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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION OCTOBER 18, 1999
REGISTRATION NO. 333-74447
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
(Exact Name of Registrant as specified in its Governing Instruments)
26032 HIGHWAY 182 EAST
ORANGE BEACH, ALABAMA 36561
(334) 981-3973
(Address of Principal Executive Offices)
JULIAN B. MACQUEEN
PRESIDENT
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
26032 HIGHWAY 182 EAST
ORANGE BEACH, ALABAMA 36561
(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. [ ]
CALCULATION OF REGISTRATION FEE (1)
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TITLE OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
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Condominium Units coupled with mandatory rental pool $12,653,700 $3,524(2)
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(1) Calculated pursuant to Rule 457(o) of the Rules and Regulations under the
Securities Act of 1933.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED OCTOBER 18, 1999
83 EXTENDED-STAY CONDOMINIUM HOTEL INVESTMENT UNITS IN
BEACHSIDE SUITES HOTEL
OFFERED BY SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
- Units are priced between $149,900 and $169,900
- A reserve of approximately $625 is due at closing
SEE "RISK FACTORS" ON PAGE 9 FOR A DISCUSSION OF MATERIAL FACTORS RELEVANT TO
THE PURCHASE OF UNITS INCLUDING:
- YOU ARE SUBJECT TO ASSESSMENTS FOR OPERATING AND CAPITAL SHORTFALLS IN
THE OPERATION OF THE HOTEL.
- IF YOU DO NOT PAY ASSESSMENTS YOU ARE SUBJECT TO AN ADVERSE ARBITRATION
AWARD WHICH MAY RESULT IN A LIEN AGAINST YOUR PERSONAL ASSETS.
- YOU MAY HAVE UNLIMITED PERSONAL LIABILITY FOR TORT AND CONTRACT CLAIMS.
- YOU WILL NOT HAVE THE USE OF FUNDS USED FOR A DOWN-PAYMENT FOR A
SIGNIFICANT AMOUNT OF TIME BECAUSE YOUR FUNDS WILL BE HELD IN ESCROW
UNTIL THE HOTEL IS COMPLETE.
- YOU MAY NOT BE ABLE TO RESELL YOUR UNIT QUICKLY BECAUSE UNITS CANNOT BE
SOLD BY REAL ESTATE AGENTS WITHOUT THE SUPERVISION OF A SECURITIES
BROKER.
- YOU MAY SUFFER A COMPLETE LOSS OF YOUR INVESTMENT IF ALL OWNERS DO NOT
PAY SHORTFALLS.
- YOU ARE LIABLE FOR PROPERTY TAXES, CONDOMINIUM FEES AND EXPENSES,
RESERVES FOR OPERATIONS AND REPAYMENT OF ADVANCES, PLUS INTEREST, MADE BY
THE HOTEL OPERATOR FOR OPERATION OF THE HOTEL.
- INNISFREE RECEIVES A FEE FOR MANAGING THE HOTEL AND MAY HAVE A CONFLICT
OF INTEREST WITH YOU IF IT IS ECONOMICALLY ADVANTAGEOUS TO YOU FOR THE
HOTEL TO CEASE OPERATIONS.
- INNISFREE OPERATES OTHER HOTELS THAT COMPETE DIRECTLY WITH THE HOTEL FOR
RENTAL ACCOMMODATIONS.
- SOUTHWIND MAY NOT HAVE SUFFICIENT CAPITAL TO PAY ASSESSMENTS ON ANY UNITS
IT OWNS.
- THERE MAY NOT BE A PUBLIC MARKET FOR THE UNITS AND THEIR LIQUIDITY MAY
THEREFORE BE LIMITED.
- ALL DISPUTES WITH THE HOTEL OPERATOR ARE SUBJECT TO ARBITRATION.
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We are offering the Units on a best effort basis. We must sell 75 Units,
the minimum number of securities offered at the prices specified in Annex A
hereto if any are sold, within twelve months from the date of this Prospectus.
We are required to use only our best efforts to sell 83 Units, the maximum
number of securities offered. We must receive funds in the aggregate of
approximately $2,272,900 within fourteen months from the date of this
Prospectus, or your deposits will be promptly refunded to you, together with
interest. The offering will terminate no later than twenty-four months from the
date of this Prospectus.
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.
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.
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[DESCRIPTION OF INSIDE FRONT COVER ARTWORK]
[BEACHSIDE SUITES HOTEL LOGO]
[ARCHITECTURAL DRAWING OF HOTEL]
THE HOTEL HAS NOT BEEN BUILT
This is an architect's drawing of the front of the Hotel. The seller reserves
the right to make modifications and changes.
[ACTUAL AERIAL PHOTOGRAPH OF HOTEL SITE]
This is an aerial view of the hotel site from the north. The building currently
occupying the hotel site, indicated by the arrow above, will be demolished prior
to commencement of construction.
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TYPICAL SUITE FLOOR PLAN
(SUITE FLOOR PLAN)
THIS IS AN ARCHITECT'S DRAWING OF A TYPICAL SUITE FLOOR PLAN
The seller reserves the right to make modifications and
changes. Size and dimensions are approximate and may vary with
actual condo plat, survey and model.
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TABLE OF CONTENTS
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SUMMARY RISK FACTORS........................................ 1
QUESTIONS AND ANSWERS....................................... 2
SUMMARY..................................................... 4
RISK FACTORS................................................ 9
You may be liable for shortfalls if revenues do not cover
expenses............................................... 9
If you do not pay shortfalls you may have a judgment
entered against you.................................... 9
Defaults on shortfalls may render the Hotel inoperable.... 9
All disputes with the Hotel Operator are subject to
arbitration............................................ 9
You must pay certain expenses directly.................... 9
The anticipated performance of the Hotel is based on
forecasts.............................................. 10
The success of the Hotel will depend primarily on the
Hotel Operator......................................... 10
The success of the Hotel will be influenced by competition
in the Gulf Shores Market.............................. 10
The success of the Hotel will be influenced by a range of
factors................................................ 10
Seasonal fluctuations will cause fluctuations in gross
revenue................................................ 11
The Hotel's insurance coverage may not be adequate........ 11
You may be personally liable for tort and contract
claims................................................. 11
Zoning restrictions restrict the use of the Hotel
property............................................... 11
There may not be a public market for the Units and their
liquidity may therefore be limited..................... 11
The Hotel will not be built if we do not sell a minimum
number of Units........................................ 11
Southwind may have substantial liability for shortfalls... 12
There are limits on the Units available................... 12
Hurricanes and other natural disasters in the Gulf Shores
Market may result in substantial damage to your
property............................................... 12
There may be conflicts of interest among Southwind,
Innisfree and their affiliates......................... 12
Violation of environmental laws may occur in the future... 13
There are significant income tax considerations to
owners................................................. 13
The rental pool may be classified as a partnership........ 13
Cash distributions may be insufficient to pay taxes....... 14
Deductions may be limited by Section 183 rules regarding
activities not engaged in for profit................... 14
Deductions may be limited by vacation home rental rules... 14
Deductions may be limited by passive activity rules....... 14
You may be subject to a partnership audit................. 14
FORWARD-LOOKING STATEMENTS.................................. 15
THE HOTEL AND THE HOTEL SITE................................ 15
The Hotel................................................. 15
The Hotel Site............................................ 15
The Suites................................................ 16
Terrace Resort Suites.................................. 16
Superior Resort Suites................................. 16
Third Floor Side View Resort Suites.................... 16
Second Floor Side View Resort Suites................... 17
First Floor Side View Resort Suites.................... 17
Standard Resort Suites................................. 17
Acquisition of the Hotel Site.......................... 17
ALABAMA..................................................... 17
THE GULF SHORES MARKET...................................... 18
Gulf Shores............................................... 18
Development Activity...................................... 18
Competition............................................... 18
Resort Market Seasonality................................. 19
Unsatisfied Demand........................................ 19
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Market Demand............................................... 19
Individual Leisure........................................ 19
Group Market.............................................. 20
Premier Location.......................................... 20
Estimated Performance for the Hotel....................... 20
Demand.................................................... 20
Occupancy................................................. 21
Average Daily Rate (ADR).................................. 21
Conclusion................................................ 22
DESCRIPTION OF SECURITIES BEING OFFERED..................... 22
THE HOTEL OPERATOR AND THE HOTEL OPERATING AGREEMENT........ 22
Management of the Hotel and the Rental Pool............... 22
Management of the Rental Pool............................. 23
Owners' Use of Suites..................................... 23
Allocation of Revenue and Expenses........................ 23
Direct Expenses of Owners................................. 24
Rental Pool Reports....................................... 24
Distributions From Rental Pool............................ 25
Reserves.................................................. 25
Shortfalls................................................ 26
Hotel Operator May Rely Upon Acts of Board of Directors... 26
Management of the Hotel................................... 26
Fees Paid to Hotel Operator............................... 27
Termination of Hotel Operator............................. 27
Sale of a Unit by an Owner................................ 28
SUMMARY OF DECLARATION AND RELATED DOCUMENTS................ 28
The Condominium Association............................... 29
Voting Rights.......................................... 29
Meetings............................................... 30
Board of Directors; Officers........................... 30
Use Restrictions.......................................... 31
Insurance................................................. 31
Enforcement of the Declaration............................ 32
SOUTHWIND DEVELOPMENT COMPANY, L.L.C. ...................... 32
MANAGEMENT.................................................. 33
CERTAIN RELATIONSHIPS AND TRANSACTIONS...................... 33
COMPENSATION AND FEES TO SOUTHWIND AND AFFILIATES........... 35
DETERMINATION OF PURCHASE PRICE............................. 35
USE OF PROCEEDS............................................. 36
PLAN OF DISTRIBUTION........................................ 36
HOW TO PURCHASE............................................. 37
CERTAIN FEDERAL AND STATE INCOME TAX ASPECTS................ 38
Classification of Rental Pool as a Partnership............ 39
Status of the Partnership as a Publicly Traded
Partnership............................................ 40
Partnership Anti-Abuse Rule............................... 40
Basis of Each Owner in the Unit and in the Rental Pool
Partnership............................................ 41
Section 183 -- Activities Not Engaged in for Profit....... 41
Section 280A -- Residence and Vacation Home Rules......... 42
Limitations on Losses from Passive Activities............. 42
Application of At-Risk Limitations........................ 43
Limitation on Interest Deductions......................... 43
Depreciation/Amortization................................. 44
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Sale or Other Disposition of a Unit......................... 44
Administrative and Compliance Matters..................... 44
Audit Risk............................................. 44
Resolution of Disputes Involving Rental Pool Items..... 44
Possible Changes in Federal Tax Laws................... 45
Investment by Foreign Persons............................. 45
Corporate Investors....................................... 45
State and Local Taxes..................................... 45
LEGAL MATTERS............................................... 46
EXPERTS..................................................... 46
ADDITIONAL INFORMATION...................................... 46
BEACHSIDE SUITES HOTEL
Forecasted Summarized Statement of Estimated Annual
Operating Results......................................... F-3
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
Balance Sheet............................................... FS-3
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SUMMARY RISK FACTORS
You should carefully consider, among other factors, the matters discussed
under "Risk Factors" in this Prospectus before deciding whether to purchase a
Unit. We have summarized below some of these risk factors.
- You are subject to assessments for operating and capital shortfalls in
the operation of the Hotel.
- If you do not pay assessments you are subject to an adverse arbitration
award which may result in a lien against your personal assets.
- The future assessments of shortfalls for operating and capital expenses
may constitute the offer and sale of a security. Accordingly, the Company
will either register each such assessment under the Securities and
Exchange Act of 1933, as amended, or will rely upon exemption from
registration.
- You will not have the use of funds used for a down-payment for a
significant amount of time because your funds will be held in escrow
until the Hotel is complete.
- You may not be able to resell your Unit quickly because you may not be
able to use a real estate broker exclusively.
- You may suffer a complete loss of your investment if all Owners do not
pay shortfalls.
- Innisfree receives a fee for managing the Hotel and may have a conflict
of interest with you if it is economically advantageous to you if the
Hotel ceases operations.
- Innisfree operates other hotels that compete directly with the Hotel for
rental accommodations.
- If the Hotel fails to experience the level of forecasted occupancy or
room rates, there may not be sufficient revenues to cover operating
expenses and shortfalls may be assessed against you.
- If a significant number of Owners default on payments required to cover
shortfalls, the Hotel might go out of business.
- The Hotel has no operating history and its performance is based on
forecasts which may differ significantly from actual performance.
- There is a lot of competition in the Gulf Shares Market that might result
in fewer rooms being rented in the Hotel at lower prices, which could
cause revenues to be less.
- You may be personally liable for tort and contract claims. You may also
be jointly liable with other Owners.
- If the Hotel goes out of business, you will have limited options for the
use of your Unit because zoning restrictions effectively restrict the use
of the property to a Hotel.
- Hurricanes and other natural disasters in the Gulf Shores Market may
result in substantial damage to your property and may cause interruptions
in the Hotel's operations. This could cause revenues to be less.
- You are liable for property taxes, condominium fees and expenses,
reserves for operations and repayment of advances, plus interest, made by
the Hotel Operator for operation of the Hotel.
- If we do not sell 75 units within twelve months from the date of this
Prospectus, this offering will terminate. If this occurs, we will refund
your deposit with accrued interest.
