<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1998
REGISTRATION NOS. 333-67907
333-67907-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT
NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HOST MARRIOTT CORPORATION HMC MERGER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED (EXACT NAME OF REGISTRANT AS SPECIFIED
IN ITS GOVERNING INSTRUMENT) IN ITS GOVERNING INSTRUMENT)
DELAWARE 53-0085950 MARYLAND 53-0085950
(STATE OF (I.R.S. EMPLOYER (STATE OF (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION ORGANIZATION) IDENTIFICATION
NUMBER) NUMBER)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817-1109
301-380-9000
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
CHRISTOPHER G. TOWNSEND, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817-1109
301-380-9000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
COPIES TO:
J. WARREN GORRELL, JR., ESQ. BRUCE E. ROSENBLUM, ESQ.
JAMES E. SHOWEN, ESQ. LATHAM & WATKINS
HOGAN & HARTSON L.L.P. 1001 PENNSYLVANIA AVENUE, N.W., SUITE
555 THIRTEENTH STREET, N.W. 1300
WASHINGTON, D.C. 20004-1109 WASHINGTON, D.C. 20004
(202) 637-5600 (202) 637-2200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
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
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. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED MAXIMUM
TITLE OF CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED PRICE(1) REGISTRATION FEE(1)
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<S> <C> <C>
Common Stock, Preferred Stock,
Depositary Shares, Warrants,
Subscription Rights(2) and Preferred
Stock Purchase Rights(3)............. $750,000,000 $221,250
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</TABLE>
(1) Determined pursuant to Rule 457(o).
(2) Rights evidencing the right to purchase Common Stock, Preferred Stock,
Depositary Shares or Warrants.
(3) The Preferred Stock Purchase Rights are initially carried and traded with
the Common Stock. The value of the Preferred Stock Purchase Rights, if
any, is reflected in the value of the Common Stock.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
PROSPECTUS SUPPLEMENT
DECEMBER , 1998
(TO THE PROSPECTUS DATED DECEMBER , 1998)
SHARES
HOST MARRIOTT CORPORATION
COMMON STOCK
We have declared a special dividend of . share of common stock or $ in
cash per share of Host Marriott common stock, payable to stockholders of record
on December , 1998.
The special dividend is payable in common stock or cash, at the option of
each stockholder exercisable by 5:00 P.M. (EST) January , 1999. You may elect
to receive either . share of common stock or $ in cash on each share of
common stock that you own. Based on the cash amount per share, the implied
value of a full share of common stock issued in the special dividend is $
($ divided by share). On January , 1999, the payment date, the value of
. share of Common Stock may be higher than, lower than or equal to the value
of the cash amount of the special dividend. If the closing price of the common
stock on the NYSE on January , 1999 is greater than $ , the value of .
share of common stock will be higher than the cash amount of the special
dividend. Conversely, if the closing price on January is less than $ ,
stockholders who do not elect to receive cash in payment of the special
dividend will receive an amount of common stock that is less than the cash
amount.
----------------
All capitalized terms used and not defined in this prospectus supplement have
the meanings set forth in the accompanying prospectus.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SHARES OF COMMON STOCK OR
DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS
TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY PERSON TO TELL YOU OTHERWISE.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Completing the Election Certificate........................................ S-3
Effect of the Ownership Limit.............................................. S-3
Federal Income Tax Consequences of the Special Dividend.................... S-3
</TABLE>
PROSPECTUS
Risk Factors............................................................ 2
About This Prospectus................................................... 14
Where You Can Find More Information..................................... 14
Forward-Looking Statements.............................................. 15
The Company............................................................. 16
Use of Proceeds......................................................... 17
ERISA Matters........................................................... 17
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.... 18
Ratio of Earnings to Fixed Charges........................................... 18
Description of Common Stock.................................................. 19
Description of Preferred Stock............................................... 22
Restrictions on Ownership and Transfer....................................... 27
Description of Depositary Shares........................................ 31
Description of Warrants................................................. 35
Description of Subscription Rights...................................... 36
Federal Income Tax Considerations....................................... 38
Plan of Distribution.................................................... 60
Legal Matters........................................................... 61
Experts................................................................. 61
S-2
<PAGE>
COMPLETING THE ELECTION CERTIFICATE
We have prepared the accompanying election certificate so that you can inform
us whether you want to receive your special dividend in common stock, cash or a
combination of common stock and cash. You do not have to make the same election
for all of your shares. However, you may not receive common stock to the extent
it would cause you to exceed the ownership limit, which is described below and
in the accompanying prospectus. If you elect to receive any common stock, you
will receive cash in lieu of any fractional share so that you will receive a
whole number of shares.
Please complete and sign the election certificate and return it to First
Chicago Trust Company of New York in the enclosed postage-paid envelope as soon
as possible. To be effective, we must receive your election on or before 5:00
p.m., Eastern Time, on , January , 1999. IF YOU DO NOT TIMELY RETURN A
PROPERLY COMPLETED ELECTION CERTIFICATE, YOU WILL RECEIVE YOUR SPECIAL DIVIDEND
IN COMMON STOCK, SUBJECT TO THE OWNERSHIP LIMIT AS DESCRIBED BELOW AND IN THE
ACCOMPANYING PROSPECTUS. PLEASE UNDERSTAND THAT YOUR ELECTION WILL BE
IRREVOCABLE.
If you have any questions about completing the election certificate, please
call at (800) - .
EFFECT OF THE OWNERSHIP LIMIT
Host Marriott has an ownership limit that, among other things, prohibits any
person or group of persons acting together from acquiring common stock if, as a
result of that acquisition, any person or group would owns directly or by
attribution under the tax laws, more than 9.8% of the outstanding common stock.
This ownership limit will apply to the special dividend. Therefore, if you
elect to receive common stock but your receipt of common stock would cause any
person or group to exceed the ownership limit, you will receive cash. If you
are a member of the Marriott family or an entity in which the Marriott family
owns an interest, the ownership limit may restrict your ability to elect to
receive common stock. If you elect to receive common stock and it is issued to
you in violation of the ownership limit, all of the remedies applicable under
the ownership limit will apply to this common stock. For a more detailed
description of the ownership limit and the remedies applicable thereunder, see
"Restrictions on Ownership and Transfer" in the accompanying prospectus.
FEDERAL INCOME TAX CONSEQUENCES OF THE SPECIAL DIVIDEND
INTRODUCTION
The following discussion summarizes the federal income tax consequences
reasonably anticipated to be material to a stockholder in connection with the
special dividend. It is for general information only, is not exhaustive of all
tax consequences, and is not intended to be (and should not be construed as)
tax advice. For example, it does not give a detailed discussion of any state,
local or foreign tax consequences. The following discussion is intended to
address only those federal income tax consequences that are generally relevant
to all stockholders. Accordingly, it does not discuss all aspects of federal
income taxation that might be relevant to a specific stockholder in light of
his particular investment or tax circumstances. Therefore, it is imperative
that a stockholder review the following discussion and consult with his own tax
advisors to determine the interaction of his individual tax situation with the
anticipated tax consequences of the Special Dividend.
The information in this section is based on the current Internal Revenue Code
of 1986, current, temporary and proposed regulations thereunder, the
legislative history of the Internal Revenue Code, current administrative
interpretations and practices of the IRS (including its practices and policies
as endorsed in private letter rulings, which are not binding on the IRS), and
court decisions, all as of the date hereof. No assurance can be given that
future legislation, regulations, administrative interpretations and court
decisions
S-3
<PAGE>
will not significantly change the current law or adversely affect existing
interpretations of current law. Any such change could apply retroactively to
transactions preceding the date of the change. No assurance can be provided
that the statements set forth herein (which do not bind the IRS or the courts)
will not be challenged by the IRS or will be sustained by a court if so
challenged.
Hogan & Hartson L.L.P. counsel to Host Marriott, has delivered to Host
Marriott an opinion to the effect that this discussion under the heading
"Federal Income Tax Consequences of the Special Dividend," to the extent that
it contains descriptions of applicable federal income tax law, is correct in
all material respects. The opinion, however, does not purport to address the
tax consequences of the special dividend to any particular stockholder in light
of his particular circumstances. The opinion is based on the Internal Revenue
Code and regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions. No
assurance can be given that future legislation, regulations, administrative
interpretations and court decisions will not significantly change the law or
the above conclusions reached by counsel. In addition, any such change could
apply retroactively to the special dividend. Moreover, opinions of counsel
merely represent counsel's best judgment with respect to the probable outcome
on the merits and are not binding on the IRS or the courts. Accordingly, even
if there is no change in applicable law, no assurance can be provided that such
opinion will not be challenged by the IRS or will be sustained by a court if so
challenged.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR STOCKHOLDER COULD HAVE A MATERIAL
IMPACT ON THE TAX CONSEQUENCES OF THE SPECIAL DIVIDEND. THEREFORE, IT IS
ESSENTIAL THAT EACH STOCKHOLDER CONSULT WITH HIS OWN TAX ADVISORS WITH REGARD
TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH STOCKHOLDER'S
PERSONAL TAX SITUATION, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS
OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
TAX CONSEQUENCES OF THE SPECIAL DIVIDEND TO U.S. STOCKHOLDERS
In this discussion, the term "U.S. stockholder" means
. a citizen or resident of the United States,
. a corporation, partnership or other entity created under the laws of the
United States or a political subdivision of the United States,
. an estate or trust subject to U.S. federal income tax or
. a trust that is supervised primarily by a United States court and is
controlled by United States persons.
Hogan & Hartson has delivered to Host Marriott an opinion to the effect that
the special dividend, to the extent that it is made out of Host Marriott's
earnings and profits, will be a taxable dividend for federal income tax
purposes. This opinion is based on the Internal Revenue Code and regulations in
effect on the date hereof, current administrative interpretations and court
decisions will not significantly change the law or the above opinion. It is
important to note that Hogan & Hartson has expressed no opinion as to whether
the special dividend will, in fact, be made out of Host Marriott's earnings and
profits. This determination depends on the fair market value of the special
dividend, which in turn, will depend on the fair market value of the common
stock distributed in the special dividend. It also depends on the amount of
Host Marriott's earnings and profits, as to which Hogan & Hartson is expressing
no opinion. See "Federal Income Tax Considerations--Federal Income Taxation of
Host Marriott--Distribution of "Earnings and Profits' Attributable to 'C'
Corporation Taxable Years" in the prospectus.
As described in more detail below, Host Marriott currently believes that the
substantial majority, if not all, of the special dividend will be made out of
its earnings and profits. If the entire special dividend is a taxable dividend,
a U.S. stockholder will treat the amount received pursuant thereto as ordinary
income. If the U.S. stockholder elects to receive cash, the amount of taxable
income will be the amount of cash received. If a U.S. stockholder elects to
receive common stock, the amount of taxable income will be the fair market
value of the common stock received plus the amount of cash received in lieu of
a fractional share. If a U.S. stockholder elects to receive common stock with
respect to some of his shares and cash with respect to the rest, the amount of
taxable income will be the fair market value of the common stock received plus
the amount of cash received, some of which will be received pursuant to the
election to receive cash and some of which will be received in lieu of a
fractional share.
S-4
<PAGE>
Although the law is not entirely clear with respect to certain of the
following matters, Host Marriott is taking the positions that:
. a U.S. stockholder should recognize income from the special dividend on
January , 1999, the day the special dividend is payable;
. a U.S. stockholder should measure the fair market value of any common
stock received as part of the special dividend on January , 1999;
. a U.S. stockholder's initial tax basis in any shares of common stock
received as part of the special dividend should be the fair market value
of the common stock on January , 1999; and
. a U.S. Stockholder's holding period in any shares of common stock
received as part of the special dividend should begin on January , 1999,
the day after the special dividend is payable.
Host Marriott cannot, however, guarantee that the IRS will agree with these
positions. No assurance can be provided that the IRS will not take the position
that a U.S. stockholder should recognize income from the special dividend on
December , 1998, the special dividend record date, or on the date the U.S.
stockholder received the Election Certificate. Host Marriott also cannot
guarantee that it would prevail if the IRS challenged its positions in court.
Host Marriott's determination that the substantial majority, if not all, of
the special dividend will be made out of its earnings and profits is based on
its current estimate of its earnings and profits. The calculation of Host
Marriott's earnings and profits, however, is very complex. It includes the
earnings and profits of Host Marriott's predecessors from 1929 through 1998 and
the earnings and profits of Host Marriott in 1998 after the REIT conversion and
in 1999. In addition, the calculation depends upon a number of factual and
legal interpretations related to the activities and operation of Host Marriott
and its predecessors during their entire corporate existence. It is subject to
review and challenge by the IRS. There can be no assurance that the IRS will
respect Host Marriott's estimate of its earnings and profits or that a
challenge to the estimate would not be upheld by a court. Hogan & Hartson has
expressed no opinion as to the amount of Host Marriott's earnings and profits.
To the extent that the special dividend exceeds Host Marriott's earnings and
profits allocable to it, a U.S. stockholder will treat the special dividend as
a tax-free return of capital, reducing the stockholder's tax basis in his
shares by the stockholder's share of the excess. If the U.S. stockholder's
basis is reduced to zero, any remaining excess would be treated as capital
gain, provided that the stockholder held his shares as a capital asset.
TAX CONSEQUENCES OF THE SPECIAL DIVIDEND TO TAX-EXEMPT STOCKHOLDERS
For a discussion of the federal income tax consequences material to a tax-
exempt stockholder of a distribution from Host Marriott, see the discussion
under the heading "Federal Income Tax Considerations--Taxation of Tax-Exempt
Stockholders" in the accompanying prospectus.
TAX CONSEQUENCES OF THE SPECIAL DIVIDEND TO NON-U.S. STOCKHOLDERS
The term "non-U.S. stockholder" means a nonresident alien individual, foreign
corporation, foreign partnership or foreign estate or trust. A non-U.S.
stockholder will treat the fair market value of the special dividend as
ordinary income to the extent it is made out of Host Marriott's earnings and
profits. For a discussion regarding the fair market value of the special
dividend and the extent to which it is made out of Host Marriott's earnings and
profits see "--Tax Consequences of the Special Dividend to U.S. Stockholders"
above.
For non-U.S. stockholders, the special dividend will be subject to
withholding of U.S. federal income tax on a gross basis (that is, without
allowance of deductions) at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty, unless it is treated as effectively
connected with the conduct by the non-U.S. stockholder of a U.S. trade or
business. Certain certification and disclosure requirements must be satisfied
to be exempt from withholding under the effectively connected income exemption.
If the special dividend is effectively connected with such a trade or business,
a non-U.S. stockholder will be subject to tax on the special dividend on a net
basis (that is, after allowance of deductions) at graduated rates, in the same
manner as U.S.
S-5
<PAGE>
stockholders are taxed with respect to the special dividend, and generally will
not be subject to withholding. A non-U.S. stockholder that is a corporation may
also be subject to an additional branch profits tax on the special dividend at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
To the extent that the special dividend exceeds Host Marriott's earnings and
profits allocable to it, it will be treated first as a tax-free return of
capital to such non-U.S. stockholder, reducing the adjusted basis in his shares
by the amount of such excess, but not below zero. If such basis is reduced to
zero and there is remaining excess, the special dividend will give rise to gain
from the sale or exchange of such stock.
As a result of a legislative change made by the Small Business Job Protection
Act of 1996, it appears that Host Marriott would be required to withhold 10% of
any distribution in excess of its earnings and profits. Consequently, although
Host Marriott currently intends to withhold at a rate of 30% on the entire
amount of the special dividend (or a lower applicable treaty rate), to the
extent that it does not do so, any portion of the special dividend not subject
to withholding at a rate of 30% (or a lower applicable treaty rate) will be
subject to withholding at a rate of 10%. However, a non-U.S. stockholder may
seek a refund of such amounts from the IRS if it subsequently determined that
the special dividend was, in fact, in excess of Host Marriott's earnings and
profits, and the amount withheld exceeded the non-U.S. stockholder's U.S. tax
liability, if any, with respect to the special dividend.
To the extent that withholding tax is owed with respect to any non-U.S.
stockholder with respect to common stock received pursuant to the special
dividend, Host Marriott anticipates that the transfer agent would sell in the
market a portion of the shares of common stock distributable to such non-U.S.
stockholder to pay such withholding taxes. As a result, the actual number of
shares received pursuant to the special dividend would be net of any shares
sold to pay such withholding taxes.
LEGAL MATTERS
The validity of the common stock issued in the special dividend will be
passed upon for Host Marriott by Hogan & Hartson L.L.P.
S-6
<PAGE>
SUBJECT TO COMPLETION
DATED DECEMBER , 1998
PROSPECTUS
$750,000,000
HOST MARRIOTT CORPORATION
COMMON STOCK, PREFERRED STOCK, DEPOSITARY SHARES,
WARRANTS AND SUBSCRIPTION RIGHTS
By this prospectus, we may offer, from time to time, in one or more series or
classes the following securities:
. shares of our common stock, par value $1.00 per share,
. shares of our preferred stock, par value $.01 per share,
. shares of preferred stock represented by depositary shares,
. our warrants exercisable for common stock, preferred stock or depositary
shares and
. subscription rights evidencing the right to purchase any of the above
securities.
The offered securities have an aggregate initial offering price of
$750,000,000. We may offer the offered securities in amounts, at prices and on
terms determined at the time of the offering. We will provide you with specific
terms of the applicable offered securities in supplements to this prospectus.
You should read this prospectus and any supplement carefully before you
decide to invest. This prospectus may not be used to consummate sales of the
offered securities unless it is accompanied by a prospectus supplement
describing the method and terms of the offering of those offered securities.
INVESTING IN THE OFFERED SECURITIES INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE OFFERED SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY
PERSON TO TELL YOU OTHERWISE.
----------------
The date of this prospectus is December , 1998.
<PAGE>
AS USED HEREIN AND IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT, "HOST MARRIOTT"
MEANS HOST MARRIOTT CORPORATION, A MARYLAND CORPORATION FORMERLY KNOWN AS HMC
MERGER CORPORATION AND THE SUCCESSOR BY MERGER TO HOST MARRIOTT CORPORATION, A
DELAWARE CORPORATION, WHICH TOGETHER WITH ITS FORMER SUBSIDIARIES ARE THE
PREDECESSORS OF HOST MARRIOTT, AND ITS SUBSIDIARY HOST MARRIOTT, L.P., A
DELAWARE LIMITED PARTNERSHIP AND ITS SUBSIDIARIES OR, AS THE CONTEXT MAY
REQUIRE, HOST MARRIOTT CORPORATION ONLY OR HOST MARRIOTT, L.P. ONLY. ALL
REFERENCES TO THE HISTORICAL ACTIVITIES OF HOST MARRIOTT PRIOR TO DECEMBER ,
1998, REFER TO THE ACTIVITIES OF HOST MARRIOTT'S PREDECESSORS.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
material risks described below.
WE DO NOT CONTROL OUR HOTEL OPERATIONS AND CERTAIN OTHER ASSETS
WE DO NOT CONTROL OUR HOTEL OPERATIONS
Because federal income tax laws restrict real estate investment trusts from
deriving revenues directly from operating a hotel, we do not operate any of our
hotels. Instead, we lease virtually all of our hotels to subsidiaries of
Crestline Capital Corporation which, in turn, retain managers to manage our
hotels pursuant to management agreements. Under the hotel leases, we have
little influence over how the lessees operate our hotels. Similarly, we have
virtually no influence over how the managers manage our hotels. As a result,
our revenue depends upon the ability of the lessees and the managers to operate
and manage our hotels. We have no recourse if we believe that the hotel
managers do not maximize the revenues from our hotels, which in turn will
maximize the rental payments we receive under the leases. We may seek redress
under most leases only if the lessee violates the terms of the lease and then
only to the extent of the remedies set forth in the lease. We may terminate a
lease if the lessee defaults, but terminating a lease could impair our ability
to qualify as a REIT for federal income tax purposes unless another suitable
lessee is found.
WE DO NOT CONTROL CERTAIN ASSETS HELD BY THE NON-CONTROLLED SUBSIDIARIES
We own economic interests in certain taxable corporations, which we refer to
as the "non-controlled subsidiaries," that hold various assets not exceeding,
in the aggregate, 15% in value of our assets. These assets consist primarily of
interests in hotels which are not leased, certain furniture, fixtures and
equipment ("FF&E") used in our hotels, and certain international hotels that
could jeopardize our REIT status. Although we own 95% of the economic interests
of the non-controlled subsidiaries, the Host Marriott Statutory
Employee/Charitable Trust owns all of the voting common stock (which represents
the remaining 5% of the economic interest) of the non-controlled subsidiaries.
This voting stockholder elects the directors who are responsible for overseeing
the operations of the non-controlled subsidiaries. As a result, we have no
control over the operation or management of the hotels or other assets owned by
the non-controlled subsidiaries, even though we depend upon the non-controlled
subsidiaries for a significant portion of our revenues.
WE ARE DEPENDENT ON THE LESSEES AND THE HOTEL MANAGERS
WE ARE DEPENDENT ON THE LESSEES' RENT PAYMENTS AS OUR PRIMARY SOURCE OF
REVENUES
Subsidiaries of Crestline lease virtually all of our hotels. The lessees'
rent payments are the primary source of our revenues. Crestline guarantees the
obligations of its subsidiaries under the hotel leases, but Crestline's
liability is limited to a relatively small portion of the aggregate rent
obligation of its subsidiaries. Crestline's and each of its subsidiaries'
ability to meet its obligations under the leases will determine the amount of
our revenue and, likewise, our ability to make distributions to stockholders.
We have no control over Crestline or any of its subsidiaries and cannot assure
you that Crestline or any of its subsidiaries will have sufficient assets,
2
<PAGE>
income and access to financing to enable them to satisfy their obligations
under the leases or to make payments of fees under the management agreements.
Because of our dependence on Crestline, our credit rating will be affected by
its general creditworthiness.
WE ARE DEPENDENT ON THE HOTEL MANAGERS TO OPERATE THE HOTELS EFFECTIVELY
Our revenue will be affected by the performance of the managers of our
hotels. It also will be affected by the relationships between the managers and
the lessees. Their decisions involving hotel management may not necessarily be
in our best interests, and disagreements between them could adversely affect
us. We have no control over these relationships. Moreover, each lessee's
ability to pay rent accrued under its lease depends to a large extent on the
ability of the hotel manager to operate the hotel effectively and to generate
gross sales in excess of its operating expenses. Our rental income from the
hotels may therefore be adversely affected if the managers fail to provide
quality services and amenities and competitive room rates at our hotels or fail
to maintain the quality of the hotel brand names. Although the lessees have
primary liability under the management agreements while the leases are in
effect, we remain liable under the leases for all obligations that the lessees
do not perform.
OUR PERFORMANCE AND STOCK VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REAL
ESTATE AND LODGING INDUSTRIES
OUR REVENUES AND THE VALUE OF OUR PROPERTIES COULD BE ADVERSELY AFFECTED BY
CONDITIONS AFFECTING THE LODGING INDUSTRY
If our assets do not generate income sufficient to pay our expenses, service
our debt and maintain our properties, we will be unable to make expected
distributions to our stockholders. Factors that could adversely affect our
revenues and the economic performance and value of our properties include:
. changes in the national, regional and local economic climate,
. local conditions such as an oversupply of hotel properties or a reduction
in demand for hotel properties,
. the attractiveness of our hotels to consumers and competition from
comparable hotels,
. the quality, philosophy and performance of the hotel managers (primarily
Marriott International, Inc.),
. the ability of any hotel lessee to maximize rental payments,
. changes in room rates and increases in operating costs due to inflation
and other factors and
. the need to periodically repair and renovate our hotels.
OUR EXPENSES MAY REMAIN CONSTANT EVEN IF OUR REVENUES DROP
The expenses of owning a property are not necessarily reduced when
circumstances such as market factors and competition cause a reduction in
income from the property. If a property is mortgaged and we are unable to meet
the mortgage payments, the lender could foreclose and take the property. Our
financial condition and ability to service debt and make distributions to our
stockholders could be adversely affected by:
.interest rate levels,
.the availability of financing,
.the cost of compliance with government regulation, including zoning and
tax laws and
.changes in laws and governmental regulations, including those governing
usage, zoning and taxes.
NEW ACQUISITIONS MAY FAIL TO PERFORM AS EXPECTED AND WE MAY BE UNABLE TO MAKE
ANY ACQUISITIONS
We intend to acquire additional full-service hotels and other types of real
estate. Newly acquired properties may fail to perform as expected, which could
adversely affect our financial condition. We may underestimate the costs
necessary to bring an acquired property up to standards established for its
intended market position. We expect to acquire hotels and other types of real
estate with cash from secured or unsecured financings and
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proceeds from offerings of equity or debt, to the extent available. We may not
be in a position or have the opportunity in the future to make suitable
property acquisitions on favorable terms. In addition, we cannot guarantee that
the leases for newly acquired hotels will be as favorable to us as the Leases.
COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED PRICES FOR HOTELS
Other major investors with significant capital compete with us for attractive
investment opportunities. These competitors include other REITs and hotel
companies, investment banking firms and private institutional investment funds.
This competition may increase prices for hotel properties, thereby decreasing
the potential return on our investment.
THE SEASONALITY OF THE HOTEL INDUSTRY MAY AFFECT THE ABILITY OF THE LESSEES TO
MAKE TIMELY RENT PAYMENTS
The seasonality of the hotel industry may, from time to time, affect either
the amount of rent that accrues under the hotel leases or the ability of the
lessees to make timely rent payments under the leases. A lessee's or
Crestline's inability to make timely rent payments to us could adversely affect
our financial condition and ability to service debt and make distributions to
our stockholders.
WE MAY BE UNABLE TO SELL PROPERTIES WHEN APPROPRIATE BECAUSE REAL ESTATE
INVESTMENTS ARE ILLIQUID
Real estate investments generally cannot be sold quickly. We may not be able
to vary our portfolio promptly in response to economic or other conditions.
This inability to respond promptly to changes in the performance of our
investments could adversely affect our financial condition and ability to
service debt and make distributions to our stockholders.
