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PROSPECTUS
5,943,577 PAIRED COMMON SHARES
STARWOOD LODGING
STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION
Starwood Lodging Trust (the "Trust") and Starwood Lodging Corporation (the
"Corporation" and, with the Trust, the "Company") is a fully integrated
owner/operator of hotels. All of the securities offered hereby (the "Offering")
consist of shares of the Trust (the "Trust Shares") and shares of the
Corporation (the "Corporation Shares") which are "paired" and trade as units
consisting of one Trust Share and one Corporation Share (the "Paired Common
Shares"). The Trust elected to be taxed as a real estate investment trust for
federal income tax purposes (a "REIT") for its tax year ended December 31, 1995
and intends to continue to so qualify. The Trust is the only publicly traded
REIT with a paired share structure investing in hotel properties. To ensure that
the Trust qualifies as a REIT, ownership by any person is limited to 8.0% of the
Paired Common Shares, subject to certain exceptions. Upon completion of the
Offering, Starwood Capital Group, L.P. and its affiliates will own less than one
percent of the Paired Common Shares on a fully diluted basis.
All of the Paired Common Shares offered hereby may be sold from time to
time by the shareholders specified in this Prospectus or their successors in
interest (the "Selling Shareholders"). See "Selling Shareholders." The Paired
Common Shares are listed on the New York Stock Exchange ("NYSE") under the
symbol "HOT." On October 8, 1996, the last reported sale price of the Paired
Common Shares on the NYSE was $42 7/8 per Paired Common Share.
SEE "RISK FACTORS" ON PAGE 6 FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN
THE COMPANY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS OCTOBER 9, 1996
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NEITHER THE NEVADA GAMING COMMISSION NOR THE NEVADA STATE GAMING CONTROL
BOARD HAS PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
INVESTMENT MERITS OF THE SECURITIES OFFERED HEREBY. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
AVAILABLE INFORMATION
The Trust and the Corporation are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy or information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy or information statements and other information can be inspected
and copied at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: Seven World
Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of such material
can be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. Such reports, proxy or
information statements and other information concerning the Trust and the
Corporation can also be inspected at the offices of the New York Stock Exchange,
Public Reference Section, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Paired Common Shares offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete, and in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Trust, the Corporation and the Paired Common Shares offered hereby, reference is
made to the Registration Statement and exhibits thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (SEC File Nos. 1-6828 and
1-7959) with the Commission under the Securities Act and the Exchange Act are
incorporated in this Prospectus by reference and are made a part hereof:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (as amended by Form 10-K/A filed on March 29, 1996).
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, and June 30, 1996.
3. The Company's Current Reports on Form 8-K, dated January 4, 1996
(as amended by Form 8-K/A filed on March 19, 1996), January 24, 1996 (as
amended by Form 8-K/A filed on February 12, 1996), April 26, 1996, May 16,
1996, June 28, 1996 and August 12, 1996.
4. The description of the Company's Paired Common Shares contained in
the Company's Registration Statement on Form 8-A, filed on October 3, 1986
and any amendments or reports filed for the purpose of updating such
descriptions which have been filed by the Company with the Commission.
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Each document filed by the Trust or the Corporation subsequent to the date
of this Prospectus pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act and prior to termination of the offering of all Paired Common Shares to
which this Prospectus relates shall be deemed to be incorporated by reference in
this Prospectus and shall be part hereof from the date of filing of such
document. Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained in this Prospectus (in the case of a statement in a previously-filed
document incorporated or deemed to be incorporated by reference herein), in any
accompanying Prospectus Supplement relating to a specific offering of Paired
Common Shares or in any other subsequently filed document that is also
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus or any accompanying Prospectus Supplement. Subject to the foregoing,
all information appearing in this Prospectus and each accompanying Prospectus
Supplement is qualified in its entirety by the information appearing in the
documents incorporated by reference.
Copies of all documents incorporated by reference, other than exhibits to
such documents not specifically incorporated by reference therein, will be
provided without charge to each person to whom this Prospectus is delivered,
upon oral or written request to Starwood Lodging Corporation, 2231 E. Camelback
Road, Suite 400, Phoenix, Arizona 85016; Attention: Alan M. Schnaid.
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PROSPECTUS SUMMARY
This Summary is qualified in its entirety by the more detailed information
appearing elsewhere in this Prospectus or incorporated herein by reference.
Unless otherwise indicated, the information contained in this Prospectus is
presented as of September 20, 1996. All references to the "Company" refer to the
Trust and the Corporation, and all references to the "Trust" and to the
"Corporation" include the Trust and the Corporation and those entities
respectively owned or controlled by the Trust or the Corporation, including SLT
Realty Limited Partnership (the "Realty Partnership") and SLC Operating Limited
Partnership (the "Operating Partnership"). The Realty Partnership and the
Operating Partnership are referred to collectively as the "Partnerships." Other
than when used in the financial statements incorporated herein by reference, the
term "on a fully diluted basis" assumes the exchange by Starwood Capital Group,
L.P., and certain of its affiliates (collectively, "Starwood Capital") and the
other holders of all of their exchangeable limited partner interests in the
Partnerships ("Units") for Paired Common Shares but not the exercise of
outstanding options or warrants.
THE COMPANY
The Company is a fully integrated owner/operator of hotels which is
comprised of the Trust, which has owned hotel assets since 1969, and the
Corporation, which has managed hotel assets since 1980. As of September 20,
1996, the Company owned, operated and managed a geographically diversified
portfolio of hotel assets (the "Hotel Assets"), including fee, ground lease and
first mortgage interests in 75 hotel properties, comprising approximately 19,400
rooms located in 24 states and the District of Columbia. Fifty-six of such
hotels are operated under licensing, membership, franchise or management
agreements with national hotel organizations, including Westin(TM),
Marriott(TM), Hilton(TM), Sheraton(TM), Omni(TM), Doubletree(TM), Embassy
Suites(R), Ritz Carlton(TM), Harvey(TM), Radisson(TM), Holiday Inn(R), Residence
Inn(TM), Days Inn(TM), Best Western(TM), Ramada(TM), Clarion(TM) and Quality
Inn(TM).
Since January 1995, the Company has been one of the fastest growing
owners/operators of hotels in the United States. During such period, the Company
invested approximately $877 million in hotel acquisitions, including
approximately $814 million since the June 1995 offering of Paired Common Shares
(the "1995 Offering"). The Company expects to continue to enhance, expand and
diversify its hotel portfolio by continuing to make opportunistic hotel
acquisitions, reinvesting strategically in its existing portfolio, and
aggressively managing the Company's hotels. The Company will continue to pursue
the acquisition of hotels, primarily in the upscale market segment, at prices
which are below replacement costs, and that have attractive yields on
investments that the Company believes can be sustained and improved over time.
Commensurate with the aggressive growth of the Company since the consummation of
its reorganization in January 1995, the Company has enhanced its executive
management team and will continue to enhance its management infrastructure and
operational focus.
Management believes that the Company's unique "paired share" ownership
structure gives it a competitive advantage over other hotel REITs and other
hotel owners/operators with respect to owning and operating hotels. Hotel REITs
cannot operate their hotels and therefore other hotel REITs must enter into
agreements with third party lessees/operators. The Company's shareholders own
both the owner, the Trust, and the lessee/operator, the Corporation, of the
Company's hotels and retain the economic benefits of both the lease payments
received by the Trust and the operating profits realized by the Corporation
while maintaining the tax benefits of the Trust's REIT status. Furthermore, the
Company is able to prevent the erosion of value of its assets that results from
encumbering such properties with long-term third party leases or management
contracts. The pairing arrangement creates total commonality of ownership, as
the shares of beneficial interest of the Trust (the "Trust Shares") and the
shares of common stock of the Corporation (the "Corporation Shares") are paired
on a one for one basis and may only be held or transferred as units consisting
of one Trust Share and one Corporation Share ("Paired Common Shares"). The
Paired Common Share structure eliminates certain potential conflicts of interest
between the hotel owner and the hotel operator. Although the Internal Revenue
Code of 1986, as amended (the "Code") has prohibited the pairing of shares
between a REIT and an operating company since 1983, this rule does not apply to
the Company
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because its Paired Common Share structure has existed since 1980. The Trust is
the only publicly traded hotel REIT which has the Paired Common Share structure.
THE OFFERING
<TABLE>
<S> <C>
Paired Common Shares Offered Hereby.................... 5,943,577 shares
Paired Common Shares Outstanding After the Offering.... 32,628,216 shares(1)
Use of Proceeds........................................ The Company will not receive any of the
proceeds from the sale of the Paired
Common Shares. All of the proceeds will
be received by the Selling Shareholders.
See "Selling Shareholders."
New York Stock Exchange Symbol......................... HOT
</TABLE>
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(1) Includes 5,991,977 Paired Common Shares which are issuable upon the exchange
of outstanding Units. Excludes (i) 1,753,822 Paired Common Shares issuable
pursuant to outstanding options under the stock option plans of the Company,
and (ii) 150,921 restricted Paired Common Shares issued or issuable to
certain senior executives.
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RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below.
This Prospectus contains statements which constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Those statements appear in a number of places in this Prospectus and
include statements regarding the intent, belief or current expectations of the
Company, its Trustees, Directors or its officers with respect to (i) the
declaration or payment of distributions, (ii) the finalization of the terms of,
or the consummation of, acquisitions, (iii) the management or operation of
hotels to be acquired, (iv) the Company's financing plans, (v) the policies of
the Company regarding investments, dispositions, financings, conflicts of
interest or other matters, (vi) the Company's continued qualification as a REIT
or (vii) trends affecting the Company's or any hotel's financial condition or
results of operations. Prospective investors are cautioned that any such forward
looking statements are not guarantees of future performance and involve risks
and uncertainties, and that actual results may differ materially from those in
the forward looking statements as a result of various factors. The accompanying
information contained in this Prospectus, including without limitation the
information set forth below and the information under the heading "The Company,"
identify important factors that could cause such differences.
FAILURE TO MANAGE RAPID GROWTH
To successfully implement its acquisition strategy, the Company must
integrate the hotels acquired since the 1995 Offering and any other subsequently
acquired hotels into its existing operations. Since the closing of the 1995
Offering, the Company's portfolio of hotel properties increased from 47 to 75.
During such period, the Company also entered geographic markets where it
previously did not have any properties. As a result, the consolidation of
functions and integration of departments, systems and procedures of acquired
properties with the Company's existing operations presents a significant
management challenge, and the failure to integrate such properties into the
Company's management and operating structures could have a material adverse
effect on the results of operations and financial condition of the Company.
The Company's future success and its ability to manage future growth
depends in large part upon the efforts of its senior management and its ability
to attract and retain key executive officers and other highly qualified
personnel. Competition for such personnel is intense. Since January 1995, the
Company has experienced significant changes in its senior management, including
the recent hiring of a new Chief Executive Officer and Chief Operating Officer
of the Corporation. There can be no assurance that the Company will continue to
be successful in attracting and retaining qualified personnel. Accordingly,
there can be no assurance that the Company's senior management will be able to
successfully execute or implement the Company's growth and operating strategies.
TAX RISKS
Failure to Qualify as a REIT. The Trust believes that it operated so as to
qualify as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code"), for its taxable year ended December 31, 1995 and intends to continue to
so operate. No assurance, however, can be given that the Trust will remain
qualified as a REIT. Qualification as a REIT involves the application of highly
technical and complex Code provisions for which there are only limited judicial
or administrative interpretations. The complexity of these provisions is greater
in the case of a REIT that owns hotels and leases them to a corporation with
which its stock is paired. The determination of various factual matters and
circumstances not entirely within the Trust's control may affect its ability to
qualify as a REIT. In addition, no assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. Furthermore, the
qualification of the Trust as a REIT will depend on the Trust's continuing
ability to meet various requirements concerning, among other things, the
ownership of Paired Common Shares, the nature of its assets, the source of its
income and the amount of its distributions to its shareholders.
