<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1998
REGISTRATION NO. 333-64657
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------
AMENDMENT NO. 3
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 Host.
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 20, 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, subject to the right of Host to cause the Company to sell
such 18% of the Common Stock to the Blackstone Entities at fair market value if
the Distribution is made prior to January 1, 1999 and the proposed acquisition
of hotels from the Blackstone Entities is consummated at a later date. 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 Common Stock of the Company has been approved for listing, subject to
official notice of issuance, 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>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY........................................................ 1
RISK FACTORS.............................................................. 8
Dependence on Marriott International.................................... 8
Competition with Marriott International................................. 8
Conflicts of Interest in Establishing the Terms of the Hotel Leases..... 8
Inability of Host to Obtain Necessary Third Party Consents Could Affect
the Number of Hotels that will be Leased to the Company................ 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
Guarantees 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................................... 19
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
Lack of Comparability Following the Distribution ....................... 46
Historical Results of Operations ....................................... 46
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
First Three Quarters 1998 (Historical).................................. 46
Period from June 21, 1997 through January 2, 1998 (Historical).......... 47
Pro Forma Results of Operations......................................... 47
First Three Quarters 1998 Compared to First Three Quarters 1997 (Pro
Forma)................................................................. 50
1997 Compared to 1996 (Pro Forma)....................................... 51
Pro Forma Results if No Partnerships Participate in the REIT
Conversion............................................................. 52
Pro Forma Results Without Blackstone Acquisition........................ 53
Liquidity and Capital Resources......................................... 53
EBITDA.................................................................. 55
Inflation............................................................... 56
Year 2000 Problem....................................................... 56
Impact of Financial Accounting Standards................................ 59
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............................................................... 76
Competition............................................................. 77
Relationship with Host after the Distribution........................... 78
Relationship with Marriott International................................ 80
Description of the Hotel Leases for Full-Service Hotels Managed by
Marriott International................................................. 80
Description of the Subleases for Limited-Service Hotels Managed by
Marriott International................................................. 87
Description of FF&E Leases.............................................. 89
Description of the Hotel Leases for Hotels Managed by Other Management
Companies.............................................................. 91
Description of Blackstone Hotel Leases.................................. 92
Description of Franchise Agreements with Marriott International......... 92
Description of Marriott International Hotel Management Agreements for
Full-Service Hotels.................................................... 93
Description of Marriott International Hotel Management Agreements for
Limited-Service Hotels................................................. 97
Description of Other Hotel Management Agreements........................ 98
Description of Hotel Management Agreements for Blackstone Hotels........ 98
Description of the Operating Agreements for the Communities............. 98
Description of Other Agreements for the Communities..................... 100
Non-Competition Agreements.............................................. 101
Staffing and Labor Costs................................................ 103
Regulation of the Healthcare Industry................................... 103
Environmental Matters................................................... 104
Employees............................................................... 105
Legal Proceedings....................................................... 105
MANAGEMENT................................................................ 106
Directors and Executive Officers........................................ 106
Committees of the Board of Directors.................................... 108
Executive Compensation.................................................. 109
Compensation of Directors............................................... 109
Employee Benefit Plans.................................................. 109
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Limitation of Liability and Indemnification............................ 112
Indemnification Agreements............................................. 113
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AFTER THE
DISTRIBUTION............................................................ 114
CERTAIN RELATIONSHIPS.................................................... 118
DESCRIPTION OF CAPITAL STOCK............................................. 119
General................................................................ 119
Common Stock........................................................... 119
Preferred Stock........................................................ 119
Power to Issue Additional Common Stock and Preferred Stock............. 120
Certain Anti-Takeover Provisions....................................... 120
Restrictions on Ownership and Transfer................................. 125
Registration Rights Agreement.......................................... 126
Transfer Agent and Registrar........................................... 127
SHARES ELIGIBLE FOR FUTURE SALE.......................................... 128
FEDERAL INCOME TAX CONSEQUENCES.......................................... 129
Introduction........................................................... 129
Federal Income Tax Consequences of the Distribution.................... 130
LEGAL MATTERS............................................................ 133
EXPERTS.................................................................. 133
AVAILABLE INFORMATION.................................................... 134
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 (the "Merger") of Host with and into HMC
Merger Corporation, a Maryland corporation ("Host
REIT") 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, 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
1
<PAGE>
will represent 100% of the outstanding Common
Stock of the Company, subject to the right of
Host to cause the Company to sell such 18% of the
Common Stock to the Blackstone Entities at fair
market value if the Distribution is made prior to
January 1, 1999 and the Blackstone Acquisition is
consummated at a later date. See "Business and
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 No separate vote of Host Stockholders is required
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
2
<PAGE>
sublease such hotels from Host REIT under their
existing brand names and 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 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
3
<PAGE>
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). In addition, if Host's Board
of Directors has determined that the conditions
to the Merger have been or likely will be
satisfied or waived (and, in particular, 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). The Board intends to
declare the Distribution and enter into the
leases and subleases of hotels with subsidiaries
of the Company. Under such circumstances,
however, the Merger and the other transactions
comprising the REIT Conversion still 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 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)
Asset Management Agreements, pursuant to which
the Company
4
<PAGE>
would provide to Host REIT and a non-controlled
subsidiary of Host REIT asset management services
related to their 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 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 Common Stock of
the Company has been approved for listing,
subject to official notice of issuance, 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 managed 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 manages five Swissotel
hotels in the United States, subject to the right
of Host REIT to repurchase such interest under
certain circumstances. See "Business and
Properties--Relationship with Host after the
Distribution."
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 $794,419 $789,419
Total debt........................ 213,034 213,034(5) 213,034(5)
Stockholder's equity.............. 392,071 407,071 407,071
</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;
and 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 lease 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.
INABILITY OF HOST TO OBTAIN NECESSARY THIRD PARTY CONSENTS COULD AFFECT THE
NUMBER OF HOTELS THAT WILL BE LEASED TO THE COMPANY
There are numerous third party consents which are required to be obtained by
Host in order to consummate the various transactions comprising the REIT
Conversion. These include consents of many hotel project lenders, ground
lessors, joint venture partners, Marriott International and others. Failure of
Host to obtain the necessary consents in order to permit Host to lease one or
more of its hotels to the Company could have a material adverse impact on the
Company's financial condition and results of operations, depending on the
specific hotels for which consents to lease the hotels to the Company cannot
be obtained.
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.
8
<PAGE>
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 (assuming all Partnerships (as defined
herein) participate and the Blackstone Acquisition is consummated). 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 certain defaults 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 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; such termination right to be without penalty if exercised by Host REIT
within 12 months after the Company's notice of its election to terminate the
pooling arrangements becomes effective. In addition, Host or Host REIT may
8--1
<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 THE 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 (assuming all Partnerships (as defined herein)
participate and the Blackstone Acquisition is consummated). 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 and the Non-MI Managers in connection with their
management of the hotels and management fees payable to Marriott International
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 (assuming all
Partnerships (as defined herein) participate and the Blackstone Acquisition is
consummated). Management fees payable to Marriott International and the 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 (assuming all Partnerships (as defined herein)
participate and the Blackstone Acquisition is consummated). 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 and pooling 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.
The Company also will guarantee the payment of certain rental obligations
with respect to the subleases of the limited-service hotels.
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 Host 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. No separate consideration
was paid to the Company for its agreement to be bound by these non-competition
agreements.
NON-COMPETITION AGREEMENT WITH MARRIOTT INTERNATIONAL REGARDING THE
HOTELS. Host and Marriott International entered into a non-competition
agreement in 1993 when Host and Marriott International became separate public
companies, as amended and restated in March 1998 (the "Hotel Non-Competition
Agreement"). The Company is currently bound by the Hotel Non-Competition
Agreement as a subsidiary of Host. In connection with the Distribution, the
Company will enter into an amendment to the Hotel Non-Competition Agreement
agreeing to be bound by the agreement once it is no longer a subsidiary of
Host. Under the Hotel Non-Competition Agreement, as supplemented by an
agreement to be entered into between Host REIT and the Company allocating
between them the exceptions to the non-competition provisions, the Company and
its subsidiaries generally will be 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. 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 limited-service 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; (iii)
contracting by the Company with a third party manager for operation of an
unlimited number of full-service hotels having the same brand name as one of
Host REIT's currently owned hotels (including the hotels to be acquired in the
Blackstone Acquisition), so long as the number of properties under such third
party management is not more than the greater of (a) five such properties
operated under a common name or (b) 12.5% of the system operated by such third
party under a common name; and (iv) franchising by the Company of an unlimited
number of limited-service hotel properties so long as the Company is not
franchisor for more than ten such properties under a common name.
12
<PAGE>
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
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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. The Company generally is permitted to act
as a manager with respect to full-service hotels, subject to certain
restrictions intended to preclude the Company from using the management
agreement relationship to take a disguised equity ownership position in full-
service hotels. The Company also generally is permitted to act as a lessee
with respect to full-service hotels owned (i) by any party under an
arrangement where the Company also manages the hotel or (ii) by a REIT,
whether or not the Company also manages the hotel, subject in each case to
certain restrictions intended to preclude the Company from using those leasing
arrangements to take significant disguised equity ownership positions in full-
service hotels.
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"). This
agreement, in general, provided that Marriott International, through its
subsidiary MSLS, would continue in its capacity as operator of the senior
living business previously conducted by Forum and, except as otherwise
provided in the agreement, Host and its subsidiaries would limit their
activities in the senior living area to owning, having equity interests in or
lending money or otherwise financing the Communities acquired from Marriott
International in the Forum Acquisition or subsequently acquired communities.
Under the agreement, Host and its subsidiaries were prohibited, 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. In addition, Host and its subsidiaries were 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 agreed to be bound by the Community Non-Competition Agreement. The
Company, as the owner of all of Host's senior living communities, is currently
bound by the Community Non-Competition Agreement. In connection with the
Distribution, the Company will enter into an amended restated Community Non-
Competition Agreement with Marriott International and Host REIT pursuant to
which the Company will agree to be bound by the Community Non-Competition
Agreement until June 17, 2010.
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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.
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 of remuneration in return
for the referral of Federal Health Care Program patients or the purchasing,
leasing,
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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 Common Stock
of the Company has been approved for listing, subject to official notice of
issuance, on the NYSE under the symbol "CLJ." Until the
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Common Stock is fully distributed 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, Marriott International, J.W. Marriott, Jr. and Richard E. Marriott;
provided that any such transaction with Marriott International that is not in
the ordinary course of business or with J.W. Marriott, Jr. or Richard E.
Marriott 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."
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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 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,
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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 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 be
required to 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 or sublease the hotels from Host REIT under their
existing brand names and 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
21
<PAGE>
December 29, 1998). In addition, Host's Board of Directors has determined that
the conditions to the Merger have been or likely will be satisfied or waived
(and, in particular, 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 recently likely to occur). The Board intends to declare the
Distribution and enter into the leases and subleases of hotels with
subsidiaries of the Company. Under such circumstances, however, the Merger and
the other transactions comprising the REIT Conversion still 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).
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, subject to the right of Host to cause the Company to sell
such 18% of the Common Stock to the Blackstone Entities at fair market value
if the Distribution is made prior to January 1, 1999 and the Blackstone
Acquisition is consummated at a later date.) See "Business and Properties--
Blackstone Acquisition."
22
<PAGE>
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 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................................................ 392,071 407,071
-------- --------
Total capitalization................................ $605,105 $620,105
======== ========
</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;
. 1998 acquisition 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) 35,022 35,022
(6,482)(B)
-------- -------- -------- --------
Total assets............. $694,419 $100,000 $794,419 $789,419
======== ======== ======== ========
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 capi-
tal....................... 386,627 15,000(B) 401,627 401,627
Retained earnings.......... 5,444 -- 5,444 5,444
-------- -------- -------- --------
Total stockholder's equi-
ty...................... 392,071 15,000 407,071 407,071
-------- -------- -------- --------
Total liabilities and
stockholder's equity.... $694,419 $100,000 $794,419 $789,419
======== ======== ======== ========
</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) $ .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 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....... 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.
. Acquisition from Host 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 and
subleasing 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 by Marriott
Properties.................. 212.0 50.6 59.2 159.2 35.0 36.8
Total Residence Inn
Properties.................. 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 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).
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. Amounts related to the Company's 25% interest in Swissotel Management
(USA) L.L.C. have not been included in the pro forma financial statements
because they are immaterial.
- --------
(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 Inter-
national........................ 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) 35,022 35,022
(6,482)(B)
-------- ------- -------- --------
Total assets................... $694,419 $82,000 $776,419 $771,419
======== ======= ======== ========
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 ac-
crued 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) 401,627 401,627
Retained earnings................ 5,444 -- 5,444 5,444
-------- ------- -------- --------
Total stockholder's equity..... 392,071 15,000 407,071 407,071
-------- ------- -------- --------
Total liabilities and stock-
holder's equity............... $694,419 $82,000 $776,419 $771,419
======== ======= ======== ========
</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.
. Acquisition from Host 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 and
subleasing 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 expressed
as a fixed dollar amount that
40
<PAGE>
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 by Marriott
Properties.................... 212.0 50.6 59.2 159.2 35.0 36.8
Total Residence Inn
Properties.................... 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. Amounts related to the Company's 25% interest in Swissotel Management
(USA) L.L.C. have not been included in the pro forma financial statements
because they are immaterial.
- --------
(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 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............ 213,034 317,440 349,934 -- 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 (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.
Revenues generated from the Communities totaled $57.8 million for the First
Three Quarters 1998. During the First Three Quarters 1998, average occupancy
of the Communities was 92%. The average per diem rate for the First Three
Quarters 1998 was $88. 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.
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.
Operating Profit. The Company's operating profit was $28.0 million (48% of
revenues) for the First Three Quarters 1998.
Corporate Expenses. Corporate expenses were $2.9 million (5.1% of revenues)
for the First Three Quarters 1998.
Interest Expense. Interest expense was $17.6 million for the First Three
Quarters 1998.
46
<PAGE>
Interest Income. Interest income was $1.1 million for the First Three
Quarters 1998, primarily reflecting interest earned on cash and certain escrow
accounts.
Net Income. Net income for the First Three Quarters 1998 was $5.0 million.
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. 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 Subleases for Limited-Service Hotels Managed by Marriott
International," "Description of the 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 (including the impact
on revenues of increases or decreases in revenue per available room
("REVPAR"), which represents the contribution of the average daily room rate
charged and the average occupancy achieved), 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). Because room revenues historically have represented a
significant portion of hotel revenues, increases or decreases in REVPAR are
likely to impact the Company's operating profit. 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. The hotel management agreements generally
provide for base management fees equal to 2% to 4% of gross revenues and
incentive management fees generally equal to 20% to 50% of hotel operating
profits (generally hotel sales less hotel expenses; hotel expenses include
property-level costs and expenses, management fees, taxes and insurance) over
a priority return (which is a percentage return on the owner's investment in
the property) 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 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 below do not include any costs of these programs because
they are charged to all hotels in the respective hotel system. The Communities
are subject to operating agreements that provide for the payment of base
management fees generally equal to 5% to 8% 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
48
<PAGE>
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.
<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............... $ -- $ -- $ 77,206 $104,999
Incentive management fees.......... -- -- 73,697 87,599
Rent to Host REIT:
Base rent(2)....................... -- -- 551,500 783,700
Percentage rent(2)................. -- -- 335,900 391,400
SENIOR LIVING COMMUNITIES:
Management fees to Marriott
International:
Base management fees............... 9,408 6,481 9,416 12,888
Incentive management fees.......... 0 0 0 0
</TABLE>
- --------
(1) Amounts assume all Partnerships participate and that the Blackstone
Acquisition is consummated. See "Pro Forma Financial Statements."
(2) 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. 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, 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 Three 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, average per diem increased 1% 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 year 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 hotel 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
approximately 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 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 partnership 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
53
<PAGE>
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 interest 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.
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 in 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 in September 2003 and September 2018, respectively. The loan agreement
contains cross-default provisions so that a default by one subsidiary can
result
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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.
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.
55
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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 Three 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 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.
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<PAGE>
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. However, Host has not received any oral or
written assurances that these third parties will be Year 2000 compliant on
time. 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's business (and, following the Distribution, the
Company's 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; (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
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<PAGE>
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. A majority of these respondents have
either given assurances of timely Year 2000 compliance or have identified the
necessary actions to be taken by them or Marriott International to achieve
timely Year 2000 compliance for their products.
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 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.
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<PAGE>
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.
59
<PAGE>
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 the Subleases for Limited-Service Hotels Managed by Marriott
International," "Description of the 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. The Company is also subject to certain restrictions relating to
leasing, operating and managing full-service hotels under its agreement with
Host. 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 agreements 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 hotel and senior living industries.
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 ensure 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 contracts
with Host REIT and a non-controlled subsidiary of Host REIT for a term of two
years (with one automatic renewal) to continue to provide asset management
services to Host REIT and such subsidiary for the Host REIT hotel portfolio
and certain hotel
63
<PAGE>
investments owned by the non-controlled subsidiary. 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 these contracts.
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 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"), which
recently has been growing at a rate of approximately 2% to 3%. 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. 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 REIT Conversion.
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 properties
expected to be leased by the Company from Host REIT 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 Courtyard by Marriott 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 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 an 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 an 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 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, subject to the right of Host to cause the
Company to sell such 18% of the Common Stock to the Blackstone Entities at
fair market value if the Distribution is made prior to January 1, 1999 and the
Blackstone Acquisition is consummated at a later date.
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 are as follows:
<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.
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%
</TABLE>
--------
(1) Number of units is based on the number of rooms.
During 1997, the average occupancy at the Communities was approximately 92%
and the average daily rate was $84. 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%, respectively, and the
average daily rate was $88 and $84, 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.
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.
75
<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 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
<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
76
<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.
77
<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 are qualified in their entirety by reference to the agreements, the
forms of which (other than the Distribution Agreement and the Corporate
Transitional Services Agreement) 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
will provide 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, Florida; (iv) the transfer to the Company of the 25% interest in
Swissotel Management (USA) L.L.C., the management company to be acquired in
the Blackstone Acquisition; (v) the return to the Company of those shares of
the Common Stock held for delivery to the Blackstone Entities in the
Blackstone Acquisition if that transaction does not occur, subject, however,
to the right of Host to cause the Company to sell such 18% of the Common Stock
of the Company to the Blackstone Entities at fair market value if the
Distribution is made prior to January 1, 1999 and the Blackstone Acquisition
is consummated at a later date; and (vi) certain other agreements governing
the relationship between the Company and Host following the Distribution. The
Company also will grant Host REIT a contingent right to purchase the Company's
interest in Swissotel Management (USA) L.L.C. at fair market value in the
event the tax laws are changed so that Host REIT could own such interest
without jeopardizing its status as a REIT.
Subject to certain exceptions, the Distribution Agreement will also provide
for, among other things, the assumption 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 Agreements. The Company will enter into two asset
management agreements (the "Asset Management Agreements"), one with Host REIT
and one with a non-controlled subsidiary, 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 or the non-controlled subsidiary, 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 approvals relating to the
operation of the Hotel required under any related loan documents; (v) advice
relating to any changes to the hotel management agreements; (vi) review of
market conditions and competition for each of the hotels; (vii) monitoring and
negotiating with
78
<PAGE>
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 calendar year for its consulting services
under the Asset Management Agreements, which will be allocated between Host
REIT and the non-controlled subsidiary. The Asset Management Agreements 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.
78--1
<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.
Host REIT Non-Competition Agreement. The Company and Host REIT will enter
into a non-competition agreement that limits the respective parties' future
business opportunities. See "Business and Properties--Non-Competition
Agreements."
79
<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 full-service 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
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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
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"--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 CPI 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 management agreement) and capital expenditures.
The consent of the Host REIT Lessor will be required for any capital
expenditures funded by the Lessee (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 after taking into
account depreciation). 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 (which shall be deemed to be book value
after taking into account depreciation). 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 and
proceeds from business interruption insurance. 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 1.4 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 (provided,
however, that if 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 preceding 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 or certain other related agreements between the parties or their
affiliates.
Assignment of the Hotel Lease. A Lessee will be permitted to 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 formula based on market recovery rates.
Certain Actions under the Hotel Leases. The full-service Hotel 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 payable for the immediately preceding Fiscal Year under all
Hotel Leases in the pool or 10% of the aggregate Rent payable 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 for each Accounting Period, in
certain events. These events include a decline in Crestline's tangible net
worth or consolidated debt coverage ratio below specified levels, a payment
default and certain other defaults under any Hotel Lease in the same pool or
any other full-service Hotel Lease with respect to which a guaranty by the
Company is in effect, a default under the lien or debt covenants under any
Hotel Leases in the same pool, 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, subject to certain conditions, the Pool Parent's guaranty and the
pooling agreement for that pool will terminate six months after the effective
date of 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. Following termination
of the Pool Parent's guaranty, the Host REIT Lessors in the applicable pool
will have the right to terminate the Hotel Leases in the pool without payment
of a termination fee, so long as the Hotel Leases are terminated within a year
and all Hotel Leases in the pool are terminated.
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
they lease 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 its leased
HPT Hotel (the "Subleases") to a subsidiary of the Company subject to the
terms of the applicable HPT Lease. The descriptions of the Subleases and the
HPT Leases 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 will 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, will not have the right to assign or sublet except
to certain affiliates of the Sublessees and concessionaires and will be liable
for only one-third of the cost of any environmental remediation.
The term of each Sublease will automatically be renewed for the
corresponding renewal term under the HPT Lease, unless either the HPT Lessee
(the "Sublessor") elects not to renew the HPT Lease, or the Sublessee elects
not to renew the Sublease at the expiration of the initial term; provided,
however, that neither party can elect to terminate fewer than all of the
Subleases in a particular pool of HPT Hotels (one for Courtyard by Marriott
hotels and one for Residence Inn hotels). Rent under the Sublease shall
consist of the Minimum Rent payable under the HPT Lease and percentage rent
payable to the Sublessor, which percentage rent shall be sufficient to cover
the Additional Rent due under the HPT Lease, with any excess being retained by
the Sublessor. The rent payable under the Subleases shall be guaranteed by the
Company, up to a maximum amount of $5,000,000, which amount will be allocated
between the two pools of HPT Hotels. In the event that changes in the federal
income tax laws allow the Sublessors, or subsidiaries or affiliates of the
Sublessors, to directly operate the hotels without jeopardizing Host REIT's
status as a REIT, the Sublessors will have the right to terminate all, but not
less than all, of the Subleases in a particular hotel pool (excluding
Subleases for any hotels not covered by any such tax law change) upon payment
of a termination fee to the Sublessees equal to the fair market value of the
Sublessees' leasehold interests in the remaining term of the Subleases using a
discount rate of 5%. Each Sublessor shall also have the right to terminate the
HPT Sublease upon a default by the Sublessee and the expiration of all
applicable grace or cure periods, in which event no termination fee shall be
payable; provided, however, that, in such event, if the Sublessor fails to
terminate the Sublease within twelve months and so long as the Company has
fully performed under its guarantees with respect to such Subleases, the
Sublessor shall pay to the Sublessee a termination fee equal to fair market
value of the Sublessee's leasehold interest in the remaining term of the
Sublease using a discount rate of 5%.
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
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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.
DESCRIPTION OF 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. Provided no default under the applicable Initial FF&E
Lease exists, each Lessee will have the option at the end of the applicable
term to purchase the Excess FF&E for a price equal to its fair market value.
Provided no default under the applicable Initial FF&E Lease exists, 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. Provided 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 Excess FF&E 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 on account of 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,
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 a new
lessee or purchaser of the hotel, (iii) to Host REIT Lessor or (iv) to a holder
of qualifying mortgage debt upon a default under such debt, provided that in
the case of (i) or (ii), the assignee, lessee or purchaser meets the financial
suitability standards for assignment of the applicable management agreement.
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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, subject to the
right of Host REIT to repurchase such interest under certain circumstances.
See "--Relationship with Host after the Distribution."
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 affecting the design,
character or appearance of the hotel, 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 part 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 or 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.
Restrictions on Sales and Other Transfers of Interests in Hotels. Each
franchise agreement generally prohibits any sale, assignment, encumbrance or
other transfer of interest of such franchise agreement or in the applicable
hotel (including a change in control of the franchisee) without Marriott
International's consent, except in accordance with the terms of such franchise
agreement. Each franchise agreement then provides that, in the event that the
franchisee has received an offer to purchase or lease the applicable hotel or
to purchase a controlling interest in the franchisee from an entity that is
not a competitor of Marriott International, then Marriott International may
elect to (i) consent to such proposed transaction or (ii) refuse to consent to
such proposed transaction (which refusal may be made by Marriott International
only if the proposed transferee is not financially capable or otherwise fails
to fulfill certain criteria set forth in the franchise agreement). However, in
the event that the franchisee has received an offer to purchase or lease the
applicable hotel or to purchase or merge with the franchisee or an affiliate
of the franchisee from an entity that is a competitor of Marriott
International, then Marriott International may elect to (i) purchase or lease
the applicable hotel on the terms of the proposed transaction, if such
proposed transaction is a sale or lease of the hotel, or purchase the hotel at
its fair market value, if such proposed transaction is a merger or purchase of
all or a portion of the stock or assets of the
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franchisee or an affiliate of the franchisee or (ii) terminate the franchise
agreement, in which event the franchisee would be obligated to pay certain
liquidated damages to Marriott International.
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 13 of 15 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 Hotel 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 full-service 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 Host REIT 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 Lessees are 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 certain 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 "Description of
Franchise Agreements with Marriott International." 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 management agreements for the Blackstone Hotels 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; 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 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 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. No separate consideration was paid
to the Company for its agreement to be bound by these non-competition
agreements. 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. In connection with the
Distribution, the Company will enter into an amendment to the Hotel Non-
Competition Agreement agreeing to be bound by the agreement once it is no
longer a subsidiary of Host. Under the Hotel Non-Competition Agreement, as
supplemented by an agreement to be entered into between Host REIT and the
Company allocating between them the exceptions to the non-competition
provisions, the Company
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and its subsidiaries generally will be 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. Certain activities are permitted, however, including: (i) the
operation by the Company of an unlimited number of limited-service 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 limited-service 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; (iii) contracting by the Company with a third
party manager for operation for an unlimited number of full-service hotels
having the same brand name as one of Host REIT's currently owned hotels
(including the hotels to be acquired in the Blackstone Acquisition), so long
as the number of properties under such third party management is not more than
the greater of (a) five such properties operated under a common name or (b)
12.5% of the system operated by such third party under a common name; and (iv)
franchising by the Company of an unlimited number of limited-service 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 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. The Company generally is
permitted to act as a manager with respect to full-service hotels, subject to
certain restrictions intended to preclude the Company from using the
management agreement relationship to take a disguised equity ownership
position in full-service hotels. The Company also generally is permitted to
act as a lessee with respect to full-service hotels owned (i) by any party
under an arrangement where the Company also manages the hotel or (ii) by a
REIT, whether or not the Company also manages the hotel, subject in each case
to certain restrictions intended to preclude the Company from using those
leasing arrangements to take significant disguised equity ownership positions
in full-service hotels.
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 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."
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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 for a term of ten years. This
agreement, in general, provided that Marriott International, through its
subsidiary MSLS, would continue in its capacity as operator of the senior
living business previously conducted by Forum and, except as otherwise
provided in the agreement, Host and its subsidiaries would limit their
activities in the senior living area to owning, having equity interests in or
lending money or otherwise financing the Communities acquired from Marriott
International in the Forum Acquisition or subsequently acquired communities.
Under the agreement, Host and its subsidiaries were prohibited, 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. In addition, Host and its subsidiaries were 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 agreed to be bound by the Community Non-Competition Agreement. The
Company, as the owner of all of Host's senior living communities, is currently
bound by the Community Non-Competition Agreement. In connection with the
Distribution, the Company will enter into an amended and restated Community
Non-Competition Agreement with Marriott International and Host REIT pursuant
to which the Company will agree to be bound by the Community Non-Competition
Agreement until June 17, 2010.
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. Mr. Wardinski also currently serves on the
board of Fairfax Opportunities Unlimited, a not-for-profit advocacy group
representing disabled individuals.
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 investment 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 are 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 additional annual 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 stockholders 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 (the "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 ("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 (HMC) Retirement and Savings
Plan to the Company Retirement and Savings Plan
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(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 ten 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, among
other things, that the Company will 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 REIT and a noncontrolled subsidiary of Host REIT asset management
services related to their 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) 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." 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 and any Interested Stockholder (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, Marriott International, J.W. Marriott, Jr.
and Richard E. Marriott; provided that any such transaction with Marriott
International that is not in the ordinary course of business or with J.W.
Marriott, Jr. or Richard E. Marriott 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 stockholders. 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 "Federal
Income Tax Consequences of the Distribution--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 "Federal Income Tax Consequences of the
Distribution--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 E & P 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.
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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
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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
$1.30 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 E&P, 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
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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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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., Washington, D.C.
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.
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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.
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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 retroactive adjustments arising
from such reviews.
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. There were no adjustments in the period presented related to
reimbursement arrangements. 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
retroactive adjustments arising from such reviews.
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> <C> <S>
3.1* -- Articles of Incorporation
3.2* -- Bylaws
3.3* -- Form of Articles of Amendment and Restatement of Articles of
Incorporation
3.4 -- Agreement and Articles of Merger between Crestline-Delaware
and CCC Merger Corporation
4.1* -- 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 Hotel Non-Competition
Agreement
10.13* -- Form of Working Capital Note and Agreement
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 Subsidiary of Host REIT
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <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
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>
- --------
*Previously filed.
#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 20, 1998.
Crestline Capital Corporation
/s/ James L. Francis
By: __________________________________
James L. Francis
Executive Vice President, Chief
Financial Officer and Treasurer
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 November 20, 1998
- ------------------------------------ Board, President
Bruce D. Wardinski and Chief
Executive Officer
(Principal
Executive Officer)
/s/ James L. Francis Executive Vice November 20, 1998
- ------------------------------------ President, Chief
James L. Francis Financial Officer
and Treasurer
(Principal
Financial Officer)
/s/ Larry K. Harvey Senior Vice November 20, 1998
- ------------------------------------ President and
Larry K. Harvey Corporate
Controller
(Principal
Accounting
Officer)
* Director November 20, 1998
- ------------------------------------
Christopher J. Nassetta
</TABLE>
- --------
* James L. Francis, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange Commission.
/s/ James L. Francis
- ------------------------------------
James L. Francis Attorney-in-Fact
II-4
<PAGE>
Exhibit 3.4
AGREEMENT AND ARTICLES OF MERGER
BETWEEN
CCC MERGER CORPORATION
(a Maryland Corporation)
AND
CRESTLINE CAPITAL CORPORATION
(a Delaware Corporation)
CCC Merger Corporation, a corporation duly organized and existing
under the laws of the State of Maryland ("Crestline-Maryland"), and Crestline
Capital Corporation, a corporation duly organized and existing under the laws of
the State of Delaware ("Crestline-Delaware"), do hereby certify that:
FIRST: Crestline-Maryland and Crestline-Delaware agree to merge.
SECOND: The name and place of incorporation of each party to this
Agreement and Articles of Merger are CCC Merger Corporation, a Maryland
corporation, and Crestline Capital Corporation, a Delaware corporation.
Crestline-Maryland shall be the successor and surviving corporation (the
"Successor Corporation") in the merger of Crestline-Delaware with and into
Crestline-Maryland (the "Merger").
THIRD: Crestline-Delaware was incorporated on May 14, 1997 under the
Delaware General Corporation Law under the name HMC Senior Communities, Inc.
Its name was changed on September 23, 1998 to Crestline Capital Corporation
pursuant to an amendment to its Certificate of Incorporation. Crestline-
Delaware has been registered and qualified to do business in Maryland since May
23, 1997.
FOURTH: Both Crestline-Maryland and Crestline-Delaware have their
principal offices in Montgomery County, Maryland. Crestline-Delaware does not
own an interest in land in Maryland.
FIFTH: The terms and conditions of the transaction set forth in this
Agreement and Articles of Merger were advised, authorized, and approved by each
corporation party to this Agreement and Articles of Merger in the manner and by
the vote required by its charter and the laws of its state of incorporation.
The manner of approval was as follows:
(a) The Board of Directors of Crestline-Delaware, by unanimous written
consent dated November 11, 1998, adopted a resolution approving this Agreement
and Articles of Merger and declaring it advisable. The sole stockholder of
Crestline-
<PAGE>
Delaware, by written consent dated November 11, 1998, approved this Agreement
and Articles of Merger.
(b) The Board of Directors of Crestline-Maryland, by unanimous written
consent dated November 11, 1998, adopted a resolution approving the Agreement
and Articles of Merger, declared the proposed Merger was advisable on
substantially the terms and conditions set forth or referred to in the
resolution and directed that the proposed Merger be submitted for consideration
by the sole stockholder of Crestline-Maryland. The sole stockholder of
Crestline-Maryland, by written consent dated November 11, 1998, approved the
Merger.
SIXTH: At the Effective Time (as defined below), Article II of the
charter of Crestline-Maryland is hereby amended to read in its entirety as set
forth below:
ARTICLE II
NAME
----
The name of the corporation (which is hereinafter called the
"Corporation") is Crestline Capital Corporation.
There are no other amendments to the charter of Crestline-Maryland in connection
with the Merger.
SEVENTH: The total number of shares of stock of all classes which
Crestline-Delaware has authority to issue is 100 shares of Common Stock, all of
which are without par value.
EIGHTH: (a) The total number of shares of stock of all classes which
Crestline-Maryland 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, and
10,000,000 of which initially are classified as Preferred Stock, par value $.01
per share.
(b) The aggregate par value of all classes of stock that Crestline-
Maryland has authority to issue is $850,000.
NINTH: The Merger shall become effective upon (i) the filing of this
Agreement and Articles of Merger with the Secretary of State of Delaware, in
accordance with the Delaware General Corporation Law and (ii) the acceptance for
record of this Agreement and Articles of Merger by the Maryland State Department
of Assessments and Taxation, in accordance with the Maryland General Corporation
Law (the "Effective Time").
TENTH: The terms and conditions of the Merger, the manner and basis
of carrying the same into effect and the manner and basis of converting or
exchanging
2
<PAGE>
issued stock of the merging corporations into different stock of a corporation,
or other consideration, and the treatment of any issued stock of the merging
corporations not to be converted or exchanged, are as follows:
(a) Each share of Crestline-Delaware Common Stock issued and
outstanding immediately prior to the Effective Time shall at the Effective Time
and without further act be converted into one validly issued, fully paid and
nonassessable share of Crestline-Maryland Common Stock.
(b) Promptly following the Effective Time, holders of certificates
representing shares of Common Stock of Crestline-Delaware before the Merger
shall, upon surrender or exchange of their existing stock certificates, be
entitled to receive new stock certificates of Crestline-Maryland Common Stock.
(c) Each share of Crestline-Maryland Common Stock issued and
outstanding immediately prior to the Effective Time shall at the Effective Time
remain issued and outstanding.
ELEVENTH: That the Successor Corporation agrees that it may be served
with process in the State of Delaware in any proceeding for enforcement of any
obligation of Crestline-Delaware as well as for enforcement of any obligation of
Successor Corporation arising from the Merger, including any suit or other
proceeding to enforce the right of any stockholders as determined in appraisal
proceedings pursuant to Section 262 of the Delaware General Corporation Law.
The Successor Corporation hereby irrevocably appoints the Delaware Secretary of
State as its agent to accept service of process in any such suit or other
proceedings. The address to which a copy of such process shall be mailed by the
Delaware Secretary of State is Crestline Capital Corporation, c/o Host Marriott
Corporation, 10400 Fernwood Road, Dep't 923, Bethesda, Maryland 20817 (Att'n:
Tracy M.J. Colden) until the Successor Corporation shall have hereafter
designated in writing to said Secretary of State a different address for such
purpose.
3
<PAGE>
IN WITNESS WHEREOF, Crestline-Maryland and Crestline-Delaware have
caused these presents to be signed in their respective names and on their
respective behalves by their respective executive vice presidents and witnessed
by their respective secretaries on November 12, 1998.
WITNESS: CCC MERGER CORPORATION
(a Maryland corporation)
/s/ TRACY M.J. COLDEN /s/ JAMES L. FRANCIS
- --------------------- ---------------------
Tracy M.J. Colden James L. Francis
Secretary Executive Vice President
WITNESS: CRESTLINE CAPITAL
CORPORATION
(a Delaware corporation)
/s/ TRACY M.J. COLDEN /s/ JAMES L. FRANCIS
- --------------------- ---------------------
Tracy M.J. Colden James L. Francis
Secretary Executive Vice President
4
<PAGE>
THE UNDERSIGNED, Executive Vice President of Crestline-Maryland, who
executed on behalf of said corporation the foregoing Agreement and Articles of
Merger of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said corporation the foregoing Agreement and Articles of Merger
to be the corporate act of said corporation and hereby certifies that to the
best of his knowledge, information and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
/s/ JAMES L. FRANCIS
- ---------------------
James L. Francis
Executive Vice President
THE UNDERSIGNED, Executive Vice President of Crestline-Delaware, who
executed on behalf of said corporation the foregoing Agreement and Articles of
Merger of which this certificate is made a part, hereby acknowledges in the name
and on behalf of said corporation the foregoing Agreement and Articles of Merger
to be the corporate act of said corporation and hereby certifies that to the
best of his knowledge, information and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
/s/ JAMES L. FRANCIS
- ---------------------
James L. Francis
Executive Vice President
5
<PAGE>
Exhibit 5.1
[LETTERHEAD OF HOGAN & HARTSON L.L.P.]
November 20, 1998
Board of Directors
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, MD 20817
Ladies and Gentlemen:
We are acting as counsel to Crestline Capital Corporation, a Maryland
corporation (the "Company"), in connection with its registration statement on
Form S-1, as amended (the "Registration Statement"), filed with the Securities
and Exchange Commission relating to the proposed distribution of up to
21,000,000 shares of the Company's common stock, par value $.01 per share (the
"Shares"), all of which Shares are to be distributed by Host Marriott
Corporation, a Delaware corporation and the Company's parent corporation
("Host"), to the stockholders of Host (the "Distribution"). This opinion letter
is furnished to you at your request to enable you to fulfill the requirements of
Item 601(b)(5) of Regulation S-K, 17 C.F.R. (S) 229.601(b)(5), in connection
with the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement, as amended.
2. The Articles of Incorporation of the Company, as filed with and
approved for record by the Maryland State Department of Assessments
and Taxation (the "SDAT") on November 9, 1998 and as certified by
the Secretary of the Company on the date hereof as then being
complete, accurate and in effect.
3. The Bylaws of the Company, as certified by the Secretary of the
Company on the date hereof as then being complete, accurate and in
effect.
4. An executed copy of the Agreement and Articles of Merger (the
"Merger Agreement") between Crestline Capital Corporation, a
<PAGE>
Board of Directors
Crestline Capital Corporation
November 20, 1998
Page 2
Delaware corporation ("Crestline-Delaware"), and the Company,
pursuant to which Crestline-Delaware was merged with and into the
Company, as filed with and accepted for record by the SDAT and as
filed with the Secretary of State of the State of Delaware on
November 12, 1998 and November 16, 1998, respectively, and as
certified by the Secretary of the Company on the date hereof as
then being complete, accurate and in effect.
5. Board resolutions relating to prior stock issuances and the stock
record books of the Company, as certified by the Secretary of the
Company on the date hereof as being complete, accurate and in
effect.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
accuracy and completeness of all documents submitted to us, and the authenticity
of all original documents and the conformity to original documents of all
documents submitted to us as certified, telecopied, photostatic, or reproduced
copies. This opinion letter is given, and all statements herein are made, in
the context of the foregoing.
This opinion letter is based as to matters of law solely on applicable
provisions of Maryland law. We express no opinion herein as to any other laws,
statutes, ordinances, rules or regulations or as to compliance with the
securities (or "blue sky") laws.
Based upon, subject to and limited by the foregoing, we are of the
opinion that following (i) the effectiveness of the Registration Statement, (ii)
the declaration by the Board of Directors of the Distribution, (iii) the
effectiveness of an amendment to the Articles of Incorporation of the Company to
effect an increase by way of a stock split in the number of outstanding shares
of Company common stock to reflect the number of Shares to be distributed in the
Distribution, and (iv) the payment of the Distribution, the Shares will be
validly issued, fully paid and nonassessable.
This opinion letter has been prepared for your use in connection with
the filing of the Registration Statement on the date of this opinion letter and
speaks as of the date hereof. We assume no obligation to advise you of any
changes in the foregoing subsequent to the delivery of this opinion letter.
<PAGE>
Board of Directors
Crestline Capital Corporation
November 20, 1998
Page 3
We hereby consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
EXHIBIT 10.1
LEASE AGREEMENT
DATED AS OF _____________, 199___
BY AND BETWEEN
-----------------------------------------
AS LANDLORD,
AND
------------------------------------------
AS TENANT
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE 1 DEFINITIONS.............................................................................................1
ARTICLE 2 COLLECTIVE LEASED PROPERTIES AND TERM..................................................................25
2.1 Leased Property........................................................................................25
2.2 Assignment and Assumption of Contracts; Initial Transaction............................................26
2.3 Condition of Leased Property...........................................................................27
2.4 Term...................................................................................................28
ARTICLE 3 RENT...................................................................................................28
3.1 Rent...................................................................................................28
3.1.1 Payment of Rent.............................................................................28
3.1.2 Revenues Computation........................................................................29
3.1.3 Confirmation of Percentage Rent.............................................................31
3.1.4 Annual Adjustments..........................................................................32
3.1.5 Additional Charges..........................................................................33
3.1.6 Adjustments to/Abatements of Rent...........................................................35
3.2 Late Payment of Rent...................................................................................37
3.3 Net Lease..............................................................................................38
3.4 No Termination, Abatement, Etc.........................................................................38
3.5 Lockbox Procedures.....................................................................................39
ARTICLE 4 USE OF THE LEASED PROPERTY.............................................................................41
4.1 Permitted Use..........................................................................................41
4.1.1 Primary Intended Use........................................................................41
4.1.2 Necessary Approvals.........................................................................41
4.1.3 Lawful Use, Etc.............................................................................41
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.2 Compliance with Legal and Insurance Requirements, Etc..................................................42
4.3 Environmental Matters..................................................................................42
4.3.1 Restriction on Use, Etc.....................................................................42
4.3.2 Environmental Indemnification of Tenant by Landlord.........................................43
4.3.3 Environmental Indemnification of Landlord by Tenant.........................................44
4.3.4 Survival....................................................................................44
4.4 FF&E Reserve...........................................................................................44
4.5 Working Capital........................................................................................45
ARTICLE 5 MAINTENANCE AND REPAIRS; SURRENDER.....................................................................46
5.1 Maintenance and Repair.................................................................................46
5.1.1 Tenant's Obligations........................................................................46
5.1.2 Landlord Obligations........................................................................47
5.2 Tenant's Personal Property.............................................................................48
5.3 Surrender..............................................................................................48
5.4 Encroachments, Restrictions, Etc.......................................................................50
5.5 Landlord to Grant Easements, Etc.......................................................................51
ARTICLE 6 CAPITAL EXPENDITURES, ETC..............................................................................51
6.1 Capital Expenditures...................................................................................51
6.2 [Intentionally Omitted]................................................................................52
6.3 Cooperation by Tenant..................................................................................52
6.4 Alterations............................................................................................52
6.5 Salvage................................................................................................53
ARTICLE 7 LIENS..................................................................................................53
7.1 Prohibition on Liens...................................................................................53
7.2 Landlord Lien..........................................................................................54
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
ARTICLE 8 PERMITTED CONTESTS.....................................................................................54
ARTICLE 9 INSURANCE AND INDEMNIFICATION..........................................................................55
9.1 General Insurance Requirements.........................................................................55
9.2 Responsibility for Insurance...........................................................................57
9.3 Replacement Cost.......................................................................................57
9.4 Waiver of Subrogation..................................................................................58
9.5 Form Satisfactory, Etc.................................................................................58
9.6 Blanket Policy.........................................................................................59
9.7 No Separate Insurance..................................................................................59
9.8 General Indemnification of Landlord by Tenant..........................................................59
9.9 General Indemnification of Tenant by Landlord..........................................................60
9.10 Independent Contractor................................................................................62
ARTICLE 10 CASUALTY..............................................................................................62
10.1 Insurance Proceeds....................................................................................62
10.2 Reconstruction in the Event of Casualty...............................................................63
10.3 Reconstruction in the Event of Damage or Destruction Not Covered by Insurance.........................64
10.4 Tenant's Property and Business Interruption Insurance.................................................65
10.5 Abatement of Rent.....................................................................................65
ARTICLE 11 CONDEMNATION..........................................................................................65
11.1 Total Condemnation, Etc...............................................................................65
11.2 Partial Condemnation..................................................................................66
11.3 Abatement of Rent.....................................................................................67
11.4 Allocation of Award...................................................................................67
ARTICLE 12 TENANT DEFAULTS; REMEDIES.............................................................................67
12.1 Event of Default......................................................................................67
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
12.2 Remedies..............................................................................................70
12.3 Waivers...............................................................................................72
12.4 Application of Funds..................................................................................72
12.5 Landlord's Right to Cure Tenant's Default.............................................................72
ARTICLE 13 HOLDING OVER..........................................................................................73
ARTICLE 14 LANDLORD NOTICE OBLIGATION; LANDLORD DEFAULT..........................................................73
14.1 Landlord Notice Obligation............................................................................73
14.2 Landlord Default......................................................................................73
ARTICLE 15 ARBITRATION...........................................................................................75
15.1 Arbitration...........................................................................................75
15.2 Arbitration Procedures................................................................................75
ARTICLE 16 SUBLETTING AND ASSIGNMENT.............................................................................76
16.1 Subletting and Assignment.............................................................................76
16.2 Required Sublease Provisions..........................................................................77
16.3 No Right of Tenant to Mortgage Its Leasehold..........................................................78
ARTICLE 17 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS........................................................78
17.1 Estoppel Certificates.................................................................................78
17.2 Financial Statements..................................................................................79
17.3 Annual Budget.........................................................................................80
ARTICLE 18 LANDLORD'S RIGHT TO INSPECT...........................................................................82
ARTICLE 19 APPRAISAL.............................................................................................82
ARTICLE 20 FACILITY MORTGAGES....................................................................................84
20.1 Landlord May Grant Liens..............................................................................84
20.2 Subordination of Lease................................................................................84
20.3 Notice to Mortgagee and Ground Landlord...............................................................87
</TABLE>
-iv-
<PAGE>
<TABLE>
<S> <C>
20.4 Transfer of Leased Property...........................................................................87
ARTICLE 21 ADDITIONAL COVENANTS OF TENANT........................................................................87
21.1 Conduct of Business...................................................................................87
21.2 Maintenance of Accounts and Records...................................................................88
21.3 Management of Leased Property.........................................................................88
21.3.1 Management Agreement, Consent and Assignment, Etc..........................................88
21.3.2 Reversion upon Termination.................................................................88
21.3.3 Abatement of Rent..........................................................................89
21.3.4 Consent Required for Certain Actions.......................................................89
21.3.5 Replacement of Manager.....................................................................90
21.4 Facility Mortgagee Agreement..........................................................................91
21.5 [Intentionally Omitted]...............................................................................92
21.6 Single Purpose Entity Covenants.......................................................................92
21.6.1 Separate Existence.........................................................................92
21.6.2 Independent Member.........................................................................92
21.6.3 Limitation on Indebtedness and Guarantees..................................................92
21.6.4 Distributions..............................................................................93
21.6.5 Single Purpose.............................................................................93
21.6.6 Certain Fundamental Changes................................................................93
21.6.7 Amendments to Organizational Documents.....................................................94
21.6.8 Qualified Affiliate........................................................................94
ARTICLE 22 LIMITATIONS...........................................................................................94
22.1 REIT Compliance.......................................................................................94
22.2 FF&E Limitation.......................................................................................95
22.3 Sublease Rent Limitation..............................................................................95
</TABLE>
-v-
<PAGE>
<TABLE>
<S> <C>
22.4 Sublease Tenant Limitation............................................................................95
22.5 Tenant Ownership Limitation...........................................................................95
ARTICLE 23 MISCELLANEOUS.........................................................................................95
23.1 No Waiver.............................................................................................96
23.2 Remedies Cumulative...................................................................................96
23.3 Severability..........................................................................................96
23.4 Acceptance of Surrender...............................................................................96
23.5 No Merger of Title....................................................................................96
23.6 Release of Landlord Following Conveyance..............................................................97
23.7 Quiet Enjoyment.......................................................................................97
23.8 Landlord's Consent....................................................................................97
23.9 Memorandum of Agreement...............................................................................98
23.10 Notices..............................................................................................98
23.11 Construction.........................................................................................99
23.12 Counterparts; Headings...............................................................................99
23.13 Governing Law; Jurisdiction.........................................................................100
23.14 No Broker...........................................................................................100
23.15 Related Agreements..................................................................................100
23.16 Legal Fees and Costs of Litigation..................................................................101
23.17 Force Majeure.......................................................................................101
23.18 Conflicts with Related Agreements...................................................................101
23.19 Operating Lease.....................................................................................101
ARTICLE 24 TERMINATION RIGHTS...................................................................................101
24.1 Landlord's Right to Terminate Lease upon Sale or Tax Law Change......................................101
24.2 Tenant's Right to Terminate Lease upon Certain Events................................................104
</TABLE>
-vi-
<PAGE>
<TABLE>
<S> <C>
24.3 Termination of Lease Following Notice of Termination of Guarantee....................................104
</TABLE>
-vii-
<PAGE>
EXHIBITS
--------
EXHIBIT A The Land
EXHIBIT B Preliminary Statement of Cash and Working Capital
EXHIBIT C EBITDA Performance Requirements
EXHIBIT D Guarantee
EXHIBIT E Working Capital Note
SCHEDULES
---------
Schedule 2.2(a)(vi) Excluded Leases
Schedule 3.1.1 Minimum Rent
Schedule 3.1.2 Revenue Percentage and Break Points
Schedule 3.1.3(b) Items of Gross Revenues
Schedule 3.1.5 Prepaid Expenses
Schedule 5.1.1 Existing Conditions Relating to Hazardous Materials
Schedule 17.2(f) Period Report Format
Schedule 20.3 Superior Mortgagee(s) and Superior Landlord(s)
Schedule 21.5 Form of Facility Mortgagee Agreement
Schedule 22.2 Provisions Relating to Excess FF&E
Schedule 22.2-A Form of Excess FF&E Lease
Schedule 22.2-B Market Leasing Factor
Schedule 23.8 Deemed Consents or Approvals
-viii-
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "LEASE") is entered into this _____ day of
___________, 1998, but effective for all purposes as of the Commencement Date,
by and between ____________________, a Delaware limited liability company,
having its principal office at 10400 Fernwood Road, Bethesda, Maryland 20817
("LANDLORD"), and ______________________, a Delaware limited liability company,
having its principal office at 10400 Fernwood Road, Bethesda, Maryland 20817
("TENANT").
WITNESSETH:
WHEREAS, Landlord owns [fee simple/leasehold] 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);
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; and
WHEREAS, as a condition to entering into this Lease, Landlord and Tenant
have entered into that "Consent and Assignment" (as that term is defined
hereafter), and have agreed that Tenant shall assume certain obligations of
Landlord under the "Assigned Agreements" (as that term is defined hereafter);
and
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 Lease, 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 Lease to designated "Articles," "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Lease, and (iv) the words "herein," "hereof," "hereunder" and other words
of similar import refer to this Lease as a whole and not to any particular
Article, Section or other subdivision.
1.1. "AAA" shall have the meaning given such term in Section 15.1.
1.2. "ACCOUNTING PERIOD" shall mean (i) for so long as the Management
Agreement is in effect each of the four (4) week accounting periods that are
used in Manager's accounting system, except that an Accounting Period may
occasionally contain five (5) weeks when necessary to conform Manager's
accounting system to the calendar and (ii) during any period when the Management
Agreement is not in effect, each calendar month during the Term.
<PAGE>
1.3. "ACCOUNTING PERIOD STATEMENT" shall have the meaning given such term
in Section 17.2(d).
1.4. "ADDITIONAL CHARGES" shall have the meaning given such term in
Section 3.1.5.
1.5. "ADVERSE PARTY" shall mean any Person (i) who is engaged in the Hotel
Business or is an Affiliate (other than an Affiliate who is a lessee under a
lease of a hotel from a real estate investment trust or other passive owner
which is managed on behalf of such Affiliate by an unaffiliated third party
manager) of any Person engaged in the Hotel Business, (ii) who is, or is an
Affiliate of, a Person who has been convicted of, or has pleaded nolo contendere
to, a felony, (iii) who does not have a Tangible Net Worth of at least (a) two
and one-half (2.5) times the amount of Guarantor's then maximum liability under
the Guarantee or (b) $50,000,000, whichever is greater, (iv) whose ownership of
a direct or indirect interest in Tenant would violate the Management Agreement
or (v) who, prior to the effective time of a Change in Control, fails to enter
into a written agreement reasonably satisfactory in form and substance to Host
REIT (1) to the effect that neither (A) such Person nor (B) any Person who would
be considered to constructively own either any interest in such Person or any
interest in Tenant owned directly or indirectly by such Person (as determined
under Section 318(a) of the Code, as modified by Section 856(d) of the Code)
(referred to as "CONSTRUCTIVE OWNERSHIP") would own (or have Constructive
Ownership of) any interest in Host REIT or Host O.P. that would cause either
Host REIT or Host O.P. to be considered to Constructively Own any interest in
either Tenant or any other tenant of either Host REIT or Host O.P. that is
described in Section 856(d)(2)(B) of the Code for purposes of applying either
Section 856(c) of the Code or Section 7704(d) of the Code, or any similar or
successor provisions thereto and (2) with respect to such other matters
reasonably required to protect the status of Host REIT as a "real estate
investment trust" for federal income tax purposes.
1.6. "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. Notwithstanding the foregoing, Manager shall
not be deemed an Affiliate of either Landlord or Tenant.
1.7. "ALTERATIONS" shall have the meaning given such term in Section 6.4.
1.8. "ANNUAL ADJUSTMENT" shall mean (a) with respect to Minimum Rent, the
product of (i) the amount of the Minimum Rent then in effect and (ii) ____
percent (____%) of any Percentage Increase in CPI; (b) with respect to each of
the Annual Room Revenues First Break Point, the Annual Food and Beverages Sales
First Break Point, and the Annual Other Income Break Point, the product of (i)
the amount of each such break point then in effect and (ii) the weighted average
resulting from the sum of _____ percent (_____%) of any Percentage Increase in
CPI plus ____ percent (___%) of any Percentage
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Increase in the Labor Index; and (c) with respect to the Annual Food and
Beverages Sales Second Break Point and the Annual Room Revenues Second Break
Point, the product of (i) the amount of each such break point then in effect and
(ii) _____% of the figure calculated in subsection (b)(ii) above.
1.9. "ANNUAL BUDGET" shall have the meaning given such term in Section
17.3.
1.10. "ANNUAL FOOD AND BEVERAGES SALES FIRST BREAK POINT" shall have the
meaning given such term in Section 3.1.2(b)(3).
1.11. "ANNUAL FOOD AND BEVERAGES SALES SECOND BREAK POINT" shall have the
meaning given such term in Section 3.1.2(b)(3).
1.12. "ANNUAL OPERATING STATEMENT" shall have the meaning given such term
in Section 17.2(c).
1.13. "ANNUAL OTHER INCOME BREAK POINT" shall have the meaning given such
term in Section 3.1.2(b)(3).
1.14. "ANNUAL ROOM REVENUES FIRST BREAK POINT" shall have the meaning
given such term in Section 3.1.2(b)(3).
1.15. "ANNUAL ROOM REVENUES SECOND BREAK POINT" shall have the meaning
given such term in Section 3.1.2(b)(3).
1.16. "APPLICABLE EXPECTED LIFE" shall have the meaning given such term in
paragraph (e)(i) of Schedule 22.2.
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1.17. "ASSET MANAGEMENT AGREEMENT" shall mean that certain agreement dated
as of even date herewith as amended or restated from time to time, between CCC
and Host O.P. relating to the provision of asset management services by CCC or a
wholly owned Subsidiary thereof with respect to the Facility and the hotel
facilities covered by the other Pool Leases or the Other Leases.
1.18. "ASSIGNED AGREEMENTS" shall have the meaning given such term in
Section 2.2(a).
1.19. "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).
1.20. "BANKRUPTCY CODE" shall have the meaning given such term in
Section 16.1.
1.21. "BUDGET SPREAD" shall have the meaning given such term in
Section 17.3.
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1.22. "BUSINESS DAY" shall mean any day other than Saturday, Sunday, or
any other day on which banking institutions in the State are authorized by law
or executive action to close.
1.23. "CAPITAL BUDGET" shall have the meaning given such term in
Section 17.3.
1.24. "CAPITAL EXPENDITURE" shall mean any expenditure for repairs,
alterations, improvements, renewals or replacements to the structure or exterior
facade of the Facility, or to the mechanical, electrical, heating, ventilating,
air conditioning, plumbing, or vertical transportation elements of the Facility
(together with all other repair and maintenance expenditures which are
classified as capital expenditures under GAAP), or, during any period when the
Management Agreement is in effect, to the extent in conflict with the foregoing,
"Capital Expenditure" as defined in the Management Agreement. To the extent
applicable as used herein, Capital Expenditure shall also refer to the actual
repair, alteration, improvement, renewal or replacement to which the Capital
Expenditure relates.
1.25. "CAPITAL PORTION" shall have the meaning given such term in
Section 17.3.
1.26. "CAPITALIZED INTEREST" shall mean interest that is capitalized and
is not counted as interest expense in accordance with GAAP.
1.27. "CAPITALIZED LEASE OBLIGATIONS" of any Person shall mean all rental
obligations which, under GAAP, are or will be required to be capitalized on the
books of such Person, in each case taken at the amount thereof accounted for as
indebtedness in accordance with such principles.
1.28. "CASE GOODS" shall mean furniture and furnishings used in the
Facility, including, without limitation, chairs, beds, chests, headboards,
desks, lamps, tables, television sets, mirrors, pictures, wall decorations and
similar items.
1.29. "CASUALTY" shall have the meaning given such term in Section 10.1.
1.30. "CCC" shall mean Crestline Capital Corporation, a Maryland
corporation.
1.31. "CCC CONSOLIDATED FINANCIAL STATEMENTS" shall mean for any Fiscal
Year or quarter thereof, consolidated statements of operations, retained
earnings and cash flow for such period and for the period from the beginning of
the respective Fiscal Year to the end of such period and the related balance
sheet as at the end of such period, together with the notes to any such
statement, all in such detail as may be required by the SEC with respect to
filings relating to periods within the Term made by Landlord, Host REIT or Host
O.P., and, after the first full Fiscal Year of Tenant, setting forth in
comparative form the corresponding figures for the corresponding period in the
preceding Fiscal Year, and prepared in accordance with GAAP and (in the case of
annual financial statements) audited by a "Big Five" firm of independent
certified public accountants or such other firm of independent certified public
accountants as may be reasonably approved by Landlord. CCC Consolidated
Financial Statements shall be prepared on the basis of the Fiscal Year or
quarter thereof, as applicable. Except as otherwise provided herein, the cost
for one (1) consolidated audit with respect to CCC per Fiscal Year and one (1)
quarterly unaudited
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statement with respect to CCC for each of the first three fiscal quarters in the
Fiscal Year as may be required by the SEC for regular reporting requirements of
Landlord, Host REIT or Host O.P. under the Securities and Exchange Act of 1934
shall be borne by Tenant. Except as otherwise provided herein, the cost of any
other audits or financial statements requested by Landlord shall be borne by
Landlord. CCC Consolidated Financial Statements shall be accepted by Landlord if
prepared on a combined basis along with all of the other hotels leased from
Landlord or any of its Affiliates by Tenant, OpCo, CCC, or a wholly owned
Subsidiary of Tenant, OpCo or CCC.
1.32. "CHANGE IN CONTROL" shall mean the (i) acquisition (after a
registered offering of shares or otherwise) by any Person, or two or more
Persons acting in concert, in a single or series of transactions (whether or not
related), of:
(a) with respect to Tenant or OpCo, beneficial ownership (within the
meaning of Rule 13d-3 of the SEC) of, or rights (including conversion rights),
options or warrants to acquire (whether absolute or conditional), all or any
portion of the outstanding voting or economic interests in Tenant or OpCo (other
than voting rights held by an Independent Member of Tenant as set forth in the
Limited Liability Company Operating Agreement of Tenant as in effect on the date
hereof); or
(b) with respect to CCC, beneficial ownership of, or rights
(including conversion rights), options or warrants to acquire, thirty-five
percent (35%) or more of the outstanding shares of voting stock of CCC;
or (ii) the merger or consolidation of Tenant, OpCo or CCC with or into any
other Person (other than any one or more Qualified Affiliates) if, in the case
of CCC, immediately following the effectiveness of such merger or consolidation,
more than thirty-five percent (35%) of the beneficial ownership of the
outstanding voting shares of the surviving entity of such merger or
consolidation (including for such purpose in both the numerator and the
denominator, shares of voting stock issuable upon the exercise of then
outstanding rights (including conversion rights), options or warrants) is held
by one or more Persons who were not holders of the outstanding voting shares of
CCC (or outstanding rights (including conversion rights), options or warrants to
acquire voting shares of CCC) immediately prior to the effectiveness of such
merger or consolidation; or
(iii) any one or a series of related sales or conveyances to any Person
(other than any one or more Qualified Affiliates) of all or substantially all of
the assets of Tenant, OpCo or CCC; or
(iv) a change in the majority of the board of directors or similar managing
body of CCC during the longer of (A) any twelve (12) month period and (B) the
period during which two consecutive annual meetings of the equity holders of CCC
at which directors or similar managers are elected have been held;
provided, however, that the acquisition by any one or more Qualified Affiliates
of beneficial ownership of, or rights (including conversion rights),options or
warrants to acquire, all or any portion of Tenant or OpCo shall not be a "Change
in Control" hereunder.
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1.33. "CLAIMS" shall have the meaning given such term in Article 8.
1.34. "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.
1.35. "COMMENCEMENT DATE" shall mean January 1, 1999.
1.36. "COMPARABLE LEASE" shall have the meaning given such term in Section
24.1(b).
1.37. "CONDEMNATION" shall mean, with respect to the Leased Property, (a)
the exercise of any governmental power with respect to all or part of the Leased
Property, whether by legal proceedings or otherwise, by a Condemnor of its power
of condemnation, (b) a voluntary sale or transfer of all or part 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.
1.38. "CONDEMNOR" shall mean any public or quasi-public authority, or
private corporation or individual, having the power of Condemnation.
1.39. "CONSENT AND ASSIGNMENT" shall have the meaning given such term in
Section 21.3.1.
1.40. "CONSOLIDATED COVERAGE RATIO" of any Person shall mean, for any
period, the ratio of (x) Consolidated EBITDA of such Person for such period to
(y) the sum of (i) Consolidated Interest Expense of such Person for such period,
and (ii) the amount of all scheduled principal amortization payments (other than
balloon payments at maturity of such Indebtedness) on all Indebtedness of such
Person and its Subsidiaries made during such period.
1.41. "CONSOLIDATED EBITDA" of any Person shall mean, for any period, the
Consolidated Net Income of such Person for such period adjusted (A) to add
thereto (to the extent deducted in determining Consolidated Net Income for such
period), without duplication, the sum of the amounts for such period of (i)
Consolidated Interest Expense, (ii) provisions for taxes based on income, (iii)
depreciation and amortization expense (provided that the depreciation and
amortization expense of a non-wholly owned Subsidiary shall be included only to
the extent of the equity interest of such Person in such non-wholly owned
Subsidiary), (iv) any other noncash items reducing Consolidated Net Income of
such Person for such period (except to the extent that such noncash items relate
to the write-off or write-down of any item included in Consolidated Net Income
in a prior period) and (v) any cash receipts of such Person or a Subsidiary
thereof during such period that represent items included in Consolidated Net
Income of such Person for a prior period which were excluded from Consolidated
EBITDA in such prior period by virtue of clause (B) of this definition, and (B)
to subtract therefrom, without duplication, the sum of the
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amounts for such period of (i) all noncash items increasing Consolidated Net
Income of such Person for such period and (ii) any cash expenditures of such
Person and its Subsidiaries during such period to the extent that such cash
expenditures (x) did not reduce Consolidated Net Income of such Person for such
period and (y) were applied against reserves or accruals that constituted
noncash items reducing Consolidated Net Income of such Person when reserved or
accrued for in a prior period; provided, that Consolidated EBITDA shall be
determined without giving effect to any extraordinary gains or losses (including
any taxes attributable to any such extraordinary gains or losses) or gains or
losses from sales of assets other than from sales of inventory in the ordinary
course of business.
1.42. "CONSOLIDATED INTEREST EXPENSE" of any Person shall mean, for any
period, the total consolidated cash interest expense of such Person and its
Subsidiaries for such period (calculated without regard to any limitations on
the payment thereof) plus, without duplication, that portion of the Capitalized
Lease Obligations of such Person and its Subsidiaries representing the interest
factor for such period, but excluding (i) any Capitalized Lease Obligations that
relate to leases of FF&E, (ii) the interest factor (if any) in such period under
[the Initial FF&E Lease,] any Excess FF&E Leases or this Lease with respect to
the FF&E subject to this Lease, and (iii) the Working Capital Note.
Notwithstanding anything to the contrary contained in the requirements of GAAP,
the amount of Capitalized Interest incurred during any period shall be added as
a component of Consolidated Interest Expense.
1.43. "CONSOLIDATED NET INCOME" of any Person shall mean, for any period,
the net income (or loss) of such Person and its Subsidiaries for such period,
determined on a consolidated basis; provided that (i) net income (or loss) of
(x) any other Person that is accounted for by such specified Person by the
equity method of accounting or (y) any Subsidiary of such Person that is
restricted from declaring or paying dividends or other distributions, directly
or indirectly, by operation of the terms of its charter, any applicable
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation or otherwise shall (in each case) be included only to the extent of
the amount of cash dividends or distributions paid to the specified Person or a
wholly owned Subsidiary of such Person, (ii) the net income (or loss) of any
other Person acquired by such specified Person or a Subsidiary of such Person in
a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iii) to the extent Consolidated Net Income
reflects amounts attributable to minority interests in Subsidiaries that are not
wholly owned Subsidiaries of such Person, Consolidated Net Income shall be
reduced by the amounts attributable to such minority interests and (iv) any
income, rental credit or expense associated with leases of Excess FF&E by Tenant
or any Other Tenant shall not be taken into account in determining Consolidated
Net Income.
1.44. "CONSTRUCTIVE OWNERSHIP" shall have the meaning given such term in
Section 1.5.
1.45. "CONSUMER PRICE INDEX" shall mean the "Consumer Price Index"
published by the Bureau of Labor Statistics of the United States Department of
Labor, All Items for Urban Wage Earners and Clerical Workers (1982-1984 = 100).
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1.46. "CONTINUING OBLIGATIONS" shall have the meaning given such term in
Section 21.3.1.
1.47. "CONTRACTOR" shall have the meaning given such term in Section 9.10.
1.48. "CONTRACTOR'S INSURANCE CERTIFICATE" shall have the meaning given
such term in Section 9.10.
1.49. "CONTRACTOR'S LIABILITY COVERAGE" shall have the meaning given such
term in Section 9.10 .
1.50. "CUMULATIVE PORTION" shall have the meaning given such term in
Section 3.1.2(b)(1).
1.51. "DEFAULT" shall mean any event, act or condition that with the
giving of notice or lapse of time, or both, would constitute an Event of
Default.
1.52. "EMERGENCY SITUATIONS" shall mean fire, any other Casualty, or any
other events, circumstances or conditions that threaten the safety or physical
well-being of the Facility's guests or employees or that involve the risk of
material property damage or loss.
1.53. "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.
1.54. "ENVIRONMENT" shall mean soil, surface water, groundwater, land,
stream, sediment, surface or subsurface strata, ambient air, physical structures
and equipment, and where radon gas is present, the interior air of buildings.
1.55. "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.
1.56. "ENVIRONMENTAL LIABILITIES" shall have the meaning given such term
in Section 4.3.2.
1.57. "ENVIRONMENTAL NOTICE" shall have the meaning given such term in
Section 4.3.1.
1.58. "ENVIRONMENTAL OBLIGATION" shall have the meaning given such term in
Section 4.3.1.
1.59. "EVENT OF DEFAULT" shall have the meaning given such term in
Section 12.1.
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1.60. "EXCESS FF&E" shall have the meaning given such term in paragraph
(b) of Schedule 22.2.
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1.61. "EXCESS FF&E COST" shall have the meaning given such term in
paragraph (e) of Schedule 22.2.
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1.62. "EXCESS FF&E LEASE" shall have the meaning given such term in
paragraph (b) of Schedule 22.2.
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1.63. "EXCESS FF&E LEASEHOLD INTEREST" shall have the meaning given such
term in paragraph (h) of Schedule 22.2.
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1.64. "EXCESS FF&E LEASEHOLD INTEREST TRANSFER" shall have the meaning
given such term in paragraph (h) of Schedule 22.2.
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1.65. "EXCESS FF&E LEASEHOLD INTEREST TRANSFER PRICE" shall have the
meaning given such term in paragraph (h) of Schedule 22.2.
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1.66. "EXCESS FF&E NOTICE" shall have the meaning given such term in
paragraph (b) of Schedule 22.2.
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1.67. "EXCESS FF&E REIMBURSEMENT AMOUNT" shall have the meaning given
such term in paragraph (i) of Schedule 22.2.
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1.68. "EXCESS FF&E REPURCHASE" shall have the meaning given such term in
paragraph (g) of Schedule 22.2.
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1.69. "EXCESS FF&E REPURCHASE PRICE" shall have the meaning given such
term in paragraph (g) of Schedule 22.2.
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1.70. "EXCESS FF&E VALUE" shall have the meaning given such term in
paragraph (e) of Schedule 22.2.
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1.71. "EXISTING CONDITION" shall mean any physical condition existing at
the Leased Property as of the Commencement Date.
1.72. "FACILITY" shall have the meaning given such term in Section 2.1(b).
1.73. "FACILITY MORTGAGE" shall mean, with respect to the Leased Property,
any Lien placed by Landlord upon the Leased Property in accordance with Article
20.
1.74. "FACILITY MORTGAGEE" shall mean the holder of a Facility Mortgage.
1.75. "FACILITY MORTGAGEE AGREEMENT" shall have the meaning given such
term in Section 21.4.
