<PAGE> 1
As filed with the Securities and Exchange Commission on March 16, 1999.
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-11
REGISTRATION STATEMENT
Under the Securities Act of 1933
----------------
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
(Exact Name of Registrant as specified in its Governing Instruments)
113 BAYBRIDGE DRIVE
GULF BREEZE, FLORIDA 32561
(850) 934-3609
(Address of Principal Executive Offices)
JULIAN B. MACQUEEN
PRESIDENT
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
113 BAYBRIDGE DRIVE
GULF BREEZE, FLORIDA 32561
(Name and Address of Agent for Service)
COPIES TO:
B. G. MINISMAN, JR., ESQ.
LANA K. HAWKINS, ESQ.
BERKOWITZ, LEFKOVITS, ISOM & KUSHNER
420 NORTH 20TH STREET
1600 SOUTHTRUST TOWER
BIRMINGHAM, ALABAMA 35203
(205) 328-0480
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registrations 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,
please check the following box.[ ]
<TABLE>
<CAPTION>
==========================================================================================================================
CALCULATION OF REGISTRATION FEE*
- --------------------------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Condominium Units coupled with mandatory rental pool.... $12,673,700 $3,524
==========================================================================================================================
</TABLE>
* Calculated pursuant to Rule 457(o) of the Rules and Regulations under the
Securities Act of 1933.
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.
<PAGE> 2
Subject to Completion, dated March 16, 1999
BEACHSIDE ALL-SUITES HOTEL
83 Extended-Stay Hotel Investment Units
(Condominiums Coupled with a Mandatory Rental Pool)
Southwind Development Company, L.L.C. is offering for sale 83 beachside
condominiums as extended-stay hotel investment units in Beachside All-Suites
Hotel. The hotel will be a beachside condominium hotel in Gulf Shores, Alabama,
a coastal vacation site located in south Alabama on the Gulf of Mexico. Each
owner will own his unit, which includes an undivided interest in the common
areas of the hotel. Each unit will be subject to a mandatory Hotel Operating and
Rental Pool Agreement that appoints Innisfree Hotels, Inc. as the manager of the
hotel. The mandatory rental pool provides for the pooling of both revenue,
adjusted for personal usage, and expenses. Distributions, if any, will be based
on the assigned percentage interest of a unit.
The units will be priced between $149,900 and $169,900, depending on
the location within the hotel. The hotel will consist of 84 fully-furnished,
one-bedroom, one and one-half bath suites (each having a built-in bunk-bed area
and a fully-equipped kitchen), a commercial unit that will be used as a lobby
and registration area, parking facilities, a central laundry and housekeeping
area and a heated swimming pool.
SEE "RISK FACTORS" ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO THE PURCHASE OF UNITS INCLUDING:
* The hotel is not built and is not expected to open before the summer of
2000. Your funds will be held in escrow until the hotel is complete and
you will not have the use of those funds during that time. The hotel
industry may change before the hotel is open.
* If the assumptions underlying the projected results turn out to be
incorrect, you may not receive a return on your investment and may have
to make additional payments to cover shortfalls in the operation of the
hotel.
* You will be personally responsible for the payment of operating and
capital deficits if the funds from the hotel operations are not
sufficient to cover such expenses. You will be personally liable for
tort and contract claims.
* We may change the price of the units if market conditions change.
* There may not be an organized resale market for the units and you may
not be able to readily resell your units. You will be able to offer
your units for resale directly or through a securities broker and not
exclusively through a real estate broker. This may limit your ability
to sell your unit quickly.
* If the appointment of the hotel operator terminates, the Condominium
Association will be responsible for the operation of the hotel until a
replacement hotel operator can be found. The Condominium Association
may have little or no hotel operating experience.
THESE ARE SPECULATIVE SECURITIES
Southwind is offering the units on a best efforts basis directly
through its members, officers and employees who are "associated persons" within
the meaning of Rule 3a4-1(c) under the Securities Exchange Act of 1934 and who
will not receive any sales commissions. The associated persons will be duly
licensed by state securities commissions in the states that require them to be
licensed as agents. Southwind will also engage duly licensed real estate
brokers, who will be supervised by its licensed agents, to assist in the sale of
the units. The real estate brokers will receive sales commissions of 6% of the
total selling price of the units sold by them in conjunction with such licensed
agents. See "Plan of Distribution."
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE AMENDED.
SOUTHWIND DEVELOPMENT COMPANY, L.L.C. MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ________________, 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary................................................................................................ 6
Risk Factors........................................................................................... 12
Revenue May Not Cover Expenses................................................................ 12
Risks in Relying on Forecasts................................................................. 12
Risks in Relying on Market Data............................................................... 12
Dependence on the Hotel Operator.............................................................. 13
Inexperience of Condominium Association Board of Directors.................................... 13
Competition................................................................................... 13
Hotel Operating Uncertainties................................................................. 13
Seasonal Fluctuations......................................................................... 14
Potential Liability of Ownership.............................................................. 14
Zoning Restrictions........................................................................... 14
Limited Resale Market......................................................................... 14
Failure to Sell Minimum Number of Units....................................................... 14
Limits on Available Units..................................................................... 15
Hurricane Risks............................................................................... 15
Conflicts of Interest......................................................................... 15
Potential Liability for Violation of Environmental Laws....................................... 16
Significant Income Tax Considerations to Owners............................................... 16
Classification of the Rental Pool as a Partnership............................................ 16
Cash Distribution May Be Insufficient to Pay Taxes............................................ 16
Section 183 Rules Regarding Activities Not Engaged in for Profit.............................. 16
Vacation Home Rental Rules.................................................................... 16
Passive Activity Rules........................................................................ 17
Partnership Audit Risk........................................................................ 17
The Hotel and the Hotel Site........................................................................... 18
The Hotel..................................................................................... 18
The Hotel Site................................................................................ 18
The Units..................................................................................... 19
Terrace Resort Units................................................................. 19
Superior Resort Units................................................................ 19
Third Floor Side View Resort Units................................................... 20
Second Floor Side View Resort Units.................................................. 20
First Floor Side View Resort Units................................................... 20
Standard Resort Units................................................................ 20
Schedule of Purchase Prices................................................................... 20
Acquisition of the Hotel Site................................................................. 21
Alabama................................................................................................ 23
The Gulf Shores Market................................................................................. 23
Gulf Shores................................................................................... 23
Market Overview............................................................................... 24
Development Activity.......................................................................... 24
Competition................................................................................... 24
The Competitive Set........................................................................... 25
Resort Market Seasonality..................................................................... 26
Unsatisfied Demand............................................................................ 26
Market Demand................................................................................. 26
</TABLE>
i
<PAGE> 4
<TABLE>
<S> <C>
Individual Leisure............................................................................ 27
Group Market.................................................................................. 27
Premier Location.............................................................................. 27
Estimated Performance for the Hotel........................................................... 28
Market Penetration................................................................... 28
Demand............................................................................... 28
Occupancy............................................................................ 28
Average Daily Rate (ADR)............................................................. 29
Conclusion.................................................................................... 29
Basis for Forecasts and Summary of Selected Financial Performance...................................... 29
The Hotel Operator..................................................................................... 34
Management of the Hotel and the Rental Pool................................................... 34
Management of the Rental Pool................................................................. 34
Owners' Use of Units.......................................................................... 34
Allocation of Revenue and Expenses............................................................ 35
Direct Expenses of Owners..................................................................... 35
Rental Pool Reports........................................................................... 36
Distributions from Rental Pool................................................................ 36
Reserves...................................................................................... 36
Shortfalls.................................................................................... 37
Hotel Operator May Rely upon Acts of Board of Directors....................................... 37
Management of the Hotel....................................................................... 37
Fees Paid to Hotel Operator................................................................... 38
Termination of Hotel Operator................................................................. 38
Sale of a Unit by an Owner.................................................................... 38
Summary of Declaration and Related Documents........................................................... 39
The Condominium Association................................................................... 39
Voting Rights........................................................................ 40
Meetings............................................................................. 40
Board of Directors; Officers......................................................... 40
Use Restrictions.............................................................................. 41
Insurance..................................................................................... 42
Enforcement of the Declaration................................................................ 42
Southwind Development Company, L.L.C. and Certain Affiliates........................................... 42
Management............................................................................................. 43
Certain Transactions................................................................................... 44
Determination of Purchase Price........................................................................ 44
Use of Proceeds........................................................................................ 44
Plan of Distribution................................................................................... 44
How to Purchase........................................................................................ 45
Certain Federal and State Income Tax Aspects........................................................... 46
</TABLE>
ii
<PAGE> 5
<TABLE>
<S> <C>
Classification of Rental Pool as a Partnership................................................ 47
Status of the Partnership as a Publicly Traded Partnership.................................... 48
Partnership Anti-abuse Rule................................................................... 49
Basis of Each Owner in the Unit and in the Rental Pool Partnership............................ 49
Section 183 - Activities Not Engaged in for Profit............................................ 49
Section 280A - Residence and Vacation Home Rules.............................................. 50
Limitations on Losses from Passive Activities................................................. 51
Application of At-risk Limitations............................................................ 51
Limitation on Interest Deductions............................................................. 52
Depreciation/Amortization..................................................................... 52
Sale or Other Disposition of a Unit........................................................... 52
Administrative and Compliance Matters......................................................... 53
Audit Risk........................................................................... 53
Resolution of Disputes Involving Rental Pool Items................................... 53
Possible Changes in Federal Tax Laws.......................................................... 53
Investment by Foreign Persons................................................................. 54
Corporate Investors........................................................................... 54
State and Local Taxes......................................................................... 54
Legal Matters.......................................................................................... 54
Experts................................................................................................ 55
Summary of Promotional and Sales Material.............................................................. 55
Additional Information................................................................................. 55
Forecasted Summary Statements of Estimated Annual Operating Results....................................F-1
Balance Sheet of Southwind Development Company, L.L.C.................................................FS-1
</TABLE>
iii
<PAGE> 6
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
- Throughout this prospectus when we say "we" "us" "our" or
"Southwind," we mean Southwind Development Company, L.L.C.
- When we say the "hotel" we mean Beachside All-Suites Hotel.
- When we refer to the "Gulf Shores Market," we mean the City of
Gulf Shores, Alabama and the City of Orange Beach, Alabama,
which is adjacent to Gulf Shores and located 7 miles east of
the hotel site.
- When we say the "Condominium Association" we mean Beachside
All-Suites Hotel Condominium Owners Association, Inc.
- When we say the "Hotel Operating Agreement" we mean the Hotel
Operating and Rental Pool Agreement entered into between each
unit owner and the hotel manager.
- We include cross-references in this prospectus to other parts
of this prospectus where you can find further related
discussions. The Table of Contents provides the pages on which
you can find these discussions.
- You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
additional or different information. We are not making an
offer of these securities in any state where the offer is not
permitted. You should not assume that the information
contained in this prospectus is accurate as of any date other
than the date on the front of this prospectus.
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus represent our
expectations for the hotel as of the date of this prospectus. We will
not report to the public any changes to any forward-looking statements
to reflect events, developments or circumstances that occur after the
date of this prospectus.
We believe the expectations expressed in all forward-looking
statements are reasonable and accurate based on information we
currently have. However, our expectations may not prove to be correct.
Important factors that could cause actual results to differ from our
expectations include, among other things, delay in completion of the
hotel beyond the summer of 2000, occupancy rate achieved, actual
average daily rate, the effects of competition (including the impact of
new supply), strength of the tourist sector of the economy and the
effects of inflation. Other factors that could cause actual results to
differ from our expectations are disclosed under "Risk Factors" and in
other parts of this prospectus.
iv
<PAGE> 7
QUESTIONS AND ANSWERS
Q: What is a hotel investment unit?
A: A hotel investment unit is a condominium, together with an
undivided interest in the common areas of the hotel, which
will be operated under a mandatory rental pool. Each hotel
suite is a condominium. The mandatory rental pool provides for
the pooling of revenue, adjusted for personal usage, and
expenses.
Q: What is the commercial unit?
A: The commercial unit will be used as a lobby and registration
area. The commercial unit is not included in the 83 units
being offered for sale. It will not generate revenue but will
bear expenses in proportion to its percentage ownership
interest, which has been fixed at .001%. The commercial unit
is also a condominium. Southwind will continue to own the
commercial unit and lease it to the hotel operator when the
hotel begins operations.
Q: What type of hotel is it?
A: Beachside All-Suites Hotel will be an extended-stay beachside
hotel located in Gulf Shores, Alabama. An extended-stay hotel
is a hotel with "in-room" kitchen facilities. The hotel will
consist of 84 fully-furnished, one-bedroom suites (each having
fully- equipped kitchens, one and one-half baths and a
built-in bunk bed area), a commercial unit that will be used
as a lobby and registration area, parking facilities, a
central laundry and housekeeping area and a heated swimming
pool. The hotel will not provide food and beverage service.
The hotel will be used by tourists and seasonal residents as
vacation accommodations and should be open by the summer of
2000.
Q: What is beachside property?
A: When we say beachside property, we mean the property located
on the gulf side of the public road closest to and parallel
with the shoreline of the Gulf of Mexico.
Q: Is there any obstruction of view from any of the units in the hotel?
A: There is a one-story restaurant and lounge on pilings that is
located near the southwest border of the hotel site. The
restaurant is visible from the hotel site and may partially
obstruct the beach view from one or more of the first-floor
units on the west side of the hotel.
Q: What are the possible future obstructions to the beach view from the
hotel site?
A: The City of Gulf Shores owns the undeveloped property south of
the hotel site. We believe the City may in the future
construct a boardwalk on a strip of this property that is
approximately 20 feet in width, but we cannot assure you that
a boardwalk will be constructed. We do not believe the City
has any other plans to develop this undeveloped property, but
we cannot assure you that it will remain undeveloped in the
future. The property south of the twenty foot strip extends to
the Gulf of Mexico and lies south of the coastal construction
line. The Alabama Department of Environmental Management
<PAGE> 8
prohibits the development of that property since it is located
south of the coastal construction line.
Q: Where is the hotel site located?
A: The hotel will be located on a 1.137 acre beachside site one
block east of the intersection of Highway 59 and East Beach
Boulevard in Gulf Shores, Alabama. East Beach Boulevard is the
primary thoroughfare through the Gulf Shores beach area.
Highway 59 is currently the most direct access into Gulf
Shores from the interstate highway system. The hotel site is
bordered on the south by undeveloped land owned by the City of
Gulf Shores that extends to the Gulf of Mexico. There are
retail stores and restaurants located immediately west of the
hotel site and across East Beach Boulevard on the north side
of the hotel site.
Q: How will hotel guests get to the public beach from the hotel?
A: Access to the public beach from the south side of the property
will be limited to a secured gate located on the west side of
the southwest corner of the property. The gate will open onto
property of the City of Gulf Shores with direct access to the
public beach.
Q: What is Southwind Development Company, L.L.C.?
A: Southwind is an Alabama limited liability company formed in
April 1998 to design, develop, finance, construct and market
the hotel. We are located at 113 Baybridge Drive, Gulf Breeze,
Florida 32561. Our telephone number at that address is (850)
934-3609. You will not acquire any ownership interest in
Southwind, and Southwind will not have any management role in
the hotel after the offering. Southwind will own any unsold
Units and the commercial unit which will be leased to the
hotel operator when the hotel begins operations.
Q: Who is going to manage the hotel?
A: Innisfree Hotels, Inc., an affiliate of Southwind, will manage
the hotel under a hotel operating and rental pool agreement.
Innisfree currently operates eleven hotel properties
throughout the southeastern United States and in Arizona.
These hotel properties include the Days Inn Hotel in Orange
Beach, Alabama and Young's By The Sea in Gulf Shores, Alabama,
two beachside hotels in the Gulf Shores Market. Innisfree has
more than 14 years of experience in the hotel operating and
development industry. Its corporate headquarters are in Gulf
Breeze, Florida. Innisfree currently has approximately 500
employees nationwide.
2
<PAGE> 9
Q: What happens if Innisfree quits or is terminated?
A: The board of directors of the Condominium Association will be
responsible for selecting another hotel operator. If a
replacement operator cannot be found immediately, the
Condominium Association will be responsible for running the
hotel. The board of directors of the Condominium Association
may have little or no experience in managing a hotel.
Q: How often can I use my Unit?
A: You are guaranteed the use of your Unit for a maximum of 14
days per year with four months notice, or based on
availability. Neither the hotel operator, the condominium
association nor Southwind will have any liability for any tax
consequences of your personal usage.
Q: How does the hotel operating and rental pool agreement work?
A: The hotel operator will rent the Units to hotel guests and
will pool the revenue for the Owners. After paying the
expenses associated with running the hotel, the hotel operator
will distribute the balance, if any, to the Owners. You will
not share in the revenue of the hotel for any day you use your
Unit but will still be obligated for your share of the
expenses.
Q: Who owns the unit that is not being offered for sale?
A: In connection with the purchase of the property for the hotel
site, we agreed with one of the sellers of that property to
place $100,000, of the purchase price for that property in
escrow until the hotel is completed. Upon completion of the
hotel, one of the sellers who sold us the real property will
use the $100,000 to purchase a first floor Unit of his choice.
The total purchase price for this Unit will be $100,000, which
is substantially below the offering prices of the other Units.
However, the Unit will participate in the rental pool in
proportion to its percentage ownership interest as indicated
on the Schedule of Purchase Price of Units on page 20.
Q: What happens if the hotel loses money?
A: If the hotel loses money, you and the other Unit Owners will
be responsible for making up any shortfalls.
Q: Will there be any debt on the hotel property?
A: The only debt will be that of individual Owners. Southwind
financed the purchase of the hotel site through lending
arrangements with third parties. It will also finance the
construction of the hotel site through third-party lending
arrangements. This debt will be paid off on the closing of the
Units from the proceeds of this offering.
3
<PAGE> 10
Q: What payments will I make as an Owner of a Unit?
A: You will have to make payments on any loan you obtain to buy
your Unit, the real property taxes on your Unit and your share
of any Condominium Association expenses. Based on current
estimates, real estate taxes are expected to range from
approximately $975 to $1,170 per annum per Unit. In addition,
the Condominium Association may make assessments. Debt service
will depend on the particular terms of any individual loan.
Q: If I decide to purchase, will I be able to purchase the Unit of my
choice from the 83 units available?
A: We granted one of the sellers who sold us the real property an
option to purchase four Units of his choice at the same price
that the Units will be offered for sale to you. The seller
must exercise this right within 3 days from the date of this
prospectus. Otherwise, the Units will be offered and sold on
an "as available" basis.
Q: Once construction begins, how long will it take to build the hotel?
A: Our current construction financing requires us to complete
construction of the hotel within ten months from the date of
the notice of commencement. The current financing also
requires us to sell a minimum of 75 Units before we may begin
construction. If we have not sold the 75 Units by the time we
are ready to begin construction, we may seek either a
modification of the construction financing or alternative
financing.
Q: Is Southwind required to sell a minimum number of Units?
A: If we do not sell 75 Units within 180 days from the date of
the sale of the first Unit, we may elect, in our sole
discretion, to terminate our contracts with Unit purchasers.
If this occurs, we will refund all deposits paid by Unit
purchasers with interest.
Q: How does the Condominium Association work?
A: All of the Owners of Units and the Owner of the commercial
Unit will be members of the Condominium Association. The
members elect a board of directors whose duties will include
approving the annual operating plan and budget for the hotel
and reviewing the performance of the hotel operator.
Q: Do I own the contents in my Unit?
A: Yes; however, you may not alter or remove any of the
furnishings or fixtures.
Q: May I sell my Unit?
A: You may sell your Unit at any time as long as the purchaser
signs the hotel operating and rental pool agreement. You may
sell the Unit yourself or through a securities broker-dealer.
You may not sell your Unit exclusively through a real estate
broker, but a real estate broker may assist in the sale if
supervised by a securities broker-dealer.
4
<PAGE> 11
Q: What are the tax implications of owning a Unit?
A: The rental pool will be taxed as a partnership for federal
income tax purposes. You will be required to report on your
federal income tax return your share of income or loss from
the hotel. You may be able to deduct property taxes, interest
expense and depreciation for your Unit and losses, if any,
from the rental pool. Your tax deductions may be limited by
certain provisions of the Internal Revenue Code, including
provisions governing vacation home rentals, passive activity
losses, and interest expense.
Q: Are there risks involved in purchasing a Unit?
A: There are inherent risks in any investment. While we have
tried to present as realistic a picture as possible, the hotel
may not perform as well as anticipated. Conditions that today
are favorable to the hotel industry may change substantially
before the hotel opens. Even though we believe our analysis
points to the hotel being successful, we cannot assure you
that this will be the case.
5
<PAGE> 12
SUMMARY
This Summary highlights selected information from this Prospectus and
may not contain all of the information that is important to you. To understand
what ownership of a Unit means and for a more complete description of the legal
terms involved, you should read carefully this entire Prospectus.
Seller Southwind, the seller of the Units, was established in April
1998 to design, develop, finance and construct the hotel and
to market the Units. Southwind's core management team consists
of a President and four Vice-Presidents who devote a portion
of their time to the development of the hotel, while
maintaining separate full-time employment in other capacities.
You will not acquire any ownership interest in Southwind.
Southwind will not have any management role in the hotel after
the offering. However, each member of Southwind's management
team will continue his involvement with Southwind until all
Units are sold and thereafter as necessary for the operating
of Southwind. If all the Units are not sold, the unsold Units
will remain in the rental pool and Southwind will be an Owner
on the same basis as other Owners. Southwind will own the
commercial unit and lease it to the hotel operator when the
hotel begins operations.
The hotel will be managed and operated by Innisfree Hotels,
Inc., an affiliate of Southwind. Southwind Development
Management Company, Inc., an Alabama corporation, is a 1%
equity owner and manager of Southwind. Julian MacQueen is a
64% equity owner of Southwind and is also the sole stockholder
of Southwind Development Management Company, Inc. William P.
Lagman, Stephen A. Shannon, Harlan R. Butler and Roger W.
Wiegner are Vice-Presidents of Southwind. Southwind Partners,
L.L.C. is a 35% equity owner of Southwind. See "Southwind
Development Company, L.L.C. and Certain Affiliates."
The Hotel The hotel will be called Beachside All-Suites Hotel.
Construction of the hotel is expected to begin in the summer
of 1999 and to be completed by the summer of 2000. The hotel
will consist of one nine-story building and will contain 84
fully-furnished, one-bedroom suites (hotel rooms), a
commercial unit that will be used as a lobby and registration
area, parking facilities, a central laundry and housekeeping
area and a heated swimming pool. We anticipate that the suites
will be used primarily by tourists and seasonal residents as
vacation accommodations.
6
<PAGE> 13
The Hotel Site The hotel will be located in Gulf Shores, Alabama on a 1.137
acre beachside site on East Beach Boulevard. East Beach
Boulevard, the primary highway through the Gulf Shores beach
area, intersects with Highway 59 one block east of the hotel
site. Highway 59 is currently the most direct access into Gulf
Shores from the interstate highway system. A building which
was formerly operated as a fast-food restaurant currently
occupies the site. This building will be demolished prior to
the commencement of construction of the hotel.
The hotel site is bordered on the south by undeveloped land
owned by the City of Gulf Shores that extends to the Gulf of
Mexico. Access to the public beach from the south side of the
property will be limited to a secured gate located on the west
side of the southwest corner of the property, which will open
onto property of the City of Gulf Shores with direct access to
the public beach. There is also a one-story restaurant and
lounge on pilings south of the hotel site on the west side of
the southwest corner of the hotel site. The restaurant is
visible from the hotel site and may partially obstruct the
beach view from the first-floor units on the west side of the
hotel. The City of Gulf Shores also owns the undeveloped land
directly to the east of the hotel site. See "The Hotel and The
Hotel Site -- The Hotel Site."
The Hotel The Hotel Operating Agreement requires the pooling of all
Operating revenue and expenses of the Units in the rental pool. We
Agreement believe that a mandatory rental pool will provide the hotel
operator with a sufficient number of hotel rooms to operate
the hotel effectively. Your Unit will be in the rental pool
except for the period you reserve the Unit for your own use.
You will not share in the revenue for any day that you use
your Unit but you will be obligated to bear your full share of
expenses. Innisfree will be the hotel operator under the Hotel
Operating Agreement.
The Hotel The hotel will be managed and operated by Innisfree Hotels,
Operator Inc., an Alabama corporation and an affiliate of Southwind.
Innisfree has been in the business of operating and developing
hotels for more than 14 years. It currently operates eleven
hotel properties throughout the southeastern United States and
Arizona, with more than 1,100 guest rooms under management.
Innisfree's corporate headquarters are located in Gulf Breeze,
Florida. It has approximately 500 employees. See "The Hotel
Operator."
7
<PAGE> 14
Development Southwind was formed in April 1998 to design, develop, finance
of the Hotel and construct the hotel and to market the Units. Southwind
financed the acquisition of the real property for the hotel
site through third-party financing and will finance the
construction of the hotel through third-party construction
financing.
The proceeds from the sale of the Units, net of offering costs
and real estate commissions, will be used to pay off the
construction loan and a loan from Mr. MacQueen, to satisfy the
existing mortgages on the real property, and to pay
development and financing costs. The total acquisition,
construction and development costs in connection with the
construction of the hotel, together with real estate
commissions, are estimated to be approximately $10.5 million.
Assuming all of the Units are sold at the prices set forth in
the Schedule of Purchase Prices, Southwind will receive gross
proceeds of approximately $12.67 million The gross revenues,
less real estate commissions and acquisition, construction and
development costs represent Southwind's pre-tax profit. See
"The Hotel and the Hotel Site -- Acquisition of the Hotel
Site" and "Use of Proceeds."
Units Available In connection with the purchase of the property for the hotel
For Purchase site, we agreed with one of the sellers of that property to
place $100,000 of the purchase price for the real property
in escrow to be held for the seller of the real property until
the hotel is completed. Upon completion of the hotel, the
seller of the real property will use the $100,000 to purchase
a first floor Unit of his choice. The total purchase price for
this Unit will be $100,000, which is substantially below the
offering prices of the other Units. In addition, we also
granted the seller of the real property an option to purchase
four additional Units of his choice at the same price that the
Units will be offered for sale to you. The seller must
exercise this right within three days from the date of this
prospectus. The remainder of the Units will be sold on an "as
available" basis. See "The Hotel and The Hotel Site --
Acquisition of the Hotel Site and -- Schedule of Purchase
Prices."
Personal Use You are guaranteed the use of your Unit for a maximum of
14 days per year with four months notice, or based on
availability. The hotel operator, the Condominium Association
and Southwind will not have any liability for any tax
consequences of your personal usage. See "Certain Federal and
State Income Tax Aspects -- Section 280A Residence and
Vacation Home Rules."
8
<PAGE> 15
Reserves At the closing of the purchase of your Unit, you will be
required to contribute your share of an operating cash reserve
of $50,000. This reserve will be available to the hotel
operator for working capital purposes. The hotel operator will
also establish a reserve for capital expenditures for the
repair and replacement of the hotel property and for the
repair and replacement of furniture, fixtures and equipment.
This reserve will range from 1% of gross revenue beginning in
year one of operations to a maximum of 5% of gross revenue for
year five and thereafter. These reserves are in addition to
the retention of a portion of distributable cash flow in order
to maintain the operating cash reserve of $50,000. See "The
Hotel Operator -- Reserves."
Shortfalls If at any time the funds from hotel operations are not
sufficient to pay the expenses of operating the hotel, to
maintain reserves, or to make capital expenditures in excess
of the established reserves, each Owner will be obligated to
pay his share of the shortfall. The hotel operator may elect,
but is not obligated, to advance such amount and to be repaid,
plus interest, out of future cash flow from hotel operations.
Interest on advances by the hotel operator will be computed at
the prime rate (as defined in the Hotel Operating Agreement)
plus 2% per annum. Each Owner will also be obligated to make
the payment on any loan obtained by him to purchase a Unit and
real estate taxes, regardless of whether the hotel operator
distributes sufficient cash to cover these expenses. See "The
Hotel Operator -- Shortfalls."
Risks of The hotel has no operating history on which to rely.
Forecasts Therefore, the anticipated performance of the hotel is based
on forecasts. While we believe that we have considered all
factors that might affect the hotel's overall economic
performance, there are inherent risks in relying on forecasts.
The evaluation of the factors that are considered in the
preparation of a forecast is highly subjective. Factors such
as occupancy are based on numerous variables including the
hotel facilities, the impact of new supply, the level and type
of demand and overall market conditions. The same data can
lead to different interpretations and conclusions. Actual
results can differ materially from results forecasted if the
assumptions underlying the forecasts prove to be incorrect.
Adverse consequences can occur if forecasted results are not
achieved. See "Basis For Forecasts and Summary of Selected
Financial Performance."
Timing of The hotel operator will prepare monthly reports on
the operation of the hotel and Distributions distribute any
rental pool income to Owners by the 25th day following the end
of each month. The hotel operator may choose to make
distributions of income based on an estimate of the annual
amount distributable to Owners, less an amount not to exceed
20%, and make distributions in 12 equal monthly installments
with the balance, if any, paid no later than 75 days following
the end of the operating year. Prior to making distributions
of rental pool income, the hotel operator will adjust your
share of such income to take into account your use of your
Unit. See "The Hotel Operator -- Distributions from Rental
Pool."
9
<PAGE> 16
Prices of Units The initial purchase prices of Units have been established by
us, and we are not required to maintain the initial purchase
price schedule. We may increase or lower the purchase price of
any Unit in response to market conditions and demand. If we
make adjustments we may not uniformly apply those adjustments
to all Units of the same type. The price of a Unit cannot be
changed once a purchase contract has been executed for such
Unit. The schedule of purchase prices, the percentage interest
and the amount to be contributed to the operating cash reserve
by the purchaser for each Unit are all set forth in the
Schedule of Purchase Prices. The percentage interest for a
Unit determines the share of revenue and expenses for that
Unit. The percentage interest will not change even if prices
of Units change in the future.
Purchase To purchase a Unit you must execute a Purchase Agreement. Upon
Procedure execution of the Purchase Agreement, you are required to make
a down payment in the amount of 20% of the purchase price of
your Unit. The down payment will be held in escrow for your
benefit and will not be available for distribution to us until
the completion of construction (estimated to be the summer of
2000) and the hotel is ready to commence operations. The down
payment is non-refundable if you breach the contract. If we do
not sell 75 Units within 180 days from the date of the sale of
the first Unit, we may elect, in our sole discretion, to
terminate our contracts with Unit purchasers. If this occurs,
your deposit is refundable with accrued interest and you will
have no further remedies. If we do not terminate our contracts
with Unit purchasers within the 180 day period, we must
deliver all Units sold within two years from the date the
first Unit is sold. If we terminate the contracts with Unit
purchasers after the 180 day period or fail to deliver the
Units within the two-year period, your deposit is refundable
with accrued interest, and you may have remedies for breach of
contract.
Further, all purchasers are entitled to receive a prospectus
in connection with the purchase of a Unit, and any purchaser
may terminate the purchase agreement within seven days of
receiving a prospectus. In case of a termination, we will
promptly refund all funds paid by the purchaser. Upon the
expiration of the seven days, the Purchase Agreement will
become irrevocable on the part of a purchaser. Upon completion
of the hotel, the purchase of all Units under contract will be
completed and the balance of the purchase price together with
any closing costs and the operating cash reserves contribution
will be due. Additional closings will occur as Units are sold.
See "How to Purchase."
Financing Prospective purchasers may obtain financing from any available
source. We may make referrals for financing for purchasers on
terms that will vary based on market conditions. Each
prospective purchaser will be required to qualify for
financing based on the requirements of the particular lender.
If a prospective purchaser is rejected for a loan, we may
elect to cancel the purchase contract. See "How to Purchase."
10
<PAGE> 17
Tax The rental pool will be treated as a partnership for federal
Considerations income tax purposes. You must therefore report your share of
the rental pool's taxable income and loss on your own federal
income tax return. You will be entitled to any available
deductions associated with ownership of the Unit for federal
income tax purposes, including deductions for property taxes,
investment interest expense and depreciation. For a more
complete discussion of the tax consequences of Unit ownership,
see "Certain Federal and State Income Tax Aspects" on page 46.
The tax laws provide for the limitation of deductions to the
amount of gross income derived from rental of a Unit if
personal use of a Unit exceeds the greater of 14 days or 10%
of the total number of days during the year that a Unit is
rented for fair market value. The limitation on personal use
of a Unit under the Hotel Operating Agreement to 14 days
should prevent this limitation from applying to a Unit Owner.
You are encouraged to consult your own tax advisors concerning
your particular situation and the impact that your ownership
of a Unit and your participation in the rental pool may have
on your federal income tax liability and any state and local
income and other tax laws liability.
The When you purchase your Unit, you will automatically become a
Condominium member of the Beachside All-Suites Hotel Condominium Owners
Association, Inc. The Condominium Association will monitor
the Hotel Operating Agreement and will levy, collect and
enforce the assessments of the Association. The Owners will
elect a Board of Directors which will be responsible for
managing the Condominium Association and acting on behalf of
the Owners in certain matters. Southwind may control the
Association for up to 60 days after the sale of at least 75%
percent of the units. See "Summary of Declaration and Related
Documents -- The Condominium Association."
11
<PAGE> 18
RISK FACTORS
Prospective investors should carefully consider the following in
conjunction with the other information contained in this Prospectus before
purchasing Units.
REVENUE MAY NOT COVER EXPENSES. If the hotel fails to experience the
level of occupancy anticipated or room rates are not as high as expected, the
hotel may not generate enough income to cover its operating expenses. In
addition, if operating costs exceed those forecasted, we cannot assure you that
revenue will increase sufficiently to cover such increases. We also cannot
assure you that the rental pool income payable to an Owner in any year will
exceed the Owner's share of hotel operating costs, reserves and potential
capital expenditures in excess of such reserves for that year and the payments
on any loan obtained by an Owner to purchase a Unit.
Assuming the forecasted average daily rate of $126.12 in year 2003, the
anticipated first year of stabilized operations, occupancy required to
break-even before and after debt service is 32.5% and 54.8% respectively. This
does not include real estate taxes on your individual unit, which are expected
to range between $975 and $1,170 per unit. This level of occupancy required to
cover debt service on an Owner's loan assumes that the loan is for 80% of the
purchase price at an interest rate of 7.5% with a 30 year amortization. The
actual level of occupancy necessary for any individual Owner to break-even
before and after debt service and real estate taxes will vary depending on the
terms of the specific financing obtained by such Owner and the amount of real
estate taxes each Owner is required to pay. If average daily rate is less than
forecasted, occupancy would have to increase to maintain a break-even level. See
"Forecasts -- Summary of Significant Forecast Assumptions" at F-17.
If a significant number of Owners default on payments required to cover
shortfalls under the Hotel Operating Agreement, the hotel operator may have
insufficient funds to pay maintenance and operating costs, which could result in
the loss of the ability to operate the property as a hotel.
RISKS IN RELYING ON FORECASTS. The hotel has no operating history.
Therefore, the anticipated performance of the hotel is based on forecasts. While
we believe we have considered all factors that might affect the overall economic
performance, there are inherent risks in relying on forecasts. The evaluation of
the factors that are considered in the preparation of a forecast is highly
subjective. Actual results can differ materially from results forecasted if the
assumptions underlying the forecasts prove to be incorrect. Factors that can
cause actual performance to vary with that of a forecast include, among others,
delays in completion of the hotel beyond the summer of 2000, occupancy rate
achieved, actual average daily rate, the effects of competition, including the
impact of new supply, strength of the tourist sector of the economy and
assumptions regarding the effects of inflation. No assurance can be given that
the assumptions will prove correct or that actual results will not differ from
the results forecasted. Adverse consequences can occur if forecasted results are
not achieved, including a Unit Owner's need to pay additional funds to meet
operating costs, to fund reserves and capital expenditures, to make payments on
any loan obtained by an Owner and to pay Condominium Association expenses and
real estate taxes.
RISKS IN RELYING ON MARKET DATA. Southwind has obtained various market
information and data set forth in this prospectus regarding the hotel,
condominium and tourist industries from the Alabama Gulf Coast Convention and
Visitors Bureau. The market information and data cited may not be indicative of
results that can be achieved by Beachside All-Suites Hotel. We have not
independently verified the information and data cited.
12
<PAGE> 19
DEPENDENCE ON THE HOTEL OPERATOR. The Hotel Operating Agreement
appoints the hotel operator as the manager of the rental pool and the bookings
of the Units for an initial term of 15 years with two automatic renewal periods
of five years, unless earlier terminated. Success of the hotel will depend to a
great extent on the efforts and abilities of the hotel operator. The loss of its
services could have a material adverse effect on the hotel's business and
results of operation. The hotel operator may terminate its appointment upon 60
days' prior notice if the Owners fail to make or authorize the hotel operator to
make capital expenditures that are necessary, in the opinion of the hotel
operator, for the hotel to be operated.
If the hotel operator is terminated or resigns, it may be difficult to
contract with another party to provide replacement services immediately at
comparable costs. Termination could result in cancellations of reservations,
reduced maintenance, loss of operating licenses, loss of staff and delays in
transferring operations to a new hotel operator. The hotel could experience
lower occupancy and reduced revenue during a transition. If the Condominium
Association is required to operate the hotel for an interim period, the
Condominium Association may be at a disadvantage without the benefits of an
advanced reservation booking system and advertising provided by a hotel
operator.
INEXPERIENCE OF CONDOMINIUM ASSOCIATION BOARD OF DIRECTORS. Following
relinquishment of control of the Condominium Association by Southwind, the
Condominium Association will be governed by a Board of Directors, all of whom
will be condominium Owners. These directors may have little or no experience in
operating a hotel or a rental pool. While the directors may hire an independent
management company, management agent or executive director to assist the
directors in performing their duties to oversee and review the services and
operational results of the hotel operator, the hotel operating inexperience of
the directors may result in the directors not being able to recognize or take
corrective action to remedy operating deficiencies by the hotel operator.
COMPETITION. The success of the hotel will be determined by, among
other things, its location, quality of accommodations and room rate structure.
The hotel will compete with existing and future hotels and short-term (less than
a 30-day stay) home and condominium rentals in the Gulf Shores Market and the
surrounding area. There are approximately 1,124 hotel and motel rooms (excluding
the hotel) in the Gulf Shores Market. Approximately 199 hotel rooms have been
added to the market since 1998. Competition in the future may be affected by
changes in the hotel and short-term home and condominium rental markets in Gulf
Shores, changes in local or regional population patterns, changes in disposable
income characteristics, changes in travel patterns and preferences, and periodic
over-building that can adversely affect patronage levels.
HOTEL OPERATING UNCERTAINTIES. The value of the hotel will depend on
the ability of the hotel operator to maintain or increase gross revenue
sufficient to cover operating expenses and generate a reasonable return for its
Owners. Income from the hotel may be adversely affected by a range of factors in
addition to increased competition as discussed above. These factors include:
increases in operating costs as a result of inflation and other factors which
the hotel operator may determine cannot be offset by increased revenue; strikes
and other labor disturbances of hotel employees; increases in energy costs and
other expenses of travel; weather conditions; and adverse effects on general and
local economic conditions. Due to minimal commercial activity in Gulf Shores,
the hotel is particularly dependent upon individual leisure travelers and
tourism; occupancy by commercial travelers is expected to be minimal. All of
these factors could reduce the hotel's ability to generate revenue.
13
<PAGE> 20
SEASONAL FLUCTUATIONS. The Gulf Shores resort market is seasonal, with
demand fluctuating at different levels throughout the year. This seasonality is
expected to cause fluctuations in the gross revenue generated from the operation
of the hotel. The peak season extends from June through August. The shoulder
seasons extend from September through October and from March through May. The
low season extends from November through February.
POTENTIAL LIABILITY OF OWNERSHIP. Included in hotel operating costs
will be insurance premiums for property damage, business interruptions, public
liability and fire and other hazard insurance carried by the Condominium
Association against certain risks of operating the hotel. We cannot assure you
that the type or amount of insurance carried by the Condominium Association will
be adequate. Further, we cannot assure you that payment for insurance claims
will be received in a timely fashion. If payments are not received timely, you
will still be responsible for the debt service on your Unit. In the event
insurance is unavailable for any reason, the Condominium Association will have
to self-insure for all or part of any potential loss or to seek coverage at
higher rates from alternative carriers.
You may personally have joint and several liability for tort and
contract claims as a result of ownership of your Unit or participation in the
rental pool. Insurance coverage maintained by the Condominium Association will
include coverage for such claims; however, you are urged to consult an insurance
advisor or attorney with respect to the nature and extent of such personal
liability and to determine what additional liability insurance coverage, if any,
may be necessary or appropriate for your particular circumstances.
ZONING RESTRICTIONS. The hotel site has been zoned "BCR - Central
Resort Business District," which generally restricts the use of the property to
retail or certain commercial activities. The zoning restrictions would prohibit
the use of the property for residential condominium usage or rental, other than
condominium units that are dedicated to the control of, or managed by, a single
management entity and operated as a hotel. If the hotel ceases to operate as a
hotel for any reason, the Owners will have limited options available for the use
of the property.
LIMITED RESALE MARKET. We cannot assure you that there will be a resale
market for the sale of your Unit since the Units will not be listed on a
publicly traded exchange. Your resale ability could be further limited if the
hotel's performance does not reach expectations. In addition, you may sell your
Unit either directly yourself or through a securities broker. You may not sell
your Unit exclusively through a real estate broker. However, a real estate
broker may assist in the sale of your Unit if properly supervised by a
securities broker. You may be obligated in such event to pay commissions to both
the real estate broker and the securities broker. The fact that you may not sell
your Unit exclusively through a real estate broker may further limit your
ability to sell your Unit. Therefore, you may not be able to sell your Unit
quickly in an emergency or for a purchase price which exceeds your indebtedness.
Consequently, the purchase of a Unit should be considered only as a long-term
investment.
FAILURE TO SELL MINIMUM NUMBER OF UNITS. If we do not sell 75 Units
within 180 days from the date of the sale of the first Unit, we may elect, in
our sole discretion, to terminate our contracts with Unit purchasers. If this
occurs, your deposit is refundable with accrued interest and you will have no
further remedies. If we do not terminate our contracts with Unit purchasers, we
must deliver all Units sold within two years from the date the first Unit is
sold. If we terminate the contracts with unit purchasers after the 180 day
period or fail to deliver the units within the two-year period, your deposit is
refundable with accrued interest, and you may have remedies for breach of
contract.
14
<PAGE> 21
LIMITS ON AVAILABLE UNITS. In connection with the purchase of the
property for the hotel site, we agreed with one of the sellers of that property
to place $100,000 of the purchase price for the real property in escrow until
the hotel is completed. Upon completion of the hotel, the seller who sold us the
real property will use the $100,000 to purchase a first floor Unit of his
choice. The total purchase price for this Unit will be $100,000, which is
substantially below the offering prices of the other Units. In addition, we also
granted one of the sellers who sold us the real property an option to purchase
four additional Units of his choice at the same price that the Units will be
offered for sale to you. The seller must exercise this right within 3 days from
the date of this prospectus.
HURRICANE RISKS. Gulf Shores receives a substantial number of hurricane
warnings and threats that may require residents and tourists to evacuate the
beach area. If evacuations occur, the hotel may lose substantial revenues. In
addition, if a hurricane actually strikes in or near the area, the hotel may
incur substantial property loss or be completely destroyed. If there is
substantial property loss or destruction, the hotel operator may, in its sole
discretion, elect to terminate the Hotel Operating Agreement. If there is damage
or destruction, we cannot assure you that the hotel will continue to operate as
a hotel or that it would be rebuilt after substantial loss or destruction. If
the hotel ceases to operate as a hotel, the Owners will have limited options
available for the use of the property. See "Zoning Restrictions."
