notice and Opportunity to Cure....................................... 63
6.03 Collateral Assignment of Management Agreement........................ 65
6.04 Subordination of Management Agreement................................ 67
6.05 Non-Disturbance Agreement............................................ 68
6.06 Attornment........................................................... 69
6.07 No Modification or Termination of Agreement.......................... 71
6.08 Owner's Right to Finance the Inn..................................... 71
6.09 Cross Collateralization.............................................. 72
6.10 Sale\Leaseback Transactions.......................................... 73
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE VII - WORKING CAPITAL AND FIXED ASSET SUPPLIES
- ------------------------------------------------------
<S> <C>
7.01 Working Capital...................................................... 75
7.02 Fixed Asset Supplies................................................. 76
ARTICLE VIII - REPAIRS, MAINTENANCE AND REPLACEMENTS
- ----------------------------------------------------
8.01 Routine Repairs and Maintenance...................................... 78
8.02 FF&E Reserve......................................................... 78
8.03 Building Alterations, Improvements, Renewals,
and Replacements................................................ 85
8.04 Liens................................................................ 90
8.05 Ownership of Replacements, Etc....................................... 91
ARTICLE IX - BOOKKEEPING AND BANK ACCOUNTS
- ------------------------------------------
9.01 Books and Records.................................................... 92
9.02 Inn Accounts, Expenditures........................................... 94
9.03 Annual Operating Budget.............................................. 95
9.04 Operating Losses; Credit............................................. 96
9.05 Consolidated Reports................................................. 97
ARTICLE X - PROPRIETARY MARKS; INTELLECTUAL PROPERTY
- ----------------------------------------------------
10.01 Proprietary Marks................................................... 98
10.02 Purchase of Inventories and Fixed Asset Supplies.................... 99
10.03 Computer Software and Equipment..................................... 99
10.04 Intellectual Property............................................... 100
10.05 Breach of Covenant.................................................. 101
ARTICLE XI - POSSESSION AND USE OF INN
- --------------------------------------
11.01 Quiet Enjoyment..................................................... 102
11.02 Use................................................................. 102
11.03 Chain Services...................................................... 103
11.04 Owner's Right to Inspect............................................ 106
11.05 Indemnity........................................................... 106
ARTICLE XII - INSURANCE
- -----------------------
12.01 Interim Insurance................................................... 109
12.02 Property and Operational Insurance.................................. 109
12.03 General Insurance Provisions........................................ 111
12.04 Cost and Expense.................................................... 112
12.05 Owner's Option to Obtain Certain Insurance.......................... 114
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE XIII - TAXES
- --------------------
<S> <C>
13.01 Real Estate and Personal Property Taxes............................. 117
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE XIV - INN EMPLOYEES
- ---------------------------
<S> <C>
14.01 Employees........................................................... 121
ARTICLE XV - DAMAGE, CONDEMNATION AND FORCE MAJEURE
- ---------------------------------------------------
15.01 Damage and Repair................................................... 125
15.02 Condemnation........................................................ 126
15.03 Force Majeure....................................................... 127
ARTICLE XVI - DEFAULTS
- ----------------------
16.01 Definition of "Default.............................................. 130
16.02 Definition of "Event of Default".................................... 131
16.03 Remedies Upon an Event of Default................................... 132
16.04 Owner's Estate...................................................... 133
ARTICLE XVII - WAIVER AND PARTIAL INVALIDITY
- --------------------------------------------
17.01 Waiver.............................................................. 135
17.02 Partial Invalidity.................................................. 135
ARTICLE XVIII - ASSIGNMENT
- --------------------------
18.01 Assignment.......................................................... 136
ARTICLE XIX - SALE OF THE INN
- -----------------------------
19.01 Sale of the Inn..................................................... 139
ARTICLE XX - MISCELLANEOUS
- --------------------------
20.01 Right to Make Agreement............................................. 144
20.02 Consents............................................................ 145
20.03 Agency.............................................................. 145
20.04 Confidentiality..................................................... 146
20.05 Equity Offerings.................................................... 147
20.06 Applicable Law...................................................... 148
20.07 Recordation......................................................... 148
20.08 Headings............................................................ 148
20.09 Notices............................................................. 149
20.10 Environmental Matters............................................... 150
20.11 Estoppel Certificates............................................... 151
20.12 Trade Area Restriction.............................................. 153
20.13 Arbitration......................................................... 153
20.14 Entire Agreement.................................................... 155
</TABLE>
<PAGE>
Exhibit "A" Location of Inn and Legal Description
Exhibit "A-1" Number of Suites and Brief Description of Facilities; Priority
Basis; Performance Termination Threshold; Loan Priority Basis (number set forth
in (i) of Definition); Revenue Index Threshold
Exhibit "B" Form of Accounting Period Statement
Exhibit "C" [Intentionally Deleted]
Exhibit "D" Map of Restricted Area
Exhibit "D-1" Narrative Description of Restricted Area
Exhibit "E" Proprietary Marks which will remain the property of Owner after
Termination
Exhibit "F" Title Encumbrances; Existing CC&R's (separately describing those
charges thereunder which will be treated as capital expenditures
under Section 8.03); Existing Ground Lease (if applicable);
Existing Mortgages (if any)
<PAGE>
RESIDENCE INN
MANAGEMENT AGREEMENT
--------------------
This Management Agreement ("Agreement") is executed as of the _____________
day of ________________________, 1993 ("Effective Date"), by HMH PROPERTIES,
INC., ("Owner"), a Delaware corporation, with a mailing address at 10400
Fernwood Road, Bethesda, Maryland 20817 and RESIDENCE INN BY MARRIOTT, INC.
(Management Company"), a Delaware corporation, with a mailing address at 10400
Fernwood Road, Bethesda, Maryland 20817.
R E C I T A L S :
A. Owner is the owner of the Inn (as defined and more fully described in
Section 1.01) which is located as set forth on Exhibit "A" hereto; and
B. Owner desires to have Management Company manage and operate the Inn,
and Management Company is willing to perform such services for the account of
Owner on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
<PAGE>
ARTICLE I
DEFINITION OF TERMS
-------------------
1.01 Definition of Terms
-------------------
The following terms when used in this Agreement shall have the meanings
indicated:
"Accounting Period" shall mean each of the four (4) week accounting periods
-----------------
which are used in Management Company's accounting system, except that an
Accounting Period may occasionally contain five (5) weeks when necessary to
conform Management Company's accounting system to the calendar.
"Accounting Period Statement" shall have the meaning set forth in Section
---------------------------
5.03.
"Additional Invested Capital" shall mean the cumulative total, as of any
---------------------------
given date during the Term, of the following: (i) any expenditures made by
Owner in response to a Building Estimate, pursuant to Section 8.03, and any
expenditures by Owner pursuant to Section 20.10.C; (ii) any contributions by
Owner to the FF&E Reserve (beyond the funding described in Section 8.02.B and
8.02.E); other than those contributions which are reimbursed to Owner under
Section 8.02.F; (iii) any payments by Owner with regard to special assessments
or impact fees, pursuant to Section 13.01.B(2) or 13.01.B(3); and (iv) any
costs, expenses and charges which are described on Exhibit "F" hereto as
September 13, 1993 2
<PAGE>
"capital charges" pursuant to Section 2.05.A. Owner shall give Management
Company prompt notice of any amounts for which it has provided funding which
constitute "Additional Invested Capital" together with such evidence of funding
as Management Company may reasonably require.
"Affiliate" shall mean any individual or entity directly or indirectly
---------
through one or more intermediaries, controlling, controlled by or under common
control with a party. The term "control," as used in the immediately preceding
sentence, means, with respect to a corporation, the right to the exercise,
directly or indirectly, of fifty-one percent (51%) or more of the voting rights
attributable to the shares of the controlled corporation, and, with respect to
an entity that is not a corporation, the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of the
controlled entity.
"Agreement" shall have the meaning set forth in the Preamble.
---------
"Annual Operating Budget" shall have the meaning set forth in Section 9.03.
-----------------------
"Annual Operating Statement" shall have the meaning set forth in Section
--------------------------
9.01.
"Available Cash Flow" shall mean an amount, with respect to
-------------------
September 13, 1993 3
<PAGE>
each Fiscal Year or portion thereof, (prorated for any partial Fiscal Year)
during the Term of this Agreement, equal to the excess, if any, of the Operating
Profit for such Fiscal Year over the sum of: (i) the applicable Owner's Priority
in such Fiscal Year, plus; (ii) the Base Management Fee, plus; (iii) Deferred
Contingent Base Management Fees paid to Manager in such Fiscal Year.
"Base Management Fee" shall mean for each Fiscal Year (prorated for any
-------------------
partial Fiscal Year) during the Term of this Agreement, an amount equal to two
percent (2%) of Gross Revenues, which shall be paid to Management Company as
compensation (in addition to the Residence Inn System Fee and Incentive
Management Fee) for the services performed pursuant to this Agreement.
"Building Estimate" shall have the meaning set forth in Section 8.03.A.
-----------------
"Capitalization Multiple" shall mean the number ten (10).
-----------------------
"Case Goods" shall mean furniture and furnishings used in the Inn,
----------
including, without limitation: chairs, beds, chests, headboards, desks, lamps,
tables, television sets, kitchen equipment, mirrors, pictures, wall decorations
and similar items.
"CC&R's" shall have the meaning set forth in Section 2.05.
------
"Chain Services" shall have the meaning set forth in Section 11.03.
--------------
September 13, 1993 4
<PAGE>
"Coverage Ratio" shall mean the number one and three-tenths (1.3).
--------------
"Cure Payment" shall have the meaning set forth in Section 4.03.B.
------------
"Deductions" shall have the meaning set forth in the definition of
----------
Operating Profit.
"Default" shall have the meaning set forth in Section 16.01.
-------
"Deferred Contingent Base Management Fees" shall mean an amount equal to
----------------------------------------
(a) the sum of all unpaid Base Management Fees deferred in accordance with
Section 5.02.B less (b) all sums paid to Management Company in accordance with
the provisions of Section 5.02.C.
"Effective Date" shall have the meaning set forth in the Preamble.
--------------
"Employee Claims" shall mean any and all claims (including all fines,
---------------
judgments, penalties, costs, Litigation and/or arbitration expenses, attorneys'
fees and expenses, and costs of settlement with respect to any such claim) by
any employee or employees of Management Company against Owner or Management
Company with respect to the employment at the Inn of such employee or employees.
"Employee Claims" shall include, without limitation, the following: (i) claims
which are eventually resolved by arbitration, by Litigation or by settlement;
(ii)
September 13, 1993 5
<PAGE>
claims which also involve allegations that any applicable employment-related
contracts affecting the employees at the Inn have been breached; and (iii)
claims which involve allegations that one or more of the Employment Laws has
been violated; provided, however, that "Employee Claims" shall not include
claims for worker compensation benefits (which shall be governed by Article XII
hereof) or for unemployment benefits.
"Employment Laws" shall mean any federal, state or local law (including the
---------------
common law), statute, ordinance, rule, regulation, order or directive with
respect to employment, conditions of employment, benefits, compensation, or
termination of employment that currently exists or may exist at any time during
the Term of this Agreement, including, but not limited to, Title VII of the
Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Workers
Adjustment and Retraining Notification Act, the Occupational Safety and Health
Act, the Immigration Reform and Control Act of 1986, the Polygraph Protection
Act of 1988 and the Americans With Disabilities Act of 1990.
"Environmental Laws" shall mean: any federal, state or local law, rule or
------------------
regulation (both present and future) dealing with the use, generation,
treatment, storage, disposal or abatement of Hazardous Materials, including, but
not limited to, (i) the Comprehensive Environmental Response, Compensation and
Liability
September 13, 1993 6
<PAGE>
Act, 42 U.S.C. Section 9601 et seq., as amended; (ii) the regulations
-- ---
promulgated thereunder, from time to time; (iii) all federal, state and local
laws, rules and regulations (now or hereafter in effect) dealing with the use,
generation, treatment, storage, disposal or abatement of Hazardous Materials;
and (iv) the regulations promulgated thereunder, from time to time.
"Event of Default" shall have the meaning set forth in Section 16.02.
----------------
"Existing CC&R's" shall have the meaning set forth in Section 2.05.A.
---------------
"Existing Ground Leases" shall mean the ground leases which are listed on
----------------------
Exhibit "F", but for purposes of this Agreement shall not include any amendments
or modifications after the Effective Date.
"Existing Mortgages" shall mean the Mortgages which are listed on Exhibit
------------------
"F", but for purposes of this Agreement shall not include any amendments or
modifications after the Effective Date.
"FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case Goods,
----
Shuttle Vehicles, signage and equipment at the Inn (including, without
limitation, facsimile machines, communication systems, audio-visual equipment,
and all computer and other equipment needed for the reservation system and the
September 13, 1993 7
<PAGE>
property management system, and all other electronic systems needed for any Inn,
from time to time, as well as similar systems based on other technologies which
may be developed in the future).
"FF&E Estimate" shall have the meaning set forth in Section 8.02.C.
-------------
"FF&E Reserve" shall have the meaning set forth in Section 8.02.A.
------------
"First Notice" shall have the meaning set forth in Section 6.02.
------------
"Fiscal Year" shall mean Management Company's Fiscal Year which now ends at
-----------
midnight on the Friday closest to December 31 in each calendar year; the new
Fiscal Year begins on the Saturday immediately following said Friday. Any
partial Fiscal Year between the Effective Date and the commencement of the first
full Fiscal Year and any partial Fiscal Year between the end of the last full
Fiscal Year and the Termination of this Agreement, shall constitute a separate
Fiscal Year. If Management Company's Fiscal Year is changed in the future,
appropriate adjustment to this Agreement's reporting and accounting procedures
shall be made; provided, however, that no such change or adjustment shall alter
the Term of this Agreement, or in any way reduce the distributions of Operating
Profit or other payments due Owner
September 13, 1993 8
<PAGE>
hereunder, or otherwise significantly and adversely affect Owner's rights or
obligations under this Agreement.
"Fixed Asset Supplies" shall mean supply items included within "Property
--------------------
and Equipment" under the Uniform System of Accounts, including linen, cleaning
supplies, china, glassware, tableware, uniforms, and similar items.
"Force Majeure" shall mean acts of God, acts of war, civil disturbance,
-------------
governmental action (including the revocation or refusal to grant a License,
where such revocation or refusal is not due to the fault of the party whose
performance is to be excused for reasons of Force Majeure), strikes, lockouts,
fire, unavoidable casualties or any other causes beyond the reasonable control
of either party (excluding, however: (i) lack of financing; or (ii) general
economic and/or market factors).
"Foreclosure" shall mean any exercise of the remedies available to a
-----------
Holder, upon a default under the Secured Loan held by such Holder, which results
in a transfer of title to or possession of the Inn. The term "Foreclosure"
shall include, without limitation, any one or more of the following events, if
they occur in connection with a default under a Secured Loan: (i) a transfer by
judicial foreclosure; (ii) a transfer by deed in lieu of foreclosure; (iii) the
appointment by a court of a receiver to assume possession of the Inn; (iv) a
transfer of
September 13, 1993 9
<PAGE>
either ownership or control of the Owner, by exercise of a stock pledge or
otherwise; (v) if title to the Inn is held by a tenant under a ground lease, an
assignment of the tenant's interest in such ground lease; or (vi) any similar
judicial or non-judicial exercise of the remedies held by the Holder.
"Foreclosure Date" shall mean the date on which title to or possession of
----------------
the Inn is transferred by means of a Foreclosure.
"Future CC&R's" shall have the meaning set forth in Section 2.05.B.
-------------
"GDP Deflator" shall mean the "Gross Domestic Product Implicit Price
------------
Deflator" issued from time to time by the United States Bureau of Economic
Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not
at such time so prepared and published, any comparable index selected by Owner
and reasonably satisfactory to Management Company (a "Substitute Index") then
prepared and published by an agency of the Government of the United States,
appropriately adjusted for changes in the manner in which such index is prepared
and/or year upon which such index is based. Any dispute regarding the selection
of the Substitute Index or the adjustments to be made thereto shall be settled
by arbitration in accordance with Section 20.13. Except as otherwise expressly
stated herein, whenever a number or amount is required to be "adjusted by the
September 13, 1993 10
<PAGE>
GDP Deflator", or similar terminology, such adjustment shall be equal to the
percentage increase or decrease (except that, for purposes of this Agreement,
the GDP Deflator shall not be decreased below its level as of the Effective
Date) in the GDP Deflator which is issued for the month in which such adjustment
is to be made (or, if the GDP Deflator for such month is not yet publicly
available, the GDP Deflator for the most recent month for which the GDP Deflator
is publicly available) as compared to the GDP Deflator which was issued for the
month in which the Effective Date occurred.
"Gross Revenues" shall mean, for each Fiscal Year during the Term of this
--------------
Agreement, all revenues and receipts of every kind derived from operating the
Inn and parts thereof, including, but not limited to: income (from both cash
and credit transactions), before commissions and discounts for prompt or cash
payments, from rental of rooms, stores, offices, meeting, exhibit or sales space
of every kind; parking fees, license, lease and concession fees and rentals (not
including gross receipts of licensees, lessees and concessionaires); income from
vending machines; health club membership fees; food and beverage sales;
wholesale and retail sales of merchandise (other than proceeds from the sale of
FF&E no longer necessary to the operation of the Inn, which shall be deposited
in the FF&E Reserve as set forth in
September 13, 1993 11
<PAGE>
Section 8.02.D hereof); service charges, to the extent not distributed to the
employees at the Inn as gratuities; and proceeds, if any, from business
interruption or other loss of income insurance; provided, however, that Gross
Revenues shall not include the following: gratuities to Inn employees; federal,
state or municipal excise, sales, use or similar taxes collected directly from
patrons or guests or included as part of the sales price of any goods or
services; insurance proceeds (other than proceeds from business interruption or
other loss of income insurance); condemnation proceeds (other than for a
temporary taking); any proceeds from any Sale of the Inn or from the refinancing
of any debt encumbering the Inn; proceeds from the disposition of FF&E no longer
necessary for the operation of the Inn; interest which accrues on amounts
deposited in either the FF&E Reserve or any escrow accounts which are
established in accordance with Section 13.01.C; or Cure Payments.
"Ground Lease Rental" shall mean the annual rental, as of the Effective
-------------------
Date, under the Existing Ground Lease.
"Ground Lessor" shall mean the landlord under the Existing Ground Lease.
-------------
"Hazardous Materials" shall mean and include any substance or material
-------------------
containing one or more of any of the following: "hazardous material",
"hazardous waste", "hazardous substance",
September 13, 1993 12
<PAGE>
"regulated substance", "petroleum", "pollutant", "contaminant", or "asbestos",
as such terms are defined in any applicable Environmental Law, in such
concentration(s) or amount(s) as may impose clean-up, removal, monitoring or
other responsibility under any applicable Environmental Laws, or which may
present a significant risk of harm to guests, invitees or employees of the Inn.
"Holder" shall mean any holder, from time to time, of any Secured Loan.
------
"Impositions" shall mean all real estate and personal property taxes,
-----------
levies, assessments and similar charges (other than those which are specifically
excluded pursuant to Section 13.01.B) including, without limitation, the
following: all water, sewer or similar fees, rates, charges, excises or levies;
license fees; permit fees; inspection fees and other authorization fees and
other governmental charges of any kind or nature whatsoever, whether general or
special, ordinary or extraordinary, foreseen or unforeseen, or hereinafter
levied or assessed of every character (including all interest and penalties
thereon), which at any time during or in respect of the Term of this Agreement
may be assessed, levied, confirmed or imposed on Owner with respect to the Inn
or otherwise in respect of or be a lien upon the Inn. Impositions shall not
include any income or
September 13, 1993 13
<PAGE>
franchise taxes payable by Owner or Management Company. Impositions shall
include any taxes, levies, assessments and similar charges which may be enacted
by the applicable governmental authority in lieu of, or in complete or partial
substitution for, Impositions.
"Incentive Management Fee" shall mean, for each Fiscal Year during the Term
------------------------
of this Agreement, the payments which shall be made to Management Company, as
compensation (in addition to the Base Management Fee and the Residence Inn
System Fee) to Management Company for its services under this Agreement, in the
amount of fifty percent (50%) of the Available Cash Flow in each Fiscal Year (or
portion thereof); provided, however, that the cumulative Incentive Management
Fee received by Management Company, from the Effective Date through any given
point in time during the Term of this Agreement, shall not exceed twenty percent
(20%) of the cumulative Operating Profit from the Effective Date through such
point in time; provided further, however, that in no event shall the aforesaid
cumulative limitation require Management Company to refund to Owner any
Incentive Management Fees which were paid in a previous Fiscal Year and which
were within such limitation as of the time when they were paid.
"Initial Term" shall have the meaning set forth in Section
------------
September 13, 1993 14
<PAGE>
4.01.
"Inn" shall mean the hotel, containing approximately the number of Suites
---
which are set forth on Exhibit "A"-1 hereto, which Owner owns at the location
specified in Exhibit "A"; the term "Inn" shall include the Site, the
improvements built thereon, and all FF&E, Fixed Asset Supplies and Inventories
installed therein.
"Inn Retention" shall have the meaning set forth in Section 12.03 hereof.
-------------
"Intellectual Property" shall mean: (i) all Software; and (ii) all
---------------------
manuals, brochures and directives issued by Management Company to its employees
at the Inn regarding the procedures and techniques to be used in operating the
Inn.
"Interest Rate" shall mean an annual rate of interest equal to the Prime
-------------
Rate (as adjusted from time to time) plus three hundred (300) basis points
provided; however, that in no event shall the Interest Rate exceed the maximum
rate which is permitted under applicable Legal Requirements.
"Inventories" shall mean "Inventories" as defined in the Uniform System of
-----------
Accounts, such as provisions in storerooms, refrigerators, pantries and
kitchens; beverages in wine cellars and bars; other merchandise intended for
sale; fuel; mechanical supplies; stationery; and other expensed supplies and
similar
September 13, 1993 15
<PAGE>
items.
"Legal Requirement" shall mean any federal, state or local law, code, rule,
-----------------
ordinance, regulation or order of any governmental authority or agency having
jurisdiction over the business or operation of the Inn or the matters which are
the subject of this Agreement, including , without limitation, the following:
(i) any building, zoning or use laws, ordinances, regulations or orders and (ii)
Environmental Laws.
"License" shall mean any license, permit, decree, act, order, authorization
-------
or other approval or instrument which is necessary in order to operate the Inn
in accordance with Legal Requirements and pursuant to the Residence Inn System
Standards and otherwise in accordance with this Agreement.
"Litigation" shall mean: (i) any cause of action commenced in a federal,
----------
state or local court; and (ii) any claim brought before an administrative agency
or body (for example, without limitation, employment discrimination claims).
"Loan Priority Basis" shall mean the sum total, as of any given point in
-------------------
time during the Term, of: (i) the amount shown on Exhibit "A-1"; plus (ii) any
Additional Invested Capital expended by Owner, less the amount of any
condemnation award received by Owner and not applied to restoration of the Inn
pursuant to Section 15.02.B.
September 13, 1993 16
<PAGE>
"Management Analysis Report" shall mean a report which, if required
--------------------------
pursuant to Section 9.01.B, shall be prepared by Management Company and
delivered to Owner and shall include a narrative description regarding the
preceding Fiscal Year, of: (i) the Inn's operating performance, including
significant variations from the Annual Operating Budget; (ii) an analysis of any
significant variation of the actual average daily revenue per available room
from what was set forth in the Annual Operating Budget; (iii) a review of the
competitive hotel market; (iv) a calculation of the Revenue Index, and Operating
Profit less Ground Lease Rental, if any, compared to the Performance Termination
Threshold; and (v) such other supplementary information as Owner or Management
Company shall reasonably deem necessary to an understanding of the operation of
the Inn.
"Management Company" shall have the meaning set forth in the Preamble.
------------------
"Management Fees" shall mean the Base Management Fee, the Deferred
---------------
Contingent Base Management Fees, the Residence Inn System Fee and the Incentive
Management Fee.
"Marriott" shall mean Marriott International, Inc., a Delaware corporation
--------
having an address at 10400 Fernwood Road, Bethesda, Maryland 20817.
"Mortgage" shall mean any security instrument which
--------
September 13, 1993 17
<PAGE>
encumbers real property, including, without limitation, mortgages, deeds of
trust, security deeds and similar instruments.
"Net Operating Profit" shall mean the greater of (i) the excess, if any, of
--------------------
Operating Profit less Owner's Priority, or (ii) zero (0).
"Non-Disturbance Agreement" shall mean an agreement, in recordable form in
-------------------------
the jurisdiction in which the Inn is located, executed and delivered by a Holder
(which agreement shall by its terms be binding upon all Subsequent Owners), for
the benefit of Management Company, pursuant to which, in the event such Holder
or any Subsequent Owner comes into possession of or acquires title to the Inn
either at or following a Foreclosure, such Holder and all Subsequent Owners
shall (x) recognize Management Company's rights under this Agreement, and (y)
shall not name Management Company as a party in any Foreclosure action or
proceeding, and (z) shall not disturb Management Company in its right to
continue to manage the Inn pursuant to this Agreement; provided, however, that
at such time: (i) this Agreement has not expired or otherwise been earlier
terminated in accordance with its terms; (ii) there are no outstanding Events of
Default by Management Company, and (iii) no material event has occurred and no
material condition exists which, after notice or the passage
September 13, 1993 18
<PAGE>
of time or both, would entitle Owner to terminate this Agreement.
"Operating Accounts" shall have the meaning set forth in Section 9.02.
------------------
"Operating Loss" shall mean a negative Operating Profit.
--------------
"Operating Profit" shall mean, in each Fiscal Year during the Term of this
----------------
Agreement, the excess of Gross Revenues over the following deductions
("Deductions") incurred by Management Company or its Affiliates (or, in the case
of any Owner Deductions, by Owner) in operating the Inn:
1. The cost of sales including, without limitation, salaries, wages,
employee benefits, Employee Claims (except to the extent specifically set forth
to the contrary in Section 14.01.C or 14.01.D), payroll taxes and other costs
related to Inn employees;
2. Departmental expenses; administrative and general expenses; the
cost of Inn advertising and business promotion; all utility costs, including but
not limited to the cost of heat, light, power and water; and the cost of routine
repairs, maintenance and minor alterations which are treated as Deductions under
Section 8.01;
3. The cost of Inventories and Fixed Asset Supplies consumed in the
operation of the Inn;
4. A reasonable reserve for uncollectible accounts
September 13, 1993 19
<PAGE>
receivable as determined by Management Company;
5. All reasonable costs and fees of independent professionals or
other third parties who are retained by Management Company to perform services
required or permitted hereunder; provided that Management Company will notify
Owner at least thirty (30) days in advance of any proposed expenditure under
this paragraph 5 which is in excess of Twenty Thousand Dollars ($20,000) and
which was not specifically identified in the Annual Operating Budget, and
Management Company shall consider in good faith any comments which Owner may
have with respect to such proposed expenditure; and provided, further, that if
such expenditure involves immediately-needed repair work to the Inn or if
immediate action is otherwise required, the above-described requirement
regarding thirty (30) days' prior notice shall be modified to require whatever
notice period is reasonable under the circumstances;
6. The reasonable cost and expense of technical consultants and
operational experts who are employees of Management Company or one of its
Affiliates, and who perform specialized services in connection with non-routine
Inn work; provided, however, that the costs and expenses so incurred shall only
be Deductions to the extent such costs and expenses are reasonable and
competitively priced, as compared to similar work
September 13, 1993 20
<PAGE>
done by outside consultants or experts; and provided, further, that Management
Company will notify Owner at least thirty (30) days in advance of any proposed
expenditure under this paragraph 6 which is in excess of Twenty Thousand Dollars
($20,000.00) and which was not specifically identified in the Annual Operating
Budget, and Management Company shall consider in good faith any comments which
Owner may have with respect to such proposed expenditure; and provided, further,
that if such expenditure involves immediately-needed repair work to the Inn or
if immediate action is otherwise required, the above-described requirement
regarding thirty (30) days' prior notice shall be modified to require whatever
notice period is reasonable under the circumstances;
7. The Residence Inn System Fee;
8. Subject to Section 11.03.B, the Inn's pro rata share of costs and
expenses incurred by Management Company (or its Affiliate) in providing Chain
Services;
9. Insurance costs and expenses as provided in Section 12.04.B;
10. Taxes, if any, payable by or assessed against Management Company
related to this Agreement or to Management Company's operation of the Inn
(exclusive of Management Company's income taxes or franchise taxes) and all
Impositions assessed
September 13, 1993 21
<PAGE>
against the Inn;
11. Amounts which are required to be transferred into the FF&E
Reserve in accordance with the provisions of Section 8.02;
12. Transfers required to be made, as they may change from time to
time, to the System Marketing Fund, in order for the Inn to remain a member of
the System; (such contributions are presently two and one-half percent (2 1/2%)
of Suite Revenues);
13. The reimbursement to Owner of the amount of any Owner Deductions;
14. Lease payments pursuant to the leases of Shuttle Vehicles and
Telephone and Office Equipment (to the extent Management Company has not elected
to make such payments from the FF&E Reserve);
15. The payment to Management Company of the cost of preparing the
Management Analysis Report pursuant to Section 9.01.B; and
16. Such other costs and expenses incurred by Management Company or
its Affiliates (not including the costs and expenses included in the Residence
Inn System Fee) as are specifically provided for elsewhere in this Agreement or
are otherwise reasonably necessary for the proper and efficient operation of the
Inn (including, without limitation, the costs
September 13, 1993 22
<PAGE>
and expenses of all functions described in Section 2.03, to the extent such
costs and expenses are not already treated as Deductions elsewhere in this
definition of Operating Profit, unless, and to the extent that, any such costs
and expenses are specifically stated not to be Deductions under any provision of
this Agreement).
The term "Deductions" shall not include: (i) debt service payments pursuant
to any Secured Loan; nor (ii) rental payments pursuant to any ground lease of
the Site; both of the foregoing shall be paid by Owner from its own funds, and
not from Gross Revenues nor from the FF&E Reserve.
"Owner" shall have the meaning set forth in the Preamble. Subject to
-----
compliance with Articles XVIII and XIX of this Agreement, the term "Owner" shall
include all successors and assigns of the entity identified as the "Owner" in
the Preamble.
"Owner Deductions" shall mean amounts paid by Owner with respect to: (i)
----------------
premiums for the insurance policies described in Section 12.04; and (ii)
reasonable costs of any negotiations or Litigation with respect to any contest
of Impositions, as described in Section 13.01.A; provided, however, that to the
extent Owner spends in excess of Five Thousand Dollars ($5,000.00) with respect
to any contest of Impositions and has not received Management Company's consent
as provided in Section
September 13, 1993 23
<PAGE>
13.01.A, then any amount in excess of such Five Thousand Dollars ($5,000.00) or
such greater amount as may be approved by Management Company, shall not be
considered an Owner Deduction. Except as specifically set forth in Section
8.02.F.2, the amount of any Owner Deductions paid by Owner shall be reimbursed
to Owner (as a Deduction) in the Fiscal Year in which they were paid. Owner
shall give Management Company prompt notice of any amounts it has paid which
constitute Owner Deductions together with such evidence of payment as Management
Company may reasonable require.
"Owner's Distribution" shall mean, with respect to each Fiscal Year or
--------------------
portion thereof during the Term, funds distributed to Owner in accordance with
the provisions of Section 5.02 hereof which shall equal Operating Profit less
any Base Management Fees, Deferred Contingent Base Management Fees and Incentive
Management Fees paid to Management Company.
"Owner's Priority" shall mean, with respect to each Fiscal Year (prorated
----------------
for any partial Fiscal Years) during the Term of this Agreement, a dollar amount
equal to ten percent (10%) of the Priority Basis for that Fiscal Year.
IF THE INN HAS AN EXISTING GROUND LEASE, THE ANNUAL RENTAL PAYMENTS FOR SUCH
FISCAL YEAR (PRORATED FOR ANY PARTIAL FISCAL YEAR), SHALL BE ADDED TO THE
OWNER'S PRIORITY.
"Performance Termination Threshold" shall mean, with respect
---------------------------------
September 13, 1993 24
<PAGE>
to each full Fiscal Year during the Term of this Agreement, the dollar amount
set forth on Exhibit "A-1", plus eight percent (8%) of any Additional Invested
Capital expended by Owner pursuant to clause (ii) of the definition of Priority
Basis; provided, however, that the aforesaid dollar amount shall be adjusted, as
of the tenth (10th) anniversary of the Effective Date, in an amount equal to
seventy-five percent (75%) of the percentage change in the GDP Deflator between
the Effective Date and the tenth (10th) anniversary of the Effective Date;
provided that, in no event will the Performance Termination Threshold be lower
than it is as of the Effective Date; and provided further, that in calculating
the aforesaid change in the GDP Deflator during such period of time, both (i)
the two (2) years having the highest annual rates of change in the GDP Deflator
during such period, and (ii) the two (2) years having the lowest annual rates of
change in the GDP Deflator during such period, shall be ignored, and such
percentage change in the GDP Deflator between the Effective Date and the tenth
(10th) anniversary of the Effective Date shall be recalculated, for purposes of
this Agreement, using as the rate of change in the GDP Deflator for each of such
four (4) excluded years (i.e., those years described in clauses (i) and (ii),
above) the average annual rate of change in the GDP Deflator during the non-
excluded years; and provided further
September 13, 1993 25
<PAGE>
that, to the extent that certain portions of the Performance Termination
Threshold, as of immediately prior to such tenth (10th) anniversary adjustment,
reflect expenditures which qualify as Additional Invested Capital, the aforesaid
GDP Deflator adjustment shall be calculated with respect to such portions by
using, as the base, not the GDP Deflator as of the Effective Date, but rather
the GDP Deflator as of either the date of such expenditure or (if construction
is involved) the date on which the items in question were substantially
completed.
"Post-Foreclosure Decision Date" shall have the meaning set forth in
------------------------------
Section 6.06.
"Prime Rate" shall mean the "prime rate" as published in the "Money Rates"
----------
section of The Wall Street Journal; however, if such rate is, at any time during
-----------------------
the Term, no longer so published, the term "Prime Rate" shall mean the average
of the prime interest rates which are announced, from time to time, by the three
(3) largest banks (by assets) headquartered in the United States which publish a
"prime rate."
"Priority Basis" shall mean the sum total, as of any given point in time
--------------
during the Term, of: (i) the dollar amount shown on Exhibit "A-1"; plus (ii)
any Additional Invested Capital expended by Owner; provided that each
expenditure of Additional Invested Capital shall be added to the Priority Basis
at such
September 13, 1993 26
<PAGE>
date or dates as the expenditure occurred, taking into consideration at what
point (or points) during the Fiscal Year such expenditure occurred; less (iii)
the amount of any condemnation award received by Owner and not applied to
restoration of the Inn pursuant to Section 15.02.B.
"Proprietary Marks" shall mean all trademarks, trade names, symbols, logos,
-----------------
slogans, designs, insignia, emblems, devices, service marks and distinctive
designs of buildings and signs, or combinations thereof, which are used to
identify inns in the Residence Inn chain. The names "Marriott", "Residence Inn"
and "Residence Inn By Marriott", and any of the foregoing used in conjunction
with other words or names, are examples without limitation of Proprietary Marks.
The term "Proprietary Marks" shall include all present and future Proprietary
Marks, whether they are now or hereafter owned by Management Company or one of
its Affiliates, and whether or not they are registered under the laws of the
United States or any other country. The term "Proprietary Marks" shall also
include all trade names, trademarks, symbols, logos, designs, etc. which are
used in connection with the operation of the Inn during the Term (such as,
without limitation, the names of the restaurants and lounges). Notwithstanding
the foregoing, those trade names, trademarks, symbols, logos, designs, etc.,
which are specifically
September 13, 1993 27
<PAGE>
set forth on Exhibit "E" hereto shall be deemed to be "Proprietary Marks" only
for so long as this Agreement is in effect, and such Proprietary Marks shall
revert to the exclusive control of Owner as of the date of Termination.
"Proprietary Signage" shall mean any signage used in connection with the
-------------------
Inn (including both interior and exterior signage, and including billboards and
other signage not located on the Site) which contains one or more Proprietary
Marks; any signage which contains the word "Marriott" or "Residence Inn" shall
automatically be deemed to be Proprietary Signage.
"Prospectus" shall have the meaning set forth in Section 20.05.
----------
"Qualified Lender" shall mean any Holder, from time to time, of any
----------------
Qualified Loan with respect to which Management Company has received a written
notice (pursuant to Section 20.09 of this Agreement) stating: (i) the name and
address of such Holder; and (ii) that such Holder is a "Qualified Lender"
pursuant to the terms of this Agreement.
"Qualified Loan" shall mean any Secured Loan in which the initial principal
--------------
amount, as of the date such Secured Loan is incurred, when added to the current
principal balance of all existing Secured Loans as of that date, is less than or
equal to the greater of the following:
(i) Seventy percent (70%) of the Loan Priority Basis; or
September 13, 1993 28
<PAGE>
(ii) the result obtained by (a) dividing the Operating Profit for the
thirteen (13) most recent full Accounting Periods by the Coverage
Ratio; then, (b) multiplying the result of clause (a) by the
Capitalization Multiple; or
(iii) the existing balance of any Secured Loans encumbering the Inn
immediately prior to the date of the incurrence of such Qualified
Loan, plus commercially reasonable Transaction Costs associated with
such refinancing, up to an amount equal to four percent (4%) of the
principal amount of such Qualified Loan.
In addition, regardless of whether or not the above test set forth in clauses
(i), (ii) and (iii) is satisfied, the existing (as of the Effective Date)
balance of any Secured Loan which is secured by an Existing Mortgage shall be
deemed to be a "Qualified Loan".
"Qualified Loan Acceleration" shall mean the acceleration of the
---------------------------
indebtedness incurred pursuant to any Qualified Loan, as a result of a default
under the terms and conditions of such Qualified Loan.
"Renewal Terms" shall have the meaning set forth in Section 4.01.
-------------
"Residence Inn System Fee" shall during any given Fiscal Year (or portion
------------------------
thereof), be equal to four percent (4%) of Gross Revenues. It shall mean an
amount paid to Management Company for
September 13, 1993 29
<PAGE>
the Residence Inn System Services.
"Residence Inn System" shall mean the Residence Inn hotel system managed by
--------------------
Marriott (or one or more of its Affiliates) which is, as of the Effective Date,
operated under the trade name "Residence Inn by Marriott" or Marriott Residence
Inn".
"Residence Inn System Services" shall mean the following services which are
-----------------------------
paid for by the Residence Inn System Fee: System financial planning and policy
services; product planning and development; human resources management and
planning for the Residence Inn System (but not any particular inn within the
Residence Inn System); protection of the "Marriott Residence Inn" "Residence Inn
by Marriott," and "Residence Inn" trade names, trademarks, logos and
servicemarks; and the development and implementation of Management Company's
technical and operational programs designed for the periodic inspection and
consultation visits to the inns in the Residence Inn System (but not the
services of the personnel of the Architecture and Construction Division of
Management Company providing architectural, technical or procurement services
for the Inn, which shall be treated as a Deduction described in paragraph 6 of
the definition of "Operating Profit").
September 13, 1993 30
<PAGE>
"Residence Inn System Standards" shall mean both the operational standards
------------------------------
(for example, staffing, amenities offered to guests, advertising, etc.) and the
physical standards (for example, the quality, condition, utility and age of the
FF&E, etc.) of Residence Inn hotels in the Marriott chain as such operational
and physical standards may fluctuate from time to time (provided, however, that
the Residence Inn System Standards shall in no event be lower than the
operational and physical standards, as of the date in question, of comparable
extended stay hotels in other hotel systems which are comparable to the
Residence Inn System).
"Restricted Area" shall mean that area which is shown on the map attached
---------------
hereto as Exhibit "D", as described in the narrative which is set forth in
Exhibit "D-1".
"Restricted Inn" shall mean any hotel whose size, facilities and market
--------------
positioning are such that, if such hotel had been operated by Management Company
or one of its Affiliates as of the Effective Date, it would have been operated
as a member of the Residence Inn System (that is, as an extended-stay hotel, as
opposed to a full service hotel or one of the other limited service brands also
operated by Affiliates of Management Company i.e. Courtyard by Marriott or
Fairfield Inn). The term "Restricted Inn" shall not include any one or more of
the
September 13, 1993 31
<PAGE>
following: (i) any existing (as of the Effective Date) member of the Residence
Inn System which is within the Restricted Area; (ii) any Courtyard by Marriott
(or other similar moderate-price lodging product) or any Fairfield Inn (or other
similar economy-priced lodging product); (iii) any full service, suite or resort
hotel; (iv) any hotel or hotels which are members of a chain of hotels (provided
that such chain has a minimum of four (4) or more hotels in operation), all or
substantially all (but in no event less than four (4) hotels) of which is
acquired by, or merged with, or franchised by or joined through marketing
agreement with, Management Company or one of its Affiliates (or the operation of
which is transferred to Management Company or one of its Affiliates); (v) any
hotel or hotels which are members of a group of hotels which is (in a single
transaction with a single seller or transferor) acquired by or merged with, or
franchised by or joined through marketing agreement, with Management Company or
one of its Affiliates (or the operation of which is transferred to Management
Company or one of its Affiliates), provided that such group of hotels contains
no fewer than four (4) hotels; (vi) any future lodging product developed by
Management Company or one of its Affiliates which is not a lodging product which
would have been included within the Residence Inn System, as such system existed
as of the Effective
September 13, 1993 32
<PAGE>
Date; or (vii) any existing non-Marriott hotel within the Restricted Area which
is specifically designated on Exhibit D-1 as not being a Restricted Inn.
"Revenue Data Publication" shall mean Smith's STAR Report, a monthly
------------------------
publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee
or an alternative source, reasonably satisfactory to both parties, of data
regarding the Revenue Per Room of hotels in the general trade area of the Inn.
The "competitive set" for the Inn shall be determined (with periodic
adjustments) by Management Company, subject to Owner's approval (such approval
not to be unreasonably withheld). If such Smith's STAR Report is discontinued in
the future, or ceases (in the reasonable opinion of either Owner or Management
Company) to be a satisfactory source of data regarding the Revenue Per Room of
various hotels in the general trade area of the Inn, Management Company shall
select an alternative source, subject to Owner's approval (such approval not to
be unreasonably withheld). If the parties fail to agree on either such
competitive set or such alternative source, as the case may be, within a
reasonable period of time, the matter shall be resolved by arbitration pursuant
to Section 20.13.
"Revenue Index" shall mean that fraction which is equal to (a) the Revenue
-------------
Per Room for the Inn, divided by (b) the average
September 13, 1993 33
<PAGE>
Revenue Per Room for the hotels in the Inn's competitive set (including the
Inn), as set forth in the Revenue Data Publication. Appropriate adjustments
shall be made in the event of a major renovation of the Inn.
"Revenue Index Threshold" shall mean the number set forth on Exhibit "A-1"
-----------------------
hereto. However, if the entry of a new hotel into the Inn's competitive set (or
the removal of a hotel from such competitive set) causes significant variations
in the Revenue Index which do not reflect the Inn's true position in the
relevant market, appropriate adjustments shall be made to the Revenue Index
Threshold by mutual consent of Owner and Management Company (neither such
consent to be unreasonably withheld).
"Revenue Per Room" shall mean, (i) the term "revenue per room" as defined
----------------
by the Revenue Data Publication; or (ii) if the Revenue Data Publication is no
longer being used (as more particularly set forth in the definition of "Revenue
Data Publication"), the aggregate gross room revenues of the hotel in question
for a given period of time divided by the total room nights for such period. If
clause (ii) of the preceding sentence is being used, a "room" shall be a hotel
guest room which is keyed as a single unit, and shall include rooms which are
temporarily unavailable due to: (i) maintenance, or (ii) ongoing renovation
work.
September 13, 1993 34
<PAGE>
"Sale/Leaseback Transaction" shall have the meaning set forth in Section
--------------------------
6.10.
"Sale of the Inn" shall mean any sale, assignment, transfer or other
---------------
disposition, for value or otherwise, voluntary or involuntary, of Owner's title
to the Inn or the Site (either fee or leasehold title, as the case may be), but
shall not include a collateral assignment intended to provide security for a
loan. For purposes of this Agreement, a "Sale of the Inn" shall also include a
lease (or sublease) of the entire Inn or Site. The phrase "Sale of the Inn"
shall also include any sale, transfer, or other disposition, for value or
otherwise, in a single transaction or a series of related transactions, of the
controlling interest in Owner. If Owner is a corporation, the phrase
"controlling interest" shall mean the right to exercise, directly or indirectly,
fifty percent (50%) or more of the voting rights attributable to the shares of
Owner (through ownership of such shares or by contract). If Owner is not a
corporation, the phrase "controlling interest" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of Owner. Notwithstanding the foregoing, the term "Sale
of the Inn" shall not include any sale, assignment, transfer or other
disposition of the Inn or the Site by Owner to an Affiliate of Owner.
September 13, 1993 35
<PAGE>
"Soft Goods" shall mean all fabric, textile and flexible plastic products
----------
(not including items which are classified as "Fixed Asset Supplies" under the
Uniform System of Accounts) which are used in furnishing the Inn, including,
without limitation: carpeting, drapes, bedspreads, wall and floor coverings,
mats, shower curtains and similar items.
"Software" shall mean all computer software and accompanying documentation
--------
(including all future upgrades, enhancements, additions, substitutions and
modifications thereof), other than computer software which is commercially
available, which are used by Management Company in connection with the property
management system, the reservation system and all future electronic systems
developed by Management Company for use in the Inn.
"Subsequent Owner" shall mean any individual or entity which acquires title
----------------
to or possession of the Inn at or through a Foreclosure.
"Suite" shall mean a lodging unit in the Inn.
-----
"Suite Revenues" shall mean that portion of the Gross Revenues of the Inn
--------------
which is attributable to the rental of Suites.
"System Marketing Fund" shall mean that certain fund (or any successor to
---------------------
such fund) maintained by Management Company or one of its Affiliates, in its
capacity as franchisor of the
September 13, 1993 37
<PAGE>
System, to pay for the following System costs: all costs associated with
developing, preparing, producing, directing, administering, conducting,
maintaining and disseminating advertising, marketing, promotional and public
relations materials, programs, campaigns, sales and marketing seminars and
training programs, and similar activities of every kind and nature, including
the Residence Inn directory; conducting market research; and paying the central
operational costs of the Residence Inn reservation system; provided, however,
that any costs described in this definition of System Marketing Fund may, at the
option of the Management Company and The Residence Inn Association, be charged
directly to each inn in the System on the basis of actual use by or benefit to
each inn and, in such event, shall become Deductions.
"Telephone and Office Equipment" shall mean the following equipment used in
------------------------------
the Inn and all ancillary equipment: (i) telephones; (ii) miscellaneous office
equipment such as copiers, postage meters, etc.; (iii) television sets; and (iv)
audio-visual equipment.
"Term" shall mean the Initial Term plus all Renewal Terms.
----
"Termination" shall mean the expiration or sooner cessation of this
-----------
Agreement.
"The Residence Inn Association" (TRIA) is an advisory
-----------------------------
September 13, 1993 38
<PAGE>
council to owners and franchisees of the Residence Inn System with respect to
advertising, marketing, reservations and other matters relating to Residence Inn
System hotels. All owners, franchisees of the Residence Inn System and Owner
shall be members of TRIA.
"Transaction Costs" shall mean, with respect to the incurring of any
-----------------
Secured Loan, all normal transaction costs (to the extent actually incurred)
including, without limitation, the following: state and local transfer taxes;
escrow fees; recording costs; Mortgage recording taxes; costs of any survey
required by the Holder; reasonable fees of the Holder's outside attorneys and
accountants; appraisal fees; title insurance premiums; financing costs
(including "points"); reasonable attorneys' fees of Owner in connection with
such Secured Loan; environmental inspection, testing and reporting fees to the
extent required by the Holder; and brokerage commissions (provided that no such
brokerage commissions shall be recognized as "Transaction Costs" hereunder if
they are made to a person or entity affiliated with Owner, to the extent (if
any) that such payments exceed the normal customary amounts).
"Uniform System of Accounts" shall mean the Uniform System of Accounts for
--------------------------
Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of
New York City, Inc.
September 13, 1993 39
<PAGE>
"Working Capital" shall mean assets which are used in the day-to-day
---------------
operation of the Inn's business, including, without limitation, amounts kept in
petty cash funds, amounts deposited in operating bank accounts, receivables,
prepaid expenses and funds expended to purchase Inventories, less accounts
payable and accrued current liabilities.
END OF ARTICLE I
September 13, 1993 40
<PAGE>
ARTICLE II
APPOINTMENT OF MANAGEMENT COMPANY
---------------------------------
2.01 Appointment
-----------
Owner hereby appoints and employs Management Company as Owner's exclusive
agent to supervise, direct and control the management and operation of the Inn
for the Term provided in Article IV. Management Company accepts said
appointment and agrees to manage the Inn during the Term of this Agreement in
accordance with the terms and conditions hereinafter set forth. The performance
of all activities by Management Company hereunder shall be for the account of
Owner.
2.02 Delegation of Authority
-----------------------
Except as otherwise specifically set forth in this Agreement, Inn
operations shall be under the exclusive supervision and control of Management
Company which, shall be responsible for the proper and efficient operation of
the Inn. Management Company shall have discretion and control, free from
interference, interruption or disturbance, but in all respects subject to the
provisions of this Agreement, in all matters relating to management and
operation of the Inn, including, without limitation, the following: charges for
Suites and
September 13, 1993 41
<PAGE>
commercial space; credit policies; food and beverage services; employment
policies; granting of leases, parking services, licenses and concessions for
shops and agencies within the Inn (provided that the term of any such lease,
license or concession shall not exceed the Term of this Agreement; and provided
further that Owner's consent shall be required prior to the execution by
Management Company of any such lease, license or concession which pertains to
the Inn, and which (i) has a term of more than five (5) years; or (ii) involves
more than five hundred (500) square feet of space within the Inn); receipt,
holding and disbursement of funds; maintenance of bank accounts; procurement of
Inventories, supplies and services; promotion and publicity; and, generally, all
activities necessary for operation of the Inn.
2.03 Operational Standards
---------------------
In accordance with the Residence Inn System Standards and the other terms
of this Agreement, Management Company shall, in connection with the Inn, perform
each of the following functions (provided that in all cases, except as otherwise
specifically set forth in this Agreement, the costs and expenses of performing
such functions shall be Deductions):
A. Obtain and keep in full force and effect, either in its own name on
behalf of Owner or in Owner's name, as may be
September 13, 1993 42
<PAGE>
required by the Legal Requirements, any and all Licenses to the extent same is
within the control of Management Company (or, if same is not within the control
of Management Company, Management Company shall use all due diligence and
reasonable efforts to obtain and keep same in full force and effect).
B. Recruit, employ, supervise, direct and (when appropriate) discharge all
of the employees at the Inn.
C. Establish and revise, as necessary, administrative policies and
procedures, including policies and procedures for the control of revenue and
expenditures, for the purchasing of supplies and services, for the control of
credit, and for the scheduling of maintenance, and verify that the foregoing
procedures are operating in a sound manner.
D. Plan, execute, and supervise repairs and maintenance at the Inn.
E. Procure (as agent for Owner) all Fixed Asset Supplies and Inventories.
F. Maintain the Operating Accounts.
G. Prepare and deliver Accounting Period Statements, Annual Operating
Statements, Annual Operating Budgets, Building Estimates, FF&E Estimates, and
such other budgets and reports as are required by this Agreement.
H. Establish prices, rates and charges for services
September 13, 1993 43
<PAGE>
provided in the Inn, including Suite rates.
I. As agent for Owner, negotiate and enter into leases, concessions and
licenses for shops and other facilities within the Inn.
J. Administer the leases, concessions and licenses for shops and other
facilities within the Inn (whether entered into pursuant to subsection I, above,
or otherwise).
K. Provide services included in the Residence Inn System Fee and the Chain
Services.
L. Provide, or cause to be provided, risk management services relating to
the types of insurance required to be obtained or provided by Management Company
under this Agreement, provided that the costs and expenses of providing such
services are to be paid as described in Section 12.04.B.
M. Reasonably cooperate with Owner concerning: (i) disputes with any
Holder regarding the Inn, (ii) contests of Impositions and Legal Requirements;
and (iii) adjustments of insurance claims and condemnation awards involving the
Inn.
N. Reasonably cooperate (provided that Management Company shall not,
except as otherwise specifically set forth in Section 6.01, be obligated to
enter into any amendments of this Agreement) with Owner in any attempt(s) by
Owner to effectuate a Sale of the Inn (provided that nothing herein shall affect
the
September 13, 1993 44
<PAGE>
provisions of Section 20.05), or to obtain any Secured Loan. If given reasonable
notice, such cooperation shall include, without limitation: (i) answering any
reasonable questions by prospective purchasers and Holders; (ii) preparing lists
and schedules of leases, concessions, FF&E, Fixed Asset Supplies, Inventories,
and similar items (but specifically excluding customer lists); and (iii) making
such certifications and representations to Owner, to such purchasers and to such
Holders, regarding the Inn and the operation thereof, as Owner may reasonably
request (taking into account the extent of Management Company's control and
responsibility provided for hereunder). Owner shall promptly reimburse
Management Company, from its own funds and not as a Deduction, for the
reasonable costs and expenses incurred by Management Company in connection with
any actions necessary to comply with the requirements of this Section 2.03.N,
provided that such actions are not otherwise required under other provisions of
this Agreement.
O. Arrange for and supervise public relations and advertising, and prepare
annual marketing plans.
P. Endeavor to manage the timing of expenditures to replenish Inventories,
Fixed Asset Supplies, payments on accounts payable and collections of accounts
receivable, so as to avoid or minimize any cash deficits with respect to Inn
operations, which
September 13, 1993 45
<PAGE>
deficits would otherwise require additional funding of Working Capital by Owner.
Q. Comply with all provisions in the Existing Ground Lease and in any
Existing Mortgages which are by their terms applicable to the operation of the
Inn; provided, however, that all practices and procedures used by Management
Company in the operation of the Inn as of the Effective Date shall be deemed to
be in compliance with the Existing Ground Lease and all Existing Mortgages; and
provided further, that if either the Ground Lessor or any Holder under an
Existing Mortgage shall, from time to time, notify Management Company that it
has determined that certain practices and procedures which are used by
Management Company in the operation of the Inn are not in compliance with the
provisions of the Existing Ground Lease or such Existing Mortgage (as the case
may be), Management Company shall promptly alter such practices and procedures
to ensure such compliance; and provided further, that if such compliance would
require work by Management Company which is beyond the normal course of Inn
operations, or would impose additional financial burdens on the Inn which are
beyond the normal course of Inn operations, Owner (from its own funds, not as a
Deduction) shall compensate Management Company for such work and such additional
burdens.
September 13, 1993 46
<PAGE>
2.04 Limitations on Authority
------------------------
A. Notwithstanding anything in Section 2.02 or elsewhere in this Agreement
to the contrary (unless otherwise stated in this Section 2.04), and in addition
to the various other provisions of this Agreement which prohibit Management
Company from taking certain actions or which allow certain actions only if
Owner's consent thereto has been obtained, Management Company shall not, without
the prior written approval of Owner, which approval Owner may withhold in its
sole discretion, perform any of the following actions in connection with the Inn
and on behalf of or burdening Owner:
1. Acquiring any land or interest therein;
2. Acquiring any capital assets or interest therein except: (i)
items in the approved Building Estimate, and (ii) FF&E, Fixed Asset Supplies and
Inventories (to the extent the same constitute capital assets) in the ordinary
course of business as expressly provided for in this Agreement;
3. Financing, refinancing or mortgaging of any portion of the Inn or
the revenue due to Owner therefrom;
4. Selling (other than dispositions of FF&E, Fixed Asset Supplies
and Inventories in the ordinary course of business as expressly provided for in
this Agreement), leasing (other than as expressly provided for in this
Agreement, including without
September 13, 1993 47
<PAGE>
limitation, Section 2.02 of this Agreement) or other transferring of, or the
pledging or placing of any lien or encumbrance on, any part of the Inn ;
5. In the event of a total or partial condemnation, consenting to
any award or participating in any condemnation proceeding, except as expressly
provided for in this Agreement;
6. Entering into, modifying or terminating any lease, concession or
License, except to the extent permitted under Section 2.02;
7. Adjusting any claim or settling any Litigation which (i) is not
covered by any of the insurance policies described in Article XII and is not an
Employee Claim, and which would result in a Deduction or payment in excess of
Two Hundred Fifty Thousand Dollars ($250,000.00) in any Fiscal Year, as adjusted
by the GDP Deflator, or (ii) would impose on Owner any material liability or
obligation other than the payment of money, or would require Owner to make any
material admission; or
8. Adjusting any claim, under the applicable property insurance
policies, regarding injury or damage to the Inn or its contents, where the
estimated cost of restoration is in excess of Five Hundred Thousand Dollars
($500,000.00), as adjusted by the GDP Deflator.
September 13, 1993 48
<PAGE>
2.05 Covenants, Conditions or Restrictions
-------------------------------------
A. As of the Effective Date, there are existing covenants, conditions,
restrictions and/or agreements, including reciprocal easements or cost-sharing
arrangements (all of the foregoing types of encumbrances on the Inn, or
agreements relating to the Inn, whether existing as of the Effective Date or
not, shall be collectively referred to as "CC&R's"; those CC&R's which are in
existence as of the Effective Date shall be referred to in this Agreement as
"Existing CC&R's"). Management Company hereby gives its consent to all Existing
CC&R's. Except as otherwise specifically set forth to the contrary in Exhibit
"F" hereto, all costs, expenses and charges which are imposed on the Inn under
the Existing CC&R's shall be paid from Gross Revenues as Deductions. Those
certain costs, expenses and charges which are described on Exhibit "F" hereto as
"capital charges" shall be paid by Owner, from its own funds, and all such
payments shall be treated for purposes of this Agreement as Additional Invested
Capital expended by Owner.
B. CC&R's which are entered into, or become encumbrances on the Inn
and/or the Site, after the Effective Date shall be referred to in this Agreement
as "Future CC&R's". Owner agrees that it will give Management Company, for
Management Company's prior approval, written notice of its intention to execute
any
September 13, 1993 49
<PAGE>
Future CC&R's, such notice to be reasonably in advance of the execution thereof.
Owner covenants that, during the Term of this Agreement, there will not be
(unless Management Company has given its prior written consent thereto) any
Future CC&R's affecting the Site or the Inn: (i) which purport to impose any
material financial obligations on the Inn; (ii) which would prohibit or limit
Management Company from operating the Inn in accordance with the Residence Inn
System Standards; or (iii) which would allow Inn facilities (for example,
parking spaces) to be used by persons other than guests, invitees or employees
of the Inn.
C. All financial obligations imposed on Owner or on Management Company or
on the Inn pursuant to any Future CC&R's shall be paid by Owner from its own
funds, and not from Gross Revenues or from the FF&E Reserve, unless Management
Company has given its prior written consent to such Future CC&R's. Management
Company agrees that it will not unreasonably withhold its consent to any such
Future CC&R's; provided, however, that Management Company shall be entitled to
withhold its consent in its discretion if a proposed Future CC&R would have a
material impact on the operation of the Inn, as described in clauses (i), (ii)
or (iii) of Section 2.05.B. Upon receipt of such consent from Management
Company, such sums shall be Deductions in computing Operating Profit.
September 13, 1993 50
<PAGE>
D. Owner shall not waive any protections which benefit the Hotel
pursuant to existing restrictive covenants without the prior written consent of
Management Company which consent shall not be unreasonably withheld, conditioned
or delayed.
2.06 Licenses and Permits
--------------------
Owner agrees that, upon request by Management Company, it will sign
promptly and without charge applications for Licenses.
END OF ARTICLE II
September 13, 1993 51
<PAGE>
ARTICLE III
OWNERSHIP OF THE INN
--------------------
3.01 Ownership of the Inn
--------------------
A. Each party acknowledges that the status of title to the Site and to the
Inn is as described on Exhibit "F" hereto; neither party will hold the other
party responsible for any defects in said status of title, and each party hereby
releases the other party from all claims stemming from any such defects.
B. Owner hereby covenants that, throughout the Term of this Agreement,
it will not change the status of title to the Site from that which is described
on Exhibit "F" hereto, except that Owner shall have the right either (i) to
effectuate a Sale of the Inn in accordance with Article XIX, or (ii) to encumber
the Site and the Inn with the following:
1. Mortgages which are given to secure any one or more Qualified
Loans;
2. Liens for Impositions or other public charges not yet due or
which are being contested in good faith; and
3. Easements or other encumbrances (not including those described in
subsection 1 or 2 above) which do not adversely affect the operation of the Inn
by Management Company and which are not prohibited pursuant to Section 2.05.B of
this
September 13, 1993 52
<PAGE>
Agreement.
C. Owner shall indemnify, defend and hold Management Company and its
Affiliates harmless from claims by entities which have loaned money to Owner
that Management Company (or any of such Affiliates) owes any such lender all or
any portion of such indebtedness.
D. Management Company shall indemnify, defend and hold Owner and its
Affiliates harmless from claims by entities which have loaned money to
Management Company that Owner (or any of such Affiliates) owes any such lender
all or any portion of such indebtedness.
END OF ARTICLE III
September 13, 1993 53
<PAGE>
ARTICLE IV
TERM
----
4.01 Term
----
A. The initial term ("Initial Term") of this Agreement shall commence with
the Effective Date and, unless sooner terminated as herein provided, shall
continue until the expiration of Fiscal Year 2013. The Term shall thereafter be
automatically renewed for each of three (3) successive periods of ten (10) full
Fiscal Years each ("Renewal Terms"), unless either: (i) Management Company, at
its option, notifies Owner, in accordance with Section 20.09, at any time within
the period of eighteen (18) months prior to the expiration of the Initial Term
or the then current Renewal Term, as the case may be, of its intention not to
renew; or (ii) Management Company has committed an Event of Default, and has
been notified by Owner of such Event of Default, under Article XVI of this
Agreement, as of the date of any such renewal.
B. If Management Company so notifies Owner of its intention not to renew
pursuant to Section 4.01.A, Management Company shall continue to manage the Inn
pursuant to this Agreement until the termination date set forth in such notice,
provided that such termination date shall be: (i) no less than twelve (12)
months
September 13, 1993 54
<PAGE>
after the date of such notice; and (ii) in no event earlier than the expiration
date of the Initial Term or the then current Renewal Term, as the case may be.
Such termination date may be after the expiration of the Initial Term or the
then current Renewal Term, as the case may be, provided that the requirements of
the preceding sentence are satisfied. However, if Management Company has so
notified Owner of its intention not to renew, Owner may, at its option, by
written notice to Management Company at least ninety (90) days prior to the date
on which Owner desires Termination to occur, reduce the period of time prior to
Termination to any shorter period of time which Owner desires, provided that
such shorter period of time shall be at least the greater of: (a) ninety (90)
days (beginning as of the date of such notice from Owner), or (b) the minimum
period of time which Management Company reasonably decides is prudent, given the
requirements of the applicable Employment Laws regarding employee discharges. In
no event shall the fact that Management Company may, pursuant to the preceding
sentence, be managing the Inn after the expiration of the Initial Term or the
then current Renewal Term, as the case may be, be construed as an election by
Management Company to renew the Term, if Management Company has elected (in
accordance with this Section 4.01) in writing not to so renew.
September 13, 1993 55
<PAGE>
C. If Owner has the right, under the provisions of the Existing Ground
Lease, to elect to renew or extend the term of the Existing Ground Lease, Owner
shall so notify Management Company at least one hundred eighty (180) days (but
no more than one (1) year) prior to the expiration of the period within which
Owner is obligated to notify the Ground Lessor of its election to renew or
extend the term of the Existing Ground Lease. Such notice from Owner shall
contain all of the relevant facts about the impending election to renew or
extend, including the length of the period of renewal or extension. Unless
Management Company notifies Owner, within a period of ninety (90) days after
receipt of the foregoing notice from Owner, that Management Company disapproves
the renewal or extension of the term of the Existing Ground Lease, Owner will,
by proper notice to the Ground Lessor, within the applicable time period under
the Existing Ground Lease, elect to renew or extend the term of the Existing
Ground Lease.
D. If, after proper notice from Owner in accordance with Section 4.01 C,
Management Company fails to disapprove the renewal or extension of the term of
the Existing Ground Lease, the Term of this Agreement shall be deemed to be
automatically extended to the later of: (i) the expiration of the term of the
Existing Ground Lease, as renewed or extended in accordance with
September 13, 1993 56
<PAGE>
Section 4.01 C; or (ii) the date on which the Term of this Agreement would
otherwise have expired absent this sentence. If, in order to comply with the
preceding sentence, it is necessary for Management Company to waive its option
not to renew with respect to one or more Renewal Terms, such waiver shall be
deemed to have been given; however, Management Company shall retain the right
not to renew (as more particularly described in Section 4.01 A) as to any
portion of such Renewal Term(s) which would occur after the expiration of the
term of the Existing Ground Lease, as renewed or extended in accordance with
Section 4.01 C.
E. If, after proper notice from Owner in accordance with Section 4.01 C,
Management Company disapproves the renewal or extension of the term of the
Existing Ground Lease, the Term of this Agreement shall be deemed to be
automatically reduced to the earlier of: (i) the expiration of the term of the
Existing Ground Lease; or (ii) the date on which the Term of this Agreement
would otherwise have expired absent this sentence.
4.02 Actions to be Taken Upon Termination
------------------------------------
Upon a Termination of this Agreement, the following shall be applicable:
A. Management Company shall, within sixty (60) days
September 13, 1993 57
<PAGE>
after Termination of this Agreement, prepare and deliver to Owner a final
accounting statement with respect to the Inn, as more particularly described in
Section 9.01 hereof, along with a statement of any sums due from Owner to
Management Company pursuant hereto, dated as of the date of Termination. Within
thirty (30) days after the receipt by Owner of such final accounting statement,
the parties will make whatever cash adjustments are necessary pursuant to such
final statement. The cost of preparing such final accounting statement shall be
a Deduction, unless the Termination occurs as a result of an Event of Default by
either party, in which case the defaulting party shall pay such cost. Management
Company and Owner acknowledge that there may be certain adjustments for which
the necessary information will not be available at the time of such final
accounting, and the parties agree to readjust such amounts and make the
necessary cash adjustments when such information becomes available; provided,
however, that (unless there are ongoing disputes of which each party has
received notice) all accounts shall be deemed final as of one hundred eighty
(180) days after such Termination.
B. As of the date of the final accounting referred to in subsection A
above, Management Company shall release and transfer to Owner any of Owner's
funds which are held or controlled by
September 13, 1993 58
<PAGE>
Management Company with respect to the Inn, with the exception of funds to be
held in escrow pursuant to Section 12.04, and Section 14.01.F. During the period
between the date of Termination and the date of such final accounting,
Management Company shall pay (or reserve against) all Deductions which accrued
(but were not paid) prior to the date of Termination, using for such purpose any
Gross Revenues prior to the date of Termination.
C. Management Company shall make available to Owner such books and
records respecting the Inn (including those from prior years, subject to
Management Company's reasonable records retention policies) as will be needed by
Owner to prepare the accounting statements, in accordance with the Uniform
System of Accounts, for the Inn for the year in which the Termination occurs and
for any subsequent year. Such books and records shall not include: (i)
employee records which must remain confidential either under Legal Requirements
or under reasonable system-wide corporate policies of Management Company; or
(ii) any Intellectual Property; or (iii) customer lists.
D. Management Company shall (to the extent permitted by Legal
Requirements) assign to Owner or any other manager employed by Owner to operate
and manage the Inn, all Licenses for the Inn which have been issued in
Management Company's name; provided that if Management Company has expended any
of its own funds in
September 13, 1993 59
<PAGE>
the acquisition or transfer of any of such Licenses, Owner shall reimburse
Management Company therefor if it has not done so already.
E. All Proprietary Signage shall be removed by Management Company from
the Inn and from the Site (and from any locations other than the Site). The
cost of such removal shall be a Deduction, unless the Termination occurs either:
(i) as a result of an Event of Default by either party, in which case the
defaulting party shall pay the cost of such removal from its own funds, and not
as a Deduction; or (ii) as a result of Management Company's election not to
renew the Term, as of the expiration of either the Initial Term or any Renewal
Term (as the case may be), in which case Management Company shall pay the cost
of such removal from its own funds, and not as a Deduction.
F. Various other actions shall be taken, as described in this Agreement,
including, but not limited to, the actions described in Sections 7.01, 10.02,
10.03, 10.04, 12.04.B, and 14.01.F.
G. Management Company shall peacefully vacate and surrender the Inn to
Owner.
The provisions of this Section 4.02 shall survive any Termination.
September 13, 1993 60
<PAGE>
4.03 Performance Termination
-----------------------
A. Subject to the provisions of Section 4.03.B below, Owner shall have
the option to terminate this Agreement if:
1. With respect to any two (2) consecutive full Fiscal Years (not
including any Fiscal Year prior to Fiscal Year 1996), Operating Profit less the
amount of Ground Lease Rental, if applicable, for each of such two (2) Fiscal
Years is less than the Performance Termination Threshold; and
2. The Revenue Index of the Inn during each of such two (2)
consecutive Fiscal Years; is less than the Revenue Index Threshold; and
3. The fact that the Inn is not meeting the tests set forth in
Section 4.03.A(1) and (2) is not the result of either (x) Force Majeure, or (y)
any major renovation of the Inn. Such option to terminate shall be exercised by
serving written notice thereof on Management Company no later than sixty (60)
days after the receipt by Owner of the annual accounting under Section 9.01
hereof for the second (2nd) of the two (2) Fiscal Years referred to in Section
4.03.A(1). If Management Company does not elect to avoid such Termination
pursuant to Section 4.03.B below, this Agreement shall terminate as of the end
of the fourth (4th) full Accounting Period following the date on which
Management Company receives Owner's written notice of its intent to terminate
September 13, 1993 61
<PAGE>
this Agreement; provided that such period of time shall be extended as required
by applicable Legal Requirements pertaining to the termination of the employment
of the employees at the Inn. Owner's failure to exercise its right to terminate
this Agreement pursuant to Section 4.03.A with respect to any given Fiscal Year
shall not be deemed an estoppel or waiver of Owner's right to terminate this
Agreement with respect to subsequent Fiscal Years to which this Section 4.03.A
may apply.
B. Upon receipt of Owner's written notice of Termination under Section
4.03.A, Management Company shall have the option, to be exercised within sixty
(60) days after receipt of said notice, to avoid such Termination by paying
Owner an amount (the "Cure Payment") equal to one hundred five percent (105%) of
the amount by which Operating Profit less Ground Lease Rental, if any, for
either of the two (2) Fiscal Years in question (i.e., the two (2) Fiscal Years
referred to in Section 4.03.A(1)) was less than the Performance Termination
Threshold. Any such Cure Payment shall be accounted for as a fee to Owner in
connection with the avoidance of such Termination. In the event Management
Company makes a Cure Payment pursuant to this Section 4.03.B, the Fiscal Year
with respect to which such Cure Payment was made shall thereafter not be
treated, for purposes of subsequent elections by Owner pursuant to Section
4.03.A, as a Fiscal Year in which the circumstances
September 13, 1993 62
<PAGE>
described in Section 4.03.A(1) have occurred. If Management Company exercises
such option to make such Cure Payment, then the foregoing Owner's election to
terminate this Agreement under Section 4.03.A shall be cancelled and of no force
or effect with respect to the two (2) Fiscal Years in question and this
Agreement shall not terminate. Such cancellation, however, shall not affect the
right of Owner, as to each subsequent Fiscal Year to which Section 4.03.A
applies, to again elect to terminate this Agreement pursuant to the provisions
of Section 4.03.A (which subsequent election shall again be subject to
Management Company's rights under this Section 4.03.B). If Management Company
does not exercise its option to make the Cure Payment then this Agreement shall
be terminated as of the date set forth in Section 4.03.A. Any Cure Payment which
is paid by Management Company pursuant to this Section 4.03.B shall not be
recoverable by Management Company. Any Cure Payment which is paid by Management
Company pursuant to this Section 4.03.B shall only operate to cancel Owner's
election to terminate this Agreement under Section 4.03.A, and shall not operate
to cure any outstanding Defaults by Management Company under Article XVI.
END OF ARTICLE IV
September 13, 1993 63
<PAGE>
ARTICLE V
COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS
-------------------------------------------------
5.01 Management Fees
---------------
A. In consideration of services to be performed during the Term of this
Agreement, Management Company shall retain the Management Fees. Owner's
Priority and the Management Fees shall be appropriately prorated for any partial
Fiscal Year.
B. Notwithstanding the provisions of Article IX of this Agreement
permitting the consolidation of reports and co-mingling of certain funds with
other hotels owned by Owner, the Base Management Fee, Deferred Contingent Base
Management Fees, Residence Inn System Fee and Incentive Management Fee shall be
calculated based on the revenues generated by the Inn and not on a consolidated
basis with any other hotels which may be owned by Owner.
5.02 Distribution of Operating Profit
--------------------------------
In each Fiscal Year, Operating Profit shall be distributed to Owner and
Management Company in accordance with the following priorities:
A. Owner shall first receive an amount equal to the lesser of: (i)
Owner's Priority; or (ii) Operating Profit.
September 13, 1993 64
<PAGE>
B. Management Company shall next receive the Base Management Fee;
provided, however, that if, in any Fiscal Year the Base Management Fee exceeds
Net Operating Profit, such Base Management Fee shall be deferred to the extent
of such excess and such deferred sums shall become "Deferred Contingent Base
Fees".
C. Management Company shall next receive an amount equal to the Deferred
Contingent Base Fees to the extent that Net Operating Profit is otherwise
sufficient for such purposes.
D. Management Company shall next receive an amount equal to the
Incentive Management Fee.
E. Owner shall receive all Operating Profit remaining after the
distributions made pursuant to the preceding subparagraphs of this Section 5.02.
5.03 Accounting and Interim Payments
-------------------------------
A. On or before the twentieth (20th) day after the close of each
Accounting Period, Management Company shall deliver to Owner a reasonably
detailed accounting statement (the "Accounting Period Statement") in
substantially the form set forth in Exhibit "B" hereto. Upon Owner's written
request therefor, Management Company shall forward copies of any such Accounting
Period Statement to any Holders or Ground Lessors, at the addresses specified by
Owner. Such Accounting Period Statement shall set forth the
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results of the operations of the Inn for the preceding Accounting Period and for
the Fiscal Year-to-date, all in accordance with generally accepted accounting
principles applied on a consistent basis. Each Accounting Period Statement shall
be accompanied by a statement, by the Controller, Assistant Controller or Vice
President of the Management Company that, to the best of his or her knowledge
and belief, and subject to routine year-end audit and adjustment, such
Accounting Period Statement is true and correct in all material respects. Each
Accounting Period Statement shall include: (i) calculations of Gross Revenues,
Deductions, Operating Profit, the Management Fees; and (ii) comparisons with the
applicable categories for the prior Fiscal Year. With each such Accounting
Period Statement, Management Company shall transfer any interim Owner's
Distribution due to Owner, and shall retain any interim Management Fees due to
Management Company. Calculations and payments of the Management Fees and the
Owner's Distribution with respect to each Accounting Period within a Fiscal Year
shall be accounted for cumulatively.
B. Within seventy-five (75) days after the close of each Fiscal Year,
Management Company shall submit an Annual Operating Statement, as more fully
described in Section 9.01, for such Fiscal Year to Owner, which Annual Operating
Statement shall be controlling over the interim Accounting Period Statements.
Any
September 13, 1993 66
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adjustments or payments required by any such Annual Operating Statement shall be
made promptly by the parties. Operating Losses shall not be carried forward or
backward to subsequent or prior Fiscal Years.
5.04 Accounting for Period Prior to Effective Date
---------------------------------------------
A. It shall be a general principle in the accounting for the Inn that all
liabilities incurred and/or income generated prior to the Effective Date, or
properly allocated to the period prior to the Effective Date under generally
accepted accounting principles, shall be included in the Accounting Period
Statements and the Annual Operating Statements for the Inn pursuant to this
Agreement for the Fiscal Year in which such liabilities are paid or such income
is received, provided, however, that the foregoing shall not be reflected in the
computation of Operating Profit for purposes of Section 4.03.
B. As of the Effective Date, the cash on hand at the Inn shall be
deposited in one of the Operating Accounts set up by Management Company pursuant
to Section 9.02, and shall be treated as part of the Working Capital described
in Section 7.01.
END OF ARTICLE V
September 13, 1993 67
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ARTICLE VI
FINANCING OF THE INN
--------------------
6.01 Amendments of Management Agreement
----------------------------------
A. If requested by any Qualified Lender or prospective Qualified Lender
(in which event such amendments shall take effect as of the funding of such
Qualified Loan), Management Company agrees to execute and deliver any amendment
of this Agreement which is reasonably required by such Qualified Lender or
prospective Qualified Lender, provided that Management Company shall be under no
obligation to amend this Agreement if the result of such amendment would be:
(i) to reduce, defer or delay the amount of any payment to be made to Management
Company hereunder; (ii) to materially increase Management Company's obligations
under this Agreement; (iii) to change the Term of this Agreement; (iv) to cause
the Inn to be operated other than pursuant to the Residence Inn System
Standards; (v) to amend either Section 8.02 or Section 14.01; or (vi) to
otherwise materially affect Management Company's rights under this Agreement.
Any such amendment shall take effect as of the funding of such Qualified Loan.
B. In addition to the provisions of Section 6.01.A, if a Qualified Lender
or prospective Qualified Lender requests that
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Management Company enter into an amendment of this Agreement, and if such
amendment would impose additional duties (for example, an increase in the
reporting requirements or in the record-keeping requirements, or adding the
obligation to prepare parallel accounting statements using a different fiscal
year) on Management Company or would otherwise adversely affect Management
Company's rights under this Agreement, but not to the degree described in
clauses (i) through (vi) of Section 6.01.A, Management Company hereby agrees
that it will execute and deliver such requested amendment of this Agreement,
provided that Owner compensates Management Company for the additional burden
imposed by such amendment out of Owner's funds and not as a Deduction. It is
understood that the word "burden", as used in the preceding sentence, shall
encompass not only additional work to be performed by Management Company, but
also any adverse effect on the Incentive Management Fee which would be caused by
requiring increased services by third parties. Any dispute as to whether
Management Company is entitled to any compensation pursuant to this Section
6.01.B, or as to the amount of such compensation, shall be resolved by
arbitration pursuant to Section 20.13.
C. Proposed amendments to this Agreement which are requested by any
Qualified Lender or prospective Qualified Lender, and which would affect the
insurance provisions set forth in Article XII,
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shall be governed exclusively by Article XII.
September 13, 1993 70
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6.02 Notice and Opportunity to Cure
------------------------------
A. In the event of: (i) a Default by Owner in the performance or
observance of any of the terms and conditions of this Agreement; or (ii) any
other occurrence which entitles Management Company to terminate this Agreement,
and in the event that Management Company gives written notice thereof to Owner
pursuant to Article XVI of this Agreement, Management Company shall also give a
duplicate copy (herein referred to as the "First Notice") of such notice to,
each Qualified Lender, at the address previously provided to Management
Company. Any such notice will be sent in the manner described in Section 20.09
hereof. In addition, in the event that such Default is not cured within the
applicable cure period under Article XVI of this Agreement, and Management
Company intends to exercise its remedy of terminating this Agreement, Management
Company shall send a second notice (the "Second Notice") to each Qualified
Lender, at the same address and in the same manner applicable to the First
Notice stating Management Company's intention to terminate this Agreement.
Management Company shall forbear from taking any action to terminate this
Agreement for a period of thirty (30) days after the service of the First
Notice, and for an additional period of thirty (30) days after the service of
the Second Notice (if such Second Notice is required, as set forth above).
September 13, 1993 71
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B. In the event of a Default by Owner under the provisions of this
Agreement, Management Company agrees to accept performance by any Qualified
Lender with the same force and effect as if same were performed by Owner, in
accordance with the provisions and within the cure periods prescribed in this
Agreement (except that each Qualified Lender shall have such additional cure
periods, not available to Owner, as are set forth in this Section 6.02).
C. No notice given by Management Company to Owner shall be effective as a
notice under Article XVI of this Agreement unless the applicable duplicate
notice to each Qualified Lender which is required under Section 6.02.A (either
the First Notice or the Second Notice, as the case may be) has been given. It
is understood that any failure by Management Company to give such a duplicate
notice (either the First Notice or the Second Notice, as the case may be) to any
Qualified Lender shall not itself be a Default by Management Company under this
Agreement, but rather shall operate only to void the effectiveness of any such
notice by Management Company to Owner under Article XVI of this Agreement.
D. Except as specifically limited by this Section 6.02, nothing herein
shall preclude Management Company from exercising any of its rights or remedies
against Owner with respect to any Default by Owner under this Agreement.
September 13, 1993 72
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6.03 Collateral Assignment of Management Agreement
---------------------------------------------
September 13, 1993 73
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Owner shall have the right to collaterally assign to any Qualified Lender,
as additional security for the indebtedness evidenced by a Qualified Loan, all
of Owner's right, title and interest in and to distributions payable to Owner
pursuant to Article V thereof. If, pursuant to any such assignment (or
subsequent loan documentation entered into between Owner and a Qualified Lender
with a similar purpose), and provided that Management Company has previously
received a copy of such assignment and such subsequent documentation, Management
Company may receive (from time to time) a notice or notices from such Qualified
Lender directing Management Company to pay to such Qualified Lender subsequent
distributions under Article V of this Agreement which would otherwise be payable
to Owner, Management Company shall comply with any such notice. Management
Company shall continue to make payments in compliance with any such notice from
such Qualified Lender until Management Company receives written instructions to
the contrary from such Qualified Lender. Owner hereby gives its consent to any
such payments by Management Company to such Qualified Lender which are in
compliance with any such notice. The foregoing consent by Owner shall be deemed
to be irrevocable until the entire Qualified Loan has been discharged, as
evidenced either by the recordation of a satisfaction or release executed by
such Qualified Lender, or by the delivery of a
September 13, 1993 74
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written statement to that effect from such Qualified Lender to Management
Company. Management Company shall comply with the direction set forth in any
such notice without any necessity to investigate why such Qualified Lender sent
such notice, or to confirm whether or not Owner is in fact in default under the
terms of such Qualified Loan. If Management Company receives such notices from
more than one Qualified Lender, Management Company shall (at its option) either:
(i) comply with the provisions of the notice sent by the Qualified Lender whose
Qualified Loan has the senior lien priority; or (ii) institute Litigation for a
declaratory judgment to determine to whom payments under this Agreement shall be
made (in which case, the costs and expenses of such Litigation, including
attorneys' fees, shall be Deductions).
6.04 Subordination of Management Agreement
-------------------------------------
A. This Agreement, and Management Company's right to continue to manage
and operate the Inn pursuant to this Agreement, are and shall be subject and
subordinate to the lien of any Qualified Loan, (i.e., upon a Foreclosure of any
such Qualified Lender, at its option, unless such Qualified Lender has otherwise
agreed to the contrary in a Non-Disturbance Agreement shall have the right to
terminate this Agreement). Notwithstanding the foregoing, during the Term of
this Agreement, all debt service
September 13, 1993 75
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(including increased or accelerated payments after a default) payable with
respect to any Qualified Loan shall be paid exclusively from Owner's
Distribution.
B. Section 6.04.A is intended to be, and is, fully effective and binding,
as between Management Company and any such Qualified Lender; however, Management
Company agrees to execute such confirmatory documentation (in recordable form in
the jurisdiction in which the Inn is located) as such Qualified Lender shall
reasonably request.
C. Notwithstanding the possible termination of this Agreement which is set
forth in the foregoing provisions of this Section 6.04, it is understood that,
until such time as this Agreement is validly terminated either (i) pursuant to
the applicable provision of this Agreement, or (ii) pursuant to a court order in
connection with the Foreclosure of a Qualified Loan (assuming that such
termination does not breach any binding Non-Disturbance Agreement), the Holder
of each Qualified Loan will honor and recognize the right of Management Company
to operate the Inn in accordance with this Agreement (including the right of
Management Company to collect all Gross Revenues and to make expenditures in
accordance with this Agreement).
September 13, 1993 76
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6.05 Non-Disturbance Agreement
-------------------------
A. Owner agrees that, in connection with the obtaining by Owner of any
Secured Loan or Secured Loans, from time to time, Owner will use good faith
reasonable efforts to obtain a Non-Disturbance Agreement from each Holder or
Holders. The phrase "good faith reasonable efforts" shall be determined by
reference to the following: (i) normal loan underwriting procedures and
practices (including those practices relating to non-disturbance agreements)
which are generally being implemented by entities which are making loans similar
to such Secured Loan, as of that point in time; and (ii) the concessions which
Management Company is, as of that point in time, reasonably prepared to make in
order to satisfy the objectives of lenders in connection with the lender-manager
relationship after a Foreclosure. In no event, however, shall the failure of
Owner to obtain such a Non-Disturbance Agreement affect or modify any of the
responsibilities of Management Company toward Qualified Lenders which are
contained elsewhere in this Article VI.
B. Notwithstanding Section 6.05.A, Owner agrees that, prior to obtaining
any Qualified Loan, it will obtain from each prospective Holder or Holders
thereof a Non-Disturbance Agreement pursuant to which Management Company's
rights under this Agreement will not be disturbed as a result of a loan default
September 13, 1993 77
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stemming from non-monetary factors which (i) relate to Owner and (ii) are not
Defaults by Management Company under Article XVI of this Agreement.
6.06 Attornment
----------
A. Management Company agrees that, subject to the provisions of Section
6.06.B, upon a Foreclosure of any Qualified Loan, provided that this Agreement
has not expired or otherwise been earlier terminated in accordance with its
terms, Management Company shall attorn to any Subsequent Owner and shall remain
bound by all of the terms, covenants and conditions of this Agreement for the
balance of the remaining Term (including any Renewal Terms) with the same force
and effect as if such Subsequent Owner were the "Owner" under this Agreement;
provided, however, that Management Company shall be under no such obligation to
so attorn, and, to the contrary, shall thereupon have the right to terminate
this Agreement on thirty (30) days' prior written notice to both Owner and such
Subsequent Owner: (i) if such Subsequent Owner would not qualify as a permitted
transferee under Section 19.01.A of this Agreement; or (ii) unless such
Subsequent Owner, within twenty (20) days after the Foreclosure Date (or, in the
event such Subsequent Owner acquires title to the Inn after the Foreclosure
Date, within twenty (20)
September 13, 1993 78
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days after the date of such acquisition of title to the Inn), assumes all of the
obligations of the "Owner" under this Agreement which arise from and after the
Foreclosure Date (or such later date of acquisition of title to the Inn),
pursuant to a written assumption agreement which shall be delivered to
Management Company. Upon the written request of any Qualified Lender, Management
Company shall periodically execute and deliver a statement, in a form reasonably
satisfactory to such Qualified Lender, reaffirming Management Company's
obligation to attorn as set forth in this Section 6.06.A.
B. It is understood by the parties that, in view of the fact that a
Qualified Lender will have the right to terminate this Agreement on a
Foreclosure under the provisions of Section 6.04, Management Company has an
interest in being informed, within a reasonable period of time after a Qualified
Loan Acceleration, of whether or not such Qualified Lender intends to exercise
such right of termination. Accordingly, if, by no later than that date (the
"Post-Foreclosure Decision Date") which is ninety (90) days after the date of
any Qualified Loan Acceleration, Management Company has not received a Non-
Disturbance Agreement executed by the Holder of such Qualified Loan, Management
Company shall, as of the Post-Foreclosure Decision Date and thereafter, no
longer be under any obligation
September 13, 1993 79
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to attorn (pursuant to the provisions of Section 6.06.A) with respect to any
Foreclosure of that Qualified Loan, and Management Company shall have the option
to terminate this Agreement, by written notice to both Owner and the Holder of
each existing Qualified Loan, at any time within the sixty (60) day period
immediately following the Post-Foreclosure Decision Date.
6.07 No Modification or Termination of Agreement
-------------------------------------------
If the documents evidencing and securing a Qualified Loan require the
consent of the Qualified Lender to any amendment or modification of this
Agreement which materially affects such Qualified Lender, no such amendment or
modification of this Agreement shall be binding or effective unless such
Qualified Lender shall have consented in writing thereto.
