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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION DECEMBER 16, 1999
REGISTRATION NO. 333-74447
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
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 DECEMBER 16, 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 WILL HAVE MINIMAL CAPITAL AND THEREFORE MAY NOT HAVE SUFFICIENT
CAPITAL TO PAY ASSESSMENTS ON ANY UNITS IT OWNS.
- THERE WILL NOT BE A PUBLIC MARKET FOR THE UNITS AND THEIR LIQUIDITY IS
THEREFORE 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, constituting downpayments of 20% of the purchase price
of the minimum number of Units, 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.................... 10
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................................................ 11
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 is therefore limited......................... 11
The Hotel will not be built if we do not sell a minimum
number of Units........................................ 12
You will not have the use of your downpayment funds while
they are held in escrow................................ 12
Southwind may not have sufficient funds to satisfy its
liability for shortfalls............................... 12
Hurricanes and other natural disasters in the Gulf Shores
Market may result in substantial damage to your
property............................................... 12
You may be liable for payments due under the Hotel
Operating Agreement even if the Hotel is inoperable.... 12
There may be conflicts of interest among Southwind,
Innisfree, their owners and their affiliates........... 13
Violation of environmental laws may occur in the future... 13
You may be subject to adverse tax consequences if the
rental pool is not classified as a partnership......... 13
Cash distributions may be insufficient to pay taxes....... 13
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
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Resort Market Seasonality................................... 19
Unsatisfied Demand........................................ 19
Market Demand............................................. 19
Individual Leisure........................................ 19
Group Market.............................................. 20
Premier Location.......................................... 20
Estimated Performance for the Hotel....................... 20
Demand.................................................... 21
Occupancy................................................. 21
Average Daily Rate (ADR).................................. 22
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............... 23
Management of the Rental Pool............................. 23
Owners' Use of Suites..................................... 23
Allocation of Revenue and Expenses........................ 24
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........................................ 37
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............................... 41
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
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Limitation on Interest Deductions........................... 43
Depreciation/Amortization................................. 44
Sale or Other Disposition of a Unit....................... 44
Administrative and Compliance Matters..................... 44
Audit Risk............................................. 44
Resolution of Disputes Involving Rental Pool Items..... 45
Possible Changes in Federal Tax Laws................... 45
Investment by Foreign Persons............................. 45
Corporate Investors....................................... 45
State and Local Taxes..................................... 46
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.
- 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 will have minimal capital and therefore may not have sufficient
capital to pay assessments on any Units it owns.
- There will not be a public market for the Units and their liquidity is
therefore 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. Innisfree will also receive
an accounting fee of $30,240 per year and a sales and marketing fee of
$10,800 per year.
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.
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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 spring of 2000 and to be completed by the
winter 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.
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 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
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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, 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 winter 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
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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. If the Hotel is not completed within
24 months from the date of this Prospectus, we will
refund your downpayment with accrued interest. 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
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
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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.
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.
The Hotel Operating Agreement provides that the Arbitrator's decision
should be based on written submissions by the parties, without a hearing, unless
the Arbitrator determines that a hearing is necessary for resolution of the
dispute. This decision making process differs from that of the Commercial Rules
of Arbitration, which contemplate the holding of one or more hearings.
In arbitration, matters such as the production of information and the
admissibility of evidence are determined by the arbitrator. You may not be able
to obtain information that would be available to you in a proceeding before a
court of law, or to introduce evidence that you would be able to introduce in
proceeding before a court of law.
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Furthermore, an arbitrator's award may be appealed only upon limited
grounds. Those grounds include: the procurement of the award by corruption,
fraud, or undue means; the evident partiality or corruption of the arbitrator;
misconduct of the arbitrator which prejudices the rights of a party to the
arbitration; and the arbitrator's exceeding his powers, or so imperfectly
executing them that a mutual, final, and definite award upon the subject matter
submitted was not made.
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. If
the Hotel Operator makes an assessment for shortfalls of expenses for operating,
maintaining or repairing the Hotel, you must pay those assessments directly. The
Hotel Operator is authorized to make advances to cover shortfalls if an Owner
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
winter 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
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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.
