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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997
REGISTRATION NO. 333-28849
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
RFS HOTEL INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
TENNESSEE 62-1534743
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
850 RIDGE LAKE BOULEVARD, SUITE 220
MEMPHIS, TENNESSEE 38120
(901) 767-7005
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT M. SOLMSON
RFS HOTEL INVESTORS, INC.
850 RIDGE LAKE BOULEVARD, SUITE 220
MEMPHIS, TENNESSEE 38120
(901) 767-7005
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
DAVID C. WRIGHT, ESQ.
HUNTON & WILLIAMS
2000 RIVERVIEW TOWER
900 S. GAY STREET
KNOXVILLE, TENNESSEE 37902
(423) 549-7700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC; FROM TIME TO
TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AS DETERMINED BY
MARKET CONDITIONS AND OTHER FACTORS.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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SUBJECT TO COMPLETION DATED JUNE 27, 1997
2,569,609 SHARES OF COMMON STOCK
RFS HOTEL INVESTORS, INC.
This Prospectus relates to (i) the possible issuance by RFS Hotel
Investors, Inc. (the "Company") of (i) up to 2,244,934 shares (the "Redemption
Shares") of common stock, par value $.01 per share ("Common Stock"), of the
Company if, and to the extent that, current holders of 2,244,934 units of
partnership interest ("Units") in RFS Partnership, L.P. (the "Partnership"), of
which the Company is the sole general partner and currently owns an
approximately 90.5% interest, tender such Units for redemption and the Company
elects to redeem the Units for shares of Common Stock, and (ii) the offer and
sale from time to time by certain selling shareholders named herein (the
"Selling Shareholders") of up to 324,675 shares of Common Stock that may be
issued to the Selling Shareholders upon redemption of Units held by such
persons (the "Secondary Shares"). The registration of the Redemption Shares and
the Secondary Shares does not necessarily mean that any of the Redemption
Shares will be issued by the Company or any of the Secondary Shares will be
offered or sold by the Selling Shareholders. See "The Company" and "Plan of
Distribution."
The Common Stock is traded on the New York Stock Exchange under the symbol
"RFS." To ensure that the Company maintains its qualification as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended,
the Company's Charter limits the number of shares of Common Stock that may be
owned by any single person or affiliated group to 9.9% of the outstanding Common
Stock and restricts the transferability of shares of Common Stock if the
purported transfer would prevent the Company from qualifying as a REIT. See
"Risk Factors -- Limitation on Acquisition and Change in Control" and
"Description of Capital Stock -- Charter and Bylaw Provisions."
SEE "RISK FACTORS" FOR CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE
COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Selling Shareholders from time to time may offer and sell the Secondary
Shares directly or through agents or broker-dealers on terms to be determined at
the time of sale. To the extent required, the names of any agent or
broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." Each of the
Selling Shareholders reserves the sole right to accept or reject, in whole or in
part, any proposed purchase of the Secondary Shares to be made directly or
through agents.
The Company will not receive any cash proceeds from the issuance of the
Redemption Shares or the sale of any Secondary Shares by the Selling
Shareholders but has agreed to bear certain expenses of registration of the
issuance of the Redemption Shares and the sale of the Secondary Shares under
federal and state securities laws. The Company will acquire Units in exchange
for any Redemption Shares that the Company may issue to Unit holders pursuant to
this Prospectus.
The Selling Shareholders and any agents or broker-dealers that participate
with the Selling Shareholders in the distribution of Secondary Shares may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), and any commissions received by them and any
profit on the resale of the Secondary Shares may be deemed to be underwriting
commissions or discounts under the Securities Act.
The date of this Prospectus is
____________, 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registation or qualification under the securities laws of any such State.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission") pursuant to the Exchange
Act. Such reports, proxy statements and other information filed by the Company
may be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates or from the Commission's site
on the World Wide Web at http://www.sec.gov. The Common Stock is listed on the
New York Stock Exchange, and such reports, proxy and informational statements
and other information concerning the Company can be inspected and copied at the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington D.C. 20549, a Registration Statement on Form S-3 under the Securities
Act of 1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, with respect to the Common Stock offered pursuant to
this Prospectus. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and financial schedules thereto. For further information
concerning the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits and schedules filed therewith, which
may be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Commission and its regional offices at the locations listed
above. Any statements contained in this Prospectus concerning the provisions of
any document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
34-0-22164) are incorporated herein by reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1996; and
(b) Current Report on Form 8-K dated January 17, 1997; and
(c) Current Report on Form 8-K-A dated February 14, 1997; and
(d) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997; and
(e) Proxy Statement for the Annual Meeting of Shareholders of the Company
held on April 24, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the securities made hereby shall be deemed to
be incorporated by reference in this Prospectus and made a part hereof from the
date of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other document subsequently filed with the
Commission which also is deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any and all of the documents incorporated by reference herein (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should be
directed to RFS Hotel Investors, Inc., 850 Ridge Lake Boulevard, Suite 220,
Memphis, Tennessee 38120, Attention: Secretary, telephone (901) 767-7005.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
descriptions and the financial information and statements appearing elsewhere
and incorporated by reference in this Prospectus. As used herein, the term
"Company" includes RFS Hotel Investors, Inc. and its subsidiaries, including
this Partnership and the term "Partnership" includes subsidiaries of the
Partnership, unless the context indicates otherwise.
