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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1605434
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes ____ No ____ (Not
Applicable. On August 25, 1992, the Registrant filed an application for
relief from the reporting requirements of the Securities Exchange Act of
1934 pursuant to Section 12(h) thereof. Pursuant to a grant of the relief
requested in such application, the Registrant was not required to, and did
not make, any filings pursuant to the Securities Exchange Act of 1934 from
October 23, 1989 until the application was voluntarily withdrawn on January
26, 1998.)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_] (Not Applicable)
Documents Incorporated by Reference
None
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MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE NO.
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PART I
<S> <C> <C>
Item 1. Business......................................................................................... 1
Item 2. Properties....................................................................................... 5
Item 3. Legal Proceedings................................................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 7
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters.............................................................. 7
Item 6. Selected Financial Data.......................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................ 8
Item 8. Financial Statements and Supplementary Data......................................................14
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.........................................................................28
PART III
Item 10. Directors and Executive Officers.................................................................28
Item 11. Management Remuneration and Transactions.........................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................29
Item 13. Certain Relationships and Related Transactions...................................................30
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K..........................................................................33
</TABLE>
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PART I
ITEM 1. BUSINESS
Description of the Partnership
Marriott Residence Inn II Limited Partnership, a Delaware limited partnership
(the "Partnership"), was formed on November 23, 1988 to acquire and own 23
Marriott Residence Inn properties (the "Inns") and the land on which the Inns
are located. The Inns are located in 16 states and contain a total of 2,487
suites as of December 31, 1996. The Partnership commenced operations on
December 28, 1988.
On October 8, 1993, Marriott Corporation's operations were divided into two
separate companies: Host Marriott Corporation ("Host Marriott") and Marriott
International, Inc. ("MII"). The sole general partner of the Partnership is
Marriott RIBM Two Corporation, a Delaware corporation (the "General Partner"), a
wholly-owned subsidiary of Host Marriott. The Partnership is engaged solely in
the business of owning and operating the Inns and therefore is engaged in one
industry segment. The principal offices of the Partnership are located at 10400
Fernwood Road, Bethesda, Maryland 20817.
The Inns are operated as part of the Residence Inn by Marriott system, which
includes over 238 Inns in 43 states and Canada in the extended-stay segment of
the U.S. lodging industry. The Inns are managed by Residence Inn by Marriott,
Inc. (the "Manager"), a wholly-owned subsidiary of MII; effective March 22,
1996, the original management agreement was restated into two separate
management agreements. The Partnership entered into a management agreement with
the Manager for 22 of the Inns and Bossier RIBM Two LLC entered into a
management agreement for the Bossier City Residence Inn, collectively, (the
"Restated Management Agreements"). The primary provisions are discussed in Item
13, "Certain Relationships and Related Transactions." The Restated Management
Agreements expire in 2012 with renewals at the option of the Manager for one or
more of the Inns for up to 45 years thereafter. See Item 13 "Certain
Relationships and Related Transactions."
The Inns are extended-stay hotels which cater primarily to business and family
travelers who stay more than five consecutive nights. The Inns typically have
88 to 144 studio, one bedroom, two bedroom and two-story penthouse suites. The
Inns generally are located in suburban settings throughout the United States and
feature a series of residential style buildings with landscaped walkways,
courtyards and recreational areas. Residence Inns do not have restaurants, but
offer a complimentary continental breakfast. In addition, most Residence Inns
provide a complimentary hospitality hour. Each suite contains a fully-equipped
kitchen and many suites have woodburning fireplaces.
The Partnership's financing needs have been funded through loan agreements with
independent financial institutions. See the "Debt Financing" section below.
Organization of the Partnership
On November 23, 1988, the Partnership executed a purchase agreement (the
"Purchase Agreement") with Host Marriott to acquire the Inns, all related
personal property, and the land
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on which the Inns are located. The total purchase price under the Purchase
Agreement was $185.7 million. On December 28, 1988 (the "Closing Date"), 70,000
units of limited partnership interests (the "Units") in the Partnership,
representing a 99% interest in the Partnership, were sold in a public offering.
The offering price per Unit was $1,000. The General Partner contributed $707,100
for its 1% general partner interest. The Partnership acquired 17 of the Inns on
the Closing Date. The remaining six Inns were acquired during 1989.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier RIBM Two LLC (the "LLC"), a Delaware limited liability company. The
general partner of the LLC with a 1% interest is Bossier RIBM Two, Inc., a
wholly owned subsidiary of the Partnership. The remaining 99% interest in the
LLC is owned by the Partnership.
Debt Financing
As of December 31, 1995, the Partnership's mortgage debt consisted of a
$131,500,000 nonrecourse mortgage loan (the "Term Loan") and $5,589,000 borrowed
under a $10 million revolving credit facility (the "Revolving Loan"). Both the
Term Loan and the Revolving Loan matured on December 30, 1995. However, the
third party lender granted the Partnership an initial and subsequent forbearance
which effectively extended the maturity of the loans through March 22, 1996.
During the forbearance period, the Partnership was required to make interest
only payments on the total outstanding debt balance of $137,089,000 at a fixed
rate of 10.174%. During 1995, the Term Loan carried interest at a fixed rate of
10.17% per annum and required no amortization of principal. The Revolving Loan
was available to provide interest payments on up to $20 million of the principal
amount of the Term Loan. Borrowings under the Revolving Loan carried interest
per annum at a floating rate equal to .625% plus the one, two, three or six
month London Interbank Offered Rate ("LIBOR"), as elected by the Partnership and
required no amortization of principal. Interest on the borrowings could also
have been funded under the Revolving Loan. There were no borrowings under the
Revolving Loan in 1995. The weighted average interest rate on the Revolving
Loan was 6.9% and 5.0% in 1995 and 1994, respectively.
Refinancing
On March 22, 1996 (the "Refinancing Closing Date") the General Partner was
successful in refinancing the Term Loan and the Revolving Loan with a new third
party lender. In conjunction with the refinancing, the principal amount of the
Partnership's mortgage debt was increased from $137.1 million to $140 million.
The refinanced mortgage debt (the "Mortgage Debt") continues to be nonrecourse
to the Partnership, bears interest at a fixed rate of 8.85% based upon actual
number of days over a 360 day year for a 10-year term expiring March 10, 2006
and requires payments of interest only during the first loan year (April 1996
through March 1997) and principal amortization based upon a 25-year amortization
schedule beginning with the second loan year.
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the
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Partnership's rights under the management agreement. Although the Partnership
continues to own 23 Residence Inns, during the course of performing
environmental studies at the properties, the lender determined that the Bossier
City Residence Inn did not pass certain required thresholds to enable the
property to collateralize the Mortgage Debt. Additionally, as part of the
refinancing, the Partnership is required to deposit $500,000 into a reserve
account and fund $250,000 annually through 2006 into the account to provide for
any claim, investigation, or litigation that may arise from any environmental
condition at the Bossier City Residence Inn. The initial $500,000 deposit was
funded and will be maintained by the lender. The Partnership is required to
repay the initial reserve as promptly as possible if the Partnership draws on
the deposit or by the end of the 10-year term in March 2006. Any draws upon the
account will accrue interest at the 30-day LIBOR plus 4.5%. If the Partnership
does not need to draw on the reserve account, the lender will hold the reserve
until such time as the Mortgage Debt is either repaid, or a governmental
authority determines that the statute of limitations on filing any claims has
expired or that no further remedial activities are required at the property.
Based upon the results of the environmental studies performed, the Partnership
does not expect that it will be necessary to draw on the reserve.
Pursuant to the terms of the Mortgage Debt, the Partnership must establish and
maintain certain reserves including:
. $3,482,000 Debt Service Reserve - This reserve was fully funded by mid-1997
and is to equal three months of debt service.
. $2,357,000 Capital Expenditure Reserve - This reserve was fully funded on the
Refinancing Closing Date. The funds will be expended for various renewals and
replacements, site improvements, Americans with Disabilities Act of 1990
modifications and environmental remediation projects identified during the
course of the appraisals and environmental studies undertaken in conjunction
with the refinancing.
. $900,000 Working Capital Reserve - This reserve was provided for from 1996
cash from operations. This reserve will provide additional funds to the
Partnership Inns in the future if needed.
. $500,000 Bossier City Residence Inn Environmental Reserve - As discussed
above, this reserve was funded by the lender.
Material Contracts
Management Agreement
To facilitate the refinancing, effective March 22, 1996, the original management
agreement was restated into two separate management agreements. The Partnership
entered into a management agreement with the Manager for 22 of the Inns and the
LLC entered into a management agreement for the Bossier City Residence Inn,
collectively, (the "Restated Management Agreements"). The primary provisions
are discussed in Item 13, "Certain Relationships and Related Transactions."
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Competition
The United States lodging industry generally is comprised of two broad segments:
full service hotels and limited service hotels. Full service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services, typically including bell service and room service. Limited
service hotels generally offer accommodations with limited or no services and
amenities. As extended-stay hotels, the Inns compete effectively with both full
service and limited service hotels in their respective markets by providing
streamlined services and amenities exceeding those provided by typical limited
service hotels at prices that are significantly lower than those available at
full service hotels.
The lodging industry in general, and the extended-stay segment in particular, is
highly competitive, but the degree of competition varies from location to
location and over time. The Inns compete with several other major lodging
brands. Competition in the industry is based primarily on the level of service,
quality of accommodations, convenience of locations and room rates. The
following are key participants in the extended-stay segment of the lodging
industry: Residence Inn, Homewood Suites, Hawthorne Suites, Summerfield Suites
and AmeriSuites.
Conflicts of Interest
Because Host Marriott, the parent of the General Partner, MII and their
affiliates own and/or operate hotels other than the Partnership's Inns and MII
and its affiliates license others to operate hotels under the various brand
names owned by MII and its affiliates, potential conflicts of interest exist.
With respect to these potential conflicts of interest, Host Marriott, MII and
their affiliates retain a free right to compete with the Partnership's Inns,
including the right to develop, own, and operate competing hotels now and in the
future in markets in which the Inns are located, in addition to those existing
hotels which may currently compete directly or indirectly with the Inns.
Under Delaware law, the General Partner has unlimited liability for the
obligations of the Partnership, unless those obligations are, by contract,
without recourse to the partners of the Partnership. Since the General Partner
is entitled to manage and control the business and operations of the
Partnership, and because certain actions taken by the General Partner or the
Partnership could expose the General Partner or its parent, Host Marriott, to
liability that is not shared by the limited partners (for example, tort
liability and environmental liability), this control could lead to conflicts of
interest.
Policies with Respect to Conflicts of Interest
It is the policy of the General Partner that the Partnership's relationship with
the General Partner, any affiliate of the General Partner, or persons employed
by the General Partner or its affiliates be conducted on terms that are fair to
the Partnership and that are commercially reasonable. Agreements and
relationships involving the General Partner or its affiliates and the
Partnership are on terms consistent with the terms on which the General Partner
or its affiliates have dealt with unrelated parties.
The Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement") provides that any agreements, contracts or arrangements between the
Partnership and the General
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Partner or any of its affiliates, except for rendering legal, tax, accounting,
financial, engineering, and procurement services to the Partnership by employees
of the General Partner or its affiliates, will be on commercially reasonable
terms and will be subject to the following additional conditions:
(i) the General Partner or any such affiliate must have the ability to render
such services or to sell or lease such goods;
(ii) such agreements, contracts or arrangements must be fair to the Partnership
and reflect commercially reasonable terms and must be embodied in a
written contract which precisely describes the subject matter thereof and
all compensation to be paid therefor;
(iii) no rebates or give-ups may be received by the General Partner or any such
affiliate, nor may the General Partner or any such affiliate participate
in any reciprocal business arrangements which would have the effect of
circumventing any of the provisions of the Partnership Agreement; and
(iv) no such agreement, contract or arrangement as to which the limited
partners had previously given approval may be amended in such a manner as
to increase the fees or other compensation payable by the Partnership to
the General Partner or any of its affiliates or to decrease the
responsibilities or duties of the General Partner or any such affiliate in
the absence of the consent of the holders of a majority in interest of the
limited partners.
Employees
Neither the General Partner nor the Partnership has any employees. Host
Marriott provides the services of certain employees (including the General
Partner's executive officers) of Host Marriott to the Partnership and the
General Partner. The Partnership and the General Partner anticipate that each
of the executive officers of the General Partner will generally devote a
sufficient portion of his or her time to the business of the Partnership.
However, each of such executive officers also will devote a significant portion
of his or her time to the business of Host Marriott and its other affiliates.
No officer or director of the General Partner or employee of Host Marriott
devotes a significant percentage of time to Partnership matters. To the extent
that any officer, director or employee does devote time to the Partnership, the
General Partner or Host Marriott, as applicable, is entitled to reimbursement
for the cost of providing such services. See Item 11 "Management Remuneration
and Transactions" for information regarding payments made to Host Marriott or
its subsidiaries for the cost of providing administrative services to the
Partnership.
Consolidation
The General Partner has undertaken, on behalf of the Partnership, to pursue,
subject to further approval of the partners, a potential transaction (the
"Consolidation") in which (i) subsidiaries of CRF Lodging Company, L.P. (the
"Company"), a newly formed Delaware limited partnership, would merge with and
into the Partnership and up to five other limited partnerships, with the
Partnership and the other limited partnerships being the surviving entities
(each, a "Merger" and collectively, the "Mergers"), subject to the satisfaction
or waiver of certain conditions, (ii) CRF Lodging Trust ("CRFLT"), a Maryland
real estate investment trust, the sole general partner of the Company, would
offer its common shares of beneficial interest, par value $0.01 per share (the
"Common Shares") to investors in an underwritten public offering and would
invest the proceeds of such offering in the Company in exchange for units of
limited partnership interests in the Company ("Units") and (iii) the Partnership
would enter into a Lease for the operation of its Hotels pursuant to which a
Lessee would pay rent to the Partnership based upon the greater of a fixed
dollar amount of base rent or specified percentages of gross sales, as specified
in the Lease. If the partners approve the transaction and other conditions are
satisfied, the partners of the Partnership would receive Units in the Merger in
exchange for their interests in the Partnership.
A preliminary Prospectus/Consent Solicitation was filed as part of a
Registration Statement on Form S-4 with the Securities and Exchange Commission
and which describes the potential transaction in greater detail. Any offer of
Units in connection with the Consolidation will be made solely by a final
Prospectus/Consent Solicitation.
ITEM 2. PROPERTIES
Introduction
The properties consisted of 23 Residence Inn by Marriott hotels as of December
31, 1996. The Inns have been in operation for at least seven years. The Inns
range in age between 7 and 13 years. The Inns are geographically diversified
among 16 states, and no state has more than four Inns.
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The extended-stay segment of the lodging industry experienced increased
competition throughout 1996 as new extended-stay purpose-built competitors
entered the market. This trend is expected to continue in 1997. In response to
this increased competition, Residence Inn by Marriott's strategy is to
differentiate the brand on the basis of superior service offerings and delivery.
On a combined basis, competitive forces affecting the Inns are not, in the
opinion of the General Partner, more adverse than the overall competitive forces
affecting the lodging industry generally. See Item 1 "Business--Competition."
Name and Location of Partnership Inns
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<CAPTION>
Inn Number of Suites Date Opened
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Birmingham, AL 128 1986
Arcadia, CA 120 1989
Irvine, CA 112 1989
Placentia, CA 112 1988
Boca Raton, FL 120 1988
Jacksonville, FL 112 1986
Pensacola, FL 64 1985
St. Petersburg, FL 88 1986
Chicago-Deerfield, IL 128 1989
Shreveport-Bossier City, LA 72 1983
Boston-Danvers, MA 96 1989
Kalamazoo, MI 83 1989
Jackson, MS 120 1986
Las Vegas, NV 192 1989
Santa Fe, NM 120 1986
Charlotte North, NC 91 1988
Greensboro, NC 128 1987
Akron, OH 112 1987
Valley Forge, PA 88 1988
Columbia, SC 128 1988
Spartanburg, SC 88 1985
Memphis, TN 105 1986
Lubbock, TX 80 1986
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TOTAL 2,487
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</TABLE>
The following table shows selected combined operating and financial statistics
for the Inns (in thousands, except combined average occupancy, combined average
daily room rate and revenue per available room ("REVPAR"). REVPAR is a commonly
used indicator of market performance for hotels which represents the combination
of daily suite rate charged and the average daily occupancy achieved:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995 1994
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<S> <C> <C> <C>
Combined average occupancy............. 84.5% 86.5% 87.5%
Combined average daily suite rate...... $84.65 $80.92 $75.25
REVPAR................................. $71.50 $70.01 $65.84
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS
The Partnership and the Inns are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
condition or results of operations of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND RELATED
SECURITY HOLDER MATTERS
There is currently no established public trading market for the Units and it is
not anticipated that a public market for the Units will develop. Transfers of
Units are limited to the first date of each accounting quarter. All transfers
are subject to approval by the General Partner. As of December 31, 1996, there
were 3,915 holders of record of the 70,000 Units.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts of less
than 50% of their original capital contributions; or
(b) 90% to the limited partners and 10% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts equal
to or greater than 50% but less than 100% of their original capital
contributions; or
(c) 75% to the limited partners and 25% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts equal
to 100% or more of their original capital contributions.
Cash available for distribution means, with respect to any fiscal period, the
cash revenues of the Partnership from all sources during the fiscal period,
other than Capital Receipts, less (i) all cash expenditures of the Partnership
during such fiscal period, including, without limitation, debt service,
repayment of advances made by the General Partner, any fees for management
services and administrative expenses, but excluding expenditures incurred by the
Partnership in
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connection with a transaction resulting in Capital Receipts, and (ii) such
reserves as may be determined by the General Partner, in its reasonable
discretion to be necessary to provide for the foreseeable cash needs of the
Partnership or for the maintenance, repair, or restoration of the Inns.
As of December 31, 1996, the Partnership has distributed a total of $39,030,000
($552 per limited partner unit) since inception. In 1996, no cash was
distributed, however $3,535,000 ($50 per limited partner unit) was distributed
on February 14, 1997 from 1996 cash from operations. In 1995, $4,949,000 ($70
per limited partner unit) was distributed. No distributions of Capital Receipts
have been made since inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years in the period ended December 31,
1996 presented in accordance with generally accepted accounting principles:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
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(in thousands, except per unit amounts)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 34,035 $ 33,300 $ 30,441 $ 28,290 $ 27,025
======== ======== ======== ======== ========
Net income (loss)........................... $ 2,663 $ 1,603 $ (528) $ (2,452) $ (5,686)
======== ======== ======== ======== ========
Net income (loss)
per limited partner unit (70,000 Units).. $ 38 $ 23 $ (7) $ (35) $ (80)
======== ======== ======== ======== ========
Total assets................................ $165,510 $165,362 $159,801 $162,216 $166,301
======== ======== ======== ======== ========
Total liabilities........................... $156,305 $158,820 $149,913 $146,709 $143,676
======== ======== ======== ======== ========
Cash distributions
per limited partner unit (70,000 Units).. $ -- $ 70 $ 72 $ 66 $ 79
======== ======== ======== ======== ========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Partnership to be different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Although the Partnership believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Partnership's
filings with the Securities and Exchange Commission. The Partnership undertakes
no obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
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GENERAL
The following discussion and analysis addresses results of operations for the
fiscal years ended December 31, 1996, 1995 and 1994. Since 1989, the
Partnership has owned the Inns which, as of December 31, 1996, contain a total
of 2,487 suites. During the period from 1994 through 1996, Partnership revenues
grew from $30.4 million to $34.0 million, while the Partnership's total Inn
sales grew from $63.0 million to $69.6 million. Growth in suite sales, and thus
Inn sales, is primarily a function of combined average occupancy and combined
average suite rates. During the period from 1994 through 1996, the Inns'
combined average room rate increased by $9.40 from $75.25 to $84.65, while the
combined average occupancy decreased from 87.5% to 84.5%.
The Partnership's operating costs and expenses are, to a great extent, fixed.
Therefore, the Partnership derives substantial operating leverage from increases
in revenue. This operating leverage is offset in part by variable expenses,
including (i) base and Residence Inn system management fees under the management
agreement, which are 2% of gross Inn sales, and 4% of suite sales, respectively
and (ii) incentive management fees under the Restated Management Agreements
equal to 15% of operating profit, as defined, payable out of 50% of available
cash flow, as defined.
RESULTS OF OPERATIONS
1996 Compared to 1995:
Revenues. Revenues (Inn sales less Inn operating costs and expenses) increased
$.7 million, or 2%, to $34.0 million in 1996 from $33.3 million in 1995.
Revenue and operating profit were impacted primarily by growth in REVPAR.
REVPAR is a commonly used indicator of market performance for hotels which
represents the combination of daily suite rate charged and the average daily
occupancy achieved. REVPAR does not include food and beverage or other
ancillary revenues generated by the property. Inn sales increased $2.8 million,
or 4%, to $69.6 million in 1996 reflecting the improvements in REVPAR for the
year. REVPAR increased 2% during the year due primarily to an increase in
average suite rates of approximately 5%, with a decrease in average occupancy of
two percentage points. Results were further impacted by a one percentage point
decrease in the house profit margin.
Operating Costs and Expenses. Operating costs and expenses increased $.4
million to $18.6 million in 1996 from $18.2 million in 1995. As a percentage of
Inn revenues, Inn operating costs and expenses represented 55% of revenues for
1996 and 55% in 1995.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $.3 million to $15.4
million, or 45% of revenues, in 1996 from $15.1 million, or 45% of revenues in
1995.
Interest Expense. Interest expense decreased $.7 million to $13.3 million
because the refinanced debt carried a lower average interest rate of 8.85%
versus 10% under the old loan.
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Net Income. Net income increased $1.1 million to $2.7 million, or 8% of
revenues, in 1996 from $1.6 million, or 5% of total revenues, in 1995 due
primarily to improved operating results and lower interest expense.
1995 Compared to 1994:
Revenues. Revenues increased $2.9 million, or 10%, to $33.3 million in 1995
from $30.4 million in 1994 as a result of strong growth in REVPAR of over 6%.
The increase in REVPAR was primarily the result of an 8% increase in average
suite rates and a decrease of one percentage point in average occupancy.
Operating Costs and Expenses. Operating costs and expenses increased $1.0
million to $18.2 million, or 55% of revenues, in 1995, from $17.2 million, or
57% of revenues in 1994.
Operating Profit. Operating profit increased $1.9 million to $15.1 million, or
45% of revenues, in 1995 from $13.2 million, or 43% of revenues, in 1994 due to
the changes in revenues and operating costs discussed above.
Interest Expense. Interest expense remained unchanged at $14.0 million for 1995
and 1994.
Net Income. Net income increased $2.1 million to $1.6 million, or 5% of
revenues, in 1995 from a net loss of $.5 million in 1994 due to the items
discussed above.
CAPITAL RESOURCES AND LIQUIDITY
General
The General Partner believes that cash from Inn operations and Partnership
reserves will provide adequate funds in the short term and long term of the
operational and capital needs of the Partnership.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from operations. Its
principal uses of cash are to make debt service payments, fund the property
improvement fund, and to make distributions to the limited partners.
Cash provided by operations was $3.9 million in 1996, $19.8 million in 1995 and
$9.9 million in 1994. The $15.9 million decrease in cash from operations in
1996 was primarily the result of changes in operating accounts due to accrued
interest expense at the end of 1995, increased amounts due from the Manager and
payment of deferred base management fees during 1996. This was partially offset
by increased net income of $1.1 million. The $9.9 million increase in cash from
operations in 1995 was mainly the result of changes in operating accounts caused
by accreued interest expense at the end of 1995 and decreased amounts due from
the Manager during 1995, as well as increased net income of $2.1 million. This
was partially offset by the payment of deferred base management fees during
1995.
10
<PAGE>
Cash used in investing activities was $7.2 million, $3.4 million and $3.2
million in 1996, 1995 and 1994, respectively. The Partnership's cash investing
activities consists primarily of contributions to the property improvement fund
and capital expenditures for improvements to existing Inns and contributions to
restricted cash reserves required under the new terms of the mortgage debt.
Cash used in financing activities was $2.6 million, $5.5 million and $5.1
million in 1996, 1995 and 1994, respectively. The Partnership's cash financing
activities consists primarily of capital distributions to partners, repayment of
debt and payment of financing costs, as well as the refinancing of certain debts
of the Partnership. In March 1996, the Partnership refinanced mortgage debt of
$137 million with proceeds from a $140 million nonrecourse mortgage loan. The
excess proceeds from the loan were primarily used to establish a reserve for
certain capital expenditures. The refinanced debt is nonrecourse to the
Partnership, bears interest at a fixed rate of 8.85%, and matures in 2006.
Principal amortization is required on the loan over the ten year term based on a
25-year amortization. In connection with refinancing, the Partnership
contributed the Bossier City Residence Inn to a newly formed wholly-owned
subsidiary.
Refinancing
On March 22, 1996 the General Partner was successful in refinancing the Term
Loan and the Revolving Loan with a new third party lender.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier RIBM Two LLC (the "LLC"), a Delaware limited liability company. The
general partner of the LLC with a 1% interest is Bossier RIBM Two, Inc., a
wholly owned subsidiary of the Partnership. The remaining 99% interest in the
LLC is owned by the Partnership. The Inns are managed by the Manager, a wholly-
owned subsidiary of MII, as part of the Residence Inn by Marriott hotel system.
In conjunction with the refinancing, the principal amount of the Partnership's
mortgage debt was increased from $137.1 million to $140 million. The refinanced
mortgage debt (the "Mortgage Debt") continues to be nonrecourse to the
Partnership, bears interest at a fixed rate of 8.85% based upon actual number of
days over a 360 day year for a 10-year term expiring March 10, 2006 and requires
payments of interest only during the first loan year (April 1996 through March
1997) and principal amortization based upon a 25-year amortization schedule
beginning with the second loan year.
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the Partnership's rights under
the management agreement. Although the Partnership continues to own 23
Residence Inns, during the course of performing environmental studies at the
properties, the lender determined that the Bossier City Residence Inn did not
pass certain required thresholds to enable the property to collateralize the
Mortgage Debt. Additionally, as part of the refinancing, the Partnership is
required to deposit $500,000 into a reserve account and fund $250,000 annually
through 2006 into the account to provide for any claim, investigation, or
11
<PAGE>
litigation that may arise from any environmental condition at the Bossier City
Residence Inn. The initial $500,000 deposit will be funded and maintained by the
lender. The Partnership is required to repay the initial reserve as promptly as
possible if the Partnership draws on the deposit or by the end of the 10-year
term in March 2006. Any draws upon the account will accrue interest at the 30-
day LIBOR plus 4.5%. If the Partnership does not need to draw on the reserve
account, the lender will hold the reserve until such time as the Mortgage Debt
is either repaid, or a governmental authority determines that the statute of
limitations on filing any claims has expired or that no further remedial
activities are required at the property. Based upon the results of the
environmental studies performed, the Partnership does not expect that it will be
necessary to draw on the reserve.
Property Improvement Fund
The Restated Management Agreements provide for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are 5% of gross Inn revenues. Total contributions to the property improvement
fund for the years ended December 31, 1996, 1995 and 1994 were $3,482,000,
$3,343,000 and $3,152,000, respectively.
Deferred Management Fees
To facilitate the refinancing, effective March 22, 1996, the original management
agreement was restated into two separate management agreements. The Partnership
entered into a management agreement with the Manager for 22 of the Inns which
the Partnership directly owns and the LLC entered into a management agreement
for the Bossier City Residence Inn, which the LLC owns, collectively (the
"Restated Management Agreements").
The Manager earns a base management fee equal to 2% of the Inns' gross revenues.
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,070,707.
Deferred base management fees are payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently. Pursuant to the terms of the Restated Management Agreements,
the Partnership paid the remaining $743,000 of deferred base management fees in
1996.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of operating profit, as defined (23.5% in any year in which operating profit is
equal to or greater than $25.3 million; however, cumulative incentive management
fees cannot exceed 20% of cumulative operating profit). The incentive
management fee is payable out of 50% of cash flow from operations remaining
after payment of debt service, provision for Partnership administrative
expenses, payment of the base management fee, payment of deferred base
management fees and retention by the Partnership of annual cash flow from
operations of $7,070,707. After the Partnership has retained an additional 5%
return, the incentive management fee is payable out of 75% of the remaining cash
flow from operations. Through 1991, the Manager was not entitled to accrue any
unpaid incentive management fees. Incentive management fees earned after 1991
are payable in the future from operating cash flow, as defined. As of December
31, 1996, $1,190,000 of incentive management fees were paid. There were no
incentive management fees paid to the Manager prior to 1996. Deferred incentive
management fees were $14,610,000 and
12
<PAGE>
$12,258,000 as of December 31, 1996 and 1995, respectively.
Competition
The extended-stay lodging segment continues to be highly competitive. An
increase in supply growth began in 1996 with the introduction of a number of new
national brands. For 1997, the outlook continues to be positive. Residence
Inns continue to command a premium share of the market in which they are located
in spite of the growth of new chains. It is expected that Residence Inn will
continue outperforming both national and local competitors. The brand is
continuing to carefully monitor the introduction of new extended-stay brands and
growth of existing brands including Homewood Suites, Hawthorne Suites,
Summerfield Suites and AmeriSuites.
Inflation
The rate of inflation has been relatively low in the past four years. The
Manager is generally able to pass through increased costs to customers through
higher room rates and prices. In 1996, average suite rates of Residence Inns
exceeded inflationary costs. On March 22, 1996, the Partnership refinanced its
mortgage debt and fixed its interest costs thereby eliminating the Partnership's
exposure to the impact of changing interest rates.
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns. For most of the Inns, demand is higher in the spring and summer
months (March through October) than during the remainder of the year.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index Page
- ----- ----
<S> <C>
Marriott Residence Inn II Limited Partnership Consolidated Financial Statements:
Report of Independent Public Accountants..................................... 15
Consolidated Statement of Operations.......................................... 16
Consolidated Balance Sheet.................................................... 17
Consolidated Statement of Changes in Partners' Capital........................ 18
Consolidated Statement of Cash Flows.......................................... 19
Notes to Consolidated Financial Statements.................................... 20
</TABLE>
14
<PAGE>
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
TO THE PARTNERS OF MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Marriott
Residence Inn II Limited Partnership (a Delaware limited partnership) and
Bossier RIBM Two LLC, its majority-owned subsidiary limited liability company,
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in partners' capital and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements and
schedule are the responsibility of the General Partner's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marriott Residence
Inn II Limited Partnership and subsidiary as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14(a)(2) is presented for purposes of complying with The Securities and Exchange
Commission's rules and are not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 21, 1997
15
<PAGE>
Consolidated Statement of Operations
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands, except per Unit amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REVENUES (Note 3)........................... $ 34,035 $ 33,300 $ 30,441
-------- -------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.............. 7,700 7,796 7,279
Incentive management fee................... 3,542 3,502 3,133
Residence Inn system fee................... 2,639 2,535 2,384
Property taxes............................. 2,141 2,092 2,174
Base management fee........................ 1,393 1,337 1,261
Equipment rent and other................... 1,201 897 1,018
-------- -------- --------
18,616 18,159 17,249
-------- -------- --------
OPERATING PROFIT............................ 15,419 15,141 13,192
Interest expense........................... (13,268) (14,038) (13,969)
Interest income............................ 512 500 249
-------- -------- --------
NET INCOME (LOSS)........................... $ 2,663 $ 1,603 $ (528)
======== ======== ========
ALLOCATION OF NET INCOME (LOSS)
General Partner............................ $ 27 $ 16 $ (5)
Limited Partners........................... 2,636 1,587 (523)
-------- -------- --------
$ 2,663 $ 1,603 $ (528)
======== ======== ========
NET INCOME (LOSS) PER LIMITED PARTNER UNIT
(70,000 Units)............................. $ 38 $ 23 $ (7)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
Consolidated Balance Sheet
Marriott Residence Inn II Limited Partnership and Subsidiary
December 31, 1996 and 1995
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net............................. $144,792 $148,116
Deferred financing costs, net of accumulated
amortization........................................... 3,797 566
Due from Residence Inn by Marriott, Inc................. 2,472 1,150
Property improvement fund............................... 2,150 1,638
Restricted cash reserves................................ 4,291 --
Cash and cash equivalents............................... 8,008 13,892
-------- --------
$165,510 $165,362
======== ========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.......................................... $140,000 $137,089
Incentive management fee due to Residence Inn by
Marriott, Inc......................................... 14,610 12,258
Base management fee due to Residence Inn by Marriott,
Inc................................................... -- 743
Accounts payable and accrued expenses.................. 1,695 8,730
-------- --------
Total Liabilities..................................... 156,305 158,820
-------- --------
PARTNERS' CAPITAL
General Partner
Capital contribution.................................. 707 707
Capital distributions................................. (390) (390)
Cumulative net losses................................. (146) (173)
-------- --------
171 144
-------- --------
Limited Partners
Capital contributions, net of offering costs of $7,845 62,155 62,155
Capital distributions................................. (38,640) (38,640)
Cumulative net losses................................. (14,481) (17,117)
-------- --------
9,034 6,398
-------- --------
Total Partners' Capital............................... 9,205 6,542
-------- --------
$165,510 $165,362
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
Consolidated Statement of Changes
in Partners' Capital
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -------
<S> <C> <C> <C>
Balance, December 31, 1993...................... $ 233 $15,274 $15,507
Capital distributions.......................... (51) (5,040) (5,091)
Net loss....................................... (5) (523) (528)
------ ------- -------
Balance, December 31, 1994...................... 177 9,711 9,888
Capital distributions.......................... (49) (4,900) (4,949)
Net income..................................... 16 1,587 1,603
------ ------- -------
Balance, December 31, 1995...................... 144 6,398 6,542
Net income..................................... 27 2,636 2,663
------ ------- -------
Balance, December 31, 1996...................... $ 171 $ 9,034 $ 9,205
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
Consolidated Statement of Cash Flows
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................... $ 2,663 $ 1,603 $ (528)
Noncash items:
Depreciation and amortization.................. 7,700 7,796 7,279
Deferred incentive management fee.............. 2,352 3,502 3,133
Amortization of deferred financing costs as
interest...................................... 322 299 302
(Gain) loss on dispositions of property and
equipment..................................... (5) -- 110
Changes in operating accounts:
Accounts payable and accrued expenses.......... (7,035) 7,701 71
Due from Residence Inn by Marriott, Inc........ (1,322) 1,203 (490)
Base management fee due to Residence Inn by
Marriott, Inc................................. (743) (2,296) --
--------- ------- -------
Cash provided by operating activities........ 3,932 19,808 9,877
--------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment, net........ (4,376) (3,009) (3,309)
Additions to restricted capital expenditure
reserve........................................ (2,357) -- --
Change in property improvement fund............. (507) (416) 137
--------- ------- -------
Cash used in investing activities............ (7,240) (3,425) (3,172)
--------- ------- -------
FINANCING ACTIVITIES
Proceeds from mortgage loan..................... 140,000 -- --
Repayment of mortgage debt...................... (137,089) -- --
Payment of financing costs...................... (3,553) (566) --
Additions to debt service reserve............... (1,934) -- --
Capital distributions to partners............... -- (4,949) (5,091)
--------- ------- -------
Cash used in investing activities............ (2,576) (5,515) (5,091)
--------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. (5,884) 10,868 1,614
CASH AND CASH EQUIVALENTS at beginning of year... 13,892 3,024 1,410
--------- ------- -------
CASH AND CASH EQUIVALENTS at end of year......... $ 8,008 $13,892 $ 3,024
========= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.......................... $ 18,985 $ 7,053 $13,666
========= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
Notes to Consolidated Financial Statements
Marriott Residence Inn II Limited Partnership and Subsidiary
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Residence Inn II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on November 23, 1988, to acquire, own and
operate 23 Residence Inn by Marriott hotels (the "Inns") and the land on which
the Inns are located. The Inns are located in 16 states in the United States:
four in Florida, three in California, two in North Carolina and South Carolina,
respectively, and one in Alabama, Illinois, Louisiana, Massachusetts, Michigan,
Mississippi, Nevada, New Mexico, Ohio, Pennsylvania, Tennessee and Texas. As of
December 31, 1996, the Inns have a total of 2,487 suites.
On December 29, 1995, Host Marriott Corporation's operations were divided into
two separate companies: Host Marriott Corporation ("Host Marriott") and Host
Marriott Services Corporation. The sole general partner of the Partnership,
with a 1% interest, is Marriott RIBM Two Corporation (the "General Partner"), a
wholly-owned subsidiary of Host Marriott.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier RIBM Two LLC (the "LLC"), a Delaware limited liability company. The
general partner of the LLC with a 1% interest is Bossier RIBM Two, Inc., a
wholly owned subsidiary of the Partnership. The remaining 99% interest in the
LLC is owned by the Partnership. The Inns are managed by Residence Inn by
Marriott, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("MII"), as part of the Residence Inn by Marriott hotel
system.
Between November 23, 1988 and December 29, 1988, 70,000 limited partnership
interests (the "Units") were sold in a public offering. The offering price per
unit was $1,000. The General Partner contributed $707,100 for its 1% general
partnership interest. The Partnership acquired 17 of the Inns on the closing
date. The remaining six Inns were acquired during 1989.
Partnership Allocations and Distributions
Net profits for Federal income tax purposes are generally allocated to the
partners in proportion to the distributions of cash available for distribution.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts of less
than 50% of their original capital contributions; or
(b) 90% to the limited partners and 10% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts equal
to or greater than 50% but less than 100% of their original capital
contributions; or
(c) 75% to the limited partners and 25% to the General Partner, if the partners
have received aggregate cumulative distributions of Capital Receipts equal
to 100% or more of their original capital contributions.
20
<PAGE>
- --------------------------------------------------------------------------------
For Federal income tax purposes, losses and net losses are allocated 99% to the
limited partners and 1% to the General Partner.
Capital Receipts not retained by the Partnership will generally be distributed
(i) first, 99% to the limited partners and 1% to the General Partner until the
partners have received cumulative distributions from all sources equal to a
cumulative simple return of 12% per annum on their Net Capital Investment and an
amount equal to their contributed capital, payable only from Capital Receipts;
(ii) next, if the Capital Receipts are from a sale, 100% to the General Partner
until it has received 2% of the gross proceeds from the sale; and (iii)
thereafter, 75% to the limited partners and 25% to the General Partner.
Gains will generally be allocated (i) first, to those partners whose capital
accounts have negative balances until such negative balances are brought to
zero; (ii) second, to all partners in amounts necessary to bring their
respective capital account balances equal to their invested capital, as defined,
plus a 12% return on such invested capital; (iii) next, to the General Partner
in an amount necessary to bring the General Partner's capital account balance to
an amount which is equal to 2% of the gross proceeds from the sale, and (iv)
thereafter, 75% to the limited partners and 25% to the General Partner.
Proceeds from the sale of substantially all of the assets of the Partnership
will be distributed to the partners in accordance with their capital account
balances as adjusted to take into account gain or loss resulting from such sale.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenues and Expenses
Revenues represent house profit from the Partnership's Inns because the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit from the Inns to the Manager. House profit
reflects the net revenues flowing to the Partnership as property owner and
represents Inn operating results less property-level expenses, excluding
depreciation and amortization, base, Residence Inn system and incentive
management fees, property taxes, equipment rent and other costs, which are
disclosed separately in the consolidated statement of operations.
21
<PAGE>
- --------------------------------------------------------------------------------
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, as follows:
Land improvements 40 years
Building and improvements 40 years
Furniture and equipment 3 to 10 years
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If a property is
impaired, its basis is adjusted to fair market value.
Income Taxes
Provision for Federal and state income taxes has not been made in the financial
statements since the Partnership does not pay income taxes but rather allocates
profits and losses to the individual partners. Significant differences exist
between the net income (loss) for financial reporting purposes and the net
income (loss) as reported in the Partnership's tax return. These differences
are due primarily to the use, for income tax purposes, of accelerated
depreciation methods and shorter depreciable lives of the assets and the timing
of the recognition of base and incentive management fee expense. As a result of
these differences, the excess between the Partnership's net assets reported in
the accompanying consolidated financial statements and the tax basis of such net
assets was $411,000 as of December 31, 1996 and $3,275,000 as of December 31,
1995.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the debt financing and are amortized over the term thereof. Deferred
financing costs associated with the original mortgage debt totaling $2,114,000
were fully amortized at December 31, 1995 and have been removed from the
Partnership's accounts. As of December 31, 1996, the Partnership incurred
$4,119,000 of additional financing costs in connection with the refinanced
mortgage debt described in Note 6 and are being amortized using the straight
line method, which approximates the effective interest method, over the ten year
term of the mortgage debt. As of December 31, 1996 and 1995, accumulated
amortization of deferred financing costs totaled $322,000 and $0, respectively.
Restricted Cash Reserves
On March 22,1996, the Partnership was required to establish certain reserves in
conjunction with the refinancing of the Mortgage Debt as described in Note 6.
The balances in those reserves at December 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Capital Expenditure Reserve.. $2,357
Debt Service Reserve......... 1,934
------
$4,291
======
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
New Statements of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS 121 did not have an
effect on the Partnership's financial statements.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1996 presentation.
NOTE 3. REVENUES
Partnership revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
INN SALES
<S> <C> <C> <C>
Suites....................... $65,969 $63,374 $59,606
Other operating departments.. 3,675 3,491 3,428
------- ------- -------
69,644 66,865 63,034
------- ------- -------
INN EXPENSES
Departmental direct costs
Suites...................... 14,313 13,279 12,742
Other operating expenses..... 21,296 20,286 19,851
------- ------- -------
35,609 33,565 32,593
------- ------- -------
REVENUES...................... $34,035 $33,300 $30,441
======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land and improvements...... $ 57,362 $ 57,362
Building and improvements.. 102,054 101,077
Furniture and equipment.... 48,761 45,362
-------- --------
208,177 203,801
Accumulated depreciation... (63,385) (55,685)
-------- --------
$144,792 $148,116
======== ========
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
As of December 31, 1996 As of December 31, 1995
======================== =======================
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- -------- ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Mortgage debt $140,000 $140,000 $137,089 $137,089
Incentive management fee
due to Residence
Inn by Marriott, Inc. $ 14,610 $ 2,800 $ 12,258 $ 6,800
Base management fee due to
Residence
Inn by Marriott, Inc. $ -- $ -- $ 743 $ 743
</TABLE>
The estimated fair value of the mortgage debt obligation is based on expected
future debt service payments discounted at estimated risk adjusted rates. Base
and incentive management fees payable are valued based on the expected future
payments from operating cash flow discounted at risk adjusted rates.
NOTE 6. MORTGAGE DEBT
As of December 31, 1995, the Partnership's mortgage debt consisted of a
$131,500,000 nonrecourse mortgage loan (the "Term Loan") and $5,589,000 borrowed
under a $10 million revolving credit facility (the "Revolving Loan"). Both the
Term Loan and the Revolving Loan matured on December 30, 1995. However, the
third party lender granted the Partnership an initial and subsequent forbearance
which effectively extended the maturity of the loans through March 22, 1996.
During the forbearance period, the Partnership was required to make interest
only payments on the total outstanding debt balance of $137,089,000 at a fixed
rate of 10.174%. During 1995, the Term Loan carried interest at a fixed rate of
10.17% per annum and required no amortization of principal. The Revolving Loan
was available to provide interest payments on up to $20 million of the principal
amount of the Term Loan. Borrowings under the Revolving Loan carried interest
per annum at a floating rate equal to .625% plus the one, two, three or six
month London Interbank Offered Rate ("LIBOR"), as elected by the Partnership and
required no amortization of principal. Interest on the borrowings could also
have been funded under the Revolving Loan. There were no borrowings under the
Revolving Loan in 1995. The weighted average interest rate on the Revolving
Loan was 6.9% and 5.0% in 1995 and 1994, respectively.
On March 22, 1996 (the "Closing Date") the General Partner was successful in
refinancing the Term Loan and the Revolving Loan with a new third party lender.
In conjunction with the refinancing, the principal amount of the Partnership's
mortgage debt was increased from $137.1 million to $140 million. The refinanced
mortgage debt (the "Mortgage Debt") continues to be nonrecourse to the
Partnership, bears interest at a fixed rate of 8.85% based upon actual number of
days over a 360 day year for a 10-year term expiring March 10, 2006 and requires
payments of interest only during the first loan year (April 1996 through March
1997) and principal amortization based upon a 25-year amortization schedule
beginning with the second loan year.
24
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal amortization of the Mortgage Debt at December 31, 1996 is as follows
(in thousands):
<S> <C>
1997................ $ 910
1998................ 1,508
1999................ 1,649
2000................ 1,767
2001................ 1,968
Thereafter.......... 132,198
--------
$140,000
========
</TABLE>
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the Partnership's rights under
the management agreement. Although the Partnership continues to own 23
Residence Inns, during the course of performing environmental studies at the
properties, the lender determined that the Bossier City Residence Inn did not
pass certain required thresholds to enable the property to collateralize the
Mortgage Debt. Additionally, as part of the refinancing, the Partnership is
required to deposit $500,000 into a reserve account and fund $250,000 annually
into the account to provide for any claim, investigation, or litigation that may
arise from any environmental condition at the Bossier City Residence Inn. The
initial $500,000 deposit was funded and will be maintained by the lender. The
Partnership is required to repay the initial reserve as promptly as possible if
the Partnership draws on the deposit or by the end of the 10-year term in March
2006. Any draws upon the account will accrue interest at the 30-day London
Interbank Offered Rate ("LIBOR") plus 4.5%. If the Partnership does not need to
draw on the reserve account, the lender will hold the reserve until such time as
the Mortgage Debt is either repaid, or a governmental authority determines that
the statute of limitations on filing any claims has expired or that no further
remedial activities are required at the property. Based upon the results of the
environmental studies performed, the Partnership believes that it is remote that
it will be necessary to draw on the reserve.
Pursuant to the terms of the Mortgage Debt, the Partnership must establish and
maintain certain reserves including:
. $3,482,000 Debt Service Reserve - This reserve was fully funded by mid-1997
and is to equal three months of debt service.
. $2,357,000 Capital Expenditure Reserve - This reserve was fully funded on
the Closing Date. The funds will be expended for various renewals and
replacements, site improvements, Americans with Disabilities Act of 1990
modifications and environmental remediation projects identified during the
course of the appraisals and environmental studies undertaken in conjunction
with the refinancing.
. $900,000 Working Capital Reserve - This reserve was funded from 1996 cash
from operations. This reserve will provide additional funds to the
Partnership Inns in the future if needed.
. $500,000 Bossier City Residence Inn Environmental Reserve - As discussed
above, this reserve was funded by the lender.
25
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7. MANAGEMENT AGREEMENT
As of December 31, 1995, the Manager operated the Inns pursuant to a long-term
management agreement (the "Original Management Agreement") with an initial term
expiring on December 28, 2007. The Manager had the option to extend the
Original Management Agreement on one or more of the Inns for up to five 10-year
terms. To facilitate the refinancing, effective March 22, 1996, the Original
Management Agreement was restated into two separate management agreements. The
Partnership entered into a management agreement with the Manager for the 22 Inns
the Mortgage Debt is secured by and the LLC also entered into a management
agreement with the Manager for the Bossier City Residence Inn (collectively, the
"Restated Management Agreements"). The terms of the Restated Management
Agreements do not differ from the Original Management Agreement with the
exception of the term. Pursuant to the Restated Management Agreements, the
initial term expires December 31, 2012, with the Manager having the option to
extend the agreement on one or more of the Inns for up to four 10-year terms.
The Manager earns a base management fee equal to 2% of the Inns' gross revenues.
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,070,707.
Deferred base management fees are payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently. Pursuant to the terms of the Restated Management Agreements,
the Partnership paid the remaining $743,000 of deferred base management fees in
1996.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of operating profit, as defined (23.5% in any year in which operating profit is
equal to or greater than $25.3 million; however, cumulative incentive management
fees cannot exceed 20% of cumulative operating profit). The incentive
management fee is payable out of 50% of cash flow from operations remaining
after payment of debt service, provision for Partnership administrative
expenses, payment of the base management fee, payment of deferred base
management fees and retention by the Partnership of annual cash flow from
operations of $7,070,707. After the Partnership has retained an additional 5%
return, the incentive management fee is payable out of 75% of the remaining cash
flow from operations. Through 1991, the Manager was not entitled to accrue any
unpaid incentive management fees. Incentive management fees earned after 1991
will be payable in the future from operating cash flow, as defined. As of
December 31, 1996, $1,190,000 of incentive management fees were paid. There
were no incentive management fees paid to the Manager in 1995. Deferred
incentive management fees were $14,610,000 and $12,258,000 as of December 31,
1996 and 1995, respectively.
The Restated Management Agreements provide for a Residence Inn system fee equal
to 4% of suite revenues. In addition, the Manager is reimbursed for each Inn's
pro rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. Such reimbursements were limited through 1991 to 2% of
gross revenues from Inn operations. As franchisor of the Residence Inn by
Marriott system, the Manager maintains a marketing fund to pay the costs
associated with certain system-wide advertising, promotional, and public
relations materials and programs and the operation of a toll-free reservation
system. Each Inn contributes 2.5% of suite revenues to the marketing fund. For
the years ended December 31, 1996, 1995 and 1994, the Partnership paid a
Residence Inn system fee of $2,639,000, $2,535,000 and $2,384,000, reimbursed
the Manager for $1,558,000, $1,498,000 and $1,486,000 of Chain Services and
contributed $1,649,000, $1,584,000 and $1,490,000 to the marketing fund,
respectively. Chain Services and contributions to the marketing fund are
included in other operating expenses in Note 3.
26
<PAGE>
- --------------------------------------------------------------------------------
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the Restated
Management Agreements, the working capital will be returned to the Partnership.
The individual components of working capital controlled by the Manager are not
reflected in the Partnership's balance sheet. As of December 31, 1996 and 1995,
$1,150,000 has been advanced to the Manager for working capital which is
included in Due from Residence Inn by Marriott, Inc. in the accompanying
consolidated balance sheet.
The Restated Management Agreements provide for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are 5% of gross Inn revenues. Total contributions to the property improvement
fund for the years ended December 31, 1996, 1995 and 1994 were $3,482,000,
$3,343,000 and $3,152,000, respectively.
27
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no directors or officers. The business and policy making
functions of the Partnership are carried out through the directors and executive
officers of Marriott RIBM Two Corporation, the General Partner, who are listed
below:
<TABLE>
<CAPTION>
Age at
Name Current Position December 31, 1996
- --------------------------- -------------------------------- -----------------
<S> <C> <C>
Bruce F. Stemerman President and Director 41
Christopher G. Townsend Vice President and Director 49
Patricia K. Brady Vice President and Chief 35
Accounting Officer
Anna Mary Coburn Secretary 41
Bruce Wardinski Treasurer 36
</TABLE>
Business Experience
Bruce F. Stemerman joined Host Marriott in 1989 as Director--Partnership
Services. He became Vice President--Lodging Partnerships in 1994 and became
Senior Vice President--Asset Management in 1996. Prior to joining Host
Marriott, Mr. Stemerman spent ten years with Price Waterhouse. He also serves
as a director and an officer of numerous Host Marriott subsidiaries.
Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Senior Attorney. In 1984 he was made Assistant Secretary of Host Marriott. In
1986 he was made an Assistant General Counsel. He was made Senior Vice
President, Corporate Secretary and Deputy General Counsel of Host Marriott in
1993. In January 1997, he was made General Counsel of Host Marriott. He also
serves as a director and an officer of numerous Host Marriott subsidiaries.