- Southwind may not have sufficient capital to pay assessments on any Units
it owns.
- There may not be a public market for the Units and their liquidity may
therefore be limited.
- All disputes with the Hotel Operator are subject to arbitration.
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QUESTIONS AND ANSWERS
Q: WHAT IS A HOTEL INVESTMENT UNIT?
A: A hotel investment unit is a Suite, together with an undivided interest
in the common areas of the Hotel, which will be operated under a
mandatory rental pool. The mandatory rental pool provides for the
pooling of revenue, adjusted for personal usage, and expenses.
Q: WHAT IS A SUITE?
A: A Suite is a hotel condominium unit. Each Suite is fully-furnished,
with a living room which includes a sleeper-sofa, one bedroom, one and
one-half bathrooms, a fully-equipped kitchen and a built-in bunk-bed
area.
Q: HOW DOES THE HOTEL OPERATING 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.
Q: WHAT HAPPENS IF THE HOTEL LOSES MONEY?
A: If the Hotel loses money, you and the other 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.
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, your share of any Condominium
Association fees and expenses, reserves for operations and repayment of
advances, plus interest, made by the Hotel Operator for operation of
the Hotel.
Q: WHAT TYPE OF HOTEL IS IT?
A: Beachside 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.
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: HOW WILL INNISFREE BE PAID FOR MANAGING THE HOTEL?
A: Innisfree will receive a base fee of 5% of annual revenues, plus
incentive fees if the hotel performs well.
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.
Q: DO I OWN THE CONTENTS IN MY SUITE?
A: Yes; however, you may not alter or remove any of the furnishings or
fixtures.
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Q: MAY I SELL MY UNIT?
A: You may sell your Unit at any time as long as the purchaser signs the
Hotel Operating 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.
3
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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 three 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.
Southwind is located at 26032 Highway 182 East,
Orange Beach, Alabama 36561. Southwind's telephone
number at that address is (334) 981-3973.
The Hotel.................. The Hotel will be called Beachside 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, 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.
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.
We believe the City may in the future construct a
boardwalk on a strip of this property. There is a
one-story restaurant and lounge near the southwest
border of the Hotel site. This restaurant may
obstruct the beach view from one or more of the
first floor suites on the west side of the Hotel.
Access to the public beach will be limited to a
secured gate located on the west side of the
southwest corner of the property. The gate will
open onto a public right of way that provides
direct access to the public beach.
The Hotel Operator......... The Hotel will be managed and operated by Innisfree
Hotels, 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 twelve
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.
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The Hotel Operating
Agreement.................. The Hotel Operating Agreement requires the pooling
of all revenue and expenses of the Units in the
rental pool. Your Suite will be in the rental pool
except for the period you reserve the Suite for
your own use. You will not share in the revenue for
any day that you use your Suite but you will be
obligated to bear your full share of expenses.
Development of the Hotel... Southwind was formed in April 1998 to design,
develop, finance and construct the Hotel and to
market the Suites. 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.
Pre-sold 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 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 may use the $100,000 to
purchase the eastern-most ninth floor Suite. The
total purchase price for this Suite will be
$100,000, which is substantially below the offering
prices of the other Suites. In addition, we also
granted the seller of the real property an option
to purchase four additional Suites 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.
Personal Use............... You are guaranteed the use of your Suite 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.
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.
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 each
Owner will be obligated to pay the Hotel Operator
his share of such advance plus interest thereon at
the prime rate plus 2% per annum.
The Hotel Operator will be entitled to obtain
payment of such advance and interest thereon from
the future cash flows from Hotel Operations or
directly from the Owner. If an Owner fails to pay
his share of a shortfall or fails to pay his share
of a shortfall advance by the Hotel Operator plus
interest thereon when due, the Hotel Operator
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<PAGE> 13
may submit the matter to arbitration. An
arbitration award adverse to an Owner may result in
the Owner's Unit or other property being sold to
recover the amount due to the Hotel Operator.
The future assessments of shortfalls for operating
and capital expenses may constitute the offer and
sale of a security. Accordingly, the Company will
either register each such assessment under the
Securities and Exchange Act of 1933, as amended, or
will rely upon one or more exemptions from
registration.
Risks of Forecasts......... The Hotel has no operating history on which to
rely. 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.
Timing of Distributions.... The Hotel Operator will prepare monthly reports on
the operation of the Hotel and 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 Suite.
Prices of Units............ The initial purchase prices of Units have been
established by us. We believe we will be able to
sell the Units for prices ranging between $149,900
and $169,900. However, market conditions could
require us to lower the prices of the Units in
order to sell all of them. 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, which is attached as
Annex A to this Prospectus.
Purchase Procedure......... Persons interested in purchasing a Unit will be
required to complete a Potential Purchaser
Questionnaire, satisfy the minimum suitability
standards established by Southwind, and otherwise
be a suitable purchaser as determined by Southwind.
Persons seeking to acquire temporary vacation
accommodations with the potential for a minimum
rate of return may be suitable investors. Persons
who are seeking a high rate of return or who need
liquid investments are not suitable. Prospective
purchasers must have a minimum gross annual income
in excess of $60,000 and a net worth,
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exclusive of principal residence, home furnishing
and automobile, of $60,000 or have a net worth,
exclusive of principal residence, home furnishing
and automobile, of $225,000.
To purchase a Unit you must execute a Purchase
Agreement. Upon 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. We anticipate that construction will
be complete by the summer of 2000. The down payment
is non-refundable if you breach the contract. If we
do not sell 75 Units within twelve months from the
date of this Prospectus, we will refund your
deposit with accrued interest. Further, purchasers
are entitled to terminate the Purchase Agreement
within seven days of signing it. 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 by the purchaser.
Once the minimum of 75 Units has been sold, we will
begin construction and will complete construction
of 84 Units. 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. Any Units
that we do not sell by the date the Hotel opens for
operations will be retained by us and will be
available for rental under the Hotel Operating
Agreement. Any payments for assessed shortfalls for
any Units we may own will be made from our working
capital account which will include all monthly
rental payments received from the Hotel Operator
for the rental of the commercial unit.
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.
Tax Considerations......... While the issue is not certain, it is the opinion
of Counsel that the rental pool likely will be
treated as a partnership for federal income tax
purposes. You must therefore report your share of
the rental pool's taxable income and loss on your
federal income tax return. You may be entitled to
federal income tax deductions for property taxes,
interest expense and depreciation associated with
your Unit and your share of losses, if any, from
hotel operations. For a more complete discussion of
the tax consequences of ownership, see "Certain
Federal and State Income Tax Aspects" on page 38.
Federal 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 Suite
exceeds the greater of 14 days or 10% of the total
number of days during the year that a Suite is
rented for fair market value. The limitation on
personal use of a Suite under the Hotel Operating
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Agreement to 14 days should prevent this limitation
from applying to an Owner.
The Condominium
Association................ When you purchase your Unit, you will automatically
become a member of the Beachside Suites Hotel
Condominium Owners Association, Inc. The owner of
the commercial unit will also be a member of the
condominium association. Members of the condominium
association will elect a board of directors. The
board of directors will review and approve the
Hotel's annual operation plan and budget and will
monitor the Hotel Operator's performance under the
Hotel Operating Agreement. The board of directors
will also levy, collect and enforce condominium
association assessments. If the Hotel Operator is
terminated, the board of directors will be
responsible for selecting another hotel operator.
If a replacement hotel operator cannot be found
immediately, the board of directors will be
responsible for running the Hotel.
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RISK FACTORS
All material risks that are known to us as of the date of this Prospectus
are disclosed below. Prospective investors should carefully consider these risks
in conjunction with the other information contained in this Prospectus before
purchasing Units.
YOU MAY BE LIABLE FOR SHORTFALLS IF REVENUES DO 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.
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. Each Owner will be obligated to pay the Hotel
Operator his share of such advance plus interest thereon at the prime rate plus
2% per annum.
The Hotel Operator may withhold from amounts otherwise distributable to an
Owner any amount the Owner owes the Hotel Operator, including, but not limited
to, amounts owed for advances to cover shortfalls, plus interest, base and
incentive fees and reimbursable expenses. The Hotel Operator may withhold from
amounts otherwise distributable to owners any amounts necessary to replenish
reserves, pay condominium association assessments and pay any taxes imposed in
connection with the use of the Hotel by guests and Owners.
IF YOU DO NOT PAY SHORTFALLS YOU MAY HAVE A JUDGMENT ENTERED AGAINST YOU.
If you fail to pay your share of a shortfall, the hotel operator may submit
the matter to arbitration. An adverse arbitration award may result in your Unit
or other property being sold to recover the amount due to the hotel operator.
The future assessments of shortfalls for operating and capital expenses may
constitute the offer and sale of a security. Accordingly, the Company will
either register each such assessment under the Securities and Exchange Act of
1933, as amended, or will rely upon exemption from registration.
DEFAULTS ON SHORTFALLS MAY RENDER THE HOTEL INOPERABLE.
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.
ALL DISPUTES WITH THE HOTEL OPERATOR ARE SUBJECT TO ARBITRATION.
When you purchase a Unit, you waive your rights to a jury trial and agree
to resolve all disputes with the Hotel Operator by arbitration in accordance
with the Commercial Rules of the American Arbitration Association, as modified
by the Hotel Operating Agreement.
YOU MUST PAY CERTAIN EXPENSES DIRECTLY.
You must pay your real property taxes directly. You must also pay debt
service on any loan you obtain to purchase a Unit. If the Condominium
Association makes any assessments, you must pay those assessments directly. The
hotel operator is authorized to make advances to cover shortfalls if an Owner
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<PAGE> 17
does not pay the shortfalls. If the hotel operator makes advances to cover the
shortfalls, you will be responsible for interest on the advances, at the prime
rate plus 2% per annum.
THE ANTICIPATED PERFORMANCE OF THE HOTEL IS BASED ON FORECASTS.
The Hotel has no operating history. Therefore, the anticipated performance
of the Hotel is based on forecasts. 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.
THE SUCCESS OF THE HOTEL WILL DEPEND PRIMARILY ON THE HOTEL OPERATOR.
The Hotel Operating Agreement appoints the Hotel Operator as the manager of
the rental pool and the bookings of the Suites 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 experience of
operating a Hotel or the benefits of an advanced reservation booking system and
advertising provided by a Hotel Operator.
THE SUCCESS OF THE HOTEL WILL BE INFLUENCED BY COMPETITION IN THE GULF SHORES
MARKET.
The success of the Hotel will be determined by, among other things, its
location, quality of accommodations and room rate structure. The Hotel will
directly compete with existing and future Hotels and indirectly with short-term
home and condominium rentals in the Gulf Shores Market and the surrounding area.
There are approximately 1,124 hotel and motel rooms 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.
THE SUCCESS OF THE HOTEL WILL BE INFLUENCED BY A RANGE OF FACTORS.
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
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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.
SEASONAL FLUCTUATIONS WILL CAUSE FLUCTUATIONS IN GROSS REVENUE.
The Gulf Shores 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.
THE HOTEL'S INSURANCE COVERAGE MAY NOT BE ADEQUATE.
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 Suite. 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 BE PERSONALLY LIABLE FOR TORT AND CONTRACT CLAIMS.
You may be personally liable for tort and contract claims as a result of
ownership of your Unit or participation in the rental pool. You may also be
liable jointly with other Owners.
ZONING RESTRICTIONS RESTRICT THE USE OF THE HOTEL PROPERTY.
The Hotel Site has been zoned "BCR -- Central Resort Business District,"
which effectively restricts the use of the property to 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.
THERE MAY NOT BE A PUBLIC MARKET FOR THE UNITS AND THEIR LIQUIDITY MAY THEREFORE
BE LIMITED.
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 be able to 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.
THE HOTEL WILL NOT BE BUILT IF WE DO NOT SELL A MINIMUM NUMBER OF UNITS.
If we do not sell 75 units within twelve months from the date of this
Prospectus, this offering will terminate. If this occurs, we will refund your
deposit with accrued interest. Funds used for a down-
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payment will be held in escrow until the offering terminates or the Hotel is
complete and you will not have the use of those funds until that time. If we
complete construction of the Hotel, we will pay you interest on any funds held
in escrow.
SOUTHWIND MAY HAVE SUBSTANTIAL LIABILITY FOR SHORTFALLS.
Southwind will retain any Units that are not sold by the end of the
offering. Any Units retained by Southwind will participate in the rental pool.
Southwind's sole source of income once the Units are sold will be income from
any Units it owns and income from the rental of the commercial unit to the Hotel
Operator. If there are a significant number of shortfalls assessed against any
Units owned by Southwind, it may not have sufficient funds to satisfy the
shortfalls.
The future assessments of shortfalls for operating and capital expenses may
constitute the offer and sale of a security. Accordingly, the Company will
either register each such assessment under the Securities and Exchange Act of
1933, as amended, or will rely upon one or more exemptions from registration.
THERE ARE LIMITS ON THE UNITS AVAILABLE.
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 may use
the $100,000 to purchase the eastern-most ninth-floor unit. The total purchase
price for this Unit will be $100,000, which is substantially below the offering
prices of the other Units. This Unit will participate in the rental pool based
on the percentage ownership interest just like all 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.