INFLATIONARY PERIODS IN THE ECONOMY MAY ADVERSELY AFFECT THE HOTEL'S
PERFORMANCE.
Inflationary periods in the economy may increase the costs of travel,
resulting in a decrease in the number of travelers and tourists staying at the
Hotel and decreased revenues. Inflationary periods may also result in increases
in operating costs that cannot be offset by increases in revenues.
STRIKES OR OTHER LABOR DISTURBANCES MAY ADVERSELY AFFECT THE HOTEL'S
PERFORMANCE.
Labor disputes may result in the inability of the Hotel to operate,
resulting in decreased revenues.
POOR WEATHER CONDITIONS MAY ADVERSELY AFFECT THE HOTEL'S PERFORMANCE.
Hurricanes, tropical storms or poor weather conditions may result in a
decrease in the numbers of travelers and tourists staying at the Hotel and in
decreased Hotel revenues.
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 shoulder seasons are the periods
of time between the peak season and the low season. 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 WILL NOT BE A PUBLIC MARKET FOR THE UNITS AND THEIR LIQUIDITY IS THEREFORE
LIMITED.
There will not be a public market for the Units and their liquidity is
therefore limited. Because you may not be able to sell your Unit quickly, this
is not a suitable investment for persons who need liquid investments. 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
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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, the Hotel will not be built and this offering will terminate. If
this occurs, we will refund your deposit with accrued interest.
YOU WILL NOT HAVE THE USE OF YOUR DOWNPAYMENT FUNDS WHILE THEY ARE HELD IN
ESCROW.
Funds used for a down-payment will be held in escrow until the earlier of
the termination of the offering or the completion of the Hotel. You will not
have the use of those funds during that time. If the Hotel is not completed
within 24 months from the date of this Prospectus, we will refund your deposit
with accrued interest. If we complete construction of the Hotel, we will pay you
interest on any funds held in escrow.
SOUTHWIND MAY NOT HAVE SUFFICIENT FUNDS TO SATISFY ITS LIABILITY FOR SHORTFALLS.
If only the minimum number of 75 Units is sold in this offering, Southwind
could retain ownership of up to 8 Units, which represents the total number of
Units offered less the number of Units sold. Any Units retained by Southwind
will participate in the rental pool. Southwind's only sources 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. Southwind's capital will therefore
be minimal and may not be sufficient to satisfy its liabilities for shortfalls.
Southwind's inability to satisfy its liabilities for shortfalls could result in
the loss of the ability to operate the property as a Hotel.
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.
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 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.
YOU MAY BE LIABLE FOR PAYMENTS DUE UNDER THE HOTEL OPERATING AGREEMENT EVEN IF
THE HOTEL IS INOPERABLE.
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 under the Hotel Operating Agreement even though the Hotel is
not in operation.
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THERE MAY BE CONFLICTS OF INTEREST AMONG SOUTHWIND, INNISFREE, THEIR OWNERS AND
THEIR AFFILIATES.
Southwind, Innisfree, their owners 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 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.
YOU MAY BE SUBJECT TO ADVERSE TAX CONSEQUENCES IF THE RENTAL POOL IS NOT
CLASSIFIED AS A PARTNERSHIP.
Berkowitz, Lefkovits, Isom & Kushner, A Professional Corporation,
Birmingham, Alabama, 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. 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. 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.
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.
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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.
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.
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.
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.
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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 winter 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 spring of 2000 and to be completed by the winter 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 Prime plus 1/4% per annum. As of the date of this Prospectus,
that rate is 8.75%. The loan is secured by a mortgage dated April 16, 1998.
Payments of accrued interest only are payable quarterly. The principal amount
together with accrued interest are payable on the maturity date, which is
currently April 12, 2000. 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
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<PAGE> 25
- Development of new tourist attractions
- Shopping
- Healthy economy
- Aggressive tourism development
We believe that the above factors all contribute to the strong growth the
tourism industry has experienced throughout Alabama. This growth makes Alabama
an ideal location for a new hotel development. We have selected the 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,
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<PAGE> 26
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.
