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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 8, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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REALTY REFUND TRUST
(Exact name of registrant as specified in its Declaration)
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OHIO
(State or other jurisdiction of incorporation or organization)
1750 HUNTINGTON BUILDING
925 EUCLID AVENUE
CLEVELAND, OHIO 44115
(216) 622-0046
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
34-6647590
(I.R.S. Employer Identification Number)
GREGORY D. BRUHN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
1750 HUNTINGTON BUILDING
925 EUCLID AVENUE
CLEVELAND, OHIO 44115
(216) 622-0046
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
JAMES B. ARONOFF, ESQ.
THOMPSON HINE & FLORY LLP
3900 KEY CENTER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 566-5504
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
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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, check the following box: [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(l)
of this form, check the following box: [ ]
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 this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES BEING AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Shares of Beneficial Interest, without
par value............................. 2,950,743 $4.28 $12,629,180.04 $3,725.61
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c); based on the average of the high and low reported
sales prices on the New York Stock Exchange on June 1, 1998.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SHARES OF BENEFICIAL INTEREST,
WITHOUT PAR VALUE
TO BE OFFERED BY SEVERAL HOLDERS OF THE SHARES
OF BENEFICIAL INTEREST OF REALTY REFUND TRUST
This Prospectus relates to the offering ("Offering") by certain selling
stockholders ("Selling Stockholders") named herein under "Selling Stockholders"
of up to 2,950,743 shares ("Shares") of beneficial interest, without par value
("Common Stock"), of Realty ReFund Trust ("Company"), which Shares have been or
will be issued to the Selling Stockholders in one or more private placements, or
may be issued to the Selling Stockholders upon conversion by the Selling
Stockholders of Class A Units of limited partner interests ("Units") in RRF
Limited Partnership, a Delaware limited partnership ("Partnership"). Under the
Agreement of Limited Partnership of the Partnership, as amended ("Partnership
Agreement"), the Company, as the sole general partner of the Partnership, is
obligated to convert the Units, at the option of the holders thereof, for a like
number of shares of Common Stock, except to the extent that the Ownership Limit
is reached in which case the Company may elect to purchase any Units in excess
of the Ownership Limit for cash. The Units were originally issued by the
Partnership in private placements for cash or interests in entities which owned
and operated hotel properties. The distribution of the Shares by the Selling
Stockholders is not subject to any underwriting agreement. The Company will
receive none of the proceeds from the sale of Shares hereunder. All expenses of
registration incurred in connection with this Offering are being borne by the
Company, but all selling and other expenses incurred by Selling Stockholders
will be borne by such Selling Stockholders. None of the Shares offered pursuant
to this Prospectus have been registered prior to the filing of the Registration
Statement of which this Prospectus is a part.
Other than the Shares, the Common Stock of the Company is listed on the New
York Stock Exchange ("NYSE") under the symbol "RRF." The Shares are the subject
of a pending listing application with the NYSE. The last reported sale price of
Common Stock on June 1, 1998 on the NYSE was $4.3125 per share. On June 1, 1998,
1,667,817 shares of Common Stock were held by 444 holders of record. To preserve
its status as a real estate investment trust under the Internal Revenue Code of
1986, as amended ("REIT"), the Company limits the amount of Common Stock that
may be owned by any single person or affiliated group to 4.9% of the outstanding
shares and restricts the transferability thereof under certain circumstances.
The Shares may be sold by the Selling Stockholders from time to time on the
NYSE or such other national securities exchange or automated interdealer
quotation system on which the Shares are then listed, through negotiated
transactions or otherwise at market prices prevailing at the time of the sale or
at negotiated prices. See "PLAN OF DISTRIBUTION."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES
OFFERED HEREBY.
Each Selling Stockholder and any broker executing sell orders on behalf of
the Selling Stockholders may be deemed to be an "underwriter" within the meaning
of the Securities Act of 1933, as amended ("Securities Act"). Commissions
received by any such broker may be deemed to be underwriting commissions under
the Securities Act.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
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THE COMPANY
Realty ReFund Trust is a self-administered equity REIT that, at June 1,
1998, owned an approximate 12.4% general partner interest in the Partnership,
which presently owns directly or indirectly, together with RRF Sub Corp., a
wholly-owned subsidiary of the Company, interests in nine hotels with an
aggregate of 1,480 suites in Arizona and southern California (collectively,
"Hotels"). The Hotels are operated as InnSuites Hotels(R). Three of the Hotels
are also marketed as "Best Western(R)" and one primarily as a "Holiday
Inn(R)Hotel and Suites." All of the Hotels are managed by InnSuites
Innternational Hotels, Inc. ("ISIH"). Unless the context otherwise requires, all
references herein to the business and assets of the Company refer to Realty
ReFund Trust, the Partnership, RRF Sub Corp. and their respective subsidiaries
on a consolidated basis and all references herein to the Partnership shall
include RRF Sub Corp.
To enable the Company to qualify as a REIT, the Partnership leases the
Hotels, and expects to lease any additional hotels acquired by it in the future,
to Realty Hotel Lessee Corp., or a wholly-owned subsidiary thereof ("Lessee"),
pursuant to leases providing for the payment of rent based primarily upon the
suite revenues of such Hotels ("Percentage Leases"). The Lessee pays rent to the
Partnership under the Percentage Leases and, in addition, pays all franchise
fees, management fees and other operating expenses of the Hotels leased by it.
The Partnership, in turn, distributes such rental payments, less expenses, to
the Company.
The Company seeks to increase operating cash flow and enhance stockholder
value through both acquisitions and internal growth. The Company believes that
InnSuites Hotels are particularly attractive investments because of the
following factors: the favorable recognition of the InnSuites Hotels brand among
consumers in the Southwest and Western regions of the United States; the
leadership position of InnSuites Hotels within the market niche of middle market
studio and two-room suite hotels and the relative strength of that market within
the hotel industry; and the Company's positive experience and expertise with
InnSuites Hotels. The Company believes that a substantial number of hotels
meeting its investment criteria remain to be acquired and repositioned at
attractive prices.
The Company's growth strategy is to utilize management's expertise and
knowledge of the hotel industry to acquire hotel assets and oversee the
refurbishment, repositioning and management of such assets and to utilize its
asset management role to improve the quality of the Hotels through upgrading and
repositioning, thereby improving their revenue performance. James F. Wirth,
Trustee, Chairman, Chief Executive Officer and President of the Company, has
been engaged in the hotel business for approximately 27 years, including serving
as Assistant to the President and Division President of Ramada Inns, where he
started in 1970.
Pursuant to the Percentage Leases, the Company will participate in any
increases in hotel revenues, thereby improving its operating cash flow. In
addition, the Company may expand certain of its hotel properties by constructing
additional extended-stay suites with meeting space, if market and other
conditions warrant.
The Company was formed as an unincorporated Ohio real estate investment
trust on April 28, 1971. The Company's executive offices are located at 1750
Huntington Building, 925 Euclid Avenue, Cleveland, Ohio 44115 and its telephone
number is (216) 622-0046.
BUSINESS OBJECTIVES
The Company believes that, while the lodging industry as a whole has
benefitted from an improved supply/demand dynamic, the greatest opportunities
for revenue growth and profitability will arise from the skillful acquisition,
management and repositioning of hotel properties. An integral element of this
management is the continuous evaluation of each Hotel's position in its market
and the implementation, as necessary, of changes in rates, amenities and
customer focus to maximize the continuing returns from the Hotels. The Company
attributes the historical performance of the Hotels to the implementation of
this asset management strategy.
The Company's primary business objectives are to maximize current returns
to its stockholders through increases in cash flow available for distribution
and to increase long-term total returns to stockholders through appreciation in
value of the hotel assets and Common Stock. The Company will seek to achieve
these objectives through participation in increased revenues from the Hotels
pursuant to the Percentage Leases and by selective acquisition, ownership,
redevelopment, repositioning and expansion of hotel properties. The Company will
seek
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to continue to invest in properties where the Company's established industry and
marketing expertise and other resources will enable it to improve the acquired
hotel's performance.
Business Strategy.
The Company's strategies to meet its objectives include the following:
Growth. The Company believes that, based on historical operating results
and the strength of InnSuites Hotels' management team, portfolio and markets,
the Hotels should provide the Company with the opportunity for cash flow growth
through the Percentage Leases. The Company believes that the revenue and cash
flow of the Hotels will be maximized by intensive management and marketing. The
Company believes that Lessee's continued commitment to customer service and the
experience of its management team should position the Company to capitalize on
the expected continued strength in the economy and improvement in the U.S. hotel
market. The Company's objectives include enhancing its competitive market
position through the continuation of a regular program of renovation, capital
improvement and niche marketing.
Acquisitions. The Company believes that attractive opportunities exist to
acquire additional hotel properties serving the market segment served by the
Hotels. The Company plans to expand the InnSuites Hotels system in southern
California and other markets in the southwestern United States where it believes
newly acquired properties will, at stabilization, add to earnings. The Company
expects to continue to affiliate with InnSuites Hotels(R), Holiday Inn(R), Best
Western(R) and/or other franchise companies. The Company believes it has the
capacity to acquire additional hotels without significantly increasing
management and overhead expenses.
Renovation and Development. Land for the addition of "extended-stay"
suites may be available adjacent to four of the Hotels. Such additional suites
may enable the Company to avoid duplication of overhead and capitalize on
InnSuites Hotels' past success by broadening service to include weekly and/or
monthly extended-stay guests while retaining the ability to offer the additional
suites on a daily basis during peak travel season.
The Company believes that a regular program of capital improvements at the
Hotels, including replacement and refurbishment of furniture, fixtures and
equipment, will enhance its competitiveness and maximize revenue growth under
the Percentage Leases.
As part of its ongoing renovation and capital expenditures program, the
Company expects to spend approximately $1,043,000 on capital improvements at the
Hotels during the 1999 fiscal year. These expenditures will be funded from
Company contributions to a Capital Expenditures Fund and/or from the Hotels'
revenues during that period.
The Company may develop additional limited-service or extended-stay hotels
on land that the Company may acquire contiguous to the properties currently
owned or elsewhere in its current geographic markets. The Company believes that
selective development of hotels in or near its existing geographic markets will
enable it to take advantage of operating and marketing efficiencies to generate
attractive returns on investment.
Financing Strategy. As of January 31, 1998, the Company, on a consolidated
pro forma basis, had an aggregate of $26,780,000 of outstanding debt. While its
organizational documents contain no limitation on the amount of debt it may
incur, the Company intends to achieve a debt to total market capitalization
ratio or debt to appraised value of real estate ratio (measured at the time debt
is incurred) of not more than 50% to 55%. The Company may from time to time
re-evaluate its debt capitalization policy in light of economic conditions,
relative costs of debt and equity capital, market values of its properties,
acquisition, development and expansion opportunities, and other factors. Any
indebtedness may be incurred by the Company or the Partnership. Indebtedness
incurred by the Company may be in the form of bank borrowings, secured or
unsecured, and publicly or privately placed debt instruments, the proceeds of
which would be loaned or contributed to the Partnership. Indebtedness incurred
by the Partnership may be in the form of purchase money obligations to the
sellers of properties, publicly or privately placed debt instruments, further
borrowings from the Company, or financing from banks, institutional investors or
other lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the property owned by the Partnership. This
indebtedness may be with recourse to all or any part of the property of the
Company or the Partnership, or recourse may be limited to the specific property
to which the indebtedness relates. The proceeds from any borrowings by the
Company or
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the Partnership may be used for the payment of distributions or dividends, for
working capital, or to refinance existing indebtedness or to finance
acquisitions or expansions of properties. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Requirements for Qualification and -- Distribution
Requirements."
The Company has entered into a $12,000,000 senior secured revolving credit
facility with Pacific Century Bank ("Credit Facility"). The Company intends to
use the Credit Facility to provide interim financing for property acquisitions
and capital improvements in anticipation of long-term financing and to fund
working capital requirements. The Credit Facility is secured by first mortgages
on three of the Hotels.
RISK FACTORS
In addition to the other information contained in, or incorporated by
reference into, this Prospectus, prospective investors should carefully consider
the following factors in evaluating an investment in the Shares offered hereby.
HOTEL INDUSTRY RISKS
OPERATING RISKS
The Hotels are subject to all operating risks common to the hotel industry.
These risks include, among other things, intense competition from other hotels;
potential over-building in the hotel industry, which has adversely affected
occupancy, average daily rate ("ADR") and revenue per available room or suite
("REVPAR") in the past; increases in operating costs due to inflation and other
factors, which increases have not always been, and may not necessarily in the
future be, offset by increased suite rates; dependence on business and
commercial travelers and tourism; increases in energy costs and other expenses
of travel; and the effects of general and local economic conditions. Such
factors could adversely affect the Lessee's ability to make lease payments and,
consequently, adversely affect the Company's ability to make any required
payments of principal and interest on indebtedness and to make distributions to
stockholders. Further, annual adjustments to the base rent and the thresholds
for the computation of percentage rent under the Percentage Leases, based upon a
formula taking into account changes in the U.S. Consumer Price Index ("CPI"),
would (in the absence of offsetting increases in suite revenue and in the event
of any decrease in suite revenue) result in decreased revenues to the
Partnership and, therefore, decreased amounts available to the Company for
required payments of principal and interest on indebtedness and to make
distributions to stockholders.
COMPETITION
Competition for Guests; Operations. The hotel industry is highly
competitive. Each of the Hotels experiences competition primarily from other
mid-market hotels in its immediate vicinity, but also competes with other hotel
properties in its geographic market. Some of the competitors of the Hotels have
substantially greater marketing and financial resources than the Company and the
Lessee. A number of additional hotel rooms have been added, are under
development or have been announced in a number of the Company's markets, and
additional hotel rooms may be developed in the future. Such additional hotel
rooms have had, and may continue to have, an adverse effect on the revenues of
the Hotels in such markets.
Competition for Acquisitions. The Company may be competing for investment
opportunities with entities that have substantially greater financial resources
than the Company. These entities may generally be able to accept more risk than
the Company prudently can 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.
SEASONALITY OF HOTEL BUSINESS
The hotel industry is seasonal in nature. Similarly, the Hotels' operations
historically have been seasonal in nature, reflecting relatively higher
occupancy rates at a majority of the Hotels during the first fiscal quarter of
each year, and to a lesser extent, the fourth fiscal quarter, and relatively
lower occupancy rates at a majority of the
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Hotels during the second fiscal quarter of each year. Accordingly, seasonality
can be expected to cause significant quarterly fluctuations in the Company's
lease revenue, to the extent it receives percentage rent. Hotels located in
southern Arizona historically experience their most profitable periods in the
winter season, whereas Hotels located in northern Arizona and California
historically experience their most profitable periods during the summer season,
providing some balance to the general seasonality in the hotel business.
INVESTMENT CONCENTRATION IN SINGLE INDUSTRY
The Company's current strategy is to acquire interests exclusively in hotel
properties. The Company will not seek to invest in assets selected to reduce the
risks associated with investments in the hotel industry and will be subject to
risks inherent in concentrating investments in a single industry. Therefore, the
adverse effect on the Company's lease revenue and amounts available for required
payments of principal and interest on indebtedness and to make distributions to
stockholders resulting from a downturn in the hotel industry will be more
pronounced than if the Company had diversified its investments outside of the
hotel industry.
EMPHASIS ON INNSUITES HOTELS; MARKET CONCENTRATION
All but one of the Hotels are marketed as InnSuites Hotels (with modest
marketing of that Hotel as an InnSuites affiliate). Accordingly, the Company is
subject to risks inherent in concentrating the Company's investments in the
InnSuites Hotels brand, such as a reduction in business following adverse
publicity related to the brand, which could have an adverse effect on the
Company's lease revenues and amounts available for required payments of
principal and interest on indebtedness and to make distributions to
stockholders.
The Hotels are located in Arizona and southern California. Therefore,
adverse events or conditions that affect those areas particularly (such as
natural disasters or adverse changes in local economic conditions) could have a
more pronounced negative impact on the operations of the Company and amounts
available for required payments of principal and interest on indebtedness and to
make distributions to stockholders than events affecting other areas.
CONSTRAINTS ON ACQUISITIONS AND IMPROVEMENTS
The Company intends to continue to pursue its current growth strategy,
which includes acquiring, repositioning and improving hotel properties. There is
a risk that the Company will not have access to sufficient equity or debt
capital to pursue its acquisition strategies indefinitely. The Company generally
cannot retain cash generated by operating activities. To qualify as a REIT, the
Company must distribute at least 95% of its taxable income annually. The
Company's $12 million Credit Facility currently expires in 2001. Since the
Company generally cannot retain earnings and the term of the Company's Credit
Facility is limited, the Company's ability to continue to make hotel
acquisitions following the expiration or utilization of the Credit Facility will
depend primarily on its ability to obtain additional private or public equity or
debt financing. There can be no assurance that such financing will be available
to make future investments.
CONFLICTS OF INTEREST
GENERAL
Because of the direct and indirect ownership interests of Mr. Wirth in, and
his positions with, the Company, the Lessee and affiliates, there were inherent
conflicts of interest in connection with the Company's acquisition of hotels in
which he held such an interest and in the ongoing lease and operation of the
Hotels. Accordingly, the interests of the Company's stockholders may not have
been, and in the future may not be, solely reflected in all decisions made or
actions taken by officers and Trustees of the Company.
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NO ARMS-LENGTH BARGAINING ON PERCENTAGE LEASES AND COMPENSATION
ARRANGEMENTS FOR OFFICERS AND TRUSTEES
The terms of the Percentage Leases and the initial compensation
arrangements for officers and Trustees of the Company were not negotiated on an
arms-length basis and, accordingly, may not reflect fair market values or terms.
Management of the Company believes, however, that the terms of such agreements
are fair to the Company. The lease payments under the Percentage Leases have
been, and future Percentage Lease rents will be, calculated with reference to
historical financial data and the projected operating and financial performance
of the Hotels to which they relate. The terms of the Percentage Leases are
believed by management of the Company to be typical of provisions found in other
leases entered into in similar transactions. Management believes that the
initial and current compensation arrangements for officers and Trustees of the
Company, as well as the substantial ownership interests in the Company held by
Mr. Wirth, provide incentives for them to seek to maximize stockholder value, by
tying incentive compensation to increases in the market value of the Common
Stock. The Percentage Leases and the employee compensation plans were approved
by the Company's independent Trustees. The Company does not own any interest in
the Lessee.
ADVERSE TAX CONSEQUENCES TO CERTAIN AFFILIATES ON A SALE OF CERTAIN HOTELS
Certain affiliates of the Company may have unrealized gain in their
investments in the seven hotels acquired by the Company on January 31, 1998
("Initial Hotels"). A subsequent sale of such Initial Hotels by the Company may
cause adverse tax consequences to such persons. Therefore, the interests of the
Company and certain of its affiliates, including Mr. Wirth, could be in
opposition in connection with the disposition of any of such Initial Hotels.
However, decisions with respect to the disposition of any of the Initial Hotels
must be approved by a majority of the independent Trustees.
RISKS OF LEVERAGE; SUBSTANTIAL AMOUNTS OF FLOATING RATE DEBT
At April 30, 1998, the Company's outstanding debt and capital lease
obligations consisted of approximately $34.14 million in principal amount
outstanding, including approximately $8.53 million under the Credit Facility, a
substantial portion of which indebtedness bears interest at floating rates.
Since the Company intends to continue to acquire additional studio and two-room
suite hotels and must distribute annually at least 95% of its taxable net income
to maintain its REIT status, it may borrow additional funds to make investments
or distributions. The Company has obtained the Credit Facility to provide, as
necessary, funds for investments in additional hotel properties, working capital
and cash for distributions. The Credit Facility is secured by a first mortgage
on the Company's interest in three of the Hotels. The majority of the Company's
floating rate debt bears interest at the 30-day London Interbank Offered Rate
("LIBOR") plus 2.75%.
There can be no assurance that the Company will be able to meet its present
or future debt service obligations and, to the extent that it cannot, it risks
the loss of some or all of its assets to foreclosure. Changes in economic
conditions could result in higher interest rates, which could increase debt
service requirements on the Company's floating rate debt and could reduce the
amounts available for distribution to stockholders. Adverse economic conditions
could cause the terms on which borrowings become available to become unfavorable
to the Company. In such circumstances, if the Company is in need of capital to
repay indebtedness in accordance with its terms or otherwise, it could be
required to liquidate one or more investments in the Hotels at times that may
not permit realization of the maximum return on such investments.
TAX RISKS
FAILURE TO QUALIFY AS A REIT
The Company operates in a manner intended to qualify as a REIT for federal
income tax purposes. Although the Company has not requested, and does not expect
to request, a ruling from the Internal Revenue Service ("Service") that it
qualifies as a REIT, it has received an opinion of its counsel that, based on
certain assumptions and representations, it so qualifies. Investors should be
aware, however, that opinions of counsel are not binding on the Service or any
court. The REIT qualification opinion only represents the view of counsel to the
Company
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based on counsel's review and analysis of existing law, which includes no
controlling precedent. Furthermore, both the validity of the opinion and the
continued qualification of the Company as a REIT will depend on the Company's
continuing ability to meet various requirements concerning, among other things,
the ownership of its outstanding stock, the nature of its assets, the sources of
its income, and the amount of its distributions to stockholders of the Company.
See "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain provisions of
the Internal Revenue Code of 1986, as amended ("Code"), the Company also would
be disqualified from treatment as a REIT for the four taxable years following
the year during which qualification was lost. As a result, the funds available
for required payments of principal and interest on indebtedness and to make
distributions to stockholders would be reduced for each of the years involved.
Although the Company operates in a manner designed to allow it to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Board of Trustees, with the consent of a majority
of the stockholders, to revoke the REIT election. See "FEDERAL INCOME TAX
CONSIDERATIONS."
REIT MINIMUM DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company generally is required each year
to distribute to stockholders at least 95% of its net taxable income (excluding
any net capital gain). In addition, the Company is subject to a 4% nondeductible
excise tax on the amount, if any, by which certain distributions paid by it with
respect to any calendar year are less than the sum of 85% of its ordinary income
plus 95% of its capital gain net income for that year.
The Company intends to make distributions to stockholders to comply with
the 95% distribution requirement and to avoid the nondeductible excise tax. The
Company's income consists primarily of its share of the income of the
Partnership and the Company's cash available for distribution consists primarily
of its share of cash distributions from the Partnership. Differences in timing
between taxable income and cash available for distribution and the effects of
seasonality on the hospitality industry could require the Company, through the
Partnership, to borrow funds on a short-term basis to meet the 95% distribution
requirement and to avoid the nondeductible excise tax. For federal income tax
purposes, distributions paid to stockholders may consist of ordinary income,
capital gains, nontaxable return of capital, or a combination thereof. The
Company provides its stockholders with an annual statement as to its designation
of the taxability of distributions.
Distributions by the Partnership will be determined by the Company's Board
of Trustees and will depend on a number of factors, including the amount of the
Partnership's cash available for distribution, the Partnership's financial
condition, any decision by the Board of Trustees to reinvest funds rather than
to distribute such funds, the Partnership's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Trustees deem relevant. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Requirements for Qualification and -- Distribution
Requirements."
FAILURE OF THE PARTNERSHIP TO BE CLASSIFIED AS A PARTNERSHIP FOR FEDERAL
INCOME TAX PURPOSES; IMPACT ON REIT STATUS
The Company believes that the Partnership will be classified as a
partnership for federal income tax purposes. If the Service were to challenge
successfully the tax status of the Partnership as a partnership for federal
income tax purposes, the Partnership would be taxable as a corporation and would
be subject to federal income tax on its taxable income at regular corporate
rates. In such event, since the value of the Company's ownership interest in the
Partnership constitutes more than 10% of the Partnership's voting securities and
exceeds 5% of the Company's assets, the Company likely would cease to qualify as
a REIT. Furthermore, the imposition of a corporate tax on the Partnership would
substantially reduce the amount of cash available for distribution to the
Company and its stockholders.
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EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that may influence the price of the Company's Common
Stock in public trading markets is the annual yield from distributions by the
Company on the Common Stock, as compared to yields on other financial
instruments. Thus, an increase in market interest rates will result in higher
yields on other financial instruments, which could adversely affect the market
price of the Common Stock.
RECENTLY ORGANIZED ENTITIES; LIMITED ASSETS AND OPERATING HISTORY
The Company was reorganized and the Partnership and the Lessee were
organized in fiscal 1998 and, therefore, have limited operating histories.
Although the management of the Company and of the Lessee have substantial
experience in developing, financing and operating hotel properties, they have
limited experience in operating as a REIT. The Company must rely on the Lessee,
and the Lessee, in turn, will depend upon ISIH, to generate sufficient cash flow
from the operation of the Hotels to enable the Lessee to meet its rent
obligations under the Percentage Leases. All of the Hotels are managed on behalf
of the Lessee by ISIH. All management contracts extend for a term of five (5)
years from the date of acquisition of the Hotel to which such contract relates,
but ISIH does not have, or will not have, any liability or obligation to the
Partnership for the payment of rent under the Percentage Leases. The obligations
of the Lessee under the Percentage Leases are unsecured. The Lessee's only
assets are cash, receivables, inventory, supplies and prepaid expenses needed in
the operation of the Hotels, the franchise licenses for the Hotels, and its
rights and benefits under the Percentage Leases. At January 31, 1998, the Lessee
had a total stockholders' equity of approximately $250,000. See "THE COMPANY"
and "PARTNERSHIP AGREEMENT."
RELIANCE ON KEY PERSONNEL AND BOARD OF TRUSTEES
Stockholders have no right or power to take part in the management of the
Company except through the election of Trustees and the exercise of voting
rights on certain specified matters. The Board of Trustees is responsible for
managing the Company. The Company's future success, including particularly the
implementation of the Company's acquisition growth strategy, is substantially
dependent on the active participation of the Company's two executive officers,
Mr. Wirth and Gregory D. Bruhn, the Company's Executive Vice President and Chief
Financial Officer. The loss of the services of either of these individuals could
have a material adverse effect on the Company.
REAL ESTATE INVESTMENT RISKS
The Company's investments are subject to varying degrees of risk generally
incident to the ownership of real property, including, in addition to the risks
discussed below, adverse changes in general or local economic conditions, zoning
laws, traffic patterns and neighborhood characteristics, tax rates, governmental
rules and fiscal policies, and by civil unrest, acts of war and other adverse
factors which are beyond the control of the Company.
ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. The ability of the Company
to alter its portfolio in response to changes in economic and other conditions
will be limited. Also, no assurances can be given that the market value of any
of the Hotels will not decrease in the future. There can be no assurance that
the Company will be able to dispose of such investments when it finds
disposition advantageous or necessary or that the sale price realized in any
disposition will recoup or exceed the amount of the Company's investment
therein.
UNINSURED AND UNDERINSURED LOSSES
Each of the Hotels is covered by comprehensive policies of insurance,
including liability, fire and extended coverage. Management believes such
specified coverage is of the type and amount customarily obtained by owners of
similar real property assets. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, hurricanes and floods,
that may be uninsurable or not economically insurable. Two of
8
<PAGE> 10
the Hotels are located in California, which is subject to relatively higher
seismic risks. Although one of these Hotels was constructed under the more
recent and stringent post-1984 building codes that were intended to reduce the
likelihood or extent of damage from seismic activity, no assurance can be given
that an earthquake would not cause substantial damage and losses to that Hotel.
The Company's Board of Trustees may exercise discretion in determining amounts,
coverage limits and the deductibility provisions of insurance, with a view to
maintaining appropriate insurance coverage on the Company's investments at a
reasonable cost and on suitable terms. This may result in insurance coverage
that, in the event of a substantial loss, would not be sufficient to pay the
full current market value or current replacement cost of the Company's lost
investment. Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it impractical to rely on
insurance proceeds to replace property after such property has been damaged or
destroyed. Under such circumstances, the insurance proceeds received by the
Company might not be adequate to restore its economic position with respect to
such property.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Liability also may extend to persons holding a
security interest in the property under certain limited circumstances. In
addition, the presence of contamination from hazardous or toxic substances, or
the failure to properly remediate such contaminated property, may adversely
affect the owner's ability to dispose of such property, to fully utilize such
property without restriction or to borrow using such property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is or ever was owned or operated by such person. Certain environmental laws and
common law principles could be used to impose liability for the release of
hazardous or toxic substances, including the release of asbestos-containing
materials ("ACMs") into the air, and third parties may seek recovery from owners
or operators of real property for personal injury or property damage associated
with such releases, including exposure to released ACMs. Environmental laws also
may impose restrictions on the manner in which property may be used or
businesses may be operated, and these restrictions may require unanticipated
expenditures. Environmental laws provide for sanctions in the event of
noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. In connection with the ownership of the
Hotels and any subsequently acquired hotels, the Company may be potentially
liable for such costs. The cost of defending against claims of liability,
complying with environmental regulatory requirements or remediating
acontaminated property could materially adversely affect the business, assets or
results of operations of the Company and the Partnership and, consequently,
amounts available for required payments of principal and interest on
indebtedness and to make distributions to stockholders.
Phase I environmental audits from independent environmental engineers were
obtained with respect to each of the Hotels prior to the acquisition thereof by
the Company. The principal purpose of a Phase I audit is to identify indications
of potential environmental contamination for which the Hotels may be responsible
and, secondarily, to assess, to a limited extent, the potential for
environmental regulatory compliance liabilities. The Phase I audits of the
Hotels were designed to meet the requirements of lenders to the Hotels and the
then current industry standards governing Phase I audits, and consistent with
those requirements, none of the audits involved testing of groundwater, soil or
air. Accordingly, they do not represent evaluations of conditions at the studied
sites that would be revealed only through such testing. In addition, their
assessment of environmental regulatory compliance issues was general in scope
and was not a detailed determination of the Hotels' complete compliance status.
Similarly, the audits did not involve comprehensive analysis of potential
off-site liability. The Phase I audit reports have not revealed any
environmental liability that management believes would have a material adverse
effect on the Company's business, assets or results of operations, nor is the
Company aware of any such liability. Nevertheless, it is possible that these
reports do not reveal all environmental liabilities or that there are material
environmental liabilities of which the Company is unaware.
9
<PAGE> 11
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act of 1990 ("ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While management of the Company believes
that, based upon an examination thereof and consultation with professionals, the
Hotels are substantially in compliance with these requirements, a determination
that the Company is not in compliance with the ADA could result in additional
expense, the imposition of fines and/or an award of damages to private
litigants. If the Company were required to make substantial modifications at the
Hotels to comply with the ADA, the Company's ability to make required payments
of principal and interest on indebtedness and to make distributions to
stockholders could be adversely affected.
INCREASES IN PROPERTY TAXES
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase as property tax rates change, as the properties are improved and as the
properties are assessed or reassessed by taxing authorities. If property taxes
increase, the Company's ability to make required payments of principal and
interest on indebtedness and to make distributions to stockholders could be
adversely affected.
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding stock may be owned, actually and
constructively under the applicable attribution provisions of the Code, by five
or fewer individuals (as defined in the Code to include certain entities) during
the last half of the taxable year (other than the first year), and the Company
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year. For the purpose of preserving the Company's REIT
qualification, the Company's Second Amended and Restated Declaration of Trust
("Declaration") prohibits ownership (taking into account applicable constructive
ownership provisions of the Code) of more than 4.9% of any class of the
Company's outstanding capital stock by any person ("Ownership Limit"), and,
subject to certain exceptions, prohibits any transfer that would result in (i)
any person owning shares in excess of the Ownership Limit, (ii) the Company's
shares being beneficially owned by fewer than 100 persons (determined without
reference to any constructive ownership rules), (iii) the Company being "closely
held" within the meaning of the Code or otherwise failing to qualify as a REIT
under the Code, or (iv) the Company owning, actually and constructively under
the applicable attribution provisions of the Code, 10% or more of the ownership
interests in the Lessee or any sublessee. Any attempted transfer of shares that
would violate any one or more of such prohibitions will be void and of no force
or effect whatsoever with respect to any shares in excess of such limits (and,
in the case of the prohibition against the Company having fewer than 100
stockholders, will be entirely void) and the attempted transferee will not
acquire any right or interest in such excess shares. The Company may take any
lawful action deemed necessary or advisable to ensure compliance with the
Ownership Limit provisions and to preserve its status as a REIT, including
without limitation refusing to recognize or record any prohibited transfer.
Should any person at any time hold any shares in violation of the Ownership
Limit (other than a violation of the requirement that a REIT have at least 100
stockholders), then that number of shares in excess of the number such person
could hold without violating the Ownership Limit will be immediately designated
as "Shares-in-Trust" and transferred automatically and by operation of law to,
and be held in, a trust for the benefit of such beneficiaries as may be
designated by the trustee of such trust (which trustee shall be designated by
the Company and be a person that is unaffiliated with the Company or any
prohibited owner). The trustee will be entitled to receive all distributions on,
and to exercise all voting rights of, any Shares-in-Trust. The record holder of
any shares so designated as Shares-in-Trust and transferred to the trustee shall
have no right or interest in such shares or trust, except the right (upon
satisfaction of certain conditions) to receive from the proceeds of sale of such
shares to a qualified person or entity an amount equal to the lesser of (i) the
amount paid therefor by such record holder (if acquired by him for value), or
the market price of such shares determined as provided in the Declaration (if
acquired by him otherwise than for value), and (ii) the amount received by the
trustee from the sale of such Shares-in-Trust.
10
<PAGE> 12
The Company or its designee may elect, within specified time limits, to
purchase from the trustee any Shares-in-Trust at the lesser of (a) the amount to
which the record holder would be entitled pursuant to clause (i) of the
immediately preceding paragraph or (b) the market price of such shares,
determined as provided in the Declaration, on the date of its election to
purchase such shares. Accordingly, the record holder of any shares that are
designated as Shares-in-Trust may experience a financial loss if the price at
which such shares are sold to a qualified person or entity, or the Company, is
less than that paid by such record holder therefor. See "CERTAIN DECLARATION AND
STATUTORY PROVISIONS -- Declaration Provisions -- Restrictions on Ownership and
Transfer" and "FEDERAL INCOME TAX CONSIDERATIONS -- Requirements for
Qualification."
LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
OWNERSHIP LIMIT
The Ownership Limit, which provides that no person may own more than 4.9%
in value of any class of the outstanding Common Stock of the Company, may have
the effect of precluding an acquisition of control of the Company by a third
party without the approval of the Board of Trustees, even if such change in
control were to be in the stockholders' interests.
CLASSIFICATION OF BOARD OF TRUSTEES
The Board of Trustees is presently divided into three classes, comprised of
two Trustees each. Trustees are elected to staggered three year terms. The
Declaration provides that, subject to any rights of holders of preferred stock,
if any, and unless the Board of Trustees otherwise determines, any vacancies
will be filled by the affirmative vote of a majority of the remaining Trustees,
though less than a quorum. Accordingly, the Board of Trustees could temporarily
prevent any stockholder from enlarging the Board of Trustees and filling the new
Trusteeships with such stockholder's own nominees. Any Trustee so elected shall
hold office until the next annual meeting of stockholders.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
No assurance can be provided that the Company will not be required to make
and fund significant additional improvements to the Hotels in the future to
obtain or maintain its franchise and/or trademark licenses. Failure to complete
improvements, when required, in a manner satisfactory to the franchisor could
result in the failure to issue, or the cancellation, of one or more franchise
licenses. In addition, the Company may desire to operate additional hotels
acquired by it under franchise licenses, and such franchisors may require that
significant capital expenditures be made to such additional hotels as a
condition of granting such franchise licenses.
The continuation of franchise licenses for the Hotels is subject to the
maintenance of specified operating standards and other terms and conditions.
Under each Percentage Lease, the Partnership is obligated, among other things,
to pay the costs of maintaining the structural elements of each Hotel and to set
aside as a reserve 4% of gross hotel suite revenues per month, on a cumulative
basis, and to fund from the reserve or from other sources capital expenditures
(subject to approval by the Company's Board of Trustees) for the periodic
replacement or refurbishment of furniture, fixtures and equipment required for
the retention of such franchise licenses. The Company's predecessors in
ownership made, and in the future the Company may be obligated or deem it
advisable to make, capital investments in the Hotels of more than 4% of the
gross suite revenues thereof. Should the Company be required or elect to do so
in the future, such investments may necessitate the use of borrowed funds or the
reduction of distributions. The Lessee is responsible for routine maintenance
and repair expenditures with respect to the Hotels. The failure to maintain the
standards or adhere to the other terms and conditions of the franchise licenses
could result in the loss or cancellation of such franchise licenses. It is
possible that a franchisor could condition the continuation of a franchise
license upon the completion of substantial capital improvements, which the Board
of Trustees may determine to be too expensive or otherwise unwarranted in light
of general economic conditions or the operating results or prospects of the
affected Hotel. In that event, the Board of Trustees may elect to allow the
franchise license to lapse, in which event the Company will be obligated to
indemnify the Lessee against any loss or liability incurred by it as a
consequence of such decision. In any case, if a franchise is terminated, the
Company and the Lessee may seek to obtain a suitable replacement franchise, or
to
11
<PAGE> 13
operate the affected Hotel independent of a franchise license. The loss of any
franchise license could have a material adverse effect upon the operations or
the underlying value of the Hotel covered by such license because of the loss of
associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. The loss of a number of the franchise
licenses for the Hotels could have a material adverse effect on the Company's
revenues under the Percentage Leases and the Company's cash available to make
required payments of principal and interest on indebtedness and to make
distributions to its stockholders.
USE OF PROCEEDS
The Selling Stockholders will receive all of the proceeds from the sale of
Shares offered hereby. The Company will not receive any proceeds from the sale
of such Shares.
SELLING STOCKHOLDERS
The following table sets forth the name of each Selling Stockholder and (i)
the number of shares of Common Stock beneficially owned by each Selling
Stockholder as of June 1, 1998, (ii) the maximum number of Shares which may be
offered for the account of each Selling Stockholder under this Prospectus, and
(iii) the amount and percentage of Common Stock that would be owned by each
Selling Stockholder after completion of the Offering, assuming the sale of all
of the Shares which may be offered hereunder. Except as otherwise noted below,
none of the Selling Stockholders has, within the past three years, had any
position, office or other material relationship with the Company.
<TABLE>
<CAPTION>
AMOUNT OF AND
PERCENTAGE OF COMMON
STOCK OWNED AFTER THE
COMMON MAXIMUM NUMBER OF OFFERING(2)
NAME OF STOCK OWNED SHARES WHICH MAY BE ----------------------
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE
------------------- -------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
Phil and Cindy Alderink............... 42 3,733 3,733 *
Mason E. or Donna Anderson, Ttees
Anderson Trust...................... 4,573 462,427 462,427 10.01
Wayne D. Anderson..................... 24 2,554 2,554 *
Karyn L. Anderson-Holt................ 24 2,554 2,554 *
B & R Venture Capital, AZ Pship
Charles Reusch...................... 822 83,263 83,263 1.80
Dr. Otto L. & Robbie K. Bendheim,
Ttees Bendheim Decl. Self-Trst...... 300 33,585 33,585 *
Dr. James Berens...................... 147 18,254 18,254 *
Joel L. Burns......................... 237 28,427 28,427 *
Dr. Daniel B. Carroll................. 273 27,560 27,560 *
N. R. Chandragiri..................... 51 5,110 5,110 *
Joyce R. Cohen, Ttee Allan Cohen
Decedent Trst....................... 201 20,438 20,438 *
TDA & Jean Collet Rev Trst Jean
Collet/WFB Co-Ttees Wells Fargo
Bank................................ 510 50,025 50,025 1.08
Larry and Judith Conrad Family
Trust............................... 114 11,231 11,231 *
C. E. Cooney.......................... 78 7,460 7,460 *
Lyle A. Deo........................... 99 9,327 9,327 *
Agnes Duisberg........................ 396 37,307 37,307 *
Carl R. Duisberg...................... 123 15,212 15,212 *
Joseph Freund......................... 48 6,084 6,084 *
Steven & Gail Getzwiller.............. 102 10,220 10,220 *
Dr. David Gralnek..................... 129 7,818 7,818 *
Henry & Freida Green.................. 150 14,437 14,437 *
Mr. & Mrs. J. W. Hancock.............. 102 10,220 10,220 *
Guy Hayden III........................ 63 7,119 7,119 *
Lori Hayden-Boyd...................... 51 5,598 5,598 *
Dave Hiddessen........................ 63 7,608 7,608 *
Robert Hiddessen Trust
Dave Hiddessen, Ttee................ 48 6,084 6,084 *
Jack Horner........................... 120 11,371 11,371 *
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
AMOUNT OF AND
PERCENTAGE OF COMMON
STOCK OWNED AFTER THE
COMMON MAXIMUM NUMBER OF OFFERING(2)
NAME OF STOCK OWNED SHARES WHICH MAY BE ----------------------
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE
------------------- -------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
Kathleen Housley, Ttee Rev Trst....... 42 3,733 3,733 *
M. William & Susan Isbell, Ttees...... 297 29,847 29,847 *
Andrew G. Isbell...................... 9 1,021 1,021 *
Elizabeth D. Isbell................... 9 1,021 1,021 *
John B. Isbell........................ 9 1,021 1,021 *
M. William Isbell II.................. 60 7,108 7,108 *
Diane Jones........................... 345 42,595 42,595 *
Madeline B. Jones..................... 9 1,021 1,021 *
Thomas T. Koziol...................... 69 6,528 6,528 *
Kriz Family Trust
James & Evelyn Kriz, Ttees.......... 102 10,220 10,220 *
Paul & Margaret Larmour............... 78 7,460 7,460 *
Murray Leonard........................ 102 10,220 10,220 *
Timothy Lewis......................... 99 9,327 9,327 *
David A. Lindley...................... 129 12,570 12,570 *
Delvin Lindley........................ 360 36,338 36,338 *
Kay Lindley........................... 78 7,460 7,460 *
John B. Lynch......................... 39 3,730 3,730 *
Chastine Mangelsdorf.................. 180 16,790 16,790 *
Aubrey Maze........................... 99 12,171 12,171 *
Dr. Charles S. Meinstein.............. 168 10,154 10,154 *
Dennis & Jeanie Merideth.............. 180 16,790 16,790 *
Richard Minor & Deborah Kerr-Minor,
Ttees............................... 1,094 12,021 12,021 *
Richard & Jacqueline Olness........... 651 62,858 62,858 1.36
Dr. Charles Parker.................... 396 37,307 37,307 *
Lorance Pemble and Phyllis Pemble Liv.
Rev. Trust.......................... 396 37,307 37,307 *
James & Joanne Retzer................. 198 18,653 18,653 *
Roadrunner Properties Ltd.
Dr. John Bull....................... 75 9,129 9,129 *
Simran Limited Partnership
Dr. Charanjit S. Dhillon............ 51 5,110 5,110 *
George M. Thornton.................... 198 18,653 18,653 *
Mr. & Mrs. Glen Volkenant............. 51 5,110 5,110 *
Dr. E. B. Waldman..................... 75 9,129 9,129 *
Zemer Investments an AZ Pship
Dr. James C. Zemer.................. 747 76,978 76,978 1.67
Christian Collet...................... 102 10,005 10,005 *
Miranda Collet........................ 102 10,005 10,005 *
Paul Collet........................... 21 2,542 2,542 *
Myra Ann Goodwin, Ttee
Myra Ann Goodwin Family Trust....... 51 5,110 5,110 *
Serena C. Murray...................... 102 10,005 10,005 *
Olive B. Schwartz, Ttee F/B/O
U/AGMT.............................. 225 25,433 25,433 *
Southard Revocable Liv. Trust
Fred & Lois Southard, Ttees......... 297 30,824 30,824 *
Michael Vekasi........................ 99 9,327 9,327 *
Michael Schuette...................... 201 20,438 20,438 *
Patrick R. Deren...................... 48 6,084 6,084 *
Lee J. Flory(3)....................... 1,173 119,517 119,517 2.59
Robert & Carol Slanicky............... 501 54,999 54,999 1.19
Donald & Jere Brunson................. 48 6,084 6,084 *
Victor C. Smith Jr.................... 396 37,307 37,307 *
Jay Dee Conrad........................ 15 1,904 1,904 *
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
AMOUNT OF AND
PERCENTAGE OF COMMON
STOCK OWNED AFTER THE
COMMON MAXIMUM NUMBER OF OFFERING(2)
NAME OF STOCK OWNED SHARES WHICH MAY BE ----------------------
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE
------------------- -------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
BRZ Partnership
Jim Zazanis......................... 396 37,307 37,307 *
John H. Lankester..................... 396 37,307 37,307 *
Dr. David S. Trump.................... 549 56,372 56,372 1.22
Gerald Gabel.......................... 345 29,069 29,069 *
Tracey Schecht........................ 357 33,577 33,577 *
PFI LC, Dr. Robert & Bette Lyn
Peterson, Mgrs...................... 303 30,658 30,658 *
David Ben Collet...................... 21 2,541 2,541 *
James R. Conrad....................... 15 1,898 1,898 *
Hospitality Corporation
International(4).................... 3,194 3,194 3,194 *
Hulsey Hotels Corporation(4).......... 300 300 300 *
Hotels America LLC(4)................. 1,188 1,188 1,188 *
InnSuites Hotels LLC(4)............... 12,519 12,519 12,519 *
InnSuites International, Inc. AZ(4)... 8,280 8,280 8,280 *
Innternational Suites Corp.(4)........ 981 981 981 *
Pepper Tree/Freeway Community(4)...... 867 867 867 *
Marc E. Berg(3)....................... 7,634 102,275 102,275 2.21
James F. & Gail J. Wirth(5)........... 643,036 643,036 643,036 13.92
FBO Brian Wirth(6)
F. L. Wirth, Custodian.............. 396 396 396 *
FBO Christopher Wirth(6)
F. L. Wirth, Custodian.............. 396 396 396 *
FBO Eric Wirth(6)
F. L. Wirth, Custodian.............. 396 396 396 *
FBO Pam Wirth(6)
F. L. Wirth, Custodian.............. 396 396 396 *
Don Schwatken......................... 120 120 120 *
Dr. Gerald Miller..................... 795 795 795 *
Stephen Jacobs........................ 168 168 168 *
L. W. Harper.......................... 33 33 33 *
Chris Cochran......................... 99 99 99 *
Wm. Michael & Beth Cochran
Living Trust........................ 60 60 60 *
Deer Family Trust, Elsie &
James A. Deer, Sr., Tees............ 1,200 1,200 1,200 *
Murray Hollenberg..................... 200 200 200 *
Mackenzie & Alma Lathrop.............. 75 75 75 *
Dr. Holly Marten...................... 150 150 150 *
Ruth Anderson......................... 0 1,200 1,200 *
Teresa Kabe........................... 0 300 300 *
Mary Fabre............................ 0 1,200 1,200 *
Dan Michael Rasmussen................. 0 300 300 *
Jeff Welty............................ 0 300 300 *
Russell Quick......................... 0 300 300 *
Larry Ferguson........................ 0 4,800 4,800 *
Ash Beshay............................ 0 1,500 1,500 *
Maria Casillo......................... 0 900 900 *
Vangie Estaban........................ 0 900 900 *
Ed Gonzales........................... 0 300 300 *
Margaret Maldonado.................... 0 900 900 *
Crystal Cantu......................... 0 300 300 *
Dolores De Avila...................... 0 300 300 *
Nicole Rivas.......................... 0 300 300 *
Estela Rosillo........................ 0 300 300 *
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
AMOUNT OF AND
PERCENTAGE OF COMMON
STOCK OWNED AFTER THE
COMMON MAXIMUM NUMBER OF OFFERING(2)
NAME OF STOCK OWNED SHARES WHICH MAY BE ----------------------
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE
------------------- -------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
Juaquin Serrano....................... 0 300 300 *
Jose Serrato.......................... 0 300 300 *
Martha Torres......................... 0 300 300 *
Graciela Aldama....................... 0 300 300 *
Imelda Gandara........................ 0 300 300 *
Joel Gandara.......................... 0 300 300 *
Victor Munoz.......................... 0 300 300 *
Pedro Tabar........................... 0 300 300 *
Frank L. Wirth(7)..................... 0 3,000 3,000 *
Joel Wirth(8)......................... 0 3,000 3,000 *
Gerry Thornton........................ 0 3,000 3,000 *
Chris Thornton........................ 0 900 900 *
Marc Thornton......................... 0 900 900 *
Craig Thornton........................ 0 900 900 *
John Phillips......................... 0 1,200 1,200 *
Arlene Jones.......................... 0 600 600 *
Ana De Souza.......................... 0 300 300 *
Christina Canavan..................... 0 300 300 *
Caridad Herrera....................... 0 300 300 *
Alejandro Melchor..................... 0 600 600 *
Anneliese Michel...................... 0 300 300 *
Jessicah Levale....................... 0 300 300 *
Maria Babylonia....................... 0 600 600 *
Ruth Lay.............................. 0 2,100 2,100 *
Toni Lindner.......................... 0 1,200 1,200 *
Lila Spitzer.......................... 0 300 300 *
Freda Zapanta......................... 0 600 600 *
Reyes Garcia.......................... 0 600 600 *
Saul Rodriguez........................ 0 300 300 *
Andy Calef............................ 0 300 300 *
Stacey Gonzales....................... 0 300 300 *
Michelle Orion........................ 0 3,300 3,300 *
Saralee Ralim......................... 0 1,200 1,200 *
Marie Reyes Lorudes................... 0 600 600 *
Lorena Gutierrez...................... 0 300 300 *
Inocente Contreras.................... 0 300 300 *
Karla Lopez........................... 0 300 300 *
Erin Milhaven......................... 0 300 300 *
Michael Carpenter..................... 0 300 300 *
Karen Basye........................... 0 300 300 *
Ken Sliwa............................. 0 13,800 13,800 *
Cindy Weishaupt....................... 0 600 600 *
Ed Meyer.............................. 0 600 600 *
Patricia Villasenor................... 0 300 300 *
Linda Godinez......................... 0 300 300 *
Patricia Richards..................... 0 300 300 *
Alan Irvin............................ 0 300 300 *
James Nichols......................... 0 600 600 *
Carla Sego............................ 0 300 300 *
Calvin Quick.......................... 0 12,900 12,900 *
Martha Gomez.......................... 0 3,300 3,300 *
Judy Correll.......................... 0 600 600 *
Mary Valencia......................... 0 2,400 2,400 *
Almadelia Verdugo..................... 0 1,200 1,200 *
John Hardin........................... 0 1,200 1,200 *
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
AMOUNT OF AND
PERCENTAGE OF COMMON
STOCK OWNED AFTER THE
COMMON MAXIMUM NUMBER OF OFFERING(2)
NAME OF STOCK OWNED SHARES WHICH MAY BE ----------------------
SELLING STOCKHOLDER PRIOR TO OFFERING(1) SOLD HEREUNDER(2) AMOUNT PERCENTAGE
------------------- -------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
Julie Valle........................... 0 1,200 1,200 *
Sharon Steinbrenner................... 0 900 900 *
Glenda Simpson........................ 0 900 900 *
Loretta May........................... 0 900 900 *
Araceli Martinez...................... 0 900 900 *
Maria Garcia.......................... 0 1,200 1,200 *
Hector Tapia.......................... 0 300 300 *
Vonnie Cayeaux........................ 0 8,100 8,100 *
Beth L Miles.......................... 0 2,700 2,700 *
James Green........................... 0 11,100 11,100 *
Carmen Ethington...................... 0 900 900 *
Sue Smith............................. 0 900 900 *
Manuela Andrade....................... 0 900 900 *
Maria Sigala.......................... 0 900 900 *
Betty Kretchmer....................... 0 900 900 *
Lilia Arzola.......................... 0 600 600 *
Rick Mora............................. 0 600 600 *
Leocodia Rubio........................ 0 600 600 *
Janna Turner.......................... 0 600 600 *
Barbara Martin........................ 0 1,500 1,500 *
Helna Campugan........................ 0 300 300 *
Sandra Dilger......................... 0 300 300 *
Suzanne Eaton......................... 0 300 300 *
Rhonda Nordin......................... 0 300 300 *
Maria Matty........................... 0 900 900 *
Evangelina Morales.................... 0 300 300 *
Donna Murry........................... 0 600 600 *
Diane Nichols......................... 0 6,000 6,000 *
John Pedersen......................... 0 1,200 1,200 *
Helen Alegria......................... 0 2,400 2,400 *
Leticia Blois......................... 0 600 600 *
Margarita Campos...................... 0 900 900 *
Maria Casillas........................ 0 900 900 *
Sharon Hensien........................ 0 2,400 2,400 *
Jerra Huckins......................... 0 900 900 *
Layshorn Brewer....................... 0 300 300 *
Cheryl Ann Simmons.................... 0 300 300 *
Ronilo Aguilar........................ 0 300 300 *
Henry Johnson......................... 0 300 300 *
Jan Rustad............................ 0 300 300 *
Norma Huckins......................... 0 1,500 1,500 *
Rita Jurgel........................... 0 3,300 3,300 *
Brenda Marine......................... 0 1,200 1,200 *
Helen Sperce.......................... 0 600 600 *
David Manzanares...................... 0 1,200 1,200 *
Bethany Clark......................... 0 600 600 *
Rebecca Nguyen........................ 0 300 300 *
Lori Reid............................. 0 300 300 *
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership as of June 1, 1998.
(2) Assumes conversion of all Units into Shares. Assumes sale of all Shares
registered hereunder, although Selling Stockholders are under no obligation
known to the Company to sell any Shares at this time.
(3) Trustee of the Company since January 30, 1998.
16
<PAGE> 18
(4) Owned or controlled by James F. Wirth.
(5) Trustee, Chairman, President and Chief Executive Officer of the Company
since January 30, 1998, and his wife.
(6) Child of James F. Wirth.
(7) Father of James F. Wirth.
(8) Brother of James F. Wirth.
PLAN OF DISTRIBUTION
The Shares may be sold pursuant to the offer made hereby from time to time
by the Selling Stockholders. The Selling Stockholders may sell the Shares being
offered hereby: (i) in ordinary brokerage transactions and in transactions in
which brokers solicit purchasers; (ii) in privately negotiated direct sales or
sales effected through agents not involving established trading markets; or
(iii) through transactions in put or call options or other rights (whether
exchange-listed or otherwise) established after the effectiveness of the
Registration Statement of which this Prospectus is a part. The Shares may be
sold at prices and on terms then prevailing or at prices related to the then
current market price of the Common Stock on the NYSE or at other negotiated
prices. In addition, any of the Shares that qualify for sale pursuant to Rule
144 may be sold in transactions complying with such rule, rather than pursuant
to this Prospectus.
The Shares consist of (i) Common Stock issued to Selling Stockholders in
private transactions exempt from the registration requirements of the Securities
Act, and (ii) Common Stock issued or to be issued to Selling Stockholders upon
conversion by the Selling Stockholders of Units previously issued to such
persons in private transactions exempt from the registration requirements of the
Securities Act. Upon the exercise of a Selling Stockholder's conversion rights,
the Company will convert each Unit into a share of Common Stock and,
consequently, its interest in the Partnership will increase.
In the case of sales of the Shares effected to or through broker-dealers,
such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders or the purchasers of
the Shares sold by or through such broker-dealers, or both. The Company has
advised the Selling Stockholders that the anti-manipulative Rules 10b-6 and
10b-7 under the Securities Exchange Act of 1934, as amended ("Exchange Act"),
may apply to their sales in the market and has informed them of the need to
deliver copies of this Prospectus. The Company is not aware as of the date of
this Prospectus of any agreements between any of the Selling Stockholders and
any broker-dealers with respect to the sale of the Shares offered by this
Prospectus. The Selling Stockholders and any broker-dealer or other agent
executing sell orders on behalf of the Selling Stockholders may be deemed to be
"underwriters" within the meaning of the Securities Act, in which case the
commissions received by any such broker-dealer or agent and profit on any resale
of the Shares may be deemed to be underwriting commissions under the Securities
Act. The commissions received by a broker-dealer or agent may be in excess of
customary compensation. The Company will receive no part of the proceeds from
the sale of any Shares hereunder.
The Selling Stockholders will pay their costs and expenses of selling the
Shares hereunder, including commissions and discounts of underwriters, brokers,
dealers or agents, while the Company has agreed to pay the costs and expenses
incident to the registration and qualification of the Shares offered hereby,
including applicable filing fees and legal and accounting fees and expenses. In
addition, the Company has agreed to indemnify the Selling Stockholders against
certain liabilities, including certain liabilities arising under the Securities
Act.
The Selling Stockholders may elect to sell all, a portion or none of the
Shares offered by them hereunder.
17
<PAGE> 19
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of an unlimited number
of shares of Common Stock. The following summary description does not purport to
be complete and is qualified in its entirety by reference to the Company's
Declaration. See "CERTAIN DECLARATION PROVISIONS -- Declaration Provisions."
COMMON STOCK
Under the Declaration, the Company has authority to issue an unlimited
number of shares of Common Stock. Under Ohio law, stockholders generally are not
responsible for a corporation's debts or obligations. At June 1, 1998, the
Company had outstanding 1,667,817 shares of Common Stock. In addition, 2,203,731
shares of Common Stock are issuable upon conversion of outstanding Units by the
Selling Stockholders.
The holders of Common Stock are entitled to one vote per share on all
matters voted on by stockholders, including the election of Trustees. The
Company's Declaration does not provide for cumulative voting in the election of
directors. Matters subject to a vote by the stockholders, including the election
of Trustees, generally require the affirmative vote of a majority of the
outstanding Common Stock present in person or by proxy at a stockholder's
meeting. Amendments to the Declaration require the affirmative vote of
two-thirds of the outstanding Common Stock whether or not present in person or
by proxy at a stockholder's meeting. Except as otherwise required by law, the
holders of Common Stock exclusively possess all voting power.
The Company's Board of Trustees is divided into three classes, comprised of
two Trustees each, which have staggered three-year terms. At least two years
would be required in order to change the membership of a majority of the Board
of Trustees.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to stockholders of at least 95% of its taxable income
(which does not include net capital gains). For the year ended January 31, 1998,
the Company had distributions totaling $.15 per share, none of which was
required to satisfy the 95% REIT distribution test. Under certain circumstances,
the Company may be required to make distributions in excess of cash available
for distribution in order to meet such REIT distribution requirements. In such
event, the Company presently would expect to borrow funds, or to sell assets for
cash, to the extent necessary to obtain cash sufficient to make the
distributions required to retain its qualification as a REIT for federal income
tax purposes.
The Company currently anticipates that it will maintain at least a dividend
rate of $0.20 per share of Common Stock per year or $0.05 per share of Common
Stock per quarter for the immediate future, unless actual results of operations,
economic conditions or other factors differ from its current expectations.
To the extent that cash flow from operations are insufficient during any
quarter, due to temporary or seasonal fluctuations in Percentage Lease revenue,
the Company expects to utilize other cash on hand or borrowings under the Credit
Facility to make such distributions. No assurance can be given, however, that
the Company will make distributions in the future at the current rate, or at
all.
The timing and amount of future distributions, if any, made by the Company
will be determined by the Board of Trustees and will depend on a number of
factors, including the amount of cash available for distribution, funds
available from operations, the Company'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 may deem relevant.
The holders of Common Stock are entitled to such dividends, if any, as may
be declared from time to time by the Board of Trustees from funds legally
available therefor and, upon liquidation, are entitled to receive, pro rata, all
assets of the Company available for distribution to such holders. All shares of
Common Stock are or, when issued upon conversion of Units, will be fully paid
and nonassessable and will have no preemptive rights.
18
<PAGE> 20
The following table sets forth certain pro forma financial information for
the Company for the year ended January 31, 1998, which was used to establish the
expected distribution per share. The following table is presented as if the
acquisition of the Hotels (except for the San Diego hotel) had occurred on
February 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31, 1998
----------------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Pro forma net income........................................ $ 216.0
Add: Minority interest...................................... 2,040.0
Depreciation and amortization.......................... 2,070.0
Less: Additions to Capital Expenditures Fund................ (938.0)
Scheduled principal amortization of long-term debt..... (785.0)
--------
Estimated cash available for distributions(1)............... $2,603.0
========
Estimated initial annual distribution(2).................... $1,772.0
Estimated initial annual distribution to Company's
stockholders (3).......................................... $ 333.6
Estimated initial annual distribution per share/unit(4)..... $ .20
Estimated payout ratio of cash available for
distribution(5)........................................... 68%
</TABLE>
- ---------------
(1) If the Partnership received only the minimum rent under the Percentage
Leases, the estimated cash available for distribution would be $1,408.
(2) Based on 1,667,817 shares of Common Stock, 2,203,731 Units and 4,688,494
Class B Units outstanding, and the equivalent of 299,622 Units held by
non-exchanging minority partners.
(3) Based on 1,667,817 shares of Common Stock outstanding and an initial annual
distribution rate of $.20 per share.
(4) An equivalent annual distribution will be made to each share of Common Stock
and each Unit and Class B Unit, irrespective of whether or not a Unit or
Class B Unit has been converted or is convertible.
(5) Represents the anticipated initial aggregate annual distribution divided by
estimated cash available for distribution.
The primary source of proceeds to be used for distributions to shareholders
is the Company's share of the rents due pursuant to the Percentage Leases. The
anticipated revenue may or may not be realized or collected. Accordingly, the
statements set forth above with regard to distributions are forward-looking
statements involving certain risks and uncertainties that could cause actual
results to differ materially from those expressed in such statements. Important
factors that could cause such different results include, but are not limited to,
competition from other hotels, increases in operating costs, seasonality effects
in hotel occupancy and revenues, and the potential loss of a franchise or liquor
license in respect of any Hotel or acquired hotel. See "FORWARD-LOOKING
STATEMENTS."
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Common Stock is subject to certain restrictions upon the ownership and
transfer thereof that were adopted for the purpose of enabling the Company to
preserve its status as a REIT. For a description of such restrictions, see
"CERTAIN DECLARATION AND STATUTORY PROVISIONS -- Declaration Provisions --
Restrictions on Ownership and Transfer."