HURRICANES AND OTHER NATURAL DISASTERS IN THE GULF SHORES MARKET MAY RESULT IN
SUBSTANTIAL DAMAGE TO YOUR PROPERTY.
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 from hurricanes or other disasters such as fire and floods, the
Hotel Operator may, in its sole discretion, elect to terminate the Hotel
Operating Agreement. If the Hotel Operator does not terminate the Hotel
Operating Agreement, you will remain liable for payments due to the Hotel
Operator under the Hotel Operating Agreement even though the Hotel is not in
operation. 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.
THERE MAY BE CONFLICTS OF INTEREST AMONG SOUTHWIND, INNISFREE AND THEIR
AFFILIATES.
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. 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 will receive a base fee of 5% annual revenues, plus incentive
fees if the Hotel performs well.
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
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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.
VIOLATION OF ENVIRONMENTAL LAWS MAY OCCUR IN THE FUTURE.
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. A
Phase I environmental assessment conducted prior to purchase of the Hotel Site
did not reveal any environmental contamination concerns. 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.
THERE ARE 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."
THE RENTAL POOL MAY BE CLASSIFIED 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 based on its interpretation of existing law statutes, regulations, case law,
and administrative rulings but it is not binding on the Internal Revenue Service
(the "Service") or the courts, either of which may interpret such authorities
differently. No definitive ruling from the service has been, or is anticipated
to be requested on the issue of the tax classification of the rental pool. 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 tax consequences of
being classified as a corporation includes, without limitation, that the taxable
income of the rental pool would be subject to the federal and state income taxes
imposed on corporations, items of income, gain, loss and deduction would not
flow through to the owners, and distributions, if any, may be taxable as
dividends to owners. The remainder of this discussion of tax considerations
assumes that the rental pool will be taxed as a partnership.
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CASH DISTRIBUTIONS 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.
DEDUCTIONS MAY BE LIMITED BY 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."
DEDUCTIONS MAY BE LIMITED BY 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 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 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."
DEDUCTIONS MAY BE LIMITED BY 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."
YOU MAY BE SUBJECT TO A PARTNERSHIP AUDIT.
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."
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FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus represent our expectations for the
Hotel as of 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, 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.
THE HOTEL AND THE HOTEL SITE
THE HOTEL
The Hotel will be called Beachside 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 Suites, the commercial unit
and the central laundry and housekeeping area. Each of levels two through eight
of the Hotel contains ten Suites, and the ninth level of the Hotel contains
eight Suites.
The architects responsible for the design of the Hotel are Stancel &
Associates, Architects, of Montgomery, Alabama. Stancel & Associates was the
architect for Emerald Sky Condominiums, a seven story condominium located on the
Gulf of Mexico in Orange Beach, Alabama and for Perdido Sky Condominiums, an
eight story condominium located on the Gulf of Mexico in Perdido Key, Florida.
The general contractor responsible for construction of the Hotel will be Terhaar
& Cronley, General Contractors, of Pensacola, Florida. Terhaar & Cronley was the
general contractor for South Harbor Condominiums, a fourteen story condominium
located on Little Sabine Bay in Pensacola Beach, Florida. Construction and
landscaping costs are estimated to be $5,556,850.
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 City of Gulf Shores has designated the undeveloped parcel of land
directly to the east of the hotel site as a dune preserve, and has restricted
access to the parcel. We are not aware of any plans that the City has to develop
this parcel, 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
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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 Suites 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.
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 SUITES
Each Suite is fully-furnished, having a living room which includes a
sleeper-sofa, 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 Suite will have approximately 613 square
feet, with the capacity to sleep up to six people as follows: two persons in the
bedroom, two persons on the sleeper-sofa in the living room and two persons in a
built-in bunk bed area.
Although all Suites will share the same basic floor plan, the Hotel will
have six types of Suites, all of which are described below. The purchase prices
for the different types of Suites vary depending upon the location of the Suites
within the Hotel. The Schedule of Purchase Prices, Percentage Ownership and
Contribution to Operating Cash Reserve for each of the Units is attached to the
Prospectus as Annex A.
TERRACE RESORT SUITES
There will be two Terrace Resort Suites. These Suites will be located on
the east and west sides of the ninth floor of the Hotel. Both Suites will
directly overlook the Gulf of Mexico. In addition, each Terrace Resort Suite
will have windows in the bedroom and living room that provide a view to either
the east or the west. Each Suite 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 SUITES
There will be sixteen Superior Resort Suites. Six Superior Resort Suites
will be located on the ninth floor of the Hotel. Each of these six Suites will
directly overlook the Gulf of Mexico, but none of these Suites will have windows
providing a view to the east or west. Five Superior Resort Suites will be
located on the fourth through eighth floors of the east side of the Hotel. Each
of these five Suites will directly overlook the Gulf of Mexico and will have a
view to the east provided by windows in the bedroom and living room. The final
five Superior Resort Suites will be located on the fourth through eighth floors
of the west side of the Hotel. Each of these five Suites will directly overlook
the Gulf of Mexico and will have a view to the west provided by windows in the
bedroom and living room. All Superior Resort Suites will have private balconies
facing the Gulf of Mexico.
THIRD FLOOR SIDE VIEW RESORT SUITES
There will be two Third Floor Side View Resort Suites, one on each side of
the Hotel. Each Suite will directly overlook the Gulf of Mexico and will have a
view to the east or west provided by windows in the bedroom and living room.
Each Suite will also have a private balcony facing the Gulf of Mexico.
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SECOND FLOOR SIDE VIEW RESORT SUITES
There will be two Second Floor Side View Resort Suites, one on each side of
the Hotel. Each Suite will directly overlook the Gulf of Mexico and will have a
view to the east or west provided by windows in the bedroom and living room.
Each Suite will also have a private balcony facing the Gulf of Mexico.
FIRST FLOOR SIDE VIEW RESORT SUITES
There will be two First Floor Side View Resort Suites, one on each side of
the Hotel. Each Suite will directly overlook the Gulf of Mexico and will have a
view to the east or west provided by windows in the bedroom and living room.
Each Suite will also have a private balcony facing the Gulf of Mexico. The Suite
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 Suite.
STANDARD RESORT SUITES
There will be sixty Standard Resort Suites. These Suites will be located
in the interior of the Hotel on the first through eighth floors. None of these
Suites will have windows providing a view to the east or west, but all Suites
will directly overlook the Gulf of Mexico and will have private balconies facing
the Gulf of Mexico. One or more of the first floor Standard Resort Suites 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.
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 October 12, 1999. 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, 2000. In connection with the purchase of
the hotel site, Southwind agreed to sell the eastern-most ninth 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.
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
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<PAGE> 25
- 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 City of Gulf
Shores and the City of Orange Beach, which is adjacent to Gulf Shores and
located seven miles east of the Hotel Site, 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 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
degreesF, with temperatures averaging 82 degreesF in July and 53 degreesF 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 sightseeing 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 lakes 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.
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 home and condominium
rentals in the Gulf Shores Market and surrounding 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 the Gulf Shores Market, 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.
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<PAGE> 26
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 the Gulf
Shores Market ranges from 80% -- 95%. As a result, the resort market experiences
numerous 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 periods in which the market is
at capacity 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.
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
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<PAGE> 27
- 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.
ESTIMATED PERFORMANCE FOR THE HOTEL
Our estimates of operating results for Beachside 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 premier location of the Hotel in relation to the other hotels
- The Hotel's beachside site
- All Suites will have private balconies
- The Hotel will be a newly-constructed property
- The estimated mix of demand for the Hotel
- 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
Based on information obtained through interviews with Gulf Shores hotel
operators, 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.
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<PAGE> 28
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
- Each 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 several
factors, including: the results from operations of similar rooms at Youngs by
the Sea during the period from August 20, 1997 to August 19, 1998, all of the
factors discussed regarding the Hotel facilities, the impact of new supply, and
market conditions. No one factor is determinative and no particular weight is
assigned to any one factor. Hurricanes interrupted Young's by the Sea's
operation in July of 1997 and September of 1998. The period of August 20, 1997
to August 19, 1998 was used to estimate performance over an uninterrupted 12
month operating period.
The following table sets forth the resulting occupancy estimates for the
Hotel by type of user and for all types of users combined during its first full
three calendar years of operation. There are 84 available room nights per day
for the Hotel, one for each Suite, resulting in 30,660 available room nights per
year. The rental of a Suite constitutes an occupied room night. For example the
rental of 35 of the Hotel's 84 Suites on a given day constitutes 35 occupied
room nights. The estimated number of occupied room nights for a particular
market segment is based on the size of the segment relevant to the total market
as determined by interviews conducted by Southwind with Gulf Shores hotel
operators.
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED OCCUPIED ROOM TOTAL ESTIMATED
OCCUPIED ROOM OCCUPIED ROOM NIGHTS: ESTIMATED OCCUPANCY
NIGHTS: LEISURE NIGHTS: GROUP COMMERCIAL OCCUPIED ROOM RATE FOR THE
YEAR SEGMENT SEGMENT SEGMENT NIGHTS HOTEL
---- --------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Year 1 (2001)........ 14,545 3,091 545 18,181 59.3%
Year 2 (2002)........ 15,207 3,232 570 19,009 62.0
Year 3 (2003)*....... 15,649 3,325 587 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 Suites Hotel.
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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 and fully-equipped kitchens, built-in bunk-beds 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 the 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.
DESCRIPTION OF SECURITIES BEING OFFERED
The securities being offered consist of 83 extended-stay Condominium Hotel
Investment Units in Beachside Suites Hotel. Each Unit consists of a Suite,
coupled with a mandatory rental pool. The Hotel will be a beachside condominium
hotel in Gulf Shores, Alabama. Each Owner will own his Unit, which includes an
undivided interest in the common areas of the Hotel. Each Unit will be subject
to the 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.
Each Unit will be priced between $149,900 and $169,900, depending on the
location within the Hotel. The Hotel will consist of 84 fully-furnished Suites.
Each Suite consists of a living room including a sleeper-sofa, a bedroom, one
and one-half baths, a built-in bunk-bed area and a fully equipped kitchen. The
Hotel includes a commercial unit that will be used as a lobby and registration
area, parking facilities, a central laundry and housekeeping area and a heated
pool.
THE HOTEL OPERATOR AND
THE HOTEL OPERATING AGREEMENT
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 94% 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 is a summary of all the
material terms of the Hotel Operating Agreement, but does not
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<PAGE> 30
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 Owners in the rental pool in accordance with the
Hotel Operating Agreement is mandatory. In addition, any Suites that have not
been sold by Southwind will be placed in the rental pool. A Suite will
automatically be placed in the rental pool except when the Suite 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 Suite and
agrees to honor and be bound by the rental booking of his Suite made by the
Hotel Operator in accordance with the Hotel Operating Agreement. Suites may not
be used for any purpose other than as condominium 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 rental rates including offering the use of Suites at low promotional
rental rates and offering Suites 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 SUITES
The Hotel Operating Agreement provides that AN OWNER MAY ONLY USE HIS SUITE
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 Suite for a stay which commences at or after 2:00
p.m. on a Friday or a Saturday, the Owner must reserve the Suite for a minimum
two night stay. An Owner may use his Suite 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. Under the Hotel Operating Agreement, an Owner may assure
the use of his Suite by sending a written reservation to the Hotel Operator no
less than four months prior to the date the Owner desires to use his Suite. An
Owner may request the use of his Suite 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. If an Owner reserves his Suite for use, but does not use
his Suite at the reserved time, he will, nevertheless, be deemed to have used
his Suite, and his Suite will not be included in the rental pool, unless he has
cancelled his reservation with the approval of the Hotel Operator at least 30
days prior to the date of his reservation and his Suite is made available for
rental to the public. An Owner will be required to pay a mandatory room cleaning
charge in connection with his use of his Suite. 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. Owners cannot remove or change any furniture,
fixtures and equipment located within a Suite 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
Suite rentals is divided among the Owners. For each day that a Suite is in the
rental pool, the Owner of that Suite will be entitled to share in the gross
revenue from the operation of the hotel, regardless of whether the Owner's Suite
generated rental income on that particular date. An Owner's share of the gross
revenue will be determined based on the percentage interest of the Suite as set
forth in Annex A and in the Declaration.
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An Owner's share of gross revenue for a day in which the Owner's Unit is in
the rental pool will be determined according to the following formula:
<TABLE>
<S> <C> <C>
(% Interest of the Unit)
(Gross Revenue for the Day) X ---------------------------------------------------------
(the sum of the % Interests of Units in rental pool that
day)
</TABLE>
DIRECT EXPENSES OF OWNERS
Each Owner will be responsible for his share of all hotel expenses and
other costs attributable to the Owners under the Hotel Operating Agreement. An
Owner will be responsible for his share of the costs attributable to the Owners
regardless of whether the Owner's Suite 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, but are not limited to:
- Repair and maintenance of hotel buildings, grounds, furniture, fixtures
and equipment located at the hotel
- Purchasing all supplies including linens, and cleaning products necessary
for the operation of the hotel
- Costs associated with hiring, firing and compensating employees necessary
to staff the hotel
- Fees paid to the hotel operator
- Utilities and insurance
- Marketing and promotion expenses, reservation fees and travel agent
commissions.