6.08 Owner's Right to Finance the Inn
--------------------------------
Owner shall have the right, from time to time, without Management Company's
prior consent or approval, to obtain Qualified Loans, and to encumber the Inn
with Mortgages securing such Qualified Loans. Owner shall not, without the
prior consent of Management Company, have the right to obtain Secured Loans
which are not Qualified Loans.
September 13, 1993 80
<PAGE>
6.09 Cross Collateralization
-----------------------
A. In connection with obtaining Qualified Loans, Owner shall have
the right to cross collateralize the Inn with other inns which it owns in the
Residence Inn System, provided that:
1. the inns to be the subject of the Qualified Loans are owned
by Owner or an Affiliate of Owner;
2. the Qualified Loans are secured only by inns in the Residence
Inn System which are managed by Management Company or its Affiliates and are not
cross collateralized with any property other than inns managed by Management
Company or its Affiliates in the Residence Inn System;
3. the basic terms and conditions of the Qualified Loans for the
Inn and each other inn securing such loan are intended to be part of an
integrated transaction; and
4. the closing of the Qualified Loans shall take place within
six (6) months of each other.
B. Any Mortgage secured by the Inn shall contain a provision
requiring Holder to provide Management Company prior written notice of any
default under such Mortgage. Further, upon receipt of any notice of default by
such Holder, Owner shall forward a copy of such notice to Management Company
within three (3) days thereafter, in accordance with the notice provisions set
September 13, 1993 81
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forth in Section 20.09.
September 13, 1993 82
<PAGE>
6.10 Sale/Leaseback Transactions
---------------------------
September 13, 1993 83
<PAGE>
Any single transaction or related series of transactions in which (i)
Owner's interest in the Inn is sold or transferred by the then Owner ("Seller")
to a buyer ("Buyer"), and (ii) the Buyer (as "landlord") leases the Inn to the
Seller (as "tenant"), is hereby defined as a "Sale/Leaseback Transaction".
With respect to each Sale/Leaseback Transaction during the Term of this
Agreement, the following provisions will apply: (a) the sale or transfer of the
Inn will be considered a Sale of the Inn; however, the Seller (as tenant under
the aforesaid lease), not the Buyer, shall thereafter be treated as the "Owner"
for purposes of this Agreement; (b) the purchase price will not be a Secured
Loan, but any mortgage financing placed (either at the time of the transaction
or later) on the Buyer's interest in the Inn will be treated as a Secured Loan,
and the proceeds of each such Secured Loan will be aggregated with all
outstanding Secured Loans, which encumber either the Buyer's interest in the Inn
or the Seller's leasehold interest in the Inn, for purposes of determining
whether a given Secured Loan qualifies as a Qualified Loan; (c) payments
pursuant to such lease shall not be treated as Deductions, except for
Impositions and similar items which would have been treated as Deductions in the
absence of such Sale/Leaseback Transaction; and (d) all subsequent sales,
transfers or assignments of either Buyer's interest in the Inn or
September 13, 1993 84
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Seller's interest in the Inn will be treated as Sales of the Inn. Owner will not
enter into any Sale/Leaseback Transaction unless Management Company and the
proposed Buyer have previously executed a mutually satisfactory attornment
agreement pursuant to which, as of the date of the termination of Seller's
leasehold interest, the provisions of this Agreement will (unless there has been
an Event of Default or other event entitling either party to terminate this
Agreement) be binding both on Management Company and on Buyer (as the successor
"Owner"); such attornment agreement will also contain an immediately-effective
provision which will incorporate the terms of Section 6.08 of this Agreement,
binding both on Management Company and on Buyer.
END OF ARTICLE VI
September 13, 1993 85
<PAGE>
ARTICLE VII
WORKING CAPITAL AND FIXED ASSET SUPPLIES
----------------------------------------
7.01 Working Capital
---------------
A. Owner shall, from time to time during the Term of this Agreement,
provide Management Company, within thirty (30) days after Owner's receipt of
written request therefor by Management Company, with the funds necessary to
maintain Working Capital at levels determined by Management Company to be
reasonably necessary to operate the Inn in accordance with the Residence Inn
System Standards. Any such request by Management Company shall be accompanied
by a detailed explanation of the reasons for the request. If Owner fails to
respond to any such request within thirty (30) days after Owner's receipt
thereof, Management Company shall be entitled, at its option, without affecting
other remedies which may be available pursuant to Article XVI, to lend Owner the
necessary additional Working Capital from Management Company's own funds, which
loan will bear interest at the Interest Rate (compounded annually), and will be
secured by a security interest subordinate to any Qualified Loan encumbering all
Working Capital previously or thereafter provided by either Owner or Management
Company, and will be repaid in accordance with such terms and conditions as
Management Company
September 13, 1993 86
<PAGE>
shall at that time reasonably determine.
B. Management Company will manage the Working capital of the Inn
prudently and in accordance with the Residence Inn System Standards. Management
Company shall review and analyze the Working Capital needs of the Inn on an
annual basis. If Management Company reasonably determines that there is excess
Working Capital, such excess shall be returned to Owner.
C. Working Capital provided by Owner pursuant to this Section 7.01 shall
remain the property of Owner throughout the Term of this Agreement. Upon
Termination, Owner shall retain any of its unused Working Capital, except for
Inventories purchased by Management Company pursuant to Section 10.02.
D. If Owner owns other inns in the Residence Inn By Marriott System
which are operated by Management Company, Management Company, at its option, may
co-mingle the Working Capital for the Inn with the Working Capital account for
Owner's other inn(s) in a single bank account.
September 13, 1993 87
<PAGE>
7.02 Fixed Asset Supplies
--------------------
As of the Effective Date, Owner shall provide the Inn with the Fixed Asset
Supplies which are necessary to operate the Inn in accordance with the Residence
Inn System Standards. Owner shall, from time to time thereafter during the Term
of this Agreement, provide Management Company, within thirty (30) days after
Owner's receipt of written request therefor by Management Company, with any
additional funds necessary to maintain Fixed Asset Supplies at levels determined
by Management Company to be necessary to operate the Inn in accordance with the
Residence Inn System Standards. Fixed Asset Supplies shall remain the property
of Owner throughout the Term of this Agreement, except for Fixed Asset Supplies
purchased by Management Company pursuant to Section 10.02.
END OF ARTICLE VII
September 13, 1993 88
<PAGE>
ARTICLE VIII
REPAIRS, MAINTENANCE AND REPLACEMENTS
-------------------------------------
8.01 Routine Repairs and Maintenance
-------------------------------
Management Company shall maintain the Inn in good repair and condition, to
a standard comparable with competitive hotels and in conformity with applicable
Legal Requirements and the Residence Inn System Standards, and shall make or
cause to be made such routine maintenance, repairs and minor alterations, the
cost of which can be expensed under generally accepted accounting principles, as
it, from time to time, deems reasonably necessary for such purposes. The cost
of such maintenance, repairs and alterations shall be paid from Gross Revenues
and shall be treated as a Deduction in determining Operating Profit.
8.02 FF&E Reserve
------------
A. Management Company shall establish a reserve account (the "FF&E
Reserve") in a bank designated by Management Company (and approved by Owner,
such approval not to be unreasonably withheld) to cover the cost of:
1. Replacements and renewals to the Inn's FF&E;
2. Certain routine repairs and maintenance to the Inn building which
are normally capitalized under generally accepted
September 13, 1993 89
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accounting principles, such as exterior and interior repainting, resurfacing
building walls, floors, roofs and parking areas, and replacing folding walls and
the like (but which are not major repairs, alterations, improvements, renewals
or replacements to the Inn's buildings' structure, roof, or exterior facade, or
to its mechanical, electrical, heating, ventilating, air conditioning, plumbing
or vertical transportation systems, the cost of which shall be governed
exclusively by Section 8.03); and
3. At Management Company's option, lease payments for Telephone and
Office Equipment, Shuttle Vehicles and computer equipment used in connection
with the operation of the Inn.
Management Company agrees that it will, from time to time, execute such
reasonable documentation as may be requested by any Qualified Lender to assist
such Qualified Lender in establishing or perfecting its security interest in the
funds which are in the FF&E Reserve; provided, however, that no such
documentation shall contain any amendment or modification of any of the
provisions of this Agreement, including this Section 8.02.
B. During the period of time from the Effective Date through the
Termination of this Agreement, subject to the provisions of Sections 8.02.E and
8.02.F, Management Company shall transfer (as of the end of each Accounting
Period) into the FF&E Reserve an amount equal to five percent (5%) of Gross
September 13, 1993 90
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Revenues for that Accounting Period. All such amounts transferred into the FF&E
Reserve after the Effective Date shall be paid from Gross Revenues and shall
constitute Deductions in determining Operating Profit.
C. Each year, at the same time as Management Company submits the Annual
Operating Budget described in Section 9.03, Management Company shall prepare an
estimate (the "FF&E Estimate") of the expenditures necessary for (i)
replacements and renewals to the Inn's FF&E, (ii) repairs to the Inn building of
the nature described in Section 8.02.A.2, and (iii) lease payments for Telephone
and Office Equipment, Shuttle Vehicles and computer equipment used in connection
with the operation of the Inn, during the ensuing Fiscal Year, and shall submit
such FF&E Estimate to Owner for its review. All expenditures from the FF&E
Reserve will be (as to both the amount of each such expenditure and the timing
thereof) both reasonable and necessary, given the objective that the Inn will be
maintained and operated to a standard comparable with competitive hotels and in
accordance with the Residence Inn System Standards. Notwithstanding the
foregoing, Management Company shall not be required to enumerate on the FF&E
Estimate any individual project which will cost less than Ten Thousand Dollars
($10,000.00) as adjusted by the GDP Deflator on each anniversary of the
Effective Date.
September 13, 1993 91
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D. Management Company shall from time to time make such (i) replacements
and renewals to the Inn's FF&E, (ii) repairs to the Inn building of the nature
described in Section 8.02.A.2, as it deems necessary, and (iii) lease payments
for Telephone and Office Equipment, Shuttle Vehicles and computer equipment as
set forth in Section 8.03.A as it deems necessary, provided that Management
Company shall not expend more than the balance in the FF&E Reserve without the
prior approval of Owner. Management Company will endeavor to follow the
applicable FF&E Estimate, but shall be entitled to depart therefrom, in its
reasonable discretion, provided that: (a) such departures from the applicable
FF&E Estimate result from circumstances which could not reasonably have been
foreseen at the time of the submission of such FF&E Estimate; and (b) such
departures from the applicable FF&E Estimate are in the best interest of the
Inn; and (c) if the deviations from the FF&E Estimate are greater than Ten
Thousand Dollars ($10,000) as adjusted by the GDP Deflator on each anniversary
of the Effective Date, Management Company has submitted to Owner a revised FF&E
Estimate setting forth and explaining such departures. At the end of each
Fiscal Year, any amounts remaining in the FF&E Reserve shall be retained in the
FF&E Reserve, and shall be carried forward to the next Fiscal Year. Upon a Sale
of the Inn funds in the FF&E Reserve will not
September 13, 1993 92
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be affected (or, if withdrawn, will be replaced as set forth in Section
19.01.D), and all dispositions of such funds (both before and after such Sale of
the Inn) will continue to be made exclusively pursuant to the provisions of this
Agreement. Proceeds from the sale of FF&E no longer necessary to the operation
of the Inn shall be deposited in the FF&E Reserve, as shall any interest which
accrues on amounts placed in the FF&E Reserve. Neither (i) proceeds from the
disposition of FF&E, nor (ii) interest which accrues on amounts held in the FF&E
Reserve, shall either (x) result in any reduction in the required contributions
to the FF&E Reserve set forth in subsection B above, or (y) be included in Gross
Revenues. Telephone and Office Equipment, as well as Shuttle Vehicles and
computer equipment used in connection with the operation of the Inn are the only
items of FF&E which Management Company is authorized to lease (rather than
purchase). At Management Company's option, lease payments with respect to
Telephone and Office Equipment, and Shuttle Vehicles and computer equipment used
in connection with the operation of the Inn shall be paid out of the FF&E
Reserve, as set forth in Section 8.02.A above. If Management Company proposes
that other items of FF&E (other than Telephone and Office Equipment, as well as
Shuttle Vehicles and computer equipment used in connection with the operation of
Inn) should be
September 13, 1993 93
<PAGE>
leased rather than purchased, Management Company shall submit such proposal to
Owner for Owner's approval (not to be unreasonably withheld); in connection with
the foregoing, it is understood that the failure of a Qualified Lender to
approve such leasing proposal shall justify Owner in withholding its approval
thereof, regardless of whether withholding such approval would otherwise be
deemed to be unreasonable.
E. The percentage contribution for the FF&E Reserve which is described in
Section 8.02.B is an estimate. As the Inn ages, this percentage may not be
sufficient to keep the FF&E Reserve at the levels necessary to make the
replacements and renewals to the Inn's FF&E, or to make the repairs to the Inn
building of the nature described in Section 8.02.A.2, which are required to
maintain the Inn in accordance with the Residence Inn System Standards and
comparable with competitive hotels. If (i) any FF&E Estimate prepared in good
faith by Management Company exceeds the available funds in the FF&E Reserve or
would cause a shortfall to occur in future years , and (ii) Management Company
has prepared and delivered to Owner a financial plan describing the shortages in
the available funding in the FF&E Reserve for the Fiscal Years in question,
Management Company will have the right, during the time periods described in
such financial plan, to increase the percentage of Gross Revenues set forth in
Section
September 13, 1993 94
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8.02.B to a higher percentage, provided that in no event will such percentage
exceed six percent (6%) of Gross Revenues per Fiscal Year.
F. If any FF&E Estimate which is prepared in accordance with clauses (i)
and (ii) of Section 8.02.E would require funding in excess of six percent (6%)
of Gross Revenues per Fiscal Year, Owner may either:
1. Agree to increase the percentages of Gross Revenues set forth in
Section 8.02.B to provide the additional funds required; or
2. Make a lump-sum contribution to the FF&E Reserve in the necessary
amount (in which case, such lump-sum contribution shall be an Owner Deduction
and shall be reimbursed to Owner in equal annual payments over the useful life
of the FF&E which is purchased, and such reimbursements shall be Deductions).
If Owner elects not to agree to either option 1 or option 2 above within
thirty (30) days after the submission of such FF&E Estimate (or, if Owner has
elected option 2, and has not funded the required amount within sixty (60) days
after expiration of the aforesaid thirty (30) day period), Management Company
shall be entitled, at its option, to terminate this Agreement by written notice
to Owner, (with a copy to each Qualified Lender)
September 13, 1993 95
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which notice shall be delivered no later than ninety (90) days after the
expiration of the sixty (60) day period described in the preceding sentence. The
effective date of such Termination shall be the date set forth in such notice,
provided that in no event shall the effective date of such Termination be less
than one hundred eighty (180) days, and no more than three hundred sixty five
(365) days after the date of such notice. Such failure to fund by Owner shall
not be deemed a Default by Owner under Article XVI, and Management Company shall
not be entitled to any remedies with respect to such failure other than such
termination of this Agreement and as set forth in Section 8.03.E.
G. If Owner owns any other inn(s) in the Residence Inn By Marriott
System which is (are) operated by Management Company, Management Company shall
co-mingle the FF&E Reserve for the Inn with the FF&E reserve account for Owner's
other inn(s) in a single bank account unless such co-mingling is prohibited by
any Qualified Lender.
8.03 Building Alterations, Improvements, Renewals, and Replacements
--------------------------------------------------------------
A. Management Company shall prepare an annual estimate (the "Building
Estimate") of the expenditures necessary for major repairs, alterations,
improvements, renewals and replacements
September 13, 1993 96
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(which repairs, alterations, improvements, renewals and replacements are not
among those referred to in Section 8.02.A.2) to the structure or exterior facade
of the Inn, or to the mechanical, electrical, heating, ventilating, air
conditioning, plumbing, or vertical transportation elements of the Inn building.
Management Company shall submit each such Building Estimate to Owner for its
approval at the same time the Annual Operating Budget is submitted, and
Management Company shall not make any expenditures for such purposes without the
prior written consent of Owner. Owner shall not unreasonably withhold its
consent with respect to such changes, repairs, alterations, improvements,
renewals or replacements to the Inn as are required by reason of any Legal
Requirement, or required under Management Company's current life-safety
standards (provided that, in order for any such life-safety standards to be
"required" within the meaning of this Section 8.03.A, such standards must be
both required and in the process of being implemented at a majority of the inns
within the Residence Inn System operated by Management Company which are
comparable to the Inn), or otherwise required for the continued safety of guests
or prevention of material damage to property, including the removal of Hazardous
Materials in compliance with all Environmental Laws pursuant to Section 20.10).
September 13, 1993 97
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B. In the event of the receipt by Management Company of a governmental
order or other circumstances described in Section 8.03.A above, Management
Company shall give Owner notice thereof within five (5) business days thereafter
or sooner if circumstances reasonably warrant. Management Company shall then be
authorized (but not obligated) to take appropriate remedial action without
receiving Owner's prior consent as follows: (i) in an emergency threatening the
Inn, its guests, invitees or employees; or (ii) if the continuation of the given
condition could (in Management Company's reasonable judgment) subject Management
Company and/or Owner to either criminal or more than de minimis civil
----------
liability, and Owner has either failed to remedy the situation or has failed to
take appropriate legal action to stay the effectiveness of any applicable Legal
Requirement. Management Company shall cooperate with Owner in the pursuit of
any such action and shall have the right to participate therein. Owner shall
reimburse Management Company for any costs incurred by Management Company in
connection with any such remedial action within thirty (30) days after Owner's
receipt of notice from Management Company of the amount of such costs.
C. The cost of all changes, repairs, alterations, improvements, renewals
or replacements referred to in Section
September 13, 1993 98
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8.03.A or 8.03.B (including the expenses incurred by either Owner or Management
Company in connection with any civil or criminal proceeding described above)
shall be borne solely by Owner, and shall not be paid from Gross Revenues or
from the FF&E Reserve. Any failure of Owner to either (i) approve and provide
funding for any proposed expenditures pursuant to the last sentence of Section
8.03.A, within seventy-five (75) days after Management Company's request
therefor, or (ii) in the case of any Legal Requirement which is described in
Section 8.03.B, to either comply therewith or to stay the effectiveness of such
Legal Requirement during the period of any contesting thereof, shall be a
Default by Owner. In such event, Management Company shall be entitled (without
affecting its other remedies under Article XVI) to terminate this Agreement upon
ninety (90) days' written notice to Owner; (with a copy to each Qualified
Lender); provided, however, that Management Company shall have the right to
stipulate such shorter period of time as may be appropriate, given the time
periods which are mandated by Legal Requirements, as described in Section
8.03.A, or given Management Company's good faith concerns about its own civil
and/or criminal liability.
D. Management Company shall have the right, from time to time, to set
forth in any Building Estimate (in addition to the
September 13, 1993 99
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expenditures described in Section 8.03.A) such changes, alterations or
improvements to the Inn as are required, in Management Company's reasonable
judgment, to keep the Inn in a competitive, efficient and economical operating
condition, in accordance with the Residence Inn System Standards (which
Management Company shall substantiate by demonstrating a reasonable return on
the proposed investment to be made by Owner). The cost of all changes,
alterations or improvements referred to in this Section 8.03.D shall be paid, to
the extent reasonably possible (given the requirement, set forth in Section
8.02, that the balance in the FF&E Reserve be maintained at a level sufficient
to maintain the Inn in accordance with the Residence Inn System Standards) from
the FF&E Reserve, and Owner shall pay such costs from its own funds only to the
extent there are not adequate funds for such purpose in the FF&E Reserve. Any
failure of Owner to approve and fund the Owner's portion of any proposed
expenditures pursuant to Section 8.03.D, as described in the preceding sentence,
or provide funding for items in Section 8.03.A (other than those items included
in the last sentence of Section 8.03.A) within sixty (60) days after Management
Company's request therefor, shall not be a Default by Owner but shall entitle
Management Company to terminate this Agreement and receive payment of the fee
set forth in Section 8.03.E. Such
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Termination shall be evidenced by written notice to Owner, (with a copy to each
Qualified Lender) which notice shall be delivered to Owner no later than ninety
(90) days after the expiration of the sixty (60) day period described in the
preceding sentence. The effective date of such Termination shall be the date
stated by Management Company in such notice, provided that such effective date
shall be no less than one hundred eighty (180) days, and no more than three
hundred sixty (360) days, after the date of such notice. It is understood that
"alterations" and "improvements" which either (a) increase or decrease the
number of guest rooms in the Inn, or (b) involve changing the architectural
footprint of the Inn or involve other significant changes in the structural
design of the Inn, in any case by more than a de minimis amount, are beyond the
-- -------
scope of this Article VIII, and would require an amendment of this Agreement
prior to implementation by either party.
E. Notwithstanding anything to the contrary in Section 8.02.F or 8.03.D,
if Owner owns five (5) or fewer inns in the Residence Inn System which are
managed by Management Company, and Management Company elects to terminate the
Management Agreement due to: (i) Owner's failure to elect either option 1 or 2
in Section 8.02.F; (ii) Owner's failure to fund the required amount in Section
8.02.F, having elected option 2, or (iii) Owner's
September 13, 1993 101
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failure to fund pursuant to Section 8.03.D, as applicable, then upon Management
Company's election to terminate the Management Agreement, which pursuant to both
Sections 8.02.F and 8.03.D must (a) be made within ninety (90) days following
the expiration of the time period in which Owner must provide such additional
funds, and (b) set forth an effective date of such Termination which is no less
than one hundred eighty (180) days and no more than three hundred sixty five
(365) days after the date of such notice, then, Owner agrees to pay to
Management Company a fee equal to three (3) times the Base Management Fee for
the prior Fiscal Year (regardless of whether said Base Management Fee was
actually paid to Management Company); provided, however, that if, within ten
(10) days from receipt of Management Company's notice to terminate, Owner
provides the funds required pursuant to Section 8.02.F or 8.03.D, as applicable,
then upon receipt of such funds by Management Company, Management Company's
notice to terminate shall be deemed null and void and this Agreement shall
continue in full force and effect. Said fee shall be paid to Management Company
upon the termination date set forth in the written notice from Management
Company to Owner terminating this Agreement. This fee shall be compensation for
lost revenue and expenses and not as a penalty. If Owner fails to pay such fee
within the time period set forth herein, then Management Company
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shall have the right (without affecting Management Company's other right under
this Agreement) to withhold the amount of such fee from Owner's Distribution.
8.04 Liens
-----
Management Company and Owner shall use their best efforts to prevent any
liens from being filed against the Inn which arise from any maintenance,
repairs, alterations, improvements, renewals or replacements in or to the Inn.
They shall cooperate fully in obtaining the release of any such liens, and the
cost thereof, if the lien was not occasioned by the fault of either party, shall
be treated the same as the cost of the matter to which it relates. If the lien
arises as a result of the fault of either party, then the party at fault shall
bear the full cost (including without limitation, all legal fees, court costs,
bonding fees and underlying debt) of obtaining the lien release.
8.05 Ownership of Replacements,Etc.
-----------------------------
All repairs, alterations, improvements, renewals or replacements of the Inn
which are made pursuant to Article VIII or otherwise shall be the property of
Owner. Subject to the provisions of Section 8.02, the funds in the FF&E Reserve
shall be the property of Owner.
September 13, 1993 103
<PAGE>
END OF ARTICLE VIII
September 13, 1993 104
<PAGE>
ARTICLE IX
BOOKKEEPING AND BANK ACCOUNTS
-----------------------------
9.01 Books and Records
-----------------
A. Books of control and account shall be kept on the accrual basis and in
material respects in accordance with the Uniform System of Accounts, with the
exceptions provided in this Agreement. Owner may at reasonable intervals during
Management Company's normal business hours examine such records. Within
seventy-five (75) days following the close of each Fiscal Year, Management
Company shall furnish Owner a statement (the "Annual Operating Statement") in
reasonable detail summarizing the Inn operations for such Fiscal Year and a
certificate of Management Company's chief accounting officer (or its controller
or any vice-president), certifying that to the best of his or her knowledge and
belief such year-end Annual Operating Statement is true and correct. Owner
shall have sixty (60) days after receipt to examine or review (at Owner's sole
expense, and not as a Deduction) said Annual Operating Statement. If Owner
raises no objections within said sixty (60) day period, the Annual Operating
Statement shall be deemed to have been accepted by Owner as true and correct,
and Owner shall have no further right to question its accuracy. If Owner does
raise such an objection,
September 13, 1993 105
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by notice to Management Company, Owner shall arrange for an audit to be
commenced within sixty (60) days after the date of such objection, and shall
diligently cause such audit to be completed within a reasonable period of time.
Owner shall pay all costs and expenses of such audit at its sole expense (and
not as a Deduction); however, if such audit establishes that Management Company
has understated the Operating Profit for that Fiscal Year by five percent (5%)
or more, the reasonable costs and expenses of such audit shall be paid as a
Deduction.
B. Upon written request by Owner, but in no event more frequently than
annually, Management Company shall prepare and deliver to Owner the Management
Analysis Report. In addition, Management Company shall, in connection with an
impending Sale of the Inn or proposed commitment by a Qualified Lender to make a
Qualified Loan, within thirty (30) days after written request therefor from
Owner, prepare and deliver to Owner an updated Management Analysis Report
describing significant changes since the effective date of the most recent
Management Analysis Report; provided, however that Management Company shall not
be required to prepare such updated Management Analysis Report if a report has
been delivered within the previous one hundred twenty (120) days. The cost and
expense of preparing the Management Analysis Report shall be paid as a
Deduction.
September 13, 1993 106
<PAGE>
C. Owner shall have the right to require that any given Annual Operating
Statement will include a reasonably detailed report setting forth the components
of Chain Services, the amounts billed for each such component during the Fiscal
Year in question and the method of allocation for each such component; provided,
however, that Owner must request Management Company to prepare such report by no
later than thirty (30) days prior to the date of such Annual Operating
Statement.
9.02 Inn Accounts, Expenditures
--------------------------
A. All funds derived from operation of the Inn shall be deposited by
Management Company in Inn bank accounts (the "Operating Accounts") in a bank or
banks designated by Management Company and approved by Owner. Withdrawals from
said accounts shall be made only by representatives of Management Company whose
signatures have been authorized. Reasonable petty cash funds shall be
maintained at the Inn.
B. All payments made by Management Company hereunder shall be made from
authorized bank accounts, petty cash funds, or from Working Capital provided by
Owner pursuant to Section 7.01. Management Company shall not be required to
make any advance or payment to or for the account of Owner except out of such
funds, and Management Company shall not be obligated to incur any
September 13, 1993 107
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liability or obligation for Owner's account without assurances that necessary
funds for the discharge thereof will be provided by Owner. Debts and liabilities
incurred by Management Company as a result of its operation and management of
the Inn pursuant to the terms hereof, whether asserted before or after the
Termination of this Agreement, will be paid by Owner to the extent funds are not
available to Management Company for that purpose from Gross Revenues.
9.03 Annual Operating Budget
-----------------------
A. Management Company shall submit to Owner for its review, at least
thirty (30) days prior to the beginning of each full Fiscal Year after the
Effective Date, a preliminary draft of the projection of the estimated financial
results of the operation of the Inn during the next Fiscal Year (the "Annual
Operating Budget"). Such Annual Operating Budget shall project the estimated
Gross Revenues and Operating Profit for the forthcoming Fiscal Year for the Inn.
In preparing the Annual Operating Budget for each Fiscal Year, Management
Company's goal will be the maximization of the long-term Operating Profit of the
Inn, in keeping with the Residence Inn System Standards and the general
standards of the hotel industry for similar properties. At Owner's request,
Management Company agrees to take reasonable
September 13, 1993 108
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steps to ensure that qualified personnel from Management Company's staff are
available to explain the preliminary draft of the Annual Operating Budget,
including any material items which have been budgeted at significantly different
amounts from the amounts actually experienced (or projected) for the same items
in the preceding Fiscal Year. A meeting (or meetings) for such purpose shall be
held, at Owner's request, within a reasonable period of time after the
submission to Owner of the preliminary draft of the Annual Operating Budget.
Management Company will at all times give good faith consideration to Owner's
suggestions regarding any Annual Operating Budget. Management Company shall
thereafter submit to Owner, within ten (10) days after the beginning of such
Fiscal Year, the final Annual Operating Budget.
B. Management Company shall use its best efforts to adhere to the Annual
Operating Budget. It is understood, however, that the Annual Operating Budget
is an estimate only and that unforeseen circumstances such as, but not limited
to, the costs of labor, materials, services and supplies, casualty, operation of
law, or economic and market conditions may make adherence to the Annual
Operating Budget impracticable, and Management Company shall be entitled to
depart therefrom for such reasons.
9.04 Operating Losses; Credit
------------------------
A. To the extent there is an Operating Loss, additional
September 13, 1993 109
<PAGE>
funds in the amount of any such Operating Loss shall be provided by Owner within
thirty (30) days after Management Company has given written notice thereof to
Owner; provided, however, that if Owner has already received a request from
Management Company for additional Working Capital pursuant to Section 7.01.A,
and if such request under Section 7.01.A reflects fundamentally the same cash
shortage which resulted in a request under this Section 9.04.A, Owner and
Management Company shall mutually discuss the extent to which the requests under
Section 7.01.A and Section 9.04.A may overlap, and such requests shall be
modified accordingly.
B. In no event shall either party borrow money in the name of or pledge
the credit of the other.
9.05 Consolidated Reports
---------------------
With respect to Management Company's reports, books and records
required to be kept and provided to Owner pursuant to Sections 9.01.A, 9.01.B
and 9.03.A hereof provided that Owner is also the owner of other hotels in the
Residence Inn System and that said Inns are managed by Management Company,
Management Company shall have the right, at Management Company's option, to
prepare said reports on a consolidated basis rather than by individual inn;
provided, however that if Owner reasonably
September 13, 1993 110
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determines that it requires individual reports for each individual inn and
requests individual reports from Management Company in writing, together with
Owner's reasons for requesting such individual reports, Management Company shall
comply with such request.
END OF ARTICLE IX
September 13, 1993 111
<PAGE>
ARTICLE X
PROPRIETARY MARKS; INTELLECTUAL PROPERTY
----------------------------------------
10.01 Proprietary Marks
-----------------
A. During the Term of this Agreement, the Inn shall be known as a
"Residence Inn", "Residence Inn by Marriott" or "Marriott Residence Inn" with
such additional identification as may be agreed to by Owner and Management
Company to provide local identification. If the name of the "Residence Inn
System" is changed, Management Company shall have the right to change the name
of the Inn to conform thereto.
B. The name "Marriott", "Residence Inn", "Residence Inn by Marriott" and
"Marriott Residence Inn" whether used alone or in connection with another word
or words, and all other Proprietary Marks shall in all events remain the
exclusive property of Management Company and its Affiliates. Owner shall have
no right to use the Marriott or Residence Inn name or any other Proprietary
Mark; provided, however, that Owner shall have the right, during the Term of
this Agreement, to have Proprietary Signage installed (in strict conformance
with the specifications provided by Management Company prior to the Effective
Date, or subsequent specifications provided by Management Company from time to
time during the Term) in the Inn and on the Site.
September 13, 1993 112
<PAGE>
C. Except as provided in Section 10.02, upon Termination, any use of or
right to use the Marriott or Residence Inn name or any other Proprietary Mark
under this Agreement by Owner shall immediately cease. As of the date of
Termination, Management Company shall remove all Proprietary Signage from the
Inn and from the Site (and from any locations other than the Site). The cost of
such removal shall be paid as set forth in Section 4.02.E.
D. Notwithstanding the foregoing, those trademarks, trade names, symbols,
logos and designs which are specifically listed on Exhibit "E" shall be deemed
"Proprietary Marks" only during the Term of this Agreement; upon a Termination,
the exclusive control of such Proprietary Marks shall revert to Owner.
10.02 Purchase of Inventories and Fixed Asset Supplies
------------------------------------------------
Upon Termination, Management Company shall have the option, to be exercised
no later than thirty (30) days prior to Termination, to elect to purchase, at
their then book value, any items of the Inn's Inventories and Fixed Asset
Supplies as may be marked with the Marriott or Residence Inn name or any other
Proprietary Mark. In the event Management Company does not exercise such
option, Owner agrees that it will use any such items not so purchased
exclusively in connection with the Inn
September 13, 1993 113
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until they are consumed.
10.03 Computer Software and Equipment
-------------------------------
A. All Software is and shall remain the exclusive property of Management
Company or one of its Affiliates (or the licensor of such Software, as the case
may be), and Owner shall have no right to use, or to copy, any Software.
B. Upon Termination, Management Company shall have the right to remove
from the Inn, without compensation to Owner, all Software. Furthermore, upon
Termination, Management Company shall be entitled to remove from the Inn any
computer equipment which is utilized as part of a centralized reservation or
property management system or is otherwise considered proprietary by Management
Company. If any of such removed computer equipment is owned by Owner,
Management Company shall reimburse Owner for all previous expenditures made by
Owner for the purchase of such equipment, subject to a reasonable allowance for
depreciation.
10.04 Intellectual Property
---------------------
All Intellectual Property shall at all times be proprietary to Management
Company or its Affiliates, and shall be the exclusive property of Management
Company or its Affiliates. During the Term of this Agreement, Management
Company shall be
September 13, 1993 114
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entitled to take all reasonable steps to ensure that the Intellectual Property
remains confidential and is not disclosed to anyone other than Management
Company's employees at the Inn. Upon Termination, all Intellectual Property
shall be removed from the Inn by Management Company, without compensation to
Owner.
10.05 Breach of Covenant
------------------
Management Company and/or its Affiliates shall be entitled, in case of any
breach of the covenants of Article X by Owner or others claiming through it, to
injunctive relief and to any other right or remedy available at law. Article X
shall survive Termination.
END OF ARTICLE X
September 13, 1993 115
<PAGE>
ARTICLE XI
POSSESSION AND USE OF INN
-------------------------
11.01 Quiet Enjoyment
---------------
Owner covenants that, so long as: (i) an Event of Default by Management
Company has not occurred under Article XVI of this Agreement; and (ii) Owner
does not have the right to terminate this Agreement under any other Section of
this Agreement, Management Company shall quietly hold, occupy and enjoy the Inn
throughout the Term hereof free from hindrance or ejection by Owner or other
party claiming under, through or by right of Owner (except as may be otherwise
set forth in Section 6.04). Owner agrees to pay and discharge any payments and
charges and, at its expense, to prosecute all appropriate actions, judicial or
otherwise, necessary to assure such free and quiet occupation. Nothing set forth
in the preceding sentence, however, shall be deemed to create a recourse
obligation by Owner to pay any payment or charge pursuant to a contract which is
non-recourse to Owner.
11.02 Use
---
A. Management Company shall use the Inn solely for the operation of a
hotel pursuant to the Residence Inn System
September 13, 1993 116
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Standards, and for all activities in connection therewith which are customary
and usual to such an operation.
B. Management Company shall comply with and abide by all applicable Legal
Requirements pertaining to its operation of the Inn, provided that: (i) all
costs and expenses (other than those which are specifically described in clauses
(ii) or (iii) of this Section 11.02.B) of such compliance shall be paid from
Gross Revenues as Deductions in the computation of Operating Profit; (ii) all
costs and expenses of compliance with Environmental Laws shall be paid as set
forth in Section 20.10; (iii) all costs and expenses of compliance with the
Legal Requirements which are described in Section 8.03.A shall be paid as set
forth in Section 8.03; and (iv) Management Company shall have the right, but not
the obligation, in its reasonable discretion, to contest or oppose, by
appropriate proceedings, any such Legal Requirements (provided that the consent
of Owner, not to be unreasonably withheld, shall be obtained prior to initiating
any such proceedings which directly involve Owner's ownership interest in the
Inn in a material manner. The reasonable expenses of any such contest shall be
paid from Gross Revenues as Deductions.
11.03 Chain Services
--------------
A. Management Company shall, beginning with the Effective
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Date and thereafter during the Term of this Agreement, cause to be furnished to
the Inn certain services ("Chain Services") which are furnished generally on a
central or regional basis to other Residence Inn hotels in the Residence Inn
System managed by the Manager. Chain Services shall include: (i) national sales
office services; central training services; career development; and the
Residence Inn computer payroll and central accounting services; and (ii) such
additional central or regional services as are or may be, from time to time,
furnished for the benefit of hotels in the Residence Inn System or in
substitution for services now performed at individual inns which may be more
efficiently performed on a group basis; including, but not limited to, regional
managers and accounting staff; provided, however, that services not currently
included in chain services pursuant to subsections 11.03.A(i) and 11.03.A(ii)
above, shall only be added to "Chain Services" if, and to the extent that, such
services: (a) are not services included in the Residence Inn System Fee (it
being understood that Management Company's sole compensation for providing the
Residence Inn System Services shall be receipt of the Residence Inn System Fee);
(b) are not services relating to non-routine work (it being understood that the
cost and expense of such non-routine services shall be Deductions as set forth
in paragraph 6 of the definition of
September 13, 1993 118
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Operating Profit); and (c) are either (x) new services (i.e., not previously
performed at or for the Inn) or (y) services which theretofore had been
performed at the Inn, but which can be performed more efficiently and
economically on a centralized or regional basis.
B. Costs and expenses incurred in the providing of Chain Services shall be
allocated on a fair and equitable basis among all Residence Inns owned, leased
or managed by Management Company in the United States. Such allocation shall be
made without regard to any "caps" or other limitations on the amount which
Management Company or its Affiliates may charge to a given inn, pursuant to
agreements which Management Company (or its Affiliates) may have with the owner
of such inn. Any excess of that portion of such costs and expenses which is
fairly allocated to a given inn over the "cap" which may be in effect with
regard to that inn shall be paid by Management Company from its own funds.
Management Company shall make no profit from Chain Services. Upon Owner's
written request, an explanation of the current Chain Services will be given to
Owner, and the basis for the allocation of the charge for each Chain Service
will be explained to Owner, in reasonable detail, at the time of the submission
of the Annual Operating Statement (as more particularly set forth in Section
9.01). In no event will the
September 13, 1993 119
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total charge for all of the Chain Services which are described in clause (i) of
Section 11.03.A for any given Fiscal Year, exceed three percent (3%) of Gross
Revenues for such Fiscal Year. The parties hereby stipulate that the limitation
set forth in the preceding sentence is intended to apply only to the services
which are currently listed (as of the Effective Date) in Section 11.03.A(i);
accordingly, if there are types of expenditures which were originally treated as
Deductions (other than pursuant to paragraph 8 of the definition of "Operating
Profit" in Section 1.01), but which are later determined to be more properly
treated as Chain Services, such expenditures shall be treated as Deductions
pursuant to said paragraph 8 of the definition of "Operating Profit" without
regard to the aforesaid limitation.
11.04 Owner's Right to Inspect
------------------------
Owner or its agents shall have access to the Inn at all reasonable times
for the purpose of inspection or showing the Inn to prospective purchasers,
tenants or Holders.
11.05 Indemnity
---------
A. Management Company shall indemnify and hold harmless Owner (and any
officer, director, employee, advisor, partner or shareholder of Owner) in
respect of, and, at Owner's request,
September 13, 1993 120
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shall defend any action, cause of action, suit, debt, cost, expense (including,
without limitation, reasonable attorneys' fees), claim or demand whatsoever
brought or asserted by any third person whomsoever, at law or in equity, arising
by reason of: (i) liabilities stemming from general corporate matters of
Management Company or its Affiliates, to the extent the same are not directly
and primarily related to the Inn; (ii) infringement and other claims relating to
the Proprietary Marks; (iii) if Management Company intentionally or negligently
fails to maintain insurance coverage that it is required to maintain pursuant to
this Agreement, the excess of the amount of any liability or loss that would
have been covered over the amount of any applicable deductible; and (iv) the bad
faith or willful misconduct of Management Company or its Affiliates, or any of
their employees, servants or agents or other persons for whom they are
responsible, resulting in a claim for bodily injury, death or property damage
occurring on, in or in conjunction with the business of the Inn, to the extent
that such claim exceeds the insurance proceeds (including Inn Retentions) which
are available to pay such claim.
B. If any claim, action or proceeding is made or brought against Owner,
against which claim, action or proceeding Management Company shall be obligated
to indemnify pursuant to
September 13, 1993 121
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the terms of this Agreement, then, upon demand by the Owner, Management Company,
at its sole cost and expense, shall resist or defend such claim, action or
proceeding (in Owner's name, if necessary), using such attorneys as the Owner
shall approve, which approval shall not be unreasonably withheld. If, in the
Owner's reasonable opinion, (i) there exists a conflict of interest which would
make it inadvisable to be represented by counsel for Management Company, or (ii)
there are legal defenses available to Management Company that are different from
or inconsistent with those available to Owner, or (iii) there are claims at
issue which are not covered by Management Company's insurance, Owner shall be
entitled to retain its own attorneys, and Management Company shall pay the
reasonable fees and disbursements of such attorneys.
C. Matters with respect to which Management Company has specifically
agreed to indemnify Owner under other provisions of this Agreement (for example,
Section 14.01 regarding "Employee Claims", and Section 20.11 regarding
environmental matters) are to be treated exclusively under such other provisions
and not under this Section 11.05.
END OF ARTICLE XI
September 13, 1993 122
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ARTICLE XII
INSURANCE
---------
12.01 Interim Insurance
-----------------
[Intentionally omitted]
12.02 Property and Operational Insurance
----------------------------------
Management Company shall, commencing with the Effective Date and thereafter
during the Term of this Agreement, procure and maintain, either with insurance
companies of recognized responsibility or by legally qualifying itself as a self
insurer, a minimum of the following insurance:
A. Property insurance on the Inn building(s) and contents against loss or
damage by fire, lightning and all other risks covered by the usual extended
coverage endorsement, all in an amount not less than one hundred percent (100%)
of the replacement cost thereof (excluding the cost of foundations and
excavations);
B. Boiler and machinery insurance against loss or damage from explosion of
boilers or pressure vessels to the extent applicable to the Inn;
C. Business interruption insurance covering loss of profits and necessary
continuing expenses for interruptions caused by any
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occurrence covered by the insurance referred to in Section 12.02 A and B, which
shall be of a type and in such amounts (but such coverage shall in no event be
for less than one (1) year) as are generally established by Management Company
at similar hotels it owns, leases or manages under the Residence Inn name in the
United States;
D. General liability insurance against claims for bodily injury, death or
property damage occurring on, in, or in conjunction with the business of the
Inn, and automobile liability insurance on vehicles operated in conjunction with
the Inn, with a combined single limit for each occurrence of not less than
Twenty-Five Million Dollars ($25,000,000.00); representatives of Management
Company and Owner shall meet, at Owner's request, at intervals of approximately
once every five (5) years, to review the adequacy of such limit;
E. Workers' compensation and employer's liability insurance as may be
required under applicable laws covering all of Management Company's employees at
the Inn;
F. Fidelity bonds, with reasonable limits to be determined by Management
Company, covering its employees in job classifications normally bonded in other
similar hotels it leases or manages under the Residence Inn name in the United
States or as otherwise required by law, and comprehensive crime insurance
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to the extent Management Company and Owner mutually agree it is necessary for
the Inn; and
G. Such other insurance in amounts as Management Company and Owner, in
their reasonable judgment, mutually deem advisable for protection against
claims, liabilities and losses arising out of or connected with the operation of
the Inn.
12.03 General Insurance Provisions
----------------------------
A. All insurance described in Section 12.02 may be obtained by Management
Company by endorsement or equivalent means under its blanket insurance policies,
provided that such blanket policies substantially fulfill the requirements
specified herein. Upon the request of either Owner or any Qualified Lender,
representatives of the requesting party shall be entitled to examine, at
Management Company's corporate headquarters, all insurance policies maintained
by Management Company regarding the Inn.
B. Management Company may self insure or otherwise retain such risks or
portions thereof as it does with respect to other similar hotels it owns, leases
or manages under the Residence Inn name in the United States.
C. All policies of insurance required under Section 12.02 shall be carried
in the name of Management Company. The policies
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required under Sections 12.02.A, B, C and D shall include the Owner as an
additional insured. Upon notice by the Owner, Management Company shall also have
the policies required under Sections 12.02.A, B, C and D include any Qualified
Lender as an additional insured. Any property losses thereunder shall be payable
to the respective parties as their interests may appear. Any Mortgage on the Inn
shall contain provisions to the effect that proceeds of the insurance policies
required to be carried under Section 12.02.A and B shall, with respect to any
casualty involving less than fifty percent (50%) of the replacement cost of the
Inn, be available for repair and restoration of the Inn.
D. Management Company shall deliver to the Owner certificates of insurance
with respect to all policies so procured and, in the case of insurance policies
about to expire, shall deliver certificates with respect to the renewal thereof.
E. All certificates of insurance provided for under Article XII shall, to
the extent obtainable, state that the insurance shall not be cancelled or
materially changed without at least thirty (30) days' prior written notice to
Owner.
F. The term "Inn Retention" shall mean the amount of any loss or reserve
under Management Company's blanket insurance or self-insurance programs which is
allocated to the Inn, not to exceed the higher of (a) the maximum per occurrence
limit
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established for similar hotels participating in such programs, or (b) the
insurance policy deductible on any loss which may fall within high hazard
classifications as mandated by the insurer (e.g., earthquake, flood, windstorm
on coastal properties, etc.). If the Inn is not a participant under Management
Company's blanket insurance or self-insurance programs, "Inn Retention" shall
mean the amount of any loss or reserve allocated to the Inn, not to exceed the
insurance policy deductible.
12.04 Cost and Expense
----------------
A. [Intentionally omitted]
B. Insurance premiums and any other costs or expenses with respect to the
insurance or self-insurance required under Section 12.02, including any Inn
Retention, shall be paid from Gross Revenues as Deductions. To the extent that
such costs or expenses include reimbursement by Management Company of its own
costs or expenses, or those of one of its Affiliates, such costs or expenses
shall be generally competitive (as calculated over the Term of this Agreement)
with costs and expenses of non-affiliated entities providing similar services.
Such premiums and costs shall be allocated on an equitable basis to the hotels
participating under Management Company's blanket insurance or self-insurance
programs. Any reserves, losses, costs or expenses
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which are uninsured shall be treated as a cost of insurance and shall be
Deductions. Upon Termination, an escrow fund in an amount reasonably acceptable
to Management Company shall be established from Gross Revenues (or, if Gross
Revenues are not sufficient, with funds provided by Owner) to cover the amount
of any Inn Retention and all other costs which will eventually have to be paid
by either Owner or Management Company with respect to pending or contingent
claims, including those which arise after Termination for causes arising during
the Term of this Agreement. Upon the final disposition of all such pending or
contingent claims, any unexpended funds remaining in such escrow shall be paid
to Owner.
12.05 Owner's Option to Obtain Certain Insurance
------------------------------------------
Owner may, at its option, by written notice to Management Company which
shall be delivered no later than ninety (90) days prior to the natural
expiration of the insurance policies which Management Company has obtained
pursuant to Section 12.02.A, B and C, procure and maintain the insurance
specified in Section 12.02.A, B and C (in which case Management Company shall
allow such policies obtained by it under Section 12.02.A, B, and C to expire),
subject to the following terms and conditions:
A. All such policies of insurance shall be carried in the
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name of Owner, with Management Company as an additional insured. Any property
losses thereunder shall be payable to the respective parties as their interests
may appear. The documentation with respect to each Secured Loan shall contain
provisions to the effect that proceeds of the insurance policies required to be
carried under Section 12.01.A and B shall be available for repair and
restoration of the Inn, to the extent required pursuant to Section 12.03.C.
However, any Holder of such Secured Loan shall be entitled to impose reasonable
conditions on the disbursement of insurance proceeds for the repair and/or
restoration of the Inn, including a demonstration by Owner and/or Management
Company that the amount of such proceeds (together with other funds Owner agrees
to make available) is sufficient for such purpose.
B. Owner shall deliver to Management Company certificates of insurance
with respect to all policies so procured and, in the case of insurance policies
about to expire, shall deliver certificates with respect to the renewal thereof.
C. All such certificates of insurance shall, to the extent obtainable,
state that the insurance shall not be canceled or materially changed without at
least thirty (30) days' prior written notice to the certificate holder.
D. Premiums for such insurance coverage shall be treated as
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Deductions, provided that if the cost of such insurance procured by Owner
exceeds the cost of Management Company's comparable coverage by more than ten
percent (10%), all such excess costs shall be the sole responsibility of Owner
and shall not be a Deduction.
E. Should Owner exercise its option to procure the insurance described in
this Section 12.05, Owner hereby waives its rights of recovery from Management
Company or any of its Affiliates (and their respective directors, officers,
shareholders, agents and employees) for loss or damage to the Inn, and any
resultant interruption of business.
F. Should Owner exercise its right to obtain the insurance described in
this Section 12.05, Owner acknowledges that Management Company is under no
obligation to thereafter include the Inn in its blanket insurance program (with
respect to the coverage described in Section 12.02.A, B and C) for the balance
of the Term of this Agreement. However, upon a Sale of the Inn, a successor
Owner shall have the right, notwithstanding the fact that the previous Owner may
have obtained insurance in accordance with this Section 12.05, to have the Inn
included in Management Company's blanket insurance program (provided that the
Inn, as of that point in time, satisfies the applicable criteria for admission
to such program, as established by the program's
September 13, 1993 130
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insurance carriers) by making a written request to Management Company for such
inclusion not later than thirty (30) days after the date on which such party
becomes the Owner.
G. All insurance procured by Owner hereunder shall be obtained from
reputable insurance companies reasonably acceptable to Management Company.
END OF ARTICLE XII
September 13, 1993 131
<PAGE>
ARTICLE XIII
TAXES
-----
13.01 Real Estate and Personal Property Taxes
---------------------------------------
A. Except as specifically set forth in subsection B below, all Impositions
which accrue during the Term of this Agreement (or are properly allocable to
such Term under generally accepted accounting principles) shall be paid by
Management Company from Gross Revenues, as a Deduction, before any fine,
penalty, or interest is added thereto or lien placed upon the Inn or the
Agreement, unless payment thereof is stayed; provided, however, that Management
Company shall not be responsible for any fine, penalty or interest resulting
through no fault of Management Company or caused by Owner. Owner shall within
five (5) business days after the receipt of any invoice, bill, assessment,
notice or other correspondence relating to any Imposition, furnish Management
Company with a copy thereof. Management Company shall, within the earlier of
thirty (30) days of payment or five (5) business days following written demand
by Owner, furnish Owner with copies of official tax bills and assessments which
Management Company has received, and evidence of payment or contest thereof.
Either Owner or Management Company (in which case each party agrees to sign the
required applications and
September 13, 1993 132
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otherwise cooperate with the other party in expediting the matter) may initiate
proceedings to contest any Imposition, and all reasonable costs of any
negotiations or proceedings with respect to any such contest shall either (i) be
paid from Gross Revenues and be a Deduction in determining Operating Profit; or
(ii) be considered an Owner Deduction; provided, however that in the event
either Owner or Management Company spends in excess of Five Thousand Dollars
($5,000.00) with respect to such contest, such party shall provide written
notice to the other party and the other party shall approve or disapprove of
such expenditure within ten (10) days following receipt of such notice. Failure
of such party to approve or disapprove such expenditure shall be deemed
approval. In the event that either party's expenditures in excess of Five
Thousand Dollars ($5,000.00) are not approved by the other party such party may
nevertheless proceed to spend whatever funds are necessary with respect to such
contest; provided, however, that any amounts in excess of Five Thousand Dollars
($5,000.00) (or such higher amount as may have been approved by the other party)
shall be at the sole cost of Owner or Management Company, as the case may be,
and shall not be considered an Owner Deduction by Owner nor be considered a
Deduction from Operating Profit by either Owner or Management Company.
September 13, 1993 133
<PAGE>
B. The word "Impositions", as used in this Agreement, shall not include
the following, all of which shall be paid solely by Owner, not from Gross
Revenues nor from the FF&E Reserve:
1. Any franchise, corporate, estate, inheritance, succession, capital
levy or transfer tax imposed on Owner, or any income tax imposed on any income
of Owner (including distributions to Owner pursuant to Article V hereof);
2. Special assessments (regardless of when due or whether they are
paid as a lump sum or in installments over time) imposed because of facilities
which are constructed by or on behalf of the assessing jurisdiction (for
example, roads, sidewalks, sewers, culverts, etc.) which directly benefit the
Inn (regardless of whether or not they also benefit other buildings), which
assessments shall not be treated as Deductions, but rather shall be added to the
Additional Invested Capital as of each payment by Owner with respect thereto;
provided, however, that any installments (after the Effective Date) of any
assessments which were levied or imposed prior to the Effective Date shall be
Deductions;
3. "Impact Fees" (regardless of when due or whether they are paid as
a lump sum or in installments over time) which are required of Owner as a
condition to the issuance of site plan approval, zoning variances or building
permits, which impact fees
September 13, 1993 134
<PAGE>
shall not be treated as Deductions, but rather shall be added to the Additional
Invested Capital as of each payment by Owner with respect thereto; provided,
however, that any installments (after the Effective Date) of any impact fees
which were levied or imposed prior to the Effective Date shall be Deductions;
and
4. "Tax-increment financing" or similar financing whereby the
municipality or other taxing authority has assisted in financing the
construction of the Inn by temporarily reducing or abating normal Impositions in
return for substantially higher levels of Impositions at later dates.
C. Owner shall have the right to require Management Company to establish
an escrow account (with either any Qualified Lender or another entity reasonably
acceptable to both Owner and Management Company) from which Impositions will be
paid. Payments into such escrow account will be Deductions. Any interest which
accrues on amounts deposited in such escrow account shall be added to the
balance in such escrow account and used to pay Impositions.
END OF ARTICLE XIII
September 13, 1993 135
<PAGE>
ARTICLE XIV
INN EMPLOYEES
-------------
14.01 Employees
---------
A. All personnel employed at the Inn shall be the employees of Management
Company. Management Company shall have absolute discretion to hire, promote,
supervise, direct, train and discharge all employees at the Inn, to fix their
compensation and, generally, establish and maintain all policies relating to
employment.
B. Management Company shall decide which, if any, of the Inn's employees
shall reside at the Inn (provided that Owner's prior approval shall be obtained
if more than one such employee and his or her immediate families reside at the
Inn), and shall be permitted to provide free accommodations and amenities to its
employees and representatives living at or visiting the Inn in connection with
its management or operation. No person shall otherwise be given gratuitous
accommodations or services without prior joint approval of Owner and Management
Company except in accordance with usual practices of the hotel and travel
industry.
C. Any proposed settlement of any Employee Claim where the amount proposed
to be offered to the employee by Management Company is in excess of the
Settlement Threshold Amount shall be
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<PAGE>
jointly approved by Management Company and Owner. Any dispute between Owner and
Management Company as to whether Management Company's settlement recommendation
is reasonable, where such proposed settlement is in excess of the Settlement
Threshold Amount shall be resolved by arbitration under Section 20.13 hereof;
provided that Management Company shall have the right to settle any Employee
Claim (prior to the arbitration on the reasonableness of the settlement, as
described in this sentence) based on Management Company's recommendation, which
shall be Management Company's reasonable estimate, in good faith, by using: (i)
funds from Gross Revenues (as a Deduction) up to the amount of Owner's
settlement recommendation, which shall be Owner's reasonable estimate, in good
faith; and (ii) Management Company's own funds to the extent Management
Company's recommendation exceeds the amount described in subparagraph (i) above.
Following the settlement of such Employee Claim, the parties will arbitrate
under Section 20.13 the issue of whether Management Company's settlement
recommendation was reasonable under the circumstances. If the arbitrators decide
that Management Company's recommendation was reasonable, Management Company
shall be entitled to reimburse itself from Gross Revenues (as a Deduction) in
the amount of the funds advanced under subparagraph (ii) above, together with
accrued interest thereon
September 13, 1993 137
<PAGE>
at the Prime Rate. If the arbitrators decide that Management Company's
settlement recommendation was not reasonable, then Management Company shall not
be entitled to any reimbursement of the amounts advanced by it under
subparagraph (ii) above, nor to accrued interest thereon.
D. Management Company shall pay from its own funds, and not from Gross
Revenues, any Employee Claim where the basis of such Employee Claim is conduct
by Management Company which: (i) is a substantial violation of the standards of
responsible labor relations as generally practiced by prudent owners or
operators of similar hotel properties in the general geographic area of the Inn;
and (ii) is not the isolated act of individual employees, but rather is a direct
result of corporate policies of Management Company which either encourage or
fail to discourage such conduct. In addition, Management Company shall
indemnify, defend and hold harmless Owner from and against any fines or
judgments arising out of such conduct, and all Litigation expenses (including
reasonable attorneys' fees and expenses) incurred in connection therewith. Any
dispute between Owner and Management Company as to whether or not certain
conduct by Management Company is not in accordance with the aforesaid standards
shall be resolved by arbitration under Section 20.13 hereof. The arbitration
proceedings described in the preceding sentence shall
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<PAGE>
be conducted independently of any arbitration proceedings with respect to such
Employee Claim pursuant to the applicable employee-related contract and/or
pursuant to Section 14.01.C of this Agreement.
E. With respect to all Litigation or arbitration involving Employee Claims
in which both Management Company and Owner are involved as actual or potential
defendants, Management Company shall have exclusive and complete responsibility
(subject to the rights of Owner to approve certain settlements, as set forth in
Section 14.01.C) for the resolution of such Employee Claims. In the event that
any Employee Claim is made against Owner, but not against Management Company,
Owner shall give notice to Management Company of the Employee Claim in a timely
manner so as to avoid any prejudice to the defense of the Employee Claim,
provided that Management Company shall in all events be so notified within
twenty (20) days after the date such Employee Claim is made against Owner.
Management Company will thereafter assume exclusive and complete responsibility
for the resolution of such Employee Claim.
F. At Termination, other than by reason of an Event of Default of
Management Company hereunder, an escrow fund shall be established from Gross
Revenues (or, if Gross Revenues are not sufficient, with funds provided by
Owner) to reimburse Management
September 13, 1993 139
<PAGE>
Company for all costs and expenses incurred by Management Company which arise
out of either the transfer or the termination of employment of Management
Company's employees at the Inn, such as reasonable transfer costs, severance
pay, unemployment compensation and other employee liability costs.
END OF ARTICLE XIV
September 13, 1993 140
<PAGE>
ARTICLE XV
DAMAGE, CONDEMNATION AND FORCE MAJEURE
--------------------------------------
15.01 Damage and Repair
-----------------
A. If, during the Term hereof, the Inn is damaged or destroyed by fire,
casualty or other cause, Owner shall, with all reasonable diligence, to the
extent that proceeds from the insurance described in Section 12.02 are available
(subject to the provisions of any Mortgage encumbering the Inn, but with the
limitations described in Section 12.03.C) for such purpose, repair or replace
the damaged or destroyed portion of the Inn to the same condition as existed
previously.
B. In the event damage or destruction to the Inn from any cause materially
and adversely affects the operation of the Inn and Owner fails to timely
(subject to Force Majeure, and subject to unreasonable delays caused by
Management Company, including unreasonable delays in adjusting the insurance
claim with the carriers which participate in Management Company's blanket
insurance program) commence and complete the repairing, rebuilding or
replacement of the same so that the Inn shall be substantially the same as it
was prior to such damage or destruction, such action shall be deemed an Event of
Default by Owner pursuant to Section 16.01.E and Management Company may, at
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its option, elect to terminate this Agreement upon one hundred twenty (120)
days' written notice in addition to its remedies under Section 16.03.
15.02 Condemnation
------------
A. In the event all or substantially all of the Inn shall be taken in any
eminent domain, condemnation, compulsory acquisition, or similar proceeding by
any competent authority for any public or quasi-public use or purpose, or in the
event a portion of the Inn shall be so taken, but the result is that it is
unreasonable to continue to operate the Inn, this Agreement shall terminate.
B. In the event a portion of the Inn shall be taken by the events
described in Section 15.02.A, or the entire Inn is affected but on a temporary
basis, and the result is not to make it unreasonable to continue to operate the
Inn, this Agreement shall not terminate. However, so much of any award for any
such partial taking or condemnation as shall be necessary to render the Inn
equivalent to its condition prior to such event shall be used for such purpose;
the balance of such award, if any, shall be fairly and equitably apportioned
between Owner and Management Company in accordance with their respective
interests. The amount of any award received by Owner pursuant to Section
15.02.B and
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<PAGE>
not applied to restoration of the Inn shall be deducted from the Priority Basis
and the Loan Priority Basis at such time as the award is received by Owner. In
addition, the Performance Termination Threshold shall be reduced by an amount
equal to eight percent (8%) of such total amount (if any) of any award received
by Owner pursuant to this Section 15.02.B which is not used to restore the Inn.
C. In the event of any proceeding described in Section 15.02.A or
15.02.B, Owner and Management Company shall each have the right to initiate such
proceedings as they deem advisable to recover any damages to which they may be
entitled; provided, however, that Management Company shall be entitled to retain
the award or compensation it may obtain through proceedings which are conducted
separately from those of Owner only if such award or compensation does not
reduce the award or compensation otherwise available to Owner. (For this
purpose, any award or compensation received by any Holder shall be deemed to be
an award or compensation received by Owner).
15.03 Force Majeure
-------------
A. The withdrawal or revocation of any License which is material to the
operation of the Inn in accordance with the Residence Inn System Standards,
where such withdrawal or
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revocation: (i) is not due to the fault of either Management Company or Owner,
and (ii) is not otherwise within the reasonable control of either Management
Company or Owner, shall not be an Event of Default under Article XVI of this
Agreement. Management Company and Owner shall each, in good faith, use all
commercially reasonable efforts (including the diligent pursuit of all available
appeals), during the period of one hundred twenty (120) days after the date of
such withdrawal or revocation, to have such License reinstated. If,
notwithstanding such efforts, such License is not reinstated prior to the
expiration of the aforesaid period of one hundred twenty (120) days, either
Owner or Management Company shall have the right, at its option, to terminate
this Agreement upon no less than sixty (60) days' notice to the other party;
provided, however, that the terminating party must deliver such notice of
Termination to the other party by no later than ninety (90) days after the
expiration of such one hundred twenty (120) day period; and provided further,
that no such Termination shall be effective if, prior to the effective date of
such Termination, such License is reinstated or such withdrawal or revocation of
such License is stayed.
B. If an order, judgment or directive by a court or administrative body is
issued, in connection with any legal or
September 13, 1993 144
<PAGE>
Litigation involving Owner, which order, judgement or directive restricts or
prevents Management Company, in a material adverse manner, from operating the
Inn in accordance with the Residence Inn System Standards, and which, in
Management Company's reasonable opinion, will have a significant adverse effect
upon operations of the Inn, Management Company shall be entitled, at its option,
to terminate this Agreement upon sixty (60) days' written notice; provided,
however, that Management Company shall (if it so elects) deliver such notice of
Termination to Owner by
September 13, 1993 145
<PAGE>
no later than ninety (90) days after the issuance of such order, judgment or
directive (or, if such order, judgment or directive is appealed, within ninety
(90) days after the final disposition of such appeal).
END OF ARTICLE XV
September 13, 1993 146
<PAGE>
ARTICLE XVI
DEFAULTS
--------
16.01 Definition of "Default"
-----------------------
Any one or more of the following shall constitute a "Default," to the
extent permitted by applicable law:
A. The filing of a voluntary petition in bankruptcy or insolvency or a
petition for reorganization under any bankruptcy law by either party, or the
admission by either party that it is unable to pay its debts as they become due;
B. The consent to an involuntary petition in bankruptcy or the failure to
vacate, within ninety (90) days from the date of entry thereof, any order
approving an involuntary petition by either party;
C. The entering of an order, judgment or decree by any court of competent
jurisdiction, on the application of a creditor, adjudicating either party as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets, and such order, judgment or decree's continuing unstayed
and in effect for any period of ninety (90) days;
D. The failure of either party to make any payment required
September 13, 1993 147
<PAGE>
to be made in accordance with the terms of this Agreement, as of the due date
which is specified in this Agreement;
E. The failure of either party to perform, keep or fulfill any of the
other covenants, undertakings, obligations or conditions set forth in this
Agreement.
16.02 Definition of "Event of Default"
--------------------------------
A. Upon the occurrence of any Default by either party hereto (hereinafter
referred to as the "defaulting party") under Section 16.01.A, B or C, such
Default shall immediately and automatically, without the necessity of any notice
to the defaulting party, constitute an "Event of Default" under this Agreement.
B. Upon the occurrence of any Default by a defaulting party under Section
16.01.D, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within ten (10)
days after written notice from the non-defaulting party specifying such Default
and demanding such cure.
C. Upon the occurrence of any Default by either party hereto under
Section 16.01.E, such Default shall constitute an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within thirty (30)
days after written
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notice from the non-defaulting party and demanding such cure, or, if the Default
is such that it cannot reasonably be cured within said thirty (30) day period of
time, if the defaulting party fails to commence the cure of such Default within
said thirty (30) day period of time or thereafter fails to diligently pursue
such efforts to completion.
16.03 Remedies Upon an Event of Default
---------------------------------
A. Upon the occurrence of an Event of Default under the provisions of
Section 16.02, the non-defaulting party shall have the right to pursue any one
or more of the following courses of action: (i) in the event of a material
breach by the defaulting party of its obligations under this Agreement, to
terminate this Agreement by written notice to the defaulting party, which
termination shall be effective as of the effective date which is set forth in
said notice, provided that said effective date shall be at least thirty (30)
days after the date of said notice; and provided further that, if the defaulting
party is the employer of all or a substantial portion of the employees at the
Inn, the foregoing period of thirty (30) days shall be extended to seventy-five
(75) days (or such longer period of time as may be necessary under applicable
Legal Requirements pertaining to termination of employment); (ii) to institute
forthwith any and
September 13, 1993 149
<PAGE>
all proceedings permitted by law or equity, including, without limitation,
actions for specific performance and/or damages; and (iii) to avail itself of
any one or more of the other remedies described in this Section 16.03.
B. Upon the occurrence of a Default by either party under the provisions
of Section 16.01.D, the amount owed to the non-defaulting party shall accrue
interest, at the Interest Rate, from and after the date on which such payment
was originally due to the non-defaulting party.
C. The rights granted hereunder are intended to be cumulative, and shall
not be in substitution for, but shall be in addition to, any and all rights and
remedies available to the non-defaulting party (including, without limitation,
injunctive relief and damages; provided that the satisfaction of damage awards
against Owner shall be limited by the provisions of Section 16.04) by reason of
applicable provisions of law or equity.
16.04 Owner's Estate
--------------
Notwithstanding any other provision of this Agreement, in the event of any
Event of Default by Owner pursuant to the terms of this Agreement, Management
Company shall look only to Owner's estate and interest in the Site and the Inn
(which shall for this
September 13, 1993 150
<PAGE>
purpose, include (i) amounts deposited in the Operating Accounts and the FF&E
Reserve, and (ii) accounts receivable) for the satisfaction of a money judgment
against Owner resulting from such Event of Default, and no other property or
assets of Owner, or of its partners, officers, directors, shareholders or
principals, shall be subject to levy, execution or other enforcement procedure
for the satisfaction of such judgment. Management Company's right to look to
Owner's estate and interest in the Site and the Inn for satisfaction of such a
money judgment against Owner shall survive Termination and shall not be affected
by any one or more Sales of the Inn. Nothing contained in this Section 16.04
shall be deemed to affect or diminish Management Company's remedies under this
Article XVI other than money damages against Owner (including, without
limitation, Termination of this Agreement).
END OF ARTICLE XVI
September 13, 1993 151
<PAGE>
ARTICLE XVII
WAIVER AND PARTIAL INVALIDITY
-----------------------------
17.01 Waiver
------
The failure of either party to insist upon a strict performance of any of
the terms or provisions of this Agreement, or to exercise any option, right or
remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
17.02 Partial Invalidity
------------------
If any portion of this Agreement shall be declared invalid by order, decree
or judgment of a court, this Agreement shall be construed as if such portion had
not been inserted herein except when such construction would operate as an undue
hardship on Management Company or Owner, or constitute a substantial deviation
from the general intent and purpose of said parties as reflected in this
Agreement.
END OF ARTICLE XVII
September 13, 1993 152
<PAGE>
ARTICLE XVIII
ASSIGNMENT
----------
18.01 Assignment
----------
A. Management Company shall not assign or transfer its management
responsibilities under this Agreement without the prior written consent of
Owner; provided, however, that Management Company shall have the right, without
such consent, to: (i) assign its interest in this Agreement to any of its
Affiliates and any such Affiliate shall be deemed to be the Management Company
for the purposes of this Agreement, and (ii) sublease shops or grant Licenses or
concessions at the Inn so long as the terms of any such subleases, Licenses or
concessions are consistent with the provisions of Section 2.02 and provided
further that Owner's consent shall be required prior to the execution by
Management Company of any such lease, License or concession which (a) has a term
of more than five (5) years, or (b) involves more than five hundred (500) square
feet of space within the Inn. In the event of such an assignment by Management
Company of its interest in this Agreement to an Affiliate, the Management
Company which is named in the Preamble to this Agreement: (i) shall
automatically be deemed to guarantee the performance of such Affiliate under
this Agreement; (ii) shall,
September 13, 1993 153
<PAGE>
at the request of Owner, execute a guaranty, in form and substance reasonably
satisfactory to both parties, of the performance of such Affiliate under this
Agreement (provided that the failure of Owner to obtain an executed guaranty
pursuant to this clause (ii) shall not affect the validity or enforceability of
the guaranty which is automatically created pursuant to clause (i); and provided
further, that, when Owner does so receive an executed guaranty pursuant to this
clause (ii), such executed guaranty shall be deemed to have superseded the
guaranty described in clause (i) above); and (iii) shall make available to such
Affiliate, in connection with the performance by such Affiliate under this
Agreement, Management Company's skill, personnel, facilities and resources.
B. Owner shall not assign or transfer its interest in this Agreement other
than (i) in connection with a Sale of the Inn which complies with the provisions
of Article XIX hereof; or (ii) as set forth in Section 18.01.C.
C. Nothing contained herein shall prevent: (i) the collateral assignment
of this Agreement by Owner as security for any Mortgage which complies with the
provisions of Section 3.01; or (ii) the transfer of this Agreement in connection
with a merger or consolidation or a sale of all or substantially all of the
assets of either party, provided that (x) if such transfer is
September 13, 1993 154
<PAGE>
by Owner, the provisions of Article XIX hereof shall be complied with, and (y)
if such transfer is by Management Company, such transfer is being done as a part
of a merger, consolidation, etc., of all or substantially all of the business
which consists of managing the Residence Inn System.
D. In the event either party consents to an assignment of this Agreement
by the other, no further assignment shall be made without the express consent in
writing of such party, unless such assignment may otherwise be made without such
consent pursuant to the terms of this Agreement.
E. An assignment (either voluntarily or by operation of law) by Owner of
its interest in this Agreement (in compliance with Article XVIII) shall not
relieve Owner from its obligations under this Agreement which accrued prior to
the date of such assignment, but shall relieve Owner of such obligations
accruing after such date, if the assignment complies with Section 18.01.B and if
Management Company has received an assumption agreement executed by the assignee
(in form and substance reasonably satisfactory to Management Company). An
assignment (either voluntarily or by operation of law) by Management Company of
its interest in this Agreement shall not relieve Management Company from its
obligations under this Agreement, unless Owner so agrees in writing.
September 13, 1993 155
<PAGE>
F. Subject to the provisions of this Article XVIII, the terms and
conditions of this Agreement shall inure to the benefit of, and be binding upon,
the respective successors, heirs, legal representatives, or assigns of each of
the parties hereto.
END OF ARTICLE XVIII
September 13, 1993 156
<PAGE>
ARTICLE XIX
SALE OF THE INN
---------------
19.01 Sale of the Inn
---------------
A. Owner shall not enter into any Sale of the Inn to any individual or
entity which: (i) does not have sufficient financial resources and liquidity to
fulfill Owner's obligations under this Agreement; (ii) is in control of or
controlled by persons who have been convicted of felonies involving moral
turpitude in any state or federal court; or (iii) is engaged in the business of
operating or franchising (as distinguished from owning) a branded hotel chain
having five hundred (500) or more guest rooms in competition with Management
Company. An individual or entity shall not be deemed to be in the business of
operating hotels in competition with Management Company solely by virtue of (x)
the ownership of such hotels, either directly or indirectly through
subsidiaries, affiliates and partnerships, or (y) holding a Mortgage or
Mortgages secured by one or more hotels. Notwithstanding the foregoing, if
Owner or an Affiliate of Owner is a corporation whose shares are listed on a
public stock exchange, and if a Sale of the Inn occurs as a result of purchases
of such shares, through such public stock exchange, in sufficient quantities to
cause a transfer of the "controlling
September 13, 1993 157
<PAGE>
interest" in Owner (as described in the definition of "Sale of the Inn"), and if
such Sale of the Inn is not in compliance with the provisions of this Section
19.01.A, Management Company shall have the right, at its option, to terminate
this Agreement by written notice to Owner (as more particularly described in
Section 19.01.B), but such non-compliance with this Section 19.01.A shall not be
an Event of Default nor shall it subject Owner to claims for damages by
Management Company pursuant to Article XVI.
B. If Owner receives a bona fide written offer to enter into a Sale of the
Inn, Owner shall give written notice thereof to Management Company, stating the
name of the prospective purchaser or tenant, as the case may be. Such notice
shall include appropriate information relating to such prospective purchaser or
tenant demonstrating compliance with the provisions of Section 19.01.A together
with such additional information as Management Company shall reasonably request.
If Management Company decides that a Sale of the Inn to such prospective
purchaser or tenant would violate the provisions of Section 19.01.A, Management
Company shall so notify Owner by no later than thirty (30) days after receipt of
such notice; provided, however, that any decision by Management Company
regarding any such prospective purchaser or tenant shall not be binding if the
September 13, 1993 158
<PAGE>
information furnished by Owner pursuant to the preceding sentence is inaccurate.
Concurrently with the finalization of such Sale of the Inn, the purchaser or
tenant, as the case may be, shall, by appropriate instrument reasonably
satisfactory to Management Company, assume all of Owner's obligations hereunder.
An executed copy of such assumption agreement shall be delivered to Management
Company. If the proposed Sale of the Inn would violate the provisions of
Section 19.01.A, Owner will not enter into any agreement relating to such Sale
of the Inn. However, if Owner does enter into such an agreement, Management
Company shall have the right to terminate this Agreement by written notice to
Owner, which notice will set an effective date for such Termination not earlier
than thirty (30) days, nor more than one hundred twenty (120) days, following
the date of the giving of such notice. Management Company shall have the right
to change such effective date of Termination to coincide with the date of the
finalization of the proposed Sale of the Inn. At Management Company's election,
said notice of Termination shall not be effective if such Sale of the Inn is not
finalized. If such Termination by Management Company results from a Default by
Owner under Section 19.01.A, such Termination shall not relieve Owner (except as
otherwise set forth to the contrary in the last sentence of Section 19.01.A) of
liability to Management Company
September 13, 1993 159
<PAGE>
for such Default.
C. In connection with the possibility of a Sale of the Inn achieved by
means of a transfer of the controlling interest in Owner, Owner, upon written
request of Management Company, shall (unless Owner is a publicly-traded
corporation which is registered under Section 12 or Section 15 of the Securities
Act of 1934) furnish Management Company with a list of the names and addresses
of the owners of the capital stock, (but only those owners which hold an
ownership interest of thirty percent (30%) or more), or the partnership
interests (both (i) general partner, and (ii) any limited partner holding an
ownership interest of thirty percent (30%) or more), or other ownership
interests in Owner. In addition, Owner shall notify Management Company of any
transaction or series of transactions in which Owner reduces its ownership
interest in the Inn below fifty percent (50%) or in which the former controlling
interest in Owner is reduced below fifty percent (50%). Management Company
agrees to use diligent efforts to keep all such lists confidential in accordance
with the provisions of Section 12.04.
D. It is understood that no Sale of the Inn (which is otherwise in
compliance with the provisions of this Article XIX) shall reduce or otherwise
affect: (i) the current level of Working Capital; (ii) the current amount
deposited in the FF&E
September 13, 1993 160
<PAGE>
Reserve; or (iii) any of the Operating Accounts maintained by Management Company
pursuant to this Agreement. If, in connection with any Sale of the Inn, the
selling Owner intends to withdraw, for its own use, any of the cash deposits
described in the preceding sentence, the selling Owner must obtain the
contractual obligation of the buying Owner to replenish those deposits (in the
identical amounts) simultaneously with such withdrawal. The selling Owner is
hereby contractually obligated to Management Company to ensure that such
replenishment in fact occurs. The obligations described in this Section 19.01.D
shall survive such Sale of the Inn and shall survive Termination.
E. Management Company shall have the right to terminate this Agreement, on
thirty (30) days' written notice, if title to or possession of the Inn is
transferred by judicial or administrative process (including, without
limitation, a Foreclosure, or a sale pursuant to an order of a bankruptcy court,
or a sale by a court-appointed receiver) to an individual or entity which would
not qualify as a permitted transferee under clause (i), (ii) or (iii) of Section
19.01.A, regardless of whether or not such transfer is the voluntary action of
the transferring Owner, or whether (under applicable law) the Owner is in fact
the transferor; provided, however, that Management Company shall not have the
right to so terminate this Agreement
September 13, 1993 161
<PAGE>
based on the assertion that a Qualified Lender fails to so qualify as a
permitted transferee under said clauses (i), (ii) or (iii) of Section 19.01.A.
END OF ARTICLE XIX
September 13, 1993 162
<PAGE>
ARTICLE XX
MISCELLANEOUS
-------------
20.01 Right to Make Agreement
-----------------------
A. Each party warrants, with respect to itself, that neither the execution
of this Agreement nor the finalization of the transactions contemplated hereby
shall: (i) violate any provision of law or any judgment, writ, injunction,
order or decree of any court or governmental authority having jurisdiction over
it; (ii) result in or constitute a breach or default under any indenture,
contract, other commitment or restriction to which it is a party or by which it
is bound to the extent that the remedies for such breach or default would have a
material adverse effect on such party's ability to perform under this Agreement;
or (iii) require any consent, vote or approval which has not been taken, or at
the time of the transaction involved shall not have been given or taken. Each
party covenants that it has and will continue to have throughout the Term of
this Agreement and any extensions thereof, the full right to enter into this
Agreement and perform its obligations hereunder.
B. Each party agrees that it will, as of the Effective Date, provide the
other party with: (i) certified copies of the applicable resolutions of its
board of directors (if it is a
September 13, 1993 163
<PAGE>
corporation), or written authorization by all general partners (if it is a
partnership) or other appropriate documentation establishing its authority to
execute this Agreement; and (ii) such opinions of counsel as the other party
shall reasonably request regarding the matters described in this Section 20.01.
20.02 Consents
--------
Wherever in this Agreement the consent or approval of Owner or Management
Company is required, such consent or approval shall (except to the extent that
such consent or approval is specifically designated as being "within the
discretion" of a party, or words to that effect, in the applicable provision)
not be unreasonably withheld, shall be in writing and shall be executed by a
duly authorized officer or agent of the party granting such consent or approval.
If either Owner or Management Company fails to respond within thirty (30) days
to a request by the other party for a consent or approval, such consent or
approval shall be deemed to have been given.
20.03 Agency
------
The relationship of Owner and Management Company shall be that of principal
and agent, and nothing contained in this Agreement shall be construed to create
a partnership or joint
September 13, 1993 164
<PAGE>
venture between them or their successors in interest. Management Company's
agency established by this Agreement is coupled with an interest and may not be
terminated by Owner until the expiration of the Term of this Agreement, except
as provided in Section 4.03 and in Articles XV or XVI. Notwithstanding the
agency relationship created by this Agreement, except to the extent specifically
set forth to the contrary in Section 20.12, nothing contained herein shall
prohibit, limit or restrict Management Company or any of its Affiliates from
developing, owning, operating, leasing, managing or franchising hotels in the
market area where the Inn is located.
The agency coupled with an interest herein was created by a complex,
single, integrated transaction between Marriott Corporation (the parent
corporation of Owner and Management Company as of the Effective Date) and its
subsidiaries whereby Marriott Corporation and its subsidiaries developed,
constructed, own and manage the Hotel. This agency is further intended to
provide security for the covenants, promises and guarantees herein. The agency
was purchased for valuable consideration, and is not terminable except as
specifically allowed by the express provisions of this Agreement. The parties
intend for this agency to be coupled with an interest, waive any right to claim
it is terminable at will, and further agree to be equitably estopped
September 13, 1993 165
<PAGE>
from asserting that the agency is not coupled with an interest.
20.04 Confidentiality
---------------
The parties hereto agree that the matters set forth in this Agreement are
strictly confidential and each party will make every effort to ensure that such
matters are not disclosed to any outside person or entities (including the
press) without the written consent of the other party; provided, however, that
such consent will not be required with respect to: (i) legally required filings
and other disclosures mandated by Legal Requirements; and (ii) in the case of
Owner, disclosure to any Qualified Lender or prospective Qualified Lender, or to
prospective purchasers of the Inn (subject to the provisions of Section 20.05,
if applicable).
September 13, 1993 166
<PAGE>
20.05 Equity Offerings
----------------
September 13, 1993 167
<PAGE>
No reference to Management Company or to any of its Affiliates will be made
in any prospectus, private placement memorandum, offering circular or offering
documentation related thereto (herein collectively referred to as the
"Prospectus"), issued by Owner or one of its Affiliates, which is designed to
interest potential investors in the Inn, unless Management Company has
previously received a copy of all such references. However, regardless of
whether Management Company does or does not so receive a copy of all such
references, neither Management Company nor any of its Affiliates will be deemed
a sponsor of the offering described in the Prospectus, nor will it have any
responsibility for the Prospectus, and the Prospectus will so state. Unless
Management Company agrees in advance, the Prospectus will not include: (i) any
Proprietary Mark; or (ii) except as required by applicable securities laws, the
text of this Agreement. Owner shall be entitled, however, to include in the
Prospectus an accurate summary of this Agreement; If there are no Legal
Requirements pursuant to which such information must be disclosed, appropriate
measures shall be taken to ensure that entities or individuals receiving such
Prospectus shall acknowledge the confidentiality of such information. Owner
shall indemnify, defend and hold Management Company and its Affiliates (and
their respective directors, officers, shareholders,
September 13, 1993 168
<PAGE>
employees and agents) harmless from and against all loss, costs, liability and
damage (including attorneys' fees and expenses, and the cost of Litigation)
arising out of any Prospectus or the offering described therein.
20.06 Applicable Law
--------------
This Agreement shall be construed under and shall be governed by the laws
of the state where the Inn is located.
20.07 Recordation
-----------
The terms and provisions of this Agreement shall run with the land
designated as the Site, and with Owner's interest therein, and shall be binding
upon all successors to such interest. At the request of either party, the
parties shall execute an appropriate memorandum of this Agreement in recordable
form and cause the same to be recorded in the jurisdiction where the Inn is
located. Any cost of such recordation shall be borne by Management Company.
20.08 Headings
--------
Headings of Articles and Sections are inserted only for convenience and are
in no way to be construed as a limitation on the scope of the particular
Articles or Sections to which they
September 13, 1993 169
<PAGE>
refer.
20.09 Notices
-------
Notices, statements and other communications to be given under the terms of
this Agreement shall be in writing, and shall be either: (i) delivered by hand
against receipt; or (ii) sent by certified or registered mail, postage prepaid,
return receipt requested or (iii) sent by either a nationally utilized overnight
delivery service or by "facsimile" machine (provided that, in either case, a
confirmatory copy is thereafter sent by certified or registered mail):
To Owner:
--------
c/o Host Marriott, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department
with a copy to:
--------------
c/o Host Marriott, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Asset Management Department 72-1AD-2
September 13, 1993 170
<PAGE>
To Management Company:
---------------------
Residence Inn by Marriott, Inc.
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Law Department - Hotel Operations
Residence Inn by Marriott, Inc.
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Residence Inn, Vice President, Finance
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice which is properly mailed, as described
above, shall be deemed to have been served as of three (3) business days after
said posting.
September 13, 1993 171
<PAGE>
20.10 Environmental Matters
---------------------
A. Management Company shall indemnify, defend and hold Owner and its
Affiliates (and their respective directors, officers, shareholders, employees
and agents) harmless from and against all loss, cost, liability and damage
(including, without limitation, engineers' and attorneys' fees and expenses, and
the cost of Litigation) arising from the placing, discharge, leakage, use or
storage of Hazardous Materials, in violation of applicable Environmental Laws,
on the Site or in the Inn by Management Company's employees, representatives or
agents during the Term of this Agreement. Regardless of whether or not a given
Hazardous Material is permitted on the Site under applicable Environmental Law,
Management Company shall only bring on the Site such Hazardous Materials as are
needed in the normal course of business of the Inn.
B. In the event of the discovery of Hazardous Materials on any portion of
the Site or in the Inn during the Term of this Agreement, Owner shall (except to
the extent such removal is Management Company's responsibility pursuant to
Section 20.10.A) promptly remove (if required by applicable Environmental Law)
such Hazardous Materials, together with all contaminated soil and containers,
and shall otherwise remedy the problem in accordance with all Environmental
Laws. Owner shall (except to the extent
September 13, 1993 172
<PAGE>
that the removal of such Hazardous Materials is Management Company's
responsibility pursuant to Section 20.10.A) indemnify, defend and hold
Management Company and its Affiliates (and their respective directors, officers,
shareholders, employees and agents) harmless from and against all loss, cost,
liability and damage (including, without limitation, engineers' and attorneys'
fees and expenses, and the cost of Litigation) arising from the presence of
Hazardous Materials on the Site or in the Inn.
C. All costs and expenses of the removal of Hazardous Materials from the
Site or the Inn pursuant to Section 20.10.B, and of the aforesaid compliance
with all Environmental Laws, and any amounts paid to Management Company pursuant
to the indemnity set forth in the last sentence of Section 20.10.B, shall be
paid by Owner from its own funds, not as a Deduction nor from the FF&E Reserve,
and shall be treated as an expenditure by Owner pursuant to Section 8.03.
20.11 Estoppel Certificates
---------------------
Each party to this Agreement shall at any time and from time to time, upon
not less than thirty (30) days' prior notice from the other party, execute,
acknowledge and deliver to such other party, or to any third party specified by
such other party, a statement in writing: (i) certifying that this Agreement is
September 13, 1993 173
<PAGE>
unmodified and in full force and effect (or if there have been modifications,
that the same, as modified, is in full force and effect and stating the
modifications); (ii) stating whether or not to the best knowledge of the
certifying party (a) there is a continuing default by the non-certifying party
in the performance or observance of any covenant, agreement or condition
contained in this Agreement, or (b) there shall have occurred any event which,
with the giving of notice or passage of time or both, would become such a
default, and, if so, specifying each such default or occurrence of which the
certifying party may have knowledge; and (iii) stating such other information as
the non-certifying party may reasonably request. Such statement shall be
binding upon the certifying party and may be relied upon by the non-certifying
party and/or such third party specified by the non-certifying party as
aforesaid. The obligations set forth in this Section 21.11 shall survive
Termination (that is, each party shall, on request, within the time period
described above, execute and deliver to the non-certifying party and to any such
third party a statement certifying that this Agreement has been terminated).
September 13, 1993 174
<PAGE>
20.12 Trade Area Restriction
----------------------
Neither Management Company nor any of its Affiliates shall own, build,
franchise, manage or operate any Restricted Inn, under the "Residence Inn by
Marriott" or "Residence Inn" brand name, within the Restricted Area during the
period from the Effective Date through the sixth (6th) anniversary of the
Effective Date.
20.13 Arbitration
-----------
A. In the event of a dispute between Owner and Management Company with
respect to any issue of fact specifically mentioned herein as a matter to be
decided by arbitration, such dispute shall be determined by arbitration as
provided in this Section 20.13.
B. Disputes shall be resolved in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then pertaining. The
decision of the arbitrators shall be binding, final and conclusive on the
parties.