CONFLICTS OF INTEREST. Southwind, Innisfree and their affiliates may
experience certain conflicts of interest in connection with the sale of the
Units and the management of the hotel. We will attempt to resolve these
conflicts of interest on a basis that is fair and equitable to you, but we
cannot assure you that we will be able to do so. For example, it is possible
that continuation of hotel activities would be advantageous to Innisfree, which
will continue to receive fees for services rendered, while termination of the
hotel activities might be advantageous to you.
Innisfree currently operates the Days Inn Hotel in Orange Beach,
Alabama and Young's By The Sea in Gulf Shores, Alabama. Both of these hotels are
beachside hotels in the Gulf Shores Market that directly compete with the Units
for rental accommodation. Innisfree and its affiliates intend to develop, market
and manage in the future other hotels, condominiums or condominium hotel
projects, to designate their employees as temporary directors for such
associations and to act as rental agent and managers for the Owners of units in
such projects. Any future projects of Innisfree or its affiliates may also
directly or indirectly compete with the Units for rental accommodations.
Although Innisfree is required to spend sufficient time for the proper
performance of its duties as hotel operator, it is entitled to engage in other
business activities. The principals of Innisfree and its staff will not be
spending full time or a major portion of their time in connection with the hotel
and they may be actively engaged in owning or exploiting other properties which
may be in competition with the hotel. Because the staff of Innisfree will be
managing competing hotels, it is possible that they may recommend accommodations
in such hotels, which would deprive Unit Owners of revenues from the rental of
Units in the hotel.
Mr. MacQueen and Mr. Lagman have equity interests in certain entities
that own or operate condominium rental properties that are not operated as
hotels in the Gulf Shores Market. These properties may also directly or
indirectly compete with the hotel. In addition, Mr. MacQueen owns approximately
5% of the common stock of First American Bank of Pensacola, NA, the construction
lender for the hotel. Mr. MacQueen is also a member of the Board of Directors
for First American Bank. See "Southwind Development Company L.L.C. and Certain
Affiliates."
15
<PAGE> 22
POTENTIAL LIABILITY FOR VIOLATION OF ENVIRONMENTAL LAWS. Under various
federal, state, and local environmental laws, ordinances, regulations, and
common law, a current or previous Owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under, or in such property. Such laws, ordinances and regulations often
impose liability whether or not the Owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. We are not
aware of any material violations of currently applicable environmental laws or
regulations. However, it is possible that violations will occur in the future or
that more stringent laws will be enacted in the future, and that Southwind, the
hotel operator or the Owners could suffer material adverse consequences as a
result.
SIGNIFICANT INCOME TAX CONSIDERATIONS TO OWNERS. The following is a
brief summary of the most significant tax considerations discussed under
"Certain Federal and State Income Tax Aspects" involved in an investment in a
Unit and participation in the rental pool. Unless otherwise noted, this summary
is based upon the opinion of Berkowitz, Lefkovits, Isom & Kushner, A
Professional Corporation, Birmingham, Alabama, which is special counsel to
Southwind ("Counsel"). If the IRS disagrees with any of the positions described
below, you may be subject to additional taxes.
Certain additional tax considerations are discussed under "Certain
Federal and State Income Tax Aspects." You are strongly urged to review the
material and to discuss with your tax advisors the tax consequences of an
investment in a Unit and participation in the rental pool.
CLASSIFICATION OF THE RENTAL POOL AS A PARTNERSHIP. Counsel has opined
that, under current law and regulations and interpretations thereof, the rental
pool should more likely than not be classified as a partnership for federal
income tax purposes. Counsel's opinion is not binding on the Internal Revenue
Service (the "Service") or the courts. If it were determined that the
partnership is taxable as a corporation rather than as a partnership, the tax
consequences to you and the rental pool would be significant and adverse. See
"Certain Federal and State Income Tax Aspects -- Classification of the rental
pool as a Partnership." The remainder of this discussion of tax considerations
assumes that the rental pool will be taxed as a partnership.
CASH DISTRIBUTION MAY BE INSUFFICIENT TO PAY TAXES. We cannot assure
you that cash distributions from the rental pool during any applicable time
period will be sufficient for an Owner to pay the federal and state income taxes
due on income that an Owner will have to recognize on his or her individual tax
return.
SECTION 183 RULES REGARDING ACTIVITIES NOT ENGAGED IN FOR PROFIT. The
tax code distinguishes between activities engaged in for profit and activities
not engaged in for profit. Your ability to deduct your share of any losses from
the rental pool may be limited by Section 183 of the Code, which is commonly
called the "hobby loss rule." If the rental pool is subject to the hobby loss
rule, the amount you will able to deduct for your share of expenses and losses
from the rental pool will be limited to the income you receive from the rental
pool. See "Certain Federal and State Income Tax Aspects -- Section 183
Activities Not Engaged in for Profit."
VACATION HOME RENTAL RULES. Section 280A of the tax code establishes a
gross income limitation and an expense allocation formula for apportioning
deductions between personal (that is, your use of your own Unit) and business
use of a dwelling unit. Your Unit is considered a dwelling unit for federal
income tax purposes. You will be permitted to deduct your share of the rental
pool operating expenses only to the extent such expenses are allocable to
business use of your Unit. Based upon the
16
<PAGE> 23
proposed operation of the rental pool, which would limit the personal use by any
Owner to a total of 14 days in any year, the Section 280A gross income
limitation should not apply. See "Certain Federal and State Income Tax Aspects
- -- Section 280A Residence and Vacation Home Rules."
PASSIVE ACTIVITY RULES. Your participation in the rental pool is
considered a passive activity under the tax code. Losses from passive activities
generally may only be deducted against income from the same or other passive
activities. See "Certain Federal and State Income Tax Aspects -- Limitations on
Losses From Passive Activities."
PARTNERSHIP AUDIT RISK. If the rental pool's information tax return is
audited and adjusted, such audit may cause corresponding adjustments to, and may
increase the probability of an audit of, your federal income tax return. See
"Certain Federal and State Income Tax Aspects -- Administrative and Compliance
Matters."
17
<PAGE> 24
THE HOTEL AND THE HOTEL SITE
THE HOTEL
The hotel will be called Beachside All-Suites Hotel. Construction of
the hotel is expected to begin in the summer of 1999 and to be completed by the
summer of 2000. The hotel will consist of one nine-story building (excluding
the ground level) and will contain 84 fully-furnished, one-bedroom suites (with
fully-equipped kitchens, one and one-half baths and a built-in bunk bed area), a
commercial unit that will be used as a lobby and registration area; parking
facilities, a central laundry and housekeeping area and a swimming pool. We
anticipate that the suites will be used primarily by tourists and seasonal
residents as vacation accommodations.
The hotel building will be constructed with poured in place
post-tensioned concrete. It will have a stucco or similar exterior finish and a
built-up roof. The hotel will be built on precast concrete pilings, with a
portion of its 106 parking spaces at ground level underneath the first elevated
floor of the building. The first story of the hotel includes six Units, the
commercial unit and the central laundry and housekeeping area. Each of levels
two through eight of the hotel contains ten Units, and the ninth level of the
hotel contains eight Units.
The following is a representation of the hotel after construction is
completed. We believe the hotel will look substantially similar to this
representation, but we cannot assure you that it will look exactly the same
since the hotel has not been built.
[Representation showing the front of the hotel.]
THE HOTEL SITE
The hotel will be located in Gulf Shores, Alabama on a 1.137 acre
beachside site on East Beach Boulevard. East Beach Boulevard, the primary
highway through the Gulf Shores beach area, intersects with Highway 59 one block
east of the hotel site. Highway 59 is currently the most direct access into Gulf
Shores from the interstate highway system. A building which was formerly
operated as a fast-food restaurant currently occupies the site. This building
will be demolished prior to the commencement of construction of the hotel.
As part of its master plan, the City of Gulf Shores has designated the
undeveloped land directly to the east of the hotel site as a public recreation
area. We are not aware of any plans that the City has to develop the recreation
site, which is currently covered with sand dunes and sea oats, but we cannot
assure you that it will remain undeveloped in the future. The City also owns a
parcel of property running along the southern border of the hotel site. The
western 50 feet of that parcel is a strip approximately 20 feet in width; the
remaining 170 feet of the City parcel that is on the south border of the hotel
site extends to the Gulf of Mexico. The City may construct a boardwalk for
public access on that parcel, immediately south of the hotel site. We cannot
assure you that the City will ever construct the boardwalk or otherwise develop
this parcel. There is a one-story restaurant and lounge on pilings immediately
south of the 20 foot strip of city property. The restaurant is visible from the
hotel site and may partially obstruct the beach view from one or more of the
first-floor units on the west side of the hotel. Access to the public beach from
the south side of the property will be limited to a secured gate located on the
west side of the southwest corner of the property, which will open onto property
of the City of Gulf Shores with direct access to the public beach.
18
<PAGE> 25
There is a public recreation area featuring a boardwalk along the beach
immediately to the west of the hotel site. There are several restaurants, oyster
bars and sandwich shops within easy walking distance. There are also family
recreation facilities in the immediate proximity of the hotel site, along with a
seasonal amusement park and souvenir and gift stores.
The following is an aerial view of the hotel site and the surrounding
area. The building that currently occupies the site will be demolished prior to
the commencement of construction.
THE UNITS
Each Unit will consist of a suite having one bedroom, one and one-half
bathrooms, a fully-equipped kitchen, a built-in bunk-bed area and a private
balcony. The kitchen will include a refrigerator with ice-maker, a dishwasher,
garbage disposal, an electric stove top and range and a microwave. Each Unit
will have approximately 613 square feet, will be fully-furnished and will have
the capacity to sleep up to six people.
The following is a floor-plan for one of the Units. We believe all of
the Units will be constructed using this floor-plan, but it may be necessary to
make certain adjustments during the construction phase.
[Picture of floor plan for Unit.]
Although all Units will share the same basic floor plan, the hotel will have six
types of Units, all of which are described below. The purchase prices for the
different types of Units vary depending upon the location of the Units within
the hotel.
TERRACE RESORT UNITS
There will be two Terrace Resort Units. These Units will be located on
the east and west sides of the ninth floor of the hotel. Both Units will
directly overlook the Gulf of Mexico. In addition, each Terrace Resort Unit will
have windows in the bedroom and living room that provide a view to either the
east or the west. Each Unit will have a private balcony extending from the Gulf
side of the hotel to either the east or west side of the hotel.
SUPERIOR RESORT UNITS
There will be sixteen Superior Resort Units. Six Superior Resort Units
will be located on the ninth floor of the hotel. Each of these six units will
directly overlook the Gulf, but none of these units will have windows providing
a view to the east or west. Five Superior Resort Units will be located on the
fourth through eighth floors of the east side of the hotel. Each of these five
units will directly overlook the Gulf and will have a view to the east provided
by windows in the bedroom and living room. The final five Superior Resort Units
will be located on the fourth through eighth floors of the west side of the
hotel. Each of these five Units will directly overlook the Gulf and will have a
view to the west provided by windows in the bedroom and living room. All
Superior Resort Units will have private balconies facing the Gulf.
19
<PAGE> 26
THIRD FLOOR SIDE VIEW RESORT UNITS
There will be two Third Floor Side View Resort Units, one on each side
of the hotel. Each Unit will directly overlook the Gulf and will have a view to
the east or west provided by windows in the bedroom and living room. Each Unit
will also have a private balcony facing the Gulf.
SECOND FLOOR SIDE VIEW RESORT UNITS
There will be two Second Floor Side View Resort Units, one on each side
of the hotel. Each Unit will directly overlook the Gulf and will have a view to
the east or west provided by windows in the bedroom and living room. Each Unit
will also have a private balcony facing the Gulf.
FIRST FLOOR SIDE VIEW RESORT UNITS
There will be two First Floor Side View Resort Units, one on each side
of the hotel. Each Unit will directly overlook the Gulf and will have a view to
the east or west provided by windows in the bedroom and living room. Each Unit
will also have a private balcony facing the Gulf. The Unit on the west side of
the hotel may have a partially-obstructed view of the beach due to the presence
of a one-story restaurant and lounge on pilings located immediately to the south
of this Unit.
STANDARD RESORT UNITS
There will be sixty Standard Resort Units. These Units will be located
in the interior of the hotel on the first through eighth floors. None of these
Units will have windows providing a view to the east or west, but all Units will
directly overlook the Gulf and will have private balconies facing the Gulf. One
or more of the first floor Standard Resort Units on the west side of the hotel
may have a partially-obstructed view of the beach due to the presence of a
one-story restaurant and lounge on pilings located on the west side of the
hotel.
SCHEDULE OF PURCHASE PRICES
The Schedule of Purchase Prices, Percentage Ownership and Contribution
to Operating Cash Reserve for each of the Units is as follows:
20
<PAGE> 27
PURCHASE PRICE, PERCENTAGE OWNERSHIP AND CONTRIBUTION TO OPERATING CASH RESERVE
<TABLE>
<CAPTION>
NUMBER OF UNIT UNIT PRICE PERCENTAGE OPERATING
UNITS DESCRIPTION OWNERSHIP OF CASH RESERVE
UNIT CONTRIBUTION
<S> <C> <C> <C> <C>
2 One Bedroom $ 169,900 1.325 $ 662.50
Terrace Resort
Unit
16 One Bedroom $ 159,900 1.247 $ 623.50
Superior Resort
Unit
2 One Bedroom 3rd $ 157,900 1.231 $ 615.50
Floor Side View
Resort Unit
2 One Bedroom $ 154,900 1.208 $ 604.00
2nd Floor Side
View Resort Unit
2 One Bedroom 1st $ 152,900 1.192 $ 596.00
Floor Side View
Unit
60 One Bedroom $ 149,900 1.169 $ 584.50
Standard Resort
Unit
</TABLE>
ACQUISITION OF THE HOTEL SITE
Southwind purchased the hotel site from Michael A. and M. Katherine
DeJusto in 1998 for $2,341,500. Southwind financed its acquisition of the hotel
site in part by borrowing $1,800,000 from First American Bank of Pensacola, N.A.
The loan is evidenced by a promissory note dated April 16, 1998 and bears
interest at the rate of 8% per annum. The loan is secured by a mortgage dated
April 16, 1998. Payments of accrued interest only are payable quarterly. The
principal amount together with accrued interest are payable on the maturity
date, which is currently April 12, 1999. We expect to obtain an extension of the
maturity date or to obtain financing sufficient to satisfy the land acquisition
loan. Pursuant to our construction financing, the $1,800,000 land acquisition
loan from First American will be combined with a construction loan from First
American to Southwind when construction is ready to begin.
In addition, Southwind financed a portion of the purchase price for the
hotel site by issuing a promissory note in the amount of $541,500 in favor of
Michael A. and M. Katherine DeJusto, together with a second mortgage on the
hotel site. Payments of interest only at the rate of 10% per annum are due
monthly. Additional interest at the rate of 10% per annum (which is not
compounded) accrues on the principal balance remaining from time to time.
Principal and any unpaid interest are due at the earlier of (i) the closing of
90% of the units, or (ii) August 17, 1999. In connection with the purchase of
the hotel site, Southwind agreed to sell one first floor condominium unit to
Michael A. DeJusto for $100,000. The $100,000 was withheld from the $1,800,000
cash portion of the purchase price and placed in escrow pending completion of
the hotel. Furthermore, Southwind agreed to grant Michael A. DeJusto a right to
purchase up to four Units of his choice at the prices the Units are sold in this
offering.
21
<PAGE> 28
ALABAMA
Tourism is Alabama's second largest industry and plays a significant
economic role throughout the state. The growth of the tourism industry in
Alabama is based on the following:
- Favorable climate
- Natural beauty
- Number and quality of hotels and championship golf courses
- Development of new tourist attractions
- Shopping
- Healthy economy
- Aggressive tourism development
We believe that the above factors all contribute to the strong growth
the tourism industry has experienced throughout Alabama. This growth makes
Alabama an ideal location for a new hotel development. We have selected the Gulf
Shores Market as a particularly attractive location for such development.
THE GULF SHORES MARKET
GULF SHORES
Alabama's Gulf Coast includes a 32-mile span of beautiful sandy, white
beaches on the Gulf of Mexico, and is a popular vacation site. Gulf Shores is
located in the southern tip of the state on the Gulf of Mexico approximately 60
miles southeast of Mobile, Alabama, a major port. Gulf Shores is best known for
its beaches, beautiful golf courses, and mild climate. It is an incorporated
town in Baldwin County, one of the state's fastest-growing areas. Tourist
spending in Baldwin County totaled more than $1 billion in 1997, a fifth of the
state's total. Approximately 22% of Alabama's tourism-related jobs are in
Baldwin County.
Gulf Shores is conveniently accessed by a major highways, and is
serviced by a small local airport and regional airports in both Mobile, Alabama
and Pensacola, Florida. Although Gulf Shores has four distinct seasons, it has a
mild climate year round that is attractive to tourists as well as to permanent
and seasonal residents. The annual mean temperature of the region is
76.1(degrees)F, with temperatures averaging 82(degrees)F in July and
53(degrees)F in January. The average annual precipitation for the region is 58
inches.
The Gulf Shores Market and surrounding area also features eight fine
golf courses and a regional outlet mall a few miles north in Foley, Alabama.
Charter excursions for fishing and site seeing are available at several
conveniently located marinas in the Gulf Shores area. The area has a large
number of restaurants, retail stores and recreational facilities.
Gulf State Park comprises 6,000 acres and lies just east of the city of
Gulf Shores. The park has a camping area, a championship golf course and 700
acres of fresh water lake for water sports or fishing. Gulf State Park's main
inland body of water, Lake Shelby, is the closest natural occurrence of fresh
water to salt water in the world.
22
<PAGE> 29
MARKET OVERVIEW
The following chart shows the monthly, seasonal and total revenues
derived from taxable lodging rentals for hotels, motels and condominiums and
rental homes that are rented on a short-term basis (less than 30 days) in Gulf
Shores and adjacent Orange Beach, Alabama for the years 1995-1998. The variance
for each category from the previous year, which is expressed as a percentage, is
also shown.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
TAXABLE LODGING RENTALS
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Month/Season 1995-96 Variance 1996-97 Variance 1997-98 Variance
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER $6,375,427 13.1% $6,557,658 2.9% $6,412,808 -2.2%
OCTOBER $3,658,304 1.3% $4,568,045 24.9% $4,986,730 9.2%
NOVEMBER $2,089,423 12.2% $2,128,268 1.9% $2,562,267 20.4%
FALL $12,123,154 8.2% $13,253,971 9.3% $13,961,805 5.3%
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER $1,180,999 -3.0% $1,328,402 12.5% $1,268,602 -4.5%
JANUARY $1,092,123 1.6% $1,281,461 17.3% $1,489,259 16.2%
FEBRUARY $1,941,941 -0.9% $2,393,948 23.3% $2,397,748 20.0%
WINTER $4,215,062 -0.9% $5,003,811 18.7% $5,155,609 3.0%
- ------------------------------------------------------------------------------------------------------------------------------
MARCH $5,363,916 5.0% $6,832,714 27.4% $5,775,341 -15.5%
APRIL $7,805,694 5.8% $7,666,209 -1.8% $9,713,109 26.7%
MAY $9,203,773 8.8% $10,597,617 15.1% $11,855,903 11.9%
SPRING $22,373,383 6.9% $25,096,540 12.2% $27,344,353 9.0%
- ------------------------------------------------------------------------------------------------------------------------------
JUNE $18,040,618 19.5% $19,298,048 7.0% $22,059,914 14.3%
JULY $22,094,438 17.8% $19,577,682 -11.4% $27,192,566 38.9%
AUGUST $14,776,622 33.3% $15,779,301 6.8% $15,664,886 -0.7%
SUMMER $54,911,678 22.2% $54,655,031 -0.5% $64,917,366 18.8%
- ------------------------------------------------------------------------------------------------------------------------------
ANNUAL $93,623,277 15.1% $98,009,353 4.7% $111,379,132 13.6%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
This information was provided by the Alabama Gulf Coast Convention &
Visitors Bureau. The source for the information is the City of Gulf Shores
Revenue Department.
DEVELOPMENT ACTIVITY
The hotel is the only hotel currently being developed in Gulf Shores of
which Southwind is aware. The limited development activity results from lack of
available beachside property and the high cost of land that is available. Due to
these barriers to entry, there have been only three hotels that have opened in
the Gulf Shores Market in the past two years, adding a total of 199 hotel rooms
to the market.
COMPETITION
The success of the hotel will be determined by, among other things, its
location, quality of accommodation and room rate structure. The hotel will
compete with existing and future hotels and short-term (less than a 30 day stay)
home and condominium rentals in the Gulf Shores Market and surrounding
23
<PAGE> 30
areas. There are approximately 1,124 hotel rooms (excluding the hotel) in the
Gulf Shores Market. Of these rooms, 199 hotel rooms have been added to the
market since 1998. Competition in the future may be affected by changes in the
hotel and short-term home and condominium rental market in Gulf Shores, changes
in local or regional population patterns, changes in disposable income
characteristics, changes in travel patterns and preferences, and periodic
over-building that can adversely affect patronage levels.
THE COMPETITIVE SET
For the purpose of the Hotel Operating Agreement, Southwind has
designated the following five hotels in the Gulf Shores Market as the
Competitive Set: the Holiday Inn of Gulf Shores, the Quality Inn of Gulf Shores,
the Light House Resort, the Oleander Hotel and Young's By The Sea. See "The
Hotel Operator -- Management of the Hotel and the Rental Pool." These hotels
are expected to directly compete with the hotel. The factors considered in
determining the Competitive Set included the number of rooms; quality and value
of overall facilities and amenities; character and style of the hotel; rate
structure and market position; and location factors such as direct beach
frontage. The following chart sets forth the characteristics of the hotels in
the Competitive Set, together with those of the hotel:
<TABLE>
<CAPTION>
Property Year No. of Facilities
- -------- Opened Rooms ----------
------ ------
<S> <C> <C> <C>
Holiday Inn Gulf Shores Before 1989 118 Full-service beachside hotel, meeting
rooms, suites, jacuzzi (29 kitchenettes
units)
Lighthouse Before 1989 200 Extended-stay beachside hotel, indoor
and outdoor heated pool (10 full
kitchens, 140 kitchenettes units)
Oleander Hotel Before 1989 90 Limited-service beachside hotel, pool
(33 full kitchens)
Quality Inn Before 1989 155 Full-service beachside hotel, indoor
heated pool, suites (48 kitchen units)
Young's By The Sea Before 1989 112 Extended-stay beachside hotel, suites,
full kitchens, outdoor pool (77 full
kitchen units)
Beachside All-Suites Hotel Not opened 84 Extended-stay beachside hotel, suites,
(84 full kitchens), outdoor heated pool
</TABLE>
Innisfree also operates Young's By The Sea and has data available
showing its historical performance. Its has been closed since September 1998 due
to hurricane damage but is expected to reopen sometime in 2000. Although Young's
By The Sea is similar to the hotel in some respects, it differs in a number of
major respects. Thirty-five of its 112 rooms do not have kitchens and are not
extended-stay rooms. In addition, twenty-eight of the rooms have inferior
locations and views. Young's By The Sea is also more than 30 years old and has
no elevator. The historical performance of Young's By The Sea, for the years
1996 and 1997 was as follows:
24
<PAGE> 31
<TABLE>
<CAPTION>
Year Number of Rooms Revenue Occupancy ADR*
---- --------------- ------- --------- ----
<S> <C> <C> <C> <C>
1996 112 $1,521,751 54.11% $68.79
1997 112 $1,707,136 58.02% $71.98
</TABLE>
* ADR is average daily rate, which is determined by dividing the hotel room
revenue by the total number of rooms rented.
RESORT MARKET SEASONALITY
The Gulf Shores resort market is affected by seasonality with demand
fluctuating at different levels throughout the year. The severity of demand
fluctuation has decreased in recent years as a result of the increasing
popularity of the area year-round. Much of the area's outdoor recreational
activities, including golf, beach activities, bird watching and deep-sea
fishing, are available on a year-round basis. Specifically, the peak season
extends from June through August. During peak periods, occupancy in Gulf Shores
ranges from 80% - 95%. As a result, the resort market experiences numerous fill
nights (periods in which the market is at capacity) during the peak seasons.
The "shoulder" seasons are September through October and March through
May. Occupancy percentages generally range from approximately 50% to
approximately 70% during these periods. Group meetings and winter "snowbird"
demand bolster midweek occupancies, with individual tourist demand occurring
primarily on the weekends. The resort market experiences numerous fill nights on
the weekends during the shoulder seasons. The low season is November through
February. Market occupancy ranges from 30% - 50% during this period.
UNSATISFIED DEMAND
As a result of significant tourist activity, the Gulf Shores Market
experiences high levels of unsatisfied demand during certain times of the year.
Unsatisfied demand means that demand cannot be accommodated in the direct market
area due to facility size or capacity constraints. Unsatisfied demand exists
whenever a market experiences periods of 100% occupancy. As a result of
seasonality, unsatisfied demand can exist even though the average annual
occupancy for the market is less than 100%. The level of unsatisfied demand is
important when considering the potential support for new hotel development in a
particular area. We believe that unsatisfied demand will continue because of
limited beachside hotel developments in the Gulf Shores Market.
MARKET DEMAND
The overall demand for lodging accommodations in the Gulf Shores Market
is generated primarily by two market segments: individual leisure and group
meetings. Based on information obtained through interviews with Gulf Shores
hotel operators, it is estimated that the commercial demand segment comprised
only approximately 3% of the total number of hotel rooms rented in the Gulf
Shores market in 1998 due to the minimal commercial activity in Gulf Shores.
Southwind does not expect a substantial amount of business from commercial
travelers.
25
<PAGE> 32
INDIVIDUAL LEISURE
The "individual leisure" market segment consists of tourists requiring
accommodations in the area for general sightseeing, weekend "get-aways", local
festivals and a variety of recreational and special events throughout the year.
This demand segment is strongest in the spring and summer. Individual leisure
demand is characterized by multiple occupancy and therefore higher rates are
applicable. Based on information obtained through interviews with Gulf Shores
hotel operators we estimate that this market segment accounted for approximately
80% of the total hotel rooms rented in the Competitive Set in Gulf Shores in
1998. We believe that individual leisure travelers generally select
accommodations based on the following factors:
- Proximity to the beach
- Relationship to the central business district
- Aesthetic appeal of surrounding area
- Proximity to area attractions
- Overall quality of the facilities
- Quality and variety of recreational facilities
- Value offered
- Name identity or affiliation and reputation
GROUP MARKET
Group meeting demand is typically composed of smaller regional or state
associations, small businesses and state government. Corporate meeting business
consists primarily of executive or incentive retreats and conferences. Group
demand in the Gulf Shores Market typically peaks during March-April and
September-October. Based on information obtained through interviews with Gulf
Shores hotel operators, we estimate that group meeting demand accounted for
approximately 17% of the total hotel rooms rented in the Gulf Shores Market in
1998 by the hotels in the Competitive Set.
We believe there has been support from the group market in the past in
the Gulf Shores Market, and that there is a significant opportunity for new
group-oriented hotel business in the Gulf Shores Market. Currently, only a few
of the properties competitive with the hotel specifically cater to the group
demand segment. The hotel does not provide meeting rooms or conference
facilities.
PREMIER LOCATION
Located one block from Highway 59, the hotel will be the closest
beachside hotel to the main artery into the Gulf Shores Market. Highway 59
provides direct access to the interstate highway system. In addition, with its
nine-story structure, the hotel will be the most visible building in the Gulf
Shores central business district. As a result of its location and visibility,
the hotel will occupy a premiere location in relation to other hotels in Gulf
Shores. There could be future highway construction that may provide more
desirable access to the Gulf Shores Market, thereby diverting traffic from
Highway 59. We cannot assure you that the hotel will be the closest hotel to the
main artery into the Gulf Shores Market in the future.
26
<PAGE> 33
ESTIMATED PERFORMANCE FOR THE HOTEL
MARKET PENETRATION
Our estimates of operating results for Beachside All-Suites Hotel are
predicated on a number of assumptions relating to conditions in the Gulf Shores
Market, the physical characteristics of the hotel and its location. We
considered the following factors in estimating the hotel's future performance:
- The location of the hotel in relation to the other hotels
- The beachside location o All suites will have private
balconies
- The hotel will be a newly-constructed property
- The estimated mix of demand for the hotel o The estimated rate
structure for the hotel
- The impact of potential new hotel and condominium developments
- The relative experience of the management companies operating
hotels and condominiums in the Gulf Shores Market
DEMAND
Southwind estimates that the leisure market will account for
approximately 80% of the occupied rooms in the hotel during a stabilized year of
operations and that the group market will account for the remaining demand.
Southwind expects the following factors to contribute to the hotel's
ability to attract leisure travelers and groups:
- Unsatisfied demand during the peak season
- The all-suites format of the hotel
- A competitive rate structure
- The yield management techniques used by the hotel operator
- The suite's capacity to sleep six persons
- The hotel's premiere, beachside location
OCCUPANCY
As indicated in the below table, we estimate that the hotel's occupancy
will increase from 59.3% in year one to 63.8% in year three of operations.
Beyond year three, the hotel is estimated to operate at a more stabilized level
of 66% to 70%.
The relatively low occupancy rate in the first year of operation is not
unusual for a new hotel entering a market. The period between when a hotel opens
and when it reaches stabilization can vary substantially depending on the type
of hotel, its physical characteristics, its location, its market mix, and
prevailing market conditions.
The determinations of the occupancy rate upon opening and the period
necessary to reach stabilization are subjective and are based on all of the
factors discussed regarding the hotel facilities, the
27
<PAGE> 34
impact of new supply (including the impact of the hotel), and market conditions.
No one factor is determinative and no particular weight is assigned to any one
factor.
The following table sets forth the resulting occupancy estimates for
the hotel during its first full three calendar years of operation:
<TABLE>
<CAPTION>
YEAR ESTIMATED ESTIMATED TOTAL ESTIMATED
- ---- OCCUPIED ROOM OCCUPIED ROOM ESTIMATED OCCUPANCY
NIGHTS: LEISURE NIGHTS: GROUP OCCUPIED ROOM RATE FOR THE
SECTOR SECTOR NIGHTS HOTEL
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Year 1 (2001) 14,545 3,091 18,181 59.3%
Year 2 (2002) 15,207 3,232 19,009 62.0%
Year 3 (2003)* 15,649 3,325 19,561 63.8%
</TABLE>
* Forecasted first year of stabilized operating performance
AVERAGE DAILY RATE (ADR)
The ADR is the total room revenue divided by the total number of rooms
rented. The ADR is driven by the yield management concept used by Innisfree to
obtain the maximum rate and the maximum occupancy for each room on a daily
basis, based on demand. We used the ADR of Young's By The Sea to determine the
methodology for deriving an ADR for Beachside All-Suites Hotel.
CONCLUSION
We believe that the Gulf Shores lodging market will experience
continued growth into the foreseeable future. Factors contributing to the
strength of the market and its overall potential growth are:
- Projected growth of tourism throughout the Alabama region
- Increased desirability of Gulf Shores for group meeting
planners
- Local municipal commitment to aggressive marketing
- Positive economic trends within Alabama
- Enhanced interest in the Alabama Gulf Coast as a
resort and golf destination
- Steady trend of growth in lodging revenues for the past three
years
- Continued growth in the low season demand
We believe that the hotel, with its larger one-bedroom, one and a half
bath suites with fully-equipped kitchens, a built-in bunk-bed area and private
balconies that overlook the Gulf of Mexico will provide an attractive
alternative to standard hotel guest rooms. We also believe that the hotel's
quality and premiere location will position the hotel to attract individual
leisure and group travelers in the Gulf Shores Market. In addition, the hotel
will be newer than most of other hotels and condominiums in the Gulf Shores
Market. Based on all of these factors, we believe the hotel is well positioned
to perform as indicated.
BASIS FOR FORECASTS AND SUMMARY OF SELECTED
FINANCIAL PERFORMANCE
The following represents a summary of selected financial performance of
a typical one-bedroom standard resort Unit, first floor side view resort unit,
second floor side view resort unit, third floor side
28
<PAGE> 35
view resort unit and the terrace resort unit for the first full three years of
operations and is derived from the Forecasts appearing on page F-l. This summary
of selected financial performance should be read in conjunction with the
Forecasts, which includes the assumptions underlying the Forecasts and related
notes.
The Forecasts include a three-year forecast of the financial
performance of the hotel and, by applying the allocable percentage to the
correct unit type, a three-year forecast of financial performance for the Owners
of each of the typical Units illustrated. Southwind has prepared the Forecasts
based upon its inquiry as set forth and based upon the stated assumptions, which
it believes are reasonable. While Southwind believes it has taken into
consideration all factors that can affect the overall economic performance of
the hotel, there are a number of critical factors that can cause actual
performance, especially when related to the hotel industry, to vary with that of
a forecast. These factors include, but are not limited to, (a) projected
occupancy rate; (b) projected average daily room rate; (c) the effect of
competition; (d) general economic environment; (e) strength of the tourist
sector of the economy; (f) assumptions regarding the effects of inflation on
both revenue and expenses; and (g) weather conditions.
Investors should recognize that there can be no assurance that the
assumptions will prove correct or that actual results will not differ from the
results forecasted. Actual results may vary materially because events and
circumstances frequently do not occur as expected. Investors are encouraged to
consult with their own advisors with respect to the assumptions upon which the
forecasts are based and are encouraged to review the discussion of risk factors
regarding the hotel and its operations set forth under the heading "Risk
Factors."
29
<PAGE> 36
<TABLE>
<CAPTION>
TYPICAL ONE-BEDROOM STANDARD RESORT UNIT ($149,900)
YEAR 1 YEAR 2 YEAR 3
(Year ending Dec 31, 2001) (Year ending Dec 31, 2002) (Year ending Dec. 31, 2003)
<S> <C> <C> <C>
Average Occupancy 59.3% 62% 63.8%
Average Occupancy required to achieve 29.6% 31% 32.53%
break-even before Debt Service (1)
ADR $117.21 $120.94 $126.12
Revenue Per Room $25,284 $27,277 $29,271
Net distributable cash flow assuming no $13,203 $13,971 $14,700
personal usage
Net distributable cash flow assuming 14 $11,313 $12,081 $12,810
days personal usage (2)
Net after debt service cash flow $3,141 $3,909 $4,638
assuming no personal usage (3)(4)
Net after debt service cash flow $1,251 $2,019 $2,748
assuming 14 days personal usage
(2)(3)(4)
</TABLE>
<TABLE>
<CAPTION>
TYPICAL ONE-BEDROOM 1st FLOOR SIDE VIEW RESORT UNIT ($152,900)
YEAR 1 YEAR 2 YEAR 3
(Year ending Dec 31, 2001) (Year ending Dec 31, 2002) (Year ending Dec. 31, 2003)
<S> <C> <C> <C>
Average Occupancy 59.3% 62% 63.8%
Average Occupancy required to achieve 29.6% 31% 32.53%
break-even before Debt Service (1)
ADR $117.21 $120.94 $126.12
Revenue Per Room $25,790 $27,823 $29,857
Net distributable cash flow assuming no $13,467 $14,251 $14,994
personal usage
Net distributable cash flow assuming 14 $11,577 $12,361 $13,104
days personal usage (2)
Net after debt service cash flow $3,204 $3,988 $4,731
assuming no personal usage (3)(4)
Net after debt service cash flow $1,314 $2,098 $2,841
assuming 14 days personal usage
(2)(3)(4)
</TABLE>
(1) Assumes the forecasted ADR is achieved, the ratio of each type of
revenue to total revenue remains constant, the ratio of departmental
expenses to departmental revenue remains constant, and undistributed
and fixed expenses remain constant as to dollar amounts. To illustrate
the effect of lower ADR, if ADR is 15% less than forecasted, the
occupancy to break-even would have to increase between 8% to 10%.
(2) Assumes that Owner usage has been calculated by multiplying 14 days
times $135 ADR per day for all three years. The cleaning charges to the
Owner have been ignored for purposes of this calculation.
(3) Assumes debt service of 80% of the purchase price at interest rate of
7.5% with a 30 year amortization.
(4) Before real estate taxes.
30
<PAGE> 37
<TABLE>
<CAPTION>
TYPICAL ONE-BEDROOM 2nd FLOOR SIDE VIEW RESORT UNIT ($154,900)
YEAR 1 YEAR 2 YEAR 3
(Year ending Dec 31, 2001) (Year ending Dec 31, 2002) (Year ending Dec. 31, 2003)
<S> <C> <C> <C>
Average Occupancy 62% 63.8% 65.6%
Average Occupancy required to achieve 29.6% 31% 32.53%
break-even before Debt Service (1)
ADR $117.21 $120.94 $126.12
Revenue Per Room $26,128 $28,187 $30,247
Net distributable cash flow assuming no $13,664 $14,437 $15,190
personal usage
Net distributable cash flow assuming 14 $11,754 $12,547 $13,300
days personal usage (2)
Net after debt service cash flow $3,246 $4,039 $4,792
assuming no personal usage (3)(4)
Net after debt service cash flow $1,356 $2,149 $2,902
assuming 14 days personal usage
(2)(3)(4)
</TABLE>
<TABLE>
<CAPTION>
TYPICAL ONE-BEDROOM 3rd FLOOR SIDE VIEW RESORT UNIT ($157,900)
YEAR 1 YEAR 2 YEAR 3
(Year ending Dec 31, 2001) (Year ending Dec 31, 2002) (Year ending Dec. 31, 2003)
<S> <C> <C> <C>
Average Occupancy 59.3% 62% 63.8%
Average Occupancy required to achieve 29.6% 31% 32.53%
break-even before Debt Service (1)
ADR $117.21 $120.94 $126.12
Revenue Per Room $26,634 $28,732 $30,833
Net distributable cash flow assuming no $13,908 $14,717 $15,484
personal usage
Net distributable cash flow assuming 14 $12,018 $12,827 $13,594
days personal usage (2)
Net after debt service cash flow $3,309 $4,118 $4,885
assuming no personal usage (3)(4)
Net after debt service cash flow $1,419 $2,228 $2,995
assuming 14 days personal usage
(2)(3)(4)
</TABLE>
(1) Assumes the forecasted ADR is achieved, the ratio of each type of
revenue to total revenue remains constant, the ratio of departmental
expenses to departmental revenue remains constant, and undistributed
and fixed expenses remain constant as to dollar amounts. To illustrate
the effect of lower ADR, if ADR is 15% less than forecasted, the
occupancy to break-even would have to increase between 8% to 10%.
(2) Assumes that Owner usage has been calculated by multiplying 14 days
times $135 ADR per day for all three years. The cleaning charges to the
Owner have been ignored for purposes of this calculation.
(3) Assumes debt service of 80% of the purchase price at interest rate of
7.5% with a 30 year amortization.
(4) Before real estate taxes.
31
<PAGE> 38
<TABLE>
<CAPTION>
TYPICAL ONE-BEDROOM SUPERIOR RESORT UNIT ($159,900)
YEAR 1 YEAR 2 YEAR 3
(Year ending Dec 31, 2001) (Year ending Dec 31, 2002) (Year ending Dec. 31, 2003)
<S> <C> <C> <C>
Average Occupancy 59.3% 62% 63.8%
Average Occupancy required to achieve 29.6% 31% 32.53%
break-even before Debt Service (1)
ADR $117.21 $120.94 $126.12
Revenue Per Room $26,971 $29,096 $31,223
Net distributable cash flow assuming no $14,084 $14,903 $15,680
personal usage
Net distributable cash flow assuming 14 $12,194 $13,013 $13,790
days personal usage (2)
Net after debt service cash flow $3,351 $4,170 $4,947
assuming no personal usage (3)(4)
Net after debt service cash flow $1,461 $2,280 $3,057
assuming 14 days personal usage
(2)(3)(4)
</TABLE>
<TABLE>
<CAPTION>
TYPICAL ONE-BEDROOM TERRACE RESORT UNIT ($169,900)
YEAR 1 YEAR 2 YEAR 3
(Year ending Dec 31, 2001) (Year ending Dec 31, 2002) (Year ending Dec. 31, 2003)
<S> <C> <C> <C>
Average Occupancy 59.3% 62% 63.8%
Average Occupancy required to achieve 29.6% 31% 32.53%
break-even before Debt Service (1)
ADR $117.21 $120.94 $126.12
Revenue Per Room $28,658 $30,916 $33,176
Net distributable cash flow assuming no $14,965 $15,835 $16,661
personal usage
Net distributable cash flow assuming 14 $13,075 $13,945 $14,771
days personal usage (2)
Net after debt service cash flow $3,561 $4,431 $5,257
assuming no personal usage (3)(4)
Net after debt service cash flow $1,671 $2,541 $3,367
assuming 14 days personal usage
(2)(3)(4)
</TABLE>
(1) Assumes the forecasted ADR is achieved, the ratio of each type of
revenue to total revenue remains constant, the ratio of departmental
expenses to departmental revenue remains constant, and undistributed
and fixed expenses remain constant as to dollar amounts. To illustrate
the effect of lower ADR, if ADR is 15% less than forecasted, the
occupancy to break-even would have to increase between 8% to 10%.
(2) Assumes that Owner usage has been calculated by multiplying 14 days
times $135 ADR per day for all three years. The cleaning charges to the
Owner have been ignored for purposes of this calculation.
(3) Assumes debt service of 80% of the purchase price at interest rate of
7.5% with a 30 year amortization.
(4) Before real estate taxes.
32
<PAGE> 39
THE HOTEL OPERATOR
The hotel will be managed and operated by Innisfree Hotels, Inc., which
is based in Gulf Breeze, Florida. Innisfree has been in business for more than
14 years and owns and operates 11 hotel properties throughout the southeastern
United States and Arizona. Innisfree currently has more than 1,100 guest rooms
under management. Two of the Innisfree properties, the Days Inn Hotel in Orange
Beach, Alabama and Young's By The Sea in Gulf Shores, Alabama, are beachside
hotels located in the Gulf Shores Market. Julian B. MacQueen founded Innisfree
in 1985 and has served as its Chairman and Chief Executive Officer since that
time. Mr. MacQueen also owns 64% of the equity interest of Southwind.
MANAGEMENT OF THE HOTEL AND THE RENTAL POOL
The hotel operator will manage the hotel and the rental pool and
maintain the hotel on behalf of the Owners pursuant to the Hotel Operating
Agreement. The following discussion of the Hotel Operating Agreement does not
purport to be complete and is qualified in its entirety by reference to the
Hotel Operating Agreement together with all attachments and exhibits to the
Hotel Operating Agreement, which is filed as an Exhibit to the Registration
Statement.
MANAGEMENT OF THE RENTAL POOL
Participation for all Unit Owners in the rental pool in accordance with
the Hotel Operating Agreement is mandatory. In addition, any Units that have not
been sold by Southwind will be placed in the rental pool. A Unit will
automatically be placed in the rental pool except when the Unit is reserved for
use by the Owner. Each Owner appoints the hotel operator as his exclusive agent
for management of the rental pool and the bookings of the Owner's Unit and
agrees to honor and be bound by the rental booking of his Unit made by the hotel
operator in accordance with the Hotel Operating Agreement. Units may not be used
for any purpose other than as hotel suites in accordance with the Hotel
Operating Agreement, the Declaration and other condominium documents governing
the hotel. The hotel operator has complete discretion to establish Unit rental
rates including offering the use of Units at low promotional rental rates and
offering Units on a complimentary basis from time to time to guests of the
hotel.
The initial operating period of the rental pool will commence on the
date that the hotel is opened by the hotel operator for business as a hotel in
the hotel operator's hotel system and will conclude on December 31 in that year.