THE COMPANY
The Company is a self-administered real estate investment trust ("REIT")
which invests in hotel properties. The Company is the sole general partner of
the Partnership and owned at June 24, 1997 an approximately 90.5% interest in
the Partnership. Substantially all of the Company's business activities are
conducted through the Partnership. At June 24, 1997, the Partnership owned 61
hotel properties (the "Hotels") with an aggregate of 8,713 rooms located in 24
states and had under development five additional hotels.
On June 24, 1997, the Company acquired a 196 room, full service hotel in
Milpitas, California for a purchase price of $33.7 million. The six full
service and two upscale extended stay Hotels located in California represent
approximately one-third of the Company's investment in hotel properties.
In order to qualify as a REIT for federal income tax purposes, neither the
Company nor the Partnership can operate hotels. As a result, the Partnership
leases all of its hotel properties to wholly-owned subsidiaries of Doubletree
Corporation, a publicly-owned hotel management company ("Doubletree")
(collectively referred to herein as the "Lessees") pursuant to leases
("Percentage Leases") which provide for rent equal to the greater of (i) fixed
base rent or (ii) percentage rent ("Percentage Rent") based on a percentage of
gross room revenue (and food and beverage revenue, if any) at the Hotels. The
Lessees operate 57 of the Hotels and the remaining hotels are operated by third
parties pursuant to management agreements with the Lessees.
The Company's hotels consist of limited service hotels, full service hotels
and extended stay hotels. Limited service hotels do not contain restaurants or
lounges and generally contain little non-revenue producing space. Full service
hotels generally provide on-site food and beverage services and may have banquet
and meeting facilities. Extended stay hotels generally contain guest suites with
a kitchen and living area separate from the bedroom but vary with respect to
providing on-site restaurant facilities. The following table set forth
information regarding the franchise affiliations of the Hotels.
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<TABLE>
<CAPTION>
NUMBER OF NUMBER OF % OF TOTAL
FRANCHISE AFFILIATION HOTELS ROOMS/SUITES ROOMS/SUITES
--------------------- --------- ------------ ------------
<S> <C> <C> <C>
LIMITED SERVICE:
Courtyard by Marriott 1 102 1.2%
Hampton Inn 17 2,358 27.1%
Comfort Inn 6 787 9.0%
Holiday Inn Express 7 861 9.9%
-- ----- -----
Subtotal 31 4,108 47.2%
FULL SERVICE:
Holiday Inn 6 1,208 13.9%
Sheraton Four Points 3 585 6.7%
Sheraton 1 229 2.6%
Doubletree 1 220 2.5%
Independent 2 511 3.6%
-- ----- -----
Subtotal 12 2,553 29.3%
EXTENDED STAY:
Residence Inn 12 1,575 18.1%
Hawthorn Suites 1 280 3.2%
Homewood Suites 2 197 2.2%
-- ----- -----
Subtotal 14 2,052 23.5%
-- ----- -----
Total(1) 61 8,713 100.0%
== ===== ======
</TABLE>
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(1) In addition, the Company is developing the following hotels:
<TABLE>
<CAPTION>
NUMBER OF ANTICIPATED
DEVELOPMENT HOTEL ROOMS/SUITES LOCATION COMPLETION
----------------- ------------ -------- -----------
<S> <C> <C> <C>
Residence Inn 120 Jacksonville, FL September 1997
Homewood Suites 83 Chandler, AZ January 1998
Marriott Courtyard 90 Crystal Lake (Chicago), IL December 1997
Hampton Inn 101 Jacksonville, FL February 1998
Residence Inn 120 West Palm Beach, FL January 1998
</TABLE>
The Company is a Tennessee corporation. The Company has elected to be taxed
as a REIT for federal income tax purposes. The Company's executive offices are
located at 850 Ridge Lake Boulevard, Suite 220, Memphis, Tennessee 38120 and its
telephone number is (901) 767-7005.
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RISK FACTORS
Prospective investors and Unit holders should carefully consider the
matters discussed under "Risk Factors" before making an investment decision
regarding the Common Stock offered hereby.
TAX STATUS OF THE COMPANY
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with its taxable year ended December 31, 1993. As a REIT,
the Company generally is not subject to federal income tax on the taxable income
that it distributes to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. Failure to
qualify as a REIT would render the Company subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates, and distributions to the shareholders in any such year would not be
deductible by the Company. Even if the Company qualifies for taxation as a REIT,
the Company may be subject to certain federal, state and local taxes on its
income and property. In connection with the Company's election to be taxed as a
REIT, the Company's Charter imposes certain restrictions on the transfer of
shares of Common Stock. The Company has adopted the calendar year as its taxable
year. See "Description of Capital Stock" and "Federal Income Tax
Considerations."
SECURITIES TO BE OFFERED
This Prospectus relates to (i) the possible issuance by the Company of up
to 2,244,934 Redemption Shares if, and to the extent that holders of Units
tender such Units for redemption and the Company elects to redeem the Units for
Common Stock and (ii) the offer and sale from time to time of the 324,675
Secondary Shares by the Selling Shareholders.