Patricia K. Brady was appointed to Vice President and Chief Accounting Officer
of the General Partner on October 10, 1996. Ms. Brady joined Host Marriott in
1989 as Assistant Manager--Partnership Services. She was promoted to Manager in
1990 and to Director--Asset Management in June 1996. Ms. Brady also serves as
an officer of numerous Host Marriott subsidiaries.
Anna Mary Coburn joined Host Marriott as an Attorney in 1988, became Assistant
General Counsel in 1993, and was elected Corporate Secretary and Associate
General Counsel in 1997. Prior to joining Host Marriott, Ms. Coburn was an
Attorney for the law firm of Shawe & Rosenthal and was a law clerk for the
United States Court of Appeals for the Fourth Circuit. Ms. Coburn resigned from
the position in January 1998. Christopher G. Townsend will assume her
responsibilities.
28
<PAGE>
Bruce Wardinski joined Host Marriott in 1987 as a Senior Financial Analyst of
Financial Planning & Analysis and was named Manager in June 1988. He was
appointed Director, Financial Planning & Analysis in 1989, Director of Project
Finance in January 1990, Senior Director of Project Finance in June 1993, Vice
President--Project Finance in June 1994, and Senior Vice President of
International Development in October 1995. In June 1996, Mr. Wardinski was
named Senior Vice President and Treasurer of Host Marriott. Prior to joining
Host Marriott, Mr. Wardinski was with the public accounting firm Price
Waterhouse.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no directors or officers nor does
it have any employees. Under the Partnership Agreement, however, the General
Partner has the exclusive right to conduct the business and affairs of the
Partnership subject only to the management agreements described in Items 1 and
13. The General Partner is required to devote to the Partnership such time as
may be necessary for the proper performance of its duties, but the officers and
directors of the General Partner are not required to devote their full time to
the performance of such duties. No officer or director of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or director does devote time to the Partnership, the General
Partner is entitled to reimbursement for the cost of providing such services.
For the fiscal years ending December 31, 1996, 1995 and 1994, the Partnership
reimbursed the General Partner in the amount of $131,000, $89,000 and $126,000,
respectively, for the cost of providing all administrative and other services as
General Partner. For information regarding all payments made by the Partnership
to Host Marriott and subsidiaries, see Item 13 "Certain Relationships and
Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1996, no person owned of record, or to the Partnership's
knowledge owned beneficially, more than 5% of the total number of limited
partnership Units. The General Partner does not own any limited partnership
interest in the Partnership.
The executive officers and directors of the General Partner, Host Marriott, MII
and their respective affiliates do not own any Units as of December 31, 1996.
The Partnership is not aware of any arrangements which may, at a subsequent
date, result in a change in control of the Partnership, other than the
Consolidation described in Item 1.
29
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
To facilitate the refinancing, effective March 22, 1996, the original Management
Agreement was restated into two separate management agreements. The Partnership
entered into a management agreement with the Manager for 22 of the Inns which
the Partnership directly owns and the LLC entered into a management agreement
for the Bossier City Residence Inn which the LLC owns, collectively, (the
"Restated Management Agreements").
Term
The Restated Management Agreements have an initial term expiring in 2012. The
Manager may renew the term, as to one or more of the Inns, at its option, for
five years, followed by four successive terms of 10-years each. The Partnership
may terminate the Restated Management Agreements if, during any three
consecutive years specified minimum operating results are not achieved.
However, the Manager may prevent termination by paying to the Partnership the
amount by which the minimum operating results were not achieved.
Management Fees
The Restated Management Agreements provide for annual payments of (i) the base
management fee equal to 2% of gross sales from the Inns, (ii) the Residence Inn
system fee equal to 4% of gross suite sales from the Inns, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (23.5% of
operating profit, as defined, in any year in which operating profit exceeds
$25.3 million; however, cumulative incentive management fee can not exceed 20%
of cumulative operating profit).
Deferral Provisions
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,070,707.
Deferred base management fees are payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently. Pursuant to the terms of the Restated Management Agreements,
the Partnership paid the remaining $743,000 of deferred base management fees in
1996.
The incentive management fee is payable out of 50% of cash flow from operations
remaining after payment of debt service, provision for Partnership
administrative expenses, payment of the base management fee, payment of deferred
base management fees and retention by the Partnership of annual cash flow from
operations of $7,070,707. After the Partnership has retained an additional 5%
return, the incentive management fee is payable out of 75% of the remaining cash
flow from operations. Through 1991, the Manager was not entitled to accrue any
unpaid incentive management fees. Incentive management fees earned after 1991
will be payable in the future from operating cash flow, as defined. As of
December 31, 1996, $1,190,000 of incentive management fees were paid. There
were no incentive management fees paid to the Manager prior to 1996. Deferred
incentive management fees were $14,610,000 and $12,258,000 as of December 31,
1996 and 1995, respectively.
30
<PAGE>
Chain Services and Marketing Fund
The Manager is reimbursed for each Inn's pro rata share of the actual costs and
expenses incurred in providing certain services ("Chain Services") on a central
or regional basis to all hotels operated by the Manager. Such reimbursements
were limited through 1991 to 2% of gross revenues from Inn operations. As
franchiser of the Residence Inn by Marriott system, the Manager maintains a
marketing fund to pay the costs associated with certain system-wide advertising,
promotional, and public relations materials and programs and the operation of a
toll-free reservation system. Each Inn contributes 2.5% of suite revenues to
the marketing fund. For the years ended December 31, 1996, 1995 and 1994, the
Partnership paid a Residence Inn system fee of $2,639,000, $2,535,000 and
$2,384,000, reimbursed the Manager for $1,558,000, $1,498,000 and $1,486,000 of
Chain Services and contributed $1,649,000, $1,584,000 and $1,490,000 to the
marketing fund, respectively. Chain Services and contributions to the marketing
fund are included in other operating expenses detailed in the Consolidated
Financial Statements (see Item 8).
Working Capital
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the Restated
Management Agreements, the working capital will be returned to the Partnership.
The individual components of working capital controlled by the Manager are not
reflected in the Partnership's balance sheet. As of December 31, 1996 and 1995,
$1,150,000 has been advanced to the Manager for working capital which is
included in Due from Residence Inn by Marriott, Inc. in the accompanying
Consolidated Balance Sheet (see Item 8).
Property Improvement Funds
The Restated Management Agreements provide for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are 5% of gross Inn revenues. Total contributions to the property improvement
fund for the years ended December 31, 1996, 1995 and 1994 were $3,482,000,
$3,343,000 and $3,152,000, respectively.
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and affiliates under the
Restated Management Agreements for the years ended December 31, 1996, 1995 and
1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Residence Inn system fee..................... $2,639 $2,535 $2,384
Marketing fund contribution.................. 1,649 1,584 1,490
Chain services............................... 1,558 1,498 1,486
Base management fee.......................... 1,393 1,337 1,261
Incentive management fee..................... 1,190 -- --
Deferred base management fees................ 743 2,296 --
------ ------ ------
$9,172 $9,250 $6,621
====== ====== ======
</TABLE>
31
<PAGE>
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by the Partnership to Host Marriott and
its subsidiaries for the years ended December 31, 1996, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Administrative expenses reimbursed.. $ 131 $ 89 $ 126
Cash distributions.................. -- 49 51
----- ----- -----
$ 131 $ 138 $ 177
===== ===== =====
</TABLE>
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) List of Documents Filed as Part of This Report
(1) Financial Statements
All financial statements of the registrant as set forth under Item 8
of this Report on Form 10-K.
(2) Financial Statement Schedules
The following financial information is filed herewith on the pages
indicated.
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
<TABLE>
<CAPTION>
(3) EXHIBITS
Exhibit Number Description
-------------- ---------------------------------------------------
<S> <C>
* 3.1 Amended and Restated Agreement of Limited
Partnership of Marriott Residence Inn II Limited
Partnership dated November 23, 1988.
3.2 First Amendment to Amended and Restated Agreement
of Limited Partnership dated April 1, 1989.
10.1 Amended and Restated Management Agreement by and
between Residence Inn by Marriott, Inc. and
Marriott Residence Inn II Limited Partnership
dated as of March 22, 1996.
* 10.2 Loan Agreement by and between Marriott Residence
Inn II Limited Partnership and the Sanwa Bank
Limited dated December 27, 1988.
10.3 Loan Agreement between Marriott Residence Inn II
Limited Partnership and Nomura Asset Capital
Corporation dated as of March 22, 1996.
</TABLE>
---------------------
* Incorporated by reference to the Partnership's previously filed
documents.
33
<PAGE>
SCHEDULE III
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Initial Costs
--------------------------
Subsequent
Land and Building and Costs
Description Debt Improvements Improvements Capitalized
- --------------------------- -------- -------------------------- ------------
<S> <C> <C> <C> <C>
Las Vegas, NV $ 16,727 $ 4,967 $ 8,284 $ 325
Irvine, CA 7,260 3,503 5,843 76
Arcadia, CA 9,164 3,426 5,714 111
Greensboro, NC 8,515 2,937 4,926 224
Birmingham, AL 7,368 2,886 4,840 316
Other properties,
each less than 5% of total 90,966 39,105 65,037 6,896
-------- ------- -------- --------
$140,000 $56,824 $ 94,644 $ 7,948
======== ======= ======== ========
<CAPTION>
Gross Amount at December 31, 1996
----------------------------------------------------- Date of
Land and Buildings and Accumulated Completion of Date Depreciation
Description Improvements Improvements Total Depreciation Construction Acquired Life
- --------------------------- ------------ ------------ ---------- ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Las Vegas, NV $ 5,016 $ 8,560 $ 13,576 $ 2,076 1989 1989 40 years
Irvine, CA 3,522 5,900 9,422 1,348 1989 1989 40 years
Arcadia, CA 3,434 5,817 9,251 1,388 1989 1989 40 years
Greensboro, NC 2,963 5,124 8,087 1,307 1987 1988 40 years
Birmingham, AL 2,929 5,113 8,042 1,360 1986 1988 40 years
Other properties,
each less than 5% of total 39,498 71,540 111,038 18,061 1983-1989 1988-1989 40 years
-------- -------- -------- -------
$ 57,362 $102,054 $159,416 $25,540
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Notes:
- ------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
(a) Reconciliation of Real Estate:
Balance at beginning of year.................... $155,461 $156,679 $158,439
Capital Expenditures............................ 1,218 1,760 977
Dispositions.................................... -- -- --
-------- -------- --------
Balance at end of year.......................... $156,679 $158,439 $159,416
======== ======== ========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year.................... $14,720 $18,115 $21,748
Depreciation.................................... 3,395 3,633 3,792
------- ------- -------
Balance at end of year.......................... $18,115 $21,748 $25,540
======= ======= =======
</TABLE>
(c) The aggregate cost of land, buildings and
improvements for Federal income tax purposes
is approximately $154.1 million at December 31, 1996.
(d) The Debt balance is $140 million as of December 31, 1996.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 26th of January,
1998.
MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP
By: MARRIOTT RIBM TWO CORPORATION
General Partner
/s/ Bruce F. Stemerman
-----------------------------------------
Bruce F. Stemerman
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
the capacities and on the date indicated above.
<TABLE>
<CAPTION>
<S> <C>
Signature Title
- --------- -----
(MARRIOTT RIBM TWO CORPORATION)
/s/Bruce F. Stemerman President and Director
- --------------------------------- (Principal Executive Officer)
Bruce F. Stemerman
/s/ Christopher G. Townsend Vice President, Secretary and Director
- ---------------------------------
Christopher G. Townsend
/s/ Patricia K. Brady Vice President and Chief Accounting Officer
- ---------------------------------
Patricia K. Brady
/s/ Bruce Wardinski Treasurer
- ---------------------------------
Bruce Wardinski
</TABLE>
35
<PAGE>
EXHIBIT 3.2
FIRST AMENDMENT TO
AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
This agreement (the "Amendment") amends that certain Amended and
Restated Agreement of Limited Partnership (the "Partnership Agreement") of
Marriott Residence Inn II Limited Partnership (the "Partnership") dated as of
December 28, 1988.
WHEREAS, Marriott RIBM Two Corporation as general partner (the "General
Partner"), Christopher G. Townsend as Organizational Limited Partner, the
General Partner as attorney in fact for all of the limited partners (the
"Limited Partners") of the Partnership, Marriott Corporation and Host
International, Inc. (the latter two solely for purposes of Section 5.03B of the
Partnership Agreement) entered into the Partnership Agreement; and
Whereas, Section 11.02E of the Partnership Agreement permits the
General Partner to amend the Partnership Agreement, without the Consent of the
Limited Partners, to clarify the provisions of the Partnership Agreement so long
as the amendment does not adversely affect the rights of the Limited Partners;
and
Whereas, Section 9.04B of the Partnership Agreement provides that
within 120 days of the end of each Fiscal Year of the Partnership, the General
Partner shall provide a report (the "Annual Report") setting forth certain
financial data of the Partnership; and
Whereas, because the Partnership began business on December 28, 1988,
the cost and effort to the Partnership of producing the Annual Report would be
prohibitive in relation to the data which would be supplied for the remainder of
Fiscal Year 1988; and
Whereas, the data which would be supplied in the Fiscal Year 1988
Annual Report will be included in the Fiscal Year 1989 Annual Report; and
Whereas, the General Partner for itself and as attorney in fact for the
Limited Partners, now wishes to amend the Partnership Agreement to provide that
an Annual Report for Fiscal Year 1988 not be supplied.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and for good and valuable consideration, the parties hereto,
intending to be legally bound hereby, mutually agree to amend the Partnership
Agreement as follows:
1
<PAGE>
EXHIBIT 3.2
1. Section 9.04B on page 33 of the Partnership Agreement shall be amended by
inserting on line 1 of the subsection after the words "each Fiscal Year of the
Partnership" the words "after Fiscal Year 1988."
2. Any other sections of the Partnership Agreement referring to the requirement
that the General Partner provide an Annual Report shall be deemed to have been
amended in accordance with paragraph 1 of this Amendment.
3. All defined terms contained in this Amendment, unless otherwise defined
herein, shall have the meaning contained in the Partnership Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the 1st day
of April, 1989.
MARRIOTT MHP TWO CORPORATION
General Partner
By: /s/ Matthew J. Hart
-------------------------------
Matthew J. Hart
President
LIMITED PARTNERS:
MARRIOTT MHP TWO CORPORATION
as Attorney in Fact for
all Limited Partners
By: /s/ Matthew J. Hart
-------------------------------
Matthew J. Hart
President
2
<PAGE>
22 RESIDENCE INNS Exhibit 10.1
- -----------------
AMENDED AND RESTATED MANAGEMENT AGREEMENT
-----------------------------------------
by and between
RESIDENCE INN BY MARRIOTT, INC.
-------------------------------
as "MANAGER"
and
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
---------------------------------------------
as "OWNER"
Dated as of March 22, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Article I - Definition of Terms
- -------------------------------
1.01 Definition of Terms.......................................2
Article II - Appointment of Manager
- -----------------------------------
2.01 Appointment..............................................15
2.02 Delegation of Authority..................................15
2.03 Licenses and Permits.....................................16
2.04 Non-Discrimination.......................................16
Article III - Ownership of the Inns
- -----------------------------------
3.01 Ownership of the Inns....................................17
Article IV - Term
- -----------------
4.01 Term.....................................................18
4.02 Performance Termination..................................18
4.03 Actions to be Taken on Termination.......................19
Article V - Compensation of Manager
- -----------------------------------
5.01 Management Fee...........................................21
5.02 Distributions of Operating Profit........................21
5.03 Application of Net Sales Proceeds
and Net Refinancing Proceeds.............................22
5.04 Accounting and Interim Payment...........................23
5.05 Manager Loans............................................24
Article VI - Working Capital and Fixed Asset Supplies
- -----------------------------------------------------
6.01 Working Capital..........................................26
6.02 Fixed Asset Supplies.....................................26
Article VII - Repairs, Maintenance and Replacements
- ---------------------------------------------------
7.01 Routine Repairs and Maintenance..........................27
7.02 Repairs and Equipment Reserve............................27
7.03 Building Alterations, Improvements,
Renewals, and Replacements...............................31
7.04 Liens....................................................32
7.05 Ownership of Replacements................................32
</TABLE>
i
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Article VIII - Bookkeeping and Bank Accounts
- --------------------------------------------
8.01 Books and Records........................................33
8.02 Accounts, Expenditures...................................34
8.03 Annual Operating Projection..............................34
8.04 Operating Losses; Credit.................................35
Article IX - Trademarks, Trade Names and Service Marks
- ------------------------------------------------------
9.01 Trademarks, Trade Names and Service Marks................36
9.02 Purchase of Inventories and Fixed Asset Supplies.........37
9.03 Breach of Covenant.......................................37
Article X - Management and Use of the Inns
- ------------------------------------------
10.01 Management of the Inns...................................38
10.02 Chain Services...........................................38
10.03 Owner's Right to Inspect.................................38
Article XI - Insurance
- ----------------------
11.01 Property Insurance.......................................39
11.02 Operational Insurance....................................40
11.03 Coverage.................................................41
11.04 Cost and Expense.........................................41
11.05 Policies and Endorsements................................41
Article XII - Taxes
- -------------------
12.01 Real Estate and Personal Property Taxes..................43
Article XIII - Inn Employees
- ----------------------------
13.01 Employees................................................44
Article XIV - Damage, Condemnation and Force Majeure
- ----------------------------------------------------
14.01 Damage and Repair........................................45
14.02 Condemnation.............................................45
14.03 Force Majeure............................................46
Article XV - Defaults
- ---------------------
15.01 Events of Default........................................47
15.02 Remedies.................................................48
Article XVI - Waiver and Partial Invalidity
- -------------------------------------------
16.01 Waiver...................................................49
16.02 Partial Invalidity.......................................49
</TABLE>
ii
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Article XVII - Assignment
- -------------------------
17.01 Assignment...................................................50
17.02 Mortgages and Collateral Assignments.........................50
Article XVIII - Sale of an Inn or Inns
- --------------------------------------
18.01 Right of First Refusal.......................................52
18.02 Effect of Sale of Inn........................................53
Article XIX - Miscellaneous
- ---------------------------
19.01 Right to Make Agreement......................................55
19.02 Consents.....................................................55
19.03 Agency.......................................................55
19.04 Applicable Law...............................................56
19.05 Recordation..................................................56
19.06 Headings.....................................................56
19.07 Notices......................................................56
19.08 Limited Liability............................................57
19.09 Confidentiality..............................................57
19.10 Offerings....................................................58
19.11 Entire Agreement.............................................59
</TABLE>
EXHIBIT A - Locations of the Inn
EXHIBIT A-1 through A-22 - Legal Descriptions of Sites
EXHIBIT B - Percentages Used for Reductions
EXHIBIT C -
Schedule of Principal and Interest Payments
iii
<PAGE>
AMENDED AND RESTATED MANAGEMENT AGREEMENT
This Amended and Restated Management Agreement ("Management Agreement"
or "Agreement") is executed as of the 22nd day of March, 1996 ("Amendment
Date"), by MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP ("Owner"), a Delaware
limited partnership with a mailing address at c/o Host Marriott Corporation,
10400 Fernwood Road, Bethesda, Maryland 20817 and RESIDENCE INN BY MARRIOTT,
INC. ("Manager"), a Delaware corporation, with a mailing address at c/o Marriott
International, Inc.,10400 Fernwood Road, Bethesda, Maryland 20817.
R E C I T A L S :
A. Owner and Manager entered into a certain Management Agreement with
an execution date of November 23, 1988 (the "Original Management Agreement")
pursuant to which Manager manages the twenty-two (22) Residence Inn by Marriott
Hotels listed in Exhibit "A", the legal descriptions for which are as set forth
in Exhibits A-1 through A-22 (the "Inns"), and one (1) other Residence Inn by
Marriott Hotel located in Shreveport/Bossier City, Louisiana (the "Bossier City
Inn"); and
B. Immediately prior to the Amendment Date, Owner transferred and
conveyed all of its right, title and interest in and to the Bossier City Inn to
an affiliate of Owner in connection with a refinancing of all of the secured
indebtedness affecting the Inns and the Bossier City Inn; and
C. As a condition of such refinancing the Bossier City Inn must be
managed pursuant to the terms of a separate management agreement; and
D. Owner and Manager have each requested that the Original Management
Agreement be amended in connection with such refinancing;
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement and other good and valuable consideration, the receipt of which
is hereby acknowledged, Owner and Manager agree that the Original Management
Agreement shall be amended and restated in its entirety as follows:
<PAGE>
ARTICLE I
DEFINITION OF TERMS
-------------------
1.01 Definition of Terms
-------------------
The following terms when used in the Agreement shall have the meanings
indicated:
"Accounting Period" shall mean the four (4) week accounting periods
-----------------
having the same beginning and ending dates as Manager's four (4) week accounting
periods, except that an Accounting Period may occasionally contain five (5)
weeks when necessary to conform Manager's accounting system to the calendar.
"Actual Debt Service" shall mean during each Fiscal Year (prorated for
-------------------
portions thereof) (a) during the term of the Term Loan, the total annual
payments of principal and interest under the Loan Agreement as set forth on
Exhibit "C" attached hereto, and (b) during the term of any loan obtained by
Owner to finance the Refinanced Principal Amount, the lesser of (i) an amount
equal to 10.5% times the Refinanced Principal Amount per Fiscal Year plus
amortization of principal in the Fiscal Year on the Refinanced Principal Amount
pursuant to a 25 year amortization schedule; or (ii) the actual interest paid or
accrued in that Fiscal Year (provided that the rate is a commercially reasonable
market interest rate), plus the actual amortization of principal in that Fiscal
Year (provided that the amortization rate is a commercially reasonable market
rate) on the Refinanced Principal Amount; provided, however, that upon the
Termination of this Agreement with respect to a given Inn or Inns (whether in
connection with the Sale of the Inn or Inns, or pursuant to other applicable
provisions of this Agreement), the Actual Debt Service shall, notwithstanding
anything to the contrary in the Loan Agreement or any document related thereto,
be reduced by the applicable percentage attributable to such Inn or Inns, as set
forth on Exhibit "B" hereto.
"Additional Inn Investment" shall mean any amounts expended by Owner,
after the purchase of the Inns by Owner, for the following purposes:
a) to fund the cost of any expansion, previously consented to by
Manager, of any Inn;
2
<PAGE>
b) to fund the cost of any repairs or replacements, with respect to
any Inn, which are not covered by insurance proceeds under
Section 14.01.A;
c) to fund the cost of any building alterations and related
expenses, requested by Manager, under Section 7.03.A.2; and
d) to fund any reasonable business needs (not including amounts
funded under Section 7.02.E) of Owner relating to operation of
one or more of the Inns, as requested by or otherwise approved by
Manager.
"Additional Inn Investment Loan" shall mean any indebtedness incurred
------------------------------
by Owner to fund an Additional Inn Investment or any refinancing thereof.
"Adjusted Capital Contribution" shall mean the balance, from time to
-----------------------------
time, of:
(i) the Capital Contributions contributed by the partners of Owner;
plus
(ii) any Additional Inn Investments, other than any Additional Inn
Investment funded by an Additional Inn Investment Loan on which
debt service constitutes Qualifying Debt Service; less
----
(iii) cumulative distributions to the partners of Owner of Net Sales
Proceeds and Net Refinancing Proceeds pursuant to Section 4.07
(ii) and Section 4.08(A)(ii) of the Partnership Agreement;
provided, however, that upon the Termination of this Agreement with respect to a
given Inn or Inns (whether in connection with the Sale of the Inn or Inns or
pursuant to other applicable provisions in this Agreement), the Adjusted Capital
Contributions shall be reduced by the amount of any Additional Inn Investment
attributable to such Inn or Inns.
"Administrative Expenses" shall mean, with respect to any Fiscal Year,
-----------------------
an annual amount equal to the lesser of (i) the aggregate amount of payments
for, or reserves created for payment for, administrative expenses of Owner with
respect to such Fiscal Year; or (ii) an amount equal to $350,000 for Fiscal Year
1996, which amount will be increased by the CPI Percentage for each Fiscal Year
thereafter.
3
<PAGE>
"Agreement" shall mean this Amended and Restated Management Agreement
---------
between Owner and Manager with respect to the 22 Inns listed on Exhibit "A"
hereto.
"Annual Operating Projection" shall have the meaning ascribed to it in
---------------------------
Section 8.03.
"Base Management Fee" shall mean an amount payable to Manager, subject
-------------------
to the provisions of Article V hereof, for the following services hereunder:
corporate planning and policy services, financial planning and corporate
financial services, risk planning and insurance services, corporate executive
management, legislative and governmental representation, in-house legal services
and protection of the "Marriott" trade name and trademarks. Such amount shall be
equal, during any given Fiscal Year (or portion thereof), to two percent (2%) of
Gross Revenues.
"Bossier City Inn" shall have the meaning ascribed to it in the
----------------
Recitals.
"Building" shall mean the improvements on each site, which includes
--------
buildings containing guest suites, a GATEHOUSE (a registered trademark of
Manager) building containing a common area lobby, meeting rooms and
administrative offices, and certain other amenities and related facilities.
"Building Estimate" shall have the meaning ascribed to it in Section
-----------------
7.03.A.
"Capital Contributions" shall mean Sixty-nine Million Two Hundred
---------------------
Forty-three Thousand Dollars ($69,243,000); provided, however, that upon the
Termination of this Agreement with respect to a given Inn or Inns (whether in
connection with the Sale of the Inn or Inns or pursuant to other applicable
provisions in this Agreement), the amount of Capital Contributions shall be
reduced by the applicable percentage attributable to such Inn or Inns as set
forth on Exhibit "B" hereto.
"Chain Services" shall have the meaning ascribed to it in Section
--------------
10.02.
"Computer Lease" means a lease or other agreement under which computer
--------------
equipment located in one or more Inns is leased to
4
<PAGE>
Owner or to Manager, as agent for Owner (including the license, if any, of
operating software therefor).
"Contingent Management Fees (Base)" shall mean the remaining unpaid
---------------------------------
balance (which shall not bear interest) of those portions of the Base Management
Fees for Fiscal Years 1988, 1989, 1990 and 1991 which were not paid to Manager
in those Fiscal Years pursuant to the provisions of the Original Management
Agreement, the balance of which as of the end of Fiscal Year 1995, after
reduction for the portion allocated to the Bossier City Inn, was Seven Hundred
Fifty-Seven Thousand Dollars ($757,000).
"Contingent Management Fees (IMF)" shall mean the cumulative total
--------------------------------
(which shall not bear interest) of those portions of any Incentive Management
Fees for each Fiscal Year (or portion thereof) which are not paid to Manager in
such Fiscal Year owing to the limitations set forth in Section 5.02 hereof, plus
the remaining unpaid balance (which shall not bear interest) of those portions
of the Contingent Management Fees (IMF) allocable to the Inns which were not
paid to Manager pursuant to the provisions of the Original Management Agreement,
the balance of which as of the end of Fiscal Year 1995, after reduction for the
portion allocated to the Bossier City Inn, was Twelve Million Seventy Thousand
Dollars ($12,070,000).
"CPI Percentage" shall mean the percentage by which the "Consumer Price
--------------
Index for All Urban Consumer (CPI-U); U.S. City Average, 1982-84=100, All Items"
(or appropriate substitute index if such index is no longer published) (the
"CPI") for November of the previous Fiscal Year exceeds the CPI for November
1988.
"Debt Service Reserve Account" shall have the meaning ascribed to it in
----------------------------
the exhibit entitled ACash Management Procedures", which is an exhibit to that
certain Modification, Subordination and Non-Disturbance Agreement, Estoppel,
Assignment and Consent Among Manager, Owner, and Lender dated as of the
Amendment Date.
"Deductions" shall have the meaning ascribed to it in the definition of
----------
Operating Profit.
"Defeasance Deposits" shall have the meaning ascribed to it in the Loan
-------------------
Agreement.
5
<PAGE>
"Effective Date" shall mean December 29, 1988, which is the date on
--------------
which Owner first acquired fee title to one or more of the Inns.
"Equipment Leases" shall mean all or any FF&E Leases, Telephone Leases,
----------------
Computer Leases, TV System Leases and motor vehicle leases.
"Execution Date" shall mean November 23, 1988, which is the date of
--------------
execution of the Original Management Agreement.
"FF&E" shall mean furniture, furnishings, fixtures, vehicles, carpeting
----
and equipment, but shall not include Fixed Asset Supplies.
"FF&E Lease" means a lease of any FF&E located in one or more Inns
----------
other than a TV System Lease, a Telephone Lease, a Computer Lease, or a lease of
a motor vehicle used primarily for transporting Inn guests.
"First Priority Return" shall mean an annual non-cumulative amount
---------------------
retained by Owner out of certain portions of Operating Profit, as set forth in
Section 5.02 hereof, equal to ten percent (10%) of the Capital Contributions for
each Fiscal Year.
"Fiscal Year" shall mean Manager's Fiscal Year which now ends at
-----------
midnight on the Friday closest to December 31 in each calendar year; the new
Fiscal Year begins on the Saturday immediately following said Friday. Any
partial Fiscal Year between the Effective Date and the commencement of the first
full Fiscal Year shall constitute a separate Fiscal Year. A partial Fiscal Year
between the end of the last full Fiscal Year and the Termination of this
Agreement shall also constitute a separate Fiscal Year. If Manager=s Fiscal Year
is changed in the future, appropriate adjustment to this Agreement=s reporting
and accounting procedures shall be made; provided, however, that no such change
or adjustment shall alter the term of this Agreement or in any way reduce the
distributions of Operating Profit or the payments due hereunder.
"Fixed Asset Supplies" shall mean items included within "Property and
--------------------
Equipment" under the Uniform System of Accounts including, but not limited to,
linen, china, glassware,
6
<PAGE>
tableware, uniforms, and similar items, whether used in connection with public
space or suites.
"Force Majeure" shall have the meaning ascribed to it in Section 14.03
-------------
hereof.
"Gross Revenues" shall mean all revenues and receipts of every kind
--------------
derived from operating the Inns and all departments and parts thereof,
including, but not limited to: income (from both cash and credit transactions)
from rental of rooms, stores, offices, exhibit or sales space of every kind;
license, lease and concession fees and rentals (not including gross receipts of
licensees, lessees and concessionaires); income from vending machines; health
club membership fees; food and beverage sales; wholesale and retail sales of
merchandise (except as otherwise provided in Section 7.02.C hereof with respect
to the sale of FF&E), service charges, and proceeds, if any, from business
interruption or other loss of income insurance; provided, however, that Gross
Revenues shall not include: (i) gratuities to employees of any of the Inns; (ii)
federal, state or municipal excise, sales or use taxes or similar Impositions
collected directly from patrons or guests or included as part of the sales price
of any goods or services; (iii) Net Refinancing Proceeds or Net Sales Proceeds;
(iv) proceeds from the sale of FF&E; (v) interest received or accrued with
respect to the funds in the Reserve or the other operating accounts of the Inns;
or (vi) any refunds, rebates, discounts and credits of a similar nature, given,
paid or returned in the course of obtaining Gross Revenues or components
thereof.
"Impositions" shall have the meaning ascribed to it in Section 12.01.
-----------
"Incentive Management Fee" shall mean an amount which equals fifteen
------------------------
percent (15%) of Operating Profit in any Fiscal Year in which the total
Operating Profit is less than the Operating Profit Objective, and twenty-three
and one-half percent (23.5%) of Operating Profit in any Fiscal Year in which the
total Operating Profit equals or exceeds the Operating Profit Objective,
provided that cumulative Incentive Management Fees shall not exceed twenty
percent (20%) of cumulative Operating Profit during the period in which the Inns
are owned by the Partnership. Payment of the Incentive Management Fee to Manager
shall be subject to the provisions of Article V hereof.
7
<PAGE>
"Initial Term" shall have the meaning ascribed to it in Section 4.01.
------------
"Inn" or "Inns" shall refer individually or collectively to the twenty
--- ----
two (22) inns located on the twenty two (22) Sites described on Exhibit "A"
hereto. The term "Inn" or "Inns" shall incorporate not only the Site or Sites
but also all easement or other appurtenant rights thereto, together with the
Buildings and all other improvements constructed or to be constructed thereon,
and all FF&E and Fixed Asset Supplies installed or located therein.
"Inn Term" shall have the meaning ascribed to it in Section 4.01.
--------
"Inventories" shall mean "Inventories" as defined in the Uniform System
-----------
of Accounts, such as, but not limited to, provision in storerooms,
refrigerators, pantries and kitchens; beverages in wine cellars and bars; other
merchandise intended for sale; fuel; mechanical supplies; stationery; and other
expensed supplies and similar items.
"Lender" shall mean Nomura Asset Capital Corporation, or its successors
------
or assigns.
"Loan Agreement" shall mean that certain Loan Agreement entered into
--------------
between Owner and Lender regarding the Term Loan.
"Management Agreement" shall have the same meaning as "Agreement".
--------------------
"Manager" shall have the meaning ascribed to it in the Preamble hereto.
-------
"Manager Loans" shall have the meaning ascribed to it in Section 5.05.
-------------
"Marketing Fund" shall mean that certain fund (or any successor to such
--------------
fund) maintained by Manager, in its capacity as franchisor of the System, to pay
for the following System costs: all costs associated with developing, preparing,
producing, directing, administering, conducting, maintaining and disseminating
advertising, marketing, promotional and public relations materials, programs,
campaigns, sales and marketing
8
<PAGE>
seminars and training programs, and similar activities of every kind and nature,
including the Residence Inn directory; conducting market research; and paying
the central operational costs of the Residence Inn reservation system.
"Marriott" shall mean Marriott International, Inc., the corporate
--------
parent of Manager.
"Marriott Affiliate" shall mean any corporation of which Marriott,
------------------
either directly or indirectly through one or more intermediary corporations,
owns fifty-one percent (51%) or more of the voting stock. Notwithstanding the
foregoing and for purposes of this Agreement, in no event shall Host Marriott
Corporation or any entity directly or indirectly controlled by Host Marriott
Corporation (including, without limitation, Owner) constitute a Marriott
Affiliate.
"Maturity Date" shall mean March 11, 2022, which is the original stated
-------------
maturity date of the indebtedness incurred by Owner pursuant to the Term Loan,
or, if earlier, the date of any refinancing or prepayment of such indebtedness.
"Net Refinancing Proceeds" shall mean the cumulative full amount
------------------------
disbursed (in one or more advances) under any loan or loans obtained by Owner,
from time to time, to the extent such disbursement or disbursements are not used
for the following purposes: (i) simultaneous repayment of other indebtedness of
Owner; (ii) commercially reasonable transaction costs; and (iii) the payment of,
or creation of reserves deemed necessary in the reasonable discretion of Owner
for, Administrative Expenses.
"Net Sales Proceeds" shall mean the cumulative net proceeds received by
------------------
Owner, from time to time, from any one or more of the following: (i) any Sale of
an Inn; (ii) the exchange, condemnation, eminent domain taking, casualty or
other disposition of any of (or any portion of) the Inns or the Sites; or (iii)
the liquidation of Owner=s property interest in the Inns in connection with a
dissolution of Owner. The phrase "net proceeds," as used in the foregoing
sentence, shall mean the gross proceeds received from any of the foregoing to
the extent such gross proceeds are not used for the following purposes: (i)
simultaneous repayment of indebtedness secured by the Inn or Inns being sold (or
the pro rata portion of indebtedness secured by all the Inns) or restoration of
the Inn in the case of a
9
<PAGE>
condemnation, eminent domain proceeding, or casualty; (ii) commercially
reasonable transaction costs; and (iii) the payment of, or creation of reserves
deemed necessary in the reasonable discretion of Owner for, Administrative
Expenses of Owner. The term "Net Sales Proceeds" shall not include proceeds from
dispositions of FF&E described in Section 7.02.C hereof.
"Operating Loss" shall mean a negative Operating Profit.
--------------
"Operating Profit" shall mean the excess of Gross Revenues over the
----------------
following deductions ("Deductions") incurred by Manager, on behalf of Owner, in
operating the Inns:
1. The cost of sales including salaries, wages (including accruals
for year-end bonuses to key management employees), fringe benefits, payroll
taxes and other costs related to employees of each Inn (the foregoing costs
shall not include salaries and other employee costs of executive personnel of
Manager who do not work at one of the Inns on a regular basis; except that the
foregoing costs shall include the allocable portion of the salary and other
employee costs of any general manager or other supervisory personnel (not
including regional vice-presidents or regional salespeople) assigned to a
"cluster" of hotels and inns which includes one or more of the Inns);
2. Departmental expenses, administrative and general expenses and the
cost of marketing, advertising and business promotion, heat, light and power,
and routine repairs, maintenance and minor alterations treated as Deductions
under Section 7.01;
3. The cost of Inventories and Fixed Asset Supplies consumed in the
operation of each Inn;
4. A reasonable reserve for uncollectible accounts receivable as
determined by Manager;
5. All costs and fees of independent accountants or other third
parties who perform services required or permitted hereunder;
6. All costs and fees of technical consultants and operational
experts for specialized services;
10
<PAGE>
7. The Residence Inn System Fee;
8. The Base Management Fee;
9. The Inns' pro rata share of costs and expenses incurred by Manager
in providing Chain Services;
10. Insurance costs and expenses as provided in Article XI;
11. Taxes, if any, payable by or assessed against Manager related to
this Agreement or to Manager's operation of the Inns (exclusive of Manager's
income taxes) and all Impositions;
12. The contributions to the Repairs and Equipment Reserve which are
required pursuant to Section 7.02;
13. The contributions required to be made, as they may change from
time to time, to the Marketing Fund in order for the Inns to remain members of
the System (such contributions are presently two and one-half percent (2.5%) of
Suite Revenues); and
14. Such other costs and expenses as are specifically provided for
elsewhere in this Agreement or are otherwise reasonably necessary for the proper
and efficient operation of the Inns.
"Operating Profit Objective" shall mean the amount of Twenty-four
--------------------------
Million Seven Hundred Seventy-six Thousand Dollars ($24,776,000) provided,
however, that upon the Termination of this Agreement with respect to a given Inn
or Inns (whether in connection with the Sale of the Inn or Inns, or pursuant to
other applicable provisions of this Agreement), the Operating Profit Objective
shall be reduced by the applicable percentage attributable to such Inn or Inns,
as set forth on Exhibit "B" hereto.
"Operative Principal Amount" shall mean the principal amount
--------------------------
outstanding under the Loan Agreement as of the Maturity Date, which amount shall
be deemed to have been reduced if not actually reduced by the amount of all
Defeasance Deposits.
"Original Management Agreement" shall have the meaning ascribed to it
-----------------------------
in the Recitals.
11
<PAGE>
"Owner" shall have the meaning ascribed to it in the Preamble.
-----
"Owner's Capital Return" shall mean the sum of: (a) an amount which,
----------------------
when added to all previous or simultaneous retentions or receipts by Owner of
Operating Profit (less the aggregate amount of Qualifying Debt Service
(including that portion of Qualifying Debt Service paid by Owner pursuant to the
Original Management Agreement allocable to the 22 Inns based on the allocation
of the purchase price paid by Owner for the purchase of the 22 Inns and the
Bossier City Inn) and administrative expenses paid or repaid by Owner (or
reserved for) out of such Operating Profit), Net Sales Proceeds and Net
Refinancing Proceeds, equals a cumulative return on the weighted average
Adjusted Capital Contributions, from time to time, of twelve percent (12%) per
annum from the Effective Date through the date such Net Sales Proceeds or Net
Refinancing Proceeds are realized; plus (b) an amount which equals the Adjusted
Capital Contributions as of the date on which such Net Sales Proceeds or Net
Refinancing Proceeds are realized by Owner.
"Partnership Agreement" shall mean that certain partnership agreement,
---------------------
dated as of the Execution Date, among the partners of Owner.
"Partnership Filing Period" shall mean such period of time (not to
-------------------------
exceed seventy-five (75) days) after the close of each Fiscal Year within which
the Owner must receive final accounting statements from Manager with respect to
such Fiscal Year in order for Owner to have a reasonable period of time within
which to prepare and make all required filings with the Securities and Exchange
Commission and other applicable governmental agencies.
"Prime Rate" shall mean the base rate of interest announced from time
----------
to time by Bankers Trust Company, New York, New York.
"Prospectus" shall have the meaning ascribed to it in Section 19.11.
----------
"Qualifying Debt Service" shall mean:
-----------------------
1. As to any Fiscal Year (prorated for portions thereof) during the
term of this Agreement, the Actual Debt Service; plus
12
<PAGE>
2. The interest and principal actually paid or accrued (provided that
the terms of each such loan are commercially reasonable) pursuant to Additional
Inn Investment Loans. In no event, however, shall "Qualifying Debt Service"
include, with respect to any indebtedness incurred to fund any Additional Inn
Investment: (i) any balloon payments; or (ii) that portion of any such
indebtedness which is incurred for the purpose of distributing the same to the
partners of Owner; provided, however, that upon the Termination of this
Agreement with respect to a given Inn or Inns (whether in connection with a Sale
of the Inn or Inns, or pursuant to other applicable provisions of this
Agreement), Qualifying Debt Service shall be reduced by interest and principal
on any (or any portion of any) Additional Inn Investment Loans attributable to
such Inn or Inns. The term "balloon payments," as used in this Agreement, shall
mean any repayments or prepayments of principal in any given Fiscal Year
(regardless of whether the borrower is permitted or obligated to make same) to
the extent that such repayments or prepayments exceed five percent (5%) per year
of the outstanding principal amount of such indebtedness as of the date of full
disbursement thereof to the borrower thereunder.
"Refinanced Principal Amount" shall mean that portion of the principal
---------------------------
amount of indebtedness incurred by Owner to refinance the debt outstanding under
the Loan Agreement and all Additional Inn Investment Loans attributable to the
Inns then subject to this Agreement being refinanced concurrently therewith as
shall be equal to the sum of: (a) the Operative Principal Amount, plus (b) the
outstanding principal balances of Additional Inn Investment Loans being
refinanced, plus (c) commercially reasonable transaction costs and loan
origination fees relating to such refinancing, but only to the extent such costs
and fees do not exceed, in the aggregate, one and one-half percent (12%) of the
aggregate of the Operative Principal Amount plus the outstanding principal
balances of Additional Inn Investment Loans begin refinanced.
"Renewal Term" or "Renewal Terms" shall have the meaning ascribed to it
------------ -------------
in Section 4.01.
"Repairs and Equipment Reserve" shall have the meaning ascribed to it
-----------------------------
in Section 7.02.A.
13
<PAGE>
"Repairs and Equipment Estimate" shall have the meaning ascribed to it
------------------------------
in Section 7.02.D.
"Replacement FF&E" shall mean the items enumerated in paragraphs (1)
----------------
and (2) of Section 7.02.A.
"Reserve" shall have the meaning ascribed to it in Section 7.02.A.
-------
"Residence Inn System Fee" shall mean an amount paid to Manager for the
------------------------
following services hereunder: divisional financial services; product planning
and development; employee planning; protection of the "Marriott Residence Inn"
"Residence Inn by Marriott," and "Residence Inn" trade names, trademarks, logos
and servicemarks; and the services of Manager's technical and operational
experts making periodic inspection and consultation visits to the Inns (but not
the services of the personnel of the Architecture and Construction Division of
Marriott providing architectural, technical or procurement services for any Inn,
which shall be treated as a Deduction described in subsection 6 of the
definition of "Operating Profit"). Such amount shall be equal, during any given
Fiscal Year (or portion thereof), to four percent (4%) of Suite Revenues.
"Sale of an Inn" or "Sale of the Inns" shall mean any sale, assignment,
-------------- ----------------
transfer or other disposition, for value or otherwise, voluntary or involuntary,
of the fee simple title to one or more of the Sites and/or the Inns.
"Second Priority Return" shall mean an annual non-cumulative amount
----------------------
retained by Owner out of certain portions of Operating Profit, as set forth in
Section 5.02 hereof, equal to five percent (5%) of the Adjusted Capital
Contributions.
"Site" or "Sites" refer individually or collectively to the parcels of
---- -----
land whose addresses are set forth on Exhibit "A" attached hereto and
incorporated herein.
"Suite Revenues" shall mean that portion of the Gross Revenues of any
--------------
Inn, or of all of the Inns, which is attributable to the rental of guest suites.
14
<PAGE>
"System" shall mean all inns which are operated under the "Residence
------
Inn by Marriott," "Residence Inn" or "Marriott Residence Inn" trade names.
"Telephone Lease" means any lease of the telephones and/or other
---------------
telecommunication systems and equipment located in one or more Inns.
"Term Loan" shall mean the term loan in the principal amount of One
---------
Hundred Forty Million Dollars ($140,000,000) provided to Owner by Lender to
refinance the Inns.
"Termination" shall mean the expiration or sooner cessation of the
-----------
Agreement with respect to a given Inn or Inns.
"Total Original Cost" shall mean the amount of One Hundred Eighty-six
-------------------
Million Nine Hundred Thirty-two Thousand Dollars ($186,932,000); provided,
however, that upon the Termination of this Agreement with respect to a given Inn
or Inns (whether in connection with a Sale of the Inn or Inns or pursuant to
other applicable provisions of this agreement), the Total Original Cost, as used
thereafter, shall be reduced by the applicable percentage attributable to such
Inn or Inns, as set forth on Exhibit "B"
"Trade Names" shall have the meaning ascribed in Section 9.01.
-----------
"TV System Lease" means a lease or other agreement under which
---------------
equipment (excluding television sets) for the transmission into Inn suites or
televised programming is leased or otherwise provided, regardless of whether
such lease or other agreement contains a right or option to purchase such
equipment.
"Uniform System of Accounts" shall mean the Uniform System of Accounts
--------------------------
for Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association
of New York City, Inc.
"Working Capital" shall mean funds which are reasonably necessary for
---------------
the day-to-day operation of the business of the Inns, including, without
limitation, amounts sufficient for the maintenance of change and petty cash
funds, operating bank accounts, receivables, payrolls, prepaid expenses and
funds required to maintain Inventories, less accounts payable and accrued
current liabilities.
15
<PAGE>
required to maintain Inventories, less accounts payable and accrued current
liabilities.
END OF ARTICLE I
16
<PAGE>
ARTICLE II
APPOINTMENT OF MANAGER
----------------------
2.01 Appointment
-----------
Owner hereby appoints and employs Manager as Owner's exclusive agent to
supervise, direct and control the management an operation of the Inns for the
term provided in Article IV. Manager accepts said appointment and agrees to
manage the Inns during their respective Inn Terms in accordance with the terms
and conditions hereinafter set forth. The performance of all activities by
Manager hereunder shall be for the account of Owner. Manager may not delegate
its duties hereunder except to Marriott or a Marriott Affiliate which satisfies
the requirements of Section 17.01.A.1 hereof. As of the Amendment Date, the
Bossier City Inn shall no longer be one of the Inns but shall continue to be
managed by Manager pursuant to a separate management agreement.
2.02 Delegation of Authority
-----------------------
The operations of the Inns shall be under the exclusive supervision and
control of Manager which, except as otherwise specifically provided in the
Agreement, shall be responsible for the proper and efficient operation of the
Inns. Manager shall have discretion and control, free from interference,
interruption or disturbance, in all matters relating to management and operation
of each Inn, including, without limitation, charges for rooms and commercial
space, credit policies, food and beverage services, employment policies,
granting of concessions or leasing of shops and agencies within each Inn,
receipt, holding and disbursement of funds, maintenance of bank accounts,
procurement of inventories, supplies and services, promotion and publicity and,
generally, all activities necessary for operation of the Inns.
2.03 Licenses and Permits
--------------------
A. Owner agrees upon request by Manager to sign promptly and
without charge applications for licenses, permits or other instruments necessary
for operation of each Inn.
17
<PAGE>
B. Manager shall have the option to terminate the Agreement with
respect to a given Inn, at any time, upon one hundred twenty (120) days' written
notice to Owner, in the event of a withdrawal or revocation, by any lawful
governing body having jurisdiction thereof, of any license or permit that
materially affects the operation of the Inn provided: (i) such withdrawal or
revocation is not the fault of Manager, but rather is due to circumstances
beyond Manager's reasonable control; (ii) all applicable appeals to higher
governmental authorities regarding such withdrawal or revocation have been
exhausted; and (iii) Manager has made every reasonable effort to obtain a
substitute license or permit that would allow for the continued operation of
such Inn as a first-class facility in accordance with Manager's standards for
Residence Inn by Marriott hotels.
2.04 Non-Discrimination
------------------
The parties recognize that Manager, Marriott and Marriott Affiliates
either own or manage other hotels and inns. Certain of these hotels and inns,
now or in the future, may be located within the general geographical area of one
or more of the Inns. Manager shall institute reasonable internal controls and
procedures to ensure that no favoritism shall be accorded to such other hotels
or inns on the basis of the ownership thereof and that, at all times during the
term of this Agreement, Manager will operate the various hotels or inns under
its management, including the Inns, in a non-discriminatory manner.
END OF ARTICLE II
18
<PAGE>
ARTICLE III
OWNERSHIP OF THE INNS
---------------------
3.01 Ownership of the Inns
---------------------
A. Owner hereby covenants that it holds and will keep and
maintain fee title to the Site of each Inn and such Inn free and clear of any
and all liens, encumbrances or other charges, except as follows:
1. Easements or other encumbrances (other than those
described in subsections 2, 3 and 4 hereof) that do not materially adversely
affect the operation of any Inn by Manager, including, without limitation, any
encumbrances or other defects of title subject to which title was conveyed to
Owner;
2. Mortgages, deeds of trust or similar security
instruments which: (i) contain a provision reasonably acceptable to Manager's
counsel that this Agreement will not be subject to forfeiture or Termination
other than in accordance with the terms hereof, notwithstanding a default under
such mortgage, deed of trust, or security instrument; and either (ii) secure
either (x) any indebtedness on which all or a portion of the payments constitute
Qualifying Debt Service, or (y) debt incurred for distribution to the partners
of Owner; or (iii) secure any amount due under the Loan Agreement;
3. Liens for taxes, assessments, levies or other public
charges not yet due or that are being contested in good faith; and
4. Liens, encumbrances, or other charges resulting from
Manager's acts.
B. Provided Manager is not in monetary default under this
Agreement, Owner shall pay and discharge, on or before the due date, any and all
installments of principal and interest due and payable upon any mortgage, deed
of trust or like instrument described in this Section (including, without
limitation, any amounts owed under the Loan Agreement) and shall indemnify
Manager from and against all claims, litigation and damages (other than damages
representing Manager's lost profits) arising from the failure to make such
payments as and when required.
19
<PAGE>
END OF ARTICLE III
20
<PAGE>
ARTICLE IV
TERM
----
4.01 Term
----
A. The term of this Agreement shall be from the Effective Date to
the expiration of the Inn Term (as defined in subsection B below) for the last
Inn to which this Agreement applies.
B. With respect to each Inn, the "Inn Term" shall consist of an
"Initial Term" and the "Renewal Term(s)". The "Initial Term" shall begin on the
Effective Date, or such later date as Owner assumed title to such Inn, and shall
continue until 11:59 p.m. on the last day of Fiscal Year 2012. Each Inn Term may
thereafter be renewed by Manager, at its option, as to any or all of the Inns
(on the same terms and conditions contained herein, except as set forth in the
final sentence of this Section 4.01.B), for one (1) period of five (5) Fiscal
Years followed by each of four (4) successive periods of ten (10) Fiscal Years
each ("Renewal Terms"), provided that an "event of default" by Manager has not
occurred under Section 15.01 hereof (or, if such an "event of default" has
occurred, that it is being cured in accordance with the provisions of Section
15.01 or 15.02 hereof). If Manager elects to exercise such option to renew as to
any or all of the Inns, it shall give Owner notice to that effect at least
eighteen (18) months prior to the expiration of the then current Inn Term with
respect to such Inn or Inns. If Manager does not elect to renew the term of this
Agreement, as to one or more of the Inns, on the expiration of the then current
Inn Term with respect to such Inn or Inns, Manager shall continue to manage such
Inn or Inns during the final eighteen (18) months of their respective Inn Terms,
unless, during such eighteen (18) month period, Owner effects a sale of such Inn
or Inns or secures a new manager therefor, in which case the respective Inn
Terms of such affected Inns shall be prematurely terminated, as of the date of
such sale or the effective date of such new management contract so long as Owner
has given Manager at least seventy-five (75) days prior written notice of such
sale date. In the event Manager elects to renew as to some, but not all, of the
Inns, the adjustment described in subsections B through E of Section 18.02 shall
be made to this Agreement.