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
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<PAGE> 27
- Proximity to area attractions
- Overall quality of the facilities
- Quality and variety of recreational facilities
- Value offered
- Name identity or affiliation and reputation
GROUP MARKET
Group meeting demand is typically composed of smaller regional or state
associations, small businesses and state government. Corporate meeting business
consists primarily of executive or incentive retreats and conferences. Group
demand in the Gulf Shores Market typically peaks during March-April and
September-October. Based on information obtained through interviews with Gulf
Shores hotel operators, we estimate that group meeting demand accounted for
approximately 17% of the total hotel rooms rented in the Gulf Shores Market in
1998 by the hotels in the Competitive Set.
We believe there has been support from the group market in the past in the
Gulf Shores Market, and that there is a significant opportunity for new
group-oriented hotel business in the Gulf Shores Market. Currently, only a few
of the properties competitive with the Hotel specifically cater to the group
demand segment. The Hotel does not provide meeting rooms or conference
facilities.
PREMIER LOCATION
Located one block from Highway 59, the Hotel will be the closest beachside
hotel to the main artery into the Gulf Shores Market. Highway 59 provides direct
access to the interstate highway system. In addition, with its nine-story
structure, the Hotel will be the most visible building in the Gulf Shores
central business district. As a result of its location and visibility, the Hotel
will occupy a premiere location in relation to other hotels in Gulf Shores.
There could be future highway construction that may provide more desirable
access to the Gulf Shores Market, thereby diverting traffic from Highway 59. We
cannot assure you that the Hotel will be the closest hotel to the main artery
into the Gulf Shores Market in the future.
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
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<PAGE> 28
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.
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. The occupancy rates of other hotels in the
competitive set are unknown and have not been considered in estimating the
occupancy rate for the Hotel. However, we believe the rooms used to estimate the
Hotel's occupancy rate are the most similar to the rooms the Hotel will have and
are therefore the best indicator of the Hotel's expected occupancy rate.
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.
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<PAGE> 29
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.
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.
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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 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
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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.
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
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<PAGE> 32
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.
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
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<PAGE> 33
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.
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
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<PAGE> 34
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.
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.
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 $359,405 between January 1 and November 24, 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)
- ---------------
1. Net Hotel Return is the amount equal to the Hotel's gross revenue less the
Hotel's expenses and contributions to the furniture, fixtures and equipment
reserve.
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
35
<PAGE> 43
excess of the purchase price. No organized market for the trading of Units is
expected to develop as a result of this offering.
USE OF PROCEEDS
Assuming that the maximum number of Units offered hereby is sold, the gross
proceeds from the sale of Units will be approximately $12.65 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.......................... $ 9,149,443(1) 77.95%
Repayment of DeJusto Note....................... 794,200(2) 6.77%
Repayment of MacQueen Advances.................. 558,306(3) 4.76%
Retained by Southwind........................... 1,235,505(4) 10.52%
----------- -----
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.......................... $ 9,149,443(1) 86.93%
Repayment of DeJusto Note....................... 794,200(2) 7.55%
Repayment of MacQueen Advances.................. 558,306(3) 5.30%
Retained by Southwind........................... 23,657(4) .22%
----------- -----
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, assuming the loans are repaid
in December, 2000. Interest on the land acquisition loan is calculated at
the rate of 8% per annum until October of 1999, at which time the interest
rate increased to 8.5%. In November, the interest rate increased to 8.75%.
It is assumed that the interest rate will remain at 8.75% until March of
2000, at which time it is estimated the acquisition loan will be rolled into
the construction loan. The construction loan will bear interest at the rate
of prime plus 1/4%. Interest on the construction loan is calculated assuming
a rate of 8.75%, that principal is drawn on as follows: 20% in March, 5% in
April, 5% in May, 10% in June, 10% in July, 10% in August, 15% in September,
10% in October, and 15% in November and assuming the construction loan is
repaid in December of 2000. 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 August, 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
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<PAGE> 44
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 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.
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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.
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
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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 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
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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.
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
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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' 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.