The Partnership issued the Units in connection with the acquisition of
certain of the Hotels. The holders of Units are limited partners of the
Partnership (the "Limited Partners"). Certain of the Limited Partners are
Selling Shareholders and the Secondary Shares represent shares of Common Stock
which may be issued for such persons upon redemption of their Units. See
"Selling Shareholders". The Partnership intends to consider the issuance of
Units to sellers of hotel properties in connection with future acquisitions of
hotel properties.
Upon notice to the Partnership, a Limited Partner may tender Units to the
Partnership for redemption. Each Unit may be redeemed by the Partnership in
exchange for one share of Common Stock or, at the Partnership's option, cash
equal to the fair market value of one share of Common Stock at the time of the
redemption (subject to certain adjustments). In addition, the Company has, in
its sole discretion, the right to elect to acquire directly any Units tendered
to the Partnership for redemption, rather than causing the Partnership to redeem
such Units. The Company anticipates that it generally will elect to acquire
directly Units tendered for redemption. Upon each such redemption, the
Company's percentage interest in the Partnership will increase. Pursuant to
this Prospectus, the Company may from time to time issue up to 2,244,934
Redemption Shares upon the acquisition of Units tendered for redemption.
The Company will not receive any cash proceeds from the issuance of any
Redemption Shares or the sale of any Secondary Shares but will acquire Units
tendered for redemption for which it elects to issue shares of Common Stock
and the Company's percentage interest in the Partnership will increase. The
registration of the Redemption Shares does not necessarily mean that any of
such shares will be issued by the Company and the registration of the Secondary
Shares does not necessarily mean that any of such shares will be offered or
sold by the Selling Shareholders.
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RISK FACTORS
Prospective investors and Unit holders should carefully consider the
following information in conjunction with the other information contained in
this Prospectus before making an investment decision regarding the Common Stock
offered hereby.
SPECIAL CONSIDERATIONS APPLICABLE TO REDEEMING UNIT HOLDERS
Tax Consequences of Redemption of Units. The exercise by a Limited Partner
of the right to require the redemption of Units will be treated for tax purposes
as a sale of the Units by the Limited Partner. Such a sale will be fully taxable
to the redeeming Limited Partner, and such redeeming Limited Partner will be
treated as realizing for tax purposes an amount equal to the sum of the cash or
the value of the Common Stock received in the redemption plus the amount of any
Partnership liabilities allocable to the redeemed Units at the time of the
redemption. It is possible that the amount of gain recognized or even the tax
liability resulting from such gain could exceed the amount of cash and the value
of the Redemption Shares received upon such disposition. See "Redemption of
Units--Tax Consequences of Redemption."
Potential Change in Investment Upon Redemption of Units. If a Limited
Partner exercises the right to require the redemption of Units, such Limited
Partner may receive, at the option of the Company, either cash or shares of
Common Stock of the Company in exchange for the Units. If the Limited Partner
receives cash, the Limited Partner will no longer have any interest in the
Units, will not benefit from any subsequent increases in share price and will
not receive any future distributions from the Company or the Partnership with
respect to such Units. If the Limited Partner receives shares of Common Stock,
the Limited Partner will become a shareholder of the Company. See "Redemption of
Units--Comparison of Ownership of Units and Shares of Common Stock."
EFFECT ON SHARE PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect the prevailing market prices
for such shares. Pursuant to this Prospectus or otherwise, generally up to
2,224,934 shares of Common Stock issuable upon redemption of Units and up to
324,675 Secondary Shares will be eligible to be sold in the public market. See
"Plan of Distribution." In addition, 1,700,000 shares of Common Stock of the
Company have been reserved for issuance pursuant to the Company's grant of
options under its Amended and Restated 1993 Restricted Stock and Stock Option
Plan (the "1993 Plan"). The Company has granted options for an aggregate of
1,063,000 shares under the 1993 Plan. The outstanding options generally vest at
the rate of 20% per year over five years from the respective dates of grant.
Upon exercise of options granted under the 1993 Plan, these shares will be
available for sale in the public markets from time to time pursuant to
exemptions from registration requirements or upon registration. No prediction
can be made about the effect that future sales of shares of Common Stock will
have on the market price of the Common Stock.
COMMON STOCK PRICE FLUCTUATIONS AND TRADING VOLUME
A number of factors may adversely influence the price of the Company's
Common Stock in public markets, many of which are beyond the control of the
Company. In particular, an increase in market interest rates will result in
higher yields on other financial instruments and may lead purchasers of shares
of Common Stock to demand a higher annual distribution rate on the price paid
for shares from distributions by the Company, which could adversely affect the
market price of the shares of Common Stock. Although the Company's Common Stock
is traded on the New York Stock Exchange, the daily trading volume of REITs in
general and the Company's shares in particular may be lower than the trading
volume of certain other industries. As a result, investors in the Company who
desire to liquidate substantial holdings at a single point in time may find that
they are unable to dispose of such shares in the market without causing a
substantial decline in the market value of such shares.