Thereafter, operating periods for the rental pool will run 12 months based on
the calendar year.
OWNERS' USE OF UNITS
United States tax laws permit an Owner to deduct his expenses
associated with owning a Unit only if he uses the Unit no more than 14 days per
year. Therefore the Hotel Operating Agreement requires that AN OWNER MAY ONLY
USE HIS UNIT FOR A TOTAL OF 14 DAYS PER CALENDAR YEAR. See "Certain Federal and
State Income Tax Aspects - Tax Consequences of Rental Pool to Owners - Section
280A." If an Owner reserves the use of his Unit for a stay which commences at or
after 2:00 p.m. on a Friday or a Saturday, the Owner must reserve the Unit for a
minimum two night stay. An Owner may use his Unit no more than four times a year
with respect to two or three night stays that commence at or after 2:00 p.m. on
a Friday or a Saturday. The Owner must reserve the use of his Unit by written
notice to the hotel operator no less than four months prior to the date the
Owner intends to use the Unit. However, an Owner may request the use of his Unit
on less than four months notice on an "as available" basis. If an Owner does not
use all of his allotted days in a calendar year, he will not be entitled to
accumulate the unused days for use in any subsequent year. Furthermore, if an
Owner reserves the use of his Unit, but does not use the Unit at the reserved
time, unless the Unit is made available for rental to
33
<PAGE> 40
the public and the Owner has canceled the reservation with the approval of the
hotel operator no less than 30 days prior to the Owner's scheduled use, the
Owner will nonetheless be deemed to have used the Unit, and the Unit will not be
deemed to be in the rental pool for the benefit of such non-canceling Owner for
the reserved time. An Owner will be required to pay a mandatory room cleaning
charge in connection with the use of his Unit. In addition, an Owner will pay
the standard charges established by the hotel operator for, among other
amenities, long distance telephone calls, movie rentals, vending machine
charges; charges for use of any recreational facilities located off the hotel
Premises pursuant to Agreement with third parties, and the purchase of other
goods and services at the hotel. All of the furniture, fixtures and equipment
located in and around the hotel (excluding any such items located in a Unit)
will be owned collectively by the Owners. Any furniture, fixtures and equipment
located within a Unit will be owned by the Owner of the Unit but cannot be
removed or changed except as set forth in the Hotel Operating Agreement.
ALLOCATION OF REVENUE AND EXPENSES
The Hotel Operating Agreement describes the manner in which income from
Unit rentals is divided among the Owners. For each day that a Unit is in the
rental pool, the Owner of that Unit will be entitled to share in the gross
revenue from the operation of the hotel, regardless of whether the Owner's Unit
generated rental income on that particular date. An Owner's allocable share of
the gross revenue will be determined based on the percentage interest of the
Unit as set forth in Annex A and in the Declaration.
An Owner's allocable share of revenue for a day in which the Owner's
Unit is in the rental pool (not reserved for use by the Owner) will be
determined according to the following formula:
(% Interest of the Unit)
(Gross Revenue for the Day) X ---------------------------------------
(the sum of the % Interests of Units in
rental pool that day)
Each Owner will be responsible for his allocable share (as determined
under the Declaration) of all hotel expenses and other costs attributable to the
Owners under the Hotel Operating Agreement. An Owner will be responsible for his
allocable share of the costs attributable to the Owners for each day that the
hotel is operating, regardless of whether the Owner's Unit is in the rental pool
on any particular day. The Owners bear all of the costs and expenses of
operating, maintaining and repairing the hotel, the hotel grounds and the
contents of the hotel. These costs include, for example: (i) repair and
maintenance of hotel buildings, grounds, furniture, fixtures and equipment
located at the hotel; (ii) purchasing all supplies including linens, and
cleaning products necessary for the operation of the hotel; (iii) costs
associated with hiring, firing and compensating employees necessary to staff the
hotel; (iv) fees paid to the hotel operator; (v) utilities and insurance; and
(vi) marketing and promotion expenses, reservation fees and travel agent
commissions.
DIRECT EXPENSES OF OWNERS
Each Owner will be personally responsible for the payment of all
property taxes applicable to his Unit and contents, amounts owed under any
financing of the Unit, and all assessments made by the Condominium Association.
The amount of property taxes to be paid by each Owner will be determined
annually by the Baldwin County Assessor's Office. Property taxes will be
assessed against each Owner as of the date the Unit is purchased by the Owner.
Southwind's estimate of taxes is based on application of 1995 tax rates to such
property. The actual tax may differ from the projected amount when actually
assessed. Subsequent transfers of one or more Units may cause further
reassessments of one or more Units and tax increases. Property taxes may
increase for all Owners even in years in which no reassessment from any sale or
transfer occurs.
34
<PAGE> 41
RENTAL POOL REPORTS
For each calendar month, the hotel operator will prepare detailed
statements of operations that describe, among other things, the gross revenue
from the hotel, hotel operating expenses, capital expenditures, reserves, and
the amount, if any, distributable to an Owner for that month. A summary of these
statements of operations will be mailed to each Owner no later than the 25th day
following the end of each calendar month. The hotel operator will also prepare
and mail to each Owner within 75 days after the end of an operating year
statements of operations for the entire operating year and individual statements
relative to each Owner's Unit. The individual statements will serve as the basis
for reporting to the Internal Revenue Service and other appropriate taxing
authorities.
DISTRIBUTIONS FROM RENTAL POOL
The amount distributable to an Owner will be computed each month by
subtracting the following amounts from the Owner's share of gross revenue from
hotel operations: (i) the Owner's share of hotel operating expenses; (ii) the
Owner's share of amounts necessary to fund or replenish operating and capital
expenditure reserves, make capital lease payments, if any, and pay the hotel
operator's Incentive Fee, if any; (iii) the Owner's share of capital
expenditures exceeding amounts paid out of the appropriate reserve; (iv) the
Owner's share of repayment expenses in connection with a previous operating
shortfall, if any, (see "Shortfalls" below) after depletion of reserves (see
"Reserves" below); (v) any assessment payable by the Owner pursuant to the
Declaration; (vi) expenses associated with an Owner's personal use of the hotel
(for example, the cleaning charge); (vii) bed taxes and other similar taxes
imposed or collected in connection with the use of the hotel by the hotel
patrons; (viii) withholding taxes, if applicable; (ix) and any other amounts
payable by the Owner to Innisfree pursuant to the Hotel Operating Agreement.
The amount distributable to an Owner, if any, will be sent to the
Owners with the monthly financial summary (see, "Rental Pool Reports" above).
Alternatively, the hotel operator, in consultation with the Board of Directors,
may prepare a reasonable estimate of the amount distributable to the Owners on
an annual basis and distribute to the Owners the estimated amount, less an
amount (not to exceed 20%) established by the hotel operator for seasonal
working capital requirements, in 12 equal monthly installments. If the hotel
operator elects to distribute an estimated amount, at the end of the operating
year the hotel operator will calculate the actual amount distributable to each
Owner and pay to each Owner the balance of the amount, if any, distributable for
that operating year. This last payment will be sent after the end of the
operating year with the annual financial statements.
RESERVES
An operating cash reserve in the amount of $50,000 will be established
when the hotel commences operations. Upon the closing of the purchase of a Unit,
the Unit Owner will be required to contribute to the operating cash reserve an
amount indicated on the Schedule of Purchase Prices on Page 21. This reserve
will be available to the hotel operator for working capital in connection with
the operation of the hotel commencing in the second year of operations.
Additionally, a reserve will be established for capital expenditures for repair
and replacement of the hotel premises and repair and replacement of furniture,
fixtures and equipment at the rate of 1% of gross revenue beginning in year one
of operations and increasing by 1% of gross revenue per year in each of the next
four years until reaching 5% of gross revenues for the fifth operating year and
subsequent years. This reserve will increase each year through year five. The
amount of the reserve for years two through five are as follows: 2% in year 2;
3% in year 3; 4% in year 4 and 5% in year 5 and beyond.
35
<PAGE> 42
SHORTFALLS
If at any time the funds derived from the operations of the hotel
(including established reserves) are not sufficient to pay when due all expenses
incurred in connection with the operation of the hotel, capital expenditures or
other amounts for which the Owners are liable (such as may occur from time to
time as a result of, among other causes, seasonal fluctuations in the use of the
hotel by Owners and other patrons), the hotel operator may require each Owner to
remit to the hotel operator his allocable share of the shortfall. The hotel
operator may elect, but is not obligated, to advance the shortfall and obtain
repayment of the shortfall, plus interest accruing at the designated prime rate
plus 2%, out of the cash flow from the operations of the hotel.
HOTEL OPERATOR MAY RELY UPON ACTS OF BOARD OF DIRECTORS
The Board of Directors of the Condominium Association elected in
accordance with the provisions of the Declaration will represent the Owners in
certain respects concerning the hotel operator. See "Summary of Declaration and
Related Documents - - The Condominium Association - Board of Directors". All of
the Owners will be bound by the acts of the Board of Directors on behalf of the
Owners and the hotel operator will be entitled to rely upon the acts of the
Board of Directors as the authorized acts of the Owners. The hotel operator has
agreed to meet with the Board of Directors on behalf of the Owners.
MANAGEMENT OF THE HOTEL
The hotel operator will perform, on an exclusive basis, all duties and
obligations within the scope of the management, maintenance, and marketing of
the hotel. The hotel operator will, among other things, use all reasonable
efforts to maintain and operate the hotel substantially in accordance with the
standards of the Competitive Set hotel, market and sell the rental use of the
Units, furnish bookkeeping, inventory control, reservations, marketing and
advertising services, direct, in consultation with the Board of Directors,
litigation in respect of the hotel, supervise the use of the hotel by guests and
Owners, hire, train, terminate and perform other managerial functions with
respect to the staff necessary to the operation of the hotel, and obtain for
itself and on behalf of the Owners all insurance, licenses and permits necessary
to the operation of the hotel. The hotel operator may make, at the Owners'
expense, but subject to the then current approved operating plan and budget and
other limitations, reasonable changes to the hotel.
The hotel operator will prepare, on or before December 1 of each year,
an annual budget for the operation of the hotel during the following operating
year. The annual budget will be subject to the reasonable approval of the Board
of Directors of the Condominium Association and a summary of the budget will be
sent to all of the Owners after it has been approved by the Board of Directors.
Disputes regarding the budget will be resolved by arbitration.
The hotel operator will obtain and maintain, as an operating expense of
the hotel, public liability, fire and casualty, business interruption, workmen's
compensation and other insurance reasonably necessary to the operation of the
hotel, naming the Owners, the hotel operator and the Condominium Association as
insureds. With regard to the possible liability of the Owners, see "Risk
Factors-Insurance."
Under the Hotel Operating Agreement, the hotel operator may, in its
discretion, assign all or a portion of its rights and obligations under the
Hotel Operating Agreement to an affiliate of the hotel operator or any successor
in interest to the hotel operator.
36
<PAGE> 43
FEES PAID TO HOTEL OPERATOR
As a compensation for its services provided under the Hotel Operating
Agreement, the hotel operator will be paid various fees. The hotel operator's
fees will be paid out of the gross revenues of the hotel. The hotel operator
will receive annually a Base Fee of 5% of gross revenues payable in monthly
installments. The hotel operator will receive an Incentive Fee in varying
percentages of the hotel's net distributable income. In 2001, the Incentive Fee
will be 15% of the net distributable income in excess of $1,252,978 and less
than $1,384,522 plus 30% of net distributable income in excess of $1,252,978. In
2002 the Incentive Fee will be 15% of the net distributable income in excess of
$1,252,978 and less than $1,384,522 plus 25% of net distributable income in
excess of $1,384,522. In 2003 through 2005 it will be 12% of the net
distributable income in excess of $1,252,978 and less than $1,384,522 plus 22.5%
of the net distributable income in excess of $1,384,522. In 2006 and thereafter
it will be 10% of the net distributable income in excess of $1,252,987 and less
than $1,384,522 plus 20% of the net distributable income in excess of
$1,384,522. The hotel operator will also receive reimbursement for marketing and
reservations system costs incurred in connection with the operation of the
hotel. The hotel operator will also be paid a monthly Accounting Fee in the
amount of $30.00 per month per Unit. In addition, the hotel operator will be
entitled to be reimbursed for costs incurred by the hotel operator in connection
with special promotional programs, training materials, travel by head office
personnel and others on matters directly involving the hotel, and other similar
expenses. The hotel operator may retain an affiliate or division as a consultant
to perform technical services in connection with any substantial remodeling,
repairs, construction or other capital improvements to the hotel and the hotel
operator will be entitled to be compensated by the Owners for such services.
TERMINATION OF HOTEL OPERATOR
The appointment of the hotel operator under the Hotel Operating
Agreement will run continuously from the date that the hotel is opened for
business as a hotel in the hotel operator's hotel system until December 31,
2014, unless earlier terminated. The appointment of the hotel operator may be
renewed for two additional terms of 5 years each if certain conditions are
satisfied or by agreement of the Owners and the hotel operator. If the Owners
fail to make or authorize the hotel operator to make capital expenditures
without which the hotel cannot be operated substantially in accordance with the
standards of the Competitive Set, the hotel operator may terminate its
appointment under the Hotel Operating Agreement upon 60 days' prior notice to
the Board of Directors of the Condominium Association. The appointment of the
hotel operator under the Hotel Operating Agreement may be terminated by a vote
of 75% of the Units entitled to vote on the matter if the hotel operator is in
default under the Hotel Operating Agreement and the hotel operator fails to cure
the breach within the required time. In addition, because the Hotel Operating
Agreement will be entered into before the Board of Directors elected by the Unit
Owners takes office, the Condominium Association may have the right to terminate
the Hotel Operating Agreement under Alabama Law.
SALE OF A UNIT BY AN OWNER
The Hotel Operating Agreement contains certain conditions that must be
satisfied in connection with the sale of a Unit by an Owner. Prior to entering
into an agreement for the sale of a Unit, the selling Owner must provide the
proposed purchaser with a copy of the Hotel Operating Agreement and must notify
the proposed purchaser of any proposed bookings of the Unit by the selling
Owner. In addition, the purchaser must, as a condition of the purchase, ratify
the Hotel Operating Agreement, appoint the hotel operator as its exclusive agent
for the management and rental of the hotel and the Unit, and expressly assume
the obligations of an Owner pursuant to a form acceptable to the hotel operator.
The Hotel Operating Agreement does not terminate upon the death or the attempted
withdrawal of an Owner or upon the sale or transfer of a Unit by an Owner.
37
<PAGE> 44
SUMMARY OF DECLARATION AND RELATED DOCUMENTS
The Declaration, Articles of Incorporation and Bylaws of the
Condominium Association impose certain covenants, conditions and restrictions on
the Units and Owners. The following discussion of these documents is a summary
of all of the material terms of these documents but does not purport to be
complete and is qualified in its entirely by reference to such documents and
instruments which are attached as Exhibits to the Registration Statement filed
by Southwind with the Securities and Exchange Commission.
THE CONDOMINIUM ASSOCIATION
The Condominium Association will be formed as an Alabama non-profit
corporation to perform various management and supervision functions at the hotel
on behalf of the Owners pursuant to the Declaration. The Declaration,
established by Southwind as Declarant, is recorded against title to the
property. An Owner of a Unit automatically becomes a member of the Condominium
Association. Membership in the Condominium Association may not be transferred or
retained separately from any Unit.
The Condominium Association will supervise the hotel manager and assure
the performance of all appropriate maintenance, management, repair, and
administration of the hotel, including the Common Elements, the Units, and all
of the furnishings, fixtures, equipment and other items located in and around
the hotel. Actual operation of the hotel will be the responsibility of a hotel
operator, pursuant to the terms of a Hotel Operating Agreement. The Condominium
Association shall be responsible for representing the Owners with respect to
matters related to the Hotel Operating Agreement, including reviewing and
approving proposed annual budgets prepared by the hotel operator and
coordinating with and reviewing the performances of the hotel operator. If the
hotel operator defaults in its obligations under the Hotel Operating Agreement
or if the Hotel Operating Agreement terminates and is not concurrently replaced
with a new hotel operator and Hotel Operating Agreement, the Condominium
Association shall be responsible for managing and operating the hotel.
Based upon the costs of operating the Condominium Association and the
performance of its obligations under the Declaration, the Condominium
Association may levy annual Assessments against each Unit. The Assessment, if
any, against each Unit shall consist of the total estimated Common Expenses set
forth in the budget adopted by the Board of Directors of the Condominium
Association (after taking into account the amounts proposed to be paid from
operating revenue by the hotel operator pursuant to the approved hotel budget)
multiplied by the allocable share attributable to each Unit. If the Board of
Directors determines during any fiscal year that available Condominium
Association funds are or will become inadequate to meet Common Expenses of the
Condominium Association for any reason, the Board of Directors may increase and
reallocate Common Expense Assessments for that fiscal year.
In addition to Common Expense Assessments, the Condominium Association
may levy special assessments for the purposes of defraying the cost of any
construction, reconstruction, repair or replacement of capital improvements to
any one or more Units or the Common Elements.
Assessments shall either be payable in whole or in installments, as
established by the Board of Directors. The Condominium Association is
responsible for enforcement and collection of the assessments. Delinquent
assessments may accrue interest and may be subject to other late fees. The
Condominium Association may request the hotel operator to offset assessments
from amounts otherwise due to the Owners pursuant to the Hotel Operating
Agreement. The Condominium Association also has the right to enforce all other
rights and remedies to collect assessments, including but not limited to either
initiating a lawsuit against a defaulting Owner to collect delinquent
assessments or foreclosing any assessment lien against a defaulting Owner's
Unit, or both. Once a delinquent Owner has paid its past
38
<PAGE> 45
due assessment, and all collection costs and any late fees and accrued interest,
whether by offset from amounts due from the rental pool or otherwise, each Owner
will have all rights available to all non-defaulting Owners under the
Declaration.
VOTING RIGHTS
All voting rights are vested exclusively in the members of the
Condominium Association. The Declaration provides that there will be a period of
control by Southwind until up to 60 days after the conveyance of 75% of the
Units to Owners other than Southwind. During the period that Southwind controls,
only Southwind will have the right to appoint and remove the members of the
Board of Directors and the officers of the Condominium Association; provided,
however, that within 90 days after the conveyance of 25% of the Units have been
sold to Owners other than Southwind, at least one board member and 25% of the
members of the Board of Directors must be elected by Owners other than Southwind
and that within 90 days after the conveyance of 50% of the Units have been sold
to Owners other than Southwind, not less than 33 1/3% of the members of the
Board of Directors must be elected by Owners other than Southwind. Such board
members and officers are not required to be Owners during the period of
Southwind control. After termination of the period of Southwind control, each
Owner will be entitled to cast a vote equal to his percentage interest in all
meetings of the members of the Condominium Association. Only a single vote may
be cast for each Unit, regardless of how title is held. If a Unit is owned by
more than one person and such Owners are unable to agree among themselves as to
how their vote or votes shall be cast, they will lose their right to vote on the
matter in question.
The Declaration may only be amended or modified by an affirmative vote
of the holders of at least 67% of the hotel interest. Except where applicable
law otherwise requires or in cases involving the exercise of development rights
by Southwind, eminent domain, relocation of limited common elements or
boundaries between Units, subdivision of Units, or termination of the
condominium. In addition, the approval of the holders of mortgage or vendor's
liens who represent at least 51% of the Units subject to mortgage or vendor's
liens is required in connection with certain acts of the Condominium
Association. Further, any amendment must be approved by the City of Gulf Shores.
MEETINGS
The Condominium Association is required to hold annual meetings.
Special meetings of the Condominium Association may be called at any time by the
president of the Condominium Association, by a majority of the Board of
Directors, or by written request of the Owners holding at least 20% of the votes
entitled to be cast at such meeting. All Condominium Association meetings will
be held pursuant to notice given to the Owners not less than 10 nor more than 60
days prior to the date of the meeting. Owners entitled to cast 51% of the total
authorized votes will constitute a quorum. If a quorum is not present at any
meeting, the Owners entitled to vote who are present at such meeting will have
the power to adjourn the meeting without notice other than announcement at the
meeting and the Owners present at the time and place announced in the prior
adjourned meeting will constitute a quorum.
BOARD OF DIRECTORS; OFFICERS
Unless the Declaration, other condominium documents or applicable law
require a vote of the Owners, approvals or actions to be given or taken by the
Condominium Association will be valid if given or taken by the Board of
Directors. The initial Board of Directors will consist of three directors, who,
except during the period of Southwind control, must be members of the
Condominium Association. Directors are non-salaried and will not be required to
render full time service. Except with respect to directors appointed by
Southwind, any director may be removed with or without cause by Owners having at
least 67% of the votes entitled to be cast on such matter.
39
<PAGE> 46
The Board of Directors is responsible for the control and management of
the Condominium Association and the disposition of its funds and properties. The
responsibilities of the Board of Directors include, but are not limited to:
opening bank accounts on behalf of the Condominium Association; approving or
disapproving additions to, improvements to, or alterations to the hotel;
enforcing, by legal means, the provisions of the Declaration and other
condominium documents; following receipt of a proposed annual budget from the
hotel operator, adopting an annual budget and operating plan for the hotel and
Condominium Association prior to the commencement of each operating year;
exercising for the Condominium Association all powers, duties and authority
vested in or delegated to the Condominium Association and not reserved to the
membership by other provisions of the Declaration or other condominium
documents; supervising all officers, agents and employees of the Condominium
Association and seeing that their duties are properly performed; levying,
collecting and enforcing the payment of assessments in accordance with the
provisions of the Declaration; causing to be procured and maintained adequate
property liability and other insurance as required by the Declaration;
negotiating with the hotel operator; and engaging providers of professional
services including attorneys, accountants and property managers, to render
services to the Condominium Association.
Officers of the Condominium Association will include a president,
vice-president, secretary and treasurer, to be appointed by the Board of
Directors for one year terms. The Board of Directors may appoint other officers
for such terms and with such authority as is determined by the Board of
Directors.
USE RESTRICTIONS
Restrictions on the use of Units appear in the Declaration, the Hotel
Operating Agreement and other documents. The use restrictions include, without
limitation, the following:
1. The Units must be used only for commercial rental by the hotel
operator to the public for tourist, visitor and transient traveller
accommodation.
2. An Owner may not individually lease his Unit or directly or
indirectly charge rent or any form of consideration for the use of the Owner's
Unit except in accordance with the terms of the Hotel Operating Agreement.
3. The use of the Units is subject to the requirements of, among other
documents, the Hotel Operating Agreement and the Declaration.
4. The rights of an Owner to make use of the common elements at the
hotel are limited to those times when the Owner has the right to occupy his Unit
in accordance with the terms of the Hotel Operating and rental pool Agreement.
5. The hotel operator is authorized to designate certain areas of the
hotel for the exclusive use of the hotel operator and the Owners may not
interfere with that exclusive use.
6. A Unit Owner is guaranteed use of his own Unit for a maximum of 14
days in any year provided at least four months advance notice is given.
7. No animals are allowed in the Units or in other areas of the hotel
except for physical impairment assistive animals to the extent that they are
required by persons at the hotel.
8. Except for signs incidental to the operation of the hotel, and any
other advertising signs that Southwind elects to post in connection with the
development of the hotel, no signs are permitted on
40
<PAGE> 47
the exterior of any Unit or any other portion of the hotel without the prior
written approval of the Board of Directors.
9. No Owner may remove, replace, substitute, alter, repair or add to
any part of the hotel (including the Owner's Unit) or any of the furniture,
fixtures or equipment located in and around the hotel (including in any Unit).
For a discussion of additional use restrictions see "The Hotel
Operating Agreement."
INSURANCE
If for any reason the hotel operator fails to provide insurance
coverage pursuant to Article XII of the Hotel Operating Agreement, the
Condominium Association will be required to assure that property damage, public
liability, fire and other hazard insurance and business interruption coverage
with respect to the hotel is maintained pursuant to the Declaration. The
Condominium Association may maintain other insurance affording such coverages
and with such limits as the Board of Directors may determine. All insurance
policies will name the Owners, the hotel operator and the Condominium
Association as insureds.
The Condominium Association will also obtain fidelity blanket bonds for
all officers, directors, trustees, and employees of the Condominium Association.
The amount of the bonds maintained by the Condominium Association will be
determined in the discretion of the Board of Directors.
Each Owner may personally have joint and several liability for tort and
contract claims as a result of ownership of Units or participation in the rental
pool. Although Southwind believes that the insurance coverage afforded Owners
will be adequate, purchasers of Units are urged to consult an insurance advisor
or attorney with respect to the nature and extent of such personal liability and
to determine what additional insurance coverage if any, may be necessary or
appropriate for their particular circumstances.
ENFORCEMENT OF THE DECLARATION
The Condominium Association will do all things necessary to enforce
each Owner's obligations under the Declaration, including, without limitation,
with respect to non-payment of assessments, the filing and foreclosure of liens,
the suspension of an Owner's right to vote on Condominium Association matters,
and the bringing of an action at law against the Owner personally. Furthermore,
the Condominium Association may direct the hotel operator to deduct the amount
of unpaid Assessments from any sum distributable to the Owner under the Hotel
Operating Agreement. All unpaid assessments will constitute a lien on a Unit
superior to all other liens except for tax and special assessment liens and
unpaid sums under a first mortgage or deed of trust.
SOUTHWIND DEVELOPMENT COMPANY, L.L.C. AND CERTAIN AFFILIATES
The seller of the Units is Southwind Development Company, L.L.C., an
Alabama limited liability company ("Southwind"). Southwind was established in
April, 1998 to develop, design, finance and construct Beachside All-Suites Hotel
and to market the Units. Julian MacQueen owns 64% of the equity interest in
Southwind. Mr. MacQueen has at least a 50% equity interest in the following
companies which own or operate hotels or condominiums in the Gulf Shores Market
and surrounding areas: Romar Motels, Inc., which owns a 94-room hotel that is
operated as a Days Inn in Orange Beach, Alabama; Young's Motels, Ltd., which
owns "Young's By The Sea," an 112-room hotel in Gulf Shores, Alabama; Perdido
Hospitality, Ltd., which owns a 100-room hotel operated as a Best Western Hotel
in Perdido Key Beach, Florida; and Sunrise Hospitality, L.L.C., which owns and
operates the 100 room Beachside Resort and Conference Center located in
Pensacola Beach, Florida.
41
<PAGE> 48
Mr. MacQueen is also the majority stockholder and Chairman and Chief
Executive Officer of Innisfree Hotels, Inc., which will manage and operate the
hotel. Innisfree is the hotel operator for each of the hotels listed above.
Innisfree is also the hotel operator for certain hotels in other markets.
Mr. MacQueen owns a 50% equity interest in Gulf Coast Accommodations,
Inc., which, in turn, owns a 50% equity interest in Island Vacations, L.L.C.
Island Vacations operates Perdido Skye Condominiums in Perdido Key Beach,
Florida, which has 46 units. In addition, it manages approximately 200
additional rental homes and condominiums in the Gulf Shores Market.
Mr. MacQueen is also the sole shareholder of Gulf Coast Accommodations
of Florida, Inc., which is located in Pensacola Beach, Florida. Gulf Coast
Accommodations of Florida, Inc. was formed in 1994 and operates three
condominium properties and 150 additional condominium rentals in Pensacola
Beach, Florida
Mr. MacQueen owns approximately 5% of First American Bank of Pensacola,
N.A., the construction lender for the development of the hotel. Mr. MacQueen is
also on the Board of Directors of First American Bank of Pensacola.
MANAGEMENT
Julian B. MacQueen, age 48, is the President of Southwind. He also
owns, 64% of the equity interest in Southwind. Mr. MacQueen is also the Chairman
and Chief Executive Officer of Innisfree. From 1979 until forming Innisfree in
1985, Mr. MacQueen was Executive Vice President of Family Inns of America, a
regional chain of 27 motels. In that capacity, he was responsible for sales,
marketing, franchise and development. During his tenure with Family Inns of
America, Mr. MacQueen was responsible for the construction of six motel
properties and the development of a national sales and reservation system. Mr.
MacQueen is a Certified Hotel Administrator and a member of the Board of
Directors of First American Bank, Pensacola, Florida.
William P. Lagman, age 59, is Vice President of Marketing for
Southwind. Mr. Lagman is also the President of Gulf Coast Accommodations, Inc.
Mr. Lagman has been associated with Gulf Coast Accommodations, Inc. since 1993.
Mr. Lagman is a licensed real estate broker in the states of Alabama and
Florida.
Harlan R. Butler, age 50, is the Vice President of Business Development
for Southwind. Mr. Butler is also an Executive Vice President for Innisfree
hotels. He joined the Innisfree management team in 1989. He directs the
operation of 11 multiple franchise properties, office parks, and condominium
management companies. Mr. Butler has more than 26 years in the hotel management
industry.
Roger W. Wiegner, age 45, is a Vice President of Operations for
Southwind. He is also the Regional Director of Operations for Innisfree, a
position he has held since 1991. Mr. Wiegner has more than 20 years of
experience in the hotel industry.
Stephen A. Shannon, age 51, is Vice President of Sales for Southwind.
Mr. Shannon is a licensed real estate broker with more than 20 years of
experience in real estate development and real estate sales.
42
<PAGE> 49
CERTAIN TRANSACTIONS
In 1998 Mr. MacQueen advanced $198,901 to Southwind. He advanced
Southwind an additional $49,900 between January 1 and March 5, 1999. These
advances are non-interest bearing and are not secured. There are no written
terms for the repayment of these advances; however, it is expected that these
advances, as well as any other such advances which may be made by Mr. MacQueen
prior to completion of the hotel, will be repaid from the proceeds received by
Southwind from its sale of Units.
DETERMINATION OF PURCHASE PRICE
The initial purchase prices of the Units have been determined by
Southwind solely on the basis of its subjective evaluation of marketing
considerations. No independent valuations have been obtained for purposes of
determining the value of the Units. We cannot assure you that Units can be
resold at or in excess of the purchase price. No organized market for the
trading of Units is expected to develop as a result of this Offering.
USE OF PROCEEDS
Assuming that the maximum number of Units offered hereby is sold, the
gross proceeds from the sale of Units will be approximately $12.67 million
exclusive of Offering expenses (estimated at $87,024, and real estate
commissions of approximately $760,000). All of the net proceeds of this Offering
will be paid to Southwind. Southwind will use the net proceeds from the offering
to repay member loans totaling approximately $248,801 to date; to repay the
promissory note in favor of Michael A. and M. Katherine DeJusto due no later
than August 17, 1999 in the principal amount of $541,200, with interest payable
at 10% per annum; and to repay the construction loan to be entered into with
First Bank of Pensacola, N.A. in the approximate principal amount of $8.5
million, with interest payable at 10% per annum, which loan becomes due and
payable nine months after construction is commenced. Southwind will deliver the
Units free and clear of any and all liens.
43
<PAGE> 50
PLAN OF DISTRIBUTION
Southwind is offering the units on a best efforts basis directly
through its members, officers and employees who are "associated persons" within
the meaning of Rule 3a4-1(c) under the Securities Exchange Act of 1934 and who
will not receive any sales commissions. The associated persons will be duly
licensed by state securities commissions in the states that require them to be
licensed as agents. Southwind will also engage duly licensed real estate
brokers, who will be supervised by its licensed agents, to assist in the sale of
the Units. The real estate brokers will receive sales commissions of 6% of the
total selling price of the Units sold by them in conjunction with such licensed
agents. The minimum subscription is one Unit.
The initial closing on the sale of Units will not occur until the hotel
is ready for operation. Deposits representing down payments received from
purchasers will be held in an escrow account for the benefit of purchasers until
the initial closing, unless the minimum number of Units is not sold within 180
days from the date of first sale and Southwind elects, in its sole discretion,
to terminate the Purchase Agreements with the Unit Purchasers, in which case the
initial deposits will be refunded. Subsequent closings will occur upon the sale
of each Unit. The offering will terminate upon the earlier of the sale of all
the Units in the offering or two years from the effective date of this
Prospectus.
Retirement plans and individual retirement accounts may not purchase
Units. No sales will be made to discretionary accounts without prior approval of
the prospective investor.
HOW TO PURCHASE
Units are being offered for sale prior to the construction of the
hotel. Prospective Owners must execute a Preconstruction Purchase and Escrow
Agreement (the "Purchase Agreement"). The Purchase Agreement requires a deposit
of at least 20% of a Unit's purchase price into escrow. Although a purchaser's
obligations under the Purchase Agreement are not contingent upon his obtaining
financing, Southwind may terminate any Purchase Agreement in the event the
prospective purchaser is denied financing. Purchasers may procure financing from
any available source. Lender requirements for financing may vary. All financing
costs will be the obligation of individual purchasers who elect to finance the
purchase of a Unit. Additionally, Southwind may review a prospective purchaser's
credit report and terminate the Purchase Agreement if, in Southwind's
discretion, such credit report is unsatisfactory. Southwind may also, in its
sole discretion, terminate the Purchase Agreement if it does not sell at least
75 Units within 180 days from the date the first Unit is sold. If this occurs,
your deposit is refundable with accrued interest and you will have no further
remedies. If we do not terminate our contracts with Unit purchasers within the
180 day period, we must deliver all Units sold within two years from the date
the first Unit is sold. If we terminate the contracts with Unit purchasers after
the 180 day period or fail to deliver the Units within the two-year period, your
deposit is refundable with accrued interest, and you may have remedies for
breach of contract.
Concurrently with the execution of the Purchase Agreement, prospective
purchasers will be required to execute an Assignment and Assumption of the Hotel
Operating Agreement. By executing the Assignment and Assumption, each
prospective purchaser agrees to be bound by and comply with the Hotel Operating
Agreement.
The closing on the sale of a Unit will occur within two years of the
sale of the Unit (unless applicable law provides a longer time) at which time
the Unit will be ready for occupancy. Purchasers will be notified of the date
and place for closing at least 10 days in advance. At closing, each purchaser
will be required to pay the balance of the Unit purchase price and to contribute
to the Operating Cash
44
<PAGE> 51
Reserve the amount indicated on the Schedule of Purchase Prices. Purchasers will
also be required to pay the following expenses: any applicable taxes, any costs
associated with purchasers financing of the purchase of the Unit, any utility
deposit apportioned to the Unit, any insurance premium apportioned to the Unit,
any fees for attorneys or other parties engaged by purchaser, and any other
expenses incidental to closing.
CERTAIN FEDERAL AND STATE INCOME TAX ASPECTS
The following discussion summarizes some of the federal income tax
aspects of the purchase, ownership and disposition of the Units and
participation in the rental pool and the opinions of Berkowitz, Lefkovits, Isom
& Kushner, A Professional Corporation, Birmingham, Alabama, counsel to Southwind
("Counsel"), with regard to certain material aspects. This discussion and
Counsel's opinions are based on the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury Regulations, IRS rulings and
procedures and judicial decisions in effect on the date of this Memorandum. The
Tax Reform Act of 1986 (the "1986 Tax Act") and the Revenue Act of 1987 (the
"1987 Tax Act") substantially altered the federal income tax system,
particularly as it relates to the tax consequences of investments by individuals
in real estate, and the Technical and Miscellaneous Revenue Act of 1988 (the
"1988 Tax Act"), the Omnibus Revenue Reconciliation Act of 1989 (the "1989 Tax
Act"), the Revenue Reconciliation Act of 1990 (the "1990 Tax Act"), the Revenue
Reconciliation Act of 1993 (the "1993 Tax Act"), the Taxpayer Relief Act of 1997
(the "1997 Tax Act") and other acts have made numerous other changes in the
Code. Consequently, significant uncertainty exists regarding various aspects of
the taxation of Owners of Units. Furthermore, applicable Treasury Regulations
and interpretations have not yet been written or are under continuing review by
the IRS in many relevant areas. No assurance is given that future legislative or
administrative changes or court decisions will not modify the legal bases for
the statements, conclusions and opinions expressed in this discussion. Any such
changes may or may not be retroactive with respect to transactions completed
prior to the dates of such changes. Additionally, the interpretation of existing
law and regulations described here may be challenged by the Service during an
audit of the rental pool's information return or an Owner's individual return.
Moreover, a successful challenge of the rental pool's information return would
likely result in an adjustment to an Owner's individual return.
The following discussion of tax aspects generally assumes that the
investor is an individual and is a United States citizen or resident and is
limited to those areas of federal income tax law that are considered to be most
important to individual investors. Although the hotel operator will furnish the
Owners with such information regarding the rental pool as is required for income
tax purposes, each Owner will be responsible for preparing and filing his own
tax returns. Prospective investors should also be aware that it is impractical
to discuss in this section all aspects of federal and state income tax law which
might affect an investment in the Units, including determinations the
correctness of which depend in significant part on future factual circumstances
and matters peculiar to certain investors. Accordingly, prospective investors
are urged to consult, and must depend upon, their tax advisors regarding their
individual circumstances (especially if the prospective investor is not an
individual) and the federal, state, local and other tax consequences arising out
of their participation as Owners.
Unless otherwise noted, the discussion in this section represents the
opinion of Counsel. Counsel's opinions expressed in the following discussion are
only opinions that the tax law results described are more likely than not to be
the tax law results that should occur, subject to any conditions stated in the
particular section of this discussion which states such tax law conclusions.
Although Counsel's opinions represent its best judgment as of the date of this
Registration Statement and are based on legal authorities published as of that
date, those opinions do not bind the Service or in any way constitute an
assurance that the Service will agree with the federal income tax consequences
described. Further, no rulings have
45
<PAGE> 52
been requested from the IRS with respect to the matters discussed in this
section. Southwind does not intend to obtain any such rulings.
CLASSIFICATION OF RENTAL POOL AS A PARTNERSHIP
Pursuant to the provisions of the Rental Pool Agreement, the hotel
operator will rent the Unit of each Owner on behalf of such Owner. Profits from
the rental of Units will be shared proportionately by the Owners of the Units.
Under Section 301.7701-2 of the Regulations, a business entity with two or more
members is classified for federal tax purposes as either a corporation or a
partnership. Counsel believes that the sum of the contractual relationships
created by the Rental Pool Agreement may cause the rental pool to be a business
entity. Therefore, although each Owner will be the legal Owner of a separate
Unit, because of provisions in the Rental Pool Agreement relating to the sharing
of income and expenses of the hotel and its operations, the Owners may be
treated as participants in an business entity taxable as either a partnership or
a corporation for federal income tax purposes.
If, consistent with tax counsel's opinion, a business entity is created
by the sum of the contractual relationships among the Owners of the Units, the
federal income tax consequences to the Owner of a Unit will depend upon the
business entity's classification for federal income tax purposes. If the
business entity is classified as a partnership for federal income tax purposes
and is not a "publicly traded partnership," it will not be subject to any
federal income tax. Instead, an Owner will be subject to tax on his or her
allocable share of the partnership's income and gain, and may be entitled to
claim his or her allocable share of the partnership's losses. However, deduction
of an Owner's allocable share of loss from a partnership is subject to many
important limitations, some of which are discussed below. Prospective Owners
should consult, and must depend on, their own tax advisor's advice concerning
detailed application of partnership tax rules to their specific tax situations.
If the business entity is classified as a corporation or as a "publicly
traded partnership," Owners will be treated as shareholders of a corporation,
and (1) the taxable income of the organization will be subject to the federal
income tax imposed on corporations, (2) items of income, gain, loss and
deduction will not flow through to the Owners to be accounted for on their
individual federal income tax returns, and (3) distributions, if any, will be
treated as corporate distributions to Owners, some or all of which may be
taxable as dividends.
Treasury Regulations which became effective January 1, 1997 address the
issue of whether a business entity must be classified for federal tax purposes
as a partnership or as a corporation. These Treasury Regulations, known as the
"check-the-box" regulations, state that a business entity that is not
specifically classified as a corporation under the Regulations (an "eligible
entity") can elect its classification for federal income tax purposes. An
eligible entity with two or more members that does not elect its classification
is classified under the default provisions of the Regulations is a partnership
for federal tax purposes. Counsel is of the opinion that the business entity
created by the contractual relationships among the Owners of the Units is an
eligible entity of two or more members under the Regulations. Therefore,
provided that the rental pool either affirmatively elects to be classified as a
partnership or makes no election and is classified under the default provisions
of the Regulations and subject to the discussion of publicly-traded partnerships
below, Counsel is of the opinion that the rental pool will be classified as a
partnership for federal tax purposes.
The discussion that follows is based upon the assumption that the
Owners will be treated as the Owners for tax purposes of their Unit and their
undivided share of the hotel common areas and that the rental pool will be
classified as a partnership and not as a corporation for federal income tax
purposes. Owners will be considered partners who have contributed the use of a
Unit, not its ownership, to the rental
46
<PAGE> 53
pool, so that each participating Owner will report separately items of expense
or deduction relating to the ownership of a Unit, including interest and
depreciation subject to the limitations described below.
No federal income tax is paid by a partnership as an entity.
Partnerships file an annual partnership information return, and each Owner will
be provided with the information required for the preparation of such Owner's
respective federal income tax return. Each partner is required to report on his
income tax return his distributive share of a partnership's income, gain, loss,
deduction or credit (and items of tax preference), regardless of whether any
actual distribution is made to that partner during his taxable year.
Consequently, a partner's share of the partnership's taxable income may exceed
the cash, if any, actually distributed to that partner. Conversely, actual (or
constructive) distributions of money from a partnership will be taxable only to
the extent that such distributions exceed the adjusted basis of the partner's
interest in the partnership, regardless of whether the partnership has current
income. The characterization of an item of income or loss generally will be the
same for the partners as it is for the partnership.
The rental pool's items of income, gain, loss, deduction or credit will
be allocated proportionately between the Owners. The extent to which a specific
Owner may deduct his or her distributive share of the rental pool's expenses
will depend upon: (1) whether the rental activity engaged in is with the intent
of making a profit (Section 183); (2) whether the Unit constitutes a "dwelling
unit" (Section 280A); (3) whether the rental activity is a "passive activity"
(Section 469); (4) whether the taxpayer is "at risk" with respect to the
activity (Section 465); and (5) the limitations on interest deductions.
Additional provisions of the Code may also limit a specific taxpayer's
deductions. Moreover, to the extent that an Owner's share of rental pool losses
exceeds the basis of his interest in the rental pool, such excess losses cannot
be utilized in that year by that Owner for any purpose, but are allowed as a
deduction (subject to the limitations described above) only when and to the
extent that Owner's adjusted basis for his interest in the rental pool at the
end of any year exceeds zero.
STATUS OF THE PARTNERSHIP AS A PUBLICLY TRADED PARTNERSHIP
Under Section 7704 of the Code, a publicly traded partnership will be
treated as a corporation for federal income tax purposes. For this purpose, a
publicly traded partnership is one the interests in which are (i) traded on an
established securities market or (ii) readily tradable on a secondary market (or
the substantial equivalent thereof). Under the Regulations, for partnerships
starting business after December 31, 1995, an "established securities market"
means generally any national, regional, or local exchange, certain foreign
exchanges, and any interdealer quotation system that regularly disseminates firm
buy or sell quotations by identified brokers or dealers. Also pursuant to the
Regulations, interests are "readily tradable on a secondary market (or the
substantial equivalent thereof)" if (i) such interests are regularly quoted by
any person making a market in the securities; (ii) any person regularly makes
available to the public bid or offer quotes with respect to the interests and
stands ready to effect buy or sell transactions at the quoted prices for itself
or on behalf of others; (iii) the holder has a readily available, regular and
ongoing opportunity to sell or exchange the interest through a public means of
obtaining or providing information of offers to buy, sell or exchange such
interests; or (iv) prospective buyers and sellers have the opportunity to buy,
sell or exchange interests in the partnership in a time frame and with the
regularity and continuity comparable to that described in (i) through (iii)
above. As a safe harbor provision, the Regulations provide that if the interests
are issued in transactions that are not subject to registration under the
Securities Act of 1934 and the partnership does not have more than 100 partners
at any time, the partnership will not be treated as publicly traded. Based on
these Regulations, Counsel is of the opinion that the rental pool will not be
treated as publicly-traded partnership.
