<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1998.
REGISTRATION NOS. 333-47639 AND 333-47639-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C>
STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND MARYLAND
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (STATE OR OTHER JURISDICTION OF INCORPORATION OR
ORGANIZATION) ORGANIZATION)
52-0901263 52-1193298
(I.R.S. EMPLOYER IDENTIFICATION NO.) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2231 E. CAMELBACK ROAD, SUITE 410 2231 E. CAMELBACK ROAD, SUITE 400
PHOENIX, ARIZONA 85016 PHOENIX, ARIZONA 85016
(602) 852-3900 (602) 852-3900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES) OFFICES)
BARRY S. STERNLICHT RONALD C. BROWN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
2231 E. CAMELBACK ROAD, SUITE 410 2231 E. CAMELBACK ROAD, SUITE 400
PHOENIX, ARIZONA 85016 PHOENIX, ARIZONA 85016
(602) 852-3900 (602) 852-3900
(NAME, AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
COPIES TO:
LAURA A. LOFTIN, ESQ.
KENNETH H. LEVIN, ESQ.
SIDLEY & AUSTIN
555 WEST FIFTH STREET
LOS ANGELES, CALIFORNIA 90013
(213) 896-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than Securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
DEREGISTRATION OF SHARES
Pursuant to this Amendment No. 1 to Registration Statement on Form S-3
(Registration Nos. 333-47639 and 333-47639-01), Starwood Hotels & Resorts Trust
(the "Trust") and Starwood Hotels & Resorts Worldwide, Inc. (the "Corporation")
hereby deregister 510 shares of beneficial interest, par value $0.01 per share,
of the Trust and 510 shares of common stock, par value $0.01 per share of the
Corporation, which shares will not be offered or sold by the "Selling
Shareholders" named herein.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 27, 1998
PROSPECTUS
10,571,535 PAIRED COMMON SHARES
STARWOOD HOTELS & RESORTS STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
Starwood Hotels & Resorts (the "Trust") and Starwood Hotels & Resorts
Worldwide, Inc. (the "Corporation") are, together with their respective
subsidiaries, the largest real estate investment trust in the United States and
one of the world's leading hotel operating companies, respectively. The shares
of beneficial interest, par value $.01 per share, of the Trust (the "Trust
Shares") and the shares common stock, par value $.01 per share, of the
Corporation (the "Corporation Shares") are "paired" and trade as units
consisting of one Trust Share and one Corporation Share (a "Paired Common
Share"). The Trust elected to be taxed as a real estate investment trust for
federal income tax purposes (a "REIT") commencing with its tax year ended
December 31, 1995 and intends to continue to so qualify as a REIT. To ensure
that the Trust continues to so qualify, ownership by any person is limited to
8.0% of the Paired Common Shares, subject to certain exceptions.
All of the Paired Common Shares offered hereby may be offered for sale and
sold from time to time by the shareholders specified in this Prospectus or their
successors in interest (the "Selling Shareholders"). See "Selling Shareholders."
The Trust and the Corporation will not receive any of the proceeds from the sale
of the Paired Common Shares in this offering.
The sale or distribution of all or any portion of the Paired Common Shares
offered hereby may be effected from time to time by the Selling Shareholders
directly, indirectly to or through brokers or dealers or in a distribution by
one or more underwriters on a firm commitment or best efforts basis, on the New
York Stock Exchange ("NYSE"), in the over-the-counter market, on any national
securities exchange on which the Paired Common Shares are listed or traded, in
privately negotiated transactions, through sales involving a distribution
reinvestment plan of the Trust and the Corporation, or otherwise, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. See "Plan of Distribution."
To the extent required, the number of Paired Common Shares to be sold, the
purchase price, the public offering price, if applicable, the name of any
underwriter, agent or broker-dealer, and any applicable commissions, discounts
or other items constituting compensation to such underwriters, agents or
broker-dealers with respect to a particular offering will be set forth in a
supplement or supplements to this Prospectus (each, a "Prospectus Supplement")
or in a post-effective amendment to the registration statement of which this
Prospectus is a part. The aggregate proceeds to the Selling Shareholder from the
sale of the Paired Common Shares offered hereby generally will be the purchase
price of the Paired Common Shares sold less (i) the aggregate commissions,
discounts and other compensation, if any, paid by the Selling Shareholders to
underwriters, agents or broker-dealers and (ii) certain other expenses of the
offering and sale of the Shares that will be the responsibility of the Selling
Shareholders. See "Selling Shareholders."
The Paired Common Shares are listed on the NYSE under the symbol "HOT." On
April 23, 1998, the last reported sale price of the Paired Common Shares on the
NYSE was $49.9375 per Paired Common Share.
SEE "RISK FACTORS" ON PAGES 7 TO 13 FOR A DESCRIPTION OF CERTAIN MATERIAL
RISKS AND UNCERTAINTIES WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE PAIRED COMMON SHARES OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, THE NEVADA GAMING
COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD, THE NEW JERSEY CASINO CONTROL
COMMISSION OR THE MISSISSIPPI GAMING COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, THE NEVADA GAMING
COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD, THE NEW JERSEY CASINO CONTROL
COMMISSION OR THE MISSISSIPPI GAMING COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
The date of this Prospectus is , 1998.
<PAGE> 4
AVAILABLE INFORMATION
The Trust and the Corporation (together with their respective subsidiaries,
the "Company" or "Starwood Hotels") 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 the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Regional Offices of the Commission at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can also 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 and copied at the offices of the New York Stock Exchange,
Public Reference Section, 20 Broad Street, New York, New York 10005.
The Trust and the Corporation have 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 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 filed as an exhibit to the Registration Statement are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or document so filed, each such statement being qualified in all respects by
such reference. For further information with respect to the Trust, the
Corporation and the Securities offered hereby, reference is made to the
Registration Statement and exhibits thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Trust and the Corporation
(Commission File Nos. 1-6828 and 1-7959) with the Commission under the Exchange
Act are incorporated in this Prospectus by reference and are made a part hereof:
1. The Joint Annual Report on Form 10-K for the fiscal year ended December 31,
1997 (the "Starwood Hotels Form 10-K");
2. The Joint Current Reports on Form 8-K dated January 2, 1998, January 15,
1998, February 3, 1998, February 23, 1998, February 24, 1998, March 11, 1998,
March 12, 1998 and April 2, 1998; and
3. 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.
Each document filed by the Trust or the Corporation (i) subsequent to the
date of the initial Registration Statement of which this Prospectus is a part
and prior to the effectiveness of such Registration Statement and (ii)
subsequent to the date of this Prospectus, in each case pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination of the
offering made hereby, 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), 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.
2
<PAGE> 5
Copies of all documents incorporated herein 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 Hotels & Resorts Worldwide,
Inc., 2231 E. Camelback Road, Suite 400, Phoenix, Arizona 85016; Attention: Alan
M. Schnaid, telephone number 602-852-3900.
FORWARD-LOOKING STATEMENTS
This Prospectus contains, or incorporates by reference, certain statements
that may be deemed "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements
relating to the Company's objectives, strategies, plans, intentions and
expectations, and all statements (other than statements of historical facts)
that address actions, events or circumstances that the Company or its management
expects, believes or intends will occur in the future, are forward-looking
statements. All such forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical results or
those anticipated in the forward-looking statements, including without
limitation, risks and uncertainties associated with the following: certain
recently proposed legislation relating to the Trust's ability to continue to
qualify as a paired-share REIT and related tax treatment; the Company's
integration of the assets and operations of ITT Corporation ("ITT") and Westin
Hotels & Resorts Worldwide, Inc. ("Westin Worldwide") and its affiliates
(collectively "Westin"); completion of future acquisitions; the availability of
capital for acquisitions and for renovations; the ability to maintain existing
management, franchise or representation agreements and to obtain new agreements
on favorable terms; competition within the lodging industry and the gaming
industry; the cyclicality of the real estate business, the hotel business and
the gaming business; general real estate and economic conditions; and the other
risks and uncertainties set forth described in this Prospectus under the caption
"Risk Factors" and in the annual, quarterly and current reports and proxy
statements of the Trust and the Corporation incorporated by reference herein.
The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise.
THE COMPANY
The Corporation and the Trust are, together with their subsidiaries, one of
the world's leading hotel operating companies and the largest real estate
investment trust in the United States, respectively. The Corporation conducts
its hotel business both directly and through its subsidiaries ITT Sheraton
Corporation ("Sheraton") and Ciga, S.P.A. ("Ciga"), and engages in the gaming
business principally through its subsidiary Caesars World, Inc. ("Caesars").
Through the Sheraton, Westin, The Luxury Collection, St. Regis, Ciga, Four
Points Hotels and Caesars brand names, Starwood Hotels is represented in most
major markets of the world. As of March 30, 1998, Starwood Hotels owned equity
interests in approximately 220 hotel properties, held mortgage interests in
eight hotel properties, operated approximately 180 hotel properties on behalf of
third-party owners and earned franchise fees by licensing one of its brand names
to approximately 240 hotel properties.
Prior to January 1, 1998, the Trust and the Corporation conducted
substantially all of their respective businesses and operations through SLT
Realty Partnership (the "Realty Partnership") and SLC Operating Partnership (the
"Operating Partnership" and together with the Realty Partnership, the
"Partnerships"). The Trust is the sole general partner of the Realty
Partnership; the Corporation is the sole general partner of the Operating
Partnership. As of the date of this Prospectus, the Company owns an
approximately 94.1% general partnership interest in each of the Partnerships.
The remaining 5.9% interest in each of the Partnerships is owned predominantly
by Starwood Capital Group, L.L.C. and certain of its affiliates. As of December
31, 1997, the Realty Partnership held fee interests, ground leaseholds and
mortgage loan interests in 120 hotel properties containing over 32,800 rooms
located in 34 states throughout the United States and the District of Columbia,
and in Mexico and Scotland. The Operating Partnership leased from the Realty
Partnership all but four of the 96 hotel properties owned in fee or held
pursuant to long-term leases by the Realty Partnership. In addition, the
Operating Partnership owned, as of December 31, 1997, the Milwaukee Sheraton,
the Midland
3
<PAGE> 6
Hotel in Chicago, Illinois, the three Westin Regina Resorts in Cabo San Lucas,
Cancun and Puerto Vallarta, Mexico and the Turnberry Hotel and Golf Resort in
Ayreshire, Scotland, all subject to mortgages to the Trust, and managed nine
hotels for third-party owners.
At December 31, 1997, the Trust owned (directly or through its
subsidiaries) fee or ground leasehold interests in 102 hotel properties and
mortgage interests in another eight hotel properties, and 98 of these hotels
were leased to the Corporation or one of its subsidiaries. Of these 102 hotels,
90 hotels were leased to the Corporation or one of its subsidiaries and 12
hotels were managed by third-party operators, including four hotels leased to
third parties. In addition, the Corporation managed nine hotels for third-party
owners. In furtherance of the Company's strategy to enhance, expand and
diversify its hotel portfolio and to develop or acquire global brands, on
January 2, 1998, the Company acquired Westin and on February 23, 1998, the
Company acquired ITT.
The Trust was organized in 1969 as a Maryland real estate investment trust.
The Trust's executive offices are located at 2231 East 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 East Camelback Road, Suite 400, Phoenix, Arizona 85016;
telephone (602) 852-3900.
Acquisition of ITT
On February 23, 1998, pursuant to an Amended and Restated Agreement and
Plan of Merger dated as of November 12, 1997, among the Trust, the Corporation,
Chess Acquisition Corp., a newly formed, wholly owned subsidiary of the Company
("Chess"), and ITT, Chess was merged with and into ITT (the "ITT Merger"). As a
result of the ITT Merger, ITT became a wholly owned subsidiary of the
Corporation, and all outstanding shares of the common stock, no par value, of
ITT ("ITT Common Stock"), together with the associated preferred share purchase
rights (other than shares held by ITT or the Company), were converted into the
right to receive an aggregate of 126,716,121 Paired Common Shares and $2.992
billion in cash. In addition, each holder of shares of ITT Common Stock became
entitled to receive for each share of ITT Common Stock converted in the ITT
Merger additional cash consideration in the amount of $0.37 computed as interest
for the period from January 31, 1998 through February 23, 1998.
In connection with the ITT Merger, the Company borrowed an aggregate of
approximately $5.6 billion from a group of financial institutions arranged by
Bankers Trust Company, Chase Securities Inc. and Lehman Brothers, Inc., which
borrowings were used to fund the cash portion of the acquisition price of ITT
and to refinance a portion of the Company's and ITT's existing indebtedness.
ITT conducts its hotel and gaming business through its subsidiaries
Sheraton, Ciga and Caesars. ITT's revenues from hotel operations are derived
worldwide from hotels that are owned, leased or managed by Sheraton under the
brand names "Sheraton" and "The Luxury Collection" and ITT's 70.3% ownership
interest in Ciga, which owns a group of luxury hotels in Europe. ITT also earns
franchise fees by licensing the "Sheraton" and "Four Points Hotels" brands to
owners of independent hotels. ITT's gaming operations are marketed under either
the "Caesars" or "Sheraton" brand name and service mark and as of December 31,
1997 were conducted at Caesars Palace and the Desert Inn Resort & Casino in Las
Vegas, Nevada, Caesars Atlantic City in Atlantic City, New Jersey, Caesars Tahoe
in Stateline, Nevada, The Sheraton Casino & Hotel in Tunica County, Mississippi;
and various other casino/hotel operations outside the United States.
As of the date of this Prospectus, ITT is seeking to sell The Desert Inn
Resort & Casino, and the Company is exploring a range of disposition strategies
for ITT's 83.3% equity interest in ITT Educational Services, Inc. ("ITT
Educational"), the subsidiary that conducts ITT's post-secondary technical
education business. As a part of this disposition strategy, on February 13,
1998, ITT Educational filed a registration statement with the Commission for the
sale by ITT of up 12,650,000 shares of the common stock of ITT Educational. In
February 1998, ITT disposed of its telephone directories publishing business
(conducted through ITT's subsidiary ITT World Directories, Inc.) to VNU, an
international publishing and information company based in The Netherlands, for a
total gross consideration valued at $2.1 billion. Proceeds from the disposition
of ITT World Directories were used in part to acquire certain outstanding
indebtedness of Starwood Hotels.
4
<PAGE> 7
Acquisition of Westin
On January 2, 1998, pursuant to a Transaction Agreement dated as of
September 8, 1997 (the "Westin Transaction Agreement") among the Trust, the
Realty Partnership, the Corporation and the Operating Partnership, WHWE L.L.C.
("WHWE"), Woodstar Investor Partnership ("Woodstar"), Nomura Asset Capital
Corporation ("Nomura"), Juergen Bartels ("Bartels" and, together with WHWE,
Woodstar and Nomura, the "Members"), Westin Worldwide, W&S Lauderdale Corp.
("Lauderdale"), W&S Seattle Corp. ("Seattle"), Westin St. John Hotel Company,
Inc. ("St. John"), W&S Denver Corp. ("Denver"), W&S Atlanta Corp. ("Atlanta"
and, together with Westin Worldwide, Lauderdale, Seattle, St. John and Denver,
"Westin") and W&S Hotel L.L.C., the Company acquired Westin.
As of December 31, 1997, Westin owned, managed, franchised or represented
97 luxury or upscale hotel and resort properties worldwide, excluding 15 Westin
hotels owned by the Company. Westin's primary business strategy is to provide,
for its own hotels and to the other owners of Westin's hotel and resort
properties, focused, responsive, high quality marketing, reservations,
management and, as appropriate, franchise services that are designed to increase
the operating revenues and profitability of the properties and to increase hotel
and resort customer satisfaction.
As of December 31, 1997, the Westin portfolio (excluding 15 Westin hotels
owned by the Company) consisted of 12 owned hotels with approximately 5,900
rooms, five joint ventures with approximately 3,200 rooms, 37 managed hotels
with approximately 20,500 rooms. 28 franchised hotels with approximately 8,400
rooms and 15 represented hotels with approximately 5,300 rooms.
Westin Hotel Company, originally founded as Western Hotels in 1930, became
Western International Hotels in 1963 and adopted the Westin name and logo in the
late 1970's. Westin grew from its initial 17 hotels located in the Pacific
Northwest to 82 properties when it was acquired by W&S Hotel L.L.C. in May 1995,
and grew to 97 luxury upscale hotel and resort properties (excluding 15
properties owned by the Company) throughout the world at December 31, 1997
through a combination of Westin's own development efforts and working with other
hotel owners to enable Westin to serve as manager, franchisor or representative.
Westin's hotel and resort properties are located throughout the United States
and in Argentina, Brazil, Canada, China, England, France, Germany, Guatemala,
Indonesia, Japan, Korea, Malaysia, Mexico, the Netherlands, Panama, the
Philippines, Portugal, Singapore, Switzerland and Thailand.