4.02 Performance Termination
-----------------------
21
<PAGE>
A. Subject to the provisions of Section 4.02.B below, Owner shall
have the option to terminate this Agreement with respect to all of the Inns if
the average of the Operating Profit (computed, for purposes of this Section
4.02.A only, without deducting any Impositions) for all of the Inns during any
three (3) consecutive Fiscal Years during the term of this Agreement does not
equal or exceed eight percent (8%) of the sum total of (i) the Total Original
Cost, and (ii) any Additional Inn Investments previously made with respect to
the Inns that were subject to this Agreement during the relevant periods. Such
option to terminate shall be exercised by serving written notice thereof on
Manager no later than sixty (60) days after the receipt by Owner of the annual
accounting under Section 8.01 hereof for such third consecutive Fiscal Year.
Such notice shall state the basis on which Owner asserts the right of
termination and shall show all mathematical calculations constituting the basis
therefor. If Manager does not elect to avoid termination pursuant to Section
4.02.B below, this Agreement shall terminate as of the end of the second full
Accounting Period following the date on which Manager receives Owner's written
notice of its intent to terminate this Agreement. Owner's failure to exercise
its right to terminate this Agreement pursuant to Section 4.02.A during any
given Fiscal Year shall not be deemed an estoppel or waiver of Owner's right to
terminate this Agreement as to subsequent Fiscal Years to which this Section may
apply.
B. Upon receipt of Owner's written notice of termination under
Section 4.02.A, Manager shall have the option, to be exercised within sixty (60)
days after receipt of said notice, to avoid such termination by advancing to
Owner the amount of any deficiency described in Section 4.02.A. If Manager
exercises such option, then the foregoing Owner's election to terminate this
Agreement under Section 4.02.A shall be canceled and of no force or effect and
this Agreement shall not terminate. Such cancellation, however, shall not affect
the right of Owner, as to each subsequent Fiscal Year to which Section 4.02.A
applies, to again elect to terminate this Agreement pursuant to the provisions
of Section 4.02.A (which subsequent election shall again be subject to Manager's
rights under this Section 4.02.B). If Manager does not exercise its option to
make the advance permitted by this Section 4.02.B, then this Agreement shall be
terminated as of the date set forth in Section 4.02.A. Any amounts advanced by
Manager pursuant to this Section 4.02.B shall
22
<PAGE>
be recovered by Manager, without interest, in subsequent Fiscal Years, in the
same manner and with the same priority as Contingent Management Fees (IMF).
4.03 Actions to be Taken on Termination
----------------------------------
Upon a Termination of this Agreement with respect to any one or more of
the Inns, the following shall be applicable:
A. Manager shall prepare a final accounting statement with
respect to such Inn or Inns, as more particularly described in Section 8.01
hereof, dated as of the date of Termination. Within thirty (30) days of the
receipt by Owner of such final accounting statement, the parties will make
whatever cash adjustments are necessary pursuant to such final statement. The
cost of preparing such final accounting statement shall be a Deduction, unless
the Termination occurs as a result of a default by either party, in which the
case defaulting party shall pay such cost.
B. Manager shall release and transfer to Owner any of Owner's
funds which are held or controlled by Manager with respect to such Inn or Inns.
C. Manager shall make available to Owner such books and records
respecting such Inn or Inns (including those from prior years, subject to
Manager's reasonable records retention policies) as will be needed by Owner to
prepare the accounting statements, in accordance with the Uniform System of
Accounts, for such Inn or Inns for the year in which the Termination occurs and
for any subsequent year.
D. Manager shall (to the extent permitted by law) assign to Owner
or to the new manager all operating licenses and permits for such Inn or Inns
which have been issued in Manager's name (including liquor and restaurant
licenses, if any); provided that if Manager has expended any of its own funds in
the acquisition of any of such licenses or permits, Owner shall reimburse
Manager therefor if it has not done so already.
E. Appropriate adjustments shall be made regarding the
application of this Agreement to any remaining Inns, such as, but not limited
to, those adjustments described in Section 18.02 and 7.02.F, and the re-
computation of Actual Debt Service, Operating
23
<PAGE>
Profit Objective, Total Original Cost and other amounts as described in the
definitions of those terms in Article I hereof.
F. Various other actions shall be taken, as described in this
Agreement, including, but not limited to, the actions described in Sections
5.05, 6.01, 13.01.C, 9.02 and 11.04.
G. Manager shall peacefully vacate and surrender such Inn or Inns
to Owner.
END OF ARTICLE IV
24
<PAGE>
ARTICLE V
COMPENSATION OF MANAGER
-----------------------
5.01 Management Fee
--------------
In consideration of services to be performed during the term of this
Agreement, Manager shall, subject to the provisions of Section 5.02 hereof, be
paid the sum of the following as its management fee:
(a) the Base Management Fee; plus
(b) the Residence Inn System Fee; plus
(c) the Incentive Management Fee.
The Incentive Management Fee, Contingent Management Fee (Base) and Contingent
Management Fee (IMF) will be payable based on Operating Profit as provided in
Sections 5.02 and 5.03 hereof. The Base Management Fee and the Residence Inn
System Fee shall be payable based on Gross Revenues, and shall not be subject to
limitations based on the amount of Operating Profit.
5.02 Distributions of Operating Profit
---------------------------------
In each Fiscal Year (and with respect to each Accounting Period within
each such Fiscal Year, as more particularly described in Section 5.04 hereof),
Operating Profit shall be retained or paid, as applicable and to the extent
available, in accordance with the following order of priority:
A. First, an amount equal to Qualifying Debt Service (which shall
be prorated among the Accounting Periods within any given Fiscal Year) shall be
retained by Owner;
B. Second, the amount needed to pay, or to create reserves deemed
necessary in the reasonable discretion of Owner for, Administrative Expenses
shall be retained by Owner.
C. Third, an amount shall be retained by Owner equal to the First
Priority Return (which shall be prorated among the Accounting Periods within any
given Fiscal Year) less the amount of any outstanding Manager Loans, which
amount shall be paid to Manager for repayment of such loans out of the amount
otherwise being retained by Owner pursuant to this subsection C;
25
<PAGE>
D. Fourth, an amount equal to the outstanding balance of the
Contingent Management Fees (Base) shall be paid to Manager;
E. Fifth, the remaining balance of Operating Profit shall be
divided into two (2) equal halves, one-half to be retained by Owner and the
other half to be paid to Manager, to the extent that the one-half retained by
Owner and the one-half paid to Manager are each (separately) equal to the Second
Priority Return (which shall be prorated among the Accounting Periods within any
given Fiscal Year) at which point payments under this subsection E shall cease
and any remaining balance of Operating Profit shall be applied to the payment of
unpaid fees in accordance with subsection F below. The one-half paid to Manager
under this subsection E shall be applied to the payment (in sequence) of the
Incentive Management Fee for the current Fiscal Year and any Contingent
Management Fee (IMF). Notwithstanding any other provisions hereof, the amount
paid to Manager under this subsection E shall in no event exceed the Incentive
Management Fee for the current Fiscal Year and any Contingent Management Fees
(IMF).
F. Sixth, the remaining balance of Operating Profit (after
retention by the Owner of an amount equal to the Second Priority Return in
accordance with Subsection E, shall be divided into two portions: (i) seventy-
five percent (75%) of such balance shall be paid to Manager subject to the last
sentence of this subsection F, and (ii) twenty-five percent (25%) shall be
retained by Owner. The 75% portion paid to Manager under this subsection F shall
be applied to the payment (in sequence) of the balance of the Incentive
Management Fee for the current Fiscal Year and the balance of any Contingent
Management Fees (IMF). Notwithstanding any other provisions hereof, the amount
paid to Manager under this subsection F, when added to the amount paid to
Manager under subsection E above, shall in no event exceed the balance of the
Incentive Management Fees for the current Fiscal Year and the balance of any
Contingent Management Fees (IMF).
G. Seventh, the remaining balance of Operating Profit shall be
retained by Owner.
5.03 Application of Net Sales Proceeds and Net Refinancing Proceeds
--------------------------------------------------------------
26
<PAGE>
In the event that Owner, from time to time during the term of this
Agreement, realizes Net Sales Proceeds or Net Refinancing Proceeds and, at that
time, there exist any unpaid (i) Manager Loans, (ii) Contingent Management Fees
(Base), (iii) Incentive Management Fees, or (iv) Contingent Management Fees
(IMF), such Net Sales Proceeds or Net Refinancing Proceeds, as applicable, shall
be retained or paid out by Owner, to the maximum extent possible, in the
following order of priority:
A. First, an amount equal to the Owner's Capital Return as of the
date on which such Net Sales Proceeds or Net Refinancing Proceeds are realized
by Owner shall be retained by Owner less the amount of any outstanding Manager
Loans, which amount shall be paid by Owner to Manager out of the amount
otherwise being retained by Owner pursuant to this subsection A;
B. Second, an amount equal to any unpaid Contingent Management
Fees (Base), Incentive Management Fees, and Contingent Management Fees (IMF)
shall be paid in such order of priority to Manager; and
C. Third, all remaining Net Sales Proceeds and Net Refinancing
Proceeds shall be retained by Owner.
5.04 Accounting and Interim Payment
------------------------------
A. Within twenty (20) days after the close of each Accounting
Period, Manager shall submit an interim accounting to Owner showing Gross
Revenues, Deductions, Operating Profit, and applications thereof with respect to
the Inns. Manager shall transfer with each accounting any interim amounts due
Owner and shall retain any interim amounts due Manager (as described in Section
5.01 hereof). Each accounting will be prepared on a consolidated basis rather
than on an individual inn basis.
B. Calculations and payments of the Incentive Management Fee, the
Base Management Fee, the Residence Inn System Fee, and applications of Operating
Profit made with respect to each Accounting Period within a Fiscal Year shall be
accounted for cumulatively. Within the Partnership Filing Period, Manager shall
submit an accounting to Owner, as more fully described in Section 8.01, for the
immediately preceding Fiscal Year, which accounting shall be controlling over
the interim accounts. Any adjustments required by the Fiscal Year accounting
shall be made
27
<PAGE>
by cash payments within five (5) business days of the receipt by Owner of such
final accounting. No adjustment shall be made for any Operating Loss in a
preceding or subsequent Fiscal Year.
C. If the Operating Profit for any Fiscal Year exceeds the
Operating Profit Objective, Manager shall be entitled to an Incentive Management
Fee of twenty-three and a half percent (23.5%) of Operating Profit for that
entire Fiscal Year, and appropriate year-end adjustments shall be made if the
interim cumulative accountings for that Fiscal Year were based on the Incentive
Management Fee being fifteen percent (15%) of Operating Profit. Beginning with
the first Accounting Period in the next succeeding Fiscal Year, and continuing
during all Accounting Periods for the remainder of such next succeeding Fiscal
Year, Manager shall be entitled to perform the above-described interim
cumulative accountings on the assumption that the Incentive Management Fee for
that entire Fiscal Year will be twenty-three and a half percent (23.5%) of
Operating Profit; subject, however, to appropriate year-end adjustments if the
final accounting pursuant to Section 8.01 hereof for any such Fiscal Year shows
that in fact the Operating Profit Objective was not exceeded during such Fiscal
Year, and that therefore the Incentive Management Fee for that Fiscal Year is
fifteen percent (15%) of Operating Profit. In all subsequent Fiscal Years,
Manager shall be entitled to perform the above-described interim cumulative
accountings on the assumption that the Incentive Management Fee will be twenty-
three and a half percent (23.5%) of Operating Profit if, and only if, the
Incentive Management Fee for the immediately preceding Fiscal Year was in fact
twenty-three and a half percent (23.5%) of Operating Profit; otherwise, such
interim cumulative accountings will be performed on the assumption that the
Incentive Management Fee will be fifteen percent (15%) of Operating Profit;
regardless of which assumption is used, appropriate year-end adjustments will be
made if such assumption proves to be incorrect. Notwithstanding anything in this
subsection C to the contrary, cumulative Incentive Management Fees shall at no
time exceed twenty percent (20%) of cumulative Operating Profit during the
period in which the Inns are owned by the Owner, provided, however, that for
purposes of calculating such cumulative Incentive Management Fees, there shall
not be counted that portion, if any, of the Incentive Management Fee for Fiscal
Years 1988, 1989, 1990 and 1991 that would have been paid for such year but was
not paid due to the limitations of Section
28
<PAGE>
5.02 pursuant to the provisions of the Original Management Agreement.
5.05 Manager Loans
-------------
Manager shall have the right, but not the obligation, at any time and
from time to time, to advance funds reasonably needed for additional Working
Capital and to fund any shortfalls in the Debt Service Reserve Account in an
amount which when added to the outstanding balance of previous such advances
shall not exceed the average amount of the Deductions for each Accounting Period
during the preceding full thirteen (13) Accounting Periods. Any such advances
shall be deemed a loan by Manager to Owner in such amount (each, a "Manager
Loan"), shall bear interest at one percent (1%) above the Prime Rate, and shall
be repayable by Owner out of, including, without limitation, Operating Profit in
the priority set forth in Section 5.02, and Net Sales Proceeds and Net
Refinancing Proceeds in the priority set forth in Section 5.03, and as required
by Section 18.02.G. Owner shall evidence any such loan by executing a promissory
note payable to Manager in the principal amount of each such loan and bearing
interest as aforesaid. Each such note shall be payable upon the earlier of (i)
ten (10) years from the date of such advance, or (ii) the sale of substantially
all of the Inns; and, during the term of this Agreement, shall be payable out of
Operating Profit, Net Sales Proceeds and Net Refinancing Proceeds, and as
required by Section 18.02.G.
END OF ARTICLE V
29
<PAGE>
ARTICLE VI
WORKING CAPITAL AND FIXED ASSET SUPPLIES
----------------------------------------
6.01 Working Capital
---------------
Owner has, prior to the Amendment Date, provided to Manager funds for
Working Capital. Owner and Manager agree that, immediately prior to the
Amendment Date, a portion of such Working Capital funds in the amount of Fifty
Thousand Dollars ($50,000) was deemed to be held by Manager pursuant to the new
separate management agreement for the Bossier City Inn, and the balance of the
Working Capital funds supplied by Owner shall continue to be held by Manager
pursuant to the terms hereof. Owner shall from time to time hereafter advance
within fifteen (15) days after receipt of Manager's written request any
additional funds necessary to maintain Working Capital at levels determined by
Manager to be necessary to satisfy the needs of each Inn as its operation may
from time to time require. In the event Owner fails to advance additional
Working Capital within said fifteen (15) day period, Manager may, in addition to
any other rights or remedies available to it at law or in equity: (i) retain the
required amounts from any portion of Operating Profit otherwise to be retained
by Owner, (ii) make a Manager Loan to Owner in accordance with Section 5.05, and
(iii) terminate this Agreement upon not less than thirty (30) days written
notice to Owner. Funds so advanced for Working Capital shall be utilized by
Manager on behalf of Owner for the purposes of this Agreement pursuant to cash-
management policies established for the System. With the exception of the
outstanding balance of all Working Capital advances by Manager made as Manager
Loans, Owner shall be the beneficial owner of all such funds throughout the term
of this Agreement. Upon Termination with respect to any Inn or Inns, Manager
shall return to Owner any unused Working Capital, except for Inventories
purchased by Manager pursuant to Section 9.02 and except for the outstanding
balance of all Working Capital advances by Manager made as Manager Loans.
6.02 Fixed Asset Supplies
--------------------
As of the Amendment Date, Owner has supplied Fixed Asset Supplies or
funds required therefor for all of the Inns. Owner shall from time to time
hereafter promptly advance, upon request of Manager, any additional funds
necessary to maintain Fixed Asset Supplies at levels determined by Manager to be
necessary to
30
<PAGE>
satisfy the needs of each Inn as its operation may from time to time require.
Fixed Asset Supplies shall remain the property of Owner throughout the term of
the Agreement except for Fixed Asset Supplies purchased by Manager pursuant to
Section 9.02.
END OF ARTICLE VI
ARTICLE VII
REPAIRS, MAINTENANCE AND REPLACEMENTS
-------------------------------------
7.01 Routine Repairs and Maintenance
-------------------------------
Manager shall maintain each Inn in good repair and condition and in
conformity with applicable laws and regulations and shall make or cause to be
made such routine maintenance, repairs and minor alterations, the cost of which
can be expended under generally accepted accounting principles, as it, from time
to time, deems necessary for such purposes. The cost of such maintenance,
repairs and alterations shall be paid from Gross Revenues and shall be treated
as a Deduction in determining Operating Profit.
7.02 Repairs and Equipment Reserve
-----------------------------
A. Manager shall establish, on a consolidated basis (or on such other
basis as may be reasonably required by lenders providing financing to Owner with
respect to the Inns), an escrow reserve account ("Repairs and Equipment Reserve"
or the "Reserve"), in a bank or similar institution reasonably acceptable to
both Manager and Owner, to cover the cost of:
1. Replacements and renewals related solely to the FF&E of the
Inns; and
2. Certain routine repairs and maintenance to each Inn's
Building which are normally capitalized under generally accepted accounting
principles, such as exterior and interior repainting; resurfacing building
walls, floors, roofs and parking areas; buying or leasing replacement vehicles;
and replacing folding walls and the like, but which are not major repairs,
alterations, improvements, renewals or replacements to such Building's structure
or to its mechanical, electrical, heating, ventilating, air conditioning,
plumbing or vertical transportation systems, the cost of which are to be paid by
Owner under Section 7.03, rather than from the Reserve.
31
<PAGE>
B. No portion of funds held in the Reserve prior to the Amendment Date
shall be allocated to the new, separate management agreement for the Bossier
City Inn. As of the Amendment Date, Manager holds the balance of funds
contributed to the Reserve under the Management Agreement. For each Fiscal Year
during the term of this Agreement, subject to the provisions of subsection E
below, Manager shall transfer into the Reserve an amount equal to five percent
(5%) of Gross Revenues. Transfers into the Reserve shall be made at the time of
each interim accounting described in Section 5.04.A hereof. Commencing with
Fiscal Year 2001, Manager shall have the right, but not the obligation, to
increase the amount it transfers into the Reserve to any amount greater than
five percent (5%) but not exceeding six percent (6%) of Gross Revenues for such
Fiscal Year and successive Fiscal Year thereafter if, based upon a review of
Replacement FF&E requirements for the Inns, such increase is necessary in
Manager's reasonable judgment to fund future Replacement FF&E that would be
necessary to maintain the Inns in accordance with Manager's standards for
Residence Inns. Any amounts held in the Reserve may be applied, as between the
Inns, without regard to the source of such amounts, provided that such
application satisfies the requirements of this Article VII. All amounts
transferred to the Reserve shall be deducted from Gross Revenues in determining
Operating Profit and shall be deposited in the special Reserve account described
in Section 7.02.A hereof.
C. Manager shall from time to time make such (1) replacements and
renewals to the FF&E of the Inns, and (2) repairs to each Inn Building of the
nature described in Section 7.02.A.2, as it deems necessary, up to the balance
in the Repairs and Equipment Reserve. No expenditures will be made in excess of
said balance without the approval of Owner. Withdrawals from the Reserve shall
be made only by representatives of Manager whose signatures have been
authorized. At the end of each Fiscal Year, any amounts remaining in the Repairs
and Equipment Reserve shall be carried forward to the next Fiscal Year. Proceeds
from the sale of FF&E no longer necessary to the operation of each Inn shall be
added to the Reserve. The Reserve will be kept in an interest-bearing account,
and any interest which accrues thereon shall be retained in the Reserve. Neither
(i) proceeds from the disposition of FF&E, nor (ii) interest which accrues on
amounts held in the Reserve, shall (a) result in any reduction in the required
contributions to the Reserve set forth in subsection B above, nor (b) be
included in Gross Revenues. Manager, in its
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reasonable discretion, and subject to the exceptions stated below, shall decide
whether to purchase or lease any Replacement FF&E or motor vehicles used in
transporting Inn guests. If Manager enters into any lease of Replacement FF&E or
motor vehicles used in transporting Inn guests, it shall do so on Owner's behalf
and as Owner's agent; or, upon Manager's recommendation and request, Owner shall
directly enter into such leases. Notwithstanding the foregoing, Manager shall
not and shall not require Owner to enter into any lease other than (i) Telephone
Leases, (ii) Computer Leases, (iii) TV System Leases, (iv) FF&E Leases, and (v)
leases of vehicles used in transporting Inn guests. With respect to FF&E Leases
only, Manager shall be required to obtain Owner's prior written approval before
entering into or requesting that Owner enter into any FF&E Lease, if (a) the
fair market value of the FF&E with respect to all FF&E Leases relating to each
Inn (including those being entered into) would exceed at any time Two Hundred
Thousand Dollars ($200,000) (as increased each Fiscal Year after Fiscal Year
1996 by the CPI Percentage) in respect of such Inn, (b) the FF&E to be covered
by such FF&E Lease is FF&E that is not customarily leased in the hotel industry
in the United States, or (c) such FF&E Lease is on payment terms (including the
amounts and schedule of payments) that would be materially more favorable to the
lessor thereof than payment terms customary in the hotel industry in the United
States for similar leases. With respect to TV System Leases only, Manager shall
be required to obtain Owner's prior written approval before entering into or
requesting the Owner enter into any TV System Lease, if (a) the equipment to be
covered by such TV System Lease is not customarily leased in the hotel industry
in the United States or (b) such TV System Lease is on payment terms (including
the amounts and schedule of payments) that would be materially more favorable to
the lessor thereof than payment terms customary in the hotel industry in the
United States for similar leases. In cases described in the preceding two
sentences, Owner's approval shall not be unreasonably withheld; provided,
however, that the failure of any Lender to approve such leasing proposal shall
justify Owner in withholding its approval.
D. Manager shall prepare an estimate ("Repairs and Equipment Estimate")
of the expenditures necessary for (1) replacements and renewals to the FF&E of
the Inns, and (2) repairs to each Inn building of the nature described in
Section 7.02.A.2, during the ensuing Fiscal Year and shall submit such Repairs
and Equipment Estimate to Owner at the same time it
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submits the Annual Operating Projection described in Section 8.03. The Repairs
and Equipment Estimate shall be prepared on a consolidating basis showing
proposed expenditures as to each Inn. It shall also indicate the time schedule
for making such replacements and renewals.
E. The percentage contributions for the Repairs and Equipment Reserve
described in Section 7.02.B are estimates based upon Manager's prior experience.
As each Inn ages, these percentages either (i) may not be sufficient to keep the
Reserve at the levels necessary to make the replacements and renewals to the
FF&E of such Inn, or to make the repairs to such Inn building of the nature
described in Section 7.02.A.2, which are required to maintain such inn as a
first-class facility in accordance with Manager's standards for Residence Inns,
or (ii) may be in excess of those amounts necessary to maintain such Inn as a
first-class facility in accordance with Manager's standards for Residence Inns.
If the Manager reasonably determines that the percentages contained in Section
7.02.B are in excess of the amounts sufficient to maintain the Inns as
first-class facilities in accordance with Manager's standards for Residence
Inns, the Manager may reduce the percentages.
If the Repairs and Equipment Estimate prepared in good faith by Manager
exceeds the available funds in the Repairs and Equipment Reserve, Owner will:
1. Agree to increase the annual percentage in Section 7.02.B
to provide the additional funds required, or
2. Arrange to obtain outside financing for the additional
funds required, in which event the principal and interest payments on such
financing shall constitute Deductions in determining Operating Profit, or
3. Provide the additional funds required; in which case, such
amounts (plus interest at the Prime Rate plus one percent (1%) per annum) shall
be repaid to Owner from Gross Revenues in equal installments over the period of
the next sixty-five (65) Accounting Periods, and such installment repayments
shall be Deductions.
A failure or refusal by Owner to agree in writing to either 1, 2 or 3
above within a sixty (60) day period after Manager's request therefor shall
entitle Manager, within sixty (60) days
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after such failure or refusal, to notify Owner that it will terminate this
Agreement, as to those Inns as to which agreement was not reached, as of a date
six (6) months after the date of Manager's notice. If Manager does not so notify
Owner, it shall continue to manage the Inns in question, as provided under this
Agreement, without the aforesaid increase in the percentage contribution to the
Reserve. If Owner agrees to obtain outside financing or provide additional
funding as described in Subsection 2 or 3 above but fails to deposit such funds
into the Reserve within sixty (60) days after such agreement, then, in addition
to any other remedies to which it is entitled, Manager shall be entitled to (i)
notify Owner that it will terminate this Agreement as to those Inns for which
funds were not deposited as of a date three (3) months after the date of
Manager's notice, or (ii) continue to manage the Inn or Inns without making such
alterations, improvements, renewals, or replacements.
F. Upon Termination of this Agreement with respect to any one or more
of the Inns, whether pursuant to Section 7.02.E above or pursuant to other
provisions of this Agreement, that portion of the Reserve properly allocable to
said Inn or Inns shall be released from the Reserve and paid to Owner unless
Manager will continue operating some or all of the Inns being terminated from
this Management Agreement, in which case Manager shall transfer all amounts held
in the Reserve properly allocable to the Inns Manager will continue operating to
one or more new accounts for the benefit of the new owner or owners of such
Inns.
7.03 Building Alterations, Improvements, Renewals, and Replacements
--------------------------------------------------------------
A. Manager shall prepare an annual estimate of the expenses necessary
for major repairs, alterations, improvements, renewals and replacements (which
repairs, alterations, improvements, renewals and replacements are not among
those referred to Section 7.02.A.2) to the structural, mechanical, electrical,
heating, ventilating, air conditioning, plumbing or vertical transportation
elements of each of the Buildings ("Building Estimate") and shall submit such
Building Estimate to Owner for its approval at the same time the Annual
Operating Projection is submitted. The Building Estimate and shall be prepared
on a consolidating basis showing proposed expenditures as to each Inn. Manager
shall not make any expenditures for such purposes without the prior written
consent of Owner. However, if
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major repairs, alterations, improvements, renewals or replacements to any Inn
are required by reason of any law, ordinance, regulation or order of a competent
government authority, or are otherwise required for the continued safe and
orderly operation of such Inn, Manager shall immediately give Owner notice
thereof and shall be authorized (but not obligated) to take appropriate remedial
action without such approval if Owner does not act; provided that Manager shall
in no event act without obtaining Owner's prior consent if the cost of such
remedial action exceeds, for any given Inn, four percent (4%) of such Inn's
annual Gross Revenues for the immediately preceding full Fiscal Year. Owner
shall bear the cost of all such alterations, improvements, renewals or
replacements by either:
1. Providing outside financing for the additional funds
required, in which event the principal and interest payments on such financing
shall constitute Qualifying Debt Service, or
2. Providing the additional funds required, which amounts
shall be treated as Additional Inn Investments hereunder.
B. If Owner does not approve the Building Estimate as to one or more or
all of the Inns within sixty (60) days after it has been submitted, Manager may,
within sixty (60) days after the end of said sixty-day period, notify Owner that
it will terminate this Agreement as to those Inns as to which agreement was not
reached as of a date six (6) months after the date of Manager's notice. If
Manager does not so notify Owner, it shall continue to manage the Inns in
question, as provided under this Agreement, without making any expenditures in
the Building Estimate that were not approved. If Owner approves the Building
Estimate as to one or more or all of the Inns but fails to deliver funds
required by such Building Estimate as to one or more Inns within sixty (60) days
after such approval, then Manager may, at its option and in addition to any
other remedies available to it, (i) notify Owner that it will terminate this
Agreement as to those Inns for which funds were not deposited as of a date three
(3) months after the date of Manager's notice, (ii) use funds from the Reserve
to pay for the expenditures in the approved Building Estimate, or (iii) continue
to manage the Inn or Inns without making such alterations, improvements,
renewals or replacements.
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7.04 Liens
-----
Manager and Owner shall use their best efforts to prevent any liens
from being filed against any Inn which arise from any maintenance, repairs,
alterations, improvements, renewals or replacements in or to such Inn. Manager
and Owner shall cooperate fully in obtaining the release of any such liens, and
the cost thereof, if the lien was not occasioned by the fault of either party,
shall be treated the same as the cost of the matter to which it relates. If the
lien arises as a result of the fault of either party, then the party at fault
shall bear the cost of obtaining the lien release.
7.05 Ownership of Replacements
-------------------------
All repairs, alterations, improvements, renewals or replacements made
pursuant to Article VII, and all amounts kept in the Reserve, shall be the
property of Owner.
END OF ARTICLE VII
37
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ARTICLE VIII
BOOKKEEPING AND BANK ACCOUNTS
-----------------------------
8.01 Books and Records
-----------------
A. Books of control and account shall be kept on the accrual basis and
in material respects in accordance with the Uniform System of Accounts, with the
exceptions provided in the Agreement. Owner may at reasonable intervals during
Manager's normal business hours examine such records. Within the Partnership
Filing Period, Manager shall furnish Owner a statement in reasonable detail
summarizing the operations of the Inns for the immediately preceding Fiscal Year
and a certificate of Manager's chief accounting officer certifying that such
year-end statement is true and correct. The parties shall, within five (5)
business days after the receipt of such statement, make any adjustments, by cash
payment, in the amounts paid or retained for such Fiscal Year as are needed
because of the final figures set forth in such statement. If Owner desires, at
its own expense, to audit such statement and supporting records, Owner shall
begin such audit within ninety (90) days following its receipt of such statement
and shall complete such audit within ninety (90) days thereafter. If Owner does
not make such an audit, then such statement shall be deemed to be conclusively
accepted by Owner as being correct, and Owner shall have no right thereafter,
except in the event of fraud by Manager, to question or examine the same. If any
audit by Owner discloses an understatement of any amounts due Owner, Manager
shall promptly pay Owner such amounts found to be due, plus interest thereon (at
the Prime Rate plus one percent (1%) per annum) from the date such amounts
should originally have been paid. If, however, the audit discloses that Manager
has not received any amounts due it, Owner shall pay Manager such amounts, plus
interest thereon (at the Prime Rate plus one percent (1%) per annum) from the
date such amounts should originally have been paid. Any dispute concerning the
correctness of an audit shall be settled by arbitration, in accordance with the
then current rules of the American Arbitration Association.
B. If Owner's audit discloses an error in the total payment of amounts
due Owner, for any Fiscal Year so audited, that is in excess of five percent
(5%), Manager shall pay for the cost of Owner's audit. In addition, in such
event, Owner may
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audit the statements of Inn operations and supporting records for the two (2)
preceding Fiscal Years. Owner shall bear the cost of such audit, except for the
cost thereof relating to any Fiscal Year in which the audit discloses an error
in excess of five percent (5%) in the payment of amounts due Owner.
C. All statements shall be prepared on consolidated basis rather than
on an individual Inn basis; however, to the extent Manager prepares them for its
own internal purposes, Manager shall, on Owner's written request, furnish Owner
with copies of unaudited statements prepared for each Inn separately.
8.02 Accounts, Expenditures
----------------------
A. All funds derived from operation of the Inns shall be deposited by
Manager in a bank account in a bank designated by Manager. Withdrawals from said
accounts shall be made only by representatives of Manager whose signatures have
been authorized. Reasonable petty cash funds shall be maintained at each Inn.
B. All payments made by Manager hereunder shall be made from authorized
bank accounts, petty cash funds, or from Working Capital provided pursuant to
Section 6.01. Manager shall not be required to make any advance or payment to or
for the account of Owner except out of such funds, and Manager shall not be
obligated to incur any liability or obligation for Owner's account without
assurances that necessary funds for the discharge thereof will be provided by
Owner. Debts and liabilities incurred by Manager as a result of its operation
and management of the Inns pursuant to the terms hereof, whether asserted before
or after the Termination of this Agreement, will be paid by Owner to the extent
funds are not available for that purpose from the operation of the Inns.
8.03 Annual Operating Projection
---------------------------
A. Manager shall submit to Owner for its review, thirty (30) days prior
to the beginning of each Fiscal Year, an "Annual Operating Projection." Such
projection shall project, on a consolidated basis, the estimated Gross Revenues,
departmental profits, Deductions, and Operating Profit for the forthcoming
Fiscal Year for the Inns, taking into account each Inn's market area. Manager
shall use its best efforts to adhere to the Annual Operating Projection. It is
understood, however, that the Annual Operating Projection is an estimate only
and that unforeseen
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circumstances such as, but not limited to, the costs of labor, material,
services and supplies, casualty, operation of law, or economic and market
conditions may make adherence to the Annual Operating Projection impracticable,
and Manager shall be entitled to depart therefrom due to causes of the foregoing
nature.
B. If Owner intends to sell or refinance any one or more of the Inns,
Manager agrees to cooperate in providing information to facilitate such sale or
refinancing.
8.04 Operating Losses; Credit
------------------------
A. To the extent there is an Operating Loss for any Accounting Period,
additional funds in the amount of any such deficiency shall be provided by Owner
within twenty (20) days after Manager has given written notice to Owner of such
Operating Loss. If Manager elects not to so notify Owner or if Owner does not so
fund such deficiency on Manager's request (but, in such latter case, without
affecting Manager's other remedies under this Agreement), Manager shall have the
right to withhold an amount equal to such deficiency from future disbursements
of funds otherwise due to Owner.
B. In no event shall either party borrow money in the name of or pledge
the credit of the other.
END OF ARTICLE VIII
40
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ARTICLE IX
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
-----------------------------------------
9.01 Trademarks, Trade Names and Service Marks
-----------------------------------------
A. During the term of the Agreement, each Inn shall be known as a
"Residence Inn" or "Residence Inn by Marriott" or "Marriott Residence Inn", with
such additional identification as may be necessary to provide local
identification. If the name of the "Residence Inn by Marriott" System is
changed, Manager will change the name of each Inn to conform thereto. The names
"Marriott," "Residence Inn," "Residence Inn by Marriott" and "Marriott Residence
Inn" (each of the foregoing names, together with any combination thereof, shall
herein be collectively referred to as the "Trade Names") when used alone or in
connection with another word or words, and the Marriott or Residence Inn
trademarks, service marks, other trade names, symbols, logos and designs shall
in all events remain the exclusive property of Manager or Marriott, and nothing
contained herein shall confer on Owner the right to use any of the Trade Names,
or the Marriott or Residence Inn trademarks, service marks, other trade names,
symbols, logos or designs otherwise than in strict accordance with the terms of
this Agreement. Except as provided in Section 9.02, upon Termination with
respect to any one or more of the Inns, any use of or right to use any of the
Trade Names, or any of the Marriott or Residence Inn trademarks, service marks,
other trade names, symbols, logos or designs by Owner shall cease forthwith and
Owner shall promptly remove from each such Inn any signs or similar items which
contain any of said Trade Names, trademarks, service marks, other trade names,
symbols, logos or designs. If Owner has not removed such signs or similar items
promptly upon Termination, Manager shall have the right to remain at such Inn as
long as is necessary for it to do so.
B. Included under the terms of this Section are all trademarks, service
marks, trade names, symbols, logos or designs used in conjunction with the Inns,
including but not limited to restaurant names, lounge names, etc., whether or
not the marks contain the "Marriott" name or the "Residence Inn" name. The right
to use such trademarks, service marks, trade names, symbols, logos or designs
belongs exclusively to Manager or Marriott, and the use thereof inures to the
benefit of Manager or
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Marriott whether or not the same are registered and regardless of the source of
the same.
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9.02 Purchase of Inventories and Fixed Asset Supplies
------------------------------------------------
Upon Termination, either of this entire Agreement or with respect to a
given Inn, Manager shall have the option, to be exercised within thirty (30)
days after Termination, to purchase, at their then book value, any items of such
Inn's Inventories and Fixed Asset Supplies as may be marked with any Trade Name,
or any Marriott or Residence Inn trademark, other trade name, symbol, logo or
design. In the event Manager does not exercise such option, Owner agrees that it
will use any such items not so purchased exclusively in connection with such Inn
(or one of the other Inns) until they are consumed.
9.03 Breach of Covenant
------------------
Manager, Marriott and the Marriott Affiliates shall be entitled, in
case of any breach of the covenants of Article IX by Owner or others claiming
through it, to injunctive relief and to any other right or remedy available at
law. Article IX shall survive Termination.
END OF ARTICLE IX
43
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ARTICLE X
MANAGEMENT AND USE OF THE INNS
10.01 Management of the Inns
----------------------
Manager shall manage each Inn under standards comparable to those
prevailing in other inns in the "Residence Inn by Marriott" System, including
all activities in connection therewith which are customary and usual to such an
operation.
10.02 Chain Services
--------------
Manager shall, commencing with the Effective Date and thereafter during
the term of this Agreement, cause to be furnished to each Inn certain services
("Chain Services") which are furnished generally on a central or regional basis
to other inns in the "Residence Inn by Marriott" System which are managed by
Manager, Marriott, or any Marriott Affiliate, and which benefit each Inn as a
participant in such System. Chain Services shall include: (i) divisional
executive management; (ii) sales office services; the development of programs
for training and manpower development; and computer payroll and accounting
services; and (iii) such additional central and regional services as may from
time to time be furnished for the benefit of inns in the "Residence Inn by
Marriott" System or in substitution for services now performed at individual
inns which may be more efficiently performed on a group basis. The services
described in this Section 10.02 shall not include services which are described
in the definitions of "Base Management Fee" and "Residence Inn System Fee."
Costs and expenses incurred in the providing of such services shall be allocated
on a fair and equitable basis, on a "per-suite" basis, among all "Residence Inn
by Marriott" inns managed by Manager in the United States receiving the same. To
the extent that services described in this Section 10.02 have been funded
through the Marketing Fund, there will be no allocation of the costs and
expenses thereof under this Section 10.02.
10.03 Owner's Right to Inspect
------------------------
Owner or its agents shall have access to any Inn at any and all
reasonable times for the purpose of protecting the same against fire or other
casualty, prevention of damage to the Inn,
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inspection, making repairs, or showing such Inn to prospective purchasers,
tenants or mortgagees.
END OF ARTICLE X
45
<PAGE>
ARTICLE XI
INSURANCE
---------
11.01 Property Insurance
------------------
A. Manager shall, commencing with the Effective Date and for the
duration of each Inn Term, procure and maintain, using funds deducted from Gross
Revenues in determining Operating Profit, with insurance companies approved by
Owner and licensed to do business in the state where the respective Inn is
located (unless coverage is not available from licensed companies or
non-licensed companies provide coverage which a reasonable insurance expert
would deem preferable), a minimum of the following insurance:
1. Insurance on each Inn (including contents) against loss or
damage by all perils included in "all risk" (as such term is commonly used in
the insurance industry) coverage, in an amount not less than one hundred percent
(100%) of the replacement cost thereof, except that if such 100% replacement
cost coverage is not available on reasonable rates and terms, then such
insurance shall be in an amount not less than ninety percent (90%) of the
replacement cost of each Inn;
2. Earthquake (except in California) and flood insurance, if
available on reasonable rates and terms, to be determined at the discretion of
Manager;
3. Insurance against loss or damage from explosion of boilers,
pressure vessels, pressure pipes and sprinklers, to the extent applicable,
installed in each Inn;
4. Business interruption insurance covering loss of profits
and necessary continuing expenses for interruptions caused by any occurrence
covered by the insurance referred to in Section 11.01.A.1, 2 and 3, for a period
of not less than one (1) year after the occurrence, of a type and in amounts and
with such deductible limits as are generally established by Manager at the other
inns it owns or manages under the Marriott Residence Inn name in the United
States.
B. All policies of insurance required under Section 11.01. A. 1, 2, 3
and 4 shall be carried in the name of Owner, Manager,
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and the holder of the first-lien permanent mortgage on such Inn; subject to the
rights of any lender, any losses thereunder shall be payable to the parties as
and to the extent their respective interests, if any, may appear.
C. Any mortgage on any Inn shall contain provisions to the effect that
proceeds of the insurance policies required to be carried under Section 11.01
shall be available for repair and restoration of such Inn.
11.02 Operational Insurance
---------------------
Manager shall, commencing with the Effective Date and for the duration
of each Inn Term, procure and maintain, using funds deducted from Gross Revenues
in determining Operating Profit, either with insurance companies approved by
Owner and licensed to do business in the state where the respective Inn is
located (unless coverage is not available from licensed companies or
non-licensed companies provide coverage which a reasonable insurance expert
would deem preferable), or by Manager legally qualifying as a workers'
compensation self-insurer in the state where the particular Inn is located, the
following insurance:
A. Worker's compensation and employer's liability insurance as may be
required under applicable laws covering all of Manager's employees at each Inn,
with such deductible limits or self-insured retentions as are generally
established by Manager at the other inns it owns or manages under the "Residence
Inn by Marriott" name in the United States;
B. Fidelity bonds, with reasonable limits and deductibles to be
determined by Manager, covering its employees in job classifications normally
bonded in the other inns it owns or manages under the "Residence Inn by
Marriott" name in the United States or as otherwise required by law, and
comprehensive crime insurance to the extent Manager and Owner mutually agree it
is necessary for each Inn;
C. Comprehensive general public liability insurance against claims for
personal injury, death or property damage occurring on, in, or about each Inn,
and automobile insurance on vehicles operated in conjunction with such Inn, with
a combined single limit of not less than Twenty-five Million Dollars
($25,000,000) for each occurrence for personal injury, death and
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property damage, with such deductible limits or self-insured retentions as are
generally established by Manager at the other inns it owns or manages under the
"Residence Inn by Marriott" name in the United States; if Manager feels in its
reasonable discretion that higher limits are appropriate, it will obtain them;
D. Such other insurance in amounts as Manager in its reasonable
judgment deems advisable for protection against claims, liabilities and losses
arising out of or connected with the operation of the Inns or as reasonably
required by Owner's lenders holding first mortgages on the Inns.
11.03 Coverage
--------
All insurance described in Sections 11.01 and 11.02 may be obtained by
Manager by endorsement or equivalent means under its blanket insurance policies,
provided that such blanket policies substantially fulfill the requirements
specified herein. Deductible limits and self-insured retentions shall be as
provided in the blanket policies covering the inns owned or managed by Manager
under the "Residence Inn by Marriott" name in the United States. In addition,
Manager may self-insure workers' compensation insurance (if it has legally
qualified to do so) or otherwise retain such risks or portions thereof as it
does with respect to other inns it owns or manages under the "Residence Inn by
Marriott" name in the United States.
11.04 Cost and Expense
----------------
Insurance premiums and any costs or expenses with respect to the
insurance described in this Article XI shall be Deductions in determining
Operating Profit. Premiums on policies for more than one year shall be charged
pro rata against Gross Revenues over the period of the policies. The expenses
incurred in maintaining Manager's self-insurance program shall be charged on an
equitable basis to the inns participating in such programs. Any reserves,
losses, costs, damages or expenses which are uninsured, or fall within
deductible limits, shall be treated as a cost of insurance and shall be
Deductions in determining Operating Profit. Upon Termination, either of this
entire Agreement or with respect to a given Inn, an escrow fund in an amount
reasonably acceptable to Manager (which amount, when funded, shall thereafter be
final as between Owner and Manager) shall be established from Gross
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Revenues (or, if Gross Revenues are not sufficient, with funds provided by
Owner) to cover the amount of any deductible limits and all other costs which
will eventually have to be paid by Manager with respect to pending or contingent
claims, including those which arise after Termination for causes arising during
the term of the Agreement.
11.05 Policies and Endorsements
-------------------------
A. Where permitted, all insurance provided under Article XI shall name
Owner and any lender or mortgagee designated by Owner as additional insureds.
Manager shall deliver to such additional insureds certificates of insurance with
respect to all policies so procured, including existing, additional and renewal
policies and, in the case of insurance about to expire, shall deliver
certificates of insurance with respect to the renewal policies not less than ten
(10) days prior to the respective dates of expiration.
B. All policies of insurance provided for under Article XI shall, to
the extent obtainable, have attached thereto an endorsement that such policy
shall not be canceled or materially changed without at lease thirty (30) days'
prior written notice to the certificate holder.
END OF ARTICLE XI
49
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ARTICLE XII
TAXES
-----
12.01 Real Estate and Personal Property Taxes
---------------------------------------
All real estate and personal property taxes, levies, assessments and
similar charges on or relating to each Inn ("Impositions") during each Inn Term
shall be paid by Manager from Gross Revenues, before any fine, penalty, or
interest is added thereto or lien placed upon any Inn or upon the Agreement,
unless payment thereof is in good faith being contested and enforcement thereof
is stayed. Any such payments shall be a Deduction in determining Operating
Profit. Owner shall, within five (5) days of receipt, furnish Manager with
copies of official tax bills and assessments which it may receive with respect
to any of the Inns. Either Owner or Manager (in which case Owner agrees to sign
the required applications and otherwise cooperate with Manager in expediting the
matter) may initiate proceedings to contest any Imposition, and all reasonable
costs of any such contest shall be paid from Gross Revenues and shall be a
Deduction in determining Operating Profit.
END OF ARTICLE XII
50
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ARTICLE XIII
INN EMPLOYEES
-------------
13.01 Employees
---------
A. All personnel employed at each Inn shall at all times be the
employees of Manager. Manager shall have absolute discretion to hire, promote,
supervise, direct and train all employees at each Inn, to fix their compensation
and, generally, establish and maintain all policies relating to employment.
B. Manager shall decide whom, if any, of the employees of each Inn
shall reside at such Inn, and shall be permitted to provide free accommodations
and amenities to its employees and representatives living at or visiting each
Inn in connection with its management or operation. No person shall otherwise be
given gratuitous accommodations or services without prior joint approval of
Owner and Manager except in accordance with usual practices of the hotel and
travel industry.
C. At Termination with respect to a given Inn, other than a Termination
(i) by reason of a default of Manager hereunder or (ii) at Manager's option
(except as a result of a default by Owner), provided that the expiration of a
given Inn Term under Section 4.01 shall not be deemed "at Manager's option" for
purposes of this Section 13.01, an escrow fund shall be established from Gross
Revenues (or, if Gross Revenues are not sufficient, with funds provided by
Owner) to reimburse Manager for all costs and expenses incurred by Manager in
terminating its employees at the affected Inn, such as severance pay,
unemployment compensation and other employee liability costs arising out of the
termination of employment of Manager's employees at such Inn.
END OF ARTICLE XIII
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ARTICLE XIV
DAMAGE, CONDEMNATION AND FORCE MAJEURE
--------------------------------------
14.01 Damage and Repair
-----------------
A. If, during the term hereof, any of the Inns is damaged or destroyed
by fire, casualty or other cause, Owner shall, at its cost and expense and with
all reasonable diligence, repair or replace the damaged or destroyed portion of
such Inn to the same condition as existed previously. To the extent available,
proceeds from the insurance described in Section 11.01 shall be applied to such
repairs or replacements. However, Owner shall not be obligated to so repair or
replace the damaged or destroyed portion of such Inn if one or more of the
following is true: (i) the Inn is so badly damaged or destroyed that it cannot
reasonably be repaired or replaced within one (1) year of the date on which the
construction work relating to the repair and/or replacement would begin; (ii)
the proceeds of insurance available for such repair or replacement are less than
ninety percent (90%) of the estimated repair and replacement costs; or (iii) the
remainder of the Inn Term with respect to such Inn is less than ten (10) years,
and Manager fails to agree to extend such Inn Term to a date which is at least
ten (10) years after the estimated date of the completion of such repair and/or
replacement. If Owner elects not to repair or replace said damaged portion of
such Inn for one or more of the foregoing reasons, it shall so notify Manager by
written notice within ninety (90) days after the date of the casualty.
B. In the event damage or destruction to any Inn from any cause
materially and adversely affects the operation of such Inn and (i) Owner fails
to promptly commence and complete the repairing, rebuilding or replacement of
the same so that such Inn shall be substantially the same as it was prior to
such damage or destruction, or (ii) Owner notifies Manager, pursuant to the
provisions of Section 14.01.A above, that Owner will not repair or replace such
damage for one or more of the reasons set forth in Section 14.01.A, Manager may,
at its option, terminate the Agreement with respect to such Inn upon sixty (60)
days' written notice.
14.02 Condemnation
------------
52
<PAGE>
A. In the event all or substantially all of any Inn shall be taken in
any eminent domain, condemnation, compulsory acquisition, or similar proceeding
by any competent authority for any public or quasi-public use or purpose, or in
the event a portion of such Inn shall be so taken, but the result is that it is
unreasonable to continue to operate such Inn, this Agreement shall terminate
with respect to such Inn. Owner and Manager shall each have the right to
initiate such proceedings as they deem advisable to recover any damages to which
they may be entitled.
B. In the event a portion of any Inn shall be taken by the events
described in Section 14.02.A, or an entire Inn is affected but on a temporary
basis, and the result is not to make it unreasonable to continue to operate such
Inn, this Agreement shall not terminate. However, so much of any award for any
such partial taking or condemnation as shall be necessary to render such Inn
equivalent to its condition prior to such event shall be used for such purpose.
Owner shall retain the balance of such award, subject to the provisions of any
mortgage of the Inn.
14.03 Force Majeure
-------------
A. If acts of God, acts of war, civil disturbance, or governmental
action (collectively herein referred to as "Force Majeure") make it impractical
for either Owner or Manager to perform any of its respective obligations
hereunder, such obligation shall be suspended until it is again possible for the
affected party to perform it. In addition, if such an event, in Manager's or
Owner's reasonable judgment, makes continued operation of an Inn impractical for
more than a reasonable temporary period, then Manager or Owner may terminate
this Agreement as to such Inn on sixty (60) day's written notice to Owner or
Manager, as the case may be.
B. The provisions of Section 14.03.A shall not apply to the specific
provisions of this Agreement regarding (i) damage or destruction, (ii)
condemnation, and (iii) withdrawal or revocation of licenses or permits.
END OF ARTICLE XIV
53
<PAGE>
ARTICLE XV
DEFAULTS
--------
15.01 Events of Default
-----------------
The following shall constitute "events of default" to the extent
permitted by applicable law:
A. The failure of either party to make any payment required to be made
in accordance with the terms hereof within ten (10) days after written notice
that such payment has not been made; or
B. Unless Section 15.01.A is applicable, the breach by either party of
any material representation, warranty or covenant contained in this Agreement,
or the default by either party in the performance of any covenants,
undertakings, obligations or conditions set forth in this Agreement, which
breach or default shall not have been cured within thirty (30) days after notice
of such breach or default; provided that an "event of default" shall not exist
with regard thereto if such breach or default (i) is not attributable to a
failure to pay any sums due under this Agreement and (ii) such breach or default
is curable (but not within such thirty (30) day period) and the defaulting party
commences the cure of said breach or default within said thirty (30) day period
and thereafter proceeds diligently and in good faith to complete such cure; or
C. If a court of competent jurisdiction has entered a final,
non-appealable judgment finding Manager liable for fraud, gross negligence or
willful and wanton misconduct in its dealings with Owner hereunder; or
D. If Manager or Owner shall apply for or consent to the appointment of
a receiver, trustee or liquidator of all or a substantial part of its assets or
make a general assignment for the benefit of its creditors, or file a voluntary
petition in bankruptcy or a petition seeking reorganization, composition,
arrangement with creditors, liquidation or similar relief under any present or
future statute, law or regulation, or file any answer admitting the material
allegations of a petition filed against it in any such proceeding, or be
adjudicated a bankrupt or insolvent, or take any action looking toward
dissolution; or
54
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E. If any final order, judgment or decree (that is, an order, judgment
or decree affirmed on appeal to a court of last resort or after the expiration
of any period to appeal) shall be entered without the application, approval or
consent of Manager or Owner by any court of competent jurisdiction, approving a
petition seeking reorganization, composition, arrangement with creditors,
liquidation or similar relief under any present or further statute, law or
regulation with respect to Manager or Owner, or appointing a receiver, trustee
or liquidator of all or a substantial part of Manager's or Owner's assets and
such order, judgment or decree shall continue unstayed and in effect for an
aggregate of sixty (60) days (whether or not consecutive).