1.76. "FACILITY TRADE NAME" shall mean, with respect to the Facility, any
name under which Tenant has conducted the business of operating the Facility at
any time during the Term.
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1.77. "FAIR MARKET RENTAL" shall mean, with respect to the Leased Property,
the rental which a willing tenant not compelled to rent would pay a willing
landlord not compelled to lease for the use and occupancy of the Leased Property
on the terms and conditions of this Lease for the term in question, assuming
Tenant is not in default hereunder and determined by agreement between Landlord
and Tenant or, failing agreement, in accordance with the appraisal procedures
set forth in Article 19.
1.78. "FAIR MARKET VALUE" shall mean, with respect to the leasehold estate
hereunder, the price that a willing transferee not compelled to accept a
transfer would pay a willing transferor not compelled to transfer for the
leasehold estate hereunder (without taking into account any reduction in value
resulting from any indebtedness to which the Leased Property is subject),
determined by agreement between Landlord and Tenant or, failing agreement, in
accordance with the appraisal procedures set forth in Article 19.
1.79. "FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case
Goods, signage and equipment at the Facility (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 Facility,
from time to time, as well as similar systems based on other technologies which
may be developed in the future), or, during any period when the Management
Agreement is in effect, to the extent in conflict with the foregoing, "FF&E" as
defined in the Management Agreement; provided, however, that FF&E shall not
include Tenant's Personal Property.
1.80. "FF&E ADJUSTMENT" shall have the meaning given such term in paragraph
(e) of Schedule 22.2.
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1.81. "FF&E ESTIMATE" shall have the meaning given such term in Section
17.3(c).
1.82. "FF&E LIMITATION" shall have the meaning given such term in paragraph
(a) of Schedule 22.2.
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1.83. "FF&E RESERVE" shall have the meaning given such term in Section 4.4.
1.84. "FINANCIAL OFFICER'S CERTIFICATE" shall mean, as to any Person, a
certificate of the chief financial officer, controller, chief accounting officer
or treasurer of such Person (or, in the case of any financial statements other
than the CCC Consolidated Financial Statements, the designee of any such
officer, duly authorized (including by providing Notice of such designee to the
other party)), 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
fairly present, in all material respects, the financial condition of such Person
as of the dates thereof, and the results of its operations for the periods
covered thereby (except that, in the case of financial statements delivered
pursuant to Sections 17.2(a) and 17.2(c), the certificate shall state the extent
to which such financial statements are not in accordance with GAAP), (b) that
such officer has no knowledge of any monetary Default or Event of Default
hereunder, and (c) the then-current Minimum Net Worth,
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Consolidated Coverage Ratio, and the maximum amount of liability of the
Guarantors under the Guarantee.
1.85. "FIRST CLASS OPERATING 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 personal property, etc.) of comparable full-service hotels in the
hotel system of which the Facility is a part (e.g., the Marriott hotel system or
the Ritz-Carlton hotel system), as such operational and physical standards may
change from time to time (provided, however, that First Class Operating
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 of the Management Agreement) full-
service hotels in other full-service hotel systems), or, during any period when
the Management Agreement is in effect, to the extent in conflict with the
foregoing, the operating standards required pursuant to the Management
Agreement.
1.86. "FIRST TIER FOOD AND BEVERAGES SALES PERCENTAGE" shall have the
meaning given such term in Section 3.1.2(b)(2).
1.87. "FIRST TIER OTHER INCOME PERCENTAGE" shall have the meaning given
such term in Section 3.1.2(b)(2).
1.88. "FIRST TIER ROOM REVENUE PERCENTAGE" shall have the meaning given
such term in Section 3.1.2(b)(2).
1.89. "FIRST YEAR FF&E ADJUSTMENT" shall have the meaning given such term in
paragraph (e)(i) of Schedule 22.2.
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1.90. "FISCAL YEAR" shall mean the fiscal year used by Manager, which now
ends at midnight on the Friday closest to December 31 in each calendar year and
begins on the Saturday immediately following said Friday. If the fiscal year
used by Manager is changed in the future by Manager or if the Management
Agreement is no longer in effect, appropriate adjustment to this Lease's
reporting and accounting procedures shall be made; provided, however, that no
such change or adjustment shall alter the Term of this Lease, or in any way
reduce the amount of Rent or other payments due to or by Landlord hereunder, or
otherwise adversely affect Landlord's or Tenant's rights or obligations under
this Lease.
1.91. "FIXED ASSET SUPPLIES" shall mean supply items included within
"Property and Equipment" under the Uniform System, including linen, china,
glassware, silver, uniforms and similar items.
1.92. "FIXTURES" shall have the meaning given such term in Section 2.1(d).
1.93. "FOOD AND BEVERAGES SALES" shall mean (a) gross revenue from the sale
of food and beverages that are prepared at the Facility and sold or delivered on
or off the Facility by or on behalf of Tenant (including, without limitation,
revenues from mini-bars), whether for cash or for credit, including in respect
of guest rooms, banquet rooms, meeting rooms and other similar rooms and (b)
gross revenue from the rental of banquet, meeting
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and other similar rooms. Food and Beverages Sales shall be determined in a
manner consistent with the Uniform System. Food and Beverages Sales shall not
include the following:
(i) sales by Tenant's subtenants, licensees and concessionaires,
the rent, license fees or concession payments from which are included in Gross
Revenues, and any rent, license fees, concession payments or other amounts paid
to Tenant by any such subtenants, licensees and concessionaires;
(ii) vending machine sales;
(iii) any gratuities or service charges added to a customer's bill or
statement in lieu of a gratuity that is paid directly to Facility employees, to
the extent actually paid to such employees;
(iv) credits, rebates or refunds; or
(v) sales taxes or taxes of any other kind imposed on the sale of
food or beverages.
1.94. "GAAP" shall mean generally accepted accounting principles
consistently applied.
1.95. "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 unit of the United States, the State, 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.
1.96. "GROSS REVENUES" shall mean Room Revenues, Food and Beverages Sales,
and Other Income, and all revenues and receipts of every kind derived from
operating the Facility and parts thereof, including, but not limited to:
(i) revenues and receipts from both cash and credit transactions,
before commissions and discounts for prompt or cash payments, from rental of
stores, offices, meeting, exhibit or sales space of every kind;
(ii) license, lease and concession fees and rentals (not including
gross receipts of the licensees, lessees and concessionaires under licenses,
leases and concessionaire agreements);
(iii) revenues and receipts from vending machines;
(iv) health club membership fees;
(v) sales of merchandise (other than proceeds from the sale of FF&E
no longer necessary to the operation of the Facility);
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(vi) service charges, to the extent not paid to the employees at the
Facility as, or in lieu of, gratuities; and
(vii) proceeds, if any, from business interruption or other loss of
income insurance;
provided, however, that Gross Revenues shall not include the following:
(i) banquet service charges to the extent actually paid to
employees;
(ii) gratuities to Facility employees to the extent actually paid to
employees;
(iii) 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;
(iv) insurance proceeds (other than proceeds from business
interruption or other loss of income insurance);
(v) condemnation proceeds (other than for a temporary taking);
(vi) any proceeds from any sale of the Facility or from the
refinancing of any debt encumbering the Facility;
(vii) proceeds from the disposition of FF&E no longer necessary for
the operation of the Facility; or
(viii) interest which accrues on amounts deposited in either the FF&E
Reserve or any escrow accounts that are established for real estate and personal
property taxes, levies, assessments and similar charges in accordance with the
terms of the Management Agreement.
1.97. "GUARANTEE" shall have the meaning given such term in Section 21.3.4
(A).
1.98. "GUARANTORS" shall have the meaning given such term in Section
21.3.4(A).
1.99. "HAZARDOUS MATERIALS" shall mean any substance or material containing
one or more of any of the following: "hazardous material," "hazardous waste,"
"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 cleanup, 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
Facility.
1.100. "HOST O.P." shall mean Host Marriott, L.P., a Delaware limited
partnership and the operating partnership of Host REIT.
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1.101. "HOST REIT" shall mean either Host Marriott Corporation, a Delaware
corporation, or Host Marriott Corporation, a Maryland corporation, which is
intended to be the successor by merger to Host Marriott Corporation, a Delaware
corporation, or their successors or assigns.
1.102. "HOTEL BUSINESS" means the business of owning, developing,
constructing, leasing, operating, managing or franchising, either directly or
through a contractual arrangement with a third party, hotels having, in the
aggregate, five thousand (5,000) or more rooms, but excluding hotels leased, as
a lessee, from a real estate investment trust or other passive owner and
operated on behalf of such lessee by an unaffiliated third party manager.
1.103. "IMPOSITIONS" shall mean, collectively, all taxes (including, without
limitation, 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 Tenant or the business conducted upon the Leased Property) not
included in Landlord Obligations, 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
not included in Landlord Obligations, in each case whether general or special,
ordinary or extraordinary, 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 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, any part thereof, 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.
1.104. "INDEBTEDNESS" shall mean all obligations, contingent or otherwise,
which in accordance with GAAP should be reflected on the obligor's balance sheet
as debt.
1.105. "INDEPENDENT MEMBER" means a Person who is not, and has not within
the past five (5) years been, (i) an officer, director, employee, partner,
member, manager, stockholder or beneficial-interest holder of Tenant; (ii) an
officer, director, employee, partner, member, beneficial-interest holder, or
stockholder of any "Affiliate" (as defined below) of Tenant; or (iii) a spouse,
parent, sibling, or child of any Person described in (i) or (ii) of this
section; provided, however, that a Person shall not be deemed to be a director
or member of an Affiliate solely by reason of such Person being a director,
manager, or member of a single-purpose entity that would otherwise be deemed to
be an Affiliate because they are under common control. For the purpose of this
definition alone, "Affiliate" means any Person (x) which owns beneficially,
directly or indirectly, more than ten percent (10%) of the outstanding equity
interest in Tenant or which is otherwise in control of Tenant; (y) of which more
than ten percent (10%) of the outstanding voting securities are owned
beneficially, directly or indirectly, by any Person described in clause (x)
above; or (z) which is controlled by, or under common control with, any Person
or entity described in
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clause (x) above; the terms "control" and "controlled by" shall have the
meanings assigned to them in Rule 405 under the Securities Act of 1933.
1.106. ["INITIAL FF&E LEASE" shall have the meaning given such term in
paragraph (a) of Schedule 22.2.]
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1.107. "INSURANCE REQUIREMENTS" shall mean all terms of any insurance policy
required by this Lease and all requirements of the issuer of any such policy.
1.108. "INTANGIBLE ASSET" shall mean, with respect to any Person, a
long-lived asset that is useful in the operations of such Person, that is not
directly used in revenue generation and that is not held for sale, and is
without physical qualities, including but not limited to patents, copyrights and
goodwill, but excluding capitalized costs associated with the acquisition of
brand names, franchises and trademarks, franchise agreements and management
agreements.
1.109. "INVENTORIES" shall have the definition given it in the Uniform
System, 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.
1.110. "LABOR INDEX" shall mean Employment Cost Index, Compensation, Private
Industry, Services Industries, Not Seasonally Adjusted as published by the U.S.
Department of Labor, Bureau of Labor Statistics.
1.111. "LAND" shall have the meaning given such term in Section 2.1(a).
1.112. "LANDLORD" shall have the meaning given such term in the preamble to
this Lease.
1.113. "LANDLORD DEFAULT" shall have the meaning given such term in Section
14.2.
1.114. "LANDLORD INDEMNITEE" shall have the meaning set forth in Section
4.3.3.
1.115. "LANDLORD LIEN" shall have the meaning set forth in Section 7.2.
1.116. "LANDLORD OBLIGATIONS" shall mean (i) Real Estate Taxes, (ii) any
tax based on net income imposed on Landlord, (iii) any net revenue tax of
Landlord, (iv) any transfer fee or other tax imposed with respect to the sale,
exchange, financing, mortgaging, or other disposition by Landlord of the Leased
Property or the proceeds thereof, (v) any sales, use, gross receipts or other
similar tax relating to the leasing of the FF&E by Landlord to Tenant pursuant
to this Lease, (vi) any single business tax, gross receipts tax, transaction,
privilege, rent or similar taxes as the same relate to or are imposed upon
Landlord, including, without limitation, any tax imposed on Landlord as a result
of this Lease, (vii) 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, (viii) any taxes or fees imposed on Landlord that are
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a result of Landlord not being considered a "United States person" as defined in
Section 7701(a)(30) of the Code, (ix) any taxes or fees that are enacted or
adopted as a substitute for any tax that would not have been payable by Tenant
pursuant to the terms of this Lease, (x) any taxes, fees or amounts required to
be paid to discharge Liens (a) imposed as a result of a breach of covenant or
representation by Landlord in any agreement with Tenant governing Landlord's
conduct or operation or (b) as a result of the gross negligence or willful
misconduct of Landlord in connection with its ownership of the Leased Property
or the performance of its obligations hereunder, or (c) securing any
indebtedness or obligations of Landlord, or (d) imposed in connection with any
other Landlord Obligations, (xi) any sales, use, occupancy or other similar tax
imposed in connection with payments made pursuant to this Lease, (xii) all rent
and other sums due from Landlord pursuant to any ground lease affecting the
Leased Property or any portion thereof, (xiii) all premiums for insurance for
which Landlord is responsible pursuant to Article 9 hereof, (xiv) all amounts
payable by Landlord under or pursuant to the Management Agreement with respect
to the Retained Obligations and/or the Continuing Obligations, (xv) any interest
and/or penalties incurred by Tenant as a result of Landlord's failure to forward
any invoices, assessment notices or other bills relating to Impositions to
Tenant, and (xvi) equipment rental costs that are treated as a "Deduction" under
the Management Agreement. "Landlord Obligations" shall not include any sales,
use, gross receipts, occupancy, single business, transaction, privilege, rent,
ad valorem or other tax not specifically enumerated herein.
1.117. "LEASE YEAR" shall mean any consecutive annual period starting on the
Commencement Date and ending on the day prior to the anniversary thereof;
provided that if the Commencement Date is not the first (1st) day of a calendar
month, then the first (1st) Lease Year shall end on the last day of the calendar
month in which the Commencement Date occurs.
1.118. "LEASED PROPERTY" shall have the meaning given such term in Article
2.
1.119. "LEGAL REQUIREMENTS" shall mean all applicable federal, state,
county, municipal and other governmental statutes, laws, rules, orders,
regulations, and ordinances, and all applicable judicial, administrative and
regulatory judgments, decrees and injunctions, affecting Tenant or 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, certificates of need, authorizations and regulations
necessary to operate the Leased Property for its Primary Intended Use and (b)
all covenants, agreements, restrictions and encumbrances contained in any
instruments either of record or actually known to Tenant (other than
encumbrances hereafter created by Landlord without the consent of Tenant) at any
time in force 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 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 other than those set forth in Article 22
hereof.
1.120. "LENDING INSTITUTION" shall mean any insurance company, federally
insured commercial or savings bank, national banking association, savings and
loan
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association, investment banking firm, employees' welfare, pension or retirement
fund or system, syndicated lenders' group, commercial finance company, leasing
company, 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
Tangible Net Worth of at least $100,000,000.
1.121. "LICENSES" shall have the meaning given such term in Section 5.3(d)
(i).
1.122. "LIEN" shall mean any mortgage, security interest, pledge, collateral
assignment, or other encumbrance, lien or charge of any kind (including, without
limitation, any easements, covenants, conditions and restrictions), or any
transfer of any property or assets for the purpose of subjecting the same to an
encumbrance, lien or charge securing the payment of Indebtedness or performance
of any other obligation in priority to payment of any Person's general
creditors.
1.123. "LOCKBOX ACCOUNT" shall have the meaning given such term in Section
3.5(b).
1.124. "LOCKBOX NOTICE DATE" shall have the meaning given such term in
Section 3.5(a).
1.125. "LOCKBOX PERIOD" shall have the meaning given such term in Section
3.5(a).
1.126. "MAJOR CAPITAL EXPENDITURE" shall mean (a) any Capital Expenditure
expected to result in a significant change in the use of any portion of the
Facility intended to materially alter or enhance an existing use (including, by
way of example and not limitation, the conversion of a typical hotel dining
facility to a nationally-known, premium-quality restaurant); (b) any and all
Capital Expenditures with respect to one or more new revenue-generating
buildings, rooms, facilities, amenities, or structures constituting any portion
of the Facility (including, by way of example and not limitation, the
construction of a new wing or new story), or the renovation, material expansion,
construction, or conversion of existing improvements of the Facility in order to
increase the room capacity of the Facility, or to provide a functionally new
facility needed to provide services not previously offered; or (c) any and all
Capital Expenditures which, individually or in a series of related expenditures,
have a total cost of completion in excess of the lesser of (i) seven and one-
half percent (7.5%) of Gross Revenues for the Fiscal Year ending immediately
prior to such expenditure, or (ii) $5,000,000. Notwithstanding the foregoing, in
no event shall Major Capital Expenditures include any room, lobby, or ballroom
refurbishments in the ordinary course or any other Routine Capital Expenditures.
1.127. "MANAGEMENT AGREEMENT" shall mean the Management Agreement described
in Section 21.3.1.
1.128. "MANAGER" shall have the meaning given such term in Section 21.3.1.
1.129. "MARKET LEASING FACTOR" shall have the meaning given such term in
paragraph (e) of Schedule 22.2.
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1.130. "MEASUREMENT DATE" shall mean September 30th of each year during the
Term.
1.131. "MINIMUM NET WORTH" means, with respect to the last day of any
Accounting Period, a Tangible Net Worth (calculated on a book value basis),
excluding amounts held in any lockbox or cash collateral account under this
Lease, any other Pool Lease, or any Other Lease, the Pooling Agreement or any
pooling and security agreement relating to Other Leases, immediately after the
"Distribution Date" (as defined in the Pooling Agreement) for such Accounting
Period, equal to one hundred fifty percent (150%) of the aggregate of the "CCC
Limits of Liability" (as defined in the Guarantee) under the Guarantee and the
"Other Guarantees" (as defined in the Pooling Agreement) from time to time;
provided that the Minimum Net Worth shall be reduced by one hundred fifty
percent (150%) of the total amount of cash held in any lockbox or cash
collateral account under this Lease, any other Pool Lease, or any Other Lease,
the Pooling Agreement or any pooling and security agreement relating to Other
Leases, immediately after the Distribution Date for such Accounting Period.
1.132. "MINIMUM RENT" shall mean for each Fiscal Year the amount set forth
on Schedule 3.1.1.
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1.133. "NONCOMPETITION AGREEMENT" shall have the meaning given such term in
Section 23.15.
1.134. "NON-CONTROLLED SUBSIDIARY" shall mean any Person (other than a
Subsidiary of Host O.P.) in which Host O.P. owns, directly or indirectly, at
least 90% of the economic interest.
1.135. "NOTICE" shall mean a notice given in accordance with Section 23.10.
1.136. "OFFICER'S CERTIFICATE" shall mean a certificate signed by an
authorized officer of Tenant.
1.137. "OPCO" shall mean any wholly owned subsidiary of CCC that owns,
directly or through one or more wholly owned subsidiaries, the entire
beneficial equity interest in Tenant.
1.138. "OPERATING BUDGET" shall have the meaning given such term in Section
17.3.
1.139. "OPERATING BUDGET SUMMARY" shall have the meaning given such term in
Section 17.3.
1.140. "OTHER INCOME" shall mean all revenues, receipts, and income of any
kind derived directly or indirectly by Tenant from or in connection with the
Facility and included in Gross Revenues other than Room Revenues and Food and
Beverages Sales (including, without limitation, gross revenue from rental
income, license fees, concession payments, or other amounts received from
subtenants, licensees and concessionaires, but excluding all exclusions from
Gross Revenues set forth in the definition thereof.
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1.141. "OTHER LEASES" shall mean any lease of a full service hotel, other
than this Lease or any other Pool Lease, under which Host O.P. or a Subsidiary
of Host O.P. is the lessor and a Subsidiary of CCC is lessee and that is the
subject of a guarantee by CCC and a pooling and security agreement in effect on
the date hereof substantially similar to the Guarantee and the Pooling
Agreement.
1.142. "OTHER TENANTS" shall mean the tenants under the Pool Leases (other
than this Lease) and the Other Leases.
1.143. "OVERDUE RATE" shall mean, on any date, a per annum rate of interest
equal to the lesser of the Prime Rate plus two (2) percentage points and the
maximum rate then permitted under applicable law.
1.144. "OWNER" shall have the meaning given such term in Section 21.3.1.
1.145. "PERCENTAGE INCREASE IN CPI" shall mean, measured as of each
Measurement Date, the percentage increase, if any, in the Consumer Price Index
over the twelve (12) months preceding the Measurement Date.
1.146. "PERCENTAGE INCREASE IN THE LABOR INDEX" shall mean, measured as of
each Measurement Date, the percentage increase, if any, in the Labor Index over
the twelve (12) months preceding the Measurement Date.
1.147. "PERCENTAGE RENT" shall mean the amount of Rent (excluding Additional
Charges) payable pursuant to Section 3.1.1 with respect to one or more
Accounting Periods or a Fiscal Year, as the case may be, in excess of Minimum
Rent payable for such period.
1.148. "PERCENTAGE RENT SCHEDULE" shall have the meaning given such term in
Section 3.1.3(a).
1.149. "PERIOD REPORT" shall have the meaning given such term in Section
17.2(f).
1.150. "PERMITTED DEBT" shall have the meaning given such term in Section
21.6.3.
1.151. "PERMITTED LIENS" shall mean (a) this Lease; (b) all rights,
restrictions, and easements of record as of the Commencement Date; (c) the
lessor's interest in any Excess FF&E leased to Tenant pursuant to [the Initial
FF&E Lease or] an Excess FF&E Lease and the lessor's interest in any other
furniture, fixtures or equipment leased to Tenant under any of the equipment
leases included in the Assigned Agreements or entered into by Tenant during the
Term; (d) security interests securing the purchase price of equipment or
personal property acquired by Tenant before or after the Commencement Date
(including, but not limited to, Excess FF&E owned by Tenant); provided, however,
that (i) any such Lien described in this clause (d) 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 described in this clause (d)
shall not exceed the cost of acquisition of the property subject thereto; and
(e) any other Liens as may have been consented to in writing by Landlord, and,
if required pursuant to the Management Agreement, Manager, from time to time,
including, without limitation, those granted in accordance with Section 5.5
hereof.
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1.152. "PERSON" shall mean any individual or Entity, and the heirs,
executors, administrators, legal representatives, successors and assigns of such
Person where the context so requires.
1.153. "POOLING AGREEMENT" shall have the meaning given such term in
Section 23.15.
1.154. "POOL LEASE" shall mean any lease subject to the Pooling Agreement.
1.155. "PREPAID EXPENSES" shall have the meaning given such term in
Schedule 3.1.5.
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1.156. "PRIMARY INTENDED USE" shall have the meaning given such term in
Section 4.1.1.
1.157. "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 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."
1.158. "QUALIFIED AFFILIATE" shall mean any Person directly or indirectly
wholly owned and controlled by CCC or OpCo.
1.159. "QUALIFIED APPRAISER" shall mean an appraiser who is not in control
of, controlled by or under common control with either Landlord or Tenant or any
Affiliate of Landlord or Tenant and has not been an employee of Landlord or
Tenant or any Affiliate of Landlord or Tenant within the past two (2) years, who
is qualified to appraise commercial real estate in the State and is a member of
the American Institute of Real Estate Appraisers (or any successor association
or body of comparable standing if such institute is not then in existence).
1.160. "REAL ESTATE TAXES" shall mean all real estate taxes, including
general and special assessments and impact fees, if any, which are imposed upon
or relate to the Land and any improvements thereon, including, without
limitation, the following :
(a) any franchise, corporate, estate, inheritance, succession, or
capital levy imposed on Landlord;
(b) special assessments (regardless of when due or whether they are
paid as a lump sum or in installments over time) imposed because of facilities
that are constructed by or on behalf of the assessing jurisdiction (i.e., roads,
sidewalks, sewers, culverts, etc.), which directly benefit the Facility
(regardless of whether or not they also benefit other buildings);
(c) impact fees (regardless of when due or whether they are paid as
a lump sum or in installments over time) that are required of Landlord as a
condition to the issuance of site plan approval, zoning variances or building
permits; and
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(d) tax-increment financing or similar financing whereby the
municipality or other taxing authority has assisted in financing the
construction of the Facility by temporarily reducing or abating normal
impositions in return for substantially higher levels of impositions at later
dates.
1.161. "RELATED AGREEMENTS" shall have the meaning given such term in
Section 23.15.
1.162. "RENT" shall mean, collectively, Minimum Rent, Percentage Rent, and
Additional Charges attributable to the Term of this Lease.
1.163. "REPLACEMENT COST" shall have the meaning given such term in
Section 9.3.
1.164. "RETAINED OBLIGATIONS" shall have the meaning given such term in
Section 21.3.1.
1.165. "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 REVPAR of hotels in the general trade area of the Facility.
If such Smith's STAR Report is discontinued in the future, or ceases to be a
satisfactory source of data regarding the REVPAR of various hotels in the
general trade area of the Facility (as provided in the Management Agreement),
Tenant shall select, or shall cause Manager to select, an alternative source in
accordance with the Management Agreement.
1.166. "REVENUES COMPUTATION" shall have the meaning given such term in
Section 3.1.2(a).
1.167. "REVPAR" 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 of such hotel 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 that are temporarily unavailable due to maintenance or ongoing renovation
work.
1.168. "ROOM REVENUES" shall mean gross revenues from the rental of guest
rooms, whether to individuals, groups, or transients at the Facility, determined
in a manner consistent with GAAP, excluding the following:
(a) the amount of all credits, rebates or refunds to customers,
guests or patrons;
(b) all sales taxes or any other taxes imposed on the rental of
such guest rooms;
(c) any fees collected for amenities including, but not limited to,
telephone, room service, laundry, movies or concessions.
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1.169. "ROUTINE CAPITAL EXPENDITURES" shall mean exterior and interior
repainting, resurfacing of building walls, floors, roof and parking areas,
replacing folding walls, and other on-going routine Capital Expenditures the
cost of which is to be paid for by the Manager out of the FF&E Reserve pursuant
to the Management Agreement.
1.170. "SEC" shall mean the Securities and Exchange Commission.
1.171. "SECOND TIER FOOD AND BEVERAGES SALES PERCENTAGE" shall have the
meaning given such term in Section 3.1.2(b)(2).
1.172. "SECOND TIER OTHER INCOME PERCENTAGE" shall have the meaning given
such term in Section 3.1.2(b)(2).
1.173. "SECOND TIER ROOM REVENUE PERCENTAGE" shall have the meaning given
such term in Section 3.1.2(b)(2).
1.174. "SECURITY AGREEMENT" shall have the meaning given such term in
Section 7.2.
1.175. "SINGLE PURPOSE" means, with respect to a Person, that such Person,
(A) at all times since its formation, except as otherwise permitted in or
contemplated by this Agreement (i) has been a duly formed and existing limited
partnership, limited liability company, or corporation, as the case may be; (ii)
has observed all customary formalities regarding its partnership, limited
liability company or corporate existence; (iii) has maintained financial
statements, accounting records, and other partnership, limited liability
company, or corporate documents separate from those of any other Person
(provided that nothing shall prohibit such Person from being included in the
consolidated financial statements or tax group of another Person); (iv) has not
commingled its assets with those of any other Person; (v) has paid its own
liabilities out of its own funds, including funds contributed to its capital by
its equity holders, and all such capital contributions have been reflected
properly in its books and records; (vi) has allocated fairly and reasonably any
overhead for shared office expenses; (vii) has identified itself in all dealings
with the public, under its own name and as a separate and distinct entity
(provided that nothing shall prohibit such Person from engaging an agent to
represent such Person with respect to tenants, vendors, and other parties, in
accordance with standard industry practice); (viii) has not identified itself as
being a division or part of any other Person; (ix) has not identified any other
Person as being a division or part of such Person; (x) has corrected any known
misunderstanding regarding its separate identity; (xi) has been adequately
capitalized in light of the nature of its business; (xii) has not assumed or
guaranteed the obligations of any other Person (other than by virtue of being a
general partner of such other Person but only if such other Person is Tenant and
provided that this clause shall not be deemed to be violated by reason of joint
and several liabilities arising as a matter of law); and (xiii) has not engaged
in any other business other than as permitted by this Lease (provided that
nothing shall prohibit a general partner from acquiring, owning, and disposing
of limited partner interests in any limited partnership, non-managing membership
interests in a limited liability company, or debt securities issued by any
Person, or the stock of a corporation that is not engaged in any activities
other than such activities, provided that no liabilities or other obligations on
the part of the
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holder of such investments will arise as a result of such investments and the
only rights of the holder of such investment are the right to receive payments
and the right to vote); (B) such Person agrees to covenants substantially to the
effect of Sections 7.1 and 21.6 hereof; and (C) such Person's organizational
documents contain restrictions similar to those contained in Sections 5.4 (only
paragraphs a, b, c, d and g thereof), 5.5, 5.6, and 5.7 of the Limited Liability
Company Operating Agreement of Tenant as in effect on the date hereof.
1.176. "SOFT GOODS" shall mean all fabric, textile and flexible plastic
products (not including items that are classified as "Fixed Asset Supplies"
under the Uniform System), which are used in furnishing the Facility, including,
without limitation, carpeting, drapes, bedspreads, wall and floor coverings,
mats, shower curtains and similar items.
1.177. "SPECIAL FORM" shall have the meaning given such term in
Section 9.1(b).
1.178. "STATE" shall mean the state, commonwealth, district, or, if the
Leased Property is not located in the United States, the country, in which the
Leased Property is located.
1.179. "SUBSIDIARY" shall mean, as to any Person, (i) any corporation more
than fifty percent (50%) of whose stock of any class or classes having by the
terms thereof ordinary voting power to elect a majority of the directors of such
corporation (irrespective of whether or not at the time stock of any class or
classes of such corporation shall have or might have voting power by reason of
the happening of any contingency) is at the time owned by such Person or one or
more Subsidiaries of such Person and (ii) any partnership, limited liability
company, association, joint venture or other entity in which such Person or one
or more Subsidiaries of such Person has more than a fifty percent (50%) equity
interest at the time.
1.180. "SUCCESSOR LANDLORD" shall have the meaning given such term in
Section 20.2.
1.181. "SUPERIOR LANDLORD" shall have the meaning given such term in
Section 20.2.
1.182. "SUPERIOR LEASE" shall have the meaning given such term in
Section 20.2.
1.183. "SUPERIOR MORTGAGE" shall have the meaning given such term in
Section 20.2.
1.184. "SUPERIOR MORTGAGEE" shall have the meaning given such term in
Section 20.2.
1.185. "TANGIBLE NET WORTH" of any Person shall mean, on any date, without
duplication, (a) the sum of the shareholders' equity of such Person on a
consolidated basis in accordance with GAAP minus (b) the sum of all Intangible
Assets (net of accumulated amortization) of such Person and its Subsidiaries,
each as shown on the consolidated balance sheets of such Person.
1.186. "TAX LAW CHANGE" shall have the meaning given such term in
Section 24.1.
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1.187. "TENANT" shall have the meaning given such term in the preamble to
this Lease.
1.188. "TENANT INDEMNITEE" shall have the meaning given such term in
Section 4.3.2.
1.189. "TENANT'S OPERATING PROFIT" shall equal for any Fiscal Year the
amount equal to revenues due to Tenant from the Leased Property after the
payment of all expenses relating to the operation or leasing of the Leased
Property less Rent paid to Landlord, but in any event not less than $1.00.
1.190. "TENANT'S PERSONAL PROPERTY" shall mean all tangible and intangible
personal property now owned, leased or hereafter acquired by Tenant on or after
the date hereof, including, without limitation, Working Capital, Excess FF&E
owned by Tenant, Excess FF&E Leasehold Interests, and all contracts and
agreements to which Tenant is a party used in the operation of the Facility, but
expressly excluding (a) FF&E leased hereunder, (b) Excess FF&E leased during the
Term hereof by Tenant [and (c) FF&E leased pursuant to the Initial FF&E Lease,
if any.]
1.191. "TERM" shall have the meaning given such term in Section 2.4,
unless sooner terminated pursuant to the terms of this Lease.
1.192. "THIRD-PARTY PURCHASER" shall have the meaning given such term in
paragraph (b) of Schedule 22.2.
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1.193. "THIRD TIER FOOD AND BEVERAGES SALES PERCENTAGE" shall have the
meaning given such term in Section 3.1.2(b)(2).
1.194. "THIRD TIER ROOM REVENUE PERCENTAGE" shall have the meaning given
such term in Section 3.1.2(b)(2).
1.195. "TRUSTEE" shall have the meaning given such term in Section 16.1.
1.196. "UNAVOIDABLE DELAY" shall mean delay due to strikes, acts of God,
force majeure, governmental restrictions or actions (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 excused by reason of such
Unavoidable Delay), enemy action, civil commotion, fire, unavoidable Casualty,
condemnation or other comparable causes beyond the reasonable control of
Landlord or Tenant; provided, however, that lack of funds shall not be deemed a
cause beyond the reasonable control of a party, unless such lack of funds is
caused by the breach of the other party's obligations under this Lease.
1.197. "UNIFORM SYSTEM" shall mean the Uniform System of Accounts for
Hotels (9th Revised Edition 1996) as published by the Hotel Association of New
York City, Inc., as the same may hereafter be revised.
1.198. "UNSUITABLE FOR ITS PRIMARY INTENDED USE" shall mean a state or
condition of the Facility such that (a) following any damage or destruction
involving the Leased Property, the Leased Property cannot reasonably be expected
to be restored within
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twelve (12) months following such damage or destruction to substantially the
same condition as existed immediately before such damage or destruction or (b)
as the result of a partial taking by Condemnation, the Facility cannot be
operated on a commercially practicable basis for its Primary Intended Use taking
into account, among other relevant factors, the number of usable rooms, the
amount of square footage, or the revenues affected by such damage, destruction,
or partial taking.
1.199. "WORKING CAPITAL" shall have the meaning given such term in
Section 4.5.
1.200. "WORKING CAPITAL NOTE" shall have the meaning given such term in
Section 4.5.
1.201. "YEAR END PERCENTAGE RENT SCHEDULE" shall mean the Percentage
Rent Schedule covering the immediately preceding full Fiscal Year delivered in
accordance with Section 17.2(e).
ARTICLE 2
COLLECTIVE LEASED PROPERTIES AND TERM
2.1 Leased Property.
Upon and subject to the terms and conditions hereinafter set forth,
including, but not limited to, the execution, delivery and performance of the
terms and conditions of the Consent and Assignment, and subject to the rights of
any Facility Mortgagee and any Superior Landlord, Landlord leases to Tenant and
Tenant leases from Landlord, effective as of the Commencement Date, all of
Landlord's right, title, and interest in and to the following (collectively, the
"LEASED PROPERTY"):
(a) those certain tracts, pieces and parcels of land that are more
particularly described in Exhibit A attached hereto (together with all and
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singular the rights and appurtenances pertaining to such tracts and parcels,
including any right, title and interest of Landlord in and to any easements
benefiting the Leased Property, adjacent strips or gores, streets, alleys or
rights-of-way, and all rights of ingress and egress thereto) (the foregoing are
hereinafter referred to collectively as the "LAND");
(b) all buildings, structures, and other improvements of every kind
situated upon the Land, including, but not limited to, all Capital Expenditures,
alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines
(onsite and offsite), parking areas and appurtenant roadways, all luxury
apartments, all swimming pools, restaurants, hotel rooms, lounges, and various
other guest and spa facilities (collectively, the "FACILITY");
(c) all easements, rights and appurtenances relating to the Land
and the Facility;
(d) all equipment, machinery, and other items of property, now or
hereafter permanently affixed to or incorporated into the Facility, including,
without limitation, all lift systems, furnaces, boilers, heaters, electrical
equipment, heating, plumbing, lighting, ventilating, refrigerating,
incineration, air and water pollution control,
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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 Tenant's Personal
Property (collectively, the "FIXTURES"); and
(e) the FF&E owned by Landlord located in or on the Facility or
stored offsite and designated for use in connection with any present or future
occupation or operation of the Facility, together with all replacements,
modifications, alterations and additions thereto, but specifically excluding any
Excess FF&E not owned by Landlord and Tenant's Personal Property.
2.2 Assignment and Assumption of Contracts; Initial Transaction.
(a) Effective upon the Commencement Date, Landlord hereby transfers
and assigns to Tenant and Tenant assumes and covenants to perform all of
Landlord's obligations under, the following agreements and contracts to which
the Leased Property remains subject on the Commencement Date, to the maximum
extent assignable pursuant to applicable law (the "ASSIGNED AGREEMENTS"):
(i) All contracts for the use or occupancy of guest rooms
and/or the meeting, dining, banquet, and spa and health facilities of the
Facility;
(ii) All service and maintenance contracts, equipment leases,
purchase orders and other contracts pertaining to the ownership, maintenance,
operation, provisioning or equipping of the Facility, including warranties and
guaranties relating thereto;
(iii) All Licenses and permits used in or relating to the
ownership, occupancy or operation of any part of the Facility;
(iv) Any developer's, declarant's, or owner's interests under
any operating agreements or reciprocal easement agreements or other similar
agreements affecting and/or benefiting the Facility;
(v) Landlord's interest as owner under the Management Agreement
as and to the extent provided in the Consent and Assignment; and
(vi) All leases of space (including any security deposits held
by Landlord pursuant thereto, which will be paid over to Tenant by check on the
Commencement Date, or credited to Tenant against the cost of the Working Capital
sold to Tenant pursuant to Section 4.5) in the Facility to tenants thereof,
excluding those leases set forth on Schedule 2.2(a)(vi) attached hereto.
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This Lease is executed by Landlord and accepted by Tenant on the
understanding that Tenant will and does hereby assume and agree to perform all
of Landlord's obligations arising from and after the Commencement Date under all
of the Assigned Agreements (except to the extent otherwise provided with respect
to the Management Agreement in the Consent and Assignment). In connection with
the Licenses
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and permits described in clause (iii) above and the Management Agreement
referred to in clause (v) above, Landlord shall be obligated (a) to take any
action that can legally or contractually be taken only by it and not Tenant, (b)
not to take any action that is not permitted by, or is contrary to the terms of,
such Licenses or permits or the Management Agreement, and (c) to cooperate with
Tenant as to actions that must be taken in Landlord's name. Notwithstanding the
foregoing but subject to Section 5.3(d)(ii) hereof, such Assigned Agreements
shall, without the necessity of further documentation, be deemed reassigned to
(and reassumed by) Landlord upon the expiration or earlier termination of the
Term. In connection with any reassignment thereof occurring following the
expiration or earlier termination of the Term, such reassignment shall not
release Tenant from any liability thereunder with respect to the period
beginning on the Commencement Date and ending on the date of expiration or
earlier termination of the Term.
(b) As between Landlord and Tenant, Landlord shall be entitled to all
income and shall be responsible for the payment or settlement of all expenses of
the Leased Property accruing prior to the Commencement Date and after the
expiration or earlier termination of the Term. Tenant shall act as Landlord's
agent for the collection of all such income and shall remit the same to Landlord
promptly upon Tenant's receipt thereof. Tenant shall notify Landlord of all
such expenses and shall act as Landlord's payment agent for such expenses using
funds provided by Landlord from time to time.
2.3 Condition of Leased Property.
Tenant acknowledges receipt and delivery of possession of the Leased
Property. Subject to the warranty of title hereinafter set forth and the
indemnifications by Landlord set forth in Sections 4.3.2, 9.9 and 21.3.3 hereof,
Tenant accepts the Leased Property in its "as is" condition, subject to the
rights of all occupants and 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 financing
instruments, mortgages and deeds of trust, 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, and all other Permitted Liens. TENANT
REPRESENTS THAT, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS LEASE, IT IS NOT
RELYING ON ANY REPRESENTATION OR WARRANTY OF LANDLORD OR LANDLORD'S AGENTS OR
EMPLOYEES WITH RESPECT TO THE CONDITION OF THE LEASED PROPERTY, AND EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED IN THIS LEASE TENANT WAIVES ANY CLAIM OR ACTION
AGAINST LANDLORD IN RESPECT THEREOF. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
THIS LEASE, LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN
RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR
USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, OR AS
TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT
BEING AGREED THAT EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS LEASE, ALL SUCH
RISKS ARE TO BE BORNE BY TENANT. NOTWITHSTANDING THE FOREGOING, LANDLORD HEREBY
WARRANTS ITS [FEE/LEASEHOLD] TITLE TO THE LEASED PROPERTY TO TENANT, SUBJECT TO
THE PERMITTED LIENS; PROVIDED,
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HOWEVER, THAT IN NO EVENT SHALL THE AMOUNT RECOVERABLE BY TENANT FOR ANY BREACH
OF SUCH WARRANTY EXCEED TENANT'S PROPORTIONATE SHARE OF THE NET AMOUNT ACTUALLY
COLLECTED BY LANDLORD UNDER LANDLORD'S EXISTING TITLE INSURANCE POLICIES, AFTER
TAKING INTO ACCOUNT THE AMOUNTS EXPENDED BY LANDLORD TO RECOVER THE AMOUNT
COLLECTED AND THE AMOUNT OF ANY FEES OWED TO MANAGER RESULTING FROM BREACH OF
SUCH WARRANTY. TENANT'S PROPORTIONATE SHARE FOR THE PURPOSES OF THE PRECEDING
SENTENCE SHALL BE EQUAL TO THE FRACTION, EXPRESSED AS A PERCENTAGE, OBTAINED BY
DIVIDING THE FAIR MARKET VALUE OF TENANT'S LEASEHOLD ESTATE AS DETERMINED IN
ACCORDANCE WITH SECTION 24.1(b) BELOW BY THE FAIR MARKET VALUE OF THE LEASED
PROPERTY AS DETERMINED BY ARTICLE 19. LANDLORD AGREES TO DILIGENTLY PURSUE THE
TITLE COMPANY OR COMPANIES PROVIDING THE EXISTING TITLE INSURANCE IN THE EVENT
IT IS DETERMINED THAT THERE IS A DEFECT IN LANDLORD'S TITLE TO THE LEASED
PROPERTY. TENANT SHALL FULLY COOPERATE WITH LANDLORD IN THE PROSECUTION OF ANY
SUCH CLAIMS, IN LANDLORD'S OR TENANT'S NAME, ALL AT LANDLORD'S SOLE COST AND
EXPENSE.
2.4 Term.
The term of this Lease (the "TERM") shall commence at 12:01 a.m. on
the Commencement Date and shall expire at 11:59 p.m. on the last day of the
[tenth (10th)] Lease Year, unless sooner terminated pursuant to the terms of
this Lease; provided that, subject to the terms of Article 13, the Term shall
also include any period of holding over by Tenant.
ARTICLE 3
RENT
3.1 Rent.
Tenant shall pay to Landlord, 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, Minimum Rent, Percentage
Rent and Additional Charges, during the Term, except as hereinafter expressly
provided. All payments to Landlord shall be made by wire transfer of immediately
available federal funds or by other means reasonably acceptable to Landlord in
its sole discretion.
3.1.1 Payment of Rent.
On or before the second (2nd) Business Day after the required
payment date under the Management Agreement for amounts due from Manager
thereunder relating to each Accounting Period (whether or not such payment under
the Management Agreement is made on the required payment date), Tenant shall pay
to Landlord an amount of Rent equal to the excess, if any, of (A) the greater of
(i) the product of (x) the Minimum Rent for the current Fiscal Year (as set
forth on Schedule 3.1.1) times (y) a fraction, the numerator of which is the
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number of elapsed Accounting Periods in such Fiscal Year (including the
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Accounting Period with respect to which payment of Rent is being made) and the
denominator of which is 13 (or 12, if the Accounting Periods are then calendar
months) or (ii) the Revenues Computation for such Fiscal Year (determined in
accordance with Section 3.1.2), over (B) the aggregate amount of Rent previously
paid pursuant to this Section 3.1.1 during such Fiscal Year (less the aggregate
amount previously paid by Landlord to Tenant pursuant to the next sentence in
this Section 3.1.1 during such Fiscal Year). In the event that the amount
specified in clause (A) is less than the amount specified in clause (B) as of
any payment date, then Landlord will promptly pay to Tenant the difference in
cash. In the event of a change in the Accounting Period during the Term which
results in payment dates (and/or number of payments) different from the payment
dates (and/or number of payments) reflected on Schedule 3.1.1, the amount of
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subsequent installments of Minimum Rent shall be appropriately adjusted in a
fair and equitable manner. In the absence of agreement between Landlord and
Tenant on the appropriate adjustments, the matter may be submitted by either
party to arbitration under Article 15 for resolution.
3.1.2 Revenues Computation.
(a) The "REVENUES COMPUTATION" for the applicable Fiscal Year shall
be the sum of the following amounts:
(1) an amount equal to the product of (a) the First Tier Room
Revenue Percentage times (b) all year-to-date Room Revenues
up to (but not exceeding) the Cumulative Portion of the
Annual Room Revenues First Break Point,
(2) an amount equal to the product of (a) the Second Tier Room
Revenue Percentage times (b) all year-to-date Room Revenues
in excess of the Cumulative Portion of the Annual Room
Revenues First Break Point up to (but not exceeding) the
Cumulative Portion of the Annual Room Revenues Second Break
Point,
(3) an amount equal to the product of (a) the Third Tier Room
Revenue Percentage times (b) all year-to-date Room Revenues
in excess of the Cumulative Portion of the Annual Room
Revenues Second Break Point,
(4) an amount equal to the product of (a) the First Tier Food
and Beverages Sales Percentage times (b) all year-to-date
Food and Beverages Sales up to (but not exceeding) the
Cumulative Portion of the Annual Food and Beverages Sales
First Break Point,
(5) an amount equal to the product of (a) the Second Tier Food
and Beverages Sales Percentage times (b) all year-to-date
Food and Beverages Sales in excess of the Cumulative
Portion of the Annual Food and Beverages Sales First Break
Point up to (but
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not exceeding) the Cumulative Portion of the Annual Food and
Beverages Sales Second Break Point,
(6) an amount equal to the product of (a) the Third Tier Food
and Beverages Sales Percentage times (b) all year-to-date
Food and Beverages Sales in excess of the Cumulative Portion
of the Annual Food and Beverages Sales Second Break Point,
(7) an amount equal to the product of (a) the First Tier Other
Income Percentage times (b) all year-to-date Other Income up
to (but not exceeding) the Cumulative Portion of the Annual
Other Income Break Point, and
(8) an amount equal to the product of (a) the Second Tier Other
Income Percentage times (b) all year-to-date Other Income in
excess of the Cumulative Portion of the Annual Other Income
Break Point.
(b) The Revenues Computation shall be computed utilizing the
following definitions:
(1) "CUMULATIVE PORTION" shall mean a fraction having as its
numerator the total number of days in the Fiscal Year which
have elapsed through the last day of the Accounting Period
with respect to which a payment of Minimum Rent or
Percentage Rent is due, and having as its denominator the
total number of days in the Fiscal Year.
(2) "FIRST TIER ROOM REVENUE PERCENTAGE," "SECOND TIER ROOM
REVENUE PERCENTAGE," "THIRD TIER ROOM REVENUE PERCENTAGE,"
"FIRST TIER FOOD AND BEVERAGES SALES PERCENTAGE," "SECOND
TIER FOOD AND BEVERAGES SALES PERCENTAGE," "THIRD TIER FOOD
AND BEVERAGES SALES PERCENTAGE," "FIRST TIER OTHER INCOME
PERCENTAGE," AND "SECOND TIER OTHER INCOME PERCENTAGE" shall
mean the percentages set forth on Schedule 3.1.2.
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(3) "ANNUAL ROOM REVENUES FIRST BREAK POINT," "ANNUAL ROOM
REVENUES SECOND BREAK POINT," "ANNUAL FOOD AND BEVERAGES
SALES FIRST BREAK POINT," "ANNUAL FOOD AND BEVERAGES SALES
SECOND BREAK POINT," AND "ANNUAL OTHER INCOME BREAK POINT"
shall mean the amounts set forth on Schedule 3.1.2.
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3.1.3 Confirmation of Percentage Rent.
(a) Tenant shall submit to Landlord on each rental payment date
pursuant to Section 3.1.1 a reasonably detailed schedule (the "PERCENTAGE
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RENT SCHEDULE"), signed and certified by Tenant to be correct, showing the
Revenues Computation with respect to the Facility for the preceding Accounting
Period and the calculation of the amount of Rent owed on such date (other than
Additional Charges) by Tenant or the amount Landlord is required to pay to
Tenant for such Accounting Period. Tenant's Percentage Rent Schedule shall
clearly indicate how much of the Gross Revenues is comprised by Room Revenues,
Food and Beverages Sales and Other Income, and shall contain such detail and
breakdown as Landlord may reasonably require. If, after notice from Landlord and
the expiration of the cure period provided for in Section 12.1(c) of this Lease,
Tenant fails to submit the Percentage Rent Schedule to Landlord when due,
Landlord, in addition to any other remedies Landlord has, shall have the right
(subject to compliance with the Management Agreement and the Consent and
Assignment) to retain an independent certified public accountant, at Tenant's
sole expense, to prepare such Percentage Rent Schedule and to perform all
inspections and audits related thereto.
(b) Tenant shall maintain in accordance with the usual and customary
practices of Tenant and in accordance with GAAP during the Term, for the current
Fiscal Year and for the immediately preceding Fiscal Year, (i) complete and
accurate general books of account, which shall reflect Gross Revenues and which
shall include, without limitation, those items set forth and described on
Schedule 3.1.3(b) hereof, and (ii) all other original records and other
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pertinent papers that will enable Landlord to determine the Gross Revenues
derived by Tenant during the relevant Fiscal Year from Room Revenues, Food and
Beverages Sales and Other Income. Such records for the current and most recent
Fiscal Year shall be maintained at Tenant's corporate headquarters. The
provisions of this Section 3.1.3(b) shall survive the expiration or earlier
termination of this Lease for a period of three (3) years thereafter, subject to
extension upon Notice from Landlord, provided that all storage and related
expenses of maintaining records beyond such three-year period shall be at
Landlord's sole cost and expense. In addition to the audit rights set forth in
Section 3.1.3(c) below, in the event Landlord, any Lending Institution, any
Facility Mortgagee, or any potential purchaser of the Leased Property, or any of
their respective representatives, desires to audit Tenant's financial records
described in clauses (i) and (ii) above, Tenant shall, at Landlord's sole cost
and expense, cooperate with such audit by making such records available at
Tenant's corporate headquarters during normal business hours upon reasonable
prior Notice.
(c) Landlord shall have fifty (50) days after the receipt of the Year
End Percentage Rent Schedule to have an independent certified public accountant
examine Tenant's records, during regular business hours upon reasonable prior
Notice by Landlord, of Room Revenues, Food and Beverages Sales, and/or Other
Income for the related Fiscal Year and all other relevant financial information.
The acceptance by Landlord of each periodic payment of Percentage Rent shall not
prejudice Landlord's right to proceed with such examination as described in the
immediately preceding sentence. If Landlord raises no objections within such
fifty (50)-day period, the Year End Percentage Rent Schedule shall be deemed to
have been accepted by Landlord as true and correct, and Landlord shall have no
further right to question its accuracy. If Landlord does raise such an
objection, by Notice to Tenant, Landlord shall arrange for an independent
certified public accountant to commence such examination within fifty (50) days
after the date of such objection and shall cause such audit to be completed no
later than one hundred eighty (180) days after
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Landlord's receipt of the Year End Percentage Rent Schedule. Landlord shall pay
all costs and expenses of such audit; provided, however:
(i) if such audit discloses that the amount of Percentage
Rent was underreported by Tenant by five percent (5%) or more for
such Fiscal Year, Tenant shall pay to Landlord, within fifteen (15)
days of its receipt of Notice from Landlord, the cost of the audit,
as Additional Charges, in addition to any deficiency in Percentage
Rent that may be due to Landlord; or
(ii) if the audit discloses that the amount of Percentage
Rent either was not underreported or was underreported by Tenant by
less than five percent (5%), Landlord shall be responsible for all
costs associated with the audit and Tenant shall pay, within fifteen
(15) days of its receipt of Notice from Landlord, any deficiency in
Percentage Rent that may be due to Landlord; or
(iii) if the audit discloses that the Percentage Rent was
overreported by Tenant for the related Fiscal Year, Landlord shall
be responsible for all costs associated with the audit, shall give
Tenant Notice of such overreporting within fifteen (15) days of
Landlord's receipt of audit results, and shall reimburse the amount
of such overpayment to Tenant in cash along with delivery of such
Notice to Tenant. The provisions of this Section shall survive the
expiration or the earlier termination of this Lease for a period of
one (1) year thereafter.
3.1.4 Annual Adjustments.
Upon the commencement of each Fiscal Year during the Term beginning
with the second Fiscal Year, each of the Minimum Rent, the Annual Room Revenues
First Break Point, the Annual Food and Beverages Sales First Break Point, the
Annual Other Income Break Point, the Annual Food and Beverages Sales Second
Break Point and the Annual Room Revenues Second Break Point shall be increased
by the amount of the applicable Annual Adjustment.
In no event shall the Minimum Rent, the Annual Room Revenues First
Break Point, Annual Food and Beverages Sales First Break Point, the Annual Room
Revenues Second Break Point, the Annual Food and Beverages Sales Second Break
Point, and the Annual Other Income Break Point be reduced as a result of the
Annual Adjustment. The Annual Adjustment described above shall be effective on
the first day of the new Fiscal Year. If Rent for the new Fiscal Year is paid
prior to the determination of the amount of the Annual Adjustment, whether
because of a delay in the publication of the Consumer Price Index or the Labor
Index applicable for the Measurement Date or because of any other reason,
payment adjustments for any shortfall in Rent paid shall be made with the first
Minimum Rent and Percentage Rent payments due after the Annual Adjustment is
determined.
If (1) a significant change is made in the number or nature (or
both) of items used in determining the Consumer Price Index or the Labor Index
or (2) the Consumer
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Price Index or Labor Index shall be discontinued for any reason, the Bureau of
Labor Statistics shall be requested to furnish a new index comparable to the
Consumer Price Index or Labor Index, together with information that will make
possible a conversion to the new index in computing the Annual Adjustment. If
for any reason the Bureau of Labor Statistics does not furnish such an index and
information, the parties will instead mutually select, accept and use such other
indexes or comparable statistics on the cost of living and cost of labor in
various United States cities that is computed and published by an agency of the
United States or a responsible financial periodical of recognized authority.
3.1.5 Additional Charges.
In addition to the Minimum Rent and Percentage Rent payable
hereunder, Tenant shall pay and discharge as and when due and payable the
following (collectively, "ADDITIONAL CHARGES"):
(a) Impositions. Subject to Article 8 relating to Permitted
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Contests and the right of any Facility Mortgagee to require tax escrows as
described in the last sentence of this paragraph of subsection (a), Tenant shall
pay or cause to be paid all Impositions attributable to any period during the
Term 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 nonpayment, 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 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
Legal Requirements, prepare and file all tax returns required to be filed by
Landlord, including, without limitation, returns in respect of Landlord's net
income, gross receipts, sales and use, single business, transaction, privilege,
rent, ad valorem, franchise taxes, Real Estate Taxes and other Landlord
Obligations, and taxes on its capital stock, and Tenant, at its expense, shall,
to the extent required or permitted by Legal Requirements, prepare and file all
tax returns and reports required to be filed by Tenant in respect of any
Imposition as may be required by any Government Agency. Provided no monetary
Default or 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 each, 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 Lease as personal
property, Tenant shall file all personal property tax returns in such
jurisdictions where it may legally be required to 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, Landlord shall provide Tenant with copies of assessment
notices in sufficient time for Tenant to file a protest. All
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Impositions assessed against such personal property that comprises FF&E shall be
(irrespective of whether Landlord or Tenant shall file the relevant return) paid
by the party that owns the FF&E not later than the last date on which the same
may be made without interest or penalty. All Impositions assessed against such
personal property that comprises Tenant's 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. If the provisions of any Facility Mortgage require deposits
on account of Impositions to be made with the Facility Mortgagee, provided the
Facility Mortgagee has not elected to waive such provision, Tenant shall either
pay Landlord the monthly amounts required with respect to any such Impositions
at the time and place that payments of Minimum Rent are required and Landlord
shall transfer such amounts to the Facility Mortgagee or, pursuant to written
direction by Landlord, Tenant shall make such deposits directly with the
Facility Mortgagee, and such payment to Landlord or Facility Mortgagee shall be
deemed to satisfy Tenant's obligation hereunder to pay the Impositions.
Landlord shall give prompt Notice to Tenant 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 and/or penalties incurred by
Tenant as a result of Landlord's failure to forward any invoices, assessment
notices or other bills to Tenant and no Default or Event of Default shall be
deemed to have occurred hereunder if Tenant's failure to pay timely any
Impositions is due to Landlord's failure to give Tenant such Notice at least ten
(10) days before the amounts therein are due.
Tenant shall give prompt Notice to Landlord of all taxes included in
Landlord Obligations payable by Landlord hereunder of which Tenant at any time
has knowledge; provided, however, that Tenant's failure to give any such Notice
shall in no way diminish Landlord's obligation hereunder to pay such Landlord
Obligations, except that Tenant shall be responsible for any interest and/or
penalties incurred by Landlord as a result of Tenant's failure to forward any
invoices, assessment notices or other bills to Landlord and no Landlord Default
shall be deemed to have occurred hereunder if Landlord's failure to pay timely
any taxes included in Landlord Obligations is due to Tenant's failure to give
Landlord such Notice at least ten (10) days before the amounts therein are due.
(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. Except as otherwise provided in Section 9.2,
------------------
Tenant shall pay or cause to be paid all premiums for the insurance coverage
required to be maintained by it pursuant to Article 9.
(d) Other Charges. Tenant shall pay or cause to be paid all other
-------------
amounts, liabilities and obligations that Tenant assumes or agrees to pay under
this Lease,
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including, without limitation, all agreements to indemnify Landlord under
Sections 4.3.3 and 9.8.
(e) Reimbursements for Prepaid Expenses. On the Commencement Date,
-----------------------------------
Tenant shall reimburse Landlord for all amounts described as Prepaid Expenses as
set forth on Schedule 3.1.5 hereto.
--------------
(f) Reimbursement for Additional Charges. If Tenant (as opposed to
------------------------------------
Manager) pays or causes to be paid Additional Charges attributable to periods
before the Commencement Date, Tenant shall provide Notice to Landlord of such
amounts and, within fifteen (15) days thereafter, Landlord shall remit to Tenant
the amount of such Additional Charges paid. If Tenant pays or causes to be paid
Additional Charges attributable to periods after the end of the Term, Tenant
may, within sixty (60) days after the end of the Term, provide Notice to
Landlord of such amounts. Provided no uncured monetary Default or Event of
Default then exists, Landlord shall reimburse Tenant for all payments of such
Additional Charges that are attributable to any period after the expiration or
earlier termination of the Term of this Lease within fifteen (15) days after its
receipt of such Notice. Notwithstanding the foregoing, Tenant shall only be
reimbursed to the extent such Additional Charges are not taken into account in
the calculation and settlement of Working Capital accounts as set forth in
Section 4.5. In the event Manager pays for Additional Charges attributable to
periods before the Commencement Date, Tenant shall receive a payment as set
forth in Section 3.1.6(g) below. Tenant shall reimburse Landlord within fifteen
(15) days after receipt of Notice (which shall be given within sixty (60) days
after the end of the Term) for any Additional Charges paid by Landlord
attributable to periods during the Term for which Tenant received a credit in
the settlement of Working Capital.
3.1.6 Adjustments to/Abatements of Rent.
(a) FF&E Adjustment to Rent. Pursuant to the terms of
-----------------------
Schedule 22.2, Rent shall be reduced by the amount of the FF&E Adjustments
- -------------
then in effect. In the event there is an FF&E Adjustment which commences on a
day other than the first day of an Accounting Period in which such FF&E
Adjustment occurs, Landlord shall reimburse Tenant in cash, within fifteen (15)
days after such FF&E Adjustment, an amount equal to the amount by which Rent
paid for the Accounting Period in which the FF&E Adjustment commenced exceeded
the amount of Rent (as reduced by the FF&E Adjustment) owed for such Accounting
Period.
(b) Adjustments of Rent Following Owner-Funded Capital Expenditures
---------------------------------------------------------------
Under Management Agreement. Except as otherwise provided in Section 3.1.6(c) or
- --------------------------
(e), effective on the date of any "Owner"-funded Capital Expenditures (as the
term "Owner" is defined in the Management Agreement) paid by Landlord (other
than Capital Expenditures paid out of the FF&E Reserve), the Rent due for each
Fiscal Year thereafter in which Room Revenues for such Fiscal Year exceed the
Annual Room Revenues Second Break Point shall be increased by an amount equal to
[2%] of the amount of such contributions or expenditures.
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(c) Adjustment of Rent for Major Capital Expenditures. In the event
-------------------------------------------------
of either a reduction or increase in Gross Revenues or an adverse or beneficial
impact on the Facility's operations, in either case resulting from any Major
Capital Expenditure, Landlord and Tenant shall, in good faith, negotiate
possible modifications to the Minimum Rent and Percentage Rent to determine an
appropriate temporary or permanent adjustment of Rent and the effective date of
such adjustment. If Landlord and Tenant are unable to agree that a reduction or
increase in Gross Revenues or an adverse or beneficial impact on Facility
operations, in either case resulting from any Major Capital Expenditure, has
occurred, within thirty (30) days after the date of Notice from either party to
the other that such event has occurred (accompanied by reasonably detailed
computations and documentation to support such assertion), the matter may be
submitted by either party to arbitration under Article 15 for resolution and for
determination of the amount of the adjustment to Minimum Rent and Percentage
Rent contemplated hereby. Tenant shall continue to pay Minimum Rent and
Percentage Rent as required under Sections 3.1.1 through 3.1.5 of this Lease
until such time as any adjustments to Percentage Rent and/or Minimum Rent are
agreed upon or determined as set forth above.
(d) Adjustment of Rent for Increases or Decreases in the FF&E Reserve
-----------------------------------------------------------------
Percentage. In the event that there is an increase or decrease, as the case may
- ----------
be, in the percentage of Gross Revenues from the Leased Property required to be
deposited by Landlord in the FF&E Reserve (the "FF&E RESERVE PERCENTAGE"), the
Rent due for each Fiscal Year thereafter in which Room Revenues for such Fiscal
Year exceed the Annual Room Revenues Second Break Point shall be increased (in
the case of an increase in the FF&E Reserve Percentage) by an amount equal to
the product of (i) the aggregate of the Room Revenues, the Food and Beverages
Sales and the Other Income for such Fiscal Year times (ii) [19]% times (iii) the
percentage point increase in the FF&E Reserve Percentage, or decreased (in the
case of a decrease in the FF&E Reserve Percentage) by an amount equal to the
product of (i) the aggregate of the Room Revenues, the Food and Beverages Sales
and the Other Income for such Fiscal Year times (ii) [21]% times (iii) the
percentage point decrease in the FF&E Reserve Percentage, in each case for the
period during which the adjusted FF&E Reserve Percentage remains in effect.
(e) Adjustment of Rent for Landlord Funded Increase in FF&E Reserve.
---------------------------------------------------------------
In the event that Landlord is required by Manager to fund an increase in the
FF&E Reserve (other than by reason of an increase in the FF&E Reserve
Percentage), the Rent due for each of the five full Fiscal Years following the
Fiscal Year in which the funding of such increase occurred shall be increased,
for each Fiscal Year during such five (5)-year period that the Room Revenues for
such Fiscal Year exceed the Annual Room Revenues Second Break Point, by an
amount equal to [4.75]% of the dollar amount increase in the FF&E Reserve
resulting from such funding.
(f) Tenant Reimbursement for Landlord Obligations Paid by Manager or
----------------------------------------------------------------
Tenant. Landlord shall reimburse Tenant in cash for the amount of any Landlord
- ------
Obligations either (i) paid by Manager and deducted by Manager out of amounts
owed to Tenant in accordance with the Management Agreement or (ii) paid by
Tenant, such reimbursement to be paid within fifteen (15) days after receiving
Notice thereof, provided no uncured monetary Default or Event of Default then
exists.
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(g) Tenant Reimbursement for Additional Charges Attributable to
-----------------------------------------------------------
Periods prior to the Commencement Date and Paid by Manager. In the event
- ----------------------------------------------------------
Manager pays Additional Charges attributable to the period before the
Commencement Date, and deducts the same from "Gross Revenues" (as defined in the
Management Agreement) in accordance with the Management Agreement, and such
Additional Charges were not taken into account in the calculation and settlement
of Working Capital accounts as set forth in Section 4.5, such Additional Charges
shall be the responsibility of Landlord, and Landlord shall remit to Tenant in
cash within fifteen (15) days after receiving Notice thereof the amount of such
Additional Charges paid, provided no uncured monetary Default or Event of
Default then exists. In the event any item of Gross Revenues attributable to
periods prior to the Commencement Date is not properly reflected in the initial
calculation of Working Capital pursuant to Section 4.5, Tenant shall remit to
Landlord in cash within fifteen (15) days after receiving Notice thereof the
amount of such item not properly reflected.
(h) Abatement of Rent for Casualty. If and to the extent that any
------------------------------
Casualty results in a reduction of Gross Revenues as provided in Section 10.5,
then Rent shall be abated to the extent provided in Section 10.5.
(i) Abatement of Rent for Partial Condemnation. In the event of a
------------------------------------------
partial Condemnation as described in Section 11.2 which does not result in a
termination of this Lease by Landlord pursuant to Section 11.2, the Rent shall
be abated in the manner and to the extent provided in Section 11.3.
3.2 Late Payment of Rent.
If any installment of (i) Minimum Rent, (ii) Percentage Rent, or (iii)
Additional Charges (but only as to those Additional Charges that are payable
directly to Landlord) shall not be paid on 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 the Facility Mortgagee pursuant to any requirement of this Lease,
Tenant shall be relieved of its obligation to pay such Additional Charges to the
Entity to which they would otherwise be due.
In the event of any failure by Tenant to pay any Additional Charges
when due to any Entity other than Landlord, Tenant shall promptly pay and
discharge, as Additional Charges, every fine, penalty, interest and cost that
may be added by the Entity to which such Additional Charges are due (other than
Landlord) for nonpayment or late payment of such items (subject to Landlord's
obligation to pay or reimburse as provided in Section 3.1.5(a)).
3.3 Net Lease.
The Rent shall be absolutely net to Landlord so that this Lease shall
yield to Landlord the full amount of the installments or amounts of Rent
throughout the Term, subject to any other provisions of this Lease which
expressly provide for adjustment or
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<PAGE>
abatement of such Rent or expressly provide that certain Landlord Obligations
and Capital Expenditures are to be paid and/or performed by Landlord.
3.4 No Termination, Abatement, Etc.
Except as otherwise specifically provided in this Lease, Tenant, to
the maximum extent permitted by law, shall remain bound by this Lease in
accordance with its terms and shall neither take any action without the consent
of Landlord to modify, surrender or terminate this Lease, nor seek, nor 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, except to the extent that a court of competent
jurisdiction has issued a final, nonappealable order determining that Tenant was
constructively evicted from the Leased Property; (c) any claim that Tenant may
have against Landlord by reason of any default or breach of any warranty by
Landlord under this Lease or any other agreement between Landlord and Tenant, or
to which Landlord and Tenant are parties (except for the Consent and
Assignment); (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) any other cause
whether similar or dissimilar to any of the foregoing, other than a discharge of
Tenant from any such obligations as a matter of law; provided, however, that the
foregoing shall not apply or be construed to restrict any other rights Tenant
may have as a result of any act or omission by Landlord constituting gross
negligence or willful misconduct. Tenant hereby waives all rights arising from
any occurrence whatsoever, which may now or hereafter be conferred upon it by
law, to (i) modify, surrender or terminate this Lease or quit or surrender the
Leased Property or any portion thereof, or (ii) entitle Tenant to any abatement,
reduction, suspension or deferment of the Rent or other sums payable or other
obligations to be performed by Tenant hereunder, except as otherwise
specifically provided in this Lease and except to the extent that a court of
competent jurisdiction has issued a final, nonappealable order determining that
Tenant was constructively evicted from the Leased Property. The obligations of
Tenant 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 Lease or this Lease shall be
terminated. Notwithstanding anything set forth in this Lease to the contrary,
in any instance where, after the occurrence of a Default or an Event of Default,
this Lease expressly permits Landlord to retain funds which, but for the Default
or Event of Default, would be payable to Tenant, Landlord shall refund such
funds to Tenant to the extent the amount exceeds the amount estimated by
Landlord in good faith to be necessary to compensate Landlord for any cost,
loss, or damage incurred or reasonably expected to be incurred in connection
with such Default or Event of Default.
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<PAGE>
3.5 Lockbox Procedures.
(a) In the event that either (i) the Tangible Net Worth of CCC is less
than two hundred percent (200%) of the amount of the maximum liability under the
Guarantee from time to time as of the end of each of three (3) consecutive
Accounting Periods, or (ii) the Consolidated Coverage Ratio of CCC is less than
2.3 to 1.0 for each of three (3) consecutive Accounting Periods, or (iii) there
is an Event of Default under Section 12.1(a)(i), 12.1(c) (by reason of a breach
of Section 7.1 or 21.6.3), 12.1(f), 12.1(g), 12.1(h), 12.1(i), 12.1(k), or
12.1(m) of this Lease, or (iv) there is a default continuing beyond any
applicable cure period under Section 12.1(a)(i) or Section 12.1(c) (by reason of
a breach of Section 7.1 or 21.6.3) of any Pool Lease (other than this Lease) or
any Other Lease with respect to which CCC Limit of Liability under any CCC
guarantee applicable to such Other Lease is greater than zero, then, at
Landlord's option and upon Notice to Manager and Tenant (the date of such
notice, the "LOCKBOX NOTICE DATE"), the procedures set forth in this Section 3.5
shall apply during the period beginning no later than two (2) weeks after the
Lockbox Notice Date and continuing thereafter until the first (1st) day of the
first (1st) full Accounting Period after (w) the Tangible Net Worth of CCC is at
least equal two hundred percent (200%) of the maximum liability under the
Guarantee from time to time as of the end of each of three (3) consecutive
Accounting Periods, (x) the Consolidated Coverage Ratio of CCC is at least 2.3
to 1.0 for each of three (3) consecutive Accounting Periods, (y) no Event of
Default under Section 12.1(a)(i), 12.1(c) (by reason of a breach of Section 7.1
or 21.6.3), 12.1(f), 12.1(g), 12.1(h), 12.1(i), 12.1(k), or 12.1(m) of this
Lease has been in effect as of the end of each of three (3) consecutive
Accounting Periods, or (z) there has been no default continuing beyond any
applicable cure period under Section 12.1(a)(i) or Section 12.1(c) (by reason of
a breach of Section 7.1 or 21.6.3) of any Pool Lease (other than this Lease) or
any Other Lease with respect to which CCC Limit of Liability under any CCC
guarantee applicable to such Other Lease is greater than zero, as of the end of
each of three (3) consecutive Accounting Periods (such period, a "LOCKBOX
PERIOD"). At any time after the termination of the Guarantee pursuant to Section
10 thereof, a Lockbox Period shall commence pursuant to this subsection (a) only
if there is an Event of Default under Section 12.1(a)(i), 12.1(c) (by reason of
a breach of Section 7.1 or 21.6.3), 12.1(f), 12.1(g), 12.1(h), 12.1(i), or
12.1(k) of this Lease.