In addition to the costs and expenses attributable to Owners under the
Hotel Operating Agreement, each Owner will be personally responsible for the
payment of all property taxes applicable to his Unit and contents. Each Owner
will also be responsible for amounts owed under any financing of the Unit and
all assessments made by the Condominium Association for costs and expenses of
its operations. These expenses may include reserves, insurance premiums and
amounts necessary to reconstruct or repair damage to an Owner's Unit if
insurance proceeds are not sufficient. 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.
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.
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<PAGE> 32
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
the Hotel's operations:
- The Owner's share of the Hotel's operating expenses
- The Owner's share of amounts necessary to:
- Fund or replenish operating and capital expenditure reserves
- Make capital lease payments
- Pay the hotel operator's Incentive Fee, if any
- The Owner's share of capital expenditures exceeding amounts paid out
of reserves
- The Owner's share of shortfalls, if any
- Any assessment payable by the Owner pursuant to the Declaration
- Expenses associated with an Owner's personal use of the Hotel
- Bed taxes and other similar taxes
- Withholding taxes, if applicable
- Any other amounts payable by the Owner under the Hotel Operating
Agreement
The amount distributable to an Owner, if any, will be sent to the Owners
with the monthly financial summary. 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
Owner will be required to contribute to the operating cash reserve an amount
indicated in Annex A. This reserve will be available to the Hotel Operator for
working capital in connection with the operation of the Hotel. 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.
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SHORTFALLS
If at any time the funds derived from the operations of the Hotel 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, as may occur from time to time as a result of 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 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. Any dispute regarding the payment or nonpayment of shortfalls may be
referred to an arbitrator pursuant to the Hotel Operating Agreement. An adverse
arbitration award could result in a judgment being entered against an Owner and
a lien against an Owner's personal assets.
The future assessments of shortfalls for operating and capital expenses may
constitute the offer and sale of a security. Accordingly, the Company will
either register each such assessment under the Securities and Exchange Act of
1933, as amended, or will rely upon one or more exemptions from registration.
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.
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, 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.
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<PAGE> 34
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 will
receive annually a base fee of 5% of gross revenues payable in monthly
installments.
In addition to the Base Fee, 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 $1,384,522. 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 be paid a monthly Sales and Marketing Fee in the
amount of $900 per month and 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, Innisfree employees or independent contractors 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 51% 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.
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<PAGE> 35
Commencing in the year 2005, the appointment of the Hotel Operator may be
terminated by a vote of 51% of the Units entitled to vote on the matter if the
Hotel does not meet the Revpar test as set forth in the Hotel Operating
Agreement. The Revpar test is a comparison of the Hotel's performance to the
performance of hotels in the Competitive Set. The hotels in the table below are
in the Gulf Shores Market and form the initial Competitive Set. They have been
selected by Southwind as members of the Competitive Set based upon a subjective
evaluation of the following criteria: their number of rooms, the quality and
value of their overall facilities and amenities, their character and style,
their rate structure and market position and location factors such as direct
beach frontage.
<TABLE>
<CAPTION>
YEAR NO. OF
HOTEL OPENED ROOMS DESCRIPTION
- ----- ------ ------ -----------
<S> <C> <C> <C>
The Holiday Inn of Gulf Shores Before 1989 118 Full-service beachside hotel,
meeting rooms, suites, jacuzzi, 29
kitchenette units
The Lighthouse Resort Before 1989 200 Extended-stay beachside hotel,
indoor and outdoor heated pool, 10
full kitchens, 140 kitchenette units
The Oleander Hotel Before 1989 90 Limited-service beachside hotel,
pool, 33 full kitchens
The Quality Inn of Gulf Shores 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
</TABLE>
The composition of the Competitive Set may be changed upon agreement of the
Owners and the Hotel Operator when a member of the Competitive Set ceases to
operate for a period of 24 months, ceases to meet the criteria for the
Competitive Set or when a hotel satisfying the Competitive Set criteria opens in
the Gulf Shores Market and completes 2 full years of operation. Any proposed
addition or deletion of a hotel to or from the Competitive Set is subject to
review, upon request by the Owners or the Hotel Operator, by a member of the
International Society of Hospitality Consultants to determine if the hotel
satisfies the criteria for being a member of the Competitive Set.
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.
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.
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<PAGE> 36
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 will be
recorded in the Probate Court of Baldwin County. When the document is recorded,
the property will become a condominium under the laws of the State. An Owner of
a Suite automatically becomes a member of the Condominium Association.
Membership in the Condominium Association may not be transferred or retained
separately from any Suite.
The Condominium Association will supervise the Hotel Operator and assure
the performance of all appropriate maintenance, management, repair, and
administration of the Hotel, including the Common Elements, the Suites, 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 the Hotel
Operator, pursuant to the terms of the Hotel Operating Agreement. The
Condominium Association will 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 will be responsible for managing and operating the Hotel.
The Condominium Association may levy assessments against the Units in order
to cover the budgeted costs of operating the Condominium Association and
performing the obligations of the Condominium Association under the Declaration
("Common Expenses"). Such assessments, if any, will be levied against a Unit in
proportion to its percentage interest in the common elements, as set forth in
the Declaration. 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 the assessment for Common Expenses.
If any portion of the Hotel is damaged or destroyed and insurance proceeds
are insufficient to cover the costs of reconstruction and repair, the
Condominium Association may make assessments to provide sufficient funds to pay
the costs. Assessments for deficiencies in insurance proceeds for reconstruction
and repair of common elements will be allocated to each Unit Owner in proportion
to the Owner's share of common elements. Assessments for deficiencies in
insurance proceeds for reconstruction and repair of Suites shall be allocated to
each Unit Owner in proportion to the costs of reconstruction and repair of his
Suite.
The Condominium Association is responsible for enforcement and monthly
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 any
past 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,
he will have all rights available to 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
29
<PAGE> 37
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's 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. Owners will receive written notice of
Condominium Association meetings 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
The Board of Directors is responsible for the control and management of the
Condominium Association and the disposition of its funds and properties. Unless
the Declaration, other condominium documents or applicable law provide
otherwise, an act or approval of the Board of Directors will be deemed to be an
act or approval of the Condominium Association. 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 the provisions of the 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
30
<PAGE> 38
- 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
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.
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 Suites 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 Suite or directly or
indirectly charge rent or any form of consideration for the use of his
Suite except in accordance with the terms of the Hotel Operating Agreement.
3. 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 Agreement.
4. The Hotel Operator is authorized to designate certain areas of the
Hotel for its exclusive use and an Owner may not interfere with that
exclusive use.
5. No animals are allowed in the Suites 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.
6. 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 the exterior of any
Suite or any other portion of the Hotel without the prior written approval
of the Board of Directors.
7. No Owner may remove, replace, substitute, alter, repair or add to
any part of the Hotel, including the Owner's Suite, or any of the
furniture, fixtures or equipment located in and around the hotel, including
in any Suite.
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
31
<PAGE> 39
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 (with other Owners) and several
(individual) liability for tort and contract claims as a result of ownership of
Suites or participation in the rental pool. Although we believe that the
insurance coverage provided to Owners will be adequate, we cannot assure you of
that fact, and you should consider whether you should obtain additional
insurance coverage.
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.
Southwind is an Alabama limited liability company. 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.
Southwind has no established policies with respect to any of the following:
- Issuing senior securities
- Borrowing money
- Making loans to other persons
- Investing in the securities of other issuers for the purpose of
exercising control
- Underwriting securities of other issuers
- Engaging in the purchase and sale or turn over of investments
- To offer securities in exchange for property
- To repurchase or otherwise reacquire its securities
- To make annual or other reports to security holders
Southwind's manager may establish policies or cause Southwind to engage in
the foregoing activities without approval of its members. If Southwind engages
in any of the foregoing activities, it will be exclusively in connection with
Beachside Suites Hotel.
32
<PAGE> 40
MANAGEMENT
Julian B. MacQueen, age 48, has served as the President of Southwind since
March 11, 1999. Like all Southwind's officers, he will serve in that capacity
until he resigns or is removed by Southwind's manager. He also owns 94% of
Southwind. Mr. MacQueen is also the Chairman and Chief Executive Officer of
Innisfree Hotels. 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. He also holds a Bachelors degree in Psychology from the
University of South Alabama.
William P. Lagman, age 59, has served as Vice President of Marketing for
Southwind since March 11, 1999. He also owns 5% of Southwind. Like all
Southwind's officers, he will serve in that capacity until he resigns or is
removed by Southwind's manager. 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, has served as the Vice President of Business
Development for Southwind since March 11, 1999. Like all Southwind's officers,
he will serve in that capacity until he resigns or is removed by Southwind's
manager. 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 of experience in the hotel
management industry. He also holds a Bachelors degree in Journalism from the
University of Arkansas.
Roger W. Wiegner, age 45, has served as a Vice President of Operations for
Southwind since March 11, 1999. Like all Southwind's officers, he will serve in
that capacity until he resigns or is removed by Southwind's manager. 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.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Julian MacQueen owns 94% of the equity interest in Southwind and 100% of
the equity interest of Southwind Development Management Company, Inc.,
Southwind's manager. 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, Florida.
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.
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<PAGE> 41
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.
The following diagram shows Mr. MacQueen's affiliates:
(DIAGRAM)
In 1998 Mr. MacQueen advanced $198,901 to Southwind. He advanced Southwind
an additional $274,405 between January 1 and September 3, 1999. These advances
are non-interest bearing and are not secured. There are no written terms for the
repayment of these advances. We expect 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.
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<PAGE> 42
COMPENSATION AND FEES TO SOUTHWIND AND AFFILIATES
The following table summarizes the compensation and fees which may be
received by Southwind and its affiliates in connection with the offering of the
Units and the operations of the Hotel, assuming that all 83 Units offered are
sold and that the maximum amount of commissions is paid. Cross-references are to
sections of this Prospectus where additional information about a particular fee
may be found.
(FEES CHART)
DETERMINATION OF PURCHASE PRICE
The initial purchase prices of the Units have been determined by Southwind
solely on the basis of prices of comparable properties in the Gulf Shares
Market. 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.
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<PAGE> 43
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 $12.65 million, exclusive
of offering expenses (estimated at $157,024) and real estate commissions and
finders fees up to $759,222. All of the net proceeds of the offering will be
paid to Southwind. Southwind will use the net proceeds from the offering as
follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE
APPLICATION OF NET PROCEEDS APPROXIMATE AMOUNT OF NET PROCEEDS
- --------------------------- ------------------ ----------------------
<S> <C> <C>
Repayment of construction loan to First American
Bank of Pensacola, N.A.......................... $9,023,333(1) 76.88%
Repayment of DeJusto Note....................... 767,125(2) 6.54%
Repayment of MacQueen Advances.................. 473,306(3) 4.03%
Retained by Southwind........................... 1,473,690(4) 12.55%
---------- -----
Total........................................... $11,737,454 100%
</TABLE>
Assuming that the minimum number of Units offered hereby is sold, the gross
proceeds from the sale of Units will be approximately $11.36 million, exclusive
of offering expenses (estimated at $157,024) and real estate commissions and
finders fees up to $681,870. All of the net proceeds of the offering will be
paid to Southwind. Southwind will use the net proceeds from the offering as
follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE
APPLICATION OF NET PROCEEDS APPROXIMATE AMOUNT OF NET PROCEEDS
- --------------------------- ------------------ ----------------------
<S> <C> <C>
Repayment of construction loan to First American
Bank of Pensacola, N.A.......................... $ 9,023,333(1) 85.73%
Repayment of DeJusto Note....................... 767,125(2) 7.29%
Repayment of MacQueen Advances.................. 473,306(3) 4.50%
Retained by Southwind........................... 267,792(4) 2.48%
----------- -----
Total........................................... $10,525,606 100%
</TABLE>
- ---------------
(1) The land acquisition loan will be combined with the construction loan. This
amount is estimated and includes the land acquisition loan, but does not
include cost overruns. In addition, this amount includes interest on the
land acquisition loan and construction loans at a rate of 8% per annum,
assuming the loans are repaid in May, 2000 and that the construction loan is
paid out over 9 equal monthly draws. Any additional amounts incurred by
Southwind under the construction loan will be repaid from the net proceeds
of the offering.
(2) This amount includes interest payable monthly at 10% per annum and an
additional 10% interest payment that is due upon maturity, and assumes the
loan is repaid in May, 2000.
(3) This amount reflects the outstanding principal amount of the loan from Mr.
MacQueen as of the date of this Prospectus. Additional amounts may be
advanced to Southwind prior to the time all of the Units are sold. In that
event, all additional amounts advanced will be repaid from the net proceeds
of the offering.
(4) This amount may be substantially reduced if additional advances are repaid
to Mr. MacQueen by Southwind, if cost overruns are incurred, or if offering
expenses exceed the estimated amount. Any amounts retained by Southwind will
be distributed to its members pursuant to its operating agreement.
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 may also engage duly licensed real estate brokers, who will
be supervised by its licensed agents, to assist in
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<PAGE> 44
the sale of the Units. The real estate brokers may receive sales commissions of
up to 6% of the total selling price of the Units sold by them in conjunction
with such licensed agents. Southwind may also pay finders fees, but in no event
will the sum of sales commissions and finder's fees exceed 6% of a Unit's price.
The minimum subscription is one Unit.