C. Owner and Management Company shall each appoint and pay all fees of a
fit and impartial person as arbitrator who shall have had at least ten (10)
years' recent professional experience in the general subject matter of the
dispute. Notice of such appointment shall be sent in writing by each party to
the other,
September 13, 1993 175
<PAGE>
and the arbitrators so appointed, in the event of their failure to agree within
thirty (30) days after the appointment of the second arbitrator upon the matter
so submitted, shall appoint a third arbitrator. If either Owner or Management
Company shall fail to appoint an arbitrator, as aforesaid, for a period of
twenty (20) days after written notice from the other party to make such
appointment, then the arbitrator appointed by the party having made such
appointment shall appoint a second arbitrator and the two so appointed shall, in
the event of their failure to agree upon any decision within thirty (30) days
thereafter, appoint a third arbitrator. If such arbitrators fail to agree upon a
third arbitrator within forty-five (45) days after the appointment of the second
arbitrator, then such third arbitrator shall be appointed by the American
Arbitration Association from its qualified panel of arbitrators, and shall be a
person having at least ten (10) years' recent professional experience as to the
subject matter in question. The fees of the third arbitrator and the expenses
incident to the proceedings shall be borne equally between Owner and Management
Company, unless the arbitrators decide otherwise. The fees of respective counsel
engaged by the parties, and the fees of expert witnesses and other witnesses
called for the parties, shall be paid by the respective party engaging such
counsel or calling or engaging such witnesses.
September 13, 1993 176
<PAGE>
D. The decision of the arbitrators shall be rendered within thirty (30)
days after appointment of the third arbitrator. Such decision shall be in
writing and in duplicate, one counterpart thereof to be delivered to Owner and
one to Management Company. A judgment of a court of competent jurisdiction may
be entered upon the award of the arbitrators in accordance with the rules and
statutes applicable thereto then obtaining.
20.14 Entire Agreement
----------------
This Agreement, together with other writings signed by the parties which
are expressly stated to be supplemental hereto and together with any instruments
to be executed and delivered pursuant to this Agreement, constitutes the entire
agreement between the parties, and supersedes all prior written and oral
understandings. This Agreement may be amended only by a writing signed by both
parties hereto.
END OF ARTICLE XX
September 13, 1993 177
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
Attest: OWNER:
HMH PROPERTIES, INC.
_______________________ By: ___________________________
Assistant Secretary Vice President
Attest: MANAGER:
RESIDENCE INN BY MARRIOTT, INC.
________________________ By: ____________________________
Assistant Secretary Vice President
September 13, 1993 178
<PAGE>
EXHIBIT "A" TO MANAGEMENT AGREEMENT
Location of Inn; Legal Description of the Site
-----------------------------------------------
September 13, 1993 179
<PAGE>
EXHIBIT "A-1"
Number of Suites and Brief Description of Facilities; Priority
--------------------------------------------------------------
Basis; Performance Termination Threshold; Loan Priority Basis
-------------------------------------------------------------
(number set forth in (i) of Definition); Revenue Index Threshold;
-----------------------------------------------------------------
<PAGE>
EXHIBIT "B" TO MANAGEMENT AGREEMENT
Form of Accounting Period Statement
-----------------------------------
<PAGE>
EXHIBIT "C" TO MANAGEMENT AGREEMENT
[INTENTIONALLY DELETED]
-----------------------
<PAGE>
EXHIBIT "D" TO MANAGEMENT AGREEMENT
Map of Restricted Area
----------------------
<PAGE>
EXHIBIT "D-1" TO MANAGEMENT AGREEMENT
Narrative Description of Restricted Area
----------------------------------------
<PAGE>
EXHIBIT "E" TO MANAGEMENT AGREEMENT
Proprietary Marks which will remain the property
------------------------------------------------
of Owner after Termination
--------------------------
NOT APPLICABLE
<PAGE>
EXHIBIT "F" TO MANAGEMENT AGREEMENT
Title Encumbrances; Existing CC&R's
-----------------------------------
(separately describing those charges thereunder
-----------------------------------------------
which will be treated as capital expenditures
---------------------------------------------
under Section 8.03) Existing Ground Lease (if applicable);
----------------------------------------------------------
Existing Mortgages (if any)
---------------------------
<PAGE>
Exhibit 10.7
================================================================================
OPERATING AGREEMENT
BETWEEN
[HOST OWNING ENTITY]
("OWNER")
AND
MARRIOTT SENIOR LIVING SERVICES, INC.
("OPERATOR")
FOR
THE
---------------------------------------------------
MARRIOTT SENIOR LIVING COMMUNITY
AT CITY, STATE
-------------------------
EXECUTED AS OF JUNE 21, 1997
================================================================================
<PAGE>
OPERATING AGREEMENT
-------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 DEFINITION OF TERMS............................................. 1
Section 1.01 Definition of Terms......................................... 1
ARTICLE 2 APPOINTMENT OF OPERATOR......................................... 16
Section 2.01 Appointment; Exclusive License.............................. 16
Section 2.02 Authority of Operator; Right of Possession.................. 16
Section 2.03 Management Functions........................................ 17
Section 2.04 Limitations on Authority of Operator........................ 20
Section 2.05 Title Encumbrances.......................................... 21
Section 2.06 Licenses and Permits........................................ 21
Section 2.07 Credit...................................................... 21
Section 2.08 Representations and Warranties of Owner..................... 22
Section 2.09 Representations and Warranties of Operator.................. 22
ARTICLE 3 OWNERSHIP OF RETIREMENT COMMUNITY............................... 23
Section 3.01 Ownership of Retirement Community........................... 23
ARTICLE 4 TERM............................................................ 23
Section 4.01 Term........................................................ 23
Section 4.02 Actions to be Taken Upon Termination........................ 24
Section 4.03 Performance Termination..................................... 25
Section 4.04 Owner's Termination Option.................................. 27
ARTICLE 5 COMPENSATION OF OPERATOR........................................ 28
Section 5.01 Base Fee, Incentive Fee..................................... 28
ARTICLE 6 FINANCING OF THE RETIREMENT COMMUNITY........................... 28
Section 6.01 Amendments of Management Agreement.......................... 28
Section 6.02 Notice and Opportunity to Cure.............................. 29
Section 6.03 Assignment of Management Agreement.......................... 30
Section 6.04 Subordination of Management Agreement....................... 31
Section 6.05 Non-Disturbance Agreement................................... 31
Section 6.06 Attornment.................................................. 32
Section 6.07 No Modification or Termination of Agreement................. 33
</TABLE>
- --------------------------------------------------------------------------------
OPERATING AGREEMENT PAGE i
<PAGE>
<TABLE>
<S> <C>
Section 6.08 Owner's Right to Finance the Retirement Community........... 33
Section 6.09 Sale/Leaseback Transactions................................. 33
Section 6.10 REIT Transactions........................................... 34
ARTICLE 7 WORKING CAPITAL AND FIXED ASSET SUPPLIES........................ 35
Section 7.01 Working Capital............................................. 35
Section 7.02 Fixed Asset Supplies........................................ 36
ARTICLE 8 REPAIRS, MAINTENANCE AND REPLACEMENTS........................... 36
Section 8.01 Routine Repairs and Maintenance............................. 36
Section 8.02 FF&E Reserve................................................ 37
Section 8.03 Building Alterations, Improvements, Renewals,
and Replacements...................................................... 39
Section 8.04 Liens....................................................... 41
Section 8.05 Ownership of Replacements................................... 41
ARTICLE 9 BOOKKEEPING AND BANK ACCOUNTS................................... 42
Section 9.01 Books and Records........................................... 42
Section 9.02 Retirement Community Accounts, Expenditures................. 44
Section 9.03 Annual Operating Projection................................. 44
Section 9.04 Operating Losses............................................ 45
ARTICLE 10 PROPRIETARY MARKS; TRADEMARK LICENSE; INTELLECTUAL PROPERTY..... 45
Section 10.01 Proprietary Marks........................................... 45
Section 10.02 Trademark License........................................... 46
Section 10.03 Purchase of Inventories and Fixed Asset Supplies............ 46
Section 10.04 Computer Software and Equipment............................. 47
Section 10.05 Intellectual Property....................................... 47
Section 10.06 Breach of Covenant.......................................... 47
ARTICLE 11 POSSESSION AND USE OF RETIREMENT COMMUNITY...................... 47
Section 11.01 Quiet Enjoyment............................................. 47
Section 11.02 Use......................................................... 48
Section 11.03 Central Administrative Services............................. 48
Section 11.04 Owner's Right to Inspect.................................... 49
Section 11.05 Indemnity................................................... 49
</TABLE>
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OPERATING AGREEMENT PAGE ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE 12 INSURANCE....................................................... 50
Section 12.01 Interim Insurance........................................... 50
Section 12.02 Property and Operational Insurance.......................... 50
Section 12.03 General Insurance Provisions................................ 51
Section 12.04 Cost and Expense............................................ 52
Section 12.05 Owner's Option to Obtain Certain Insurance.................. 52
ARTICLE 13 TAXES........................................................... 54
Section 13.01 Real Estate and Personal Property Taxes..................... 54
ARTICLE 14 RETIREMENT COMMUNITY EMPLOYEES.................................. 55
Section 14.01 Employees................................................... 55
ARTICLE 15 DAMAGE, CONDEMNATION AND FORCE MAJEURE.......................... 57
Section 15.01 Damage and Repair........................................... 57
Section 15.02 Condemnation................................................ 58
Section 15.03 Force Majeure............................................... 58
ARTICLE 16 DEFAULTS........................................................ 59
Section 16.01 Definition of............................................... 59
Section 16.02 Definition of............................................... 60
Section 16.03 Remedies Upon an Event of Default........................... 60
Section 16.04 Operator's Right to Specific Performance for Owner's
Wrongful Termination.................................................. 61
Section 16.05 Owner's Estate.............................................. 62
ARTICLE 17 ASSIGNMENT...................................................... 62
Section 17.01 Assignment.................................................. 62
ARTICLE 18 SALE OF THE RETIREMENT COMMUNITY................................ 63
Section 18.01 Sale of the Retirement Community............................ 63
Section 18.02 Assumption Agreement of Successor Owner..................... 66
ARTICLE 19 MISCELLANEOUS................................................... 66
Section 19.01 Right to Make Agreement..................................... 66
Section 19.02 Consents.................................................... 67
</TABLE>
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OPERATING AGREEMENT PAGE iii
<PAGE>
<TABLE>
<S> <C>
Section 19.03 Relationship Between the Parties............................ 67
Section 19.04 Confidentiality............................................. 68
Section 19.05 Applicable Law.............................................. 68
Section 19.06 Covenants Running With the Land; Recordation................ 68
Section 19.07 Headings.................................................... 68
Section 19.08 Notices..................................................... 68
Section 19.09 Environmental Matters....................................... 69
Section 19.10 Estoppel Certificates....................................... 70
Section 19.11 Arbitration................................................. 71
Section 19.12 Affiliates.................................................. 71
Section 19.13 Equity and Debt Offerings................................... 72
Section 19.14 Restriction on Operator..................................... 72
Section 19.15 Entire Agreement............................................ 74
Section 19.16 Waiver...................................................... 74
Section 19.17 Partial Invalidity.......................................... 75
Section 19.18 Construction................................................ 75
EXHIBITS
- --------
Exhibit A. Legal Description of the Land
- ---------
Exhibit B. Existing Title Encumbrances
- ---------
Exhibit C. Pro Forma Fees
- ---------
Exhibit D. Owner's Initial Cost and Secured Loan Balance
- ---------
</TABLE>
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OPERATING AGREEMENT PAGE iv
<PAGE>
OPERATING AGREEMENT
-------------------
THIS OPERATING AGREEMENT ("Agreement") is effective as of the 21st day of
June, 1997 ("Effective Date"), by
___________________________________________________________________, with a
mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817 ("Owner"), and
MARRIOTT SENIOR LIVING SERVICES, INC. ("Operator"), a Delaware corporation, with
a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817.
R E C I T A L S :
A. Owner is the [owner/lessee] of the Retirement Community (as hereafter
defined);
B. Operator is in the business of managing and operating senior living
residence facilities and communities;
C. Operator is the owner of the Proprietary Marks that are used to
identify retirement communities in the Marriott Retirement Community System;
D. Operator desires to assure itself that it will be able to conduct and
enhance its business at Owner's Retirement Community by obtaining from Owner an
irrevocable (but subject in every respect to all of the provisions of this
Agreement, including those providing for termination prior to the expiration of
the full Term) license to operate Operator's business in Owner's Retirement
Community;
E. Owner desires to assure that it will have the benefit of Operator's
experience, services and Proprietary Marks in establishing, enhancing and
maintaining a successful Retirement Community.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE 1
DEFINITION OF TERMS
SECTION 1.01 DEFINITION OF TERMS
The following terms when used in this Agreement shall have the meanings
indicated:
"Accounting Period" means the four (4) week accounting periods having the
-----------------
same beginning and ending dates as Operator's four (4) week accounting periods,
except that an Accounting Period may occasionally contain five (5) weeks when
necessary to conform Operator's accounting system to the calendar. In the event
that the Effective Date is not the first day of Operator's four (4) week
accounting periods, the first Accounting Period under
- --------------------------------------------------------------------------------
OPERATING AGREEMENT PAGE 1
<PAGE>
this Agreement shall consist of the first four (4) week accounting period of
Operator commencing after the Effective Date and the period from the Effective
Date until the commencement of such first four (4) week accounting period.
"Additional Invested Capital" shall mean the cumulative total, as of any
---------------------------
given date during the Term, of the following: (i) any contribution made by
Owner pursuant to Section 7.01A (provided that Additional Invested Capital shall
be decreased by any return to Owner of excess Working Capital pursuant to
Section 7.01B); (ii) any expenditures made by Owner pursuant to Section 8.03,
and any expenditures by Owner pursuant to Section 19.09; (iii) any contributions
by Owner to the FF&E Reserve (beyond the funding described in Section 8.02B),
other than those contributions which are reimbursed to Owner under Section
8.02F; (iv) consideration paid and reasonable costs incurred by Owner or any
Affiliate of Owner in connection with the purchase of any interest (direct or
indirect) held in Owner by any party which is not an Affiliate of Owner;
(v) consideration paid and reasonable costs incurred by Owner or any Affiliate
of Owner in connection with the acquisition of the fee interest in any Land in
the event the Retirement Community is subject to an Existing Lease (less that
portion of the then current Owner's Investment representing the capitalized
value of the Existing Lease at the time of the acquisition of said fee
interest), (vi) Expansion Payments paid pursuant to the Expansion Agreement or
Stock Purchase Agreement, and (vii) any additional amounts advanced or funded by
Owner pursuant to this Agreement which do not constitute Owner Deductions.
"Affiliate" means any individual or entity directly or indirectly through
---------
one or more intermediaries, controlling, controlled by or under common control
with a party. The term "control," as used in the immediately preceding
sentence, means, with respect to a corporation, the right to the exercise,
directly or indirectly, of more than fifty percent (50%) of the voting rights
attributable to the shares of the controlled corporation, and, with respect to
an entity that is not a corporation, the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of the
controlled entity.
"Agreement" shall mean this Operating Agreement as the same may be amended
---------
from time to time.
"Agreement Year" shall mean an annual period; the first Agreement Year
--------------
shall commence on the Effective Date and each subsequent Agreement Year shall
commence on the succeeding anniversaries of the Effective Date.
"Annual Financial Report" shall have the meaning specified in Section 9.01.
-----------------------
"Annual Operating Projection" shall have the meaning set forth in
---------------------------
Section 9.03.
"Area A" shall have the meaning set forth in Section 19.14D.
------
"Area B" shall have the meaning set forth in Section 19.14D.
------
"Base Fee" shall have the meaning set forth in Section 5.01A.
--------
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OPERATING AGREEMENT PAGE 2
<PAGE>
"Bonus Fee" shall have the meaning set forth in Section 5.01B.
---------
"Building Estimate" shall have the meaning set forth in Section 8.03A.
-----------------
"Business Day(s)" means Monday through Friday except for New Year's Day,
---------------
President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
"Canceled Term" shall have the meaning set forth in Section 4.04.
-------------
"Capital Expenditures" shall have the meaning set forth in Section 8.03A.
--------------------
"Capitalization Multiple" shall mean the number ten (10).
-----------------------
"Case Goods" means furniture and furnishings used in the Retirement
----------
Community, including, without limitation: chairs, beds, chests, headboards,
desks, lamps, tables, television sets, mirrors, pictures, wall decorations and
similar items.
"Central Administrative Services" shall have the meaning set forth in
-------------------------------
Section 11.03.
"Central Administrative Services Fee" shall have the meaning set forth in
-----------------------------------
Section 11.03.
"Consumer Price Index" or "CPI" means the Consumer Price Index from time to
-------------------- ---
time issued by the United States Government Bureau of Labor Statistics for Urban
Wage Earners and Clerical Workers, All Items, for the United States of America
(1982-84=100), or if the aforesaid Consumer Price Index is not at such time so
prepared and published, any comparable index selected by Owner and reasonably
satisfactory to Operator (a "Substitute Index") then prepared and published by
an agency of the Government of the United States, appropriately adjusted for
changes in the manner in which such index is prepared and/or year upon which
such index is based. Any dispute regarding the selection of the Substitute
Index or the adjustments to be made thereto shall be settled by arbitration in
accordance with Section 19.11. Except as otherwise expressly stated herein,
when a number or amount is required to be "adjusted by the Consumer Price
Index", or similar terminology, such adjustment shall be equal to the percentage
increase or decrease (except that for purposes of this Agreement, the Consumer
Price Index shall not be reduced below its level as of the Effective Date) in
the Consumer Price Index which is issued for the month in which such adjustment
is to be made (or, if the Consumer Price Index for such month is not yet
publicly available, the Consumer Price Index for the most recent month for which
the Consumer Price Index is publicly available) as compared to the Consumer
Price Index which was issued for the prior month in which the Effective Date
occurred unless another base month is indicated herein.
"Coverage Ratio" shall mean the number one and one-quarter (1.25), or one
--------------
and two-tenths (1.2) in the case of a mortgage issued or insured by an agency of
the United States Government, or Fannie Mae or Freddie Mac or lending
institutions established by the federal government.
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OPERATING AGREEMENT PAGE 3
<PAGE>
"Cure Notice" shall have the meaning set forth in Section 4.03B.
-----------
"Day(s)" means one or more calendar days(s).
------
"Debt Service" means all installments of principal and interest required to
------------
be made under any Secured Loan or any replacement thereof.
"Effective Date" shall have the meaning set forth in the Preamble.
--------------
"Employee Claims" means any and all claims (including all fines, judgments,
---------------
penalties, costs, Litigation and/or arbitration expenses, attorneys' fees and
expenses, and costs of settlement with respect to any such claim) by any
employee or employees of Operator against Owner or Operator with respect to the
employment at the Retirement Community of such employee or employees. "Employee
Claims" shall include, without limitation, the following: (i) claims which are
eventually resolved by arbitration, by Litigation or by settlement; (ii) claims
which also involve allegations that any applicable employment-related contracts
affecting the employees at the Retirement Community have been breached; and
(iii) claims which involve allegations that one or more of the Employment Laws
has been violated; provided, however, that "Employee Claims" shall not include
claims for worker compensation benefits (which shall be governed by Article 12
hereof) or for unemployment benefits.
"Employment Laws" means any federal, state or local law (including the
---------------
common law), statute, ordinance, rule, regulation, order or directive with
respect to employment, conditions of employment, benefits, compensation, or
termination of employment that currently exists or may exist at any time during
the Term of this Agreement, including, but not limited to, Title VII of the
Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Workers
Adjustment and Retraining Act, the Occupational Safety and Health Act, the
Immigration Reform and Control Act of 1986, the Polygraph Protection Act of 1988
and the Americans With Disabilities Act of 1990.
"Environmental Laws" shall mean: (i) the Comprehensive Environmental
------------------
Response, Compensation and Liability Act, 42 U.S.C. Sections 9601 et seq., as
-- ---
now or hereafter amended, and the Resource Conservation and Recovery Act of
1976, as now or hereafter amended; (ii) the regulations promulgated thereunder,
from time to time; and (iii) all federal, state and local laws, rules and
regulations (now or hereafter in effect) dealing with the use, generation,
treatment, management, storage, disposal or abatement of Hazardous Materials or
protection of human health or the environment.
"Event of Default" shall have the meaning set forth in Section 16.02.
----------------
"Existing Mortgage" shall mean the Mortgages listed on Exhibit D, but for
-----------------
purposes of this Agreement shall not include any amendments or modifications
thereof that would materially adversely affect the interests of Operator after
the Effective Date.
- --------------------------------------------------------------------------------
OPERATING AGREEMENT PAGE 4
<PAGE>
"Existing Title Encumbrances" shall have the meaning set forth in
---------------------------
Section 2.05A.
"Expansion Agreement" means that certain Expansion Agreement of even date
-------------------
herewith between Owner and Marriott Senior Living Services, Inc.
"Expansion Units" shall have the meaning set forth in the Expansion
---------------
Agreement between the parties of even date herewith.
"Extended Term" shall have the meaning set forth in Section 4.01.
-------------
"FF&E" means furniture, furnishings, fixtures, Soft Goods, Case Goods,
----
vehicles and equipment (including, but not limited to, telephone systems,
facsimile machines, communications and computer systems hardware) but shall not
include Fixed Asset Supplies or any Software.
"FF&E Estimate" shall have the meaning set forth in Section 8.02C.
-------------
"FF&E Reserve" shall have the meaning set forth in Section 8.02A.
------------
"FF&E Reserve Payment" shall have the meaning set forth in Section 8.02B.
--------------------
"First Mortgage" shall mean any Mortgage which is a first lien on the
--------------
Retirement Community having priority over all other Mortgages that may then
encumber the Retirement Community.
"Fiscal Year" means Operator's Fiscal Year which now ends at midnight on
-----------
the Friday closest to December 31 in each calendar year; the new Fiscal Year
begins on the Saturday immediately following said Friday. Any partial Fiscal
Year between the Effective Date and the commencement of the first full Fiscal
Year shall constitute a separate Fiscal Year. A partial Fiscal Year between the
end of the last full Fiscal Year and the Termination of this Agreement shall,
for purposes of this Agreement, constitute a separate Fiscal Year. If
Operator's Fiscal Year is changed in the future, appropriate adjustment to this
Agreement's reporting and accounting procedures shall be made upon mutual
consent of Owner and Operator; provided, however, that no such change or
adjustment shall alter the Term of this Agreement or in any way reduce the
distributions of Operating Profit or other payments due Owner hereunder, and
Operator shall bear (not as an Operating Expense) any incidental accounting
costs imposed on Owner necessitated by any such change in Operator's Fiscal
Year. Fiscal Year shall not include any portion of a Fiscal Year prior to the
Effective Date or after the Termination of this Agreement.
"Fixed Asset Supplies" means supply items included within "Property and
--------------------
Equipment" under the Uniform System of Accounts, including linen, china,
glassware, silver, uniforms, and similar items.
"Force Majeure" means acts of God, acts of war, civil disturbance,
-------------
governmental action (including the revocation or refusal to grant licenses or
permits, where such revocation or refusal
- --------------------------------------------------------------------------------
OPERATING AGREEMENT PAGE 5
<PAGE>
is not due to the fault of the party whose performance is to be excused for
reasons of Force Majeure), strikes, lockouts, fire, unavoidable casualties or
any other causes beyond the reasonable control of either party.
"Foreclosure" shall mean any exercise of the remedies available to a
-----------
Holder, upon a default under the Secured Loan held by such Holder, which results
in a transfer of title to or possession of the Retirement Community. The term
"Foreclosure" shall include, without limitation, any one or more of the
following events, if they occur in connection with a default under a Secured
Loan: (i) a transfer by judicial foreclosure or exercise of a power of sale;
(ii) a transfer by deed in lieu of foreclosure; (iii) the appointment by a court
of a receiver to assume possession of the Retirement Community; (iv) a transfer
of either ownership or control of the Owner, by exercise of a stock pledge or
otherwise; (v) if title to the Retirement Community is held by a tenant under a
ground lease, an assignment of the tenant's interest in such ground lease; or
(vi) any similar judicial or non-judicial exercise of the remedies held by the
Holder.
"Foreclosure Date" shall mean the date on which title to or possession of
----------------
the Retirement Community is transferred by means of a Foreclosure.
"Future Title Encumbrance" shall have the meaning set forth in
------------------------
Section 2.05B.
"GAAP" means Generally Accepted Accounting Principles as adopted by the
----
American Institute of Certified Public Accountants.
"Gross Revenues" shall mean, for each Accounting Period, all revenues and
--------------
receipts of every kind derived by Owner from operating the Retirement Community
and all departments and parts thereof, including, but not limited to: income
(from both cash and credit transactions) from monthly occupancy fees (including
the amortized portion of the "endowment" or like one-time payments received
under "lifecare" or like contracts with residents), health care fees and
ancillary services fees received pursuant to various agreements with residents
of the Retirement Community; income from food and beverage, and catering sales;
income from vending machines; and proceeds, if any, from business interruption
or other loss of income insurance, all determined in accordance with GAAP;
provided, however, that Gross Revenues shall not include: (i) gratuities to
employees at the Retirement Community; (ii) federal, state or municipal excise,
sales or use taxes or similar taxes imposed at the point of sale and collected
directly from residents or guests of the Retirement Community or included as
part of the sales price of any goods or services; (iii) proceeds from the sale
of FF&E and any other capital asset; (iv) interest received or accrued with
respect to the monies in any operating or reserve accounts of the Retirement
Community; (v) any cash refunds, rebates or discounts to residents of the
Retirement Community, or cash discounts and credits of a similar nature, given,
paid or returned in the course of obtaining Gross Revenues or components
thereof; (vi) proceeds from any Sale of the Retirement Community, or any other
capital transaction; (vii) proceeds of any financing transaction affecting the
Retirement Community; (viii) any endowment or like one-time payments received
under lifecare or like contracts with residents, except as specifically set
forth above in this paragraph; (ix) security deposits until such time as the
same are applied to rent and other charges due and payable; (x) awards of
damages, settlement proceeds and other payments
- --------------------------------------------------------------------------------
OPERATING AGREEMENT PAGE 6
<PAGE>
received by Owner in respect of any Litigation; (xi) proceeds of any
condemnation; (xii) proceeds of any casualty insurance, other than loss of rents
or business interruption insurance; (xiii) any Shortfall Payment made by
Operator to Owner pursuant to Section 4.03B; and (xiv) payments under any policy
of title insurance.
"Hazardous Materials" shall have the meaning set forth in Section 19.09D
-------------------
hereof.
"Holder" means any holder, from time to time, of any Secured Loan.
------
"Impositions" means all real estate and personal property taxes, levies,
-----------
assessments and similar charges (other than those which are specifically
excluded pursuant to Section 13.01B) including, without limitation, the
following: all water, sewer or similar fees, rents, rates, charges, excises or
levies; vault license fees or rentals; license fees; permit fees; inspection
fees and other authorization fees and other governmental charges of any kind or
nature whatsoever, whether general or special, ordinary or extraordinary,
foreseen or unforeseen, or hereinafter levied or assessed of every character
(including all interest and penalties thereon), which at any time during or in
respect of the Term of this Agreement may be assessed, levied, confirmed or
imposed on Owner or Operator with respect to the Retirement Community or the
operation thereof, or otherwise in respect of or be a lien upon the Retirement
Community (including, without limitation on any of the FF&E, Inventories or
Fixed Asset Supplies now or hereafter located therein). Impositions shall not
include any income or franchise taxes payable by Owner or Operator.
"Incentive Fee" shall have the meaning set forth in Section 5.01A.
-------------
"Initial Term" shall have the meaning set forth in Section 4.01.
------------
"Intellectual Property" means: (i) all Software; and (ii) all manuals,
---------------------
instructions, policies, procedures and directives issued by Operator to its
employees at the Retirement Community regarding the procedures and techniques to
be used in operating the Retirement Community.
"Interim Report" shall have the meaning specified in Section 9.01C.
--------------
"Inventories" means "Inventories" as defined by GAAP, such as provisions in
-----------
storerooms, refrigerators, pantries and kitchens; medical supplies; other
merchandise intended for sale; fuel; mechanical supplies; stationery; and other
expensed supplies and similar items.
"Land" means the land described in Exhibit A.
----
"Legal Requirement" means any federal, state or local law, code, rule,
-----------------
ordinance, regulation or order of any governmental authority having jurisdiction
over the business or operation of the Retirement Community or the matters which
are the subject of this Agreement, including any resident care or health care,
building, zoning or use laws, ordinances, regulations or orders, environmental
protection laws and fire department rules.
- --------------------------------------------------------------------------------
OPERATING AGREEMENT PAGE 7
<PAGE>
"License(s)" means any license, permit, decree, act, order, authorization
----------
or other approval (including Medicare/Medicaid certification to the extent
applicable) or instrument which is necessary in order to operate the Retirement
Community in accordance with Legal Requirements or pursuant to the Marriott
Standards and otherwise in accordance with this Agreement.
"Litigation" means: (i) any cause of action commenced in a federal, state
----------
or local court; or (ii) any claim brought before an administrative agency or
body (for example, without limitation, employment discrimination claims)
relating to the Retirement Community and/or the ownership and/or operation
thereof.
"Management Analysis Report" shall mean a relatively brief, narrative
--------------------------
report on the state of business and affairs of the Retirement Community,
prepared on an annual basis by Operator and delivered to Owner at the time of
delivery of the Annual Financial Report, which shall include a narrative
description regarding the preceding Fiscal Year of: (i) the Retirement
Community's operating performance, including significant variations from the
Annual Operating Projection; (ii) an analysis of any significant variation of
the actual resident fees and occupancy from what was set forth in the Annual
Operating Projection; (iii) a review of the competitive retirement community
market; (iv) a description of any significant promotional or other marketing
programs in which the Retirement Community participated, which were not included
as part of the Annual Operating Projection for the preceding Fiscal Year; and
(v) such other supplementary information as Owner or Operator shall reasonably
deem necessary to an understanding of the operation of the Retirement Community.
"Marriott Retirement Community System" means at any particular time the
------------------------------------
entire system or group of full service (that is consisting of both independent
living and health care accommodations and services) retirement communities then
owned and/or operated or managed by Operator (or one or more of its Affiliates),
under the "Marriott" name.
"Marriott Standards" means from time to time both the operational standards
------------------
(for example, staffing levels, accounting and fiscal management, resident care
and health care policies and procedures, accounting and financial reporting
policies and procedures) and the physical standards (for example, quality of
FF&E, frequency of FF&E replacement) that are then generally and consistently
(but not necessarily, absolutely or without exception) applied at or to
retirement communities in the Marriott Retirement Community System which are of
comparable size, age and market orientation as the Retirement Community,
(provided, however, that the Marriott Standards shall in no event be lower than
(i) what is required, from time-to-time during the Term, by Legal Requirements,
or (ii) the operational and physical standards, as of the date in question, of
comparable retirement communities in the quality segment of the retirement
communities industry in the state in which the Retirement Community is located).
"Mortgage" means any mortgage, deed of trust, or deed to secure debt or
--------
other security instrument recorded against the Project as security for a Secured
Loan.
"Mortgagee" means the Holder, from time to time, of a Mortgage or any
---------
replacement of a Mortgage.
- --------------------------------------------------------------------------------
OPERATING AGREEMENT PAGE 8
<PAGE>
"Net Operating Profit" means Operating Profit less Owner's Priority.
--------------------
"Non-Disturbance Agreement" shall mean an agreement, in recordable form in
-------------------------
the jurisdiction in which the Retirement Community is located, executed and
delivered by a Holder (which agreement shall by its terms be binding upon all
assignees of such Holder), for the benefit of Operator, pursuant to which, in
the event such Holder (or its assignee) comes into possession of or acquires
title to the Retirement Community as a result of a Foreclosure, such Holder (and
its assignees) shall (x) recognize Operator's rights under this Agreement, and
(y) shall not name Operator as a party in any Foreclosure action or proceeding,
and (z) shall not disturb Operator in its right to continue to manage the
Retirement Community pursuant to this Agreement; provided, however, that at such
time, (i) this Agreement has not expired or otherwise been earlier terminated in
accordance with its terms, and (ii) there are no outstanding Events of Default
by Operator, and (iii) no material event has occurred and no material condition
exists which, after notice or the passage of time or both, would entitle Owner
to terminate this Agreement (excluding events which would constitute an Event of
Default, which are to be governed exclusively by clause (ii) hereof).
"Operating Expense(s)" means any or all, as the context requires, of the
--------------------
following:
1. All costs of operating the Retirement Community incurred in
accordance with this Agreement, including, without limitation, all salaries,
wages, fringe benefits, payroll taxes and other costs related to Retirement
Community employees, Employee Claims (except to the extent specifically set
forth to the contrary in Section 14.01), all departmental expenses,
administrative and general expenses, the cost of Retirement Community
advertising and business promotion, heat, light, power, electricity, gas,
telephone, cable and other utilities, and routine repairs, maintenance and minor
alterations treated as Operating Expenses under Section 8.01;
2. The cost of Inventories and Fixed Asset Supplies consumed in the
operation of the Retirement Community;
3. A reasonable reserve for uncollectible accounts receivable as
determined by Operator;
4. All reasonable costs and fees of audit, legal, technical and other
independent professionals or other third parties who are retained by Operator to
perform services required or permitted hereunder; provided Operator will notify
Owner at lease thirty (30) Days in advance of any proposed expenditure under
this paragraph 4 which is in excess of Fifty Thousand Dollars ($50,000.00) (to
be adjusted by the CPI) and which was not specifically identified in the Annual
Operating Projection; and Operator shall consider in good faith any comments
which Owner may have with respect to such proposed expenditure; and provided,
further, that if such expenditure involves immediately-needed repair work to the
Retirement Community or if immediate action is otherwise required, the above-
described requirement regarding thirty (30) Days' prior notice shall be modified
to require whatever notice period is reasonable under the circumstances;
- --------------------------------------------------------------------------------
OPERATING AGREEMENT PAGE 9
<PAGE>
5. The reasonable cost and expense of technical consultants and
operational experts who are employees of Operator or one of its Affiliates, and
who perform specialized services in connection with non-routine Retirement
Community work; provided, however, that the costs and expenses so incurred shall
only be Operating Expenses to the extent such costs and expenses are reasonable
and competitively priced, as compared to similar work done by outside
consultants or experts; and provided, further, that Operator will notify Owner
at least thirty (30) Days in advance of any proposed expenditure under this
paragraph 5 which is in excess of Fifty Thousand Dollars ($50,000.00) (to be
adjusted by CPI) and which is not specifically identified in the Annual
Operating Projection, and Operator shall consider in good faith any comments
which Owner may have with respect to such proposed expenditure; and provided,
further, that if such expenditure involves immediately-needed repair work to the
Retirement Community or if immediate action is otherwise required, the above-
described requirement regarding thirty (30) Days' prior notice shall be modified
to require whatever notice period is reasonable under the circumstances;
6. Costs and expenses for preparation of Medicare and Medicaid cost
reports and billing submissions;
7. The Base Fee and the Bonus Fee, if any;
8. Subject to the limitation set forth below in this definition, the
Central Administrative Services Fee;
9. Insurance costs and expenses as provided in Sections 12.04 and
12.05;
10. All Impositions assessed against the Retirement Community;
11. Payments (other than the lump-sum contribution provided for in
Section 8.02F2) into the FF&E Reserve pursuant to Section 8.02;
12. Such other non-capital costs and expenses incurred by Operator as
are specifically provided for elsewhere in this Agreement or are otherwise
reasonably necessary for the proper and efficient operation of the Retirement
Community in accordance with the Marriott Standards; all as determined in
accordance with GAAP;
13. The reimbursement to Owner of the amount of any Owner Deductions;
14. [RENTAL PAYMENTS UNDER THE EXISTING LEASE]; and
15. Lease payments for any equipment lease to the extent set forth in
Section 8.02D.
It is understood that the term "Operating Expenses" shall not include:
(i) Debt Service payments pursuant to any Secured Loan or any other loans or
borrowings of Owner; nor
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OPERATING AGREEMENT PAGE 10
<PAGE>
(ii) except as set forth above, payments pursuant to equipment leases or other
forms of financing obtained for the FF&E located in or connected with the
Retirement Community (such payments shall be paid out of the FF&E Reserve in
accordance with Section 8.02), nor (iii) rental payments pursuant to any ground
lease [OTHER THAN THE EXISTING LEASE], nor (iv) any other payments which are
designated as Owner's responsibility under any of the provisions of this
Agreement and which are not Owner Deductions, all of which shall be paid by
Owner from its own funds, and not from Gross Revenues nor from the FF&E Reserve.
Unless otherwise specifically set forth in this Agreement, all the costs and
expenses of the Retirement Community shall be Operating Expenses.
Commencing with the second (2nd) Agreement Year and continuing
thereafter until the earlier of (i) the end of the seventh (7th) Agreement Year,
or (ii) the date on which the ratio of Operating Profit, to the Owner's Priority
amount for any consecutive thirteen (13) Accounting Periods equals or exceeds
one-and-one-quarter (1.25) (but in no event prior to the end of the fourth (4th)
Agreement Year), fifty percent (50%) of the Central Administrative Services Fee
shall be paid as an Operating Expense and fifty percent (50%) shall be paid (and
to the extent paid shall constitute an Operating Expense) only after Owner
receives Owner's Priority for the subject Fiscal Year, and only to the extent of
Operating Profit remaining after payment of the Owner's Priority.
"Operating Profit" shall mean for each Fiscal Year, the excess of Gross
----------------
Revenues over Operating Expenses for such Fiscal Year.
"Operating Loss" shall mean for each Fiscal Year, a negative Operating
--------------
Profit; that is, an excess of Operating Expenses over Gross Revenues.
"Operator" shall have the meaning set forth in the Preamble.
--------
"Owner" shall have the meaning set forth in the Preamble.
-----
"Owner Deduction(s)" shall mean amounts paid by Owner with respect to:
------------------
(i) reasonable third party out-of-pocket costs of any negotiations or Litigation
with respect to any contest of Impositions, (ii) fees and expenses of technical
consultants and operational experts which are retained by Owner, with the
approval of Operator, to give advice with respect to the operation of the
Retirement Community, and (iii) any other amount which under this Agreement
constitutes an Owner Deduction. The amount of any Owner Deductions paid by
Owner shall be reimbursed to Owner (as an Operating Expense) in the Fiscal Year
in which they were paid.
"Owner's Initial Cost" shall have the meaning set forth in Exhibit D.
--------------------
"Owner's Investment" shall mean the sum total, as of any given point in
------------------
time during the Term, of: (i) the Owner's Initial Cost; plus (ii) any
Additional Invested Capital expended by Owner; provided that each expenditure of
Additional Invested Capital shall be added to the Owner's Investment (with
respect to the Fiscal Year or Fiscal Years during which such
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OPERATING AGREEMENT PAGE 11
<PAGE>
expenditure(s) occurred) on a pro rata basis, beginning with the first full
Accounting Period after such expenditures occurred, and thereafter over the
remainder of the then current Fiscal Year.
"Owner's Preferred Return" shall mean ten and three-quarters percent
------------------------
(10.75%) through Fiscal Year 1999, eleven percent (11%) for Fiscal Years 2000
through 2003, and eleven and one-half percent (11.5%) thereafter for the
remainder of the Term.
"Owner's Priority" shall mean, with respect to any Fiscal Year (or partial
----------------
Fiscal Year), an amount sufficient to provide to Owner, a simple, non-
compounded, non-cumulative return for such Fiscal Year (or partial Fiscal Year)
on Owner's Investment during such Fiscal Year (or partial Fiscal Year) at an
annual rate equal to Owner's Preferred Return for such Fiscal Year (or partial
Fiscal Year). In the event that the amount of Owner's Investment varies during
such Fiscal Year (or partial Fiscal Year), Owner's Investment for such Fiscal
Year (or partial Fiscal Year) shall be based upon the weighted daily average of
Owner's Investment during such Fiscal Year (or partial Fiscal Year).
"Prime Rate" means the "prime rate" as published in the "Money Rates"
----------
section of The Wall Street Journal; however, if such rate is, at any time during
--- ---- ------ -------
the Term, no longer so published, the term "Prime Rate" means the average of the
prime interest rates which are announced, from time to time, by the three (3)
largest banks (by assets) headquartered in the United States which publish a
"prime rate."
"Project" means the Retirement Community.
-------
"Proprietary Marks" means all trademarks, trade names, symbols, logos,
-----------------
slogans, designs, insignia, emblems, devices, service marks and distinctive
designs of buildings and signs, or combinations thereof, which are used to
identify retirement communities in the Marriott Retirement Community System.
The term "Proprietary Marks" shall also include all trade names, trademarks,
symbols, logos, designs, etc., which are used in connection with the operation
of the Retirement Community during the Term. The term "Proprietary Marks" shall
include all present and future Proprietary Marks, whether they are now or
hereafter owned by Operator or any of its Affiliates, and whether or not they
are registered under the laws of the United States or any other country. The
names "Marriott", "Forum" and "Marriott Retirement Community", and any of the
foregoing used in conjunction with other words or names, are examples of
Proprietary Marks.
"Prospectus" shall have the meaning set forth in Section 19.13.
----------
"Qualified Lender" shall mean any Holder, from time to time, of any
----------------
Qualified Loan with respect to which Operator has received a written notice
(pursuant to Section 19.08 of this Agreement) stating: (i) the name and address
of such Holder; and (ii) that such Holder is a "Qualified Lender" pursuant to
the terms of this Agreement.
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OPERATING AGREEMENT PAGE 12
<PAGE>
"Qualified Loan" shall mean any Secured Loan in which the initial principal
--------------
amount, as of the date such Secured Loan is incurred, when added to the current
principal balance of all existing Secured Loans as of that date, is less than or
equal to the greater of the following:
(i) seventy-five percent (75%) of Owner's Investment, or eighty-five
percent (85%) in the case of a mortgage issued or insured by an
agency of the United States Government, or Fannie Mae or Freddie Mac
or lending institutions established by the federal government; or
(ii) the result obtained by (a) dividing the Operating Profit for the
thirteen (13) most recent full Accounting Periods by the Coverage
Ratio; then, (b) multiplying the result of clause (a) by the
Capitalization Multiple; or
(iii) the existing balance of any Secured Loans encumbering the Retirement
Community immediately prior to the date of the incurrence of such
Qualified Loan, plus the existing balance of any expansion payment
debt arising under either the Stock Purchase Agreement or the
Expansion Agreement plus commercially reasonable Transaction Costs
associated with such refinancing up to an amount equal to four
percent (4%) of the principal amount of such Qualified Loan.
In addition, regardless of whether or not the above test set forth in
clauses (i), (ii) and (iii) is satisfied, (a) the existing (as of the Effective
Date) balance of any Secured Loan which is secured by a Mortgage shall be deemed
to be a "Qualified Loan"; and (b) any Secured Loan which is secured by a
Mortgage and with respect to which Operator, in it sole discretion, shall have
given its written approval shall be deemed to be a "Qualified Loan" (provided
that an approval by Operator that a given Secured Loan shall be deemed to be a
Qualified Loan hereunder shall only apply to the specific retirement communities
which are described in such approval, and shall not be deemed to be an approval
with respect to other retirement communities, regardless of whether such Secured
Loan by its terms permits the substitution or addition of such other retirement
communities as security for such Secured Loan).
"REIT Transaction" shall have the meaning set forth in Section 6.10.
----------------
"Required Capital Expenditures" shall have the meaning set forth in
-----------------------------
Section 8.03A.
"Retirement Community" means the retirement community which Owner
--------------------
[owns/leases] at the location specified in the Recitals; the term "Retirement
Community" shall include the Land, the improvements now or hereafter situated on
the Land, and all FF&E, Fixed Asset Supplies and Inventories installed therein.
"Retirement Community Retention" shall have the meaning set forth in
------------------------------
Section 12.03F hereof.
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OPERATING AGREEMENT PAGE 13
<PAGE>
"ROI Capital Expenditures" shall mean such Capital Expenditures as are
------------------------
required, in Operator's reasonable judgment, to keep the Retirement Community in
a competitive, efficient and economical operating condition (which Operator
shall substantiate by demonstrating a reasonable return on the proposed
investment to be made by Owner), in accordance with the Marriott Standards;
provided that the term "ROI Capital Expenditures" shall in no event include
expenditures which are within the definition of Required Capital Expenditures.
"Sale of the Retirement Community" means any sale, assignment, transfer or
--------------------------------
other disposition, for value or otherwise, voluntary or involuntary, of Owner's
title (or any part thereof) to the Retirement Community or the Land (either fee
or leasehold title, as the case may be). For purposes of this Agreement, a Sale
of the Retirement Community shall also include: (i) a lease (or sublease) of
the entire Retirement Community or Land; and (ii) any sale, assignment,
transfer, or other disposition, for value or otherwise, voluntary or
involuntary, in a single transaction or a series of related transactions, of the
controlling interest in Owner. If Owner is a corporation, the phrase
"controlling interest" means the right to exercise, directly or indirectly, more
than fifty percent (50%) of the voting rights attributable to the shares of
Owner (through ownership of such shares or by contract). If Owner is not a
corporation, the phrase "controlling interest" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of Owner. For purposes of this Agreement, a Sale of the Retirement
Community shall exclude: (i) any condemnation, expropriation of, or injurious
happening to the Retirement Community or any part thereof or interest therein;
(ii) the recovery by Owner of damage awards or insurance proceeds in connection
with any casualty or title insurance claim, (iii) any Foreclosure, (iv) any
Title Encumbrance, (v) any sale, assignment, transfer or other disposition by
Owner of title (fee, leasehold or otherwise) to the Retirement Community to an
Affiliate of Owner, and (vi) any transfer of a controlling interest in Owner to
an Affiliate of Owner.
"Sale/leaseback Transaction" shall have the meaning set forth in
--------------------------
Section 6.09 below.
"Secured Loan" means and includes: (i) any indebtedness of Owner secured by
------------
a Mortgage encumbering the Retirement Community or all or any part of Owner's
interest therein; and (ii) all amendments, modifications, supplements and
extensions of such indebtedness. The total balance of all Secured Loans as of
June 21, 1997, shall have the meaning set forth in Exhibit D.
"Secured Loan Acceleration" shall mean the acceleration of the indebtedness
-------------------------
incurred pursuant to any Secured Loan, as a result of a default under the terms
and conditions of such Secured Loan.
"Settlement Threshold Amount" shall mean the greater of (i) One Hundred
---------------------------
Thousand Dollars ($100,000.00) (as adjusted by the CPI); or (ii) a dollar amount
(to be re-determined whenever reasonably necessary) equal to the highest amount
paid in a representative sampling of Employee Claims which have been settled
within the preceding twelve (12) months, where each of such settlements can be
reasonably characterized as being (i) within the normal course of business at
the Retirement Community, and (ii) within the range of similar settlements at
other
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OPERATING AGREEMENT PAGE 14
<PAGE>
retirement communities comparable to the Retirement Community. Any dispute
between the parties as to the appropriate amount under clause (ii) of the
preceding sentence shall be submitted to arbitration under Section 19.11.
"Shortfall Payment" shall have the meaning set forth in Section 4.03B.
-----------------
"Similar Property" means a full-service, retirement community offering the
----------------
continuum of care, that is, independent living (predominantly) accommodations,
assisted living accommodations, licensed nursing accommodations and associated
community, recreational and health care services.
"Soft Goods" means all fabric, textile and flexible plastic products (not
----------
including items which are classified as "Fixed Asset Supplies" under the Uniform
System of Accounts) which are used in furnishing the Retirement Community,
including, without limitation: carpeting, drapes, bedspreads, wall and floor
coverings, mats, shower curtains and similar items.
"Software" means all computer software and accompanying documentation
--------
(including all future upgrades, enhancements, additions, substitutions and
modifications thereof), other than computer software which is commercially
available, which are used by Operator in connection with its operations at the
Retirement Community.
"Stock Purchase Agreement" means that certain Stock Purchase Agreement of
------------------------
even date herewith between Host Marriott Corporation and Marriott Senior Living
Services, Inc.
"Subsequent Owner" mean any individual or entity which acquires title to a
----------------
possession of the Retirement Community at or through a Foreclosure.
"Term" means the Initial Term plus any Extended Term.
----
"Termination" means the expiration or sooner cessation of this Agreement.
-----------
"Threshold Amount" shall have the meaning set forth in Section 4.03A1.
----------------
"Title Encumbrance" means any covenant, easement, condition, restriction or
-----------------
agreement affecting title to the Retirement Community and recorded among the
land records of the jurisdiction in which the Retirement Community is situated,
but not including any Mortgage.
"Uniform System of Accounts" shall mean the Uniform System of Accounts for
--------------------------
Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of
New York City, Inc.
"Working Capital" means assets which are reasonably necessary and used for
---------------
the day-to-day operation of the Retirement Community's business, including,
without limitation, amounts sufficient for the maintenance of change and petty
cash funds, amounts deposited in operating bank accounts, receivables, prepaid
expenses, and funds required to maintain
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OPERATING AGREEMENT PAGE 15
<PAGE>
Inventories and pay all Operating Expenses as they become due, less accounts
payable and accrued current liabilities.
ARTICLE 2
APPOINTMENT OF OPERATOR
SECTION 2.01 APPOINTMENT; EXCLUSIVE LICENSE
Owner hereby authorizes and engages Operator to act as the exclusive
operator and manager of the Retirement Community during the Term, with an
exclusive license to operate its retirement community business within the
Retirement Community and with exclusive responsibility and complete and full
control and discretion in the operation, direction, management and supervision
of the Retirement Community, subject only to the limitations expressed herein,
all in accordance with Marriott Standards. Operator accepts said appointment
and agrees to operate and manage the Retirement Community during the Term of
this Agreement in accordance with the terms and conditions set forth
hereinafter. The performance of all activities by Operator hereunder shall be
for the account of Owner.
SECTION 2.02 AUTHORITY OF OPERATOR; RIGHT OF POSSESSION
A. Retirement Community operations shall be under the exclusive
supervision and control of Operator which, except as otherwise specifically
provided in this Agreement, shall be responsible for the proper and efficient
operation of the Retirement Community. Subject to the terms of this Agreement,
Operator shall have discretion and control, free from interference, interruption
or disturbance from Owner or those claiming by, through or under Owner, in all
matters relating to management and operation of the Retirement Community,
including, without limitation, the following: fees and charges for providing
accommodations, food services, health care services, and related services to
residents and their guests; supervision of resident care; health care policies;
credit policies; food and beverage services; employment policies; executing,
modifying and terminating leases, licenses and concessions and agreements for
commercial space within the Retirement Community and the provision of services
to residents to the Retirement Community; receipt, holding and disbursement of
funds; maintenance of bank accounts; procurement of inventories, supplies and
services; promotion and publicity; and, generally, all activities necessary for
operation of the Retirement Community.
B. Operator shall have during the term of this Agreement the exclusive
right of possession of the management office within the Retirement Community and
those areas of the Retirement Community designed for exclusive possession by the
operator of the Retirement Community.
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OPERATING AGREEMENT PAGE 16
<PAGE>
SECTION 2.03 MANAGEMENT FUNCTIONS
A. In accordance with Marriott Standards and the other requirements
imposed by this Agreement, Operator shall, in connection with the Retirement
Community, perform each of the following functions:
1. Obtain and keep in full force and effect, either in its own name
on behalf of Owner or in Owner's name, as may be required by the Legal
Requirements, any and all Licenses necessary for the operation of the Retirement
Community, to the extent the same is within the control of Operator (or, if same
is not within the control of Operator, Operator shall use all due diligence and
reasonable efforts to obtain and keep same in full force and effect);
2. Recruit, employ, supervise, direct and discharge all of the
employees at the Retirement Community;
3. Establish and revise, as necessary, resident care and health care
policies and procedures and general administrative policies and procedures,
including policies and procedures for the control of revenue and expenditures,
for the purchasing of supplies and services, for the control of credit, and for
the scheduling of maintenance, and verify that the foregoing policies and
procedures are implemented in a sound manner in accordance with Marriott
Standards;
4. Plan, execute, and supervise repairs and maintenance at the
Retirement Community;
5. Procure such food stuffs, supplies, equipment, furniture and
fixtures (including, FF&E, Fixed Asset Supplies and Inventories), and third-
party services as are necessary to keep, operate and maintain the Retirement
Community in accordance with Marriott Standards;
6. Maintain the operating accounts and pay all Operating Expenses to
the extent funds are available;
7. Prepare and deliver the statements, projections and reports as are
specified herein;
8. Establish prices, rates and charges for services provided at the
Retirement Community;
9. Negotiate, enter into, and administer licenses, concession
agreements and/or agreements with third-party providers of services to residents
at the Retirement Community;
10. Provide the Central Administrative Services;
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OPERATING AGREEMENT PAGE 17
<PAGE>
11. Provide, or cause to be provided, risk management services
relating to the types of insurance required to be obtained or provided by
Operator under this Agreement, provided that the costs and expenses of providing
such services are to be paid as described in Section 12.04;
12. Reasonably cooperate with Owner concerning disputes with any
Holder, contests of Impositions and Legal Requirements, adjustments of insurance
claims and condemnation awards, and any other Litigation arising in connection
with the Retirement Community;
13. Reasonably cooperate (provided that Operator shall not be
obligated to enter into any amendments of this Agreement (except as set forth in
Article 6)) with Owner in any attempt(s) by Owner to effectuate a Sale of the
Retirement Community, either directly or through transfers or sales of ownership
interests in Owner (provided that nothing herein shall affect the provisions of
Section 6.05), or to obtain any Secured Loan or other financing, or to purchase
the interests of any equity holders in Owner or the fee interest in the
Retirement Community. Such cooperation shall include, without limitation:
(i) answering any reasonable questions by prospective purchasers, Holders and
lenders; (ii) preparing lists and schedules of leases, concessions, Fixed Asset
Supplies, Inventories, and similar items; and (iii) making such certifications
and representations to Owner, to such purchasers, to such Holders and lenders,
regarding the Retirement Community and the operation thereof, as Owner may
reasonably request (taking into account the extent of Operator's control and
responsibility provided for hereunder). Owner shall promptly reimburse Operator,
from its own funds and not as an Operating Expense, for the reasonable costs and
expenses incurred by Operator in connection with any actions necessary to comply
with the requirements of this Section, provided that such actions are not
otherwise required under other provisions of this Agreement.
14. Arrange for and supervise public relations and advertising, and
prepare and implement annual marketing plans;
15. Endeavor to manage the timing of expenditures to replenish
Inventories, Fixed Asset Supplies, payments on accounts payable and collections
of accounts receivable, so as to avoid or minimize any cash deficits with
respect to Retirement Community operations, which deficits would otherwise
require additional funding of Working Capital by Owner;
16. Maintain the Retirement Community in good repair and condition;
17. See to the performance of all covenants, duties and obligations
of Owner and Operator pursuant to all agreements with residents;
18. Negotiate, execute, administer, renew and/or cancel agreements
with residents of the Retirement Community (either in its name or, as agent for
Owner, in Owner's name, as the case may be, in order to comply with Legal
Requirements and the applicable Licenses) for the services to be rendered to
such residents at the Retirement Community;
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OPERATING AGREEMENT PAGE 18
<PAGE>
19. Subject to Owner's prior approval, institute and prosecute such
legal actions against third parties, and settle compromise and/or release such
actions, as necessary and prudent for the successful operation of the Retirement
Community;
20. Exercise its reasonable best efforts to give Owner as early
notice as is practicable of all extraordinary developments with respect to the
operation of the Retirement Community, including, but not limited to, Operator's
forecast of the need for any additional Working Capital or other cash
requirements;
21. Comply with all provisions in the Existing Lease and in any
Existing Mortgage which are by their terms applicable to the operation of the
Retirement Community, provided that with respect to any Mortgage, the provisions
in question do not amend or affect the Operator's rights or obligations under
this Agreement;
22. Comply with all Legal Requirements to the extent the same is
within the control of Operator (or, if same is not within the control of
Operator, Operator shall use all due diligence and reasonable efforts to so
comply), subject to Sections 2.03B and 11.02B; and
23. Promptly notify Owner of receipt by Operator of any notice of a
violation of any Legal Requirements, and formulate and implement an appropriate
plan of correction.
B. The parties understand that certain deficiencies or situations of non-
compliance with various Legal Requirements (such as building codes, OSHA, ADA,
health care regulations and the like) are likely to occur from time to time in
the normal course of business operations. Such occurrences will not otherwise
constitute a Default by Operator hereunder, if same resulted from Owner's action
or inaction either in breach hereunder or of any applicable Legal Requirement,
or so long as all of the following conditions are satisfied: (i) they are not
materially beyond the general experience of similar retirement community
operations in the quality tier of retirement communities (but if the quality
tier then does not include twenty (20) or more communities, then the comparison
shall be against all similar retirement community operations) in the state in
which the Retirement Community is located, in terms of scope, seriousness, or
frequency, (ii) Operator takes all reasonable actions in a timely manner to cure
such deficiencies or situations of non-compliance, and (iii) they do not cause
the revocation, termination or suspension of any material License. The costs of
curing such deficiencies or circumstances of non-compliance shall constitute
Operating Expenses unless incurred by reason of Operator's willful failure,
gross negligence, or Default hereunder, in which event such costs shall be borne
by Operator and Operator shall indemnify and hold harmless Owner in respect of
any such costs (including any penalties and fines for non-compliance). If
Operator or Owner shall receive written notice from any governmental authority
that such authority intends, or may exercise its right, to revoke, terminate or
suspend any material License unless such deficiencies or circumstances are
corrected, then during the thirty (30) Day period prior to the earliest possible
effective date for such revocation, termination, or suspension, Owner shall have
the right to enter onto the Community and to take such action as may be
reasonably necessary to remedy or correct such deficiencies or circumstances,
and the costs thereof shall constitute Operating Expenses.
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OPERATING AGREEMENT PAGE 19
<PAGE>
SECTION 2.04 LIMITATIONS ON AUTHORITY OF OPERATOR
Notwithstanding anything contained in this Agreement to the contrary
(unless otherwise stated in this Section 2.04), and in addition to the various
other provisions of this Agreement which prohibit Operator from taking certain
actions or which allow certain actions only if Owner's consent thereto has been
obtained, Operator shall not, without the prior written approval of Owner, which
approval Owner may withhold in its sole discretion, perform any of the following
actions on behalf of Owner:
1. Acquire any land or interest therein;
2. Acquire any capital assets or interest therein except: (i) items
in the approved Building Estimate; and (ii) FF&E, Fixed Asset Supplies and
Inventories (to the extent
the same constitute capital assets) in the ordinary course of business as
expressly provided for in this Agreement;
3. Finance, refinance or mortgage any portion of the Retirement
Community or the revenue due to Owner therefrom;
4. Sell (other than dispositions of FF&E, Fixed Asset Supplies and
Inventories in the ordinary course of business as expressly provided for in this
Agreement), lease (other than as expressly provided for in this Agreement), or
otherwise transfer, or pledge or place any lien or encumbrance on, any part of
the Retirement Community;
5. In the event of a total or partial condemnation, consent to any
award or participate in any condemnation proceeding, except as expressly
provided for in this Agreement;
6. Enter into, modify or terminate any lease, concession or license
or other agreement, otherwise permitted under Section 2.02 if (i) a non-
Retirement Community related use is involved, (ii) the term of the proposed
agreement will exceed the lesser of five (5) years or the remaining Term, or
(iii) the proposed agreement involves the exclusive use of more than fifteen
hundred (1,500) square feet within the Retirement Community. For this purpose,
a "non-Retirement Community use" shall mean any use which is not ultimately for
the primary benefit of residents of the Retirement Community;
7. Adjust any claim or settle any Litigation which: (i) is not
covered by any of the insurance policies described in Article 12 and is not an
Employee Claim, and which would result in an Operating Expense or payment in
excess of Twenty Five Thousand Dollars ($25,000.00) in any Fiscal Year, or One
Hundred Thousand Dollars ($100,000.00) in any Fiscal Year in the aggregate for
all such claims, both as adjusted by the CPI; or (ii) would impose on Owner any
material liability or obligation other than the payment of money, or would
require Owner to make any material admission; or
8. Adjust any claim, under the applicable property insurance
policies, regarding injury or damage to the Retirement Community or its
contents, where the estimated cost of restoration is in excess of One Hundred
Thousand Dollars ($100,000.00), as adjusted by the CPI.
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OPERATING AGREEMENT PAGE 20
<PAGE>
SECTION 2.05 TITLE ENCUMBRANCES
A. As of the Effective Date, a title report of the Retirement Community
has shown that there are no Title Encumbrances other than those identified in
Exhibit B attached hereto ("Existing Title Encumbrances"). Operator hereby
gives its consent to all Existing Title Encumbrances. All costs, expenses and
charges which are imposed on the Retirement Community under the Existing Title
Encumbrances shall be paid from Gross Revenues as Operating Expenses.
B. Title Encumbrances which are entered into, or become encumbrances on
the Retirement Community and/or the Land, after the Effective Date shall be
referred to in this Agreement as "Future Title Encumbrances." Owner agrees that
it will give Operator written notice of its intention to execute any Future
Title Encumbrances, such notice to be reasonably in advance of the execution
thereof. Owner covenants that, during the Term of this Agreement, there will
not be (unless Operator has given its prior written consent thereto) any Future
Title Encumbrances affecting the Land or the Retirement Community unless
Operator consents thereto, which consent shall not be unreasonably withheld by
Operator, and which consent shall not be required, if such Future Title
Encumbrance (i) would not impose any material financial obligations on the
Retirement Community; (ii) would not prohibit or limit Operator from operating
the Retirement Community, including dining and other facilities customarily a
part of or related to a similar retirement community, in accordance with the
Marriott Standards; and (iii) would not allow Retirement Community facilities
(for example, parking spaces) to be used by persons other than residents,
invitees or employees of the Retirement Community.
C. All financial obligations imposed on Owner or on Operator or on the
Retirement Community pursuant to any Future Title Encumbrances shall be paid by
Owner from its own funds, and not from Gross Revenues or from the FF&E Reserve,
unless Operator has given its prior written consent to such Future Title
Encumbrance, or unless such consent of Operator is not required under
Section 2.05B.
SECTION 2.06 LICENSES AND PERMITS
Owner agrees upon request by Operator to sign promptly and without charge
applications for Licenses, permits or other instruments necessary for operation
of the Retirement Community and to provide such information and perform such
acts relative to the ownership of the Retirement Community as are required by
law, regulation or governmental practice in order for Operator to obtain and/or
maintain any License, permit, instrument, certificate, certification or approval
with respect to the proper operation of the Retirement Community. Costs
incurred by Owner in complying with this Section 2.06 shall constitute an
Owner's Deduction.
SECTION 2.07 CREDIT
In no event shall either party borrow money in the name of, or pledge the
credit of, the other.
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OPERATING AGREEMENT PAGE 21
<PAGE>
SECTION 2.08 REPRESENTATIONS AND WARRANTIES OF OWNER
A. Owner represents and warrants to Operator as follows:
1. Owner is in good standing under the laws of the state in which it
is organized, and has full power and authority to own its properties, is duly
qualified or licensed to do business as a foreign corporation in the
jurisdiction in which the Retirement Community is located, and has obtained or
will exercise reasonable efforts to obtain and maintain all material Licenses to
own the Retirement Community as it is operated on the Effective Date in
accordance with the terms of this Agreement.
2. Owner has full power and authority to enter into this Agreement
and to carry out its obligations set forth herein. Owner has taken all action
required by law, its organizational documents, or otherwise to be taken to
authorize the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby. This Agreement is a valid and binding
agreement of Owner enforceable in accordance with its terms, except that such
enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium
or other similar laws now or hereafter in effect relating to creditor's rights,
and the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
SECTION 2.09 REPRESENTATIONS AND WARRANTIES OF OPERATOR
A. Operator represents and warrants to Owner as follows:
1. Operator is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, has full cooperate power
and authority to own its properties, is duly qualified or licensed to do
business as a foreign corporation in the jurisdiction in which the Retirement
Community is located, and has obtained all material Licenses to manage or
operate the Retirement Community as it is operated on the Effective Date in
accordance with the terms of this Agreement.
2. Operator has full power and authority to enter into this Agreement
and to carry out its obligations to set forth herein. Operator has taken all
action required by law, its Articles of Incorporation, its Bylaws, or otherwise
to be taken to authorize the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. This Agreement is a valid
and binding agreement of Operator enforceable in accordance with its terms,
except that such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditor's rights, and the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
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ARTICLE 3
OWNERSHIP OF RETIREMENT COMMUNITY
SECTION 3.01 OWNERSHIP OF RETIREMENT COMMUNITY
A. Owner hereby covenants that throughout the Term of this Agreement, it
will use commercially reasonable efforts to have, keep and maintain good and
marketable [fee/leasehold] title to the Retirement Community, free and clear of
any and all liens, encumbrances or other charges, except for the following:
1. Mortgages which are given to secure any one or more Secured Loans
provided that Owner has complied with the provisions of Article 6;
2. Liens for Impositions or other public charges not yet due or which
are being contested in good faith;
3. Existing Title Encumbrances and Future Title Encumbrances
permitted pursuant to Section 2.05 of this Agreement; and
4. [THE EXISTING LEASE.]
B. Owner shall pay and discharge, at or prior to the due date, any and all
installments of principal and interest due and payable upon any Secured Loan
encumbering the Retirement Community. Operator shall have no liability for the
payment of any debt service or other costs or payments of whatever nature due
with respect to any Secured Loans or the Retirement Community and any such
liability shall be solely that of Owner.
ARTICLE 4
TERM
SECTION 4.01 TERM
The "Term" shall consist of an "Initial Term" and the "Extended Term". The
"Initial Term" shall begin on the Effective Date, and, unless sooner terminated,
shall continue until the expiration of the thirtieth (30th) Agreement Year. The
Term shall thereafter be extended by Operator, at its option (on the same terms
and conditions contained herein) for one additional period of five (5) Agreement
Years ("Extended Term"), provided that (i) such extension option, if exercised,
shall be void and of no effect unless, for the last three (3) Agreement Years of
the Initial Term, Owner received an average annual return on the actual level of
Owner's Investment (adjusted for seventy-five percent (75%) of CPI), of at least
eleven and one-half percent (11.5%), and (ii) as of the date of Operator's
notice of exercise, and as of the last day of the Initial Term, there are no
outstanding Events of Default by Operator. If Operator elects to exercise this
option to extend, it shall give written notice to that effect to Owner, pursuant
to Section 19.08, not more than twenty-four (24) months and not less than twelve
(12) months prior to the expiration of the Initial Term.
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OPERATING AGREEMENT PAGE 23
<PAGE>
Notwithstanding the foregoing, if the Retirement Community is subject to an
Existing Lease, and the term of the Existing Lease shall expire prior to the
expiration of the Term of this Agreement, then the Term of this Agreement shall
expire effective as of the date of expiration of the term of the Existing Lease
unless Owner has either (i) obtained an extension of the term of the Existing
Lease, in which event this Agreement shall continue in effect to the earlier of
(a) the expiration of the Term, or (b) the expiration of the extended term of
the Existing Lease, or (ii) purchased fee title to the Retirement Community, in
which event this Agreement shall continue in effect to the end of the Term.
SECTION 4.02 ACTIONS TO BE TAKEN UPON TERMINATION
Upon any Termination of this Agreement, the following shall be applicable:
A. Operator shall, within sixty (60) Days after Termination of this
Agreement, prepare and deliver to Owner a final accounting statement with
respect to the Retirement Community, which, to the extent appropriate, satisfies
the requirements of an Annual Financial Report, along with a statement of any
sums due from one party to the other pursuant hereto, dated as of the date of
Termination. Within thirty (30) Days after the receipt by Owner of such final
accounting statement, the parties will make whatever cash adjustments are
necessary pursuant to such final statement. The cost of preparing such final
accounting statement shall be an Operating Expense, unless the Termination
occurs as a result of a default by either party, in which case the defaulting
party shall pay such cost. Operator and Owner acknowledge that there may be
certain adjustments for which the information is not available at the time of
the final accounting and the parties agree to readjust such amounts and make the
necessary cash adjustments when such information becomes available; provided,
however, that (unless and except for ongoing disputes of which each party has
received notice or refunds or underpayments of Impositions) all accounts shall
be deemed final one hundred and eighty (180) Days after Termination;
B. As of the date of the final accounting referred to in Section 4.02A,
Operator shall release and transfer to Owner (or to any purchaser as may be
provided herein) any funds then remaining in the FF&E Reserve and any other of
Owner's funds which are held or controlled by Operator with respect to the
Retirement Community with the exception of funds to be held in escrow pursuant
to Sections 12.04 and 14.01G and otherwise in accordance herewith;
C. Operator shall make available to Owner such books and records
respecting the Retirement Community (including those from prior years, subject
to Operator's reasonable records retention policies) as will be needed by Owner
to prepare the accounting statements, in accordance with GAAP consistently
applied, for the Retirement Community for the year in which the Termination
occurs and for any subsequent year. If such books and records are contained in
Software, Operator shall provide suitable hard-copy of said information to
Owner, but shall not be required to turn over said Software to Owner. Such
books and records shall not include: (i) employee records which must remain
confidential either under applicable law or under reasonable system-wide
corporate policies of Operator; or (ii) any Intellectual Property;
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OPERATING AGREEMENT PAGE 24
<PAGE>
D. Operator shall (to the extent permitted by law) assign to Owner or to
the new operator all operating licenses and permits for the Retirement Community
which have been issued in Operator's name; provided that if Operator has
expended any of its own funds in the acquisition of any of such licenses or
permits, Owner shall reimburse Operator therefor if it has not done so already;
E. Upon Termination, Owner shall adopt a new name for the Property that
does not include the "Forum" mark or a confusingly similar term and shall take
steps to change the name of the property to the new name and to eliminate all
use of the "Forum" mark in connection with the Property including but not
limited to: acquisition of any required name changes or governmental approvals;
replacement of all signage, collateral, fixtures, furnishing, equipment,
advertising materials, stationery, supplies, forms or other articles that
display the "Forum" mark; and notification of any telephone, facsimile or other
business directory (including any Internet site or register). Owner shall have
a phase-out period of two (2) years from the date of termination or expiration
of this Operating Agreement to complete its transition to the new property name.
During the two (2) year phase-out period, Owner shall pursue in good faith the
gradual discontinuance of the "Forum" mark and may exhaust any inventory of
items existing as of the date of termination or expiration of this Operating
Agreement which contain or display the "Forum" mark, but Owner may not order or
develop any additional material which contain or display the "Forum" mark during
the phase-out period, or at any time after the termination or expiration of this
Operating Agreement. Upon expiration of the phase-out period, Owner shall make
no further use whatsoever of the "Forum" mark, including distribution or display
of any materials bearing the "Forum" mark;
F. Operator shall cooperate with Owner in effecting a smooth transition of
operations at the Retirement Community to Owner or Owner's designee; and
G. The provisions of this Section 4.02 shall survive any Termination.
SECTION 4.03 PERFORMANCE TERMINATION
A. Subject to the provisions of Section 4.03 B below, Owner shall have the
option to terminate this Agreement if:
1. With respect to each of any two (2) consecutive Fiscal Years
during the Term commencing with Fiscal Year 2000, Operating Profit is less than
eight percent (8%) of the Owner's Investment (the "Threshold Amount"); and
2. The fact that the Retirement Community is not meeting the test set
forth in Section 4.03A1 is not the result of either: (i) a Force Majeure; or
(ii) any major renovation of the Retirement Community.
B. Such option to terminate shall be exercised by serving written notice
thereof on Operator no later than sixty (60) Days after the receipt by Owner of
the Annual Financial Report for the second (2nd) of the two (2) Fiscal Years
referred to in Section 4.03A1. If Operator does
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OPERATING AGREEMENT PAGE 25
<PAGE>
not elect to avoid such Termination pursuant to Section 4.03B below, this
Agreement shall terminate as of the end of the fourth (4th) full Accounting
Period following the date on which Operator receives Owner's written notice of
its intent to terminate this Agreement; provided that such period of time shall
be extended as required by applicable Legal Requirements pertaining to the
termination of the employment of the employees at the Retirement Community.
Owner's failure to exercise its right to terminate this Agreement pursuant to
Section 4.03A with respect to any given Fiscal Year shall not be deemed an
estoppel or waiver of Owner's right to terminate this Agreement with respect to
subsequent Fiscal Years to which this Section 4.03A may apply.
1. Upon receipt of a written notice of Termination sent by Owner to
Operator pursuant to Section 4.03B, Operator shall have the option, to be
exercised by written notice (the "Cure Notice") to Owner within sixty (60) Days
after receipt of said Termination notice from Owner, to avoid such Termination
by electing either (i) to pay to Owner an amount equal to the difference between
the Threshold Amount for the two consecutive Fiscal Years that gave rise to the
Cure Notice and the Operating Profit for the same two consecutive Fiscal Years
(the "Shortfall Payment"), or (ii) to reduce the Base Fee payable to Operator
pursuant to Section 5.01B during the two (2) full Fiscal Years immediately
following the two (2) Fiscal Years referred to in Section 4.03A1 from five
percent (5%) of Gross Revenues to two percent (2%) of Gross Revenues. In the
event Operator elects to avoid such Termination by sending to Owner a Cure
Notice, the two consecutive Fiscal Years referred to in Section 4.03A1 with
respect to which such election was made shall thereafter not be treated, for
purposes of subsequent elections by Owner pursuant to Section 4.03A, as Fiscal
Years in which the circumstances described in Section 4.03A1 have occurred. If
Operator exercises such option to send to Owner a Cure Notice, then any Owner's
election to terminate this Agreement under Section 4.03 shall be canceled and of
no force or effect and this Agreement shall not terminate. The preceding
sentence, however, shall not affect the right of Owner, as to each subsequent
Fiscal Year to which Section 4.03A applies, to again elect to terminate this
Agreement, pursuant to the provisions of Section 4.03A.
2. Upon receipt of a second written notice of Termination sent by
Owner to Operator pursuant to Section 4.03B, Operator shall have the option, to
be exercised by written notice (the "Second Cure Notice") to Owner within sixty
(60) Days after receipt of such Termination notice from Owner, to avoid such
Termination by electing to reduce the Base Fee payable to Operator pursuant to
Section 5.01B during the two (2) full Fiscal Years immediately following the two
(2) Fiscal Years referred to in Section 4.03A1 from five percent (5%) of Gross
Revenues to two percent (2%) of Gross Revenues. In the event Operator elects to
avoid such Termination by sending to Owner a Second Cure Notice, the two
consecutive Fiscal Years referred to in Section 4.03A1 with respect to which
such election was made shall thereafter not be treated, for purposes of
subsequent elections by Owner pursuant to Section 4.03A, as Fiscal Years in
which the circumstances described in Section 4.03A1 have occurred. If Operator
exercises such option to send Owner a Second Cure Notice, then any Owner's
election to terminate this Agreement under Section 4.03 shall be canceled and of
no force or effect and this Agreement shall not terminate. The preceding
sentence, however, shall not affect the right of Owner, as to each subsequent
Fiscal Year to which Section 4.03A applies to again elect to terminate this
Agreement, pursuant to the provisions of Section 4.03A.
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OPERATING AGREEMENT PAGE 26
<PAGE>
3. In the event that for any Fiscal Year Operator reduces the Base
Fee pursuant to Section 4.03B1 or 2, then in calculating Operating Expenses for
such Fiscal Year for purposes of determining the Incentive Fee and other
compensation to Operator, such reduction shall not be taken into account and the
Base Fee shall be deemed to be five percent (5%) of Gross Revenues.
4. Upon receipt of a third written notice of Termination sent by
Owner to Operator pursuant to Section 4.03A, then notwithstanding the provisions
of Section 4.03B1 and 2, Operator shall have no options to prevent such
Termination as set forth in such Sections.
5. If Operator does not exercise (or is unable to exercise) its
option to send a Cure Notice or a Second Cure Notice, then this Agreement shall
be terminated as of the date set forth in Section 4.03B. Notwithstanding the
foregoing, the provisions of Section 4.03B1 and 4.03B2 shall cease to apply and
Operator shall not have the right to deliver any further Cure Notices after such
time that Operator has delivered a Cure Notice on two (2) separate occasions.
SECTION 4.04 OWNER'S TERMINATION OPTION
Owner shall have the option to terminate this Operating Agreement prior to
the expiration of the Term otherwise specified in Section 4.01, (i) by giving
Operator at least one hundred twenty (120) Days prior notice, and (ii) by, and
upon, the payment to Operator of the termination fee (the "Termination Fee")
herein specified. The Termination Fee shall be determined by (i) taking the
average, annual, total of the Central Administrative Services Fee, the Base Fee,
and the Incentive Fee paid to Operator for the immediately preceding three (3)
Fiscal Years, or if less than three (3) such Fiscal Years have been completed,
the pro-forma fees set forth on Exhibit C shall be substituted for that portion
of the three (3) year period for which actual figures are not available,
(ii) increasing said dollar amount annually by the average increase in the CPI
for the preceding three (3) years, for the "Canceled Term", and
(iii) discounting the resulting annual amounts to their net present value using
a discount rate equal to the then current U.S. Treasury rate for a period most
comparable to the number of years remaining in the Canceled Term. For this
purpose, the "Canceled Term" means the lesser of (i) the number of years
remaining in the Initial Term, plus the Extended Term if Operator has exercised
its extension right prior to the date of Owner's termination notice, or
(ii) fifteen (15) years. Owner's right to terminate this Agreement as set forth
in this Section 4.04 shall be in addition to, and not in lieu of, Owner's right
to terminate this Agreement as set forth in any other provision of this
Agreement, (ii) shall not be subject to the options of Operator set forth in
Section 4.03B, and (iii) may be exercised by Owner irrespective of whether a
Default or Event of Default exists on the part of Owner.
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OPERATING AGREEMENT PAGE 27
<PAGE>
ARTICLE 5
COMPENSATION OF OPERATOR
SECTION 5.01 BASE FEE, INCENTIVE FEE AND BONUS FEE
A. In consideration of services to be performed hereunder, Operator shall
receive during each Fiscal Year (or portion thereof) on a non-cumulative basis,
a base fee (the "Base Fee") and an incentive fee (the "Incentive Fee") as
provided below.
1. The Base Fee shall be an amount equal to five percent (5%) of
Gross Revenues, and shall constitute an Operating Expense.
2. The Incentive Fee shall be an amount equal to twenty percent (20%)
of Net Operating Profit for such Fiscal Year.
B. As further consideration for the services to be performed hereunder,
Operator shall receive for the Fiscal Year 1998, a bonus fee (the "Bonus Fee")
to wit, if Operating Profit for the Fiscal Year 1998 exceeds
$______________________________________ (the "Bonus Threshold"), Operator shall
receive a Bonus Fee, payable only from and to the extent of any excess of
Operating Profit over the Bonus Threshold, equal to one percent (1%) of Gross
Revenues.
ARTICLE 6
FINANCING OF THE RETIREMENT COMMUNITY
SECTION 6.01 AMENDMENTS OF MANAGEMENT AGREEMENT
A. If requested by any Qualified Lender or prospective Qualified Lender,
Operator agrees to execute and deliver any amendment of this Agreement which is
reasonably required by such Qualified Lender or prospective Qualified Lender,
provided that Operator shall be under no obligation to amend this Agreement if
the result of such amendment would be: (i) to reduce, defer or delay the amount
of any payment to be made to Operator hereunder; (ii) to materially increase
Operator's obligations under this Agreement; (iii) to change the Term of this
Agreement; (iv) to cause the Retirement Community to be operated other than
pursuant to the Marriott Standards; (v) to amend materially either Section 8.02
or Article 14; or (vi) to otherwise materially affect Operator's rights and/or
obligations under this Agreement. Any such amendment shall take effect as of
the funding of such Qualified Loan.
B. In addition to the provisions of Section 6.01 A, if a Qualified Lender
or prospective Qualified Lender requests that Operator enter into an amendment
of this Agreement, and if such amendment would impose additional duties (for
example, an increase in the reporting requirements or in the record-keeping
requirements, or adding the obligation to prepare parallel accounting statements
using a different fiscal year) on Operator or would otherwise adversely affect
Operator's rights under this Agreement, but not to the degree described in
clauses (i)
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OPERATING AGREEMENT PAGE 28
<PAGE>
through (vi) of Section 6.01A, Operator hereby agrees that it will execute and
deliver such requested amendment of this Agreement, provided that Owner
compensates Operator for the additional burden imposed by such amendment. It is
understood that the word "burden", as used in the preceding sentence, shall
encompass not only additional work to be performed by Operator, but also the
adverse effect on the Incentive Management Fee which would be caused by
requiring increased services by third parties. Any dispute as to whether
Operator is entitled to any compensation pursuant to this Section 6.01B, or as
to the amount of such compensation, shall be resolved by arbitration pursuant to
Section 19.11.
C. Proposed amendments to this Agreement which are requested by any
Qualified Lender or prospective Qualified Lender, and which would affect the
insurance provisions set forth in Article 12, shall be governed exclusively by
Article 12.
D. Notwithstanding any other provision of this Agreement, Operator shall
continue to provide the necessary information regarding the operation of the
Retirement Community (in such form as may be required by any Qualified Loan
existing as of the Effective Date) so that Owner may comply with all reporting,
accounting and similar obligations imposed by any Qualified Loan existing as of
the Effective Date, without any additional fee or compensation, and upon request
from time-to-time shall provide such explanations and back-up as may be
reasonably requested.
SECTION 6.02 NOTICE AND OPPORTUNITY TO CURE
A. In the event of (i) a Default by Owner in the performance or observance
of any of the terms and conditions of this Agreement, or (ii) any other
occurrence which entitles Operator to terminate this Agreement, and in the event
that Operator gives written notice thereof to Owner pursuant to Article 16 of
this Agreement, Operator shall also give a duplicate copy (herein referred to as
the "First Notice") of such notice to each Qualified Lender, at the address
previously provided to Operator. Any such notice will be sent in the manner
described in Section 19.09 hereof. In addition, in the event that such Default
is not cured within the applicable cure period under Article 16 of this
Agreement, and Operator intends to exercise its remedy of terminating this
Agreement, Operator shall send a second notice (the "Second Notice") to each
Qualified Lender, to the same address and in the same manner applicable to the
First Notice, stating Operator's intention to terminate this Agreement.
Operator shall forbear from taking any action to terminate this Agreement for a
period of thirty (30) Days after the service of the First Notice, and for an
additional period of thirty (30) Days after the service of the Second Notice (if
such Second Notice is required, as set forth above).
B. In the event of a Default by Owner under the provisions of this
Agreement, Operator agrees to accept performance by any Qualified Lender with
the same force and effect as if same were performed by Owner, in accordance with
the provisions and within the cure periods prescribed in this Agreement (except
that each Qualified Lender shall have such additional cure periods, not
available to Owner, as are set forth in this Section 6.02).
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OPERATING AGREEMENT PAGE 29
<PAGE>
C. No notice given by Operator to Owner shall be effective as a notice
under Article 16 of this Agreement unless the applicable duplicate notice to
each Qualified Lender which is required under Section 6.02A (either the First
Notice or the Second Notice, as the case may be) has been given. It is
understood that any failure by Operator to give such a duplicate notice (either
the First Notice or the Second Notice, as the case may be) to any Qualified
Lender shall not itself be a Default by Operator under this Agreement, but
rather shall operate only to void the effectiveness of any such notice by
Operator to Owner under Article 16 of this Agreement.
D. Except as specifically limited by this Section 6.02, nothing herein
shall preclude Operator from exercising any of its rights or remedies against
Owner with respect to any Default by Owner under this Agreement.
SECTION 6.03 ASSIGNMENT OF MANAGEMENT AGREEMENT
Owner shall have the right to collaterally assign to any Qualified Lender,
as additional security for the indebtedness evidenced by a Qualified Loan, all
of Owner's right, title and interest in and to this Agreement, including the
right to all distributions payable to Owner hereunder. If, pursuant to any such
assignment (or subsequent loan documentation entered into between Owner and a
Qualified Lender with a similar purpose), and provided that Operator has
previously received a copy of such assignment and such subsequent documentation,
Operator may receive (from time to time) a notice or notices from such Qualified
Lender directing Operator to pay to such Qualified Lender subsequent
distributions under Section 9.01C of this Agreement which would otherwise be
payable to Owner, Operator shall comply with any such notice. Operator shall
continue to make payments in compliance with any such notice from such Qualified
Lender until Operator receives written instructions to the contrary from such
Qualified Lender. Owner hereby gives its consent to any such payments by
Operator to such Qualified Lender which are in compliance with any such notice.
The foregoing consent by Owner shall be deemed to be irrevocable until the
entire Qualified Loan has been discharged, as evidenced either by the
recordation of a satisfaction or release executed by such Qualified Lender, or
by the delivery of a written statement to that effect from such Qualified Lender
to Operator. Operator shall comply with the direction set forth in any such
notice without any necessity to investigate why such Qualified Lender sent such
notice, or to confirm whether or not Owner is in fact in default under the terms
of such Qualified Loan. If Operator receives such notices from more than one
Qualified Lender, Operator shall (at its option) either (i) comply with the
provisions of the notice sent by the Qualified Lender whose Qualified Loan has
the senior lien priority, or (ii) institute Litigation for a declaratory
judgment to determine to whom payments under this Agreement shall be made (in
which case, the costs and expenses of such Litigation, including attorneys'
fees, shall be Operating Expenses).
SECTION 6.04 SUBORDINATION OF MANAGEMENT AGREEMENT
A. This Agreement, and Operator's right to continue to manage and
operate the Retirement Community pursuant to this Agreement, are and shall be
subject and subordinate to the lien of any Qualified Loan (i.e., upon a
Foreclosure of any such Qualified Loan, such Qualified Lender, at its option,
unless it has otherwise agreed to the contrary in a Non-
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OPERATING AGREEMENT PAGE 30
<PAGE>
Disturbance Agreement, shall have the right to terminate this Agreement).
Notwithstanding the foregoing, during the Term of this Agreement, all debt
service (including increased or accelerated payments after a default) payable
with respect to any Qualified Loan shall be paid exclusively from Owner's
portion of Operating Profit.
B. Section 6.04A is intended to be, and is, fully effective and binding,
as between Operator and any such Qualified Lender; however, Operator agrees to
execute such confirmatory documentation (in recordable form in the jurisdiction
in which the Retirement Community is located) as such Qualified Lender shall
reasonably request.
C. Notwithstanding the possible termination of this Agreement which is
set forth in the foregoing provisions of this Section 6.04, it is understood
that, until such time as this Agreement is validly terminated either (i)
pursuant to the applicable provision of this Agreement, or (ii) pursuant to a
Foreclosure of a Qualified Loan (assuming that such termination does not breach
any binding Non-Disturbance Agreement), the Holder of each Qualified Loan will
not disturb any of the rights of Operator under this Agreement to operate the
Retirement Community in accordance with this Agreement (including the right of
Operator to collect all Gross Revenues and to make expenditures in accordance
with this Agreement).
SECTION 6.05 NON-DISTURBANCE AGREEMENT
A. Owner agrees that, in connection with the obtaining by Owner of any
Secured Loan or Secured Loans, from time to time, Owner will use good faith
reasonable efforts to obtain a Non-Disturbance Agreement from each Holder or
Holders. The phrase "good faith reasonable efforts" shall be determined by
reference to the following: (i) normal loan underwriting procedures and
practices (including those practices relating to non-disturbance agreements)
which are generally being implemented by entities which are making loans similar
to such Secured Loan, as of that point in time; and (ii) the concessions which
Operator is, as of that point in time, reasonably prepared to make in order to
satisfy the objectives of lenders in connection with the lender-manager
relationship after a Foreclosure. In no event, however, shall the failure of
Owner to obtain such a Non-Disturbance Agreement affect or modify any of the
responsibilities of Operator toward Qualified Lenders which are contained
elsewhere in this Article 6.
B. Notwithstanding Section 6.05 A, Owner agrees that, prior to obtaining
any Qualified Loan, it will obtain from each prospective Holder or Holders
thereof a Non-Disturbance Agreement pursuant to which Operator's rights under
this Agreement will not be disturbed as a result of a loan default stemming from
non-monetary factors which (i) relate to Owner and do not relate solely to the
Retirement Community, and (ii) are not Defaults by Operator under Article 16 of
this Agreement. If Owner desires to obtain a Qualified Loan, Operator, on
written request from Owner, shall promptly identify those provisions in the
proposed loan documents which fall within the categories described in clauses
(i) and (ii) above, and Operator shall otherwise assist in expediting the
preparation of an agreement between the prospective Holder and Operator which
will implement the provisions of this Section 6.05B.