15.02 Remedies
--------
A. If, at any time during the term of this Agreement, an "event of
default" (as defined in Section 15.01) shall occur, then the non-defaulting
party may, at its option, terminate this Agreement by giving notice to the other
party, specifying a date, not earlier than thirty (30) days after the receipt of
such notice, for Termination of this Agreement. If the default has not been
cured on or before the date specified in the aforesaid notice, this Agreement
shall terminate on such date.
B. The rights set forth in Section 15.02.A shall not be in substitution
for, but shall be in addition to, any and all rights and remedies available to
the non-defaulting party by reason of applicable law.
END OF ARTICLE XV
55
<PAGE>
ARTICLE XVI
WAIVER AND PARTIAL INVALIDITY
-----------------------------
16.01 Waiver
------
The failure of either party to insist upon a strict performance of any
of the terms or provisions of the Agreement, or to exercise any option, right or
remedy herein contained, shall not be construed as a waiver or as a
relinquishment for the future of such term, provision, option, right or remedy,
but the same shall continue and remain in full force and effect. No waiver by
either party of any term or provision hereof shall be deemed to have been made
unless expressed in writing and signed by such party.
16.02 Partial Invalidity
------------------
If any portion of the Agreement shall be declared invalid by order,
decree or judgment of a court, the Agreement shall be construed as if such
portion had not been inserted herein except when such construction would operate
as an undue hardship on Manager or Owner or constitute a substantial deviation
from the general intent and purpose of said parties as reflected in the
Agreement.
END OF ARTICLE XVI
56
<PAGE>
ARTICLE XVII
ASSIGNMENT
----------
17.01 Assignment
----------
A. Neither party shall assign or transfer or permit the assignment or
transfer of this Agreement without the prior written consent of the other;
provided, however, that Manager shall have the right, without such consent, to
(1) assign its interest in this Agreement to Marriott or any Marriott Affiliate
(other than one which is a partner of Owner) which (i) has adequate experience
in managing hotels and has adequate capital to conduct its business as Manager
under this Agreement, and (ii) agrees in writing to be bound by and comply with
the terms of this Agreement (such written agreement to be delivered to Owner);
and (2) lease shops or grant concessions at the Inns so long as the terms of any
such leases or concessions do not exceed the term of this Agreement. Nothing
contained herein shall prevent (i) the conditional assignment of this Agreement
by Owner as security for any mortgage on the Inns pursuant to Section 17.02;
(ii) the transfer of this Agreement in connection with a merger or consolidation
or a sale of all or substantially all of the assets of Marriott; or (iii) an
assignment of this Agreement in connection with an approved sale of one or more
of the Inns pursuant to Section 18.01.A.2.
B. In the event either party consents to an assignment of this
Agreement by the other, no further assignment shall be made without the express
consent in writing of such party, unless such assignment may otherwise be made
without such consent pursuant to the terms of this Agreement. An assignment by
either Owner or Manager of its interest in this Agreement shall not relieve
Owner or Manager, as the case may be, from their respective obligations under
this Agreement, and shall inure to the benefit of, and be binding upon, their
respective successors, heirs, legal representatives, or assigns.
17.02 Mortgages and Collateral Assignments
------------------------------------
Owner may from time to time (i) grant mortgages, deeds of trust or
similar security instruments encumbering the Inns, and (ii) collaterally assign
its interest under this Agreement as additional security, provided that all such
mortgages, deeds of
57
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trust, other security instruments and collateral assignments: (a) are granted or
entered into in connection with indebtedness that is described in Section
3.01.A.2 (ii) and (iii) hereof, and (b) each contain a non-disturbance provision
in the form described in Section 3.01.A.2(i) hereof. Provided that all of the
provisions of Section 3.01.A.2 are complied with, Manager agrees that (in
connection with Owner obtaining such secured loans) it will: (x) deliver to the
lender, upon Owner's written request therefor, a statement that this Agreement
is in full force and effect and that there are no outstanding defaults
hereunder, or, if there are outstanding defaults, describing what they are; (y)
subordinate Manager's interest in this Agreement to the rights of the lender
upon foreclosure of any such mortgage, deed of trust, security agreement or like
instrument, or upon the granting of a deed in lieu of foreclosure (provided that
such lender simultaneously agrees to a non-disturbance provision in the form
described in Section 3.01.A.2(i) hereof); and (z) attorn to and recognize such
lender or its assignee as being the "Owner" under this Agreement upon a
conveyance of title to the Inns to such lender or its assignee, whether such
conveyance is the result of a foreclosure of said mortgage, deed of trust,
security agreement or like instrument, or is the result of a deed in lieu of
foreclosure.
END OF ARTICLE XVII
58
<PAGE>
ARTICLE XVIII
SALE OF AN INN OR INNS
----------------------
18.01 Right of First Refusal
----------------------
A. It is a principal inducement for Manager to enter into this
transaction that the twenty-two (22) Inns shall not, at any one time, ever be
owned by more than five (5) separate individuals or entities each of whom has a
management agreement with Manager with respect to its Inn or Inns. Accordingly,
Owner agrees that it will not have the right to sell or lease any one or more of
the Inns if such a transaction, when consummated, would result in the twenty-two
(22) Inns being owned by more than five (5) separate owners. Subject to the
foregoing, if Owner receives a bona fide written offer to purchase or lease any
one or more of the Inns, and desires to accept such offer, Owner shall give
written notice thereof to Manager stating the name of the prospective purchaser
or tenant, as the case may be, the price or rental and the terms and conditions
of such proposed sale or lease, together with all other information requested by
Manager and reasonably available to Owner. Within thirty (30) days after the
date of receipt of Owner's written notice and such other information, Manager
shall elect, by written notice to Owner, one of the following alternatives:
1. To purchase or lease such Inn or Inns at the same price or rental
and upon the same terms and conditions as those set forth in the written notice
from Owner to Manager or upon other terms acceptable to Owner, in which event
Owner and Manager shall promptly enter into an agreement for such sale or lease
and shall finalize the same within ninety (90) days.
2. To consent to such sale or lease and to agree to enter into a new
management agreement, with respect to such Inn or Inns, with such purchaser or
tenant, which new management agreement will be on all of the terms and
conditions of this Agreement, except that the Actual Debt Service and the
Operating Profit Objective shall be only the portion thereof allocable to such
Inn or Inns based on the percentages as set forth in Exhibit "B" hereof, and
except that, in preparing such new management agreement, appropriate adjustments
shall be made to all other terms and provisions of this Agreement which have
been agreed to and/or computed on the assumption that this Agreement will apply
59
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to all twenty-two (22) Inns (and reciprocal adjustments shall likewise be made
to this Agreement itself, which will be applicable to the Inns not being sold
under this Section 18.01, as set forth in Section 18.02 hereof); provided,
however, that if Manager in good faith believes (and so states in writing to
Owner) that any one or more of the following is true: (i) that the proposed
purchaser is a competitor, in the lodging business, of Manager, Marriott or any
Marriott Affiliate; (ii) that the business character and reputation of the
proposed purchaser have not been firmly established; or (iii) that the financial
condition and prospects of the proposed purchaser are not adequate to discharge
the obligations of Owner under this Agreement, Manager shall have the right to
terminate this Agreement, by written notice to Owner, with respect to such Inn
or Inns, and Manager shall not be required to enter into such new management
agreement with respect thereto. The effective date of such Termination shall
coincide with the date of the finalization of the proposed sale or lease. Such
Termination shall not be effective if such sale or lease is not finalized.
B. If Manager shall fail to elect any of the above alternatives within
said thirty (30) day period, such failure shall be conclusively deemed to
constitute an election under subsection 2 above to enter into a new management
agreement, with respect to such Inn or Inns, with such purchaser or tenant, and
the provisions thereof shall prevail as if Manager had consented in writing
thereto. Any proposed sale or lease of which notice has been given by Owner to
Manager hereunder must be finalized within one hundred eighty (180) days
following the giving of such notice, unless Manager has exercised its option
under subsection 1 above to purchase or lease the Inns. Failing such
finalization, such notice, and any response thereto given by Manager, shall be
null and void and all of the provisions of Section 18.01.A must again be
complied with before Owner shall have the right to finalize a sale or lease of
the Inns upon the terms contained in said notice, or otherwise.
18.02 Effect of Sale of Inn
---------------------
Upon the consummation of the sale of an Inn, subject to the provisions
of Section 18.01, then:
A. This Agreement shall terminate with respect to such Inn, but not
with respect to the remaining Inns; as to such Inn,
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the actions described in Section 4.03 shall be taken (except that, if Manager is
entering into a new management agreement with the purchaser or tenant, as the
case may be, of such Inn, then (i) the actions described in subsections D and G
of Section 4.03 shall not be necessary), and (ii) the actions described in
subsection C of Section 4.03 shall be complied with to the extent such books and
records are in Manager's control or possession and shall apply to those books
and records related only to the period prior to such termination;
B. The Actual Debt Service shall be reduced by the percentage thereof
allocable to such Inn as set forth in Exhibit "B" hereto;
C. The Operating Profit Objective shall be reduced by the percentage
thereof allocable to such Inn as set forth in Exhibit "B" hereto;
D. That portion of the Repairs and Equipment Reserve maintained
pursuant to Section 7.02 hereof that is properly allocable to such Inn shall be
transferred to a new account for the benefit of the purchaser of such Inn;
E. Appropriate adjustments shall be made to those other terms and
provisions of this Agreement (e.g., Working Capital, insurance) which have been
agreed on, computed or established on the assumption that this Agreement will
apply to all twenty-two (22) of the Inns;
F. Unless Manager has elected not to enter into a new management
agreement with the purchaser or tenant, as the case may be, of such Inn, for one
or more of the reasons set forth in subsections (i),(ii) and (iii) of Section
18.01.A.2 hereof, Manager and such purchaser or tenant shall execute the new
management agreement described in Section 18.01.A.2.; and
G. Owner shall pay Manager an amount equal to a portion of the
outstanding balance of all Manager Loans determined by multiplying the total
outstanding balance of all Manager Loans by a fraction, the numerator of which
is the amount of Operating Profit attributable to the Inn being sold for the
immediately preceding full Fiscal Year, and the denominator of which is the
amount of Operating Profit from all Inns for the immediately preceding full
Fiscal Year.
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END OF ARTICLE XVIII
62
<PAGE>
ARTICLE XIX
MISCELLANEOUS
-------------
19.01 Right to Make Agreement
-----------------------
Each party warrants, with respect to itself, that neither the execution
of the Agreement nor the finalization of the transactions contemplated hereby
shall violate any provision of law or judgment, writ, injunction, order or
decree of any court or governmental authority having jurisdiction over it;
result in or constitute a breach or default under any indenture, contract, other
commitment or restriction to which it is a party or by which it is bound; or
require any consent, vote or approval which has not been taken, or at the time
of the transaction involved shall not have been given or taken. Each party
covenants that it has and will continue to have throughout the term of the
Agreement and any extensions thereof, the full right to enter into the Agreement
and perform its obligations hereunder.
19.02 Consents
--------
Wherever in the Agreement the consent or approval of Owner or Manager
is required, such consent or approval shall not be unreasonably withheld, shall
be in writing and shall be executed by a duly authorized officer or agent of the
party granting such consent or approval. If either Owner or Manager fails to
respond within thirty (30) days to a request by the other party for a consent or
approval, such consent or approval shall be deemed to have been given (except as
otherwise provided in this Agreement).
19.03 Agency
------
The relationship of Owner and Manager shall be that of principal and
agent, and nothing contained in the Agreement shall be construed to create a
partnership or joint venture between them or their successors in interest.
Manager's agency established by the Agreement is coupled with an interest and
may not be terminated by Owner until the expiration of the term of the
Agreement, except as provided in Section 4.02 or Article XV. Notwithstanding the
agency relationship created by the Agreement, nothing contained herein shall
prohibit, limit or restrict (except as specifically set forth in Section 2.04
hereof) Manager, Marriott, or any Marriott Affiliates from
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developing, owning, operating, leasing, managing or franchising inns, hotels or
other lodging products in any of the market areas where any of the Inns are
located.
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19.04 Applicable Law
--------------
The Agreement shall be construed under and shall be governed by the
laws of the State of Maryland.
19.05 Recordation
-----------
The terms and provisions of the Agreement shall run with the parcels of
land designated as the Sites, and with Owner's interest therein, and shall be
binding upon all successors to such interest. At the request of either party,
the parties shall execute sufficient copies of an appropriate memorandum of the
Agreement in recordable form and cause the same to be recorded in each of the
jurisdictions where the Inns are located. Any cost of such recordation shall be
initially borne by Owner, reimbursed to Owner from Gross Revenues, and treated
as a Deduction.
19.06 Headings
--------
Headings of Articles and Sections are inserted only for convenience and
are in no way to be construed as a limitation on the scope of the particular
Articles or Sections to which they refer.
19.07 Notices
-------
Notices, statements and other communications to be given under the
terms of the Agreement shall be in writing and delivered by hand against receipt
or sent by certified or registered mail or Express Mail service, postage
prepaid, return receipt requested:
To Owner:
--------
Marriott Residence Inn II Limited Partnership
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Assistant General Counsel, Asset Management
Law Department - 923
With copy to:
------------
65
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Marriott Residence Inn II Limited Partnership
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Lodging Partnerships - Dept. 908
To Manager:
----------
Residence Inn by Marriott, Inc.
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Assistant General Counsel - Dept. 52.923
(Lodging Operations)
With Copy to:
------------
Residence Inn by Marriott, Inc.
c/o Marriott International, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
Attn: Lodging Finance - Dept. 51.911
or at such other address as is from time to time designated by the party
receiving the notice. Any such notice which is properly mailed shall be deemed
to have been served as of five (5) days after said posting for purposes of
establishing that the sending party complied with the applicable time
limitations set forth herein, but shall not be binding on the addressee until
actually received.
19.08 Limited Liability
-----------------
Manager agrees that no limited partner of Owner shall have any personal
liability hereunder in excess of such limited partner's contribution to the
capital of Owner.
19.09 Confidentiality
---------------
The parties agree that matters set forth in and all information,
budgets and reports generated as a result of this Agreement are strictly
confidential and each party will make every effort to ensure that the
information is not disclosed to any outside person or entities (including the
press), other than
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such parties' lenders, equity holders, bona fide prospective investors or
purchasers, and their respective accountants, counsel and other consultants or
advisors, and other than the holders of any securities to be issued by Owner or
by any lender pursuant to a securitization of the note evidencing the obligation
of Owner (so long as all such information sent to such holders is marked with a
confidentiality notice that refers to the provisions of this Section 19.09 and
directs such holders to comply with the provisions hereof reasonably acceptable
to Manager), without the written consent of the other party except as may be
reasonably necessary (i) to obtain licenses, permits and other public approvals
necessary for the refurbishment or operation of the Inns, (ii) in connection
with Owner's financing of the Inns or any sale of any Inn (subject to the
limitations above with respect to a securitization), (iii) in connection with a
sale of a controlling interest in Owner, Manager, or Marriott, (iv) in
connection with an audit or other investigation conducted pursuant to this
Agreement or the Owner's or Manager's interest in any of the Inns, (v) in
connection with a foreclosure sale on Owner's interest in the Inns, or (vi) as
required by any law, rule, regulation or judicial process, or by any regulatory
or supervisory authority having jurisdiction over the parties or their
Affiliates.
19.10 Offerings
---------
No reference to Manager, Marriott, or to any Marriott Affiliate will be
made in any prospectus, private placement memorandum, offering circular or
offering documentation related thereto (herein collectively referred to as the
"Prospectus"), issued by Owner or one of its affiliates or lenders, which is
designed to interest potential investors (debt or equity) in one or more or all
of the Inns, or securities secured by the Inns, unless Manager has previously
received a copy of all such references. However, regardless of whether Manager
does or does not so receive a copy of all such references, neither Manager,
Marriott, nor any Marriott Affiliate will be deemed an issuer or obligor or
guarantor in respect of any securities described in the Prospectus, nor will it
have any responsibility for the Prospectus, and Owner will not issue or approve
any Prospectus that does not so state. Unless Manager agrees in advance, the
Prospectus will not include: (i) any proprietary marks of Manager, Marriott, or
any Marriott Affiliate; or (ii) except as required by applicable securities
laws, the text of this
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Agreement. Owner shall be entitled, however, to include in the Prospectus an
accurate summary of this Agreement. With respect to any offering not registered
under any federal or state securities law, if there are no legal requirements
pursuant to which such information must be publicly disclosed, appropriate
measures shall be taken to ensure that entities or individuals receiving such
Prospectus shall acknowledge the confidentiality of such information. Owner
shall indemnify, defend and hold Manager, Marriott, and all Marriott Affiliates
(and their respective directors, officers, shareholders, employees and agents)
harmless from and against all loss, costs, liability and damage (including
attorneys' fees and expenses, and the cost of litigation related thereto)
arising out of any Prospectus or the offering described therein for which Owner
or any of its affiliates is an issuer or sponsor. Owner shall, prior to
distribution of any Prospectus by any of its lenders, use commercially
reasonable best efforts to obtain such an indemnification for the benefit of
Manager, Marriott, and all Marriott Affiliates from such lender.
19.11 Entire Agreement
----------------
The Agreement, together with other writings signed by the parties
expressly stated to be supplemental hereto and together with any instruments to
be executed and delivered pursuant to the Agreement, constitutes the entire
agreement between the parties and supersedes all prior understandings and
writings, and may be changed only by a writing signed by the parties hereto.
END OF ARTICLE XIX
68
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed as of the day and year first written above.
MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP, a Delaware
limited partnership ("Owner")
Attest: By: MARRIOTT RIBM TWO
CORPORATION, a
Delaware corporation,
General Partner
By:
- --------------------- --------------------------
Assistant Secretary Vice President
Attest: RESIDENCE INN BY MARRIOTT, INC.,
a Delaware corporation
("Manager")
By:
- --------------------- --------------------------
Assistant Secretary Vice President
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EXHIBIT A
Locations of the Inns
---------------------
1) Birmingham, Alabama
-------------------
#3 Greenhill Parkway at U.S. Hwy. 280
Birmingham, Alabama 35243
2) Arcadia, California
-------------------
Huntington Drive and Second Street just off I-210
Arcadia, California
3) Irvine, California
------------------
Alton Pkwy and Morgan near I-5 and I-405
Irvine, California
4) Placentia, California
---------------------
700 West Kimberly
Placentia, California 92670
5) Boca Raton, Florida
-------------------
525 NW 77th Street
Boca Raton, Florida 33487
6) Jacksonville, Florida
---------------------
Interstate 95 and Baymeadows Exit
8365 Dix Ellis Trail
Jacksonville, Florida 32256
7) Pensacola, Florida
------------------
7230 Plantation Road
Pensacola, Florida 32504
8) St. Petersburg/Clearwater, Florida
----------------------------------
5050 Ulmerton Road
Clearwater, Florida 34620
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9) Chicago/Deerfield, Illinois
---------------------------
Corporate 500 Drive
Deerfield, Illinois 60015
10) Boston/Danvers, Massachusetts
-----------------------------
U.S. Route 1
Danvers, Massachusetts
11) Kalamazoo, Michigan
-------------------
I-94 and Portage Road
Kalamazoo, Michigan
12) Jackson, Mississippi
--------------------
881 East River Place
Jackson, Mississippi 39202
13) Santa Fe, New Mexico
--------------------
1698 Galisteo Street
Santa Fe, New Mexico 87501
14) Charlotte North, North Carolina
-------------------------------
8503 U.S. Highway 29
Charlotte, North Carolina 28213
15) Greensboro, North Carolina
--------------------------
2000 Veasley Street
Greensboro, North Carolina 27407
16) Las Vegas, Nevada
-----------------
Paradise Road and Convention Center Drive
Las Vegas, Nevada
17) Akron, Ohio
-----------
120 Montrose West Avenue
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I-77 at Route 18
Akron, Ohio 44321
18) Philadelphia/Berwyn, Pennsylvania
---------------------------------
600 West Swedesford Road
Berwyn, Pennsylvania 19312
19) Columbia, South Carolina
------------------------
150 Stoneridge Drive
Columbia, South Carolina 29221
20) Spartanburg, South Carolina
---------------------------
9011 Fairforest Road
Spartanburg, South Carolina 29305
21) Memphis East, Tennessee
-----------------------
6141 Poplar Pike
Memphis, Tennessee 38119
22) Lubbock, Texas
--------------
2551 South Loop 289
Lubbock, Texas 79423
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EXHIBIT A-1
Legal Description
-----------------
Birmingham, Alabama
-------------------
73
<PAGE>
EXHIBIT A-2
Legal Description
-----------------
Arcadia, California
-------------------
74
<PAGE>
EXHIBIT A-3
Legal Description
-----------------
Irvine California
-----------------
75
<PAGE>
EXHIBIT A-4
Legal Description
-----------------
Placentia, California
---------------------
76
<PAGE>
EXHIBIT A-5
Legal Description
-----------------
Boca Raton, Florida
-------------------
77
<PAGE>
EXHIBIT A-6
Legal Description
-----------------
Jacksonville, Florida
---------------------
78
<PAGE>
EXHIBIT A-7
Legal Description
-----------------
Pensacola, Florida
------------------
79
<PAGE>
EXHIBIT A-8
Legal Description
-----------------
St. Petersburg/Clearwater, Florida
----------------------------------
80
<PAGE>
EXHIBIT A-9
Legal Description
-----------------
Chicago/Deerfield, Illinois
---------------------------
81
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EXHIBIT A-10
Legal Description
-----------------
Boston/Danvers, Massachusetts
-----------------------------
82
<PAGE>
EXHIBIT A-11
Legal Description
-----------------
Kalamazoo, Michigan
-------------------
83
<PAGE>
EXHIBIT A-12
Legal Description
-----------------
Jackson, Mississippi
--------------------
84
<PAGE>
EXHIBIT A-13
Legal Description
-----------------
Santa Fe, New Mexico
--------------------
85
<PAGE>
EXHIBIT A-14
Legal Description
-----------------
Charlotte, North Carolina
-------------------------
86
<PAGE>
EXHIBIT A-15
Legal Description
-----------------
Greensboro, North Carolina
--------------------------
87
<PAGE>
EXHIBIT A-16
Legal Description
-----------------
Las Vegas, Nevada
-----------------
88
<PAGE>
EXHIBIT A-17
Legal Description
-----------------
Akron, Ohio
-----------
89
<PAGE>
EXHIBIT A-18
Legal Description
-----------------
Philadelphia/Berwyn, Pennsylvania
---------------------------------
90
<PAGE>
EXHIBIT A-19
Legal Description
-----------------
Columbia, South Carolina
------------------------
91
<PAGE>
EXHIBIT A-20
Legal Description
-----------------
Spartanburg, South Carolina
---------------------------
92
<PAGE>
EXHIBIT A-21
Legal Description
-----------------
Memphis, Tennessee
------------------
93
<PAGE>
EXHIBIT A-22
Legal Description
-----------------
Lubbock, Texas
--------------
94
<PAGE>
EXHIBIT B
Percentages Used for Reductions
-------------------------------
<TABLE>
<CAPTION>
Applicable Percentage
---------------------
<S> <C> <C>
1) Birmingham, Alabama 5.26%
2) Arcadia, California 6.55%
3) Irvine, California 5.19%
4) Placentia, California 3.40%
5) Boca Raton, Florida 5.30%
6) Jacksonville, Florida 4.25%
7) Pensacola, Florida 2.71%
8) St. Petersburg/Clearwater, Florida 3.78%
9) Chicago/Deerfield, Illinois 4.17%
10) Boston/Danvers, Massachusetts 4.59%
11) Kalamazoo, Michigan 3.45%
12) Jackson, Mississippi 4.95%
13) Santa Fe, New Mexico 5.08%
14) Charlotte North, North Carolina 2.94%
15) Greensboro, North Carolina 6.08%
16) Las Vegas, Nevada 11.95%
17) Akron, Ohio 3.88%
18) Philadelphia/Berwyn, Pennsylvania 5.09%
19) Columbia, South Carolina 3.71%
20) Spartanburg, South Carolina 2.62%
21) Memphis East, Tennessee 2.66%
</TABLE>
95
<PAGE>
<TABLE>
<S> <C> <C>
22) Lubbock, Texas 2.39%
-----
TOTAL 100.00%
=======
</TABLE>
96
<PAGE>
EXHIBIT C
Schedule of Principal and Interest Payments
-------------------------------------------
97
<PAGE>
Exhibit 10.3
LOAN AGREEMENT
between
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
and
NOMURA ASSET CAPITAL CORPORATION
Dated as of March 22, 1996
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
ARTICLE I
<S> <C> <C>
DEFINITIONS............................................................... 1
Section 1.1 Definitions........................................... 1
ARTICLE II
PROVISIONS CONCERNING THE ACCOUNTS
AND PLEDGED PROPERTY...................................................... 16
Section 2.1 Cash Management Procedures............................ 16
Section 2.2 Right to Contest...................................... 16
Section 2.3 Defeasance............................................ 17
Section 2.4 Sale of all the Properties............................ 21
Section 2.5 Change of Control..................................... 21
Section 2.7 Bossier Reserve Account............................... 23
ARTICLE III
PAYMENTS.................................................................. 24
Section 3.1 Payments on the Note.................................. 24
Section 3.2 Interest.............................................. 24
Section 3.3 Payments without Deduction, etc....................... 24
ARTICLE IV
DEFAULT; REMEDIES; ENFORCEMENT............................................ 25
Section 4.1A Events of Default..................................... 25
Section 4.1B Event of Default Cure................................. 27
Section 4.2 Remedies.............................................. 28
Section 4.3 Remedies Cumulative; Delay or Omission
Not a Waiver.......................................... 28
ARTICLE V
REPRESENTATIONS, WARRANTIES AND COVENANTS................................. 29
Section 5.1 Representations and Warranties of the
Borrower............................................... 29
Section 5.2 Affirmative Covenants.................................. 36
Section 5.3 Negative Covenants..................................... 41
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
Section 5.4 Further Assurances..................................... 44
Section 5.5 Representations, Warranties and
Covenants of NACC...................................... 45
Section 5.6 Other.................................................. 45
ARTICLE VI
SECURITIZATION............................................................. 48
Section 6.1 Securitization......................................... 48
ARTICLE VII
PAYMENT OF FEES AND EXPENSES; INDEMNIFICATION.............................. 50
Section 7.1 Fees and Expenses...................................... 50
Section 7.2 Indemnification........................................ 51
ARTICLE VIII
IMMUNITY................................................................... 53
Section 8.1 Partners, Employees and Agents of the
Borrower Immune from Liability......................... 53
ARTICLE IX
MISCELLANEOUS PROVISIONS................................................... 53
Section 9.1 Notices................................................ 53
Section 9.2 Benefit of Agreement................................... 54
Section 9.3 Governing Law.......................................... 54
Section 9.4 Counterparts........................................... 55
Section 9.5 Index, Descriptive Headings............................ 55
Section 9.6 Amendment or Waiver; Integration....................... 55
Section 9.7 Survival of Representations and
Warranties; Reliance................................... 55
Section 9.8 Returned Payments...................................... 55
Section 9.9 Jurisdiction and Service; Waiver of Jury
Trial.................................................. 56
Section 9.10 Enforceability......................................... 56
Section 9.11 Conflicting Terms...................................... 56
Section 9.12 Relationship of Parties................................ 57
</TABLE>
Exhibit A - ADA Compliance Work and Deferred Maintenance Work
Exhibit B - Cash Management Procedures
ii
<PAGE>
Exhibit C - Environmental Remediation Work
Exhibit D - Permitted Investments
Exhibit E - Properties and Addresses
Exhibit F - Release Price
Exhibit G - Organizational Structure of the Borrower
Exhibit H - Operating Budget
Exhibit I - Capital Budget
Exhibit J - Financial Statements
Exhibit K - Environmental Procedures
Schedule 1 - Disclosure Report
iii
<PAGE>
LOAN AGREEMENT, dated as of March 22, 1996, between Marriott Residence Inn
II Limited Partnership, a Delaware limited partnership (the "Borrower"), and
--------
Nomura Asset Capital Corporation ("NACC") (together with its assigns and
successors, the "Lender").
------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower wishes to obtain a loan from the Lender in the
principal amount of One hundred Forty Million Dollars ($140,000,000) to, among
other things, (i) satisfy all existing debt secured by the Properties (as
hereinafter defined) and an existing line of credit and, (ii) to the extent of
any remaining proceeds, (a) provide initial funding for reserves for deferred
maintenance, environmental remediation, compliance with the Americans With
Disabilities Act of 1990, replacement of furniture, fixtures and equipment and
capital improvements, (b) pay the costs of completing the transactions
contemplated hereby, (c) provide working capital to the Borrower and (d) for
such other purposes as the Borrower shall deem necessary or desirable, and the
Lender is willing to make such loan to the Borrower on the terms and conditions
hereinafter set forth; and
WHEREAS, such loan is to be evidenced by the Note (as hereinafter defined)
and secured by, inter alia, the Mortgages (as hereinafter defined),
----- ----
NOW, THEREFORE, in consideration of the above-mentioned premises and the
agreements, representations and warranties hereafter set forth, the Borrower and
the Lender agree as follows:
ARTICLE I
DEFINITIONS
Section I.1 Definitions. For all purposes of this Agreement, except as
-----------
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Section have the meanings assigned to them
in this Section, and include the plural as well as the singular;
(b) the words "herein," "hereof," "hereto" and "hereunder" and other words
of similar import refer to this Agreement as a
<PAGE>
whole and not to any particular Article, Section or other subdivision;
(c) all references to any agreement or instrument shall be to that
agreement or instrument as in effect from time to time, including any
amendments, consolidations, replacements, restatements, modifications and
supplements thereto; and
(d) all terms defined in this Section with reference to the Cash
Management Procedures shall continue in effect after the termination of such
Cash Management Procedures in accordance with the terms thereof.
"Accounting Period" means, initially, each accounting period of four
-----------------
consecutive weeks having the same beginning and ending dates as the Manager's
corresponding four week accounting periods, except that the last Accounting
Period in a Fiscal Year may be longer than four consecutive weeks when and to
the extent necessary to conform the accounting system to the calendar, or if the
accounting year on the basis of which the Properties are operated is changed to
a calendar year or a conve ntional 365-day fiscal year, "Accounting Period"
shall mean each calendar month in such fiscal year.
"Accounting Quarter" means, initially, three (or, in the case of the last
------------------
Accounting Quarter in any Fiscal Year, four) consecutive Accounting Periods,
ending on the last day of the third, sixth, ninth and last Accounting Period in
each Fiscal Year, or, if the accounting year on the basis of which the
Properties are operated is changed to a calendar year or a conventional 365-day
fiscal year, "Accounting Quarter" shall mean each of the fiscal quarters in such
fiscal year (i.e., there shall be four consecutive Accounting Quarters of three
----
months each).
"Action" means any action, suit, claim, arbitration, governmental
------
investigation or other proceeding.
"ADA Compliance Work" means the repairs, improvements and replacements to
-------------------
the Properties to comply with the Americans with Disabilities Act of 1990, as
amended from time to time, in the amounts more particularly described on Exhibit
-------
A annexed hereto.
- -
"Additional Capital Expenditures" has the meaning set forth in Section 8.3
-------------------------------
of the Cash Management Procedures.
"Affiliate" means, with respect to any Person, any individual, corporation,
---------
partnership, limited liability company, trust or other
<PAGE>
entity of whatever nature which controls, is controlled by or is under common
control with, such Person, including, without limitation, (a) any officer or
director of any of the foregoing and (b) any partner, member or shareholder that
controls any of the foregoing, and "control" shall mean ownership of more than
twenty-five percent (25%) of all of the voting stock of a corporation or more
than twenty-five percent (25%) of all of the legal and beneficial interests in
any other entity or the possession of the power, directly or indirectly, to
direct or cause the direction of the management and policy of a corporation or
other entity, whether through the ownership of voting securities, common
directors or officers, the contractual right to manage the business affairs of
such entity, or otherwise.
"Agreement" means this Loan Agreement.
---------
"Annual Plan" has the meaning set forth in Section 5.2(d)(vii).
-----------
"Bankruptcy Custodian" has the meaning set forth in Section 4.1A(g)(A)(2).
--------------------
"Base Rate" has the meaning set forth in the Note.
---------
"Best Knowledge" means with respect to any provision, knowledge of
--------------
information obtained by the Borrower or any officer or director of the General
Partner.
"Borrower" means Marriott Residence Inn II Limited Partnership.
--------
"Borrower Debt Service Reserve Account" has the meaning set forth in
-------------------------------------
Section 5.1 of the Cash Management Procedures.
"Bossier Reserve Account" has the meaning set forth in Section 2.7(a).
-----------------------
"Business Day" means a day on which banks and foreign exchange markets are
------------
open for business in New York, New York.
"Capital Budget" has the meaning set forth in Section 5.2(d)(vii).
--------------
"Capital Expenditure and FF&E Reserve Account" means the account
--------------------------------------------
established pursuant to Section 8.1 of the Cash Management Procedures.
<PAGE>
"Capital and FF&E Expenditures" means the expenditures of amounts for the
-----------------------------
purpose of the Repairs and Equipment Reserve, as such term in defined in the
Management Agreement.
"Cash Collateral Account" means the account established and held by the
-----------------------
Servicer pursuant to Section 4.1 of the Cash Management Procedures.
"Cash Management Procedures" means the provisions of Exhibit B.
-------------------------- ---------
"Change of Control" means any transfer of (i) an equity interest in the
-----------------
General Partner, (ii) the General Partner's interest in the Borrower or (iii)
any interest of a limited partner in the Borrower such that as a result of such
transfer and any other transfers of limited partnership interests prior to the
date of determination, MII or Host Marriott, directly or indirectly, holds more
than 5% of the limited partnership interests in the Borrower.
"Citgo Refinery Site" has the meaning set forth in Section 2.7(d).
-------------------
"Closing Date" means the date of execution and delivery of this Agreement.
------------
"Condemnation Proceeds" has the meaning set forth in the applicable
---------------------
Mortgage.
"DCR" means Duff & Phelps Credit Rating Co.
---
"Debt" means the obligations of the Borrower under the Transaction
----
Documents, together with all interest thereon, and all other sums, including,
without limitation, fees, expenses, commissions, premiums and indemnities, which
may or shall become due under any of the Transaction Documents, including the
costs and expenses of enforcing any provision of the Transaction Documents that
may be reimbursable thereunder.
"Debt Service Coverage Ratio" means, as of any given date, the ratio of (i)
---------------------------
Net Operating Income for the 13 full Accounting Periods for which financial
statements are required to be furnished to the Lender pursuant to Section
5.2(d)(ii) immediately preceding the date of calculation for the Property or
Properties regarding which the calculation is being made (or 12 Accounting
Periods in the case of a calendar year or 365 day Fiscal Year) to (ii) Debt
Service Expense in respect of the 13 full Accounting Periods next
<PAGE>
succeeding such date (or 12 Accounting periods in the case of a calendar year or
365 day Fiscal Year).
"Debt Service Expense" means, in respect of any fiscal period, the
--------------------
aggregate amount of scheduled interest and principal payable on (i) the Note,
(ii) Subordinate Debt and (iii) Indebtedness covered by Purchase Money Security
Interests for such period. For the purpose of the calculation prior to the
Optional Prepayment Date of Debt Service Expense for any period subsequent to
the Optional Prepayment Date, such aggregate amount shall be computed based on
the Monthly Debt Service Payment.
"Debt Service Payment Date" means the 11th day of each calendar month or
-------------------------
the next Business Day immediately thereafter.
"Debt Service Reserve Account" has the meaning set forth in Section 5.1 of
----------------------------
the Cash Management Procedures.
"Defeasance Collateral" has the meaning set forth in Section 2.3(a)(iv)(A).
---------------------
"Defeasance Debt Service Coverage Ratio" has the meaning set forth in
--------------------------------------
Section 2.3(f).
"Defeasance Deposit" has the meaning set forth in Section 2.3(f).
------------------
"Defeasance Security Agreement" has the meaning set forth in Section
-----------------------------
2.3(a)(iv)(A).
"Deferred Maintenance Work" means the repairs, improvements and
-------------------------
replacements to the Properties in the amounts more particularly described on
Exhibit A hereto.
"Disclosure Report" means the schedule annexed hereto as Schedule 1.
-----------------
"Eligible Account" means either (i) an account maintained with a federal or
----------------
state chartered depository institution or trust company, the long-term unsecured
debt obligations of which (or, in the case of a depository institution or trust
company that is the principal subsidiary of a holding company, the long-term
unsecured debt obligations of such holding company) are rated by each Rating
Agency in one of its two highest rating categories (or such other ratings as
will not result in the rating of any of the Securities being reduced below their
respective ratings on the date determination is to be made and as to which the
Rating Agencies may
<PAGE>
otherwise agree) at the time of the deposit therein, or the short-term unsecured
debt obligations of such depository institution or trust company (or holding
company), as the case may be, are rated by each Rating Agency not lower than A-
1+ by S&P and D1+ by DCR, or (ii) a segregated trust account maintained with the
trust department of a federal or state chartered depository institution or trust
company acting in its fiduciary capacity provided that such account is subject
to fiduciary funds on deposit regulations (or internal guidelines) substantially
similar to 12 C.F.R. 9.10(b), or (iii) after the Securitization, an account in
any other inured depository institution reasonably acceptable to the Servicer
and the Trustee, so long as prior to the establishment of an account in any such
other depository institution each of the Rating Agencies shall have delivered a
Rating Comfort Letter with respect thereto.
"Emergency Expenditures" means expenditures arising in the event of an
----------------------
emergency arising out of a fire or other casualty at an Inn, or other events,
circumstances or conditions which give rise to safety or life threatening
situations, to the extent such expenditures are necessary to protect the safety
or welfare of guests and employees or to protect against further property damage
to the Inn.
"Entities" has the meaning set forth in Section 6.1(b).
--------
"Environmental Indemnity Agreement" means the environmental indemnity
---------------------------------
agreement, dated the Closing Date, from the Borrower to NACC.
"Environmental Laws" has the meaning set forth in the Environmental
------------------
Indemnity Agreement.
"Environmental Remediation Work" means the actions taken with respect to
------------------------------
the Properties set forth on Exhibit C.
---------
"Equipment Leases" means, with respect to each Property, the leases of
----------------
furniture, fixtures and equipment used in connection with the Properties.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" means all members of a controlled group of corporations
---------------
and all trades and businesses (whether or not incorporated) under common control
and all other entities which,
<PAGE>
together with the Borrower, are treated as a single employer under any or all of
Sections 414(b), (c), (m) or (o) of the IRC.
"Event of Default" has the meaning set forth in Section 4.1A.
----------------
"Excess Cash Flow" means, for the period of determination, the difference
----------------
between (i) Net Operating Income and (ii) the sum of (A) the Monthly Debt
Service Payment and (B) other Debt then due and payable to the Lender and (C)
the Partnership's Administrative Expenses (as such term is defined in the
Management Agreement).
"Excluded Amounts" has the meaning set forth in Section 4.3(E) of the Cash
----------------
Management Procedures.
"Expense Deposit" has the meaning set forth in Section 7.1(c).
---------------
"Fiscal Year" means January 1 of each year through and including December
-----------
31 of such year except that, for purposes of calculating the Debt Service
Coverage Ratio or any other calculation requiring reference to Gross Revenues,
Net Operating Income or other amounts calculated with reference to the
Accounting Periods, "Fiscal Year" shall mean the fiscal year of the Manager, as
defined in the Management Agreement.
"GAAP" means generally accepted accounting principles in the United States
----
of America (as such principles may change from time to time) applied on a
consistent basis (except for changes in application in which the Borrower's
independent certified public accountants concur), both as to classification of
items and amounts.
"General Partner" means Marriott RIBM Two Corporation, a Delaware
---------------
corporation.
"Governmental Authority" means any court, agency, authority, board
----------------------
(including, without limitation, environmental protection, planning and zoning)
bureau, commission, department, office or instrumentality of any nature
whatsoever of any governmental or quasi-governmental unit of the United States
or the state, county or city where each Property is located or any political
subdivision of any of the foregoing, whether now or hereafter in existence, or
any officer or official thereof, having jurisdiction over the Borrower or the
General Partner or any of the Properties or any portion thereof.
"Grant" means to issue, grant, sell, remise, convey, assign, and/or
-----
transfer.
<PAGE>
"Gross Revenues" means, with regard to the Properties, for any period, all
--------------
revenues and receipts of every kind derived from or otherwise relating to the
Properties and all departments and parts thereof during such period, including,
but not limited to: income (from both cash and credit transactions) from rental
of rooms, stores, offices, exhibit or sales space of every kind; license, lease
and concession fees and rentals (not including gross receipts of licensees,
lessees and concessionaires); income from vending machines; health club
membership fees; food and beverage sales; wholesale and retail sales of
merchandise, service charges, and proceeds, if any, from business interruption
or other loss of income insurance; excluding, however, (i) gratuities to
employees of the Inns, (ii) federal, state or municipal use, sales or use taxes
or similar Impositions collected directly from patrons or guests or included as
part of the sales price of any goods or services; (but only to the extent such
gratuities and taxes are not included in Management Expenses), (iii) net
Condemnation Proceeds, (iv) receipts of Tenants (as defined in the Mortgages),
if any, not an Affiliate of the Borrower (except to the extent paid to the
Borrower as rent, percentage rents or otherwise), (v) sums and credits received
in settlement of claims for loss or damage to property, (vi) income from the
sale of furnishings, fixtures or equipment, and (vii) Insurance Proceeds, (viii)
charges or payments collected from patrons or guests for telephone, telegraph or
other communication systems that are remitted to the provider thereof, (ix)
proceeds from the sale or refinancing of the Properties and any (x) refunds,
rebates, discounts and credits of a similar nature, given, paid or returned in
the course of obtaining Gross Revenues or components thereof.
"Host Marriott" means Host Marriott Corporation, a Delaware corporation.
-------------
"Impositions" has the meaning set forth in the applicable Mortgage.
-----------
"Indebtedness" means for any Person (a) obligations for borrowed money
------------
(including, without limitation, in the case of the Borrower, the Debt), (b)
obligations under letters of credit, (c) obligations relating to Purchase Money
Security Interests, (d) obligations, whether or not assumed, secured by Liens or
payable out of the proceeds or production from property now owned by such
Person, (e) obligations for trade credit or acceptances incurred in the ordinary
course of business which are 60 days past due, and (f) obligations of another
Person of the type set forth in clauses (a) through (e) above which such Person
has guaranteed or in respect of
<PAGE>
which such Person is liable, contingently or otherwise, including, without
limitation, by way of agreement to purchase property or services, to provide
funds to or otherwise invest in such other Person, or otherwise to assure a
creditor of such other Person against loss.
"Indemnified Parties" shall have the meaning set forth in Section 7.2(a).
-------------------
"Independent Director" means a person who is not, and has not within the
--------------------
past five years been, (i) an officer, director, employee, partner, member, or
stockholder or beneficial-interest holder of the General Partner, the Borrower,
the Managing Member or the Subsidiary; (ii) an officer, director, employee,
partner, member, beneficial-interest holder or more than 5% stockholder of any
Affiliate (as defined below) of the General Partner, the Borrower the Managing
Member or the Subsidiary; (iii) affiliated with a customer or supplier of either
the Borrower or the Subsidiary or its Affiliates (other than a hotel guest or a
customer or supplier that does not derive more than 10% of its purchases or
revenues from its activities with the Borrower); or (iv) a spouse, parent,
sibling, or child of any person described in (i), (ii), or (iii); provided,
--------
however, that a person shall not be deemed to be a director of an Affiliate
- -------
solely by reason of such person being a director of a single-purpose entity. For
the purpose of this definition alone, "Affiliate" means any person or entity
other than the General Partner and the Managing Member (i) which owns
beneficially, directly or indirectly, more than 10 percent of the outstanding
shares of the Common Stock of the General Partner or which is otherwise in
control of the General Partner or the Managing Member, (ii) of which more than
10% of the outstanding voting securities are owned beneficially, directly or
indirectly, by any person or entity described in clause (i) above, or (iii)
which is controlled by any person or entity described in clause (i) above;
provided that the term "control" and "controlled by" shall have the meanings
assigned to them in Rule 405 under the Securities Act of 1933.
"Individual Material Adverse Effect" means a material adverse effect on the
----------------------------------
condition (financial or otherwise), business, prospects, assets, liabilities,
management, financial position or results of operations of any Property.
"Initial Debt Service Coverage Ratio" means 1.5:1.
-----------------------------------
"Inns" means the Residence Inn by Marriott hotels and the hotel operations
----
located at the Properties.
<PAGE>
"Insolvency Law" has the meaning set forth in Section 4.1A(g)(A)(1).
--------------
"Insurance Proceeds" has the meaning set forth in the applicable Mortgage.
------------------
"Insurance Requirements" means all terms of any insurance policy required
----------------------
by the applicable Mortgage covering or applicable to a particular Property or
any part thereof and all requirements of the insurance carrier, all as more
fully described in such Mortgage.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
---
time, and the rules and regulations promulgated thereunder, or any successor
statute(s).
"Leases" means the respective written or unwritten agreements pursuant to
------
which lessees, tenants or other third parties are occupying any portion of the
Properties excluding, however, the letting of rooms and other facilities to
hotel guests in the ordinary course of business.
"Legal Requirements" has the meaning set forth in the applicable Mortgage.
------------------
"Lien" means any security interest, mortgage, pledge, lien, restriction on
----
transferability, claim, charge, encumbrance, title retention agreement or
analogous instrument, in, of or on the Properties or any of them.
"Lender" means Nomura Asset Capital Corporation.
------
"Loan" means the loan evidenced by the Note.
----
"Local Account" has the meaning set forth in Section 3 of the Cash
-------------
Management Procedures.
"Lockbox Account" has the meaning set forth in Section 7.1.2 of the Cash
---------------
Management Procedures.
"Lockbox Event" has the meaning set forth in Section 7 of the Cash
-------------
Management Procedures.
"Lockbox Period" has the meaning set forth in Section 7 of the Cash
--------------
Management Procedures.
<PAGE>
"Management Agreement" means the Amended and Restated Management Agreement,
--------------------
executed as of the Closing Date, by the Borrower and the Manager, and as further
amended by that certain Modification, Subordination and Non-Disturbance
Agreement, Estoppel and Consent, dated as of the date hereof, among the Manager,
the Borrower and the Lender, and any other management agreement entered into by
the Borrower as required or permitted herein.
"Management Expenses" has the meaning set forth in Schedule I to the Cash
-------------------
Management Procedures.
"Manager" means Residence Inn by Marriott, Inc., a Delaware corporation,
-------
or any entity that is an Affiliate of MII and any property manager appointed as
permitted herein.
"Manager's Account" has the meaning set forth in Section 1.2(i) of the Cash
-----------------
Management Procedures.
"Managing Member" means Bossier RIBM Two, Inc., the managing member of the
---------------
Subsidiary.
"Master Account" has the meaning set forth in Section 1.2(i) of the Cash
--------------
Management Procedures.
"Material Adverse Effect" means a material adverse effect on (a) the
-----------------------
Borrower's ability to enter into or fulfill its material obligations under the
Transaction Documents or to effect the transactions contemplated thereby or (b)
a material adverse effect on the condition (financial or otherwise), business,
prospects, assets, liabilities, management, financial position or results of
operations of the Borrower or the Properties.
"MII" means Marriott International, Inc., a Delaware corporation.
---
"MII Cash Management Conditions" means the following conditions: (i) the
---
Properties are managed by the Manager under the Management Agreement and (ii)
the Manager is a wholly owned, direct or indirect, subsidiary of MII.
"MII Debt" has the meaning set forth in Section 6 of the Cash Management
---
Procedures.
"Monthly Debt Service Payment" has the meaning set forth in Section
----------------------------
4.3(A)(i) of the Cash Management Procedures, as modified by Section 12.5 of the
Cash Management Procedures.
<PAGE>
"Mortgage" means, with regard to each Property, the mortgage, deed of
--------
trust or other security instrument creating a first mortgage lien on such
Property, dated as of the Closing Date, from the Borrower to or for the benefit
of the Lender.
"NACC" means Nomura Asset Capital Corporation.
----
"NACC Account" has the meaning set forth in that certain Letter Agreement,
------------
dated as of the Closing Date, between the Borrower, the Servicer and NACC.
"NACC Debt Service Reserve Account" has the meaning set forth in Section
---------------------------------
5.2 of the Cash Management Procedures.
"Net Operating Income" means, in respect of any fiscal period, Gross
--------------------
Revenues less the sum of, without duplication, (A) Management Expenses and (B)
any Impositions or insurance premiums paid or reserved for payment with respect
to the Properties.
"Non-Recourse" means, with respect to the Debt, that the Debt is limited in
------------
recourse solely to the Pledged Property and is not guaranteed directly or
indirectly by any Partner or the Manager and no Partner or the Manager or any
shareholder, member, director, officer, employee or agent of any Partner or the
Manager, either directly or indirectly, shall be personally liable in any
respect (except to the extent of their respective interests in the Pledged
Property) for (i) the payment of any Debt, (ii) the performance of any covenant
or obligation under any Transaction Document or (iii) monetary damages for the
breach of performance of any covenant or obligation contained in any Transaction
Document; provided, however, that in the event of any fraud, material
-------- -------
misrepresentation or misappropriation of funds under any Transaction Document or
under the Management Agreement, nothing herein or in such other documents shall
estop the Lender from prosecuting an Action against the party or parties
committing such fraud, misappropriation or material misrepresentation, or
misappropriating such funds, or the recipient or beneficiary of such fraud,
material misrepresentation or misappropriation, whether or not such party,
recipient or beneficiary is the Borrower or a Partner or the Manager, to the
extent of losses relating to or arising from such fraud, material
misrepresentation or misappropriation of funds under any Transaction Document;
provided, further, that the Borrower's obligations in respect of the
- -------- -------
Environmental Indemnity Agreement and the covenants, indemnities,
representations and warranties relating to environmental matters contained in
any Transaction Document shall not be Non-Recourse to the Borrower (but shall be
Non-
<PAGE>
Recourse to its Partners other than the General Partner). The foregoing
provisions shall not (a) prevent recourse to the Pledged Property or constitute
a waiver, release or discharge of any Debt, and the same shall continue until
paid or discharged, (b) limit the right of any Person, if required by applicable
law, to name the Borrower or any successor or assign of the Borrower as a party
defendant in any Action in the exercise of any remedy under any Transaction
Document, so long as no judgment seeking the performance of any act requiring
the expenditure of money shall be sought against the Borrower or any such
successor or assign and so long as any monetary judgment seeking the expenditure
of money is payable only from the Pledged Property or (c) impair any right of
the Lender to obtain a deficiency judgment against the Borrower or any such
successor or assign in any Action where necessary as a matter of law to preserve
the rights and remedies of the Lender against the Pledged Property, provided
that such deficiency judgment may only be enforced against the Pledged Property.