Southwind must sell 75 Units, the minimum number of securities offered at
the prices specified in Annex A hereto if any are sold, within twelve months
from the date of this Prospectus. Southwind is required to use only its best
efforts to sell 83 Units, the maximum number of securities offered. Southwind
must receive funds in the aggregate of approximately $2,272,900 within fourteen
months from the date of this Prospectus, or your deposits will be promptly
refunded to you, together with interest. The offering will terminate on the
earlier to occur of the following events:
- Twenty-four months from the date of this Prospectus
- Twelve months from the date of this Prospectus if 75 Units have not been
sold
- The date the last of the 83 Units is sold
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. The escrow agent will be Gulf
Shores Title Company, of Gulf Shores, Alabama. Deposits will be held by the
escrow agent until closing. Closing will not occur until the Hotel is
substantially complete, as evidenced by a recorded certificate of substantial
completion from an independent registered architect, independent registered
engineer or by issuance of certificate of occupancy authorized by law. A
purchaser may terminate the Purchase Agreement within 7 days of entering the
Purchase Agreement and his or her deposit will be refunded by the escrow agent.
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 12 months from the date of this
Prospectus. If this occurs, your deposit is refundable with accrued interest and
you will have no further remedies.
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.
Persons interested in purchasing a Unit will be required to complete a
Potential Purchaser Questionnaire, satisfy the minimum suitability standards
established by Southwind, and otherwise be a suitable purchaser as determined by
Southwind.
Persons seeking to acquire temporary vacation accommodations with the
potential for a minimum rate of return may be suitable investors. Persons who
are seeking a high rate of return or who need liquid investments are not
suitable. Prospective purchasers must have a minimum gross annual income in
excess of $60,000 and a net worth, exclusive of principal residence, home
furnishing and automobile, of $225,000.
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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 Reserve the
amount indicated on the Schedule of Purchase Prices attached hereto as Annex A.
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
- 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, while this discussion
applies generally to all individual prospective investors, prospective investors
are urged to consult, and must depend upon, their tax advisors regarding their
particular 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
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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 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 cause the rental pool to be a business
entity. Therefore, in counsel's opinion 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 will be treated as participants in an business entity taxable as
either a partnership or a corporation for federal income tax purposes. There is
no assurance that the IRS or a court will agree that the rental pool should be
classified as a business entity.
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 need to be reported on a
corporate income tax return and will be subject to the federal income tax
imposed on corporations, (2) items of income, gain, loss, deduction or credit
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. As a result, an owner's share of income from the rental pool would be
subject to two levels of taxation, at the corporate level when earned and at the
owner level when distributed.
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. There is no assurance that
the IRS or a court will agree with counsel's opinion.
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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 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 among 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. Based on these Regulations, Counsel is of the opinion that the rental
pool will not be treated as publicly-traded partnership.
PARTNERSHIP ANTI-ABUSE RULE
Regulation sec. 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'
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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.
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.
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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.
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
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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.
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
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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, 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.
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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 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 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. Judicial
decisions generally are given retroactive effect, and other significant changes
historically have been given prospective application. However 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
45
<PAGE> 53
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 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.
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.
46
<PAGE> 54
BEACHSIDE 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
<PAGE> 55
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Basis for Forecasts......................................... F-2
Forecasted summarized statement of estimated annual
operating results......................................... F-3
Summary of significant assumptions and accounting
policies.................................................. F-4 - F-6
</TABLE>
F-1
<PAGE> 56
BASIS FOR FORECASTS
The accompanying Forecasts include a three-year forecast of the financial
performance of the hotel. The Forecasts do not take into account the effects of
inflation. Southwind has prepared the Forecasts based upon the following
assumptions, which reflect management's plans for the construction and
development of the Hotel and which it believes are reasonable:
- 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 baths.
- 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.
- Innisfree Hotels, Inc. will operate the facility as discussed on pages 23
through 28 of this Prospectus.
- Management fees are as set forth in the hotel operating agreement.
- The percentage expenses is based on the percentage expenses of Youngs by
the Sea.
- Reserves for furniture, fixtures and expenses are based on industry
standards.
- 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 until all are
sold or the offering terminates, whichever occurs earlier.
- Each Unit will include a built-in bunk bed area that will allow each unit
to sleep 6 people.
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:
- Projected occupancy rate
- Projected average daily room rate
- The effect of competition
- General economic environment
- Strength of the tourist sector of the economy
- Assumptions regarding the effects of inflation on both revenue and
expenses
- 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."
The Hotel will not become operational until the summer of 2000. Because
this offering will terminate prior to the time the Hotel becomes operational,
investors will not receive updated forecasts.
F-2
<PAGE> 57
BEACHSIDE 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> <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 Reserves........................................... 1,151,135 53.2% 1,241,848 53.2% 1,332,636 53.2%
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%
========== ===== ========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Number Units.............................................. 84 84 84
Number 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 and has not been deducted
from room revenue. Cleaning charges have not been included in room revenue.
(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 Suites
Hotel site.
(C)Net distributable cash flow excludes certain costs and expenses that an Owner
will be directly responsible for. The excluded expenses consist of debt
service on any loan obtained by an Owner to purchase a Unit, property taxes
on an Owner's Unit, depreciation, any condominium association fees or
assessments that might be assessed by the condominium association and any
interest, calculated at the prime rate plus 2%, that may arise from the Hotel
Operator's advancement of funds to cover shortfalls.
See accompanying summary of significant assumptions and accounting policies
and accountant's report.
F-3
<PAGE> 58
BEACHSIDE 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.
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."
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 83 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 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, zoning studies and real estate consultation.
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.
- Innisfree Hotels, Inc. will operate the facility as discussed on pages 23
through 27 of this Summary.
- Management fees are as set forth in the Hotel Operating Agreement.
- The percentage expenses is based on the percentage expenses of Youngs by
the Sea.
- Reserves for furniture, fixtures and expenses are based on industry
standards.
F-4
<PAGE> 59
- 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 until all are
sold or the offering terminates, whichever occurs earlier.
- Each Unit will include a built-in bunk bed area that will allow each unit
to sleep 6 people.
- The Hotel's occupancy and average daily room rates will approximate those
certain ground floor rooms at Young's by the Sea during the period from
August 20, 1997 to August 19, 1998.
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-3, 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 forecast on page F-3 does 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 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.
F-5
<PAGE> 60
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>
YEARS ENDING
DECEMBER 31,
NET DISTRIBUTABLE CASH FLOW, ------------------
EXCLUDING 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 statement on pages F-3.
F-6
<PAGE> 61
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
AND JUNE 30, 1999
<PAGE> 62
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JUNE 30, 1999
CONTENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Independent Auditor's Report................................ FS-2
Balance Sheets.............................................. FS-3
Statements of Operations and Member's Equity (Deficit)...... FS-4
Statements of Cash Flows.................................... FS-5
Notes to Financial Statements............................... FS-6 - FS-9
</TABLE>
FS-1
<PAGE> 63
INDEPENDENT AUDITOR'S REPORT
September 3, 1999
To the Member
Southwind Development Company, L.L.C.
Gulf Breeze, Florida
We have audited the accompanying balance sheet of Southwind Development
Company, L.L.C. (the Company) as of December 31, 1998 and the related statements
of operations and member's equity and cash flows for the eight month and
twenty-one day period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we 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. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southwind Development
Company, L.L.C., as of December 31, 1998 and the results of its operations and
cash flows for the eight month and twenty-one day period then ended in
conformity with generally accepted accounting principles.
We have also compiled the accompanying balance sheet of Southwind
Development Company, L.L.C., as of June 30, 1999 and the related statements of
operations and member's equity and cash flows for the six month period then
ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or other form of assurance on them.
Sincerely,
Randall L. Sansom
Certified Public Accountant
FS-2
<PAGE> 64
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 2,168 $ 2,366
Due from affiliate........................................ 8,210 --
Refundable application fees............................... 2,500 --
Real estate under development............................. 2,684,614 3,011,012
---------- ----------
Total Current Assets.............................. $2,697,492 $3,013,378
Other Assets
Organization costs........................................ 1,566 --
---------- ----------
Total Assets...................................... $2,699,058 $3,013,378
========== ==========
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
Current Liabilities
Accounts payable.......................................... $ 35,982 $ 149,510
Accrued interest payable.................................. 72,174 99,249
Accrued liabilities....................................... 50,000 50,000
Due to member............................................. 198,901 353,306
Due to affiliates......................................... -- 20,940
Note payable -- first mortgage............................ 1,800,000 1,800,000
Note payable -- second mortgage........................... 541,500 541,500
---------- ----------
Total Current Liabilities......................... $2,698,557 $3,014,505
Member's Equity (Deficit)................................... 501 (1,127)
---------- ----------
Total Liabilities and Member's Equity (Deficit)... $2,699,058 $3,013,378
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
FS-3
<PAGE> 65
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
STATEMENTS OF OPERATIONS AND MEMBER'S EQUITY (DEFICIT)
FOR THE EIGHT MONTH AND TWENTY-ONE DAY PERIOD ENDED DECEMBER 31, 1998
AND THE SIX MONTH PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ -- $ --
Cost of Sales............................................... -- --
----- -------
Gross Revenues.............................................. $ -- $ --
----- -------
Operating Expenses
Bank charges.............................................. $ 148 $ 62
Office supplies........................................... 75 --
----- -------
Total Operating Expenses.......................... $ 223 $ 62
----- -------
Loss from Operations........................................ $(223) $ (62)
Other Expense
Amortization.............................................. $(276) $ --
----- -------
Loss before Cumulative Effect-type
Change in Accounting Principle............................ $(499) $ 62
Cumulative Effect-type
Change in Accounting Principle............................ -- (1,566)
----- -------
Net Loss.................................................... $(499) $(1,628)
Member's Equity, Beginning.................................. -- 501
Equity Contributions........................................ 1,000 --
----- -------
Member's Equity (Deficit), Ending........................... $ 501 $(1,127)
===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
FS-4
<PAGE> 66
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
STATEMENTS OF CASH FLOWS
FOR THE EIGHT MONTH AND TWENTY-ONE DAY PERIOD ENDED DECEMBER 31, 1998
AND THE SIX MONTH PERIOD ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities
Net loss.................................................. $ (499) $ (1,628)
Adjustments:
Amortization........................................... 276 --
Cumulative effect-type change in accounting
principle............................................ -- 1,566
Decrease (Increase) In:
Real estate under development.......................... (2,684,614) (326,398)
Refundable application fees............................ (2,500) 2,500
Organization costs..................................... (1,841) --
Decrease (Increase) In:
Accounts payable....................................... 35,982 113,528
Accrued interest payable............................... 72,174 27,075
Accrued liabilities.................................... 50,000 --
----------- ---------
Net Cash Used by Operating Activities............. $(2,531,022) $(183,357)
----------- ---------
Cash Flows from Investing Activities
Loans to related parties.................................. $ (8,210) $ --
Repayments from related parties........................... -- 8,210
----------- ---------
Net Cash (Used) Provided by Investing
Activities...................................... $ (8,210) $ 8,210
----------- ---------
Cash Flows from Financing Activities
Notes payable -- mortgages................................ $ 2,341,500 $ --
Loans from member......................................... 198,900 154,405
Loans from affiliates..................................... -- 20,940
Capital contribution...................................... 1,000 --
----------- ---------
Net Cash Provided by Financing Activities......... $ 2,541,400 $ 175,345
----------- ---------
Increase in Cash and Cash Equivalents....................... $ 2,168 $ 198
Cash and Cash Equivalents, Beginning Balance................ -- 2,168
----------- ---------
Cash and Cash Equivalents, Ending Balance................... $ 2,168 $ 2,366
=========== =========
Supplemental disclosure:
Interest paid (capitalized)............................... $ 107,700 $ 99,975
Income taxes paid......................................... -- --
</TABLE>
The accompanying notes are an integral part of these financial statements
FS-5
<PAGE> 67
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JUNE 30, 1999
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 Suites Hotel. 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 PRINCIPLES
Unaudited Interim Balance Sheet
The Interim Balance Sheet as of June 30, 1999 is unaudited and has been
prepared on the same basis as the audited financial statements. In the opinion
of management, such unaudited information includes all adjustments necessary for
a fair presentation of the interim information.
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 (See Note E).
Upon construction completion, the funds will be transferred to the company
through a closing and the condominium unit Owners will receive title to their
new unit. At that time, revenue will be recognized for the sale of the
condominium units and the costs associated with revenue will be expenses with a
corresponding reduction to real estate under development.
Organization Costs
On December 31, 1998, organization costs consisted of legal fees stated at
cost and amortized on a straight-line basis over a period of five years. SOP
98-5 is effective for fiscal years beginning after December 15, 1998. It
requires organization costs to be expensed as incurred and for previously
capitalized costs to be reported as a cumulative effect-type change in
accounting principle as noted on the June 30, 1999 financial statements.
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.
Member Liability
The member of the Company shall have no liability for any debt, obligation,
or liability of the Company.
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.
FS-6
<PAGE> 68
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cash Flow Information
For the purpose of the statement of cash flows, the Company considers all
highly liquid debt instrument purchases with a maturity of three months or less
to be cash equivalents.
Cash paid for interest in 1998 was $107,700 and in 1999 was $99,975. All
interest is capitalized.