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OPERATING AGREEMENT PAGE 31
<PAGE>
SECTION 6.06 ATTORNMENT
A. Operator agrees that, subject to the provisions of Section 6.06B, upon
a Foreclosure of any Qualified Loan, provided that this Agreement has not
expired or otherwise been earlier terminated in accordance with its terms,
Operator shall attorn to any Subsequent Owner and shall remain bound by all of
the terms, covenants and conditions of this Agreement for the balance of the
remaining Term (including any Renewal Terms) with the same force and effect as
if such Subsequent Owner were the "Owner" under this Agreement; provided,
however, that Operator shall be under no such obligation to so attorn, and, to
the contrary, shall thereupon have the right to terminate this Agreement on
thirty (30) Days' prior written notice to both Owner and such Subsequent Owner:
(i) if such Subsequent Owner would not qualify as a permitted transferee under
Section 18.01A of this Agreement; or (ii) unless such Subsequent Owner, within
twenty (20) Days after the Foreclosure Date (or, in the event such Subsequent
Owner acquires title to the Retirement Community after the Foreclosure Date,
within twenty (20) Days after the date of such acquisition of title to the
Retirement Community), assumes all of the obligations of the "Owner" under this
Agreement which arise from and after the Foreclosure Date (or such later date of
acquisition of title to the Retirement Community), pursuant to a written
assumption agreement which shall be delivered to Operator. Upon the written
request of any Qualified Lender, Operator shall periodically execute and deliver
a statement, in a form reasonably satisfactory to such Qualified Lender,
reaffirming Operator's obligation to attorn as set forth in this Section 6.06A.
B. It is understood by the parties that, in view of the fact that a
Qualified Lender will have the right to terminate this Agreement on a
Foreclosure under the provisions of Section 6.04, Operator has an interest in
being informed, within a reasonable period of time after a Secured Loan
Acceleration, of whether or not such Qualified Lender intends to exercise such
right of termination. Accordingly, if, by no later than that date (the "Post-
Foreclosure Decision Date") which is ninety (90) Days after the date of any
Secured Loan Acceleration, Operator has not received a Non-Disturbance Agreement
executed by the Holder of such Secured Loan, Operator shall, as of the Post-
Foreclosure Decision Date and thereafter, no longer be under any obligation to
attorn (pursuant to the provisions of Section 6.06 A) with respect to any
Foreclosure of that Secured Loan, and Operator shall have the option to
terminate this Agreement, by written notice to both Owner and the Holder of each
existing Qualified Loan, at any time within the sixty (60) Day period
immediately following the Post-Foreclosure Decision Date.
SECTION 6.07 NO MODIFICATION OR TERMINATION OF AGREEMENT
If the documents evidencing and securing a Qualified Loan require the
consent of the Qualified Lender to any amendment or modification of this
Agreement which materially affects such Qualified Lender, no such amendment or
modification of this Agreement shall be binding or effective unless such
Qualified Lender shall have consented in writing thereto.
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SECTION 6.08 OWNER'S RIGHT TO FINANCE THE RETIREMENT COMMUNITY
Owner shall have the right, from time to time, without Operator's prior
consent or approval, to obtain Qualified Loans, and to encumber the Retirement
Community with Mortgages securing such Qualified Loans. Owner shall not,
without the prior consent of Operator, have the right to obtain Secured Loans
which are not Qualified Loans.
SECTION 6.09 SALE/LEASEBACK TRANSACTIONS
Any single transaction or related series of transactions in which (i)
Owner's interest in the Retirement Community is sold or transferred by the then
Owner ("Seller") to a buyer ("Buyer"), and (ii) the Buyer (as "landlord") leases
the Retirement Community to the Seller (as "tenant"), is hereby defined as a
"Sale/leaseback Transaction". With respect to each Sale/leaseback Transaction
during the Term of this Agreement, the following provisions will apply: (a) the
sale or transfer of the Retirement Community will be considered a Sale of the
Retirement Community; however, the Seller (as tenant under the aforesaid lease),
not the Buyer, shall thereafter be treated as the "Owner" for purposes of this
Agreement; (b) the purchase price will not be a Secured Loan, but any mortgage
financing placed (either at the time of the transaction or later) on the Buyer's
interest in the Retirement Community will be treated as a Secured Loan, and the
proceeds of each such Secured Loan will be aggregated with all outstanding
Secured Loans, which encumber either the Buyer's interest in the Retirement
Community or the Seller's leasehold interest in the Retirement Community, for
purposes of determining whether a given Secured Loan qualifies as a Qualified
Loan; (c) payments pursuant to such lease shall not be treated as Operating
Expenses, except for Impositions and similar items which would have been treated
as Operating Expenses in the absence of such Sale/leaseback Transaction; and
(d) all subsequent sales, transfers or assignments of either Buyer's interest in
the Retirement Community or Seller's interest in the Retirement Community will
be treated as Sales of the Retirement Community. Owner will not enter into any
Sale/leaseback Transaction unless Operator and the proposed Buyer have
previously executed a mutually satisfactory attornment agreement pursuant to
which, as of the date of the termination of Seller's leasehold interest, the
provisions of this Agreement will (unless there has been an Event of Default or
other event entitling either party to terminate this Agreement) be binding both
on Operator and on Buyer (as the successor"Owner"); such attornment agreement
will also contain an immediately-effective provision which will incorporate the
terms of Section 6.06 of this Agreement, binding both on Operator and on Buyer.
SECTION 6.10 REIT TRANSACTIONS
Any single transaction or related series of transactions pursuant to which
(i) Owner by election, reorganization, merger, consolidation, stock transfer,
transfer of title to the Retirement Community or otherwise) is or becomes a
"Real Estate Investment Trust" or "Qualified REIT Subsidiary," or the partner in
a partnership in which the general partner is a "Real Estate Investment Trust"
or "Qualified REIT Subsidiary," as such terms are defined in the Internal
Revenue Code of 1986 ("Code"), and (ii) in connection therewith, Owner, as
landlord ("Landlord"), enters into a lease ("Operating Lease") of all or
substantially all of the Retirement
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OPERATING AGREEMENT PAGE 33
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Community to an operating company ("Tenant"), and transfers to the Tenant
certain non-real estate assets (such as FF&E) included within the Retirement
Community, shall constitute a "REIT" Transaction." With respect to each REIT
Transaction during the Term of this Agreement, the following provisions shall
apply:
A. The reorganization, merger, consolidation, stock transfer, or transfer
of title to the Retirement Community shall, to the extent the same constitutes a
Sale of the Retirement Community, be subject to all requirements of Article 18;
however, from and after the consummation of the REIT Transaction, the Tenant,
not the Landlord, shall be treated as the "Owner" for purposes of this
Agreement.
B. Any consideration paid in connection with the REIT Transaction shall
not constitute a Secured Loan, but any mortgage financing placed (either at the
time of the REIT Transaction or later) on the Landlord's interest in the
Retirement Community will be treated as a Secured Loan, and the proceeds of each
such Secured Loan will be aggregated with all outstanding Secured Loans, which
encumber either the Landlord's interest in the Retirement Community or the
Tenant's leasehold interest in the Retirement Community, for the purposes of
determining whether a given Secured Loan qualifies as a Qualified Loan.
C. Payments pursuant to the Operating Lease shall not be treated as
Operating Expenses, except for Impositions and similar items which would have
been treated as Operating Expenses in the absence of such REIT Transaction.
D. All subsequent sales, transfers or assignments of either the
Landlord's interest in the Retirement Community of the Tenant's leasehold
interest in the Retirement Community will be treated as a Sale of the Retirement
Community, to the extent applicable.
E. Owner will not enter into any REIT Transaction unless on or before
consummation of the REIT Transaction, Operator and the proposed Landlord execute
a mutually satisfactory attornment agreement pursuant to which, as of the date
of termination of the Operating Lease, the provisions of this Agreement will
(unless there has been an Event of Default or other event entitling either party
to terminate this Agreement) be binding both on Operator and on Landlord (as the
successor "Owner"); such attornment agreement will also contain an immediately
effective provision which will incorporate the terms of the Section 6.06 of this
Agreement, binding on both Operator and on Landlord.
F. If requested by the Landlord or Tenant, Operator agrees to execute and
deliver any amendment to this Agreement which is reasonably required for the
REIT Transaction to comply with the requirements of the Code, provided that
Operator shall be under no obligation to amend this Agreement if the result of
such amendment would be: (i) to reduce, defer or delay the amount of any
payment to be made to Operator hereunder; (ii) to materially increase Operator's
obligations under this Agreement; (iii) to change the Term of this Agreement;
(iv) to cause the Retirement Community to be operated other than pursuant to the
Marriott Standards; (v) to amend materially either Section 8.02 or Article 14;
or (vi) to otherwise materially affect
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OPERATING AGREEMENT PAGE 34
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Operator's rights and/or obligations under this Agreement. Any such amendment
shall take effect as of the consummation of the REIT Transaction.
ARTICLE 7
WORKING CAPITAL AND FIXED ASSET SUPPLIES
SECTION 7.01 WORKING CAPITAL
A. As of the Effective Date, Owner has provided the funds necessary to
supply the Retirement Community with Working Capital in an amount mutually
approved by Owner and Operator, and Owner shall from time to time thereafter
promptly advance, upon request of Operator, any additional funds necessary to
maintain Working Capital at levels generally consistent with the Marriott
Standards, and as reasonably determined by Operator to be necessary to satisfy
the needs of the Retirement Community as its operation may from time to time
require, or that may be necessary, by reason of delays in collecting accounts
receivable or otherwise, for the Retirement Community to have sufficient cash on
hand to pay its accounts payable and meet its cash expenditures when the timing
of collection of accounts receivable and other funds will be insufficient to
meet the Retirement Community's cash requirements. Any such request by Operator
shall be accompanied by a detailed explanation of the reasons for the request.
If Owner fails to respond to any such request within sixty (60) Days after
Owner's receipt thereof, Operator shall be entitled, at its option, without
affecting other remedies which may be available pursuant to Article 16, to
either: (i) deduct the necessary additional Working Capital from any funds that
are then payable or may thereafter become payable to Owner hereunder; or
(ii) unless prohibited by any Secured Loan, lend Owner the necessary additional
Working Capital from Operator's own funds, which loan will bear interest at the
Prime Rate (compounded annually), and will be secured by a security interest
(subordinated to any Secured Loan) encumbering all Working Capital previously or
thereafter provided by either Owner or Operator, and will be repaid from any
subsequent distributions to Owner pursuant to the terms of this Agreement.
B. Operator will manage the Working Capital of the Retirement Community
prudently and in accordance with the Marriott Standards. Operator shall review
and analyze the Working Capital needs of the Retirement Community on an annual
basis. If Operator reasonably determines that there is excess Working Capital,
such excess shall be returned to Owner.
C. Working Capital provided by Owner pursuant to this Section 7.01 shall
remain the property of Owner throughout the Term of this Agreement. Upon
Termination, Owner shall retain any of its unused Working Capital.
SECTION 7.02 FIXED ASSET SUPPLIES
Prior to the Effective Date, Owner has supplied the Retirement Community
with Fixed Asset Supplies. In the event that any additional funds are necessary
to maintain Fixed Asset Supplies at levels determined by Operator to be
necessary to operate the Retirement Community
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OPERATING AGREEMENT PAGE 35
<PAGE>
in accordance with the Marriott Standards, such funds shall be provided from
Gross Revenues and treated as an Operating Expense. Fixed Asset Supplies shall
remain the property of Owner throughout the Term of this Agreement, except for
Fixed Asset Supplies purchased by Operator pursuant to Section 10.03.
ARTICLE 8
REPAIRS, MAINTENANCE AND REPLACEMENTS
SECTION 8.01 ROUTINE REPAIRS AND MAINTENANCE
A. Operator shall maintain the Retirement Community in good repair and
condition and in conformity with Legal Requirements and Marriott Standards and
shall make or cause to be made such routine and preventative maintenance,
repairs and minor alterations, the cost of which can be expensed under GAAP, as
it, from time to time, deems necessary for such purposes. The cost of such
maintenance, repairs and alterations shall be paid from Gross Revenues and shall
be treated as an Operating Expense in determining Operating Profit.
B. Operator shall (pursuant to a schedule which shall be subject to the
reasonable approval of both Owner and Operator) arrange for and coordinate
routine and other appropriate inspections of the structure, exterior facade,
roof, parking areas, and other significant physical components of the Retirement
Community, and of the mechanical, electrical, heating, ventilating, air
conditioning, plumbing, and vertical transportation elements of the Retirement
Community. The costs of such inspections shall be treated as Operating
Expenses.
C. Operator shall submit to Owner (at the same time as the submission of
the Annual Operating Projection) a signed copy of an annual report summarizing
all significant preventative maintenance activities (including repairs,
alterations and inspections conducted at the Retirement Community) on all
building components of the Retirement Community during the previous twelve (12)
calendar months.
SECTION 8.02 FF&E RESERVE
A. Operator shall establish a reserve account (the "FF&E Reserve") in a
bank designated by Operator and approved by Owner (which approval shall not be
unreasonably withheld) to cover the cost of:
1. Replacements and renewals to the Retirement Community's FF&E; and
2. Certain routine repairs and maintenance to the Retirement
Community building which are normally capitalized under GAAP such as exterior
and interior repainting, resurfacing building walls, floors, roofs and parking
areas, and replacing folding walls and the like, but which are not major
repairs, alterations, improvements, renewals or replacements to the Retirement
Community building's structure or exterior facade or to its mechanical,
electrical, heating, ventilating, air conditioning, plumbing or vertical
transportation systems, the cost of which shall be governed exclusively by
Section 8.03.
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OPERATING AGREEMENT PAGE 36
<PAGE>
B. Throughout the Term, Operator shall transfer into the FF&E Reserve the
amounts required in Section 8.02E and F (the "FF&E Reserve Payment"). All
amounts transferred into the FF&E Reserve shall be paid from Gross Revenues and
shall constitute Operating Expenses.
C. Each year, at the same time as Operator submits the Annual Operating
Projection, Operator shall prepare an estimate (the "FF&E Estimate") of the
expenditures necessary for (i) replacements and renewals to the Retirement
Community's FF&E, and (ii) repairs to the Retirement Community of the nature
described in Section 8.02A2, during the ensuing Fiscal Year, and shall submit
such FF&E Estimate to Owner for its review. Operator shall also prepare
tentative forecasts of such expenditures with regard to the four (4) subsequent
Fiscal Years. Operator will at all times give good faith consideration to
Owner's suggestions regarding any FF&E Estimate. In the event such forecasts
project a deficit in the FF&E Reserve at some point during the current Fiscal
Year or during such four (4) subsequent Fiscal Years, Owner and Operator will
work together in good faith to prepare alternative forecasts for such Fiscal
Years which will reduce or eliminate such deficit, but also take into account
the needs of the Retirement Community during such periods of time. All
expenditures from the FF&E Reserve will be (as to both the amount of each such
expenditure and timing thereof) both reasonable and necessary, given the
objective that the Retirement Community will be maintained and operated in
accordance with the Marriott Standards.
D. Operator shall from time to time make such (1) replacements and
renewals to the Retirement Community's FF&E, and (2) repairs to the Retirement
Community of the nature described in Section 8.02A2, as it deems necessary,
provided that Operator shall not expend more than the balance in the FF&E
Reserve without the prior approval of Owner. Operator will endeavor to follow
the applicable FF&E Estimate, but shall be entitled to depart therefrom, in its
reasonable discretion, provided that: (A) such departures from the applicable
FF&E Estimate result from circumstances which could not reasonably have been
foreseen at the time of the submission of such FF&E Estimate; and (B) such
departures from the applicable FF&E Estimate result from circumstances which
require prompt repair and/or replacement or are necessary to comply with Legal
Requirements; and (C) Operator has submitted to Owner a revised FF&E Estimate
setting forth and explaining such departures. At the end of each Fiscal Year,
any amounts remaining in the FF&E Reserve shall be retained in the FF&E Reserve,
and shall be carried forward to the next Fiscal Year. Upon a Sale of the
Retirement Community, funds in the FF&E Reserve will not be affected (or, if
withdrawn, will be replaced as set forth in Section 18.01G), and all
dispositions of such funds (both before and after such Sale of the Retirement
Community) will continue to be made exclusively pursuant to the provisions of
this Agreement. Proceeds from the sale of FF&E no longer necessary to the
operation of the Retirement Community shall be deposited in the FF&E Reserve, as
shall any interest which accrues on amounts placed in the FF&E Reserve. Neither
(i) proceeds from the disposition of FF&E, nor (ii) interest which accrues on
amounts held in the FF&E Reserve, shall either (x) result in any reduction in
the required contributions to the FF&E Reserve set forth in subsection B above,
or (y) be included in Gross Revenues. The only items of FF&E which Operator is
authorized to lease (rather than purchase) shall be telephones, office equipment
(such as copiers and the like), and shuttle vans. If Operator enters into a
lease described in the preceding sentence, Operator
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OPERATING AGREEMENT PAGE 37
<PAGE>
shall give Owner notice of such lease either prior to or promptly after entering
into such lease. Lease payments with respect to telephones and office equipment
shall be Operating Expenses; lease payments with respect to shuttle vans shall
be paid from the FF&E Reserve. If Operator proposes that items of FF&E other
than telephones and office equipment or shuttle vans should be leased rather
than purchased, Operator shall submit such proposal (which proposal shall
include, without limitation, an indication as to whether the rental which is
owed under such lease will be treated as an Operating Expense or paid from the
FF&E Reserve) to Owner for Owner's approval (not to be unreasonably withheld).
In connection with the foregoing, it is understood that the failure of a
Qualified Lender to approve such leasing proposal shall justify Owner in
withholding its approval thereof, regardless of whether withholding such
approval would otherwise be deemed to be unreasonable.
E. The amount of the FF&E Reserve Payment shall be determined as follows:
1. Two and sixty-five one hundredths percent (2.65%) of Gross
Revenues during the period from the Effective Date to the expiration of the
Fiscal Year 2002;
2. Two and eighty-five one hundredths percent (2.85%) of Gross
Revenues during the period from the first day of the Fiscal Year 2003 to the
last day of the Fiscal Year 2007;
3. Three and one-half percent (3.5%) of Gross Revenues during the
period from the first day of Fiscal Year 2008 to the last day of the Term.
F. The percentage contribution for the FF&E Reserve which is described
in Section 8.02E is an estimate based upon Operator's prior experience with
other comparable retirement communities. As the Retirement Community ages, this
percentage may not be sufficient to keep the FF&E Reserve at the levels
necessary to make the replacements and renewals to the Retirement Community's
FF&E, or to make the repairs to the Retirement Community of the nature described
in Section 8.02A2, which are required to maintain the Retirement Community in
accordance with the Marriott Standards. If any FF&E Estimate which is prepared
in accordance with Section 8.02C would require funding in excess of the
applicable percentage of Gross Revenues which is set forth in Section 8.02E
above, Owner may either:
1. Agree to increase the percentages of Gross Revenues set forth in
Section 8.02E up to the level set forth in such FF&E Estimate, in order to
provide the additional funds required, such increases to be treated as Operating
Expenses, or
2. Make a lump-sum contribution to the FF&E Reserve in the necessary
amount (in which case such lump-sum contribution plus interest (at the Prime
Rate plus one percentage point (1%) per annum), shall be reimbursed to Owner
from Gross Revenues in equal installments over the period of the next five (5)
calendar years beginning as of the date of such contribution, and such
installment repayments shall be an Operating Expense).
If Owner elects not to agree to either option 1 or option 2 above (or Owner
does not respond with respect to either option) within thirty (30) Days after
the submission of such FF&E Estimate (or, if Owner has elected option 2, if
Owner fails to fund the required amount within a sixty (60) Day period after the
date of such election), Operator shall be entitled, at its option, to
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OPERATING AGREEMENT PAGE 38
<PAGE>
terminate this Agreement upon one hundred and twenty (120) Days' written notice
to Owner (with a copy to each Qualified Lender); however, such failure by Owner
shall not be deemed a Default by Owner under Article 16, and Operator shall not
be entitled to any remedies with respect to such failure other than such
termination of this Agreement. If Operator so elects to terminate this
Agreement, it shall notify Owner of such election within the sixty (60) Day
period following either: (x) the date of receipt of Owner's election not to
agree to either option 1 or option 2 above, or the expiration of the aforesaid
thirty (30) Day period without Owner making an election with respect to either
option; or (y) if Owner has elected option 2, the date of the expiration of the
aforesaid sixty (60) Day period without Owner funding the required amount.
However, if Owner elects not to fund an FF&E Estimate that is specifically
needed to meet Legal Requirements, such failure shall constitute a Default under
Article 16 and Operator shall have recourse to all the remedies therein
specified.
SECTION 8.03 BUILDING ALTERATIONS, IMPROVEMENTS, RENEWALS, AND REPLACEMENTS
A. Operator shall prepare an annual estimate (the "Building Estimate") of
the expenditures necessary for major repairs, alterations, improvements,
renewals and replacements to the structure or exterior facade of the Retirement
Community, or to the mechanical, electrical, heating, ventilating, air
conditioning, plumbing, or vertical transportation elements of the Retirement
Community (the foregoing expenditures, together with all other repair and
maintenance expenditures which are classified as capital expenditures under
GAAP, shall be collectively referred to as "Capital Expenditures"). Operator
shall submit each such Building Estimate to Owner for its approval at the same
time the Annual Operating Projection is submitted. Except with respect to the
items described in Section 8.02A2, Operator shall not make any Capital
Expenditures without the prior written consent of Owner. Owner shall not
unreasonably withhold its consent with respect to Capital Expenditures which are
required by reason of any Legal Requirement, or required under Operator's
current life-safety standards (provided that, in order for any such life-safety
standards to be "required" within the meaning of this Section 8.03A, such
standards must be both required and in the process of being implemented at a
majority of the retirement communities which are comparable to the Retirement
Community then either owned or operated by Operator), or otherwise required for
the continued safety of residents or prevention of material damage to property,
including the removal of Hazardous Materials in compliance with all
Environmental Laws pursuant to Section 19.09. All Capital Expenditures which
are described in the preceding sentence shall be referred to in this Agreement
as "Required Capital Expenditures".
B. In the event of (x) an emergency threatening the Retirement Community,
its guests, invitees or employees, or (y) the receipt by Operator of a
governmental order or other Legal Requirement regarding any Required Capital
Expenditures, Operator shall give Owner notice thereof within five (5) Business
Days thereafter or sooner if circumstances reasonably warrant. Operator shall
then be authorized (but not obligated) to take appropriate remedial action
without receiving Owner's prior consent as follows: (i) in an emergency
threatening the Retirement Community, its guests, invitees or employees; or (ii)
if the continuation of the given condition could (in Operator's reasonable
judgment) subject Operator and/or Owner to either criminal or more than de
--
minimis civil liability, and Owner has either failed to remedy the
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OPERATING AGREEMENT PAGE 39
<PAGE>
situation or has failed to take appropriate legal action to stay the
effectiveness of any applicable Legal Requirement. Operator shall cooperate with
Owner in the pursuit of any such action and shall have the right to participate
therein. Owner shall reimburse Operator for any costs incurred by Operator in
connection with any such remedial action within thirty (30) Days after Owner's
receipt of notice from Operator of the amount of such costs.
C. The cost of all Capital Expenditures (including the expenses incurred
by either Owner or Operator in connection with any civil or criminal proceeding
described above, but not including costs of those Capital Expenditures which are
described in Section 8.02A2 hereof) shall be borne solely by Owner, and shall
not be paid from Gross Revenues or from the FF&E Reserve.
D. The failure of Owner to either (i) approve and provide funding for any
proposed Required Capital Expenditure, within thirty Days (30) after Operator's
request therefor, or (ii) in the case of any Legal Requirement which is
described in Section 8.03B, comply therewith or to stay the effectiveness of
such Legal Requirement during the period of any contesting thereof, shall be a
Default by Owner. In such event, Operator shall be entitled (without affecting
its other remedies under Article 16) to terminate this Agreement upon ninety
(90) Days' written notice to Owner (with a copy to each Qualified Lender);
provided, however, that Operator shall have the right to stipulate such shorter
period of time as may be appropriate, given the time periods which are mandated
by Legal Requirements, as described in Section 8.03A or B, or given Operator's
good faith concerns about its own civil and/or criminal liability.
E. Operator shall have the right, from time-to-time, to set forth in any
Building Estimate the recommendations of Operator regarding proposed ROI Capital
Expenditures. Notwithstanding the provisions of Section 8.03C to the contrary,
the cost of all ROI Capital Expenditures shall be paid, to the extent reasonably
possible (given the requirement, set forth in Section 8.02, that the balance in
the FF&E Reserve be maintained in accordance with the Marriott Standards) from
the FF&E Reserve, and Owner shall pay such costs from its own funds only to the
extent there are not adequate funds for such purpose in the FF&E Reserve.
Expenditures which are, pursuant to the preceding sentence, made from the FF&E
Reserve shall not be treated as Additional Invested Capital. Any failure of
Owner to approve and provide funding for any ROI Capital Expenditures, or any
other Capital Expenditures (not including those Capital Expenditures which are
described in Section 8.02A2 hereof) which are not Required Capital Expenditures,
within sixty (60) Days after Operator's request therefor, shall not be a Default
by Owner but shall entitle Operator to terminate this Agreement. Such
Termination shall be evidenced by a written notice to Owner (with a copy to each
Qualified Lender), which notice shall be delivered to Owner no later than ninety
(90) Days after the expiration of the sixty (60) Day period described in the
preceding sentence. The effective date of such Termination shall be the date
stated by Operator in such notice, provided that such effective date shall be no
less than one hundred eighty (180) Days, and no more than three hundred sixty
(360) Days, after the date of such notice.
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OPERATING AGREEMENT PAGE 40
<PAGE>
SECTION 8.04 LIENS
Operator and Owner shall use their best efforts to prevent any liens from
being filed against the Retirement Community which arise from any maintenance,
repairs, alterations, improvements, renewals or replacements in or to the
Retirement Community. They shall cooperate fully in obtaining the release of
any such liens, and the cost thereof, if the lien was not occasioned by the
fault of either party, shall be treated the same as the cost of the matter to
which it relates. If the lien arises as a result of the fault of either party,
then the party at fault shall bear the cost of obtaining the lien release.
SECTION 8.05 OWNERSHIP OF REPLACEMENTS
All repairs, alterations, improvements, renewals or replacements made
pursuant to this Article 8 shall be the property of Owner. Subject to the
provisions of this Article 8 and Section 18.01G, the funds in the FF&E Reserve
shall be the property of Owner.
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OPERATING AGREEMENT PAGE 41
<PAGE>
ARTICLE 9
BOOKKEEPING AND BANK ACCOUNTS
SECTION 9.01 BOOKS AND RECORDS
A. Books of control and account shall be kept on the accrual basis and in
all material respects in accordance with GAAP, with the exceptions provided in
this Agreement. Owner may at reasonable intervals during Operator's normal
business hours examine, copy (including copying any such records contained in
Software), and audit such records. Within seventy-five (75) Days after the end
of each Fiscal Year, Operator shall furnish Owner a financial report in
reasonable detail summarizing the operations of the Retirement Community for
such Fiscal Year and, including a certificate of Operator's chief accounting
officer certifying that such year-end statement is true and correct (the "Annual
Financial Report"). The parties shall, within thirty (30) Business Days after
the receipt of such statement, make any adjustments needed because of the final
figures set forth in the Annual Financial Report, or send a notice of disputed
items or matters in appropriate detail. Final adjustments, if any, will be made
at the time any disputed items or matters are resolved by the parties. If Owner
desires, at its own expense, to audit the Annual Financial Report and supporting
records, Owner shall begin such audit as soon as reasonably possible following
its receipt thereof and shall complete such audit as soon as reasonably possible
thereafter. If Owner does not make an audit or does not otherwise raise
disputed items as aforesaid, then such Annual Financial Report shall be deemed
to be conclusively accepted by Owner as being correct, and Owner shall have no
further right to challenge the correctness of the Annual Financial Report
thereafter, except in the event of fraud by Operator and except as set forth in
Section 9.01B. If any audit by Owner discloses an overpayment of any amounts to
Operator, Operator shall promptly pay Owner such amounts found to be due, plus
interest thereon (at the Prime Rate plus one percentage point (1%) per annum)
from the date such amounts should originally have been paid. If, however, the
audit discloses that Operator has not received any amounts due it, Owner shall
pay Operator such amounts, plus interest thereon (at the Prime Rate plus one
percentage point (1%) per annum) from the date such amounts should originally
have been paid. Any dispute concerning the correctness of an audit shall be
settled as provided in Section 19.11.
B. If Owner's audit discloses an overpayment in the total payment of
amounts due Operator for any Fiscal Year so audited that is in excess of five
percent (5%), Owner may audit the Retirement Community operations and supporting
records for the three (3) preceding Fiscal Years. The costs of such audits
shall be borne by Operator and not be treated as an Operating Expense. Any
error or dispute with respect thereto shall be handled as set forth in Section
9.01A.
C. By the twentieth (20th) Day after the end of each Accounting Period,
Operator shall furnish to Owner and, if required by Owner, to any Holder and to
the lessor under any Existing Lease, a report ("Interim Report") for the
immediately preceding Accounting Period, including the following:
1. A statement of the actual and budgeted Gross Revenue, Operating
Expenses, and Operating Profit for the Accounting Period and for the "year-to-
date";
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2. A cash flow report;
3. An aged schedule of accounts receivable;
4. An analysis of escrow deposits and a cash reconciliation;
5. An itemized list of all fee delinquencies as of the twentieth
(20th) Day of the current month;
6. An occupancy report; and
7. Such other reports as may be reasonably requested by Owner.
With each Interim Report Operator shall transfer any interim amounts
of Operating Profit due Owner and shall retain any interim Base Fee and
Incentive Fee, if any, due Operator. A final reconciliation and transfer of
funds due Owner and Operator shall be made at the end of each Fiscal Year prior
to issuing the Annual Financial Report, based upon the Operating Profit, Base
Fee, Bonus Fee, CAS Fee and Incentive Fee for the entire Fiscal Year. It is the
intention hereof that Owner receive with respect to each Fiscal Year during the
Term the Operating Profit for such Fiscal Year less the Incentive Fee for such
Fiscal Year and that all computations of Operating Profit, Operating Loss, Base
Fee, Bonus Fee, CAS Fee and Incentive Fee shall be made based upon the entire
Fiscal Year so that any interim payments to Owner or Operator hereunder shall be
subject to final adjustment based upon the results for the entire Fiscal Year.
Each quarterly Interim Report will be accompanied by a statement, by either the
local or regional controller of the Retirement Community, that, to the best of
his or her knowledge and belief, and subject to routine year-end audit
adjustments, such Interim Report is true and correct in all material respects.
D. Operator shall, on an annual basis, at the time of the delivery of the
Annual Operating Projection, prepare and deliver to Owner the Management
Analysis Report. In addition, Operator shall, in connection with an impending
Sale of the Retirement Community or commitment by a Holder to make a Secured
Loan, within thirty (30) Days after written request therefor from Owner, prepare
and deliver to Owner an updated Management Analysis Report describing
significant changes since the effective date of the most recent Management
Analysis Report.
E. For purposes of calculating the Operator's fees for any given Fiscal
Year, Operating Profits shall not include adjustments for either refunds or
additional payments of Impositions relating to any prior Fiscal Years. In the
event such refunds or additional payments occur, the Operating Profit with
respect to the prior Fiscal Years in which such Impositions accrued shall be
recalculated to show such refund or additional payment; if the fees with respect
to such prior Fiscal Years are either increased or decreased as a result of such
recalculation of Operating Profit, the party which owes money to the other party
shall promptly pay the amount owed.
SECTION 9.02 RETIREMENT COMMUNITY ACCOUNTS, EXPENDITURES
A. All funds derived from operation of the Retirement Community shall be
deposited by Operator in Retirement Community bank accounts in a bank designated
by Operator and approved by Owner, which approval shall not be unreasonably
withheld. Withdrawals from said
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<PAGE>
accounts shall be made by representatives of Operator whose signatures have been
authorized. Such accounts shall be separate from all other accounts maintained
by Operator, and Operator shall not commingle in such accounts funds derived
from any source other than the operation of the Retirement Community without
prior consent of Owner. Reasonable petty cash funds shall be maintained at the
Retirement Community.
B. All Operating Expenses shall be paid by Operator and Operator shall
have the right to apply Gross Revenues or Working Capital provided by Owner
pursuant to Section 7.01 for such purpose. Operator shall not be required to
make any payment of amounts that are not Operating Expenses except out of funds
provided by Owner.
SECTION 9.03 ANNUAL OPERATING PROJECTION
A. Forty-five (45) Days prior to the beginning of each Fiscal Year,
Operator shall submit to Owner a projection (the "Annual Operating Projection")
of the estimated financial results of the operation of the Retirement Community
during the next Fiscal Year. Such projection shall project the estimated Gross
Revenues, Operating Expenses, and Operating Profit for the forthcoming Fiscal
Year for the Retirement Community, taking into account the Retirement
Community's market area. In preparing the Annual Operating Projection for each
Fiscal Year, Operator's goal will be the maximization of the long-term Operating
Profit of the Retirement Community, in keeping with the Marriott Standards,
Legal Requirements, and the general standards of the retirement industry for
similar quality-tier properties. If there are material items in any given
Annual Operating Projection which have been budgeted at significantly different
amounts from the amounts actually experienced (or projected) for the same items
in the preceding Fiscal Year, Operator agrees to take reasonable steps to ensure
that, at Owner's request, qualified personnel from Operator's staff are
available to explain these differences to Owner. A meeting (or meetings) for
such purpose shall be held, at Owner's request, within a reasonable period of
time after the submission to Owner of the preliminary draft of the Annual
Operating Projection. Operator shall consult with Owner with respect to the
Annual Operating Projection and shall at all times give good faith consideration
to Owner's suggestion regarding the same, but shall not be required to obtain
Owner's approval thereof, except that Owner shall have the right to approve the
Annual Operating Projection, which approval shall not be unreasonably delayed or
denied, in the event that Owner's Priority was not paid for the prior Fiscal
Year or is not forecasted to be reached in the current Fiscal Year or is not
forecasted to be reached in the Annual Operating Projection for the following
Fiscal Year that has been submitted to Owner.
B. If Owner's approval of the Annual Operating Projection is required
pursuant to Section 9.03A and if Owner fails to approve the Annual Operating
Projection prepared by Operator pursuant to Section 9.03A prior to the first Day
of the Fiscal Year in question, Operator shall commence the operations of the
Retirement Community for said Fiscal Year, and continue such operations until
Owner's approval is obtained, under a provisional Annual Operating Projection
which shall consist of the actual financial results of the immediately preceding
Fiscal Year, with projected Operating Expenses adjusted by the CPI, and with
further reasonable adjustments as necessary to comply with any Legal
Requirements or respond to known cost
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increases or any extraordinary circumstances that Operator has good reason to
anticipate in the subject Fiscal Year.
C. Operator shall use its best efforts to adhere to the Annual Operating
Projection. It is understood, however, that the Annual Operating Projection is
only a projection by Operator of estimated results and that various
circumstances such as, but not limited to, the costs of labor, material,
services and supplies, casualty, operation of law, or economic and market
conditions may make achievement of the Annual Operating Projection impracticable
or not obtainable. Accordingly, Operator shall be under no obligation to
achieve any of the results shown in the Annual Operating Projection, and
Operator shall be entitled to depart therefrom due to such circumstances,
provided that nothing herein shall be deemed to authorize Operator to take any
action prohibited by this Agreement to reduce Operator's other obligations
hereunder.
D. Operator shall notify Owner of any significant variations from the
Annual Operating Projection promptly after Operator learns of the same, but in
not event later than the date on which Operator is required to give Owner the
Interim Report covering the period in which such variation occurs. Any such
notice shall set forth in reasonable detail the nature, extent and, if known by
Operator, the cause of such variation, and recommendations of appropriate
actions, either to correct the variation or to prevent or minimize its
occurrence or effect. Owner and Operator shall, at Owner's request, meet to
review such variations and discuss appropriate action with respect thereto.
SECTION 9.04 OPERATING LOSSES
Owner shall be solely responsible for any Operating Losses.
ARTICLE 10
PROPRIETARY MARKS; TRADEMARK LICENSE; INTELLECTUAL PROPERTY
SECTION 10.01 PROPRIETARY MARKS
During the term of this Agreement, the Retirement Community shall be known
as a Marriott Retirement Community, with such additional identification as may
be necessary and agreed to by Owner and Operator to provide local
identification. If the name of the Marriott Retirement Community System is
changed, Operator shall have the right to change the name of the Retirement
Community to conform thereto, provided, however, that the word "Marriott" shall
be a part of any such new or revised name. Any incremental costs associated
with implementing such name change shall be borne by Operator and will not be an
Operating Expense. It shall constitute an Event of Default under this Agreement
if Operator shall cease to use, or to have the right to use, the word "Marriott"
in connection with the operation and marketing of the Retirement Community, and
in such event Owner shall be entitled to all rights and remedies as may be set
forth in Article 16, including without limitation the right to terminate this
Agreement. The Proprietary Marks shall in all events remain the exclusive
property of Operator, and nothing contained herein shall confer on Owner the
right to use the Proprietary Marks. Except as
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OPERATING AGREEMENT PAGE 45
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provided in Section 10.03, upon Termination, any use of or right to use the
Proprietary Marks by Owner shall cease forthwith and Owner shall promptly remove
from the Retirement Community any signs or similar items which contain the
Proprietary Marks, provided that Operator shall bear the cost of removal if such
Termination was pursuant to Article 16. The right to use such Proprietary Marks
belongs exclusively to Operator, and the use thereof inures to the benefit of
Operator whether or not the same are registered and regardless of the source of
the same.
SECTION 10.02 TRADEMARK LICENSE
In consideration of the rights granted to Operator in this Operating
Agreement, Operator grants to Owner a non-exclusive right and license,
"Trademark License", to use the "Forum" mark solely as part of the name of the
Retirement Community as an identifier for the term of this Operating Agreement.
Owner is not permitted to use the "Forum" mark in connection with the
identification or operation of any other business or property, or at any other
location, except as may otherwise be provided in other Operating Agreements
between Operator and Owner. Owner acknowledges and agrees that Operator is the
owner of all right, title and interest in and to the "Forum" mark and the
goodwill associated with and symbolized by that mark, the Owner's use of the
"Forum" mark pursuant to this Trademark License shall not give Owner any
ownership, apart from this Trademark License, to the "Forum" mark, and that all
goodwill arising from Owner's use of the "Forum" mark shall inure solely to
Operator's benefit.
This Trademark License shall immediately terminate (but subject to the
provisions of Section 4.02E) upon termination or expiration of this Operating
Agreement.
SECTION 10.03 PURCHASE OF INVENTORIES AND FIXED ASSET SUPPLIES
Upon Termination, Operator shall have the option, to be exercised within
thirty (30) Days after Termination, to purchase, at their then book value, any
items of the Retirement Community's Inventories and Fixed Asset Supplies as may
be marked with the Proprietary Marks subject to Section 4.02E. In the event
Operator does not exercise such option, Owner agrees that it will use any such
items not so purchased exclusively in connection with the Retirement Community
until they are consumed.
SECTION 10.04 COMPUTER SOFTWARE AND EQUIPMENT
A. All Software is and shall remain the exclusive property of Operator or
one of its Affiliates (or the licensor of such Software, as the case may be),
and Owner shall have no right to use, or to copy, any Software.
B. Upon Termination, Operator shall have the right to remove from the
Retirement Community, without compensation to Owner, all Software. Furthermore,
upon Termination, Operator shall be entitled to remove from the Retirement
Community any computer equipment which is utilized as part of a centralized
operations control or property management system of Operator or is otherwise
considered proprietary by Operator, or (ii) any other computer equipment
utilized as part of a centralized system that is owned by Operator or a third
party other
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OPERATING AGREEMENT PAGE 46
<PAGE>
than Owner. If any of such removed computer equipment is owned by Owner,
Operator shall reimburse Owner for the book value of such equipment and shall
repair any damage caused by the removal of such computer equipment.
C. Upon Termination, Operator shall have the right to remove from the
Retirement Community without compensation to Owner, any computer software
(including upgrades and replacements) owned or licensed by Operator, or any of
its Affiliates.
SECTION 10.05 INTELLECTUAL PROPERTY
All Intellectual Property shall at all times be proprietary to Operator or
its Affiliates, and shall be the exclusive property of Operator or its
Affiliates. During the Term of this Agreement, Operator shall be entitled to
take all reasonable steps to ensure that the Intellectual Property remains
confidential and is not disclosed to anyone other than Operator's employees at
the Retirement Community. Upon Termination, all Intellectual Property shall be
removed from the Retirement Community by Operator, without compensation to
Owner.
SECTION 10.06 BREACH OF COVENANT
Operator and/or its affiliated companies shall be entitled, in case of any
breach of the covenants of Article 10 by Owner or others claiming through it, to
injunctive relief and to any other right or remedy available at law. Article 10
shall survive Termination.
ARTICLE 11
POSSESSION AND USE OF RETIREMENT COMMUNITY
SECTION 11.01 QUIET ENJOYMENT
Owner covenants that, so long as Owner has not terminated this Agreement by
reason of (i) an Event of Default by Operator under Article 16 of this
Agreement; or (ii) the exercise by Owner of any right of Owner to terminate this
Agreement under any other Section of this Agreement, Operator shall quietly
hold, occupy and enjoy the Retirement Community throughout the Term hereof free
from hindrance or ejection by Owner or other party claiming under, through or by
right of Owner (except as may be otherwise set forth in Section 6.04). Owner
agrees to pay and discharge any payments and charges and, at its expense, to
prosecute all appropriate actions, judicial or otherwise, necessary to assure
such free and quiet occupation. Nothing set forth in the preceding sentence,
however, shall be deemed to create a recourse obligation by Owner to pay any
payment or charge pursuant to a contract which is non-recourse to Owner.
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OPERATING AGREEMENT PAGE 47
<PAGE>
SECTION 11.02 USE
A. Operator shall use the Retirement Community solely for the operation of
a Retirement Community pursuant to the Marriott Standards and for all activities
in connection therewith which are customary and usual to such an operation.
B. Operator shall comply with and abide by all Legal Requirements
pertaining to the operation of the Retirement Community, provided that: (i) all
costs and expenses (other than those which are specifically described in clauses
(ii), (iii) or (iv) of this Section 11.02B) of such compliance shall be paid
from Gross Revenues as Operating Expenses; (ii) all costs and expenses of
compliance with Environmental Laws shall be paid as set forth in Section 19.09;
(iii) all costs and expenses of compliance with the Legal Requirements which are
described in Section 8.03A shall be paid as set forth in Section 8.03;
(iv) certain costs and expenses are to be borne by Operator and not paid as
Operating Expenses, as and to the extent set forth in Section 2.03B; and
(v) Operator shall have the right, but not the obligation, in its reasonable
discretion, to contest or oppose, by appropriate proceedings, any such Legal
Requirements (provided that the consent of Owner, not to be unreasonably
withheld, shall be obtained prior to instituting any such proceedings which
involve Owner's ownership interest in the Retirement Community in a material
manner); the reasonable expenses of any such contest shall be paid from Gross
Revenues as Operating Expenses.
SECTION 11.03 CENTRAL ADMINISTRATIVE SERVICES
A. Operator will, commencing with the Effective Date and thereafter during
the Term of this Agreement, cause to be furnished to the Retirement Community
certain central administrative services ("Central Administrative Services")
which are furnished generally on a central or regional basis to other Retirement
Communities in the Marriott Retirement Community System and which benefit each
retirement community as a participant in the Marriott Retirement Community
System. Central Administrative Services shall include: marketing and public
relations services; human resources program development; information systems
support and development; centralized computer payroll and accounting services.
In lieu of reimbursement to Operator for any of such Central Administrative
Services, Operator shall be paid, as an Operating Expense, the amount (the
"Central Administrative Services Fee") set forth in Section 11.03B, and none of
the costs incurred by Operator in providing any Central Administrative Service
shall be treated as an Operating Expense. The Central Administrative Services
Fee shall be paid to Operator at the end of each Accounting Period and shall be
based on the Gross Revenues earned during the previous Accounting Period,
subject to final adjustment based upon the results for the entire Fiscal Year.
B. Subject to the last paragraph in the definition of Operating Expenses,
the Central Administrative Services Fee shall be equal to (i) zero percent (0%)
of Gross Revenues for the first thirteen (13) Accounting Periods following the
Effective Date, and (ii) two percent (2%) of Gross Revenues thereafter for the
remainder of the Term.
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OPERATING AGREEMENT PAGE 48
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SECTION 11.04 OWNER'S RIGHT TO INSPECT
Owner or its agents shall have access to the Retirement Community at any
and all reasonable times for the purpose of inspection or showing the Retirement
Community to prospective purchasers, investors, tenants, or mortgagees.
SECTION 11.05 INDEMNITY
A. Operator shall indemnify and hold harmless Owner (and any officer,
director, employee, advisor, partner or shareholder of Owner) in respect of,
and, at Owner's request, shall defend any action, cause of action, suit, debt,
cost, expense (including without limitation reasonable attorneys' fees), claim
or demand whatsoever brought or asserted by any third person whomsoever, at law
or in equity, arising by reason of: (i) liabilities stemming from general
corporate matters of Operator or its Affiliates, to the extent the same are not
directly and primarily related to the Retirement Community; (ii) infringement
and other claims relating to the Proprietary Marks; (iii) if Operator fails to
maintain insurance coverage that it is required to maintain pursuant to this
Agreement, the excess of the amount of any liability or loss that would have
been covered over the amount of any applicable deductible; and (iv) the bad
faith or willful misconduct of Operator or its Affiliates, or any of their
employees, servants or agents or other persons for whom they are responsible,
result in a claim for bodily injury, death or property damage occurring on, in
or in conjunction with the business of the Retirement Community, to the extent
that such claim exceeds the insurance proceeds (including Retirement Community
Retentions) which are available to pay such claim.
B. If any claim, action or proceeding is made or brought against Owner,
against which claim, action or proceeding Operator shall be obligated to
indemnify pursuant to the terms of this Agreement, then, upon demand by Owner,
Operator, at its sole cost and expense, shall resist or defend such claim,
action or proceeding (in Owner's name, if necessary), using such attorneys as
Owner shall approve, which approval shall not be unreasonably withheld. If, in
Owner's reasonable opinion, (i) there exists a conflict of interest which would
make it inadvisable to be represented by counsel for Operator, or (ii) there are
legal defenses available to Operator that are different from or inconsistent
with those available to Owner, or (iii) there are claims at issue which are not
covered by Operator's insurance, Owner shall be entitled to retain its own
attorneys, and Operator shall pay the reasonable fees and disbursements of such
attorneys.
C. Matters with respect to which Operator has specifically agreed to
indemnify Owner under other provisions of this Agreement are to be treated
exclusively under such other provisions and not under this Section 11.05.
D. Payments made by Operator pursuant to this Section 11.05 shall be from
Operator's own funds and shall not constitute Operating Expenses.
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ARTICLE 12
INSURANCE
SECTION 12.01 INTERIM INSURANCE
[Intentionally omitted]
SECTION 12.02 PROPERTY AND OPERATIONAL INSURANCE
Operator shall, commencing with the Effective Date and thereafter during
the Term of this Agreement, procure and maintain, either with insurance
companies of recognized responsibility or by legally qualifying itself as a self
insurer, a minimum of the following insurance:
A. Property insurance on the Retirement Community and contents against
loss or damage by fire, lightning and all other risks covered by the usual
extended coverage endorsement, all in an amount not less than one hundred
percent (100%) of the replacement cost thereof (excluding the cost of
foundations and excavations);
B. Boiler and machinery insurance against loss or damage from explosion of
boilers or pressure vessels to the extent applicable to the Retirement
Community;
C. Business interruption insurance covering loss of profits and
necessary continuing expenses for interruptions caused by any occurrence covered
by the insurance referred to in Section 12.02 A and B, which shall be of a type
and in such amounts (but such coverage shall in no event be for less than one
(1) year) as are generally established by Operator at similar retirement
communities it owns, leases or manages under the Marriott name in the United
States;
D. General liability insurance against claims for bodily injury, death
or property damage occurring on, in, or in conjunction with the business of the
Retirement Community, and automobile liability insurance on vehicles operated in
conjunction with the Retirement Community, with a combined single limit for each
occurrence of not less than One Hundred Million Dollars ($100,000,000);
representatives of Operator and Owner shall meet, at Owner's request, at
intervals of approximately once every five (5) years, to review the adequacy of
such limit;
E. Employment Practices Liability Insurance, and Workers' compensation
and employer's liability insurance as may be required under applicable laws
covering all of Operator's employees at the Retirement Community;
F. Fidelity bonds, with reasonable limits to be determined by Operator,
covering its employees in job classifications normally bonded in other similar
retirement communities it leases or manages under the Marriott name in the
United States or as otherwise required by law, and comprehensive crime insurance
to the extent Operator and Owner mutually agree it is necessary for the
Retirement Community; and
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OPERATING AGREEMENT PAGE 50
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G. Such other insurance in amounts as Operator and Owner, in their
reasonable judgment, mutually deem advisable for protection against claims,
liabilities and losses arising out of or connected with the operation of the
Retirement Community.
SECTION 12.03 GENERAL INSURANCE PROVISIONS
A. All insurance described in Section 12.02 may be obtained by Operator
by endorsement or equivalent means under its blanket insurance policies,
provided that such blanket policies substantially fulfill the requirements
specified herein. Upon the request of either Owner or any Qualified Lender,
representatives of the requesting party shall be entitled to examine, at
Operator's corporate headquarters, all insurance policies maintained by Operator
regarding the Retirement Community.
B. Operator may self insure or otherwise retain such risks or portions
thereof as it does with respect to other similar retirement communities it owns,
leases or manages under the Marriott name in the United States.
C. All policies of insurance required under Section 12.02 shall be carried
in the name of Operator. The policies required under Sections 12.02A, B, C and D
shall include the Owner as an additional insured. Upon notice by the Owner,
Operator shall also have the policies required under Sections 12.02A, B, C and D
include any Qualified Lender as an additional insured. Any property losses
thereunder shall be payable to the respective parties as their interests may
appear. Any Mortgage on the Retirement Community shall contain provisions to the
effect that proceeds of the insurance policies required to be carried under
Section 12.02A and B shall, with respect to any casualty involving less than
twenty-five percent (25%) of the replacement cost of the Retirement Community,
be available for repair and restoration of the Retirement Community. However,
any Qualified Lender shall be entitled to impose reasonable conditions on the
disbursement of insurance proceeds for repair and/or restoration of the
Retirement Community that are imposed solely for the purpose of assuring that
such proceeds will be properly applied for the purpose of repair and restoration
or that the amount of such proceeds (together with any other funds that Owner
agrees to make available) is sufficient at all times to complete such repair and
restoration.
D. Operator shall deliver to the Owner and to each Qualified Lender
requested by Owner certificates of insurance with respect to all policies so
procured and, in the case of insurance policies about to expire, shall deliver
certificates with respect to the renewal thereof.
E. All certificates of insurance provided for under Article XII shall, to
the extent obtainable, state that the insurance shall not be canceled or
materially changed without at least thirty (30) Days' prior written notice to
the certification holder.
F. The term "Retirement Community Retention" shall mean the amount of any
loss or reserve under Operator's blanket insurance or self-insurance programs
which is allocated to the Retirement Community, not to exceed the higher of (a)
the maximum per occurrence limit established for similar retirement communities
participating in such programs, or (b) the
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insurance policy deductible on any loss which may fall within high hazard
classifications as mandated by the insurer (e.g., earthquake, flood, windstorm
on coastal properties, etc.). If the Retirement Community is not a participant
under Operator's blanket insurance or self-insurance programs, "Retirement
Community Retention" shall mean the amount of any loss or reserve allocated to
the Retirement Community, not to exceed the insurance policy deductible.
SECTION 12.04 COST AND EXPENSE
Insurance premiums and any other costs or expenses with respect to the
insurance or self-insurance required under Section 12.02, including any
Retirement Community Retention, shall be paid from Gross Revenues as Operating
Expenses. To the extent that such costs or expenses include reimbursement by
Operator of its own costs or expenses, or those of one of its Affiliates, such
costs or expenses shall be generally competitive (as calculated over the Term of
this Agreement) with costs and expenses of non-affiliated entities providing
similar services. Such premiums and costs shall be allocated on an equitable
basis to the retirement communities participating under Operator's blanket
insurance or self-insurance programs. Any reserves, losses, costs or expenses
which are uninsured (unless required to be insured under Section 12.02) shall be
treated as a cost of insurance and shall be Operating Expenses. Upon
Termination, an escrow fund in an amount reasonably acceptable to Operator shall
be established from Gross Revenues (or, if Gross Revenues are not sufficient,
with funds provided by Owner) to cover the amount of any Retirement Community
Retention and all other costs which will eventually have to be paid by either
Owner or Operator with respect to pending or contingent claims, including those
which arise after Termination for causes arising during the Term of this
Agreement. Upon the final disposition of all such pending or contingent claims,
any unexpended funds remaining in such escrow shall be paid to Owner, and
Operating Profit for the final Fiscal Year shall be recalculated as a result of
any claims paid and Operator and Owner shall each pay the other such amounts as
may be required as a result of such adjustment.
SECTION 12.05 OWNER'S OPTION TO OBTAIN CERTAIN INSURANCE
Owner may, at its option, by written notice to Operator which shall be
delivered no later than ninety (90) Days prior to the natural expiration of the
insurance policies which Operator has obtained pursuant to Section 12.02 A, B
and C, procure and maintain the insurance specified in Section 12.02A, B and C
(in which case Operator shall allow such policies obtained by it under
Section 12.02A, B, and C to expire), subject to the following terms and
conditions:
A. All such policies of insurance shall be carried in the name of Owner,
with Operator named as an additional insured. Any property losses thereunder
shall be payable to the respective parties as their interests may appear. The
documentation with respect to each Secured Loan shall contain provisions to the
effect that proceeds of the insurance policies required to be carried under
Section 12.02A and B shall be available for repair and restoration of the
Retirement Community, to the extent required pursuant to Section 12.03C.
However, any Holder of such Secured Loan shall be entitled to impose reasonable
conditions on the disbursement of insurance proceeds for the repair and/or
restoration of the Retirement Community, including a
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demonstration by Owner and/or Operator that the amount of such proceeds
(together with other funds Owner agrees to make available) is sufficient for
such purpose.
B. Owner shall deliver to Operator certificates of insurance with respect
to all policies so procured and, in the case of insurance policies about to
expire, shall deliver certificates with respect to the renewal thereof.
C. All such certificates of insurance shall, to the extent obtainable,
state that the insurance shall not be canceled or materially changed without at
least thirty (30) Days' prior written notice to the certificate holder.
D. Premiums for such insurance coverage shall be treated as Operating
Expenses, provided that if the cost of such insurance procured by Owner exceeds
the cost of Operator's comparable coverage by more than ten percent (10%), all
such excess costs shall be the sole responsibility of Owner and shall not be an
Operating Expense.
E. Should Owner exercise its option to procure the insurance described
in this Section 12.05, Owner hereby waives its rights of recovery from Operator
or any of its Affiliates (and their respective directors, officers,
shareholders, agents and employees) for loss or damage to the Retirement
Community, and any resultant interruption of business.
F. Should Owner exercise its right to obtain the insurance described in
this Section 12.05, Owner acknowledges that Operator is under no obligation to
thereafter include the Retirement Community in its blanket insurance program
(with respect to the coverage described in Section 12.02A, B and C) for the
balance of the Term of this Agreement. However, upon a Sale of the Retirement
Community, a successor Owner shall have the right, notwithstanding the fact that
the previous Owner may have obtained insurance in accordance with this
Section 12.05, to have the Retirement Community included in Operator's blanket
insurance program (provided that the Retirement Community, as of that point in
time, satisfies the applicable criteria for admission to such program, as
established by the program's insurance carriers) by making a written request to
Operator for such inclusion not later than thirty (30) Days after the date on
which such party becomes the Owner.
G. All insurance procured by Owner hereunder shall be obtained from
reputable insurance companies reasonably acceptable to Operator.
ARTICLE 13
TAXES
SECTION 13.01 REAL ESTATE AND PERSONAL PROPERTY TAXES
A. Except as specifically set forth in subsection B below, all Impositions
which accrue during the Term of this Agreement (or are properly allocable to
such Term under GAAP) shall be paid by Operator from Gross Revenues, as an
Operating Expense, before any fine,
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penalty, or interest is added thereto or lien placed upon the Retirement
Community or the Agreement, unless payment thereof is stayed. Owner shall within
five (5) business Days after the receipt of any invoice, bill, assessment,
notice or other correspondence relating to any Imposition, furnish Operator with
a copy thereof. Operator shall, within the earlier of thirty (30) Days of
payment or five (5) business Days following written demand by Owner, furnish
Owner with copies of official tax bills and assessments which Operator has
received, and evidence of payment or contest thereof. Either Owner or Operator
(in which case each party agrees to sign the required applications and otherwise
cooperate with the other party in expediting the matter) may initiate
proceedings to contest any Imposition, and all reasonable costs of any
negotiations or proceedings with respect to any such contest shall be paid from
Gross Revenues and shall be an Operating Expense in determining Operating
Profit; provided, however, that neither party shall have the right to expend in
excess of Five Thousand Dollars ($5,000) (to be adjusted by the CPI) with
respect to any such negotiations or proceedings without the consent of the other
party.
B. The word "Impositions", as used in this Agreement, shall not include
any franchise, corporate, estate, inheritance, succession, capital levy or
transfer tax imposed on Owner, or any income tax imposed on any income of Owner
(including distributions to Owner pursuant to Section 9.01 hereof), all of which
shall be paid solely by Owner, not from Gross Revenues nor from the FF&E
Reserve.
C. Owner shall have the right to require Operator to establish an escrow
account (with either any Qualified Lender or another entity reasonably
acceptable to both Owner and Operator) from which Impositions will be paid.
Payments into such escrow account will be Operating Expenses. Any interest
which accrues on amounts deposited in such escrow account shall not constitute
Gross Revenue and be added to the balance in such escrow account and used to pay
Impositions.
ARTICLE 14
RETIREMENT COMMUNITY EMPLOYEES
SECTION 14.01 EMPLOYEES
A. All personnel employed at the Retirement Community shall be the
employees of Operator. Subject to the provisions of this Agreement, Operator
shall have absolute discretion to hire, promote, supervise, direct, train and
discharge all employees at the Retirement Community, to fix their compensation
and, generally, establish and maintain all policies relating to employment;
provided, however, that (i) all of the foregoing shall be in accordance with the
Marriott Standards, and (ii) Operator shall not enter into any written
employment agreements with any person which purport to bind the Owner and/or
purport to be effective regardless of a Termination, without obtaining Owner's
prior consent which may be withheld in Owner's sole discretion. Operator and
Owner shall each comply with all Legal Requirements regarding labor relations;
if either Operator or Owner shall be required, pursuant to any such Legal
Requirement, to recognize a labor union or to enter into collective bargaining
with a labor union, the party so required shall promptly notify the other party
pursuant to Section 19.08. Operator and Owner
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shall comply with all requirements under any collective bargaining agreements
binding upon each of them during the Term. All costs and expenses of such
compliance shall be Operating Expenses.
B. No person shall be given gratuitous accommodations or services without
prior joint approval of Owner and Operator except in accordance with usual
practices of the Operator with respect to its employees visiting the Retirement
Community in the normal course of business.
C. Any proposed settlement of any Employee Claim where the amount proposed
to be offered to the employee by Operator is in excess of the Settlement
Threshold Amount shall be jointly approved by Operator and Owner. In addition,
Operator shall give Owner a written notice (pursuant to Section 19.08) of any
settlement of any Employee Claim where the settlement amount is below the
Settlement Threshold Amount, but is in excess of Fifty Thousand Dollars
($50,000.00) (said dollar amount to be adjusted by the CPI). Any dispute
between Owner and Operator as to whether Operator's settlement recommendation is
reasonable, where such proposed settlement is in excess of the Settlement
Threshold Amount, shall be resolved by arbitration under Section 19.11 hereof;
provided that Operator shall have the right to settle any Employee Claim (prior
to the arbitration on the reasonableness of the settlement, as described in this
sentence) based on Operator's recommendation, which shall be Operator's
reasonable estimate, in good faith, by using: (i) funds from Gross Revenues (as
an Operating Expense) up to the amount of Owner's settlement recommendation,
which shall be Owner's reasonable estimate, in good faith, and (ii) Operator's
own funds to the extent Operator's recommendation exceeds the amount described
in subparagraph (i) above. Following the settlement of such Employee Claim, the
parties will arbitrate under Section 19.11 the issue of whether Operator's
settlement recommendation was reasonable under the circumstances. If the
arbitrators decide that Operator's recommendation was reasonable, Operator shall
be entitled to reimburse itself from Gross Revenues (as an Operating Expense) in
the amount of the funds advanced under subparagraph (ii) above, together with
accrued interest thereon at the Prime Rate. If the arbitrators decide that
Operator's settlement recommendation was not reasonable, then Operator shall not
be entitled to any reimbursement of the amounts advanced by it under
subparagraph (ii) above, nor to accrued interest thereon.
D. Operator shall pay from its own funds, and not from Gross Revenues, any
Employee Claim which is not covered by insurance as set forth in this Agreement,
where the basis of such Employee Claim is conduct by Operator which (i) is a
substantial violation of the standards of responsible labor relations as
generally practiced by prudent owners or operators of similar retirement
community operations in the quality tier of retirement communities (but if the
quality tier then does not include twenty (20) or more communities, then the
comparison shall be against all similar retirement community operations) in the
state in which the Retirement Community is situated, and (ii) is not the
isolated act of individual employees, but rather is a direct result of corporate
policies of Operator which either encourage or fail to discourage such conduct.
In addition, Operator shall indemnify, defend and hold harmless Owner from and
against any fines or judgments arising out of such conduct, and all Litigation
expenses (including reasonable attorneys' fees and expenses) incurred in
connection therewith. Any dispute between
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Owner and Operator as to whether or not certain conduct by Operator is not in
accordance with the aforesaid standards shall be resolved by arbitration under
Section 19.11 hereof. It is the intention of the parties that the arbitration
proceedings described in the preceding sentence shall be conducted independently
of any arbitration proceedings with respect to such Employee Claim pursuant to
the applicable union contract and/or pursuant to Section 14.01C of this
Agreement.
E. With respect to all Litigation or arbitration involving Employee Claims
in which both Operator and Owner are involved as actual or potential defendants,
Operator shall have exclusive and complete responsibility (subject to the rights
of Owner to approve certain settlements, as set forth in Section 14.01C) for the
resolution of such Employee Claims. In the event that any Employee Claim is
made against Owner, but not against Operator, Owner shall give notice to
Operator of the Employee Claim in a timely manner so as to avoid any prejudice
to the defense of the Employee Claim, provided that Operator shall in all events
be so notified within twenty (20) Days after the date such Employee Claim is
made against Owner. Operator will thereafter assume exclusive and complete
responsibility for the resolution of such Employee Claim.
F. It is the understanding of the parties that payments made in the normal
course of business to any union pension fund, on behalf of the unionized
employees (if any) at the Retirement Community, shall be paid from Gross
Revenues as Operating Expenses.
G. At Termination, other than by reason of a Default of Operator
hereunder, an escrow fund shall be established from Gross Revenues (or, if Gross
Revenues or are not sufficient, with funds provided by Owner) to reimburse
Operator for all costs and expenses reasonably anticipated to be incurred by
Operator such as reasonable transfer costs, or severance pay, unemployment
compensation and other employee liability costs arising out of either the
transfer or termination of employment of Operator's employees at the Retirement
Community, as the case may be. Upon the final payment of such costs, any
unexpended funds remaining in such escrow (i) shall be paid to Owner if Owner or
the FF&E Reserve had provided such funds or (ii) if such funds had been paid
from Gross Revenues, shall be distributed between Owner and Operator in the same
manner as such funds would have been distributed if such funds had been included
in Operating Profit for the Fiscal Year in which such Termination occurs, and
Operating Profit for the final Fiscal Year shall be recalculated as a result of
payment of such costs, and Operator and Owner shall each pay to the other such
amounts as may be required as a result of such adjustment.
H. Operator (and not Owner) shall have the exclusive power to hire,
dismiss or transfer the general manager of the Retirement Community, provided,
however, that Operator shall keep Owner reasonably informed and shall give Owner
the opportunity to participate in the process with respect to any such hiring,
dismissal or transfer, as follows:
1. Owner shall be given a reasonable prior notice, circumstances
permitting, of any proposed hiring, dismissal or transfer of the general
manager.
2. Prior to any dismissal or transfer of the general manager, Owner
shall be notified and Owner shall be advised of the reason for such proposed
dismissal or transfer of the
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general manager and of the qualifications of any proposed replacement manager.
Owner shall be given a reasonable opportunity to interview the proposed
replacement general manager. Operator shall consider in good faith the opinions
and requests of Owner with respect to such matters and, if Operator elects not
to implement any such request, Operator shall explain its decision to Owner in
reasonable detail.
ARTICLE 15
DAMAGE, CONDEMNATION AND FORCE MAJEURE
SECTION 15.01 DAMAGE AND REPAIR
If, during the Term hereof, the Retirement Community is damaged or
destroyed by fire, casualty or other cause, Owner shall, at its cost and expense
and with all reasonable diligence, repair or replace the damaged or destroyed
portion of the Retirement Community substantially to the same condition as
existed previously. Proceeds from the insurance described in Section 12.01
shall be applied to such repairs or replacements. However, Owner shall not be
obligated to so repair or replace the damaged or destroyed portion of the
Retirement Community if one or more of the following is true: (i) the
Retirement Community is so badly damaged or destroyed that it cannot reasonably
be repaired or replaced within one (1) year of either the date of the casualty
or such later date as is covered by business interruption insurance described
under Article 12; (ii) the loss, if uninsured, is greater than One Hundred
Thousand Dollars ($100,000.00); or (iii) the cost of the repair and restoration
work exceeds Five Million Dollars ($5,000,000) and the remainder of the Term is
less than ten (10) years. If Owner elects not to repair or replace the damaged
portion of the Retirement Community for one or more of the foregoing reasons, it
shall so notify Operator by written notice within sixty (60) Days after the date
of the casualty. If Owner does not so notify Operator, Owner shall promptly
commence and complete the repairing, rebuilding or replacement so that the
Retirement Community shall be substantially the same as it was prior to such
damage or destruction. If Owner is not obligated to so repair or replace the
damaged or destroyed portion of the Retirement Community as aforesaid and elects
not to so repair or replace, either party may terminate this Agreement upon
sixty (60) Days notice.
SECTION 15.02 CONDEMNATION
A. In the event all or substantially all of the Retirement Community shall
be taken in any eminent domain, condemnation, compulsory acquisition, or similar
proceeding by any competent authority for any public or quasi-public use or
purpose, or in the event a portion of the Retirement Community shall be so
taken, but the result is that it is unreasonable to continue to operate the
Retirement Community, this Agreement shall terminate effective as of the date of
such taking or similar proceeding.
B. In the event a portion of the Retirement Community shall be taken by
the events described in Section 15.02A, or the entire Retirement Community is
affected but on a temporary basis, and the result is not to make it unreasonable
to continue to operate the Retirement
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Community, this Agreement shall not terminate. However, so much of any award for
any such partial taking or condemnation as shall be necessary to render the
Retirement Community equivalent to its condition prior to such event shall be
used for such purpose; the balance of such award, if any, shall be fairly and
equitably apportioned between Owner and Operator in accordance with their
respective interests.
C. In the event of any proceeding described in Section 15.02 A or B and
Owner and Operator cannot agree on a fair and equitable apportionment of any
such award, the dispute shall be decided in accordance with Section 19.11. For
this purpose, any award or compensation received by any Holder shall be deemed
to be an award or compensation received by Owner.
SECTION 15.03 FORCE MAJEURE
A. The expiration, withdrawal or revocation of any License which is
material to the operation of the Retirement Community in accordance with the
Marriott Standards, where such expiration, withdrawal or revocation: (i) is not
due to the Default of either Operator or Owner; and (ii) is not otherwise within
the reasonable control of either Operator or Owner, shall not be an Event of
Default under Article 16 of this Agreement. Operator and Owner shall each, in
good faith, use all commercially reasonable efforts (including the diligent
pursuit of all available appeals), during the period of one hundred twenty (120)
Days after the date of such withdrawal or revocation, to have such License
reinstated. If, notwithstanding such efforts, such License is not reinstated
prior to the expiration of the aforesaid period of one hundred twenty (120)
Days, either Owner or Operator shall have the right, at its option, to terminate
this Agreement upon no less than sixty (60) Days' notice to the other party;
provided, however, that the terminating party must deliver such notice of
Termination to the other party by no later than ninety (90) Days after the
expiration of such one hundred twenty (120) Day period; and provided further,
that no such Termination shall be effective if, prior to the effective date of
such Termination, such License is reinstated or such expiration, withdrawal or
revocation of such License is stayed.
B. If an order, judgment or directive by a court or administrative body is
issued, in connection with any Litigation involving Owner, which restricts or
prevents Operator, in a material adverse manner, from operating the Retirement
Community in accordance with the Marriott Standards, and which, in Operator's
reasonable opinion, will have a significant adverse effect upon operations of
the Retirement Community, Operator shall be entitled, at its option, to
terminate this Agreement upon sixty (60) Days' written notice; provided,
however, that Operator shall (if it so elects) deliver such notice of
Termination to Owner by no later than ninety (90) Days after Operator receives
written notice of the issuance of such order, judgment or directive (or, if such
order, judgment or directive is appealed, within ninety (90) Days after Operator
receives written notice of the final disposition of such appeal).
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ARTICLE 16
DEFAULTS
SECTION 16.01 DEFINITION OF "DEFAULT"
Any one or more of the following shall constitute a "Default," to the
extent permitted by applicable law:
A. The commencement by either party of any proceeding under any
bankruptcy, reorganization, readjustment of debt, dissolution or liquidation law
or statute or an assignment for the benefit of creditors or application for the
appointment of a trustee or receiver for a substantial part of its assets or if
a petition is filed against it for any such purpose which petition is not timely
controverted.
B. The consent to an involuntary petition in bankruptcy or the failure to
vacate, within ninety (90) Days from the date of entry thereof, any order
approving any involuntary petition by either party;
C. The entering of an order, judgment or decree by any court of competent
jurisdiction, on the application of a creditor, adjudicating either party as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee, or liquidator of all or a substantial part of
such party's assets, and such order, judgment or decree's continuing to be
unstayed and in effect for any period of ninety (90) Days;
D. Any "Default" which is specifically designated as such under any
provision of this Agreement;
E. The failure of either party to make any payment required to be made in
accordance with the terms of this Agreement, as of the due date which is
specified in this Agreement; and
F. The failure of either party to perform, keep or fulfill any of the
other covenants, undertakings, obligations or conditions set forth in this
Agreement.
SECTION 16.02 DEFINITION OF "EVENT OF DEFAULT"
A. Upon the occurrence of any Default by either party hereto (hereinafter
referred to as the "defaulting party") under Section 16.01A, B, and C, such
Default shall immediately and automatically, without the necessity of any notice
to the defaulting party, be deemed an "Event of Default" under this Agreement.
B. Upon the occurrence of any Default by either party hereto under
Section 16.01E, such Default shall be deemed an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within ten (10)
Business Days after written notice from the non-defaulting party demanding such
cure.
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OPERATING AGREEMENT PAGE 59
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C. Upon the occurrence of any Default by either party hereto under Section
16.01D and F, such Default shall be deemed an "Event of Default" under this
Agreement if the defaulting party fails to cure such Default within thirty (30)
Days after written notice from the non-defaulting party demanding such cure, or
if the Default is such that it cannot reasonably be cured within said thirty
(30) Day period, if the defaulting party fails to commence the cure of such
Default within said thirty (30) Day period or fails to diligently pursue such
efforts to completion.
D. Upon the occurrence of any Default by Operator with respect to its
obligations under Section 2.03A1 resulting in the suspension or revocation of a
material License, such Default shall be deemed an "Event of Default" under this
Agreement if Operator fails to obtain reinstatement of such License, either
(i) within sixty (60) Days after the date of the relevant suspension(s) or
revocation, or (ii) if Operator had received from the appropriate regulatory
authorities at least thirty (30) Days prior written notice of the impending
suspension or revocation, then within thirty (30) Days after the relevant
suspension or revocation.
SECTION 16.03 REMEDIES UPON AN EVENT OF DEFAULT
A. Upon the occurrence of an Event of Default, the non-defaulting party
shall have the right to pursue any one or more of the following courses of
action: (i) in the event of a material breach by the defaulting party of its
obligations under this Agreement, to terminate this Agreement by written notice
to the defaulting party, which Termination shall be effective as of the
effective date which is set forth in said notice, provided that said effective
date shall be at least thirty (30) Days after the date of said notice; provided
that, if the defaulting party is the employer of all or a substantial portion of
the employees at the Retirement Community, the foregoing period of thirty (30)
Days shall be extended to seventy five (75) Days (or such longer period of time
as may be necessary under applicable federal, state or local laws pertaining to
termination of employment); (ii) to institute forthwith any and all proceedings
permitted by law or at equity, including, without limitation, actions for
specific performance and/or damages; and (iii) to avail itself of any one or
more of the other remedies described in this Section 16.03.
B. Upon the occurrence of a Default by either party under the provisions
of Section 16.01E, the amount owed to the non-defaulting party shall accrue
interest, at the Prime Rate, from and after the date on which such payment was
originally due to the non-defaulting party.
C. The rights granted hereunder are intended to be cumulative, and shall
not be in substitution for, but shall be in addition to, any and all rights and
remedies available to the non-defaulting party (including, without limitation,
injunctive relief and damages) by reason of applicable provisions of law or
equity.
SECTION 16.04 OPERATOR'S RIGHT TO SPECIFIC PERFORMANCE FOR OWNER'S WRONGFUL
TERMINATION
Owner hereby acknowledges that (i) Operator has an interest in this
Agreement beyond the fees that Operator will earn pursuant to the provisions of
this Agreement, (ii) the termination
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of this Agreement by Owner when Owner is not entitled to terminate this
Agreement pursuant to the provisions of this Agreement will be injurious to
Operator's business conducted beyond Owner's Retirement Community, and will
damage Operator's Proprietary Marks, (iii) Operator's Proprietary Marks are
unique, Operator's exclusive rights of possession under Section 2.02B are
unique, the Retirement Community is unique and Operator is entitled to an
exclusive license to operate Operator's business at the Retirement Community and
to promote Operator's Proprietary Marks at the Retirement Community, which
license is irrevocable except pursuant to the express provisions of this
Agreement, (iv) it would be impossible to calculate the damages that Operator
would sustain if Owner terminated this Agreement when Owner is not entitled to
terminate this Agreement pursuant to the provisions of this Agreement, and
(v) the remedy of specific performance of Owner's obligations under this
Agreement is fair, equitable and practicable. Accordingly, Owner agrees that
(i) Owner shall not exercise any legal power that it may have to breach this
Agreement by terminating, or purporting to terminate, this Agreement, except
where this Agreement (including without limitation Sections 4.03, 4.04 and
Article 16) expressly permits such termination, and Owner hereby surrenders and
releases any such legal power, and (ii) Owner consents to the issuance by a
court of competent jurisdiction of injunctive relief prohibiting Owner from
terminating, or purporting to terminate, this Agreement or from evicting
Operator from the Retirement Community, except where this Agreement (including
without limitation Sections 4.03, 4.04 and Article 16) expressly permits such
termination, and Owner consents to the grant by a court of competent
jurisdiction of specific performance of the obligations of Owner under this
Agreement. Nothing set forth in this Section 16.04 modifies any right of Owner
to terminate this Agreement as expressly set forth in this Agreement (including
without limitation Sections 4.03, 4.04 and Article 16).
SECTION 16.05 OWNER'S ESTATE
Notwithstanding any other provisions of this Agreement, in the event of any
Event of Default by Owner pursuant to the terms of this Agreement, Operator
shall look only to Owner's estate and interest in the Retirement Community
(which shall, for this purpose, include but not be limited to, (i) amounts
deposited in the FF&E Reserve, and (ii) accounts receivable) for the
satisfaction of a money judgment against Owner resulting from such Event of
Default, and no other property or assets of Owner, or of its partners, officers,
directors, shareholders or principals, shall be subject to levy, execution or
other enforcement procedure for the satisfaction of such judgment. Operator's
right to look to Owner's estate and interests in the Retirement Community for
satisfaction of such a money judgment against Owner shall survive Termination
and shall not be affected by any one or more Sales of the Retirement Community.
Nothing contained in this Section 16.05 shall be deemed to affect or diminish
Operator's remedies under this Article 16 other than money damages against Owner
(including, without limitation, Termination of this Agreement).
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ARTICLE 17
ASSIGNMENT
SECTION 17.01 ASSIGNMENT
A. Operator shall not assign or transfer its interest in this Agreement
without the prior written consent of Owner, such consent to be granted or
withheld in Owner's sole discretion; provided, however, that Operator shall have
the right, without such consent, (but following written notice to Owner), to
(1) assign its interest in this Agreement to any of its Affiliates, and any such
Affiliate shall be deemed to be the Operator for the purposes of this Agreement,
and (2) sublease shops or grant licenses or concessions at the Retirement
Community so long as the terms of any such subleases, licenses or concessions do
not exceed the Term of this Agreement and are otherwise consistent with the
requirements of this Agreement. In the event of such an assignment by Operator
of its interest in this Agreement to an Affiliate, the Operator which is named
in the Preamble to this Agreement: (i) shall automatically be deemed to
guarantee the performance of such Affiliate under this Agreement; (ii) shall, at
the request of Owner, execute a guaranty, in form and substance reasonably
satisfactory to both parties, of the performance of such Affiliate under this
Agreement (provided that the failure of Owner to obtain an executed guaranty
pursuant to this clause (ii) shall not affect the validity or enforceability of
the guaranty which is automatically created pursuant to clause (i); and provided
further, that, when Owner does so receive an executed guaranty pursuant to this
clause (ii), such executed guaranty shall be deemed to have superseded the
guaranty described in clause (i) above); and (iii) shall make available to such
Affiliate, in connection with the performance by such Affiliate under this
Agreement, Operator's skill, personnel, facilities and resources.
B. Owner shall not assign or transfer its interest in this Agreement
other than (i) in connection with a Sale of the Retirement Community which
complies with the provisions of Article 18 hereof, or (ii) as set forth in
Section 17.01C.
C. Nothing contained herein shall prevent (i) the collateral assignment
of this Agreement by Owner as security for any Mortgage which complies with the
provisions of Article 6; or (ii) the transfer of this Agreement in connection
with a merger or consolidation or a sale of all or substantially all of the
assets of either party, provided that (x) if such transfer is by Owner, the
provisions of Article 18 hereof shall, if applicable, be complied with, and
(y) if such transfer is by Operator, such transfer is being done as a part of a
merger or consolidation or a sale, disposition or other conveyance of all or
substantially all of the assets of Operator.
D. In the event either party consents to an assignment of this Agreement
by the other, no further assignment shall be made without the express consent in
writing of such party, unless such assignment may otherwise be made without such
consent pursuant to the terms of this Agreement.
E. An assignment (either voluntarily or by operation of law) by Owner of
its interest in this Agreement shall not relieve Owner from its obligations
under this Agreement which accrued prior to the date of such assignment, but
shall relieve Owner of such obligations accruing
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after such date, if the assignment complies with Section 17.01 and if Operator
has received an assumption agreement executed by the assignee (in form and
substance reasonably satisfactory to Operator) pursuant to which such assignee
assumes all obligations liabilities of Owner accruing under this Agreement from
and after the date of assignment. An assignment (either voluntarily or by
operation of law) by Operator of its interest in this Agreement shall not
relieve Operator from its obligations under this Agreement, unless Owner so
agrees in writing, such agreement to be granted or withheld in Owner's sole
discretion.
F. Subject to the provisions of this Article 17, the terms and
conditions of this Agreement shall inure to the benefit of, and be binding upon,
the respective successors, heirs, legal representatives, or assigns of each of
the parties hereto.
ARTICLE 18
SALE OF THE RETIREMENT COMMUNITY
SECTION 18.01 SALE OF THE RETIREMENT COMMUNITY
A. Owner shall not enter into any Sale of the Retirement Community to any
individual or entity which: (i) does not, in Operator's reasonable judgment,
have sufficient financial resources and liquidity to fulfill Owner's obligations
under this Agreement; (ii) is known in the community as being of bad moral
character, or is in control of or controlled by any one or more persons who have
been convicted of a felony involving turpitude in any state or federal court, or
whose reputation would otherwise result in the cancellation of, or failure to
issue or renew, any License; (iii) is a competitor or significant potential
competitor of Operator (defined below); or (iv) does not accept the full
assignment of the Owner's Liabilities under this Agreement accruing from and
after the date of sale and recognize the continuing presence at, and operation
of, the Retirement Community by Operator pursuant to this Agreement. An
individual or entity shall not be deemed to be in the business of operating
retirement communities in competition with Operator solely by virtue of: (x) the
ownership of such retirement communities, either directly or indirectly through
subsidiaries, affiliates and partnerships; or (y) holding a mortgage or
mortgages secured by one or more retirement communities. Furthermore, the
phrase "a competitor or significant potential competitor of Operator" means any
individual or entity (either directly or through an Affiliate) which
(i) operates or manages (as distinguished from owning) a nursing home, assisted
living facility, home health care agency, retirement community or health care
facility, which, in the aggregate contain more than (a) 1,000 units or beds if
such sale occurs between the Effective Date and the first day of 2003, or
(b) 1,500 units or beds if such sale occurs during 2003 through 2007, or
(c) 2,000 units or beds if such sale occurs on or after January 1, 2008; and
(ii) has a net worth in excess of seventy million dollars ($70,000,000.00).
B. If at the time of a Sale of the Retirement Community, Operator has
certified to Owner that Owner has failed to pay a specific sum that is due and
payable by Owner hereunder, then net proceeds of the Sale, in an amount, as
available, equal to the sum owed shall be placed in escrow pending either
payment or resolution of the dispute. The insufficiency of the net
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proceeds to pay the full amount due and payable shall not affect Owner's right
to consummate such sale of the Retirement Community.
C. Notwithstanding the foregoing, if Owner or an Affiliate of Owner is a
corporation or other entity whose shares are listed on a public stock exchange,
and if a Sale of the Retirement Community occurs as a result of purchases of
such shares, through such public stock exchange, in sufficient quantities to
cause a transfer of the "controlling interest" in Owner (as described in the
definition of "Sale of the Retirement Community"), and if such Sale of the
Retirement Community is not in compliance with the provisions of this
Section 18.01A, Operator shall have the right, at its option, to terminate this
Agreement by written notice to Owner, but such non-compliance with Section
18.01A shall not be an Event of Default nor shall it subject Owner to claims for
damages by Operator pursuant to Article 16.
D. If Owner desires to enter into a Sale of the Retirement Community with
a third party, Owner shall give written notice thereof to Operator, stating the
name of the prospective purchaser. Such notice shall include appropriate
information relating to such prospective purchaser demonstrating compliance with
the provisions of Section 18.01A; if Operator reasonably requests additional
information, Owner shall promptly furnish such information to Operator. Within
thirty (30) Days after the date of receipt of Owner's written notice and such
other information, Operator shall elect, by written notice to Owner, one of the
following alternatives:
1. To consent to such Sale of the Retirement Community and to the
assignment of this Agreement to such purchaser, provided that concurrently with
the finalization thereof the purchaser shall, by appropriate instrument
reasonably satisfactory to Operator, assume all of Owner's obligations hereunder
accruing from and after the date of sale. An executed copy of such assumption
agreement shall be delivered to Operator.
2. If such Sale of the Retirement Community would not comply with the
provisions of Section 18.01A hereof, to terminate this Agreement by written
notice from Operator to Owner. Such notice will set an effective date for such
Termination not earlier than thirty (30) Days, nor more than one hundred twenty
(120) Days, following the date of the giving of such notice. Operator shall
have the right to change such effective date of Termination to coincide with the
date of the finalization of the proposed Sale of Retirement Community. At
Operator's election, said notice of Termination shall not be effective if such
Sale of the Retirement Community is not finalized. If such Termination by
Operator results from a Default by Owner under Section 18.01A, such Termination
shall not relieve Owner of liability to Operator for such Default.
E. If Operator shall fail to elect any of the above alternatives set forth
in Section 18.01D within said thirty (30) Day period, the same shall be
conclusively deemed to constitute an election and consent under Section 18.01D1,
and the provisions thereof shall prevail as if Operator had consented in writing
thereto. Any proposed Sale of the Retirement Community of which notice has been
given by Owner to Operator under Section 18.01D must be consummated within one
hundred eighty (180) Days following the giving of such notice, or such longer
period
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as may be necessary so long as Owner is diligently working in good faith to
effectuate the Sale. Failing such consummation, such notice, and any response
thereto given by Operator, shall be null and void and all of the provisions of
Sections 18.01C and D must again be complied with before Owner shall have the
right to consummate a Sale of the Retirement Community upon the terms contained
in said notice, or otherwise.
F. In connection with the possibility of a Sale of the Retirement
Community achieved by means of a transfer of the controlling interest in Owner,
Owner, from time to time, upon written request of Operator, shall (unless Owner
is a publicly-traded entity registered under the Securities Act of 1934) furnish
Operator with a list of the names and addresses of the owners of the capital
stock (but only those owners which hold an ownership interest of thirty percent
(30%) or more), or the partnership interests (both the General Partner and any
limited partner holding an interest of thirty percent (30%) or more), or other
proprietary ownership interests in Owner. In connection with obtaining and
maintaining any material License, Owner shall provide such information regarding
its owners as may be required. Operator shall treat such information as
confidential pursuant to Section 19.04.
G. It is understood that no Sale of the Retirement Community (which is
otherwise in compliance with the provisions of this Article 18) shall reduce or
otherwise affect : (i) the current level of Working Capital; (ii) the current
amount deposited in the FF&E Reserve; or (iii) any of the operational bank
accounts maintained by Operator pursuant to this Agreement. If, in connection
with any Sale of the Retirement Community, the selling Owner intends to
withdraw, for its own use, any of the cash deposits described in the preceding
sentence, the selling Owner must obtain the contractual obligation of the buying
Owner to replenish those deposits (in the identical amounts) immediately upon
such withdrawal and the selling Owner shall not be entitled to withdraw any of
such deposits unless and until the buying Owner has replenished such deposits in
the amount withdrawn by the selling Owner. The obligations described in this
Section 18.01G shall survive such Sale of the Retirement Community and shall
survive Termination.
H. Operator shall have the right to terminate this Agreement, on thirty
(30) Days written notice, if title to or possession of the Retirement Community
is transferred either by Owner in breach of the provisions of Section 18.01A, or
by judicial or administrative process (including, without limitation, a
Foreclosure, or a sale pursuant to an order of a bankruptcy court, or a sale by
a court-appointed receiver) to an individual or entity which would not qualify
as a permitted transferee under clause (i), (ii) or (iii) of Section 18.01A,
regardless of whether or not such transfer is the voluntary action of the
transferring Owner, or whether (under applicable law) the Owner is in fact the
transferor; provided, however, that Operator shall not have the right to so
terminate this Agreement based on the assertion that a Holder fails to so
qualify as a permitted transferee under said clauses (i), (ii) or (iii) of
Section 18.01A.
I. In the event of any sale or transfer to an Affiliate of Owner, such
sale or transfer shall be subject to this Agreement and such Affiliate shall
assume all of the obligations of Owner under this Agreement.
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OPERATING AGREEMENT PAGE 65
<PAGE>
SECTION 18.02 ASSUMPTION AGREEMENT OF SUCCESSOR OWNER
In the event of any Sale of the Retirement Community, the purchaser shall,
prior to finalization of such Sale of the Retirement Community, execute and
deliver to Operator a written instrument reasonably satisfactory to Operator
pursuant to which such purchaser assumes all of Owner's obligations hereunder
accruing from and after the date of sale. By accepting a deed conveying the
Retirement Community to any grantee thereunder, the grantee under such deed
shall be deemed to have assumed all obligations of Owner under this Agreement
accruing from and after the date of sale, whether or not such grantee executes
and delivers to Operator a written assumption agreement.