Pursuant to the terms of the Westin Transaction Agreement
(i) Westin Worldwide merged into the Trust (the "Westin Merger"). In
connection with the Westin Merger, all of the issued and outstanding shares of
capital stock of Westin Worldwide (other than shares held by Westin and its
subsidiaries or by the Company) were converted into an aggregate of 6,285,783
Class A Exchangeable Preferred Shares, par value $.01 per share (the "Class A
EPS"), of the Trust and 5,294,783 Class B Exchangeable Preferred Shares, par
value $.01 per share (the "Class B EPS" and together with the Class A EPS, the
"EPS"), of the Trust and $177.9 million in cash;
(ii) The stockholders of Lauderdale, Seattle and Denver contributed all of
the outstanding shares of such companies to the Realty Partnership. In exchange
for such contribution and after giving effect to the deemed exchange of certain
units, the Realty Partnership issued to such stockholders an aggregate of
470,309 limited partnership units of the Realty Partnership and the Trust issued
to such stockholders an aggregate of 127,534 shares of Class B EPS. In addition,
in connection with the foregoing share contribution, the Realty Partnership
assumed, repaid or refinanced the indebtedness of Lauderdale, Seattle and Denver
and assumed $84.2 million of indebtedness incurred by the Members prior to such
contributions; and
(iii) The stockholders of Atlanta and St. John contributed all of the
outstanding shares of such companies to the Operating Partnership. In exchange
for such contribution and after giving effect to the deemed exchange of certain
units, the Operating Partnership issued to such stockholders an aggregate of
312,741 limited partnership units of the Operating Partnership and the Trust
issued to such stockholders an aggregate of 80,415 shares of Class B EPS. In
addition, in connection with the foregoing share contributions, the Operating
Partnership assumed repaid or refinanced indebtedness of Atlanta and St. John
and assumed $3.4 million of indebtedness incurred by the Members prior to such
contributions.
5
<PAGE> 8
The aggregate principal amount of debt assumed by the Company pursuant to
the Westin Transaction Agreement was approximately $1.0 billion.
The shares of Class A EPS, the shares of Class B EPS and the limited
partnership interests issued in connection with the Westin Merger and the
contribution of Seattle, Lauderdale, Denver, St. John and Atlanta to the
Partnerships are directly or indirectly exchangeable on a one-to-one basis
(subject to certain adjustments) for Paired Common Shares (subject to the right
of the Company to elect to pay cash in lieu of issuing such shares). The limited
partnership interests also are exchangeable on a one-to-one basis for shares of
Class B EPS. The shares of Class B EPS have a liquidation preference of $38.50
per share and provide the holders with the right, from and after the fifth
anniversary of the closing date of the Westin Merger, to require the Trust to
redeem such shares at a price of $38.50.
6
<PAGE> 9
RISK FACTORS
Prospective purchasers should consider carefully the following factors
before acquiring the Paired Common Shares offered hereby:
RECENTLY PROPOSED LEGISLATION
On March 26, 1998, the Chairman of the Ways and Means Committee of the
United States House of Representatives and the Chairman of the Finance Committee
of the United States Senate introduced identical bills ("H.R. 3558") that would,
if enacted, limit the ability of the Company to manage or operate real property
that it acquires after March 26, 1998. On March 31, 1998, the Senate Finance
Committee voted to include the provisions of H.R. 3558 in the "Internal Revenue
Service Restructuring and Reform Act of 1997." If enacted H.R. 3558 would make
it difficult for the Company to acquire and operate hotels after March 26, 1998
in the same manner as the Company has in the past. As a result, enactment of
H.R. 3558 could have a material adverse effect on the results of operations,
financial condition and prospects of the Company. No assurance can be given that
H.R. 3558 will not be enacted in its current form or that other new legislation,
regulations or administrative interpretations will not be adopted with respect
to the Company's exemption from the anti-pairing rules of Section 269B(a)(3) of
the Code. The Company is evaluating its options in the event that H.R. 3558 (or
a similar measure) were to be adopted.
FAILURE TO MANAGE RAPID GROWTH
The full benefits of the Company's acquisition of Westin, ITT and other
hotel properties acquired during 1997 and thereafter will require the
integration of administrative, finance, sales and marketing organizations; the
coordination of sales efforts; and the implementation of appropriate operations,
financial and management systems and controls in order to realize the
efficiencies, revenue enhancements and cost reductions that are expected from
such acquisitions. Although the Company's management team has experience
integrating acquisitions, none of the prior acquisitions have been of comparable
magnitude to, or included the breadth of operations involved in, the acquisition
of Westin or ITT. The diversion of management attention, as well as any other
difficulties which may be encountered in the transition and integration process,
could have an adverse impact on the revenue and operating results of the
Company. There can be no assurance that the Company will be able to integrate
successfully the operations of the acquired properties with those of the Company
or that anticipated synergies will be realized or, if realized, that such
synergies will occur when anticipated.
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 officers and other highly qualified personnel.
Competition for such personnel is intense. Since January 1996, the Company has
experienced significant changes in its senior management, including executive
officers. 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
successfully to execute and implement the Company's growth and operating
strategies.
TAX RISKS
Failure to Qualify as a REIT. The Trust believes that it has operated so as
to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with the Trust's taxable year ended December 31, 1995 and
the Trust 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. As a result, the Trust is
likely to encounter a greater number of interpretive issues under the REIT
qualification rules, and more such issues which lack clear guidance, than are
other REITs. 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
7
<PAGE> 10
that new 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 and other equity securities
of the Trust, the nature of the Trust's assets, the sources of its income and
the amounts of its distributions to its shareholders. In connection with the
acquisition of Westin in January 1998 and ITT in February 1998, the Trust
acquired new assets and operations (including the leasing of newly acquired
assets, loans to the Corporation and the ownership of certain corporations that
own hotels or intangible assets). By increasing the complexity of the Company's
operations, these assets and operations may make it more difficult for the Trust
to continue to satisfy the REIT qualification requirements.
The Trust's ability to qualify as a REIT is also dependent on its continued
exemption from the anti-pairing rules of Section 269B(a)(3) of the Code. Section
269B(a)(3) would ordinarily prevent a company from qualifying as a REIT if its
stock is paired with the stock of another company whose activities are
inconsistent with REIT status, such as the Corporation. The "grandfathering
rules" governing Section 269B(a)(3) generally provide, however, that Section
269B(a)(3) does not apply to a paired REIT if the shares of the REIT and its
paired operating company were paired on or before June 30, 1983 and the REIT was
taxable as a REIT on or before June 30, 1983. There are, however, no judicial or
administrative authorities interpreting the grandfathering rules governing
Section 269B(a)(3).
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 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. The failure of the Trust to qualify as a REIT would reduce its net
earnings available for distribution to shareholders because of the additional
tax liability to the Trust for the year or years involved. In addition,
distributions would no longer be required to be made. To the extent that
distributions to shareholders would have been made in anticipation of the Trust
qualifying as a REIT, the Trust might be required to borrow funds or to
liquidate certain of its investments to pay the applicable tax. The failure to
qualify as a REIT would also constitute a default under certain debt obligations
of the Trust.
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 the Trust with respect to any calendar year are less than
the sum of (i) 85% of the Trust's 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.
Distributions by the Trust and Corporation will be determined by the
Trust's Board of Trustees (the "Board of Trustees") or the Corporation's Board
of Directors (the "Board of Directors"), as applicable, and will depend on a
number of factors, including the amount of cash available for distributions, the
Company's financial condition, decisions by either Board to reinvest funds
rather than to distribute such funds, the Company's capital expenditures, the
annual distribution requirements under the REIT provisions of the Code (in the
case of the Trust) and such other factors as either Board deems relevant. For
federal income tax purposes, distributions paid to shareholders may consist of
ordinary income, capital gains (in the case of the Trust), nontaxable return of
capital, or a combination thereof.
DEBT FINANCING
As a result of incurring debt, the Company is subject to the following
risks associated with debt financing: (i) the risk that cash flow from
operations will be insufficient to meet required payments of principal and
8
<PAGE> 11
interest; (ii) the risk that (to the extent that the Company maintains floating
rate indebtedness) interest rates will fluctuate; and (iii) the agreements
governing the Company's loan and credit facilities contain covenants imposing
certain limitations on the Company's ability to acquire and dispose of assets.
In addition, although the Company anticipates that it will be able to repay or
refinance its existing indebtedness and any other indebtedness when it matures,
there can be no assurance that the Company will be able to do so or that the
terms of such refinancings will be favorable.
In connection with the acquisitions of Westin and ITT, the Company incurred
a substantial amount of additional debt, thereby increasing its exposure to the
risks associated with debt financing. The Company's increased leverage may have
important consequences, including the following: (i) the ability of the Company
to obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary, may be impaired or such financing
may not be available on terms favorable to the Company, (ii) a substantial
decrease in operating cash flow or an increase in expenses of the Company could
make it difficult for the Company to meet its debt service requirements and
force it to modify its operations; (iii) the Company's higher level of debt and
resulting interest expense may place it at a competitive disadvantage with
respect to certain competitors with lower amounts of indebtedness and/or higher
credit ratings; and (iv) the Company's greater leverage may make it more
vulnerable to a downturn in its business or in the economy generally.
Ownership Limitation. In order for the Trust 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 (which term is defined in
the Code to include certain entities) at any time during the last half of the
Trust's taxable year. 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 shares of the Trust or the
Corporation, whether measured by vote, value or number of shares (the "Ownership
Limit"). 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 Limit.
The constructive ownership rules of the Code are extensive and complex and
may cause Paired Common Shares owned, directly or indirectly, by certain 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 Limit. Direct or constructive
ownership in excess of the Ownership Limit 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 Limit. Notwithstanding the Ownership Limit, given the breadth of the
Code's constructive ownership rules and that it is not possible for the Trust
and the Corporation continuously to 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.
Limits on Change of Control. Certain provisions of the Trust's declaration
of trust, as amended (the "Declaration of Trust"), and the Corporation's
articles of incorporation, as amended (the "Articles of Incorporation"),
including, without all limitation, those providing for 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 delay,
defer or prevent a change in control under circumstances that could otherwise
give the holders of Paired Common Shares or other equity securities of the
Company the opportunity to realize a premium over then-prevailing market prices.
9
<PAGE> 12
INFLUENCE BY STARWOOD CAPITAL
Individuals employed by or otherwise affiliated with Starwood Capital
Group, L.L.C. ("Starwood Capital") hold two positions on the Board of Trustees
and two positions on the Board of Directors. 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. Barry S. Sternlicht is the President and Chief Executive Officer
of, and controls, Starwood Capital. Mr. Sternlicht also is a Trustee of the
Trust and the Chairman and Chief Executive Officer of the Trust. In addition,
Mr. Sternlicht is Chairman of the Board of Directors of the Corporation. As a
consequence, Mr. Sternlicht has the ability to exercise certain influence over
the affairs of the Company. Starwood Capital and certain of its officers own
limited partnership interests in the Realty Partnership and the Operating
Partnership ("Units") that are exchangeable for Paired Common Shares. As a
result, and due to its different tax situation, prior to the exchange of its
Units into Paired Common Shares, 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.
RISKS RELATING TO HOTEL OPERATIONS
Operating Risk. The properties of the Company are subject to all operating
risks common to the hotel industry. These risks include changes in general
economic conditions (as described below); decreases in 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
obtain property and liability insurance fully to 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, and
some of the Company's competitors may have substantially greater marketing and
financial resources than the Company.
Acquisition Risks. The Company competes for acquisition opportunities with
other owners of hotel properties, some of which may have substantially greater
financial resources than the Company. These competitors may generally be able to
accept more risk than the Company can prudently manage. Competition may
generally reduce the number of suitable investment opportunities offered to the
Company and increase the bargaining power of property owners seeking to sell.
Further, management believes that the Company will face competition for
acquisition opportunities from entities organized for purposes substantially
similar to the objectives of the Company.
Seasonality of Hotel Business. The hotel industry is seasonal in nature.
This seasonality may cause quarterly fluctuations in the operating results of
the Company and the market prices of the Paired Common Shares.
Capital Intensive Business. The Company's properties are capital intensive
and, in order to remain attractive and competitive, must be well maintained as
well as periodically modernized and refurbished. This creates an on-going need
for capital and, to the extent such capital expenditures may not be funded from
cash generated by the Company, financial results may be sensitive to the cost
and availability of funds.
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.
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. For example, existing or
new real estate, zoning or tax laws can make it more expensive and/or time
consuming to develop real property or expand, modify or renovate hotels.
10
<PAGE> 13
Governments can, under eminent domain laws, take real property, sometimes
for less compensation than the owner believes the property is worth. When
prevailing interest rates increase, the expense of acquiring, developing,
expanding or renovating real property increases, and values decrease as it
becomes more difficult to sell property because the number of potential buyers
decreases. Similarly, as financing becomes less available, it becomes more
difficult both to acquire real property and, because of the diminished number of
potential buyers, to sell real property. Any of these factors could have a
material adverse impact on the Company's results of operations or financial
condition, as well as on its ability to make distributions to its shareholders.
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. 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 the Trust's ability to make
distributions to shareholders will be adversely affected.
Hotel Development Risks. The Company intends to develop hotel properties as
suitable opportunities arise and is currently developing several upscale hotels.
New project development is subject to a number of risks, including risks of
construction delays or cost overruns that may increase project costs; receipt of
zoning, occupancy and other required governmental permits and authorizations and
the incurring of development costs that are not pursued to completion. There can
be no assurance that any development project will be completed in a timely
manner or within budget.
Possible Liability Relating to Environmental Matters. Under various
federal, state, local and foreign 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 properly to 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 and foreign 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, state, local
and foreign laws.
RISKS RELATING TO GAMING OPERATIONS
Regulation of Gaming Operations. The Company owns and operates a number of
casino gaming facilities, including Caesars Palace and The Desert Inn Resort &
Casino in Las Vegas, Nevada; Caesars Atlantic City in Atlantic City, New Jersey;
and Caesars Tahoe in Stateline, Nevada. Other gaming facilities are located in
Nevada, New Jersey, Delaware, Indiana and Mississippi; in four foreign
countries; and on cruise ships operating in international waters. Each of these
gaming operations is subject to extensive licensing, permitting and regulatory
requirements administered by various governmental entities. Typically, gaming
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 Company and its gaming subsidiaries, impose substantial fines
and take other actions, any of which could have a material adverse effect on the
business and the value of the Company's hotel/casinos. Directors, officers and
certain key employees of the Company and its gaming subsidiaries are subject to
licensing or suitability determinations by various gaming authorities. If any of
such gaming authorities were to find a person occupying any such position
unsuitable, the Company would be required to sever its relationship with that
person.
Increased Gaming Competition. The Company faces significant domestic and
international competition from both established casinos and newly emerging
gaming operations. Proposals have been made for a
11
<PAGE> 14
significant number of casinos, both land-based and those involving vessels on
navigable waters, in a number of jurisdictions and large metropolitan areas.
Legalization of gaming in additional jurisdictions may also provide
opportunities for expansion by the Company's competitors that could adversely
affect the Company's existing gaming operations. The Company believes that the
adoption of legalized gaming in any jurisdiction near Nevada (particularly
California or other states in the southwestern United States) or near New Jersey
(particularly New York or Pennsylvania) or the advent of gaming on nearby Native
American lands could have a material adverse effect on the Company's operations
in Las Vegas and Atlantic City.
Risks Associated with High-End Gaming. There are risks associated with the
high end gaming business that currently comprises a portion of the Company's
Caesars Palace and Desert Inn operations. High-end gaming is more volatile than
other forms of gaming, and variances attributable to high-end gaming could,
under certain circumstances, have a positive or negative impact on cash flow,
earnings and other financial measures in a particular quarter. In addition, a
substantial portion of the Company's table gaming revenues from its Caesars
Palace and Desert Inn operations is attributable to the play of a relatively
small number of international customers. The loss of, or a reduction in play of,
the most significant of such customers could have an adverse effect on the
Company's future operating results.
FOREIGN OPERATIONS AND CURRENCY FLUCTUATIONS
The Company has significant international operations, including as of March
1, 1998, 31 owned properties in Europe, two properties owned in Africa/the
Middle East, 15 properties owned in Latin America and three properties owned in
Asia/Pacific. International operations generally are subject to various
political and other risks that are not present in U.S. operations, including,
among other things, the risk of war or civil unrest, expropriation and
nationalization. In addition, certain international jurisdictions restrict the
repatriation of non-U.S. earnings. Various international jurisdictions also have
laws limiting the right and ability of non-U.S. entities to pay dividends and
remit earnings to affiliated companies unless specified conditions have been
met. In addition, sales in international jurisdictions typically are made in
local currencies, which subjects the Company to risks associated with currency
fluctuations. Currency devaluations and unfavorable changes in international
monetary and tax policies and other changes in the international regulatory
climate and international economic conditions could materially adversely affect
the Company's profitability and financing plans. Other than Italy, where the
Company is subject to certain risks due to currency fluctuations, the Company's
properties are geographically diversified and not concentrated in any particular
region.
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 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 liabilities, 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.
RISKS RELATING TO GENERAL ECONOMIC CONDITIONS
The Company's hotel and gaming operations may be adversely affected by
moderate or severe economic downturns, including conditions which may be
isolated to one or more geographic regions. As a result, the Company's ability
to achieve or sustain substantial improvements in funds from operations and
other important financial tests may be adversely affected by general economic
conditions.
12
<PAGE> 15
Further, an economic downturn in the countries from which the Company's
gaming operations draw high-end international customers could cause a reduction
in the frequency of visits and the revenues generated by such customers.
Similarly, the collectibility of receivables from international gaming customers
could be adversely affected by future business or economic trends, or by
significant events, in the countries in which such customers reside.