NOTE C -- REAL ESTATE UNDER DEVELOPMENT
Real estate under development consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(UNAUDITED)
<S> <C> <C>
Land.................................................... $2,391,500 $2,391,500
Capitalized interest.................................... 179,874 306,924
Capitalized closing costs............................... 24,003 24,003
Architect and engineering fees.......................... 53,552 65,652
Legal and accounting fees............................... 28,196 213,963
Taxes and permits....................................... 4,447 4,447
Other costs............................................. 3,042 4,523
---------- ----------
Total......................................... $2,684,614 $3,011,012
========== ==========
</TABLE>
NOTE D -- AMORTIZATION OF ORGANIZATION COSTS
Amortizable costs consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999 TERM
----------------- ------------- -----
(UNAUDITED)
<S> <C> <C> <C>
Organization costs............................... $1,842 $ -- 5 yrs
Less accumulated amortization.................. (276) --
------ ------
$1,566 $ --
====== ======
</TABLE>
Amortization charged to expense for 1998 was $276 Per SOP 98-5, $1,566 in
unamortized organization costs was written off as a cumulative effect-type
change in accounting principles in 1999.
NOTE E -- 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 other extensions for a current maturity date of October
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. Letters of
credit will be accepted by the financial institution for 50% of the required 20%
down payment with the other 50% paid in cash. It is anticipated that the
construction loan would carry an interest rate of 1/4% above Prime, with
principal and interest due at maturity. As of the date of these financial
statements that rate is 8.25%. No one person,
FS-7
<PAGE> 69
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
investor, or connected investor group may acquire more than four units, and all
sales will be additionally qualified by the construction lender. 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 F -- NOTE PAYABLE -- SECOND MORTGAGE
The second mortgage payable is due to the seller of the property and
matured no earlier than January 1, 1999 and, then, at the earlier of final
closing of 90% of the units or August 17, 1999. On August 12, 1999, the original
agreement was amended. New terms extend the maturity date to August 17, 2000.
However, if 63 units have been sold under pre-construction contracts by January
15, 2000, the new maturity date is January 15, 2000. There may be no prepayments
prior to January 2000. 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 G -- 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 $169,900. In
the event the condominium units are not constructed, $50,000 is due to the
second mortgage holder in cash. Furthermore, the second mortgage holder has
first right of refusal on four additional units.
NOTE H -- 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 June 30, 1999 the member advanced an additional
$154,405. Between June 30, 1999 and the date of these financial statements, the
member advanced $120,000 more.
NOTE I -- DUE FROM/TO AFFILIATES
At December 31, 1998, the Company had 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 of $8,210 from
the affiliate. This advance is non-interest bearing, unsecured, and has no
specific terms of repayment. Between December 31, 1998 and June 30, 1999, the
related party repaid the $8,210 to the Company, and loaned the Company $17,340.
This loan is non-interest bearing, unsecured, and has no specific terms of
repayment. The related party will enter into an agreement with Beachside Suites
Hotel as hotel operator. The majority of stock in this related party is owned by
a member of the Company.
As of June 30, 1999, a related party loaned the Company $3,600. The loan is
non-interest bearing, unsecured, and has no specific terms of repayment.
NOTE J -- 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.
FS-8
<PAGE> 70
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- 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. As of the date of these financial statements, the filing is still not
effective.
NOTE L -- 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.
Per the incomplete prospectus dated June 22, 1999, the Company must sell 67
units within 12 months of the date of the prospectus and receive funds
approximating $1,995,000 within 14 months of the date of the prospectus, or
deposits, including interest, will be refunded to potential buyers. The offering
will terminate 24 months from the date of the prospectus.
NOTE M -- CONSTRUCTION AND RELATED CONSTRUCTION CONTRACTS
As of December 31, 1998, the Company had entered into construction-related
contracts totaling $55,600. On December 31, 1998, earnings on these contracts
totaled $42,352, of which $21,927 remained in accounts payable. Between December
31, 1998 and the date of these financial statements, the remaining balances on
the contracts were earned, and all amounts due have been paid. The Company has
not entered into any other construction-related contracts.
FS-9
<PAGE> 71
ANNEX A
PURCHASE PRICE, PERCENTAGE OWNERSHIP AND CONTRIBUTION
TO OPERATING CASH RESERVE
<TABLE>
<CAPTION>
OPERATING
CASH
NUMBER OF UNIT PERCENTAGE RESERVE
UNITS DESCRIPTION UNIT PRICE OWNERSHIP CONTRIBUTION
- --------------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
2................... One Bedroom Terrace Resort Unit $169,900 1.325 $662.50
16................... One Bedroom Superior Resort Unit $159,900 1.247 $623.50
2................... One Bedroom 3rd Floor Side View Resort
Unit $157,900 1.231 $615.50
2................... One Bedroom 2nd Floor Side Resort Unit $154,900 1.208 $604.00
2................... One Bedroom 1st Floor Side View Unit $152,900 1.192 $596.00
60................... One Bedroom Standard Resort Unit $149,900 1.169 $584.50
</TABLE>
<PAGE> 72
[DESCRIPTION OF INSIDE BACK COVER ARTWORK]
[ACTUAL AERIAL PHOTOGRAPH OF HOTEL SITE]
This is an aerial view of the hotel site from the south.
The building currently occupying the hotel site will be demolished prior to
commencement of construction.
<PAGE> 73
------------------------------------------------------
------------------------------------------------------
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary Risk Factors.................. 1
Questions and Answers................. 2
Summary............................... 4
Risk Factors.......................... 9
Forward-Looking Statements............ 15
The Hotel and the Hotel Site.......... 15
Alabama............................... 17
The Gulf Shores Market................ 18
Description of Securities Being
Offered............................. 22
The Hotel Operator and the Hotel
Operating Agreement................. 22
Summary of Declaration and Related
Documents........................... 28
Southwind Development Company,
L.L.C............................... 32
Management............................ 33
Certain Relationships and
Transactions........................ 33
Compensation and Fees to Southwind and
Affiliates.......................... 35
Determination of Purchase Price....... 35
Use of Proceeds....................... 36
Plan of Distribution.................. 36
How to Purchase....................... 37
Certain Federal and State Income Tax
Aspects............................. 38
Legal Matters......................... 46
Experts............................... 46
Additional Information................ 46
Forecasted Summary Statements of
Estimated Annual Operating
Results............................. F-3
Balance Sheet of Southwind Development
Company, L.L.C...................... FS-3
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
(BEACHSIDE SUITES HOTEL LOGO)
83 EXTENDED-STAY CONDOMINIUM HOTEL INVESTMENT UNITS IN
BEACHSIDE
SUITES HOTEL
OFFERED BY SOUTHWIND DEVELOPMENT
COMPANY, L.L.C.
-------------------
PROSPECTUS
-------------------
, 1999
------------------------------------------------------
------------------------------------------------------
<PAGE> 74
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..................................... 120,000
Printing expenses........................................... 25,000
--------
Total............................................. $157,024
========
</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.
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
II-1
<PAGE> 75
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
Unaudited Balance Sheet as of March 31, 1999
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
*3.1 -- Articles of Organization of the Registrant
*3.2 -- Operating Agreement of the Registrant
*5.1 -- Opinion of Berkowitz, Lefkovits, Isom & Kushner, A
Professional Corporation, as to the Legality of the
Securities being Registered
*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
*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
10.11 -- Amendment to Agreement and Promissory Note among Michael A.
and M. Katherine DeJusto and Southwind
*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,
</TABLE>
II-2
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
27.1 -- Financial Data Schedule (for SEC use only)
*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>
- ---------------
* Previously filed
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.
(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.
(b) 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-3
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Amendment No. 3 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Gulf Breeze,
State of Florida, as of the 18 day of October, 1999.
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
By: /s/ SOUTHWIND DEVELOPMENT
MANAGEMENT COMPANY, INC.
------------------------------------
Southwind Development Management
Company, Inc.
Manager
By: /s/ JULIAN B. MACQUEEN
------------------------------------
Julian B. MacQueen
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
SOUTHWIND DEVELOPMENT MANAGEMENT COMPANY, INC. Manager of Southwind Development October 18, 1999
By: /s/ JULIAN B. MACQUEEN Company, L.L.C.
-------------------------------------------
Julian B. MacQueen
President
/s/ JULIAN B. MACQUEEN President of Southwind Development October 18, 1999
- ------------------------------------------------ Company, L.L.C., President and
Julian B. MacQueen Sole Director of Southwind
Development Management Company,
Inc.
/s/ ROGER W. WIEGNER Controller and Principal Accounting October 18, 1999
- ------------------------------------------------ Officer of Southwind Development
Roger W. Wiegner Company, L.L.C.
</TABLE>
II-4
<PAGE> 1
EXHIBIT 10.3
PRECONSTRUCTION
PURCHASE AND ESCROW AGREEMENT FOR
BEACHSIDE ALL-SUITES HOTEL, A CONDOMINIUM
THIS AGREEMENT is made and entered into by and between Purchaser
identified on the signature page hereof (hereafter referred to as "Purchaser")
and SOUTHWIND DEVELOPMENT COMPANY, L.L.C., an Alabama limited liability company
(hereafter referred to as "Developer").
R E C I T A L S
Developer proposes to construct a Condominium known as Beachside
All-Suites Hotel, a Condominium, located in Baldwin County, Alabama, more
particularly described in the Declaration of Condominium of said Condominium
(the "Condominium"). If the Condominium is built, Purchaser desires to purchase
a Unit on the terms and conditions stated in this Agreement. IF FEWER THAN 75
HOTEL GUEST UNITS HAVE BEEN SOLD BY _________, ____ THE CONDOMINIUM IMPROVEMENTS
WILL NOT BE BUILT, AND YOUR ERNEST MONEY DEPOSIT WILL BE REFUNDED TO YOU, WITH
INTEREST, IN ACCORDANCE WITH SECTIONS 5 & 8 HEREOF. The Declaration of
Condominium, which, if the Condominium is developed, will be filed for record in
the Probate Court of Baldwin County, Alabama (the "Declaration"), more
particularly describes the Condominium. The Declaration provides, among other
things, that the Condominium will be known and operated as a hotel and that
personal use of any Hotel Guest Unit by the owner thereof is limited.
IT IS, THEREFORE, AGREED AS FOLLOWS:
1. UNIT.
A. Subject to the terms and conditions hereinafter set forth, Developer
agrees to sell and Purchaser agrees to purchase the Hotel Guest Unit known as
Unit Number ___ in Beachside All-Suites Hotel, a Condominium, located near the
City of Gulf Shores, Baldwin County, Alabama. The Unit described above is herein
referred to as the "Unit".
B.
------------------------------- -----------------------------
Purchaser Developer
2. PRICE AND TERMS OF PAYMENT. Purchaser agrees to pay the Purchase Price
in the following manner:
<PAGE> 2
<TABLE>
<S> <C> <C>
A. Condominium Unit $
----------------
B. Earnest Money Deposit paid as
earnest money upon the execution of this Agreement, which
shall be held by an "Escrow Agent" in an interest bearing
account in accordance with the terms and conditions of this
Agreement. $
----------------
C. Balance Due Upon Closing: $
----------------
</TABLE>
3. FURNISHINGS. The Unit will be sold finished with colors and materials
determined by Developer and furnished as Developer deems appropriate for the
operation of the hotel.
4. MORTGAGE FINANCING; FINANCIAL STATEMENT; AND CREDIT REPORT. This sale
is not contingent upon Purchaser's obtaining financing. Notwithstanding the
foregoing, if Purchaser is denied financing by a lender, Developer may, in its
discretion, terminate this contract by written notice to Purchaser. If Purchaser
obtains financing to close this sale, all charges of the lender and other costs
of such loan and closing costs shall be borne by Purchaser. Purchaser shall
provide to Developer for review by Developer and Developer's lender a financial
statement signed by Purchaser in a form approved by Developer. Purchaser hereby
authorizes the Developer and Developer's lender to order and review credit
report(s) concerning Purchaser. If, in Developer's discretion, Purchaser's
credit report(s) is unsatisfactory, then Developer may terminate this contract
by written notice to Purchaser.
5. ESCROW AGENT. The deposits required to be made to the Escrow Agent by
Purchaser shall be deposited in escrow and held within the State of Alabama in
an account designated solely for that purpose by either a licensed title
insurance company, an attorney, a licensed real estate broker, or an institution
whose accounts are insured by a governmental agency or instrumentality until:
(i) delivered to the Developer at closing; (ii) delivered to the Developer
because of Purchaser's default under this Preconstruction Purchase and Escrow
Agreement to purchase the Unit; or (iii) refunded to Purchaser in accordance
with this Preconstruction Purchase and Escrow Agreement. The funds representing
such deposit shall be held in an interest bearing account, and the interest
accrued thereon shall belong to the party entitled to the principal deposit. The
Escrow Agent shall hold said deposit in the escrow account subject to the terms
and conditions of this Agreement. Developer shall give to Purchaser notice of
the person or company which shall act as Escrow Agent and the name and account
number of the escrow account. Developer may, from time to time, designate a
different Escrow Agent, and in any such case, Developer will promptly notify, in
writing, Purchaser of the name and address of the new Escrow Agent. In all
events, the Escrow Agent shall be a licensed title insurance company, an
attorney, a licensed real estate broker or an institution whose accounts are
insured by a governmental agency or instrumentality.