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Section 183 creates a presumption in favor of the determination that the
activity is engaged in for profit if a profit (without regard to operating loss
carry forwards) is realized in three out of five consecutive years. To allow the
presumption to work, a taxpayer is given an election to postpone the
determination of whether the presumption applies until the end of the fourth
taxable year following the taxable year in which he first purchased his Unit and
engaged in rental activity. An Owner should make an election as prescribed in
the Regulations to preserve the ability to take advantage of this presumption
and the delay in determining its application. An Owner should note that
Southwind makes no assurances or representations concerning whether an Owner can
expect a profit from the ownership of a Unit and participation in the rental
pool within four years, however, it believes that the rental pool will more
likely than not be considered an activity engaged in for profit.
SECTION 280A -- RESIDENCE AND VACATION HOME RULES
The Section 280A home business expense disallowance rule applies to any
"dwelling unit" used by the taxpayer as a residence. Affected taxpayers include
individuals, partnerships, trusts, estates, and S corporations. Section 280A
does not apply to a C corporation, except in its capacity as a member of a
partnership or S corporation or as a beneficiary of a trust or estate. A
"dwelling unit" includes a house, apartment, condominium, mobile home, boat or
other similar property and all structures and other property appurtenant to such
dwelling unit. A dwelling unit does not, however, include that portion of a unit
which is used exclusively as a hotel, motel, inn or similar establishment. For
this purpose, any personal use of a Unit will likely result in the Unit being
deemed a dwelling unit and not used exclusively as a hotel, motel, inn or
similar establishment.
The Regulations provide an objective standard for determining whether a
taxpayer's use of a dwelling unit causes it to be considered a residence subject
to a gross income limitation on deductions. Any Unit used by the Owner for
personal use for a number of days during a taxable year which exceeds the
greater of (i) 14 days, or (ii) 10% of the number of days during the year for
which the Unit is rented for fair value will be deemed a residence. Personal use
includes use by the taxpayer, use by the taxpayer's family, use by an individual
pursuant to a reciprocal arrangement that permits the taxpayer use of another
unit, days on which the unit is rented for less than fair rental, use by other
Owners in a time sharing arrangement or use by the taxpayer of other units in a
rental pool, and use of the unit as a result of a charitable donation by the
taxpayer. Based upon the proposed operation of the rental pool, which would
limit the use by any Owner of any of the Units to a combined total of 14 days,
the Section 280A gross income limitation should not should not apply to the
Owners.
Section 280A also establishes an expense allocation fraction to be used in
apportioning deductions between personal and business use of a dwelling unit.
The expense allocation formula permits deduction of the fraction of expenses
associated with the property (other than those expenses that are otherwise
deductible even if a property is used for personal use) of which the numerator
is the days the property is actually used for business and the denominator of
which is the total of the days the property is actually used (either for
business or personal use). This allocation formula applies if a property is used
for personal use for even one day. If an Unit is a dwelling unit, it is possible
that, pursuant to an election of all Owners, Units held by other Owners could be
aggregated with the Unit held by a particular Owner, with the result that even
an Owner that never used an Unit for personal purposes could, nevertheless, have
otherwise deductible expenses reduced pursuant to Section 280A. Based upon the
expense allocation requirement, an Owner will be able to deduct expenses
attributable to the rental pool only to the extent allocable to business use.
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).
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In general, a passive activity, is one which: (1) is a trade or business
activity in which the taxpayer does not materially participate; or (2) is a
rental activity. Counsel believes that it is very unlikely that an Owner will be
treated as materially participating in the rental pool because, under the terms
of the Pooling Agreement, sole authority for the management and operation of the
hotel resides in the Hotel Manager.
Investments in rental activities generally produce passive income and loss.
Rental activities are treated as passive without regard to whether they involve
the conduct of trade or business or whether the taxpayer materially
participates. The Regulations provide that where the actual or prospective
customer's payments are principally for the use of tangible property, the
activity is a rental activity, even if payments are made pursuant to a service
contract or other arrangement that is not denominated as a lease. There are
several exceptions provided by the Regulations to treatment as a rental
activity, however, Counsel does not believe that any of the exceptions apply to
the rental pool. Therefore, income and losses from the rental pool will be
treated as derived from a passive activity.