(b) Following the Lockbox Notice Date and prior to commencement of the
Lockbox Period, Landlord (or, if required by the terms of any Facility Mortgage,
any Facility Mortgagee or its agent) shall establish and maintain a cash
collateral account at a financial institution mutually acceptable to Landlord
and Tenant (the "LOCKBOX ACCOUNT"), as a segregated account in the name of
Landlord (or, if applicable, the Facility Mortgagee or its agent), into which
all revenues of Tenant due from Manager to Tenant or paid by Landlord to Tenant
hereunder that are to be held as security for Tenant's obligations under this
Lease shall be deposited.
(c) During the Lockbox Period, Manager shall, in accordance with the
Consent and Assignment, deposit into the Lockbox Account all amounts required to
be paid to Tenant under the Management Agreement and Landlord shall deposit any
funds that it is required to pay to Tenant under this Lease directly into the
Lockbox Account. During the Lockbox Period, any funds received directly by
Tenant and not yet deposited into the Lockbox Account shall irrevocably be
deemed to be held in trust pursuant to the terms of this Section 3.5 and shall,
immediately upon receipt and identification as belonging to Tenant (and in no
event later than one full Business Day after receipt and identification as
belonging to Tenant), be deposited by Tenant into the Lockbox Account.
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(d) During the Lockbox Period, all funds that are received in cash in
the Lockbox Account in any Accounting Period shall be disbursed in the following
order of priority on the next date on which a scheduled payment of Rent is due:
First: for the account of Tenant, to pay to Landlord all Rent
(including Additional Charges) due and payable by Tenant as of such
payment date; and
Second: provided that no Event of Default under Section
12.1(a)(i) has occurred and is then continuing, all Distributable Cash
(as defined in the Pooling Agreement) shall be remitted to the
Collateral Agent under the Pooling Agreement for deposit in the Pool
Cash Collateral Account (as defined in the Pooling Agreement); and
Third: provided that no Event of Default under Section 12.1(a)(i)
or 12.1(c) (by reason of a breach of Section 7.1 or 21.6.3) hereof has
occurred and is then continuing, any remaining balance will be
transferred from the Lockbox Account to Tenant.
(e) The funds on deposit in the Lockbox Account shall be the property
of Tenant but shall be pledged to Landlord as further security for Tenant's
obligations under this Lease pursuant to the Security Agreement.
(f) Upon termination of the Lockbox Period, provided the Guarantors
are not then in monetary default under the Guarantee, and unless otherwise
specified in the Pooling Agreement, all amounts in the Lockbox Account shall be
paid to Tenant.
(g) Notwithstanding the foregoing, a Lockbox Period shall commence
upon the giving of any notice of termination of the Guarantee pursuant to
Section 10(a) of the Guarantee. Any Lockbox Period that commences under this
subsection (g) shall continue until the earlier of (i) the date 12 months after
the date on which the six-month period specified in Section 10(a)(iii) of the
Guarantee commences or (ii) if no such six-month period commences, the date on
which such notice is deemed to be void pursuant to Section 10(a)(ii)(F) of the
Guarantee. During the portion (if any) of such Lockbox Period that commences on
the day after the expiration of such six-month period, the Collateral Agent
shall retain all funds not applied to payment of Rent under the Lease and, (x)
on the "Distribution Date" (as such term is defined in the Pooling Agreement)
relating to the third Accounting Period beginning after the commencement of such
portion of the Lockbox Period and (y) at the termination of such Lockbox Period,
distribute all funds held in the Lockbox Account to Tenant, provided that there
are not then any unpaid Rents that are due under the Lease or that no other
Event of Default under Section 7.1 or 21.6.3 of the Lease has occurred and is
continuing (in which event such funds will only be disbursed in accordance with
the provisions of Section 3.5(d) above).
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ARTICLE 4
USE OF THE LEASED PROPERTY
4.1 Permitted Use.
4.1.1 Primary Intended Use.
Tenant shall, at all times during the Term and at any other
time that Tenant shall be in possession of any Leased Property, continuously use
the Leased Property for the operation of a first class, full-service hotel and
for such other uses as may be incidental or necessary thereto (such use being
hereinafter referred to as the Leased Property's "PRIMARY INTENDED USE"). Tenant
covenants and agrees to use its best efforts to operate the Facility according
to First Class Operating Standards (which, during any period when the Management
Agreement is in effect, Tenant shall be deemed to have done so long as Tenant
uses its best efforts to cause the Manager to operate the Facility in accordance
with the terms of the Management Agreement) and, except as otherwise expressly
provided herein, agrees to pay all costs related thereto. Tenant shall not use
the Leased Property or any portion thereof for any use inconsistent with the
Primary Intended Use without the prior written consent of Landlord. Tenant shall
not 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 Primary Intended Use.
4.1.2 Necessary Approvals.
Tenant shall proceed with all due diligence and exercise best
efforts to obtain and maintain (or to cause Manager to procure and maintain) all
Licenses necessary to use and operate, for its Primary Intended Use, the Leased
Property and Facility located thereon under Legal Requirements and Landlord
shall cooperate with respect to obtaining any such License, including joining in
any application for Licenses to the extent required by Legal Requirements.
4.1.3 Lawful Use, Etc.
Tenant shall not use, and shall use commercially reasonable
efforts to prohibit third parties from using, the Leased Property or Tenant's
Personal Property for any unlawful purpose. Tenant shall not commit, and shall
use commercially reasonable efforts not to suffer to be committed, any waste on
the Leased Property, or in the Facility, nor shall Tenant cause or permit any
nuisance thereon or therein. Tenant shall not use, and shall use commercially
reasonable efforts to prohibit third parties from using, the Leased Property or
any portion thereof, including Tenant's Personal Property, in such a manner as
(i) might reasonably tend to impair Landlord's (or Tenant's, as the case may be)
title thereto or to any portion thereof or (ii) may reasonably make possible a
claim or claims for adverse usage or adverse possession by the public, or of
implied dedication of the Leased Property or any portion thereof. Tenant shall
not use, and shall use commercially reasonable efforts to prohibit third parties
from using, the Leased Property in any manner that 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 otherwise
provide to guests or residents therein, and shall use commercially reasonable
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efforts to prohibit third parties from keeping, using or selling 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.
4.2 Compliance with Legal and Insurance Requirements, Etc.
Subject to the provisions of the Management Agreement and Article 8
hereof, and subject to compliance by Landlord with its obligations hereunder,
Tenant, at its sole expense, shall (i) comply in all material respects with
Legal Requirements and Insurance Requirements in respect of the use, operation,
maintenance, repair, alteration and restoration of the Leased Property,
including Legal Requirements regarding labor relations with respect to Manager's
employees as required pursuant to the Management Agreement, and (ii) procure,
maintain and comply in all material respects with all appropriate licenses,
permits, and other authorizations and agreements required for any use of the
Leased Property and Tenant's Personal Property then being made, and for the
proper erection, installation, operation and maintenance of the Leased Property
or any part thereof. Landlord shall comply in all material respects with Legal
Requirements pertaining to Landlord regarding labor relations with respect to
Manager's employees.
4.3 Environmental Matters.
4.3.1 Restriction on Use, Etc.
Tenant shall not store, spill upon, dispose of or transfer to
or from the Leased Property any Hazardous Materials, except that Tenant may
store, transfer and dispose of Hazardous Materials in compliance with all
Environmental Laws. Tenant shall use commercially reasonable efforts to cause
Manager to maintain the Leased Property at all times free of any Hazardous
Materials (except such Hazardous Materials as are maintained in compliance with
all Environmental Laws). Tenant shall promptly (a) notify Landlord in writing of
any material change in the nature or extent of Hazardous Materials at the Leased
Property of which Tenant has notice or actual knowledge, (b) transmit to
Landlord a copy of any Community Right to Know report which is required to be
filed by Tenant with respect to the Leased Property pursuant to SARA Title III
or any other Environmental Law, (c) transmit to Landlord copies of any demand
letters, complaints or other documents initiating legal action, citations,
orders, notices or other material communications asserting claims by private
parties or government agencies with respect to Hazardous Materials received by
Tenant or its agents or representatives (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 could give rise to a
material violation of any Environmental Law and/or could give rise to any
material cost, expense, loss or damage (an "ENVIRONMENTAL OBLIGATION"), (d) use
commercially reasonable efforts to cause Manager to observe and comply with all
Environmental Laws relating to the use, maintenance and disposal of Hazardous
Materials and all orders or directives from any official, court or agency of
competent jurisdiction relating to the use or maintenance thereof or requiring
the removal, treatment, containment or other disposition thereof, and (e)
subject to Section 4.3.2, pay or otherwise dispose of any fine, charge or
imposition related thereto, unless Tenant shall contest the
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same in good faith and by appropriate proceedings and the right to use, and the
value of, the Leased Property is not adversely affected thereby in any
substantial manner.
If at any time Hazardous Materials are discovered in violation
of Environmental Laws on the Leased Property, subject to Section 4.3.2 Tenant
shall exercise commercially reasonable efforts to cause Manager to take all
actions and incur any and all expenses (which actions and expenses shall be
subject to Landlord's prior approval, not to be unreasonably withheld,
conditioned or delayed except in Emergency Situations, in which case Landlord's
prior approval shall not be required) as may be necessary or as may be required
by any Government Agency (i) to clean up and remove from and about the Leased
Property all Hazardous Materials thereon, (ii) to contain and prevent any
further release or threat of release of Hazardous Materials on or about the
Leased Property and (iii) to use good faith efforts to eliminate any further
release or threat of release of Hazardous Materials on or about the Leased
Property.
4.3.2 Environmental Indemnification of Tenant by Landlord.
Landlord shall protect, indemnify and hold harmless Tenant, its
Affiliates and their respective members, shareholders or other equity owners,
directors, management committee, or similar persons, trustees, officers, and
employees and any of their respective successors or assigns (hereafter the
"TENANT INDEMNITEES," and when referred to singly, a "TENANT 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 attorneys' fees and expenses) imposed
upon, incurred by or asserted against any Tenant Indemnitee resulting from,
either directly or indirectly, the presence during the Term in the Environment
of the Leased Property or any properties surrounding the Leased Property of any
Hazardous Materials (collectively, "ENVIRONMENTAL LIABILITIES"), except to the
extent that the same arise by reason of the negligence or willful misconduct of
Tenant, any other Tenant Indemnitee, or their respective agents (including
during the Term, the Manager). Landlord's duty herein includes, but is not
limited to, indemnification for costs associated with personal injury or
property damage claims as a result of the presence of Hazardous Materials in,
upon or under the soil or ground water of the Leased Property in violation of
any Environmental Law. Upon Notice from Tenant, Landlord shall undertake the
defense, at Landlord's sole cost and expense, of any indemnification duties set
forth herein, in which event Landlord shall not be responsible for any
duplicative attorneys' fees incurred by any Tenant Indemnitee.
Landlord shall, upon demand, pay to Tenant any cost, expense,
loss or damage (including, without limitation, reasonable attorneys' fees)
incurred by Tenant in asserting any right under this Section 4.3.2, including,
without limitation, any right of indemnity under this Section 4.3.2 or otherwise
arising from a failure of Landlord strictly to observe and perform the foregoing
requirements, which amounts shall bear interest from the date upon which demand
is made therefor until paid by Landlord to Tenant at the Overdue Rate. Landlord
agrees to waive any and all rights of contribution from Tenant which might arise
under applicable law for any liability imposed upon Landlord pursuant to this
Section 4.3.2.
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4.3.3 Environmental Indemnification of Landlord by Tenant.
Tenant shall protect, indemnify and hold harmless Landlord and
each Facility Mortgagee, their Affiliates and their respective members,
shareholders or other equity owners, directors, management committee, or similar
persons, trustees, officers, and employees, and any of their respective
successors or assigns (hereafter the "LANDLORD INDEMNITEES," and when referred
to singly, a "LANDLORD INDEMNITEE") for, from and against any and all
Environmental Liabilities to the extent that the same arise by reason of
Tenant's, any other Tenant Indemnitee's, or their respective agents' (including
the Manager's) gross negligence or willful misconduct. Upon Notice from
Landlord, 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 responsible for payment of any duplicative attorneys' fees incurred by any
Landlord 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 in asserting any right under
this Section 4.3.3, including, without limitation, any right of indemnity under
this Section 4.3.3 or otherwise arising from a failure of Tenant strictly to
observe and perform the foregoing requirements, which amounts shall bear
interest from the date upon which demand is made therefor until paid by Tenant
to Landlord at the Overdue Rate. The foregoing notwithstanding, with respect to
Tenant's indemnification of Landlord for the acts or failure to act of Manager,
Tenant shall only become obligated to pay any sums upon a final, non-appealable
determination, in a judicial proceeding in which Manager is a party (or a
binding written acknowledgment of Manager to such effect), that Manager is
liable to Tenant for Environmental Liabilities in accordance with the terms of
the Management Agreement.
4.3.4 Survival.
The provisions of this Section 4.3 shall survive the expiration
or sooner termination of this Lease.
4.4 FF&E Reserve.
Tenant shall cause Manager to establish and maintain a reserve
account (the "FF&E RESERVE") in accordance with the terms of the Management
Agreement and to deposit into such account during each Fiscal Year monies for
the account of Landlord (which amounts shall be funds of Landlord for all
purposes and shall be credited against the Rent obligation of Tenant pursuant to
Section 3.1.6(f)) in the amount required to be maintained pursuant to the
Management Agreement and in accordance with established custom of Manager prior
to the Commencement Date. Landlord shall be responsible for the payment of all
amounts required to be paid by "Owner" (as defined in the Management Agreement)
pursuant to the Management Agreement to fund the FF&E Reserve, including,
without limitation, any deficits therein, and for paying for all FF&E necessary
for the continued operation of the Facility in accordance with First Class
Operating Standards, subject to the provisions of Schedule 22.2. Tenant shall
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make no expenditure for replacement of FF&E in excess of the amounts
in the FF&E Reserve without first obtaining the written approval of Landlord
(unless Tenant makes such
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expenditures from its own funds without any right to reimbursement hereunder).
In the event Tenant funds any amounts required to be funded by Landlord for FF&E
pursuant hereto or by "Owner" pursuant to the Management Agreement which
Landlord has approved, Tenant shall receive a reimbursement in accordance with
Section 3.1.6(f) hereof. Any additions to or replacements of furniture,
fixtures, and equipment located at the Leased Property shall become part of the
FF&E which is owned by Landlord, subject to the limitations set forth in
Schedule 22.2 hereof. Throughout the Term of this Lease, Tenant shall, at its
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sole cost and expense but subject to the terms hereof and of the Management
Agreement, cause all of the items of FF&E to be in proper working order and in
good condition (ordinary wear and tear excepted).
4.5 Working Capital.
Subject to the provisions of the Management Agreement, Landlord agrees
to sell the existing working capital (including (a) Inventories, Fixed Asset
Supplies, and net receivables due from Manager, and (b) accounts payable,
accrued payroll expenses and other accrued expenses related to the Facility)
(the "WORKING CAPITAL") to Tenant on the Commencement Date at a purchase price
equal to the fair market value of such assets (which Landlord and Tenant agree
is equal to the book value of such assets on the Commencement Date after taking
into account any depreciation as of the Commencement Date). Except as provided
in the next sentence, title to the Working Capital so assigned, transferred and
delivered shall be free and clear of any Liens of any nature whatsoever created
by Landlord or arising in respect of any obligation of Landlord or arising by
reason of any act or omission of Landlord. Such sale shall be made expressly
subject to the Facility Mortgagee's first-priority lien, if any, on some or all
of such Working Capital, and Tenant shall acknowledge same in writing to Lender
and sign UCC-1 financing statements confirming same (at Landlord's expense) in
accordance with the Facility Mortgagee Agreement, which financing statements
shall be prepared and filed by Landlord at Landlord's sole cost and expense.
The purchase price for the Working Capital shall be paid by Tenant by the
issuance to Landlord of a promissory note in the form set forth on Exhibit E
hereto (the "WORKING CAPITAL NOTE"). The Working Capital Note shall be in the
principal amount of said purchase price and shall provide for accrual of
interest on such principal amount from the Commencement Date until payment in
full thereof at the rate per annum equal to the "long-term applicable federal
rate" (as defined in Section 1274 of the Code) in effect on the Commencement
Date. The Working Capital Note shall provide that such interest will be payable
from time to time at such time as each payment of Rent is due under Section
3.1.1, and the amount of interest paid under the Working Capital Note on any
interest payment date also shall be credited against Rent payable on such date.
The Working Capital Note shall further provide that the principal amount thereof
will be payable in full, together with accrued and unpaid interest thereon, upon
the expiration or earlier termination of this Lease for any reason (including,
without limitation, a termination by the Facility Mortgagee in accordance with
Section 20.2 hereof) as follows: Upon such expiration or termination, Tenant
will transfer to Landlord, in payment of the principal amount of the Working
Capital Note and accrued and unpaid interest thereon, title to all Working
Capital then owned by Tenant. To the extent that the fair market value of the
Working Capital at such time (which Landlord and Tenant agree shall be equal to
the book value of such assets at such time after taking into account any
depreciation as of such date) exceeds the principal amount of the Working
Capital Note
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plus accrued and unpaid interest thereon, Landlord shall pay to Tenant an amount
in cash equal to such excess; to the extent that such fair market value is less
than the principal amount of the Working Capital Note plus accrued and unpaid
interest thereon, Tenant shall pay to Landlord an amount in cash equal to such
deficiency.
In the event that this Lease is terminated by the Facility Mortgagee
pursuant to the terms of Section 20.2 hereof, Tenant agrees that it shall
transfer title to the Working Capital then owned by it (and pay in cash any
deficiency due to Landlord pursuant to the Working Capital Note) directly to the
Facility Mortgagee or its designee and that it shall look only to Host O.P. for
payment of the amount (if any) by which such payment exceeds the principal
amount of the Working Capital Note, all in accordance with the terms of the
Facility Mortgagee Agreement, and Host O.P. agrees to pay such amount.
Landlord and Tenant agree that, following the sale of the Working
Capital on the Commencement Date as provided for above, all Working Capital
during the Term of this Lease shall be the property of Tenant (and not Landlord)
for all purposes (subject, however, to the Liens hereinafter referred to in this
paragraph), and neither Landlord nor Tenant shall at any time take a position
(in its books and records or otherwise) or make an assertion inconsistent
therewith. Tenant has granted Landlord a security interest in all such Working
Capital pursuant to Section 7.2 hereof. Tenant acknowledges that Landlord has
pledged and assigned to the Facility Mortgagee, as additional security for
Landlord's obligations under the loan secured by the Facility Mortgage, the
Working Capital Note and Landlord's rights and interest in respect of this
Lease, including all Landlord Liens with respect to any and all Tenant's
Personal Property, including, without limitation, all Working Capital owned by
Tenant during the Term of this Lease, securing Tenant's obligations hereunder.
ARTICLE 5
MAINTENANCE AND REPAIRS; SURRENDER
5.1 Maintenance and Repair.
5.1.1 Tenant's Obligations.
Except as otherwise expressly provided in this Lease, and
except for conditions caused by the gross negligence or willful misconduct of
Landlord, its employees, agents or independent contractors (which terms shall
not be deemed to include Manager with respect to actions or inactions of Manager
during the Term of this Lease), Tenant shall, at its sole cost and expense, keep
the Leased Property and all private roadways, sidewalks and curbs appurtenant
thereto (and Tenant's Personal Property) in good order and repair, ordinary wear
and tear excepted (whether or not the need for such repairs occurs as a result
of Tenant's use, any prior use, the elements or the age of the Leased Property
or Tenant's Personal Property, or any portion thereof), and shall promptly make
all necessary and appropriate repairs and replacements thereto of every kind and
nature (excluding Capital Expenditures), whether interior or exterior,
structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen,
necessary for the Primary Intended Use (concealed or otherwise). Notwithstanding
anything set forth herein to the contrary, unless the need for compliance with
this Section 5.1.1 is caused by Tenant's negligence or
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willful misconduct or that of its employees or agents (including Manager, but
only to the extent that Tenant is obligated to indemnify Landlord and Landlord
Indemnitees for Manager's acts or omissions pursuant to Section 4.3.3) and is
not otherwise covered by insurance, Tenant shall not be responsible for any
necessary repair of Existing Conditions relating to Hazardous Materials,
including, without limitation, those set forth and described on Schedule 5.1.1
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hereto, which are Landlord Obligations. All repairs shall be made in a good,
workmanlike and first-class manner, in accordance with all Legal Requirements.
Tenant shall not 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 the Primary Intended Use. Tenant's obligations under this
Section 5.1.1 shall be limited, in the event of any Casualty or Condemnation
involving the Leased Property, as set forth in Articles 10 and 11. Tenant's
obligations under this Section 5.1.1 with respect to FF&E are subject to the
provisions of Section 4.4 hereof. Tenant shall have the non-exclusive right to
prosecute claims against Landlord's predecessors-in-interest (other than any
Affiliates of Landlord), contractors, subcontractors and suppliers for breach of
any representation or warranty or for any latent defects in the Leased Property,
unless Landlord is already diligently pursuing such claims.
5.1.2 Landlord Obligations.
(a) Landlord shall be obligated to pay the actual costs of any
items that are classified as Capital Expenditures and are approved by Landlord
as well as the actual costs of any necessary repairs (i) of Existing Conditions
relating to Hazardous Materials or (ii) resulting from the gross negligence or
willful misconduct of Landlord, its employees, agents or independent contractors
(which terms shall not be deemed to include Manager with respect to acts or
omissions of Manager during the Term of this Lease). Landlord shall not,
however, except as expressly set forth herein or otherwise required under the
Management Agreement or the Consent and Assignment (including, without
limitation, as set forth in this Section 5.1.2 and in Sections 4.3.2, 4.4,
5.1.1, 9.9 and 21.3.3 and in Article 6 hereof), 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 to make any expenditure whatsoever with respect
thereto, or to maintain the Leased Property in any way. 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 or from time to time, the Management
Agreement requires that funds be disbursed for repairs, maintenance, renovations
or replacements at or to the Leased Property, or, pursuant to the terms of this
Lease (including, without limitation, Section 4.4 hereof), Tenant is required to
make any expenditures in connection with any repair, maintenance or renovation
with respect to the Leased Property which constitute Landlord Obligations, and
the amount of such disbursements or expenditures exceeds the amount on deposit
in the FF&E Reserve, Tenant shall furnish Landlord with reasonable detail
regarding 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. Landlord shall, within ten (10) Business Days
after such Notice, subject to and in accordance with the applicable
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provisions of Article 6, disburse such required funds to Tenant (or, if Tenant
shall so elect, or if an Event of Default shall then exist hereunder, directly
to Manager or any other Person performing the required work).
5.2 Tenant's Personal Property.
Tenant may (and shall as provided hereinbelow), at its expense,
install, affix or assemble or place on the Facility any items of Tenant's
Personal Property, and Tenant may, subject to Section 7.2 and the conditions set
forth below, remove and replace the same at any time in the ordinary course of
business. Tenant shall provide and maintain throughout the Term all such
Tenant's Personal Property as shall be necessary in order to operate the
Facility in compliance in all material respects with applicable Legal
Requirements and Insurance Requirements and otherwise in accordance with
customary practice in the industry for such Primary Intended Use.
Subject to Section 4.5 hereof, all Tenant's Personal Property (except
that removed and replaced in the ordinary course of business as permitted above,
but including supplies and inventory that are equivalent, on an aggregate basis,
in amount and value similar to that reasonably established for use by the
Facility in the immediately preceding Lease Year) shall remain at the Leased
Property at the expiration or earlier termination of this Lease without the
necessity of any payment by Landlord to Tenant and without any obligation to
account therefor.
If Tenant acquires an interest in any material item of Tenant's
Personal Property (other than motor vehicles) on, or in connection with, the
Leased Property that belongs to anyone other than Tenant, Tenant shall use its
commercially reasonable efforts to require the agreement permitting such use to
provide that Landlord or its designee may assume Tenant's rights under such
agreement upon management or operation of the applicable Facility by Landlord or
its designee.
5.3 Surrender.
(a) Condition of Leased Property Upon Surrender. Upon the expiration
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or sooner termination of this Lease, Tenant shall vacate and surrender the
Leased Property to Landlord in the condition in which the Leased Property was on
the Commencement Date, ordinary wear and tear excepted, except as repaired,
rebuilt, restored, altered or added to as permitted or required by the
provisions of this Lease, ordinary wear and tear excepted. Together therewith
Tenant shall surrender to Landlord any and all records and documents related to
the Leased Property and Tenant's Personal Property (but not, subject to Section
5.3(d) hereof, documents primarily related to Tenant's business operated
therein).
(b) [Intentionally omitted]
(c) Membership Contracts. Upon expiration or earlier termination of
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this Lease, Tenant shall assign to Landlord any membership contracts relating to
golf courses, spas or other facilities in which there are nonequity interests
entered into by Tenant during the Term, and Landlord agrees to assume the
obligations of Tenant under any such
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membership contracts arising from and after the date of expiration or earlier
termination of this Lease.
(d) Transition Procedures. Tenant shall cooperate in good faith
---------------------
to provide access and information to any prospective purchaser or tenant of the
Leased Property that may acquire the Leased Property or lease it upon the
expiration or earlier termination of the Term, provided that Landlord shall use
its reasonable efforts to cause such prospective purchaser or tenant to enter
into a confidentiality agreement with respect thereto reasonably acceptable to
Tenant. Upon any expiration or earlier termination of the Term, Landlord and
Tenant shall do the following and, in general, shall cooperate in good faith to
effect an orderly transition of the management or lease of the Facility (and the
provisions of this Section 5.3(d) shall survive the expiration or earlier
termination of this Lease until they have been fully performed, up to a maximum
period of one (1) year after such expiration or termination, and nothing
contained herein shall limit Landlord's rights and remedies under this Lease if
such termination occurs as the result of an Event of Default):
(i) Upon the expiration or earlier termination of the Term,
Tenant shall use its commercially reasonable efforts (A) to transfer
to Landlord or Landlord's designee all licenses, operating permits and
other governmental authorizations and all contracts with governmental
or quasi-governmental entities, that may be necessary for the
operation of the Facility (collectively, "LICENSES"), to the extent
transferable or (B) if such transfer is prohibited by law or Landlord
otherwise elects, to cooperate with Landlord or Landlord's designee in
connection with the processing by Landlord or Landlord's designee of
any applications for all Licenses; provided, in either case, that the
costs and expenses of any such transfer or the processing of any such
application shall be paid by Landlord or Landlord's designee.
(ii) Tenant shall assign or cause to be assigned to Landlord or
Landlord's designee simultaneously with the termination of this Lease,
and the assignee shall assume, all leases, contracts, concession
agreements and other agreements in effect with respect to the Facility
then in Tenant's name; provided, however, that any leases of Excess
FF&E shall be subject to the provisions of Schedule 22.2 hereof, and
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provided further, that Landlord shall not be obligated to assume and
may reject any such contracts or agreements requiring the "Owner's"
approval under the Management Agreement which were entered into
subsequent to the date hereof and were not previously approved or
deemed approved by Landlord. In the event Landlord declines to assume
or reject any such contracts, agreements and/or leases, the contracts,
agreements and/or leases so rejected shall not be assigned or shall be
deemed reassigned and shall remain the property and responsibility of
Tenant. In no event shall Landlord (or its designee) have any
liability under such contracts for obligations or liabilities accruing
under such contracts after the Commencement Date and prior to the date
of such assumption by such party.
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(iii) To the extent that Landlord has not already received
copies thereof, copies of all books and records (including computer
records) for the Facility kept by (or available to) Tenant shall be
promptly delivered or made available for inspection and copying to
Landlord or Landlord's designee.
(iv) Subject to Section 4.5 hereof, Tenant shall be entitled to
retain all cash, bank accounts and house banks, and to collect all
Gross Revenues and accounts receivable accrued through the termination
date of this Lease. Tenant shall be responsible for the payment of
Rent, all operating expenses of the Facility as provided in this Lease
and all other obligations of Tenant accrued under this Lease as of the
termination date, and Landlord shall be responsible for all operating
expenses of the Facility accruing after the termination date.
(v) So long as termination is not the result of an Event of
Default, Landlord shall reimburse Tenant for its reasonable expenses
in connection with any cooperation with a prospective purchaser or
tenant hereunder.
5.4 Encroachments, Restrictions, Etc.
If any portion of the Facility shall, at any time, encroach upon any
property, street or right-of-way adjacent to the Leased Property, or shall
violate the agreements or conditions contained in any lawful restrictive
covenant or other agreement affecting the Leased Property, or any part thereof,
or shall impair the rights of others under any easement or right-of-way to which
the Leased Property is subject, upon the request of Landlord (but only as to any
encroachment, violation or impairment that is not a Permitted Lien) or of any
Person affected by any such encroachment, violation or impairment, Tenant shall,
at Tenant's sole cost and expense (except to the extent that the encroachment,
violation or impairment existed prior to the Commencement Date or was the result
of the act or omission of Landlord or its employees, agents (excluding Manager
except for Manager's acts or omissions in respect of Landlord Obligations) or
independent contractors), subject to its right to contest the existence of any
encroachment, violation or impairment in accordance with the provisions of
Article 8, either (a) obtain valid and effective waivers or settlements of all
claims, liabilities and damages resulting from each such encroachment, violation
or impairment, whether the same shall affect Landlord or Tenant or (b), subject
to Section 6.1, make such changes in the Facility and take such other actions as
are reasonably practicable to remove such encroachment and to end such violation
or impairment, including, if necessary, the alteration of the Facility and, in
any event, take all such actions as may be necessary in order to enable the
continued operation of the Facility for its Primary Intended Use substantially
in the manner and to the extent the Facility was operated prior to the assertion
of such violation, impairment or encroachment. Any such alteration shall be
made in conformity with the applicable requirements of this Article 5. Tenant's
obligations under this Section 5.4 shall be in addition to and shall in no way
discharge or diminish any obligation of any insurer under any policy of title or
other insurance.
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5.5 Landlord to Grant Easements, Etc.
Landlord shall from time to time, at the request of Tenant and at
Landlord's sole cost and expense, (a) grant easements and other rights in the
nature of easements with respect to the Leased Property to third parties, (b)
release existing easements or other rights in the nature of easements which are
for the benefit of the Leased Property, (c) dedicate or transfer unimproved
portions of the Leased Property for road, highway or other public purposes, (d)
execute petitions to have the Leased Property annexed to any municipal
corporation or utility district, (e) execute amendments to any covenants and
restrictions affecting the Leased Property and (f) execute and deliver to any
Person any instrument appropriate to confirm or effect such grants, release,
dedications, transfers, petitions and amendments (to the extent of its interests
in the Leased Property); provided, however, that Landlord shall have first
determined, in its reasonable discretion, that such grant, release, dedication,
transfer, petition or amendment is not detrimental to the operation of the
Leased Property for its Primary Intended Use and is beneficial to the value of
the Leased Property and is not in violation of the Management Agreement, and
Landlord shall have received within five (5) Business Days of its request an
Officer's Certificate confirming such determination, together with such
additional information as Landlord may request. Landlord agrees to obtain
Tenant's prior written approval, which shall not be unreasonably withheld,
conditioned or delayed, as to any recorded covenants, conditions and
restrictions which would affect the use or operation of the Leased Property as
it is then being used or operated by Tenant in accordance with this Lease (it
being agreed that the provisions of a Facility Mortgage or a ground lease shall
not be deemed to constitute covenants, conditions and restrictions subject to
this sentence).
ARTICLE 6
CAPITAL EXPENDITURES, ETC.
6.1 Capital Expenditures.
It shall be Landlord's obligation (and a Retained Obligation) to
approve and fund the cost of any Capital Expenditures, including, without
limitation, any Capital Expenditures required under the Management Agreement, in
accordance with the terms of the Management Agreement. Except as otherwise
hereinafter provided, Tenant shall not construct or install Capital Expenditures
on the Leased Property without obtaining Landlord's prior written consent.
Landlord's approval of the Capital Portion of the Annual Budget shall constitute
approval of the Capital Expenditures described therein. If Owner's consent is
required under the Management Agreement with respect to any Capital Expenditure
not covered in the Capital Portion of the Annual Budget, prior to commencing
construction of any Capital Expenditure Tenant shall submit to Landlord, in
writing, a proposal setting forth, in reasonable detail, any proposed Capital
Expenditure and shall provide to Landlord such plans and specifications,
permits, licenses, contracts and other information concerning the proposed
Capital Expenditure as Landlord may reasonably request. Without limiting the
generality of the foregoing, such proposal shall indicate the approximate
projected cost of constructing such Capital Expenditure and the use or uses to
which it will be put. Tenant shall not fund or otherwise finance the cost of
any construction of any Capital Expenditure without the prior written consent of
Landlord, which consent may be withheld by Landlord in Landlord's sole
discretion (unless Landlord
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has declined to fund such Capital Expenditure, Manager has consented to such
Capital Expenditure and Tenant's financing of such Capital Expenditure would not
result in the imposition of a Lien on any portion of the Leased Property or the
Capital Expenditure, in which event Landlord shall not unreasonably withhold its
consent). Any Capital Expenditures funded or financed by Tenant shall, upon the
expiration or sooner termination of this Lease, pass to and become the property
of Landlord, free and clear of all encumbrances other than Permitted Liens.
Notwithstanding the foregoing, Landlord's consent shall not be required in
connection with any Capital Expenditures (i) with respect to which immediate
action is required in order to comply with Legal Requirements or to prevent or
remedy Emergency Situations or (ii) not requiring the "Owner's" consent under
the Management Agreement; it being the intention hereof that the consent
requirements hereunder shall be consistent with the "Owner" consent requirements
with respect to Capital Expenditures under the Management Agreement.
6.2 [Intentionally Omitted.]
6.3 Cooperation by Tenant.
If Landlord shall, in Landlord's sole discretion, elect to finance any
proposed Capital Expenditure, or if Landlord is otherwise required to do so
pursuant to the terms of the Management Agreement and the Retained Obligations,
Tenant shall provide Landlord with such information as Landlord may from time to
time reasonably request.
6.4 Alterations.
Subject to the provisions of the Management Agreement, Tenant shall
have the right, at Tenant's sole cost and expense, to make additions,
modifications or improvements to the Leased Property which are not Capital
Expenditures ("ALTERATIONS") and which have a total cost of completion of less
than or equal to (a) $10,000, as to any individual Alteration, or (b) $50,000,
as to all Alterations, in the aggregate, over a twelve-month period, from time
to time as Tenant, in its discretion, may deem desirable for the Primary
Intended Use, provided that any such Alteration will not materially alter the
character or purpose or materially detract from the value, operating efficiency
or revenue-producing capability of the Leased Property or adversely affect the
ability of Tenant to comply with the provisions of this Lease, and, without
limiting the foregoing, will not violate any Legal Requirement or Insurance
Requirement applicable to the Leased Property. Any Alteration estimated to
exceed the applicable limits set forth above shall be subject to Landlord's
prior approval and the terms set forth in Section 6.1. All such Alterations
shall, upon expiration or earlier termination of this Lease, pass to and become
the property of Landlord, free and clear of all liens and encumbrances, other
than Permitted Liens.
6.5 Salvage.
All materials which are scrapped or removed in connection with the
making of either Capital Expenditures, Alterations, or repairs required by
Article 5 shall be the property of the party that paid for such work.
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ARTICLE 7
LIENS
7.1 Prohibition on Liens.
Tenant shall not, directly or indirectly, create or allow to remain
and shall promptly discharge, at its expense, any Lien on the Leased Property,
Tenant's leasehold interest therein, any Tenant's Personal Property now or
hereafter owned, any Excess FF&E owned by Tenant, any Excess FF&E Leasehold
Interest, Working Capital, or the Rent, other than (a) Permitted Liens, (b)
liens for Real Estate Taxes and other Landlord Obligations, (c) subleases
permitted by Article 16, (d) liens for Impositions or for sums arising from the
application of Legal Requirements so long as the same (i) are not yet delinquent
or (ii) are being contested in accordance with Article 8, (e) liens of
mechanics, laborers, materialmen, suppliers or vendors incurred in the ordinary
course of business that are not yet delinquent or are for sums that are being
contested in accordance with Article 8, (f) any Facility Mortgage or other liens
which are the responsibility of Landlord pursuant to the provisions of Article
20, (g) liens first arising prior to the Commencement Date, and (h) Landlord
Liens. Notwithstanding the foregoing, but subject to all other applicable terms
and conditions of this Lease, including without limitation the provisions hereof
regarding a Change in Control, a pledge of the ownership interests in CCC or
OpCo to secure bona fide Indebtedness shall not be deemed a violation of this
Section 7.1, provided that a subsequent foreclosure or other realization upon
such pledge shall be subject to the Change in Control provisions of this Lease.
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 are expressly
prohibited and that they must look solely to Tenant to secure payment for any
work done or material furnished for Alterations or Capital Expenditures by
Tenant or for any other purpose during the Term.
Tenant hereby acknowledges and agrees that, at all times while a
Facility Mortgage is in effect, all Excess FF&E acquired by Tenant, directly or
indirectly, from Landlord or leased by Tenant in accordance with Schedule 22.2
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hereof shall be and remain subject to a first priority Lien in favor of the
Facility Mortgagee. Tenant further acknowledges that Landlord has assigned and
pledged (or may assign or pledge in the future) to the Facility Mortgagee, as
additional security for Landlord's obligations under the loan secured by the
Facility Mortgage, Landlord's rights and interests under the Landlord Liens with
respect to any and all Tenant's Personal Property, Working Capital and Excess
FF&E Leasehold Interest now owned or hereafter acquired by Tenant at any time
while the Facility Mortgage remains in effect.
7.2 Landlord Lien.
In addition to any statutory landlord's lien and in order to secure
(a) payment of the Rent and all other sums payable to Landlord hereunder by
Tenant, (b) payment of the amounts owed under the Working Capital Note, (c)
payment of any loss, cost or damage that Landlord may suffer by reason of
Tenant's breach of this Lease, and (d) the performance of all of Tenant's other
obligations hereunder and under the Working
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Capital Note, Tenant and Landlord have, simultaneously with the execution of
this Lease, entered into a Security Agreement (the "SECURITY AGREEMENT") whereby
Tenant grants unto Landlord a security interest in, and an express contractual
lien upon, (i) Tenant's Personal Property (other than Working Capital), and all
proceeds therefrom (subject to any Permitted Liens), (ii) any Excess FF&E owned
by Tenant, (iii) any Excess FF&E Leasehold Interest of Tenant, and (iv) any
Working Capital of Tenant (collectively, together with any statutory lien
rights, "LANDLORD LIENS"). Tenant's Personal Property shall not be removed from
the Leased Property by Tenant at any time when a Default (with respect to any
monetary obligation of Tenant to Landlord hereunder and under the Working
Capital Note) or an Event of Default has occurred and is continuing except as
otherwise permitted pursuant to Section 5.2. In addition, Tenant hereby grants
unto Landlord a security interest in those contracts described in Section
5.3(d)(ii) hereof.
Upon Landlord's request, Tenant shall execute and deliver to Landlord
financing statements in form sufficient to perfect the security interest of
Landlord in (subject to the Facility Mortgagee's first-priority Lien thereon)
(x) Tenant's Personal Property and the proceeds thereof, (y) the contracts
described in Section 5.3(d)(ii) hereof, in accordance with the provisions of the
applicable laws of the State, and (z) any and all Working Capital, Excess FF&E
and Excess FF&E Leasehold Interests, in each case owned by Tenant from time to
time during the Term of this Lease.
ARTICLE 8
PERMITTED CONTESTS
Tenant 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 any obligation of Tenant provided
for in this Lease to pay any Claims as finally determined, (b) such contest, or
the maintenance of any Lien during such contest, shall not cause Landlord or
Tenant to be in default under any mortgage, deed of trust or other agreement
encumbering the Leased Property or any interest therein or result in a Lien
attaching to the Leased Property unless Tenant shall within ten (10) days
thereafter, have such Lien released of record or deliver to Landlord a bond or
other security reasonably satisfactory to Landlord, which shall be in form,
amount, and issued by a surety reasonably satisfactory to Landlord, indemnifying
Landlord against all costs and liabilities resulting from such Lien and the
foreclosure or attempted foreclosure thereof, (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. 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 and for which Landlord has been fully reimbursed
by Tenant. If Tenant shall fail (x) to pay any Claims when finally determined,
(y) to provide reasonable security therefor, or (z) to prosecute 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
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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. 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
or cost therefor (including, without limitation, for the payment of any costs or
expenses in connection therewith).
ARTICLE 9
INSURANCE AND INDEMNIFICATION
9.1 General Insurance Requirements.
At all times during the Term and at any other time Tenant shall be in
possession of the Leased Property, the Leased Property shall be insured against
the risks and in the amounts described below. This insurance shall be written
by companies authorized to issue insurance in the State. The policies must name
the party obtaining the policy as the insured and the other party, the Manager
and any Facility Mortgagee(s) as additional named insureds and/or (in the case
of any Facility Mortgagees) as loss payees. Losses shall be payable to Landlord
or Tenant as provided in Article 10 of this Lease. Any loss adjustment for
coverages insuring both parties shall require the written consent of Landlord
and Tenant, each acting reasonably and in good faith. The policies on the
Leased Property (including the Facility, Fixtures and FF&E owned by Landlord),
and on Tenant's Personal Property, shall, subject to Section 9.1(k), satisfy the
requirements of any ground lease, mortgage, security agreement or other
financing lien affecting the Leased Property (provided, however, that any
insurance coverage maintained with respect to the Leased Property by Manager or
Landlord in accordance with the Management Agreement shall be deemed to satisfy
such requirements so long as the Management Agreement is in effect) and at a
minimum shall include:
(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
Facility, extended coverage perils, earthquake (if available at commercially
reasonable rates) and all physical loss perils insurance, including, but not
limited to, sprinkler leakage, in an amount equal to one hundred percent (100%)
of the then full Replacement Cost thereof (as defined in Section 9.2), with the
usual extended coverage endorsements, including a Replacement Cost Endorsement
and Builder's Risk Coverage during the continuance of any construction at the
Leased Property;
(b) Loss of rent insurance (on the "SPECIAL FORM") in the minimum
amount of one (1) year of Minimum Rent and Percentage Rent (based on the last
twelve (12) months in which the Facility was operated for its Primary Intended
Use) for the benefit of Landlord, and business interruption insurance on the
"Special Form" in the amount of one year of projected net profit of Tenant from
the Facility (exclusive of collection costs and any operating expenses that are
considered by the applicable insurance company to be non-continuing as a result
of any Casualty), for the benefit of Tenant;
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(c) Flood (if the Facility 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, said coverage to be in an
amount equal to the lesser of the full Replacement Cost of the Facility or the
maximum amount available;
(d) Comprehensive general liability insurance, including bodily
injury, property damage, and innkeeper's liability (including broad form
contractual liability, fire legal liability and completed operations coverage)
having policy limits as to claims with respect to the Leased Property of at
least One Million Dollars ($1,000,000) per occurrence, Two Million Dollars
($2,000,000) aggregate per location, provided that such limits shall be modified
to conform to any required underlying statutory coverage, and Umbrella coverage
shall be provided having limits of One Hundred Million Dollars ($100,000,000)
per occurrence and in the aggregate, and attaching in excess of policy limits as
to general liability, where applicable, and employer's liability coverage,
covering each of the following: bodily injury, death, or property damage
liability per occurrence, personal injury, general aggregate, products and
completed operations, and "all risk legal liability" (including liquor law or
"dram shop" liability, if liquor or alcoholic beverages are served on the Leased
Property) with respect to Landlord and Tenant;
(e) To the extent applicable at the Facility, comprehensive form
automobile liability insurance for owned, non-owned and hired vehicles in the
amount of $1,000,000;
(f) Fidelity bonds or blanket crime policies with limits and
deductibles as may be reasonably determined by Landlord, covering Tenant's
employees in job classifications normally bonded under prudent hotel management
practices in the United States or otherwise required by law;
(g) To the extent applicable at the Facility, garagekeeper's legal
liability insurance covering both comprehensive and collision-type losses with a
limit of liability of $1,000,000 for any one occurrence;
(h) Insurance coverage for claims by employees of Manager for wrongful
termination, discrimination or sexual harassment;
(i) 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 Legal Requirements, and employer's
liability insurance having a limit of $500,000;
(j) To the extent applicable at the Facility, safe deposit box legal
liability insurance covering property or guests while in a safe deposit box on
the Leased Property for which Tenant is legally responsible with a limit of not
less than $100,000 in any one occurrence; and
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(k) Such additional insurance and endorsements (and/or increased
amounts of insurance hereinabove required) as may be reasonably required, from
time to time, by Landlord, any Facility Mortgagee or any rating agency, or any
existing or future ground lessor, provided that any incremental cost incurred as
a result of such additional coverage shall be borne by Landlord.
9.2 Responsibility for Insurance.
Tenant shall obtain or cause to be obtained the insurance and pay the
premiums for the coverages described in Sections 9.1(d) through (j) and for that
portion of the premium for the coverage described in Section 9.1(b) that is
attributable to business interruption insurance, and Landlord shall obtain the
insurance and pay the premiums for the coverages described in Sections 9(a)
through (c) and (k) (excluding that portion of the premium for the coverage
described in Section 9.1(b) that is attributable to business interruption
insurance that is for the benefit of Tenant). The party responsible for the
premium for any insurance coverage shall also be responsible for any and all
deductibles and self-insured retentions in connection with such coverages. In
the event that either party can obtain comparable insurance coverage required to
be carried by the other party from comparable insurers and at a cost
significantly less than that at which such other party can obtain such coverage,
the parties shall cooperate in good faith to obtain such coverage at the lower
cost and shall allocate the premiums therefor in accordance with the provisions
of the first sentence of this Section 9.2.
Notwithstanding anything in this Article 9 to the contrary, so long as
the Management Agreement is in full force and effect and Manager is maintaining
the insurance required thereunder, Landlord's and Tenant's obligations to
maintain the insurance required under this Article 9 shall be deemed to have
been met (provided, that the costs therefor shall be allocated between Landlord
and Tenant in the manner contemplated by the first sentence of this Section
9.2).
9.3 Replacement Cost.
"REPLACEMENT COST" as used herein, shall mean the actual replacement
cost of the Leased Property requiring replacement from time to time, including
an increased cost of construction endorsement, if available, and the cost of
debris removal 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 written notice thereof to the other. The
determination of such appraiser shall be final and binding on the parties
hereto, and Landlord shall forthwith conform the amount of the insurance carried
to the amount so determined by the appraiser.
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9.4 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 loss 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 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.
9.5 Form Satisfactory, Etc.
Subject to the second paragraph of Section 9.2, all insurance policies
and endorsements required pursuant to this Article 9 shall be fully paid for,
nonassessable and, except for umbrella and flood coverage, shall contain such
provisions and expiration dates and be in such form and amounts and issued by
insurance carriers authorized to do business in the State, having a general
policy holder's rating of A/VI in Best's latest rating guide (or such other
higher rating or such other customarily used rating agency as may be required by
the Facility Mortgagee, provided that any additional expense associated with
such higher ratings shall be borne by Landlord), and otherwise satisfactory to
Landlord and Tenant. Without limiting the foregoing, such policies shall
include only deductibles reasonably approved by Landlord. The party responsible
for obtaining any policy shall deliver policies or certificates thereof to the
other party prior to their effective date (and, with respect to any renewal
policy, thirty (30) days prior to the expiration of the existing policy), and,
in the event either party shall fail to effect such insurance as herein
required, to pay the premiums therefor or to deliver such policies or
certificates to the other party or the Facility Mortgagee at the times required,
the other party shall have the right, but not the obligation, after ten (10)
days' written notice to the responsible party, to acquire such insurance and pay
the premiums therefor, which amounts shall be reimbursed by the responsible
party, together with interest accrued thereon at the Overdue Rate from the date
such payment is made until the date repaid. All such policies shall provide the
non-responsible party (and the Facility Mortgagee and Manager, if required by
the same) thirty (30) days' prior written notice of any material modification,
expiration or cancellation of such policy.
9.6 Blanket Policy.
Notwithstanding anything to the contrary contained in this Article 9,
Tenant's and Landlord's obligations to maintain the insurance herein required
may be brought within the coverage of a so-called blanket policy or policies of
insurance, provided that, except as otherwise approved by the other party in
writing, (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 Lease, and (b) the requirements of this Article 9
(including an appropriate allocation of the costs for such blanket policy
between Landlord and Tenant in a manner consistent with the first sentence of
Section 9.2) are otherwise satisfied.
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9.7 No Separate Insurance.
Neither Landlord nor Tenant shall 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 are included therein as
additional insureds and the loss is payable under such insurance in the same
manner as losses are payable under the insurance required to be carried pursuant
to this Lease. In the event either shall take out any such separate insurance
or increase any of the amounts of the then existing insurance, it shall give the
other party prompt Notice thereof.
9.8 General Indemnification of Landlord by Tenant.
Except as otherwise provided in Sections 4.3.2, 5.1, 9.9, 14.1 and
21.3.3, and except for liabilities, obligations, claims, damages, penalties,
causes of action, costs and expenses (including, without limitation, attorneys'
fees) arising from Landlord's or any other Landlord Indemnitee's or their
respective agents' (including Manager, but only with respect to Manager's acts
or omissions with respect to Landlord Obligations) willful misconduct or gross
negligence, Tenant shall protect, indemnify and hold harmless Landlord and each
Landlord Indemnitee 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, and notwithstanding the existence of any insurance provided for herein,
but subject to Section 9.4 hereof, and without regard to the policy limits of
any such insurance, imposed upon or incurred by or asserted against Landlord or
any Landlord Indemnitee by reason of:
(i) liabilities arising after the Commencement Date and during the
Term under any leases, contracts, concession agreements or other agreements
either (A) entered into by Tenant or any Tenant Indemnitee, or their respective
agents (including Manager, except with respect to Manager's acts or omissions
with respect to Landlord Obligations), with respect to the Facility, or (B)
assigned to Tenant pursuant to Section 2.2(a) (except liabilities arising out of
agreements described in this clause (B) for any employee claims by employees of
Manager for wrongful termination, discrimination or sexual harassment,
(ii) the gross negligence or willful misconduct of Tenant or any
other Tenant Indemnitee, or their respective agents (including Manager, except
with respect to Manager's acts or omissions with respect to Landlord
Obligations), including any such gross negligence or willful misconduct giving
rise to any employee claims by employees of Manager for wrongful termination,
discrimination or sexual harassment,
(iii) 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 on or after the Commencement Date and during the
Term, including, without limitation, any claims under liquor liability, "dram
shop" or similar laws,
(iv) any litigation, proceeding (other than Condemnation
proceedings) or claim by governmental entities or other third parties to which
Landlord or any Landlord
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Indemnitee is made a party or participant or which is otherwise asserted against
Landlord or any Landlord Indemnitee, relating to the Leased Property or Tenant's
Personal Property or any use, misuse, non-use, condition, management,
maintenance, or repair thereof, the occurrence giving rise to which litigation,
proceeding or claim occurs on or after the Commencement Date and during the
Term,
(v) any Impositions that are the obligations of Tenant to pay
pursuant to the applicable provisions of this Lease, and
(vi) any failure on the part of Tenant or anyone claiming under Tenant
to perform or comply with any of the terms of this Lease.
Tenant shall pay all amounts payable under this Section 9.8 within ten
(10) days after demand therefor and, if not timely paid, such amounts shall bear
interest at the Overdue Rate from the date of determination to the date of
payment. 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 duplicate 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 9.8 for any incremental increase in costs
or expenses resulting therefrom. The obligations of Tenant under this Section
9.8 are in addition to the obligations set forth in Section 4.3.3 and 21.3.3 and
shall survive the termination or expiration of this Lease.
Nothing in this Section 9.8 is intended to limit Tenant's right to
assert a claim or defense against Landlord based upon the obligations imposed
upon Landlord pursuant to Sections 4.3, 5.1, 9.9, 14.1 and 21.3.3.
9.9 General Indemnification of Tenant by Landlord.
Except for liabilities arising from Tenant's or any other Tenant
Indemnitee's, or their respective agents' (including Manager, except with
respect to Manager's acts or omissions with respect to Landlord Obligations)
willful misconduct or gross negligence, Landlord shall protect, indemnify and
hold harmless Tenant and each Tenant Indemnitee 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, and notwithstanding the existence
of any insurance provided for herein, but subject to Section 9.4 hereof, and
without regard to the policy limits of any such insurance, imposed upon or
incurred by or asserted against Tenant or any Tenant Indemnitee by reason of:
(i) liabilities arising at any time under any leases, contracts,
concession agreements or other agreements with respect to the Facility, except
liabilities arising after the Commencement Date and during the Term under any
leases, contracts, concession agreements or other agreements either (a) entered
into during the Term by Tenant or any other Tenant Indemnitee, or their
respective agents (including Manager, except with
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respect to Manager's acts or omissions with respect to Landlord Obligations)
with respect to the Facility, or (b) assigned to Tenant pursuant to Section
2.2(a),
(ii) the gross negligence or willful misconduct of Landlord or any
other Landlord Indemnitee, or their respective agents (including Manager, but
only with respect to Manager's acts or omissions with respect to Landlord
Obligations),
(iii) 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 prior to the Commencement Date or after expiration or
earlier termination of the Term, including, without limitation any claims under
liquor liability, "dram shop" or similar laws,
(iv) any litigation, proceeding (other than Condemnation
proceedings) or claim by governmental entities or other third parties to which
Tenant or any Tenant Indemnitee is made a party or participant or which is
otherwise asserted against Tenant or any Tenant Indemnitee, relating to the
Leased Property or any use, misuse, non-use, condition, management, maintenance,
or repair thereof, the occurrence giving rise to which litigation, proceeding or
claim occurs prior to the Commencement Date or after the expiration or earlier
termination of the Term,
(v) any Landlord Obligations, and
(vi) any failure on the part of Landlord or anyone claiming under
Landlord (including Manager, but only with respect to Manager's acts or
omissions with respect to Landlord Obligations) to perform or comply with any of
the terms of this Lease.
Landlord shall pay all amounts payable under this Section 9.9 within
ten (10) days after demand therefor and, if not timely paid, such amounts shall
bear interest at the Overdue Rate from the date of determination to the date of
payment. Landlord, at its expense, shall contest, resist and defend any such
claim, action or proceeding asserted or instituted against Tenant and shall not
be responsible for any duplicate attorneys' fees incurred by Tenant, or may
compromise or otherwise dispose of the same with Tenant's prior written consent
(which consent may not be unreasonably withheld or delayed). In the event
Tenant shall unreasonably withhold or delay its consent, Landlord shall not be
liable pursuant to this Section 9.9 for any incremental increase in costs or
expenses resulting therefrom. The obligations of Landlord under this Section
9.9 are in addition to the obligations set forth in Section 4.3.2 and 21.3.3 and
shall survive the termination of this Lease.
Nothing in this Section 9.8 is intended to limit Landlord's right to
assert a claim or defense against Tenant based upon the obligations imposed upon
Tenant pursuant to Sections 4.3, 5.1, 9.8 and 21.3.3.
9.10 Independent Contractor.
Except as otherwise approved by Landlord in writing, Tenant shall
cause any person or company entering upon the Leased Property to provide any
installation, construction or repair (each a "CONTRACTOR"), which (x)
constitutes a Capital Expenditure
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or (y) has an anticipated cost in excess of [$_______________] to (a) have in
full force and effect Contractor's Liability Coverage (hereafter defined)
effective throughout the period said Contractor is upon the Leased Property and
for one year thereafter and (b) deliver within five (5) Business Days of
Landlord's request a certificate ("CONTRACTOR'S INSURANCE CERTIFICATE")
evidencing compliance with subpart (a) to Tenant prior to the Contractor's first
entry upon the Leased Property. As used herein, the term "CONTRACTOR'S LIABILITY
COVERAGE" means a comprehensive general liability insurance policy meeting the
requirements of this Article 9 (as if required to be provided by Tenant) except
the minimum policy limit shall be $1,000,000 per occurrence and $3,000,000 in
the aggregate. Within thirty (30) days after delivery of Landlord's written
request, Tenant shall deliver copies of all Contractor's Insurance Certificates
to Landlord.
ARTICLE 10
CASUALTY
10.1 Insurance Proceeds.
All proceeds of the insurance contemplated by Section 9.1(a)-(c)
payable by reason of any loss, damage or destruction to the Leased Property, or
any portion thereof ("CASUALTY"), and insured under any policy of property or
casualty insurance required by Article 9 (other than proceeds of business
interruption insurance and any insurance proceeds paid with respect to Tenant's
Personal Property, which shall be paid to Tenant) shall be paid directly to
Landlord, and paid out by Landlord from time to time for the reasonable costs of
reconstruction or repair of the Leased Property necessitated by such Casualty,
if and to the extent required by the provisions of Section 10.2; provided,
however, that so long as no Event of Default shall have occurred and be
continuing, all such proceeds less than or equal to $1,000,000 shall be paid
directly to Tenant and applied to the reasonable costs of restoration and repair
of the Leased Property necessitated by such Casualty, and such losses may be
adjusted without Landlord's consent. Any excess proceeds of insurance remaining
after the completion of the restoration shall be paid to Landlord. All salvage
resulting from any risk covered by insurance shall belong to Landlord, except
for any amount thereof paid with respect to Tenant's Personal Property. If
Landlord is not required and elects not to repair and restore as permitted under
this Lease, and this Lease is terminated pursuant to Section 10.2, all such
insurance proceeds shall be retained by Landlord, except for any amount thereof
paid with respect to Tenant's Personal Property and any amount attributable to
business interruption insurance.
10.2 Reconstruction in the Event of Casualty.
10.2.1 Facility Rendered Unsuitable for Its Primary Intended Use. If
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during the Term the Leased Property is totally or partially destroyed by a
Casualty and the Facility is thereby rendered Unsuitable for Its Primary
Intended Use, as reasonably determined by Landlord, this Lease shall terminate
as of the date of the Casualty and neither Landlord nor Tenant shall have any
further liability hereunder except for any liabilities which have arisen or
occurred prior to such termination, and those which expressly survive
termination of this Lease, and Landlord shall be entitled to retain all Casualty
insurance proceeds (except for any amount thereof paid with respect to Tenant's
Personal Property and any amount attributable to business interruption
insurance). If the
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Lease is terminated in accordance with this Section 10.2.1, Landlord shall not
be permitted to commence restoration of the Leased Property for a period of one
(1) year after the date of the Casualty.
10.2.2 Facility Not Rendered Unsuitable for Its Primary Intended Use.
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If during the Term the Leased Property is totally or partially destroyed by a
Casualty, but the Facility is not thereby rendered Unsuitable for Its Primary
Intended Use, as reasonably determined by Landlord, Landlord or, at Landlord's
election, Tenant shall, subject to Section 10.2.3, promptly restore the Facility
as provided in Section 10.2.4. Except as provided in Section 10.2.3, such
damage or destruction shall not terminate this Lease.
10.2.3 Deficiency in Insurance Proceeds. If the cost of the repair
--------------------------------
or restoration exceeds the amount of proceeds received by Landlord from the
insurance required under Article 9 and Tenant is obligated to restore pursuant
to Section 10.2.2 hereof, Landlord agrees, subject to this Section 10.2.3, to
contribute any excess amounts needed to restore the Facility prior to requiring
Tenant to commence such work. Such difference shall be made available by
Landlord, together with any insurance proceeds, for application to the cost of
repair and restoration in accordance with the provisions of Section 10.2.4. In
the event the sum of (a) the insurance proceeds released to Landlord, and (b)
that portion of the deductible, if any, which is greater than five percent (5%)
of the cost of the repair, is equal to at least ninety-five percent (95%) of the
cost of the repair or restoration, Landlord shall fund the deficiency. In the
event the sum of (y) the insurance proceeds, and (z) that portion of the
deductible, if any, which is greater than five percent (5%) of the cost of the
repair, is less than ninety-five percent (95%) of the cost of the repair or
restoration, Landlord shall fund such deficiency in its sole discretion;
provided, however, that in the event Landlord does not agree to make such
deficiency available for restoration, either Landlord or Tenant may terminate
this Lease by written notice to the other, whereupon this Lease shall terminate
as provided in Section 10.2.1 and Landlord shall pay to Tenant a termination fee
equal to Tenant's Operating Profit for the immediately preceding Fiscal Year.
If Landlord or Tenant elects to terminate this Lease in accordance with this
Section 10.2.3, Landlord shall not be permitted to commence restoration of the
Leased Property for a period of one (1) year after the date of the Casualty.
10.2.4 Disbursement of Proceeds. In the event Tenant is required to
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restore the Leased Property pursuant to Section 10.2.2, Tenant shall (or shall
direct Manager to) commence promptly and continue diligently to perform the
repair and restoration of the Leased Property, so as to restore the Leased
Property in compliance with all Legal Requirements to substantially the same
condition, to the extent reasonably practicable, as existed immediately before
the damage or destruction and otherwise in accordance with this Lease. Landlord
shall advance the insurance proceeds and, subject to the terms hereof, 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 frequently 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
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any uncured Event of Default, (ii) its approval of plans and specifications of
an architect reasonably satisfactory to Landlord (which approval shall not be
unreasonably withheld or delayed), (iii) general contractor's 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 Facility
Mortgagee to Landlord, and Tenant's obligation to restore the Leased Property
pursuant to this Article 10 shall be subject to the release of available
insurance proceeds by any Facility Mortgagee to Landlord or directly to Tenant
or Manager and, in the event such proceeds are insufficient, Landlord electing
to make such deficiency available therefor (and disbursement of such
deficiency); provided, however, that Landlord and Tenant shall each have the
same termination rights in the event of any Facility Mortgagee's failure or
refusal to disburse insurance proceeds as they have with respect to Landlord's
failure to disburse any deficiency in insurance proceeds, as provided in Section
10.2.3. If Landlord elects to terminate this Lease in accordance with this
Section 10.2.4, Landlord shall not be permitted to commence restoration of the
Leased Property for a period of one (1) year after the date of the Casualty.
10.3 Reconstruction in the Event of Damage or Destruction Not Covered by
Insurance.
If during the Term the Facility is totally or materially damaged or
destroyed by a risk not covered by the insurance described in Article 9, or if
the proceeds of such insurance are not available to Landlord for restoration of
the Facility, whether or not in either event such damage or destruction renders
the Facility Unsuitable for Its Primary Intended Use, Landlord at its option
shall either, (a) direct Tenant to restore the Facility at Landlord's sole cost
and expense to substantially the same condition it was in immediately before
such damage or destruction, in which case such damage or destruction shall not
terminate this Lease, or (b) terminate this Lease and neither Landlord nor
Tenant shall have any further liability thereunder, except for any liabilities
which have arisen or occurred prior to such termination and those which
expressly survive termination of this Lease. If Landlord elects to terminate
this Lease in accordance with this Section 10.3, Landlord shall not be permitted
to commence restoration of the Leased Property for a period of one (1) year
after the date of the Casualty.
10.4 Tenant's Property and Business Interruption Insurance.
All insurance proceeds payable by reason of any loss of or damage to
any of Tenant's Personal Property and the business interruption insurance
maintained for the benefit of Tenant shall be paid to Tenant.
10.5 Abatement of Rent.
Any damage or destruction due to Casualty notwithstanding, this Lease
shall remain in full force and effect (except as otherwise expressly provided in
this Article 10)
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and Tenant's obligation to pay Rent required by this Lease shall remain unabated
by any Casualty which does not result in a reduction of Gross Revenues. If and
to the extent that any Casualty results in a reduction of Gross Revenues
(including proceeds of any business interruption insurance actually received by
Tenant or that would have been received by Tenant if Tenant were in full
compliance with the insurance requirements of Article 9) which would otherwise
be realizable from the operation of the Facility, then Landlord shall receive
all loss of rental income insurance and Tenant shall have no obligation to pay
Rent with respect to any Accounting Period during the continuation of such
Casualty in excess of the greater of (i) one-thirteenth (or one-twelfth, if
Accounting Periods are then the same as calendar months) of the aggregate amount
of Rent (excluding Additional Charges) paid to Landlord with respect to the last
full Fiscal Year prior to such Casualty or (ii) the amount of Rent calculated
with respect to such Accounting Period under Section 3.1.1 without regard to
clause (A)(i) of such Section (which relates to Minimum Rent); provided,
however, that if such damage or destruction was caused by Tenant's gross
negligence or willful misconduct, Tenant shall remain liable for the amount of
Rent which would have been payable hereunder at a rate equal to the average Rent
during the last three (3) preceding Lease Years (or if three (3) Lease Years
shall not have elapsed, the average during the preceding Lease Years), as if
such Casualty had not occurred.
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 Primary Intended Use, as
reasonably determined by Landlord, this Lease shall terminate as of the day of
the Condemnation, and Tenant and Landlord shall seek the Award for their
respective interests in the Leased Property as provided in Section 11.4.
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 Primary
Intended Use, as reasonably determined by Landlord, Tenant shall, to the extent
that the Award and additional amounts disbursed by Landlord are sufficient
therefor, commence promptly and continue diligently to restore the untaken
portion of the Facility so that the Facility shall constitute a complete
architectural unit of the same general character and condition (as nearly as may
be possible under the circumstances) as the Facility existing immediately prior
to such Condemnation, in full compliance with all Legal Requirements. 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 portion of the Facility
(provided, however, that the amount of such contribution shall not exceed such
cost), and such amounts shall be advanced 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 continuing Event of Default, (ii)
its approval of
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plans and specifications of an architect reasonably 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 under this Section 11.2 to disburse the Award and
such other amounts shall be subject to (x) the collection of the Award by
Landlord and (y) the satisfaction of any applicable requirements of the Facility
Mortgage, and the release of such Award by the Facility Mortgagee. Tenant's
obligation to restore the Leased Property shall be subject to the release of the
Award and any additional funds to be disbursed by Landlord pursuant hereto
required for restoration. Subject to Section 21.3.3, if Landlord has received
the Award, but elects not to make the Award available to Tenant for restoration,
then Tenant shall have the right to terminate this Lease and Landlord shall pay
to Tenant a termination fee equal to the amount of Tenant's Operating Profit for
the immediately preceding Fiscal Year. Subject to Section 21.3.3, if Landlord
has not received the Award, or the Award is insufficient to restore the untaken
portion of the Facility as provided above, then Landlord, in its sole
discretion, shall have the right to terminate this Lease and neither Landlord
nor Tenant shall have any further liability hereunder, except for any
liabilities which have arisen or occurred prior to such termination and those
which expressly survive termination of this Lease, and Landlord shall be
entitled to retain the entire Award; provided that Tenant shall be permitted to
seek a separate award for the value of Tenant's Personal Property that was taken
in such Condemnation; and provided further that if Landlord elects to terminate
this Lease in accordance with this Section 11.2, then Landlord shall not be
permitted to commence restoration of the untaken portion of the Leased Property
for a period of one (1) year after the date of the Condemnation.
11.3 Abatement of Rent.
In the event of a partial Condemnation as described in Section 11.2
which does not result in a termination of this Lease by Landlord, the Rent shall
be abated in the manner and to the extent that is fair, just, and equitable to
both Tenant and Landlord, taking into consideration, among other relevant
factors, the number of usable rooms, the amount of square footage, or the effect
upon revenues of such partial Condemnation. If Landlord and Tenant are unable
to agree upon the amount of such abatement within thirty (30) days after such
partial Condemnation, the matter shall be submitted to appraisal as provided for
in Article 19 hereof.
11.4 Allocation of Award.
Except as provided in the second sentence of this Section 11.4, 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 (valued without regard to any right of termination in Landlord
that otherwise exists under this Article 11), loss of business during the
remainder of the Term (determined without regard to any provision for
termination that might otherwise arise under this Article 11), the taking of
Tenant's Personal Property or Tenant's removal and relocation expenses shall be
the sole property of and payable to Tenant (subject to the provisions of Section
11.2). Subject to the
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rights of the Manager under the Management Agreement and the rights of any
Facility Mortgagee under a Facility Mortgage, in any Condemnation proceedings,
Landlord and Tenant shall each seek its own Award in conformity herewith, at its
own expense.
ARTICLE 12
TENANT DEFAULTS; REMEDIES
12.1 Event of Default.
The occurrence of any one or more of the following events shall
constitute an "EVENT OF DEFAULT" hereunder:
(a) Tenant fails (i) to make any payment of the Minimum Rent or
Percentage Rent payable hereunder when due and such failure continues for a
period of ten (10) days after the date due, or (ii) subject to the right to
contest same pursuant to Article 8 hereof, to make any required payments of
Additional Charges within ten (10) days following Notice from Landlord that such
payment is due and owing and unpaid.
(b) Tenant fails to maintain the insurance coverages that it is
required to maintain under Article 9.
(c) Except as otherwise expressly provided herein, Tenant defaults 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, in either case, such default continues for a
period of thirty (30) days after Notice thereof from Landlord to Tenant;
provided, however, that if such default is curable but such cure cannot be
accomplished with due diligence within such period of time and if, in addition,
Tenant commences to cure such default within thirty (30) 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 one hundred twenty (120) days in the aggregate, subject to
Unavoidable Delay) as may be necessary to cure such default, provided further
that the cure rights shall not apply to any breach of a Tenant covenant under
Section 22.1, 22.3, 22.4, or 22.5.
(d) Any obligation of Tenant in respect of any Indebtedness (other
than Tenant's obligations under any Excess FF&E Lease that constitutes
Indebtedness) in a principal amount in excess of ($1,000,000) for money borrowed
or for the deferred purchase price of any material property or services, is
declared to be, or as a result of acceleration becomes, due and payable prior to
the stated maturity thereof.