ARTICLE 19
MISCELLANEOUS
SECTION 19.01 RIGHT TO MAKE AGREEMENT
A. Each party warrants, with respect to itself, that to the best of its
knowledge, (i) neither the execution of this Agreement nor the finalization of
the transactions contemplated hereby shall violate any provision of law or
judgment, writ, injunction, order or decree of any court or governmental
authority having jurisdiction over it; (ii) result in or constitute a breach or
default under any indenture, contract, other commitment or restriction to which
it is a party or by which it is bound; or (iii) require any consent, vote or
approval which has not been taken, or at the time of the transaction involved
shall not have been given or taken. Each party covenants that it has and will
continue to have throughout the Term of this Agreement and any extensions
thereof, the full right to enter into this Agreement and perform its obligations
hereunder.
B. Each party agrees that it will, at its own expense, on or before the
Effective Date, provide: (i) certified copies of the applicable resolutions of
its board of directors (if it is a corporation), or written authorization by all
stockholders, or members (if it is a limited liability company) or written
authorization by all general partners (if it is a partnership) or other
appropriate documentation establishing its authority to execute this Agreement;
and (ii) such opinions of counsel (which may be provided by house counsel of
Operator or Marriott International, Inc. or Host Marriott Corporation) as the
other party shall reasonably request regarding the matters described in this
Section 19.01.
C. Each party (the "Indemnifying Party") hereby agrees to indemnify,
defend and hold harmless the other party from all expenses (including attorneys'
fees), losses, claims, and damages stemming from any action by any third party
alleging: (i) such a breach or default by the Indemnifying Party under any
indenture, contract, commitment or restriction; (ii) the failure of the
Indemnifying Party to obtain such consent, vote or approval; or (iii) that the
Indemnifying Party does not have the full right and authority to enter into this
Agreement and perform its obligations hereunder.
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OPERATING AGREEMENT PAGE 66
<PAGE>
SECTION 19.02 CONSENTS
Wherever in this Agreement the consent or approval of Owner or Operator is
required, unless otherwise expressly provided, such consent or approval shall
not be unreasonably withheld, shall be in writing and shall be executed by a
duly authorized officer or agent of the party granting such consent or approval.
Unless otherwise expressly provided, if either Owner or Operator fails to
respond within thirty (30) Days to a request by the other party for a consent or
approval, such consent or approval shall be deemed to have been given.
SECTION 19.03 RELATIONSHIP BETWEEN THE PARTIES
The relationship between Owner and Operator pursuant to this Agreement
shall be that of Owner with an independent contractor, provided, however, that
with respect to those specific and limited circumstances in which (i) Operator
is holding funds for the account of Owner, and (ii) Operator is required to act
as agent for Owner with respect to agreements with residents pursuant to
Licenses and/or Legal Requirements, the relationship between Owner and Operator
shall be that of principal and agent. Neither this Agreement nor any agreement
nor any agreements, instruments, documents or transactions contemplated hereby
shall in any respect be interpreted, deemed or construed as making Operator a
partner or joint venturer with Owner or as creating any similar relationship or
entity, and each party agrees that it will not make any contrary assertion,
contention, claim or counterclaim in any action, suit or other legal proceedings
involving the other.
SECTION 19.04 CONFIDENTIALITY
The parties hereto agree that the matters set forth in this Agreement are
strictly confidential, each party will make every effort to ensure that the
information is not disclosed to any outside person or entities (including the
press) without the written consent of the other party, provided, that such
consent will not be required with respect to (i) legally required filing and
other disclosures mandated by Legal Requirements, (ii) in the case of Owner,
disclosure to any Holder, prospective Holder, investor, purchaser of the
Retirement Community or prospective purchaser of the Retirement Community, and
(iii) in the case of either party, disclosure to any rating agencies, lenders,
stock analysts, banks, accountants, and other like professionals.
SECTION 19.05 APPLICABLE LAW
This Agreement shall be construed under and shall be governed by the laws
of the State of Maryland.
SECTION 19.06 COVENANTS RUNNING WITH THE LAND; RECORDATION
The terms and provisions of this Agreement shall run with the land
described in Exhibit A, and with Owner's interest therein, and shall be binding
upon all successors to, and assignees or transferees of, such interest, provided
that no such successor, assignee or transferee shall have any liability for
obligations of Owner for the period preceding or following such successor's,
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OPERATING AGREEMENT PAGE 67
<PAGE>
assignee's or transferee's ownership of the Retirement Community. Upon request
of either party, the parties shall execute an appropriate memorandum of this
Agreement in recordable form and the requesting party, at its sole cost and
expense, may cause the same to be recorded in the jurisdiction where the
Retirement Community is located. Immediately upon request of Owner following
any termination of this Agreement, Operator shall execute, acknowledge and
record such release or termination statement as may be required to release such
memorandum. In the event that Operator shall fail to so immediately execute,
acknowledge and record such release or termination statement, Operator hereby
appoints Owner as its attorney-in-fact to execute, acknowledge and record the
same, and all costs incurred by Owner in connection therewith (including
reasonable attorneys' fees) shall be reimbursed by Operator. Such power-of-
attorney shall be deemed coupled with an interest and irrevocable.
SECTION 19.07 HEADINGS
Headings of Articles and Sections are inserted only for convenience and in
no way limit the scope of the particular Articles or Sections to which they
refer.
SECTION 19.08 NOTICES
Notices, statements and other communications to be given under the terms of
this Agreement shall be in writing and delivered either by hand, a nationally
recognized overnight courier or sent by certified or registered mail, postage
prepaid, return receipt requested:
To Owner:
--------
Host Marriott Corporation
Asset Management Department
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: SLS Asset Manager
Department 908
Copy to:
-------
Host Marriott Corporation
Law Department - 923
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
To Operator:
------------
Marriott Senior Living Services, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Chief Financial Officer
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OPERATING AGREEMENT PAGE 68
<PAGE>
Copy to:
--------
Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice which is properly given, as described
above, shall be deemed to have been received as of the date of delivery to the
addressee in the case of hand delivery, or, in all other cases, on the date when
the return receipt or courier service confirmation indicates delivery was made
to the addressee or acceptance of delivery was refused by the addressee.
SECTION 19.09 ENVIRONMENTAL MATTERS
A. Operator shall indemnify, defend and hold Owner and its Affiliates (and
their respective directors, officers, shareholders, employees and agents)
harmless from and against all loss, cost, liability and damage (including,
without limitation, engineers' and attorneys' fees and expenses, and the cost of
Litigation) arising from the placing, discharge, leakage, use and storage of
Hazardous Materials in violation of applicable Environmental Laws, on or in the
Retirement Community by Operator's employees, representatives or agents during
the Term of this Agreement. Operator shall only bring on the Land such
Hazardous Materials as are needed in the normal course of business of the
Retirement Community.
B. In the event of the discovery of Hazardous Materials on or in the
Retirement Community during the Term of this Agreement, Owner shall (except to
the extent such removal is Operator's responsibility pursuant to Section 19.09A)
promptly remove (if required by applicable Environmental Law) such Hazardous
Materials, together with all contaminated soil and containers, and shall
otherwise remedy the problem in accordance with all Environmental Laws. Owner
shall (except to the extent that the removal of such Hazardous Materials is
Operator's responsibility pursuant to Section 19.09A) indemnify, defend and hold
Operator and its Affiliates (and their respective directors, officers,
shareholders, employees and agents) harmless from and against all loss, cost,
liability and damage (including, without limitation, engineers' and attorneys'
fees and expenses, and the cost of Litigation) arising from the presence of
Hazardous Materials on or in the Retirement Community.
C. All costs and expenses of the removal of Hazardous Materials from the
Retirement Community pursuant to Section 19.09B, and of the aforesaid compliance
with all Environmental Laws, and any amounts paid to Operator pursuant to the
indemnity set forth in the last sentence of Section 19.09B, shall be paid by
Owner from its own funds, not as an Operating Expense or from the FF&E Reserve,
shall be treated as an expenditure by Owner pursuant to Section 8.03, and shall
be counted in determining Owner's Additional Investment.
D. The term "Hazardous Materials" means and include any substance or
material containing one or more of any of the following: "hazardous material",
"hazardous waste", "hazardous substance", "regulated substance", "petroleum",
"pollutant", "contaminant", or "asbestos" as such terms are defined in any
applicable Environmental Law in such
- --------------------------------------------------------------------------------
OPERATING AGREEMENT PAGE 69
<PAGE>
concentration(s) or amount(s) as may impose clean-up, removal, monitoring or
other responsibility under any applicable Environmental Law, or which may
present a significant risk of harm to residents, invitees or employees of the
Retirement Community.
SECTION 19.10 ESTOPPEL CERTIFICATES
Each party to this Agreement shall at any time and from time to time, upon
not less than thirty (30) Days' prior notice from the other party, execute,
acknowledge and deliver to such other party, or to any third party specified by
such other party, a statement in writing: (i) certifying that this Agreement is
unmodified and in full force and effect (or if there have been modifications,
that the same, as modified, is in full force and effect and stating the
modifications); (ii) stating whether or not to the best knowledge of the
certifying party: (x) there is a continuing Default by the non-certifying party
in the performance or observance of any covenant, agreement or condition
contained in this Agreement; or (y) there shall have occurred any event which,
with the giving of notice or passage of time or both, would become such a
Default, and, if so, specifying each such Default or occurrence of which the
certifying party may have knowledge; and (iii) stating such other information as
the non-certifying party may reasonably request. Such statement shall be
binding upon the certifying party and may be relied upon by the non-certifying
party and/or such third party specified by the non-certifying party as
aforesaid. The obligations set forth in this Section 19.10 shall survive
Termination (that is, each party shall, on request, within the time period
described above, execute and deliver to the non-certifying party and to any such
third party a statement certifying that this Agreement has been terminated).
SECTION 19.11 ARBITRATION
A. In the event of a dispute between Owner and Operator with respect to
any issue of fact specifically mentioned herein as a matter to be decided by
arbitration, such dispute shall be determined by arbitration as provided in this
Section 19.11.
B. Disputes shall be resolved in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then pertaining. The
decision of the arbitrators shall be binding, final and conclusive on the
parties.
C. Owner and Operator shall each appoint and pay all fees of a fit and
impartial person as arbitrator with at least ten (10) years' recent
professional experience in the general subject matter of the dispute. Notice of
such appointment shall be sent in writing by each party to the other, and the
arbitrators so appointed, in the event of their failure to agree within thirty
(30) Days after the appointment of the second arbitrator upon the matter so
submitted, shall appoint a third arbitrator. If either Owner or Operator shall
fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) Days
after written notice from the other party to make such appointment, then the
arbitrator appointed by the party having made such appointment shall appoint a
second arbitrator and the two so appointed shall, in the event of their failure
to agree upon any decision within thirty (30) Days thereafter, appoint a third
arbitrator. If such arbitrators fail to agree upon a third arbitrator within
forty five (45) Days after the appointment of the
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OPERATING AGREEMENT PAGE 70
<PAGE>
second arbitrator, then such third arbitrator shall be appointed by the American
Arbitration Association from its qualified panel of arbitrators, and shall be a
person having at least ten (10) years' recent professional experience as to the
subject matter in question. The fees of the third arbitrator and the expenses
incident to the proceedings shall be borne equally between Owner and Operator,
unless the arbitrators decide otherwise. The fees of respective counsel engaged
by the parties, and the fees of expert witnesses and other witnesses called for
the parties, shall be paid by the respective party engaging such counsel or
calling or engaging such witnesses.
D. The decision of the arbitrators shall be rendered within thirty (30)
Days after appointment of the third arbitrator. Such decision shall be in
writing and in duplicate, one counterpart thereof to be delivered to Owner and
one to Operator. A judgment of a court of competent jurisdiction may be entered
upon the award of the arbitrators in accordance with the rules and statutes
applicable thereto then obtaining.
SECTION 19.12 AFFILIATES
Except as otherwise specifically set forth in this Agreement, Operator
shall be entitled to contract with one or more of its Affiliates to provide
goods and/or services to the Retirement Community only if the prices and/or fees
paid to any such Affiliate are competitive with the prices and/or fees then
currently being paid to reputable and qualified parties which are not Affiliates
of Operator. In determining, pursuant to the foregoing sentence, whether such
prices and/or fees are competitive, the goods and/or services which are being
purchased shall be grouped in reasonable categories, rather than being compared
item by item.
SECTION 19.13 EQUITY AND DEBT OFFERINGS
No reference to Operator or to any of its Affiliates will be made in any
prospectus, private placement memorandum, offering circular or offering
documentation related thereto (herein collectively referred to as the
"Prospectus"), issued by Owner or one of its Affiliates, which is designed to
interest potential investors or lenders in the Retirement Community, unless
Operator has previously received a copy of all such references. However,
regardless of whether Operator does or does not so receive a copy of all such
references, neither Operator nor any of its Affiliates will be deemed a sponsor
of the offering described in any such Prospectus, nor will it have any
responsibility for the Prospectus, and the Prospectus will so state. Unless
Operator agrees in advance, the Prospectus will not include: (i) any
Proprietary Marks (provided that the Prospectus may identify the name of the
Retirement Community even if such name is a Proprietary Mark); or (ii) except as
required by applicable securities laws, the text of this Agreement. Owner shall
be entitled, however, to include in such Prospectus an accurate summary of this
Agreement. If there are no Legal Requirements pursuant to which such
information must be publicly disclosed, appropriate measures shall be taken to
ensure that entities or individuals receiving such Prospectus shall acknowledge
the confidentiality of such information. Owner shall indemnify, defend and hold
Operator and its Affiliates (and their respective directors, officers,
shareholders, employees and agents) harmless from and against all loss, costs,
liability and damage (including attorneys' fees and expenses, and the cost of
Litigation) arising out of any Prospectus or the offering described therein.
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OPERATING AGREEMENT PAGE 71
<PAGE>
SECTION 19.14 RESTRICTION ON OPERATOR
A. Subject to the other provisions of this Section 19.14, Operator and its
Affiliates shall not be prohibited or restricted from developing, owning,
operating, leasing, managing, financing, or franchising other retirement
communities or businesses.
B. During the first seven (7) Agreement Years neither Operator nor any of
its Affiliates shall (directly or indirectly) construct, own, operate, manage,
lease, finance, or franchise (or participate in any of the foregoing activities)
a Similar Property in either Area A or Area B, except that;
1. Operator or any Affiliate may so own, operate, manage, lease, or
franchise a Similar Property in Area B (but not Area A) if such Similar Property
was in operation on the Effective Date and the average total occupancy at the
Retirement Community has been at least ninety-three percent (93%) for the six
(6) months immediately preceding any notice (identifying the subject site) from
Operator to Owner that it intends to proceed with an activity permitted by this
subparagraph 1, which notice shall be given at least thirty (30) Days prior to
the date on which Operator intends to proceed (the "B1 Notice"), provided,
however, that, if Operator does not execute a binding contract to purchase,
operate, manage, lease or franchise such a Similar Property within twelve (12)
months after giving a B1 Notice, then a new such B1 Notice will be required
before Operator can proceed with any further activities pursuant to this
subparagraph 1, and
2. At any time following one (1) year after the last to occur of
(i) the first Agreement Year, or (ii) completion of all Expansion Units
undertaken at the Retirement Community, Operator or any Affiliate may construct,
own, operate, manage, lease, or franchise a Similar Property within Area B (but
not Area A) if the average total occupancy at the Retirement Community has been
at least ninety-three percent (93%) during the six (6) months immediately
preceding any notice (identifying the subject site) from Operator to Owner that
it intends to proceed with an activity permitted by this subparagraph 2, which
notice shall be given at least thirty (30) Days prior to the date on which
Operator intends to proceed (the "B2 Notice"), provided, however, that, if,
after giving a B2 Notice, Operator should either fail to proceed or, having
initiated action to proceed, should cease such actions -- in either case for a
period of ninety (90) Days or more, then a new B2 Notice will be required before
Operator can either continue the original action or proceed with any new actions
pursuant to this subparagraph 2. Notwithstanding the foregoing, if Operator
elects not to undertake the completion of substantially all of the Expansion
Units by either providing written notice to Owner of its election or by
operation of the expiration of the Option set forth in the Expansion Agreement
and Owner elects to undertake the Expansion Units within nine (9) months of such
notice or expiration, Operator or an Affiliate shall not construct, own,
operate, manage, lease or franchise a Similar Property within Area B until the
occurrence of: (i) the second anniversary of the earlier to occur of (x) the
Option set forth in the Expansion Agreement has expired and, (y) delivery of
notice to Owner that Operator elects not to undertake the completion of the
Expansion Units; and (ii) the occupancy test set forth in the immediate
preceding sentence has been met.
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OPERATING AGREEMENT PAGE 72
<PAGE>
For purposes of this Section 19.14B, the words and phrases
..."proceed", "proceed with actions", "actions", and "activities", refer, in the
broadest r easonable sense, to all customary and usual actions, plans,
investigations, preparations, negotiations, studies, and the like in connection
with the planning for, designing of, financing (both debt and equity) of, site
acquisition for, construction of, land use approvals for, all permitting and
approval processes for, and all other related activities with respect to the
development of (by the way of purchase, lease, franchise, operation or
management) such a Similar Property.
C. The restrictions set forth in Section 19.14B shall not apply to any
construction, ownership, operation, management, leasing or franchising by
Operator or its Affiliates of a Similar Property, if Operator's involvement with
such Similar Property resulted from a chain acquisition, that is, the
acquisition (whether by stock or asset purchase of either real property
interests or contract rights) by Operator or an Affiliate of five (5) or more
communities or facilities in a single transaction. However, if (i) any such
acquisition results in more than twelve (12) Similar Properties located in
either this or other Areas A as designated in this Agreement and similar
operating agreements between Operator and Host Marriott Corporation or one or
more of its Affiliates, in the aggregate, or (ii) more than one such Similar
Property is located in any one such Area A; then Operator (or its Affiliate as
needs be), at Owner's request, will, within two (2) years of the date of such
chain acquisition, divest itself of the ownership, operation, development,
leasing, franchising, and/or management of all such Similar Properties (with
Operator choosing which particular Similar Properties are to be disposed of) in
excess of the twelve (12) facility limitation specified in clause (i)
immediately above, and/or the one facility limitation specified in clause (ii)
immediately above.
D. For the purposes of this Section 19.14, Area A shall include all of the
real property located within a two and one-half (2.5) mile radius of the
Retirement Community; and Area B shall include all of the real property located
beyond a two and one-half (2.5) mile radius, but within a five (5) mile radius
of the Retirement Community. In each case the radius shall be measured from the
main entrance of the Retirement Community. A Similar Property shall be deemed
to be within either Area A or B if more than twenty (20) percent of the square
feet of land area of the real estate parcel on which it is located lies within
either Area A or B. If a Similar Property falls within both Areas, it shall be
considered to be within Area A.
E. The parties agree that the period of restriction and the geographical
area of restriction imposed upon MSLS in this Section 19.14 are fair and
reasonable and are reasonably required for the protection of Owner. If the
provisions of this Section 19.14 relating to the area of restriction or the
period of restriction shall be deemed to exceed the maximum areas or period
which a court having jurisdiction over the matter would deem enforceable, such
area or period shall, for purposes of this Agreement, be deemed to be the
maximum area or period which such court would deem valid and enforceable.
F. The parties agree that irreparable damage would occur in the event any
of the provisions of this Section 19.14 were not to be performed in accordance
with the terms hereof, and that their remedy at law for any breach of the other
party's obligations hereunder would be
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OPERATING AGREEMENT PAGE 73
<PAGE>
inadequate. The parties agree and consent that, in addition to any other rights
or remedies that may be available at law or in equity, temporary and permanent
injunctive relief may be granted in any proceeding which may be brought to
enforce this Section 19.14 without the necessity of proof of actual damage.
SECTION 19.15 ENTIRE AGREEMENT
This Agreement, together with other writings signed by the parties which
are expressly stated to be supplemental hereto and together with any instruments
to be executed and delivered pursuant to this Agreement, constitutes the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersedes all prior understandings and writings and may be
changed only by a writing signed by both parties hereto.
SECTION 19.16 WAIVER
The failure of either party to insist upon a strict performance of any of
the terms or provisions of this Agreement, or to exercise any option, right or
remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
SECTION 19.17 PARTIAL INVALIDITY
If any portion of this Agreement shall be declared invalid by order, decree
or judgment of a court, this Agreement shall be construed as if such portion had
not been inserted herein except when such construction would operate as an undue
hardship on Operator or Owner, or constitute a substantial deviation from the
general intent and purpose of said parties as reflected in this Agreement.
SECTION 19.18 CONSTRUCTION
No provisions of this Agreement shall be construed in favor of, or against,
any particular party by reason of any presumption with respect to the drafting
of this Agreement; both parties, being represented by counsel, having fully
participated in the negotiation of this instrument.
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OPERATING AGREEMENT PAGE 74
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the Effective Date.
ATTEST: OWNER:
_______________________________________
__________________________________ By:____________________________________
Title:____________________________ Printed Name:__________________________
Its:___________________________________
ATTEST: OPERATOR:
MARRIOTT SENIOR LIVING SERVICES, INC.
__________________________________ By:____________________________________
Title:____________________________ Printed Name:__________________________
Its: Vice President
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OPERATING AGREEMENT PAGE 75
<PAGE>
JOINDER OF PARTY
For the purpose of inducing Owner to enter into this Agreement, Marriott
International, Inc. for itself and its Affiliates, hereby agrees to be directly
bound, as a party, to the provisions of Section 19.14 of the above Agreement,
but not to any of the other terms and conditions of the Agreement.
IN WITNESS WHEREOF, Marriott International, Inc. has executed this JOINDER
OF PARTY as of the Effective Date.
ATTEST: MARRIOTT INTERNATIONAL, INC.
__________________________________ By:____________________________________
Title:____________________________ Printed Name:__________________________
Its: Vice President
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OPERATING AGREEMENT PAGE 76
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
<PAGE>
EXHIBIT B
EXISTING TITLE ENCUMBRANCES
<PAGE>
EXHIBIT C
PRO FORMA FEES
<PAGE>
EXHIBIT D
OWNER'S INITIAL COST AND
SECURED LOAN BALANCE
<PAGE>
Exhibit 10.8
FIRST AMENDMENT TO OPERATING AGREEMENT
This First Amendment to Operating Agreement (the "First Amendment") is
effective as of the ____ day of ____ (Effective Date) by _____________________
with a mailing address of 10400 Fernwood Road, Bethesda, Maryland 20817 (Owner)
and MARRIOTT SENIOR LIVING SERVICES, INC. (Operator), a Delaware corporation
with a mailing address of 10400 Fernwood Road, Bethesda, Maryland 20817.
RECITALS:
A. Owner and Operator entered into that certain Operating Agreement (the
"Operating Agreement") effective the 21st day of June 1997;
B. Owner and Operator desire to amend Section 6.05 of the Operating
Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
1. Section 6.05B of the Operating Agreement shall be deleted in its
entirety and replaced with the following:
B. Notwithstanding Section 6.05A, Owner agrees that in connection with
obtaining any Qualified Loan, it will obtain from each prospective Holder
or Holders thereof, a Non-Disturbance Agreement pursuant to which
Operator's rights under this Agreement will not be disturbed as a result of
a loan default stemming from non-monetary factors which (i) relate to Owner
and do not relate solely to the Retirement Community, and (ii) are not
Defaults by Operator under Article 16 of this Agreement. Furthermore, such
Non-Disturbance Agreement shall provide that in the event of a monetary
default by Owner under a Secured Loan(s), prior to and as a condition of
any resulting Foreclosure, the Holder(s) shall provide Operator with
written notice of Owner's monetary default and, thereafter, afford Operator
an opportunity to cure such monetary default within a reasonable time
period, and the Holder(s) shall accept such performance by Operator in
place of performance by Owner. If Owner desires to obtain a Qualified Loan,
Operator, on written request from Owner, shall promptly identify those
provisions in the proposed loan documents which fall within the categories
described in clauses (i) and (ii) above, and Operator shall otherwise
assist in expediting the preparation of an agreement between the
prospective Holder(s) and Operator, which will implement the provisions of
this Section 6.05B.
2. Section 6.05 of the Operating Agreement is further amended by the
insertion of the following additional subparagraph:
<PAGE>
SECTION 6.05 NON-DISTURBANCE AGREEMENT
C. In the event Operator elects to cure a monetary default by Owner
under a Secured Loan, pursuant to the provisions of a Non-Disturbance
Agreement (and otherwise pursuant to the provisions of subparagraph 6.05B
above) all such payments made by Operator shall constitute a loan to Owner
and shall accrue interest at a rate equal to the Prime Rate (compounded
annually) and shall be repaid to Operator out of first available Operating
Profit due Owner after deducting that portion of Operating Profit necessary
to pay then current Debt Service.
3. New Section 6.11 shall be added as follows:
SECTION 6.11 COVENANT TO PAY DEBT SERVICE
Notwithstanding anything contained herein to the contrary, Owner
covenants that during the Term of this Agreement, Owner shall first apply all
Owner's Priority and Net Operating Profit that it receives to the payment of
Debt Service.
4. Any capitalized term used but not defined herein shall have the
meaning given such term in the Operating Agreement.
5. The Operating Agreement is in full force and effect and except as
modified hereby has not been amended.
IN WITNESS WHEREOF, Marriott Senior Living Services, Inc., as Operator and
______________________ as Owner, have executed and delivered this First
Amendment on the date first herein above set forth.
OPERATOR:
By:
------------------------------------
Vice President
Marriott Senior Living Services, Inc.
OWNER:
By:
------------------------------------
Vice President,
---------------------
2
<PAGE>
EXHIBIT 10.9
NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT ("Agreement") is made and entered into as of
_______________, 1998, between and among HOST MARRIOTT CORPORATION, a Delaware
corporation ("HMC"), HOST MARRIOTT, L.P., a Delaware limited partnership (the
"Operating Partnership," together with HMC "Host"), CRESTLINE CAPITAL
CORPORATION, a Delaware corporation ("CCC"), ________________, a Delaware
corporation ("NCS1") and _________, a Delaware corporation ("NCS2," together
with NCS1, "NCS"). As used in this Agreement, the terms "Host," "CCC" and "NCS"
shall mean Host, CCC and NCS, as the case may be, and their respective
Subsidiaries and Affiliates (as such terms are defined in Section 1).
WHEREAS, in connection with (i) the lease of substantially all of the full-
service hotels owned by Host, and the sublease of certain limited-service hotels
leased by Host from third parties, to CCC (each, a "Hotel Lease" and, together,
the "Hotel Leases") and (ii) the lease by NCS to CCC of certain furniture,
furnishing, fixtures, soft goods, case goods, equipment and other similar items
for use in the hotels ("FF&E") under certain leases entered into in connection
with the Hotel Leases (the "FF&E Leases"), in each case as part of the REIT
Conversion (as defined in Section 1), Host, CCC and NCS have agreed to enter
into this Agreement; and
WHEREAS, as of the date hereof, CCC's principal business consists of owning
the Senior Living Community Business, the Hotel Leasing Business, the Asset
Management Services Business and the Swissotel Management Company Interest (as
such terms are defined in Section 1); and
WHEREAS, as of the date hereof, Host's principal business consists of
owning the Host Business and the Non-Controlled Subsidiary Interests (as such
terms are defined in Section 1).
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, in the Hotel Leases and the FF&E Leases, and in the related
agreements entered into pursuant to or related to the Hotel Leases or the FF&E
Leases, and for other valuable consideration, the receipt and sufficiency of
which are hereby mutually acknowledged, Host, CCC, and NCS agree as follows:
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ARTICLE ONE
DEFINITIONS
1. Definitions.
The following terms when used herein shall have the meanings set forth
below:
"Affiliates" shall mean any Person directly or indirectly controlling or
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controlled by, or under direct or indirect common control with, Host, NCS or
CCC, as the case may be. For purposes of this definition, "control," when used
with respect to any Person, means the power to direct the management and
policies of such Person, directly or indirectly, through the ownership of voting
securities, by contract, or otherwise. Notwithstanding the foregoing, (i)
Host's Affiliates shall not include CCC, any Non-Controlled Subsidiary or
Marriott International, Inc., or their respective Subsidiaries or Affiliates,
(ii) CCC's Affiliates shall not include Host, any Non-Controlled Subsidiary or
Marriott International, Inc., or their respective Subsidiaries or Affiliates,
(iii) NCS1's Affiliates shall not include Host, CCC, Marriott International,
Inc. or any other Non-Controlled Subsidiary, or their respective Subsidiaries or
Affiliates and (iv) NCS2's Affiliates shall not include Host, CCC, Marriott
International, Inc. or any other Non-Controlled Subsidiary, or their respective
Subsidiaries or Affiliates.
"Asset Management Services Business" means the provision of asset
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management services to owners of hotels, including without limitation, (i)
administration of contracts, (ii) review of operating and financial results,
financial statements, budgets, revenue projections and capital spending plans
with hotel managers and owners, (iii) administration of facility loans, (iv)
negotiation of third party management arrangements, (v) assessment of market
conditions, (vi) negotiation of regulatory issues and (vii) provision of advice
and information in connection with acquisitions or dispositions of hotels.
"Carried Interest" shall mean with respect to any Person, any right of
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another Person (by reason of its status as a general partner, sponsor or
otherwise) to receive a specific portion of the earnings or assets of such
Person once other investors in such Person have received an agreed upon return
on their investment in such Person.
"CCC" shall have the meaning set forth in the first paragraph of this
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Agreement.
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"Compete" shall mean (i) to conduct or participate or engage in, or bid
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for, or otherwise pursue, a business, whether as a principal, sole proprietor,
partner, stockholder, or agent of, or consultant or lender to, or manager for,
any Person or in any other capacity, or (ii) have any ownership or financial
interest in any Person or business which conducts, participates or engages in,
or bids for, or otherwise pursues, a business, whether as a principal, sole
proprietor, partner, stockholder, or agent of, investor in, or consultant or
lender to or manager for, any Person or in any other capacity.
"FF&E" shall have the meaning set forth in the second paragraph of this
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Agreement.
"FF&E Leases" shall have the meaning set forth in the second paragraph of
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this Agreement.
"Franchise Business" shall mean the ownership or operation of any single or
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multiple full-service hotel management or franchise system operating under one
or more common brand names. Without otherwise expanding the definition of
"Franchise Business," the term "Franchise Business" shall not include (i) the
operation of hotels, whether owned by CCC or otherwise, pursuant to a franchise
or similar license agreement with the owner or operator of the brand name as
long as such owner or operator is not CCC, including the operation of full-
service hotels owned by owners other than CCC pursuant to management agreements,
(ii) any business or activity with respect to limited-service hotels or (iii)
any asset management activities undertaken with respect to hotels for the owners
of such hotels.
"Host" shall have the meaning set forth in the first paragraph of this
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Agreement.
"Host Business" shall mean the business of owning full-service hotels,
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including without limitation the Initial Hotels, acquiring additional existing
and newly developed full-service hotels, developing and constructing for
ownership by Host full-service hotels, and improving and expanding the Initial
Hotels and any additional full-service hotels in which Host acquires an
interest. The term "Host Business" shall not include, without limitation, (i)
any business or other activity with respect to limited-service hotels or (ii)
any business or other activity with respect to full-service hotels other than
the acquisition, development or ownership of full-service hotels or equity
interests therein.
"Host REIT" shall mean HMC Merger Corporation, a Maryland corporation into
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and with which Host will merge as part of the REIT Conversion.
"Hotel Lease" shall have the meaning set forth in the second paragraph of
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this Agreement.
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"Hotel Leasing Business" means the business of leasing, as the tenant or
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subtenant, limited-service or full-service hotel properties and operating or
franchising, as the operator or franchisee, such properties, either directly or
through a contractual arrangement with a third party, provided, however, that
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with respect to leases of full-service hotels, it is understood that the
estimated economic benefit to be derived by the tenant or subtenant, as
applicable, from the lease during the period commencing on the lease
commencement date and ending on the initial lease termination date, or, in the
case of any extension or renewal of any lease which may be exercised solely at
the lessee's option (other than renewals or extensions which provide for rent at
then prevailing fair market rental rates), the termination of the extension or
renewal period (the "Lease Term") shall not exceed twenty-five percent (25%) of
the estimated total economic benefit to be generated by the leased property
during the Lease Term. For purposes of the foregoing proviso, (i) the estimated
economic benefit to be derived by the tenant or subtenant during the Lease Term
shall equal the present value of the tenant's or subtenant's reasonably
projected net cash flows after deduction for rental payments (excluding for this
purpose debt service but including any residual payments owed to the tenant or
subtenant at any time during the Lease Term (including on the last day thereof))
to be received by the tenant or subtenant, respectively, from the leased
property for the Lease Term, calculated by applying a discount factor which is
appropriate in light of the leased property's condition and overall market
conditions at the time of determination of such economic value and the risk to
the tenant or subtenant associated with the proposed lease structure (the
"Applicable Discount Factor") and (ii) the estimated total economic benefit to
be derived from the leased property during the Lease Term shall equal the
present value of the tenant's or subtenant's reasonably projected total net
operating income before any deductions for rental payments to be made under the
lease (excluding for this purpose debt service) from the leased property for the
Lease Term, calculated by applying the Applicable Discount Factor and assuming a
sale of the leased property at the end of the Lease Term for a price equal to
the capitalized projected net operating income (excluding for this purpose debt
service) at such time, calculated by using a capitalization rate which is
appropriate in light of the leased property's condition and overall market
conditions at the time of determination of such capitalized projected net
operating income. Without otherwise expanding the definition of "Hotel Leasing
Business," the term "Hotel Leasing Business" shall not, as to the activities of
any Person, include the Hotel Management Business, whether as to management
activities by such Person on behalf of itself or on behalf of others.
"Hotel Management Business" means the business of managing, operating or
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franchising limited-service or full-service hotel properties on behalf of third
parties with respect to matters incident to the operation of such properties
including, without limitation, management services with respect to food,
beverages, housekeeping, laundry, vending, plant and equipment operation and
maintenance, grounds care, gift or merchandise shops within such properties,
reservations, sales and marketing services, conference and meeting facilities,
health rooms, swimming
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and other sports facilities and all other services related to the operation of
such hotel properties.
"Initial Hotels" shall mean the full-service hotels operated primarily
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under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names
in which Host will initially have controlling interests or own outright
following the REIT Conversion, as set forth on Schedule A hereto.
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"Merger" shall mean the merger of Host with and into Host REIT as part of
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the REIT Conversion.
"NCS" shall have the meaning set forth in the first paragraph of this
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Agreement.
"NCS1" shall have the meaning set forth in the first paragraph of this
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Agreement.
"NCS2" shall have the meaning set forth in the first paragraph of this
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Agreement.
"1998 Noncompetition Agreement" shall have the meaning set forth in Section
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4.1.B. hereof.
"Non-Controlled Subsidiary" shall mean any taxable corporation, including
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without limitation NCS, in which the Operating Partnership owns, directly or
through a Subsidiary, more than fifty percent (50%) of the economic interest but
which the Operating Partnership, either directly or through a Subsidiary, does
not control. For purposes of this definition, "control," when used with respect
to any Non-Controlled Subsidiary, means the power to direct the management and
policies of such Non-Controlled Subsidiary, directly or indirectly, through the
ownership of voting securities, by contract, or otherwise.
"Non-Controlled Subsidiary Interests" shall mean the economic interests
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held by the Operating Partnership, either directly or through a Subsidiary, in
the Non-Controlled Subsidiaries.
"Operating Partnership" shall have the meaning set forth in the first
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paragraph of this Agreement.
"Permitted Full-Service Lease" shall mean a lease which satisfies the
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criteria set forth in the proviso of the first sentence of the definition of
"Hotel Leasing Business" above.
"Person" shall mean any person, firm, corporation, general or limited
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partnership, association, or other entity.
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"Primary Host Lessee" shall mean the lessee of more than 25% by number of
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the Initial Hotels.
"REIT Conversion" shall mean the reorganization of Host's business
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operations to permit Host to qualify as a "real estate investment trust" under
Sections 856 through 859 of the Internal Revenue Code of 1986, as amended,
including the Merger and the other transactions described in the
Prospectus/Consent Solicitation that is part of the Registration Statement filed
with the Securities and Exchange Commission by Host REIT and the Operating
Partnership on Form S-4 (File No. 333-55807).
"Senior Living Community Business" shall mean, as to any Person, the
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business of acquiring and owning existing and newly developed retirement
community properties, improving and expanding the retirement community
properties owned and acquired by such Person and/or operating retirement
community properties for other owners thereof (whether pursuant to a management
agreement, operating agreement, lease, license or otherwise).
"Subsidiaries" shall mean corporations or other entities which are more
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than ten percent (10%) owned, directly or indirectly, by Host, CCC or NCS, as
the case may be, and partnerships in which Host, CCC or NCS, as the case may be,
or a Subsidiary thereof, is a general partner. Notwithstanding the foregoing,
Host's Subsidiaries shall not include NCS or any other Non-Controlled Subsidiary
which becomes a party to this Agreement or otherwise agrees to be bound by terms
which are substantially the same as those set forth in Section 2.
"Swissotel Management Company Interest" means CCC's 25% interest in
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BRE/Swiss Management L.L.C.
"Transfer" shall mean the sale, conveyance, disposal of or other transfer
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of ownership, title or other interest.
ARTICLE TWO
NONCOMPETITION WITH RESPECT TO THE SENIOR LIVING
COMMUNITY BUSINESS
2. Certain Restrictions on Host and NCS.
A. Except as provided in Section 2.C., from the date hereof until December
31, 2003, neither Host nor NCS shall Compete in the Senior Living Community
Business.
B. Except as provided in Section 2.C., from the date hereof until the
earlier of (i) December 31, 2008 and (ii) the date on which CCC is no longer the
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Primary Host Lessee, Host nor NCS shall Compete in the Hotel Leasing Business.
C. Neither Section 2.A. nor Section 2.B. shall prohibit Host or NCS from
engaging in the following activities:
(i) the ownership of any equity interest in any Person which Competes
in the Senior Living Community Business or the Hotel Leasing Business if
Host or NCS, as the case may be, directly or indirectly, is the beneficial
owner of not more than five percent (5%) of such Person's outstanding
equity interests, including for such purpose any Carried Interest in such
Person, whether or not earned (based upon the maximum percentage applicable
for such Carried Interest) and cannot, by reason of the ownership of such
equity interest or otherwise, have any right to control such Person
(including, but not limited to, control resulting from a general partner
interest, special rights as a manager of a limited liability company or
similar entity, contractual or other rights to representation on the board
of such Person that are disproportionate to Host's or NCS', as the case may
be, equity ownership in such Person, disproportionate voting rights with
respect to Host's or NCS', as the case may be, equity position, or veto or
approval rights as to major decisions);
(ii) the acquisition (by merger, stock purchase or otherwise) of, or
the purchase of assets from, any Person who Competes in the Senior Living
Community Business or the Hotel Leasing Business if the fair market value,
on the acquisition date, of the acquired assets which relate to activities
which Compete with the Senior Living Community Business or the Hotel
Leasing Business, as the case may be, do not constitute more than ten
percent (10%) of the total purchase price for the transaction; or
(iii) (A) the leasing, directly or indirectly, by Host from NCS or by
NCS from Host of limited-service or full-service hotel properties, (B) the
leasing, directly or indirectly, by Host of properties pursuant to the
leases listed on Schedule B attached hereto, including any renewals or
extensions thereof, or (C) the leasing, directly or indirectly, by Host
from any other Person of limited-service or full-service hotel properties
where Host has a direct or indirect equity interest in such Person
sufficient for such Person to be consolidated with Host for financial
accounting purposes.
D. Each of Host and NCS agrees that, from the date hereof until December
31, 2000, it will not solicit, hire or induce the termination of employment of,
a person who is employed by CCC at the time of, or was employed by CCC at any
time within three months prior to, such solicitation, hiring or inducement and
whose grade is, or, if applicable, was at the time of the termination of his
employment with CCC, the equivalent of Host's current grade 56 or above.
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ARTICLE THREE
NONCOMPETITION WITH RESPECT TO THE HOST BUSINESS
3. Certain Restrictions on CCC.
A. Except as provided in Section 3.B., from the date hereof until the
earlier of (i) December 31, 2008 and (ii) the date on which CCC is no longer the
Primary Host Lessee, CCC shall not Compete in the Host Business, nor, with
respect to full-service hotels, enter into any leases other than Permitted Full-
Service Leases.
B. Section 3.A. shall not prohibit CCC from engaging in the following
activities:
(i) any activity (including any investments) undertaken by CCC that
is necessary to and reasonably connected with its business of acting as a
lessee of full-service hotels, including acquisitions of property and
assets used in such hotels that are incidental to CCC's role as lessee
(such as "hotel working capital" and "furniture, fixtures and equipment" in
a manner similar to that contemplated under the Hotel Leases) but excluding
loans to or equity investments in the lessor or any of its Affiliates
except to the extent permitted under clause (v) below;
(ii) any activity undertaken by CCC with respect to the Asset
Management Services Business;
(iii) the ownership of any equity interest in any Person which
Competes in the Host Business if CCC, directly or indirectly, is the
beneficial owner of not more than five percent (5%) or more of such
Person's outstanding equity interests, including for such purpose any
Carried Interest in such Person, whether or not earned (based upon the
maximum percentage applicable for such Carried Interest) and cannot, by
reason of the ownership of such equity interest or otherwise, have any
right to control such Person (including, but not limited to, control
resulting from a general partner interest, special rights as a manager of a
limited liability company or similar entity, contractual or other rights to
representation on the board of such Person that are disproportionate to
CCC's equity ownership in such Person, disproportionate voting rights with
respect to CCC's equity position, or veto or approval rights as to major
decisions);
(iv) the acquisition (by merger, stock purchase or otherwise) of, or
the purchase of assets from, any Person who Competes in the Host Business
if the fair market value, on the acquisition date, of the acquired assets
which
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relate to activities which Compete with the Host Business do not constitute
more than ten percent (10%) of the total purchase price for the
transaction; or
(v) the provision of financing for any full-service hotel (whether
directly or by participation in a lender syndicate) so long as the
following conditions are met:
(A) on the date on which CCC becomes contractually committed to
provide such financing (1) CCC is (or in connection with such
financing will become) the lessee of such hotel (pursuant to a lease
which is a Permitted Full-Service Lease) or (2) CCC has a bona fide
contract to become the lessee of such hotel (pursuant to a lease which
is a Permitted Full-Service Lease) upon completion of the construction
and development or stabilization of such hotel and upon satisfaction
of reasonable conditions, and
(B) if such financing is in the form of a loan, (1) the interest
of CCC in such financing does not exceed twenty percent (20%) of the
fair market value, on the date on which CCC becomes contractually
committed to provide such financing, of the hotel which is subject to
such financing, and (2) such loan does not include any equity
participation feature (whether in the form of warrants, options, a
conversion right, interest payments based upon profits, revenues,
and/or appreciation, or otherwise) that would cause CCC to violate
subclause (C) below at any time, assuming for purposes of such
determination that CCC would exercise any and all options and other
rights that it might have in connection with such loan (provided that
the foregoing shall not prevent the exercise by CCC of its rights upon
foreclosure of such indebtedness unless the default with respect to
such indebtedness giving the right to such foreclosure had occurred or
was imminent at the time CCC acquired such indebtedness), and/or
(C) if such financing is in the form of an equity investment,
directly or indirectly, in the hotel or the Person owning, directly or
indirectly, the hotel, CCC will not beneficially own (and will not
have any right to acquire beneficial ownership of) more than fifteen
percent (15%) of the outstanding equity interests of the Person which
owns such hotel, including for such purpose any Carried Interest in
such Person, whether or not earned (based upon the maximum percentage
applicable for such Carried Interest), and CCC cannot, by reason of
the ownership of such equity interest or otherwise, have any right to
control the hotel or the Person owning such hotel (including, but not
limited to, control resulting from a general partner interest, special
rights as a manager of a limited liability company or similar entity,
contractual or other rights to representation on the board of such
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Person that are disproportionate to CCC's equity ownership in such
Person, disproportionate voting rights with respect to CCC's equity
position, or veto or approval rights as to major decisions), and
(D) the combined economic interest of CCC in the hotel under the
Permitted Full-Service Lease (calculated as set forth in the
definition of "Hotel Leasing Business") and any financing or equity
interests in subclauses (B) and (C) above cannot exceed (1) twenty-
five percent (25%) of the fair market value, on the date CCC becomes
contractually committed to provide such financing, of the hotel which
is subject to such financing or (2) fifty percent (50%) of the excess
of the fair market value of the hotel on such date over the
outstanding principal balance of all third party indebtedness that is
senior, directly or indirectly, in right of payment (whether by reason
of direct subordination, structural subordination or otherwise) to the
debt or equity investment made by CCC.
C. CCC agrees that, from the date hereof until December 31, 2000, it will
not solicit, hire, or induce the termination of employment of, a person who is
employed by Host or NCS at the time of, or was employed by Host or NCS at any
time within three months prior to, such solicitation, hiring or inducement and
whose grade, is or, if applicable, was at the time of the termination of his
employment with Host or NCS, the equivalent of Host's current grade 56 or above.
ARTICLE FOUR
LIMITATION ON ENGAGEMENT IN THE HOTEL MANAGEMENT BUSINESS
4.1 Certain Restrictions on CCC.
A. Except as provided in Sections 4.1.B. and 4.1.C., CCC shall be entitled
to Compete in the Hotel Management Business.
B. CCC acknowledges that the provisions of that certain Restated
Noncompetition Agreement between and among Host and Marriott International,
Inc., dated March 3, 1998 (the "1998 Noncompetition Agreement"), applies to it
and that such 1998 Noncompetition Agreement has been amended effective the date
hereof to include CCC as a party thereto.
C. Notwithstanding the foregoing Section 4.1.A., from the date hereof
until the earlier of (i) December 31, 2008 and (ii) the date on which CCC is no
longer the Primary Host Lessee, CCC shall comply with the following
restrictions:
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(i) CCC shall not, without the consent of Host in its sole
discretion, engage in the Hotel Management Business with regard to any
hotels owned by Host, provided that, the foregoing shall not be deemed to
prohibit CCC from acting in its capacity as a lessee of hotels owned by
Host where CCC has engaged another Person who is not a Affiliate of CCC to
manage or operate, within the meaning of the term "Hotel Management
Business," the leased hotels.
(ii) CCC shall not Compete in the Franchise Business.
D. Notwithstanding anything herein to the contrary, nothing in this
Agreement shall prohibit CCC from owning the Swissotel Management Company
Interest or any activities undertaken by BRE/Swiss Management L.L.C.
ARTICLE FIVE
MISCELLANEOUS
5.1 Arbitration of Certain Matters.
Host, CCC and NCS agree that any controversy or dispute concerning any
calculation or determination of value, net cash flows, present values, net
operating income, capitalization rate or sales arising under the definition of
"Host Leasing Business" in Section 1, Section 2.C.(ii), 3.B.(iv) or 3.B.(v).(B)
hereof shall be settled in arbitration in accordance with the Rules of the
American Arbitration Association then in effect. Such arbitration shall take
place in Washington, D.C. Any judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The
arbitrators shall not, under any circumstances, have any authority to award
punitive, consequential, exemplary or similar damages, and may not, in any
event, make any ruling, finding or award that does not conform to the terms and
conditions of this Agreement. Nothing contained in this Section 5.1 shall limit
or restrict in any way the right or power of a party at any time to seek
injunctive relief in any court and to litigate the issues relevant to such
request for injunctive relief before such court (i) to restrain the other party
from breaching this Agreement, or (ii) for specific enforcement of this Section
5.1. The parties agree that any legal remedy available to a party with respect
to a breach of this Section 5.1 will not be adequate and that, in addition to
all other legal remedies, each party is entitled to an order specifically
enforcing this Section 5.1. Neither party nor the arbitrators may disclose the
existence or results of any arbitration under this Agreement or any evidence
presented during the course of the arbitration without the prior written consent
of both parties, except as required to fulfill applicable disclosure and
reporting obligations, or as otherwise required by agreements with third
parties, or by law.
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5.2 Entire Agreement.
This Agreement, the Hotel Leases, the FF&E Leases and the 1998
Noncompetition Agreement constitute the entire agreement of the parties
concerning the subject matter hereof.
5.3 Modification.
This Agreement may only be amended, modified or supplemented in a written
agreement signed by both parties hereto.
5.4 Waiver.
No term or condition of this Agreement shall be deemed to have been waived,
nor shall there be any estoppel against the enforcement of any provision hereof,
except by written instrument of the party charged with such waiver or estoppel.
5.5 Severability.
Host, CCC and NCS agree that the period of restriction and the lack of
geographical area of restriction imposed upon the parties are fair and
reasonable, are reasonably required for the protection of each of the parties
hereto and have been specifically negotiated and carefully tailored with a view
to preventing the serious and irreparable injury the other party will suffer in
the event of competition by such party with the other party during the time
periods set forth herein. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect as though the invalid portions were not a part
hereof. If the provisions of this Agreement relating to the geographical area
of restriction or the period of restriction shall be deemed to exceed the
maximum geographical area or period which a court having jurisdiction over the
matter would deem enforceable, such area or period shall, for purposes of this
Agreement, be deemed to be the maximum geographical area or period which such
court would deem valid and enforceable.
5.6 Remedies.
CCC, Host and NCS agree that irreparable damage would occur in the event
any of the provisions of this Agreement were not to be performed in accordance
with the terms hereof, and that their remedy at law for any breach of the other
party's obligations hereunder would be inadequate. CCC, Host and NCS agree and
consent that temporary and permanent injunctive relief may be granted in any
proceeding which may be brought to enforce any provision hereof without the
necessity of proof of actual damage.
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The parties hereby agree that the obligations of Host and NCS hereunder are
independent and that neither Host nor NCS shall have any liability for the
breach by the other of such other's obligations hereunder. CCC and Host agree
that, in the event that any Non-Controlled Subsidiary which is not a party to
this Agreement engages in any activity in which Host is prohibited from engaging
under this Agreement, CCC shall not be entitled to terminate this Agreement but
Host shall indemnify and hold CCC harmless from any liabilities, damages, losses
and reasonable expenses incurred by CCC as a result thereof.
5.7 Enforceability.
The terms, conditions and promises contained in this Agreement shall be
binding upon and shall inure to the benefit of each of the parties hereto, their
heirs, personal representatives, or successors and assigns. Without limiting
the generality of the foregoing, the parties agree that, following the Merger,
Host REIT shall be deemed to be a successor of Host under this Agreement. Each
of the parties hereto shall cause its Subsidiaries which are not Non-Controlled
Subsidiaries to comply with such party's obligations hereunder. Nothing herein,
expressed or implied, shall be construed to give any other Person any legal or
equitable rights hereunder.
5.8 Assignment and Successors and Assigns.
Neither party shall, without the prior written consent of the other, assign
any rights or delegate any obligations under this Agreement. Notwithstanding
anything herein to the contrary, the restrictions, rights and obligations set
forth herein shall be treated as follows: in the event Host Transfers all or
substantially all of the Host Business, the transferee thereof shall
automatically be bound by the terms of this Agreement; in the event CCC
Transfers all or substantially all of the Senior Living Community Business or
all or substantially all of the Hotel Leasing Business or all or substantially
all of the Asset Management Services Business, the transferee thereof shall
automatically be bound by the terms of this Agreement; and, in the event either
NCS1 or NCS2 Transfers all or substantially all of its business of leasing FF&E
to lessees of full and limited-service hotels, the transferee thereof shall
automatically be bound by the terms of this Agreement.
5.9 Consent to Jurisdiction.
Subject to Section 5.1 hereof, the parties irrevocably submit to the
exclusive jurisdiction of (i) the Courts of the State of Maryland in Montgomery
County, and (ii) if federal jurisdiction exists, the United States District
Court for the State of Maryland for the purposes of any suit, action or other
proceeding arising out of this Agreement.
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5.10 Interpretation.
When a reference is made to this Agreement to a Section, Article, or
Schedule, such reference shall be to a Section, Article, or Schedule of this
Agreement unless otherwise indicated. The headings contained in this Agreement
are for reference purposes only and shall neither affect the meaning or
interpretation of this Agreement, nor define or limit the scope or intent of any
provision or part hereof. Whenever the words "include," or "includes," or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
5.11 Notices.
All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by telecopier with computer generated acknowledgment
of receipt, by mail or by Federal Express or similar expedited commercial
carrier, to the parties at the following addresses (or at such other addresses
for a party as shall be specified by like notice), postpaid and certified with
return receipt requested (if by mail), or with all freight charges prepaid (if
by Federal Express or similar carrier), and shall be deemed given on the date of
acknowledged receipt, in the case of a notice by telecopier, and, in all other
cases, on the date of receipt or refusal:
To Host:
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher G. Townsend, Senior Vice
President, General Counsel and
Corporate Secretary
Fax No.: 301/380-3588
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<PAGE>
To CCC:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Tracy M.J. Colden, Senior Vice President,
General Counsel and Corporate Secretary
Fax No.: 301/
--------
To NCS1:
------------------------
10400 Fernwood Road
Bethesda, Maryland 20817
Attention:
----------------
Fax: 301/
-----------------
To NCS2:
------------------------
10400 Fernwood Road
Bethesda, Maryland 20817
Attention:
----------------
Fax: 301/
-----------------
5.12 Governing Law.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland, regardless of the laws that might be applied
under applicable principles of conflicts of laws.
5.13 Relationship of Parties.
It is understood and agreed that nothing in this Agreement shall be deemed
or construed by the parties or any third party as creating an employer-employee,
principal/agent, partnership or joint venture relationship between or among the
parties.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the day and year first above written.
CRESTLINE CAPITAL CORPORATION
By:
-----------------------------
Name:
Title:
HOST MARRIOTT CORPORATION
By:
-----------------------------
Name:
Title:
HOST MARRIOTT, L.P.
By: HMC REAL ESTATE LLC,
General Partner
By:
-----------------------------
Name:
Title:
[NCS1]
By:
-----------------------------
Name:
Title:
-16-
<PAGE>
[NCS2]
By:
-----------------------------
Name:
Title:
-17-
<PAGE>
Schedule A
----------
Initial Hotels
--------------
-18-
<PAGE>
Schedule B
----------
Certain Permitted Leases
------------------------
-19-
<PAGE>
Exhibit 10.10
AMENDED AND RESTATED
NONCOMPETITION AGREEMENT
THIS AMENDED AND RESTATED NONCOMPETITION AGREEMENT ("Agreement") is
made and entered into as of __________, 1998 by and among HOST MARRIOTT
CORPORATION, a Delaware corporation ("Host Marriott"), CRESTLINE CAPITAL
CORPORATION, a Maryland corporation ("Crestline"), FORUM GROUP, INC., an Indiana
corporation ("FGI"), MARRIOTT SENIOR LIVING SERVICES, INC., a Delaware
corporation ("MSLS"), and MARRIOTT INTERNATIONAL, INC., a Delaware corporation
("MI").
RECITALS
WHEREAS, Host Marriott, FGI, MSLS and MI entered into that certain
Noncompetition Agreement dated as of June 21, 1997 (the "Original Noncompetition
Agreement") in connection with the Stock Purchase Agreement dated as of June 21,
1997 (the "Stock Purchase Agreement") by and between Host and MSLS; and
WHEREAS, it was the intent of the parties that from and after the
closing under the Stock Purchase Agreement (x) MSLS would continue in its
capacity as Operator of the Senior Living Business previously conducted by FGI
and its Subsidiaries and Affiliates and (y) except as otherwise specifically set
forth in this Agreement, Host Marriott and FGI would act solely in their
capacities as Investors in the Senior Living Facilities owned by FGI and its
Subsidiaries and Affiliates and other Senior Living Facilities that Host
Marriott and FGI might acquire in the future; and
WHEREAS, MSLS and MI desired to grant Host Marriott certain rights to
participate in the development of certain retirement communities and to acquire
certain other retirement communities within limited geographic areas adjacent to
the Senior Living Facilities owned by FGI and its Subsidiaries and Affiliates on
the Closing Date; and
WHEREAS, Host Marriott has determined that it will restructure its
business operations so that as to qualify as a real estate investment trust for
federal income tax purposes, and, in connection therewith, on or about December
29, 1998, (i) Host Marriott will distribute approximately 82% of the outstanding
common stock of Crestline to or on behalf of the stockholders of Host Marriott
(the "Crestline Distribution") and will contribute the remaining 18% of such
Crestline common stock to Host Marriott, L.P. for delivery to The Blackstone
Group and certain affiliated entities thereof (or for return to Crestline if not
delivered to The Blackstone Group and its affiliated entities) and (ii) Host
Marriott will merge (the "Merger") into HMC Merger Corporation, a Maryland
corporation ("Host REIT"); and
<PAGE>
WHEREAS, following the Crestline Distribution (i) FGI will remain a
subsidiary of Crestline and (ii) Crestline will conduct those certain activities
as an Investor in Senior Living Facilities conducted by Host Marriott prior to
the restructuring; and
WHEREAS, as a result of such restructuring, Crestline is obligated to
become a party to this Agreement, as contemplated by Section 3.4 of the Original
Noncompetition Agreement; and
WHEREAS, the parties hereto desire to amend and restate the Original
Noncompetition Agreement to add Crestline as a party to the Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and in the Stock Purchase Agreement and in the
related agreements entered into pursuant to or related to the Stock Purchase
Agreement, and for other valuable consideration, the receipt and sufficiency of
which are hereby mutually acknowledged, the parties hereto agree as follows:
ARTICLE ONE
DEFINITIONS
The following terms when used herein shall have the meaning set forth
below:
"AFFILIATES" means, with respect to any Person at any time, any other
Person directly or indirectly controlling or controlled by, or under direct or
indirect common control with, such Person at such time. For purposes of this
definition "control", when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
through the ownership of voting securities, by contract, or otherwise.
Notwithstanding the foregoing, from and after the Closing Date, (x) "Affiliates"
of Host Marriott do not include MI, MSLS, Host Marriott Services Corporation,
Crestline, FGI, any of their respective Subsidiaries or any of their officers,
directors or stockholders (in such capacity only), (y) "Affiliates" of MI and
MSLS do not include Host Marriott, Crestline, FGI, Host Marriott Services
Corporation or any of their respective Subsidiaries or any of their officers,
directors or stockholders (in such capacity only), and (z) "Affiliates" of
Crestline and FGI do not include Host Marriott, Host Marriott Services
Corporation, MI, MSLS or any of their respective Subsidiaries or any of their
officers, directors or stockholders (in such capacity only).
"CLOSING DATE" means June 21, 1997.
"CRESTLINE" has the meaning set forth in the first paragraph of this
Agreement.
"CRESTLINE DISTRIBUTION DATE" means the effective date of the Crestline
Distribution.
"FGI" has the meaning set forth in the first paragraph of this Agreement.
2
<PAGE>
"FORUM OPERATING AGREEMENTS" has the meaning set forth in Section 3.1
hereof.
"HOST MARRIOTT" has the meaning set forth in the first paragraph of this
Agreement.
"INVESTOR" means, with respect to any facility or property, any Person who,
directly or indirectly, owns, has an equity interest in or lends money to or
otherwise finances, such facility or property.
"MI" has the meaning set forth in the first paragraph of this Agreement.
"MSLS" has the meaning set forth in the first paragraph of this Agreement.
"OPERATOR" means, with respect to any facility or property, any Person who,
in whatever capacity, operates, manages, franchises (as a franchisor), or in any
other manner supervises the day-to-day conduct of, such facility or property.
"PERSON" means any person, firm, corporation, limited liability company,
general or limited partnership, limited liability partnership, association or
other entity.
"SENIOR LIVING BUSINESS" means (i) the business of operating, managing or
franchising (as a franchisor), or in any other manner supervising the day-to-day
conduct of, any Senior Living Facility (other than typical monitoring of an
Operator of a Senior Living Facility done by an Investor in such Senior Living
Facility) and (ii) operational or management services with respect to health
care, therapy, home health care, assisted living, nursing and related medical,
residential, supportive and personal care services conducted at or related to
any Senior Living Facility; provided that "SENIOR LIVING BUSINESS" does not
-------- ----
include activities involving services that are ancillary to a Senior Living
Facility (e.g. operation of a gift shop business), so long as such activities do
not involve either (x) conduct as an Operator of any such Senior Living
Facilities or (y) any of the activities described in clause (ii) above.
"SENIOR LIVING FACILITY" means any limited service or full service
retirement or senior living service facilities or communities, including
assisted living facilities, nursing homes, congregate care facilities and other
health care facilities providing residential, recreational, personal care, home
care, assisted living, nursing care, other health care and like services, in any
combination, to the elderly.
"SUBSIDIARIES" means, with respect to any Person at any time, corporations
or other entities which are more than fifty percent (50%) owned, directly or
indirectly, by such Person at such time, and partnerships in which such Person
or a subsidiary thereof is a general partner at such time.
"TERM" means that period commencing on the Closing Date and terminating on
the tenth anniversary of the Closing Date, provided, however, that, with respect
to Crestline and FGI,
3
<PAGE>
"Term" shall mean that period commencing on the Closing Date and terminating on
the thirteenth anniversary of the Closing Date.
"TERRITORY" shall mean the continental United States.
"TRANSFER" shall mean the sale, conveyance, disposal of or other transfer
of ownership, title or other interest, by operation of law or otherwise.
ARTICLE TWO
AGREEMENTS
2.1 AGREEMENT NOT TO COMPETE. Except as otherwise provided in this
------------------------
Article II, Host Marriott, Crestline and FGI shall not, nor shall Host Marriott,
Crestline or FGI permit any of their Subsidiaries or Affiliates to:
(i) during the Term, directly or indirectly, within the Territory (a)
compete in the Senior Living Business by conducting, participating or
engaging in, or bidding for or otherwise pursuing, whether as a principal,
sole proprietor, partner, financing source, equity holder or agent of, or
consultant to, or manager or operator for, another Person, any Senior
Living Business, or (b) have any ownership interest whatsoever in, or lend
money to or otherwise finance any Person that conducts, participates or
engages in, or bids for or otherwise pursues any Senior Living Business; or
(ii) except as expressly permitted by the Stock Purchase Agreement or
by a Forum Operating Agreement, use or permit any Subsidiary or Affiliate
to use, either as an Investor or as an Operator, the name "Forum" (or any
variant thereof) with respect to any Senior Living Facility or in any other
capacity in the Senior Living Business, including using their corporate
names, designs or logos (including the name "Forum") with respect to any
such Senior Living Facility (including identifying a geographic location
with respect to any such Senior Living Facility).
2.2 AGREEMENT NOT TO TRANSFER. During the Term, Host Marriott,
-------------------------
Crestline and FGI shall not, nor shall Host Marriott, Crestline or FGI permit
any of their Subsidiaries or Affiliates to, enter into (or agree to enter into)
any transaction or series of transactions that would upon consummation result,
directly or indirectly, in the Transfer of a controlling interest in ten (10) or
more Senior Living Facilities set forth on Schedule 1 hereto to the same Person
or affiliated group of Persons, unless contemporaneously therewith such
Person(s) execute and deliver an agreement binding such Person or Persons during
the remainder of the Term, to the restrictions in this Article II applicable to
Host Marriott, Crestline and FGI (subject to the exceptions set forth in Section
2.3), in form and substance reasonably satisfactory to MSLS.
2.3 EXCEPTIONS. Notwithstanding anything herein to the contrary,
----------
clause (i) of Section 2.1 shall not prohibit Host Marriott, Crestline, FGI or
any of their Subsidiaries and Affiliates from engaging in the following
activities:
4
<PAGE>
(i) the ownership of equity interests in any Person which derives
revenue from activities as an Operator in the Senior Living Business if (a)
such equity interests are traded on a national or regional stock exchange
in the United States or are traded on the National Association of
Securities Dealers, Inc., Automated Quotation System, and (b) Host
Marriott, Crestline, FGI or any of their Subsidiaries and Affiliates
directly or indirectly, are not beneficial owners of more than five percent
(5%) of such Person's outstanding equity interests, but only so long as
Host Marriott, Crestline, FGI or any of their Subsidiaries and Affiliates
do not seek to control the management or operations of any such Person; or
(ii) activities as an Operator of any Senior Living Facility owned by
any such Person for a period not to exceed twelve months in any such
instance, so long as such conduct arises solely as a result of a change in
management or the manager or operator of any such Senior Living Facility;
or
(iii) bidding for, otherwise pursuing the acquisition of, or
acquiring either (A) all of the voting and ownership interests in a Person,
or (B) voting and ownership interests sufficient to control a Person, in
each case if such Person is both an Operator in the Senior Living Business
and an Investor in Senior Living Facilities (including by means of
acquiring equity or debt securities of any such Person or providing
financing to any such Person); provided that (x) the principal purpose of
--------
such acquisition is other than acquiring for its own account, or
controlling, an Operator of a Senior Living Business and (y) the activities
conducted by such Person as an Operator in the Senior Living Business are
terminated, or such Senior Living Business (or Host Marriott's, Crestline's
or FGI's investment therein) is divested by Host Marriott, Crestline, FGI
and their Subsidiaries and Affiliates, within twelve months from the date
Host Marriott, Crestline, FGI or their Subsidiaries and Affiliates
(together with any Persons that may be acting in concert therewith) first
acquire a majority of the voting interests of such Operator or otherwise
are able to control such Operator; and provided further that, if requested
-------- -------
in writing by MSLS, Host Marriott or Crestline within five days confirms or
reconfirms in writing to MSLS that the principal purpose of the acquisition
is other than acquiring for its own account, or controlling, an Operator of
a Senior Living Business (for purposes of this paragraph, the terms
"control" and "controlling," when used with respect to any Person, mean the
power to direct the management and policies of such Person, directly or
indirectly, through the ownership of voting securities, by contract or
otherwise); or
(iv) engagement of an Operator (other than Host Marriott, Crestline,
FGI or any of their Subsidiaries or Affiliates) with respect to any Senior
Living Facility owned by Host Marriott, Crestline, FGI or any of their
Subsidiaries or Affiliates.
<PAGE>
2.4 PROPRIETARY INFORMATION.
-----------------------
(a) Host Marriott, Crestline and FGI shall not, nor shall either
Host Marriott, Crestline or FGI permit any of their Subsidiaries or
Affiliates to, at any time use for its own account or divulge to any Person
whomsoever any MSLS Confidential Information (as defined below). Each of
Host Marriott, Crestline and FGI shall use its best efforts to prevent the
publication or disclosure of any such MSLS Confidential Information by any
of their Subsidiaries or Affiliates. "MSLS Confidential Information" means
confidential or proprietary information or material received directly or
indirectly from MSLS or any of its Affiliates that is not publicly
available relating to the following: (1) projects in the Senior Living
Business or Senior Living Facilities that are under consideration or
development by MSLS or any of its Affiliates at any time, (2) current and
future operating systems and procedures employed by MSLS and its Affiliates
in their capacities as Operators in the Senior Living Business, (3)
marketing and feasibility analyses, studies and materials used and
developed from time to time by MSLS and its Affiliates, (4) development of
new or derivative products for use in the Senior Living Business or Senior
Living Facilities and (5) such other types of information and materials as
are reasonably requested by MSLS from time to time in writing to be treated
as confidential or proprietary information hereunder. Notwithstanding the
foregoing, Host Marriott, Crestline and FGI may disclose MSLS Confidential
Information (x) if and to the extent required by law, so long as prior
thereto (to the extent permitted by law) MSLS is provided the opportunity
to contest any such required disclosure, and (y) if and to the extent
required by existing or potential lenders, existing or potential investors
or potential acquirors of any Senior Living Facility owned or leased by
Host Marriott, Crestline, FGI or any of their Subsidiaries or Affiliates,
so long as such Persons acknowledge the confidential and proprietary nature
of such MSLS Confidential Information and agree, for the benefit of MSLS,
to keep such information confidential to the same extent as required
hereby.
(b) MSLS shall not, nor shall MSLS permit any of its
Subsidiaries or Affiliates to, at any time use for its own account or
divulge to any Person whomsoever any Host Confidential Information (as
defined below). MSLS shall use its best efforts to prevent the publication
or disclosure of any Host Confidential Information by any of its
Subsidiaries or Affiliates. "Host Confidential Information" means
confidential or proprietary information or material received directly or
indirectly from Host Marriott, Crestline, FGI or any of their Subsidiaries
or Affiliates that is not publicly available relating to (i) projects that
are under consideration or development by Host Marriott, Crestline, FGI or
any of their Subsidiaries or Affiliates at any time in their capacities as
Investors in Senior Living Facilities, (ii) marketing and feasibility
analyses, studies and materials used and developed from time to time by
Host Marriott, Crestline, FGI and their Subsidiaries and Affiliates in
their capacities as Investors in Senior Living Facilities or (iii) such
other types of information and materials as are reasonably requested by
Host Marriott or Crestline from time to time in writing to be treated as
confidential or proprietary information hereunder. Notwithstanding the
foregoing, MSLS may disclose Host
6
<PAGE>
Confidential Information (x) if and to the extent required by law, so long
as prior thereto (to the extent permitted by law) Host Marriott, Crestline
and FGI are provided the opportunity to contest any such required
disclosure and (y) if and to the extent required by existing or potential
lenders, existing or potential investors or potential acquirors of MSLS's
Senior Living Business, so long as such Persons acknowledge the
confidential and proprietary nature of such Host Confidential Information
and agree, for the benefit of Host Marriott or Crestline, to keep such
information confidential to the same extent as required hereby.
2.5 INTERPRETATION. The parties agree that the period of restriction
--------------
and the geographical area of restriction imposed upon Host Marriott, Crestline
and FGI in this Article II are fair and reasonable and are reasonably required
for the protection of MSLS. If the provisions of this Agreement relating to the
area of restriction or the period of restriction shall be deemed to exceed the
maximum area or period which a court having jurisdiction over the matter would
deem enforceable, such area or period shall, for purposes of this Agreement, be
deemed to be the maximum area or period which such court would deem valid and
enforceable.
ARTICLE THREE
DEVELOPMENT AND ACQUISITION RIGHTS
3.1 DEVELOPMENT RESTRICTIONS. MSLS is a party to operating
------------------------
agreements with respect to all Senior Living Facilities owned indirectly by FGI
on the date hereof and listed on Schedule 1 to this Agreement (the "Forum
Operating Agreements"), and, in accordance therewith, the parties thereto have
agreed upon certain restrictions regarding development of Similar Properties
within specified regions. These regions are referred to as "Area A" and "Area
B" in each Forum Operating Agreement. As used herein, "Similar Property" means
a then-existing full service retirement community offering the full care
continuum of independent living (predominantly), assisted living, and health
care services, and "Assisted Living Facility" means a retirement community or
facility dedicated in its entirety to assisted living accommodations and
services, Alzheimer's facilities and nursing care facilities, so long as the
Alzheimer's and nursing care facilities constitute less than half of such
community or facility.
3.2 ACQUISITION OF SIMILAR PROPERTY. Until the earlier of (x) the
-------------------------------
seventh anniversary of the Closing Date or (y) the date on which the Forum
Operating Agreement for the relevant Senior Living Facility is terminated
(unless such termination results from a breach by MSLS thereunder), if MI, MSLS
or any of their Affiliates has the opportunity to acquire a Similar Property in
either Area A or Area B and MSLS is permitted under the Forum Operating
Agreement to acquire Similar Properties in Area A or Area B, at MI's or MSLS's
option, MI or MSLS shall either (i) offer Crestline the opportunity to acquire
such Similar Property by providing prompt written notice to Crestline of such
opportunity or (ii) attempt to acquire such Similar Property itself (or through
one of its Affiliates) and, if successful in acquiring such similar Property,
thereafter offer Crestline the opportunity to acquire such Similar Property on
substantially similar terms and conditions by providing prompt written notice to
Crestline of such
7
<PAGE>
opportunity as soon as practicable following the acquisition of such Similar
Property. Within thirty (30) days of this initial notice, Crestline must provide
written notice to MI or MSLS of its intention to exercise this right. Failure to
deliver such notice in a timely manner will terminate Crestline's rights
hereunder as to the Similar Property in question. In connection with its
acquisition of a Similar Property in accordance with this Section 3.2, Crestline
will cause the owner of such Similar Property to enter into an operating
agreement with MSLS having terms substantially similar to a Forum Operating
Agreement. Crestline's rights under this Section 3.2 will not apply to any
Similar Properties constructed or developed by MI, MSLS or any of their
Affiliates.
3.3 ASSISTED LIVING DEVELOPMENT PARTICIPATION RIGHTS. Until the
------------------------------------------------
earlier of (x) the seventh anniversary of the Closing Date or (y) the date on
which the Forum Operating Agreement for the relevant Senior Living Facility is
terminated (unless such termination results from a breach by MSLS thereunder),
MI and MSLS will allow Crestline the opportunity to negotiate to participate in
the development (as an Investor) of any Assisted Living Facility that MI, MSLS
or their Affiliates may seek to develop in such Area A or Area B. The right of
Crestline to negotiate with MI or MSLS to participate in the development of an
Assisted Living Facility in such Area A or Area B shall commence upon its
receipt of written notice from MI or MSLS, specifically referencing this Section
3.3, of its intent to develop an Assisted Living Facility in such area.
Crestline must provide written notice to MI or MSLS within ten (10) days of this
initial notice if it intends to exercise this right. Failure to deliver such
notice in a timely manner will terminate Crestline's rights hereunder as to the
Assisted Living Facility in question. If such notice is timely received, MI or
MSLS and Crestline shall negotiate the terms and conditions upon which MI or
MSLS would permit Crestline to invest in such Assisted Living Facility (it being
understood that any such terms and conditions would require the owner of such
Assisted Living Facility to enter into an operating agreement with MI or MSLS
having terms substantially similar to a Forum Operating Agreement). If the
terms of the proposed investment are not mutually agreed upon within forty-five
(45) days of MI's or MSLS' initial notice, MI or MSLS may enter into agreements
with any other parties for investment in such Assisted Living Property upon any
terms whatsoever. In no event shall MI or MSLS be obligated to offer to
Crestline the opportunity to invest in such Assisted Living Property on the same
terms to which MI or MSLS agrees with any other party so long as MI or MSLS has
complied with the other provisions of this Section. Crestline's rights under
this Section 3.3 will not apply to (x) any of the Senior Living Facilities set
forth on Schedule 2 hereto or (y) any Assisted Living Facility acquired or
sought to be acquired by MI, MSLS or any of their Affiliates.
3.4 ASSIGNMENT. The rights under this Article III are not assignable
----------
by Crestline, except to (i) one of its Affiliates or (ii) any successor to all
or substantially all of Crestline's business as an Investor in Senior Living
Facilities; provided that neither Host Marriott nor Crestline is released from
--------
its obligations in connection with any such assignment.
3.5 NO EFFECT ON FORUM OPERATING AGREEMENTS. The terms of this
---------------------------------------
Article III do not modify or otherwise affect the restrictions on MI, MSLS and
their Affiliates set forth in Section 19.14 of each Forum Operating Agreement.
8
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
4.1 ENTIRE AGREEMENT. This Agreement, the Stock Purchase Agreement
----------------
and the other Transaction Documents (as defined in the Stock Purchase Agreement)
constitute the entire agreement of the parties concerning the subject matter
hereof. Additional restrictions on competition may be contained in the Forum
Operating Agreements, and restrictions contained therein shall be in addition to
the restrictions contained herein.
4.2 DOCUMENTARY CONVENTIONS. This Agreement shall be governed by the
-----------------------
Documentary Conventions. Documentary Conventions means, with respect to any
document or agreement that states in substance that it is governed thereby, that
such document or agreement shall be deemed to include the following provisions
and all references in any such provisions to "this Agreement," "hereunder,"
"hereby" or similar phrases shall refer to the document or agreement in which
such provisions are incorporated:
(i) MODIFICATIONS. No modification to this Agreement shall be valid
unless in writing and signed by all parties thereto. No purported waiver
of any of the provisions of this Agreement shall be valid or effective
unless in writing signed by the party against whom such waiver is sought to
be enforced.
(ii) SURVIVAL. All representations, warranties and covenants in this
Agreement shall survive and not be merged in the execution of this
Agreement.
(iii) GOVERNING LAW. The Agreement shall be governed by and
construed in accordance with the internal laws of the State of Maryland,
without reference to conflicts of laws principles.
(iv) CAPTIONS; PRONOUNS. Captions in this Agreement are for
convenience of reference only and shall not be considered in construing
this Agreement. Whenever the context shall so require, the singular shall
include the plural, the male gender shall include the female, and vice
versa. "Include," "includes" and "including" shall be deemed to be
followed by "without limitation" whether or not they are in fact followed
by such words or words of like import.
(v) EXHIBITS. All exhibits to this Agreement are incorporated in
this Agreement as though set forth in full in the text of this Agreement.
(vi) COUNTERPARTS. Multiple originals of this Agreement may be
executed, each of which shall constitute one and the same agreement. This
Agreement may be executed in counterparts, and it shall not be necessary
that the original signature of each party to this Agreement appear on each
such counterpart.
9
<PAGE>
(vii) SEVERABILITY. In the event that one or more of the provisions
of this Agreement shall be held to be illegal, invalid or unenforceable,
such provisions shall be deemed severable and the remaining provisions of
this Agreement shall continue in full force and effect.
(viii) NOT CONSTRUED AGAINST DRAFTER. Each party to this Agreement
acknowledges that it was represented by counsel in connection with this
Agreement, and that it and its counsel reviewed and participated in the
preparation and negotiation of this Agreement. Consequently, any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this
Agreement.
(ix) BUSINESS DAY. To the extent that the date of any performance
required under this Agreement falls on a date which is not a business day,
the date of performance shall be extended to the next succeeding business
day.
(x) WAIVERS. No waiver of any provision or right set forth in this
Agreement shall be valid unless it is in writing signed by the party
against which such waiver is sought to be enforced. The failure of any
party to insist on strict performance of any of the provisions of this
Agreement or to exercise any right granted to it under this Agreement shall
not be construed as a waiver of the requirement of such performance.
(xi) PARTIES IN INTEREST. This Agreement shall be binding upon and
inure to the benefit of each party, and nothing in this Agreement, express
or implied, is intended to confer upon any other person or entity any
rights or remedies of any nature whatsoever under or by reason of this
Agreement. Nothing in this Agreement is intended to relieve or discharge
the obligation of any third person to any party of this Agreement.
4.3 REMEDIES. The parties agree that irreparable damage would occur
--------
in the event any of the provisions of this Agreement were not to be performed in
accordance with the terms hereof, and that their remedy at law for any breach of
the other party's obligations hereunder would be inadequate. The parties agree
and consent that, in addition to any other rights or remedies that may be
available of law or in equity, temporary and permanent injunctive relief may be
granted in any proceeding which may be brought to enforce any provision hereof
without the necessity of proof of actual damage.
4.4 ENFORCEABILITY; SUCCESSORS AND ASSIGNS. Subject to the terms of
--------------------------------------
Section 4.5 hereof, the terms, conditions and promises contained in this
Agreement shall be binding upon and shall inure to the benefit of each of the
parties hereto, their heirs, personal representatives or successors and assigns,
including, in the case of MSLS, any successor to all or substantially all of
MSLS's Senior Living Business. Each party hereto covenants and agrees to cause
its Subsidiaries and Affiliates to comply with such party's obligations
hereunder. Nothing herein,
10
<PAGE>
expressed or implied, shall be construed to give any other Person any legal or
equitable rights hereunder.
4.5 ASSIGNMENT. Except in the case of MSLS as provided in Section
----------
4.4 and in the case of Crestline as provided in Section 3.4, no party to this
Agreement shall, without the prior written consent of the others assign any
rights or delegate any obligations under this Agreement.
4.6 CONSENT TO JURISDICTION. Any suit, action or proceeding under or
-----------------------
in connection with this Agreement shall be brought in any federal or state court
of competent jurisdiction located in the State of Maryland. By execution of
this Agreement, each party consents to the exclusive jurisdiction of such
courts, and waives any right to challenge the jurisdiction of such courts or the
appropriateness of venue in such courts. EACH PARTY HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING UNDER OR IN
CONNECTION WITH THIS AGREEMENT.
4.7 NOTICES. All notices and other communications hereunder shall be
-------
in writing and shall be delivered by hand, by facsimile, delivered by nationally
recognized overnight courier, or mailed by registered or certified mail (return
receipt requested) to the parties at the following addresses (or at such other
addresses for a party as shall be specified by like notice) and shall be deemed
given on the date on which such notice is received:
To Host Marriott:
Host Marriott Corporation
Asset Management Department 908
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Director, Senior Living Facilities
FAX NO. 301/380-6338
with a copy to:
Host Marriott Corporation
Law Department 903
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: General Counsel
FAX NO. 301/380-3588
with a copy to:
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004
11
<PAGE>
Attention: Michael D. Goodwin, Esq.
FAX NO. 202/942-5999
To Crestline or FGI:
c/o Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland, 20817
Attention: General Counsel
FAX NO.
with a copy to:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland, 20817
Attention: Elizabeth Lieberman
FAX NO.
To MSLS:
Marriott Senior Living Services, Inc.
One Marriott Drive
Washington, D.C. 20058 (registered or certified mail)
Attention: Chief Financial Officer
Dept. 52/923
FAX NO. 301/380-6540
and
10400 Fernwood Road
Bethesda, Maryland 20817 (express mail or courier)
Attention: General Counsel
Dept. 52/923
FAX NO. 301/380-6727
12
<PAGE>
with a copy to:
O'Melveny & Myers LLP
555 13th Street, N.W.
Washington, D.C. 20004
Attention: David G. Pommerening, Esq.
FAX NO. 202/383-5414
4.8 RELATIONSHIP OF PARTIES. It is understood and agreed that
-----------------------
nothing in this Agreement shall be deemed or construed by the parties or any
third party as creating an employer-employee principal/agent, partnership or
joint venture relationship between the parties. It is further understood that
the obligations of each of Host Marriott, on the one hand, and Crestline and
FGI, on the other hand, hereunder, and any liability arising therefrom, is
several and not joint.
4.9 HOST REIT AS SUCCESSOR. The parties acknowledge that, upon the
-----------------------
effectiveness of the Merger, Host REIT shall succeed to all the rights and
obligations of Host Marriott under this Agreement.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the day and year first above written.
MARRIOTT SENIOR LIVING SERVICES, INC.
By:
-------------------------------------
Name:
Title:
MARRIOTT INTERNATIONAL, INC.
By:
-------------------------------------
Name:
Title:
HOST MARRIOTT CORPORATION
By:
-------------------------------------
Name:
Title:
HMC MERGER CORPORATION
By:
-------------------------------------
Name:
Title:
S-1
<PAGE>
FORUM GROUP, INC.
By:
-------------------------------------
Name:
Title:
CRESTLINE CAPITAL CORPORATION
By:
-------------------------------------
Name:
Title:
S-2
<PAGE>
SCHEDULE 1
----------
COMMUNITIES SUBJECT TO FORUM OPERATING AGREEMENTS
-------------------------------------------------
The Forum at Brookside, Louisville, Kentucky.
Coral Oaks Retirement Community, Palm Harbor, Florida.
Forum at Deer Creek, Deerfield Beach, Florida.
Desert Harbor, Peoria, Arizona.
Forwood Manor, Wilmington, Delaware.
The Forum at the Crossing, Indianapolis, Indiana.
Foulk Manor North, Wilmington, Delaware.
Foulk Manor South, Wilmington Delaware.
Fountainview, West Palm Beach, Florida.
Springwood Court, Ft. Myers, Florida.
The Forum at Knightsbridge, Columbus, Ohio.
Lafayette at Country Place, Lexington, Kentucky.
Lexington at Country Place, Lexington, Kentucky.
Forum at Lincoln Heights, San Antonio, Texas.
The Forum at Memorial Woods Healthcare, Houston, Texas.
Millcroft Retirement & Nursing Home, Wilmington, Delaware.
Montebello on Academy, Albuquerque, New Mexico.
Montevista at Coronado, El Paso, Texas.
Myrtle Beach Manor, Myrtle Beach, South Carolina.
<PAGE>
The Forum at Overland Park, Overland Park, Kansas.
The Forum at Park Lane, Dallas, Texas.
Park Summit at Coral Springs, Coral Springs, Florida.
The Forum - Pueblo Norte, Scottsdale, Arizona.
Remington Club I at Rancho Bernardo, San Diego, California.
Remington Club II at Rancho Bernardo, San Diego, California.
Shipley Manor, Wilmington, Delaware.
Tiffany House, Ft. Lauderdale, Florida.
Forum at Tucson, Tucson, Arizona.
Forum at The Woodlands, Montgomery County, Texas.
<PAGE>
SCHEDULE 2
Assisted Living Sites Under Development
---------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
EXISTING COMMUNITY APPROXIMATE LOCATIONS OF EXISTING DEVELOPMENT SITES
- -----------------------------------------------------------------------------------------------------
<S> <C>
1. BROOKSIDE None
- -----------------------------------------------------------------------------------------------------
2. CORAL OAKS None
- -----------------------------------------------------------------------------------------------------
3. FORUM @ CROSSING Approximately 400 feet west of Forum @ Crossing at NWC of E. 86th
St. & Elrico
- -----------------------------------------------------------------------------------------------------
4. DEER CREEK None
- -----------------------------------------------------------------------------------------------------
5. DESERT HARBOR None
- -----------------------------------------------------------------------------------------------------
6. FORWOOD MANOR S/W corner of New Murph Rd. (Rt. 141) and Rockland Rd.
- -----------------------------------------------------------------------------------------------------
7. FOULK MANOR NORTH S/W corner of New Murph Rd. (Rt. 141) and Rockland Rd.
- -----------------------------------------------------------------------------------------------------
8. FOULK MANOR NORTH . S/W corner of New Murph Rd. (Rt. 141) and Rockland Rd.
. S/E corner of Lancaster Pike (Rt. 48) and Centerville Rd.
- -----------------------------------------------------------------------------------------------------
9. FOUNTAINVIEW None
- -----------------------------------------------------------------------------------------------------
10. KNIGHTSBRIDGE None
- -----------------------------------------------------------------------------------------------------
11. LAFAYETTE None
- -----------------------------------------------------------------------------------------------------
12. LEXINGTON None
- -----------------------------------------------------------------------------------------------------
13. LINCOLN HEIGHTS None
- -----------------------------------------------------------------------------------------------------
14. MEMORIAL WOODS None
- -----------------------------------------------------------------------------------------------------
15. MILLCROFT None
- -----------------------------------------------------------------------------------------------------
16. MONTEBELLO None
- -----------------------------------------------------------------------------------------------------
17. MONTEVISTA None
- -----------------------------------------------------------------------------------------------------
18. MYRTLE BEACH MANOR None
- -----------------------------------------------------------------------------------------------------
19. OVERLAND PARK East Side of Mission Road South of 71st Street
- -----------------------------------------------------------------------------------------------------
20. PARK LANE Across the street from Park Lane Forum
- -----------------------------------------------------------------------------------------------------
21. PARK SUMMIT None
- -----------------------------------------------------------------------------------------------------
22. PUEBLO NORTE . Hayden Avenue and E. Cactus Rd.
. 91st St.; South of Shea Blvd.
- -----------------------------------------------------------------------------------------------------
23. REMINGTON I None
- -----------------------------------------------------------------------------------------------------
24. REMINGTON II None
- -----------------------------------------------------------------------------------------------------
25. SHIPLEY MANOR S/W corner of New Murph Rd. (Rt. 141) and Rockland Rd.
- -----------------------------------------------------------------------------------------------------
26. SPRINGWOOD COURT None
(formerly known as
Independence Court of
Kentwood)
- -----------------------------------------------------------------------------------------------------
27. TIFFANY HOUSE None
- -----------------------------------------------------------------------------------------------------
28. TUCSON None
- -----------------------------------------------------------------------------------------------------
29. WOODLANDS (formerly known None
as Chambrel)
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 10.11
RESTATED NONCOMPETITION AGREEMENT
---------------------------------
THIS RESTATED NONCOMPETITION AGREEMENT ("Agreement") is made and
entered into as of March __, 1998, by and between HOST MARRIOTT CORPORATION, a
Delaware corporation ("Host Marriott"), NEW MARRIOTT MI, INC., a Delaware
corporation (to be renamed Marriott International, Inc.) ("New Marriott"), and,
subject to Section 5.14 hereof, MARRIOTT INTERNATIONAL, INC., a Delaware
corporation (to be renamed Sodexho Marriott Services, Inc.) ("SMS"). As used in
this Agreement, and subject to the provisions of Section 5.14 hereof with
respect to Marriott International, the terms "Host Marriott" and "Marriott
International" shall mean Host Marriott and New Marriott, respectively, and
their respective Subsidiaries and Affiliates, other than any Subsidiaries and
Affiliates in which the respective direct or indirect ownership interest of Host
Marriott or Marriott International is less than fifty percent (50%).