To the extent that an Owner has passive losses from other activities, he
should be able to offset those passive losses against his allocable share of the
rental pool's income and profits. Losses and credits disallowed by the passive
activity rules are suspended and may be carried forward (but not back) and
treated as losses and credits from passive activities in each successive taxable
year until offset by income from passive activities or allowed against other
income as a result of the complete disposition of the taxpayer's interest in
that activity. When a taxpayer's entire interest in an activity is disposed of
in a taxable transaction (other than to a related party), any remaining
suspended loss incurred in connection with that specific activity is allowed in
full, first against income or gain from such activity during the year of
disposition, second against net income or gain from all other passive
activities, and thereafter against income from all sources, including active
income. A disposition can occur through a partner's disposition of his entire
partnership interest.
APPLICATION OF AT-RISK LIMITATIONS
Generally, Code section 465 limits losses that a taxpayer can claim in real
estate and other enumerated activities to the amount that the taxpayer has at
risk with respect to such activities. Losses that are disallowed in any year
because of the at-risk limitations are carried over to succeeding years and can
be used in those years to the extent that the partner's at-risk amount has
increased. A taxpayer is considered at risk in any activity with respect to (i)
the net amount of money and the adjusted basis of property contributed by the
taxpayer to the activity, (ii) any amount with respect to the activity if the
taxpayer is considered personally liable for the repayment of that amount, and
(iii) the taxpayer's proportionate share of any other amount borrowed with
respect to the activity if the lender is an institutional lender and the loan is
secured by real property used in the activity ("qualified nonrecourse
financing"). A taxpayer is not considered to be "at risk" to the extent he or
she is protected against loss through nonrecourse financing not so secured,
guarantees, stop loss agreements or similar agreements. A taxpayer's at-risk
amount is increased by profits earned in the activity and decreased by losses
occurring in the activity. In determining the amount of loss, if any, disallowed
under Section 465, Sections 183 and 280A are applied prior to the application of
Section 465, and Section 469 is applied after any limitation under Section 465
is determined.
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
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portfolio income under the passive loss rules, and (iii) the portion of interest
expense incurred or continued to purchase or carry an interest in a passive
activity to the extent attributable to portfolio income (within the meaning of
the passive loss rules). Owners who intend to finance the purchase of their
Units with borrowed funds should consult their own tax advisors before borrowing
such funds and should maintain careful records of any debt they incur to carry
or acquire their Units, because the interest on such debt may be investment
interest to the extent the rental pool does not engage in a passive activity or
to the extent of any portfolio income received from the rental pool.
Net investment income includes gross income from property held for
investment, gain attributable to the disposition of property held for
investment, and amounts treated as gross portfolio income pursuant to the
passive loss rules less deductible expenses (other than interest) directly
connected with the production of investment income. Investment interest
deductions which are disallowed may be carried forward and deducted in
subsequent years to the extent of net investment income in such years.
DEPRECIATION/AMORTIZATION
In Counsel's opinion, it is more likely than not that an Owner will be
treated as the Owner of a Unit and the tangible personal property associated
with the Unit and be entitled to depreciation deductions with respect to the
Unit and the tangible personal property. Each Owner of a Unit used for rental
purposes will separately determine the applicable allowance for depreciation
with respect to such Unit and any tangible personal property associated with
such Unit for any year, subject to the limitations described above. Section 179
of the Code allows a taxpayer (other than trusts, estates and certain
noncorporate lessors) to expense certain depreciable business assets in the year
of acquisition by electing to treat the cost of new property as an expense
rather than as a capital expenditure subject to depreciation. The deductions for
which the election are made are allowed for the tax year in which the Section
179 property is placed in service and are in lieu of a depreciation deduction.
Generally, a taxpayer may elect to expense only tangible personal property under
Section 179.