If in any taxable year the Trust were to fail to qualify as a REIT, the
Trust would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal
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income tax on its taxable income at regular corporate rates. Unless entitled to
relief under certain Code provisions, the Trust would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. As a result, the funds available for distribution to the
Trust's shareholders would be reduced for each of the years involved.
Required Distributions to Shareholders. In order to obtain and retain REIT
status, the Trust must distribute to its shareholders at least 95% of its REIT
taxable income (excluding any net capital gain). In addition, the Trust will be
subject to tax on its undistributed net taxable income and net capital gain, and
a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of (i) 85% of its ordinary income, (ii) 95% of its capital gain net income for
that year, and (iii) 100% of its undistributed income from prior years. The
Trust intends to make distributions to its shareholders to comply with the
distribution requirements of the Code and to avoid federal income taxes and the
nondeductible federal excise tax. The Trust (or the Realty Partnership) could be
required to borrow funds on a short-term basis to meet the REIT distribution
requirements, which borrowing may not otherwise be advisable for the Company.
LIMITS ON CHANGE OF CONTROL AND OWNERSHIP LIMITS
Limits on Change of Control. Certain provisions of the Trust's Declaration
of Trust (the "Declaration of Trust") and the Corporation's Articles of
Incorporation (the "Articles of Incorporation") including, without limitation,
the ability to issue preferred shares and the maintenance of staggered terms for
trustees and directors, may have the effect of discouraging a third party from
making an acquisition proposal for the Trust and the Corporation and may thereby
inhibit a change in control under circumstances that could give the holders of
Paired Common Shares the opportunity to realize a premium over the
then-prevailing market prices.
Ownership Limitation. In order for the Trust to qualify and to maintain
its qualification as a REIT, not more than 50% in value of its outstanding
shares may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities). Furthermore, actual or
constructive ownership of a sufficient number of the Paired Common Shares could
cause the Operating Partnership or the Corporation to become a related party
tenant of the Trust which would result in the loss of the Trust's REIT status.
In order to help preserve the Trust's REIT status, the Declaration of Trust and
the Articles of Incorporation prohibit actual or constructive ownership by any
one person or group of related persons of more than 8.0% of the Paired Common
Shares (the "Ownership Limitation"). Generally, the Paired Common Shares owned
by related or affiliated persons will be aggregated and certain options and
warrants will be treated as exercised for purposes of the Ownership Limitation.
The constructive ownership rules of the Code are extensive and complex and
may cause Paired Common Shares owned, directly or indirectly, by all direct or
indirect partners in any partnership, including the direct and indirect owners
of interests in the Realty Partnership and the Operating Partnership, and other
classes of related individuals and/or entities to be deemed to be constructively
owned by one individual or entity. As a result, the acquisition of less than
8.0% of the Paired Common Shares (or the acquisition of an interest in an entity
which owns Paired Common Shares) by an individual or entity could cause that
individual or entity (or another individual or entity) to own constructively in
excess of 8.0% of the Paired Common Shares, and thus subject such Paired Common
Shares to the Ownership Limitation. Direct or constructive ownership in excess
of the Ownership Limitation would cause the violative transfer or ownership to
be void, or cause such shares to be converted into "Excess Shares," which have
limited economic rights, to the extent necessary to ensure that the purported
transfer or other event does not result in a violation of the Ownership
Limitation. Notwithstanding the Ownership Limitation, given the breadth of the
Code's constructive ownership rules and that it is not possible for the Trust
and the Corporation to continuously monitor direct and constructive ownership of
Paired Common Shares, it is possible that an individual or entity could at some
time constructively own sufficient Paired Common Shares to cause termination of
the Trust's REIT status.
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RISK OF INFLUENCE BY STARWOOD CAPITAL
Individuals employed by or otherwise affiliated with Starwood Capital hold
two positions on the Board of Trustees and two positions on the management
committee of the Operating Partnership and will hold at least two positions on
the Board of Directors subject to receipt of certain regulatory approvals.
Accordingly, although the Company has a policy requiring a majority of its
trustees and directors to be "independent," Starwood Capital may have the
ability to exercise certain influence over the affairs of the Company. Due to
its different tax situation, prior to the exchange of its Units, Starwood
Capital's objectives regarding the pricing, structure and timing of any sale of
certain properties or the restructuring or sale of certain mortgage loans may
differ from the objectives of the shareholders of the Company or current
management of the Company. Barry S. Sternlicht is the President and Chief
Executive Officer of, and controls, Starwood Capital. Mr. Sternlicht is a
trustee of the Trust and the Chairman and Chief Executive Officer of the Trust.
In addition, Mr. Sternlicht is a member of the management committee of the
Operating Partnership and, upon the receipt of certain regulatory approvals, he
will be a director of the Corporation. As a consequence, Mr. Sternlicht has the
ability to exercise certain influence over the affairs of the Company.
RISK OF DEBT FINANCING
As a result of incurring debt, the Company is subject to the risks normally
associated with debt financing, including the risk (i) that cash flow from
operations will be insufficient to meet required payments of principal and
interest, and (ii) of fluctuations in interest rates. The $135.0 million Line of
Credit Agreement (as amended, the "Credit Facility"), the $71.0 million Mortgage
Loan Funding Facility Agreement (as amended, the "Mortgage Facility"), the $94.0
million loan (the "Term Loan"), and the $300 million Acquisition Facility (the
"Acquisition Facility"), under which the Company has borrowed, as of August 31,
1996, approximately $92 million, $71 million, $94 million, and $140 million,
respectively, mature in October 1998, July 1997, April 1997, and August 1997,
respectively. The Company also assumed indebtedness of approximately $27.5
million in connection with the acquisition of two hotels on September 20, 1996.
Although the Company anticipates that it will be able to repay or refinance the
Credit Facility, Mortgage Facility, the Term Loan, the Acquisition Facility and
any other such indebtedness, there can be no assurance that it will be able to
do so or that the terms of such refinancings will be favorable to the Company.
LIMITATION ON STARWOOD CAPITAL AND WESTIN OBLIGATIONS
Starwood Capital has agreed that, subject to certain exceptions and
limitations, until the later of June 1998 or the time at which no officer,
director, general partner or employee of Starwood Capital is on either the Board
of Trustees or the Board of Directors, Starwood Capital will not compete with
the Realty Partnership or the Operating Partnership (the "Starwood Noncompete")
and will present to the Partnerships certain investment opportunities in hotel
properties in the United States. Mr. Sternlicht is also bound by a similar
noncompete agreement. The termination of either of those noncompete agreements
and the exceptions to and limitations thereon could have a material adverse
effect on the Company.
In addition, Starwood Capital owns an interest in W & S, L.L.C., which owns
a controlling interest in Westin Hotel Company and certain affiliates
("Westin"), which own equity interests in domestic and international hotels and
which manage, franchise or represent hotels worldwide. The Company has entered
into an agreement (the "Westin Agreement") with Westin pursuant to which Westin
has agreed that, subject to certain exceptions and limitations, Westin will not
acquire or seek to acquire United States hotel equity interests. The termination
of the Westin Agreement and the exceptions to and limitations on the Westin
Agreement could have a material adverse effect on the Company.
POSSIBLE LIABILITY OF TRUST SHAREHOLDERS
Both the Maryland statute governing real estate investment trusts formed
under the laws of that state (the "Maryland REIT Law") and the Declaration of
Trust provide that no shareholder of the Trust will be personally liable for any
obligation of the Trust solely as a result of his status as a shareholder of the
Trust. The Declaration of Trust further provides that the Trust shall indemnify
each shareholder against any claim or
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liability to which the shareholder may become subject by reason of his being or
having been a shareholder. In addition, it is the Trust's policy to include a
clause in its contracts which provides that shareholders assume no personal
liability for obligations entered into on behalf of the Trust. However, with
respect to tort claims, contractual claims where shareholder liability is not so
negated, claims for taxes and certain statutory liability, the shareholders may,
in some jurisdictions, be personally liable to the extent that such claims are
not satisfied by the Trust. Inasmuch as the Trust does and will carry public
liability insurance which it considers adequate, any risk of personal liability
to shareholders is limited to situations in which the Trust's assets plus its
insurance coverage would be insufficient to satisfy the claims against the Trust
and its shareholders.
HOTEL INDUSTRY RISKS
Operating Risks. The properties of the Company are subject to all
operating risks common to the hotel industry. These risks include: changes in
general economic conditions; the level of demand for rooms and related services;
cyclical over-building in the hotel industry; restrictive changes in zoning and
similar land use laws and regulations or in health, safety and environmental
laws, rules and regulations; the inability to secure property and liability
insurance to fully protect against all losses or to obtain such insurance at
reasonable rates; and changes in travel patterns. In addition, the hotel
industry is highly competitive. The properties of the Company compete with other
hotel properties in their geographic markets. However, some of the Company's
competitors may have substantially greater marketing and financial resources
than the Company.
Franchise Agreement Risks. As of September 20, 1996, all but 23 of the
Hotel Assets will be operated pursuant to existing franchise or license
agreements with national hotel organizations (the "Franchise Agreements").
Franchise agreements generally contain specific standards for, and restrictions
and limitations on, the operation and maintenance of a hotel property in order
to maintain uniformity in the system created by the franchisor. In addition,
compliance with such standards could require a franchisee to incur significant
expenses or capital expenditures. Certain of the Franchise Agreements require
the Company to obtain the consent of the franchisor to certain matters,
including certain securities offerings. Although the Company has been able to
obtain similar consents under such agreements in the past, the failure to obtain
any such consent could be grounds for termination of such Franchise Agreements.
Seasonality of Hotel Business. The hotel industry is seasonal in nature.
Generally, hotel revenues are greater in the second and third quarters than in
the first and fourth quarters. As a result, the Trust may be required from time
to time to borrow to provide funds necessary to make quarterly distributions.
Regulation of Gaming Operations. The Company's casino gaming facilities
located in Las Vegas, Nevada are subject to extensive licensing and regulatory
control by the Nevada Gaming Commission (the "Nevada Commission") and other
Nevada authorities. These regulatory authorities have broad powers with respect
to the licensing of gaming operations, and may revoke, suspend, condition or
limit the gaming approvals and licenses of the Corporation and its gaming
subsidiary, impose substantial fines and take other actions, any of which could
have a material adverse affect on the Corporation's business and the going
concern value of the Trust's hotel/casino. Directors, officers and certain key
employees of the Corporation and its gaming subsidiary are subject to licensing
or suitability determinations by the Nevada Commission and local gaming
authorities. If the Nevada Commission were to find a person occupying any such
position unsuitable, the Corporation would be required to sever its relationship
with that person. Any beneficial holder of the Corporation's voting securities
may be required to file an application, be investigated, and have his
suitability as a holder of such securities determined if the Nevada Commission
has reason to believe that such ownership would be inconsistent with the
policies of the State of Nevada. Any person who acquires more than 5% of the
Corporation Shares must report such acquisition to the Nevada Commission.
Beneficial owners of more than 10% of the Corporation Shares must apply to be
found suitable by the Nevada Commission. In addition, changes in control of the
Corporation may not occur without the prior approval of the Nevada Commission.
The Company is actively marketing for sale the King 8 Hotel & Gambling Hall, its
gaming property, however, there can be no assurance that a sale will be
consummated.