47
<PAGE> 54
PARTNERSHIP ANTI-ABUSE RULE
Regulation ss. 1.701-2 gives the IRS broad authority to disregard a
partnership in whole or in part, to refuse to treat a partner as a partner, to
adjust a partnership's methods of accounting, or to alter or disregard
partnership allocations in the case of a partnership which the IRS determines to
have been formed or availed of with a principal purpose of substantially
reducing the present value of the partners' aggregate federal tax liability in a
manner which, even though in compliance with the literal language of the Code or
Regulations, the IRS determines to be "inconsistent with the intent of
subchapter K" of the Code. While the Counsel does not believe that the
anti-abuse rule has any application to the rental pool and its operations as
presently contemplated, the IRS is given very broad power under the Regulation.
Tax advisors can only speculate as to how such power might be used and how it
may be applied to future facts. Accordingly, Counsel has not given an opinion on
this matter.
BASIS OF EACH OWNER IN THE UNIT AND IN THE RENTAL POOL PARTNERSHIP
For federal and state income tax purposes, an Owner will acquire an
ownership interest in the Unit and its furnishings and will be required to
contribute his or her pro-rata share to the initial operating cash reserve.
The Owner will acquire a tax basis in the Unit and the furnishings
equal to the Owner's cost for those items. These costs are not deductible but
will be recoverable either through depreciation deductions (see
"Depreciation/Amortization" below) or as an offset to the sales amount realized
in the computation of gain or loss on the sale or other disposition of such
property.
The amount contributed by an Owner to the operating cash reserve will
be treated as a cash contribution to the rental pool partnership and the Owners
will acquire an initial tax basis in their rental pool partnership interest
equal to such contribution. From time to time, such tax basis will be increased
by the amount of an Owner's allocable share of rental pool income on gain and
decreased (but not below zero) by the amount of an Owner's allocable share of
losses and deductions and by the amount of cash or other property distributions
received by the Owner. The basis of an Owner in his or her partnership interest
is important for determining, among other things, the amount of losses and
deductions an Owner may deduct on his or her own tax return, the taxability of
distributions of cash or other property from the rental pool to the Owner, and
the amount of gain or loss on the sale of an Owner's interest in the rental
pool.
SECTION 183 - ACTIVITIES NOT ENGAGED IN FOR PROFIT
Section 183 of the Code provides that, in the case of an activity
engaged in by an individual or an S corporation, certain deductions attributable
to such activity will be limited to the gross income generated by such activity
if the activity is not engaged in for profit. Losses disallowed under Section
183 are permanently denied, not suspended. The Regulations under Section 183
provide a three-tier system of permitted deductions up to a maximum of the gross
income from the activity. The Regulations also provide rules for allocation of
expenses to the specific tiers.
Section 1.183-2 of the Regulations provides that all facts and
circumstances are to be taken into account and no one factor or combination of
factors is determinative of whether an activity is engaged in for profit. The
Regulations list nine factors that will generally be considered, but caution
that other factors may also be relevant. Because the presence or absence of a
profit objective is in part a factual issue which depends upon the individual
circumstances of each Owner, it is impossible to presently predict with accuracy
whether a particular Owner will be able to establish that he or she has a profit
objective with respect to his or her ownership of a Unit and participation in
the rental pool.
48
<PAGE> 55
Section 183 creates a presumption in favor of the determination that
the activity is engaged in for profit if a profit (without regard to operating
loss carry forwards) is realized in three out of five consecutive years. To
allow the presumption to work, a taxpayer is given an election to postpone the
determination of whether the presumption applies until the end of the fourth
taxable year following the taxable year in which he first purchased his Unit and
engaged in rental activity. An Owner should make an election as prescribed in
the Regulations to preserve the ability to take advantage of this presumption
and the delay in determining its application. An Owner should note that
Southwind makes no assurances or representations concerning whether an Owner can
expect a profit from the ownership of a Unit and participation in the rental
pool within four years, however, it believes that the rental pool will more
likely than not be considered an activity engaged in for profit.
SECTION 280A - RESIDENCE AND VACATION HOME RULES
The Section 280A home business expense disallowance rule applies to any
"dwelling unit" used by the taxpayer as a residence. Affected taxpayers include
individuals, partnerships, trusts, estates, and S corporations. Section 280A
does not apply to a C corporation, except in its capacity as a member of a
partnership or S corporation or as a beneficiary of a trust or estate. A
"dwelling unit" includes a house, apartment, condominium, mobile home, boat or
other similar property and all structures and other property appurtenant to such
dwelling unit. A dwelling unit does not, however, include that portion of a unit
which is used exclusively as a hotel, motel, inn or similar establishment. For
this purpose, any personal use of a Unit, will likely result in the Unit being
deemed a dwelling unit and not used exclusively as a hotel, motel, inn or
similar establishment.
The Regulations provide an objective standard for determining whether a
taxpayer's use of a dwelling unit causes it to be considered a residence subject
to a gross income limitation on deductions. Any Unit used by the Owner for
personal use for a number of days during a taxable year which exceeds the
greater of (i) 14 days, or (ii) 10% of the number of days during the year for
which the Unit is rented for fair value will be deemed a residence. Personal use
includes use by the taxpayer, use by the taxpayer's family, use by an individual
pursuant to a reciprocal arrangement that permits the taxpayer use of another
unit, days on which the unit is rented for less than fair rental, use by other
Owners in a time sharing arrangement or use by the taxpayer of other units in a
rental pool, and use of the unit as a result of a charitable donation by the
taxpayer. Based upon the proposed operation of the rental pool, which would
limit the use by any Owner of any of the Units to a combined total of 14 days,
the Section 280A gross income limitation should not should not apply to the
Owners.
Section 280A also establishes an expense allocation fraction to be used
in apportioning deductions between personal and business use of a dwelling unit.
The expense allocation formula permits deduction of the fraction of expenses
associated with the property (other than those expenses that are otherwise
deductible even if a property is used for personal use) of which the numerator
is the days the property is actually used for business and the denominator of
which is the total of the days the property is actually used (either for
business or personal use). This allocation formula applies if a property is used
for personal use for even one day. If an Unit is a dwelling unit, it is possible
that, pursuant to an election of all Owners, Units held by other Owners could be
aggregated with the Unit held by a particular Owner, with the result that even
an Owner that never used an Unit for personal purposes could, nevertheless, have
otherwise deductible expenses reduced pursuant to Section 280A. Based upon the
expense allocation requirement, an Owner will be able to deduct expenses
attributable to the rental pool only to the extent allocable to business use.
49
<PAGE> 56
LIMITATIONS ON LOSSES FROM PASSIVE ACTIVITIES
The Code characterizes certain activities as producing either passive
or portfolio income and loss. Deductions of passive activity losses incurred by
an individual, estate, trust, or personal service corporation or, with
modifications, certain closely held corporations, may not be used to offset
non-passive activity income. In general, passive activity losses can be used
only to offset passive income, not wages or portfolio income (such as dividends,
interest, annuities and royalties).
In general, a passive activity, is one which: (1) is a trade or
business activity in which the taxpayer does not materially participate; or (2)
is a rental activity. Counsel believes that it is very unlikely that an Owner
will be treated as materially participating in the rental pool because, under
the terms of the Pooling Agreement, sole authority for the management and
operation of the hotel resides in the Hotel Manager.
Investments in rental activities generally produce passive income and
loss. Rental activities are treated as passive without regard to whether they
involve the conduct of trade or business or whether the taxpayer materially
participates. The Regulations provide that where the actual or prospective
customer's payments are principally for the use of tangible property, the
activity is a rental activity, even if payments are made pursuant to a service
contract or other arrangement that is not denominated as a lease. There are
several exceptions provided by the Regulations to treatment as a rental
activity, however, Counsel does not believe that any of the exceptions apply to
the rental pool. Therefore, income and losses from the rental pool will be
treated as derived from a passive activity.
To the extent that an Owner has passive losses from other activities,
he should be able to offset those passive losses against his allocable share of
the rental pool's income and profits. Losses and credits disallowed by the
passive activity rules are suspended and may be carried forward (but not back)
and treated as losses and credits from passive activities in each successive
taxable year until offset by income from passive activities or allowed against
other income as a result of the complete disposition of the taxpayer's interest
in that activity. When a taxpayer's entire interest in an activity is disposed
of in a taxable transaction (other than to a related party), any remaining
suspended loss incurred in connection with that specific activity is allowed in
full, first against income or gain from such activity during the year of
disposition, second against net income or gain from all other passive
activities, and thereafter against income from all sources, including active
income. A disposition can occur through a partner's disposition of his entire
partnership interest.
APPLICATION OF AT-RISK LIMITATIONS
Generally, Code section 465 limits losses that a taxpayer can claim in
real estate and other enumerated activities to the amount that the taxpayer has
at risk with respect to such activities. Losses that are disallowed in any year
because of the at-risk limitations are carried over to succeeding years and can
be used in those years to the extent that the partner's at-risk amount has
increased. A taxpayer is considered at risk in any activity with respect to (i)
the net amount of money and the adjusted basis of property contributed by the
taxpayer to the activity, (ii) any amount with respect to the activity if the
taxpayer is considered personally liable for the repayment of that amount, and
(iii) the taxpayer's proportionate share of any other amount borrowed with
respect to the activity if the lender is an institutional lender and the loan is
secured by real property used in the activity ("qualified nonrecourse
financing"). A taxpayer is not considered to be "at risk" to the extent he or
she is protected against loss through nonrecourse financing not so secured,
guarantees, stop loss agreements or similar agreements. A taxpayer's at-risk
amount is increased by profits earned in the activity and decreased by losses
occurring in the activity. In determining the amount of loss, if any, disallowed
under Section 465, Sections 183 and 280A are applied prior to the application of
Section 465, and Section 469 is applied after any limitation under Section 465
is determined.
50
<PAGE> 57
LIMITATION ON INTEREST DEDUCTIONS
Interest incurred to finance the purchase of a Unit will be deductible
subject to the application of the Residence and Vacation Home Rules and the
Passive Activity rules discussed above. Generally interest used to purchase an
interest in an entity which produces passive income or loss is treated as
passive. However to the extent that the rental pool partnership has investment
income, a portion of such interest may be characterized as investment (or
portfolio) interest. The deductibility of a taxpayer's investment interest
expense generally is limited to the amount of such taxpayer's net investment
income. Investment interest expense does not include any interest expense which
is taken into account in determining the income or loss from a passive activity,
but does include (i) interest on indebtedness incurred or continued to purchase
or carry property held for investment, (ii) a partnership's interest expense
attributable to portfolio income under the passive loss rules, and (iii) the
portion of interest expense incurred or continued to purchase or carry an
interest in a passive activity to the extent attributable to portfolio income
(within the meaning of the passive loss rules). Owners who intend to finance the
purchase of their Units with borrowed funds should consult their own tax
advisors before borrowing such funds and should maintain careful records of any
debt they incur to carry or acquire their Units, because the interest on such
debt may be investment interest to the extent the rental pool does not engage in
a passive activity or to the extent of any portfolio income received from the
rental pool.
Net investment income includes gross income from property held for
investment, gain attributable to the disposition of property held for
investment, and amounts treated as gross portfolio income pursuant to the
passive loss rules less deductible expenses (other than interest) directly
connected with the production of investment income. Investment interest
deductions which are disallowed may be carried forward and deducted in
subsequent years to the extent of net investment income in such years.
DEPRECIATION/AMORTIZATION
In Counsel's opinion, it is more likely than not that an Owner will be
treated as the Owner of a Unit and the tangible personal property associated
with the Unit and be entitled to depreciation deductions with respect to the
Unit and the tangible personal property. Each Owner of a Unit used for rental
purposes will separately determine the applicable allowance for depreciation
with respect to such Unit and any tangible personal property associated with
such Unit for any year, subject to the limitations described above. Section 179
of the Code allows a taxpayer (other than trusts, estates and certain
noncorporate lessors) to expense certain depreciable business assets in the year
of acquisition by electing to treat the cost of new property as an expense
rather than as a capital expenditure subject to depreciation. The deductions for
which the election are made are allowed for the tax year in which the Section
179 property is placed in service and are in lieu of a depreciation deduction.
Generally, a taxpayer may elect to expense only tangible personal property under
Section 179.
SALE OR OTHER DISPOSITION OF A UNIT
If a Unit is held solely for business purposes for more than one year
by an Owner who is not a dealer with respect to such Unit, gain or loss realized
on the sale of such Unit generally will be considered gain or loss from the sale
of a Section 1231 asset and will be so taken into account in computing the
taxpayer's net Section 1231 gain or loss for the taxable year. A net Section
1231 gain generally is treated as a long-term capital gain, while a net Section
1231 loss is treated as an ordinary loss. If any such gain on the sale of a Unit
represents recapture of depreciation of personal property, that portion of the
gain will be taxable as ordinary income.
No loss will be allowed in connection with the sale of a Unit held for
personal use. Any gain realized on the sale of a Unit held for personal use will
be a long-term or a short-term capital gain,
51
<PAGE> 58
depending upon whether the Unit was held for more than one year. If a Unit is
held partly for personal use and partly for business use, an apportionment of
the gain or loss will be required and each portion will be reported in
accordance with the principles stated above.
In the event of an Owner's sale or other transfer of a Unit, the
distributive share of rental pool income, gain, loss, deduction or credit for
the entire year allocable to such Unit generally will be allocated between the
transferor and the transferee, based upon the period of time during the taxable
year that each owned such Unit, notwithstanding the timing or amounts of any
rental pool distributions.
ADMINISTRATIVE AND COMPLIANCE MATTERS
AUDIT RISK
The Service has the right to audit partnership information returns. If
the Service audits and adjusts the rental pool's information return, it is
likely that the Service will make corresponding adjustments to the Owners'
income tax returns. It also will be more likely that the Owners' individual tax
returns also will be audited. It is not expected that the rental pool will make
cash distributions to Owners to assist them in paying a tax liability resulting
from either an audit of the rental pool or the Owner.
RESOLUTION OF DISPUTES INVOLVING RENTAL POOL ITEMS
The rental pool will be treated as a separate entity for purposes of
federal tax audits, judicial review of administrative adjustments by the Service
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss, deduction and credit are determined at the partnership level
in a unified partnership proceeding rather than in separate proceedings with the
partners. The Code provides for one partner to be designated as the "Tax Matters
Partner" for these purposes. The Board of Directors shall be responsible for
selecting the Tax Matters Partner for the rental pool.
The Tax Matters Partner is entitled to make certain elections on behalf
of the rental pool and Owners and can extend the statute of limitations for
assessment of tax deficiencies against Owners with respect to rental pool items.
The Tax Matters Partner may bind to a settlement with the Service any Owners
with less than a 1% profits interest in the rental pool unless the Owners elect,
by filing a statement with the Secretary of the Treasury, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review (to which all the Owners are bound) of a final rental pool administrative
adjustment and, if the Tax Matters Partner fails to seek judicial review, such
review may be sought by any Owners having in the aggregate at least a 5% profits
interest. Only one action for judicial review will go forward, however, and any
Owners with an interest in the outcome may participate.
The Owners generally will be required to treat rental pool items on
their personal federal income tax returns consistent with the treatment of the
items on the rental pool's information return. In general, this consistency
requirement is waived if an Owner files a statement with the Service identifying
the inconsistency. Failure to satisfy the consistency requirement, if not
waived, will result in an adjustment to conform the Owner's treatment of the
item with his treatment on the rental pool's information return. Even if the
consistency requirement is waived, adjustments to an Owner's tax liability with
respect to rental pool items may result from an audit of the rental pool's or
the Owner's tax return. Intentional or negligent disregard of the consistency
requirement may subject an Owner to substantial penalties.
POSSIBLE CHANGES IN FEDERAL TAX LAWS
The Code is subject to change by Congress, and interpretations of the
Code may be modified or affected by judicial decisions, by the Treasury
Department through changes in Regulations and by the
52
<PAGE> 59
Service through its audit policy, announcements, and published and private
rulings. Such changes may be retroactive. Accordingly, the ultimate effect on an
Owner's tax situation may be governed by laws, regulations or interpretations of
laws or regulations which have not yet been proposed, passed or made, as the
case may be. Although significant changes historically have been given
prospective application, no assurance can be given that any changes made in the
tax law affecting an investment in the rental pool would be limited to
prospective effect.
INVESTMENT BY FOREIGN PERSONS
The rules governing the federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
investors ("foreign persons") are complex, and no attempt has been made herein
to discuss such rules. Potential investors that are foreign persons should
consult with their tax advisors to fully determine the impact on them of United
States federal, state and local income tax laws.
CORPORATE INVESTORS
Section 183 does not apply to corporate Owners. Section 280A does not
apply to corporations that are not electing S corporations. Section 469 applies
only to certain closely held C corporations and personal service corporations.
However, deduction of expenses associated with the acquisition and ownership of
a Unit by a corporation may be disallowed or restricted under other Code
sections. In particular, corporations that purchase Units should consult their
own tax advisor regarding the application of Section 274 of the Code, which
prohibits the deduction of certain expenses incurred with respect to facilities
used for entertainment, amusement or recreation. There are numerous issues
involved in corporate ownership, and corporations should obtain tax advice from
their own counsel before purchasing a Unit.
STATE AND LOCAL TAXES
The rental pool's activities will be carried on within the state of
Alabama and the rental pool will be considered to be domiciled in the state of
Alabama. Alabama imposes an income tax with respect to all income, regardless of
source, of Alabama residents and the income derived from Alabama sources earned
by a nonresident. Alabama income tax law generally conforms to federal income
tax law in matters material to an investment in the rental pool.
Owners who are not Alabama residents may be subject to taxation by
their state of residence as well as Alabama with respect to income derived from
the rental pool. Depending upon applicable state and local laws, both Alabama
residents and nonresidents may find that some deductions that are available to
the Owners for federal income tax purposes may not be available for state or
local income tax purposes.
Furthermore, the tax treatment of particular items under other state or
local income tax laws may vary materially from federal income tax treatment. In
addition, Owners may be subject to income, gift, estate or inheritance taxes in
the state or locality of their residence or domicile, as well as in the state of
Alabama. Prospective Owners are urged to consult their tax advisors concerning
those matters.
LEGAL MATTERS
Berkowitz, Lefkovits, Isom & Kushner, A Professional Corporation,
Birmingham, Alabama, has passed on certain tax matters as described under
"Certain Federal and State Income Tax Aspects." Prospective Owners should not
consider Berkowitz, Lefkovits, Isom & Kushner, A Professional Corporation, to be
their legal counsel with respect to this Offering or any other related matter
and are
53
<PAGE> 60
strongly encouraged to seek the advice of qualified and independent legal
counsel with respect to entering any of the agreements or contracts contemplated
by this Offering and any other related matters, including the tax implications
of the purchase of a Unit.
EXPERTS
The balance sheet of Southwind dated as of December 31, 1998 appearing
in this Prospectus and Registration Statement has been audited by Randall
Sansom, CPAs, independent auditors, as set forth in their report appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
SUMMARY OF PROMOTIONAL AND SALES MATERIAL
Sales materials may be used in connection with this Offering only when
accompanied or preceded by the delivery of this Prospectus. Such sales materials
may include a booklet, slides, films, "fact" sheets, articles, publications, and
brochures describing the Offering, Innisfree, and the hotel. The Offering is
made only by means of the Prospectus.
ADDITIONAL INFORMATION
Southwind Development Company, L.L.C. has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement under the
Securities Act with respect to the Units offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information with respect to the
Units offered by this Prospectus, reference is made to the Registration
Statement, including the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, together with exhibits thereto, may be
inspected at the public reference facilities of the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, without charge and copies of
the material contained therein may be obtained at prescribed rates from the
Commission's public reference facilities in Washington, D.C. The Commission also
maintains a Web site that contains reports, proxy and information statements and
other materials that are filed through the Commission's Electronic Data
Gathering, Analysis, and Retrieval system. This Web site can be accessed at
http://www.sec.gov.
54
<PAGE> 61
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL
IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENTS
OF ESTIMATED ANNUAL OPERATING RESULTS
FOR THE OPERATING YEARS ENDING
DECEMBER 31, 2001-2003
F-1
<PAGE> 62
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL
IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENTS
OF ESTIMATED ANNUAL OPERATING RESULTS
FOR THE OPERATING YEARS ENDING
DECEMBER 31, 2001-2003
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Accountant's Compilation Report.............................................................................. F-3
Forecasted summarized statement of estimated
annual operating results..................................................................................... F-4
Forecasted summarized statement of allocation
of net distributable cash flow to Owner of Units...................................................... F-5 - F-16
Summary of significant forecast assumptions........................................................... F-17 - F-19
</TABLE>
F-2
<PAGE> 63
March 5, 1999
To the Member
Southwind Development Company, L.L.C.
Gulf Breeze, Florida
I have compiled the accompanying forecasted summarized statement of estimated
annual operating results and the related forecasted summarized statements of
allocation of net distributable cash flow to an Owner of the following: a
typical one bedroom superior resort unit, a typical one bedroom terrace resort
unit, a typical one bedroom 3rd floor side view resort unit, a typical one
bedroom 2nd floor side view resort unit, a typical one bedroom 1st floor side
view resort unit, a typical one bedroom standard resort unit both with and
without individual Owners' usage and the forecasted summarized statement of
allocation of net distributable cash flow to an Owner of a unit both with and
without individual Owners' usage, of Beachside All-Suites Hotel, a proposed 84
room hotel in Gulf Shores, Alabama for the operating years ending December 31,
2001 through 2003, in accordance with standards established by the American
Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of a forecast, information
that is the representation of management and does not include evaluation of the
support for the assumptions underlying the forecast information that is the
representation of management and does not include evaluation of the support for
the assumptions underlying the forecast. I have not examined the forecasts and,
accordingly, do not express an opinion or any other form of assurance on the
actual results, because events and circumstances frequently do not occur as
expected, and those differences may be material. I have no responsibility to
update this report for events and circumstances occurring after the date of this
report.
Randall L. Sansom
Certified Public Accountant
F-3
<PAGE> 64
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ESTIMATED ANNUAL OPERATING RESULTS
FOR THE OPERATING YEARS ENDING DECEMBER 31, 2001-2003
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
December 31, 2001 December 31, 2002 December 31, 2003
<S> <C> <C> <C>
Revenue (A)
Rooms 2,131,040 98.5% 2,298,973 98.5% 2,467,043 98.5%
Telephone (1% of Room Rev) 21,310 1.0% 22,990 1.0% 24,670 1.0%
Other Income (.5% of Room Rev) 10,655 0.5% 11,494 0.5% 12,336 0.5%
--------------------------- --------------------------- ----------------------------
Total Revenue 2,163,005 100.0% 2,333,457 100.0% 2,504,049 100.0%
Departmental Expenses (B)
Rooms 348,243 16.1% 375,686 16.1% 403,151 16.1%
Telephone 27,704 1.3% 29,887 1.3% 32,072 1.3%
Other Income - 0.0% - 0.0% - 0.0%
--------------------------- --------------------------- ----------------------------
Total Departmental Expenses 375,947 17.4% 405,573 17.4% 435,223 17.4%
--------------------------- --------------------------- ----------------------------
Income Before Undistributed Expenses 1,787,058 82.6% 1,927,884 82.6% 2,068,826 82.6%
Undistributed Expenses
Administrative & General 173,041 8.0% 186,677 8.0% 200,324 8.0%
Sales & Marketing 62,727 2.9% 67,670 2.9% 72,617 2.9%
Property Operations 108,150 5.0% 116,673 5.0% 125,202 5.0%
Energy 114,639 5.3% 123,673 5.3% 132,715 5.3%
--------------------------- --------------------------- ----------------------------
Total Undistributed Expenses 458,557 21.2% 494,693 21.2% 530,858 21.2%
--------------------------- --------------------------- ----------------------------
Gross Operating Profit 1,328,501 61.4% 1,433,191 61.4% 1,537,968 61.4%
Fixed Costs
Management Fees 108,150 5.0% 116,673 5.0% 125,202 5.0%
Incentive Management Fees 0 0.0% - 0.0% 0 0.0%
Property Insurance 64,890 3.0% 70,004 3.0% 75,121 3.0%
Equipment Leases 4,326 0.2% 4,666 0.2% 5,009 0.2%
Property Taxes 0 0.0% - 0.0% 0 0.0%
--------------------------- --------------------------- ----------------------------
Total Fixed Costs 177,366 8.2% 191,343 8.2% 205,332 8.2%
--------------------------- --------------------------- ----------------------------
Total Operating Income before 1,151,135 53.2% 1,241,848 53.2% 1,332,636 53.2%
Reserves
Reserve Replacement 21,630 1.0% 46,669 2.0% 75,121 3.0%
--------------------------- --------------------------- ----------------------------
Net Distributable Cashflow (C) 1,129,505 52.2% 1,195,179 51.2% 1,257,515 50.2%
=========================== =========================== ============================
# Units 84 84 84
# days 365 365 365
Available Room nights 30,660 30,660 30,660
Projected Room Nights 18,181 19,009 19,561
Projected Room Revenue $2,131,040 $2,298,973 $2,467,043
Projected Average Room Rate $ 117.21 $ 120.94 $ 126.12
Projected Occupancy % 59.3% 62.0% 63.8%
</TABLE>
(A) An Owner's personal usage is fourteen days per year. Cleaning
charges have been included.
(B) The percentages for departmental expenses are stated as a
percentage of the related revenue, based on the experience of
Young's By The Sea, which is a Gulf Shores hotel, operated by
Innisfree. Young's By The Sea is a beachfront extended stay
property approximately 0.5 miles east of the Beachside
All-Suites Hotel site.
(C) Net distributable cash flow excludes certain fixed costs such
as interest, property taxes, depreciation, association dues or
assessments and various other costs that will be paid at the
investor level.
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-4
<PAGE> 65
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM STANDARD RESORT UNIT
WITHOUT USAGE
--------------------
SALES PRICE $149,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $25,284 $27,277 $29,271
Operating Expenses from forecast (2) $11,828 $12,760 $13,693
------- ------- -------
Net Operating Income Before certain charges $13,456 $14,517 $15,578
Reserves for Replacement (3) $ 253 $ 546 $ 878
------- ------- -------
Net Distributive Cash Flow $13,203 $13,971 $14,700
Debt Service (4) $10,062 $10,062 $10,062
------- ------- -------
Annual Cash Flow (Deficiency) received Prior
to Deduction for Depreciation & Income Tax Effect (5) $ 3,141 $ 3,909 $ 4,638
======= ======= =======
Owners Initial Cash Investment $30,564 $30,564 $30,564
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See the Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. This forecast assumes no
individual Owner usage. Revenues exclude lodging and sales tax.
(2) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(3) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(4) Debt service assumes a mortgage of 80% of the purchase price ($149,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(5) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 149,900
Less estimated financing of 80% of Purchase Price ($119,920)
---------
Down Payment $ 29,980
Additional funding of Operating Reserve (1.169%) $ 584
---------
Owner's Initial Cash Investment $ 30,564
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 29.6% 53.6%
2002 $120.94 62.0% 31.0% 54.3%
2003 $126.12 63.8% 32.5% 54.8%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-5
<PAGE> 66
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM STANDARD RESORT UNIT
WITH 14 DAYS OF PERSONAL USAGE
SALES PRICE $149,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $25,284 $27,277 $29,271
Operating Expenses from forecast (3) $11,828 $12,760 $13,693
Owner Usage (2) $ 1,890 $ 1,890 $ 1,890
------- ------- -------
Net Operating Income Before certain charges $11,566 $12,627 $13,688
Reserves for Replacement (4) $ 253 $ 546 $ 878
------- ------- -------
Net Distributive Cash Flow $11,313 $12,081 $12,810
Debt Service (5) $10,062 $10,062 $10,062
------- ------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax
Effect (6) $ 1,251 $ 2,019 $ 2,748
======= ======= =======
Owners Initial Cash Investment $30,564 $30,564 $30,564
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See the Schedule of Purchase Prices in the
Prospectus. Revenues exclude lodging and sales tax.
(2) This forecast assumes fourteen days of personal usage of each unit.
Based on this assumption, the reduction of gross revenue due to an
Owner's usage has been calculated by multiplying fourteen days times
$135 ADR per day for all three years. The $135 ADR is calculated by
taking an average of peak season ADR and low season ADR.
(3) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(4) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(5) Debt service assumes a mortgage of 80% of the purchase price ($149,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(6) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 149,900
Less estimated financing of 80% of Purchase Price ($119,920)
---------
Down Payment $ 29,980
Additional funding of Operating Reserve (1.169%) $ 585
---------
Owner's initial Cash Investment $ 30,565
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 31.2% 58.0%
2002 $120.94 62.0% 32.6% 58.5%
2003 $126.12 63.8% 34.0% 58.90%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-6
<PAGE> 67
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM FIRST FLOOR SIDE VIEW RESORT UNIT
WITHOUT USAGE
--------------------
SALES PRICE $152,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $25,790 $27,823 $29,857
Operating Expenses from forecast (2) $12,065 $13,016 $13,968
------- ------- -------
Net Operating Income Before certain charges $13,725 $14,807 $15,889
Reserves for Replacement (3) $ 258 $ 556 $ 896
------- ------- -------
Net Distributive Cash Flow $13,467 $14,251 $14,993
Debt Service (4) $10,263 $10,263 $10,263
------- ------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (5) $ 3,204 $ 3,988 $ 4,730
======= ======= =======
Owners Initial Cash Investment $31,176 $31,176 $31,176
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. This forecast assumes no
individual Owner usage. Revenues exclude lodging and sales tax.
(2) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses exclude lodging and
sales tax.
(3) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(4) Debt service assumes a mortgage of 80% of the purchase price ($152,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(5) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 152,900
Less estimated financing of 80% of Purchase Price ($122,320)
---------
Down Payment $ 30,580
Additional funding of Operating Reserve (1.192%) $ 596
---------
Owner's initial Cash Investment $ 31,176
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 29.6% 53.6%
2002 $120.94 62.0% 31.0% 54.3%
2003 $126.12 63.8% 32.5% 54.8%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-7
<PAGE> 68
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM FIRST FLOOR SIDE VIEW RESORT UNIT
WITH 14 DAYS OF PERSONAL USAGE
------------------------------
SALES PRICE $152,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $25,790 $27,823 $29,857
Operating Expenses from forecast (3) $12,065 $13,016 $13,968
Owner Usage (2) $ 1,890 $ 1,890 $ 1,890
------- ------- -------
Net Operating Income Before certain charges $11,835 $12,917 $13,999
Reserves for Replacement (4) $ 258 $ 556 $ 895
------- ------- -------
Net Distributive Cash Flow $11,577 $12,361 $13,104
Debt Service (5) $10,263 $10,263 $10,263
------- ------- -------
Annual Cash Flow (deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (6) $ 1,314 $ 2,098 $ 2,841
======= ======= =======
Owners Initial Cash Investment $31,176 $31,176 $31,176
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. Revenues exclude lodging
and sales tax.
(2) This forecast assumes fourteen days of personal usage of each unit.
Based on this assumption, the reduction of gross revenue due to an
Owner's usage has been calculated by multiplying fourteen days times
$135 ADR per day for all three years. The $135 ADR is calculated by
taking an average of peak season ADR and low season ADR.
(3) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(4) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(5) Debt service assumes a mortgage of 80% of the purchase price ($152,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(6) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 152,900
Less estimated financing of 80% of Purchase Price ($122,320)
---------
Down Payment $ 30,580
Additional funding of Operating Reserve (1.192%) $ 596
---------
Owner's initial Cash Investment $ 31,176
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 31.2% 58.0%
2002 $120.94 62.0% 32.6% 58.5%
2003 $126.12 63.8% 34.0% 58.9%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-8
<PAGE> 69
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM 2ND FLOOR SIDE VIEW RESORT UNIT
WITHOUT USAGE
------------------------
SALES PRICE $154,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $26,128 $28,187 $30,247
Operating Expenses from forecast (2) $12,223 $13,186 $14,150
------- ------- -------
Net Operating Income Before certain charges $13,905 $15,001 $16,097
Reserves for Replacement (3) $ 261 $ 564 $ 907
------- ------- -------
Net Distributive Cash Flow $13,644 $14,437 $15,190
Debt Service (4) $10,398 $10,398 $10,398
------- ------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (5) $ 3,246 $ 4,039 $ 4,792
======= ======= =======
Owners Initial Cash Investment $31,584 $31,584 $31,584
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. This forecast assumes no
individual Owner usage. Revenues exclude lodging and sales tax.
(2) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sale tax.
(3) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(4) Debt service assumes a mortgage of 80% of the purchase price ($154,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(5) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 154,900
Less estimated financing of 80% of Purchase Price ($123,920)
---------
Down Payment $ 30,980
Additional funding of Operating Reserve (1.208%) $ 604
---------
Owner's initial Cash Investment $ 31,584
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 29.6% 53.6%
2002 $120.94 62.0% 31.0% 54.3%
2003 $126.12 63.8% 32.5% 54.8%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-9
<PAGE> 70
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM 2ND FLOOR SIDE VIEW RESORT UNIT
WITH 14 DAYS OF PERSONAL USAGE
---------------------------------
SALES PRICE $154,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $26,128 $28,187 $30,247
Operating Expenses from forecast (3) $12,223 $13,186 $14,150
Owner Usage (2) $ 1,890 $ 1,890 $ 1,890
------- ------- -------
Net Operating Income Before certain charges $12,015 $13,111 $14,207
Reserves for Replacement (4) $ 261 $ 564 $ 907
------- ------- -------
Net Distributive Cash Flow $11,754 $12,547 $13,300
Debt Service (5) $10,398 $10,398 $10,398
------- ------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (6) $ 1,356 $ 2,149 $ 2,902
======= ======= =======
Owners Initial Cash Investment $31,584 $31,584 $31,584
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. Revenues exclude lodging
and sales tax.
(2) This forecast assumes fourteen days of personal usage of each unit.
Based on this assumption, the reduction of gross revenue due to an
Owner's usage has been calculated by multiplying fourteen days times
$135 ADR per day for all three years. The $135 ADR is calculated by
taking an average of peak season ADR and low season ADR.
(3) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(4) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(5) Debt service assumes a mortgage of 80% of the purchase price ($154,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(6) Before real estate taxes.
<TABLE>
<C> <C>
Unit Price $ 154,900
Less estimated financing of 80% of Purchase Price ($123,920)
---------
Down Payment $ 30,980
Additional funding of Operating Reserve (1.208%) $ 604
---------
Owner's initial Cash Investment $ 31,584
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 31.2% 58.0%
2002 $120.94 62.0% 32.6% 58.5%
2003 $126.12 63.8% 34.0% 58.9%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-10
<PAGE> 71
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM 3RD FLOOR SIDE VIEW RESORT UNIT
WITHOUT USAGE
------------------------
SALES PRICE $157,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $26,634 $28,732 $30,833
Operating Expenses from forecast (2) $12,459 $13,441 $14,424
------- ------- -------
Net Operating Income Before certain charges $14,175 $15,291 $16,409
Reserves for Replacement (3) $ 266 $ 575 $ 925
------- ------- -------
Net Distributive Cash Flow $13,909 $14,716 $15,484
Debt Service (4) $10,599 $10,599 $10,599
------- ------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (5) $ 3,310 $ 4,117 $ 4,885
======= ======= =======
Owners Initial Cash Investment $32,196 $32,196 $32,196
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. This forecast assumes no
individual Owner usage. Revenues exclude lodging and sales tax.
(2) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(3) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(4) Debt service assumes a mortgage of 80% of the purchase price ($157,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(5) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 157,900
Less estimated financing of 80% of Purchase Price ($126,320)
---------
Down Payment $ 31,580
Additional funding of Operating Reserve (1.231%) $ 616
---------
Owner's initial Cash Investment $ 32,196
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 29.6% 53.6%
2002 $120.94 62.0% 31.0% 54.3%
2003 $126.12 63.8% 32.5% 54.8%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-11
<PAGE> 72
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM 3RD FLOOR SIDE VIEW RESORT UNIT
WITH 14 DAYS OF PERSONAL USAGE
----------------------------------
SALES PRICE $157,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $26,634 $28,732 $30,833
Operating Expenses from forecast (3) $12,459 $13,441 $14,424
Owner Usage (2) $ 1,890 $ 1,890 $ 1,890
------- ------- -------
Net Operating Income Before certain charges $12,285 $13,401 $14,519
Reserves for Replacement (4) $ 266 $ 575 $ 925
------- ------- -------
Net Distributive Cash Flow $12,019 $12,826 $13,594
Debt Service (5) $10,599 $10,599 $10,599
------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (6) $ 1,420 $ 2,227 $ 2,995
======= ======= =======
Owners Initial Cash Investment $32,196 $32,196 $32,196
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. Revenues exclude lodging
and sales tax.
(2) This forecast assumes fourteen days of personal usage of each unit.
Based on this assumption, the reduction of gross revenue due to an
Owner's usage has been calculated by multiplying fourteen days times
$135 ADR per day for all three years. The $135 ADR is calculated by
taking an average of peak season ADR and low season ADR.
(3) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(4) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(5) Debt service assumes a mortgage of 80% of the purchase price ($157,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(6) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 157,900
Less estimated financing of 80% of Purchase Price ($126,320)
------------------------------------------------- ---------
Down Payment $ 31,580
Additional funding of Operating Reserve (1.231%) $ 616
------------------------------------------------- ---------
Owner's initial Cash Investment $ 32,196
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 31.2% 58.0%
2002 $120.94 62.0% 32.6% 58.5%
2003 $126.12 63.8% 34.0% 58.9%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-12
<PAGE> 73
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM SUPERIOR RESORT UNIT
WITHOUT USAGE
------------------------
SALES PRICE $159,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $26,971 $29,096 $31,223
Operating Expenses from forecast (2) $12,617 $13,611 $14,606
------- ------- -------
Net Operating Income Before certain charges $14,354 $15,485 $16,617
Reserves for Replacement (3) $ 270 $ 582 $ 937
------- ------- -------
Net Distributive Cash Flow $14,084 $14,903 $15,680
Debt Service (4) $10,733 $10,733 $10,733
------- ------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (5) $ 3,351 $ 4,170 $ 4,947
======= ======= =======
Owners Initial Cash Investment $32,603 $32,603 $32,603
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. This forecast assumes no
individual Owner usage. Revenues exclude lodging and sales tax.
(2) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(3) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(4) Debt service assumes a mortgage of 80% of the purchase price ($159,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(5) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 159,900
Less estimated financing of 80% of Purchase Price ($127,920)
---------
Down Payment $ 31,920
Additional funding of Operating Reserve (1.247%) $ 623
---------
Owner's initial Cash Investment $ 32,603
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 29.6% 53.6%
2002 $120.94 62.0% 31.0% 54.3%
2003 $126.12 63.8% 32.5% 54.8%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-13
<PAGE> 74
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM SUPERIOR RESORT UNIT
WITH 14 DAYS OF PERSONAL USAGE
------------------------------
SALES PRICE $159,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $26,971 $29,096 $31,223
Operating Expenses from forecast (3) $12,617 $13,611 $14,607
Owner Usage (2) $ 1,890 $ 1,890 $ 1,890
------- ------- -------
Net Operating Income Before certain charges $12,464 $13,595 $14,727
Reserves for Replacement (4) $ 270 $ 582 $ 937
------- ------- -------
Net Distributive Cash Flow $12,194 $13,013 $13,790
Debt Service (5) $10,733 $10,733 $10,733
------- ------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (6) $ 1,461 $ 2,280 $ 3,057
======= ======= =======
Owners Initial Cash Investment $32,603 $32,603 $32,603
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. Revenues exclude lodging
and sales tax.
(2) This forecast assumes fourteen days of personal usage of each unit.
Based on this assumption, the reduction of gross revenue due to an
Owner's usage has been calculated by multiplying fourteen days times
$135 ADR per day for all three years. The $135 ADR is calculated by
taking an average of peak season ADR and low season ADR.
(3) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(4) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(5) Debt service assumes a mortgage of 80% of the purchase price ($159,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(6) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 159,900
Less estimated financing of 80% of Purchase Price ($127,920)
------------------------------------------------- ---------
Down Payment $ 31,980
Additional funding of Operating Reserve (1.247%) $ 623
------------------------------------------------- ---------
Owner's initial Cash Investment $ 32,603
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 31.2% 58.0%
2002 $120.94 62.0% 32.6% 58.5%
2003 $126.12 63.8% 34.0% 58.9%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-14
<PAGE> 75
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM TERRACE RESORT UNIT
WITHOUT USAGE
-------------
SALES PRICE $169,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $28,658 $30,916 $33,176
Operating Expenses from forecast (2) $13,407 $14,463 $15,520
------- ------- -------
Net Operating Income Before certain charges $15,251 $16,453 $17,656
Reserves for Replacement (3) $ 287 $ 618 $ 995
------- ------- -------
Net Distributive Cash Flow $14,964 $15,835 $16,661
Debt Service (4) $11,404 $11,404 $11,404
------- ------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (5) $ 3,560 $ 4,431 $ 5,257
======= ======= =======
Owners Initial Cash Investment $34,642 $34,642 $34,642
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. This forecast assumes no
individual Owner usage. Revenues exclude lodging and sales tax.
(2) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(3) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(4) Debt service assumes a mortgage of 80% of the purchase price ($169,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(5) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 169,900
Less estimated financing of 80% of Purchase Price ($135,920)
------------------------------------------------- ---------
Down Payment $ 33,980
Additional funding of Operating Reserve (1.325%) $ 662
------------------------------------------------ ---------
Owner's initial Cash Investment $ 34,642
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 29.6% 53.6%
2002 $120.94 62.0% 31.0% 54.3%
2003 $126.12 63.8% 32.5% 54.8%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-15
<PAGE> 76
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL IN GULF SHORES, ALABAMA
FORECASTED SUMMARIZED STATEMENT OF ALLOCATION OF NET DISTRIBUTABLE CASH FLOW
TO AN OWNER OF A TYPICAL ONE-BEDROOM TERRACE RESORT UNIT
WITH 14 DAYS OF PERSONAL USAGE
------------------------------
SALES PRICE $169,900
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
Dec 31, 2001 Dec 31, 2002 Dec 31, 2003
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from Forecast (1) $28,658 $30,916 $33,176
Operating Expenses from forecast (3) $13,407 $14,463 $15,520
Owner Usage (2) $ 1,890 $ 1,890 $ 1,890
------- ------- -------
Net Operating Income Before certain charges $13,361 $14,563 $15,766
Reserves for Replacement (4) $ 287 $ 618 $ 995
------- ------- -------
Net Distributive Cash Flow $13,074 $13,945 $14,771
Debt Service (5) $11,404 $11,404 $11,404
------- ------- -------
Annual Cash Flow (Deficiency) received Prior to
Deduction for Depreciation & Income Tax Effect (6) $ 1,670 $ 2,541 $ 3,367
======= ======= =======
Owners Initial Cash Investment $34,642 $34,642 $34,642
======= ======= =======
</TABLE>
(1) Revenues are allocated to Owners based on the assigned percentage
interests of the units. See Schedule of Purchase Prices in the
Prospectus for assigned percentage interests. Revenues exclude lodging
and sales tax.
(2) This forecast assumes fourteen days of personal usage of each unit.
Based on this assumption, the reduction of gross revenue due to an
Owner's usage has been calculated by multiplying fourteen days times
$135 ADR per day for all three years. The $135 ADR is calculated by
taking an average of peak season ADR and low season ADR.