WE MAY BE UNABLE TO RENEW LEASES OR FIND OTHER LESSEES
Our current hotel leases have terms of seven to ten years. There can be no
assurance that the affected hotels will be relet to Crestline or the current
lessees, or if relet, will be relet on terms as favorable to us. If our hotels
are not relet, we will be required to find other lessees who meet certain
requirements of the management agreements and of the REIT tax rules. We cannot
assure you that we would be able to find satisfactory lessees or that the terms
of any new leases would be as favorable as under the current leases. Failure to
find satisfactory lessees could cause us to lose our REIT status, and failure
to enter leases on satisfactory terms could result in reduced cash available
for distribution.
TERMS OF THE HOTEL GROUND LEASES MAY ADVERSELY AFFECT OUR REVENUES
As of December , 1998, we lease of our hotels pursuant to ground leases.
These ground leases generally require increases in ground rent payments every
five years. Our ability to make cash distributions to our stockholders could be
adversely affected to the extent that the rents payable by the lessees under
the leases do not increase at the same or a greater rate as the increases under
the ground leases. In addition, if we were to sell a hotel encumbered by a
ground lease, the buyer would have to assume the ground lease, which could
result in a lower sales price.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE
We carry comprehensive liability, fire, flood, extended coverage and rental
loss (for rental losses extending up to 12 months) insurance with respect to
all of our hotels. We believe the policy specifications and insured limits of
these policies are of the type customarily carried for similar hotels. Certain
types of losses, such as from earthquakes and environmental hazards, however,
may be either uninsurable or too expensive to justify insuring against. Should
an uninsured loss or a loss in excess of insured limits occur, we could lose
all or a portion of the capital we have invested in a hotel, as well as the
anticipated future revenue from the hotel. In such an event, we might
nevertheless remain obligated for any mortgage debt or other financial
obligations related to the property.
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THE LEASES, MANAGEMENT AGREEMENTS AND CERTAIN OTHER CONTRACTS COULD IMPAIR OUR
ABILITY TO SELL OR REFINANCE OUR HOTELS
LEASES COULD IMPAIR THE SALE OR OTHER DISPOSITION OF OUR HOTELS
Each lease with a subsidiary of Crestline generally requires us to make a
termination payment to the lessee if we terminate the lease prior to the
expiration of its term. A termination payment is required even if we terminate
a lease because of a change in the federal income tax laws that either would
make continuation of the lease jeopardize our REIT status or would enable us to
operate our hotels ourselves. The termination fee generally is equal to the
fair market value of the lessee's leasehold interest in the remaining term of
the lease, which could be a significant amount. In addition, if we decide to
sell a hotel, we may be required to terminate its lease, and the payment of the
termination fee under such circumstances could impair our ability to sell the
hotel and would reduce the net proceeds of any sale.
MANAGEMENT AGREEMENTS COULD IMPAIR THE SALE OR OTHER DISPOSITION OF OUR HOTELS
Under the terms of the management agreements, we generally may not sell,
lease or otherwise transfer the hotels unless the transferee assumes the
related management agreements and meets certain other conditions. Our ability
to finance, refinance or effect a sale of any of the properties managed by
Marriott International or another manager may, depending upon the structure of
such transactions, require the manager's consent. If Marriott International or
other manager did not consent, we would be prohibited from consummating the
financing, refinancing or sale without breaching the management agreement.
THE ACQUISITION CONTRACTS RELATING TO CERTAIN HOTELS LIMIT OUR ABILITY TO SELL
OR REFINANCE SUCH HOTELS
For reasons relating to federal income tax considerations of the former
owners of certain of our hotels, we have agreed to restrictions on selling
certain hotels or repaying or refinancing the mortgage debt thereon for lock-
out periods which vary depending on the hotel. We anticipate that, in certain
circumstances, we may agree to similar restrictions in connection with future
hotel acquisitions. As a result, even if it were in our best interests to sell
such hotels or refinance their mortgage debt, it may be difficult or impossible
to do so during their respective lock-out periods.
MARRIOTT INTERNATIONAL'S AND CRESTLINE'S OPERATION OF THEIR RESPECTIVE
BUSINESSES COULD RESULT IN DECISIONS NOT IN OUR BEST INTEREST
Marriott International, a public company in the business of hotel management,
manages a significant number of our hotels. In addition, Marriott International
manages hotels owned by others that compete with our hotels. As a result,
Marriott International may make decisions regarding competing lodging
facilities which it manages that would not necessarily be in our best
interests. Further, J.W. Marriott, Jr., a member of our Board of Directors, and
Richard E. Marriott, our Chairman of the Board and J.W. Marriott, Jr.'s
brother, serve as directors, and, in the case of J.W. Marriott, Jr., also an
officer, of Marriott International. As of December , 1998, J.W. Marriott, Jr.
and Richard E. Marriott also beneficially own approximately 10.6% and 10.2%,
respectively, of the outstanding shares of common stock of Marriott
International, and will beneficially own approximately 5.33% and 5.31%,
respectively, of the outstanding shares of common stock of Crestline, but
neither will serve as an officer or director of Crestline. As a result, J.W.
Marriott, Jr. and Richard E. Marriott have potential conflicts of interest when
making decisions regarding Marriott International, including decisions relating
to the management agreements involving the hotels, Marriott International's
management of competing lodging properties and Crestline's leasing and other
businesses.
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The Boards of Directors of both Host Marriott and Marriott International
follow appropriate policies and procedures to limit the involvement of Messrs.
J.W. Marriott, Jr. and Richard E. Marriott in conflict situations, including
requiring them to abstain from voting as directors of either Host Marriott or
Marriott International or their subsidiaries on certain matters which present a
conflict between the companies. If appropriate, these policies and procedures
will apply to other directors and officers.
STOCKHOLDERS' ABILITY TO EFFECT A CHANGE IN CONTROL OF HOST MARRIOTT IS LIMITED
PROVISIONS OF OUR CHARTER AND BYLAWS COULD INHIBIT CHANGES IN CONTROL
Certain provisions of our charter and bylaws may delay or prevent a change in
control of Host Marriott or other transaction that could provide our
stockholders with a premium over the then-prevailing market price of their
shares or which might otherwise be in their best interests. These include a
staggered Board of Directors and the ownership limit described below. Also, any
future class or series of stock may have certain voting provisions that could
delay or prevent a change in control or other transaction that might involve a
premium price or otherwise be good for our stockholders.
THE MARRIOTT INTERNATIONAL PURCHASE RIGHT MAY DISCOURAGE A TAKEOVER OF HOST
MARRIOTT
Marriott International has the right to purchase up to 20% of each class of
our outstanding voting shares at the then fair market value upon the occurrence
of certain change of control events involving Host Marriott. We refer to this
right as the "Marriott International purchase right." The Marriott
International purchase right will continue in effect until June 2017, subject
to certain limitations intended to protect the our REIT status. The Marriott
International purchase right may have the effect of discouraging a takeover of
Host Marriott, because any person considering acquiring a substantial or
controlling block of our common stock will face the possibility that its
ability to obtain or exercise control would be impaired or made more expensive
by the exercise of the Marriott International purchase right.
WE HAVE ADOPTED MARYLAND LAW LIMITATIONS ON CHANGES IN CONTROL
The Maryland General Corporation Law, as amended (the "MGCL"), prohibits
certain "business combinations" (including certain issuances of equity
securities) between a Maryland corporation and any person who owns 10% or more
of the voting power of the corporation's then outstanding shares of stock (an
"Interested Stockholder") or an affiliate of the Interested Stockholder unless
a business combination is approved by the board of directors any time before an
Interested Stockholder first becomes an Interested Stockholder. The prohibition
lasts for five years after the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be approved by
stockholders under certain special voting requirements. We will be subject to
such provisions although we may elect to "opt-out" in the future. As a result,
a change in control of Host Marriott or other transaction that could provide
our stockholders with a premium over the then-prevailing market price of their
shares or which might otherwise be in their best interests may be prevented or
delayed. Our Board of Directors has exempted from this statute the acquisition
of shares by Marriott International (together with its successors and permitted
assignees) pursuant to the terms of the Marriott International purchase right
as well as any other transactions involving Host Marriott and Marriott
International or our respective subsidiaries, or J.W. Marriott, Jr. or Richard
E. Marriott, provided that, if any such transaction is not in the ordinary
course of business, it must be approved by a majority of our directors present
at a meeting at which a quorum is present, including a majority of the
disinterested directors, in addition to any vote of stockholders required by
other provisions of the MGCL.
MARYLAND CONTROL SHARE ACQUISITION LAW COULD DELAY OR PREVENT A CHANGE IN
CONTROL
Under the MGCL, unless a corporation elects not to be subject thereto,
"control shares" acquired in a "control share acquisition" have no voting
rights except to the extent approved by stockholders by a vote of two-thirds of
the votes entitled to be cast on the matter, excluding shares owned by the
acquiror and by officers
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or directors who are employees of the corporation. "Control shares" are voting
shares which would entitle the acquiror to exercise voting power in electing
directors within certain specified ranges of voting power. A "control share
acquisition" means the acquisition of control shares, subject to certain
exceptions. We are subject to these control share provisions of Maryland law
and, as a result, a change in control of Host Marriott or other transaction
that could provide our stockholders with a premium over the then-prevailing
market price of their shares or which might otherwise be in their best
interests may be delayed or prevented. Our bylaws contain an exemption from
this statute for any shares acquired by Marriott International, together with
its successors and permitted assignees, pursuant to the Marriott International
purchase right.
WE HAVE ADOPTED A RIGHTS AGREEMENT WHICH COULD DELAY OR PREVENT A CHANGE IN
CONTROL
Our Rights Agreement provides, among other things, that upon the occurrence
of certain events, stockholders will be entitled to purchase shares of our
stock, subject to the ownership limit. These purchase rights would cause
substantial dilution to a person or group that acquires or attempts to acquire
20% or more of our common stock on terms not approved by the Board of Directors
and, as a result, could delay or prevent a change in control of Host Marriott
or other transaction that could provide our stockholders with a premium over
the then-prevailing market price of their shares or which might otherwise be in
their best interests. See "Description of Common Stock--Stockholder Rights
Plan/Preferred Stock Purchase Rights."
WE HAVE A STOCK OWNERSHIP LIMIT PRIMARILY FOR REIT TAX PURPOSES
Primarily to facilitate maintenance of our REIT qualification, our charter
imposes an ownership limit on our common stock and preferred stock. See
"Restrictions on Ownership and Transfer." The attribution provisions of the
federal tax laws that are used in applying the ownership limit are complex.
They may cause one stockholder to be considered to own the stock of a number of
related stockholders. As a result, these provisions may cause a stockholder
whose direct ownership of stock does not exceed the ownership limit to, in
fact, exceed the ownership limit.
The ownership limit could delay or prevent a change in control and,
therefore, could adversely affect stockholders' ability to realize a premium
over the then-prevailing market price for the common stock in connection with
such transaction.
THE MARKET VALUE OF OUR PUBLICLY TRADED SECURITIES COULD BE ADVERSELY AFFECTED
BY MANY FACTORS IN ADDITION TO GENERAL MARKET CONDITIONS
THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR PUBLICLY TRADED SECURITIES
In connection with the REIT conversion, we have reserved approximately
million shares of our common stock for future issuance. Up to million
shares of this common stock may be issued in January 1999. Such common stock
will be freely transferable upon receipt. The balance of the reserved common
stock may be issued upon the redemption of units of limited partnership
interest in Host Marriott, L.P. These limited partnership units will become
redeemable at various times over the next year, with million limited
partnership units becoming redeemable beginning on July 1, 1999, pursuant to
each holder's right under Host Marriott, L.P.'s partnership agreement to redeem
them for shares of our common stock or the cash equivalent thereof (as elected
by Host Marriott). In addition, we have reserved a substantial number of shares
of our common stock for issuance pursuant to benefit plans or outstanding
options, and such shares of our common stock will be available for sale in the
public markets from time to time. Moreover, we may issue additional shares of
our common stock in the future. We cannot predict the effect that future sales
of shares of our common stock, or the perception that such sales could occur,
will have on the market prices of our equity securities.
OUR FFO AND CASH DISTRIBUTIONS WILL AFFECT THE MARKET PRICE OF OUR PUBLICLY
TRADED SECURITIES
We believe that the market value of a REIT's equity securities is based
primarily upon the market's perception of the REIT's growth potential,
including its prospects for accretive acquisitions and development,
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and its current and potential future cash distributions, and is secondarily
based upon the real estate market value of the underlying assets. For that
reason, our common stock may trade at prices that are higher or lower than the
net asset value per share. To the extent we retain operating cash flow for
investment purposes, working capital reserves or other purposes, these retained
funds, while increasing the value of our underlying assets, may not
correspondingly increase the market price of our common stock. Our failure to
meet the market's expectations with regard to future FFO and cash distributions
would likely adversely affect the market price of our publicly traded
securities.
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR PUBLICLY TRADED
SECURITIES
One of the factors that investors consider important in deciding whether to
buy or sell shares of a REIT is the distribution rate on such shares (as a
percentage of the price of such shares) relative to market interest rates. If
market interest rates go up, prospective purchasers of our equity securities
may expect a higher dividend yield. Higher interest rates would not, however,
result in more funds for us to distribute and, in fact, would likely increase
our borrowing costs and potentially decrease cash available for distribution to
the extent that our indebtedness has floating interest rates. Thus, higher
market interest rates could cause the market price of our publicly traded
securities to go down.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
To qualify as a REIT, we must distribute to our stockholders each year at
least 95% of our net taxable income (excluding any net capital gain). Because
of these distribution requirements, it is not likely that we will be able to
fund all future capital needs, including acquisitions, from income from
operations. We therefore will have to rely on third-party sources of capital,
which may or may not be available on favorable terms or at all. Our access to
third-party sources of capital depends upon a number of factors, including
general market conditions, the market's perception of our growth potential, our
current and potential future earnings and cash distributions and the market
price of our common stock. Moreover, additional equity offerings may result in
substantial dilution of stockholders' interests, and additional debt financing
may substantially increase our leverage.
DEGREE OF LEVERAGE AND RIGHTS OF LENDERS COULD ADVERSELY AFFECT OUR ECONOMIC
PERFORMANCE
OUR DEGREE OF LEVERAGE COULD LIMIT OUR ABILITY TO OBTAIN ADDITIONAL FINANCING
Our debt-to-total market capitalization ratio was approximately % as of
December , 1998. We have a policy of incurring debt only if, immediately
following such incurrence, our debt-to-total market capitalization ratio on a
pro forma basis would be 60% or less. Our degree of leverage could affect our
ability to obtain financing in the future for working capital, capital
expenditures, acquisitions, development or other general corporate purposes and
to refinancing borrowings on favorable terms. Our leveraged capital structure
also makes us more vulnerable to a downturn in our business or in the economy
generally. Moreover, there are no limitations in our organizational documents
that limit the amount of indebtedness that we may incur, although our existing
debt instruments contain certain restrictions on the amount of indebtedness
that we may incur. Accordingly, our Board of Directors could alter or eliminate
the 60% policy (or any other investment or financing policy) without
stockholder approval to the extent permitted by our debt agreements. If this
policy were changed, we could become more highly leveraged, resulting in an
increase in debt service payments that could adversely affect our cash flow and
consequently our ability to service our debt and make distributions to
stockholders.
RENTAL REVENUES FROM HOTELS ARE SUBJECT TO PRIOR RIGHTS OF LENDERS
The mortgages on certain of our hotels require that rent payments under the
leases on such hotels be used first to pay the debt service on such mortgage
loans. Consequently, only the cash flow remaining after debt service will be
available to satisfy other obligations (including property taxes and insurance,
FF&E reserves for the hotels and capital improvements, and debt service on
unsecured debt) and to make distributions to stockholders.
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WE DEPEND ON OUR KEY PERSONNEL
We depend on the efforts of our executive officers. While we believe we
could find replacements for these key personnel, the loss of their services
could have a significant adverse effect on our operations. We do not intend to
obtain key-man life insurance with respect to any of our executive officers.
THE REIT CONVERSION COULD RESULT IN LITIGATION
Over the last several years, business reorganizations involving the
combination of several partnerships into a single entity have occasionally
given rise to investor lawsuits. These lawsuits have involved claims against
the general partners of the participating partnerships, the partnerships
themselves and related persons involved in the structuring of, or benefiting
from, the conversion or reorganization, as well as claims against the
surviving entity and its directors and officers. If any lawsuits are filed in
connection with the partnership mergers or other transactions in connection
with our REIT conversion, such lawsuits could result in substantial damage
claims against us, as successor to the liabilities of our predecessors. One
such lawsuit has been filed by the partners of Potomac Hotels Limited
Partnership, the former owner of eight of our hotels. Such lawsuits, if
successful, could adversely affect our financial condition and our ability to
service our debt and make distributions to stockholders.
JOINT VENTURE INVESTMENTS HAVE ADDITIONAL RISKS
Instead of purchasing hotel properties directly, we may invest as a co-
venturer. Joint venturers often share control over the operation of the joint
venture assets. Actions by a co-venturer could subject such assets to
additional risk. Our co-venturer in an investment might have economic or
business interests or goals that are inconsistent with our interests or goals,
or be in a position to take action contrary to our instructions or requests or
contrary to our policies or objectives. Although we generally will seek to
maintain sufficient control of any joint venture to permit our objectives to
be achieved, we might not be able to take action without the approval of our
joint venture partners. Also, our joint venture partners could take actions
binding on the joint venture without our consent. A joint venture partner
could go bankrupt, leaving us liable for its share of joint venture
liabilities. Also, the requirement that we lease our assets to qualify as a
REIT may make it more difficult for us to enter into joint ventures in the
future.
THE YEAR 2000 PROBLEM MAY ADVERSELY IMPACT OUR BUSINESS AND FINANCIAL
CONDITION
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore do not properly recognize a year that begins with
"20" instead of the familiar "19." If not corrected, many computer
applications could fail or create erroneous results. Our potential year 2000
problems include issues relating to our in-house hardware and software
computer systems, as well as issues relating to third parties with which we
have a material relationship or whose systems are material to the operations
of our hotels.
IN-HOUSE SYSTEMS
Since October of 1993, we have invested in the implementation and
maintenance of accounting and reporting systems and equipment that are
intended to enable us to provide adequately for our information and
reporting needs and which are also year 2000 compliant. Substantially all
of our in-house systems have already been certified as year 2000 compliant
through testing and other mechanisms. We have not delayed any systems
projects due to the year 2000 issue. We have engaged a third party to
review our year 2000 in-house compliance.
THIRD-PARTY SYSTEMS
We rely upon operational and accounting systems provided by third
parties, primarily the managers of our hotels, to provide the appropriate
property-specific operating systems, including reservation, phone,
elevator, security, HVAC and other systems, and to provide us with
financial information. We will continue to monitor the efforts of these
third parties to become year 2000 compliant and will take appropriate steps
to address any non-compliance issues.
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RISKS
Management believes that future costs associated with year 2000 issues
for its in-house systems will be insignificant and therefore not impact our
business, financial condition and results of operations. However, the
actual effect that year 2000 issues will have on our business will depend
significantly on whether other companies and governmental entities properly
and timely address year 2000 issues and whether broad-based or systemic
failures occur. We cannot predict the severity or duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or disruption of hotel reservations made on centralized
reservation systems and errors or failures in financial transactions or
payment processing systems such as credit cards.
Moreover, we are dependent upon Crestline to interface with third parties
in addressing year 2000 issues at our hotels leased to its subsidiaries.
Due to the general uncertainty inherent with respect to year 2000 issues
and our dependence on third parties, including Crestline, we are unable to
determine at this time whether the consequences of year 2000 failures will
have a material impact on Host Marriott. Although our joint year 2000
compliance program with Crestline is expected to significantly reduce
uncertainties arising out of year 2000 issues and the possibility of
significant interruptions of normal operations, we cannot assure you that
this will be the case.
THE COST OF COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND OTHER
REGULATIONS COULD DECREASE OUR CASH AVAILABLE FOR DISTRIBUTION
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT CAN BE COSTLY
The hotels must comply with Title III of the Americans with Disabilities Act
to the extent that such hotels are "public accommodations" or "commercial
facilities" as defined by the ADA. The ADA requires removal of structural
barriers to access by persons with disabilities in certain public areas of
hotels where such removal is readily achievable. We do not believe that
substantial non-budgeted capital expenditures will be required in the future
to comply with the ADA. Our existing hotel leases would require us to fund any
such expenditures. Noncompliance with the ADA could also result in the
imposition of fines or an award of damages to private litigants. Unexpected
capital expenditures or the payment of fines or damages would decrease our
cash available for distribution and potentially adversely affect our ability
to make distributions to stockholders.
COMPLIANCE WITH OTHER REGULATIONS CAN ALSO BE COSTLY
Hotels are subject to various forms of regulation in addition to the ADA,
including building codes and fire safety regulations. Such regulations may be
changed from time to time, or new regulations adopted, resulting in additional
or unexpected costs of compliance. Any such increased costs could reduce our
cash available for debt service and distributions to stockholders.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY
Federal, state and local laws and regulations relating to the protection of
the environment may require a current or previous owner or operator of real
estate to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property. The owner or operator may have to pay a
governmental entity or third parties for property damage and for investigation
and clean-up costs incurred by such parties in connection with the
contamination. These laws typically impose clean-up responsibility and
liability without regard to whether the owner or operator knew of or caused
the presence of the contaminants. Even if more than one person may have been
responsible for the contamination, each person covered by the environmental
laws may be held responsible for all of the clean-up costs incurred. In
addition, third parties may sue the owner or operator of a site for damages
and costs resulting from environmental contamination emanating from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they
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notify and train those who may come into contact with asbestos and that they
undertake special precautions, including removal or other abatement, if
asbestos would be disturbed during renovation or demolition of a building.
These laws may impose fines and penalties on building owners or operators who
fail to comply with these requirements and may allow third parties to seek
recovery from owners or operators for personal injury associated with exposure
to asbestos fibers. We believe that our properties are in compliance in all
material respects with applicable environmental laws. Unidentified
environmental liabilities could arise, however, and could have an adverse
effect on our financial condition and performance.
OUR SUCCESS AS A REIT DEPENDS ON OUR COMPLIANCE WITH COMPLICATED TAX RULES
WE INTEND TO QUALIFY AS A REIT, BUT WE CANNOT GUARANTEE THAT WE WILL QUALIFY
We intend to operate to qualify as a REIT for tax purposes beginning in 1999.
If we qualify as a REIT, we generally will not be taxed on our income that we
distribute to our stockholders so long as we distribute currently at least 95%
of our income, excluding our net capital gain. We cannot guarantee, however,
that we will qualify as a REIT in 1999 or in any future year. In addition, it
is possible that even if we do qualify as a REIT, new tax rules will change the
way we are taxed. Hogan & Hartson L.L.P., a law firm, has given us an opinion
that beginning January 1, 1999, we will be organized in conformity with the
requirements for qualification as a REIT and that our proposed method of
operation will enable us to satisfy the requirements for qualification and
taxation as a REIT. However, Hogan & Hartson based its opinion on a number of
assumptions and conditions, including the accuracy of factual representations
that we and Host Marriott, L.P. made. These representations relate to a large
number of matters, including how we and our subsidiaries operate and will
operate in the future and how the hotels are leased. With respect to how the
hotels are leased, we made representations to Hogan & Hartson about the
economic terms of the leases and the other terms of the leases. We also made
representations to Hogan & Hartson about our expectations and the expectations
of the lessees regarding the leases. It is important that you understand that
Hogan & Hartson's opinion only represents its judgment based on the facts
represented by us and does not bind the IRS or the courts. Neither we nor Hogan
& Hartson can guarantee that the IRS or a court will agree that we qualify as a
REIT.
HOST MARRIOTT, L.P. MAY NEED TO BORROW MONEY OR ISSUE ADDITIONAL EQUITY IN
ORDER FOR US TO QUALIFY AS A REIT
A REIT must distribute to its shareholders at least 95% of its net taxable
income, excluding any net capital gain. The source of the distributions we make
to our stockholders will be money distributed to us by Host Marriott, L.P. We
intend to meet this 95% requirement, but there are a number of reasons why Host
Marriott, L.P.'s cash flow alone may be insufficient for it to distribute to us
the funds we will need. First, as a result of some of the transactions of the
Host Predecessors, we expect to recognize large amounts of taxable income in
future years for which Host Marriott, L.P. will have no corresponding cash flow
or EBITDA. This type of income is often referred to as "phantom income."
Second, in order to qualify as a REIT in 1999, we need to distribute to our
stockholders, prior to the end of 1999, all of the "earnings and profits" that
accumulated prior to 1999. If we do not meet this requirement when the
distributions declared in connection with the REIT conversion are paid, we will
be required to make further distributions prior to the end of 1999. Host
Marriott, L.P. will not have cash flow that corresponds to these distributions
and may not be able to borrow or otherwise obtain the funds necessary to
distribute to us an amount necessary to make these distributions. Third, the
seasonality of the hospitality industry could cause a further mismatch of Host
Marriott, L.P.'s income and its cash flow.
In addition, even if a REIT meets the 95% requirement, it may still be
subject to a 4% nondeductible excise tax. This excise tax applies to the amount
by which certain of the REIT's distributions in a given calendar year are less
than the sum of 85% of its ordinary income, 95% of its capital gain net income
and any undistributed taxable income from prior years. We intend to make
distributions so that we will not be subject to this excise tax, but for the
reasons described above, Host Marriott, L.P.'s cash flow alone may be
insufficient for it to distribute to us the funds we will need.
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<PAGE>
If Host Marriott, L.P.'s cash flow alone is insufficient for it to distribute
to us the money we need to meet the 95% distribution requirement or to avoid
the 4% excise tax, it will need to issue additional equity or borrow money. We
cannot guarantee that these sources of funds will be available to Host
Marriott, L.P. on favorable terms or even at all. Any problems Host Marriott,
L.P. has in borrowing money could be exacerbated by two factors. First, it will
need to distribute most if not all of its earnings to us and so it will be
unable to retain these earnings. Accordingly, it generally will need to
refinance its maturing debt with additional debt or equity and rely on third-
party sources to fund future capital needs. Second, the borrowing needs of Host
Marriott, L.P. will be increased if we are required to pay taxes or liabilities
attributable to prior years. If Host Marriott, L.P. is unable to raise the
money necessary for us to meet the 95% distribution requirement, we will fail
to qualify as a REIT. If it is able to raise the money, but only on unfavorable
terms, then our financial performance may be hurt.