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REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The investment returns available from equity investments in real estate
depend in large part on the amount of income earned and capital appreciation
generated by the related properties as well as the expenses incurred. If the
properties of the Company do not generate revenue sufficient to meet operating
expenses, including debt service and capital expenditures, the income of the
Company and its ability to make distributions to its shareholders will be
adversely affected. In addition, income from properties and real estate values
are also affected by a variety of other factors, such as governmental
regulations and applicable laws (including real estate, zoning, tax and eminent
domain laws), interest rate levels and the availability of financing. In
addition, equity real estate investments, such as the investments held by the
Company and any additional properties that may be acquired by the Company, are
relatively illiquid.
Possible Liability Relating to Environmental Matters. Under various
federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real property may become liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability without regard to whether the
owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. The presence of hazardous or toxic substances, or
the failure to properly remediate such substances when present, may adversely
affect the owner's ability to sell or rent such real property or to borrow using
such real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic wastes may be liable for the costs of removal or
remediation of such wastes at the disposal or treatment facility, regardless of
whether such facility is owned or operated by such person. Other federal, state
and local laws, ordinances and regulations require abatement or removal of
certain asbestos-containing materials in the event of demolition or certain
renovations or remodeling and govern emissions of and exposure to asbestos
fibers in the air. The operation and subsequent removal of certain underground
storage tanks also are regulated by federal and state laws.
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THE COMPANY
The Company is a fully integrated owner/operator of hotels which is
comprised of the Trust, which has owned hotel assets since 1969, and the
Corporation which has managed hotel assets since 1980. As of September 20, 1996,
the Company owned, operated and managed a geographically diversified portfolio
of hotel assets, including fee, ground lease and first mortgage interests in 75
hotel properties, comprising over approximately 19,400 rooms located in 24
states and the District of Columbia. Fifty-six of such hotels are operated under
licensing, membership, franchise or management agreements with national hotel
organizations, including Westin(TM), Marriott(TM), Hilton(TM), Sheraton(TM),
Omni(TM), Doubletree(TM), Embassy Suites(R), Ritz Carlton(TM), Harvey(TM),
Radisson(TM), Holiday Inn(R), Residence Inn(TM), Days Inn(TM), Best Western(TM),
Ramada(TM), Clarion(TM) and Quality Inn(TM).
Since January 1995, the Company has been one of the fastest growing
owners/operators of hotels in the United States. During such period, the Company
invested approximately $877 million in hotel acquisitions, including
approximately $814 million since the 1995 Offering. The Company expects to
continue to enhance, expand and diversify its hotel portfolio by continuing to
make opportunistic hotel acquisitions, reinvesting strategically in its existing
portfolio, and aggressively managing the Company's hotels. The Company will
continue to pursue the acquisition of hotels, primarily in the upscale market
segment, at prices which are below replacement costs, and that have attractive
yields on investment that the Company believes can be sustained and improved
over time. The Company is actively pursuing the acquisition of other primarily
upscale hotels in major metropolitan areas.
Management believes that the Company's unique "paired share" ownership
structure gives it a competitive advantage over other hotel REITs and other
hotel owners/operators with respect to owning and operating hotels. Hotel REITs
cannot operate their hotels and therefore other hotel REITs must enter into
agreements with third party lessees/operators. The Company's shareholders own
both the owner, the Trust, and the lessee/operator, the Corporation, of the
Company's hotels. Therefore, the Company's shareholders retain the economic
benefits of both the lease payments received by the Trust and the operating
profits realized by the Corporation while maintaining the tax benefits of the
Trust's REIT status. Furthermore, the Company is able to prevent the erosion of
value of its assets that results from encumbering such properties with long-term
third party leases or management contracts. The pairing arrangement creates
total commonality of ownership, as the Trust Shares and the Corporation Shares
are paired on a one for one basis and may only be held or transferred as units
consisting of one Trust Share and one Corporation Share.
Under the REIT qualification requirements of the Code, REITs generally must
lease their hotels to third party operators. Since such leases must be
structured so that the third party operator captures a portion of each hotel's
current cash flow and future growth, the shareholders of a typical hotel REIT do
not receive all of the economic benefits of both hotel ownership and hotel
operations. Leases may create conflicts of interest between the REIT and the
operator of each hotel, particularly when insiders of the REIT own an economic
interest in the operator. The Paired Common Share structure eliminates potential
conflicts of interest between the hotel owner and the hotel operator. Although
the Code has prohibited the pairing of shares between a REIT and an operating
company since 1983, this rule does not apply to the Company because its Paired
Common Share structure has existed since 1980. The Trust is the only publicly
traded hotel REIT which has the Paired Common Share structure.
Commensurate with the aggressive growth of the Company's hotel portfolio
since its January 1995 reorganization (the "Reorganization"), the Company has
enhanced its executive management team, and will continue to enhance its
management infrastructure and operational focus. In addition to the
Corporation's recent hiring of a new chief executive officer and a new chief
operating officer, the Corporation has further reorganized its management
structure for hotel operations to provide a significant increase in direct hotel
supervision. In particular, expertise has been added in the areas of food and
beverage, sales and marketing, revenue management, MIS and capital project
management. Management believes that these enhancements to its organizational
structure have positioned the Company to further improve its hotel operating
results and support the current portfolio and future acquisitions of the
Company.
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<PAGE> 12
Upon completion of the Offering, Starwood Capital will own less than one
percent of the Company's equity on a fully diluted basis. Starwood Capital is a
private real estate investment firm that since 1991 has acquired in excess of
$2.0 billion (at cost) of real estate assets. In January 1995, the Company
completed the Reorganization in which Starwood Capital contributed to the
Company several hotels, hotel mortgages, cash and other related assets. Starwood
Capital has entered into a noncompetition agreement with the Company relating to
the acquisition of new equity interests in hotel properties in the United
States. Starwood Capital's experienced real estate acquisition and finance
professionals, with their network of industry contacts, will continue to
actively assist management in identifying acquisitions and advantageous sources
of capital.
Each Partnership is a Delaware limited partnership formed in 1994. The
Trust conducts substantially all of its business and operations through the
Realty Partnership, and the Corporation, upon receipt of certain regulatory
gaming approvals or sale of its gaming assets, will conduct substantially all of
its business and operations through the Operating Partnership, which leases from
the Realty Partnership all but three of the hotel properties owned by the Realty
Partnership. The Company is the sole general partner of the Realty Partnership
and the managing general partner of the Operating Partnership, owning a
controlling interest of approximately 81.6% in each of the Partnerships as of
September 20, 1996. The remaining 18.4% interest in each of the Partnerships is
owned predominantly by Starwood Capital and will be reduced upon the conversion
of Units in connection with the sale of the Paired Common Shares offered hereby.
The Company currently expects that future real estate acquisitions by the Trust
will generally be made through the Realty Partnership and will be leased to and
operated by the Operating Partnership. Certain assets are or may be held by
partnerships or limited liability companies owned or controlled in whole or in
part by the Company.
The Trust was organized in 1969 as a Maryland real estate investment trust.
The Trust's executive offices are located at 2231 E. Camelback Road, Suite 410,
Phoenix, Arizona 85016; telephone (602) 852-3900.
The Corporation is a Maryland corporation formed in 1980. The Corporation's
executive offices are located at 2231 E. Camelback Road, Suite 400, Phoenix,
Arizona 85016; telephone (602) 852-3900.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Paired Common Shares. All of the proceeds will be received by the Selling
Shareholders. See "Selling Shareholders."
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<PAGE> 13
PRICE RANGES OF PAIRED COMMON SHARES AND DISTRIBUTION HISTORY
The Paired Common Shares are traded principally on the New York Stock
Exchange (the "NYSE") under the symbol "HOT." The following table sets forth,
for the fiscal periods indicated, the high and low closing sales prices per
Paired Common Share on the NYSE (after giving effect to the one-for-six reverse
stock split in June 1995).
<TABLE>
<CAPTION>
PRICE DISTRIBUTIONS
----------- DECLARED BY
PERIOD HIGH LOW THE TRUST(1)
- ------------------------------------------------------------------- --- --- -------------
<S> <C> <C> <C>
1996
Third Quarter.................................................... $41 7/8 $33 1/8 $ .49
Second Quarter................................................... $38 5/8 $31 3/4 $ .49
First Quarter.................................................... $34 7/8 $29 1/2 $ .47
1995
Fourth Quarter................................................... $30 $26 7/8 $ .47
Third Quarter.................................................... $29 1/8 $23 5/8 $ .47
Second Quarter................................................... $24 3/4 $21 $ 0
First Quarter.................................................... $24 $15 3/4 $ 0
1994
Fourth Quarter................................................... $19 1/2 $15 3/4 $ 0
Third Quarter.................................................... $20 1/4 $17 1/4 $ 0
Second Quarter................................................... $18 $ 9 3/4 $ 0
First Quarter.................................................... $15 $10 1/2 $ 0
</TABLE>
- ---------------
(1) Distributions are shown for the periods during which they were declared.
These distributions actually were or will be paid in the immediately
subsequent period.
On October 8, 1996, the last reported sale price for the Paired Common
Shares on the NYSE was $42 7/8 per Paired Common Share. As of October 8, 1996,
there were approximately 1,250 holders of record of Paired Common Shares.
Commencing with the quarter ended September 30, 1995, the Trust has
declared and paid regular quarterly distributions. The Trust intends to continue
to pay regular quarterly distributions. The Board of Trustees increased the
Trust's regular quarterly distributions from $.47 to $.49 per Paired Common
Share in the second quarter of 1996. The Corporation has not paid any
distributions in the periods set forth in the table above and does not
anticipate that it will make any such distributions in the near future.
In order to maintain its qualification as a REIT, the Trust must make
annual distributions to its shareholders of at least 95% of its taxable income
(which does not include net capital gains). Under certain circumstances, the
Trust may be required to make distributions in excess of cash available for
distribution in order to meet such distribution requirements. In such event, the
Trust (or the Realty Partnership) would seek to borrow the amount of the
deficiency or sell assets to obtain the cash necessary to make the distributions
necessary to retain the Trust's qualification as a REIT for federal income tax
purposes.
Distributions made by the Trust will be determined by its Board of Trustees
and will depend on a number of factors, including the amount of cash flow from
operations, the Realty Partnership's financial condition, capital expenditure
requirements for the Company's properties, the annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Trustees deems relevant.
Under the terms of the Mortgage Facility, the Credit Facility, the Term
Loan and the Acquisition Facility, the Trust is generally permitted to
distribute to its shareholders on an annual basis an amount equal to the
greatest of (1) 100% of funds from operations for any four consecutive calendar
quarters; (2) an amount sufficient to maintain the Trust's tax status as a real
estate investment trust; and (3) the amount necessary for the Trust to avoid the
payment of federal income or excise tax.
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<PAGE> 14
WESTIN(TM), MARRIOTT(TM), HILTON(TM), SHERATON(TM), OMNI(TM),
DOUBLETREE(TM), EMBASSY SUITES(R), RITZ CARLTON(TM), HARVEY(TM), RADISSON(TM),
HOLIDAY INN(R), RESIDENCE INN(TM), DAYS INN(TM), BEST WESTERN(TM), RAMADA(TM),
CLARION(TM) AND QUALITY INN(TM) ARE REGISTERED TRADEMARKS OF THIRD PARTIES, NONE
OF WHICH IS AFFILIATED WITH THE COMPANY, WHICH HAVE NOT ENDORSED OR APPROVED THE
OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS
PROSPECTUS. A GRANT OF ANY SUCH FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS
NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED
APPROVAL OR ENDORSEMENT BY ANY SUCH FRANCHISOR OR LICENSOR (OR ANY OF THEIR
RESPECTIVE AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE PAIRED
COMMON SHARES OFFERED HEREBY.