Notwithstanding the foregoing, under no circumstances shall the Debt be recourse
to any limited partner of the Partnership in its capacity as such.
"Note" means that certain Consolidated Secured Promissory Note, dated the
----
Closing Date, from the Borrower to the Lender in the principal sum of
$140,000,000.
"NSI" has the meaning set forth in Section 7.1(a).
---
"Officer's Certificate" means a certificate signed by any officer of the
---------------------
General Partner who is authorized to act hereunder on behalf of the Borrower.
"Operating Account" has the meaning set forth in Section 7.7 of the Cash
-----------------
Management Procedures.
"Operating Budget" has the meaning set forth in Section 5.2(d)(vii).
----------------
"Operating Profit Payment Date" has the meaning set forth in Section 2.4
-----------------------------
of the Cash Management Procedures.
"Operational Agreements" means the Management Agreement, the Property
----------------------
Agreements, the Equipment Leases, the Leases, if any, and any assignments and
assumption agreements or other agreements related thereto.
"Optional Prepayment Date" means March 11, 2006.
------------------------
<PAGE>
"Partners" means the limited partners of the Borrower as constituted from
--------
time to time and the General Partner, in their capacities as such.
"P&I Payments" has the meaning set forth in Section 2.3(c).
------------
"Permits" means all permits, licenses, certificates, approvals,
-------
authorizations and other documents necessary for the construction, use,
operation or maintenance of the Inns and the Properties.
"Permitted Exceptions" has the meaning set forth in the Mortgages.
--------------------
"Permitted Investments" has the meaning set forth in Exhibit D hereto.
--------------------- ---------
"Person" means any individual, corporation, partnership, joint venture,
------
association, limited liability company, joint stock company, estate, trust,
unincorporated organization or other business entity or Governmental Authority.
"Phase-In Period" has the meaning set forth in Section 1.2 of the Cash
---------------
Management Procedures.
"Plan(s)" means an employee benefit or other plan established or
-------
maintained by the Borrower or any ERISA Affiliate or to which the Borrower or
any ERISA Affiliate makes or is obligated to make contributions and which is
covered by Title IV of ERISA or Section 302 of ERISA or Section 412 of the IRC.
"Pledged Property" means the Properties and the other collateral in which a
----------------
security interest is being granted pursuant to the Security Documents.
"Potential Event of Default" means an event which, with the giving of any
--------------------------
applicable notice and/or lapse of any applicable time period, would become an
Event of Default.
"Principal Payment" has the meaning set forth in the Note.
-----------------
"Property" or "Properties" means any or all of those 22 Residence Inn by
--------- ----------
Marriott hotels at the locations set forth in Exhibit E hereto, including all
---------
improvements thereon, fixtures thereto, direct interests therein, and personal
property related thereto or included therein; provided, however, that "Property"
-------- -------
or "Properties" shall not include (i) any property owned by tenants,
<PAGE>
guests, licensees or concessionaires of or to such Property or Properties, or
(ii) any Property or Properties released from the Lien of the Security Documents
pursuant to the provisions of this Agreement or any Security Document from and
after the date of such release.
"Property Agreements" means all material agreements, contracts and other
-------------------
documents not specifically referred to herein relating to the operation of the
Inns other than agreements for services performed by third parties which
services are generally available from other third parties and which agreements
can be terminated on not more than 30 days' prior notice without payment of any
damages or penalty.
"Purchase Money Security Interest" means purchase money mortgages or
--------------------------------
security interests, conditional sale arrangements and other similar security
interests on furniture, fixtures or equipment acquired by the Borrower in the
ordinary course of business (and not inconsistent with customary industry
practices), with the proceeds of the indebtedness secured thereby; provided,
--------
however, that (i) any Purchase Money Security Interest shall attach only to the
- -------
furniture, fixtures or equipment acquired in such transaction (and any proceeds,
as defined in the Uniform Commercial Code, thereof), and (ii) such indebtedness
shall not exceed the cost of such furniture, fixtures or equipment.
"Quarterly Report" shall have the meaning set forth in 5.6(c)(i).
----------------
"Rating Agencies" means one or more of S&P, Fitch Investors Services Inc.
---------------
and DCR that are, at the time of determination, selected by NACC to rate the
Securities.
"Rating Comfort Letter" a letter from each Rating Agency pursuant to
---------------------
which it confirms that the taking of the action referred to therein will not
result in a withdrawal, qualification or reduction of the then existing ratings
of the Securities.
"Release Date" has the meaning set forth in Section 2.3(a)(i).
------------
"Release Price" means the amount of the proceeds of the Loan allocated to
-------------
each Property as set forth in Exhibit F annexed hereto. Release Prices will be
---------
adjusted as follows: If the principal amount of the Note is prepaid as a result
of (i) the release of a property pursuant to Section 2.6, (ii) the application
of U.S. Obligations pursuant to Section 2.3(g), or (iii) optional prepayment
pursuant to the last sentence of Section 3.1, the Release Price for each
Property shall equal the product of (x) a
<PAGE>
fraction the numerator of which is the Release Price of such Property
immediately before such adjustment and the denominator of which is the aggregate
Release Prices for all Properties immediately before such adjustment, times (y)
the outstanding principal amount of the Note immediately after such adjustment.
"REMIC" has the meaning set forth in Section 2.3(a).
-----
"S&P" means Standard & Poor's Rating Services.
---
"Securities" has the meaning set forth in Section 6.1.
----------
"Securities Act" means the Securities Act of 1933, as amended from time to
--------------
time, and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
"Securitization" has the meaning set forth in Section 6.1.
--------------
"Security Documents" means (a) the Mortgages, (b) the collateral
------------------
assignment of documents and property rights, dated as of the Closing Date, by
the Borrower to the Lender, (c) the assignment of leases, rents and profits,
dated as of the Closing Date, by the Borrower to the Lender, (d) the collateral
account agreement, dated as of the Closing Date, among the Servicer, the
Borrower and the Lender, (e) the Environmental Indemnity Agreement, (f) all
Uniform Commercial Code financing statements relating to the Debt and (g) any
other documents securing the Debt.
"Servicer" means Amresco Inc., a Texas corporation, its assigns and
--------
successors and any other nationally recognized servicer of commercial mortgage
loans selected by the Lender.
"Servicing Expenses" has the meaning set forth in Section 4.3(A)(i) of the
------------------
Cash Management Procedures.
"Subsidiary" means Bossier RIBM Two LLC.
----------
"Subsidiary Inn" means the Residence Inn by Marriott hotel owned by the
--------------
Subsidiary.
"Subordinate Debt" means Indebtedness incurred after March 21, 1998 that is
----------------
expressly subordinate in right of payment to the Debt pursuant to the provisions
of the Mortgages and with respect to which evidence is provided satisfactory to
the Lender that the pro forma Debt Service Coverage Ratio on its date of
--- -----
issuance (the "Issuance Date") is at least 2:1 and as to which the Rating
Agencies deliver a Rating Comfort Letter. For the purpose of calculating such
Debt Service Coverage Ratio, Debt Service Expense
<PAGE>
shall be the aggregate amount of scheduled interest and principal payable on the
proposed subordinate indebtedness and any other Indebtedness secured by any
assets of the Borrower.
"Substantive Consolidation Opinion" has the meaning set forth in Section
---------------------------------
6.1(b).
"Successor Entity" has the meaning set forth in Section 2.3(e).
----------------
"Tax and Insurance Account" means the escrow accounts provided for in
-------------------------
Section 5.1 of the Cash Management Procedures.
"Third Party Payors" has the meaning set forth in Section 1.2(ii) of the
------------------
Cash Management Procedures.
"Transaction Documents" means this Agreement, the Security Documents, the
---------------------
Note and all other documents executed and delivered by the Borrower in favor of
the Lender in connection with the Loan, including, without limitation, all
agreements, instruments and documents pursuant to which the Pledged Property is
assigned, collaterally assigned and/or pledged to the Lender hereunder.
"Transition Period" has the meaning set forth in Section 7.1.2(ii) of the
-----------------
Cash Management Procedures.
"Triggering Event" has the meaning set forth in Section 5.6(c).
----------------
"Trustee" means the trustee to which NACC assigns its interest in the
-------
Transaction Documents in connection with a Securitization.
"U.S. Obligations" has the meaning set forth in Section 2.3(f).
----------------
"USAH" means the Uniform System of Accounts for Hotels, Eighth Edition, or
----
any other subsequent edition as may be determined by the accountants for the
Borrower to be applicable to the operations of the Borrower, or if USAH is no
longer published, GAAP.
"United States" means the United States of America (including the States
-------------
and the District of Columbia), its territories, its possessions and other
areas subject to its jurisdiction.
"Welfare Plan" means an employee welfare benefit plan, as defined in
------------
Section 3(1) of ERISA.
<PAGE>
"Work" has the meaning set forth in Section 8.1 of the Cash Management
----
Procedures.
"Yield Maintenance Premium" shall mean an amount in cash that would be
-------------------------
necessary to purchase U.S. Obligations in an amount that would be sufficient,
together with U.S. Obligations that could be purchased with the unpaid principal
of and accrued interest on the Note paid to the Lender upon an acceleration of
the Note pursuant to Section 4.2, to provide the payments due on or prior to,
but as close as possible to, all successive Debt Service Payment Dates after the
receipt of such amount in respect of (i) the remaining Monthly Debt Service
Payments that would be required under the Note through and including April 11,
2006 and (ii) a balloon payment of the outstanding principal balance of the Note
and accrued and unpaid interest as of such date as if such balloon payment were
then due and payable.
ARTICLE II
PROVISIONS CONCERNING THE ACCOUNTS AND PLEDGED PROPERTY
Section II.1 Cash Management Procedures
--------------------------
The provisions of Exhibit B are incorporated herein by reference.
---------
Section II.2 Right to Contest. To the extent consistent with the
----------------
Mortgages, the Borrower at its expense may contest, by appropriate Action
conducted in good faith and with due diligence, the amount or validity or
application, in whole or in part, of any Imposition or Lien therefor or any
Legal Requirement or Insurance Requirement or the application of any instrument
of record affecting the Pledged Property or any part thereof or any claims or
judgments of mechanics, materialmen, suppliers or vendors or Liens therefor, and
may direct the Manager or the Servicer, as the case may be, to withhold payment
of the same pending such Action if permitted by law; provided, however, that (a)
-------- -------
in the case of any Impositions or Liens therefor or any claims or judgments of
mechanics, materialmen, suppliers or vendors or Liens therefor, such Action
shall suspend the enforcement thereof and the accrual of penalties thereon from
the Borrower, the Manager, the Servicer and the Pledged Property, (b) neither
the Pledged Property nor any part thereof or interest therein could be in any
danger of being sold, forfeited or lost if the Borrower pays the amount or
satisfies the condition being contested, and the Borrower would
<PAGE>
have the opportunity to so pay or satisfy if the Borrower fails to prevail in
the contest and (c) in the case of an Insurance Requirement, the failure of the
Borrower to comply therewith shall not impair the validity of any insurance
required to be maintained by the Borrower under the applicable Mortgage or the
right to full payment of any claims thereunder.
Section II.3 Defeasance.
----------
(a) At any time after the date which is the earlier of (i) two years after
the "startup day," within the meaning of Section 860G(a)(9) of the IRC, of a
"real estate mortgage investment conduit," within the meaning of Section 860D of
the IRC (a "REMIC"), that holds the Note (if the Note has been transferred to a
-----
REMIC prior to March 22, 1998) and (ii) March 22, 2000, but prior to the
Optional Prepayment Date, and provided no Event of Default has occurred and is
continuing (other than an Event of Default that will be cured by the release of
a Property or Properties from the Lien of the Security Documents pursuant to the
provisions of clause (e) of Section 4.1A), the Borrower may defease such Lien to
cause the release of one or more Properties from such Lien by providing the
Lender with funds in an amount sufficient to purchase U.S. Obligations in an
amount equal to the Defeasance Deposit for that portion of the Note which the
Borrower wishes to defease, upon the satisfaction of the following conditions:
(i) not less than 30 days' notice to the Lender specifying a Debt
Service Payment Date (the "Release Date") on which the Defeasance Deposit is to
------------
be made;
(ii) the payment to the Lender of interest accrued and unpaid on the
principal balance of the Note and all other Debt due through and including the
Release Date;
(iii) the payment to the Lender of the Defeasance Deposit; and
(iv) the delivery to the Lender of:
(A) a security agreement (the "Defeasance Security Agreement"),
-----------------------------
in form and substance satisfactory to the Lender, creating a
first priority perfected security interest in favor of the
Lender in the Defeasance Deposit and the U.S. Obligations
purchased with the Defeasance Deposit in accordance with
this
<PAGE>
subsection (a) (together, the "Defeasance Collateral");
---------------------
(B) form(s) of release of the Property(ies) to be released from
the Lien of the Security Documents (for execution by the
Lender) appropriate for the jurisdiction(s) in which such
Property(ies) are located;
(C) an Officer's Certificate certifying that the requirements
set forth in subsections (a) (ii)-(iv) have been satisfied;
(D) an opinion of counsel for the Borrower (which may be a
"reasoned" opinion), in form and substance satisfactory to
the Lender, that (i) the transfer of the Defeasance
Collateral in exchange for release(s) of the Property(ies)
to be released will not constitute an avoidable preference
under Section 547 of the United States Bankruptcy Code in
the event of a filing of a petition for relief under the
United States Bankruptcy Code for or against the Borrower,
(ii) the Defeasance Collateral has been duly and validly
assigned and delivered to the Trustee for the benefit of the
holders of the Securities, (iii) the Trustee holds a first
priority perfected security interest in the Defeasance
Collateral for the benefit of such holders, (iv) such
transfer will not result in a deemed exchange of the
Securities pursuant to Section 1001 of the IRC, (v) such
transfer will not, by itself, adversely affect the status of
the Securities as indebtedness for federal income tax
purposes and (vi) such transfer will not adversely affect
the status of the entity holding the Debt as a REMIC
(assuming for such purposes that such entity otherwise
qualifies as a REMIC and that the Note was transferred to
such REMIC not later than two years prior to the Release
Date);
(E) a certificate of a certified public accountant acceptable to
the Lender that the Defeasance Collateral complies with the
requirements set forth in subsection (b) below;
<PAGE>
(F) such other certificates, documents or instruments as the
Lender may reasonably request;
(G) evidence satisfactory to the Lender that the Defeasance Debt
Service Coverage Ratio will be maintained for the twelve
full months commencing immediately after the Release Date at
the greater of (x) the Initial Debt Service Coverage Ratio
and (y) the ratio of the Net Operating Income for the
thirteen (13) full Accounting Periods next preceding the
Release Date divided by the difference between (i) Debt
Service Expense for such period and (ii) the payments
received for such period from or with respect to U.S.
Obligations purchased by the Lender with the Defeasance
Deposits paid to it by the Borrower pursuant to this Section
2.3(a) and then held as security for the Note for such
period; and
(H) If the defeasance is made after the Securitization, the
Rating Agencies deliver a Rating Comfort Letter.
(b) If, following the release of the subject Property(ies), less than all
of the Properties shall have been released, the Lender shall use the Defeasance
Deposit to purchase U.S. Obligations that provide payments on or prior to, but
as close as possible to, all successive Debt Service Payment Dates after the
Release Date equal to the sum of (i) 125% of the portion of the P&I Payments due
on such Debt Service Payment Dates allocable to the Property(ies) to be released
from the Lien of the Security Documents on such Release Date (determined, pro
---
rata, on the basis of the Release Prices) through and including the Optional
- ----
Prepayment Date and (ii) 125% of the amount allocable to such Property(ies)
(determined, pro rata, on the basis of the Release Prices) of a balloon payment
--- ----
equal to the outstanding principal balance of the Note, and accrued and unpaid
interest thereon, that would remain unpaid as of the Optional Prepayment Date as
if such balloon payment were then due and payable. If a Property is released
pursuant to this Section 2.3 as a result of a condemnation or casualty, the
payments provided for in the preceding sentence shall be equal to the greater of
(A) the Release Price and (B) the lesser of (x) the Defeasance Deposit and (y)
the net Condemnation Proceeds or the net Insurance Proceeds received on account
of such
<PAGE>
Property. The Lender shall deliver such U.S. Obligations to the Servicer
for application pursuant to Sections 4.3(A) and 7.9(A) of the Cash Management
Procedures.
(c) If, as a result of the release of the subject Property(ies), all of
the Properties shall have been released, the Lender shall use the Defeasance
Deposit to purchase U.S. Obligations that provide, together with any U.S.
Obligations purchased in connection with any prior releases of Properties,
payments on or prior to, but as close as possible to, all successive Debt
Service Payment Dates after the Release Date equal to the sum of (i) the
remaining Monthly Debt Service Payments (such Monthly Debt Service Payments due
on such Debt Service Payment Dates being herein referred to as the "P&I
---
Payments") that would be required under the Note through and including the 120th
- --------
Debt Service Payment Date and (ii) a balloon payment of the outstanding
principal balance of the Nothe applicable Rating Agencies.
(d) For purposes of this Section 2.3, "Defeasance Deposit" shall mean an
------------------
amount in cash necessary to purchase U.S. Obligations whose cash flows are in an
amount sufficient to make the P&I Payments required under subsections (b) or
(c), as the case may be, plus any costs and expenses incurred or to be incurred
in making such purchase; "U.S. Obligations" shall mean obligations or securities
----------------
not subject to prepayment, call or early redemption which are direct obligations
of, or obligations fully guaranteed as to timely payment by, the United States
of America or any agency or instrumentality of the United States of America, the
obligations of which are backed by the full faith and credit of the United
States of America; and "Defeasance Debt Service Coverage Ratio" shall mean, in
--------------------------------------
respect of any fiscal period, the ratio of (i) Net Operating Income of the
Properties for such period remaining after a defeasance pursuant to this Section
2.3 to (ii) the difference between (x) Debt Service Expense for such period and
(y) the payments to be received from or with respect to U.S. Obligations then
held as security for the Note for such period.
(e) If the payment of accrued and unpaid interest and principal of the
Note and any other Debt has not been made in full by the Optional Prepayment
Date, payments from or with respect to U.S. Obligations then held by the Lender
and such payments received by the Lender thereafter shall be applied on the date
such payment is received (i) first, to payment of accrued and unpaid interest on
the Note and (ii) second, to prepayment of the Principal Payments in inverse
order of maturity.
<PAGE>
(f) Notwithstanding the provisions of subsection (a) of this Section
2.3, the Borrower may defease the Lien of the Security Documents to cause the
release of a Property for the purpose set forth in clause (e) of Section 4.1A
prior to the date set forth in such subsection (a) if it provides to the Lender
an opinion in form and substance, and from a firm, acceptable to the Lender, in
the exercise of its sole discretion, that such release will not adversely affect
the status of the entity holding the Debt as a REMIC (assuming for such purpose
that such entity otherwise qualifies as a REMIC).
Section II.4 Sale of all the Properties. Provided that no Event of
--------------------------
Default has occurred and is continuing, upon at least 60 days' notice to the
Lender, the Borrower has the right to sell all the Properties, subject to the
Debt, to any Person so long as such Person is approved by the Lender, and, after
the Securitization, by the Lender, such approval not to be unreasonably
withheld, and the Rating Agencies deliver a Rating Comfort Letter. It is
understood that the Rating Agencies may require, as a condition to such
delivery, matters equivalent to those contained in clauses (i) and (ii) of
Section 2.5. Upon such approval and delivery, the Lender shall deliver to the
Borrower for execution and delivery such instruments as may be reasonably
required to effect an assignment and assumption of the Debt and a release of the
obligations of the Borrower under the Transaction Documents, including, without
limitation, a new Note as to which the purchaser of the Properties shall be the
obligor, in a principal amount equal to the then outstanding principal amount of
the Note.
Section II.5 Change of Control. There shall be no Change of Control;
-----------------
provided, however, that if no Event of Default has occurred and is continuing
- -------- -------
there can be a Change of Control if (i) the Borrower submits to the Lender an
opinion in form and substance and from a firm satisfactory to the Lender, with
respect to the requested Change of Control, to the same effect as the
Substantive Consolidation Opinion, (ii) the organizational documents of the
Person involved in the requested Change of Control are approved by the Lender
and (iii) after the Securitization, the Rating Agencies deliver a Rating Comfort
Letter.
Section II.6 Partial Release after the Optional Prepayment Date. On
--------------------------------------------------
any Debt Service Payment Date after the Optional Prepayment Date, upon the sale
of any Property to any Person, the Borrower may cause the release of such
Property from the Lien of
<PAGE>
the Security Documents upon the satisfaction of the following conditions:
(a) not less than 30 days' notice to the Lender specifying a Debt
Service Payment Date on which the amount set forth in clause (c) below is to be
provided to the Servicer which notice shall be accompanied by an Officer's
Certificate to the effect that no Potential Event of Default or Event of Default
has occurred and is continuing (or in the case of a Potential Event of Default
or Event of Default that shall be cured or avoided by the release of the
affected Propert(ies)) describing the nature of the Potential Event of Default
or Event of Default and certifying that such Potential Default or Event of
Default shall be cured by the release and that no other Potential Event of
Default or Event of Default has occurred and is continuing) and that such
Release will comply with all applicable requirements of this Section 2.6;
(b) the payment to the Lender of interest accrued and unpaid on the
principal balance of the Note and all other sums due under the Transaction
Documents, through and including such Debt Service Payment Date;
(c) the payment to the Lender, to be applied to prepayment of the
Principal Payments in inverse order of maturity, of an amount equal to 125% of
the Release Price of such Property; provided, however, that if a Property is
-------- -------
released pursuant to this Section 2.6 as a result of a condemnation or casualty,
such payment shall be an amount equal to the greater of (a) the Release Price
for such Property and (b) the lesser of (x) 125% of such Release Price and (y)
the net Condemnation Proceeds or net Insurance Proceeds received on account of
such Property;
(d) delivery to the Lender for execution of forms of release of such
Property from the Lien of the Security Documents appropriate for the
jurisdiction in which such Property is located; and
(e) delivery to the Lender of evidence satisfactory to the Lender that
the Debt Service Coverage Ratio will be maintained for the twelve full months
commencing after the release date at the greater of (x) the Initial Debt Service
Coverage Ratio and (y) the ratio of the Net Operating Income for the thirteen
Accounting Periods next preceding the release date divided by the difference
between (i) Debt Service Expense for such period and (ii) the payments received
from U.S. Obligations purchased by the Lender with the Defeasance Deposits, if
any, delivered to it by the
<PAGE>
Borrower pursuant to Section 2.3(a) and then held as security for the Note for
such period.
Section II.7 Bossier Reserve Account
-----------------------
(a) On the Closing Date the Servicer will establish a segregated
deposit account (the "Bossier Reserve Account") in its name on behalf of the
-----------------------
Lender at LaSalle National Bank or another bank selected by the Lender. The
Bossier Reserve Account shall be an Eligible Account. The Borrower shall deposit
directly into the Bossier Reserve Account the annual sum of $250,000 prior to
March 11, 1997 and March 11 of each subsequent 12-month period thereafter
through and including the later to occur of (A) March 11, 2006 and (B) if funds
from the NACC Account have been provided to the Borrower pursuant to the
provisions of subsection (c) below, the date such funds are reimbursed to NACC
by the Borrower. If there is a shortfall in such annual sum required to be
deposited prior to any date referred to above, the Borrower hereby directs the
Servicer to fund such shortfall in the Bossier Reserve Account through the use
of all amounts which the Borrower is entitled to receive on each Debt Service
Payment Date from the Servicer after the applicable March 11 pursuant to
Sections 4.3(F) and 7.9(C) of the Cash Management Procedures.
(b) The Servicer shall invest amounts in the Bossier Reserve Account in
Permitted Investments that have a maturity of not more than one year. The
Servicer shall remit to the Borrower monthly all interest received with respect
to such Permitted Investments.
(c) The Borrower may request the Servicer to sell such of the Permitted
Investments as may be required to provide to the Borrower funds necessary to
satisfy a liability described in clause (ii) of Section 5.6(c); provided,
--------
however that the Borrower may not make such request unless and until the
- -------
Borrower has applied or caused to be applied to satisfy such liability: (i)
first, the Operating Profit (as such term is defined in the management agreement
between the Manager and the Subsidiary) of the Subsidiary after deduction of (y)
reasonable reserves established by the Subsidiary in connection with the
operations of the Subsidiary Inn (z) incentive management fees paid, and manager
loans repaid, to the Manager pursuant to such management agreement and (ii)
next, the net sales proceeds from the sale of the Subsidiary Inn unless the
Subsidiary Inn cannot be sold despite the Subsidiary's good faith efforts. In
connection with any such request, a senior officer of the General Partner shall
certify to the Servicer the accuracy of the conditions to such request set forth
herein. If, after the use by the Borrower of the amounts set forth in the
preceding clauses (i)
<PAGE>
and (ii) and the amounts available from the Bossier Reserve Account, there
remains a shortfall in the funds required to satisfy such liability as certified
to the Servicer by such senior officer, the Borrower shall notify NACC of such
shortfall and NACC shall direct the Servicer to sell such of the Permitted
Investments in the NACC Account as shall be designated by NACC and as may be
required to provide to the Borrower the amount of such shortfall. The Borrower
will apply any amount received from the NACC Account solely for the purposes
contemplated by this subsection (c).
(d) The Servicer shall deliver to the Borrower the funds and the
Permitted Investments contained in the Bossier Reserve Account upon
certification by NACC to the Servicer that there are no obligations of the
Borrower to NACC pursuant to Section 5 of that certain Letter Agreement, dated
the Closing Date, among the Borrower, NACC and the Servicer and the earlier to
occur of: (y) the repayment of the Loan or (z) receipt by the Servicer of (i) an
opinion in form and substance and from counsel satisfactory to the Servicer to
the effect that the Borrower has received a written determination by the United
States Environmental Protection Agency, the Louisiana Department of
Environmental Quality or such other agency as may hereafter have jurisdiction
over the property described by the United States Environmental Protection Agency
in HRS Documentation Record dated January 21, 1995 as the old "Citgo Refinery
(Bossier City)" (the "Citgo Refinery Site") that no further remedial activities
-------------------
are required at the Citgo Refinery Site and the applicable statute of
limitations for contribution or other actions with respect to the Citgo Refinery
Site against the Subsidiary and the Borrower has expired and (ii) the delivery
by the Rating Agencies of a Rating Comfort Letter, it being understood that such
letter shall be based upon the Rating Agencies determination that the opinion
referred to in clause (i) is in form and substance and from counsel satisfactory
to the Rating Agencies.
<PAGE>
ARTICLE III
PAYMENTS
Section III.1 Payments on the Note. All payments made on the Note
--------------------
shall be made in the manner, and subject to the conditions, provided in this
Agreement and the Note. The Note shall not be prepayable except as expressly
provided for in this Section 3.1, Section 2.6 and Sections 4.4(F) and 7.10(C) of
the Cash Management Procedures. In addition, on the Optional Prepayment Date and
each Debt Service Payment Date thereafter, the Note may be prepaid, at the
option of the Borrower, in full or in part, without penalty or premium.
Section III.2 Interest. The Note shall bear interest as provided
--------
therein.
Section III.3 Payments without Deduction, etc. All payments of the
--------------------------------
Debt to the Lender shall be absolute and unconditional, shall be paid strictly
in accordance with the terms of the Transaction Documents without being subject
to any claim, set-off, defense or other right which the Borrower may have
against the Lender or any other Person, whether in connection with this
Agreement, the transactions contemplated herein or any other circumstance or
happening whatsoever. The Borrower shall pay such payments to the Lender free
and clear of, and without deduction for, any and all present or future taxes,
levies, imposts, deductions, charges, penalties or withholdings, and any
liabilities with respect thereto, by whomever imposed, other than present or
future taxes on the income of the Lender or franchise taxes imposed on the
Lender as a result of its conducting business in specific jurisdictions. The
Borrower shall pay and indemnify and hold the Lender harmless from and against,
any present or future claim for liability for United States, state or local
taxes on the ownership by the Lender of the debt obligations of the Borrower
evidenced by the Note, the Mortgages or on the principal, interest, fees or
other amounts payable under any Transaction Document or otherwise in respect of
the Debt (other than income or franchise taxes imposed on the Lender or its
Affiliates by any jurisdiction). The obligations of the Borrower hereunder shall
survive repayment of the Debt and termination of the Transaction Documents.
<PAGE>
ARTICLE IV
DEFAULT; REMEDIES; ENFORCEMENT
Section IV.1A Events of Default. Any of the following shall constitute a
-----------------
default under this Agreement (an "Event of Default"):
----------------
(a) failure by the Borrower to pay on the due date any interest or
principal due and payable on the Note as set forth therein; or
(b) failure by the Borrower to make any other payment due under any
Transaction Document within ten (10) days after demand therefor shall have been
made; or
(c) any representation or warranty of the Borrower contained in any
Transaction Document shall have been untrue or incorrect when made in any
respect that may have a Material Adverse Effect; provided, however, that for the
-------- -------
purpose of this clause (c) the words "To the Best Knowledge of the Borrower"
shall be deleted, where used, from the provisions of each representation and
warranty contained in Section 5.1.
(d) failure by the Borrower to perform its covenants in Section 5.2(d),
and such failure continues unremedied for ten days after notice thereof by the
Lender to the Borrower requiring the same to be remedied; or
(e) failure by the Borrower to perform or observe any other of its
covenants under any Transaction Document that has a Material Adverse Effect, and
such failure continues unremedied for 30 days after notice thereof by the Lender
to the Borrower requiring the same to be remedied; provided, however, that it
-------- -------
shall not be an Event of Default if (a) such failure is curable but is not
reasonably capable of being cured within such 30-day period and the Borrower
shall have commenced to cure such failure within such 30-day period and
thereafter shall diligently pursue such cure to completion, but in no event
later than 180 days after the date on which the Borrower received such written
notice from the Lender or (b) such failure affects one or more but not all of
the Properties and the Borrower, within thirty (30) days after the Borrower's
receipt of such notice from the Lender, gives notice to the Lender of its intent
to release such Property from the Lien of the Security Documents pursuant to the
provisions of Section 2.3 or 2.6 and, thereafter diligently pursues efforts to
take such action and, within 180 days after the date on which the Borrower
received such written notice from the Lender, effects such release pursuant to
the provisions of Section 2.3 or 2.6, as the case may be; or
<PAGE>
(f) an order (that has not been vacated or stayed within 60 days from the
entry thereof) is made for, or the Partners take any action with regard to, the
winding up of the Borrower or the General Partner except a winding up for the
purpose of a merger, restructuring or contribution, the terms of which have
previously been approved in writing by the Lender; or
(g) (A) the Borrower or the General Partner shall commence any Action (1)
under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors
(collectively, "Insolvency Law") seeking to have an order for relief entered
--------------
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or (2)
seeking appointment of a receiver, trustee, custodian or other similar official
(each a "Bankruptcy Custodian") for it or for all or substantially all of its
--------------------
assets, or the Borrower or the General Partner shall make a general assignment
for the benefit of its creditors; or (B) there shall be commenced against the
Borrower or the General Partner any Action of a nature referred to in clause (A)
above which (1) results in the entry of any order for relief or any such
adjudication or appointment and (2) remains undismissed, undischarged or
unbonded for a period of 60 days; or (C) there shall be commenced against the
Borrower or the General Partner any Action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or substantially
all of its assets which results in the entry of an order for any such relief
that shall not have been vacated, discharged, stayed, satisfied or bonded
pending appeal within 60 days from the entry thereof; or (D) the Borrower or the
General Partner shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due; or
(h) Unless (a) the Borrower causes all of the Properties then owned by the
Borrower to come under management by another nationally recognized hotel
operator acceptable to the Lender, in the exercise of its reasonable discretion,
(b) such Properties are operated as part of a comparable nationally recognized
hotel system acceptable to the Lender and (c) each of the Rating Agencies
delivers to the Lender a Rating Comfort Letter with respect thereto: (A) the
Manager shall commence any Action (1) under any Insolvency Law seeking to have
an order for relief entered with respect to it, or seeking to adjudicate it a
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up,
<PAGE>
liquidation, dissolution, composition or other relief with respect to it or its
debts, or (2) seeking appointment of a Bankruptcy Custodian for it or for all or
substantially all of its assets, or the Manager shall make a general assignment
for the benefit of its creditors; or (B) there shall be commenced against the
Manager any Action of a nature referred to in clause (A) above which (1) results
in the entry of any order for relief or any such adjudication or appointment and
(2) remains undismissed, undischarged or unbonded for a period of 60 days; or
(C) there shall be commenced against the Manager any Action seeking issuance of
a warrant of attachment, execution, distraint or similar process against all or
substantially all of its assets which results in the entry of an order for any
such relief that shall not have been vacated, discharged, stayed, satisfied or
bonded pending appeal within 60 days from the entry thereof; or (D) the Manager
shall generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due;
(i) one or more judgments or decrees, not covered by insurance, in an
aggregate amount exceeding $2,000,000 shall be entered against the Borrower or
the General Partner, and such judgments or decrees shall not have been vacated,
discharged, stayed, satisfied or bonded pending appeal within 60 days from the
entry thereof; or
(j) there is a Change of Control, unless permitted under Section 2.5.
Section 4.1B Event of Default Cure. None of the foregoing shall
---------------------
constitute an Event of Default if after the occurrence thereof, the Borrower
tenders a cure for such Event of Default or a plan to cure such Event of Default
and the Lender accepts such tender, such acceptance to contain such conditions
as the Lender, in the exercise of its sole discretion, may require. If the
Borrower tenders to the Lender all sums, the non-payment of which constituted an
Event of Default under clauses (a) or (b) of Section 4.1A, and the Lender
accepts such sums (which shall be evidenced by Lender's failure to return such
sums to the Borrower within 15 days from the date of Lender's receipt thereof),
such non-payment shall not constitute an Event of Default. If the Lender does
not accept any such payment or tender, the Event of Default shall be continuing.
If the Lender fails to respond to the Borrower within 30 days of its receipt of
such tender, it shall be deemed to be rejected.
<PAGE>
Section IV.2 Remedies. If an Event of Default shall have occurred and be
--------
continuing, the Lender shall have the right, in its sole discretion, by notice
to the Borrower (with a copy to the Manager) (except upon the occurrence of an
Event of Default under clauses (f) or (g) of Section 4.1A, in which case all
principal and accrued interest thereon will be immediately due and payable on
the Note without any declaration or other act on the part of the Lender) to take
one or more of the following actions:
(a) To declare the principal of and all amounts accrued but unpaid under
the Note and the Transaction Documents, together with the Yield Maintenance
Premium, to be immediately due and payable, and such amounts shall thereupon
become immediately due and payable, without presentment, demand, protest or
notice of any kind, other than any notice specifically required by this Section
4.2, all of which are hereby expressly waived by Borrower;
(b) Pursue such rights and remedies against the Borrower, or otherwise, as
are provided under and pursuant to the Mortgages or any of the other Transaction
Documents and as may be available to the Lender at law or in equity, including,
without limitation, during such time as the Lender may be considering a tender
of a cure or a plan pursuant to Section 4.1B; provided, however, that the Lender
-------- -------
shall not initiate foreclosure proceedings unless five (5) Business Days' prior
notice of such intention is given to Borrower and the tender of a cure or a plan
therefor shall not have been accepted by the Lender pursuant to the provisions
of Section 4.1B before the end of such 5 Business Day period; and
(c) If the Event of Default involves the Borrower's failure to pay any
Imposition or to comply with the Insurance Requirements, or to perform or
observe any other covenant, condition or term in any Transaction Document or in
the Management Agreement, the Lender may, at its option, without waiving or
affecting any of its rights or remedies hereunder, pay,perform or observe the
same, and, in connection therewith, the Lender shall be entitled to rely on any
representations and statements of the Manager under the Management Agreement in
regard to alleged breaches or violations thereof, and all payments made or costs
or expenses incurred by the Lender in connection therewith shall be repaid by
Borrower to the Lender within fifteen (15) days after demand therefor, and shall
be added to and become a part of the Debt. The Lender is hereby empowered to
enter and to authorize others to enter upon any Property for the purpose of
performing or observing any such defaulted covenant, condition or term, without
thereby becoming liable to Borrower or any Person in possession holding under
Borrower.
<PAGE>
Section IV.3 Remedies Cumulative; Delay or Omission Not a Waiver. To the
---------------------------------------------------
extent permitted by law, every remedy given hereunder or in any other
Transaction Document to the Lender shall not be exclusive of any other remedy or
remedies, and every such remedy shall be cumulative and in addition to every
remedy provided by statute, law, equity or otherwise. The Lender may exercise
all or any of the powers, rights or remedies given to it hereunder or which may
be now or hereafter given by statute, law, equity or otherwise, in its absolute
discretion. No course of dealing between the Borrower and the Lender or any
delay or omission of the Lender to exercise any power, right or remedy accruing
upon any Event of Default shall impair any power, right or remedy or shall be
construed to be a waiver of any such Event of Default or acquiescence therein,
and every power, right and remedy given by each Transaction Document to the
Lender may, to the extent permitted by law, be exercised from time to time and
as often as may be deemed expedient by the Lender.
ARTICLE V
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section V.1 Representations and Warranties of the Borrower. The Borrower
----------------------------------------------
represents and warrants to, and covenants with the Lender, that, as of the
Closing Date, except as set forth on the Disclosure Schedule:
(a) Exhibit G hereto sets forth the organizational structure of the
---------
Borrower, and the equity interests and holders therein. The Borrower is a
limited partnership validly existing and in good standing under the laws of the
State of Delaware and is qualified to do business in each jurisdiction where the
nature of its business or location of the Properties requires it to be so
qualified; the General Partner is a corporation validly existing and in good
standing under the laws of the State of Delaware and is qualified to do business
in each jurisdiction where the nature of its business or location of the
Properties requires it to be so qualified. Neither the General Partner nor the
Borrower has engaged in any business unrelated to the ownership of the
Properties. Neither the General Partner nor the Borrower has assets other than
those related to the Properties.
The Subsidiary is a limited liability company validly existing and in good
standing under the laws of the State of Delaware and will be qualified to do
business in Louisiana as soon as possible after the Closing Date; the Managing
Member is a corporation
<PAGE>
validly existing and in good standing under the laws of the state of Delaware.
The Subsidiary was organized in March 1996 and since such date has not engaged
in any business unrelated to the ownership of the Residence Inn by Marriott
located in Bossier City, Louisiana. All of the capital stock of the Managing
Member and 99% of the membership interests in the Subsidiary is held of record
and beneficially by the Borrower.
(b) The Borrower has, and at relevant times has had, the requisite power
and authority to own its assets and conduct its business, to execute and deliver
each of the Transaction Documents and all Operational Agreements to which the
Borrower is a party and to carry out the transactions contemplated thereby.
(c) The execution, delivery and performance by the Borrower of (i) each
of the Transaction Documents and (ii) the Operational Agreements to which the
Borrower is a party have been duly and validly authorized by all necessary
actions and proceedings on the part of the General Partner and the Borrower, and
no further approvals or filings of any kind, including, without limitation, any
approval of or filing with any Governmental Authority, are required as a
condition thereto.
(d) Neither the execution and delivery of each of the Transaction
Documents and the Operational Agreements, nor the fulfillment of or compliance
with the terms and conditions thereof:
(i) will conflict with or result in any breach or violation of any
law, rule or regulation issued by any Governmental Authority,
or any judgment or order applicable to the Borrower, the
General Partner, the Subsidiary or the Managing Member or to
which the Borrower, the General Partner, the Subsidiary or the
Managing Member or any of the Properties or the Subsidiary Inn
are subject;
(ii) will conflict with or result in any breach or violation of, or
constitute a default under, any of the provisions of the
Amended and Restated Agreement of Limited Partnership of the
Borrower, the Restated Certificate of Incorporation of the
General Partner, the Limited Liability Company Agreement of the
Subsidiary or the Certificate of Incorporation of the Managing
Member or any agreement or instrument to which the Borrower,
the General Partner, the Subsidiary or the Managing Member is a
party or to which the Borrower, the
<PAGE>
General Partner the Subsidiary or the Managing Member or any
of the Properties is subject; or
(iii) will result in or require the creation of any Lien on any of
the Properties or the Subsidiary Inn, except Permitted
Exceptions.
(e) Each of (i) the Transaction Documents and (ii) the Operational
Agreements to which the Borrower is a party, and, to the Best Knowledge of the
Borrower, each of the Operational Agreements, if any, to which the Borrower is
not a party, has been duly executed and delivered by the Borrower and to the
Best Knowledge of the Borrower, the other parties thereto and constitutes the
legal, valid and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its terms subject to the effects of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally and general equitable principles (whether
considered in a proceeding in equity or at law).
(f) There is no Action pending to which the Borrower, the General
Partner, the Subsidiary or the Managing Member is a party or to which any
Property is subject, directly or indirectly, and, to the Best Knowledge of the
Borrower and, based on a certification to the Borrower by the Manager, of the
Manager, no such Action is threatened or contemplated by any Person, in each
case, other than an Action that does not involve an amount in controversy in
excess of $25,000.
(g) Neither the Borrower nor the Subsidiary has received notice of, and
does not have any knowledge of, any violations of any Legal Requirements
affecting any Property or the construction, development, use, operation,
maintenance or management thereof, except as set forth in the Exhibits and
Schedules to this Agreement.
(h) Neither the Borrower, the General Partner, the Subsidiary nor the
Managing Member has any subsidiaries, except that the Borrower is a 99% member
of the Subsidiary and the 100% shareholder of the Managing Member and the
Managing Member is a 1% member of the Subsidiary.
(i) Except for the Debt, since September 20, 1988, the Borrower has not
incurred Indebtedness other than Purchase Money Security Interests; since its
date of formation, the Subsidiary has not incurred any Indebtedness.
<PAGE>
(j) Neither the Borrower nor the Subsidiary has any employees.
(k) True and complete copies of the Operational Agreements (including all
amendments, agreements, side letters and all other material documents relating
thereto other than those effected in the ordinary course of business and which
individually or in the aggregate do not have an Individual Material Adverse
Effect) have been made available to the Lender; each such agreement is
unmodified and in full force and effect; to the Best Knowledge of the Borrower,
there is no default by any party thereunder; and no event has occurred and is
continuing which, with the passage of time and/or the giving of notice, would
constitute a default or event of default by the Borrower thereunder in such
circumstances that such default or event of default might have an Individual
Material Adverse Effect. All necessary consents to the transactions described in
the Transaction Documents required by such agreements have been obtained. Since
its inception, neither the Borrower nor the General Partner has entered into any
agreements or obligations other than the Transaction Documents and the
Operational Agreements.
(l) All necessary governmental consents, if any, to the transactions
described in the Transaction Documents have been obtained.
(m) The Operating Budget annexed hereto as Exhibit H contains all
---------
anticipated operating expenses for the Properties for the year ending December
31, 1996. The Capital Budget annexed hereto as Exhibit I contains all
---------
anticipated Capital and FF&E Expenditures for the Properties for the year ending
December 31, 1996.
(n) All Permits material to the operations of each Property have been
obtained and are in full force and effect.
(o) Each Property has available to it adequate parking to comply with all
Legal Requirements and to permit the operation of the Property as a hotel
conforming to at least the standards applicable to Residence Inn by Marriott and
is in compliance with the Management Agreement.
(p) Neither the Borrower nor the Subsidiary is subject to any United
States or state income, unincorporated business, capital, franchise or similar
gross income or income based taxes.
(q) (i) Neither the Borrower, any ERISA Affiliate of the Borrower, the
Subsidiary nor any ERISA Affiliate of
<PAGE>
the Subsidiary maintains, sponsors, contributes to or is
obligated to contribute to, or during the five (5) years ending
on the date of the execution and delivery of this Agreement,
has maintained, sponsored, contributed to or was obligated to
contribute to, any Plan.
(ii) The Borrower does not, and is not obligated to, maintain,
sponsor or contribute to any Welfare Plan.
(iii) The assets of the Borrower are not nor are they deemed "plan
assets", whether by operation of law or under regulations
promulgated under ERISA.
(r) The Borrower (1) has not entered into any Transaction Document with
the actual intent to hinder, delay, or defraud any creditor and (2) has received
reasonably equivalent value in exchange for its obligations under the
Transaction Documents. The fair saleable value of the Borrower's assets is
greater than the Borrower's probable liabilities, including the maximum amount
of its contingent liabilities or its debts as such debts become absolute and
matured. The Borrower's assets do not constitute unreasonably small capital to
carry out its business as conducted or as proposed to be conducted. The Borrower
does not intend to, and does not believe that it will, incur debts and
liabilities (including, without limitation, contingent liabilities and other
commitments) beyond its ability to pay such debts as they mature (taking into
account the timing and amounts to be payable on or in respect of obligations of
the Borrower).
(s) Neither the Borrower nor the Subsidiary has sustained any loss or
interference with its business from fire, explosion, flood or other calamity, or
from any labor dispute or governmental action, order or decree, nor has there
been any material adverse change, nor any other development or event that, in
each case, may have an Individual Material Adverse Effect.
(t) The Security Documents, when duly executed and delivered, and (to the
extent required or contemplated) filed or recorded, will create a valid and
enforceable first priority perfected security interest in the Borrower's right,
title and interest in and to the rights and properties described therein, as to
which perfection may be effected by such filing or recording, for the benefit of
the Lender, subject only to Permitted Exceptions.
<PAGE>
(u) The Borrower is not (1) an "investment company" or a company
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, as amended, (2) a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" of either a "holding company"
or a "subsidiary company" within the meaning of the Public Utility Holding
Company Act of 1935, as amended, nor (3) subject to any other federal or state
law or regulation which purports to restrict or regulate its ability to borrow
money.
(v) There exists no Event of Default or Potential Event of Default.
(w) To the Best Knowledge of the Borrower, no representation or warranty
by the Borrower made in any Transaction Document, and no schedule, exhibit,
certificate, written statement, list, document or other material furnished or to
be furnished to the Lender pursuant to or in connection with any Transaction
Document or any of the transactions contemplated thereby contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
(x) There is no offset, defense, counterclaim or right to rescission with
respect to the Note or the other Transaction Documents.
(y) All taxes and governmental assessments currently due and owing in
respect of, and affecting, the Properties, have been paid, or an escrow of funds
in an amount sufficient to cover such assessments has been established with the
Servicer or title insurance company.
(z) Except as set forth in the Disclosure Report, there is no Action
pending, or, to the Best Knowledge of the Borrower, for the total or partial
condemnation of any Property or the Subsidiary Inn, and except for ADA
Compliance Work, Deferred Maintenance Work and Environmental Remediation Work,
each Property is in good repair and free and clear of any damage that could
affect materially and adversely the value of such Property as security for the
Note or the use for which such Property was intended.
(aa) Insurance required to be maintained pursuant the Insurance
Requirements is in effect; and the Properties and the use and operation thereof
constitute a legal use under applicable zoning regulations and comply in all
respects with all applicable Legal Requirements.
<PAGE>
(bb) To the Best Knowledge of the Borrower, the amounts deposited in the
Capital Expenditure and FF&E Reserve Account for ADA Compliance Work, Deferred
Maintenance Work and Environmental Remediation Work are sufficient for their
intended purposes.
(cc) None of the Properties is listed in or, to the Best Knowledge of the
Borrower and, based on a certification to the Borrower by the Manager, of the
Manager, proposed for listing in the United States Environmental Protection
Agency's National Priorities List of sites or any other comparable list of sites
maintained by any state or local governmental agency.
(dd) Except as set forth on the Disclosure Schedule, none of the
Properties is subject to any Lien or claim for Lien in favor of any Governmental
Authority or any other Person as a result of any Hazardous Substance (as such
term is defined in the Environmental Indemnity Agreement) on, in or affecting
the Property.
(ee) None of the Properties is subject to any collective bargaining or
other union contracts.
(ff) Each of the Borrower and the General Partner has (a) not sought or
consented to any dissolution, winding up, liquidation, consolidation, merger or
sale of all or substantially all of its assets, (b) not failed to correct any
known misunderstanding regarding its separate identity, (c) maintained its
accounts, books and records separate from any other person or entity, (d)
maintained its books, records, resolutions and agreements as official records,
(e) not commingled its funds or assets with those of any other person or entity
and has held its assets in its own name, (f) conducted its business in its name
(except that all the Properties are operated under the name "Residence Inn By
Marriott" or similar names), (g) maintained its financial statements, accounting
records and other entity documents separate from any other person or entity, (h)
paid its own liabilities out of its own funds and assets, (i) observed all
partnership and corporate formalities, as the case may be, (j) not assumed or
guaranteed or become obligated for the debts of any other person or entity or
held out its credit as being available to satisfy the obligations of any other
person or entity, (k) not acquired obligations or securities of its partners or
shareholders, as the case may be, except as set forth in the Disclosure Report,
(l) allocated fairly and reasonably any overhead for shared office space and
used separate stationery, invoices and checks from those of any entity, (m) not
pledged any of its assets for the benefit of any other person or entity, except
as set forth in the Disclosure Report, (n)
<PAGE>
held and identified itself as a separate and distinct entity under its own name
and not as a division or part of any other person or entity, (o) not made any
loans to any person or entity, (p) not identified its partners or shareholders,
as the case may be, or any of its Affiliates as a division or part of it, or (q)
not entered into or become a party to any transaction with its partners or
shareholders, as the case may be, or its Affiliates except in the ordinary
course of its business and on terms which are fair and are no less favorable to
it than would be obtained in a comparable arm's length transaction with an
unrelated third party, (r) not filed a bankruptcy or insolvency petition or
otherwise instituted insolvency proceedings with respect to itself or to any
other entity in which it has a direct or indirect legal or beneficial ownership
interest, (s) maintained adequate capital in light of its contemplated business
operations, (t) not engaged in any business activity other than as stated in
Section 2.03 of the Amended and Restated Agreement of Limited Partnership of the
Borrower and Article THIRD of the Amended and Restated Certificate of
Incorporation of the General Partner, as the case may be and (u) maintained an
arms' length relationship with partners, affiliates and any other party
furnishing services to it.
(gg) The Permitted Exceptions do not materially and adversely affect (1)
the ability of the Borrower to pay in full the principal and interest on the
Note in a timely manner or (2) the use of any Property for the use currently
being made thereof, the operation of any Property as currently being operated or
the value of any Property.
(hh) [Intentionally omitted]
(ii) To the Best Knowledge of the Borrower, neither the Borrower nor the
Subsidiary has any material contingent liabilities.
(jj) Neither the Borrower nor the Subsidiary has any material financial
obligation under any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Borrower or the Subsidiary is a party or by
which the Borrower, or any Property or the Subsidiary Inn is bound, other than
obligations incurred in the ordinary course of the operation of the Properties
and the Subsidiary Inn and under the Transaction Documents.
(kk) The Borrower has not borrowed or received debt financing that has not
been heretofore or contemporaneously herewith repaid in full, other than
Purchase Money Security Interests permitted by the provisions of this Loan
Agreement.
<PAGE>
(ll) To the Best Knowledge of the Borrower, no principal of the Borrower,
the General Partner, the Subsidiary or the Managing Member or officer authorized
to execute and deliver an Officer's Certificate has ever been indicted and/or
convicted of a felony under any federal, state or foreign laws.
(mm) There are no pending or, to the Best Knowledge of the Borrower,
proposed, special or other assessments for public improvements or otherwise
affecting any of the Properties or the Subsidiary Inn, nor, to the Best
Knowledge of the Borrower and, based on a certification to the Borrower by the
Manager, of the Manager, are there any contemplated improvements to any of the
Properties or the Subsidiary Inn that may result in such special or other
assessment.
(nn) All of the rooms at each of the Inns are in service, except for
rooms that are temporarily out of service for routine maintenance and repair.