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE CONSEQUENCES
If we fail to qualify as a REIT, we will be subject to federal income tax at
regular corporate rates. This additional tax would significantly reduce the
cash we would have available to distribute to our stockholders and it could
reduce the value of our common stock by a significant amount. Furthermore, if
we fail to qualify as a REIT, we will go into default under some of our debt
instruments. If we fail to qualify as a REIT, we may be disqualified from
treatment as a REIT for the next four taxable years.
WE ARE REQUIRED TO DISTRIBUTE ALL OF OUR PRIOR EARNINGS AND PROFITS, BUT WE
CANNOT GUARANTEE THAT WE WILL BE ABLE TO DO SO
In order to qualify as a REIT for 1999, we are required to distribute to our
stockholders, prior to the end of 1999, all of our earnings and profits that we
accumulated prior to 1999. We believe that we will meet this requirement.
However, it is very hard to determine the exact level of our pre-1999 earnings
and profits because the determination depends on an extremely large number of
factors. The complexity of the determination is compounded by the fact that we
started accumulating earnings and profits in 1929. Also, it is difficult to
value our distributions which have not been cash, such as the distribution of
Crestline common stock we made this past December. Therefore, we cannot
guarantee that we will meet this requirement. If we do not meet this
requirement, then we will not qualify as a REIT at least for 1999. Hogan &
Hartson is not providing us with an opinion regarding the amount of our
earnings and profits or whether we meet this requirement. Moreover, for
purposes of their opinion that we qualify as a REIT, they relied on our
statement that we will meet this requirement.
WE WILL QUALIFY AS A REIT ONLY IF THE RENT FROM THE LEASES MEETS A NUMBER OF
TESTS, BUT WE CANNOT GUARANTEE THAT IT WILL
A REIT's income must meet certain tests relating to its source. If the income
meets the tests, it is called "good income." Almost all of our income will be
rent from the hotel leases. This rent will be good income only if the leases
are respected as true leases for federal income tax purposes. If the leases are
treated as service contracts, joint ventures or some other type of arrangement,
then this rent will not be good income and we will fail to qualify as a REIT.
See "Federal Income Tax Considerations--Federal Income Taxation of Host
Marriott--Income Tests Applicable to REITs."
In addition, the rent from any particular hotel lease will be good income
only if we own less than 10% of the lessee of the hotel. For purposes of this
test, we are treated as owning both any interests that we hold directly and the
interests owned by a person who owns more than 10% of our stock. In determining
who owns more than 10% of our stock, a person may be treated as owning the
stock of another person who is either a relative or has common financial
interests. We will not directly own more than 10% of any of the lessees. In
addition, we intend to enforce the ownership limit in our charter, which
restricts the amount of our capital stock that any person can own. If the
ownership limit is effective, then no person will ever own more than 10% of our
capital stock and we should never own more than 10% of the lessees. However, we
cannot guarantee that the ownership limit will be effective. If the ownership
limit is not effective, our ownership in the lessees may exceed the 10% limit.
As a result, the rent from our leases would not be good income and we would
fail to qualify as a REIT.
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Furthermore, rent from any particular hotel lease will be good income only if
no portion of the rent is based on the income or profits of the lessee of the
hotel. The rent, however, can be based on the gross revenues of the lessees,
unless the arrangement does not conform to normal business practice or is being
used as a device to base rent on the income or profits of the lessees. The rent
from the current leases is based on the gross revenues of the lessees. We
believe that the leases conform to normal business practice and are not being
used as a device to base rent on the income or profits of the lessees. Hogan &
Hartson has not given us an opinion on this issue, and we cannot guarantee that
the IRS will agree with our position. If rent from the leases is found to be
based on the income or profits of the lessees, the rent would not be good
income and we would fail to qualify as a REIT.
WE WILL QUALIFY AS A REIT ONLY IF THE PERSONAL PROPERTY ARRANGEMENTS ARE
RESPECTED
Rent that is attributable to personal property is not good income under the
REIT rules. Hotels contain significant personal property. Therefore, in order
to protect our ability to qualify as a REIT, Host Marriott, L.P. is selling an
estimated $180 million of personal property associated with some of our hotels
to the non-controlled subsidiaries. The non-controlled subsidiaries lease the
personal property associated with each hotel directly to the lessee that is
leasing the hotel. Under each personal property lease, the non-controlled
subsidiary receives rent payments directly from the applicable lessee. We
believe the amount of the rent represents the fair rental value of the personal
property. If for any reason these lease arrangements are not respected for
federal income tax purposes, we likely would not qualify as a REIT.
WE WILL BE SUBJECT TO TAXES EVEN IF WE QUALIFY AS A REIT
Even if we qualify as a REIT, we will be subject to some federal, state and
local taxes on our income and property. For example, we will have to pay tax on
income that we do not distribute. We also will be liable for any tax that the
IRS successfully asserts against Host Marriott's predecessors for corporate
income taxes for years prior to 1999. Furthermore, we will derive income from
the non-controlled subsidiaries and they will be subject to regular corporate
taxes.
In addition, we and our subsidiaries contributed a large number of assets to
Host Marriott, L.P. with a value that was substantially greater than our tax
basis in the assets. We refer to these assets as assets with "built-in gain."
We will be subject to tax on the built-in gain if Host Marriott, L.P. sells
these assets prior to the end of 2008. We also have substantial deferred tax
liabilities that we will recognize as built-in gain (or that a non-controlled
subsidiary will recognize) without the receipt by us of any corresponding cash.
Even if Host Marriott, L.P. does not sell the built-in gain assets prior to the
end of 2008, there are a number of other transactions that likely would cause
us to be subject to the tax on the built-in gain. For example, we are likely to
recognize gain if Host Marriott, L.P. sells a hotel contributed to it after
2008, refinances a loan secured by a hotel contributed to it, spends money to
improve a hotel contributed to it, or issues additional limited partnership
units. Lastly, over time, Host Marriott, L.P. will allocate income and
depreciation to its partners in such a way that it will eliminate the built-in
gain in its assets. As a result of these various events, it is likely that over
the next several years, we will recognize a large amount of the built-in gain
associated with the assets that we contributed to Host Marriott, L.P. In
connection with this gain, neither we nor Host Marriott, L.P. will receive any
corresponding cash.
IF THE OPERATING PARTNERSHIP IS TREATED AS A CORPORATION, WE WILL FAIL TO
QUALIFY AS A REIT
A REIT cannot own more than 10% of the voting securities of a corporation. We
own more than 10% of the voting securities of Host Marriott, L.P. Accordingly,
if Host Marriott, L.P. is treated as a corporation, we will fail to qualify as
a REIT. See "Federal Income Tax Consideration--Tax Aspects of Host Marriott's
Ownership of Interests in Host Marriott, L.P.--Entity Classification.
We also should point out that if Host Marriott, L.P. is treated as a
corporation, it will be subject to corporate income tax. This would
significantly reduce the amount of cash it would have available to distribute
to us, which would in turn reduce the amount of cash we would have available to
distribute to our stockholders.
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<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process under
the Securities Act of 1933. Under the shelf process, we may, from time to time,
sell any combination of the offered securities described in this prospectus in
one or more offerings up to a total dollar amount of $750,000,000.
This prospectus and the accompanying prospectus supplement do not contain all
of the information included in the registration statement. We have omitted
parts of the registration statement in accordance with the rules and
regulations of the Commission. For further information, we refer you to the
registration statement on Form S-3, including its exhibits. Statements
contained in this prospectus and any accompanying prospectus supplement about
the provisions or contents of any agreement or other document are not
necessarily complete. If the Commission rules and regulations require that such
agreement or document be filed as an exhibit to the registration statement,
please see such agreement or document for a complete description of these
matters. You should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date on the
front of each document.
This prospectus provides you with a general description of the offered
securities. Each time we sell offered securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change any
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with additional information described
under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You may read and copy materials that we have
filed with the Commission, including the registration statement, at the
following Commission public reference rooms:
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms.
Our Commission filings can also be read at the following address:
New York Stock Exchange
20 Broad Street
New York, New York 10005
Our Commission filings are also available to the public on the Commission's
Web Site at http://www.sec.gov.
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is an important part of this prospectus, and information that we file later
with the Commission will automatically update and supersede this information.
We incorporate be reference the documents listed below and any future filings
made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until we have sold all of the offered
securities to which this prospectus relates or the offering is otherwise
terminated.
1. Annual Report on Form 10-K of Host Marriott Corporation, a Delaware
corporation and predecessor of Host Marriott, for the fiscal year ended
January 2, 1998 (filed on March 27, 1998).
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2. Quarterly Reports on Form 10-Q of Host Marriott Corporation, a
Delaware corporation and predecessor of the Company, for the quarters
ended:
. March 27, 1998 (filed on May 11, 1998 and amended on May 11, 1998),
. June 19, 1998 (filed on July 21, 1998) and
. September 11, 1998 (filed on October 26, 1998).
3. Current Reports on Form 8-K filed by Host Marriott Corporation, a
Delaware corporation and predecessor of the Company, dated:
. April 17, 1998 (filed on April 17, 1998),
. July 29, 1998 (filed on August 6, 1998),
. August 5, 1998 (filed on September 11, 1998) and
. November 24, 1998 (filed on November 25, 1998 and superseding the
Current Reports on Form 8-K dated July 15, 1998 (filed on July 17,
1998), July 17, 1998 (filed on July 28, 1998), July 29, 1998 (filed
on July 30, 1998), and July 29, 1998 (filed on July 31, 1998)).
4. Host Marriott's Current Report on Form 8-K filed by the Company, dated
December , 1998 (filed on December , 1998).
5. Description of Host Marriott's Common Stock included in a Registration
Statement on Form 8-A filed on November 18, 1998.
6. Description of Host Marriott's Rights included in a Registration
Statement on Form 8-A filed on December 11, 1998.
You may request a copy of these filings, at no cost, by writing us at the
following address or telephoning us at (301) 380-2070 between the hours of 9:00
a.m. and 4:00 p.m., Eastern Time:
Corporate Secretary Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. In addition to historical information,
this prospectus and other materials filed or to be filed by us with the
Commission and incorporated by reference in this prospectus contain or will
contain forward-looking statements within the meaning of the federal securities
law. Forward-looking statements include information relating to our intent,
belief or current expectations, primarily, but not exclusively, with respect
to:
. capital expenditures,
. cost reduction,
. cash flow,
. economic outlook,
. operating performance or
. improvements and related industry developments.
We intend to identify forward-looking statements in this prospectus and other
materials filed or to be filed by us with the Commission and incorporated by
reference in this prospectus by using words or phrases such as "anticipate,"
"believe," "estimate," "expect," "intend," "may be," "objective," "plan,"
"predict," "project" and "will be" and similar words or phrases (or the
negative thereof).
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<PAGE>
The forward-looking information involves important risks and uncertainties
that could cause our actual results, performance or achievements to differ
materially from our anticipated results, performance or achievements expressed
or implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to:
. national and local economic and business conditions that will, among
other things, affect demand for hotels and other properties, the level
of rates and occupancy that can be achieved by such properties and the
availability and terms of financing;
. the ability to maintain the properties in a first-class manner
(including meeting capital expenditure requirements);
. our ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures;
. our ability to acquire or develop additional properties and the risk
that potential acquisitions or developments may not perform in
accordance with expectations;
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs;
. governmental approvals, actions and initiatives including the need for
compliance with environmental and safety requirements, and changes in
laws and regulations or the interpretation thereof;
. the effects of tax legislative action;
. the effect on us and our operations of the year 2000 issue; and
. the timing (if it occurs) of our election to be taxed as a REIT and our
ability to satisfy complex rules in order to qualify as a REIT for
federal income tax purposes and to operate effectively within the
limitations imposed by these rules.
Although we believe the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, we can give you no assurance
that such expectations will be attained or that any deviations will not be
material. We disclaim any obligation or undertaking to disseminate to you any
updates or revisions to any forward-looking statement contained in this
prospectus or other materials that we have filed or will file with the
Commission and incorporated by reference in this prospectus to reflect any
change in our expectations or any changes in events, conditions or
circumstances on which any statement is based.
THE COMPANY
Host Marriott was formed to continue and expand the hotel lodging property
ownership business of its predecessors. Host Marriott succeeded to this
business as a result of its merger with Host Marriott Corporation, a Delaware
corporation, and other restructuring transactions consummated in December 1998
which we refer to as the "REIT conversion." Host Marriott is one of the largest
owners of hotels in the world, with ownership of or controlling interests in
approximately upscale and luxury full-service hotel lodging properties in
its portfolio as of December , 1998. Virtually all of these properties are
leased to subsidiaries of Crestline, formerly a wholly owned subsidiary of Host
Marriott, and are generally operated under the Marriott and Ritz-Carlton brand
names and managed by Marriott International. Host Marriott intends to make an
election to be taxed as a REIT for federal income tax purposes effective for
its taxable year beginning January 1, 1999. Host Marriott owns all of its
assets and conducts substantially all of its business through Host Marriott,
L.P. and its subsidiaries. Host Marriott is the sole general partner of Host
Marriott, L.P.
Host Marriott's principal executive offices are located at 10400 Fernwood
Road, Bethesda, Maryland 20817-1109, and its telephone number is (301) 380-
9000.
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USE OF PROCEEDS
Unless otherwise indicated in the applicable prospectus supplement, we
anticipate that any net proceeds from the sale of offered securities will be
used for general operational purposes, which may include, but are not limited
to, working capital, capital expenditures, acquisitions and the repayment or
repurchase of the indebtedness of Host Marriott or our subsidiaries or our
capital stock. The factors which we will consider in any repayment or
repurchase of its indebtedness will include the amount and characteristics of
any offered securities issued and may include, among others, the impact of such
refinancing on the liquidity of Host Marriott or on our debt-to-capital ratio
and funds from operations ("FFO") per share. When a particular series of
offered securities is offered, the prospectus supplement relating thereto will
set forth the intended use for the net proceeds received from the sale of such
offered securities. Pending the application of the net proceeds, we expect to
invest such proceeds in short-term, interest-bearing instruments or other
investment-grade debt securities or to reduce indebtedness under our bank
credit agreement.
ERISA MATTERS
Host Marriott and our subsidiaries may each be considered a "party in
interest," within the meaning of the Employee Retirement Income Security Act,
or a "disqualified person," within the meaning of Section 4975 of the Internal
Revenue Code, with respect to many employee benefit plans that are subject to
ERISA. The purchase of offered securities by an ERISA plan that is subject to
the fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of the Internal Revenue Code (including individual retirement
arrangements and other plans) and with respect to which Host Marriott or any of
our affiliates is a service provider (or otherwise is a party in interest or a
disqualified person) may constitute or result in a prohibited transaction under
ERISA or the Internal Revenue Code, unless such offered securities are acquired
pursuant to and in accordance with an applicable federal statutory exemption,
or administrative exemption issued on a class-wide basis by the United States
Department of Labor. Any pension or other employee benefit plan proposing to
acquire any offered securities should consult with its counsel.
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<PAGE>
RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth Host Marriott's ratio of earnings to combined
fixed charges and preferred stock dividends on a historical basis for the
periods indicated.
<TABLE>
<CAPTION>
3RD QUARTER FISCAL YEAR
----------- --------------------------------------
1998 1997 1997 1996 1995 1994 1993
----- ----- ------- ------- ------ ------ ------
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined
fixed charges and preferred
stock dividends(a)........... 1.7x 1.4x 1.3x 1.0x -- -- --
Deficiency of earnings to com-
bined fixed charges and pre-
ferred stock dividends(b).... -- -- -- -- $ 70 $ 12 $ 45
</TABLE>
- --------
(a) The ratio of earnings to fixed charges and preferred stock dividends is
computed by dividing income from continuing operations before income taxes
and fixed charges and preferred stock dividends by total fixed charges and
preferred stock dividends. Fixed charges represent interest expense
(including capitalized interest), the amortization of debt issuance costs,
and the portion of rental expense that represents interest.
(b) The deficiency of earnings to fixed charges and preferred stock dividends
in 1995, 1994 and 1993 is largely the result of depreciation and
amortization of $122 million in 1995, $113 million in 1994 and $196 million
in 1993. In addition, the deficiency for 1995 was impacted by the $60
million pre-tax charge to write-down the carrying value of one undeveloped
land parcel to its estimated sales value.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth Host Marriott's ratio of earnings to fixed
charges on a historical basis for the periods indicated.
<TABLE>
<CAPTION>
3RD QUARTER FISCAL YEAR
----------- --------------------------------------
1998 1997 1997 1996 1995 1994 1993
----- ----- ------- ------- ------ ------ ------
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges(a)................ 1.7x 1.4x 1.3x 1.0x -- -- --
Deficiency of earnings to
fixed charges(b).......... -- -- -- -- $ 70 $ 12 $ 45
</TABLE>
- --------
(a) The ratio of earnings to fixed charges is computed by dividing income from
continuing operations before income taxes and fixed charges by total fixed
charges. Fixed charges represent interest expense (including capitalized
interest), the amortization of debt issuance costs, and the portion of
rental expense that represents interest.
(b) The deficiency of earnings to fixed charges in 1995, 1994 and 1993 is
largely the result of depreciation and amortization of $122 million in
1995, $113 million in 1994 and $196 million in 1993. In addition, the
deficiency for 1995 was impacted by the $60 million pre-tax charge to write
down the carrying value of one undeveloped land parcel to its estimated
sales value.
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DESCRIPTION OF COMMON STOCK
The following description sets forth the general terms of the common stock
which Host Marriott may issue. The description set forth below and in any
prospectus supplement does not purport to be complete and is subject to and
qualified in its entirety by reference to Host Marriott's Articles of Amendment
and Restatement of Articles of Incorporation and Bylaws, each of which will be
made available upon request.
GENERAL
Our Articles of Incorporation provide that the total number of shares of
stock of all classes which Host Marriott has authority to issue is 800,000,000
shares of stock, initially consisting of 750,000,000 shares of common stock and
50,000,000 shares of preferred stock. The Board of Directors is authorized,
without a vote of stockholders, to classify or reclassify any unissued shares
of capital stock and to establish the preferences and rights of any preferred
or other class or series of capital stock to be issued. At December , 1998,
shares of our common stock were issued and outstanding.
Subject to the preferential rights of any other classes or series of shares
of capital stock and to the provisions of the Articles of Incorporation
regarding restrictions on transfers of shares of capital stock, holders of our
common stock are entitled to receive distributions if, as and when authorized
and declared by the Board of Directors, out of assets legally available
therefor and to share ratably in the assets of Host Marriott legally available
for distribution to its stockholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all
known debts and liabilities of Host Marriott. Host Marriott currently intends
to pay regular quarterly distributions.
Subject to the provisions of the Articles of Incorporation regarding
restrictions on the transfer of shares of capital stock, each outstanding share
of common stock entitles the holder to one vote on all matters submitted to a
vote of stockholders, including the election of directors, and, except as
provided with respect to any other class or series of shares of Host Marriott's
capital stock, the holders of shares of common stock will possess the exclusive
voting power. There is no cumulative voting in the election of directors, which
means that the holders of a majority of the outstanding common stock can elect
all of the directors then standing for election.
Holders of shares of common stock have no preferences, conversion, sinking
fund, redemption rights or preemptive rights to subscribe for any securities of
Host Marriott. Subject to the provisions of the Articles of Incorporation
regarding restrictions on transfer of capital stock, shares of common stock
have equal distribution, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, consolidate, effect a share exchange or transfer its assets
within the meaning of the MGCL unless approved by the Board of Directors and by
stockholders holding at least two-thirds of the shares entitled to vote on the
matter (unless a greater or lesser percentage (but not less than a majority of
all the votes entitled to be cast) is set forth in the corporation's charter.
Under the Articles of Incorporation, any merger, consolidation, share exchange
or transfer of its assets must be approved (a) by the Board of Directors in the
manner provided in the MGCL and (b) by stockholders to the extent required
under the MGCL. The Articles of Incorporation generally provide for stockholder
approval of such transactions by a two-thirds vote of all the votes entitled to
be cast, except that any merger of Host Marriott with or into a trust organized
for the purpose of changing Host Marriott's form of organization from a
corporation to a trust will require the approval of stockholders of Host
Marriott by the affirmative vote only of a majority of all the votes entitled
to be cast on the matter. In addition, under the MGCL, certain mergers may be
accomplished without a vote of stockholders. For example, no stockholder vote
is required for a merger of a subsidiary of a Maryland corporation into its
parent, provided the parent owns at least 90 percent of the subsidiary. In
addition, a merger need not be approved by stockholders of a Maryland successor
corporation if the merger does not reclassify or change the outstanding shares
or otherwise amend the charter, and the number of shares to be issued or
delivered in the merger is not more than 20 percent of the number of its shares
of the same class or series outstanding immediately before the merger
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<PAGE>
becomes effective. A share exchange need be approved by a Maryland successor
only by its Board of Directors. Any amendments to the provisions contained in
the Articles of Incorporation relating to restrictions on transferability of
stock, the classified Board and fixing the size of the Board within the range
set forth in the Articles of Incorporation, as well as the provisions relating
to removal of directors, the filling of Board vacancies and the exclusive
authority of the Board of Directors to amend the Bylaws will require the
approval of the Board of Directors and stockholders by the affirmative vote of
the holders of not less than two-thirds of the votes entitled to be cast on the
matter. Other amendments to the Articles of Incorporation may be effected by
requisite action of the Board of Directors and approval by stockholders by the
affirmative vote of not less than a majority of the votes entitled to be cast
on the matter.
The Articles of Incorporation authorize the Board of Directors to reclassify
any unissued shares of common stock into other classes or series of capital
stock, including preferred stock, and to establish the number of shares in each
class or series and to set the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption for each such class or
series.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be First Chicago
Trust Company of New York.
STOCKHOLDER RIGHTS PLAN/PREFERRED STOCK PURCHASE RIGHTS
The Board of Directors has adopted a Stockholder Rights Plan pursuant to a
Rights Agreement. Each share of common stock issued by Host Marriott between
the date of adoption of the Rights Agreement and the Rights Distribution Date
(as defined below), or the date, if any, on which the Rights (as defined below)
are redeemed would have one preferred stock purchase right (a "Right") attached
to it. It is expected that the Rights will expire ten years after adoption of
the Rights Agreement, unless earlier redeemed or exchanged. Each Right, when
exercisable, would entitle the holder to purchase upon payment of the purchase
price a fraction of a share of a newly created series of junior participating
preferred stock. Until a Right is exercised, the holder thereof, as such, would
have no rights as a stockholder of Host Marriott, including, without
limitation, the right to vote or to receive dividends.
The Rights Agreement provides that the Rights initially attach to all
certificates representing common stock then outstanding. The Rights would
separate from the common stock and a distribution of Rights certificates would
occur (a "Rights Distribution Date") upon the earlier to occur of (a) ten days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding common stock
(the "Stock Acquisition Date") or (b) ten business days (or such later date as
the Board of Directors may determine) following the commencement of a tender
offer or exchange offer, the consummation of which would result in the
beneficial ownership by a person of 20% or more of the outstanding common
stock. For the purposes of determining the 20% threshold amount, shares of
common stock that can be acquired by Marriott International pursuant to the
Marriott International purchase right are deemed exempt shares under the Rights
Agreement and will not be included in any determination of the number of shares
of common stock beneficially owned by Marriott International. Until the Rights
Distribution Date, the Rights would be evidenced by the common stock
certificates, and would be transferred with, and only with, the common stock
certificates.
It is expected that if a person becomes the beneficial owner of 20% or more
of the then outstanding common stock (except pursuant to an offer for all
outstanding common stock which the directors by a two-thirds vote determine to
be fair to and otherwise in the best interests of Host Marriott and its
stockholders), each holder of a Right would, after the end of a redemption
period, have the right (subject to the ownership limit and the other ownership
restrictions contained in the Articles of Incorporation) to exercise the Right
by purchasing shares of common stock (or, in certain circumstances, cash,
property or other securities of Host Marriott) having a value equal to two
times the purchase price of the Right, subject to the ownership limit.
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If at any time following the Stock Acquisition Date, (a) Host Marriott is
acquired in a merger or other business combination transaction in which it is
not the surviving corporation (other than a merger which follows an offer
described in the preceding paragraph) or (b) 50% or more of Host Marriott's
assets or earning power is sold or transferred, each holder of a Right would
have the right to receive, upon exercise, common shares of the acquiring
company having a value equal to two times the purchase price of the Right.
It is expected that, in general, the Board of Directors may redeem the Rights
at a nominal price per Right at any time until ten days after an Acquiring
Person has been identified as such. If the decision to redeem the Rights occurs
after a person becomes an Acquiring Person, the decision will require the
concurrence of directors by a two-thirds vote.
The Rights have certain anti-takeover effects. The Rights would cause
substantial dilution to a person or group that attempts to acquire Host
Marriott. The Rights, however, would not interfere with any merger or other
business combination approved by the Board of Directors since the Board may, at
its option, at any time prior to any person becoming an Acquiring Person,
redeem all rights or amend the Rights Agreement to exempt the person from the
Rights Agreement.
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DESCRIPTION OF PREFERRED STOCK
The following description sets forth the general terms of the preferred stock
which Host Marriott may issue. The description set forth below and in any
prospectus supplement does not purport to be complete and is subject to and
qualified in its entirety by reference to the Articles of Incorporation, the
applicable Articles Supplementary to the Articles of Incorporation determining
the terms of the related series of preferred stock and the Bylaws, each of
which will be made available upon request.
GENERAL
The Articles of Incorporation authorize the Board of Directors to issue 50
million shares of preferred stock and to classify or reclassify any unissued
preferred shares into one or more classes or series of capital stock, including
common stock. Prior to issuance of shares of any class or series of stock other
than common stock, the Board of Directors is required, under the MGCL, to set,
subject to the provisions of the Articles of Incorporation regarding the
restriction on transfer of capital stock, the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
such class or series. Thus, the Board of Directors could authorize the issuance
of preferred stock or other capital stock with terms and conditions which could
have the effect of delaying, deferring or preventing a transaction or a change
in control of Host Marriott that might involve a premium price for holders of
shares of common stock or otherwise be in their best interest. As of the date
hereof, only common stock is outstanding, but the Company may issue preferred
stock or other capital stock in the future.