DEPENDENCE ON LESSEES AND PAYMENTS UNDER THE PARTICIPATING LEASES
The Company's ability to make distributions to its shareholders depends
solely upon the ability of the Lessees to make rent payments under the
Percentage Leases. Any failure or delay by the Lessees in making rent payments
would adversely affect the Company's ability to make anticipated distributions
to its shareholders. Such failure or delay by the Lessees may be caused by
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reductions in revenue from the Hotels or in the net operating income of the
Lessees or otherwise. Although failure on the part of a Lessee to materially
comply with the terms of a Percentage Lease (including failure to pay rent when
due) would give the Company the right to terminate such lease, repossess the
applicable property and enforce the payment obligations under the lease, the
Company would then be required to find another lessee to lease such property.
There can be no assurance that the Company would be able to find another lessee
or that, if another lessee were found, the Company would be able to enter into a
new lease on favorable terms.
RIGHT OF FIRST REFUSAL
The Company has entered into an agreement with RFS, Inc. which gives RFS,
Inc. a right of first refusal, subject to certain exceptions, to lease hotels
acquired by the Company or the Partnership in the future, even though RFS, Inc.
and its affiliates may not be operating hotels leased from the Company in a
manner which is satisfactory to the Company.
DEVELOPMENT AND ACQUISITION RISKS
The Company intends to continue to pursue the development and construction
of hotels in accordance with the Company's development and underwriting
policies. Risks associates with the Company's development and construction
activities may include: the abandonment of development opportunities explored by
the Company; construction costs of a hotel may exceed original estimates due to
increased materials, labor or other expenses, which could make completion of the
hotel uneconomical; operating results at a newly completed hotel are dependant
on a number of factors, including market and general economic conditions,
competition and market acceptance; financing may not be available on favorable
terms for the development of a hotel; and construction and stabilization may not
be completed on schedule, resulting in increased debt service expense and
construction costs. Development activities are also subject to risks relating to
the inability to obtain, or delays in obtaining, all necessary zoning, land-use,
building, occupancy, and other required governmental permits and authorizations.
The occurrence of any of the events described above could adversely affect the
Company's ability to achieve its projected yields on hotels under development
and could prevent the Company from making expected distributions.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the cots of
improvements to bring an acquired hotel up to standards established for the
market position intended for that hotel or by the franchisor will prove
inaccurate, as well as general investment risks associated with any new real
estate investment. Although the Company undertakes an evaluation of the physical
condition of each new hotel before it is acquired, certain defects or necessary
repairs may not be detected until after the hotel is acquired, which would
significantly increase the Company's total acquisition costs.
NATURAL DISASTER
Certain of the Hotels located in California are in the general vicinity of
active earthquake faults, including the five full service hotels acquired in
1997. The Company did not obtain a seismic risk analyses, however, relied on
information furnished by its' insurance carrier as to the predicted earthquake
risk for each hotel. Only one California hotel is a high rise hotel which was
designed with seismic protection with the remaining hotels being two to three
story detached buildings. The Company has in place earthquake insurance both
for the physical damage and lost revenues, with respect to all Hotels. Property
insurance has been obtained which provides coverage for fire damage. The
property insurance also provides earthquake coverage of $5 million less a 5%
deductible for California properties and 2% deductible for all other locations.
In addition, the Company has access to $95 million of excess earthquake
coverage. The Company has purchased a no deductible general liability policy
with coverage of $1 million with an umbrella policy of $300 million.
In the event that an uninsured disaster or a loss in excess of insured
limits were to occur, the Company could lose its capital investment in the
affected Hotel, as well as anticipated future revenues from such Hotel, and
would continue to be obligated to repay any mortgage indebtedness or other
obligations related to the Hotel. Any such loss could materially and adversely
affect the business of the Company and its financial condition and results of
operations.
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HOTEL INDUSTRY RISKS
Operating Risks
The Hotels are subject to all operating risks common to the hotel industry.
These risks include, among other things, competition from other hotels;
over-building in the hotel industry, which adversely affects occupancy and
revenues; increases in operating costs due to inflation and other factors, which
increases have not been, and may not be, offset by increased room rates;
dependence on business and commercial travelers and tourism; increases in energy
costs and other expenses affecting travel; and adverse effects of general and
local economic conditions. These factors could adversely affect the Lessees'
ability to make lease payments and therefore the Company's ability to make
expected distributions to shareholders. Further, decreases in room revenues of
the Hotels would result in decreased revenues to the Partnership under the
Percentage Leases and, therefore, decreased amounts available for distribution
to the Company's shareholders.
Competition
Competition for Guests; Operations. The hotel industry is highly
competitive. The Hotels compete with other hotel properties in their geographic
markets. Many of the Company's competitors have substantially greater marketing
and financial resources than the Company and the Lessees.
Competition for Acquisitions. The Company will compete for investment
opportunities with entities which have substantially greater financial resources
than the Company. These entities generally may be able to accept more risk than
the Company can manage prudently. Competition generally may reduce the number of
suitable investment opportunities offered to the Company and may increase the
bargaining power of property owners seeking to sell. Further, the Company
believes that competition from entities organized for purposes substantially
similar to the Company's objectives has increased and will increase
significantly in the future.
Investment Concentration in Certain Segments of Single Industry
The Company's current investment strategy is to acquire interests in
limited service, extended stay and full service hotel properties. The Company
will not seek to invest in assets selected to reduce the risks associated with
an investment in real estate in the hotel industry, and will thus be subject to
risks inherent in concentrating investments in limited segments of a single
industry. Therefore, an adverse effect on the Company's lease revenues and
amounts available for distribution to shareholders resulting from a downturn in
the hotel industry will be more pronounced than if the Company had diversified
its investments outside of the hotel industry.