EXCHANGE LISTING
The Company's Common Stock is listed on the NYSE under the symbol "RRF."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is National City
Bank, Cleveland, Ohio.
19
<PAGE> 21
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables set forth (i) selected unaudited pro forma condensed
consolidated financial information for the Company for the year ended January
31, 1998, and (ii) selected unaudited pro forma condensed combined financial
information for the Lessee for the year ended December 31, 1997.
The Pro Forma Condensed Consolidated Balance Sheet of the Company (i) is
presented as if the acquisition of the membership interests in Tucson St. Mary's
Suite Hospitality LLC ("St. Mary's") as discussed in "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" had occurred on
January 31, 1998; and (ii) adjusts the historical balance sheet of the Company
as of January 31, 1998 for the effects of the acquisition. The Pro Forma
Condensed Consolidated Statement of Income for the Company for the year ended
January 31, 1998 (i) is presented as if the acquisitions of the Hotels (except
for the San Diego hotel) had occurred on February 1, 1997; and (ii) adjusts the
historical operating results of the Company for the year ended January 31, 1998
for the effects of those acquisitions. The pro forma information is not
necessarily indicative of what the actual financial position and results of
operations of the Company would have been, assuming these transactions had been
consummated as of January 31, 1998 or as of the beginning of the period
presented, nor does it purport to represent the future financial position or
results of operations of the Company.
The Pro Forma Condensed Combined Statement of Operations of the Lessee for
the year ended December 31, 1997 is presented as if the acquisitions of the
Hotels (except for the San Diego hotel) and the beginning of the relevant lease
years had occurred on January 1, 1997, and therefore incorporates certain
assumptions that are included in the Notes to the Pro Forma Condensed Combined
Statement of Operations. The pro forma operating information for the Lessee is
presented to reflect the pro forma operations of the Lessee for 1997, which
operations are the source of funds for the Percentage Lease payments to the
Partnership.
The following selected financial information and the financial statements
contained in the Company's Form 10-K for the year ended January 31, 1998 should
be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and all other historical financial
statements and notes included elsewhere in this Prospectus. See "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE."
20
<PAGE> 22
REALTY REFUND TRUST
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TRUST ST. MARY'S PRO FORMA PRO
HISTORICAL HISTORICAL ADJUSTMENTS FORMA
---------- ---------- ----------- -------
(A) (A) (B)
<S> <C> <C> <C> <C>
ASSETS
INVESTMENTS IN HOTEL PROPERTIES, net............ $41,241 $6,315 $ -- $47,556
CASH AND CASH EQUIVALENTS....................... 2,379 106 (16)(C) 2,469
ACCOUNTS RECEIVABLE............................. -- 52 (52)(C) --
INVENTORY....................................... -- 97 (97)(C) --
OTHER ASSETS.................................... -- 96 (96)(C) --
------- ------ ------ -------
TOTAL ASSETS.................................... $43,620 $6,666 $ (261) $50,025
======= ====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
MORTGAGE NOTES PAYABLE.......................... $17,710 $6,000 $ -- $23,710
NOTES PAYABLE TO BANKS.......................... 155 50 -- 205
OTHER NOTES PAYABLE............................. 2,865 -- -- 2,865
ADVANCES PAYABLE TO RELATED PARTIES............. 1,700 1,140 -- 2,840
DUE TO LESSEE................................... 944 -- 130(C) 1,074
ACCOUNTS PAYABLE AND ACCRUED EXPENSES........... 572 690 (391)(C) 871
MINORITY INTEREST IN LIMITED PARTNERSHIP........ 14,075 -- (1,214)(D) 12,861
EQUITY:
Shares of beneficial interest without par
value; unlimited authorization; 1,667,817
shares issued and outstanding.............. 5,599 (1,214) 1,214(D) 5,599
------- ------ ------ -------
TOTAL EQUITY.................................... 5,599 (1,214) 1,214 5,599
------- ------ ------ -------
TOTAL LIABILITIES AND EQUITY.................... $43,620 $6,666 $ (261) $50,025
======= ====== ====== =======
</TABLE>
The accompanying notes to pro forma condensed consolidated balance sheet
are an integral part of this balance sheet.
21
<PAGE> 23
REALTY REFUND TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
(A) Derived from the historical balance sheet of the Company as of January 31,
1998 and the historical balance sheet of St. Mary's as of December 31, 1997.
(B) Reflects the acquisition of St. Mary's membership interest by the
Partnership. Giving effect to the acquisition, the Company is a 12.4% sole
general partner in the Partnership. As James F. Wirth, Chairman, President
and Chief Executive Officer of the Company and holder of Class B limited
partnership units representing 53% of the Partnership, together with his
spouse, owned 100% of St. Mary's, no adjustments to the historical carrying
amounts of St. Mary's assets and liabilities have been made.
(C) Represents the elimination of working capital assets and liabilities assumed
by the Lessee.
(D) Reflects the elimination of the historical equity of St. Mary's and the
adjustment to minority interest resulting from the acquisition.
22
<PAGE> 24
REALTY REFUND TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1998
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
ST. MARY'S
TRUST FORMATION PRO FORMA PRO
HISTORICAL TRANSACTIONS ADJUSTMENTS FORMA
---------- ------------ ----------- ----------
(A) (B) (B)
<S> <C> <C> <C> <C>
PERCENTAGE LEASE REVENUE.................. $ - $7,902 $ 995 $ 8,897
OTHER RENTAL REVENUE...................... 1,367 (1,367) -- --
INTEREST INCOME........................... 55 -- -- 55
---------- ------ ------ ----------
TOTAL REVENUES.................. 1,422 6,535 995 8,952
---------- ------ ------ ----------
LOSS ON SALE OF REAL ESTATE............... 36 (36) -- --
INTEREST EXPENSE ON MORTGAGE AND OTHER
NOTES PAYABLE........................... 118 1,492 630 2,240
ADVISORY FEE TO RELATED PARTY ADVISOR..... -- 576 112 688
OPERATING EXPENSES OF REAL ESTATE HELD FOR
SALE.................................... 1,379 (1,379) -- --
DEPRECIATION AND AMORTIZATION............. 21 1,689 360 2,070
GENERAL AND ADMINISTRATIVE................ 441 137 70 648
REAL ESTATE AND PERSONAL PROPERTY TAXES,
CASUALTY INSURANCE AND GROUND RENT...... -- 820 230 1,050
MINORITY INTEREST......................... -- 2,396 (356) 2,040
---------- ------ ------ ----------
TOTAL EXPENSES AND MINORITY
INTEREST...................... 1,995 5,695 1,046 8,736
---------- ------ ------ ----------
NET INCOME (LOSS) ATTRIBUTABLE TO SHARES
OF BENEFICIAL INTEREST.................. $ (573) $ 840 $ (51) $ 216
========== ====== ====== ==========
NET INCOME (LOSS) PER SHARE............... $ (0.34) $ 0.13
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING............................. 1,667,817 1,667,817
</TABLE>
The accompanying notes to pro forma condensed consolidated statement of
income are an integral part of this statement.
23
<PAGE> 25
REALTY REFUND TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1998
(UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
(A) Derived from the historical statement of operations for the Company for the
year ended January 31, 1998.
(B) Represents pro forma adjustments to reflect the acquisitions of the Hotels
as of February 1, 1997. The pro forma adjustments include the following:
1. Pro forma percentage rent as calculated pursuant to the terms of the
Percentage Leases between the Partnership and the Hotels.
2. Pro forma adjustments to other rental revenue, loss on sale of real
estate and operating expenses of real estate held for sale assume the
sale of the related real estate occurred as of February 1, 1997. The
real estate was sold on September 4, 1997 for $6,000.
3. Pro forma interest expense includes interest on existing mortgage
indebtedness assumed by the Partnership. The interest rates on the
mortgage debt range from 8.0% to 9.75%. Historical interest expense on
$2,300 is eliminated as that loan from related party was retired with
proceeds from the sale of the real estate.
4. Pro forma advisory fee to related party advisor (equal to 1% of the
Company's invested assets) reflects assets under management having a
total appraised value of $68,485.
5. Pro forma depreciation and amortization represents (i) the elimination
of historical amortization of the Company related to the real estate
held for sale, and (ii) depreciation of the properties owned and
acquired by the Company. Depreciation is computed using the
straight-line method and is based upon the estimated useful lives of 40
years for building and improvements and 7 years for furniture and
equipment. These estimated useful lives are based on management's
knowledge of the properties and hotel industry in general.
The Company's pro forma investment in hotel properties, at cost, consists
of the following:
<TABLE>
<CAPTION>
ST. MARY'S
FORMATION PRO FORMA
TRANSACTIONS ADJUSTMENTS
------------ -----------
<S> <C> <C>
Land................................................... $ 3,440 $ 900
Building and improvements.............................. 31,395 3,615
Furniture, fixtures and equipment...................... 6,406 1,800
------- ------
$41,241 $6,315
======= ======
</TABLE>
6. Pro forma general and administrative expense reflects expenses related
to salaries and wages, professional fees, directors expenses and other
operating expenses of the properties assumed by the Company.
7. Pro forma real estate and personal property taxes, property and casualty
insurance and ground rent expense paid by the Company based on
historical amounts.
8. Pro forma minority interest represents 87.6% of net income of the
Partnership attributable to minority interest holders who hold 7,191,847
limited partnership units (including non-exchanging minority partners
representing the equivalent of 299,622 limited partnership units). The
Company holds 1,020,586 units of general partner interests or 12.4% of
the total.
24
<PAGE> 26
<TABLE>
<CAPTION>
ST. MARY'S
FORMATION PRO FORMA
TRANSACTIONS ADJUSTMENTS
------------ -----------
<S> <C> <C>
Pro forma income before minority interest:
Company................................................ $ 55 $ --
RRF Sub Corp........................................... (128) --
Partnership............................................ 2,736 (255)
------- ------
2,663 (255)
Minority interest in pro forma net income of the
Partnership at 87.6%................................. 2,396 (223)
------- ------
$ 267 $ (32)
======= ======
</TABLE>
25
<PAGE> 27
LESSEE
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL ST. MARY'S PRO FORMA PRO FORMA
HOTEL COMPANIES HOTEL ADJUSTMENTS LESSEE
--------------- ----------- ----------- ---------
(A) (B)
<S> <C> <C> <C> <C>
REVENUES:
Room revenue.............................. $18,801 $2,562 $ -- $21,363
Food and beverage revenue................. 519 814 -- 1,333
Other revenue............................. 591 166 -- 757
------- ------ ------- -------
Total Revenues.......................... 19,911 3,542 -- 23,453
------- ------ ------- -------
EXPENSES:
Departmental expenses of Hotels:
Rooms................................... 4,915 1,119 -- 6,034
Food and beverage....................... 921 611 -- 1,532
General and administrative................ 3,056 168 90(C) 3,314
Advertising and promotion................. 871 120 -- 991
Utilities................................. 934 350 -- 1,284
Management fees........................... 833 59 (306)(D) 586
Franchisor royalties and other charges.... 582 101 348(E) 1,031
Repairs and maintenance................... 2,473 457 -- 2,930
Real estate and personal property taxes,
insurance, and ground rent.............. 912 204 (1,022)(F) 94
Interest expense.......................... 1,854 556 (2,410)(G) --
Depreciation and amortization............. 1,226 248 (1,474)(H) --
Percentage Lease payments................. 0 0 8,897(I) 8,897
------- ------ ------- -------
Total Expenses....................... 18,577 3,993 4,123 26,693
------- ------ ------- -------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS..................... $ 1,334 $ (451) $(4,123) $(3,240)
======= ====== ======= =======
</TABLE>
The accompanying notes to pro forma condensed combined statement of
operations are an integral part of this statement of operations.
26
<PAGE> 28
LESSEE
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED, DOLLAR AMOUNTS IN THOUSANDS)
(A) Derived from the historical combined financial statements of the Hotels for
the year ended December 31, 1997.
(B) Derived from the historical financial statements of St. Mary's.
(C) Increase reflects the estimated incremental expenses to be incurred by
Lessee in connection with administrative salaries and occupancy expenses,
net of historical general and administrative expenses of the Lessee which
will be incurred by the Partnership.
(D) Reflects the adjustment of management fee expense of the Hotels to a
standard 2.5% of revenues per year pursuant to the management agreement
entered into between the Lessee and the Partnership.
(E) Reflects the adjustment of franchise fees paid to InnSuites to a standard
2.5% of revenues per year (1.25% at four existing properties with dual
franchises).
(F) Reflects the elimination of real estate and personal property taxes,
property and casualty insurance, and ground rent expenses to be paid by the
Partnership.
(G) Reflects the elimination of interest expense related to debt assumed by the
Partnership.
(H) Reflects the elimination of depreciation expense related to the investments
in hotel properties of the Hotels which were acquired by the Partnership.
(I) Represents lease payments calculated on a pro forma basis by applying the
rent provisions of the Percentage Leases to the pro forma room and other
revenues of the Hotels.
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In September 1997, the Company sold its interests in the Carbon & Carbide
Building in Chicago, Illinois for $6,000,000, before consideration of closing
and other costs related to the sale. A loss of approximately $36,000 was
recorded as a result of the sale. The Carbon & Carbide Building was originally
acquired in July 1992 when the Company accepted title in lieu of foreclosure. At
the time of title acceptance, the Company recorded a provision to write down its
investment to estimated net realizable value as it was the Company's intention
to sell the real estate. Since that time, the carrying value of the investment
increased as a result of considerable investment in building and tenant
improvements. Based on both market conditions for similar commercial property in
Chicago and the operating performance of the property, the Company recorded a
$3,000,000 provision in the fourth quarter of fiscal 1996 to reduce the carrying
value of the property to its then estimated net realizable value. The amount of
the writedown was based upon the Company's best estimate of the amount of net
proceeds which would be realized upon sale of the real estate. In the fourth
quarter of fiscal 1997, the Company entered into a contract to sell the building
for $6,000,000. Accordingly, the Company recorded an additional provision of
$1,085,000 to reduce the carrying value of the real estate held for sale to its
estimated net realizable value based upon the pending contract price and
estimated costs associated with the potential sale.
Having liquidated all of its other investments (primarily wrap-around
mortgages) prior to January 31, 1997, the Company's principal asset after the
sale of the Carbon & Carbide Building consisted of cash and cash equivalents. On
January 31, 1998 the Company contributed $2,081,000 to the Partnership in
exchange for a 13.6% general partner interest therein. The Company is the sole
general partner of the Partnership. The Partnership issued limited partnership
interests representing 86.4% of the Partnership to acquire six hotel properties
from various entities. In addition, through RRF Sub Corp., the Company issued
647,231 shares of beneficial interest in exchange for all of the outstanding
shares of BPI which owned a hotel located in Scottsdale, Arizona. On February 1,
1998 the Partnership acquired 100% of the ownership interests in the Tucson St.
Mary's InnSuites Hotel and Resort for $10,820,000. The Partnership assumed
$7,803,000 in mortgage debt and other obligations and issued 699,933 limited
partnership units to James and Gail Wirth (of which 28,800 Units were
subsequently paid to third parties as advisory fees), who each held a 50% equity
ownership in the Tucson St. Mary's hotel. On April 29, 1998, the Partnership
acquired 100% of the ownership of the InnSuites Hotel San Diego for $5,148,000.
The Partnership invested $1,448,000 in cash (of which $1,348,000 was drawn under
the Credit Facility) and became obligated for $3,700,000 in seller financing in
the form of two promissory notes secured by mortgage trust deeds on the
property.
Having completed the acquisition of the Hotels, the Company owns a 12.4%
interest in eight of the Hotels through its interest in the Partnership and 100%
of the Scottsdale hotel through RRF Sub Corp. In order for the Company to
qualify as a REIT, neither the Company nor the Partnership can operate the
Hotels. Therefore, each of the Hotels are leased to the Lessee pursuant to
Percentage Leases. Each Percentage Lease obligates the Lessee to pay rent equal
to the greater of the minimum rent or a percentage rent based on the gross
revenues of each Hotel. The Lessee holds the franchise agreement for each Hotel.
The Lessee is owned 9.8% by ISIH, an entity owned by Mr. Wirth and his wife. The
Company's principal source of revenue is lease payments from the Lessee pursuant
to the Percentage Leases. Lease revenue is based upon the room and other
revenues of the Hotels leased to the Lessee. The Lessee's ability to make
payments to the Partnership pursuant to the Percentage Leases is dependent
primarily upon the operations of the Hotels. Therefore, management believes that
a discussion of the pro forma operating results of the Lessee and the historical
operating results of the Hotels are important to an understanding of the
business of the Company. The following discusses (i) the Company's pro forma
results of operations for the years ended January 31, 1997 and January 31, 1998;
(ii) the Lessee's pro forma results of operations for the year ended December
31, 1997; and (iii) the historical results of the Initial Hotels for the years
ended December 31, 1997, 1996 and 1995.
GENERAL
Results of operations are best explained by three key performance
indicators: occupancy, ADR and REVPAR. Increases in REVPAR attributable to
increases in occupancy are accompanied by increases in most
28
<PAGE> 30
categories of variable operating costs. Increases in REVPAR attributable to
increases in ADR are accompanied by increases in limited categories of operating
costs, such as management fees and franchise and licenses fees.
PRO FORMA RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY
The following tables set forth key indicators for (i) all of the Hotels
combined, and (ii) all fully operational Hotels (which excludes the Flagstaff,
Arizona and the Tucson St. Mary's hotels, which were under renovation), and are
useful in understanding the underlying changes in the percentage rent during the
Company's pro forma years ended January 31, 1997 and January 31, 1998. The
following tables do not include any information regarding the recently acquired
San Diego, California hotel.
<TABLE>
<CAPTION>
ALL FULLY-OPERATING HOTELS ALL OPERATING HOTELS
(EXCLUDES FLAGSTAFF AND (INCLUDES FLAGSTAFF AND
ST. MARY'S) ST. MARY'S)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------
KEY FACTORS 1997 1996 1995 1997 1996(1) 1995(1)
----------- ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Occupancy.......................... 74.3% 71.9% 72.2% 63.4% 68.4% 67.6%
ADR................................ $71.80 $69.17 $64.50 $66.04 $65.71 $62.80
REVPAR............................. $52.57 $49.75 $46.57 $42.60 $45.79 $42.45
</TABLE>
- ---------------
(1) Does not include information regarding the Tucson St. Mary's hotel.
The pro forma financial information set forth below is presented as if the
acquisitions of the Hotels (except for the San Diego hotel) had been consummated
as of February 1, 1997. The pro forma financial information is not necessarily
indicative of what actual results of operations of the Company would have been
assuming the acquisitions of the Hotels had been consummated as of February 1,
1997, nor does it purport to represent the results of operations for future
periods. Financial information for Tucson St. Mary's, which InnSuites did not
own in the fiscal year ended January 31, 1997, is not included in the pro forma
1997 results.
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
------------------
1998 1997
------ ------
(UNAUDITED, IN
THOUSANDS)
<S> <C> <C>
Percentage Lease Revenue.................................... $8,897 $7,376
Interest Income............................................. 55 1,638
------ ------
Total Revenues.................................... 8,952 9,014
------ ------
Provision for Writedowns of Loan Receivable................. -- 111
Interest on Loans Underlying Wrap Mortgages................. -- 239
Interest Expense on Mortgage and Other Notes Payable........ 2,240 1,929
Advisory Fee to Related Party Advisor....................... 688 576
Depreciation and Amortization............................... 2,070 1,710
General and Administrative.................................. 648 578
Real Estate and Personal Property Taxes and Casualty
Insurance and Ground Rent................................. 1,050 942
Minority Interest........................................... 2,040 1,625
------ ------
Total Expenses and Minority Interest.............. 8,736 7,710
------ ------
Net Income Attributable to Shares of Beneficial Interest.... $ 216 $1,304
====== ======
Net Income Per Share -- basic and diluted................... $ .13 $ .78
====== ======
</TABLE>
For the year ended January 31, 1998, the Company had pro forma revenues of
$9.0 million from the Percentage Leases that would have been in place at the
Hotels (except for the San Diego hotel). The Company had only $.55 million in
interest income compared to $1.6 million in interest income from mortgage
investments
29
<PAGE> 31
in 1997 due to loan repayments during fiscal 1997. Other rental revenue of $1.4
million and operating expenses of $1.4 million and amortization of $.02 million
related to the Carbon & Carbide Building (the sale of which closed on September
4, 1997), have been eliminated. Net income to shareholders (after minority
interest) declined to $.24 million from $1.3 million due to the elimination of
the positive spread on the mortgage investments and presentation of $2.3 million
in cash realized from sale of the Carbon & Carbide Building without reflecting
any pro forma income or return from investment of that cash.
For the year ended January 31, 1997, the Company had pro forma revenues of
$7.4 million from the Percentage Leases that would have been in place at the
Hotels (except for the San Diego and Tuscon St. Mary's hotels). The Company also
had $1.6 million in interest income from mortgage investments which were repaid
during fiscal 1997. Expenses included interest expense related to the mortgage
investments and a note payable to an affiliated party. Other rental revenue of
$2.3 million and operating expenses of $2.1 million and amortization of $.04
million related to the Carbon & Carbide Building (the sale of which closed on
September 4, 1997) have been eliminated.
PRO FORMA RESULTS OF OPERATIONS OF LESSEE
For the year ended December 31, 1997, the Lessee had pro forma revenues of
$23.5 million compared to $18.3 million for the year ended December 31, 1996, an
increase of $5.2 million (28.4%). This was due to the inclusion of St. Mary's
revenue in 1998 and an increase in occupancy from 68.4% in 1996 to 70.6% in 1997
and an increase in ADR from $65.71 in 1996 to $66.04 in 1997 (at the Initial
Hotels). Total expenses increased $6.6 million from $20.2 million in the year
ended December 31, 1996 to $26.8 million in the year ended December 31, 1997.
Increases of $1.1 million in general and administrative expenses, and $1.7
million in Percentage Lease payments were consistent with the inclusion of St.
Mary's results, decreased occupancy and increased revenues and, in the case of
general and administrative expenses, due to increased legal and accounting and
advisory expenses related to the formation of the Partnership. Repairs and
maintenance of $2.9 million in 1997 ($.3 million more than in 1996) remained
high due to costs of the ongoing refurbishment program which was substantially
completed by the end of calendar 1997 and the inclusion of St. Mary's expenses.
The larger increase in expenses ($6.6 million) as compared to the $5.2 million
increase in revenues resulted in a $1.4 million increased loss to $3.4 million
in the year ended December 31, 1997 as compared to the $1.8 million loss for the
year ended December 31, 1996.
The pro forma net loss of Lessee for 1996 was $1.8 million, due to having
incurred $1.7 million of maintenance expense as part of a multi-year
refurbishment program and $286,000 of losses due to the renovation of the
Flagstaff hotel. The refurbishment programs, including the Flagstaff renovation,
were all substantially completed as of the end of calendar 1997. Mr. and Mrs.
Wirth's management and trademark corporations have agreed to subordinate their
receipt of management fees and trademark fees from the Lessee, to the extent
that Flagstaff does not generate sufficient operating cash flow to meet its
$250,000 minimum annual rent payment, until Flagstaff has generated sufficient
operating cash flow to meet its $250,000 minimum annual rent payment in two
consecutive years. The elimination of the maintenance expense associated with
refurbishment and Mr. Wirth's subsidy of Flagstaff should enable Lessee to
generate a positive cash flow.
RESULTS OF OPERATIONS OF THE HOTELS
The following table sets forth certain combined historical financial
information for the Initial Hotels, as a percentage of revenues, for the periods
indicated.
30
<PAGE> 32
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
FINANCIAL DATA
Room revenue.......................................... 94.4% 96.1% 96.4%
Food and beverage revenue............................. 2.6 1.1 0.8
Other revenue......................................... 3.0 2.8 2.8
------- ------- -------
Total revenue....................................... 100.0 100.0 100.0
------- ------- -------
Departmental and other expenses....................... 73.2 70.1 69.6
Real estate and personal property taxes, insurance and
rent................................................ 4.6 4.8 4.1
Depreciation and amortization......................... 6.2 6.3 6.6
Interest expense...................................... 9.3 8.6 12.5
------- ------- -------
Income before extraordinary items..................... 6.7 10.2 7.2
Extraordinary item -- gain on early extinguishment of
debt................................................ -- 1.7 40.6
------- ------- -------
Net income............................................ 6.7% 11.9% 47.8%
======= ======= =======
OTHER DATA
EBITDA(1), as a % of revenue.......................... 22.2% 25.0% 26.3%
Cash Flow from Operating Activities, as a % of
revenue............................................. 19.7% 14.4% 13.2%
Cash Flow from Investing Activities, as a % of
revenue............................................. -8.4% -10.9% -2.5%
Cash Flow from Financing Activities, as a % of
revenue............................................. -13.8% -6.4% -11.9%
KEY FACTORS(2)
Occupancy............................................. 70.6% 68.4% 67.6%
ADR................................................... $ 68.73 $ 65.71 $ 62.80
REVPAR................................................ $ 48.62 $ 45.79 $ 42.45
</TABLE>
- ---------------
(1) Represents income (loss) before extraordinary items, excluding interest
expense, depreciation and amortization. The Company believes that EBITDA,
defined as net income before interest, depreciation, amortization, taxes and
extraordinary items, provides a good indicator of the financial performance
of the Hotels and will be a significant factor in determining the Lessee's
ability to make lease payments to the Partnership. This indicator should
not, however, be considered as an alternative to net income as an indication
of Lessee's performance or to cash flow as a measure of liquidity.
(2) No assurance can be given that the trends reflected in this data will
continue or that occupancy, ADR and REVPAR will not decrease as a result of
changes in national or local economic or hospitality industry conditions.
These figures include the Flagstaff hotel, acquired in June 1996 and under
renovation during the remainder of 1996 and the first half of 1997. The
renovation was substantially completed as of October 15, 1997.
Comparison of the year ended December 31, 1997 with 1996 for the Initial
Hotels
Room revenues increased $1.19 million, or 6.7%, from 1996 to 1997. This was
driven by increases in ADR at almost all of the Initial Hotels, along with an
increase in occupancy of 3.0%. These were attributable to the general
improvement in the business travel and tourism industries, lack of any new
competition in the markets where the Initial Hotels operate and the InnSuites'
refurbishment program. Food and beverage revenue grew $.32 million or 163.5%
from 1996 to 1997, relating to the increase in occupancy and expansion of food
service, including room service at two of the Initial Hotels. The composition of
revenue remained consistent between the periods, with only a slight increase in
food and beverage revenues, from 1.1% of the total to 2.6%, which reflects that
most of the gains in revenue occurred in occupancy and room rates during this
period.
31
<PAGE> 33
Departmental and other expenses grew by $1.73 million, or 13.4%, between
the years because of expansion of food service, increased payroll costs, general
inflationary pressures and increased occupancy. These costs increased as a
percentage of revenues from 70.1% in 1996 to 73.2% in 1997, as expenses grew
faster than revenues, primarily through increased payroll. Depreciation and
amortization increased slightly between 1996 and 1997.
Interest expense increased by $.28 million in 1997 compared to 1996 due to
refinancing costs of capital improvements.
Income before extraordinary items decreased $.54 million primarily due to
increased expenses discussed above.
A gain on early extinguishment of debt of $.3 million recorded in May 1996
related to the extinguishment of debt at the Flagstaff property. No gains or
losses related to the extinguishment of debt were realized in 1997.
Net income declined $.85 million due to the extinguishment of debt income
realized in 1996 and increased expenses in 1997.
EBITDA declined $.17 million, or 3.8%, from 1996 to 1997. This decline is
attributable to the increase in expenses during the periods.
Comparison of the year ended December 31, 1996 with 1995 for the Initial
Hotels
Total revenues increased $2.38 million, or 14.9%, from 1995 to 1996. Room
revenues increased $2.2 million, or 14.6%, from 1995 to 1996. As can be seen by
the growth of REVPAR, revenues as reported were driven by increases in the ADR
which occurred at five of the Initial Hotels, while occupancy increased 1.4%
overall. This was attributable in part to the general improvement in the
business travel and tourism industries as well as to InnSuites' refurbishment
program which was substantially completed at all the Initial Hotels by the end
of calendar 1997. The continuation of InnSuites' focus on maximizing REVPAR by
focusing on increasing ADR while maintaining stable occupancy during this period
had significant effects. Food and beverage revenue grew $.066 million, or 50.8%,
from 1995 to 1996. The composition of revenue stayed consistent between the
periods, with only a slight increase in food and beverage revenues, from .8% of
the total to 1.1%.
Departmental and other expenses increased by $1.77 million, or 16.0%,
between the years substantially because of a $.68 million increase in
maintenance associated with the refurbishment program, the inclusion of the
operating results of the Flagstaff hotel from January 1, 1996, increases in
management and franchise fees due to increased revenues and general inflationary
pressures. These costs increased slightly as a percentage of revenues from 69.6%
in 1995 to 70.1% in 1996, due to the effect of expenses growing at a faster pace
than revenues, in particular maintenance expenses, and the less-profitable
operating results of the Flagstaff hotel acquired in 1996. In addition,
management fees increased from 3.8% of revenues in 1995 to 4.6% of revenues in
1996 because of higher revenues and increases in the management fee rate
implemented in the second quarter of 1996 at four of the Initial Hotels. Real
estate and personal property taxes, insurance and rent increased 33.6% from 1995
to 1996. This is primarily attributable to real estate taxes which increased
40.3% due to increased property valuations based on improved revenues.
Depreciation and amortization expense increased by $.088 million, or 8.3%,
primarily due to the additional depreciation associated with the increased rate
of refurbishment at the Initial Hotels.
Interest expense decreased $0.42 million, or 21.1%, in 1996 due to (i)
principal payments on mortgage notes payable of $2.2 million in 1995 and $.62
million in 1996, net of new mortgage debt of $.99 million in 1996;
Income before extraordinary items increased $.72 million primarily due to
increases in ADR at the Initial Hotels and decreased interest expense.
The gain on early extinguishment of debt of $.3 million recorded in May
1996 related to the extinguishment of debt in Hulsey Hotels (the Flagstaff
property) in the form of forgiveness of advances from affiliates and was
substantially less than the $6.5 million gain recorded in May 1995 related to
the extinguishment of debt at the Ontario property in the form of forgiveness of
mortgage debt.
32
<PAGE> 34
Net income declined $5.44 million due to substantially larger forgiveness
of debt income in 1995, which was offset partially by the improvement in ADR and
reduced interest expense in 1996.
EBITDA grew $.39 million or 9.3% from 1995 to 1996. This improvement was
attributable to the increase in revenues due to growth in ADR during the periods
which was partially offset by increases in franchise and management fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company, through its ownership interest in the Partnership, will have
its proportionate share of the benefits and obligations of the Partnership's
ownership interests in the Hotels. The Company's principal sources of cash to
meet its cash requirements, including distributions to stockholders, will be its
share of the Partnership's cash flow. The Partnership's principal source of
revenue will be rent payments under the Percentage Leases. Lessee's obligations
under the Percentage Leases are unsecured and Lessee's ability to make rent
payments to the Partnership under the Percentage Leases, and the Company's
liquidity, including its ability to make distributions to stockholders, will be
dependent on the Lessee's ability to generate sufficient cash flow from the
operation of the Hotels, particularly the Scottsdale hotel, which represents, on
a pro forma basis, 58.9% of the Company's cash flow in 1996 and 26.7% in 1997,
respectively.
For a discussion of the abatement of management and trademark fees at the
Flagstaff property, see "Pro Forma Results of Operations of Lessee" above.
Beyond the 4% reserve for refurbishment and replacements set aside annually,
other than $450,000 in anticipated refurbishing costs at the recently acquired
InnSuites Hotel San Diego, the Company has no present commitments for
extraordinary capital expenditures.
At April 30, 1998, outstanding mortgage debt had been reduced from $23.7
million on a pro forma basis at January 31, 1998 to $20.7 million through line
of credit borrowings of $8.3 million and available cash. The Company intends to
acquire and develop additional hotels and will incur indebtedness to fund those
acquisitions and developments. The Company may also incur indebtedness to meet
distribution requirements imposed on a REIT under the Code to the extent that
working capital and cash flow from the Company's investments are insufficient to
make the required distributions. The terms of the line of credit discussed below
permit borrowings for that purpose, but impose certain limitations on the
Company's ability to engage in other borrowings.
On April 16, 1998, the Company obtained the $12,000,000 Credit Facility to
assist it in its funding of acquisition and development of additional hotels and
for certain other business purposes. Borrowings under the Credit Facility are
secured by first mortgages on three of the Hotels. The Company may seek to
increase the amount of its Credit Facility, negotiate additional credit
facilities, or issue debt instruments. Any debt incurred or issued by the
Company may be secured or unsecured, long-term, medium-term or short-term, bear
interest at a fixed or variable rate, and be subject to such other terms as the
Company considers prudent.
The Company will acquire or develop additional hotels only as suitable
opportunities arise, and the Company will not undertake acquisition or
redevelopment of properties unless adequate sources of financing are available.
Funds for future acquisitions or development of hotels are expected to be
derived, in whole or in part, from borrowings under the Credit Facility or other
borrowings or from the proceeds of additional issuances of Common Stock or other
securities. The Company has an option to acquire an additional hotel property in
Buena Park, California. See "BUSINESS AND PROPERTIES -- Other Property Owned".
There is no agreement or understanding to invest in any properties other than
the option property, and there can be no assurance that the Company will
successfully acquire or develop additional hotels.
The Partnership will contribute to a Capital Expenditures Fund on a
continuing basis, from the rent paid under the Percentage Leases, an amount
equal to 4% of the Lessee's revenues from operation of the Hotels. The Capital
Expenditures Fund is intended to be used for capital improvements to the Hotels
and refurbishment and replacement of furniture, fixtures and equipment, in
addition to other uses of amounts in the Fund considered appropriate from time
to time. The Partnership anticipates making similar arrangements with respect to
future hotels that it may acquire or develop. During the period from January 1,
1995 through December 31, 1997, the Hotels spent approximately $2.0 million for
capital expenditures, excluding hotel acquisitions. The Company considers the
majority of these improvements to be revenue producing and therefor these
amounts have been capitalized and are being depreciated over their estimated
useful lives. The Hotels also spent $7.0 million during
33
<PAGE> 35
the period from January 1, 1995 through December 31, 1997 on repairs and
maintenance and these amounts have been charged to expense as incurred.
INFLATION
The Company's revenues initially will be based on the Percentage Leases,
which will result in changes in the Company's revenues based on changes in the
underlying Hotel revenues. Therefore, the Company initially will be relying
entirely on the performance of the Hotels and the Lessee's ability to increase
revenues to keep pace with inflation. Operators of hotels in general, and the
Lessee in particular, can change room rates quickly, but competitive pressures
may limit the Lessee's ability to raise rates faster than inflation.
The Company's largest fixed expense is the depreciation of the investment
in Hotel properties. The Company's variable expenses, which are subject to
inflation, represented approximately 17.5% of pro forma revenues in fiscal 1998.
These variable expenses (general and administrative costs, as well as real
estate and personal property taxes, property and casualty insurance and ground
rent) are expected to grow with the general rate of inflation.
SEASONALITY
The Hotels' operations historically have been seasonal. The six southern
Arizona hotels experience their highest occupancy in the first fiscal quarter
and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter
tends to be the lowest occupancy period at those six southern Arizona hotels.
This seasonality pattern can be expected to cause fluctuations in the Company's
quarterly lease revenue under the Percentage Leases. The Company anticipates
that its cash flow from the Lessee's operation of the Hotels will be sufficient
to enable the Company to make quarterly distributions at the estimated initial
rate of $.05 per share of Common Stock for at least the next twelve months. To
the extent that cash flow from operations is insufficient during any quarter,
because of temporary or seasonal fluctuations in lease revenue, the Company
expects to utilize other cash on hand or borrowings to make those distributions.
No assurance can be given that the Company will make distributions in the future
at the initially estimated rate, or at all.
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of computer programs having been
written using two digits instead of four digits to define the applicable year.
Any of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could potentially result in a system failure or miscalculations, causing
disruptions of operations and normal business activity.
The Company is currently in the process of identifying and evaluating its
computer programs that could be affected by the Year 2000 problem and, if
necessary, will develop a plan to make its computer programs Year 2000
compliant. If the Company determines that modifications and conversions are
necessary, the failure to complete such modifications and conversions in a
timely manner may have a material impact on the operations of the Company. The
Company has not determined with certainty the total cost which will be incurred
by the Company in connection with Year 2000 compliance. However, the Company
believes that such costs will not result in a material adverse effect on its
financial condition or results of operations. Costs related to the Year 2000
problem are being expensed as incurred.
The Company cannot predict the effect of the Year 2000 problem on vendors,
customers and other entities with which the Company transacts business, and
there can be no assurance that the effect of the Year 2000 problem on such
entities will not adversely effect the Company's operations.
34
<PAGE> 36
BUSINESS AND PROPERTIES
THE PROPERTIES.
The following table sets forth certain information in respect of each of
the Hotels:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF YEAR OF MOST NUMBER OF
OF PARKING CONSTRUCTION/ RECENT RESTAURANTS/ MEETING
PROPERTY SUITES SPACES BUILDING STRUCTURE ADDITION RENOVATION LOUNGES ROOMS
-------- ------ ------- ------------------ ------------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
InnSuites 123 153 Metal stud construction 1980 1995/1996 0 2-total
Hotel Phoenix with stucco exterior of 1000
Best Western sq. ft.
InnSuites Hotel 170 200 Metal stud construction 1982/1985 1995/1996 1 6-total
Tempe/Phoenix with stucco exterior of 4065
Airport/South sq. ft.
Mountain
InnSuites Hotel 159 189 Metal stud construction 1981/1983 1995/1996 1 10-total
Tucson, Catalina with stucco exterior of 4500
Foothills sq. ft.
Best Western
InnSuites Hotel 166 196 Metal stud construction 1982/1984 1995/1996 1 11-total
Yuma Best Western with stucco exterior of 8900
sq. ft.
Holiday Inn Airport 150 180 Wood construction, stucco 1990 1995/1996 1 9-total
Hotel and exterior, concrete floors of 5850
Suites/Ontario sq. ft.
InnSuites Hotel 134 158 Masonry construction 1966-67/ 1996/1997 1 3-total
Flagstaff/ 1972 of 1111
Grand Canyon sq. ft.
InnSuites Hotel 134 163 Metal stud construction 1980 1995/1996 1 0
Scottsdale El with stucco exterior
Dorado Park Resort
InnSuites Hotel Tucson 297 352 Concrete block construction 1960/1967/ 1997 2 10-total
St. Mary's with stucco exterior 1971 of 14,252
sq. ft.
InnSuites Hotel 147 129 Wood construction 1946/1989 1996 1 7-total
San Diego with stucco exterior of 12,000
sq. ft.
-----
Total Suites 1,480
=====
<CAPTION>
FITNESS POOL/
PROPERTY CENTERS JACUZZI OTHER
-------- ------- ------- -----
<S> <C> <C> <C>
InnSuites Yes Yes
Hotel Phoenix
Best Western
InnSuites Hotel Yes Yes 2 tennis
Tempe/Phoenix courts
Airport/South
Mountain
InnSuites Hotel Yes Yes 2 tennis
Tucson, Catalina courts
Foothills
Best Western
InnSuites Hotel Yes Yes 2 tennis
Yuma Best Western courts
Holiday Inn Airport Yes Yes basketball
Hotel and court
Suites/Ontario
InnSuites Hotel Yes Yes
Flagstaff/
Grand Canyon
InnSuites Hotel Yes Yes
Scottsdale El
Dorado Park Resort
InnSuites Hotel Tucson Yes Yes
St. Mary's
InnSuites Hotel Yes Yes
San Diego
Total Suites
</TABLE>
General. Each of the Hotels is under the direction of a general manager and
an executive committee, who is accountable for, and compensated in part based
on, the property's performance. This group oversees day-to-day operations and
develops annual budgets and marketing, long-term capital and human resource
development plans for the respective Hotel. Each Hotel is responsible for
developing its own comprehensive marketing plan, which analyzes local market
conditions and the hotel's competition, determines hotel positioning, identifies
consumer needs, and outlines marketing objectives and strategies. Each plan will
continue to be evaluated quarterly by the Lessee to maintain effectiveness under
changing market conditions.
The Lessee and ISIH stress comprehensive financial management and revenue
reporting and believe their management teams are skilled at anticipating
business needs and changes. All hotel departments, including rooms, food and
beverage, accounting, sales and marketing, and maintenance, will continue to
receive regular on-site performance reviews and to have open lines of
communication directly to the Lessee's and ISIH's management. These performance
reviews will enable the Lessee and ISIH to maintain an in-depth understanding of
each Hotel's marketing opportunities and to insure that the Company's properties
receive the direction necessary to enable on-site management to maximize
profits.
35
<PAGE> 37
<TABLE>
<CAPTION>
AVERAGE DAILY REVENUE PER
OCCUPANCY(1) RATE(2) AVAILABLE ROOM(3)
------------- --------------- -----------------
PROPERTY 1997 1996 1997 1996 1997 1996
-------- ----- ----- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
InnSuites................... 68.2% 72.3% $78.57 $76.04 $53.57 $54.97
Hotel Phoenix
Best Western
InnSuites Hotel............. 76.0% 73.1% $69.43 $68.43 $52.74 $49.99
Tempe/Phoenix
Airport/South
Mountain
InnSuites Hotel............. 81.5% 84.4% $76.42 $73.87 $62.32 $62.33
Tucson, Catalina
Foothills
Best Western
InnSuites Hotel............. 75.1% 73.7% $64.24 $62.12 $48.28 $45.81
Yuma Best Western
Holiday Inn Airport......... 76.6% 66.2% $76.20 $68.35 $56.57 $45.28
Hotel and Suites/Ontario
InnSuites Hotel............. 45.9% 45.2% $48.07 $42.40 $22.08 $19.14
Flagstaff/
Grand Canyon
InnSuites Hotel............. 65.3% 59.0% $67.53 $67.89 $40.68 $39.58
Scottsdale El
Dorado Park Resort
InnSuites Hotel Tucson...... 38.1% 37.3% $56.67 $45.99 $21.59 $17.16
St. Mary's (4)
InnSuites Hotel............. 51.8% 51.2% $50.24 $45.54 $26.02 $23.32
San Diego
</TABLE>
- ---------------
(1) Occupancy is calculated by dividing the actual number of rooms rented by the
actual number of rooms available for rent and is expressed as a percentage.
(2) Average Daily Rate is calculated by dividing actual room revenues by the
actual number of rooms rented.
(3) Revenue per Available Room is calculated by dividing actual room revenues by
the actual number of rooms available for rent.
(4) Occupancy, ADR and REVPAR for the InnSuites Hotel Tucson St. Mary's in 1996
are based on partial year data (June through December).
36
<PAGE> 38
The following discussion sets forth additional information for each Hotel.
Holiday Inn Hotel and Suites Airport Ontario, an InnSuites Hotel
Located at the foot of California's San Gabriel Mountains and Mt. Baldy,
this Hotel is situated minutes from the Ontario, California International
Airport and the newly-opened Ontario Mills Mall. Dining and entertainment are
centered around P.J.'s Winery Cafe and Lounge, serving breakfast, lunch and
dinner, with a complimentary breakfast buffet and a free daily afternoon social
hour. On Wednesdays, guests are treated to the complimentary Manager's barbecue.
In addition to the customary risks of hotel ownership, within the Ontario,
California submarket there are several new hotels that have either been
completed or are under construction. The additional supply has or will create
moderate competitive pressure as one or more of these properties are expected to
be directly competitive with the Hotel. Concurrently, southern California is
experiencing an increase in general economic activity which has served to
enhance lodging demand in this submarket. As compared to the year ended December
31, 1996, the average occupancy for the period from January 1, 1997 through
December 31, 1997 was 76.6% versus 66.2% and the average daily rate for the
period from January 1, 1997 through December 31, 1997 was $76.20 versus $68.35.
To the knowledge of the Company, this Hotel is in compliance with all relevant
environmental regulations. The Company is unaware of any specific fuel or energy
requirements with which the Hotel must comply. Finally, as a hotel, this
property is not subject to rent control regulations.
InnSuites Hotel Tucson/Catalina Foothills Best Western
This Hotel is located in northwest Tucson's Catalina Foothills resort area,
five miles east of I-10, convenient to downtown and the Tucson International
Airport. The Tucson Mall and Foothills Mall and a variety of restaurants and
golf courses are within minutes of the property. Many Tucson attractions,
including Biosphere II, the Old Tucson movie studio, the Arizona Sonora Desert
Museum, the arts district and the University of Arizona are conveniently located
for access by the hotel's guests.
In addition to the customary risks of hotel ownership, within the Tucson,
Arizona submarket there are several new hotels that have either been completed
or are under construction, including one or more properties that will be
directly competitive with the Hotel. The additional supply has or will create
moderate competitive pressure as one or more of these properties are expected to
be directly competitive with the Hotel. This new product could enhance this
submarket's lodging capacity, creating an increase in competitive pressure. As
an offset to the increase in supply, the general Arizona marketplace has
experienced renewed economic strength during the past several years, generally
boosting lodging demand throughout the state. As compared to the year ended
December 31, 1996, the average occupancy for the period from January 1, 1997
through December 31, 1997 was 81.5% versus 84.4% and the average daily rate for
the period from January 1, 1997 through December 31, 1997 was $76.42 versus
$73.87. To the knowledge of the Company, this Hotel is in compliance with all
relevant environmental regulations. The Company is unaware of any specific fuel
or energy requirements with which the Hotel must comply. Finally, as a hotel,
this property is not subject to rent control regulations.
InnSuites Hotel & Resort/Tucson St. Mary's
Conveniently located off of I-10 at the St. Mary's Road exit, this
297-suite property occupies 11 acres and is centrally located in the heart of
Tucson's art and historic downtown district. Attractions include the Tucson
Mall, the Tucson Convention Center, the Old Tucson movie studio, the Arizona
Sonora Desert Museum, Biosphere II and golfing, and is minutes away from the
University of Arizona.
In addition to the customary risks of hotel ownership, within the Tucson,
Arizona submarket there are several new hotels that have either been completed
or are under construction, including one or more properties that will be
directly competitive with the Hotel. The additional supply has or will create
moderate competitive pressure as one or more of these properties are expected to
be directly competitive with the Hotel. This new product could enhance this
submarket's lodging capacity, creating an increase in competitive pressure. As
an offset to the increase in supply, the general Arizona marketplace has
experienced renewed economic strength during the past several years, generally
boosting lodging demand throughout the state. As compared to the year
37
<PAGE> 39
ended December 31, 1996, the average occupancy for the period from January 1,
1997 through December 31, 1997 was 38.1% versus 37.3% and the average daily rate
for the period from January 1, 1997 through December 31, 1997 was $56.67 versus
$45.99. To the knowledge of the Company, this Hotel is in compliance with all
relevant environmental regulations. The Company is unaware of any specific fuel
or energy requirements with which the Hotel must comply. Finally, as a hotel,
this property is not subject to rent control regulations.
InnSuites Hotel Tempe/Phoenix Airport
This Hotel is located on Baseline Road at I-10, less than eight minutes
from Phoenix Sky Harbor International Airport with easy access to the Phoenix
East Valley and the Tempe/Mesa/Chandler area. Area attractions include spring
training baseball, Arizona State University, Firebird Raceway, Old Towne Mill
Avenue shopping and dining and South Mountain Resort golf.
In addition to the customary risks of hotel ownership, within the Tempe,
Arizona submarket there are several new hotels that have either been completed
or are under construction, including one or more properties that will be
directly competitive with the Hotel. As an offset to the increase in supply, the
general Arizona marketplace has experienced renewed economic strength during the
past several years, generally boosting lodging demand throughout the state.
Additionally, within this specific submarket, a large outlet shopping mall was
opened across the street from this Hotel in 1997, which the Company expects will
further enhance this submarket's lodging demand. As compared to the year ended
December 31, 1996, the average occupancy for the period from January 1, 1997
through December 31, 1997 was 76.0% versus 73.1% and the average daily rate for
the period from January 1, 1997 through December 31, 1997 was $69.43 versus
$68.43. To the knowledge of the Company, this Hotel is in compliance with all
relevant environmental regulations. The Company is unaware of any specific fuel
or energy requirements with which the Hotel must comply. Finally, as a hotel,
this property is not subject to rent control regulations.
InnSuites Hotel Yuma Best Western
This Hotel is located on Castle Dome Avenue, just off the 16th Street exit
of I-8, convenient to the Yuma International Airport, restaurants, golf,
shopping and boating on the nearby Colorado River. Many attractions of Yuma and
the Colorado River Park, including Fort Yuma, the Yuma Art Center, Yuma
Territorial Prison Park and Martinez Lake, are convenient to this property.
In addition to the customary risks of hotel ownership, within the Yuma,
Arizona submarket, although there have not been in recent years any new hotels
added to the supply of lodging, all hotels within the submarket, including the
Hotel, are dependent to some extent upon demand from surrounding U.S. military
facilities. With no supply growth and only modest demand expansion, the Company
has worked to gain market share for this Hotel. As compared to the year ended
December 31, 1996, the average occupancy for the period from January 1, 1997
through December 31, 1997 was 75.1% versus 73.7% and the average daily rate for
the period from January 1, 1997 through December 31, 1997 was $64.24 versus
$62.12. To the knowledge of the Company, this Hotel is in compliance with all
relevant environmental regulations. The Company is unaware of any specific fuel
or energy requirements with which the Hotel must comply. Finally, as a hotel,
this property is not subject to rent control regulations.
InnSuites Hotel Flagstaff/Grand Canyon
This Hotel's hillside location in Arizona Mountain Country is located 90
minutes west of the Grand Canyon. Situated on historic Route 66, hotel guests
can conveniently visit downtown Flagstaff's restaurants and pubs, as well as
many Native American shops. Other attractions include the Snow Bowl ski resort,
the cliffs of Walnut Canyon, the Lowell Observatory and Oak Creek Canyon.
In addition to the customary risks of hotel ownership, within the
Flagstaff, Arizona submarket there is an abundance of hospitality capacity
attempting to capture the Grand Canyon visitor demand. There are also several
new hotels that have either been completed or are under construction, including
one or more properties that will be directly competitive with the Hotel. As an
offset to the increase in supply, the general Arizona marketplace has
experienced renewed economic strength during the past several years, generally
boosting lodging demand
38
<PAGE> 40
throughout the state. That factor is, however, less relevant to this Hotel than
to other of the Hotels, as this Hotel relies more heavily on the tourist trade
than on the business traveler. As compared to the year ended December 31, 1996,
the average occupancy for the period from January 1, 1997 through December 31,
1997 was 45.9% versus 45.2% and the average daily rate for the period from
January 1, 1997 through December 31, 1997 was $48.07 versus $42.40. To the
knowledge of the Company, this Hotel is in compliance with all relevant
environmental regulations. The Company is unaware of any specific fuel or energy
requirements with which the Hotel must comply. Finally, as a hotel, this
property is not subject to rent control regulations.
InnSuites Hotel Phoenix Best Western
This property is located just off the Squaw Peak Parkway, in the North
Phoenix resort area, convenient to the Phoenix International Airport and
downtown central Phoenix. The resort area offers golf, tennis, jogging and Squaw
Peak hiking trails as well as a variety of restaurants. Nearby attractions
include Turf Paradise Racing and shopping at Biltmore Fashion Park, Metro Center
and Paradise Valley Mall.
In addition to the customary risks of hotel ownership, within the Phoenix,
Arizona submarket there are several new hotels that have either been completed
or are under construction, including one or more properties that will be
directly competitive with the Hotel. As an offset to the increase in supply, the
general Arizona marketplace has experienced renewed economic strength during the
past several years, generally boosting lodging demand throughout the state. As
compared to the year ended December 31, 1996, the average occupancy for the
period from January 1, 1997 through December 31, 1997 was 68.2% versus 72.3% and
the average daily rate for the period from January 1, 1997 through December 31,
1997 was $78.57 versus $76.04. To the knowledge of the Company, this Hotel is in
compliance with all relevant environmental regulations. The Company is unaware
of any specific fuel or energy requirements with which the Hotel must comply.
Finally, as a hotel, this property is not subject to rent control regulations.
InnSuites Hotel Scottsdale El Dorado Park Resort
This Hotel is located in the heart of Scottsdale, adjacent to El Dorado
Park and 15 minutes from Phoenix's Sky Harbor International Airport. Located
beside El Dorado Park, guests of this hotel are offered many attractions,
including paddle boats, hiking, golf, walking and jogging trails. Other nearby
attractions include Island of Big Surf, the Phoenix Zoo, the Desert Botanical
Gardens, Papago Park Golf and the Scottsdale Art Galleries. The Fiesta Bowl,
Arizona State University's Sun Devil Stadium and the homes of football's Arizona
Cardinals and baseball's San Francisco Giants and Chicago Cubs (spring training)
are also easily accessible.
In addition to the customary risks of hotel ownership, within the
Scottsdale, Arizona submarket there are several new hotels that have either been
completed or are under construction, including one or more properties that will
be directly competitive with the Hotel. These new properties could significantly
enhance this submarket's lodging capacity, creating an increase in competitive
pressure. As an offset to the increase in supply, the general Arizona
marketplace has experienced renewed economic strength during the past several
years, generally boosting lodging demand throughout the state. As compared to
the year ended December 31, 1996, the average occupancy for the period from
January 1, 1997 through December 31, 1997 was 65.3% versus 59.0% and the average
daily rate for the period from January 1, 1997 through December 31, 1997 was
$67.53 versus $67.89. To the knowledge of the Company, this Hotel is in
compliance with all relevant environmental regulations. The Company is unaware
of any specific fuel or energy requirements with which the Hotel must comply.
Finally, as a hotel, this property is not subject to rent control regulations.
InnSuites Hotels San Diego Balboa Park Suite Resort
Located in San Diego, California, this Hotel is conveniently located near
many major attractions in San Diego, including Balboa Park, the San Diego Zoo,
the Convention Center, Sea World, Old Town and beaches. The elegant, colonial
style mansion has 147-suites, many of which have fireplaces. Additional
amenities include an Olympic-size, terrazzo tile swimming pool and a choice of
studio, one, two and three bedroom suites.
In addition to the customary risks of hotel ownership, within the San
Diego, California submarket there are several new hotels that have either been
completed or are under construction. The additional supply has or will
39
<PAGE> 41
create moderate competitive pressure as one or more of these properties are
expected to be directly competitive with the Hotel. Concurrently, southern
California is experiencing an increase in general economic activity which has
served to enhance lodging demand in this submarket. As compared to the year
ended December 31, 1996, the average occupancy for the period from January 1,
1997 through December 31, 1997 was 51.8% versus 51.2% and the average daily rate
for the period from January 1, 1997 through December 31, 1997 was $50.24 versus
$45.54. To the knowledge of the Company, this Hotel is in compliance with all
relevant environmental regulations. The Company is unaware of any specific fuel
or energy requirements with which the Hotel must comply. Finally, as a hotel,
this property is not subject to rent control regulations.
OTHER PROPERTY OWNED
Mr. Wirth holds ownership interests ("Ownership Interests") in one property
("Property Under Option"). The Property Under Option comprises a fifty percent
(50%) interest in a 185-suite full-service InnSuites Hotel (formerly a Ramada(R)
hotel) located in Buena Park, California. The Ownership Interests may be
acquired by the Company between February 1, 1998 and February 15, 1999, upon the
Company's exercise of an option granted by Mr. Wirth, at a price equal to the
greater of (i) $6,900,000 or (ii) fair market value as determined by an
independent appraisal.
The existence of the option minimizes the risk of a conflict of interest
between Mr. Wirth and the Company because of the existence of the Ownership
Interests. The Company did not pay any cash or other additional consideration
for the option, and the option may be exercised only by action of a majority of
the Company's independent Trustees.
LEASING AND MANAGEMENT OF THE HOTELS
The Lessee entered into substantially identical Percentage Leases for each
Hotel with the Partnership. In addition, ISIH provides property management
services to the Hotels, and the InnSuites Licensing Corp. provides trademark and
licensing services to the Hotels. Additional information regarding the
Percentage Leases is set forth below:
Each of the Hotels is leased by the Partnership to the Lessee. The
following table sets forth (i) the percentage rent formulas, (ii) the annual
minimum rent, and (iii) the pro forma percentage rent and total rent that would
have been paid for each Hotel pursuant to the terms of the Percentage Leases
based upon historical revenues for the twelve months ended December 31, 1997 as
if the Partnership had owned the Hotels and the Percentage Leases had been in
effect since January 1, 1997 (amounts in thousands of dollars).
40
<PAGE> 42
<TABLE>
<CAPTION>
FOR THE 12 MONTHS
ENDED 12/31/97
----------------------
FRANCHISE HISTORICAL
LEASE RENEWAL ANNUAL ROOMS & OTHER ROOMS & PRO FORMA
EXPIRATION EXPIRATION MINIMUM PERCENTAGE OTHER ANNUAL
HOTEL DATE DATE RENT RENT FORMULA(1) REVENUE RENT(2)
----- ---------- ---------- ------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
InnSuites Hotel 5/31/07 12/31/98 $ 800 37% under $1,800, $ 2,444 $ 996
Phoenix Best Western 50% from $1,800 to $2,400,
68% over $2,400
InnSuites Hotel 5/31/07 N/A $1,000 37.5% under $1,800, $ 3,480 $1,671
Tempe/Phoenix 50% from $1,800 to $2,700,
Airport/South Mountain 70% over $2,700
InnSuites Hotel Tucson, 5/31/07 12/31/98 $1,000 37.5% under $2,000, $ 3,913 $1,848
Catalina Foothills 50% from $2,000 to $3,000,
Best Western 70% over $3,000
InnSuites Hotel Yuma 5/31/07 12/31/98 $ 800 32% under $2,100, $ 3,003 $1,214
Best Western 50% from $2,100 to $2,500,
68% over $2,500
Holiday Inn Airport 5/31/07 6/30/04 $ 600 34% under $2,700, $ 3,341 $1,300
Hotel and Suites/Ontario 50% from $2,700 to $3,000,
68% over $3,000
InnSuites Hotel 5/31/07 N/A $ 250 25% under $1,300, $ 1,106 $ 250
Flagstaff/Grand Canyon 40% from $1,300 to $1,500,
58% over $1,500
InnSuites Hotel 5/31/07 N/A $ 600 35% under $1,600, $ 2,105 $ 623
Scottsdale El Dorado Park 50% from $1,600 to $2,000,
Resort 68% over $2,000
InnSuites Hotel Tucson 5/31/07 N/A $ 800 35% under $3,500, $ 2,728 $ 995
St. Mary's 50% from $3,500 to $5,000,
68% over $5,000
InnSuites Hotel 5/31/07 N/A $ 500 35% under $1,700, $ 1,391 $ 500
------ ------- ------
San Diego 50% from $1,700 to $2,200,
70% over $2,200
Total $6,350 $23,511 $9,397
====== ======= ======
</TABLE>
- ---------------
(1) Shown as a percentage of revenues.
(2) Calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases to historical revenues of the properties for the
twelve-month period as if January 1, 1997 was the beginning of the lease
year.
The following summary of the Percentage Leases, and the descriptions of
certain provisions thereof set forth herein, are qualified in their entirety by
reference to the form of Percentage Lease, which is an exhibit to the
Registration Statement of which this Prospectus is a part.
Duration. The Percentage Leases have initial terms ending on May 31, 2007,
subject to earlier termination on the occurrence of certain contingencies
described in the Percentage Leases (including, particularly, the provisions
described herein under "-- Damage to Properties," "-- Condemnation of
Properties" and "--Termination of Percentage Leases on Disposition of the
Hotels").
Amounts Payable Under the Percentage Leases. Lessee is obligated to pay (i)
the higher of minimum rent or percentage rent; and (ii) certain other amounts,
including interest accrued on any late payment or charge ("Additional Charges").
Minimum rent is a fixed amount determined by negotiation between the Partnership
and Lessee. Percentage rent is calculated by multiplying fixed percentages by
gross room and other revenues exceeding specified threshold amounts. Minimum
rent is payable monthly in arrears, and percentage rent is payable for each
quarter within 30 days after the end of the quarter.
Both the threshold gross room and other revenue amounts used in computing
percentage rent and minimum rent will be adjusted for changes in the CPI. The
changes will be calculated at the beginning of each calendar year beginning with
1999, based on the average annual change in the CPI during the prior 12 months.
Each Percentage Lease requires Lessee to pay rent, all costs and expenses,
and all utility and other charges incurred in the operation of the Hotel. All
capital expenditures (as defined in the Percentage Lease) will be the
41
<PAGE> 43
responsibility of the Partnership. Each Percentage Lease also provides for rent
reductions and abatements in the event of damage or destruction or a partial
taking of the Hotel as described under "-- Damage to Properties" and
"-- Condemnation of Properties." Lessee is required to carry insurance to cover
rental interruption for a period of up to one year.
Maintenance and Modifications. The Partnership is required to maintain the
underground utilities and the structural elements, including exterior walls
(excluding plate glass) and the roof, of the Hotels. The Partnership will also
fund the repair, replacement and refurbishment of furniture, fixtures and
equipment in the Hotels, when and as considered necessary by the Partnership and
will maintain a Capital Expenditures Fund to help provide funds to cover such
expenses. See "THE COMPANY -- Business Objectives -- Business
Strategy -- Renovations and Development." The Partnership will make a quarterly
contribution to the Capital Expenditures Fund in an amount equal to 4% of
Lessee's aggregate gross revenues generated from the Hotels. Lessee will be
required, at its expense, to maintain the Hotels in good order and repair,
except for ordinary wear and tear, and to make nonstructural, foreseen and
unforeseen, and ordinary and extraordinary, repairs which may be necessary and
appropriate to keep the Hotels in good order and repair. Capital expenses and
furniture, fixture and equipment replacements will be paid for by the
Partnership generally out of the Capital Expenditures Fund. The Partnership and
Lessee will agree on an annual budget for each Hotel.