Reference is made to the prospectus supplement relating to the class or
series of preferred stock being offered for the specific terms thereof,
including:
(a) The title and stated value of such preferred stock;
(b) The number of shares of such preferred stock offered, the liquidation
preference per share and the purchase price of such preferred stock;
(c) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such preferred stock;
(d) Whether dividends shall be cumulative or non-cumulative and, if
cumulative, the date from which dividends on such preferred stock shall
accumulate;
(e) The procedures for any auction and remarketing, if any, for such
preferred stock;
(f) The provisions for a sinking fund, if any, for such preferred stock;
(g) The provisions for redemption, if applicable, of such preferred
stock;
(h) Any listing of such preferred stock on any securities exchange or
market;
(i) The terms and conditions, if applicable, upon which such preferred
stock will be convertible into common stock of Host Marriott, including the
conversion price (or manner of calculation thereof) and conversion period;
(j) The terms and conditions, if applicable, upon which preferred stock
will be exchangeable into debt securities, including the exchange price (or
manner of calculation thereof) and exchange period);
(k) Voting rights, if any, of such preferred stock;
(l) Whether interests in such preferred stock will be represented by
depositary shares;
(m) A discussion of any material and/or special United States federal
income tax considerations applicable to such preferred stock;
(n) The relative ranking and preferences of such preferred stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of Host Marriott;
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(o) Any limitations on issuance of any class or series of preferred stock
ranking senior to or on a parity with such series of preferred stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of Host Marriott; and
(p) Any other specific terms, preferences, rights, limitations or
restrictions of such preferred stock.
RANK
Unless otherwise specified in the applicable prospectus supplement, the
preferred stock will, with respect to distribution rights and rights upon
liquidation, dissolution or winding up of Host Marriott, rank (i) senior to all
classes or series of common stock of Host Marriott and to all equity securities
the terms of which specifically provide that such equity securities rank junior
to such preferred stock; (ii) on a parity with all equity securities issued by
Host Marriott other than referred to in clauses (i) and (iii); and (iii) junior
to all equity securities issued by Host Marriott the terms of which
specifically provide that such equity securities rank senior to such preferred
stock. The term "equity securities" does not include convertible debt
securities.
DISTRIBUTIONS
Holders of the preferred stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of Host
Marriott legally available for payment to stockholders, cash distributions (or
distributions in kind or in other property if expressly permitted and described
in the applicable prospectus supplement) at such rates and on such dates as
will be set forth in the applicable prospectus supplement. Each such
distribution shall be payable to holders of record as they appear on the stock
transfer books of Host Marriott on such record dates as shall be fixed by the
Board of Directors.
Distributions on any series of preferred stock, if cumulative, will be
cumulative from and after the date set forth in the applicable prospectus
supplement. If the Board of Directors fails to declare a distribution payable
on a distribution payment date on any series of the preferred stock for which
distributions are non-cumulative, then the holders of such series of preferred
stock will have no right to receive a distribution in respect of the
distribution period ending on such distribution payment date, and Host Marriott
will have no obligation to pay the distribution accumulated for such period,
whether or not distributions on such series are declared payable on any future
distribution payment date.
Unless otherwise specified in the applicable prospectus supplement, if any
shares of preferred stock of any series are outstanding, no full distributions
shall be declared or paid or set apart for payment on any shares of capital
stock of Host Marriott of any other series ranking, as to distributions, on a
parity with or junior to the shares of preferred stock of such series for any
period unless (i) if such series of preferred stock has a cumulative
distribution, full cumulative distributions have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the shares of preferred stock of such series for all
past distribution periods and the then current distribution period or (ii) if
such series of preferred stock does not have a cumulative distribution, full
distributions for the then current distribution period have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the preferred stock of such
series. When distributions are not paid in full (or a sum sufficient for such
full payment is not so set apart) upon preferred stock of any series and the
shares of any other series of preferred stock ranking on a parity as to
distributions with the shares of preferred stock of such series, all
distributions declared upon preferred stock of such series and any other series
of preferred stock ranking on a parity as to distributions with such shares of
preferred stock shall be declared pro rata so that the amount of distributions
declared per share of preferred stock of such series and such other series of
preferred stock shall in all cases bear to each other the same ratio that
accumulated distributions per share on the preferred stock of such series and
such other series of preferred stock (which shall not include any accumulation
in respect of unpaid distributions for prior distribution periods if such
shares of preferred stock do not have a cumulative distribution) bear to each
other. No interest, or sum of money in lieu of interest, shall
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be payable in respect of any distribution payment or payments on shares of
preferred stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if such
series of preferred stock has a cumulative distribution, full cumulative
distributions on the shares of preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past distribution periods and
the then current distribution period, and (ii) if such series of preferred
stock does not have a cumulative distribution, full distributions on the shares
of preferred stock of such series have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current distribution period, no distributions (other than
in common stock or other shares of capital stock ranking junior to the shares
of preferred stock of such series as to distributions and upon liquidation)
shall be declared or paid or set aside for payment or other distribution upon
the common stock, or any other shares of capital stock of Host Marriott ranking
junior to or on a parity with the shares of preferred stock of such series as
to distributions or upon liquidation, nor shall any common stock, or any other
shares of capital stock of Host Marriott ranking junior to or on a parity with
the shares of preferred stock of such series as to distributions or upon
liquidation, be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any such shares) by Host Marriott (except by conversion into or
exchange for other shares of capital stock of Host Marriott ranking junior to
the shares of preferred stock of such series as to distributions and upon
liquidation).
If, for any taxable year, Host Marriott elects to designate as "capital gain
dividends" (as defined in Section 857 of the Internal Revenue Code) any portion
(the "Capital Gains Amount") of the dividends (within the meaning of the
Internal Revenue Code) paid or made available for the year to holders of all
classes of capital stock (the "Total Dividends"), then the portion of the
Capital Gains Amount that will be allocable to the holders of preferred stock
will be the Capital Gains Amount multiplied by a fraction, the numerator of
which will be the total dividends (within the meaning of the Internal Revenue
Code) paid or made available to the holders of the preferred stock for the year
and the denominator of which shall be the Total Dividends.
REDEMPTION
If so provided in the applicable prospectus supplement, the preferred stock
will be subject to mandatory redemption or redemption at the option of Host
Marriott, in whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such prospectus supplement.
The prospectus supplement relating to a series of preferred stock that is
subject to mandatory redemption will specify the number of such shares of
preferred stock that shall be redeemed by Host Marriott on the date(s) or
during the period(s) to be specified, at a redemption price per share to be
specified therein. Notwithstanding the foregoing, the holders of record of
preferred stock at the close of business on a dividend record date will be
entitled to receive the dividend payable on such preferred stock on the
corresponding dividend payment date notwithstanding the redemption of such
preferred stock after such record date and on or prior to such payment date, in
which case the redemption price shall not include such dividend. The redemption
price may be payable in cash or other property, as specified in the applicable
prospectus supplement. If the redemption price for preferred stock of any
series is payable only from the net proceeds of the issuance of shares of
capital stock of Host Marriott, the terms of such preferred stock may provide
that, if no such shares of capital stock shall have been issued or to the
extent the net proceeds from any issuance are insufficient to pay in full the
aggregate redemption price then due, such preferred stock shall automatically
and mandatorily be converted into the applicable shares of capital stock of
Host Marriott pursuant to conversion provisions specified in the applicable
prospectus supplement.
Notwithstanding the foregoing, unless (i) if such series of preferred stock
has a cumulative distribution, full cumulative distributions on all shares of
preferred stock of such series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past
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distribution periods and the current distribution period and (ii) if such
series of preferred stock does not have a cumulative distribution, full
distributions on the shares of preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the then current distribution
period, no preferred stock of any series shall be redeemed unless all
outstanding shares of preferred stock of such series are simultaneously
redeemed provided, however, that the foregoing shall not prevent the
redemption, purchase or acquisition of shares of preferred stock of such series
to preserve the REIT status of Host Marriott or pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding preferred
stock of such series. In addition, unless (i) if such series of preferred stock
has a cumulative distribution, full cumulative distributions on all preferred
stock of such series have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past distributions periods and the then current distribution period, and
(ii) if such series of preferred stock does not have a cumulative distribution,
full distributions on the preferred stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the then current distribution
period, Host Marriott shall not purchase or otherwise acquire directly or
indirectly any shares of preferred stock of such series (except by conversion
into or exchange for shares of capital stock of Host Marriott ranking junior to
the preferred stock of such series as to distributions and upon liquidation);
provided, however, that the foregoing shall not prevent the redemption,
purchase or acquisition of shares of preferred stock of such series to assist
in maintaining the REIT status of Host Marriott or pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding shares of
preferred stock of such series.
If fewer than all of the outstanding shares of preferred stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
Host Marriott and such shares may be redeemed pro rata from the holders of
record of such shares in proportion to the number of such shares held or for
which redemption is requested by such holder (with adjustments to avoid
redemption of fractional shares) or by lot in a manner determined by Host
Marriott.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of preferred stock of
any series to be redeemed at the address shown on the stock transfer books of
Host Marriott. Each notice shall state:
(a) the redemption date;
(b) the number and series of shares of preferred stock to be redeemed;
(c) the place or places where certificates for such preferred stock are to
be surrendered for payment of the redemption price;
(d) that distributions on the shares to be redeemed will cease to accrue on
such redemption date; and
(e) the date upon which the holders' conversion rights, if any, as to such
shares shall terminate.
If fewer than all of the shares of preferred stock of any series are to be
redeemed, the notice mailed to each such holder thereof shall also specify the
number of shares of preferred stock to be redeemed from each such holder. If
notice of redemption of any preferred stock has been given and if the funds
necessary for such redemption have been set aside by Host Marriott in trust for
the benefit of the holders of any preferred stock so called for redemption,
then from and after the redemption date distributions will cease to accumulate
on such preferred stock, and all rights of the holders of such shares will
terminate, except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of Host Marriott, then, before any distribution or payment shall be
made to the holders of any common stock or any other class or series of shares
of capital stock of Host Marriott ranking junior to the preferred stock in the
distribution of assets upon any liquidation, dissolution or winding up of Host
Marriott, the holders of each series of preferred
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stock shall be entitled to receive out of assets of Host Marriott legally
available for distribution to shareholders liquidating distributions in the
amount of the liquidation preference per share (set forth in the applicable
prospectus supplement), plus an amount equal to all distributions accumulated
and unpaid thereon (which shall not include any accumulation in respect of
unpaid distributions for prior distribution periods if such shares of preferred
stock do not have a cumulative distribution). After payment of the full amount
of the liquidating distributions to which they are entitled, the holders of
shares of preferred stock will have no right or claim to any of the remaining
assets of Host Marriott. If, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of Host Marriott
are insufficient to pay the amount of the liquidating distributions on all
outstanding shares of preferred stock and the corresponding amounts payable on
all shares of other classes or series of shares of capital stock of Host
Marriott ranking on a parity with the preferred stock in the distribution of
assets, then the holders of the preferred stock and all other such classes or
series of shares of capital stock shall share ratably in any such distribution
of assets in proportion to the full liquidating distributions to which they
would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
preferred stock, the remaining assets of Host Marriott shall be distributed
among the holders of any other classes or series of shares of capital stock
ranking junior to the preferred stock upon liquidation, dissolution or winding
up, according to their respective rights and preferences and in each case
according to their respective number of shares. For such purposes, the
consolidation or merger of Host Marriott with or into any other corporation,
trust or entity, or the sale, lease or conveyance of all or substantially all
of the property or business of Host Marriott, shall not be deemed to constitute
a liquidation, dissolution or winding up of Host Marriott.
VOTING RIGHTS
Holders of preferred stock will not have any voting rights, except as set
forth below or as otherwise from time to time required by law or as indicated
in the applicable Prospectus Supplement.
Whenever distributions on any shares of preferred stock shall be in arrears
for six or more quarterly periods (whether or not consecutive), the holders of
such preferred stock (voting together as a single class with all other series
of preferred stock upon which like voting rights have been conferred and are
exercisable) will be entitled to vote for the election of two additional
Directors of Host Marriott at a special meeting called by the holders of record
of at least ten percent (10%) of any series of preferred stock so in arrears
(unless such request is received less than 90 days before the date fixed for
the next annual or special meeting of the stockholders) or at the next annual
meeting of stockholders, and at each subsequent annual meeting until (a) if
such series of preferred stock has a cumulative distribution, all distributions
accumulated on such series of preferred stock for the past distribution periods
and the then current distribution period shall have been fully paid or declared
and a sum sufficient for the payment thereof set aside for payment or (b) if
such series of preferred stock does not have a cumulative distribution, four
consecutive quarterly distributions shall have been fully paid or declared and
a sum sufficient for the payment thereof set aside for payment. In such case,
the entire Board of Directors will be increased by two Directors.
Unless provided otherwise for any series of preferred stock, so long as any
shares of preferred stock remain outstanding, Host Marriott will not, without
the affirmative vote or consent of the holders of at least two-thirds of each
series of preferred stock outstanding at the time, given in person or by proxy,
either in writing or at a meeting (such series voting together as a single
class), (a) authorize or create, or increase the authorized or issued amount
of, any class or series of shares of capital stock ranking senior to such
series of preferred stock with respect to the payment of distributions or the
distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized shares of capital stock of Host Marriott into such
shares, or create, authorize or issue any obligation or security convertible
into or evidencing the right to purchase any such shares; or (b) amend, alter
or repeal the provisions of Host Marriott's charter or the Articles
Supplementary for such series of preferred stock, whether by merger,
consolidation or otherwise (an "Event"), so as to materially and adversely
affect any right, preference, privilege or voting power of such series of
preferred stock or the holders thereof; provided, however, with respect to the
occurrence of any of the Events
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set forth in (b) above, so long as the shares of preferred stock remain
outstanding or are converted into like securities of the surviving entity, in
each case with the terms thereof materially unchanged, taking into account that
upon the occurrence of an Event, Host Marriott may not be the surviving entity
and that the surviving entity may be a non-corporate entity, such as a limited
liability company, limited partnership or business trust (in which case the
preferred stock would be converted into an equity interest, other than stock,
having substantially equivalent terms), the occurrence of any such Event shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers of holders of preferred stock; and provided further
that (x) any increase in the amount of the authorized preferred stock, or (y)
any increase in the amount of authorized shares of such series or any other
series of preferred stock, in each case ranking on a parity with or junior to
the preferred stock of such series with respect to payment of distributions and
the distribution of assets upon liquidation, dissolution or winding up of Host
Marriott, shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of preferred stock of such series shall
have been converted or redeemed or called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of preferred stock is
convertible into common stock will be set forth in the applicable prospectus
supplement relating thereto. Such terms will include the number of shares of
common stock into which the shares of preferred stock are convertible, the
conversion price (or manner of calculation thereof), the conversion date(s) or
period(s), provisions as to whether conversion will be at the option of the
holders of the preferred stock or Host Marriott, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such series of preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the preferred stock will be set forth in
the applicable prospectus supplement.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For Host Marriott to qualify as a REIT under the Internal Revenue Code, no
more than 50% in value of its outstanding shares of stock may be owned,
actually or constructively, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities) during the last half of a
taxable year (other than the first year for which an election to be treated as
a REIT has been made) or during a proportionate part of a shorter taxable year.
In addition, if Host Marriott, or one or more owners (actually or
constructively) of 10% or more of Host Marriott, actually or constructively
owns 10% or more of a tenant of Host Marriott (or a tenant of any partnership
in which Host Marriott is a partner), the rent received by Host Marriott
(either directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Internal
Revenue Code. A REIT's shares also must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of twelve months or during a
proportionate part of a shorter taxable year (other than the first year for
which an election to be treated as a REIT has been made).
Primarily because the Board of Directors believes it is desirable for Host
Marriott to qualify as a REIT, the Articles of Incorporation provide that,
subject to certain exceptions, no person or persons acting as a group may own,
or be deemed to own by virtue of the attribution provisions of the Internal
Revenue Code, more than (a) 9.8% of the lesser of the number or value of shares
of common stock outstanding or (b) 9.8% of the lesser of the number or value of
the issued and outstanding preferred or other shares of any class or series of
Host
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Marriott's stock, subject to (a) an exception for a holder of shares of common
stock solely by reason of the Merger in excess of the ownership limit so long
as such holder would not own, directly or by attribution under the Internal
Revenue Code, more than 9.9% by value of the outstanding capital stock of Host
Marriott as of December , 1998, and (b) a limitation on the application of the
"group" limitation (but no other element of the ownership limit) to any "group"
that otherwise would exceed the ownership limit at the effective time of the
Merger solely by reason of its status as a "group." The ownership limit
prohibits Marriott International and its subsidiaries and affiliates (including
members of the Marriott family) from collectively owning shares of capital
stock in excess of the ownership limit, but the Board of Directors will grant
an exception (pursuant to the applicable provisions of the Charter) that will
permit Marriott International to exercise its right to purchase up to 20% of
each class of Host Marriott's voting stock in connection with a change in
control of Host Marriott (but only in the event that (a) Marriott International
and its subsidiaries and affiliates (including members of the Marriott family)
do not own at such time or thereafter, directly and by attribution, 10% or more
of Crestline or any of the lessees and (b) such ownership of Host Marriott's
shares would not cause Host Marriot, L.P. to be considered to own, directly or
by attribution, 10% or more of Crestline or any of the lessees). The ownership
attribution rules under the Internal Revenue Code are complex and may cause
capital stock owned actually or constructively by a group of related
individuals and/or entities to be owned constructively by one individual or
entity. As a result, the acquisition of less than 9.8% of the common stock (or
the acquisition or ownership of an interest in an entity that owns, actually or
constructively, common stock) by an individual or entity could nevertheless
cause that individual or entity, or another individual or entity, to own
constructively in excess of 9.8% of the outstanding common stock and thus
subject such common stock to the remedy provision under the ownership limit.
The Board of Directors may grant an exemption from the ownership limit with
respect to one or more persons who would not be treated as "individuals" for
purposes of the Internal Revenue Code if it is satisfied, based upon an opinion
of counsel and such other evidence as is satisfactory to the Board of Directors
in its sole discretion, that such ownership will not cause a person who is an
individual to be treated as owning capital stock in excess of the ownership
limit, applying the applicable constructive ownership rules, and will not
otherwise jeopardize Host Marriott's status as a REIT [(for example, by causing
any tenant of Host Marriott, L.P. (including but not limited to Crestline and
the lessees) to be considered a "related party tenant" for purposes of the REIT
qualification rules)]. As a condition of such waiver, the Board of Directors
may require undertakings or representations from the applicant with respect to
preserving the REIT status of Host Marriott.
The Board of Directors will have the authority to increase the ownership
limit from time to time, but will not have the authority to do so to the extent
that after giving effect to such increase, five beneficial owners of capital
stock could beneficially own in the aggregate more than 49.5% of the
outstanding capital stock.
The Articles of Incorporation further prohibit (i) any person from actually
or constructively owning shares of beneficial interest of Host Marriott that
would result in Host Marriott being "closely held" under Section 856(h) of the
Internal Revenue Code or otherwise cause Host Marriott to fail to qualify as a
REIT and (ii) any person from transferring shares of Host Marriott's capital
stock if such transfer would result in shares of Host Marriott's capital stock
being owned by fewer than 100 persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of Host Marriott's capital stock that will or
may violate any of the foregoing restrictions on transferability and ownership
is required to give notice immediately to Host Marriott and provide Host
Marriott with such other information as Host Marriott may request in order to
determine the effect of such transfer on Host Marriott's status as a REIT.
If any purported transfer of shares of Host Marriott's capital stock or any
other event would otherwise result in any person violating the ownership limit
or the other restrictions in the Articles of Incorporation, then any such
purported transfer will be void and of no force or effect with respect to the
purported transferee (the "Prohibited Transferee") as to that number of shares
that exceeds the ownership limit (referred to as "excess shares") and the
Prohibited Transferee shall acquire no right or interest (or, in the case of
any event other than
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a purported transfer, the person or entity holding record title to any such
shares in excess of the ownership limit (the "Prohibited Owner") shall cease to
own any right or interest) in such excess shares. Any such excess shares
described above will be transferred automatically, by operation of law, to a
trust, the beneficiary of which will be a qualified charitable organization
selected by Host Marriott (the "Beneficiary"). Such automatic transfer shall be
deemed to be effective as of the close of business on the Business Day (as
defined in the Articles of Incorporation) prior to the date of such violating
transfer. Within 20 days of receiving notice from Host Marriott of the transfer
of shares to the trust, the trustee of the trust (who shall be designated by
Host Marriott and be unaffiliated with Host Marriott and any Prohibited
Transferee or Prohibited Owner) will be required to sell such excess shares to
a person or entity who could own such shares without violating the ownership
limit, and distribute to the Prohibited Transferee an amount equal to the
lesser of the price paid by the Prohibited Transferee for such excess shares or
the sales proceeds received by the trust for such excess shares. In the case of
any excess shares resulting from any event other than a transfer, or from a
transfer for no consideration (such as a gift), the trustee will be required to
sell such excess shares to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair market value of such
excess shares as of the date of such event or the sales proceeds received by
the trust for such excess shares. In either case, any proceeds in excess of the
amount distributable to the Prohibited Transferee or Prohibited Owner, as
applicable, will be distributed to the Beneficiary. Prior to a sale of any such
excess shares by the trust, the trustee will be entitled to receive, in trust
for the Beneficiary, all dividends and other distributions paid by Host
Marriott with respect to such excess shares, and also will be entitled to
exercise all voting rights with respect to such excess shares. Subject to
Maryland law, effective as of the date that such shares have been transferred
to the trust, the trustee shall have the authority (at the trustee's sole
discretion and subject to applicable law) (a) to rescind as void any vote cast
by a Prohibited Transferee prior to the discovery by Host Marriott that such
shares have been transferred to the trust and (b) to recast such vote in
accordance with the desires of the trustee acting for the benefit of the
Beneficiary. However, if Host Marriott has already taken irreversible corporate
action, then the trustee shall not have the authority to rescind and recast
such vote. Any dividend or other distribution paid to the Prohibited Transferee
or Prohibited Owner (prior to the discovery by Host Marriott that such shares
had been automatically transferred to a trust as described above) will be
required to be repaid to the trustee upon demand for distribution to the
Beneficiary. If the transfer to the trust as described above is not
automatically effective (for any reason) to prevent violation of the ownership
limit, then the Articles of Incorporation provides that the transfer of the
excess shares will be void.
In addition, shares of Host Marriott's stock held in the trust shall be
deemed to have been offered for sale to Host Marriott, or its designee, at a
price per share equal to the lesser of (a) the price per share in the
transaction that resulted in such transfer to the trust (or, in the case of a
devise or gift, the market value at the time of such devise or gift) and (b)
the market value of such shares on the date Host Marriott, or its designee,
accepts such offer. Host Marriott will have the right to accept such offer
until the trustee has sold the shares held in the trust. Upon such a sale to
Host Marriott, the interest of the Beneficiary in the shares sold will
terminate and the trustee will distribute the net proceeds of the sale to the
Prohibited Owner.
The foregoing restrictions on transferability and ownership will not apply if
the Board of Directors determines that it is no longer in the best interests of
Host Marriott to attempt to qualify, or to continue to qualify, as a REIT.
All certificates representing shares of Host Marriott's capital stock will
bear a legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Internal Revenue Code, more than 5% (or such other percentage between 1/2
of 1% and 5% as provided in the rules and regulations promulgated under the
Internal Revenue Code) of the lesser of the number or value of the outstanding
shares of Host Marriott's capital stock must give a written notice to Host
Marriott within 30 days after the end of each taxable year. In addition, each
stockholder will, upon demand, be required to disclose to Host Marriott in
writing such information with respect to the direct, indirect and constructive
ownership of shares of Host
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Marriott's capital stock as the Board of Directors deems reasonably necessary
to comply with the provisions of the Internal Revenue Code applicable to a
REIT, to comply with the requirements of any taxing authority or governmental
agency or to determine any such compliance.
These ownership limitations could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of the common stock might receive a premium for their common stock
over the then prevailing market price or which such holders might believe to be
otherwise in their best interest.
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DESCRIPTION OF DEPOSITARY SHARES
GENERAL
Host Marriott may issue depositary receipts for depositary shares, each of
which will represent a fractional interest of a share of a particular series of
preferred stock, as specified in the applicable prospectus supplement. Shares
of preferred stock of each series represented by depositary shares will be
deposited under a separate Deposit Agreement among Host Marriott and the
depositary named therein. Subject to the terms of the Deposit Agreement, each
owner of a depositary receipt will be entitled, in proportion to the fractional
interest of a share of a particular series of preferred stock represented by
the depositary shares evidenced by such depositary receipt, to all the rights
and preferences of the preferred stock represented by such depositary shares
(including dividend, voting, conversion, redemption and liquidation rights).
The depositary shares will be evidenced by depositary receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of the preferred stock by Host Marriott to the
depositary, Host Marriott will cause the depositary to issue, on behalf of Host
Marriott, the depositary receipts. Copies of the applicable form of Deposit
Agreement and depositary receipt may be obtained from Host Marriott upon
request, and the statements made hereunder relating to the Deposit Agreement
and the depositary receipts to be issued thereunder are summaries of certain
provisions thereof and do not purport to be complete and are subject to, and
qualified in their entirety by reference to, all of the provisions of the
applicable Deposit Agreement and related depositary receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
The depositary will distribute all cash dividends or other cash distributions
received in respect of the preferred stock to the record holders of depositary
receipts evidencing the related depositary shares in proportion to the number
of such depositary receipts owned by such holders, subject to certain
obligations of holders to file proofs, certificates and other information and
to pay certain charges and expenses to the depositary.
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary receipts
entitled thereto, subject to certain obligations of holders to file proofs,
certificates and other information and to pay certain charges and expenses to
the depositary, unless the depositary determines that it is not feasible to
make such distribution, in which case the depositary may, with the approval of
Host Marriott, sell such property and distribute the net proceeds from such
sale to such holders.