RISKS RELATING TO ACTS OF GOD AND WAR
The Company's financial and operating performance may be adversely affected
by acts of God, such as natural disasters, in both the locations in which the
Company owns and/or operates significant properties and areas of the world from
which the Company draws a large number of customers. Similarly, wars, political
unrest and other forms of civil strife may cause the Company's results to differ
materially from predicted results.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Paired Common Shares offered hereby, all of which proceeds will be received by
the Selling Shareholders. See "Selling Shareholders."
PRICE RANGE OF PAIRED COMMON SHARES AND DISTRIBUTIONS
The Paired Common Shares are listed on the New York Stock Exchange under
the symbol "HOT." The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per Paired Common Share on the NYSE and
distributions to shareholders for the fiscal periods indicated.
<TABLE>
<CAPTION>
PRICE
--------------------
PERIOD HIGH LOW DISTRIBUTIONS(A)
------ ------ ------ ----------------
<S> <C> <C> <C>
1998
- -----------------------------------
Second Quarter (through April
23).............................. $54.00 $49.50 $0.52
First Quarter...................... $57.75 $51.82 $0.48
1997
- -----------------------------------
Fourth Quarter..................... $60.38 $52.13 $0.48(b)
Third Quarter...................... $57.44 $41.38 $0.48
Second Quarter..................... $42.81 $34.25 $0.39
First Quarter...................... $45.88 $34.50 $0.39
1996
- -----------------------------------
Fourth Quarter..................... $36.75 $27.42 $0.39(c)
Third Quarter...................... $27.92 $22.08 $0.33
Second Quarter..................... $25.75 $21.17 $0.33
First Quarter...................... $23.25 $19.67 $0.31
</TABLE>
- ---------------
(a) During the fourth quarter of 1996, the Trust and the Corporation each
declared a three-for-two stock split in the form of a 50% stock dividend
payable to shareholders of record on December 30, 1996. The stock dividend
was paid in January 1997. The information set forth in the table has been
adjusted to reflect the stock split.
(b) The Trust declared a distribution for the fourth quarter of 1997 to
shareholders of record on December 31, 1997. The distribution was paid in
January 1998.
(c) The Trust declared a distribution for the fourth quarter of 1996 to
shareholders of record on December 30, 1996. The distribution was paid in
January 1997.
On April 23, 1998, the last reported sales price for the Paired Common
Shares on the NYSE was $49.9375 per Paired Common Share. As of April 22, 1998,
there were approximately 40,232 holders of record of Paired Common Shares
including approximately 15,998 holders of record of ITT Shares converted into
Paired Common Shares in connection with the ITT Merger who have not yet
surrendered their certificates.
13
<PAGE> 16
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). Thus, the Trust intends to continue
to pay regular quarterly dividends. 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 Trust'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 Company's current credit facilities, the Trust is
generally permitted to make cash distributions to the Trust's shareholders on an
annual basis in an amount equal to the greater of (1) 85% of adjusted funds from
operations (as defined) for any four consecutive calendar quarters, and (2) the
minimum amount necessary to maintain the Trust's tax status as a REIT.
The Corporation has not paid any cash dividends since its organization in
the periods set forth in the table above and does not anticipate that it will
make any such distributions in the foreseeable future.
14
<PAGE> 17
SELLING SHAREHOLDERS
The Paired Common Shares offered by this Prospectus are offered for the
account of the Selling Shareholders.
Selling Shareholders, including Prudential Property Investment Account II
("PRISA II"), that beneficially own approximately 62% of the Paired Common
Shares offered hereby have informed the Company that as of the date of this
Prospectus, they have no current intent to sell any such Paired Common Shares.
However, such Selling Shareholders have reserved the right to exchange any of
their Units for Paired Common Shares or to sell any Paired Common Shares without
further notice to the Company or the making of any change or supplement to this
Prospectus.
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>
NUMBER OF
PAIRED
NUMBER OF PAIRED COMMON SHARES
COMMON SHARES BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNERS NUMBER(1) PERCENT(2) TO BE SOLD AFTER THE OFFERING(3)
------------------------- --------- ---------- ---------------- ----------------------
<S> <C> <C> <C> <C>
The Prudential Insurance Company of
America, on behalf of PRISA
II(4).............................. 4,529,906 2.4% 4,529,007 899
Aspen Enterprises International
Holdings, Ltd.(5).................. 3,088,372 1.6% 3,088,372 0
Gary Mendell(6)...................... 935,612 * 599,112 300,000
Ellen-Jo Mendell(7).................. 635,612 * 521,617 0
Stephen Mendell(8)................... 635,612 * 113,995 0
Polestar Limited(5).................. 539,535 * 539,535 0
Zapco Holdings, Inc.................. 331,291 * 331,291 0
Judith K. Rushmore................... 298,667 * 298,667 0
The Hermitage L.P.................... 233,106 * 233,106 0
Murray Dow II(9)..................... 183,913 * 33,913 150,000
Moonbeam Enterprises International,
Ltd.(5)............................ 89,696 * 89,696 0
Philadelphia HSR, L.P................ 72,601 * 72,601 0
Gary Mendell Family Limited
Partnership........................ 36,500 * 36,500 0
Westport Hospitality, Inc............ 31,831 * 31,831 0
Felix Cacciato(10)................... 23,767 * 3,767 20,000
Orna L. Shulman...................... 20,962 * 20,962 0
Arthur Green(11)..................... 19,172 * 2,505 16,667
Zapco Holdings, Inc.
Deferred Comp. Plan Trust.......... 18,126 * 18,126 0
Mark Rosinsky(12).................... 5,839 * 1,253 3,334
Randi Rosinsky(13)................... 5,839 * 1,252 3,334
Michael Hall(14)..................... 4,655 * 1,321 3,334
John Daily........................... 2,161 * 2,161 0
Thomas Clearwater.................... 497 * 497 0
Harvey Moore......................... 224 * 224 0
Tracy Driscoll....................... 224 * 224 0
</TABLE>
- ---------------
* Less than one percent.
(1) Includes an aggregate of 3,824,591 limited partnership units in the
Partnerships and 254,341 Class A limited partnership units in the Operating
Partnership, in each case exchangeable for a like number of Paired Common
Shares.
(2) Based on the number of Paired Common Shares outstanding on April 22, 1998.
15
<PAGE> 18
(3) Constitutes for each such Selling Shareholder less than one percent of the
number of Paired Common Shares outstanding on February 28, 1998. Assumes
that all Paired Common Shares offered hereby are sold by the Selling
Shareholders.
(4) PRISA II is a commingled separate account managed by Prudential Real Estate
Investors ("PREI"), a division of The Prudential Insurance Company of
America ("Prudential"). Roger S. Pratt, a trustee of the Trust since
February 1997, is a Managing Director and Senior Portfolio Manager of PREI
and the portfolio manager for PRISA II. As of March 27, 1998, Prudential,
directly or indirectly through one or more subsidiaries, beneficially owned
an additional 508,720 Paired Common Shares held by other accounts and may
from time to time have beneficial ownership of additional Paired Common
Shares; PRISA II disclaims beneficial ownership of any such additional
Paired Common Shares because the voting and disposition of any such shares
is not controlled by PRISA II or PREI and such shares have not been
included in the table of beneficial ownership.
(5) As disclosed in the Schedule 13D dated January 15, 1998 and filed with the
Commission by Aspen Enterprises International Holdings, Inc., Polestar
Limited and Moonbeam Enterprises International, Ltd., His Excellency the
Sheikh Abdulaziz bin Ibrahim Al Ibrahim is deemed to control this holder
for purposes of the Exchange Act and thus is a beneficial owner of the
Paired Common Shares held by this holder.
(6) Gary M. Mendell was an officer and a Trustee of the Trust until March 1998.
Includes 36,500 Paired Common Shares offered hereby held of record by The
Gary Mendell Family Limited Partnership, of which Mr. Mendell is General
Partner, and options to purchase 300,000 Paired Common Shares. Does not
include 31,831 Paired Common Shares held of record by Westport Hospitality,
Inc., of which Mr. Mendell is President, as to which Mr. Mendell disclaims
beneficial ownership.
(7) Includes 113,995 Paired Common Shares owned by Ms. Mendell's spouse,
Stephen Mendell and offered hereby.
(8) Includes 521,617 Paired Common Shares owned by Mr. Mendell's spouse,
Ellen-Jo Mendell and offered hereby.
(9) Includes options to purchase 150,000 Paired Common Shares.
(10) Includes options to purchase 20,000 Paired Common Shares.
(11) Includes options to purchase 16,667 Paired Common Shares.
(12) Includes options to purchase 3,334 Paired Common Shares and 1,252 Paired
Common Shares held of record by Mr. Rosinsky's spouse, Randi Rosinsky and
offered hereby.
(13) Includes 4,587 Paired Common Shares beneficially owned by Ms. Rosinsky's
spouse, Mark Rosinsky (including 1,253 Paired Common Shares offered
hereby).
(14) Includes options to purchase 3,334 Paired Common Shares.
PLAN OF DISTRIBUTION
The Paired Common Shares covered by this Prospectus (the "Shares") may be
sold from time to time by the Selling Shareholders. Such sales may be made in
one or more of the following transactions: (i) to underwriters who will acquire
the Shares for their own account and resell such shares in one or more
transactions, including negotiated transactions, at a fixed price or at varying
prices determined at the time of sale, with any initial public offering price
and any discount or concession allowed or re-allowed or paid to dealers subject
to change from time to time; (ii) through brokers or dealers, acting as
principal or agent, in transactions (which may involve block transactions) on
the New York Stock Exchange or other stock exchanges in ordinary brokerage
transactions, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or otherwise (including without limitation sales in
transactions that comply with the volume and manner of sale provisions contained
in paragraphs (e) and (f) of Rule 144 under the Securities Act ("Rule 144")); or
(iii) directly or indirectly through brokers or agents in private sales at
negotiated prices, or in any combination
16
<PAGE> 19
of such methods of sale. This Prospectus may be supplemented or amended from
time to time to describe a specific plan of distribution.
In connection with the distribution of the Shares or otherwise, a Selling
Shareholder may: (i) enter into hedging transactions with broker-dealers or
other persons, and in connection with such transactions, broker-dealers or other
persons may engage in short sales of Paired Common Shares in the course of
hedging the positions they assume with such Selling Shareholder; (ii) sell
Paired Common Shares short and redeliver the Shares to close out such short
positions; (iii) and/or enter into option or other transactions with
broker-dealers or other persons that require the delivery to such broker-dealer
or other persons of the Shares, which Paired Common Shares such broker-dealer or
other financial institution may (subject to any applicable transfer restriction
contained in an agreement between such Selling Shareholder and the Company)
resell pursuant to this Prospectus as supplemented or amended to reflect such
transaction. In addition to the foregoing, a Selling Shareholder may, from time
to time, enter into other types of hedging transactions.
A Selling Shareholder may from time to time, after the effective date of
the Registration Statement, transfer shares to a donee, sucessor or other person
other than for value, and such transfers will not be made pursuant to this
Prospectus. To the extent permitted by applicable law, this Prospectus shall
cover sales by such transferee. To the extent required by the terms of any
agreement between the Company and such Selling Shareholder and applicable law,
the Company may supplement or amend this Prospectus to include such transferee
as an additional named selling shareholder.
Underwriters participating in any offering may receive underwriting
discounts and commissions, discounts or concessions may be allowed or re-allowed
or paid to dealers, and brokers or agents participating in such transactions may
receive brokerage or agent's commissions or fees, all in amounts to be
negotiated in connection with sales pursuant hereto. The underwriter, agent or
dealer utilized in the sale of the Shares will not confirm sales to accounts
over which such persons exercise discretionary authority. In effecting sales of
the Shares, brokers or dealers engaged by a Selling Shareholder may arrange for
other brokers or dealers to participate. Brokers or dealers may receive
compensation in the form of commissions or discounts from a Selling Shareholder
and may receive commission from the purchases of the Shares for whom such
broker-dealers may act as agents, all in amounts to be negotiated, including
immediately prior to the sale.
The Selling Shareholders and all underwriters, dealers or agents, if any,
who participate in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any profit on the sale of such Shares by such Shareholders, and all
discounts, commissions or concessions received by such underwriters, dealers or
agents, if any (whether received from a Selling Shareholder and/or from the
purchasers of the Shares for whom those dealers or agents may act as agents),
may be deemed to be underwriting discounts and commissions under the Securities
Act.
Certain of the above-described underwriters, dealers, brokers or agents may
engage in transactions with, or perform services for, the Company and its
affiliates in the ordinary course of business.
Upon the Company being notified by a Selling Shareholders that any
agreement or arrangement has been entered into with a broker-dealer for the sale
of Shares through a block trade, special offering or secondary distribution or a
purchase by a broker-dealer, to the extent required by applicable law a
supplement to this Prospectus will be distributed that will set forth the
name(s) of the participating underwriters, dealers or agents, the aggregate
amount of the Shares being so offered and the terms of the offering, including
all underwriting discounts, commissions and other items constituting
compensation from, and the resulting net proceeds to, such Selling Shareholder,
all discounts, commissions or concessions allowed or re-allowed or paid to
dealers, if any, and, if applicable, the purchase price to be paid by any
underwriter for the Shares purchased from such Selling Shareholder.
The Selling Shareholders and other persons participating in the
distribution of the Shares will be subject to applicable provisions of the
Exchange Act and the rules and regulations of the Commission thereunder,
including, without limitation, Regulation M, which provisions may limit the
timing of the purchase and sale of shares by a Selling Shareholder.
17
<PAGE> 20
Shares that qualify for sale pursuant to Rule 144 may be sold under Rule
144 rather than pursuant to this Prospectus. In addition, a Selling Shareholder
may devise, gift or otherwise transfer the Shares by means not described herein,
in which event such transfer will not be pursuant to this Prospectus.
Under agreements that have been entered into by the Company with the
Selling Shareholders, the Selling Shareholders are entitled to indemnification
by the Company against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act, and to contribution with respect
to payments which the Selling Shareholders may be required to make in respect
thereof. The Company may, in connection with an underwritten distribution of
Shares, enter into agreements with underwriters, dealers and agents who
participate in such distribution that provide for similar indemnification and
contribution.
The Company has agreed to bear the expenses of registration of the Shares
and other costs and expenses incurred by the Selling Shareholders in connection
with the sale of the Shares, except for costs and expenses of Selling
Shareholders' counsel and accountants, brokerage commissions and charges, and
income taxes and stock transfer taxes due.
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.
18
<PAGE> 21
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 Internal
Revenue Service (the "IRS") or opinions of counsel have been rendered 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. Sidley & Austin,
counsel for the Company, has opined, as of April 24, 1998, on certain Federal
income tax consequences with respect to the Paired Common Shares for the Company
and the shareholders and stockholders of the Company. Such opinion has been
filed as an exhibit to the Registration Statement. Sidley & Austin has advised
the Company that such opinion is not binding on the IRS or any court and no
assurance can be given that the IRS will not challenge the propriety of part or
all of such opinion or that such a challenge would not be successful. Such
opinion of Sidley & Austin relies upon and is premised on the accuracy of
statements and representations of the Company concerning its business and
properties, ownership, organization, sources of income, future operations,
levels of distributions and recordkeeping, and the judgments of the Company with
respect to the fair market value of its real estate assets, the relative value
of the Trust Shares and the Corporation Shares to the value of the Paired Common
Shares, the reasonableness of the guaranty fee paid by the Corporation to the
Trust with respect to indebtedness incurred by the Corporation in connection
with the acquisition of ITT, and the ability of the Corporation to have arranged
for debt financing for the ITT Acquisition without a guaranty of the Trust. Such
statements and representations by the Company are attached to and incorporated
by reference into Sidley & Austin's opinion. 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 opinions contained in the Sidley & Austin opinion letter and/or 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 SECURITIES IS URGED TO CONSULT HIS OR HER OWN
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF SECURITIES.
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. The Ruling does not impose any
continuing limitations on the Trust or the Corporation. 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(a)(3) of the Code,
which treats a REIT and a non-REIT, the paired shares of which were not
19
<PAGE> 22
paired on or before June 30, 1983, as one entity for purposes of determining
whether either company qualifies as a REIT. Section 269B(a)(3) 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 provided 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 compliance controls that are intended to prevent
the reoccurrence of any such failure to comply with the reporting and
recordkeeping requirements for REITs.
Recently Proposed Legislation
On March 26, 1998, the Chairman of the Ways and Means Committee of the
United States House of Representatives and the Chairman of the Finance Committee
of the United States Senate introduced identical bills ("H.R. 3558") that would,
if enacted, limit the ability of the Company to manage or operate real property
that it acquires after March 26, 1998. On March 31, 1998, the Senate Finance
Committee voted to include the provisions of H.R. 3558 in the "Internal Revenue
Service Restructuring and Reform Act of 1997." If enacted, H.R. 3558 would make
it difficult for the Company to acquire and operate hotels after March 26, 1998
in the same manner as the Company has in the past. As a result, enactment of
H.R. 3558 could have a material adverse effect on the results of operations,
financial condition and prospects of the Company. No assurance can be given that
H.R. 3558 will not be enacted in its current form or that other new legislation,
regulations or administrative interpretations will not be adopted with respect
to the Company's exemption from the anti-pairing rules of Section 269B(a)(3) of
the Code. The Company is evaluating its options in the event that H.R. 3558 (or
a similar measure) were to be adopted.