(oo) The Borrower has or anticipates that it will have sufficient funds
available to it for implementing the reasonably anticipated Capital and FF&E
Expenditures.
Section V.2 Affirmative Covenants. So long as any of the Debt remains
---------------------
outstanding as an obligation of the Borrower, the Borrower shall:
(a) do all things necessary to keep in full force and effect its valid
existence as a limited partnership and the valid existence of the Subsidiary as
a limited liability company and to qualify to do business in each jurisdiction
in which such qualification is necessary to the conduct of its business or to
protect the validity and enforceability of the Transaction Documents;
(b) do all things necessary to enable it and the Subsidiary to comply
with all applicable legal, fiscal and accounting rules and regulations;
(c) keep and cause the Subsidiary to keep proper books of account and
records in which full, true and correct entries in accordance with GAAP shall be
made of all transactions in relation to its business and activities; allow the
Lender access to such books of account and records at all reasonable times
during normal business hours upon reasonable notice; and permit the Lender to
discuss the affairs, finances and accounts of the Borrower or the
<PAGE>
Subsidiary with any of the management employees of the General Partner, the
Manager and the Managing Member;
(d) furnish to the Lender (and after the Securitization, also to NACC):
(i) not later than 120 days after the end of each Fiscal Year,
audited financial statements (including balance sheet, income
statement and statement of cash flows of the Borrower),
prepared in accordance with GAAP consistently applied,
audited by a "Big Six" accounting firm (copies of all such
information provided for above being also furnished to NACC
after the Securitization);
(ii) not later than 27 days after the end of each Accounting
Period (i) unaudited financial statements substantially in
the form of Exhibit J(1) attached hereto, covering such
------------
Accounting Period and the annual amount for the period to
date showing in detail for each Inn separately, among other
things, a breakdown of sales revenues and operating expenses
and the calculation of house profit, average suite and
average occupancy rates, each of the foregoing with a
comparison to budget and prior year, and (ii) an unaudited
profit and loss statement and escrow analysis on a
consolidated basis in the form of Exhibit J(2) attached
------------
hereto, and (iii) unaudited periodic and year-to-date reports
detailing for each Property the calculation of Operating
Profit substantially in the form of Exhibit J(3) attached
------------
hereto (copies of all such information provided for above
being also furnished to NACC after the Securitization);
(iii) not later than 60 days after the end of each Accounting
Quarter, quarterly and year-to-date unaudited financial
statements for the Borrower (including without limitation
balance sheets, income statements and statements of cash
flows) (copies of all such information provided for above
being also furnished to NACC after the Securitization);
(iv) such other reports and other documents as shall be
replacements of the foregoing, which reports and other
documents shall not contain less detail than
<PAGE>
that provided for in clauses (i), (ii) and (iii) above;
(v) not later than 27 days after the end of each Fiscal Year, an
Officer's Certificate stating whether or not the signer
thereof knows of any Event of Default; and
(vi) if the financial statements provided for in clauses (i), (ii)
and (iii) above do not include the operations of the
Subsidiary, such financial statements, to the extent such
financial statements are prepared for the Subsidiary; and
(vii) on or before January 15 of each year commencing on January
15, 1997, an annual plan (the "Annual Plan") for such year
-----------
for each Property which annual Plan shall include a detailed
operating budget (an "Operating Budget") and a detailed
----------------
capital expenditure budget (a "Capital Budget"), reflecting
--------------
the Manager's best good faith estimate of the anticipated
results of management fees, Management Expenses, and Capital
and FF&E Expenditures. The Annual Plan shall contain
provisions for deposit into the Capital Expenditures and FF&E
Reserve Account of an aggregate amount equal to at least (5%)
of projected Gross Revenues for each year.
(e) (i) if the Borrower has the right under the Management Agreement
to approve any aspect of each Annual Operating Projection or
the Repairs and Equipment Estimate (as such terms is defined
in the Management Agreement) or any other budget, submit each
of the foregoing to the Lender for its approval;
(ii) submit to the Lender for its approval the Building Estimate
(as such term is defined in the Management Agreement);
(iii) the Lender's review and approval of each of the foregoing
shall not be unreasonably withheld or delayed;
(f) take all reasonable actions necessary so that the Borrower is not
required to register as an investment company under the Investment Company Act
of 1940, as amended;
<PAGE>
(g) promptly inform the Lender in writing of the following:
(i) the Borrower becoming aware of the commencement of any rule
making or disciplinary proceeding or the promulgation of any
proposed or final rule affecting the Borrower, any Property,
the Subsidiary or the Subsidiary Inn (other than a rule or
proceeding which has general applicability to Persons
including the Borrower and the Subsidiary);
(ii) the Borrower becoming aware of the commencement of any Action
by or against the Borrower or the Subsidiary or with respect
to any Property or the Subsidiary Inn before any Governmental
Authority or arbitration board, or the written threat of any
such Action;
(iii) the receipt of written notice from any Governmental Authority
that (1) the Borrower or the Subsidiary is being placed under
regulatory supervision, (2) any Permit material to the conduct
of the Borrower's or the Subsidiary's business is to be
suspended or revoked or (3) the Borrower or the Subsidiary is
to cease and desist any practice, procedure or policy employed
by the Borrower or the Subsidiary in the conduct of its
business; and
(iv) the receipt of written notice from the Manager that the
Borrower has not complied with any of its obligations under
the Management Agreement or the Subsidiary has not complied
with any of its obligations under its management agreement
with the Manager or altering in any material respect the
rules, standards and requirements of the Manager under each
such agreement;
(h) generally pay and cause the Subsidiary to generally pay its debts as
they become due;
(i) do or cause to be done all things necessary to establish, perfect,
maintain and continue the perfection and first priority (subject to Permitted
Exceptions) of the security interest of the Lender in the Pledged Property and
pay the costs and expenses of all filings and recordings and all searches
necessary to establish and determine the validity and the priority of such
security interest;
<PAGE>
(j) subject to Section 2.2, pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, all taxes, assessments and
governmental charges levied or imposed upon the Borrower or the Subsidiary or
upon the income, profits or property of the Borrower (including the Properties)
or the Subsidiary (including the Subsidiary Inn);
(k) subject to Section 2.2, pay or cause to be paid all operating expenses
and all other costs and expenses associated with the operation and maintenance
of (i) the Properties in accordance with the Annual Operating Projections,
Repairs and Equipment Estimate, and Building Estimate in accordance with the
provisions of the Management Agreement and (ii) the Subsidiary Inn in accordance
with the management agreement between the Subsidiary and the Manager;
(l) complete all items of Deferred Maintenance Work, ADA Compliance Work
and Capital and FF&E Expenditures as set forth in the Capital Budget for the
year ended December 31, 1996, attached hereto as Exhibit I, from funds deposited
in the Capital Expenditure and FF&E Reserve Account prior to December 31, 1996
and, to the extent necessary for such completion, from Excess Cash Flow;
(m) pay over to the Servicer for application pursuant to the applicable
Mortgage, Insurance Proceeds and Condemnation Proceeds;
(n) complete as promptly as possible all Deferred Maintenance Work, ADA
Compliance Work and Environmental Remediation Work (under the supervision of a
licensed architect or engineer, if the item of Work requires the expenditure of
at least, $50,000 or if such supervision is required by Legal Requirements), and
in a good and workmanlike manner, using materials comparable in quality to the
original installation and all items of Capital and FF&E Expenditures as set
forth in the Capital Budget for the year ending December 31, 1996 attached
hereto as Exhibit I and the then effective Annual Operating Projection, Building
Estimate, or Repairs and Equipment Estimate (as such terms are defined in the
Management Agreement) under the supervision of a licensed architect or engineer
or comparable professional, as appropriate, and in all events, complete all such
work as required under the Management Agreement and this Agreement and any
additional work that shall be necessary to maintain standards at least as high
as those standards apply generally to inns in the "Residence Inn by Marriott"
system. Any work to be completed in accordance with this provision shall
<PAGE>
be completed despite the insufficiency, if any, of funds in the Capital
Expenditure and FF&E Reserve Account to complete such work;
(o) promptly on request, furnish to the Lender copies of all material
contracts, bills of sale, statements, receipted vouchers and agreements in its
possession or control under which the Borrower claims title to any materials,
fixtures or articles of personal property used in construction at or operation
of the Properties.
(p) cause the Manager to operate the Properties as hotels open for
business under the Management Agreement and the Subsidiary Inn as a hotel open
for business under the management agreement between the Subsidiary and the
Manager;
(q) promptly on request, from time to time, deliver to the Lender a
statement setting forth all of the accounts maintained by the Borrower or the
Manager with respect to the Inns and the Properties, the purposes of such
accounts and the balances thereof;
(r) maintain or cause to be maintained each of the liquor licenses and all
other Permits in connection with the Inns and the Subsidiary Inn, in full force
and effect (or replace any thereof that may be cancelled or otherwise lapsed),
and observe and perform or cause to be observed or performed all of its
obligations thereunder;
(s) comply with and cause each Property and the Subsidiary Inn to be in
compliance with all Legal Requirements and all Insurance Requirements;
(t) give the Lender prompt notice upon the discovery, to the Best
Knowledge of the Borrower, of the occurrence of any Potential Event of Default
or Event of Default;
(u) give the Lender prompt notice of any Grant of any equity interest in
the General Partner or the partnership interest of the General Partner in the
Borrower or the acquisition by either MII or Host Marriott of more than 5% of
the limited partnership interests in the Borrower;
(v) ensure that the Manager pays all trade indebtedness within 60 days of
the date incurred except for such trade indebtedness that is subject to a bona
----
fide dispute;
- ----
<PAGE>
(w) ensure that the General Partner and the Managing Member shall have an
Independent Director acceptable to the Lender at all times, which may be the
same individual;
(x) provide to the Lender not less than (10) days prior to the execution
thereof, a true and complete copy of any (i) proposed amendment to the
Partnership Agreement of the Borrower (other than amendments of a ministerial
nature that will not have any adverse impact on the Lender, the value of the
Pledged Property, the validity or priority of the Lender's security interest
therein, or any of the Lender's rights or remedies under the Transaction
Documents) and (ii) proposed amendments to the Limited Liability Company
Agreement of the Subsidiary (other than amendments of a ministerial nature that
will not have an adverse impact on the Lender, the value of the Subsidiary Inn
or any of the obligations of the Borrower with respect to the Subsidiary under
this Loan Agreement;
(y) ensure that the representations and warranties contained in Section
5.1(a) and 5.1(af) remain true and accurate at all times with respect to itself
and the Subsidiary; and
(z) cause the Subsidiary (xx) to be insured in the manner required of a
Property pursuant to Schedule X of each of the Mortgages; and (yy) to hold and
apply any Insurance Proceeds or Condemnation Proceeds, as the case may be, in
accordance with the requirements of the Mortgages, specifically including
Paragraph 13 (with respect to Insurance Proceeds) and Paragraph 14 (with respect
- ------------ ------------
to Condemnation Proceeds) of the Mortgages; provided, however, that the
-------- -------
Subsidiary may cause the insurance with respect to this sub-clause to be issued
by insurance carrier(s) who would not be Qualified Insurers pursuant to Schedule
X of each of the Mortgages so long as each of such insurance carrier(s) is a
reputable carrier licensed to do business in the State of Louisiana.
Section V.3 Negative Covenants. So long as any portion of the Debt shall
------------------
remain outstanding as an obligation of the Borrower, except as expressly
permitted in this Agreement, each of the Borrower and the Subsidiary shall not,
without the prior consent of the Lender,
(a) purchase any real properties other than, in the case of the Borrower,
the Properties and, in the case of the Subsidiary, the Subsidiary Inn, have any
assets or liabilities other than assets or liabilities derived from or related
to in the case of the Borrower, the Properties and, in the case of the
Subsidiary, the Subsidiary Inn, or engage in any business or undertake any
activity
<PAGE>
other than as permitted herein, including, without limitation, the operation, as
a lessee or otherwise, of any property other than in the case of the Borrower,
the Properties, and, in the case of the Subsidiary, the Subsidiary Inn;
(b) have any subsidiaries other than the Subsidiary and the Managing
Member;
(c) amend, supplement or otherwise modify its partnership agreement, in
the case of the Borrower, and its Limited Liability Company Operating Agreement,
in the case of the Borrower, in any way that would cause a breach of the
covenants in this Agreement;
(d) Grant any of the Pledged Property other than as permitted in the
Transaction Documents and pursuant to the Permitted Exceptions; provided,
--------
however, that the Borrower may sell or otherwise dispose of personalty or
- -------
fixtures from time to time constituting portions of any Property so long as such
personalty or fixtures are replaced by personalty or fixtures of equal or better
quality to those sold or otherwise disposed of and except for immaterial amounts
of personalty disposed of in the ordinary course of business and items that need
not be replaced to continue the then existing level of quality of operation;
(e) dissolve, liquidate, merge or consolidate with any Person (and the
Borrower agrees that upon any dissolution, liquidation, merger or consolidation
in breach of this clause (v), the Pledged Property shall continue to be held
under and otherwise subject to the Lien of the Security Documents until the Debt
is paid in full);
(f) in the case of the Borrower permit the validity or effectiveness of
any of the Transaction Documents or, unless replaced with other necessary
agreements that do not have an Individual Material Advance Effect, any of the
Operational Agreements to be impaired or permit the Lien of the Security
Documents to be amended, hypothecated, subordinated, terminated or discharged or
permit any Liens to be created on or extend to or otherwise arise upon or burden
the Pledged Property or any part thereof or any interest therein or the proceeds
thereof (other than any Permitted Exceptions);
(g) take any action if such action is likely to interfere with the
enforcement of any rights of the Lender under the agreements or instruments
relating to any of the Pledged Property;
(h) in the case of the Borrower, incur any Indebtedness other than (a) the
Note, (b) Subordinate Debt, or (c) unsecured
<PAGE>
Indebtedness incurred (i) in connection with capitalized equipment leases as
permitted by Section 7.02(c) of the Management Agreement or (ii) to provide
working capital and to fund any shortfalls in the Debt Service Reserve Account,
in an aggregate amount, which when added to the outstanding balance of previous
indebtedness incurred and outstanding for such purpose, shall not exceed the
average amount of the Management Expenses for each Accounting Period during the
preceding full 13 Accounting Periods; provided, however, that in the case of
-------- -------
indebtedness incurred pursuant to clause (ii) the payee of such indebtedness
shall agree not to assert any remedies with respect to the non-payment thereof
so long as the Debt is outstanding or (d) Indebtedness covered by Purchase Money
Security Interests, in an aggregate amount not to exceed $1,000,000 outstanding
at any time;
(i) in the case of the Subsidiary, incur any Indebtedness other than in
connection with capitalized equipment leases as permitted by the management
agreement between the Subsidiary and the Manager;
(j) enter into any Equipment Lease other than solely with the supplier of
the furnishings, fixtures or equipment subject to such lease or sell any such
furnishings, fixtures, or equipment to any third party under a "Sale Leaseback"
arrangement;
(k) terminate, amend or modify any Operational Agreements if the same
would have an Individual Material Adverse Effect and, in the case of the
Subsidiary, terminate, amend or modify any agreement relating to the operation
of the Subsidiary Inn to which the Subsidiary is a party if the same would have
a Material Adverse Effect on the condition (financial or otherwise), business,
prospects, assets, liabilities, management, financial position or results of
operations of the Subsidiary Inn;
(l) (a) maintain, sponsor, contribute to or become obligated to
contribute to, or suffer or permit any ERISA Affiliate of the Borrower or the
Subsidiary to, maintain, sponsor, contribute to or become obligated to
contribute to, any Plan or any Welfare Plan or (b) permit the assets of the
Borrower or the Subsidiary to become "plan assets," whether by operation of law
or under regulations promulgated under ERISA;
(m) engage in any transactions with its Affiliates except, on terms at
least as favorable to the Borrower or the Subsidiary, as the case may be, as
those obtainable from unrelated third parties acting in their own best interests
and without duress and which,
<PAGE>
taken singly or in the aggregate, would not reasonably be expected to have an
Individual Material Adverse Effect;
(n) (A) cancel, release, terminate or surrender the Management Agreement
or permit any cancellation, release, termination or surrender thereof or (B)
amend, modify or alter the terms of the Management Agreement in any material
respect; provided, however, that the Borrower may cancel, release, terminate,
-------- -------
surrender, amend, modify or alter the Management Agreement in connection with
the replacement of the Manager if, before the date on which the Manager ceases
to be the Manager of any Inn, (i) the Borrower causes such Inn to come under
management by a nationally recognized hotel operator acceptable to the Lender,
in the exercise of its reasonable discretion, (ii) such Hotel continues to be
part of a comparable nationally recognized hotel system acceptable to the
Lender, and (iii) each of the Rating Agencies delivers to the Lender a Rating
Comfort Letter;
(o) take any action in furtherance of, or stating its consent to,
approval of, or acquiescence in, any of the acts set forth above;
(p) permit the General Partner or the Managing Member to amend its
Certificate of Incorporation (other than amendments of a ministerial nature that
will not have an adverse impact on the Lender, the value of any Property or any
of the obligations of the Borrower under this Loan Agreement); or
(q) In the case of the Borrower, resign or withdraw as a member of the
Subsidiary or apply for a decree of judicial disillusion of the Subsidiary under
Section 18-802 of the Delaware Limited Liability Company Act.
Section V.4 Further Assurances. The Borrower shall execute and
------------------
deliver or cause to be executed and delivered, all such additional instruments,
and do, or cause to be done, all such additional acts as (i) may be necessary or
proper, to carry out the purposes of this Agreement and to make subject to the
Lien of the Security Documents any property intended so to be subject,
including, without limitation, the delivery of such instruments and documents,
including confirmatory and corrective Mortgages, financing statements and
continuation statements under the Uniform Commercial Code of each applicable
jurisdiction, and the delivery of such updated mortgagee's title insurance
policies or endorsements (or commitments therefor) in favor of the Lender as may
be reasonably required to confirm and/or secure continued coverage under the
title policies issued to the Lender in respect
<PAGE>
of the Properties or the Mortgages, including payment of all fees and title
insurance premiums required to maintain such continuity of title insurance
coverage, (ii) may be necessary or proper to transfer to any assignee of the
Lender the estate, powers, instruments and funds held in trust hereunder and to
confirm the Security Documents, or (iii) the Lender may reasonably request in
connection with the Loan; provided, however, that such instruments shall contain
express unconditional exculpations of the Partners and the Borrower's officers,
employees or agents and any of their successors or assigns exculpating such
Persons from any liability arising under or by reason of their obligations,
covenants, representations, warranties and agreements contained in such
instruments, subject to the exceptions set forth in the definition of Non-
Recourse. If, in connection with the Securitization, the Borrower is required to
furnish newly issued title policies with respect to the Properties, the Lender
shall bear the cost thereof.
Section V.5 Representations, Warranties and Covenants of NACC. NACC
-------------------------------------------------
represents and warrants to, and agrees with the Borrower, that, as of the
Closing Date: (i) it has the power and authority to perform its obligations
under this Agreement and the other Transaction Documents, (ii) this Agreement
and the other Transaction Documents have been duly authorized, executed and
delivered by NACC, and constitute valid and legally binding instruments
enforceable against NACC in accordance with their respective terms, subject to
the effects of bankruptcy, insolvency, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally and general
equitable principles (whether considered in a proceeding in equity or at law),
and (iii) it has such knowledge, sophistication and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in the Note, is able to bear the economic risk of an investment in
the Note and is an "accredited investor" within the meaning of Section 2(15) of
the Securities Act and (iv) no part of the Loan shall be deemed "plan assets"
within the meaning of ERISA.
Section V.6 Other.
-----
(a Neither the Borrower nor any Person acting on behalf of the Borrower
has dealt with any broker or any other Person entitled to a fee or commission in
connection with the Loan and the Borrower agrees to indemnify and hold NACC and
its Affiliates harmless from and against any claims or commissions, finder's fee
and other payments, no matter how described, and against any and all
<PAGE>
costs and expenses including, without limitation, attorneys' fees relating to
any such claim.
(b Notwithstanding anything in the Management Agreement or the
management agreement between the Subsidiary and the Manager to the contrary, the
Borrower, the Lender, the Servicer, and the Trustee may disclose information
regarding such agreements and the operation of the Inns and the Subsidiary Inn,
and provide copies of such agreements and any financial statements or reports
delivered by the Manager pursuant to such Agreements or the requirements of
Section 5.2(d) to the Lender, the Trustee and the Servicer or any holder of the
Securities, and any counsel to or agents, officers, employees, and
representatives of any such Person, and may disclose and describe the terms
hereof and thereof in any offering memorandum, prospectus, or registration
statement or other filing required under applicable law, provided, however, that
-------- -------
(i) the Borrower, the Servicer, the Lender, and the Trustee shall implement
procedures to restrict the dissemination of information to the holders of the
Loan or the Securities concerning revenues per available rooms, Gross Revenues,
Operating Profit, and occupancy and room rate statistics of individual Inns to
the extent reasonably practicable, giving due regard to the desire of holders of
the Securities to have access to such information and to the requirements of
applicable securities laws, and (ii) any disclosure of information in any
offering memorandum, prospectus, or registration statement or other filing
required under applicable law or to any prospective holder of the Securities
concerning revenues per available rooms, Gross Revenues, Operating Profit,
occupancy and room rate statistics of individual Inns shall be made in a format
with no identification as to which information applies to which specific Inn,
but which may refer to the Inns on a Property by Property basis under which each
Inn is identified by a code and the Inns are grouped by the following regions:
Northern, Carolinas, Other Southeastern, Florida, California, and Southwestern
(e.g. an Inn may be identified as "Northern -1"). Notwithstanding the foregoing,
any such offering memorandum, prospectus, registration or other filing required
under applicable law or given to any prospective holder of the Securities, may
include a report dated December 31, 1995 which identifies each Inn (without
coding) by specific location, number of rooms, date of opening, appraised value,
average occupancy, average daily room rate, and revenue per available rooms, and
such other information as is required by applicable securities laws.
(c (i The Borrower shall promptly notify the Lender in writing
of any Triggering Event.
<PAGE>
For the purpose of this subsection (c), "Triggering Event" means the
receipt by the Borrower of notice of any claim, investigation, proceeding or
litigation from any third party with respect to the Subsidiary Inn relating to
or arising from any Environmental Condition (as such term is defined in the
Environmental Indemnity Agreement) with respect to the Subsidiary Inn under any
Environmental Law, including, without limitation, by any Governmental Authority
in which the Borrower or the Subsidiary is identified as a Potentially
Responsible Party, as defined by Environmental Laws, with respect to the
Subsidiary Inn.
If a Triggering Event occurs, the Borrower shall provide notice of such
Triggering Event within five Business Days of the occurrence thereof and
thereafter, written reports to the Lender on a quarterly basis ("Quarterly
---------
Report"). Each Quarterly Report shall contain a detailed description of the
- ------
Triggering Event, including, without limitation, copies of notices, reports,
correspondence and other written material received by or on behalf of the
Borrower, a list of other parties involved, the status of the matter, the steps
taken by the Borrower to respond to the Governmental Authority, a financial plan
and such other information as the Lender reasonably determines to be necessary.
The financial plan shall include an estimate of Borrower's liability, if any, to
the Governmental Authority in connection with the Triggering Event and a
proposed budget to demonstrate how the Borrower intends to satisfy any such
liability. In addition, the Borrower shall promptly provide to the Lender notice
of any hearing or any other preceding with respect to the foregoing.
If there is a material change in the litigation or other proceeding as
described in the Quarterly Report, the Borrower shall provide an immediate
written update to the Lender and a revised financial plan.
(ii If the Borrower incurs any liability in connection with the
foregoing, it shall satisfy such liability by applying or causing to be applied
the following sources of funds in the order indicated: (a) first, the Operating
Profit of the Subsidiary (as such term is defined in the management agreement
between the Manager and the Subsidiary) after deduction of (y) reasonable
reserves established by the Subsidiary in connection with operation of the
Subsidiary Inn and (z) Contingent Management Fees (Base) and Contingent
Management Fees (IMF) to the Manager pursuant to such management agreement, (b)
next, the net sales proceeds, if any, from the sale of the Subsidiary Inn (which
sale the Borrower shall cause the Subsidiary to pursue in good faith), (c) next,
the Bossier Reserve Account pursuant to the provisions of Section 2.7,
<PAGE>
(d) next, an amount equal to the difference between (i) the Operating Profit of
the Borrower after deduction of (y) Contingent Management Fees (Base) and
Contingent Management Fees (IMF), and Manager Loans repaid, to the Manager
pursuant to the Management Agreement and (z) the Borrower's Administrative
Expenses (as such term is defined in the Management Agreement) and (ii) the Debt
then due and payable, so long as the Debt Service Coverage Ratio as of the date
such application is made is not less than 1.25:1, and (e) next, the net sales
proceeds, if any, from the sale of one or more of the Properties. If the
Subsidiary Inn or any direct or indirect membership interest of the Borrower in
the Subsidiary or any interest of the Borrower in the Managing Member is sold
prior to such time as the proceeds of such sale are required for the purpose set
forth in this clause (ii), the net sales proceeds from such sale shall be
maintained by the Servicer in a separate deposit account to be used for such
purpose until such time as the Lender determines, in the exercise of its sole
discretion, that any such liability is not likely to be incurred by the
Borrower.
(d) The Borrower shall cause the Subsidiary to implement the procedures
described in Exhibit K within the time frames set forth on such Exhibit. The
---------
Borrower has caused the Subsidiary to establish an environmental reserve account
with the Servicer in the aggregate amount of $41,875 to implement such
procedures. The Borrower may request the Servicer to disburse amounts in such
account to it upon the submission to the Servicer of invoices in the amount
requested for work relating to such procedures.
ARTICLE VI
SECURITIZATION
Section VI.1 Securitization. The Borrower and the General Partner shall
--------------
use commercially reasonable best efforts to cooperate with NACC in its
activities in connection with the sale of the Loan as a whole loan or any
securitization of the Loan (the "Securitization"), including obtaining ratings
--------------
by the Rating Agencies. The Securitization will involve the issuance of rated
single- or multi-class securities secured by or evidencing ownership interests
in the Transaction Documents (the "Securities"). Such cooperation shall include,
----------
without limitation, the obligation to:
(a maintain the ownership of the Properties in an entity that permits the
Borrower to comply with its obligations under clauses (w) and (y) of Section
5.2;
<PAGE>
(b to the extent permitted under its existing partnership agreement
without the consent of its limited partners, structure and maintain the
organizational, operational and financial affairs of the Borrower and the
General Partner, (collectively, the "Entities") to enable its counsel to render
--------
a reasoned opinion if requested by the Rating Agencies in form and substance
customary or required for rating the Securities (the "Substantive Consolidation
-------------------------
Opinion") that upon a petition for bankruptcy under the United States Bankruptcy
- --------
Code, neither Host Marriott as a debtor in possession nor its bankruptcy
trustees nor creditors should cause a court to order the substantive
consolidation of the assets and liabilities of the General Partner or the
Borrower with those of Host Marriott, which counsel and which opinion shall be
satisfactory to NACC and the Rating Agencies;
(c provide such financial and other information with respect to each
Property, the Borrower, the Subsidiary and, if such information is reasonably
available to the Borrower, the Manager, as may be requested by the Rating
Agencies or as may be reasonably requested by NACC, including, without
limitation, audits or agreed-upon procedures of operating cash flow and Net
Operating Income on an individual and aggregate Property basis, occupancy
statistics, and average rents and quarterly and annual financial statements for
each Property (reviewed and in the case of annual financial statements audited)
by a firm of certified public accountants acceptable to NACC and the Rating
Agencies to the extent customarily given in similar transactions;
(d prepare and deliver such agreements and instruments relating to the
Note, the Securities, the Properties and the Entities, including (A) agreements
to indemnify the Rating Agencies, NACC and any servicer or trustee, to the
extent customarily given in commercial mortgage-backed securities transactions,
and (B) amendments of any of the Transaction Documents" that are necessary to
effect the Securitization, in form and scope satisfactory to the Rating Agencies
and reasonably satisfactory to NACC;
(e perform or permit to be performed such appraisals, surveys, site
inspections, market studies, current environmental reviews and reports (Phase
I's, including, without limitation, testing for asbestos, lead paint or radon
gas and Phase II's and other environmental investigations recommended by
environmental consultants), structural engineering reports (which shall include
an analysis of requirements for deferred maintenance and ongoing capital
expenditure and furniture, fixtures and equipment reserve
<PAGE>
requirements), reviews of property, casualty, business interruption, earthquake,
flood, liability and title insurance and other due diligence items customarily
requested by nationally recognized underwriters in connection with the
origination and securitization of comparably sized commercial real estate loans
or by the Rating Agencies in connection with rating the Loan or the Securities;
provided, however, NACC shall use its best efforts to limit the circumstances
- -------- -------
under which the Borrower or the General Partner will be required to duplicate
its efforts or third party costs in complying with its obligations under this
clause (e);
(f) provide business plans and budgets relating to the Properties as may
be requested by the Rating Agencies;
(g) cause counsel to render opinions (which may be reasoned opinions) with
respect to the Properties, the Entities, and the Transaction Documents as to
bankruptcy remoteness and other matters customary in securitization
transactions, which may be requested by the Rating Agencies in form and
substance customary or required for Rating the Securities which counsel and
which opinion shall be satisfactory to the Rating Agencies and reasonably
satisfactory to NACC; provided, however, that if the Rating Agencies request
-------- -------
opinions subsequent to the Closing Date in connection with the Securitization
that are materially different from the opinions delivered on the Closing Date,
the Lender shall bear the fees and expenses incurred by counsel in rendering
such opinions
(h) make such representations and warranties with respect to the
Properties, the Entities, and the Transaction Documents as are customary in
securitization transactions and as may be requested by the Rating Agencies and
reasonably requested by NACC and consistent with the facts covered by such
representations and warranties as they exist on the date thereof, including the
representations and warranties made in the Transaction Documents;
(i) cooperate with the Lender in providing to the Rating Agencies such
information as is customarily provided in connection with annual reviews
conducted in commercial mortgage backed securities transactions similar to the
Securitization;
(j) cooperate with NACC in the preparation, at NACC's cost, of a private
placement memorandum, prospectus, prospectus supplement or other disclosure
document to be used by NSI or any of its Affiliates to privately place or
publicly distribute the Loan as a whole loan or the Securities in a manner and
to the extent that the same satisfy the requirements of the Securities Act and
applicable state securities laws; and
<PAGE>
(k) subject to the provisions of Section 5.6(B), permit NACC to provide
to the Rating Agencies, potential investors in the Securities and others as may
be required to effect the Securitization or the sale of the Loan as a whole
loan, the information provided to NACC by the Borrower and the Manager and their
respective Affiliates in connection with the transactions contemplated by this
Agreement.
Any and all due diligence materials (including without limitation
appraisals, engineering reports and environmental reports) shall be addressed to
and shall run to the benefit of NACC and its successors and assigns, the Rating
Agencies and the Borrower, and shall, upon delivery, become the property of
NACC, its successors and assigns and the Borrower.
ARTICLE VII
PAYMENT OF FEES AND EXPENSES; INDEMNIFICATION
Section VII.1 Fees and Expenses.
-----------------
(a) The Borrower shall pay or reimburse NACC and after the Securitization,
NACC and the Lender, on demand, without set-off, withholding or deduction, for
the payment of all of the reasonable fees, costs and expenses incurred by NACC
in connection with the underwriting, negotiation, documentation and closing of
the Loan, including, without limitation, the finder's fee due to Nomura
Securities International, Inc. ("NSI") as provided for in that certain Finder's
---
Fee Agreement, dated December 8, 1995, between the Borrower and NSI, and the
fees, costs and expenses of the following:
(i) title insurance, transfer taxes (if any), mortgage taxes and
recording fees;
(ii) counsel and local counsel to the Borrower;
(iii) counsel and local counsel to NACC, which shall be reasonable;
(iv) due diligence activities of NACC including, without limitation,
auditors, lien searches, surveys, appraisals, environmental
reports, engineering reports, insurance reviews and site
inspections;
<PAGE>
(v) bank charges relating to the operation of the Lockbox Account,
the Capital Expenditure and FF&E Reserve Account, the Tax and
Insurance Account, the Cash Collateral Account, and the
Operating Account; and
(vi) initial and ongoing activity of any special servicer incurred
as a result of an Event of Default; and
(vii) the Rating Agencies (for the annual ratings reviews).
(b) The Lender shall pay the initial and regular ongoing fees of the
Servicer and the Trustee.
(c) The Borrower has provided $400,000 to NACC for deposit in an interest
bearing account (the "Expense Deposit") for the payment of the fees, costs and
---------------
expenses payable by the Borrower described in Section 7.1(a). If any portion of
the Expense Deposit remains after payment of such fees, costs and expenses, NACC
shall pay such portion to the Borrower within 30 days after the closing of the
Loan. The establishment of the Expense Deposit shall not limit the Borrower's
obligations to pay the fees, costs and expenses described in Section 7.1(a).
Section VII.2 Indemnification.
---------------
(a) The Borrower, for itself and all those claiming under or through the
Borrower, to the fullest extent permitted by law, hereby releases and shall
defend, hold harmless and indemnify NACC and after the Securitization, NACC and
the Lender, and its respective directors, officers, agents and employees,
(together, the "Indemnified Parties") from and against any and all liabilities,
-------------------
claims, charges, losses, expenses or damages of any kind or nature, including
reasonable attorneys' fees and disbursements, which may arise in connection with
(i) the performance or non-performance by the Borrower of any of the Transaction
Documents, or the operation of the Properties by the Borrower and (ii) any
breach or failure by the Borrower to comply with any representation, warranty or
covenant made by the Borrower herein or in any other document furnished by the
Borrower in connection with the transactions contemplated by the Transaction
Documents, except to the extent caused by the willful acts or omissions,the
gross negligence or bad faith of any Indemnified Party. It is understood that if
the Borrower performs its obligations set forth in the Transaction Documents
strictly in
<PAGE>
accordance with the terms and provisions thereof, the provisions of clause (i)
of the foregoing sentence in so far as they relate to the "performance... by the
Borrower of any of the Transaction Documents, shall not be applicable. The
Borrower shall appear in and defend any Action that might in any way in the good
faith judgment of the Lender affect the value of the Properties, the title to
the Properties, the priority of the Mortgages or the rights and powers of the
Lender. Any sums due under this Section 7.2 shall be payable by the Borrower
within 10 days of demand therefor with evidence of the amount due and, if not
paid within such 10-day period, shall bear interest from the date of demand to
the date of payment at the Default Rate (as defined in the Note). The Borrower
shall pay the cost of suit, cost of evidence of title and reasonable attorneys'
fees and disbursements in any Action brought by the Lender to foreclose any
Mortgage, including trial and any appeal with respect to any such Action.
(b The Borrower hereby indemnifies and holds NACC and its controlling
persons and Affiliates, including, without limitation, NSI, harmless against all
costs, expenses and damages incurred by NACC and its controlling persons and
affiliates (including, without limitation, all liabilities under all applicable
federal and state securities laws) as a direct result of any untrue statement of
a material fact contained in the offering documents used in connection with the
Securitization based on information provided by the Borrower or the Manager,
which describes the Borrower or the Manager, the Properties (and the management
thereof) or any aspect of the Loan or the parties directly involved therein, or
as a result of any untrue statement of a material fact in any of the financial
statements of the Borrower or the Manager incorporated into such offering
documents or the failure to include in such financial statements or in such
offering documents any material fact relating to the Borrower or the Manager,
the Properties (and the management thereof) and any aspect of the Loan necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided that the Borrower shall have had
an opportunity to review, comment on and approve the relevant portions of such
offering documents. The Borrower shall act reasonably and promptly in connection
with its approval of the relevant portions of the offering documents. The
Borrower shall not indemnify NACC for any cost, expense or damage incurred as a
result of the inclusion of any erroneous or misleading information in such
offering documents, or the omission of material information from the offering
documents, provided that the Borrower or its counsel shall have previously
indicated to NACC or its counsel the erroneous or misleading nature of such
information or the omission of material information, as the case
<PAGE>
may be. At the time of the use of such offering documents, NACC shall execute
and deliver to the Borrower an instrument (in form and substance reasonably
satisfactory to the Borrower) indemnifying and holding each of the Borrower, the
General Partner (and the officers and directors thereof), and its agents and
employees harmless against all costs, expenses and damages (other than costs and
expenses specifically agreed by the Borrower to be borne by it) incurred by them
(including, without limitation, all liabilities under all applicable federal and
state securities laws) caused by and directly relating to the offering described
in such Offering Documents; provided, however, that such indemnification shall
not apply if any such costs, expenses or damages arise out of or are based upon
an untrue statement of a material fact or an omission to state a material fact
in such offering documents or in the Borrower's financial statements for which
the Borrower is providing indemnification as provided above.
(c) The obligations of the Borrower under this Section 7.2 shall survive
termination of this Agreement.
ARTICLE VIII
IMMUNITY
Section VIII.1 Partners, Employees and Agents of the Borrower Immune from
----------------------------------------------------------
Liability. Notwithstanding anything to the contrary herein, including, without
- ---------
limitation, Article Seven, the obligations under each Transaction Document shall
be Non-Recourse.
ARTICLE IX
MISCELLANEOUS PROVISIONS
Section IX.1 Notices. All notices, requests, demands, consents, reports or
-------
other communications, including, without limitation, a tender of a cure pursuant
to Section 4.1B, to or upon the respective parties hereto shall be in writing
and be deemed to have been duly given or made when received, addressed to the
party to which such notice, request, demand or other communication is being
given at its address set forth below, or at such other address as any of the
parties hereto may hereafter notify the others by notice given hereunder:
If to NACC:
<PAGE>
Nomura Asset Capital Corporation
2 World Financial Center, Building B
New York, New York 10281
Attention: Daniel S. Abrams, Director
Telecopier: (212) 667-1022
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attention: Robert I. Fisher, Esq.
Telecopier: (212) 940-8776
and:
Nomura Asset Capital Corporation
2 World Financial Center, Building B
New York, New York 10281
Attention: Sheryl McAfee
Telecopier: (212) 667-1206
If to the Borrower:
Marriott Residence Inn II Limited Partnership
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Law Department 923/Assistant General Counsel,
Asset Management
Telecopier: (301) 380-6332
With a copy to:
Marriott Residence Inn II Limited Partnership
c/o Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Lodging Partnerships Department 908
Telecopier: (301) 380-8260
Evidence of such receipt shall include personal delivery, electronic
confirmation (hard copy to be sent by regular mail) and the failure to accept a
communication sent by registered or certified U.S. mail, postage prepaid.
<PAGE>
Section IX.2 Benefit of Agreement. This Agreement shall be binding upon,
--------------------
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided, however, that the Borrower may not
assign or transfer any of its rights or obligations hereunder without the
consent of the Lender which may be withheld in the sole discretion of the
Lender. Except as expressly provided otherwise in the Agreement, any such
assignment or transfer shall not release the Borrower from any obligations or
liabilities hereunder. The Lender's interests under the Transaction Documents
shall be freely assignable and transferrable. No party other than the parties
hereto and their permitted assigns shall be deemed to have any benefits or
obligations under this Agreement.
Section IX.3 Governing Law. This Agreement and the rights and obligations
-------------
of the parties under the Transaction Documents (except for the Mortgages and the
assignments of leases, rents and profits, dated the Closing Date, from the
Borrower to the Lender which shall be governed by the jurisdiction in which the
Property covered thereby is located) shall be governed by the internal laws of
the State of New York.
Section IX.4 Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument.
Section IX.5 Index, Descriptive Headings. The Index to this Agreement and
---------------------------
the descriptive headings of the several Sections and Articles of this Agreement
are inserted for convenience only and shall not in any way affect the meaning or
construction of any provision of this Agreement. In the preparation of the
Transaction Documents indistinguishable contributions were made by
representatives of both NACC and the Borrower, and each of the Lender and the
Borrower waives any and all rights, either at law or in equity, to have the
provisions of any Transaction Document interpreted in favor of one over the
other based on a claim that representatives of one or the other were the
principal draftsmen thereof.
<PAGE>
Section IX.6 Amendment or Waiver; Integration. No provision of this
--------------------------------
Agreement may be amended, changed, waived, discharged or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement of
the amendment, change, waiver, discharge or termination is sought. This
Agreement and the other Transaction Documents set forth the entire agreement and
understanding of the parties with respect to the subject matter hereof and
thereof, and supersede any and all prior agreements and understandings of the
parties hereto with respect to the subject matter hereof and thereof including,
without limitation, that certain Finder's Fee Agreement and Commitment Letter,
each of which is dated December 8, 1995 and is between the Borrower and NACC or
NSI, which prior agreements and understandings are terminated in all respects.
Section IX.7 Survival of Representations and Warranties; Reliance. All
----------------------------------------------------
representations and warranties contained in this Agreement and the
indemnification provisions hereof shall survive the execution and delivery of
this Agreement, the making of the Loan and shall be considered to have been
relied upon by the Lender regardless of any investigation made by or on behalf
of it.
Section IX.8 Returned Payments. If after receipt of any payment of all
-----------------
or any part of the Debt, the Lender is for any reason compelled to surrender
such payment to any Person because such payment is determined to be void or
voidable as a preference, an impermissible set-off, a diversion of trust funds
or for any other reason, this Agreement shall continue in full force, and the
Borrower shall be liable to, and shall indemnify and hold the Lender harmless
for, the amount of such payment surrendered until the Lender shall have been
finally and irrevocably paid in full. The provisions of the foregoing sentence
shall be and remain effective notwithstanding any contrary action which may have
been taken by the Lender in reliance upon such payment, and any such contrary
action so taken shall be without prejudice to the Lender's rights under this
Agreement and shall be deemed to have been conditioned upon such payment having
become final and irrevocable.
SECTION IX.9 JURISDICTION AND SERVICE; WAIVER OF JURY TRIAL. EACH OF THE
----------------------------------------------
GENERAL PARTNER AND THE BORROWER HEREBY (I) IRREVOCABLY CONSENTS AND SUBMITS
ITSELF AND ACKNOWLEDGES AND RECOGNIZES THE JURISDICTION OF THE COURTS OF THE
STATE OF NEW YORK LOCATED IN NEW YORK COUNTY AND THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR PURPOSES OF ANY ACTION
<PAGE>
ARISING OUT OF, UNDER, OR IN CONNECTION WITH, RELATING TO, OR BASED UPON ANY
TRANSACTION DOCUMENT OR THE SUBJECT MATTER THEREOF, (II) AGREES THAT SUCH COURTS
SHALL BE THE SOLE AND EXCLUSIVE COURTS AND FORUMS FOR THE PURPOSE OF ANY SUCH
ACTION AND (III) WAIVES AND AGREES NOT TO ASSERT, AS A DEFENSE OR OTHERWISE, IN
ANY SUCH ACTION, ANY CLAIM THAT SUCH COURTS DO NOT HAVE JURISDICTION OVER IT OR
THAT SUCH ACTION IS BROUGHT IN AN INCONVENIENT FORUM; PROVIDED, HOWEVER, THAT
NOTHING CONTAINED HEREIN SHALL LIMIT, IN ANY MANNER, THE RIGHT OF NACC TO
INSTITUTE OR TAKE ANY ACTION IN ANY COURT IN ANY JURISDICTION FOR THE PURPOSE OF
PROTECTING, PRESERVING OR REALIZING UPON ANY COLLATERAL, IF ANY, SECURING THE
DEBT OR ENFORCING ANY JUDGMENT OBTAINED BY IT IN CONNECTION WITH ANY TRANSACTION
DOCUMENT OR THE SUBJECT MATTER THEREOF. EACH OF THE GENERAL PARTNER, THE
BORROWER AND NACC HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION
ARISING OUT OF, UNDER, OR IN CONNECTION WITH, RELATING TO, OR BASED UPON ANY
TRANSACTION DOCUMENT OR THE SUBJECT MATTER THEREOF, AND AGREES THAT PROCESS IN
ANY SUCH ACTION, IN ADDITION TO ANY OTHER METHOD PERMITTED BY LAW, MAY BE SERVED
UPON IT BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO
THE GENERAL PARTNER OR THE BORROWER OR NACC AT THE ADDRESS SET FORTH IN SECTION
9.1 OR AT SUCH OTHER ADDRESS AS THE GENERAL PARTNER OR THE BORROWER OR NACC MAY
DESIGNATE BY NOTICE, AND SUCH SERVICE SHALL BE DEEMED EFFECTIVE AS IF PERSONAL
SERVICE HAD BEEN MADE UPON IT WITHIN NEW YORK COUNTY.
Section IX.10 Enforceability. Any provision of this Agreement which is
--------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the Borrower hereby waives any provision of law which renders
any provision hereof prohibited or unenforceable in any respect.
Section IX.11 Conflicting Terms. In the event of any direct conflict
-----------------
between any provision of this Agreement and any provision of any other
Transaction Document, this Agreement shall govern; provided, however, that (a)
notwithstanding the foregoing, the remedies contained in the Mortgages and any
other Transaction Document shall govern in the event of any direct conflict with
any remedy contained in this Agreement, and (b) the parties intend that the
terms and provisions of each of the Transaction Documents be given full effect,
and, accordingly, the provisions of the other
<PAGE>
Transaction Documents, to the fullest extent possible, shall be construed to be
additional and supplementary to, and not in conflict with or in derogation of,
the provisions of this Agreement.
Section IX.12 Relationship of Parties. The relationship of
-----------------------
the Borrower to the Lender is strictly and solely that of borrower and lender
and mortgagor and mortgagee and nothing contained in any Transaction Document
is intended to create, or shall in any event or under any circumstance be
construed as creating, a partnership, joint venture, tenancy-in-common, joint
tenancy or other relationship of any nature whatsoever between the Borrower and
the Lender other than as borrower and lender and mortgagor and mortgagee. The
Borrower acknowledges that (a) NACC engages in the business of real estate
financings and other real estate transactions and investments which may be
viewed as adverse to or competitive with the business of the Borrower or its
Affiliates, (b) it is represented by competent counsel and has consulted counsel
before executing this Agreement and (c) it shall rely solely on its own
judgement and advisors in entering into the transactions contemplated hereby
without relying in any manner on any statements, representations or
recommendations of NACC or any Affiliate of NACC except as set forth in Section
5.6.
(Signature page follows)
<PAGE>
IN WITNESS WHEREOF, each of the Borrower and NACC has caused this Agreement to
be signed and delivered, all as of the day and year first above written.
NOMURA ASSET CAPITAL CORPORATION
By:
---------------------------------
Daniel S. Abrams
Director
MARRIOTT RESIDENCE INN II LIMITED
PARTNERSHIP
By: Marriott RIBM Two Corporation,
General Partner
By:
-----------------------------
Bruce D. Wardinski
Vice President
65
<PAGE>
EXHIBIT 10.3
EXHIBIT B
CASH MANAGEMENT PROCEDURES
Capitalized terms used in this Exhibit and not defined herein shall
have the meanings ascribed to them in Schedule I hereto and if not defined
therein, in the Management Agreement.
1. Deposit of Funds into Accounts: Phase--In of Procedures
1.1 All Gross Revenues from and after the Closing Date (other
than any Gross Revenues deposited into the Local Accounts) shall be deposited
into the Manager's Account within one full Business Day after receipt thereof
and identification as belonging to the Borrower (or, at such time as the
procedures described in Section 7 hereof become applicable, into the Lockbox
Account), other than customary amounts of petty cash held at each Property, and
shall be applied only for such purposes and in such manner as set forth in this
Exhibit. All Condemnation Proceeds and Insurance Proceeds received after the
Closing Date shall be deposited in the accounts specified herein and applied for
such purposes and in such manner as set forth in this Exhibit.
1.2 The obligations of the Borrower and the Manager to follow
the procedures set forth in this Exhibit shall be phased in during the period of
up to 120 days after the Closing Date (the "Phase-In Period") as follows:
---------------
(i) Within fifteen Business Days after the Closing
Date, the Manager shall establish a segregated account in the name of
the Manager or MII for which separate accounting of deposits and
withdrawals shall be maintained (such account, including any
supplements thereto or replacements thereof, the "Manager's Account").
-----------------
The Manager's Account shall be established and maintained either as an
Eligible Account or, for so long as the central cash management system
of MII is maintained at Mellon Bank, as a segregated account at Mellon
Bank. The Manager's Account may be a subaccount of MII's cash
management system (the "Master Account") maintained for various hotels
--------------
and other properties managed by MII and its subsidiaries.
(ii) From and after the Closing Date, the Manager
will notify third parties from whom the Borrower has accounts
receivable, including, without limitation, credit card companies (but
not including guests who pay by cash or check at an Inn) ("Third Party
-----------
Payors") in their billing statements or otherwise that all payments
------
owing to the Borrower thereafter should be sent either to the Manager's
Account (unless and until such payments are required to be sent to the
Lockbox Account pursuant to Section 7 below) or to the Manager for
deposit in a Local Account; provided, however, that credit card
-------- -------
companies will be notified that all payments should be sent only to the
Manager's Account. With regard to those Third Party Payors for which it
is not feasible to redirect their next scheduled payments to the
Manager's Account, including certain credit card companies, the Manager
will work diligently with such Third Party Payors to enable them to
send their payments to the Manager's Account at the earliest reasonably
practicable date but not later than the end of the 120 day period
referred to above. Within 60 days after the Closing Date, the Manager
will deliver a report to the Borrower, which shall provide copies
thereof to the Lender or, if the Securitization has been effected, to
NACC, the Lender and each Rating Agency, regarding the status of the
transition to the new cash management procedures, and upon the request
of the Lender or, if the Securitization has been effected, the Lender
or a Rating Agency, shall provide up to two additional reports (no more
frequently than 30 days after the prior report) regarding the status
thereof.
<PAGE>
(iii) The Manager will cause all Gross Revenues
received by the Manager to be deposited within one Business Day after
receipt thereof and identification as belonging to the Borrower, into
the Manager's Account or into a Local Account in accordance with the
procedures described in Section 3 below. Notwithstanding the foregoing,
during the Phase-In Period, Gross Revenues received in the Master
Account may be retained there and applied to the payment of operating
expenses and remittance to the Borrower, as described in Section 2
hereof. Following the Phase-In Period, Gross Revenues received in the
Master Account will be deposited into the Manager's Account within one
full Business Day after the receipt thereof and identification as
belonging to the Borrower.
2. Manager's Account; Payments of Operating Expenses;
Remittance to the Borrower
2.1 Subject to the special provisions applicable during the
Phase-In Period, as set forth in Section 1.2 hereof, the Manager shall deposit
into the Manager's Account, within one full Business Day after the receipt
thereof and identification as belonging to the Borrower, all Gross Revenues
received by the Manager, other than Gross Revenues deposited in a Local Account
and customary amounts of petty cash held at each Property, and shall direct all
Third Party Payors (other than guests who pay by cash or check at an Inn) to
send their payments with respect to the Borrower directly to the Manager's
Account or to the Manager for deposit into a Local Account. As noted above,
payments from credit card companies will be sent only to the Manager's Account.
2.2 The Manager's Account will be controlled by the Manager or
MII. Funds on deposit in the Manager's Account shall not be commingled with
funds related to any other properties owned or managed by the Manager or any
Person other than the Borrower. Until such time as the procedures described in
Section 7 hereof become applicable, the Manager will be free, at any time and
from time to time, to transfer funds from the Manager's Account into the Master
Account in accordance with the Manager's and MII's customary cash management
practices and commingle such transferred funds with other funds held in the
Master Account.