No distribution will be made in respect of any depositary share to the extent
that it represents any preferred stock converted into other securities.
WITHDRAWAL OF STOCK
Upon surrender of the depositary receipts at the corporate trust office of
the depositary (unless the related depositary shares have previously been
called for redemption or converted into other securities), the holders thereof
will be entitled to delivery at such office, to or upon such holder's order, of
the number of whole or fractional shares of the preferred stock and any money
or other property represented by the depositary shares evidenced by such
depositary receipts. Holders of depositary receipts will be entitled to receive
whole or fractional shares of the related preferred stock on the basis of the
proportion of preferred stock represented by such depositary share as specified
in the applicable prospectus supplement, but holders of such shares of
preferred stock will not thereafter be entitled to receive depositary shares
therefor. If the depositary receipts delivered by the holder evidence a number
of depositary shares in excess of the number of depositary shares representing
the number of shares of preferred stock to be withdrawn, the depositary will
deliver to such holder at the same time a new depositary receipt evidencing
such excess number of depositary shares.
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REDEMPTION OF DEPOSITARY SHARES
Whenever Host Marriott redeems shares of preferred stock held by the
depositary, the depositary will redeem, as of the same redemption date, the
number of depositary shares representing shares of the preferred stock so
redeemed, provided Host Marriott shall have paid in full to the depositary the
redemption price of the preferred stock to be redeemed plus an amount equal to
any accrued and unpaid dividends thereon to the date fixed for redemption. The
redemption price per depositary share will be equal to the corresponding
proportion of the redemption price and any other amounts per share payable with
respect to the preferred stock. If fewer than all the depositary shares are to
be redeemed, the depositary shares to be redeemed will be selected pro rata (as
nearly as may be practicable without creating fractional depositary shares) or
by any other equitable method determined by Host Marriott.
From and after the date fixed for redemption, all dividends in respect of the
shares of preferred stock so called for redemption will cease to accrue, the
depositary shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the depositary receipts evidencing
the depositary shares so called for redemption will cease, except the right to
receive any moneys payable upon such redemption and any money or other property
to which the holders of such depositary receipts were entitled upon such
redemption and surrender thereof to the depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the preferred
stock are entitled to vote, the depositary will mail the information contained
in such notice of meeting to the record holders of the depositary receipts
evidencing the depositary shares which represent such preferred stock. Each
record holder of depositary receipts evidencing depositary shares on the record
date (which will be the same date as the record date for the preferred stock)
will be entitled to instruct the depositary as to the exercise of the voting
rights pertaining to the amount of preferred stock represented by such holder's
depositary shares. The depositary will vote the amount of preferred stock
represented by such depositary shares in accordance with such instructions, and
Host Marriott will agree to take all reasonable action which may be deemed
necessary by the depositary in order to enable the depositary to do so. The
depositary will abstain from voting the amount of preferred stock represented
by such depositary shares to the extent it does not receive specific
instructions from the holders of depositary receipts evidencing such depositary
shares. The depositary shall not be responsible for any failure to carry out
any instruction to vote, or for the manner or effect of any such vote made, as
long as such action or non-action is in good faith and does not result from
negligence or willful misconduct of the depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of Host Marriott,
whether voluntary or involuntary, the holders of each depositary receipt will
be entitled to the fraction of the liquidation preference accorded each share
of preferred stock represented by the depositary shares evidenced by such
depositary receipt, as set forth in the applicable prospectus supplement.
CONVERSION OF PREFERRED STOCK
The depositary shares, as such, are not convertible into common stock or any
other securities or property of Host Marriott. Nevertheless, if so specified in
the applicable prospectus supplement relating to an offering of depositary
shares, the depositary receipts may be surrendered by holders thereof to the
depositary with written instructions to the depositary to instruct Host
Marriott to cause conversion of the preferred stock represented by the
depositary shares evidenced by such depositary receipts into whole shares of
common stock, other shares of preferred stock of Host Marriott or other shares
of stock, and Host Marriott has agreed that upon receipt of such instructions
and any amounts payable in respect thereof, it will cause the conversion
thereof utilizing the same procedures as those provided for delivery of
preferred stock to effect such conversion. If the depositary shares evidenced
by a depositary receipt are to be converted in part only, a new depositary
receipt or receipts will be issued for any depositary shares not to be
converted. No fractional shares of common stock will be
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issued upon conversion, and if such conversion would result in a fractional
share being issued, an amount will be paid in cash by Host Marriott equal to
the value of the fractional interest based upon the closing price of the common
stock on the last business day prior to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of depositary receipt evidencing the depositary shares which
represent the preferred stock and any provision of the Deposit Agreement may at
any time be amended by agreement between Host Marriott and the depositary.
However, any amendment that materially and adversely alters the rights of the
holders of depositary receipts or that would be materially and adversely
inconsistent with the rights granted to the holders of the related preferred
stock will not be effective unless such amendment has been approved by the
existing holders of at least 66% of the depositary shares evidenced by the
depositary receipts then outstanding. No amendment shall impair the right,
subject to certain exceptions in the Deposit Agreement, of any holder of
depositary receipts to surrender any depositary receipt with instructions to
deliver to the holder the related preferred stock and all money and other
property, if any, represented thereby, except in order to comply with law.
Every holder of an outstanding depositary receipt at the time any such
amendment becomes effective shall be deemed, by continuing to hold such
receipt, to consent and agree to such amendment and to be bound by the Deposit
Agreement as amended thereby.
The Deposit Agreement may be terminated by Host Marriott upon not less than
30 days prior written notice to the depositary if a majority of each series of
preferred stock affected by such termination consents to such termination,
whereupon the depositary shall deliver or make available to each holder of
Depositary Receipts, upon surrender of the depositary receipts held by such
holder, such number of whole or fractional shares of preferred stock as are
represented by the depositary shares evidenced by such depositary receipts
together with any other property held by the depositary with respect to such
depositary receipt. In addition, the Deposit Agreement will automatically
terminate if (a) all outstanding depositary shares shall have been redeemed,
(b) there shall have been a final distribution in respect of the related
preferred stock in connection with any liquidation, dissolution or winding up
of Host Marriott and such distribution shall have been distributed to the
holders of depositary receipts evidencing the depositary shares representing
such preferred stock or (c) each share of the related preferred stock shall
have been converted into securities of Host Marriott not so represented by
depositary shares.
CHARGES OF PREFERRED STOCK DEPOSITARY
Host Marriott will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, Host
Marriott will pay the fees and expenses of the depositary in connection with
the performance of its duties under the Deposit Agreement. However, holders of
depositary receipts will pay the fees and expenses of the depositary for any
duties requested by such holders to be performed which are outside of those
expressly provided for in the Deposit Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The depositary may resign at any time by delivering to Host Marriott notice
of its election to do so, and Host Marriott may at any time remove the
depositary, any such resignation or removal to take effect upon the appointment
of a successor depositary. A successor depositary must be appointed within 60
days after delivery of the notice of resignation or removal and must be a bank
or trust company having its principal office in the United States and having a
combined capital and surplus of at least $50,000,000.
MISCELLANEOUS
The depositary will forward to holders of depositary receipts any reports and
communications from Host Marriott which are received by the depositary with
respect to the related preferred stock.
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Neither the depositary nor Host Marriott will be liable if it is prevented
from or delayed in, by law or any circumstances beyond its control, performing
its obligations under the Deposit Agreement. The obligations of Host Marriott
and the depositary under the Deposit Agreement will be limited to performing
their duties thereunder in good faith and without negligence (in the case of
any action or inaction in the voting of preferred stock represented by the
depositary shares), gross negligence or willful misconduct, and Host Marriott
and the depositary will not be obligated to prosecute or defend any legal
proceeding in respect of any depositary receipts, depositary shares or shares
of preferred stock represented thereby unless satisfactory indemnity is
furnished. Host Marriott and the depositary may rely on written advice of
counsel or accountants, or information provided by persons presenting shares of
preferred stock represented thereby for deposit, holders of depositary receipts
or other persons believed in good faith to be competent to give such
information, and on documents believed in good faith to be genuine and signed
by a proper party.
In the event the depositary shall receive conflicting claims, requests or
instructions from any holders of depositary receipts, on the one hand, and Host
Marriott, on the other hand, the depositary shall be entitled to act on such
claims, requests or instructions received from Host Marriott.
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DESCRIPTION OF WARRANTS
GENERAL
Host Marriott may issue warrants to purchase preferred stock, depositary
shares or common stock. Warrants may be issued independently or together with
any offered securities and may be attached to or separate from such offered
securities. The warrants are to be issued under Warrant Agreements to be
entered into between Host Marriott and a bank or trust company, as warrant
agent, all as shall be set forth in the prospectus supplement relating to the
warrants being offered pursuant thereto. The warrant agent will act solely as
an agent of Host Marriott in connection with the warrants of such series and
will not assume any obligation or relationship of agency or trust for or with
any holders or beneficial owners of warrants.
The applicable prospectus supplement will describe the following terms of
warrants in respect of which this prospectus is being delivered:
(i) the title of such warrants;
(ii) the securities for which such warrants are exercisable;
(iii) the price or prices at which such warrants will be issued;
(iv) the number of such warrants issued with each share of preferred
stock or common stock;
(v) any provisions for adjustment of the number or amount of shares of
preferred stock or common stock receivable upon exercise of such warrants
or the exercise price of such warrants;
(vi) if applicable, the date on and after which such warrants and the
related preferred stock or common stock will be separately transferable;
(vii) if applicable, a discussion of the material United States federal
income tax considerations applicable to the exercise of such warrants;
(viii) any other terms of such warrants, including terms, procedures and
limitations relating to the exchange and exercise of such warrants;
(ix) the date on which the right to exercise such warrants shall
commence, and the date on which such right shall expire; and
(x) the maximum or minimum number of such warrants which may be exercised
at any time.
EXERCISE OF WARRANTS
Each warrant will entitle the holder of warrants to purchase for cash such
amount of shares of preferred stock, shares of common stock or depositary
shares at such exercise price as shall in each case be set forth in, or be
determinable as set forth in, the prospectus supplement relating to the
warrants offered thereby. Warrants may be exercised at any time up to the close
of business on the expiration date set forth in the prospectus supplement
relating to the warrants offered thereby. After the close of business on the
expiration date, unexercised warrants will become void.
Warrants may be exercised as set forth in the prospectus supplement relating
to the warrants offered thereby. Upon receipt of payment and the warrant
certificate properly completed and duly executed at the corporate trust office
of the warrant agent or any other office indicated in the prospectus
supplement, Host Marriott will, as soon as practicable, forward the shares of
preferred stock, shares of common stock or depositary shares purchasable upon
such exercise. If less than all of the warrants represented by such warrant
certificate are exercised, a new warrant certificate will be issued for the
remaining warrants.
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DESCRIPTION OF SUBSCRIPTION RIGHTS
GENERAL
Host Marriott may issue subscription rights to purchase common stock,
preferred stock, depositary shares or warrants to purchase preferred stock or
common stock. Subscription rights may be issued independently or together with
any other offered security and may or may not be transferable by the purchaser
receiving the subscription rights. In connection with any subscription rights
offering to Host Marriott's stockholders, Host Marriott may enter into a
standby underwriting arrangement with one or more underwriters pursuant to
which such underwriter will purchase any offered securities remaining
unsubscribed for after such subscription rights offering. In connection with a
subscription rights offering to Host Marriott's stockholders, certificates
evidencing the subscription rights and a prospectus supplement will be
distributed to Host Marriott's stockholders on the record date for receiving
subscription rights in such subscription rights offering set by Host Marriott.
The applicable prospectus supplement will describe the following terms of
subscription rights in respect of which this prospectus is being delivered:
(i) the title of such subscription rights;
(ii) the securities for which such subscription rights are exercisable;
(iii) the exercise price for such subscription rights;
(iv) the number of such subscription rights issued to each stockholder;
(v) the extent to which such subscription rights are transferable;
(vi) if applicable, a discussion of the material United States federal
income tax considerations applicable to the issuance or exercise of such
subscription rights;
(vii) any other terms of such subscription rights, including terms,
procedures and limitations relating to the exchange and exercise of such
subscription rights;
(viii) the date on which the right to exercise such subscription rights
shall commence, and the date on which such right shall expire.
(ix) the extent to which such subscription rights includes an over-
subscription privilege with respect to unsubscribed securities.
(x) if applicable, the material terms of any standby underwriting
arrangement entered into by Host Marriott in connection with the
subscription rights offering.
EXERCISE OF SUBSCRIPTION RIGHTS
Each subscription right will entitle the holder of subscription rights to
purchase for cash such principal amount of shares of preferred stock,
depository shares, common stock, warrants or any combination thereof, at such
exercise price as shall in each case be set forth in, or be determinable as set
forth in, the prospectus supplement relating to the subscription rights offered
thereby. Subscription rights may be exercised at any time up to the close of
business on the expiration date for such subscription rights set forth in the
prospectus supplement. After the close of business on the expiration date, all
unexercised subscription rights will become void.
Subscription rights may be exercised as set forth in the prospectus
supplement relating to the subscription rights offered thereby. Upon receipt of
payment and the subscription rights certificate properly completed and duly
executed at the corporate trust office of the subscription rights agent or any
other office indicated in the prospectus supplement, Host Marriott will, as
soon as practicable, forward the shares of preferred stock or
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common stock, depository shares or warrants purchasable upon such exercise. In
the event that not all of the subscription rights issued in any offering are
exercised, Host Marriott may determine to offer any unsubscribed offered
securities directly to persons other than stockholders, to or through agents,
underwriters or dealers or through a combination of such methods, (including
pursuant to standby underwriting arrangements), as set forth in the applicable
prospectus supplement.
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FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following discussion summarizes the federal income tax considerations
reasonably anticipated to be material to a stockholder in connection with the
purchase, ownership and disposition of common stock. The applicable prospectus
supplement will contain information about additional federal income tax
considerations, if any, relating to particular offerings. The following
discussion is intended to address only those federal income tax consequences
that are generally relevant to all stockholders. Accordingly, it does not
discuss all aspects of federal income taxation that might be relevant to a
specific stockholder in light of his particular investment or tax
circumstances. Therefore, it is imperative that a stockholder review the
following discussion and consult with his own tax advisors to determine the
interaction of his individual tax situation with the tax considerations
associated with the purchase, ownership and disposition of common stock.
The following discussion provides general information only, is not exhaustive
of all possible tax considerations and is not intended to be (and should not be
construed as) tax advice. For example, this summary does not give a detailed
description of any state, local or foreign tax considerations. In addition, the
discussion does not purport to deal with all aspects of taxation that may be
relevant to a stockholder subject to special treatment under the federal income
tax laws, including, without limitation, insurance companies, financial
institutions or broker-dealers, tax-exempt organizations or foreign
corporations and persons who are not citizens or residents of the United
States.
The information in this section is based on the Internal Revenue Code,
current, temporary and proposed regulations thereunder, the legislative history
of the Internal Revenue Code, current administrative interpretations and
practices of the IRS, including its practices and policies as endorsed in
private letter rulings, which are not binding on the IRS, and court decisions,
all as of the date hereof. No assurance can be given that future legislation,
regulations, administrative interpretations and court decisions will not
significantly change the current law or adversely affect existing
interpretations of current law. Any such change could apply retroactively to
transactions preceding the date of the change. No assurance can be provided
that the statements set forth herein (which do not bind the IRS or the courts)
will not be challenged by the IRS or will be sustained by a court if so
challenged.
Hogan & Hartson has given Host Marriott an opinion to the effect that the
discussion herein under the heading "Federal Income Tax Considerations," to the
extent that it contains descriptions of applicable federal income tax law, is
correct in all material respects. The opinion, however, does not purport to
address the actual tax consequences of the purchase, ownership and disposition
of common stock to any particular stockholder. The opinion is based on the
Internal Revenue Code and regulations in effect on the date hereof, current
administrative interpretations and positions of the IRS and existing court
decisions. No assurance can be given that future legislation, regulations,
administrative interpretations and court decisions will not significantly
change the law on which the above opinion is based. Any such change could
adversely affect the opinion. In addition, any such change could apply
retroactively. Moreover, opinions of counsel merely represent counsel's best
judgment with respect to the probable outcome on the merits and are not binding
on the IRS or the courts. Accordingly, even if there is no change in applicable
law, no assurance can be provided that such opinion, which does not bind the
IRS or the courts, will not be challenged by the IRS or will be sustained by a
court if so challenged.
The specific tax attributes of a particular stockholder could have a material
impact on the tax considerations associated with the purchase, ownership and
disposition of common stock. Therefore, it is essential that each prospective
stockholder consult with his own tax advisors with regard to the application of
the federal income tax laws to such stockholder's personal tax situation, as
well as any tax consequences arising under the laws of any state, local or
foreign taxing jurisdiction.
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FEDERAL INCOME TAXATION OF HOST MARRIOTT
General. Host Marriott plans to make an election to be taxed as a REIT under
Sections 856 through 859 of the Internal Revenue Code, effective for the
taxable year beginning January 1, 1999. Host Marriott intends that, commencing
with such year, it will be organized and will operate in such a manner as to
qualify for taxation as a REIT, but no assurance can be given that it in fact
will qualify or remain qualified as a REIT.
The sections of the Internal Revenue Code and the corresponding regulations
that govern the federal income tax treatment of a REIT and its stockholders are
highly technical and complex. The following discussion is a summary of the
material aspects of these rules, which is qualified in its entirety by the
applicable Internal Revenue Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
Hogan & Hartson has provided to Host Marriott an opinion to the effect that,
beginning in 1999, Host Marriott will be organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to meet the requirements for qualification and taxation as a
REIT under the Internal Revenue Code. It must be emphasized that this opinion
is conditioned upon certain assumptions and representations made by Host
Marriott and Host Marriott, L.P. as to factual matters relating to the
organization and operation of Host Marriott and its subsidiaries, Host
Marriott, L.P. and its subsidiaries, the non-controlled subsidiaries, the Host
Employee/Charitable Trust and Crestline and its subsidiaries, including the
economic and other terms of each lease and the expectations of Host Marriott
and the lessees with respect thereto. This opinion also is based on the timely
completion of all of the transactions comprising the REIT conversion, which are
described in detail in certain documents that are incorporated by reference
into this prospectus. See "Where You Can Find More Information." This generally
means that all of the transactions are completed prior to end of 1998, except
for those transactions that clearly are contemplated to be completed afterward.
In addition, this opinion is based upon the factual representations of Host
Marriott concerning its business and properties as described in, or
incorporated by reference into, this prospectus. Moreover, qualification and
taxation as a REIT depends upon Host Marriott's ability to meet on an ongoing
basis (through actual annual operating results, distribution levels and
diversity of share ownership) the various qualification tests imposed under the
Internal Revenue Code discussed below. Hogan & Hartson will not review these
operating results. Accordingly, no assurance can be given that the actual
results of Host Marriott's operations for any particular taxable year will
satisfy such requirements. Further, the anticipated income tax treatment
described below may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time. See "--Failure of Host Marriott
to Qualify as a REIT" below.
If Host Marriott qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that it currently
distributes to its stockholders. This treatment substantially eliminates the
"double taxation" at the corporate and stockholder levels that generally
results from an investment in a regular corporation. However, Host Marriott
will be subject to federal income tax as follows:
1. Host Marriott will be taxed at regular corporate rates on any
undistributed "REIT taxable income," including undistributed net capital
gains; provided, however, that properly designated undistributed capital
gains will effectively avoid taxation at the stockholder level. A REIT's
"REIT taxable income" is the otherwise taxable income of the REIT subject
to certain adjustments, including a deduction for dividends paid.
2. Under certain circumstances, Host Marriott may be subject to the
"alternative minimum tax" on its items of tax preference.
3. If Host Marriott has net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income.
4. Host Marriott's net income from "prohibited transactions" will be
subject to a 100% tax. In general, "prohibited transactions" are certain
sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure
property.
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5. If Host Marriott fails to satisfy the 75% gross income test or the 95%
gross income test discussed below, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
be subject to a tax equal to (1) the gross income attributable to the
greater of the amount by which Host Marriott fails the 75% or 95% test
multiplied by (2) a fraction intended to reflect its profitability.
6. If Host Marriott fails to distribute during each calendar year at
least the sum of (1) 85% of its REIT ordinary income for such year, (2) 95%
of its REIT capital gain net income for such year and (3) any undistributed
taxable income from prior periods, Host Marriott will be subject to a 4%
excise tax on the excess of such required distribution over the sum of
amounts actually distributed and amounts retained but with respect to which
federal income tax was paid.
7. If Host Marriott acquires any asset from a "C" corporation (i.e.,
generally a corporation subject to full corporate-level tax) in a
transaction in which the basis of the asset in the hands of Host Marriott
is determined by reference to the basis of the asset in the hands of the
"C" corporation, and Host Marriott recognizes gain on the disposition of
such asset during the ten-year period beginning on the date on which such
asset was acquired by Host Marriott (the "Recognition Period"), then, to
the extent of the asset's "built-in gain" (i.e., the excess of (a) the fair
market value of such asset over (b) Host Marriott's adjusted basis in the
asset, determined when Host Marriott acquired the asset), such gain will be
subject to tax at the highest regular corporate rate applicable.
Host Marriott owns an indirect interest in appreciated assets that its
predecessors held before the REIT conversion. Such appreciated assets have a
"carryover" basis and thus have built-in gain with respect to Host Marriott. If
such appreciated property is sold within the ten-year period following the REIT
conversion, Host Marriott generally will be subject to regular corporate tax on
that gain to the extent of the built-in gain in that property at the time of
the REIT conversion. The total amount of gain on which Host Marriott can be
taxed is limited to the excess of the aggregate fair market value of its assets
at the time of the REIT conversion over the adjusted tax bases of those assets
at that time). This tax could be very material, however, and may result in the
Host Marriott, L.P. and Host Marriott seeking to avoid a taxable disposition of
any significant asset owned by the Host Predecessors at the time of the REIT
conversion for the ten taxable years following the REIT conversion even though
such disposition might otherwise be in the best interests of Host Marriott.
Notwithstanding Host Marriott's status as a REIT, it is likely that
substantial deferred liabilities of the Host Predecessors will be recognized
over the next ten years (including, but not limited to, tax liabilities
attributable to built-in gain assets and deferred tax liabilities attributable
to taxable income for which neither Host Marriott nor Host Marriott, L.P. will
receive corresponding cash). In addition, the IRS could assert substantial
additional liabilities for taxes against Host Marriott's predecessors for
taxable years prior to the time Host Marriott qualifies as a REIT. Under the
terms of the REIT conversion and the partnership agreement of Host Marriott,
L.P., Host Marriott, L.P. will be responsible for paying, or reimbursing Host
Marriott for the payment of all such tax liabilities as well as any other
liabilities (including contingent liabilities and liabilities attributable to
litigation that Host Marriott may incur), whether such liabilities are incurred
by reason of activities prior to the REIT conversion or activities subsequent
thereto.
Host Marriott, L.P. will pay, or reimburse Host Marriott for the payment of
all taxes incurred by Host Marriott, except for taxes imposed on Host Marriott
by reason of its failure to qualify as a REIT or to distribute to its
stockholders an amount equal to its "REIT taxable income," including net
capital gains. This obligation by Host Marriott, L.P. includes any federal
corporate income tax imposed on built-in gain.
Requirements for Qualification. The Internal Revenue Code defines a REIT as a
corporation, trust or association
(1) which is managed by one or more directors or trustees;
(2) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;
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(3) which would be taxable as a domestic corporation, but for Sections 856
through 859 of the Internal Revenue Code;
(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value of
the outstanding stock of which is owned, actually or constructively, by
five or fewer individuals (as defined in the Internal Revenue Code to
include certain entities); and
(7) which meets certain other tests, described below, regarding the nature
of its income and assets.
Conditions (1) to (4), inclusive, must be met during the entire taxable year
and condition (5) must be met during at least 335 days of a taxable year of
twelve months, or during a proportionate part of a taxable year of less than
twelve months. Conditions (5) and (6) will not apply until after the first
taxable year for which Host Marriott makes the election to be taxed as a REIT.
For purposes of conditions (5) and (6), pension funds and certain other tax-
exempt entities are treated as individuals, subject to a "look-through"
exception in the case of condition (6). Compliance with condition (5) shall be
determined by disregarding the ownership of Host Marriott shares by any
person(s) who: (a) acquired such shares as a gift or bequest or pursuant to a
legal separation or divorce; (b) is the estate of any person making such
transfer to the estate; or (c) is a company established exclusively for the
benefit of (or wholly-owned by) either the person making such transfer or a
person described in (a) or (b).
In connection with condition (6), Host Marriott is required to send annual
letters to its stockholders requesting information regarding the actual
ownership of its shares. If Host Marriott complies with this requirement, and
it does not know, or exercising reasonable diligence would not have known,
whether it failed to meet condition (6), then it will be treated as having met
condition (6). If Host Marriott fails to send such annual letters, it will be
required to pay either a $25,000 penalty or, if the failure is intentional, a
$50,000 penalty. The IRS may require Host Marriott, under those circumstances,
to take further action to ascertain actual ownership of its shares, and failure
to comply with such an additional requirement would result in an additional
$25,000 (or $50,000) penalty. No penalty would be assessed in the first
instance, however, if the failure to send the letters is due to reasonable
cause and not to willful neglect.
Host Marriott believes that it meets and will continue to meet conditions (1)
through (4). In addition, Host Marriott believes that it will have outstanding
(commencing with its first taxable year as a REIT) common stock with sufficient
diversity of ownership to allow it to satisfy conditions (5) and (6). With
respect to condition (6), Host Marriott intends to comply with the requirement
that it send annual letters to its stockholders requesting information
regarding the actual ownership of its shares. In addition, the Host Marriott
Articles of Incorporation contains an ownership limit, which is intended to
assist Host Marriott in continuing to satisfy the share ownership requirements
described in (5) and (6) above. See "Restrictions on Ownership and Transfer."
The ownership limit, together with compliance with the annual stockholder
letter requirement described above, however, may not ensure that Host Marriott
will, in all cases, be able to satisfy the share ownership requirements
described above. If Host Marriott fails to satisfy such share ownership
requirements, Host Marriott will not qualify as a REIT. See "--Failure of Host
Marriott to Qualify as a REIT."