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 Provisions"),
commencing with its taxable year ended December 31, 1995. The Trust believes
that, commencing with such taxable year, it was organized and has 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.
Sidley & Austin has rendered an opinion to the effect that, commencing with
the Trust's taxable year ended December 31, 1995, the Trust was organized and
has operated in conformity with the REIT Provisions, and its proposed method of
operation will enable it to continue to comply with the REIT Provisions for its
taxable year ending December 31, 1998 and future taxable years. It must be
emphasized that 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. The
Trust's annual operating results will not be reviewed by Sidley & Austin.
Accordingly, 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
20
<PAGE> 23
income tax treatment described in this Prospectus may be changed, perhaps
retroactively, by legislative, administrative, or judicial action at any time.
See "-- Recently Proposed Legislation" above. For a discussion of the tax
consequences of failure to qualify as a REIT, see "-- Failure to Qualify,"
below.
As long as the Trust qualifies for taxation as a REIT, except in the
circumstances set forth in the following paragraph, it 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 will be
subject to federal income or excise tax in the following circumstances. 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 will 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
nonetheless maintains its qualification as a REIT because certain other
requirements are 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 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 had
Built-in-Gain Assets as of January 1, 1995 and that it acquired additional
Built-in-Gain Assets as a result of the acquisition of Westin and, thus, direct
or indirect sales of such Built-in-Gain Assets by the Trust after 1994 in excess
of available loss carryforwards will 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
21
<PAGE> 24
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) do 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
in the immediately preceding paragraph. The Trust believes that the dividends
paid and to be paid by the Trust and its predecessors will enable the Trust to
satisfy condition (vii) 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. See "Risk Factors -- Limits on Change of Control and
Ownership Limitation." With respect to its taxable years which ended before
January 1, 1998, in order to maintain its election 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 complied and will comply with these requirements.
If a REIT owns a "Qualified REIT Subsidiary," the Code provides that such
Qualified REIT Subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
Qualified REIT Subsidiary are treated as assets, liabilities and such items of
the REIT itself. A Qualified REIT Subsidiary is a corporation all of the capital
stock of which is owned by the REIT and, for taxable years beginning on or
before August 5, 1997, has been owned by the REIT from the commencement of such
corporation's existence. Unless the context otherwise requires, all references
to the Trust in this "Federal Income Tax Considerations" section include the
Trust's Qualified REIT Subsidiaries.
As part of the acquisition of Westin, the Realty Partnership acquired
substantially all of the stock of Seattle, Lauderdale, and Denver, which
corporations intend to elect to be taxed as REITs (the "Subsidiary REITs"). The
Subsidiary REITs will not be treated as Qualified REIT Subsidiaries and will be
subject to the REIT Provisions as described in this section. Also, certain of
the assets of Westin, including third party management, franchise and
representation agreements and certain trademarks and other intangible property,
are held by corporations (the "Management Subsidiaries") of which the Trust or
the Realty Partnership own all of the nonvoting preferred stock and common stock
comprising less than 10% of the outstanding voting stock of each Management
Subsidiary. The remainder of the voting stock of the Management Subsidiaries is
owned by the Corporation. The Management Subsidiaries will not be treated as
Qualified REIT Subsidiaries.
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 Aspects
of the Partnerships and the Subsidiary Entities" below. Sidley & Austin has
advised the Company,
22
<PAGE> 25
however, that 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 and, in such a case, the Trust would lose its REIT
status.
Paired Common Shares. Section 269B(a)(3) 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(a)(3) 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(a)(3) does not apply, however, if the shares of a REIT and a 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(a)(3) 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. Sidley & Austin has rendered an opinion to the effect
that the termination of the Trust's REIT election for the taxable years ended
December 31, 1991 through 1994 did not result in Section 269B(a)(3) becoming
applicable to the Trust. There are, however, no judicial or administrative
authorities interpreting this grandfathering rule. Therefore, Sidley & Austin's
opinion is based solely on the literal language of the statutory grandfathering
rule.
Sidley & Austin has advised the Company that, even though Section
269B(a)(3) 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 would only be upheld
if the separate corporate identities of the Trust and the Corporation 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, the Realty Subsidiary Entities and the partnerships
or limited liability companies owned in whole or in part by the Operating
Partnership (collectively, the "Operating Subsidiary Entities") 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, and the entities in which they
own a direct or indirect interest 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. Sidley &
Austin has rendered an opinion to the effect that, based on the foregoing, the
separate corporate identities of the Trust and the Corporation will be
respected.
Due to the paired structure, the Trust, the Corporation, and certain of the
entities in which they own a direct or indirect interest 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, and the entities in which they own a direct or
indirect interest 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. Application of Section 482 of the Code depends on
whether, as a factual matter, transactions between commonly controlled entities
are at arm's length. As a result, no opinion of counsel can be given with
respect to the potential application of Section 482 of the Code.
Income Tests. In order to maintain qualification as a REIT, the Trust must
annually satisfy certain 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, for taxable
23
<PAGE> 26
years beginning on or before August 5, 1997, 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 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, if a REIT provides
services to its tenants, 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." For taxable years beginning after August 5, 1997,
the provision of Prohibited Services by a REIT in connection with a lease of
real property will not cause the rent to fail to qualify as "rents from real
property" unless the amount treated as received for the Prohibited Services
exceeds 1% of all amounts received or accrued during the taxable year directly
or indirectly by the REIT with respect to such property.
A substantial portion of the Trust's income will be derived from its
partnership interests in the Realty Partnership and the Realty Subsidiary
Entities and its ownership (through the Realty Partnership) of the Subsidiary
REITs. The Trust, the Realty Partnership, the Realty Subsidiary Entities and the
Subsidiary REITs lease for a fixed period all of their fee and leasehold
interests in their hotels and associated property to the Corporation, the
Operating Partnership, 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 determined by calculating a fixed percentage of the gross room revenues
and adding, 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.
Sidley & Austin has rendered an opinion to the effect that the Leases will
be treated as true leases for federal income tax purposes, which opinion is
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
24
<PAGE> 27
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.
Therefore, the opinion of Sidley & Austin is based upon an analysis of the facts
and circumstances and upon rulings and judicial decisions involving situations
that are analogous. 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 or, in the
case of the recharacterization of a Lease of a Subsidiary REIT, one or more of
the asset tests, and, as a result, would lose its REIT status.
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 that, with respect to hotel
properties that it may directly or indirectly acquire in the future, the Trust
will not charge rent that is based in whole or in part on the net 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, with respect to a sufficient number of the Leases, rent attributable
to personal property is greater than 15% of the total rent, then the Trust would
not be able to satisfy either the 75% or 95% gross income tests, or, in the case
of a Lease of a Subsidiary REIT, one or more of the assets 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 neither the Trust nor any Subsidiary REIT may own,
directly or constructively, 10% or more of the Corporation, the Operating
Partnership or any Operating Subsidiary Entity or any other tenant under a
Lease. If the Trust or any Subsidiary REIT were to own directly or indirectly,
10% or more of 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. See
"Risk Factors -- Limits on Change of Control and Ownership Limitation." Sidley &
Austin has advised the Company, however, that 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 for a person to
own sufficient Paired Common Shares to cause the termination of the Trust's REIT
status.
25
<PAGE> 28
Finally, rent under the Leases will not qualify as "rents from real
property" if either the Trust, the Realty Partnership, any Realty Subsidiary
Entity, any Subsidiary REIT or any Management Subsidiary renders or furnishes
Prohibited Services to the occupants of the properties (subject to a de minimis
rule for taxable years beginning after August 5, 1997). So long as the Leases
are treated as true leases, none of the Trust, the Realty Partnership, any
Realty Subsidiary Entity, any Subsidiary REIT or any Management Subsidiary will
be treated as rendering or furnishing Prohibited Services to the occupants of
the properties as a result of the Leases. The Trust has represented that neither
it nor any entity in which it directly or indirectly owns an interest or from
which it receives income will be providing Prohibited Services to the
Corporation or to any entity in which the Corporation directly or indirectly
owns an interest, or will be managing or operating any assets owned directly or
indirectly by the Trust. Sidley & Austin has advised the Company that if the IRS
were to successfully assert that one or more of the Management Subsidiaries were
providing Prohibited Services to the Corporation or to any entity in which the
Corporation directly or indirectly owns an interest, or was managing or
operating any assets owned directly or indirectly by the Trust, then, in certain
cases, the Trust would not be able to satisfy either the 75% or 95% gross income
test, or one or more of the asset tests, and, as a result, would lose its REIT
status.
Based on the foregoing, Sidley & Austin has rendered an opinion to the
effect 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." If such failures were
in sufficient amounts, the Trust or a Subsidiary REIT 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 from the term "interest" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. The Trust, 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 Trust, 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. Accordingly, to the extent the notes held by the Trust, the
Realty Partnership or the Realty Subsidiary Entities are secured by real
property, the interest received or accrued with respect to such notes will be
treated as qualifying income for both the 75% and the 95% gross income tests.
Certain of the notes held by the Trust and the Realty Partnership are not
secured by real property and, with respect to such notes that are secured by
real property (including notes issued in connection with the acquisition of
ITT), it is possible that the amount of such notes will exceed the fair market
value of the real property security therefor. To the extent such notes are not
secured by real property, interest received or accrued with respect to such
notes will be treated as qualifying income for the 95% gross income test but
will 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.
As part of the acquisition of ITT, the Trust guaranteed certain
indebtedness of the Corporation. The fees paid to the Trust for such guarantee
are unlikely to be treated as qualifying income for either the 75% or the 95%
gross income tests. However, the Company believes that the amount of such fees
will not cause the Trust to fail to satisfy either the 75% or the 95% gross
income test.
For taxable years beginning on or before August 5, 1997, any gross income
derived from a prohibited transaction is taken into account in applying the 30%
income test necessary to qualify as a REIT. In addition, the net income from a
prohibited transaction is subject to a 100% tax. The Trust believes that no
asset directly
26
<PAGE> 29
or indirectly owned by it is held for sale to customers and that the 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 will nevertheless qualify as a REIT for such year
if it is entitled to and receives relief under certain provisions of the Code.
No assurance can be given that 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 for a taxable year beginning
prior to January 1, 1998. In such case, the Trust will cease to qualify as a
REIT.
Asset Tests. In order to maintain qualification as a REIT, a REIT, 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
REIT'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
REIT), cash, cash items and government securities and shares of REITs. Second,
not more than 25% of the REIT'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 REIT
may not exceed 5% of the value of the REIT's total assets, and the REIT 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. A substantial portion 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 portion of the indebtedness of the Corporation and the Operating
Partnership to the Trust and 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 Trust and, thus, will not cause the Trust to fail the 5%
asset test.
The Trust (or the Realty Partnership) owns all of the nonvoting stock and
less than 10% of the voting stock of each Management Subsidiary. Neither the
Trust nor the Realty Partnership, however, directly owns more than 10% of the
voting securities of any Management Subsidiary. The Trust also acquired, as a
result of the acquisition of Westin, certain intangible assets of Westin. The
Trust believes that, as of the end of each calendar quarter commencing with the
calendar quarter ending March 31, 1998, the value of the securities of each
Management Subsidiary held directly by the Trust and the Trust's pro rata share
of the value of the securities of each Management Subsidiary held indirectly
through the Realty Partnership will not exceed 5% of the value of the Trust's
total assets and that not more than 25% of the value of the Trust's total assets
will consist of assets other than "real estate assets," cash and cash items
(including receivables), government securities and shares of REITs. The Trust's
belief is based in part upon its analysis of the estimated values of the various
securities and other assets owned by the Trust and the Realty Partnership. There
can be no assurance, however, that the IRS will not successfully assert that
certain securities held by the Trust or the Realty Partnership cause the Trust
to fail either the 5% or 10% asset tests or that less than 75% of the value of
the Trust's total assets consists of "real estate assets," cash and cash items
(including receivables), government securities and shares of REITs.
After 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 subsequent 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.
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
27
<PAGE> 30
of any Built-in Gain Asset during its Recognition Period, the Trust will be
required, pursuant to Treasury 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 Subsidiary REIT may find it necessary to arrange for short-term
or possibly long-term borrowings.
Under certain circumstances, the Trust will be permitted to rectify a
failure to meet the distribution requirements for a year by paying "deficiency
dividends" to shareholders in a later year, which would be included in the
Trust's deduction for dividends paid for the earlier year. In such case, the
Trust would 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 subject to federal income tax on its taxable income. A
portion of the interest paid or accrued by the Corporation with respect to its
indebtedness to the Trust or to the Realty Partnership may not be currently
deductible. The amount of any such deferred interest deductions for a taxable
year will depend on the amount and sources of income and expense of the
Corporation and the extent to which the holders of Paired Common Shares are
exempt from federal income tax. No opinion of counsel is being rendered on the
deductibility of such interest expense because no controlling legal authority
exists with respect to the application of the relevant sections of the Code to
such interest expense.
FEDERAL INCOME TAXATION OF HOLDERS OF PAIRED COMMON SHARES
Deemed Distributions
Sidley & Austin has advised the Company that the IRS could assert that a
significant portion of the third party debt incurred by the Corporation to
finance its purchase of shares of ITT from the Trust as part of the ITT
acquisition should properly be treated for tax purposes as debt of the Trust. If
a portion of the third party
28
<PAGE> 31
debt were so recharacterized, the Trust would be treated as making a deemed
distribution of such proceeds to its shareholders, who would be deemed to
immediately recontribute such proceeds to the Corporation. Similarly, repayments
of such portion of the third party debt by the Corporation would be deemed
distributions of the repaid funds by the Corporation to its stockholders
followed by deemed contributions of such amounts to the Trust. With respect to
issuances of Paired Common Shares, the IRS could also assert that a deemed
distribution of cash or other property occurs if the relative value of the Trust
Shares and the Corporation Shares were determined to be in a different ratio
than the ratio used to determine the number of ITT shares sold by the Trust to
the Corporation. For federal income tax purposes, any such deemed distributions
would be taxed to a holder of Paired Common Shares as a dividend to the extent
of the allocable portion of the distributing entity's earnings and profits, and
then as a return of capital to the extent of such shareholder's adjusted basis
in his or her shares in the distributing entity and thereafter, as gain from the
sale or exchange of the applicable shares. Each entity's earnings and profits
would be allocable to its deemed distributions in the same proportion as such
deemed distributions bear to the sum of the actual and deemed distributions made
to shareholders of such entity in such taxable year. Any gain recognized by a
shareholder with respect to a deemed distribution would be treated as capital
gain, and shareholders who are individuals may be entitled to lower capital
gains tax rates depending on the holding period of their Paired Common Shares.
Deemed distributions would likely result in shareholders being allocated more of
the earnings and profits of the distributing entity, and consequently
recognizing more taxable income, than in the absence of deemed distributions.
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 such U.S. Shareholders 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 will, in certain circumstances, 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. Certain capital
gain dividends will be taxed at different rates, depending on the type of gain
recognized by the Trust. 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 will 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.
For taxable years beginning after August 5, 1997, if the Trust elects to
retain and pay tax on its net capital gains, the Trust's U.S. Shareholders will
be required to include their proportionate share of the undistributed long-term
capital gains in income and will receive a credit for their share of the tax
paid by the Trust. The basis of the Trust's U.S. Shareholders' Trust Shares
would be increased by a corresponding amount.
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. In such a case, holders will 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
29
<PAGE> 32
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 that are treated by such holder as long-term
capital gain.
For U.S. Shareholders who are individuals, the maximum capital gains tax
rate for sales of Paired Common Shares will be: (i) 28%, if such shares have
been held for more than 12 but not more than 18 months, (ii) 20%, if such shares
have been held for more than 18 months, or (iii) 18%, if such shares have been
held for more than five years and the holding period for such shares begins
after December 31, 2000. The eligibility of capital gains dividends for lower
capital gains tax rates is subject to special rules.
U.S. Shareholders will not be permitted to 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 will 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 will 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.
30
<PAGE> 33
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 Limit, 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.
Treasury Regulations were issued on October 14, 1997 (the "1997 Final
Regulations") that will affect the United States federal income taxation of
distributions by the Trust or Corporation to Non-U.S. Shareholders. The 1997
Final Regulations are generally effective for payments made after December 31,
1999. The discussion below does not include a complete discussion of the 1997
Final Regulations, and prospective Non-U.S. Shareholders are urged to consult
their tax advisors concerning the tax consequences of their investment in light
of the 1997 Final Regulations.
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 will 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 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, are permitted to apply to the IRS for a
certificate that reduces or
31
<PAGE> 34
eliminates this withholding tax. Any such amounts withheld will 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 would 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 the 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 will 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 ("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 will 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 is urged to consult his or her tax advisor with
respect to any such information reporting and withholding requirements.
32
<PAGE> 35
FEDERAL INCOME TAX ASPECTS OF THE PARTNERSHIPS AND THE SUBSIDIARY ENTITIES
A substantial portion of the Trust's assets are held directly or indirectly
through the Realty Partnership and a substantial portion of the Corporation's
assets are 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 would substantially reduce the amount of cash available for distribution to
holders of Paired Common Shares. 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.
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.