Lessee, at its expense, may make noncapital and capital additions,
modifications or improvements to the Hotels, so long as doing so does not
significantly alter the character or purposes of the Hotels or significantly
detract from their value or operating efficiencies. All such additions,
modifications and improvements will be subject to all of the terms of the
Percentage Leases and will become the property of the Partnership upon
termination of the Percentage Leases. The Partnership will own the furniture,
fixtures and equipment, except in limited circumstances under which the
Partnership may require Lessee to purchase certain furniture, fixtures and
equipment, and Lessee will own substantially all other personal property not
affixed to, or considered a part of, the real estate or improvements thereon.
Any purchase of furniture, fixtures and equipment by Lessee will be made on
terms negotiated between the Partnership and Lessee.
Insurance and Property Taxes. The Partnership is responsible for paying
real estate and personal property taxes on the Hotels and for maintaining
property insurance, including casualty insurance. The Lessee is required to
maintain comprehensive general public liability, workers' compensation, 12-month
rental interruption insurance and any other insurance customary for properties
similar to the Hotels or required by any relevant franchisor, and to have the
Partnership named as an additional insured. The Partnership believes that the
insurance coverage carried by each Hotel is adequate in scope and amount.
Indemnification. Under each Percentage Lease, the Lessee will indemnify the
Partnership against all liabilities, costs and expenses (including reasonable
attorneys' fees and disbursements) incurred by, imposed on or asserted against
the Partnership on account of, among other things, (i) any accident or injury to
person or property on or about a Hotel; (ii) any negligence by Lessee or any of
its agents as to the leased property; (iii) any environmental liability
resulting from conditions caused or resulting thereafter from any action,
inaction or negligence of Lessee; (iv) taxes and assessments in respect of a
Hotel (other than real estate taxes and income taxes of the Partnership on
income attributable to a Hotel); (v) the sale or consumption of alcoholic
beverages on or in the real property or improvements thereon; or (vi) any breach
of the Percentage Lease by Lessee. The Lessee will not be required, however, to
indemnify the Partnership against the Partnership's gross negligence or willful
misconduct.
Assignment and Subleasing. The Lessee will not be permitted to sublet all
or any part of a Hotel or assign its interest under the Percentage Lease, other
than to an affiliate of Lessee, without the prior written consent of the
Partnership. No assignment, subletting or management agreement will release
Lessee from any of its obligations under the Percentage Lease.
Management Agreements. Lessee entered into a management agreement with ISIH
for the management and operation of the Hotels. Lessee will pay ISIH an annual
management fee equal to two and one-half percent (2.5%) of gross revenues.
42
<PAGE> 44
Damage to Properties. If damage to or destruction of any Hotel renders such
Hotel unsuitable for Lessee's use and occupancy and is covered by insurance, the
Partnership will be obligated to repair, rebuild or restore such Hotel, but only
to the extent of available insurance proceeds. The Percentage Lease will remain
in full force and effect during the first 12 months of any period required for
repair or restoration of a Hotel, after which time rent will be equitably
abated.
Condemnation of Properties. In the event of a total condemnation of a
Hotel, each of the Partnership and Lessee will be entitled to terminate the
Percentage Lease as of the date of taking. The resulting condemnation award will
be allocated between the Partnership and Lessee as set forth in the Percentage
Lease. In the event of a partial taking that does not render a Hotel unsuitable
for Lessee's use, Lessee must restore the untaken portion of such Hotel to a
complete architectural unit. In such a case, the Partnership must provide the
required funds to cover the cost of that restoration, which may include that
part of the condemnation award specified for restoration.
Events of Default. Events of Default under each Percentage Lease include,
among others, the following:
(i) the failure by Lessee to pay minimum rent when due and the
continuation of such failure for a period of 10 days;
(ii) the failure by Lessee to pay the percentage rent for any quarter
within 10 days after the end of such quarter;
(iii) the failure by Lessee to observe or perform any other term of
the Percentage Lease and the continuation of such failure beyond any
applicable cure period;
(iv) an Event of Default under any other Percentage Lease;
(v) if Lessee files a petition in bankruptcy or reorganization under
any federal or state bankruptcy law or any similar federal or state law, or
is adjudicated a bankrupt or makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts generally as
they become due, or if a petition or answer proposing the adjudication of
Lessee as a bankrupt or its reorganization pursuant to any federal or state
bankruptcy law or any similar federal or state law is filed in any court
and Lessee is adjudicated a bankrupt and that adjudication is not vacated
or set aside or stayed within 60 days after the entry of an order in
respect thereof, or if a receiver of Lessee or of the whole or
substantially all of the assets of Lessee is appointed in any proceeding
brought by Lessee, or any such receiver, trustee or liquidator is appointed
in any proceeding brought against Lessee and that appointment is not
vacated or set aside or stayed within 60 days after that appointment is
made;
(vi) if Lessee voluntarily discontinues operations of a Hotel for more
than 30 days, except as a result of damage, destruction or condemnation; or
(vii) if the franchise agreement in respect of any Hotel is terminated
by the franchisor as a result of any action or failure to act by Lessee or
its agents and is not replaced within 90 days after the date of termination
by a new franchise agreement that is acceptable to the Partnership acting
in its reasonable discretion.
If an Event of Default occurs and continues beyond any curative period, the
Partnership may terminate the Percentage Lease and any or all of the other
Percentage Leases by giving Lessee 30 days' written notice of the date for
termination thereof and, unless that Event of Default is cured prior to that
termination date, the specified Percentage Leases will terminate on that date
and Lessee will be required to surrender possession of the affected Hotels.
Termination of Percentage Leases on Disposition of the Hotels. If the
Partnership enters into an agreement to transfer a Hotel to a non-affiliate, the
Partnership may terminate that Hotel's Percentage Lease by giving Lessee 30
days' prior notice and paying it the fair market value of its leasehold interest
in the remaining term of that Percentage Lease.
Franchise Agreements. Lessee and/or the relevant Hotel are the franchisee
under the franchise agreements for the Hotels. The current franchise agreements
for the three Best Western(R) Hotels, which are renewable
43
<PAGE> 45
annually, expire on December 31, 1998. The current franchise agreement for the
Holiday Inn(R) Hotel expires on June 30, 2004. There can be no assurance that
such franchise agreements will be renewed upon their expiration or as to the
effect on the Company of any non-renewal.
Trademark/License Agreements. Lessee and/or the relevant Hotel are each a
licensee under the license agreements pursuant to which InnSuites Licensing
Corp. will receive an annual licensing fee equal to 2.5% of gross room revenue
from each of the Hotels. Those Hotels which carry a third-party franchise
(currently Best Western(R) and Holiday Inn(R)) will have their licensing fee
reduced to 1.25% so long as the third-party franchise is in place.
Inventory. All working capital assets required in the operation of the
Hotels will be purchased by the Lessee at its expense.
EMPLOYEES
The Company has no employees. The Company's external advisor, Mid-America
ReaFund Advisors, Inc. ("MARA") performs, directly or through the Partnership,
various acquisition, development, redevelopment and management functions. The
Lessee has approximately 493 employees engaged in the operation of the Hotels.
The Lessee will continue InnSuites' ongoing recruiting efforts to attract
quality talent at all levels of sales and management.
None of the persons who will be employees of the Company or the Lessee are
represented by a union. The Company believes that its and the Lessee's relations
with their respective employees are excellent.
LEGAL PROCEEDINGS
Neither the Company, the Lessee nor the Partnership is currently involved
in any material litigation nor, to the Company's knowledge, is any material
litigation currently threatened against the Company, the Lessee or the
Partnership.
POLICIES AND OBJECTIVES WITH RESPECT
TO CERTAIN ACTIVITIES
The following supplements the discussion of the Company's growth,
acquisition, development and financing strategies set forth in "THE COMPANY."
The Company's policies with respect to those activities and the matters
discussed below have been established by the Board of Trustees of the Company
and may be amended or revised from time to time at the discretion of the Board
of Trustees without a vote of the stockholders of the Company, except that
changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements.
INVESTMENT POLICIES
Investments in Real Estate. The Company may acquire equity interests in
hotel properties other than the Hotels through the Partnership or other entities
controlled by the Partnership, or through joint ventures or other types of
co-ownership. These investments may be subject to existing mortgage financing
and other indebtedness that may have priority over the equity interest of the
Company.
The Company's current policy is to not invest in any one property more than
25% of its total assets at the time of the investment.
Investments in Real Estate Mortgages. While the Company will emphasize
equity real estate investments, it may invest in mortgage and other real estate
interests, including securities of other REITs, and in nonperforming mortgages
with the goal of acquiring the underlying property. The Company may invest in
participating or convertible mortgages (which are similar to equity
participation) if it may benefit from the cash flow or any appreciation in the
value of the subject property. The Company does not currently intend to invest
in mortgages or securities of other REITs.
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FINANCING
While its organizational documents contain no limitation on the amount of
debt it may incur, the Company, subject to the discretion of the Board of
Trustees, intends to maintain a debt to total market capitalization ratio or
debt to appraised value of real estate ratio (measured at the time the debt is
incurred) of not more than 50% to 55%. The Company may from time to time
re-evaluate its debt capitalization policy in light of economic conditions,
relative costs of debt and equity capital, market value of its properties,
acquisition, development and expansion opportunities, and other factors. Any
indebtedness may be incurred by the Partnership or the Company. Indebtedness
incurred by the Company may be in the form of bank borrowings, secured or
unsecured, and publicly or privately placed debt instruments, the proceeds of
which would be loaned or contributed to the Partnership. Indebtedness incurred
by the Partnership may be in the form of purchase money obligations to the
sellers of properties, publicly or privately placed debt instruments, further
borrowings from the Company, or financing from banks, institutional investors or
other lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the property owned by the Partnership. This
indebtedness may be recourse to all or any part of the property of the Company
or the Partnership, or may be limited to the specific property to which the
indebtedness relates. The proceeds from any borrowings by the Company or the
Partnership may be used for the payment of distributions or dividends, for
working capital, or to refinance existing indebtedness or to finance
acquisitions or expansions of properties. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Requirements for Qualification and -- Distribution
Requirements."
If the Board of Trustees determines to raise additional equity capital, the
Board has the authority, without stockholder approval, to issue additional
Common Stock of the Company in any manner (and generally on such terms and for
such consideration) as it deems appropriate, including in exchange for property.
Any such offering might cause a dilution of the existing stockholders'
investment in the Company.
The Company has obtained the Credit Facility. See "THE COMPANY -- Business
Objectives -- Business Strategy -- Financing Strategy" for a description of the
terms of the Credit Facility.
POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES
The Company has authority to offer capital shares or other securities and
to repurchase or otherwise reacquire its shares or any other securities, and may
engage in such activities in the future. The Company has no outstanding loans to
other entities or persons, including its officers and directors, and except as
described above under "-- Investment Policies," does not currently intend to
make loans to other entities. The Company has not engaged, and does not
currently intend to engage, in trading, underwriting or agency distribution or
sale of securities of other issuers, and has not invested, and does not
currently intend to invest, in the securities of other issuers (other than the
Partnership) for the purpose of exercising control. The Company intends to make
investments in such a way that it will not be treated as an investment company
under the Investment Company Act of 1940.
The Company intends to make investments at all times in a manner consistent
with the requirements of the Code in order for the Company to qualify as a REIT
unless, because of changing circumstances or changes in the Code, in Treasury
Regulations or in the interpretations of either, the Company's Board of Trustees
determines that it is no longer in the best interests of the Company and its
stockholders to qualify as a REIT.
CONFLICT OF INTEREST POLICY
Neither the Company's governing instruments nor Company policy prohibit any
Company Trustee, officer, stockholder or affiliate from having a pecuniary
interest in any investment to be acquired or disposed of by the Company or in
any transaction to which the Company is a party or in which it has an interest.
Determinations to be made on behalf of the Company with respect to
relationships or opportunities that represent a conflict of interest for any
Company officer or Trustee as such will be subject to the approval of the
independent Trustees. See "RISK FACTORS -- Conflicts of Interest." In addition,
Mr. Wirth and the other affiliates of InnSuites Hotels have agreed that they
will conduct all of their hotel ownership, development and
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acquisition activities through the Company, except as described under "BUSINESS
AND PROPERTIES -- Other Property Owned."
The Partnership Agreement requires the Company to resolve in favor of the
Company's stockholders any conflict of interest between those stockholders, on
the one hand, and the limited partners of the Partnership, on the other hand, if
the conflict cannot be resolved in a manner not adverse to the interests of
either group. The Partnership Agreement also exonerates the Company from
monetary damages for losses sustained, liabilities incurred or benefits not
derived by limited partners in connection with any such resolution, so long as
the Company has acted in good faith.
CERTAIN DECLARATION AND STATUTORY PROVISIONS
DECLARATION PROVISIONS
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding stock. Specifically,
not more than 50% in value of the Company's outstanding stock may be owned,
actually and constructively under the applicable attribution provisions of the
Code, by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year (other than the first year),
and the Company must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Requirements for Qualification." For the purpose of preserving
the Company's REIT qualification, the Company's Declaration contains the
"Ownership Limitation Provisions," which restrict the ownership and transfer of
the Company's capital stock under certain circumstances.
The Ownership Limitation Provisions provide that, subject to certain
exceptions specified in the Declaration, no person may own, or be deemed to own
by virtue of the applicable attribution provisions of the Code, more than 4.9%
of any class of the Company's outstanding capital stock. The Board of Trustees
may, but in no event will be required to, waive the Ownership Limit if it
determines that such ownership will not jeopardize the Company's status as a
REIT. As a condition of such waiver, the Board of Trustees may require opinions
of counsel satisfactory to it and/or undertakings or representations from the
applicant with respect to preserving the REIT status of the Company. The
Ownership Limitation Provisions will not apply if the Board of Trustees and the
holders of two-thirds of the outstanding shares of capital stock entitled to
vote on such a matter determine that it is no longer in the best interests of
the Company to attempt to qualify, or to continue to qualify, as a REIT.
Any purported transfer of capital stock of the Company and any other event
that would otherwise result in any person or entity violating the Ownership
Limit will be void and of no force or effect as to that number of shares in
excess of the Ownership Limit, and the purported transferee ("Prohibited
Transferee") shall acquire no right or interest (or, in the case of any event
other than a purported transfer, the person or entity holding record title to
any such shares in excess of the Ownership Limit ("Prohibited Owner") shall
cease to own any right or interest) in such excess shares. In addition, if any
purported transfer of capital stock of the Company or any other event otherwise
would cause the Company to become "closely held" under the Code or otherwise
fail to qualify as a REIT under the Code (other than as a result of a violation
of the requirement that a REIT have at least 100 stockholders), then any such
purported transfer will be void and of no force or effect as to that number of
shares in excess of the number that could have been transferred without such
result, and the Prohibited Transferee shall acquire no right or interest (or, in
the case of any event other than a transfer, the Prohibited Owner shall cease to
own any right or interest) in such excess shares. Also, if any purported
transfer of capital stock of the Company or any other event would otherwise
cause the Company to own, or be deemed to own by virtue of the applicable
attribution provisions of the Code, 10% or more of the ownership interests in
the Lessee or in any sublessee, then any such purported transfer will be void
and of no force or effect as to that number of shares in excess of the number
that could have been transferred without such result, and the Prohibited
Transferee shall acquire no right or interest (or, in the case of any event
other than a transfer, the Prohibited Owner shall cease to own any right or
interest) in such excess shares.
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Any such excess shares described above will be transferred automatically,
by operation of law, to a trust, the beneficiary of which will be a qualified
charitable organization selected by the Company ("Beneficiary"). The trustee of
the trust who shall be designated by the Company and be unaffiliated with the
Company and any Prohibited Owner, will be empowered to sell such excess shares
to a qualified person or entity and distribute to a Prohibited Transferee an
amount equal to the lesser of the price paid by the Prohibited Transferee for
such excess shares or the sales proceeds received by the trust for such excess
shares. In the case of any excess shares resulting from any event other than a
transfer, or from a transfer for no consideration, the trustee will be empowered
to sell such excess shares to a qualified person or entity and distribute to the
Prohibited Owner an amount equal to the lesser of the fair market value of such
excess shares on the date of such event or the sales proceeds received by the
trust for such excess shares. Prior to a sale of any such excess shares by the
trust, the trustee will be entitled to receive, in trust for the benefit of the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all voting
rights with respect to such excess shares.
Any purported transfer of capital stock of the Company that would otherwise
cause the Company to be beneficially owned by fewer than 100 persons will be
null and void in its entirety, and the intended transferee will acquire no
rights in such stock.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Every owner of more than 4.9% (or such lower percentage as may be required
by the Code or Treasury Regulations) of the outstanding shares of capital stock
of the Company must file a written notice with the Company containing the
information specified in the Declaration no later than January 30 of each year.
In addition, each stockholder shall upon demand be required to disclose to the
Company in writing such information as the Company may request in order to
determine the effect, if any, of such stockholder's actual and constructive
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limit.
The Ownership Limitation Provisions may have the effect of precluding an
acquisition of control of the Company without approval of the Board of Trustees.
NUMBER OF TRUSTEES; REMOVAL; FILLING VACANCIES
The Declaration provides that the Board of Trustees consist of not less
than five persons, subject to increase by the affirmative vote of a majority of
the members of the entire Board of Trustees. At all times a majority of the
Trustees shall be independent Trustees, except that upon the death, removal or
resignation of an independent Trustee, such requirement shall not be applicable
for 60 days. Currently, there are six Trustees, four of whom are independent
Trustees. The stockholders shall be entitled to vote on the election of
Trustees, with each share entitled to one vote. The Board of Trustees is
presently divided into three classes, comprised of two Trustees each. Trustees
are elected to staggered three year terms. Any Trustee may be removed for cause
by the vote of two-thirds of the remaining Trustees. The Declaration provides
that, subject to any rights of holders of preferred stock, if any, and unless
the Board of Trustees otherwise determines, any vacancies will be filled by the
affirmative vote of a majority of the remaining Trustees, though less than a
quorum. Any Trustee so elected may qualify as an independent Trustee only if he
has received the affirmative vote of at least a majority of the remaining
independent Trustees, if any. Accordingly, the Board of Trustees could
temporarily prevent any stockholder from enlarging the Board of Trustees and
filling the new Trusteeships with such stockholder's own nominees. Any Trustee
so elected shall hold office until the next annual meeting of stockholders.
LIMITATION OF LIABILITY
The Declaration provides that to the maximum extent that Ohio law in effect
from time to time permits the limitation of liability of Trustees and officers,
no Trustee or officer of the Company shall be liable to the Company or its
stockholders for money damages.
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INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Declaration and Bylaws require the Company to indemnify its Trustees,
officers, employees and agents to the fullest extent permitted from time to time
by Ohio law. Ohio law permits a corporation to indemnify its trustees, officers,
employees and agents against judgments, penalties, fines, settlements and
reasonable expenses (including attorneys fees) actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is established
that (i) the act or omission of the indemnified party was material to the matter
giving rise to the proceeding and the act or omission was committed in bad faith
or was the result of active and deliberate dishonesty, (ii) the indemnified
party actually received an improper personal benefit in money, property or
services, or (iii) in the case of any criminal proceeding, the indemnified party
had reasonable cause to believe that the act or omission was unlawful.
Indemnification is mandatory if the indemnified party has been successful on the
merits or otherwise in the defense of any proceeding unless such indemnification
is not otherwise permitted as provided in the preceding sentence. In addition to
the foregoing, a court of competent jurisdiction, under certain circumstances,
may order indemnification if it determines that the person is fairly and
reasonably entitled thereto in view of all the relevant circumstances, unless
the proceeding was an action by or in the right of the corporation or involved a
determination that the person received an improper personal benefit.
AMENDMENT
The Declaration may be amended by the affirmative vote of the holders of
two-thirds of the outstanding shares of Common Stock, with the stockholders
voting as a class with one vote per share.
PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the descriptions of
certain provisions thereof set forth herein, are qualified in their entirety by
reference to the Partnership Agreement, which is an exhibit to the Registration
Statement of which this Prospectus is a part.
MANAGEMENT
The Partnership is a Delaware limited partnership and was formed pursuant
to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, the Company, as the sole general partner of the Partnership ("General
Partner"), has full, exclusive and complete responsibility and discretion in the
management and control of the Partnership, and the limited partners of the
Partnership ("Limited Partners", together with the General Partner, "Partners")
have no authority to transact business for, or participate in the management
activities or decisions of, the Partnership. However, any amendment to the
Partnership Agreement that would (i) affect the conversion rights described
under "--Conversion Rights" below, (ii) adversely affect the Limited Partners'
rights to receive cash distributions, (iii) alter the Partnership's allocations
of income, or (iv) impose on the Limited Partners any obligations to make
additional contributions to the capital of the Partnership, requires the consent
of Limited Partners holding at least a majority of the Units and Class B Units.
TRANSFERABILITY OF INTERESTS
The Company may not voluntarily withdraw from the Partnership or transfer
or assign its interest in the Partnership unless the transaction in which such
withdrawal or transfer occurs results in the Limited Partners receiving property
in an amount equal to the amount they would have received had they exercised
their conversion rights immediately prior to such transaction, or unless the
successor to the Company contributes substantially all of its assets to the
Partnership in return for an interest in the Partnership. The Limited Partners
may not transfer their interests in the Partnership without the consent of the
Company, which the Company may withhold in its sole discretion. The Company may
not consent to any transfer that would cause the Partnership to be treated as a
separate corporation for federal income tax purposes.
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CAPITAL CONTRIBUTION
The Company and the Limited Partners contributed cash or interests in
certain of the Hotels to the Partnership in exchange for partnership interests
in the Partnership. As required by the Partnership Agreement, immediately prior
to a capital contribution by the Company, the Partners' capital accounts and the
Carrying Value (as that term is defined in the Partnership Agreement) of the
Partnership property shall be adjusted to reflect the unrealized gain or
unrealized loss attributable to the Partnership property as if such items had
actually been recognized immediately prior to such issuance and had been
allocated to the Partners at such time.
The Partnership Agreement provides that if the Partnership requires
additional funds at any time or from time to time in excess of funds available
to the Partnership from borrowing or capital contributions, the Company may
borrow such funds from a financial institution or other lender and lend such
funds to the Partnership on the same terms and conditions as are applicable to
the Company's borrowing of such funds. As an alternative to borrowing funds
required by the Partnership, the Company may contribute the amount of such
required funds as an additional capital contribution to the Partnership. If the
Company so contributes additional capital to the Partnership, the Company will
receive additional partnership interests in the Partnership and the Company's
percentage interest in the Partnership will be increased on a proportionate
basis with the amount of such additional capital contributions and the value of
the Partnership at the time of such contributions. Conversely, the percentage
interests of the Limited Partners will be decreased on a proportionate basis in
the event of additional capital contributions by the Company.
CONVERSION RIGHTS
Pursuant to the Partnership Agreement, the Limited Partners holding Units
are entitled to conversion rights, which enable them to cause the Partnership to
convert their interests in the Partnership (subject to certain restrictions)
into shares of Common Stock, except to the extent that the Ownership Limit is
reached in which case the Company may elect to purchase any Units in excess of
the Ownership Limit for cash. The conversion rights may not be exercised if the
issuance of shares of Common Stock by the Company, as General Partner, for any
part of the interest in the Partnership sought to be converted would (i) result
in any person violating the Ownership Limit contained in the Company's
Declaration, (ii) cause the Company to be "closely held" within the meaning of
the Code, (iii) cause the Company to be treated as owning 10% or more of the
Lessee or any sublessee within the meaning of the Code, or (iv) otherwise cause
the Company to fail to qualify as a REIT; unless, in any case, the Partnership
or the Company (as the case may be) elects, in its sole and absolute discretion,
to pay the conversion amount in cash. The conversion rights may be exercised by
the Limited Partners, in whole or in part (in either case, subject to the above
restrictions), at any time or from time to time, following the satisfaction of
any applicable holding period requirements. At June 1, 1998, the aggregate
number of shares of Common Stock issuable upon exercise of the conversion rights
by the Limited Partners was 2,203,731. The number of shares issuable upon the
exercise of the conversion rights will be adjusted upon the occurrence of stock
splits, mergers, consolidations or similar pro rata share transactions, which
otherwise would have the effect of diluting the ownership interests of the
Limited Partners or the stockholders of the Company.
TAX MATTERS
Pursuant to the Partnership Agreement, the Company is the tax matters
partner of the Partnership and, as such, has authority to make tax elections
under the Code on behalf of the Partnership.
Profit and loss of the Partnership generally are allocated among the
partners in accordance with their respective interests in the Partnership based
on the number of partnership interests held by the Partners.
OPERATIONS
The Partnership Agreement requires that the Partnership be operated in a
manner that enables the Company to satisfy the requirements for being classified
as a REIT and to avoid any federal income tax liability.
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DISTRIBUTIONS
The Partnership Agreement provides that the Partnership will distribute
cash from operations (including net sale or refinancing proceeds, but excluding
net proceeds from the sale of the Partnership's property in connection with the
liquidation of the Partnership) quarterly, in amounts determined by the Company
in its sole discretion, to the Partners in accordance with their respective
percentage interests in the Partnership. Upon liquidation of the Partnership,
after payment of, or adequate provision for, debts and obligations of the
Partnership, including any Partner loans, any remaining assets of the
Partnership will be distributed to all Partners with positive capital accounts
in accordance with their respective positive capital account balances. If any
Partner, including the Company, has a negative balance in its capital account
following a liquidation of the Partnership, it will be obligated to contribute
cash to the Partnership equal to the negative balance in its capital account.
TERM
The Partnership will continue until December 31, 2047, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the Company as
General Partner (unless the Limited Partners elect to continue the Partnership),
(ii) the sale or other disposition of all or substantially all the assets of the
Partnership, (iii) the conversion of all limited partnership interests in the
Partnership (other than those held by the Company, if any), or (iv) the election
of the General Partner.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations relevant to a prospective holder of Common Stock. The discussion
does not purport to deal with all aspects of taxation that may be relevant to a
holder of Common Stock in light of their personal investment or tax
circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code. The Company currently is qualified as a REIT and
intends to continue to operate in such manner, but no assurance can be given
that the Company will operate in a manner so as to remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retrospectively. Thompson Hine & Flory LLP has acted as counsel to the Company
commencing February 1, 1998.
The Company believes that it will continue to be qualified to be taxed as a
REIT for its taxable year ended January 31, 1998, and that its organization and
current and proposed method of operation will enable it to continue to qualify
as a REIT for its taxable year ended January 31, 1999 and in the future. The
Company has obtained an opinion of Thompson Hine & Flory LLP as to its REIT
qualifications beginning with its fiscal year ended January 31, 1999. Investors
should be aware, however, that opinions of counsel are not binding upon the
Service or any court. It must be emphasized that the opinion of Thompson Hine &
Flory LLP is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters,
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including representations regarding the nature of the Company's properties and
the future conduct of its business. Such factual assumptions and representations
are described below. Moreover, such continued qualification and taxation as a
REIT depends upon the Company's ability to meet on a continuing basis, through
actual annual operating results, distribution levels, and stock ownership, the
various qualification tests imposed under the Code discussed below. Thompson
Hine & Flory LLP will not review the Company's compliance with those tests on a
continuing basis. Accordingly, no assurance can be given that the actual results
of the Company's operation for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of failure to qualify as
a REIT, see "-- Failure to Qualify."
If the Company continues to qualify for taxation as a REIT, it generally
will not be subject to federal corporate income taxes on its net income that is
distributed currently to the stockholders. That treatment substantially
eliminates the "double taxation" (i.e., taxation at both the corporate and
stockholder levels) that generally results from investment in a corporation.
However, the Company will be subject to federal income tax in the following
circumstances. First, the Company will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains. Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" under Section 55 of the Code. Third, if the Company
has (i) net income from the sale or other disposition of "foreclosure property"
that is held primarily for sale to customers in the ordinary course of business
or (ii) other nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if the Company 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 Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income tests. Sixth, if the Company 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 Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if the Company acquires any asset from a
C corporation (i.e. , a corporation generally subject to full corporate-level
tax) in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such asset during the ten-year period beginning on the date on which such asset
was acquired by the Company, then to the extent of such asset's built-in gain
(i.e. , the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
built-in gain assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
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 Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year ("5/50 Rule"); (vii)
that makes an election to be a REIT (or has made such election for a previous
taxable year) and satisfies all relevant filing and other administrative
requirements established by the Service that must be met in order to elect and
to maintain REIT status; (viii) that uses a calendar year for federal income tax
purposes unless the REIT (such as the Company) uses a fiscal year and was in
existence as a REIT for any taxable year beginning on or before October 4, 1976,
and complies with the recordkeeping requirements of the Code and Treasury
Regulations promulgated thereunder; and (ix) that meets certain other tests,
described below, regarding the nature of its
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income and assets. The Code provides that conditions (i) to (iv), inclusive,
must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v) and
(vi) will not apply until after the first taxable year for which an election is
made by the Company to be taxed as a REIT. The Company has issued and will issue
sufficient Common Stock in sufficient diversity of ownership to allow it to
satisfy requirements (v) and (vi). In addition, the Company's Declaration
provides for restrictions regarding transfer of the Common Stock that are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above.
For purposes of determining stock ownership under the 5/50 Rule, a (i)
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual, and (ii) stock held by a trust
that is a qualified trust under Section 401(a) of the Code is treated as held by
the Company's beneficiaries in proportion to their actuarial interests in the
pension trust for purposes of the 5/50 Rule.
The Company owns a corporate subsidiary, RRF Sub Corp., which the Company
believes to be a "qualified REIT subsidiary". (A qualified REIT subsidiary is
any corporation wholly-owned by a REIT.) As such, RRF Sub Corp. is disregarded
for federal income tax purposes and all assets, liabilities and items of income,
deduction and credit of RRF Sub Corp. are treated as assets, liabilities and
items of the Company itself.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the character
of the assets and gross income of the partnership will retain the same character
in the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income and asset tests, described below. Thus, the
Company's proportionate share of the assets, liabilities and items of income of
the Partnership (and any lower tier partnership) will be treated as assets and
gross income of the Company for purposes of applying the requirements described
herein.
INCOME TESTS
In order for the Company to maintain its qualification as a REIT, there are
two requirements relating to the Company's gross income that must be satisfied
annually. First, at least 75% of the Company'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" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of Common Stock that do not
constitute dealer property, or from any combination of the foregoing.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above 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 of sales. 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 Company, or an owner of 10% or more of the Company, directly
or constructively owns 10% or more of such tenant (a "Related Party Tenant")
(including in such 10% calculation the attribution of certain interests held by
family members, corporations (in which such owner owns more than 10% of the
value of the outstanding shares) and a partnership in which such person owns 25%
or more of the capital or profits, or held by certain partners of any such
person). 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, for rents received to
qualify as "rents from real property," the Company generally must not operate or
manage the property or furnish or render more than a de minimis amount
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of services to the tenants of such property, other than through an "independent
contractor" from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by the Company are "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant."
Pursuant to the Percentage Leases, the Lessee leases from the Partnership
and the Subsidiary Partnerships (as defined below) and RRF Sub Corp. the land,
buildings, improvements, furnishings, and equipment comprising the Hotels for a
ten-year period. The Percentage Leases provide that the Lessee is obligated to
pay to the Partnership or RRF Sub Corp., as the case may be, (i) the greater of
a fixed rent ("Base Rent") or a percentage rent ("Percentage Rent")
(collectively, "Rents") and (ii) certain other amounts, including interest
accrued on any late payments or charges ("Additional Charges"). The Percentage
Rent is calculated by multiplying fixed percentages by the gross suite revenues
and food and beverage rent revenues for each of the Hotels in excess of certain
levels. The Base Rent accrues and is required to be paid monthly. Although
Percentage Rent is due quarterly, the Lessee will not be in default for
non-payment of Percentage Rent due in any calendar year if the Lessee pays,
within 90 days of the end of the calendar year, the excess of Percentage Rent
due and unpaid over the Base Rent with respect to such year. For purposes of
this section, the term "Partnership" includes the Subsidiary Partnerships and
RRF Sub Corp. when the context requires.
In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute "rents from real property," the Percentage 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 Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).
In addition, Section 7701(e) of the Code provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property, (ii) the service
recipient controls the property, (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the value of
the property, the recipient shares in savings in the property's operating costs,
or the recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient, and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination whether a service
contract should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.
The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes. Such belief is based, in part, on the
following facts: (i) the Partnership and the Lessee intend for their
relationship to be that of a lessor and lessee and such relationship will be
documented by lease agreements, (ii) the Lessee has the right to exclusive
possession and use and quiet enjoyment of the Hotels during the term of the
Percentage Leases, (iii) the Lessee bears the cost of, and will be responsible
for, day-to-day maintenance and repair of the Hotels, other than the cost of
maintaining underground utilities and structural elements, and will dictate how
the Hotels are operated, maintained and improved, (iv) the Lessee bears all of
the costs and expenses of operating the Hotels (including the cost of any
inventory and supplies used in their operation) during the term of the
Percentage Leases (other than real and personal property taxes, and the cost of
replacement or refurbishment of furniture, fixtures and equipment, to the extent
such costs do not exceed the allowance for such costs provided by the
Partnership under each Percentage Lease), (v) the Lessee benefits from any
savings in the
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costs of operating the Hotels during the term of the Percentage Leases, (vi) in
the event of damage or destruction to a Hotel, the Lessee will be at economic
risk because it will be obligated either (A) to restore the property to its
prior condition, in which event it will bear all costs of such restoration or
(B) purchase the Hotel for an amount generally equal to the Partnership's
investment in the property, (vii) the Lessee will indemnify the Partnership
against all liabilities imposed on the Partnership during the term of the
Percentage Leases by reason of (A) injury to persons or damage to property
occurring at the Hotels or (B) the Lessee's use, management, maintenance or
repair of the Hotels, (viii) the Lessee is obligated to pay substantial fixed
rent for the period of use of the Hotels, and (ix) the Lessee stands to incur
substantial losses (or reap substantial gains) depending on how successfully it
operates the Hotels.
INVESTORS SHOULD BE AWARE THAT THERE ARE NO CONTROLLING TREASURY
REGULATIONS, PUBLISHED RULINGS, OR JUDICIAL DECISIONS INVOLVING LEASES WITH
TERMS SUBSTANTIALLY THE SAME AS THE PERCENTAGE LEASES THAT DISCUSS WHETHER SUCH
LEASES CONSTITUTE TRUE LEASES FOR FEDERAL INCOME TAX PURPOSES. THEREFORE, THE
RELATIONSHIP BETWEEN THE PARTNERSHIP AND THE LESSEE IS BASED UPON ALL OF THE
FACTS AND CIRCUMSTANCES AND UPON RULINGS AND JUDICIAL DECISIONS INVOLVING
SITUATIONS THAT ARE CONSIDERED TO BE ANALOGOUS. THERE CAN BE NO COMPLETE
ASSURANCE THAT THE SERVICE WILL NOT ASSERT SUCCESSFULLY A CONTRARY POSITION. If
the Percentage Leases are recharacterized as service contracts or partnership
agreements, rather than true leases, part or all of the payments that the
Partnership receives from the Lessee may not be considered rent or may not
otherwise satisfy the various requirements for qualification as "rents from real
property." In that case, the Company likely would not be able to satisfy either
the 75% or 95% gross income tests and, as a result, would lose its REIT status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel must not be greater than 15% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in a Hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in the Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of the such taxable year
("Adjusted Basis Ratio"). The initial adjusted basis of the personal property in
each Hotel was less than 15% of the initial adjusted bases of both the real and
personal property comprising such hotel. The basis of such personal property, to
the extent it was included in the Hotels at the time of their purchase, was
based on appraisals at the date of purchase. There can be no assurance, however,
that the Service would not assert that the personal property originally acquired
by the Partnership had a value in excess of the appraised value, or that a court
would not uphold such assertion. If such a challenge were successfully asserted,
the Company could fail the 15% Adjusted Basis Ratio as to one or more of the
Percentage Leases, which in turn potentially could cause it to fail to satisfy
the 95% or 75% gross income tests and thus lose its REIT status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, 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 Percentage Leases are entered
into, (ii) are not renegotiated during the term of the Percentage 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, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
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. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases and the Company represented that the percentages (i) will
not be renegotiated during the terms of the Percentage Leases in a manner that
has the effect of basing the Percentage Rent on income or profits and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company represented that, with respect to other hotel
properties that it acquires in the future, it will not charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage of gross revenues,
as described above).
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A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of the Lessee. The constructive ownership rules generally provide that, if
10% or more in value of the stock of the Company is owned, directly or
indirectly, by or for any person, the Company is considered as owning the
ownership interests in any lessee that are owned, directly or indirectly, by or
for such person. The Company does not currently own, directly or constructively,
any ownership interest in the Lessee. In addition, the Partnership Agreement
provides that a converting Limited Partner will not be permitted to convert
Units (unless the Company elects, in its sole discretion, to pay cash in lieu of
Common Stock) to the extent that the acquisition of Common Stock by such partner
would result in the Company being treated as owning, directly or constructively,
10% or more of the ownership interests of the Lessee or of the ownership
interests in any sublessee. Thus, the Company should never own, directly or
constructively, 10% or more of the Lessee or any sublessee. Furthermore, the
Company represents that, with respect to other hotel properties that it acquires
in the future, it will not rent any property to a Related Party Tenant. However,
because the Code's constructive ownership rules for purposes of the Related
Party Tenant rules are broad and it is not possible to monitor continually
direct and indirect transfers of shares of Common Stock, no absolute assurance
can be given that such transfers or other events of which the Company has no
knowledge will not cause the Company to own constructively 10% or more of the
Lessee at some future date.
A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render (i) impermissible
services to the Lessee or the tenants of the Hotels, or manage or operate the
Hotels, other than through an independent contractor from whom the Company
itself does not derive or receive any income, or (ii) unpermitted services to
the Lessee, except in either case to a de minimis extent. Provided that the
Percentage Leases are respected as true leases, the Company should satisfy this
requirement because the Partnership is not performing any services other than
customary ones for the Lessee. Furthermore, the Company represents that, with
respect to other hotel properties that it acquires in the future, it will not
perform noncustomary services with respect to the tenant of the property. As
described above, however, if the Percentage Leases are recharacterized as
service contracts or partnership agreements, the Rents likely would be
disqualified as "rents from real property" because the Company would be
considered to furnish or render services to the occupants of the Hotels and to
manage or operate the Hotels other than through an independent contractor who is
adequately compensated and from whom the Company derives or receives no income.
If the Rents do not qualify as "rents from real property" because the rents
attributable to personal property exceed 15% of the total Rents for a taxable
year, the portion of the Rents that is attributable to personal property will
not be qualifying income for purposes of either the 75% or 95% gross income
tests. Thus, if the Rents attributable to personal property, plus any other
nonqualifying income, during a taxable year exceeds 5% of the Company's gross
income during the year, the Company would lose its REIT status. If, however, the
Rents do not qualify as "rents from real property" because either (i) the
Percentage Rent is considered based on income or profits of the Lessee, (ii) the
Company owns, directly or constructively, 10% or more of the Lessee, or (iii)
the Company furnishes noncustomary services to the Lessee (other than through a
qualified independent contractor) or manages or operates the Hotels, none of the
Rents would qualify as "rents from real property." In that case, the Company
likely would lose its REIT status because it would be unable to satisfy either
the 75% or 95% gross income tests.
In addition to the Rents, the Lessee is required to pay to the Partnership
the Additional Charges. To the extent that the Additional Charges represent
either (i) reimbursements of amounts that the Lessee is obligated to pay to
third parties or (ii) penalties for nonpayment or late payment of such amounts,
the Additional Charges should qualify as "rents from real property." To the
extent, however, that the Additional Charges represent interest that is accrued
on the late payment of the Rents or the Additional Charges, the Additional
Charges should not qualify as "rents from real property," but instead should be
treated as interest that qualifies for the 95% gross income test.
The Company believes that the Rents and the Additional Charges will qualify
as "rents from real property" for purposes of the 75% and 95% gross income
tests, except to the extent that the Additional Charges represent interest that
is accrued on the late payment of the Rents or the Additional Charges (which
will be qualifying gross income for the 95% test but not the 75% test). However,
there can be no complete assurance that the Service will not assert successfully
a contrary position and, therefore, prevent the Company from qualifying as a
REIT.
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The term "interest," as defined for purposes of the 75% gross income test,
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.
Furthermore, to the extent that interest from a loan that is based on the
residual cash proceeds from sale of the property securing the loan constitutes a
"shared appreciation provision" (as defined in the Code), income attributable to
such participation feature will be treated as gain from the sale of the secured
property.
The net income from any prohibited transaction entered into by the Company
is subject to a 100% tax. The term "prohibited transaction" generally includes a
sale or other disposition of property (other than foreclosure property) that is
held primarily for sale to customers in the ordinary course of a trade or
business. All inventory required in the operation of the Hotels will be
purchased by the Lessee or its designee as required by the terms of the
Percentage Leases. Accordingly, the Company and the Partnership believe that no
asset owned by the Company or the Partnership is held for sale to customers and
that a sale of any such asset will not be in the ordinary course of business of
the Company or the Partnership. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to the particular property. Nevertheless, the Company and the Partnership will
attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company or
the Partnership can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real property)
and any personal property incident to such real property (i) that is acquired by
a REIT as the result of such REIT having bid on such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness that such property secured and (ii)
for which such REIT makes a proper election to treat such property as
foreclosure property. However, a REIT will not be considered to have foreclosed
on a property where such REIT takes control of the property as a mortgagee-in-
possession and cannot receive any profit or sustain any loss except as a
creditor of the mortgagor. Under the Code, property generally ceases to be
foreclosure property as of the close of the third taxable year following the
taxable year in which the REIT acquired such property (or longer if an extension
is granted by the Secretary of the Treasury). The foregoing grace period is
terminated and foreclosure property ceases to be foreclosure property on the
first day (i) on which a lease is entered into with respect to such property
that, by its terms, will give rise to income that does not qualify under the 75%
gross income test or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise to
income that does not qualify under the 75% gross income test, (ii) on which any
construction takes place on such property (other than completion of a building,
or any other improvement, where more than 10% of the construction of such
building or other improvement was completed before default became imminent) or
(iii) which is more than 90 days after the day on which such property was
acquired by the REIT and the property is used in a trade or business that is
conducted by the REIT (other than through an independent contractor from whom
the REIT itself does not derive or receive any income). As a result of the rules
with respect to foreclosure property, if the Lessee defaults on its obligations
under a Percentage Lease for a Hotel, the Company terminates the Lessee's
leasehold interest, and the Company is unable to find a replacement Lessee for
such Hotel within 90 days of such foreclosure, gross income from hotel
operations conducted by the Company from such Hotel would cease to qualify for
the 75% and 95% gross income tests. In such event, the Company likely would be
unable to satisfy the 75% and 95% gross income tests and, thus, would fail to
qualify as a REIT.
It is possible that, from time to time, the Company or the Partnership will
enter into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of
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forms, including interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts and options. To the extent that the
Company or the Partnership enters into an interest rate swap or cap contract to
hedge any interest rate risk with respect to indebtedness incurred to acquire or
carry real estate assets, any periodic income or gain from the disposition of
such contract should be qualifying income for purposes of the 95% gross income
test. To the extent that the Company or the Partnership hedges with other types
of financial instruments or in other situations, it may not be entirely clear
how the income from those transactions will be treated for purposes of the
various income tests that apply to REITs under the Code. The Company intends to
structure any hedging transactions in a manner that does not jeopardize its
status as REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions will be generally available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "-- Taxation of the Company," even if those relief provisions
apply, a tax would be imposed with respect to the net income attributable to the
excess of 75% or 95% of the Company's gross income over its qualifying income in
the relevant category, whichever is greater.
ASSET TESTS
The Company, at the close of each quarter of its tax year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets" and, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the mortgage balance does
not exceed the value of the associated real property, and shares of other REITs.
For purposes of the 75% asset requirement, the term "interest in real property"
includes an interest in land and improvements thereon, such as buildings or
other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold in real property and an
option to acquire real property (or a leasehold in real property). Second, of
the investments not included in the 75% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities (except for its ownership interest in the
Partnership and Subsidiary Partnership or the stock of a subsidiary with respect
to which it has held 100% of the stock at all times during the subsidiary's
existence).
For purposes of the asset requirements, the Company will be deemed to own
its proportionate share of the assets of the Partnership (and any Subsidiary
Partnership), rather than its general partnership interest in the Partnership.
The Company represents that, at all relevant times, (i) at least 75% of the
value of its total assets will be represented by real estate assets, cash and
cash items (including receivables), and government securities and (ii) it will
not own any securities that do not satisfy the 75% asset requirement (except for
the stock of subsidiaries with respect to which it has held 100% of the stock at
all times during the subsidiary's existence). In addition, the Company
represents that it will not acquire or dispose, or cause the Partnership to
acquire or dispose, of assets in a way that would cause it to violate either
asset requirement. The Company believes that it satisfies both asset
requirements for REIT status.
If the Company should fail inadvertently to satisfy the asset requirements
at the end of a calendar quarter, such a failure would not cause it to lose its
REIT status if (i) it satisfied all of the asset tests at the close of the
preceding calendar quarter and (ii) the discrepancy between the value of the
Company's assets and the standards imposed by the asset requirements either did
not exist immediately after the acquisition of any particular asset or was not
wholly or partly caused by such an acquisition (i.e., the discrepancy arose from
changes in the market values of its assets). If the condition described in
clause (ii) of the preceding sentence were not satisfied, the Company still
could avoid disqualification by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which it arose.
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DISTRIBUTION REQUIREMENTS
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and (B)
95% of the net income (after tax), if any, from foreclosure property, minus (ii)
the sum of certain items of noncash income. Such dividends must be paid in the
tax year to which they relate, or in the following tax year if declared before
the Company 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 Company 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 gains corporate
tax rates (in the case of capital gains taxes paid by the Company, each
shareholder shall be entitled to claim a tax credit based on the amount of such
taxes. See "Taxation of Taxable Domestic Stockholders"). Furthermore, if the
Company 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 Company would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed. The
Company has made, and intends to continue to make, timely distributions
sufficient to satisfy all annual distribution requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, under the
Percentage Leases, the Lessee may defer payment of the excess of the Percentage
Rent over the Base Rent for a period of up to 90 days after the end of the
calendar year in which such payment was due. In that case, the Partnership still
would be required to recognize as income the excess of the Percentage Rent over
the Base Rent in the calendar quarter to which it relates. Further, it is
possible that, from time to time, the Company may be allocated a share of net
capital gain attributable to the sale of depreciated property which exceeds its
allocable share of cash attributable to that sale. Therefore, the Company may
have less cash available for distribution than is necessary to meet its annual
distribution requirements to avoid corporate income tax or the excise tax
imposed on certain undistributed income. In such a situation, the Company may
find it necessary to arrange for short-term (or possibly long-term) borrowings
or to raise funds through the issuance of additional shares of common or
preferred stock.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirements for a year by paying "deficiency
dividends" to its stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENT
Pursuant to applicable Treasury Regulations, in order to elect to be taxed
as a REIT, the Company must maintain certain records and request on an annual
basis certain information from its stockholders designed to disclose the actual
ownership of its outstanding stock. The Company intends to comply with such
requirements.
PARTNERSHIP ANTI-ABUSE RULE
The Treasury Department has issued a final regulation ("Anti-Abuse Rule"),
under the partnership provisions of the Code ("Partnership Provisions"), that
would authorize the Service, in certain abusive transactions involving
partnerships, to disregard the form of the transaction and recast it for federal
tax purposes as the Service deems appropriate. The Anti-Abuse Rule would apply
where a partnership is formed or availed of in connection with a transaction (or
series of related transactions), a principal purpose of which is to reduce
substantially the present value of the partners' aggregate federal tax liability
in a manner inconsistent with the intent of the Partnership Provisions. The
Anti-Abuse Rule states that the Partnership Provisions are intended to permit
taxpayers to conduct joint business (including investment) activities through a
flexible economic arrangement that accurately reflects the partners' economic
agreement and clearly reflects the partners' income
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without incurring an entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions. The Anti-Abuse Rule is generally
effective for all transactions relating to a partnership occurring on and after
May 12, 1994.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partner interest. The
limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. The
Company believes that the Anti-Abuse Rule will not have any adverse impact on
its ability to qualify as a REIT. However, because the Anti-Abuse Rule is
extraordinarily broad in scope and is applied based on an analysis of all of the
facts and circumstances, there can be no assurance that the Service will not
attempt to apply the Anti-Abuse Rule to the Company. If the conditions of the
Anti-Abuse Rule are met, the Service is authorized to take appropriate
enforcement action, including disregarding the Partnership for federal tax
purposes or treating one or more of its partners as nonpartners. Any such action
potentially could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Dividends to the stockholders in any year in which the
Company fails to qualify would not be deductible by the Company, nor would they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all dividends to stockholders would be taxable as ordinary
income 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 Company also would be disqualified from
taxation as a REIT for the four taxable years following the year during which
the Company ceased to qualify as a REIT. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief. In
addition, President Clinton's 1999 Federal Budget Proposal contains a provision
which, if enacted in its present form, would result in the immediate taxation of
all gain inherent in a C corporation's assets upon an election by the
corporation to become a REIT in taxable years beginning after January 1, 1999,
and thus could effectively preclude the Company from re-electing to be taxed as
a REIT following a loss of REIT status.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
Provided the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. stockholders as ordinary income and will not be eligible
for the dividends received deduction for corporations. Each year the Company
will designate a certain amount of income as capital gains. Such amount will be
taxed as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held its Common Stock and will be subject to a credit
if it is not currently distributed to such stockholder. Corporate stockholders,
however, may be required to treat up to 20% of certain capital gain dividends as
ordinary income. Distributions in excess of current and accumulated earnings and
profits will not be taxable to a stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's stock, but rather such
distributions will reduce the adjusted basis of such stock. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a stockholder's stock, 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 or mid-term capital gain if the shares of
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Common Stock have been held for more than one year but less than 18 months). Any
dividend distribution declared by the Company in October, November, or December
of any year payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
stockholder on December 31 of such year, provided that the dividend distribution
is actually paid by the Company during January of the following calendar year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company.
The Company is permitted under the Code to elect to retain and pay income
tax on its net capital gain for any taxable year. Under the Taxpayer Relief Act
of 1997 (the "1997 Act"), however, if the Company so elects, a stockholder must
include in income such stockholder's proportionate share of the Company's
undistributed capital gain for the taxable year, and will be deemed to have paid
such stockholder's proportionate share of the income tax paid by the Company
with respect to such undistributed capital gain. Such tax would be credited
against the stockholder's tax liability and subject to normal refund procedures.
In addition, each stockholder's basis in its shares of Common Stock would be
increased by the amount of undistributed capital gain (less the tax paid by the
Company) included in the stockholder's income.
The 1997 Act also alters the taxation of capital gain income for
individuals (and for certain trusts and estates). Gain from the sale or exchange
of certain investments held for more than 18 months will be taxed at a maximum
capital gain rate of 20%. Gain from the sale or exchange of such investments
held for 18 months or less, but for more than one-year, will be taxed at a
maximum capital gain rate of 28%. The 1997 Act also provides a maximum rate of
25% for "unrecaptured section 1250 gain" recognized on the sale or exchange of
certain real estate assets, introduces special rules for "qualified 5-year
gain," and makes certain other changes to prior law. On November 10, 1997, the
Service issued Notice 97-64, which provides generally that the Company may
classify portions of its designated capital gain dividend as (i) a 20% rate gain
distribution (which would be taxed as capital gain in the 20% group), (ii) an
unrecaptured Section 1250 gain distribution (which would be taxed as capital
gain in the 25% group), or (iii) a 28% rate gain distribution (which would be
taxed as capital gain in the 28% group). If no designation is made, the entire
designated capital gain dividend will be treated as a 28% rate capital gain
distribution. Notice 97-64 provides that a REIT must determine the maximum
amounts that it may designate as 20% and 25% rate capital gain dividends by
performing the computation required by the Code as if the REIT were an
individual whose ordinary income was subject to a marginal tax rate of at least
28%.
In general, any loss upon a sale or exchange of Common Shares by a
stockholder who has held such Common 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 Company required to be treated by
that stockholder as long-term capital gain.
BACKUP WITHHOLDING
The Company will report to its U.S. stockholders and the Service the amount
of distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
the holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder that does not provide the Company with its
correct taxpayer identification number may also be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable against
the stockholder's income tax liability.
OTHER TAX CONSEQUENCES
The 1997 Act modifies many of the provisions relating to the requirements
for qualification as, and the taxation of, a REIT. Among other things, the 1997
Act (i) replaces the rule that disqualifies a REIT for any year in which the
REIT fails to comply with Treasury Department regulations that are intended to
enable a REIT to ascertain its ownership, with an intermediate penalty for
failing to do so; (ii) permits a REIT to render a de minimis amount of
impermissible services to tenants, or in connection with the management or
operation of
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property, and still treat amounts received with respect to that property as
rents from real property; (iii) permits a REIT to elect to retain and pay income
tax on net long-term capital gains; (iv) repeals a rule that required that less
than 30% of a REIT's gross income be derived from gain from the sale or other
disposition of stock or securities held for less than one year, certain real
property held for less than four years, and property that is sold or disposed of
in a prohibited transaction; (v) lengthens the original grace period for
foreclosure property from two years after the REIT acquired the property to a
period ending on the last day of the third full taxable year following the tax
year in which the property was acquired; (vi) treats income from all hedges that
reduce the interest rate risk of REIT liabilities, not just interest rate swaps
and caps, as qualifying income under the 95% gross income test; and (vii)
permits any corporation wholly-owned by a REIT to be treated as a qualified
subsidiary, regardless of whether the corporation has always been owned by a
REIT. The changes are effective for taxable years beginning after August 5,
1997. Thus, these changes will apply to the operation of the Company.
The Clinton Administration proposals would also eliminate the ability of an
existing C corporation which elects REIT status to defer recognition of built-in
gain on assets until such assets are disposed of during a 10 year period (under
current law, thereafter no gain is recognized). The proposal would limit the
availability of that built-in gain deferral provision to small C corporations
(i.e., corporations the value of whose stock is $5,000,000 or less). This
proposal, if enacted, could adversely affect the ability of the Company to
acquire substantially all of the assets of existing C corporations and thus
potentially limit the Company's growth. No prediction can be made as to the
likelihood of passage into law of the administration's REIT proposals or as to
the effective date of any changes.
Prospective holders should recognize that the present federal income tax
treatment of the Company may be modified by future legislative, judicial or
administrative actions or decisions at any time, which may be retroactive in
effect, and, as a result, any such action or decision may affect investments and
commitments previously made. The rules dealing with federal income taxation are
constantly under review by persons involved in the legislative process and by
the Service and the Treasury Department, resulting in statutory changes as well
as promulgation of new, or revisions to existing, regulations and revised
interpretations of established concepts. No prediction can be made as to the
likelihood of passage of any new tax legislation or other provisions either
directly or indirectly affecting the Company or its stockholders. Revisions in
federal income tax laws and interpretations thereof could adversely affect the
tax consequences of an investment in the Common Stock.
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local laws on an investment in
the Company.
CONSEQUENTLY, PROSPECTIVE HOLDERS OF COMMON STOCK SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT
IN THE COMPANY.
TAX ASPECTS OF THE PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Partnership. The
partnerships in which the Partnership has made an investment are collectively
referred to herein as the "Subsidiary Partnerships." The discussion does not
cover state or local tax laws or any federal tax laws other than income tax
laws.
CLASSIFICATION AS A PARTNERSHIP
The Company is entitled to include in its income its distributive share of
the Partnership's income (including the Partnership's distributive share of
income of a Subsidiary Partnership) and to deduct its distributive share of the
Partnership's losses (including the Partnership's distributive share of losses
of a Subsidiary Partnership) only if the Partnership (and each Subsidiary
Partnership) is classified for federal income tax purposes as a partnership
rather than as an association taxable as a corporation. An organization formed
as a partnership will be treated as a
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partnership if it (i) is organized under state law as a partnership and (ii) is
not a "publicly traded" partnership. The Partnership is organized under Delaware
limited partnership law. A publicly traded partnership is a partnership whose
interests are traded on an established securities market or are readily tradable
on a secondary market (or the substantial equivalent thereof). A publicly traded
partnership will not, however, be treated as a corporation for any taxable year
if 90% or more of the partnership's gross income for such year consists of
certain passive-type income, including real property rents, gains from the sale
or other disposition of real property, interest, and dividends. Whether, for any
particular period, the Partnership or a Subsidiary Partnership will satisfy this
passive income exception will depend upon the fact and circumstance applicable
to the Partnership or the Subsidiary Partnership for such period.
The Service has issued Notice 88-75, providing limited safe harbors from
the definition of a publicly traded partnership in advance of the issuance of
Treasury Regulations. Pursuant to one of those safe harbors (the "Private
Placement Exclusion"), interests in a partnership will not be treated as readily
tradeable on a secondary market or the substantial equivalent thereof if (i) all
of the partnership interests are issued in a transaction that is not registered
under the Securities Act of 1933, as amended, and (ii) the partnership does not
have more than 500 partners (taking into account as a partner each person who
indirectly owns an interest in the partnership through a partnership, grantor
trust, or S corporation). The Partnership and each Subsidiary Partnership
satisfies the Private Placement Exclusion.
The Treasury Department recently issued regulations ("PTP Regulations")
that limit the Private Placement Exclusion to partnerships that have no more
than 100 partners at any time during the taxable year. The Partnership and the
Subsidiary Partnerships do not have more than 100 partners (taking into account
indirect ownership of such partnerships through partnerships, grantor trusts,
and S corporations). Thus, the Partnership and each Subsidiary Partnership
should satisfy the Private Placement Exclusion, as modified by the PTP
Regulations. If, however, the Partnership or any Subsidiary Partnership were
treated as publicly traded and the 90% passive income exception did not apply,
the Company would not be able to satisfy the income and assets requirements for
REIT status.
The Company believes that the Partnership and each Subsidiary Partnership
is properly treated as a partnership for federal income tax purposes and is not
an association taxable as a corporation. The Partnership has not requested, and
does not intend to request, a ruling from the Service that it or any of the
Subsidiary Partnership will be classified as a partnership for federal income
tax purposes.
EFFECT OF FAILURE TO QUALIFY AS A PARTNERSHIP
If for any reason the Partnership or a Subsidiary Partnership were taxable
as a corporation, rather than as a partnership, for federal income tax purposes,
the Company would not be able to satisfy the income and asset requirements for
REIT status. See "FEDERAL INCOME TAX CONSIDERATIONS -- Income Tests" and
"FEDERAL INCOME TAX CONSIDERATIONS -- Asset Tests." In addition, any change in
the Partnership's or a Subsidiary Partnership's status for tax purposes might be
treated as a taxable event, in which case the Company might incur a tax
liability without any related cash distribution. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Distribution Requirements." Further, items of income and
deduction of the Partnership and the Subsidiary Partnership would not pass
through to its partners, and its partners would be treated as stockholders for
tax purposes. Consequently, the Partnership or a Subsidiary Partnership would be
required to pay income tax at corporate tax rates on its net income, and
distributions to its partners would constitute distributions that would not be
deductible in computing the Partnership's or a Subsidiary Partnership's taxable
income.
INCOME TAXATION OF THE PARTNERSHIP, THE SUBSIDIARY PARTNERSHIPS AND THEIR
PARTNERS
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of the Partnership's income, gains,
losses, deductions, and credits for any taxable year of the Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution of the Partnership. Such
items will include the Partnership's available share of income, gain, loss,
deductions and credits of the Subsidiary Partnerships.
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Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under Section 704(b) of the Code if they do
not comply with the provisions of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
The Partnership's allocations of taxable income and loss of the Partnership and
the Subsidiary Partnerships are intended to comply with the requirements of
Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department recently
issued regulations requiring partnerships to use a "reasonable method" for
allocating items affected by Section 704(c) of the Code and outlining certain
two reasonable allocation methods.
The Partnership intends to use the "traditional method" of allocation under
Section 704(c) of the Code. The traditional method is the least favorable method
from the Company's perspective because of certain technical limitations. Under
the traditional method, depreciation with respect to a contributed property for
which there is a Book-Tax Difference first will be allocated to the Company and
other partners who did not have an interest in such property until they have
been allocated an amount of depreciation equal to what they would have been
allocated if the Partnership had purchased such property for its fair market
value at the time of contribution. In addition, if such a property is sold, gain
equal to the Book-Tax Difference at the time of sale will be specially allocated
to the partner who contributed the property. These allocations will tend to
eliminate the Book-Tax Differences with respect to the contributed Hotels over
the life of the Partnership. However, they may not always entirely eliminate the
Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. This could cause the Company (i) to be allocated
lower amounts of depreciation deductions for tax purposes than would be
allocated to the Company if each of the Hotels were to have a tax basis equal to
its fair market value at the time of contribution and (ii) to be allocated lower
amounts of taxable loss in the event of a sale of such contributed interests in
the Hotels at a book loss than the economic or book loss allocated to the
Company as a result of such sale, with a corresponding benefit to the other
partners in the Partnership. These allocations might adversely affect the
Company's ability to comply with REIT distribution requirements, although the
Company does not anticipate that this will occur. These allocations may also
affect the earnings and profits of the Company for purposes of determining the
portion of distributions taxable as dividend income. See "FEDERAL INCOME TAX
CONSIDERATIONS -- Taxation of Taxable Domestic Stockholders". The application of
these rules over time may result in a higher portion of distributions being
taxed as dividends than would have occurred had the Company purchased its
interests in the Hotels at their agreed values.