A corporation may not elect to become a REIT unless its taxable year is the
calendar year. Although Host Marriott previously had a 52-53 week year ending
on the Friday closest to January 1, it adopted a calendar year taxable year in
connection with the REIT conversion.
Distribution of "Earnings and Profits" Attributable to "C" Corporation
Taxable Years. A REIT cannot have at the end of any taxable year any
undistributed earnings and profits ("E&P") that are attributable to a "C"
corporation taxable year (which includes all undistributed E&P of Host
Marriott's predecessors). Accordingly, Host Marriott has until December 31,
1999 to distribute such E&P. In connection with the REIT conversion,
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Host Marriott declared dividends intended to eliminate the substantial
majority, if not all, of such E&P. To the extent, however, that any such E&P
remains (the "Acquired Earnings"), Host Marriott is required to distribute such
E&P prior to the end of 1999. Failure to do so would result in disqualification
of Host Marriott as a REIT at least for 1999. If Host Marriott should be so
disqualified for 1999, subject to the satisfaction by Host Marriott of certain
"deficiency dividend" procedures described below in "--Annual Distribution
Requirements Applicable to REITs" and assuming that Host Marriott otherwise
satisfies the requirements for qualification as a REIT, Host Marriott should
qualify as a REIT for 2000 and thereafter. Host Marriott believes that the
dividends it has already declared will be sufficient to distribute all of the
Acquired Earnings as of December 31, 1999. However, there are substantial
uncertainties relating to both the estimate of the Acquired Earnings, as
described below, and the value of noncash consideration that Host Marriott has
distributed or will distribute. Accordingly, there can be no assurance this
requirement will be met.
The estimated amount of the Acquired Earnings will be based on the allocated
consolidated E&P of Host Marriott's predecessors accumulated from 1929 through
and including 1998 and taking into account the allocation, as a matter of law,
of 81% of Host Marriott's predecessors' accumulated E&P to Marriott
International on October 8, 1993 in connection with the spin-off of Marriott
International. The estimate was determined based on the available tax returns
and certain assumptions with respect to both such returns and other matters.
The calculation of the Acquired Earnings, however, depends upon a number of
factual and legal interpretations related to the activities and operations of
Host Marriott's predecessors during their entire corporate existence and is
subject to review and challenge by the IRS. There can be no assurance that the
IRS will not examine the tax returns of Host Marriott's predecessors and
propose adjustments to increase their taxable income. The impact of such
proposed adjustments, if any, may be material. If the IRS examines Host
Marriott's calculation of its E&P (and thus the amount of Acquired Earnings, if
any), the IRS can consider all taxable years of the Host Predecessors as open
for review for purposes of such determination.
Hogan & Hartson has expressed no opinion as to the amount of E&P of Host
Marriott and Host Marriott's predecessors. Accordingly, for purposes of its
opinion as to the qualification of Host Marriott as a REIT following the REIT
conversion, Hogan & Hartson is relying upon a representation from Host Marriott
that by the end of 1999 it will have eliminated all Acquired Earnings.
Qualified REIT Subsidiary. If a REIT owns a corporate subsidiary that is a
"qualified REIT subsidiary," that subsidiary will be disregarded for federal
income tax purposes, and all assets, liabilities and items of income, deduction
and credit of the subsidiary will be treated as assets, liabilities and items
of the REIT itself. Generally, a qualified REIT subsidiary is a corporation all
of the capital stock of which is owned by one REIT. Host Marriott holds several
qualified REIT subsidiaries that hold de minimis indirect interests in the
partnerships that own hotels. These entities will not be subject to federal
corporate income taxation, although they may be subject to state and local
taxation in certain jurisdictions.
Ownership of Partnership Interests by a REIT. A REIT which is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership shall retain the same character in the hands of the
REIT for purposes of Section 856 of the Internal Revenue Code (including
satisfying the gross income tests and the asset tests). Thus, Host Marriott's
proportionate share of the assets and items of income of Host Marriott, L.P.
(including Host Marriott, L.P.'s share of such items of any subsidiaries that
are partnerships or LLCs are treated as assets and items of income of Host
Marriott for purposes of applying the requirements described herein. A summary
of the rules governing the federal income taxation of partnerships and their
partners is provided below in "--Tax Aspects of Ownership of Interests in Host
Marriott, L.P." As the sole general partner of Host Marriott, L.P., Host
Marriott has direct control over Host Marriott, L.P. and indirect control over
the subsidiaries in which Host Marriott, L.P. or a subsidiary has a controlling
interest. Host Marriott intends to operate these entities consistent with the
requirements for qualification of Host Marriott as a REIT.
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Income Tests Applicable to REITs. In order to maintain qualification as a
REIT, Host Marriott must satisfy two gross income requirements. First, at least
75% of Host Marriott's gross income (excluding gross income from "prohibited
transactions") for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property
(including "rents from real property" and, in certain circumstances, interest)
or from certain types of temporary investments. Second, at least 95% of Host
Marriott's gross income (excluding gross income from "prohibited transactions")
for each taxable year must be derived from any combination of such real
property investments, dividends, interest, certain hedging instruments and gain
from the sale or disposition of stock or securities, including certain hedging
instruments.
Rents paid pursuant to Host Marriott's leases, together with dividends and
interest received from the non-controlled subsidiaries, will constitute
substantially all of the gross income of Host Marriott. Several conditions must
be satisfied in order for rents received by Host Marriott, including the rents
received pursuant to the leases, to qualify as "rents from real property."
First, the amount of rent must not be based in whole or in part on the income
or profits of any person. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
rents received from a tenant will not qualify as "rents from real property" if
Host Marriott, or an actual or constructive owner of 10% or more of Host
Marriott, actually or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property
leased in connection with a lease of real property is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."
Finally, if Host Marriott operates or manages a property or furnishes or
renders services to the tenants at the property other than through an
independent contractor from whom Host Marriott derives no revenue, excluding
for these purposes services "usually or customarily rendered" in connection
with the rental of real property and not otherwise considered "rendered to the
occupant," and the income derived from such services (the "Impermissible
Service Income") exceeds one percent of the total amount received by Host
Marriott with respect to the property, then no amount received by Host Marriott
with respect to the property will qualify as "rents from real property." For
these purposes, Impermissible Service Income cannot be less than 150% of the
cost of providing the service. If the Impermissible Service Income is one
percent or less of the total amount received by the REIT with respect to the
property, then only the Impermissible Service Income will not qualify as "rents
from real property." To the extent that services other than those customarily
furnished or rendered in connection with the rental of real property are
rendered to the tenants of the property by an independent contractor, the cost
of the services must be borne by the independent contractor.
Host Marriott, L.P. and each subsidiary that owns hotels have entered into
leases with subsidiaries of Crestline, pursuant to which the hotels are leased
for a term ranging generally from seven to ten years commencing on January 1,
1999. Each lease provides for thirteen payments per annum of a specified base
rent plus, to the extent that it exceeds the base rent, additional rent which
is calculated based upon the gross sales of the hotels subject to the lease,
plus certain other amounts.
Neither Host Marriott nor Host Marriott, L.P. intends to do any of the
following:
. provide any services to the lessees with respect to the operation of the
hotels;
. charge rent for any hotel that is based in whole or in part on the
income or profits of any person, except by reason of being based on a
percentage of receipts or sales, as described above;
. rent any hotel to a Related Party Tenant unless the Board of Directors
determines in its discretion that the rent received from such Related
Party Tenant is not material and will not jeopardize Host Marriott's
status as a REIT; or
. derive rental income attributable to personal property other than
personal property leased in connection with the lease of real property,
the amount of which is less than 15% of the total rent received under
the lease, unless the Board of Directors determines in its discretion
that the amount of such rent attributable to personal property is not
material and will not jeopardize Host Marriott's status as a REIT.
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In order for the rent paid pursuant to the leases to constitute "rents from
real property," the lessees must not be regarded as Related Party Tenants, and
the leases must be respected as true leases for federal income tax purposes.
Accordingly the lessee cannot be treated as service contracts, joint ventures
or some other type of arrangement. A lessee will be regarded as a Related Party
Tenant only if Host Marriott and/or one or more actual or constructive owners
of 10% or more of Host Marriott, actually or constructively, own 10% or more of
such lessee through an ownership interest in Crestline. In order to help
preclude the lessees from being regarded as Related Party Tenants, the
following organizational documents contain the following ownership limits:
. the articles of incorporation of Crestline expressly prohibit any person
(or persons acting as a group), including Host Marriott (and/or any 10%
or greater stockholder of Host Marriott), from owning more than 9.8% of
the lesser of the number or value of the shares of capital stock of
Crestline;
. the Host Marriott Articles of Incorporation expressly prohibits any
person (or persons acting as a group) or entity from owning, actually
and/or constructively, more than 9.8% of the lesser of the number or
value of capital stock of Host Marriott (subject to a limited exception
for a holder of shares of capital stock of Host Marriott solely by
reason of the Merger in excess of the ownership limit so long as the
holder thereof did not own, directly or by attribution under the
Internal Revenue Code, more than 9.9% in value of the outstanding shares
of capital stock of Host Marriott) or any other class or series of
shares of Host Marriott; and
. Host Marriott, L.P.'s partnership agreement expressly prohibits any
person (or persons acting as a group) or entity (other than Host
Marriott and an affiliate of the The Blackstone Group and a series of
related funds controlled by Blackstone Real Estate Partners (the
"Blackstone Entities")) from owning more than 4.9% by value of any class
of interests in Host Marriott, L.P. Each of these prohibitions contains
self-executing enforcement mechanisms. Assuming that these prohibitions
are enforced at all times (and no waivers thereto are granted), the
lessees should not be regarded as Related Party Tenants.
There can be no assurance, however, that these ownership restrictions will be
enforced in accordance with their terms in all circumstances or otherwise will
ensure that the lessees will not be regarded as Related Party Tenants.
The determination of whether the leases are true leases depends upon an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following:
. the intent of the parties;
. the form of the agreement;
. the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the
operation of the property or whether the lessee was required simply to
use its best efforts to perform its obligations under the agreement);
and
. the extent to which the property owner retains the risk of loss with
respect to the property (e.g., whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property)
or the potential for economic gain (e.g., appreciation) with respect to
the property.
In addition, Section 7701(e) of the Internal Revenue Code provides that a
contract that purports to be a service contract or a partnership agreement is
treated instead as a lease of property if the contract is properly treated as
such, taking into account all relevant factors. Since the determination of
whether a service contract should be treated as a lease is inherently factual,
the presence or absence of any single factor may not be dispositive in every
case. Some of the relevant factors include whether:
. the service recipient is in physical possession of the property;
. the service recipient controls the property;
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. the service recipient has a significant economic or possessory interest
in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of
the property, the recipient shares the risk that the property will
decline in value, the recipient shares in any appreciation in the value
of the property, the recipient shares in savings in the property's
operating costs or the recipient bears the risk of damage to or loss of
the property);
. the service provider does not bear any risk of substantially diminished
receipts or substantially increased expenditures if there is
nonperformance under the contract;
. the service provider does not use the property concurrently to provide
significant services to entities unrelated to the service recipient; and
. the total contract price does not substantially exceed the rental value
of the property for the contract period.
Host Marriott's leases have been structured with the intent to qualify as
true leases for federal income tax purposes. For example, with respect to each
lease:
. Host Marriott, L.P. or the applicable subsidiary or other lessor entity
and the lessee intend for their relationship to be that of a lessor and
lessee and such relationship is documented by a lease agreement,
. the lessee has the right to exclusive possession and use and quiet
enjoyment of the hotels covered by the lease during the term of the
lease,
. the lessee bears the cost of, and will be responsible for, day-to-day
maintenance and repair of the hotels (other than the cost of certain
capital expenditures), and will dictate (through the hotel managers, who
work for the lessees during the terms of the leases) how the hotels are
operated and maintained,
. the lessee bears all of the costs and expenses of operating the hotels
(including the cost of any inventory used in their operation) during the
term of the lease (other than the cost of certain furniture, fixtures
and equipment, and certain capital expenditures),
. the lessee benefits from any savings (and bears the burdens of any
increases) in the costs of operating the hotels during the term of the
lease,
. in the event of damage or destruction to a hotel, the lessee is at
economic risk because it will bear the economic burden of the loss in
income from operation of the hotels subject to the right, in certain
circumstances, to terminate the lease if the lessor does not restore the
hotel to its prior condition,
. the lessee has indemnified Host Marriott, L.P. or the applicable
subsidiary against all liabilities imposed on Host Marriott, L.P. or the
applicable subsidiary during the term of the lease by reason of (A)
injury to persons or damage to property occurring at the hotels or (B)
the lessee's use, management, maintenance or repair of the hotels,
. the lessee is obligated to pay, at a minimum, substantial Base Rent for
the period of use of the hotels under the lease,
. the lessee stands to incur substantial losses (or reap substantial
gains) depending on how successfully it (through the hotel managers, who
work for the lessees during the terms of the leases) operates the
hotels,
. Host Marriott and Host Marriott, L.P. believe that each lessee
reasonably expects to derive a meaningful profit, after expenses and
taking into account the risks associated with the lease, from the
operation of the hotels during the term of its leases, and
. upon termination of each lease, the applicable hotel is expected to have
a remaining useful life equal to at least 20% of its expected useful
life on the date of the consummation of the REIT conversion, and a fair
market value equal to at least 20% of its fair market value on the date
of the consummation of the REIT conversion.
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If, however, the leases were recharacterized as service contracts or
partnership agreements, rather than true leases, or disregarded altogether for
tax purposes, all or part of the payments that Host Marriott, L.P. receives
from the lessees would not be considered rent or would not otherwise satisfy
the various requirements for qualification as "rents from real property." In
that case, Host Marriott very likely would not be able to satisfy either the
75% or 95% gross income tests and, as a result, would lose its REIT status.
As indicated above, "rents from real property" must not be based in whole or
in part on the income or profits of any person. Payments made pursuant to Host
Marriott's leases should qualify as "rents from real property" since they are
based on either fixed dollar amounts or on specified percentages of gross sales
fixed at the time the leases were entered into. The foregoing assumes that the
leases are not renegotiated during their term in a manner that has the effect
of basing either the percentage rent or base rent on income or profits. The
foregoing also assumes that the leases are not in reality used as a means of
basing rent on income or profits. More generally, the rent payable under the
leases will not qualify as "rents from real property" if, considering the
leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice. Host Marriott intends that it will not
renegotiate the percentages used to determine the percentage rent during the
terms of the leases in a manner that has the effect of basing rent on income or
profits. In addition, Host Marriott believes that the rental provisions and
other terms of the leases conform with normal business practice and were not
intended to be used as a means of basing rent on income or profits.
Furthermore, Host Marriott intends that, with respect to other properties that
it acquires in the future, it will not charge rent for any property that is
based in whole or in part on the income or profits of any person, except by
reason of being based on a fixed percentage of gross revenues, as described
above.
Host Marriott leases certain items of personal property to the lessees in
connection with its leases. Under the Internal Revenue Code, if a lease
provides for the rental of both real and personal property and the portion of
the rent attributable to personal property is 15% or less of the total rent due
under the lease, then all rent paid pursuant to such lease qualifies as "rent
from real property." If, however, a lease provides for the rental of both real
and personal property, and the portion of the rent attributable to personal
property exceeds 15% of the total rent due under the lease, then the portion of
the rent that is attributable to personal property does not qualify as "rent
from real property." The amount of rent attributable to personal property is
that amount which bears the same ratio to total rent for the taxable year as
the average of the adjusted tax bases of the personal property at the beginning
and end of the year bears to the average of the aggregate adjusted tax bases of
both the real and personal property at the beginning and end of such year. Host
Marriott has represented that, with respect to each of its leases that includes
a lease of items of personal property, the amount of rent attributable to
personal property with respect to such lease, determined as set forth above,
will not exceed 15% of the total rent due under the lease (except for several
leases where the rent attributable to personal property, which would constitute
non-qualifying income for purposes of the 75% and 95% gross income tests, would
not be material relative to the overall gross income of Host Marriott). Each
lease permits Host Marriott, L.P. to take certain measures, including requiring
the lessee to purchase certain furniture, fixtures and equipment or to lease
such property from a third party (including a non-controlled subsidiary), if
necessary to ensure that all of the rent attributable to personal property with
respect to such lease will qualify as "rent from real property." In order to
protect Host Marriott's ability to qualify as a REIT, Host Marriott, L.P. sold
substantial personal property associated with a number of hotels acquired in
connection with the REIT conversion to a non-controlled subsidiary. The non-
controlled subsidiary separately leases all such personal property directly to
the applicable lessee and receives rental payments which Host Marriott believes
represent the fair rental value of such personal property directly from the
lessees. If such arrangements are not respected for federal income tax
purposes, Host Marriott likely would not qualify as a REIT.
If any of the hotels were to be operated directly by Host Marriott, L.P. or a
subsidiary as a result of a default by a lessee under the applicable lease,
such hotel would constitute foreclosure property until the close of the third
tax year following the tax year in which it was acquired (or for up to an
additional three years if an extension is granted by the IRS), provided that:
(1) the operating entity conducts operations through an independent
contractor (which might, but would not necessarily in all
circumstances, include Marriott International and its subsidiaries)
within 90 days after the date the hotel is acquired as the result of a
default by a lessee,
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(2) the operating entity does not undertake any construction on the
foreclosed property other than completion of improvements that were
more than 10% complete before default became imminent, and
(3) foreclosure was not regarded as foreseeable at the time the applicable
partnership entered into such lease. For as long as any of these
hotels constitute foreclosure property, the income from the hotels
would be subject to tax at the maximum corporate rates, but it would
qualify under the 75% and 95% gross income tests.
However, if any of these hotels does not constitute foreclosure property at any
time in the future, income earned from the disposition or operation of such
property will not qualify under the 75% and 95% gross income tests.
"Interest" generally will not qualify under the 75% or 95% gross income tests
if it depends in whole or in part on the income or profits of any person.
However, interest will not fail to so qualify solely by reason of being based
upon a fixed percentage or percentages of receipts or sales. Host Marriott does
not expect to derive significant amounts of interest that will not qualify
under the 75% and 95% gross income tests.
The non-controlled subsidiaries hold various assets, the ownership of which
by Host Marriott, L.P. might jeopardize Host Marriott's status as a REIT. These
assets primarily consist of partnership or other interests in hotels that are
not leased, certain foreign hotels, and approximately $200 million in value of
personal property associated with certain Hotels. Host Marriott, L.P. owns 100%
of the nonvoting stock of each non-controlled subsidiary but none of the voting
stock (or control) of that non-controlled subsidiary. Each non-controlled
subsidiary is taxable as a regular "C" corporation. Host Marriott, L.P.'s share
of any dividends received from a non-controlled subsidiary should qualify for
purposes of the 95% gross income test, but not for purposes of the 75% gross
income test. Host Marriott, L.P. does not anticipate that it will receive
sufficient dividends from the non-controlled subsidiaries to cause it to fail
the 75% gross income test.
Host Marriott inevitably will have some gross income from various sources
that fails to constitute qualifying income for purposes of one or both of the
75% or 95% gross income tests. These include, but are not limited to, the
following:
. ""safe harbor" leases,
. the operation of the hotel that is located in Sacramento,
. minority partnership interests in partnerships that own hotels that are
not leased under leases that produce rents qualifying as "rents from
real property," and
. rent attributable to personal property at a few hotels that does not
satisfy the 15% personal property test.
Host Marriott, however, believes that, even taking into account the anticipated
sources of non-qualifying income, its aggregate gross income from all sources
will satisfy the 75% and 95% gross income tests applicable to REITs for each
taxable year commencing subsequent to the date of the REIT conversion.
If Host Marriott fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Internal Revenue
Code. These relief provisions will be generally available if Host Marriott's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, Host Marriott attaches a schedule of the sources of its income to its
federal income tax return and any incorrect information on the schedule was not
due to fraud with intent to evade tax. It is not possible, however, to state
whether in all circumstances Host Marriott would be entitled to the benefit of
these relief provisions. For example, if Host Marriott fails to satisfy the
gross income tests because nonqualifying income that Host Marriott
intentionally incurs exceeds the limits on such income, the IRS could conclude
that Host Marriott's failure to satisfy the tests was not due to
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reasonable cause. If these relief provisions are inapplicable to a particular
set of circumstances involving Host Marriott, Host Marriott will not qualify as
a REIT. As discussed above in "--General," even if these relief provisions
apply, a tax would be imposed with respect to the excess net income.
Any gain realized by Host Marriott on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business, including Host Marriott's share of any such gain
realized by Host Marriott, L.P., will be treated as income from a "prohibited
transaction" that is subject to a 100% penalty tax. Such prohibited transaction
income may also have an adverse effect upon Host Marriott's ability to satisfy
the income tests for qualification as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends upon
all the facts and circumstances with respect to the particular transaction.
Host Marriott, L.P. intends that both it and its subsidiaries will hold the
hotels for investment with a view to long-term appreciation, to engage in the
business of acquiring and owning the hotels (and other hotels) and to make such
occasional sales of the hotels as are consistent with Host Marriott, L.P.'s
investment objectives. There can be no assurance, however, that the IRS might
not contend that one or more of such sales is subject to the 100% penalty tax.
Asset Tests Applicable to REITs. Host Marriott, at the close of each quarter
of its taxable year, must satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of Host Marriott's total assets must
be represented by real estate assets. Host Marriott's real estate assets
include, for this purpose, its allocable share of real estate assets held by
Host Marriott, L.P. and the non-corporate subsidiaries of Host Marriott, L.P.,
as well as stock or debt instruments held for less than one year purchased with
the proceeds of a stock offering, or long-term (at least five years) debt
offering of Host Marriott, cash, cash items and government securities. Second,
no more than 25% of Host Marriott's total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by Host Marriott may not exceed 5% of the value of Host Marriott's total assets
and Host Marriott may not own more than 10% of any one issuer's outstanding
voting securities.
Host Marriott, L.P. does not own any of the voting stock of any of non-
controlled subsidiaries but it does own 100% of the nonvoting stock of each
non-controlled subsidiary. Host Marriott, L.P. may also own nonvoting stock,
representing substantially all of the equity, in other corporate entities that
serve as partners or members in the various entities that hold title to the
hotels. Neither Host Marriott, Host Marriott, L.P., nor any of the non-
corporate subsidiaries of Host Marriott, L.P., own more than 10% of the voting
securities of any entity that is treated as a corporation for federal income
tax purposes. In addition, Host Marriott believes that the securities of any
one issuer owned by Host Marriott, Host Marriott, L.P., or any of the non-
corporate subsidiaries of Host Marriott, L.P., including Host Marriott's pro
rata share of the value of the securities of each non-controlled subsidiary do
not exceed 5% of the total value of Host Marriott's assets. There can be no
assurance, however, that the IRS might not contend that the value of such
securities exceeds the 5% value limitation or that nonvoting stock of a non-
controlled subsidiary or another corporate entity owned by Host Marriott, L.P.
should be considered "voting stock" for this purpose.
After initially meeting the asset tests at the close of any quarter, Host
Marriott will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. An example of such an acquisition would be an increase in Host
Marriott's interest in Host Marriott, L.P. as a result of the exercise of a
limited partner's unit redemption right or an additional capital contribution
of proceeds from an offering of capital stock by Host Marriott. Host Marriott
to maintains adequate records of the value of its assets to ensure compliance
with the asset tests and to take such other actions within 30 days after the
close of any quarter as may be required to cure any noncompliance. If Host
Marriott fails to cure noncompliance with the asset tests within such time
period, Host Marriott would cease to qualify as a REIT.
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Clinton Administration's Proposed Changes to REIT Asset Test. The Clinton
Administration's fiscal year 1999 budget proposal, announced on February 2,
1998, includes a proposal to amend the 10% voting securities test. The proposal
would require a REIT to own no more than 10% of the vote or value of all
classes of stock of any corporation (except for qualified REIT subsidiaries or
corporations that qualify as REITs). Corporations existing prior to the
effective date of the proposal generally would be "grandfathered"; i.e., the
REIT would be subject to the existing 10% voting securities test (described
above) with respect to grandfathered corporations. However, such
"grandfathered" status would terminate with respect to a corporation if the
corporation engaged in a new trade or business or acquired substantially new
assets.
Because Host Marriott, L.P. owns 100% of the nonvoting stock of each non-
controlled subsidiary, and Host Marriott is deemed to own an interest in each
non-controlled subsidiary equal to its proportionate interest in Host Marriott,
L.P., Host Marriott would not satisfy the proposed 10% value limitation with
respect to any of the non-controlled subsidiaries. Whether any of the non-
controlled subsidiaries would qualify as a grandfathered corporation as the
proposal is currently drafted would depend upon the effective date of the
proposal (which is not yet known). If a non-controlled subsidiary otherwise
eligible for "grandfathered" status were to engage in a new trade or business
or were to acquire substantial new assets, or if Host Marriott were to make a
capital contribution to a non-controlled subsidiary otherwise eligible for
"grandfathered" status, its "grandfathered" status would terminate and Host
Marriott would fail to qualify as a REIT. Moreover, Host Marriott would not be
able to own, directly or indirectly, more than 10% of the vote or value of any
corporation formed or acquired after the effective date of the proposal. Thus,
the proposal, if enacted, would materially impede Host Marriott's ability to
engage in new third-party management or similar activities.
Annual Distribution Requirements Applicable to REITs. Host Marriott, in order
to qualify as a REIT, is required to distribute dividends, other than capital
gain dividends, to its stockholders in an amount at least equal to (i) the sum
of (a) 95% of REIT taxable income, computed without regard to the dividends
paid deduction and Host Marriott's net capital gain, and (b) 95% of the net
income, after tax, if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. In addition, if Host Marriott disposes of any
built-in gain asset during its Recognition Period, Host Marriott is required,
pursuant to Treasury Regulations which have not yet been promulgated, to
distribute at least 95% of the built-in gain, after tax, if any, recognized on
the disposition of such asset. See "--General" above for a discussion of built-
in gain assets. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before Host Marriott
timely files its tax return for such year and if paid on or before the first
regular dividend payment date after such declaration. Host Marriott intends to
make timely distributions sufficient to satisfy these annual distribution
requirements. In this regard, Host Marriott, L.P.'s partnership agreement
authorizes Host Marriott, as general partner, to take such steps as may be
necessary to cause Host Marriott, L.P. to distribute to its partners an amount
sufficient to permit Host Marriott to meet these distribution requirements.