Sidley & Austin has rendered an opinion to the effect that the Company's
structure is not inconsistent with the intent of the Partnership Provisions and
that, therefore, the IRS will not be able to invoke the Anti-Abuse Rule to
recast the structure of the Company for federal income tax purposes. This
opinion is based on examples contained in the Anti-Abuse Rule. However, because
no controlling legal authority exists, no assurance can be given that the IRS or
a court will concur with such opinion.
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
income and asset tests. Therefore, 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, local or foreign taxation in various jurisdictions, including those in
which it or they transact business or reside. The state, local
33
<PAGE> 36
or foreign 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 OF STATE, LOCAL AND FOREIGN TAX LAWS ON THE
PURCHASE, OWNERSHIP AND SALE OF PAIRED COMMON SHARES.
LEGAL MATTERS
Sidley & Austin, Los Angeles, California, has passed upon the validity of
the issuance of the Paired Common Shares offered pursuant to this Prospectus.
Lawyers at Sidley & Austin participating in this offering on behalf of such firm
own or hold options to purchase an aggregate of approximately 22,500 Paired
Common Shares. Sidley & Austin has relied 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 the Trust and the Corporation as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997, appearing in
the Starwood Hotels Form 10-K and incorporated herein by reference 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 consolidated financial statements of ITT as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997, the
combined financial statements of Westin Worldwide as of and for the year ended
December 31, 1997, and the consolidated financial statements of W&S Hotel L.L.C.
as of and for the year ended December 31, 1996 and for the period from
acquisition (May 12, 1995) through December 31, 1995, incorporated by reference
in this registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included in reliance upon the authority of said firm as experts
in giving said reports. Reference is made to the report dated February 12, 1998
on the consolidated financial statements of ITT, which includes an explanatory
paragraph with respect to the change in the method of accounting for start-up
costs as explained in the Notes to the Financial Statements.
34
<PAGE> 37
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION 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 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>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Forward-Looking Statements............ 3
The Company........................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 13
Price Range of Paired Common Shares
and Distributions................... 13
Selling Shareholders.................. 15
Plan of Distribution.................. 16
Federal Income Tax Considerations..... 19
Legal Matters......................... 34
Experts............................... 34
</TABLE>
======================================================
======================================================
10,571,535
PAIRED COMMON SHARES
STARWOOD HOTELS &
RESORTS
STARWOOD HOTELS &
RESORTS WORLDWIDE, INC.
------------------------
PROSPECTUS
------------------------
======================================================
<PAGE> 38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee............................................ $163,454
Printing and Engraving Expenses............................. 50,000
Legal fees and Expenses..................................... 60,000
Accounting Fees and Expenses................................ 30,000
Fees and Expenses of Transfer Agent......................... 5,000
Miscellaneous............................................... 15,000
--------
Total............................................. $323,454
========
</TABLE>
- ---------------
* Expenses are estimated except for the registration fee.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation and the Trust Declaration provide that the
Corporation and the Trust, respectively, shall indemnify, to the fullest extent
permitted by law, all persons who may be indemnified pursuant to the MGCL and
the Maryland REIT Law, respectively. The MGCL requires a corporation or a
Maryland real estate investment trust (a "Maryland REIT") (unless its charter or
declaration provides otherwise, which the Corporation Articles and the Trust
Declaration do not) to indemnify a director, trustee or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL and
the Maryland REIT Law permit a corporation or Maryland REIT to indemnify its
present and former directors, trustees and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director, trustee or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director, trustee or officer actually received an improper personal benefit in
money, property or services or (c) in the case of any criminal proceeding, the
director, trustee or officer had reasonable cause to believe that the act or
omission was unlawful. However, under the MGCL and the Maryland REIT Law, a
Maryland corporation or a Maryland REIT may not indemnify for an adverse
judgment in a suit by or in the right of the corporation or the Maryland REIT or
for a judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, the MGCL and the Maryland REIT Law permit a corporation
or a Maryland REIT to advance reasonable expenses to a director, trustee or
officer upon the receipt by the corporation or the Maryland REIT of (a) a
written affirmation by the director, trustee or officer of his good faith belief
that he has met the standard of conduct necessary for indemnification by the
corporation and (b) a written undertaking by or on his behalf to repay the
amount paid or reimbursed by the corporation or the Maryland REIT if it shall
ultimately be determined that the standard of conduct was not met.
The Company has entered into indemnification agreements with its directors,
trustees and executive officers providing for the maintenance of directors,
trustees and officers liability insurance, subject to certain conditions, and
the indemnification of and advancement of expenses to such directors, trustees
and executive officers.
II-1
<PAGE> 39
ITEM 16. EXHIBITS.
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger dated as
of November 12, 1997, among the Trust, the Corporation,
Chess Acquisition and ITT (incorporated by reference to
Exhibit A to the Joint Proxy Statement/Prospectus dated
January 14, 1998, included in the Company's Registration
Statement on Form S-4 (Registration Statement Nos. 333-39409
and 39409-01).
2.2 Transaction Agreement dated as of September 8, 1997, among
the Trust, the Corporation, and inter alia, WHWE L.L.C.
(incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K dated September 25, 1997).
5.1 Opinion of Sidley & Austin.
5.2 Opinion of Piper & Marbury L.L.P.
8.1 Opinion of Sidley & Austin.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Sidley & Austin (included in Exhibits 5.1 and
8.1)
23.4 Consent of Piper & Marbury LLP.
24.1* Powers of Attorney.
24.2 Power of Attorney (included in the signature pages hereto).
</TABLE>
- ---------------
* Previously Filed
ITEM 17. UNDERTAKINGS.
(a) Each of the undersigned Registrants hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of such Registrant
pursuant to the provisions described in Item 15 above, or otherwise, such
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, each Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrants hereby further undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (Section 230-424(b) of 17 C.F.R.) if, in the
aggregate, the
II-2
<PAGE> 40
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the Registrants
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrants hereby further undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrants' annual reports pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrants further undertake that:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Phoenix, State of Arizona, on the 27th
day of April, 1998.
STARWOOD HOTELS & RESORTS
By: /s/ BARRY S. STERNLICHT
------------------------------------
Barry S. Sternlicht
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ BARRY S. STERNLICHT Chairman, Chief Executive Officer April 27, 1998
- --------------------------------------------------- and Trustee (Principal Executive,
Barry S. Sternlicht Financial and Accounting Officer)
* Trustee April 27, 1998
- ---------------------------------------------------
Jean-Marc Chapus
* Trustee April 27, 1998
- ---------------------------------------------------
Bruce W. Duncan
* Trustee April 27, 1998
- ---------------------------------------------------
Madison F. Grose
* Trustee April 27, 1998
- ---------------------------------------------------
George J. Mitchell
* Trustee April 27, 1998
- ---------------------------------------------------
Roger S. Pratt
* Trustee April 27, 1998
- ---------------------------------------------------
Stephen R. Quazzo
* Trustee April 27, 1998
- ---------------------------------------------------
Stuart M. Rothenberg
</TABLE>
II-4
<PAGE> 42
<TABLE>
<C> <S> <C>
Trustee April , 1998
- ---------------------------------------------------
Raymond S. Toubh
*By: /s/ BARRY S. STERNLICHT
---------------------------------------------
Barry S. Sternlicht
Attorney-in-Fact
</TABLE>
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Barry S. Sternlicht, Madison F. Grose and Sherwin
L. Samuels and each of them, his or her true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him or her and in
his or her name, place and stead, to sign any and all amendments (including
post-effective amendments) and supplements to this Registration Statement and
any registration statement filed pursuant to Rule 462(b) under the Securities
Act of 1933 and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto such attorneys-in-fact and agents and each of them full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, to all intents and purposes and as fully
as the undersigned might or could do in person, hereby ratifying and confirming
all that such attorneys-in-=fact and agents, each acting alone, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
April , 1998
- ---------------------------------------------
Raymond S. Troubh
II-5
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing a Form S-3 and has duly caused this Amendment No.
1 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Phoenix, State of Arizona, on the 27th
day of April, 1998.
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.
By: /s/ RONALD C. BROWN
------------------------------------
Ronald C. Brown
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
* Chairman of the Board of April 27, 1998
- --------------------------------------------------- Directors
Barry S. Sternlicht and Director
* Chief Executive, Hotel Operating April 27, 1998
- --------------------------------------------------- Group and Director (Principal
Juergen Bartels Executive Officer)
/s/ RONALD C. BROWN Executive Vice President and April 27, 1998
- --------------------------------------------------- Chief Financial Officer
Ronald C. Brown (Principal Financial and
Accounting Officer)
* Director April 27, 1998
- ---------------------------------------------------
Brenda C. Barnes
* Director April 27, 1998
- ---------------------------------------------------
Jonathan D. Eilian
* Director April 27, 1998
- ---------------------------------------------------
Bruce M. Ford
* Director April 27, 1998
- ---------------------------------------------------
Graeme W. Henderson
</TABLE>
II-6
<PAGE> 44
<TABLE>
<C> <S> <C>
* Director April 27, 1998
- ---------------------------------------------------
Earle F. Jones
* Director April 27, 1998
- ---------------------------------------------------
Michael A. Leven
* Director April 27, 1998
- ---------------------------------------------------
Daniel H. Stern
* Director April 27, 1998
- ---------------------------------------------------
Barry S. Volpert
* Director April 27, 1998
- ---------------------------------------------------
Daniel W. Yih
*By /s/ RONALD C. BROWN
---------------------------------------------
Ronald C. Brown
Attorney-in-Fact
</TABLE>
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Ronald C. Brown and Alan M. Schnaid and each of
them, his or her true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for him or her and in his or her name, place
and stead, to sign any and all amendments (including post-effective amendments)
and supplements to this Registration Statement and any registration statement
filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the
same, with all exhibits thereto and all other documents in connection therewith,
with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents and each of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, to all intents and purposes and as fully as the undersigned
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, each acting alone, or their respective
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<C> <S> <C>
/s/ BRENDA C. BARNES April 27, 1988
-------------------------------------------------
Brenda C. Barnes
</TABLE>
II-7
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger dated as
of November 12, 1997, among Starwood Hotels & Resorts (the
"Trust"), Starwood Hotels & Resorts Worldwide, Inc. (the
"Corporation"), Chess Acquisition Corp. and ITT Corporation
(incorporated by reference to Exhibit A to the Joint Proxy
Statement/Programs dated January 14, 1998, included in the
Trust's and the Corporation's Registration Statement on Form
S-4 (Registration Statement Nos. 333-39409 and 39409-01).
2.2 Transaction Agreement dated as of September 8, 1997, among
the Trust, the Corporation, and inter alia, WHWE L.L.C.
(incorporated by reference to Exhibit 2 to the Trust's and
the Corporation's Current Report on Form 8-K dated September
25, 1997).
5.1 Opinion of Sidley & Austin.
5.2 Opinion of Piper & Marbury L.L.P.
8.1 Opinion of Sidley & Austin.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen L.L.P.
23.3 Consent of Sidley & Austin (included in Exhibits 5.1 and
8.1)
23.4 Consent of Piper & Marbury L.L.P. (included in Exhibit 8.1)
24.1* Powers of Attorney (contained in signature pages hereto).
24.2 Powers of Attorney (included in the signature pages hereto).
</TABLE>
- ---------------
* Previously Filed
<PAGE> 1
EXHIBIT 5.1
SIDLEY & AUSTIN
April 24, 1998
Starwood Hotels & Resorts
2231 E. Camelback Road, Suite 410
Phoenix, Arizona 85016
Starwood Hotels & Resorts Worldwide, Inc.
2231 E. Camelback Road, Suite 400
Phoenix, Arizona 85016
Re: Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
-- Registration Statement on Form S-3 (Registration Nos. 333-47639 and
333-47639-01
Ladies and Gentlemen:
We are counsel to Starwood Hotels & Resorts, a Maryland real estate
investment trust (the "Trust"), and Starwood Hotels & Resorts Worldwide, Inc., a
Maryland corporation (the "Corporation" and, together with the Trust, the
"Company"), and have represented the Company with respect to the Registration
Statement on Form S-3, as amended (as so amended, the "Registration Statement"),
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), relating to the registration of the offer and sale from time to time, by
the Selling Shareholders named in the Registration Satement, of 10,571,535
shares of beneficial interest, $.01 par value, of the Trust (the "Trust Shares")
and 10,571,535 shares of common stock, $.01 par value, of the Corporation (the
"Corporation Shares"), which are "paired" and traded as units consisting of one
Trust Share and one Corporation Share (the "Paired Common Shares").
In rendering this opinion, we have examined and relied upon a copy of the
Registration Statement. We have also examined originals, or copies of originals
certified to our satisfaction, of such agreements, documents, certificates and
other statements of governmental officials and other instruments, and have
examined such questions of law and have satisfied ourselves as to such matters
of fact, as we have considered relevant and necessary as a basis for this
opinion. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of all natural
persons and the conformity with the original documents of any copies thereof
submitted to us for our examination.
Based on the foregoing, it is our opinion that: the Paired Common Shares
have been legally issued and are fully paid and non-assessable.
We do not find it necessary for the purposes of this opinion to cover, and
accordingly we express no opinion as to, the application of the securities or
blue sky laws of the various states to the sale of the Paired Common Shares.
Except as expressly stated in the next sentence, this opinion is limited to the
laws of the States of California and New York and the laws of the United States
of America, to the extent applicable. Insofar as the opinions expressed above
relate to matters governed by the laws of the State of Maryland, we have not
made an independent examination of such laws, but have relied exclusively as to
such laws, subject to the exceptions, qualifications and limitations therein
expressed, upon the opinion of Piper & Marbury L.L.P. of Baltimore, Maryland, a
copy of which has been separately provided to you and is being separately filed
as an exhibit to the Registration Statement.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our firm included in or made a
part of the Registration Statement.
Very truly yours,
SIDLEY & AUSTIN
<PAGE> 1
EXHIBIT 5.2
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH WASHINGTON
36 SOUTH CHARLES STREET NEW YORK
BALTIMORE, MARYLAND 21201-3018 PHILADELPHIA
410-539-2530 EASTON
FAX: 410-539-0489
April 24, 1998
Starwood Hotels & Resorts
2231 E. Camelback Road, Suite 410
Phoenix, Arizona 85016
Starwood Hotels & Resorts Worldwide, Inc.
2231 E. Camelback Road, Suite 400
Phoenix, Arizona 85016
Ladies and Gentlemen:
We have acted as special Maryland counsel in connection with the joint
registration statement on Form S-3 (the "Registration Statement") to be filed by
Starwood Hotels & Resorts, a Maryland real estate investment trust (the
"Trust"), and Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation
(the "Corporation"), relating to the registration of an aggregate of 10,571,535
shares of beneficial interest, $.01 par value, of the Trust (the "Trust Shares")
and 10,571,535 shares of common stock, $.01 par value, of the Corporation (the
"Corporation Shares"), which are "paired" and traded as units consisting of one
Trust Share and one Corporation Share (the "Paired Shares"), including (i)
6,492,603 Paired Shares (the "Acquisition Shares") issued in connection with
certain property acquisitions by the Trust and the Corporation or upon exchange
of limited partnership units ("Units") issued by SLC Operating Limited
Partnership (the "Operating Partnership") and SLT Realty Limited Partnership
(together with the Operating Partnership, the "Partnerships"), each a Delaware
limited partnership and (ii) 4,078,932 Paired Shares (the "Exchange Shares")
issuable upon exchange of Units issued by the Partnerships.
In our capacity as special Maryland counsel, we have reviewed the
following:
(a) The Declaration of Trust of the Trust, as amended to date, certified
by an officer of the Trust (the "Declaration of Trust");
(b) The Charter of the Corporation, as amended to date, certified by an
officer of the Corporation (the "Charter");
(c) A copy of the Trustees' Regulations of the Trust as in effect on the
date hereof (the "Trustees' Regulations");
(d) A copy of the By-laws of the Corporation as in effect on the date
hereof (the "Corporation By-laws");
(e) The Exchange Rights Agreement dated June 3, 1996 among the Trust, the
Corporation, the Partnerships, Philadelphia HIR Limited Partnership
and Philadelphia HSR Limited Partnership;
(f) The Units Exchange Rights Agreement dated February 14, 1997 among the
Trust, the Corporation, the Partnerships and the limited partners of
the Partnerships listed on the signature pages thereto;
(g) The Class A Exchange Rights Agreement dated February 14, 1997 among
the Trust, the Corporation, the Operating Partnership and the limited
partners of the Operating Partnership listed on the signature pages
thereto;
<PAGE> 2
Starwood Hotels & Resorts Piper & Marbury L.L.P.
Starwood Hotels & Resorts Worldwide, Inc.
April 24, 1998
(h) The Exchange Rights Agreement dated March 11, 1997 among the Trust,
the Partnerships and The Hermitage, L.P. (together with the agreements
referred to in paragraphs (e), (f) and (g), the "Exchange Rights
Agreements");
(i) Four (4) Purchase and Sale Agreements and Joint Escrow Instructions
each dated as of December 30, 1997 among the Trust, the Corporation
and the following entities (i) D.C. Overnight Partners, L.P. ("D.C.