Under the Partnership Agreement, depreciation or amortization deductions of
the Partnership generally will be allocated among the partners in accordance
with their respective interests in the Partnership, except to the extent that
Section 704(c) of the Code requires that the Company receive a
disproportionately large share of such deductions. In addition, gain on sale of
a Hotel will be specially allocated to the Limited Partners to the extent of any
built-in gain with respect to such Hotel for federal income tax purposes. The
application of Section 704(c) of the Code to the Partnership is not entirely
clear, however, and may be affected by Treasury Regulations promulgated in the
future. Similar provisions are included in the partnership agreements of the
Subsidiary Partnerships.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally (i) equals the amount of cash
and the basis of any other property contributed to the Partnership by the
Company, (ii) is increased by (A) its allocable share of the Partnership's
income and (B) its allocable share of indebtedness of the Partnership and (iii)
is reduced, but not below zero, by the Company's
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allocable share of (A) the Partnership's loss and (B) the amount of cash
distributed to the Company and by constructive distributions resulting from a
reduction in the Company's share of indebtedness of the Partnership. Similar
rules apply to the Partnership's tax basis in the Subsidiary Partnerships.
If the allocation of the Company's distributive share of the Partnership's
loss would reduce the adjusted tax basis of the Company's partnership interest
in the Partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce the Company's
adjusted tax basis below zero. To the extent that the Partnership's
distributions, or any decrease in the Company's share of the indebtedness of the
Partnership (such decrease being considered a constructive cash distribution to
the partners), would reduce the Company's adjusted tax basis below zero, such
distributions (including such constructive distributions) constitute taxable
income to the Company. Such distributions and constructive distributions
normally will be characterized as capital gain, and, if the Company's
partnership interest in the Partnership has been held for longer than the
long-term capital gain holding periods, the distributions and constructive
distributions will be subject to favorable capital gains tax rates. See "FEDERAL
INCOME TAX CONSIDERATIONS -- Taxation of Taxable Domestic Stockholders".
Depreciation Deductions Available to the Partnership. Immediately after
the acquisition of the Initial Hotels, the Company made a cash contribution to
the Partnership in exchange for a general partner interest in the Partnership.
The Partnership's initial basis in the Initial Hotels for federal income tax
purposes generally is a carryover of the basis of the previous ownership
entities in the Initial Hotels on the date of such merger. Although the law is
not entirely clear, the Partnership has depreciated such depreciable hotel
property for federal income tax purposes under the same methods used by the
transferors. The Partnership's tax depreciation deductions will be allocated
among the partners in accordance with their respective interests in the
Partnership, except to the extent that Section 704(c) of the Code requires that
the Company receive a disproportionately large share of such deductions. The
Partnership plans to depreciate, for federal income tax purposes, any
depreciable hotel property which it may acquire for cash in the future under
either the modified accelerated cost recovery system of depreciation ("MACRS")
or the alternative depreciation system of depreciation ("ADS"). The Partnership
plans to use MACRS for subsequently acquired furnishings and equipment. Under
MACRS, the Partnership generally will depreciate such furnishings and equipment
over a seven-year recovery period using a 200% declining balance method and a
half-year convention. If, however, the Partnership places more than 40% of its
furnishings and equipment in service during the last three months of a taxable
year, a mid-quarter depreciation convention must be used for the furnishings and
equipment placed in service during that year. The Partnership plans to use ADS
for the depreciation of subsequently acquired buildings and improvements. Under
ADS, the Partnership generally will depreciate such buildings and improvements
over a 40-year recovery period using a straight line method and a mid-month
convention.
To the extent that the Partnership acquires additional hotels in exchange
for Partnership Units, the Partnership's initial basis in each such hotel, for
federal income tax purposes, should be the same as the transferor's basis in
that hotel on the date of acquisition.
SALE OF THE PARTNERSHIP'S PROPERTY
Generally, any gain realized by the Partnership or the Subsidiary
Partnerships on the sale of property held for more than the applicable holding
period will be subject to favorable capital gains tax rates (See "FEDERAL INCOME
TAX CONSIDERATIONS-- Taxation of Taxable Domestic Stockholders"), except for any
portion of such gain that is treated as depreciation or cost recovery recapture.
Any gain recognized by the Partnership on the disposition of the Initial Hotels
will be allocated first to the Limited Partners under Section 704(c) of the Code
to the extent of their built-in gain on those Hotels. The Limited Partners'
built-in gain on the Initial Hotels sold will equal the excess of the Limited
Partners' proportionate share of the book value of those Initial Hotels over the
Limited Partners' tax basis allocable to those Initial Hotels at the time of
sale. Any remaining gain recognized by the Partnership on the disposition of the
Initial Hotels will be allocated among the partners in accordance with their
respective percentage interests in the Partnership. The Board of Trustees has
adopted a policy requiring that any decision to sell the Initial Hotels will be
made by a vote of a majority of the independent Trustees.
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The Company's share of any gain realized by the Partnership or a Subsidiary
Partnership on the sale of any property held as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's or a
Subsidiary Partnership's trade or business, however, will be treated as income
from a prohibited transaction that is subject to a 100% penalty tax. See
"FEDERAL INCOME TAX CONSIDERATIONS -- Income Tests." Such prohibited transaction
income also may have an adverse effect upon the Company's ability to satisfy the
income test for REIT status. See "FEDERAL INCOME TAX CONSIDERATIONS -- Income
Tests" above.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission ("SEC") a
Registration Statement on Form S-2 ("Registration Statement") under the
Securities Act with respect to the Shares. This Registration Statement, which
constitutes part of the Registration Statement, omits certain of the information
contained in the Registration Statement and the exhibits thereto on file with
the SEC pursuant to the Securities Act and the rules and regulations of the SEC
thereunder. The Registration Statement, including exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the SEC's
Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048,
and Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies may be obtained at the prescribed rates from the
Public Reference Section of the SEC at its principal office in Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and proxy statements and other
information with the SEC. Such reports, proxy statements and other information
can be inspected and copied at the locations described above. Copies of such
materials can be obtained by mail from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed
rates. In addition, certain of such materials can be inspected at the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York. Further, the SEC
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, including the Company. The address of such Web site is
http://www.sec.gov.
No person is authorized to give any information or to make any
representations, other than those contained or incorporated by reference in this
Prospectus, in connection with the offering of Shares described herein and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Selling Stockholder. This
Prospectus does not constitute an offer to sell, or the solicitation of an offer
to buy, nor shall there be any sale of the Shares by any person in any
jurisdiction in which it is unlawful for such person to make such offer,
solicitation or sale. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been previously filed by the Company
with the SEC, under the Exchange Act (File No. 1-7062) are incorporated herein
by reference:
1. Annual Report on Form 10-K for the year ended January 31, 1998,
filed on May 18,1998;
2. Current Report on Form 8-K dated February 17, 1998, as amended by
Form 8-K/A filed on April 20, 1998;
3. Current Report on Form 8-K dated March 16, 1998, as amended by Form
8-K/A filed on May 15, 1998; and
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4. Current Report on Form 8-K dated May 14, 1998, as amended by Form
8-K/A filed on May 27, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Shares made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents.
Any statement contained herein, or in any 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 herein or in any subsequently filed document that also is or is 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.
The Company will provide, without charge, to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, on the request
of any such person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to the Company at 1750 Huntington Building, 925 Euclid
Avenue, Cleveland, Ohio 44115, Attention: Investor Relations; (216) 622-0046.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. The Company intends that such forward-looking
statements be subject to the safe harbors created by such Acts. Those
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company, its Trustees or its officers in respect of
(i) the declaration or payment of dividends; (ii) the leasing, management or
operation of the Hotels; (iii) the adequacy of reserves for renovation and
refurbishment; (iv) the Company's financing plans; (v) the Company's position
regarding investments, acquisitions, financings, conflicts of interest and other
matters; (vi) the Company's continued qualification as a REIT; and (vii) trends
affecting the Company's or any Hotel's financial condition or results of
operations. The words and phrases "looking ahead", "we are confident", "should
be", "will be", "predicted", "believe", "expect", "anticipate" and similar
expressions identify forward-looking statements.
These forward-looking statements reflect the Company's current views in
respect of future events and financial performance, but are subject to many
uncertainties and factors relating to the operations and business environment of
the Hotels which may cause the actual results of the Company to differ
materially from any future results expressed or implied by such forward-looking
statements. Examples of such uncertainties include, but are not limited to:
fluctuations in hotel occupancy rates; changes in room rental rates which may be
charged by the Lessee in response to market rental rate changes or otherwise;
interest rate fluctuations, changes in Federal income tax laws and regulations;
competition; any changes in the Company's financial condition or operating
results due to acquisitions or dispositions of hotel properties; real estate and
hospitality market conditions; hospitality industry factors; and local or
national economic and business conditions, including, without limitation,
conditions which may affect public securities markets generally, the hospitality
industry, or the markets in which the Company operates or will operate. The
Company undertakes no obligation to update publicly or revise any
forward-looking statements whether as a result of new information, future events
or otherwise. Pursuant to Section 21E(b)(2)(E) of the Exchange Act, the
qualifications set forth hereinabove are inapplicable to any forward-looking
statements in this Prospectus relating to the operations of the Partnership.
LEGAL MATTERS
The validity of the Shares will be passed upon for the Company by Thompson
Hine & Flory LLP, Cleveland, Ohio. In addition, the description of federal
income tax consequences contained in the Prospectus under the caption "FEDERAL
INCOME TAX CONSIDERATIONS" is based upon the opinion of Thompson Hine & Flory
LLP.
66
<PAGE> 68
EXPERTS
The audited Consolidated Financial Statements and schedule of Realty ReFund
Trust incorporated by reference in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein upon the authority of said firm as experts in
giving said reports.
The audited Combined Financial Statements of InnSuites Hotels System
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement have been audited by Michael Maastricht, C.P.A., independent public
accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein upon the authority of said firm as experts in
giving said reports.
Any financial statements and schedules hereafter filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act and
incorporated by reference in the registration statement, of which this
Prospectus is a part, that have been examined and are the subject of a report by
independent accountants will be so incorporated by reference in reliance upon
such reports given and upon the authority of such firms as experts in accounting
and auditing to the extent covered by consents filed with the SEC.
67
<PAGE> 69
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE SELLING
STOCKHOLDERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company........................... 2
Risk Factors.......................... 4
Use of Proceeds....................... 12
Selling Stockholders.................. 12
Plan of Distribution.................. 17
Description of Capital Stock.......... 18
Selected Historical and Pro Forma
Financial and Operating Data........ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 28
Business and Properties............... 35
Policies and Objectives With Respect
to Certain Activities............... 44
Certain Declaration and Statutory
Provisions.......................... 46
Partnership Agreement................. 48
Federal Income Tax Considerations..... 50
Tax Aspects of the Partnership........ 61
Available Information................. 65
Incorporation of Certain Documents by
Reference........................... 65
Forward-Looking Statements............ 66
Legal Matters......................... 66
Experts............................... 67
</TABLE>
======================================================
======================================================
2,950,743 SHARES
LOGO
REALTY REFUND TRUST
SHARES OF BENEFICIAL INTEREST,
WITHOUT PAR VALUE
------------------------
PROSPECTUS
------------------------
======================================================
<PAGE> 70
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting discounts and commissions) payable by the
Registrant in connection with the issuance and distribution of the Shares.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee........ $3,725.61
Printing and mailing........................................ *
Blue Sky fees and expenses.................................. *
Accountant's fees and expenses.............................. *
Legal fees and expenses..................................... *
Miscellaneous............................................... *
---------
Total..................................................... $ *
=========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Declaration of the Company generally limits the liability for money
damages of the Company's Trustees and officers to the Company and its
stockholders to the fullest extent permitted from time to time by the laws of
the State of Ohio. The Declaration also provides generally for the
indemnification of Trustees and officers, among others, against judgments,
settlements, penalties, fines and reasonable expenses actually incurred by them
in connection with any proceeding to which they have been made a party by reason
of their service in those or other capacities except in respect of any matter as
to which they shall have been adjudicated to have acted in bad faith or with
willful misconduct or reckless disregard of their duties or gross negligence or
not to have acted in good faith in the reasonable belief that their action was
in the best interests of the Company. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to Trustees and officers of
the Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable.
The Company may purchase Trustee and officer liability insurance for the
purpose of providing a source of funds to pay any indemnification described
above.
ITEM 16. EXHIBITS
<TABLE>
<C> <S> <C>
4.1 -- Form of Common Stock Certificate.
5.1 -- Opinion of Thompson Hine & Flory LLP.**
8.1 -- Opinion of Thompson Hine & Flory LLP as to Tax Matters.**
10.1 -- First Amended and Restated Agreement of Limited Partnership
of RRF Limited Partnership dated January 31, 1998.
10.2 -- Advisory Agreement dated as of January 31, 1998, between RRF
Limited Partnership and Mid-America ReaFund Advisors, Inc.
(incorporated by reference to Exhibit 10(a) of the
Registrant's Form 10-K for the year ended January 31, 1998,
filed with the Securities and Exchange Commission on May 18,
1998).*
10.3 -- Employment Agreement dated as of January 31, 1998, between
the Company and James F. Wirth (incorporated by reference to
Exhibit 10(b) of the Registrant's Form 10-K for the year
ended January 31, 1998, filed with the Securities and
Exchange Commission on May 18, 1998).*
</TABLE>
II-1
<PAGE> 71
<TABLE>
<C> <S> <C>
10.4 -- Formation Agreement among the Company, Mid-America ReaFund
Advisors, Inc., Alan M. Krause, James H. Berick, Hospitality
Corporation International, InnSuites Hotels, L.L.C., James
F. Wirth, Tucson Hospitality Properties, Ltd., Yuma
Hospitality Properties, Ltd., Baseline Hospitality
Properties, Ltd., Northern Phoenix Investment Limited
Partnership, Ontario Hospitality Properties Limited
Partnership, Hulsey Hotels Corporation and Buenaventura
Properties, Inc. (incorporated by reference to Exhibit 2.1
of the Registrant's Form 8-K, filed with the Securities and
Exchange Commission on February 17, 1998).
10.5 -- Contribution Agreement dated as of February 1, 1998, between
James F. Wirth, Gail J. Wirth and RRF Limited Partnership
(incorporated by reference to Exhibit 2.1 of the
Registrant's Form 8-K, filed with the Securities and
Exchange Commission on March 16, 1998).
10.6 -- Agreement of Purchase and Sale and Joint Escrow Instructions
dated March 20, 1998, between Lafayette Hotel, LLC and RRF
Limited Partnership (incorporated by reference to Exhibit
2.1 of the Registrant's Form 8-K/A, filed with the
Securities and Exchange Commission on May 27, 1998).
23.1 -- Consent of Thompson Hine & Flory LLP (included in Exhibits
5.1 and 8.1).**
23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of Michael Maastricht, CPA.
24.1 -- Power of Attorney.
99.1 -- Form of Percentage Lease.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
Rule 415 Offering. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities 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.
Filings Incorporating Subsequent Exchange Act Documents by Reference. The
undersigned Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and,
II-2
<PAGE> 72
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.
Request For Acceleration of Effective Date. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
provisions referred to in Item 15 of this Registration Statement, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cleveland, State of Ohio, on the 8th day of June,
1998.
REALTY REFUND TRUST
an unincorporated Ohio real estate
investment trust (Registrant)
By: /s/ JAMES F. WIRTH
------------------------------------
James F. Wirth
Chairman, President and Chief
Executive Officer
By: /s/ GREGORY D. BRUHN
------------------------------------
Gregory D. Bruhn
Executive Vice President, Chief
Financial Officer,
Treasurer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAMES F. WIRTH Trustee, Chairman, President and June 8, 1998
- -------------------------------------- Chief Executive Officer
James F. Wirth
/s/ GREGORY D. BRUHN Trustee, Executive Vice President, June 8, 1998
- -------------------------------------- Chief Financial Officer,
Gregory D. Bruhn Treasurer and Secretary
* Trustee June 8, 1998
- --------------------------------------
Marc E. Berg
* Trustee June 8, 1998
- --------------------------------------
Lee J. Flory
* Trustee June 8, 1998
- --------------------------------------
Edward G. Hill
* Trustee June 8, 1998
- --------------------------------------
Mark J. Nasca
* Signature by Gregory D. Bruhn as Attorney-in-Fact under Power of June 8, 1998
Attorney-in-Fact under Power of Attorney
Attorney
/s/ GREGORY D. BRUHN
-------------------------------------
Gregory D. Bruhn
</TABLE>
II-4
<PAGE> 74
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
4.1 -- Form of Common Stock Certificate.
5.1 -- Opinion of Thompson Hine & Flory LLP.**
8.1 -- Opinion of Thompson Hine & Flory LLP as to Tax Matters.**
10.1 -- First Amended and Restated Agreement of Limited Partnership
of RRF Limited Partnership dated January 31, 1998.
10.2 -- Advisory Agreement dated as of January 31, 1998, between RRF
Limited Partnership and Mid-America ReaFund Advisors, Inc.
(incorporated by reference to Exhibit 10(a) of the
Registrant's Form 10-K for the year ended January 31, 1998,
filed with the Securities and Exchange Commission on May 18,
1998).*
10.3 -- Employment Agreement dated as of January 31, 1998, between
the Company and James F. Wirth (incorporated by reference to
Exhibit 10(b) of the Registrant's Form 10-K for the year
ended January 31, 1998, filed with the Securities and
Exchange Commission on May 18, 1998).*
10.4 -- Formation Agreement among the Company, Mid-America ReaFund
Advisors, Inc., Alan M. Krause, James H. Berick, Hospitality
Corporation International, InnSuites Hotels, L.L.C., James
F. Wirth, Tucson Hospitality Properties, Ltd., Yuma
Hospitality Properties, Ltd., Baseline Hospitality
Properties, Ltd., Northern Phoenix Investment Limited
Partnership, Ontario Hospitality Properties Limited
Partnership, Hulsey Hotels Corporation and Buenaventura
Properties, Inc. (incorporated by reference to Exhibit 2.1
of the Registrant's Form 8-K, filed with the Securities and
Exchange Commission on February 17, 1998).
10.5 -- Contribution Agreement dated as of February 1, 1998, between
James F. Wirth, Gail J. Wirth and RRF Limited Partnership
(incorporated by reference to Exhibit 2.1 of the
Registrant's Form 8-K, filed with the Securities and
Exchange Commission on March 16, 1998).
10.6 -- Agreement of Purchase and Sale and Joint Escrow Instructions
dated March 20, 1998, between Lafayette Hotel, LLC and RRF
Limited Partnership (incorporated by reference to Exhibit
2.1 of the Registrant's Form 8-K/A, filed with the
Securities and Exchange Commission on May 27, 1998).
23.1 -- Consent of Thompson Hine & Flory LLP (included in Exhibits
5.1 and 8.1).**
23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of Michael Maastricht, CPA.
24.1 -- Power of Attorney.
99.1 -- Form of Percentage Lease.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto.
** To be filed by amendment.
<PAGE> 1
Exhibit 4.1
Form of Common Stock Certificate
[Front of Certificate]
CERTIFICATE FOR SHARES SHARES
OF BENEFICIAL INTEREST
WITHOUT PAR VALUE
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR
IN CLEVELAND OR NEW YORK CITY CERTAIN DEFINITIONS
AN OHIO UNINCORPORATED ASSOCIATION IN THE FORM OF A BUSINESS TRUST
REALTY REFUND TRUST
THIS CERTIFIES THAT
IS THE REGISTERED HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST WITHOUT PAR
VALUE, IN Realty ReFund Trust (the "Trust"), an Ohio unincorporated association
in the form of a business trust established by Declaration of Trust dated April
28, 1971, as amended from time to time, a copy of which, together with all
amendments thereto, is on file with the Recorder of Cuyahoga County, Ohio. The
provisions of the Declaration of Trust are hereby incorporated in and made a
part of this certificate as fully as if set forth herein in their entirety, to
all of which provisions the holder and every transferee or assignee hereof by
accepting or holding the same agrees to be bound. SEE REVERSE FOR EXISTENCE OF
REDEMPTION AND PROHIBITION OF TRANSFER PROVISIONS GOVERNING THE SHARES
REPRESENTED BY THIS CERTIFICATE. This certificate and the shares represented
hereby are negotiable and transferable on the books of the Trust by the
registered holder hereof in person or by attorney upon surrender of this
certificate properly endorsed or assigned to the same extent as a stock
certificate and the shares represented thereby of an Ohio corporation for
profit. This certificate is issued by the Trustees of the Trust, acting not
individually but as such Trustees, and is not valid until countersigned by the
Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Trust and the facsimile signatures of
its duly authorized representatives.
Dated: [Seal]
COUNTERSIGNED AND REGISTERED
NATIONAL CITY BANK, TRANSFER AGENT AND REGISTRAR
(CLEVELAND, OHIO) CHAIRMAN
BY: SECRETARY
Authorized Signature.
<PAGE> 2
THE DECLARATION OF TRUST PROVIDES THAT THE NAME "REALTY REFUND TRUST"
REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST, AS TRUSTEES, BUT NOT
INDIVIDUALLY OR PERSONALLY, AND NO TRUSTEE, SHAREHOLDER, OFFICER, EMPLOYEE OR
AGENT OF THE TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, NOR SHALL RESORT BE
HAD TO THEIR PRIVATE PROPERTY FOR THE SATISFACTION OF ANY OBLIGATION OR CLAIM,
IN CONNECTION WITH THIS INSTRUMENT, BUT THE TRUST PROPERTY ONLY IS LIABLE.
<PAGE> 3
[Back of Certificate]
REALTY REFUND TRUST
PROVISIONS RELATING TO REDEMPTION AND PROHIBITION OF TRANSFER OF SHARES
If necessary to effect compliance by the Trust with certain
requirements of the Internal Revenue Code, the Shares represented by this
certificate are subject to redemption by the Trustees of the Trust and the
transfer thereof may be prohibited upon the terms and conditions set forth in
the Declaration of Trust. The Trust will furnish a copy of such terms and
conditions to the registered holder of this certificate upon request and without
charge.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT-- Custodian
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under the Uniform Gifts to Minors
JT TEN -- as joint tenants with right of Act _________________________
survivorship and not as tenants (State)
in common
Additional abbreviations may also be used though not in the above list.
<CAPTION>
<S> <C>
FOR VALUE RECEIVED hereby sell(s), assign(s), and transfer(s) unto
- ----------------------------------------------------------------------------------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE.
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Shares of Beneficial
- ----------------------------------------------------------------------------
Interest represented by the within Certificate, hereby irrevocably constituting and appointing
- ---------------------------------------------------------------------------------------
Attorney
</TABLE>
<PAGE> 4
to transfer the said shares on the books of the within-named Trust with
full power of substitution in the premises.
Dated, __________________
(Sign here)
------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE,
IN EVERY PARTICULAR, WITHOUT
ALTERNATION OR ENLARGEMENT, OR ANY
CHANGE WHATEVER.
<PAGE> 1
Exhibit 10.1
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
RRF LIMITED PARTNERSHIP
Dated: January 31, 1998
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
ARTICLE I DEFINED TERMS; EXHIBITS.....................................................................1
Section 1.1 Defined Terms........................................................................1
Section 1.2 Exhibits, Schedules, Etc.............................................................7
ARTICLE II FORMATION; ADMISSION OF LIMITED PARTNERS;
NAME; PLACE OF BUSINESS
AND REGISTERED AGENT...........................................................7
Section 2.1 Certificate of Limited Partnership; Other Filings..............................7
Section 2.2 Limited Partners; Additional Limited Partners..................................7
Section 2.3 Name; Principal Place of Business..............................................8
Section 2.4 Registered Agent and Registered Office.........................................8
ARTICLE III BUSINESS AND TERM OF PARTNERSHIP..........................................................8
Section 3.1 Business.......................................................................8
Section 3.2 Term...........................................................................9
ARTICLE IV CAPITAL CONTRIBUTIONS......................................................................9
Section 4.1 General Partner................................................................9
Section 4.2 Limited Partners...............................................................9
Section 4.3 Additional Capital Contributions and
Issuances of Additional Partnership Interests................................9
Section 4.4 Additional Funding............................................................11
Section 4.5 Equity Plan...................................................................11
Section 4.6 Dividend Reinvestment Plan....................................................12
Section 4.7 Interest......................................................................12
Section 4.8 Return of Capital.............................................................12
ARTICLE V PROFITS, LOSSES AND ACCOUNTING.............................................................13
Section 5.1 Allocation of Profits and Losses..............................................13
Section 5.2 Accounting....................................................................13
Section 5.3 Partners' Accounts............................................................14
Section 5.4 Section 754 Elections.........................................................14
ARTICLE VI POWERS, DUTIES, LIABILITIES, COMPENSATION
AND VOTING OF GENERAL PARTNER.................................................15
Section 6.1 Powers of General Partner.....................................................15
Section 6.2 Delegation of Authority.......................................................17
Section 6.3 Duties of General Partner.....................................................17
Section 6.4 Liabilities of General Partner; Indemnification...............................18
Section 6.5 Compensation of General Partner; Reimbursement................................21
Section 6.6 Reliance on Act of General Partner............................................21
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 6.7 Outside Services; Dealings with Affiliates; Outside
Activities..................................................................21
Section 6.8 General Partner Participation.................................................22
ARTICLE VII RIGHTS, PROHIBITIONS AND REPRESENTATIONS
WITH RESPECT TO LIMITED PARTNERS............................................22
Section 7.1 Rights of Limited Partners....................................................22
Section 7.2 Prohibitions with Respect to the Limited Partners.............................23
Section 7.3 Ownership by Limited Partner of Corporate
General Partner or Affiliate................................................23
Section 7.4 Grant of Rights...............................................................24
Section 7.5 Warranties and Representations of the Limited Partners........................24
Section 7.6 Indemnification by Limited Partners...........................................25
Section 7.7 Notice of Sale or Refinancing.................................................25
ARTICLE VIII DISTRIBUTIONS AND PAYMENTS TO PARTNERS..................................................25
Section 8.1 Distributions of Cash Flow....................................................25
Section 8.2 REIT Distribution Requirements................................................26
Section 8.3 No Right to Distributions in Kind.............................................26
Section 8.4 Disposition Proceeds..........................................................26
Section 8.5 Withdrawals...................................................................26
ARTICLE IX TRANSFERS OF INTERESTS....................................................................26
Section 9.1 General Partner...............................................................26
Section 9.2 Admission of a Substitute or Additional General Partner.......................26
Section 9.3 Effect of Bankruptcy, Withdrawal, Death or
Dissolution of a General Partner............................................27
Section 9.4 Removal of a General Partner..................................................28
Section 9.5 Restrictions on Transfer of Limited Partnership Interests.....................28
Section 9.6 Admission of Substitute Limited Partner.......................................29
Section 9.7 Rights of Assignees of Partnership Interests..................................30
Section 9.8 Effect of Bankruptcy, Death, Incompetence or
Termination of a Limited Partner............................................30
Section 9.9 Joint Ownership of Interests..................................................30
Section 9.10 Transferees...................................................................31
Section 9.11 Absolute Restriction..........................................................31
Section 9.12 Investment Representation.....................................................31
ARTICLE X TERMINATION OF THE PARTNERSHIP.............................................................31
Section 10.1 Termination...................................................................31
Section 10.2 Payment of Debts..............................................................32
Section 10.3 Debts to Partners.............................................................32
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 10.4 Remaining Distribution........................................................32
Section 10.5 Reserve.......................................................................32
Section 10.6 Final Accounting..............................................................32
ARTICLE XI AMENDMENTS................................................................................33
Section 11.1 Authority to Amend............................................................33
Section 11.2 Notice of Amendments..........................................................33
ARTICLE XII POWER OF ATTORNEY........................................................................34
Section 12.1 Power.........................................................................34
Section 12.2 Survival of Power.............................................................34
ARTICLE XIII CONSENTS, APPROVALS, VOTING AND MEETINGS................................................35
Section 13.1 Method of Giving Consent or Approval..........................................35
Section 13.2 Meetings of Limited Partners..................................................35
Section 13.3 Opinion.......................................................................35
Section 13.4 Submissions to Partners.......................................................36
ARTICLE XIV MISCELLANEOUS............................................................................36
Section 14.1 Governing Law.................................................................36
Section 14.2 Agreement for Further Execution...............................................36
Section 14.3 Entire Agreement..............................................................36
Section 14.4 Severability..................................................................36
Section 14.5 Notices.......................................................................37
Section 14.6 Titles and Captions...........................................................37
Section 14.7 Counterparts..................................................................37
Section 14.8 Pronouns......................................................................37
Section 14.9 Survival of Rights............................................................37
Section 14.10 Personal Liability............................................................37
EXHIBIT A LIST OF PARTNERS
EXHIBIT B FEDERAL INCOME TAX MATTERS
EXHIBIT C INITIAL AND CORPORATE HOTELS
EXHIBIT D RIGHTS TERMS
</TABLE>
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<PAGE> 5
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
RRF LIMITED PARTNERSHIP
THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP made as of the 31st day of January, 1998, by and among REALTY REFUND
TRUST, an unincorporated Ohio business trust, having an address at 1750
Huntington Building, 925 Euclid Avenue, Cleveland, Ohio 44114, the general
partner ("General Partner"), and the limited partners listed on Exhibit A
attached hereto ("Limited Partners"), is intended to evidence the mutual
agreement of the General Partner and the Limited Partners to form a limited
partnership pursuant to Title 6, Chapter 17 of the Delaware Code (the "Act") for
the purposes and upon the terms and conditions hereinafter set forth.
ARTICLE I
DEFINED TERMS; EXHIBITS
-----------------------
Section 1.1 DEFINED TERMS. Whenever used in this Agreement,
the following terms shall have the meanings respectively assigned to them in
this Article I, unless otherwise expressly provided herein or unless the context
otherwise requires:
ADDITIONAL FUNDS: "Additional Funds" has the meaning set forth
in Section 4.4 hereof.
ADDITIONAL LIMITED PARTNER: "Additional Limited Partner" shall
mean a Person admitted to this Partnership as a Limited Partner pursuant to and
in accordance with Section 2.2(b) of this Agreement.
ADDITIONAL SECURITIES: "Additional Securities" means any
additional REIT Shares (other than REIT Shares issued in connection with an
exchange pursuant to Section 7.4 hereof) or rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase REIT Shares, as set forth in Section 4.3(a)(ii).
AFFILIATE: "Affiliate" of another Person shall mean (a) any
Person directly or indirectly owning, controlling or holding with power to vote
ten percent (10%) or more of the outstanding voting securities of such other
Person; (b) any Person ten percent (10%) or more of whose outstanding voting
securities are directly or indirectly owned, controlled or held with power to
vote by such other Person;
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(c) any Person directly or indirectly controlling, controlled by, or under
common control with, such other Person; (d) any officer, director, member or
partner of such other Person; and (e) if such other Person is an officer,
director, member or partner in a company, the company for which such Person acts
in any such capacity.
AGREED VALUE: "Agreed Value" shall mean the fair market value
of Contributed Property as agreed to by the Contributing Partner and the
Partnership, using such reasonable method of valuation as they may adopt.
AGREEMENT: "Agreement" shall mean this First Amended and
Restated Agreement of Limited Partnership of RRF Limited Partnership, as
amended, modified, supplemented or restated from time to time, as the context
requires.
BANKRUPTCY CODE: "Bankruptcy Code" shall mean the United
States Bankruptcy Code, as amended, 11 U.S.C. sections 101 ET SEQ., and as
hereafter amended from time to time.
BUSINESS DAY: "Business Day" shall mean any day when the New
York Stock Exchange is open for trading.
CAPITAL ACCOUNT: "Capital Account" shall mean, as to any
Partner, the account established and maintained for such Partner pursuant to
Section 5.3 hereof.
CAPITAL CONTRIBUTION: "Capital Contribution" shall mean the
amount in cash or the Agreed Value of Contributed Property contributed by each
Partner (or his original predecessor in interest) to the capital of the
Partnership for his interest in the Partnership.
CASH FLOW: "Cash Flow" shall mean the excess of cash revenues
actually received by the Partnership in respect of Partnership operations for
any period, less Operating Expenses for such period. Cash Flow shall not include
Disposition Proceeds.
CLASS A LIMITED PARTNERS: "Class A Limited Partners" shall
mean those persons listed under the heading "Class A Limited Partners" on the
signature pages hereto.
CLASS B LIMITED PARTNERS: "Class B Limited Partners" shall
mean those persons listed under the heading "Class B Limited Partners" on the
signature pages hereto.
CODE: "Code" shall mean the Internal Revenue Code of 1986, as
amended, and as hereafter amended from time to time. Reference to any particular
provision of the Code shall mean that provision in the Code at the date hereof
and any succeeding provision of the Code.
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COMMISSION: "Commission" shall mean the U.S. Securities and
Exchange Commission.
COMPUTATION DATE: "Computation Date" shall mean the date on
which an Exchange Exercise Notice is delivered to the General Partner.
CONTRIBUTED PARTNERSHIPS: "Contributed Partnerships" shall
mean the various limited partnerships that own the Initial Hotels prior to the
formation transaction.
CONTRIBUTED PROPERTY: "Contributed Property" shall mean a
Partner's interest in property or other consideration (excluding services and
cash) contributed to the Partnership by such Partner.
CORPORATE HOTEL: "Corporate Hotel" shall mean those Properties
identified as such on Exhibit C hereto.
DECLARATION OF TRUST: "Declaration of Trust" shall mean that
certain Second Amended and Restated Declaration of Trust, dated as of January
__, 1998, of the General Partner, as amended, modified, supplemented or restated
from time to time, as the context requires.
DISPOSITION PROCEEDS: "Disposition Proceeds" shall mean the
excess of the proceeds received by the Partnership from the refinancing, sale,
exchange or other disposition of all or substantially all of the Partnership's
Property less any expenses incurred or paid by the Partnership in connection
with such transaction.
EQUITY PLAN: "Equity Plan" shall mean the General Partner's
1997 Stock Incentive and Option Plan, as the same may be amended from time to
time.
EVENT OF BANKRUPTCY: "Event of Bankruptcy" shall mean as to
any Person the filing of a petition for relief as to such Person as debtor or
bankrupt under the Bankruptcy Code or similar provision of law of any
jurisdiction (except if such petition is contested by such Person and has been
dismissed within ninety (90) days of the filing thereof); insolvency of such
Person as finally determined by a court of competent jurisdiction; filing by
such Person of a petition or application to accomplish the same or for the
appointment of a receiver or a trustee for such Person or a substantial part of
such Person's assets; commencement of any proceedings relating to such Person as
a debtor under any other reorganization, arrangement, insolvency, adjustment of
debt or liquidation law of any jurisdiction, whether now in existence or
hereinafter in effect, either by such Person or by another; provided, however,
that if such proceeding is commenced by another, such Person indicates his
approval of such proceeding, consents thereto or acquiesces therein, or such
proceeding is contested by such Person and has not been finally dismissed within
ninety (90) days. The term "Event of Bankruptcy" as defined in this Agreement
and as used herein, is intended
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and shall be deemed to supersede and replace the events of withdrawal described
in Sections 17-402(a)(4) and (5) of the Act.
GENERAL PARTNER: "General Partner" shall mean Realty ReFund
Trust and any Person who becomes a substitute or additional General Partner as
provided herein, and any of their successors as General Partner.
GENERAL PARTNERSHIP INTEREST: "General Partnership Interest"
shall mean the ownership interest of a General Partner in the Partnership.
HART SCOTT ACT: "Hart Scott Act" shall mean the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended.
INDEMNITEE: "Indemnitee" shall mean (i) any Person made a
party to a proceeding by reason of its status as (A) the General Partner, or (B)
a trustee, director or officer of the General Partner, and (ii) such other
Persons (including Affiliates of the General Partner or the Partnership) as the
General Partner may designate from time to time, in its sole and absolute
discretion.
INITIAL HOTELS: "Initial Hotels" shall mean those Properties
listed on Exhibit C hereto.
IRS: "IRS" shall mean the Internal Revenue Service.
LIMITED PARTNERS: "Limited Partners" shall mean the Class A
Limited Partners and the Class B Limited Partners, in their respective
capacities as limited partners of the Partnership, their permitted successors or
assigns who have been admitted to the Partnership as limited partners of the
Partnership, or any Person who, at the time of reference thereto, is a limited
partner of the Partnership.
LIMITED PARTNERSHIP INTEREST: "Limited Partnership Interest"
shall mean the ownership interest of a Limited Partner in the Partnership at any
particular time, including the right of such Limited Partner to any and all
benefits to which such Limited Partner may be entitled as provided in this
Agreement and in the Act, together with the obligations of such Limited Partner
to comply with all the provisions of this Agreement and of the Act.
MAJORITY-IN-INTEREST OF THE LIMITED PARTNERS:
"Majority-In-Interest of the Limited Partners" shall mean Limited Partner(s) who
hold in the aggregate more than fifty percent (50%) of the Percentage Interests
then allocable to and held by the Limited Partners, as a class (other than the
General Partner if it holds any Partnership Interests allocable to the Limited
Partners).
OPERATING EXPENSES: "Operating Expenses" shall mean (i) all
administrative and operating costs and expenses incurred by the Partnership,
(ii) those
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<PAGE> 9
administrative costs and expenses of the General Partner, including any salaries
or other payments to trustees, officers or employees of the General Partner, and
any accounting and legal expense of the General Partner, which expenses the
Partners have agreed, are expenses of the Partnership and not the General
Partner, and (iii) to the extent not included in clause (ii) above, REIT
Expenses; PROVIDED, HOWEVER, that Operating Expenses shall not include any
administrative costs and expenses incurred by the General Partner that are
attributable to properties or partnership interests in a Subsidiary that are
owned by the General Partner directly.
PARTNER: "Partner" shall mean the General Partner or any
Limited Partner.
PARTNERSHIP: "Partnership" shall mean RRF Limited Partnership,
a Delaware limited partnership.
PARTNERSHIP INTEREST: "Partnership Interest" shall mean an
ownership interest in the Partnership representing a Capital Contribution by
either a Limited Partner or the General Partner and includes any and all
benefits to which the holder of such an ownership interest may be entitled as
provided in this Agreement or the Act, together with all obligations of such
Person to comply with the terms and provisions of this Agreement and the Act.
PARTNERSHIP RECORD DATE: "Partnership Record Date" shall mean
the record date established by the General Partner for the distribution of Cash
Flow pursuant to Section 8.1 hereof, which record date shall be the same as the
record date established by the General Partner for a distribution to its
shareholders of some or all of its portion of such distribution.
PARTNERSHIP UNIT: "Partnership Unit" shall mean a fractional,
undivided share of the Partnership Interests of all Partners issued hereunder.
As of the date of this Agreement, there shall be considered to be Seven Million
Eight Hundred Six Thousand One Hundred Fifty (7,806,150) Partnership Units
outstanding, with each Partnership Unit representing a .0000128% Percentage
Interest in the Partnership. The initial allocation of Partnership Units to each
Partner is as set forth on Exhibit A hereto.
PERCENTAGE INTEREST: "Percentage Interest" shall mean the
percentage ownership interest in the Partnership of each Partner, as determined
by dividing the Partnership Units owned by a Partner by the total number of
Partnership Units then outstanding.
PERSON: "Person" shall mean any individual, partnership,
corporation, limited liability company, trust or other entity.
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PROPERTY: "Property" shall mean any hotel property or other
investment in which the Partnership holds an ownership interest.
REIT: "REIT" shall mean a real estate investment trust under
Sections 856 through 860, inclusive, of the Code.
REIT EXPENSES: "REIT Expenses" means (i) costs and expenses
relating to the formation and continuity of existence of the General Partner and
any Subsidiaries thereof (which Subsidiaries shall, for purposes hereof, be
included within the definition of General Partner), including taxes, fees and
assessments associated therewith, any and all costs, expenses or fees payable to
any trustee, director, officer, or employee of the General Partner, (ii) costs
and expenses relating to a public offering and registration of securities or
private offering of securities by the General Partner and all statements,
reports, fees and expenses incidental thereto, including underwriting discounts
and selling commissions applicable to any such offering of securities, (iii)
costs and expenses associated with the preparation and filing of any periodic
reports by the General Partner under federal, state or local laws or
regulations, including filings with the Commission, (iv) costs and expenses
associated with compliance by the General Partner with laws, rules and
regulations promulgated by any regulatory body, including the Commission, and
(v) all other operating or administrative costs of the General Partner,
including, without limitation, insurance premiums, and legal, accounting and
trustees fees, incurred in the ordinary course of its business on behalf of or
in connection with the Partnership.
REIT SHARE: "REIT Share" shall mean a common share of
beneficial interest without par value of the General Partner.
SUBSIDIARY: "Subsidiary" shall mean, with respect to any
Person, any corporation or other entity of which a majority of (i) the voting
power of the voting equity securities, or (ii) the outstanding equity interests,
are owned, directly or indirectly, by such Person.
SUBSTITUTE GENERAL PARTNER: "Substitute General Partner" has
the meaning set forth in Section 9.2.
SUBSTITUTE LIMITED PARTNER: "Substitute Limited Partner" shall
mean any Person admitted to the Partnership as a Limited Partner pursuant to
Section 9.6 hereof.
TRANSFER: "Transfer" has the meaning set forth in Section
9.5(a) hereof.
VALUE: "Value" shall mean, with respect to a REIT Share, the
average of the daily market price for the ten (10) consecutive trading days
immediately preceding the Valuation Date. The market price for each such trading
day shall be: (i) if the REIT Shares are listed or admitted to trading on any
securities exchange or
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the NASDAQ-National Market System, the closing price, regular way, on such day,
or if no such sale takes place on such day, the average of the closing bid and
asked prices on such day; (ii) if the REIT Shares are not listed or admitted to
trading on any securities exchange or the NASDAQ-National Market System, the
last reported sale price on such day or, if no sale takes place on such day, the
average of the closing bid and asked prices on such day, as reported by a
reliable quotation source designated by the General Partner; or (iii) if the
REIT Shares are not listed or admitted to trading on any securities exchange or
the NASDAQ-National Market System and no such last reported sale price or
closing bid and asked prices are available, the average of the reported high bid
and low asked prices on such day, as reported by a reliable quotation source
designated by the General Partner, or if there shall be no bid and asked prices
on such day, the average of the high bid and low asked prices, as so reported,
on the most recent day (not more than ten (10) days prior to the date in
question) for which prices have been so reported; provided, however, that if
there are no bid and asked prices reported during the ten (10) days prior to the
date in question, the Value of the REIT Shares shall be determined by the
General Partner acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment, appropriate. In the
event the REIT Shares includes rights that a holder of REIT Shares would be
entitled to receive, and the General Partner acting in good faith determines
that the value of such rights is not reflected in the Value of the REIT Shares
determined as aforesaid, then the Value of such rights shall be determined by
the General Partner acting in good faith on the basis of such quotations and
other information as it considers, in its reasonable judgment, appropriate.
Section 1.2 EXHIBITS, SCHEDULES, ETC.. References to "Exhibit"
or to a "Schedule" are, unless otherwise specified, to one of the Exhibits or
Schedules attached to this Agreement, and references to an "Article" or a
"Section" are, unless otherwise specified, to one of the Articles or Sections of
this Agreement. Each Exhibit and Schedule attached hereto and referred to herein
is hereby incorporated herein by reference.
ARTICLE II
FORMATION;
ADMISSION OF LIMITED PARTNERS;
NAME; PLACE OF BUSINESS AND REGISTERED AGENT
--------------------------------------------
Section 2.1 CERTIFICATE OF LIMITED PARTNERSHIP; OTHER FILINGS.
The General Partner shall prepare (or caused to be prepared), execute,
acknowledge, record and file at the expense of the Partnership, a Certificate of
Limited Partnership and all requisite fictitious name statements and notices in
such places and jurisdictions as may be required by the Act or necessary to
cause the Partnership to be treated as a limited partnership under, and
otherwise to comply with, the laws of each state or other jurisdiction in which
the Partnership conducts business.
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Section 2.2 LIMITED PARTNERS; ADDITIONAL LIMITED PARTNERS. (a)
The Limited Partners shall be those Persons identified as Limited Partners on
Exhibit A attached hereto, as amended from time to time pursuant to the terms of
this Agreement, and such Persons are hereby admitted to the Partnership as
Limited Partners.
(b) The General Partner shall in timely fashion amend this
Agreement and, if required by the Act, the Certificate of Limited Partnership
filed for record to reflect the admission pursuant to the terms of this
Agreement of a Person as a Limited Partner.
Section 2.3 NAME; PRINCIPAL PLACE OF BUSINESS. The name of the
Partnership shall be RRF Limited Partnership. The principal place of business of
the Partnership shall be at 1615 E. Northern Avenue, Suite 105, Phoenix, Arizona
85020. The General Partner may at any time change the location of such office,
provided the General Partner gives notice to the Partners of any such change.
Section 2.4 REGISTERED AGENT AND REGISTERED OFFICE. The
registered agent of the Partnership shall be The Corporation Trust Company, a
Delaware corporation, located at 1209 Orange Street, Wilmington, New Castle
County, Delaware 19801, or such other Person as the General Partner may select
in its sole discretion. The registered office of the Partnership shall be
Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801, or such other location as the General Partner may select in its
sole and absolute discretion.
ARTICLE III
BUSINESS AND TERM OF PARTNERSHIP
--------------------------------
Section 3.1 BUSINESS. The purpose and nature of the business
of the Partnership is to conduct any business that may lawfully be conducted by
a limited partnership organized pursuant to the Act, provided, however, that
such business shall be limited to and conducted in such a manner as to permit
the General Partner at all times to be classified as a REIT, unless the Board of
Trustees of the General Partner determines to cease to maintain the
qualification of the General Partner as a REIT. To consummate the foregoing and
to carry out the obligations of the Partnership in connection therewith or
incidental thereto, the General Partner shall have the authority, in accordance
with and subject to the limitations set forth elsewhere in this Agreement, to
make, enter into, perform and carry out any arrangements, contracts and/or
agreements of every kind for any lawful purpose, without limit as to amount or
otherwise, with any corporation, association, partnership, limited liability
company, firm, trustee, syndicate, individual and/or any political or
governmental division, subdivision or agency, domestic or foreign, and generally
to make and perform agreements and contracts of every kind and description and
to do any and all things necessary or incidental to the foregoing for the
protection and enhancement of the assets of the Partnership.
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Section 3.2 TERM. The Partnership as herein constituted shall
continue until December 31, 2047, unless earlier dissolved or terminated
pursuant to law or the provisions of this Agreement.
ARTICLE IV
CAPITAL CONTRIBUTIONS
Section 4.1 GENERAL PARTNER. (a) The General Partner has
contributed cash and certain other assets to the capital of the Partnership in
the amount set forth opposite the name of the General Partner on Exhibit A
attached hereto.
Section 4.2 LIMITED PARTNERS. The Limited Partners have
contributed their respective ownership interests in the Contributed Partnerships
to the capital of the Partnership. The Agreed Values of the Limited Partners'
proportionate ownership interests in the Contributed Partnerships are set forth
on Exhibit A attached hereto.
Section 4.3 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF
ADDITIONAL PARTNERSHIP INTERESTS. Except as provided in this Section 4.3 or in
Section 4.4, the Partners shall have no right or obligation to make any
additional Capital Contributions or loans to the Partnership. The General
Partner may contribute additional capital to the Partnership, from time to time,
and receive additional Partnership Interests in respect thereof, in the manner
contemplated in this Section 4.3.
(a) ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS.
(i) GENERAL. The General Partner is hereby authorized
to cause the Partnership to issue such additional Partnership Interests
in the form of Partnership Units for any Partnership purpose at any
time or from time to time, to the Partners or to other Persons for such
consideration and on such terms and conditions as shall be established
by the General Partner in its sole and absolute discretion, all without
the approval of any of the Limited Partners. Any additional Partnership
Interest issued thereby may be issued in one or more classes, or one or
more series of any of such classes, with such designations, preferences
and relative, participating, optional or other special rights, powers
and duties, including rights, powers and duties senior to Limited
Partnership Interests, all as shall be determined by the General
Partner in its sole and absolute discretion and without the approval of
any Limited Partner, subject to Delaware law, including, without
limitation, (i) the allocations of items of Partnership income, gain,
loss, deduction and credit to each such class or series of Partnership
Interests; (ii) the right of each such class or series of Partnership
Interests to share in Partnership distributions; and (iii) the rights
of each class or series of Partnership Interests upon dissolution
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and liquidation of the Partnership; PROVIDED, HOWEVER, that no
additional Partnership Interests shall be issued to the General Partner
unless:
(1) (A) The additional Partnership Interests are
issued in connection with an issuance of Additional Securities
as permitted under clause (ii) below, or
(2) the additional Partnership Interests are issued
to all Partners in proportion to their respective Percentage
Interests.
Without limiting the foregoing, the General Partner is expressly authorized to
cause the Partnership to issue Partnership Interests for less than fair market
value, so long as the General Partner concludes in good faith that such issuance
is in the best interests of the General Partner and the Partnership.
(ii) UPON ISSUANCE OF ADDITIONAL SECURITIES. The
General Partner shall not issue any additional REIT Shares (other than
REIT Shares issued in connection with an exchange pursuant to Section
7.4 hereof) or rights, options, warrants or convertible or exchangeable
securities containing the right to subscribe for or purchase REIT
Shares (collectively, "Additional Securities") other than to all
holders of REIT Shares, unless (A) the General Partner shall cause the
Partnership to issue to the General Partner Partnership Interests or
rights, options, warrants or convertible or exchangeable securities of
the Partnership having designations, preferences and other rights, all
such that the economic interests are substantially similar to those of
the Additional Securities, and (B) the General Partner contributes the
proceeds from the issuance of such Additional Securities and from any
exercise of rights contained in such Additional Securities to the
Partnership. Without limiting the foregoing, the General Partner is
expressly authorized to issue Additional Securities for less than fair
market value, and to cause the Partnership to issue to the General
Partner corresponding Partnership Interests, so long as (x) the General
Partner concludes in good faith that such issuance is in the best
interests of the General Partner and the Partnership, and (y) the
General Partner contributes all proceeds from such issuance to the
Partnership. For example, in the event the General Partner issues REIT
Shares for a cash purchase price and contributes all of the proceeds of
such issuance to the Partnership as required hereunder, the General
Partner shall be issued a number of additional Partnership Units equal
to the product of (A) the number of such REIT Shares issued by the
General Partner, the proceeds of which were so contributed, multiplied
by (B) a fraction, the numerator of which is 100%, and the denominator
of which is the Exchange Factor in effect on the date of such
contribution.
(b) CERTAIN DEEMED CONTRIBUTIONS OF PROCEEDS OF ISSUANCE OF
REIT SHARES. In connection with any and all issuances of REIT Shares, the
General
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Partner shall contribute all of the proceeds raised in connection with such
issuance to the Partnership as Capital Contributions, PROVIDED THAT if the
proceeds actually received and contributed by the General Partner are less than
the gross proceeds of such issuance as a result of any underwriter's discount or
other expenses paid or incurred in connection with such issuance, then the
General Partner shall be deemed to have made Capital Contributions to the
Partnership in the aggregate amount of the gross proceeds of such issuance and
the Partnership shall be deemed simultaneously to have paid such offering
expenses in connection with the required issuance of additional Partnership
Units to the General Partner for such Capital Contributions pursuant to Section
4.3(a) hereof.
Section 4.4 ADDITIONAL FUNDING. If the General Partner
determines that it is in the best interests of the Partnership to provide for
additional Partnership funds ("Additional Funds") for any Partnership purpose,
the General Partner may (i) cause the Partnership to obtain such funds from
outside borrowings, or (ii) elect to have the General Partner provide such
Additional Funds to the Partnership through loans or otherwise.
Section 4.5 EQUITY PLAN. If at any time or from time to time
stock options or other equity compensation granted in connection with the
General Partner's Equity Plan or other compensation programs are exercised in
accordance with the terms of such agreements:
(a) the General Partner shall, as soon as practicable
after such exercise, contribute to the capital of the Partnership an
amount equal to the exercise price paid to the General Partner by such
exercising party in connection with the exercise of the stock option;
(b) the Partnership shall issue and the General
Partner shall receive the number of Partnership Units corresponding to
the number of REIT Shares delivered by the General Partner to such
exercising party multiplied by a fraction the numerator of which is one
(1) and the denominator of which is the Exchange Factor (as defined in
Exhibit D hereto) in effect on the date of such contribution;
(c) after the issuance of such Partnership Units to
the General Partner, the Percentage Interest of each Limited Partner
shall be adjusted such that the Percentage Interest of the Limited
Partner shall be equal to a fraction, the numerator of which is the
number of Partnership Units owned by such Limited Partner and the
denominator of which is the total number of issued and outstanding
Partnership Units on such date. The General Partner shall promptly give
each Limited Partner written notice of its Percentage Interest, as
adjusted; and
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(d) after the issuance of such Partnership Units to
the General Partner, the Percentage Interest of the General Partner
shall be adjusted such that it equals 100% minus the sum of the
Percentage Interests of all Limited Partners immediately after being
adjusted pursuant to paragraph (c) of this Section 4.5.
4.6 DIVIDEND REINVESTMENT PLAN. All amounts received
by the General Partner in respect of its dividend reinvestment plan, if any,
shall be contributed by the General Partner to the Partnership in exchange for
additional Partnership Units as follows:
(a) the Partnership shall issue and the General
Partner shall receive the number of Partnership Units corresponding to
the number of REIT Shares delivered by the General Partner to such
exercising party multiplied by a fraction the numerator of which is one
(1) and the denominator of which is the Exchange Factor (as defined in
Exhibit D hereto) in effect on the date of such contribution;
(b) after the issuance of such Partnership Units to
the General Partner, the Percentage Interest of each Limited Partner
shall be adjusted such that the Percentage Interest of the Limited
Partner shall be equal to a fraction, the numerator of which is the
number of Partnership Units owned by such Limited Partner and the
denominator of which is the total number of issued and outstanding
Partnership Units on such date. The General Partner shall promptly give
each Limited Partner written notice of its Percentage Interest, as
adjusted; and
(c) after the issuance of such Partnership Units to
the General Partner, the Percentage Interest of the General Partner
shall be adjusted such that it equals 100% minus the sum of the
Percentage Interests of all Limited Partners immediately after being
adjusted pursuant to paragraph (b) of this Section 4.6.
Section 4.7 INTEREST. No interest shall be paid on
the Capital Contribution or Capital Account of any Partner.
Section 4.8 RETURN OF CAPITAL. Except as expressly
provided in this Agreement, no Partner shall be entitled to demand or receive
the return of his Capital Contribution.
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ARTICLE V
PROFITS, LOSSES AND ACCOUNTING
------------------------------
Section 5.1 ALLOCATION OF PROFITS AND LOSSES. Except as
otherwise provided herein or in Exhibit B, profits earned and losses incurred by
the Partnership shall be allocated among the Partners in accordance with their
respective Percentage Interests.
Section 5.2 ACCOUNTING. (a) The books of the Partnership shall
be kept on the accrual basis and in accordance with generally accepted
accounting principles consistently applied.
(b) The fiscal year of the Partnership shall be the calendar
year.
(c) The terms "profits" and "losses," as used herein, shall
mean all items of income, gain, expense or loss as determined utilizing federal
income tax accounting principles and shall also include each Partner's share of
income described in Section 705(a)(1)(B) of the Code, any expenditures described
in Section 705(a)(2)(B) of the Code, any expenditures described in Section
709(a) of the Code which are not deducted or amortized in accordance with
Section 709(b) of the Code, losses not deductible pursuant to Sections 267(a)
and 707(b) of the Code and adjustments made pursuant to Exhibit B attached
hereto.
(d) The General Partner shall be the Tax Matters Partner of
the Partnership within the meaning of Section 6231(a)(7) of the Code. As Tax
Matters Partner, the General Partner shall have the right and obligation to take
all actions authorized and required, respectively, by the Code for the Tax
Matters Partner. The General Partner shall have the right to retain professional
assistance in respect of any audit of the Partnership by the IRS, and all
out-of-pocket expenses and fees incurred by the General Partner on behalf of the
Partnership as Tax Matters Partner shall constitute Operating Expenses of the
Partnership. In the event the General Partner receives notice of a final
Partnership adjustment under Section 6223(a)(2) of the Code, the General Partner
shall either (i) file a court petition for judicial review of such final
adjustment within the period provided under Section 6226(a) of the Code, a copy
of which petition shall be mailed to each Limited Partner on the date such
petition is filed, or (ii) mail a written notice to each Limited Partner, within
such period, that describes the General Partner's reasons for determining not to
file such a petition.
(e) Except as specifically provided herein, all elections
required or permitted to be made by the Partnership under the Code shall be made
by the General Partner in its sole discretion.
(f) Any Partner shall have the right to a private audit of the
books and records of the Partnership, provided such audit is made at the expense
of the Partner desiring it, and it is made during normal business hours.
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Section 5.3 PARTNERS' ACCOUNTS. (a) There shall be maintained
a Capital Account for each Partner in accordance with this Section 5.3 and the
principles set forth in Exhibit B attached hereto and made a part hereof. The
amount of cash and the net fair market value of property contributed to the
Partnership by each Partner, net of liabilities assumed by the Partnership,
shall be credited to its Capital Account, and from time to time, but not less
often than annually, the share of each Partner in profits, losses and fair
market value of distributions shall be credited or charged to its Capital
Account. The determination of Partners' Capital Accounts, and any adjustments
thereto, shall be made consistent with tax accounting and other principles set
forth in Section 704(b) of the Code and applicable regulations thereunder and
Exhibit B attached hereto.
(b) Except as otherwise specifically provided herein or in a
guarantee of a Partnership liability, signed by a Limited Partner, no Limited
Partner shall be required to make any further contribution to the capital of the
Partnership to restore a loss, to discharge any liability of the Partnership or
for any other purpose, nor shall any Limited Partner personally be liable for
any liabilities of the Partnership or of the General Partner except as provided
by law or this Agreement. All Limited Partners hereby waive their right of
contribution which they may have against other Partners in respect of any
payments made by them under any guarantee of Partnership debt.
(c) Immediately following the transfer of any Partnership
Interest, the Capital Account of the transferee Partner shall be equal to the
Capital Account of the transferor Partner attributable to the transferred
interest, and such Capital Account shall not be adjusted to reflect any basis
adjustment under Section 743 of the Code.
(d) For purposes of computing the amount of any item of
income, gain, deduction or loss to be reflected in the Partners' Capital
Accounts, the determination, recognition and classification of any such item
shall be the same as its determination, recognition and classification for
federal income tax purposes, taking into account any adjustments required
pursuant to Section 704(b) of the Code and the applicable regulations thereunder
as more fully described in Exhibit B attached hereto.
Section 5.4 SECTION 754 ELECTIONS. The General Partner shall
elect, pursuant to Section 754 of the Code, to adjust the basis of the
Partnership's assets for all transfers of Partnership interests if such election
would benefit any Partner or the Partnership.
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ARTICLE VI
POWERS, DUTIES, LIABILITIES,
COMPENSATION AND VOTING OF GENERAL PARTNER
------------------------------------------
Section 6.1 POWERS OF GENERAL PARTNER. Notwithstanding any
provision of this Agreement to the contrary, the General Partner's discretion
and authority are subject to the limitations imposed by law, by the General
Partner's Declaration of Trust and its By-Laws. Subject to the foregoing and to
other limitations imposed by this Agreement, the General Partner shall have
full, complete and exclusive discretion to manage and control the business and
affairs of the Partnership and make all decisions affecting the business and
assets of the Partnership. Without limiting the generality of the foregoing (but
subject to the restrictions specifically contained in this Agreement), the
General Partner shall have the power and authority to take the following actions
on behalf of the Partnership:
(a) to acquire, purchase, own, lease and dispose of
any real property and any other property or assets that the General Partner
determines are necessary or appropriate or in the best interests of conducting
the business of the Partnership;
(b) to construct buildings and make other
improvements (including renovations) on or to the properties owned or
leased by the Partnership;
(c) to borrow money for the Partnership, issue
evidences of indebtedness in connection therewith, refinance,
guarantee, increase the amount of, modify, amend or change the terms
of, or extend the time for the payment of, any indebtedness or
obligation of or to the Partnership, and secure such indebtedness by
mortgage, deed of trust, pledge or other lien on the Partnership's
assets;
(d) to pay, either directly or by reimbursement, for
all Operating Expenses to third parties or to the General Partner (as
set forth in this Agreement);
(e) to lease all or any portion of any of the
Partnership's assets, whether or not the terms of such leases extend
beyond the termination date of the Partnership and whether or not any
portion of the Partnership's assets so leased are to be occupied by the
lessee, or, in turn, subleased in whole or in part to others, for such
consideration and on such terms as the General Partner may determine;
(f) to prosecute, defend, arbitrate, or compromise
any and all claims or liabilities in favor of or against the
Partnership, on such terms and in such manner as the General Partner
may reasonably
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determine, and similarly to prosecute, settle or defend litigation with
respect to the Partners, the Partnership, or the Partnership's assets;
provided, however, that the General Partner may not, without the
consent of all of the Partners, confess a judgment against the
Partnership;
(g) to file applications, communicate, and otherwise
deal with any and all governmental agencies having jurisdiction over,
or in any way affecting, the Partnership's assets or any other aspect
of the Partnership business;
(h) to make or revoke any election permitted or
required of the Partnership by any taxing authority;
(i) to maintain such insurance coverage for public
liability, fire and casualty, and any and all other insurance for the
protection of the Partnership, for the conservation of Partnership
assets, or for any other purpose convenient or beneficial to the
Partnership, in such amounts and such types as the General Partner
shall determine from time to time;
(j) to determine whether or not to apply any
insurance proceeds for any Property to the restoration of such Property
or to distribute the same;
(k) to retain providers of services of any kind or
nature in connection with the Partnership business and to pay therefor
such reasonable remuneration as the General Partner may deem proper;
(l) to negotiate and conclude agreements on behalf of
the Partnership with respect to any of the rights, powers and authority
conferred upon the General Partner, including, without limitation,
management agreements, franchise agreements, agreements with federal,
state or local liquor licensing agencies and agreements with operators
of restaurants and bars;
(m) to maintain accurate accounting records and to
file promptly all federal, state and local income tax returns on behalf
of the Partnership;
(n) to form or acquire an interest in, and contribute
property to, any further limited or general partnerships, joint
ventures or other relationships that it deems desirable (including,
without limitation, the acquisition of interests in, and the
contributions of
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property to, its Subsidiaries and any other Person in which it has an
equity interest from time to time);
(o) to distribute Partnership cash or other
Partnership assets in accordance with this Agreement;
(p) to establish Partnership reserves for working
capital, capital expenditures, contingent liabilities or any other
valid Partnership purpose;
(q) to take whatever action the General Partner deems
appropriate to maintain an equivalency of Partnership Units and REIT
Shares; and
(r) to take such other action, execute, acknowledge,
swear to or deliver such other documents and instruments, and perform
any and all other acts the General Partner deems necessary or
appropriate for the formation, continuation and conduct of the business
and affairs of the Partnership (including, without limitation, all
actions consistent with qualification of the General Partner as a REIT)
and to possess and enjoy all of the rights and powers of a general
partner as provided by the Act.