6. PURCHASER'S ACKNOWLEDGMENTS. REPRESENTATIONS AND WARRANTIES. Purchaser
hereby acknowledges, represents and warrants of the following:
[INITIALS]
[________(A) I HAVE RECEIVED FROM THE DEVELOPER COPIES OF THE FOLLOWING
DOCUMENTS:
(I) THE PROSPECTUS
(II) THE PROPOSED DECLARATION WITH PROPOSED PLANS ATTACHED;
(III) THE PROPOSED ARTICLES OF INCORPORATION OF THE CONDOMINIUM
ASSOCIATION;
(IV) THE PROPOSED BYLAWS OF THE CONDOMINIUM ASSOCIATION;
(V) THE PROPOSED HOTEL OPERATING AND RENTAL POOL AGREEMENT;
(VI) THIS PRECONSTRUCTION PURCHASED AND ESCROW AGENT
(ALL HEREIN COLLECTIVELY REFERRED TO AS THE "CONDOMINIUM
DOCUMENTS")
_________(B) I HAVE PERSONALLY VIEWED AND INSPECTED THE SITE OF THE PROPOSED
CONDOMINIUM.
_________(C) I MEET THE MINIMUM INCOME AND NET WORTH STANDARDS FOR THE PURCHASE
OF A UNIT BECAUSE (INITIAL APPROPRIATE LINE):
____ MY ANNUAL GROSS INCOME EXCEEDS $60,000 AND MY NET
WORTH, EXCLUDING HOME, HOME FURNISHINGS AND AUTOMOBILES,
EXCEEDS $60,000;
OR
____ MY NET WORTH, EXCLUSIVE OF HOME, HOME FURNISHINGS AND
AUTOMOBILES, EXCEEDS $225,000.]
2
<PAGE> 3
This Preconstruction Purchase and Escrow Agreement is subject to all of the
terms, conditions and stipulations of the Condominium Documents. The Condominium
Documents may be amended from time to time by the Developer prior to the
closing. Purchaser hereby adopts and ratifies all of the terms and provisions of
the Condominium Documents. Purchaser agrees to execute at closing the Assignment
and Assumption Agreement attached to the Hotel Operating and Rental Pool
Agreement, thereby making Purchaser a party thereto.
7. PURCHASER'S RIGHT OF TERMINATION. Purchaser shall have the right to
terminate this Agreement within seven (7). If the Purchaser elects to cancel
this Agreement pursuant to the terms hereof, Purchaser may do so by hand
delivering notice thereof to the Developer or by mailing notice thereof by
prepaid United States mail to the Developer. However, if Purchaser does not
deliver to Developer notice terminating this Agreement as provided for herein,
Purchaser shall have no further rights to terminate. Upon such proper
cancellation and termination by Purchaser, all sums paid to Escrow Agent by
Purchaser, together with interest accrued thereon, will be repaid to Purchaser
forthwith upon demand. Upon return to Purchaser of all sums, the parties hereto
shall be released from all obligations under this Agreement and, thereupon,
neither party hereto shall have any further liability to the other.
8. MINIMUM SALES CONTINGENCY. If the Developer does not sell at least 75
Hotel Guest Units prior to _____________ ____, ____, the Developer shall
promptly refund all monies paid hereunder by the Purchaser, together with the
interest accrued thereon, to Purchaser through the escrow account and this
Agreement shall be null and void.
9. CONSTRUCTION OF THE CONDOMINIUM. The Developer proposes to construct
the Condominium substantially in accordance with the Plans, subject, however, to
modifications and amendments approved solely by the Developer. In the event that
there is a conflict or ambiguity between the Plans and the brochures,
advertisement, or other drawings, it is agreed that the Plans shall govern. Risk
of loss and right to possession shall transfer to Purchaser at closing.
10. THE UNIT. The Unit dimensions are approximate. In the course of
construction of the improvements on the Property and of the Unit, certain
changes, deviations or omissions may be required by the Developer, an engineer
or architect, or required by governmental authorities. Therefore, Purchaser
hereby authorizes any changes, deviations or omissions that may be required
provided such do not materially affect the rights of the Purchaser, size or
location of the Purchaser's Unit, decrease the Purchaser's share in the Common
Elements, change the Purchaser's voting rights or increase his share in the
Common Expense.
Living area ceilings at the top floor will be insulated with permalite tapered
roof insulation or equivalent to an average thickness of 5 inches, which
thickness, according to the manufacturer, will result in an approximate R-Value
of 14. Living area exterior walls will be insulated with fiberglass butt type
insulation to a thickness of 3.5 inches, which thickness, according to the
manufacturer, will result in an approximate R-Value of 13. (Purchaser agrees and
understands that in accordance with FTC Regulations,
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this information has been supplied by the installer and has not been determined
by Developer.)
11. INSPECTION PRIOR TO CLOSING/WARRANTY. The Purchaser has the right to
inspect, and/or have the Purchaser's designee inspect, the premises prior to
closing; such inspection shall occur within three (3) business days after notice
to Purchaser that the Unit may be inspected. The Purchaser shall satisfy himself
at his expense that all appliances, heating and air conditioning, wiring, and
plumbing are in working order before closing. Neither Developer nor Developer's
agent makes any warranty regarding the condition of the Unit or of the Common
Elements, except as follows: At closing, the Developer will give to Purchaser a
one (1) year limited warranty on the following terms and conditions:
(A) Not later than thirty (30) days after closing or occupancy,
whichever event shall first occur, the Purchaser shall deliver a written list of
any minor omissions or malfunctions not previously made known, in writing, to
the Developer. To the extent that such items are the responsibility of Developer
or not otherwise excluded hereunder, corrections or adjustments will be made by
the Developer;
(B) Developer warrants the Unit to be free from latent defects for
a period of one (1) year following closing or occupancy, whichever event shall
first occur;
(C) A latent defect in construction is herein defined as a defect
not apparent at time of occupancy or closing, but which becomes apparent within
one (1) year from date of closing or occupancy, whichever event shall first
occur, and such defect has been directly caused by Developer's failure to
construct in accordance with the standards of construction prevailing in the
geographical area of the Unit. It is understood, however, by Purchaser that
normal characteristic behavior of building materials, wear and tear, general
maintenance, and like items, will not constitute a latent defect;
(D) All latent defects must be described, in writing, and
delivered to Developer within the one (1) year period described herein;
(E) Developer does not assume responsibility for any of the
following, all of which are expressly excluded from this Limited Warranty:
(i) defects in appliances and pieces of equipment which
are covered by manufacturer's warranties;
(ii) incidental, consequential, or secondary damages
caused by a breach of this warranty;
(iii) defects which are the result of characteristics
common to the materials used, such as, but not limited to: warping and
deflection of wood; mildew and fading; chalking and checking of paint
due to sunlight; cracks due to drying and curing of concrete, stucco,
plaster, bricks, and masonry; drying, shrinking and cracking of
caulking and weather-stripping;
(iv) conditions resulting from condensation on, or
expansion or contraction of materials;
(v) defective design or materials supplied by the
Purchaser or installed under the Purchaser's direction, or defects in,
or caused by anything not built into or installed in the Unit pursuant
to Preconstruction Purchaser and Escrow Agreement between the Developer
and the
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<PAGE> 5
Purchaser;
(vi) damages due to ordinary wear and tear, abusive use,
or lack of proper maintenance of the Unit; and
(vii) chips, scratches, or mars in tile, woodwork, walls,
porcelain, brick, plumbing fixtures, formica and glass not expressly
identified to the Developer prior to closing.
(F) NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THE LIMITED
WARRANTY PROVIDED BY THE DEVELOPER TO THE PURCHASER OF A UNIT DOES NOT COVER ANY
APPLIANCE, PIECE OF EQUIPMENT, OR ITEM WHICH IS A CONSUMER PRODUCT FOR PURPOSES
OF THE MAGNUSON-MOSS WARRANTY ACT (15 U.S.C., ss.ss.2301 THROUGH 2312). THE
LIMITED WARRANTY PROVIDED BY THE DEVELOPER TO THE PURCHASER IS GIVEN IN LIEU OF
ANY AND ALL OTHER WARRANTIES, EITHER EXPRESSED OR IMPLIED, INCLUDING ANY IMPLIED
WARRANTY OF MERCHANTABILITY WHICH ARE SEPARATELY DISCLAIMED.
(G) This warranty is extended only to the Purchaser named herein.
It is not transferable to subsequent purchasers of the Unit.
(H) Should any term of this Agreement be determined by a court of
competent jurisdiction to be unenforceable, such determination shall not affect
the enforceability of the remaining provisions.
(I) This Agreement shall be governed by and construed in
accordance with the laws of the State of Alabama.
If the premises are destroyed or substantially damaged by fire or any other
cause before the closing date, this Agreement shall become null and void at the
option of either party, and the earnest money, together with the interest
accruing thereon, shall be refunded to Purchaser.
12. CLOSING.
A. Date and Place. The closing date and the place of closing
shall be specified in a written notice given by the Developer to Purchaser in
the manner hereinafter provided for the giving of notice, provided such written
notice shall be given not fewer than ten (10) days prior to the date specified
in the notice as the date of closing. The closing shall not take place until the
Declaration of Condominium is recorded and the Unit is substantially completed,
as evidenced by a recorded certificate of substantial completion executed by an
independent registered architect or independent registered engineer or by
issuance of a certificate of occupancy authorized by law.
B. Title to be Conveyed. Upon closing, Developer shall convey the
Unit to Purchaser subject to the following exceptions:
(1) The terms, conditions, covenants, and provisions of
the Declaration of Condominium, as amended, the Articles of
Incorporation of the Condominium Association, the Bylaws, and Rules and
Regulations of the Condominium Association;
(2) Zoning, planning and other restrictions, regulations
and other limitations imposed
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on the Real Property, or the use thereof, by or under the Federal
Coastal Zone Management Act, or other federal law or regulation, or the
City of Gulf Shores or any other governmental authorities having
jurisdiction over the Real Property;
(3) Current ad valorem taxes not yet due and payable;
(4) Any easements which may be, or have been, granted to
public authorities or utility companies to provide for utility lines,
equipment, etc., for utilities serving the Condominium or other
property;
(5) Encroachments, overlaps, boundary line disputes, and
any other matter which would be disclosed by an accurate survey or
inspection of the Real Property;
(6) Applicable building setback lines;
(7) Outstanding oil, gas, and other mineral interests and
rights in connection thereunder;
(8) Existing utility easements; and
(9) Covenants prohibiting use of a portion of the Real
Property for certain quick service restaurants or for certain named
restaurants for a period of twenty (20) years.
C. Expenses.
(1) The following expenses will be paid by the Developer:
(a) Preparation of the deed;
(b) Developer's attorney's fees; and
(c) Cost of owner's title insurance policy.
(2) The Purchaser shall pay all other costs of the
closing, including but not limited to:
(a) Recording of the deed, including all deed
taxes;
(b) All costs required to be paid by the
Mortgagee, if the Unit is to be mortgaged by
the Purchaser;
(c) Utility deposits apportioned or assigned to
said Unit;
(d) Purchaser's attorney's fees and the fees for
services of any other parties engaged by
Purchaser;
(e) Purchaser's proportionate share of the
premium(s) for the insurance procured by the
Developer for the Condominium Association
for the first year of operation; the total
premium is expected to be approximately
$___.00. The Purchaser's proportionate
share will be the same percentage as the
Purchaser's percentage ownership in the
Common
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Elements; and
(f) Purchaser's proportionate share of the ad
valorem taxes of the Real Property allocable
to the Unit for the period of time from the
date of closing to the end of the then
pending tax year. The estimate will be based
on the assumption that the Tax Assessor's
Office will assess the Real Property for the
pertinent year based on the sales price
provided for in the Preconstruction Purchase
and Escrow Agreement at full millage rates
and further on the assumption that no
exemptions will be applied by the Tax
Assessor's Office. The foregoing sum shall
be paid to the Developer, and such funds
shall not be, nor be deemed to be, trust
funds, but may be co-mingled with the
general funds of Developer. The Developer
will cause the ad valorem tax bill on the
Real Property to be paid for such year.
Purchaser shall be entitled to a refund from
the Developer if the ad valorem tax bill
pertaining to the Real Property is less than
the amount collected at closing. In
determining the portion of the ad valorem
tax bill pertaining to the Unit, the amount
of such tax bill shall be multiplied by a
percentage equal to Purchaser's percentage
ownership of Common Elements.
D. Obligations at Closing. At the closing, the following will
take place:
(1) Purchaser shall execute and deliver to Developer such
documents which may be necessary to give effect to
this Agreement;
(2) Purchaser will pay the balance of the Purchase Price
to the Developer;
(3) Purchaser will pay to the Condominium Association for
deposit into an Operating Cash Reserve Fund;
(4) The Developer will execute and deliver to the
Purchaser a Warranty Deed conveying the Unit, subject
to the matters and things hereinabove set forth. The
acceptance of said deed by Purchaser shall be deemed
to be a full performance and discharge of every
agreement and obligation on the part of the Developer
to be performed pursuant to the provisions of this
Agreement, except those which survive by operation of
law or are herein specifically stated to survive the
delivery of the deed;
(5) The Escrow Agent will transfer to the Developer, for
credit to Purchaser, all money deposited by Purchaser
with Escrow Agent, together with the interest accrued
thereon; and
(6) The Developer will obtain, at Developer's expense,
from Gulf Shores Title Company or other title
insurance company chosen by the Developer, a standard
American Land Title Condominium Association owner's
title insurance commitment, in the usual form,
listing the Purchaser as proposed insured in the
amount of the Purchase Price. The commitment will
contain the standard exceptions and shall further
contain the same exceptions as the Warranty Deed.