Overnight"), (ii) Savannah Limited Partnership ("Savannah"), (iii)
N.Y. Overnight Partners, L.P. ("N.Y. Overnight") and (iv) New
Remington Partners ("New Remington");
(j) Four (4) Stock Agreements each dated as of January 15, 1998 among the
Trust, the Corporation and the following entities (i) D.C. Overnight,
(ii) Savannah, (iii) N.Y. Overnight and (iv) New Remington;
(k) Four (4) Registration Rights Agreements each dated as of January 15,
1998 among the Trust, the Corporation and the following entities (i)
D.C. Overnight, (ii) Savannah, (iii) N.Y. Overnight and (iv) New
Remington (together with the agreements referred to in paragraphs (i)
and (j), the "Stock Agreements");
(l) The Registration Statement, as amended to date;
(m) Certified resolutions of the Board of Trustees of the Trust;
(n) Certified resolutions of the Board of Directors of the Corporation;
(o) A good standing certificate for the Trust, of recent date, issued by
the Maryland State Department of Assessments and Taxation (the
"Department");
(p) A good standing certificate for the Corporation, of recent date,
issued by the Department;
(q) An Officer's Certificate of the Trust dated as of the date hereof as
to certain factual matters (the "Trust Officer's Certificate");
(r) An Officer's Certificate of the Corporation dated as of the date
hereof as to certain factual matters (the "Corporation Officer's
Certificate"); and
(s) Such other documents as we have considered necessary to the rendering
of the opinions expressed below.
In such examination, we have assumed, without independent investigation,
the genuineness of all signatures, the legal capacity of all individuals who
have executed any of the aforesaid documents, the authenticity of all documents
submitted to us as originals, the conformity with originals of all documents
submitted to us as copies and that all public records received are accurate and
complete. As to factual matters, we have relied upon the Trust Officer's
Certificate and the Corporation Officer's Certificate and have not independently
verified the matters stated therein.
We assume also that the issuance of the Trust Shares and the Corporation
Shares to be offered from time to time upon exchange of Units will be pursuant
to the terms of the Exchange Rights Agreements and in accordance with the
Declaration of Trust and the Charter, respectively, and applicable Maryland law.
We further assume that prior to the issuance of any Corporation Shares and Trust
Shares there will exist, under the Declaration of Trust or the Charter, as the
case may be, the requisite number of authorized but unissued Corporation Shares
or Trust Shares, as the case may be.
Page 2
<PAGE> 3
Starwood Hotels & Resorts Piper & Marbury L.L.P.
Starwood Hotels & Resorts Worldwide, Inc.
April 24, 1998
Based upon the foregoing, we are of the opinion that:
1. The Trust has been duly formed and is validly existing as a real
estate investment trust in good standing under the laws of the State of
Maryland.
2. The Corporation has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Maryland.
3. When issued in accordance with the terms of the Exchange Rights
Agreements, the Exchange Shares will be duly authorized, validly issued,
fully paid and nonassessable.
4. The Acquisition Shares have been duly authorized and validly
issued, and are fully paid and nonassessable
The opinions expressed above are limited to the law of Maryland, exclusive
of the securities or "blue sky" laws of the State of Maryland. We assume no
obligation to supplement this opinion if any applicable laws change after the
date hereof or if we become aware of any facts that might change the opinions
expressed herein after the date hereof. We hereby consent to the filing of this
opinion as Exhibit 5.2 to the Registration Statement and to the reference to our
firm in the Registration Statement.
Very truly yours,
PIPER & MARBURY L.L.P.
Page 3
<PAGE> 1
EXHIBIT 8.1
SIDLEY & AUSTIN
April 24, 1998
Starwood Hotels & Resorts
2231 E. Camelback Road
Suite 410
Phoenix, Arizona 85016
Starwood Hotels & Resorts Worldwide, Inc.
2231 E. Camelback Road
Suite 400
Phoenix, Arizona 85016
Re: Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
Registration Statement on Form S-3
Registration Nos. 333-47639 and 333-47639-01
Ladies and Gentlemen:
We have acted as special counsel to Starwood Hotels & Resorts, a
Maryland real estate investment trust (the "Trust"), and Starwood Hotels &
Resorts Worldwide, Inc., a Maryland corporation (the "Corporation" and, together
with the Trust, the "Company"), in connection with the preparation of the
Registration Statement on Form S-3 of the Company, as initially filed with the
Securities and Exchange Commission (the "Commission") on March 10, 1998 (as
thereafter amended from time to time and together with all exhibits thereto, the
"Registration Statement"). This opinion is being furnished in accordance with
the requirements of Item 16 of Form S-3 and Item 601(b)(8) of Regulation S-K
under the Securities Act of 1933, as amended (the "Act"). Capitalized terms used
but not otherwise defined herein have the respective meanings set forth in the
Registration Statement.
Our opinion is based upon an examination of the Registration
Statement, and such other documents as we have deemed necessary or appropriate
as a basis therefor. In our examination, we have assumed the legal capacity of
all natural persons, the genuineness of all
<PAGE> 2
SIDLEY & AUSTIN LOS ANGELES
Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
April 24, 1998
Page 2
signatures, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified,
conformed, or photostatic copies, and the authenticity of the originals of such
copies. As to any facts material to this opinion that we did not independently
establish or verify, we have relied upon the detailed statements and
representations of the Company set forth in its letters to us dated the date of
this opinion, which letters are attached hereto and incorporated by reference
herein. Our opinion is premised on the accuracy of such letters, statements and
representations.
I. ANALYSIS AND DISCUSSION
1. In General
The analysis and discussion set forth in the summary contained in
the Registration Statement under the caption "Federal Income Tax Considerations"
is hereby incorporated by reference as though set forth herein in its entirety.
2. Section 269B of the Code
Section 269B(a)(3) of the Code provides that, for purposes of
determining whether any stapled entity is a REIT, all entities which are stapled
entities with respect to each other shall be treated as one entity. Section
269B(c) of the Code defines the term "stapled entities" to mean any group of two
or more entities if more than 50 percent in value of the beneficial ownership in
each of such entities consists of interests where, by reason of form of
ownership, restrictions on transfer, or other terms or conditions, the transfer
of one of such interests causes or requires the transfer of the other of such
interests.
The Trust and the Corporation are "stapled entities" within the
meaning of Section 269B(c) of the Code. Therefore, if Section 269B(a)(3) were to
apply to the Trust and the Corporation, they would be treated as one entity for
purposes of determining whether the Trust is a REIT. In such case, the Trust
would not satisfy either the 75 percent or the 95 percent gross income tests
provided in Section 856(c)(2) and (3) of the Code and the Trust would not
qualify as a REIT.
Section 136(c)(3) of the Deficit Reduction Act of 1984, P.L.
98-369 (the "1984 Tax Act"), however, provided that Section 269B(a)(3) of the
Code shall not apply in determining the application of Sections 856 through 859
of the Code to any REIT which is part of a group of stapled entities if:
<PAGE> 3
SIDLEY & AUSTIN LOS ANGELES
Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
April 24, 1998
Page 3
(A) all members of such group were stapled entities as of June
30, 1983, and
(B) as of June 30, 1983, such group included one or more REITs.
No regulations, rulings or cases have been issued or decided interpreting
Section 136(c)(3) of the 1984 Tax Act.
Section 269B(a)(3) of the Code does not apply to the Trust
because the Trust and the Corporation were stapled entities on June 30, 1983 and
the Trust was a REIT on such date. Section 136(c)(3) of the 1984 Tax Act does
not, by its terms, require the Trust to have been a REIT at all times after June
30, 1983 in order for Section 269B(a)(3) of the Code not to apply. Therefore,
the termination of the Trust's status as a REIT for the taxable years ended
December 31, 1991 through 1994 did not result in Section 269B(a)(3) of the Code
applying to the Trust for the taxable year ending December 31, 1995, nor will it
result in Section 269B(a)(3) of the Code applying to the Trust for future
taxable years. Because there are no judicial or administrative authorities
interpreting Section 136(c)(3) of the 1984 Tax Act, this conclusion is based
solely on the literal language of this provision.
However, on March 26, 1998, the Chairman of the House Ways and
Means Committee and the Chairman of the Senate Finance Committee introduced
identical bills in the House (H.R. 3558) and Senate (S. 1871) that would, if
enacted, have the effect of repealing the grandfathering of stapled REITs with
respect to certain acquisitions of real property interests occurring after March
26, 1998. This opinion is based solely on current law and does not take into
consideration the consequences to the Company if H.R. 3558, S. 1871 or similar
legislation is enacted.
II. OPINION
In rendering our opinion, we have considered the applicable
provisions of the Code, Regulations, judicial decisions, administrative rulings
and other applicable authorities, in each case as in effect on the date hereof.
The statutory provisions, regulations, decisions, rulings and other authorities
on which this opinion is based are subject to change, and such changes could
apply retroactively. Opinions of counsel are not binding on the IRS or on any
court. Accordingly, no assurance can be given that the IRS will not challenge
the propriety of one or more of the opinions set forth in the following
paragraphs or that such a challenge would not be successful.
Based on and subject to the foregoing, we are of the opinion
that:
<PAGE> 4
SIDLEY & AUSTIN LOS ANGELES
Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
April 24, 1998
Page 4
1. The discussion set forth in the section of the Registration
Statement entitled "Federal Income Tax Considerations" constitutes, in
all material respects, a fair and accurate summary of the Federal
income tax consequences that are likely to be material to the Company
and to its shareholders and stockholders and constitutes the opinion
of Sidley & Austin to the extent so stated in such section.
2. Commencing with its taxable year ended December 31, 1995, the
Trust was organized and operated in conformity with the requirements
for qualification as a REIT pursuant to Sections 856 through 860 of
the Code and the Regulations, and the Company's proposed method of
operation will enable the Trust to continue to meet the requirements
for qualification and taxation as a REIT under the Code and the
Regulations for its taxable year ending December 31, 1998 and for
future taxable years.
3. Section 269B(a)(3) of the Code has not applied and will
continue not to apply to the Trust and the Corporation.
4. The separate corporate identities of the Trust and the
Corporation will be respected.
5. The Leases will be treated as true leases for Federal income
tax purposes.
6. Except to the extent such rent is attributable to personal
property, the rent payable under the Leases will be treated as "rents
from real property" for purposes of Sections 856(c)(2) and (3) of the
Code.
7. Based on examples contained in Section 1.701-2(b) of the
Regulations, the structure of the Company is not inconsistent with the
intent of Subchapter K of the Code and the IRS will not be able to
invoke Section 1.701-2(b) of the Regulations to recast the structure
of the Company for Federal income tax purposes.
Other than as expressly stated above, we express no opinion on
any issue relating to the Company or to any investment therein or under any
other law. We are furnishing this opinion to you for the Company's benefit in
connection with the filing of the Registration Statement with the Commission and
this opinion is not to be used, circulated, quoted, or otherwise referred to for
any other purpose without our written permission. This opinion is expressed as
of the date hereof, and we disclaim any undertaking to advise you of
<PAGE> 5
SIDLEY & AUSTIN LOS ANGELES
Starwood Hotels & Resorts
Starwood Hotels & Resorts Worldwide, Inc.
April 24, 1998
Page 5
any subsequent changes of the matters stated, represented, or assumed herein or
any subsequent changes in applicable law, regulations or interpretations
thereof.
We consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the reference to Sidley & Austin therein under the
caption "Legal Matters." In giving this consent, we do not hereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Act or the rules or regulations of the Commission promulgated thereunder.
Very truly yours,
SIDLEY & AUSTIN
<PAGE> 6
STARWOOD HOTELS & RESORTS
2231 E. CAMELBACK ROAD
SUITE 410
PHOENIX, ARIZONA 85016
April 24, 1998
Sidley & Austin
555 West Fifth Street
Los Angeles, California 90013
Re: Tax Opinion
Ladies and Gentlemen:
In connection with the opinion letter (the "Opinion Letter") to be
provided by Sidley & Austin in connection with the preparation of the
Registration Statement on Form S-3 of the Company, as initially filed with the
Securities and Exchange Commission on March 10, 1998 (as thereafter amended from
time to time and together with all exhibits thereto, the "Registration
Statement") and recognizing that Sidley & Austin will rely on this letter in
providing the Opinion Letter, the undersigned, an officer of Starwood Hotels &
Resorts (the "Trust"), duly appointed by the Board of Trustees of the Trust and
acting as such, hereby certifies the following, to the best knowledge of the
Trust, as of the date hereof. Insofar as such certification pertains to any
person other than the Trust, such certification is only as to the knowledge of
the undersigned without specific inquiry. Capitalized terms used but not defined
herein have the meaning provided in the Registration Statement. References to
the Trust and the Corporation include their respective subsidiaries.
1. Each of the following documents has been (or will be) duly
authorized, executed, and delivered, and has not been amended or further
amended after the noted date:
a. The Trust's Declaration of Trust dated August 25, 1969, as
amended and restated as of June 6, 1988, as further amended as of
February 1, 1995, as further amended as of January 2, 1998, and as
further amended as of February 23, 1998;
<PAGE> 7
Sidley & Austin
April 24, 1998
Page 2
b. The letter ruling issued by the Internal Revenue Service (the
"IRS") to the Trust dated January 4, 1980;
c. The letter from the IRS to the Trust dated August 15, 1994,
concerning the termination of the Trust's election to be taxed as a
REIT (the "IRS Letter");
d. The Certificate of Limited Partnership of SLT Realty Limited
Partnership (the "Realty Partnership") dated December 9, 1994, as
corrected as of December 20, 1994, as amended as of March 30, 1995 and
as amended and restated as of July 5, 1995;
e. The Second Amended and Restated Limited Partnership Agreement
of the Realty Partnership dated as of November 14, 1997, as amended as
of January 1, 1998, and as further amended as of January 2, 1998 (the
"Realty Agreement");
f. The Formation Agreement dated as of November 11, 1994, among
the Trust, the Corporation, Starwood Capital Group, L.P., Berl
Holdings, L.P., Starwood Apollo Hotel Partners I, L.P., Starwood
Apollo Hotel Partners VIII, L.P., Starwood Apollo Hotel Partners IX,
L.P., and Starwood Nomura Hotel Investors, L.P. as amended to the date
hereof, and the exhibits and schedules attached thereto;
g. The organizational documents and the limited partnership
agreement or limited liability company agreement, as the case may be,
for each of the limited partnerships and limited liability companies
in which the Trust owns a direct or indirect interest (the "Realty
Subsidiary Entities"), as amended to the date hereof;
h. The Transaction Agreement;
i. The Amended and Restated Agreement and Plan of Merger; and
j. Any other documents we have furnished you in connection with
your issuance of your opinion.
<PAGE> 8
Sidley & Austin
April 24, 1998
Page 3
2. During its taxable year ended December 31, 1995 and during each of
its taxable years ending after December 31, 1995, each of the Trust, the
Realty Partnership and the Realty Subsidiary Entities has operated and will
operate in such a manner that will make each representation set forth below
true for such years or for the period set forth in such representation.
3. The Trust will not make any amendments to its organizational
documents after the date hereof that would affect the Trust's qualification
as a real estate investment trust as defined in Section 856(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
4. Each partner of the Realty Partnership, and each partner or member
of the Realty Subsidiary Entities that is a corporation or other entity has
a valid legal existence.
5. Each partner and each member of the Realty Partnership and the
Realty Subsidiary Entities has full power, authority, and legal right to
enter into and perform the terms of the Realty Agreement or the partnership
or limited liability company agreements, as the case may be, of each Realty
Subsidiary Entity, and the transactions contemplated thereby.
6. No actions will be taken by the Trust, any Realty Subsidiary Entity
or the partners or the members of any of them that would have the effect of
altering the facts upon which your opinion is based.
7. The Trust has filed amended federal income tax returns for its
taxable years ended December 31, 1991 and 1992 reflecting that it did not
qualify as a real estate investment trust (a "REIT") and was taxable as a C
corporation. The Trust has filed its federal income tax returns for its
taxable years ended December 31, 1993 and 1994 reflecting that it did not
qualify as a REIT and was taxable as a C corporation.
8. At all times on or after January 1, 1995, the Trust was and will be
managed by the Board of Trustees and, except for immaterial amounts, the
paired shares and other equity securities of the Trust and the Corporation
(the "Paired Shares") were and will be transferable. At all times after the
Closing Date, each Subsidiary REIT will be managed by its board of
directors and we will not agree to any changes to the certificate of
incorporation, by-laws or other relevant documents that would result in the
stock of each Subsidiary REIT not being transferable.
<PAGE> 9
Sidley & Austin
April 24, 1998
Page 4
9. The Trust timely elected to be a REIT for its taxable year ending
December 31, 1995, computed its taxable income as a REIT on its federal
income tax return for that taxable year, and filed IRS Form 1120-REIT with
a copy of the IRS Letter attached thereto properly and timely electing REIT
status and has not terminated or revoked such election. The Subsidiary
REITs will timely file IRS Forms 1120-REIT for their taxable years ending
December 31, 1998, will timely elect to be taxed as REITs for such year and
will not terminate or revoke such elections.
10. The Trust has timely filed its income tax return for its taxable
year ended December 31, 1996, and will timely file its income tax returns
for subsequent taxable years reflecting that it has qualified as a REIT and
will not terminate or revoke its election to be taxed as a REIT.
11. The Trust, as of December 31, 1994, did not have any accumulated
earnings and profits. As of December 31, 1998, the Trust will not have any
earnings and profits accumulated in any year in which the Trust, or any
corporation to whose earnings and profits the Trust succeeded by operation
of Section 381 of the Code, was not a REIT.