Concentration of Investments in California
Eight of the Hotels, including six full-service and two upscale extended
stay, are located in California. The concentration of the Company's investments
in California could result in adverse events, or conditions which affect that
area in particular, such as economic recessions and natural disasters, having a
more significant negative effect on the operations of the combined Hotels, and
ultimately cash distributions to shareholders of the Company, than if the
Company's investments were more geographically diverse.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
This seasonality can be expected to cause quarterly fluctuations in the
Company's lease revenues. Quarterly earnings may be adversely affected by
factors beyond the Company's control, including poor weather conditions and
economic factors. The Company may be required to enter into short-term borrowing
in the first and fourth quarters in order to offset such fluctuations in
revenues and to fund the Company's anticipated obligations, including
distributions to its shareholders.
Capital Expenditures
The Company's hotel properties have an ongoing need for renovations and
other capital improvements, including periodic replacement of furniture,
fixtures and equipment. Franchisors of the Company's Hotels may also require
periodic capital improvements as a condition of the franchise licenses. The cost
of such capital improvements could have an adverse effect on the Company's
financial condition. Such renovations involve certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
the possibility that the Company will not have available cash to fund
renovations or that financing for renovations will not be available on favorable
terms, uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
hotels. The Company intends to
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fund such improvements out of future cash from operations, present cash balances
or the remaining available borrowing capacity under its bank line of credit.
REAL ESTATE INVESTMENT RISKS
General Risks of Investing in Real Estate
The Company's investments in the Hotels are subject to varying degrees of
risk generally incident to the ownership of real property. The underlying value
of the Company's real estate investments and the Company's income and ability to
make distributions to its shareholders are both dependent upon the ability of
the Lessees to operate the Hotels in a manner sufficient to maintain or increase
room revenues and to generate sufficient income in excess of operating expenses
to make rent payments under the Percentage Leases. Income from the Hotels may be
adversely affected by adverse changes in national economic conditions, changes
in local market conditions due to changes in general or local economic
conditions and neighborhood characteristics, competition from other hotel
properties, changes in interest rates and in the availability, cost and terms of
mortgage funds, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital improvements,
particularly in older structures, changes in real property tax rates and other
operating expenses, changes in governmental rules and fiscal policies, civil
unrest, acts of God, including earthquakes, floods and other natural disasters
(which may result in uninsured losses), acts of war, adverse changes in zoning
laws, and other factors which are beyond the control of the Company.
Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions is
limited. There can be no assurance that the Company will be able to dispose of
an investment when it finds disposition advantageous or necessary or that the
sale price of any disposition will recoup or exceed the amount of the Company's
investment.
Operational Risks of Rapid Growth
Since the Company's initial public offering in August 1993, The Company has
acquired more than 50 additional Hotels increasing the size and geographic
dispersion of the Company's hotel properties. The Company's growth strategy also
contemplates acquisitions of additional hotels that meet the Company's
investment criteria, further increasing the size and geographic dispersion of
its hotel properties. Failure of the Company and the Lessees to effectively
manage such expanded operations could have a material adverse effect on the
Hotels operating results. Deteriorating operations could negatively impact
revenues at the Hotels and, therefore, the lease payments under the Percentage
Leases and amounts available for distribution to shareholders.
Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be maintained on
each of the Hotels, including liability, fire and extended coverage. Management
believes such specified coverage is of the type and amount customarily obtained
for or by an owner or real property assets. Leases for subsequently acquired
hotels will contain similar provisions. However, there are certain types of
losses, generally of a catastrophic nature, such as earthquakes and floods, that
may be uninsurable or not economically insurable. The Company's Board of
Directors will use their discretion in determining amounts, coverage limits and
deductibility provisions of insurance, with a view to maintaining appropriate
insurance coverage on the Company's investments at a reasonable cost and on
suitable terms. This may result in insurance coverage that, in the event of a
substantial loss, would not be sufficient to pay the full current market value
or current replacement cost of the Company's lost investment. Inflation, changes
in building codes and ordinances, environmental considerations, and other
factors also might make it infeasible to use insurance proceeds to replace the
property after such property has been damaged or destroyed. Under such
circumstances, the insurance proceeds received by the Company might not be
adequate to restore its economic position with respect to such property.
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RISKS OF LEVERAGE; NO LIMITS ON INDEBTEDNESS
General
Neither the Company's Amended and Restated Bylaws (the "Bylaws") nor its
Second Amended and Restated Charter, as amended (the "Charter"), limit the
amount of indebtedness the Company may incur. The Company maintains a line of
credit (the "Line of Credit") with NationsBank -- ("NationsBank"). Currently,
the maximum committed amount available under the Line of Credit is $175 million.
The Company has utilized the Line of Credit to finance certain acquisitions of
Hotels and may use the Line of Credit to fund the acquisition of additional
hotels. The Line of Credit is currently secured by a first mortgage lien on
certain of the Hotels and a negative pledge on certain of the remaining hotels.
Other Hotels may be added as security for the Line of Credit depending upon the
outstanding balances thereunder. Subject to the limitations described above, the
Company may borrow additional amounts from the same or other lenders in the
future, or may issue corporate debt securities in public or private offerings.