To the extent that Host Marriott does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its REIT taxable
income, as adjusted, it is subject to tax thereon at regular ordinary and
capital gain corporate tax rates. Host Marriott, however, may designate some or
all of its retained net capital gain, so that, although the designated amount
will not be treated as distributed for purposes of this tax, a stockholder
would include its proportionate share of such amount in income, as capital
gain, and would be treated as having paid its proportionate share of the tax
paid Host Marriott with respect to such amount. The stockholder's basis in its
capital stock of Host Marriott would be increased by the amount the stockholder
included in income and decreased by the amount of the tax the stockholder is
treated as having paid. Host Marriott would make an appropriate adjustment to
its earnings and profits. For a more detailed description of the federal income
tax consequences to a stockholder of such a designation, see "--Taxation of
Taxable U.S. Stockholders Generally."
There is a significant possibility that Host Marriott's REIT taxable income
will exceed its cash flow, due in part to certain "non-cash" or "phantom"
income expected to be taken into account in computing Host Marriott's REIT
taxable income. Host Marriott anticipates, however, that it will generally have
sufficient cash
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or liquid assets to enable it to satisfy the distribution requirements
described above. It is possible, however, that Host Marriott, from time to
time, may not have sufficient cash or other liquid assets to meet these
distribution requirements. In such event, in order to meet the distribution
requirements, Host Marriott may find it necessary to arrange for short-term, or
possibly long-term, borrowings to fund required distributions and/or to pay
dividends in the form of taxable stock dividends.
Host Marriott calculates its REIT taxable income based upon the conclusion
that the non-corporate subsidiaries of Host Marriott, L.P. or Host Marriott,
L.P. itself, as applicable, is the owner of the hotels for federal income tax
purposes. As a result, Host Marriott expects that the depreciation deductions
with respect to the Hotels will reduce its REIT taxable income. This conclusion
is consistent with the conclusion above that the leases entered into with the
Crestline subsidiaries will be treated as true leases for federal income tax
purposes. If the IRS were to challenge successfully this position, in addition
to failing in all likelihood the 75% and 95% gross income tests described
above, Host Marriott also might be deemed retroactively to have failed to meet
the REIT distribution requirements and would have to rely on the payment of a
"deficiency dividend" in order to retain its REIT status.
Under certain circumstances, Host Marriott may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Host
Marriott's deduction for dividends paid for the earlier year. Thus, Host
Marriott may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Host Marriott would be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
Furthermore, if Host Marriott should fail to distribute during each calendar
year at least the sum of 85% of its REIT ordinary income for such year, 95% of
its REIT capital gain income for such year, and any undistributed taxable
income from prior periods, it would be subject to an excise tax. The excise tax
would equal 4% of the excess of such required distribution over the sum of
amounts actually distributed and amounts retained with respect to which the
REIT pays federal income tax.
Failure of Host Marriott to Qualify as a REIT. If Host Marriott fails to
qualify for taxation as a REIT in any taxable year, and if the relief
provisions do not apply, Host Marriott will be subject to tax, including any
applicable alternative minimum tax, on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which Host Marriott fails
to qualify will not be deductible by Host Marriott nor will they be required to
be made. As a result, Host Marriott's failure to qualify as a REIT would
significantly reduce the cash available for distribution by Host Marriott to
its stockholders and could materially reduce the value of its capital stock. In
addition, if Host Marriott fails to qualify as a REIT, all distributions to
stockholders will be taxable as ordinary income, to the extent of Host
Marriott's current and accumulated E&P, although, subject to certain
limitations of the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to these
distributions. Unless entitled to relief under specific statutory provisions,
Host Marriott also will be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances Host Marriott would be entitled
to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
Distributions by Host Marriott. As long as Host Marriott qualifies as a REIT,
distributions made by Host Marriott out of its current or accumulated E&P, and
not designated as capital gain dividends constitute dividends taxable to its
taxable U.S. stockholders as ordinary income. Such distributions are not
eligible for the dividends received deduction in the case of U.S. stockholders
that are corporations. To the extent that Host Marriott makes distribution not
designated as capital gain dividends in excess of its current and accumulated
E&P, such distributions are treated first as a tax-free return of capital to
each U.S. stockholder, reducing the adjusted basis which such U.S. stockholder
has in its common stock for tax purposes by the amount of such distribution but
not below zero, with distributions in excess of a U.S. stockholder's adjusted
basis in its common stock taxable as capital gains, provided that the common
stock has been held as a capital asset. Dividends declared by Host Marriott in
October, November or December of any year and payable to a
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stockholder of record on a specified date in any such month shall be treated as
both paid by Host Marriott and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by Host Marriott on or
before January 31 of the following year.
Distributions made by Host Marriott that are properly designated by Host
Marriott as capital gain dividends are taxable to taxable non-corporate U.S.
stockholders, i.e., individuals, estates or trusts. They are taxed as gain from
the sale or exchange of a capital asset held for more than one year to the
extent that they do not exceed Host Marriott's actual net capital gain for the
taxable year, without regard to the period for which such non-corporate U.S.
stockholder has held his common stock. In the event that Host Marriott
designates any portion of a dividend as a "capital gain dividend," a U.S.
stockholder's share of such capital gain dividend would be an amount which
bears the same ratio to the total amount of dividends paid to such U.S.
stockholder for the year as the aggregate amount designated as a capital gain
dividend bears to the aggregate amount of all dividends paid on all classes of
shares for the year. On November 10, 1997, the IRS issued Notice 97-64, which
provides generally that Host Marriott may classify portions of its designated
capital gain dividend as either a 20% gain distribution, which would be taxable
to non-corporate U.S. stockholders at a maximum rate of 20%, an unrecaptured
Section 1250 gain distribution, which would be taxable to non-corporate U.S.
stockholders at a maximum rate of 25%, or a 28% rate gain distribution, which
would be taxable to non-corporate U.S. stockholders at a maximum rate of 28%.
If no designation is made, the entire designated capital gain dividend will be
treated as a 28% rate gain distribution. Notice 97-64 provides that a REIT must
determine the maximum amounts that it may designate as 20% and 25% rate capital
gain dividends by performing the computation required by the Internal Revenue
Code as if the REIT were an individual whose ordinary income were subject to a
marginal tax rate of at least 28%. Notice 97-64 further provides that
designations made by the REIT only will be effective to the extent that they
comply with Revenue Ruling 89-81, which requires that distributions made to
different classes of shares be composed proportionately of dividends of a
particular type. On July 22, 1998, as part of the IRS Restructuring Act, the
holding period requirement for the application of the 20% and 25% capital gain
tax rates was reduced to 12 months from 18 months for sales of capital gain
assets on or after January 1, 1998. Although Notice 97-64 will apply to sales
of capital gain assets after July 28, 1997 and before January 1, 1998, it is
expected that the IRS will issue clarifying guidance, most likely applying the
same principles set forth in Notice 97-64, regarding a REIT's designation of
capital gain dividends in light of the new holding period requirements. For a
discussion of the capital gain tax rates applicable to non-corporate U.S.
stockholders, see "--Taxpayer Relief Act and IRS Restructuring Act Changes to
Capital Gain Taxation" below.
Distributions made by Host Marriott that are properly designated by Host
Marriott as capital gain dividends will be taxable to taxable corporate U.S.
stockholders as long-term gain to the extent that they do not exceed Host
Marriott's actual net capital gain for the taxable year at a maximum rate of
35% without regard to the period for which such corporate U.S. stockholder has
held its common stock. Such U.S. stockholders may, however, be required to
treat up to 20% of certain capital gain dividends as ordinary income.
U.S. stockholders may not include in their individual income tax returns any
net operating losses or capital losses of Host Marriott. Instead, such losses
would be carried over by Host Marriott for potential offset against future
income (subject to certain limitations). Distributions made by Host Marriott
and gain arising from the sale or exchange by a U.S. stockholder of common
stock will not be treated as passive activity income, and, as a result, U.S.
stockholders generally will not be able to apply any "passive losses" against
such income or gain. In addition, taxable distributions from Host Marriott
generally will be treated as investment income for purposes of the investment
interest limitation. Capital gain dividends and capital gains from the
disposition of shares, including distributions treated as such, however, will
be treated as investment income only if the U.S. stockholder so elects, in
which case such capital gains will be taxed at ordinary income rates.
Host Marriott will notify stockholders after the close of its taxable year as
to the portions of distributions attributable to that year that constitute
ordinary income, return of capital and capital gain. Host Marriott may
designate, by written notice to its stockholders, its net capital gain so that
with respect to retained net capital
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gains, a U.S. stockholder would include its proportionate share of such gain in
income, as long-term capital gain, and would be treated as having paid its
proportionate share of the tax paid by Host Marriott with respect to the gain.
The U.S. stockholder's basis in its common stock would be increased by its
share of such gain and decreased by its share of such tax. With respect to such
long-term capital gain of a U.S. stockholder that is an individual or an estate
or trust, the IRS, as described above in this section, has authority to issue
regulations that could apply the special tax rate applicable generally to the
portion of the long-term capital gains of an individual or an estate or trust
attributable to deductions for depreciation taken with respect to depreciable
real property. IRS Notice 97-64, described above in this section, did not
address the taxation of non-corporate REIT stockholders with respect to
retained net capital gains.
Sales of Common Stock. Upon any sale or other disposition of common stock, a
U.S. stockholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and
(ii) the holder's adjusted basis in such common stock for tax purposes. Such
gain or loss will be capital gain or loss if the common stock has been held by
the U.S. stockholder as a capital asset. In the case of a U.S. stockholder who
is an individual or an estate or trust, such gain or loss will be long-term
capital gain or loss, and any such long-term capital gain shall be subject to
the maximum capital gain rate of 20%. In the case of a U.S. stockholder that is
a corporation, such gain or loss will be long-term capital gain or loss if such
shares have been held for more than one year, and any such capital gain shall
be subject to the maximum capital gain rate of 35%. In general, any loss
recognized by a U.S. stockholder upon the sale or other disposition of common
stock that has been held for six months or less, after applying certain holding
period rules, will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. stockholder from Host Marriott that were
required to be treated as long-term capital gains.
Taxpayer Relief Act and IRS Restructuring Act Changes to Capital Gain
Taxation. The Taxpayer Relief Act of 1997 altered the taxation of capital gain
income. Under the Act, individuals, trusts and estates that hold certain
investments for more than 18 months may be taxed at a maximum long-term capital
gain rate of 20% on the sale or exchange of those investments. Individuals,
trusts and estates that hold certain assets for more than one year but not more
than 18 months may be taxed at a maximum long-term capital gain rate of 28% on
the sale or exchange of those investments. The Taxpayer Relief Act also
provides a maximum rate of 25% for "unrecaptured Section 1250 gain" for
individuals, trusts and estates, special rules for "qualified 5-year gain" and
other changes to prior law. The recently enacted IRS Restructuring Act of 1998,
however, reduced the holding period requirement established by the Taxpayer
Relief Act for the application of the 20% and 25% capital gain tax rates to 12
months from 18 months for sales of capital gain assets after December 31, 1997.
The Taxpayer Relief Act allows the IRS to prescribe regulations on how the
Taxpayer Relief Act's capital gain rates will apply to sales of capital assets
by "pass-through entities," including REITs, such as Host Marriott, and to
sales of interests in "pass-through entities." For a discussion of the rules
under the Taxpayer Relief Act that apply to the taxation of distributions by
Host Marriott to its stockholders that are designated by Host Marriott as
"capital gain dividends," see "--Distributions by Host Marriott" above.
Stockholders are urged to consult with their own tax advisors with respect to
the rules contained in the Taxpayer Relief Act and the IRS Restructuring Act.
BACKUP WITHHOLDING FOR HOST MARRIOTT'S DISTRIBUTIONS
Host Marriott reports to its U.S. stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a U.S. stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder either is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. stockholder that does not provide Host Marriott with
a correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding is creditable against
the stockholder's income tax liability. In addition, Host Marriott may be
required to withhold a portion of its capital gain distributions to any U.S.
stockholders who fail to certify their non-foreign status to Host Marriott. See
"--Taxation of Non-U.S. Stockholders."
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TAXATION OF TAX-EXEMPT STOCKHOLDERS
Provided that a tax-exempt stockholder has not held its common stock as "debt
financed property" within the meaning of the Internal Revenue Code and such
common stock are not otherwise used in a trade or business, the dividend income
from Host Marriott will not be unrelated business taxable income ("UBTI") to a
tax-exempt stockholder. Similarly, income from the sale of common stock will
not constitute UBTI unless such tax-exempt stockholder has held such common
stock as "debt financed property" within the meaning of the Internal Revenue
Code or has used the common stock in a trade or business.
However, for a tax-exempt stockholder that is a social club, voluntary
employee benefit association, supplemental unemployment benefit trust or
qualified group legal services plan exempt from federal income taxation under
Internal Revenue Code Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20),
respectively, income from an investment in Host Marriott will constitute UBTI
unless the organization is properly able to deduct amounts set aside or placed
in reserve for certain purposes so as to offset the income generated by its
investment in Host Marriott. Such a prospective stockholder should consult its
own tax advisors concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of
1993 provides that, effective for taxable years beginning in 1994, a portion of
the dividends paid by a "pension held REIT" shall be treated as UBTI as to any
trust which is described in Section 401(a) of the Internal Revenue Code, is
tax-exempt under Section 501(a) of the Internal Revenue Code and holds more
than 10%, by value, of the interests in the REIT. Tax-exempt pension funds that
are described in Section 401(a) of the Internal Revenue Code are referred to
below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Internal Revenue Code, added by
the 1993 Act, provides that stock owned by qualified trusts shall be treated,
for purposes of the "not closely held" requirement, as owned by the
beneficiaries of the trust rather than by the trust itself, and (ii) either (a)
at least one such qualified trust holds more than 25% by value, of the
interests in the REIT, or (b) one or more such qualified trusts, each of which
owns more than 10%, by value, of the interests in the REIT, hold in the
aggregate more than 50%, by value, of the interests in the REIT. The percentage
of any REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI
earned by the REIT, treating the REIT as if it were a qualified trust and
therefore subject to tax on UBTI, to (ii) the total gross income of the REIT. A
de minimis exception applies where the percentage is less than 5% for any year.
The provisions requiring qualified trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the "not
closely held" requirement without relying upon the "look-through" exception
with respect to qualified trusts.
Based on the current estimated ownership of Host Marriott common stock and as
a result of certain limitations on transfer and ownership of common stock
contained in the Host Marriott Articles of Incorporation, Host Marriott should
not be classified as a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing federal income taxation of the ownership and disposition
of common stock by non-U.S. stockholders are complex and no attempt is made
herein to provide more than a brief summary of such rules. Accordingly, the
discussion does not address all aspects of federal income tax and does not
address state, local or foreign tax consequences that may be relevant to a non-
U.S. stockholder in light of its particular circumstances. In addition, this
discussion is based on current law, which is subject to change, and assumes
that Host Marriott qualifies for taxation as a REIT. Prospective non-U.S.
stockholders should consult with their own tax advisers to determine the impact
of federal, state, local and foreign income tax laws with regard to an
investment in common stock, including any reporting requirements.
Distributions by Host Marriott. Distributions by Host Marriott to a non-U.S.
stockholder that are neither attributable to gain from sales or exchanges by
Host Marriott of United States real property interests nor
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designated by Host Marriott as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated E&P of Host Marriott. Such distributions ordinarily will be subject
to withholding of United States federal income tax on a gross basis (that is,
without allowance of deductions) at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless the dividends are treated
as effectively connected with the conduct by the non-U.S. stockholder of a
United States trade or business. Under certain treaties, however, lower
withholding rates generally applicable to dividends do not apply to dividends
from a REIT, such as Host Marriott. Certain certification and disclosure
requirements must be satisfied to be exempt from withholding under the
effectively connected income exemption. Dividends that are effectively
connected with such a trade or business will be subject to tax on a net basis
(that is, after allowance of deductions) at graduated rates, in the same manner
as U.S. stockholders are taxed with respect to such dividends and are generally
not subject to withholding. Any such dividends received by a non-U.S.
stockholder that is a corporation may also be subject to an additional branch
profits tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Host Marriott expects to withhold United States
income tax at the rate of 30% on any distribution made to a non-U.S.
stockholder unless (i) a lower treaty rate applies and any required form or
certification evidencing eligibility for that lower rate is filed with Host
Marriott or (ii) a non-U.S. stockholder files an IRS Form 4224 with Host
Marriott claiming that the distribution is effectively connected income.
Distributions in excess of the current or accumulated E&P of Host Marriott
will not be taxable to a non-U.S. stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that such
distributions exceed the adjusted basis of a non-U.S. stockholder's common
stock, they will give rise to gain from the sale or exchange of its common
stock, the tax treatment of which is described below.
As a result of a legislative change made by the Small Business Job Protection
Act of 1996, it appears that Host Marriott will be required to withhold 10% of
any distribution in excess of its current and accumulated E&P. Consequently,
although Host Marriott intends to withhold at a rate of 30% on the entire
amount of any distribution (or a lower applicable treaty rate), to the extent
that Host Marriott does not do so, any portion of a distribution not subject to
withholding at a rate of 30% (or a lower applicable treaty rate) would be
subject to withholding at a rate of 10%. However, a non-U.S. stockholder may
seek a refund of such amounts from the IRS if it subsequently determined that
such distribution was, in fact, in excess of current or accumulated E&P of Host
Marriott, and the amount withheld exceeded the non-U.S. stockholder's United
States tax liability, if any, with respect to the distribution.
Distributions to a non-U.S. stockholder that are designated by Host Marriott
at the time of distribution as capital gain dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless:
(i) the investment in the common stock is effectively connected with the
non-U.S. stockholder's United States trade or business, in which case
the non-U.S. stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain (except that a stockholder that
is a foreign corporation may also be subject to the 30% branch profits
tax, as discussed above), or
(ii) the non-U.S. stockholder is a nonresident alien individual who is
present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the
individual's capital gains.
Pursuant to the federal law known as FIRPTA, distributions to a non-U.S.
stockholder that are attributable to gain from sales or exchanges by Host
Marriott of United States real property interests, whether or not designated as
capital gain dividends, will cause the non-U.S. stockholder to be treated as
recognizing such gain as income effectively connected with a United States
trade or business. non-U.S. stockholders would thus generally be taxed at the
same rates applicable to U.S. stockholders (subject to a special alternative
minimum tax in the case of nonresident alien individuals). Also, such gain may
be subject to a 30% branch profits tax in the hands of a non-U.S. stockholder
that is a corporation, as discussed above. Host Marriott is required to
withhold 35% of any such distribution. That amount is creditable against the
non-U.S. stockholder's federal income tax liability.
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Although the law is not entirely clear on the matter, it appears that amounts
designated by Host Marriott pursuant to the Taxpayer Relief Act as
undistributed capital gains in respect of the common stock held by U.S.
Stockholders (see "--Annual Distribution Requirements Applicable to REITs"
above) would be treated with respect to non-U.S. stockholders in the manner
outlined in the preceding two paragraphs for actual distributions by Host
Marriott of capital gain dividends. Under that approach, the non-U.S.
stockholders would be able to offset as a credit against their United States
federal income tax liability resulting therefrom their proportionate share of
the tax paid by Host Marriott on such undistributed capital gains (and to
receive from the IRS a refund to the extent their proportionate share of such
tax paid by Host Marriott were to exceed their actual United States federal
income tax liability).
Sales of Common Stock. Gain recognized by a non-U.S. stockholder upon the
sale or exchange of common stock generally will not be subject to United States
taxation unless such shares constitute a "United States real property interest"
within the meaning of FIRPTA. The common stock will not constitute a "United
States real property interest" so long as Host Marriott is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock is
held directly or indirectly by non-U.S. stockholders. Host Marriott believes,
but cannot guarantee, that it is a "domestically controlled REIT." Moreover,
even if Host Marriott is a "domestically controlled REIT," because the common
stock is publicly traded, no assurance can be given that Host Marriott will
continue to be a "domestically controlled REIT." Notwithstanding the foregoing,
gain from the sale or exchange of common stock not otherwise subject to FIRPTA
will be taxable to a non-U.S. stockholder if the non-U.S. stockholder is a
nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States. In
such case, the nonresident alien individual will be subject to a 30% United
States withholding tax on the amount of such individual's gain.
Even if Host Marriott does not qualify as or ceases to be a "domestically
controlled REIT," gain arising from the sale or exchange by a non-U.S.
stockholder of common stock would not be subject to United States taxation
under FIRPTA as a sale of a "United States real property interest" if:
(i) the common stock are "regularly traded" (as defined by applicable
regulations) on an established securities market (e.g., the NYSE), and
(ii) such non-U.S. stockholder owned 5% or less of the common stock
throughout the five-year period ending on the date of the sale or
exchange.
If gain on the sale or exchange of common stock were subject to taxation under
FIRPTA, the non-U.S. stockholder would be subject to regular United States
income tax with respect to such gain in the same manner as a taxable U.S.
stockholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations) and the purchaser of the common stock would be required to
withhold and remit to the IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup withholding tax
generally is a withholding tax imposed at the rate of 31% on certain payments
to persons that fail to furnish certain information under the United States
information reporting requirements. Backup withholding and information
reporting will generally not apply to distributions paid to non-U.S.
stockholders outside the United States that are treated as dividends subject to
the 30% (or lower treaty rate) withholding tax discussed above, capital gain
dividends or distributions attributable to gain from the sale or exchange by
Host Marriott of United States real property interests. As a general matter,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a foreign
broker. Generally, information reporting (but not backup withholding) will
apply, however, to a payment of the proceeds of a sale of common stock by a
foreign office of a broker that:
(a) is a United States person,
(b) derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, or
(c) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by United States stockholders) for United
States tax purposes.
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If, however, the broker has documentary evidence in its records that the holder
is a non-U.S. stockholder and certain other conditions are met or the
stockholder otherwise establishes an exemption information reporting will not
apply. Payment to or through a United States office of a broker of the proceeds
of a sale of common stock is subject to both backup withholding and information
reporting unless the stockholder certifies under penalty of perjury that the
stockholder is a non-U.S. stockholder, or otherwise establishes an exemption. A
non-U.S. stockholder may obtain a refund of any amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.
The IRS has recently finalized regulations regarding the withholding and
information reporting rules discussed above. In general, these regulations do
not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. These regulations generally are effective for payments made after
December 31, 2000, subject to certain transition rules. Valid withholding
certificates that are held on December 31, 1999, will remain valid until the
earlier of December 31, 2000 or the date of expiration of the certificate under
rules currently in effect, unless otherwise invalidated due to changes in the
circumstances of the person whose name is on such certificate. A non-U.S.
stockholder should consult its own advisor regarding the effect of the new
regulations.
TAX ASPECTS OF HOST MARRIOTT'S OWNERSHIP OF INTERESTS IN HOST MARRIOTT, L.P.
General. Substantially all of Host Marriott's investments are held through
Host Marriott, L.P., which will hold the hotels either directly or through
certain subsidiaries. In general, partnerships are "pass-through" entities that
are not subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit
of a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. Host Marriott
includes in its income its proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and in the computation of
its REIT taxable income. Moreover, for purposes of the REIT asset tests, Host
Marriott includes its proportionate share of assets held through Host Marriott,
L.P. and certain of its subsidiaries. See "--Federal Income Taxation of Host
Marriott--Ownership of Partnership Interests by a REIT."
Entity Classification. If Host Marriott, L.P. or any non-corporate subsidiary
other than a subsidiary held through an entity treated for federal income tax
purposes as a corporation were treated as an association, the entity would be
taxable as a corporation and therefore would be subject to an entity level tax
on its income. In such a situation, the character of Host Marriott's assets and
items of gross income would change and could preclude Host Marriott from
qualifying as a REIT (see "--Federal Income Taxation of Host Marriott--Asset
Tests Applicable to REITs" and "--Income Tests Applicable to REITs").
The entire discussion of the federal income tax consequences of the ownership
of common stock is based on Host Marriott, L.P. and all of its non-corporate
subsidiaries, other than a subsidiary held by an entity treated as a
corporation for federal income tax purposes, being classified as partnerships
for federal income tax purposes. Pursuant to regulations under Section 7701 of
the Internal Revenue Code, a partnership will be treated as a partnership for
federal income tax purposes unless it elects to be treated as a corporation or
would be treated as a corporation because it is a "publicly traded
partnership." Neither Host Marriott, L.P. nor any of the non-corporate
subsidiaries have elected or will elect to be treated as a corporation, and
therefore, subject to the disclosure below, each will be treated as a
partnership for federal income tax purposes (or if it has only one partner or
member, disregarded entirely for federal income tax purposes).
Pursuant to Section 7704 of the Internal Revenue Code, however, a partnership
that does not elect to be treated as a corporation nevertheless will be treated
as a corporation for federal income tax purposes if it is a "publicly traded
partnership," unless at least ninety percent (90%) of its income consists of
"qualifying income" within the meaning of that section. A "publicly traded
partnership" is any partnership (i) the interests in which are traded on an
established securities market or (ii) the interests in which are readily
tradable on a "secondary market (or the substantial equivalent thereof)." Units
of limited partnership interest in Host Marriott L.P. will not be traded on an
established securities market. There is a significant risk, however, that
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after the right to redeem such units becomes exercisable, such interests would
be considered readily tradable on the substantial equivalent of a secondary
market. In this regard, the income requirements generally applicable to REITs
and the definition of "qualifying income" under Section 7704 of the Internal
Revenue Code are similar in most key respects. There is one significant
difference, however, that is relevant to Host Marriott, L.P. For a REIT, rent
from a tenant does not qualify as "rents from real property" if the REIT and/or
one or more actual or constructive owners of 10% or more of the REIT actually
or constructively own 10% or more of the tenant; under Section 7704 of the
Internal Revenue Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owners of 5% or more of
the partnership actually or constructively own 10% or more of the tenant.