(e) There occurs a final unappealable determination by applicable
federal or State authorities of the revocation or limitation of any material
license (including, but not limited to, any gaming license), permit,
certification, or approval required for the material lawful operation of the
Facility in accordance with its Primary Intended Use or the loss or limitation
of any material license (including but not limited to any gaming license),
permit, certification, or approval under any other circumstances under which
Tenant is required to cease its operation of the Facility in accordance with its
Primary Intended Use at the time of such loss or limitation, which revocation,
limitation or loss is
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not caused by actions of Landlord or its Affiliates or which is not beyond the
reasonable control of Tenant.
(f) Tenant is generally not paying its debts as they become due, or
Tenant makes a general assignment for the benefit of creditors.
(g) Any petition is filed by or against Tenant under the Federal
bankruptcy laws, or any other proceeding is 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, in the case of any involuntary
petition filed or proceeding instituted against Tenant only, such proceeding is
not dismissed within sixty (60) days after institution thereof, or Tenant takes
any action to authorize or effect any of the actions set forth above in this
paragraph.
(h) Tenant causes or institutes any proceeding for its dissolution or
termination.
(i) Tenant ceases operation of the Leased Property for its Primary
Intended Use for a period in excess of thirty (30) consecutive days, except as a
result of a Casualty, other Emergency Situations, the matters set forth in
Section 23.17 or partial or complete Condemnation of or to the Facility or of or
to the immediate surroundings so as to prohibit reasonable access by patrons to
the Facility.
(j) The estate or interest of Tenant in the Leased Property or any
part thereof is levied upon or attached in any proceeding and the same is not
vacated or discharged within the later of (i) 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 (ii) 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).
(k) Any Change in Control occurs.
(l) Tenant, OpCo or CCC defaults under the terms of any of the Related
Agreements beyond the expiration of any applicable notice and cure periods.
(m) CCC fails to maintain for three (3) consecutive Accounting Periods
either (i) a Tangible Net Worth equal to or greater than (x) the maximum
liability under the Guarantee from time to time less (y) amounts held in any
lockbox or cash collateral account under this Lease, any other Pool Lease, any
Other Lease, the Pooling Agreement or any pooling and security agreement
relating to Other Leases immediately after payment of Rent under Section 3.1.1
with respect to the preceding Accounting Period, or (ii) a Consolidated Coverage
Ratio of at least 1.4 to 1.0.
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(n) For so long as this Lease is subject to the Pooling Agreement,
there is a default that remains uncured beyond the expiration of applicable
notice and cure periods by any of the Other Tenants under Section 12.1(a)(i) or
Section 12.1(c) (by reason of a breach of Section 7.1 or Section 21.6.3) of any
Pool Lease (other than this Lease); provided that, if a notice of termination
has been given pursuant to Section 10(a) of the Guarantee and the six-month
period specified in Section 10(a)(iii) of the Guarantee has commenced, then a
default that remains uncured beyond the expiration of applicable notice and cure
periods occurring under Section 12.1(a)(i) or 12.1(c) (by reason of a breach of
Section 7.1 or 21.6.3) of any Pool Lease (other than this Lease) after
commencement of such period shall not be a default under this paragraph (n).
In any such event, Landlord, in addition to all other remedies
available to it, may terminate this Lease by giving Notice thereof to Tenant,
and upon the expiration of the time, if any, fixed in such Notice, this Lease
shall terminate and all rights of Tenant under this Lease shall cease. Subject
to Section 23.11, Landlord shall have, and may exercise in its sole and absolute
discretion, all, or none of the, rights and remedies available at law and in
equity to Landlord as a result of Tenant's breach of this Lease; provided,
however, that notwithstanding anything set forth herein to the contrary, (A)
Landlord's sole remedy for an Event of Default under Section 12.1(k) and (m)
shall be to terminate this Lease, and (B) Landlord's actual damages in the event
of a breach by Tenant of any of its obligations pursuant to Article 22 and a
resulting loss of REIT status by Host REIT shall include, without limitation,
amounts equal to income taxes paid by Host REIT and (without duplication) loss
of value of Host REIT, both to the extent attributable to the loss of REIT
status; provided that any termination as a result of an Event of Default under
Section 12.1(k) shall occur no later than 450 days after the applicable Change
in Control (or such shorter period as may be expressly provided in the
Management Agreement or Consent and Assignment) and upon not less than 30 days'
Notice to Tenant. If Landlord terminates this Lease because of an Event of
Default under Section 12.1(k) above, and the Change in Control does not involve
an Adverse Party, then Landlord shall pay to Tenant a termination fee equal to
Tenant's Operating Profit for the immediately preceding Fiscal Year.
Upon the occurrence of an Event of Default, Landlord may, in addition
to any other remedies provided herein, enter upon the Leased Property and take
possession thereof, and either (i) retain any and all of Tenant's Personal
Property on the Leased Property, without liability for trespass or conversion
(Tenant hereby waiving any right to Notice or hearing prior to such taking of
possession by Landlord) or (ii) 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 Tenant or its assigns may purchase all or any portion of
Tenant's Personal Property. 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
ten (10) Business 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 (including reasonable
attorneys' fees) shall belong to Landlord and 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.
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The foregoing provisions of this Section 12.1 notwithstanding, in the
event that Landlord exercises its right to terminate this Lease as the result of
an Event of Default that first occurs after a notice of termination has been
given pursuant to Section 10(a) of the Guarantee and the six-month period
specified in Section 10(a)(iii) of the Guarantee has commenced, Landlord shall
be entitled to all accrued Rent remaining unpaid as of the date of termination
but shall not be entitled to an award based on lost future Rents under this
Lease, Landlord's sole remedy in such event being termination of the Lease and
payment of all accrued but unpaid Rent.
The foregoing provisions hereof notwithstanding, Landlord shall have
no right to assert any remedy hereunder in respect of an Event of Default, and
an Event of Default shall be deemed to no longer exist, if Tenant (or Guarantor,
or its Affiliate, pursuant to the Guarantee or otherwise) cures an Event of
Default (A) under Section 12.1(a) prior to the earlier of (x) the commencement
by Landlord of the exercise of any remedy under this Lease by Landlord or (y)
Landlord's Notice to Tenant stating that an Event of Default exists and further
stating Landlord's intention to assert one or more remedies hereunder, and (B)
under any of Section 12.1(b)-(m), prior to the commencement by Landlord of the
exercise of any remedy under this Lease by Landlord.
12.2 Remedies.
None of (a) the termination of this Lease pursuant to Section 12.1,
(b) the repossession of the Leased Property, (c) the failure of Landlord to re-
let the Leased Property, or (d) the reletting 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 earlier of what would have been
the end of the Term of this Lease in the absence of such termination, or the
date on which Tenant pays Landlord the liquidated final damages described in the
next paragraph of this Section 12.2, 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 or other
operation by or on behalf of Landlord of the Leased Property, after deducting
all 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
Lease had not been so terminated.
At any time after such termination, at Landlord's election, whether or
not Landlord shall have previously collected any such current damages, as
liquidated final damages beyond the date of such termination, Tenant shall pay
to Landlord an amount equal to the present value (discounted at a rate of twelve
percent (12%) per annum) 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 would be the same as payments required for
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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 Lease if the same remained in effect, over the Fair
Market Rental for the same period. Nothing contained in this Lease 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.
Percentage Rent for the purposes of this Section 12.2 shall be a sum
equal to (i) the average of the annual amounts of Percentage Rent for the three
(3) Fiscal Years immediately preceding the Fiscal Year in which the termination,
re-entry or repossession takes place, or (ii) if three (3) Fiscal Years shall
not have elapsed, the Percentage Rent during the preceding Fiscal Year during
which this Lease was in effect, or (iii) if one (1) Fiscal Year has not elapsed,
the amount derived by annualizing the Percentage Rent from the Commencement Date
of this Lease.
In case of any Event of Default, re-entry, expiration and
dispossession by summary proceedings or otherwise, Landlord may, subject to the
rights of 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) 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 during the continuation of an Event of Default hereunder.
Landlord covenants and agrees in the event of any termination of this Lease as a
result of an Event of Default to use commercially reasonable efforts to mitigate
its damages.
12.3 Waivers.
LANDLORD AND TENANT WAIVE, TO THE EXTENT PERMITTED BY LAW, ANY RIGHT
TO A TRIAL BY JURY IN CONNECTION WITH ANY MATTER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT AND/OR
TENANT'S USE OR OCCUPANCY OF THE LEASED PROPERTY. TENANT WAIVES, TO THE EXTENT
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PERMITTED BY LAW, THE BENEFIT OF ANY LAWS NOW OR HEREAFTER IN FORCE EXEMPTING
PROPERTY FROM LIABILITY FOR RENT OR FOR DEBT.
12.4 Application of Funds.
Any payments received by Landlord under any of the provisions of this
Lease 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 obligations under this Lease 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 (i) a Default shall have occurred and is continuing which in the
reasonable judgment of Landlord requires immediate action on the part of
Landlord or (ii) an Event of Default shall have occurred and is continuing,
Landlord, after Notice to Tenant (which Notice need not precede such action 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, including the management
of the Facility by Landlord or its designee, and Tenant hereby irrevocably
appoints, in the event of such election by Landlord, Landlord or its designee as
the operator of the Facility and its attorney in fact for such purpose,
irrevocably and coupled with an interest, in the name, place and stead of
Tenant. 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 Lease (other than with the express written consent of Landlord) shall be
treated as a tenancy at sufferance at a rate equal to (a) one and one-half (1.5)
times one-twelfth of the aggregate Minimum Rent and Percentage Rent payable with
respect to the last Fiscal Year of the Term, (b) all Additional Charges accruing
during the applicable Accounting Period, and (c) all other sums, if any, payable
by Tenant under this Lease with respect to the Leased Property during the
applicable Accounting Period. 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 Lease,
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 Lease.
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ARTICLE 14
LANDLORD NOTICE OBLIGATION; LANDLORD DEFAULT
14.1 Landlord Notice Obligation.
Landlord shall give prompt Notice to Tenant and Manager of any matters
materially 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. Except as expressly set
forth herein or in the Consent and Assignment, Landlord shall not amend the
Management Agreement without Tenant's prior written consent, which consent shall
not be unreasonably withheld, conditioned or delayed.
14.2 Landlord Default.
The occurrence of the following events shall constitute a "LANDLORD
DEFAULT":
(a) Landlord fails to make any payment due hereunder when due and such
failure continues for a period of ten (10) days following Notice from Tenant
that such payment is due and owing and unpaid.
(b) Landlord fails to maintain the insurance coverages that it is
required to maintain under Article 9.
(c) Landlord defaults 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, in either
case, such default continues for a period of thirty (30) days after Notice
thereof from Tenant to Landlord; provided, however, that if such default is
curable but such cure cannot be accomplished with due diligence within such
period of time and if, in addition, Landlord commences to cure such default
within thirty (30) days after Notice thereof from Tenant 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 one hundred twenty
(120) days in the aggregate, subject to Unavoidable Delay) as may be necessary
to cure such default.
(d) Landlord is generally not paying its debts as they become due, or
Landlord makes a general assignment for the benefit of creditors.
(e) Any petition is filed by or against Landlord under the Federal
bankruptcy laws, or any other proceeding is instituted by or against Landlord
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 Landlord or for any
substantial part of the property of Landlord and, in the case of any involuntary
petition filed or proceeding instituted against Landlord only, such proceeding
is not
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dismissed within sixty (60) days after institution thereof, or Landlord takes
any action to authorize or effect any of the actions set forth above in this
paragraph.
(f) Landlord causes or institutes any proceeding for its dissolution
or termination.
(g) Landlord or Host O.P. defaults under the terms of any of the
Related Agreements beyond the expiration of any applicable notice and cure
periods.
Subject to Section 23.11, in the event of a Landlord Default, Tenant
shall have and may exercise all rights and remedies available at law and in
equity, including, without limitation, the right to pursue an action for damages
against Landlord; provided, however, that except as otherwise expressly provided
in this Lease, Tenant shall have no right to terminate this Lease for any
Landlord Default hereunder and no right 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 shall give Notice thereof to
Tenant, setting forth, in reasonable detail, the basis therefor, and Tenant and
Landlord shall fail, in good faith, to resolve any such dispute within ten (10)
days after Landlord's Notice of dispute, then either may submit the matter to
arbitration under Article 15 for resolution, and no Landlord Default shall be
deemed to have occurred and Landlord shall have no obligation with respect
thereto until final adverse determination thereof in such arbitration. In the
event of any such adverse determination, Landlord shall pay to Tenant interest
on any disputed funds at the Overdue Rate, from the date demand was made until
paid, and in the event Landlord fails to make such payment within fifteen (15)
days after such adverse determination, Tenant shall be entitled to offset such
amount against the payment or, if necessary, payments of Rent next coming due
hereunder. If Tenant reasonably determines that immediate action is necessary
to protect person or property or to comply with Legal Requirements, Tenant may
forthwith cure the Landlord Default and 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 Notice, at the Overdue Rate.
ARTICLE 15
ARBITRATION
15.1 Arbitration.
In each case specified in this Lease in which it shall become
necessary to resort to arbitration, such arbitration shall be determined as
provided in this Article 15. The party desiring such arbitration shall give
Notice to that effect to the other party, specifying the nature of the dispute,
the amount involved (if any), and the remedy sought. An arbitrator shall be
selected by mutual agreement of the parties, or if they cannot agree within
thirty (30) days of such Notice, by appointment made by the American Arbitration
Association ("AAA") from among the members of its panels who are qualified and
who have experience in resolving matters of a nature similar to the matter to be
resolved by arbitration.
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15.2 Arbitration Procedures.
Any arbitration commenced pursuant to Section 15.1 shall be conducted
in accordance with the AAA's Rules of Commercial Arbitration in business
disputes. A single arbitrator shall be designated and shall resolve the
dispute. The arbitrator's decision shall be binding on all parties, shall not
be subject to further review or appeal except as otherwise allowed by applicable
law and may be filed in and enforced by a court of competent jurisdiction. The
arbitrator shall award to the prevailing party, if any, as determined by the
arbitrator, all of its costs and expenses, including attorneys' fees,
arbitrator's fees, and reasonable out-of-pocket expenses of any kind, except as
otherwise specified below in this Section 15.2. The term "prevailing party," as
used in the preceding sentence, shall mean the party whose position is most
nearly upheld in arbitration. Upon the failure of either party (the "non-
complying party") to comply with the arbitrator's decision, the arbitrator shall
be empowered, at the request of the other party, to order such compliance by the
non-complying party and to supervise or arrange for the supervision of the non-
complying party's obligation to comply with the arbitrator's decision, all at
the expense of the non-complying party. To the maximum extent practicable, the
arbitrator and the parties, and the AAA, if applicable, shall take any action
necessary to insure that the arbitration shall be concluded within ninety (90)
days of the filing of such dispute. Unless otherwise agreed in writing by the
parties or required by the arbitrator or the AAA, if applicable, arbitration
proceedings hereunder shall be conducted in the Washington, DC, metropolitan
area. Notwithstanding formal rules of evidence, each party may submit such
evidence as each party deems appropriate to support its position, and the
arbitrator shall have access to and the right to examine all books and records
of Landlord and Tenant and, subject to the Management Agreement, the Manager
regarding the Leased Property during the arbitration The consideration of the
parties to be bound by arbitration is not only the waiver of trial by jury but
also the waiver of any rights to appeal the arbitration finding.
ARTICLE 16
SUBLETTING AND ASSIGNMENT
16.1 Subletting and Assignment.
Except as otherwise expressly provided in this Section 16.1, Tenant
shall not, without the prior written consent of Landlord (which consent may be
withheld in Landlord's sole and absolute discretion), assign, mortgage, pledge,
hypothecate, encumber or otherwise transfer this Lease or sublease (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 Lease or the
leasehold estate created hereby or any other rights arising under this Lease 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 occupancy of the Leased Property by anyone other than Tenant
or Manager (except in accordance with Section 21.3.4), or permit the Leased
Property to be offered or advertised for assignment or subletting.
Notwithstanding the foregoing, (i) any sublease to a subtenant, licensee or
concessionaire made in the ordinary course of operating the Facility (a) shall
not require Landlord's consent if it is for a term of not more than five (5)
years and involves not more than one thousand (1,000) square feet of rentable
space, or (b) shall require Landlord's consent, but such consent shall not be
unreasonably
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withheld, conditioned or delayed, if it is for a term of more than five (5)
years or involves more than one thousand (1,000) square feet of rentable space
and (ii) Tenant may, in each instance, after Notice to Landlord, assign this
Lease to any Qualified Affiliate in accordance with Section 21.6.6, so long as
such assignment will not violate or affect any applicable Legal Requirements or
Insurance Requirements. For purposes of this Section 16.1, an assignment of this
Lease (other than to a Qualified Affiliate in accordance with Section 21.6.6)
shall be deemed to constitute a Change in Control.
If this Lease is assigned or if the Leased Property or any part
thereof is sublet in contravention of this Lease, 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 (i) a waiver of the provisions set forth in the first paragraph of this
Section 16.1, (ii) the acceptance by Landlord of such assignee, subtenant or
occupant, as the case may be, as a tenant, or (iii) a release of Tenant from the
future performance by Tenant of its covenants, agreements or obligations
contained in this Lease.
Tenant, as the debtor in possession, or the trustee for Tenant
(collectively, the "TRUSTEE") in any proceeding under Title 11 of the United
States Bankruptcy Code relating to Bankruptcy, as amended (the "BANKRUPTCY
CODE"), shall not have the right to assign this Lease or sublet the Leased
Property to an assignee or sublessee that (i) is a competitor of Landlord or
(ii) is not a capable, reliable, qualified Person of good reputation and
character with the financial capacity to satisfy Tenant's obligations under this
Lease. The Trustee shall not have the right to assign this Lease or sublet the
Leased Property to a real estate investment trust that is, or intends to be,
publicly traded.
In the event that Tenant becomes the subject of any proceeding under
Title 11 of the Bankruptcy Code, Tenant covenants and agrees that: (i) it shall
promptly upon demand therefor from Landlord, but in no event later than sixty
(60) days (as such time may be extended by a bankruptcy court in such
proceeding) after the commencement of such proceeding (a "TENANT BANKRUPTCY"),
announce its decision whether to assume or reject this Lease and Tenant's
obligations under the Consent and Assignment and the Assigned Agreements, and
promptly take and diligently pursue such actions as may be necessary to
authorize and implement such decision; and (ii) it shall either assume this
Lease and all of Tenant's obligations under the Consent and Assignment and the
Assigned Agreements to the extent such Assigned Agreements have not expired or
terminated in accordance with their respective terms, or it shall reject this
Lease and all of Tenant's obligations under the Consent and Assignment and the
Assigned Agreements. In a Tenant Bankruptcy, Tenant covenants and agrees that
it cannot cure any defaults under this Lease and cannot provide adequate
assurances of future performance of this Lease without curing any and all
monetary and non-monetary defaults of Tenant's obligations under the Consent and
Assignment and the Assigned Agreements and providing adequate assurances of
Tenant's future performance of its obligations under the Consent and Assignment
and the Assigned Agreements.
No subletting or assignment shall in any way impair the continuing
primary liability of Tenant hereunder, and no consent to any subletting or
assignment in a
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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
Primary Intended Use. Any subletting, assignment or other transfer of Tenant's
interest under this Lease 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 subsequent to the Commencement Date shall provide (a) that it is subject
and subordinate to this Lease and to the matters to which this Lease is or shall
be subject or subordinate; (b) that in the event of termination of this Lease or
reentry or dispossession of Tenant by Landlord under this Lease, 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 the Facility
Mortgagee, as holder of a mortgage or as Landlord under this Lease, 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 requiring
Landlord's consent hereunder and 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 to be performed after the
date of such attornment, (vii) be responsible for any monies owing by Tenant
prior to the date of attornment 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
the Facility 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
Facility Mortgagee, as the case may be, shall be credited against the amounts
owing by Tenant under this Lease, 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 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 upon request
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 Lease 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.
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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 No Right of Tenant to Mortgage Its Leasehold.
Notwithstanding any other provision of this Lease to the contrary,
Tenant shall not assign its interest in this Lease as collateral for
Indebtedness.
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 non-requesting party shall
furnish to the requesting party, or a designee thereof, an Officer's Certificate
certifying that this Lease is unmodified and in full force and effect (or that
this Lease is in full force and effect as modified and setting forth the
modifications), the date to which the Rent has been paid, that to the knowledge
of the certifying party, 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 lender, and any prospective purchaser
or mortgagee of the Leased Property or the leasehold estate conveyed hereby.
17.2 Financial Statements.
Tenant shall furnish the following statements to Landlord:
(a) within forty (40) days after each of the first three (3) quarters
of any Fiscal Year, the most recent unaudited CCC Consolidated Financial
Statements accompanied by the Financial Officer's Certificate;
(b) within eighty (80) days after the end of each Fiscal Year, the CCC
Consolidated Financial Statements for such Fiscal Year, certified by an
independent certified public accountant reasonably satisfactory to Landlord and
accompanied by a Financial Officer's Certificate;
(c) within [ ] days after the end of each Fiscal Year, the results of
operations of the Facility for the preceding Fiscal Year (the "ANNUAL OPERATING
STATEMENT"), in the form received by Tenant from Manager in accordance with the
Management Agreement, accompanied by a Financial Officer's Certificate;
(d) simultaneously with the payment of Rent under Section 3.1.1, the
results of operations of the Facility for the preceding Accounting Period (the
"ACCOUNTING PERIOD STATEMENT"), in the form received by Tenant from Manager in
accordance with the Management Agreement;
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(e) simultaneously with the payment of Rent under Section 3.1.1, the
Percentage Rent Schedule and, simultaneously with the payment of Rent with
respect to the final Accounting Period of each Fiscal Year, the Year End
Percentage Rent Schedule, accompanied by a Financial Officer's Certificate;
(f) to the extent such information has been provided by Manager to
Tenant, not later than twenty-eight (28) days after the end of each Accounting
Period, except as described below, the summary of operating results of the
Facility (the "PERIOD REPORT"). The Period Report will provide REVPAR and
EBITDA substantially in the format of the period report attached hereto as
Schedule 17.2(f). Notwithstanding the foregoing, for the first Accounting
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Period of each Fiscal Year, the Period Report will be provided to Landlord not
later than thirty-five (35) days after the end of the prior Fiscal Year;
(g) to the extent such information has been provided by Manager to
Tenant, not later than twenty-eight (28) days after each of the first three (3)
quarters of any Fiscal Year, Tenant will provide the forecast Gross Revenues,
Room Revenues and EBITDA for the Facility. In addition, to the extent such
information is available from Manager, Tenant will provide forecast Gross
Revenues by department by Accounting Period and for the Fiscal Year;
(h) promptly after the sending or filing thereof, copies of all
periodic reports which CCC, OpCo or Tenant files with the SEC or any stock
exchange on which any of their shares are listed or traded;
(i) promptly after the delivery thereof to Tenant, a copy of any
management letter or written report prepared by the independent certified public
accountants with respect to the financial condition, operations, business or
prospects of Tenant, as the case may be; and
(j) at the expense of Landlord, at any time and from time to time upon
not less than forty-five (45) days Notice from Landlord, any financial reporting
information required to be filed by Landlord with any securities or 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.
Landlord may at any time, and from time to time, provide the Facility
Mortgagee with copies of any of the foregoing statements, provided that Landlord
has used commercially reasonable efforts to cause the Facility Mortgagee to
execute and deliver a confidentiality agreement reasonably satisfactory to
Tenant. Upon reasonable Notice from Landlord, Tenant agrees to cooperate with
Landlord to provide to Landlord the data, forecasts, and reports used in the
preparation of the foregoing statements within a reasonable time frame after
such data and reports become available to Tenant, provided, however, that Tenant
makes no representation as to the accuracy of the data, forecasts and reports
provided.
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17.3 Annual Budget.
Not later than twenty-eight (28) days prior to the commencement of
each Fiscal Year except for the first Fiscal Year, Tenant shall prepare and
submit to Landlord a schedule of Tenant's reasonable estimate of Gross Revenues
by department (the "OPERATING BUDGET SUMMARY"). Not later than fifteen (15)
days prior to the commencement of each Fiscal Year except for the first Fiscal
Year, Tenant shall prepare and submit to Landlord an operating budget (the
"OPERATING BUDGET") and a capital budget (the "CAPITAL BUDGET") prepared in
accordance with the requirements of this Section 17.3. The Operating Budget and
the Capital Budget (together, the "ANNUAL BUDGET") shall be consistent with the
format provided by Manager and show the following for the year as a whole:
(a) Tenant's reasonable estimate of Gross Revenues (including room
rates and anticipated Room Revenues) for the forthcoming Fiscal Year, together
with a summary of the estimated operating results provided by the Manager;
(b) An estimate of any amounts Landlord will be requested to provide
for Capital Expenditures during the Fiscal Year;
(c) An estimate of the expenditures necessary for replacements and
renewals of FF&E (the "FF&E ESTIMATE"); and
(d) Tenant's reasonable estimate of Percentage Rent payable with
respect to Room Revenues, Food and Beverages Sales, and Other Income.
Upon reasonable Notice from Landlord, Tenant agrees to cooperate with
Landlord to provide to Landlord the data, forecasts, and reports used in the
preparation of the Capital Budget and the Operating Budget within a reasonable
time frame after such data and reports become available to Tenant, provided,
however, that Tenant makes no representation as to the accuracy of the data,
forecasts and reports provided. Landlord shall have twenty-five (25) days after
the date on which it receives the Annual Budget to review, disapprove or change
the entries and information appearing in the Annual Budget relating to the
Capital Budget or the FF&E Estimate, but with regard to the FF&E Estimate, but
only to the extent the FF&E Estimate indicates amounts in excess of the FF&E
Reserve (the Capital Budget and the FF&E Estimate, to the extent it proposes
expenditures in excess of the FF&E Reserve, are collectively referred to herein
as the "CAPITAL PORTION"). If the parties are not able to reach agreement on
the Capital Portion for any Fiscal Year during Landlord's twenty-five (25)-day
review period, the parties shall attempt in good faith during the subsequent
twenty-five (25)-day period to resolve any disputes, which attempt shall
include, if requested by either party, at least one (1) meeting of executive
level officers of Landlord and Tenant. In the event the parties are still not
able to reach agreement on the Capital Portion of the Annual Budget for any
particular Fiscal Year after complying with the foregoing requirements of this
Section 17.3.2, no Capital Expenditures or FF&E expenditures in excess of the
FF&E Reserve shall be made unless the same are set forth in a previously
approved Capital Budget or are specifically approved by Landlord or are
otherwise required to comply with Legal
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Requirements or to make emergency expenditures in connection with Emergency
Situations or otherwise required pursuant to the Management Agreement.
Tenant shall operate the Leased Property consistent with the Annual
Budget and shall promptly report to Landlord in writing any actual or
anticipated deviation from the Operating Budget or Capital Budget of any
material or long-term consequence. To the extent the budget estimates for the
categories of revenues identified in (d) above are not made available on an
Accounting Period or Fiscal Year basis from Manager, Tenant shall cooperate with
Landlord, at Landlord's sole cost, in its efforts to obtain such budget
information from Manager.
Not later than seventy-five (75) days after the beginning of the
Fiscal Year, Tenant shall provide Landlord with itemized schedules on an
Accounting Period basis detailing the Operating Budget and the anticipated
Percentage Rent (collectively, the "BUDGET SPREAD").
ARTICLE 18
LANDLORD'S RIGHT TO INSPECT
Tenant shall permit Landlord and its authorized representatives to inspect
the Leased Property during normal business hours upon not less than twenty-four
(24) hours Notice, and to make such repairs as are required by Legal
Requirements and Insurance Requirements which Tenant fails to make and as
Landlord is permitted or required to make pursuant to the terms of this Lease,
provided that any inspection or repair by Landlord or its representatives will
not unreasonably interfere with Tenant's use and operation of the Leased
Property and provided further that in the event of an emergency, as determined
by Landlord in its reasonable discretion, prior Notice shall not be necessary.
ARTICLE 19
APPRAISAL
In the event that it becomes necessary to determine the Fair Market Value
or Fair Market Rental for any purpose of this Lease, or the amount of any
adjustment to or abatement of Minimum Rent and Percentage Rent hereunder, and
the parties cannot agree thereon, such Fair Market Value or Fair Market Rental,
or reduction, adjustment or abatement, as the case may be, shall be determined
upon the written request of either party in accordance with the following
procedure.
The party requesting an appraisal, by Notice given to the other, shall
propose and unilaterally appoint a Qualified Appraiser. The other party, by
Notice given within fifteen (15) days after receipt of such Notice appointing
the first Qualified Appraiser, may appoint a second Qualified Appraiser. If the
other party fails to appoint the second Qualified Appraiser within such fifteen
(15)-day period, such party shall have waived its right to appoint a Qualified
Appraiser, the first Qualified Appraiser shall appoint a second Qualified
Appraiser within fifteen (15) days thereafter, and the Fair Market Value or Fair
Market Rental, or reduction, adjustment or abatement, as the case may be, shall
be determined by the Qualified Appraisers as set forth below.
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The two Qualified Appraisers shall thereupon endeavor to agree upon the
Fair Market Value or Fair Market Rental, or reduction, adjustment or abatement,
as the case may be. If the two Qualified Appraisers so named cannot agree upon
such value or rental, or reduction, adjustment or abatement, as the case may be,
within thirty (30) days after the designation of the second such appraiser, each
such appraiser shall, within five (5) days after the expiration of such thirty
(30)-day period, submit his appraisal to the other appraiser in writing, and if
the Fair Market Values or Fair Market Rentals, or amounts of reduction,
adjustment or abatement, as the case may be, set forth in such appraisals vary
by five percent (5%) or less of the greater value, the Fair Market Value or Fair
Market Rental, or reduction, adjustment or abatement, as the case may be, shall
be determined by calculating the average of the two determinations of the two
appraisers.
If the Fair Market Values or Fair Market Rentals, or amounts of reduction,
adjustment or abatement, as the case may be, set forth in the two appraisals
vary by more than five percent (5%) of the greater value, the two Qualified
Appraisers shall select a third Qualified Appraiser within an additional fifteen
(15) days following the expiration of the aforesaid five (5)-day period. If the
two appraisers are unable to agree upon the appointment of a third appraiser
within such fifteen (15)-day period, either party may, upon written notice to
the other, request that such appointment be made by the then President (or
equivalent officer) of the State's Chapter of the American Institute of Real
Estate Appraisers, or his or her designee, or, if there is no such organization
or if such individual declines to make such appointment, by any state or Federal
court of competent jurisdiction for the State.
In the event that all three of the appraisers cannot agree upon Fair Market
Value or Fair Market Rental, or reduction, adjustment or abatement, as the case
may be, within twenty (20) days following the selection of the third appraiser,
each appraiser shall, within ten (10) days thereafter, submit his appraisal to
the other two appraisers in writing, and the Fair Market Value or Fair Market
Rental, or reduction, adjustment or abatement, as the case may be, shall be
determined by calculating the average of the two numerically closest values (or,
if the values are equidistant, the average of all three values) determined by
the three appraisers.
In the event that any appraiser appointed hereunder does not or is unable
to perform his or her obligation hereunder, then the party or the appraiser(s)
appointing such appraiser shall have the right to propose and approve
unilaterally a substitute Qualified Appraiser, but if the party or the
appraiser(s) who have the right to appoint a substitute Qualified Appraiser fail
to do so within ten (10) days after written Notice from the other party (or
either party in the event such appraiser was appointed by the other appraisers),
either party may, upon written Notice to the party having the right to appoint a
substitute Qualified Appraiser, request that such appointment be made by such
officer of the American Institute of Real Estate Appraisers or court of
competent jurisdiction as described above; provided, however, that a party who
has the right to appoint an appraiser or a substitute appraiser shall have the
right to make such appointment only up until the time such appointment is made
by such officer or court.
In connection with the appraisal process, so long as Tenant receives
reasonable prior Notice, Tenant shall provide the appraisers full access during
normal business hours
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to examine the Leased Property, the books, records and files of Tenant and all
agreements, leases and other operating agreements relating to the Leased
Property.
The costs of each such appraisal shall be borne by the party selecting the
appraiser, provided the cost of the third appraiser shall be split equally
between Landlord and Tenant. Upon determining such Fair Market Value or Fair
Market Rental, or reduction, adjustment or abatement, as the case may be, the
appraisers shall promptly notify Landlord and Tenant in writing of such
determination. If any party shall fail to appear at the hearings appointed by
the appraisers, the appraisers may act in the absence of such party.
The determination of the Qualified Appraisers made in accordance with the
foregoing provisions shall be final and binding upon the parties, such
determination may be entered as an award in arbitration in a court of competent
jurisdiction, and judgment thereon may be entered.
ARTICLE 20
FACILITY MORTGAGES
20.1 Landlord May Grant Liens.
(a) 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 or ground lease upon its
interest in 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 Lien or ground lease shall be consistent with the
requirements of the Management Agreement or otherwise approved by Manager, and
shall not modify the terms of this Lease, except as expressly set forth in
Section 20.2. Landlord agrees to provide to Tenant copies of all existing and
future ground leases, and amendments thereto, which affect the Leased Property.
(b) Tenant shall, upon the request of Landlord or any existing,
potential or future Facility Mortgagee, and to the extent in Tenant's possession
or obtainable from Manager pursuant to the Management Agreement, (i) provide
Landlord or the Facility Mortgagee with copies of all licenses, permits,
occupancy agreements, operating agreements, leases, contracts, inspection
reports, studies, appraisals, assessments, default or other notices and similar
materials reasonably requested in connection with any existing or proposed
financing of the Leased Property, and (ii) execute such estoppel certificates
and collateral assignments with respect to the Facility's licenses and any of
the other aforementioned agreements as the Facility Mortgagee may reasonably
request in connection with any such financing, provided that no such estoppel
certificate or collateral assignment shall, except as expressly set forth in
Section 20.2, modify the terms of this Lease.
20.2 Subordination of Lease.
Subject to Section 20.1 and the terms of Section 7.1, this Lease, and
any and all rights of Tenant hereunder, are and shall be subject and subordinate
to any Facility
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Mortgage, any ground or master lease, and all renewals, extensions,
modifications, consolidations and replacements thereof, and to each and every
advance made or hereafter to be made under any such Facility Mortgage. 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 landlord
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. Tenant shall not
unreasonably withhold its consent to any amendment to this Lease reasonably
required by such lender or ground lessor, provided that such amendment does not
(i) increase Tenant's rental obligations or other financial obligations
hereunder, or (ii) have a material adverse effect upon Tenant's rights
hereunder, or (iii) materially increase Tenant's non-economic obligations
hereunder, or (iv) decrease Landlord's obligations hereunder. Landlord shall
exercise commercially reasonable efforts to require any future Facility
Mortgagee or landlord under a ground lease affecting the Leased Property to
provide Tenant with notice and an opportunity to cure Landlord defaults under
the respective Facility Mortgage or ground lease.
Any lease to which this Lease is, at the time referred to, subject and
subordinate is herein called a "SUPERIOR LEASE," and the landlord of a Superior
Lease or its successor in interest at the time referred to is herein called
"SUPERIOR LANDLORD"; the Facility Mortgage and any other mortgage or deed of
trust to which this Lease is, at the time referred to, subject and subordinate,
is herein called a "SUPERIOR MORTGAGE," and the Facility Mortgagee and any other
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.
Notwithstanding the obligations of Tenant hereunder, neither any
Superior Mortgagee nor any Superior Landlord shall have an obligation to provide
a non-disturbance agreement to Tenant. Any Superior Mortgagee or Superior
Landlord shall have the right to terminate this Lease upon the foreclosure, deed
in lieu of foreclosure or exercise of the power of sale with respect to the
Leased Property; provided that, if such right is exercised because of (a) a non-
monetary default by Landlord under the terms of the relevant loan agreement or
ground lease not caused by an Event of Default hereunder or (b) a monetary
default by Landlord (including a misapplication of Rent paid by Tenant) where
Tenant is not in Default in the payment of Rent hereunder beyond the expiration
of applicable notice and cure periods, then Landlord shall pay to Tenant the
Fair Market Value of Tenant's leasehold estate as of the termination date in
accordance with Section 24.1(b); provided further that (i) such fee shall be
paid first by offsetting any amounts owed by Tenant to Landlord at such time and
the balance (if any) shall be paid to Tenant in cash, and (ii) Tenant agrees to
seek payment of such cash balance (if any) solely from Host O.P. (which, by its
execution of this Lease, agrees to be primarily liable for Landlord's obligation
under this subparagraph of Section 20.2) pursuant to the terms of the Facility
Mortgagee Agreement, and shall not make any demand or claim therefor against
Landlord, the Facility Mortgagee, any purchaser in foreclosure or transferee by
deed in lieu of foreclosure or other party claiming under any of the foregoing.
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In the event a cash flow sweep structure is implemented by any
Superior Mortgagee, and such structure remains in place for twelve (12)
consecutive months, Tenant, at its election, upon not less than thirty (30) days
Notice, may terminate this Lease effective as of the end of such twelve (12)
month period. For any period prior to such termination date, (i) Tenant's
obligation to pay Rent or any other amounts payable hereunder shall be reduced
by any amounts received by any Superior Mortgagee and (ii) Landlord shall
compensate Tenant on an Accounting Period basis for any Tenant Operating Profit
not received because of the cash flow sweep structure (i.e., any amount swept in
excess of the Rent and other amounts otherwise payable by Tenant under this
Lease) and any other costs incurred or advanced by Tenant pursuant to this
Lease, and Host O.P. agrees to be primarily liable for Landlord's obligation
under this clause (ii). Likewise, for any period during which cash management
procedures are implemented by or on behalf of any Superior Mortgagee, (a)
Tenant's obligation to pay Rent or any other amounts payable hereunder shall be
reduced by any amounts received by any Superior Mortgagee and (b) Landlord shall
compensate Tenant on an Accounting Period basis for any Tenant Operating Profit
not received because of the cash management procedures (i.e., any amount swept
in excess of the Rent and other amounts otherwise payable by Tenant under this
Lease) and any other costs incurred or advanced by Tenant pursuant to this
Lease, and Host O.P. agrees to be primarily liable for Landlord's obligation
under this clause (b). If Tenant elects to terminate this Lease pursuant to the
termination right granted in the first sentence of this paragraph, Landlord
shall pay to Tenant the Fair Market Value of Tenant's leasehold estate as of the
termination date calculated in accordance with Section 24.1(b); provided,
however, (x) such fee shall be paid first by offsetting any amounts owed by
Tenant to Landlord at such time and the balance (if any) shall be paid to Tenant
in cash, and (y) Tenant agrees to seek payment of such cash balance (if any)
solely from Host O.P. (which, by its execution of this Lease, agrees to be
primarily liable for Landlord's obligation to pay the cash balance referenced in
this clause (y)) pursuant to the terms of the Facility Mortgagee Agreement, and
shall not make any demand or claim therefor against Landlord, the Facility
Mortgagee, any purchaser in foreclosure or transferee by deed in lieu of
foreclosure or other party claiming under any of the foregoing.
Subject to the termination rights of any Superior Landlord or Superior
Mortgagee, if any, in the event that 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 Lease (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 Lease as herein provided and Tenant shall attorn to
and recognize the Successor Landlord as Tenant's landlord under this Lease 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 Lease), whereupon, this Lease 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 Lease, except that the Successor Landlord (unless formerly the
landlord under this Lease 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 party of
any prior Landlord under this Lease, (b) responsible for any monies owing by or
on deposit with any prior Landlord to the credit of
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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
Lease subsequent to such Superior Lease or Superior 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, (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 Landlord under this
Lease 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.
20.3 Notice to Mortgagee and Ground Landlord.
Attached hereto as Schedule 20.3 is a list of the Superior
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Mortgagee(s) and Superior Landlord(s) as of the date hereof, including their
addresses for notices. No default 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 Superior Mortgagee(s) and Superior Landlord(s), and subsequent to the
receipt by Tenant of Notice from Landlord as to the identity of any future
Facility Mortgagee or ground landlord under a lease with Landlord, as ground
tenant, which includes the Leased Property as part of the demised premises and
which complies with Sections 20.1 and 20.2 (which Notice shall include a copy of
the applicable mortgage or lease), no default Notice from Tenant to Landlord
hereunder shall be effective unless and until a copy of the same is given to the
Facility Mortgagee or ground landlord at the address set forth in such Notice.
The curing of any Landlord Default by any Superior Mortgagee(s) or Superior
Landlord(s) listed on Schedule 20.3, or by any Facility Mortgagee or ground
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landlord of which Tenant receives Notice after the date hereof as provided
above, shall be treated as performance by Landlord, provided any such cure shall
be made within the time periods set forth herein.
20.4 Transfer of Leased Property.
Notwithstanding anything set forth herein to the contrary, but subject
to the rights of a Facility Mortgagee as set forth herein, Landlord shall not,
without the consent of Tenant, transfer the Leased Property, or any interest
therein, to any Person (i) which does not have sufficient financial resources
and liquidity to fulfill the Landlord's Retained Obligations and Continuing
Obligations under the Management Agreement and Landlord's obligations under this
Lease, or (ii) which has been, or is in control of or controlled by Persons who
have been, convicted of felonies involving moral turpitude in any state or
federal court, or otherwise would cause a breach of the Management Agreement.
ARTICLE 21
ADDITIONAL COVENANTS OF TENANT
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21.1 Conduct of Business.
Tenant 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 existence and
its rights and licenses necessary to conduct such business.
21.2 Maintenance of Accounts and Records.
Tenant shall keep records and books of account in which full, true and
correct entries in all material respects will be made of dealings and
transactions in relation to the business and affairs of Tenant.
21.3 Management of Leased Property.
21.3.1 Management Agreement, Consent and Assignment, Etc.
For and during the Term of this Lease, but not thereafter,
Landlord has assigned unto Tenant Landlord's interest as "Owner" under that
certain Management Agreement dated ______________, _____, by and between
Landlord and ___________________ (the "MANAGER"), as amended prior to the date
hereof and subsequently modified and amended pursuant to that certain [Consent,
Assignment and Assumption and Amendment of Management Agreement] dated as of
even date herewith by and among Landlord, Tenant and Manager (the "CONSENT AND
ASSIGNMENT") (together with all past and future modifications and amendments
thereto, the "MANAGEMENT AGREEMENT"). Pursuant to the Consent and Assignment,
Tenant has accepted such assignment and assumed and agreed to perform all of
Landlord's obligations as "Owner" under the Management Agreement (including
certain obligations of "Owner" that the Consent and Assignment expressly
provides shall both apply to and be binding upon Tenant, and continue to apply
to and be binding upon Landlord (as, but only to the extent, such obligations
apply to Landlord, the "CONTINUING OBLIGATIONS")), except for certain
obligations of "Owner" that the Consent and Assignment expressly provides shall
remain the sole obligations of Landlord (the "RETAINED OBLIGATIONS"). Landlord
hereby covenants to perform the Retained Obligations and the Continuing
Obligations. In addition, Landlord shall be entitled, together with Tenant, to
exercise the "Continuing Rights," as defined in the Consent and Assignment, and
Tenant shall not be entitled to exercise any of the "Reserved Rights," as
defined in the Consent and Assignment, which are reserved exclusively to
Landlord.
21.3.2 Reversion upon Termination.
All of Landlord's rights, benefits and privileges with respect
to the Management Agreement shall be vested in Tenant throughout the Term of
this Lease; provided, however, that upon termination of this Lease, for whatever
reason, all of Landlord's rights, benefits and privileges under the Management
Agreement shall automatically revert to Landlord without the necessity of any
action on the part of Landlord hereunder.
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21.3.3 Compliance with Management Agreement and Indemnification.
To the extent that any of the provisions of the Management
Agreement impose a greater obligation on Tenant than the corresponding
provisions of this Lease, then Tenant shall be obligated to comply with, and to
take all reasonable actions necessary to prevent breaches or defaults under, the
provisions of the Management Agreement. Notwithstanding anything contained
herein to the contrary, Tenant shall perform and comply in every respect with
the provisions of the Management Agreement, except for the Retained Obligations
and Continuing Obligations, which shall remain the sole responsibility of
Landlord, so as to avoid any default thereunder during the Term of this Lease.
Tenant shall, at all times, direct and require Manager to perform all of
Manager's obligations under the Management Agreement. 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 permitted by law, imposed upon, incurred by, or asserted against
Landlord by reason of a default by Tenant under the Management Agreement,
including, without limitation, any default by Tenant under the Management
Agreement attributable to a failure by Tenant to perform its obligations under
this Lease. Likewise, Landlord shall protect, indemnify and hold harmless Tenant
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 permitted by law, imposed upon,
incurred by, or asserted against Tenant by reason of a default by Landlord under
the Management Agreement, including, without limitation, any default by Landlord
under the Management Agreement attributable to a failure by Landlord to perform
its obligations under this Lease. The obligations of Landlord and Tenant set
forth in this Section 21.3.3 shall survive the termination of this Lease.
21.3.4 Consent Required for Certain Actions.
Without at least thirty (30) days prior written Notice to
Landlord in the case of subsections (1), (2), (5), and (6) below, and without at
least fifteen (15) days prior written Notice in the case of subsections (3) and
(4) below, Tenant shall not take any of the following actions:
(1) terminate the Management Agreement prior to the expiration
of the term thereof;
(2) amend, modify or assign its interest in (except in
connection with an assignment permitted pursuant to Section 16.1 hereof) the
Management Agreement;
(3) waive (or fail to enforce) any right of "Owner" under the
Management Agreement;
(4) waive any breach or default by Manager under the
Management Agreement (or fail to enforce any right of "Owner" in connection
therewith);
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(5) agree to any change in Manager or consent to any
assignment by Manager; or
(6) take any other action which reasonably could be expected
to materially adversely affect Landlord's rights or obligations under the
Management Agreement for periods following termination of this Lease (whether
upon the expiration of its term or upon earlier termination as provided for
herein).
Notwithstanding the foregoing, Tenant shall not take any of the
actions listed in clauses (1) through (6) above without Landlord's prior written
consent if such action:
(A) would materially impair the ability of Tenant to
perform Tenant's obligations under this Lease (including, without limitation,
make all payments of Rent as and when due under this Lease) (determined taking
into account the guarantee attached hereto as Exhibit F (the "GUARANTEE") of CCC
and OpCo (together, the "GUARANTORS") of Tenant's payment and performance of all
of its obligations under this Lease);
(B) would cause Tenant not to comply with the obligations
of Tenant set forth in Section 4.1;
(C) would materially adversely affect the economic value
of the Leased Property to Landlord following the termination of this Lease
(whether upon the expiration of the Term or upon earlier termination as provided
for herein); or
(D) would materially increase the legal exposure of
Landlord to Manager under the Management Agreement during the Term, either by
reason of Landlord's continuing liability to Manager pursuant to the Consent and
Assignment (determined taking into account the Guarantee), or with respect to
the Retained Obligations or the Continuing Obligations.
21.3.5 Replacement of Manager.
Notwithstanding Section 21.3.4 above, Tenant shall not agree
to change the management or the brand affiliation of the Facility without the
prior approval of Landlord, which approval shall not be unreasonably withheld,
conditioned or delayed. In addition, the proposed replacement manager shall be
nationally recognized and shall have substantial experience managing hotels of
comparable quality. No such replacement or change in brand affiliation shall
continue beyond the Term hereof without the prior written approval of Landlord,
which approval may be granted or withheld in Landlord's sole discretion.
21.4 Facility Mortgagee Agreement.
Tenant agrees to enter into an agreement with Landlord, any Facility
Mortgagee and Host O.P. (the "FACILITY MORTGAGEE AGREEMENT") pursuant to which,
in consideration of Facility Mortgagee's consent to this Lease and the
transactions contemplated hereby: (i) Tenant acknowledges to the Facility
Mortgagee that the Working
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Capital purchased by Tenant with the Working Capital Note and all Excess FF&E
acquired by Tenant from Landlord while the Facility Mortgage is in effect is
subject to the Facility Mortgagee's first priority Lien (without Tenant assuming
any liability for Landlord's obligations that are secured by or arise under any
Facility Mortgage) and that the Facility Mortgagee's rights and remedies with
respect to such Working Capital and Excess FF&E shall survive and be enforceable
with respect thereto; (ii) Tenant covenants to the Facility Mortgagee to sign,
provided Landlord shall prepare and file at its sole cost, UCC-1 financing
statements confirming the foregoing for notice purposes; (iii) Tenant covenants
not to sell, lease, transfer or otherwise dispose of such Working Capital or
Excess FF&E or any interest therein (other than in the ordinary course of
business or other than to Landlord in accordance with the terms of this Lease
upon the expiration or earlier termination of the Term), or grant or cause or
permit to exist any lien, charge or encumbrance with respect thereto, other than
the aforesaid Lien in favor of the Facility Mortgagee and any other Liens
securing obligations which are the responsibility of Landlord; (iv) Landlord
agrees that this Lease and the Working Capital Note will not be modified or
amended in any manner that would adversely affect the Facility Mortgagee's
collateral under the Facility Mortgage without the Facility Mortgagee's prior
written consent; (v) Landlord and Tenant agree to confirm to the Facility
Mortgagee that the Facility Mortgagee shall have the right to terminate this
Lease in the event of a foreclosure by the Facility Mortgagee under the Facility
Mortgage, pursuant to Article 20 hereof; (vi) Tenant agrees that, in the event
of a foreclosure by the Facility Mortgagee under the Facility Mortgage, the
Facility Mortgagee shall have the right to continue this Lease as lessor and
succeed to all Landlord's rights hereunder and under the Security Agreement,
provided that in such event the Facility Mortgagee recognizes Tenant's rights
hereunder; (vii) if the Facility Mortgagee terminates this Lease in accordance
with Article [20] [24] hereof, (A) Tenant agrees, at the Facility Mortgagee's
request, to convey all Working Capital existing at such time directly to the
Facility Mortgagee or its designee in payment of the Working Capital Note
(together with any cash balance due from Tenant in respect thereto), (B) Tenant
agrees to look solely to Host O.P. for payment of any cash balance payable to
Tenant for Working Capital to the extent such Working Capital exceeds the
balance due under the Working Capital Note, and (C) Host O.P. agrees to pay such
cash balance directly to Tenant, without the necessity of notice or demand on
Landlord; and (viii) Tenant agrees that if the amount specified in Section
24.1(b) of this Lease and/or the Excess FF&E Reimbursement Amount become payable
in connection with a foreclosure by the Facility Mortgagee under the Facility
Mortgage, then (A) such amount(s) shall be paid first by offsetting any amounts
owed by Tenant to Landlord, and the balance (if any) shall be paid by Host O.P.
to Tenant in cash, (B) Host O.P. agrees to pay such cash balance (if any)
directly to Tenant without the need for notice or demand on Landlord, and (C)
Tenant agrees to look only to Host O.P. for payment of such cash balance.
21.5 [Intentionally Omitted.]
21.6 Single Purpose Entity Covenants.
21.6.1 Separate Existence
Tenant shall (i) maintain its books and records and bank
accounts separate from any other person or entity (except that, for accounting
and reporting
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purposes, Tenant may be included in the CCC Consolidated Financial Statements
in accordance with GAAP); (ii) maintain an arm's length relationship
with its members, Affiliates and any other party furnishing services to it;
(iii) maintain its books, records, resolutions and agreements as official
records; (iv) conduct its business in its own name and through its own
authorized officers and agents; (v) maintain its financial statements,
accounting records and other limited liability company documents separate from
those of any other Person (except for inclusion in the CCC Consolidated
Financial Statements); (vi) pay its own liabilities out of its own funds and
other assets, including funds contributed to its capital by its equity holders,
and all such capital contributions shall be reflected properly in its books and
records; (vii) observe all limited liability company formalities, as applicable,
necessary to maintain its identity as an entity separate and distinct from its
members, CCC, and all other Affiliates; (viii) participate in the fair and
reasonable allocation of any and all overhead expenses and other common expenses
for facilities, goods or services provided to multiple entities; (ix) use its
own stationery, invoices and checks (except when acting in a representative
capacity); (x) hold and identify itself as a separate and distinct entity under
its own name and not as a division or part of any other Person (except for
inclusion in the CCC Consolidated Financial Statements); and (xi) hold its
assets in its own name.
21.6.2 Independent Member
Upon Notice from Landlord, Tenant shall have an Independent
Member (who shall be a non-equity member) at all times, or if the Independent
Member has withdrawn, Tenant shall not take any action which may not be taken
pursuant to the organizational documents of Tenant without the consent of the
Independent Member until such time as a replacement Independent Member has been
admitted to Tenant.
21.6.3 Limitation on Indebtedness and Guarantees
Except pursuant to the Consent and Assignment or as otherwise
expressly provided herein, Tenant shall not (i) incur, create or assume any
Indebtedness of any kind; or (ii) guarantee or have any consensual contingent
obligation for the obligations of any other Person; provided that, so long as no
Event of Default has occurred and is continuing, Tenant may incur, create or
assume any Permitted Debt (as defined below). As used herein, "PERMITTED DEBT"
shall mean:
(i) if no Default or Event of Default has occurred and is
continuing, purchase money Indebtedness and capitalized lease
obligations for the purchase or lease of FF&E in the ordinary course
of business (and not inconsistent with customary industry practices),
which Indebtedness may be secured by a first priority lien on the
goods and equipment that have been so purchased or leased;
(ii) if no Event of Default has occurred and is continuing,
unsecured Indebtedness owing to CCC or any wholly owned Subsidiary
thereof, with respect to which the lender shall have agreed in
writing, in form and substance satisfactory to Landlord, that payment
of such Indebtedness shall be subordinated in all respects to
performance of Tenant's
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obligations under this Lease and that no
remedies may be exercised with respect to enforcement or collection of
such Indebtedness until such time as this Lease shall have terminated
and all obligations owed by Tenant hereunder shall have been
discharged in full; and
(iii) if no Event of Default has occurred and is continuing,
Indebtedness solely in respect of surety and appeal bonds, performance
bonds and other obligations of a like nature (to the extent that such
incurrence does not result in the incurrence of any obligation to
repay any obligation relating to borrowed money of others), all in the
ordinary course of business in accordance with customary industry
practices.
21.6.4 Distributions
Tenant shall make no distributions of cash or other assets to
any of its members if an Event of Default has occurred and is continuing under
Section 12.1(a) hereof.
21.6.5 Single Purpose
Tenant shall not have or create any Subsidiaries or hold any
equity interest in any other Person. Tenant shall at all times be a Single
Purpose entity.
Tenant shall not (i) engage in any business activity or
operate for any purpose other than as stated in its Limited Liability Company
Operating Agreement as in effect on the date hereof; (ii) without the consent of
all its members, including the consent of an Independent Member, file a
bankruptcy or insolvency petition or otherwise institute bankruptcy proceedings;
or (iii) acquire any assets not reasonably related to the business and operation
of the Facility.
21.6.6 Certain Fundamental Changes
Without the consent of Landlord and any Facility Mortgagee (if
required), Tenant shall not (i) be a party to any merger or consolidation with
any Person, or (ii) assign its rights under this Lease, or assign, transfer, or
sell all or any substantial portion of its assets to any Person, in each case
other than a Qualified Affiliate that is a Single Purpose entity, has no
outstanding Indebtedness (other than Permitted Debt) and no Liens on any of its
assets (other than Permitted Liens) at the time of such assignment, and assumes
all of the obligations of Tenant hereunder. Without the consent of Landlord and
any Facility Mortgagee, Tenant shall not adopt a plan of dissolution or
liquidation or dissolve, wind up or liquidate. Without the approval of the
Independent Member, Tenant shall not take any action for which the approval of
the Independent Member is required under its organizational documents.
21.6.7 Amendments to Organizational Documents
Tenant shall not, in any manner, without the consent of
Landlord and any Facility Mortgagee (if required), amend, modify or alter the
terms of Sections 2.2, 2.3,
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2.4, 5.4 (only paragraphs a, b, c, d and g thereof), 5.5, 5.6, 5.7, and 8.1 of
the Limited Liability Company Operating Agreement of Tenant, as in effect on the
date hereof.
21.6.8 Qualified Affiliate
Tenant shall, at all times during the Term of this Lease, be a
Qualified Affiliate.
ARTICLE 22
LIMITATIONS
22.1 REIT Compliance.
Tenant acknowledges that Host REIT intends to qualify as a real estate
investment trust under the Code. Tenant agrees that it will not knowingly or
intentionally take or omit to take any action, or permit any status or condition
to exist at the Leased Property, which Tenant actually knows (acting in good
faith) would or could result in (i) the Rent payable under this Lease not
qualifying as "rents from real property" as defined in Section 856(d) of the
Code or (ii) Host REIT being disqualified from treatment as a real estate
investment trust under the Code as the provisions exist on the date hereof;
provided, however, that notwithstanding anything herein to the contrary, (i)
Tenant shall not be responsible for any act or omission of Landlord or Manager
(unless Manager's action was with the express written consent or at the
direction of Tenant), and (ii) any action by Tenant taken in compliance with the
express terms of this Lease, the Consent and Assignment, or the Management
Agreement shall not be deemed to create a Default or Event of Default under this
Section 22.1.
22.2 FF&E Limitation.
This Section 22.2 is intended to insure that all of the rent payable
under this Lease qualifies as "rents from real property" within the meaning of
Section 856(d) of the Code or any similar or successor provisions thereto. In
furtherance of such purpose, the parties have agreed to the terms set forth in
Schedule 22.2 attached hereto.
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22.3 Sublease Rent Limitation.
Anything contained in this Lease to the contrary notwithstanding, from
and after the Commencement Date, Tenant shall not knowingly or intentionally
(acting in good faith) enter into any sublease with respect to the Leased
Property or any part thereof on any basis such that the rental to be paid by the
sublessee thereunder would be based (or considered to be based), in whole or in
part, on either (a) the income or profits derived by the business activities of
the sublessee, or (b) any other formula such that any portion of the rent
payable hereunder would or could, to Tenant'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.
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22.4 Sublease Tenant Limitation.
Anything contained in this Lease to the contrary notwithstanding,
Tenant shall not knowingly or intentionally (acting in good faith) sublease any
Leased Property or any part thereof to any Person or Entity in which Landlord,
Host O.P., or Host REIT owns, directly or indirectly, a ten percent (10%) or
greater interest, within the meaning of Section 856(d)(2)(B) of the Code, or any
similar or successor provisions thereto. Tenant shall take reasonable
precautions in connection with each sublease (including providing Landlord with
prompt Notice of the same) to ensure that such sublease will not result in a
violation of this Section 22.4.
22.5 Tenant Ownership Limitation.
Anything contained in this Lease to the contrary notwithstanding,
Tenant shall not knowingly or intentionally (acting in good faith), and shall
use commercially reasonable efforts to cause its Affiliates not to knowingly or
intentionally (acting in good faith), acquire, directly or indirectly, (a) a
nine and 80/100 percent (9.8%) or greater interest in Landlord or Host REIT, or
(b) a four and 90/100 percent (4.9%) or greater interest in Host O.P., within
the meaning of Section 856(d)(2)(B) of the Code, or any similar or successor
provisions thereto.
ARTICLE 23
MISCELLANEOUS
23.1 No Waiver.
No failure by either 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 Lease, which shall continue in
full force and effect with respect to any other then existing or subsequent
breach.
23.2 Remedies Cumulative.
To the maximum extent permitted by law, each legal, equitable or
contractual right, power and remedy of either party now or hereafter provided
either in this Lease or by statute, or otherwise, shall be cumulative and
concurrent and shall be in addition to every other right, power and remedy, and
the exercise or beginning of the exercise by either party of any one or more of
such rights, powers and remedies shall not preclude the simultaneous or
subsequent exercise by such party of any or all of such other rights, powers and
remedies.
23.3 Severability.
Any clause, sentence, paragraph, section or provision of this Lease
held by a court of competent jurisdiction to be invalid, illegal or ineffective
shall not impair, invalidate or nullify the remainder of this Lease, but rather
the effect thereof shall be
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confined to the clause, sentence, paragraph, section or provision so held to be
invalid, illegal or ineffective, and this Lease shall be construed as if such
invalid, illegal or ineffective provisions had never been contained herein.
23.4 Acceptance of Surrender.
No surrender to Landlord of this Lease or of the Leased Property or
any part thereof, or of any interest therein, shall be valid or effective unless
agreed to and accepted in writing by 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.
23.5 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 Lease 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 Lease or the leasehold estate created hereby
and the fee estate or ground landlord's interest in the Leased Property.
23.6 Release of Landlord Following Conveyance.
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 the grantee or
transferee 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 Lease with respect to such of the Leased Property arising or
accruing from and after the date of such conveyance or other transfer, all such
future liabilities and obligations shall thereupon be binding upon the new
owner, and all references herein to Landlord thereafter shall be deemed to refer
to the new owner.
23.7 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) all Permitted Liens,
(b) 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 Facility, (c)
Liens that have been consented to in writing by Tenant, and (d) Landlord's
option to terminate this Lease pursuant to Article 24. Except as otherwise
provided in this Lease, no failure by Landlord to comply with the foregoing
covenant shall give Tenant any right to cancel or terminate this Lease or abate,
reduce or make a deduction from or offset against the Rent or any other sum
payable under this Lease, or to fail to perform any other obligation of Tenant
hereunder.
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23.8 Landlord's Consent.
Where provision is made in this Lease for Landlord's consent and
Landlord shall fail or refuse to give such consent, except to the extent
expressly provided herein to the contrary Tenant shall not be entitled to any
damages for any withholding by Landlord of its consent, it being intended that
Tenant's sole remedy shall be an action for specific performance or injunction
and that such remedy shall be available only in those cases where Landlord has
expressly agreed in writing not unreasonably to withhold its consent. Whenever
in this Lease the consent or approval of Landlord or Tenant 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,
conditioned or delayed, shall be in writing and shall be executed by a duly
authorized officer or agent of the party granting such consent or approval;
provided, however, that Landlord shall be deemed to have reasonably withheld its
consent in the event any Facility Mortgagee withholds its consent or otherwise
objects to any proposed consent or approval. With respect only to the matters
set forth on Schedule 23.8, if either Tenant or Landlord fails to respond within
-------------
fifteen (15) days (or such shorter or longer period of time as may be expressly
specified in this Lease) to a request in the form of a Notice by the other party
for a consent or approval, such consent or approval shall be deemed to have been
given.
23.9 Memorandum of Lease.
Unless required by Legal Requirements, neither Landlord nor Tenant
shall record this Lease. However, Landlord and Tenant shall promptly, upon the
request of the other, enter into a short form memorandum of this Lease, in form
suitable for recording under the laws of the State in which reference to this
Lease, and all options contained herein, shall be made. The requesting party
shall bear the costs and expenses of recording such memorandum. If a memorandum
of this Lease is required by Legal Requirements to be recorded, the parties
shall share equally the costs and expenses of recording such memorandum.
23.10 Notices.
(a) Any and all notices, demands, consents, approvals, offers,
elections and other communications required or permitted under this Lease 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 Lease 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
Lease 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
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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 Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Chris Nassetta
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: Bruce Stemerman
with a copy (which shall not constitute notice) to:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
(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 Lease 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.
23.11 Construction.
Anything contained in this Lease to the contrary notwithstanding, all
claims against, and liabilities of, Tenant or Landlord arising prior to any date
of termination or expiration of this Lease shall survive such termination or
expiration. In no event shall either party be liable for any punitive or
consequential damages as the result of a breach of this Lease by such other
party. Neither this Lease nor any provision hereof may be changed, waived,
discharged or terminated except by an instrument in writing signed by
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the party to be charged. All the terms and provisions of this Lease shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Each term or provision of this Lease to be performed by
Tenant or Landlord shall be construed as an independent covenant and condition.
Time is of the essence with respect to the exercise of any rights of, and
performance of any obligations by, Tenant or Landlord under this Lease. Except
as otherwise set forth in this Lease, any obligations of Tenant and Landlord
(including, without limitation, any monetary, repair and indemnification
obligations) shall survive the expiration or sooner termination of this Lease.
23.12 Counterparts; Headings.
This Lease 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 Lease are for
purposes of reference only and shall not limit or affect the meaning of the
provisions hereof.
23.13 Governing Law; Jurisdiction.
(a) This Lease 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, and the laws of the State shall apply to the perfection and priority of
liens upon and the disposition of and disposition with respect to the Leased
Property and in any case regardless of (i) where this Lease is executed or
delivered; or (ii) where any payment or other performance required by this Lease
is made or required to be made; or (iii) where any breach of any provision of
this Lease 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.
(b) 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 Lease may be brought and prosecuted only in the court or courts located in
the State of Maryland; and the parties consent to the jurisdiction of said court
or courts located in the State and to service of process by certified mail,
return receipt requested, or by any other manner provided by law.
23.14 No Broker.
Each party hereby represents and warrants to the other that it has
not engaged, dealt with or otherwise discussed this transaction with any broker,
agent or finder. Each party agrees to indemnify and hold the other harmless from
and against any claim arising out of a breach of the foregoing agreement and
representation and warranty.
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23.15 Related Agreements.
[(a)] Anything herein to the contrary notwithstanding, neither
Landlord nor Tenant shall take any action, or fail to take any action, which
would constitute a breach or default under (i) that certain Noncompetition
Agreement dated as of even date herewith by and between CCC and Host O.P., as
the same may be subsequently amended or restated (the "NONCOMPETITION
AGREEMENT"), (ii) that certain Pooling and Security Agreement dated as of even
date herewith by and between CCC, OpCo, the Tenants and Landlords named therein
and Host O.P., as the same may be subsequently amended or restated (the "POOLING
AGREEMENT"), [(iii) that certain Facility Mortgagee Agreement dated as of even
date herewith by and between Tenant Landlord, and [Landlord's lender], as the
same may be amended or restated,] (iv) the Security Agreement, (v) the Consent
and Assignment, or (vi) the Guarantee (collectively, the Noncompetition
Agreement, the Pooling Agreement, the Facility Mortgagee Agreement, the Security
Agreement, the Consent and Assignment and the Guarantee are sometimes referred
to herein as the "RELATED AGREEMENTS."
[(b) Anything herein to the contrary notwithstanding, Tenant shall
not take any action or fail to take any action authorized or required to be
taken hereunder that would constitute a breach or default of the Landlord under
that certain ground lease dated as of ____________________ by and between
_____________ and _____________ as the same may have been or may subsequently be
amended or restated.]
23.16 Legal Fees and Costs of Litigation.
In the event either party to this Lease commences legal action of any
kind to enforce the terms and conditions of this Lease, the prevailing party in
such litigation will be entitled to collect from the other party all reasonable
costs, expenses and attorneys' fees incurred in connection with such action.
23.17 Force Majeure.
If Landlord or Tenant is in any way delayed or prevented from
performing any obligation, except any monetary obligation, hereunder due to acts
of God, acts of war, civil disturbance, action of any Governmental Agency
(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 or other Casualty, or
any other cause beyond the reasonable control of either party (as applicable),
then the time for performance of such obligation shall be excused for the period
of such delay or prevention and extended for a period equal to the period of
such delay, interruption or prevention.
23.18 Conflicts with Related Agreements.
In the event of any conflict or inconsistency between this Lease and
any of the Related Agreements or the Asset Management Agreement, the terms of
any of the Related Agreements or the Asset Management Agreement shall govern.
Notwithstanding the foregoing, in the event of any conflict or inconsistency
between this Lease and the Consent and Assignment, as they relate to the
respective rights and obligations of Landlord and Tenant, the terms of this
Lease shall govern.
23.19 Operating Lease.
The parties hereto intend that this Lease shall be deemed for all
purposes to be an operating lease and not a capital lease.
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ARTICLE 24
TERMINATION RIGHTS
24.1 Landlord's Right to Terminate Lease upon Sale or Tax Law Change.
(a) In the event (i) Landlord enters into a bona fide contract to sell
the Leased Property to a non-Affiliate, or (ii) of a Tax Law Change resulting in
Landlord's determination to terminate this Lease, then in either such event
Landlord may terminate this Lease by giving not less than sixty (60) days prior
Notice to Tenant of Landlord's election to terminate this Lease upon the closing
under such contract or upon a date specified by Landlord which is on or after
the effective date of the Tax Law Change. Landlord shall be entitled to
terminate this Lease by reason of a Tax Law Change only if all other Pool Leases
and Other Leases are concurrently terminated, other than any other Pool Lease or
Other Lease that relates to a property that Host REIT, Host O.P. or any wholly
owned Subsidiary thereof cannot own, following such Tax Law Change, without
incurring potential adverse effects for Host REIT, Host O.P. or such Subsidiary,
unless such property is subject to a lease. Effective upon such date, this
Lease shall terminate and be of no further force and effect except as to any
obligations of the parties existing as of such date that survive termination of
this Lease, and all Rent, including Percentage Rent and Additional Charges,
shall be adjusted as of the termination date. (The term "TAX LAW CHANGE" shall
mean any change in the Code (including, without limitation, a change in the
Treasury regulations promulgated thereunder), or in the judicial or
administrative interpretations of the Code, which in Landlord's determination
will permit Landlord, Host REIT, Host O.P. or another entity in which Host REIT
or Host O.P. owns substantially all of the economic interests to operate the
Facility as a hotel without adversely affecting Host REIT's qualification for
taxation as a real estate investment trust under applicable Code provisions).
Landlord, in the event it enters into a bona fide contract to sell the Leased
Property to a non-Affiliate, and subject to the restrictions set forth in
Section 20.4, shall be permitted to transfer the Leased Property subject to the
Lease, provided, however, that the parties shall make such reasonable
modifications, if any, hereto as shall be necessary or appropriate in connection
with such transfer, including, without limitation, termination or modification
of the Related Agreements and/or the Asset Management Agreement as they relate
to this Lease, but no amendment hereto shall (i) increase Tenant's rental
obligations or other financial obligations hereunder, (ii) have a material
adverse effect upon Tenant's rights hereunder, (iii) materially increase
Tenant's non-economic obligations hereunder, or (iv) decrease Landlord's
obligations hereunder; and provided further that in such event Landlord shall
not, without the consent of Tenant, transfer the Leased Property or any interest
therein to any Person which (A) does not have sufficient financial resources and
liquidity to fulfill "Owner's" obligations under the Management Agreement and
Landlord's obligations under this Lease, or (B) who has been, or is in control
of, controlled by or under common control with Persons who have been, convicted
of felonies involving moral turpitude in any state or federal court.