SALE OR OTHER DISPOSITION OF A UNIT
If a Unit is held solely for business purposes for more than one year by an
Owner who is not a dealer with respect to such Unit, gain or loss realized on
the sale of such Unit generally will be considered gain or loss from the sale of
a Section 1231 asset and will be so taken into account in computing the
taxpayer's net Section 1231 gain or loss for the taxable year. A net Section
1231 gain generally is treated as a long-term capital gain, while a net Section
1231 loss is treated as an ordinary loss. If any such gain on the sale of a Unit
represents recapture of depreciation of personal property, that portion of the
gain will be taxable as ordinary income.
No loss will be allowed in connection with the sale of a Unit held for
personal use. Any gain realized on the sale of a Unit held for personal use will
be a long-term or a short-term capital gain, 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
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audited. It is not expected that the rental pool will make cash distributions to
Owners to assist them in paying a tax liability resulting from either an audit
of the rental pool or the Owner.
Resolution of Disputes Involving Rental Pool Items
The rental pool will be treated as a separate entity for purposes of
federal tax audits, judicial review of administrative adjustments by the Service
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss, deduction and credit are determined at the partnership level
in a unified partnership proceeding rather than in separate proceedings with the
partners. The Code provides for one partner to be designated as the "Tax Matters
Partner" for these purposes. The Board of Directors shall be responsible for
selecting the Tax Matters Partner for the rental pool.
The Tax Matters Partner is entitled to make certain elections on behalf of
the rental pool and Owners and can extend the statute of limitations for
assessment of tax deficiencies against Owners with respect to rental pool items.
The Tax Matters Partner may 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
45
<PAGE> 53
facilities used for entertainment, amusement or recreation. There are numerous
issues involved in corporate ownership, and corporations should obtain tax
advice from their own counsel before purchasing a Unit.
STATE AND LOCAL TAXES
The rental pool's activities will be carried on within the state of Alabama
and the rental pool will be considered to be domiciled in the state of Alabama.
Alabama imposes an income tax with respect to all income, regardless of source,
of Alabama residents and the income derived from Alabama sources earned by a
nonresident. Alabama income tax law generally conforms to federal income tax law
in matters material to an investment in the rental pool.
Owners who are not Alabama residents may be subject to taxation by their
state of residence as well as Alabama with respect to income derived from the
rental pool. Depending upon applicable state and local laws, both Alabama
residents and nonresidents may find that some deductions that are available to
the Owners for federal income tax purposes may not be available for state or
local income tax purposes.
Furthermore, the tax treatment of particular items under other state or
local income tax laws may vary materially from federal income tax treatment. In
addition, Owners may be subject to income, gift, estate or inheritance taxes in
the state or locality of their residence or domicile, as well as in the state of
Alabama. Prospective Owners are urged to consult their tax advisors concerning
those matters.
LEGAL MATTERS
Berkowitz, Lefkovits, Isom & Kushner, A Professional Corporation,
Birmingham, Alabama, has passed on certain tax matters as described under
"Certain Federal and State Income Tax Aspects." Prospective Owners should not
consider Berkowitz, Lefkovits, Isom & Kushner, A Professional Corporation, to be
their legal counsel with respect to this Offering or any other related matter
and are 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 financial statements 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 winter 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 winter 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 paid by Unit Owners 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 winter 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 suites will have similar physical characteristics to ground
floor suites at Young's by the Sea during the period from August 20, 1997
to August 19, 1998. Similarities will include: a suite format, full
kitchens and newness of construction. Young's by the Sea did not have
elevators, making access to upper level floors more difficult than ground
level floors, and therefore making upper level floors less desirable.
Because the Hotel will have elevators providing convenient access to
upper floors, upper floor rooms will experience similar occupancy rates
to ground floor rooms.
- Revenues will increase in years 2002 and 2003 by approximately the same
percentage as the revenues derived from the ground floor suites at
Young's by the Sea over the period from September 1997 to September 1998.
- The overall demand for lodging accommodations in the Gulf Shores Market
is composed of individual leisure, group and commercial demand segments,
comprising 80%, 17% and 3% of the market demand, respectively. The Hotel
will receive a similar mix of guests.
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.