E. Title Taken. Purchaser requests that title be taken in the
name(s) of _____________ and ____________, and that if more than one name is
shown, the form of ownership be _____ tenants in common; _______ joint tenants
with rights of survivorship; or _____ other [explain:________________________ ].
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13. DEFAULT. Should Purchaser fail to make any of the payments coming due
hereunder or fail or refuse to execute the instruments required to close this
transaction, or refuse to pay the Purchase Price, costs or other sums required
by this Agreement, or otherwise default hereunder, the Developer shall be
forthwith paid all monies held in the escrow account, including interest accrued
thereon, on behalf of the Purchaser, and such monies shall be retained by the
Developer either, at the Developer's option, (i) as partial payment of the
Purchase Price, in which case, Developer shall be entitled to specific
performance of this Agreement by Purchaser and shall be entitled to recover its
costs of enforcing this Agreement against Purchaser, including reasonable
attorney fees; or (ii) as liquidated and agreed upon damages which the Developer
has sustained and suffered as a result of Purchaser's default, and thereupon the
parties hereto will be released and relieved from all obligations hereunder. The
provisions herein contained for liquidated and agreed upon damages are bona fide
provisions for such and are not a penalty, the parties understanding that by
reason of the Developer binding itself to the sale of the Unit, and by reason of
the withdrawal of it from sale at a time when other parties would be interested
in purchasing the Unit, that the Developer will have sustained damages, if
Purchaser defaults, which damages will be substantial but will not be capable of
determination with mathematical precision, and therefore, as aforesaid, the
provision for liquidated and agreed upon damages has been incorporated in this
Agreement as a provision beneficial to both parties and as a reasonable estimate
of damages that would be suffered by the Developer in the event of such default.
Purchaser agrees that if Purchaser defaults in this Agreement, Purchaser will
not file any action against the Developer seeking the return of any portion of
any payment made pursuant this Agreement, or seeking any reduction in the amount
of the liquidated and agreed upon damages.
14. NON-ASSIGNABILITY. The Purchaser shall not assign this Agreement or the
Purchaser's rights hereunder without the prior written consent of the Developer.
If Developer consents to any proposed assignment, such consent shall not release
the original purchaser from liability under this Agreement. Any proposed
assignment is subject to restrictions arising from the registration of the sale
of the Unit as a security. Subject to the provisions hereof, this Agreement
shall be binding upon the parties hereto and their personal representatives,
heirs, successors and assigns.
15. ESCROW AGREEMENT. This Agreement will also serve as the Escrow
Agreement between the parties.
16. AGREEMENT NOT AN ENCUMBRANCE. No encumbrance shall arise against the
Property as a result of this Agreement or any monies deposited hereunder. In
furtherance and not in limitation of the provisions of the preceding sentence,
Purchaser agrees that the provisions of this Agreement are and shall be subject
and subordinate to any lien of any mortgage, including, but not limited to, any
building loan mortgage, heretofore or hereafter made and any advances heretofore
made thereon and any payments or expenses already made or incurred or which
hereafter may be made or incurred, pursuant to the terms hereof, or incidental
thereto, or to protect the security thereof, to the full extent thereof without
the execution of any further legal documents by Purchaser. This subordination
shall apply whether such advances are voluntary or involuntary and whether made
in accordance with any schedule of payments or accelerated by virtue of the
right of the lender to make advances before they become due in accordance with
the schedule of payments. Developer shall, at its option, either satisfy such
mortgage or obtain a release of the Unit from the lien of such mortgage on or
prior to the closing date. The existence of any mortgage or mortgages
encumbering the Property, or portions thereof, other than the Unit, shall not
constitute an objection to title or excuse Purchaser from completing payment of
the Purchase Price or performing all his other obligations hereunder or be the
basis of any claim against, or liability of, Developer, provided that any such
mortgage is subordinated to the Declaration of Condominium or that the Unit is
released from the lien of such mortgage.
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17. SPECIAL DECLARANT RIGHTS. The Declaration of Condominium reserves
certain Special Declarant Rights to the Developer. Reference is made to the
Declaration of Condominium for those Special Declarant Rights. In general and
not by way of limitation, the Developer has the right to: (i) maintain sales
offices, management offices, and models in Units in the Condominium; (ii)
maintain signs on the Common Elements; (iii) use easements throughout Common
Elements for purposes of making improvements within the Condominium or within
real estate that may be added to the Condominium; and (iv) appoint or remove the
officers and members of the Board of Directors of the Condominium Association.
18. MERGER. All understandings and agreements heretofore made between the
parties are merged in this Agreement which expresses the parties entire
agreement, and no representations, oral or written, not contained herein shall
be considered a part hereof. This Agreement may not be altered, enlarged,
modified, or changed except by an instrument in writing executed by the parties
hereto. The authority of Developer's sales representatives is limited and
confined to securing purchasers for the Property upon the terms and conditions
set out in this Agreement. Sales representatives have no power or authority to
make any change, alteration, modification, stipulation, inducement, promise, or
representation whatsoever other than those stated herein.
19. WHEN AGREEMENT EFFECTIVE. This Agreement shall not be binding upon
Developer until signed by either the Developer's Manager or a person duly
authorized by Developer's Manager to act on behalf of Developer for the purpose
of binding Developer to this Agreement. However, once executed by Developer this
Agreement shall be effective as of the date executed by the Developer as set out
below.
20. NOTICE. All notices, statements, demands or other communications
(herein referred to as "notices"), to be given under or pursuant to this
Agreement, shall be in writing, and addressed to the parties at their respective
addresses, as provided herein, and shall be delivered in person, or by certified
or registered mail, post prepaid, or by telegram or cable, charges prepaid. If
mailed or telegraphed, such Notice shall be deemed to have been given
twenty-four (24) hours after the date of mailing or twenty-four (24) hours after
the date of delivery to the telegraph or cable company.
The Developer's address is (for purposes of this paragraph):
The Purchaser's address is as set out below.
21. MISCELLANEOUS. When the context permits within this Agreement, use of
the plural shall include the singular, use of the singular shall include the
plural, and the use of any gender shall be deemed to include all genders. All
terms used herein shall have the meaning given to them in the Declaration of
Condominium and hereby are incorporated by reference and made a part hereof.
22. DISCLOSURE. The Listing Company, _____________________________ is
exclusively an agent of:
________ Developer
________ Purchaser
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________ Both parties as a limited consensual dual agent
________ Neither party and is acting as a transaction broker
The selling company, ______________________________ is exclusively an agent of:
________ Developer
________ Purchaser
________ Both parties as a limited consensual dual agent
________ Neither party and is acting as a transaction broker
Developer initials:_________
Purchaser's initials:_______
23. ARBITRATION OF DISPUTES. Any controversy or claim between the parties
hereto arising out of this Agreement must be settled by binding arbitration in
_______________ 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.
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IN WITNESS WHEREOF, the Purchaser has executed this Agreement this
_____ day of _________, _______.
--------------------------------------------
PURCHASER
Social Security No.:
------------------------
--------------------------------------------
PURCHASER
Social Security No.:
------------------------
ADDRESS OF PURCHASER
--------------------------------------------
--------------------------------------------
bus. phone
---------------------------------
home phone
---------------------------------
IN WITNESS WHEREOF, the Developer has caused this Agreement to be
executed and accepted this offer to purchase on the day of ______, _______.
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.,
An Alabama limited liability company
By:
-----------------------------------------
As Its:
-------------------------------------
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Exhibit 10.4
- --------------------------------------------------------------------------------
BEACHSIDE 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>
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<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>
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<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>
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<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;
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(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 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.
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(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 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,
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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;
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(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 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;
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(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;
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(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 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
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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 51% 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.
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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;
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(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
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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
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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
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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
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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.
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<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. The Owners
agree that during the Term, Innisfree shall receive monthly a $900 fee for, and
further agree to reimburse Innisfree for all costs incurred by Innisfree in
connection with, its provision of Marketing, Advertising, Sales and Reservation
System services for the Hotel (collectively called "Innisfree's Marketing and
Sales Expenses").
7.4 Limitation on Innisfree's Marketing and Sales Expenses. Innisfree may
advertise and market the Hotel either individually or together with other hotels
in the Innisfree Group. In the event that the Hotel is advertised or marketed
together with other hotels in the Innisfree Group, the expenses for such
marketing or advertising will be allocated pro rata among the hotels included
in such advertisement or marketing.
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;
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<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
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<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;
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<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
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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.
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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.
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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
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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
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(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.
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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.
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(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
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(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;
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(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
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(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.
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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 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
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 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 10.11
AMENDMENT TO AGREEMENT AND TO PROMISSORY NOTE
This amends (a) that certain Agreement between Michael A. DeJusto and
M. Katherine DeJusto (collectively "DeJusto") and Southwind Development
Company, L.L.C. ("Southwind") (as successor-in-interest to MacQueen
Enterprises, Inc.) dated as of March 20, 1998, and (b) that certain Promissory
Note from Southwind to DeJusto dated as of April 16, 1998, in the original
principal amount of $541,500.00. The parties agree as follows:
1. Should Southwind fail to make any principal or interest
payment due under said note within ten (10) days after the day
the same becomes due and payable, Southwind shall owe and pay
a late charge equal to ten percent (10%) of the amount of the
delinquent payment. Further there shall be no partial
prepayments under this Agreement and no prepayments of any
sort prior to January 2000.
2. All references to August 17, 1999, in the Agreement and in
the Promissory Note are hereby changed to August 17, 2000;
provided, however, that the change to August 17, 2000, shall
be deemed a change to January 15, 2000, unless as of January
15, 2000, Southwind certifies to DeJusto that at least
sixty-three (63) of the Hotel Guest Units in Beachside All
Suites Hotel, a Condominium, have been sold under
pre-construction agreements (in connection with such
certification, Southwind may assume that DeJusto has exercised
his option to purchase four (4) additional Units -- in
addition to the Unit to be conveyed to DeJusto under the terms
of subparagraph 2(b) of the Agreement -- for a total of five
(5) units) ("sold" means under contract for sale, subject to
the terms and conditions of such contract(s)) and that
Southwind has obtained its building permit to construct the
hotel building.
3. The parties agree to amend subparagraph 2(b) of the Agreement
as follows: The phrase "Buyer shall select a unit either on
the ground floor or the first living floor, that meets with
Sellers approval, to be conveyed to Seller" shall be changed
to read "Buyer shall reserve for the Sellers Unit 902, a unit
to be constructed on the top floor as depicted on the Buyer's
pre-construction price list dated February 16, 1999. When
completed, this unit will be conveyed to Sellers at no
additional cost or expense to Sellers as to sales price.
Sellers shall pay ordinary closing costs and association
capital contributions as are ordinarily paid by buyers of
condominium units in the area as set out in a standard
pre-construction purchase agreement as set out below. Buyer
acknowledges having received a copy of the preliminary
prospectus dated June 22, 1999, pertaining to Seller's
offering of condominium units as securities. Both parties
agree that Buyer is not obligated to purchase Unit 902 or any
units unless and until Buyer signs a binding purchase
agreement and that no purchase agreement will be available for
Buyer's signature unless and until Seller's registration with
the SEC has been declared effective. Therefore, any obligation
to purchase on the part of the Buyer will remain completely
revocable by Buyer until the SEC has declared Seller's
registration effective.
<PAGE> 2
4. Should DeJusto exercise his right of first refusal to purchase up
to four (4) additional units under the terms set out in
subparagraph 2(c) of the Agreement, then the parties further agree
that the purchase agreement(s) for the purchase of such units shall
not require DeJusto to put up earnest money deposits in escrow to
secure his performance under such contract(s) so long as the
principal amount due to DeJusto under the above recited Promissory
Note exceeds the amount of escrowed funds which would otherwise be
required under the terms and conditions offered to other
purchasers.
In all other respects, the said Agreement, the Promissory Note, and
the mortgage securing said Promissory Note, are hereby ratified Julian B.
MacQueen, as guarantor of the obligations under said Promissory Note, hereby
consents to the above amendment.
/s/ Michael A. DeJusto
-------------------------------------
MICHAEL A. DEJUSTO
/s/ M. Katherine A. DeJusto
---------------------------------------
M. KATHERINE A. DEJUSTO
Southwind Development Company, L.L.C.
By: /s/ Julian B. MacQueen
------------------------------------
JULIAN B. MACQUEEN
As Its Manager
By: /s/ Julian B. MacQueen
------------------------------------
JULIAN B. MACQUEEN
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
I consent to the inclusion in Amendment No.3 to the Registration
Statement on Form S-11 of Southwind Development Company, L.L.C. of our report
dated September 3, 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
October 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND MEMBER'S EQUITY DATED JUNE 30, 1999 OF
SOUTHWIND DEVELOPMENT COMPANY, L.L.C. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH BALANCE SHEET.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,366
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 3,011,012
<CURRENT-ASSETS> 3,013,378
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,013,378
<CURRENT-LIABILITIES> 3,014,505
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,013,378
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 62
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,566)
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