12. The Trust timely made an election pursuant to IRS Notice 88-19,
1988-2 C.B. 486, to apply rules similar to those of Section 1374 of the
Code for its taxable year ended December 31, 1995 and the Trust and the
Subsidiary REITs will each make such an election for their taxable years
ending December 31, 1998.
13. The Paired Shares were paired prior to June 30, 1983, and at all
times thereafter. The Trust elected to be taxed as a REIT for its taxable
year that included June 30, 1983.
14. The following requirements are now and will continue to be met by
any person which provides services with respect of or to any tenant of a
property in which the Realty Partnership, the Realty Subsidiary Entities
and, commencing with the taxable year ending December 31, 1998, the
Subsidiary REITs own an interest (the "Properties"):
a. Such person does not and will not own, directly or indirectly
(within the meaning of Section 856(d)(5) of the Code), more than 35
percent of the shares of beneficial interest of the Trust (the "Trust
Shares") or the stock of any Subsidiary REIT;
<PAGE> 10
Sidley & Austin
April 24, 1998
Page 5
b. If such person is a corporation, not more than 35 percent of
its stock, measured by voting power or number of shares, or, if such
person is a non corporate entity, not more than a 35 percent interest
in its assets or net profits is or will be owned, directly or
indirectly (within the meaning of Section 856(d)(5) of the Code), by
one or more persons who own 35 percent or more of the Trust Shares or
the stock of any Subsidiary REIT;
c. None of the Trust, any Realty Subsidiary Entity or any
Subsidiary REIT presently derives or receives, or will derive or
receive, any income from such person;
d. Such person was, is and will be adequately compensated for its
services; and
e. If such person is an individual, he or she is not and will not
be an officer of the Trust, any Realty Subsidiary Entity or any
Subsidiary REIT.
15. Beneficial ownership of the Trust was held by 100 or more persons
for at least 335 days of the taxable years ended December 31, 1995, 1996
and 1997 and will be held by 100 or more persons for at least 335 days of
each taxable year ending after December 31, 1997. Beneficial ownership of
each Subsidiary REIT will be held by 100 or more persons for at least 335
days of each taxable year ending after December 31, 1998.
16. At no time during the last half of the Trust's taxable years ended
December 31, 1995, 1996 and 1997 and at no time during the last half of
each of the Trust's taxable years ending after December 31, 1997, were or
will more than 50 percent in value of the Trust Shares be owned, directly
or indirectly (within the meaning of Section 544 of the Code, as modified
by Section 856(h)(1)(B) of the Code), by or for the benefit of five or
fewer individuals. At no time during the last half of each Subsidiary
REIT's taxable years ending after December 31, 1998, were or will more than
50 percent in value of the stock of any Subsidiary REIT be owned, directly
or indirectly (within the meaning of Section 544 of the Code, as modified
by Section 856(h)(1)(B) of the Code), by or for the benefit of five or
fewer individuals.
17. During the Trust's taxable years ended December 31, 1995, 1996 and
1997 and during each of the Trust's taxable years ending after December 31,
1997, at least 95 percent of the gross income of the Trust and each
Subsidiary REIT, determined after
<PAGE> 11
Sidley & Austin
April 24, 1998
Page 6
application of Treas. Reg. Section 1.856-3(g), excluding gross income from
the sale of property held as inventory or held primarily for sale to
customers in the ordinary course of the trade or business of the Trust,
each Realty Subsidiary Entity and each Subsidiary REIT, as the case may be
("Prohibited Income"), was and will be derived from:
a. Dividends;
b. Interest;
c. Rents from real property;
d. Gain from the sale or other disposition of stock, securities,
and real property (including interests in real property and interests
in mortgages on real property) that is not Prohibited Income;
e. Abatements and refunds of taxes on real property;
f. Income and gain derived from foreclosure property as defined
in Section 856(e) of the Code ("Foreclosure Property");
g. Amounts (other than amounts the determination of which depends
in whole or in part on the income or profits of any person) received
or accrued as consideration for entering into agreements (i) to make
loans secured by mortgages on real property or on interests in real
property or (ii) to purchase or lease real property (including
interests in real property and interests in mortgages on real
property);
h. Gain from the sale or other disposition of real estate assets
(including regular and residual interests in real estate mortgage
investment conduits ("REMICs")) that is not Prohibited Income;
i. Payments under bona fide interest rate swap or cap agreements
entered into by any of the Trust or any Realty Subsidiary Entity to
hedge variable rate indebtedness that it incurred to acquire or carry
real estate assets (including
<PAGE> 12
Sidley & Austin
April 24, 1998
Page 7
regular and residual interests in REMICs, to the extent provided in
Section 856(c)(5)(E) of the Code) ("Qualified Hedging Contracts")(1);
and
j. Gain from the sale or other disposition of Qualified Hedging
Contracts.
18. During the Trust's taxable years ended December 31, 1995, 1996 and
1997 and during each of the Trust's taxable years ending after December 31,
1997, and during each Subsidiary REIT's taxable years ending on or after
December 31, 1998, at least 75 percent of the gross income of the Trust and
each Subsidiary REIT, determined after application of Treas. Reg.
Section 1.856-3(g) (excluding Prohibited Income) was and will be derived
from:
a. Rents from real property (excluding any interest accrued on
such rents);
b. Interest on obligations secured by mortgages on real property
or on interests in real property (including interests on regular or
residual interests in REMICs, to the extent provided in Section
856(c)(5)(E) of the Code);
c. Gain from the sale or other disposition of real property
(including interests in real property and interests in mortgages on
real property) that was not Prohibited Income;
d. Dividends or other distributions on, and gain (other than
Prohibited Income) from the sale or other disposition of, transferable
shares in other REITs;
e. Abatements and refunds of taxes on real property;
f. Income and gain (other than Prohibited Income) derived from
Foreclosure Property;
- -----------------------
(1) For taxable years ending after December 31, 1997, Qualified Hedging
Contracts will include any interest rate swap or cap agreement, option, futures
contract, forward rate agreement, or any similar financial instrument, entered
into in a transaction to reduce the interest rate risks with respect to any
indebtedness incurred or to be incurred to acquire or carry real estate assets.
<PAGE> 13
Sidley & Austin
April 24, 1998
Page 8
g. Amounts (other than amounts the determination of which depends
in whole or in part on the income or profits of any person) received
or accrued as consideration for entering into agreements (i) to make
loans secured by mortgages on real property or on interests in real
property or (ii) to purchase or lease real property (including
interests in real property and interests in mortgages on real
property);
h. Gain (other than Prohibited Income) from the sale or other
disposition of real estate assets (including regular and residual
interests in REMICs, to the extent provided in Section 856(c)(5)(E) of
the Code); and
i. Income that is (i) attributable to stock or a debt instrument,
(ii) attributable to the temporary investment of amounts received in
exchange for Trust Shares (other than Trust Shares issued pursuant to
a dividend reinvestment plan) or in a public offering of debt
obligations of the Trust which have maturities of at least five years,
and (iii) received or accrued during the one-year period beginning on
the date on which the Trust received such amounts.
19. The leases entered into by the Realty Partnership, the Realty
Subsidiary Entities and the Subsidiary REITs with the Operating
Partnership, the limited partnerships or limited liability companies owned
in whole or in part by the Operating Partnership (the "Operating Subsidiary
Entities") and others (the "Leases") provide that rent is the greater of a
fixed amount or a percentage amount that is either fixed or based on a
percentage of receipts or sales derived with respect to the property (the
"Percentage Rent"). The percentages used to compute the Percentage Rent (i)
will not be renegotiated during the term of the Leases in a manner that has
the effect of basing the Percentage Rent on income or profits of any person
and (ii) will conform with normal business practices.
20. The parties to each Lease intend for their relationship to be that
of lessor and lessee, or sublessor and sublessee, as the case may be, and
each current relationship is and each future relationship shall be
documented by a lease agreement; the lessees or sublessees, as the case may
be, have and shall have the right to exclusive possession and use and quiet
enjoyment of the leased premises during the term of the Leases; the lessees
bear and will bear the cost of, and are or will be responsible for,
day-to-day maintenance and repair of the leased premises, other than the
cost of certain capital expenditures, and dictate and will dictate how the
leased premises are operated and maintained; the lessees or sublessees, as
the case may be, bear and will bear all of the costs and expenses of
<PAGE> 14
Sidley & Austin
April 24, 1998
Page 9
operating the leased premises during the term of the Leases; the term of
each Lease is less than the economic life of the leased premises and the
lessees do not have purchase options with respect to the leased premises;
the lessees or sublessees, as the case may be, are required to pay
substantial fixed rent during the term of the Leases; and each lessee or
sublessee, as the case may be, stands to incur substantial losses or reap
substantial profits depending on how successfully it operates the leased
premises.
21. The Trust has monitored and will monitor the terms of each lease
entered into or assumed by it, the Realty Partnership, any Realty
Subsidiary Entity and each Subsidiary REIT to ensure that the amount of
rent attributable to personal property received or accrued by the Realty
Partnership, the Realty Subsidiary Entities and each Subsidiary REIT does
not cause the Trust or any Subsidiary REIT to fail to satisfy the gross
income tests of Sections 856(c)(2) and (3) of the Code.
22. During the Trust's taxable years ended December 31, 1995, 1996 and
1997 and during each of the Trust's taxable years ending after December 31,
1997, the Trust, determined after application of Treas. Reg.
Section 1.856-3(g), and, for taxable years ending on or after December 31,
1998, the Subsidiary REITs, did not and will not receive or accrue,
directly or indirectly, any rent, interest, contingency fees, or other
amounts that were determined in whole or in part with reference to the
income or profits derived by any person (excluding amounts received (i) as
rents that are (A) based solely on a percentage or percentages of receipts
or sales and the percentage or percentages are fixed at the time the leases
are entered into, are not renegotiated during the term of the leases in a
manner that has the effect of basing rent on income or profits, and conform
with normal business practices or (B) attributable to qualified rents from
subtenants as provided in Section 856(d)(6) of the Code, and (ii) as
interest that was (A) based solely on a fixed percentage or percentages of
receipts or sales or (B) attributable to qualified rents received or
accrued by debtors as provided by Section 856(f)(2) of the Code).
23. During the Trust's taxable years ended December 31, 1995, 1996 and
1997 and for each of the Trust's taxable years ending after December 31,
1997, the Trust and, for taxable years ending on or after December 31,
1998, the Subsidiary REITs did not and will not own, directly or indirectly
(within the meaning of Section 856(d)(5) of the Code), 10 percent or more,
by voting power, value or number, of the shares of the Corporation or 10
percent or more of the assets or net profits of the Operating Partnership
or any Operating Subsidiary Entity, except that for taxable years ending
after December 31, 1997, the Trust may own 100 percent of the stock of a
subsidiary corporation. The Trust and, for taxable years ending on or after
December 31, 1998, the Subsidiary REITs did
<PAGE> 15
Sidley & Austin
April 24, 1998
Page 10
not and will not receive or accrue, directly or indirectly, any rents from
any of the following:
a. A corporation of which the Trust or any Subsidiary REIT owns,
directly or indirectly (within the meaning of Section 856(d)(5) of the
Code), 10 percent or more of the stock, by voting power or number of
shares; or
b. A non-corporate entity in which the Trust or any Subsidiary
REIT owns, directly or indirectly (within the meaning of Section
856(d)(5) of the Code), 10 percent or more of the assets or net
profits.
24. The Trust currently enforces and will continue to enforce the
provisions of its Declaration of Trust, the Realty Agreement and the
partnership or limited liability company agreements, as the case may be, of
the Realty Subsidiary Entities concerning any and all restrictions on
ownership of Paired Shares. Each Subsidiary REIT will enforce any and all
restrictions in its articles of incorporation concerning restrictions on
ownership of its stock.
25. During the Trust's taxable years ended December 31, 1995, 1996 and
1997, less than 30 percent of the gross income of the Trust, determined
after application of Treas. Reg. Section 1.856-3(g), was be derived from
the sale or other disposition of:
a. Stock, Qualified Hedging Contracts, or other securities held
for less than one year;
b. Property in a transaction that generates Prohibited Income; or
c. Real property (including interests in real property, interests
in mortgages on real property, regular and residual interests in
REMICs, and mortgage pass-through securities) held for less than four
years other than (i) property compulsorily or involuntarily converted
to another form as a result of its destruction (in whole or in part),
seizure, requisition, or condemnation (or the threat or imminence
thereof) and (ii) Foreclosure Property.
26. At the close of each quarter of a taxable year commencing with the
quarter ended March 31, 1995, (i) at least 75 percent of the value of the
total assets of the Trust were and will be represented by real estate
assets (including interests in mortgages on real property and interests in
REMICs, to the extent provided in Section 856(c)(5)(E) of the
<PAGE> 16
Sidley & Austin
April 24, 1998
Page 11
Code), cash and cash items (including receivables), and government
securities (the "75 Percent Test") and (ii) with respect to the securities
of the Trust not included under the 75 Percent Test, (A) not more than five
percent of the value of the Trust's total assets did and will consist of
the securities of any one issuer (excluding the Trust's interest in the
Realty Partnership, the Realty Subsidiary Entities, the Subsidiary REITs or
any corporation with respect to which the Trust has directly held 100
percent of the stock at all times during such corporation's existence) and
(B) not more than 10 percent of the outstanding voting securities of any
one issuer (excluding the Trust's interest in the Realty Partnership, the
Realty Subsidiary Entities, the Subsidiary REITs or any corporation with
respect to which the Trust has directly held 100 percent of the stock at
all times during such corporation's existence)(2) will be held by the
Trust. At the close of each quarter of a taxable year commencing with the
quarter ended March 31, 1998, (i) at least 75 percent of the value of the
total assets of each Subsidiary REIT will be represented by real estate
assets (including interests in mortgages on real property and interests in
REMICs, to the extent provided in Section 856(c)(5)(E) of the Code), cash
and cash items (including receivables), and government securities (the "75
Percent Test") and (ii) with respect to the securities of each Subsidiary
REIT not included under the 75 Percent Test, (A) not more than five percent
of the value of each Subsidiary REIT's total assets will consist of the
securities of any one issuer (excluding each Subsidiary REIT's interest in
any corporation with respect to which the Subsidiary REIT holds 100 percent
of the stock) and (B) not more than 10 percent of the outstanding voting
securities of any one issuer (excluding each Subsidiary REIT's interest in
any corporation with respect to which the Subsidiary REIT holds 100 percent
of the stock) will be held by any Subsidiary REIT. With respect to this
representation, the assets of the Trust and the Subsidiary REITs will be as
determined pursuant to Treas. Reg. Section 1.856-3(g) and the term "value"
means (i) fair value as determined in good faith by the Board of Trustees
of the Trust or the board of directors of each Subsidiary REIT, as the case
may be, or (ii) in the case of securities for which market quotations are
readily available, the market value of such securities.
27. With respect to each loan secured by real estate held by the
Trust, the Realty Partnership or any Realty Subsidiary Entity the amount of
the loan has not exceeded and does not exceed the fair market value of the
real property security therefor, except by amounts which would not cause
the Trust to fail to satisfy the asset tests of Section 856(c)(4) of the
Code or the gross income test of Section 856(c)(3) of the Code.
- ---------------------
(2) For taxable years ending after December 31, 1997, a REIT may own 100
percent of the stock of a subsidiary corporation at the close of any quarter.
<PAGE> 17
Sidley & Austin
April 24, 1998
Page 12
28. The Trust and each Subsidiary REIT maintains and will continue to
maintain until the expiration of any applicable statute of limitations
period sufficient records as to its investments to be able to show that it
complies with the asset tests described above.
29. None of the Management Subsidiaries will provide Prohibited
Services to any of the Corporation, the Operating Subsidiary Entities,
Atlanta or St. John or will manage or operate any assets owned directly or
indirectly by the Trust, the Realty Partnership or any Subsidiary REIT.
30. During the Trust's taxable years ended December 31, 1995, 1996 and
1997 and during each of the Trust's taxable years ending after December 31,
1997, the deduction for dividends paid by the Trust (as defined in Section
561 of the Code, but without regard to capital gain dividends, as defined
in Section 857(b)(3)(C) of the Code) has equaled or exceeded or will equal
or exceed (i) the sum of (A) 95 percent of the Trust's real estate
investment trust taxable income (as defined in Section 857(b)(2) of the
Code, but without regard to the deduction for dividends paid and excluding
any net capital gain) and (B) 95 percent of the excess of its net income
from Foreclosure Property over the tax imposed on such income by Section
857(b)(4)(A) of the Code, minus (ii) any excess noncash income (as
determined under Section 857(e) of the Code). During the taxable years of
the Subsidiary REITs ending on or after December 31, 1998, the deduction
for dividends paid by each Subsidiary REIT (as defined in Section 561 of
the Code, but without regard to capital gain dividends, as defined in
Section 857(b)(3)(C) of the Code) will equal or exceed (i) the sum of (A)
95 percent of each Subsidiary REIT's real estate investment trust taxable
income (as defined in Section 857(b)(2) of the Code, but without regard to
the deduction for dividends paid and excluding any net capital gain) and
(B) 95 percent of the excess of its net income from Foreclosure Property
over the tax imposed on such income by Section 857(b)(4)(A) of the Code,
minus (ii) any excess noncash income (as determined under Section 857(e) of
the Code). For purposes of this paragraph, the deduction for dividends paid
shall be determined after the application of Section 857(d)(3) of the Code.