2.3 From and after the Closing Date, and until such time as
the procedures described in Section 7 hereof become applicable, the Manager
shall make disbursements on behalf of the Borrower from funds on deposit in the
Manager's Account, the Local Accounts and the Master Account, or from petty cash
at the Properties, to pay Management Expenses (i.e. "Deductions," as such term
----------
is defined in the Management Agreement) and to make deposits into the Capital
Expenditure and FF&E Reserve Account.
2.4 Unless Section 6.4 applies, commencing with the Accounting
Period that begins on March 23, 1996, on the last Business Day of the third week
of each Accounting Period (each such day, an "Operating Profit Payment Date")
-----------------------------
the Manager will transfer cash (with the first of such transfers to take place
on April 11, 1996) from the Manager's Account or the Master Account, by federal
wire, automated clearing house funds, or other transfer of next-day available
funds, to the Cash Collateral Account; provided, however, that any such transfer
-------- -------
made within five days prior to a Debt Service Payment Date shall be made by
federal wire of immediately available funds. The amount of cash transferred on
such Business Day will be equal to the Operating Profit for the immediately
preceding Accounting Period. On or before the last Business Day of the fourth
week in each Accounting Period, the Borrower will provide to the Lender a
statement setting forth the calculation for the amount of Operating Profit
transferred to the Cash Collateral Account with respect to the immediately
preceding Accounting Period and certifying that the correct amount has been
transferred.
2
<PAGE>
3. Local Accounts
The Manager shall be entitled to establish, from time to time,
segregated accounts in the name of the Manager or the name under which an
individual Property operates, which are not required to be Eligible Accounts, at
financial institutions located in the vicinity of individual Properties or the
Manager's principal business offices (each a "Local Account"), solely for the
-------------
purpose of (i) receiving deposits of Gross Revenues, other than payments from
credit card companies, received by the Manager and (ii) paying certain operating
expenses for such Properties that, in the ordinary course of the Manager's
business, are customarily paid from such Local Accounts. Funds on deposit in the
Local Accounts shall not be commingled with funds related to any other
properties owned or managed by the Manager or any Person other than the
Borrower. At least twice each week, the Manager shall transfer, by federal wire,
automated clearing house funds, or other transfer of next-day available funds,
into the Manager's Account or, if the procedures described in Section 7 hereof
are then applicable, into the Lockbox Account, all available funds held on
deposit in each Local Account, less amounts required to pay Property operating
expenses previously incurred that in the ordinary course of the Manager's
business are customarily paid from such Local Accounts, not previously reserved
for, plus an amount to be held as petty cash or as a reserve for operating
expenses not yet incurred that are customarily paid out of the Local Accounts;
provided, however, that the aggregate amount of such petty cash and reserves for
- -------- -------
the Local Account for each Property shall not exceed $25,000 (subject to
adjustment at the end of each Fiscal Year for increases in the CPI since the end
of the preceding Fiscal Year) and for all of the Local Accounts shall not exceed
$375,000 (subject to such adjustment and reduction by $15,000 for each Property
that is sold or otherwise released from the applicable Mortgage) after giving
effect to all transfers made from the Local Accounts on any day.
4. Cash Collateral Account
4.1 On or before the Closing Date, the Servicer shall
establish and maintain one or more segregated accounts in the name of the
Servicer on behalf of the Lender (collectively the "Cash Collateral Account"),
-----------------------
which must be Eligible Accounts, into which all amounts received by the Servicer
from the Manager's Account, the Master Account, the Operating Account, and the
Lockbox Account, as applicable, and all other funds of the Borrower (other than
funds held in the Capital Expenditure and FF&E Reserve Account) held as security
for the Loan shall be deposited.
4.2 From time to time, the Servicer will establish one or more
segregated subaccounts of the Cash Collateral Account into which (a) Insurance
Proceeds held by the Lender in accordance with Section 13 of the Mortgages, the
text of which is set forth in Schedule II hereto, shall be deposited, (b)
certain payments of Condemnation Proceeds held by the Lender pursuant to Section
14 of the Mortgages, the text of which is set forth in Schedule II hereto, shall
be deposited, (c) the tax and insurance escrows required by Section 6 hereof
shall be deposited and (d) the amounts in the Borrower Debt Service Reserve
Account required by the provisions of these Cash Management Procedures shall be
deposited. All Condemnation Proceeds and Insurance Proceeds (except Condemnation
Proceeds and Insurance Proceeds that the Borrower is permitted to retain under
the terms of the applicable Mortgage) will be deposited into the appropriate
subaccount to be disbursed by the Servicer in the manner contemplated by the
applicable Mortgage.
4.3 On each Debt Service Payment Date prior to the Optional
Prepayment Date, unless the procedures set forth in Section 7 apply, withdrawals
from the Cash Collateral Account (excluding amounts held in escrow, reserve, or
other subaccounts, which shall be withdrawn and applied solely for the purposes
for which such subaccounts are maintained) shall be made by the Servicer only
for the following purposes and in the following order of priority:
(A) (i) if the Securitization has been effected, to transfer
funds to the Collection Account (as such term is defined in the Pooling
and Servicing Agreement used in
3
<PAGE>
the Securitization) in the amount needed (y) to pay the fees, costs and
expenses (together, the "Servicing Expenses") to be paid or reimbursed
------------------
by the Borrower pursuant to the provisions of clauses (v) and (vi) of
Section 7.1(a) of the Loan Agreement, the text of which is set forth in
Schedule II hereto, to the parties entitled thereto and (z) to the
extent that the payments called for under this clause (i) have not been
received by the Servicer from or with respect to U.S. Obligations held
by the Servicer in accordance with the provisions of Section 2.3 of the
Loan Agreement, the text of which is set forth in Schedule II hereto
(the "U.S. Obligations"), (a) first, to the payment of the interest at
----------------
the Base Rate and/or Default Rate, as applicable, then due and payable
under the Note, (b) next, to the Principal Payment then due and payable
under the Note, and (c) next, to the payment of any other Debt then due
and payable to the Lender (Items (a) and (b) hereinafter, the "Monthly
-------
Debt Service Payment");
--------------------
(ii) if the Securitization has not been effected, (y)
to pay the Servicing Expenses and (z) to the extent that the payments
called for under this clause (ii) have not been received by the
Servicer from or with respect to U.S. Obligations, (a) first, to make
the Monthly Debt Service Payment and (b) next, to the payment of any
other Debt then due and payable to the Lender;
(B) if required under the terms of Section 6 hereof, to
transfer amounts necessary to fund the escrow accounts maintained by
the Servicer thereunder for real estate taxes and insurance premiums,
as subaccounts of the Cash Collateral Account;
(C) commencing on April 11, 1997, to fund any shortfall in the
Borrower Debt Service Reserve Account in the amount required under
Section 5.1;
(D) to fund any shortfall in the Capital Expenditure and FF&E
Reserve Account in accordance with Section 8.2; and
(E) to remit to the Manager any funds in the Cash Collateral
Account (other than the amounts described in (A) through (D) above and
Insurance Proceeds or Condemnation Proceeds required to be held for
payment of the expenses of restoration or repair of a Property in
accordance with Sections 13 and 14 of the Mortgages (the "Excluded
--------
Amounts"), as set forth in Schedule II), to which the Manager is
-------
entitled pursuant to the provisions of the Management Agreement; and
(F) subject to Section 6.5, so long as no Event of Default has
occurred and is continuing, to remit to the Borrower any funds
remaining in the Cash Collateral Account other than the Excluded
Amounts.
In making the distribution specified in clause (D) and (E) above, the
Servicer shall be entitled to rely conclusively on written instructions that the
Manager shall provide (with copies to the Borrower) as to the amounts to be paid
and compliance with the provisions of the documents named therein. In making the
distributions specified in clause (F) above, the Servicer shall be entitled to
rely on information provided to it by the Manager (with copies to the Borrower).
The Servicer shall have no duty to recompute, recalculate, or verify the data
contained in such instructions or information and shall incur no liability to
the Borrower or the Manager if the Servicer disburses funds in accordance
therewith.
4.4 Until the Note has been Paid In Full, unless the
procedures set forth in Section 7 apply, on the Optional Prepayment Date, and
each other Debt Service Payment Date thereafter, withdrawals from the Cash
Collateral Account (excluding amounts held in escrow, reserve, or other
subaccounts, which shall be withdrawn and applied solely for the purposes for
which such subaccounts are maintained) shall be made by the Servicer only for
the following purposes and in the following order of priority on each Debt
Service Payment Date:
4
<PAGE>
(A) (i) if the Securitization has been effected, to transfer
funds to the Collection Account (as such term is defined in the Pooling
and Services Agreement used in the Securitization) in the amount needed
to pay (x) the Servicing Expenses, (y) next, the Monthly Debt Service
Payment and (z) next, any other Debt then due and payable to the Lender
(other than pursuant to the provision of clause (F) below);
(ii) if the Securitization has not been effected, to
pay (x) the Servicing Expenses, (y) next, the Monthly Debt Service
Payment and (z) next, any other Debt then due and payable to the Lender
(other than pursuant to the provision of clause (F) below);
(B) if required under the terms of Section 6 hereof, to
transfer amounts necessary to fund the escrow accounts maintained by
the Servicer thereunder for real estate taxes and insurance premiums,
as subaccounts of the Cash Collateral Account;
(C) to fund any shortfall in the Borrower Debt Service Reserve
Account in the amount required under Section 5.1;
(D) to fund any shortfall in the Capital Expenditure and FF&E
Reserve Account in accordance with Section 8.2: and
(E) to the Manager, to be applied to (i) repayment of each
Manager Loan and accrued interest thereon; provided, however, that for such
--------
purpose the principal balance of each Manager Loan shall be amortized on a five
year straight line basis, from the later of (x) the date funds are advanced or
(y) the Optional Prepayment Date, and (ii) payment of Incentive Management Fees
earned in the then current Fiscal Year;
(F) subject to the provisions of Section 6.5, to the extent of
Excess Cash Flow for each of the Operating Profit Payment Dates occurring during
the period from and including the eleventh (11th) day of the calendar month
immediately preceding such Debt Service Payment Date to the tenth (10th) day of
the calendar month in which such Debt Service Payment Date occurs, (A) first, to
prepayment of each Principal Payment required to be made on each Debt Service
Payment Date in inverse order of maturity until the principal of the Note has
been paid in full, and (B) next, to payment of the difference, if any, between
(y) the sum of (i) interest accrued and unpaid on the Note calculated at the
Adjusted Rate and (ii) interest on such accrued and unpaid amount at the
Adjusted Rate and (z) interest at the Base Rate paid on each Debt Service
Payment Date pursuant to subsection (A) of this section 4.4.
In making the distributions and payments specified in clauses (D) and
(E) above, the Servicer shall be entitled to rely conclusively on written
instructions that the Manager shall provide (with copies to the Borrower) as to
the amounts to be paid and compliance with the provisions of the documents named
therein. In making the distribution specified in clause (F) above, the Servicer
shall be entitled to rely on information provided to it by the Manager (with
copies to the Borrower). The Servicer shall have no duty to recompute,
recalculate, or verify the data contained in such instructions or information
and shall incur no liability to the Borrower or the Manager if the Servicer
disburses funds in accordance therewith.
5. Debt Service Reserve Account
5.1 The Servicer shall maintain, as a sub-account of the Cash
Collateral Account, an account (the "Borrower Debt Service Reserve Account") to
-------------------------------------
be used by the Servicer to pay Monthly Debt Service Payments, if the amounts
available from Operating Profit transmitted by the Manager to the Servicer
pursuant to the provisions of Section 2.4, Section 6.4 and Section 7.8.2 are
insufficient for such payments. The Borrower shall deposit in the Borrower Debt
Service Reserve Account an amount equal to two months' Monthly Debt Service
Payments in 12 approximately equal consecutive
5
<PAGE>
monthly installments commencing on April 11, 1996 and on each Debt Service
Payment Date thereafter until the Borrower Debt Service Reserve Account contains
$2,321,056.02. Thereafter, the Borrower Debt Service Reserve Account shall be
funded in accordance with the provisions set forth in Sections 4.3(C), 4.4(C)
and 7.8.1 to an amount equal to twice the Monthly Debt Service Payments in
effect from time to time.
5.2 The Servicer will maintain an account (the "NACC Debt
---------
Service Reserve Account") pursuant to the provisions of that certain Letter
- -----------------------
Agreement, dated as of the date hereof, among the Borrower, NACC and the
Servicer. The NACC Debt Service Reserve Account shall be used by the Servicer to
pay Monthly Debt Service Payments if the amounts available from (i) Operating
Profit transmitted by the Manager to the Servicer pursuant to the provisions of
Sections 2.4, 6.4 and 7.8.2 and (ii) amounts contained in the Borrower Debt
Service Reserve Account are insufficient for such payments.
6. Single Downgrade Procedures
The procedures set forth in this Section 6, in addition to the other
procedures set forth in this Exhibit (other than those set forth in Section 7
hereof), shall apply during each period, if any, from time to time, beginning
with the first day of the first full Accounting Period following such time as
(a) the long-term senior unsecured debt of MII (the "MII Debt") is rated BBB+ by
--------
S&P, unless a Lockbox Event occurs, in which event the procedures in Section 7
hereof shall apply, and (b) the Servicer delivers a notice to the Manager and
the Borrower that such procedures are in effect. The Borrower will notify the
Servicer and the Lender promptly after becoming aware of the event described
above.
6.1 The Servicer will maintain escrow accounts, as subaccounts
of the Cash Collateral Account, for payments of the next succeeding payments of
all insurance premiums (including property, liability, and other insurance, but
not including workers compensation insurance) and real estate taxes coming due
for each Property. The escrow accounts will be funded (i) upon commencement of
these procedures, by transfers from the Manager's Account and/or the Master
Account to the Cash Collateral Account of amounts previously deducted by the
Manager for payment of future insurance premiums and real estate taxes for the
Properties, but not expended and, (ii) thereafter, from cash in the Cash
Collateral Account on each Debt Service Payment Date in accordance with Section
4.3 hereof, such that the balance in each escrow account is equal, with respect
to each tax payment or insurance premium owing with respect to the Properties,
to the product of (x) the amount of such next payment or premium (or, the most
recent payment or premium if the amount of the next payment or premium is
unknown) times (y) a fraction, the numerator of which is the number of whole
Accounting Periods since the date of the last payment of the applicable tax or
premium and the denominator of which is the number of whole Accounting Periods
from the date of the last payment of the applicable tax or premium to the date
of the next payment of such tax or premium. With regard to any insurance
obtained for the Properties from MII's blanket insurance program, the premiums
shall be the Properties' allocable share of insurance premiums and such premiums
shall be paid directly to MII when due out of such escrows or other funds in the
Cash Collateral Account or provided by the Borrower.
6.2 Provided that the necessary invoices or bills have been
provided to the Servicer by the Manager or the Borrower, the Servicer will pay
directly all real estate taxes and insurance premiums with respect to which
escrows have been established from the amounts held in such escrows or, if such
amounts are insufficient, from amounts available in the Cash Collateral Account
and the Manager will be relieved of any such obligation. The Borrower and/or the
Manager shall promptly send all such invoices or bills to the Servicer. Upon
acceleration of the maturity of the Note following an Event of Default, the
Lender shall be entitled to apply the funds held in such escrows (other than
escrows for payment of liability insurance premiums) to payment of the Note.
6
<PAGE>
6.3 During any period when the procedures set forth in this
Section 6 apply, the amounts of Operating Profit remitted by the Manager to the
Cash Collateral Account pursuant to Section 3 hereof shall be calculated without
deduction for any such taxes or premiums.
6.4 On the last Business Day of the first and third week of
each Accounting Period, the Manager will transfer cash from the Manager's
Account and/or the Master Account to the Cash Collateral Account for application
by the Servicer on the next Debt Service Payment Date. The amount of cash
transferred on or before the last Business Day on the first week in each
-----
Accounting Period will be equal to 50% of the budgeted Operating Profit for the
immediately preceding Accounting Period. The amount of cash transferred on or
before the last Business Day of the third week in each Accounting Period will be
-----
an amount equal to (x) the actual Operating Profit for the immediately preceding
Accounting Period, minus (y) the amount previously transferred with respect to
such immediately preceding Accounting Period. On or before the last Business Day
of the fourth week in each Accounting Period, the Borrower will provide to the
------
Lender a statement setting forth the calculation for the amount of Operating
Profit transferred to the Cash Collateral Account with respect to the Accounting
Period ended four weeks earlier and certifying that the correct amount has been
transferred.
6.5 The Borrower shall deposit into the Borrower Debt Service
Reserve Account an amount equal to the Monthly Debt Service Payment then in
effect in six approximately equal consecutive monthly installments commencing on
the first day referred to in the preamble to this Section 6 such that at the end
of the later of such six-month period and March 11, 1997, the Borrower Debt
Service Reserve Account will contain an aggregate amount equal to three times
the Monthly Debt Service Payment then in effect; provided, however, that the
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Borrower shall be deemed to be in compliance with the provisions of this Section
6.5 if the Borrower delivers an irrevocable direction to the Servicer to deposit
such amount out of (y) prior to the Optional Prepayment Date, all amounts
payable to the Borrower pursuant to Sections 4.3(F) and 7.9(C) and (z) after the
Optional Prepayment Date, amounts available immediately prior to the application
of Excess Cash Flow pursuant to the provisions of Sections 4.4(F) and 7.10(C)
but after amounts are paid to the Manager pursuant to Section 4.4(E) and
7.10(B).
6.6 Beginning with the first full Accounting Period following
such time as the MII Debt is rated at least A- by S&P, (i) the Borrower will no
longer be required to maintain the escrow accounts described in Section 6.1 and
all amounts then held in such escrow accounts will be transferred to the
Manager's Account and thereafter the Manager will be responsible for paying real
estate taxes and insurance premiums in accordance with the terms of the
Management Agreement, and (ii) the Manager will no longer be required to make
the transfers provided for in Section 6.4 (the provisions of Section 2.4 being
operative in lieu thereof) and (iii) all amounts then held in the Borrower Debt
Service Reserve Account in excess of two Monthly Debt Service Payments will be
returned to the Borrower.
7. Lockbox
A "Lockbox Event" shall occur at any time or times if (a) (i) any of
-------------
the MII Cash Management Conditions are not satisfied or (ii) S&P does not rate
the MII Debt at least BBB+ or (iii) either (x) at any time after September 11,
1996, S&P rates the MII Debt at least A- and the Borrower Debt Service Reserve
Account contains less than one Monthly Debt Service Payment in effect at such
time or (y) at any time after March 11, 1997, S&P rates the MII Debt BBB+ and
the Borrower Debt Service Reserve Account contains less than two Monthly Debt
Service Payments in effect at such time and (z) in each of cases (x) and (y)
above, the Borrower does not fund the shortfall in the Borrower Debt Service
Reserve Account within fifteen days of notice to such effect from the Servicer
to the Borrower and the Manager and (b) the Servicer delivers a notice to the
Manager and the Borrower that the procedures described in this Section 7 are in
effect. If a Lockbox Event occurs, such procedures shall apply in lieu of the
procedures set forth in Sections 2, 4.3, 4.4 and 6 hereof
7
<PAGE>
during the period, as provided below, beginning no later than the later of (A)
two weeks after the date on which the Servicer delivers the notice described in
subclause (b) above and (B) 120 days after the Closing Date, and continuing
thereafter until the first day of the first full Accounting Period after (i)
each of the MII Cash Management Conditions is again satisfied, (ii) S&P rates
the MII Debt at least BBB+, and (iii) either (y) if S&P rates the MII Debt at
least A-, the Borrower Debt Service Reserve Account contains at least two
Monthly Debt Service Payments then in effect or (z) if S&P rates the MII Debt
BBB+, the Borrower Debt Service Reserve Account contains at least three Monthly
Debt Service Payments then in effect (any such period, a "Lockbox Period"). The
--------------
Servicer shall advise the Manager when the procedures set forth in this Section
7 are no longer in effect. The Borrower will notify the Lender and the Servicer
promptly after becoming aware that a Lockbox Event has occurred.
7.1 The following transition procedures will apply after a Lockbox
Event:
7.1.1 During the period indicated, the Manager will take the
following steps:
(i) during the first two weeks following the Lockbox
Event, if the Manager's Account is not an Eligible
Account at such time, determine if the Manager's
Account can be used as the Lockbox Account;
(ii) as soon as possible but, in any event, not later
than 120 days after the end of such two week
period, develop the systems necessary for the cash
management procedures set forth in this Section 7;
and
(iii) during the first two weeks following the Lockbox
Event, identify the exact amount of funds of the
Borrower then held in the Master Account.
7.1.2 Following the two-week period described in Section 7.1.1
(i) hereof, a lockbox account (the "Lockbox Account") will be established, as a
---------------
segregated account in the name of the Servicer on behalf of the Lender, into
which payments from Third Party Payors will be deposited (other than Third Party
Payors that send payments to the Manager for deposit in a Local Account) and
funds from the Local Accounts will be transferred during the Lockbox Period. The
Lockbox Account either will be the same account as the Manager's Account or will
be a newly established Eligible Account, as follows:
(i) if the Manager's Account is an Eligible Account or
the Manager determines that the Manager's Account
can become the Lockbox Account, then the Manager
shall change the name on the Manager's Account to
the Servicer and the account will become the
Lockbox Account. The Servicer on behalf of the
Lender will have sole control over the Lockbox
Account.
(ii) If the Manager's Account is not an Eligible
Account and the Manager is unable to determine
that the Manager's Account can become the Lockbox
Account, then the Servicer will open a new
Eligible Account to be the Lockbox Account and
also will convert the Manager's Account into a
lockbox account, in the name of the Servicer over
which the Servicer on behalf of the Lender will
have sole control. In this event, the transition
8
<PAGE>
procedures described in Section 7.2 below will
apply for a period (the "Transition Period") of up
-----------------
to 120 days after the beginning of the Lockbox
Period.
(iii) If the Manager determines, in its good faith
reasonable judgment after due inquiry, that
LaSalle National Bank or any other bank suggested
by the Servicer appears capable of putting in
place within the Transition Period the systems
required to service the Manager's cash management
needs and LaSalle National Bank or such other
suggested bank then meets the requirements for
establishing an Eligible Account, then Manager
shall select such bank to hold the Lockbox
Account.
7.2 In the event that the Manager's Account does not become the
Lockbox Account, the Manager will notify Third Party Payors in their billing
statements or otherwise that all payments owing to the Borrower thereafter
should be sent either to the Lockbox Account or to the Manager for deposit in a
Local Account; provided, however, that no credit card companies' payments will
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be sent to any Local Account. The Manager will work diligently with Third Party
Payors to enable them to send their payments to the Lockbox Account at the
earliest reasonably practicable date and, in any event, no later than 120 days
after the beginning of the Lockbox Period. During the Transition Period, such
Third Party Payors may continue to send their payments to the Manager's Account.
Any amounts received into the Manager's Account during the Lockbox Period will
be transferred by the Servicer, within one Business Day of receipt, to the Cash
Collateral Account. Within 60 days after the beginning of the Lockbox Period,
the Manager will deliver a report to the Borrower, which shall provide copies
thereof to the Lender or, after the Securitization, the Lender and each Rating
Agency, regarding the status of the transition to the new cash management
procedures, and upon the request of NACC or, after the Securitization, the
Lender or a Rating Agency, shall provide up to two additional reports (no more
frequently than 30 days after the prior report) regarding the status thereof.
7.3 The Manager shall deposit into the Lockbox Account, within one
full Business Day after the receipt thereof and identification of a payment as
belonging to the Borrower, all Gross Revenues received by the Manager other than
(i) Gross Revenues deposited by the Manager in a Local Account, (ii) customary
amounts of petty cash held at each Property, and (iii) payments made into the
Manager's Account (if it does not become the Lockbox Account).
7.4 Commencing as soon as practicable but, in any event, not later
than 120 days from the Lockbox Event, the Manager shall transfer into the
Lockbox Account, at least twice each week, by federal wire, automated clearing
house funds, or other transfer of next-day available funds, all available funds
held on deposit in each Local Account, less amounts required to pay Management
Expenses previously incurred and customarily paid out of the Local Accounts, not
previously reserved for, plus an amount to be held as petty cash or as a reserve
for Management Expenses customarily paid out of the Local Accounts; provided,
--------
however, that the aggregate amount of such petty cash and reserves for the Local
- -------
Account for each Property shall not exceed $25,000 (subject to adjustment at the
end of each Fiscal Year for increases in the CPI since the end of the preceding
Fiscal Year), and for all of the Local Accounts shall not exceed $375,000
(subject to such adjustment and reduction by $15,000 for each Property that is
released from the applicable Mortgage) after giving effect to all transfers made
from the Local Accounts on any day.
7.5 Any funds received directly by the Borrower or the Manager
during a Lockbox Period and not yet deposited into the Lockbox Account shall
irrevocably be deemed to be held in trust for the benefit of the Lender and
(other than receipts received at the Properties and held as petty cash or
deposited into a Local Account) shall, immediately upon receipt and
9
<PAGE>
identification as belonging to the Borrower (and in no event later than one full
Business Day after receipt and identification as belonging to the Borrower), be
deposited by the Borrower or the Manager, as applicable, into the Lockbox
Account or a Local Account. Funds on deposit in the Lockbox Account shall not be
commingled with funds related to any other properties owned or managed by the
Manager or any Person other than the Borrower .Expenses previously incurred and
customarily paid out of the Local Accounts, not previously reserved for, plus an
amount to be held as petty cash or as a reserve for Management Expenses
customarily paid out of the Local Accounts; provided, however, that the
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aggregate amount of such petty cash and reserves for the Local Account for each
Property shall not exceed $25,000 (subject to adjustment at the end of each
Fiscal Year for increases in the CPI since the end of the preceding Fiscal
Year), and for all of the Local Accounts shall not exceed $375,000 (subject to
such adjustment and reduction by $15,000 for each Property that is released from
the applicable Mortgage) after giving effect to all transfers made from the
Local Accounts on any day.
7.6 During a Lockbox Period, the Servicer shall maintain escrow
accounts, as subaccounts of the Cash Collateral Account, for (i) prepayments of
the next succeeding payments of all insurance premiums and real estate taxes, as
described in Section 6 hereof and (ii) the Debt Service Reserve. During a
Lockbox Period, provided that the necessary invoices or bills have been provided
to the Servicer by the Manager or the Borrower, the Servicer will pay all real
estate taxes and insurance premiums with respect to which escrows have been
established from the amounts held in such escrows or, if such amounts are
insufficient, from amounts available in the Cash Collateral Account or
additional funds provided by the Borrower, and the Manager will be relieved of
any such obligation. The Borrower and/or the Manager shall promptly send all
such invoices or bills to the Servicer. Upon acceleration of the maturity of the
Note following an Event of Default, the Lender shall be entitled to apply the
funds held in such escrows (other than escrows for payment of liability
insurance premiums) to payment of the Note .Expenses previously incurred and
customarily paid out of the Local Accounts, not previously reserved for, plus an
amount to be held as petty cash or as a reserve for Management Expenses
customarily paid out of the Local Accounts; provided, however, that the
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aggregate amount of such petty cash and reserves for the Local Account for each
Property shall not exceed $25,000 (subject to adjustment at the end of each
Fiscal Year for increases in the CPI since the end of the preceding Fiscal
Year), and for all of the Local Accounts shall not exceed $375,000 (subject To
such adjustment and reduction by $15,000 for each Property that is released from
the applicable Mortgage) after giving effect to all transfers made from the
Local Accounts on any day.
7.7 Prior to commencement of a Lockbox Period, the Servicer will
establish a segregated account (the "Operating Account"), in its name on behalf
-----------------
of the Lender, which shall be an Eligible Account at a bank selected by the
Manager and reasonably acceptable to the Lender. If the Manager determines, in
its good faith reasonable judgment after due inquiry that LaSalle National Bank
or any other bank suggested by the Servicer appears capable of putting in place
within the Transition Period the systems required to service the Manager's cash
management needs and LaSalle National Bank or such other suggested bank then
meets the requirements of an Eligible Account, then Manager shall select such
bank to hold the Operating Account. At the beginning of the Lockbox Period, the
Manager shall transfer, by immediately available funds, to the Operating
Account, all funds of the Borrower then held in the Master Account, less (i)
amounts required to cover outstanding checks and (ii) amounts which the Servicer
advises the Manager are required to be applied for the purposes set forth in
First, Second and Third of Section 7.8.1. The Manager shall transfer to the Cash
Collateral Account, by immediately available funds, the amounts advised by the
Servicer to be so required for application by the Servicer for such purposes.
The Manager will have the authority to write checks on and make other transfers
from the Operating Account for payment of Management Expenses (i.e.,
"Deductions," as such term is defined in the Management Agreement)(excluding
----------
real estate taxes and insurance premiums with respect to which escrows are being
maintained by the Servicer). Promptly following the end of each Accounting
Period ending after funds are first deposited into the Operating Account, the
Manager will be required to certify
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that all prior expenditures from the Operating Account have been for Management
Expenses (excluding real estate taxes and insurance premiums with respect to
which escrows are being maintained) and that, to the best of the Manager's
knowledge, there are no accounts payable of the Properties with an unpaid
balance of more than S20,000 individually, or more than $150,000 in the
aggregate, that are more than 60 days past due (unless payment is being
contested in good faith in accordance with Section 2.2 of the Loan Agreement,
the text of which is set forth in Schedule II hereto), except as otherwise
stated with an explanation therefor.
7.8.1 During a Lockbox Period all Gross Revenues that are received in
cash in the Lockbox Account (and the Manager's Account, if it does not become
the Lockbox Account) in any calendar month shall first be transferred to the
Cash Collateral Account, within one Business Day after receipt thereof, and
shall be applied by the Servicer each Business Day thereafter in the following
order of priority, and to the extent of available funds:
First: to fund the tax and insurance escrows in the amount
specified in Section 6 above (to the extent the balance of any such escrows
is insufficient); and
Second: commencing March 12, 1997, to fund the Borrower Debt
Service Reserve Account until the balance in such Account equals twice the
Monthly Debt Service Payments in effect at such time; and
Third: to fund any shortfall in the Capital Expenditure and
FF&E Reserve Account in accordance with Section 8.2 until the balance in
such Account equals the amount set forth therein; and
Fourth: after the balances in the escrow accounts, the Borrower
Debt Service Reserve Account and the Capital Expenditure and FF&E Reserve
Account described in First, Second and Third are at the required levels,
the remaining Gross Revenues will be transferred by the Servicer from the
Cash Collateral Account to the Operating Account.
In making the funding and payments specified in Third above, the Servicer
shall be entitled to rely conclusively on written instructions that the Manager
shall provide (with copies to the Borrower) as to the amounts to be paid and
compliance with the provisions of the documents named therein. The Servicer
shall have no duty to recompute, recalculate, or verify the information
contained in such instructions and shall incur no liability to the Borrower or
the Manager if the Servicer disburses funds in accordance therewith.
7.8.2 At least one Business Day prior to each Debt Service Payment
Date, the Manager will transfer from the Operating Account to the Cash
Collateral Account, by immediately available funds, an amount equal to the
Operating Profit (calculated without deduction for the real estate taxes and
insurance premiums for which escrows are being maintained by the Servicer or for
shortfalls in the Capital Expenditure and FF&E Reserve Account funded pursuant
to Section 7.8.1 (Third) and subtracting any amount that was transferred during
the applicable period to the Borrower Debt Service Reserve Account instead of
the Operating Account) for each Accounting Period ended at least three weeks
prior to such Debt Service Payment Date with respect to which the Manager has
not theretofore transferred such Operating Profit.
7.9 On each Debt Service Payment Date prior to the Optional
Prepayment Date, the Servicer will make withdrawals from the Cash Collateral
Account in the amount of (and not exceeding) the Operating Profit transferred to
the Cash Collateral Account by the Manager pursuant to Section 7.8.2 with
respect to such Debt Service Payment Date only for the following purposes and in
the following order of priority (excluding amounts held in escrow, reserve, or
other subaccounts, which shall be withdrawn and applied solely for the purposes
for which such subaccounts are maintained):
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(A) (i) if the Securitization has been effected, to transfer funds to
the Collection Account (as such term is defined in the Pooling and Servicing
Agreement used in the Securitization) in the amount needed (y) to pay the
Servicing Expenses and (z) to the extent that the payments called for under this
clause (i) have not been received by the Servicer from or with respect to U.S.
Obligations, (a) first, to the payment of Monthly Debt Service Payment and (b)
next, to the payment of any other Debt then due and payable to the Lender;
(ii) if the Securitization has not been effected, (y) to pay the
Servicing Expenses and (z) to the extent that the payments called for under this
clause (ii) have not been received by the Servicer from or with respect to U.S.
Obligations, (a) first, to payment of Monthly Debt Service Payment and (b) next,
to the payment of any other Debt then due and payable to the Lender; and
(B) to remit to the Manager that portion of the remainder of such
Operating Profit, other than the Excluded Amounts, to the extent to which it is
entitled thereto pursuant to the provisions of the Management Agreement.
(C) subject to the provisions of Sections 6.5 and 7.13, so long as no
Event of Default has occurred and is continuing, to remit to the Borrower the
remainder of such Operating Profit other than the Excluded Amounts.
In making the distribution specified in clause (B) above, the Servicer
shall be entitled to rely conclusively on written instructions that the Manager
shall provide (with copies to the Borrower) as to the amounts to be paid and
compliance with the provisions of the documents named therein. In making the
distribution specified in clause (C) above, the Servicer shall be entitled to
rely on information provided to it by the Manager (with copies to the Borrower).
The Servicer shall have no duty to recompute, recalculate, or verify the data
contained in such instructions or information and shall incur no liability to
the Borrower or the Manager if the Servicer disburses funds in accordance
therewith.
7.10 Until the Note has been Paid In Full, on the Optional Prepayment
Date and each other Debt Service Payment Date thereafter, the Servicer will make
withdrawals from the Cash Collateral Account in the amount of the Operating
Profit (and not exceeding) transferred to the Cash Collateral Account by the
Manager pursuant to Section 7.8.2 with respect to such Debt Service Payment Date
only for the following purposes and in the following order of priority
(excluding amounts held in escrow, reserve, or other subaccounts, which shall be
withdrawn and applied solely for the purposes for which such subaccounts are
maintained):
(A) (i) if the Securitization has been effected, to transfer funds to
the Collection Account in the amount needed to pay (x) the Servicing Expenses,
(y) next, the Monthly Debt Service Payment then due and payable and (z) next,
any other Debt then due and payable to the Lender (other than pursuant to the
provisions of clause (C) below;
(ii) if the Securitization has not been effected, to pay (x) the
Servicing Expenses, (y) next, the Monthly Debt Service Payment then due and
payable, and (z) next, any other Debt then due and payable to the Lender (other
than pursuant to the provisions of clause (C) below;
(B) to the Manager, to be applied to (i) repayment of each Manager Loan
and accrued interest thereon, provided that for such purpose the principal
balance of each Manager Loan shall be amortized on a five year straight line
basis, from the later of (x) the date funds were advanced, or (y) the optional
Prepayment Date, and (ii) payment of Incentive Management Fees earned in the
then current Fiscal Year; and
(C) subject to the provisions of Sections 6.5 and 7.13, to the extent of
Excess Cash Flow for each of the Operating Profit Payment Dates occurring during
the period from and including the
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eleventh (11th) day of the calendar month immediately preceding such Debt
Service Payment Date to the tenth (10th) day of the calendar month in which such
Debt Service Payment Date occurs, (A) first, to prepayment of each Principal
Payment required to be made on each Debt Service Payment Date in inverse order
of maturity until the principal of the Note has been paid in full, and (B) next,
to payment of the difference, if any, between (y) the sum of (i) interest
accrued and unpaid on the Note calculated at the Adjusted Rate and (ii) interest
on such accrued and unpaid amount at the Adjusted Rate and (z) interest at the
Base Rate paid on each Debt Service Payment Date pursuant to subsection (A) of
this Section 7.10; and
At such time as the Note has been Paid-In Full, the Servicer shall
remit (a) to the Manager, for application consistent with the Management
Agreement, any funds remaining in the Cash Collateral Account (including
subaccounts thereof, subject to the exception set forth in (b) below), the
Operating Account, the Lockbox Account, the Capital Expenditure and FF&E Reserve
Account and the Manager's Account if such account is a lockbox account and (b)
to the Borrower any funds remaining in the Borrower Debt Service Reserve
Account.
In making the distributions and payments specified in paragraph (B) above,
the Servicer shall be entitled to rely conclusively on written instructions that
the Manager shall provide (with copies to the Borrower) as to the amounts to be
paid and compliance with the provisions of the documents named therein. In
making the distribution specified in clause (C) above, the Servicer shall be
entitled to rely on information provided to it by the Manager (with copies to
the Borrower). The Servicer shall have no duty to recompute, recalculate, or
verify the data contained in such instructions or information and shall incur no
liability to the Borrower or the Manager if the Servicer disburses funds in
accordance therewith.
7.11 At such time as the Lockbox Period terminates and until a
further Lockbox Event occurs, the Manager will have the option of reinstating
the cash management procedures set forth in Sections 2, 3, 4.3, 4.4 and 6 hereof
(as applicable) by notice to the Lender, the Servicer, the Borrower and if NACC
is not the Lender, NACC, and all funds then held in the Operating Account shall
be transferred to the Manager's Account (and, if the Manager's Account was
changed into the Lockbox Account in accordance with Section 7.1 hereof, the
Lockbox Account will be changed to the Manager's Account and if the Manager's
Account was not so changed into the Lockbox Account, the Servicer will change
the Lockbox Account into an account over which the Manager will have the
authority to write checks or other transfers for payment to implement the
provisions of this Section 7.12) and, unless the provisions of Section 6 hereof
apply, all funds held in the real estate tax and insurance escrows shall be
transferred to the Manager's Account.
7.12 If an entity that is an Affiliate of MII or MII itself is not
the manager, the Borrower shall take such action or may be required to ensure
that the procedures set forth in Section 7, to the maximum extent possible, are
followed by a replacement manager. In any event, the Borrower shall ensure that
credit card companies continue to send payments directly to the Lockbox Account.
7.13 The requirements set forth in Section 6.5 to deposit an
additional Monthly Debt Service Payment into the Borrower Debt Service Reserve
Account are hereby incorporated by reference except that the obligation to make
such deposit set forth therein shall commence on the date the Servicer delivers
a notice to the Manager and the Borrower that the lockbox procedures are in
effect, as provided for in the preamble to Section 7. If a Lockbox Period
terminates pursuant to the provisions of the preamble to Section 7 prior to the
completion of such obligation, the requirement to make such deposits shall
continue in effect.
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8. Capital Expenditure and FF&E Reserve Account
8.1 On or before the Closing Date, the Servicer will establish and
maintain a segregated deposit account, which shall be an Eligible Account, in
its name on behalf of the Lender at LaSalle National Bank (the "Capital
-------
Expenditure and FF&E Reserve Account"), into which $1,568,788.63 (i.e., the
- ------------------------------------
existing balance in the Repairs and Equipment Reserve, as such term is defined
in the Management Agreement, less amounts required to cover outstanding checks)
will be deposited on the Closing Date. In addition to such balance, the Borrower
will deposit in the Capital Expenditure and FF&E Reserve Account on the Closing
Date (i) $1,992,000 for Deferred Maintenance Work, (ii) $117,000 for ADA
Compliance Work and (iii) $206,000 for Environmental Remediation Work
(collectively, the "Work"). In addition, the Borrower has deposited $297,000 in
----
the Capital Expenditure and the FF&E Reserve Account on the Closing Date.
8.2 On or before the date three weeks after the end of each
Accounting Period, the Manager shall make deposits directly into the Capital
Expenditure and FF&E Reserve Account in an amount equal to 5% (or such other
greater percentage contribution as may be required from time to time under the
Management Agreement) of Gross Revenues during the immediately preceding
Accounting Period, provided, however, that (i) the amount set forth in the last
-------- -------
sentence of Section 8.1 shall not be credited towards the Manager's obligation
to make the deposits provided for in this Section 8.2 and (ii) for the purpose
of determining the amount to be funded in the Capital Expenditure and FF&E
Reserve account pursuant to the provisions of Sections 4.3, 4.4 and 7.8.1, the
maximum amount to be so funded shall be equal to 5% of Gross Revenues and, if
the Manager elects to increase such amount to up to 6% of Gross Revenues at any
time starting with the Fiscal Year beginning nearest to January 1, 2001 pursuant
to the provisions of the Management Agreement, up to 6% of Gross Revenues,
during the immediately preceding Accounting Period with respect to which such
funding is made. Within 75 days after the end of each Fiscal Year, amounts
deposited into the Capital Expenditure and FF&E Reserve Account during such
Fiscal Year shall be adjusted to ensure that the aggregate amount of all
deposits made into the Capital Expenditure and FF&E Reserve Account during such
Fiscal Year is equal to 5% of Gross Revenues (or up to 6% of Gross Revenues, at
Manager's election at any time starting with the Fiscal Year beginning nearest
to January 1, 2001) of aggregate Gross Revenues for such Fiscal Year. Any
shortfall in the Capital Expenditure and FF&E Reserve Account on the date such
adjustment is computed based on such percentage shall be funded into the Capital
Expenditure and FF&E Reserve Account from amounts that otherwise would be
distributed to the Borrower from the Cash Collateral Account at the end of the
month in which such adjustment is computed, and any overages shall be
transferred from the Capital Expenditure and FF&E Reserve Account to the Cash
Collateral Account on such date.
8.3 So long as each of the MII Cash Management Conditions shall
remain satisfied, the Manager will be permitted to request withdrawals of funds
from the Capital Expenditure and FF&E Reserve Account once each week (or more
frequently in the case of an Emergency Expenditure, as certified by the Manager
to the Lender), based on its reasonable estimate of upcoming, near-term
expenditures for Capital and FF&E Expenditures, such Emergency Expenditure and
Work and, to the extent permitted by the Management Agreement, for expenditures
("Additional Capital Expenditures") set forth in an approved Building Estimate
-------------------------------
as such term is defined in the Management Agreement. The Manager will be
required to certify within 20 days of the end of each Accounting Period to the
Lender that (i) withdrawals made from the Capital Expenditure and FF&E Reserve
Account during the preceding Accounting Period were necessary for the aforesaid
purposes (and to the extent the same were used for Additional Capital
Expenditures, that the applicable provisions of the Management Agreement have
been complied with), (ii) all funds that it previously has withdrawn from the
Capital Expenditure and FF&E Reserve Account (other than amounts being retained
for reasonably estimated future Capital and FF&E Expenditures) have been used to
pay Capital and FF&E Expenditures, Work, or subject to the foregoing provisions
of this Section 8.3, Additional Capital Expenditures, and (iii) that, to the
Best Knowledge of the Manager, there are no accounts payable of the Properties
for Capital and FF&E Expenditures or Work with an
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unpaid balance of more than $25,000 individually, or more than $100,000 in the
aggregate, that are more than 60 days past due (unless payment is being
contested in good faith in accordance with Section 2.2 of the Loan Agreement, as
set forth in Schedule II), except as otherwise stated with an explanation
therefor. If, to the Best Knowledge of the Manager, any such account payable is
more than 60 days past due (other than for the reason specified in the preceding
sentence), the Manager shall inform the Lender of such fact concurrently with a
request for funds. The Manager will not be required to obtain approval of the
Lender or any other Person for individual expenditures, except as otherwise
required by the Management Agreement. Upon the request of the Lender in writing,
the Borrower will provide a detailed written accounting of expenditures for
Capital and FF&E Expenditures, Work and Additional Capital Expenditures, in a
form customarily maintained by the Manager in the ordinary course of business.
8.4 During a Lockbox Period, the Manager shall be permitted to
request disbursements from the Capital Expenditure and FF&E Reserve Account
after the submission to the Lender of (a) a certificate of the Manager verifying
that (i) the amounts requested are necessary for Capital and FF&E Expenditures
or Work, (ii) all funds that it previously has withdrawn from the Capital
Expenditure and FF&E Reserve Account (other than amounts being retained for
reasonably estimated future Capital and FF&E Expenditures) have been used to pay
Capital and FF&E Expenditures or Work, and (iii) that, to the Best Knowledge of
the Manager, there are no accounts payable of the Properties for Capital and
FF&E Expenditures or Work with an unpaid balance of more than $25,000,
individually, or more than $100,000 in the aggregate, that are more than 60 days
past due (unless payment is being contested in good faith in accordance with
Section 2.2 of the Loan Agreement, as set forth in Schedule II), except as
otherwise stated with an explanation therefor, and (b) a schedule setting forth
the names of the payees and amounts to be paid out of the proceeds of such
disbursement. The Manager will not be required to obtain approval of the Lender
or any other Person for individual expenditures, except as otherwise required by
the Management Agreement.
8.5 Upon the receipt of a request from the Manager for a
disbursement from the Capital Expenditure and FF&E Reserve Account, the Servicer
shall disburse the requested amount to the Manager by automated clearing house
funds or by Federal wire on the same day for requests made no later than 11:00
a.m. on any Business Day or on the next Business Day for requests made after
such time on any Business Day, to be held in the name of the Manager for payment
of Capital and FF&E Expenditures or Work.
9. Security for Loan
The funds on deposit in the Lockbox Account, the Capital Expenditure
and FF&E Reserve Account, the Operating Account, and the Cash Collateral Account
and each subaccount thereof, and all Permitted Investments thereof, are pledged
to the Lender as further security for the Loan pursuant to the Security
Agreement and the Collateral Account Agreement. The authority of the Manager to
pay Management Expenses with respect to the Properties in the manner set forth
in this Exhibit shall not be terminated, unless the Management Agreement shall
have been terminated and until all Management Expenses incurred or contracted
for prior to or as a result of such termination have been paid or an amount
sufficient to pay such expenses is set aside in a reserve. Unless and until the
Management Agreement is terminated and all expenses relating to Capital and FF&E
Expenditures made or contracted for prior to termination have been paid in full,
or an amount sufficient to pay such expenses has been set aside in a reserve,
(a) the Lender shall not freeze or otherwise restrict the ability of the Manager
to obtain disbursements of funds from the Capital Expenditure and F&E Reserve
Account in accordance with Section 8 hereof or apply funds on deposit in the
Capital Expenditure and FF&E Reserve Account to repayment of the Note and (b)
the right of the Manager to direct the expenditure of funds in the Capital
Expenditure and FF&E Reserve Account in accordance with the procedures set forth
in Section 8 hereof shall not be terminated unless otherwise agreed by the
Lender and the Manager.
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10. Investment of Funds in Accounts
The Borrower shall have the right to instruct the Servicer to invest
funds, if any, in the Cash Collateral Account and the Capital Expenditure and
FF&E Reserve Account, at the risk of and for the benefit of the Borrower, in
Permitted Investments.
11. Notice of New Accounts
The Manager shall notify the Lender in writing of the account name and
account numbers of the Manager's Account and each Local Account, and of each
supplemental or replacement account established by the Manager from time to time
in connection with the Properties, and the institution in which each such
Account is maintained. The Manager shall not change the Manager's Account
without obtaining the consent of the Lender, which shall not be unreasonably
withheld. If a Local Account shall be changed, or any new Local Account shall be
opened, by the Manager or the Borrower, the Manager or the Borrower, as the case
may be, shall send a notice to the Lender, specifying the new or changed Local
Account and any Local Account replaced thereby.
12. General
12.1 The Lender shall cause the Manager and the Borrower to have
access to information each Business Day regarding activity and balances and
source of receipts in the Cash Collateral Account and all subaccounts thereof,
the Capital Expenditure and FF&E Reserve Account, the Operating Account, the
Lockbox Account, and during such time as the Manager's Account is a lockbox
account, the Manager's Account.
12.2 Unless the context specifies otherwise, transfers of funds held
in any Account that are required by this Agreement shall require only the
transfer of available funds.
12.3 Once each Accounting Period, the Manager will certify to the
Lender that, to its Best Knowledge, it has complied with the cash management
procedures set forth in this Exhibit in all material respects.
12.4 If the principal amount of the Note or a portion thereof is
prepaid by the application of payments received (i) from or with respect to U.S.
Obligations held on the Optional Prepayment Date pursuant to Section 2.3(g) of
the Loan Agreement, (ii) from the release of a Property from the Lien of the
Security Documents pursuant to Section 2.6(c) of the Loan Agreement, (iii) on
and after the Optional Prepayment Date, pursuant to the last sentence of Section
3.1 of the Loan Agreement, or (iv) otherwise, with the Lender's consent, the
Monthly Debt Service Payment payable on each Debt Service Payment Date
thereafter shall be reduced in an amount equal to the percentage reduction in
the principal amount payable under the Note effected by such prepayment.
12.5 Notwithstanding the definition of Monthly Debt Service Payment
set forth in Section 4.3(A)(i), the use of such term in these Cash Management
Procedures other than in Sections 4.3(A), 4.4(A), 7.9(A) and 7.10(A) shall mean
the constant monthly payment set forth in Paragraph 4(b) of the Note, as
adjusted in accordance with Paragraph 4(c) of the Note.