(3) Operating expenses include the estimated departmental, undistributed
and fixed expenses to manage the hotel. Expenses are allocated based on
the assigned percentage interests of the units. Expenses exclude
lodging and sales tax.
(4) Reserve for replacement is 1% in the first year, 2% of gross revenue in
year two, 3% of gross revenue in year 3, 4% of gross revenue in year 4,
stabilizing at 5% thereafter. This reserve for replacement is
established for the replacement of capital items.
(5) Debt service assumes a mortgage of 80% of the purchase price ($169,900)
bearing a 7.5% interest rate with a 30-year amortization. The terms of
this financing are based on mortgage availability from a variety of
Alabama lenders for qualified individuals purchasing an investment
property.
(6) Before real estate taxes.
<TABLE>
<S> <C>
Unit Price $ 169,900
Less estimated financing of 80% of Purchase Price ($135,920)
------------------------------------------------- ---------
Down Payment $ 33,980
Additional funding of Operating Reserve (1.325%) $ 662
------------------------------------------------- ---------
Owner's initial Cash Investment $ 34,642
</TABLE>
Occupancy Level Required to
Break Even
<TABLE>
<CAPTION>
Years Ending Average Daily Projected Before Debt After Debt
December 31, Room Rates Occupancy Service Service
------------ ---------- --------- ------- -------
<S> <C> <C> <C> <C>
2001 $117.21 59.3% 31.2% 58.0%
2002 $120.94 62.0% 32.6% 58.5%
2003 $126.12 63.8% 34.0% 58.9%
</TABLE>
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES AND
ACCOUNTANT'S REPORT
F-16
<PAGE> 77
BEACHSIDE ALL-SUITES HOTEL
PROPOSED 84 ROOM HOTEL
IN GULF SHORES, ALABAMA
SUMMARY OF SIGNIFICANT ASSUMPTIONS AND ACCOUNTING POLICIES
These financial forecasts present, to the best of management's knowledge and
belief, the hotel's expected annual operating years ending December 31, 2001
through 2003. Accordingly, the forecasts reflect its judgment as of March 5,
1999, the date of these forecasts, of the expected conditions and these expected
courses of action. The assumptions disclosed herein are those that management
believes are significant to the forecasts. There will usually be differences
between the forecasted and actual results, because events and circumstances
frequently do not occur as expected, and those differences may be material.
The securities prospectus should be reviewed for a more detailed explanation of
the investment and its related risk factors.
1. DESCRIPTION OF THE PROJECT AND ANALYSIS OF SOURCES OF FORECASTED
INFORMATION:
Southwind Development Company, L.L.C. owns a parcel of land in Gulf
Shores, Alabama for the purpose of developing a hotel. Southwind
Development Company, L.L.C. plans to market the hotel as 84 individual
units to individual investors. Concurrent with the purchase of the
units, the unit Owners will enter into a hotel and operating rental
pool agreement. Unit Owners will be subject to income taxes at an
individual level on their allocated share of income or loss, as
forecasted on pages F-5 through F-16, less other deductions, such as
interest, depreciation, association dues and/or assessments, cleaning
fees and various other costs that will be paid at the investor level.
Management of Southwind Development Company, L.L.C. has evaluated
numerous sources of information and believes they have identified the
most relevant material sources of information available pertaining to
this forecast to support assumptions for revenues and expenses in this
forecast. These sources include, but are not limited to, market data,
operating data for the geographic location and certain mandatory
facility requirements based on architectural renderings, cost analysis,
site surveys, traffic studies, zoning studies and real estate
consultation. In addition, certain facilities contracts are being
negotiated, as more fully described in the following notes. Management
has analyzed this information for consistency and completeness in
developing this forecast.
2. SUMMARY OF SIGNIFICANT FORECAST ASSUMPTIONS:
- The property will be developed as an 84-unit hotel, all units
directly on the Gulf of Mexico with full kitchens and a bath
and a half.
- The anticipated opening date for the hotel is the summer of
2000.
- The number of rooms available in the rental pool is 84
individual hotel units.
- The anticipated occupancy and average daily room rates as
shown on page F-5 through F-16 are more fully discussed in
Section 4 of this Summary.
- Innisfree Hotels, Inc. will operate the facility as discussed
in Section 5 of this Summary.
- The forecasted summarized statements of allocation of Net
Distributable Cash Flow to an Owner are presented on pages F-5
through F-16.
F-17
<PAGE> 78
- A minimum of 84 rooms must be completed prior to the hotel
opening
- At the time of closing, Southwind Development Company, L.L.C.
will retain ownership of any unsold units and the commercial
unit and will share in the rental pool operations
proportionately. Southwind Development Company, L.L.C. will
continue to market any unsold units.
- Each Unit will include a built-in bunk bed area that will
allow each unit to sleep 6 people.
3. BASIS OF PRESENTATION:
The forecasted presentation of Net Distributable Cash Flow has been
presented using the accrual basis of accounting. Net Distributable Cash
Flow, as presented on page F-4, excludes expense for property taxes.
The operating reserve established concurrently with the purchase of the
units will be used to stabilize cash flow for operations and investor
distribution purposes. Due to the establishment of this reserve, no
adjustments have been made for any differences between the accrual
basis Net Distributable Cash Flow and the net distributable cash flow,
except for the reserve for replacements.
4. HOTEL AND OPERATING RENTAL POOL AGREEMENT:
Upon purchasing a unit, each Owner will be required to sign a
fifteen-year agreement with Innisfree Hotels, Inc. Innisfree Hotels,
Inc. will be engaged to act as the Owners' exclusive manager for the
operation of the hotel. Innisfree Hotels, Inc. will prepare, on a
monthly basis, calculations of unit revenue based upon the days each
unit qualifies to be included in the rental pool, in addition to
various other financial reports. Revenues, adjusted for personal usage,
and operating expenses will be shared by all of the Owners based upon
the assigned percentage interests of each unit. The percentage interest
of a unit equals the initial value of a Unit as established by
Southwind Development Company, L.L.C. divided by $12,673,700. Innisfree
Hotels, Inc. will maintain certain minimum insurance requirements at
the expense of the Owners.
Innisfree Hotels, Inc. will establish on behalf of the Owners, a
reserve for capital expenditures and for the replacement of furniture,
fixtures and equipment. The reserve for replacement will be 1% of gross
revenues in the first year, 2% the second year, 3% the third year, 4%
the fourth year and 5% in year five and 5% every year thereafter.
The forecasts as outlined in pages F-5 through F-16 do not assume any
requirement for any assessments by the Condominium Association,
although one may be required. The cash return to the investor will be
lower if assessments are required.
The Owners will fund an operating cash reserve for working capital
purposes in connection with the operation of the hotel at the time of
closing of the Owner's purchase of the unit. Innisfree Hotels, Inc will
manage the operating fund.
Innisfree Hotels, Inc., at its option, will distribute to the investors
monthly, based upon 80% of anticipated net distributable cash flow for
the year, multiplied by the individual investor's allocable share. The
balance of the net distributable cash flow will be distributed no later
than
F-18
<PAGE> 79
seventy-five days after the operating year-end. Innisfree Hotels, Inc.
will also prepare final year- end reports for purposes of filing
individual income tax returns.
Base management fees paid to Innisfree Hotels, Inc. will be 5% of total
revenue, payable monthly with the submission of the Owner's statements.
In addition, an incentive management fee will be paid to Innisfree
Hotels, Inc. when net distributable cash flow, excluding the management
incentive, reaches $1,252,987. The incentive fees will be calculated
for the next three years, based on the appropriate percentage applied
to the net distributable cash flow.
<TABLE>
<CAPTION>
Net distributable cash flow, excluding Years ending December 31,
association expenses 2001 2002 2003
-------------------- ---- ---- ----
<S> <C> <C> <C>
Less than $1,252,987 0.0% 0.0% 0.0%
Over $1,252,987 and up to $1,384,522 15.0% 15.0% 12.0%
Over $1,384,522 30.0% 25.0% 22.5%
</TABLE>
Innisfree Hotels, Inc. will receive additional fees for accounting
services and sales and marketing services. These fees are included in
hotel operating expenses in the accompanying forecasted statements on
pages F-5 through F-16.
F-19
<PAGE> 80
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
BALANCE SHEET
DECEMBER 31, 1998
FS-1
<PAGE> 81
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
BALANCE SHEET
DECEMBER 31, 1998
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report.................................................. FS-3
Balance Sheet................................................................. FS-4
Notes to Balance Sheet................................................. FS-5 - FS-7
</TABLE>
FS-2
<PAGE> 82
March 5, 1999
INDEPENDENT AUDITOR'S REPORT
To the Member
Southwind Development Company, L.L.C.
Gulf Breeze, Florida
I have audited the accompanying balance sheet of Southwind Development Company,
L.L.C. (the "Company") as of December 31, 1998. This financial statement is the
responsibility of the Company's management. My responsibility is to express an
opinion on this financial statement based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. I believe that my audit
provides a reasonable basis for my opinion.
In my opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Southwind Development Company,
L.L.C. as of December 31, 1998 in conformity with generally accepted accounting
principles.
Randall L. Sansom
Certified Public Accountant
FS-3
<PAGE> 83
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,168
Due from affiliate 8,210
Refundable application fees 2,500
Real estate under development 2,684,614
----------
TOTAL CURRENT ASSETS $2,697,492
OTHER ASSETS
Organization costs 1,566
----------
TOTAL ASSETS $2,699,058
==========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 35,982
Accrued interest payable 72,174
Accrued liabilities 50,000
Due to member 198,901
Note payable - first mortgage 1,800,000
Note payable - second mortgage 541,500
----------
TOTAL CURRENT LIABILITIES $2,698,557
MEMBER'S EQUITY 501
----------
TOTAL LIABILITIES AND MEMBER'S EQUITY $2,699,058
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
FS-4
<PAGE> 84
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO BALANCE SHEET
DECEMBER 31, 1998
NOTE A - NATURE OF ORGANIZATION
The Company was formally organized in Alabama in April, 1998 to acquire and
develop real estate for future sale. The Company acquired a parcel of land in
Gulf Shores, Alabama in April, 1998 and intends to develop 84 condominium units
and a commercial unit to be known as Beachside All-Suites Hotel, a Condominium.
As part of the sales transaction, each condominium purchaser will enter into a
hotel operating and rental pool agreement with the hotel operator. The Company
has incurred certain project development costs, but has not yet commenced
construction or its marketing campaign.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method
As the Company receives purchase contracts for condominium units, deposits of
20% of the purchase price will be placed into an escrow account. Upon
construction completion, the funds will be transferred to the company through a
closing and the condominium unit Owners will receive title to their unit. At
that time, revenue will be recognized for the sale of the condominium units and
the costs associated with revenue will be expensed with a corresponding
reduction to real estate under development.
Organization Costs
Organization costs consist of legal fees stated at cost and amortized on a
straight-line basis over a period of five years.
Income Taxes
The Company is treated as a partnership for federal income tax purposes and does
not incur income taxes. Instead, its earnings and losses are included in the
personal return of the member and taxed depending on his personal tax situation.
The financial statement does not reflect a provision for income taxes.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
NOTE C - REAL ESTATE UNDER DEVELOPMENT
Real estate under development consists of the following:
<TABLE>
<S> <C>
Land $2,391,500
Capitalized interest 179,874
Capitalized closing costs 24,003
Architect and engineering fees 53,552
Legal fees 28,196
Taxes and permits 4,447
Other costs 3,042
----------
Total $2,684,614
</TABLE>
FS-5
<PAGE> 85
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO BALANCE SHEET
DECEMBER 31, 1998
NOTE D - NOTE PAYABLE - FIRST MORTGAGE
The note payable is due to a financial institution and originally matured on
October 12, 1998. On that date, Southwind Development Company, L.L.C. (the
"Company") was granted an extension to January 11, 1999. Subsequent to year-end,
the Company was granted another extension of the maturity date to April 12,
1999. The terms of the note call for quarterly interest payments calculated at
8% simple interest annually. The mortgage is collateralized by the land and its
improvements and an unconditional standby letter of credit in the amount of
$360,000 which has been personally guaranteed by the member. It is anticipated
that the mortgage on the land will be converted to a construction loan at final
maturity. Under current financing arrangements, the Company must have a purchase
contract on 43 units 45 days before requesting a construction loan and on 70
units with a minimum contract price of $147,500 before closing on such loan. 90%
of the units must be under contract before the first draw is allowed on the
construction loan. At that time, additional collateral would also include a 10%
contractors holdback and the third party escrows described in Note B. It is
anticipated that the construction loan would carry an interest rate of 8%, with
principal and interest due at maturity. The construction loan is subject to
participation by another lender. The member of the Company is on the Board of
Directors and owns 5% of the equity interest of the financial institution
holding the first mortgage on the land.
NOTE E - NOTE PAYABLE - SECOND MORTGAGE
The second mortgage payable is due to the seller of the property and matures no
earlier than January 1, 1999 and, then, at the earlier of final closing on 90%
of the units or August 17, 1999. Simple interest is payable in monthly
installments of 10% annual interest. An additional 10% simple interest is
payable upon maturity of the loan. This loan is personally guaranteed by the
member of the Company.
NOTE F - ACCRUED LIABILITY
As an additional condition of the second mortgage, the second mortgage holder
has escrowed $100,000 toward the purchase of a condominium unit. It is
anticipated that the sales price of the unit would be approximately $150,000.
The $50,000 variance is due to the second mortgage holder as the difference in
the sales price of the unit or, in the event the condominium units are not
constructed, is due to the second mortgage holder in cash. Furthermore, the
second mortgage holder has first right of refusal on four additional units.
NOTE G - DUE TO MEMBER
Amounts due to member are for real estate development advances. The advances are
non-interest bearing, unsecured, and have no fixed repayment terms. The advances
will be repaid from future cash flows as they become available. Between December
31, 1998 and the date of these financial statements, the member advanced an
additional $49,900.
FS-6
<PAGE> 86
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO BALANCE SHEET
DECEMBER 31, 1998
NOTE H - DUE FROM AFFILIATE
The Company has made an advance to a related party. After deducting repayments
from the related party and amounts paid by the related party for Company
expenses, there is still a balance due from the affiliate. This advance is
non-interest bearing, unsecured, and has no specific terms of repayment. Between
December 31, 1998 and the date of these financial statements, the related party
repaid an additional $4,600 to the Company. The related party will enter into an
agreement with Beachside All-Suites Hotel, A Condominium, as hotel operator. The
majority of stock in this related party is owned by a member of the Company.
NOTE I - OTHER RELATED PARTIES
The member of the Company has a 50% equity interest in the real estate company
which handled the purchase of the land for the Company. This real estate company
is expected to handle some of the listings for the sale of the condominium
units. The Company plans to retain ownership of the commercial unit and lease it
to the hotel operator.
NOTE J - OTHER SUBSEQUENT EVENTS
This audit has been prepared in anticipation of the Company registering with the
Securities and Exchange Commission for the sale of the condominium unit
interests.
NOTE K - OTHER COMMITMENTS AND CONTINGENCIES
The Company must have purchase contracts for 75 units within 180 days from the
time the first unit is sold unless the construction lender agrees to allow a
lesser number of units to be sold or unless alternative financing is obtained.
Furthermore, per the proposed purchase contracts, the Company has committed to
construction of the condominium units within two years of contract signing.
NOTE L - CONSTRUCTION AND RELATED CONSTRUCTION CONTRACTS
As of December 31, 1998, the Company had entered into construction-related
contracts totaling $55,600.00. On December 31, 1998, earnings on these contracts
totaled $42,352.00, of which $21,927.00 remained in accounts payable. Between
December 31, 1998 and the date of these financial statements, an additional
$5,000.00 of the accounts payable was paid.
FS-7
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses incurred in connection with the issuance and
distribution of the securities being registered hereby are as follows:
<TABLE>
<S> <C>
SEC registration fee ......................... $ 3,524
Accountants' fees and expenses ............... 8,500
Legal fees and expenses ...................... 60,000
Printing expenses ............................ 15,000
Total ........................................ $87,024
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
None.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
Southwind has engaged in one prior sale of unregistered securities as
follows: on April 9, 1998, Julian MacQueen purchased 100% of the interests in
Southwind in exchange for one thousand dollars ($1,000.00). This sale of
securities was exempt from registration under Section 4(2) of the Securities Act
of 1933.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Southwind is a limited liability company organized under the laws of
the State of Alabama. Section 10-12-4 of the Alabama Limited Liability Company
Act (the "Act") provides that, subject to such standards and restrictions, if
any, as are set forth in its operating agreement, a limited liability company
may, and shall have the power to, indemnify and hold harmless any member or
manager or other persons from and against any and all claims and demands
whatsoever.
Section 8 of Southwind's Operating Agreement (the "Agreement")
provides, among other things, that Southwind shall indemnify any Person and the
heirs, devisees, executors and administrators of such Person (individually, an
"Indemnified Party," collectively, the "Indemnified Parties") who, by reason of
the fact that such Indemnified Party is or was a Member, Manager, agent,
affiliate or employee of Southwind or an officer, director, shareholder, member
or manager of a Member or Manager, and was or is a party or is threatened to be
made a party, to any threatened, pending or completed claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative, including
appeals (other than an action by or in the right of the Company), against
expenses, including, without limitation, attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any such threatened, pending or completed claim, action, suit or
proceeding; and any threatened, pending or completed claim, action or suit by or
in the right of the Company to procure a judgment in its favor, against expenses
including, without limitation, attorneys' fees, actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit.
II-1
<PAGE> 88
The Operating Agreement further provides that expenses, including
attorneys' fees, incurred by any such Indemnified Party in defending a
proceeding may be paid by Southwind in advance of the final disposition of such
proceeding, including any appeal therefrom, upon receipt of an undertaking by or
on behalf of such Indemnified Party to repay such amount if it shall ultimately
be determined that such Indemnified Party is not entitled to be indemnified by
Southwind.
The Operating Agreement defines "Person" as any individual,
partnership, limited liability company, corporation, trust, estate, or other
association, whether created by the laws of the State of Alabama or another
state or foreign country. The Operating Agreement defines "Member" as each
Person who is an initial signatory to the Operating Agreement, or has been
admitted to Southwind as a Member in accordance with the provisions of the
Operating Agreement. According to the Operating Agreement, Southwind shall have
power to purchase and maintain insurance on behalf of any Indemnified Party
against any liability asserted against such Person and incurred by such Person
in any such capacity.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrants pursuant to the foregoing provisions, the registrants have been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements *
Independent Auditor's Report
Balance Sheet as of December 31, 1998
Notes to Balance Sheet - December 31, 1998
* Included in the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
3.1 Articles of Organization of the Registrant
3.2 Operating Agreement of the Registrant
* 8.1 Opinion of Berkowitz, Lefkovits, Isom & Kushner, A Professional Corporation, as to the
Tax Matters
* 10.1 Purchase Agreement between MacQueen Enterprises, Inc. and Michael A. DeJusto
* 10.2 Assignment of Purchase Agreement between MacQueen Enterprises, Inc. and Michael A.
DeJusto from MacQueen Enterprises, Inc. to Southwind
* 10.3 Form of Preconstruction Purchase and Escrow Agreement
10.4 Form of Hotel Operating and Rental Pool Agreement
</TABLE>
II-2
<PAGE> 89
<TABLE>
<S> <C>
* 10.5 Promissory Note from Southwind in favor of First American Bank, N.A., dated April 16,
1998
* 10.6 First Mortgage from Southwind in favor of First American Bank, N.A., dated April 16,
1998
* 10.7 Promissory Note from Southwind in favor of Michael A. and M. Katherine DeJusto, dated
April 16, 1998
* 10.8 Second Mortgage from Southwind in favor of Michael A. and M. Katherine DeJusto,
dated April 15, 1998
* 10.9 Letter from First American Bank, N.A. extending maturity date of April 16, 1998
Promissory Note from Southwind in favor of First American Bank, N.A. to January 11,
1999
* 10.10 Letter from First American Bank, N.A. extending maturity date of April 16, 1998
Promissory Note from Southwind in favor of First American Bank, N.A. to April 12,
1999
* 23.1 Consent of Berkowitz, Lefkovits, Isom & Kushner, A Professional Corporation (included
as Exhibits 5.1 and 8.1 hereto)
23.2 Consent of Randall L. Sansom, CPAs,
27.1 Financial Data Schedule
* 99.1 Articles of Incorporation of Beachside All-Suites Hotel Condominium Owners
Association, Inc.
* 99.2 Bylaws of Beachside All-Suites Hotel Condominium Owners Association, Inc.
* 99.3 Declaration of Condominium of Beachside All-Suites Hotel, a Condominium
</TABLE>
* To be filed by amendment
ITEM 37. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the minimum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
II-3
<PAGE> 90
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offer therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(h) 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 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 Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Gulf Breeze, State of Florida, on the 15 day of
March, 1999.
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
By: /s/ Julian B. MacQueen
---------------------------
Its: President
II-5
<PAGE> 92
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Julian B.
MacQueen, as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
SOUTHWIND DEVELOPMENT Manager of Southwind March 15, 1999
MANAGEMENT COMPANY, INC. Development Company, L.L.C.
By: /s/ Julian B. MacQueen
---------------------------------
Julian B. MacQueen
Its: President
/s/ Julian B. MacQueen President of Southwind March 15, 1999
- -------------------------------------- Development Company, L.L.C.,
Julian B. MacQueen President and Sole Director of
Southwind Development
Management Company, Inc.
/s/ Roger W. Wiegner Controller and Principal March 15, 1999
- -------------------------------------- Accounting Officer of
Roger W. Wiegner Southwind Development
Company, L.L.C.
</TABLE>
II-6
<PAGE> 1
Exhibit 3.1
ARTICLES OF ORGANIZATION
OF
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
THE UNDERSIGNED Organizer desires to form a limited liability company
pursuant to the provisions of the "Alabama Limited Liability Company Act" as
codified in Chapter 12 of Title 10 of the Code of Alabama of 1975, as amended
(the "Act"), and does hereby adopt the following Articles of Organization:
ARTICLE ONE
NAME OF COMPANY: The name of the limited liability company is
Southwind Development Company, L.L.C. (the "Company").
ARTICLE TWO
DURATION: The period for the duration of the Company shall be
perpetual, and the Company shall continue until it is dissolved in accordance
with the provisions of the Act or the Operating Agreement of the Company.
Notwithstanding any provision to the contrary, the Company shall
continue and not dissolve as a result of the death, retirement, resignation,
expulsion, bankruptcy, or dissolution of any Member or any other event that
terminates the continued Membership of the Member, unless there is no remaining
Member, and the holders of all the financial rights in the Company do not
continue the Company in accordance with the Act.
ARTICLE THREE
PURPOSES: The purposes for which the Company is organized are:
(a) To purchase, own, hold, control, use, develop, improve, exchange,
mortgage, lease, rent, sell, convey, or otherwise acquire and dispose of and
deal generally in and with, real property, both improved and unimproved, all
timber located or to be cultivated thereon, and any and all oil, gas and other
minerals and mineral rights of every kind and any easement or other interest
therein, wherever situate; to erect, or cause to be erected, on any lands owned,
held or occupied by the company, houses, buildings, or other structures, with
their appurtenances; to manage, operate, lease, rebuild, enlarge, alter or
improve any buildings or other structures, now or hereafter erected on lands so
owned, held or occupied; to encumber, sell or otherwise dispose of any lands or
interests in lands, timber located or hereafter cultivated thereon, and any
buildings or other structures; and
<PAGE> 2
(b) In general, to take any and all actions, and to exercise any and
all powers which it might now or hereafter be lawful for a limited liability
company to do or exercise under the Act, or any act amendatory thereof or
supplemental thereto, that may be now or hereafter in force.
ARTICLE FOUR
REGISTERED OFFICE AND AGENT: The address of the initial
registered office of the Company is as follows:
150 Government Street
Suite 2000
Mobile, Alabama 36602
and the name of the initial registered agent of the Company at said
address is as follows:
Richard E. Davis
ARTICLE FIVE
INITIAL MEMBER: The name and mailing address of the Initial
Member of the Company is as follows:
Julian MacQueen
Baybridge Professional Park
Building 113
Gulf Breeze, Florida 32561
ORGANIZER: The name and mailing address of the Organizer of
the Company, who has been authorized to execute this document in
connection with the formation of the Company is as follows:
Richard E. Davis
LaClede Building
150 Government Street
Suite 2000
Mobile, Alabama 36602
ARTICLE SIX
ADDITIONAL MEMBERS: The Member may admit Additional Members to
the Company, as that term is defined in the Operating Agreement of
the Company.
<PAGE> 3
ARTICLE SEVEN
MANAGEMENT: The Company shall be managed by one (1) or more Managers.
The Initial Manger who shall serve until his successor is elected and begins
serving is as follows:
Julian MacQueen
Baybridge Professional Park
Building 113
Gulf Breeze, Florida 32561
ARTICLE EIGHT
INTERNAL AFFAIRS: The provisions for the regulation of the internal
affairs of the Company shall be as set forth in the Operating Agreement of the
Company.
ARTICLE NINE
NO LIABILITY: The Member of the Company shall have no liability for any
debt, obligation, or liability of the Company, as provided in the Alabama
Limited Liability Company Act.
IN WITNESS WHEREOF, the undersigned Organizer has hereunto affixed his
signature on this the 9th day of April, 1998.
/s/ Richard E. Davis
-----------------------
RICHARD E. DAVIS
THIS INSTRUMENT PREPARED BY:
ROBIN K. FINCHER, ESQUIRE
HELMSING, SIMS & LEACH, P.C.
150 Government Street, Suite 2000
Mobile, Alabama 36602
(334) 432-5521
<PAGE> 1
Exhibit 3.2
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
DATED AS OF MARCH 10, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
1. CERTAIN DEFINED TERMS......................................................................... 1
2. CAPITALIZATION OF THE COMPANY................................................................. 2
(a) Initial Capital Contributions........................................................ 2
(b) Additional Contributions............................................................. 2
(c) Class A Units and Class B Units...................................................... 2
(d) Indemnification for Guaranteed Debt.................................................. 3
(e) Nature of the Obligations............................................................ 3
(f) No Voluntary Withdrawal, Resignation or Return of Capital............................ 3
3. MANAGEMENT OF THE COMPANY..................................................................... 3
(a) Management by Managers............................................................... 3
(b) Administrative Certifications........................................................ 3
(c) Resignation, Removal or Dissolution of a Manager..................................... 4
(d) Durable Power of Attorney............................................................ 4
(e) Decisions Reserved to Members........................................................ 4
(f) Transactions with Members............................................................ 5
(g) Company Property..................................................................... 5
(h) Execution of Instruments............................................................. 5
4. TAX, ACCOUNTING AND FINANCIAL MATTERS......................................................... 5
(a) Partnership Status................................................................... 5
(b) Capital Accounts..................................................................... 5
(c) Distribution of Funds................................................................ 6
(d) Preparation of Tax Returns........................................................... 6
(e) Tax Allocations...................................................................... 6
(f) Additional Tax Provisions............................................................ 6
(g) Books of Account..................................................................... 7
(h) Banking and Investments.............................................................. 7
5. TRANSFERS BY MEMBERS.......................................................................... 7
(a) General Restrictions................................................................. 7
(b) Company Restrictions................................................................. 8
(c) Death, Dissolution, Incompetency, Insolvency or Bankruptcy of a
Member............................................................................... 8
(d) Effect of Transfer................................................................... 8
(e) Effect of Agreement.................................................................. 8
6. CESSATION OF MEMBERSHIP....................................................................... 9
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
7. DISSOLUTION OF THE COMPANY.................................................................... 9
(a) Events Causing Dissolution........................................................... 9
(b) Winding Up Of Business............................................................... 9
8. LIABILITY AND INDEMNIFICATION PROVISIONS...................................................... 9
(a) Obligations and Debts of the Company................................................. 9
(b) Liability of Members to Each Other................................................... 10
(c) Exculpation of Members............................................................... 10
(d) Indemnification by Company........................................................... 10
(e) Interim Advances..................................................................... 10
(f) Maintenance of Indemnification Insurance............................................. 11
(g) Notification and Defense of Claims................................................... 11
(h) Other Remedies....................................................................... 11
(i) Scope of Provisions.................................................................. 11
9. DUTY OF LOYALTY AND CARE...................................................................... 11
10. GENERAL PROVISIONS............................................................................ 12
(a) Specific Performance................................................................. 12
(b) Arbitration Of Disputes.............................................................. 13
(c) Procedure For Consent................................................................ 13
(d) Survival of Rights................................................................... 13
(e) Headings............................................................................. 13
(f) Governing Law........................................................................ 13
(g) Waiver............................................................................... 13
(h) Amendment............................................................................ 14
(i) Further Assurances................................................................... 14
(j) Notice............................................................................... 14
(k) Entire Agreement..................................................................... 14
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
THIS AMENDED AND RESTATED OPERATING AGREEMENT is made and entered into as of
the 10th day of March, 1999, by and between JULIAN B. MACQUEEN ("MacQueen")
and SOUTHWIND DEVELOPMENT MANAGEMENT COMPANY, INC. ("Southwind Development").
R E C I T A L S:
WHEREAS, MacQueen organized Southwind Development Company, L.L.C. (the
"Company") pursuant to the Alabama Limited Liability Company Act (the "Act"), as
set forth in the Code of Alabama (1994), ss. 10-12-1 et seq., as the same may be
amended from time to time;
WHEREAS, MacQueen transferred one percent (1%) of his Membership Interest to
Southwind Development;
WHEREAS, MacQueen desires to admit Southwind Development as a substitute Member
and to resign as Manager of the Company and to appoint Southwind Development as
Manager of the Company; and
WHEREAS, the Members have entered into this Operating Agreement (the
"Agreement") to regulate and establish the affairs of the Company, the conduct
of its business, and the relations of its Members.
NOW, THEREFORE, in consideration of the premises and the mutual covenants of the
parties herein contained, the parties do hereby agree as follows:
1. CERTAIN DEFINED TERMS. Capitalized terms used herein and not otherwise
defined shall have the respective meanings indicated below:
(a) "Manager" means Southwind Development in its capacity as Manager of the
Company and any Person designated as a substitute or additional Manager of the
Company pursuant to this Agreement; but such term does not include any person
who has ceased to be a Manager of the Company.
(b) "Majority" means any one or more of the Members authorized to act on a
particular matter whose aggregate Percentage Interest equals or exceeds
fifty-one percent (51%) of the aggregate Percentage Interest of all Members who
are so authorized.
<PAGE> 5
(c) "Members" means and includes the Members listed in the preamble to this
Agreement and any additional Members admitted to the Company pursuant to the
provisions of this Agreement, but such term does not include such parties who
have ceased to be Members.
(d) "Membership Interest" means the ownership interest of a Member in the
Company at any particular time, including a Member's share of profits and
losses, the right to receive distributions from the Company, and the other
rights accorded to such Member under this Agreement or by the Act.
(e) "Percentage Interest" means, subject to adjustment upon any transfer
required or permitted under this Agreement, a fraction with a numerator equal to
the number of Class A Units owned by such Member and a denominator equal to the
total issued and outstanding Class A Units owned by all Members. Each Member's
initial Percentage Interest is shown on EXHIBIT A attached to this Agreement.
(f) "Person" means any individual or any partnership, limited liability company,
corporation, trust, estate, or other association, whether created by the laws of
the State of Alabama or another state or foreign country.
(g) "Units" means the Class A and Class B units of participation in the Company,
which are issued, held and conveyed pursuant to this Agreement.
2. CAPITALIZATION OF THE COMPANY.
(a) Initial Capital Contributions. Each Member has made a contribution to the
capital of the Company. In exchange for such capital contributions, each Member
has received Units indicated for such Member on EXHIBIT A attached hereto for an
aggregate of One Hundred (100) issued and outstanding Class A Units. Southwind
Development has, as the initial Manager of the Company, received one (1) Class B
Unit.
(b) Additional Contributions. No Member shall be permitted or required to make
any additional capital contributions except as expressly required or permitted
pursuant to this Agreement.
(c) Class A Units and Class B Units. Except as otherwise provided herein, Class
A Units shall be issued to and held by MacQueen, Southwind Development and any
substitute or replacement Members. Class B Units shall only be issued to and
held by the Manager and shall entitle the holder thereof to exercise the rights
and obligations of a Manager hereunder. Upon the resignation, removal or
dissolution of a Manager in accordance with Section 3(c) hereof, such resigning,
removed or deceased Manager shall surrender to the Company his certificates
evidencing ownership of such Class B Units and the Company shall issue a new
certificate evidencing ownership of one Class B Unit to each successor Manager
appointed in accordance with the provisions hereof.
2
<PAGE> 6
(d) Indemnification for Guaranteed Debt. The Members acknowledge that from time
to time, one or more of them may be called upon to guarantee debts and
obligations of the Company. The Members intend that any amount paid pursuant to
any such guarantee of indebtedness (a "Guaranty") shall be borne by them in
accordance with their respective Percentage Interests on the date that the
Company or any Member first receives notice (whether or not in writing) from the
creditor of any such guaranteed indebtedness that a default with respect to such
indebtedness has occurred. Each Member who receives a notice from a Member who
gives a Guaranty and is called upon or required to pay any amount pursuant to
such Guaranty (a "Called Party") with respect to the amount required to be paid
by such Called Party pursuant to any guaranty shall, within seven (7) days after
receipt of such notice, pay to the Called Party his proportionate share
(calculated in accordance with his Percentage Interest) of such total amount
payable by the Called Party. Each Member shall indemnify and hold harmless the
other Members and the Company from and against any loss, cost, damage, claim or
expense (including reasonable attorneys' fees) which may be incurred as a result
of such indemnifying Member's breach of any of the obligations contained in this
Section.
(e) Nature of the Obligations. No creditors of the Company or other third
parties shall have any rights, as third party beneficiaries or otherwise, to
compel any call for supplemental capital contributions or any capital
contribution. The Company may not assign the obligations of the Members under
Section 2(a) of this Agreement to any creditor or other third party.
(f) No Voluntary Withdrawal, Resignation or Return of Capital. No Member shall
have the right to withdraw or resign voluntarily as a Member or to be repaid any
of his capital contributions, except as expressly set forth in this Agreement.
No interest shall accrue on the capital contributions of the Members, except as
expressly set forth herein or otherwise approved by the Managers.
3. MANAGEMENT OF THE COMPANY.
(a) Management by Managers. Pursuant to the Articles of Organization of the
Company, management of the Company is vested in the Manager. Subject to the
restrictions described in Section 3(e) hereof, the Manager shall have the
exclusive right, power and authority to manage and operate the business and
affairs of the Company and to authorize any act or transaction on behalf of the
Company. The Manager shall not be required to devote full time or attention to
the business of the Company and may engage in other activities in addition to
those relating to the Company. The Manager is an agent of the Company for the
purpose of its business or affairs, and the act of a Manager, including, without
limitation, the execution in the name of the Company of any instrument, for
apparently carrying on in the usual way the business or affairs of the Company,
shall bind the Company.
(b) Administrative Certifications. The Manager shall be authorized to execute
and deliver such certifications as he may determine to be necessary or
appropriate concerning the status and identity of the Members, the continued
existence of the Company, and the existence or nonexistence of any fact or facts
which constitute conditions precedent to acts by the Company,
3
<PAGE> 7
the Manager or the Members that are related in any way to the business and
affairs of the Company, including, without limitation, compliance with any
provisions of this Agreement, the granting or refusal of any approvals or
consents required hereunder, and the identity of the Persons who are authorized
to execute and deliver any instrument or document on behalf of the Company. Any
Person dealing with the Company or the Manager may rely upon any such
certificate executed by a Manager, unless such Person has actual knowledge that
the same is inaccurate or incomplete in a material respect, without the
necessity of further inquiry.
(c) Resignation, Removal or Dissolution of a Manager. A Manager may resign as
such as of the end of any calendar quarter upon notice to the Members of not
less than thirty (30) days. A Manager may be removed at any time by a Majority
of the Members. Upon the removal, death or resignation of a Manager, his
successor shall be appointed by a Majority of the Members.
(d) Durable Power of Attorney. Each Member, by execution of this Agreement,
designates and appoints the Manager (with the power to substitute his successor)
as the true and lawful attorney-in-fact of such Member for the purpose of
executing, acknowledging and delivering any and all instruments and documents
which may be necessary or appropriate for the proper exercise of any of the
rights and powers conferred upon the Manager under this Agreement, including,
but not limited to, any and all instruments and documents which the Managers are
authorized to execute under this Agreement which might appropriately be executed
by one or more of the Members, as Members, pursuant to the Act. Such Powers of
Attorney shall be exercisable only in furtherance of the provisions of this
Agreement, and not in contravention thereof. Each such Power of Attorney is
irrevocable, is coupled with an interest, shall not be affected by the
disability, incompetency, incapacity, death, insolvency, bankruptcy or
dissolution of any Member, shall be binding on all Members, their successors and
permitted assigns, and may be exercised by any one or more of the persons who
serve as Managers of the Company from time to time.
(e) Decisions Reserved to Members. Notwithstanding the foregoing provisions of
this Section or anything to the contrary contained in this Agreement, the
approval or concurrence of a Majority of the Members shall be required to effect
any of the following actions:
(i) a substantial change in the nature of the Company's business;
(ii) the sale of substantially all of the assets or merger or
consolidation of the Company;
(iii) the liquidation, dissolution and winding up of the Company;
(iv) any amendment to or modification of this Agreement, except as
authorized pursuant to the terms hereof;
(v) the addition, compensation or removal and replacement of any
Manager;
4
<PAGE> 8
(vi) the execution of any agreement or instrument other than in the
ordinary course of business;
(vii) incurring indebtedness other than in the ordinary course of
business; or
(viii) the making of any capital expenditures other than in the
ordinary course of business.
No Member, acting solely in the capacity as a Member of the Company, is an agent
for the Company for any purpose. Without limiting the generality of the
preceding sentence, a Member, acting solely as a Member, shall not have any
authority to transfer title to any property of the Company or to otherwise bind
the Company in any manner.
(f) Transactions with Members. Subject to the provisions of this Section, a
Manager or Member or Affiliate thereof shall have the right to contract, enter
into a lease, and otherwise deal with the Company, including, without
limitation, the lending of money to, or the guarantee of indebtedness or
extension of credit for or on behalf of the Company, provided that any such
loan, contract, arrangement or understanding shall be on such terms and
conditions, and shall provide such compensation, as is customarily found in
arms-length transactions between unrelated parties engaged in similar
transactions and shall be approved by a Majority of the Members.
(g) Company Property. Any property acquired as of or after the date hereof by
the Company by lease, purchase or otherwise, shall be acquired and held in the
name of the Company and conveyed only in accordance with this Agreement. A
Member has no interest in specific assets of the Company except as may be
expressly provided in any written agreement in effect from time to time.
(h) Execution of Instruments. Any deed, agreement or other instrument, whether
or not for apparently carrying on in the usual way the business or affairs of
the Company, shall be binding on the Company and may be relied upon by any
person or entity which is supplied with such executed deed, agreement or other
instrument, if the same is executed on behalf of the Company by the Managers.
4. TAX, ACCOUNTING AND FINANCIAL MATTERS.
(a) Partnership Status. The Members intend that the Company shall be taxed as a
partnership for federal and state tax purposes, and not as an association
taxable as a corporation.
(b) Capital Accounts. A separate capital account (collectively, the "Capital
Accounts") shall be established for each Member and maintained and adjusted in
accordance with the Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations promulgated thereunder (the "Regulations"). None of the Members
shall be obligated to the Company, to the other
5
<PAGE> 9
Members, or to any other party, to restore any deficit balances which at any
time may exist in their respective Capital Accounts.
(c) Distribution of Funds. The Manager may establish, set aside, expend and
replenish such reasonable reserves as they shall determine to be necessary or
appropriate for working capital and other anticipated costs and expenses of the
Company's business. Each outstanding Class B Unit shall entitle the holder
thereof to receive a distribution of Five Thousand Dollars ($5,000) of the net
profits of the Company for each full fiscal year during the term hereof and a
pro rata portion of said net profits for any partial fiscal year. All other
funds which the Manager decides to distribute shall be distributed to the
Members in accordance with their Percentage Interests at such times and in such
manner as the Manager shall determine; provided, however, that the Company
shall, at a minimum, distribute an amount sufficient for each Member to pay
federal and state income taxes attributable to such Member's share of the
Company's net taxable earnings for each fiscal year or part thereof which amount
shall equal the product of:
(i) the portion of the Company's net taxable earnings for each fiscal
year or part thereof, as the case may be, which are attributable to the
Member's Percentage Interest; and
(ii) the sum of the highest federal income tax rate and the highest
applicable state income tax rate in effect for individuals for such
fiscal year.
(d) Preparation of Tax Returns. The Company shall arrange, at its expense, for
the timely filing of all necessary tax returns for the Company and for the
preparation and distribution of such tax information as may be reasonably
required by the Members for federal, state and local income tax reporting
purposes.
(e) Tax Allocations. Profits or losses of the Company for each fiscal year shall
be determined by the Company's accountants in accordance with tax methods and
practices approved by the Members. Except as specifically provided to the
contrary in this Agreement, and as otherwise required by provisions of the Code
and Regulations, the profits or losses of the Company, each item of income,
gain, loss, deduction or credit entering into the computation thereof, and each
item of income, gain, loss, deduction or credit which the Members are required
to take into account separately under the provisions of the Code or Regulations,
shall be allocated among the Members so as to maintain their respective Capital
Accounts in proportion to their Percentage Interests from time to time.
(f) Additional Tax Provisions. Notwithstanding Section 4(e) hereinabove, (i) if
there is a net decrease in the Company's minimum gain (as determined pursuant to
Section 1.704-2(b)(2) of the Regulations) during any fiscal year, the Members
shall be allocated, before any other allocation for such year, items of income
and gain for such year (and, if necessary, subsequent years) in the amounts and
proportions set forth in Section 1.704-2(g) of the Regulations; (ii) if there is
a net decrease in the minimum gain attributable to any nonrecourse debt (as
determined pursuant to Section 1.704-2(b)(4) of the Regulations) during any
fiscal year, any Member with
6
<PAGE> 10
a share of the minimum gain attributable to such debt shall be allocated items
of income and gain for such year (and, if necessary, subsequent years) in the
amounts and proportions set forth in Section 1.704-2(i) of the Regulations;
(iii) in the event any Member unexpectedly receives any adjustment, allocation
or distribution described in subsections (4), (5), or (6) of Regulations Section
1.704-1(b)(2)(ii)(d), items of Company income or gain shall be specially
allocated to such Member in an amount and manner sufficient to eliminate any
deficit balance in such Member's Capital Account (and for purposes of this
provision, the balance in each Member's Capital Account shall be computed with
the adjustments required by such Regulations); (iv) except as otherwise provided
in this Agreement, all nonrecourse deductions (as defined in Section
1.704-2(b)(1) of the Regulations) shall be allocated among the Members in
accordance with their Percentage Interests; (v) any item of Company loss,
deduction or Code Section 705(a)(2)(B) expenditure that is attributable to
nonrecourse debt shall be allocated to any Member or Members bearing the
economic risk of loss for such debt in the amounts and proportions set forth in
Section 1.704-2(i)(1) of the Regulations; (vi) in the event that mandatory
allocations are made under this Section, then to the extent permitted under
applicable Regulations, subsequent allocations of profits and losses of the
Company will first be made to the Members in a manner that will result as
closely as possible in each Member having a Capital Account balance equal to the
balance that would have resulted if such mandatory allocations had not been
made; and (vii) in the event of a change in the Members' Percentage Interests
during any fiscal year of the Company, profits or losses of the Company for such
fiscal year shall be allocated under an accounting method which complies with
Section 706(d) of the Code and Regulations.