SELLING SHAREHOLDERS
The Paired Common Shares offered by this Prospectus are offered for the
account of the Selling Shareholders.
Selling Shareholders, including Starwood Capital and its principals, that
beneficially own Units exchangeable into approximately 90% of the Paired Common
Shares offered hereby, have informed the Company that they have no current
intent to exchange any Units or to sell any Paired Common Shares.
The following table and the notes thereto set forth information, as of the
date of this Prospectus, relating to the beneficial ownership (as defined in
Rule 13d-3 of the Exchange Act) of the Company's equity securities by each
Selling Shareholder:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP OF OF
PAIRED COMMON SHARES PAIRED COMMON SHARES
PRIOR TO THE OFFERING NUMBER OF PAIRED AFTER THE OFFERING
------------------------ COMMON SHARES ----------------------
NAME OF BENEFICIAL OWNERS NUMBER PERCENT(1) TO BE SOLD NUMBER PERCENT(1)
- ----------------------------------- --------- ---------- ---------------- ------- ----------
<S> <C> <C> <C> <C> <C>
Starwood Capital Group, L.P. and
affiliated entities.............. 2,307,940(2) 8.0%(2) 11,267(3) 243,933 *(2)
Starwood-Apollo Hotel Partners
VIII, L.P........................ 218,576 * 218,576 0 --
Starwood-Apollo Hotel Partners IX,
L.P.............................. 174,861 * 174,861 0 --
Starwood-Nomura Hotel Investors,
L.P.............................. 875,876 3.2% 875,876 0 --
Firebird Consolidated Partners,
L.P.............................. 813,880 3.0% 813,880 0 --
Starwood Opportunity Fund II,
L.P.............................. 678,601 2.5% 628,668 49,933 *
Moonwood Investment Partners,
L.P.............................. 2,307,940 8.0%(4) 2,405,261 0 --
Woodstar II, L.P................... 741,032 2.7% 741,032 0 --
Berl Holdings I, Inc............... 17,812 * 17,812 0 --
Hospitality Partners............... 20,276 * 20,276 0 --
Edward J. Rohling.................. 10,341 * 10,341 0 --
Bristol Hotel Management
Corporation...................... 25,145 * 25,145 0 --
SRL Holdings, Inc.................. 582 * 582 0 --
</TABLE>
- ---------------
* Less than one percent.
(1) Based on the number of Paired Common Shares outstanding on September 20,
1996.
(2) Based on information contained in Amendment No. 1 to Schedule 13D dated
January 23, 1996 filed by Starwood Capital Group, L.P., Barry S. Sternlicht
and the following person and entities that are entitled to receive, or
received such shares in distributions by, affiliates of Starwood Capital
Group, L.P.: Berl Holdings L.P., Starwood-Apollo Hotel Partners VIII, L.P.,
Starwood-Apollo Hotel Partners IX, L.P., Starwood-Nomura Hotel Investors,
L.P., Starwood/Wichita Investors, L.P., Starwood-Huntington
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<PAGE> 15
Partners, L.P., Woodstar Partners I, L.P., Firebird Consolidated Partners,
L.P., Starwood Opportunity Fund II, L.P., ("SOFI II"), Berl Holdings I,
Inc., SAHI, Inc., SNHI, Inc., BSS Capital Partners, L.P., Sternlicht
Holdings II, Inc., and SRL Holdings, Inc. Mr. Sternlicht has sole power to
vote and dispose of 30,000 Paired Common Shares held by him and that SOFI II
beneficially owns 49,933 Paired Common Shares and that SOFI II and Mr.
Sternlicht have the power to vote and dispose of such Paired Common Shares
and that the Starwood Partners hold units in the Realty Partnership and the
Operating Partnership which are, subject to the 8.0% Ownership Limitation,
exchangeable for an aggregate of 5,943,577 Paired Common Shares
(approximately 18.2% of the outstanding Paired Common Shares after such
exchange). Such units were acquired in the Reorganization. Mr. Sternlicht
also owns 15,000 Paired Common Shares, which are subject to the terms of a
presently exercisable restricted stock warrant and may not be transferred
prior to February 1998, and 149,000 Paired Common Shares subject to
presently exercisable options. Such Amendment No. 1 to Schedule 13D reports
that because of the Ownership Limitation, Starwood Capital cannot
beneficially own more than 8.0% of the outstanding Paired Common Shares. The
amount beneficially owned and the percent of class assumes that Starwood
Capital exchanges Units for Paired Common Shares to the maximum extent
permitted within the Ownership Limitation; provided, however, that prior to
receipt of any required gaming approval, Starwood Capital's ownership of
Paired Common Shares may not exceed 4.9% of the outstanding Paired Common
Shares.
(3) Excludes 5,932,310 Paired Common Shares to be sold by the following person
and entities that are entitled to receive, or received such shares in
distributions by, affiliates of Starwood Capital Group, L.P.:
Starwood-Apollo Hotel Partners VIII, L.P., Starwood-Apollo Hotel Partners
IX, L.P., Starwood-Nomura Hotel Investors, L.P., Firebird Consolidated
Partners, L.P., Starwood Opportunity Fund II, L.P., Moonwood Investment
Partners, L.P., Woodstar II, L.P., Berl Holdings I, Inc., Hospitality
Partners, Edward J. Rohling, Bristol Hotel Management Corporation, and SRL
Holdings, Inc.
(4) Moonwood Investment Partners, L.P. cannot beneficially own more than 8.0% of
the outstanding Paired Common Shares. The amount beneficially owned and the
percent of class assumes that Moonwood Investment Partners, L.P. exchanges
Units for Paired Common Shares to the maximum extent permitted within the
Ownership Limitation.
15
<PAGE> 16
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations that may be relevant to a prospective holder of Paired Common
Shares. This summary is for information purposes only and is not tax advice.
Except as discussed below, no ruling or determination letters from the IRS or
opinions of counsel have been or will be requested by the Company on any tax
issue connected with this Registration Statement. This summary is based upon the
Code, as currently in effect, applicable Treasury Regulations thereunder and
judicial and administrative interpretations thereof, all of which are subject to
change, including changes that may be retroactive. No assurance can be given
that the IRS will not challenge the propriety of one or more of the tax
positions described herein or that such a challenge would not be successful.
The discussion below addresses federal income tax considerations to holders
of Paired Common Shares. This summary does not purport to deal with all aspects
of taxation that may be relevant to particular holders of Paired Common Shares
in light of their personal investment or tax circumstances. Except as
specifically provided, the discussion below does not address foreign, state, or
local tax consequences, nor does it specifically address the tax consequences to
taxpayers subject to special treatment under the federal income tax laws
(including dealers in securities, foreign persons, life insurance companies,
tax-exempt organizations, financial institutions, and taxpayers subject to the
alternative minimum tax). The discussion below assumes that the Paired Common
Shares are or will be held as capital assets within the meaning of Section 1221
of the Code. No assurance can be given that legislative, judicial or
administrative changes will not affect the accuracy of any statements in this
Prospectus with respect to transactions entered into or contemplated prior to
the effective date of such changes.
EACH PROSPECTIVE PURCHASER OF PAIRED COMMON SHARES IS ADVISED TO CONSULT
HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER
OF THE PURCHASE, OWNERSHIP AND SALE OF PAIRED COMMON SHARES, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN THE APPLICABLE TAX LAWS.
FEDERAL INCOME TAXATION OF THE TRUST
BACKGROUND
In 1980, prior to the establishment of the Corporation and the pairing of
its shares with the shares of the Trust, the IRS issued a Private Letter Ruling
(the "Ruling") to the Trust in which the IRS held that the pairing of the Trust
Shares and the Corporation Shares and the operation of the Corporation would not
preclude the Trust from qualifying as a REIT. Subsequent to the issuance of the
Ruling, (i) the IRS announced that it would no longer issue rulings to the
effect that a REIT whose shares are paired with those of a non-REIT will qualify
as a REIT if the activities of the paired entities are integrated, and (ii)
Congress, in 1984, enacted Section 269B of the Code, which treats a REIT and a
non-REIT, the paired shares of which were not paired on or before June 30, 1983,
as one entity for purposes of determining whether either company qualifies as a
REIT. Section 269B of the Code has not applied to the Trust and the Corporation
(since the Trust Shares and the Corporation Shares were paired prior to that
date), and the Ruling's conclusions were not adversely affected thereby.
In 1994, the Trust requested and received a determination letter from the
IRS (the "IRS Letter"). The IRS Letter provides that the Trust's failure to send
the shareholder demand letters required by the REIT Provisions (defined below)
terminated its election to be taxed as a REIT beginning with the Trust's taxable
year ended December 31, 1991 and permitted the Trust to re-elect to be taxed as
a REIT commencing with its taxable year ended December 31, 1995. The IRS Letter
also directed the Trust to file amended federal income tax returns for its
taxable years ended December 31, 1991 and 1992 as a C corporation (and not as a
REIT) and to file its federal income tax returns for its taxable years ended
December 31, 1993 and 1994 as a C corporation. The Trust has filed such returns.
Because the Trust had net losses for federal income tax purposes and did not pay
any dividends during its taxable years ended December 31, 1991, 1992, 1993 and
1994, the IRS Letter did not result in the Trust owing any federal income tax.
The Trust has instituted REIT
16
<PAGE> 17
compliance controls that are intended to prevent the reoccurrence of any such
failure to comply with the reporting and recordkeeping requirements for REITs.
GENERAL
The Trust has elected to be taxed as a REIT under Sections 856 through 860
of the Code and applicable Treasury Regulations (the "REIT Requirements" or
"REIT Provisions"), commencing with its taxable year ended December 31, 1995.
The Trust believes that, commencing with such taxable year, it was organized and
operated in such a manner so as to qualify for taxation as a REIT and the Trust
intends to continue to operate in such a manner; however no assurance can be
given that the Trust has qualified as a REIT or will continue to so qualify.
The REIT Provisions are highly technical and complex. The following sets
forth the material aspects of the REIT Provisions that govern the federal income
tax treatment of a REIT and its shareholders. This summary is qualified in its
entirety by the REIT Provisions and administrative and judicial interpretations
thereof.
The Trust believes that, commencing with the Trust's taxable year ended
December 31, 1995, the Trust was organized and has operated in conformity with
the requirements for qualification as a REIT, and its proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT under the Code for its subsequent taxable years. Such
qualification and taxation as a REIT depends upon the Trust's ability to meet,
through actual annual operating results, certain distribution levels, specified
diversity of stock ownership, and various other qualification tests imposed
under the REIT Provisions, as discussed below. No assurance can be given that
the actual results of the Trust's operation for any particular taxable year will
satisfy such requirements. Further, the anticipated federal income tax treatment
described in this Prospectus may be changed, perhaps retroactively, by
legislative, administrative, or judicial action at any time. For a discussion of
the tax consequences of failure to qualify as a REIT, see "-- Failure to
Qualify."
As long as the Trust qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on net income that it currently
distributes to shareholders. This treatment substantially eliminates the "double
taxation" (once at the corporate level and again at the shareholder level) that
generally results from investment in a regular corporation.