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EXHIBIT D
"Permitted Investments" means any one or more of the following obligations
---------------------
or securities:
(a) obligations of, or obligations fully guaranteed as to payment of
principal and interest by, the United States or any agency or
instrumentality thereof provided such obligations are backed by the
full faith and credit of the United States of America including,
without limitation, obligations of the U. S. Treasury (all direct or
fully guaranteed obligations), the Farmers Home Administration
(certificates of beneficial ownership) the General Services
Administration (participation certificates), the U. S. Maritime
Administration (guaranteed Title XI financing), the Small Business
Administration (guaranteed participation certificates and guaranteed
pool certificates), the U. S. Department of Housing and Urban
Development (local authority bonds) and the Washington Metropolitan
Area Transit Authority (guaranteed transit bonds); provided, however,
that the investments described in this clause must (A) have a
predetermined fixed dollar of principal due at maturity that cannot
vary or change, (B) if rated by S&P, must not have an "r" highlighter
affixed to their rating, (C) if such investments have a variable rate
of interest, such interest rate must be tied to a single interest rate
index plus a fixed spread (if any) and must move proportionately with
that index, and (D) such investments must not be subject to
liquidation prior to their maturity;
(b) Federal Housing Administration debentures;
(c) obligations of the following United States government sponsored
agencies: Federal Home Loan Mortgage Corp. (debt obligations), the
Farm Credit System (consolidated systemwide bonds and notes), the
Federal Home Loan Banks (consolidated debt obligations), the Federal
National Mortgage Association (debt obligations), the Student Loan
Marketing Association (debt obligations), the Financing Corp. (debt
obligations), and the Resolution Funding Corp. (debt obligations);
provided however, that the investments described in this clause must
(A) have a predetermined fixed dollar of principal due at maturity
that cannot vary or change, (B) if rated by S&P, must not have an "r"
highlighter affixed to their rating, (C) if such investments have a
variable rate of interest, such interest rate must be tied to a single
interest rate index plus a fixed spread (if any) and must move
proportionately with that index, and (D) such investments must not be
subject to liquidation prior to their maturity;
(d) federal funds, unsecured certificates of deposit, time deposits,
bankers' acceptances and repurchase agreements having maturities of
not more than 365 days of any bank, the short term obligations of
which are rated in the highest short term rating category by each
Rating Agency (or, if not rated by any Rating Agency other than S&P,
otherwise acceptable to such Rating Agency or Agencies, as applicable,
as confirmed in writing that such investment would not, in and of
itself, result in a downgrade, qualification or withdrawal of the then
current ratings assigned to the Securities); provided, however, that
the investments described in this clause must (A) have a predetermined
fixed dollar of principal due at maturity that cannot vary or change,
(B) if rated by S&P, must not have an "r" highlighter affixed to their
rating, (C) if such investments have a variable rate of interest, such
interest rate must be tied to a single interest rate index plus a
fixed spread (if any) and must move proportionately with that index,
and (D) such investments must not be subject to liquidation prior to
their maturity;
(e) fully Federal Deposit Insurance Corporation-insured demand and time
deposits in, or certificates of deposit of, or bankers' acceptances
issued by, any bank or trust
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company, savings and loan association or savings bank, the short term
obligations of which are rated in the highest short term rating
category by reach Rating Agency (or, if not rated by any Rating Agency
other than S&P, otherwise acceptable to such Rating Agency or
Agencies, as applicable, as confirmed in writing that such investment
would not, in and of itself, result in a downgrade, qualification or
withdrawal of the then current ratings assigned to the Securities);
provided, however, that the investments described in this clause must
(A) have a predetermined fixed dollar of principal due at maturity
that cannot vary or change, (B) if rated by S&P, must not have an "r"
highlighter affixed to their rating, (C) if such investments have a
variable rate of interest, such interest rate must be tied to a single
interest rate index plus a fixed spread (if any) and must move
proportionately with that index, and (D) such investments must not be
subject to liquidation prior to their maturity;
(f) debt obligations with maturities of not more than 365 days and rated
by each Rating Agency (or, if not rated by any Rating Agency other
than S&P, otherwise acceptable to such Rating Agency or Agencies, as
applicable, as confirmed in writing that such investment would not, in
and of itself, result in a downgrade, qualification or withdrawal of
the then current ratings assigned to the Securities) in the highest
long-term unsecured rating category; provided, however, that the
investments described in this clause must (A) have a predetermined
fixed dollar of principal due at maturity that cannot vary or change,
(B) if rated by S&P, must not have an "r" highlighter affixed to their
rating, (C) if such investments have a variable rate of interest, such
interest rate must be tied to a single interest rate index plus a
fixed spread (if any) and must move proportionately with that index,
and (D) such investments must not be subject to liquidation prior to
their maturity;
(g) commercial paper (including both non-interest-bearing discount
obligations and interest-bearing obligations payable on demand or on a
specified date not more than one year after the date of issuance
thereof) with maturities of not more than 365 days and rated by each
Rating Agency (or, if not rated by any Rating Agency other than S&P,
otherwise acceptable to such Rating Agency or Agencies, as applicable,
as confirmed in writing that such investment would not, in and of
itself, result in a downgrade, qualification or withdrawal of the then
current ratings assigned to the Securities) in its highest short-term
unsecured debt rating; provided, however, that the investments
described in this clause must (A) have a predetermined fixed dollar of
principal due at maturity that cannot vary or change, (B) if rated by
S&P, must not have an "r" highlighter affixed to their rating, (C) if
such investments have a variable rate of interest, such interest rate
must be tied to a single interest rate index plus a fixed spread (if
any) and must move proportionately with that index, and (D) such
investments must not be subject to liquidation prior to their
maturity; and
(h) the Federated Prime Obligation Money Market Fund (the "Fund") so long
as the Fund is rated "AAA" by each Rating Agency (or, if not rated by
any Rating Agency other than S&P, otherwise acceptable to such Rating
Agency or Agencies, as applicable, as confirmed in writing that such
investment would not, in and of itself, result in a downgrade,
qualification or withdrawal of the then current ratings assigned to
the Securities);
(i) any other demand, money market or time deposit, or any other
obligation, security or investment, provided that, each rating Agency
has confirmed in writing to the Lender, that such investment would
not, in and of itself, result in a downgrade, qualification or
withdrawal of the then current ratings assigned to the Securities; and
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(j) such other obligations as are acceptable as Permitted Investments to
each Rating Agency, as confirmed in writing to the Lender, that such
obligations would not, in and of itself, result in a downgrade,
qualification or withdrawal of the then current ratings assigned to
the Securities;
provided, however, that, in the judgment of the Lender, such instrument
continues to qualify as a "cash flow investment" pursuant to Code Section
860G(a)(6) earning a passive return in the nature of interest and that no
instrument or security shall be a Permitted Investment if (i) such instrument or
security evidences a right to receive only interest payments or (ii) the right
to receive principal and interest payments derived from the underlying
investment provides a yield to maturity in excess of 120% of the yield to
maturity at par of such underlying investment.
19
<PAGE>
Schedule I
1. The terms defined in this Section have the meanings assigned to them in
this Section, and include the plural as well as the singular.
"ADA Compliance Work" means the repairs, improvements and replacements to
-------------------
the Properties to comply with the Americans with Disabilities Act of 1990, as
amended from time to time, in the amounts more particularly described on Exhibit
-------
A to the Loan Agreement.
- -
"Adjusted Rate" means the Base Rate adjusted in accordance with paragraph
-------------
4(e) of the Note.
"Base Rate" means 8.85% per annum.
---------
"Borrower" means Marriott Residence Inn II Limited Partnership, a Delaware
--------
limited partnership
"Business Day" means a day on which banks and foreign exchange markets are
------------
open for business in New York, New York.
"CPI" means the Consumer Price Index, all items for All Urban Consumers,
---
U.S. City Average and (a) using 1982-1984 as the standard reference base period
equal to 100 or (b) if the CPI ceases to be issued with the reference base
period referred to in clause (a) for any time period for which the CPI is to be
determined hereunder, using for the CPI for the time period for which such
reference base period is not used the standard reference base period for such
time period times a conversion factor that will convert such CPI to a value
corresponding to a 1982-1984 base period equal to 100.
"Capital and FF&E Expenditures" means the expenditure of amounts for the
-----------------------------
purpose of the Repairs and Equipment Reserve, as such term is defined in the
Management Agreement.
<PAGE>
"Closing Date" means the date of execution and delivery of the Loan
------------
Agreement.
"Condemnation Proceeds" means all awards or payments, and any interest paid
---------------------
or payable with respect thereto, which may be made with respect to all or any
portion of the Properties, whether from the exercise of right of condemnation,
eminent domain or similar proceedings (including any transfer made in lieu of
the exercise of said right), or from any taking for public use, or for any other
injury to or decrease in the value of all or any portion of the Premises
(including, without limitation, any awards resulting from a change of grade of
streets and awards for severance damages), all of the foregoing to be held,
applied and paid in accordance with the provisions of the applicable Mortgage.
"Cure Notice" shall mean a written notice delivered to Manager by Lender
-----------
acknowledging that an Event of Default has been cured (and such cure has been
accepted by Lender) or waived, which notice Lender agrees to deliver promptly
upon any such cure (if accepted by Lender) or waiver.
"Debt" means the obligations of the Borrower under the Transaction
----
Documents, together with all interest thereon, and all other sums, including,
without limitation, fees, expenses, commissions, premiums and indemnities, which
may or shall become due under any of the Transaction Documents, including the
costs and expenses of enforcing any provision of the Transaction Documents that
may be reimbursable under the Transaction Documents.
"Debt Service Payment Date" means the 11th day of each calendar month or
-------------------------
the next Business Day immediately thereafter.
"Default Notice" shall mean any notice of a Payment Event of Default or
--------------
Non-Payment Event of Default from Lender or the Servicer to Manager.
<PAGE>
"Default Rate" means a rate per annum equal to the lesser of (aa) two
------------
percent (2%) above the Base Rate or Adjusted Rate, as applicable, and (bb) the
maximum rate allowed by law.
"Deferred Maintenance Work" means the repairs, improvements and
-------------------------
replacements to the Properties in the amounts more particularly described on
Exhibit B to the Loan Agreement.
- ---------
"Eligible Account" means either (i) an account maintained with a federal or
----------------
state chartered depository institution or trust company, the long-term unsecured
debt obligations of which (or, in the case of a depository institution or trust
company that is the principal subsidiary of a holding company, the long-term
unsecured debt obligations of such holding company) are rated by each Rating
Agency in one of its two highest rating categories (or such other ratings as
will not result in the rating of any of the Securities being reduced below their
respective ratings on the date determination is to be made and as to which the
Rating Agencies may otherwise agree) at the time of the deposit therein, or the
short-term unsecured debt obligations of such depository institution or trust
company (or holding company), as the case may be, are rated by each Rating
Agency not lower than A-1+ by S&P and D1+ by DCR, or (ii) a segregated trust
account maintained with the trust department of a federal or state chartered
depository institution or trust company acting in its fiduciary capacity
provided that such account is subject to fiduciary funds on deposit regulations
(or internal guidelines) substantially similar to 12 C.F.R. (S)9.10 (b), or
(iii) after the Securitization, an account in any other insured depository
institution reasonably acceptable to the Servicer and the trustee, so long as
prior to the establishment of an account in any such other depository
institution each of the Rating Agencies shall have delivered a Rating Comfort
Letter with respect thereto.
"Environmental Remediation Work" means the actions taken with respect to
------------------------------
the Properties set forth on Exhibit C to the Loan Agreement.
"Events of Default" means any of the following:
-----------------
iii
<PAGE>
1. failure by the Borrower to pay on the due date any interest or
principal due and payable on the Note as set forth therein; or
2. failure by the Borrower to make any other payment due under any
Transaction Document within ten (10) days after demand therefor shall have been
made; or
3. any representation or warranty of the Borrower contained in any
Transaction Document shall have been untrue or incorrect when made in any
respect that may have a Material Adverse Effect; or
4. failure by the Borrower to perform its covenants in Section 5.2(iv),
and such failure continues unremedied for ten days after notice thereof by NACC
to the Borrower requiring the same to be remedied; or
5. failure by the Borrower to perform or observe any other of its
covenants under any Transaction Document, and such failure continues unremedied
for 30 days after notice thereof by NACC to the Borrower requiring the same to
be remedied; provided, however, that it shall not be an Event of Default if (a)
-------- -------
such failure is curable but is not reasonably capable of being cured within such
30-day period and the Borrower shall have commenced to cure such failure within
such 30-day period and thereafter shall diligently pursue such cure to
completion, but in no event later than 180 days after the date on which the
Borrower received such written notice from NACC or (b) such failure affects one
or more but not all of the Properties and the Borrower, within thirty (30) days
after the Borrower's receipt of such notice from NACC, gives notice to NACC of
its intent to release such Property from the Lien of the Security Documents
pursuant to the provisions of Section 2.6 or 2.9 and, thereafter diligently
pursues efforts to take such action and, within 180 days after the date on which
the Borrower received such written notice from NACC, effects such release
pursuant to the provisions of Section 2.4 or 2.7, as the case may be; or
6. an order (that has not been vacated or stayed within 60 days from the
entry thereof) is made for, or the Partners take any action with regard to, the
winding up of the Borrower or the General Partner except a winding up for the
purpose of a merger, restructuring or contribution, the terms of which have
previously been approved in writing by NACC; or
iv
<PAGE>
7. (A) the Borrower or the General Partner shall commence any Action (1)
under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors
(collectively, "Insolvency Law") seeking to have an order for relief entered
--------------
with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or
seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or (2)
seeking appointment of a receiver, trustee, custodian or other similar official
(each a "Bankruptcy Custodian") for it or for all or substantially all of its
--------------------
assets, or the Borrower or the General Partner shall make a general assignment
for the benefit of its creditors; or (B) there shall be commenced against the
Borrower or the General Partner any Action of a nature referred to in clause (A)
above which (1) results in the entry of any order for relief or any such
adjudication or appointment and (2) remains undismissed, undischarged or
unbonded for a period of 60 days; or (C) there shall be commenced against the
Borrower or the General Partner any Action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or substantially
all of its assets which results in the entry of an order for any such relief
that shall not have been vacated, discharged, stayed, satisfied or bonded
pending appeal within 60 days from the entry thereof; or (D) the Borrower or the
General Partner shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due; or
8 . Unless (a) the Borrower causes all of the Properties
then owned by the Borrower to come under management by another nationally
recognized hotel operator acceptable to NACC, (b) such Properties are operated
as part of a comparable nationally recognized hotel system acceptable to NACC
and (c) each of the Rating Agencies delivers to NACC a Rating Comfort Letter
with respect thereto: (A) the Manager shall commence any Action (1) under any
Insolvency Law seeking to have an order for relief entered with respect to it,
or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution, composition or
other relief with respect to it or its debts, or (2) seeking appointment of a
Bankruptcy Custodian for it or for all or substantially all of its assets, or
the Manager shall make a general assignment for the benefit of its creditors; or
(B) there shall be commenced against the Manager any Action of a nature referred
to in clause (A) above which (1) results in the entry of any order for relief or
any such adjudication or appointment and (2) remains undismissed,
v
<PAGE>
undischarged or unbonded for a period of 60 days; or (C) there shall be
commenced against the Manager any Action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or substantially
all of its assets which results in the entry of an order for any such relief
that shall not have been vacated, discharged, stayed, satisfied or bonded
pending appeal within 60 days from the entry thereof; or (D) the Manager shall
generally not, or shall be unable to, or shall admit in writing its inability
to, pay its debts as they become due;
9. one or more judgments or decrees, not covered by insurance, in an
aggregate amount exceeding $2,000,000 shall be entered against the Borrower or
the General Partner, and such judgments or decrees shall not have been vacated,
discharged, stayed, satisfied or bonded pending appeal within 60 days from the
entry thereof; or
10. there is a Change of Control, unless permitted under Section
2.6.
"Impositions" has the meaning set forth in the applicable Mortgage.
-----------
"Inns" means the residence inns and the residence inns operations located
----
at the Properties.
"Insurance Proceeds" means all proceeds of, and any unearned premiums on,
------------------
the Policies (as hereinafter defined) and any other insurance policies covering
all or any portion of the Properties, the Equipment, the Personal Property
and/or the Rents, including, without limitation, the right to receive and apply
the proceeds of any insurance, judgments, or settlements made in lieu thereof,
for damage to all or any portion of the Properties, the Equipment and/or the
Personal Property, and any interest actually paid with respect thereto, all of
the foregoing to be held, applied and paid in accordance with the provisions of
the Mortgage.
"Lender" means NACC or any person to whom the rights and obligations of
------
NACC under the Transaction Documents are assigned.
"Loan" means the loan evidenced by the Note.
----
vi
<PAGE>
"Management Agreement" means the Amended and Restated Management Agreement,
--------------------
executed as of the Closing Date, by the Borrower and the Manager relating to the
management and operation of the Properties as such agreement is amended by the
Modification, Subordination and Non-Disturbance Agreement, Estoppel and Consent,
dated as of the Closing Date, among the Manager, the Lender and the Borrower.
"Management Expenses" means the following (without duplication):
-------------------
(i) The cost of operations including salaries, wages (including accruals
for year-end bonuses to key management employees), fringe benefits, payroll
taxes and other costs related to employees of each Hotel (the foregoing costs
shall not include salaries and other employee costs of executive personnel of
the Manager who do not work at one of the Inns on a regular basis; except that
the foregoing costs shall include the allocable portion of the salary and other
employee costs of any general manager or other supervisory personnel (not
including regional vice-presidents or regional salespeople) assigned to a
"cluster" of hotels and inns which includes one or more of the Inns; (ii)
departmental expenses, administrative and general expenses and the cost of
marketing, advertising and business promotion, heat, light and power, and
routine repairs, maintenance and minor alterations, the cost of which can be
expensed under GAAP, as may be deemed by the Manager to be necessary to maintain
each Inn in good repair and condition and in conformity with Legal Requirements;
(iii) the cost of Inventories (as defined in USAH) and items included within
"Property and Equipment" under USAH consumed in the operation of each Inn; (iv)
a reasonable reserve for uncollectible accounts receivable as determined by the
Manager; (v) all costs and fees of independent accountants or other third
parties who perform services required or permitted hereunder; (vi) all costs and
fees of technical consultants and operational experts for specialized services;
(vii) the Residence Inn System Fee (as such term is defined in the Management
Agreement) in an amount equal to the greater of 4% of Suites Revenues (as such
term is defined in the Management Agreement) or the actual fee incurred; (viii)
the Base Management Fee (as such term is defined in the Management Agreement) in
an amount equal to the greater of 2% of Gross Revenues or the actual fee
incurred; (ix) the Inns' pro rata share of costs and expenses incurred by
Manager in providing Chain Services (as such term is defined in the Management
Agreement) in
vii
<PAGE>
an amount equal to the greater of 2.5% of Gross Revenues or the actual costs and
expenses incurred; (x) insurance costs and expenses (without duplication); (xi)
taxes, if any, payable by or assessed against the Manager related to this
Agreement or to the Manager's operation of the Inns (exclusive of Manager's
income taxes) and all Impositions (without duplication); (xii) deposits required
to be made into the Capital Expenditure and FF&E Reserve Account and the Tax and
Insurance Account to the extent required by the Cash Management Procedures (but
not including any amounts paid from such Accounts); (xiii) the contributions
required to be made, as they may change from time to time, to the Marketing Fund
(as such term is defined in the Management Agreement) in an amount equal to the
greater of 2.5% of Gross Revenues or the actual contributions made; and (xiv)
Such other costs and expenses as are otherwise reasonably necessary for the
proper and efficient operation of the Inns.
"MII" means Marriott International, Inc., a Delaware corporation.
---
"MII Cash Management Conditions" means the following conditions: (i) the
------------------------------
Properties from which Gross Revenues are to be deposited in the Manager's
Account are managed by the Manager under the Management Agreement and (ii) the
Manager is a wholly owned, direct or indirect, subsidiary of MII.
"Monthly Debt Service Payment" means the constant monthly payment set forth
----------------------------
in Paragraph 4(b) of the Note.
--------------
"NACC" means Nomura Asset Capital Corporation.
----
"Note" means that certain Secured Promissory Note, dated the Closing Date,
----
from the Borrower to NACC in the principal sum of $140,000,000.
"Optional Prepayment Date" means April 11, 2006.
------------------------
"Paid in Full" shall mean, with respect to the Note, that all indebtedness
------------
evidenced by the Note has been paid, provided,
viii
<PAGE>
however, that the Note shall be deemed to have been Paid in Full for purposes of
this Agreement (but not for purposes of the Loan Documents) at such time as all
of the Property has been transferred to Lender or its designee, or to a third
party purchaser, through foreclosure or Deed in Lieu of Foreclosure, it being
understood that the Note shall not be deemed to have been Paid in Full (unless
all indebtedness evidenced by the Note shall actually have been paid) so long as
any of the Property remains subject to the lien of a Mortgage.
"Payment Event of Default" shall mean any Event of Default resulting from a
------------------------
default in payment required under any Loan Document.
"Principal Payment." Payment of principal on the Note in reduction of such
-----------------
principal in the amount of the difference between the Monthly Debt Service
Payment and the Base Rate Interest
"Property" or "Properties" means any or all of those 22 residence inns at
-------- ----------
the locations set forth in Exhibit E to the Loan Agreement including all
---------
improvements thereon, fixtures thereto, direct interests therein, and personal
property related thereto or included therein; provided, however, that "Property"
or "Properties" shall not include (i) any property owned by tenants, guests,
licensees or concessionaires of or to such Property or Properties, or (ii) any
Property or Properties released from the Lien of the Security Documents pursuant
to the provisions of this Agreement or any Security Document from and after the
date of such release.
"Rating Agencies" means one or more of S&P, Fitch Investors Services Inc.,
---------------
Moody's Investor Services Inc. and DCR that are, at the time of determination,
selected by NACC to rate the Securities.
"S&P" means Standard & Poor's Rating Services.
---
"Securitization" means any securitization of the Loan.
--------------
"Servicer" means Amresco, Inc., its assigns and successors and any other
--------
nationally recognized servicer of commercial mortgage loans selected by NACC.
ix
<PAGE>
"Transaction Documents" means the Loan Agreement, the Security Documents,
---------------------
the Note and all other documents executed and delivered by the Borrower in favor
of NACC in connection with the Loan, including, without limitation, all
agreements, instruments and documents pursuant to which the Pledged Property is
assigned, collaterally assigned and/or pledged to NACC hereunder.
x
<PAGE>
Schedule II
LOAN AGREEMENT
Section 2.2 Right to Contest. To the extent consistent with the Mortgages,
----------------
the Borrower at its expense may contest, by appropriate Action conducted in good
faith and with due diligence, the amount or validity or application, in whole or
in part, of any Imposition or Lien therefor or any Legal Requirement or
Insurance Requirement or the application of any instrument of record affecting
the Pledged Property or any part thereof or any claims or judgments of
mechanics, materialmen, suppliers or vendors or Liens therefor, and may direct
the Manager or the Servicer, as the case may be, to withhold payment of the same
pending such Action if permitted by law; provided, however, that (a) in the case
-------- -------
of any Impositions or Liens therefor or any claims or judgments of mechanics,
materialmen, suppliers or vendors or Liens therefor, such Action shall suspend
the enforcement thereof and the accrual of penalties thereon from the Borrower,
the Manager, the Servicer and the Pledged Property, (b) neither the Pledged
Property nor any part thereof or interest therein could be in any danger of
being sold, forfeited or lost if the Borrower pays the amount or satisfies the
condition being contested, and the Borrower would have the opportunity to so pay
or satisfy if the Borrower fails to prevail in the contest and (c) in the case
of an Insurance Requirement, the failure of the Borrower to comply therewith
shall not impair the validity of any insurance required to be maintained by the
Borrower under the applicable Mortgage or the right to full payment of any
claims thereunder.
i
<PAGE>
Section 2.3 Defeasance.
----------
(a) At any time after the date which is the earlier of (i) two years after
the "startup day," within the meaning of Section 860G(a)(9) of the IRC, of a
"real estate mortgage investment conduit," within the meaning of Section 860D of
the IRC (a "REMIC"), that holds the Note (if the Note has been transferred to a
-----
REMIC prior to March 22, 1998) and (ii) March 22, 2000, but prior to the
Optional Prepayment Date, and provided no Event of Default has occurred and is
continuing (other than an Event of Default that will be cured by the release of
a Property or Properties from the Lien of the Security Documents pursuant to the
provisions of clause (e) of Section 4.1A), the Borrower may defease such Lien to
cause the release of one or more Properties from such Lien by providing the
Lender with funds in an amount sufficient to purchase U.S. Obligations in an
amount equal to the Defeasance Deposit for that portion of the Note which the
Borrower wishes to defease, upon the satisfaction of the following conditions:
(i) not less than 30 days' notice to the Lender specifying a Debt
Service Payment Date (the "Release Date") on which the Defeasance Deposit is to
------------
be made;
(ii) the payment to the Lender of interest accrued and unpaid on the
principal balance of the Note and all other Debt due through and including the
Release Date;
(iii) the payment to the Lender of the Defeasance Deposit;
(iv) the delivery to the Lender of:
(a) a security agreement (the "Defeasance Security
-------------------
Agreement"), in form and substance satisfactory to the
---------
Lender, creating a first priority perfected security
interest in favor of the Lender in the Defeasance Deposit
and the U.S. Obligations purchased with the Defeasance
Deposit in accordance with this subsection (a) (together,
the "Defeasance Collateral");
---------------------
(b) form(s) of release of the Property(ies) to be released
from the Lien of the Security Documents (for execution by
the Lender)
ii
<PAGE>
appropriate for the jurisdiction(s) in which such
Property(ies) are located;
(c) an Officer's Certificate certifying that the requirements
set forth in subsections (a) (ii)-(iv) have been
satisfied;
(d) an opinion of counsel for the Borrower (which may be a
"reasoned" opinion), in form and substance satisfactory to
the Lender, that (i) the transfer of the Defeasance
Collateral in exchange for release(s) of the Property(ies)
to be released will not constitute an avoidable preference
under Section 547 of the United States Bankruptcy Code in
the event of a filing of a petition for relief under the
United States Bankruptcy Code for or against the Borrower,
(ii) the Defeasance Collateral has been duly and validly
assigned and delivered to the Trustee for the benefit of
the holders of the Securities, (iii) the Trustee holds a
first priority perfected security interest in the
Defeasance Collateral for the benefit of such holders,
(iv) such transfer will not result in a deemed exchange of
the Securities pursuant to Section 1001 of the IRC, (v)
such transfer will not, by itself, adversely affect the
status of the Securities as indebtedness for federal
income tax purposes and (vi) such transfer will not
adversely affect the status of the entity holding the Debt
as a REMIC (assuming for such purposes that such entity
otherwise qualifies as a REMIC and that the Note was
transferred to such REMIC not later than two years prior
to the Release Date);
(e) a certificate of a certified public accountant acceptable
to the Lender that the Defeasance Collateral complies with
the requirements set forth in subsection (b) below;
(f) such other certificates, documents or instruments as the
Lender may reasonably request;
iii
<PAGE>
(g) evidence satisfactory to the Lender that the Defeasance Debt
Service Coverage Ratio will be maintained for the twelve
full months commencing immediately after the Release Date at
the greater of (x) the Initial Debt Service Coverage Ratio
and (y) the ratio of the Net Operating Income for the
thirteen (13) full Accounting Periods next preceding the
Release Date divided by the difference between (i) Debt
Service Expense for such period and (ii) the payments
received for such period from or with respect to U.S.
Obligations purchased by the Lender with the Defeasance
Deposits paid to it by the Borrower pursuant to this Section
2.3(a) and then held as security for the Note for such
period; and
(v) If the defeasance is made after the Securitization, the Rating
Agencies deliver a Rating Comfort Letter.
(b) If, following the release of the subject Property(ies), less than all
of the Properties shall have been released, the Lender shall use the Defeasance
Deposit to purchase U.S. Obligations that provide payments on or prior to, but
as close as possible to, all successive Debt Service Payment Dates after the
Release Date equal to the sum of (i) 125% of the portion of the P&I Payments due
on such Debt Service Payment Dates allocable to the Property(ies) to be released
from the Lien of the Security Documents on such Release Date (determined, pro
---
rata, on the basis of the Release Prices) through and including the Optional
- ----
Prepayment Date and (ii) 125% of the amount allocable to such Property(ies)
(determined, pro rata, on the basis of the Release Prices) of a balloon payment
--- ----
equal to the outstanding principal balance of the Note, and accrued and unpaid
interest thereon, that would remain unpaid as of the Optional Prepayment Date as
if such balloon payment were then due and payable. If a Property is released
pursuant to this Section 2.3 as a result of a condemnation or casualty, the
payments provided for in the preceding sentence shall be equal to the greater of
(A) the Release Price and (B) the lesser of (x) the Defeasance Deposit and (y)
the net Condemnation Proceeds or the net Insurance Proceeds received on account
of such Property. The Lender shall deliver such U.S. Obligations to the Servicer
for application pursuant to Sections 4.3(A) and 7.9(A) of the Cash Management
Procedures.
iv
<PAGE>
(c) If, as a result of the release of the subject Property(ies), all of
the Properties shall have been released, the Lender shall use the Defeasance
Deposit to purchase U.S. Obligations that provide, together with any U.S.
Obligations purchased in connection with any prior releases of Properties,
payments on or prior to, but as close as possible to, all successive Debt
Service Payment Dates after the Release Date equal to the sum of (i) the
remaining Monthly Debt Service Payments (such Monthly Debt Service Payments due
on such Debt Service Payment Dates being herein referred to as the "P&I
---
Payments") that would be required under the Note through and including the 120th
- --------
Debt Service Payment Date and (ii) a balloon payment of the outstanding
principal balance of the Note and accrued and unpaid interest thereon as of the
Optional Prepayment Date as if such balloon payment were then due and payable.
The Lender shall deliver such U.S. Obligations to the Servicer for application
pursuant to Sections 4.3(A) and 7.9(A) of the Cash Management Conditions.
(d) Upon compliance with the requirements of this Section 2.3, the
Property(ies) to be released shall be released from the Lien of the Security
Documents and shall not be deemed a Property hereunder and the U.S. Obligations
shall constitute substitute collateral which, together with the Security
Documents applicable to the remaining Properties, shall secure the Debt.
(e) If all the Properties have been released, the Borrower may assign its
obligations under the Note together with the U.S. Obligations to a successor
entity (the "Successor Entity") designated by the Lender and thereupon be
----------------
released fully from all obligations relating to the Debt. In such event the
opinion of counsel provided for in clause (a)(iv)(D) of this Section 2.3 shall
provide that the Defeasance Collateral will not be part of the estate of the
Borrower under Section 541 of the United States Bankruptcy Code. The Lender
shall retain its obligation to designate a Successor Entity notwithstanding the
transfer of the Note unless such obligation is specifically assumed by the
transferee. In consideration for the payment of $1,000 by the Borrower, such
Successor Entity shall assume the Borrower's obligations under the Note and the
Defeasance Security Agreement, the Borrower shall be relieved of its obligations
thereunder and the Debt of the Borrower shall not be deemed outstanding for any
purpose of this Agreement. If required by the applicable Rating Agencies, the
Borrower shall also deliver or cause to be delivered a Substantive Consolidation
Opinion with respect to the Successor Entity in form and substance satisfactory
to the Lender and the applicable Rating Agencies.
v
<PAGE>
(f) For purposes of this Section 2.3, "Defeasance Deposit" shall mean an
------------------
amount in cash necessary to purchase U.S. Obligations whose cash flows are in an
amount sufficient to make the P&I Payments required under subsections (b) or
(c), as the case may be, plus any costs and expenses incurred or to be incurred
in making such purchase; "U.S. Obligations" shall mean obligations or securities
----------------
not subject to prepayment, call or early redemption which are direct obligations
of, or obligations fully guaranteed as to timely payment by, the United States
of America or any agency or instrumentality of the United States of America, the
obligations of which are backed by the full faith and credit of the United
States of America; and "Defeasance Debt Service Coverage Ratio" shall mean, in
--------------------------------------
respect of any fiscal period, the ratio of (i) Net Operating Income of the
Properties for such period remaining after a defeasance pursuant to this Section
2.3 to (ii) the difference between (x) Debt Service Expense for such period and
(y) the payments to be received from or with respect to U.S. Obligations then
held as security for the Note for such period.
(g) If the payment of accrued and unpaid interest and principal of the
Note and any other Debt has not been made in full by the Optional Prepayment
Date, payments from or with respect to U.S. Obligations then held by the Lender
and such payments received by the Lender thereafter shall be applied on the date
such payment is received (i) first, to payment of accrued and unpaid interest on
the Note and (ii) second, to prepayment of the Principal Payments in inverse
order of maturity.
(h) Notwithstanding the provisions of subsection (a) of this Section 2.3,
the Borrower may defease the Lien of the Security Documents to cause the release
of a Property for the purpose set forth in clause (e) of Section 4.1A prior to
the date set forth in such subsection (a) if it provides to the Lender an
opinion in form and substance, and from a firm, acceptable to the Lender, in the
exercise of its sole discretion, that such release will not adversely affect the
status of the entity holding the Debt as a REMIC (assuming for such purpose that
such entity otherwise qualifies as a REMIC).
Section 7.1(a)
(v) initial and ongoing administration by the Servicer of the Lockbox
Account, the Capital Expenditure and FF&E Reserve Account,
vi
<PAGE>
the Tax and Insurance Subaccount, the Cash Collateral Account and the Lockbox
Account;
(vi) initial and ongoing activity of any special servicer incurred as a
result of an Event of Default;
MORTGAGE
13. Damage to and Destruction of the Mortgaged Property
---------------------------------------------------
(a) In the event that the Mortgaged Property shall be damaged or
destroyed, in whole or in part, by fire or other casualty, whether insured or
uninsured, Mortgagor shall give prompt written notice thereof to Mortgagee,
together with Mortgagor's best estimate of the cost of restoration (the
"Restoration Cost"). Subject to the provisions of this Paragraph 13, Mortgagor
---------------- ------------
shall restore the Premises to the standard required by Paragraph 12(a)(vi) of
-------------------
this Mortgage. Mortgagor shall timely file all claims or proofs of claim so as
not to prejudice any claim and, if the Restoration Cost is equal to or greater
than an amount (the "Restoration Benchmark") equal to the lesser of (xx)
---------------------
$250,000.00 and (yy) 5% of the Release Price attributed to the Premises in the
Loan Agreement, or, irrespective of the Restoration Cost, if an Event of Default
exists as of the date of submission of any claims or proofs of claim, Mortgagor
shall submit all claims or proofs of claim and other submissions to Mortgagee
for the written approval of Mortgagee prior to any such filing, which approval
shall not be unreasonably withheld, conditioned or delayed.
(b) Provided that no Event of Default exists at the time of
settlement, Mortgagor shall have the right to settle any insurance claim with
respect to any casualty where the Restoration Cost is less than the Restoration
Benchmark, but shall give prompt written notice of any such claim and settlement
to Mortgagee. In such event, Mortgagor shall apply the Insurance Proceeds
relating to such casualty to restoration, replacement, rebuilding or repair
(hereinafter collectively referred to as "Restoration") of the damage to the
-----------
standard required by Paragraph 12(a)(vi) hereof.
-------------------
(c) If the Restoration Cost equals or exceeds the Restoration
Benchmark, and unless Mortgagor has obtained the release of this Mortgage as a
Casualty Event Release (as hereinafter defined) in accordance with the Loan
Agreement,
vii
<PAGE>
Mortgagee shall have the right to participate in the settlement of all insurance
claims relating to such casualty, and all Insurance Proceeds relating to such
casualty shall be paid directly to Mortgagee, and, after settlement of the
claim(s) and subject to Paragraph 13(d) hereof, such Insurance Proceeds shall be
---------------
deposited in the Insurance Proceeds Subaccount (as defined in the Loan
Agreement) of the Cash Collateral Account (as defined in the Loan Agreement) and
advanced to Mortgagor from time to time (subject to the conditions set forth
below) in reimbursement for amounts expended by Mortgagor or as direct payments
to contractors in Restoration of the Mortgaged Property. Upon completion of the
entire Restoration and provided no uncured Event of Default exists at the time
of payment, Mortgagee shall pay the remaining amount of the Insurance Proceeds,
if any, to Mortgagor; provided, however, that nothing herein contained shall
-------- -------
prevent Mortgagee from applying at any time the whole or any part of the
Insurance Proceeds to the curing of any default under any Transaction Document
or to the payment of the Debt in the circumstances set forth in Paragraph 13(d).
---------------
Advances of Insurance Proceeds shall be made available to Mortgagor, no less
frequently than monthly, in accordance with the general procedures employed at
the time by Mortgagee in connection with the disbursement of loan proceeds in
general by Mortgagee (including, without limitation, an endorsement to the title
insurance policy of Mortgagee as to the Premises insuring the continued first
priority lien of this Mortgage against mechanics' liens that may arise out of
the Restoration and appropriate certifications from a licensed architect or
engineer selected by Mortgagor subject to the reasonable approval of Mortgagee
(each, an "Architect") that the requested payment is for work completed in
---------
accordance with plans and specifications approved by Mortgagee and that the
balance of funds held on deposit after such payment will be sufficient to pay
the cost of completing the Restoration (provided, however, that if the cost of
the Restoration is or is estimated to be less than $100,000.00, Mortgagee will
accept a certificate of the officer of the general partner of Mortgagor
certifying to this effect), and evidence satisfactory to Mortgagee that no liens
have been filed for the labor and materials used in connection therewith and
that the requested payment will be received in trust, to be applied first to the
payment for such labor and materials in amounts which are equal to the
percentage of completion attained at the time of such advance, less, in the case
of any Restoration in which the original estimated cost or actual cost is
$100,000.00 or more, all amounts previously advanced and a holdback of 10% (or
such lesser amount as may be customary in the trade in such location or as may
be required under the applicable restoration contract, but in no event less than
5% for any contact
viii
<PAGE>
where a holdback is required), which remaining amounts will be advanced upon
full completion of the Restoration as due under the applicable Restoration
contract. All Insurance Proceeds and other sums deposited with Mortgagee
pursuant to this Paragraph, until expended or applied as provided in this
Paragraph, shall constitute additional security for the Debt and shall be
invested in "Permitted Investments" (as defined in the Loan Agreement) with
---------------------
income thereon inuring to the benefit of Mortgagor in accordance with the Loan
Agreement.
(d) Notwithstanding the foregoing, if an Event of Default exists or
if, in Mortgagee's reasonable judgment based on professional consultation:
(i) the Restoration of the Improvements cannot be completed (A)
so as to constitute an economically viable building or (B) at least six (6)
months prior to the Maturity Date; or
(ii) the amount of business interruption insurance is
insufficient to cover all fixed and operating expenses of the Premises,
including such portion of debt service on the Loan as is reasonably
allocable to the Premises, during Restoration and until the operation of
Mortgagor's business at the Premises is resumed; or
(iii) the amount of Insurance Proceeds equals or exceeds the
amount of the outstanding principal balance of the Loan; or
(e) Restoration of the Mortgaged Property cannot be completed except
at a cost which exceeds the amount of available Insurance Proceeds and Mortgagor
shall not have deposited with Mortgagee, within ninety (90) days following
Mortgagee's receipt of such Insurance Proceeds and delivery to Mortgagor of
notice of a deficiency, an amount, in cash or cash equivalent, equal to the
excess of the estimated cost of restoration as determined by an Architect over
the amount of such Insurance Proceeds;
then Mortgagee shall have the option to apply Insurance Proceeds to the payment
of the Note, interest accrued and unpaid thereon, and the Yield Maintenance
Premium, and other unpaid amounts, if any, of the Debt, all in such order as
Mortgagee shall designate in accordance with the Transaction Documents,
provided, however, that
- -------- -------
ix
<PAGE>
any such application shall in no event affect the payments to be made in respect
of the Note.
(f) Mortgagor shall, promptly after the occurrence of a casualty,
commence and thereafter with reasonable diligence prosecute to completion any
Restoration of the Mortgaged Property or part thereof to the standard required
by Paragraph 12(a)(vi) hereof. Any such Restoration shall be undertaken and
-------------------
completed in accordance with this Paragraph 13, subject to the final provision
------------
of this Paragraph 13(e). All Restoration shall be in a good and workmanlike
---------------
manner with reasonable diligence, and in compliance with all Legal Requirements.
Seasonality or weather permitting, if Mortgagor fails to commence Restoration
within thirty (30) days following Mortgagee's receipt of Insurance Proceeds or
fails to prosecute the Restoration to completion, Mortgagee may upon ten (10)
days' notice to Mortgagor, but shall not be obligated to, perform the
Restoration, and may use any of the Insurance Proceeds and Mortgagor's funds
deposited pursuant to Paragraph 13(c) or 13(d) of this Paragraph in payment
------------------------
therefor. Mortgagor shall pay to Mortgagee, within ten (10) days after written
demand, the amount of any deficiency between funds available for the Restoration
and the cost thereof (including funds deposited by Mortgagor pursuant to
Paragraph 13(c) or 13(d) of this Paragraph) together with interest thereon at
- ------------------------
the Default Rate from such tenth (10th) day through and including the date of
payment to Mortgagee. Notwithstanding the foregoing provisions of this Paragraph
---------
13(e) or anything else contained in this Paragraph 13, if Mortgagor has obtained
- ----- ------------
the release of the Premises and the lien of this Mortgage in accordance with the
Loan Agreement by payment of the applicable Release Price and other amounts due,
if any, to obtain a release under the Loan Agreement, and the taking of any
other actions required by the Loan Agreement with respect thereto (the payment
of such amounts and the taking of such actions being collectively called a
"Casualty Event Release"), then Mortgagor shall not be required to undertake the
----------------------
Restoration described herein. As set forth in the Loan Agreement, the payment of
amounts with respect to a Casualty Event Release shall not require the payment
of a Yield Maintenance Premium, and any Insurance Proceeds paid to Mortgagee
shall be credited against payments of the Release Price and any other amounts
due with respect to a Casualty Event Release required to be paid by the
provisions of the Loan Agreement.
(g) It is intended that, anything contained herein to the contrary
notwithstanding, no trust or fiduciary relationship shall be created by the
receipt by Mortgagee of any Insurance Proceeds, but only a debtor-creditor
relationship between
x
<PAGE>
Mortgagee, on the one hand, and Mortgagor, on the other, and only to the extent
of the Insurance Proceeds.
(h) If any Insurance Proceeds are not paid until after the
extinguishment of the Debt, whether by foreclosure or otherwise, and Mortgagee
shall not have received the entire amount of the Debt outstanding at the time of
such extinguishment, then such Insurance Proceeds, to the extent of the amount
of the Debt not so received, shall be paid to Mortgagee and be the property of
Mortgagee; and Mortgagor hereby assigns, transfers and sets over to Mortgagee
all of Mortgagor's right, title and interest in and to such proceeds. The
balance of such Insurance Proceeds, if any, shall be paid to and be the property
of Mortgagor. The provisions of this Paragraph shall survive the termination of
this Mortgage by foreclosure or otherwise as a consequence of the rights and
remedies of Mortgagee hereunder after an Event of Default.
(i) Subject to the provisions of Paragraph 13(d) or 13(e), as
------------------------
applicable, nothing herein contained shall be deemed to excuse Mortgagor from
repairing or maintaining the Mortgaged Property as provided in this Mortgage or
restoring all damage or destruction to the Mortgaged Property, regardless of the
sufficiency or availability of Insurance Proceeds, and the application or
release by Mortgagee of Insurance Proceeds shall not be deemed, in and of
itself, to cure or waive any default or Event of Default or notice of default.
Notwithstanding any casualty, Mortgagor shall continue to pay the Debt at the
time and in the manner provided for its payment in this Mortgage and the Note
and the Debt shall not be reduced until any Insurance Proceeds shall have been
actually received by Mortgagee and applied to the discharge of the Debt or
payments with respect to a Casualty Event Release.
(j) Mortgagee, to the extent that Mortgagee has not been reimbursed
therefor by Mortgagor, shall be entitled as a first priority out of any
Insurance Proceeds, to reimbursement for all actual costs, fees, reimbursements
and expenses of Mortgagee incurred in the determination and collection of any
such proceeds.
14. Condemnation Proceedings.
------------------------
(a) In the event that the Mortgaged Property, or any part thereof,
shall be taken pursuant to Condemnation Proceedings, Mortgagee shall, as
hereinafter set forth, have certain consent rights with respect to settlement of
any such Condemnation Proceedings, but shall not participate in any such
Condemnation
xi
<PAGE>
Proceedings except as expressly provided herein, and any Condemnation
Proceedings that may be made or any proceeds thereof are hereby assigned to
Mortgagee and shall be received and deposited into the Condemnation Proceeds
Subaccount (as defined in the Loan Agreement) of the Cash Collateral Account and
held and distributed by Mortgagee in the manner herein set forth. Mortgagor will
give Mortgagee prompt notice of the actual commencement of any Condemnation
Proceedings affecting the Mortgaged Property or of any threatened condemnation
of which Mortgagor becomes aware, including proceedings for severance and change
in grade of streets, and will deliver to Mortgagee copies of any and all papers
served in connection with any Condemnation Proceedings. Mortgagee is hereby
authorized to commence, appear in, and prosecute in its own name or Mortgagor's
name any action or proceeding relating to any Condemnation Proceedings, upon not
less than ten (10) Business Days' prior written notice to Mortgagor, if
Mortgagor has not commenced any such action or proceeding. Mortgagor may not
settle or compromise any claim in connection with any Condemnation Proceeding,
whether involving a Total Taking, Partial Taking or Temporary Taking, which
claim equals or exceeds, or, at the outset of any such Condemnation Proceedings,
appears to involve a sum which is likely to equal or exceed, in Mortgagee's
reasonable judgment based on professional consultation, the Restoration
Benchmark, without the prior written consent of Mortgagee in each instance,
which consent shall not be unreasonably withheld, conditioned or delayed, and
Mortgagee shall have the right to settle or compromise any claim in connection
therewith (irrespective of amount), without the consent of Mortgagor after the
occurrence of an Event of Default. Mortgagor agrees to execute any and all
further documents that may be reasonably required in order to facilitate the
collection of any Condemnation Proceeds and the making of any such deposit and
Mortgagor hereby appoints Mortgagee its attorney-in-fact for the limited purpose
of executing any such documents after the occurrence of an Event of Default,
such power being coupled with an interest and irrevocable.
(b) If, at any time during the term of the Loan, there occurs a Total
Taking (as hereinafter defined), Mortgagee shall collect any Condemnation
Proceeds, and apply the same, after payment of Mortgagee's reasonable costs of
collection thereof, including reasonable attorneys' fees and disbursements, to
payment of the Debt (but no Yield Maintenance Premium shall be due), all in such
order as Mortgagee shall designate, provided, however, that any such application
-------- -------
shall in no event affect the payments to be made in respect of the Note. Any
portion of any Condemnation Proceeds remaining after the payment in full of the
Debt shall be
xii
<PAGE>
released by Mortgagee to Mortgagor. For the purposes of this Paragraph, a "Total
-----
Taking" shall mean any taking or any constructive taking of Mortgagor's title to
- ------
the Premises in Condemnation Proceedings or by agreement by Mortgagor which
shall, in the reasonable opinion of Mortgagee, render it impracticable to
restore, within six (6) months prior to the Maturity Date, the portion of the
Premises not subject to such taking to a complete architectural unit of
substantially the same economic viability and for the same purposes and uses as
existed immediately prior to the date of the commencement of the Condemnation
Proceedings.
(c) If, at any time during the term of the Loan, there occurs a
taking which is less than a Total Taking (a "Partial Taking"), then, provided
--------------
that no Event of Default exists as of the date of submission of Mortgagor's
claim in the Condemnation Proceeding with respect to such Partial Taking,
Mortgagor shall have the right to settle any such claim with respect to any
Partial Taking where the Restoration Cost is less than the Restoration
Benchmark, but shall give prompt written notice of any such claim and settlement
to Mortgagee. If the Restoration Cost equals or exceeds, or, at the outset of
such Condemnation Proceedings, appears to involve a sum which is likely to equal
or exceed, in Mortgagee's reasonable judgment based on professional
consultation, the Restoration Benchmark, then, unless Mortgagor has obtained the
release of this Mortgage as a Condemnation Event Release (as hereinafter
defined) in accordance with the Loan Agreement, Mortgagee shall have the right
to participate in the settlement of such claim and all Condemnation Proceeds
relating to such Partial Taking shall be held by Mortgagee and shall be released
to pay the costs of restoration of the Improvements (a "Condemnation
------------
Restoration") subject to and upon satisfaction of the conditions set forth in
- -----------
Paragraphs 13(c) and 13(d) hereof as if such Condemnation Proceeds constituted
- --------------------------
Insurance Proceeds and the balance, if any, shall be paid to Mortgagor; unless,
------
in Mortgagee's reasonable judgment based on professional consultation, the
Condemnation Restoration cannot be completed in accordance with the conditions
of Paragraphs 13(c) and 13(d). In the event that there exists an Event of
--------------------------
Default, or (xx) any of such conditions shall not have been met, or (yy) the
Condemnation Restoration cannot be completed, in Mortgagee's reasonable judgment
based on professional consultation, prior to a date which is at least six (6)
months prior to the Maturity Date, regardless of compliance with all of the
other conditions of Paragraphs 13(c) and 13(d), or (zz) if the Condemnation
--------------------------
Proceeds exceed the cost of the Condemnation Restoration, Mortgagee, at the
discretion of Mortgagee, shall apply the Condemnation Proceeds, or balance
thereof, to payment of the
xiii
<PAGE>
Debt, (but no Yield Maintenance Premium shall be due), all in such order as
Mortgagee shall designate, provided, however, that any such application shall in
-------- -------
no event affect the schedule of payments to be made in respect of the Note. If
there is any balance of any Condemnation Proceeds remaining in the hands of
Mortgagee after any payment of the Debt in full, such balance shall be released
to Mortgagor. In the event that the costs of any permitted Condemnation
Restoration, as estimated reasonably by Mortgagee at any time, shall exceed the
net Condemnation Proceeds received by Mortgagee, Mortgagor shall deposit such
deficiency with Mortgagee.
(d) In the event of any taking of all or any portion of the Mortgaged
Property for temporary use or occupancy ("Temporary Taking"), any Condemnation
----------------
Proceeds with respect to such Temporary Taking shall be treated as Gross
Revenues (as defined in the Loan Agreement) and shall be distributed and applied
in the manner contemplated in the Loan Agreement (but only to the extent that
any such Condemnation Proceeds have not been used for Condemnation Restoration).
(e) Subject to the final provision of this Paragraph 14(e), nothing
---------------
contained in this Paragraph shall relieve Mortgagor of its duty to maintain,
repair, replace or restore the Improvements or the Equipment or rebuild the
Improvements, from time to time, following any Condemnation Proceedings with
respect to a Partial Taking or Temporary Taking and nothing in this Paragraph
shall relieve Mortgagor of its duty to pay the Debt, which shall be absolute,
regardless of any such occurrence with respect to all or any portion of the
Mortgaged Property. Notwithstanding any taking, whether a Total Taking, a
Partial Taking or a Temporary Taking, Mortgagor shall continue to pay the Debt
at the time and in the manner provided for its payment in this Mortgage and the
Note, and the Debt shall not be reduced until any award or payment therefor
shall have been actually received by Mortgagee and applied to the discharge of
the Debt. Notwithstanding the foregoing provisions of this Paragraph 14(e) or
---------------
anything else contained in this Paragraph 14, if Mortgagor has obtained the
------------
release of the Premises and the lien of this Mortgage in accordance with the
Loan Agreement by payment of the applicable Release Price and other amounts, if
any, due to obtain a release under the Loan Agreement, and the taking of any
other actions required by the Loan Agreement with respect thereto (the payment
of such amounts and the taking of such actions being, with respect to any
Condemnation Proceeding(s), being collectively called a "Condemnation Event
------------------
Release"), then Mortgagor shall not be required to undertake the Condemnation
- -------
Restoration described herein. As set
xiv
<PAGE>
forth in the Loan Agreement, the payment of amounts with respect to a
Condemnation Event Release shall not require the payment of a Yield Maintenance
Premium, and any Condemnation Proceeds paid to Mortgagee shall be credited
against payments of the Release Price and any other amounts due with respect to
a Condemnation Event Release required to be paid by the provisions of the Loan
Agreement. It is recognized that, with respect to a Partial Taking or a Total
Taking, depending on the amount of the award from the Governmental Authority
available to pay the Release Price and any other amounts due under the Loan
Agreement, that Mortgagor may have to pay to Mortgagee monies in addition to the
total available amount of the Condemnation Proceeds to obtain a Condemnation
Event Release.
(f) If a claim under any Condemnation Proceedings arising during the
term of this Mortgage is not paid until after the extinguishment of the Debt,
whether by foreclosure or otherwise, and Mortgagee shall not have received the
entire amount of the Debt outstanding at the time of such extinguishment, then
the Condemnation Proceeds relating to any such Condemnation Proceedings, to the
extent of the amount of the Debt not so received, shall be paid to Mortgagee and
be the property of Mortgagee; and Mortgagor hereby assigns, transfers and sets
over to Mortgagee all of Mortgagor's right, title and interest in and to such
Condemnation Proceeds. The balance of such Condemnation Proceeds, if any, shall
be paid to and be the property of Mortgagor. The provisions of this Paragraph
shall survive the termination of this Mortgage by foreclosure or otherwise as a
consequence of the rights and remedies of Mortgagee hereunder after an Event of
Default.
(g) All Condemnation Proceeds and other sums deposited with Mortgagee
pursuant to this Paragraph, until expended or applied as provided in this
Paragraph, shall constitute additional security for the Debt and shall be
invested in Permitted Investments with income thereon inuring to the benefit of
Mortgagor.
xv
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARRIOTT
RESIDENCE INN II LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS AND
CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000841283
<NAME> MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.00
<CASH> 8,008
<SECURITIES> 0
<RECEIVABLES> 2,472
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,238
<PP&E> 208,177
<DEPRECIATION> (63,385)
<TOTAL-ASSETS> 165,510
<CURRENT-LIABILITIES> 156,305
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 9,205
<TOTAL-LIABILITY-AND-EQUITY> 165,510
<SALES> 0
<TOTAL-REVENUES> 34,035
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,104
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,268
<INCOME-PRETAX> 2,663
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,663
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