(g) Books of Account. The Company's books of account and all other records
required by the Act shall be kept at the registered office maintained for the
Company under the Act. Each transaction of the Company shall be fully and
accurately entered on the Company's books in a manner conforming to the methods
and practices used by the Company for federal income tax purposes. All the books
and records of the Company shall be open to inspection by any Member, and by the
designated agents of the Members, and shall be available for copying, at such
Member's expense, at any time during normal business hours.
(h) Banking and Investments. Funds of the Company may be deposited in such
checking accounts or savings accounts, or invested in certificates of deposit,
money market funds, mutual funds, or other securities, with such institutions
and on such terms as the Managers shall designate. Checks or withdrawals from
any such accounts, or the liquidation of any such investments or securities, may
be made for any proper Company purpose, upon such signatures and other
instructions as the Managers may designate.
5. TRANSFERS BY MEMBERS.
(a) General Restrictions. No Member shall transfer, sell, assign, encumber or in
any way alienate or dispose of all or any portion of his or her Membership
Interest whether voluntarily, by operation of law (including, without
limitation, any inter vivos conveyance, testamentary disposition, transfer by
intestate succession, or pursuant to a divorce decree or settlement) or
7
<PAGE> 11
otherwise (a "Disposition"), except where the same is expressly required or
permitted under this Agreement or upon the consent of a Majority of the Members.
Any purported Disposition in breach of the preceding sentence shall be void or
ineffectual, and shall not operate to transfer any Membership Interest or any
portion thereof or other claims or benefits against the Company to the purported
assignee or recipient and shall not relieve the Member attempting to make such
Disposition from any liability under this Agreement.
(b) Company Restrictions. Even though otherwise required or permitted under the
terms of this Agreement, no Disposition shall be made or effective in violation
of the terms and provisions of any mortgages, covenants or other instruments
affecting the Company or the Members and approved by the Managers pursuant to
this Agreement.
(c) Death, Dissolution, Incompetency, Insolvency or Bankruptcy of a Member. A
person shall cease to be a Member only upon the occurrence of the events
specified in Section 6 hereof. In the event of the death, dissolution,
incompetency, insolvency or bankruptcy of a Member, such Member's personal
representative, conservator or other legal representative shall have no
management rights, but shall have the right to receive distributions and to
share in the profits and losses of the Company ("Financial Rights") attributable
to such Member's Membership Interest and may transfer such Membership Interest
pursuant to this Agreement.
(d) Effect of Transfer. An assignment of any Membership Interest does not of
itself dissolve the Company, or entitle the assignee thereof (the "Assignee") to
exercise any management rights. Unless otherwise provided in this Agreement, any
such assignment only entitles the Assignee to the Financial Rights of the party
making the assignment (the "Assignor"), to the extent assigned. A person may
become a Member of the Company only upon the written consent of the Managers.
Any Disposition permitted under this Agreement shall be effective only after
each Member has received not less than thirty (30) days prior written notice
thereof. A Member who assigns his Membership Interest does not cease to be a
Member, and is not relieved in any manner from any obligations under this
Agreement, unless and until the Assignee is substituted as a Member pursuant to
this Agreement, and then only to the extent of the interest assigned.
(e) Effect of Agreement. The rights of any party acquiring any Membership
Interest, any portion thereof, or other rights in or claims against the Company
shall be subject in all respects to terms and provisions of this Agreement
including, without limitation, restrictions on any further transfer. If the
Assignor from whom the Assignee receives his assignment is required to sell his
Membership Interest pursuant to any provision of this Agreement, such sale shall
extinguish any further rights the Assignee may have in or against the Company,
and the Assignee shall upon request deliver an instrument to that effect. The
rights of an Assignee against his Assignor with respect to the proceeds of any
such sale, and with respect to any interest in the Company which the Assignor
may acquire after the date of assignment by virtue of any provision under this
Agreement, shall be as set forth in any written agreement with respect thereto
between the Assignor and the Assignee. The Company and the Members shall have no
obligation to inquire into any such agreements between an Assignee and his
Assignor, and may rely upon the books and records of the Company in issuing
notices under this
8
<PAGE> 12
Agreement, and in making distributions and allocations of profit or loss, until
instructions to the contrary are received from the Assignor and the Assignee.
6. CESSATION OF MEMBERSHIP. A Member has no power to cease being a Member of the
Company by voluntary act. In accordance with the Act, as modified by the
provisions hereof, a Person shall cease to be a Member only upon the assignment
of the entire Membership Interest of such Member and the admission of the
Assignee thereof as a substitute Member, all in accordance with the terms of
this Agreement.
7. DISSOLUTION OF THE COMPANY.
(a) Events Causing Dissolution. The Company shall be dissolved, and its affairs
wound up, upon the occurrence of the first of the following events:
(i) The written consent of all Members to dissolve;
(ii) the cessation of membership of all Members of the Company, unless
the holders of all of the Financial Rights agree in writing, within
ninety (90) days after the cessation of Membership of the last Member,
to continue the legal existence and business of the Company and to
appoint one or more new Members;
(iii) when the Company is not the successor in a merger or
consolidation of the Company with one or more entities; or
(iv) upon the entry of a decree of judicial dissolution pursuant to the
Act.
(b) Winding Up Of Business. All Members who have not wrongfully dissolved the
Company may participate in the winding up of the Company's business and affairs.
Such Members may preserve the Company business or property as a going concern
for a reasonable time, prosecute and defend actions and proceedings, settle and
close the Company's business, dispose of and transfer property, discharge the
Company's liabilities, distribute the assets of the Company pursuant to the Act
and provisions of this Agreement, file articles of dissolution pursuant to the
Act, dispose of known claims against the Company under the procedure described
in the Act, publish notice of dissolution pursuant to the procedures in the Act
concerning unknown claims, and perform other necessary and appropriate acts.
8. LIABILITY AND INDEMNIFICATION PROVISIONS.
(a) Obligations and Debts of the Company. Except as any Member or Manager may
specifically otherwise agree in writing, no Member or Manager shall be liable
under any judgment, decree or order of a court or in any other manner for any
debt, obligation or liability of the Company, whether arising in contract, tort
or otherwise, or for the acts or omissions of any other Member or Manager, or of
any agent or employee of the Company.
9
<PAGE> 13
(b) Liability of Members to Each Other. A Member or Manager who breaches any
provision of this Agreement shall be liable to each other Member and to the
Company for any loss, damage or expense arising, directly or indirectly, as a
result of the breaching Member's or Manager's (i) willful breach of any
provision of this Agreement (including but not limited to any actual or
attempted transfer of any portion of a Membership Interest other than as
permitted under the terms hereof), (ii) commission of any act which subjects any
Member or Manager to liability of any debt, obligation or liability of the
Company as if he were a general partner in any jurisdiction or to any other
liability except as provided for in this Agreement or under the Act or (iii)
commission of any act which results in the taxation of the Company for federal
income tax purposes as an association taxable as a corporation.
(c) Exculpation of Members. Except as provided in Section 10(b) and to the
extent that may otherwise be required by applicable law, no Member, Manager or
former Member or Manager, shall be liable, responsible or accountable in damages
or otherwise to the Company, to any Members or former Members, for any acts or
omissions related to the Company or its business activities unless the same
constitutes (i) gross negligence, (ii) fraud or other willful misconduct or
(iii) the breach of any material covenant to be performed under this Agreement.
(d) Indemnification by Company. Except for claims expressly excluded from the
exculpation provisions in Section 10(c), the Company shall, to the fullest
extent permitted by applicable law, indemnify, any Person, and the heirs,
devisees, executors and administrators of such Person (individually, an
"Indemnified Party," collectively, the "Indemnified Parties") who, by reason of
the fact that such Indemnified Party is or was a Member, Manager, agent,
affiliate or employee of the Company or an officer, director, shareholder,
member or manager of a Member or Manager, and was or is a party or is threatened
to be made a party, to:
(i) any threatened, pending or completed claim, action, suit or
proceeding, whether civil, criminal, administrative or investigative,
including appeals (other than an action by or in the right of the
Company), against expenses, including, without limitation, attorneys'
fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with any such
threatened, pending or completed claim, action, suit or proceeding; and
(ii) any threatened, pending or completed claim, action or suit by or
in the right of the Company to procure a judgment in its favor, against
expenses including, without limitation, attorneys' fees, actually and
reasonably incurred by him in connection with the defense or settlement
of such action or suit.
(e) Interim Advances. Expenses (including, without limitation, attorneys' fees)
incurred by any Indemnified Party in defending a civil or criminal claim,
action, suit or proceeding may be paid by the Company in advance of the final
disposition of such claim, action, suit or proceeding upon the Company's receipt
of an undertaking to repay such amount if and to the extent that it shall be
ultimately determined that such Indemnified Party is not entitled to be
indemnified by the Company.
10
<PAGE> 14
(f) Maintenance of Indemnification Insurance. The Manager shall have the power
to purchase and maintain, at the expense of the Company, insurance on behalf of
any person who is or was a Member, Manager or employee of the Company against
any liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the Company would have the
power to indemnify him against such liability under applicable law. When, and
if, the Company obtains any such insurance, the Company shall not be required to
maintain the same in effect, but the Company shall make reasonable efforts to
notify the covered person in writing within five (5) business days after making
any decision not to renew or replace such coverage. The maintenance of any such
insurance shall not diminish the Company's liability for indemnification under
the provisions hereof. Any claim for reimbursement or indemnification hereunder
shall not be denied by the Company on the basis that the same may or will be
covered by any insurance maintained by the Company.
(g) Notification and Defense of Claims. Promptly after receipt of any notice
concerning the commencement of an action, suit or proceeding, if a claim in
respect thereof is to be made against the Company, the Indemnified Party shall
notify the Company thereof, provided that failure to give such prompt notice
shall not relieve the Company from any liability it may have to the Indemnified
Party hereunder, except to the extent that the Company is prejudiced in its
defense of such claim as a result of such failure. The Company may assume the
defense of any such claim with counsel reasonably satisfactory to the
Indemnified Party, and shall not be obligated to furnish separate counsel to the
Indemnified Party in any action in which the Company and the Indemnified Party
are joined unless the Indemnified Party reasonably concludes that there may be a
conflict of interest between him and the Company. After notice from the Company
to the Indemnified Party of its election to so assume the defense of such claim,
the Company shall not be liable to the Indemnified Party for any legal or other
expenses subsequently incurred by him, except in cases where separate
representation is required. No settlement of any such claim shall be made
without the mutual approval of the Company and the Indemnified Party, but
neither of them shall unreasonably condition, delay or withhold their consent to
any settlement which the other has proposed.
(h) Other Remedies. The indemnification and advancement of expenses provided
under this Section shall not be deemed exclusive of any other rights to which an
Indemnified Party may be entitled under the Articles, this Agreement, or any
other agreement or understanding approved by a Majority.
(i) Scope of Provisions. For purposes of this Section, references to the Company
shall include all constituent entities absorbed in any consolidation or merger,
as well as the resulting or surviving entity, and the term "Indemnified Party"
shall mean any person who is or was a Member, Manager or employee of such a
constituent entity or is or was serving in any capacity at the request of the
Company or of any such constituent entity.
9. DUTY OF LOYALTY AND CARE. Pursuant to Section 10-12-21 of the Act, each
Member shall owe the Company and each other Member a duty of loyalty and a duty
of care. Notwithstanding the foregoing, as contemplated by Section 10-12-21(1)
of the Act, each Member
11
<PAGE> 15
agrees that such duties of loyalty and care shall be modified to permit each
Member or affiliate thereof to do any of the following:
(a) to contract or otherwise deal with the Company in the conduct or
winding up of its business or affairs (including, without limitation, the
provision of services to, the lending of money to, of the guarantee of
indebtedness or extension of credit for or on the behalf of the Company),
provided that such Member or affiliate shall fully disclose to the Members all
material facts of such proposed contract, loan or arrangement and the Majority
of disinterested Members shall approve, authorize or ratify such contract, loan
or arrangement; and
(b) to carry on, participate or invest in any business, opportunity or
investment activity which may be competitive with or otherwise within the line
of business of the Company or which may present an opportunity for the Company
(in each case, regardless of whether the Company may be interested in pursuing
and financially able to undertake such activity, investment or enterprise),
other than ownership and management of property directly owned by the Company
(any such permitted business, opportunity or activity being hereinafter referred
to as a "Business Opportunity").
Each Member specifically acknowledges and consents to the right of each other
Member or Affiliate thereof to pursue any investment or participation in any
Business Opportunity without first being required to offer the same to the
Company for its own benefit, and such Member shall not be deemed in violation of
the duty of loyalty imposed under Section 10-12-21(f) of the Act as a result of
such investment or participation. Each Member hereby waives, releases and
relinquishes any claim it may have against any other Member and Member's
affiliates under any "partnership opportunity" doctrine or other legal or
equitable principal of law (including Section 10-12-21(f) of the Act) arising
with respect to or in connection with the pursuit of any Business Opportunity by
any other Member or affiliate thereof.
Each Member hereby further agrees as contemplated by Section 10-12-21(l)(2)(b)
of the Act, that a Majority of disinterested Members may approve, authorize, or
ratify, after full disclosure of all material facts, a specific act or
transaction that would otherwise violate the duty of loyalty prescribed under
Section 10-12-21 of the Act.
10. GENERAL PROVISIONS.
(a) Specific Performance. The parties hereby acknowledge and agree that the
Membership Interests are of a unique and extraordinary nature and cannot be
purchased on the open market because of the restriction on transferability
contained herein, and for those reasons, among others, the parties will be
irreparably damaged in the event that certain provisions of this Agreement are
not specifically enforced. Therefore, in the event of any controversy concerning
the sale or disposition of any Membership Interest, the same shall be
enforceable in a court of equity by a decree of specific performance, by
temporary or permanent injunction, or by any other legal or equitable remedy,
without the necessity of instituting arbitration proceedings, showing actual
damages or furnishing a bond or other security. Such remedies shall be
12
<PAGE> 16
cumulative, rather than exclusive, and shall be in addition to any other remedy
which the Company or any Member may have for such breach of this Agreement.
(b) Arbitration Of Disputes. The parties hereto acknowledge and agree that this
Agreement and the performance of the transactions contemplated hereby evidence
transactions which involve a substantial nexus with interstate commerce.
Accordingly, except in the case of a controversy or claim concerning the sale or
disposition of any Membership Interest, any controversy or claim between the
Members arising out of or related to the Company or any breach of this Agreement
must be settled by binding arbitration in Birmingham, Alabama by the American
Arbitration Association in accord with its then-prevailing rules, in lieu of
judicial proceedings. The arbitrators shall have no power to change the
provisions of this Agreement, and the determination of the arbitrators shall be
conclusive and binding upon the parties thereto, and judgment upon the award
rendered may be entered in accordance with applicable law in any court having
jurisdiction thereof. The prevailing party in any arbitration proceeding shall
be entitled, in addition to such other relief as it may obtain, to the payment
of all costs and expenses incurred in connection therewith, including reasonable
attorneys' fees.
(c) Procedure For Consent. If a Member delivers notice to the other Members of
any proposal or other matter required to be submitted for consideration, consent
or approval under this Agreement, which notice shall include a description of
the matter and may include such Member's recommendation as to such matter, then
the matter shall be conclusively presumed to have been consented to and approved
by any Member who fails to deliver notice of a written objection or negative
vote within ten (10) days thereafter.
(d) Survival of Rights. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, legatees,
executors, administrators, successors and permitted assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement.
(e) Headings. The headings of the Sections of this Agreement are inserted for
convenience and general reference only, shall not be construed as part of this
Agreement, and shall in no way be construed as defining, limiting or affecting
the scope or intent of the provisions of this Agreement.
(f) Governing Law. This Agreement shall be governed by, construed and enforced
in accordance with the laws of the State of Alabama.
(g) Waiver. No consent or waiver, expressed or implied, by a Member with respect
to any breach or default by any other Member in the performance by such other
Member of his obligations hereunder shall be deemed or construed to be a consent
or waiver with respect to any other breach or default in the performance by such
other Member of the same or any other obligations of such other Member
hereunder. Failure on the part of a Member to complain of any act or failure to
act of any other Member or to declare any other Member in default, irrespective
of how long such failure continues, shall not constitute a waiver by such Member
13
<PAGE> 17
of his rights hereunder. The giving of consent by a Member in any one instance
shall not limit or waive the necessity of obtaining such Member's consent in any
future instance. Any consent required to be given hereunder shall be in writing
unless otherwise provided herein.
(h) Amendment. This Agreement may not be changed orally, but only by an
instrument in writing signed by a Majority of Members after ten (10) days notice
of the proposed amendment has been given to each Member.
(i) Further Assurances. Each party hereto agrees to do all acts and things and
to make, execute and deliver such written instruments as shall from time to time
be reasonably required to carry out the terms and provisions of this Agreement.
(j) Notice. Company statements, reports and income tax returns may be mailed to
Members by regular first-class mail. All other notices and communications under
this Agreement shall be in writing, duly signed by the party giving the same,
and shall be deemed to have been delivered (i) when deposited in any United
States postal facility, with sufficient postage affixed, for delivery by
registered or certified mail, return receipt requested, and addressed as follows
(or to such other address as a Member may specify by notice in the manner
provided herein):
Julian B. MacQueen 113 Baybridge Drive
Gulf Breeze, Florida 32561
Southwind Development c/o Julian B. MacQueen
Management Company, Inc. 113 Baybridge Drive
Gulf Breeze, Florida 32561
or (ii) when actually received by hand delivery, by nationwide air courier, by
telecopy or by other form of facsimile transmission. The registered agent of the
Company shall use his reasonable best efforts to notify the Members of any
notices or communications required to be delivered pursuant to this Agreement.
(k) Entire Agreement. This Agreement constitutes the entire agreement and
understanding between the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings relating to the subject
matter hereof, and there are no agreements, understandings, warranties or
representations between the parties hereto other than those set forth herein.
14
<PAGE> 18
IN WITNESS WHEREOF, the Members have caused this Agreement to be executed and
delivered as of the date first written above.
MACQUEEN:
/s/ Julian B. MacQueen
--------------------------------------
Julian B. MacQueen
SOUTHWIND DEVELOPMENT:
SOUTHWIND DEVELOPMENT MANAGEMENT
COMPANY, INC.
By: /s/ Julian B. MacQueen
-----------------------------------
Its President
15
<PAGE> 19
EXHIBIT A
<TABLE>
<CAPTION>
Percentage
Member Class A Units Interest
------ ------------- -----------
<S> <C> <C>
Julian B. MacQueen 99 99%
Southwind Development 1 1%
Management Company, Inc.
</TABLE>
A-1
<PAGE> 1
Exhibit 10.4
- --------------------------------------------------------------------------------
BEACHSIDE ALL-SUITES HOTEL, A CONDOMINIUM
HOTEL OPERATING AND RENTAL POOL AGREEMENT
BY AND AMONG
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
AND
THE OWNERS OF THE UNITS
AND
INNISFREE HOTELS, INC.
DATED AS OF ________________, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS................................................................................. 1
Definitions................................................................................... 1
ARTICLE II HOTEL RENTAL MANAGEMENT.................................................................... 8
Management of Hotel Rental Pool............................................................... 8
Hotel Rental Pool............................................................................. 8
Use........................................................................................... 9
Restrictions Regarding Condominium Documents.................................................. 9
Monitoring Use by Owners...................................................................... 9
ARTICLE III THE BOARD OF DIRECTORS.................................................................... 9
Board of Directors............................................................................ 9
Release and Indemnity of Board of Directors................................................... 9
Major Decisions - Special Resolutions......................................................... 9
Owners to be Bound............................................................................ 10
ARTICLE IV COMMENCEMENT DATE, TERM OF AGREEMENT....................................................... 10
Commencement Date............................................................................. 10
Initial Term.................................................................................. 10
Renewal....................................................................................... 10
Renewal - By Agreement........................................................................ 11
Performance by Innisfree...................................................................... 11
Revpar Test................................................................................... 11
ARTICLE V BUDGET...................................................................................... 12
Approval...................................................................................... 12
Items to be Included.......................................................................... 13
Budget Summary................................................................................ 14
ARTICLE VI OWNERS' REVENUES AND DISTRIBUTIONS TO OWNERS............................................... 14
Calculations by Innisfree..................................................................... 14
Calculations of Unit Revenue Share............................................................ 15
In the Rental Pool............................................................................ 15
Payments to Owners............................................................................ 15
Maintenance and Repair of Units............................................................... 16
FF&E Reserve.................................................................................. 16
Operating Cash Reserve........................................................................ 16
Shortfalls.................................................................................... 17
Payment of Unit Expenses by Owners............................................................ 17
Other Taxes................................................................................... 17
No Separate Revenue for Innisfree............................................................. 17
Foreign Owners................................................................................ 18
ARTICLE VII MANAGEMENT AND OTHER FEES AND REIMBURSABLE EXPENSES....................................... 18
Base Fee...................................................................................... 18
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Incentive Fee................................................................................. 18
Sales, Reservations, Advertising and Marketing Expenses....................................... 19
Limitation on Innisfree's Marketing and Sales Expenses........................................ 19
Accounting Fee................................................................................ 19
Reimbursement of Innisfree Recoveries......................................................... 19
ARTICLE VIII HOTEL BANK ACCOUNT AND BOOKS AND RECORDS................................................. 20
Hotel Bank Account............................................................................ 20
Books, Records, Financial Statements.......................................................... 20
ARTICLE IX SERVICES TO BE RENDERED BY INNISFREE....................................................... 20
Management Services........................................................................... 20
General Management............................................................................ 21
Maintenance................................................................................... 22
Changes and Alterations....................................................................... 22
Capital Expenditures.......................................................................... 23
Personnel and Employees....................................................................... 24
Marketing of the Hotel........................................................................ 24
Reservation and Sales Systems................................................................. 25
Other Innisfree Systems....................................................................... 26
Performance of Innisfree's Services........................................................... 26
Meetings...................................................................................... 26
ARTICLE X USE OF UNITS BY OWNERS...................................................................... 27
Use of Units by Owners........................................................................ 27
Daily Cleaning................................................................................ 27
No Charge for Common Property or Common Facilities............................................ 27
Owner Election Not to Use..................................................................... 27
Use by or on Behalf of Owner.................................................................. 28
Promotional Use by Owner-Seller............................................................... 28
Additional Personal Use Benefits.............................................................. 28
ARTICLE XI COVENANTS, REPRESENTATIONS AND WARRANTIES.................................................. 28
Covenants..................................................................................... 28
Representations and Warranties of Innisfree................................................... 28
Representations and Warranties of Owners...................................................... 28
ARTICLE XII INSURANCE................................................................................. 29
Insurance..................................................................................... 29
Parties Insured............................................................................... 30
Insurance by Innisfree........................................................................ 30
Schedules of Insurance........................................................................ 30
ARTICLE XIII TITLE.................................................................................... 30
Title......................................................................................... 30
ARTICLE XIV DEFAULT, OBLIGATIONS ON TERMINATION....................................................... 31
Events of Default............................................................................. 31
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
Remedies for Owners........................................................................... 31
Termination by Innisfree...................................................................... 31
Condemnation Proceedings...................................................................... 32
Remedies for Innisfree........................................................................ 32
Obligations on Termination.................................................................... 32
ARTICLE XV OWNER-SELLER, UNITS, DISPOSITIONS.......................................................... 33
Initial Agreement by Owner-Seller............................................................. 33
Limitation of Owners' Liability............................................................... 33
Sale of Unit by any Owner..................................................................... 33
Assumption and Release........................................................................ 34
Financing of Units............................................................................ 34
Estoppel Certificates......................................................................... 35
Attornment by Innisfree....................................................................... 35
ARTICLE XVI ASSIGNMENT BY INNISFREE................................................................... 35
Assignment by Innisfree....................................................................... 35
ARTICLE XVII ARBITRATION.............................................................................. 36
Arbitration................................................................................... 36
ARTICLE XVIII MISCELLANEOUS........................................................................... 37
Third Party Beneficiary....................................................................... 37
Cooperation................................................................................... 37
United States Funds........................................................................... 37
No Waiver of Breach........................................................................... 37
Severability of Provisions.................................................................... 37
Notices....................................................................................... 37
Successors and Assigns........................................................................ 38
Counterparts.................................................................................. 38
Waiver........................................................................................ 38
Independent Contractor; No Partnership or Joint Venture....................................... 38
Approvals..................................................................................... 38
Force Majeure................................................................................. 38
Interpretation................................................................................ 38
Applicable Law................................................................................ 39
Statutes...................................................................................... 39
</TABLE>
iii
<PAGE> 5
HOTEL OPERATING AND RENTAL POOL AGREEMENT
This Agreement dated as of ______________________, 1999, by and among SOUTHWIND
DEVELOPMENT COMPANY, L.L.C., an Alabama limited liability company, and THE
OWNERS OF THE UNITS from time to time, who are parties to this Agreement in
accordance with Article 16 hereof (collectively, the "Owners") and INNISFREE
HOTELS, INC., an Alabama Corporation ("Innisfree").
WHEREAS:
A. The Owners are the owners of the Units;
B. Innisfree is knowledgeable in the operation of hotels and has performed
such functions in Alabama, Arizona and Florida;
C. The Owners desire to engage Innisfree to act as the Owners' exclusive
manager for the operation of the Hotel in accordance with the terms and
conditions set out in this Agreement; and
D. Innisfree agrees to perform such services for the Owners in accordance
with this Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. The following terms as used in this Agreement have the
following meanings, except as otherwise expressly provided or unless the context
otherwise requires:
(a) "ADMINISTRATION FEE" means the fee payable to Innisfree
established and paid pursuant to Section 7.5.
(b) "AFFILIATE" means, with respect to any person:
(i) any person which is Controlled by that particular
person; or
(ii) any person which Controls that particular person,
whether such Control be direct or indirect;
(c) "ANNUAL GENERAL MEETING" means the annual general meeting of
the Association pursuant to the Condominium Act;
(d) "ANNUAL STATEMENT" has the meaning set forth in Section 8.2;
(e) "APPROVED BUDGET" means any Budget approved, or deemed to be
approved, pursuant to Section 5.1;
1
<PAGE> 6
(f) "ARM'S LENGTH" means characteristic of a transaction
negotiated by unrelated parties each acting in its own best interests;
(g) "ASSESSMENT" means a Common Expense Assessment or a Special
Assessment levied against Unit pursuant to the Condominium Documents;
(h) "ASSOCIATION" means Beachside All-Suites Hotel Condominium
Owners Association, Inc., an Alabama non-profit corporation;
(i) "ASSOCIATION EXPENSES" means expenditures made by or on behalf
of the Association for professional services rendered by accountants, attorneys,
consultants and any manager engaged by the Association who performs any services
other than those required to be performed by Innisfree under this Agreement;
(j) "BASE FEE" means the fee payable to Innisfree established and
paid pursuant to Section 7.1;
(k) "BOARD OF DIRECTORS" means the duly elected board of directors
of the Association, or its authorized agent;
(l) "BUDGET" means the marketing and operating plan and budget for
the operations of the Hotel for any Operating Year established pursuant to the
terms of Sections 5.1 and 5.2;
(m) "BUSINESS DAY" means any day which is not a Saturday, Sunday,
or a statutory state or federal holiday in the State of Alabama;
(n) "CAPITAL EXPENDITURES" means all expenditures of the Hotel of
a capital nature which are not expenses, as determined in accordance with
Generally Accepted Hotel Accounting Principles;
(o) "CERTIFIED PUBLIC ACCOUNTANTS" means the firm of certified
public accountants selected by Innisfree and approved by the Board of Directors;
(p) "COMMENCEMENT DATE" means the date that the Hotel (including
the parking areas contained therein) is opened by Innisfree for business as a
hotel;
(q) "COMMON ELEMENTS" means Parcels A and B on the Plat and all
other portions of the Condominium other than the Units.
(r) "COMPETITIVE SET" means those hotels in the Gulf Shores,
Alabama market that are considered comparable to the Hotel, such hotels being
more particularly listed or described in Section 4.6(d) below.
(s) "CONDOMINIUM ACT" means the Alabama Uniform Condominium Act of
1991, Code of Alabama, Sections 35-8A-101 through 35-8A-417, as amended from
time to time.
(t) "CONDOMINIUM DOCUMENTS" means the Declaration, the Articles of
Incorporation and the Bylaws of the Association.
2
<PAGE> 7
(u) "CONTROL" means:
(i) the right to exercise a majority of the votes which
may be put at a meeting of the shareholders of a
corporation, the partners of a partnership, or the
members of a limited liability company; and
(ii) the right to elect or appoint, directly or
indirectly, a majority of the directors of a
corporation or the manager of a limited liability
company or other persons who have the right to manage
or supervise the management of the affairs and
business of a person;
(v) "DECLARATION" means the Declaration for Beachside All-Suites
Hotel, A Condominium, dated ________________, 1999, by Southwind Development
Company, L.L.C., an Alabama limited liability company, which condominium
declaration has been recorded at Slide ______, in the office of the Judge of
Probate of Baldwin County, Alabama, and any amendments, supplements or
corrections thereto;
(w) "EMPLOYEES" means the employees of the Hotel hired by
Innisfree pursuant to Section 9.6;
(x) "ESCALATION FACTOR" means the greater of five percent (5%) or
a fraction of which:
(i) the numerator is the Consumer Price Index for all
Urban Consumers (CPI-U) U.S. City Average (1982-84 =
100), issued by the United States Department of
Labor, Bureau of Labor Statistics (the "Consumer
Price Index") as of the date that the Escalation
Factor is to be determined; and
(ii) the denominator is the Consumer Price Index as of the
prior date to which the date of the determination of
the Escalation Factor is being compared, except that
if at any time the Bureau of Labor Statistics no
longer publishes the Consumer Price Index or is no
longer operated by the United States government, the
Escalation Factor will be determined by the agreement
of the Board of Directors and Innisfree or, failing
such agreement, by arbitration in accordance with
Section 17.1, but in no event less than five percent
(5%);
(y) "FF&E RESERVE" means the reserve to be established by
Innisfree pursuant to the terms of Section 6.6;
(z) "FRINGE BENEFITS" means those benefits normally given from
time to time to employees or personnel at any hotel within the Innisfree Group,
including without limitation, pension, medical, health and life insurance and
similar employee plans, bonus or gain sharing plan participation, the benefits
of any housing loan and relocation costs;
(aa) "FURNITURE, FIXTURES AND EQUIPMENT" means all furniture,
equipment, fixtures and furnishings necessary for the proper operation of the
Hotel and wherever situated in the Hotel Premises, whether or not located in a
Unit or in the Common Elements, including, without limitation, office equipment
and furniture, computers and computer systems, laundry equipment, telephones and
telephone systems, heating and air-conditioning equipment, video machines, mini
bars, refrigerators,
3
<PAGE> 8
stoves, kitchen equipment, carpeting, rugs and other floor coverings, draperies,
curtains, tapestries, screens, works of art, pictures, paintings, prints, beds,
mattresses, bedspreads, pillows, radios and television sets, including such
items bearing the Innisfree name or identifying characteristics as Innisfree,
acting reasonably, considers appropriate;
(ab) "GENERALLY ACCEPTED HOTEL ACCOUNTING PRINCIPLES" means
generally accepted accounting principles observed by certified public
accountants in the United States and as supplemented by the Uniform System of
Accounts for Hotels published by the American Hotel & Motel Association;
(ac) "GROSS REVENUE" means all revenue of any kind whatsoever
derived directly or indirectly from the Hotel Premises or any portion thereof
and the operation of the Hotel, including, without limitation, all of the
following:
(i) all revenue from the use and enjoyment of the Hotel
by Hotel Guests and Owners pursuant to this
Agreement, including room charges, mini-bar revenue
(if applicable), housekeeping charges, telephone
revenue, movie rental revenue and the fees and
charges referred to in Section 10.2;
(ii) all revenue from parking, if any;
(iii) proceeds received from any business interruption
insurance; and
(iv) all other revenue from the operation of the Hotel,
including revenue from any amenity at the Hotel for
which a charge is made and from any business or
facility operated within the Hotel Premises, vending
machine revenue and revenue and fees from licensees
or concessionaires within the Hotel Premises,
excluding, however, all of the following:
(v) applicable excise, sales, income, hotel, room,
entertainment and use taxes or similar government
charges collected directly from Hotel Guests and
Owners or as part of the sales price of any goods or
services;
(vi) gains arising from the sale or other disposition of
capital assets or unwanted inventory;
(vii) revenue from condemnation awards or sales or other
transfers in lieu of and under the threat of
condemnation;
(viii) proceeds of any insurance other than business
interruption insurance;
(ix) rebates, discounts or credits of a similar nature
(other than credit card discounts, which will be
included as an item of revenue and considered a Hotel
Expense);
(x) gratuities paid to Employees; and
(xi) payments received at the Hotel for accommodation,
goods or services to be provided at other hotels;
4
<PAGE> 9
(ad) "HEAD OFFICE PERSONNEL" means any member of the corporate
staff of Innisfree operating on behalf of the Innisfree Group and not for the
Hotel only;
(ae) "HOTEL" means the Hotel Premises and the hotel operation known
as "Beachside All-Suites Hotel", managed by Innisfree for the Owners in respect
of the Hotel Premises pursuant to this Agreement;
(af) "HOTEL BANK ACCOUNT" means the bank account established
pursuant to Section 8.1;
(ag) "HOTEL EXPENSES" means all expenses properly incurred in
accordance with Generally Accepted Hotel Accounting Principles and the terms and
conditions set out in this Agreement in connection with the earning of the Gross
Revenue and chargeable to the Owners in accordance with this Agreement,
including, without limitation:
(i) the Base Fee;
(ii) the Innisfree Marketing and Sales Expenses;
(iii) the Innisfree Recoveries;
(iv) the Accounting Fee;
(v) any amount payable to and in respect of the Employees
in accordance with this Agreement, including hiring
costs and expenses, Fringe Benefits, withholding
amounts and costs of termination;
(vi) utility costs and charges;
(vii) the cost of the Operating Supplies and Expendables;
(viii) expenses in connection with the maintenance and
repair of the Hotel Premises and the maintenance and
repair of any Furniture, Fixtures and Equipment;
(ix) the cost of operating and maintaining any parking
facility at the Hotel;
(x) travel agent commissions and credit card commissions;
(xi) insurance premiums;
(xii) deductibles paid in connection with claims on
insurance policies required to be maintained under
Article XII; and
(xiii) the cost of filing any tax returns and reports in
regards to the taxes described in Section 6.10(a);
but excluding the following:
(xiv) the Association Expenses;
5
<PAGE> 10
(xv) Special Assessments for capital improvements
(xvi) the Incentive Fee;
(xvii) depreciation and amortization;
(xviii) capital lease payments;
(xix) Capital Expenditures;
(xx) any taxes personal to the Owners, including but not
limited to income taxes, real property taxes and
capital gains taxes; and
(xxi) debt service payments payable by the Owners;
(ah) "HOTEL GUESTS" means the users and occupants of the Hotel from
time to time including the Owners, other than the Owners using the Hotel in
accordance with Schedule B and persons claiming under the Owners pursuant to
Schedule B;
(ai) "HOTEL PREMISES" means the real property located in the City
of Gulf Shores, Baldwin County, Alabama, together with the buildings and other
improvements located thereon and more particularly described as the
"Condominium" in the Declaration;
(aj) "INCENTIVE FEE" means the fee payable to Innisfree established
and paid pursuant to Section 7.2;
(ak) "INITIAL TERM" has the meaning set forth in Section 4.2;
(al) "IN THE RENTAL POOL" has the meaning set forth in Section 6.3;
(am) "INNISFREE" means Innisfree Hotels, Inc., an Alabama
corporation;
(an) "INNISFREE GROUP" means the group of hotels as may, from time
to time, be managed by Innisfree or any Affiliate of Innisfree;
(ao) "INNISFREE MARKETING AND SALES EXPENSES" has the meaning set
forth in Section 7.3;
(ap) "INNISFREE RECOVERIES" has the meaning set forth in Section
7.6;
(aq) "NET HOTEL RETURN" means Gross Revenue less the aggregate of
all of the following:
(i) the Hotel Expenses; and
(ii) the amount contributed to the FF&E Reserve in respect
of all of the Hotel Premises during the Operating
Year for which the Net Hotel Return is being
determined;
6
<PAGE> 11
(ar) "OPERATING CASH RESERVE" means the reserve to be established
pursuant to Section 6.7;
(as) "OPERATING SUPPLIES AND EXPENDABLES" means any operating
supplies used by Innisfree in the operation of the Hotel in accordance with this
Agreement, including the terms of any Approved Budget, including, without
limitation, laundry supplies, linens, housekeeping supplies, engineering
supplies, accounting supplies, miscellaneous general supply items, uniforms,
food and beverage inventories, inventories, paper supplies and other such items
that when used once are considered to be disposed of and all other similar items
necessary or appropriate for the operation of the Hotel as contemplated by this
Agreement;
(at) "OPERATING YEAR" means:
(i) the period from the Commencement Date to and
including December 31 of the year in which the
Commencement Date occurs; and
(ii) thereafter, each twelve (12) month period from and
including the first day of January to and including
the last day of December, or any portion thereof in
the case of the last year of the Term.
(au) "OWNER-SELLER" means Southwind Development Company, L.L.C., an
Alabama limited liability company;
(av) "PERCENTAGE INTEREST" means the percentage interest of any
Unit as set forth in the Declaration;
(aw) "PERSON" means any individual, corporation, body corporate,
limited liability company, partnership, joint venture, trust, unincorporated
organization or other entity, government or governmental or regulatory
authority, however constituted, or any trustee, executor, administrator or other
legal representative;
(ax) "PLAT" means the Condominium Plat for Beachside All-Suites
Hotel, a Condominium, which plat has been recorded in Slide _______ in the
records of the office of the Judge of Probate of Baldwin County, Alabama, and
any amendments, supplements or corrections thereto;
(ay) "PRIME RATE" means the "prime rate" published in the "Money
Rates" or equivalent section of the Eastern Edition of THE WALL STREET JOURNAL;
provided, however, that if a "prime rate" range is published by THE WALL STREET
JOURNAL, then the highest rate of that range will be used, and if THE WALL
STREET JOURNAL ceases publishing a prime rate or prime rate range, the Prime
Rate will be determined by the agreement of the Board of Directors and Innisfree
or, failing such agreement, by arbitration in accordance with Section 17.1;
(az) "RELATED PERSON" means, with respect to any person: (a) any
Affiliate of such person; (b) any person who is not at Arm's Length to such
person or any Affiliate of such person; or (c) any person who is a director,
officer, employee or agent of such person or any Affiliate of such person or any
spouse, parent, child or relative (including by marriage) of any of the
foregoing;
(ba) "RENTAL POOL" means the rental management arrangement in
respect of the Hotel
7
<PAGE> 12
undertaken by Innisfree on behalf of the Owners pursuant to this Agreement;
(bb) "REVPAR" means "Room Revenue" divided by "Available Rooms",
where:
(i) "Room Revenue" means all gross revenue derived from
the rental of sleeping rooms, net of any applicable
rebates and discounts and excluding any incidental
revenue such as telephone charges and movie rental;
and
(ii) "Available Rooms" means the total number of rooms
available for rental to the public on a daily basis,
and in the case of the Hotel, the Available Rooms
will mean the total number of rooms in the Rental
Pool on a daily basis;
(bc) "REVPAR TEST" means that test contemplated by Section 4.6;
(bd) "SECURITY" has the meaning set forth in Section 15.5;
(be) "SECURITY HOLDER" has the meaning set forth in Section 15.5;
(bf) "SPECIAL RESOLUTION" means a resolution passed at a meeting of
the Owners properly convened in accordance with the Condominium Documents passed
by Owners present or represented by proxy and representing not less than 75% of
the Owners entitled to vote thereon.
(bg) "TERM" has the meaning set forth in Section 4.2;
(bh) "UNIT REVENUE SHARE" has the meaning set forth in Section 6.2;
(bi) "UNIT" means that portion of the Hotel Premises designated for
separate ownership or occupancy, the boundaries of which are described in
Section 4.5 of the Declaration together with any limited common element for the
exclusive use of any such Units;
ARTICLE II
HOTEL RENTAL MANAGEMENT
2.1 Management of Hotel Rental Pool. The Owners hereby appoint Innisfree as
their exclusive agent to rent the Units and to manage and operate the Hotel and
the Rental Pool in accordance with the terms and conditions set out in this
Agreement. Innisfree shall undertake on an exclusive basis, on behalf of and for
the account of the Owners, all duties and obligations coming within the scope of
the management and marketing of the Hotel Premises, including those specific
services as set forth herein. Without limiting any of its duties or obligations
set out in this Agreement, Innisfree shall operate the Hotel Premises
substantially in accordance with the standards of the Competitive Set, except to
the extent that Innisfree is prevented from maintaining this standard of service
due to any default by any Owner of its duties or obligations pursuant to this
Agreement.
2.2 Hotel Rental Pool. Innisfree will manage the rental of the Units in
accordance with this Agreement. Each of the Owners hereby irrevocably covenants
and agrees to be bound by the rental bookings of its Unit made by Innisfree in
accordance with this Agreement.
8
<PAGE> 13
2.3 Use. The Units will be used only as condominium hotel units and only in
accordance with the Condominium Documents and this Agreement and will not be
used for any other purpose without the prior written consent of the Owners and
Innisfree. Any use of the Units will comply with the Condominium Documents and
all applicable laws, bylaws, rules and regulations.
2.4 Restrictions Regarding Condominium Documents. No Owner will vote in
favor of any amendment or modification of, or addition to, the Condominium
Documents which conflicts with a term or condition set out in this Agreement.
2.5 Monitoring Use by Owners. Innisfree will maintain such books and
records as may be necessary to monitor use of the Units by Owners to ensure that
no Owner uses its Unit more than is permitted by this Agreement.
ARTICLE III
THE BOARD OF DIRECTORS
3.1 Board of Directors. With respect to the rights, duties and obligations
of the Owners under this Agreement, the Owners hereby appoint the Board of
Directors to represent them in interacting with Innisfree in the operation of
the Rental Pool except as otherwise specifically provided herein. Innisfree and
the Owners agree that:
(a) Innisfree will advise the Owners of any nominee to the Board
of Directors who is a representative of a person who is a Related Person to
Innisfree prior to the election of such person to the Board of Directors;
(b) unless otherwise determined by the Owners from time to time,
Innisfree will be given notice of and be entitled to attend meetings of the
Board of Directors;
(c) Innisfree will be entitled to rely on any agreement, document
or instrument signed by the chairperson or any two members of the Board of
Directors or the duly appointed agent of the Board of Directors; and
(d) all acts and things done by the Board of Directors or its duly
appointed agent as set out in this Agreement will be binding upon all of the
Owners and Innisfree will be entitled to rely on all acts and things done by the
Board of Directors in purported compliance with this Agreement, except where a
Special Resolution is expressly required.
3.2 Release and Indemnity of Board of Directors. The Owners hereby release
and indemnify and hold harmless the members of the Board of Directors for all
acts and things done by such members as members of the Board of Directors in
good faith in connection with this Agreement.
3.3 Major Decisions - Special Resolutions. The following actions are
subject to the approval of the Owners by Special Resolution:
(a) any amendment to or modification of this Agreement;
(b) the renewal of the Term pursuant to Section 4.4;
9
<PAGE> 14
(c) termination of the appointment of Innisfree as Owners' manager
pursuant to Section 14.2;
(d) assignment, transfer or disposition of Innisfree's rights
under this Agreement if required in Section 16.1;
(e) changes and modifications to the Hotel Premises as provided in
Section 9.4(a); and
(f) any other matter which, pursuant to the terms of this
Agreement, is required to be approved by a Special Resolution.