Even if the Trust qualifies for taxation as a REIT, however, it may be
subject to federal income or excise tax as follows. First, the Trust will be
taxed at regular corporate rates on any undistributed REIT taxable income (as
discussed below), including undistributed net capital gains. Second, under
certain circumstances, the Trust may be subject to the "alternative minimum tax"
on its items of tax preference, if any. Third, if the Trust has (i) net income
from the sale or other disposition of "foreclosure property" (which is, in
general, property acquired on foreclosure or otherwise on default on a loan
secured by such property or a lease of such property) or (ii) other
non-qualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income. Fourth, if the Trust has net income
from "prohibited transactions" (which are, in general, certain sales or other
dispositions of property, other than foreclosure property, held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Trust should fail to satisfy the 75% gross
income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Trust fails the 75% or
95% test, multiplied by a fraction intended to reflect the Trust's
profitability. Sixth, if the Trust should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Trust will be subject to a
4% excise tax on the excess of such required distributions over the amounts
actually distributed. Seventh, pursuant to IRS Notice 88-19, if the Trust has a
net unrealized built-in gain, with respect to any asset (a "Built-in Gain
Asset") held by the Trust on January 1, 1995 or acquired by the Trust from a
corporation that is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in certain transactions in which the basis
of the Built-in Gain Asset in the hands of the Trust is determined by reference
to the basis of the asset in the hands of the
17
<PAGE> 18
C corporation, and the Trust directly or indirectly recognizes gain on the
disposition of such asset during the 10-year period (the "Recognition Period")
beginning on January 1, 1995 with respect to assets held by the Trust on such
date or, with respect to other assets, the date on which such asset was acquired
by the Trust, then, to the extent of the Built-in Gain (i.e., the excess of (a)
the fair market value of such asset over (b) the Trust's adjusted basis in such
asset, determined as of the beginning of the Recognition Period), such gain will
be subject to tax at the highest regular corporate rate pursuant to Treasury
Regulations that have not yet been promulgated. The results described above with
respect to the recognition of Built-in Gain assume that the Trust will make an
election pursuant to IRS Notice 88-19 with respect to assets acquired by the
Trust from a corporation that is or has been a C corporation. The Trust believes
that it will have Built-in-Gain Assets as of January 1, 1995 and, thus, direct
or indirect sales of assets by the Trust after 1994 could result in a federal
income tax liability to the Trust.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Trust must elect to be so treated and must meet
on a continuing basis certain requirements (as discussed below) relating to the
Trust's organization, sources of income, nature of assets, and distribution of
income to shareholders.
The Code defines a REIT as a corporation, trust or association: (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for the REIT Provisions; (iv) that is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half of
each taxable year not more than 50% in value of the outstanding stock of which
is owned, directly or indirectly, by five or fewer individuals (defined in the
Code to include certain entities); (vii) as of the close of the taxable year,
has no earnings and profits accumulated in any non-REIT year; (viii) is not
electing to be taxed as a REIT prior to the fifth taxable year which begins
after the first taxable year for which its REIT status terminated or was revoked
or the IRS has waived the applicability of such waiting period; (ix) that has
the calendar year as its taxable year; and (x) that meets certain other tests,
described below, regarding the nature of its income and assets. The REIT
Provisions provide that conditions (i) to (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a taxable
year of less than 12 months. Conditions (v) and (vi) will not apply until after
the first taxable year for which an election is made by the REIT to be taxed as
a REIT.
The Trust believes that it satisfies conditions (i) through (x) (described
above). In addition, the Declaration of Trust and the Articles of Incorporation
provide for restrictions regarding the transfer and ownership of shares, which
restrictions are intended to assist the Trust in continuing to satisfy the share
ownership requirements described in conditions (v) and (vi) above. In order to
elect to be taxed as a REIT, the Trust must also maintain certain records and
request certain information from its shareholders designed to disclose the
actual ownership of its stock. The Trust believes that it has and will comply
with these requirements.
In the case of a REIT that is a partner in a partnership, the REIT
Provisions provide that the REIT is deemed to own its proportionate share of the
assets of the partnership based on the REIT's capital interest in the
partnership and is deemed to be entitled to the income of the partnership
attributable to such proportionate 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 satisfying the gross income tests and the
asset tests, described below. Similar treatment applies with respect to
lower-tier partnerships which the REIT indirectly owns through its interests in
higher-tier partnerships. Thus, the Trust's proportionate share of the assets,
liabilities and items of income of the Realty Partnership and the other
partnerships and limited liability companies in which the Trust owns a direct or
indirect interest (collectively, the "Realty Subsidiary Entities"), will be
treated as assets, liabilities and items of income of the Trust for purposes of
applying the gross income tests and the asset tests described below, provided
that the Realty Partnership and the Realty Subsidiary Entities are treated as
partnerships for federal income tax purposes. See "-- Federal Income Tax
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<PAGE> 19
Aspects of the Partnerships and the Subsidiary Entities" below. If the gross
income tests and the asset tests described below were applied to partnerships in
a manner different from that described in this paragraph, then the Trust might
not be able to satisfy one or more of the gross income tests or asset tests
described below and, thus, could lose its REIT status.
Paired Shares. Section 269B of the Code provides that if the shares of a
REIT and a non-REIT are paired, then the REIT and the non-REIT shall be treated
as one entity for purposes of determining whether either company qualifies as a
REIT. If Section 269B applied to the Trust and the Corporation, then the Trust
would not be able to satisfy the gross income tests (described below) and thus
would not be eligible to be taxed as a REIT. Section 269B does not apply,
however, if the shares of the REIT and the non-REIT were paired on or before
June 30, 1983 and the REIT was taxable as a REIT on or before June 30, 1983. As
a result of this grandfathering rule, Section 269B has not applied to the Trust
and the Corporation. This grandfathering rule does not, by its terms, require
that the Trust be taxed as a REIT at all times after June 30, 1983. There are,
however, no judicial or administrative authorities interpreting this
grandfathering rule. Based solely on the literal language of the statutory
grandfathering rule the Trust believes that the IRS Letter and the termination
of the Trust's REIT election for the taxable years ended December 31, 1991
through 1994 did not result in Section 269B becoming applicable to the Trust.
Even though Section 269B of the Code does not apply to the Trust and the
Corporation, the IRS could assert that the Trust and the Corporation should be
treated as one entity under general tax principles. In general, such an
assertion should only be upheld if the separate corporate identities are a sham
or unreal. Not all of the trustees of the Trust are also directors of the
Corporation and no individual serves as an officer of both the Trust and the
Corporation. In addition, the Trust, the Corporation, the Realty Partnership,
the Operating Partnership, each Realty Subsidiary Entity and each partnership or
limited liability company owned in whole or in part by the Operating Partnership
("Operating Subsidiary Entity") have separate creditors and are subject to
different state law licensing and regulatory requirements. The Trust and the
Corporation have represented that they and the Realty Partnership, the Operating
Partnership, the Realty Subsidiary Entities and the Operating Subsidiary
Entities will each maintain separate books and records and all material
transactions among them have been and will be negotiated and structured with the
intention of achieving an arm's-length result. Based on the foregoing, the
Company believes that the separate corporate identities of the Trust and the
Corporation will be respected.
Due to the paired structure, the Trust, the Corporation, the Realty
Partnership, the Operating Partnership, the Realty Subsidiary Entities and the
Operating Subsidiary Entities are controlled by the same interests. As a result,
the IRS could, pursuant to Section 482 of the Code, seek to distribute,
apportion or allocate gross income, deductions, credits or allowances between or
among them if it determines that such distribution, apportionment or allocation
is necessary in order to prevent evasion of taxes or to clearly reflect income.
The Trust and the Corporation believe that all material transactions between
them and among them and the Realty Partnership, the Operating Partnership, the
Realty Subsidiary Entities and the Operating Subsidiary Entities have been and
will be negotiated and structured with the intention of achieving an arm's-
length result. As a result, the potential application of Section 482 of the Code
should not have a material effect on the Trust or the Corporation.
Income Tests. In order to maintain qualification as a REIT, the Trust must
annually satisfy three gross income requirements (the "gross income tests").
First, at least 75% of the Trust's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of defined types of
income derived directly or indirectly from investments relating to real property
or mortgages on real property (including "rents from real property," as
described below, and in certain circumstances, interest) or from certain types
of qualified temporary investments. Second, at least 95% of the Trust's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from the same items which qualify under the 75% income test
and from dividends, interest, and gain from the sale or disposition of stock or
securities that do not constitute dealer property or from any combination of the
foregoing. Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and
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sales of foreclosure property) must represent less than 30% of the Trust's gross
income (including gross income from prohibited transactions) for each taxable
year.
Rents received or deemed to be received by the Trust will qualify as "rents
from real property" for purposes of the gross income tests only if several
conditions are met. 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 (or items thereof). Second, the Code provides that rents received from
a tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or a direct or indirect owner of 10% or more of the
REIT directly or indirectly, 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, a REIT may provide
services to its tenants and the income will qualify as "rents from real
property" only if the services are of a type that a tax-exempt organization can
provide to its tenants without causing its rental income to be unrelated
business taxable income under the Code. Services that would give rise to
unrelated business taxable income if provided by a tax-exempt organization
("Prohibited Services") must be provided by an "independent contractor" who is
adequately compensated and from whom the REIT does not derive any income.
Payments for services furnished (whether or not rendered by an independent
contractor) that are not customarily provided to tenants in properties of a
similar class in the geographic market in which the REIT's property is located
will not qualify as "rents from real property."
Substantially all of the Trust's income will be derived from its
partnership interest in the Realty Partnership and the Realty Subsidiary
Entities. The Realty Partnership and the Realty Subsidiary Entities lease for a
fixed period all of their fee and leasehold interests in their hotels and
associated property to the Operating Partnership, to the Operating Subsidiary
Entities or to unrelated persons (the "Leases"). The Leases are net leases which
generally provide for payment of rent equal to the greater of a fixed rent or a
percentage rent. The percentage rent is calculated by multiplying fixed
percentages of the gross room revenues and, for certain hotels, fixed
percentages of other types of gross revenues in excess of certain levels.
In order for the rents paid under the Leases to constitute "rents from real
property," the Leases must be respected as true leases for federal income tax
purposes and not treated as service contracts, joint ventures or some other type
of arrangement. The determination of whether the Leases are true leases depends
upon an analysis of all of the surrounding facts and circumstances. In making
such a determination, courts have considered a variety of factors, including the
intent of the parties, the form of the agreement, the degree of control over the
property that is retained by the property owner and the extent to which the
property owner retains the risk of loss with respect to the property.
The Trust believes that the Leases will be treated as true leases for
federal income tax purposes, based, in part, on the following facts: (i) the
lessors and the lessees intend for their relationship to be that of lessor and
lessee and each such relationship will be documented by a lease agreement; (ii)
the lessees will have the right to exclusive possession and use and quiet
enjoyment of the leased premises during the term of the Leases; (iii) the
lessees will bear the cost of, and be responsible for, day-to-day maintenance
and repair of the leased premises, other than the cost of certain capital
expenditures, and will dictate how the leased premises are operated and
maintained; (iv) the lessees will bear all of the costs and expenses of
operating the leased premises during the term of the Leases; (v) the term of the
Leases is less than the economic life of the leased premises and the lessees do
not have purchase options with respect to the leased premises; (vi) the lessees
are required to pay substantial fixed rent during the term of the Leases; and
(vii) each lessee stands to incur substantial losses or reap substantial profits
depending on how successfully it operates the leased premises.
Investors should be aware, however, that there are not controlling
authorities involving leases with terms substantially the same as the Leases. If
any significant Lease is recharacterized as a service contract or a partnership
agreement, rather than as a true lease, the Trust would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
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In order for rent payments under the Leases to qualify as "rents from real
property," the rent must not be based on the income or profits of any person.
The percentage rent under the Leases will qualify as "rents from real property"
if it is based on percentages of receipts or sales and the percentages (i) are
fixed at the time the Leases are entered into; (ii) are not renegotiated during
the term of the Leases in a manner that has the effect of basing percentage rent
on income or profits; and (iii) conform with normal business practice. More
generally, percentage rent 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, but is in reality used as a
means of basing the percentage rent on income or profits. The Trust and the
Corporation believe that the Leases conform with normal business practice and
the percentage rent will be treated as "rents from real property" under this
requirement. The Trust has further represented with respect to hotel properties
that the Realty Partnership may directly or indirectly acquire in the future
that it will not charge rent 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
receipts or sales, as described above).