Except as otherwise provided herein, to the extent the duties of the General
Partner require expenditures of funds to be paid to third parties, the General
Partner shall not have any obligations hereunder except to the extent that
Partnership funds are reasonably available to it for the performance of such
duties, and nothing herein contained shall be deemed to authorize or require the
General Partner, in its capacity as such, to expend its individual funds for
payment to third parties or to undertake any individual liability or obligation
on behalf of the Partnership.
Section 6.2 DELEGATION OF AUTHORITY. The General Partner may
delegate any or all of its powers, rights and obligations hereunder, and may
appoint, employ, contract or otherwise deal with any Person for the transaction
of the business of the Partnership, which Person may, under supervision of the
General Partner, perform any acts or services for the Partnership as the General
Partner may approve.
Section 6.3 DUTIES OF GENERAL PARTNER. (a) The General
Partner, subject to the limitations contained elsewhere in this Agreement, shall
manage or cause to be managed the affairs of the Partnership in a prudent and
businesslike manner and shall devote sufficient time and effort to the
Partnership affairs.
(b) In carrying out its obligations, the General Partner
shall:
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(i) Render annual reports to all Partners with
respect to the operations of the Partnership;
(ii) On or before April 30th of every year, mail to
all persons who were Partners at any time during the Partnership's
prior fiscal year an annual report of the Partnership, including all
necessary tax information, and any other information regarding the
Partnership and its operations during the prior fiscal year deemed by
the General Partner to be material;
(iii) Maintain complete and accurate records of all
business conducted by the Partnership and complete and accurate books
of account (containing such information as shall be necessary to record
allocations and distributions), and make such records and books of
account available for inspection and audit by any Partner or such
Partner's duly authorized representative (at the sole expense of such
Partner) during regular business hours and at the principal office of
the Partnership; and
(iv) Cause to be filed such certificates and do such
other acts as may be required by law to qualify and maintain the
Partnership as a limited partnership under the laws of the State of
Delaware.
(c) The General Partner shall take such actions as it
deems appropriate to maintain an equivalency of Partnership Units and REIT
Shares.
Section 6.4 LIABILITIES OF GENERAL PARTNER;
INDEMNIFICATION. (a) The General Partner shall not be liable for the return of
all or any part of the Capital Contributions of the Limited Partners. Any
returns shall be made solely from the assets of the Partnership according to the
terms of this Agreement.
(b) In carrying out its duties hereunder, the
General Partner shall not be liable to the Partnership or to any other Partner
for any actions taken in good faith and reasonably believed to be in the best
interests of the Partnership, or for errors of judgment, but shall be liable
only for fraud or gross negligence. The Limited Partners expressly acknowledge
that the General Partner is acting on behalf of the Partnership, the General
Partner and the General Partner's shareholders collectively, and that the
General Partner is under no obligation to consider the separate interests of the
Limited Partners (including, without limitation, the tax consequences to Limited
Partners) in deciding whether to cause the Partnership to take (or decline to
take) any actions. In the event of a conflict between the interests of the
shareholders of the General Partner on one hand and the Limited Partners on the
other, the General Partner shall endeavor in good faith to resolve the conflict
in a manner not adverse to either the shareholders of the General Partner or the
Limited Partners; provided, however, that for so long as the General Partner has
securities
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registered pursuant to ss.12 or ss.15 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), any such conflict that cannot be resolved in a
manner not adverse to either the shareholders of the General Partner or the
Limited Partners shall be resolved in favor of the shareholders. The General
Partner shall not be liable for monetary damages for losses sustained,
liabilities incurred, or benefits not derived by Limited Partners in connection
with such decisions, provided that the General Partner has acted in good faith.
Any amendment, modification or repeal of this Section 6.4 or any provision
hereof shall be prospective only and shall not in any way affect the limitations
on the General Partner's liability to the Partnership and the Limited Partners
under this Section 6.4 as in effect immediately prior to such amendment,
modification or repeal with respect to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when claims
relating to such matters may arise or be asserted.
(c) The Partnership shall indemnify and defend an
Indemnitee to the fullest extent permitted by law, and save and hold it harmless
from and against, and in respect of, all: (i) fees, costs and expenses
(including reasonable attorney fees) incurred in connection with or resulting
from any claim, action or demand against any Indemnitee or the Partnership that
arises out of or in any way relates to the Partnership, and (ii) claims, actions
and demands arising out of or in any way related to the Partnership, and any
losses or damages resulting from such claims, actions and demands, including,
without limitation, reasonable costs and expenses of litigation and appeal and
amounts paid in settlement or compromise of any such claim, action or demand;
provided, however, that this indemnification shall not apply if: (A) the act or
omission of the Indemnitee was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active and
deliberate dishonesty; (B) the Indemnitee actually received an improper personal
benefit in money, property or services; or (C) in the case of any criminal
proceeding, the Indemnitee had reasonable cause to believe that the act or
omission was unlawful. The termination of any proceeding by judgment, order or
settlement does not create a presumption that the Indemnitee did not meet the
requisite standard of conduct set forth in this Section 6.4(c). The termination
of any proceeding by conviction or upon a plea of nolo contendere or its
equivalent, or an entry of an order of probation prior to judgment, creates a
rebuttable presumption that the Indemnitee acted in a manner contrary to that
specified in this Section 6.4(c). Any indemnification pursuant to this Section
6.4 shall be made only out of the assets of the Partnership.
(d) The Partnership may reimburse an Indemnitee for
reasonable expenses incurred by an Indemnitee who is a party to a proceeding in
advance of the final disposition of the proceeding upon receipt by the
Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's
good faith belief that the standard of conduct necessary for indemnification by
the Partnership as authorized in this Section 6.4 has been met, and (ii) a
written undertaking by or on behalf of the Indemnitee to repay the amount if it
shall ultimately be determined that the standard of conduct has not been met.
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<PAGE> 24
(e) The indemnification provided by this Section 6.4
shall be in addition to any other rights to which an Indemnitee or any other
Person may be entitled under any agreement, pursuant to any vote of the
Partners, as a matter of law or otherwise, and shall continue as to an
Indemnitee who has ceased to serve in such capacity.
(f) The Partnership may purchase and maintain
insurance on behalf of the Indemnities, and such other Persons as the General
Partner shall determine, against any liability that may be asserted against or
expenses that may be incurred by such Person in connection with the
Partnership's activities, regardless of whether the Partnership would have the
power to indemnify such Person against such liability under the provisions of
this Agreement.
(g) For purposes of this Section 6.4, the Partnership
shall be deemed to have requested an Indemnitee to serve as fiduciary of an
employee benefit plan whenever the performance by the Indemnitee of its duties
to the Partnership also imposes duties on, or otherwise involves services by the
Indemnitee, to the plan or participants or beneficiaries of the plan; excise
taxes assessed on an Indemnitee with respect to an employee benefit plan
pursuant to applicable law shall constitute fines within the meaning of this
Section 6.4; and actions taken or omitted by the Indemnitee with respect to an
employee benefit plan in the performance of its duties for a purpose reasonably
believed by the Indemnitee to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of the Partnership.
(h) In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the indemnification provisions set
forth in this Agreement.
(i) An Indemnitee shall not be denied
indemnification in whole or in part under this Section 6.4 because the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted by the terms
of this Agreement.
(j) The provisions of this Section 6.4 are for the
benefit of the Indemnities, their heirs, successors, assigns and administrators
and shall not be deemed to create any rights for the benefit of any other
persons.
(k) Notwithstanding any other provisions of this
Agreement or the Act, any action of the General Partner on behalf of the
Partnership or any decision of the General Partner to refrain from acting on
behalf of the Partnership, undertaken in the good faith belief that such action
or omission is necessary or advisable in order (i) to protect the ability of the
General Partner to continue to qualify as a REIT, or (ii) to prevent the General
Partner from incurring any taxes under Section 857 or Section 4981 of the Code,
is expressly authorized under this Agreement and is deemed
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approved by all of the Limited Partners. Further, any provision of this
Agreement that might jeopardize the General Partner's REIT status shall be (i)
void and of no effect, or (ii) reformed, as necessary, to avoid the General
Partner's loss of REIT status, unless the Board of Trustees of the General
Partner shall determine not to maintain the General Partner's REIT status.
Section 6.5 COMPENSATION OF GENERAL PARTNER;
REIMBURSEMENT. The General Partner, as such, shall not receive any compensation
for services rendered to the Partnership. Notwithstanding the preceding
sentence, the General Partner shall be entitled to its allocable share of the
profits and distributable Cash Flow of the Partnership and shall be entitled, in
accordance with the provisions of Section 6.7 below, to pay reasonable
compensation to its Affiliates and other entities with which it may be
associated for services performed. The General Partner shall be reimbursed on a
monthly basis, or such other basis as the General Partner may determine in its
sole and absolute discretion, for all REIT Expenses.
Section 6.6 RELIANCE ON ACT OF GENERAL PARTNER.
No financial institution or any other person, firm or corporation dealing with
the General Partner or the Partnership shall be required to ascertain whether
the General Partner is acting in accordance with this Agreement, but such
financial institution or such other person, firm or corporation shall be
protected in relying solely upon the assurance of and the execution of any
instrument or instruments by the General Partner.
Section 6.7 OUTSIDE SERVICES; DEALINGS WITH
AFFILIATES; OUTSIDE ACTIVITIES. (a) Notwithstanding any provision of this
Article VI to the contrary, the General Partner may employ such agents,
accountants, attorneys and others as it shall deem advisable, including its
trustees, directors, officers, shareholders, and its Affiliates and entities
with which the General Partner, any Limited Partner or their respective
Affiliates may be associated, and may pay them reasonable compensation from
Partnership funds for services performed, which compensation shall be reasonably
believed by the General Partner to be comparable to and competitive with fees
charged by unrelated Persons who render comparable services which could
reasonably be made available to the Partnership. The General Partner shall not
be liable for the neglect, omission or wrongdoing of any such Person so long as
it was not grossly negligent in appointing such Person.
(b) The Partnership may lend or contribute to its
Subsidiaries or other Persons in which it has an equity investment Partnership
funds on terms and conditions established in the sole and absolute discretion of
the General Partner. The foregoing authority shall not create any right or
benefit in favor of any Subsidiary or any other Person.
(c) The Partnership may transfer assets to joint
ventures, other partnerships, corporations or other business entities in which
it is or thereby becomes
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a participant upon such terms and subject to such conditions consistent with
this Agreement and applicable law.
(d) Except as expressly permitted by this Agreement,
neither the General Partner nor any of its Affiliates nor any Limited Partner
shall sell, transfer or convey any property to, or purchase any property from,
the Partnership, directly or indirectly, except pursuant to transactions that
are on terms that are fair and reasonable to the Partnership.
(e) Subject to the Declaration of Trust and any
agreements entered into by the General Partner or its Affiliates with the
Partnership or a Subsidiary, any officer, director, employee, agent, trustee,
Affiliate or shareholder of the General Partner shall be entitled to and may
have business interests and engage in business activities in addition to those
relating to the Partnership, including business interests and activities
substantially similar or identical to those of the Partnership. Neither the
Partnership nor any of the Limited Partners shall have any rights by virtue of
this Agreement in any business ventures of such person.
(f) In the event the General Partner exercises its
rights under its Declaration of Trust to redeem REIT Shares, then the General
Partner shall cause the Partnership to purchase from it a number of Partnership
Units as determined based on the application of the Exchange Factor on the same
terms that the General Partner redeemed such REIT Shares.
Section 6.8 GENERAL PARTNER PARTICIPATION. The
General Partner agrees that all business activities of the General Partner,
including activities pertaining to the acquisition, development and ownership of
Properties, shall be conducted through the Partnership (other than the General
Partner's interest in the Corporate Hotel not owned through the Partnership).
Without the Consent of the Limited Partners, the General Partner shall not,
directly or indirectly, participate in or otherwise acquire any interest in any
real or personal property unless the Partnership participates in, or otherwise
acquires an interest in, such real or personal property at least to the extent
of 999 times such proposed participation by the General Partner. The General
Partner agrees that all borrowings for the purpose of making distributions to
its shareholders will be incurred by the Partnership and the proceeds of such
indebtedness will be included as Net Financing Proceeds hereunder.
ARTICLE VII
RIGHTS, PROHIBITIONS AND REPRESENTATIONS
WITH RESPECT TO LIMITED PARTNERS
--------------------------------
Section 7.1 RIGHTS OF LIMITED PARTNERS. (a) The
Partnership may engage the Limited Partners or persons or firms associated with
them for specific purposes and may otherwise deal with such Partners on terms
and for compensation to
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be agreed upon by any such Partner and the Partnership; provided, however, that
no Limited Partner shall be entitled to participate in the management or control
of the business of the Partnership.
(b) Each Limited Partner shall be entitled to have
the Partnership books kept at the principal place of business of the Partnership
and at all times, during reasonable business hours and at such Partner's sole
expense, shall be entitled to inspect and copy any of them and have on demand
true and full information of all things affecting the Partnership and a formal
accounting of Partnership affairs whenever circumstances render it just and
reasonable.
(c) No Limited Partner shall be liable for any debts,
liabilities, contracts or obligations of the Partnership. A Limited Partner
shall be liable to the Partnership only to make payments of its Capital
Contribution, if any, as and when due hereunder. After its Capital Contribution
is fully paid, no Limited Partner shall, except as otherwise required by the
Act, be required to make any further Capital Contributions or other payments or
lend any funds to the Partnership.
Section 7.2 PROHIBITIONS WITH RESPECT TO THE
LIMITED PARTNERS. No Limited Partner shall have the right:
(a) To take part in the control or management of the
Partnership business, to transact business for or on behalf of the
Partnership or to sign for or to bind the Partnership, such powers
being vested solely in the General Partner as set forth herein;
(b) To have such Partner's Capital Contributions
repaid except to the extent provided in this Agreement;
(c) To require partition of Partnership property or
to compel any sale or appraisement of Partnership assets or sale of a
deceased Partner's interests therein, notwithstanding any provisions of
law to the contrary; or
(d) To sell or assign all or any portion of such
Partner's Limited Partnership Interest in the Partnership or to
constitute the vendee or assignee thereunder a Substitute Limited
Partner, except as provided in Article IX hereof.
Section 7.3 OWNERSHIP BY LIMITED PARTNER OF
CORPORATE GENERAL PARTNER OR AFFILIATE. No Limited Partner shall at any time,
either directly or indirectly, own any shares or other interest in the General
Partner or in any Affiliate thereof if such ownership by itself or in
conjunction with other shares or other interests owned by other Limited Partners
would, in the opinion of counsel for the Partnership, jeopardize the
classification of the Partnership as a partnership or the
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General Partner as a REIT for federal income tax purposes. The General Partner
shall be entitled to make such reasonable inquiry of the Limited Partners as is
required to establish compliance by the Limited Partners with the provisions of
this Section 7.3 and the Limited Partners shall promptly and fully respond to
such inquiries.
Section 7.4 GRANT OF RIGHTS. (a) The General
Partner does hereby grant to the Class A Limited Partners and the Class A
Limited Partners do hereby accept the right, but not the obligation (such rights
hereinafter sometimes referred to as the "Rights"), to exchange all or a portion
of their Partnership Units for REIT Shares and to sell the remainder (or any
part thereof) of their Partnership Units to the General Partner (or its
designee), at any time or from time to time prior to the time the Partnership is
dissolved, on the terms and subject to the conditions and restrictions contained
in Exhibit D hereto. The Rights granted hereunder may be exercised by any one or
more of the Limited Partners, on the terms and subject and to the conditions and
restrictions contained in Exhibit D hereto, upon delivery to the General Partner
of an Exercise Notice in the form of Schedule 1 attached to Exhibit D, which
notice shall specify the Partnership Units to be converted by such Limited
Partner. Once delivered, the Exercise Notice shall be irrevocable, subject to
payment by the General Partner of the Purchase Price in respect of such
Partnership Units in accordance with the terms hereof.
(b) The terms and provisions applicable to the Rights
shall be as set forth in attached Exhibit D.
(c) Any Partnership Units acquired by the General
Partner pursuant to an exercise by any Limited Partner of the Rights shall be
deemed to be acquired by and reallocated or reissued to the General Partner. The
General Partner shall amend Exhibit A hereto to reflect each such conversion and
reallocation or reissuance of Partnership Units and each corresponding
recalculation of the Partnership Units of the Partners.
(d) The Class B Limited Partners shall not be
entitled to the Rights unless and until the Board of Trustees of the General
Partner agrees to reclassify any of the Partnership Units held as Class B Units
to Class A Units; provided, however, in the event that (a) a Class B Limited
Partner pledges any Partnership Units and (b) the secured creditor of such Class
B Limited Partner should exercise its rights with respect to such Units,
including repossession thereof, then at such secured creditor's option, such
Units shall be reclassified as Class A Units and entitle the holder thereof (or
other third-party assignee of the secured creditor) to exercise the Rights, in
all cases subject to the terms and provisions of this Agreement, including,
without limitation, the Ownership Limit.
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Section 7.5 WARRANTIES AND REPRESENTATIONS OF THE
LIMITED PARTNERS. Each Limited Partner hereby warrants and represents to and for
the benefit of the General Partner and the Partnership that such Limited Partner
owns good, valid and marketable title to the ownership interests in the
Contributed Partnerships being contributed to the capital of the Partnership by
such Limited Partner (the "Ownership Interests") and that such Ownership
Interests are free and clear of all mortgages, pledges, liens, security
interests, encumbrances and restrictions of any nature whatsoever. Each Limited
Partner further warrants and represents to and for the benefit of the General
Partner and the Partnership that such Limited Partner has all necessary power
and authority to transfer the Ownership Interests to the Partnership without the
consent or authorization of, or notice to, any third party, except those third
parties from whom such consents or authorizations have been obtained. The Class
B Limited Partners also represent and warrant to and for the benefit of the
General Partner and the Partnership those matters set forth on Exhibit E hereto.
Section 7.6 INDEMNIFICATION BY LIMITED PARTNERS.
Each Limited Partner hereby agrees to indemnify and defend the General Partner
and the Partnership and hold the General Partner, its shareholders, officers and
trustees and the Partnership and its partners and each of their respective
representatives, successors and assigns harmless from and against any and all
claims, demands, losses, liabilities, damages and expenses (including reasonable
attorneys' fees) arising out of or in connection with (i) the inaccuracy of the
warranties and representations made by such Limited Partner under Section 7.5
above, or (ii) the ownership of the Ownership Interests by such Limited Partner.
Section 7.7 LIMITED PARTNER GUARANTEES. Upon the
request of the General Partner, or upon its own election, a Limited Partner (the
"Initiating Limited Partner") from time to time, may, but shall not be required
to, guarantee or otherwise provide credit support for Partnership indebtedness
as such Limited Partner may elect; provided, however, that the Limited Partner
shall be entitled to take such action(s) only if the General Partner determines
that any such action would not have a material adverse effect on the tax
position of the General Partner. All Partners are entitled to notice of any such
guarantee(s) or credit support, and shall have the right to provide guarantees
or credit support on the same terms and conditions as the Initiating Limited
Partner does, and all Limited Partners interested in providing such guarantee or
credit support shall cooperate with the General Partner and each other in
considering any guarantee or credit support proposal, and the General Partner
will cooperate in permitting or obtaining any consents for such guarantees or
credit support.
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ARTICLE VIII
DISTRIBUTIONS AND PAYMENTS TO PARTNERS
--------------------------------------
Section 8.1 DISTRIBUTIONS OF CASH FLOW. (a) The
General Partner shall distribute on a quarterly basis such portion of the Cash
Flow of the Partnership as the General Partner shall determine in its sole
discretion. All such distributions of Cash Flow shall be made to Partners who
are Partners on the Partnership Record Date in accordance with such Partner's
respective Percentage Interests on such Partnership Record Date.
(b) In no event may a Partner receive a
distribution of Cash Flow with respect to a Partnership Unit if such Partner is
entitled to receive a dividend out of the General Partner's share of such Cash
Flow with respect to a REIT Share for which all or part of such Partnership Unit
has been exchanged.
Section 8.2 REIT DISTRIBUTION REQUIREMENTS. Unless
the General Partner determines that such a distribution would not be in the
best interests of the Partnership, the Partnership shall make a distribution of
Cash Flow for each fiscal year of the Partnership to enable the General Partner
(i) to meet its distribution requirement for qualification as a REIT as set
forth in Section 857(a)(1) of the Code, and (ii) to avoid the excise tax
imposed by Section 4981 of the Code.
Section 8.3 NO RIGHT TO DISTRIBUTIONS IN KIND. No
Partner shall be entitled to demand property other than cash in connection with
any distribution by the Partnership.
Section 8.4 DISPOSITION PROCEEDS. Disposition
Proceeds (less reasonable reserves set aside by the General Partner for
reasonably anticipated expenses or needs of the Partnership) shall be
distributed to the Partners in accordance with their respective Percentage
Interests in the Partnership.
Section 8.5 WITHDRAWALS. No Partner shall be
entitled to make withdrawals from its Capital Account except as provided herein.
ARTICLE IX
TRANSFERS OF INTERESTS
----------------------
Section 9.1 GENERAL PARTNER. The General Partner
shall not withdraw from the Partnership and shall not sell, assign, pledge,
encumber or otherwise dispose of all or any portion of its interest in the
Partnership. In the event the General Partner withdraws from the Partnership, in
violation of this Agreement or otherwise, or dissolves, terminates or upon an
Event of Bankruptcy of the General Partner, then the Partnership shall be
dissolved and terminated unless a Majority-In-
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Interest of the Limited Partners elect to continue the Partnership business by
selecting a substitute general partner.
Section 9.2 ADMISSION OF A SUBSTITUTE OR ADDITIONAL
GENERAL PARTNER. A Person shall be admitted as a Substitute or Additional
General Partner of the Partnership only if the transaction giving rise to such
substitution or admission is otherwise permitted under this Agreement and the
following terms and conditions are satisfied:
(a) the Person to be admitted as a Substitute or
Additional General Partner shall have accepted and agreed to be bound
by all the terms and provisions of this Agreement by executing a
counterpart thereof and such other documents or instruments as may be
required or appropriate in order to effect the admission of such Person
as a General Partner, and a certificate evidencing the admission of
such Person as a General Partner shall have been filed for recordation
and all other actions required by the Act in connection with such
admission shall have been performed;
(b) if the Person to be admitted as a Substitute or
Additional General Partner is a corporation or a partnership, it shall
have provided the Partnership with evidence satisfactory to counsel for
the Partnership of such Person's authority to become a General Partner
and to be bound by the terms and provisions of this Agreement; and
(c) counsel for the Partnership shall have rendered
an opinion (relying on such opinions from counsel in the state or any
other jurisdiction as may be necessary) that the admission of the
Person to be admitted as a Substitute or Additional General Partner is
in conformity with the Act and that none of the actions taken in
connection with the admission of such Person as a Substitute or
Additional General Partner will cause the termination of the
Partnership under Section 708 of the Code, or will cause it to be
classified other than a partnership for federal income tax purposes, or
will result in the loss of any Limited Partner's limited liability
status.
Section 9.3 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH
OR DISSOLUTION OF A GENERAL PARTNER. (a) Upon the occurrence of an Event of
Bankruptcy as to a General Partner or the withdrawal, removal or dissolution of
a General Partner (except that, if a General Partner is on the date of such
occurrence a partnership, the withdrawal, death, dissolution, Event of
Bankruptcy as to or removal of a partner in such partnership shall be deemed not
to be a dissolution of such General Partner if the business of such General
Partner is continued within ninety (90) days by the remaining general partners
or all remaining members of such partnership), the
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Partnership shall be dissolved and terminated unless the Partnership is
continued pursuant to Section 9.3(b).
(b) Following the occurrence of an Event of Bankruptcy as to a
General Partner or the withdrawal, removal or dissolution of a General Partner
(except that, if a General Partner is on the date of such occurrence a
partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to or
removal of a partner in such partnership shall be deemed not be a dissolution of
such General Partner if the business of such General Partner is continued within
ninety (90) days by the remaining general partners or all remaining members of
such partnership), persons holding at least a majority of the Limited
Partnership Interests, within ninety (90) days after such occurrence, may elect
to continue the business of the Partnership for the balance of the term
specified in Section 3.2 by selecting, subject to Section 9.2 and any other
provisions of this Agreement, a Substitute General Partner. If the Limited
Partners elect to reconstitute the Partnership and admit a Substitute General
Partner, the relationship between the Partners and any Person who has acquired
an interest of a Partner in the Partnership shall be governed by this Agreement.
Section 9.4 REMOVAL OF A GENERAL PARTNER. (a) Upon the
occurrence of an Event of Bankruptcy as to, or the dissolution of, a General
Partner, such General Partner shall be deemed to be removed automatically;
provided, however, that if a General Partner is on the date of such occurrence a
partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to or
removal of a partner in such partnership shall be deemed not to be a dissolution
of the General Partner if the business of such General Partner is continued
within ninety (90) days by the remaining general partners or all remaining
members of such Partnership.
(b) If a General Partner has been removed pursuant to this
Section 9.4 and the Partnership is not continued pursuant to Section 9.3(b), the
Partnership shall be dissolved.
Section 9.5 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP
INTERESTS. (a) Except as otherwise provided in this Article IX, no Limited
Partner may offer, sell, assign or otherwise transfer its Limited Partnership
Interest, in whole or in part, whether voluntarily or by operation of law or at
judicial sale or otherwise (collectively, a "Transfer"), without the written
consent of the General Partner, which consent may be withheld in the sole and
absolute discretion of the General Partner. The General Partner may require, as
a condition of any Transfer, that the transferor assume all costs incurred by
the Partnership in connection therewith.
(b) No Limited Partner may effect a Transfer of its Limited
Partnership Interest if, in the opinion of legal counsel for the Partnership,
such proposed Transfer would require the registration of the Limited Partnership
Interest under the Securities Act of 1933, as amended, or would otherwise
violate any
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applicable federal or state securities or "Blue Sky" law (including investment
suitability standards).
(c) No Transfer by a Limited Partner of its Partnership
Interest may be made to any Person if (i) in the opinion of legal counsel for
the Partnership, the Transfer would result in the Partnership's being treated as
an association taxable as a corporation (other than a qualified REIT subsidiary
within the meaning of Section 856(i) of the Code), (ii) such transfer is
effectuated through an "established securities market" or a "secondary market"
(or the substantial equivalent thereof) within the meaning of Section 7704 of
the Code, or (iii) the Transfer would create a risk that the General Partner
would not be taxed as a REIT for federal income tax purposes.
(d) Section 9.5(a) shall not prevent any donative Transfer by
an individual Limited Partner to his immediate family members or any trust in
which the individual or his immediate family members own, collectively, one
hundred percent (100%) of the beneficial interests, provided that the transferor
assumes all costs of the Partnership in connection therewith and any such
transferee shall not have the rights of a Substitute Limited Partner (unless and
until admitted as a Substitute Limited Partner pursuant to this Section 9.5 and
Section 9.6 of this Agreement).
(e) Any Transfer in contravention of any of the provisions of
this Article IX shall be void and ineffectual and shall not be binding upon, or
recognized by, the Partnership.
Section 9.6 ADMISSION OF SUBSTITUTE LIMITED PARTNER. (a)
Subject to the other provisions of this Article IX (including, without
limitation, the provisions of Section 9.5(a) regarding consent of the General
Partner), an assignee of the Limited Partnership Interest of a Limited Partner
(including, without limitation, any purchaser, transferee, donee, or other
recipient of any disposition of such Limited Partnership Interest) shall be
deemed admitted as a Limited Partner of the Partnership only upon the
satisfactory completion of the following:
(i) the assignee shall have accepted and agreed to be
bound by the terms and provisions of this Agreement by executing a
counterpart or an amendment thereof, including a revised Exhibit A, and
such other documents or instruments as the General Partner may require
in order to effect the admission of such Person as a Limited Partner;
(ii) to the extent required, an amended certificate
of limited partnership evidencing the admission of such Person as a
Limited Partner shall have been signed, acknowledged and filed for
record in accordance with the Act;
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(iii) the assignee shall have delivered a letter
containing the representations and warranties and agreements set forth
in Section 9.12;
(iv) if the assignee is a corporation, partnership or
trust, the assignee shall have provided the General Partner with
evidence satisfactory to counsel for the Partnership of the assignee's
authority to become a Limited Partner under the terms and provisions of
this Agreement;
(v) the assignee shall have executed a power of
attorney containing the terms and provisions set forth in Article XII;
and
(vi) the assignee shall have paid all reasonable
legal fees of the Partnership and the General Partner and all filing
and publication costs incurred in connection with its substitution as a
Limited Partner.
(b) For the purpose of allocating profits and losses
and distributing cash received by the Partnership, a Substitute Limited Partner
shall be treated as having become, and appearing in the records of the
Partnership as, a Partner upon the filing of the certificate described in
Section 9.6(a)(ii) or, if no such filing is required, the later of the date
specified in the transfer documents, or the date on which the General Partner
has received all necessary instruments of transfer and substitution.
(c) The General Partner shall cooperate with the
Person seeking to become a Substitute Limited Partner by preparing the
documentation required by this Section and making all official filings and
publications. The Partnership shall take all such action as promptly as
practicable after the satisfaction of the conditions in this Article IX to
effectuate the admission of such Person as a Limited Partner of the Partnership.
Section 9.7 RIGHTS OF ASSIGNEES OF PARTNERSHIP
INTERESTS. (a) Subject to the provisions of Sections 9.5 and 9.6 hereof, except
as required by operation of law, the Partnership shall not be obligated for any
purposes whatsoever to recognize the assignment by any Limited Partner of his
Partnership Interest until the Partnership has received notice thereof.
(b) Any Person who is the assignee of all or any
portion of a Limited Partner's Limited Partnership Interest, but does not become
a Substitute Limited Partner and desires to make a further assignment of such
Limited Partnership Interest, shall be subject to all the provisions of this
Article IX to the same extent and in the same manner as any Limited Partner
desiring to make an assignment of its Limited Partnership Interest.
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Section 9.8 EFFECT OF BANKRUPTCY, DEATH,
INCOMPETENCE OR TERMINATION OF A LIMITED PARTNER. The occurrence of an Event of
Bankruptcy as to a Limited Partner, the death of a Limited Partner or a final
adjudication that a Limited Partner is incompetent (which term shall include,
but not be limited to, insanity) shall not cause the termination or dissolution
of the Partnership, and the business of the Partnership shall continue. If an
order for relief in a bankruptcy proceeding is entered against an individual
Limited Partner, the trustee or receiver of his estate or, if he dies, his
executor, administrator or trustee, or, if he is finally adjudicated
incompetent, his committee, guardian or conservator, shall have the rights of
such Limited Partner for the purpose of settling or managing his estate property
and such power as the bankrupt, deceased or incompetent Limited Partner
possessed to assign all or any part of his Partnership Interest and to join with
the assignee in satisfying conditions precedent to the admission of the assignee
as a Substitute Limited Partner.
Section 9.9 JOINT OWNERSHIP OF INTERESTS. A
Partnership Interest may be acquired by two (2) individuals as joint tenants
with right of survivorship (but not as tenants in common), provided that such
individuals either are married or are related. The written consent or vote of
both owners of any such jointly held Partnership Interest shall be required to
constitute the action of the owners of such Partnership Interest; provided,
however, that the written consent of only one (1) joint owner will be required
if the Partnership has been provided with evidence satisfactory to counsel for
the Partnership that the actions of a single joint owner can bind both owners
under the applicable laws of the state of residence of such joint owners. Upon
the death of one (1) owner of a Partnership Interest held in a joint tenancy
with a right of survivorship, the Partnership Interest shall become owned solely
by the survivor as a Limited Partner and not as an assignee. The Partnership
need not recognize the death of one (1) of the owners of a jointly held
Partnership Interest until it shall have received notice of such death. Upon
notice to the General Partner from either owner prior to the death of either
owner, the General Partner shall cause the Partnership Interest to be divided
into two (2) equal Partnership Interests, which shall thereafter be owned
separately by each of the former owners.
Section 9.10 TRANSFEREES. Any Partnership Interests
owned by the Partners and transferred pursuant to this Article IX shall be and
remain subject to all of the provisions of this Agreement.
Section 9.11 ABSOLUTE RESTRICTION. Notwithstanding any
provision of this Agreement to the contrary, the sale or exchange of any
interest in the Partnership will not be permitted if the interest sought to be
sold or exchanged, when added to the total of all other interests sold or
exchanged within the period of twelve (12) consecutive months ending with the
proposed date of the sale or exchange, would result in the termination of the
Partnership under Section 708 of the Code, if such termination would materially
and adversely affect the Partnership or any Partner.
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Section 9.12 INVESTMENT REPRESENTATION. Each
Limited Partner hereby represents and warrants to the General Partner and to the
Partnership that the acquisition of his Partnership Interest is made as a
principal for his account for investment purposes only and not with a view to
the resale or distribution of such Partnership Interest. Each Limited Partner
agrees that he will not sell, assign or otherwise transfer his Partnership
Interest or any fraction thereof, whether voluntarily or by operation of law or
at judicial sale or otherwise, to any Person who does not similarly represent
and warrant and similarly agree not to sell, assign or transfer such Partnership
Interest or fraction thereof to any Person who does not similarly represent,
warrant and agree.
ARTICLE X
TERMINATION OF THE PARTNERSHIP
------------------------------
Section 10.1 TERMINATION. The Partnership shall be
dissolved upon (i) an Event of Bankruptcy as to the General Partner or the
dissolution or withdrawal of the General Partner (unless within ninety (90) days
thereafter Limited Partners holding more than fifty percent (50%) of the Limited
Partnership Interests in the Partnership elect to continue the Partnership and
to elect one or more persons to serve as the General Partner or General Partners
of the Partnership), (ii) ninety (90) days following the sale of all or
substantially all of the Partnership's assets (provided that if the Partnership
receives an installment obligation as consideration for such sale or other
disposition, the Partnership shall continue, unless sooner dissolved under the
provisions of this Agreement, until such time as such note or notes are paid in
full), (iii) the expiration of the term specified in Section 3.2, (iv) the
redemption of all Limited Partnership Interests (other than any of such
interests held by the General Partner), or (v) the election by the General
Partner (but only in accordance with and as permitted by applicable law) that
the Partnership should be dissolved. Upon dissolution of the Partnership (unless
the business of the Partnership is continued as set forth above), the General
Partner (or its trustee, receiver, successor or legal representative) shall
proceed with the winding up of the Partnership, and its assets shall be applied
and distributed as herein provided.
Section 10.2 PAYMENT OF DEBTS. The assets shall
first be applied to the payment of the liabilities of the Partnership (other
than any loans or advances that may have been made by Partners to the
Partnership) and the expenses of liquidation. A reasonable time shall be allowed
for the orderly liquidation of the assets of the Partnership and the discharge
of liabilities to creditors so as to enable the General Partner to minimize any
losses resulting from liquidation.
Section 10.3 DEBTS TO PARTNERS. The remaining
assets shall next be applied to the repayment of any loans made by any Partner
to the Partnership.
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Section 10.4 REMAINING DISTRIBUTION. The remaining
assets shall then be distributed to the Partners in accordance with the
Partners' positive Capital Account balances, after making the adjustments for
allocations under Article V hereof.
Section 10.5 RESERVE. Notwithstanding the
provisions of Sections 10.3 and 10.4, the General Partner may retain such amount
as it deems necessary as a reserve for any contingent liabilities or obligations
of the Partnership, which reserve, after the passage of a reasonable period of
time, shall be distributed pursuant to the provisions of this Article X.
Section 10.6 FINAL ACCOUNTING. Each of the Partners
shall be furnished with a statement examined by the Partnership's independent
accountants, which shall set forth the assets and liabilities of the Partnership
as of the date of the complete liquidation. Upon the compliance by the General
Partner with the foregoing distribution plan, the Limited Partners shall cease
to be such, and the General Partner, as the sole remaining Partner of the
Partnership, shall execute and cause to be filed a Certificate of Cancellation
of the Partnership and any and all other documents necessary with respect to
termination and cancellation of the Partnership.
ARTICLE XI
AMENDMENTS
----------
Section 11.1 AUTHORITY TO AMEND. (a) This
Agreement may be amended by the General Partner without the approval of any
other Partner if such amendment is solely for the purpose of clarification and
does not change the substance hereof and the Partnership has obtained an opinion
of counsel to that effect.
(b) This Agreement may be amended by the General
Partner without the approval of any other Partner if such amendment is for the
purpose of adding or substituting Limited Partners.
(c) This Agreement may be amended by the General
Partner without the approval of any other Partner if such amendment is, in the
opinion of counsel for the Partnership, necessary or appropriate to satisfy
requirements of the Code with respect to partnerships or REITs or of any federal
or state securities laws or regulations. Any amendment made pursuant to this
Section 11.1(c) may be made effective as of the date of this Agreement.
(d) Notwithstanding any contrary provision of this
Agreement, any amendment to this Agreement or other act which would (i)
adversely affect the limited liabilities of the Limited Partners, (ii) change
the method of allocation of profit and loss as provided in Article V or the
distribution provisions of Articles VIII and X hereof, (iii) seek to impose
personal liability on the Limited Partners, or (iv) affect the
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operation of the Exchange Factor of the Rights shall require the consent and
approval of Limited Partners holding more than sixty-five percent (65%) of the
Percentage Interests of the Limited Partners.
(e) Except as otherwise specifically provided in
this Section 11.1, amendments to this Agreement shall require the approval of
the General Partner and Limited Partners holding more than fifty percent (50%)
of the Percentage Interests of the Limited Partners.
Section 11.2 NOTICE OF AMENDMENTS. A copy of any
amendment to be approved by the Partners pursuant to Sections 11.1(d) or 11.1(e)
shall be mailed in advance to such Partners. Partners shall be notified as to
the substance of any amendment pursuant to Sections 11.1(a), (b) or (c), and
upon request shall be furnished a copy thereof.
ARTICLE XII
POWER OF ATTORNEY
-----------------
Section 12.1 POWER. Each of the Limited Partners
irrevocably constitutes and appoints the General Partner as such Limited
Partner's true and lawful attorney in such Limited Partner's name, place and
stead to make, execute, swear to, acknowledge, deliver and file:
(a) Any certificates or other instruments which may
be required to be filed by the Partnership under the laws of the State
of Delaware or of any other state or jurisdiction in which the General
Partner shall deem it advisable to file;
(b) Any documents, certificates or other instruments,
including, but not limited to, any and all amendments and modifications
of this Agreement or of the instruments described in Section 12.1(a)
which may be required or deemed desirable by the General Partner to
effectuate the provisions of any part of this Agreement and, by way of
extension and not in limitation, to do all such other things as shall
be necessary to continue and to carry on the business of the
Partnership; and
(c) All documents, certificates or other instruments
which may be required to effectuate the dissolution and termination of
the Partnership, to the extent such dissolution and termination is
authorized hereby. The power of attorney granted hereby shall not
constitute a waiver of, or be used to avoid, the rights of the Partners
to approve certain amendments to this Agreement pursuant to Sections
11.1 (d) and 11.1 (e) or be used in any other manner
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inconsistent with the status of the Partnership as a limited
partnership or inconsistent with the provisions of this Agreement.
Section 12.2 SURVIVAL OF POWER. It is expressly
intended by each of the Partners that the foregoing power of attorney is coupled
with an interest, is irrevocable and shall survive the death, incompetence,
dissolution, liquidation or adjudication of insanity or bankruptcy or insolvency
of each such Partner. The foregoing power of attorney shall survive the delivery
of an assignment by any of the Partners of such Partner's entire interest in the
Partnership, except that where an assignee of such entire interest has become a
substitute Limited Partner, then the foregoing power of attorney of the assignor
Partner shall survive the delivery of such assignment for the sole purpose of
enabling the General Partner to execute, acknowledge and file any and all
instruments necessary to effectuate such substitution.
ARTICLE XIII
CONSENTS, APPROVALS, VOTING AND MEETINGS
----------------------------------------
Section 13.1 METHOD OF GIVING CONSENT OR APPROVAL. Any
consent or approval required by this Agreement may be given as follows:
(a) by a written consent given by the consenting
Partner and received by the General Partner at or prior to the doing of the act
or thing for which the consent is solicited, provided that such consent shall
not have been nullified by:
(i) Notice to the General Partner of such
nullification by the consenting Partner prior to the doing of any act
or thing, the doing of which is not subject to approval at a meeting
called pursuant to Section 13.2, or
(ii) Notice to the General Partner of such
nullification by the consenting Partner prior to the time of any
meeting called pursuant to Section 13.2 to consider the doing of such
act or thing, or
(iii) The negative vote by such consenting Partner at
any meeting called pursuant to Section 13.2 to consider the doing of
such act or thing;
(b) by the affirmative vote by the consenting
Partner to the doing of the act or thing for which the consent is solicited at
any meeting called pursuant to Section 13.2 to consider the doing of such act or
thing; or
(c) by the failure of the Partner to respond or
object to a request from the General Partner for such Partner's consent within
thirty (30) days from its receipt of such request (or such shorter period of
time as the General Partner may
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indicate in such request in order to ensure that the General Partner has
sufficient time to respond, if required, to any third party with respect to the
subject matter of such request).
Section 13.2 MEETINGS OF LIMITED PARTNERS. Any
matter requiring the consent or vote of all or any of the Partners may be
considered at a meeting of the Partners held not less than five (5) nor more
than sixty (60) days after notice thereof shall have been given by the General
Partner to all Partners. Such notice (i) may be given by the General Partner, in
its discretion, at any time, or (ii) shall be given by the General Partner
within fifteen (15) days after receipt from Limited Partners holding more than
fifty percent (50%) of the Percentage Interests of the Limited Partners of a
request for such meeting.
Section 13.3 OPINION. Except for Consents obtained
pursuant to Sections 13.1 or 13.2, no Limited Partner shall exercise any consent
or voting rights unless either (a) at the time of the giving of consent or
casting of any vote by the Partners hereunder, counsel for the Partnership or
counsel employed by the Limited Partners (and reasonably satisfactory to the
General Partner) shall have delivered to the Partnership an opinion satisfactory
to the Partners to the effect that such conduct (i) is permitted by the Act,
(ii) will not impair the limited liability of the Limited Partners, and (iii)
will not adversely affect the classification of the Partnership as a partnership
for federal income tax purposes, or (b) irrespective of the delivery or
nondelivery of such opinion of counsel, Limited Partners holding more than
seventy-five percent (75%) of the Percentage Interests of the Limited Partners
determine to exercise their consent and/or voting rights.
Section 13.4 SUBMISSIONS TO PARTNERS. The General
Partner shall give the Partners notice of any proposal or other matter required
by any provision of this Agreement, or by law, to be submitted for consideration
and approval of the Partners. Such notice shall include any information required
by the relevant provision or by law.
ARTICLE XIV
MISCELLANEOUS
-------------
Section 14.1 GOVERNING LAW. The Partnership and
this Agreement shall be governed by and construed in accordance with the laws of
the State of Delaware.
Section 14.2 AGREEMENT FOR FURTHER EXECUTION. At
any time or times upon the request of the General Partner, the Limited Partners
hereby agree to sign, swear to, acknowledge and deliver all further documents
and certificates required by the laws of Delaware, or any other jurisdiction in
which the Partnership does, or proposes to do, business, or which may be
reasonable, necessary, appropriate
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or desirable to carry out the provisions of this Agreement or the Act. This
Section 14.2 shall not prejudice or affect the rights of the Limited Partners to
approve certain amendments to this Agreement pursuant to Sections 11.1(d) and
11.1(e).
Section 14.3 ENTIRE AGREEMENT. This Agreement and
the exhibits attached hereto contain the entire understanding among the parties
and supersede any prior understandings or agreements among them respecting the
within subject matter. There are no representations, agreements, arrangements or
understandings, oral or written, between or among the parties hereto relating to
the subject matter of this Agreement which are not fully expressed herein.
Section 14.4 SEVERABILITY. This Agreement is
intended to be performed in accordance with, and only to the extent permitted
by, all applicable laws, ordinances, rules and regulations of the jurisdictions
in which the Partnership does business. If any provision of this Agreement, or
the application thereof to any person or circumstance, shall, for any reason and
to any extent, be invalid or unenforceable, the remainder of this Agreement and
the application of such provision to other persons or circumstances shall not be
affected thereby, but rather shall be enforced to the greatest extent permitted
by law.
Section 14.5 NOTICES. Notices to Partners or to
the Partnership shall be deemed to have been given when personally delivered or
mailed, by prepaid registered or certified mail, addressed as set forth in
Exhibit A attached hereto, unless a notice of change of address has previously
been given in writing by the addressee to the addressor, in which case such
notice shall be addressed to the address set forth in such notice of change of
address.
Section 14.6 TITLES AND CAPTIONS. All titles and
captions are for convenience only, do not form a substantive part of this
Agreement, and shall not restrict or enlarge any substantive provisions of this
Agreement.
Section 14.7 COUNTERPARTS. This Agreement may be
executed in multiple counterparts, each one of which shall constitute an
original executed copy of this Agreement.
Section 14.8 PRONOUNS. All pronouns and any
variations thereof shall be deemed to refer to the masculine, feminine, neuter,
singular or plural, as the identity of the person or persons may require.
Section 14.9 SURVIVAL OF RIGHTS. Subject to the
provisions hereof limiting transfers, this Agreement shall be binding upon and
inure to the benefit of the Partners and the Partnership and their respective
legal representatives, successors, transferees and assigns.
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Section 14.10 PERSONAL LIABILITY. As provided in the
Declaration of Trust establishing the General Partner, no trustee, officer,
shareholder, employee or agent of the General Partner shall be held to any
personal liability, jointly or severally, for any obligation of, or claim
against, the General Partner.
IN WITNESS WHEREOF, the parties have hereunto set
their hands as of the day and year first above written.
GENERAL PARTNER:
REALTY REFUND TRUST, an
unincorporated Ohio business trust
By:
------------------------------------
Gregory D. Bruhn,
Executive Vice President
LIMITED PARTNERS:
(See attached limited partner signature pages)
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<PAGE> 43
LIMITED PARTNERSHIP SIGNATURE PAGE
----------------------------------
The undersigned, desiring to become a Limited
Partner of RRF Limited Partnership, hereby agrees to all of the terms of the
Agreement of Limited Partnership of RRF Limited Partnership and agrees to be
bound by the terms and provisions thereof.
Executed by the undersigned as a Limited Partner of
RRF Limited Partnership.
LIMITED PARTNER:
By
--------------------------------
(Signature of Limited Partner)
----------------------------------
(Residence Street Address)
----------------------------------
(City State Zip Code)
-----------------------------------
(Taxpayer Identification or Social
Security Number)
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<PAGE> 44
EXHIBIT A
LIST OF PARTNERS
----------------
Intentionally Omitted.
<PAGE> 45
EXHIBIT B
FEDERAL INCOME TAX MATTERS
--------------------------
For purposes of interpreting and implementing Article V of the
Partnership Agreement, the following rules shall apply and shall be treated as
part of the terms of the Partnership Agreement:
A. SPECIAL ALLOCATION PROVISIONS.
1. For purposes of determining the amount of gain or loss to
be allocated pursuant to Article V of the Partnership Agreement, any basis
adjustments permitted pursuant to Section 743 of the Code shall be disregarded.
2. When Partnership Interests are transferred during any
taxable year, the General Partner intends to allocate Partnership income, loss,
deductions and credits using the closing of the books method.
3. Notwithstanding any other provision of the Partnership
Agreement, to the extent required by law, income, gain, loss and deduction
attributable to property contributed to the Partnership by a Partner shall be
shared among the Partners so as to take into account any variation between the
basis of the property and the fair market value of the property at the time of
contribution in accordance with the requirements of Section 704(c) of the Code
and the applicable regulations thereunder as more fully described in Part B
hereof. Treasury regulations under Section 704(c) of the Code allow partnerships
to use any reasonable method for accounting for Book-Tax Differences for
contributions of property so that a contributing partner receives the tax
benefits and burdens of any built-in gain or loss associated with contributed
property. The Operating Partnership shall account for Book-Tax Differences using
a method specifically approved in the regulations, the traditional method. An
allocation of remaining built-in gain under Section 704(c) will be made when
Section 704(c) property is sold.
4. Notwithstanding any other provision of the Partnership
Agreement, in the event the Partnership is entitled to a deduction for interest
imputed under any provision of the Code on any loan or advance from a Partner
(whether such interest is currently deducted, capitalized or amortized), such
deduction shall be allocated solely to such Partner.
5. Notwithstanding any provision of the Partnership Agreement
to the contrary, to the extent any payments in the nature of fees made to a
Partner or reimbursements of expenses to any Partner are finally determined by
the Internal Revenue Service to be distributions to a Partner for federal income
tax purposes, there will be a gross income allocation to such Partner in the
amount of such distribution.
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<PAGE> 46
6. (a) Notwithstanding any provision of the Partnership
Agreement to the contrary and subject to the exceptions set forth in Section
1.704-2(f)(2)-(5) of the Treasury Regulations, if there is a net decrease in
Partnership Minimum Gain during any Partnership fiscal year, each Partner shall
be specially allocated items of Partnership income and gain for such year (and,
if necessary, subsequent years) in an amount equal to such Partner's share of
the net decrease in Partnership Minimum Gain determined in accordance with
Section 1.704-2(g)(2) of the Treasury Regulations. Allocations pursuant to the
previous sentence shall be made in proportion to the respective amounts required
to be allocated to each Partner pursuant thereto. The items to be so allocated
shall be determined in accordance with Section 1.704-2(f) of the Treasury
Regulations. This paragraph 6(a) is intended to comply with the minimum gain
chargeback requirement in such Section of the Regulations and shall be
interpreted consistently therewith. To the extent permitted by such Section of
the Regulations and for purposes of this paragraph 6(a) only, each Partner's
Adjusted Capital Account Balance shall be determined prior to any other
allocations pursuant to Article V of the Partnership Agreement with respect to
such fiscal year and without regard to any net decrease in Partner Minimum Gain
during such fiscal year.
(b) Notwithstanding any provision of the Partnership Agreement
to the contrary, except paragraph 6(a) of this Exhibit and subject to the
exceptions set forth in Section 1.704-2(i)(4) of the Treasury Regulations, if
there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any
Partnership fiscal year, each Partner who has a share of the Partner Nonrecourse
Debt Minimum Gain, determined in accordance with Section 1.704-2(i)(3) of the
Treasury Regulations, shall be specially allocated items of Partnership income
and gain for such year (and, if necessary, subsequent years) in an amount equal
to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum
Gain, determined in accordance with Section 1.704-2(i)(5) of the Treasury
Regulations. Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Partner
pursuant thereto. The items to be so allocated shall be determined in accordance
with Section 1.704-2(i)(4) of the Treasury Regulations. This paragraph 6(b) is
intended to comply with the minimum gain chargeback requirement in such Section
of the Treasury Regulations and shall be interpreted consistently therewith.
Solely for purposes of this paragraph 6(b), each Partner's Adjusted Capital
Account Balance shall be determined prior to any other allocations pursuant to
Article V of the Partnership Agreement with respect to such fiscal year, other
than allocations pursuant to paragraph 6(a) hereof.
7. Notwithstanding any provision of the Partnership Agreement
to the contrary, in the event any Partners unexpectedly receive any adjustments,
allocations or distributions described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(4), 1.704-1 (b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6),
items of Partnership income and gain shall be specially allocated to such
Partners in an amount and manner sufficient to eliminate the deficits in their
Adjusted Capital
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<PAGE> 47
Account Balances created by such adjustments, allocations or distributions as
quickly as possible.
8. No loss shall be allocated to any Partner to the extent
that such allocation would result in a deficit in its Adjusted Capital Account
Balance while any other Partner continues to have a positive Adjusted Capital
Account Balance; in such event, losses shall first be allocated to any Partners
with positive Adjusted Capital Account Balances, and in proportion to such
balances, to the extent necessary to reduce their positive Adjusted Capital
Account Balances to zero. Any excess shall be allocated to the General Partner.
9. Any special allocations of items pursuant to this Part A
shall be taken into account in computing subsequent allocations so that the net
amount of any items so allocated and the profits, losses and all other items
allocated to each such Partner pursuant to Article V of the Partnership
Agreement shall, to the extent possible, be equal to the net amount that would
have been allocated to each such Partner pursuant to the provisions of Article V
of the Partnership Agreement if such special allocations had not occurred.
10. Notwithstanding any provision of the Partnership Agreement
to the contrary, Nonrecourse Deductions for any fiscal year or other period
shall be specially allocated to the Partners in the manner and in accordance
with the percentages set forth in Section 5.1 of the Partnership Agreement.
11. Notwithstanding any provision of the Partnership Agreement
to the contrary, any Partner Nonrecourse Deduction for any fiscal year or other
period shall be specially allocated to the Partner who bears the economic risk
of loss with respect to the Partner Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable in accordance with Section 1.704-2(i) of
the Treasury Regulations.
B. CAPITAL ACCOUNT ADJUSTMENTS AND 704(c) TAX ALLOCATIONS.
1. For purposes of computing the amount of any item of income,
gain, deduction or loss to be reflected in the Partners' capital accounts, the
determination, recognition and classification of any such item shall be the same
as its determination, recognition and classification for federal income tax
purposes; provided, however, that:
(a) Any income, gain or loss attributable to the
taxable disposition of any property shall be determined by the
Partnership as if the adjusted basis of such property as of such date
of disposition was equal in amount to (i) the Agreed Value less book
depreciation in the case of the Initial Hotels or other contributed
properties, or (ii) the Carrying Value with respect to property
subsequently purchased.
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<PAGE> 48
(b) The computation of all items of income, gain,
loss and deduction shall be made by the Partnership and, as to those
items described in Section 705(a)(1)(B) or Section 705(a)(2)(B) of the
Code, without regard to the fact that such items are not includable in
gross income or are neither currently deductible nor capitalizable for
federal income tax purposes.
2. A transferee of a Partnership interest will succeed to the
capital account relating to the Partnership interest transferred; provided,
however, that if the transfer causes a termination of the Partnership under
Section 708(b)(1)(B) of the Code, the Partnership properties shall be deemed to
have been distributed in liquidation of the Partnership to the Partners
(including the transferee of a Partnership interest) and recontributed by such
Partners and transferees in reconstitution of the Partnership. The capital
accounts of such reconstituted Partnership shall be maintained in accordance
with the principles set forth herein.
3. Upon an issuance of additional Partnership interests for
cash, the capital accounts of all Partners (and the Agreed Values of all
Partnership properties) shall, immediately prior to such issuance, be adjusted
(consistent with the provisions hereof) upward or downward to reflect any
unrealized gain or unrealized loss attributable to each Partnership property (as
if such unrealized gain or unrealized loss had been recognized upon an actual
sale of such property at the fair market value thereof, immediately prior to
such issuance, and had been allocated to the Partners, at such time, pursuant to
Article V of the Partnership Agreement). In determining such unrealized gain or
unrealized loss attributable to the properties, the fair market value of
Partnership properties shall be determined by the General Partner using such
reasonable methods of valuation as it may adopt.
4. Immediately prior to the distribution of any Partnership
property in liquidation of the Partnership, the capital accounts of all Partners
shall be adjusted (consistent with the provisions hereof and Section 704 of the
Code) upward or downward to reflect any unrealized gain or unrealized loss
attributable to the Partnership property (as if such unrealized gain or
unrealized loss had been recognized upon an actual sale of each such property,
immediately prior to such distribution, and had been allocated to the Partners,
at such time, pursuant to Article V of the Partnership Agreement). In
determining such unrealized gain or unrealized loss attributable to property,
the fair market value of Partnership property shall be determined by the General
Partner using such reasonable methods of valuation as it may adopt.
5. In accordance with Section 704(c) of the Code and the
regulations thereunder, income, gain, loss and deduction with respect to any
property shall, solely for tax purposes, and not for capital account purposes,
be allocated among the Partners so as to take account of any variation between
the adjusted basis of such property to the Partnership for federal income tax
purposes.
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6. In the event the Agreed Value of any Partnership asset is
adjusted as described in paragraph 3 above, subsequent allocations of income,
gain, loss and deduction with respect to such asset shall take account of any
variation between the adjusted basis of such asset for federal income tax
purposes and its Agreed Value in the same manner as under Section 704(c) of the
Code and the regulations thereunder.
7. Any elections or other decisions relating to such
allocations shall be made by the General Partner in any manner that reasonably
reflects the purpose and intention of this Agreement.
C. DEFINITIONS. For the purposes of this Exhibit, the
following terms shall have the meanings indicated unless the context clearly
indicates otherwise:
"ADJUSTED CAPITAL ACCOUNT BALANCE": means the balance in the
capital account of a Partner as of the end of the relevant fiscal year of the
Partnership, after giving effect to the following: (i) credit to such capital
account any amounts the Partner is obligated to restore, pursuant to the terms
of this Agreement or otherwise, or is deemed obligated to restore pursuant to
the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the
Treasury Regulations, and (ii) debit to such capital account the items described
in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations.
"AGREED VALUE": means the net fair market value of Contributed
Property as agreed to by the Contributing Partner and the Partnership (or other
property subsequently adjusted to reflect contributions), using such reasonable
method of valuation as they may adopt.
"CARRYING VALUE": means the adjusted basis of such property
for federal income tax purposes as of the time of determination.
"NONRECOURSE DEDUCTIONS": shall have the meaning set forth in
Section 1.704-2(b)(1) of the Treasury Regulations. The amount of Nonrecourse
Deductions for a Partnership fiscal year equals the excess, if any, of the net
increase, if any, in the amount of Partnership Minimum Gain during that fiscal
year over the aggregate amount of any distributions during that fiscal year of
proceeds of a Nonrecourse Liability, that are allocable to an increase in
Partnership Minimum Gain, determined according to the provisions of Section
1.704-2(c) of the Treasury Regulations.
"NONRECOURSE LIABILITY": shall have the meaning set forth in
Section 1.704-2(b)(3) of the Treasury Regulations.
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"PARTNER NONRECOURSE DEBT MINIMUM GAIN": means an amount, with
respect to each Partner Nonrecourse Debt, determined in accordance with Section
1.704-2(i) of the Treasury Regulations.
"PARTNER NONRECOURSE DEBT": shall have the meaning set forth
in Section 1.704-2(b)(4) of the Treasury Regulations.
"PARTNER NONRECOURSE DEDUCTIONS": shall have the meaning set
forth in Section 1.704-2(i)(2) of the Treasury Regulations. For any Partnership
taxable year, the amount of Partner Nonrecourse Deductions with respect to a
Partner Nonrecourse Debt equal the net increase during the year, if any, in the
amount of Partner Nonrecourse Debt Minimum Gain reduced (but not below zero) by
proceeds of the liability that are both attributable to the liability and
allocable to an increase in the Partner Nonrecourse Debt Minimum Gain.
"PARTNERSHIP AGREEMENT": shall mean this Agreement of Limited
Partnership Agreement of RRF Limited Partnership.
"PARTNERSHIP MINIMUM GAIN": shall have the meaning set forth
in Sections 1.704-2(b)(2) and 1.704-2(d) of the Treasury Regulations.
For purposes of this Exhibit, all other capitalized terms will
have the same definition as in the Partnership Agreement.
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EXHIBIT C
INITIAL AND CORPORATE HOTELS
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Intentionally omitted.
<PAGE> 52
EXHIBIT D
RIGHTS TERMS
------------
The Rights granted by the General Partner to the Class A
Limited Partners pursuant to SECTION 7.4 hereof shall be subject to the
following terms and conditions:
1. DEFINITIONS. The following terms and phrases
shall, for purposes of this EXHIBIT D and the Agreement, have the meanings set
forth below:
"BENEFICIALLY OWN" shall mean the ownership of REIT Shares by a
Person who would be treated as an owner of such REIT Shares either
directly or constructively through the application of Section 544 of
the Code, as modified by Section 856(h)(1)(B) of the Code.
"CASH PURCHASE PRICE" shall have the meaning set forth in Paragraph 4
hereof.
"COMPUTATION DATE" shall mean the date on which an Exchange Exercise
Notice is delivered to the General Partner.
"ELECTION NOTICE" shall mean the written notice to be given by the
General Partner to the Exercising Partner(s) in response to the
receipt by the General Partner of an Exchange Exercise Notice from
such Exercising Partner(s), the form of which Election Notice is
attached hereto as Schedule 2.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any successor statute.
"EXCHANGE EXERCISE NOTICE" shall have the meaning set forth in
Paragraph 2 hereof.
"EXCHANGE FACTOR" shall mean 100%, PROVIDED that such factor shall be
adjusted in accordance with the Antidilution Provisions of Paragraph
10 hereof.
"EXCHANGE RIGHTS" shall have the meaning set forth in Paragraph 2
hereof.
"EXERCISING PARTNERS" shall have the meaning set forth in Paragraph
2 hereof.
"OFFERED PARTNERSHIP UNITS" shall mean the Partnership Units of the
Exercising Partner(s) identified in an Exchange Exercise Notice
which,
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pursuant to the exercise of Exchange Rights, can be acquired by the
General Partner under the terms hereof.