3.4 Owners to be Bound. All of the Owners shall be bound by any acts and
things done by the Board of Directors in accordance with the Condominium
Documents and this Agreement and any Special Resolutions passed by the Owners at
any meeting of the Owners in accordance with the Condominium Documents and this
Agreement.
ARTICLE IV
COMMENCEMENT DATE, TERM OF AGREEMENT
4.1 Commencement Date. This Agreement will be a binding agreement and bind
the Hotel Premises, Innisfree and all of the Owners upon the execution and
delivery hereof by the Owner-Seller and Innisfree. The duties and obligations of
the parties under this Agreement will come into full force and effect upon the
Commencement Date except that Innisfree's obligation to prepare a Budget for the
first Operating year will come into full force and effect upon execution of this
Agreement by all of the parties hereto.
4.2 Initial Term. The initial term of the appointment of Innisfree as the
Owners' manager under this Agreement will be a period commencing on the
Commencement Date and terminating at midnight at the end of the day on December
31, 2014 (the "Initial Term"). For purposes of this Agreement, the word "Term"
means the Initial Term and any extensions thereof pursuant to Section 4.3 or
Section 4.6.
4.3 Renewal. Following the Initial Term, the appointment of Innisfree as
the Owners' manager pursuant to this Agreement will be automatically renewed
(without the requirement for notice by either the Owners or Innisfree) for two
successive periods of five years each (each called a "Renewal Term"), provided
that:
(a) the Owners have not, prior to the end of the Initial Term or
any Renewal Term, elected to terminate the appointment of Innisfree as manager
under this Agreement pursuant to Section 14.2;
(b) Innisfree has not, prior to the end of the Initial Term or any
Renewal Term, elected to terminate its appointment as manager under this
Agreement pursuant to Section 14.3 or Section 14.4;
(c) the Initial Term has been extended for all prior periods;
(d) Innisfree, in its sole discretion, has not given the Owners
written notice of its election not to so renew such appointment on or before the
date which is six months prior to the end of the then existing Initial Term or
Renewal Term, as the case may be; and
(e) the Owners have not elected to terminate the appointment of
Innisfree as manager under
10
<PAGE> 15
this Agreement in accordance with Section 4.5.
4.4 Renewal - By Agreement. In addition to renewals pursuant to Section
4.3, the parties may agree in writing to renew the appointment of Innisfree as
the Owners' manager pursuant to this Agreement for such period or periods and
upon such terms and conditions as may be approved by Innisfree and the Owners
and both Innisfree and all of the Owners will be bound by any such renewal.
4.5 Performance by Innisfree. This Agreement may be terminated by the
Owners in 2005 or any subsequent Operating Year by Special Resolution if the
Revpar Test is not met. Such termination shall be effected by written notice
from the Owners or the Board of Directors to Innisfree and shall be effective no
less than 60 and no more than 90 days after delivery of the notice of
termination.
4.6 Revpar Test.
(a) Commencing in 2004, the Revpar Test shall be deemed to not
have been met if, in two consecutive Operating Years beginning on or after 2003,
the Revpar for the Hotel, under Innisfree's management, is not at least the
Minimum Average Revpar of the Competitive Set (as determined below). For
purposes of this Section 4.6(a), the Minimum Average Revpar shall be equal to
80% of the average Revpar of the Competitive Set for the comparable time period.
(b) Commencing in 2009, the Revpar Test shall be deemed to not
have been met if, in two consecutive Operating Years beginning on or after 2008,
the Revpar for the Hotel, under Innisfree's management, is not at least the
Minimum Average Revpar of the Competitive Set. For purposes of this Section
4.6(b), the Minimum Average Revpar shall be equal to 90% of the average Revpar
of the Competitive Set for the comparable time period.
(c) The Minimum Average Revpar may be adjusted higher or lower by
agreement of the Owner-Seller and Innisfree as provided in Section 4.6(i) and
following an addition to or deletion from the Competitive Set.
(d) The Competitive Set shall initially consist of the following
hotels:
Young's By The Sea
Holiday Inn-Gulf Shores
Oleander Hotel
Lighthouse Hotel
Quality Inn-Gulf Shores
(e) The Competitive Set may not be changed except as provided in
Section 4.6(i) and except as agreed to by the Owners and Innisfree where one of
the following occurs:
(i) One of the Competitive Set members ceases to operate
for a period of 24 months or more or no longer meets
the criteria for the Competitive Set.
(ii) An additional hotel that satisfies the Competitive
Set criteria opens in the vicinity of Gulf Shores,
Alabama and completes 2 full years of operation.
The addition or deletion of a hotel as a member of
the Competitive Set shall, at
11
<PAGE> 16
the request of the Owners or Innisfree, be subject to
review by a member of the International Society of
Hospitality Consultants ("ISH") to determine whether
the proposed hotel satisfies the criteria for being a
member of the Competitive Set.
(f) The Competitive Set shall consist of the hotels determined
from time to time in accordance with this Agreement based on the following
criteria:
(i) the number of rooms;
(ii) quality and value of the overall facilities and
amenities;
(iii) character and style of the hotel;
(iv) rate structure and market position; and
(v) location factors such as direct beach frontage.
(g) The Competitive Set and the amount of the Minimum Average
Revpar shall be reevaluated and, if appropriate, changed by agreement of the
Owner-Seller and Innisfree approximately five months prior to the Commencement
Date.
(h) If Innisfree and the Owners are unable to agree within ninety
(90) days after a change in the Competitive Set, upon an appropriate Minimum
Average Revpar taking into account the effect, if any, of such change, then,
such matter shall be resolved by arbitration in the manner described in this
Section 4.6. All arbitrators appointed pursuant to this Section 4.6 shall be
hospitality industry experts selected from the membership of the ISH. If the
Owners and Innisfree are unable to agree, within thirty (30) days after the
event giving rise to the arbitration, upon the selection of a single arbitrator
to arbitrate the dispute, Innisfree and the Owners shall each select one
arbitrator to arbitrate the dispute. If the two arbitrators selected by the
Owners and Innisfree are unable to agree upon a resolution of the dispute, a
third arbitrator shall be selected by the Chairman of the ISH for that purpose.
The authority of the arbitrators shall be limited to determining the Minimum
Average Revpar or the Competitive Set, as the case may be.
(i) Commencing in 2002, Innisfree shall compile Revpar information
for the Competitive Set on or before June 30 of each year. The Revpar
information shall be obtained, to the extent available, from a generally
accepted industry source, such as Smith Travel Research. Innisfree shall attempt
to directly obtain Revpar information for any Competitive Set property for which
the Revpar information is not available from an recognized industry source. The
Owners and Innisfree agree that the Revpar information, whether obtained
directly from a Competitive Set property or through a recognized industry
source, shall be deemed to be conclusively accurate, absent manifest error.
ARTICLE V
BUDGET
5.1 Approval.
(a) For the first Operating Year, the Budget will be prepared by
Innisfree and approved by the Owner-Seller, prior to the Commencement Date. Such
Budget will be an Approved Budget and
12
<PAGE> 17
Innisfree will mail a summary thereof to each of the Owners.
(b) After the first Operating Year, on or before December 1 of
each year Innisfree will prepare and deliver to the Owners and to the Board of
Directors a preliminary Budget for the following Operating Year and Innisfree
will review such preliminary Budget with the Board of Directors at a duly
convened meeting of the Board of Directors. The Board of Directors will give
good faith consideration to the preliminary Budget and will not unreasonably
refuse to accept any item, provided such item is in accordance with this
Agreement. The Board of Directors may request additional information from
Innisfree. Within thirty (30) days of the delivery of the preliminary Budget to
the Board of Directors, the Board of Directors may give Innisfree written notice
(an "Objection Notice") of objections to the Preliminary Budget and proposals
for amendment of any disputed items. The Board of Directors and Innisfree, both
acting reasonably, will endeavor to resolve any such disputed items. If the
Board of Directors fails to approve or disapprove the preliminary Budget or to
send an Objection Notice within such 30 day period, then the Owners will be
deemed to have approved the preliminary Budget and such Budget will be deemed to
be an Approved Budget.
(c) Each Budget is subject to the approval of the Board of
Directors and no Budget will be an Approved Budget unless it is approved or
deemed to be approved by the Board of Directors in accordance with this Section
5.1. If any Budget is not approved or deemed to be approved by the Board of
Directors, then:
(i) pending resolution of any disputed item, the specific
disputed items of the Budget will be suspended and
replaced for the Operating Year in question by an
amount equal to the lesser of (A) that proposed by
Innisfree for such Operating Year or (B) such budget
item in the Approved Budget for the Operating Year
prior thereto, subject to escalation per item by the
Escalation Factor, over the 12 month period
immediately following the start of the Operating Year
in question, provided that if such budget item was
not in the Approved Budget for the Operating Year
prior thereto, such item will be suspended pending
resolution of such item; and
(ii) either the Board of Directors or Innisfree may submit
the Budget to be settled by arbitration in accordance
with Section 17.1.
Notwithstanding the foregoing, if labor costs, or any component thereof, is an
item in dispute, then the average within the Competitive Set for such costs or
components shall be adopted and included in the approved Budget.
(d) Innisfree makes no assurances that actual performance of the
Hotel will correspond to such estimates contained in the Approved Budget.
However, Innisfree agrees to use its best efforts to operate the Hotel within
the Approved Budget. The Owners acknowledge that notwithstanding Innisfree's
experience and expertise in relation to the operation of hotels, the projections
contained in each Approved Budget are subject to and may be affected by changes
in financial, economic and other conditions and circumstances beyond Innisfree's
control.
5.2 Items to be Included. The Budget will be a reasonably detailed budget
of revenue and expenses prepared in connection with the operation of the Hotel,
similar in kind and scope to operating plans and budgets prepared by Innisfree
for other hotels in the Innisfree Group as of the Commencement Date, and
13
<PAGE> 18
will include the following:
(a) the projected Gross Revenue, detailed as to each source of
revenue, together with information and background as to how the various
projections have been determined;
(b) the budgeted Hotel Expenses, by major expense category,
together with information and background as to how the various projections have
been determined;
(c) the projected Unit Revenue Share for each Unit;
(d) the marketing strategy and plan for the Hotel;
(e) any recommended Capital Expenditures for capital improvements
to be made to the Hotel Premises; and
(f) the basis upon which the Innisfree Marketing and Sales
Expenses and Innisfree Recoveries will be charged.
5.3 Budget Summary. Innisfree will mail to each of the Owners a summary of
each Approved Budget once it is approved in accordance with this Article V.
ARTICLE VI
OWNERS' REVENUES AND DISTRIBUTIONS TO OWNERS
6.1 Calculations by Innisfree. For each calendar month during the Term,
Innisfree will prepare or cause to be prepared reasonably detailed financial
statements, prepared in accordance with Generally Accepted Hotel Accounting
Principles and for each such period Innisfree will calculate:
(a) the Gross Revenue;
(b) the Hotel Expenses;
(c) the Capital Expenditures, if any;
(d) the FF&E Reserve;
(e) the Incentive Fee, if any;
(f) capital lease payments, if any;
(g) the Operating Cash Reserve;
(h) the Unit Revenue Share for each Unit, determined in accordance
with Section 6.2.;
(i) the number of days in the month the Unit was occupied; and
(j) the number of days in the month the Unit was in the Rental
Pool.
14
<PAGE> 19
No later than the 25th day following the end of each calendar month during the
Term, Innisfree will deliver to the Board of Directors such financial statements
and mail to each of the Owners a written summary statement (the "Monthly
Statement"), setting out the amounts calculated pursuant to Section 6.1 above
and the calculations thereof, in reasonable detail.
6.2 Calculations of Unit Revenue Share. The Owners and Innisfree agree
that:
(a) for each day that a Unit is In the Rental Pool, the Owner of
such Unit will be entitled to share in the Gross Revenue from the Hotel Premises
and the operation of the Hotel earned on such day, as calculated by multiplying
the Gross Revenue earned on such day by the fraction which has as its numerator
the Percentage Interest of such Unit and as its denominator the aggregate of the
Percentage Interests of all of the Units In the Rental Pool on such day;
(b) each Owner of a Unit will be responsible for the payment of
its share of all Hotel Expenses, Capital Expenditures exceeding the FF&E
Reserve, capital lease payments and Incentive Fees payable for all days (whether
or not the Unit is In the Rental Pool), as calculated by multiplying the
relevant Hotel Expenses, the Capital Expenditures exceeding the FF&E Reserve,
capital lease payments and Incentive Fees by the Percentage Interest;
(c) each Owner will be responsible for its share of the FF&E
Reserve in accordance with Section 6.6 and for the Operating Cash Reserve in
accordance with Section 6.7, as calculated by multiplying each of the FF&E
Reserve and the Operating Cash Reserve by the Percentage Interest; and
For the purposes of this Agreement, the "Unit Revenue Share" for any Unit in
respect of any period means the amount allocated to such Unit in accordance with
Section 6.2(a) for such period less the amounts allocated to such Unit in
accordance with Sections 6.2(b) and 6.2(c).
6.3 In the Rental Pool. For the purposes of this Agreement, a Unit will be
considered to be "In the Rental Pool" on a particular day only if it is not
booked by the Owner for use by the Owner in accordance with Article X.
6.4 Payments to Owners. Concurrently with the mailing of the Monthly
Statement, Innisfree will mail to each Owner a check, drawn upon the Hotel Bank
Account, in the amount equal to the Owner's Unit Revenue Share for the month for
which the Monthly Statement applies less the following amounts:
(a) any unpaid amount then payable by the Owner to Innisfree
pursuant to Section 6.8;
(b) any amount deductible therefrom pursuant to Sections 6.9, 6.10
or 10.3;
(c) any other amount payable by the Owner to Innisfree pursuant to
this Agreement; and
(d) withholding tax, if applicable.
Notwithstanding the foregoing, Innisfree may at any time, in consultation with
the Board of Directors, prepare a reasonable estimate of the annual Unit Revenue
Share payable to each of the Owners pursuant to this Section 6.4 and distribute
to the Owners concurrently with the mailing of the monthly statements the amount
of such estimate, less a percentage (not to exceed 20%) established by Innisfree
for seasonal working capital requirements in twelve (12) equal monthly payments,
in which case at the end of such
15
<PAGE> 20
Operating Year Innisfree will calculate or cause to be calculated the actual
Unit Revenue Share payable to each of the Owners in accordance with this
Agreement and include such calculation in the Annual Statement as set out in
Section 8.2(b) and at such time Innisfree will pay to each Owner the balance of
his or her Unit Revenue Share payable for such Operating Year.
6.5 Maintenance and Repair of Units. Innisfree will, for and on behalf of
the Owners, keep the Units in substantially the same condition they were in as
of the Commencement Date, normal wear and tear excepted, and the cost thereof
will be a Hotel Expense. The Owners acknowledge and agree that the cost of
maintaining and repairing the Units will be shared by all of the Owners during
the Term in accordance with their respective Percentage Interests.
6.6 FF&E Reserve. Innisfree will establish for and on behalf of the Owners
a reserve in the following amounts:
<TABLE>
<CAPTION>
Amount to be Reserved Each Operating Year Expressed
Operating Year as a Percentage of Gross Revenue in that Year
<S> <C>
1 1%
2 2%
3 3%
4 4%
5 and subsequent 5%
Operating Years
</TABLE>
The FF&E Reserve will be held by Innisfree, for and on behalf of the Owners, in
a separate account from the Hotel Bank Account, as a reserve for Capital
Expenditures for the repair and replacement of the Hotel Premises and for the
repair and replacement of any Furniture, Fixtures and Equipment in accordance
with Section 9.3. Innisfree will, for and on behalf of the Owners, keep the
Hotel Premises and the Furniture, Fixtures and Equipment in substantially the
same condition, quality and scope they were in as of the Commencement Date,
normal wear and tear excepted, and the Owners hereby authorize Innisfree to use
the FF&E Reserve only for such purposes. Innisfree will be under no obligation
to use its own funds for such purpose. The Owners acknowledge and agree that the
FF&E Reserve will be for the benefit of all of the Units collectively and not
for each individual Unit separately and that the cost of maintaining and
replacing the Furniture, Fixtures and Equipment will be shared by all of the
Owners during the Term in accordance with their respective Percentage Interests.
The FF&E Reserve, at all times during the Term and after termination or expiry
of this Agreement, shall remain the property of the Owners.
6.7 Operating Cash Reserve. A reserve in the amount of $50,000 will be
established for and on behalf of the Owners, for use by Innisfree on behalf of
the Owners, as working capital in connection with the operation of the Hotel.
The Operating Cash Reserve will be initially established with funds paid by each
Owner at the time of closing of the Owner's purchase of its Unit. If, twelve
(12) months after the Commencement Date, there have not been a sufficient number
of purchases of Units to fund the Operating Cash Reserve in the amount of
$50,000, Owner-Seller shall contribute such amounts as are necessary to fully
fund the Operating Cash Reserve. Owner-Seller shall be reimbursed for the amount
so contributed out of closing proceeds as and when remaining Units are
purchased. Commencing twelve (12) months after the Commencement Date, Innisfree
will at all times be authorized to withhold each month from the Owners' Unit
Revenue Shares sufficient funds in order to keep the Operating Cash Reserve at
such $50,000 level throughout the Term. The Operating Cash Reserve will be held
in the Hotel Bank Account
16
<PAGE> 21
and, commencing as of the Commencement Date, Innisfree may withdraw funds from
the Operating Cash Reserve to pay any Hotel Expenses, Capital Expenditures in
excess of the FF&E Reserve, capital lease payments and the Incentive Fee. Within
ninety (90) days following the twelve (12) month period following the
Commencement Date, Owner-Seller shall pay to Innisfree for deposit into the
Operating Cash Reserve the amount by which funds derived from the operations of
the Hotel during such twelve (12) month period were insufficient to pay Hotel
Expenses, Capital Expenditures, capital lease payments and the Incentive Fee for
such twelve (12) month period. The Operating Cash Reserve, at all times during
the Term and after termination or expiry of this Agreement, shall remain the
property of the Owners.
6.8 Shortfalls. If at any time the funds in the Hotel Bank Account are not
sufficient to pay when due any Hotel Expenses, Capital Expenditures in excess of
the FF&E Reserve, capital lease payments or Incentive Fees payable under this
Agreement, then:
(a) Innisfree may (such as in the case of seasonal operating
shortfalls), but will not be obligated to, pay any such amount out of its own
funds, in which case the Owners will repay such amount to Innisfree forthwith
upon demand and will pay interest on any amount outstanding at the rate equal to
the Prime Rate plus 2% per annum, calculated from the date of advance by
Innisfree until the date of repayment by the Owners and Innisfree may deduct the
amount of any such payment by Innisfree and interest thereon from the Hotel Bank
Account; or
(b) Innisfree may require the Owners to pay the amount of the
shortfall estimated by Innisfree, by mailing to the Owners a written notice
setting out such amount and each Owner's proportionate share thereof, as
calculated by multiplying the amount of such shortfall by such Owner's
Percentage Interest.
(c) Innisfree shall have all rights and remedies available at law
or in equity to enforce the payment of any shortfall by any Owner.
6.9 Payment of Unit Expenses by Owners. Each of the Owners will promptly
pay when due all taxes personal to the Owners in respect of such Owner's Unit,
including income taxes and capital gains taxes, and all amounts owing under any
financing of the Owner's Unit arranged by such Owner. For administrative
purposes, each Owner agrees that Innisfree may, if requested by the Board of
Directors, pay to the Association for and on behalf of and in the name of each
Owner, out of the Unit Revenue Share payable to such Owner, such Owner's pro
rata share of Assessments.
6.10 Other Taxes. The parties agree that:
(a) Innisfree will, as agent for and on behalf of the Owners,
collect and remit to any applicable taxing authority, within the required time
for the remittance thereof, any hotel tax, transient lodging tax, bed tax and
other tax imposed or collected in connection with the use of the Hotel Premises
by Hotel Guests and Owners, and make any necessary filings and reports in
respect thereof; and
(b) Innisfree may withhold from any of the Owners and remit to any
relevant taxing authority any amount required to be withheld or remitted in
respect of withholding tax or any other applicable statutory tax, charge or levy
which Innisfree is required to withhold or remit.
6.11 No Separate Revenue for Innisfree. Except as specifically set out in
this Agreement or any other agreement in writing between or among Innisfree and
the Owners or the Association, neither Innisfree nor any Related Person of
Innisfree will receive any other revenue, profit or reward of any kind or nature
17
<PAGE> 22
from or in respect of the Hotel Premises or the Hotel or any portion thereof.
Notwithstanding anything in this Agreement to the contrary, Innisfree and any
Related Person of Innisfree are entitled to receive any amount payable to
Innisfree or such person pursuant to this Agreement as an Owner of any Unit and
to the extent Innisfree or any Related Person of Innisfree owns any Units,
Innisfree or such Related Person shall be entitled to all of the rights,
benefits and privileges, and shall be subject to all of the burdens, obligations
and liabilities of an Owner hereunder.
6.12 Foreign Owners. Owners that are non-resident aliens or foreign
corporations agree to file such tax returns and make such tax elections with,
and provide such information to, all applicable taxing authorities located in
the United States as may be required to avoid the necessity for withholding
income tax on distributions. In addition, Owners that are non-resident aliens or
foreign corporations agree to pay all income taxes for which withholding would
otherwise be required because of such Owners' status as non-resident aliens or
foreign corporations. Each Owner that is a non-resident alien or foreign
corporation shall notify Innisfree, in writing, of its status as such and shall
advise Innisfree whether it is subject to income tax on withholding or is exempt
therefrom. Each Owner that is a non-resident alien or foreign corporation shall
indemnify and hold harmless all other Owners, Owner-Seller and Innisfree, for,
from and against any and all liability, including liability for taxes, penalties
and interest, arising out of or in connection with such Owner's failure to
fulfill its obligations under this Section 6.12.
ARTICLE VII
MANAGEMENT AND OTHER FEES AND REIMBURSABLE EXPENSES
7.1 Base Fee. The Owners and Innisfree agree that during the Term,
Innisfree will receive the Base Fee as compensation for the services rendered in
accordance with this Agreement. The Owners will pay to Innisfree a Base Fee of
5.0% of Gross Revenue for each Operating Year. Such Base Fee shall be payable in
monthly installments based on the Gross Revenue for the preceding month upon the
delivery of the Monthly Statement in respect of such month, and shall be payable
as a Hotel Expense in each case; provided, however, that during any period that
operation of the Hotel is interrupted by fire, hurricane, or other catastrophic
events and said interruption decreases the number of rentable rooms or requires
additional resources or personnel of Innisfree, then business interruption
insurance proceeds will not be included as Gross Revenue, but Innisfree shall be
paid a Base Fee for such month (prorated for any partial month) equal to the
average monthly fee paid Innisfree pursuant to this Section 7.1 for the twelve
(12) month period preceding the period of interruption, plus $1,500.00 per
month.
7.2 Incentive Fee. The Owners and Innisfree agree that:
(a) if, in any Operating Year during the Term, the Net Hotel
Return exceeds $1,252,987 the Owners will pay to Innisfree an Incentive Fee for
such Operating Year in an amount equal to the sum of the following percentages
for any given year of operation:
<TABLE>
<CAPTION>
NET HOTEL RETURN: YEAR 1 YEAR 2 YEARS 3 - 5 YEARS 6 - 15
<S> <C> <C> <C> <C>
Over $1,252,987 and 15.0% 15.0% 12.0% 10.0%
up to $1,384,522 of the amount by which Net Hotel Return exceeds $1,252,987 and is less than $1,384,522
Over $1,384,522 30.0% 25.0% 22.50% 20.0%
of the amount by which Net Hotel Return exceeds $1,384,522
</TABLE>
18
<PAGE> 23
(b) for purposes of computing the Incentive Fee, the first
Operating Year shall be deemed to commence on January 1, 2001 and end on
December 31, 2001;
(c) the Incentive Fee in respect of each Operating Year, will be
payable to Innisfree within 30 days after the mailing of the Annual Statement;
and
(d) during any Renewal Term, the Incentive Fee shall be computed
in the same manner as in years 6 through 15 of the Initial Term.
7.3 Sales, Reservations, Advertising and Marketing Expenses. For the
services provided by Innisfree pursuant to Article IX, including, without
limitation, the Innisfree Group advertising and marketing programs, sales and
reservation systems the Owners will, pay to Innisfree and its Affiliates the
fees and charges set out in Sections 9.9(c) and 9.9(g), (net of any applicable
credits) (collectively called "Innisfree's Marketing and Sales Expenses"). The
Owners acknowledge that the basis and method of allocation of Innisfree's
Marketing and Sales Expenses may change during the Term and the Owners agree to
any such change provided it is in accordance with Section 7.4.
7.4 Limitation on Innisfree's Marketing and Sales Expenses. Innisfree
agrees that none of Innisfree's Marketing and Sales Expenses will be (a) charged
on a basis different than that charged to any other hotel in the Innisfree
Group; or (b) allocated by a method other than that set out in the then current
Approved Budget.
7.5 Accounting Fee. The Owners and Innisfree agree that (a) for the
services provided by Innisfree pursuant to Articles II and VI the Owners will
pay to Innisfree an annual Accounting Fee equivalent to $30.00 per month per
Unit; and (b) the Accounting Fee will be payable monthly as a Hotel Expense in
each case upon the delivery of the Monthly Statement in respect of such month.
7.6 Reimbursement of Innisfree Recoveries. The Owners agree to reimburse
Innisfree for all reasonable costs incurred by Innisfree for the Owners' account
in the ordinary course of business, which costs will be Hotel Expenses,
including, without limitation, the following:
(a) the daily per diem rate for those personnel of Innisfree
assigned to special projects, which will be based upon each individual's rate of
pay and Fringe Benefits (such special projects will include, but not be limited
to, special sales or marketing programs, training and installation of capital
purchases and reasonable travel and out-of-pocket expenses will be included);
(b) reasonable travel and out-of-pocket expenses incurred directly
in connection with the operation of the Hotel by Head Office Personnel; and
(c) the reasonable cost of the standard Innisfree corporate
services utilized by hotels within the Innisfree Group such as, but not limited
to, attendance at Innisfree's management seminars and other conferences,
operating handbooks and manuals, purchasing services, departmental services, and
corporate marketing services.
19
<PAGE> 24
When any expenses required to be reimbursed hereunder were incurred in visiting
a number of hotels within the Innisfree Group, the cost will be reasonably
prorated to all those hotels. Each of the foregoing expenses shall be set out in
an Approved Budget or otherwise preapproved by the Board of Directors.
ARTICLE VIII
HOTEL BANK ACCOUNT AND BOOKS AND RECORDS
8.1 Hotel Bank Account. Innisfree may designate the United States bank
having a branch reasonably convenient to the Hotel with which the Hotel will
conduct its various banking affairs. All funds received in the operation of the
Hotel will be deposited into a trust account bearing the name of the Hotel in
such bank. The Hotel Bank Account will be under the control of Innisfree. Checks
and other documents of withdrawal will be signed only by persons authorized by
Innisfree. All funds in the Hotel Bank Account will belong to the Owners and
will be dealt with in accordance with this Agreement. Innisfree is hereby
authorized to pay all Hotel Expenses, Capital Expenditures, Association
Expenses, capital lease payments (if any) and Incentive Fees incurred in
accordance with this Agreement and all amounts repayable to the Owner-Seller
pursuant to Section 6.7 from funds in the Hotel Bank Account.
8.2 Books, Records, Financial Statements.
(a) Innisfree agrees, on behalf of the Owners, to keep on the
Hotel Premises books of account and other records relating to or reflecting the
results of the operations of the Hotel in accordance with this Agreement. All
books of account and other records are the property of the Owners and will be
available to the Board of Directors and to the Owners at all reasonable times
for examination, audit, inspection and copying. Upon any termination of this
Agreement, all financial books and records and a list of the Hotel's individual
guests who stayed at the Hotel during the preceding two years (with their names
and addresses and the dates of their arrivals and departures) will be turned
over forthwith to the Board of Directors to ensure the orderly continuance of
the operation of the Hotel. All books and records will thereafter be available
to Innisfree at the Hotel, at all reasonable times, for inspection, audit,
examination and copying. Any costs and expenses incurred in providing books and
records to Innisfree after termination will be paid by Innisfree.
(b) Within seventy five (75) days after the end of each Operating
Year, Innisfree shall cause to be prepared and mailed to all of the Owners,
reasonably detailed financial statements in accordance with Generally Accepted
Hotel Accounting Principles, together with an annual statement setting out the
items referred to in Section 6.1 and the calculation of each of them
(collectively called the "Annual Statement") and any other reports or
information as may be reasonably required by the Owners for tax purposes. Unless
otherwise agreed by the Board of Directors in advance, the Annual Statement will
be audited by the Certified Public Accountants and will contain a certification
by the Certified Public Accountants to the effect that all of such items have
been calculated in accordance with the terms of this Agreement.
ARTICLE IX
SERVICES TO BE RENDERED BY INNISFREE
9.1 Management Services. Innisfree will:
(a) use all reasonable efforts to sell room nights in respect of
the Units to Hotel Guests;
20
<PAGE> 25
(b) carry out and perform all such acts and things as are
reasonably necessary or desirable in connection with the operation of the Hotel
in a manner substantially in accordance with the standards of the Competitive
Set;
(c) procure and maintain any licenses and permits which may be
required in connection with the carrying out of its duties and obligations under
this Agreement;
(d) strictly observe and abide by the terms and conditions set out
in the Declaration; and
(e) diligently and faithfully perform its duties and obligations
under this Agreement as would a reasonably prudent hotel manager in the position
of Innisfree.
9.2 General Management. Subject to the terms and conditions of this
Agreement and any Approved Budget, Innisfree agrees to and shall have all
necessary power and authority to perform all appropriate and necessary
management services in connection with the operation of the Hotel as a hotel in
a manner substantially in accordance with the standards of the Competitive Set,
including but not limited to:
(a) the general organization of the Hotel;
(b) the development and implementation of sales, advertising,
personnel, employment, purchasing and maintenance programs consistent with the
provisions of this Agreement;
(c) the implementation of administrative accounting, budgeting,
and operational policies and practices of Innisfree as used in the hotels within
the Innisfree Group, from time to time. Such policies and practices will be
deemed to be in compliance with Innisfree's obligations hereunder, and the
Owners will accept such policies and practices so long as they do not conflict
with any term or condition of this Agreement or any Approved Budget;
(d) the review of the conduct of hotel operations at the Hotel
from time to time in accordance with the standards of the Competitive Set and
established management practices and policies of Innisfree;
(e) the establishment and supervision of Innisfree's standard
accounting and inventory control systems which are normally used for the hotels
within the Innisfree Group which are comparable to the Hotel;
(f) the arrangement for the provision to the Hotel of all goods
and services as are necessary for the proper operation and maintenance of the
Hotel in a manner substantially in accordance with the standards of the
Competitive Set;
(g) the establishment of all prices, charges and rates, and in
connection therewith, the supervision and control of the collection, receipt and
giving of receipts for all goods or services provided or revenue of any nature
derived from the operations of the Hotel;
(h) the determination of the Hotel's purchasing policy, including
the selection of the merchandise, supplies and materials and establishment and
maintenance of all inventories required for the proper operation of the Hotel,
and the selection of the suppliers and negotiation of supply contracts in order
to assure that all purchases are made on the best available terms;
21
<PAGE> 26
(i) the negotiation and execution of contracts which are normally
entered into within the scope of hotel operations and preparation of the
corresponding legal documents;
(j) the determination of credit practices applicable to suppliers
and to the Hotel's clientele and negotiation of arrangements with credit
organizations, in particular those issuing credit cards;
(k) with the prior approval of the Board of Directors, acting
reasonably, instituting in the name of the Hotel any lawsuits or other legal
actions having a direct link with the operations of the Hotel and deemed
necessary or advisable by Innisfree; and
(l) the supervision of the activities of Owners while in occupancy
of a Unit, Hotel Guests and any tenants, concessionaires and holders of
privileges in respect of any portion of the Hotel Premises and their employees,
including the dispossession of Hotel Guests, Owners and tenants for nonpayment
of rent or any other proper cause, or the termination of the rights of
concessionaires or licensees for proper cause.
(m) the employment of persons, agents and contractors in the
rental operation and management of the Units, including, but not limited to,
supervisory managing agents, building management agents, rental agents,
marketing representatives, security personnel and insurance brokers, on such
terms and for such compensation as Innisfree deems appropriate.
(n) the employment of persons to perform legal and independent
auditing services in connection with the rental operation and the management of
the Units and to provide services in connection with the preparation and filing
of any tax returns required in connection with the Hotel or the rental pool.
9.3 Maintenance.
(a) Innisfree shall cause the Hotel Premises and the Furniture,
Fixtures and Equipment to be maintained in good operating condition and repair,
normal wear and tear excepted, and Innisfree will replace, at the expense of the
Owners, such items of the Furniture, Fixtures and Equipment and Operating
Supplies and Expendables as from time to time may be appropriate in accordance
with the then current Approved Budget. All items of Furniture, Fixtures and
Equipment not located within a Unit, upon acquisition and receipt by Innisfree
of any payment therefor, will become, without further act, the property of the
Owners and will be owned collectively in accordance with their respective
Percentage Interests. Upon completion of reconstruction of any change or
addition to the Hotel, Innisfree will furnish to the Owners any guaranties and
warranties relating to any portions of the Hotel or the Furniture, Fixtures and
Equipment and Operating Supplies and Expendables. Innisfree agrees to cooperate
with the Owners to enforce the provisions of such guaranties and warranties.
Innisfree will not make any Capital Expenditures except if the same is included
in an Approved Budget or otherwise preapproved by the Board of Directors.
(b) The Owners acknowledge that the Hotel will be operated as a
member of the Innisfree Group and that it will, therefore, be mandatory for the
Hotel Premises and the Furniture, Fixtures and Equipment to be maintained in a
manner substantially in accordance with the standards of the Competitive Set in
order to continue operation of the Hotel as part of the Innisfree Group.
9.4 Changes and Alterations. From time to time during the Term, Innisfree
may make, at the Owners' expense, but subject to the terms of this Agreement and
the then current Approved Budget, reasonable
22
<PAGE> 27
changes and alterations to the Hotel Premises, or any part thereof, subject,
however, in all cases to the following:
(a) no change or alteration will be made without the prior consent
of the Owners by Special Resolution which would:
(i) change the general character of the Hotel;
(ii) involve the excavation of any portion of the Hotel
Premises;
(iii) include alteration of, or result in increasing the
burden upon the foundation of the Hotel Premises; or
(iv) reduce the size of any Unit.
(b) all permits, licenses and authorizations required to be
procured in connection with any change or alteration will be procured (or caused
to be procured) by Innisfree, and the cost of the same will be a Hotel Expense;
(c) any change or alteration will be made promptly in a good and
workmanlike manner and in compliance with all applicable laws, rules,
regulations and permits and insurance requirements;
(d) the cost of any change or alteration will be promptly paid (or
caused to be paid) so that the Hotel Premises will at all times be free from any
lien, encumbrance, mortgage, chattel mortgage, conditional sales agreement,
title retention agreement or other charge for labor, services or material
supplied or claimed to have been supplied to the Hotel Premises;
(e) if any such change or alteration involves an estimated cost of
more than $50,000, then:
(i) Innisfree agrees to obtain the specific approval (in
addition to approval of the Approved Budget) of the
Board of Directors to such change or alteration prior
to Innisfree proceeding;
(ii) if Innisfree proposes to have such change or
alteration supervised by personnel of Innisfree or
the Hotel, Innisfree will obtain the specific
approval of the Board of Directors as to whether such
change or alteration requires the supervision of an
independent engineer or architect; and
(iii) if the Board of Directors so advises Innisfree in
writing prior to the Owners approving same, such
change or alteration will be made under the
supervision of an architect or engineer approved by
the Board of Directors in accordance with detailed
plans and specifications approved by the Board of
Directors prepared by such architect or engineer and
the Board of Directors will have the right to approve
the contractor and to supervise construction.
9.5 Capital Expenditures. Innisfree is authorized to make Capital
Expenditures only in accordance with the terms of the then current Approved
Budget or otherwise pre-approved by the Board of Directors, except where
required in an emergency to preserve property or the safety of persons in or
about the Hotel
23
<PAGE> 28
Premises.
9.6 Personnel and Employees.
(a) The selection and employment of the general manager and all
such other employees and personnel necessary for the proper operation of the
Hotel is the responsibility of Innisfree and all such persons will be employed
by Innisfree as its employees. The hiring, promoting and discharging of the
general manager and any other employees and personnel and the terms of their
employment, including compensation, will be at the sole discretion of Innisfree,
acting reasonably and in the best interest of the Owners.
(b) Innisfree may delegate to the general manager of the Hotel,
who in turn may delegate to others, the selection and hiring of all employees
and personnel required for the operation of the Hotel.
(c) The general manager may, during the Term be replaced by
Innisfree, and likewise the employment of any other Employee may be terminated
by Innisfree or the general manager or by the person or persons to whom the
general manager will delegate such authority. The decision in regard to any such
discharge, whether directly or through the general manager of the Hotel, will be
at the sole discretion of Innisfree, acting reasonably.
(d) The Owners agree that all costs and expenses incurred by
Innisfree, acting reasonably and prudently, in connection with the employment of
the Employees (including any hiring costs and expenses, Fringe Benefits,
withholding amounts and termination costs payable, including the costs of
terminating Employees at the end of the Term or earlier termination of the
appointment of Innisfree under this Agreement), will be Hotel Expenses, payable
by the Owners pursuant to this Agreement.
9.7 Marketing of the Hotel.
(a) Innisfree agrees to integrate the Hotel in all corporate
publicity, advertising, audio visual and public relation programs and campaigns
with respect to hotels affiliated with the Innisfree Group, including the
promotion of the clientele of the other hotels in and affiliated with the
Innisfree Group in a similar manner to the other hotels in and affiliated with
the Innisfree Group.
(b) Innisfree will carry out, on behalf of the Hotel, all
operational marketing activities and the implementation of the Innisfree Group
marketing policy as applied to the Hotel.
(c) Marketing at the Hotel level will be established and carried
out by Innisfree for the market where the Hotel is located and other markets
which Innisfree reasonably believes relevant considering the nature of the
Hotel.
(d) Innisfree agrees to establish for the Hotel, as part of the
Operating Plan and Budget, an annual marketing plan for each Operating Year,
including, but not limited to:
(i) the determination of the sales policy of the Hotel;
(ii) the determination of yearly and long-term objectives
regarding occupancy rates, revenues and clientele;
24
<PAGE> 29
(iii) the establishment of all Hotel rates;
(iv) the setting of any special sales terms;
(v) the determination of credit practices;
(vi) the establishment of sales methods and procedures
relating to the various clientele segments; and
(vii) the analysis of results and permanent control.
(e) Innisfree agrees to perform appropriate advertising and
promotion services at the Hotel level including:
(i) the definition of the Hotel policy regarding
advertising and promotion;
(ii) the preparation of advertising documents and
brochures; and
(iii) the reasonable distribution of such documents in the
hotels of the Innisfree Group and other sales
outlets.
(f) Innisfree agrees to make its central sales office available to
the Hotel for marketing action intended for specific territories. Innisfree will
assist the Hotel in reaching specific market segments through the drafting of
potential clientele lists, the visiting of selected travel agencies, tour
operators and corporations and the following up of such activities in the
processing of sales orders.
(g) Innisfree may undertake advertising campaigns in specific
territories through the Innisfree Group sales offices if necessary, subject to
the Approved Budget.
(h) The Owners consent to the integration of the Hotel's guest
list and client list into Innisfree's guest history and client listing data
base, which may be used by hotels in the Innisfree Group.
9.8 Reservation and Sales Systems.
(a) The Hotel will be integrated into all reservation systems
established and used by the Innisfree Group including other sales and
reservation systems chosen by the Hotel and available under contract with the
Innisfree Group according to the same terms and conditions negotiated by the
Innisfree Group for the other hotels of the Innisfree Group (including
international airlines and independent reservations systems).
(b) Innisfree agrees with the Owners that throughout the Term, the
Hotel will have the right to benefit from the sales communication systems used
by the Innisfree Group.
(c) The Owners agree to abide by the reservation charges
negotiated or established by Innisfree with or for the Other Reservation
Systems.
(d) The Owners agree to honor all reservations made by Innisfree
in accordance with this Agreement, including those made for the twenty four (24)
month period after the termination of the
25
<PAGE> 30
appointment of Innisfree under this Agreement.
(e) The Hotel will be entitled to benefit from the sales and
promotional activities planned for groups undertaken at the national or
international level and intended for travel agents, tour operators, incentive
groups, conventions, corporations, governmental agencies, international
associations and airline companies. These activities will be performed by or
through Head Office Personnel.
(f) Innisfree agrees to distribute to all sales outlets as
determined by Innisfree (i) information on services and facilities offered by
the Hotel and advertising literature published by the Hotel; and (ii) the
individual and group rates established annually by the Hotel, and if necessary,
any special rates offered for specific markets.
(g) The Owners agree that the Hotel will abide by all commission
agreements negotiated and established by Innisfree in good faith with third
parties who are not Related to Innisfree, pursuant to which the services
described in Section 9.8(e) may be offered to hotels in the Innisfree Group.
9.9 Other Innisfree Systems. Innisfree agrees to make available to the
Hotel:
(a) all operational departmental supervision and control and other
similar services furnished to other hotels within the Innisfree Group; and
(b) all services used by hotels within the Innisfree Group
generally, with regard to the procurement of all Furniture, Fixtures and
Equipment and Operating Supplies and Expendables and other goods and services
required for the Hotel.
9.10 Performance of Innisfree's Services.
(a) In its management of the Hotel and to provide the Hotel with
the benefits of volume purchasing, market research in the development of new and
used equipment and supplies and design, decorating and other services, Innisfree
may, subject to the Approved Budget or the prior approval of the Board of
Directors, purchase goods, supplies and services from or through Innisfree or
any of its Affiliates, so long as the prices and terms are competitive with the
prices and terms of goods and services of equal quality available from others.
(b) Innisfree may pay to any of its Affiliates a reasonable fee
for the negotiation of contracts for the direct purchase by Innisfree from
independent suppliers of goods, supplies and services so long as the prices and
terms thereof when added to the fee are competitive. Such fee and the prices and
terms of goods and services charged to the operation of the Hotel will be on the
same basis as charged to the operation of hotels owned by Innisfree Affiliates.
(c) Subject to the Approved Budget, Innisfree may retain an
Affiliate or division as a consultant and to perform technical services in
connection with any substantial remodeling, repairs, construction or other
capital improvement to the Hotel and the Affiliate or division will be
reasonably compensated for its services.
9.11 Meetings. Innisfree agrees to meet with the Board of Directors
quarterly, upon reasonable written notice, to discuss general Hotel operating
procedures, the current Approved Budget, the Budget for an Operating Year,
results of an Operating Year, or any other matter of interest or concern.
26
<PAGE> 31
ARTICLE X
USE OF UNITS BY OWNERS
10.1 Use of Units by Owners. The parties agree that the terms and conditions
set out in Schedule B are binding upon Innisfree, all the Owners, and all
persons claiming under any Owner pursuant to Schedule B and are hereby
incorporated into this Agreement. Each Owner and each person claiming under the
Owner will be permitted to use its Unit in accordance with Schedule B and in no
other manner whatsoever. If any Owner proposes to book the use of his or her
Unit in accordance with Schedule B, Innisfree will not be responsible if the
Unit has been otherwise booked, provided that Innisfree has complied with
Schedule B. Notwithstanding anything contained in Schedule B (including the
definition of "Day"), the Owners will be bound by and comply with the check-in
and check-out times established by Innisfree for the use of the Units.