WHEREAS, SMS and Host Marriott entered into a Noncompetition Agreement
dated as of October 8, 1993, as amended (the "Original Agreement"), in
connection with and pursuant to that certain Distribution Agreement between them
dated as of September 15, 1993, (as thereafter amended from time to time,
"Distribution Agreement").
WHEREAS, on December 29, 1995, Host Marriott spun off certain of the
businesses subject to the Original Agreement through a distribution of the stock
of its then subsidiary, Host Marriott Services Corporation ("HMSC"), to its
shareholders, and accordingly, SMS, Host Marriott and HMSC entered into an
amendment dated as of December 29, 1995 to the Original Agreement which added
HMSC as a party (the Original Agreement, as so amended, the "Existing
Agreement").
WHEREAS, on October 1, 1997, SMS announced its intention to spin off
to its shareholders a new company, New Marriott, which will directly or through
subsidiaries own all or substantially all of Marriott International's lodging,
senior living and distribution services businesses; and to rename SMS, the
corporate entity which will retain its management services business, Sodexho
Marriott Services, Inc.
WHEREAS, as a result of consummation the two spin off transactions
described above, the businesses subject to the Existing Agreement will be owned
by four separate companies, Host Marriott, HMSC, SMS, and Marriott
International; with the result that four companies would need to participate in
any and every future modification of or waiver under the Existing Agreement,
even though any such waiver or modification would likely have no relevance to
two of the four companies.
<PAGE>
WHEREAS, New Marriott, SMS, Host Marriott and HMSC now wish to replace
the Existing Agreement with two bilateral agreements, of which this Agreement is
one, each covering only that subset of the businesses covered by the Existing
Agreement which are germane to such parties and each of which is to be deemed by
the parties thereto to be a continuation of the Original Agreement with respect
to such parties; and accordingly are entering into an Acknowledgment and Release
substantially in the form of Exhibit A attached hereto.
---------
NOW, THEREFORE, in consideration of the premises and the mutual
convenants contained herein and for other valuable consideration, the receipt
and sufficiency of which are hereby mutually acknowledged, Host Marriott and
Marriott International agree as between themselves to Amend and Restate the
Existing Agreement as follows:
ARTICLE ONE
DEFINITIONS
1. DEFINITIONS. The following terms when used herein shall have the
-----------
meaning set forth below:
"AFFILIATES" shall mean any Person directly or indirectly controlling
----------
or controlled by, or under direct or indirect common control with Host Marriott
or Marriott International, as the case may be. For purposes of this definition
"control", when used with respect to any Person, means the power to direct the
management and policies of such person, directly or indirectly, through the
ownership of voting securities, by contract, or otherwise. Notwithstanding the
foregoing, Host Marriott's Affiliates shall not include Marriott International
or its Subsidiaries or Affiliates, and Marriott International's Affiliates shall
not include Host Marriott or its Subsidiaries of Affiliates.
"COMMON NAME" shall mean any single or multiple hotel management or
-----------
franchise system operating under one or more common brand names.
"COMPETE" shall mean (i) to conduct or participate or engage in, or
-------
bid for or otherwise pursue a business, whether as a principal, sole proprietor,
partner, stockholder, or agent of, or consultant to or manager for, any Person
or in any other capacity, or (ii) have any ownership interest in any Person or
business which conducts, participates or engages in, or bids for or otherwise
pursues a business, whether as a principal, sole proprietor, partner,
stockholder, or agent of, or consultant to or manager for, any Person or in any
other capacity.
"CONFERENCE CENTERS" shall mean the facilities for conferences and
------------------
meetings of groups and associations (together with the lodging, food and other
services related thereto), principally utilized by Persons belonging to or
affiliated with educational, health care, governmental, corporate or other
organizations, or
2
<PAGE>
other facilities marketed primarily for such conference and group meeting
business, such as the U.S. Postal Service Conference Center located in Norman,
Oklahoma, substantially as it is being operated by Marriott International as of
October 8, 1993.
"EFFECTIVE PERIOD" shall mean that period commencing on October 8,
----------------
1993 and automatically terminating without further documentation on October 8,
2000.
"HOTEL MANAGEMENT BUSINESS" means the business of managing, operating
-------------------------
or franchising limited service or full service hotel properties with respect to
matters incident to the operation of such properties including, without
limitation, management services with respect to food, beverages, housekeeping,
laundry, vending, plant and equipment operation and maintenance, grounds care,
gift or merchandise shops within such properties, reservations, sales and
marketing services, conference and meeting facilities, health rooms, swimming
and other sports facilities and all other services related to the operation of
such hotel properties.
"HOST MARRIOTT" shall have the meaning set forth in the first
-------------
paragraph of this Agreement.
"MARRIOTT INTERNATIONAL" shall have the meaning set forth in the first
----------------------
paragraph of this Agreement.
"NEW MARRIOTT" shall have the meaning set forth in the first paragraph
------------
of this Agreement.
"NEW MARRIOTT SPINOFF" means the spinoff of New Marriott to the
--------------------
shareholders of SMS which was announced on October 1, 1997 and is expected to be
consummated on or about March 27, 1998.
"PERSON" shall mean any person, firm, corporation, general or limited
------
partnership, association, or other entity.
"SMS" shall have the meaning set forth in the first paragraph of this
---
Agreement.
"SUBSIDIARIES" shall mean corporation or other entities which are more
------------
than fifty percent (50%) owned, directly or indirectly, by Host Marriott or
Marriott International, as the case may be, and partnerships in which Host
Marriott or Marriott International, as the case may be, or a subsidiary
corporation, is a general partner.
"TERRITORY" shall mean the United States, Canada, and their respective
---------
territories and protectorates.
3
<PAGE>
"TRANSFER" shall mean the sole, conveyance, disposal of or other
--------
transfer of ownership, title or other interest.
Any capitalized terms defined in the Distribution Agreement and used herein
shall have the meanings ascribed to them in the Distribution Agreement unless
otherwise defined herein. By this reference, the Distribution Agreement is
incorporated in this Agreement.
ARTICLE TWO
NONCOMPETITION WITH RESPECT TO THE MMS BUSINESS
2. [INTENTIONALLY DELETED].
ARTICLE THREE
NONCOMPETITION WITH RESPECT TO THE HOST BUSINESS
3. [INTENTIONALLY DELETED].
ARTICLE FOUR
NONCOMPETITION WITH RESPECT TO THE HOTEL MANAGEMENT BUSINESS
4.1 CERTAIN RESTRICTIONS ON HOST MARRIOTT.
-------------------------------------
A. Except as provided in Sections 4.1.B., 4.1.C. and 4.1.D., Host
Marriott shall be entitled to (i) own, lease, acquire and develop hotel
properties, (ii) operate or manage (self-managed or managed by a third party)
Host Marriott's hotel properties, and (iii) Compete in the Hotel Management
Business.
B. Host Marriott shall not own, lease subsequently acquire any hotel
properties using the names "Marriott", "Courtyard", "Residence Inn" or
"Fairfield" unless Marriott International is operating, managing or franchising
such properties pursuant to an agreement with Host Marriott.
C. Notwithstanding the foregoing Section 4.1.A., during the Effective
Period, but solely with respect to hotel properties acquired subsequent to the
Effective Date, Host Marriott shall comply with the following restrictions:
(i) Host Marriott may operate an unlimited number of hotel
properties so long as Host Marriott does not operate more than ten
(10) such properties under a Common Name.
(ii) Host Marriott may contract with a third party manager for
operation of an unlimited number of hotel properties so long as the
number so operated in not more than the greater of (a) ten (10) such
4
<PAGE>
properties operated under a common name or (b) twenty-five percent
(25%) of the system operated by such manager or managers under a
Common Name.
(iii) Host Marriott may franchise as franchisor an unlimited
number of hotel properties so long as Host Marriott is not franchisor
for more than ten (10) such properties under a Common Name.
The foregoing restrictions in this Section 4.1.C. shall not be binding upon a
lender of Host Marriott nor on a purchaser of the aforementioned hotel
properties.
D. Nothing in this Agreement shall give any party the right to be a
franchisee or franchisor of Marriott International without the approval of
Marriott International.
ARTICLE FIVE
MISCELLANEOUS
5.1 [INTENTIONALLY DELETED].
5.2 ENTIRE AGREEMENT. This Agreement, the Distribution Agreement and
----------------
the Restated Documents constitute the entire agreement of the parties concerning
the subject matter hereof. Additional restrictions on competition may be
contained in the Assignment and License Agreement between Host Marriott and
Marriott International of even date herewith, or in certain hotel facility,
management agreements, and restrictions continued therein shall be in addition
to the restrictions contained herein.
5.3 MODIFICATION. This Agreement may only be amended, modified or
------------
supplemented in a written agreement signed by both parties hereto.
5.4 WAIVER. No term or condition of this Agreement shall be deemed
------
to have been waived, nor shall there be any estoppel against the enforcement of
any provision hereof, except by written instrument of the party charged with
such waiver or estoppel.
5.5 SEVERABILITY. Host Marriott and Marriott International agree
------------
that the period of restriction and the geographical area of restriction imposed
upon the parties are fair and reasonable and are reasonably required for the
protection of each of the parties hereto. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect as though the invalid
portions were not a part hereof. If the provisions of this Agreement relating
to the area of restriction or the period of restriction shall be deemed to
exceed the maximum area or period which a court having jurisdiction over the
matter would deem enforceable, such area or period
5
<PAGE>
shall, for purposes of this Agreement, be deemed to be the maximum area or
period which such court would deem valid and enforceable.
5.6 REMEDIES. Marriott International and Host Marriott agree that
--------
irreparable damage would occur in the event any of the provisions of this
Agreement were not to be performed in accordance with the terms hereof, and that
their remedy at law for any breach of the other party's obligations hereunder
would be inadequate. Marriott International and Host Marriott agree and consent
that temporary and permanent injunctive relief may be granted in any proceeding
which may be brought to enforce any provision hereof without the necessity of
proof of actual damage.
5.7 ENFORCEABILITY. The terms, conditions and promises contained in
--------------
this Agreement shall be binding upon and shall inure to the benefit of each of
the parties hereto, their heirs, personal representatives, or successors and
assigns. Each of the parties hereto shall cause its subsidiaries to comply with
such party's obligations hereunder. Nothing herein, expressed or implied, shall
be construed to give any other person any legal or equitable rights hereunder.
5.8 ASSIGNMENT AND SUCCESSORS AND ASSIGNS. Neither party shall,
-------------------------------------
without the prior written consent of the other, assign any rights or delegate
any obligations under this Agreement.
5.9 CONSENT TO JURISDICTION. Subject to Section 5.1 hereof, the
-----------------------
parties irrevocably submit to the exclusive jurisdiction of (a) the Courts of
the State of Maryland in Montgomery County, and (b) if federal jurisdiction
exists, the United States District Court for the State of Maryland for the
purposes of any suit, action or other proceeding arising out of this Agreement.
Each party hereby irrevocably designates, appoints and empowers Prentice Hall
Corporation System, Inc. as its true and lawful agent and attorney-in-fact in
its name, place, and stead to receive on its behalf service of process in any
action, suit, or proceeding with respect to any matters as to which it has
submitted to jurisdiction as set forth in the immediate preceding sentence.
5.10 INTERPRETATION. When a reference is made in this Agreement to a
--------------
Section, Article, or Schedule, such reference shall be to a Section, Article, or
Schedule of this Agreement unless otherwise indicated. The headings contained
in this Agreement are for reference purposes only and shall neither affect the
meaning or interpretation of this Agreement, nor define or limit the scope or
intent of any provision or part hereof. Whenever the words "include," or
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
5.11 NOTICES. All notices and other communications hereunder shall
-------
be in writing and shall be delivered by hand, by facsimile or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or
6
<PAGE>
at such other addresses for a party as shall be specified by like notice) and
shall be deemed given on the date on which such notice is received:
To Host Marriott:
Host Marriott Corporation
10400 Fernwood Road
Washington, D.C. 20058 (registered or certified mail)
Bethesda, Maryland 20817 (express mail or courier)
Attention: General Counsel
Dept. 72/923
FAX NO.________________
To Marriott International:
Marriott International, Inc.
One Marriott Drive
Washington, D.C. 20058 (registered or certified mail)
Attention: General Counsel
Dept. 52/923
FAX NO. 301/380-6727
or
10400 Fernwood Road
Bethesda, Maryland 20817 (express mail or courier)
Attention: General Counsel
Dept. 52/923
FAX NO. 301/380-6727
5.12 GOVERNING LAW. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Maryland, regardless of
the laws that might be applied under applicable principles of conflicts of laws.
5.13 RELATIONSHIP OF PARTIES. It is understood and agreed that
-----------------------
nothing in this Agreement shall be deemed or construed by the parties or any
third party as creating an employer-employee, principal/agent, partnership or
joint venture relationship between the parties.
5.14 NEW MARRIOTT SPINOFF; RELEASE OF SMS. Until such time as the
------------------------------------
New Marriott Spinoff is consummated, the term "Marriott International" shall
mean SMS and its Subsidiaries (including, without limitation, New Marriott) and
Affiliates, other than any Subsidiaries and Affiliates in which the direct or
indirect ownership interest of SMS is less than fifty percent (50%). Upon
consummation of the New Marriott Spinoff, SMS shall automatically cease to be a
party to this
7
<PAGE>
Agreement, and shall have no further rights and be released from all duties
hereunder.
5.15 EFFECTIVENESS AND EFFECT ON EXISTING AGREEMENT. This Agreement
----------------------------------------------
shall not become effective, and the Existing Agreement shall remain in effect,
until such time as New Marriott, Host Marriott, SMS, and HMSC have executed and
delivered an Acknowledgment and Release substantially in the form of Exhibit A
---------
hereto. Thereafter, as between Marriott International and Host Marriott, this
Agreement shall for all purposes be deemed to be an amendment, restatement and
continuation of the Existing Agreement, which shall then have no further
independent force or effect.
[SIGNATURES ON FOLLOWING PAGE]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered, all as of the day and year first above written.
Marriott International:
NEW MARRIOTT MI, INC. (to be renamed Marriott
International, Inc.)
By: /s/ Raymond G. Murphy
-------------------------------
Raymond G. Murphy
Senior Vice President and Treasurer
Host Marriott:
HOST MARRIOTT CORPORATION
By: /s/ C.G. Townsend
-------------------------------
Name: C.G. Townsend
Title: Senior Vice President
SMS [Subject to the provisions of Section 5.14]
MARRIOTT INTERNATIONAL, INC. (to be renamed
Sodexho Marriott Services, Inc.)
By: /s/ Raymond G. Murphy
-------------------------------
Raymond G. Murphy
Senior Vice President and Treasurer
9
<PAGE>
EXHIBIT A
---------
ACKNOWLEDGMENT AND RELEASE
--------------------------
This ACKNOWLEDGMENT AND RELEASE is made and entered into as of March
__, 1998, by and between (each a "Party") HOST MARRIOTT CORPORATION, a Delaware
corporation ("Host Marriott"), NEW MARRIOTT MI, INC., a Delaware corporation (to
be renamed Marriott International, Inc.) ("New Marriott"), MARRIOTT
INTERNATIONAL, INC., a Delaware corporation (to be renamed Sodexho Marriott
Services, Inc.) ("SMS"), and HOST MARRIOTT SERVICES CORPORATION, a Delaware
corporation ("HMSC").
WHEREAS, SMS and Host Marriott entered into a Noncompetition Agreement
dated as of October 8, 1993, as amended (the "Original Agreement").
WHEREAS, on December 29, 1995, Host Marriott spun off certain of the
businesses subject to the Original Agreement through a distribution of the stock
of its then subsidiary, HMSC, to its shareholders, and accordingly, SMS, Host
Marriott and HMSC entered into an amendment dated as of December 29, 1995 to the
Original Agreement which added HMSC as a party (the Original Agreement, as so
amended, the "Existing Agreement").
WHEREAS, on October 1, 1997, SMS announced its intention to spin off
to its shareholders a new company, New Marriott, which will directly or through
subsidiaries own all or substantially all of Marriott International's lodging,
senior living and distribution services businesses; and to rename SMS, the
corporate entity which will retain its management services business, Sodexho
Marriott Services, Inc.
WHEREAS, as a result of consummation the two spin off transactions
described above, the businesses subject to the Existing Agreement will be owned
by the four separate Parties, with the result that each Party would need to be
participate in any and every future modification of one waiver under the
Existing Agreement, even though any such waiver or modification would likely
have no relevance to two of the four Parties.
WHEREAS, the Parties have therefore agreed to replace the Existing
Agreement with the following bilateral agreements, each covering only that
subset of the businesses covered by the Existing Agreement which is germane to
such Parties and each of which is deemed by the Parties thereto to be a
continuation of the Original Agreement with respect to such parties (each, a
"Restated Agreement"): (1) that certain Restated Noncompetition Agreement dated
as of March __, 1998 between New Marriott, Host Marriott and (only until the
consummation of the New Marriott spinoff) SMS, and (2) that certain Restated
Noncompetition Agreement dated as of March __, 1998 between SMS and HMSC.
10
<PAGE>
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in the Restated Agreements and for other valuable consideration, the
receipt and sufficiency of which are hereby mutually acknowledged, each Party
acknowledges that except as set forth in the Restated Agreement to which it is
party, (1) no Party shall have any further right, duty, or obligation to any
other Party under the Existing Agreement and releases each other party from any
and all such other duties and obligations, and (2) the Existing Agreement has no
further independent force or effect.
NEW MARRIOTT MI, INC. (to be HOST MARRIOTT CORPORATION
renamed Marriott International, Inc.)
By: By:
-------------------------------- --------------------------------
Raymond G. Murphy Name:
Senior Vice President and Treasurer Title:
MARRIOTT INTERNATIONAL, INC. HOST MARRIOTT SERVICES
(to be renamed Sodexho Marriott CORPORATION
Services, Inc.)
By: By:
-------------------------------- --------------------------------
Raymond G. Murphy Name:
Senior Vice President and Treasurer Title:
11
<PAGE>
EXHIBIT 10.12
FIRST AMENDMENT TO RESTATED NONCOMPETITION AGREEMENT
THIS FIRST AMENDMENT TO RESTATED NONCOMPETITION AGREEMENT (this
"Amendment") is made and entered into as of __th day of _________, 1998 by and
among Marriott International, Inc., a Delaware corporation ("Marriott
International"), Host Marriott Corporation, a Delaware corporation ("Host
Marriott"), and Crestline Capital Corporation, a Maryland corporation
("Crestline").
RECITALS
--------
WHEREAS, Host Marriott and Marriott International are parties that
certain Restated Noncompetition Agreement dated March 3, 1998 (as amended, the
"1998 Agreement"); and
WHEREAS, Host Marriott has determined that it will restructure its
business operations so as to qualify as a real estate investment trust for
federal income tax purposes, and, in connection therewith, on or about December
29, 1998, (i) Host Marriott will distribute approximately 82% of the outstanding
common stock of Crestline to or on behalf of the stockholders of Host Marriott
(the "Crestline Distribution") and will contribute the remaining 18% of such
Crestline common stock to Host Marriott, L.P. for delivery to The Blackstone
Group and certain affiliated entities thereof (or for return to Crestline if not
delivered to The Blackstone Group and its affiliated entities) and (ii) Host
Marriott will merge (the "Merger") into HMC Merger Corporation, a Maryland
corporation ("Host REIT"); and
WHEREAS, the parties hereto desire to amend the 1998 Agreement in
connection with the Crestline Distribution and the Merger.
NOW, THEREFORE, in consideration of the foregoing recitals and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties intending to be legally bound agree as follows:
1. Crestline is hereby added as a party to the 1998 Agreement and
shall be subject to the same restrictions, obligations and benefits thereunder
as Host Marriott, it being further understood that all references to "Host
Marriott" in the 1998 Agreement (other than the definition of "Host Marriott" in
Article One and the term "Host Marriott" in the third sentence of the definition
of "Affiliates" under Article One) shall mean each of Host Marriott and
Crestline as if each of the foregoing entities were parties to a separate
agreement with MI having terms identical to the 1998 Agreement.
<PAGE>
2. The third sentence of the definition of "Affiliates" under Article
One is hereby deleted and replaced in its entirety with the following:
Notwithstanding the foregoing, (i) Host Marriott's Affiliates shall
not include Marriott International, Crestline or their respective
Subsidiaries or Affiliates, (ii) Marriott International's Affiliates
shall not include Host Marriott, Crestline or their respective
Subsidiaries or Affiliates, and (iii) Crestline's Affiliates shall not
include Marriott International, Host Marriott, or their respective
Subsidiaries or Affiliates.
3. The following definition shall be added to Article One after the
definition of "Conference Centers":
"Crestline" means Crestline Capital Corporation, a Maryland
corporation.
4. The following sentence shall be added to the definition of "Hotel
Management Business" at the end thereof."
For purposes of this definition, it is expressly understood and
acknowledged that, with respect to the activities of any Person who is the
lessee of property, the terms "operate"and "operating" do not include the terms
"lease" and "leasing," respectively, where such Person has engaged another
Person who is not an Affiliate of such Person to manage or operate, within the
meaning of the term "Hotel Management Business" set forth herein, the leased
property.
5. The following language shall be added to the end of Section 5.11:
To Crestline:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: General Counsel
FAX NO. 301/380-______
6. The following sentence shall be added to the end of Section 5.13:
It is further understood and agreed that the obligations of each of
Host Marriott and Crestline under this Agreement, and any liability
arising therefrom, shall be several and not joint.
7. The parties acknowledge that upon the effectiveness of the Merger,
Host REIT shall succeed to all of the rights and obligations of Host Marriott
under the 1998 Agreement.
2
<PAGE>
8. Except as specifically amended hereby, the 1998 Agreement shall
remain unchanged and in full force and effect.
9. This Amendment shall be effective as of the effective date of the
Crestline Distribution.
10. This Amendment may be executed in any number of counterparts,
which, when taken together, shall constitute a single binding instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered, all as of the day and year first above written.
MARRIOTT INTERNATIONAL, INC.
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
HOST MARRIOTT CORPORATION
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
CRESTLINE CAPITAL CORPORATION
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
3
<PAGE>
The undersigned is executing this Amendment solely for the purpose of
acknowledging and consenting to the provisions of paragraph 7 above.
HMC MERGER CORPORATION
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
4
<PAGE>
Exhibit 10.18
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT
MATTERS ALLOCATION AGREEMENT
BETWEEN HOST MARRIOTT CORPORATION,
HOST MARRIOTT, L.P. AND
CRESTLINE CAPITAL CORPORATION
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS.................................................................2
1.1. Definitions............................................................2
-----------
Aggregate Exercise Price....................................................2
------------------------
Aggregate Spread............................................................2
----------------
Aggregate Value.............................................................2
---------------
Agreement...................................................................2
---------
Code........................................................................2
----
Company Contribution........................................................2
--------------------
Commission..................................................................2
----------
Conversion Award............................................................2
----------------
Contribution Agreement......................................................3
----------------------
Contribution Date...........................................................3
-----------------
Crestline...................................................................3
---------
Crestline Common Stock......................................................3
----------------------
Crestline Stock Price.......................................................3
---------------------
Current Plan Year...........................................................3
-----------------
Deferred Compensation Plan..................................................3
--------------------------
(i) HMC Deferred Compensation Plan...................................3
------------------------------
(ii) Crestline Deferred Compensation Plan.............................3
------------------------------------
Distribution Agreement.....................................................3
----------------------
Distribution...............................................................4
------------
Distribution Date..........................................................4
-----------------
Employee...................................................................4
--------
(i) Crestline Employee...............................................4
------------------
(ii) Retained Employee................................................4
-----------------
(iii) Retained Individual..............................................4
-------------------
Employer Security..........................................................4
-----------------
ERISA......................................................................4
-----
Existing HMC Stock Award...................................................4
------------------------
Flexible Spending Plan.....................................................5
----------------------
HMC Comprehensive Stock Incentive Plan.....................................5
--------------------------------------
HMC........................................................................5
---
HMC Common Stock...........................................................5
----------------
HMC Stock Price............................................................5
---------------
HMLP.......................................................................5
----
HMO........................................................................5
---
Host Marriott Services Distribution:.......................................5
------------------------------------
Host REIT Stock............................................................5
---------------
Host REIT..................................................................5
---------
IRS........................................................................5
---
-i-
<PAGE>
Page
----
Marriott International Distribution:.......................................5
------------------------------------
Medical/Dental Plan........................................................6
-------------------
(i) Crestline Medical/Dental Plan...................................6
-----------------------------
(ii) Host Marriott Medical/Dental Plan...............................6
---------------------------------
Nonqualified Stock Option..................................................6
-------------------------
Plan.......................................................................6
----
Profit Sharing Plan........................................................6
-------------------
(i) Crestline Profit Sharing Plan...................................6
-----------------------------
(ii) Host Marriott Profit Sharing Plan...............................6
---------------------------------
Qualified Beneficiary......................................................6
---------------------
(i) HMC Qualified Beneficiary.......................................7
-------------------------
(ii) Crestline Qualified Beneficiary.................................7
-------------------------------
Service Credit.............................................................7
--------------
Stock Purchase Plan........................................................7
-------------------
Welfare Plan...............................................................7
------------
1.2. Certain Constructions.................................................7
---------------------
1.3. Schedules, Sections...................................................7
-------------------
1.4. Survival..............................................................7
--------
2. EMPLOYEE BENEFITS...........................................................8
-----------------
2.1. Employment............................................................8
----------
2.1.1. Allocation of Responsibilities................................8
------------------------------
2.1.2. Service Credits...............................................8
---------------
(i) Distribution Date Transfers.....................................8
---------------------------
(ii) Post-Distribution Date Transfers................................8
--------------------------------
2.2. Profit Sharing Plans..................................................8
--------------------
2.2.1. Sponsorship of Host Marriott Profit Sharing Plan..............8
------------------------------------------------
2.2.2. Establishment of the Crestline Profit Sharing Plan............9
--------------------------------------------------
2.2.3. Obligation to Make Company Contribution.......................9
---------------------------------------
2.2.4. Transfer and Acceptance of Account Balances...................9
-------------------------------------------
2.2.5. HMLP to Provide Information..................................10
---------------------------
2.2.6. Regulatory Filings...........................................11
------------------
2.3. Deferred Compensation Plans..........................................11
---------------------------
2.3.1. HMC Deferred Compensation Plan...............................11
------------------------------
2.3.2. Crestline Deferred Compensation Plan.........................11
------------------------------------
2.4. Other Plans..........................................................12
-----------
2.5. Stock Plans..........................................................12
-----------
2.5.1. Host Marriott Comprehensive Stock Incentive Plan.............12
------------------------------------------------
2.5.2. Crestline Comprehensive Stock Incentive Plan.................12
--------------------------------------------
2.5.3. Effect of the Distribution and Host REIT Conversion
---------------------------------------------------
on Awards Made Under the 1997 HMC
---------------------------------
Comprehensive Stock Incentive Plan Prior to the
-----------------------------------------------
Distribution Date............................................12
-----------------
2.5.4. Effect of the Host REIT Conversion on the Host
----------------------------------------------
Marriott Corporation Employee Stock Purchase Plan............14
-------------------------------------------------
2.6. Medical/Dental Plan Liability and Coverage...........................15
------------------------------------------
-ii-
<PAGE>
Page
----
2.6.1. Liability for Claims.........................................15
--------------------
2.6.2. Continuation Coverage Administration.........................16
------------------------------------
2.6.3. Flexible Benefits Plan.......................................16
----------------------
2.7. Paid Time Liabilities................................................17
---------------------
2.7.1. Division of Liabilities......................................17
-----------------------
2.8. Reservation of Right To Amend or Terminate Plans.....................17
------------------------------------------------
2.9. Notice...............................................................17
------
2.10. Payroll Reporting and Withholding...................................18
---------------------------------
2.10.1. Form W-2 Reporting..........................................18
------------------
2.10.2. Forms W-4 and W-5...........................................18
-----------------
2.10.3. Garnishments, Tax Levies, Child Support Orders,
-----------------------------------------------
Qualified Medical Child Support Orders and Wage
-----------------------------------------------
Assignments.................................................18
-----------
2.10.4. Authorizations for Payroll Deductions.......................18
-------------------------------------
3. LABOR AND EMPLOYMENT MATTERS...............................................20
----------------------------
3.1. Separate Employers...................................................20
------------------
3.2. Employment Policies and Practices....................................20
---------------------------------
3.3. Claims...............................................................20
------
3.3.1. Scope........................................................20
-----
3.3.2. Employment-Related Claims....................................20
-------------------------
3.3.3. Obligation to Indemnify......................................20
-----------------------
3.3.4. Pre-Host REIT Conversion.....................................21
------------------------
3.3.5. Distribution and Other Joint Liability Claims................21
---------------------------------------------
3.3.6. Host REIT Conversion Employment-Related Claims...............22
----------------------------------------------
3.4. Notice of Claims.....................................................22
----------------
3.5. Assumption of Unemployment Tax Rates.................................22
------------------------------------
3.6. Intercompany Service Charge..........................................22
---------------------------
3.7. WARN Claims..........................................................23
-----------
3.8. Employees on Leave of Absence........................................23
-----------------------------
3.9. No Third Party Beneficiary Rights....................................23
---------------------------------
3.10. Attorney-Client Privilege...........................................23
-------------------------
4. DEFAULT....................................................................24
-------
4.1. Default..............................................................24
-------
4.2. Force Majeure........................................................24
-------------
5. MISCELLANEOUS..............................................................25
-------------
5.1. Relationship of Parties..............................................25
-----------------------
5.2. Access to Information; Cooperation...................................25
----------------------------------
5.3. Assignment...........................................................25
----------
5.4. Headings.............................................................25
--------
5.5. Severability of Provisions...........................................25
--------------------------
5.6. Parties Bound........................................................26
-------------
5.7. Notices..............................................................26
-------
5.8. Further Action.......................................................27
--------------
5.9. Waiver...............................................................27
------
5.10. Governing Law.......................................................27
-------------
-iii-
<PAGE>
Page
----
5.11. Consent to Jurisdiction.............................................27
-----------------------
5.12. Entire Agreement....................................................27
----------------
-iv-
<PAGE>
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS
----------------------------------------------
ALLOCATION AGREEMENT
--------------------
THIS EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
("Agreement") is made and entered into as of _________________, by and between
HOST MARRIOTT CORPORATION, a Delaware corporation ("HMC"), HOST MARRIOTT, L.P.,
a Delaware limited partnership ("HMLP") and CRESTLINE CAPITAL CORPORATION, a
Maryland corporation ("Crestline").
R E C I T A L S
WHEREAS, subject to certain conditions, HMC intends to enter into
certain transactions pursuant to a plan to reorganize its business operations so
that it will qualify as a real estate investment trust as of January 1, 1999
("Host REIT Conversion"); and
WHEREAS, as part of the Host REIT Conversion (i) HMC will transfer all
its liabilities, including but not limited to liabilities relating to employee
benefits, to HMLP (ii) HMC will merge with and into HMC Merger Corporation (to
be renamed Host Marriott Corporation) and (iii) holders of HMC Common Stock will
receive a dividend of outstanding common shares of Crestline; and
WHEREAS, in connection with the Host REIT Conversion, HMC and
Crestline have entered into a Distribution Agreement (the "Distribution
Agreement") dated as of ____________, 1998, and HMC and HMLP have entered into a
Contribution Agreement ("Contribution Agreement") dated as of _____________,
1998; and
WHEREAS, pursuant to the Distribution Agreement, HMC and Crestline
have agreed to enter into an agreement allocating responsibilities with respect
to employee compensation, benefits, labor and certain other employment matters
pursuant to the terms and conditions set forth herein; and
WHEREAS, pursuant to the Contribution Agreement, HMC and HMLP have
agreed to enter into an agreement allocating responsibilities with respect to
employee compensation, benefits, labor and certain other employment matters
pursuant to the terms and conditions set forth herein; and
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, HMC, HMLP and Crestline agree as follows:
1. DEFINITIONS
1.1. Definitions
-----------
As used in this Agreement, the following terms shall have the meanings
indicated below:
Aggregate Exercise Price: the exercise price of shares of HMC Common
------------------------
Stock covered by an Existing HMC Stock Award multiplied by the number of shares
of HMC Common Stock covered by such award on the Distribution Date.
Aggregate Spread: the difference between the aggregate exercise price
----------------
of an Existing HMC Stock Award and sum of the HMC Stock Price and one-tenth
(1/10) of the Crestline Stock Price, multiplied by the number of shares
underlying such Existing HMC Stock Award remaining unexercised on the
Distribution Date.
Aggregate Value: the number of shares of HMC Common Stock covered
---------------
under an Existing HMC Stock Award under the 1997 HMC Comprehensive Stock
Incentive Plan as of the Distribution Date multiplied by the sum of the HMC
Stock Price and one-tenth (1/10) of the Crestline Stock Price.
Agreement: the Employee Benefits And Other Employment Matters
---------
Allocation Agreement Between Host Marriott Corporation, Host Marriott, L.P. and
Crestline Capital Corporation, as set forth herein.
Code: the Internal Revenue Code of 1986, as amended, or any successor
----
legislation.
Company Contribution: the contributions of HMC under the Host Marriott
--------------------
Corporation (HMC) Retirement and Savings Plan, as determined in the sole and
absolute discretion of HMC's Board of Directors.
Commission: the Securities and Exchange Commission.
----------
Conversion Award: an adjustment under the 1997 HMC Comprehensive Stock
----------------
Plan of an option to acquire Host REIT Stock or an adjustment of restricted
shares or deferred shares of Host REIT Stock with respect to a Retained
Individual or Retained Employee or a conversion under the Crestline
Comprehensive Stock Incentive Plan of Existing HMC Stock Awards to acquire
Crestline Common Stock or an award of restricted shares or deferred shares of
Crestline Common Stock with respect to a Crestline Employee to reflect the
2
<PAGE>
Distribution and Host REIT Conversion on Existing HMC Stock Awards held on
the Distribution Date, in accordance with Section 2.5.
Contribution Agreement: the agreement described in the third recital
----------------------
of this Agreement.
Contribution Date: the Closing Date, as defined in the Contribution
-----------------
Agreement.
Crestline: Crestline Capital Corporation, a Maryland corporation.
---------
Crestline Common Stock: the common stock, $.01 par value per share,
----------------------
of Crestline.
Crestline Comprehensive Stock Incentive Plan: the Crestline Capital
--------------------------------------------
Corporation 1998 Comprehensive Stock Incentive Plan, an equity-based incentive
compensation plan established by Crestline providing for awards of options,
restricted stock, deferred stock, stock appreciation rights, dividend equivalent
rights and other stock based awards for eligible employees of Crestline and
their beneficiaries.
Crestline Stock Price: the average of the average of the highest and
---------------------
lowest quoted per share trading prices on the New York Stock Exchange for a
share of Crestline Common Stock for each of the 10 consecutive trading days
beginning on the date the Crestline Common Stock begins trading on a when issued
basis.
Current Plan Year: the plan year or fiscal year, whichever is
-----------------
applicable with respect to any Plan, which includes the Distribution Date.
Deferred Compensation Plan: a plan of deferred compensation that is
--------------------------
not tax-qualified under Section 401(a) of the Code and that is maintained for
Employees of HMC, HMLP or Crestline and their beneficiaries, as described below:
(i) HMC Deferred Compensation Plan: the Host Marriott Corporation
------------------------------
Executive Deferred Compensation Plan maintained by HMC for the period before the
Contribution Date which will be assumed and maintained by HMLP effective as of
the Contribution Date and will be renamed the Host Marriott, L.P. Executive
Deferred Compensation Plan, effective as of the Contribution Date.
(ii) Crestline Deferred Compensation Plan: the Crestline Capital
------------------------------------
Corporation Executive Deferred Compensation Plan to be established by Crestline,
effective as of the Distribution Date to provide benefits to Crestline Employees
on or after the Distribution Date
Distribution Agreement: the agreement described in the third recital
----------------------
of this Agreement.
3
<PAGE>
Distribution: the distribution by HMC of outstanding common shares of
------------
Crestline to HMC's shareholders.
Distribution Date: the date as of which the stock records of Crestline
-----------------
reflect the Distribution.
Employee: an individual who on the Distribution Date, is identified
--------
as being in any of the following categories:
(i) Crestline Employee: any individual: (i) employed by HMC or
------------------
any subsidiary of HMC on or before the Distribution Date who will be employed by
Crestline or any subsidiary of Crestline as part of the Host REIT Conversion on
or after the Distribution Date, or (ii) who is a beneficiary of an individual
described in the immediately preceding clause;
(ii) Retained Employee: any individual: (i) employed by HMC or
-----------------
any subsidiary of HMC on or before the Contribution Date who will be employed by
HMLP or any subsidiary or affiliate of HMLP as part of the Host REIT Conversion
on or after the Contribution Date, or (ii) who is a beneficiary of an individual
described in the immediately preceding clause; or
(iii) Retained Individual: any individual, other than a Crestline
-------------------
Employee or a Retained Employee, who (x) on or before the Distribution Date was
employed by HMC or any subsidiary of HMC (y) was or is a Marriott International
Employee or Marriott Terminee, as defined in the Employee Benefits & Other
Employment Matters Allocation Agreement, entered into as of October 8, 1993,
between Marriott International, Inc. (renamed Sodexho Marriott Services, Inc.)
and HMC, (z) was or is a Host Marriott Services Individual, Host Marriott
Services Employee or Host Marriott Services Terminee, as defined in the Employee
Benefits & Other Employment Matters Allocation Agreement, entered into as of
December 29, 1995, between Host Marriott Services Corporation and HMC or (w) is
a beneficiary of an individual described in clauses (x), (y) or (z).
Employer Security: Host REIT Stock in the case of Retained Employees
-----------------
and Retained Individuals and Crestline Common Stock in the case of Crestline
Employees.
ERISA: the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor legislation.
Existing HMC Stock Award: an (i) unexercised option to purchase
------------------------
shares, (ii) award of restricted shares, (iii) award of deferred shares or (iv)
award of stock appreciation rights held by a grantee on the Distribution Date
pursuant to the 1997 HMC Comprehensive Stock Incentive Plan.
4
<PAGE>
Flexible Spending Plan: the Host Marriott Corporation Section 125 Plan
----------------------
maintained by HMC before the Distribution Date which will be assumed and
maintained by HMLP, in accordance with Section 2.6.3 of this Agreement.
1997 HMC Comprehensive Stock Incentive Plan: the Host Marriott
-------------------------------------------
Corporation 1997 Comprehensive Stock Incentive Plan (formerly called the Host
Marriott Corporation 1993 Comprehensive Stock Incentive Plan), as may be amended
from time to time, maintained by HMC before the Contribution Date and continued
by HMC, HMLP and their affiliates after the Contribution Date.
HMC: Host Marriott Corporation, a Delaware corporation for the period
---
before the Contribution Date and Host REIT for the period beginning on or after
the Contribution Date.
HMC Common Stock: the common stock, $1.00 par value per share, of HMC.
----------------
HMC Stock Price: the average of the average of the highest and lowest
---------------
quoted per share trading prices on the New York Stock Exchange for a share of
HMC Common Stock (trading on an ex-dividend basis for the period before the
Distribution Date) for each of the 10 consecutive trading days beginning on the
date the Crestline Common Stock begins trading on a when issued basis.
HMLP: Host Marriott, L.P., a Delaware limited partnership.
----
HMO: any health maintenance organization organized under 42 U.S.C. (S)
---
300e-9, or a state health maintenance organization statute that provides medical
services for Employees under any Plan.
Host Marriott Services Distribution: the 1995 Host Marriott Services
-----------------------------------
Corporation distribution by HMC to shareholders of the capital stock of its
wholly owned subsidiary Host Marriott Services Corporation.
Host REIT Stock: the common stock, $.01 par value per share, of Host
---------------
REIT.
Host REIT: Host Marriott Corporation, a Maryland corporation for the
---------
period beginning on the Contribution Date and HMC Merger Corporation for the
period before the Contribution Date.
IRS: the Internal Revenue Service.
---
Marriott International Distribution: the: (i) 1993 Marriott
-----------------------------------
Corporation distribution to its shareholders of the capital stock of its wholly
owned subsidiary Marriott International, Inc., and (ii) 1997 Marriott
International, Inc. (renamed Sodexho Marriott Services, Inc.) distribution to
its shareholders of the capital stock of its subsidiary New Marriott, Inc.
(renamed Marriott International, Inc.).
5
<PAGE>
Medical/Dental Plan: a Welfare Plan providing health benefits to
-------------------
Employees and their dependents, as described below:
(i) Crestline Medical/Dental Plan: the Plan to be established by
-----------------------------
HMC in accordance with Section 2.6 of this Agreement to provide welfare
benefits, including but not limited to health and dental benefits; or
(ii) Host Marriott Medical/Dental Plan : the existing Host
---------------------------------
Marriott Corporation Medical/Dental/Vision Care Plan maintained by HMC prior to
the Contribution Date primarily for the benefit of eligible employees and their
dependents and assumed and continued by HMLP, effective as of the Contribution
Date pursuant to Section 2.6 of this Agreement.
Nonqualified Stock Option: an award under the 1997 HMC Comprehensive
-------------------------
Stock Incentive Plan of a stock option which is not qualified as an incentive
stock option under Code Section 422.
Plan: any plan, policy, arrangement, contract or agreement providing
----
compensation or benefits for any group of Employees or former Employees or any
individual Employee or former Employee, or the dependents or beneficiaries of
any such Employee or former Employee, whether formal or informal or written or
unwritten, and including, without limitation, any means, whether or not legally
required, pursuant to which any benefit is provided by an employer to any
Employee or former employee or the beneficiaries of any such Employee or former
employee.
Profit Sharing Plan: a defined contribution plan maintained pursuant
-------------------
to Section 401(a) of the Code, as described below:
(i) Crestline Profit Sharing Plan: the Crestline Capital
-----------------------------
Corporation Retirement and Savings Plan to be adopted by Crestline; or
(ii) Host Marriott Profit Sharing Plan: the Host Marriott
---------------------------------
Corporation (HMC) Retirement and Savings Plan maintained by HMC prior to the
Contribution Date which will be assumed and maintained by HMLP, in accordance
with Section 2.2 of this Agreement.
Qualified Beneficiary: an individual (or dependent thereof) who
---------------------
either (1) experiences a "qualifying event" (as that term is defined in Code
Section 4980B(f)(3) and ERISA Section 603) while a participant in a
Medical/Dental Plan, or (2) becomes a "qualified beneficiary" (as that term is
defined in Code Section 4980B(g)(1) and ERISA 607(3)) under a Medical/Dental
Plan, and who is included in any one of the following categories:
6
<PAGE>
(i) HMC Qualified Beneficiary: any person, other than a Crestline
-------------------------
Qualified Beneficiary, who is a Qualified Beneficiary on or after the
Distribution Date under the Host Marriott Medical/Dental Plan; or
(ii) Crestline Qualified Beneficiary: any person who is a
-------------------------------
Qualified Beneficiary under the Crestline Medical/Dental Plan.
Service Credit: the period taken into account under any Plan for
--------------
purposes of determining length of service, eligibility, participation, vesting,
benefit accrual and similar requirements under such Plan.
Stock Purchase Plan: a stock-based Plan meeting the requirements of
-------------------
Section 423 of the Code.
Welfare Plan: any Plan which provides medical, health, disability,
------------
accident, life insurance, death, dental or other welfare benefit, including,
without limitation, any post-employment benefit.
1.2. Certain Constructions
---------------------
References to the singular in this Agreement shall refer to the plural and
vice-versa and references to the masculine shall refer to the feminine and vice-
versa.
1.3. Schedules, Sections
-------------------
References to a "Schedule" are, unless otherwise specified, to one of
the Schedules attached to this Agreement, and references to a "Section" are,
unless otherwise specified, to one of the Sections of this Agreement.
1.4. Survival
--------
Obligations described in this Agreement shall remain in full force and
effect and shall survive the Distribution Date and the Contribution Date.
7
<PAGE>
2. EMPLOYEE BENEFITS
2.1. Employment
----------
2.1.1. Allocation of Responsibilities
------------------------------
Effective as of the Distribution Date, except to the extent retained or
assumed by HMLP under this Agreement or any other agreement relating to the
Distribution or Host REIT Conversion, Crestline shall retain or assume, as the
case may be, responsibility as employer for the Crestline Employees. Effective
as of the Contribution Date, except to the extent retained or assumed by HMC
under this Agreement or any other agreement relating to the Host REIT
Conversion, HMLP or its affiliates shall retain or assume, as the case may be,
responsibility as employer for the Retained Employees. The assumption or
retention of responsibility as employer described in this Section 2.1.1 shall
not, of itself, constitute a severance or a termination of employment under any
Plan of severance or of income extension maintained by HMC, HMLP or Crestline,
and no such severance, separation or termination shall be deemed to occur.
2.1.2. Service Credits
---------------
(i) Distribution Date Transfers . HMLP shall credit each Retained
---------------------------
Individual and Retained Employee with such Employee's Service Credits and
original hire date as are reflected in HMC's records on the Contribution Date.
Crestline shall credit each Crestline Employee with such Employee's Service
Credits and original hire date as are reflected in HMC's records on the
Distribution Date. Such Service Credits and hire dates shall continue to be
maintained as described herein for as long as the Employee does not terminate
employment.
(ii) Post-Distribution Date Transfers. Subject to the provisions
--------------------------------
of ERISA and the Code, HMLP in the case of Retained Employees and Crestline in
the case of Crestline Employees may its sole discretion make such decisions as
it deems appropriate with respect to determining an Employee's Service Credits
for periods of service after the Distribution Date for Crestline Employees and
after the Contribution Date for Retained Employees.
2.2. Profit Sharing Plans
--------------------
2.2.1. Sponsorship of Host Marriott Profit Sharing Plan
------------------------------------------------
HMC shall transfer sponsorship of the Host Marriott Profit Sharing
Plan to HMLP, effective as of the Contribution Date. Further, on or around the
Contribution Date, HMC, as the General Partner for HMLP, shall in a timely
manner ratify: (1) the adoption of the Host Marriott Profit Sharing Plan by
HMLP, effective as of the Contribution Date, (2) changing the name of the Host
Marriott Profit Sharing Plan to the Host Marriott, L.P. Retirement and Savings
Plan,
8
<PAGE>
effective as of the Contribution Date, and (3) the adoption of any desired
amendments or amendments necessary for maintaining its tax-qualified status
under the Code or ERISA.
2.2.2. Establishment of the Crestline Profit Sharing Plan
--------------------------------------------------
Prior to the Distribution Date, Crestline shall take, or cause to be
taken, all action necessary and appropriate to establish and administer a new
Plan called the Crestline Capital Corporation Retirement and Savings Plan,
effective on or around the Distribution Date. The Crestline Capital Corporation
Retirement and Savings Plan shall be intended to qualify for tax-favored
treatment under Sections 401(a) and 401(k) of the Code and to be in compliance
with the requirements of ERISA and shall have terms substantially similar to the
terms of the Host Marriott Corporation (HMC) Retirement and Savings Plan (as in
effect on the Distribution Date). Crestline shall provide benefits under the
Crestline Capital Corporation Retirement and Savings Plan for all Crestline
Employees who were participants in or otherwise entitled to benefits under the
Host Marriott Profit Sharing Plan on the Distribution Date.
2.2.3. Obligation to Make Company Contribution
---------------------------------------
Effective as of the Contribution Date, HMLP shall be responsible for:
(1) HMC's obligations, if any, to make payment of Company Contributions (to the
extent allocable but not paid on the Contribution Date) under the Host Marriott
Profit Sharing Plan, in accordance with the terms and conditions of such Plan,
for the Plan Year beginning January 2, 1998, and (2) HMLP's obligations, if any,
to make payment of Company Contributions under the Host Marriott Profit Sharing
Plan in accordance with the terms and conditions of such Plan for the period
beginning on the Contribution Date. Notwithstanding any other provision of this
Agreement to the contrary, a Crestline Employee or Host Employee who ceases to
be an employee of HMC during the Plan Year beginning January 2, 1998 because of
a transaction relating to or arising from the Distribution or Host REIT
Conversion shall be eligible for an allocation of the discretionary
contributions, if any, made under the Host Profit Sharing Plan for such Plan
Year.
Effective as of the Distribution Date, Crestline shall be responsible
for the contributions, if any, required under the terms of the Crestline Profit
Sharing Plan in accordance with the terms and conditions of such Plan.
2.2.4. Transfer and Acceptance of Account Balances
-------------------------------------------
As soon as administratively practicable after the Contribution Date
and after the allocation of the contributions, if any, made for the Plan Year
beginning on January 2, 1998:
9
<PAGE>
(1) HMLP shall cause the trustee of the Host Marriott Profit Sharing
Plan to transfer to the trustee of the Crestline Profit Sharing Plan, in a
trustee-to-trustee transfer, cash, securities, other property or a combination
thereof equal to the account balances of all Crestline Employees. Prior to the
transfer described in the preceding sentence, HMLP shall cooperate with
Crestline and take such action as is appropriate to cause the trustee of the
Host Marriott Profit Sharing Plan to convert the account balances of Crestline
Employees to cash or other investments acceptable to the trustee of the
Crestline Profit Sharing Plan;
(2) Crestline shall cause the trustee of the Crestline Profit Sharing
Plan to accept the transfer from the trustee of the Host Marriott Profit Sharing
Plan; and
(3) Crestline shall credit the accounts under the Crestline Profit
Sharing Plan established for the benefit of Crestline Employees with the
amounts, if any, transferred on their behalf.
The transfers required by this Section 2.2.4 shall comply with Section
414(l) of the Code and the requirements of ERISA and the regulations promulgated
thereunder. Additionally, the transfers required by this Section 2.2.4 may take
place pending issuance of favorable determination letters (as described in
Section 2.2.6 below), or upon receipt of an opinion of counsel reasonably
satisfactory to both HMLP and Crestline that the Plans satisfy the requirements
for tax-qualification described in Sections 401(a) and 401(k) of the Code, or
can be made to so qualify by retroactive amendment, and that the transfers will
not adversely affect the tax-qualified status of either Plan or decrease the
accrued benefits of any participant.
2.2.5. HMLP to Provide Information
---------------------------
As soon as administratively practicable after the Distribution Date,
HMLP (with the cooperation of Crestline to the extent that relevant information
is in the possession of Crestline or any of its subsidiaries and in accordance
with Section 5.2), shall provide Crestline with a list of Crestline Employees
who, to the best knowledge of HMC or HMLP, were participants in or otherwise
entitled to benefits under the Host Marriott Profit Sharing Plan on the
Distribution Date, together with a listing of each participant's Service Credits
and account balance under such Plan. HMLP shall, as soon as administratively
practicable after the Distribution Date and in accordance with Section 5.2,
provide Crestline with such additional information in the possession of HMLP,
HMC or their subsidiaries or affiliates (and not already in the possession of
Crestline or any of its subsidiaries or affiliates) as may be reasonably
requested by Crestline and necessary for the administration of the Crestline
Profit Sharing Plan.
10
<PAGE>
2.2.6. Regulatory Filings
------------------
HMLP and Crestline shall, in connection with the plan-to-plan transfer
described in Section 2.2.4, cooperate in making any and all appropriate filings
required by the Commission or the IRS, or required under the Code, ERISA or any
applicable securities laws and the regulations thereunder, and take all such
action as may be necessary and appropriate to cause such transfer to take place
as soon as administratively convenient after the Distribution Date or otherwise
when required by law. Further, HMLP and Crestline shall each seek favorable IRS
determination letters to the effect that their respective Profit Sharing Plans
satisfy all tax-qualification requirements under Sections 401(a) and 401(k) of
the Code, and that the transfer described in Section 2.2.4 complied with the
applicable requirements of the Code and ERISA.
2.3. Deferred Compensation Plans
---------------------------
2.3.1. HMC Deferred Compensation Plan.
------------------------------
HMC shall transfer to HMLP sponsorship of the HMC Deferred
Compensation Plan and all liabilities and obligations for accrued benefits
(including any earnings attributable to such benefits) for Retained Individuals
and Retained Employees, effective as of the Contribution Date. Further, on or
around the Contribution Date, HMC, as General Partner for HMLP, shall in a
timely manner ratify the (1) assumption of the HMC Deferred Compensation Plan,
effective as of the Contribution Date, (2) assumption from HMC of all
liabilities for accrued benefits of Retained Individuals and Retained Employees
and earnings attributable to such benefits, effective as of the Contribution
Date (3) changing of the name of the Host Marriott Corporation Executive
Deferred Compensation Plan to Host Marriott, L.P. Executive Deferred
Compensation Plan, effective as of the Contribution Date, and (4) the adoption
of any amendments which are determined to be necessary or desirable for the
operation and administration of the HMC Deferred Compensation Plan.
2.3.2. Crestline Deferred Compensation Plan
------------------------------------
As soon as practicable before the Distribution Date, Crestline shall
adopt: (1) a new Deferred Compensation Plan with terms substantially similar to
the terms of the HMC Deferred Compensation Plan (as in effect on the
Distribution Date) and named the Crestline Capital Corporation Executive
Deferred Compensation Plan, and (2) assume from HMC all liabilities and
obligations of HMC relating to the accrued benefits and any earnings
attributable to such benefits for Crestline Employees. The foregoing shall be
subject to the requirements of ERISA and the Code.
11
<PAGE>
2.4. Other Plans
-----------
HMLP shall assume and continue the sponsorship, responsibility and the
associated liabilities of HMC for the Plans listed on Schedule A, effective as
of the Contribution Date. Nothing in this Section 2.4 is intended to require
HMLP to continue the Plans identified on Schedule A that have been terminated
prior to the Contribution Date or from terminating Plans identified on Schedule
A after the Contribution Date.
2.5. Stock Plans
-----------
2.5.1. Host Marriott Comprehensive Stock Incentive Plan
------------------------------------------------
Effective as of the Contribution Date, all future awards under the
1997 HMC Comprehensive Stock Incentive Plan will be denominated in Host REIT
Stock. Following the Contribution Date, HMC shall continue to reserve those
shares already reserved under the 1997 HMC Comprehensive Stock Plan. The shares
reserved pursuant to the preceding sentence shall be authorized by the
shareholders of HMC.
2.5.2. Crestline Comprehensive Stock Incentive Plan
--------------------------------------------
As soon as practicable before the Distribution Date: (i) Crestline
shall establish the Crestline Comprehensive Stock Incentive Plan, to cover the
Conversion Awards of Crestline Common Stock required by Section 2.5.3 of this
Agreement and for granting future awards of Crestline Common Stock to eligible
employees of Crestline and its affiliates, and (ii) HMC, acting as sole
shareholder of Crestline, shall approve the adoption of the Crestline
Comprehensive Stock Incentive Plan. All awards under the Crestline
Comprehensive Stock Incentive Plan will be denominated in Crestline Common
Stock. Crestline shall reserve 4,000,000 shares of Crestline Common Stock for
the awards, including the Conversion Awards, required by this Agreement. Shares
that are reserved pursuant to the preceding sentence but that are not used shall
be available for future awards under the Crestline Comprehensive Stock Incentive
Plan. Effective as of the Distribution Date, Crestline shall assume all
obligations with respect to, and shall administer Conversion Awards denominated
in Crestline Common Stock under the Crestline Comprehensive Stock Incentive
Plan.
2.5.3. Effect of the Distribution and Host REIT Conversion on Awards
-------------------------------------------------------------
Made Under the 1997 HMC Comprehensive Stock Incentive Plan Prior
----------------------------------------------------------------
to the Distribution Date
------------------------
(i) Restricted Stock: As soon as practicable after the Distribution
----------------
Date, each holder of an Existing HMC Stock Award of restricted shares who held
such award on the Distribution Date, shall receive, as part of the Distribution
and
12
<PAGE>
Host REIT Conversion, (1) one restricted share of Host REIT Stock, subject to
the terms of the 1997 HMC Comprehensive Stock Incentive Plan, for each
restricted share of HMC Common Stock held by such holder on the Distribution
Date, and (2) one restricted share of Crestline Common Stock, subject to the
terms of the Crestline Comprehensive Stock Incentive Plan, for each 10
restricted shares of HMC Common Stock held by such holder on the Distribution
Date.
The restrictions applicable to the shares awarded pursuant to this
Section 2.5.3(i) shall be replaced with restrictions in favor of HMLP, its
subsidiaries or affiliates with respect to Retained Individuals and Retained
Employees and Crestline, its subsidiaries or affiliates with respect to
Crestline Employees. The restrictions shall be released at the same time and on
the same schedule as the shares of HMC Common Stock were subject under the 1997
HMC Comprehensive Stock Incentive Plan on the Distribution Date, except that
release of such restrictions shall be contingent upon a finding by: (1) the
Compensation Policy Committee of the Board of Directors of HMC (or its designee)
that a grantee who is a Retained Employee or Retained Individual has satisfied
the conditions for such release; and (2) the Compensation Policy Committee of
the Board of Directors of Crestline (or its designee) that a grantee that is a
Crestline Employee has satisfied the conditions for such release.
(ii) Deferred Stock: As soon as administratively practicable after
--------------
the Distribution Date, holders of Existing HMC Stock Awards of deferred shares
shall have their accounts, determined as of the Distribution Date, treated as
follows: (1) the Existing HMC Stock Awards of each Retained Employee and
Retained Individual will be adjusted to the number of Host REIT Stock with a
total value based on the HMC Stock Price equal to the Aggregate Value of the
shares credited to their accounts, and (2) the Existing HMC Stock Awards of
each Crestline Employee will be assumed by the Crestline Comprehensive Stock
Incentive Plan and credited to accounts under such plan, as appropriate, and
will be adjusted to the number of shares of Crestline Common Stock with a total
value based on the Crestline Stock Price equal to the Aggregate Value of the
shares credited to their accounts.
(iii) Substitution of Stock Options: As soon as practicable after
-----------------------------
the Distribution Date, each Retained Employee, Retained Individual, Crestline
Employee who on the Distribution Date is a holder of an Existing HMC Stock Award
of stock options shall receive a Conversion Award of an option for Employer
Security in substitution of such Existing HMC Stock Award. The exercise price
and the number of shares underlying a Conversion Award that is granted pursuant
to this Section 2.5.3(iii) shall be determined in accordance with Sections 2.5.3
(iv) and 2.5.3 (v) of this Agreement.
Notwithstanding any other provision to the contrary, HMLP and
Crestline reserve the right prior to the issuance of any Conversion Award to
adopt
13
<PAGE>
resolutions modifying the terms and conditions, including but not limited
to the time within which options may be exercised, of Conversion Awards granted
pursuant to this Section 2.5.3(iii).
(iv) Adjustment of Option Price for Shares Covered by Options Granted
----------------------------------------------------------------
Pursuant to a Conversion Award: The provisions of this Section 2.5.3(iv) are
- ------------------------------
intended to ensure that the Aggregate Spread on each Existing HMC Stock Award is
maintained in the grants of Conversion Awards required by Section 2.5.3(iii) and
shall govern the determination of the option price of such Conversion Awards.
The option price for each share of Employer Security covered by a Conversion
Award shall be equal to the Aggregate Exercise Price divided by the number of
shares covered by such Conversion Award (determined in accordance with Section
2.5.3(v)).
(v) Number of Shares Covered by Options Granted Pursuant to a
---------------------------------------------------------
Conversion Award: A Conversion Award granted in substitution for an Existing
- ----------------
HMC Stock Award pursuant to Section 2.5.3(iii) shall be for the number of shares
of Employer Security with a total value based on the HMC Stock Price or the
Crestline Stock Price, as the case may be, equal to the Aggregate Value.
(vi) Limitation on 1997 HMC Comprehensive Stock Incentive Plan: To
---------------------------------------------------------
the extent that any adjustment or limitation of this Section 2.5.3 is
inconsistent with the terms of the 1997 HMC Comprehensive Stock Incentive Plan,
as in effect on the Distribution Date, or the terms of an Existing HMC Stock
Award, as in effect on the Distribution Date, the terms of the 1997 HMC
Comprehensive Incentive Plan or the terms of the Existing HMC Stock Award shall
not apply. Notwithstanding the preceding sentence, to the extent that the
requirements of this Section 2.5.3 are inconsistent with: (x) the intended tax
or accounting treatment of the Host REIT Conversion, or (y) any Existing HMC
Stock Award, HMLP and Crestline shall mutually agree on the alternative
adjustment.
2.5.4. Effect of the Host REIT Conversion on the Host Marriott
-------------------------------------------------------
Corporation Employee Stock Purchase Plan
----------------------------------------
The 1998 Plan Year for the Host Marriott Corporation Employee Stock
Purchase Plan shall end on December 18, 1998 or such other date as HMC shall
specify. HMC shall take all action necessary and appropriate for the eligible
participants of the Host Marriott Corporation Employee Stock Purchase Plan to
participate in the Distribution and Host REIT Conversion.
Prior to the Distribution Date Crestline shall take, or cause to be
taken all action necessary and appropriate to establish and administer a new
Plan called the Crestline Capital Corporation Employee Stock Purchase Plan,
effective as of the date approved by the Board of Directors of Crestline or such
other date as Crestline's Board of Directors shall specify. As soon as
administratively practicable before the Distribution Date, HMC, acting as sole
shareholder of Crestline, shall
14
<PAGE>
approve the adoption of Crestline Capital Corporation Employee Stock Purchase
Plan. The Crestline Capital Corporation Employee Stock Purchase Plan shall
constitute a Stock Purchase Plan and authorize eligible employees of Crestline,
its subsidiaries and affiliates to purchase Employer Security based on terms
similar to the Host Marriott Corporation Employee Stock Purchase Plan, as in
effect on January 2, 1998.
As soon as administratively practicable after the Distribution Date:
(1) HMLP shall take, or cause to be taken all action necessary and appropriate
to establish and administer a new Plan called the Host Marriott, L.P. Employee
Share Purchase Plan, effective as of January 1, 1999 or such other date as HMLP
shall specify; and (2) HMC, acting as General Partner for HMLP, shall ratify
the adoption of the Host Marriott, L.P. Employee Share Purchase Plan. The Host
Marriott, L.P. Employee Share Purchase Plan shall authorize eligible employees
of HMLP, its subsidiaries and affiliates to purchase Host REIT Stock based on
terms substantially similar to the Host Marriott Corporation Employee Stock
Purchase Plan, as in effect on January 2, 1998.
2.6. Medical/Dental Plan Liability and Coverage
------------------------------------------
2.6.1. Liability for Claims
--------------------
Effective as of the Contribution Date, HMC shall transfer sponsorship
of the Host Marriott Medical/Dental Plan to HMLP and HMLP shall be responsible
for providing medical/dental coverage, including stop-loss insurance, if any,
and assuming responsibility for the associated liabilities and accrued
obligations under such Plan for all Retained Employees and HMC Qualified
Beneficiaries. Retained Employees and HMC Qualified Beneficiaries shall have no
pre-existing condition limitation imposed other than that which is or was
imposed under the Host Marriott Medical/Dental Plan on the Contribution Date An
individual who is covered under the Host Marriott Medical/Dental Plan
immediately after the Contribution Date shall be credited with any expenses
incurred toward deductibles, out-of pocket expenses, maximum benefit payments,
and any benefit usage credited to such individual before the Contribution Date
for purposes of determining such individual's benefits under the Host Marriott
Medical/Dental Plan after the Contribution Date
Prior to the Distribution Date, Crestline shall take, or cause to be
taken, all action necessary and appropriate to: (1) establish a new
Medical/Dental Plan, on the terms deemed appropriate by Crestline (hereinafter
referred to as the Crestline Medical/Dental Plan) effective as of the
Distribution Date, and (2) assume from HMC all responsibility and liability for
the claims incurred on or after the Distribution Date for all Crestline
Employees and Crestline Qualified Beneficiaries. An individual who is covered
under the Crestline Medical/Dental Plan immediately after the Distribution Date
shall be credited with any expenses
15
<PAGE>
incurred toward deductibles, out-of pocket expenses, maximum benefit payments,
and any benefit usage credited to such individual on the Distribution Date for
purposes of determining such individual's benefits under the Crestline
Medical/Dental Plan after the Distribution Date.
The parties intend that an Employee who was covered under a Welfare
Plan maintained by HMC before the Contribution Date shall not have a gap in such
coverage because of a transaction relating to or arising from the Distribution
or Host REIT Conversion.
2.6.2. Continuation Coverage Administration
------------------------------------
Effective as of the Contribution Date, HMLP shall assume from HMC and
shall be solely responsible for, or cause its insurance carriers or HMOs to be
responsible for, the administration of the continuation coverage requirements
imposed by Code Section 4980B and ERISA Sections 601 through 608 as they relate
to any HMC Qualified Beneficiary. Effective as of the Distribution Date,
Crestline shall assume from HMC and shall be solely responsible for, or cause
its insurance carriers or HMOs to be responsible for, the administration of the
continuation coverage requirements imposed by Code Section 4980B and ERISA
Sections 601 through 608 as they relate to any Crestline Qualified Beneficiary.
2.6.3. Flexible Benefits Plan
----------------------
HMC shall transfer sponsorship of the Flexible Benefits Plan to HMLP,
effective as of the Contribution Date. Further, on or around the Contribution
Date, HMC, as the General Partner for HMLP, shall in a timely manner ratify: (1)
the adoption of the Flexible Benefits Plan, effective as of the Contribution
Date, (2) changing the name of the Flexible Benefits Plan to Host Marriott, L.P.
Flexible Benefits Plan, effective as of the Contribution Date, and (3) the
adoption of any desired amendments. Notwithstanding any other provision of this
Agreement or the Flexible Benefits Plan, claims incurred by a Crestline Employee
or Host Employee during the Current Plan Year shall be paid for under the
Flexible Benefits Plan, to the extent covered under the terms of such plan.
2.7. Paid Time Liabilities
---------------------
2.7.1. Division of Liabilities
-----------------------
Effective as of the Contribution Date, HMC shall transfer to HMLP all
accrued liabilities (whether vested or unvested and whether funded or unfunded)
for paid time leave, if any, for Retained Employees and Retained Individuals.
After the Contribution Date, HMLP shall be solely responsible for the payment of
such paid time leave to Retained Employees and Retained Individuals. Effective
as of the
16
<PAGE>
Distribution Date, HMC shall transfer to Crestline all accrued liabilities
(whether vested or unvested and whether funded or unfunded) for paid time leave,
if any, for Crestline Employees. After the Distribution Date, Crestline shall be
responsible for the payment of such paid time leave to Crestline Employees. HMLP
(in the case of Retained Employees) and Crestline (in the case of Crestline
Employees) shall provide the individuals covered by this Section 2.7.1 with the
same vested and unvested balances of paid time leave as was credited to such
individuals by HMC on the Contribution Date (in the case of Retained Employees)
and the Distribution Date (in the case of Crestline Employees). Nothing in this
Section 2.7.1 shall be construed in any way to limit the right of either HMLP or
Crestline to change its vacation or sick leave policies as it deems appropriate.
2.8. Reservation of Right To Amend or Terminate Plans
------------------------------------------------
Except as otherwise expressly provided, no provision of this
Agreement, shall be construed as a limitation on the right of HMC, HMLP or
Crestline to amend or terminate a Plan. In addition, notwithstanding any other
provision to the contrary, no provision of this Agreement shall be construed to
create a right in any individual (including an employee or former employee of
HMC, or dependent or beneficiary of such employee or former employee) under a
Plan which such individual would not otherwise have under the terms of the Plan.
2.9. Notice
------
HMC, HMLP and Crestline acknowledge that each may incur costs and
expenses, including, but not limited to, contributions to a Plan and the payment
of insurance premiums arising from or related to any Plan which are, as set
forth in this Agreement, the responsibility of the other party hereto.
Accordingly, HMC, HMLP and Crestline shall give notice to the other party of the
costs to be incurred prior to payment and demand that the other party which has
the obligation to pay shall pay the cost and expense and the other party shall
pay the cost and expenses no later than 30 days after receipt of such notice.
2.10. Payroll Reporting and Withholding
---------------------------------
2.10.1. Form W-2 Reporting
------------------
HMC, HMLP and Crestline shall prepare, file and distribute IRS Forms
W-2 in accordance with applicable laws and regulations.
2.10.2. Forms W-4 and W-5
-----------------
HMC, HMLP and Crestline shall cooperate as necessary with each other
to ensure that IRS Form W-4 (Employee's Withholding Allowance Certificate) and
W-5 (Earned Income Credit Advance Payment Certificate) are distributed,
completed and filed, in accordance with applicable laws and regulations.
17
<PAGE>
2.10.3. Garnishments, Tax Levies, Child Support Orders, Qualified
---------------------------------------------------------
Medical Child Support Orders and Wage Assignments
- -------------------------------------------------
With respect to Employees with garnishments, tax levies, child support
orders, qualified medical child support orders, and wage assignments in effect
with HMC on or before the: (i) Contribution Date, HMLP with respect to each
Retained Employee shall honor such payroll deduction authorizations or court or
governmental orders, and will continue to make payroll deductions and payments
to any authorized payee, as specified by the court or governmental order which
was filed with HMC on or before the Contribution Date, and (ii) Distribution
Date, Crestline with respect to each Crestline Employee shall honor such payroll
deduction authorization or court or governmental orders, and will continue to
make payroll deductions and payments to any authorized payee, as specified by
the court or governmental order which was filed with HMC on or before the
Distribution Date.
2.10.4. Authorizations for Payroll Deductions
-------------------------------------
Unless otherwise prohibited by this or another agreement entered into
in connection with the Host REIT Conversion, a governing Plan document, or
applicable law, with respect to Retained Employees with authorizations for
payroll deductions in effect with HMC: (i) HMLP or its affiliates as the
successor employer for each Retained Employee will honor the payroll deduction
authorizations for such Retained Employee and shall not require that such
Retained Employee submit a new authorization to the extent that the type of
deduction by HMLP does not differ from that made by HMC before the Contribution
Date, and (ii) Crestline as the successor employer for each Crestline Employee
will honor the payroll deduction authorizations for such Crestline Employee and
shall not require that such Crestline Employee submit a new authorization to the
extent that the type of deduction by Crestline does not differ from that made by
HMC before the Distribution Date. The deductions covered by this Section 2.10.4
include, but are not limited to, contributions to any Plan, U.S. Savings Bonds,
and United Giver's Fund; scheduled loan repayments to the Profit Sharing Plan or
to an employee credit union; and Direct Deposit of Payroll, bonus advances,
union dues, employee relocation loans, and other types of authorized company
receivables usually collectible through payroll deductions.
18
<PAGE>
3. LABOR AND EMPLOYMENT MATTERS
Notwithstanding any other provision of this Agreement or any other
Agreement between HMC, HMLP and Crestline to the contrary, HMC, HMLP and
Crestline understand and agree that:
3.1. Separate Employers
------------------
After the separation of Employees into their respective companies,
HMLP and Crestline will be separate and independent employers.
3.2. Employment Policies and Practices
---------------------------------
After the Distribution Date as to Crestline and the Contribution Date
as to HMLP, HMLP and Crestline may adopt, continue, modify or terminate such
employment policies, compensation practices, Plans, and other employee benefit
arrangements of any kind or description, as each may determine, in its sole
discretion, are necessary and appropriate.
3.3. Claims
------
3.3.1. Scope
-----
This section is intended to allocate all liabilities for employment-
related claims involving HMC, HMLP or Crestline including, but not limited to,
claims against either party or all the parties and their officers, directors,
agents and employees, or against or by their various Plans and plan
administrators and fiduciaries.
3.3.2. Employment-Related Claims
-------------------------
An employment-related claim shall include any actual or threatened
lawsuit, arbitration, ERISA claim, or federal, state, or local judicial or
administrative proceeding of whatever kind involving a demand by or on behalf of
or relating to Employees, or by or relating to any federal, state or local
government agency alleging liability against HMC, HMLP or Crestline, or against
any of their respective officers, directors, agents, employees, administrators,
trustees or fiduciaries.
3.3.3. Obligation to Indemnify
-----------------------
The duty of a party to indemnify, defend and hold harmless the other
party under this Section 3.3 shall include the following obligations of the
party having such duty: to provide a legal defense and incur all attorneys fees
and litigation costs which may be associated with such a defense; to pay all
costs of
19
<PAGE>
settlement or judgment where the indemnifying party has the full duty to do so
or to pay the full percentage of the party's share when the duty is only a
percentage of the full settlement or judgment; and to hold harmless from all
claims and costs which may be asserted with or arising from the duty of the
indemnifying party to defend and indemnify.
3.3.4. Pre-Host REIT Conversion
------------------------
(i) Crestline shall indemnify, defend and hold harmless HMC
and HMLP from any employment-related claim of a Crestline Employee; and
(ii) HMLP shall indemnify, defend and hold harmless HMC and
Crestline from any employment-related claims of a Retained Employee or Retained
Individual.
3.3.5. Distribution and Other Joint Liability Claims
---------------------------------------------
Where employment-related claims alleging or involving joint and
several liability asserted against Crestline and HMLP are not separately
traceable to liabilities relating to Crestline Employees, Retained Employees and
Retained Individuals any liability shall be apportioned between Crestline and
HMLP in accordance with the percentage that each party's Employees represents of
the combined total number of Employees of both parties. For purposes of the
preceding sentence, the percentage of liability assumed by Crestline shall equal
the ratio of (i) the total number of Crestline Employees on the Distribution
Date, to (ii) the combined total number of Crestline Employees, Retained
Employees and Retained Individuals (other than a Marriott International Employee
or Marriott Terminee, as defined in the Employee Benefits & Other Employment
Matters Allocation Agreement, entered into as of October 8, 1993 between
Marriott International, Inc. (renamed Sodexho Marriott Services, Inc.) and HMC
and a Host Marriott Services Individual, Host Marriott Services Employee or Host
Marriott Services Terminee, as defined in the Employee Benefits & Employee
Matters Allocation Agreement, entered into as of December 29, 1995, between Host
Marriott Services Corporation and HMC) on such date. Additionally, the
percentage of liability assumed by HMLP shall equal the ratio of (i) the total
number of Retained Employees and Retained Individuals on the Distribution Date
to (ii) the combined total number of Crestline Employees, Retained Employees and
Retained Individuals (other than a Marriott International Employee or Marriott
Terminee, as defined in the Employee Benefits & Other Employment Matters
Allocation Agreement, entered into as of October 8, 1993 between Marriott
International, Inc. (renamed Sodexho Marriott Services, Inc.) and HMC and a Host
Marriott Services Individual, Host Marriott Services Employee or Host Marriott
Services Terminee, as defined in the Employee Benefits & Employee Matters
Allocation Agreement, entered into as of December 29, 1995, between Host
Marriott Services Corporation and HMC) on such date.
20
<PAGE>
Each party will indemnify, defend, and hold harmless the other to the extent of
the indemnifying party's apportioned percentage determined in accordance
herewith.
3.3.6. Host REIT Conversion Employment-Related Claims
----------------------------------------------
Employment-related claims arising after the Distribution and division
of the Employees between the parties and not relating to, arising from, or in
connection with the Host REIT Conversion, will be the sole responsibility of
Crestline as to Crestline Employees and of HMLP as to Retained Employees and
Retained Individuals. Each party will indemnify, defend, and hold harmless the
other from employment-related claims of the other company.
3.4. Notice of Claims
----------------
Without limitation to the scope and application to each party in the
performance of its duties under Sections 3.4 and 3.5 of this Agreement, each
party will notify in writing and consult with the other party prior to making
any settlement to an employee claim, for the purpose of avoiding any prejudice
to such other party arising from the settlement.
3.5. Assumption of Unemployment Tax Rates
------------------------------------
Changes in state unemployment tax experience as of the Distribution
Date shall be handled in accordance with this Section 3.5. In the event
applicable state law permits the allocation of the unemployment tax experience
of HMC as of the Distribution Date, the HMC experience shall be transferred to
Crestline if this results in the lowest aggregate unemployment tax costs for
both Crestline and HMLP combined, and the HMC experience shall be retained by
HMLP if this results in the lowest aggregate unemployment tax costs for HMLP and
Crestline combined. In the event applicable state law does not permit the
allocation of the unemployment tax experience of HMC as of the Distribution
Date, the HMC experience shall be transferred to HMLP.
3.6. Intercompany Service Charge
---------------------------
Legal, professional, managerial, administrative, clerical, consulting,
and support or production services provided to one party by personnel of the
other party, upon the request of the first party or when such services are
otherwise required by this Agreement shall be charged to the party receiving
such services on commercially reasonable terms to be negotiated (or in
accordance with the provisions of any applicable agreement between the parties).
21
<PAGE>
3.7. WARN Claims
-----------
Before and after the Distribution Date, each party shall comply in all
material respects with the Worker Adjustment and Retraining Act ("WARN"). HMLP
shall be responsible for WARN claims relating to Retained Individuals and
Retained Employees. Crestline shall be responsible for WARN Claims relating to
Crestline Employees. Each party shall indemnify, defend and hold harmless the
other in connection with WARN Claims for which the indemnitor is responsible and
which are brought against the indemnitee.
3.8. Employees on Leave of Absence
-----------------------------
As of the Distribution Date, Crestline shall assume responsibility, if
any, as employer for any individual returning from an approved leave of absence
who prior to the Distribution Date was employed by HMC or any subsidiary of HMC
(other than Crestline) and who but for such approved leave of absence would be
an active employee of Crestline on or after the Distribution Date. As of the
Contribution Date, HMLP shall assume responsibility, if any, as employer for an
individual returning from an approved leave of absence who prior to the
Contribution Date was employed by HMC or any subsidiary of HMC (other than
Crestline) and who but for such approved leave of absence would be an active
employee of HMLP or its affiliates on or after the Contribution Date.
3.9. No Third Party Beneficiary Rights
---------------------------------
Neither this Agreement nor any other intercompany agreement between
HMC, HMLP and Crestline is intended to nor does it create any third party
contractual third-party beneficiary or other common law rights.
3.10. Attorney-Client Privilege
-------------------------
The provisions herein requiring either party to this Agreement to
cooperate shall not be deemed to be a waiver of the attorney/client privilege
for either party not shall it require either party to waive its attorney/client
privilege.
22
<PAGE>
4. DEFAULT
4.1. Default
-------
If a party materially defaults hereunder, each non-defaulting party
shall be entitled to all remedies provided by law or equity (including
reasonable attorneys' fees and costs of suit incurred).
4.2. Force Majeure
-------------
HMC, HMLP and Crestline shall incur no liability to each other due to
a default under the terms and conditions of this Agreement resulting from fire,
flood, war, strike, lock-out, work stoppage or slow-down, labor disturbances,
power failure, major equipment breakdowns, construction delays, accident, riots,
acts of God, acts of United States' enemies, laws, orders or at the insistence
or result of any governmental authority or any other delay beyond each other's
reasonable control.
23
<PAGE>
5. MISCELLANEOUS
5.1. Relationship of Parties
-----------------------
Nothing in this Agreement shall be deemed or construed by the parties
or any third party as creating the relationship of principal and agent,
partnership or joint venture between the parties, it being understood and agreed
that no provision contained herein, and no act of the parties, shall be deemed
to create any relationship between the parties other than the relationship set
forth herein.
5.2. Access to Information; Cooperation
----------------------------------
HMC, HMLP and Crestline and their authorized agents will be given
reasonable access to and may take copies of all information relating to the
subjects of this Agreement (to the extent permitted by federal and state
confidentiality laws) in the custody of the other party, including any agent,
contractor, subcontractor, agent or any other person or entity under the
contract of such party. The parties will provide one another with such
information within the scope of this Agreement as is reasonably necessary to
administer each party's Plans. The parties will cooperate with each other to
minimize the disruption caused by any such access and providing of information.
5.3. Assignment
----------
Neither party shall, without the prior written consent of the other,
have the right to assign any rights or delegate any obligations under this
Agreement.
5.4. Headings
--------
The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
5.5. Severability of Provisions
--------------------------
Neither HMC, HMLP nor Crestline intends to violate statutory or common
law by executing this Agreement or any contractual obligations of HMC. If any
provision in this Agreement is in violation of any law, such provision shall be
inoperative and the remainder of this Agreement shall remain in full force and
effect and shall be binding upon the parties.
24
<PAGE>
5.6. Parties Bound
-------------
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder.
5.7. Notices
-------
All notices, consents, approvals and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given when delivered personally or by overnight courier or three days after
being mailed by registered or certified mail (postage prepaid, return receipt
requested) to the named representatives of the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice, except that notices of changes of address shall be effective upon
receipt):
(a) if to HMC
HOST MARRIOTT CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher Townsend
(b) if to HMLP
HOST MARRIOTT, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher Townsend
(c) if to Crestline
CRESTLINE CAPITAL CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Tracy Colden
HMC shall, upon the request of Crestline or HMLP, provide copies of
all of its notices, consents, approvals and other communications relating to the
matters covered by this Agreement to any lender of Crestline or HMLP or other
person specified by Crestline or HMLP. HMLP shall upon the request of HMC or
Crestline provide copies of all of its actions, consents, approvals and other
communications given or made pursuant to its obligations under this Agreement to
any lender of HMC or Crestline or other person specified by HMC or Crestline.
Additionally, Crestline shall upon the request of HMC or HMLP provide copies of
25
<PAGE>
all of its actions, consents, approvals and other communications given or made
pursuant to its obligations under this Agreement to any lender of HMC or HMLP or
other person specified by HMC or HMLP.
5.8. Further Action
--------------
HMC, HMLP and Crestline each shall cooperate in good faith and take
such steps and execute such papers as may be reasonably requested by the other
party to implement the terms and provisions of this Agreement.
5.9. Waiver
------
HMC, HMLP and Crestline each agree that the waiver of any default
under any term or condition of this Agreement shall not constitute a waiver of
any subsequent default or nullify the effectiveness of that term or condition.
5.10. Governing Law
-------------
All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Maryland, regardless of
the laws that might be applied under applicable principles of choice of laws.
5.11. Consent to Jurisdiction
-----------------------
The parties irrevocably submit to the exclusive jurisdiction of (a)
the Courts of the State of Maryland, Montgomery County, or (b) any federal
district court where there is federal jurisdiction for the purpose of any suit,
action or other Court proceeding arising out of this Agreement. The parties
hereby irrevocably designate, appoint and empower [_____________________] in
each case as its true and lawful agent and attorney-in-fact in its name, place,
and stead to receive on its behalf service of process in any action, suit, or
proceeding with respect to any matters as to which it has submitted to
jurisdiction as set forth in the immediately preceding sentence.
5.12. Entire Agreement
----------------
This Agreement, the Distribution Agreement and Merger Agreement
constitute the entire understanding between the parties hereto, and supersede
all prior written or oral communications, relating to the subject matter covered
by said agreements. No amendment, modification, extension or failure to enforce
any condition of this Agreement by either party shall be deemed a waiver of any
of its rights herein. This Agreement shall not be amended except by a writing
executed by the parties.
26
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HOST MARRIOTT CORPORATION,
a Delaware corporation
By:
----------------------------
HOST MARRIOTT, L.P.,
a Delaware limited partnership
By:
----------------------------
CRESTLINE CAPITAL CORPORATION,
a Maryland corporation
By:
----------------------------
27
<PAGE>
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT
MATTERS ALLOCATION AGREEMENT
BETWEEN HOST MARRIOTT CORPORATION,
HOST MARRIOTT, L.P. AND
CRESTLINE CAPITAL CORPORATION
SCHEDULE A
Howard Johnson (Prime & Exeter) Retirement Award
Howard Johnson Company Executive Retirement Plan
Howard Johnson Retirement Plan (Long & Loyal)
Marriott Family Restaurants, Inc. Retirement Savings Plan
Big Boy Cleveland Disposition Deferred Stock Plan
<PAGE>
Exhibit 10.19
ASSET MANAGEMENT AGREEMENT
This ASSET MANAGEMENT AGREEMENT ("Agreement") is made and entered into as
of the _____day of _____________________, 199_ (the "Effective Date"), by and
between HOST MARRIOTT, L.P ("Company"), a Delaware limited partnership and
CRESTLINE CAPITAL CORPORATION ("Consultant"), a Maryland corporation.
RECITALS
WHEREAS, Company (or an Affiliate (defined below) thereof) is the owner of
the hotels as more particularly described on Exhibit "A" attached hereto and by
reference incorporated herein (each included in the definition of "Hotels"); and
WHEREAS, each Hotel is being managed by the management company (referred to
herein as the "Hotel Manager") identified in that certain related hotel
management agreement, as may be amended from time to time, (each, a "Management
Agreement" or collectively, the "Management Agreements"); and
WHEREAS, Company (or an Affiliate of Company), as "Hotel Landlord", has
entered or will be entering into certain hotel lease agreements (each, a "Hotel
Lease" or collectively, the "Hotel Leases") with Consultant (or an Affiliate of
Consultant), as "Hotel Tenant", which Hotel Leases are effective as of the
Effective Date of this Agreement; and
WHEREAS, the Hotels leased under the Hotel Leases have been divided into
four pools (each, a "Hotel Pool") pursuant to certain Pooling and Security
<PAGE>
Agreements among Company, Consultant and certain of their respective Affiliates;
and
WHEREAS, in connection with each Hotel Lease, the parties thereto and the
applicable Hotel Manager have entered into that certain Consent, Assignment and
Assumption and Amendment of Management Agreement (the "Assignment and Assumption
Agreement") pursuant to which the "Hotel Landlord" under each such Hotel Lease
assigned certain rights and obligations of "Owner" under the Management
Agreements to the "Hotel Tenant"; and
WHEREAS, Company desires to retain Consultant to provide certain advisory
and consultation services with respect to the Hotels and the performance by the
"Hotel Landlord" of the rights and obligations that it retained under the
related Hotel Lease and Assignment and Assumption Agreement and Consultant has
agreed to provide such services all as set forth in and subject to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Company and Consultant agree as
follows:
2
<PAGE>
ARTICLE I
DEFINITIONS
-----------
1.1 Definition of Terms.
-------------------
As used in this Agreement, the following terms shall have the meanings
ascribed to each such term:
"Affiliate" shall mean any individual or entity directly or indirectly
---------
through one or more intermediaries controlling, controlled by or under common
control with a party. The term "control", as used in the immediately preceding
sentence, means, with respect to a corporation, the right to exercise, directly
or indirectly, fifty percent (50%) or more of the voting rights of any class of
the shares of the controlled corporation, and, with respect to an entity that is
not a corporation, the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of the controlled
entity.
"Agreement" shall have the meaning set forth in the first paragraph of
---------
this Agreement.
"Asset Management Services" shall mean those Asset Management Services
-------------------------
described in Section 4.2 performed by Consultant in connection with the Hotels.
"Assignment and Assumption Agreement" shall have the meaning set forth
-----------------------------------
in the fifth Recital of this Agreement.
"Claims" shall have the meaning set forth in Section 9.1.
------
"Company" shall have the meaning set forth in the first paragraph of
-------
this Agreement.
"Company Indemnitee" shall have the meaning set forth in Section 9.2.
------------------
3
<PAGE>
"Consultant" shall have the meaning set forth in the first paragraph
----------
of this Agreement.
"Consultant Approved Capital Expense" shall have the meaning set forth
-----------------------------------
in Section 4.2(f).
"Consultant Indemnitee" shall have the meaning set forth in Section
---------------------
9.1.
"Default" shall have the meaning set forth in Section 7.1.
-------
"Default Rate" shall mean an annual rate of interest equal to the
------------
Prime Rate, as adjusted from time to time, plus three hundred (300) basis
points; provided, however, that in no event shall the Default Rate exceed the
maximum rate which is permitted under applicable law.
"Effective Date" shall have the meaning set forth in the first
--------------
paragraph of this Agreement.
"Event of Default" shall have the meaning set forth in Section 7.2.
----------------
"Feasibility Services" shall have the meaning set forth in Section
--------------------
4.1.
"Fee" shall have the meaning set forth in Section 6.1.
---
"Hotel" or "Hotels" shall mean those (i) full-service and limited-
-----------------
service hotels described on Exhibit "A" and (ii) any full-service or limited-
service hotel that Company (or an Affiliate of Company) subsequently leases to
Consultant (or an Affiliate of Consultant) at any time after the Effective Date.
The parties agree to execute an amendment to this Agreement adding any hotel
described in clause (ii) of the foregoing sentence to Exhibit "A" (and, if
applicable, Exhibit "B") of this Agreement as of the date specified in such
amendment.