Certain of such additional borrowings may be secured by properties owned by the
Company.
In November 1996, RFS Financing Partnership, L.P. ("RFS Financing"), a
newly-formed special purpose entity, issued in a private placement $75 million
of Commercial Mortgage Bonds, Series 1996-1 (the "Bonds"), which are secured by
first priority mortgages on 15 of the Hotels transferred to RFS Financing by the
Partnership. The Partnership owns an approximately 99% limited partnership
interest in RFS Financing, and RFS Financing Corporation, a newly formed
wholly-owned subsidiary of the Company, owns an approximately 1% general
partnership interest in RFS Financing. The Bonds have a 15 year fully amortizing
term. Interest on $50 million of principal amount of the Bonds accrues at a
fixed rate of 6.83% and interest on the remaining $25 million of principal
amount of the Bonds accrues at a fixed rate of 7.30%. The Bonds cannot be
prepaid for five years, and thereafter only upon payment of a yield maintenance
premium, which could be substantial and adversely affect the ability of the
Company to sell or refinance the Hotels securing the Bonds during the term of
the Bonds. Proceeds from the issuance of the Bonds were used to repay existing
indebtedness under the Credit Line, to fund additional acquisitions of hotels
and for other general business purposes.
There can be no assurance that the Company will be able to meet its debt
service obligations and, to the extent that it cannot, the Company risks the
loss of some or all of its assets, including the Hotels, to foreclosure. Adverse
economic conditions could cause the terms on which borrowings become available
to be unfavorable. In such circumstances, if the Company is in need of capital
to repay indebtedness in accordance with its terms or otherwise, it could be
required to liquidate one or more investments in hotel properties at times which
may not permit realization of the maximum return on such investments.
Variable Rate Debt
The Line of Credit bears interest at a variable rate. Economic conditions
could result in higher interest rates, which could increase debt service
requirements on variable rate debt and could reduce the amount of Cash Available
for Distribution (defined as funds from operations, adjusted for certain
non-cash items, less reserves for capital expenditures). Funds from operations
means net income or loss computed in accordance with generally accepted
accounting principles, excluding gains or losses from debt restructuring or
sales of property, plus depreciation of real property, and after adjustments for
unconsolidated partnerships and joint ventures.
ENVIRONMENTAL MATTERS
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to remediate such contaminated
property properly, may adversely affect the owner's ability to borrow using such
real property as collateral. Persons who arrange for the disposal or treatment
of hazardous or toxic substances also may be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether or
not such facility is or ever was owned or operated by such person. Certain
environmental laws and common-law principles could be used to impose liability
for release of asbestos-containing materials ("ACMs") into the air, and third
parties may seek recovery from owners or operators of real properties for
personal injury associated with exposure to released ACMs. Environmental laws
also may impose restrictions on the manner in
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which property may be used or businesses may be operated, and these restrictions
may require expenditures. In connection with the ownership of the Hotels, the
Company, or the Partnership may be potentially liable for any such costs. The
cost of defending against claims of liability or remediating the contaminated
property could materially adversely affect amounts available for distribution to
the Company's shareholders. Phase I environmental audits have been obtained on
each of the Hotels in connection with their respective acquisitions by the
Partnership. The purpose of Phase I audits is to identify potential
environmental contamination for which the Hotels may be responsible and the
potential for environmental regulatory compliance liabilities. The Phase I audit
reports on the Hotels did not reveal any environmental liability that the
Company believes would have a material adverse effect on the Company's business,
assets, results of operating or liquidity, nor is the Company aware of any such
liability. Nevertheless, it is possible that these reports do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware.
The Clean Water Act ("CWA") prohibited the Environmental Protection Agency
("EPA") from requiring permits for all but a few (primarily industrial and
certain municipal) discharges of storm water prior to October 1, 1994. Even
though the moratorium ended, the EPA has not yet issued permitting regulations
for non-industrial and non-municipal discharges of storm water. In October 1994,
EPA officials indicated that all storm water discharges without permits were
technically in violation of the CWA. How the EPA will ultimately define the
universe of dischargers requiring a permit is unclear. Nevertheless, it is
possible that storm water drainage to a navigable water from one or more of the
Company's properties is a discharge in violation of the CWA since October 1,
1994. Penalties for non-compliance may be substantial. Although the EPA has
stated that it will not take enforcement action against those storm water
dischargers formerly subject to the moratorium and the Company is not aware of
any current or reasonably likely penalties to be imposed for its storm water
discharges, it is possible, given the uncertainty about the scope and timing of
EPA or state regulations on the subject, that liability may exist.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
AND OTHER CHANGES IN GOVERNMENTAL RULES AND REGULATIONS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that the Hotels
are substantially in compliance with these requirements, a determination that
the Company is not in compliance with the ADA could result in imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use and
operation of the Hotels, including changes to building codes and fire and life
safety codes, may occur. If the Company were required to make substantial
modifications at the Hotels to comply with the ADA or other changes in
governmental rules and regulations, the Company's ability to make distributions
to its shareholders could be adversely affected.