F-5
<PAGE> 60
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.
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 SEPTEMBER 30, 1999
<PAGE> 62
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
CONTENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Independent Auditors' Report................................ FS-2
Balance Sheets.............................................. FS-3
Statements of Operations and Member's/Members' Equity
(Deficit)................................................. FS-4
Statements of Cash Flows.................................... FS-5
Notes to Financial Statements............................... FS-6 - FS-9
</TABLE>
FS-1
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
November 24, 1999
To the Members
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 and the related statements
of operation and member's equity and cash flows 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.
Sincerely,
Randall L. Sansom
Certified Public Accountant
Gulf Breeze, Florida
FS-2
<PAGE> 64
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 2,168 $ 298
Due from affiliate........................................ 8,210 --
Refundable application fees............................... 2,500 --
Real estate under development............................. 2,684,614 3,094,340
---------- ----------
Total Current Assets.............................. $2,697,492 $3,094,638
Other Assets
Organization costs........................................ 1,566 --
---------- ----------
Total Assets...................................... $2,699,058 $3,094,638
========== ==========
LIABILITIES AND MEMBER'S/MEMBERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable.......................................... $ 35,982 $ 23,347
Accrued interest payable.................................. 72,174 112,787
Accrued liabilities....................................... 50,000 50,000
Due to member............................................. 198,901 547,306
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 $3,095,880
Member's/Members' Equity (Deficit).......................... 501 (1,242)
---------- ----------
Total Liabilities and Member's/Members' Equity
(Deficit)....................................... $2,699,058 $3,094,638
========== ==========
</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/MEMBERS' EQUITY (DEFICIT)
FOR THE EIGHT MONTH AND TWENTY-ONE DAY PERIOD ENDED DECEMBER 31, 1998
AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ -- $ --
Cost of Sales............................................... -- --
----- -------
Gross Revenues.............................................. $ -- $ --
----- -------
Operating Expenses
Bank charges.............................................. $ 148 $ 177
Office supplies........................................... 75 --
----- -------
Total Operating Expenses.......................... $ 223 $ 177
----- -------
Loss from Operations........................................ $(223) $ (177)
Other Expense
Amortization.............................................. $(276) $ --
----- -------
Loss before Cumulative Effect-type
Change in Accounting Principle............................ $(499) $ (177)
Cumulative Effect-type
Change in Accounting Principle............................ -- (1,566)
----- -------
Net Loss.................................................... $(499) $(1,743)
Member's/Members' Equity, Beginning......................... -- 501
Equity Contributions........................................ 1,000 --
----- -------
Member's/Members' Equity (Deficit), Ending.................. $ 501 $(1,242)
===== =======
</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 NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities
Net loss.................................................. $ (499) $ (1,743)
Adjustments:
Amortization........................................... 276 --
Cumulative effect-type change in accounting
principle............................................ -- 1,566
Decrease (Increase) In:
Real estate under development.......................... (2,684,614) (409,726)
Refundable application fees............................ (2,500) 2,500
Organization costs..................................... (1,841) --
(Decrease) Increase In:
Accounts payable....................................... 35,982 (12,635)
Accrued interest payable............................... 72,174 40,613
Accrued liabilities.................................... 50,000 --
----------- ---------
Net Cash Used by Operating Activities............. $(2,531,022) $(379,425)
----------- ---------
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......................................... 198,900 348,405
Loans from affiliates..................................... -- 20,940
Capital contribution...................................... 1,000 --
----------- ---------
Net Cash Provided by Financing Activities......... $ 2,541,400 $ 369,345
----------- ---------
Increase (Decrease) in Cash and Cash Equivalents............ $ 2,168 $ (1,870)
Cash and Cash Equivalents, Beginning Balance................ -- 2,168
----------- ---------
Cash and Cash Equivalents, Ending Balance................... $ 2,168 $ 298
=========== =========
Supplemental disclosure:
Interest paid (capitalized)............................... $ 107,700 $ 149,912
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 SEPTEMBER 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 Financial Statements
The Interim Balance Sheet, Statement of Operations and Members' Deficit and
Statement of Cash Flows as of September 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. All adjustments are of a normal
recurring nature except for the adjustment for the change in accounting
principle described below.