"Hotel Lease" or "Hotel Leases" shall have the meaning set forth in
------------------------------
4
<PAGE>
the third Recital of this Agreement.
"Hotel Manager" shall have the meaning set forth in the second Recital
-------------
of this Agreement.
"Hotel Pool" shall have the meaning set forth in the fourth Recital of
----------
this Agreement.
"Indemnified Party" shall have the meaning set forth in Section 9.3.
-----------------
"Indemnifying Party" shall have the meaning set forth in Section 9.3.
------------------
"Initial Term" shall have the meaning set forth in Section 3.1.
------------
"Management Agreement" or "Management Agreements" shall have the
-----------------------------------------------
meaning set forth in the second Recital of this Agreement.
"Partnership Hotels" shall have the meaning set forth in Section 6.4.
------------------
"Prime Rate" shall mean the "prime rate" as published in the "Money
----------
Rates" section of The Wall Street Journal; however, if such rate is no longer
-----------------------
published, the term "Prime Rate" shall mean the average of the prime interest
rates that are announced, from time to time, by the three (3) largest banks (by
assets) headquartered in the United States which publish a "prime rate".
"Reimbursable Expenses" shall mean those amounts actually incurred by
---------------------
Consultant for services performed by third parties (including, without
limitation, attorneys, engineers, project managers and other outside
consultants) and directly related to Consultant's performance of the Asset
Management Services and/or Feasibility Services. Consultant shall not incur any
Reimbursable Expenses without the prior approval of Company, which approval may
be withheld by Company in its sole discretion.
"Renewal Notice Deadline" shall have the meaning set forth in
-----------------------
5
<PAGE>
Section 3.1.
"Renewal Term" shall have the meaning set forth in Section 3.1.
------------
"Term" shall mean the Initial Term plus all Renewal Terms.
----
"Termination" shall mean the expiration or sooner cessation of this
-----------
Agreement.
"Year" shall mean a full twelve (12) month period consisting of 365
----
days commencing with the date specified in this Agreement.
1.2 Certain Management Agreement Defined Terms.
------------------------------------------
Section 4.2 of this Agreement refers to capitalized terms that are not
defined in this Agreement. (For example, "Accounting Statements", "Building
Estimates" and "Management Analysis Reports" are terms used in Section 4.2 but
not defined in this Agreement.) Any such capitalized term in Section 4.2 shall
have the meaning ascribed to that term in the related Management Agreement. If,
however, the Management Agreement for any Hotel does not include such
capitalized term, then the capitalized term or related provision used in the
respective Management Agreement that carries out the intent of the respective
provision in this Agreement shall be deemed to be substituted for the
capitalized term as used in Section 4.2 hereof.
ARTICLE II
APPOINTMENT OF CONSULTANT
-------------------------
2.1 Independent Contractor.
----------------------
Company hereby retains Consultant as an independent contractor for the
purpose of performing the Asset Management Services and Feasibility Services
described in this Agreement and Consultant hereby agrees to perform
6
<PAGE>
such services on the terms and conditions set forth herein. Consultant will act
as Company's authorized representative in gathering data, analyses, records and
other materials as may be necessary to perform the Asset Management Services in
connection with each Hotel and the Feasibility Services further described in
Section 4.1. The parties acknowledge that, as between Company and Consultant,
Company (or an Affiliate of Company) will retain title and ownership of the
Hotels and that Consultant will not acquire title to, or any security interest
in, or any rights of any kind in or to the Hotels (or any income, receipts or
revenues therefrom) in its capacity as asset manager and advisor under or
pursuant to this Agreement.
ARTICLE III
TERM OF AGREEMENT
-----------------
3.1 Term.
----
The initial term ("Initial Term") of this Agreement shall commence as
of the Effective Date and, unless sooner terminated as provided in Section 7.3
or Section 8.2 of this Agreement, shall continue until the expiration of the
second (2nd) Year after the Effective Date. The Term shall thereafter be
automatically renewed for successive one (1) Year periods (each one-Year period
being a "Renewal Term"), subject to (i) the parties agreeing on the Fee for any
Renewal Term prior to the Renewal Notice Deadline or (ii) either party notifying
the other in writing of its intent not to renew this Agreement by no later than
one hundred eighty (180) days prior to the end of the Initial Term or then
current Renewal Term, as the case may be (referred to as the "Renewal Notice
Deadline"); in either case this Agreement shall end at the expiration of the
Initial Term or the then
7
<PAGE>
current Renewal Term, as the case may be.
ARTICLE IV
ASSET MANAGEMENT SERVICES
-------------------------
4.1 Scope of Agreement.
------------------
The retention of Consultant by Company to perform the Asset Management
Services and Consultant's obligations to perform such Asset Management Services,
all as described and subject to the terms of this Agreement, is expressly
limited to the Hotels. Consultant will also perform acquisition and/or
feasibility services (collectively referred to as "Feasibility Services"), at
Company's request, in connection with due diligence being conducted by Company
for a hotel that Company (or an Affiliate of Company) is or may be acquiring or
constructing and developing at some future time, whether or not such hotel
subsequently becomes a "Hotel" pursuant to the provisions of this Agreement.
Any reference to "Asset Management Services" hereinafter shall include the Asset
Management Services and the Feasibility Services as described in this Agreement.
4.2 Asset Management Services.
-------------------------
Consultant will provide review of and advice on the management and
operation of the Hotels generally and with respect to matters required by
Company to make operating and strategic decisions affecting any such Hotel,
including, without limitation, real estate tax issues, compliance with insurance
provisions under the related Hotel Lease or Management Agreement, capital
expenditure programs and compliance with related ground leases (if any). The
following
8
<PAGE>
activities are included, without limitation, within the scope of the "Asset
Management Services" to be provided by Consultant:
a. Contract Administration: Review and approve (on behalf of
-----------------------
Company) contracts, concessions, license and lease agreements (collectively
referred to for purposes of this paragraph as "contracts") related to the
operation of each of the Hotels for which the "Owner" under the related
Management Agreement has approval rights and which approval rights have been
retained by Company or its Affiliates under the related Hotel Lease and
Assignment and Assumption Agreement; provided, however, Consultant will be
required to obtain Company's prior consent before approving, modifying, waiving
any rights under, or terminating, any such contract (i) which has a term of more
than five (5) years or involves more than 1,000 square feet of space within the
Hotel; (ii) for any "non-hotel use" (for example, antenna license agreements or
concessions relating to time-share activities) for which the annual rental over
the initial term of any such agreement exceeds Twenty-Five Thousand Dollars
($25,000.00); or (iii) for any uses customarily related to the operation of a
hotel for which the annual rental over the initial term of any such agreement
exceeds Fifty Thousand Dollars ($50,000.00). Consultant will provide quarterly
status reports to Company identifying any contract that Consultant approved,
modified, waived any rights under or terminated during the previous calendar
quarter that did not require Company's prior consent pursuant to this Section
4.2(a).
b. Operating and Financial Reviews with Hotel Management: Conduct
-----------------------------------------------------
site visits, generally at least twice per calendar year, and operating, capital
spending requirements and financial reviews with the executive property
management at each of the Hotels.
9
<PAGE>
c. Review Meetings with Company: Conduct scheduled review
----------------------------
meetings, at least quarterly, or more frequently as reasonably requested by
Company, with Company to review the operating and financial results and
strategies of the Hotels.
d. Review of Financial Statements and Budgets: Review and
------------------------------------------
assess all financial statements, summaries and budgets provided by Hotel Manager
detailing operating and financial results and projections (including period
Accounting Statements, Annual Operating Budgets and Statements for the Hotels,
FF&E Budgets, Building Estimates, Management Analysis Reports and other reports
and summaries that may be required to be submitted by the Hotel Manager under
the related Management Agreement).
e. Revenue Projections: Review revenue projections for the
-------------------
Hotels and evaluate whether they are consistent with marketing and operating
strategies and current operating results.
f. Review of Capital Spending Programs: Review existing
-----------------------------------
plans assessing the need and/or costs and benefits of capital expenditure
programs for each of the Hotels and approve all capital spending commitments,
including commitments for which funds are to be drawn from the FF&E Reserve, for
which Company or its Affiliates has retained approval rights under the related
Hotel Lease and Assignment and Assumption Agreement. Consultant will obtain
Company's prior approval for (i) any project or expenditure to be funded from
the FF&E Reserve totaling One Hundred Thousand Dollars ($100,000.00) or more;
(ii) any owner-funded Capital Expenditure totaling Fifty Thousand Dollars
($50,000.00) or more; and (iii) any project or expenditure not previously
approved pursuant to the foregoing clauses (i) and (ii), whether funded from the
FF&E
10
<PAGE>
Reserve and/or an owner-funded Capital Expenditure (a "Consultant Approved
Capital Expense") if, at the time of approval of such project or expenditure,
the aggregate of all Consultant Approved Capital Expenses approved by Consultant
since the beginning of the calendar year in which such approval will be given
exceeds Two Hundred Thousand Dollars ($200,000.00). Further, Consultant will
provide project management services in connection with capital expenditure
programs at the Hotels.
g. Administration of Facility Mortgages: Administer, as
------------------------------------
requested by Company and required by a Holder, approvals relating to the
operation of the Hotel required under the related loan documents affecting any
Hotel. In the event this Agreement is terminated prior to the termination of
the related Hotel Lease, Consultant (or an Affiliate thereof) will agree, upon
request by Company, to continue to provide such services under the related loan
documents under the terms of a separate agreement and for a fair and equitable
fee for such services, all as may be agreed upon in good faith by Company and
consultant (or Affiliate thereof). This Section 4.2(g) shall survive
Termination of this Agreement.
h. Modifications of the Management Agreement: Consult and
-----------------------------------------
advise Company with respect to modifications of any related Management Agreement
for which Company or its Affiliates has retained approval rights under the
related Hotel Lease and Assignment and Assumption Agreement including, without
limitation, any proposed assignment of the Management Agreement by the
applicable Hotel Manager, it being understood, however, that Consultant shall
have no authority to approve any such modification or assignment on behalf of
Company or the applicable Hotel owner.
11
<PAGE>
i. Market Review: Review and assess competitive and
-------------
market conditions of each of the Hotels.
j. Condemnations: Monitor and negotiate to the extent Company
-------------
or its Affiliates has retained approval rights under the related Hotel Lease and
Assignment and Assumption Agreement (with Company's prior approval) proceedings
with governmental agencies in connection with (partial) takings affecting the
"Hotel Landlord's" interest in a Hotel (for example, the taking of a portion of
the Hotel property for the expansion of highways).
k. Casualties. Monitor and negotiate to the extent Company or its
----------
Affiliates has retained approval rights under the related Hotel Lease and
Assignment and Assumption Agreement (with Company's prior approval) the
restoration of any portion (or whole) of the Hotel following a casualty with
insurance companies and\or contractors as may be required by the "Owner" of the
Hotel pursuant to the related Management Agreement and the "Hotel Landlord"
pursuant to the related Hotel Lease.
Subject to Section 4.3 of this Agreement, Asset Management Services
shall not include, and Consultant shall not be required to conduct, physical
engineering or environmental inspections of the Hotels; Consultant shall not be
liable for any failure to discover or report any defect or other adverse
condition existing at any Hotel.
Nothing in this Agreement shall create in Company or any of its
Affiliates any right or approval authority with respect to any Hotel that does
not exist under the applicable Hotel Lease or Assignment and Assumption
Agreement.
4.3 Standard of Performance.
-----------------------
Consultant will carry out its duties and responsibilities hereunder in
12
<PAGE>
all material respects in accordance with the provisions of all applicable laws
and governmental regulations. Consultant will perform its obligations with
respect to each Hotel, with the care, skill, prudence and diligence under the
circumstances consistent with normal and prudent practices in the real estate
asset management industry then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character. Decisions made and/or actions taken by
Consultant will represent Consultant's reasonable judgment based on industry
standard applicable to first class hotels. Company acknowledges that
recommendations to be made by Consultant in connection with the performance of
the Asset Management Services involve subjective judgments and may result in
unanticipated consequences. Consultant assumes no responsibility other than to
render the Asset Management Services in good faith and with reasonable care and
diligence and will not be responsible to Company, or others, for any action or
inaction by Company in following or declining to follow the advice given by
Consultant.
4.4 Consents.
--------
Company and Consultant each acknowledge that Company may be required
to give certain consents within those time periods specified in the related
Management Agreement and/or Hotel Lease for each respective Hotel. Accordingly,
the parties agree to cooperate in good faith with one another to ensure that the
proper consents are given, or withheld, as the case may be, within any such
required time periods. Consultant will provide its recommendations regarding
such matters to Company in a timely manner in order to provide Company with a
reasonable time period in which to make any such decisions.
13
<PAGE>
ARTICLE V
PERSONNEL
---------
5.1 Personnel.
---------
Consultant's obligations and duties hereunder may be performed by one
or more principals or employees of Consultant or independent contractors. Any
independent contractors to whom Consultant delegates its responsibilities
hereunder shall be parties that are in contractual privity with Consultant, and
not with Company; Company shall have no obligation (monetary or otherwise) to
such independent contractors and Consultant shall be responsible for the actions
of all such independent contractors. It is expressly understood that all
personnel of Consultant are solely employees of Consultant and are not employees
of Company.
ARTICLE VI
CONSULTANT'S COMPENSATION
-------------------------
6.1 Fees for Services.
------------------
Company shall pay to Consultant as compensation for its Asset
Management Services a fee (the "Fee") equal to _________________ Dollars
($______________________) for each Year during the Initial Term of this
Agreement. No further reimbursement for Consultant's costs and expenses incurred
in the provision of the Asset Management Services by Consultant in connection
with any Hotel shall be owing or paid by Company unless otherwise specifically
permitted under this Agreement. The Fee during any Renewal Period shall be
negotiated and agreed to by the parties prior to the Renewal Notice Deadline.
6.2 Manner of Payment
-----------------
14
<PAGE>
The Fee shall be payable by Company to Consultant in twelve (12)
monthly equal installments, on or before the tenth (10th) day of each calendar
month. In the event that this Agreement shall commence on a date other than the
first day of a calendar month or terminate prior to the last day of the
respective calendar month, the installment due to Consultant for any such
partial calendar month shall be prorated accordingly.
6.3 Reimbursable Expenses
---------------------
Company shall reimburse Consultant (in addition to the Fee) for its
Reimbursable Expenses within ten (10) days after receipt of an invoice from
Consultant containing reasonably sufficient documentary evidence of such
Reimbursable Expenses.
6.4 Partnership Expenses.
--------------------
Those Hotels listed on Exhibit "B" attached to this Agreement and by
reference incorporated herein, are referred to as the "Partnership Hotels".
Consultant shall (in addition to the Fee paid by Company pursuant to Section
6.1) invoice the respective owner/partnership of each of the Partnership Hotels
for Asset Management Services provided by Consultant on behalf of the
owner/partnership in connection with the related Partnership Hotel. Consultant
represents to Company that the invoice for such services (i) will be for
services that were customarily billed to the owner/partnership by Host Marriott
Corporation (or a subsidiary thereof) prior to the date of this Agreement and
(ii) such services will not be billed to Company as Reimbursable Expenses. Each
owner/partnership will be instructed to pay Consultant directly for such
services; provided, however, that Company may elect that Consultant forward all
such
15
<PAGE>
invoices directly to Company. Company shall then reimburse Consultant for
all amounts that Company actually receives from the related owner/partnership
within five (5) days after Company's receipt of any such payment from the
owner/partnership. All invoices prepared by Consultant will provide sufficient
explanation and/or documentary evidence backing up the charges included on the
given invoice.
ARTICLE VII
DEFAULTS
--------
7.1 Definition of Default.
---------------------
Any one or more of the following shall constitute a "Default", to the
extent permitted by applicable law:
(a) the entry of an order, judgment or decree by any court of
competent jurisdiction, on the application of a creditor, adjudicating either
party as bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee or liquidator of all or a substantial part of
such party's assets, and, in the case of any involuntary petition or filing
only, such order, judgment or decree continuing unstayed and in effect for any
period of sixty (60) days;
(b) the failure of either party to make any payment required to be
made in accordance with the terms of the Agreement as of the due date which is
specified in the Agreement. Upon the occurrence of a monetary Default the
amount owed to the non-defaulting party shall accrue interest at the Default
Rate from and after the date on which such payment was originally due to the
non-defaulting party;
16
<PAGE>
(c) the failure of either party to perform, keep or fulfill in all
material respects any of the other covenants, undertaking, obligations or
conditions set forth in the Agreement.
7.2 Definition of "Event of Default".
--------------------------------
The occurrence of a Default under Section 7.1(a) shall immediately and
automatically, without the necessity of any notice to the defaulting party,
constitute an "Event of Default". A Default under Section 7.1(b) shall
constitute an "Event of Default" if the defaulting party fails to cure such
Default within ten (10) days after written notice from the non-defaulting party.
A Default under Section 7.1(c) shall constitute an "Event of Default" if the
defaulting party fails to cure such Default within thirty (30) days after
written notice from the non-defaulting party, or, if the Default is such that it
cannot reasonably be cured within said time period, if the defaulting party
fails to commence the cure within the 30-day period or thereafter fails to
diligently pursue such efforts to completion.
7.3 Remedies Upon an Event of Default.
---------------------------------
Upon the occurrence of an Event of Default, the non-defaulting party
shall have the right to (i) terminate the Agreement upon thirty (30) days'
notice to the defaulting party and/or (ii) institute any and all proceedings
permitted by law or equity, including, without limitation, actions for specific
performance and/or damages.
ARTICLE VIII
TERMINATION OF AGREEMENT
------------------------
8.1 Procedures Upon Termination of Agreement.
----------------------------------------
Upon Termination of this Agreement, the following shall
17
<PAGE>
be applicable:
(a) Consultant shall transfer all supporting documents, reports
and files that could be considered proprietary to the Company (and not the
property of the applicable "Hotel Tenant") or each Hotel as directed (in the
reasonable judgment of Company) by Company.
(b) Consultant shall be entitled to receive its Fee, any fees
described in Section 6.3 and Reimbursable Expenses, in each case accrued (but
unpaid) through the effective date of the Termination; unless, however,
Consultant is terminated by reason of its gross negligence, willful misconduct
or fraud, in which event Consultant's entitlement to receive accrued but unpaid
Fees, other fees and Reimbursable Expenses shall terminate immediately upon
receipt of Company's termination notice, it being understood, however, that the
foregoing shall not prevent Company from seeking or otherwise limiting the
amount of damages payable by Consultant as a result of any breach by it of this
Agreement.
8.2 Other Terminations.
------------------
Company may elect to terminate this Agreement upon thirty (30) days'
written notice to Consultant and Consultant shall have no remedies or cause of
action with respect to such termination:
(a) in respect to any Hotel, upon the sale of such Hotel as may
be permitted pursuant to the provisions of the related Hotel Lease and the
related Management Agreement; or
(b) in the event Company (or an Affiliate of Company) as
"Landlord" under the Hotel Leases terminates more than two (2) Hotel Pools by
reason of an Event of Default (as that term in defined in the Hotel Lease) by
"Tenant" under such Hotel Leases, during the Term of this Agreement.
18
<PAGE>
ARTICLE IX
INDEMNIFICATIONS
----------------
9.1 Indemnification of Consultant by Company.
----------------------------------------
Company agrees to indemnify, defend and hold harmless Consultant and
its Affiliates, including independent contractors, and all of their respective
officers, directors, partners, shareholders, employees, and agents (each, a
"Consultant Indemnitee") against any and all costs, losses, liabilities, claims,
demands, actions, expenses (including reasonable attorneys' fees), judgments,
fines, and charges (collectively, referred to as "Claims") asserted at any time
by any third party against any Consultant Indemnitee which result from or are
based upon such Consultant Indemnitee's performance (or lack of performance)
under this Agreement, or otherwise related to this Agreement, unless the amounts
covered by this indemnity are caused directly by an act or omission of
Consultant constituting gross negligence, willful misconduct or fraud, in which
event neither Consultant nor any other Consultant Indemnitee will be indemnified
for such amounts under this Agreement.
9.2 Indemnification of Company by Consultant.
----------------------------------------
Consultant shall indemnify, defend and hold harmless Company and its
Affiliates and all of their respective officers, directors, partners,
shareholders, employees, and agents (each, a "Company Indemnitee") against any
and all Claims asserted at any time by any third party against any Company
Indemnitee to the extent resulting from an act or omission by Consultant
hereunder constituting gross negligence, willful misconduct or fraud.
19
<PAGE>
9.3 Notice of Claims.
----------------
Upon receipt by any party entitled to indemnification under Sections
9.1 or 9.2 above (an "Indemnified Party") of a complaint, claim or other notice
of any loss, claim, damage or liability giving rise to a claim for
indemnification under this Article IX, such Indemnified Party shall promptly
notify the other party (either Company or Consultant) from whom indemnification
is sought (the "Indemnifying Party"), but failure to provide such notice shall
not relieve the Indemnifying Party from its duty to indemnify unless the
Indemnifying Party is materially prejudiced by such failure and had no actual
knowledge of such complaint, claim or other notice. The Indemnifying Party
shall pay all amounts payable under the related provisions of this Article IX
within ten (10) days after demand therefor and, if not timely paid, such amounts
shall bear interest at the Default Rate from the date of determination to the
date of payment. The Indemnifying Party, at its expense, shall contest, resist
and defend any such claim, action or proceeding asserted or instituted against
the Indemnified Party and shall not be responsible for any duplicate attorneys'
fees incurred by the Indemnified Party, or may compromise or otherwise dispose
of the same with the Indemnified Party's prior written consent (which consent
may not be unreasonably withheld or delayed). In the event that the Indemnified
Party shall unreasonably withhold or delay its consent, the Indemnifying Party
shall not be liable for any incremental increase in costs or expenses resulting
therefrom.
This Article IX shall survive the Termination of this Agreement.
ARTICLE X
NOTICES
-------
20
<PAGE>
10.1 Notices.
-------
Notices and other communications to be given under the terms of this
Agreement shall be in writing, and shall be either (i) delivered by hand
evidenced by a receipt, or (ii) sent by certified or registered mail, postage
prepaid, return receipt requested, or (iii) sent by overnight delivery service:
To Company: Host Marriott, L.P.
10400 Fernwood Road
Bethesda Maryland 20817
Attn: Christopher J. Nassetta
With a copy to: Host Marriott, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Christopher G. Townsend, Esq.
To Consultant: Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Bruce Stemerman
With a copy to: Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Elizabeth Lieberman, Esq.
or such other address as is from time to time designated by either party. Any
such notice which is properly mailed as described above, shall be deemed to have
been served as of three (3) business days after said posting.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
11.1 Entire Agreement.
----------------
21
<PAGE>
This Agreement constitutes the entire agreement between the parties
and supersedes all prior written and oral understandings provided, that, this
Agreement shall not create any right in Company with respect to any Hotel or the
operation thereof that does not exist under the applicable Hotel Lease or
Assignment and Assumption Agreement. This Agreement may be amended only by a
writing signed by both parties hereto.
11.2 Partial Invalidity.
------------------
If any portion of this Agreement shall be declared invalid by a court
of competent jurisdiction, this Agreement shall be construed as if such portion
had not been inserted herein except to the extent that such construction would
operate as an undue hardship on either party, or constitute a substantial
deviation of the general intent and purpose of the parties as reflected in this
Agreement.
11.3 Confidentiality.
---------------
The parties hereto agree, for their benefit and for the benefit of
Marriott International, Inc. and the Affiliates thereof, that the matters set
forth in this Agreement are strictly confidential and each party will use
commercially reasonable efforts to ensure that such matters are not disclosed to
any outside person or entities without the written consent of the other party;
provided, however, that such consent will not be required with respect to (i)
legally required filings and other disclosures mandated by applicable legal
requirements; (ii) disclosure to any existing or prospective lender or ground
lessor or prospective purchaser of a Hotel; and (iii) disclosure to the parties'
outside counsel and financial advisors provided, that, such persons are informed
of the confidential nature of such matters and are instructed to keep them
confidential.
11.4 Applicable Law.
--------------
22
<PAGE>
This Agreement shall be construed and governed by the laws of Maryland
without regard to conflict of laws rules.
11.5 Headings.
--------
Headings of Articles or Sections are inserted only for convenience and
are in no way to be construed as a limitation of the scope of the particular
Articles or Sections to which they refer.
11.6 No Restrictions.
---------------
Notwithstanding any provision in this Agreement to the contrary,
nothing contained in this Agreement shall prohibit, limit or restrict Consultant
or any of its Affiliates from rendering advisory or asset management services or
services similar to the Asset Management Services, whether or not in connection
with a hotel facility, to other persons, corporations, governmental agencies,
pension funds or any other entity and Consultant hereby specifically reserves
the right to do the foregoing.
11.7 Assignment.
----------
Neither party shall assign or otherwise transfer this Agreement or any
of the rights granted to it hereunder without the prior written consent of the
other party, not to be unreasonably withheld, conditioned or delayed, and no
such assignment or transfer shall be effective without such required written
consent;
provided, however that either party shall have the right, without such consent,
to assign its interest in this Agreement to any of its Affiliates.
11.8 No Partnership.
--------------
Nothing in this Agreement, or in the relationship between Company and
Consultant, shall be deemed to constitute a partnership, joint venture or any
other similar relationship.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
HOST MARRIOTT, L.P.
By: Host Marriott Corporation, general partner
By
----------------------------------
Vice President
CRESTLINE CAPITAL CORPORATION
By
----------------------------------
Vice President
24
<PAGE>
EXHIBIT 10.20
ASSET MANAGEMENT AGREEMENT
This ASSET MANAGEMENT AGREEMENT ("Agreement") is made and entered into as
of the _____day of _____________________, 199__ (the "Effective Date"), by and
between ROCKLEDGE HOTEL PROPERTIES, INC. ("Company"), a Delaware limited
partnership and CRESTLINE CAPITAL CORPORATION ("Consultant"), a Maryland
corporation.
RECITALS
WHEREAS, Company (or an Affiliate (defined below) thereof) is the owner of
the hotels as more particularly described on Exhibit "A" attached hereto and by
reference incorporated herein (each included in the definition of "Hotels"); and
WHEREAS, each Hotel is being managed by the management company (referred to
herein as the "Hotel Manager") identified in that certain related hotel
management agreement, as may be amended from time to time, (each, a "Management
Agreement" or collectively, the "Management Agreements"); and
WHEREAS, Company desires to retain Consultant to provide certain advisory
and consultation services with respect to the management and operation of the
Hotels and Consultant has agreed to provide such services all as set forth in
and subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
1
<PAGE>
agreements set forth below, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Company and Consultant
agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Definition of Terms.
-------------------
As used in this Agreement, the following terms shall have the meanings
ascribed to each such term:
"Affiliate" shall mean any individual or entity directly or indirectly
---------
through one or more intermediaries controlling, controlled by or under common
control with a party. The term "control", as used in the immediately preceding
sentence, means, with respect to a corporation, the right to exercise, directly
or indirectly, fifty percent (50%) or more of the voting rights of any class of
the shares of the controlled corporation, and, with respect to an entity that is
not a corporation, the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of the controlled
entity.
"Agreement" shall have the meaning set forth in the first paragraph of
---------
this Agreement.
"Asset Management Services" shall mean those Asset Management Services
-------------------------
described in Section 4.2 performed by Consultant in connection with the Hotels.
"Claims" shall have the meaning set forth in Section 9.1.
------
"Company" shall have the meaning set forth in the first paragraph of
-------
this Agreement.
2
<PAGE>
"Company Indemnitee" shall have the meaning set forth in Section 9.2.
------------------
"Consultant" shall have the meaning set forth in the first paragraph
----------
of this Agreement.
"Consultant Approved Capital Expense" shall have the meaning set forth
-----------------------------------
in Section 4.2(f).
"Consultant Indemnitee" shall have the meaning set forth in Section
---------------------
9.1.
"Default" shall have the meaning set forth in Section 7.1.
-------
"Default Rate" shall mean an annual rate of interest equal to the
------------
Prime Rate, as adjusted from time to time, plus three hundred (300) basis
points; provided, however, that in no event shall the Default Rate exceed the
maximum rate which is permitted under applicable law.
"Effective Date" shall have the meaning set forth in the first
--------------
paragraph of this Agreement.
"Event of Default" shall have the meaning set forth in Section 7.2.
----------------
"Feasibility Services" shall have the meaning set forth in Section
--------------------
4.1.
"Fee" shall have the meaning set forth in Section 6.1.
---
"Hotel" or "Hotels" shall mean (i) those full-service and limited-
-----------------
service hotels described on Exhibit "A" and (ii) any full-service or limited-
service hotel that Company (or an Affiliate of Company) acquires or develops at
any time after the Effective Date. The parties agree to execute an amendment to
this Agreement adding any hotel described in clause (ii) of the foregoing
sentence to Exhibit "A" (and, if applicable, Exhibit "B") of this Agreement as
of the date specified in such amendment.
3
<PAGE>
"Hotel Manager" shall have the meaning set forth in the second Recital
-------------
of this Agreement.
"Indemnified Party" shall have the meaning set forth in Section 9.3.
-----------------
"Indemnifying Party" shall have the meaning set forth in Section 9.3.
------------------
"Initial Term" shall have the meaning set forth in Section 3.1.
------------
"Management Agreement" or "Management Agreements" shall have the
-----------------------------------------------
meaning set forth in the second Recital of this Agreement.
"Partnership Hotels" shall have the meaning set forth in Section 6.4.
------------------
"Prime Rate" shall mean the "prime rate" as published in the "Money
----------
Rates" section of The Wall Street Journal; however, if such rate is no longer
-----------------------
published, the term "Prime Rate" shall mean the average of the prime interest
rates that are announced, from time to time, by the three (3) largest banks (by
assets) headquartered in the United States which publish a "prime rate".
"Reimbursable Expenses" shall mean those amounts actually incurred by
---------------------
Consultant for services performed by third parties (including, without
limitation, attorneys, engineers, project managers and other outside
consultants) and directly related to Consultant's performance of the Asset
Management Services and/or Feasibility Services. Consultant shall not incur any
Reimbursable Expenses without the prior approval of Company, which approval may
be withheld by Company in its sole discretion.
"Renewal Notice Deadline" shall have the meaning set forth in Section
-----------------------
3.1.
"Renewal Term" shall have the meaning set forth in Section 3.1.
------------
"Term" shall mean the Initial Term plus all Renewal Terms.
----
"Termination" shall mean the expiration or sooner cessation of this
-----------
4
<PAGE>
Agreement.
"Year" shall mean a full twelve (12) month period consisting of 365
----
days commencing with the date specified in this Agreement.
1.2 Certain Management Agreement Defined Terms.
------------------------------------------
Section 4.2 of this Agreement refers to capitalized terms that are not
defined in this Agreement. (For example, "Accounting Statements", "Building
Estimates" and "Management Analysis Reports" are terms used in Section 4.2 but
not defined in this Agreement.) Any such capitalized term in Section 4.2 shall
have the meaning ascribed to that term in the related Management Agreement. If,
however, the Management Agreement for any Hotel does not include such
capitalized term, then the capitalized term or related provision used in the
respective Management Agreement that carries out the intent of the respective
provision in this Agreement shall be deemed to be substituted for the
capitalized term as used in Section 4.2 hereof.
ARTICLE II
APPOINTMENT OF CONSULTANT
-------------------------
2.1 Independent Contractor.
----------------------
Company hereby retains Consultant as an independent contractor for the
purpose of performing the Asset Management Services and Feasibility Services
described in this Agreement and Consultant hereby agrees to perform such
services on the terms and conditions set forth herein. Consultant will act as
Company's authorized representative in gathering data, analyses, records and
other materials as may be necessary to perform the Asset Management Services in
5
<PAGE>
connection with each Hotel and the Feasibility Services further described in
Section 4.1. The parties acknowledge that, as between Company and Consultant,
Company (or an Affiliate of Company) will retain title and ownership of the
Hotels and that Consultant will not acquire title to, or any security interest
in, or any rights of any kind in or to the Hotels (or any income, receipts or
revenues therefrom) in its capacity as asset manager and advisor under or
pursuant to this Agreement.
ARTICLE III
TERM OF AGREEMENT
-----------------
3.1 Term.
----
The initial term ("Initial Term") of this Agreement shall commence as
of the Effective Date and, unless sooner terminated as provided in Section 7.3
or Section 8.2 of this Agreement, shall continue until the expiration of the
second (2nd) Year after the Effective Date. The Term shall thereafter be
automatically renewed for successive one (1) Year periods (each one-Year period
being a "Renewal Term"), subject to (i) the parties agreeing on the Fee for any
Renewal Term prior to the Renewal Notice Deadline or (ii) either party notifying
the other in writing of its intent not to renew this Agreement by no later than
one hundred eighty (180) days prior to the end of the Initial Term or then
current Renewal Term, as the case may be (referred to as the "Renewal Notice
Deadline"); in either case this Agreement shall end at the expiration of the
Initial Term or the then current Renewal Term, as the case may be.
ARTICLE IV
6
<PAGE>
ASSET MANAGEMENT SERVICES
-------------------------
4.1 Scope of Agreement.
------------------
The retention of Consultant by Company to perform the Asset Management
Services and Consultant's obligations to perform such Asset Management Services,
all as described and subject to the terms of this Agreement, is expressly
limited to the Hotels. Consultant will also perform acquisition and/or
feasibility services (collectively referred to as "Feasibility Services"), at
Company's request, in connection with due diligence being conducted by Company
for a hotel that Company (or an Affiliate of Company) is or may be acquiring or
constructing and developing at some future time, whether or not such hotel
subsequently becomes a "Hotel" pursuant to the provisions of this Agreement.
Any reference to "Asset Management Services" hereinafter shall include the Asset
Management Services and the Feasibility Services as described in this Agreement.
4.2 Asset Management Services.
-------------------------
Consultant will provide review of and advice on the management and
operation of the Hotels generally and with respect to matters required by
Company to make operating and strategic decisions affecting any such Hotel,
including, without limitation, real estate tax issues, compliance with insurance
provisions under the related Management Agreement, capital expenditure programs
and compliance with related ground leases (if any). The following activities
are included, without limitation, within the scope of the "Asset Management
Services" to be provided by Consultant:
a. Contract Administration: Review and approve (on behalf of
-----------------------
Company) contracts, concessions, license and lease agreements (collectively
7
<PAGE>
referred to for purposes of this paragraph as "contracts") related to the
operation of each of the Hotels for which the "Owner" under the related
Management Agreement has approval rights; provided, however, Consultant will be
required to obtain Company's prior consent before approving, modifying, waiving
any rights under, or terminating any such contract, (i) which has a term of more
than five (5) years or involves more than 1,000 square feet of space within the
Hotel; (ii) for any "non-hotel use" (for example, antenna license agreements or
concessions relating to time-share activities) for which the annual rental over
the initial term of any such agreement exceeds Twenty-Five Thousand Dollars
($25,000.00); or (iii) for any uses customarily related to the operation of a
hotel for which the annual rental over the initial term of any such agreement
exceeds Fifty Thousand Dollars ($50,000.00). Consultant will provide quarterly
status reports to Company identifying any contract that Consultant approved,
modified, waived any rights under or terminated during the previous calendar
quarter that did not require Company's prior consent pursuant to this Section
4.2(a).
b. Operating and Financial Reviews with Hotel Management: Conduct
-----------------------------------------------------
site visits, generally at least twice per calendar year, and operating, capital
spending requirements and financial reviews with the executive property
management at each of the Hotels.
c. Review Meetings with Company: Conduct scheduled review
----------------------------
meetings, at least quarterly, or more frequently as reasonably requested by
Company, with Company to review the operating and financial results and
strategies of the Hotels.
d. Review of Financial Statements and Budgets: Review and
------------------------------------------
assess all financial statements, summaries and budgets provided by Hotel Manager
8
<PAGE>
detailing operating and financial results and projections (including period
Accounting Statements, Annual Operating Budgets and Statements for the Hotels,
FF&E Budgets, Building Estimates, Management Analysis Reports and other
reports and summaries that may be required to be submitted by the Hotel Manager
under the related Management Agreement).
e. Revenue Projections: Review revenue projections for the
-------------------
Hotels and evaluate whether they are consistent with marketing and operating
strategies and current operating results.
f. Review of Capital Spending Programs: Review existing
-----------------------------------
plans assessing the need and/or costs and benefits of capital expenditure
programs for each of the Hotels and approve all capital spending commitments,
including commitments for which funds are to be drawn from the FF&E Reserve.
Consultant will obtain Company's prior approval for (i) any project or
expenditure to be funded from the FF&E Reserve totaling One Hundred Thousand
Dollars ($100,000.00) or more; (ii) any owner-funded Capital Expenditure
totaling Fifty Thousand Dollars ($50,000.00) or more; and (iii) any project or
expenditure not previously approved pursuant to the foregoing clauses (i) and
(ii), whether funded from the FF&E Reserve and/or an owner-funded Capital
Expenditure (a "Consultant Approved Capital Expense") if, at the time of
approval of such project or expenditure, the aggregate of all Consultant
Approved Capital Expenses approved by Consultant since the beginning of the
calendar year in which such approval will be given exceeds Two Hundred Thousand
Dollars ($200,000.00). Further, Consultant will provide project management
services in connection with capital expenditure programs at the Hotels.
g. Administration of Facility Mortgages: Administer, as
------------------------------------
9
<PAGE>
requested by Company and required by a Holder, approvals relating to the
operation of the Hotel required under the related loan documents affecting any
Hotel.
h. Modifications of the Management Agreement: Consult and
-----------------------------------------
advise Company with respect to modifications of any related Management Agreement
including, without limitation, any proposed assignment of the Management
Agreement by the applicable Hotel Manager, it being understood, however, that
Consultant shall have no authority to approve any such modification or
assignment on behalf of Company or the applicable Hotel owner.
i. Market Review: Review and assess competitive and
-------------
market conditions of each of the Hotels.
j. Condemnations: Monitor and negotiate (with Company's prior
-------------
approval) proceedings with governmental agencies in connection with (partial)
takings affecting a Hotel (for example, the taking of a portion of the Hotel
property for the expansion of highways).
k. Casualties. Monitor and negotiate (with Company's prior approval)
----------
the restoration of any portion (or whole) of the Hotel following a casualty with
insurance companies and\or contractors as may be required by the "Owner" of the
Hotel pursuant to the related Management Agreement.
Subject to Section 4.3 of this Agreement, Asset Management Services
shall not include, and Consultant shall not be required to conduct, physical
engineering or environmental inspections of the Hotels; Consultant shall not be
liable for any failure to discover or report any defect or other adverse
condition existing at any Hotel.
4.3 Standard of Performance.
-----------------------
10
<PAGE>
Consultant will carry out its duties and responsibilities hereunder in
all material respects in accordance with the provisions of all applicable laws
and governmental regulations. Consultant will perform its obligations with
respect to each Hotel, with the care, skill, prudence and diligence under the
circumstances consistent with normal and prudent practices in the real estate
asset management industry then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character. Decisions made and/or actions taken by
Consultant will represent Consultant's reasonable judgment based on industry
standard applicable to first class hotels. Company acknowledges that
recommendations to be made by Consultant in connection with the performance of
the Asset Management Services involve subjective judgments and may result in
unanticipated consequences. Consultant assumes no responsibility other than to
render the Asset Management Services in good faith and with reasonable care and
diligence and will not be responsible to Company, or others, for any action or
inaction by Company in following or declining to follow the advice given by
Consultant.
4.4 Consents.
--------
Company and Consultant each acknowledge that Company may be required
to give certain consents within those time periods specified in the related
Management Agreement for each respective Hotel. Accordingly, the parties agree
to cooperate in good faith with one another to ensure that the proper consents
are given, or withheld, as the case may be, within any such required time
periods. Consultant will provide its recommendations regarding such matters to
Company in a timely manner in order to provide Company with a reasonable time
period in
11
<PAGE>
which to make any such decisions.
ARTICLE V
PERSONNEL
---------
5.1 Personnel.
---------
Consultant's obligations and duties hereunder may be performed by one
or more principals or employees of Consultant or independent contractors. Any
independent contractors to whom Consultant delegates its responsibilities
hereunder shall be parties that are in contractual privity with Consultant, and
not with Company; Company shall have no obligation (monetary or otherwise) to
such independent contractors and Consultant shall be responsible for the actions
of all such independent contractors. It is expressly understood that all
personnel of Consultant are solely employees of Consultant and are not employees
of Company.
ARTICLE VI
CONSULTANT'S COMPENSATION
-------------------------
6.1 Fees for Services.
-----------------
Company shall pay to Consultant as compensation for its Asset
Management Services a fee (the "Fee") equal to ________________________ Dollars
($______________) for each Year during the Initial Term of this Agreement. No
further reimbursement for Consultant's costs and expenses incurred in the
12
<PAGE>
provision of the Asset Management Services by Consultant in connection with any
Hotel shall be owing or paid by Company unless otherwise specifically permitted
under this Agreement. The Fee during any Renewal Period shall be negotiated and
agreed to by the parties prior to the Renewal Notice Deadline.
6.2 Manner of Payment
-----------------
The Fee shall be payable by Company to Consultant in twelve (12)
monthly equal installments, on or before the tenth (10th) day of each calendar
month. In the event that this Agreement shall commence on a date other than the
first day of a calendar month or terminate prior to the last day of the
respective calendar month, the installment due to Consultant for any such
partial calendar month shall be prorated accordingly.
6.3 Reimbursable Expenses
---------------------
Company shall reimburse Consultant (in addition to the Fee) for its
Reimbursable Expenses within ten (10) days after receipt of an invoice from
Consultant containing reasonably sufficient documentary evidence of such
Reimbursable Expenses.
6.4 Partnership Expenses.
--------------------
Those Hotels listed on Exhibit "B" attached to this Agreement and by
reference incorporated herein, are referred to as the "Partnership Hotels".
Consultant shall (in addition to the Fee paid by Company pursuant to
Section 6.1) invoice the respective owner/partnership of each of the Partnership
Hotels for Asset Management Services provided by Consultant on behalf of the
owner/partnership in connection with the related Partnership Hotel. Consultant
represents to Company that the invoice for such services (i) will be for
services
13
<PAGE>
that were customarily billed to the owner/partnership by Host Marriott
Corporation (or a subsidiary thereof) prior to the date of this Agreement and
(ii) such services will not be billed to Company as Reimbursable Expenses. Each
owner/partnership will be instructed to pay Consultant directly for such
services; provided, however, that Company may elect that Consultant forward all
such invoices directly to Company. Company shall then reimburse Consultant for
all amounts that Company actually receives from the related owner/partnership
within five (5) days after Company's receipt of any such payment from the
owner/partnership. All invoices prepared by Consultant will provide sufficient
explanation and/or documentary evidence backing up the charges included on the
given invoice.
ARTICLE VII
DEFAULTS
--------
7.1 Definition of Default.
---------------------
Any one or more of the following shall constitute a "Default", to the
extent permitted by applicable law:
(a) the entry of an order, judgment or decree by any court of
competent jurisdiction, on the application of a creditor, adjudicating either
party as bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee or liquidator of all or a substantial part of
such party's assets, and, in the case of any involuntary petition or filing
only, such order, judgment or decree continuing unstayed and in effect for any
period of sixty (60) days;
(b) the failure of either party to make any payment required to
be made in accordance with the terms of the Agreement as of the due date
14
<PAGE>
which is specified in the Agreement. Upon the occurrence of a monetary Default
the amount owed to the non-defaulting party shall accrue interest at the Default
Rate from and after the date on which such payment was originally due to the
non-defaulting party;
(c) the failure of either party to perform, keep or fulfill in
all material respects any of the other covenants, undertaking, obligations or
conditions set forth in the Agreement.
7.2 Definition of "Event of Default".
--------------------------------
The occurrence of a Default under Section 7.1(a) shall immediately and
automatically, without the necessity of any notice to the defaulting party,
constitute an "Event of Default". A Default under Section 7.1(b) shall
constitute an "Event of Default" if the defaulting party fails to cure such
Default within ten (10) days after written notice from the non-defaulting party.
A Default under Section 7.1(c) shall constitute an "Event of Default" if the
defaulting party fails to cure such Default within thirty (30) days after
written notice from the non-defaulting party, or, if the Default is such that it
cannot reasonably be cured within said time period, if the defaulting party
fails to commence the cure within the 30-day period or thereafter fails to
diligently pursue such efforts to completion.
7.3 Remedies Upon an Event of Default.
---------------------------------
Upon the occurrence of an Event of Default, the non-defaulting party
shall have the right to (i) terminate the Agreement upon thirty (30) days'
notice to the defaulting party and/or (ii) institute any and all proceedings
permitted by law or equity, including, without limitation, actions for specific
performance and/or damages.
15
<PAGE>
ARTICLE VIII
TERMINATION OF AGREEMENT
------------------------
8.1 Procedures Upon Termination of Agreement.
----------------------------------------
Upon Termination of this Agreement, the following shall
be applicable:
(a) Consultant shall transfer all supporting documents, reports
and files that could be considered proprietary to the Company (and not the
property of the applicable "Hotel Tenant") or each Hotel as directed (in the
reasonable judgment of Company) by Company.
(b) Consultant shall be entitled to receive its Fee, any fees
described in Section 6.3 and Reimbursable Expenses, in each case accrued (but
unpaid) through the effective date of the Termination; unless, however,
Consultant is terminated by reason of its gross negligence, willful misconduct
or fraud, in which event Consultant's entitlement to receive accrued but unpaid
Fees, other fees and Reimbursable Expenses shall terminate immediately upon
receipt of Company's termination notice, it being understood, however, that the
foregoing shall not prevent Company from seeking or otherwise limiting the
amount of damages payable by Consultant as a result of any breach by it of this
Agreement.
8.2 Other Terminations.
------------------
Company may elect to terminate this Agreement in respect to any Hotel,
upon the sale of such Hotel to a non-Affiliate of Company, upon thirty (30)
days' written notice to Consultant and Consultant shall have no remedies or
cause of action with respect to such termination.
16
<PAGE>
ARTICLE IX
INDEMNIFICATIONS
----------------
9.1 Indemnification of Consultant by Company.
----------------------------------------
Company agrees to indemnify, defend and hold harmless Consultant and
its Affiliates, including independent contractors, and all of their respective
officers, directors, partners, shareholders, employees, and agents (each, a
"Consultant Indemnitee") against any and all costs, losses, liabilities, claims,
demands, actions, expenses (including reasonable attorneys' fees), judgments,
fines, and charges (collectively, referred to as "Claims") asserted at any time
by any third party against any Consultant Indemnitee which result from or are
based upon such Consultant Indemnitee's performance (or lack of performance)
under this Agreement, or otherwise related to this Agreement, unless the amounts
covered by this indemnity are caused directly by an act or omission of
Consultant constituting gross negligence, willful misconduct or fraud, in which
event neither Consultant nor any other Consultant Indemnitee will be indemnified
for such amounts under this Agreement.
9.2 Indemnification of Company by Consultant.
----------------------------------------
Consultant shall indemnify, defend and hold harmless Company and its
Affiliates and all of their respective officers, directors, partners,
shareholders, employees, and agents (each, a "Company Indemnitee") against any
and all Claims asserted at any time by any third party against any Company
Indemnitee to the extent resulting from an act or omission by Consultant
hereunder constituting gross negligence, willful misconduct or fraud.
9.3 Notice of Claims.
----------------
17
<PAGE>
Upon receipt by any party entitled to indemnification under
Sections 9.1 or 9.2 above (an "Indemnified Party") of a complaint, claim or
other notice of any loss, claim, damage or liability giving rise to a claim for
indemnification under this Article IX, such Indemnified Party shall promptly
notify the other party (either Company or Consultant) from whom indemnification
is sought (the "Indemnifying Party"), but failure to provide such notice shall
not relieve the Indemnifying Party from its duty to indemnify unless the
Indemnifying Party is materially prejudiced by such failure and had no actual
knowledge of such complaint, claim or other notice. The Indemnifying Party shall
pay all amounts payable under the related provisions of this Article IX within
ten (10) days after demand therefor and, if not timely paid, such amounts shall
bear interest at the Default Rate from the date of determination to the date of
payment. The Indemnifying Party, at its expense, shall contest, resist and
defend any such claim, action or proceeding asserted or instituted against the
Indemnified Party and shall not be responsible for any duplicate attorneys' fees
incurred by the Indemnified Party, or may compromise or otherwise dispose of the
same with the Indemnified Party's prior written consent (which consent may not
be unreasonably withheld or delayed). In the event that the Indemnified Party
shall unreasonably withhold or delay its consent, the Indemnifying Party shall
not be liable for any incremental increase in costs or expenses resulting
therefrom.
This Article IX shall survive the Termination of this Agreement.
ARTICLE X
NOTICES
-------
10.1 Notices.
-------
18
<PAGE>
Notices and other communications to be given under the terms of this
Agreement shall be in writing, and shall be either (i) delivered by hand
evidenced by a receipt, or (ii) sent by certified or registered mail, postage
prepaid, return receipt requested, or (iii) sent by overnight delivery service:
To Company: Rockledge Hotel Properties, Inc.
10400 Fernwood Road
Bethesda Maryland 20817
Attn: Christopher J. Nassetta
With a copy to: Rockledge Hotel Properties, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Christopher G. Townsend, Esq.
To Consultant: Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Bruce Stemerman
With a copy to: Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Elizabeth Lieberman, Esq.
or such other address as is from time to time designated by either party. Any
such notice which is properly mailed as described above, shall be deemed to have
been served as of three (3) business days after said posting.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
11.1 Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties
19
<PAGE>
and supersedes all prior written and oral understandings. This Agreement may be
amended only by a writing signed by both parties hereto.
11.2 Partial Invalidity.
------------------
If any portion of this Agreement shall be declared invalid by a court
of competent jurisdiction, this Agreement shall be construed as if such portion
had not been inserted herein except to the extent that such construction would
operate as an undue hardship on either party, or constitute a substantial
deviation of the general intent and purpose of the parties as reflected in this
Agreement.
11.3 Confidentiality.
---------------
The parties hereto agree, for their benefit and for the benefit of
Marriott International, Inc. and the Affiliates thereof, that the matters set
forth in this Agreement are strictly confidential and each party will use
commercially reasonable efforts to ensure that such matters are not disclosed to
any outside person or entities without the written consent of the other party;
provided, however, that such consent will not be required with respect to (i)
legally required filings and other disclosures mandated by applicable legal
requirements; (ii) disclosure to any existing or prospective lender or ground
lessor or prospective purchaser of a Hotel; and (iii) disclosure to the parties'
outside counsel and financial advisors provided, that, such persons are informed
of the confidential nature of such matters and are instructed to keep them
confidential.
11.4 Applicable Law.
--------------
This Agreement shall be construed and governed by the laws of
Maryland without regard to conflict of laws rules.
11.5 Headings.
--------
Headings of Articles or Sections are inserted only for convenience
20
<PAGE>
and are in no way to be construed as a limitation of the scope of the particular
Articles or Sections to which they refer.
11.6 No Restrictions.
---------------
Notwithstanding any provision in this Agreement to the contrary,
nothing contained in this Agreement shall prohibit, limit or restrict Consultant
or any of its Affiliates from rendering advisory or asset management services or
services similar to the Asset Management Services, whether or not in connection
with a hotel facility, to other persons, corporations, governmental agencies,
pension funds or any other entity and Consultant hereby specifically reserves
the right to do the foregoing.
11.7 Assignment.
----------
Neither party shall assign or otherwise transfer this Agreement or
any of the rights granted to it hereunder without the prior written consent of
the other party, not to be unreasonably withheld, conditioned or delayed, and no
such assignment or transfer shall be effective without such required written
consent; provided, however that either party shall have the right, without such
consent, to assign its interest in this Agreement to any of its Affiliates.
11.8 No Partnership.
--------------
Nothing in this Agreement, or in the relationship between Company and
Consultant, shall be deemed to constitute a partnership, joint venture or any
other similar relationship.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
21
<PAGE>
ROCKLEDGE HOTEL PROPERTIES, INC.
By
--------------------------------------------
Vice President
CRESTLINE CAPITAL CORPORATION
By
--------------------------------------------
Vice President
22
<PAGE>
Exhibit 10.21
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of ________________, 1998 by and among (i) Crestline Capital
Corporation, a Maryland corporation (the "Company"), and (ii) those entities
specified on Schedule 1 to that certain Contribution Agreement dated as of April
----------
16, 1998 among Host Marriott Corporation ("HMC"), Host Marriott, L.P. (the
"Operating Partnership") and the entities specified on Schedule 1 thereto (the
----------
"Contribution Agreement"), including their permitted successors, assigns and
transferees (each such entity and its permitted successors, assigns and
transferees, separately, a "Contributor" and collectively, the "Contributors").
Unless otherwise defined, capitalized terms used herein shall have the
respective meanings ascribed to them in the Contribution Agreement.
WHEREAS, pursuant to the Contribution Agreement, each of the
Contributors is transferring (by means of contribution) certain of its assets
(the "Contribution") to the Operating Partnership in exchange for certain
consideration, including, but not limited to, shares of common stock of the
Company ("Shares");
WHEREAS, in connection with the Contribution and pursuant to the
Contribution Agreement, HMC agreed to cause the Company to grant to Contributors
the Registration Rights (as defined in Section 1 hereof) with respect to the
Registrable Shares (as defined in Section 1 hereof);
NOW, THEREFORE, the parties hereto, in consideration of the
foregoing, the mutual covenants and agreements hereinafter set forth, and other
good and valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, hereby agree as follows:
Section 1. Registration Rights
A Contributor shall be entitled to offer for sale pursuant to a
shelf registration statement or, in certain other circumstances, as provided by
Section 1.3 hereof, subject to the terms and conditions set forth herein (the
"Registration Rights") (i) up to 50% of the Shares received by such Contributor
in connection with the Contribution beginning July 1, 1999, (ii) an additional
25% of such Shares beginning October 1, 1999 and (iii) the remaining 25%
beginning January 1, 2000 (such Shares on and after such dates are referred to
herein as the "Registrable Shares"). Shares shall cease to be Registrable Shares
at such time as they have been sold pursuant to an offering registered under the
Securities Act (as defined below) or pursuant to Rule 144 under the Securities
Act.
1.1 Shelf Registration Rights.
-------------------------
(a) Shelf Registration Statement. No later than April 30, 1999,
----------------------------
the Company shall file with the Securities and Exchange Commission ("SEC") a
registration statement for an offering to be made on a continuous basis pursuant
to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"),
covering all of the Registrable Shares (the "Registration Statement"; and the
related prospectus (including any preliminary prospectus) is referred to as the
"Prospectus"). The Registration
<PAGE>
Statement shall be on the appropriate form, and shall otherwise comply as to
form in all material respects with the requirements of the Securities Act and
the rules and regulations promulgated thereunder, permitting registration of
such Registrable Shares for resale by Contributors in the manner or manners
designated by them (including, without limitation, one or more underwritten
public offerings). The Company will use its commercially reasonable efforts to
cause the Registration Statement to be declared effective by the SEC as promptly
as practicable (and in any event by no later than July 1, 1999) and will notify
each Contributor when such Registration Statement has become effective. The
Company agrees (subject to Section 1.2 hereof) to use its commercially
reasonable efforts to keep the Registration Statement effective (including the
preparation and filing of any amendments and supplements necessary for that
purpose) until the earlier of (i) the date on which the Contributors shall have
sold all of the Registrable Shares, or (ii) the date on which all of the
Registrable Shares are eligible for sale pursuant to Rule 144(k) (or any
successor provision) or in a single transaction pursuant to Rule 144(e) (or any
successor provision) under the Securities Act (such period, the "Effective
Period"). Each Contributor seeking to offer and sell its Registrable Shares upon
exercise of a Registration Right agrees to provide in a timely manner
information regarding the proposed distribution by such Contributor of the
Registrable Shares and such other information reasonably requested by the
Company in connection with the preparation of and for inclusion in the
Registration Statement. The Company agrees to provide to each such Contributor a
reasonable number of copies of the final Prospectus and any amendments or
supplements thereto. If the Registration Statement ceases to be effective for
any reason at any time during the Effective Period (other than because of the
sale of all of the securities registered thereunder or as permitted by Section
1.3 hereof), the Company shall use its commercially reasonable efforts to obtain
the prompt withdrawal of any order suspending the effectiveness thereof.
(b) Offerings and Sales. At any time and from time to time after
-------------------
the date that any Shares become Registrable Shares, subject to Sections 1.1(c)
(in the case of any underwritten public offering) and Section 1.2 (in the case
of all offerings hereunder), each Contributor may exercise its Registration
Rights hereunder with respect to such Registrable Shares. If any Contributor
desires to offer and sell such Registrable Shares pursuant to an underwritten
public offering, such Contributor (the "Initiating Contributor") shall deliver
to the Company a written notice (an "Underwritten Registration Notice"), which
notice shall be given at least forty-five (45) days prior to the date on which
such Initiating Contributor desires to consummate the sale of such Registrable
Shares. Any such Underwritten Registration Notice shall in any event be subject
to revocation by such Initiating Contributor by delivery of a subsequent written
notice delivered to the Company by no later than the tenth day prior to the
contemplated offering, provided, however, that a revoked Underwritten
-------- -------
Registration Notice shall be treated the same as an Underwritten Registration
Notice that is not revoked for purposes of Section 1.1(c) hereof.
Upon receipt of an Underwritten Registration Notice, the Company
shall, within thirty (30) days of receipt of the Underwritten Registration
Notice, give written notice to the other Contributors and any other persons
possessing similar registration rights (a "Company Notice") of the Company's
receipt of the Underwritten Registration Notice. Within fifteen (15) days of
receipt of such a Company Notice, any other Contributor desiring to offer and
sell any of its Registrable Shares in such an offering of the type described in
the Underwritten Registration Notice (each, a "Participating Contributor") shall
give written notice to each of the Company, the Initiating Contributor,
2
<PAGE>
and the lead managing underwriter, if any, that has been selected, of such a
desire, specifying the number of Registrable Shares which such Participating
Contributor desires to offer and sell. Subject to the provisions of Section 1.2
hereof, the Company shall not be permitted to participate in the offering made
pursuant to an Underwritten Registration Notice without the written consent of
the Initiating Contributor (which consent shall not be unreasonably withheld).
(c) Limitations on Registration Rights for Underwritten Offerings.
-------------------------------------------------------------
Each exercise of a Registration Right pursuant to an Underwritten Registration
Notice shall be with respect to an underwritten public offering of Registrable
Shares, the minimum aggregate total gross proceeds of which to the Initiating
Contributor and all other Participating Contributors shall be (x) equal to or
greater than Fifteen Million Dollars ($15,000,000), and (y) equal to or less
than Forty Million Dollars ($40,000,000). The Contributors shall not be
permitted to deliver, individually or collectively, more than one Underwritten
Registration Notice in any six-month period; provided, however, that any
-------- -------
Underwritten Registration Notice relating to an underwritten public offering
which is suspended by the Company pursuant to Section 1.2 hereof, shall not be
counted as an Underwritten Registration Notice for purposes of this sentence
unless such underwritten public offering is concluded following the termination
of such suspension. All offers and sales by each Contributor under the
Registration Statement referred to in this Section 1.1 shall be completed within
the Effective Period, and upon expiration of such period no Contributor will
offer or sell any Registrable Shares under the Registration Statement and no
Contributor shall be entitled to deliver an Underwritten Registration Notice
hereunder. If directed by the Company, each Contributor will return all
undistributed copies of the Prospectus in its possession upon the expiration of
such period.
1.2 Suspension of Offering. At any time during the Effective Period,
----------------------
the Company may determine, in the good faith judgment of its Board of Directors,
with the advice of counsel, that offers and sales by the Contributors under the
Registration Statement shall be suspended if (i) a negotiation or consummation
of a transaction by the Company or its subsidiaries is pending or an event has
occurred, which negotiation, consummation or event would require additional
disclosure by the Company in the Registration Statement of material information
which the Company has a bona fide business purpose for keeping confidential and
---- ----
the nondisclosure of which in the Registration Statement would reasonably be
expected to cause the Registration Statement to fail to comply with applicable
disclosure requirements, or (ii) in the case of any underwritten public offering
of Registrable Shares pursuant to an Underwritten Registration Notice, the
offering of such Registrable Shares would adversely affect a pending or proposed
public offering of the Company's Shares. Immediately upon making such a
determination, the Company shall give written notice to all Contributors (a
"Materiality Notice"), upon receipt of which each Contributor agrees that it
will immediately discontinue offers and sales of the Registrable Shares under
the Registration Statement until (x) in the case of a Materiality Notice
delivered pursuant to clause (i) above, such Contributor receives copies of a
supplemented or amended Prospectus that corrects the misstatement(s) or
omission(s) referred to above and receives notice that any post-effective
amendment has become effective or (y) in the case of a Materiality Notice
delivered pursuant to clause (ii) above, such Contributor receives a subsequent
notice from the Company that revokes or otherwise withdraws such Materiality
Notice; provided, that the Company may delay, suspend or withdraw the
--------
Registration Statement for such reason
3
<PAGE>
for no more than fifteen (15) days after the abandonment or consummation of any
of the foregoing negotiations, transactions, events or offerings or, in any
event, for no more than ninety (90) days after delivery of the Materiality
Notice at any one time (and the Company shall not be entitled to deliver a
Materiality Notice at any time within 180 days of the termination of any
suspension of an offering pursuant to a prior Materiality Notice). If so
directed by the Company, each Contributor will deliver to the Company all copies
of the Prospectus covering the Registrable Shares current at the time of receipt
of a Materiality Notice. If a Materiality Notice is given pursuant to clause
(ii) above, the Company agrees to permit the Initiating and Participating
Contributors to complete an underwritten public offering substantially similar
to the type which was suspended pursuant to clause (ii) within ninety (90) days
of the closing of the Company's public offering or its decision not to undertake
a public offering, as the case may be.
1.3 Piggyback Registration.
----------------------
(a) If, at any time during the Effective Period, the Company proposes
to register any of its Shares for sale under the Securities Act, except as
otherwise described in Section 1.1 hereof, whether or not for sale for the
Company's own account, on a form and in a manner that would also permit
registration of Registrable Shares for sale under the Securities Act, the
Company shall give written notice to each Contributor of the Company's intention
to effect such registration at least thirty (30) days prior to the anticipated
filing of such registration statement. If, within twenty (20) days after the
giving of such notice by the Company, any Contributor shall deliver to the
Company a written request specifying the number of Registrable Shares such
Contributor desires to offer and sell, and the intended disposition thereof, the
Company shall use its commercially reasonable efforts to effect the registration
of all such Registrable Shares that the Company has been requested to register,
provided:
- --------
(i) if, at any time after giving written notice of its intention
to register any securities and prior to the effectiveness of the
registration statement filed in connection therewith, the Company shall
determine for any reason not to register any such securities, the Company
may, at its election, give written notice of such determination to each
Contributor who made a request as provided in this Section 1.3, and
thereupon the Company shall be relieved of its obligation to register any
Registrable Shares in connection with such registration (but not from its
obligations under Section 1.4 hereunder), without prejudice, however, to
the Registration Rights of Contributors generally under this Section 1; and
(ii) subject to the provisions of Section 1.6 hereof, if such
registration involves an underwritten public offering, all Contributors
requesting to be included in the Company's registration must sell their
Registrable Shares to the underwriters selected by the Company on the same
terms and conditions as are applicable to the Company.
(b) The Company shall not be obligated to effect any registration of
Registrable Shares under this Section 1.3 as a result of the registration of any
of its
4
<PAGE>
securities in connection with mergers, acquisitions, exchange offers, dividend
reinvestment plans or option or other employee benefit plans.
1.4 Expenses. The Company shall pay all expenses incident to the
--------
performance by it of its registration obligations under this Section 1,
including (i) all stock exchange, SEC registration, listing and filing fees,
(ii) all expenses incurred in connection with the preparation, printing and
distribution of the Registration Statement and Prospectus and any other document
or amendment thereto and the mailing and delivery of copies thereof to the
underwriter and dealers, (iii) fees and disbursements of counsel for the Company
and of the independent public accountants and other experts of the Company;
(iv) the cost of printing or producing any agreement(s) among underwriters,
underwriting agreement(s) and blue sky or legal investment memoranda, any
selling agreements and any other documents in connection with the offering, sale
or delivery of Registrable Shares to be disposed of; (v) all expenses in
connection with the qualification of Registrable Shares to be disposed of for
offering and sale under state securities laws, including the fees and
disbursements of counsel for the underwriters in connection with such
qualification and in connection with any blue sky and legal investment surveys
(but not for any other fees or disbursements of counsel for the underwriters);
(vi) the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of Registrable
Shares to be disposed of; and (vii) fees and expenses incurred in connection
with the listing of Registrable Shares on each securities exchange or quotation
system on which the Common Shares are then listed. Any Contributor offering and
selling Registrable Shares hereby shall be responsible for the payment of any
brokerage and sales commissions, fees and disbursements of such Contributor's
counsel, and any transfer taxes relating to the sale or disposition of the
Registrable Shares.
1.5 Selection of Underwriters. If Registrable Shares are being
-------------------------
offered and sold pursuant to an Underwritten Registration Notice, the Initiating
Contributor delivering such notice shall have the right to select the lead
managing underwriter of the offering, which shall be an investment banking firm
of nationally recognized standing reasonably satisfactory to the Company.
1.6 Registration Procedures.
-----------------------
(a) If and whenever the Company is required to effect the registration
under the Securities Act of Registrable Shares as provided in this Agreement,
the Company will, as expeditiously as possible:
(i) use its commercially reasonable efforts to register or
qualify the Registrable Shares by the time the applicable Registration
Statement is declared effective by the SEC under all applicable state
securities or "blue sky" laws of such jurisdictions as the Contributors
shall reasonably request in writing, to keep each such registration or
qualification effective during the Effective Period, and to do any and all
other acts and things which may be reasonably necessary or advisable to
enable each Contributor to consummate the disposition in each such
jurisdiction of the Registrable Shares owned by such Contributor; provided,
---------
however, that the Company shall not be required to (x) qualify generally to
--------
do business in any jurisdiction or to register as a broker or dealer in
such jurisdiction where it
5
<PAGE>
would not otherwise be required to qualify but for this Section 1.1, (y)
subject itself to taxation in any such jurisdiction, or (z) submit to the
general service of process in any such jurisdiction;
(ii) prepare and file with the SEC such amendments and
supplements to the Registration Statement and the Prospectus as may be
necessary to keep the Registration Statement effective and to comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Shares until such time as all Registrable Shares have been
disposed of in accordance with the intended methods of disposition by the
Contributors set forth in the Registration Statement;
(iii) furnish to the Contributors and to any underwriter of
such Registrable Shares such number of conformed copies of the Registration
Statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the Prospectus included
in the Registration Statement (including each preliminary prospectus and
any summary prospectus), in conformity with the requirements of the
Securities Act, such documents incorporated by reference in the
Registration Statement or Prospectus, and such other documents as the
Contributors or such underwriter may reasonably request;
(iv) cause the Registrable Shares to be listed on each national
securities exchange or quotation system on which the Shares are then
listed, if the listing of such securities is then permitted under the rules
of such exchange;
(v) enter into such customary agreements (including, in the
case of an underwritten public offering, an underwriting agreement), and
the Contributors, on whose behalf Registrable Shares are to be distributed
by such underwriters, shall also be parties to any such underwriting
agreement;
(vi) obtain a "cold comfort" letter or letters from the
Company's independent public accountants and furnish a signed counterpart
of a customary opinion of counsel of the Company, in each case, addressed
to the Contributors (and the underwriters, if any), in customary form and
substance, dated the effective date of the Registration Statement (and, if
such registration includes an underwritten public offering, dated the date
of the closing under the underwriting agreement);
(vii) notify the Contributors immediately upon the happening of
any event as a result of which a Prospectus included in a Registration
Statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and, subject to the provisions
of Section 1.2 hereof, at the request of the Contributors prepare and
furnish to the Contributors as many copies of a supplement to or an
amendment of such Prospectus as the Contributors reasonably request so
6
<PAGE>
that, as thereafter delivered to the purchasers of such Registrable Shares,
such Prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; and
(viii) make available for reasonable inspection by, or give
reasonable access to, any Contributor, by any underwriter participating in
any disposition to be effected pursuant to the Registration Statement and
by any attorney, accountant or other agent retained by any Contributor, all
pertinent financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
Contributor, underwriter or other person in connection with the offering
thereunder.
(b) In connection with any underwritten public offering of
Registrable Shares, management of the Company shall participate in customary
road show meetings reasonably requested (and reasonable in scope in light of the
size of the offering) upon reasonable prior notice by the lead managing
underwriter of such offering.
(c) The Company may require each Contributor selling Registrable
Shares as to which any registration is being effected to furnish the Company
with such information regarding such Contributor and the distribution of such
securities as required to be included in the Registration Statement as the
Company may from time to time reasonably request in writing.
(d) If a registration pursuant to this Section 1 involves an
underwritten public offering and the lead managing underwriter of such offering
advises the Company (and the Initiating Contributor, if applicable) that, in its
judgment, the number of Shares proposed to be included in such underwritten
public offering by the Company (or the Initiating Contributor, if applicable)
and the Contributors should be limited due to market conditions, then the
Company will promptly so advise each other Contributor which has requested to
offer and sell Registrable Shares in the offering, and the Company (and the
Initiating Contributor, if applicable) and such Contributors will include in
such offering the number of shares which, in the opinion of the lead managing
underwriter can be sold (the "Maximum Offering Amount"). The Maximum Offering
Amount shall be allocated (i) in an offering initiated by the Company as
described in Section 1.3 hereof, first, to the full extent of Shares the Company
-----
desires to sell, and second, if any Shares remain under the Maximum Offering
------
Amount, to each Contributor and to any other persons possessing similar
registration rights to the Registration Rights, pro rata in accordance with each
request for inclusion made by each such Contributor and each such other person,
or (ii) in an offering initiated by an Initiating Contributor as described in
Section 1.1(b) hereof, first, to the Initiating Contributor, to the full extent
-----
of Shares the Initiating Contributor desires to sell, and second, if any Shares
------
remain under the Maximum Offering Amount, to each other Contributor, pro rata in
accordance with each request for inclusion made by each such other Contributor,
and third, if any Shares remain under the Maximum Offering Amount, to any other
-----
persons possessing similar registration rights to the Registration Rights, pro
rata in accordance with each request for inclusion
7
<PAGE>
made by each such other person. If the underwriting agreement executed in
connection with such offering provides for an overallotment option to be granted
to the underwriters, and if such option is exercised by the underwriters, the
allocation priority established by clause (i) or clause (ii) above, whichever is
applicable, shall govern the allocation with respect to the sale of any Shares
and Registrable Shares pursuant to such exercise by the underwriters.
(e) If a Contributor exercises its Registration Rights to
offer and sell Registrable Shares in an underwritten public offering initiated
by any other person or persons possessing registration rights similar to those
conveyed upon the Contributors by this Agreement (each such other person
initiating such an underwritten public offering, an "Other Initiating Person"),
the Contributors agree that the allocation priority for such offering shall be
comparable to the allocation priority established by clause (ii) of Section
1.6(d), except that the Contributors shall participate in such offering with the
lowest level of priority described in clause (ii) of Section 1.6(d), pro rata in
accordance with each request for inclusion made by each such Contributor.
Section 2. Indemnification
2.1 Indemnification by the Company. The Company agrees to
------------------------------
indemnify and hold harmless each Contributor who participates in any offering or
sale of Registrable Shares, each person (if any) who participates as an
underwriter in any offering and sale of Registrable Shares, and each person, if
any, who controls any Contributor or such underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and their respective directors, trustees,
officers, partners, agents, employees and affiliates as follows:
(a) against any and all loss, liability, claim, damage and
expense (joint or several) and action or proceeding (whether
commenced or threatened) whatsoever ("Losses"), as incurred, arising
out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement
(or any amendment thereto) pursuant to which the Registrable Shares
were registered under the Securities Act, including all documents
incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading or
arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any Prospectus (or any
amendment or supplement thereto), including all documents
incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading;
(b) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission, if such settlement is effected with the
8
<PAGE>
written consent of the Company (which consent will not be unreasonably
withheld); and
(c) against any and all expense whatsoever, as incurred
(including reasonable fees and disbursements of counsel), reasonably
incurred in investigating, preparing or defending against any Losses
or any litigation, or investigation or proceeding by any governmental
agency or body, commenced or threatened, in each case whether or not a
party, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under subparagraph (a) or (b)
above;
provided, however, that the indemnity provided pursuant to this Section 2.1 does
- -------- -------
not apply to any indemnified party with respect to any Loss or expense to the
extent arising out of (i) any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with written
information furnished to the Company by such indemnified party expressly for use
in the Registration Statement (or any amendment thereto) or the Prospectus (or
any amendment or supplement thereto), or (ii) such indemnified party's failure
to deliver an amended or supplemental Prospectus if such Loss or expense would
not have arisen had such delivery occurred.
2.2 Indemnification by Contributor. Each Contributor who
------------------------------
participates in an offering or sale of Registrable Shares (and each permitted
assignee of such a Contributor, on a several basis) agrees to indemnify and hold
harmless the Company, each person (if any) who participates as an underwriter in
any offering and sale of Registrable Shares and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, and their respective directors, trustees,
officers, partners, agents, employees and affiliates, as follows:
(a) against any and all Loss and expense whatsoever, as incurred,
arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement
(or any amendment thereto) pursuant to which the Registrable Shares
were registered under the Securities Act, including all documents
incorporated therein by reference, or the omission or alleged omission
therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any Prospectus (or any amendment or
supplement thereto), including all documents incorporated therein by
reference, or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
(b) against any and all Loss and expense whatsoever, as incurred,
to the extent of the aggregate amount paid in settlement of any
litigation, or investigation or proceeding by any governmental agency
or body, commenced or threatened, or of any claim whatsoever based
upon any such untrue statement or omission, or any such alleged untrue
statement or omission, if
9
<PAGE>
such settlement is effected with the written consent of each such
Contributor (which consent will not be unreasonably withheld); and
(c) against any and all expense whatsoever, as incurred
(including reasonable fees and disbursements of counsel), reasonably
incurred in investigating, preparing or defending against any Loss or
any litigation, or investigation or proceeding by any governmental
agency or body, commenced or threatened, in each case whether or not a
party, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under subparagraph (a) or (b)
above;
provided, however, that the indemnity provided pursuant to this Section 2.1
- -------- -------
shall only apply with respect to any Loss or expense to the extent arising out
of (i) any untrue statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with written information furnished to
the Company by each such Contributor expressly for use in the Registration
Statement (or any amendment thereto) or the Prospectus (or any amendment or
supplement thereto), or (ii) each such Contributor's failure to deliver an
amended or supplemental Prospectus if such Loss or expense would not have arisen
had such delivery occurred. Notwithstanding the provisions of this Section 2.2,
no Contributor or any permitted assignee shall be required to indemnify the
Company, its indemnified persons hereunder with respect to any amount in excess
of the amount of the total proceeds to each such Contributor or such permitted
assignee, as the case may be, from sales of the Registrable Shares of such
Contributor under the Registration Statement with respect to such offering, and
no Contributor shall be liable under this Section 2.2 for any statements or
omissions of any other Contributor.
2.3 Conduct of Indemnification Proceedings. The indemnified party
--------------------------------------
shall give reasonably prompt notice to the indemnifying party of any action or
proceeding commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify the indemnifying party shall not relieve it
from any liability which it may have under the indemnity agreement provided in
Section 2.1 or 2.2 above, unless and to the extent it did not otherwise learn of
such action and the lack of notice by the indemnified party results in the
forfeiture by the indemnifying party of substantial rights and defenses. If the
indemnifying party so elects within a reasonable time after receipt of such
notice, the indemnifying party may assume the defense of such action or
proceeding at such indemnifying party's own expense with counsel chosen by the
indemnifying party and approved by the indemnified party, which approval shall
not be unreasonably withheld; provided, however, that the indemnifying party
-------- -------
will not settle any such action or proceeding without the written consent of the
indemnified party unless, as a condition to such settlement, the indemnifying
party secures the unconditional release of the indemnified party; and provided
--------
further, that if the indemnified party reasonably determines that a conflict of
- -------
interest exists where it is advisable for the indemnified party to be
represented by separate counsel or that, upon advice of counsel, there may be
legal defenses available to it which are different from or in addition to those
available to the indemnifying party, then the indemnifying party shall not be
entitled to assume such defense and the indemnified party shall be entitled to
separate counsel at the indemnifying party's expense. If the indemnifying party
is not entitled to assume the defense of such action or proceeding as a result
of the proviso to the preceding sentence, the indemnifying party's counsel shall
be
10
<PAGE>
entitled to conduct the indemnifying party's defense and counsel for the
indemnified party shall be entitled to conduct the defense of the indemnified
party, it being understood that both such counsel will cooperate with each other
to conduct the defense of such action or proceeding as efficiently as possible.
If the indemnifying party is not so entitled to assume the defense of such
action or does not assume such defense, after having received the notice
referred to in the first sentence of this paragraph, the indemnifying party will
pay the reasonable fees and expenses of counsel for the indemnified party. In
such event, however, the indemnifying party will not be liable for any
settlement effected without the written consent of the indemnifying party (which
consent will not be unreasonably withheld). Except as expressly stated herein,
if an indemnifying party is entitled to assume, and assumes, the defense of such
action or proceeding in accordance with this paragraph, the indemnifying party
shall not be liable for any fees and expenses of counsel for the indemnified
party incurred thereafter in connection with such action or proceeding.
2.4 Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnity agreement provided for in
this Section 2 is unavailable to an indemnified party, the indemnifying party
shall contribute to the aggregate Losses and expenses of the nature contemplated
by such indemnity agreement incurred by any indemnified party, (i) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and the indemnified parties on the other, in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative fault of but also the relative benefits to the
Company on the one hand and each such Contributor on the other, in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits to the indemnifying party and the indemnified party shall
be determined by reference to, among other things, the total proceeds received
by the indemnifying party and the indemnified party in connection with the
offering to which such losses, claims, damages, liabilities or expenses relate.
The relative fault of the indemnifying party and indemnified party shall be
determined by reference to, among other things, whether the action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or relates to
information supplied by, the indemnifying party or the indemnified party, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such action.
The parties hereto agree that it would not be just or equitable if
contribution pursuant to this Section 2.4 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 2.4, no Contributor shall be
required to contribute any amount in excess of the amount of the total proceeds
to such Contributor from sales of the Registrable Shares of such Contributor
under the Registration Statement.
Notwithstanding the foregoing, no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 2.4, each person, if
any, who controls an
11
<PAGE>
indemnified party within the meaning of Section 15 of the Securities Act shall
have the same rights to contribution as such indemnified party, and each
director of the Company, each officer of the Company who signed a Registration
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Securities Act shall have the same rights to contribution
as the Company.
The indemnity agreements contained in this Section 2 shall be in
addition to any other rights (to indemnification, contribution or otherwise)
which any indemnified party may have pursuant to law or contract and shall
remain operative and in full force and effect regardless of any investigation
made or omitted by or on behalf of any indemnified party and shall survive the
transfer of any Registrable Shares by any Contributor.
Section 3. Rule 144 Compliance
The Company covenants that it will use its best efforts to timely file
the reports required to be filed by the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended, so as to enable each Contributor to
sell Registrable Shares pursuant to Rule 144 under the Securities Act. In
connection with any sale, transfer or other disposition by Contributor of any
Registrable Shares pursuant to Rule 144 under the Securities Act, the Company
shall cooperate with each Contributor to facilitate the timely preparation and
delivery of certificates representing Registrable Shares to be sold and not
bearing any Securities Act legend, and enable certificates for such Registrable
Shares to be for such number of shares and registered in such names as such
Contributor may reasonably request at least ten (10) business days prior to any
sale of Registrable Shares hereunder.
Section 4. Miscellaneous
4.1 Integration; Amendment. This Agreement, together with the
----------------------
Contribution Agreement, constitutes the entire agreement among the parties
hereto with respect to the matters set forth herein and supersedes and renders
of no force and effect all prior oral or written agreements, commitments and
understandings among the parties with respect to the matters set forth herein.
Except as otherwise expressly provided in this Agreement, no amendment,
modification or discharge of this Agreement shall be valid or binding unless set
forth in writing and duly executed by the Company and the Contributors.
4.2 Waivers. No waiver by a party hereto shall be effective unless
-------
made in a written instrument duly executed by the party against whom such waiver
is sought to be enforced, and only to the extent set forth in such instrument.
Neither the waiver by any of the parties hereto of a breach or a default under
any of the provisions of this Agreement, nor the failure of any of the parties,
on one or more occasions, to enforce any of the provisions of this Agreement or
to exercise any right or privilege hereunder shall thereafter be construed as a
waiver of any subsequent breach or default of a similar nature, or as a waiver
of any such provisions, rights or privileges hereunder.
4.3 Assignment; Successors and Assigns. This Agreement and the
----------------------------------
rights granted hereunder may not be assigned by a Contributor without the
written consent of the
12
<PAGE>
Company; provided, however, that such Contributor may assign its rights and
-------- -------
obligations hereunder, following at least ten (10) days prior written notice to
the Company, (i) to such Contributor's partners or beneficiaries in connection
with a distribution of the Shares to its partners or beneficiaries, (ii) to a
permitted transferee in connection with a transfer of the Shares (but solely to
the extent that such Contributor was permitted to transfer Units (as defined in
the Contribution Agreement) under the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership) and (iii) to a third party in
connection with a transfer of Shares as security for or in satisfaction of
obligations of any partner of Contributor, if in the case of (i) and (ii) and
(iii) above, such persons or such third party agree in writing to be bound by
all of the provisions hereof. This Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective heirs, executors,
personal and legal representatives, successors and, subject to this Section 4.3,
assigns.
4.4 Benefits of Registration Rights. Each Contributor and its
-------------------------------
permitted transferees of Registrable Shares may severally or jointly exercise
the Registration Rights hereunder in such proportion as they shall agree among
themselves. No consent of any Contributor shall be required for permitted
transferees to exercise Registration Rights under this Agreement or otherwise to
be entitled to the benefits of this Agreement as applicable to all Contributors.
4.5 Notices. Notices and other communications required by this
-------
Agreement shall be in writing and delivered by hand against receipt or sent by
recognized overnight delivery service or by certified or registered mail,
postage prepaid, with return receipt requested or by facsimile transmission.
All notices shall be addressed as follows:
If to any Contributor:
Blackstone Real Estate Acquisitions L.L.C.
345 Park Avenue, 31st Floor
New York, New York 10154
Attention: Thomas J. Saylak
Senior Managing Director
Telephone: (212) 836-9895
(212) 754-8726
with a copy (which shall not constitute notice) to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Gregory J. Ressa
Telephone: (212) 455-7430
Fax: (212) 455-2502
If to the Company:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
13
<PAGE>
Attention: Bruce D. Wardinski
Chairman of the Board, President and
Chief Executive Officer
and
Tracy M. J. Colden
Senior Vice President and
General Counsel
Telephone: (301) 380-_____
(301) 380-_____
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Warren Gorrell, Jr.
Telephone: (202) 637-8618
Fax: (202) 637-5910
or such other address as may be designated by a proper notice. Any notice
delivered to the party hereto to whom its is addressed shall be deemed to have
been given and received on the day it was deemed to have been given and received
on the business day next following such day. Any notice sent by facsimile
transmission shall be deemed to have been given and received on the business day
next following the transmission.
4.6 Specific Performance. The parties hereto acknowledge that the
--------------------
obligations undertaken by them hereunder are unique and that there would be no
adequate remedy at law if any party fails to perform any of its obligations
hereunder, and accordingly agree that each party, in addition to any other
remedy to which it may be entitled at law or in equity, shall be entitled to (i)
compel specific performance of the obligations, covenants and agreements of any
other party under this Agreement in accordance with the terms and conditions of
this Agreement and (ii) obtain preliminary injunctive relief to secure specific
performance and to prevent a breach or contemplated breach of this Agreement in
any court of the United States or any State thereof having jurisdiction.
4.7 Governing Law. This Agreement, the rights and obligations of the
-------------
parties hereto, and any claims or disputes relating thereto, shall be governed
by and construed in accordance with the laws of the State of Maryland but not
including the choice of law rules thereof.
4.8 Headings. Section and subsection headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
4.9 Pronouns. All pronouns and any variations thereof shall be
--------
deemed to refer to the masculine, feminine, neuter, singular or plural, as the
identity of the person or entity may require.
14
<PAGE>
4.10 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required. It shall
not be necessary that the signature of or on behalf of each party appears on
each counterpart, but it shall be sufficient that the signature of or on behalf
of each party appears on one or more of the counterparts. All counterparts
shall collectively constitute a single agreement. It shall not be necessary in
any proof of this Agreement to produce or account for more than a number of
counterparts containing the respective signatures of or on behalf of all of the
parties.
4.11 Severability. If fulfillment of any provision of this Agreement,
------------
at the time such fulfillment shall be due, shall transcend the limit of validity
prescribed by law, then the obligation to be fulfilled shall be reduced to the
limit of such validity; and if any clause or provision contained in this
Agreement operates or would operate to invalidate this Agreement, in whole or in
part, then such clause or provision only shall be held ineffective, as though
not herein contained, and the remainder of this Agreement shall remain operative
and in full force and effect.
15
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first hereinabove set
forth.
COMPANY:
CRESTLINE CAPITAL CORPORATION
By:
______________________________
Name:
______________________________
Title:
______________________________
CONTRIBUTORS:
By:
______________________________
Name:
______________________________
Title: Attorney-in-Fact
16
<PAGE>
EXHIBIT 10.22
TAX MATTERS AGREEMENT
---------------------
This TAX MATTERS AGREEMENT is being entered into as of June 21, 1997 by
and among MARRIOTT INTERNATIONAL, INC., a Delaware corporation ("Seller
Parent"), MARRIOTT SENIOR LIVING SERVICES, INC., a Delaware corporation
("Transferor"), HOST MARRIOTT CORPORATION, a Delaware corporation ("Buyer
Parent"), HMC SENIOR COMMUNITIES, INC., a Delaware corporation ("Transferee"),
Forum Group, Inc., an Indiana corporation ("FGI") and the Subsidiaries
(collectively, the "parties").
WHEREAS, Transferor and Buyer Parent have entered into the Stock Purchase
Agreement; and
WHEREAS, the Stock Purchase Agreement provides for a Tax Matters Agreement
among the parties;
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, the following definitions shall apply:
(a) "Affiliate" shall mean, with respect to any corporation (the "given
---------
corporation"), any corporation, partnership, limited liability company, joint
venture or other entity which the given corporation controls directly or
indirectly (through one or more intermediaries). For purposes of this
definition, "control" means the possession, direct or indirect, of the power
either (1) to vote fifty percent (50%) or more of the voting interests of a
corporation, partnership, limited liability company, joint venture or other
entity, or (2) to direct or cause the direction of the management and policies
of a corporation, partnership, limited liability company, joint venture or other
entity, whether by contract or otherwise. Notwithstanding the foregoing, in no
event shall Transferor or any Person that is controlled by or is under common
control with Transferor be deemed an "Affiliate" of Transferee or any Person
that is controlled by or is under common control with Transferee.
(b) "Affiliated Group" shall mean an "affiliated group" as defined in
----------------
Section 1504(a) of the Code.
(c) "Agreement" shall mean this Tax Matters Agreement.
---------
(d) "Buyer" shall mean, collectively, Buyer Parent and Transferee.
-----
(e) "Buyer-Filed Entire Year Return" shall mean any Tax Return which is
-------------------------------
required to be filed by FGI or a Subsidiary (including any partnership return
filed
<PAGE>
by a Subsidiary that is a partnership for tax purposes) if such Tax Return
includes the results of FGI or the Subsidiaries or other information pertaining
to FGI or the Subsidiaries for a period on or before the Closing Date and a
period after the Closing Date. For purposes of this Agreement, any payment for
Taxes of FGI or a Subsidiary that is required to be made by FGI or a Subsidiary
after the Closing Date, for which no Tax Return is filed and which includes
Taxes allocable to a period on or before the Closing Date and a period after the
Closing Date, shall be deemed to be made pursuant to a Buyer-Filed Entire Year
Return.
(f) "Buyer Group" shall mean any Affiliated Group that includes Buyer or
-----------
any successor thereof or, if such Affiliated Group shall cease to exist, Buyer
and any successors thereto.