FLUCTUATIONS IN PROPERTY TAXES
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase or decrease as tax rates change and as the properties are assessed or
reassessed by taxing authorities. If property taxes increase, the Company's
ability to make distributions to its shareholders could be adversely affected.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
All but one of the Hotels are subject to franchise agreements. The
continuation of the franchise licenses is subject to specified operating
standards and other terms and conditions. The franchisors periodically inspect
their licensed properties to confirm adherence to operating standards. The
failure of a hotel, the Partnership or a Lessee to maintain such standards or
adhere to such other terms and conditions could result in the loss or
cancellation of the franchise license. It is possible that a franchisor could
condition the continuation of a franchise license on the completion of capital
improvements which the Board of Directors determines are too expensive or
otherwise unwarranted in light of general economic conditions or the operating
results of prospects of the affected hotel. In that event, the Board of
Directors may elect to allow the franchise license to lapse. In any case, if a
franchise is terminated, the Partnership and the Lessee may seek to obtain a
suitable replacement franchise, or to operate the hotel independent of a
franchise license. The loss of a franchise license could have a material adverse
effect upon the operations or the underlying value of the hotel covered by the
franchise because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchisor. Although the
Percentage Leases require the Lessees to maintain the franchise license for each
Hotel, a
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Lessee's loss of a franchise license for one or more of the Hotels could have a
material adverse effect to on the Partnership's revenues under the Percentage
Leases and the Company's cash available for distribution to its shareholders.
ABILITY OF BOARD OF DIRECTORS TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, growth, operations, debt capitalization and
distributions, will be determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies from time to time without
a vote of the shareholders of the Company.
LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Ownership Limitation
The Ownership Limitation (as defined herein and as described under
"Description of Capital Stock -- Charter and Bylaw Provisions -- Restrictions on
Transfer"), which provides that no person may own, directly or indirectly, more
than 9.9% of any class of the outstanding stock of the Company, may have the
effect of precluding an acquisition of control of the Company by a third party
without the approval of the Board of Directors, even if the change of control is
in the shareholders' best interests.
Staggered Board
The Board of Directors of the Company has three classes of directors. The
current terms of the Company's directors expire in 1998, 1999 and 2000,
respectively. Directors for each class will be elected for a three-year term
upon the expiration of that class' term. The staggered terms of directors may
affect the shareholders' ability to change control of the Company, even if such
a change were in the shareholders' best interests. See "Description of Capital
Stock -- Charter and Bylaw Provisions." The foregoing may also discourage offers
or other bids for the Common Stock at a premium over the market price.
Authority to Issue Preferred Stock
The Company's Charter authorizes the Board of Directors to issue up to
5,000,000 shares of preferred stock and to establish the preferences and rights
of any shares issued. The Company has 973,684 shares of Series A Preferred Stock
issued and outstanding as of the date of this Prospectus. See "Description of
Capital Stock -- Preferred Stock." The issuance of preferred stock may have the
effect of delaying or preventing a change in control of the Company even if a
change in control were in the shareholders' interests.
Tennessee Anti-Takeover Statutes
As a Tennessee corporation, the Company is subject to various legislative
acts set forth in Chapter 35 of Title 48 of the Tennessee Code, which impose
certain restrictions and require certain procedures with respect to certain
takeover offers and business combinations, including, but not limited to,
combinations with interested shareholders and share repurchases from certain
shareholders. See "Description of Capital Stock -- Tennessee Anti-Takeover
Statutes."
EMPLOYMENT CONTRACTS AND STOCK OPTION GRANTS
The employment contracts for certain key employees provide for payments
equal to three times the employee's salary under certain circumstances following
a change in control of the Company. In addition, all of the stock option and
restricted stock grants under the 1993 Plan provide that any unvested options to
purchase Common Stock of the Company and unvested shares of restricted stock
vest immediately upon a change of control of the Company. These change of
control provisions could have the effect of discouraging offers or other bids
for the Common Stock at a premium over the market price or may otherwise have
the effect of delaying or preventing a change in control of the Company even if
a change of control were in the shareholders' best interests.
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TAX RISKS
Failure to Qualify as a REIT
The Company operates and intends to continue to operate so as to qualify as
a REIT for federal income tax purposes. The Company has not requested, and does
not expect to request, a ruling from the Service that it qualifies as a REIT.
The continued qualification of the Company as a REIT will depend on the
Company's continuing ability to meet various requirements concerning, among
other things, the ownership of its outstanding stock, the nature of its assets,
the sources of its income, and the amount of its distributions to the
shareholders of the Company. See "Federal Income Tax Considerations -- Taxation
of the Company."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain Code
provisions, the Company also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, the funds available for distribution to the shareholders would be
reduced for each of the years involved. Although the Company currently intends
to continue to operate in a manner designed to qualify as a REIT, it is possible
that future economic, market, legal, tax or other considerations may cause the
Board of Directors, with the consent of a majority of the shareholders, to
revoke the REIT election. See "Federal Income Tax Considerations."
REIT Minimum Distribution Requirements
In order to avoid corporate income taxation of the earnings it distributes,
the Company generally is required each year to distribute to its shareholders at
least 95% of its net taxable income (excluding any net capital gain). In
addition, the Company will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of (i) 85% of its ordinary income for that
year, (ii) 95% of its capital gain net income for that year, and (iii) 100% of
its undistributed income from prior years.