(b) As compensation for the early termination of its leasehold estate
under this Article 24 because of a sale of the Leased Property (or as otherwise
expressly provided in this Lease), and as a condition precedent to Landlord's
right to terminate this Lease upon such a sale, Landlord shall, not more than
one (1) year prior to the anticipated termination date of this Lease and in any
event within sixty (60) days prior to the closing
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of such sale, either (i) pay to Tenant the Fair Market Value of Tenant's
leasehold estate hereunder as of the termination date of the Lease or (ii) offer
to lease to Tenant, pursuant to one or more leases, one or more substitute hotel
facilities (a "COMPARABLE LEASE") that (A) are comparable, in Tenant's
commercially reasonable judgment, to the average quality of the properties
leased pursuant to the other Pool Leases and the Other Leases, taking into
consideration the age, physical condition, location and other relevant factors,
and (B) would create for Tenant leasehold estates having an aggregate Fair
Market Value as to that portion of its term equal to the remaining Term
hereunder of no less than the Fair Market Value of the remaining Term hereunder,
both such values to be determined as of the closing of the sale of the Leased
Property. It is the intent of the parties that the Comparable Lease shall result
in substantially the same ratio between Tenant's Operating Profit and Rent as
then exists under this Lease for the Fiscal Year immediately preceding the sale.
For the purposes of determining the Fair Market Value for purposes of this
Section 24.1 or pursuant to any other Section of this Lease providing for such
compensation of Tenant upon a Lease termination, a discount rate of twelve
percent (12%) per annum will be used, and the annual income for the remainder of
the Term will be assumed to be equal to the average Tenant Operating Profit
generated during the three (3) Fiscal Years immediately preceding the
termination date, or if three (3) Fiscal Years have not elapsed since the
Commencement Date, the average during the preceding Fiscal Years that have
elapsed (with the annual income for each of such Fiscal Years escalated from the
end of each such Fiscal Year to the date of determination at the rate of
inflation before such average is determined), provided that this amount shall be
determined on a pro forma basis if the Leased Property has not operated as a
hotel for at least the preceding twelve (12) months. In the event Landlord and
Tenant are unable to agree upon the Fair Market Value of the original leasehold
estate or the proposed Comparable Lease leasehold estate, it shall be determined
by arbitration pursuant to the procedure set forth in Article 15. The parties
agree that, if Landlord elects to offer enter into a Comparable Lease, to the
extent that the Fair Market Value of the Comparable Lease is less than the Fair
Market Value of the original leasehold estate, calculated as set forth above,
then Landlord shall compensate Tenant in cash for the deficiency prior to the
effective date of the termination.
(c) Notwithstanding the provisions of Section 24.1(b), Landlord shall
be entitled to terminate this Lease in connection with a sale or other transfer
of the Leased Property to an unrelated Person or a Person in which Host O.P.
owns, directly or indirectly, less than two-thirds of the equity interests,
without payment of any termination fee, by giving not less than sixty (60) days
prior written Notice to Tenant, provided that the landlords under the Other
Leases and the other Pool Leases (excluding this Lease) relating to an aggregate
of fewer than twelve (12) hotels have elected to terminate such Other Leases or
other Pool Leases (excluding this Lease) without payment of a termination fee.
(d) Host O.P. agrees to guarantee Landlord's obligation to pay to
Tenant the compensation for (i) termination by a Superior Mortgagee or Superior
Landlord under Section 20.2, (ii) termination of this Lease following a Casualty
pursuant to Section 10.2.3, or (iii) termination of this Lease by Tenant by
reason of Landlord's election not to make an Award available to Tenant for
restoration following a Condemnation pursuant to Section 11.2; provided that at
the time of any such termination Landlord is a wholly owned direct or indirect
subsidiary of Host O.P., and if Landlord is then partially owned, directly or
indirectly, by Host O.P., Host O.P. shall guaranty that portion of such
compensation
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that represents the same percentage of the total compensation payable as Host
O.P.'s direct or indirect percentage ownership interest in Landlord. Landlord
agrees to be exclusively responsible for (and shall reimburse Tenant for any
payment Tenant otherwise might be required to make) the Manager's termination
fee (if any) payable to Manager because of the termination of the Management
Agreement in connection with the sale of the Leased Property.
(e) As compensation for the early termination of its leasehold estate
under this Article 24 because of a Tax Law Change, Landlord shall, not more than
one (1) year prior to the anticipated termination date of this Lease and in any
event within sixty (60) days of such termination, pay to Tenant the Fair Market
Value of Tenant's leasehold estate hereunder as of the termination date of this
Lease, as determined under Section 24.1(b). The amount determined to be the
Fair Market Value of Tenant's leasehold estate shall be payable, at the option
of Landlord, in cash or in the form of stock in Host REIT.
24.2 Tenant's Right to Terminate Lease upon Certain Events.
Notwithstanding any provision of this Lease to the contrary, Tenant
shall be entitled to terminate this Lease by giving not less than 180 days'
prior Notice to Landlord, without penalty, provided that the Other Tenants have
theretofore elected to terminate Other Leases and other Pool Leases (excluding
this Lease) relating to an aggregate of fewer than twelve (12) hotels without
penalty pursuant to a similar provision contained in such Other Leases or other
Pool Leases (excluding this Lease).
24.3 Termination of Lease Following Notice of Termination of
Guarantee.
At any time after a notice of termination has been given pursuant to
Section 10(a) of the Guarantee and the six-month period specified in Section
10(a)(iii) of the Guarantee has commenced, Landlord shall be entitled to
terminate this Lease by giving Notice thereof to Tenant, and upon expiration of
the time, if any, fixed in such Notice, this Lease shall terminate and except as
otherwise expressly provided herein the rights and obligations of the parties
under this Lease shall cease, subject to compliance with the provisions of this
Section 24.3. Landlord shall not be required to pay any termination fee under
this Article 24 if such termination pursuant to this Section 24.3 occurs no
later than 12 months after the date on which the six-month period specified in
Section 10(a)(iii) of the Guarantee commenced; provided, however, that if the
termination occurs after such 12-month period, then Landlord shall be required
to pay Tenant a termination fee calculated in accordance with Section 24.1(b).
Notwithstanding the foregoing, in the event any other Pool Lease under which
there does not then exist a default by the Other Tenant thereunder beyond the
applicable notice and cure period, is terminated pursuant to a provision similar
to the foregoing, Landlord's right to terminate this Lease under this Section
24.3 without payment of a termination fee shall be conditioned upon termination
of this Lease and all other Pool Leases no later than 4 months after the
earliest date on which termination of this Lease or any other Pool Lease
pursuant to this Section 24.3 becomes effective. The provisions of this 24.3
shall be in addition to, and not in lieu of, the right of Landlord to terminate
this Lease by reason of the occurrence of an Event of Default hereunder pursuant
to the provisions of Article 12, without regard to the time limits or other
provisions of this Section 24.3.
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IN WITNESS WHEREOF, the parties have executed this Lease as a sealed
instrument as of the date above first written.
LANDLORD:
Attest:
By:
-----------------------------------
Name: Name:
------------------------------ ---------------------------------
Title: Title:
----------------------------- --------------------------------
TENANT:
Attest:
By:
-----------------------------------
Name: Name:
------------------------------ ---------------------------------
Title: Title:
----------------------------- --------------------------------
Not as a party, but solely to acknowledge and agree to the obligations
imposed upon it by Sections 4.5, 20.2, 21.4 and 24.1(d) and Schedule 22.2.
-------------
HOST MARRIOTT, L.P., a Delaware limited
partnership
Attest:
By:
-----------------------------------
Name: Name:
------------------------------ -------------------------------
Title: Title:
----------------------------- ------------------------------
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SCHEDULE 22.2
PROVISIONS RELATING TO EXCESS FF&E
(a) This Schedule 22.2 is intended to insure that all of the rent
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payable under this Lease qualifies as "rents from real property" within the
meaning of Section 856(d) of the Code or any similar or successor provisions
thereto. In furtherance of such purpose, the parties have agreed to the terms
set forth in the following paragraphs of this Schedule 22.2 with the objective
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that, anything contained in this Lease to the contrary notwithstanding, the
average of the adjusted tax basis of the items of "personal property" (within
the meaning of Section 856(d)(i)(C) of the Code) that are leased to Tenant under
this Lease at the beginning and at the end of any calendar year shall not exceed
fifteen percent (15%) of the average of the aggregate adjusted tax bases of the
Leased Property at the beginning and at the end of each such calendar year (the
"FF&E LIMITATION"). The provisions contained in the following paragraphs shall
be interpreted in a manner consistent with the intent and objective described
above (it being understood that this paragraph constitutes a statement of the
parties' mutual intent only and that the failure to achieve such objective,
absent any Default or Event of Default under the other paragraphs of this
Schedule 22.2 or any other provisions of this Lease, shall not constitute a
- -------------
Default or an Event of Default hereunder). [In order to avoid exceeding the
FF&E Limitation at the commencement of this Lease, Tenant has entered into an
Excess FF&E Lease (as defined below) with Non-Controlled Subsidiary for certain
Excess FF&E (as defined below) more specifically described therein that Landlord
has sold to Non-Controlled Subsidiary and that is now owned by Non-Controlled
Subsidiary (the "INITIAL FF&E LEASE").]
(b) If Landlord reasonably anticipates and gives Notice (an "EXCESS
FF&E NOTICE") and reasonably satisfactory evidence to Tenant that the FF&E
Limitation might be exceeded with respect to the Leased Property for any Fiscal
Year, Tenant shall, in accordance with the provisions set forth below and within
sixty (60) days following the delivery of such Excess FF&E Notice, either (a)
purchase from Landlord those items or categories of FF&E to be acquired by
Landlord during such Fiscal Year which are designated in such Excess FF&E Notice
as anticipated to cause Landlord to exceed the FF&E Limitation ("EXCESS FF&E")
or (b) arrange for Non-Controlled Subsidiary or another third party (in either
case, a "THIRD-PARTY PURCHASER") to purchase such Excess FF&E from Landlord and
to lease it to Tenant pursuant to a written lease agreement between such Third-
Party Purchaser and Tenant (an "EXCESS FF&E LEASE") that shall include the terms
specified for an Excess FF&E Lease in this Schedule 22.2 and in Schedule 22.2-A
------------- ---------------
hereto (it being understood that, without limiting the foregoing, Landlord and
Tenant intend that each Excess FF&E Lease be structured in a manner intended to
avoid the classification of Tenant's obligations thereunder as Capitalized Lease
Obligations).
(c) Upon receiving an Excess FF&E Notice, Tenant shall first offer to
Non-Controlled Subsidiary the opportunity to purchase from Landlord the Excess
FF&E designated therein and to lease same to Tenant pursuant to an Excess FF&E
Lease. Each Excess FF&E Lease with Non-Controlled Subsidiary shall provide for
an annual rental in an amount equal to the mathematical product of (i) the
applicable Market Leasing Factor (as defined below) for all Excess FF&E subject
to such Excess FF&E Lease multiplied by (ii) the Excess FF&E Value (as defined
below) of the Excess FF&E subject to such Excess FF&E Lease.
<PAGE>
(d) If Non-Controlled Subsidiary does not agree to purchase and lease
all the Excess FF&E which is the subject of an Excess FF&E Notice within fifteen
(15) days after the date it receives Tenant's offer with respect thereto, then
Tenant shall either purchase such Excess FF&E from Landlord for Tenant's own
account or shall arrange for another Third-Party Purchaser that has satisfied
the requirements of paragraph (j) of this Schedule 22.2 to purchase such Excess
-------------
FF&E from Landlord and lease it to Tenant pursuant to an Excess FF&E Lease. If
a Third-Party Purchaser that has satisfied the requirements of paragraph (j) of
this Schedule 22.2 shall not have purchased such Excess FF&E from Landlord and
-------------
leased it to Tenant under an Excess FF&E Lease within forty-five (45) days after
Landlord's delivery of the Excess FF&E Notice relating thereto, then Tenant
shall itself purchase such Excess FF&E from Landlord as and when (but only
after) Landlord takes title to such Excess FF&E. Tenant shall purchase, or
shall cause each Third-Party Purchaser to purchase, Excess FF&E with the
purchaser's own funds.
(e) With respect to any Excess FF&E first leased or purchased by
Tenant pursuant to the terms of this Schedule 22.2 during a particular calendar
-------------
year, Tenant's annual Rent obligations shall be reduced in the following manner
(the "FF&E ADJUSTMENT"):
(i) For the calendar year in which such Excess FF&E is first
placed in service by either Tenant or a Third-Party Purchaser, such
reduction shall be in an amount (the "FIRST YEAR FF&E ADJUSTMENT") equal to
the mathematical product of (A) the Market Leasing Factor (as defined
below) for personal property with an average expected useful life
corresponding to the weighted average expected useful life (as determined
in accordance with GAAP and rounded to the nearest whole year) of all
Excess FF&E first placed in service by Tenant or a Third-Party Purchaser
during such calendar year (such weighted average, the "APPLICABLE EXPECTED
LIFE") times (B) the Excess FF&E Cost (as defined below) of all Excess FF&E
first placed in service by Tenant or a Third-Party Purchaser during such
calendar year times (C) either (x) 100% if Tenant leases such Excess FF&E
from Non-Controlled Subsidiary or (y) 110% if Tenant purchases such Excess
FF&E or leases such Excess FF&E from a Third-Party Purchaser other than
Non-Controlled Subsidiary times (D) 50%;
(ii) For each subsequent calendar year prior to the calendar year
in which the Applicable Expected Life for such Excess FF&E expires, such
reduction shall be in an amount equal to twice the First Year FF&E
Adjustment; and
(iii) For the calendar year in which the Applicable Expected
Life for such Excess FF&E expires, such reduction shall be in an amount
equal to the First Year FF&E Adjustment.
It is contemplated that there would be a separate FF&E Adjustment for all Excess
FF&E first placed in service during a single calendar year (with such FF&E
Adjustment extending for a period equal to the lesser of the remaining Term or
the Applicable Expected Life of the Excess FF&E acquired during such calendar
year). The Rent payable by Tenant
-2-
<PAGE>
for each Accounting Period in a calendar year to which one or more FF&E
Adjustments apply shall be reduced by an amount equal to the mathematical
product of (i) the amount of such applicable FF&E Adjustment (or if more than
one FF&E Adjustment apply in such calendar year, the sum of such applicable FF&E
Adjustments) times (ii) a fraction, the numerator of which is one and the
denominator of which is the number of Accounting Periods in such calendar year.
The "EXCESS FF&E VALUE" of any Excess FF&E shall be the fair market value of
such Excess FF&E (which shall be the purchase price paid by the purchaser
thereof from Landlord, whether such purchaser is Non-Controlled Subsidiary,
another Third Party Purchaser or Tenant) plus the aggregate amount of out-of-
pocket transactional costs (including, without limitation, reasonable attorneys'
fees and any ad valorem, sales, transfer, transaction or similar tax, levy or
other governmental charge) incurred by such purchaser in connection with its
purchase of such Excess FF&E. The "MARKET LEASING FACTOR" for the first two (2)
Lease Years shall be the amounts set forth in Schedule 22.2-B* (with there to be
----------------
a separate Market Leasing Factor for each whole number of years of expected
useful life of Excess FF&E). Thereafter the Market Leasing Factors shall be
determined by an independent valuation expert, acceptable to both Landlord and
Tenant, who shall determine the Market Leasing Factors based on the median of
the leasing rates of at least three nationally recognized companies engaged in
the business of leasing similar FF&E or personal property and equipment with
average expected useful lives equal to the weighted average of the expected
useful lives set forth on Schedule 22.2-B. The cost of such expert shall be
---------------
borne by Landlord. The Market Leasing Factors shall take into account any use
taxes and similar Impositions payable by Tenant in connection with its leasing
of Excess FF&E under the relevant Excess FF&E Leases, as well as the reasonably
estimated anticipated out-of-pocket cost (including reasonable attorneys' and
accountants' fees) to Tenant of administering such Excess FF&E Leases during the
Term, so that the economic burden of such Impositions and administration costs
will be borne by Landlord. The "EXCESS FF&E COST" of any Excess FF&E shall be
the Excess FF&E Value of such Excess FF&E plus, if Tenant leases such Excess
FF&E from a Third-Party Purchaser, the aggregate amount of out-of-pocket
transactional costs (including, without limitation, reasonable attorneys' fees
and any ad valorem, sales, transfer, transaction or similar tax, levy or other
governmental charge) incurred by Tenant in connection with its entry into an
Excess FF&E Lease of such Excess FF&E in accordance with this Schedule 22.2.
-------------
(f) Landlord and Tenant agree to cause Manager to purchase all Excess
FF&E for Landlord's account with funds from the FF&E Reserve (or with funds
otherwise made available by Landlord). The parties specifically intend (and
Tenant hereby agrees to take such reasonable steps at Landlord's expense as
Landlord may request to insure) that
- --------------------------
* As provided below with respect to the Market Leasing Factors for subsequent
- -
years, the Market Leasing Factor for the first two years will take into
account any use taxes and similar Impositions payable by Tenant in
connection with its leasing of Excess FF&E under the relevant Excess FF&E
Leases, as well as the reasonably estimated anticipated out-of-pocket cost
(including reasonable attorneys' and accountants' fees) to Tenant of
administering such Excess FF&E Leases during the Term, so that the economic
burden of such Impositions will be borne by Landlord.
-3-
<PAGE>
Landlord shall own all Excess FF&E for a period of time sufficient to permit
such Excess FF&E to become subject to any then existing Liens in favor of the
Facility Mortgagee that encumber FF&E acquired by Landlord; provided, however,
that in no event shall Landlord own any Excess FF&E (i) for more than five (5)
Business Days, or (ii) so long that the FF&E Limitation would be exceeded at the
beginning or end of any calendar year. Without limiting Tenant's obligation
under the immediately preceding sentence to take reasonable steps requested by
Landlord (at Landlord's expense) to achieve the objective set forth therein, it
is understood and agreed that the failure to achieve such objective, absent any
Default or Event of Default under the other provisions of this Schedule 22.2 or
-------------
any other provisions of this Lease, shall not constitute a Default or an Event
of Default hereunder. Every purchase of Excess FF&E from Landlord, whether by
Tenant or a Third-Party Purchaser, shall be made expressly subject to any and
all Liens encumbering such Excess FF&E in favor of any Facility Mortgagee.
Following the purchase of any Excess FF&E by Tenant or a Third-Party Purchaser
as contemplated by this Schedule 22.2, Landlord shall not be considered to own
-------------
or be the lessor of any of such Excess FF&E during the Term of this Lease for
any purpose, nor shall any of such Excess FF&E be considered part of the Leased
Property, and neither Landlord nor Tenant shall at any time take a position (in
its books and records or otherwise) or make an assertion inconsistent therewith.
(g) In the event that Tenant owns any Excess FF&E at the expiration or
earlier termination of this Lease (including, without limitation, a termination
in connection with a transfer of ownership of the Leased Property), Landlord
shall purchase from Tenant and Tenant shall sell to Landlord (the "EXCESS FF&E
REPURCHASE"), on the effective date of such expiration or termination, all such
Excess FF&E (except for any Excess FF&E to which the terms of paragraph (i) of
this Schedule 22.2 apply) for a purchase price equal to the fair market value
-------------
(which the parties hereby agree shall not be less than the adjusted book value)
of such Excess FF&E at such time (the "EXCESS FF&E REPURCHASE PRICE"). The
Excess FF&E Repurchase Price shall be payable first by offset against any Rent
owed by Tenant to Landlord as of such time and any amounts owed by Tenant to
Landlord as of such time under the Working Capital Note, and the remainder (if
any) shall be paid by Landlord to Tenant in cash within ten (10) days after the
expiration or termination of this Lease.
(h) In the event that Tenant is leasing any Excess FF&E from a Third-
Party Purchaser at the expiration or earlier termination of this Lease
(including, without limitation, a termination resulting in connection with a
transfer of ownership of the Leased Property), Landlord shall purchase and
assume from Tenant, and Tenant shall sell, assign and delegate to Landlord, on
the effective date of such expiration or termination all Tenant's right, title
and interest in and its obligations under each Excess FF&E Lease between Tenant
and such Third-Party Purchaser (an "EXCESS FF&E LEASEHOLD INTEREST"). In the
aforesaid transaction (an "EXCESS FF&E LEASEHOLD INTEREST TRANSFER"), the
transfer price for such Excess FF&E Leasehold Interest (the "EXCESS FF&E
LEASEHOLD INTEREST TRANSFER PRICE") shall be an amount equal to the fair market
value of such Excess FF&E Leasehold Interest at such time (as determined in
accordance with the procedure provided below) and shall be payable (i) by
Landlord if such fair market value is a positive number or (ii) by Tenant if
such fair market value is a negative number. The fair market value of the
Excess FF&E Leasehold Interest shall be
-4-
<PAGE>
determined taking into account all relevant factors, including the remaining
term thereof, the remaining expected useful life of the Excess FF&E (as
determined in accordance with GAAP) subject to such leasehold, and the leasing
rate that would apply, under market conditions at that time, if a new lease for
such Excess FF&E were to be entered into with an unrelated party for a term
equal to the term remaining for such Excess FF&E Leasehold Interest; provided,
however, that in no event shall such fair market value be less than the adjusted
book value of such Excess FF&E Leasehold Interest. Any amount payable pursuant
to this paragraph shall be paid within ten (10) days after the expiration or
termination of this Lease and, if due from Landlord, shall be paid first by
offset against any Rent owed by Tenant to Landlord as of such time and any
amounts owed by Tenant to Landlord as of such time under the Working Capital
Note, and the remainder (if any) shall be paid in cash.
(i) In the event that the Facility Mortgagee forecloses on its Lien on
any Excess FF&E owned by Tenant in connection with, but not separate from, a
foreclosure of the Leased Property, Landlord shall reimburse Tenant for the loss
of such Excess FF&E in an amount equal to the Excess FF&E Repurchase Price plus
any reasonable costs and expenses (including, without limitation, reasonable
attorneys' fees) incurred by Tenant in complying with (but not contesting) such
foreclosure (the "EXCESS FF&E REIMBURSEMENT AMOUNT"). In the event that the
Excess FF&E Reimbursement Amount becomes payable to Tenant pursuant to the
immediately preceding sentence, (i) it shall be paid first by offsetting any
amounts owed by Tenant to Landlord as of such time and the balance (if any)
shall be paid in cash, (ii) Tenant agrees to seek payment of such cash balance
(if any) solely from Host O.P. pursuant to the terms of the Facility Mortgagee
Agreement and shall not make any demand or claim therefor against Landlord, the
Facility Mortgagee, any purchaser in foreclosure or transferee by deed in lieu
of foreclosure or other party claiming under any of the foregoing, and (iii)
Host O.P. agrees to pay any such cash balance.
(j) No Third-Party Purchaser shall purchase any Excess FF&E from
Landlord unless and until such Third-Party Purchaser shall have (i) agreed to
purchase such Excess FF&E with cash from such Third-Party Purchaser's own funds;
(ii) agreed to lease such Excess FF&E to Tenant under an Excess FF&E Lease; and
(iii) entered into an agreement with Landlord, the Facility Mortgagee and Host
O.P. pursuant to which (A) the Third-Party Purchaser acknowledges to the
Facility Mortgagee that all Excess FF&E purchased by such Third-Party Purchaser
while the Facility Mortgage is in effect is subject to the Facility Mortgagee's
first-priority Lien (without Third-Party Purchaser assuming any liability for
Landlord's obligations that are secured by or arise under any Facility Mortgage)
and that the Facility Mortgagee's rights and remedies with respect to such
Excess FF&E shall survive and be enforceable with respect thereto; (B) the
Third-Party Purchaser covenants to the Facility Mortgagee to execute and deliver
UCC-1 financing statements prepared by Landlord or any Facility Mortgagee
confirming the foregoing for notice purposes, which UCC-1 financing statements
may then be filed by Landlord or the Facility Mortgagee at Landlord's sole
expense; (C) the Third-Party Purchaser covenants not to sell, lease, transfer or
otherwise dispose of such Excess FF&E or any interest therein, or grant or cause
or permit there to exist any lien, charge or encumbrance with respect thereto,
other than the Lien in favor of the Facility Mortgagee, any other Liens which
are the responsibility of Landlord and any Lien arising pursuant to such
agreement
-5-
<PAGE>
or the Excess FF&E Lease, (D) in the event that this Lease expires or is
terminated prior to the expiration or termination of the Excess FF&E Lease,
Landlord agrees to purchase from the Third-Party Purchaser, and the Third-Party
Purchaser agrees to sell to Landlord, all Excess FF&E owned by the Third-Party
Purchaser at that time (other than any Excess FF&E to which clause (E) below
applies) on the same terms as those applicable to the Excess FF&E Repurchase;
and (E) if the Facility Mortgagee forecloses on its Lien with respect to Excess
FF&E owned by the Third-Party Purchaser: (x) Landlord and Host O.P. agree to
reimburse the Third-Party Purchaser for the loss of such Excess FF&E (such
reimbursement to be paid first by offsetting any amounts owed by the Third-Party
Purchaser to Landlord and the balance (if any) to be paid in cash); (y) Host
O.P. agrees to pay the cash balance (if any) of such reimbursement amount
directly to the Third-Party Purchaser without the need for notice or demand on
Landlord; and (z) the Third-Party Purchaser agrees to look only to Host O.P. for
payment of such cash balance.
(k) It is the intent of Landlord and Tenant that the leases of FF&E
pursuant to the [Initial FF&E Lease,] any Excess FF&E Lease[,] and this Lease
shall be treated as operating leases and not Capitalized Lease Obligations under
GAAP. Landlord and Tenant agree to cooperate to the extent feasible and
consistent with the terms of this Lease to provide terms for such leases of FF&E
that are so treated.
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<PAGE>
SCHEDULE 23.8
DEEMED CONSENTS
. Section 4.3.1 - If Hazardous materials are discovered in violation of
Environmental Laws on the Leased Property, Tenant will exercise all
commercially reasonable efforts to cause Manager to take all actions and incur
all expenses (which actions and expenses will be subject to Landlord's prior
approval, except in Emergency Situations) as may be necessary or required by
any Government Agency.
. Section 9.5 - All insurance policies shall include only deductibles reasonably
approved by Landlord.
. Section 10.2.4 - Landlord may, at its option, condition advancement of
insurance proceeds and other amounts on, among other things, its approval of
plans and specifications of an architect reasonably satisfactory to Landlord.
. Section 11.2 - Landlord may, at its option, condition advancement of an Award
and other amounts on, among other things, its approval of plans and
specifications of an architect reasonably satisfactory to Landlord.
. Section 16.1 - For subleases made in the ordinary course of operating the
Facility which are for a term of more than five years and involve more than
1,000 square feet, Landlord's consent is required, but such consent may not be
unreasonably withheld.
<PAGE>
AGREEMENT OF SUBLEASE
---------------------
(Residence Inn)
THIS AGREEMENT OF SUBLEASE ("SUBLEASE") is entered into this _____ day
of December, 1998, but effective for all purposes as of January 1, 1999, by and
between HMH HPT RESIDENCE INN, INC., a Delaware corporation 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 those certain lease agreements dated April 4,
1996, by and between HPTRI Corporation, a Delaware corporation ("PRIME
LANDLORD") and Landlord (collectively, the "PRIME LEASE"), listed on Schedule 1
attached hereto, Landlord has leased property commonly known as the "Residence
Inn" hotels (individually, a "Hotel" and collectively, the "Hotels") located at
the locations listed on Schedule 2 attached hereto (collectively, 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.
----
(a) 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, as to each of the Hotels, expiring on the day
immediately prior to the expiration date of the Prime Lease with respect to such
Hotel (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.
(b) The term of this Sublease shall automatically be extended for an
Extended Term in accordance with Section 2.4 of the Prime Lease unless either
(i) Landlord provides written notice to Tenant, not less than twenty-four (24)
months prior to the scheduled expiration date of the then-current term hereof,
that Landlord has elected not to renew the Prime Lease with respect to all, but
not less than all, of the Residence Inn hotels subject to the Prime Lease, or
(ii) Tenant provides written notice to Landlord, not less than twenty-eight with
respect to all, but not less than all, of the Residence Inn hotels subject to
the Prime Lease, (28) months prior to the scheduled expiration date of the then
current term hereof, that Tenant has elected to terminate this Sublease with
respect to all, but not less than all, of the Residence Inn hotels subject to
this Sublease.
<PAGE>
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. (a) Tenant shall pay rent in an amount equal to (i) the
----
Minimum Rent due under the Prime Lease plus (ii) percentage rent as set forth
and described on Schedule 3 attached hereto and made a part hereof ("Rent"),
----------
which Rent shall be prorated on a per diem basis for any partial month.
(b) The obligations of Tenant to pay rent [on an annual aggregate
basis] under this Sublease shall be guaranteed by Crestline Capital Corporation
("CCC") up to a maximum amount of $____ [allocable portion of $5,000,000],
pursuant a Pool Guarantee of even date herewith by CCC for the benefit of
Landlord (the "Residence Inn Pool Guarantee").
6. Obligations Under the Prime Lease.
---------------------------------
(a) Except as expressly set forth herein and on Schedule 4
----------
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 in Section 5 above
and on Schedule 3 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, except as expressly set forth herein and on Schedule 4 attached
----------
hereto and made a part hereof, 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.
(b) Any notices required to be given by Tenant to Prime Landlord
under the Prime Lease shall be given to Landlord not less than five (5) days
prior to the deadline for such notice under the Prime Lease.
(c) Any notice and cure period required to be provided to Tenant
under Article 12 of the Prime Lease shall be reduced by five (5) days for
purposes of this Sublease.
(d) Notwithstanding the provisions of Section 4.3 of the Prime
Lease to the contrary, any liability or obligation of the tenant thereunder
shall be borne two-thirds (2/3) by Landlord and one-third (1/3) by Tenant unless
such liability or obligation shall have been caused by the gross negligence or
willful misconduct of Landlord (in which case Landlord shall bear the entire
such cost) or Tenant (in which case Tenant shall bear the entire such cost).
7. Termination of Sublease.
-----------------------
(a) In addition to the rights and remedies set forth in Article
12 of the Prime Lease, Landlord shall have the right to terminate the Sublease
at any time upon not less than sixty (60) days prior written notice to Tenant,
effective upon a date specified by Landlord which is on or after the effective
date of a Tax Law Change. Landlord shall be entitled to terminate this Sublease
by reason of a Tax Law Change with respect to all, but not less than all, of the
Residence Inn hotels subject to this Sublease, other than to the extent that
this Sublease relates to a property that Host Marriott Corporation ("Host
REIT"), Host Marriott, L.P. ("Host
-2-
<PAGE>
O.P.") or any wholly owned subsidiary thereof cannot own, following such Tax Law
Change, without incurring potential adverse effects for Host REIT, Host O.P. or
such subsidiary, unless such property is subject to a lease or sublease.
Effective upon such date, this Sublease shall terminate and be of no further
force and effect except as to any obligations of the parties existing as of such
date that survive termination of this Sublease, and all Rent shall be adjusted
as of the termination date. (The term "TAX LAW CHANGE" shall mean any change in
the Code (including, without limitation, a change in the Treasury regulations
promulgated thereunder), or in the judicial or administrative interpretations of
the Code, which in Landlord's determination will permit Landlord, Host REIT,
Host O.P. or another entity in which Host REIT or Host O.P. owns substantially
all of the economic interests to operate the Leased Property as a hotel without
adversely affecting Host REIT's qualification for taxation as a real estate
investment trust under applicable Code provisions). In such event, Landlord
shall pay to Tenant the fair market value of Tenant's leasehold estate hereunder
as of the termination date of this Sublease which shall be deemed to equal the
net present value of the annual income to Tenant for the remainder of the term
of this Sublease (the "Fair Market Value"). For the purposes of determining the
Fair Market Value for purposes of this Section 7(a), a discount rate of five
percent (5%) per annum will be used, and the annual income for the remainder of
the term hereof will be assumed to be equal to the average Tenant's Operating
Profit generated during the three (3) Fiscal Years immediately preceding the
termination date, or if three (3) Fiscal Years have not elapsed since the
Commencement Date, the average during the preceding Fiscal Years that have
elapsed (with the annual income for each of such Fiscal Years escalated from the
end of each such Fiscal Year to the date of determination at the rate of
inflation before such average is determined), provided that this amount shall be
determined on a pro forma basis if the Leased Property has not operated as a
hotel for at least the preceding twelve (12) months.
(b) (i) In the event that Landlord elects to terminate this Sublease
due to an Event of Default by Tenant, no termination fee shall be payable to
Tenant by Landlord unless (A) Landlord shall terminate this Sublease more than
twelve (12) months after the occurrence of such Event of Default, and (B) CCC
shall fully perform its obligations under the Residence Inn Pool Guarantee, in
which event Landlord shall pay to Tenant a termination fee calculated as set
forth in Section 7(a) above.
(ii) As used herein, "Tenant's Operating Profit" shall equal for
any Fiscal Year the amount equal to revenues due to Tenant from the Leased
Property after the payment of all expenses relating to the operation or leasing
of the Leased Property less Rent paid to Landlord, but in any event not less
than $1.00.
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<PAGE>
8. 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.
9. 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
-4-
<PAGE>
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.
10. 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:
HMH HPT Residence Inn, Inc.
c/o 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
-5-
<PAGE>
with a copy (which shall not constitute notice) to:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Bruce Stemerman
(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.
11. 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.
12. 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.
13. 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.
-6-
<PAGE>
(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.
(h) No Recordation. Neither this Sublease nor any short-form
--------------
memorandum or version hereof shall be recorded by either party.
(i) Assignment. Without the prior written consent of Landlord [and
----------
Prime Landlord, to the extent required under the terms of the Prime Lease], this
Lease shall not be assigned, nor shall the Leased Property be further sublet,
except to an Affiliated Person of Tenant. No such assignment or subletting
shall relieve Tenant of its obligations hereunder.
-7-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have each executed this
Sublease on the day and year first hereinabove written.
LANDLORD
--------
HMH HPT RESIDENCE INN, INC.
BY:
-----------------------------------
NAME:
---------------------------------
TITLE:
--------------------------------
TENANT:
------
--------------------------------------
BY:
-----------------------------------
NAME:
---------------------------------
TITLE:
--------------------------------
-8-
<PAGE>
Schedule 1
List of Prime Leases
--------------------
<PAGE>
Schedule 1
List of Prime Leases
--------------------
<PAGE>
Schedule 2
----------
Leased Property
---------------
<PAGE>
Schedule 3
----------
Percentage Rent
---------------
Tenant shall pay to Landlord Percentage Rent in an amount and upon terms as
follows:
[Percentage Rent Calculation]
<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:
<PAGE>
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
----------
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
----------------------------------
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
----------------
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
---
Agreement.
"CCC Managed Hotel" shall have the meaning given to it in subparagraph (b)
-----------------
in the definition of "Hotel Leasing Business".
"Code" shall mean the Internal Revenue Code of 1986, as amended.
----
-2-
<PAGE>
"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 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
----
Agreement.
"FF&E Leases" shall have the meaning set forth in the second paragraph of
-----------
this Agreement.
"Franchise Business" shall mean the ownership or operation of any single or
------------------
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 leases on 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
----
Agreement.
"Host Business" shall mean the business of owning full-service hotels,
-------------
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
---------
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
-----------
this Agreement.
-3-
<PAGE>
"Hotel Leasing Business" means the business of leasing, as the tenant or
----------------------
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
-------- -------
a lease (or sublease) of a full-service hotel by CCC shall not be considered a
permitted part of the Hotel Leasing Business unless the following conditions
shall apply:
(a) If the lease is with respect to a full-service hotel and CCC will not
be the operator or manager of such hotel (other than through a contractual
arrangement with a third-party manager),
(i) the lessor must be a Publicly-Traded REIT or a Permitted
Private REIT and the rental payments made by CCC to the lessor must
qualify as "rents from real property" within the meaning of Section
856(d) of the Code; and
(ii) 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
fifteen percent (15%) of the estimated total economic benefit to be
generated by the leased property during the Lease Term, computed as
described in clause (iii) below;
(iii) For purposes of clause (ii) above:
(A) the estimated economic benefit to be derived by the
tenant or subtenant during the Lease Term shall equal the
present value of the projected net operating income to be
received by the tenant or subtenant, respectively, from the
leased property for the Lease Term (after deduction for
rental payments but before deduction for debt service
and including any residual payments to be received by the
tenant or subtenant at any time during the Lease Term
(including on the last day thereof)), 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; and
(B) the estimated total economic benefit to be derived from
the leased property during the Lease Term shall equal the sum
of (1) the present value (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) of the projected total
net operating income from the leased property for the Lease
Term (before any deductions for rental payments to be made
under the lease and before any deductions for debt service, and
in the event the hotel is a CCC Managed Hotel, before any
deductions for management fees paid to CCC) and (2) the present
value (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) of the projected residual value of the leased
property at the expiration of the Lease Term, computed by
applying a capitalization rate which is appropriate in light of
the leased property's expected condition and overall market
conditions as of such date to the projected annual net
operating income (before any deductions for debt service, rent,
and in the event the hotel is a CCC Managed Hotel, management
fees paid to CCC) as of the last day of the Lease Term (the
"Leased Hotel Present Value").
All of the various determinations of net operating
income from the leased property provided for above, together
with the various adjustments thereto, and the discount rates
and capitalization rates to be applied in making the
computations provided for above shall be as reasonably
determined by CCC (subject to the review and approval of Host
in its reasonable judgment and to the Section 5.1 of this
Agreement in the event that there is a disagreement between
Host and CCC with respect thereto).
(b) If the lease is with respect to a full-service hotel and CCC will
be the operator or manager of the hotel (other than through a contractual
arrangement with a third-party manager) (a "CCC Managed Hotel"), the lessor may
be any Person, but the estimated economic benefit to be derived by the CCC from
the lease and any related management contract (including both management fees,
including any base incentive and other similar management fees, and any
operating profit to be retained by the tenant or subtenant in such capacity)
during the Lease Term, computed as described in clause (i) below, shall not
exceed either twenty-five percent (25%) of the estimated Leased Hotel Present
Value, or fifty percent (50%) of the Leased Hotel Equity Value of such hotel,
computed as described in clause (ii) below:
(i) For purposes of subparagraph (b) above, the estimated
economic benefit to be derived by CCC during the Lease Term shall
equal the present value of the sum of (1) the projected net operating
income to be received by the tenant or subtenant, respectively, from
the leased property for the Lease Term (after deduction for rental
payments but before deduction for debt service and including any
residual payments to be received by the tenant or subtenant at any
time during the Lease Term (including on the last day thereof)) and
(2) the projected management fees (including base management fees,
incentive management fees, and other amounts payable to CCC),
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; and
(ii) For purposes of subparagraph (b) above, the equity value
of such hotel shall be the Hotel Present Value of such hotel less the
outstanding debt with respect to such hotel at the commencement of
the Lease Term (the "Leased Hotel Equity Value.")
All of the various determinations of net operating income from
the leased property provided for above, together with the various
adjustments thereto, and the discount rates and capitalization rates
to be applied in making the computations provided for above shall be
as reasonably determined by CCC (subject to the review and approval
of Host in its reasonable judgment and to the Section 5.1 of this
Agreement in the event that there is a disagreement between Host and
CCC with respect thereto).
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 when undertaken with respect to a hotel,
whether as to management activities by such Person on behalf of itself or on
behalf of others, or such person has not entered into any lease relationship
with respect to such hotel.
"Hotel Management Business" means the business of managing, operating or
-------------------------
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
-4-
<PAGE>
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
--------------
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.
----------
"Lease Term" shall have the meaning set forth in the definition of "Hotel
Leasing Business."
"Leased Hotel Equity Value" shall have the meaning given to it in
subsection (b)(ii) of the definition of "Hotel Leasing Business" (computed as of
the time specified in the specific provision of this Agreement where the term is
being used).
"Leased Hotel Present Value" shall have the meaning given to it in
subsection (a)(iii)(B) of the definition of "Hotel Leasing Business" (computed
as of the time specified in the specific provision of this Agreement where the
term is being used).
"Managed Hotel Equity Value" shall mean with respect to any CCC
Managed Hotel the Managed Hotel Present Value of such hotel less the outstanding
debt with respect to such hotel at the commencement of the Management Agreement
Term (computed as of the time specified in the specific provision of this
Agreement where the term is being used).
"Managed Hotel Present Value" shall have the meaning given to it in
subsection (ii) of the definition of "Permitted Full-Service Management
Agreement" (computed as of the time specified in the specific provision of the
agreement where the term is being used).
"Merger" shall mean the merger of Host with and into Host REIT as part of
------
the REIT Conversion.
"NCS" shall have the meaning set forth in the first paragraph of this
---
Agreement.
"NCS1" shall have the meaning set forth in the first paragraph of this
----
Agreement.
"NCS2" shall have the meaning set forth in the first paragraph of this
----
Agreement.
"1998 Noncompetition Agreement" shall have the meaning set forth in Section
-----------------------------
4.1.B. hereof.
"Non-Controlled Subsidiary" shall mean any taxable corporation, including
-------------------------
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
-----------------------------------
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
---------------------
paragraph of this Agreement.
"Permitted Full-Service Lease" shall mean either a Permitted REIT Lease or
----------------------------
a Permitted Operating Lease.
"Permitted Full-Service Management Agreement" shall mean a management
-------------------------------------------
agreement entered into by CCC (or to be entered into by CCC) with respect to a
full-service hotel where CCC will be the manager but CCC will not also be the
lessee with respect to such full-service hotel and with respect to which the
estimated economic benefit to be derived by CCC from such management contract
(including any base, incentive and other similar management fees) during period
commencing on the management agreement commencement date and ending on the
initial management agreement termination date, or, in the case of any extension
or renewal of any management agreement which may be exercised solely at the
manager's option (other than renewals or extensions which provide for management
fees at then prevailing fair market rates), the termination of the extension or
renewal period (the "Management Agreement Term"), computed as described in
clause (i) below, shall not exceed twenty percent (20%) of the estimated Managed
Hotel Present Value (as defined below):
(i) The estimated economic benefit to be derived by
CCC during the Management Agreement Term shall equal the
present value of the projected management fees (including base
management fees, incentive management fees, and other amounts
payable to CCC), calculated by applying a discount factor
which is appropriate in light of overall market conditions at
the time of determination of such economic value and the risk
to the manager associated with the proposed management
agreement fee structure; and
(ii) The term "Managed Hotel Present Value" means the
---------------------------
estimated total economic benefit to be derived from the
managed property during the Management Agreement Term, which
shall equal the sum of (1) the present value (calculated by
applying a discount factor which is appropriate in light of
the managed property's condition and overall market conditions
at the time of determination of such economic value) of the
projected total net operating income from the managed property
for the Management Agreement Term (before any deductions for
rental payments to be made under any lease, before any
deductions for debt service, and before any deduction for any
management fees paid to CCC) and (2) the present value
(calculated by applying a discount factor which is appropriate
in light of the managed property's condition and overall
market conditions at the time of determination of such
economic value) of the projected residual value of the managed
property at the expiration of the Management Agreement Term,
computed by applying a capitalization rate which is
appropriate in light of the managed property's expected
condition and overall market conditions as of such date to the
projected annual net operating income (before any deductions
for debt service, rent, and any management fees paid to CCC)
as of the last day of the Management Agreement Term (the
"Managed Hotel Present Value").
---------------------------
All of the various determinations of net operating
income from the managed property provided for above, together
with the various adjustments thereto, and the discount rates
and capitalization rates to be applied in making the
computations provided for above shall be as reasonably
determined by CCC (subject to the review and approval of Host
in its reasonable judgment and to Section 5.1 of this
Agreement in the event that there is a disagreement between
Host and CCC with respect thereto).
"Permitted Operating Lease" shall mean a lease which satisfies the criteria
-------------------------
set forth in subparagraph (b) to the proviso in the definition of "Hotel
Leasing Business."
"Permitted Private REIT" shall mean an entity that would be a Publicly-
----------------------
Traded REIT but for the fact that shares of capital stock or other units of
equity interests of the REIT that are generally entitled to vote for the
election of directors or similar managers are not listed or admitted to trading
on the New York Stock Exchange or the American Stock Exchange or designated for
quotation on the Nasdaq National Market, or any successor to any of the
foregoing, so long as CCC's lease or sublease of a full-service hotel from such
entity and any other investment in or with respect to such full-service hotel
would not cause CCC to violate Section 3.D.
"Permitted REIT Lease" shall mean a lease which satisfies the criteria
--------------------
set forth in subparagraph (a) to the proviso in the definition of "Hotel Leasing
Business" and that is not a Permitted Operating Lease.
"Person" shall mean any person, firm, corporation, general or limited
------
partnership, association, or other entity.
-5-
<PAGE>
"Primary Host Lessee" shall mean the lessee of more than 25% by number of
-------------------
the Initial Hotels.
"Publicly-Traded REIT" shall mean a REIT whose shares of capital stock or
--------------------
other units of equity interests that are generally entitled to vote for the
election of directors or similar managers are listed or admitted to trading on
the New York Stock Exchange or the American Stock Exchange or designated for
quotation on the Nasdaq National Market, or any successor to any of the
foregoing. The term "Publicly-Traded REIT" shall include any Person whose
operations are consolidated with those of a Publicly-Traded REIT under generally
accepted accounting principles or in which the Publicly-Traded REIT otherwise
owns, directly or indirectly, a twenty-five percent (25%) or greater equity
interest so long as, in either case, the Publicly-Traded REIT must take the
assets and operations of such Person into account in determining whether it
satisfies the income and asset requirements of Section 856(c) of the Code.
"REIT" shall mean "real estate investment trust" within the meaning of
----
Sections 856 through 859 of the Code.
"REIT Conversion" shall mean the reorganization of Host's business
---------------
operations to permit Host REIT to qualify as a REIT, 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
--------------------------------
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
------------
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
-------------------------------------
Swissotel Management (USA) L.L.C.
"Transfer" shall mean the sale, conveyance, disposal of or other transfer
--------
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
-6-
<PAGE>
Primary Host Lessee, neither 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.
-7-
<PAGE>
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, (a) CCC shall not Compete in the Host Business, and (b) CCC
shall not, without the consent of Host, in its sole and absolute discretion,
either enter into any leases with respect to full-service hotels other than
Permitted Full-Service Leases or enter into any management agreements with
respect to full-service hotels other than Permitted Full-Service Management
Agreements.
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), (2)CCC is (or in
connection with such financing will become) the manager of such hotel
(pursuant to a management agreement which is a Permitted Full-Service
Management Agreement) or (3) CCC has a bona fide contract to become
the lessee of such hotel (pursuant to a lease which would be a
Permitted Full-Service Lease) or the manager of such hotel (pursuant
to a management agreement which would be a Permitted Full-Service
Management Agreement) upon completion of the construction and
development or stabilization of such hotel and upon satisfaction of
reasonable conditions; and either
(B) if the Permitted Full-Service Lease will not be a Permitted
Operating Lease, the following conditions are met:
(1) if such financing is in the form of a loan, (x) the present
value of CCC in such financing (determined applying the principles set
forth in clause (E) below) does not exceed fifteen percent (15%) of
the Leased Hotel Present Value of the hotel which is subject to such
financing, each as determined as of, on the date on which CCC becomes
contractually committed to provide such financing, and (y) 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 (2) 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
(2) if such financing is in the form of an equity investment,
directly or indirectly, in the full-service hotel or the Person
owning, directly or indirectly, such 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 Leased Hotel Equity
Value, computed on the date on which CCC becomes contractually
commited to make such equity investment (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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<PAGE>
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
(3) the combined economic interest of CCC in the full-service
hotel under the Permitted REIT Lease (calculated as set forth in the
definition of "Hotel Leasing Business") and the present value of CCC's
interest in any financing or equity interests described in subclauses
(1) and (2) above (determined applying the principles set forth in
Clause (E) below), all determined as of the date CCC becomes
contractually committed to make such investment, cannot exceed either
(x) twenty percent (20%) of the Leased Hotel Present Value, on the date
CCC becomes contractually committed to provide such financing, of the
hotel which is subject to such financing or (v) forty percent (40%) of
the Leased Hotel Equity Value of such hotel on such date; or
(C) if the Permitted Full-Service Lease will be a Permitted
Operating Lease, the following conditions are met:
(1) if such financing is in the form of a loan, 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 (2) 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),
(2) if such financing is in the form of an equity investment,
directly or indirectly, in the full-service hotel or the Person owning,
directly or indirectly, such hotel, 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
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
(3) the combined economic interest of CCC in the full-service
hotel under the Permitted Operating Lease (calculated as set forth in
the definition of "Hotel Leasing Business") and the present value of
CCC's interest in any financing or equity interests described in
subclauses (1) and (2) above, (determined applying the principles set
forth in clause (E) below), all determined as of the date CCC becomes
contractually committed to make such investment cannot exceed either
(x) twenty five percent (25%) of the Leased Hotel Present Value, on the
date CCC becomes contractually committed to provide such financing, of
the hotel which is subject to such financing, or (y) fifty percent
(50%) of the Leased Hotel Equity Value of such hotel, on such date.
(D) if CCC is a party to, or has a bona fide contract to become a
party to, a Permitted Full-Service Management Agreement, the following
conditions are met:
(1) if such financing is in the form of a loan, 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 (2) 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),
(2) if such financing is in the form of an equity investment,
directly or indirectly, in the full-service hotel or the Person
owning, directly or indirectly, such hotel, 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 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
(3) the combined economic interest of CCC in the full-service
hotel under the Permitted Full-Service Management Agreement
(calculated as set forth in the definition of "Permitted Full-
Service Management Agreement") and the present value of CCC's in
any financing or equity interests described in subclauses (1) and
(2) above (determined applying the principles set forth in clause
(E) below), all determined as of the date CCC becomes
contractually committed to make such investment, cannot exceed
either (x) twenty percent (20%) of the Managed Hotel Present
Value, on the date CCC becomes contractually committed to provide
such financing, of the hotel which is subject to such financing,
or (y) forty percent (40%) of the Managed Hotel Equity Value of
such hotel on such date.
(E) The present value of CCC's interest in any financing or
equity interests purposes of this Section 3.B.(v) shall be determined
by computing the present value of the cash flow projected to be
received by CCC with respect to such financing or equity interest
during the Lease Term or the Management Agreement Term, as applicable,
assuming that such financing or equity interest is liquidated for its
projected fair market value at the expiration of the Lease Term or
Management Agreement Term, as applicable, calculated by applying a
discount factor which is appropriate in light of overall market
conditions at the time of determination of such economic value and the
risk to CCC associated with the proposed financing or equity interest.
All of the various determinations of cash flow projected to be received
from the proposed financing or equity interest and the discount rates
to be applied in making the computations provided for above (and any
capitalization rates to be applied for determining projected fair
market values at the expiration of the Lease Term or Management
Agreement Term, as applicable) shall be as reasonably determined by CCC
(subject to the review and approval of Host in its reasonable judgment
and to Section 5.1 of this Agreement in the event that there is a
disagreement between Host and CCC with respect thereto).
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.
D. Notwithstanding any other provision of this Agreement, until the
expiration of the period set forth in Section 3.A, CCC shall not lease or
sublease any full-service hotel from a REIT that is not a Publicly-Traded REIT
unless the combined economic interest of CCC in the full-service hotel under
such lease and any other leases of full-service hotels from REITs that are not
Publicly-Traded REITs (calculated as set forth in the definition of "Hotel
Leasing Business" but with such calculation being made as of the date on which
the determination is being made under this Paragraph D) and any financing or
equity interests in hotels leased from such REITs (or in the Persons owning such
hotels) (with the value thereof determined as of the date on which the
determination is being made under this Paragraph D) does not exceed the greater
of $125,000,000 or the book fifteen percent (15%) of the book value of CCC is
assets value of CCC as of such date.
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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<PAGE>
(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 engage in the Hotel Management Business with regard
to any full-service hotels not owned by Host unless either (a) CCC is not the
lessee (or sublessee) with respect to such hotel, the management agreement with
respect to such hotel is a Permitted Full-Service Management Agreement, or (b)
if CCC is either the lessee or sublessee with respect to such hotel, the lease
with respect to such hotel is a Permitted Full-Service Lease and CCC is in
compliance with the conditions set forth in Section 3.B(v) with respect to such
hotel.
(iii) 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 Swissotel Management (USA) 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
anticipated cash flow, "Host Leasing Business," "Leased Hotel Equity Value,"
"Leased Hotel Present Value," "Permitted Full-Service Management Agreement,"
"Managed Hotel Present Value" or "Managed Hotel Equity Value" in Section 1, or
under Section 2C(ii), 3B(iv), 3B(v) or Section 3E, hereof, including without
limitation any dispute as to whether a determination of any of the foregoing by
CCC is reasonable, 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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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.
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<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:
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<PAGE>
[NCS2]
By:
-----------------------------
Name:
Title:
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<PAGE>
Schedule A
----------
Initial Hotels
--------------
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Schedule B
----------
Certain Permitted Leases
------------------------
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<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 in the definition of "Host Marriott"
in Article One and the third sentence of the definition of "Affiliates" under
Article One and the last sentence of Section 4.1.C. as set forth in Paragraph 5
below, which, in each of the foregoing cases, shall mean only Host Marriott
Corporation and its Subsidiaries and Affiliates) 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 as
amended by this Amendment, subject to the limitations set forth in Paragraph 5
below.
<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. Section 4.1.C. of the 1998 Agreement is hereby amended by adding
the following sentence at the end thereof:
It is hereby understood for purposes of this Section 4.1.C. that (i)
in no event shall Host Marriott and Crestline be permitted, on an
aggregate basis, to operate or franchise as franchisor more than ten
(10) hotel properties under a Common Name or to contract with a third
party manager for operation of the greater of (a) ten (10) hotel
properties operated by such manager under a Common Name or (b) twenty-
five percent (25%) of the system operated by such manager under a
Common Name and (ii) each hotel owned by Host Marriott which is leased
to Crestline shall count as one hotel property for purposes of
determining compliance with the foregoing clause.
6. 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-______
7. 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.
8. 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>
9. Except as specifically amended hereby, the 1998 Agreement shall
remain unchanged and in full force and effect.
10. This Amendment shall be effective as of the effective date of the
Crestline Distribution.
11. 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:
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The undersigned is executing this Amendment solely for the purpose of
acknowledging and consenting to the provisions of paragraph 8 above.
HMC MERGER CORPORATION
By:
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Name:
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Title:
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Exhibit 10.14
TAX SHARING AGREEMENT
TAX SHARING AGREEMENT, dated as of December ___, 1998, among Host Marriott
Corporation, a Delaware corporation, and any successor thereto ("Host
Marriott"), Crestline Capital Corporation, a Maryland corporation, as successor
by merger to Crestline Capital Corporation, a Delaware corporation, and any
successor thereto ("Crestline"), Host Marriott L.P., a Delaware limited
partnership, and any successor thereto (the "Operating Partnership"), and their
respective direct and indirect subsidiaries and affiliates. References herein
to a "party" (or "parties") to this Agreement shall refer to Host Marriott,
Crestline, the Operating Partnership and where appropriate and the context so
requires, their direct and indirect subsidiaries and affiliates.
WHEREAS, Host Marriott and its subsidiaries, including Crestline, have
joined in filing consolidated federal Tax Returns and certain consolidated,
combined or unitary state, local or foreign Tax Returns;
WHEREAS, on June 21, 1997, the predecessor to Crestline purchased all of
the stock of Forum Group, Inc. ("Forum") from Marriott Senior Living Services,
Inc. ("Services"), a subsidiary of Marriott International, Inc. ("MII"), and in
connection therewith, Host Marriott, MII, Services, the predecessor to
Crestline, and Forum and its subsidiaries entered into a Tax Matters Agreement
dated as of June 21, 1997 (the "Forum Tax Matters Agreement"), providing for
allocations of and indemnifications with respect to certain liabilities for
Taxes of Forum and its subsidiaries;
WHEREAS, Host Marriott and Crestline have entered into that certain
Distribution Agreement, dated as of ______________, 1998 (the "Distribution
Agreement"), pursuant to which Host Marriott will distribute approximately 82%
of the outstanding common stock in Crestline on a pro rata basis to Host
Marriott's stockholders (the "Distribution");
WHEREAS, pursuant to the Distribution, Crestline and its subsidiaries
(including Forum and its subsidiaries) will leave the Pre-Distribution Group (as
defined below); and
WHEREAS, the parties hereto wish to provide for (i) allocations of, and
indemnifications against, certain liabilities for Taxes, including Income Taxes
and Other Taxes, (ii) the preparation and filing of Tax Returns on a basis
consistent with prior practice and the payment of Taxes with respect thereto,
and (iii) certain related matters;
NOW THEREFORE, in consideration of their mutual promises, the parties
hereby agree as follows:
1. DEFINITIONS.
When used herein the following terms shall have the following meanings:
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"Affiliate" -- with respect to any corporation, partnership, limited
liability company or other entity (the "given entity"), (i) each person,
corporation, partnership, limited liability company or other entity that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the given entity, provided that
none of MII, Services, or any subsidiary of either shall be considered an
Affiliate of Host Marriott (ii) each corporation, partnership, limited liability
company or other entity in which the given entity owns, directly or indirectly,
through one or more intermediaries, at least 50% of the value of all outstanding
equity interests, (iii) any partnership or limited liability company in which
the given entity is the sole general partner or the sole managing member, or
(iv) any successor of any of the above. For purposes of this definition,
"control" means the possession, directly or indirectly, of (i) 50% or more of
the voting power or value of outstanding voting interests, or (ii) the power to
direct or cause the direction of the management of an entity, whether by
contract or otherwise.
"Affiliated Group" -- an affiliated group of corporations within the
meaning of Code Section 1504(a) for the Taxable Period or, for purposes of any
state income tax matters, any consolidated, combined or unitary group of
corporations within the meaning of the corresponding provisions of tax law for
the state in question.
"Closing" -- the time at which the Distribution shall become effective on
the Closing Date, which will be 9:00 AM on the Closing Date.
"Closing Date" -- the date on which the Distribution is effected by Host
Marriott, which will be the first business day immediately following the record
date for the Distribution.
"Code" -- the Internal Revenue Code of 1986, as amended, or any successor
thereto, as in effect for the Taxable Year in question.
"Combined Jurisdiction" -- for any Taxable Period, any state, local or
foreign jurisdiction in which Host Marriott or a Host Marriott Affiliate is
included in a consolidated, combined, unitary or similar return with Crestline
or any Crestline Affiliate for state, local or foreign Tax purposes.
"Crestline" -- as defined in the preamble to this Agreement.
"Crestline Group" -- Crestline and each corporation that joins with
Crestline in filing a consolidated federal income tax return for any Post-
Closing Taxable Period. For purposes of this Agreement, the Crestline Group
shall exist from the beginning of the day immediately after the Closing Date.
"Crestline Member" -- a corporation that was a Pre-Distribution Member and
becomes a member of the Crestline Group at the beginning of the day immediately
after the Closing Date.
"Distribution" -- as defined in the Preamble to this Agreement.
"Distribution Agreement" -- as defined in the preamble to this Agreement.
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"Final Determination" -- (i) a decision, judgment, decree, or other order
by a court of competent jurisdiction, which has become final and unappealable;
(ii) a closing agreement or accepted offer in compromise under Code Sections
7121 or 7122, or comparable agreements under the laws of other jurisdictions;
(iii) any other final settlement with the IRS or other Taxing Authority; (iv)
the receipt of any refund; or (v) the expiration of an applicable statute of
limitations.
"Fixed Asset Records" such records as detailed in Section 2(b) of this
Agreement.
"Forum" as defined in the preamble to this Agreement.
"Forum Acquisition Date" June 21, 1997.
"Forum Entity" or "Forum Entities" each or all of Forum and every
Affiliate owned by Forum, including any subsidiaries of Forum.
"Forum Tax Matters Agreement" as defined in the preamble to this
Agreement.
"Forum Taxes" any Taxes imposed upon or with respect to any Forum Entity
for any Pre-Closing Taxable Period ending before, on or including the Forum
Acquisition Date, excluding all Taxes allocable to Host Marriott or to the
predecessor of Crestline under the terms of the Forum Tax Matters Agreement.
"Forum Tax Return(s)" any Tax Returns required to be filed by or with
respect to any Forum Entity for any Pre-Closing Taxable Period ending before, on
or including the Forum Acquisition Date, excluding all Tax Returns for which
Host Marriott or the predecessor of Crestline are responsible for preparing and
filing under the terms of the Forum Tax Matters Agreement
"Forum Tax Information" any information relating or pertaining to any
Forum Entity for any Pre-Closing Taxable Period ending before, on or including
the Forum Acquisition Date, but excluding (i) any such information in the
possession of Host Marriott or any Affiliate of Host Marriott on or before the
Closing Date, and (ii) any such information as may come into the possession of
Host Marriott or any Affiliate of Host Marriott at any time after the Closing
Date.
"Host Marriott" -- as defined in the preamble to this Agreement.
"Host Marriott Group" -- Host Marriott and each corporation that joins with
Host Marriott in filing a consolidated federal income tax return for any Post-
Closing Taxable Period. For purposes of this Agreement, the Host Marriott Group
shall exist from the beginning of the day immediately after the Closing Date.
"Host Marriott Member" -- a corporation that was immediately before the
Distribution a Pre-Distribution Member and is a member of the Host Marriott
Group at the beginning of the day immediately after the Closing Date.
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"Income Tax(es) -- with respect to any entity, any and all taxes based upon
or measured by net income, gross income, gross receipts, alternative minimum
taxable income or equity, regardless of whether denominated as an "income tax,"
a "franchise tax," an "equity-based franchise tax" or otherwise, imposed by any
Taxing Authority, whether any such tax is imposed directly or through
withholding or otherwise, together with any interest and any penalty, addition
to tax or additional amount.
"Income Tax Attribute" any deduction, loss, adjustment, or other tax item
or attribute, other than an Income Tax Credit, that can be used by a taxpayer to
reduce its taxable income for purposes of determining its Income Tax liability
(assuming for these purposes that the taxpayer has sufficient taxable income to
fully utilize the deduction, loss or other tax attribute).
"Income Tax Credit" any credit, including without limitation any
investment tax credit, foreign tax credit, targeted jobs credit, research and
development credit, alternative minimum tax credit, or other credit, that can be
used by a taxpayer to reduce its Income Tax liability (assuming for these
purposes that the taxpayer has sufficient liability for Income Taxes to fully
utilize the credits).
"Information Return(s)" -- with respect to any entity, any and all reports,
returns, declarations or other filings (other than Tax Returns) required to be
supplied to any Tax Authority.
"IRS" -- the Internal Revenue Service.
"MII" as defined in the preamble to this Agreement.
"Operating Partnership" as defined in the preamble to this Agreement.
"Other Tax(es)" -- with respect to any entity, any license, business
privilege, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including under Code Section 59A), customs
duties, franchise, social security, unemployment, disability, real property,
personal property, intangibles, sales, use, transfer, registration, value added,
add-on minimum, or other tax of any kind whatsoever, whether any such tax is
imposed directly or through withholding or otherwise, together with any interest
and any penalty, addition to tax or additional amount, provided, however, that
the term "Other Tax(es)" shall not include Income Tax(es).
"Overdue Rate" -- a rate of interest per annum that equals the prime rate,
as reported in the Wall Street Journal for the period in which the Overdue Rate
is applicable, plus 2.00%.
"Post-Closing Straddle Period" -- with respect to any Straddle Period, the
period beginning on the day immediately after the Closing Date and ending on the
last day of the Taxable Year in which the Closing Date occurs.
"Post-Closing Taxable Period" -- a Taxable Year that begins on or after the
day immediately after the Closing Date.
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"Pre-Closing Straddle Period" -- with respect to any Straddle Period, the
period beginning on the first day of such Taxable Year and ending on the close
of business on the Closing Date.
"Pre-Closing Taxable Period" -- a Taxable Year that ends at or before the
close of business on the Closing Date.
"Pre-Distribution Affiliate" -- any Affiliate of any Pre-Distribution
Member.
"Pre-Distribution Group" -- Host Marriott and each corporation that joined
with Host Marriott in filing a consolidated federal income tax return for any
Pre-Closing Taxable Period. For purposes of this Agreement, the Pre-
Distribution Group shall terminate at the close of business on the Closing Date
(except as otherwise provided in this Agreement).
"Pre-Distribution Member" -- a corporation that was a member of the Pre-
Distribution Group.
"Related Transactions" -- those certain transactions in furtherance of Host
Marriott's plan to become a real estate investment trust, as described in the
Proxy Statement/Prospectus dated November [ ], 1998.
"Representative" -- with respect to any person or entity, any of such
person's or entity's directors, officers, employees, agents, consultants,
accountants, attorneys and other advisors.
"Services" -- as defined in the preamble to this Agreement.
"Straddle Period" -- any Taxable Year beginning before and ending after the
close of business on the Closing Date.
"Tax(es)" -- collectively, Income Tax(es) and Other Tax(es).
"Taxable Period" -- a Pre-Closing Taxable Period, a Post-Closing Taxable
Period or a Straddle Period.
"Taxable Year" -- a taxable year (which may be shorter than a full calendar
or fiscal year), year of assessment or similar period with respect to which any
Tax may be imposed.
"Tax Benefit(s)" -- (i) in the case of an Income Tax Attribute, the amount
of the Income Tax Attribute multiplied by the sum of the highest federal
corporate Income Tax rate and highest applicable state corporate Income Tax
rate, plus any interest received with respect to any related Tax refund or
otherwise credited to the party that used the Income Tax Attribute; (ii) in the
case of an Income Tax Credit, 100% of the amount of the Income Tax Credit, plus
any interest received with respect to any related Tax refund or otherwise
credited to the party that used the Income Tax Credit; and (iii) in the case of
any Other Tax, the amount by which the Tax liability of a corporation or other
entity is actually reduced for any Taxable Period, plus any interest received
with respect to any related Tax refund or otherwise credited to such corporation
or entity.
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"Taxing Authority" -- the IRS and any other domestic or foreign
governmental authority responsible for the administration of any Tax.
"Tax Practices" -- the most recently applied policies, procedures and
practices employed by Host Marriott or the Pre-Distribution Group in the
preparation and filing of, and positions taken on, any Tax Returns of Host
Marriott or any Pre-Distribution Member or Pre-Distribution Affiliate for any
Pre-Closing Taxable Period.
"Tax Return(s)" -- all returns, reports, estimates, information statements,
declarations and other filings relating to, or required to be filed in
connection with, the payments or refund of any Tax for any Taxable Period.
2. OBLIGATIONS, RESPONSIBILITIES AND RIGHTS OF HOST MARRIOTT AND CRESTLINE.
(a) Preparation and Filing of Tax Returns
(i) By Host Marriott. Except for any Forum Tax Return(s), Host
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Marriott shall prepare and timely file (or cause to be prepared
and timely filed):
(A) all Tax Returns and Information Returns of the Pre-
Distribution Group, any Pre-Distribution Member and any Pre-
Distribution Affiliate that are required to be filed on or
before the Closing Date;
(B) all Tax Returns and Information Returns of the Pre-
Distribution Group, any Pre-Distribution Member and any Pre-
Distribution Affiliate for all Pre-Closing Taxable Periods
that are not required to be filed on or before the Closing
Date;
(C) all Tax Returns and Information Returns of the Pre-
Distribution Group, any Pre-Distribution Member and any Pre-
Distribution Affiliate for all Taxable Years that include
any Pre-Closing Straddle Periods, provided that, in the
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event the Closing Date (i) does not occur on or before
January 1, 1999 and (ii) does occur on or before June 30,
1999, this Section 2(a)(i)(C) shall not include any such Tax
Returns or Information Returns that relate solely to one or
more Crestline Members or Crestline Affiliates each of which
are not Host Marriott Members nor Affiliates of Host
Marriott (such status as an Affiliate to be determined on
the first day immediately following the Closing Date);
(D) all state and local Tax Returns and state and local
Information Returns of the Pre-Distribution Group, any Pre-
Distribution Member and Any Pre-Distribution Affiliate for
all Straddle Periods (for these purposes, the Pre-
Distribution Group shall be deemed to exist for each such
Straddle Period and, to the extent not prohibited by
applicable law, such state and local Tax Returns and state
and local Information Returns shall be filed by treating
each such
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Straddle Period as a single Taxable Year), provided that,
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in the event the Closing Date (i) does not occur on or
before January 1, 1999 and (ii) does occur on or before June
30, 1999, this Section 2(a)(i)(D) shall not include any such
Tax returns or Information Returns that relate solely to one
or more Crestline Members or Crestline Affiliates each of
which are not Host Marriott Members nor Affiliates of Host
Marriott (such status as an Affiliate to be determined on
the first day immediately following the Closing Date);
(E) all Tax Returns and Information Returns of Host Marriott,
any Affiliate of Host Marriott, the Host Marriott Group, any
Host Marriott Member, and any Affiliate of any Host Marriott
Member for all Straddle Periods and all Post-Closing Taxable
Periods; and
(F) all Tax Returns and Information Returns not otherwise
required to be filed by Host Marriott pursuant to paragraphs
(A), (B), (C), (D) or (E) of this Section 2(a)(i) or by
Crestline pursuant to Section 2(a)(ii).
(ii) By Crestline. Crestline shall prepare and timely file (or cause
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to be prepared and timely filed):
(A) the federal Income Tax Return for Crestline and the
Crestline Group for the Post-Closing Taxable Period
beginning on the first day immediately following the Closing
Date;
(B) all other Tax Returns for Crestline, the Crestline Group,
any Crestline Member, any Affiliate of Crestline or any
Affiliate of any Crestline Member for any Post-Closing
Taxable Period beginning on the first day immediately
following the Closing Date;
(C) all Tax Returns and Information Returns of Crestline, the
Crestline Group, any Crestline Member, any Affiliate of
Crestline or any Affiliate of any Crestline Member for all
Post-Closing Taxable Periods (including without limitation
the Post-Closing Taxable Periods described in Sections
2(a)(ii)(A) and (B), above); and
(D) in the event the Closing Date (i) does not occur on or
before January 1, 1999 and (ii) does occur on or before June
30, 1999, any Tax Returns or Information Returns that relate
solely to Crestline, the Crestline Group and any Crestline
Member or any Affiliate of Crestline for any Straddle
Periods beginning on or after January 1, 1999, but only to
the extent, in each case, that such Returns fall within the
proviso exclusion to Section 2(a)(i)(C) or Section
2(A)(i)(D), above.
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(b) Provision of Filing Information. With respect to any matter directly
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related to Crestline, the Crestline Group or any Crestline Member, or
any matter directly related to any Affiliate controlled by Crestline
or a Crestline Member, each party to this Agreement shall cooperate
and assist the other party in connection with the preparation and
filing of all Tax Returns and Information Returns that are required to
be filed by a specified party pursuant to Section 2(a), including
providing the party required to file such Tax Returns and Information
Returns with (i) all necessary filing information in a manner
consistent with past Tax Practices (whether or not a Tax Return or
Information Return has previously been filed with respect to any of
Crestline, the Crestline Group, any Crestline Member or any Affiliate
of Crestline or any Crestline Member) and (ii) all other information
reasonably requested in connection with the preparation of such Tax
Returns and Information Returns by the party responsible for preparing
and filing such Returns, in each case promptly after such request
(which shall be within fourteen (14) days after such request).