(g) "Buyer Parent" shall have the meaning set forth in the Preamble to
------------
this Agreement.
(h) "Closing" shall mean the purchase of the Shares by Transferee from
-------
Transferor.
(i) "Closing Date" shall mean the date on which the Closing occurs.
------------
(j) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(k) "Expansion Units" shall mean the additional units described by number
---------------
and type on Exhibit A-10 to the Stock Purchase Agreement.
(l) "Final Closing Accounting" shall mean the final accounting based on
------------------------
the actual financial position of FGI and the Subsidiaries as of the Closing Date
prepared pursuant to Section 6.4.2 of the Stock Purchase Agreement, as adjusted
by Sections 6.4.3 and 6.4.4 of the Stock Purchase Agreement.
(m) "Final Determination" shall mean the earlier to occur of: (1) a
-------------------
decision of the United States Tax Court, or a judgment, decree or other order by
another court of competent jurisdiction, which has become final and
unappealable; (2) a closing agreement under Section 7121 of the Code; or (3) any
other final disposition by reason of an agreement between the affected party or
parties and the appropriate tax authority, the expiration of the applicable
statute of limitations, or otherwise.
(n) "FGI" shall have the meaning set forth in the Preamble to this
---
Agreement.
(o) "Forum Entity" or "Forum Entities" shall mean each or all of FGI and
------------ --------------
every Affiliate of FGI, including, without limitation, the Subsidiaries.
-2-
<PAGE>
(p) "Indemnified Party" and "Indemnifying Party" shall have the respective
----------------- ------------------
meanings assigned in Section 7(a).
(q) "Initial Return Filing Costs" shall mean all costs and expenses
---------------------------
(including, without limitation, expenses of investigation, attorneys' fees and
expenses, and accountants' fees and expenses) associated with, arising out of or
incidental to the preparation and filing of any Tax Return (other than an
amended Tax Return) or the initial determination and payment of any Taxes for
which no Tax Return is filed.
(r) "Interest Rate" shall mean, as of any date, the rate that is 100 basis
-------------
points above the highest "Prime Rate" reported in the "Money Rates" section of
the eastern edition of The Wall Street Journal published from time to time as of
-----------------------
such date; provided that the Interest Rate for any date on which The Wall Street
-------- ---------------
Journal is not published shall mean the rate that is 100 basis points above the
- -------
highest "Prime Rate" reported in the "Money Rates" section of the eastern
edition of The Wall Street Journal published immediately prior to such date.
-----------------------
(s) "Notice" shall mean a writing containing the information required by
------
this Agreement to be communicated to a Person and delivered by nationally
recognized overnight courier or mailed by registered or certified mail, postage
prepaid, return receipt requested, to the Person, the date of delivery to the
Person's address being deemed the date of such Notice; provided, however, that
-------- -------
any written communication containing the information required in this Agreement
actually received by a Person shall constitute Notice for all purposes of this
Agreement.
(t) "Notification Date" shall have the meaning set forth in Section
-----------------
7(c)(1).
(u) "Other Tax Costs" shall mean, collectively, Initial Return Filing
---------------
Costs and Post-Initial Filing Costs; provided, however, that such term shall
-------- -------
include only payments to third parties and shall exclude any allocation of
internal costs (e.g., salary, benefits and other overhead costs) of the party
- -
seeking to be indemnified for Other Tax Costs under this Agreement.
(v) "Person" shall mean any individual, corporation, partnership, limited
------
liability company, trust, joint venture or other entity.
(w) "Post-Closing Records" shall mean the business records and files
--------------------
relating to Taxes or Tax Attributes of FGI or any Subsidiary now in the
possession of, or subsequently acquired by, Buyer, any member of the Buyer Group
or any Affiliate of Buyer, which records relate to a Taxable Year ending after
the Closing Date.
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(x) "Post-Initial Filing Costs" shall mean all costs and expenses
-------------------------
(including, without limitation, expenses of investigation, attorneys' fees and
expenses, and accountants' fees and expenses) associated with, arising out of or
incidental to any Post-Initial Filing Work.
(y) "Post-Initial Filing Work" shall mean, with respect to any Taxes or
------------------------
Tax Returns, work performed by or on behalf of a taxpayer after the initial
payment of such Taxes or the initial filing of such Tax Returns that is
associated with, arises out of or is incidental to such payment or filing,
including, without limitation, (1) responding to any question, audit or
investigation by a Tax authority, (2) filing amended returns, (3) defending
against any asserted Tax liability or seeking refunds of Taxes, whether in
administrative proceedings or court litigation, and (4) taking all actions
required by law as a result of any adjustment to a Tax Return, such as notifying
Tax authorities or filing amended returns in any jurisdiction.
(z) "Pre-Closing Records" shall mean the business records and files
-------------------
relating to Taxes or Tax Attributes of any Forum Entity now in the possession
of, or subsequently acquired by, Seller, any member of the Seller Group or any
Affiliate of Seller, which records either (1) relate to a Taxable Year ending on
or before the Closing Date or (2) relate to that portion of a Taxable Year
ending on the Closing Date.
(aa) "Regulations" shall mean the Income Tax Regulations, including
-----------
Temporary Regulations, promulgated under the Code, as such regulations may be
amended from time to time (including corresponding provisions of succeeding
regulations).
(ab) "Seller" shall mean, collectively, Transferor and Seller Parent.
------
(ac) "Seller-Filed Entire Year Return" shall mean any Tax Return
--------------------------------
(including, without limitation, the federal consolidated income tax return for
the Seller Group that includes the Closing Date) which Tax Return is required to
be filed by Seller Parent or Transferor after the Closing Date and includes
results of any Forum Entity or other information pertaining to any Forum Entity
for periods on or before the Closing Date. For purposes of this Agreement, any
payment for Taxes of any Forum Entity that is required to be made by Seller
Parent or Transferor after the Closing Date for which no Tax Return is filed and
which includes Taxes allocable to any Forum Entity for a period on or before the
Closing Date shall be deemed to be made pursuant to a Seller-Filed Entire Year
Return.
(ad) "Seller Group" shall mean any Affiliated Group that includes Seller
------------
Parent or any successor thereof or, if such Affiliated Group shall cease to
exist, Seller Parent and any successors thereto.
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(ae) "Seller Parent" shall have the meaning set forth in the Preamble to
-------------
this Agreement.
(af) "Shares" shall mean the shares of stock of FGI to be purchased by
------
Transferee from Transferor.
(ag) "Short Taxable Year" shall mean any Taxable Year that either begins
------------------
or ends on the Closing Date or begins on the date immediately after the Closing
Date, in each case by reason of the purchase and sale of the Shares.
(ah) "State" shall mean any state of the United States of America or the
-----
District of Columbia, or a local jurisdiction thereof.
(ai) "Stock Purchase Agreement" shall mean that certain Stock Purchase
------------------------
Agreement entered into as of June 21, 1997, by and between Buyer Parent and
Transferor.
(aj) "Subsidiary" or "Subsidiaries" shall mean each Person or all Persons
---------- ------------
which are described on Exhibit A-1 to the Stock Purchase Agreement.
(ak) "Tax" or "Taxes" shall mean all taxes, however denominated, including
--- -----
any interest, penalties or additions to tax or other additional amounts that may
become payable in respect thereof, imposed by any federal, State, local or
foreign government or any agency or political subdivision of any such
government. Without limiting the generality of the foregoing, "Tax" or "Taxes"
shall include all income taxes, payroll and employee taxes, withholding taxes,
unemployment insurance taxes, social security taxes, sales and use taxes, excise
taxes, franchise taxes, net worth taxes, gross receipts taxes, occupation taxes,
real and personal property taxes, stamp taxes, value added taxes, transfer
taxes, profits taxes, licenses in the nature of taxes, estimated taxes,
severance taxes, and other fees, assessments, charges or obligations of the same
or of a similar nature, whether arising before, on or after the Closing Date,
but "Tax" and "Taxes" shall specifically exclude duties (custom and others) and
workers' compensation taxes or premiums.
(al) "Tax Attributes" shall mean (1) any losses, credits and other tax
--------------
attributes that may be carried forward or back on a separate return or
consolidated, combined or unitary basis to a Taxable Year other than the Taxable
Year in which such attribute is recognized, including, but not limited to, net
operating losses, alternative minimum tax credits, targeted jobs tax credits,
investment tax credits, foreign tax credits, research and development credits
and similar credits under State or local law, and (2) any other tax attribute,
including, but not limited to, the tax basis and depreciable life of any asset,
which arose in or is attributable to one Taxable Year but which affects the
calculation of taxable income in one or more other Taxable Years.
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<PAGE>
(am) "Tax Returns" shall mean all returns, reports, estimates, information
-----------
statements or other written or electronic submissions required or permitted to
be filed pursuant to the statutes, rules and regulations of any federal, State,
local or foreign government Tax authority, including but not limited to,
original returns and filings, amended returns, claims for refunds, information
returns, ruling requests, administrative or judicial filings, accounting method
change requests, responses to revenue agents' reports (federal, State, local or
foreign) and settlement documents.
(an) "Taxable Year" shall mean any taxable year or any other taxable
------------
period (including any Short Taxable Year) with respect to which any Tax may be
imposed under any applicable statute, rule or regulation.
(ao) "Transferee" shall have the meaning set forth in the Preamble to this
----------
Agreement.
(ap) "Transferor" shall have the meaning set forth in the Preamble to this
----------
Agreement.
2. TAX REPRESENTATIONS AND WARRANTIES.
Seller hereby represents and warrants to Buyer that:
(a) All income Tax Returns for Taxable Years ending on or before or
including the Closing Date that are or were required to be filed by any Forum
Entity or by any affiliated, consolidated, combined, unitary or other groups of
which any Forum Entity is or was a member have been or will be timely filed and
are or will be complete in all material respects, and all amounts due and
payable with respect to such income Tax Returns have been or will be timely
paid.
(b) Except as set forth on Schedule 2(b), there are no audit examinations,
deficiencies, adjustments or litigation pending against any Forum Entity in
respect of income taxes.
(c) Except for this Agreement, as of the Closing Date, no Forum Entity
will be a party to any agreement providing for the allocation or sharing of, or
indemnification for, Taxes.
3. COVENANTS OF SELLER.
(a) Initial Returns -- Seller shall prepare and file timely or cause to be
---------------
prepared and filed timely and shall pay all Taxes due and Initial Return Filing
Costs with respect to (1) any Tax Return of or including any Forum Entity
(including any Tax Return for any affiliated, consolidated, combined, unitary or
other group of which any Forum Entity is or was a member) for any Taxable Year
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<PAGE>
ending on or before the Closing Date, or for which the due date is on or before
the Closing Date, and (2) any Seller-Filed Entire Year Return.
(b) (1) Within one hundred twenty (120) days after the Closing Date,
Seller shall provide (in accordance with the requirements of Sections 3(b)(2),
3(b)(3) and 3(b)(4)): (i) the electronic details of all tax and financial fixed
asset records and CIP records (to include detail ledger reconciliations at the
general ledger account level) and (ii) the completed Tax Fixed Asset packages
(to include detail/system reconciliations) for the 1997 fiscal year as of
Closing.
(2) The electronic details and Tax Fixed Asset packages must include:
(i) the original cost, (ii) acquisition dates, (iii) depreciation reserves and
(iv) depreciation lives and methods, of all assets. Additionally, all assets
shall be definable by year of acquisition, by property class life, by operating
property unit and by legal entity.
(3) All records provided by Seller pursuant to this Section 3(b) must
be sufficiently maintained to support and reconcile to the consolidated balance
sheet as of the Closing Date and to each Seller-Filed Entire Year Return as well
as to the PP&E on each entity's financial accounting balance sheet as of
Closing.
(4) Seller shall (i) at Closing, turn over to Buyer all records,
schedules, data, work product and other information then in the possession of
Seller or its Affiliates that represent work done to date relating to the
preparation of entity-level tax basis balance sheets for FGI and the
Subsidiaries as of the Closing Date ("Entity Tax Basis Balance Sheets") and (ii)
from and after the Closing Date, promptly provide to Buyer any information in
the possession of Seller or its Affiliates reasonably deemed necessary by Buyer
or Buyer's designee to complete such Entity Tax Basis Balance Sheets. Seller
shall assist and cooperate with Buyer or Buyer's designee during the preparation
of such Entity Tax Basis Balance Sheets.
(c) Seller shall cooperate and regularly consult with Buyer in the process
of preparing (1) any return filed pursuant to Section 3(a) and (2) any
information or records prepared pursuant to Section 3(b). Notwithstanding the
foregoing, no actions taken or foregone by Buyer in the course of such
cooperation and consultation shall relieve Seller from its obligation to
indemnify Buyer as otherwise provided in this Agreement.
(d) Seller agrees that, after the Closing Date, any and all Tax sharing,
allocation or indemnification agreements between FGI and any Subsidiary, on the
one hand, and Seller or any Affiliates thereof, on the other hand, for all Taxes
or Tax Attributes shall be of no further force or effect.
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<PAGE>
(e) Seller shall retain possession of all Pre-Closing Records; however,
ownership of those Pre-Closing Records that relate to FGI and the Subsidiaries
shall belong to Buyer. Seller shall not, and shall not permit any of its
Affiliates to, dispose of or destroy any Pre-Closing Records without obtaining
the written consent of Buyer. If, after the third anniversary of the Closing
Date, Seller seeks the consent of Buyer to destroy any such Pre-Closing Records,
and Buyer fails to give consent within 30 days thereafter, Seller shall either
retain such Pre-Closing Records or deliver them to Buyer.
(f) Seller shall perform or cause to be performed the Post-Initial Filing
Work set forth in Section 8(a).
(g) Seller shall (1) provide Buyer or its designee with reasonable access
to those Pre-Closing Records that relate to FGI or the Subsidiaries and (2)
cooperate with Buyer and allow Buyer or its designee reasonable access to all
other Pre-Closing Records to the extent such access is reasonably necessary to
assist Buyer in performing its obligations to file returns under Section 4(a)
and to perform Post-Initial Filing Work under Section 8(b).
(h) Seller shall revoke or cause to be revoked, as of the Closing Date,
any outstanding power of attorney (including, without limitation, any Internal
Revenue Service Form 2848) authorizing any Person other than FGI and the
Subsidiaries to perform any acts on behalf of FGI or any Subsidiary relating to
Tax matters or contacts with any Tax authority.
(i) Seller shall promptly deliver or cause to be delivered to Buyer any
business records and files relating to Taxes or Tax Attributes of FGI or any
Subsidiary now in the possession of, or subsequently acquired by, Seller, any
member of the Seller Group or any Affiliate of Seller, if such records are not
Pre-Closing Records.
4. COVENANTS OF BUYER.
(a) Initial Returns -- Buyer shall prepare and file timely or cause to be
---------------
prepared and filed timely (1) any Tax Return of or including FGI or the
Subsidiaries (including any Tax Return for any affiliated, consolidated,
combined, unitary or other group of which FGI or the Subsidiaries will be a
member) for any Taxable Year beginning after the Closing Date during which FGI
is an Affiliate of Buyer and (2) any Buyer-Filed Entire Year Return.
(b) Buyer shall perform or cause to be performed the Post-Initial Filing
Work set forth in Section 8(b).
(c) Buyer shall cooperate with Seller and allow Seller or its designee
reasonable access to Post-Closing Records in the possession of Buyer, the Buyer
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<PAGE>
Group or any Affiliate of Buyer, to the extent such access is reasonably
necessary to assist Seller in performing its obligations to file returns and to
pay Taxes under Section 3(a) and to perform Post-Initial Filing Work under
Section 8(a).
(d) Buyer shall provide, upon request, powers of attorney (including,
without limitation, any Internal Revenue Service Form 2848) and other
authorizations of representation which Seller reasonably believes are necessary
to authorize Seller or any of its Affiliates to file returns and to pay Taxes
under Section 3(a) and to perform Post-Initial Filing Work under Section 8(a).
Any such power of attorney or other authorization may, in Buyer's discretion,
expressly exclude the authority to sign agreements or consents.
(e) Buyer shall promptly pay or shall cause prompt payment to be made to
Seller of any refund of Taxes, or the applicable portion thereof, received by
Buyer, FGI or the Subsidiaries (net of any costs incurred by or Taxes, if any,
imposed on Buyer, FGI or the Subsidiaries allocable to or resulting from the
obtaining of such refund) attributable to any Taxable Year ending on or before
the Closing Date or allocable under Section 5(e)(2) to periods on or before the
Closing Date (other than those refunds, if any, reflected on the Final Closing
Accounting).
5. INDEMNIFICATION BY SELLER.
Each paragraph in this Section 5 is intended to be cumulative and
separate, and the inapplicability of any particular paragraph shall not affect
any indemnification obligation contained in another paragraph, provided that as
--------
to any given damages (including any Taxes and Other Tax Costs) Buyer may recover
from Seller only once under this Section 5. Any amount (other than payments of
interest at the Interest Rate pursuant to Section 7(c)(2)) paid by Seller to
Buyer or its Affiliates pursuant to this Agreement shall be treated as an
adjustment to the purchase price under the Stock Purchase Agreement.
(a) Seller shall indemnify and hold harmless Buyer and its Affiliates
(including FGI and the Subsidiaries) from and against any and all damages
(including any Taxes and Other Tax Costs) resulting from the inaccuracy of any
representation or warranty contained in this Agreement. The foregoing shall
constitute the sole and exclusive remedy under this Agreement of Buyer and its
Affiliates for any such inaccuracy. The parties recognize that the purpose of
the representations and warranties in this Agreement is to allocate costs and
risks between the parties. Accordingly, it shall not be a defense to Seller's
indemnification obligation under this Section 5(a) that Buyer had or should have
had knowledge of the inaccuracy of any representation or warranty.
(b) Seller shall indemnify and hold harmless Buyer and its Affiliates
(including FGI and the Subsidiaries) from and against any and all damages
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<PAGE>
(including any Taxes and Other Tax Costs) resulting from the breach of any
covenant made by Seller in this Agreement.
(c) Seller shall indemnify and hold harmless Buyer and its Affiliates
(including FGI and the Subsidiaries) from and against any and all damages
(including any Taxes and Other Tax Costs) resulting from the inaccuracy of any
of the following:
(1) All (i) Seller-Filed Entire Year Returns and (ii) Tax Returns for
Taxable Years ending on or before the Closing Date that are or were required to
be filed by any Forum Entity and any affiliated, consolidated, combined, unitary
or other groups of which any Forum Entity is or was a member, have been or will
be filed timely and are or will be complete and accurate in all respects, and
all Taxes with respect to such Tax Returns have been or will be timely paid.
(2) Each Forum Entity (i) has timely filed all informational Tax
Returns required to have been filed and will file all such informational Tax
Returns required to be filed on or before the Closing Date, including, but not
limited to, informational Tax Returns under Sections 1441-1446 of the Code,
Sections 6031-6060 of the Code and the Regulations thereunder, and any
comparable foreign, State and local laws and regulations, and (ii) has timely
complied in all respects with the requirements of Section 3406 of the Code and
the Regulations thereunder and any comparable foreign, State and local laws and
regulations.
(3) No Forum Entity has filed any agreement or consent pursuant to
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code) owned by any Forum Entity, nor has any Person filed such
agreement or consent on behalf of any Forum Entity.
(4) No Forum Entity is subject to any unpaid penalty or other addition
to tax by reason of a violation of any Tax order, Tax rule or Tax regulation or
an unpaid default with respect to any Tax Return for Taxable Years ending on or
before or including the Closing Date.
(5) The Subsidiaries' aggregate initial tax basis in those Expansion
Units referenced in Section 3.3.5 of the Stock Purchase Agreement will be equal
to the Total Cost of those units, as that term is defined in the Stock Purchase
Agreement.
(d) Seller shall indemnify and hold harmless Buyer and its Affiliates
(including FGI and the Subsidiaries) from and against any and all Taxes and
Other Tax Costs with respect to which any Forum Entity or any Person as
successor thereto may be liable to the extent such Taxes (1) are attributable
to, accrue during
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<PAGE>
or are otherwise allocable to any Taxable Year ending on or prior to the Closing
Date or (2) are payable with respect to any Seller-Filed Entire Year Return.
(e) (1) Seller shall indemnify and hold harmless Buyer and its
Affiliates (including FGI and the Subsidiaries) from and against any and all
Taxes and Other Tax Costs with respect to which any Forum Entity or any Person
as successor thereto may be liable to the extent such Taxes or Other Tax Costs
are payable with respect to any Buyer-Filed Entire Year Return and are allocable
under Section 5(e)(2) to periods on or before the Closing Date. For purposes of
this Agreement, the Taxes payable with respect to a Buyer-Filed Entire Year
Return that is a partnership return shall be those Taxes imposed on Buyer or any
Affiliate of Buyer (including FGI or a Subsidiary) as a result of the pass-
through to it, as partner, of income, gain or other Tax Attributes shown on such
partnership return.
(2) For purposes of this Agreement, in the case of any Taxes and Other
Tax Costs with respect to any Buyer-Filed Entire Year Return, the portion of
such Taxes and costs allocable to Seller shall be equal to the product of the
total Taxes and Other Tax Costs for the period covered by such Buyer-Filed
Entire Year Return multiplied by a fraction the numerator of which is the number
of days within such period that are prior to and include the Closing Date and
the denominator of which is the number of days covered by such Buyer-Filed
Entire Year Return; provided, however, that (i) any Taxes and Other Tax Costs
-------- -------
that are attributable to the Excluded Assets, Excluded Communities and Excluded
Subsidiaries (all as defined in the Stock Purchase Agreement) shall be allocated
to the period before the Closing Date and thus such Taxes and Other Tax Costs
shall be the responsibility of Seller, and (ii) to the extent Buyer and Seller
agree in writing, Taxes and Other Tax Costs (including Taxes and Other Tax Costs
covered by (i)) may be specifically allocated as occurring on or before the
Closing Date (in which case Seller shall be responsible for such Taxes and Other
Tax Costs) or as occurring after the Closing Date (in which case Buyer shall be
responsible for such Taxes and Other Tax Costs).
(f) (1) Except as provided in Section 5(f)(3), Seller shall indemnify
and hold harmless Buyer and its Affiliates (including FGI and the Subsidiaries)
from and against any and all Taxes and Other Tax Costs arising in any Taxable
Year ending after the Closing Date that result from any adjustment (whether
initiated by Seller, any Affiliate of Seller, any Tax authority, Buyer or any
Affiliate of Buyer) relating to or affecting income, deductions, gains, losses,
methods of accounting or any Tax Attribute of any Forum Entity with respect to
periods on or before the Closing Date; provided, however, that (i) in the case
-------- -------
of an adjustment that merely reduces the amount of tax credits (including
alternative minimum tax credits, targeted jobs tax credits, investment tax
credits, foreign tax credits, research and development credits and similar
credits under State or local law) available to be carried forward from periods
prior to the Closing Date to periods after the Closing Date, no indemnification
shall be required, and (ii) in the case of
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<PAGE>
an adjustment that merely reduces net operating losses available to be carried
forward from periods prior to the Closing Date to periods after the Closing
Date, Seller's indemnification obligation shall be determined in accordance with
Section 5(f)(2).
(2) The parties assume that, for each of the ten (10) taxable years
immediately following the Closing, the net operating loss carryforwards of FGI
for federal income tax purposes from Taxable Years ending on or before the
Closing Date and the "Section 382 Limitation" (as defined in Section 382(b) of
the Code) applicable to such net operating loss carryforwards will each be at
least $1,407,402 (the "Assumed NOL Amounts"). Seller shall not be required to
indemnify Buyer for any adjustment relating to FGI's net operating loss
carryforwards for federal income tax purposes from a pre-Closing Date Taxable
Year, unless and to the extent such adjustment reduces the available net
operating loss below the Assumed NOL Amounts or reduces the applicable Section
382 Limitation for any Taxable Year below $1,407,402. Notwithstanding anything
in this Agreement to the contrary, neither Buyer nor any Affiliate of Buyer
shall have any obligation to pay any amount to Seller or its Affiliates in the
event that the available net operating losses of FGI or the applicable Section
382 Limitation exceed the Assumed NOL Amounts.
(3) Notwithstanding any other provision of this Agreement other than
Section 5(c)(5), Seller shall have no obligation to indemnify Buyer or its
Affiliates for any Taxes arising in any Taxable Year ending after the Closing
Date to the extent such Taxes result solely from any adjustment to the tax
basis, depreciable life or depreciation method of any asset of FGI or any
Subsidiary.
(g) Seller shall indemnify and hold harmless Buyer and its Affiliates
(including FGI and the Subsidiaries) from and against any and all payments due
pursuant to any agreement between any Forum Entity and any other Person that
provides for the allocation or sharing of, or indemnification for, Taxes or Tax
Attributes and was in effect on or before the Closing Date.
(h) Seller shall indemnify and hold harmless Buyer and its Affiliates
(including FGI and the Subsidiaries) from and against any and all Taxes and
Other Tax Costs assessed with respect to any Seller-Filed Entire Year Return or
any Tax Return for a Taxable Year ending on or before the Closing Date,
including, by way of example and not limitation, federal income Taxes assessed
against the Seller Group for which FGI or the Subsidiaries would otherwise be
liable under Section 1.1502-6(a) of the Regulations (or any similar provision of
State, local or foreign law).
(i) Seller shall indemnify and hold harmless Buyer and its Affiliates
(including FGI and the Subsidiaries) from and against any and all Post-Initial
Filing Costs set forth in Section 8(c).
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<PAGE>
(j) Seller shall indemnify Buyer and its Affiliates (including FGI and the
Subsidiaries) from and against any and all damages (including any Taxes and
Other Tax Costs) attributable to any cash or other asset that is received by
Seller or any of its Affiliates (including any Forum Entity) on or before the
Closing Date or that is shown as an asset on the Final Closing Accounting, if
income attributable to such cash or asset is recognized for tax purposes after
the Closing Date. The parties agree that the Base Lifecare Contracts (as
defined in the Stock Purchase Agreement) and any amounts received thereunder are
assets that were received by Seller on or before the Closing Date.
(k) Seller shall indemnify and hold harmless Buyer and its Affiliates
(including FGI and the Subsidiaries) from and against any and all Other Tax
Costs relating to any Taxes or asserted Taxes described in this Section 5.
(l) Any indemnification payment owing under this Section 5 shall be due
and payable at the time, in the manner and with the interest provided in Section
7(c).
6. INDEMNIFICATION BY BUYER.
Each paragraph in this Section 6 is intended to be cumulative and
separate, and the inapplicability of any particular paragraph shall not affect
any indemnification obligation contained in another paragraph, provided that as
--------
to any given damages (including any Taxes and Other Tax Costs) Seller may
recover from Buyer only once under this Section 6. Any amount (other than
payments of interest at the Interest Rate pursuant to Section 7(c)(2)) paid by
Buyer to Seller or its Affiliates pursuant to this Agreement shall be treated as
an adjustment to the purchase price under the Stock Purchase Agreement. Buyer
shall not be required to indemnify Seller under this Section 6 for any Taxes or
Other Tax Costs for which Seller is obligated to indemnify Buyer under Section 5
of this Agreement.
(a) Buyer shall indemnify and hold harmless Seller and its Affiliates from
and against any and all damages (including any Taxes and Other Tax Costs)
resulting from the breach of any covenant made by Buyer in this Agreement.
(b) Buyer shall indemnify and hold harmless Seller and its Affiliates from
and against any and all Taxes and Other Tax Costs with respect to which FGI or
the Subsidiaries or any Person as successor thereto may be liable to the extent
such Taxes are attributable to, accrue during or are otherwise allocable to any
Taxable Year beginning after the Closing Date.
(c) Buyer shall indemnify and hold harmless Seller and its Affiliates from
and against any and all Taxes and Other Tax Costs with respect to which FGI or
the Subsidiaries or any Person as successor thereto may be liable to the extent
such Taxes or Other Tax Costs are payable with respect to that portion of the
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Taxable Year covered by any Buyer-Filed Entire Year Return that is allocable
under Section 5(e)(2) to periods after the Closing Date.
(d) For the purpose of clarity, it is expressly acknowledged and agreed
that Buyer shall have no obligation to indemnify Seller or its Affiliates for
any Taxes or Other Tax Costs that result solely from any adjustment to tax
bases, depreciable lives or depreciation method of any asset of any Forum
Entity.
(e) Buyer shall indemnify and hold harmless Seller and its Affiliates from
and against any and all Other Tax Costs relating to any Taxes or asserted Taxes
described in this Section 6.
(f) Any indemnification payment owing under this Section 6 shall be due
and payable at the time, in the manner and with the interest provided in Section
7(c).
7. PROCEDURAL RULES.
(a) In the event that any party to this Agreement or Affiliate thereof (an
"Indemnifying Party") would be liable to make an indemnification payment with
respect to Taxes, Other Tax Costs or Tax Attributes under Section 5 or 6 and
such Taxes, Other Tax Costs or adjustments to Tax Attributes are asserted,
assessed or imposed on, or incurred by, another party or any of its Affiliates
(including any assignee thereof) (an "Indemnified Party"), the Indemnified Party
shall make reasonable efforts to notify the Indemnifying Party of such
assertion, assessment, imposition or incurrence and to inform and consult with
the Indemnifying Party regarding the progress of the same. Any failure by the
Indemnified Party to comply with the previous sentence shall have no effect on
the indemnification obligations of the Indemnifying Party unless and only to the
extent the Indemnifying Party demonstrates that it has been materially
prejudiced by such failure.
(b) The Indemnified Party shall have the right to take or forego any
action that would result in a Final Determination with respect to Taxes, Other
Tax Costs or adjustments to Tax Attributes that have been asserted, assessed or
imposed against, or incurred by, such Indemnified Party, without affecting any
rights of the Indemnified Party under Section 5 or 6, except as provided in the
next sentence. At the request of the Indemnifying Party, the Indemnified Party
shall not take action that would result in a Final Determination, if (1) the
Indemnifying Party, in a manner in form and substance reasonably satisfactory to
the Indemnified Party, (i) acknowledges in writing its obligation to indemnify
the Indemnified Party for such audited or contested Taxes, Other Tax Costs or
adjustments to Tax Attributes in the event that there is a Final Determination
with respect to such Taxes or Tax Attributes, (ii) agrees in writing to pay any
out-of-pocket expenses or costs incurred by the Indemnified Party at the
specific request of the Indemnifying Party in connection with such audit or
contest of such Taxes,
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Other Tax Costs or Tax Attributes, including reasonable fees of attorneys and
other professional advisors, and (iii) pays all or any portion of such contested
Taxes or Other Tax Costs which are required to be paid as a condition to
initiation or continuance of such contest or which are due and payable
notwithstanding the contest, and (2) the course of action proposed by the
Indemnifying Party has a reasonable basis, will not subject the Indemnified
Party to penalties or other sanctions, and will not result in the imposition of
liens or other charges against the assets of the Indemnified Party, all as
determined in the reasonable opinion of the Indemnified Party.
(c) (1) The Indemnified Party shall provide Notice to the Indemnifying
Party when an obligation to indemnify has accrued pursuant to this Agreement,
and the date of such Notice for any particular obligation to indemnify shall be
referred to as the "Notification Date." Such Notice shall include a calculation
and an explanation of the basis for indemnification. Whenever such Notice is
given, the Indemnifying Party shall, within fifteen (15) days after the
Notification Date, pay the amount requested in such Notice to the Indemnified
Party.
(2) Payments, if any, pursuant to Section 7(c)(1) shall include
interest (in addition to any interest included as part of Taxes or Other Tax
Costs in calculating damages) at the Interest Rate from and including the
Notification Date through but excluding the date of payment by the Indemnifying
Party to the Indemnified Party.
8. POST-INITIAL FILING WORK AND COSTS.
(a) Seller shall perform or cause to be performed all Post-Initial Filing
Work arising out of, incidental to or associated with (1) any Tax Return of or
including any Forum Entity (including any Tax Return for any affiliated,
consolidated, combined, unitary or other group of which any Forum Entity is or
was a member) for any Taxable Year ending on or before the Closing Date and (2)
any Seller-Filed Entire Year Return. Seller shall promptly provide to Buyer
copies of any amended Tax Return filed by Seller or any of its Affiliates
pursuant to this Section 8(a) and of any document evidencing a Final
Determination with respect to any Tax Return pursuant to this Section 8(a).
Seller shall cooperate and regularly consult with Buyer in the process of any
Post-Initial Filing Work undertaken pursuant to this Section 8(a).
Notwithstanding the foregoing, no actions taken or foregone by Buyer in the
course of such cooperation and consultation shall relieve Seller from its
obligation to indemnify Buyer as otherwise provided in this Agreement.
(b) Buyer shall perform or cause to be performed all Post-Initial Filing
Work arising out of, incidental to or associated with (1) any Tax Return of or
including FGI or the Subsidiaries (including any Tax Return for any affiliated,
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consolidated, combined, unitary or other group of which FGI or the Subsidiaries
will be a member) for any Taxable Year beginning after the Closing Date during
which FGI is an Affiliate of Buyer, and (2) any Buyer-Filed Entire Year Return.
(c) Seller shall be responsible for any and all Post-Initial Filing Costs
for Post-Initial Filing Work arising out of, incidental to or associated with
any Tax Return of or including any Forum Entity except for Post-Initial Filing
Work relating to (1) Tax Returns of or including FGI or the Subsidiaries
(including any Tax Return for any affiliated, consolidated, combined, unitary or
other group of which FGI or the Subsidiaries will be a member) for any Taxable
Year beginning after the Closing Date and (2) the portion of any Buyer-Filed
Entire Year Return allocable to the period beginning after the Closing Date, as
determined pursuant to Section 5(e)(2).
(d) Notwithstanding anything in this Agreement to the contrary, and
subject to the provisions of Section 4(e), Buyer may, in its discretion, elect
to assume sole responsibility for any or all appeals with respect to real or
personal property taxes that are pending as of the Closing Date.
9. SURVIVAL.
The covenants, promises, representations, warranties, indemnifications and
other obligations of the parties set forth in this Agreement shall survive the
Closing until fully carried out and until any applicable statute of limitations
relating to the Taxes or Tax Attributes covered thereby has expired.
10. ENTIRE AGREEMENT.
This Agreement, the Stock Purchase Agreement and the Indemnity Agreement
of even date herewith among Seller Parent, Transferor, Buyer Parent and
Transferee (the "Indemnity Agreement") (including all exhibits and schedules to
such agreements) constitute the entire agreement among the parties pertaining to
the subject matter of this Agreement and supersede all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
parties. The promises, covenants and agreements set forth in this Agreement
shall be in addition to, and not in lieu of, any other agreements between any of
the parties concerning indemnification, including, without limitation, the Stock
Purchase Agreement and the Indemnity Agreement.
11. MODIFICATIONS.
No supplement or modification to this Agreement shall be valid unless in
writing and signed by all the parties.
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12. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland, without regard to its conflicts of laws
principles.
13. CAPTIONS; PRONOUNS.
Captions in this Agreement are for convenience of reference only and shall
not be considered in construing this Agreement. Whenever the context shall so
require, the singular shall include the plural, the male gender shall include
the female, and vice versa. "Include," "includes" and "including" shall be
deemed to be followed by "without limitation" whether or not they are in fact
followed by such words or words of like import.
14. EXHIBITS; SCHEDULES.
All exhibits and schedules to this Agreement are incorporated in this
Agreement as though set forth in full in the text of this Agreement.
15. COUNTERPARTS.
For the convenience of the parties, this Agreement may be executed in any
number of counterparts, each such counterpart being deemed to be an original
instrument, and all such counterparts shall together constitute the same
agreement.
16. SEVERABILITY.
In the event that one or more of the provisions of this Agreement shall be
held to be illegal, invalid or unenforceable, such provisions shall be deemed
severable and the remaining provisions of this Agreement shall continue in full
force and effect.
17. RULES OF CONSTRUCTION.
(a) The intent of this Agreement is to allocate to Seller all Taxes and
Other Tax Costs arising out of, attributable to or otherwise allocable to
periods prior to and including the Closing Date. Accordingly, this Agreement
shall be construed in order to effectuate this intent.
(b) Seller acknowledges that it was represented by counsel in connection
with this Agreement and that Seller and Seller's counsel reviewed and
participated in the preparation and negotiation of this Agreement.
Consequently, any rule of construction to the effect that ambiguities are to be
resolved against the drafting party or Buyer shall not be employed in the
interpretation of this Agreement.
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18. JURISDICTION.
Any suit, action or proceeding under or in connection with this Agreement
shall be brought in any federal or state court of competent jurisdiction located
in the State of Maryland. By execution of this Agreement, Buyer and Seller each
consents to the exclusive jurisdiction of such courts and waives any right to
challenge the jurisdiction of such courts or the appropriateness of venue in
such courts. Buyer and Seller each hereby waives any right to trial by jury in
connection with any suit, action or proceeding under or in connection with this
Agreement.
19. BUSINESS DAY.
To the extent that the date of any performance required under this
Agreement falls on a date that is not a business day, the date of performance
shall be extended to the next succeeding business day.
20. NOTICES.
Any Notice required or permitted to be given under this Agreement to
Seller or Buyer shall be sent to the addresses set forth below, or to such other
addresses of which either Seller or Buyer shall give Notice to the other:
If to Seller: Senior Vice President-Taxes
Marriott International, Inc.
One Marriott Drive
Washington, D.C. 20058
If to Buyer: Senior Vice President and
General Tax Counsel
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817-1109
21. WAIVERS.
No purported waiver of any provision or right set forth in this Agreement
shall be valid or effective unless it is in writing signed by the party against
which such waiver is sought to be enforced. The failure of either Seller or
Buyer to insist on strict performance of any of the provisions of this Agreement
or to exercise any right granted to it under this Agreement shall not be
construed as a waiver of the requirement of such performance.
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22. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon, and shall inure to the benefit of,
Seller and Buyer and their respective heirs, legal representatives, successors
and assigns.
23. NO THIRD-PARTY BENEFICIARIES.
Nothing in this Agreement, express or implied, is intended or shall be
construed to confer upon or to give any Person, other than the parties to this
Agreement, any rights or remedies under or by reason of this Agreement.
24. EXPENSES.
Except as otherwise provided herein, each party to this Agreement shall
bear its own expenses with respect to this Agreement.
[signatures on following page]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Closing Date.
ATTEST: MARRIOTT INTERNATIONAL, INC.
/s/ M. Lester Pulse, Jr.
- ---------------- -----------------------------------
By: M. Lester Pulse, Jr.
Its: Senior Vice President--Taxes
ATTEST: MARRIOTT SENIOR LIVING SERVICES, INC.
/s/ M. Lester Pulse, Jr.
- ---------------- -----------------------------------
By: M. Lester Pulse, Jr.
Its: Assistant Secretary
ATTEST: HOST MARRIOTT CORPORATION
/s/ Richard A. Burton
- ---------------- -----------------------------------
By: Richard A. Burton
Its: Senior Vice President and
General Tax Counsel
ATTEST: HMC SENIOR COMMUNITIES, INC.
/s/ Richard A. Burton
- ---------------- -----------------------------------
By: Richard A. Burton
Its: Vice President
ATTEST: FORUM GROUP, INC., on its own
behalf and on behalf of each Subsidiary
/s/ Richard A. Burton
- ---------------- -----------------------------------
By: Richard A. Burton
Its: Vice President
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SCHEDULE 2(b)
Tax Matters Agreement
Listing of Audit Examinations, Deficiencies,
Adjustments, or Litigation Pending
1.) 1994 Indiana Income Tax Return - $15,628 penalty and interest assessed.
Requested recalculation based on amended return amounts.
2.) 3/31/95 Federal Income Tax Return - $269,027 of requested refund was
applied to Forum's pre-bankruptcy liabilities. IRS has agreed that this was
improper, but refund not yet received.
3.) 3/31/95 Federal Income Tax Return Application of overpayment of $50,000
applied by IRS to Forum's pre-bankruptcy liabilities. IRS has agreed that this
was improper, but refund not yet received.
4.) 3/31/96 Federal Income Tax Return Request for Payment letter received from
the IRS for the amount of $19,342. This again relates to Forum's pre-bankruptcy
liabilities. IRS has agreed that this was improper, but has not yet rescinded
the notice.
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EXHIBIT 10.23
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT ("Agreement") is made as of June 21, 1997 (the
"Closing Date") among (i) MARRIOTT SENIOR LIVING SERVICES, INC., a Delaware
corporation ("MSLS") and MARRIOTT INTERNATIONAL, INC., a Delaware corporation
("MII," and collectively with MSLS, "MI"), and (ii) HMC SENIOR COMMUNITIES,
INC., a Delaware corporation ("HMCSC") and HOST MARRIOTT CORPORATION, a Delaware
corporation ("Host Marriott," and collectively with HMCSC, "Host").
RECITALS
On the Closing Date, MSLS is selling to HMCSC all of the issued and
outstanding stock ("Stock") of Forum Group, Inc., an Indiana corporation (the
"Company"), pursuant to the Stock Purchase Agreement dated as of the Closing
Date between Host Marriott and MSLS (the "Purchase Agreement"). As a condition
to the sale and purchase of the Stock, MI and Host have each agreed to indemnify
the other as set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, of the mutual
covenants set forth in this Agreement, and of other good and valuable
consideration, the receipt and sufficiency of which are acknowledged, MI and
Host agree as follows:
I. INTERPRETATION
1.1 DEFINITIONS. As used in this Agreement, capitalized terms shall have the
meanings indicated in the Purchase Agreement, and the following capitalized
terms shall have the meanings indicated:
ACCRUED NOMURA FEE: the "Exit Fee" payable by the Company pursuant to
Section 3.01 of the Credit Agreement dated September 1, 1995 between Nomura
Asset Capital Corporation and the Company as in effect on the date of this
Agreement.
CDLP INVESTMENT AGREEMENT: the Investment Agreement dated as of May 17,
1995 between Forum Alpha Investments, Inc. and CDLP Partners, Ltd., as in effect
on the date of this Agreement.
CLAIMS: any and all claims, demands, suits, causes of action,
administrative or regulatory proceedings, governmental investigations,
arbitration proceedings or mediation proceedings which assert that a Liability
is or may be due and payable.
<PAGE>
COLLECTIVE BARGAINING AGREEMENTS: collectively, (i) the Agreement between
Forum Group, Inc. d/b/a Foulk Manor South and Amalgamated Local Union 747 Health
Care Employees' Union, Effective August 1, 1995, and (ii) Agreement between
Forum Group, Inc. d/b/a Shipley Manor and Amalgamated Local Union 747 Health
Care Employees' Union, Effective August 1, 1995.
ENVIRONMENTAL LIABILITIES: all Liabilities in connection with the
Communities that result from, relate to, arise out of or are based upon any
Environmental Laws.
INDEMNIFIABLE CLAIM: as defined in Section 5.1.
INDEMNIFIED PARTY: as defined in Section 5.1.
INDEMNIFYING PARTY: as defined in Section 5.1.
LIABILITIES: any and all liabilities, indebtedness, obligations, losses,
damages, claims, assessments, fines, penalties, costs, fees and expenses of
every kind, nature or description, whether fixed or contingent, known or
unknown, suspected or unsuspected, or foreseen or unforeseen, and whether based
on contract, tort, statute or other legal or equitable theory of recovery,
including interest which may be imposed in connection therewith, court costs,
costs resulting from any judgments, orders, awards, decrees or equitable relief,
and reasonable fees and disbursements of counsel, consultants and expert
witnesses.
MAJORITY-OWNED SUBSIDIARY: any Subsidiary of the Company not wholly
owned, directly or indirectly, by the Company immediately after Closing. In the
event that subsequent to Closing, Host shall acquire, directly or indirectly,
all of the ownership of any Majority-Owned Subsidiary, then such Majority-Owned
Subsidiary shall cease to be a Majority-Owned Subsidiary for purposes of this
Agreement.
POST-CLOSING LIABILITIES: any and all Liabilities of the Company and/or
any Subsidiary which accrue, arise, are entered into or relate to periods,
events or circumstances on or after the Closing Date.
PRE-CLOSING LIABILITIES: any and all Liabilities of the Company and/or
any Subsidiary which accrue, arise, are entered into or relate to periods,
events or circumstances prior to the Closing Date.
1.2 INTEGRATION. This Agreement, the Purchase Agreement and the Tax
Agreement contain the final and entire understanding of the parties hereto with
respect to the subject matter of this Agreement, and supersede all prior
negotiations, commitments, agreements and understandings, both written and oral,
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among the parties or any of them with respect to the subject matter of this
Agreement.
1.3 DOCUMENTARY CONVENTIONS. This Agreement shall be governed by the
Documentary Conventions.
II. INDEMNIFICATION BY MI
2.1 INDEMNIFICATION. Subject to the exclusions set forth in Section 2.2 and
the other terms of this Agreement, MI shall indemnify Host and its Affiliates
(including the Company and each Subsidiary), and their respective officers,
directors, members, and partners, against, and hold Host and its Affiliates
(including the Company and each Subsidiary), and their respective officers,
directors, members, and partners, harmless from, the following:
2.1.1 All Pre-Closing Liabilities, including such Liabilities as may
result from, relate to or arise out of the pending Claims described on Exhibit
A;
2.1.2 All Liabilities for repayment, refunding or reimbursement to any
Resident of all or any portion of any Lifecare Payment received prior to the
Closing Date in respect of Base Lifecare Contracts, together with such interest
thereon as may be required by law or by the terms of the applicable Lifecare
Contract, provided that prior to seeking indemnification under this Section
2.1.2, all Lifecare Reserves relating to the applicable Base Lifecare Contract
that may at such time be used to repay, refund or reimburse any Resident for a
Lifecare Payment are so used;
2.1.3 All Liabilities that result from, relate to or arise out of the
creation, maintenance and disbursement of any Lifecare Reserve held or required
to be held with respect to any Base Lifecare Contract, except to the extent such
Liabilities result from the negligence or willful misconduct after the Closing
Date of the Company or any of its Subsidiaries or Affiliates (it being
understood that all Lifecare Reserves held or required to be held with respect
to any Base Lifecare Contracts after the Closing Date are to be held, maintained
and disbursed by MSLS pursuant to management or operating agreements to the
extent permitted by applicable law);
2.1.4 The Liability to pay the Accrued Nomura Fee;
2.1.5 All Liabilities that result from, relate to, arise out of or under,
or are based upon (i) any Plan, or any contract or agreement listed on Exhibit
C-10 to the Purchase Agreement, whether accruing before or after the Closing
Date, except to the extent such Liability is treated as an "Operating Expense"
under a New Operating Agreement (whether such New Operating Agreement is
executed on the
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Closing Date or attached as an exhibit to any Transition Agreement), taking into
account the provisions of Sections 6.9.4 and 6.9.5 of the Purchase Agreement,
(ii) the employment or hiring practices of the Company or any of its
Subsidiaries prior to the Closing Date, or (iii) the employment or termination
of employment of any person by the Company or any Affiliate of the Company
(including each Subsidiary) prior to the Closing Date (including any workers'
compensation taxes or premiums);
2.1.6 All Liabilities, whether accrued before or after the Closing Date,
relating to or arising out of any Excluded Asset, Excluded Community, or
Excluded Subsidiary;
2.1.7 All Liabilities that result from the inaccuracy of any
representation or warranty in any material respect made by MSLS in the Purchase
Agreement;
2.1.8 The failure of MSLS to perform any covenant of MSLS in the Purchase
Agreement;
2.1.9 All Liabilities that result from, relate to, arise out of or under,
or are based upon any Collective Bargaining Agreement, whether accruing before
or after the Closing Date, except for Liabilities accruing from and after the
Closing Date which constitute "Operating Expenses" under any New Operating
Agreement (whether such New Operating Agreement is executed on the Closing Date
or attached as an exhibit to any Transition Agreement), taking into account the
provisions of Section 6.9.4 and 6.9.5 of the Purchase Agreement;
2.1.10 All Pre-Closing Liabilities of the Company as manager under the
FRP Management Agreement, the FRC-I Management Agreement, and the FFI Management
Agreement, and all Post-Closing Liabilities of the Company as manager under the
FRP Management Agreement, the FRC-I Management Agreement, and the FFI Management
Agreement arising from the fact that the Company may remain obligated as a party
under such Management Agreements;
2.1.11 All Liabilities which arise under the CDLP Investment Agreement
from or in connection with the acquisition of any senior living facility, except
for Liabilities indemnifiable by Host pursuant to Section 3.1.2; and
2.1.12 All costs and expenses relating to the defense of any Claims which
assert Liabilities described in this Section 2.1, including the reasonable fees
and disbursements of counsel.
2.2 EXCLUSIONS. The following Liabilities shall be excluded from the
indemnification obligation described in Section 2.1:
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2.2.1 Current Liabilities to the extent such Current Liabilities are set
forth on the Final Closing Accounting;
2.2.2 The principal amount of the Existing Financing to the extent such
principal amount is set forth in Section 4.20 of the Purchase Agreement, all
interest and other charges accruing on such principal from and after the Closing
Date (but expressly excluding the Accrued Nomura Fee), and all other Liabilities
in respect of the Existing Financing or under the Existing Financing Documents
accruing on or after the Closing Date (but expressly excluding the Accrued
Nomura Fee);
2.2.3 All Liabilities for the return of Deposits to the extent such
Deposits are set forth on the Final Closing Accounting;
2.2.4 All Liabilities for or in connection with Taxes (which shall be
governed by the Tax Agreement);
2.2.5 Liability for amounts payable in respect of any Lease, Equipment
Lease, Commercial Lease, Residence Agreement (other than as specifically set
forth in Section 2.1.2 or 2.1.3), Contract, Medicaid/Medicare Contract, and any
Restrictive Agreement, which accrue from and after the Closing Date and which do
not arise as a result of any breach or default on the part of MI, the Company or
any Subsidiary prior to the Closing Date;
2.2.6 Liability for amounts payable by the owner in respect of the FRP
Management Agreement, the FRC-I Management Agreement, and the FFI Management
Agreement, which accrue from and after the Closing Date and which do not arise
as a result of any breach or default on the part of MI, the Company or any
Subsidiary prior to the Closing Date;
2.2.7 Liability for the payment of deferred management fees by FRP to the
Company in respect of the FRP Management Agreement for periods prior to
January 1, 1994;
2.2.8 Liability for repayment, refunding or reimbursement to any Resident
of all or any portion of any Lifecare Payments received prior to the Closing
Date in respect of Excess Lifecare Contracts, to the extent such Lifecare
Payments are set forth on the Final Closing Accounting;
2.2.9 All Liabilities indemnifiable by Host pursuant to Section 3.1; and
2.2.10 All Environmental Liabilities, which shall be governed exclusively
by Article IV.
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2.3 ACKNOWLEDGEMENT OF "AS IS" PURCHASE. HOST ACKNOWLEDGES THAT EXCEPT FOR
THE REPRESENTATIONS, WARRANTIES AND COVENANTS EXPRESSLY SET FORTH IN THE
PURCHASE AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS, (I) HOST IS ACCEPTING
THE LAND, IMPROVEMENTS, PERSONAL PROPERTY, AND ANY PERSONAL PROPERTY SUBJECT TO
ANY EQUIPMENT LEASE, IN ITS "AS IS, WHERE IS" CONDITION AS OF THE CLOSING DATE,
AND (II) MI IS MAKING NO REPRESENTATIONS OR WARRANTIES CONCERNING, AND SHALL
HAVE NO LIABILITY TO HOST WITH RESPECT TO, THE USE OR CONDITION OF THE LAND,
IMPROVEMENTS, PERSONAL PROPERTY, OR PERSONAL PROPERTY SUBJECT TO ANY EQUIPMENT
LEASE, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY AND ANY IMPLIED
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.
III. INDEMNIFICATION BY HOST
3.1 INDEMNIFICATION. Subject to the terms of this Agreement, Host shall
indemnify MI and its Affiliates, and their respective officers, directors,
members, and partners, against, and hold MI and its Affiliates, and their
respective officers, directors, members, and partners, harmless from, the
following:
3.1.1 All Post-Closing Liabilities, other than any Liabilities set forth
in Section 2.1;
3.1.2 All Post-Closing Liabilities which arise under the CDLP Investment
Agreement from or in connection with the acquisition, on or after the Closing
Date, of any senior living facility by the Company or any Person in which the
Company, directly or indirectly, owns an interest;
3.1.3 All Liabilities for repayment, refunding or reimbursement to any
Resident of all or any portion of any Lifecare Payment received prior to the
Closing Date in respect of Excess Lifecare Contracts to the extent such Lifecare
Payments are set forth on the Final Closing Accounting, together with such
interest thereon as may be required by law or by the terms of the applicable
Lifecare Contract, except to the extent such Liabilities result from the
negligence or willful misconduct after the Closing Date of MSLS or any of its
Subsidiaries or Affiliates (it being understood that all Lifecare Reserves held
or required to be held with respect to any Excess Lifecare Contracts after the
Closing Date are to be held, maintained and disbursed by MSLS pursuant to
management or operating agreements to the extent permitted by law);
3.1.4 The inaccuracy of any representation or warranty in any material
respect made by Host Marriott in the Purchase Agreement;
3.1.5 The failure of Host Marriott to perform any covenant in the
Purchase Agreement;
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3.1.6 All Liabilities arising out of any negligent act or omission or
willful misconduct on the part of Host and its Affiliates, and their agents and
representatives, during their entry onto the Communities prior to the Closing
Date in connection with the due diligence investigation performed for the
acquisition of the Company pursuant to the Purchase Agreement;
3.1.7 All Liabilities which are expressly excluded from MI's
indemnification obligations pursuant to Section 2.2, other than Liabilities for
or in connection with Taxes (which shall be governed by the Tax Agreement) and
Environmental Liabilities (which shall be governed by Article IV); and
3.1.8 All costs and expenses relating to the defense of any Claims which
assert Liabilities described in this Section 3.1, including the reasonable fees
and disbursements of counsel.
3.2 EXCLUSIONS. The following Liabilities shall be excluded from the
indemnification obligation described in Section 3.1:
3.2.1 Any Liability which results from, relates to or arises out of the
inaccuracy of any representation or warranty made by MSLS in any material
respect in the Purchase Agreement or any Transaction Document executed pursuant
to the Purchase Agreement;
3.2.2 All Liabilities indemnifiable by MI pursuant to Section 2.1; and
3.2.3 All Environmental Liabilities, which shall be governed exclusively
by Article IV.
IV. ENVIRONMENTAL MATTERS
4.1 ALLOCATION OF ENVIRONMENTAL LIABILITIES. It is the intent of the parties
that all Environmental Liabilities shall be allocated between MI and Host in the
same manner as such Environmental Liabilities would have been allocated under
applicable Environmental Laws (i) had MI (rather than the Company, its
Subsidiaries or Affiliates) owned title to the Communities and the related
assets prior to the Closing Date during the period in which the Company, its
Subsidiaries and/or Affiliates owned title to such Communities and assets, and
(ii) had Host directly acquired title to such Communities and assets on the
Closing Date (rather than acquiring the Stock of the Company) and continued to
own such Communities and assets during the period commencing on the Closing Date
and continuing until their transfer or other disposition to a Person which is
not an Affiliate of Host. Therefore, the following shall apply:
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4.1.1 MI shall pay and/or reimburse Host for (and shall indemnify Host
and its Affiliates, and their respective officers, directors, members, and
partners, against, and hold Host and its Affiliates, and their respective
officers, directors, members, and partners, harmless from) all Environmental
Liabilities that would, under applicable Environmental Laws, be the
responsibility of MI had MI (rather than the Company, its Subsidiaries or
Affiliates) owned title to the Communities and the related assets during the
period prior to the Closing Date in which the Company, its Subsidiaries and/or
Affiliates owned title to the Communities and the related assets, and had Host
directly acquired title to the Communities and related assets on the Closing
Date; and
4.1.2 Host shall pay and/or reimburse MI for (and shall indemnify MI and
its Affiliates, and their respective officers, directors, members, and partners,
against, and hold MI and its Affiliates, and their respective officers,
directors, members, and partners, harmless from) all Environmental Liabilities
that would, under applicable Environmental Laws, be the responsibility of Host
during the period commencing on the Closing Date and continuing until the
transfer or other disposition of each Community or asset to a Person which is
not an Affiliate of Host, had Host acquired title to the Communities and related
assets on the Closing Date (rather than acquiring the Stock of the Company).
4.2 NO THIRD PARTY RIGHTS. The allocation of Environmental Liabilities set
forth in Section 4.1 shall be solely as between Host and MI, and their
respective Affiliates, officers, directors, members, and partners, and shall not
be for the benefit of, or be enforceable by, any other Person.
4.3 PROCEDURES. The parties will cooperate with and assist each other in
addressing any matters relating to Environmental Liabilities so that the total
exposure of the parties for Environmental Liabilities is, to the extent
possible, minimized.
V. INDEMNIFICATION PROCEDURES
5.1 NOTICE. In the event that Host, the Company or any Subsidiary on the one
hand, or MI on the other hand (as applicable, an "Indemnifying Party"), is
liable under Article II, III or IV to indemnify or hold harmless any other
Person (as applicable, an "Indemnified Party") for a Liability, or a Claim by a
third party subject to indemnification under Article II, III or IV is asserted
against the Indemnified Party (an "Indemnifiable Claim"), the Indemnified Party
shall promptly notify the Indemnifying Party of such Liability or Claim, and, in
the case of an Indemnifiable Claim, such notice shall be given within thirty
(30) days after the Indemnified Party's receipt of a written assertion of
liability from the third party. Such notice shall describe the facts and
circumstances giving rise to such Liability or Claim, and the type and amount of
Liability incurred or threatened, to
-8-
<PAGE>
the extent known by the Indemnified Party. Any failure by the Indemnified Party
to so notify the Indemnifying Party shall not foreclose the indemnification
obligations of the Indemnifying Party unless and only to the extent the
Indemnifying Party incurs out-of-pocket expenses (in addition to any out-of-
pocket expenses which it otherwise would have incurred had notice been given
promptly) or otherwise has been materially prejudiced by such failure. The
Indemnified Party shall cooperate fully in the investigation of such Liability
or Claim by the Indemnifying Party, and shall make available such books and
records as may be necessary in connection therewith.
5.2 ELECTION OF INDEMNIFYING PARTY TO DEFEND. Within thirty (30) days after
receipt of notice of a Claim pursuant to Section 5.1 (or within such lesser
period of time as may be required under the circumstances), the Indemnifying
Party may elect to defend, contest or otherwise protect the Indemnified Party
against the Claim at its own cost and expense. Such election shall be by
written notice to the Indemnified Party given within such thirty (30) day (or
lesser) period, and shall be accompanied by the Indemnifying Party's
acknowledgment, in form and substance reasonably satisfactory to the Indemnified
Party, that it shall indemnify the Indemnified Party for the Liability asserted
by such Claim in the event such Liability is incurred. In the event the
Indemnifying Party so elects to defend such Claim, the Indemnified Party may,
but shall not be obligated to, participate at its own cost and expense (not
subject to indemnification) in the defense of such Claim by counsel of its own
choosing, but the Indemnifying Party shall be entitled to control the defense
unless the Indemnified Party has relieved the Indemnifying Party from liability
with respect to the particular Liability. The Indemnified Party shall cooperate
and provide such assistance as the Indemnifying Party may reasonably request in
connection with the Claim, provided that the Indemnifying Party reimburses the
Indemnified Party for all reasonable out-of-pocket costs incurred in connection
with such cooperation and assistance. In connection with its defense of any
Claim, the Indemnifying Party shall have the right to settle and compromise such
Claim, provided that the Indemnified Party is released from Liability in
connection with the Claim so settled or compromised.
5.3 RIGHT OF INDEMNIFIED PARTY TO DEFEND. In the event the Indemnifying
Party does not elect to defend such Claim, or fails to defend, contest or
otherwise protect against any such Claim, the Indemnified Party may, but shall
not be obligated to, defend, contest or otherwise protect against the same, and
make any compromise or settlement thereof, and the Indemnifying Party shall be
bound by the results obtained by the Indemnified Party. The Indemnified Party
shall have the right to recover from the Indemnifying Party all reasonable costs
and expenses incurred by it in connection with such defense or contest,
including reasonable attorneys' fees, disbursements and all amounts paid as a
result of such Claim or the compromise or settlement of such Claim.
-9-
<PAGE>
5.4 EXCEPTIONS TO DEFENSE. Notwithstanding Section 5.2, the Indemnifying
Party shall not have the right to undertake the defense or contest of any Claim
on behalf of the Indemnified Party if, in the reasonable judgment of the
Indemnified Party, upon advice of counsel, the course of action proposed by the
Indemnifying Party (i) does not have a substantial basis, (ii) may subject the
Indemnified Party to criminal liabilities, penalties or similar sanctions, or
(iii) has a reasonable likelihood of resulting in the imposition of liens or
other charges against the assets of the Indemnified Party, other than potential
liens resulting solely from a possible adverse judgment, or liens which the
Indemnifying Party has bonded off or otherwise released pending completion of
litigation. In such event, the Indemnified Party may assume the exclusive right
to defend, compromise or settle such Claim, but the Indemnifying Party shall not
be bound by any compromise or settlement made without its consent (which consent
shall not be unreasonably withheld).
5.5 PAYMENT OF LIABILITY. Within thirty (30) days of receipt of notice of a
Liability pursuant to Section 5.1, or the imposition of a Liability as a result
of the adjudication of a Claim pursuant to Section 5.2 or 5.3, the Indemnifying
Party shall (i) pay such Liability, or (ii) in the event the Indemnified Party
has previously paid such Liability, reimburse the Indemnified Party for payment
of such Liability together with interest on such amount at the Interest Rate
from the date of payment by the Indemnified Party through the date of receipt of
reimbursement by the Indemnified Party.
5.6 EXCEPTION FOR DE MINIMIS CLAIMS.
5.6.1 Notwithstanding anything to the contrary in the Purchase Agreement
or this Agreement (other than Section 5.6.2), (i) MI shall not be required to
indemnify or hold harmless any Indemnified Party for any Liability or Claim if
(a) such Liability (or the potential Liability in the case of a Claim) is in the
amount of $50,000 or less and (b) such Liability (or the potential Liability in
---
the case of a Claim), together with all other Liabilities for which MI is not
responsible as a result of this Section 5.6, is less than $250,000 in the
aggregate, and (ii) Host shall not be required to indemnify or hold harmless any
Indemnified Party for any Liability or Claim if such Liability (or the potential
Liability in the case of a Claim), together with all other Liabilities for which
Host is not responsible as a result of this Section 5.6, is less than $100,000
in the aggregate. Notwithstanding the foregoing, if a Claim is asserted in
excess of the foregoing thresholds, and the Indemnifying Party defends such
Claim, but the ultimate Liability (including all defense costs) in connection
with such Claim equals or is less than such thresholds, such Claim will be
treated as a Liability covered by clause (i)(a) or (b) (in the case of MI) or
clause (ii) (in the case of Host), as applicable, and the Indemnified Party
shall, subject to the other terms of this Agreement, reimburse the Indemnifying
Party for all Liabilities incurred in connection therewith.
-10-
<PAGE>
5.6.2 The limitation set forth in Section 5.6.1 shall not apply to the
indemnification obligation of MI with respect to the following: pending Claims
described on Exhibit A, Sections 2.1.2, 2.1.3, 2.1.4, 2.1.6, and 2.1.8, and any
Plan or contract or agreement described on Exhibit C-10 to the Purchase
Agreement and referenced in Section 2.1.5. The limitation set forth in Section
5.6.1 shall not apply to the indemnification obligation of Host with respect to
the following: Section 3.1.1 (but only to the extent that the Liabilities
described in Section 3.1.1 constitute "Operating Expenses" under any New
Operating Agreement (whether such Operating Agreement is executed on the Closing
Date or attached as an exhibit to any Transition Agreement)), 3.1.3, 3.1.5,
3.1.6 and 3.1.7.
5.7 LIMITATION ON DAMAGES. Notwithstanding anything to the contrary in the
Purchase Agreement or this Agreement, neither MI nor Host, nor their respective
Affiliates, shall, in connection with any Indemnifiable Claim pursuant to this
Agreement, seek or be liable for (i) any punitive damages, or (ii) consequential
damages (including damages for lost profits, loss of business reputation and
opportunity) in excess of twenty-five percent (25%) of actual damages incurred
with respect to such Indemnifiable Claim. The foregoing limitation shall not
apply to the extent that such punitive damages, or consequential damages
(including damages for lost profits, loss of business reputation or
opportunity), are awarded to a third party with respect to a matter which is an
Indemnifiable Claim.
5.8 EXCLUSIVE REMEDY. The covenants set forth in this Agreement shall
constitute the sole and exclusive remedy for any claims made by any of the
parties to this Agreement or their Affiliates based on, related to or arising
with respect to the Purchase Agreement. In no event shall a breach of such a
representation or warranty be used as evidence of or deemed to constitute bad
faith, misconduct or fraud, except to the extent that any party or its
Affiliates or any of their respective directors, employees or officers directly
and actively engaged in the Transaction had actual knowledge of information
which was materially inconsistent with any of the representations or warranties
set forth in the Purchase Agreement and willfully and knowingly failed to
disclose such information. Nothing set forth in this Section 5.8 shall limit
the right of any party to seek or obtain specific performance or other
injunctive relief with respect to covenants contained in the Purchase Agreement.
5.9 MITIGATION.
5.9.1 The Indemnified Party shall take all reasonable steps to mitigate
all Liabilities and Claims, including availing itself as reasonably directed by
the Indemnifying Party of any defenses, limitations, rights of contribution,
claims against third parties and other rights at law (it being understood that
any out-of-pocket costs paid to third parties in connection with such mitigation
shall constitute Liabilities), and shall provide such evidence and documentation
of the nature and extent of any Liability as may be reasonably requested by the
Indemnifying Party.
-11-
<PAGE>
5.9.2 Each party shall act in a commercially reasonable manner in
addressing any Liabilities that may provide the basis for an Indemnifiable Claim
(that is, each party shall respond to such Liability in the same manner that it
would respond to such Liability in the absence of the indemnification provided
for in this Agreement). Any Liabilities subject to indemnification under this
Agreement shall be reduced by the dollar amount of any insurance proceeds
actually received by the Indemnified Party with respect to such Liabilities.
5.10 LIMITATION FOR MAJORITY-OWNED SUBSIDIARIES. In the event any Majority-
Owned Subsidiary or any Subsidiary of any Majority-Owned Subsidiary incurs any
Liability which would be the basis for an Indemnifiable Claim under this
Agreement, the indemnification obligation of MI under this Agreement shall
extend only to Host and those of its Affiliates which are not Majority-Owned
Subsidiaries (as opposed to extending to such Majority-Owned Subsidiary). The
calculation of the amount of such Liability shall be determined by multiplying
the total amount of such Liability by the percentage of ownership interests in
the Majority-Owned Subsidiary owned, directly or indirectly, by Host as of the
date that the indemnification payment is due under this Agreement.
5.11 NO SET-OFFS. Amounts payable by the Indemnifying Party to the
Indemnified Party under this Agreement shall be paid without set-off,
counterclaim or deduction. Without limiting the generality of the foregoing, MI
waives any right to set-off against amounts payable under this Agreement any
amounts which may be payable by Host under the Guaranty or any Expansion
Guaranty.
5.12 PENDING CLAIMS. Host and MI acknowledge that as of the Closing Date,
the Claims set forth on Exhibit A have been threatened, asserted and/or are
pending. MI shall undertake, or continue to undertake, the defense of such
Claims in accordance with this Article V, and shall indemnify Host, the Company
and each Subsidiary against any Liability in respect of such Claims in
accordance with Article II and the other provisions of this Agreement.
5.13 ATTORNEYS' FEES AND COSTS. In the event of a default by any party in
making any payments under this Agreement, the non-defaulting party shall have
the right to recover reasonable attorneys' fees and court costs incurred in
connection with such default.
5.14 SURVIVAL. All indemnification provided for in this Agreement shall
survive Closing and, except as set forth in the next sentence, shall continue
without limitation (other than applicable statutes of repose). The
indemnification set forth in Sections 2.1.7 and 3.1.4 shall terminate on the
second anniversary of the Closing Date (except for Liabilities as to which the
Indemnified Party has previously notified the Indemnifying Party pursuant to
Section 5.1) with respect to all of the representations and warranties set forth
in the Purchase Agreement, other than the
-12-
<PAGE>
following sections of the Purchase Agreement (which shall be governed by the
first sentence of this Section 5.14): 4.1, 4.2, 4.3 (first sentence, and second
sentence only with respect to the agreements referenced therein have not been
provided to Host prior to the Closing Date), 4.5, 4.6, 4.7, 4.8, 4.9, 4.29
(survival limited to five years from the Closing Date), 4.31, 4.32, and 4.33.
Expiration of the indemnification provisions referenced in the foregoing
sentence shall not affect the continuing validity of any other indemnification
provision in this Agreement.
5.15 STRADDLING LIABILITIES. The parties acknowledge that certain
Liabilities of the Company and/or any Subsidiary may arise from ongoing conduct
or practices at one or more of the Communities that occur both prior to and
after Closing, including conduct and practices that may violate Legal
Requirements or be the basis of Claims by third parties. Host and MI shall
allocate such Liabilities as follows: (i) Liabilities attributable to such
ongoing conduct and practices prior to Closing shall be treated for all purposes
as Pre-Closing Liabilities and (ii) Liabilities attributable to such ongoing
conduct and practices from and after Closing will be evaluated under the New
Operating Agreement for the applicable Community (for example, they may be
treated as "Operating Expenses" thereunder or as matters that are indemnifiable
by the "Operator" thereunder). Notwithstanding any other provision herein,
nothing in this Agreement shall enlarge, diminish or alter any payment
obligation expressly set forth in the Purchase Agreement, whether or not such
payment obligation arises before, at or after the Closing. Without limiting the
generality of the foregoing, no such payment obligation shall constitute a "Pre-
Closing Liability" or a "Post-Closing Liability" hereunder.
VI. MISCELLANEOUS
6.1 JURISDICTION. Any suit, action or proceeding under or in connection with
this Agreement or the Transaction shall be brought in any federal or state court
of competent jurisdiction located in the State of Maryland. By execution of
this Agreement, each party consents to the exclusive jurisdiction of such
courts, and waives any right to challenge the jurisdiction of such courts or the
appropriateness of venue in such courts. EACH PARTY HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING UNDER OR IN
CONNECTION WITH THIS AGREEMENT.
6.2 NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be hand-delivered, delivered by
nationally recognized overnight courier, mailed by certified or registered mail,
postage prepaid, return receipt requested, or telecopied with confirmation of
receipt, to the addresses set forth below, or to such other addresses of which
either party shall notify the other party in accordance with this Section 6.2,
and shall be deemed given as of the time of such mailing or delivery, as
applicable:
-13-
<PAGE>
If to MI: Marriott Senior Living Services, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Chief Financial Officer
Telecopy: 301/380-6540
With a copy to: Marriott International Law Department
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: General Counsel
Telecopy: 301/380-6727
And a copy to: O'Melveny & Myers LLP
555 13th Street, N.W.
Washington, D.C. 20004
Attention: David G. Pommerening
Telecopy: 202/383-5414
If to Host: Host Marriott Corporation
Asset Management Department 908
10400 Fernwood Road
Bethesda, Maryland 20817-1109
Attention: Director, Senior Living Facilities
Telecopy: 301/380-6338
with a copy to: Host Marriott Corporation
Law Department 923
10400 Fernwood Road
Bethesda, Maryland 20817-1109
Attention: General Counsel
Telecopy: 301/380-6332
with a copy to: Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
Attention: Michael D. Goodwin
Telecopy: 202/942-5999
-14-
<PAGE>
6.3 ASSIGNMENT. Neither Host nor MI shall, without the prior written consent
of the other party, assign its rights or delegate its obligations under this
Agreement. Notwithstanding the foregoing, (i) Host and MI may each assign their
rights under this Agreement to any Person which is its Affiliate, so long as
such Person remains its Affiliate, (ii) Host may assign its rights under this
Agreement to any transferee of or successor to all or substantially all of the
senior living communities owned, directly or indirectly, by Host, and (iii) MSLS
may assign its rights under this Agreement to any transferee of or successor to
all or substantially all of the senior living business conducted by MSLS.
6.4 BINDING EFFECT. This Agreement shall be binding upon, and shall inure to
the benefit of, Host, MI and their respective successors and permitted assigns.
The Affiliates of Host and MI, the Company and the Subsidiaries (other than the
Majority-Owned Subsidiaries) are intended as third party beneficiaries of this
Agreement, and shall have the right to enforce this Agreement to the same extent
as a party to this Agreement. The obligations of MI on the one hand, and Host
on the other hand, shall be the joint and several obligations of all Persons
comprising MI and Host, respectively.
6.5 RELATIONSHIP TO MANAGEMENT AGREEMENT. Host and MI acknowledge that on
the Closing Date, the Company and its Subsidiaries will be continuing Existing
Management Agreements (together with certain Transition Agreements) and/or
executing New Operating Agreements with respect to the Communities. In the
event that any such Existing Management Agreement (together with the applicable
Transition Agreement) or New Operating Agreement provides that Host, the Company
or any Subsidiary, as owner, is required to pay any Liability or defend any
Claim as to which Host, the Company or any Subsidiary is indemnified under this
Agreement, such provision shall not affect the rights or obligations of the
parties under this Agreement.
6.6 LIABILITIES ARISING FROM CLOSING. Any Liability which arises from or as
a result of the consummation of Closing shall not constitute a Pre-Closing
Liability or a Post-Closing Liability. Nothing set forth in the foregoing
sentence shall relieve any party from liability for a breach of or default under
any representation, warranty or covenant in any Transaction Document.
[signatures on following page]
-15-
<PAGE>
IN WITNESS WHEREOF, MI and Host have executed this Agreement as of the Closing
Date.
MARRIOTT SENIOR LIVING SERVICES, INC., a
Delaware corporation
By: /s/
-------------------------------------
Its: President
-------------------------------------
MARRIOTT INTERNATIONAL, INC., a
Delaware corporation
By: /s/
-------------------------------------
Its: Vice-President
-------------------------------------
HMC SENIOR COMMUNITIES, INC., a
Delaware corporation
By: /s/ Steven Fairbanks
-------------------------------------
Its:
-------------------------------------
HOST MARRIOTT CORPORATION, a
Delaware corporation
By: /s/ Steven Fairbanks
-------------------------------------
Its: Vice-President
-------------------------------------
LIST OF EXHIBITS
Exhibit A: List of Certain Pending Claims
-16-
<PAGE>
EXHIBIT A
LIST OF CERTAIN PENDING CLAIMS
1. Russell F. Knapp in his capacity as Trustee of the Russell F. Knapp
-------------------------------------------------------------------
Revocable Trust v. Forum Group, Inc. and Forum Retirement, Inc., Case No. IP
- ---------------------------------------------------------------
95-778-C-D/F, United States District Court, Southern District of Indiana,
Indianapolis Division.
2. Threatened action by limited partner(s) of Greenville Retirement
Community, L.P. against Forum Group, Inc. and/or Marriott Senior Living
Services, Inc. as general partner.
<PAGE>
Exhibit 10.24
[FORM OF]
WORKING CAPITAL NOTE AND AGREEMENT
This Working Capital Note and Agreement (this "Note and Agreement") is
made as of the ____ day of _____, 199_, by __________________, a
_____________________ (the "Maker"), and _______________________, a
__________________ (the "Holder").
WHEREAS, the Maker and the Holder are parties to that certain [Lease
Agreement], dated as of _______________, 1998 (as the same may be amended,
supplemented or otherwise modified from time to time, the "Lease");
WHEREAS, pursuant to the Lease, the Holder is selling to the Maker on
the date hereof the Working Capital (as defined in the Lease) existing as of the
Commencement Date (as defined in the Lease) of the Lease (the "Initial Working
Capital");
WHEREAS, the parties desire to enter into this Note and Agreement for
the purpose, among others, of evidencing the obligation of the Maker to pay to
the Holder the purchase price of the Initial Working Capital, together with
interest thereon, as more fully hereinafter set forth;
NOW THEREFORE, in consideration of the foregoing and the agreements
hereinafter set forth, the parties hereto hereby agree as follows:
1. FOR VALUE RECEIVED, the Maker promises to pay to the order of the
Holder, at the address specified on Schedule A attached hereto ("Schedule A"),
---------- ----------
or at such other place as the Holder of this Note and Agreement may from time to
time designate, the principal amount specified on Schedule A (the "Principal
----------
Amount"), together with interest on the Principal Amount from the date hereof
until paid in full.
Such interest shall accrue at the rate, be calculated in the manner,
and be due and payable at the times, provided in Schedule A. All interest
----------
payments shall be in cash, except as otherwise provided in the next paragraph.
The Principal Amount and all accrued and unpaid interest thereon shall
be due and payable in full, in the manner set forth hereinbelow, upon the
expiration or earlier termination of the Lease for any reason (including,
without limitation, a termination of the Lease by the Facility Mortgagee (as
defined in the Lease) in accordance with the terms of the Lease or this Note and
Agreement). The date on which such expiration or termination occurs is
sometimes hereinafter referred to as the "Maturity Date." Payment of the
Principal Amount and all
<PAGE>
accrued and unpaid interest thereon shall be made as follows: (i) the Maker
shall assign, transfer and deliver to the Holder title to all Working Capital
owned by the Maker on the Maturity Date by means of one or more written
instruments reasonably satisfactory in form and content to the Holder; and (ii)
to the extent that the Principal Amount and all accrued and unpaid interest
thereon exceeds the fair market value of such Working Capital so assigned,
transferred and delivered by the Maker to the Holder (which the Maker and the
Holder agree shall be equal to the book value of such Working Capital, after
taking into account any depreciation as of the Maturity Date) (the "Fair Market
Value"), the Maker shall pay to the Holder on the Maturity Date an amount in
cash equal to the amount of such excess (the "Maker True-Up Amount"). Title to
the Working Capital so assigned, transferred and delivered to the Holder shall
be free and clear of any security interests, liens and other encumbrances of any
nature whatsoever created by the Maker or arising in respect of any obligation
of the Maker or arising by reason of any act or omission of the Maker.
All payments of cash hereunder shall be made in lawful money of the
United States of America and, except as otherwise provided in a written
agreement between the Maker and the Holder, without offset.
This Note and Agreement may not be prepaid in whole or in part.
The occurrence of one or more of the following events shall constitute
an event of default ("Event of Default") hereunder: (i) the failure to make any
payment in cash of interest hereunder when due on any interest payment date
(other than the Maturity Date) if such failure continues for a period of 10 days
after the due date therefor, or (ii) the failure to make any payment (in cash or
in kind, as applicable) of all or any portion of the Principal Amount and all
accrued and unpaid interest thereon on the Maturity Date.
Upon the occurrence of an Event of Default, the Holder shall have the
option to terminate the Lease. In addition, the interest rate otherwise
applicable pursuant to Schedule A shall be increased by two hundred basis points
----------
(two (2) percentage points (2%)) per annum from the date of the Event of Default
until the date on which all obligations of the Maker pursuant to this Note and
Agreement are paid (in cash or in kind, as applicable) in full. The rights and
remedies provided in this paragraph are in addition to, and not in limitation
of, any other rights and remedies that the Holder may have with respect to an
Event of Default; it being agreed that all such rights and remedies shall be
cumulative.
The Maker promises to pay all reasonable costs and expenses (including
without limitation reasonable attorneys' fees and disbursements) incurred by
Holder in connection with the collection or enforcement hereof.
-2-
<PAGE>
The Maker hereby waives presentment, protest, demand, notice of
dishonor and all other notices, and all defenses and pleas on the grounds of any
extension or extensions of the time of payments or the due date of this Note and
Agreement, before or after maturity, with or without notice. No renewal or
extension of this Note and Agreement, and no delay in enforcement of this Note
and Agreement or in exercising any right or power hereunder, shall affect the
liability of the Maker.
Whenever used herein, the words "Maker" and "Holder" shall be deemed
to include their respective successors and assigns.
2. In the event the Maker has satisfied all of its obligations
pursuant to Section 1 hereof and the Fair Market Value exceeds the Principal
Amount and all accrued and unpaid interest thereon, the Holder shall pay to the
Maker on the Maturity Date an amount in cash equal to the amount of such excess
(the "Holder True-Up Amount").
3. Notwithstanding anything to the contrary set forth above, in the
event that the Lease is terminated by the Facility Mortgagee pursuant to the
terms thereof, the Maker agrees that it shall transfer title to the Working
Capital owned by it on the Maturity Date (and pay any Maker True-Up Amount
payable by it under Section 1 hereof) directly to the Facility Mortgagee or its
designee and that it shall look only to Host Marriott, L.P., a Delaware limited
partnership, for payment of any Holder True-Up Amount payable pursuant to
Section 2 hereof.
4. This Note and Agreement shall be governed by and construed under
and in accordance with the laws of the State of Maryland (but not including the
choice of law rules of such jurisdiction).
IN WITNESS WHEREOF, each of the parties hereto has caused this Note
and Agreement to be duly executed on its behalf by its duly authorized
representative on the date first set forth above.
[MAKER]
--------------------------
[HOLDER]
--------------------------
-3-
<PAGE>
Schedule A to Working
Capital Note and
Agreement
1. Address at which payments and deliveries are to be made by the
Maker pursuant to Section 1:
--------------------------------------------------------
--------------------------------------------------------
2. Principal amount:/1/
--------------------------------------------------------
3. Interest rate:/1/
--------------------------------------------------------
4. Interest shall be computed on the basis of a 365/6 day year and
applied to the actual number of days elapsed.
5. Accrued interest shall be due and payable/3/
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------.
- ----------------------------
/1/ The fair market value (which the parties agree will be the book value) of
the Working Capital transferred by the Holder to the Maker at the commencement
of the Lease.
/2/ The "long-term applicable federal rate" (as defined in Section 1274 of the
Internal Revenue Code of 1986, as amended) in effect on the commencement date of
the Lease.
/3/ Interest payment schedule will be the same as the Rent payment schedule
under the Lease.
-4-
<PAGE>
EXHIBIT 12.1
CRESTLINE CAPITAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- --------------------
PERIOD FROM
FIRST THREE JUNE 21, 1997 FIRST THREE FISCAL
QUARTERS THROUGH QUARTERS YEAR
1998 JANUARY 2, 1998 1998 1997
----------- --------------- ----------- --------
<S> <C> <C> <C> <C>
Income from operations before ex-
traordinary items............... $ 8,620 $ 607 $ 32,896 $ 38,090
Add (Deduct):
Fixed charges.................. 17,722 13,496 584,400 775,197
Capitalized interest........... -- -- -- (34)
Amortization of capitalized in-
terest........................ -- -- -- 1
Minority interest.............. 234 436 63 182
------- ------- -------- --------
Adjusted earnings................ $26,576 $14,539 $617,359 $813,436
======= ======= ======== ========
Fixed Charges:
Interest on indebtedness and
amortization of debt expense
and premium................... $17,560 $13,396 $ 16,302 $ 22,933
Portion of rents representative
of the interest factor........ 162 100 568,098 752,264
------- ------- -------- --------
Total Fixed Charges.............. $17,722 $13,496 $584,400 $775,197
======= ======= ======== ========
Ratio of earnings to fixed
charges......................... 1.50 1.08 1.06 1.05
======= ======= ======== ========
</TABLE>
<PAGE>
EXHIBIT 21.1
------------
List of Subsidiaries
--------------------
State of Incorporation
----------------------
Entity or Organization
------ ---------------
Forum Group, Inc. Indiana
Forum of Kentucky, Inc. Kentucky
Forum Ohio Healthcare, Inc. Ohio
Forum Pueblo Norte, Inc. Arizona
FGI Financing I Corporation Delaware
Forum A/H, Inc. Delaware
Forum Alpha Investments, Inc. Delaware
Forum Delaware, Inc. Delaware
Forum Investments I, LLC Delaware
Forum Retirement, Inc. Delaware
Forum Retirement Communities, I, L.P. Delaware
Forum Retirement Communities, II, L.P. Delaware
Forum Retirement Partners, L.P. Delaware
FRP Financing Limited, L.P. Delaware
HMC Leisure Park Corporation Delaware
LTJ Senior Living Communities Corporation Delaware
Leisure Park Venture Limited Partnership Delaware
Panther GenPar, Inc. Delaware
Panther Holdings Level I, L.P. Delaware
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Washington, D.C.
November 6, 1998
<PAGE>
EXHIBIT 23.3
The Board of Directors
Forum Group, Inc.:
We consent to the use of our report included herein dated September 3, 1997,
with respect to the combined balance sheets of Forum Group, Inc. and
subsidiaries as partitioned for sale to Host Marriott Corporation as of March
31, 1996 and 1995, and the related combined statements of operations, and cash
flows for the years then ended, and to the reference to our firm under the
heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Indianapolis, Indiana
November 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CRESTLINE
CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001070752
<NAME> CRESTLINE CAPITAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> SEP-11-1998
<EXCHANGE-RATE> 1
<CASH> 26,504
<SECURITIES> 0
<RECEIVABLES> 4,097
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 649,528
<DEPRECIATION> 14,259
<TOTAL-ASSETS> 694,419
<CURRENT-LIABILITIES> 0
<BONDS> 213,034
0
0
<COMMON> 0
<OTHER-SE> 392,071
<TOTAL-LIABILITY-AND-EQUITY> 694,419
<SALES> 0
<TOTAL-REVENUES> 57,800
<CGS> 0
<TOTAL-COSTS> 29,803
<OTHER-EXPENSES> 1,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,560
<INCOME-PRETAX> 8,620
<INCOME-TAX> 3,534
<INCOME-CONTINUING> 5,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,086
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Ex 99.1
CONSENT OF DIRECTOR NOMINEE
---------------------------
To Crestline Capital Corporation:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement on
Form S-1 (Registration No. 333-64657), and amendments thereto (the "Registration
Statement"), of Crestline Capital Corporation (the "Corporation"), which
indicate that I will become a director of the Corporation upon completion of the
Distribution (as defined in the Registration Statement).
/s/ ADAM M. ARON
-------------------------
Adam M. Aron
Dated: October 20, 1998
<PAGE>
CONSENT OF DIRECTOR NOMINEE
---------------------------
To Crestline Capital Corporation:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement on
Form S-1 (Registration No. 333-64657), and amendments thereto (the "Registration
Statement"), of Crestline Capital Corporation (the "Corporation"), which
indicate that I will become a director of the Corporation upon completion of the
Distribution (as defined in the Registration Statement).
/s/ LOUISE M. CROMWELL
-------------------------
Louise M. Cromwell
Dated: October 20, 1998
<PAGE>
CONSENT OF DIRECTOR NOMINEE
---------------------------
To Crestline Capital Corporation:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement on
Form S-1 (Registration No. 333-64657), and amendments thereto (the "Registration
Statement"), of Crestline Capital Corporation (the "Corporation"), which
indicate that I will become a director of the Corporation upon completion of the
Distribution (as defined in the Registration Statement).
/s/ KELVIN L. DAVIS
-------------------------
Kelvin L. Davis
Dated: October 20, 1998
<PAGE>
CONSENT OF DIRECTOR NOMINEE
---------------------------
To Crestline Capital Corporation:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement on
Form S-1 (Registration No. 333-64657), and amendments thereto (the "Registration
Statement"), of Crestline Capital Corporation (the "Corporation"), which
indicate that I will become a director of the Corporation upon completion of the
Distribution (as defined in the Registration Statement).
/s/ JOHN B. MORSE, JR.
-------------------------
John B. Morse, Jr.
Dated: October 21, 1998
<PAGE>
CONSENT OF DIRECTOR NOMINEE
---------------------------
To Crestline Capital Corporation:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement on
Form S-1 (Registration No. 333-64657), and amendments thereto (the "Registration
Statement"), of Crestline Capital Corporation (the "Corporation"), which
indicate that I will become a director of the Corporation upon completion of the
Distribution (as defined in the Registration Statement).
/s/ MICHAEL A. WILDISH
-------------------------
Michael A. Wildish
Dated: October 22, 1998
<PAGE>
CONSENT OF DIRECTOR NOMINEE
---------------------------
To Crestline Capital Corporation:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement on
Form S-1 (Registration No. 333-64657), and amendments thereto (the "Registration
Statement"), of Crestline Capital Corporation (the "Corporation"), which
indicate that I will become a director of the Corporation upon completion of the
Distribution (as defined in the Registration Statement).
/s/ John W. Marriott, III
-------------------------
John W. Marriott, III
Dated: November 5, 1998