"OWNERSHIP LIMIT" shall have the meaning set forth in Paragraph 3
hereof.
"PURCHASE PRICE" shall mean the Cash Purchase Price or the Stock
Purchase Price, or a combination thereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any successor statute.
"STOCK PURCHASE PRICE" shall have the meaning set forth in Paragraph
4 hereof.
2. DELIVERY OF EXCHANGE EXERCISE NOTICES. Any one or
more Limited Partners ("Exercising Partners") may, subject to the limitations
set forth herein, deliver to the General Partner written notice (the "Exchange
Exercise Notice") pursuant to which such Exercising Partners elect to exercise
their rights to exchange (the "Exchange Rights") all or any portion of their
Partnership Units for REIT Shares subject to the limitations contained in
Paragraph 3 below.
3. LIMITATION ON EXERCISE OF EXCHANGE RIGHTS.
Exchange Rights may be exercised at any time and subject, in all cases, to the
limitations contained herein and in Section 8.5 of the General Partner's
Declaration of Trust (the "Ownership Limit"). The Exchange Rights shall expire
with respect to any Partnership Units for which an Exchange Exercise Notice has
not been delivered to the General Partner on or prior to the date that the
Partnership is dissolved. If an Exchange Exercise Notice is delivered to the
General Partner but, as a result of the Ownership Limit, the Exchange Rights
cannot be exercised in full, the Exchange Exercise Notice shall be deemed to be
modified such that the Exchange Rights shall be exercised only to the extent
permitted under the Ownership Limit; with the remainder of such Exchange Rights
being deemed to be an offer to sell such Offered Partnership Units to the
General Partner for the Cash Purchase Price.
4. COMPUTATION OF PURCHASE PRICE/FORM OF PAYMENT.
The Purchase Price payable by the General Partner to each Exercising Partner for
the Offered Partnership Units shall be payable by the issuance by the General
Partner of the number of shares of its REIT Shares equal to the product,
expressed as a whole number, of (i) the number of Partnership Units being
exchanged, multiplied by (ii) the Exchange Factor (the "Stock Purchase Price").
At the time that the Ownership Limit is reached, the Purchase Price to be paid
for the Offered Partnership Units shall be paid in cash rather than in REIT
Shares (the "Cash Purchase Price"). The Cash Purchase Price shall mean, with
respect to the applicable number of Offered Partnership Units upon the exercise
of any Exchange Right, an amount of cash (in immediately available funds) equal
to (i) the number of shares of the General Partner's
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<PAGE> 54
REIT Shares that would be issued to the Exercising Partner if the Stock Purchase
Price were paid for such Offered Partnership Units (taking into account the
adjustments required pursuant to the definition of "Exchange Factor") multiplied
by (ii) the REIT Share Value computed as of the Computation Date. The Cash
Purchase Price shall be paid in the form of cash, or cashier's check, or by wire
transfer of immediately available funds to the Exercising Partner's designated
account.
5. CLOSING; DELIVERY OF ELECTION NOTICE. The closing of the
acquisition of Offered Partnership Units shall, unless otherwise mutually
agreed, be held at the principal office of the General Partner, on the following
date(s):
(a) With respect to the exercise of Exchange Rights for which the
Stock Purchase Price is payable, or for which the General Partner
elects to pay the Cash Purchase Price, the closing shall occur no
later than the later of (i) ten (10) days after the delivery of the
Election Notice and (ii) the expiration or termination of the waiting
period applicable to each Exercising Partner, if any, under the
Hart-Scott Act; and
(b) With respect to the exercise of Exchange Rights for which the
General Partner is required to pay the Cash Purchase Price, the
General Partner shall, within thirty (30) days after receipt by the
General Partner of the Exchange Exercise Notice delivered in
accordance with the requirements of Paragraph 2 hereof, deliver to
the Exercising Partner(s) an Election Notice, which Election Notice
shall (i) specify the General Partner's need to pay the Cash Purchase
Price for some or all of the Offered Partnership Units and (ii) set
forth the computation of the Cash Purchase Price to be paid by the
General Partner to such Exercising Partner(s) and the date, time and
location for completion of the purchase and sale of the Offered
Partnership Units, which date shall, to the extent required, in no
event be more than sixty (60) days after the Computation Date for
such Exchange Exercise Notice; PROVIDED, HOWEVER, that such sixty
(60) day period may be extended for an additional period to the
extent required for the General Partner to cause additional REIT
Shares to be issued to provide financing to be used to acquire the
Offered Partnership Units. Notwithstanding the foregoing, the General
Partner agrees to use its best efforts to cause the closing of the
acquisition of Offered Partnership Units hereunder to occur as
quickly as is reasonably possible.
6. CLOSING DELIVERIES. At the closing, payment of
the Purchase Price shall be accompanied by proper instruments of transfer and
assignment and by the delivery of (i) representations and warranties of (A) the
Exercising Partner with respect to its due authority to sell all of the right,
title and interest in and to such Offered Partnership Units to the General
Partner and with respect to the status of the Offered Partnership Units being
sold, free and clear of all liens, and (B) the General Partner with respect to
due authority for the purchase of such Offered Partnership Units, and (ii) to
the extent that REIT Shares are issued in payment of the Stock
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<PAGE> 55
Purchase Price, (A) an opinion of counsel for the General Partner reasonably
satisfactory to the Exercising Partner(s), to the effect that such REIT Shares
have been duly authorized, are validly issued, fully-paid and non-assessable,
and (following the date on which the a shelf registration has been declared
effective by the SEC) have been duly registered under the Securities Act, and
(B) a stock certificate or certificates evidencing the REIT Shares to be issued
and registered in the name of the Exercising Partner(s) or its (their) designee.
7. TERM OF RIGHTS. Unless sooner terminated, the
rights of the parties with respect to the Rights shall commence as of the date
hereof and lapse for all purposes and in all respects on the date that the
Partnership is dissolved; PROVIDED, HOWEVER, that the parties hereto shall
continue to be bound by an Exchange Exercise Notice delivered to the General
Partner prior to such date.
8. COVENANTS OF THE GENERAL PARTNER. To facilitate
the General Partner's ability to fully perform its obligations hereunder, the
General Partner covenants and agrees as follows:
(a) At all times during the pendency of the Exchange Rights, the
General Partner shall reserve for issuance and keep available, free
from preemptive rights, out of its authorized but unissued REIT
Shares, such number of REIT Shares as may be necessary to enable the
General Partner to issue REIT Shares in full satisfaction of all
Exchange Rights which are from time to time outstanding (assuming no
Ownership Limit applied and that the General Partner paid the Stock
Purchase Price with respect to all such Exchange Rights).
(b) As long as the General Partner shall be obligated to file
periodic reports under the Exchange Act, the General Partner will
timely file such reports in such manner as shall enable any recipient
of REIT Shares issued to Limited Partners hereunder in reliance upon
an exemption from registration under the Securities Act to continue
to be eligible to utilize Rule 144 promulgated by the SEC pursuant to
the Securities Act, or any successor rule or regulation or statute
thereunder, for the resale thereof.
(c) During the pendency of the Exchange Rights, the Limited Partners
shall receive in a timely manner all reports filed by the General
Partner with the SEC and all other communications transmitted from
time to time by the General Partner to its shareholders generally.
(d) All REIT Shares which may be issued upon exchange of Offered
Partnership Units will upon issue be fully paid and non-assessable.
(e) Except as provided in Section 4.3(a)(iii) of the Agreement, the
General Partner shall not issue or sell any REIT Shares or other
equity securities or
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<PAGE> 56
any instrument convertible into any equity security for a
consideration less than the fair value of such REIT Shares or other
equity security, as determined in each case by the Board of Trustees
of the General Partner, in consultation with the General Partner's
professional advisors, and under no circumstances shall the General
Partner declare any stock dividend, stock split, stock distribution
or the like, unless fair and equitable arrangements are provided, to
the extent necessary, to fully adjust, and to avoid any dilution in,
the Exchange Rights of the Limited Partners under this Agreement, as
provided in paragraph 10 below.
9. LIMITED PARTNERS' COVENANTS. Each Limited Partner
covenants and agrees with the General Partner that all Offered Partnership Units
tendered to the General Partner in accordance with the exercise of Exchange
Rights herein provided shall be delivered to the General Partner free and clear
of all liens and should any liens exist or arise with respect to such Offered
Partnership Units, the General Partner shall be under no obligation to acquire
the same unless, in connection with such acquisition, the General Partner has
elected to pay a portion of the purchase price in the form of the Cash Purchase
Price in circumstances where such Cash Purchase Price will be sufficient to
cause such existing lien to be discharged in full upon application of all or a
part of the Cash Purchase Price and the General Partner is expressly authorized
to apply such portion of the Cash Purchase Price as may be necessary to satisfy
any indebtedness in full and to discharge such lien in full. Each Limited
Partner further agrees that, in the event any state or local property transfer
tax is payable as a result of the transfer of its Offered Partnership Units to
the General Partner (or its designee), such Limited Partner shall assume and pay
such transfer tax.
10. ANTIDILUTION PROVISIONS.
(a) The Exchange Factor shall be subject to
adjustment from time to time effective upon the occurrence of the following
events and shall be expressed as a percentage, calculated to the nearest
one-thousandth of one percent (.001%):
(i) In case the General Partner shall pay or make a dividend or other
distribution on any class of shares of the General Partner in REIT
Shares, the Exchange Factor in effect at the opening of business on
the day following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution
shall be increased in proportion to the increase in outstanding REIT
Shares resulting from such dividend or other distribution, such
increase to become effective immediately after the opening of
business on the day following the record date fixed for such dividend
or other distribution.
(ii) In case outstanding REIT Shares shall be subdivided into a
greater number of shares, the Exchange Factor in effect at the
opening of business on
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<PAGE> 57
the day following the day upon which such subdivision becomes
effective shall be proportionately increased, and, conversely, in
case the outstanding REIT Shares shall be combined into a smaller
number of shares, the Exchange Factor in effect at the opening of
business on the day following the day upon which such combination
becomes effective shall be proportionately reduced, such increase or
reduction, as the case may be, to become effective immediately after
the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(b) In case the General Partner shall issue rights,
options or warrants to all holders of its REIT Shares entitling them to
subscribe for or purchase REIT Shares at a price per share less than the current
market price per share (as determined in the next sentence), each holder of a
Partnership Unit shall be entitled to receive such number of rights or warrants,
as the case may be, as he would have been entitled to receive had he exchanged
his Partnership Units immediately prior to the record date for such issuance by
the General Partner. For the purpose of any computation pursuant to the next
sentence, the current market price per share of REIT Shares on any date shall be
deemed to be the average of the daily closing prices for the five consecutive
Trading Days selected by the General Partner commencing not more than twenty
(20) Trading Days before, and ending not later than, the earlier of the day in
question and the day before the "ex" date with respect to the issuance or
distribution requiring such computation. For purposes of this EXHIBIT D, the
term "Trading Day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day which securities are not traded on such exchange or
in such market and the term "'ex' date", when used in respect of any issuance or
distribution, shall mean the first date on which the shares trade regular way on
such exchange or in such market without the right to receive such issuance or
distribution.
(c) In case the REIT Shares shall be changed into the
same or a different number of shares of any class or classes of stock, whether
by capital reorganization, reclassification, or otherwise (other than
subdivision or combination of shares or a stock dividend described in
subparagraph (a)(ii) of this Paragraph) then and in each such event the Limited
Partners shall have the right thereafter to exchange their Partnership Units for
the kind and amount of shares and other securities and property which would have
been received upon such reorganization, reclassification or other change by
holders of the number of shares into which the Partnership Units might have been
exchanged immediately prior to such reorganization, reclassification or change.
(d) The General Partner may, but shall not be required
to, make such adjustments to the number of REIT Shares issuable upon exchange of
a Partnership Unit, in addition to those required by this Paragraph 10, as the
General Partner's board of trustees considers to be advisable in order that any
event treated for Federal income tax purposes as a dividend of stock or stock
rights shall not be taxable to the recipients. The General Partner's board of
trustees shall have the power to
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<PAGE> 58
resolve any ambiguity or correct any error in the adjustments made pursuant to
this Paragraph and its actions in so doing shall be final and conclusive.
11. FRACTIONS OF SHARES. No fractional REIT Shares
shall be issued upon exchange of Partnership Units. If more than one Partnership
Unit shall be surrendered for exchange at one time by the same Exercising
Partner, the number of full REIT Shares which shall be issuable upon exchange
thereof (or the cash equivalent amount thereof if the Cash Purchase Price is
paid) shall be computed on the basis of the aggregate amount of Partnership
Units so surrendered. Instead of any fractional REIT Share which would otherwise
be issuable upon exchange of any Partnership Unit or Partnership Units, the
General Partner shall pay a cash adjustment in respect of such fraction in an
amount equal to the same fraction of the Value of a REIT Share at the close of
business on the day of closing specified in Paragraph 5 of this EXHIBIT D (or,
if such day is not a Trading Day, on the Trading Day immediately preceding such
day).
12. NOTICE OF ADJUSTMENTS OF EXCHANGE FACTOR.
Whenever the Exchange Factor is adjusted as herein provided:
(a) the General Partner shall compute the adjusted Exchange Factor in
accordance with Paragraph 10 hereof and shall prepare a certificate
signed by the chief financial officer or the Treasurer of the General
Partner setting forth the adjusted Exchange Factor and showing in
reasonable detail the facts upon which such adjustment is based; and
(b) a notice stating that the Exchange Factor has been adjusted and
setting forth the adjusted Exchange Factor shall forthwith be mailed
by the General Partner to all holders of Exchange Rights at their
last addresses on record under this Agreement.
13. NOTICE OF CERTAIN CORPORATE ACTIONS.
In case:
(a) the General Partner shall declare a dividend (or any other
distribution) on its REIT Shares payable otherwise than in cash; or
(b) the General Partner shall authorize the granting to holders of
its REIT Shares of rights, options or warrants to subscribe for or
purchase any shares of stock of any class or of any other rights; or
(c) of any reclassification of the REIT Shares (other than a
subdivision or combination of its outstanding REIT Shares, or of any
consolidation, merger or share exchange to which the General Partner
is a party and for which approval of any shareholders of the General
Partner is required), or of the
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sale or transfer of all or substantially all of the assets of the
General Partner; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the General Partner;
then the General Partner shall cause to be mailed to all holders of Exchange
Rights at their last addresses on record under this Agreement, at least twenty
(20) days (or twelve (12) days in any case specified in clause (a) or (b) above)
prior to the applicable record date hereinafter specified, a notice stating (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution, rights, options or warrants, or, if a record is not to be taken,
the date as of which the holders of REIT Shares of record to be entitled to such
dividend, distribution, rights, options or warrants are to be determined, or
(ii) the date on which such reclassification, consolidation, merger, share
exchange, sale, transfer, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that holders of REIT
Shares of record shall be entitled to exchange their shares for securities, cash
or other property deliverable upon such reclassification, consolidation, merger,
share exchange, sale, transfer, dissolution, liquidation or winding up.
14. PROVISIONS IN CASE OF CONSOLIDATION, MERGER OR
SALE OF ASSETS.
In case of any consolidation of the General Partner
with, or merger of the General Partner into, any other Persons, any merger or
consolidation of another Person into the General Partner (other than a merger
which does not result in any reclassification, conversion, exchange or
cancellation of outstanding REIT Shares of the General Partner), or any sale or
transfer of all or substantially all of the assets of the General Partner, the
Person formed by such consolidation or resulting from such merger or which
acquires such assets of the General Partner, as the case may be, shall execute
and deliver to each holder of Exchange Rights an agreement providing that such
holder shall have the right thereafter, during the period such Exchange Rights
shall be exercisable as specified herein, to require the exchange of Partnership
Units for the kind and amount of securities, cash and other property receivable
upon such consolidation, merger, sale or transfer by a holder of the number of
REIT Shares, for which such Partnership Unit might have been exchanged
immediately prior to such consolidation, merger, sale or transfer, assuming such
holder of REIT Shares is not a Person with which the General Partner
consolidated or into which the General Partner merged or which merged into the
General Partner, or to which such sale or transfer, was made, as the case may be
(a "Constituent Person"), or an Affiliate of a Constituent Person, and failed to
exercise his right of election, if any, as to the kind or amount of securities,
cash or other property receivable upon such consolidation, merger, sale or
transfer (PROVIDED that if the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer is not the
same for each Common Share in respect of which such rights of
-8-
<PAGE> 60
election shall not have been exercised ("non-electing Share"), then for the
purpose of this Paragraph 14 the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by each
non-electing Share shall be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing Shares). Such agreement shall provide
for adjustments which, for events subsequent to the effective date of such
agreement, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this EXHIBIT D. The above provisions of this
Paragraph 14 shall similarly apply to successive consolidations, mergers, sales
or transfers.
-9-
<PAGE> 61
SCHEDULE 1
----------
EXCHANGE EXERCISE NOTICE
------------------------
To: REALTY REFUND TRUST
Reference is made to that certain Agreement of Limited
Partnership, dated as of January __, 1998 (the "Partnership Agreement"),
pursuant to which Realty ReFund Trust, an unincorporated Ohio business trust,
and certain other persons, including the undersigned, formed a Delaware limited
partnership known as RRF Limited Partnership (the "Partnership"). Capitalized
terms used but not defined herein shall have the meanings set forth in the
Partnership Agreement. Pursuant to SECTION 7.4 and Paragraph 2 of EXHIBIT D of
the Partnership Agreement, each of the undersigned, being a limited partner of
the Partnership (an "Exercising Partner"), hereby elects to exercise its
Exchange Rights as to the number of Offered Partnership Units specified opposite
its name below:
Dated: ___________________________
=================== =================== ==========================
EXERCISING PARTNER PARTNERSHIP UNITS NUMBER OF OFFERED
=================== =================== ==========================
Exercising Partners:
- -------------------------------------
- --------------------------------------
-1-
<PAGE> 62
SCHEDULE 2
----------
ELECTION NOTICE
---------------
To: Exercising Partner(s)
Reference is made to that certain Agreement of Limited
Partnership of RRF Limited Partnership, dated as of January __, 1998 (the
"Partnership Agreement"), pursuant to which the undersigned and certain other
persons, including the Exercising Partners, formed a Delaware limited
partnership known as RRF Limited Partnership (the "Partnership"). All
capitalized terms used but not defined herein shall have the meanings set forth
in the Partnership Agreement. Pursuant to subsection (b) of Paragraph 5 of
EXHIBIT D to the Partnership Agreement, the undersigned, being the general
partner of the Partnership, hereby notifies the Exercising Partner(s) that [(a)
the Stock Purchase Price is payable by issuance of the number of Common Shares
to the Existing Partner(s), as set forth below,] [(b) it has elected to pay the
Cash Purchase Price by payment of cash to the Exercising Partner(s) for the
number of Offered Partnership Units, as set forth below,] (c) the computation of
the [Stock Purchase Price and Cash Purchase Price] as set forth on an attachment
hereto, (d) the closing of the purchase and sale of the Offered Partnership
Units by payment of the [Stock Purchase Price shall take place at the offices of
________________________ on [date]] and [(e) the closing of the payment of the
Cash Purchase Price shall take place at the offices of ________________________
on [date].
EXERCISING NUMBER OF OFFERED STOCK CASH PURCHASE
PARTNER(S) PARTNERSHIP UNITS PURCHASE PRICE PRICE
- ---------- ----------------- ------------- ---------------
REALTY REFUND TRUST,
an unincorporated Ohio business trust
By: ____________________________
Its: ____________________________
Dated: ______________________
-1-
<PAGE> 63
EXHIBIT E
REPRESENTATIONS AND WARRANTIES OF WARRANTING PARTNERS
-----------------------------------------------------
Each of Hospitality Corporation International and InnSuites
Innternational Hotels and Resorts, Inc. (collectively, the "Warranting
Partners"), jointly and severally, represents to the Partnership that, except as
set forth on the Disclosure Schedule delivered to the General Partner in
connection with the execution of this Agreement, as follows:
(a) ORGANIZATION: AUTHORITY. Each of the Contributed
Partnerships is a Partnership duly formed, validly existing and in good standing
(to the extent applicable) under the laws of its jurisdiction of formation. Each
Warranting Partner has the requisite power and authority to enter into and
perform this Agreement.
(b) AUTHORIZATION: BINDING AGREEMENT. The execution, delivery
and performance of this Agreement by each Warranting Partner has been duly and
validly authorized by all necessary action of such Warranting Partner. This
Agreement has been duly executed and delivered by each Warranting Partner and
constitutes the legal, valid and binding obligation of such Warranting Partner,
enforceable against such Warranting Partner in accordance with the terms hereof.
(c) CONSENTS AND APPROVALS. Except for those obtained prior to
the date hereof, no consent, waiver, approval or authorization of, or filing,
registration or qualification with or notice to, any governmental unit or any
other person is required to be made, obtained or given by any of the Warranting
Partners or the Contributed Partnerships in connection with the execution,
delivery and performance of this Agreement.
(d) NO VIOLATION. None of the execution, delivery or
performance of this Agreement by any Warranting Partner does, or with the giving
of notice, lapse of time or both, will (1) violate, conflict with or constitute
a default under any term or condition of (A) the organizational documents of
such Warranting Partner or any of the Contributed Partnerships, or (B) any term
or provision of any judgment, decree, order, statute, injunction, rule or
regulation of a governmental unit applicable to such Warranting Partner or any
of the Contributed Partnerships, or (C) any agreement, instrument or document to
which such Warranting Partner or any of the Contributed Partnerships is a party
or by which any of them is bound or to which their assets or properties is
subject or bound or (2) result in the creation of any lien, claim, equity,
security interest or other encumbrance ("Lien") upon the Contributed Property of
such Warranting Partner or the assets or properties of such Warranting Partner
or the Contributed Partnerships.
-1-
<PAGE> 64
(e) COMPLIANCE WITH LAWS. To the Warranting Partners' best
knowledge, each of the Contributed Partnerships is in compliance in all material
respects with all private restrictions and laws, ordinances and regulations
applicable to the conduct of the business of such Contributed Partnership and
the ownership, use and operation of its properties (including the Initial Hotels
and Corporate Hotel) and each has obtained all licenses, permits and other
governmental approvals for the conduct thereof, which licenses and permits are
in full force and effect, and the Contributed Partnerships have not taken (or
failed to take) any action that would result in the revocation of such licenses
or permits nor have the Contributed Partnerships received any notice of
violation from any federal, state or municipal or other governmental or
quasi-governmental authority or notice of an intention by any such authority to
revoke any certificate of occupancy or other certificate, license or permit
issued by it in connection with the use of any such Contributed Partnership's
properties.
(f) ENVIRONMENTAL MATTERS. To the Warranting Partners' best
knowledge, (1) the Contributed Partnerships and their respective properties
(including the Initial Hotels and the Corporate Hotels) are in compliance, and
heretofore have complied, with all Environmental Laws (as hereinafter defined);
(2) none of the Contributed Partnerships has received any written notice from
any governmental or quasi-governmental authority or other person that it, its
current or former operations, or its properties now or heretofore owned, leased
or used by it or any of its predecessors, are not or have not been in compliance
with any Environmental Laws or that it has any material liability in respect
thereof; and (3) there are no administrative, regulatory or judicial proceedings
pending or threatened against any Contributed Partnership pursuant to, or
alleging any violation of or liability under, any Environmental Laws. To the
Warranting Partners' best knowledge, except as set forth in the ESA's previously
delivered to the General Partner, all of the properties now or heretofore owned,
leased or used by any of the Contributed Partnerships are free of all Hazardous
Materials, and, to the best knowledge of Warranting Partners, no Hazardous
Materials have ever been located on any of the properties now or heretofore
owned, leased or used by any of the Contributed Partnerships.
The term "Hazardous Materials" shall mean any substance,
material, waste, gas or particulate matter which is regulated by any local
governmental authority, the state in which any real property of the Contributed
Partnerships is situated, or the United States Government, including but not
limited to, any material or substance which is (i) defined as a "hazardous
waste", "hazardous material", "hazardous substance", "extremely hazardous waste"
or "restricted hazardous waste" under any provision of law of the state in which
any real property of the Contributed Partnerships is situated, (ii) petroleum or
petroleum based, (iii) asbestos, (iv) polychlorinated biphenyl, (v) radioactive
material, (vi) designed a "hazardous substance" pursuant to Section 311 of the
CLEAN WATER ACT, 33 U.S.C. Section 1251 et seq. (33 U.S.C. Section 1317), (vii)
defined as a "hazardous waste" pursuant to Section 1004 of the RESOURCE
CONVERSATION AND RECOVERY ACT, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section
6903) or (viii) defined as a "hazardous substance" pursuant to
-2-
<PAGE> 65
Section 101 of the COMPREHENSIVE ENVIRONMENTAL RESPONSE. COMPENSATION. AND
LIABILITY ACT, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601). The term
"Environmental Laws" shall mean all statutes specifically described in the
foregoing sentence and all federal, state and local environmental health and
safety statutes, ordinances, codes, rules, regulations, orders and decrees
regulating, relating to or imposing liability or standards concerning or in
connection with Hazardous Materials.
(g) OWNERSHIP OF PROPERTIES. Each of the Contributed
Partnerships (i) is the sole owner of its respective properties and (ii) has
good, valid and marketable title to such properties, free and clear of all Liens
other than Permitted Exceptions (as hereafter defined).
The term "Permitted Exceptions" shall mean in respect of real
property or any interest or estate therein: (1) zoning laws and ordinances; (2)
any deeds of trust or mortgages listed as exceptions to title in the most recent
title commitments to insure title issued by TransNation Title Insurance Company
relating to the properties of the Contributed Partnerships and delivered to the
General Partner in connection with the execution of this Agreement (the "Title
Commitments"); (3) any laws, ordinances, Liens, easements, rights of way,
restrictions, exemptions, reservations, conditions, limitations, covenants,
adverse rights or interests described as exceptions on Schedule B (or any other
applicable Schedule) of the Title Commitments; provided that any Contributed
Partnership's property is not in violation thereof or, if in violation, provided
that the same do not require the demolition, vacation or cessation of the
present use of nay portion of the improvements material to such property or
require the discontinuance of the use of all or any material portion of such
property for its present use; (4) any other easements, restrictions,
reservations and encumbrances which do not individually or in the aggregate (A)
impair the use of any such property in the operation of the business of the
respective Contributed Partnership or (B) detract from the value of such
property for the purpose of such business; and (5) taxes and assessments, both
general and special, which are a lien but not yet due and payable.
(h) ABSENCE OF UNDISCLOSED LIABILITIES AND CONTRACTUAL
OBLIGATIONS. Except for liabilities arising in the ordinary course of business
since the date of the Contributed Partnerships' financial statements as of and
for the period ended December 31, 1996, the Contributed Partnerships have no
liabilities of any nature, whether matured or unmatured, fixed or contingent
(regardless of whether the disclosure thereof otherwise would be required by
generally accepted accounting principles) which could have, individually or in
the aggregate, a material adverse effect upon such Contributed Partnership or
the Partnership. There are no Significant Agreements (as hereinafter defined) of
a Contributed Partnership other than as previously disclosed to the General
Partner.
For purposes hereof, "Significant Agreement" of a Contributed
Partnership means and includes any of the following to which such entity is a
party or by which it or any of its assets or properties may be subject or bound:
(1) all
-3-
<PAGE> 66
agreements, instruments and documents evidencing, securing or pertaining to con
tractual obligations of a Contributed Partnership that involve annual payments
or receipts in excess of $50,000.00; (2) all leases involving real property; and
(3) all mortgages and deeds of trust encumbering any real property.
(i) SIGNIFICANT AGREEMENTS: BINDING AGREEMENTS. Each of the
Significant Agreements is valid and binding and in full force and effect,
enforceable against the Contributed Partnership which is a party thereto in
accordance with its terms, subject to the bankruptcy or insolvency of such
parties, similar laws of general applicability relating to or affecting
creditors' rights generally, to general equity principles and to the discretion
of any court in granting any relief or issuing any order and to the
unenforceability of attorneys' fees provisions. Such Contributed Partnership is
not in default in the performance of any obligation thereunder, and no event has
occurred which, with the giving of notice or lapse of time or both, would
constitute a default thereunder or permit the other party to terminate the
rights of such Contributed Partnership thereunder.
(j) LITIGATION. There are no claims, actions, suits,
proceedings or investigations pending, or, to the Warranting Partners'
knowledge, threatened, before any court, governmental unit or any arbitrator in
respect of any Contributed Partnership or its assets.
(k) TRANSFER TAXES. There are no transfer taxes payable,
accruing or otherwise arising out of the transfer of the Contributed Partnership
Interests or the Contributed Property to the Partnership, the admission of the
General Partner to this Partnership or arising out of any of the transactions
specified in this Agreement that are expected to occur contemporaneously or
concurrent with or immediately after the execution hereof, which shall not have
been paid by the Limited Partners.
(l) PROJECT IMPROVEMENTS. To the Warranting Partners' best
knowledge, all buildings and improvements on the property owned by each
Contributed Partnership, and all tangible personal property, equipment and
fixtures constituting a part thereof, are in good condition and repair, and the
roofs, walls and foundations of the buildings are free from leaks and seepage of
moisture. To the best knowledge of the Warranting Partners, there is no
defective condition (latent or otherwise) in respect of the buildings and
improvements on the property owned by any Contributed Partnership.
(m) PROJECT EQUIPMENT: UTILITIES. The equipment located at the
property owned by each Contributed Partnership is sufficient to permit the full
operation of the improvements for their respective intended purposes. All water,
sewer, gas, electric, telephone and drainage facilities and all of the utilities
required by law for the normal operation of the property owned by the
Contributed Partnerships are installed to the property line and are connected
with valid permits, are in good working order and are adequate to serve such
property in full compliance with law.
-4-
<PAGE> 67
(n) CONDEMNATION PROCEEDINGS. No proceedings have been
commenced or threatened by any authority having the power of eminent domain to
condemn any part of the land or improvements relating to any of the properties
owned by the Contributed Partnerships.
(o) INSURANCE. The Warranting Partners have not received any
notices from any insurance company of any defects or inadequacies in any
property owned by a Contributed Partnership or any part thereof which would
affect adversely the insurability of such property, and each such property
complies with the require ments of all insurance carriers providing insurance
therefor.
For the purposes of the representations and warranties made
pursuant to this Exhibit E, a statement that a fact is true to "the Warranting
Partner's best knowledge" means that, after due investigation, none of the
following Persons actually knows such statement to be untrue: James F. Wirth.
-5-
<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 of our report dated May 13, 1998
included in Realty ReFund Trust's Form 10-K for the year ended January 31, 1998
and to all references to our Firm in this Registration Statement.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
June 8, 1998
<PAGE> 1
Exhibit 23.3
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated February 19, 1998
included in Realty ReFund Trust's Form 10-K for the year ended January 31, 1998
and to all references to our Firm in this Registration Statement.
Michael Maastricht, C.P.A.
Phoenix, Arizona
June 8, 1998
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of James F. Wirth and Gregory D. Bruhn, with full power to act without the
other, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all amendments
(including post-effective amendments) to this Registration Statement, to file
the same, together with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, to sign any and all
applications, registration statements, notices and other documents necessary or
advisable to comply with the applicable state securities laws, and to file the
same, together with all other documents in connection therewith, with the
appropriate state securities authorities, granting unto said attorneys-in-fact
and agents or any of them, or their or his substitutes or substitute, full power
and authority to perform and do each and every act and thing necessary and
advisable as fully to all intents and purposes as he might or could perform and
do in person, thereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAMES F. WIRTH Trustee, Chairman, President and June 3, 1998
- -------------------------------------- Chief Executive Officer
James F. Wirth
/s/ GREGORY D. BRUHN Trustee, Executive Vice President, June 4, 1998
- -------------------------------------- Chief Financial Officer,
Gregory D. Bruhn Treasurer and Secretary
/s/ MARC E. BERG Trustee June 3, 1998
- --------------------------------------
Marc E. Berg
/s/ LEE J. FLORY Trustee June 4, 1998
- --------------------------------------
Lee J. Flory
/s/ EDWARD G. HILL Trustee June 3, 1998
- --------------------------------------
Edward G. Hill
/s/ MARK J. NASCA Trustee June 4, 1998
- --------------------------------------
Mark J. Nasca
</TABLE>
<PAGE> 1
Exhibit 99.1
FORM OF
PERCENTAGE LEASE AGREEMENT
DATED AS OF , 1997
BETWEEN
----------------------------------------------------
AS LESSOR
AND
REALTY HOTEL LESSEE CORP.
AS LESSEE
<PAGE> 2
<TABLE>
<CAPTION>
Page
----
TABLE OF CONTENTS
-----------------
PAGE
----
<S> <C>
ARTICLE I............................................................................................ 1
1.1 Leased Property................................................................ 1
1.2 Term........................................................................... 2
1.3 Building Contracts.............................................................. 3
1.4 Assignment and Assumption...................................................... 3
ARTICLE II........................................................................................... 3
ARTICLE III.......................................................................................... 13
3.1 Rent........................................................................... 13
3.2 Payment of Percentage Rent..................................................... 14
3.3 Confirmation of Percentage Rent................................................ 15
3.4 Additional Charges............................................................. 16
3.5 Annual Revenue Projections..................................................... 16
3.6 Annual Capital Expenditures Budget............................................. 17
3.7 Capital Expenditure Fund....................................................... 17
3.8 Application of Capital Expenditure Fund........................................ 18
3.9 Unbudgeted Capital Expenditures................................................ 18
3.10 Agent Method for Purchases
of Capital Expenditures........................................................ 18
ARTICLE IV........................................................................................... 20
4.1 Payment of Taxes and Impositions............................................... 20
4.2 Utility Charges................................................................ 21
4.3 Insurance Premiums............................................................. 21
ARTICLE V............................................................................................ 21
ARTICLE VI........................................................................................... 22
6.1 Ownership of the Leased Property............................................... 22
6.2 Lessee's Personal Property..................................................... 22
ARTICLE VII.......................................................................................... 23
7.1 Condition of the Leased Property............................................... 23
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
7.2 Use of the Leased Property..................................................... 24
7.3 Lessor to Grant Easements, Etc................................................. 25
7.4 Compliance with Ground Lease................................................... 25
ARTICLE VIII......................................................................................... 25
8.1 Compliance with Legal, Insurance
Requirements, Lessor's Insurance and
Tax Obligations.............................................................. 25
8.2 Legal Requirements Covenants....................................................26
8.3 Environmental Covenants........................................................ 26
ARTICLE IX........................................................................................... 29
9.1 Maintenance and Repair......................................................... 29
9.2 Encroachments, Restrictions, Etc............................................... 29
ARTICLE X............................................................................................ 30
10.1 Alterations.................................................................... 30
10.2 Salvage........................................................................ 30
10.3 Joint Use Agreements........................................................... 31
ARTICLE XI........................................................................................... 31
11.1 Liens.......................................................................... 31
ARTICLE XII.......................................................................................... 31
12.1 Permitted Contests............................................................. 31
ARTICLE XIII......................................................................................... 32
13.1 General Insurance Requirements................................................. 32
13.2 Full Replacement Cost.......................................................... 34
13.3 Waiver of Subrogation.......................................................... 34
13.4 Waiver of Coinsurance.......................................................... 34
13.5 Form Satisfactory, Etc......................................................... 34
13.6 Increase in Limits............................................................. 35
13.7 Blanket Policy................................................................. 35
13.8 No Separate Insurance.......................................................... 35
13.9 Reports of Insurance Claims.................................................... 35
13.10 Failure to Obtain Insurance.................................................... 36
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XIV.......................................................................................... 36
14.1 Insurance Proceeds............................................................. 36
14.2 Reconstruction in the Event of Damage or
Destruction Covered By Insurance............................................. 36
14.3 Reconstruction in the Event Of Damage or
Destruction Not Covered By Insurance......................................... 37
14.4 Lessee's Personal Property..................................................... 37
14.5 Abatement of Rent.............................................................. 37
14.6 Damage Near End of Term. ...................................................... 38
14.7 Waiver......................................................................... 38
ARTICLE XV........................................................................................... 38
15.1 Parties' Rights and Obligations................................................ 38
15.2 Total Taking................................................................... 38
15.3 Allocation of Award............................................................ 38
15.4 Partial Taking................................................................. 39
15.5 Temporary Taking............................................................... 39
ARTICLE XVI.......................................................................................... 40
16.1 Events of Default.............................................................. 40
16.2 Remedies....................................................................... 41
16.3 Waiver......................................................................... 44
16.4 Application of Funds........................................................... 45
16.5 Surrender...................................................................... 45
ARTICLE XVII......................................................................................... 45
17.1 Lessor's Right to Cure Lessee's Default.........................................45
ARTICLE XVIII........................................................................................ 46
18.1 Exculpation.....................................................................46
ARTICLE XIX.......................................................................................... 46
19.1 Reit Compliance................................................................ 46
19.2 Sublease Lessee Limitation..................................................... 47
19.3 Lessee Ownership Limitation.................................................... 47
19.4 Lessee Officer and Employee Limitation......................................... 47
</TABLE>
(iii)
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XX........................................................................................... 47
20.1 Holding Over....................................................................47
ARTICLE XXI.......................................................................................... 48
21.1 Risk of Loss....................................................................48
ARTICLE XXII......................................................................................... 48
22.1 Indemnification.................................................................48
ARTICLE XXIII........................................................................................ 49
23.1 Subletting and Assignment...................................................... 49
23.2 Attornment..................................................................... 49
23.3 Management Agreement........................................................... 50
ARTICLE XXIV......................................................................................... 50
24.1 Officers' Certificates; Financial
Statements; Lessor's Estoppel
Certificates and Covenants................................................... 50
ARTICLE XXV.......................................................................................... 51
25.1 Books and Records; Lessor's Right to Inspect....................................51
ARTICLE XXVI......................................................................................... 51
26.1 No Waiver.......................................................................51
ARTICLE XXVII........................................................................................ 52
27.1 Remedies Cumulative.............................................................52
ARTICLE XXVIII....................................................................................... 52
28.1 Acceptance of Surrender.........................................................52
ARTICLE XXIX......................................................................................... 52
29.1 No Merger of Title..............................................................52
</TABLE>
(iv)
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XXX.......................................................................................... 52
30.1 Conveyance by Lessor............................................................52
ARTICLE XXXI......................................................................................... 53
31.1 Quiet Enjoyment.................................................................53
ARTICLE XXXII........................................................................................ 53
32.1 Notices.........................................................................53
ARTICLE XXXIII....................................................................................... 53
33.1 Lessor May Grant Liens, Subordination.......................................... 53
33.2 Lessee's Right to Cure......................................................... 55
33.3 Breach by Lessor............................................................... 56
33.4 Lessee's Cooperation........................................................... 56
ARTICLE XXXIV........................................................................................ 56
34.1 Miscellaneous.................................................................. 56
34.2 Transition Procedures.......................................................... 56
34.3 Change of Franchise............................................................ 57
34.4 Waiver of Presentment, Etc..................................................... 57
ARTICLE XXXV......................................................................................... 58
35.1 Memorandum of Lease.............................................................58
ARTICLE XXXVI........................................................................................ 58
36.1 Lessor's Option to Terminate Lease..............................................58
ARTICLE XXXVII....................................................................................... 58
37.1 Compliance with Franchise Agreement.............................................58
</TABLE>
(v)
<PAGE> 7
PERCENTAGE LEASE AGREEMENT
--------------------------
THIS PERCENTAGE LEASE AGREEMENT (this "Lease"), made as of the
____ day of ______________, 199_, by and between _______________________, a
___________________________ ("Lessor") and Realty Hotel Lessee Corp., a Nevada
corporation ("Lessee"), provides as follows:
ARTICLE I
---------
1.1 GRANT. Lessor, in consideration of the payment of rent by
Lessee to Lessor, the covenants and agreements to be performed by Lessee, and
upon the terms and conditions hereinafter stated, does hereby rent and lease
unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased
Property (as hereinafter defined).
1.2 LEASED PROPERTY. The "Leased Property" is comprised of
Lessor's interest in the following:
(a) the ground leasehold interest described in Exhibit A
attached hereto and incorporated herein by reference (the "Land");
(b) all buildings, structures and other improvements of every
kind including, but not limited to, alleyways and connecting tunnels,
sidewalks, utility pipes, conduits and lines (on-site and off-site),
parking areas and roadways appurtenant to such buildings, structures
and other improvements presently situated upon the Land (collectively,
the "Leased Improvements"), including the Facility;
(c) all easements, rights and appurtenances relating to the
Land and to the Leased Improvements;
(d) all equipment, machinery, fixtures, and other items of
property required or incidental to the use of the Leased Improvements
as a hotel, including all components thereof, now and hereafter
permanently affixed to or incorporated in the Leased Improvements,
including, without limitation, all furnaces, boilers, heaters,
electrical equipment, heating, plumbing, lighting, ventilating,
refrigerating, incineration, air and water pollution control, waste
disposal, air-cooling and air-conditioning systems and apparatus,
sprinkler systems and fire and theft protection equipment, all of which
to the greatest extent permitted by law are hereby deemed by the
parties hereto to constitute real estate, together with all
replacements, modifications, alterations and additions thereto
(collectively, the "Fixtures");
-1-
<PAGE> 8
(e) all existing leases of space within the Leased Property
(including any security deposits or collateral held by Lessor pursuant
thereto), which space leases, if any, are listed on Exhibit B attached
hereto and incorporated by reference; and
(f) all contract rights, trade names, logos and other
intangible property of Lessor with respect to the operation of the
existing hotel business conducted on the Leased Property, including
without limitation, all rights relating to the Franchise Agreement.
(g) the furniture, fixtures and equipment listed or referred
to on Exhibit C attached hereto and incorporated by reference.
THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION
OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF
PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL CURRENT
AND FUTURE COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS (NOT
LIMITED TO ITEMS OF RECORD) INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE
LIEN OF FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND
INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED
PROPERTY OR BY AN ACCURATE SURVEY THEREOF.
1.3 TERM. (a) The term of the Lease (the "Term") shall
commence on the date that Lessor acquires the Leased Premises (the "Commencement
Date") and shall end on December 31, 2006, unless sooner terminated in
accordance with the provisions hereof.
(b) Subject to the conditions set forth below, Lessee shall
have the right, exercisable by delivering written notice to Sublessor at any
time during the last twelve (12) months of the Term but in no event later than
ninety (90) days prior to the expiration of the Term, to elect to extend the
term of this Lease for a period of five (5) years on the same terms and
conditions set forth herein except (i) that Lessee shall have no further right
to extend the term hereof, and (ii) Base Rent and Percentage Rent shall be
adjusted as the parties may agree, and if the parties do not, in the sole
discretion of each party, reach agreement on such adjustment in such rent by the
expiration of the Term, then the Base Rent for such extended term shall be equal
to the greater of (x) the then current Base Rent and (y) one hundred forty
percent (140%) of the initial Base Rent set forth above. The parties agree that
any adjusted rent calculation shall not be based on the net income or net
profits of Lessee.
1.4 BUILDING CONTRACTS. Lessee acknowledges and agrees that
the Leased Property is subject to the following contracts relating to the use,
operation and maintenance thereof:
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(a) Laundry Equipment Lease; and
(b) those certain service and other contracts
identified on EXHIBIT B attached hereto and made a part hereof
(collectively the "Service Contracts").
1.5 MANAGEMENT AGREEMENT; ASSIGNMENT AND ASSUMPTION. Upon the
execution and delivery of this Lease, (a) Lessee shall enter into the Hotel
Management Agreement in the form of EXHIBIT D attached hereto and made a part
hereof; (b) all of Lessor's right, title and interest in the Leases shall be
assigned to, and assumed by, Lessee, pursuant to an Assignment and Assumption of
Leases in the form of EXHIBIT E attached hereto and made a part hereof; and (c)
all of Lessor's rights and interests in the Service Contracts shall be assigned
to, and assumed by, Lessee pursuant to an Assignment and Assumption of Service
Contracts in the form of EXHIBIT F attached hereto and made a part hereof.
ARTICLE II
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DEFINITIONS. For all purposes of this Lease, except as
otherwise expressly provided or unless the context otherwise requires, (a) the
terms defined in this Article have the meanings assigned to them in this Article
and include the plural as well as the singular, (b) all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance with
generally accepted accounting principles as are at the time applicable, (c) all
references in this Lease to designated "Articles," "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Lease and (d) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Lease as a whole and not to any particular
Article, Section or other subdivision.
"Additional Charges". As defined in Section 3.4.
"Affiliate". As used in this Lease the term "Affiliate" of a
Person shall mean (a) any Person that, directly or indirectly, controls or is
controlled by or is under common control with such Person, (b) any other Person
that owns, beneficially, directly or indirectly, five percent (5%) or more of
the outstanding capital stock, shares or equity interests of such Person, or (c)
any officer, director, employee, partner or trustee of such Person or any Person
controlling, controlled by or under common control with such Person (excluding
trustees and persons serving in similar capacities who are not otherwise an
Affiliate of such Person). For the purposes of this definition, "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the ownership
of voting securities, partnership interests or other equity interests.
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"Audited Consolidated Financials". Consolidated Financials
audited by a firm of independent certified public accountants acceptable to
Lessor in its sole discretion.
"Award". Compensation, sums or anything of value awarded, paid
or received on a total or partial Condemnation.
"Base Rent". The annual sum of $1,000,000, payable in advance
in monthly installments as provided in Section 3.1(a), on or before the tenth
(10th) day of each calendar month of the Term; provided however, that the first
monthly payment of Base Rent shall be payable on the Commencement Date and that
the first and last monthly payments of Base Rent shall be prorated as to any
partial month (subject to adjustment as provided in Sections 14.5, 15.2, 15.4,
and 15.5).
"Business Day". Each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which national banks in the City of Phoenix,
Arizona, or in the municipality wherein the Leased Property is located, are
closed.
"Capital Expenditures". As defined in Section 3.7.
"CERCLA". The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Code". The Internal Revenue Code of 1986, as amended.
"Commencement Date". As defined in Section 1.2.
"Condemnation". A Taking resulting from (1) the exercise of
any governmental power, whether by legal proceedings or otherwise, by a
Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor,
either under threat of condemnation or while legal proceedings for condemnation
are pending.
"Condemnor". Any public or quasi-public authority, or private
corporation or individual, having the power of Condemnation.
"Consolidated Financials". For any fiscal year (or other
period for which such statements are prepared) for Lessee and its consolidated
subsidiaries, a statement of financial position as of such fiscal year (or other
period) end date and statements of operations, cash flows and retained earnings
for the fiscal year (or other period) then ended, all in comparative form,
together with notes thereto, prepared in accordance with generally accepted
accounting principles.
"Consolidated Net Worth". The sum of consolidated
shareholders' equity of Lessee and any consolidated subsidiaries as shown on the
most recent Audited Consolidated Financials.
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"Consumer Price Index". The "U.S. City Average, All Items"
Consumer Price Index for All Urban Consumers published by the Bureau of Labor
Statistics of the United States Department of Labor (Base: 1982-1984=100), or
any successor index thereto. If (i) a significant change is made in the number
or nature (or both) of items used in determining the Consumer Price Index, or
(ii) the Consumer Price Index shall be discontinued for any reason, the Lessor
shall request that the Bureau of Labor Statistics furnish a new index comparable
to the Consumer Price Index, together with information which will make possible
a conversion to the new index in computing the adjusted Base Rent hereunder. If
for any reason the Bureau of Labor Statistics does not furnish an index and such
information, the parties will instead mutually select, accept and use such other
index or comparable statistic on the cost of living in Washington, D.C. that is
computed and published by an agency of the United States or a responsible
financial periodical of recognized authority.
"Date of Taking". The date the condemnor has the right to
possession of the Property being condemned.
"Encumbrance". As defined in Article XXXIV.
"Environmental Authority". Any federal, state, local or
foreign department, agency or other body or component of any Government that
administers, oversees or enforces any Environmental Laws.
"Environmental Laws". All federal, state, county, municipal
and other governmental statutes, laws, rules, orders, regulations, ordinances,
judgments, decrees, injunctions and duties under the common law relating to
occupational health and safety, the protection of human health, and pollution of
the indoor and outdoor environment (including without limitation, ambient air,
surface water, ground water, (and surface or subsurface strata), including
without limitation laws and regulations relating to emissions, discharges,
Releases or threatened Releases of Hazardous Materials or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials. Environmental Laws include, but
are not limited to, CERCLA, EPCRA, FIFRA, RCRA, SARA and TSCA.
"Environmental Liabilities". Any and all obligations to pay
the amount of any judgment or settlement, the cost of complying with any
settlement, judgment or order for injunctive or other equitable relief, the cost
of compliance or corrective action in response to any notice, demand or request
from an Environmental Authority, the amount of any civil penalty or fine or
criminal fine, and any court costs and reasonable amounts for attorney's fees,
fees for witnesses, consultants and experts, and costs of investigation and
preparation for defense of any claim or any Proceeding, regardless of whether
such Proceeding is threatened, pending or completed, that may be or have been
asserted against or imposed upon Lessor, Lessee, any Predecessor, the Leased
Property or any property used therein and arising out of:
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(a) Failure of Lessee, any Predecessor or
the Leased Property to comply at any time with all
Environmental Laws;
(b) Presence of any Hazardous Materials on,
in, under, at or in any way affecting the Leased Property;
(c) A Release at any time of any Hazardous
Materials on, in, at, under or in any way affecting the Leased
Property or any off-site property or facility;
(d) Identification of Lessee, or any
Predecessor as potentially responsible party under CERCLA or
under any Environmental Law similar to CERCLA;
(e) Presence at any time of any above ground
and/or underground storage tanks as defined in RCRA or in any
applicable Environmental Law on, in at or under the Leased
Property or any off-site property or facility; or
(f) Any and all claims for injury or damage
to persons or property arising out of exposure to Hazardous
Materials originating or located at the Leased Property, or
resulting from operation thereof.
"Environmental Liability". Either of an Identified
Environmental Liability or an Unidentified Environmental Liability.
"EPCRA". The Emergency Planning and Community Right
to Know Act, as amended.
"Event of Default". As defined in Section 16.1.
"Facility". The hotel and/or other facility offering
lodging and other services or amenities being operated or proposed to be
operated on the Leased Property which shall be included in the Leased
Improvements. The Facility is more particularly described on Exhibit D attached
hereto and incorporated by reference.
"FIFRA". The Federal Insecticide, Fungicide, and
Rodenticide Act as amended.
"Fiscal Year". The 12-month period from January 1 to
December 31.
"Fixtures". As defined in Section 1.1.
"Food and Beverage Revenues". Gross revenues,
receipts and income of any kind (whether on a cash or credit basis) paid,
collected or accrued and
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derived directly or indirectly by Lessee from: (i) the sale, for on-site
consumption at the Leased Property or through off-site catering services, of
food and nonalcoholic beverages, including sales attributable to guest rooms,
banquet rooms, meeting rooms, the restaurant, the lounge, the bar and other
similar rooms; (ii) the sale of wine, beer, liquor or other alcoholic beverages,
including sales attributable to the restaurant, the bar, the lounge, guest
rooms, meeting rooms, banquet rooms, off-site catering or any location at the
Leased Property; (iii) cover charges and audio-visual rental charges related to
banquet, ballroom or meeting room events, and (iv) banquet and meeting room
revenues, including room rental charges from such banquet and meeting rooms.
Such revenues shall not include the following:
(a) Room and Other Revenues as defined below;
(b) Any gratuities or service charges added to a
customer's bill or statement in lieu of a gratuity, which gratuity or
charge Lessee is obligated to pay to or which was paid directly to an
employee;
(c) Customary and reasonable credits, rebates,
refunds or negative adjustments to guests;
(d) Sales taxes and any additional taxes imposed on
the sale of alcoholic beverages; and
(e) Amounts attributable to customary and reasonable
allowances, give aways and promotions.
"Franchise Agreement". The franchise agreements or
license agreements currently in effect with Franchisor, and any amendments,
replacements or extensions thereof or other agreements relating thereto
hereafter implemented with the prior approval of Lessor, under which the
Facility is operated.
"Franchisor". Best Western International, Inc.,
InnSuites Licensing Corp. or such other national hotel franchisor approved by
Lessor in accordance with Section 34.3.
"Government". The United States of America, any
state, county, municipality, local government, district or territory thereof,
any foreign nation, any state, district, department, territory or other
political division thereof, or any administrative agency, board, commission,
bureau or political subdivision of any of the foregoing.
"Ground Lease". The ground lease between Lessor and
_______________________ dated as of ________________, as amended, executed
with respect to the Land.
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"Ground Rent". All rent payable by Lessor as
sublessee with respect to the Ground Lease.
"Hazardous Materials". All chemicals, pollutants,
contaminants, wastes and toxic substances, including without limitation:
(a) Solid or hazardous waste, as defined in RCRA or
in any Environmental Law;
(b) Hazardous substances, as defined in CERCLA or in
any Environmental Law;
(c) Toxic substances, as defined in TSCA or in any
Environmental Law;
(d) Insecticides, fungicides, or rodenticides, as
defined in FIFRA or in any Environmental Law; and
(e) Gasoline or any other petroleum product or
byproduct, polychlorinated biphenyls, asbestos, radon and urea
formaldehyde.
"Impositions". Collectively, all taxes (including,
without limitation, all personal property, sales and use (including sales, rent
or occupancy taxes on Rent), single business, gross receipts, transaction,
privilege, rent or similar taxes as the same relate to or are imposed upon
Lessee, its personal property or its business conducted upon the Leased
Property), assessments (including, without limitation, all assessments for
public improvements or benefit, whether or not commenced or completed prior to
the date hereof and whether or not to be completed within the Term), water,
sewer or other rents and charges, excises, tax inspection, authorization and
similar fees and all other governmental charges, in each case whether general or
special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Leased Property or the business conducted thereon by
Lessee (including all interest and penalties thereon caused by any failure in
payment by Lessee), which at any time prior to, during or with respect to the
Term may be assessed or imposed on or with respect to or be a lien upon (a)
Lessor's interest in the Leased Property, (b) the Leased Property, or any part
thereof or any rent therefrom or any estate, right, title or interest therein,
or (c) any occupancy, operation, use or possession of, or sales from, or
activity conducted on or in connection with the Leased Property, or the leasing
or use of the Leased Property or any part thereof by Lessee. Notwithstanding the
foregoing, Impositions shall not include (1) any Real Estate Taxes on the Leased
Property, (2) any personal property taxes on Lessor's personal property, (3) any
tax based on net income (whether denominated as an income, franchise or capital
stock or other tax) imposed on Lessor or any other Person other than Lessee and
Affiliates of Lessee, (4) any net revenue tax of Lessor or any other Person
(other than Lessee or an Affiliate of Lessee), (5) any
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tax imposed with respect to the sale, exchange or other disposition by Lessor of
any Leased Property or the proceeds thereof, or (6) any single business, gross
receipts (other than a tax on any rent received by Lessor from Lessee),
transaction, privilege or similar taxes as the same relate to or are imposed
upon Lessor, except to the extent that any tax, assessment, tax levy or charge
that Lessee is obligated to pay pursuant to the first sentence of this
definition, and that is in effect any time during the Term hereof, is totally or
partially repealed, and a tax, assessment, tax levy or charge set forth in
clause (1) through (6) is levied, assessed or imposed expressly in lieu thereof.
"Indemnified Environmental Liability". As defined in
Section 8.3.
"Indemnified Party; Indemnitee". Either of a Lessee
Indemnified Party or a Lessor Indemnified Party.
"Indemnifying Party". Any party obligated to
indemnify an Indemnified Party pursuant to Section 8.3 or Article XXII.
"Insurance Requirements". All terms of any
insurance policy required by this Lease, any Franchisor or any Legal
Requirement, and all requirements of the issuer of any such policy as to such
policy and/or the Leased Property.
"Inventory". All inventories, supplies, guest
supplies, food and beverage inventory, and consumable merchandise used in
connection with the operation of the Facility, but excluding all such items to
the extent owned by concessionaires, tenants, subtenants, licensees or other
Persons occupying all or a portion of the Leased Property as permitted by this
Lease.
"Land". As defined in Section 1.1(a).
"Lease". This Lease.
"Leased Improvements; Leased Property". Each as
defined in Section 1.1.
"Legal Requirements". All federal, state, county,
municipal and other governmental statutes, laws, rules, orders, regulations,
ordinances, judgments, decrees and injunctions affecting either the Leased
Property or the maintenance, construction, use or alteration thereof (whether by
Lessee or otherwise), whether or not hereafter enacted and in force, including
(a) all Environmental Laws, and (b) any laws, rules or regulations that may (1)
require repairs, modifications or alterations in or to the Leased Property or
(2) in any way adversely affect the use and enjoyment thereof; and all permits,
licenses and authorizations and regulations relating thereto and all covenants,
agreements, restrictions and encumbrances contained in any instruments, either
of record or known to Lessee (other than
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encumbrances hereafter created by Lessor without the consent of Lessee), at any
time in force affecting the Leased Property.
"Lending Institution". Any insurance company,
investment banking company, credit company, federally insured commercial or
savings bank, national banking association, savings and loan association,
employees welfare, pension or retirement fund or system, corporate profit
sharing or pension trust, college or university, or real estate investment
trust, including any corporation qualified to be treated for federal tax
purposes as a real estate investment trust, such trust having a net worth of at
least $10,000,000 and REMIC, conduit lenders.
"Lessee". The Lessee designated on this Lease and its
permitted successors and assigns.
"Lessee Indemnified Party". Lessee and (i) any
Affiliate of Lessee; (ii) any Person against whom any liability may be asserted
as a result of a direct or indirect ownership interest (including a
shareholder's interest) in Lessee; (iii) the officers, directors, shareholders,
employees, agents and representatives of Lessee; and (iv) the respective heirs,
personal representatives, successors and assigns of any of the foregoing
Persons.
"Lessee's Personal Property". As defined in Section
6.2.
"Lessor". The Lessor designated on this Lease and
its successors and assigns.
"Lessor Indemnified Party". Lessor and (i) any
Affiliate of Lessor; (ii) any Person against whom any liability may be asserted
as a result of a direct or indirect ownership interest (including an interest as
a partner) in Lessor; (iii) the employees, agents and representatives of Lessor;
(iv) Realty ReFund Trust, its officers, trustees, shareholders, employees and
agents; and (v) the respective heirs, personal representatives, successors and
assigns of any of the foregoing Persons.
"Notice". A notice given pursuant to Article XXXII.
"Officer's Certificate". A certificate of Lessee in
form and substance reasonably acceptable to Lessor signed by the chief operating
officer and the chief financial officer or another officer authorized so to sign
by the board of directors or by-laws of Lessee, or any other person whose power
and authority to act has been authorized by delegation in writing by any such
officer.
"Overdue Rate". On any date, a rate equal to 1% per
month, but in no event greater than the maximum rate then permitted under
applicable law.
"Partial Fiscal Year". Any portion of a Fiscal Year
which falls during the Term hereof.
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"Payment Date". Any due date for the payment of any
installment of Rent.
"Percentage Rent". As defined in Section 3.1(b).
"Person". Any individual, corporation, general or
limited partnership, limited liability company, limited liability partnership,
stock company or association, joint venture, association, company, trust, bank,
trust company, land trust, real estate investment trust, business trust, or
other entity and government and agency and political subdivision thereof.
"Predecessor". Any Person whose liabilities arising
under any Environmental Law relating to the Leased Property have or may have
been retained or assumed by Lessee, either contractually or by operation of law.
"Primary Intended Use". As defined in Section
7.2(b).
"Prime Rate". The rate of interest announced
publicly by Citibank N.A., in New York, New York from time to time, as such
bank's base rate. If no such rate is announced or if such rate is discontinued,
then such other rate as Lessor may reasonably designate.
"Proceeding". Any judicial action, suit or
proceeding (whether civil or criminal), any administrative proceeding (whether
formal or informal), any investigation by a governmental authority or entity
(including a grand jury), and any arbitration, mediation or other non-judicial
process for dispute resolution.
"RCRA". The Resource Conservation and Recovery Act,
as amended.
"Real Estate Taxes". All real estate taxes
(including any applicable interest and penalties thereon), including general and
special assessments, if any, and possessory interest taxes which are imposed
upon the Land and/or the Leased Property.
"Release". A "Release" as defined in CERCLA or in
any Environmental Law, unless such Release has been properly authorized and
permitted in writing by all applicable Environmental Authorities or is allowed
by such Environmental Law without authorizations or permits.
"Rent". Collectively, the Base Rent, Percentage Rent
and Additional Charges.
"Room and Other Revenues". All gross revenues,
receipts and income of any kind (whether on a cash or credit basis) paid,
collected or accrued and derived directly or indirectly by Lessee from: (i) the
rental of guest rooms; (ii) gift
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shop operations; (iii) fees collected from telephone, game room and guest
laundry services; and (iv) guaranteed no show reservations, space rentals
(excluding banquet and meeting room space rentals), discounts earned, vending
machines (but only to the extent of the net proceeds therefrom), valet services,
movie services (but only to the extent of the net proceeds therefrom), and
commissions earned; and (v) all other revenues in connection with the use or
operation of the Leased Property and all services or activities provided
thereon, including revenue derived from subtenants, concessionaires, and
licensees, all as determined in accordance with generally accepted accounting
principles. Notwithstanding the previous sentence, Room and Other Revenues shall
not include:
(a) The amount of any credits, rebates, refunds or
adjustments to customers, guests or patrons;
(b) Sales or use taxes;
(c) Interest income;
(d) Gratuities paid or payable to Persons other than
Lessee or its Affiliate;
(e) Gains from the sale of assets out of the ordinary
course of business; and
(f) Food and Beverage Revenues as defined above.
"SARA". The Superfund Amendments and Reauthorization
Act of 1985, as amended.
"State". The State or Commonwealth of the United
States in which the Leased Property is located.
"Subsidiaries". Corporations in which Lessee owns,
directly or indirectly, more than fifty percent (50%) of the voting stock or
control, as applicable.