Without limiting the foregoing in any respect, the cooperation and
assistance of Host Marriott shall include, for each of Crestline, any
Crestline Member or any Affiliate of Crestline or a Crestline Member,
with respect to (x) each Post-Closing Taxable Period described in
Sections 2(a)(ii)(A) and (B) and (y) any Straddle Periods with respect
to which Crestline is required to file any Tax Return pursuant to
Section 2(a)(ii)(D), the following information (in each case set forth
in adequate detail and provided by Host Marriott to Crestline not
later than sixty (60) days prior to the date the applicable Tax Return
with respect to the applicable Taxable Period is required to be
filed): (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 completed
Fixed Asset Records (as detailed below) for the applicable Taxable
Period or Straddle Period, as the case may be, and (ii) each item of
gross income and each deduction, expense, loss, credit or other tax
attribute included in the applicable Tax Period or Straddle Period
(which, if appropriate, may be presented on the basis of a pro rata
percentage allocation between Pre-Closing Taxable Periods and Post-
Closing Taxable Periods or Pre-Closing Straddle Periods and Post-
Closing Straddle Periods, as the case may be). Without limiting the
foregoing in any respect, the parties agree that the electronic
details and Fixed Asset Records shall include, with respect to each
asset owned by any of Crestline, the Crestline Group, any Crestline
Member, or any Affiliate of Crestline or a Crestline Member, during
any applicable Taxable Period or Straddle Period, (a) the original
cost, (b) acquisition date, (c) depreciation reserves, and (d)
depreciation lives and methods. In addition, without limiting the
foregoing in any respect, the Fixed Asset Records shall define the
assets by year of acquisition, by property class life, by operating
property unit, and by legal entity. All records provided by or on
behalf of Host Marriott pursuant to this Section 2(b) must be
sufficiently maintained to support, and reconcile to, (i) the
consolidated balance sheet of Crestline and the Affiliates of
Crestline as of the Closing Date, (ii) each entity's financial
accounting balance sheet as of the Closing Date and (iii) each
entity's financial accounting balance sheet as of the end of any
Taxable Period for which Host Marriott is required to file Tax Returns
pursuant to Section 2(a)(i). Host
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Marriott and Crestline Agree that (a) within 60 days after the Closing
Date, Host Marriott shall provide Crestline with all records,
schedules, data, work product and other information then in the
possession of Host Marriott (or any Affiliate) that represent work
done as such date relating to the preparation of entity-level tax
basis balance sheets for Crestline, any Crestline Member, the
Crestline Group, and any Affiliate of Crestline or any Crestline
Member as of the Closing Date, (b) from and after 60 days after the
Closing Date, Host Marriott shall provide Crestline, promptly upon
Crestline's request (which shall be within 14 days of such request),
any information in the possession of Host Marriott or its Affiliates
reasonably deemed necessary by Crestline (or Crestline's designee) to
complete such tax basis balance sheets, and (c) Host Marriott shall
assist, and cooperate with, Crestline (or Crestline's designee) during
the preparation of such tax basis balance sheets. Notwithstanding
anything in this Section 2(b) to the contrary, Host Marriott shall not
have any responsibility to provide to Crestline, the Crestline Group,
any Crestline Member, or any Crestline Affiliate any Forum Tax
Information, which information Crestline shall seek directly from MII
or Services to the extent provided for in the Forum Tax Matters
Agreement, provided, however, that at Crestline's written request,
Host Marriott agrees to use good faith efforts to jointly pursue such
Forum Tax Information from MII and Services pursuant to the terms of
the Forum Tax Matters Agreement.
(c) Taxable Year. Crestline and Host Marriott agree that, for all Tax
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purposes, (i) for the Pre-Closing Taxable Period of Crestline and the
Crestline Members that ends at the close of business on the Closing
Date, for any Pre-Closing Taxable Periods of Forum and its
subsidiaries commencing after the Forum Acquisition Date, and for any
other Pre-Closing Taxable Periods of Crestline and the Crestline
Members (other than Forum and its subsidiaries), Crestline and the
Crestline Members (including, as applicable, Forum and its
subsidiaries) shall be included in the consolidated federal Income Tax
Return of the Pre-Distribution Group for the Taxable Year that
includes such Pre-Closing Taxable Period, subject to the "next day"
rule set forth in Treas. Reg. Sec. 1.1502-76(b)(1)(ii)(A) (and, to the
extent permitted by law, in all corresponding consolidated, combined
or unitary state or other Income Tax Returns of the Pre-Distribution
Group) and (ii) Crestline, the Crestline Group and each Crestline
Member shall begin a new Taxable Year for purposes of such federal
and, to the extent permitted by law, state Income Taxes on the day
immediately after the Closing Date. The parties further agree that, to
the extent permitted by applicable law, all federal, state or other
Tax Returns (including Income Tax Returns and Other Tax Returns) and
all Information Returns shall be filed consistently with this
position; provided, however, that with respect to any Affiliate of
Crestline or any Affiliate of any Crestline Member that is a
partnership or limited liability company, solely for purposes of
determining the Taxable Period to which the partnership's or the
limited liability company's items of income, deduction, expense, loss,
credit or other tax attributes are to be allocated, Crestline, any
Crestline Member or any Crestline Affiliate that owns an interest in
such partnership or limited liability company shall be treated as
selling or exchanging its entire interest in such
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partnership or limited liability company immediately before the
Closing and acquiring such interest at the beginning of the day
immediately following the Closing Date, under the principles set forth
in Treas. Reg. Sec. 1.1502-76(b)(2)(v)(A).
(d) Straddle Period Taxes.
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(i) For purposes of this Agreement, pursuant to Sections 2(a)(ii)
(A) and 2(c), federal Income Taxes for Crestline, the Crestline
Group, any Crestline Member will not be reported in any
Straddle Period or allocated pursuant to this Section 2(d).
(ii) For purposes of this Agreement, Taxes (other than federal
Income Taxes) for any Straddle Period shall be allocated
between the Pre-Closing Straddle Periods and Post-Closing
Straddle Periods in the following manner: (A) state and local
Income Taxes shall be allocated pro-rata between Pre-Closing
Straddle Periods and Post-Closing Straddle Periods based on a
fraction, the numerator of which shall be the number of days in
the Pre-Closing Straddle Period or the Post-Closing Straddle
Period, as the case may be, and the denominator of which shall
be the total number of days in the Straddle Period (provided,
however, that at the written request of either Host Marriott or
Crestline, state and local Income Taxes shall be allocated on
the basis of the actual taxable income for each such period,
determined by closing the books of the Pre-Distribution Group
and any Pre-Distribution Affiliate at the close of business on
the Closing Date, provided further that an allocation on the
basis of actual taxable income shall occur only if (a) such an
allocation would result in a reduction of the requesting
party's liability (including the liability of any Affiliates)
for state and local Income Taxes of at least 10% from the
allocation that would result under the pro rata allocation
method described above, (b) the requesting party is responsible
for preparing the allocation based on actual taxable income,
(c) such allocation shall be consented to by the other party
(which consent shall not be unreasonably withheld), and (d) the
requesting party shall pay all direct and indirect costs
associated with such revised allocation); and (B) Other Taxes
shall be allocated between Pre-Closing Straddle Periods and
Post-Closing Straddle Periods on the basis of the actual
transactions, events or activities that give rise to or create
liability for such Other Taxes.
(iii) Crestline shall pay to Host Marriott, within fourteen (14) days
after receipt of an executed Straddle Period Tax Return that
has been prepared and filed by or on behalf of Host Marriott
pursuant to Section 2(a)(i), the excess of any amount allocated
to Crestline or any Crestline Affiliate for the Post-Closing
Straddle Period (based on the amount of Tax shown on such Tax
Return, allocated as provided in Section 2(d)(ii)) over the
amount of any estimated Taxes previously paid by or on behalf
of any Pre-Distribution Member or Pre-Distribution Affiliate to
the relevant Taxing Authority
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with respect to such Tax with respect to the applicable Taxable
Period; Host Marriott shall pay to Crestline, within fourteen
(14) days after receipt of an executed Straddle Period Tax
Return that has been prepared and filed by or on behalf of
Crestline pursuant to Section 2(a)(ii), the excess of any
amount allocated to Host Marriott or any Host Marriott
Affiliate for the Pre-Closing Straddle Period (based on the
amount of Tax shown on such Tax Return, allocated as provided
in Section 2(d)(ii)) over the amount of any estimated Taxes
previously paid by or on behalf of any Pre-Distribution Member
or Pre-Distribution Affiliate to the relevant Taxing Authority
with respect to such Tax with respect to the applicable Taxable
Period.
(e) Payment of Taxes. Host Marriott shall pay (i) all Taxes (other than
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Forum Taxes) shown to be due and payable on all Tax Returns filed by
Host Marriott pursuant to Section 2(a)(i) hereof (except for any Taxes
that are allocable to Crestline or a Crestline Affiliate for a Post-
Closing Straddle Period under Sections 2(d)(ii) or (iii), which shall
be paid by Crestline), (ii) all Taxes (other than Forum Taxes) that
shall thereafter become due and payable with respect to all Tax
Returns filed pursuant to Sections 2(a)(i) or the applicable Taxable
Periods as a result of a Final Determination (except for any Taxes
that are allocable to Crestline or a Crestline Affiliate for a Post-
Closing Straddle Period under Sections 2(d)(ii) or (iii), which shall
be paid by Crestline), and (iii) all Taxes allocable to a Pre-Closing
Straddle Period under Sections 2(d)(ii) or (iii). Crestline shall pay
(i) all Taxes attributable to all Tax Returns filed by Crestline
pursuant to Section 2(a)(ii) hereof, including without limitation (a)
federal Income Taxes of Crestline, the Crestline Group and any
Crestline Member for the Post-Closing Taxable Period beginning on the
first day immediately following the Closing Date and (b) all other
Taxes of Crestline, the Crestline Group, any Crestline Member, any
Affiliate of Crestline or any Affiliate of any Crestline Member for
any Post-Closing Taxable Period beginning on the first day immediately
following the Closing Date, and (ii) all Taxes that are allocable to
Crestline or a Crestline Affiliate for a Post-Closing Straddle Period
under Sections 2(d)(ii) or (iii) (but excluding any Taxes that are
allocable to a Pre-Closing Straddle Period under Sections 2(d)(ii) or
(iii), which shall be paid by Host Marriott).
(f) Amendments to Tax Returns. No Tax Returns for any Pre-Closing Taxable
-------------------------
Periods or Straddle Periods filed by Host Marriott may be amended
without the consent of Host Marriott and Crestline, which in each case
shall not be unreasonably withheld; provided, however, that (i) no
party shall be considered unreasonable in withholding such consent if
such amendment would result in an increase in a Tax liability for
which such party has responsibility under this Agreement (unless the
other party agrees to pay such party an amount equal to the amount of
such increase, in which case a failure to consent will be considered
unreasonable), and (ii) Host Marriott shall not be required to seek
the consent of Crestline if such amendment would not result in any
adjustment to any Income Tax Attributes or Income Tax Credits, and
such amendment would not result in any increase in the Tax liability,
of each of Crestline, the Crestline Group, any
11
<PAGE>
Crestline Member and any Crestline Affiliate for each Post-Closing
Straddle Period and Post-Closing Taxable Period.
(g) Refunds of Taxes.
----------------
(i) Host Marriott shall be entitled to (a) any refund of Taxes and
any Tax Benefits realized as a result of a Final Determination
with respect to all Tax Returns filed by Host Marriott pursuant
to Section 2(a)(i) (except that Crestline shall be entitled to
any refund of, or Tax Benefit related to, any Taxes that are
allocable to Crestline or a Crestline Affiliate for a Post-
Closing Straddle Period under Sections 2(d)(ii) or (iii)) and
(b) any refund of, and any Tax Benefit related to, any Taxes
that are allocable to a Pre-Closing Straddle Period under
Sections 2(d)(ii) or (iii). Crestline shall be entitled to (a)
any refund with respect to all Tax Returns filed by Crestline
pursuant to Section 2(a)(ii) (except that Host Marriott shall
be entitled to any refund of, or Tax Benefit related to, any
Taxes that are allocable to any Pre-Closing Straddle Period
under Sections 2(d)(ii) or (iii)) and (b) any refund of, or Tax
Benefit related to, any Taxes that are allocable to Crestline
or a Crestline Affiliate for a Post-Closing Straddle Period
under Sections 2(d)(ii) or (iii). Any refunds attributable to a
Straddle Period shall be allocated between the Pre-Closing
Straddle Period and Post-Closing Straddle Period on a basis
consistent with the method used to allocate the Tax liability
for such Straddle Period. Notwithstanding the above, if and to
the extent any refund of Taxes or other Tax Benefit for any
Pre-Closing Taxable Period is required to be paid to MII or
Services pursuant to the Forum Tax Matters Agreement or
otherwise, neither Host Marriott nor Crestline (nor any
Affiliate of either) shall be entitled to such refund of Tax or
Tax Benefit.
(ii) If Host Marriott, any Host Marriott Affiliate, any Host
Marriott Member or Affiliate of a Host Marriott Affiliate
receives a Tax refund or Tax Benefit to which Crestline, any
Affiliate of Crestline, the Crestline Group, any Crestline
Member or any Affiliate of a Crestline Member is entitled
pursuant to this Agreement, Host Marriott shall pay (in
accordance with Section 4) the amount of such Tax refund or Tax
Benefit to Crestline within fourteen (14) days of the receipt
thereof.
(iii) If Crestline or any Crestline Member or Affiliate of Crestline
or a Crestline Member receives a Tax refund or Tax Benefit to
which Host Marriott, any Host Marriott Member or any Affiliate
of Host Marriott or any Host Marriott Member is entitled
pursuant to this Agreement, Crestline shall pay (in accordance
with Section 4) the amount of such Tax refund or Tax Benefit
(including any interest received thereon) to Host Marriott
within fourteen (14) days of the receipt thereof.
(h) Carrybacks. Neither Crestline nor Host Marriott shall file any
----------
carryback claim for federal Taxes or state, local or foreign Taxes in
a Combined Jurisdiction for the
12
<PAGE>
Crestline Group or any Crestline Member or the Host Marriott Group or
any Host Marriott Member into a Pre-Closing Taxable Period without the
prior written consent of Host Marriott or Crestline, as applicable,
which shall not be unreasonably withheld, provided that Host Marriott
shall not be required to seek the consent of Crestline if such
carryback claim, if granted, would not result in any adjustment to any
Income Tax Attribute or Income Tax Credit or increase the liability
for Taxes of any of Crestline, the Crestline Group, any Crestline
Member or any Crestline Affiliate for any Post-Closing Straddle Period
or any Post-Closing Taxable Period.
3. INDEMNIFICATION.
(a) By Host Marriott
----------------
(i) Taxes. Host Marriott shall indemnify and hold Crestline, the
-----
Crestline Group, Crestline Members and Affiliates of Crestline
and Crestline Members harmless from and against any and all (A)
Taxes attributable to all Tax Returns filed (or required to be
filed) by Host Marriott pursuant to Section 2(a)(i) and the
related Taxable Periods (other than Taxes that are allocable to
Crestline or a Crestline Affiliate for a Post-Closing Straddle
Period under Sections 2(d)(ii) or (iii)), (B) all Taxes
attributable to or arising from the Distribution or the Related
Transactions, and (C) any Taxes that are allocable to any Pre-
Closing Straddle Period under Sections 2(d)(ii) or (iii).
(ii) Member Liability. Host Marriott shall indemnify and hold
----------------
Crestline, the Crestline Group, the Crestline Members and
Affiliates of Crestline and Crestline Members harmless against
each and every liability for (a) Income Taxes of the Pre-
Distribution Group and any other Affiliated Group in which
Crestline or any Crestline Affiliate have been members at any
time under Treasury Regulation Section 1.1502-6 or any similar
law, rule or regulation administered by any Taxing Authority and
(b) Other Taxes of the Pre-Distribution Group, Pre-Distribution
Members and Pre-Distribution Affiliates, provided that Host
Marriott shall not have any liability to Crestline, the Crestline
Group, the Crestline Members or any Affiliates of Crestline for
any Forum Taxes.
(b) By Crestline. Crestline shall indemnify and hold Host Marriott, Host
------------
Marriott Members and any Affiliates of Host Marriott or Host Marriott
Members harmless against (A) any and all Taxes attributable to all Tax
Returns filed (or required to be filed) by Crestline pursuant to
Section 2(a)(ii) (other than any Taxes that are allocable to Pre-
Closing Straddle Periods pursuant to Sections 2(d)(ii) or (iii)) and
(B) any Taxes that are allocable to Crestline or a Crestline Affiliate
for any Post-Closing Straddle Period under Sections 2(d)(ii) or (iii).
13
<PAGE>
(c) Certain Reimbursements. Crestline (or Host Marriott, as the case may
----------------------
be) shall notify Host Marriott (or Crestline) of any Taxes paid by
Crestline, the Crestline Group, any Crestline Member or any Affiliate
of Crestline or a Crestline Member (or Host Marriott, the Host
Marriott Group, any Host Marriott Member or any Affiliate of Host
Marriott or a Host Marriott Group Member) which are subject to
indemnification under this Section 3. To the extent not otherwise
provided in this Section 3, any notification contemplated by this
Section 3(c) shall include a detailed calculation (including, if
applicable, separate allocations of such Taxes between Pre-Closing
Taxable Periods and Post-Closing Taxable Periods and Pre-Closing
Straddle Periods and Post-Closing Straddle Periods and supporting work
papers) and a brief explanation of the basis for indemnification
hereunder. Whenever a notification described in this Section 3(c) is
given, the notified party shall pay the amount requested in such
notice to the notifying party in accordance with Section 4, but only
to the extent that the notified party agrees with such request. To the
extent the notified party disagrees with such request, it shall,
within thirty (30) days, so notify the notifying party, whereupon the
parties shall use their best efforts to resolve any such disagreement.
Any payment made after such thirty-day period shall include interest
at the Overdue Rate from the date such payment would have been made
under Section 4 based upon the original notice given by the notifying
party.
(d) Other Indemnifications. The terms of this Agreement, including
----------------------
without limitation the indemnification provisions set forth herein,
shall govern the matters described herein notwithstanding the scope,
limitations or other elements of any other indemnification provisions
between or among any of Host Marriott, any Host Marriott Member, any
Host Marriott Affiliate, Crestline, any Crestline Member or Crestline
Affiliate as set forth in any other intercompany agreements entered
into in connection with the Distribution or the Related Transactions
or otherwise. This Agreement shall not restrict the scope,
limitations or other elements of indemnifications provisions in such
other agreements that relate to matters other than those described
herein.
(e) Forum Tax Matters Agreement. Host Marriott and Crestline (i)
---------------------------
acknowledge that Crestline, as successor to HMC Senior Communities,
Inc., a Delaware corporation, and Host Marriott are each a party to,
and beneficiary of, the Forum Tax Matters Agreement, (ii) agree that,
with respect to any Post-Closing Taxable Period under this Agreement,
Crestline shall assume all rights and obligations under, and be
entitled to all payments made by MI or Services with respect to, the
Forum Tax Matters Agreement, and (iii) agree that with respect to Pre-
Closing Taxable Periods ending before, on, or including the Forum
Acquisition Date, Host Marriott assigns to Crestline the right to any
and all payments for or with respect to any Forum Taxes or any matter
related to or arising out of the filing (or failure to file) any Forum
Tax Return, and (iv) agree that notwithstanding any other provision of
this Agreement, Host Marriott shall not in any event have any
liability to Crestline, the Crestline Group, any Crestline Member or
any Crestline Affiliate for any Forum Taxes or for any matters
related to or arising out of the filing (or failure to file) Forum Tax
Returns or the provision (or accuracy of) any
14
<PAGE>
Forum Tax Information, and that the sole recourse of Crestline, the
Crestline Group, the Crestline Members or any Crestline Affiliate with
respect to such matters shall be against MII and/or Services as and to
the extent provided in the Forum Tax Matters Agreement. Host Marriott
and Crestline agree to cooperate in good faith in asserting their
respective rights against MII and/or Services under the Forum Tax
Matters Agreement for the respective periods for which they are the
beneficiaries of such agreement.
4. METHOD, TIMING AND CHARACTER OF PAYMENTS REQUIRED BY THIS AGREEMENT.
(a) Payment in Immediately Available Funds; Interest. All payments made
------------------------------------------------
pursuant to this Agreement shall be made in immediately available
funds. Except as otherwise provided herein, any payment not made
within fourteen (14) days of when due shall thereafter bear interest
at the Overdue Rate from the date such payment was due.
(b) Characterization of Payments. Any payment (other than interest
----------------------------
thereon) made hereunder by Host Marriott to Crestline or by Crestline
to Host Marriott shall be treated by all parties for Tax purposes to
the extent permitted by law, and for accounting purposes to the extent
permitted by generally accepted accounting principles, as non-taxable
dividend distributions or capital contributions made prior to the
close of business on the Closing Date.
5. TAX RETURNS; COOPERATION; DOCUMENT RETENTION; CONFIDENTIALITY.
(a) Provision of Cooperation, Documents and Other Information. Upon the
---------------------------------------------------------
reasonable request of any party to this Agreement, Host Marriott and
Crestline agree that, with respect to any matter directly related to
Crestline, the Crestline Group or any Crestline Member, or any matter
directly related to any Affiliate controlled by Crestline or a
Crestline Member, they shall provide (and shall cause their Affiliates
to provide) the requesting party, promptly upon request, with such
cooperation and assistance, access to documents, and other
information, without charge, as may reasonably be requested by such
party in connection with (i) the preparation and filing of any
original or amended Tax Return, (ii) the conduct of any audit or other
examination or any judicial or administrative proceeding involving
Taxes or Tax Returns, or (iii) the verification by a party of an
amount payable hereunder to, or receivable hereunder from, another
party. Such cooperation and assistance shall include, without
limitation: (i) the prompt provision (which shall be within fourteen
(14) days after a request) of books, records, Tax Returns,
documentation or other information relating to any relevant Tax
Return; (ii) the execution of any document that may be necessary or
reasonably helpful in connection with the filing of any Tax Return, or
in connection with any audit, proceeding, suit or action of the type
generally referred to in the preceding sentence, including, without
limitation, the execution of powers of attorney and extensions of
applicable statutes of limitations, with
15
<PAGE>
respect to Tax Returns which Host Marriott may be obligated to file on
behalf of Crestline Members pursuant to Section 2(a); (iii) the prompt
and timely filing of appropriate claims for refund; and (iv) the use
of reasonable efforts to obtain any documentation from a governmental
authority or a third party that may be necessary or helpful in
connection with the foregoing. Each party shall make reasonable
efforts to make available its employees and facilities available on a
mutually convenient basis to facilitate such cooperation.
Notwithstanding anything in this Section 5(a) to the contrary, Host
Marriott shall not have any responsibility to provide Crestline, the
Crestline Group, any Crestline Member or any Crestline Affiliate any
Forum Tax Information, which information Crestline and Host Marriott
shall jointly seek directly from MII and/or Services to the extent
provided for in the Forum Tax Matters Agreement.
(b) Retention of Books and Records. Host Marriott, each Host Marriott
------------------------------
Member, each Affiliate of a Host Marriott Member, Crestline, each
Crestline Member and each Affiliate of a Crestline Member shall retain
or cause to be retained all Tax Returns, and all books, records,
schedules, workpapers, and other documents relating thereto, until the
expiration of the later of (i) all applicable statutes of limitations
(including any waivers or extensions thereof), and (ii) any retention
period required by law or pursuant to any record retention agreement.
The parties hereto shall notify each other in writing of any waivers,
extensions or expirations of applicable statutes of limitations. The
parties shall provide written notice of any intended destruction of
the documents referred to in this subsection at least fourteen (14)
days prior to the date of intended destruction. A party giving such a
notification shall not dispose of any of the foregoing materials
without first offering to transfer possession thereof to all notified
parties. The parties agree that (i) Crestline shall be deemed to own
all Tax Returns and Information Returns relating to Crestline, the
Crestline Group, any Crestline Member, and any Affiliate of Crestline
or a Crestline Member, and all books, records, schedules, workpapers,
and other documents relating thereto, and (ii) Host Marriott shall own
all other Tax Returns and Information Returns, and the other related
books, records, schedules, workpapers, and other documents relating
thereto.
(c) Status and Other Information Regarding Audits and Litigation. Each
------------------------------------------------------------
party shall use reasonable best efforts to keep the other party
advised, as to the status of Tax audits and litigation involving any
issue relating to any Taxes, Tax Returns or Tax Benefits subject to
indemnification under this Agreement. To the extent relating to any
such issue, each party shall promptly furnish the other party copies
of any inquiries or requests for information from any Taxing Authority
or any other administrative, judicial or other governmental authority,
as well as copies of any revenue agent's report or similar report,
notice of proposed adjustment or notice of deficiency.
(d) Confidentiality of Documents and Information. Except as required by
--------------------------------------------
law or with the prior written consent of the other party, all Tax
Returns, documents, schedules, work papers and similar items and all
information contained therein, which Tax Returns and other materials
are within the scope of this Agreement,
16
<PAGE>
shall be kept confidential by the parties hereto and their
Representatives, shall not be disclosed to any other person or entity
and shall be used only for the purposes provided herein.
6. CONTESTS AND AUDITS.
(a) Notification of Audits or Disputes. Upon the receipt by a party of
----------------------------------
notice of any pending or threatened Tax audit or assessment which may
affect the liability for Taxes that are subject to indemnification
hereunder, such party shall notify the other party in writing within
fourteen (14) days of the receipt of such notice. The failure of any
party to make such notification to another party shall not affect in
any respect the first party's right to indemnification hereunder
unless, and only to the extent that, such other party can demonstrate
that it was materially prejudiced by such failure.
(b) Control and Settlement. Except as otherwise provided in this
----------------------
paragraph, Host Marriott shall have the right and obligation, at its
own expense, to control, and to represent the interests of all
affected taxpayers in, any Tax audit or administrative, judicial or
other proceeding relating, in whole or in part, to any Pre-Closing
Taxable Period or any other Taxable Period for which Host Marriott is
responsible, in whole or in part, for Taxes pursuant to Section 2(e),
and to employ counsel of its choice, at Host Marriott's expense;
provided, however, that, (a) with respect to such issues that may
impact Crestline, the Crestline Group, any Crestline Member or any
Affiliate of Crestline or a Crestline Member for any Taxable Period,
Host Marriott (i) shall in good faith consult with Crestline and
Crestline's counsel of choice as to the handling and disposition of
such issues and (ii) shall not enter into any settlement that impacts
Crestline, the Crestline Group, any Crestline Member, or any Affiliate
of Crestline or a Crestline Member without the prior written consent
of Crestline, which shall not be unreasonably withheld, and (b) Host
Marriott shall not enter into any settlement for any Taxable Period
that impacts or changes the accounting methods adopted or used with
respect to (including without limitation the useful lives of) any
property of Crestline, the Crestline Group, any Crestline Member or
any Affiliate of Crestline placed in service in 1997 or 1998, unless
Host Marriott shall have obtained the prior written consent of
Crestline, which shall not be unreasonably be withheld. Crestline's
Senior Vice President Taxes shall deliver to Host Marriott's Tax
Director a written response to any written notification by Host
Marriott of a proposed settlement within fourteen (14) days of the
receipt by the Crestline Senior Vice President Taxes of such
notification. If the Crestline Senior Vice President Taxes fails to
so respond within such fourteen (14) day period, Crestline shall be
deemed to have consented to the proposed settlement. Host Marriott
shall have no obligation with respect to any proceeding involving any
Forum Taxes or Forum Tax Returns except (and only to the extent) Host
Marriott, in its sole and absolute discretion, elects to take control
of any such proceeding, provided, however, that if Host Marriott does
not elect to take control of any such proceeding, Crestline shall be
entitled to elect to control any such proceeding under the Forum Tax
Matters Agreement.
17
<PAGE>
(c) Delivery of Powers of Attorney and Other Documents. Crestline shall
--------------------------------------------------
execute and deliver to Host Marriott, promptly upon request, powers of
attorney authorizing Host Marriott to extend statutes of limitations,
receive refunds, negotiate settlements and take such other actions
that are reasonably appropriate in the exercise of Host Marriott's
control rights pursuant to Section 6(b), and any other documents
reasonably necessary to effect the exercising of such control rights,
consistent with Crestline's rights of consultation and consent as set
forth in Section 6(b).
7. OTHER AGREEMENTS. To the extent any provision in this Agreement conflicts
----------------
with any other provision in any other agreement to which Crestline and Host
Marriott are parties, the parties agree that, except as contemplated in the
provisions of this Agreement addressing the Forum Tax Matters Agreement,
the provisions of this Agreement shall govern.
8. MISCELLANEOUS.
(a) Effectiveness. This Agreement shall have no force or effect if the
-------------
Distribution does not occur. If the Distribution occurs, this
Agreement shall be effective from and after the Closing on the Closing
Date and shall survive until the expiration of any applicable statute
of limitations (including any waivers and extensions thereof).
(b) Entire Agreement. This Agreement contains the entire agreement among
----------------
the parties hereto with respect to the subject matter hereof. This
Agreement terminates and supercedes any and all other sharing or
allocation agreements with respect to Taxes in effect at the time of
the Distribution that relate solely to the Pre-Distribution Group and
the Crestline Members, but shall not affect any such agreement to the
extent applicable only among Host Marriott Members.
(c) Guarantees of Performance. Host Marriott hereby guarantees the
-------------------------
complete and prompt performance by the Host Marriott Group, each Host
Marriott Member, the Pre-Distribution Group, and all Affiliates of
Host Marriott or any Host Marriott Member, of all of their obligations
and undertakings pursuant to this Agreement. Crestline hereby
guarantees the complete and prompt performance by the Crestline Group,
any Crestline Member, and any Affiliate of Crestline or any Crestline
Member, of all of their obligations and undertakings pursuant to this
Agreement. If, subsequent to the close of business on the Closing
Date, either Host Marriott or Crestline shall be acquired by another
entity such that 50% or more of its common stock is in common control,
such acquirer shall, by making such acquisition, simultaneously agree
to jointly and severally guarantee the complete and prompt performance
by the acquired corporation and any Affiliate of the acquired
corporation of all of their obligations and undertakings pursuant to
this Agreement. The Operating Partnership and Host Marriott agree
that, without limiting in any respect Host Marriott's obligations or
liabilities under, or undertakings pursuant to, this Agreement,
including without limitation Host Marriott's obligations to pay Taxes
to any Tax Authority or to any party to this
18
<PAGE>
Agreement, the Operating Partnership (i) hereby assumes all of Host
Marriott's obligations, liabilities and undertakings set forth in this
Agreement and agrees to pay any amounts that Host Marriott is
obligated to pay to any Tax Authority or to any party pursuant to this
Agreement, (ii) hereby guarantees the complete and prompt performance
by Host Marriott, the Host Marriott Group, each Host Marriott Member,
the Pre-Distribution Group, each Pre-Distribution Member, and all
Affiliates of Host Marriott or any Host Marriott Member, of all of
their obligations, liabilities and undertakings made under or pursuant
to this Agreement, and (iii) hereby indemnifies and holds harmless
Host Marriott and any Affiliate of Marriott from and against any
obligation hereunder including without limitation any obligation to
pay Taxes to any Tax Authority or any party pursuant to this
Agreement.
(d) Severability. In case any one or more of the provisions contained in
------------
this Agreement should be invalid, illegal or unenforceable, the
enforceability of the remaining provisions hereof shall not in any way
be affected or impaired thereby. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions hereof without
including any of such which may hereafter be declared invalid, void or
unenforceable. In the event that any such term, provision, covenant or
restriction is hereafter held to be invalid, void or unenforceable,
the parties hereto agree to use their best efforts to find and employ
an alternate means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or
restriction.
(e) Indulgences, etc. Neither the failure nor any delay on the part of
-----------------
any party hereto to exercise any right under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise
of any right preclude any other or further exercise of the same or any
other right, nor shall any waiver of any right with respect to any
occurrence be construed as a waiver of such right with respect to any
other occurrence.
(f) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Maryland without
regard to the conflict of law principles thereof, except with respect
to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or subject of this Agreement, and
as to those matters the law of the jurisdiction under which the
respective entity derives its powers shall govern.
(g) Notices. All notices, requests, demands and other communications
-------
required or permitted under this Agreement that are routine in nature
shall be made in writing and shall be delivered by hand or mailed by
registered or certified mail (return receipt requested) to the
designated representative of the tax department of each party and
confirmed by a way thereof directed to the general counsel of each
party.
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<PAGE>
(h) Modification or Amendment. This Agreement may be amended at any time
-------------------------
by written agreement executed and delivered by duly authorized
officers of Crestline and Host Marriott.
(i) Successors and Assigns. A party's rights and obligations under this
----------------------
Agreement may not be assigned without the prior written consent of the
other party. All of the provisions of this Agreement shall be binding
upon and inure to the benefit of the parties and their respective
successors and permitted assigns, and shall survive any acquisition,
disposition or other corporate restructuring or transaction involving
either party.
(j) No Third-Party Beneficiaries. This Agreement is solely for the
----------------------------
benefit of the parties to this Agreement and their respective
Affiliates and should not be deemed to confer upon third parties any
remedy, claim, liability, reimbursement, claim of action or other
right in excess of those existing without this Agreement.
(k) Other. This Agreement may be executed in any number of counterparts,
-----
each such counterpart being deemed to be an original instrument, and
all of such counterparts shall together constitute one and the same
instrument. The section numbers and captions herein are for
convenience of reference only, do not constitute part of this
Agreement, and shall not be deemed to limit or otherwise affect any
of the provisions hereof.
(l) Predecessors and Successors. To the extent necessary to give effect
---------------------------
to the purposes of this Agreement, any reference to any corporation,
partnership, limited liability company, Affiliated Group, member of an
Affiliated Group or other entity shall also include any predecessors
or successors thereto, by operation of law or otherwise.
(m) Tax Elections. Except as provided in Section 6(b) or this paragraph,
-------------
(i) nothing in this Agreement is intended to change or otherwise
affect any previous tax election made by or on behalf of the Pre-
Distribution Group (including the election with respect to the
calculation of earnings and profits under Code Section 1552 and the
regulations thereunder), and (ii) Host Marriott shall continue to have
discretion, reasonably exercised, to make any and all elections with
respect to all members of the Pre-Distribution Group for all Pre-
Closing Taxable Periods or other Tax Periods for which it is obligated
to file Tax Returns or Information Returns under Section 2(a)(i).
Notwithstanding anything to the contrary in this Agreement, (i) Host
Marriott agrees that it shall consult with Crestline regarding, and
shall obtain Crestline's written consent (which shall not be
unreasonably withheld) with respect to, all accounting methods adopted
or used (including without limitation with respect to useful lives) in
connection with any property of Crestline, the Crestline Group, any
Crestline Member, or any Crestline Affiliate that is placed in service
in 1998, (ii) Host Marriott agrees to provide to Crestline's Senior
Vice President - Taxes, not later than January 30, 1999 (or, if later,
30 days following the Closing Date), a report detailing all property
placed in service in 1998 (based on the information reasonably
available to Host Marriott at the time such report is
20
<PAGE>
prepared), and the accounting methods proposed to be adopted or used
with respect to such property, and to provide an update of such report
not later than the last business day of every month thereafter, and to
provide a final report, not later than July 31, 1999 (the "Final
Report"), detailing all property of Crestline, the Crestline Group,
any Crestline member or any Crestline Affiliate that is placed in
service in 1998 and the accounting methods proposed to be adopted or
used with respect to such property. If Crestline does not respond in
writing to the Final Report within twenty-one (21) days of receipt of
the Final Report by Crestline's Senior Vice-President Taxes, Crestline
shall be deemed to have consented to the proposed accounting methods
contained in the Final Report.
(n) Injunctions. The parties acknowledge that irreparable damage would
-----------
occur in the event that any of the provisions of this Agreement were
not performed in accordance with its specific terms or were otherwise
breached. The parties hereto shall be entitled to an injunction or
injunctions to prevent breaches hereto and to enforce specifically the
terms and provisions hereof in any court having jurisdiction; such
remedy shall be in addition to any other remedy available at law or in
equity.
(o) Further Assurances. Subject to the provisions hereof, the parties
------------------
hereto shall make, execute, acknowledge and deliver such other
instruments and documents, and take all such other actions, as may be
reasonably required in order to effectuate the purposes of this
Agreement and to consummate the transactions contemplated hereby.
Subject to the provisions hereof, each party shall, in connection with
entering into this Agreement, performing its obligations hereunder and
taking any and all actions relating hereto, comply with all applicable
laws, regulations, orders and decrees, obtain all required consents
and approvals and make all required filings with any governmental
agency, other regulatory or administrative agency, commission or
similar authority and promptly provide the other party with all such
information as it may reasonably request in order to be able to comply
with the provisions of this sentence.
(p) Setoff. All payments to be made by any party under this Agreement
------
shall be made without setoff, counterclaim or withholding, all of
which are expressly waived.
(q) Costs and Expenses. Unless otherwise specifically provided herein,
------------------
each party agrees to pay its own costs and expenses resulting from the
fulfillment of its respective obligations hereunder.
(r) Rules of Construction. Any ambiguities shall be resolved without
---------------------
regard to which party drafted the Agreement.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed on their respective behalf by their
respective officers thereunto duly authorized, as of the day and year above
written.
HOST MARRIOTT CORPORATION AND
SUBSIDIARIES AND AFFILIATES
By: ________________________________
Name: ________________________________
Title: ________________________________
CRESTLINE CAPITAL CORPORATION
AND SUBSIDIARIES AND AFFILIATES
By: ________________________________
Name: ________________________________
Title: ________________________________
HOST MARRIOTT, L.P.
By: Host Marriott Corporation, its General Partner
By:____________________________________
Name: _________________________________
Title: __________________________________
22
<PAGE>
Exhibit 10.15
MASTER FF&E LEASE AGREEMENT
DATED AS OF
________________, 199__
BETWEEN
[NON-CONTROLLED SUBSIDIARY]
(LESSOR)
AND
[_______________________________________________________]
(LESSEE)
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 AGREEMENT FOR LEASE OF EQUIPMENT....................................1
ARTICLE 2 ACCEPTANCE OF EQUIPMENT.............................................2
ARTICLE 3 DISCLAIMER OF WARRANTIES............................................2
ARTICLE 4 BASE TERM...........................................................3
ARTICLE 5 RENT................................................................3
ARTICLE 6 LESSEE'S REPRESENTATIONS AND WARRANTIES.............................5
ARTICLE 7 IDENTIFICATION MARKS................................................7
ARTICLE 8 FEES AND TAXES......................................................7
ARTICLE 9 GENERAL INDEMNITY...................................................9
ARTICLE 10 USE OF EQUIPMENT; LOCATION; LIENS..................................10
ARTICLE 11 MAINTENANCE AND REPAIRS; ADDITIONS TO EQUIPMENT....................12
ARTICLE 12 LOSS, DAMAGE OR DESTRUCTION OF EQUIPMENT...........................13
ARTICLE 13 REPORTS; INSPECTIONS...............................................15
ARTICLE 14 INSURANCE..........................................................15
ARTICLE 15 RETURN OF EQUIPMENT................................................16
ARTICLE 16 LESSOR'S OWNERSHIP; EQUIPMENT TO BE AND REMAIN PERSONAL PROPERTY...19
ARTICLE 17 OTHER COVENANTS....................................................20
ARTICLE 18 EVENTS OF DEFAULT..................................................20
ARTICLE 19 ASSIGNMENT AND TRANSFER BY LESSOR..................................24
ARTICLE 20 RECORDING AND FILING; EXPENSES.....................................26
ARTICLE 21 OPTION TO RENEW....................................................26
ARTICLE 22 QUIET ENJOYMENT....................................................27
ARTICLE 23 FAILURE OR INDULGENCE NOT WAIVER; ADDITIONAL RIGHTS OF LESSOR......27
ARTICLE 24 NO SUBLEASE OR ASSIGNMENT..........................................27
ARTICLE 25 PURCHASE OPTIONS...................................................28
ARTICLE 26 MISCELLANEOUS......................................................29
ARTICLE 27 DEFINITIONS........................................................33
-i-
<PAGE>
MASTER FF&E LEASE AGREEMENT
---------------------------
THIS MASTER FF&E LEASE AGREEMENT (this "Master Agreement") is entered
into this _____ day of ____________, 199__, by and between
________________________ (hereinafter called "Lessee"), a Delaware limited
liability company, having its principal office at
____________________________________ ___________________________________ and
[NON-CONTROLLED SUBSIDIARY] (hereinafter called "Lessor"), a Delaware
corporation with its principal office at
____________________________________________________________________________.
WITNESSETH:
WHEREAS, Lessee is the tenant under the Hotel Lease with HMC Owner
(this and other capitalized terms used and not otherwise defined herein having
the meanings ascribed to such terms in Article 27);
WHEREAS, Lessor has acquired ownership of the Equipment;
WHEREAS, Lessor wishes to lease the Equipment to Lessee and Lessee
wishes to lease the Equipment from Lessor, all subject to and upon the terms and
conditions herein set forth;
WHEREAS, Lessee is leasing the Equipment in connection with its
entering into the Hotel Lease with HMC Owner; [AND]
WHEREAS, as a condition to entering into this Master Agreement, Lessor
and HMC Owner have entered into the Hotel Owner Agreement [; AND]
[WHEREAS, as a condition to entering into this Master Agreement,
Lessor, Hotel Owner and Facility Mortgagee have entered into the NS Multiparty
Agreement].
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, Lessor and Lessee hereby
agree as follows:
ARTICLE 1
AGREEMENT FOR LEASE OF EQUIPMENT
Lessor shall lease to Lessee and Lessee shall lease from Lessor, upon
the terms and conditions specified in this Master Agreement and the applicable
Rental Schedule, the items of personal property (collectively, the "Equipment,"
and individually, an "Item") described in the applicable Rental Schedule
including
<PAGE>
Schedule A of such Rental Schedule and this Master Agreement. Each
Rental Schedule shall incorporate the terms of this Master Agreement and shall
constitute a separate and independent lease and contractual obligation of Lessee
(the term "this Lease" shall refer collectively to the applicable Rental
Schedule and this Master Agreement). Only the signed copy of each Rental
Schedule and not this Master Agreement shall constitute chattel paper, the
possession of which can perfect a security interest. In the event of a conflict
between the provisions of this Master Agreement and the provisions of any Rental
Schedule, the provisions of the Rental Schedule shall prevail.
ARTICLE 2
ACCEPTANCE OF EQUIPMENT
By executing the applicable Rental Schedule, Lessee acknowledges
acceptance of the Equipment by Lessee under this Lease, as of the date of such
Rental Schedule.
ARTICLE 3
DISCLAIMER OF WARRANTIES
EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE 3, LESSOR HAS NOT MADE
AND SHALL NOT BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, AS TO THE MERCHANTABILITY, FITNESS FOR USE, FITNESS FOR A PARTICULAR
PURPOSE OR TITLE OF THE EQUIPMENT (OR ANY PART THEREOF) OR AS TO COMPLIANCE WITH
SPECIFICATIONS, COMPLIANCE WITH GOVERNMENTAL REGULATIONS, QUALITY, SELECTION,
INSTALLATION, SUITABILITY, PERFORMANCE, CONDITION, DESIGN, ABSENCE OF DEFECTS,
OPERATION OR NON-INFRINGEMENT OF PATENT, COPYRIGHT, TRADEMARK OR OTHER
INTELLECTUAL PROPERTY RIGHTS OF THE EQUIPMENT (OR ANY PART THEREOF). LESSEE
SHALL LEASE THE EQUIPMENT "AS IS, WHERE IS". LESSOR HEREBY DISCLAIMS ANY AND
ALL WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, OTHER THAN THE EXPRESS
REPRESENTATIONS AND WARRANTIES OF LESSOR SET FORTH BELOW IN THIS ARTICLE 3.
Without limiting the generality of the foregoing, Lessor shall have no liability
to Lessee for any claim, loss or damage of any kind or nature whatsoever, nor
shall there be any abatement of Rent for any reason for claims arising out of or
in connection with (i) the deficiency or inadequacy of the Equipment for any
purpose, whether or not known or disclosed to Lessor, (ii) any deficiency or
defect in the Equipment, (iii) the use or performance of the Equipment or (iv)
any loss of business or other consequential loss or damage, whether or not
resulting from any of the foregoing. The provisions of this Article
-2-
<PAGE>
have been negotiated and are intended to be a complete exclusion and negation of
any representations or warranties by Lessor, express or implied, with respect to
the Equipment that may arise pursuant to any law now or hereafter in effect, or
otherwise, except as otherwise expressly provided below. Notwithstanding the
foregoing, Lessor represents and warrants that as of the Lease Commencement Date
for this Lease: (i) Lessor is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, and is
qualified and in good standing to do business wherever necessary to carry on its
present business and operations; (ii) Lessor has full power and authority to
enter into this Lease and any other instruments and documents executed by Lessor
in connection herewith and to perform its obligations under this Lease and any
of such other instruments and documents; (iii) each of this Lease and such
instruments and documents has been duly authorized, executed and delivered by
Lessor and each constitutes the legal, valid and binding obligation of Lessor
enforceable in accordance with its terms; and (vi) Lessor has good title to the
Equipment free and clear of all Lessor Liens [but subject to the Facility
Mortgagee Lien]. For the term of this Lease, but only so long as no Event of
Default shall have occurred and be continuing hereunder, Lessor assigns to
Lessee (to the extent Lessor has the right and power to assign), and Lessee may
have the benefit of, any and all Manufacturer's warranties, service agreements
and indemnities, if any, with respect to the Equipment; provided, however, that
Lessee's sole remedy for the breach of any such warranty, indemnification or
service agreement shall be against the Manufacturer of the Equipment and not
against Lessor, nor shall any such breach have any effect whatsoever on the
rights and obligations of Lessor or Lessee with respect to this Lease. Lessor
shall cooperate with Lessee where reasonably necessary to enable the Lessee to
enforce such warranty, indemnification or service agreements.
ARTICLE 4
BASE TERM
The Base Term for each Item shall commence on the Lease Commencement
Date provided for by the Rental Schedule for such Item, and unless sooner
terminated pursuant to the provisions of this Lease, shall be for the number of
Accounting Periods set forth in such Rental Schedule, plus the number of days
remaining in any partial Accounting Period if the Lease Commencement Date occurs
on other than the first day of an Accounting Period.
ARTICLE 5
RENT
5.1 Basic Rent. Lessee shall pay to Lessor in lawful money of the
----------
United States of America which shall be legal tender for the payment of public
and
-3-
<PAGE>
private debts, as rent for the Equipment during the Lease Term, the amounts
provided for in the Rental Schedule ("Basic Rent") for such Equipment on the
dates designated therein ("Payment Dates"), at the account of Lessor set forth
therein, or at such other account or to such other person or entity as Lessor,
from time to time, may designate. All payments to Lessor shall be made by wire
transfer of immediately available federal funds or by other means reasonably
acceptable to Lessor in its sole discretion.
5.2 Additional Rent. Lessee shall also pay to Lessor, upon notice by
---------------
Lessor to Lessee that payment is due, any sums other than for Basic Rent that
Lessee at any time shall be required to pay Lessor pursuant to the provisions of
this Lease, together with every additional charge, interest and cost provided
for hereunder which may be added for non-payment or late payment of any such
sums or of Basic Rent. All such sums shall be additional rent ("Additional
Rent") and Lessor shall provide Lessee with notification as to the amount of any
Additional Rent. If Lessee shall fail to pay any Additional Rent, Lessor shall
have all rights, powers and remedies with respect thereto as are provided herein
or by law in the case of non-payment of Basic Rent.
5.3 Late Payments. With respect to any payment of Basic Rent or
-------------
Additional Rent not received by Lessor on its due date hereunder, Lessee shall
pay to Lessor as Additional Rent a late charge (to the extent permitted by law)
computed at the Default Interest Rate on the amount of such payment from the due
date thereof until payment is received by Lessor.
5.4 Time is of the Essence. LESSEE AGREES THAT TIME IS OF THE
----------------------
ESSENCE TO LESSOR IN LESSEE'S MAKING PAYMENTS OF BASIC RENT AND ADDITIONAL RENT
WHEN SUCH PAYMENTS BECOME DUE.
5.5 No Set-Off, Etc. This Lease is a net lease and, notwithstanding
---------------
any other provisions of this Lease, it is the intent of the parties that Basic
Rent and Additional Rent shall be paid without notice, demand, counterclaim,
set-off, deduction or defense and without abatement, suspension, deferment,
diminution or reduction. Lessee shall perform all its obligations under this
Lease at its sole cost and expense. Except to the extent otherwise expressly
specified herein, the obligations and liabilities of Lessee hereunder shall in
no way be released, discharged or otherwise affected for any reason, including,
without limitation: (i) any defect in the condition, quality or fitness for use
of the Equipment, any Item or any part thereof; (ii) any damage to, removal,
abandonment, salvage, loss, scrapping or destruction of or any requisition or
taking of the Equipment, any Item or any part thereof; (iii) any restriction,
prevention or curtailment of or interference with any use of the Equipment, any
Item or any part thereof; (iv) any defect in title or rights to the Equipment or
any Item or any lien on such title or rights or on the Equipment or any Item;
(v) any change, waiver, extension, indulgence or other
-4-
<PAGE>
action or omission in respect of any obligation or liability of Lessor; (vi) any
bankruptcy, insolvency, reorganization, composition, adjustment, dissolution,
liquidation or other like proceedings relating to Lessee or any action taken
with respect to this Lease by any trustee or receiver of Lessee or by any court,
in any such proceeding; (vii) any claim that Lessee has or might have against
any Person, including without limitation Lessor; (viii) any failure on the part
of Lessor to perform or comply with any of the terms hereof; or (ix) any
invalidity, unenforceability or disaffirmance of this Lease or any provision
hereof against or by Lessee. To the extent permitted by law, Lessee waives all
rights now or hereafter conferred by statute or otherwise to quit, terminate,
cancel, rescind or surrender this Lease, or to any diminution or reduction of
Basic Rent or Additional Rent payable by Lessee hereunder. Nothing in this
Article 5 shall be construed to prevent Lessee, after complying with this
Article 5, from pursuing any claim it may have against Lessor (including any
claim for breach by Lessor of any obligation hereunder) or any other Person in
such court of law or otherwise as Lessee may deem appropriate.
ARTICLE 6
LESSEE'S REPRESENTATIONS AND WARRANTIES
Lessee represents and warrants that as of the date that Lessee signs
this Master Agreement and as of each Lease Commencement Date pursuant to a
Rental Schedule hereunder:
(i) Lessee is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, and
is qualified and in good standing to do business wherever necessary to
carry on its present business and operations;
(ii) Lessee has full power and authority to enter into this
Lease and the other instruments and documents executed by Lessee in
connection herewith (together with this Lease, the "Transactional
Documents") and to pay and perform its obligations under this Lease
and the other Transactional Documents;
(iii) each of this Lease and the other Transactional Documents
has been duly authorized, executed and delivered by Lessee, and each
constitutes the valid, legal and binding obligation of Lessee
enforceable in accordance with its terms;
(iv) no vote or consent of, or notice to, the holders of any
class of membership interest of Lessee is required, or if required,
such vote or consent has been obtained or given, to authorize the
execution,
-5-
<PAGE>
delivery and performance of this Lease and the other Transactional
Documents by Lessee;
(v) neither the execution and delivery by Lessee of this Lease
or the other Transactional Documents, nor the consummation by Lessee
of the transactions contemplated hereby or thereby, nor compliance by
Lessee with the provisions hereof or thereof, conflicts with or
results in a breach of any of the provisions of any certificate of
formation or limited liability company agreement of Lessee, or of any
applicable law, judgment, order, writ, injunction, decree, award, rule
or regulation of any court, administrative agency or other
governmental authority, or of any indenture, mortgage, deed of trust,
other agreement or instrument of any nature to which Lessee is a party
or by which it or its property is bound or affected or pursuant to
which it is constituted, or constitutes a default under any thereof or
will result in the creation of any Lien upon any of the Equipment,
other than the interests therein of Lessor or any Assignee or a
Permitted Lien, or upon any other right or property of Lessee or will
in any manner materially and adversely affect Lessor's or any
Assignee's right, title and interest in any of the Equipment;
(vi) no consent, approval, withholding of objection or other
authorization of or by any court, administrative agency, other
governmental authority or any other Person is required, except such
consents, approvals or other authorizations which have been duly
obtained and are in full force and effect;
(vii) there are no actions, suits or proceedings pending, or, to
the knowledge of Lessee, threatened, in any court or before any
administrative agency or other governmental authority against or
affecting Lessee, which, if adversely decided, would or could,
individually or in the aggregate, materially and adversely affect the
financial or other condition, business, operations, properties, assets
or prospects of Lessee or the ability of Lessee to perform any of its
obligations under this Lease or under the other Transactional
Documents, except for any such actions, suits or proceedings that
Lessee has described in writing to Lessor;
(viii) no Default or Event of Default exists or is continuing;
and
(ix) Lessee possesses any and all material authorizations,
certifications and licenses which are or may be required to use and
operate the Equipment.
-6-
<PAGE>
ARTICLE 7
IDENTIFICATION MARKS
To the extent requested by Lessor or if required by applicable law,
Lessee shall affix to the Equipment at Lessee's expense signs, labels, or other
forms of notice to disclose Lessor's ownership of, and the interest of any
Assignee in, the Equipment. Lessee shall keep and maintain such signs, labels
or other forms of notice affixed to the Equipment throughout the Lease Term.
Lessor may furnish such signs, labels or other forms of notice to Lessee.
Except as otherwise directed by Lessor, Lessee shall not allow the name of any
person other than Lessor or the brand name of the Hotel to be placed on any part
of the Equipment as a designation that might reasonably be interpreted as a
claim of ownership.
ARTICLE 8
FEES AND TAXES
8.1 General Tax Indemnity. Lessee agrees to pay promptly when due,
---------------------
and to indemnify and hold Lessor and Assignee harmless from, all license, title,
registration and recording fees whatsoever, all taxes including, without
limitation, sales, use, franchise, personal property, excise, import, export and
stamp taxes and customs duties, and all charges together with any penalties,
fines or interest thereon (collectively, "Taxes") which are assessed, levied or
imposed by any governmental or taxing authority against Lessor or Assignee with
respect to any or all of the Equipment or any Item or the purchase, acquisition,
ownership, construction, installation, shipment, delivery, lease, possession,
use, maintenance, condition, operation, control, return or other disposition
thereof or the rents, receipts or earnings arising therefrom which accrue or are
payable with respect to the Equipment or any Item or this Lease or which are
assessed, are based on a valuation date, or are due during or with respect to
the Lease Term or any subsequent period until the Equipment has been returned to
Lessor pursuant to the provisions of this Lease or until the Equipment has been
purchased by Lessee pursuant to any purchase option provisions of this Lease,
excluding, however, any Taxes imposed on or measured by Lessor's gross or net
income or on Lessor's franchises, capital, net worth, alternative minimum
taxable income or items of tax preference and interest, penalties or other
charges in respect thereof (collectively "Income Taxes") arising in connection
with the general operation of Lessor's business. In the event any Taxes payable
by Lessee pursuant to the preceding sentence are paid by Lessor, or if Lessor is
required to collect or pay all or any part thereof, Lessee shall reimburse
Lessor therefor (plus any penalties, fines or interest thereon, but only to the
extent that such penalties, fines or interest are imposed as a result of
Lessee's delinquency) promptly upon demand. Lessee shall file and pay any
personal property taxes levied or assessed on the Equipment or any Item directly
to the levying authority. Upon Lessor's written request, Lessee shall
-7-
<PAGE>
submit to Lessor reasonably satisfactory evidence of payment by Lessee of any or
all amounts for which Lessee is required to make payment or to indemnify Lessor
hereunder that are paid by Lessee, and of the filing of any and all reports,
returns and other documentation required in connection with any such payment. In
the event Lessor elects to pay the personal property taxes directly to a levying
authority, Lessor shall submit to Lessee a copy of its personal property tax
return and its receipt for the full amount of such personal property taxes so
paid by Lessor. All of the obligations of Lessee under this Article shall
continue in full force and effect notwithstanding any expiration, termination,
rescission or cancellation of this Lease with respect to Taxes (other than
Income Taxes) attributable to the Term of this Lease. Lessee acknowledges that
Lessor may not be exempt from the payment of any of the amounts referred to
herein, even though Lessee might have been exempt therefrom if it were the owner
or purchaser of the Equipment or Item, and Lessee agrees that this Article shall
apply, and the amounts due from it hereunder shall be due, whether or not Lessee
might itself have otherwise been exempt from any such payments. Subject to the
foregoing, Lessee shall have the right to contest in good faith any such Taxes
levied or imposed by any governmental or taxing authority, provided that Lessee
shall have given Lessor not less than ten (10) days prior written notice of its
intention to contest and full particulars of the proposed contest, if in the
reasonable opinion of Lessor the proposed contest will not risk the forfeiture
or loss of the Equipment, and Lessee either shall have paid the Taxes or
provided for a bond or other security so that none of the Equipment will be
subject to seizure, confiscation or forfeiture. Lessor agrees that it shall
cooperate with Lessee in the pursuit of any such contest.
8.2 Exclusions from General Tax Indemnity. The indemnity provided
-------------------------------------
for in Section 8.1 above shall not extend or apply to any of the following:
(a) Income Taxes imposed on Lessor.
(b) Tax imposed on or with respect to Lessor resulting from any
assignment or transfer of any interest in the Equipment other than a transfer
pursuant to the exercise of remedies while an Event of Default shall have
occurred and be continuing.
(c) Tax imposed on or with respect to Lessor resulting from
Lessor's gross negligence or willful misconduct.
(d) Any Tax attributable to the Equipment that is imposed with
respect to any period after the expiration of the Term and the return of
possession of the Equipment to Lessor.
(e) Any Tax imposed on or with respect to a Transferee to the
extent that such Tax would not have been imposed on or with respect to Lessor.
-8-
<PAGE>
(f) Any Tax imposed on, resulting from or otherwise attributable
to a Lessor Lien.
8.3 Lessor's Tax Benefits. Lessee acknowledges that Lessor shall be
---------------------
entitled to claim all tax benefits, credits and deductions related to the
Equipment for federal income tax purposes including, without limitation: (i)
deductions on Lessor's cost of the Equipment for each of its tax years during
the Lease Term under any method of depreciation or other cost recovery formula
permitted by the Internal Revenue Code of 1986, as amended (hereinafter called
the "Code"), and (ii) interest deductions as permitted by the Code on the
aggregate interest paid to any Assignee (hereinafter collectively "Lessor's Tax
Benefits"). Lessee agrees to take no action inconsistent (including the
voluntary substitution of Equipment) with the foregoing or which would result in
the loss, disallowance, recapture or unavailability to Lessor of Lessor's Tax
Benefits. Lessee hereby indemnifies Lessor and its Assignee(s) from and against
(a) any loss, disallowance, unavailability or recapture of Lessor's Tax Benefits
resulting from any action or failure to act of Lessee, including replacement of
the Equipment, plus (b) all interest, penalties, costs (including attorney fees)
or additions to tax resulting from such loss, disallowance, unavailability or
recapture.
ARTICLE 9
GENERAL INDEMNITY
9.1 Indemnity. Lessee shall indemnify on an after-tax basis Lessor
---------
and any Assignee and their respective officers, directors, employees, agents and
servants (each, an "Indemnified Person"), against, and agrees to defend,
protect, save and keep them harmless from, any and all liabilities, obligations,
losses, damages, fines, penalties, claims, actions, suits, costs, expenses and
disbursements, including reasonable attorneys' fees and expenses and costs for
customs, completion, performance and appeal bonds, of whatsoever kind and nature
(each, a "Claim"), imposed on or incurred by or assessed against Lessor and/or
any Assignee, in any way relating to or arising out of (i) the failure of Lessee
to provide or obtain any certificates, documents, consents, authorizations,
clearances, licenses, permits or instruments required hereunder or under any of
the other Transactional Documents, or (ii) the design, manufacture,
construction, installation, delivery, testing, ownership, lease, possession,
use, maintenance, operation, control, movement, import, export, shipment,
condition, or return of the Equipment or any Item. Notwithstanding the
foregoing, Lessee shall not be required to indemnify any Indemnified Person for
any Claim to the extent such Claim (i) arises out of or results from the gross
negligence or willful misconduct of such Indemnified Person; (ii) arises out of
or relates to the breach by such Indemnified Person of any provision of any
Transactional Documents; (iii) arises out of or results from any
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<PAGE>
facts, circumstances or events occurring, in the case of any Item subject to
this Lease, after the later of (1) the termination of this Lease with respect to
such Item, or (2) the return of such Item in accordance with the terms of this
Lease; (iv) arises out of or results from a Lessor Lien; or (v) is a Tax (in
which case the terms of Article 8 shall apply).
9.2 Survival. The obligations of Lessee under this Article shall
--------
survive the payment of all known obligations under this Lease and any
expiration, termination, rescission or cancellation of this Lease, and are
expressly made for the benefit of and shall be enforceable by each Indemnified
Person, its successors and assigns.
ARTICLE 10
USE OF EQUIPMENT; LOCATION; LIENS
10.1 Compliance with Law; Compliance with Manufacturer's Procedures.
--------------------------------------------------------------
During the Lease Term, Lessee warrants and agrees that the Equipment and each
Item shall be used and operated and otherwise be in compliance with any
established operating procedures therefor of any Manufacturer and all applicable
statutes, regulations and orders of any governmental body. Lessee shall bear
and pay all costs of such compliance. Lessee shall not permit the Equipment or
any Item to be used or maintained in any manner or condition that would violate,
or could reasonably be expected to result in the termination of, the insurance
policies carried by Lessee pursuant to the provisions of this Lease on
insurance, or in any manner or condition or for any purpose for which, in the
opinion of any Manufacturer, the Equipment is not designed or suited.
10.2 Removal of Equipment. Lessee agrees that without Lessor's prior
--------------------
written consent, it will not remove any Item from the location specified in the
Rental Schedule for such Equipment.
10.3 No Liens. During the Lease Term and until the Item has been
--------
returned to Lessor pursuant to the provisions of this Lease or until the Item is
purchased by Lessee pursuant to any purchase option provisions of this Lease,
Lessee will not directly or indirectly create, incur, assume or suffer to exist
any Lien on any Item or on Lessor's or any Assignee's title thereto or interest
therein, except for Permitted Liens. Lessee, at its own expense, will promptly
take such action as may be necessary to keep the Item free and clear of, and to
duly discharge, any Lien except for Permitted Liens.
10.4 Licenses and Permits. Lessee agrees to procure and maintain (or
--------------------
cause to be procured and maintained) in effect all licenses, certificates,
permits and other approvals and consents required by applicable federal, state
and local
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<PAGE>
laws and regulations in connection with Lessee's possession, use, operation and
maintenance of the Equipment.
10.5 Perfection of Security Interests. Lessee has no interest in the
--------------------------------
Equipment except as expressly set forth in this Lease, and that interest is a
lease-hold interest. Lessor and Lessee agree, and Lessee represents for the
benefit of Lessor and its Assignee(s) that this Lease is intended to be a
"finance lease" and not a "lease intended as security" as those terms are used
in the Uniform Commercial Code; and that this Lease is intended to be a "true
lease" as the term is commonly used under the Internal Revenue Code of 1986 and,
to the extent applicable, the Treasury Regulations promulgated thereunder, each
as from time to time amended. Lessee shall cooperate fully with Lessor or any
Assignee to perfect and record their respective interests in connection with the
Transactional Documents including, without limitation, the execution, delivery
and filing of financing statements. If Lessee fails to execute any financing
statements requested by Lessor within ten (10) days after written request
therefor, Lessee authorizes Lessor to file financing statements that are signed
only by Lessor or that are signed for Lessee by Lessor in any jurisdiction when
permitted by law or local authority, and Lessee grants to Lessor power of
attorney to act as Lessee's attorney-in-fact to sign Lessee's name on such
financing statements as "Debtor."
[10.6 Subordination. This Lease, and any and all rights of Lessee
-------------
hereunder, are and shall be subject and subordinate to any Facility Mortgagee
Lien and all renewals, extensions, modifications, consolidations and
replacements thereof, and to each and every advance made or hereafter to be made
under any Facility Mortgage. This section shall be self-operative and no
further instrument of subordination shall be required. In confirmation of such
subordination, Lessee shall promptly execute, acknowledge and deliver any
instrument that Lessor, HMC Owner, the holder of any such Facility 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.
Lessee shall not unreasonably withhold its consent to any amendment to this
Lease reasonably required by such lender, provided that such amendment does not
(i) increase Lessee's rental obligations or other financial obligations
hereunder, or (ii) have a material adverse effect upon Lessee's rights
hereunder, or (iii) materially increase Lessee's non-economic obligations
hereunder, or (iv) decrease Lessor's obligations hereunder. Lessor and Lessee
acknowledge that the Equipment was acquired by Lessor and leased to Lessee
subject to the Facility Mortgagee Lien.
The Facility Mortgagee Lien and any other Lien to which this Lease is,
at the time referred to, subject and subordinate, is herein called a "Superior
Lien"; and the Facility Mortgagee and any other holder, trustee or beneficiary
of a Superior Lien is herein called "Superior Mortgagee". Lessee shall
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have no obligations under any Superior Lien other than those expressly set forth
in this Section 10.6.
Notwithstanding the obligations of Lessee hereunder, no Superior
Mortgagee shall have an obligation to provide a non-disturbance agreement to
Lessee. Any Superior Mortgagee shall have the right to terminate this Lease
upon the foreclosure, deed in lieu of foreclosure or exercise of the power of
sale with respect to the Hotel (a "Repossession Event"). Lessee agrees upon a
Repossession Event to surrender possession of the Equipment upon written demand
therefor by Superior Mortgagee. Nothing in this Section 10.6 shall be construed
to limit the rights of Lessor or Lessee as against HMC Owner or Host O.P. under
the NS Multiparty Agreement or any other agreement between any of such parties
if Lessee's right to possess the Equipment hereunder is terminated because of a
Repossession Event.
Notwithstanding anything to the contrary contained herein, the sole
and exclusive remedy against Lessee upon a Repossession Event shall be to
require Lessee to surrender possession of the Equipment at the Hotel in the
condition required by Section 15.2 (the remaining provisions of Article 15 shall
not be applicable to such a Repossession Event). Upon such surrender of
possession, Lessee's obligations hereunder shall terminate with respect to the
Equipment; provided, however, that Lessee's obligations to pay Additional Rent
-------- -------
with respect to any Default or Event of Default or other event (including acts
or omissions) arising prior to the date of termination of this Lease shall
continue.]
ARTICLE 11
MAINTENANCE AND REPAIRS; ADDITIONS TO EQUIPMENT
11.1 Maintenance and Repairs. Lessee shall, for the entire Lease
-----------------------
Term, at no cost to Lessor, maintain, or cause to be maintained, all of the
Equipment in good working order, repair, appearance and condition, and make all
required adjustments, replacements and repairs (collectively, "maintenance and
repairs"), all of which shall become the property of Lessor. Such maintenance
and repairs shall include, but not be limited to, all recommended or advised by
a Manufacturer; all required or advised by applicable governmental agencies or
regulatory bodies and all commonly performed by prudent business and/or
professional practice.
11.2 Modifications. Lessee shall not modify, except in connection
-------------
with performing its obligations under Section 11.1, the Equipment without the
prior written consent of Lessor, such consent not to be unreasonably withheld.
Any replacements, substitutions, additions, attachments, accessions, parts,
fittings, accessories, modifications, enhancements, maintenance and repairs and
other
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upgrades to the Equipment whenever made shall be considered accessions to the
Equipment and shall automatically become the property of Lessor and title
thereto shall, without further act, vest in Lessor.
11.3 Supplemental Data; Software. All instruction manuals, published
---------------------------
statements of capabilities and technical specifications, service, maintenance
and repair records, installation, qualification, certification and calibration
reports, usage logs, and printed material relating to the Equipment shall be
deemed part of the Equipment. Computer programs, programming codes, operating
systems, data processing instructions, series of instructions or statements
which are machine readable, and any like symbols or signals usable by an
electronic data processing system ("Software") that are installed or entered in
the Equipment as of the Lease Commencement Date and any modifications, changes,
enhancements or improvements thereto installed or entered thereafter
(collectively, "Lessor Software") shall become a part of the Equipment.
Whenever Lessee acquires software licenses from other parties with respect to
the Software, such licenses shall automatically and without further action by
Lessee be assigned to Lessor and become through assignment a part of the
Equipment transferable to any future user of the Equipment for use with the
Equipment. Lessee reserves the right, upon a return of the Equipment, to remove
Software owned or licensed by Lessee which is not Lessor Software.
ARTICLE 12
LOSS, DAMAGE OR DESTRUCTION OF EQUIPMENT
12.1 Risk of Loss. Lessee shall bear all risks of damage to, taking
------------
of, theft, loss or destruction of, each Item commencing as of the Lease
Commencement Date for such Item and continuing throughout the Lease Term and
until such Item has been returned to Lessor or purchased by Lessee pursuant to
any purchase option provisions of this Lease. Except as otherwise herein
expressly provided, no damage to, taking of or theft, loss or destruction of any
Item shall impair any obligation of Lessee to Lessor under this Lease,
including, without limitation, the obligation to pay Basic Rent.
12.2 Notice of Loss. In the event that any Item shall become damaged
--------------
from any cause whatsoever, Lessee agrees to promptly notify Lessor in writing of
such fact, fully informing Lessor of the details thereof. If any Item is
damaged, Lessee shall, at no cost to Lessor, place the same in good repair,
condition and working order, unless such Item, in the opinion of Lessor, is
irreparably damaged, in which case the provisions of this Lease with respect to
a Casualty Occurrence shall apply. In the event that an Item has been damaged,
but not irreparably, if no Default or Event of Default has occurred and is
continuing hereunder, upon receipt by Lessor of evidence, reasonably
satisfactory to Lessor,
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that such repair or restoration has been completed, and an invoice therefor,
Lessor shall release to Lessee or its supplier the proceeds of any insurance
received by Lessor as a result of such damage for the purpose of reimbursing
Lessee for the costs of repairing or restoring such Item.