10.2 Daily Cleaning. The Owners will pay, upon checkout, Innisfree's daily
mandatory cleaning charge, payable by an Owner for the periods in which the
Owner or a person claiming under the Owner uses the Owner's Unit in accordance
with Schedule B. The cleaning charge shall initially be $30.00, but may be
changed by Innisfree, subject to approval of the Board of Directors. In
addition, the Owners and those using the Units with the permission of the Owners
in accordance with Schedule B will pay the standard charges established by
Innisfree for the following:
(a) long distance calls;
(b) movie rentals;
(c) vending machine charges;
(d) charges for use of any recreational facilities, including
spas, golf courses and racquet sport facilities located off the Hotel Premises
pursuant to agreement with third parties; and
(e) purchases of other goods and services offered by Innisfree.
If any Owner or person claiming under any Owner does not pay any fee or charge
set out in this Section 10.2, Innisfree may deduct such amount from the Owner's
Unit Revenue Share. All of the fees and charges set out in this Section 10.2
received by Innisfree will be included in the Gross Revenue.
10.3 No Charge for Common Property or Common Facilities. Except as set out
in Section 10.2, Innisfree will not charge any Owner or any person claiming
under the Owner pursuant to Schedule B for the use or enjoyment of its Unit or
any portion of the Hotel Premises (including parking), provided that such use is
in accordance with this Article X and Schedule B.
10.4 Owner Election Not to Use. The Owner will notify Innisfree in writing
if the Owner determines or discovers at any time that the Owner or any person
claiming under such Owner will not use the Unit on any of the days for which the
Owner gave notice of the Owners use thereof pursuant to Schedule B and Innisfree
may then rent out the Owner's Unit to Hotel Guests on such days.
27
<PAGE> 32
10.5 Use by or on Behalf of Owner. No Owner will use or permit any person to
use the Owner's Unit or the Common Elements except in accordance with this
Article X or with the prior written consent of Innisfree in its sole discretion.
The Owner will be responsible for any use of its Unit by the Owner or any person
claiming under the Owner in accordance with this Article X and any amount
payable from any Owner in respect of such use of such Owner's Unit to Innisfree
hereunder. Under no circumstances will the Owner during the Term directly or
indirectly charge rent or accept any form of consideration for the use of the
Owner's Unit except in accordance with this Agreement.
10.6 Promotional Use by Owner-Seller. Notwithstanding any other provision in
this Agreement to the contrary, until Owner-Seller has sold all of the Units to
another Owner, Owner-Seller shall have the right to use Units reasonably
designated by Innisfree as models for the promotion and sale of the remaining
unsold Units.
10.7 Additional Personal Use Benefits.
(a) Each Owner will have privileges with other Innisfree hotels
managed or operated in North America by Innisfree or its parent company to
reserve rooms at a 25% discount off the rack rate, subject to availability.
(b) Each Owner will receive, upon application to Innisfree or its
parent company, membership in the Elite Club guest recognition program. The
Owner's benefits and continued membership as an Elite Club member holder are
subject to the rules of such program, as such rules may be amended by Innisfree
from time to time.
ARTICLE XI
COVENANTS, REPRESENTATIONS AND WARRANTIES
11.1 Covenants. All of the terms and provisions of this Agreement will be
deemed and construed to be "covenants" to be performed by the respective parties
as though words specifically expressing or importing covenants and conditions
were used in each separate term and provision hereof.
11.2 Representations and Warranties of Innisfree. Innisfree represents and
warrants as of the date hereof and at all times during the Term, as follows:
(a) it is a corporation duly organized, validly existing and in
good standing under the laws of the State of Alabama.
(b) it has full corporate power, authority and legal right to
operate the Hotel and to perform and observe the provisions of this Agreement;
and
(c) this Agreement constitutes a binding obligation of Innisfree
enforceable in accordance with its terms; and
Innisfree hereby covenants that it will, during the Term, preserve and keep in
effect, at its own expense and not as a Hotel Expense, its corporate existence,
rights and licenses as required to carry on business in the State of Alabama.
11.3 Representations and Warranties of Owners. Each of the Owners represents
and warrants as of the
28
<PAGE> 33
date hereof and at all during the Term, as follows:
(a) if such Owner is a corporation, it is a corporation duly
authorized to do business under the laws of the State of Alabama;
(b) it has full power, authority and legal right to own real
property in the State of Alabama and to execute and deliver, and to perform and
observe the provisions of this Agreement; and
(c) this Agreement constitutes the valid and binding obligations
of the Owner enforceable in accordance with its terms.
Each Owner covenants that if such Owner is a corporation, it will, during the
term of this Agreement, preserve and keep in effect, at its own expense, its
corporate existence, rights and licenses to carry on business in the State of
Alabama.
ARTICLE XII
INSURANCE
12.1 Insurance. Innisfree will, for itself, the Owners, and the Association,
at the sole cost and expense of the Owners, as a Hotel Expense, take out and
maintain, to the extent that such insurance is available on commercially
reasonable terms, at all times during the Term:
(a) insurance in respect of the Hotel Premises and all the
Furniture, Fixtures and Equipment, including those in the Units, against loss or
damage by fire and all other reasonably insurable perils included in the broad
form extended coverage endorsement available under fire policies in an amount
not less than the actual replacement cost;
(b) comprehensive public, products and innkeepers' liability and
property damage insurance against claims for personal and bodily injury or death
and property damage occurring in or about the Hotel Premises, with a single
limit of not less than $1,000,000.00 per occurrence, wherever practicable, or
such higher amount as the Board of Directors and Innisfree may agree, acting
prudently;
(c) reasonable levels of business interruption insurance, as
determined by Innisfree, acting reasonably;
(d) worker's compensation insurance to the extent necessary to meet the
requirements of the laws of Alabama;
(e) employer's liability insurance, with a minimum liability limit
of $1,000,000;
(f) employee honesty insurance in the amount of $25,000 per
occurrence;
(g) reasonable levels of boiler and machinery insurance; and
29
<PAGE> 34
(h) such insurance coverages as are required under the Declaration
with limits no less than are required under the Declaration; provided, however,
that nothing contained herein shall require Innisfree and the Association to
maintain dual coverage for any of the policies of insurance listed above.
12.2 Parties Insured. All insurance policies provided for in Section 12.1
will, to the extent reasonably possible, include the Owners, Innisfree and the
Association as parties insured as their interests may appear. All insurance
policies referred to in Section 12.1 will provide that the same may not be
canceled or materially modified until at least ten (10) days after prior notice
to the Board of Directors and Innisfree. Innisfree and the Board of Directors
will be provided copies of all such policies.
12.3 Insurance by Innisfree. The cost of furnishing any insurance pursuant
to Section 12.1 will be borne by the Owners and charged by Innisfree to the
Owners as a Hotel Expense.
12.4 Schedules of Insurance. Innisfree will provide the Board of Directors
with copies of insurance certificates for any insurance obtained pursuant to
Section 12.1. At least once during each Operating Year, Innisfree will furnish
to the Owners a schedule of insurance, listing the number of the policies of
insurance obtained by Innisfree then outstanding and in force with respect to
the Hotel Premises, or any part thereof, the names of the companies issuing such
policies, or dates of such policies and the risks covered thereby.
ARTICLE XIII
TITLE
13.1 Title. Each Owner represents, warrants, covenants and agrees that:
(a) it has, and that throughout the Term it will maintain, full
ownership of the Owner's Unit and the Furniture, Fixtures and Equipment therein,
free and clear of all non-consensual liens and encumbrances except any Security
and any other liens or encumbrances which do not materially affect the operation
of the Hotel by Innisfree, and those hereafter approved in writing by Innisfree;
(b) the Owner will not remove, and will not permit any person
claiming under the Owner to remove, any item of FF&E in the Owner's Unit except
in accordance with this Agreement; and
(c) Innisfree, in the course of fulfilling its duties and
obligations herein, will and may peaceably and quietly possess, manage and
operate the Owner's Unit and the Furniture, Fixtures and Equipment therein
during the Term.
Each Owner will, at its own expense, undertake and prosecute any appropriate
action, judicial or otherwise, to assure peaceful and quiet possession of such
Owner's Unit by Innisfree. Each Owner further agrees that throughout the Term it
will observe and perform all terms, covenants, conditions, duties and
obligations required under any law, mortgage, or other agreement creating a lien
on the Owner's Unit and the Furniture, Fixtures and Equipment therein and pay
all property taxes and other charges levied with the property taxes.
30
<PAGE> 35
ARTICLE XIV
DEFAULT, OBLIGATIONS ON TERMINATION
14.1 Events of Default. The following will constitute events of default on
the part of Innisfree:
(a) the filing of a voluntary petition in bankruptcy or insolvency
or a petition for reorganization under any bankruptcy law by Innisfree;
(b) the consent to an involuntary petition in bankruptcy or the
failure to vacate within sixty (60) days from the date of entry thereof any
order approving an involuntary petition by Innisfree;
(c) the entering of an order, judgement, or decree by any court of
competent jurisdiction, on the application of one or more creditors,
adjudicating Innisfree a bankrupt or insolvent or approving a petition seeking
reorganization or appointing a receiver, trustee or liquidator of all or a
substantial part of such party's assets, and such order, judgment or decree will
continue unstayed and in effect for a period of one hundred twenty (120)
consecutive days; and
(d) the failure of Innisfree to perform, keep or fulfil any of its
material covenants, undertakings, obligations or conditions set forth in this
Agreement.
14.2 Remedies for Owners. If Innisfree is in default pursuant to Section
14.1, the Board of Directors may give to Innisfree notice of its intention to
call a meeting after the expiration of a period of fifteen (15) days from the
date of such notice of the Owners to terminate the appointment of Innisfree
under this Agreement. Notwithstanding the foregoing, with respect to events of
default referred to in Sections 14.1(a) and (d), upon receipt of such notice,
Innisfree, promptly and with all due diligence, will proceed to cure the default
referred to in Sections 14.1(a) and 14.1(d), or if such default is not
susceptible of being cured within a fifteen (15) day period, Innisfree will take
and continue action to cure such default with all due diligence until the same
is cured, such additional period not to exceed ninety (90) days from such
notice. During such ninety (90) day period, the Board of Directors shall not
terminate the appointment of Innisfree. Once a cure has been effected the notice
will be of no effect. If, following the expiration of such period such default
has not been cured, the Owners may, by Special Resolution, terminate the
appointment of Innisfree pursuant to this Agreement. The remedies granted in
this Section 14.2 will not be in substitution for, but will be in addition to
any rights and remedies otherwise available for breach of contract or otherwise.
14.3 Termination by Innisfree.
(a) Innisfree may terminate its appointment as manager under this
Agreement at any time upon sixty (60) days written notice to the Owners and the
Board of Directors if the Owners fail to make or to authorize Innisfree to make
(at the sole cost and expense of the Owners) Capital Expenditures without which
the Hotel cannot be operated substantially in accordance with the standards of
the Competitive Set (and Innisfree hereby acknowledges and agrees that as of the
Commencement Date the capital improvements within the Hotel Premises are
sufficient for the Hotel to be operated substantially in accordance with the
standards of the Competitive Set). Any termination by Innisfree pursuant to this
Section 14.3 is without prejudice to any other rights that Innisfree might
otherwise have against the Owners or any of them.
31
<PAGE> 36
(b) Provided that Innisfree shall have maintained the insurance
required by this Agreement, in the event that (i) the Hotel shall be totally
destroyed by fire or other casualty, or (ii) any building constituting a portion
of the Hotel is damaged by fire or other casualty to the extent of fifty percent
(50%) or more of the replacement value of all building improvements Innisfree
shall, at its election, terminate this Agreement by written notice to the Owners
within sixty (60) days following the occurrence of such casualty and pay or
assign all of the insurance proceeds to the Association.
14.4 Condemnation Proceedings.
(a) If the whole of the Hotel shall be taken for any public or
quasi-public use under any statute or by right of eminent domain, or by private
purchase in lieu thereof, then this Agreement shall automatically terminate as
of the date that title shall be taken with respect to the Hotel. If any part of
the Hotel shall be so taken as to substantially impair the operation of the
Hotel to the extent that the remaining premises would not be economically or
feasibly usable by Innisfree, then Innisfree shall have the right to terminate
this Agreement on thirty (30) days written notice to the Owners given within
ninety (90) days after the date of such taking.
(b) In the event of a partial taking, if this Agreement is not
terminated by Innisfree pursuant to subparagraph (a) above, then the entire
condemnation award shall be made available to Innisfree, and Innisfree shall
apply the total award to the restoration and reconstruction of the Hotel.
14.5 Remedies for Innisfree. The Owners acknowledge and agree that if any
Owner or Owners are in breach of any of their duties or obligations under this
Agreement Innisfree may seek an injunction or the specific performance by such
Owner or Owners of such duties or obligations, instead of or in addition to,
seeking damages against such Owner or Owners.
14.6 Obligations on Termination. Upon termination or expiration of the
appointment of Innisfree under this Agreement, the following will apply:
(a) Innisfree and the Owners will cooperate with respect to all
matters relating to the transition of the Management of the Hotel;
(b) all fees and payments payable to Innisfree in accordance with
this Agreement, other than those referred to in Subsection 14.6(c), will be paid
to Innisfree when due, provided that Innisfree will not be entitled to any Base
Fee, Administrative Fee, Incentive Fee, Innisfree Marketing and Sales Expenses
or Innisfree Recoveries for any period following such termination or expiry;
(c) all fees and payments due to Innisfree in accordance with this
Agreement which are computed on an annual or other periodic basis will be
annualized, prorated and paid within thirty (30) days after termination of the
appointment of Innisfree under this Agreement, including all deferred, accrued
and unpaid fees;
(d) Innisfree will peacefully vacate the Hotel Premises and
surrender the management of the Hotel to or to the order of the Owners; and
32
<PAGE> 37
(e) Innisfree will deliver to the Owners all the Owners' books and
records respecting the Hotel in the custody and control of Innisfree, and assign
and transfer to or to the order of the Owners all of Innisfree's right, title
and interest in and to all licenses and permits, if any, used by Innisfree in
the operation of the Hotel, provided that if Innisfree has expended any of its
own funds in the acquisition of such licenses or permits, the Owners will
reimburse Innisfree therefor if the Owners request assignment and transfer of
such licenses and permits.
ARTICLE XV
OWNER-SELLER, UNITS, DISPOSITIONS
15.1 Initial Agreement by Owner-Seller. The parties acknowledge and agree
that this Agreement is initially entered into with the Owner-Seller, as the
owner of all of the Units. The Owner-Seller entered into this Agreement on
behalf of all subsequent owners of the Units and each such subsequent owner of
a Unit will be bound by the terms and conditions of this Agreement insofar as
this Agreement relates to such Owner's Unit as though such Owner was a signatory
hereto. This Agreement will run with each of the Units and bind the Owners from
time to time of all of the Units and all of the Units will continue to be in the
Rental Pool in accordance with the terms and conditions of this Agreement.
Forthwith upon the completion of the sale of each unit from the Owner-Seller,
Owner-Seller will provide to Innisfree the Assignment and Assumption Agreement
in the form of Schedule A, duly executed by the Owner-Seller and the purchaser.
15.2 Limitation of Owners' Liability. Notwithstanding anything contained in
this Agreement, the duties, obligations and liabilities of each Owner pursuant
to this Agreement will be limited to:
(a) with respect to the duties and obligations relating directly
to the Units, to such Owner's duties and obligations arising directly in respect
of any Unit owned by such Owner; and
(b) with respect to duties and obligations of the Owners
collectively under this Agreement, to such Owner's proportionate share of such
duties and obligations, as calculated in accordance with the Percentage
Interest, and without limiting the generality of the foregoing.
The duties and obligations of the Owners are several only and not joint duties
or obligations. Innisfree will not look to any Owner for the payment of any
amount in connection with this Agreement except as is expressly set out herein.
No Owner will be liable for any act or omission of any other Owner.
15.3 Sale of Unit by any Owner. The Owners and Innisfree agree that if at
any time any Owner wishes to sell, lease or otherwise directly or indirectly
dispose of its Unit or any interest therein to any person (in this Section 15.3
called a "Transferee") (other than by way of financing to any Security Holder):
(a) prior to entering into any contract or agreement with any
Transferee, the Owner will notify the proposed Transferee of the existence and
substance of this Agreement and the fact that the ownership and use of the Unit
are subject to the rights of Innisfree and any bookings of the Unit by the
Selling Owner pursuant to this Agreement and the Declaration, notify the
proposed Transferee of any bookings of the Unit by the Owner pursuant to Article
X and provide the proposed Transferee with a true copy of this Agreement;
33
<PAGE> 38
(b) the Owner will not directly or indirectly sell, lease or
otherwise directly or indirectly dispose of the Unit or any interest therein
unless prior to the completion of such transaction the proposed Transferee
covenants pursuant to an agreement in writing in favor of Innisfree, in the form
and content of Schedule A (modified to change the name of the Owner-Seller to
the name of the vendor of such Unit), to fully assume and be bound by this
Agreement insofar as it relates to such Unit, and Innisfree will provide the
Owner and the Transferee with copies of such agreement, duly executed by
Innisfree, as soon as reasonably possible thereafter;
(c) upon written request from the Owner, Innisfree will provide
any prospective Transferee therein with details of any bookings of the Unit by
the Owner pursuant to Article X;
(d) the Owner or the Transferee will notify Innisfree of the
completion of the sale, lease or other disposition of the Unit and provide
Innisfree with reasonable evidence thereof, together with the assignment and
assumption agreement in the form of Schedule A, duly executed by the Owner and
the Transferee;
(e) Innisfree will not be required to make any adjustments as
between the Owner and any Transferee and Innisfree will be deemed to have fully
discharged its obligations hereunder if Innisfree pays the Unit Revenue Share
payable to such Owner in accordance with Section 6.4 to or to the order of the
person who was, according to the records of Innisfree, the registered owner of
the Unit on the days such Unit Revenue Share is payable to such Owner in
accordance with Section 6.4; and
(f) subject to Innisfree's approval, acting reasonably, the
Transferee may upon not less than thirty (30) days' notice to Innisfree,
reschedule the use by the Transferee pursuant to Article X.
15.4 Assumption and Release. Upon the execution and delivery of the
assignment and assumption agreement in the form of Schedule A by the vendor
(including the Owner-Seller as vendor) and purchaser of any Unit and the
transfer of title of such Unit to the purchaser thereof:
(a) the vendor of such Unit will be released from its duties and
obligations under this Agreement insofar as such duties and obligations relate
to such Unit for the period from and including the date of such transfer of
title, provided that the vendor of such Unit will not be released from any of
its duties or obligations under this Agreement in respect of any other Unit
owned by such vendor; and
(b) the purchaser of such Unit will be responsible for all duties
and obligations under this Agreement insofar as such duties and obligations
relate to such Unit for the period from and including the date of such transfer
of title.
15.5 Financing of Units. If title to any Unit is at any time to be subject
to any mortgage, assignment of rents or other security registered or to be
registered by any Owner against title to its Unit, including any renewals,
modifications, replacements or extensions thereof (collectively called the
"Security"), then:
(a) prior to granting any Security, the Owner of such Unit will
notify the proposed holder of such Security (the "Security Holder") of the
existence and substance of this Agreement and the fact that the ownership and
use of the Unit are subject to the rights of Innisfree and the Hotel Guests
pursuant to this Agreement and the Owner will provide the Security Holder with a
true copy of this Agreement; and
34
<PAGE> 39
(b) if the Security Holder in respect of such Security does not
agree to the priority of the Declaration and this Agreement over the Security,
the Declaration and this Agreement will be subordinate to such Security and
Innisfree will, upon request of the Owner, execute any instrument of
postponement or in confirmation of the subordination of the Declaration and this
Agreement pursuant to this Section 15.5(b) and in such case the Owner will use
its best efforts to obtain a non-disturbance agreement in the form of Schedule B
from such Security Holder.
15.6 Estoppel Certificates. Innisfree will, from time to time, upon not less
than ten (10) days' prior notice by any Owner or any Security Holder, execute
and deliver to such Owner or Security Holder, a certificate in writing
certifying that this Agreement is unmodified and in force (or, if there have
been modifications, that the same is in force as modified and stating the
modifications), stating such facts as to this Agreement as such Owner or
Security Holder reasonably requires, and stating whether or not to the best
knowledge of the signer of such certificate, there exists any default in the
performance of any duty or obligation contained in this Agreement, and, if so,
specifying each such default of which the signer may have knowledge. Any
certificate so delivered may be relied upon by such Owner and by any such
Security Holder or prospective Security Holder. Innisfree, upon similar notice,
will be entitled to a similar certificate from each Owner.
15.7 Attornment by Innisfree. Innisfree agrees to attorn to and become the
manager, in accordance with this Agreement, of any purchaser, mortgagee or
trustee who becomes entitled to possession of any Unit in accordance with any
requirements set out in this Article XV.
ARTICLE XVI
ASSIGNMENT BY INNISFREE
16.1 Assignment by Innisfree. Innisfree has the right to assign its rights
under this Agreement as security to its bankers, provided prior thereto the
assignee agrees to be liable hereunder for the obligations of Innisfree to the
Owners upon any enforcement by the assignee of its security comprising
Innisfree's rights under this Agreement. Innisfree has the further right, so
long as it is not then in default under this Agreement, to assign its rights
under this Agreement to an Affiliate of Innisfree; or to any successor assignee
of Innisfree which may result from any merger, transfer, consolidation or
reorganization, provided in any such case that such assignee enjoys the benefits
of the organization of Innisfree and that Innisfree will continue to be liable
for its obligations hereunder and following any such assignment, Innisfree will
deliver to the Board of Directors an agreement pursuant to which such assignee
agrees to assume and be bound by all of the provision of this Agreement on terms
and conditions determined by Innisfree, acting reasonably. Except as provided,
Innisfree will not directly or indirectly assign, transfer, convey or otherwise
dispose of this Agreement, any interest in this Agreement or any of its rights
or duties and obligations under this Agreement without the Owners' prior
approval by Special Resolution.
35
<PAGE> 40
ARTICLE XVII
ARBITRATION
17.1 Arbitration. Any dispute, controversy or claim of any kind or nature
(other than pursuant to Section 4.6 which may arise between the parties, whether
arising out of past, present or future dealings between the parties, shall be
settled by arbitration in accordance with this Section 17.1 and such arbitration
shall be conducted as follows:
(a) The Federal Arbitration Act and the Commercial Rules of the
American Arbitration Association (the "Rules") will apply to the arbitration,
except as otherwise provided in this Section 17.1.
(b) Such matter will be determined by a single arbitrator agreed
upon by the parties, or, failing agreement on the arbitrator by the date which
is ten (10) days after the party submitting the matter to arbitration has
notified the other party that it wishes the matter to be determined by
arbitration, the arbitrator will be appointed in accordance with the Rules, upon
request by either party at any time after such date.
(c) The arbitrator will be an experienced hotel consultant or such
other person as is approved by Innisfree and the Board of Directors.
(d) The arbitrator will make this determination on the basis of
written submissions and affidavits (including expert evidence) submitted by the
parties, without any hearing, unless the arbitrator determines that a hearing is
necessary, and the arbitrator may require the parties to make further and other
written submissions or provide further and other affidavits. Each party will
receive a copy of each such submission and affidavit.
(e) The arbitrator's decision will be final and binding on the
parties and any judgment upon the award by the arbitrator may be entered in any
court having jurisdiction thereof.
(f) The parties will share all costs of the arbitrator equally,
unless otherwise determined by the arbitrator.
(g) The parties acknowledge and agree that they have provided for
arbitration to determine the matters set out in this Section 17.1 so as to
promote the efficient, expeditious and inexpensive resolution of the issue. The
parties agree to act at all times so as to facilitate, and not frustrate nor
delay, such efficient, expeditious and inexpensive resolution of the issue. The
arbitrator is authorized and directed to make orders, on his initiative or upon
application of either party, to ensure that the arbitration proceeds in an
efficient, expeditious and inexpensive manner, and, in particular, to enforce
strictly the time limits provided for in the Rules or as set by order of the
arbitrator, unless the arbitrator considers it inappropriate to do so. The
parties acknowledge and agree that it is their wish that the issue be determined
within thirty (30) days after appointment of the arbitrator, subject to an order
of the arbitrator extending the date.
36
<PAGE> 41
ARTICLE XVIII
MISCELLANEOUS
18.1 Third Party Beneficiary. The Association is a third party beneficiary
of this Agreement.
18.2 Cooperation. Subject to the terms and conditions set out in this
Agreement, the parties will at all times during the Term act in good faith,
cooperate and act reasonably in respect of all matters within the scope of this
Agreement.
18.3 United States Funds. Unless otherwise noted, all amounts payable by
either party to the other hereunder will be paid in funds of the United States.
18.4 No Waiver of Breach. No failure by Innisfree or the Owners to insist
upon the strict performance of any covenant, agreement, term or condition of
this Agreement, or to exercise any right or remedy consequent upon a breach,
will constitute a waiver of any such breach or any subsequent breach of such
Covenant, agreement, term or condition. No waiver of any breach will affect or
alter this Agreement, but each and every Covenant, agreement, term and condition
of this Agreement will continue in full force and effect with respect to any
other then existing or subsequent breach.
18.5 Severability of Provisions. If any provision of this Agreement or the
application thereof to any person or circumstance will, to any extent, be
invalid or unenforceable, the remainder of this Agreement and the application of
such provision to persons or circumstances other than those as to which it is
held invalid or unenforceable, as the case may be, will not be affected thereby,
and each provision of this Agreement will be valid and enforceable to the
fullest extent permitted by law.
18.6 Notices. All notices, requests, approvals, demands and other
communications required or permitted to be given under this Agreement will be in
writing and addressed to the parties as follows:
(a) if to Innisfree: INNISFREE HOTELS, INC.
113 Baybridge Drive
Gulf Breeze, Florida 32561
ATTENTION: President
Fax No.: (850) 934-3896
and:
(b) if to the Owners:
(1) in the case of the Owner-Seller: SOUTHWIND DEVELOPMENT
COMPANY, L.L.C.
113 Baybridge Drive
Gulf Breeze, Florida 32561
Attention: President
Fax No.: (850) 934-3896
(2) in the case of any other Owner, to the address of such Owner
as notified by such Owner to Innisfree,
37
<PAGE> 42
or at such other address as the party to whom the notice is sent will have
designated in accordance with the provision of this Section 18.6. All notices
will be delivered personally, transmitted by fax or mailed by postage prepaid
mail (provided that in the event of a disruption in mail services, notices will
be delivered personally or transmitted by fax). Notices will be deemed to be
received on the date of delivery or transmittal thereof if delivered personally
or sent by fax; or on the fifth Business Day after the mailing thereof, if sent
by mail.
18.7 Successors and Assigns. Subject to Section 15.4, this Agreement will
enure to the benefit of and will be binding upon the heirs, executors,
successors, legal representatives and permitted assigns of the parties.
18.8 Counterparts. This Agreement may be executed in several counterparts,
each of which will be an original, but all of which will constitute but one and
the same instrument.
18.9 Waiver. No provision of this Agreement may be changed orally, but only
by an instrument in writing signed by the party against which the enforcement of
the change is sought.
18.10 Independent Contractor; No Partnership or Joint Venture. For all
purposes of this Agreement, Innisfree and its affiliates shall be and act as
independent contractors. Nothing contained in this Agreement will constitute or
be deemed to create a partnership or joint venture between the Owners or the
Association and Innisfree or its Affiliates.
18.11 Approvals. Except as expressly set out herein, whenever any party
hereto is requested to give its approval to any matter, such approval will not
be withheld or delayed unreasonably. If a party will desire the approval of the
other party hereto to any matter, such party will give notice to such other
party that it requests such approval, specifying in such notice the matter (in
reasonable detail) as to which such approval is requested.
18.12 Force Majeure. If a party is prevented or delayed from performing any
of the obligations on its part to be performed hereunder by reason of Act of
God, strike, labor dispute, lockout, threat of imminent strike, fire, flood,
hurricane or other tropical storm, tornado, interruption or delay in
transportation, war, insurrection or mob violence, requirement or regulation of
government, or statute, unavoidable casualties, shortage of labor, equipment or
materials, economic or market conditions, plant breakdown or failure of
operation equipment or any disabling cause (other than lack of funds), without
regard to the foregoing enumeration, beyond the control of either party or which
cannot be overcome by the means normally employed in performance, then and in
every such event, any such prevention or delay will not be deemed to be a breach
of this Agreement but performance of any of the said obligations or requirements
will be suspended during such period or disability and the period of all such
delays resulting from any such thing required or permitted by either party to be
done is to be done hereunder, it being understood and agreed that the time
within which anything is to be done, or made pursuant hereto will be extended by
the total period of all such delays.
18.13 Interpretation. For all purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires:
38
<PAGE> 43
(a) "this Agreement" means this Hotel Operating and Rental Pool
Agreement, as it may from time to time be supplemented or amended by one or more
agreements between the parties in accordance with the terms hereof;
(b) except where otherwise specifically stated, all references in
this Agreement to designated "Articles", "sections" and other subdivisions are
to be designated Articles, sections and other subdivisions of this Agreement;
(c) the words "herein", "hereof" and "hereunder" and other words
of similar import refer to this Agreement as a whole or not to any particular
Article, section or other subdivision;
(d) the headings are for convenience of reference only and do not
form a part of this Agreement and they will not be used to interpret, define or
limit the scope, extent or intent of this Agreement or any provision hereof;
(e) the word "including", when following any general statement,
term or matter, will not be construed to limit such general statement, term or
matter to the specific items or matters set forth immediately following such
word or to similar items or matters, whether or not non-limiting language (such
as "without limitation", "without limiting the generality of the foregoing", or
"but not limited to" or words of similar import) is used with reference thereto,
but rather will be deemed to refer to all other items or matters that could
reasonably fall within the broadest possible scope of such general statement,
term or matter;
(f) the masculine gender shall be deemed to include the feminine
and vice versa, the neuter gender shall be deemed to include the masculine or
feminine gender and the singular shall include the plural, and vice versa.
18.14 Applicable Law. This Agreement will be governed by and construed and
enforced in accordance with the laws of the State of Alabama (without giving
effect to the principles thereof relating to conflicts of law) which will be
deemed to be the proper law hereof, and, subject to Article XVII, the courts of
the State of Alabama or of the United States of America for the Southern
District of Alabama will have exclusive jurisdiction in connection with all
matters under this Agreement and the interpretation and enforceability hereof.
18.15 Statutes. Any reference in this Agreement to any statute means such
statute and any statute or law enacted to supersede or replace such statute.
39
<PAGE> 44
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
INNISFREE HOTELS, INC.
By:
-----------------------------------------
Its:
----------------------------------------
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
By:
-----------------------------------------
Its:
----------------------------------------
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
On behalf of the Owners
By:
-----------------------------------------
Its:
----------------------------------------
40
<PAGE> 45
SCHEDULE A
ASSIGNMENT AND ASSUMPTION OF HOTEL OPERATING
AND RENTAL POOL AGREEMENT
"INNISFREE" INNISFREE HOTELS, INC.
113 Baybridge Drive
Gulf Breeze, Florida 32561
Fax: (850) 934-3896
"SELLER" Name:
-----------------------------
Address:
----------------------------------
----------------------------------
----------------------------------
Phone:
----------------------------
Fax:
------------------------------
"PURCHASER" Name:
-----------------------------
Address:
----------------------------------
----------------------------------
----------------------------------
Phone:
----------------------------
Fax:
------------------------------
Name:
-----------------------------
Address:
----------------------------------
----------------------------------
----------------------------------
Phone:
----------------------------
Fax:
------------------------------
"UNIT" Beachside All-Suites Hotel, a Condominium Unit
"SALE DATE" ________________, 1999
1
<PAGE> 46
WHEREAS:
A. Seller is the owner of the Unit.
B. Seller and Purchaser have entered into a contract for the sale
of the Unit from Seller to Purchaser on the Sale Date.
C. Seller and Innisfree are parties to a Hotel Operating and
Rental Pool Agreement dated as of _________________________, 1999, among
Innisfree, Southwind Development Company, L.L.C., and the Owners of the Units
(as defined therein), as amended by the amendments, if any, described in Section
5 below (collectively, the "RENTAL POOL AGREEMENT") in respect of the Beachside
All- Suites Hotel, a Condominium.
D. The parties are required to enter into this Agreement in
accordance with the Rental Pool Agreement.
NOW, THEREFORE, in consideration of the transfer of the Unit from
Seller to Purchaser on the Sale date, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
all of the parties, the parties agree as follows:
1. Assignment to Purchaser. Effective as of the Sale Date, Seller
hereby absolutely assigns, transfers and conveys, effective from and including
the Sale Date, all of Seller's right, title and interest in and to the Rental
Pool Agreement insofar as they arise from ownership of and related to the Unit,
and all rights and benefits to be derived thereunder (including any amounts
payable to Seller thereunder) insofar as such rights and benefits arise from
ownership of and related to the Unit.
2. Direction to Pay. Seller and Purchaser hereby direct Innisfree
to pay any amounts payable under the Rental Pool Agreement in respect to the
Unit from and including the Sale Date to Purchaser at the address set out above.
3. Assumption and Indemnity by Purchaser. Purchaser hereby
assumes, from and including the Sale Date, all of the duties and obligations of
Seller under the Rental Pool Agreement insofar as such duties and obligations
arise from ownership of and relate to the Unit, and covenants and agrees with
Seller and Innisfree to perform and observe all of such duties and obligations
from and including the Sale Date, and ratifies the Rental Pool Agreement in all
respects.
4. Other Units Excluded. This Agreement relates only to the Unit
and not to any other units in the Development.
5. Amendments to Rental Management Agreement. Seller represents
to Purchaser that the Rental Pool Agreement has not been amended except as
follows [none if not completed]:
6. Miscellaneous. If either Seller or Purchaser is comprised of
more than one person, the covenants and agreements of Seller or Purchaser, as
the case may be, are joint and several covenants and agreements. This Agreement
will be binding upon and inure to the benefit of the heirs, executors,
successors, legal and personal representatives, and assigns of the parties, as
applicable.
7. Purchaser's Acknowledgment. Purchaser acknowledges that
Purchaser has received a copy
2
<PAGE> 47
of and has been given an opportunity to read the Rental Pool Agreement
(including any amendments set out in Section 5 above).
Dated:______________, 1999.
SELLER:
-------------------------------------------,
a(n)
----------------------------------------
By:
-----------------------------------------
Name:
---------------------------------------
Its:
----------------------------------------
PURCHASER:
-------------------------------------------,
a(n)
----------------------------------------
By:
-----------------------------------------
Name:
---------------------------------------
Its:
----------------------------------------
3
<PAGE> 48
CONSENT OF INNISFREE
Innisfree hereby agrees that Seller is hereby released from all of
Seller's duties and obligations under the Rental Pool Agreement arising from and
including the Sale Date, insofar as such duties and obligations arise from
ownership of or relate to the Unit.
Dated:______________, 1999.
Innisfree Hotels, Inc., an Alabama corporation
By:
--------------------------------------------
Name:
------------------------------------------
Its:
-------------------------------------------
4
<PAGE> 49
SCHEDULE B
BEACHSIDE ALL-SUITES HOTEL, A CONDOMINIUM
USE OF UNITS BY OWNERS
1. DEFINITIONS. For the purposes of this Schedule B:
(a) capitalized terms used in this Schedule B and not defined
herein have the meanings ascribed to such terms in the Hotel
Operating and Rental Pool Agreement;
(b) "Day" means any period of 24 consecutive hours, commencing at
2:00 p.m. on any day and ending at 2:00 p.m. on the
immediately following day;
(c) "Hotel Operating and Rental Pool Agreement" means the hotel
operating and rental pool agreement to which this Schedule B
is attached.
(d) "Hotel Operator" means the entity appointed by the Unit Owners
under the Hotel Operating and Rental Pool Agreement as the
Unit Owners' exclusive manager to manage the Hotel and the
Rental Pool.
(e) "Public" means all persons other than the Unit Owner;
(f) "Registered Owner" means the person shown in the records of
the Judge of Probate of Baldwin County, Alabama as owner in
fee simple of the Unit;
(g) "Unit Owner" means the Registered Owner and the spouse,
children and parents of such Registered Owner and the parents
of the Registered Owner's spouse; and where there is more than
one Registered Owner, all the Registered Owners and their
spouses, children, parents and the parents of their spouses
will together constitute the "Unit Owner" for the Unit and,
where the Registered Owner is a corporation or corporations,
all directors, officers, shareholders and employees and the
spouses, children and parents of corporations constitute the
"Unit Owner" for the Unit; and "Unit Owner" will include any
person permitted by any of the foregoing to Use the Unit free
of charge;
(h) "Use" includes the purpose to which the Unit is put, and
includes reside, sleep, inhabit, or otherwise occupy;
(i) "Year" means a calendar year.
2. FOUR MONTH ADVANCE RESERVATIONS.
(a) A Unit Owner may reserve and Use its Unit for up to a maximum
of 14 days per Year provided that the Registered Owner (or any
other person permitted by the Hotel Operator, in its sole
discretion, to reserve the use of the Unit on behalf of the
Registered Owner) first reserves the Use of the Unit by a
notice in writing to the Hotel Operator at least four months
prior to the commencement of the period in which the Unit
Owner wishes to Use the Unit. If the Unit is not reserved for
use by the Public, the Unit owner may reserve the use of its
Unit on less than four months notice on a "space available
basis" and in the discretion of the Hotel operator.
1
<PAGE> 50
(b) If a Unit is reserved for a stay which commences at or after
2:00 p.m. on a Friday or a Saturday, the Unit must be reserved
for Use for a minimum of 2 Days. A Unit Owner may Use the Unit
no more than 4 times per Year with respect to 2 or 3 Day stays
that commence at or after 2:00 p.m. on a Friday or a Saturday.
(c) If the Unit Owner (or any other person permitted by the Hotel
Operator, in its sole discretion, to reserve the Use of the
Unit on behalf of the Registered Owner) reserves the Use of
the Unit pursuant to this Paragraph 2, the Unit Owner shall be
entitled to Use such Unit during the period or periods so
reserved regardless of whether the Hotel Operator has accepted
a reservation from the Public for the Use of the Unit for the
period or periods reserved by the Registered Owner and Use
shall be in accordance with the applicable provisions of the
Hotel Operating and Rental Pool Agreement, including Section
10.2 of the Hotel Operating and Rental Pool Agreement
regarding payment for any services used by the Unit Owner and
payment of any restocking/cleaning charges. For purposes of
determining whether the Registered Owner participates in any
rental pool provided for in the Hotel Operating and Rental
Pool Agreement (or as operated by the Association, if no Hotel
Operating and Rental Pool Agreement is in effect), a
Registered Owner will be deemed to have Used the Unit during
the period or periods so reserved, whether or not the Unit
Owner actually Uses or occupies the Unit during such period or
periods unless the Unit is available for rental to the Public
and at least 30 Days prior to the Unit Owner's scheduled Use
of the Unit the Unit Owner cancels such reservation, with the
approval of the Hotel Operator, acting reasonably.
(d) If the Unit Owner does not Use the Unit for the full 14 Days
permitted to be Used by the Unit Owner pursuant to this
Paragraph 2 in any Year, the Unit Owner will not be entitled
to accumulate or otherwise use the unused Days in any future
Year.
(e) The Unit may only be reserved and Used for a total of 14 Days
per Year pursuant to this Paragraph 2, regardless of the
number of Registered Owners of the Unit or Unit Owners during
such Year.
3. USE RESTRICTIONS. Use of the Units shall be subject to the following
restrictions:
(a) The Units must be used only for commercial rental by the hotel
operator to the public for tourist, visitor and transient
traveller accommodation.
(b) An Owner may not individually lease his Unit or directly or
indirectly charge rent or any form of consideration for the
use of the Owner's Unit except in accordance with the terms of
the Hotel Operating and Rental Pool Agreement.
(c) The use of the Units is subject to the requirements of, among
other documents, the Hotel Operating and Rental Pool Agreement
and the Declaration.
(d) The rights of an Owner to make use of the common elements at
the hotel are limited to those times when the Owner has the
right to occupy his Unit in accordance with the terms of the
Hotel Operating and Rental Pool Agreement.
(e) The hotel operator is authorized to designate certain areas of
the hotel for the exclusive
2
<PAGE> 51
use of the hotel operator and the Owners may not interfere
with that exclusive use.
(f) A Unit Owner is guaranteed use of his own Unit for a maximum
of 14 days in any year provided at least four months advance
notice is given.
(g) No animals are allowed in the Units or in other areas of the
hotel except for physical impairment assistive animals to the
extent that they are required by persons at the hotel.
(h) Except for signs incidental to the operation of the hotel, and
any other advertising signs that Declarant elects to post in
connection with the development of the hotel, no signs are
permitted on the exterior of any Unit or any other portion of
the hotel without the prior written approval of the Board of
Directors.
(i) No owner may remove, replace, substitute, alter, repair or add
to any part of the hotel (including the owner's Unit) or any
of the furniture, fixtures or equipment located in and around
the hotel (including in any Unit).
4. Subject to the Use by the Unit Owners pursuant to this Schedule B, the
Unit will be available at all times for rental to the Public; the Hotel
Operator may accept reservations from the Public for the Use of the
Unit for any future Day or Days, unless the Registered Owner has
already reserved that Day or those Days pursuant to paragraph 2 hereof.
THERE ARE TAX CONSEQUENCES TO A REGISTERED OWNER (SOME OF WHICH MAY BE
ADVERSE) THAT RESULT FROM THE USE OF A UNIT BY A UNIT OWNER. THE
REGISTERED OWNER SHOULD CONSULT ITS TAX ADVISOR REGARDING HOW THE USE
OF THE UNIT MAY AFFECT THE REGISTERED OWNER'S TAX SITUATION.
THE REGISTERED OWNER IS RESPONSIBLE FOR MONITORING THE IMPACT ANY USE OF ITS
UNIT MAY HAVE ON THE REGISTERED OWNER'S TAXES. NEITHER SOUTHWIND DEVELOPMENT
COMPANY, L.L.C. NOR THE HOTEL OPERATOR SHALL HAVE ANY LIABILITY OR
RESPONSIBILITY FOR THE TAX CONSEQUENCES TO A REGISTERED OWNER RESULTING FROM THE
USE OF THE REGISTERED UNIT OWNER BY A UNIT OWNER.
3
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITOR'S CONSENT
I consent to the inclusion in the Registration Statement on Form S-11
of Southwind Development Company, L.L.C. of our March 5, 1999 compilation and
our report dated March 5, 1999 on our audit of the balance sheet of Southwind
Development Company, L.L.C. as of December 31, 1998. I also consent to the
reference to my Firm under the caption "Experts".
RANDALL L. SANSOM CPAs
By: /s/ Randall L. Sansom
-----------------------
Randall L. Sansom
Gulf Breeze, Florida
March 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET DATED DECEMBER 31, 1998 OF SOUTHWIND DEVELOPMENT COMPANY, L.L.C. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,168
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2,684,614
<CURRENT-ASSETS> 2,697,492
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,699,058
<CURRENT-LIABILITIES> 2,698,557
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,699,058
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 499
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
THE ITEMS SET FORTH IN THIS FINANCIAL DATA SCHEDULE ARE QUALIFIED IN THEIR
ENTIRETY BY THE NOTES TO THE BALANCE SHEET OF SOUTHWIND DEVELOPMENT COMPANY,
L.L.C. DATED DECEMBER 31, 1998 AND SHOWN ON PAGES FS-5 THROUGH FS-7 OF THE
REGISTRATION STATEMENT.
</FN>
</TABLE>