"Taking". A taking or voluntary conveyance during
the Term hereof of all or part of the Leased Property, or any interest therein
or right accruing thereto or use thereof, as the result of, or in settlement of,
any Condemnation or other eminent domain proceeding affecting the Leased
Property whether or not the same shall have actually been commenced.
"Term". As defined in Section 1.3.
"TSCA". The Toxic Substances Control Act, as
amended.
"Unavoidable Delay". A delay due to strikes,
lock-outs, labor unrest, inability to procure materials, power failure, acts of
God, governmental
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restrictions, enemy action, civil commotion, fire, unavoidable casualty or other
causes beyond the control of the party responsible for performing an obligation
hereunder, provided that lack of funds shall not be deemed a cause beyond the
control of either party hereto unless such lack of funds is caused by the
failure of the other party hereto to perform any obligations of such party under
this Lease.
"Uneconomic For Its Primary Intended Use". A state
or condition of the Facility such that in the good faith judgment of Lessor it
is uneconomic to operate the Facility for its Primary Intended Use, taking into
account, among other relevant factors, the number of usable rooms and projected
revenues.
"Uniform System". The Uniform System of Accounts for
Hotels (8th Revised Edition, 1986) as published by the Hotel Association of New
York City, Inc. as same may hereafter be revised.
"Unsuitable For Its Primary Intended Use". A state
or condition of the Facility such that, in the good faith judgment of Lessor,
due to casualty damage or loss through Condemnation, the Facility cannot be
operated or cannot function as an integrated hotel facility consistent with
standards applicable to a well maintained and operated hotel.
ARTICLE III
-----------
3.1 RENT. Lessee will pay to Lessor in lawful money
of the United States of America which shall be legal tender for the payment of
public and private debts, in immediately available funds, at Lessor's address
set forth in Article XXXII hereof or at such other place or to such other
Person, as Lessor from time to time may designate in a Notice, (A) the higher of
(i) Base Rent or (ii) Percentage Rent and (B) Additional Charges, during the
Term, as follows:
(a) BASE RENT: The annual sum of $____________,
payable in advance in consecutive monthly installments, on or before the tenth
(10th) day of each calendar month of the Term ("Base Rent") in an amount equal
to the product of the Base Rent multiplied by the applicable Monthly Factor,
provided, however, that the first monthly payment of Base Rent shall be payable
on the Commencement Date and that the first and last monthly payments of Base
Rent shall be prorated as to any partial month (subject to adjustment as
provided in Sections 14.5, 15.2, 15.4, and 15.5); and provided, further, that
Base Rent shall be increased by increases in CPI as set forth in Subsection (c)
below.
(b) PERCENTAGE RENT: For each Fiscal Year and
Partial Fiscal Year during the Term commencing with the Fiscal Year or Partial
Fiscal Year ending December 31, 1997, Lessee shall pay percentage rent
("Percentage Rent"), if such Percentage Rent is in excess of Base Rent for such
Fiscal Year or Partial Fiscal Year, in an amount calculated as follows:
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(i) The sum of (A) __% of the first $_________ in Room and Other
Revenues for such Fiscal Year or Partial Fiscal Year, (B) __% of
all amounts above $_________ up to $_________ in Room and Other
Revenues for such Fiscal Year or Partial Fiscal Year, and (C) __%
of all Room and Other Revenues in excess of $_________ for such
Fiscal Year or Partial Fiscal Year (the preceding dollar figures
being referred to hereinafter as the "Threshold Amounts", such
Threshold Amounts to be prorated on a per diem basis for any
Partial Fiscal Year), plus
(ii) 5% of all Food and Beverage Revenues in excess of $200,000
for such Fiscal Year or Partial Fiscal Years.
(c) CPI ADJUSTMENTS TO THE THRESHOLD AMOUNTS AND BASE
RENT. For each Fiscal Year of the Term beginning on or after January 1, 1998,
the Threshold Amounts and Base Rent shall be adjusted from time to time as
follows:
If the most recently published Consumer Price Index as of the last day
of the last month (the "Comparison Month") of any Fiscal Year is
different than the average Consumer Price Index for the twelve (12)
month period prior thereto, each of Base Rent and the Threshold Amount
for the next Fiscal Year shall be adjusted by the percentage change in
the Consumer Price Index calculated by multiplying the Base Rent and
each Threshold Amount by the quotient obtained by dividing the Consumer
Price Index for the most recent Comparison Month by the Consumer Price
Index for the month which is exactly twelve (12) months prior thereto.
Adjustments in the Threshold Amounts and Base Rent
shall be effective on the first day of the first calendar month of the Fiscal
Year to which such adjusted Threshold Amounts apply. In the event of casualty
and corresponding payment of rent out of the proceeds of rental interruption
insurance provided pursuant to Section 13.1(c), the Percentage Rent shall be
based upon the higher of (i) actual revenues, (ii) revenues for the same period
in the previous Fiscal Year (whether or not during the Term), or (iii) projected
revenues used in computing the final insurance settlement.
(d) MONTHLY FACTORS. For purposes of this Section
3.1, the applicable Monthly Factors shall be as follows:
January - .___ April - .___ July - .___ October - .___
February - .___ May - .___ August - .___ November - .___
March - .___ June - .___ September - .___ December - .___
3.2 PAYMENT OF PERCENTAGE RENT. Percentage Rent shall
be due and payable quarterly on or before the thirtieth (30th) day after the
last day of each quarter during the Term. Additionally, an Officer's
Certificate, setting forth the
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calculation of such rent payment for such quarter, shall be delivered to Lessor
quarterly, together with such quarterly Percentage Rent payment after each
quarter of each Fiscal Year (or part thereof) during the Term. Such quarterly
payment shall be based on the formula set forth in Section 3.1(b), but, in
calculating the Revenue Computations for each quarter, gross Room and Other
Revenues for the year to date shall be annualized by dividing such sum by the
number of months which have passed year to date (including the current month)
and multiplying the result by 12. The resulting Percentage Rent amount shall be
multiplied by the number of months that have passed year-to-date (including the
current month) and divided by twelve (12). Payments of Base Rent and Percentage
Rent for the year to date shall be subtracted from the result to arrive at the
Percentage Rent payment due for that quarter. In no event, however, shall the
Percentage Rent for any quarter exceed the amount arrived at by applying the sum
of the Monthly Factors for the months that comprise the particular quarter to
the Annualized Revenue. The Revenue Computations shall be appropriately adjusted
to calculate Percentage Rent for partial years. There shall be no reduction in
the Base Rent regardless of the result of the Revenue Computations.
In addition, on or before March 1 of each year,
commencing with March 1, 1998, Lessee shall deliver to Lessor an Officer's
Certificate reasonably acceptable to Lessor setting forth the computation (based
on audited financial statements of Lessee) of the actual Percentage Rent that
accrued for each quarter of the Fiscal Year that ended on the immediately
preceding December 31 and shall pay to Lessor, with the delivery of the
Officer's Certificate, the amount of Percentage Rent due and payable for the
Fiscal Year then ended as shown in the Officer's Certificate, if any, that
exceeds the amount actually paid as Percentage Rent by Lessee for such Fiscal
Year. If the Percentage Rent actually due and payable for such Fiscal Year is
shown by such certificate to be less than the amount actually paid as Percentage
Rent for the applicable Fiscal Year, Lessor, at its option, shall reimburse such
amount to Lessee or credit such amount against the next quarter's Percentage
Rent payments; provided, however, that no Event of Default exists.
The obligation to pay Percentage Rent shall survive the
expiration or earlier termination of the Term. A final reconciliation, taking
into account, among other relevant adjustments, any adjustments which are
accrued after such expiration or termination date but which related to
Percentage Rent accrued prior to such termination date and Lessee's computation
of Percentage Rent due and payable, shall be made not later than ninety (90)
days after such expiration or termination date. Within such ninety (90) day
period, Lessee shall deliver to Lessor an Officer's Certificate setting forth
the final Percentage Rent amount payable to Lessor and payment of the amount
due, if any.
3.3 CONFIRMATION OF PERCENTAGE RENT. Lessee shall
utilize, or cause to be utilized, an accounting system for the Leased Property
in accordance with generally accepted accounting principles consistently applied
and the Uniform System, that will accurately record all data necessary to
compute Percentage Rent, and Lessee shall retain for at least four years after
the expiration of each Fiscal Year (and in any
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event until the reconciliation described in Section 3.2 for such Fiscal Year has
been made), reasonably adequate records conforming to such accounting system
showing all data necessary to compute Percentage Rent for the applicable Fiscal
Years. In the event of a conflict between generally accepted accounting
principles and the Uniform System, the Uniform System shall prevail. Lessor (or
its accountants or representatives), at its expense (except as provided herein),
shall have the right from time to time to audit the information that formed the
basis for the data set forth in any Officer's Certificate provided under Section
3.2 and, in connection with such audits, to examine all Lessee's records
(including supporting data and sales and excise tax returns) reasonably required
to verify Percentage Rent, subject to any prohibitions or limitations on
disclosure of any such data under Legal Requirements. If any such audit
discloses a deficiency in the payment of Percentage Rent, and either Lessee
agrees with the result of such audit or the matter is otherwise determined or
compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency,
as finally agreed or determined, together with interest calculated at the
Overdue Rate from the due date for the last quarterly payment of Percentage Rent
for the Fiscal Year to the date of payment thereof; provided, however, that as
to any audit that is commenced more than two (2) years after the date Percentage
Rent for any Fiscal Year is reported by Lessee to Lessor, the deficiency, if
any, with respect to such Percentage Rent, shall bear interest at the Overdue
Rate only from the date such determination of deficiency is made unless such
deficiency is the result of gross negligence or willful misconduct on the part
of Lessee. If any such audit discloses that the Percentage Rent actually due
from Lessee for any Fiscal Year exceed those reported by Lessee by more than
three percent (3%), Lessee shall pay the cost of such audit and examination. Any
proprietary information obtained by Lessor pursuant to the provisions of this
Section shall be treated as confidential, except that such information may be
used, subject to appropriate confidentiality safeguards, in any litigation
between the parties, and except further that Lessor may disclose such
information to prospective lenders or purchasers, their respective attorneys,
accountants and other representatives, or pursuant to any Legal Requirements.
The obligations of Lessee contained in this Section shall survive the expiration
or earlier termination of this Lease.
3.4 ADDITIONAL CHARGES. In addition to the Base Rent
and Percentage Rent, (a) Lessee also will pay and discharge as and when due and
payable all other amounts, liabilities, obligations, costs and expenses
necessary to perform its obligations hereunder and under the Franchise
Agreement, and (b) in the event of any failure on the part of Lessee to timely
pay any of those items referred to in clause (a) of this Section 3.4, Lessee
also will promptly pay and discharge every fine, penalty, interest and cost that
may be added for non-payment or late payment of such items (the items referred
to in clauses (a) and (b) of this Section 3.4 being additional rent hereunder
and being referred to herein collectively as the "Additional Charges"), and
Lessor shall have all legal, equitable and contractual rights, powers and
remedies provided either in this Lease or by statute or otherwise in the case of
non-payment of the Additional Charges as in the case of non-payment of the Base
Rent. If any installment of Base Rent, Percentage Rent or Additional Charges
(but only as to those
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Additional Charges that are payable directly to Lessor) shall not be paid on its
due date, Lessee will pay Lessor on demand, as Additional Charges, a late charge
(to the extent permitted by law) computed at the Overdue Rate on the amount of
such installment, from the due date of such installment to the date of payment
thereof. To the extent that Lessee pays any Additional Charges to Lessor
pursuant to any requirement of this Lease (which charges are not payable to
Lessor), Lessee shall be relieved of its obligation to pay such Additional
Charges to the entity to which they would otherwise be due and Lessor shall pay
same from monies received from Lessee.
3.5 ANNUAL REVENUE PROJECTIONS. No later than thirty
(30) days prior to the commencement of each Fiscal Year, Lessee shall submit
Annual Revenue Projections for such Fiscal Year to Lessor. The Annual Revenue
Projections shall be subject to Lessor's prior approval as to form and content
and shall be in such form and shall contain such information as Lessee included
in its annual revenue projections in accordance with its past practice, and
shall, in any event, include the following:
(a) Lessee's reasonable estimate of Room and Other
Revenues for the Fiscal Year itemized on a monthly basis, as such
estimates may be revised or replaced from time to time by Lessee; and
(b) A projection of the Percentage Rent payable for
such Fiscal Year.
3.6 ANNUAL CAPITAL EXPENDITURES BUDGET. Subject to
the provisions of Sections 8.1, 9.2 and 19.1(a), Lessor, at its sole expense,
shall be responsible for all Capital Expenditures as defined in this Section
3.6, provided, however, Lessor shall not be obligated to make any Capital
Expenditure the need for which Lessor disputes or objects to in good faith. Not
later than forty-five (45) days prior to the commencement of each Fiscal Year or
Partial Fiscal Year, Lessee shall submit to Lessor for Lessor's approval,
Lessee's proposed Annual Capital Expenditures Budget. The Annual Capital
Expenditures Budget (the "Capital Expenditures Budget") shall be subject to
Lessor's approval and shall contain the following:
(a) Lessee's estimate of the amounts to be expended
during the upcoming Fiscal Year to renew, replace or refurbish FF&E, and a
reasonably detailed description of the expenses to be incurred, and Lessee's
estimate of the amount that will be expended during the upcoming Fiscal Year on
capital repairs, replacements and improvements to the Leased Improvements,
together with a reasonably detailed description of the capital repairs,
replacements and improvements that will be undertaken. The expenditures referred
to in this Section 3.6 are referred to in this Lease as "Capital Expenditures".
(b) A capital renewal program showing the major
anticipated Capital Expenditures and that will be incurred over the ensuing
three (3) year and five (5) year periods. If Lessor shall not give its approval
to the Annual Capital
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Expenditures Budget, Lessee shall revise the Annual Capital Expenditures Budget,
as may be required to obtain Lessor's consent thereto.
3.7 CAPITAL EXPENDITURE FUND. Lessor shall
establish and maintain an account to provide a reserve for the Capital
Expenditures costs at the Facility and each other facility covered by a
Percentage Lease. Such Account shall be funded with an initial balance of
_____________________ and 00/100 Dollars ($_________) upon or prior to the
execution of this Percentage Lease Agreement. In addition, Lessor shall deposit
in such account a quarterly amount equal to four percent (4%) of the Room and
Other Revenues for each such Facility.
3.8 APPLICATION OF CAPITAL EXPENDITURE FUND. When
amounts are budgeted and agreed to be spent for Capital Expenditures, Lessee
shall be responsible for the implementation of the Capital Expenditure program
and shall make periodic draws on the Capital Expenditure Fund by the
presentation to Lessor of appropriate documentation establishing the amounts to
be paid in accordance with the Capital Expenditure Budget, and including such
supporting documentation as Lessor may reasonably require. Lessor and Lessee
shall cooperate in good faith to accomplish such implementation as quickly as
practicable in accordance with sound business practices.
3.9 UNBUDGETED CAPITAL EXPENDITURES. No
disbursements shall be made from the Capital Expenditure Fund which are not in
accordance with the Capital Expenditure Budget. However, Lessor and Lessee
recognize that, in certain circumstances, Capital Expenditures which were not
budgeted may be necessary. In the following circumstances, disbursements shall
be made for Capital Expenditures from the Capital Expenditures Fund even though
such expenditures were not included in the Capital Expenditure Budget:
(i) When Lessor and Lessee agree to an addition to
the Capital Expenditure Budget;
(ii) When, due to circumstances beyond the control of
Lessee or Lessor, expenditures for a project exceed the budgeted
amount;
(iii) When the Capital Expenditure is necessary on an
emergency basis for any reason including the comfort and safety of
guests or employees; and
(iv) For DE MINIMIS Capital Expenditures not in
excess of $10,000 per item and not in excess, on an aggregate basis, of
$25,000 per year.
3.10 AGENT METHOD FOR PURCHASES OF CAPITAL
EXPENDITURES. (a) Lessor hereby retains Lessee as an independent contractor on
the terms contained
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in this Agreement to act for and on behalf of Lessor as Lessor's agent in
connection with the implementation of the Capital Expenditure program for the
Facility. Lessee's cost analysis shall be based upon the plans and furnishings
set forth in the specifications and other written information agreed to be
implemented under the Capital Expenditure Budget. Lessee will be responsible for
negotiating purchases of Capital Expenditures on Lessor's behalf. All purchases
will be based on Lessee's actual cost, net of trade discounts (including cash
discounts, where applicable).
(b) Lessor acknowledges and agrees that purchase
orders relating to any Capital Expenditure for the Project will be executed by
Lessee as agent for and on behalf of Lessor. Lessor further acknowledges and
agrees that Lessee shall have no liability under this Agreement or otherwise for
payment of the Capital Expenditure or for freight or storage related to the
Capital Expenditure provided that no expenditures shall be made except in
accordance with the Budget and as provided above. All down payments as well as
payment of all vendor invoices are the responsibility and obligation of Lessor.
Lessor acknowledges that a delay on the part of Lessor relating to any required
deposits or payments can result in delivery delays of the Capital Expenditure.
The timing of the making of all purchase orders and delivery schedules will be
established by mutual agreement of Lessor and Lessee.
(c) Lessee shall not be obligated under any
circumstances to (but in its discretion may) use its own funds for the purpose
of making down payments (either at the time purchase orders are processed or
otherwise) or making progress or final payments to Capital Expenditure vendors.
Taxes, warehouse, delivery, redelivery, restocking, installation and similar
charge, including, but not limited to delivery and storage costs, shall be
obligations of Lessor and Lessor agrees to perform such obligations in a timely
manner. All vendor invoices shall be addressed to and issued directly to Lessor.
(d) Lessor shall designate a representative
authorized to act on its behalf with respect to the Leased Property.
(e) Lessor agrees to reimburse Lessee for all
out-of-pocket expenses (including long distance and messenger fees) incurred by
Lessee on behalf of or in connection with the Capital Expenditures for the
Facility. All such reimbursements shall be paid monthly as incurred upon receipt
of bills or other evidence reasonably satisfactory to Lessor.
(f) Lessor shall furnish to Lessee from time to time
all information, take such actions and process such draws as may be reasonably
requested by Lessee or otherwise required under this Agreement in a timely
manner as reasonably necessary for the orderly progress of work under this
Agreement. Lessee shall have no responsibility or be liable in any manner
whatsoever for any delay caused by information to be supplied or actions to be
taken by Lessor, its agents or other independent contractors working on or at
the Facility or caused by Lessor's failure to timely pay vendors.
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<PAGE> 26
(g) If Lessor desires to change, modify or alter the
quantity or specifications of any Capital Expenditure purchased by Lessee in
writing, Lessee will endeavor to satisfy any such request. Lessor acknowledges
and understands that Lessee's ability to comply with requested changes,
modifications or alterations is subject to acceptance and performance on the
part of the vendors and supplier with whom Lessee has entered into agreements
for and on behalf of Lessor. Lessee assumes no liability or responsibility for
its inability to comply with Lessor's request for changes, modifications or
alterations under this paragraph.
(h) Lessor acknowledges and agrees that Lessee shall
not be responsible or liable to Lessor for any losses incurred or damages
suffered by Lessor due to delays, failures or omissions of third party vendors
in delivery of Capital Expenditure. Lessor agrees to hold Lessee harmless for
any such losses or damages. Lessor assumes ownership of Capital Expenditure at
the time of shipment of Capital Expenditure from any third party vendor or
manufacturer and any claims Lessor may have against any freight company in
connection with the delivery or shipment of the Capital Expenditure are the
responsibility of Lessor.
(i) LESSOR ACKNOWLEDGES AND AGREES THAT LESSEE
MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, RELATING TO QUALITY, FITNESS
OR CAPACITY OF THE WORK DONE PURSUANT TO CAPITAL EXPENDITURES. Lessor, as
purchaser of the Capital Expenditure, shall have the benefit of any guarantees
and warranties, either express or implied, from vendors and suppliers of the
Capital Expenditure, but Lessee shall have no liability for any such third party
guarantees or warranties. Lessee will use its best efforts on Lessor's behalf to
obtain proper service for the replacement or correction of unsatisfactory
Capital Expenditure, but Lessee does not warrant its ability to obtain such
service and Lessee shall have no obligation or responsibility to replace or
correct any such unsatisfactory Capital Expenditure.
(j) Except with respect to matters arising from
Lessee's misconduct or Lessee's negligence, Lessor agrees to indemnify and hold
Lessee, its directors and officers harmless from and against any and all claims,
suits, costs, liabilities, obligations, losses and damages whatsoever arising
out of or in connection with the work done pursuant to Capital Expenditures, the
use of results of Capital Expenditures in or at the Project and the payment of
any and all sales, use or other taxes (excepting federal, state and local income
taxes relating to Lessee's business).
(k) Lessor shall be responsible for and shall pay
all applicable sales and use taxes arising as a result of the purchase or use of
the Capital Expenditures or Lessor shall deliver appropriate exemption
certificates.
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ARTICLE IV
----------
4.1 PAYMENT OF TAXES AND IMPOSITIONS. Lessor shall
pay all property taxes (including the items in clauses (1) through (6) of the
definition of "Impositions" set forth in Article II). Subject to Article XII
relating to permitted contests, each party will pay, or cause to be paid, all
Impositions imposed on each of them, respectively, before any fine, penalty,
interest or cost may be added for non-payment, such payments to be made directly
to the taxing or other authorities where feasible, and will promptly furnish to
the other party copies of official receipts or other satisfactory proof
evidencing such payments; provided, however, Lessee shall pay all Impositions in
respect of the Leased Property and this Lease (other than fees, property taxes
and taxes imposed on Lessor's income from the Leased Property). Lessor and
Lessee shall, upon request of the other, provide such data as is maintained by
the party to whom the request is made with respect to the Leased Property as may
be necessary to prepare any required returns and reports. Lessee shall file all
personal property tax returns in such jurisdictions where it is legally required
to so file. Lessor, to the extent it possesses the same, and Lessee, to the
extent it possesses the same, will provide the other party, upon request, with
cost and depreciation records necessary for filing returns for any property so
classified as personal property. Where Lessor is legally required to file
personal property tax returns, Lessor shall provide Lessee with copies of
assessment notices in sufficient time for Lessee to file a protest. Lessee may,
upon notice to Lessor, at Lessee's option and at Lessee's sole expense, protest,
appeal, or institute such other proceedings (in its or Lessor's name) as Lessee
may deem appropriate to effect a reduction of real estate or personal property
assessments for those Impositions to be paid by Lessee, and Lessor shall fully
cooperate with Lessee in such protest, appeal, or other action. Lessee hereby
agrees to indemnify, defend, and hold harmless Lessor from and against any
claims, obligations, and liabilities against or incurred by Lessor in connection
with such cooperation, although Lessee is not liable for the amount of any (i)
Real Estate Taxes or (ii) personal property taxes attributable to personal
property owned by Lessor. Lessor, however, reserves the right to effect any such
protest, appeal or other action and, upon notice to Lessee, shall control any
such activity, which shall then go forward at Lessor's sole expense. Upon such
notice, Lessee, at Lessor's expense, shall cooperate fully with such activities.
4.2 UTILITY CHARGES. Lessee will be solely
responsible for obtaining utility services to the Leased Property and will pay,
or cause to be paid, all charges for electricity, gas, oil, water, sewer and
other utilities attributable to, or used on, under or in the Leased Property
during the Term as such charges become due.
4.3 INSURANCE PREMIUMS. Lessee will pay or cause
to be paid all premiums for the insurance coverages required to be maintained by
it under Article XIII. Lessor shall pay or cause to be paid all premiums for the
insurance coverages required to be maintained by it under Article VIII.
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ARTICLE V
---------
NO TERMINATION, ABATEMENT, ETC. Except as otherwise
specifically provided in this Lease, Lessee, to the extent permitted by law,
shall remain bound by this Lease in accordance with its terms and shall neither
take any action without the written consent of Lessor to modify, surrender or
terminate the same, nor seek nor be entitled to any abatement, deduction,
deferment or reduction of the Rent, or setoff against the Rent, nor shall the
obligations of Lessee be otherwise affected by reason of (a) any damage to, or
destruction of, any Leased Property or any portion thereof from whatever cause
or any Taking of the Leased Property or any portion thereof, (b) any claim which
Lessee has or might have against Lessor by reason of any default or breach of
any warranty by Lessor under this Lease or any other agreement between Lessor
and Lessee, or to which Lessor and Lessee are parties, (c) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding up or other proceedings affecting Lessor or any assignee or transferee
of Lessor, (d) any lawful or unlawful prohibition of, or restriction upon,
Lessee's use of Leased Property, or interference with such use, or (e) for any
other cause whether similar or dissimilar to any of the foregoing. Lessee hereby
specifically waives all rights arising from any occurrence whatsoever, which may
now or hereafter be conferred upon it by law to (1) modify, surrender or
terminate this Lease or quit or surrender the Leased Property or any portion
thereof, or (2) abate, reduce, suspend or defer Rent or other sums payable by
Lessee hereunder, except as otherwise specifically provided in this Lease. The
obligations of Lessee hereunder shall be separate and independent covenants and
agreements and the Rent and all other sums payable by Lessee hereunder shall
continue to be payable in all events unless the obligations to pay the same
shall be terminated pursuant to the express provisions of this Lease or by
termination of this Lease other than by reason of an Event of Default.
ARTICLE VI
----------
6.1 OWNERSHIP OF THE LEASED PROPERTY. Lessee
acknowledges that the Leased Property is the property of Lessor and that Lessee
has only the right to the possession and use of the Leased Property upon the
terms and conditions of this Lease.
6.2 LESSEE'S PERSONAL PROPERTY. Throughout the
Term, Lessee will acquire, own, maintain and replace such personal property
(other than Capital Expenditures) and Inventory as is required to operate the
Leased Property as a hotel and, otherwise, in the manner contemplated by this
Lease. At all times during the Term Lessee shall maintain an adequate and
customary supply of inventory. Lessee may (and shall as provided herein below),
at its expense, install, affix or assemble or place on any parcels of the Land
or in any of the Leased Improvements, any items of personal property (including
Inventory) owned by Lessee (collectively, the "Lessee's Personal Property").
Lessee, at the commencement of the Term, and from time to
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time thereafter, shall provide Lessor with an accurate list of all such items of
the Lessee's Personal Property. Lessee may, subject to the conditions set forth
in this Section 6.2 and Section 6.3, remove any of Lessee's Personal Property
set forth on such list at any time during the Term or upon the expiration or any
prior termination of the Term. All of Lessee's Personal Property not removed by
Lessee within ten (10) days following the expiration or earlier termination of
the Term shall be considered abandoned by Lessee and may be appropriated, sold,
destroyed or otherwise disposed of by Lessor without first giving Notice thereof
to Lessee, without any payment to Lessee and without any obligation to account
therefor. Lessee will, at its expense, restore the Leased Property to the
condition required by Section 9.1(d), including repair of all damage to the
Leased Property caused by the removal of Lessee's Personal Property, whether
effected by Lessee or Lessor. Lessee may make such financing arrangements, title
retention agreements, leases or other agreements with respect to the Lessee's
Personal Property as it sees fit provided that Lessee first advises Lessor of
any such arrangement and such arrangement expressly provides that in the event
of Lessee's default thereunder, Lessor may assume Lessee's obligations and
rights under such arrangement.
ARTICLE VII
-----------
7.1 CONDITION OF THE LEASED PROPERTY. Lessee
acknowledges receipt and delivery of possession of the Leased Property. Lessee
has examined and otherwise has knowledge of the condition of the Leased Property
and has found the same to be satisfactory for its purposes hereunder. Lessee is
leasing the Leased Property "as is," "where is" and with "all faults," in its
present condition. Lessee waives any claim or action against Lessor in respect
of the condition of the Leased Property. THE LEASED PROPERTY IS DEMISED IN ITS
PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY
LESSOR AND SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING
STATE OF TITLE INCLUDING ALL CURRENT AND FUTURE COVENANTS, CONDITIONS,
RESTRICTIONS, EASEMENTS AND OTHER MATTERS (NOT LIMITED TO ITEMS OF RECORD)
INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS,
MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH
WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE
SURVEY THEREOF. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED,
IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS
FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS
TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT
BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES
THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT.
Notwithstanding the foregoing,
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however, to the extent permitted by law, Lessor hereby assigns to Lessee all of
Lessor's rights to proceed against any predecessor in title other than Lessee
(or an Affiliate of Lessee which conveyed the Leased Property to Lessor) for
breaches of warranties or representations or for latent defects in the Leased
Property. Lessor shall fully cooperate with Lessee in the prosecution of any
such claim, in Lessor's or Lessee's name, all at Lessee's sole cost and expense.
Lessee hereby agrees to indemnify, defend and hold harmless Lessor from and
against any claims, obligations and liabilities against or incurred by Lessor in
connection with such cooperation. All amounts recovered that are attributable to
the period after the Term shall belong to Lessor.
7.2 USE OF THE LEASED PROPERTY. (a) Lessee
covenants that it will proceed with all due diligence and will exercise its best
efforts to obtain and to maintain all approvals needed to use and operate the
Leased Property and the Facility under applicable local, state and federal law.
(b) Lessee shall use or cause to be used the Leased
Property only as a hotel facility (including food and beverage operations) of a
caliber consistent with its present use, and for such other uses as may be
necessary or incidental to such use or such other use as otherwise approved by
Lessor (the "Primary Intended Use"). Lessee shall not use the Leased Property or
any portion thereof for any other use without the prior written consent of
Lessor, which consent may be granted, denied or conditioned in Lessor's sole
discretion. No use shall be made or permitted to be made of the Leased Property,
and no acts shall be done, which will cause the cancellation or increase the
premium of any insurance policy covering the Leased Property or any part thereof
(unless another adequate policy satisfactory to Lessor is available and Lessee
pays any premium increase), nor shall Lessee sell or permit to be kept, used or
sold in or about the Leased Property any article which may be prohibited by law
or fire underwriter's regulations. Lessee shall, at its sole cost, comply with
all of the requirements pertaining to the Leased Property of any insurance
board, association, organization or company necessary for the maintenance of
insurance, as herein provided, covering the Leased Property and Lessee's
Personal Property.
(c) Subject to the provisions of Articles XIV and
XV Lessee covenants and agrees that during the Term it will (1) maintain,
operate continuously the Leased Property as a hotel facility of the class
currently operated at the Leased Property, (2) keep in full force and effect and
comply with all the provisions of the Franchise Agreement, (3) not terminate or
amend the Franchise Agreement without the consent of Lessor, (4) maintain
appropriate certifications and licenses for such use and otherwise comply with
all Legal Requirements and (5) seek to maximize the gross revenues generated
therefrom consistent with sound business practices.
(d) Lessee shall not commit or suffer to be
committed any waste on the Leased Property, or in the Facility, nor shall Lessee
cause or permit any nuisance thereon.
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(e) Lessee shall neither suffer nor permit the Leased
Property or any portion thereof, or Lessee's Personal Property, to be used in
such a manner as (1) might reasonably tend to impair Lessor's (or Lessee's, as
the case may be) title thereto or to any portion thereof, or (2) may reasonably
make possible a claim or claims of adverse usage or adverse possession by the
public, as such, or of implied dedication of the Leased Property or any portion
thereof, subject to Lessor's prior consent.
(f) Lessee shall not use, generate, handle, dispose
or store Hazardous Materials on the Leased Property, except in the normal course
of operations of the Leased Property as a hotel and in compliance with all
Environmental Laws.
(g) Lessee shall not enter into any collective
bargaining agreements with respect to any of the employees at the Leased
Property without the prior consent of Lessor, which shall not be unreasonably
withheld or delayed, unless required by law.
(h) Lessee hereby assumes and agrees to perform all
of the obligations of Lessor under all leases in effect at the Leased Property
as of the date of commencement of the Term.
7.3 LESSOR TO GRANT EASEMENTS, ETC. Lessor will,
from time to time, so long as no Event of Default has occurred and is
continuing, at the request of Lessee and at Lessee's cost and expense (but
subject to the approval of Lessor, which approval shall not be unreasonably
withheld or delayed), (a) grant easements and other rights in the nature of
easements with respect to the Leased Property to third parties, (b) release
existing easements or other rights in the nature of easements which are for the
benefit of the Leased Property, (c) dedicate or transfer unimproved portions of
the Leased Property for road, highway or other public purposes, (d) execute
petitions to have the Leased Property annexed to any municipal corporation or
utility district, (e) execute amendments or additions to any covenants and
restrictions affecting the Leased Property and (f) execute and deliver to any
Person any instrument appropriate to confirm or effect such grants, releases,
dedications, transfers, petitions and amendments (to the extent of its interests
in the Leased Property), but only upon delivery to Lessor of an Officer's
Certificate stating that such grant, release, dedication, transfer, petition or
amendment is beneficial to the proper conduct of the business of Lessee on the
Leased Property and does not materially reduce the value of the Leased Property.
7.4 COMPLIANCE WITH GROUND LEASE. Lessee shall
comply with the provisions of the Ground Lease and shall take no action, or omit
to take any action, that would cause or result in any default thereunder.
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ARTICLE VIII
------------
8.1 COMPLIANCE WITH LEGAL, INSURANCE REQUIREMENTS,
LESSOR'S INSURANCE AND TAX OBLIGATIONS. Subject to Article XII relating to
permitted contests, Lessee, at its expense, will promptly (a) comply and cause
the Leased Property to comply with all applicable Legal Requirements and
Insurance Requirements in respect of the use, operation, maintenance, repair and
restoration of the Leased Property; provided, however, that Lessor shall be
responsible for the cost of compliance with Insurance Requirements presented to
Lessor in writing including Franchisor requirements which are related to the
leased real and personal property, as more fully set forth in Article XIII, and
shall be responsible for all Capital Expenditures and the items in clauses (1)
through (6) of the definition of "Impositions" set forth in Article II, unless
the need for such Capital Expenditure is the result of Lessee's negligence,
misconduct or an Alteration made by or commenced by Lessee other than
Alterations contained in the Capital Expenditure Budget, and (b) procure,
maintain and comply with all appropriate licenses and other authorizations
required for any use of the Leased Property and Lessee's Personal Property then
being made, and for the proper erection, installation, operation and maintenance
of the Leased Property or any part thereof.
8.2 LEGAL REQUIREMENTS COVENANTS. Lessee covenants
and agrees that the Leased Property and Lessee's Personal Property shall not be
used for any unlawful purpose, and that Lessee shall not permit or suffer to
exist any unlawful use of the Leased Property by others. Lessee shall acquire
and maintain all appropriate licenses, certifications, Permits and other
authorizations and approvals needed to operate the Leased Property in its
customary manner for the Primary Intended Use, and any other lawful use
conducted on the Leased Property as may be permitted from time to time
hereunder. Lessee further covenants and agrees that Lessee's use of the Leased
Property and maintenance, alteration, and operation of the same, and all parts
thereof, shall at all times conform to all Legal Requirements, unless the same
are finally determined by a court of competent jurisdiction to be unlawful (and
Lessee shall cause all such subtenants, invitees or others to so comply with all
Legal Requirements). Lessee may, however, upon prior Notice to Lessor, and
subject to the provisions of Article XII, contest the legality or applicability
of any such Legal Requirement or any licensure or certification decision if
Lessee maintains such action in good faith, with due diligence, without
prejudice to Lessor's rights hereunder, and at Lessee's sole expense. If by the
terms of any such Legal Requirement compliance therewith pending the prosecution
of any such proceeding may legally be delayed without the incurrence of any
lien, charge or liability of any kind against the Facility or Lessee's leasehold
interest therein and without subjecting Lessee or Lessor to any liability, civil
or criminal, for failure so to comply therewith, Lessee may delay compliance
therewith until the final determination of such proceeding. If any lien, charge
or civil or criminal liability would be incurred by reason of any such delay,
Lessee, on the prior written consent of Lessor, which consent shall not be
unreasonably withheld, may nonetheless contest as aforesaid and delay as
aforesaid provided that such delay would not subject Lessor to criminal
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liability and Lessee both (a) furnishes to Lessor security reasonably
satisfactory to Lessor against any loss or injury to Lessor by reason of such
contest or delay and (b) prosecutes the contest with due diligence and in good
faith.
8.3 ENVIRONMENTAL COVENANTS. In addition to, and
not in diminution of, Lessee's covenants and undertakings in Sections 8.1 and
8.2 hereof, Lessee covenants and undertakes with Lessor as follows:
(a) At all times hereafter until such time as all
liabilities, duties or obligations of Lessee to the Lessor under the Lease have
been satisfied in full, Lessee shall fully comply with all Environmental Laws
applicable to the Leased Property and the operations thereon, subject to
Lessor's obligation to pay for Capital Expenditures, Lessee agrees to give
Lessor prompt written notice of (1) all Environmental Liabilities; (2) all
pending, threatened or anticipated Proceedings, and all notices, demands,
requests or investigations, relating to any Environmental Liability or relating
to the issuance, revocation or change in any Environmental Authorization
required for operation of the Leased Property; (3) all Releases at, on, in,
under or in any way affecting the Leased Property, or any Release known by
Lessee at, on, in or under any property adjacent to or near the Leased Property;
and (4) all facts, events or conditions that could reasonably lead to the
occurrence of any of the above-referenced matters.
(b) Lessor hereby agrees to defend, indemnify and
save harmless any and all Lessee Indemnified Parties from and against any and
all Environmental Liabilities, other than Environmental Liabilities which were
caused by the acts or negligent failures to act of Lessee.
(c) Lessee hereby agrees to defend, indemnify and
save harmless any and all Lessor Indemnified Parties from and against any and
all Environmental Liabilities caused by the acts or negligent failures to act of
Lessee.
(d) If any Proceeding is brought against any
Indemnified Party in respect of an Environmental Liability with respect to which
such Indemnified Party may claim indemnification under either Section 8.3(b) or
(c) (an "Indemnified Environmental Liability"), the Indemnifying Party, upon
request, shall at its sole expense resist and defend such Proceeding, or cause
the same to be resisted and defended by counsel designated by the Indemnified
Party and approved by the Indemnifying Party, which approval shall not be
unreasonably withheld; provided, however, that such approval shall not be
required in the case of defense by counsel designated by any insurance company
undertaking such defense pursuant to any applicable policy of insurance. Each
Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel will be at the sole expense of such Indemnified Party unless
such counsel has been approved by the Indemnifying Party, which approval shall
not be unreasonably withheld. The Indemnifying Party shall not be liable for any
settlement of any such Proceeding made without its consent, which shall
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not be unreasonably withheld, but if settled with the consent of the
Indemnifying Party, or if settled without its consent (if its consent shall be
unreasonably withheld), or if there be a final, nonappealable judgment for an
adversarial party in any such Proceeding, the Indemnifying Party shall indemnify
and hold harmless the Indemnified Parties from and against any liabilities
incurred by such Indemnified Parties by reason of such settlement or judgment.
For purposes of this Section 8.3, all amounts for
which any Indemnitee seeks indemnification shall be computed net of (a) any
actual income tax benefit resulting therefrom to such Indemnitee, (b) any
insurance proceeds received (net of tax effects) with respect thereto, and (c)
any amounts recovered (net of tax effects) from any third parties based on
claims the Indemnitee has against such third parties which reduce the damages
that would otherwise be sustained; provided that in all cases, the timing of the
receipt or realization of insurance proceeds or income tax benefits or
recoveries from third parties shall be taken into account in determining the
amount of reduction of damages. Each Indemnitee agrees to use its reasonable
efforts to pursue, or assign to Lessee, any claims or rights it may have against
any third party which would materially reduce the amount of damages otherwise
incurred by such Indemnitee.
Notwithstanding anything to the contrary contained
in this Lease, if Lessor shall become entitled to the possession of the Leased
Property by virtue of the termination of this Lease or repossession of the
Leased Property, then Lessor may assign its indemnification rights under Section
8.3 of this Lease (but not any other rights hereunder) to any Person to whom the
Lessor subsequently transfers the Leased Property, subject to the following
conditions and limitations, each of which shall be deemed to be incorporated
into the terms of such assignment, whether or not specifically referred to
therein;
(1) The indemnification rights referred to in this
section may be assigned only if a known Environmental Liability then
exists or if a Proceeding is then pending or, to the knowledge of
Lessee or Lessor, then threatened with respect to the Leased Property;
(2) Such indemnification rights shall be limited to
Indemnified Environmental Liabilities relating to or specifically
affecting the Leased Property; and
(3) Any assignment of such indemnification rights
shall be limited to the immediate transferee of Lessor, and shall not
extend to any such transferee's successors or assigns.
(e) At any time any Indemnitee has reason to believe
circumstances exist which could reasonably result in an Indemnified
Environmental Liability, upon reasonable prior written notice to Lessee stating
such Indemnitee's basis for such belief, an Indemnitee shall be given immediate
access to the Leased
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Property (including, but not limited to, the right to enter upon, investigate,
drill wells, take soil borings, excavate, monitor, test, cap and use available
land for the testing of remedial technologies), Lessee's employees, and to all
relevant documents and records regarding the matter as to which a
responsibility, liability or obligation is asserted or which is the subject of
any Proceeding; provided that such access may be conditioned or restricted as
may be reasonably necessary to ensure compliance with Legal Requirements and the
safety of personnel and facilities or to protect confidential or privileged
information. All Indemnitees requesting such immediate access and cooperation
shall endeavor to coordinate such efforts to result in as minimal interruption
of the operation of the Leased Property as practicable.
ARTICLE IX
----------
9.1 MAINTENANCE AND REPAIR. (a) Subject to
Lessor's obligation to make Capital Expenditures and performance of Lessor's
obligations under Subsection 9.1(c), Lessee, at its sole expense, shall keep the
Leased Property in good order and repair, except for ordinary wear and tear
(whether or not the need for such repairs occurred as a result of Lessee's use,
any prior use, the elements or the age of the Leased Property, or any portion
thereof). Except as otherwise provided in Section 9.1(b), Article XIV or Article
XV, and subject to Lessor's obligation to make Capital Expenditures, Lessee
shall, with reasonable promptness, make all necessary and appropriate repairs,
replacements, and improvements thereto of every kind and nature, whether
interior or exterior ordinary or extraordinary, foreseen or unforeseen, or
arising by reason of a condition existing prior to the commencement of the Term
of this Lease (concealed or otherwise), or required by any governmental agency
having jurisdiction over the Leased Property. Lessee, however, shall be
permitted upon prior written notice to Lessor to prosecute claims against
Lessor's predecessors in title for breach of any representation or warranty or
for any latent defects in the Leased Property to be maintained by Lessee unless
Lessor is already diligently pursuing or elects to diligently pursue such a
claim. All repairs shall, to the extent reasonably achievable, be at least
equivalent in quality to the original work. Lessee will not take or omit to take
any action, the taking or omission of which might materially impair the value or
the usefulness of the Leased Property or any part thereof for its Primary
Intended Use.
(b) Lessee shall, upon the expiration or prior
termination of the Term, vacate and surrender the Leased Property to Lessor in
the condition in which the Leased Property was originally received from Lessor,
except as repaired, rebuilt, restored, altered or added to as permitted or
required by the provisions of the Lease and except for ordinary wear and tear
(subject to the obligation of Lessee to maintain the Leased Property in good
order and repair, as provided in Subsection 9.1(a)), damage by casualty or
Condemnation, and Lessor's obligations with respect to Capital Expenditures.
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(c) Lessor shall be responsible for and pay for
items of a capital nature and to make Capital Expenditures, all as required by
and provided in Section 3.6.
9.2 ENCROACHMENTS, RESTRICTIONS, ETC. If, as a
result of any act or omission by Lessee, any of the Leased Improvements, at any
time, materially encroach upon any property, street or right-of-way adjacent to
the Leased Property, or violate the agreements or conditions contained in any
lawful restrictive covenant or other agreement affecting the Leased Property, or
any part thereof, or impair the rights of others under any easement or
right-of-way to which the Leased Property is subject (each of the foregoing
conditions being referred to herein as an "Encroachment"), then promptly upon
the request of Lessor or at the behest of any person affected by any such
encroachment, violation or impairment, Lessee shall, at its expense, subject to
its right to contest the existence of any encroachment, violation or impairment
and in such case, in the event of an adverse final determination, either (a)
obtain valid and effective waivers or settlements of all claims, liabilities and
damages resulting from each such encroachment, violation or impairment, whether
the same shall affect Lessor or Lessee or (b) make such changes in the Leased
Improvements, and take such other actions, as Lessee in the good faith exercise
of its judgment deems reasonably practicable to remove such encroachment, and to
end such violation or impairment, including, if necessary, the alteration of any
of the Leased Improvements, and in any event take all such actions as may be
necessary in order to be able to continue the operation of the Leased
Improvements for the Primary Intended Use substantially in the manner and to the
extent of the Leased Improvements were operated prior to the assertion of such
violation, impairment or encroachment. If any such alteration is required for
any reason other than Lessee's willful misconduct or gross negligence, the cost
of such alterations shall be treated as Capital Expenditures and be performed
pursuant to Section 3.6. Any such alteration shall be made in conformity with
the applicable requirements of Article X. Nothing contained herein shall be
construed as imposing on Lessee any liability for, or responsibility for
remedying the effects of, any Encroachment occurring other than as a result of
any willful misconduct or gross negligence of Lessee. Lessee's obligations under
this Section 9.2 shall be in addition to and shall in no way discharge or
diminish any obligation of any insurer under any policy of title or other
insurance held by Lessor.
ARTICLE X
---------
10.1 ALTERATIONS. Lessee shall have the right, but
not the obligation, with the prior approval of Lessor (which approval may not be
unreasonably withheld) to make additions, modifications or improvements to the
Leased Property in connection with the Primary Intended Use (collectively
"Alterations"), provided that such action shall not significantly alter the
character or purposes or significantly detract from the value or operating
efficiency thereof and will not impair the revenue-producing capability of the
Leased Property or adversely
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affect the ability of Lessee to comply with the provisions of this Lease. As a
condition of its approval, Lessor may retain the right to separately approve all
plans and specifications related to any additions, modifications or
improvements. Lessor may further require Lessee to obtain appropriate completion
bonds and to provide for the removal of any improvements upon the termination of
this Lease. The cost of such Alterations shall, subject to Lessor's obligations
to make Capital Expenditures, be paid by Lessee, and all such Alterations shall
be included under the terms of this Lease and upon expiration or earlier
termination of the Lease shall pass to and become the property of Lessor.
10.2 SALVAGE. All materials which are scrapped or
removed in connection with the making of repairs or alterations required or
permitted by Article IX or X shall be or become the property of Lessor or Lessee
depending on which party is paying for or providing the financing for such work.
10.3 JOINT USE AGREEMENTS. If Lessee constructs
additional improvements that are connected to the Leased Property or share
maintenance facilities, HVAC (as defined in Section 13.1(b)), electrical,
plumbing or other systems, utilities, parking or other amenities, the parties
shall enter into a mutually agreeable cross-easement or joint use agreement to
make available necessary services and facilities in connection with such
additional improvements, to protect each of their respective interests in the
properties affected, and to provide for separate ownership, use, and/or
financing of such improvements.
ARTICLE XI
----------
11.1 LIENS. Subject to the provision of Article XII
relating to permitted contests, Lessee will not directly or indirectly create or
allow to remain and will promptly discharge at its expense any lien,
encumbrance, attachment, title retention agreement or claim upon the Leased
Property or any attachment, levy, claim or encumbrance in respect of the Rent,
not including, however, (a) this Lease, (b) the matters, if any, included as
exceptions in the title policy insuring Lessor's interest in the Leased
Property, (c) restrictions, liens and other encumbrances which are consented to
in writing by Lessor or any easements granted pursuant to the provisions of
Section 7.3 of this Lease, (d) liens for those Impositions upon Lessor which
Lessee is not required to pay hereunder, (e) subleases permitted by Article
XXIII hereof, (f) liens for Impositions or for sums resulting from noncompliance
with Legal Requirements so long as (1) the same are not yet payable or are
payable without the addition of any fine or penalty or (2) such liens are in the
process of being contested as permitted by Article XII, (g) liens of mechanics,
laborers, materialmen, suppliers or vendors for sums either disputed or not yet
due provided that (1) the payment of such sums shall not be postponed under any
related contract for more than sixty (60) days after the completion of the
action giving rise to such lien and such reserve or other appropriate provisions
as shall be required by law or generally accepted accounting principles shall
have been made therefor or (2) any such liens are
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in the process of being contested as permitted by Article XII hereof, and (h)
any liens which are the responsibility of Lessor pursuant to the provisions of
Article XXXIV of this Lease, or result from Lessor's wrongful failure to pay for
Capital Expenditures.
ARTICLE XII
-----------
12.1 PERMITTED CONTESTS. Lessee shall have the
right to contest the amount or validity of any Imposition to be paid by Lessee
or any Legal Requirement or Insurance Requirement or any lien, attachment, levy,
encumbrance, charge or claim ("Claims") not otherwise permitted by Article XI,
by appropriate legal proceedings in good faith and with due diligence (but this
shall not be deemed or construed in any way to relieve, modify or extend
Lessee's covenants to pay or its covenants to cause to be paid any such charges
at the time and in the manner as in this Article provided), on condition,
however, that such legal proceedings shall not operate to relieve Lessee from
its obligations hereunder and shall not cause the sale or risk the loss of the
Leased Property, or any part thereof, or cause Lessor or Lessee to be in default
under any mortgage, deed of trust or security deed encumbering the Leased
Property or any interest therein. Upon the request of Lessor, Lessee shall
either (a) provide a bond or other assurance reasonably satisfactory to Lessor
that all Claims which may be assessed against the Leased Property together with
interest and penalties, if any, thereon will be paid, or (b) deposit within the
time otherwise required for payment with a bank or trust company as trustee upon
terms reasonably satisfactory to Lessor, as security for the payment of such
Claims, money in an amount sufficient to pay the same, together with interest
and penalties in connection therewith, as to all Claims which may be assessed
against or become a Claim on the Leased Property, or any part thereof, in said
legal proceedings. Lessee shall furnish Lessor and any lender of Lessor with
reasonable evidence of such deposit within five days of the same. Lessor agrees
to join in any such proceedings if the same be required to legally prosecute
such contest of the validity of such Claims; provided, however, that Lessor
shall not thereby be subjected to any liability for the payment of any costs or
expenses in connection with any proceedings brought by Lessee; and Lessee
covenants to indemnify and save harmless Lessor from any such costs or expenses.
Lessee shall be entitled to any refund of any Claims and such charges and
penalties or interest thereon which have been paid by Lessee or paid by Lessor
and for which Lessor has been fully reimbursed. In the event that Lessee fails
to pay any Claims when due or to provide the security therefor as provided in
this paragraph and to diligently prosecute any contest of the same, Lessor may,
upon ten days advance Notice to Lessee, pay such charges together with any
interest and penalties and the same shall be repayable by Lessee to Lessor as
Additional Charges at the next Payment Date provided for in this Lease.
Provided, however, that should Lessor reasonably determine that the giving of
such Notice would risk loss to the Leased Property or cause damage to Lessor,
then Lessor shall give such Notice as is practical under the circumstances.
Lessor reserves the right to contest any of the Claims at its expense not
pursued by Lessee. Lessor and Lessee agree to cooperate in coordinating the
contest of any claims.
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ARTICLE XIII
------------
13.1 GENERAL INSURANCE REQUIREMENTS. Lessee shall
at all times keep the Leased Property and the Facility (including all personal
property) insured with the kinds and amounts of insurance described below and in
compliance with any Franchise requirements; provided, however, that as to both
Lessor's and Lessee's insurance requirements, the kinds and amounts of insurance
required are reasonably available for purchase from insurance companies (i)
authorized to write insurance in the State and (ii) with a minimum financial
stability rating (A.M. Bests Rating) of ["A minus 7"] (or as otherwise
reasonably acceptable to Lessor). The insurance shall be maintained in the
amounts set forth below with deductibles in amounts reasonably acceptable to
Lessor. The policies shall name Lessor and Lessee as insureds or as additional
named insureds, as the case may be. Losses shall be payable to Lessor and/or its
lenders except that Lessee's Business Interruption Insurance and Personal
Property Insurance shall name Lessor as loss payee. Any loss adjustment shall
require the written mutual consent of Lessor and Lessee, each acting reasonably
and in good faith. Evidence of insurance shall be provided to each party on the
date hereof, and evidence of renewal shall be provided, no later than thirty
(30) days prior to expiration of any policy required hereunder. The policies on
the Leased Property, including the Leased Improvements, Fixtures and all
personal property shall include:
(a) Lessor shall provide building insurance on the
"Special Form" (formerly "All Risk" form) in an amount and carry such
risks as are reasonably acceptable to Lessor, and personal property
insurance on its property as is reasonably acceptable to it;
(b) Lessor shall provide insurance on the
"Comprehensive Coverage Form" for loss or damage (direct and indirect)
from steam boilers, pressure vessels, electrical and mechanical
systems, heating, ventilation and air conditioning ("HVAC") systems or
similar apparatus, now or hereafter installed in the Facility, in an
amount reasonably determined by Lessor from time to time;
(c) Lessee shall provide loss of income/business
interruption insurance/rent insurance on the "Special Form", with
proceeds to be in an amount not less than one year of gross rent and
other charges hereunder;
(d) Lessee shall provide commercial general liability
insurance, with amounts not less than [$1,000,000], together with
excess liability coverage of not less than [$3,000,000], covering each
of the following: bodily injury, death, or property damage liability
per occurrence, personal and advertising injury, general aggregate,
products and completed operations, and "all risk legal liability"
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(including, but not limited to, liquor law or "dram shop" liability),
all with respect to Lessor, Lessee and the Leased Property;
(e) Except to the extent Lessee is required to pay
for the same, or otherwise required to be provided by Lessor hereunder,
Lessor shall provide insurance covering such other hazards and in such
amounts as may be customary for comparable properties in the vicinity
of the Leased Property and reasonably acceptable to Lessor and is
available from insurance companies, insurance pools or other
appropriate companies authorized to do business in the State, and each
with a minimum financial stability rating (A.M. Bests Rating) of ["A
minus 7,"] at rates which are economically practicable in relation to
the risks covered as may be reasonably requested by Lessee;
(f) Lessee shall provide fidelity bonds with limits
and deductibles as may be reasonably requested by Lessor, covering
Lessee's employees and other crime insurance as may be reasonably
required by Lessor;
(g) Lessee shall provide workmen's compensation
insurance to the extent required by law;
(h) Lessee shall provide vehicle liability and
physical damage insurance for owned, non-owned, and hired vehicles, in
the amount of $1,000,000; and
(i) Lessee shall provide such other insurance as
Lessor may reasonably request for facilities such as the Leased
Property and the operation thereof, consistent with Lessee's and
Lessor's obligations hereunder.
13.2 FULL REPLACEMENT COST. The term "full
replacement cost" as used herein shall mean the actual replacement cost of the
Leased Property requiring replacement from time to time including an increased
cost of construction endorsement, if available, and the cost of debris removal
in an amount not to exceed twenty-five percent (25%) of the cost of
construction. In the event either party believes that full replacement cost has
increased or decreased at any time during the Lease Term, it shall have the
right to have such full replacement cost redetermined. Lessee shall obtain such
additional insurance as may be required as a result of such redetermination as
full replacement cost.
13.3 WAIVER OF SUBROGATION. All insurance policies
covering the Leased Property, the Fixtures, the Facility or any personal
property, including, without limitation, contents, fire, property and "special
perils" insurance shall expressly waive any right of subrogation on the part of
the insurer of one party to this Lease against the other party to this Lease.
Such policies will include such waiver
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clause or endorsement so long as the same are obtainable without unreasonable
extra cost, and in the event of such an extra charge the other party, at its
election, may pay the same, but shall not be obligated to do so.
13.4 WAIVER OF COINSURANCE. All insurance policies
covering the Leased Property, the Fixtures, the Facility or any personal
property, and all insurance covering loss of income and business interruption,
shall expressly waive any coinsurance penalty and resulting reduction in
insurance proceeds, provided that a waiver of coinsurance is applicable with
respect to a given insurance policy.
13.5 FORM SATISFACTORY, ETC. All of the policies
of insurance referred to in this Article XIII shall be written in a form
satisfactory to Lessor and Lessee and by insurance companies satisfactory to
Lessor and Lessee. Each party agrees that it will not unreasonably withhold its
approval as to the form of the policies of insurance or as to the insurance
companies selected. All premiums therefor, shall be paid and such policies or
binders delivered and followed with duplicate policies as issued thereof to the
other party prior to their effective date (and, with respect to any renewal
policy, thirty (30) days prior to the expiration of the existing policy), and in
the event of the failure of the party required to provide such insurance either
to effect such insurance as herein called for or to pay the premiums therefor,
or to deliver such policies or certificates thereof at the times required, the
other party shall be entitled, but shall have no obligation, to effect such
insurance and pay the premiums therefor, which premiums shall be repayable upon
written demand therefor. Each insurer mentioned in this Article XIII shall
agree, by endorsement to the policy or policies issued by it, or by independent
instrument, that it will give thirty (30) days' written notice before the policy
or policies in question shall be materially altered, not renewed or cancelled.
13.6 INCREASE IN LIMITS. If either Lessor or Lessee
at any time deems the limits of bodily injury or property damage under the
comprehensive public liability insurance then carried to be either excessive or
insufficient, Lessor or Lessee shall endeavor in good faith to agree on the
proper and reasonable limits for such insurance to be carried; provided,
however, that such limits shall not be reduced below a minimum aggregate limit
of $3,000,000. Thereafter, such insurance shall be carried with the limits thus
agreed on until further change pursuant to the provisions of this Section.
13.7 BLANKET POLICY. Notwithstanding anything to
the contrary contained in this Article XIII, Lessee's obligations to carry the
insurance provided for herein may be brought within the coverage of a so-called
blanket policy or policies of insurance; provided, however, that the coverage
afforded will not be reduced or diminished or otherwise be different from that
which would exist under a separate policy meeting all other requirements of this
Lease by reason of the use of such blanket policy of insurance, and provided
further that the requirements of this Article XIII are otherwise satisfied.
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13.8 NO SEPARATE INSURANCE. Neither Lessee nor
Lessor on its own initiative, or pursuant to the request or requirement of any
third party, shall (i) take out separate insurance concurrent in form or
contributing in the event of loss, with that required in this Article, or (ii)
increase the amount of any then existing insurance by securing an additional
policy or additional policies, unless all parties having an insurable interest
in the subject matter of the insurance, are included therein as additional
insureds, and the loss is payable under such additional separate insurance in
the same manner as losses are payable under this Lease. The party obtaining such
separate insurance shall immediately notify the other party of the obtaining of
any such separate insurance or of the increasing of any of the amounts of the
then existing insurance.
13.9 REPORTS OF INSURANCE CLAIMS. Lessee shall
promptly investigate and make a written report to the appropriate insurance
company as to all accidents, claims for damage relating to the ownership,
operation, and maintenance of the Leased Improvements, any damage or destruction
to the Leased Improvements and the estimated cost of repair thereof and shall
prepare any and all reports required by any insurance company in connection
therewith. Lessee shall submit such proposed filings and reports relating to
such claims to Lessor for its review and approval, which approval shall not be
unreasonably withheld or delayed, prior to submitting same to the appropriate
insurance company. All other adjustments, settlements and compromises shall be
made only with the prior written consent of Lessor.
13.10 FAILURE TO OBTAIN INSURANCE. In the event
that Lessee shall fail to obtain or maintain any such insurance, Lessor shall
have the right but not the obligation, to obtain such insurance and to charge
the premium cost of such to Lessee as Additional Charges.
ARTICLE XIV
-----------
14.1 INSURANCE PROCEEDS. All proceeds payable by
reason of any loss or damage to the Leased Property, or any portion thereof, and
insured under any policy of insurance required by Article XIII of this Lease
shall be paid by the payor to Lessor. If for any reason such proceeds are paid
to any Person other than Lessor, the recipient shall surrender all proceeds to
Lessor to be held in trust by Lessor in an interest-bearing account (subject to
the provisions of Section 14.6). The net proceeds shall be made available for
reconstruction or repair, as the case may be, of any damage to or destruction of
the Leased Property, or any portion thereof, and shall be paid out by Lessor
from time to time for the reasonable costs of such reconstruction or repair upon
satisfaction of reasonable terms and conditions. Any excess proceeds of
insurance remaining after the completion of the restoration or reconstruction of
the Leased Property shall be paid to Lessor. If Lessor is not required to, and
elects not to, repair and restore, and the Lease is terminated as described in
Section 14.2(a), all such insurance proceeds shall be retained by Lessor. All
salvage resulting from any risk covered by insurance shall belong to Lessor.
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14.2 RECONSTRUCTION IN THE EVENT OF DAMAGE OR
DESTRUCTION COVERED BY INSURANCE. (a) If during the Term the Leased Property is
totally or partially damaged or destroyed by a risk covered by the insurance
described in Article XIII and the Facility thereby is rendered Unsuitable for
its Primary Intended Use or following such casualty the Facility is Uneconomic
for its Primary Intended Use, Lessor shall, at Lessor's option, either (1)
restore the Facility to substantially the same condition as existed immediately
before the damage or destruction and otherwise in accordance with the terms of
the Lease, or (2) terminate this Lease by Notice to Lessee given within ninety
(90) days of the date of such damage or destruction. If Lessor determines to
terminate this Lease, the Lease will terminate as of the date specified in
Lessor's notice not later than sixty (60) days after such notice without further
liability hereunder (other than liability stated to survive the expiration or
termination hereof) and Lessor shall be entitled to retain all insurance
proceeds.