Another requirement for rent payments under a Lease to constitute "rents
from real property" is that the rent attributable to personal property under the
Lease must not be greater than 15% of the rent received under the Lease. For
this purpose, rent attributable to personal property is the amount that bears
the same ratio to the total rent for the taxable year as the average of the
adjusted basis of the personal property at the beginning and at the end of the
taxable year bears to the average of the aggregate adjusted basis of both the
real property and personal property leased under, or in connection with, such
lease. If the IRS were to successfully assert that with respect to one or more
of the Leases rent attributable to personal property is greater than 15% of the
total rent, then it is possible that the Trust would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status. With respect to both the Leases and future acquisitions, the Trust has
represented that it will monitor the 15% test to ensure continued qualification
as a REIT.
A third requirement for qualification of rent under the Leases as "rents
from real property" is that the Trust must not own, directly or constructively,
10% or more of the Operating Partnership or any Operating Subsidiary Entity (or
any other tenant under a Lease). If the Trust were to own directly or
indirectly, 10% or more of the Operating Partnership or any Operating Subsidiary
Entity (or such tenant), the rent paid by the tenant with respect to the leased
property would not qualify as income of the type that can be received by a REIT.
In order to prevent such a situation, which would likely result in the
disqualification of the Trust as a REIT, the Declaration of Trust and the
Articles of Incorporation contain restrictions on the amount of Trust Shares and
Corporation Shares that any one person can own. These restrictions generally
provide that any attempt by any one person to actually or constructively acquire
8.0% or more of the outstanding Paired Common Shares will be ineffective.
However, notwithstanding such restrictions, because the Code's constructive
ownership rules for purposes of the 10% ownership limit are broad and it is not
possible to continually monitor direct and indirect ownership of Paired Common
Shares, it is possible that some person may at some time own sufficient Paired
Common Shares to cause the termination of the Trust's REIT status.
Finally, rent under the Leases will not qualify as "rents from real
property" if either the Trust, the Realty Partnership or any Realty Subsidiary
Entity renders or furnishes Prohibited Services to the occupants of the
properties. So long as the Leases are treated as true leases, none of the Trust,
the Realty Partnership or any Realty Subsidiary Entity should be treated as
rendering or furnishing Prohibited Services to the occupants of the properties.
Based on the foregoing, the Trust believes that the rent payable under the
Leases will be treated as "rents from real property" for purposes of the 75% and
95% gross income tests. There can, however, be no assurance that the IRS will
not successfully assert a contrary position or that there will not be a change
in circumstances (such as the entering into of new leases) which would result in
a portion of the rent received to fail to qualify as "rents from real property."
In such case, it is possible that the Trust would not be able to satisfy either
the 75% or 95% gross income test and, as a result, would lose its REIT status.
For purposes of the gross income tests, the term "interest" generally does
not include any amount received or accrued (directly or indirectly) if the
determination of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded
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from the term "interest" solely by reason of being based on a fixed percentage
or percentages of receipts or sales. The Realty Partnership and certain of the
Realty Subsidiary Entities hold notes and may advance money from time to time to
tenants for the purpose of financing tenant improvements, making real estate
loans or holding or acquiring additional notes. None of the notes currently held
by the Realty Partnership or the Realty Subsidiary Entities provide for the
payment of any amount based on the income or profits of any person other than
amounts based, on a fixed percentage or percentages of receipts or sales. In
addition, none of the Trust, the Realty Partnership or the Realty Subsidiary
Entities intend to charge interest that will depend in whole or in part on the
income or profits of any person or to make loans (not secured in substantial
part by real estate mortgages) in amounts that could jeopardize the Trust's
compliance with the 75% and 5% asset tests, discussed below. To the extent the
notes held by the Realty Partnership or the Realty Subsidiary Entities are
secured by real property, the interest received or accrued with respect to such
notes should be treated as qualifying income for both the 75% and the 95% gross
income tests. Certain of the notes held by the Realty Partnership are not
secured by real property. Interest received or accrued with respect to such
notes should be treated as qualifying income for the 95% gross income test but
should not be treated as qualifying income for the 75% gross income test.
However, the Company believes that the amount of such interest will not cause
the Trust to fail to satisfy the 75% gross income test.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT, and the
net income from that transaction is subject to a 100% tax. The Trust believes
that no asset directly or indirectly owned by it is held for sale to customers
and that sale of any such property will not be in the ordinary course of
business of the Trust, the Realty Partnership or any Realty Subsidiary Entity.
If the Trust 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 Code. It is not
possible to state whether in all circumstances the Trust would be entitled to
the benefit of these relief provisions. Even if these relief provisions apply, a
tax would be imposed with respect to the excess net income. No similar
mitigation provision applies if the Trust fails the 30% income test. In such
case, the Trust will cease to qualify as a REIT.
Asset Tests. In order to maintain qualification as a REIT, the Trust, at
the close of each quarter of its taxable year, must also satisfy three tests
relating to the nature of its assets. First, at least 75% of the value of the
Trust's total assets must be represented by "real estate assets" (including
stock or debt instruments held for not more than one year purchased with the
proceeds of a stock offering or long-term (at least five years) debt offering of
the Trust), cash, cash items and government securities. Second, not more than
25% of the Trust'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 the Trust may not
exceed 5% of the value of the Trust's total assets, and the Trust may not own
more than 10% of any one issuer's outstanding voting securities.
The Trust believes that commencing with its taxable year ended December 31,
1995 it has complied with the asset tests. Substantially all of the Trust's
investments are in properties owned by the Realty Partnership and the Realty
Subsidiary Entities, at least 75% of which represent qualifying real estate
assets. A substantial portion of the indebtedness of the Operating Partnership
to the Realty Partnership may not be qualifying assets under the 75% asset test.
However, such portion does not exceed 5% of the value of the assets of the
Realty Partnership and, thus, will not cause the Trust to fail the 5% asset
test.
After initially meeting the asset tests at the close of any quarter, the
Trust 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 non-qualifying assets within 30 days after the close of that quarter.
The Trust intends to maintain adequate records of the value of its assets to
ensure compliance with the asset tests and to take such actions within 30 days
after the close of any quarter as may be required to cure any non-compliance.
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Annual Distribution Requirements. The Trust, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Trust's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Trust'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
non-cash income. In addition, if the Trust directly or indirectly disposes of
any Built-in Gain Asset during its Recognition Period, the Trust will be
required, pursuant to IRS regulations that 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. Distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the Trust
timely files its tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that the Trust
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 will be subject to
tax thereon at regular ordinary and capital gain corporate tax rates.
Furthermore, if the Trust should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year, and (iii) any undistributed taxable
income from prior periods, the Trust will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
The Trust intends to make timely distributions sufficient to satisfy the
annual distribution requirements and to the extent practical, avoid payment of
material amounts of federal income or excise tax by the Trust. It is possible,
however, that the Trust, from time to time may not have sufficient cash or other
liquid assets to meet the distribution requirements described above. In order to
meet the distribution requirements in such cases, the Trust, the Realty
Partnership or a Realty Subsidiary Entity may find it necessary to arrange for
short-term or possible long-term borrowings or to pay dividends in the form of
taxable stock dividends.
Under certain circumstances, the Trust may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Trust's deduction
for dividends paid for the earlier year. Thus, the Trust may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Trust
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
FAILURE TO QUALIFY
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Trust fails to qualify will not be deductible by the Trust nor will they be
required to be made. As a result, the Trust's failure to qualify as a REIT could
reduce the cash available for distribution by the Trust to its shareholders. In
addition, if the Trust fails to qualify as a REIT, all distributions to
shareholders will be taxable as ordinary income to the extent of the Trust's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific statutory
provisions, the Trust will also 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 the Trust would be entitled
to such statutory relief.
FEDERAL INCOME TAXATION OF THE CORPORATION
The Corporation is the common parent of an affiliated group of corporations
filing a consolidated return (the "Corporation Group"). After obtaining certain
necessary licenses and regulatory approvals of certain gaming authorities or
sale of the Company's gaming assets, substantially all of the Corporation
Group's taxable income will consist of its distributive share of the Operating
Partnership's taxable income. The Corporation Group will be subject to federal
income tax on its taxable income.
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FEDERAL INCOME TAXATION OF HOLDERS OF PAIRED COMMON SHARES
FEDERAL INCOME TAXATION OF TAXABLE U.S. HOLDERS
As used herein, the term "U.S. Shareholder" means a holder of Paired Common
Shares who is: (i) a citizen or resident of the United States; (ii) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof; or (iii) an
estate or trust the income of which is subject to U.S. federal income taxation
regardless of its source. As long as the Trust qualifies as a REIT,
distributions made to the Trust's U.S. Shareholders up to the amount of the
Trust's current or accumulated earnings and profits (and not designated as
capital gain dividends) will be taken into account by them as ordinary income
and will not be eligible for the dividends-received deduction for corporations.
Distributions that are properly designated by the Trust as capital gain
dividends will be taxed as long-term capital gain (to the extent they do not
exceed the Trust's actual net capital gain for the taxable year) without regard
to the period for which the holder has held its stock. However, corporate
holders may be required to treat up to 20% of certain capital gain dividends as
ordinary income, and capital gains dividends are not eligible for the
dividends-received deduction. Distributions in excess of the Trust's current and
accumulated earnings and profits will not be taxable to a holder to the extent
that they do not exceed the adjusted basis of the holder's Trust Shares, but
rather will reduce the adjusted basis of such Trust Shares. To the extent that
such distributions exceed the adjusted basis of a holder's Trust Shares they
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for one year or less). In addition, any dividend
declared by the Trust in October, November or December of any year payable to a
holder of record on a specified date in any such month shall be treated as both
paid by the Trust and received by the holder on December 31 of such year,
provided that the dividend is actually paid by the Trust during January of the
following calendar year.
The Trust will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Trust up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed
above. As a result, holders may be required to treat certain distributions that
would otherwise result in a tax-free return of capital as taxable distributions.
Moreover, any "deficiency dividend" will be treated as a "dividend" (either as
ordinary or capital gain dividend, as the case may be), regardless of the
Trust's earnings and profits.
Distributions from the Trust and gain from the disposition of the Trust
Shares will not be treated as passive activity income and, therefore,
shareholders will not be able to apply any "passive losses" against such income.
Dividends from the Trust (to the extent they do not constitute a return of
capital) will generally be treated as investment income for purposes of the
investment interest expense limitation. Gain from the disposition of shares and
capital gains dividends will not be treated as investment income unless the
holders elect to have the gain taxed at ordinary income rates.
Distributions from the Corporation up to the amount of the Corporation's
current or accumulated earnings and profits will be taken into account by U.S.
Shareholders as ordinary income and will be eligible for the dividends-received
deduction for corporations. Distributions in excess of the Corporation's current
and accumulated earnings and profits will not be taxable to a holder to the
extent that they do not exceed the adjusted basis of the holder's Corporation
Shares, but rather will reduce the adjusted basis of such Corporation Shares. To
the extent that such distributions exceed the adjusted basis of a holder's
Corporation Shares they will be included in income as long-term capital gain (or
short-term capital gain if the stock has been held for one year or less).
In general, a U.S. Shareholder will realize capital gain or loss on the
disposition of Paired Common Shares equal to the difference between the amount
realized on such disposition and the holder's adjusted basis in such Paired
Common Shares. Such gain or loss will generally constitute long-term capital
gain or loss if the holder held such Paired Common Shares for more than one
year. However, any loss upon a sale or exchange of Trust Shares by a holder who
has held such shares 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 from the Trust required to be treated by such holder as long-term
capital gain.