12.3 Casualty Occurrences. In the event that any Item shall become
--------------------
lost, stolen, destroyed or irreparably damaged from any cause whatsoever, or if
any Item or Lessor's title thereto shall be requisitioned or seized by any
governmental authority (each such occurrence being herein called a "Casualty
Occurrence") during the Lease Term and until such Item has been returned to
Lessor pursuant to the provisions of this Lease or until such Item is purchased
by Lessee pursuant to any purchase option provisions of this Lease, Lessee shall
promptly notify Lessor in writing of such fact, fully informing Lessor of all
details of the Casualty Occurrence in question. Lessee shall, within fifteen
(15) days following the Casualty Occurrence, make an election to either pay
Lessor in cash the "Stipulated Loss Value" as set forth in the Table of
Stipulated Loss Values attached to the Rental Schedule pursuant to which such
Item is leased hereunder, calculated as of the date of the Casualty Occurrence,
or replace the same. If Lessee elects to make the payment of Stipulated Loss
Value, this payment shall be made within thirty (30) days following the Casualty
Occurrence, together with the Basic Rent accrued and unpaid with respect to such
Item as of the date of the Casualty Occurrence, plus all Additional Rent or
amounts owing with respect to such Item on such date of payment. If Lessee
elects to replace such Item, Lessee shall, within thirty (30) days following the
Casualty Occurrence, replace the same (or cause it to be replaced) with "like
property" having the same value and operating capabilities and remaining useful
life at least equal to the replaced Item prior to the date of such Casualty
Occurrence, which property shall thereupon become subject to this Lease with
title thereto in Lessor[, and subject to the Facility Mortgagee Lien in
accordance with the NS Multiparty Agreement].
12.4 Termination Upon Payment of Stipulated Loss Value. Upon the
-------------------------------------------------
payment of the Stipulated Loss Value of the Item in question in accordance with
the terms of this Article, and the payment of all accrued and unpaid Basic Rent
and Additional Rent and any other sums then due hereunder, this Lease shall
terminate with respect to the Item suffering the Casualty Occurrence and all
Lessor's right, title and interest in and to such Item shall pass to Lessee,
[subject to the Facility Mortgagee Lien, and] "as is" and "where is", without
any representation or warranty by, or recourse to, Lessor, except as to the
absence of Lessor Liens, as evidenced by a duly executed bill of sale naming
Lessor as the seller and Lessee as the buyer.
12.5 Insurance Proceeds. Provided that no Default or Event of
------------------
Default has occurred and is continuing, any insurance proceeds received as the
result of a Casualty Occurrence with respect to any or all Items shall be
applied
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(i) if Lessee has elected to pay Stipulated Loss Value, then in reduction of
Lessee's obligation to pay the Stipulated Loss Value for such Item if not
already paid by Lessee to Lessor, or, if already paid by Lessee, to the
reimbursement of Lessee therefor, and (ii) if Lessee has elected to replace the
Equipment, then upon receipt of evidence, reasonably satisfactory to Lessor,
that such replacement has been completed, including an invoice therefor, to
Lessee or its supplier for the cost of replacement. The balance of the insurance
proceeds, if any, shall be paid to Lessee.
ARTICLE 13
REPORTS; INSPECTIONS
Lessee will cause to be furnished to Lessor, if requested, from time-
to-time a statement showing the condition and such other information regarding
the Equipment as Lessor may reasonably request. Lessor and any Assignee shall
have the right, upon reasonable notice to Lessee, to inspect the Equipment
during normal business hours including Lessee's records with respect to the
Equipment and to copy such records. Any inspection by Lessor or any Assignee
shall not be deemed to be approval or acknowledgment by Lessor or such Assignee
of the safety, freedom from defects, performance or compliance with
specifications or governmental requirements of the Equipment or of the
conformity of the Equipment to the requirements or warranties of this Lease, and
the disclaimers set forth in the provisions of this Master Agreement on
disclaimer of warranties shall apply to any such inspection.
ARTICLE 14
INSURANCE
During the Lease Term and until all Equipment has been returned to
Lessor pursuant to the provisions of this Lease or until the Equipment is
purchased by Lessee pursuant to any purchase option provisions of this Lease,
Lessee shall, at no cost to Lessor, procure and maintain (or cause to be
procured and maintained) with reputable insurers reasonably acceptable to Lessor
(i) insurance on all of the Equipment in an amount not less than the Stipulated
Loss Value of all of the Equipment insuring against all risks of loss or damage
to the Equipment, and (ii) comprehensive general liability and property damage
insurance having policy limits as to claims with respect to the Equipment of at
least One Million Dollars ($1,000,000) per occurrence, Two Million Dollars
($2,000,000) aggregate per location, provided that such limits shall be modified
to conform to any required underlying statutory coverage, and umbrella coverage
shall be provided having limits of One Hundred Million Dollars ($100,000,000)
per occurrence and in the aggregate, and attaching in excess of policy limits as
to general liability, where applicable, insuring Lessor and any Assignees, as
their interests may appear,
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against liability for death, bodily injury and property damage arising out of or
resulting from the design, construction, manufacture, ownership, use, operation,
lease or maintenance of, or otherwise in connection with, the Equipment. On the
policies referred to in clause (i), such insurance shall name Lessor (and any
Assignees) as the sole loss payee so that (and Lessor and Lessee hereby agree
that) the insurance proceeds payable under such policies will be payable and
paid solely to Lessor (and to any Assignees). On the policies referred to in
clause (ii), such insurance will name Lessor (and any Assignees) as an
additional insured as its interests may appear. All such policies shall provide
that they may not be invalidated against Lessor (or any Assignees) because of
any violation of a condition or a breach of warranty of the policies or
application therefor by Lessee, that they may not be altered or canceled except
after thirty (30) days prior written notice to Lessor, and that Lessor and any
Assignee have the right but not the obligation to pay the premiums with respect
to coverage required by this Lease in order to continue such insurance in effect
or to obtain like coverage. Under the policies of insurance required to be
maintained by Lessee pursuant to this Master Agreement, Lessee agrees to waive
any right of subrogation and to cause the insurance carrier to waive any right
of subrogation in each instance as such right may exist against Lessor or any
Assignee and for any and all loss or damage to the Equipment. Lessor is hereby
appointed Lessee's attorney-in-fact to endorse any check or draft which may be
payable to Lessee in order to collect the proceeds of such insurance if Lessee
fails to endorse any such check or draft within seven (7) days after written
request therefor. Lessee shall deliver to Lessor, prior to the beginning of the
Lease Term with respect to any of the Equipment and at such other time or times
as Lessor may reasonably request, a certificate or other evidence reasonably
satisfactory to Lessor of the maintenance of such insurance. Lessor shall be
under no duty to examine such policies, certificates or other evidence of
insurance or to advise Lessee in the event that its insurance is not in
compliance with this Lease. In the event of failure on the part of Lessee to
provide such insurance, Lessor may, at its option, but without obligation,
provide such insurance and add the amount of the premiums to the rents due
hereunder, and Lessee shall, upon Lessor's demand, pay the same as Additional
Rent.
ARTICLE 15
RETURN OF EQUIPMENT
15.1 Return Fee; Manner of Return. At the end of the Lease Term for
----------------------------
any Equipment, except for Equipment being purchased by Lessee pursuant to
Article 25, Lessee shall pay to Lessor a return fee in an amount equal to one
(1) Accounting Period payment of Basic Rent at the last prevailing rate during
the Lease Term for Basic Rent and, at its sole expense, shall forthwith return
possession of such Equipment without omissions to Lessor by:
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(i) properly preparing, crating and/or assembling such
Equipment (in accordance with the Manufacturer's instructions if such
instructions exist) for shipment by common carrier with all containers
and pieces labeled with model, part and unit numbers and descriptions;
and
(ii) shipping such Equipment by common carrier, with insurance
and freight prepaid, to a place designated by Lessor within a two
thousand (2,000) mile radius of the Hotel; provided, however, that
-------- -------
Lessor may designate a place of return which is beyond such two
thousand (2,000) mile radius if Lessor shall pay the additional
shipping charges attributable to distances in excess of such two
thousand (2,000) miles.
The insurance required by clause (ii) above shall provide that in the event of
loss such insurance shall pay Lessor in cash directly an amount (the "Insured
Amount") equal to the greater of (A) the full replacement value of such
Equipment and (B) the "Stipulated Loss Value" as set forth in the Exhibit to the
Rental Schedule calculated as of the Payment Date next preceding the date of
loss; provided, however, that if insurance in the Insured Amount is not then
-------- -------
commercially available, Lessee shall procure insurance in the highest amount
then commercially available and shall be liable to Lessor upon an event of loss
for the amount, if any, by which insurance proceeds paid to Lessor are less than
the Insured Amount. Lessee acknowledges that "full replacement value" may
exceed Fair Market Value.
15.2 Condition of Equipment. When the Equipment is returned to
----------------------
Lessor it shall be in compliance with the provisions of Article 11 and shall be
(i) in the same condition, repair and appearance as on the Lease Commencement
Date, ordinary wear and tear excepted; (ii) in fully operational condition;
(iii) capable of being installed and operated in the normal course by another
user; (iv) free of Lessee's markings or labelings; and (v) free and clear of all
Liens, except Lessor Liens [and the Facility Mortgagee Lien].
15.3 Inspection; Compliance. Lessor reserves the right, upon
----------------------
reasonable notice during normal business hours, to inspect the Equipment within
thirty (30) days of its return to verify compliance with the provisions of this
Master Agreement on condition of the Equipment on return. Should there be less
than full compliance, Lessor at its option may (i) perform or cause to be
performed through service organizations of its own choosing such maintenance and
repairs, including upgrades, replacements and other services, as it deems
necessary to effect such compliance, (ii) require Lessee to perform or cause to
be performed such maintenance and repairs, including upgrades, replacements and
other services, as Lessor deems necessary to effect such compliance and/or (iii)
reasonably estimate the costs to effect such compliance. Lessee shall pay to
Lessor the costs for
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performance of (i) or (ii) above, or the estimated costs under (iii) above, in
any such case including the costs of the inspection(s). If maintenance and
repairs, including upgrades, replacements and other services, are necessary to
place any of the Items under any Rental Schedule in the condition required by
this Lease, Lessee shall continue to pay to Lessor Additional Rent each
Accounting Period at the last prevailing rate during the Lease Term for Basic
Rent on the Items under such Rental Schedule for the period of delay until all
such required maintenance and repairs can be performed, or for the period of
time reasonably necessary to accomplish such maintenance and repairs. For any
such period that applies, Lessee shall continue to provide the insurance
required during the Lease Term. However, Lessor's acceptance of such rent and
provisions of insurance during such period shall not constitute a renewal of the
Lease Term, a waiver of Lessor's right to prompt return of such Equipment in the
condition required by this Section, or a waiver of Lessor's right to possession
of such Equipment.
15.4 Missing Equipment. Should the inspection reveal any Items to be
-----------------
missing, Lessee shall be responsible for paying to Lessor promptly the greater
of the Stipulated Loss Value or the Fair Market Value of such Items computed as
of the last Payment Date prior to the end of the Lease Term, plus the amount of
any impairment of the Fair Market Value of the remaining Items due to the
absence of such missing Items.
15.5 Extension of Lease Term Based on Failure to Return Equipment.
------------------------------------------------------------
In the event that Lessee fails to return any Items when required, at the
election of Lessor effected by notice to Lessee, the Lease Term for such Items
shall be extended on an Accounting Period-to-Accounting Period basis on the same
terms as previously in effect, except that Lessee shall pay to Lessor, at the
beginning of each Accounting Period, Basic Rent for such Accounting Period for
such Items at the last prevailing rate during the unextended Lease Term, until
such Items have been returned to Lessor pursuant to the provisions of this
Lease. Notwithstanding any Accounting Period-to-Accounting Period continuance
of this Lease, Lessor may resort to any remedies available to it under this
Lease, at law or in equity, to recover such Equipment at any time following the
end of such extended Lease Term.
15.6 Notice of Return. Not less than one hundred twenty (120) days
----------------
prior to expiration of the Lease Term under any Rental Schedule, if Lessee has
not given notice of the exercise of any renewal or purchase with respect to the
Equipment then subject to such Rental Schedule, Lessee shall give Lessor notice
that Lessee shall be returning the Equipment forthwith upon the expiration of
the Lease Term.
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ARTICLE 16
LESSOR'S OWNERSHIP; EQUIPMENT TO BE AND REMAIN PERSONAL PROPERTY
16.1 Title. Lessee acknowledges and agrees that it does not have,
-----
and by execution of this Lease and/or payments and performance hereunder it
shall not have or obtain, any title to any Items, nor any property right or
interest, legal or equitable, therein, except its rights as Lessee hereunder.
16.2 Equipment to Remain Personal Property. All of the Equipment
-------------------------------------
shall be and remain personal property notwithstanding the manner in which the
Equipment may be attached or affixed to realty. Upon the expiration,
cancellation or termination of the Lease Term for any or all of the Equipment,
Lessee shall have the obligation, and Lessor shall have the right, to remove, or
cause the removal of, such Equipment from the premises where the same is then
located, for return to Lessor pursuant to the provisions of this Master
Agreement on return of Equipment and, if applicable, on Events of Default,
whether or not any of the Equipment is affixed or attached to realty or to any
building. In the exercise of its rights, Lessor shall not be liable for any
damage to the realty or any such building or other real or personal property
occasioned by any removal of the Equipment by Lessee or Lessor or the agents of
Lessee or Lessor, except to the extent caused by the gross negligence or willful
misconduct of Lessor or the agents of Lessor.
16.3 Failure to Return Equipment. If Lessee is unable to return, or
---------------------------
is prevented from returning, any of the Equipment to Lessor upon the expiration,
cancellation or termination of the Lease Term as required under the provisions
of this Master Agreement on return of Equipment for any reason whatsoever
(excluding as a result of the assertion of a Permitted Lien), including, but not
limited to, the assertion by any third party (other than the holder of any
Permitted Liens) of any claim against such Equipment, or of any right with
respect thereto, whether or not resulting from the manner in which such
Equipment is affixed or attached to, or installed in, the realty or any
building(s) thereon or any other personal or real property, for all purposes of
this Lease such Equipment shall be deemed to have been the subject of a Casualty
Occurrence. Thereupon, Lessee shall pay to Lessor the amounts provided for by
the provisions of this Master Agreement on loss, damage or destruction of
Equipment, with respect to such Equipment, at the time, in the manner, and with
the consequences provided by such provisions.
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ARTICLE 17
OTHER COVENANTS
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 non-
requesting party shall furnish to the requesting party, or a designee thereof,
an Officer's Certificate certifying that this Lease is unmodified and in full
force and effect (or that this Lease is in full force and effect as modified and
setting forth the modifications), the date to which the Basic Rent has been
paid, that to the knowledge of the certifying party, 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 lender, any
Assignee and any prospective purchaser or mortgagee of the Equipment or the
Hotel.
17.2 Financial Statements. Lessee shall promptly furnish to Lessor
--------------------
or Assignee, within forty (40) days after the end of the filing thereof by CCC,
all reports filed by CCC on Form 10-K and Form 10-Q with the Securities and
Exchange Commission.
17.3 Notice of Address Change. Lessee shall give Lessor notice of
------------------------
any change in the address of the executive office or principal place of business
of Lessee not less than fifteen (15) days prior to the change.
ARTICLE 18
EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall
constitute an "Event of Default" hereunder:
(a) Lessee fails (i) to make any payment of the Basic Rent
payable hereunder when due and such failure continues for a period of
ten (10) days after the date due, or (ii) to make any required
payments of Additional Rent within ten (10) days following Notice from
Lessor that such payment is due and owing and unpaid;
(b) Lessee fails to maintain or to cause to be maintained the
insurance coverages that are required under Article 14;
(c) any representation or warranty by Lessee made in this
Master Agreement or in any other Transactional Document or
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certificate furnished to Lessor in connection with this Lease or
pursuant hereto shall at any time prove to be incorrect in any
material respect;
(d) Lessee shall make or permit any unauthorized assignment or
transfer of this Master Agreement or any Rental Schedule to this
Master Agreement or of any of Lessee's rights and obligations
hereunder or thereunder, or Lessee shall make or permit any
unauthorized sublease or transfer of any Equipment or the possession
of any Equipment;
(e) Lessee defaults 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) through (d)
above), and, in either case, such default continues for a period of
thirty (30) days after Notice thereof from Lessor to Lessee; provided,
however, that if such default is curable but such cure cannot be
accomplished with due diligence within such period of time and if, in
addition Lessee commences to cure such default within thirty (30) days
after Notice thereof from Lessor 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 one hundred twenty
(120) days in the aggregate, subject to Unavoidable Delay) as may be
necessary to cure such default; provided further that the extension of
the cure period beyond thirty (30) days shall not apply to a breach by
Lessee of a covenant under Section 10.3;
(f) Lessee is generally not paying its debts as they become
due, or Lessee makes a general assignment for the benefit of
creditors;
(g) any petition is filed by or against Lessee under the
federal bankruptcy laws, or any other proceeding is instituted by or
against Lessee seeking to adjudicate it 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 Lessee or for any
substantial part of the property of Lessee, and, in the case of any
involuntary petition filed or proceeding instituted against Lessee,
such proceeding is dismissed within sixty (60) days after institution
thereof, or Lessee takes any action to authorize or effect any of the
actions set forth above in this subparagraph;
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(h) Lessee causes or institutes any proceeding for its
dissolution or termination;
(i) the occurrence of any "Event of Default" as that term is
defined in the Hotel Lease;
(j) Lessee defaults under the terms of any other Transactional
Documents beyond the expiration of any applicable notice and cure
periods;
(k) at any time there shall occur under (A) any lease between
Lessee and a party other than Lessor as lessor (except for the Hotel
Lease) or (B) under any lease wholly or partially guaranteed by Lessee
(except for the Hotel Lease), the exercise by the lessor of its
possessory remedies or commencement of legal proceedings by the lessor
for default under the lease; provided that the aggregate future
payments remaining to be made or guaranteed by Lessee exceed One
Hundred Thousand Dollars ($_______); or
(l) any obligation of Lessee in respect of any Indebtedness in
a principal amount in excess of Five Hundred Thousand Dollars
($_______), for money borrowed or for the deferred purchase price of
any material property or services, is declared to be, or as a result
of acceleration becomes, due and payable prior to the stated maturity
thereof.
Upon the occurrence of any Event of Default and at any time thereafter so long
as the same is continuing, Lessor may, at its option, declare that this Lease is
in default (provided that upon the occurrence of an Event of Default specified
in subparagraph (g), this Lease shall automatically be deemed in default). At
any time after this Lease has been declared in default (or deemed to be in
default), Lessor may exercise one or more of the following remedies, to the
extent not then prohibited by law, as Lessor in its sole discretion may elect:
(I) to proceed by appropriate court action or actions at
law or in equity or in bankruptcy to enforce performance by Lessee of
the covenants and terms of this Lease and/or to recover damages for
the breach thereof;
(II) to terminate or cancel this Lease upon written notice
to Lessee whereupon all rights of Lessee to use the Equipment shall
immediately terminate, but Lessee shall not be relieved of any
obligations under this Lease;
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(III) whether or not this Lease be so terminated or
canceled, and without notice to Lessee, to repossess and/or to render
inoperable the Equipment wherever found, with or without legal
process, and for this purpose Lessor and/or its agents may enter upon
any premises of or under the control or jurisdiction of Lessee or any
agent of Lessee without liability for suit, action or other proceeding
by Lessee and remove the Equipment therefrom; Lessee hereby expressly
waives any claims for damages occasioned by such repossession; LESSEE
HEREBY EXPRESSLY WAIVES ANY AND ALL RIGHTS, INCLUDING RIGHTS TO NOTICE
OR A JUDICIAL HEARING, WITH RESPECT TO REPOSSESSION OF THE EQUIPMENT
AFTER AN EVENT OF DEFAULT;
(IV) to hold or to use any Equipment returned to Lessor or
repossessed by Lessor for any purpose whatsoever, to sell any
Equipment at a private or public, cash or credit sale, to re-lease any
Equipment, in all the foregoing events free and clear of any rights of
Lessee and without any duty to account to Lessee with respect to such
action or inaction;
(V) whether or not Lessor shall have exercised, or shall
hereafter at any time exercise, any of its other rights with respect
to an Item, upon written notice to Lessee, to demand that Lessee pay
to Lessor, and Lessee shall pay to Lessor on the date specified in
such notice, as liquidated damages for loss of a bargain and not as a
penalty (in lieu of the Basic Rent for such Equipment that prior to
the Event of Default was to have been paid on Payment Dates subsequent
to the date specified in such notice), the sum equal to the excess, if
any, of (i) the Stipulated Loss Value for such Item computed as of the
latest Payment Date when all Basic Rent and Additional Rent then due
and payable was fully paid, over (ii) whichever of the following three
amounts Lessor, in its sole discretion, shall designate in such
notice:
(A) the present value of the fair market rental
value (determined as hereafter provided in this Section) of such
Item for the remainder of the Lease Term as of the date specified
in such notice, the present value to be computed on the basis of
a six percent (6%) per annum rate of discount from the respective
dates upon which such Rent would be paid;
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(B) the fair market sales value (determined as
hereafter provided in this Section) of such Item as of the date
specified in such notice; or
(C) if Lessor shall have sold or re-leased any Item
pursuant to clause (IV) above, the net proceeds of such sale or
re-lease,
plus interest at the Default Interest Rate (a) on such sum from the
date so specified by Lessor until paid and (b) on whichever of such
three amounts is so designated by Lessor from such date until
whichever one of the following shall be applicable to the designated
amount: the time when the fair market rental or sales value shall have
been so determined or the time when the Equipment shall have been sold
or released; and
(VI) to forthwith recover from Lessee, and Lessee shall be
fully liable for, all Basic Rent that shall accrue until the date that
the Equipment is returned to or repossessed by Lessor and any
Additional Rent including collection fees, whenever accrued, and
interest at the Default Interest Rate from the date due.
In addition to the foregoing, Lessor may also recover from Lessee all costs and
expenses arising out of Lessee's default, including, without limitation,
expenses of repossession of the Equipment and the storage, inspection, repair,
reconditioning, sale and re-leasing thereof, and reasonable attorney's fees
incurred by Lessor in exercising any of its rights or remedies hereunder. For
the purposes of this Article only, "fair market rental value" and "fair market
sales value" shall be determined by an appraisal of an independent appraiser
chosen by Lessor, and the cost of any such appraisal shall be borne by Lessee.
No remedy referred to in this Article is intended to be exclusive, but each
shall be cumulative and in addition to any other remedy referred to above or
otherwise available to Lessor at law or in equity or bankruptcy. Lessor shall
have no duty to pay Lessee any surplus from sale or lease of the Equipment, or
in the fair market rental or sales value of the Equipment, above all amounts
payable by Lessee to Lessor. The exercise by Lessor of any one or more remedies
shall not be deemed to preclude the simultaneous or later exercise by Lessor of
any or all such previously exercised remedies and any and all other remedies.
ARTICLE 19
ASSIGNMENT AND TRANSFER BY LESSOR
19.1 Assignment by Lessor. Lessor may at any time and from time to
--------------------
time assign to one or more security assignees (all herein called the "Secured
Party"
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and also called an "Assignee") for the purpose of securing a loan to Lessor or
for any other purpose, and at its sole discretion, may also sell or transfer to
one or more Persons (herein called the "Transferee" and also called an
"Assignee"), in any case subject to the rights of Lessee under this Lease but
without notice to or consent of Lessee, this Lease, any other Transactional
Documents, any or all of the Equipment, and all sums at any time due and to
become due or at any time owing or payable by Lessee to Lessor under this Lease
or pursuant to any or all of the Transaction Documents. The Secured Party shall
not be obligated to perform any duty, covenant or condition required to be
performed by Lessor under this Lease or any other Transactional Documents unless
and until it shall become the Transferee and pursuant to Section 19.2 shall have
assumed the obligations of Lessor.
19.2 Lessor to Remain Liable. Lessee agrees that notwithstanding any
-----------------------
assignment to a Secured Party or a Transferee, each and every covenant,
agreement, representation and warranty of Lessor under this Lease shall be and
remain the sole liability of Lessor and of every successor in interest of Lessor
(excluding any Secured Party). In the case of assignment to a Transferee, if
Lessee has provided its prior written consent to the assignment and assumption
by Transferee (which consent may not be unreasonably withheld), then the
Transferee shall assume all of Lessor's obligations pursuant to this Lease and
any other Transactional Documents so assigned, and Lessor shall be released
therefrom.
19.3 Rights of Secured Parties; Certificates. Lessee further
---------------------------------------
acknowledges and agrees that from and after the receipt by Lessee of written
notice from Lessor of an assignment by Lessor, Lessee shall comply with the
directions or demands given in writing by the Secured Party or (to the extent
not inconsistent with the directions or demands of the Secured Party) by the
Transferee, and the Secured Party or Transferee shall have the right to exercise
(either in its own name or in the name of Lessor) all rights, privileges, and
remedies of Lessor provided for herein. Lessee agrees that any obligation to a
Secured Party as a result of the assignment of this Lease to a Secured Party as
aforesaid shall not be reduced or minimized by reason of any claim, defense,
counterclaim, set-off, abatement, reduction or recoupment or other right that
Lessee might otherwise have been able to assert against Lessor, any prior
Assignee or any Transferee. After any assignment to a Secured Party of which
Lessee has received Notice and unless and until Lessee is otherwise notified by
the Secured Party, this Lease may not be amended or modified, and no consent or
waiver hereunder shall be effective, without the prior written consent of the
Secured Party. Lessee agrees to execute and Lessor or any Transferee or Secured
Party may record any instruments and documents relating to such assignment,
mortgage or security interest desired by Lessor or any Transferee or Secured
Party.
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ARTICLE 20
RECORDING AND FILING; EXPENSES
Lessee will, upon demand of Lessor, at Lessee's cost and expense, do
and perform any other act and will execute, acknowledge, deliver, file,
register, record and deposit (and will re-file, re-register, re-record or re-
deposit whenever required) any and all instruments required by law or requested
by Lessor (or any Assignee) including, without limitation, financing statements
under the Uniform Commercial Code (which, notwithstanding the intent of Lessor
and Lessee that this is a "finance lease" as such term is defined in Article 2A
of the Uniform Commercial Code, Lessor shall have the right to file wherever and
whenever Lessor requires), for the purpose of providing proper protection to the
satisfaction of Lessor (and/or any Assignee) of Lessor's title to any Equipment
(and/or of any Assignee's security interest in the Equipment) or for the purpose
of carrying out the intention of this Lease.
ARTICLE 21
OPTION TO RENEW
21.1 Option to Renew. Upon the expiration of the Base Term provided
---------------
for under any Rental Schedule, and provided that no Default or Event of Default
has occurred and is continuing, Lessee shall have the option, exercisable on at
least one hundred twenty (120) days prior written notice to Lessor, to renew
this Lease with respect to all, but not less than all (except for Items that
have been destroyed and for which Lessor has received payment of the Stipulated
Loss Value with respect thereto) of the Items then subject to such Rental
Schedule, for up to [TWO (2)] successive additional renewal terms (each a
"Renewal Term") consisting of thirteen (13) Accounting Periods each at a rate of
Basic Rent for each Renewal Term equal to the rate that would be obtained in an
arm's-length transaction at the end of the Base Term between an informed and
willing prospective lessee and an informed and willing lessor, each under no
compulsion to lease (said rate being herein called the "Fair Rental Rate").
21.2 Disagreements as to Fair Rental Rate. If, on or before a date
------------------------------------
ninety (90) days prior to the expiration of the Base Term or any Renewal Term
with respect to such Rental Schedule, Lessor and Lessee are unable to agree upon
a determination of the Fair Rental Rate of the Equipment, Lessee shall have no
obligation to renew this Lease and shall either give the notice required by
Section 15.6 of this Master Agreement or a written notice that the Lessee wishes
to proceed with its renewal option. If Lessee gives such notice that it will
proceed with its renewal option, such Equipment shall be leased during the
Renewal Term at the Fair Rental Rate determined in accordance with the procedure
for Appraisal.
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ARTICLE 22
QUIET ENJOYMENT
So long as no Event of Default has occurred and is continuing
hereunder, Lessor will not, nor will Lessor permit another Person (including any
Assignee [but excluding any Superior Mortgagee]) claiming by, through or under
Lessor, to interfere with Lessee's continued peaceful and quiet possession, use
and enjoyment of the Equipment during the Lease Term.
ARTICLE 23
FAILURE OR INDULGENCE NOT WAIVER; ADDITIONAL RIGHTS OF LESSOR
23.1 Failure or Indulgence Not Waiver. No failure to exercise, and
--------------------------------
no delay in exercising, any right, power or remedy hereunder on the part of
Lessor shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or remedy preclude any other or further exercise
thereof or the exercise of any other right, power or remedy. Any waiver, to be
effective, must be in writing. A waiver of any covenant, term or condition
contained herein shall not be construed as a waiver of any subsequent breach of
the same covenant, term or condition. Receipt by Lessor of any Basic Rent or
Additional Rent with knowledge of the breach of any provision hereof shall not
constitute a waiver of such breach.
23.2 Additional Rights of Lessor. Lessor shall be entitled to
---------------------------
injunctive relief in case of the violation or attempted or threatened violation
of any of the provisions hereof, to a decree compelling performance of any of
the provisions hereof, and to any other remedy allowed at law or in equity.
ARTICLE 24
NO SUBLEASE OR ASSIGNMENT
Lessee shall not sublease the Equipment, relinquish possession of the
Equipment, or assign, pledge or hypothecate this Lease or any of Lessee's rights
or obligations hereunder, in whole or in part, without the prior written consent
of Lessor, and any such attempted relinquishment of possession, assignment,
pledge or hypothecation by Lessee without such consent shall be null and void.
Notwithstanding the foregoing, Lessee shall have the right, without the need for
consent of Lessor, to assign its rights in this Lease and any other Transaction
Documents (i) to an assignee of Lessee's rights under the Hotel Lease, (ii) to a
purchaser or new lessee of the Hotel, (iii) to HMC Owner (with HMC Owner having
the right to assign its interest to any Facility Mortgagee) or (iv) to Facility
Mortgagee upon a Repossession Event, provided that in the case of (i) or (ii),
the
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assignee, purchaser or lessee meets the financial suitability standards for
assignment of the Management Agreement.
ARTICLE 25
PURCHASE OPTIONS
25.1 Early Termination Purchase Option. If (i) no Default or Event
---------------------------------
of Default has occurred and is continuing, Lessee, at its option, upon written
notice to Lessor, as hereinafter provided, shall have the right at any time
after the [4TH] Payment Date therefor, to terminate this Lease as to all, but
not less than all, Items then subject to a Rental Schedule, such termination to
be effective on the Payment Date specified in such notice (the "Termination
Date"). If Lessee elects to terminate this Lease pursuant to this Section 25.1,
Lessee shall be obligated to purchase or cause any third party to purchase such
Items on the Termination Date for an amount, with respect to each such Item,
payable in immediately available funds, equal to (i) the greater of the
applicable Stipulated Loss Value for such Item on the Termination Date or Fair
Market Value of such Item on the Termination Date, determined in accordance with
Section 25.3 hereof, plus (ii) any applicable sales, excise or other taxes
imposed as a result of such sale (other than Income Taxes attributable to such
sale). Upon payment in full of the amounts payable pursuant to this Section
25.1, and of all other unpaid Rent then due hereunder, Lessor will transfer to
Lessee, on an "as-is," "where-is" basis, without recourse or warranty (except as
to the absence of Lessor Liens), all of Lessor's right, title and interest in
and to such Item[; provided, however, that any Item sold shall remain encumbered
-------- -------
by and shall be acquired subject to the Facility Mortgagee Lien]. If Lessee
intends to exercise said early termination option, Lessee shall give written
notice to Lessor to such effect at least one hundred twenty (120) days prior to
the proposed Termination Date. If Lessee gives such written notice, Lessee
shall be obligated to buy, and Lessor shall be obligated to sell, such Equipment
on the terms herein provided.
25.2 Purchase Option at End of Lease Term. If (i) no Default or
------------------------------------
Event of Default has occurred and is continuing, and (ii) this Lease shall not
have been earlier terminated, Lessee shall be entitled, at its option, upon
written notice to Lessor, as hereinafter provided, to purchase all, but not less
than all, Items then subject to a Rental Schedule, at the expiration of the Base
Term for such Items or, as the case may be, at the expiration of any Renewal
Term for such Items, for an amount, with respect to each such Item, payable in
immediately available funds, equal to (i) the Fair Market Value thereof as
determined pursuant to Section 25.3 hereof, plus (ii) any applicable sales,
excise or other taxes imposed as a result of such sale (other than Income Taxes
attributable to such sale). Upon payment in full of the amounts payable
pursuant to this Section 25.2, and of all other unpaid Rent then due hereunder,
Lessor will transfer to Lessee, on an "as-is," "where-is"
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basis, without recourse or warranty (except as to the absence of Lessor Liens),
all of Lessor's right, title and interest in and to such Item[; provided,
however, that any Item sold shall remain encumbered by and shall be acquired
subject to the Facility Mortgagee Lien]. If Lessee intends to exercise said
purchase option, Lessee shall give written notice to Lessor to such effect at
least one hundred twenty (120) days prior to the expiration of the Base Term of
the Item(s) subject to the particular Rental Schedule with respect to which
Lessee intends to exercise its purchase option, or, if a Renewal Term is then in
effect, at least one hundred twenty (120) days prior to the expiration of the
then current Renewal Term of the Item(s) subject to the particular Rental
Schedule with respect to which Lessee intends to exercise its purchase option.
If Lessee fails to give such written notice to Lessor as aforesaid, it shall be
conclusively presumed that Lessee has elected not to exercise such purchase
option. If Lessee gives such written notice, Lessee shall be obligated to buy,
and Lessor shall be obligated to sell, such Equipment on the terms herein
provided.
25.3 Determination of Fair Market Value. If Lessee has elected to
----------------------------------
exercise a purchase option, as provided in this Section, as soon as practicable
following Lessor's receipt of the written notice from Lessee of Lessee's intent
to exercise such option, Lessor and Lessee shall consult for the purpose of
determining the Fair Market Value of each such Item as of the applicable date
for purchase, and any values agreed upon in writing shall constitute the Fair
Market Value of each such Item for the purposes of this Article. In so
consulting, Lessor and Lessee may refer to books containing indexes of standard
values for used equipment of relevant type and age and to the records of Lessee
and similar users which tabulate the history of revenues and various other
economic benefits derived from the use of the Equipment. If Lessor and Lessee
have failed to agree upon such value prior to the 60th day before the expiration
of the Base Term, or, if this Lease has been renewed, prior to the 60th day
before the applicable date for purchase, either party may request that such
value be determined by Appraisal.
25.4 Effect of Election of Purchase Option. Notwithstanding any
-------------------------------------
election by Lessee to purchase, the provisions of this Lease shall continue in
full force and effect until the transfer of ownership of such Equipment upon the
date of purchase by the delivery of a Bill of Sale by Lessor.
ARTICLE 26
MISCELLANEOUS
26.1 Notices. (a) Any and all notices, demands, consents, approvals,
-------
offers, elections and other communications required or permitted under this
Lease 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,
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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 Lease 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
Lease 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 Lessee to:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, MD 20817
Attention: General Counsel
with a copy to:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, MD 20817
Attention: Corporate Controller
If to Lessor to:
[NON-CONTROLLED SUBSIDIARY]
10400 Fernwood Road
Bethesda, MD 20817
Attention: Law Department
with a copy to:
[NON-CONTROLLED SUBSIDIARY]
10400 Fernwood Road
Bethesda, MD 20817
Attention: Treasury Department
(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 Lease Term to change their respective addresses effective
upon
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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.
26.2 Entire Agreement. This Lease constitutes the complete and
----------------
exclusive statement of the terms of the agreement between the parties with
respect to the leasing of the Equipment and any sale of the Equipment by Lessor
to Lessee.
26.3 Severability. Any article, clause, sentence, paragraph, section
------------
or provision of this Lease held by a court of competent jurisdiction to be
invalid, illegal or ineffective shall not impair, invalidate or nullify the
remainder of this Lease, but rather the effect thereof shall be confined to the
article, clause, sentence, paragraph, section or provision so held to be
invalid, illegal or ineffective, and this Lease shall be construed as if such
invalid, illegal or ineffective provisions had never been contained herein.
26.4 Construction. Anything contained in this Lease to the contrary
------------
notwithstanding, all claims against, and liabilities of, Lessor or Lessee
arising prior to any date of termination or expiration of this Lease shall
survive such termination or expiration. In no event shall either party be
liable for any consequential or punitive damages as the result of a breach of
this Lease by such other party. Neither this Lease 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 Lease
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 Lease to be
performed by Lessor or Lessee shall be construed as an independent covenant and
condition. Time is of the essence with respect to the exercise of any rights
of, and performance of any obligations by, Lessor or Lessee under this Lease.
26.5 Counterparts; Headings. This Lease 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 Lease are for purposes of reference only and shall not limit or affect the
meaning of the provisions hereof.
26.6 Waiver of Jury. Lessor and Lessee waive any and all right to
--------------
trial by jury in any action or proceeding relating in any way to this Lease.
26.7 Governing Law; Jurisdiction. (a) This Lease shall be
---------------------------
interpreted, construed, applied and enforced in accordance with the laws of the
State of Maryland applicable to contracts between residents of Maryland and the
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laws of the State of Maryland shall apply to the perfection and priority of
liens upon and the disposition of and disposition with respect to the Equipment
and in any case regardless of (i) where this Lease is executed or delivered; or
(ii) where any payment or other performance required by this Lease is made or
required to be made; or (iii) where any breach of any provision of this Lease
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 of
Maryland; or (vii) any combination of the foregoing.
(b) 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 Lease may be brought and prosecuted in such court or courts
located in the State of Maryland as is provided by law; and the parties consent
to the jurisdiction of said court or courts located in the State of Maryland and
to service of process by certified mail, return receipt requested, or by any
other manner provided by law.
26.8 No Broker. Each party hereby represents and warrants to the
---------
other that it has not engaged, dealt with or otherwise discussed this
transaction with any broker, agent or finder. Each party agrees to indemnify
and hold the other harmless from and against any claim arising out of a breach
of the foregoing agreement and representation and warranty.
26.9 Legal Fees and Costs of Litigation. In the event either party
----------------------------------
to this Lease commences legal action of any kind to enforce the terms and
conditions of this Lease, the prevailing party in such litigation will be
entitled to collect from the other party all costs, expenses and attorneys' fees
incurred in connection with such action.
26.10 Lessor's Right to Perform for Lessee. If Lessee fails to duly
------------------------------------
and promptly perform any of its obligations under this Lease or fails to comply
with any of the covenants or agreements contained herein, after applicable
Notice and cure periods in Article 18 (except in the case of an emergency which
in the reasonable judgment of Lessor requires sooner action on the part of
Lessor, in which case such Notice and cure periods shall not apply), Lessor may
itself perform such obligations or comply with such covenants or agreements, for
the account of Lessee, without thereby waiving any default, and any amount paid
or expense (including, without limitation, reasonable attorney's fees)
reasonably incurred by Lessor in connection with such performance or compliance
shall, together with interest thereon at the Default Interest Rate, be payable
by Lessee to Lessor on demand.
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26.11 Binding Effect. This Lease shall inure to the benefit of and
--------------
be binding upon the parties hereto and their respective permitted successors and
assigns.
26.12 Counterparts. The single executed original of a Rental
------------
Schedule marked "Original" shall be the "Original" and all other counterparts
thereof shall be marked and be "Copies." To the extent, if any, that a Rental
Schedule constitutes chattel paper (as such term is defined in the Uniform
Commercial Code as in effect in any applicable jurisdiction) no security
interest in such Rental Schedule may be created through the transfer or
possession of any counterpart other than the counterpart marked "Original."
26.13 Change in Accounting Period. In the event of a change in the
---------------------------
Accounting Period during the Lease Term which results in payment dates (and/or
number of payments) different from the payment dates (and/or number of payments)
reflected on the Rental Schedule to this Lease, the amount of subsequent
installments of Basic Rent and the Stipulated Loss Value tables shall be
appropriately adjusted in a fair and equitable manner. In the absence of
agreement between Lessor and Lessee on the appropriate adjustments, the matter
may be submitted by either party for determination by an outside independent
valuation expert, acceptable to both Lessor and Lessee, who in the absence of
agreement between Lessor and Lessee shall be the independent valuation expert
most recently used to determine the "Market Leasing Factor" under the Hotel
Lease. Such expert shall be instructed to render its determination as soon as
reasonably practicable, but in no event later than sixty (60) days after
referral of the matter. The determination of the valuation expert shall be
final and binding upon the parties and shall not be subject to judicial review.
Lessor and Lessee will share equally the fees and expenses of the independent
valuation expert.
ARTICLE 27
DEFINITIONS
For all purposes of this Lease, 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 Lease to designated "Articles", "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Lease and (iv) the words "herein", "hereof", "hereunder" and other words of
similar import refer to this Lease as a whole and not to any particular Article,
Section or other subdivision.
"ACCOUNTING PERIOD" shall mean (i) for so long as the Management
Agreement is in effect each of the four (4) week accounting periods that are
used in
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Manager's accounting system, except that an Accounting Period may occasionally
contain five (5) weeks when necessary to conform Manager's accounting system to
the calendar and (ii) during any period when the Management Agreement is not in
effect, each calendar month.
"ADDITIONAL RENT" shall have the meaning given to such term in
Section 5.2.
"APPRAISAL" shall mean the following procedure whereby recognized
independent qualified equipment appraisers shall mutually agree upon the amount
in question. The party seeking Appraisal shall deliver a written notice to that
effect to the other party appointing its appraiser, and within ten (10) days
after receipt of such notice, the other party shall, by written notice, appoint
its appraiser. If within ten (10) days after appointment of the two appraisers
as described above, the two appraisers are unable to agree upon the amount in
question, a third appraiser shall be chosen within five (5) days thereafter by
mutual agreement of the first two appraisers, or if the first two appraisers
fail to agree upon the appointment of a third appraiser, such appointment shall
be made by an authorized representative of the American Arbitration Association.
The appraisal of the third appraiser shall be given within a period of ten (10)
days after the selection of the third appraiser. The average of the three
appraisals arrived at by the three appraisers shall be binding and conclusive on
Lessor and Lessee. Lessor and Lessee each shall pay the fees of the appraiser
appointed by it and shall share equally the fees and expenses of the third
appraiser, if any, and those of the American Arbitration Association, if
applicable.
"ASSIGNEE" shall have the meaning given to such term in Section 19.1.
"BASE TERM" shall have the meaning given to such term in Article 4.
"BASIC RENT" with respect to an Item shall mean the Basic Rent as
provided by the applicable Rental Schedule.
"BILL OF SALE" shall have the meaning given to such term in
Section 25.4.
"BUSINESS DAY" shall mean any day other than Saturday, Sunday or any
other day on which banking institutions in the State of Maryland are authorized
by law or executive action to close.
"CASUALTY OCCURRENCE" shall have the meaning given to such term in
Section 12.3.
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"CCC" shall mean Crestline Capital Corporation, a Maryland
corporation.
"CLAIM" shall have the meaning given to such term in Section 9.1.
"DEFAULT" shall mean any event, act or condition that with the giving
of notice or lapse of time, or both, would constitute an Event of Default.
"DEFAULT INTEREST RATE" shall mean, on any date, a per annum rate of
interest equal to the lesser of (i) the prime rate as published in the Wall
Street Journal from time to time plus two (2) percentage points and (ii) the
maximum rate then permitted under applicable law.
"EQUIPMENT" shall have the meaning given to such term in Article 1.
"EVENT(S) OF DEFAULT" shall have the meaning given to such term in
Article 18.
"FACILITY MORTGAGE" shall mean, with respect to the Hotel, any Lien
placed or permitted to exist by HMC Owner on the Hotel in accordance with
Article 20 of the Hotel Lease.
"FACILITY MORTGAGEE" shall mean the holder of a Facility Mortgage.
"FACILITY MORTGAGEE LIEN" shall mean, with respect to any of the
Equipment, any Lien placed or permitted to exist by HMC Owner on such Equipment
to secure the performance of HMC Owner's obligations under or secured by the
Facility Mortgage.
"FAIR MARKET VALUE" shall mean, with respect to the equipment in
question, the amount which would be paid for that Equipment in an arm's-length
sale transaction between an informed and willing buyer (not a used equipment or
scrap dealer) who wants the Equipment to be as described in the next following
sentence and is under no compulsion to buy, and an informed and willing seller
under no compulsion to sell. In determining the Fair Market Value, it shall be
assumed (whether or not the same be true) that the Equipment is fully
operational, installed and in economically productive service and that all
maintenance and repairs including upgrades, replacements and other services
required by this Lease have been performed and that the Equipment is in such
condition to comply fully with the requirements of this Lease, including
provisions of this Master Agreement governing the return of Equipment. The
costs of removal from the location of current use and installation at another
location for use shall not be a deduction in determining the Fair Market Value.
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"FAIR RENTAL RATE" shall have the meaning given to such term in
Section 21.1.
"GAAP" shall mean generally accepted accounting principles
consistently applied.
"HMC OWNER" shall mean [________________________].
"HOST O.P." shall mean Host Marriott, L.P., a Delaware limited
partnership and the operating partnership of Host REIT.
"HOST REIT" shall mean Host Marriott Corporation, a Maryland
corporation, or its successors or assigns.
"HOTEL" shall mean "Leased Property" as defined in the Hotel Lease.
"HOTEL LEASE" shall mean that certain Lease Agreement dated as of
___________, 199___, by and between [HMC OWNER] and [LESSEE], as the same may be
amended, modified, supplemented or restated from time to time.
"HOTEL OWNER AGREEMENT" shall mean that certain Hotel Owner Agreement
dated as of ____________, 199__, by and between [LESSOR] and [HMC OWNER] as the
same may be amended, modified, supplemented or restated from time to time.
"INCOME TAXES" shall have the meaning given such term in Section 8.1.
"INDEBTEDNESS" shall mean all obligations, contingent or otherwise,
which in accordance with GAAP should be reflected on the obligor's balance sheet
as debt excluding trade payables.
"INDEMNIFIED PERSON" shall have the meaning given to such term in
Section 9.1.
"ITEM" shall have the meaning given to such term in Article 1.
"LEASE" shall have the meaning given to such term in Article 1.
"LEASE COMMENCEMENT DATE" with respect to an item of Equipment shall
mean the date of commencement of the Lease Term of the item as provided by the
applicable Rental Schedule.
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"LEASE FACTOR" with respect to an item of Equipment shall mean the
Lease factor of the Equipment as provided by the applicable Rental Schedule.
"LEASE TERM" with respect to an item of the Equipment shall mean the
Base Term plus any and all Renewal Terms plus any period during which Lessee
retains the Equipment on an Accounting Period-to-Accounting Period basis
pursuant to provisions of this Master Agreement governing the return of the
Equipment. The Lease Term shall include the Lease Commencement Date and the
date on which the Lease Term ends.
"LESSEE" shall have the meaning given to such term in the Recitals.
"LESSOR" shall have the meaning given to such term in the Recitals.
"LESSOR LIENS" means any Lien or disposition of title affecting the
Equipment arising as a result of: (i) claims against Lessor not related to the
transactions contemplated by this Lease; (ii) any act or omission of Lessor
which is either not related to the transactions contemplated by or is expressly
prohibited under this Lease; (iii) claims against Lessor with respect to Taxes
against which Lessee is not required to indemnify Lessor hereunder; (iv) claims
against Lessor with respect to any loss, damage, or claim against which Lessee
is not required to indemnify Lessor pursuant to this Lease; or (v) claims
against Lessor arising out of any transfer by Lessor of all or any portion of
its interest in the Equipment other than the transfer of the Equipment pursuant
to Sections 12.4, and 16.3 and Articles 18, 19 and 25 hereof. Notwithstanding
anything to the contrary herein contained, any Lien which is attributable solely
to Lessor and would otherwise constitute a Lessor Lien hereunder shall not
constitute a Lessor Lien hereunder so long as: (1) the existence of such Lien
poses no material risk of seizure of the Equipment; (2) the existence of such
Lien does not interfere in any way with the possession, use or operation of the
Equipment by Lessee as permitted hereunder; and (3) Lessor is diligently
contesting such Lien.
"LIEN" shall mean any mortgage, security interest, pledge, collateral
assignment, or other encumbrance, lien or charge of any kind (including, without
limitation, any easements, covenants, conditions and restrictions), or any
transfer of any property or assets for the purpose of subjecting the same to an
encumbrance, lien or charge securing the payment of Indebtedness or performance
of any other obligation in priority to payment of any Person's general
creditors.
"MANAGEMENT AGREEMENT" shall mean the Management Agreement dated
, 19 , by and between [HMC OWNER] and [MANAGER], as subsequently modified and
amended pursuant to that certain Consent, Assignment and Assumption and
Amendment of Management Agreement, dated as of the date of the Hotel Lease, by
and among HMC Owner, Lessee and
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<PAGE>
Manager, together with all future modifications and amendments thereto and
replacements thereof.
"MANAGER" shall mean [____________________], and any successor manager
from time to time under the Management Agreement.
"MANUFACTURER" shall mean the Person that manufactures the item of the
Equipment in question.
"MASTER AGREEMENT" shall mean this Master FF&E Lease Agreement.
"NOTICE" shall mean notice given in accordance with Section 26.1.
"NS MULTIPARTY AGREEMENT" shall mean that certain NS Multiparty
Agreement dated as of _____________, 199__, by and between [LESSOR,] [HMC
OWNER,] [HOST O.P.] and [FACILITY MORTGAGEE], as the same may be amended,
modified, supplemented, restated or replaced from time to time.
"PAYMENT DATES" shall have the meaning given to such term in Section
5.1.
"PERMITTED LIENS" shall mean (i) Lessor Liens and (ii) any Facility
Mortgagee Liens.
"PERSON" shall mean an individual, a corporation, a partnership, a
limited liability company, an association, a joint-stock company, a trust, an
estate, any incorporated organization or similar association, a government or
political subdivision, or any other entity.
"RENEWAL TERM" shall have the meaning given to such term in Section
21.1.
"RENT" shall mean Basic Rent plus Additional Rent.
"RENTAL SCHEDULE" shall mean each schedule, executed by Lessor and
Lessee pursuant to this Master Agreement, providing for a description of some or
all of the Equipment to be leased hereunder, the place or places where such
Equipment shall be located, its acquisition cost, the Basic Rent payable by
Lessee with respect thereto, the Base Term thereof, the Lease Commencement Date
with respect thereto, and such other matters as Lessor and Lessee may agree
upon.
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<PAGE>
"REPOSSESSION EVENT" shall have the meaning given to such term in
Section 10.6.
"SECURED PARTY" shall have the meaning given to such term in Section
19.1.
"STIPULATED LOSS VALUE" shall mean the amounts specified in the Table
of Stipulated Loss Values applicable to the items of the Equipment subject to a
Rental Schedule, as provided by the Schedule B attached to the Rental Schedule.
Except as otherwise provided in a writing signed by Lessor and Lessee, the
Stipulated Loss Value immediately prior to the end of the Base Term for any
items of the Equipment shall be the Stipulated Loss Value throughout any Renewal
Term(s) for such items, and thereafter until such items are returned to Lessor
pursuant to the provisions of this Lease or purchased by Lessee pursuant to any
then applicable purchase option provisions of this Lease.
"SUPERIOR LIEN" shall have the meaning given to such term in Section
10.6.
"SUPERIOR MORTGAGEE" shall have the meaning given to such term in
Section 10.6.
"TAXES" shall have the meaning given to such term in Article 8.
"TRANSACTIONAL DOCUMENTS" shall have the meaning given to such term in
Article 6.
"TRANSFEREE" shall have the meaning given to such term in Section
19.1.
"UNAVOIDABLE DELAY" shall mean delay due to strikes, acts of God,
force majeure, governmental restrictions or actions (including the revocation or
refusal to grant Licenses (as defined in the Hotel Lease), or permits, where
such revocation or refusal is not due to the fault of the party whose
performance is excused by reason of such Unavoidable Delay), enemy action, civil
commotion, fire, unavoidable Casualty, condemnation or other comparable causes
beyond the reasonable control of Lessor or Lessee; provided, however, that lack
of funds shall not be deemed a cause beyond the reasonable control of a party,
unless such lack of funds is caused by the breach of the other party's
obligations under this Lease.
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<PAGE>
IN WITNESS WHEREOF, the duly authorized representatives of Lessor and
Lessee have executed this Master Agreement as of the date first above written.
LESSOR: LESSEE:
[NON-CONTROLLED SUBSIDIARY] [___________________________]
By: By:
----------------------------- -----------------------------
Title: Title:
-------------------------- --------------------------
<PAGE>
FORM OF RENTAL SCHEDULE
-----------------------
SCHEDULE NO. ______________
DATED THIS _______________ DAY OF ___________ 199_
TO MASTER FF&E LEASE AGREEMENT DATED ______________, 199_
This Rental Schedule is executed pursuant to, and incorporates by reference the
terms and conditions of, and capitalized terms not defined herein shall have the
meanings assigned to them in, the Master FF&E Lease Agreement identified above
(the "Master Agreement"; said Master Agreement and this Rental Schedule being
collectively referred to as the "Lease").
Description of Equipment: See attached Schedule A
- ------------------------
Location of Equipment:
- ---------------------
Lease Commencement Date:
- -----------------------
Lessor's Cost:
- -------------
Lease Factor:
- ------------
Base Term:
- ---------
Renewal Term:
- ------------
Basic Rent:
- ----------
Payment Dates:
- -------------
Payment Location:
- ----------------
<PAGE>
IN WITNESS WHEREOF, the duly authorized representatives of Lessor and
Lessee have executed this Rental Schedule as of the date first above written.
LESSOR: LESSEE:
[NON-CONTROLLED SUBSIDIARY] [________________________]
By: By:
----------------------------- -----------------------------
Title: Title:
-------------------------- --------------------------
<PAGE>
ATTACHMENT A
------------
Description of Equipment
------------------------
<PAGE>
Attachment B
------------
<PAGE>
ATTACHMENT C
------------
Table of Stipulated Loss Values
-------------------------------
<PAGE>
Exhibit 10.16
POOL GUARANTEE
THIS POOL GUARANTEE (this "GUARANTEE") is made as of ____________________,
199_____ by Crestline Capital Corporation, a Maryland corporation ("CCC"),
and _____________________, a Delaware corporation ("POOL PARENT") (individually
a "GUARANTOR" and collectively the "GUARANTORS"), to and for the benefit of each
of the entities listed on Schedule 1 attached hereto (as such Schedule 1 may be
---------- ----------
amended from time to time to reflect any entities that are landlords under any
Leases (as hereinafter defined) added or deleted from Schedule 3 attached
----------
hereto, collectively, the "LANDLORDS").
WHEREAS, CCC is the owner of all of the capital stock of Pool Parent; and
WHEREAS, Pool Parent is the owner, directly or through wholly owned
subsidiaries, of all of the equity interests of each of the entities listed on
Schedule 2 attached hereto (as such Schedule 2 may be amended from time to time
- ---------- ----------
to reflect any entities that are tenants under any Leases added or deleted from
Schedule 3 attached hereto, collectively, the "TENANTS"); and
- ----------
WHEREAS, the Tenants and the Landlords have executed and delivered the
leases (the "LEASES"), working capital notes, and other agreements and
instruments listed on Schedule 3 attached hereto (as such Schedule 3 may be
---------- ----------
amended from time to time to reflect any addition or deletion of Leases on
Schedule 1 to the Pooling Agreement (as hereinafter defined)) and the
Guarantors, Tenants, and Landlords have executed and delivered a Pooling and
Security Agreement of even date herewith (as such agreement may be amended from
time to time, the "POOLING AGREEMENT" and, together with the agreements and
instruments listed on Schedule 3, the "AGREEMENTS"); and
----------
WHEREAS, each Landlord is willing to enter into the Agreements to which it
is a party only upon the condition that it receive this guarantee of the
Tenants' payment and performance under all of the Agreements;
WHEREAS, the Guarantors desire to induce the Landlords to enter into the
Leases, which may be reasonably expected to benefit, directly or indirectly, the
Guarantors;
WHEREAS, certain capitalized terms used herein are defined in Section 11 of
this Guarantee.
NOW, THEREFORE, in consideration of the premises and in order to induce the
Landlords to enter into the Agreements to which they are a party, the Guarantors
jointly and severally agree as follows:
1. GUARANTEE OF OBLIGATIONS
The Guarantors unconditionally and absolutely guarantee the due and
punctual payment of rent and all other the monies due or which may become due
under the Agreements, and the due and punctual performance and observance by the
Tenants or any
<PAGE>
Guarantor of all of the other terms, covenants and conditions of the Agreements
to be performed by any Tenant, whether according to the present terms thereof,
at any earlier or accelerated date or dates as provided therein, or pursuant to
any extension of time or to any change or changes in the terms, covenants and
conditions thereof now or at any time hereafter made or granted, and including
obligations that, but for any automatic stay under Section 362(a) of the
Bankruptcy Code (11 U.S.C. (S)101 et seq.) (or other successor provision), would
become due. All payments due hereunder shall be made in accordance with the
procedures set forth in the Pooling Agreement, and payment in accordance with
such procedures shall be deemed to satisfy the obligations of the Guarantors
hereunder.
2. LIMIT OF CCC'S LIABILITY
Notwithstanding any provisions of this Guarantee to the contrary (except as
specifically stated), the obligations and liabilities of CCC under this
Guarantee shall at all times be subject to the CCC Limit of Liability; provided
that the CCC Limit of Liability shall not limit the obligation of CCC (i) to
guarantee repayment of funds misappropriated or wrongfully applied by Pool
Parent or any Tenant or Tenant Member (as defined in the Pooling Agreement) in
violation of the provisions of the Pooling Agreement, but only to the extent of
the funds misappropriated or wrongfully applied, or (ii) to pay for any losses
of Landlords resulting from the fraud of Pool Parent or any Tenant or Tenant
Member, or (iii) to discharge any liens on any property of Pool Parent or any
Tenant existing in violation of the obligations of Pool Parent or any Tenant
under the Pooling Agreement or any applicable Lease (the obligations described
in clauses (i), (ii), and (iii), collectively, the "SPECIAL GUARANTEE
OBLIGATIONS").
3. COLLATERAL
The obligations of Pool Parent hereunder are secured by the pledge of
certain accounts and other collateral pursuant to the Pooling Agreement.
4. CERTAIN WAIVERS
The Guarantors waive diligence, presentment, protest, notice of dishonor,
demand, extension of time for payment, notice of non-payment at maturity and
indulgences and notices of every kind, and consent to any and all forbearances
and extensions of time of payment of any monies due or which may become due
under the Agreements, and to any and all changes in terms, covenants and
conditions of the Agreements; it being the intention hereof that each Guarantor
shall remain liable as a principal until the full amount of all sums payable
under the Agreements shall have been fully paid, the terms, covenants and
conditions of the Agreements shall have been performed and observed by the
Tenants and each Guarantor and all other amounts payable under this Guarantee
shall have been fully paid, notwithstanding any act, omission or thing which
might otherwise operate as a legal or equitable discharge of the Guarantors, or
any one or more of them.
5. OBLIGATIONS UNCONDITIONAL
(a) The Guarantors agree that the obligation of each Guarantor as a
Guarantor shall not be impaired, modified, changed, released or limited in any
manner
2
<PAGE>
whatsoever by any impairment, modification, change, release or limitation
of the liability of any one or more of the Tenants or their respective estates
in bankruptcy, resulting from the operation of any present or future provision
of the bankruptcy laws or other similar statute, or from the decision of any
court.
(b) The Guarantors agree that any one or more of the Landlords shall have
the full right, in its or their sole discretion and without any notice to or
consent from the Guarantors, from time to time and at any time and without
affecting, impairing or discharging, in whole or in part, the liability of the
Guarantors hereunder: (i) to make any change, amendment or modification
whatsoever of any of the terms or conditions of any one or more of the
Agreements; (ii) to extend, in whole or in part, by renewal or otherwise, and on
one or any number of occasions, the time for the payment of any amount pursuant
to any one or more of the Agreements or for the performance of any term or
condition of any one or more of the Agreements; (iii) to settle, compromise,
release, substitute, surrender, modify or impair, to enforce and exercise, or to
fail or refuse to enforce or exercise, any claims, rights or remedies, of any
kind or nature, which any one or more of the Landlords may at any time have
against any one or more of the Tenants or any Guarantor, or with respect to any
security interest of any kind held by any one or more of the Landlords at any
time, whether under any one or more of the Agreements or otherwise; (iv) to
release, substitute, surrender or enforce any security interest of any kind held
by any one or more of the Landlords at any time, and to collect and retain or
liquidate any collateral subject to such security interest, whether under this
Guarantee or otherwise; and (v) to apply any sums by whomsoever paid or
howsoever realized to any liability or liabilities of any one or more of the
Tenants to any one or more of the Landlords regardless of what liabilities of
any one or more of the Tenants remain unpaid.
6. OBLIGATIONS INDEPENDENT
The Guarantors agree that the Guarantors' obligations hereunder are
irrevocable, are joint and several (except as the obligations of CCC may be
limited under Section 2), and are independent of the obligations of any one or
more of the Tenants; that a separate action or actions may be brought and
prosecuted against the Guarantors or any one or more of them regardless of
whether any action is brought against any one or more of the Tenants (or against
any other Guarantor) or whether any one or more of the Tenants (or any other
Guarantor) is joined in any such action or actions; and that the Guarantors
waive the benefit of any statute of limitations affecting their liability
hereunder or the enforcement hereof.
7. NO SUBROGATION
The Guarantors agree that the Guarantors shall have no right of subrogation
whatever with respect to the payment and performance obligations of the Tenants
under the Agreements or to any collateral securing such payment and performance
obligations unless and until such payment and performance obligations have been
paid and performed in full.
3
<PAGE>
8. REMEDIES
(a) The Guarantors agree that this Guarantee is a continuing guaranty and
that all liabilities which are guaranteed by the Guarantors hereunder shall be
conclusively presumed to have been created in reliance hereon. No failure or
delay on the part of any Landlord in exercising any right, power or privilege
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein expressly specified are cumulative and not
exclusive of any rights or remedies which any Landlord would otherwise have. No
notice to or demand on any one or more of the Guarantors in any case shall
entitle any one or more of the Guarantors to any other further notice or demand
in similar or other circumstances or constitute a waiver of the rights of any
Landlord to any other or further action in any circumstances without notice or
demand.
(b) The Guarantors agree that in the event that any one or more of the
Landlords retain or engage an attorney or attorneys to enforce this Guarantee
and one or more of the Landlords prevail in such enforcement action, the
Guarantors will reimburse the Landlords for all expenses incurred, including
reasonable attorneys' fees and disbursements, without regard to the CCC Limit of
Liability set forth in Section 2. In the event that the Guarantors prevail in
any such enforcement action, the Landlords bringing such action will reimburse
the Guarantors for all expenses incurred, including reasonable attorneys' fees
and disbursements. If the Guarantors commence an action to enforce their rights
hereunder, the parties prevailing in such action shall be reimbursed by the
parties losing such action for all expenses incurred, including reasonable
attorneys' fees and disbursements, without regard to the CCC Limit of Liability.
9. BENEFIT OF GUARANTEE
The Guarantors agree that this Guarantee shall inure to the benefit of and
may be enforced by each of the Landlords and its respective successors,
transferees and assigns, and shall be binding upon and enforceable against the
Guarantors and the Guarantors' successors or assigns. Without limiting the
generality of the foregoing, the Guarantors further agree that each Landlord may
assign or otherwise transfer its rights under the Agreements or any interest in
any of the foregoing to any person or entity (including any lender or other
creditor of such Landlord), and such other person or entity shall thereupon
become vested with all of the rights in respect thereof granted to the Landlords
herein or otherwise; provided that no Landlord shall be permitted to assign its
rights hereunder to any Person to which such Landlord sells or conveys any hotel
subject to a Lease, other than a Subsidiary (as defined in the Pooling
Agreement) of the Landlord Representative.
10. TERMINATION OF GUARANTEE; REINSTATEMENT
(a) At any time when the CCC Limit of Liability shall be equal to zero as
of the most recent Distribution Date (as defined in the Pooling Agreement),
after giving effect to any payments of Rent Shortfalls on such date, Pool Parent
shall be entitled to cause this Guarantee and the Pooling Agreement to terminate
(except to the extent provided in paragraph (b) below) by giving Landlord
Representative (as defined in the Pooling Agreement) notice of termination, in
which event the following provisions will apply:
4
<PAGE>
(i) If (x) the notice is given after the end of a Fiscal Year, (y) the
CCC Limit of Liability as of the end of the Fiscal Year immediately preceding
the date of such notice was zero, and (z) either the notice is given prior to
the Distribution Date with respect to the first Accounting Period of a Fiscal
Year or the Cumulative Guarantee Payments as of the end of the Fiscal Year
immediately preceding the date of such notice are greater than or equal to the
Cumulative Guarantee Ceiling for the Fiscal Year in which such notice is
given, this Guarantee will terminate (except to the extent provided in
paragraph (b) below) effective on the date 6 months after the date of such
notice, and the provisions of paragraph (iii) below shall apply during such 6-
month period.
(ii) If the conditions set forth in paragraph (i) above do not apply,
then the following provisions will be applicable.
(A) Pool Parent shall provide to Landlord Representative, together
with the termination notice, a statement setting forth a calculation of
the Allowable Projected Year-End Guarantee Payments as of the end of the
then current Fiscal Year and the Allowable Projected Annual Operating
Deficit for each Lease as to which a Guarantee Payment has been made in
such Fiscal Year.
(B) If the statement provided by the Pool Parent under paragraph (A)
shows that the Allowable Projected Year-End Guarantee Payments as of the
end of the then current Fiscal Year are greater than or equal to the
Cumulative Guarantee Ceiling for such Fiscal Year, and the Landlord
Representative does not dispute such calculation, then the termination
will be effective six months after the date of such notice, and the
provisions of paragraph (iii) below shall apply during such 6-month
period.
(C) If the statement provided by the Pool Parent does not show that
the Allowable Projected Year-End Guarantee Payments as of the end of the
then current Fiscal Year are greater than or equal to the Cumulative
Guarantee Ceiling for such Fiscal Year, or the Landlord Representative
informs the Pool Parent that it reasonably believes that the calculations
on the statement incorrectly show that the Allowable Projected Year-End
Guarantee Payments as of the end of the then current Fiscal Year are
greater than or equal to the Cumulative Guarantee Ceiling for such Fiscal
Year, then the notice will not be given effect at such time, and the
provisions of paragraph (D) will apply.
(D) If the initial statement does not show that the Allowable
Projected Year-End Guarantee Payments as of the end of the then current
Fiscal Year are greater than or equal to the Cumulative Guarantee Ceiling
for such Fiscal Year or the Landlord Representative reasonably disputes
the conclusion set forth in the statement, then Pool Parent may provide
additional statements with respect to subsequent Accounting Periods in
such Fiscal Year, setting forth the calculations in the manner set forth
in paragraph (A). If a subsequent statement shows that the Allowable
Projected Year-End Guarantee Payments as of the end of the then current
Fiscal Year are greater than or equal to the Cumulative Guarantee Ceiling
for such Fiscal Year, and the Landlord
5
<PAGE>
Representative does not dispute such calculation, then the termination
will be effective six months after the end of the applicable Accounting
Period, and the provisions of paragraph (iii) below shall apply during
such 6-month period.
(E) If, as of the end of the Fiscal Year in which the notice of
termination is given, the CCC Limit of Liability, based on actual
results, is zero, then the termination will be effective six months after
the end of such Fiscal Year, and the provisions of paragraph (iii) below
shall apply during such 6-month period.
(F) If, as of the end of the Fiscal Year in which the notice of
termination is given, the CCC Limit of Liability, based on actual
results, is greater than zero, then the notice of termination will be
deemed to be void and of no further effect.
(G) If (i) a notice of termination becomes effective pursuant to
paragraph (D) or (E) above, (ii) CCC and the Pool Parent made additional
Guarantee Payments after the date of the initial notice and (iii) the CCC
Limit of Liability as of the end of the Fiscal Year (disregarding the
floor of zero) was less than the CCC Limit of Liability computed
(disregarding the floor of zero) as of the Distribution Date on which the
notice was initially given or immediately preceding the date of such
notice, then, promptly after the date on which the relevant financial
information becomes available that permits such determination, the
Landlord Representative shall reimburse Pool Parent for the lesser of the
amount of such additional Guarantee Payments after the date of the
initial notice and the amount by which the CCC Limit of Liability as of
the end of such Fiscal Year was less than the CCC Limit of Liability
computed as of the time of such notice.
(iii) During the six-month period after a notice of termination
becomes effective pursuant to paragraph (i), (ii)(B), (ii)(D), or (ii)(E)
above, CCC shall have no obligations hereunder other than with respect to
Special Guarantee Obligations, which shall survive termination of this
Guarantee, and the obligations of Pool Parent under this Guarantee shall
remain in full force and effect, provided that the aggregate liability of Pool
Parent for payment of Rent Shortfalls during such six-month period shall not
exceed the aggregate amount of Distributable Cash with respect to all Leases
during such period.
(b) Upon expiration of the six-month period specified in paragraph (iii),
neither CCC nor Pool Parent shall have any obligations hereunder other than with
respect to Special Guarantee Obligations which shall survive such termination.
(c) In the event that, on or before the 91st day after the expiration of
the six-month period specified in paragraph (a)(iii) above, any Tenant or Pool
Parent shall have become the debtor in any voluntary or involuntary bankruptcy
proceeding, the Guarantee shall not be deemed to terminate as a result of such
notice and shall be reinstated.
6
<PAGE>
11. CERTAIN DEFINITIONS
As used in this Guarantee, the following capitalized terms have the
meanings set forth below:
"ANNUAL OPERATING DEFICIT" shall mean, with respect to any hotel for each
full Fiscal Year in the Measurement Period (treating the period from the date of
this Guarantee to the end of the Fiscal Year ending on or about December 31,
1999 as one full Fiscal Year), an amount equal to the excess (if any) of Tenant
Operating Expenses for such Fiscal Year over Gross Revenues for such Fiscal
Year. If Gross Revenues for such Fiscal Year are greater than or equal to
Tenant Operating Expenses for such Fiscal Year with respect to the hotel, then
there shall be no Annual Operating Deficit for such period with respect to such
hotel.
"ALLOWABLE PROJECTED ANNUAL OPERATING DEFICIT" means, for any Lease with
respect to the Fiscal Year in which the date of determination occurs, an amount
equal to (i) the projected Annual Operating Deficit, if any, for such Lease as
of the end of such Fiscal Year, based on the actual Gross Revenues and Tenant
Operating Expenses through the end of the most recent Accounting Period and the
projected Gross Revenues and the projected Tenant Operating Expenses for the
remaining Accounting Periods in such Fiscal Year as set forth in the most recent
projected operating results prepared by the applicable hotel manager, less (ii)
an amount equal to 1% of the amount of Rent under such Lease for the remaining
Accounting Periods in such Fiscal Year as reasonably projected by the Tenant on
the basis of the most recent projected operating results prepared by the
applicable hotel manager.