31. At all times after December 31, 1994, the dividends paid by the
Trust have been paid and will be paid in respect of each class of stock pro
rata, with no preference to any share as compared with other shares of the
same class. At all times after December 31, 1997, the dividends paid by
each of the Subsidiary REITs will be paid in respect of each class of stock
pro rata, with no preference to any share as compared with other shares of
the same class.
<PAGE> 18
Sidley & Austin
April 24, 1998
Page 13
32. On or before January 30, 1996, 1997 and 1998, the Trust demanded
written statements from each record shareholder of one percent or more of
its stock (or, if the Trust has 2,000 or more shareholders of record of its
stock on any dividend record date, each record shareholder of five percent
or more of its stock) setting forth the following information:
a. The actual owners of the Trust's stock (i.e., the persons who
are required to include in gross income in their returns the dividends
received on the stock); and
b. The maximum number of shares of the Trust (including the
number and face value of securities convertible into stock of the
Trust) that were considered owned, directly or indirectly (within the
meaning of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code), by each of the actual owners of any of the
Trust's stock at any time during the last half of the Trust's taxable
year.
33. The Trust will maintain the written statements described in the
preceding paragraph and the Trust and the Subsidiary REITs will keep and
maintain all records required pursuant to Treas. Reg. Section 1.857-8 in
the internal revenue district in which they are required to file their
federal income tax returns, and the statements and records will be
available for inspection by the IRS until the expiration of any applicable
statute of limitations period.
34. The shareholder demand letters sent in January 1996 were sent by
the Corporation for the benefit of and at the request and under the
direction and control of the Trust.
35. The Trust will continue to, and the Subsidiary REITs will, use the
calendar year as their taxable year.
36. Not all of the trustees of the Trust are also directors of the
Corporation, and some of the directors of the Corporation are not trustees
of the Trust. No individual serves as an officer of both the Trust and the
Corporation concurrently.
37. The Trust, the Realty Partnership, each Realty Subsidiary Entity
and each Subsidiary REIT each maintain separate books and records.
<PAGE> 19
Sidley & Austin
April 24, 1998
Page 14
38. The Trust, the Realty Partnership, the Realty Subsidiary Entities
and each Subsidiary REIT (and any other entity in which the Trust directly
or indirectly holds an interest) do not and will not furnish or render any
services to the Corporation, the Operating Partnership, any Operating
Subsidiary Entity, Atlanta or St. John.
39. At all times, material transactions among the Trust, the
Corporation, the Realty Partnership, the Realty Subsidiary Entities, the
Operating Partnership, the Operating Subsidiary Entities, the Subsidiary
REITs, Atlanta and St. John, or any of them, have been and will be
negotiated and structured with the intention of achieving an arm's-length
result.
40. The Realty Partnership and each Realty Subsidiary Entity is
operated and will continue to be operated in accordance with the enabling
statute of the jurisdiction under which it is organized, its organizational
documents and its partnership or limited liability company agreement, as
the case may be.
41. The partnership or limited liability company agreement, as the
case may be, of the Realty Partnership and each Realty Subsidiary Entity
will remain in substantially the same form as it is upon the date of this
letter and will not be amended in any manner which would affect your
opinion.
42. No general partner is acting as an agent of any limited partner in
connection with the investments by the limited partners in, and operations
of, the Realty Partnership or any Realty Subsidiary Entity that is a
limited partnership. The Trust will be active in the management of the
Realty Partnership and will be independent of the limited partners.
43. No member is acting as an agent of any other member in connection
with the investments by the members in, and operations of, any Realty
Subsidiary Entity that is a limited liability company. The Trust and the
Realty Partnership will be active in the management of the Realty
Subsidiary Entities.
44. The transactions in which the partners and members acquired
interests in the Realty Partnership and the Realty Subsidiary Entities are
not required to be registered under the Securities Act of 1933, as amended.
45. The Realty Partnership will not have more than 100 Partners.
<PAGE> 20
Sidley & Austin
April 24, 1998
Page 15
46. The interests in each of the Realty Partnership and each Realty
Subsidiary Entity will not be traded on an established securities market or
be readily tradeable on a secondary market (or the substantial equivalent
thereof).
47. The Realty Partnership and the Realty Subsidiary Entities intend
to hold assets for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing, owning, and operating
hotel properties and interests in hotels and to make such occasional sales
of such properties, including peripheral land, as are consistent with the
investment objectives of the Realty Partnership and the Realty Subsidiary
Entities.
48. Neither the Realty Partnership nor any Realty Subsidiary Entity
has elected or will elect to be classified as an association for federal
tax purposes.
49. The Realty Partnership and each Realty Subsidiary Entity that was
in existence prior to January 1, 1997 claimed or will claim classification
as a partnership for federal tax purposes for all periods prior to January
1, 1997 during which it was in existence.
50. The Trust expects to own in excess of 20 percent of the
partnership interests of the Realty Partnership throughout the life of the
Realty Partnership.
51. The intent of the partners and the members of the Realty
Partnership and the Realty Subsidiary Entities is to conduct joint business
and investment activities through a flexible economic arrangement without
incurring an entity-level tax.
52. The Realty Partnership and the Realty Subsidiary Entities are each
bona fide and each transaction or series of related transactions will be
entered into for a substantial business purpose.
53. The payment of cash in lieu of fractional Paired Shares in
connection with any merger, stock dividend or other transaction was not and
will not be separately bargained for consideration and was or will be made
solely for the purpose of saving the Trust and the Corporation the expense
and inconvenience of issuing fractional Paired Shares or Exchangeable
Preferred Shares.
54. Westin Worldwide, Seattle, Lauderdale and Denver each declared and
paid a dividend prior to and independent of the closing date of the Westin
<PAGE> 21
Sidley & Austin
April 24, 1998
Page 16
Merger and neither the amount nor the source of funds for such dividends
was dependent on the occurrence of the closing date of the Westin Merger.
55. The Westin Merger was consummated in compliance with the material
terms of the Transaction Agreement, and none of the material terms and
conditions therein were waived or modified.
56. The ratio for the exchange of shares of Westin Worldwide (the
"Worldwide Shares") for Exchangeable Preferred Shares and cash in the
Westin Merger was negotiated through arm's-length bargaining.
57. There is no plan by the Members to sell, exchange or otherwise
dispose of a number of Exchangeable Preferred Shares received pursuant to
the Westin Merger that would reduce the Members' ownership of Exchangeable
Preferred Shares to a number of shares having a value as of January 2, 1998
of less than 50 percent of the value of all of the formerly outstanding
Worldwide Shares as of January 2, 1998. For purposes of this
representation, Worldwide Shares exchanged for cash or exchanged for cash
in lieu of fractional Exchangeable Preferred Shares were treated as
outstanding Worldwide Shares as of January 2, 1998. Moreover, Worldwide
Shares and Exchangeable Preferred Shares held by the Members and otherwise
sold, redeemed or disposed of prior or subsequent to January 2, 1998 were
considered in making this representation.
58. The Trust has no plan to reacquire any of the Exchangeable
Preferred Shares issued pursuant to the Westin Merger.
59. The Trust has no plan to sell or otherwise dispose of any of the
assets of Westin Worldwide acquired in the Westin Merger, except for
dispositions (i) in the ordinary course of business, or (ii) that are
necessary to ensure that the representations set forth herein are accurate,
or in transactions described in Section 368(a)(2)(C) of the Code.
60. The Trust has continued and will continue the historic business of
Westin Worldwide and has used and will continue to use a significant
portion of Westin Worldwide's historic business assets in a business.
<PAGE> 22
Sidley & Austin
April 24, 1998
Page 17
61. Except as set forth in the Transaction Agreement, the Westin
Companies paid their expenses incurred in connection with the Westin
Merger. Westin Worldwide did not pay any of the expenses of the Members
incurred in connection with the Westin Merger.
62. There is no intercorporate indebtedness existing between the Trust
and Westin Worldwide that was issued, acquired, or will be settled at a
discount.
63. Westin Worldwide was not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
64. Westin Worldwide was not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Code.
65. As of January 2, 1998, the fair market value of the assets of
Westin Worldwide exceeded the sum of its liabilities (including any
liabilities to which its assets are subject).
66. The ITT Merger was consummated in compliance with the material
terms of the Amended and Restated Agreement and Plan of Merger, and none of
the material terms and conditions therein was waived or modified.
67. As of February 23, 1998, the fair market value of the real estate
assets of ITT that serve as security for the indebtedness of the
Corporation to the Trust exceeded $3,200,000,000.
68. As of February 23, 1998, the fair market value of the Corporation
Shares and the fair market value of the Trust Shares relative to the total
fair market value of the Paired Shares was 30 percent and 70 percent,
respectively.
69. The 0.25 percent per annum fee received by the Trust for its
guarantee of the third party indebtedness incurred by the Corporation in
connection with the ITT Merger is reasonable as to each of the Trust and
the Corporation.
<PAGE> 23
Sidley & Austin
April 24, 1998
Page 18
70. As of February 23, 1998, the Corporation could have arranged debt
financing for the acquisition of ITT without the credit support provided by
a guaranty by the Trust.
71. Where the foregoing representations involve matters of law, you
have explained to us the relevant and material legal authority to which
such representations relate.
The undersigned fully understands that Sidley & Austin will be relying
on the accuracy and completeness of the statements made in this letter in
rendering the opinion contained in the Opinion Letter, and the undersigned
has examined such records and other documents and made such inquiries and
investigation as the undersigned deemed necessary to obtain sufficient
actual knowledge to support the representations made herein.
Very truly yours,
STARWOOD HOTELS
& RESORTS
By: /s/ STEVEN R. GOLDMAN
--------------------------------
Name: Steven R. Goldman
Title: Executive Vice President
<PAGE> 24
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
2231 E. CAMELBACK ROAD
SUITE 400
PHOENIX, ARIZONA 85016
April 24, 1998
Sidley & Austin
555 West Fifth Street
Los Angeles, California 90013
Re: Tax Opinion
Ladies and Gentlemen:
In connection with the opinion letter (the "Opinion Letter") to be
provided by Sidley & Austin in connection with the preparation of the
Registration Statement on Form S-3 of the Company, as initially filed with the
Securities and Exchange Commission on March 10, 1998 (as thereafter amended from
time to time and together with all exhibits thereto, the "Registration
Statement") and recognizing that Sidley & Austin will rely on this letter in
providing the Opinion Letter, the undersigned, an officer of Starwood Hotels &
Resorts Worldwide, Inc. (the "Corporation"), duly appointed by the Board of
Directors of the Corporation and acting as such, hereby certifies the following,
to the best knowledge of the Corporation, as of the date hereof. Insofar as such
certification pertains to any person other than the Corporation, such
certification is only as to the knowledge of the undersigned without specific
inquiry. Capitalized terms used but not defined herein have the meaning provided
in the Registration Statement. References to the Trust and the Corporation
include their respective subsidiaries.
1. Each of the following documents has been (or will be) duly
authorized, executed, and delivered, and has not been amended or further
amended after the noted date:
a. The Articles of Incorporation of the Corporation as amended
and restated as of February 1, 1995, as amended as of January 2, 1998,
and as further amended as of February 23, 1998;
<PAGE> 25
Sidley & Austin
April 24, 1998
Page 2
b. The Certificate of Limited Partnership of the Operating
Partnership dated as of December 13, 1994, as corrected as of December
20, 1994, as amended as of March 30, 1995, as amended and restated as
of July 5, 1995, and as further amended as of November 14, 1997;
c. The Second Amended and Restated Limited Partnership Agreement
of the Operating Partnership dated as of November 14, 1997, as amended
as of January 1, 1998, and as further amended as of January 2, 1998
(the "Operating Agreement");
d. The organizational documents and the limited partnership
agreement or limited liability company agreement, as the case may be,
for each of the limited partnerships and limited liability companies
in which the Corporation owns a direct or indirect interest (the
"Operating Subsidiary Entities"), as amended to the date hereof;
e. The Transaction Agreement;
f. The Amended and Restated Agreement and Plan of Merger; and
g. Any other documents we have furnished you in connection with
your issuance of your opinion.
2. During its taxable years ended December 31, 1995, 1996 and 1997 and
during each of its taxable years ending after December 31, 1997, each of
the Corporation, the Operating Partnership and the Operating Subsidiary
Entities has operated and will operate in such a manner that will make each
representation set forth below true for such years or for the period set
forth in such representation.
3. The Corporation will not make any amendments to its organizational
documents after the date hereof that would affect the Trust's qualification
as a real estate investment trust as defined in Section 856(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
4. Each partner of the Operating Partnership and of an Operating
Subsidiary Entity that is a partnership and each member of an Operating
Subsidiary Entity that is a limited liability company that is a corporation
or other entity has a valid legal existence.
<PAGE> 26
Sidley & Austin
April 24, 1998
Page 3
5. Each partner and each member, as the case may be, has full power,
authority, and legal right to enter into and perform the terms of the
Operating Agreement or the partnership or limited liability company
agreements of the Operating Subsidiary Entities, as the case may be, and
the transactions contemplated thereby.
6. No actions will be taken by the Corporation, the Operating
Partnership, or any Operating Subsidiary Entity or the partners or the
members of any of them that would have the effect of altering the facts
upon which your opinion is based.
7. The Paired Shares were paired prior to June 30, 1983, and at all
times thereafter.
8. Not all of the trustees of the Trust are also directors of the
Corporation, and some of the directors of the Corporation are not trustees
of the Trust. No individual serves as an officer of both the Trust and the
Corporation concurrently.
9. The Corporation, the Operating Partnership, each Operating
Subsidiary Entity, Atlanta and St. John each maintain separate books and
records.
10. The Trust, the Realty Partnership, the Realty Subsidiary Entities
and the Subsidiary REITs do not and will not furnish or render any services
to the Corporation, the Operating Partnership, any of the Operating
Subsidiary Entities, Atlanta or St. John.
11. At all times, material transactions among the Trust, the
Corporation, the Realty Partnership, the Realty Subsidiary Entities, the
Subsidiary REITs, the Operating Partnership, the Operating Subsidiary
Entities, Atlanta or St. John, or any of them, have been and will be
negotiated and structured with the intention of achieving an arm's-length
result.
12. The Operating Partnership and the Operating Subsidiary Entities
are each bona fide and each transaction or series of related transactions
will be entered into for a substantial business purpose.
13. The payment of cash in lieu of fractional Paired Shares in
connection with any merger, stock dividend or other transaction was not and
will not be separately bargained for consideration and was or will be made
solely for the purpose
<PAGE> 27
Sidley & Austin
April 24, 1998
Page 4
of saving the Trust and the Corporation the expense and inconvenience
of issuing fractional Paired Shares or Exchangeable Preferred Shares.
14. As of February 23, 1998, the fair market value of the real estate
assets of ITT that serve as security for the indebtedness of the
Corporation to the Trust exceeded $3,200,000,000.
15. As of February 23, 1998, the fair market value of the Corporation
Shares and the fair market value of the Trust Shares relative to the total
fair market value of the Paired Shares was 30 percent and 70 percent,
respectively.
16. The 0.25 percent per annum fee received by the Trust for its
guarantee of the third party indebtedness incurred by the Corporation in
connection with the ITT Merger is reasonable as to the Trust and the
Corporation.
17. As of February 23, 1998, the Corporation could have arranged debt
financing for the acquisition of ITT without the credit support provided by
a guaranty of the Trust.
18. The ITT Merger was consummated in compliance with the material
terms of the Amended and Restated Agreement and Plan of Merger, and none of
the material terms and conditions therein was waived or modified.
19. Where the foregoing representations involve matters of law, you
have explained to us the relevant and material legal authority to which
such representations relate.
<PAGE> 28
Sidley & Austin
April 24, 1998
Page 5
The undersigned fully understands that Sidley & Austin will be relying
on the accuracy and completeness of the statements made in this letter in
rendering the opinion contained in the Opinion Letter, and the undersigned has
examined such records and other documents and made such inquiries and
investigation as the undersigned deemed necessary to obtain sufficient actual
knowledge to support the representations made herein.
Very truly yours,
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.
By: /s/ RONALD C. BROWN
-----------------------------------
Name: Ronald C. Brown
Title: Executive Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT ACCOUNTANT'S CONSENT
We consent to the incorporation by reference in this registration statement
on Amendment No. 1 to Form S-3 of our report dated February 27, 1998, on our
audits of the financial statements and financial statement schedules appearing
in the Joint Annual Report of Starwood Hotels & Resorts (formerly Starwood
Lodging Trust) and Starwood Hotels and Resorts Worldwide, Inc. (formerly
Starwood Lodging Corporation) on Form 10-K. We also consent to the reference to
our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
April 24, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement on Form S-3 of our report dated
February 12, 1998 on the consolidated financial statements and financial
statement schedule of ITT Corporation, and our report dated March 11, 1998 on
the combined financial statements of Westin Hotels & Resorts Worldwide, Inc. and
the consolidated financial statements of W&S Hotel L.L.C. included in Starwood
Hotels & Resorts and Starwood Hotels & Resorts Worldwide, Inc. Joint Form 8-K
filed April 27, 1998 and to all references to our Firm included in this
registration statement.
ARTHUR ANDERSEN LLP
New York, New York
April 27, 1998