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U.S. Shareholders may not include in their individual income tax returns
any net operating losses or capital losses of the Trust or the Corporation.
FEDERAL TAXATION OF TAX-EXEMPT HOLDERS OF PAIRED COMMON SHARES
The IRS has ruled that amounts distributed as dividends by a REIT to a
tax-exempt employee's pension trust do not constitute unrelated business taxable
income ("UBTI"). Based on this ruling and the analysis therein, distributions by
the Trust should not, subject to certain exceptions described below, be UBTI to
a qualified plan, IRA or other tax-exempt entity (a "Tax-Exempt Shareholder")
provided the Tax-Exempt Shareholder has not held its shares as "debt financed
property" within the meaning of the Code and the shares are not otherwise used
in an unrelated trade or business of the Tax-Exempt Shareholder. Similarly,
income from the sale of Trust Shares should not, subject to certain exceptions
described below, constitute UBTI unless the Tax-Exempt Shareholder has held such
Trust Shares as a dealer (under Section 512(b)(5)(B) of the Code) or as
"debt-financed property" within the meaning of Section 514 of the Code. Revenue
rulings are interpretive in nature and subject to revocation or modification by
the IRS.
For Tax-Exempt Shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans, exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code respectively, income from an
investment in the Trust will constitute UBTI unless the organization is able to
deduct properly amounts set aside or placed in reserve for certain purposes so
as to offset the income generated by its investment in the Trust. Such
prospective investors should consult their tax advisors concerning these
"set-aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall (subject to a de minimis exception) be treated as UBTI
as to any trust that (i) is described in Section 401(a) of the Code, (ii) is
tax-exempt under Section 501(a) of the Code, and (iii) holds more than 10% (by
value) of the interests in the REIT. Due to the Ownership Limitation, the Trust
does not expect to be a "pension held REIT" within the meaning of the Code.
FEDERAL TAXATION OF NON-U.S. HOLDERS OF PAIRED COMMON SHARES
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
non-resident alien individuals, foreign corporations, foreign partnerships, or
foreign estates or trusts (collectively, "Non-U.S. Shareholders") 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 United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Shareholder in light of its particular
circumstances. Prospective Non-U.S. Shareholders should consult with their own
tax advisors to determine the effect of federal, state, local, and foreign
income tax laws with regard to an investment in Paired Common Shares, including
any reporting requirements.
In general, a Non-U.S. Shareholder will be subject to regular United States
income tax with respect to its investment in Paired Common Shares if such
investment is "effectively connected" with the Non-U.S. Shareholder's conduct of
a trade or business in the United States. A corporate Non-U.S. Shareholder that
receives income that is (or is treated as) effectively connected with a United
States trade or business may also be subject to the branch profits tax under
Section 884 of the Code, which is payable in addition to regular United States
corporate income tax. The following discussion will apply to Non-U.S.
Shareholders whose investment in Paired Common Shares is not so effectively
connected.
Distributions. Distributions by the Trust to a Non-U.S. Shareholder that
are neither attributable to gain from sales or exchanges by the Trust of United
States real property interests nor designated by the Trust as capital gains
dividends and distributions by the Corporation will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the Trust or the Corporation, as the case may be. Such
distributions ordinarily will be subject to United States withholding tax on a
gross basis at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Any
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such amounts withheld should be creditable against the Non-U.S. Shareholder's
United States federal income tax liability.
Distributions in excess of current or accumulated earnings and profits of
the Trust or the Corporation, as the case may be, will not be taxable to a
Non-U.S. Shareholder to the extent that they do not exceed the adjusted basis of
the Non-U.S. Shareholder's Trust Shares or Corporation Shares, as the case may
be, but rather will reduce the adjusted basis of such shares. To the extent that
such distributions exceed the adjusted basis of a Non-U.S. Shareholder's Trust
Shares or Corporation Shares, as the case may be, they will give rise to gain
from the sale or exchange of Non-U.S. Shareholder's Paired Common Shares if the
Non-U.S. Shareholder otherwise would be subject to tax on any gain from the sale
or other disposition of Paired Common Shares, as described below. Distributions
to Non-U.S. Shareholders that reduce the adjusted basis of Trust Shares or
Corporation Shares and distributions to Non-U.S. Shareholders that exceed the
adjusted basis of Trust Shares or Corporation Shares will ordinarily be subject
to a withholding tax on a gross basis at a 10% rate, regardless of whether such
distributions result in gain to the Non-U.S. Shareholder. The Trust or the
Corporation, as the case may be, may apply to the IRS for a certificate that
reduces or eliminates this withholding tax. Any such amounts withheld should be
creditable against the Non-U.S. Shareholder's United States federal income tax
liability.
If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current or accumulated earnings and
profits, the distribution will generally be treated as a dividend for
withholding purposes. However, amounts thus withheld are generally refundable if
it is subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Trust or the Corporation, as
the case may be. The Trust and the Corporation expect to withhold United States
income tax at the rate of 30% on the gross amount of any such distributions made
to a Non-U.S. Shareholder unless (i) a lower rate is provided for under an
applicable tax treaty and the shareholder files the required form evidencing
eligibility for that reduced rate with the Trust and the Corporation, or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Trust and the
Corporation claiming that the distribution is "effectively connected" income.
Distributions to a Non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Trust of United States real property interests will
cause the Non-U.S. Shareholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Shareholders would thus generally be taxed at the same rates applicable to U.S.
Shareholders (subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of non-resident alien individuals). Also,
such gain may be subject to a 30% branch profits tax in the hands of a Non-U.S.
Shareholder that is a corporation, that is not entitled to an exemption under a
tax treaty. The Trust is required to withhold and remit to the IRS 35% of any
distribution that could be designated a capital gains dividend. That amount is
creditable against the Non-U.S. Shareholder's United States federal income tax
liability.
Sale of Paired Common Shares. Gain recognized by a Non-U.S. Shareholder
upon a sale or other disposition of Paired Common Shares generally will not be
subject to United States federal income tax, if (i) in the case of Trust Shares,
the Trust is a "domestically controlled REIT" or (ii) (A) the Paired Common
Shares are regularly traded on an established securities market (e.g., the NYSE,
where the Paired Common Shares are currently traded) and (B) the selling
Non-U.S. Shareholder held 5% or less of the outstanding Paired Common Shares at
all times during specified period, unless, in the case of a Non-U.S. Shareholder
who is a non-resident alien individual, such individual is present in the United
States for 183 days or more and certain other conditions apply. A domestically
controlled REIT is defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Trust believes that it qualifies as a
domestically controlled REIT.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Under certain circumstances, U.S. Shareholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or on cash
proceeds of a sale or exchange of, Paired Common Shares. Backup withholding will
apply only if the holder: (i) fails to furnish its taxpayer identification
number
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<PAGE> 27
("TIN") (which, for an individual, would be his or her Social Security number);
(ii) furnishes an incorrect TIN; (iii) is notified by the IRS that the holder
has failed to report properly payments of interest and dividends; or (iv) under
certain circumstances, fails to certify, under penalty of perjury, that the
holder has furnished a correct TIN and has not been notified by the IRS that the
holder is subject to backup withholding for failure to report interest and
dividend payments. Backup withholding will not apply with respect to payments
made to certain exempt recipients, such as corporations and tax-exempt
organizations. In addition, the Trust and the Corporation may be required to
withhold a portion of capital gain distributions made to any holders who fail to
certify their non-foreign status. Additional issues may arise pertaining to
information reporting and withholding with respect to Non-U.S. Shareholders and
each Non-U.S. Shareholder should consult his or her tax advisor with respect to
any such information reporting and withholding requirements.
FEDERAL INCOME TAX ASPECTS OF THE PARTNERSHIPS AND THE SUBSIDIARY ENTITIES
Substantially all of the Trust's assets are held directly or indirectly
through the Realty Partnership and, after obtaining certain necessary licenses
and regulatory approvals of certain gaming authorities or sale of the Company's
gaming assets, substantially all of the Corporation's (and its subsidiaries')
assets will be held directly or indirectly through the Operating Partnership.
The Realty Partnership, the Operating Partnership, the Realty Subsidiary
Entities and the Operating Subsidiary Entities involve special tax
considerations, including the possibility of a challenge by the IRS of the
status of any of such partnerships or limited liability companies as a
partnership (as opposed to an association taxable as a corporation) for federal
income tax purposes. If any of such partnerships or limited liability companies
were to be treated as an association, it would be taxable as a corporation and,
therefore, subject to an entity level tax on its income. Such an entity level
tax is likely to substantially reduce the amount of cash available for
distribution to holders of Paired Common Shares. See "-- Federal Income Taxation
of the Corporation" above. In addition, if the Realty Partnership or any Realty
Subsidiary Entity were to be taxable as a corporation, the Trust would not
qualify as a REIT. Furthermore, any change in the status of a partnership or
limited liability company for tax purposes might be treated as a taxable event
in which case the Trust or the Corporation might incur a tax liability without
any related cash distributions.
The Company has not requested and does not intend to request, a ruling from
the IRS regarding treatment of any partnership or limited liability company in
which it owns an interest as a partnership for federal income tax purposes. No
assurance can be given that the IRS will not challenge the status of a
partnership or limited liability company as a partnership for federal income tax
purposes. If such a challenge were sustained by a court, the subject partnership
or limited liability company would be treated as an association taxable as a
corporation for federal income tax purposes.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property 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 unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. The Realty Partnership, the Operating Partnership and
certain of the Realty Subsidiary Entities and the Operating Subsidiary Entities
have been formed by way of contributions of the Company's property and certain
property held by Starwood Capital. Consequently, allocations with respect to
such contributed property must be made in a manner consistent with Section
704(c) of the Code.
The Treasury Regulations under Section 704(c) of the Code allow
partnerships to use any reasonable method of accounting for Book-Tax Differences
so that the contributing partner receives the tax benefits and burdens of any
built-in gain or loss associated with the contributed property. However, the
special allocation
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<PAGE> 28
rules of Section 704(c) of the Code do not always entirely eliminate the
Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed assets
in the hands of the Realty Partnership or the Operating Partnership may cause
the Trust or the Corporation, as the case may be, to be allocated lower
depreciation and other deductions, and possibly an amount of taxable income in
the event of a sale of such contributed assets in excess of the economic or book
income allocated to it as a result of such sale. This may cause the Trust or the
Corporation to recognize taxable income in excess of cash proceeds, which, in
the case of the Trust, might adversely affect the Trust's ability to comply with
the REIT distribution requirements. See "-- Federal Income Taxation of the
Trust -- Requirements For Qualification -- Annual Distribution Requirements."
The foregoing principles also apply in determining the earnings and profits of
the Trust and the Corporation for purposes of determining the portion of
distributions taxable as dividend income. See "-- Federal Income Taxation of
Holders of Paired Common Shares." The application of these rules over time may
result in a higher portion of distributions being taxed as dividends than would
have occurred had the Trust and the Corporation contributed assets with an
adjusted tax basis equal to their fair market values.
PARTNERSHIP ANTI-ABUSE RULE
The IRS has published regulations that provide an anti-abuse rule (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions"). Under the Anti-Abuse Rule, if a partnership is formed
or availed of in connection with a transaction a principal purpose of which is
to reduce substantially the present value of the partners' aggregate federal tax
liability in a manner that is inconsistent with the intent of the Partnership
Provisions, the IRS can recast the transaction for federal tax purposes to
achieve tax results that are consistent with the intent of the Partnership
Provisions. This analysis is to be made based on all facts and circumstances.