(b) Except as provided in Section 14.6, if during
the Term the Leased Property is partially damaged or destroyed by a risk covered
by the insurance described in Article XIII, but the Facility is not thereby
rendered Unsuitable for its Primary Intended Use, provided the Facility is not
unecomonic for its Primary Intended Use, Lessor shall restore the Facility to
substantially the same condition as existed immediately before the damage or
destruction and otherwise in accordance with the terms of this Lease to the
extent it can reasonably do so with the net insurance proceeds actually received
in respect to such damage or destruction. Such damage or destruction shall not
terminate this Lease; provided, however, that if Lessor cannot within a
reasonable time, obtain all necessary government approvals, including building
permits licenses and conditional use permits, after diligent efforts to do so,
in order to be able to perform all required repair and restoration work and to
operate the Facility for its Primary Intended Use in substantially the same
manner as that existing immediately prior to such damage or destruction and
otherwise in accordance with the terms of this Lease, this Lease shall terminate
on the date which is thirty (30) days after Lessor shall have notified the
Lessee of the passage in such Lessor's reasonable determination of such
reasonable period of time.
(c) If Lessor elects to repair or restore the Leased
Property, and the cost of the repair or restoration exceeds the net amount of
proceeds received by Lessor from the insurance required under Article XIII,
Lessor shall be obligated to contribute any excess amounts needed to restore the
Leased Property.
14.3 RECONSTRUCTION IN THE EVENT OF DAMAGE OR
DESTRUCTION NOT COVERED BY INSURANCE. Except as provided in Section 14.6 below,
if during the Term the Facility is totally or materially destroyed by a risk not
covered by the insurance described in Article XIII (whether or not actually
obtained or in full force), whether or not such damage or destruction renders
the Facility Unsuitable for its Primary Intended Use, Lessor at its option shall
either (a) repair, rebuild or restore the Facility at Lessor's sole expense to
substantially the same condition it was in immediately before such damage or
destruction and such damage or destruction shall not terminate this Lease, or
(b) terminate this Lease by Notice to Lessee given within
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ninety (90) days of the date of such destruction and this Lease will terminate
as of the date specified in Lessor's notice not later than sixty (60) days after
such notice. If such damage or destruction is not material, Lessor shall restore
the Facility to substantially the same condition as existed immediately before
the damage or destruction and otherwise in accordance with the terms of the
Lease.
14.4 LESSEE'S PERSONAL PROPERTY. All insurance
proceeds payable by reason of any loss of or damage to any of Lessee's Personal
Property shall be paid to Lessee.
14.5 ABATEMENT OF RENT. In the event of a casualty,
except as otherwise provided herein, this Lease shall remain in full force and
effect and Lessee's obligation to make rental payments and to pay all other
charges required by this Lease (whether through the payment of insurance
proceeds to Lessor or otherwise) shall remain unabated.
14.6 DAMAGE NEAR END OF TERM. Notwithstanding any
provisions of Section 14.2 or 14.3 to the contrary, if damage to or destruction
of the Facility occurs during the last twenty-four (24) months of the Term, and
such damage or destruction cannot be repaired or restored within the earlier of
(i) twelve (12) months, or (ii) the expiration of the Term, then Lessee shall
have the right to terminate this Lease by giving written notice to Lessor within
60 days after the date of damage or destruction, whereupon all accrued Rent
shall be paid immediately.
14.7 WAIVER. Lessee hereby waives any statutory
rights of termination that may arise by reason of any damage or destruction of
the Facility that Lessor is obligated to restore or may restore under any of the
provisions of this Lease.
ARTICLE XV
----------
15.1 PARTIES' RIGHTS AND OBLIGATIONS. If during
the Term there is any Condemnation of all or any part of the Leased Property or
any interest in this Lease, the rights and obligations of Lessor and Lessee
shall be determined by this Article XV.
15.2 TOTAL TAKING. If (i) title to the fee of the
whole of the Leased Property or (ii) the entire ground lease is condemned by any
Condemnor, this Lease shall cease and terminate as of the Date of Taking by the
Condemnor. If title to the fee of less than the whole of the Leased Property is
so taken or condemned, which nevertheless renders the Leased Property Unsuitable
or Uneconomic for its Primary Intended Use, Lessee and Lessor shall each have
the option, by notice to the other, at any time prior to the date that is thirty
(30) days after the Date of Taking, to terminate this Lease as of the Date of
Taking. Upon such date, if such Notice has been given, this Lease shall
thereupon cease and terminate. All Rent paid or payable by Lessee
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hereunder shall be apportioned as of the Date of Taking, and Lessee shall
promptly pay Lessor such amounts. In the event of any such termination, the
provisions of Section 15.6 shall apply.
15.3 ALLOCATION OF AWARD. The total Award made
with respect to the Leased Property or for loss of rent, or for Lessor's loss of
business beyond the Term of this Lease, shall be solely the property of and
payable to Lessor. Any Award made for the taking of Lessee's Personal Property,
or for removal and relocation expenses of Lessee in any such proceedings shall
be the sole property of and payable to Lessee. In any Condemnation proceedings,
Lessor and Lessee shall each seek its Award in conformity herewith, at its
respective expense; provided, however, Lessee shall not initiate, prosecute or
acquiesce in any proceedings that may result in a diminution of any Award
payable to Lessor.
15.4 PARTIAL TAKING. If title to less than the
whole of the Leased Property is condemned, and the Leased Property is still
suitable for its Primary Intended Use, and not Uneconomic for its Primary
Intended Use, or if Lessee or Lessor is entitled but each fails to timely elect
to terminate this Lease as provided in Section 15.3 hereof, Lessor at its cost
(not to exceed the net Condemnation Award) shall with all reasonable dispatch
after the payment of such award to Lessor restore the untaken portion of any
Leased Improvements so that such Leased Improvements constitute a complete
architectural unit of the same general character and condition (as nearly as may
be possible under the circumstances) as the Leased Improvements existing
immediately prior to the Condemnation. During and after the restoration of the
untaken portion of the Leased Property, Base Rent shall be abated in the manner
and to the extent that is fair, just and equitable to both Lessee and Lessor,
taking into consideration, among other relevant factors, the number of usable
rooms the amount of square footage, and the revenues affected by such partial
Taking. In the event Base Rent is abated, the Threshold Amounts shall also be
reduced accordingly. If Lessor and Lessee are unable to agree upon the amount of
such abatement and for reduction within thirty (30) days after such partial
Taking, the matter may be submitted by either party to a court of competent
jurisdiction for resolution.
15.5 TEMPORARY TAKING. If the whole or any part
of the Leased Property or of Lessee's interest under this Lease is condemned by
any Condemnor for its temporary use or occupancy, this Lease shall not terminate
by reason thereof, and Lessee shall continue to pay, in the manner and at the
terms herein specified, the full amounts of Rent and Additional Charges, but, if
the entire Leased Property is so condemned, only to the extent of net proceeds
of condemnation awards. Except only to the extent that Lessee may be prevented
from so doing pursuant to the terms of the order of the Condemnor, Lessee shall
continue to perform and observe all of the other terms, covenants, conditions
and obligations hereof on the part of the Lessee to be performed and observed,
as though such Condemnation had not occurred. In the event of any Condemnation
as in this Section 15.5 described, the entire amount of any Award made for such
Condemnation allocable to the Term, whether paid by way of damages, rent or
otherwise, shall be paid to Lessee. Lessor
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covenants that upon the termination of any such period of temporary use or
occupancy it will, at its sole expense, restore the Leased Property as nearly as
may be reasonably possible to the condition in which the same was immediately
prior to such Condemnation, unless such period of temporary use or occupancy
extends beyond the expiration of the Term, in which case Lessor shall not be
required to make such restoration.
ARTICLE XVI
-----------
16.1 EVENTS OF DEFAULT. If any one or more of the
following events (individually, an "Event of Default") occurs:
(a) Lessee fails to make payment of the Base Rent
when the same becomes due and payable and such condition continues for
a period of ten (10) days after receipt by the Lessee of Notice thereof
from Lessor; or
(b) Lessee fails to make payment of Percentage Rent
when the same becomes due and payable and such condition continues for
a period of ten (10) days after receipt by the Lessee of Notice thereof
from Lessor; or
(c) Lessee fails to observe or perform any other
term, covenant or condition of this Lease and such failure is not cured
by Lessee within a period of thirty (30) days after receipt by the
Lessee of Notice thereof from Lessor, unless such failure cannot with
due diligence be cured within a Period of thirty (30) days, in which
case it shall not be deemed an Event of Default if Lessee proceeds
promptly and with due diligence to cure the failure and diligently
completes the curing thereof; provided, however, in no event shall such
cure period extend beyond one hundred eighty (180) days after such
Notice; or
(d) Lessee shall file a petition in bankruptcy or
reorganization for an arrangement pursuant to any federal or state
bankruptcy law or any similar federal or state law, or shall be
adjudicated a bankrupt or shall make an assignment for the benefit of
creditors or shall admit in writing its inability to pay its debts
generally as they become due, or if a petition or answer proposing the
adjudication of the Lessee as a bankrupt or its reorganization pursuant
to any federal or state bankruptcy law or any similar federal or state
law shall be filed in any court and the Lessee shall be adjudicated a
bankrupt and such adjudication shall not be vacated or set aside or
stayed within sixty (60) days after the entry of an order in respect
thereof, or if a receiver of the Lessee or of the whole or
substantially all of the assets of the Lessee shall be appointed in any
proceeding
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brought by the Lessee or if any such receiver, trustee or liquidator
shall be appointed in any proceeding brought against the Lessee and
shall not be vacated or set aside or stayed within sixty (60) days
after such appointment; or
(e) without Lessor's consent, Lessee is liquidated or
dissolved or begins proceedings toward such liquidation or dissolution,
or, in any manner, permits the sale or divestiture of substantially all
of its assets; or
(f) the estate or interest of Lessee in the Leased
Property or any part thereof is voluntarily or involuntarily
transferred, assigned, conveyed, levied upon or attached in an
proceeding (unless Lessee is contesting such lien or attachment in good
faith in accordance with Article XII hereof); or
(g) except as a result of damage, destruction or a
partial or complete Condemnation, Lessee voluntarily ceases operation
of the Leased Property for a period in excess of ten (10) consecutive
days;
(h) the Franchise Agreement with respect to the
Facility on the Leased Premises is terminated by the Franchisor as a
result of any action or failure to act by the Lessee; or
(i) Lessee shall breach the terms of Section 7.2(f),
Article 19, Section 23.1. or Section 24.2;
then, and in any such event, Lessor may, so long as such Event of Default
continues, exercise one or more remedies available to it herein or at law or in
equity including, but not limited to, its right to terminate this Lease by
giving Lessee the shortest Notice of such termination permitted by law.
If litigation is commenced with respect to any
alleged default under this Lease, the prevailing party in such litigation shall
receive, in addition to its damages incurred, such sum as the court shall
determine as its reasonable attorneys' fees, and all costs and expenses incurred
in connection therewith.
No Event of Default (other than a failure to make a
payment of money) shall be deemed to exist under clause (c) during any time the
curing thereof is prevented by an Unavoidable Delay, provided that upon the
cessation of such unavoidable Delay, Lessee remedies such default or Event of
Default without further delay.
16.2 REMEDIES. (a) If any one or more Events of
Default shall occur and be continuing, then Lessor shall have the right, in
addition to all other rights or remedies available at law or in equity, at its
election:
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(i) To give Lessee written notice of Lessor's
intention to terminate this Lease on the earliest date permitted by law
or on any later date specified in such notice, in which case Lessee's
right to possession of the Leased Property shall cease and this Lease
will be terminated on such date, except as to liability of Lessee
expressly, stated herein to survive the termination of this Lease,
including, without limitation, liability pursuant to Section 16.2(d);
or
(ii) Without further demand or notice, to reenter and
take possession of the Leased Property or any part of the Leased
Property, repossess the same, expel Lessee and those claiming through
or under Lessee, and remove the effects of both or either, using such
force for such purposes as may be Lawful and necessary, without being
liable for prosecution, without being deemed guilty of any manner of
trespass, and without prejudice to any remedies for arrears or future
payments of Base Rent, Percentage Rent, Additional Charges or other
amounts payable under this Lease or as a result of any preceding breach
of covenants or conditions; or
(iii) To cure any Event of Default and to charge
Lessee for the cost of effecting such cure, including, without
limitation, reasonable attorneys fees and interest on the amount so
advanced at the overdue Rate, provided that Lessor shall have no
obligation to cure any such Event of Default.
(b) Should Lessor elect to reenter as provided in
Section 16.2(a)(ii), or should Lessor take possession pursuant to legal
proceedings or pursuant to any notice provided by law while an Event of Default
is continuing, Lessor may, from time to time, without terminating this Lease,
relet the Leased Property or any part of the Leased Property in Lessor's or
Lessee's name, but for the account of Lessee, for such term or terms (which may
be greater or less than the period which would otherwise have constituted the
balance of the Term of this Lease) and on such conditions and upon such other
terms (which may include concessions of free rent and alteration and repair of
the Leased Improvements) as Lessor, in its reasonable discretion, may determine
and Lessor may collect and receive the rent. No such reentry or taking
possession of the Leased Property by Lessor will be construed as an election on
Lessor's part to terminate this Lease unless a written notice of such intention
is given to Lessee. No notice from Lessor under this Article 16 or under a
forcible or unlawful entry and detainer statute or similar law will constitute
an election by Lessor to terminate this Lease unless such notice specifically so
states. Lessor reserves the right following any such reentry or reletting to
exercise its right to terminate this Lease by giving Lessee such written notice,
in which event this Lease will terminate as specified in such notice.
(c) In the event that Lessor does not elect to
terminate this Lease as permitted in Section 16.2(a)(i), but elects instead to
take possession as
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provided in Section 16.2(a)(ii), Lessee shall pay to Lessor Base Rent,
Percentage Rent, Additional Charges and other sums as provided in this Lease
which would be payable under this Lease if such repossession had not occurred,
less the net proceeds, if any, of any reletting of the Leased Property, after
deducting all of Lessor's expenses in connection with such reletting, including,
without limitation, all repossession costs, brokerage commissions, attorneys
fees, expenses of employees, alteration and repair costs and expenses of
preparation for such reletting. If, in connection with any reletting, the new
lease term extends beyond the existing Term of this Lease, or the premises
covered by such new lease include other premises not part of the Leased
Property, a fair apportionment of the rent received from such reletting and the
expenses incurred in connection with such reletting as provided in this
Paragraph will be made in determining the net proceeds from such reletting, and
any rent concessions will be equally apportioned over the term of the new lease.
Lessee shall pay such rent and other sums to Lessor monthly on the date on which
the Base Rent and Additional Charges, and, in the case of Percentage Rent,
quarterly on the day on which Percentage Rent, would have been payable under
this Lease if possession had not been retaken, and Lessor shall be entitled to
receive such rent and other sums from Lessee on each such day.
(d) If an Event of Default has occurred and this
Lease is terminated by Lessor, Lessee shall remain liable to Lessor for damages
in an amount equal to Base Rent, Percentage Rent, Additional Charges and other
amounts which would have been owing by Lessee for the balance of the Term of
this Lease had this Lease not been terminated, less the net proceeds, if any, of
any reletting of the Leased Property by Lessor subsequent to such termination,
after deducting all of Lessor's expenses in connection with such reletting,
including, but without limitation, the expenses enumerated in Section 16.2(c)
(which expenses, if the reletting is for a term that will extend beyond the
existing Term, will be apportioned as described in Section 16.2(c)). Lessor
shall be entitled to collect such damages from Lessee monthly on the day on
which Base Rent or Additional Changes, and quarterly on the day on which
Percentage Rent would have been payable under this Lease if this Lease had not
been terminated, and Lessor shall be entitled to receive such Base Rent and
other amounts from Lessee on each such day. Alternatively, at the option of
Lessor, in the event this Lease is so terminated, Lessor shall be entitled to
recover against Lessee as damages for loss of the bargain and not as a penalty:
(i) The worth at the time of award of the unpaid Base
Rent and Percentage Rent which had been earned at the time of
termination;
(ii) The worth at the time of award of the amount, if
any, by which the unpaid Base Rent, Percentage Rent and all Additional
Charges which would have been earned after termination until the time
of award exceeds the amount of rental loss that Lessee proves could
have been reasonable avoided;
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(iii) The worth at the time of award of the amount,
if any, by which the unpaid Base Rent, Percentage Rent and Additional
Charges for the balance of the Term (had the same not been so
terminated by Lessor) after the time of award exceeds the amount of
such rental loss during such period that Lessee proves could be
reasonably avoided; and
(iv) Any other amount necessary to compensate Lessor
for all the detriment proximately caused by Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of
events would be likely to result therefrom.
The "worth at the time of award" of the amounts referred to in clauses (i) and
(ii) above shall be computed by adding interest from the date of termination
until the time of the award computed at the Overdue Rate on the date on which
this Lease is terminated. The worth at the time of award of the amount referred
to in clause (iii) above shall be computed by using a discount rate of the
Federal Reserve Bank of New York at the time of the award plus one percent (1%).
(e) Percentage Rent for the purposes of this Section
16.2 shall be a sum equal to (i) the average of the annual amounts of the
Percentage Rent for the three (3) Fiscal Years immediately preceding the Fiscal
Year in which the termination, re-entry or repossession takes place, or (ii) if
three (3) Fiscal Years shall not have elapsed, the average of the Percentage
Rent during the preceding Fiscal Years during which the Lease was in effect, or
(iii) if one (1) Fiscal Year has not elapsed, the amount derived by analyzing
the Percentage Rent from the effective date of this Lease.
(f) Any suit or suits for the recovery of the
amounts and damages set forth in Sections 16.2(c) or (d) may be brought by,
Lessor, from time to time, at Lessor, a election, and nothing in this Lease will
be deemed to require Lessor to await the date upon which this Lease or the Term
of this Lease would have expired had there occurred no Event of Default. Each
right and remedy provided for in this Lease as a result of the occurrence of a
default is cumulative and is in addition to every other right or remedy provided
for in this Lease or now or after the date of the commencement of the Term
existing at law or in equity or by statute or otherwise, and the exercise or
beginning of the exercise by Lessor of any one or more of the rights or remedies
provided for in this Lease or now or after the date of the commencement of the
Term existing at law or in equity or by statute or otherwise shall not preclude
the simultaneous or later exercise by Lessor of any or all other rights or
remedies provided for in this Lease or now or after the date of the commencement
of the Term existing at law or in equity or by statute or otherwise. All costs
incurred by Lessor in collecting any amounts and damages owing by Lessee
pursuant to the provisions of this Lease or to enforce any provision of this
Lease, including, but not limited to, reasonable attorneys' fees and related
costs, whether or
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not one or more actions are commenced by Lessor, shall also be recoverable by
Lessor from Lessee.
(g) Lessor shall have no obligation to mitigate
damage following the occurrence of an Event of Default.
16.3 WAIVER. Lessee hereby waives, to the extent
permitted by applicable law, (a) any right to a trial by jury in the event of
summary proceedings to enforce the remedies set forth in this Article 16; (b)
the benefit of any laws now or hereafter in any force exempting property from
liability for rent or for debt; (c) any equity of redemption; and (d) except as
provided herein, any presentations, demands for payment or for performance, or
notice of non-performance.
16.4 APPLICATION OF FUNDS. Any payments received
by Lessor under any of the provisions of this Lease during the existence or
continuance of any Event of Default shall, to the extent permitted by applicable
law, be applied to Lessee's obligations in the order that Lessor may determine,
in Lessor's discretion.
16.5 SURRENDER. If an Event of Default occurs (and
the event giving rise to such Event of Default has not been cured within the
curative period relating thereto as set forth in Section 16.1) and is
continuing, whether or not this Lease has been terminated pursuant to Section
16.1, Lessee shall, if requested by Lessor to do so, immediately surrender to
Lessor the Leased Property including, without limitation, any and all books,
records, files, licenses, permits and keys relating thereto, and quit the same
and Lessor may enter upon and repossess the Leased Property by reasonable force,
summary proceedings, ejectment or otherwise and may remove Lessee and all other
persons and any and all personal property from the Leased Property, subject to
rights of any hotel guests and to any requirement of law. Lessee hereby waives
any and all requirements of applicable law for service of notice to reenter the
Leased Property. Lessor shall be under no obligation to, but may if it so
chooses, relet the Leased Property or otherwise mitigate Lessor's damages.
ARTICLE XVII
------------
17.1 LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT. If
Lessee fails to make any payment or to perform any act required to be made or
performed under this Lease including, without limitation, Lessee's failure to
comply with the terms of the Franchise Agreement, and fails to cure the same
within the relevant time periods provided in Section 16.1, Lessor, without
waiving or releasing any obligation of Lessee, and without waiving or releasing
any obligation or default, may (but shall be under no obligation to) at any time
thereafter make such payment or perform such act for the account and at the
expense of Lessee, and may, to the extent permitted by law, enter upon the
Leased Property for such purpose and, subject to Section 16.2, take all such
action thereon as, in Lessor's opinion, may be necessary or appropriate
therefor. No such entry shall be deemed an eviction of Lessee. All sums so paid
by Lessor and
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all costs and expenses (including, without limitation, reasonable attorney's
fees and expenses, in each case to the extent permitted by law) so incurred,
together with a late charge thereon (to the extent permitted by law) at the
Overdue Rate from the date on which such sums or expenses are paid or incurred
by Lessor, shall be paid by Lessee to Lessor on demand. The obligations of
Lessee and rights of Lessor contained in this Article shall survive the
expiration or earlier termination of this Lease.
ARTICLE XVIII
-------------
18.1 EXCULPATION. In the event of (a) a sale or
transfer of all or any part of the Leased Property (by operation of law or
otherwise), (b) the making of a lease of all or substantially all of the Leased
Property or (c) a sale or transfer (by operation of Law or otherwise) of the
leasehold estate under any such lease, (i) the seller, transferor or lessor, as
the case may be, shall be and hereby is automatically and entirely released and
discharged, from and after the date of such sale, transfer or lease, of all
liability in respect of the performance of any of the terms of this Lease on the
part of Lessor thereafter to be performed and (ii) the term "Lessor" shall
thereafter mean only the purchaser, transferee or lessee, as the case may be,
and the covenants and agreements of Lessor shall thereafter be binding upon such
purchaser, transferee or lessee.
Lessee shall look solely to Lessor's estate and
interest in the Leased Property for the satisfaction of any right of Lessee for
the collection of a judgment or other judicial process or arbitration award
requiring the payment of money by Lessor, and no other property or assets of
Lessor. Lessor's agents, incorporators, subscribers, shareholders, officers,
directors, members, partners, principals (disclosed or undisclosed) an
affiliates, whether directly or through Lessor or through any receiver,
assignee, trustee in bankruptcy or through anyone else, shall not be subject to
levy, lien, execution, attachment, or other enforcement procedure for the
satisfaction of Lessee's rights and remedies under of with respect to or arising
from or in connection with this Lease.
ARTICLE XIX
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19.1 REIT COMPLIANCE. Lessee acknowledges that the
general partner of the general partner of Lessor (the "REIT") intends to
continue to qualify as a real estate investment trust under the Code, and that
pursuant to Lessor's limited partnership agreement, Lessor may not take or omit
to take any action, or engage in any business or business transaction or
relationship, that would or could result in the REIT being disqualified from
treatment as a real estate investment trust. As a material inducement to Lessor
to enter into this Lease, Lessee hereby agrees that it shall not take or omit to
take any action, or engage in any business or business transaction or
relationship, that would or could result in the REIT being disqualified from
treatment as a real estate investment trust under the Code. Without limiting the
generality of the foregoing, Lessee agrees that:
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(A) PERSONAL PROPERTY LIMITATION. Anything
contained in this Lease to the contrary notwithstanding, the average of the
adjusted tax bases of the items of personal property that are leased to Lessee
under this Lease at the beginning and at the end of any Fiscal Year shall not
exceed 15% of the average of the aggregate adjusted tax bases of the Leased
Property at the beginning and at the end of such Fiscal Year. This Section
19.1(a) is intended to ensure that the Rent qualifies as "rents from real
property," within the meaning of Section 856(d) of the Code, or any similar or
successor provisions thereto, and shall be interpreted in a manner consistent
with such intent.
(B) SUBLEASE RENT LIMITATION. Anything contained in
this Lease to the contrary notwithstanding, Lessee shall not sublet the Leased
Property on any basis such that the rental to be paid by the sublessee
thereunder would be based, in whole or in part, on either (i) the income or
profits derived by the business activities of the sublessee, or (ii) any other
formula such that any portion of the Rent would fail to qualify as "rents from
real property" within the meaning of Section 856(d) of the Code, or any similar
or successor provision thereto.
19.2 SUBLEASE LESSEE LIMITATION. Anything contained
in this Lease to the contrary notwithstanding, Lessee shall not sublease the
Leased Property to any Person in which Realty ReFund Trust, owns, directly or
indirectly a ten percent (10%) or more interest, within the meaning of Section
856(d)(2)(B) of the Code, or any similar or successor provisions thereto.
19.3 LESSEE OWNERSHIP LIMITATION. Anything
contained in this Lease to the contrary notwithstanding, neither Lessee or an
Affiliate of Lessee shall acquire, directly or indirectly, a 10% or more
interest in Realty ReFund Trust, within the meaning of Section 856(d)(2)(B) of
the Code, or any similar or successor provision thereto.
19.4 LESSEE OFFICER AND EMPLOYEE LIMITATION. If a
Person serves as both (a) a director of Lessee (or any Person who furnishes or
renders services to the tenants of the Leased Property, or manages or operates
the Leased Property) and (b) a trustee and officer (or employee) of the REIT,
that Person shall not receive any compensation for serving as a director of
Lessee (or any Person who furnishes or renders services to the tenants of the
Leased Property, or manages or operates the Leased Property). Furthermore, if a
Person serves as both (a) a trustee of the REIT and (b) a director and officer
(or employee) of Lessee (or any Person who furnishes or renders services to the
tenants of the Leased Property, or manages or operates the Leased Property),
that Person shall not receive any compensation for serving as a director of
Lessee (or any Person who furnishes or renders services to the tenants of the
Leased Property, or manages or operates the Leased Property).
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ARTICLE XX
----------
20.1 HOLDING OVER. If Lessee for any reason
remains in possession of the Leased Property after the expiration or earlier
termination of the Term, such possession shall be as a tenant at sufferance
during which time Lessee shall pay as rental each month the aggregate of 105% of
(a) one-twelfth of the aggregate Base Rent and Percentage Rent payable with
respect to the last Fiscal Year of the Term, (b) all Additional Charges accruing
during the applicable month and (c) all other sums, if any, payable by Lessee
under this Lease with respect to the Leased Property. During such period, Lessee
shall be obligated to perform and observe all of the terms, covenants and
conditions of this Lease, but shall have no rights hereunder other than the
right, to the extent given by law to tenants at sufferance, to continued
occupancy and use of the Leased Property. Nothing contained herein shall
constitute the consent, express or implied, of Lessor to the holding over of
Lessee after the expiration or earlier termination of this Lease.
ARTICLE XXI
-----------
21.1 RISK OF LOSS. During the Term, the risk of loss
or of decrease in the enjoyment and beneficial use of the Leased Property in
consequences of the damage or destruction thereof by fire, the elements,
casualties, thefts, riots, wars or otherwise, or in consequences of
foreclosures, attachments, levies or executions is retained by Lessor, and, in
the absence of negligence, misconduct or breach of this Lease by Lessee, Lessee
shall in no event be answerable or accountable therefor.
ARTICLE XXII
------------
22.1 INDEMNIFICATION. Notwithstanding the existence
of any insurance provided for in Article XIII, and without regard to the policy
limits of any such insurance, Lessee will protect, indemnify, hold harmless and
defend any Lessor Indemnified Party from and against all liabilities,
obligations, claims, damages, penalties, causes of action, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses), to the
extent permitted by law, imposed upon or incurred by or asserted against any
Lessor Indemnified Party by reason of: (a) any accident, injury to or death of
persons or loss of or damage to property occurring on or about the Leased
Property or adjoining sidewalks, including without limitation any claims under
liquor liability, "dram shop" or similar laws, (b) any past, present or future
use, misuse, non-use, condition, management, maintenance or repair or negligence
by Lessee, its agents, invitees, employees or guests, or any other person other
than Lessor, of the Leased Property or Lessee's Personal Property or any
litigation, proceeding or claim by governmental entities or other third parties
to which Lessor is made a party or participant related to such use, misuse,
non-use, condition, management, maintenance, or repair thereof by Lessee,
including Lessee's failure to
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perform obligations (other than Condemnation proceedings), (c) any Impositions
that are the obligations of Lessee pursuant to the applicable provisions of this
Lease, (d) any failure on the part of Lessee to perform or comply with any of
the terms of this Lease, (e) the nonperformance of any of the terms and
provisions of any and all existing and future subleases of the Leased Property
to be performed by the landlord thereunder, and (f) the sale of or consumption
of alcoholic beverages on or in the Leased Property, (g) claims of Franchisor
and Managers. Any amounts that become payable by Lessee under this Article shall
be paid within ten days after demand therefor by Lessor, and if not timely paid,
shall bear a late charge (to the extent permitted by law) at the Overdue Rate
from the expiration of such ten (10) day period date of such determination to
the date of payment. Lessee, at its expense, shall contest, resist and defend
any such claim, action or proceeding asserted or instituted against any Lessor
Indemnified Party or may compromise or otherwise dispose of the same as Lessee
sees fit. Nothing herein shall be construed as indemnifying any Lessor
Indemnified Party against its own grossly negligent acts or omissions or willful
misconduct.
Lessor shall indemnify and hold any Lessee
Indemnified Party from and against any and all liabilities, losses, interest,
damages, costs or expenses (including, without limitation, reasonable attorneys'
fees) assessed against, levied upon or collected from any Lessee Indemnified
Party arising out of the negligence, misconduct or breach of this Lease by
Lessor.
Lessee's and Lessor's liability under the provisions
of this Article shall survive any termination of this Lease.
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ARTICLE XXIII
-------------
23.1 SUBLETTING AND ASSIGNMENT. Except as
expressly permitted herein, Lessee shall not mortgage, assign, sublet, or
otherwise transfer its interest in the Facility and, subject to the provisions
of Article XIX and Section 23.2 and any other express conditions or limitations
set forth herein, Lessee may, but only with the prior written consent of Lessor,
which may be granted or withheld in Lessor's sole and absolute discretion, (a)
assign this Lease, (b) sublet all or any part of the Leased Property, or (c)
sublet any retail or restaurant portion of the Leased Improvements in the normal
course of the Primary Intended Use; provided that any subletting to any party
other than an Affiliate of Lessee shall not individually as to any one such
subletting, or in the aggregate, materially diminish the actual or potential
Rent payable under this Lease. In the case of a subletting, the sublessee shall
comply with the provisions of Section 23.2, and in the case of an assignment,
the assignee shall assume in writing and agree to keep and perform all of the
terms of this Lease on the part of Lessee to be kept and performed and shall be,
and become, jointly and severally liable with Lessee for the performance
thereof. An original counterpart of each such sublease and assignment and
assumption, duly executed by Lessee and such sublessee or assignee, as the case
may be, in form and substance satisfactory to Lessor, shall be delivered
promptly to Lessor. In case of either an assignment or subletting made during
the Term, Lessee shall remain primarily liable, as principal rather than as
surety, for the prompt payment of the Rent and for the performance and
observance of all of the covenants and conditions to be performed by Lessee
hereunder.
23.2 ATTORNMENT. Lessee shall insert in each
sublease permitted under Section 23.1 provisions to the effect that (a) such
sublease is subject and subordinate to all of the terms and provisions of this
Lease and to the rights of Lessor hereunder, (b) if this Lease terminates before
the expiration of such sublease, the sublessee thereunder will, at Lessor's
option, attorn to Lessor and waive any right the sublessee may have to terminate
the sublease or to surrender possession thereunder as a result of the
termination of this Lease, and (c) if the sublessee receives a written Notice
from Lessor or Lessor's assignees, if any, stating that an uncured Event of
Default exists under this Lease, the sublessee shall thereafter be obligated to
pay all rentals accruing under said sublease directly to the party giving such
Notice, or as such party may direct. All rentals received from the sublessee by
Lessor or Lessor's assignees, if any, as the case may be, shall be credited
against the amounts owing by Lessee under this Lease.
23.3 MANAGEMENT AGREEMENT. Notwithstanding anything
contained in this Article XXIII to the contrary, Lessee may, with the prior
written consent of Lessor (which consent may be withheld in the sole and
absolute direction of Lessor), enter into an agreement (a "Management
Agreement") with any third party to assign responsibility for the management
and/or operation of all or any part of the Leased Property, including any retail
or restaurant portion of the Leased Improvements, provided, however, that Lessee
shall not enter into any Management Agreement which will materially diminish the
actual or potential Rent payable under
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this Lease. Notwithstanding the above, Lessee shall remain primarily liable, as
principal rather than as surety, for the prompt payment of the Rent and for the
performance and observance of all of the covenants and conditions to be
performed by Lessee hereunder. Lessor hereby consents to Lessee's entering into
a Management Agreement with InnSuites Innternational Hotels, Inc.
ARTICLE XXIV
------------
24.1 OFFICERS' CERTIFICATES; FINANCIAL STATEMENTS;
LESSOR'S ESTOPPEL CERTIFICATES AND COVENANTS. (a) At any time and from time to
time upon not less than twenty (20) days Notice by Lessor, Lessee will furnish
to Lessor an Officer's Certificate certifying that this Lease is unmodified and
in full force and effect (or that this Lease is in full force and effect as
modified and setting forth the modifications), the date to which the Rent has
been paid, whether to the knowledge of Lessee there is any existing default or
Event of Default thereunder by Lessor or Lessee, and such other information as
may be reasonably requested by Lessor or Lessor's lender. Any such certificate
furnished pursuant to this Article may be relied upon by Lessor, any lender and
any prospective purchaser of the Leased Property.
(b) Lessee will furnish the following statements to
Lessor:
(1) on or before the twentieth (20th) day of each
month, a detailed profit and loss statement for the Leased Property for
the preceding month, a balance sheet for the Leased Property as of the
end of the preceding month, and a detailed accounting of revenues for
the Leased Property for the preceding month, and such other information
as may be requested by Lessor or required by Lessor's lender, each in
form acceptable to Lessor; and
(2) the most recent Consolidated Financials of Lessee
within forty-five (45) days after each quarter of any Fiscal Year (or,
in the case of the final quarter in any Fiscal Year, the most recent
Audited Consolidated Financials of Lessee within ninety (90) days)
after such final quarter; and
(3) with reasonable promptness, such information
respecting the financial condition and affairs of Lessee as may be
requested by Lessor.
(c) At any time and from time to time upon not less
than twenty (20) days notice by Lessee, Lessor will furnish to Lessee or to any
person designated by Lessee an estoppel certificate certifying that this Lease
is unmodified and in full force and effect (or that this Lease is in full force
and effect as modified and setting forth the modifications), the date to which
Rent has been paid, whether to the
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knowledge of Lessor there is any existing default or Event of Default on
Lessee's part hereunder, and such other information as may be reasonably
requested by Lessee.
ARTICLE XXV
-----------
25.1 BOOKS AND RECORDS; LESSOR'S RIGHT TO INSPECT.
Lessee shall keep full and adequate books of account and other records
reflecting the results of operation of the Facility on an accrual basis, all in
accordance with the Uniform System and generally accepted accounting principles.
The books of account and all other records relating to or reflecting the
operation of the Facility shall be available to Lessor and its representatives
and its auditors or accountants, at all reasonable times for examination, audit,
inspection and transcription. All of such books and records pertaining to the
Facility including, without limitation, books of account, guest records and
front office records, at all times shall be the property of Lessee, (subject to
the terms of Section 35.2) but shall not be removed from the Facility or
Lessee's offices by Lessee without Lessor approval.
Lessee shall permit Lessor and its authorized
representatives as frequently as reasonably requested by Lessor to inspect the
Leased Property and Lessee's accounts and records pertaining thereto and make
copies thereof, during usual business hours upon reasonable advance notice,
subject only to any business confidentiality requirements reasonably requested
by Lessee.
ARTICLE XXVI
------------
26.1 NO WAIVER. No failure by Lessor or Lessee to
insist upon the strict performance of any term hereof or to exercise any right,
power or remedy consequent upon a breach thereof, and no acceptance of full or
partial payment of Rent during the continuance of any such breach, shall
constitute a waiver of any such breach or of any such term. To the extent
permitted by law, no waiver of any breach shall affect or alter this Lease,
which shall continue in full force and effect with respect to any other then
existing or subsequent breach.
ARTICLE XXVII
-------------
27.1 REMEDIES CUMULATIVE. To the extent permitted
by law, each legal, equitable or contractual right, power and remedy of Lessor
or Lessee now or hereafter provided either in this Lease or by statute or
otherwise shall be cumulative and concurrent and shall be in addition to every
other right, power and remedy and the exercise or beginning of the exercise by
Lessor or Lessee of any one or more of such rights, powers and remedies shall
not preclude the simultaneous or subsequent exercise by Lessor or Lessee of any
or all of such other rights, powers and remedies.
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ARTICLE XXVIII
--------------
28.1 ACCEPTANCE OF SURRENDER. No surrender to Lessor
of this Lease or of the Leased Property or any part thereof, or of any interest
therein, shall be valid or effective unless agreed to and accepted in writing by
Lessor and no act by Lessor or any representative or agent of Lessor, other than
such a written acceptance by Lessor, shall constitute an acceptance of any such
surrender.
ARTICLE XXIX
------------
29.1 NO MERGER OF TITLE. There shall be no merger
of this Lease or of the leasehold estate created hereby by reason of the fact
that the same person or entity may acquire, own or hold, directly or indirectly:
(a) this Lease or the leasehold estate created hereby or any interest in this
Lease or such leasehold estate and (b) the fee estate in the Leased Property.
ARTICLE XXX
-----------
30.1 CONVEYANCE BY LESSOR. If Lessor or any successor
owner of the Leased Property conveys the Leased Property in accordance with the
terms hereof other than as security for a debt, and the grantee or transferee of
the Leased Property expressly assumes all obligations of Lessor hereunder
arising or accruing from and after the date of such conveyance or transfer,
Lessor or such successor owner, as the case may be, shall thereupon be released
from all future liabilities and obligations of Lessor under this Lease arising
or accruing from and after the date of such conveyance or other transfer as to
the Leased Property and all such future liabilities and obligations shall
thereupon be binding upon the new owner.
ARTICLE XXXI
------------
31.1 QUIET ENJOYMENT. So long as Lessee pays all
Rent as the same becomes due and complies with all of the terms of this Lease
and performs its obligations hereunder, in each case within the applicable grace
periods, if any, Lessee shall peaceably and quietly have, hold and enjoy the
Leased Property for the Term hereof, free of any claim or other action by Lessor
or anyone claiming by, through or under Lessor, but subject to all liens and
encumbrances subject to which the Leased Property was conveyed to Lessor or
hereafter consented to by Lessee or provided for herein. Notwithstanding the
foregoing, Lessee shall have the right by separate and independent action to
pursue any claim it may have against Lessor as a result of a breach by Lessor of
the covenant of quiet enjoyment contained in this Section.
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ARTICLE XXXII
-------------
32.1 NOTICES. All notices, demands, requests,
consents, approvals and other communications ("Notice" or "Notices") hereunder
shall be in writing and personally served, mailed (by registered or certified
mail, return receipt requested and postage prepaid) or sent by facsimile
transmission, addressed to Lessor at c/o Realty ReFund Trust, 1750 Huntington
Building, 925 Euclid Avenue, Cleveland, Ohio 44115, Attention: Mr. Gregory D.
Bruhn, with copy to James B. Aronoff, Esq., Thompson Hine & Flory LLP, 3900 Key
Center, 127 Public Square, Cleveland, Ohio 44114-1216, and addressed to Lessee
at 1615 E. Northern Avenue, Suite 105, Phoenix, Arizona 85020, Attention: Mr.
J.R. Chase and Mr. Kevin Fell, with a copy to Mr. James F. Wirth at the same
address, or to such other address or addresses as either party may hereafter
designate, Notice by personal delivery or facsimile transmission shall be
effective upon receipt, and Notice given by mail shall be complete at the time
of deposit in the U.S. Mail system, but any prescribed period of Notice and any
right or duty to do any act or make any response within any prescribed period or
on a date certain after the service of such Notice given by mail shall be
extended five days.
ARTICLE XXXIII
--------------
33.1 LESSOR MAY GRANT LIENS, SUBORDINATION. Without
the consent of Lessee, Lessor may, from time to time, directly or indirectly,
create or otherwise cause to exist, modify or extend any lien, encumbrance,
superior lease or title retention agreement ("Encumbrance") upon the Leased
Property, or any portion thereof or interest therein, whether to secure any
borrowing or other means of financing or refinancing. This Lease and Lessee's
interest herein shall be subordinate to each and every Encumbrance unless the
holder thereof elects otherwise.
(a) The subordination provisions herein contained
shall be self-operative and no further instrument of subordination shall be
required. In confirmation of such subordination, Lessee shall execute and
deliver promptly any certificate that Lessor or its successors in interest may
request. Lessee hereby constitutes and appoints Lessor or its successors in
interest as Lessee's attorney-in-fact to execute and deliver any such
certificate or certificates for and on behalf of Lessee. Notwithstanding any
provision in this Lease or any separate agreement with Lessee, Lessee covenants
and agrees that Lessee shall not do any act, or refrain from doing any act, if
doing such act, or refraining from doing such act, would constitute a default or
breach of any Encumbrance.
(b) This Lease has been, or may be, assigned as
collateral security. After Lessee receives notice of such assignment and so long
as the obligations secured by such assignment remain outstanding, Lessee (i)
will not pay any Rent under this Lease more than thirty (30) days in advance of
its due date without the prior written consent of the holder of any such
assignment (the
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"Assignee"), (ii) will not surrender or consent to the modification of any of
the terms of the Lease nor to the termination hereof by Lessor without the
Assignee's prior written consent, (iii) will continue to pay Rent under this
Lease to the Lessor or as directed by Lessor in accordance with the terms of
this Lease (unless and until notified otherwise in writing by the Assignee in
case of an event of default under the Assignee's mortgage or other Encumbrance,
in which event Lessee will pay the rent due under this Lease directly to the
Assignee or the Assignee's designee) and (iv) will not seek to terminate this
Lease or seek or assert any set-off or counterclaim against Rent by reason of
any act or omission of the Lessor, until Lessee shall have given written notice
of such act or omission to the Assignee (at the Assignee's last address
furnished to Lessee) and until a reasonable period of time shall have elapsed
following the giving of such notice, during which period the Assignee shall have
the right, but shall not be obligated, to remedy such act or omission. Any
payments made to the Assignee by Lessee shall not affect or impair the other
rights and remedies the Assignee may have under said mortgage or Encumbrance or
otherwise against the Lessor.
(c) Lessee agrees, at the election of the holder of
any interest superior to this Lease pursuant to the terms hereof ("Holder") to
fully and completely attorn to, from time to time, and to recognize Holder or
any person, or such person's successors or assigns, who acquires the interest of
Lessor under the Lease as Lessee's lessor under this Lease (collectively,
"Successor Landlord") upon the then executory terms of this Lease. The foregoing
provisions of this paragraph shall inure to the benefit of any such Successor
Landlord, shall apply notwithstanding that, as a matter of law, the Lease may
automatically terminate, shall be self-operative upon any such demand, and no
further instrument shall be required to give effect to said provisions. Lessee
however, upon demand of any such Successor Landlord agrees to execute, from time
to time, lessor or any instruments to evidence and confirm the provisions of
this paragraph, satisfactory to lessor or any such Successor Landlord. Upon such
attornment and the acceptance thereof in writing by such Successor Landlord,
this Lease shall continue in full force and effect as a direct lease between
such Successor Landlord and Lessee upon all of the then executory terms of the
Lease, except that such Successor Landlord shall not be:
(i) liable for any act or omission of any prior
lessor (including Lessor); or
(ii) liable for the return of any security deposit
(unless actually received by such Successor Lessor); or
(iii) bound by any waiver or forbearance of any prior
lessor (including Lessor); or
(iv) be liable for any damages or other relief
attributable to any latent or patent defects in construction; or
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(v) bound by any covenant to perform or complete any
construction or to pay any sum to Lessee; or
(vi) subject to any offsets or defenses which might
have against any prior Lessor (including Lessor); or
(vii) bound by any Rent which Lessee might have paid
for more than the current quarter to any prior lessor (including
Lessor); or
(viii) bound by any amendment or modification of the
Lease made without its consent.
(d) Lessor shall request of each Holder that such
Holder enter into a so-called "non-disturbance agreement" with Lessee on such
Holder's standard form, and Lessor shall use best efforts to obtain such
non-disturbance agreement.
33.2 LESSEE'S RIGHT TO CURE. Subject to the
provisions of Section 33.3, if Lessor breaches any covenant to be performed by
it under this Lease, Lessee, after Notice to and demand upon Lessor, without
waiving or releasing any obligation hereunder, and in addition to all other
remedies available to Lessee, may (but shall be under no obligation at any time
thereafter to) make such payment or perform such act for the account and at the
expense of Lessor. All sums so paid by Lessee and all costs and expenses
(including, without limitation, reasonable attorneys' fees) so incurred,
together with interest thereon at the Overdue Rate from the date on which such
sums or expenses are paid or incurred by Lessee, shall be paid by Lessor to
Lessee on demand or, following entry of a final, nonappealable judgment against
Lessor for such sums, may be offset by Lessee against the Base Rent payments
next accruing or coming due. The rights of Lessee hereunder to cure and to
secure payment from Lessor in accordance with this Section 34.2 shall survive
the termination of this Lease with respect to the Leased Property.
33.3 BREACH BY LESSOR. It shall be a breach of this
Lease if Lessor: [(i)] fails to observe or perform any term, covenant or
condition of this Lease on its part to be performed and such failure continues
for a period of thirty (30) days after Notice thereof from Lessee, unless such
failure cannot with due diligence be cured without a period of thirty (30) days,
in which case such failure shall not be deemed to continue if Lessor, within
such thirty (30) day period, proceeds promptly and with due diligence to cure
the failure and diligently completes the curing thereof, or [(ii) defaults under
the Ground Lease if such default is not cured within thirty (30) days after
Notice thereof from the ground lessor of the Ground Lease.] The time within
which Lessor shall be obligated to cure any such failure also shall be subject
to extension of time due to the occurrence of any Unavoidable Delay.
33.4 LESSEE'S COOPERATION. In connection with the
termination of this Lease due to the expiration of the Term or otherwise, Lessee
shall cooperate
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with Lessor in transferring possession of the Leased Property to a new tenant,
including, without limitation, cooperating with the transfer of any licenses or
permits necessary for the operation of the Facility.
ARTICLE XXXIV
-------------
34.1 MISCELLANEOUS. Anything contained in this
Lease to the contrary notwithstanding, all claims against, and liabilities of,
Lessee or Lessor arising prior to any date of termination of this Lease shall
survive such termination. If any term or provision of this Lease or any
application thereof is invalid or unenforceable, the remainder of this Lease and
any other application of such term or provisions shall not be affected thereby.
If any late charges or any interest rate provided for in any provision of this
Lease are based upon a rate in excess of the maximum rate permitted by
applicable law, the parties agree that such charges shall be fixed at the
maximum permissible rate. Neither this Lease nor any provision hereof may be
changed, waived, discharged or terminated except by a written instrument in
recordable form signed by Lessor and Lessee. All the terms and provisions of
this Lease shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. The headings in this Lease are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Lease shall be governed by and construed in accordance with
the laws of the State but not including its conflicts of laws rules.
34.2 TRANSITION PROCEDURES. Upon the expiration or
termination of the Term of this Lease, for whatever reason, Lessor and Lessee
shall do the following (and the provisions of this Section 35.2 shall survive
the expiration or termination of this Lease until they have been fully
performed) and, in general, shall cooperate in good faith to effect an orderly
transition of the management of the Facility.
(a) TRANSFER OF LICENSES. Upon the expiration or
earlier termination of the Term, Lessee shall use its best efforts (i) to
transfer to Lessor or Lessor's nominee, to the extent assignable or
transferable, the Franchise Agreement, any liquor licenses, and all other
licenses, operating permits and other governmental authorizations and all
contracts, including contracts with governmental or quasi-governmental entities,
that may be necessary for the operation of the Facility (collectively,
"Licenses"), or (ii) if such transfer is prohibited by law or Lessor otherwise
elects, to cooperate with Lessor or Lessor's nominee in connection with the
processing by Lessor of Lessor's nominee of any applications for, all Licenses;
provided, in either case, except in the case of a termination resulting from an
Event of Default by Lessee, that the costs and expenses of any such transfer or
the processing of any such application shall be paid by Lessor or Lessor's
nominee.
(b) LEASES AND CONCESSIONS. Lessee shall assign to
Lessor or Lessor's nominee simultaneously with the termination of this Lease,
and the assignee
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shall assume any and all subleases and concession agreements in effect with
respect to the Facility which Lessor elects to have assigned and to assume.
(c) BOOKS AND RECORDS. Any and all books, records
files and keys for the Facility kept by Lessee pursuant to this Lease or
otherwise shall be delivered promptly to Lessor or Lessor's nominee,
simultaneously with the termination of this Agreement, but such books and
records shall thereafter be available to Lessee at all reasonable times for
inspection, audit, examination, and transcription for a period of three (3)
years and Lessee may retain (on a confidential basis) copies or computer records
thereof.
(d) TRANSITION ADJUSTMENTS. Lessee shall pay all
accounts payable and accrued expenses relating to the Leased Property as of the
date of termination of this Lease, to the extent such accounts payable and
accrued expenses are required to be paid by Lessee under this Lease, and Lessee
shall be entitled to receive and retain all accounts receivable, and an amount
equal to all prepaid expenses paid by Lessee, as of the date of this
termination. All advance bookings deposits and credits shall be paid to Lessor.
(e) The provisions of this Section 34.2 shall survive
the termination or expiration of this Lease.
34.3 CHANGE OF FRANCHISE. Lessee may not change
the existing franchise covering the Leased Property with the prior written
consent of Lessor, which consent may be given or withheld at Lessor's sole
discretion.
34.4 WAIVER OF PRESENTMENT, ETC. Lessee waives all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance and waives
all notices of the existence, creation or incurring of new or additional
obligations, except as expressly granted herein.
ARTICLE XXXV
------------
35.1 MEMORANDUM OF LEASE. Lessor and Lessee shall
promptly upon the request of either enter into a short form memorandum of this
Lease, in form suitable for recording under the laws of the State in which
reference to this Lease, and all options contained herein, shall be made. Lessee
shall pay all costs and expenses of recording such memorandum of this Lease.
ARTICLE XXXVI
-------------
36.1 LESSOR'S OPTION TO TERMINATE LEASE. In the
event Lessor enters into a bona fide contract to sell the Leased Property to a
non-Affiliate, Lessor
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may terminate the Lease by giving not less than thirty (30) days' prior Notice
to Lessee of Lessor's election to terminate this Lease effective upon the
closing under such contract. In the event a closing under such contract does not
occur, this Lease shall continue to be in full force and effect. Effective upon
such closing, this Lease shall terminate and be of no further force and effect
except as to any obligations of the parties existing as of such date that
survive termination of this Lease. As compensation for the early termination of
its leasehold estate under this Article XXXVI, Lessor shall within ninety (90)
days of such closing pay to Lessee the fair market value of Lessee's leasehold
estate hereunder as of the closing of the sale of the Leased Property.
For the purposes of this Article, fair market value
of the leasehold estate means, as applicable, an amount equal to the price that
a willing buyer not compelled to buy would pay a willing seller not compelled to
sell for Lessee's leasehold estate under this Lease provided, however, that such
amount shall not be less than six percent (6%) of the total of Room and Other
Revenues for the twelve (12) months immediately preceding such termination nor
more than $300,000.00.
ARTICLE XXXVII
--------------
37.1 COMPLIANCE WITH FRANCHISE AGREEMENT. To the
extent any of the provisions of the Franchise Agreement impose a greater
obligation on Lessee than the corresponding provisions of this Lease, then
Lessee shall be obligated to comply with, and the provisions of this Lease are
deemed modified to the extent necessary to comply with, the provisions of the
Franchise Agreement, it being the intent of the parties hereto that Lessee
comply in every respect with the provisions of the Franchise Agreement so as to
avoid any default thereunder. In addition, and notwithstanding any other
provisions to the contrary contained in this Lease, in the event that Franchisor
terminates the Franchise Agreement for any reason Lessor shall have the right to
terminate this Lease in which case neither party shall thereafter have any
liability to the other, provided, however, should Lessor elect to terminate this
Lease, due to a termination of the Franchise Agreement for other than a default
by Lessee under Section 16.1(h) of this Lease, then Lessor shall pay a
termination fee equal to two and one-half percent (2.50%) of the total of Room
and Other Revenues for the twelve (12) months immediately preceding such
termination.
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<PAGE> 66
IN WITNESS WHEREOF, the parties have executed this
Lease under seal by their duly authorized officers as of the date first above
written.
"LESSOR"
___________________________, a ________
By:
---------------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
"LESSEE"
REALTY HOTEL LESSEE CORP., a Nevada
corporation
By:
--------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
[CORPORATE SEAL]
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<PAGE> 67
SCHEDULE OF EXHIBITS
--------------------
A. Description of Land
B. Schedule of Leases and Service Contracts
C. Inventory of Furniture, Fixtures and Equipment
D. Hotel Management Agreement
E. Assignment and Assumption of Leases
F. Assignment and Assumption of Service Contracts
G. Memorandum of Lease
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<PAGE> 68
EXHIBIT A
---------
DESCRIPTION OF LAND
-------------------
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<PAGE> 69
EXHIBIT B
---------
SCHEDULE OF LEASES AND SERVICE CONTRACTS
----------------------------------------
-1-
<PAGE> 70
EXHIBIT C
---------
INVENTORY OF FURNITURE, FIXTURES AND EQUIPMENT
----------------------------------------------
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<PAGE> 71
EXHIBIT D
---------
HOTEL MANAGEMENT AGREEMENT
--------------------------
-1-
<PAGE> 72
EXHIBIT E
---------
ASSIGNMENT AND ASSUMPTION OF LEASES
-----------------------------------
THIS ASSIGNMENT AND ASSUMPTION OF LEASES is
made as of the ____ day of ____________, 199_, by and between
____________________, a ____________________________ ("Assignor"), and REALTY
HOTEL LESSEE CORP., a Nevada corporation ("Assignee").
W I T N E S S E T H:
-------------------
WHEREAS, Assignor, as Lessor, and Assignee, as
Lessee, entered into that certain Percentage Lease Agreement of even date
herewith (the "Lease Agreement"), relating to that certain hotel building known
as the ______________________________ (the "Hotel Building"), situated on
certain real property located in _______________, ______________ as described on
EXHIBIT A attached hereto and made a part hereof (the "Land"); and
WHEREAS, the Lease Agreement contemplates that
Assignor shall assign to Assignee all its right, title and interest in the
certain leases and other instruments relating to the Hotel Building;
NOW, THEREFORE, in consideration of the mutual
agreements hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged by each of the parties hereto,
Assignor and Assignee do hereby agree as follows:
1. ASSIGNMENT. Assignor hereby gives, grants,
bargains, sells, conveys, transfers and sets over unto Assignee, its successors
and assigns, as of the Effective Date (as hereinafter defined), all of
Assignor's right, title and interest in and to the following instruments
(collectively the "Lease Instruments"):
(a) [List Leases]
2. ASSUMPTION. Assignee hereby accepts the
foregoing assignment and, in consideration thereof, Assignee hereby covenants
and agrees that, on and after the Effective Date, Assignee will assume, observe,
perform, fulfill and be bound by all terms, covenants, conditions and
obligations under each of the Lease Instruments which arise on and after the
Effective Date and are to be observed, performed and fulfilled by the sublessor
named therein on and after the Effective Date in the same manner and to the same
extent as if Assignee were the sublessor named therein.
3. INDEMNIFICATION. (a) Assignor hereby
indemnifies Assignee, and agrees to defend and hold harmless Assignee from and
against any and all liability, loss, damage and expense, including, without
limitation, reasonable
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<PAGE> 73
attorneys fees, which Assignee may or shall incur under the Lease Instruments by
reason of any failure or alleged failure of Assignor to have complied with or to
have performed, before the Effective Date, the obligations of the sublessor
thereunder which were to be performed before the Effective Date.
(b) Assignee hereby indemnifies Assignor, and agrees
to defend and hold harmless Assignor from and against any and all liability,
loss, damage and expense, including without limitation reasonable attorneys'
fees, which Assignor may or shall incur under the Lease Instruments by reason of
any failure or alleged failure of Assignee to comply with or to perform, on or
after the Effective Date, all the obligations of the sublessor thereunder which
are to be performed on or after the Effective Date.
4. EFFECTIVE DATE. The "Effective Date", as used
herein, shall mean the date upon which this document is fully executed and
delivered.
5. SUCCESSORS AND ASSIGNS. The terms and conditions
of this agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns.
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<PAGE> 74
IN WITNESS WHEREOF, the parties hereto have caused
this instrument to be duly executed as of the date set forth above.
"ASSIGNOR"
_________________________, a ____________
By:
--------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
"ASSIGNEE"
REALTY HOTEL LESSEE CORP., a Nevada
corporation
By:
--------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
[CORPORATE SEAL]
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<PAGE> 75
STATE OF _______________ )
) SS:
COUNTY OF _____________ )
BEFORE me, a Notary Public in and for said County and
State, personally appeared __________________, ____________ of ____________, who
acknowledged that he did sign the foregoing instrument for and on behalf of
___________________ and that the same is his free act and deed individually and
as such officer and the free act and deed of ________________.
IN TESTIMONY WHEREOF, I have hereunto set my hand and
official seal at ______________, _________________ this ____ day of
______________, 199_.
--------------------------------
Notary Public
(Seal)
STATE OF _______________ )
) SS:
COUNTY OF ______________ )
BEFORE me, a Notary Public in and for said County
and State, personally appeared ___________________, _____________ of REALTY
HOTEL LESSEE CORP., a Nevada corporation, who acknowledged that he did sign the
foregoing instrument on behalf of such corporation and that the same is his free
act and deed individually and as such officer and the free act and deed of such
corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand and
official seal at ______________, ________________ this ____ day of ____________,
199_.
--------------------------------
Notary Public
(Seal)
This instrument prepared by:
James B. Aronoff, Esq.
Thompson Hine & Flory LLP
3900 Key Center
127 Public Square
Cleveland, Ohio 44114-1216
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<PAGE> 76
EXHIBIT F
---------
ASSIGNMENT AND ASSUMPTION
-------------------------
OF
--
SERVICE AND OTHER CONTRACTS
---------------------------
THIS ASSIGNMENT AND ASSUMPTION OF SERVICE
AND OTHER CONTRACTS is made as of the ____ day of _______________, 199_, by and
between _________________________________________________, a ___________________
___________ ("Assignor"), and REALTY HOTEL LESSEE CORP., a Nevada corporation
("Assignee").
W I T N E S S E T H:
WHEREAS, Assignor, as Lessor, and Assignee, as
Lessee, entered into that certain Percentage Lease Agreement of even date
herewith (the "Lease Agreement"), relating to that certain hotel building known
as the ______________________________ (the "Hotel Building"), situated on
certain real property located in _______________, ______________ as described on
EXHIBIT A attached hereto and made a part hereof (the "Land"); and
WHEREAS, the Lease Agreement contemplates that
Assignor shall assign and convey to Assignee all its right, title and interest
in certain service and other contracts upon the consummation of the transactions
set forth in the Lease Agreement;
NOW, THEREFORE, in consideration of the mutual
agreements hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged by each of the parties hereto,
Assignor and Assignee do hereby agree as follows:
1. ASSIGNMENT. Assignor hereby assigns to Assignee,
its successors and assigns, as of the Effective Date (as hereinafter defined),
all of Assignor's right, title and interest in and to each of the service and
other contracts relating to the Hotel Building as set forth on EXHIBIT A
attached hereto and made a part hereof (the "Contracts").
2. ASSUMPTION. Assignee hereby accepts the
foregoing assignment and, in consideration thereof, Assignee hereby covenants
and agrees that, on and after the Effective Date, Assignee will assume, observe,
perform, fulfill and be bound by all terms, covenants, conditions and
obligations of each of the Contracts which arise on and after the Effective Date
and are to be observed, performed and fulfilled by Assignor on and after the
Effective Date, in the same manner and to the same extent as if Assignee,
instead of Assignor, were originally named therein.
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<PAGE> 77
3. INDEMNIFICATION. (a) Assignor hereby
indemnifies Assignee, and agrees to defend and hold harmless Assignee from and
against any and all liability, loss, damage and expense, including without
limitation reasonable attorneys fees, which Assignee may or shall incur under
any of the Contracts by reason of any failure or alleged failure of Assignor to
have complied with or to have fully performed, before the Effective Date, all
obligations on its part to have been performed, complied with or discharged
under any of the terms and conditions contained in any of the Contracts which
were to be performed before the Effective Date.
(b) Assignee hereby indemnifies Assignor, and
agrees to defend and hold harmless Assignor from and against any and all
liability, loss, damage and expense, including without limitation reasonable
attorneys' fees, which Assignor may or shall incur under any of the Contracts by
reason of any failure or alleged failure of Assignee to comply with or to
perform, on or after the Effective Date, all obligations on its part to be
performed or complied with under any of the terms and conditions contained in
any of the Contracts which are to be performed on or after the Effective Date.
4. EFFECTIVE DATE. The "Effective Date", as used
herein, shall mean the date upon which this document is fully executed and
delivered.
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<PAGE> 78
5. SUCCESSORS AND ASSIGNS. The terms and conditions
of this agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused
this instrument to be duly executed as of the day and year first set forth
above.
"ASSIGNOR"
__________________________, a ___________________
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
"ASSIGNEE"
REALTY HOTEL LESSEE CORP., a Nevada
corporation
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
[CORPORATE SEAL]
-3-
<PAGE> 79
EXHIBIT A
---------
Schedule of Service and Other Contracts
-4-
<PAGE> 80
EXHIBIT G
---------
MEMORANDUM OF LEASE
-------------------
-1-