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 September 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 members and taxed depending on their personal tax
situations. The financial statement does not reflect a provision for income
taxes.
Members' Liability
The members of the Company shall have no liability for any debt,
obligation, or liability of the Company.
FS-6
<PAGE> 68
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
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.
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 $149,912. All
interest is capitalized.
NOTE C -- REAL ESTATE UNDER DEVELOPMENT
Real estate under development consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Land................................................ $2,391,500 $2,391,500
Capitalized interest................................ 179,874 370,400
Capitalized closing costs........................... 24,003 24,003
Architect and engineering fees...................... 53,552 65,652
Legal and accounting fees........................... 28,196 214,548
Taxes and permits................................... 4,447 23,456
Other costs......................................... 3,042 4,781
---------- ----------
Total..................................... $2,684,614 $3,094,340
========== ==========
</TABLE>
NOTE D -- AMORTIZATION OF ORGANIZATION COSTS
Amortizable costs consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 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 April
12, 2000. The terms of the note called for quarterly interest payments
calculated at 8% simple interest annually. Effective October 12, 1999, the
interest is calculated at prime (currently 8.5%) plus 1/4%. 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 majority 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
FS-7
<PAGE> 69
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
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
8.75%. No one person, 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 majority 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, unless 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
majority 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 from the majority member and 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 September 30, 1999 the
member advanced an additional $348,405. Between September 30, 1999 and the date
of these financial statements, the member advanced $11,000 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 September 30, 1999,
the related party repaid the $8,210 to the Company, and loaned the Company
$17,340. Between September 30, 1999 and the date of these financial statements,
the related party loaned the Company an additional $38,000. These loans are
non-interest bearing, unsecured, and have 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 the majority
member of the Company.
FS-8
<PAGE> 70
SOUTHWIND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
As of September 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 majority member of the Company has a 50% equity interest and a minority
member has the other 50% interest in the real estate company which handled the
purchase of the land for the Company. This real estate company is expected to
handle some of the listings for the sale of the condominium units. The Company
plans to retain ownership of the commercial unit and lease it to the hotel
operator.
NOTE 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.
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.
NOTE N -- COMPANY MEMBERS
As of December 31, 1998, there was only one member of the Company. Between
December 31, 1998 and September 30, 1999, this member transferred minority
interests to other parties, resulting in multiple members of the Company as of
the date of these financial statements.
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.................. 37
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
II-1
<PAGE> 75
another state or foreign country. The Operating Agreement defines "Member" as
each Person who is an initial signatory to the Operating Agreement, or has been
admitted to Southwind as a Member in accordance with the provisions of the
Operating Agreement. According to the Operating Agreement, Southwind shall have
power to purchase and maintain insurance on behalf of any Indemnified Party
against any liability asserted against such Person and incurred by such Person
in any such capacity.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrants pursuant to the foregoing provisions, the registrants have been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Independent Auditor's Report
Balance Sheet as of December 31, 1998
Notes to Balance Sheet -- December 31, 1998
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)
</TABLE>
II-2
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
23.2 -- Consent of Randall L. Sansom, CPAs,
*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. 5 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 16th day of December, 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. 5 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 December 16, 1999
By: /s/ JULIAN B. MACQUEEN Company, L.L.C.
-------------------------------------------
Julian B. MacQueen
President
/s/ JULIAN B. MACQUEEN President of Southwind December 16, 1999
- ------------------------------------------------ Development Company, L.L.C.,
Julian B. MacQueen President and Sole Director of
Southwind Development
Management Company, Inc.
/s/ ROGER W. WIEGNER Controller and Principal December 16, 1999
- ------------------------------------------------ Accounting Officer of Southwind
Roger W. Wiegner Development Company, L.L.C.
</TABLE>
II-4
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
I consent to the inclusion in Amendment No.5 to the Registration
Statement on Form S-11 of Southwind Development Company, L.L.C. of our report
dated November 24, 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
December 16, 1999