The Anti-Abuse Rule states that the intent of the Partnership Provisions
incorporates the following requirements: (i) the partnership must be bona fide
and each partnership transaction or series of related transactions must be
entered into for a substantial business purpose; (ii) the form of each
partnership transaction must be respected under substance over form principles;
and (iii) with certain exceptions, the tax consequences under the Partnership
Provisions to each partner of partnership operations and the transactions
between the partner and the partnership must accurately reflect the partner's
economic agreement and clearly reflect the partner's income.
The Company believes that its structure is not inconsistent with the intent
of the Partnership Provisions and that, therefore, the IRS should not be able to
invoke the Anti-Abuse Rule to recast the structure of the Company for federal
income tax purposes. No assurance can be given that the IRS or a court will
concur with the Company's position, which is based on examples contained in the
Anti-Abuse Rule.
The Anti-Abuse Rule also provides that, unless a provision of the Code or
the Treasury Regulations prescribes the treatment of a partnership as an entity,
in whole or in part, and that treatment and the ultimate tax results, taking
into account all the relevant facts and circumstances, are clearly contemplated
by that provision, the IRS can treat a partnership as an aggregate of its
partners, in whole or in part, as appropriate to carry out the purpose of any
provision of the Code or the Treasury Regulations. Treatment of either
Partnership or any of the Subsidiary Entities, in whole or in part, as an
aggregate rather than an entity is unlikely to materially change the federal tax
consequences to any partner. In addition, the REIT Provisions generally treat a
partnership as an aggregate rather than an entity for purposes of applying the
REIT Requirements. Therefore, the Trust believes that the Anti-Abuse Rule should
not have a material adverse effect on the federal income tax consequences to any
partner or on the ability of the Trust to qualify as a REIT.
OTHER TAX CONSEQUENCES
The Company and the holders of Paired Common Shares may be subject to state
or local taxation in various jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Trust, the
Corporation and the holders of Paired Common Shares may not conform to the
federal income tax consequences discussed above. CONSEQUENTLY, HOLDERS OF PAIRED
COMMON SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT
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<PAGE> 29
OF STATE AND LOCAL TAX LAWS ON THE PURCHASE, OWNERSHIP AND SALE OF PAIRED COMMON
SHARES.
PLAN OF DISTRIBUTION
The Selling Shareholders may sell the Paired Common Shares: (i) in an
underwritten offering or offerings, (ii) through brokers and dealers, (iii) "at
the market" to or through a market maker or into an existing trading market, on
an exchange or otherwise, for such shares, (iv) in other ways not involving
market makers or established trading markets, including direct sales to
purchasers, and (v) to the extent not prohibited by applicable securities law,
in ways other than pursuant to the distribution plan presented in the
Prospectus. Pursuant to the terms of the Registration Rights Agreement, the
Company has agreed to maintain the effectiveness of the registration statement
until all of the Paired Common Shares have been sold.
The distribution of the Paired Common Shares may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices.
In connection with any underwritten sale of Paired Common Shares,
underwriters or agents may receive compensation from the Selling Shareholders
for whom they may act as agents, in the form of discounts, concessions or
commissions. Underwriters may sell Paired Common Shares 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.
At any time a particular offer of Paired Common Shares is made, if
required, a Prospectus Supplement will be distributed that will set forth the
names of the Selling Shareholder(s) offering such Paired Common Shares, the
aggregate amount of such Paired Common Shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents,
any discounts, commissions and other items constituting compensation from the
Selling Shareholders and any discounts, commissions or concessions allowed or
reallowed or paid to dealers. Such Prospectus Supplement and, if necessary, a
post-effective amendment to the Registration Statement of which this Prospectus
is a part will be filed with the Commission to reflect the disclosure of
additional information with respect to the distribution of such Paired Common
Shares. The Selling Shareholders and any underwriters, dealers or agents that
participate in the distribution of Paired Common Shares may be deemed to be
underwriters, and any profit on the sale of Paired Common Shares by the Selling
Shareholders and any discounts, commissions or concessions received by any such
underwriters, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Trust or the Corporation
will be described, in the Prospectus Supplement.
Under an agreement that may be entered into by the Trust and the
Corporation, underwriters, dealers and agents who participate in the
distribution of Paired Common Shares may be entitled to indemnification by the
Trust or the Corporation against certain liabilities, including liabilities
under the Securities Act, or to contribution with respect to payments which such
underwriters, dealers or agents may be required to make in respect thereof.
The sale of the Paired Common Shares by the Selling Shareholders may also
be effected from time to time by selling Paired Common Shares directly to
purchasers or to or through certain broker-dealers. In connection with any such
sale, any such broker-dealer may act as agent for the Selling Shareholders or
may purchase from the Selling Shareholders all or a portion of the Paired Common
Shares as principal and thereafter may resell any Paired Common Shares so
purchased. Sales by any such broker-dealer, acting as agent or as principal, may
be made pursuant to any of the methods described below. Such sales may be made
on the NYSE or other exchanges on which the Paired Common Shares are then
traded, in the over-the-counter market, in negotiated transactions or otherwise
at prices and at terms then prevailing or at prices related to the then-current
market prices or at prices otherwise negotiated.
The Paired Common Shares may also be sold in one or more of the following
transactions: (a) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such Paired
29
<PAGE> 30
Common Shares as agent but may position and resell all or a portion of the block
as principal to facilitate the transaction; (b) purchases by any such
broker-dealer as principal and resale by such broker-dealer for its own account
pursuant to this Prospectus which is part of the Registration Statement; (c) a
special offering, an exchange distribution or a secondary distribution in
accordance with applicable stock exchange rules; and (d) ordinary brokerage
transactions and transactions in which any such broker-dealer solicits
purchasers. In effecting sales, broker-dealers engaged by the Selling
Shareholders may arrange for other broker-dealers to participate. Broker-dealers
will receive commissions or other compensation from the Selling Shareholders in
amounts to be negotiated immediately prior to the sale that will not exceed
those customary in the types of transaction involved. Broker-dealers may also
receive compensation from purchasers of the shares which is not expected to
exceed that customary in the types of transactions involved.
Unless prohibited by applicable law, the Selling Shareholders may assign
their right to sell the Paired Common Shares.
No trustee, director, officer or agent of the Company is expected to be
involved in soliciting offers to purchase the Paired Common Shares offered
hereby, and no such person will be compensated by the Company for the sale of
any of such Paired Common Shares. Certain officers of the Company may assist
such representatives of the Selling Shareholders in such efforts but will not be
compensated therefor.
The Company will pay all of the expenses incident to the offering and sale
of the Paired Common Shares, other than commissions, discounts and fees of
underwriters, dealers or agents. The Company has agreed to indemnify the Selling
Shareholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Sidley & Austin, Los Angeles, California, has passed upon certain legal
matters on behalf of the Company. Lawyers at Sidley & Austin own or hold options
to purchase an aggregate of 20,880 Paired Common Shares. Piper & Marbury L.L.P.,
Baltimore, Maryland, has passed upon the validity of the issuance of the Paired
Common Shares offered pursuant to this Prospectus. Sidley & Austin will rely
upon the opinion of Piper & Marbury L.L.P., Baltimore, Maryland, as to certain
matters of Maryland law.
EXPERTS
The separate and combined financial statements and financial statement
schedules of Starwood Lodging Trust and Starwood Lodging Corporation as of
December 31, 1995 and for the year then ended appearing in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, incorporated by
reference in this Prospectus, the combined financial statements of Winston-Salem
Hotel Ventures, Inc., Needham Hotel Ventures, L. P., Needham Hotel Ventures II,
Inc., Needham Hotel Ventures, Inc., Minneapolis Hotel Ventures, Inc., Palm
Desert Hotel Ventures, Inc., Allentown Hotel Ventures, Inc., HOD Allentown I
Corp., HOD Allentown II Corp., HOD Allentown Trust, Atlanta Hotel Ventures,
Inc., St. Louis Hotel Ventures, Inc., Tucson Hotel Ventures, Inc., and Arlington
Heights Hotel Ventures, Inc., as of December 31, 1995 and 1994, and for each of
the years then ended appearing in the Company's Current Report on Form 8-K,
dated June 28, 1996, incorporated by reference in this Prospectus, and the
financial statements of the Terrace Garden Inn and the Lenox Inn for the year
ended December 31, 1995, appearing in the Company's Current Report on Form 8-K,
dated January 4, 1996, incorporated by reference in this Prospectus, have been
audited by Coopers & Lybrand, L.L.P., independent auditors, as stated in their
reports also incorporated by reference herein. Such financial statements and
financial statement schedules have been incorporated by reference herein in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The separate and combined financial statements and financial statement
schedules of Starwood Lodging Trust and Starwood Lodging Corporation as of
December 31, 1994 and for each of the two years in the period ended December 31,
1994, incorporated by reference in this Prospectus, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report also
incorporated by reference herein. Such
30
<PAGE> 31
financial statements and financial statement schedules have been incorporated by
reference herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of 730 Cal Hotel Properties II, Inc. d/b/a
Doubletree Hotel Los Angeles Airport as of December 31, 1995, 1994 and 1993, for
the years ended December 31, 1995 and 1994 and the period from April 1, 1993 to
December 31, 1993; the financial statements of 730 Georgia Hotel Properties I,
Inc. d/b/a Doubletree Concourse, Atlanta as of December 31, 1995 and 1994, for
the year ended December 31, 1995, and for the period from April 5, 1994 to
December 31, 1994; the Historical Summary of Gross Revenue and Direct Operating
Expenses of the Doubletree Concourse Hotel, Atlanta for the year ended December
31, 1993; the financial statements of 730 Minn. Hotel Properties I, Inc. d/b/a
Doubletree Grand Hotel at Mall of America as of December 31, 1995, 1994 and
1993, and for each of the three years in the period ended December 31, 1995; the
financial statements of 730 MO Hotel Properties I, Inc. d/b/a the Ritz-Carlton,
Kansas City as of December 31, 1995 and 1994, for the year ended December 31,
1995 and for the period from February 22, 1994 to December 31, 1994; the
financial statements of Cal Hotel Properties I Associates d/b/a Doubletree
Hotel-Horton Plaza, San Diego as of December 31, 1995, 1994 and 1993, and for
each of the three years in the period ended December 31, 1995; the Historical
Summaries of Gross Revenue and Direct Operating Expenses of the Ritz-Carlton,
Philadelphia for the years ended December 31, 1995 and 1994; and the Historical
Summary of Gross Revenue and Direct Operating Expenses of the Sheraton Fort
Lauderdale Airport Hotel for the year ended December 31, 1995, to the extent and
for the periods included in their reports, have been audited by Pannell Kerr
Forster, P.C., independent auditors, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of Guaranteed Hotel Investors 1985, L.P., to the
extent and for the periods included in their report, have been audited by Arthur
Andersen LLP, independent auditors, given on the authority of said firm as
experts in auditing and accounting.
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<PAGE> 32
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT, DEALER OR
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE REGISTERED
SECURITIES OF THE COMPANY OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES BY ANYONE IN
ANY JURISDICTION WHERE SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH
IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 4
Risk Factors.......................... 6
The Company........................... 11
Use of Proceeds....................... 12
Price Ranges of Paired Common
Shares and Distribution History..... 13
Selling Shareholders.................. 14
Federal Income Tax Considerations..... 16
Plan of Distribution.................. 29
Legal Matters......................... 30
Experts............................... 30
</TABLE>
================================================================================
================================================================================
5,943,577 PAIRED
COMMON SHARES
STARWOOD LODGING
TRUST
STARWOOD LODGING
CORPORATION
PAIRED COMMON SHARES
--------------
PROSPECTUS
--------------
OCTOBER 9, 1996
================================================================================