A substantial majority of Host Marriott, L.P. income comes from rent payments
by subsidiaries of Crestline. Accordingly, because The Blackstone Group, Host
Marriott and any owner of 10% or more of Host Marriott will own (or be deemed
to own) 5% or more of Host Marriott, L.P., if The Blackstone Group, Host
Marriott and/or any owner of 10% or more of Host Marriott were to own (or be
deemed to own) collectively 10% or more of Crestline, none of the rent from the
lessees of Host Marriott's hotels would be qualifying income for purposes of
determining whether Host Marriott, L.P. should be taxed as a corporation. In
order to avoid this result, the Crestline articles of incorporation expressly
provide that no person (or persons acting as a group), including The Blackstone
Group, Host Marriott and any owner of 10% or more of Host Marriott, may own,
actually and/or constructively, more than 9.8% by value of the equity in
Crestline and the Crestline articles of incorporation contain self-executing
mechanisms intended to enforce this prohibition. In addition, Host Marriott,
L.P.'s partnership agreement prohibits any person (or persons acting as a
group) or entity (other than an affiliate of The Blackstone Group and Host
Marriott) from owning, actually and/or constructively, more than 4.9% of the
value of Host Marriott, L.P., and the Host Marriott charter prohibits any
person (or persons acting as a group) or entity (including The Blackstone Group
and the Marriott family and their affiliated entities as a group) from, subject
to certain limited exceptions, owning, actually and/or constructively, more
than 9.8% of the lesser of the number or value of the total outstanding shares
of Host Marriott. Assuming that all of these prohibitions are enforced at all
times in accordance with their terms (as to which there can be no assurance),
then so long as Host Marriott, L.P.'s income is such that Host Marriott could
meet the gross income tests applicable to REITs (see "--Federal Income Taxation
of Host Marriott--Income Tests Applicable to REITs" and "--Ownership of
Partnership Interests by a REIT"), Host Marriott, L.P.'s "qualifying income"
should be sufficient for it to avoid being classified as a corporation even if
it were considered a publicly traded partnership.
If Host Marriott, L.P. were taxable as a corporation, most, if not all, of
the tax consequences described herein would be inapplicable. In particular,
Host Marriott would not qualify as a REIT because the value of Host Marriott's
ownership interest in Host Marriott, L.P. would exceed 5% of Host Marriott's
assets and Host Marriott would be considered to hold more than 10% of the
voting securities of another corporation (see "--Federal Income Taxation of
Host Marriott--Asset Tests Applicable to REITs"), which would adversely affect
the value of the common stock (see "--Federal Income Taxation of Host
Marriott--Failure of Host Marriott to qualify as a REIT").
Allocations of Operating Partnership Income, Gain, Loss and Deduction. The
partnership agreement of the Host Marriott, L.P. provides that if Host
Marriott, L.P. operates at a net loss, net losses shall be allocated to Host
Marriott and the limited partners in proportion to their respective percentage
ownership interests in Host Marriott, L.P., provided that net losses that would
have the effect of creating a deficit balance in a limited partner's capital
account (as specially adjusted for such purpose) ("Excess Losses") will be
reallocated to Host Marriott, as general partner of Host Marriott, L.P. The
partnership agreement also provides that, if Host Marriott, L.P. operates at a
net profit, net income shall be allocated first to Host Marriott to the extent
of Excess Losses with respect to which Host Marriott has not previously been
allocated net income and any remaining net income shall be allocated in
proportion to the respective percentage ownership interests of Host Marriott
and the limited partners. Finally, the partnership agreement provides that if
Host Marriott, L.P. has preferred units outstanding, income will first be
allocated to such preferred units to the extent necessary to reflect and
preserve the economic rights associated with such preferred units.
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Although a partnership agreement will generally determine the allocation of
income and loss among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) of the
Internal Revenue Code and the applicable regulations. Generally, Section 704(b)
and the applicable regulations require that partnership allocations respect the
economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The allocations of taxable income and loss
provided for in the Host Marriott, L.P. partnership agreement and the
partnership agreements and operating agreements of the non-corporate
subsidiaries are intended to comply with the requirements of Section 704(b) of
the Internal Revenue Code and the regulations promulgated thereunder.
Tax Allocations with Respect to the Hotels. Pursuant to Section 704(c) of the
Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated property (such as the hotels) that is contributed to
a partnership in exchange for an interest in the partnership must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, the difference between the adjusted tax basis and the fair
market value of such property at the time of contribution associated with the
property at the time of the contribution. This difference is know as built-in
gain. The Host Marriott, L.P. partnership agreement requires that such
allocations be made in a manner consistent with Section 704(c) of the Internal
Revenue Code. In general, the partners of Host Marriott, L.P. (including Host
Marriott) who contributed depreciated assets having built-in gain are allocated
depreciation deductions for tax purposes that are lower than such deductions
would be if determined on a pro rata basis. Thus, the carryover basis of the
contributed assets in the hands of Host Marriott, L.P. may cause Host Marriott
to be allocated lower depreciation and other deductions, and therefore to be
effectively allocated more income, which might adversely affect Host Marriott's
ability to comply with the REIT distribution requirements. See "--Federal
Income Taxation of Host Marriott--Annual Distribution Requirements Applicable
to REITs".
In addition, in the event of the disposition of any of the contributed assets
which have built-in gain, all income attributable to the built-in gain
generally will be allocated to the contributing partners, even though the
proceeds of such sale would be allocated proportionately among all the partners
(and likely would be retained by Host Marriott, L.P., rather than distributed).
Thus, if Host Marriott, L.P. were to sell a hotel with built-in gain that was
contributed to Host Marriott, L.P. by Host Marriott's predecessors or Host
Marriott, Host Marriott generally would be allocated all of the income
attributable to the built-in gain, which could exceed the economic or book
income allocated to it as a result of such sale. Such an allocation might cause
Host Marriott to recognize taxable income in excess of cash proceeds, which
might adversely affect Host Marriott's ability to comply with the REIT
distribution requirements. In addition, Host Marriott will be subject to a
corporate level tax on such gain to the extent the gain is recognized within
the 10-year period after the first day of Host Marriott's first taxable year as
a REIT). See "--Federal Income Taxation of Host Marriott--Annual Distribution
Requirements Applicable to REITs" and "--Federal Income Taxation of Host
Marriott--General." It should be noted in this regard that as the general
partner of Host Marriott, L.P., Host Marriott will determine whether or not to
sell a hotel contributed to Host Marriott, L.P. by Host Marriott.
Host Marriott, L.P. and Host Marriott generally use the traditional method,
with a provision for a curative allocation of gain on sale to the extent prior
allocations of depreciation with respect to a specific hotel were limited by
the "ceiling rule" applicable under the traditional method, to account for
built-in gain with respect to the hotels contributed to Host Marriott, L.P. in
connection with the REIT conversion (although there may be certain exceptions).
This method is generally a more favorable method for accounting for built-in
gain from the perspective of those partners (including Host Marriott) who
received units of limited partnership interest in Host Marriott, L.P. in
exchange for property with a low basis relative to value at the time of the
REIT conversion and is a less favorable method from the perspective of those
partners who contributed cash (or "high basis" assets) to Host Marriott, L.P.
(including Host Marriott, to the extent it contributes cash to Host Marriott,
L.P.).
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Any property purchased by Host Marriott, L.P. subsequent to the REIT
conversion will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Internal Revenue Code will not apply.
OTHER TAX CONSEQUENCES FOR HOST MARRIOTT AND ITS STOCKHOLDERS
Host Marriott and its stockholders are subject to state or local taxation in
various state or local jurisdictions, including those in which it (through Host
Marriott, L.P.) or they transact business or reside. The state and local tax
treatment of Host Marriott and its stockholders may not conform to the federal
income tax consequences discussed above. Consequently, prospective stockholders
of Host Marriott should consult their own tax advisors regarding the effect of
state and local tax laws on an investment in Host Marriott.
A portion of the cash to be used by Host Marriott to fund distributions comes
from each non-controlled subsidiary through payments of dividends on the shares
of such corporation held by Host Marriott, L.P. (and, in some cases, interest
on notes held by Host Marriott, L.P.). Each non-controlled subsidiary pays
federal and state income tax at the full applicable corporate rates on its
taxable income computed without regard to any deduction for dividends. To the
extent that a non-controlled subsidiary is required to pay federal, state or
local taxes, the cash otherwise available for distribution by Host Marriott to
its stockholders will be reduced accordingly.
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PLAN OF DISTRIBUTION
Host Marriott may sell the offered securities being offered hereby: (i)
directly to purchasers; (ii) through agents; (iii) through dealers; (iv)
through underwriters; (v) directly to its stockholders; or (vi) through a
combination of any such methods of sale. In addition, the offered securities
may be issued by Host Marriott as a dividend or distribution.
The distribution of the offered securities may be effected from time to time
in one or more transactions either: (i) at a fixed price or prices, which may
be changed; (ii) at market prices prevailing at the time of sale; (iii) at
prices related to such prevailing market prices; or (iv) at negotiated prices.
Offers to purchase offered securities may be solicited directly by Host
Marriott. Offers to purchase offered securities may also be solicited by agents
designated by Host Marriott from time to time. Any such agent, who may be
deemed to be an "underwriter" as that term is defined in the Securities Act,
involved in the offer or sale of the offered securities in respect of which
this prospectus is delivered will be named, and any commissions payable by Host
Marriott to such agent will be set forth in the prospectus supplement.
If a dealer is utilized in the sale of the offered securities in respect of
which this prospectus is delivered, Host Marriott will sell such offered
securities to the dealer, as principal. The dealer, who may be deemed to be an
"underwriter" as that term is defined in the Securities Act, may then resell
such offered securities to the public at varying prices to be determined by
such dealer at the time of resale.
If an underwriter is, or underwriters are, utilized in the sale, Host
Marriott will execute an underwriting agreement with such underwriters at the
time of sale to them and the names of the underwriters will be set forth in the
prospectus supplement, which will be used by the underwriter to make resales of
the offered securities in respect of which this prospectus is delivered to the
public. In connection with the sale of offered securities, such underwriter may
be deemed to have received compensation from Host Marriott in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of offered securities for whom they may act as agents. Underwriters
may also sell offered securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act
as agents. Any underwriting compensation paid by Host Marriott to underwriters
in connection with the offering of offered securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement.
Pursuant to any standby underwriting agreement entered into in connection
with a subscription rights offering to Host Marriott's stockholders, persons
acting as standby underwriters may receive a commitment fee for all securities
underlying the subscription rights that the underwriter commits to purchase on
a standby basis. Additionally, prior to the expiration date with respect to any
subscription rights, any standby underwriters in a subscription rights offering
to Host Marriott's stockholders may offer such securities on a when-issued
basis, including securities to be acquired through the purchase and exercise of
subscription rights, at prices set from time to time by the standby
underwriters. After the expiration date with respect to such subscription
rights, the underwriters may offer securities of the type underlying the
subscription rights, whether acquired pursuant to a standby underwriting
agreement, the exercise of the subscription rights or the purchase of such
securities in the market, to the public at a price or prices to be determined
by the underwriters. The standby underwriters may thus realize profits or
losses independent of the underwriting discounts or commissions paid by Host
Marriott. If Host Marriott does not enter into a standby underwriting
arrangement in connection with a subscription rights offering to Host
Marriott's stockholders, Host Marriott may elect to retain a dealer-manager to
manage such a subscription rights offering for Host Marriott. Any such dealer-
manager may offer securities of the type underlying the subscription rights
acquired or to be acquired pursuant to the purchase and exercise of
subscription rights and may thus realize profits or losses independent of any
dealer-manager fee paid by Host Marriott.
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Underwriters, dealers, agents and other persons may be entitled, under
agreements that may be entered into with Host Marriott, to indemnification by
Host Marriott against certain civil liabilities, including liabilities under
the Securities Act, or to contribution with respect to payments which they may
be required to make in respect thereof. Underwriters and agents may engage in
transactions with, or perform services for, Host Marriott in the ordinary
course of business.
If so indicated in the applicable prospectus supplement, Host Marriott will
authorize underwriters, dealers or other persons to solicit offers by certain
institutions to purchase offered securities pursuant to contracts providing for
payment and delivery on a future date or dates. Institutions with which such
contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others. The obligations of any purchasers under any such
contract will not be subject to any conditions except that (i) the purchase of
the offered securities shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such purchaser is subject, and (ii) if
the offered securities are also being sold to underwriters, Host Marriott shall
have sold to such underwriters the offered securities not sold for delayed
delivery. The underwriters, dealers and such other persons will not have any
responsibility in respect of the validity or performance of such contracts. The
prospectus supplement relating to such contracts will set forth the price to be
paid for offered securities pursuant to such contracts, the commission payable
for solicitation of such contracts and the date or dates in the future for
delivery of offered securities pursuant to such contracts.
Any underwriter may engage in stabilizing and syndicate covering transactions
in accordance with Rule 104 under the Exchange Act. Rule 104 permits
stabilizing bids to purchase the underlying security so long as the stabilizing
bids do not exceed a specified maximum. The underwriters may over-allot shares
of the offered securities in connection with an offering of offered securities,
thereby creating a short position in the underwriters' account. Syndicate
covering transactions involve purchases of the offered securities in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing and syndicate covering transactions may cause the
price of the offered securities to be higher than it would otherwise be in the
absence of such transactions. These transactions, if commenced, may be
discontinued at any time.
The anticipated date of delivery of offered securities will be set forth in
the applicable prospectus supplement relating to each offer.
LEGAL MATTERS
The validity of the offered securities will be passed upon for Host Marriott
by Christopher G. Townsend, Esq., Vice President of Host Marriott or by other
counsel to Host Marriott. If the offered securities are distributed in an
underwritten offering or through agents, certain legal matters may be passed
upon for any agents or underwriters by counsel for such agents or underwriters
identified in the applicable prospectus supplement.
EXPERTS
The consolidated financial statements and schedules of Host Marriott, Host
Marriott Hotels, Host Marriott, L.P., HMC Senior Communities, Inc., Host
Marriott Corporation, a Delaware corporation, and the combined financial
statements of HMH Properties, Inc., and subsidiaries and HMC Capital Resources
Holding Corporation and subsidiaries and incorporated by reference in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated fees and expenses, other than
underwriting discounts and commissions, payable by Host Marriott in connection
with the issuance and distribution of the securities being registered:
<TABLE>
<S> <C>
Registration Fee................................................... $221,250
Printing and Duplicating Expenses.................................. 100,000
Legal Fees and Expenses............................................ 50,000
Accounting Fees and Expenses....................................... 50,000
Miscellaneous...................................................... 50,000
--------
Total............................................................ $471,250
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Host Marriott's Articles of Amendment and Restatement of Articles of
Incorporation (the "Articles of Incorporation") authorize it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay
or reimburse reasonable expenses in advance of final disposition of a
proceeding to (i) any present or former director or officer or (ii) any
individual who, while a director of Host Marriott and at the request of Host
Marriott, serves or has served another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan or any other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her status
as a present or former director or officer of Host Marriott. Host Marriott's
Bylaws obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer
who is made a party to the proceeding by reason of his service in that
capacity or (b) any individual who, while a director of Host Marriott and at
the request of Host Marriott, serves or has served another corporation, real
estate investment trust, partnership, joint venture, trust, employee benefit
plan or other enterprise as a director, trustee, officer or partner of such
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity, against any claim or
liability to which he may become subject by reason of such status. Host
Marriott's Articles of Incorporation and Bylaws also permit Host Marriott to
indemnify and advance expenses to any person who served a predecessor of Host
Marriott in any of the capacities described above and to any employee or agent
of Host Marriott or a predecessor of Host Marriott. Host Marriott's Bylaws
require Host Marriott to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity.
The Maryland General Corporation Law, as amended (the "MGCL"), permits a
Maryland corporation to indemnify and advance expenses to its directors,
officers, employees and agents, and permits a corporation to indemnify its
present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by
them in connection with any proceeding to which they may be made a party by
reason of their service in those or other capacities unless it is established
that (a) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and (i) was committed in bad faith or
(ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or
officer had reasonable cause to believe that the act or omission was unlawful.
However, under the MGCL, a Maryland corporation may not indemnify a director
or officer in a suit by or in the right of the corporation if such director or
officer has been adjudged to be liable to the corporation. In accordance with
the MGCL, Host Marriott's bylaws require it, as a condition to advancing
expenses, to obtain (1) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary
II-1
<PAGE>
for indemnification by Host Marriott as authorized by Host Marriott's bylaws
and (2) a written statement by or on his behalf to repay the amount paid or
reimbursed by the Host Marriott shall ultimately be determined that the
standard of conduct was not met.
Host Marriott intends to enter into indemnification agreements with each of
its directors and officers. The indemnification agreements will require, among
other things, that Host Marriott indemnify its directors and officers to the
fullest extent permitted by law and advance to its directors and officers all
related expenses, subject to reimbursement if it is subsequently determined
that indemnification is not permitted.
The Amended and Restated Agreement of Limited Partnership of Host Marriott,
L.P. (the "Partnership Agreement") also provides for indemnification of Host
Marriott and its officers and directors to the same extent that
indemnification is provided to officers and directors of Host Marriott in its
Articles of Incorporation, and limits the liability of Host Marriott and its
officers and directors to the Operating Partnership and its respective
partners to the same extent that the liability of the officers and directors
of Host Marriott to Host Marriott and its stockholders is limited under Host
Marriott's Articles of Incorporation.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, Host Marriott has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Articles of Amendment and Restatement of Articles of Incorporation of
Host Marriott
3.2** Bylaws of Host Marriott dated September 28, 1998
4.1*** Rights Agreement between Host Marriott and The Bank of New York, as
Rights Agent, dated as of November 23, 1998
4.2*** Articles Supplementary of Host Marriott Classifying and Designating a
Series of Preferred Stock as Series A Junior Participating Preferred
Stock and Fixing Distribution and Other Preferences and Rights of
such Series
4.3*** Form of Rights Certificate
4.4* Specimen Common Stock Certificate
5.1* Opinion of Hogan & Hartson L.L.P. regarding the legality of the
securities being registered
8.1* Opinion of Hogan & Hartson L.L.P. regarding certain tax matters
12.1**** Statement of Computation of Ratios
23.1* Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 5.1)
23.2* Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 8.1)
23.3 Consent of Arthur Andersen LLP, independent public accountants
24.1**** Power of Attorney (included in signature page)
99.1 Form of Election Certificate
</TABLE>
- --------
* To be filed by amendment or by a Current Report on Form 8-K pursuant to
Regulation S-K, Item 601(b).
** Incorporated herein by reference to the same-numbered exhibit to Host
Marriott' s Registration Statement No. 333-64793.
*** Incorporated herein by reference to the same-numbered exhibit to Host
Marriott's Registration Statement on Form 8-A filed with the Commission on
December 11, 1998.
**** Previously Filed.
ITEM 17. 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-2
<PAGE>
(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 this 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 end 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 a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement; and
(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 this registration statement;
provided, however, that subparagraphs (i) and (ii) above shall not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in the periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in this 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 Offered Securities
offered herein, and the offering of such Offered 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) The undersigned Registrant hereby further undertakes that, for the
purposes of determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the Offered Securities offered herein, and the offering
of such Offered Securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned Registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriters during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If
any public offering by the underwriters is to be made on terms differing from
those set forth on the cover page of the prospectus, a post-effective
amendment will be filed to set forth the terms of such offering.
(d) 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 existing provisions or arrangements whereby the
Registrant may indemnify a director, officer or controlling person of the
Registrant against liabilities arising under the Securities Act of 1933, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under
II-3
<PAGE>
the Securities Act shall be deemed to be a part of this registration
statement as of the time it was declared effective; and
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN BETHESDA, MARYLAND, ON THIS 16TH DAY OF DECEMBER, 1998.
Host Marriott Corporation
/s/ Robert E. Parsons, Jr.
By: _________________________________
ROBERT E. PARSONS, JR.
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AS OF THE 16TH DAY OF DECEMBER, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* President, Chief Executive Officer and
- ------------------------------------------- Director (principal executive officer)
TERENCE C. GOLDEN
* Executive Vice President and Chief
- ------------------------------------------- Financial Officer (principal financial
officer)
ROBERT E. PARSONS, JR.
* Senior Vice President and Corporate
- ------------------------------------------- Controller (principal accounting officer)
DONALD D. OLINGER
* Chairman of the Board of Directors
- -------------------------------------------
RICHARD E. MARRIOTT
* Director
- -------------------------------------------
R. THEODORE AMMON
Director
- -------------------------------------------
ROBERT M. BAYLIS
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Director
- -------------------------------------------
J.W. MARRIOTT, JR.
* Director
- -------------------------------------------
ANN DORE MCLAUGHLIN
Director
- -------------------------------------------
HARRY L. VINCENT, JR.
Director
- -------------------------------------------
JOHN G. SCHREIBER
</TABLE>
/s/ Christopher G. Townsend
By: ____________________________
CHRISTOPHER G. TOWNSEND
AS ATTORNEY-IN-FACT
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN BETHESDA, MARYLAND, ON THIS 16TH DAY OF DECEMBER, 1998.
HMC Merger Corporation
/s/ Robert E. Parsons, Jr.
By: _________________________________
ROBERT E. PARSONS, JR.
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AS OF THE 16TH DAY OF DECEMBER, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* President and Initial Director (principal
- ------------------------------------------- executive officer and principal financial
officer)
ROBERT E. PARSONS, JR.
* Vice President (principal accounting
- ------------------------------------------- officer)
DONALD D. OLINGER
/s/ Christopher G. Townsend Vice President and Initial Director
- -------------------------------------------
CHRISTOPHER G. TOWNSEND
*By:
/s/ Christopher G. Townsend
- -------------------------------------------
AS ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Articles of Amendment and Restatement of Articles of Incorporation of
the Company
3.2** Bylaws of the Company dated September 28, 1998
4.1*** Rights Agreement between the Company and The Bank of New York, as
Rights Agent, dated as of November 23, 1998
4.2*** Articles Supplementary of Host Marriott Classifying and Designating a
Series of Preferred Stock as Series A Junior Participating Preferred
Stock and Fixing Distribution and Other Preferences and Rights of
such Series
4.3*** Form of Rights Certificate
4.4* Specimen Common Stock Certificate
5.1* Opinion of Hogan & Hartson L.L.P. regarding the legality of the
securities being registered
8.1* Opinion of Hogan & Hartson L.L.P. regarding certain tax matters
12.1**** Statement of Computation of Ratios
23.1* Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 5.1)
23.2* Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 8.1)
23.3 Consent of Arthur Andersen LLP, independent public accountants
24.1**** Power of Attorney (included in signature page)
99.1 Form of Election Certificate
</TABLE>
- --------
* To be filed by amendment or by a Current Report on Form 8-K pursuant to
Regulation S-K, Item 601(b).
** Incorporated herein by reference to the same-numbered exhibit to the
Company's Registration Statement No. 333-64793.
*** Incorporated herein by reference to the same-numbered exhibit to Host
Marriott's Registration Statement on Form 8-A filed with the Commission
on December 11, 1998.
**** Previously filed.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated February 27, 1998
for Host Marriott Corporation included in Host Marriott Corporation's Form 10-K
for the fiscal year ended January 2, 1998; June 28, 1998 for the combined
financial statements of HMH Properties, Inc. and Subsidiaries and HMC Capital
Resources Holding Corporation and Subsidiaries included in the Form 8-K of Host
Marriott Corporation dated July 29, 1998; May 22, 1998 for Host Marriott Hotels
included in the Form 8-K of Host Marriott Corporation dated July 15, 1998 and in
Host Marriott's Form 8-K dated November 24, 1998; May 1, 1998 for HMC Senior
Communities, Inc. included in Host Marriott's Form 8-K dated November 24, 1998;
August 5, 1998 for Host Marriott, L.P. included in Host Marriott's Form 8-K
dated November 24, 1998; September 29, 1998 for HMC Merger Corporation included
in Host Marriott's Form 8-K dated November 24, 1998 and to all references to our
Firm included in this registration statement.
Arthur Andersen LLP
Washington, D.C.
December 15, 1998
<PAGE>
EXHIBIT 99.1
ELECTION CERTIFICATE
Host Marriott Corporation has declared a special dividend of .__ share of
common stock or $__ per share of Host Marriott common stock to shareholders of
record on December __, 1998. The special dividend will be payable in common
stock or cash, at the option of each stockholder, subject to the ownership
limit, as described in the prospectus supplement and accompanying prospectus
sent with this form. You may make this election on a per-share basis, so that
you may receive common stock on some of your shares and cash on the rest. If
common stock is elected, cash will be paid in lieu of a factional share so that
you will receive a whole number of shares of common stock.
Please indicate below whether you elect to receive the special dividend in
common stock, cash or a combination thereof on all shares of commons stock that
you owned on December __, 1998. THIS ELECTION IS IRREVOCABLE. IF YOU DO NOT
RETURN THIS ELECTION CERTIFICATE BY 5:00 P.M., EASTERN TIME, ON JANUARY __, 1999
YOU WILL RECEIVE THE SPECIAL DIVIDEND IN COMMON STOCK, SUBJECT TO THE OWNERSHIP
LIMIT.
[_] I elect to receive common stock in payment of the special dividend on ALL
of my common stock.
[_] I elect to receive cash in payment of the special dividend on ALL of my
common stock.
[_] I elect to receive a combination of common stock and cash in payment of
the special dividend on my common stock as indicated below:
. Common stock, in payment of the special dividend on __ shares of common
stock
. Cash, in payment of the special dividend on __ shares of common stock
Dated: __, 1999
-----------------------------
Signature of Investor
-----------------------------
Signature of Co-Owner, if any
Please sign exactly as your
name is printed on this
Election Certificate. For
joint owners, each joint
owner must sign. When signing
in a representative capacity,
please give title.
PLEASE COMPLETE, SIGN, DATE AND DELIVER THIS ELECTION CERTIFICATE TO FIRST
CHICAGO TRUST COMPANY OF NEW YORK AT IN THE ACCOMPANYING
PRE-PAID ENVELOPE OR BY FACSIMILE AT (800) __ -__.