"ALLOWABLE PROJECTED YEAR-END GUARANTEE PAYMENTS" means, as of any date of
determination, an amount equal to the sum of (i) the Cumulative Guarantee
Payments as of the end of the prior Fiscal Year plus (ii) with respect to each
Lease as to which any Guarantee Payment has been made in the then current Fiscal
Year, the lesser of (x) the aggregate amount of such Guarantee Payments or (y)
the Allowable Projected Annual Operating Deficit (as defined below) for such
Lease for such Fiscal Year.
"CCC LIMIT OF LIABILITY" at any time during a Fiscal Year shall be an
amount (not less than zero) equal to the excess, if any, of (i) the Cumulative
Guarantee Ceiling for such Fiscal Year over (ii) the Cumulative Guarantee
----
Payments (as hereinafter defined) as of the date of determination.
"CUMULATIVE GUARANTEE CEILING" means, (i) for Fiscal Year 1999,
$_________________/1/ and (ii) for any subsequent Fiscal Year, ten percent (10%)
of the greater of (x) the aggregate Rent, prior to any FF&E Adjustments and
excluding Additional Charges (as all such terms are defined in the Leases),
payable with respect to the previous Fiscal Year pursuant to all of the Leases
and (y) the aggregate actual Rent (prior to FF&E Adjustments and excluding
Additional Charges) payable with respect to Fiscal Year 1999 pursuant to all of
the Leases.
- --------------------------------
/1/ An agreed estimate of 10% of the aggregate amount of Rent (prior to FF&E
Adjustments and excluding Additional Charges) payable under all Leases listed on
Schedule 3 for Fiscal Year 1999.
- ----------
7
<PAGE>
"CUMULATIVE GUARANTEE PAYMENTS" shall mean, with respect to any date of
determination, the lesser of (i) the aggregate amount of Annual Operating
Deficits and Current Year Operating Deficits with respect to all Leases during
the applicable Measurement Period and (ii) the aggregate amount of Guarantee
Payments made by Pool Parent and CCC during the applicable Measurement Period.
"CURRENT YEAR OPERATING DEFICIT" shall mean, with respect to any hotel as
of any date of determination, an amount equal to the excess (if any) of Tenant
Operating Expenses for the period from the beginning of the Fiscal Year in which
the most recently completed Accounting Period falls to the end of the most
recently completed Accounting Period over Gross Revenues for such period. If
Gross Revenues for such period are greater than or equal to Tenant Operating
Expenses for such period with respect to the hotel, then there shall be no
Current Year Operating Deficit for such period with respect to such hotel.
"GROSS REVENUES" shall have the meaning ascribed thereto for each hotel in
the applicable Lease.
"GUARANTEE PAYMENT" shall mean a payment by Pool Parent or CCC in respect
of a Rent Shortfall (as defined in the Pooling Agreement).
"MEASUREMENT PERIOD" means, as of any date of determination, the period
beginning on the first day of the Accounting Period in which the date of this
Guarantee occurs and ending on the last day of the Accounting Period ending
immediately preceding such date of determination.
"TENANT OPERATING EXPENSES" shall mean, with respect to any hotel, all
expenses incurred by Tenant or the applicable hotel manager on behalf of Tenant
in connection with the operation of such hotel, including Rent and base and
incentive management fees payable by Tenant, all determined in accordance with
GAAP; provided that Tenant Operating Expenses shall not include (i) any amounts
that are Landlord Obligations under the applicable Lease, (ii) any debt service
payable by Tenant, or (iii) any administrative or overhead expenses of Tenant
(other than such expenses reimbursable to the applicable hotel manager).
12. MISCELLANEOUS
(a) This Guarantee, 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 Maryland (but not including the choice of law rules
thereof).
(b) The Guarantors agree that service of process may be made upon any one
or more of them by registered mail (return receipt requested) directed to the
applicable Guarantors at their respective addresses designated for notice on the
signature page hereof, and service so made upon a Guarantor shall be deemed to
be completed upon receipt by such applicable Guarantor. Nothing in this Section
12(b) shall affect the right of any Landlord to serve legal process in any other
manner permitted by law.
(c) To the maximum extent permitted by law, the Guarantors hereby waive any
right that they may have to a trial by jury of any dispute (whether a claim in
tort,
8
<PAGE>
contract, equity or otherwise) arising under or related to this Guarantee or any
related matters, and agree that any such dispute shall be tried before a judge
sitting without a jury.
(d) For all purposes of this Guarantee, except as otherwise expressly
provided or unless the context otherwise requires, (i) all accounting terms not
otherwise defined herein shall have the meanings assigned to them in accordance
with generally accepted accounting principles consistently applied, (ii) all
references in this Guarantee to designated "Sections" and other subdivisions are
to the designated Sections and other subdivisions of this Guarantee, (iii) the
term "including" shall have the same meaning as "including, without limitation,"
and (v) the words "herein," "hereof," "hereunder" and other words of similar
import refer to this Guarantee as a whole and not to any particular Section or
other subdivision.
(e) This Guarantee 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.
9
<PAGE>
IN WITNESS WHEREOF, the Guarantors have executed this Guarantee as of the
day and year first above written.
CRESTLINE CAPITAL CORPORATION
By:________________________________
Bruce D. Wardinski
President and CEO
Address for Notice:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
[POOL PARENT]
By:________________________________
James L. Francis
President
Address for Notice:
c/o Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
HOST MARRIOTT, L.P.
By: Host Marriott Corporation, its general
partner
By:________________________________
Name:
Title:
Address for Notice:
Host Marriott, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
10
<PAGE>
Schedule 1
----------
to
--
Guarantee
---------
LIST OF LANDLORDS
[TO BE PROVIDED]
11
<PAGE>
Schedule 2
----------
to
--
Guarantee
---------
LIST OF TENANTS
[TO BE PROVIDED]
12
<PAGE>
Schedule 3
----------
to
--
Guarantee
---------
LIST OF AGREEMENTS
[List will include the following agreements in connection with each lease
pool: all Leases, all working capital notes, and all owner's agreements]
13
<PAGE>
Exhibit 10.17
POOLING AND SECURITY AGREEMENT
BY AND AMONG
CRESTLINE CAPITAL CORPORATION,
[POOL PARENT], AND
THE PERSONS NAMED AS TENANTS
AND TENANT MEMBERS HEREIN
AND
HOST MARRIOTT, L.P.
AND THE PERSONS NAMED AS LANDLORDS HEREIN
DATED AS OF _____________, 199___
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. CERTAIN DEFINITIONS................................................................... 1
2. CASH COLLATERAL ARRANGEMENTS.......................................................... 11
2.1 Security Agreement Relating to Account Collateral................................. 11
2.2 Establishment, Maintenance and Funding of Pool Cash Collateral Account............ 13
2.3 Disbursements from Pool Cash Collateral Account................................... 14
3. ADDITION OF LEASES.................................................................... 15
3.1 Addition of Leases, Tenants, or Tenant Members.................................... 15
4. NEGATIVE COVENANTS APPLICABLE TO POOL PARENT.......................................... 16
4.1 Indebtedness...................................................................... 16
4.2 Liens............................................................................. 16
4.3 Investments....................................................................... 16
4.4 Transfers of Interests in Tenants and Tenant Members.............................. 16
4.5 Amendment of Organizational Documents............................................. 17
4.6 Misapplication of Funds........................................................... 17
4.7 Place of Business................................................................. 17
5. SPE COVENANTS......................................................................... 17
5.1 Business of Pool Parent........................................................... 17
5.2 Separate Existence................................................................ 17
5.3 Independent Director.............................................................. 18
5.4 Fundamental Changes............................................................... 18
6. EVENTS OF DEFAULT; REMEDIES........................................................... 18
6.1 Events of Default................................................................. 18
6.2 Remedies in Case of an Event of Default........................................... 19
6.3 Remedies, Etc. Cumulative......................................................... 21
6.4 Indemnity......................................................................... 21
7. MISCELLANEOUS PROVISIONS.............................................................. 22
7.1 Termination....................................................................... 22
7.2 Financial Reporting............................................................... 22
7.3 Notices........................................................................... 23
7.4 Waiver; Amendment................................................................. 24
7.5 Benefit........................................................................... 24
7.6 Governing Law..................................................................... 24
7.7 Headings.......................................................................... 25
7.8 Counterparts...................................................................... 25
7.9 Assignment........................................................................ 25
7.10 Waiver of Jury Trial............................................................. 25
7.11 Delay Not a Waiver............................................................... 25
7.12 Severability..................................................................... 25
7.13 Preferences...................................................................... 26
7.14 Waiver of Notice................................................................. 26
7.15 Remedies of Pool Parent, CCC, or Tenants......................................... 26
</TABLE>
-i-
<PAGE>
SCHEDULES
Schedule 1 Leases, Tenants, Landlords, and Hotels
Schedule 2 Tenant Members
-ii-
<PAGE>
POOLING AND SECURITY AGREEMENT
THIS POOLING AND SECURITY AGREEMENT (this "AGREEMENT") is made and entered
into as of December [___], 1998 by and among Crestline Capital Corporation, a
Maryland corporation ("CCC"), [________________], a Delaware corporation ("POOL
PARENT"), the Tenants party hereto named on Schedule 1 hereto from time to time,
----------
and the Tenant Members party hereto named on Schedule 2 hereto from time to time
----------
(collectively, the "CCC ENTITIES") for the benefit of (i) the Landlords named on
Schedule 1 hereto from time to time, (ii) Host Marriott, L.P., a Delaware
- ----------
limited partnership, in its capacity as Landlord Representative hereunder, and
(iii) __________, as collateral agent for the benefit of the Landlords (together
with its permitted successors and assigns, the "COLLATERAL AGENT").
RECITALS
A. The Tenants and Landlords are party to leases (the "LEASES") of the
respective hotels (the "HOTELS") set forth on Schedule 1 hereto.
----------
B. Pool Parent, the Tenants, and the Tenant Members are direct or
indirect wholly owned Subsidiaries of CCC. The Tenants and the Tenant Members
are direct or indirect wholly owned Subsidiaries of Pool Parent. The Tenant
Members are the sole equity members of the respective Tenants set forth on
Schedule 2 attached hereto.
- ----------
C. In order to induce the Landlords to enter into the Leases, CCC and
Pool Parent (together, the "GUARANTORS") have executed and delivered a Pool
Guarantee, of even date herewith (the "GUARANTEE"), pursuant to which the
Guarantors have guaranteed certain obligations of Tenants under the Leases for
the benefit of the respective Landlords, and the CCC Entities are executing and
delivering this Agreement.
NOW, THEREFORE, in consideration of the covenants contained in this
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. CERTAIN 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, (iv) the term "including" shall have the same meaning as
"including, without limitation," and (v) the words "herein," "hereof,"
<PAGE>
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular Article, Section or other subdivision.
"ACCOUNT COLLATERAL" has the meaning ascribed to such term in Section
2.1(a).
"ACCOUNTING PERIOD" means (i) for so long as CCC uses a fiscal year
consisting of 52/53 weeks ending on the Friday closest to December 31 each year,
each of the four (4) week accounting periods which are used in CCC's accounting
system, except that an Accounting Period may occasionally contain five (5) weeks
when necessary to conform CCC's accounting system to the calendar, and (ii) if
CCC uses a fiscal year based on calendar quarters, each calendar month.
"AFFILIATE" means, with respect to any Person, any other Person directly or
indirectly through one or more intermediaries controlling, controlled by or
under common control with the subject Person. 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. Notwithstanding the foregoing, Marriott
International, Inc. and its Subsidiaries shall not be deemed to be Affiliates of
CCC, Pool Parent, Landlord Representative, any Landlord or any Tenant.
"BUSINESS DAY" means any day other than Saturday, Sunday, or any other day
on which banking institutions in the State of Maryland are authorized by law or
executive action to close.
"CAPITALIZED INTEREST" shall mean interest that is capitalized and is not
counted as interest expense in accordance with GAAP.
"CAPITALIZED LEASE OBLIGATIONS" of any Person shall mean all rental
obligations which, under GAAP, are or will be required to be capitalized on the
books of such Person, in each case taken at the amount thereof accounted for as
indebtedness in accordance with such principles.
"CASH EXPENSES" means, with respect to any Tenant or Tenant Member, all
expenses incurred by such Person and payable in cash, excluding (i) expenses of
a Tenant paid by a manager on behalf of such Tenant pursuant to a hotel
management agreement with respect to a hotel that is subject to a Lease, (ii)
expenses relating to the performance of asset management services for the hotels
subject to the Leases, including salaries or other employee costs of employees
relating to the performance of asset management services, fees paid to
independent contractors for provision of such services, or amounts paid to
Affiliates for provision of such services, and (iii) expense reimbursements,
overhead allocations and any other amount paid to an Affiliate of such Person.
"CCC" means Crestline Capital Corporation, and its successors and permitted
assigns.
-2-
<PAGE>
"CCC CONSOLIDATED FINANCIAL STATEMENTS" shall mean for any Fiscal Year or
quarter thereof, consolidated statements of operations, retained earnings and
cash flow for such period and for the period from the beginning of the
respective Fiscal Year to the end of such period and the related balance sheet
as at the end of such period, together with the notes to any such statement, all
in such detail as may be required by the Securities and Exchange Commission with
respect to filings made by Landlord Representative or Host REIT and, after the
first full Fiscal Year of Pool Parent, setting forth in comparative form the
corresponding figures for the corresponding period in the preceding Fiscal Year,
and prepared in accordance with GAAP and (in the case of annual financial
statements) audited by a "Big Five" firm of independent certified public
accountants or such other firm of independent certified public accountants as
may be reasonably approved by Landlord Representative. CCC Consolidated
Financial Statements shall be prepared on the basis of the Fiscal Year or
quarter thereof, as applicable.
"CCC LIMIT OF LIABILITY" means, with respect to the Guarantee or any Other
Guarantee, the maximum liability of CCC under such Guarantee or Other Guarantee
for obligations under the Leases or Other Leases, as the case may be, other than
liability with respect to fraud or misapplication or misappropriation of funds
or the existence of liens in violation of the Pooling Agreement or any Lease.
"CHANGE OF CONTROL" means the (i) acquisition (after a registered offering
of shares or otherwise) by any Person, or two or more Persons acting in concert,
in a single or series of transactions (whether or not related), of:
(a) with respect to Pool Parent, beneficial ownership (within the
meaning of Rule 13d-3 of the SEC) of, or rights (including conversion
rights), options or warrants to acquire (whether absolute or
conditional), all or any portion of the outstanding voting or economic
interests in Pool Parent (other than voting rights held by an Independent
Member of Tenant as set forth in the Limited Liability Company Operating
Agreement of Tenant as in effect on the date hereof); or
(b) with respect to CCC, beneficial ownership of, or rights (including
conversion rights), options or warrants to acquire, thirty-five percent
(35%) or more of the outstanding shares of voting stock of CCC;
or (ii) the merger or consolidation of Pool Parent or CCC with or into
any other Person if, in the case of CCC, immediately following the effectiveness
of such merger or consolidation, more than thirty-five percent (35%) of the
beneficial ownership of the outstanding voting shares of the surviving entity of
such merger or consolidation (including for such purpose in both the numerator
and the denominator, shares of voting stock issuable upon the exercise of then
outstanding rights (including conversion rights), options or warrants) is held
by one or more Persons who were not holders of the outstanding voting shares of
CCC (or outstanding rights (including conversion rights), options or warrants to
acquire voting shares of CCC) immediately prior to the effectiveness of such
merger or consolidation; or
(iii) any one or a series of related sales or conveyances to any Person of
all or substantially all of the assets of Pool Parent or CCC; or
-3-
<PAGE>
(iv) a change in the majority of the board of directors or similar managing
body of CCC during the longer of (A) any twelve (12) month period and (B) the
period during which two consecutive annual meetings of the equity holders of CCC
at which directors or similar managers are elected have been held;
provided, however, that the acquisition by any one or more wholly owned
direct or indirect Subsidiaries of CCC of beneficial ownership of, or rights,
options or warrants to acquire, all or any portion of Pool Parent shall not be a
"Change of Control" hereunder.
"COLLATERAL AGENT" means [__________________], or its successors and
assigns.
"CONSOLIDATED COVERAGE RATIO" of any Person means, for any period, the
ratio of (x) Consolidated EBITDA of such Person for such period to (y) the sum
of (i) Consolidated Interest Expense of such Person for such period, and (ii)
the amount of all scheduled principal amortization payments (other than balloon
payments at maturity of such Indebtedness) on all Indebtedness of such Person
and its Subsidiaries made during such period.
"CONSOLIDATED EBITDA" of any Person shall mean, for any period, the
Consolidated Net Income of such Person for such period adjusted (A) to add
thereto (to the extent deducted in determining Consolidated Net Income for such
period), without duplication, the sum of the amounts for such period of (i)
Consolidated Interest Expense, (ii) provisions for taxes based on income, (iii)
depreciation and amortization expense (provided that the depreciation and
amortization expense of a non-wholly owned Subsidiary shall be included only to
the extent of the equity interest of such Person in such non-wholly owned
Subsidiary), (iv) any other noncash items reducing Consolidated Net Income of
such Person for such period (except to the extent that such noncash items relate
to the write-off or write-down of any item included in Consolidated Net Income
in a prior period) and (v) any cash receipts of such Person or a Subsidiary
thereof during such period that represent items included in Consolidated Net
Income of such Person for a prior period which were excluded from Consolidated
EBITDA in such prior period by virtue of clause (B) of this definition, and (B)
to subtract therefrom, without duplication, the sum of the amounts for such
period of (i) all noncash items increasing Consolidated Net Income of such
Person for such period and (ii) any cash expenditures of such Person and its
Subsidiaries during such period to the extent that such cash expenditures (x)
did not reduce Consolidated Net Income of such Person for such period and (y)
were applied against reserves or accruals that constituted noncash items
reducing Consolidated Net Income of such Person when reserved or accrued for in
a prior period; provided, that Consolidated EBITDA shall be determined without
giving effect to any extraordinary gains or losses (including any taxes
attributable to any such extraordinary gains or losses) or gains or losses from
sales of assets other than from sales of inventory in the ordinary course of
business.
"CONSOLIDATED INTEREST EXPENSE" of any Person shall mean, for any period,
the total consolidated cash interest expense of such Person and its Subsidiaries
for such period (calculated without regard to any limitations on the payment
thereof) plus, without duplication, that portion of the Capitalized Lease
Obligations of such Person and its Subsidiaries representing the interest factor
for such period, but excluding (i) any Capitalized Lease Obligations that relate
to leases of furniture, fixtures and equipment,
-4-
<PAGE>
(ii) the interest factor (if any) in such period under any leases of furniture,
fixtures and equipment or any Lease or Other Lease with respect to the
furniture, fixtures and equipment subject to such Lease or Other Lease, and
(iii) any note issued by a tenant to a landlord pursuant to a Lease or Other
Lease in connection with the purchase of working capital by such tenant.
Notwithstanding anything to the contrary contained in the requirements of GAAP,
the amount of Capitalized Interest incurred during any period shall be added as
a component of Consolidated Interest Expense.
"CONSOLIDATED NET INCOME" of any Person shall mean, for any period, the net
income (or loss) of such Person and its Subsidiaries for such period, determined
on a consolidated basis; provided, that (i) net income (or loss) of (x) any
other Person that is accounted for by such specified Person by the equity method
of accounting or (y) any Subsidiary of such Person that is restricted from
declaring or paying dividends or other distributions, directly or indirectly, by
operation of the terms of its charter, any applicable agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation or otherwise
shall (in each case) be included only to the extent of the amount of cash
dividends or distributions paid to the specified Person or a wholly owned
Subsidiary of such Person, (ii) the net income (or loss) of any other Person
acquired by such specified Person or a Subsidiary of such Person in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iii) to the extent Consolidated Net Income reflects amounts
attributable to minority interests in Subsidiaries that are not wholly owned
Subsidiaries of such Person, Consolidated Net Income shall be reduced by the
amounts attributable to such minority interests, and (iv) any income, rental
credit or expense associated with leases of Excess FF&E by any Tenant or any
Other Tenant shall not be taken into account in determining Consolidated Net
Income.
"DISTRIBUTABLE CASH" means, with respect to a Tenant as of any Rent Payment
Date, an amount of cash equal to (i) the aggregate amount of cash in all lockbox
accounts of such Tenant maintained pursuant to the applicable Lease as of such
date, immediately after payment of all rent owing under the Leases to which such
Tenant is party less (ii) the amount of Cash Expenses of such Tenant then
----
payable less (y) the amount of available cash reasonably required to be reserved
----
for payment of future Cash Expenses for which such Tenant reasonably believes,
after taking into account existing cash reserves of such Tenant, that it will
not have adequate cash after payment of rent in future Accounting Periods.
"Distributable Cash" means, with respect to a Tenant Member as of any Rent
Payment Date, an amount of cash equal to (x) the aggregate amount of cash
distributed to such Tenant Member by the applicable Tenant on such date, less
----
(y) the amount of Cash Expenses of such Tenant Member then payable, less (z) the
----
amount of available cash reasonably required to be reserved for payment of
future Cash Expenses for which such Tenant Member reasonably believes, after
taking into account existing cash reserves of such Tenant Member, that it will
not have adequate cash.
"DISTRIBUTION DATE" means, with respect to any Accounting Period, the first
Business Day after the latest date on which payment of regularly scheduled Rent
is due under any Lease.
"EVENT OF DEFAULT" has the meaning ascribed to such term in Section 6.1.
-5-
<PAGE>
"EXCESS FF&E" means furniture, fixtures or equipment that any Tenant or
Other Tenant is required to lease from a Person other than a Landlord or the
landlord under an Other Lease, as the case may be, and receives a rental credit
in respect of such lease, pursuant to the terms of any Lease or Other Lease.
"FINANCIAL OFFICER'S CERTIFICATE" shall mean a certificate of the chief
financial officer, controller, chief accounting officer or treasurer of CCC,
accompanying the financial statements required to be delivered by CCC pursuant
to Section 7.2, in which such officer shall certify (a) that such statements
have been properly prepared in accordance with GAAP and fairly present, in all
material respects, the financial condition of CCC as of the dates thereof, and
the results of its operations for the periods covered thereby (except that, in
the case of financial statements delivered pursuant to clause Section 7.2(b)(i),
the certificate shall state the extent to which such financial statements are
not in accordance with GAAP), (b) that such officer has no knowledge of any
Payment Default or Event of Default hereunder, and (c) the then-current Tangible
Net Worth, Consolidated Coverage Ratio, Minimum Net Worth, and the CCC Limit of
Liability under the Guarantee and each Other Guarantee.
"FISCAL YEAR" means the fiscal year of CCC.
"GAAP" means generally accepted accounting principles consistently applied.
"GUARANTEE" means that certain Pool Guarantee, of even date herewith,
entered into by CCC and Pool Parent for the benefit of the Landlords, as it may
be amended from time to time.
"GUARANTEED OBLIGATIONS" means any obligation of a Tenant or a Tenant
Member that is guaranteed pursuant to the Guarantee.
"HOST REIT" shall mean Host Marriott Corporation, a Maryland corporation,
or its successors or assigns.
"INDEBTEDNESS" shall mean all obligations, contingent or otherwise, which
in accordance with GAAP should be reflected on the obligor's balance sheet as
debt.
"INDEPENDENT DIRECTOR" means a Person who is not, and has not within the
past five (5) years been, (i) an officer, director, employee, partner, member,
manager, stockholder or beneficial-interest holder of Pool Parent; (ii) an
officer, director, employee, partner, member, beneficial-interest holder, or
stockholder of any "Affiliate" (as defined below) of Pool Parent; or (iii) a
spouse, parent, sibling, or child of any Person described in (i) or (ii) of this
section; provided, however, that a Person shall not be deemed to be a director
or member of an Affiliate solely by reason of such Person being a director,
manager, or member of a single-purpose entity that would otherwise be deemed to
be an Affiliate because they are under common control. For the purpose of this
definition alone, "Affiliate" means any Person (x) which owns beneficially,
directly or indirectly, more than ten percent (10%) of the outstanding equity
interest in Pool Parent or which is otherwise in control of Pool Parent; (y) of
which more than ten percent (10%) of the outstanding voting securities are owned
beneficially, directly or indirectly, by any Person described in clause (x)
above; or (z) which is controlled by, or under common control with, any Person
or entity
-6-
<PAGE>
described in clause (x) above; the terms "control" and "controlled by" shall
have the meanings assigned to them in Rule 405 under the Securities Act of 1933.
"INTANGIBLE ASSET" shall mean, with respect to any Person, a long-lived
asset that is useful in the operations of such Person, that is not directly used
in revenue generation and that is not held for sale, and is without physical
qualities, including but not limited to patents, copyrights and goodwill, but
excluding capitalized costs associated with the acquisition of brand names,
franchises and trademarks, franchise agreements and management agreements.
"LANDLORD" means each Person named as the lessor under a Lease on Schedule
--------
1 hereto, and each Person that becomes a "Landlord" hereunder pursuant to
- -
Section [__].
"LANDLORD REPRESENTATIVE" means Host Marriott, L.P., a Delaware limited
partnership, or its successor or permitted assigns.
"LEASE" means any lease listed on Schedule 1 hereto.
----------
"LIEN" means any mortgage, security interest, pledge, collateral
assignment, or other encumbrance, lien or charge of any kind (including, without
limitation, any easements, covenants, conditions and restrictions), or any
transfer of any property or assets for the purpose of subjecting the same to an
encumbrance, lien or charge securing the payment of Indebtedness or performance
of any other obligation in priority to payment of any Person's general
creditors.
"LOCKBOX NOTICE DATE" means, with respect to a Lockbox Trigger Event, the
earliest date of a notice by a Landlord or the Landlord Representative to a
Tenant and to CCC and the Pool Parent of the exercise by such Landlord of its
right to implement the lockbox procedures under the Lease to which such Landlord
and Tenant are parties.
"LOCKBOX PERIOD" means the period beginning no later than two weeks after a
Lockbox Notice Date and continuing thereafter until the first day of the first
full Accounting Period after (i) the Consolidated Coverage Ratio of CCC is at
least 2.3 to 1.0 for each of three consecutive Accounting Periods, (ii) the
Tangible Net Worth of CCC is at least equal to two hundred percent (200%) of the
aggregate of the CCC Limits of Liability under the Guarantee and all Other
Guarantees from time to time as of the end of each of three consecutive
Accounting Periods, and (iii) no Payment Default under (A) any Lease or (B) any
Other Lease with respect to which the CCC Limit of Liability under the
applicable Other Guarantee is greater than zero and no "Event of Default" (as
defined in the applicable Lease) under Section 12.1(c) of any Lease by reason of
a breach of Section 7.1 or 21.6.3 of such Lease has been in effect as of three
consecutive Distribution Dates; provided that a Lockbox Period shall not
terminate by reason of an event described in clause (i), (ii), or (iii) if the
CCC Limit of Liability under the Guarantee shall have been reduced to zero.
"LOCKBOX TRIGGER EVENT" means any of the following events:
(i) the Tangible Net Worth of CCC is less than two hundred percent
(200%) of the amount of the aggregate of the CCC Limits of
Liability
-7-
<PAGE>
under the Guarantee and all Other Guarantees from time
to time as of the end of each of three consecutive Accounting
Periods;
(ii) the Consolidated Coverage Ratio of CCC is less than 2.3 to 1.0
for each of three consecutive Accounting Periods;
(iii) the occurrence of a Payment Default under (A) any Lease or (B)
any Other Lease with respect to which the CCC Limit of
Liability under the applicable Other Guarantee is greater than
zero, or an "Event of Default" (as defined in the applicable
Lease) under Section 12.1(c) of any Lease by reason of a breach
of Section 7.1 or 21.6.3 of such Lease; or
(iv) the CCC Limit of Liability under the Guarantee shall have been
reduced to zero.
"MINIMUM NET WORTH" means, with respect to the last day of any Accounting
Period, a Tangible Net Worth (calculated on a book value basis), excluding
amounts held in any lockbox or cash collateral account under any Lease, any
Other Lease, this Agreement or any pooling and security agreement relating to
Other Leases, immediately after the Distribution Date for such Accounting
Period, equal to one hundred fifty percent (150%) of the aggregate of the CCC
Limits of Liability under the Guarantee and the Other Guarantees from time to
time; provided that the Minimum Net Worth shall be reduced by one hundred fifty
percent (150%) of the total amount of cash held in any lockbox or cash
collateral account under any Lease, any Other Lease, this Agreement or any
pooling and security agreement relating to Other Leases, immediately after the
Distribution Date for such Accounting Period.
"OTHER GUARANTEE" means a guarantee by CCC and any Subsidiary of CCC of the
obligations under one or more Other Leases.
"OTHER LEASE" means any lease (other than a Lease) of a full service hotel
under which Host Marriott, L.P. or a Subsidiary of Host Marriott, L.P. is the
lessor and a Subsidiary of CCC is the lessee and that is the subject of a
guarantee by CCC and a pooling and security agreement substantially similar to
the Guarantee and this Agreement, as in effect on the date hereof.
"OTHER TENANT" means the lessee under an Other Lease.
"PAYMENT DEFAULT" means, with respect to a Lease or any Other Lease as to
which the CCC Limit of Liability under the applicable Other Guarantee is greater
than zero, a default by the applicable Tenant or Other Tenant in the payment of
Rent after expiration of any applicable notice and cure periods and after giving
effect to distributions from the Pool Cash Collateral Account or payment of such
Rent by Pool Parent or CCC pursuant to the Guarantee; provided that no Payment
Default will be deemed to have occurred with respect to any Other Lease under
which the ownership interest of CCC (direct or indirect) in the lessee is less
than 100%, so long as CCC and the applicable
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Subsidiary of CCC that has entered into a guarantee of the obligations under
such Other Lease shall have fulfilled their obligations under such guarantee./1/
"PERMITTED DEBT" has the meaning ascribed to such term in Section 4.1.
"PERMITTED INVESTMENTS" means any one or more of the following:
(i) securities issued or directly and fully guaranteed or insured by
the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United
--------
States of America is pledged in support thereof) having
maturities of not more than one year from the date of
acquisition (or such shorter period required by the terms of
this Agreement);
(ii) U.S. dollar denominated time deposits, certificates of deposit
and bankers acceptances of any bank whose short-term commercial
paper rating from Standard & Poor's Rating Services ("S&P") is
at least A-2 or the equivalent thereof or from Moody's Investors
Service, Inc. ("MOODY'S") is at least P-2 or the equivalent
thereof (any such bank, an "APPROVED BANK"), in each case with
maturities of not more than one year from the date of
acquisition (or such shorter period required by the terms of
this Agreement);
(iii) commercial paper issued by any Approved Bank or by the parent
company of any Approved Bank and commercial paper issued by, or
guaranteed by, any industrial or financial company with a short-
term commercial paper rating of at least A-2 or the equivalent
thereof by S&P or at least P-2 or the equivalent thereof by
Moody's, or guaranteed by any industrial company with a long
term unsecured debt rating of at least A or A-2, or the
equivalent of each thereof, from S&P or Moody's, as the case may
be, and in each case maturing within one year after the date of
acquisition (or such shorter period required by the terms of
this Agreement);
(iv) marketable direct obligations issued by the District of Columbia
or any state of the United States of America or any political
subdivision of any such state or any public instrumentality
thereof maturing within one year from the date of acquisition
thereof (or such shorter period required by the terms of this
Agreement) and, at the time of acquisition, having one of the
two highest ratings obtainable from either S&P or Moody's; and
(v) investments in money market funds substantially all the assets
of which are comprised of securities of the types described in
clauses (i) through (iv) above.
- -------------------
/1/ The liability under the guarantee of such a lease will be limited to the
percentage ownership interest of CCC in the lessee.
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<PAGE>
"PERMITTED LIEN" has the meaning ascribed to such term in Section 4.2.
"PERSON" means any individual, partnership, limited liability company,
joint venture, firm, corporation, association, trust or other enterprise or any
government or political subdivision or any agency, department or instrumentality
thereof.
"POOL CASH COLLATERAL ACCOUNT" has the meaning ascribed to such term in
Section 2.2(a).
"RENT" means, with respect to any Lease or Other Lease, minimum rent,
percentage rent or additional charges owing under such Lease or Other Lease.
"RENT PAYMENT DATE" means, with respect to any Lease, the date on which a
regularly scheduled payment of Rent is due.
"RENT SHORTFALL" means, with respect to any Lease, the amount of any
deficit in payment of Rent on any Rent Payment Date, prior to giving effect to
any distribution from the Pool Cash Collateral Account or any payment of the
amount owing by Pool Parent or CCC pursuant the Guarantee.
"REQUIRED RESERVE AMOUNT" means, as of any Distribution Date, an amount
equal to the greater of (i) the CCC Limit of Liability under the Guarantee as of
such Distribution Date, after giving effect to all payments on such date or (ii)
0.5% of the aggregate Rent (excluding Additional Charges (as defined in each
Lease) and without deduction of FF&E Adjustments under any Lease) payable under
all Leases for the preceding Fiscal Year (with the amount in this clause (ii)
being for Fiscal Year 1999 0.5% of the aggregate Rent (excluding Additional
Charges (as defined in each Lease) and without deduction of FF&E Adjustments
under any Lease) payable under all Leases for Fiscal Year 1999).
"SECONDARY LOCKBOX PERIOD" means the period beginning upon the occurrence
of a Secondary Lockbox Trigger Event and continuing thereafter until the first
day of the first full Accounting Period after (i) the Tangible Net Worth of CCC
is at least equal to the Minimum Net Worth as of the end of each of three
consecutive Accounting Periods, (ii) the Consolidated Coverage Ratio of CCC is
at least 1.8 to 1.0 for each of three consecutive Accounting Periods, and (iii)
no Payment Default under (A) any Lease or (B) any Other Lease with respect to
which the CCC Limit of Liability under the applicable Other Guarantee is greater
than zero and no "Event of Default" (as defined in the applicable Lease) under
Section 12.1(c) of any Lease by reason of a breach of Section 7.1 or 21.6.3 of
such Lease has been in effect as of three consecutive Distribution Dates;
provided that a Secondary Lockbox Period shall not terminate by reason of an
event described in clause (i), (ii), or (iii) if the CCC Limit of Liability
under the Guarantee shall have been reduced to zero.
"SECONDARY LOCKBOX TRIGGER EVENT" means any of the following events:
(i) the Tangible Net Worth of CCC is less than the Minimum Net
Worth as of the end of each of three consecutive Accounting
Periods;
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(ii) the Consolidated Coverage Ratio of CCC is less than 1.8 to 1.0
for each of three consecutive Accounting Periods;
(iii) the occurrence of a Payment Default under (A) any Lease or (B)
any Other Lease with respect to which the CCC Limit of
Liability under the applicable Other Guarantee is greater than
zero, or "Event of Default" (as defined in the applicable
Lease) under Section 12.1(c) of any Lease by reason of a breach
of Section 7.1 or 21.6.3 of such Lease; or
(iv) the CCC Limit of Liability under the Guarantee shall have been
reduced to zero.
"SUBSIDIARY" shall mean, as to any Person, (i) any corporation more than
fifty percent (50%) of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of such
corporation (irrespective of whether or not at the time stock of any class or
classes of such corporation shall have or might have voting power by reason of
the happening of any contingency) is at the time owned by such Person or one or
more Subsidiaries of such Person and (ii) any partnership, limited liability
company, association, joint venture or other entity in which such Person or one
or more Subsidiaries of such Person has more than a fifty percent (50%) equity
interest at the time.
"TANGIBLE NET WORTH" means, with respect to any Person on any date, without
duplication, (i) the sum of the shareholders' equity of such Person on a
consolidated basis in accordance with GAAP minus (ii) the sum of all Intangible
Assets (net of accumulated amortization) of such Person and its Subsidiaries,
each as shown on the consolidated balance sheets of such Person.
"TENANT" means each Person named as the lessee under a Lease on Schedule 1
----------
hereto, and each Person that becomes a "Tenant" hereunder pursuant to Section
3.1.
"TENANT MEMBER" means each wholly owned Subsidiary of Pool Parent named as
the sole equity member of a Tenant on Schedule 2 hereto, and each Person that
----------
becomes a "Tenant Member" hereunder pursuant to Section 3.1.
2. CASH COLLATERAL ARRANGEMENTS
2.1 SECURITY AGREEMENT RELATING TO ACCOUNT COLLATERAL
(a) Pledge of Account Collateral. To secure the full and punctual payment
----------------------------
and performance when due of all of the Guaranteed Obligations, Pool Parent
hereby pledges, and grants to the Collateral Agent for the benefit of the
Landlords, a first and continuing security interest in and to, the following
property, whether now owned or existing or hereafter acquired or arising and
regardless of where located (such property, collectively, the "ACCOUNT
COLLATERAL"):
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(i) all of Pool Parent's right, title and interest in and to any
dividends, distributions or other amounts paid with respect to any
equity interests in a Tenant or Tenant Member;
(ii) all of Pool Parent's right, title and interest in and to the
Pool Cash Collateral Account; and all moneys and Permitted
Investments, if any, from time to time deposited or held in the
aforementioned account; and
(iii) to the extent not covered by clause (i) or (ii) above, all
cash, instruments and other property received, receivable or otherwise
distributed in respect of or in exchange for any or all of the
foregoing.
(b) Financing Statements; Further Assurances. Upon the request of Landlord
----------------------------------------
Representative, Pool Parent will execute and deliver to the Collateral Agent for
filing a financing statement or statements in connection with the Account
Collateral in the form required to properly perfect the Collateral Agent's
security interest for the benefit of the Landlords in the Account Collateral to
the extent that it may be perfected by such a filing. From time to time, at the
expense of Pool Parent, Pool Parent shall promptly execute and deliver all
further instruments prepared by the Landlord Representative, and take all
further action, that the Collateral Agent and the Landlord Representative may
reasonably request, in order to perfect and protect the pledge and security
interest granted or purported to be granted hereby, or to enable the Collateral
Agent to exercise and enforce the Collateral Agent's rights and remedies
hereunder with respect to any Account Collateral. Neither the Collateral Agent
nor the Pool Parent shall be responsible for the determination of the financing
statements and other instruments necessary to perfect such security interest or
for the filing of such financing statements and other instruments at the
locations necessary to perfect and continue such security interest.
(c) Transfers and Other Liens. Pool Parent shall not sell or otherwise
-------------------------
dispose of any of the Account Collateral other than pursuant to the terms
hereof, or create or permit to exist any Lien upon or with respect to all or any
of the Account Collateral, except for the Lien granted to the Collateral Agent
for the benefit of the Landlords under this Agreement.
(d) Continuing Security Interest; Termination. This Section 2.1 shall
-----------------------------------------
create a continuing pledge of and security interest in the Account Collateral
and shall remain in full force and effect so long as the Guarantee remains
outstanding. Upon termination or expiration of the Guarantee and payment of all
Guaranteed Obligations, subject to the limits specified in the Guarantee, Pool
Parent shall be entitled to the return, upon its request and at its expense, of
such of the Account Collateral as shall not have been sold or otherwise applied
pursuant to the terms hereof, and, upon written notification by the Landlord
Representative to the Collateral Agent that the Guarantee has terminated or
expired and all outstanding Guaranteed Obligations have been paid in full, the
Collateral Agent shall release any funds then held by it in the Pool Cash
Collateral Account and execute such instruments and documents as may be
reasonably requested by Pool Parent to evidence such termination and the release
of the pledge and lien hereof.
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<PAGE>
2.2 ESTABLISHMENT, MAINTENANCE AND FUNDING OF POOL CASH COLLATERAL ACCOUNT
(a) At any time after a Lockbox Notice Date, or in the discretion of
Landlord Representative prior thereto, Landlord Representative shall establish
and thereafter maintain with the Collateral Agent a master collection account
(the "POOL CASH COLLATERAL ACCOUNT") in the name of Pool Parent and the
Collateral Agent for the benefit of the Landlords as secured party.
(b) During any Lockbox Period, Pool Parent shall cause to be promptly
deposited (and in any event, Pool Parent will use its best efforts to cause such
to occur within 24 hours) in the Pool Cash Collateral Account all revenues and
other income that it receives from any source whatsoever. Pool Parent shall not
permit any other funds so to be deposited or commingled in the Pool Cash
Collateral Account, except as required pursuant to paragraph (d) below.
(c) During any Lockbox Period, each Tenant shall distribute to the Pool
Parent (or, if the equity member of such Tenant is a Tenant Member, to the
applicable Tenant Member and such Tenant Member shall distribute to the Pool
Parent) all Distributable Cash on each Rent Payment Date under each Lease to
which such Tenant is a party and Pool Parent shall deposit such funds,
immediately upon receipt, into the Pool Cash Collateral Account.
(d) During any Lockbox Period, CCC and Pool Parent shall deposit all
payments made by either of them under the Guarantee directly into the Pool Cash
Collateral Account, and the deposit of all amounts owing under the Guarantee
into the Pool Cash Collateral Account shall be deemed to constitute payment of
their obligations thereunder.
(e) Pool Parent shall direct the Collateral Agent in writing to invest and
reinvest any balance in the Pool Cash Collateral Account from time to time in
Permitted Investments; provided that (i) the maturities of the Permitted
Investments on deposit in the Pool Cash Collateral Account shall be such that
the amounts required to be withdrawn therefrom pursuant to Section 2.3 shall be
available in cash as of the close of business on the Business Day immediately
preceding the date on which such funds are required to be withdrawn, (ii) all
such Permitted Investments other than during the continuance of an Event of
Default shall be held in the name of Pool Parent and, during the continuance of
an Event of Default, shall be held in the name of the Collateral Agent for the
benefit of the Landlords, and (iii) no Permitted Investment shall be directed to
be made unless the Collateral Agent for the benefit of the Landlords shall
retain a perfected first priority Lien in such Permitted Investment and all
filings and other actions necessary to ensure the validity, perfection, and
priority of such Lien have been taken. Neither the Collateral Agent, the
Landlord Representative nor any Landlord shall have any liability for any loss
in investments of funds in the Pool Cash Collateral Account that are invested in
Permitted Investments (unless, in the case of the Collateral Agent, such funds
are invested contrary to Pool Parent's or the Landlord Representative's written
direction, as applicable) and no such loss shall affect Pool Parent's obligation
to fund, or liability for funding, the Pool Cash Collateral Account. Pool
Parent shall include all earnings on the Pool Cash Collateral Account as income
of Pool Parent for federal and applicable state tax purposes. In the
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<PAGE>
absence of any written direction, the Collateral Agent shall invest the balance
of the Pool Cash Collateral Account in the Permitted Investment described in
clause (v) of the definition thereof. Notwithstanding the foregoing, the
Collateral Agent shall be permitted to keep uninvested funds in the Pool Cash
Collateral Account from the day prior to each Rent Payment Date until such Rent
Payment Date.
(f) Pool Parent shall be the owner of the Pool Cash Collateral Account for
all purposes, subject to the security interest therein created by this Agreement
and to the application of all amounts held therein for the account of the Pool
Parent as set forth in this Agreement.
2.3 DISBURSEMENTS FROM POOL CASH COLLATERAL ACCOUNT.
(a) Disbursements Prior to Secondary Lockbox Event. On each Distribution
----------------------------------------------
Date during any Lockbox Period, and provided that no Secondary Lockbox Trigger
Event shall have occurred and be continuing (in which event the provisions of
paragraphs (b) or (c) below shall apply), upon receipt of a certificate signed
by Pool Parent and the Landlord Representative stating that all Rent owing for
the immediately preceding Accounting Period and all prior Accounting Periods
under each Lease and under each Other Lease as to which the CCC Limit of
Liability under the applicable Other Guarantee is greater than zero has been
paid in full, the Collateral Agent shall disburse all funds held in the Pool
Cash Collateral Account to Pool Parent. If, on any such Distribution Date, a
Rent Shortfall exists under any Lease for the immediately preceding Accounting
Period or any prior Accounting Period, upon receipt of a certificate from the
Landlord Representative setting forth the Leases as to which there is a Rent
Shortfall and the amount of each such Rent Shortfall, the Collateral Agent shall
pay to the applicable Landlord an amount equal to such Rent Shortfall; if the
funds available in the Pool Cash Collateral Account are not sufficient to pay
all Rent Shortfalls, then the Collateral Agent shall make payments with respect
to each Rent Shortfall to the extent of available funds ratably based on the
ratio of the amount of each Rent Shortfall to the aggregate amount of Rent
Shortfalls under all Leases. Any funds remaining in the Pool Cash Collateral
Account after satisfying any Rent Shortfall shall be distributed promptly upon
receipt of the certificate referred to in the first sentence of this paragraph.
(b) Disbursements During Secondary Lockbox Period. On each Distribution
---------------------------------------------
Date during a Secondary Lockbox Period, the Collateral Agent shall disburse from
the Pool Cash Collateral Account, to the extent available therein, funds in
amounts sufficient for the following purposes, in the following order of
priority:
First, to the Landlord under each Lease with respect to which there
is a Rent Shortfall for the immediately preceding Accounting Period or any
prior Accounting Period, an amount equal to such Rent Shortfall; if the
funds available in the Pool Cash Collateral Account are not sufficient to
pay all Rent Shortfalls, then the Collateral Agent shall make payments with
respect to each Rent Shortfall to the extent of available funds ratably
based on the ratio of the amount of each Rent Shortfall to the aggregate
amount of Rent Shortfalls under all Leases;
Second, subject to the provisions of Section 2.3(c), to Pool Parent,
an amount equal to (x) $3,077 times the number of Leases as to which there
is no
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Payment Default after application of funds disbursed pursuant to clause
First above times the number of full Accounting Periods that have then
elapsed since the beginning of the applicable Secondary Lockbox Period,
less (y) the aggregate amount of Cash Expenses of all Tenants deducted in
determining Distributable Cash for all Accounting Periods since the
beginning of the applicable Secondary Lockbox Period, less (z) the
cumulative amount of all distributions under this clause Second during such
Secondary Lockbox Period; and
Third, subject to the provisions of Section 2.3(c), to Pool Parent
any remaining funds in excess of the Required Reserve Amount, so long as
there is no Payment Default under any Lease or under any Other Lease as to
which the CCC Limit of Liability under the applicable Other Guarantee is
greater than zero and no Event of Default hereunder shall have occurred and
be continuing; if the remaining funds are less than or equal to the
Required Reserve Amount, the Collateral Agent shall retain all funds
remaining in the Pool Cash Collateral Account.
(c) Disbursements after Default. If a Payment Default under any Lease or
---------------------------
under any Other Lease as to which the CCC Limit of Liability under the
applicable Other Guarantee is greater than zero or an Event of Default hereunder
shall have occurred and be continuing, then the Collateral Agent shall not
disburse any funds from the Pool Cash Collateral Account pursuant to paragraph
Second or Third of Section 2.3(b).
(d) Disbursements at End of Lockbox Period. Promptly after the termination
--------------------------------------
of any Lockbox Period, the Collateral Agent shall disburse to the Pool Parent
any funds then held in the Pool Cash Collateral Account that are not required to
cure any existing Rent Shortfalls.
(e) Reliance on Certificates. During a Secondary Lockbox Period, the
------------------------
Collateral Agent shall make distributions from the Pool Cash Collateral Account
on the basis of, and it shall be entitled to rely on, certificates furnished by
Landlord Representative.
3. ADDITION OF LEASES
3.1 ADDITION OF LEASES, TENANTS, OR TENANT MEMBERS
From time to time, the Landlord Representative and the Pool Parent shall be
entitled to cause an additional lease of a lodging facility under which Host
Marriott, L.P. or a Subsidiary of Host Marriott, L.P. is the lessor and a
Subsidiary of CCC is the lessee to become subject to this Agreement, without the
consent of the Landlords or Tenants, by amending Schedule 1 hereto to add such
----------
lease, provided that the obligations under such lease are guaranteed pursuant to
the Guarantee and the lessee and lessor under such lease agree in writing to be
bound by the respective obligations hereunder of a "Tenant" or "Landlord," as
the case may be. Upon such amendment of Schedule 1 and such agreement by such
----------
the lessor and lessee under such lease, such lease shall be a "Lease" and the
lessee and lessor thereunder shall be a "Tenant" or "Landlord," as the case may
be, under this Agreement.
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4. NEGATIVE COVENANTS APPLICABLE TO POOL PARENT
4.1 INDEBTEDNESS
Pool Parent shall not (i) incur, create or assume any Indebtedness; or (ii)
guarantee or have any consensual contingent obligation for the obligations of
any other Person, other than pursuant to the Guarantee or this Agreement;
provided that, so long as no Event of Default has occurred and is continuing,
Pool Parent may incur, create or assume any Permitted Debt (as defined below).
As used herein, "PERMITTED DEBT" shall mean:
(i) if no Event of Default has occurred and is continuing,
unsecured Indebtedness owing to CCC, with respect to which CCC shall
have agreed in writing, in form and substance satisfactory to Landlord
Representative, that payment of such Indebtedness shall be
subordinated in all respects to performance of Pool Parent's
obligations under this Agreement and that no remedies may be exercised
with respect to enforcement or collection of such Indebtedness until
such time as this Agreement shall have terminated and all obligations
owed by Pool Parent hereunder shall have been discharged in full; and
(ii) if no Event of Default has occurred and is continuing,
Indebtedness solely in respect of surety and appeal bonds, performance
bonds and other obligations of a like nature (to the extent that such
incurrence does not result in the incurrence of any obligation to
repay any obligation relating to borrowed money of others), all in the
ordinary course of business in accordance with customary industry
practices.
4.2 LIENS
Pool Parent shall not create or suffer to exist any Liens on its assets
other than Permitted Liens. As used herein, "PERMITTED LIEN" shall mean the
Liens created by this Agreement and any other Lien securing obligations under
the Guarantee.
4.3 INVESTMENTS
Pool Parent shall not make any investment in, or advance, loan or extend
credit to, make any capital contribution to, or acquire or own stock or other
equity interests in, any other Person other than advances, loans or extensions
of credit to, capital contributions to, or equity interests in Tenants and
Tenant Members.
4.4 TRANSFERS OF INTERESTS IN TENANTS AND TENANT MEMBERS
Pool Parent shall not (i) transfer or otherwise dispose of any equity
interest in any Tenant other than to a wholly owned Subsidiary of Pool Parent
that agrees in writing
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to be bound by the obligations of a Tenant Member hereunder or (ii) transfer or
otherwise dispose of any equity interest in any Tenant Member.
4.5 AMENDMENT OF ORGANIZATIONAL DOCUMENTS
CCC and Pool Parent shall not modify Sections ____ [SPECIFY SECTIONS
RELATING TO SPE PROVISIONS] of the certificate of incorporation of Pool Parent
and shall not modify, or permit or fail to prevent any modification of, the
limited liability company operating agreement, articles of incorporation,
partnership agreement or similar organizational document of any Tenant in
violation of the applicable Lease or of any Tenant Member without the consent of
the Landlord Representative (such consent not to be unreasonably withheld).
Pool Parent shall not (i) issue any capital stock to any Person other than CCC
and shall not permit any Tenant or Tenant Member to admit any new member or
issue any capital stock to any Person other than Pool Parent or (ii) permit or
suffer to occur any change in the identity of the owner of its capital stock or
the capital stock or membership interests of any Tenant or Tenant Member without
the prior approval of the Landlord Representative (such approval not to be
unreasonably withheld).
4.6 MISAPPLICATION OF FUNDS
Pool Parent shall not make any distribution to or for the benefit of any of
its equity owners while a Event of Default is pending; or fail to remit or cause
to be remitted to the Pool Cash Collateral Account all amounts required so to be
remitted pursuant to this Agreement.
4.7 PLACE OF BUSINESS
Pool Parent shall not change its chief executive office or its principal
places of business without giving the Landlord Representative at least 20 days'
prior written notice thereof and promptly providing the Landlord Representative
such information as the Landlord Representative may reasonably request in
connection therewith.
5. SPE COVENANTS
5.1 BUSINESS OF POOL PARENT
Pool Parent shall not engage in any business other than the ownership of
equity interests in the Tenants and Tenant Members.
5.2 SEPARATE EXISTENCE
Pool Parent shall (i) maintain its books and records and bank accounts
separate from any other Person (except that, for accounting and reporting
purposes, Pool Parent may be included in the CCC Consolidated Financial
Statements in accordance with GAAP);
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(ii) maintain an arm's length relationship with its stockholders, Affiliates and
any other party furnishing services to it; (iii) maintain its books, records,
resolutions and agreements as official records; (iv) conduct its business in its
own name and through its own authorized officers and agents; (v) maintain its
financial statements, accounting records and other corporate documents separate
from those of any other Person (except for inclusion in the CCC Consolidated
Financial Statements); (vi) pay its own liabilities out of its own funds and
other assets, including funds contributed to its capital by its equity holders,
and all such capital contributions shall be reflected properly in its books and
records; (vii) observe all corporate formalities, as applicable, necessary to
maintain its identity as an entity separate and distinct from its stockholders,
CCC, and all other Affiliates; (viii) participate in the fair and reasonable
allocation of any and all overhead expenses and other common expenses for
facilities, goods or services provided to multiple entities; (ix) use its own
stationery, invoices and checks (except when acting in a representative
capacity); (x) hold and identify itself as a separate and distinct entity under
its own name and not as a division or part of any other Person (except for
inclusion in the CCC Consolidated Financial Statements); and (xi) hold its
assets in its own name.
5.3 INDEPENDENT DIRECTOR
Pool Parent shall have an Independent Director at all times, or if the
Independent Director has resigned, Pool Parent shall not take any action which
may not be taken pursuant to the organizational documents of Pool Parent without
the consent of the Independent Director until such time as a replacement
Independent Director has been appointed to the board of directors of Pool
Parent.
5.4 FUNDAMENTAL CHANGES
Pool Parent shall not merge or consolidate with any other Person, liquidate
or dissolve, or permit any Tenant or Tenant Member to merge or consolidate with
any other Person or liquidate or dissolve.
6. EVENTS OF DEFAULT; REMEDIES
6.1 EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall be an
"EVENT OF DEFAULT" hereunder:
(a) A failure by CCC or Pool Parent to make any payment under the Guarantee
when due;
(b) Pool Parent or any Tenant is in default of any of its obligations under
Article 2 hereof and such default is not cured within (i), with respect to their
respective obligations under Section 2.2, 5 Business Days after the occurrence
thereof, or (ii), with
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respect to any other obligations under Article 2, 10 Business Days after receipt
of notice of such default;
(c) Pool Parent is in default of any of its obligations under Article 4 or
5 hereof;
(d) Any Change of Control occurs;
(e) Any obligation of Pool Parent in respect of any Indebtedness in a
principal amount in excess of $1,000,000 for money borrowed or for the deferred
purchase price of any material property or services, is declared to be, or as a
result of acceleration becomes, due and payable prior to the stated maturity
thereof;
(f) Pool Parent or CCC is generally not paying its debts as they become
due, or Pool Parent or CCC makes a general assignment for the benefit of
creditors;
(g) A petition is filed by or against Pool Parent or CCC under the federal
bankruptcy laws, or any other proceeding is instituted by or against Pool Parent
or CCC 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 Pool Parent or CCC or
for any substantial part of the property of Pool Parent or CCC, and, in the case
of any involuntary petition filed or proceeding instituted against Pool Parent
or CCC only, such proceeding is not dismissed within sixty (60) days after
institution thereof, or Pool Parent or CCC takes any action to authorize or
effect any of the actions set forth above in this paragraph;
(h) Pool Parent or CCC causes or institutes any proceeding for its
dissolution or termination; or
(i) CCC fails to maintain for each of three (3) consecutive Accounting
Periods either (i) a Tangible Net Worth equal to or greater than (x) the CCC
Limit of Liability under the Guarantee from time to time less (y) amounts held
in any lockbox or cash collateral account under any Lease, any Other Lease, this
Agreement or any pooling and security agreement relating to Other Leases,
immediately after the Distribution Date for the preceding Accounting Period, or
(ii) a Consolidated Coverage Ratio of at least 1.4 to 1.0.
6.2 REMEDIES IN CASE OF AN EVENT OF DEFAULT
(a) If an Event of Default shall have occurred and be continuing, in
addition to such other rights and remedies as may be available at law or in
equity, the Collateral Agent shall be entitled to exercise all of the rights,
powers and remedies (whether vested in it by this Agreement, the Guarantee or by
law) for the protection and enforcement of its rights in respect of the Account
Collateral, including, without limitation, all the rights and remedies of a
secured party upon default under the Uniform Commercial Code of the State of
Maryland, and the Collateral Agent shall be entitled, without limitation, to
exercise any
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or all of the following rights, which Pool Parent hereby agrees to be
commercially reasonable:
(i) to receive all amounts payable in respect of the Account
Collateral otherwise payable to Pool Parent; and
(ii) to transfer all or any part of the Account Collateral into the
Collateral Agent's name or the name of its nominee or nominees.
(b) Upon the occurrence and during the continuance of an Event of Default,
the Collateral Agent may, upon prior written notice from the Landlord
Representative and without notice or liability to Pool Parent, apply any or all
amounts in the Pool Cash Collateral Account for any of the following purposes
relating to the Guaranteed Obligations, in the following order:
(i) reimbursement of the Landlord Representative, the Collateral
Agent and the Landlords for all losses and reasonable expenses
(including without limitation reasonable legal fees) actually suffered
or incurred by such Persons as a result of such Event of Default;
(ii) payment of any reasonable amount expended in exercising rights
and remedies available to the Collateral Agent, the Landlord
Representative or the Landlords at law or in equity or under this
Agreement or under the Guarantee; and
(iii) payment of any Guaranteed Obligations then due and payable
(and if the amount available in the Pool Cash Collateral Account is
insufficient to pay all such amounts in full, then the amounts then
due and payable to each Landlord in respect of Guaranteed Obligations
will be paid pro rata based on the respective amounts of Guaranteed
Obligations then due to each Landlord).
(c) Every right and remedy granted to the Collateral Agent under this
Agreement or by law may be exercised by the Collateral Agent at any time and
from time to time as and when provided hereby, and as often as the Collateral
Agent may deem it expedient. Any and all of the Collateral Agent's rights with
respect to the pledge of and security interest in the Account Collateral granted
hereunder shall continue unimpaired, and Pool Parent shall be and remain
obligated in accordance with the terms hereof, notwithstanding (i) any
proceeding of Pool Parent, CCC, or any Tenant under the United States Bankruptcy
Code or any bankruptcy, insolvency or reorganization laws or statutes of any
state, (ii) the release or substitution of Account Collateral at any time, or of
any rights or interests therein pursuant to this Agreement, or (iii) any delay,
extension of time, renewal, compromise or other indulgence granted by the
Collateral Agent at the written direction of the Landlord Representative in the
event of any Event of Default with respect to the Account Collateral or
otherwise hereunder.
(d) Collateral Agent Appointed Attorney-In-Fact. Pool Parent hereby
-------------------------------------------
irrevocably constitutes and appoints the Collateral Agent as Pool Parent's true
and lawful attorney-in-fact, with full power of substitution, at any time after
the occurrence and
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during the continuation of an Event of Default, to execute, acknowledge and
deliver any instruments and to exercise and enforce every right, power, remedy,
option and privilege of Pool Parent with respect to the Account Collateral, and
do in the name, place and stead of Pool Parent, all such acts, things and deeds
for and on behalf of and in the name of Pool Parent with respect to the Account
Collateral, which Pool Parent could or might do in the absence of such Event of
Default or which the Landlord Representative may deem necessary or desirable to
more fully vest in the Collateral Agent the rights and remedies provided for
herein with respect to the Account Collateral and to accomplish the purposes of
this Agreement. For so long as the Guarantee remains outstanding, the foregoing
powers of attorney are irrevocable and coupled with an interest.
6.3 REMEDIES, ETC. CUMULATIVE
Each right, power and remedy of the Collateral Agent provided for in this
Agreement or the Guarantee now or hereafter existing at law or in equity or by
statute shall be cumulative and concurrent and shall be in addition to every
other such right, power or remedy. The exercise or beginning of the exercise by
the Collateral Agent of any one or more of the rights, powers or remedies
provided for in this Agreement or the Guarantee or now or hereafter existing at
law or in equity or by statute or otherwise shall not preclude the simultaneous
or later exercise by the Collateral Agent of all such other rights, powers or
remedies, and no failure or delay on the part of the Collateral Agent to
exercise any such right, power or remedy shall operate as a waiver thereof.
6.4 INDEMNITY
Pool Parent agrees (i) to indemnify and hold harmless the Collateral Agent
from and against any and all claims, demands, losses, judgments and liabilities
(including liabilities for penalties) of whatsoever kind or nature arising out
of the performance of its duties hereunder, and (ii) to reimburse the Collateral
Agent, the Landlord Representative and the Landlords for all reasonable costs
and expenses, including reasonable attorneys' fees, growing out of or resulting
from the exercise by the Collateral Agent of any right or remedy granted to it
hereunder or under the Guarantee except, with respect to clauses (i) and (ii)
above, for those claims, demands, losses, judgments and liabilities arising from
the Collateral Agent's gross negligence, bad faith, fraud or willful misconduct.
In no event shall the Collateral Agent be liable, in the absence of gross
negligence, bad faith, fraud or willful misconduct on its part, for any matter
or thing in connection with this Agreement other than to account for moneys or
other property actually received by it in accordance with the terms hereof or
thereof. If and to the extent that the obligations of Pool Parent under this
Section are unenforceable for any reason, Pool Parent hereby agrees to make the
maximum contribution to the payment and satisfaction of such obligations which
is permissible under applicable law.
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7. MISCELLANEOUS PROVISIONS
7.1 TERMINATION
This Agreement shall terminate on the date that the obligations of the Pool
Parent under the Guarantee terminate (other than with respect to Special
Guarantee Obligations (as defined in the Guarantee)), as provided in Section
10(a) of the Guarantee. Upon termination of this Agreement, any funds remaining
in the Pool Cash Collateral Account, after application in accordance with this
Agreement, including pursuant to the provisions of Section 6.2(b), and
satisfaction of any Guaranteed Obligations to the extent of such funds, shall be
released by the Collateral Agent to the Pool Parent.
7.2 FINANCIAL REPORTING
(a) On each Distribution Date, CCC shall furnish to Landlord Representative
a certificate of the chief financial officer, controller, chief accounting
officer or treasurer of CCC setting forth the Tangible Net Worth, Consolidated
Coverage Ratio, and Minimum Net Worth of CCC as of the last day of the
immediately preceding Accounting Period and the CCC Limit of Liability under the
Guarantee and each Other Guarantee as of such date.
(b) CCC shall furnish to Landlord Representative, (i) within 40 days after
the end of each of the first three quarters of a Fiscal Year, the most recent
unaudited CCC Consolidated Financial Statements accompanied by a Financial
Officer's Certificate and, (ii) within 80 days after the end of each Fiscal
Year, the CCC Consolidated Financial Statements for such Fiscal Year, certified
by Arthur Andersen LLP or another independent certified public accountant
reasonably satisfactory to Landlord and accompanied by a Financial Officer's
Certificate.
(c) Except as otherwise provided herein, the cost for one consolidated
audit with respect to CCC per Fiscal Year and one quarterly unaudited statement
with respect to CCC for each of the first three fiscal quarters in the Fiscal
Year as may be required by the Securities and Exchange Commission for regular
reporting requirements of Landlord Representative or Host REIT under the
Securities and Exchange Act of 1934 shall be borne by Pool Parent. Except as
otherwise provided herein, the cost of any other audits or financial statements
requested by Landlord Representative or any Landlord shall be borne by Landlord
Representative and the Landlords. CCC Consolidated Financial Statements shall
be accepted by Landlord Representative if prepared on a combined basis along
with all of the other hotels leased from Landlord Representative or any of its
Affiliates by a wholly owned Subsidiary of Pool Parent or CCC.
(d) Any financial report or certificate delivered hereunder by CCC in a
timely manner that includes the information required to be furnished under a
Lease shall be deemed to satisfy the obligation to provide such report or
certificate under such Lease.
(e) If Landlord Representative does not object to the calculation of the
CCC Limit of Liability under the Guarantee or any Other Guarantee within 30 days
after receipt of the Financial Officer's Certificate accompanying any audited
annual CCC
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Consolidated Financial Statements, Landlord Representative will not be permitted
to object to such calculation at any time thereafter.
7.3 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 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 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
Lease 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 any Landlord, addressed to such Landlord at:
10400 Fernwood Road
Bethesda, Maryland 20817
Attn:
--------------------------
with a copy to:
Host Marriott, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
If to Landlord Representative, to:
Host Marriott, L.P.
-------------------------------
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
If to Pool Parent or any Tenant, addressed to Pool Parent or such
Tenant, as the case may be, at:
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<PAGE>
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: General Counsel
with a copy to:
Crestline Capital Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Chief Financial Officer
(d) By notice given as herein provided, the parties hereto and their
respective successor and assigns shall have the right from time to time 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.
7.4 WAIVER; AMENDMENT
None of the terms and conditions of this Agreement may be changed, waived,
modified or varied in any manner whatsoever unless in writing duly signed by
CCC, Pool Parent and the Landlord Representative (with the consent of the
Collateral Agent if such change or waiver imposes any new duties on the
Collateral Agent or would adversely affect the Collateral Agent); provided,
however, that no such change, waiver, modification or variance shall be made to
Section 2.2(c) hereof or this Section 7.4 without the consent of each Tenant
adversely affected thereby.
7.5 BENEFIT
This Agreement shall create a continuing security interest in the Account
Collateral and shall (i) be binding upon Pool Parent, CCC, each Tenant, each
Tenant Member, the Landlord Representative and each Landlord, and the Collateral
Agent and their respective successors and assigns; and (ii) inure to the
benefit of the Collateral Agent, the Landlord Representative and each Landlord
and their respective successors and assigns; provided that no Landlord shall be
permitted to assign its rights hereunder to any Person to which such Landlord
sells or conveys any hotel subject to a Lease, other than a Subsidiary of the
Landlord Representative.
7.6 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 GOVERN UNDER
APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF.
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<PAGE>
7.7 HEADINGS
The headings of the several sections and subsections in this Agreement are
for purposes of reference only and shall not limit or define the meaning hereof.
7.8 COUNTERPARTS
This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other party.
7.9 ASSIGNMENT
The rights of the Collateral Agent under this Agreement may be assigned to
a successor Collateral Agent.
7.10 WAIVER OF JURY TRIAL
THE PARTIES HERETO, TO THE FULLEST EXTENT PERMITTED BY LAW, EACH HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
7.11 DELAY NOT A WAIVER
Neither any failure nor any delay on the part of the Collateral Agent in
insisting upon strict performance of any term, condition, covenant or agreement,
or exercising any right, power, remedy or privilege hereunder, shall operate as
or constitute a waiver thereof, nor shall a single or partial exercise thereof
preclude any other future exercise, or the exercise of any other right, power,
remedy or privilege. In particular, and not by way of limitation, by accepting
payment after the due date of any amount payable under this Agreement or the
Guarantee, neither the Landlord Representative, any Landlord, nor the Collateral
Agent shall be deemed to have waived any right either to require prompt payment
when due of all other amounts due under this Agreement or the Guarantee or to
declare a default for failure to effect prompt payment of any such other amount.
7.12 SEVERABILITY
Any term or provision of this Agreement which is invalid or unenforceable
in any applicable jurisdiction shall, as to that jurisdiction, be ineffective to
the extent of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement or affecting
the validity or enforceability of any of the terms or provisions of this
Agreement in any other applicable jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
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<PAGE>
7.13 PREFERENCES
Neither the Collateral Agent, the Landlord Representative nor any of the
Landlords shall have any obligation to marshal any assets in favor of Pool
Parent, CCC or any other party or against or in payment of any or all of the
obligations of Pool Parent or CCC pursuant to the Guarantee or this Agreement.
To the extent Pool Parent makes a payment or payments to the Collateral Agent,
the Landlord Representative or the Landlords, which payment or proceeds or any
part thereof is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, receiver or any
other party under any bankruptcy law, state or federal law, common law or
equitable cause, then, to the extent of such payment or proceeds received, the
obligations hereunder or part thereof intended to be satisfied shall be revived
and continue in full force and effect, as if such payment or proceeds had not
been received by the Collateral Agent, the Landlord Representative or the
Landlords.
7.14 WAIVER OF NOTICE.
Pool Parent shall not be entitled hereunder to any notices of any nature
whatsoever from the Collateral Agent, the Landlord Representative or the
Landlords except with respect to matters for which this Agreement specifically
and expressly provides for the giving of notice by such Person to Pool Parent
and except with respect to matters for which Pool Parent is not, pursuant to
applicable legal requirements, permitted to waive the giving of notice. To the
extent permitted by applicable legal requirements, Pool Parent hereby expressly
waives the right to receive any notice hereunder from the Collateral Agent, the
Landlord Representative or the Landlords with respect to any matter for which
this Agreement does not specifically and expressly provide for the giving of
notice by any one or more of such Persons to Pool Parent.
7.15 REMEDIES OF POOL PARENT, CCC, OR TENANTS
In the event that a claim or adjudication is made that the Collateral Agent
has unreasonably delayed acting in any case where, by law or under this
Agreement, the Collateral Agent has an obligation to act promptly, Pool Parent,
CCC and Tenants agree that the Collateral Agent shall not be liable for any
monetary damages, and their sole remedies shall be limited to commencing an
action seeking injunctive relief or declaratory judgment, so long as the
Collateral Agent acted without gross negligence, bad faith, fraud or willful
misconduct.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Pooling and
Security Agreement to be duly executed in their names, all as of the date first
written above.
[POOL PARENT]
By:________________________
Name:______________________
Title:_____________________
CRESTLINE CAPITAL CORPORATION
By:________________________
Name:______________________
Title:_____________________
EACH OF THE TENANTS NAMED ON
SCHEDULE 1 HERETO, BY THEIR DULY
APPOINTED ATTORNEY IN FACT
______________________________
Name:______________________
Attorney in Fact
HOST MARRIOTT, L.P., AS LANDLORD
REPRESENTATIVE
By: Host Marriott Corporation, its general
partner
By:___________________
Name:_________________
Title:________________
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<PAGE>
EACH OF THE LANDLORDS NAMED ON
SCHEDULE 1 HERETO, BY THEIR DULY
APPOINTED ATTORNEY IN FACT
_______________________________
Name:______________________
Attorney in Fact
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<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 19, 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 19, 1998