The Company has made and intends to continue to make distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income consists primarily of the
Company's share of the income of the Partnership, and the Company's cash
available for distribution consists primarily of the Company's share of cash
distributions from the Partnership. Differences in timing between the
recognition of taxable income and the receipt of cash available for distribution
due to the seasonality of the hospitality industry could require the Company,
through the Partnership, to borrow funds on a short-term basis to meet the 95%
distribution requirement and to avoid the nondeductible excise tax.
Distributions by the Partnership will be determined by the Board of
Directors of the Company, as the sole general partner of the Partnership, and
will be dependent on a number of factors, including the amount of the
Partnership's cash available for distribution, the Partnership's financial
condition, any decision by the Board of Directors to reinvest funds rather than
to distribute such funds, the Partnership's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution Requirements."
Failure of the Partnership to be Classified as a Partnership for Federal
Income Tax Purposes; Impact on REIT Status
The Company has not requested, and does not expect to request, a ruling
from the Service that the Partnership and RFS Financing will be classified as
partnerships for federal income tax purposes. If the Service were to challenge
successfully the tax status of the Partnership or RFS Financing as a partnership
for federal income tax purposes, the Partnership or RFS Financing would be
taxable as a corporation. In such event, the Company would cease to qualify as a
REIT for a variety of reasons. Furthermore, the imposition of a corporate income
tax on the Partnership or RFS Financing would substantially reduce the amount of
cash available for distribution to the Company and its shareholders. See
"Federal Income Tax Considerations -- Tax Aspects of the Partnership and RFS
Financing."
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OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, no more
than 50% in value of its outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of any taxable year. Furthermore, if any
shareholder or group of shareholders of a Lessee owns, actually or
constructively, 10% or more of the stock of the Company, the Lessee could become
a related party tenant, which likely would result in loss of REIT status for the
Company. For the purpose of preserving the Company's REIT qualification, the
Company's Charter prohibits direct or indirect ownership of more than 9.9% of
the outstanding shares of any class of the Company's stock by any person or
group (the "Ownership Limitation"), subject to adjustment as described below.
Generally, the capital stock owned by affiliated owners will be aggregated for
purposes of the Ownership Limitation.
Any transfer of shares that would prevent the Company from continuing to
qualify as a REIT under the Code will be void ab initio, and the intended
transferee of such shares will be deemed never to have had an interest in such
shares. Further, if, in the opinion of the Board of Directors, (i) a transfer of
shares would result in any shareholder or group of shareholders acting together
owning shares in excess of the Ownership Limitation or (ii) a proposed transfer
of shares may jeopardize the qualification of the Company as a REIT under the
Code, the Board of Directors may, in its sole discretion, refuse to allow the
shares to be transferred to the proposed transferee. Finally, the Company may,
in the discretion of the Board of Directors, redeem any stock held of record by
any shareholder in excess of the Ownership Limitation.
The Company's Charter sets the redemption price of the stock to be redeemed
at the lesser of the market price on the date the Company provides written
notice of redemption or the date such stock was purchased, subject to certain
provisions of Tennessee law. Therefore, the record holder of stock in excess of
the Ownership Limitation may experience a financial loss when such shares are
redeemed, if the market price falls between the date of purchase and the date of
redemption. See "Description of Capital Stock -- Charter and Bylaw Provisions --
Restrictions on Transfer" and "Federal Income Tax Considerations -- Requirements
for Qualification."
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THE COMPANY
The Company, a Tennessee corporation which was incorporated in 1993, was
formed to acquire equity interests in hotels. The Company is a self-administered
and self-managed equity REIT. The Partnership currently owns 61 Hotels located
in 24 states with an aggregate of 8,713 rooms. In order for the Company to
qualify as a REIT, neither the Company nor the Partnership can operate hotels.
Therefore, the Partnership leases its Hotels to the Lessees pursuant to the
Percentage Leases. The Percentage Leases are designed to allow the Company to
participate in growth in room revenues at the Hotels by providing that a portion
of room revenues in excess of specified amounts (subject to inflation
adjustments) will be paid to the Partnership as Percentage Rent. The Company's
executive offices are located at 850 Ridge Lake Boulevard, Suite 220, Memphis,
Tennessee 38120 and its telephone number is (901) 767-7005.
THE LESSEES
The Lessees lease the Hotels from the Partnership pursuant to similar
Percentage Leases. Prior to February 27, 1996, all of the Company's hotels were
leased to RFS, Inc. and substantially all of the equity interests of RFS, Inc.
were owned by Robert M. Solmson and H. Lance Forsdick. Mr. Solmson is chairman
of the Board and Chief Executive Officer of the Company and Mr. Forsdick is a
director of the Company. Effective February 27, 1996, RFS, Inc. merged with a
wholly-owned subsidiary of Doubletree, a publicly owned hotel management company
and RFS, Inc. became a wholly-owned subsidiary of Doubletree. Certain of the
Hotels are leased to subsidiaries of Doubletree other than RFS, Inc. Under the
Percentage Leases, the Lessees generally are required to perform all operational
and management functions necessary to operate the Hotels. Such functions include
accounting, periodic reporting, ordering, supplies, advertising and marketing,
maid service, laundry, and maintenance. The Lessees are entitled to all profits
and cash flow from the Hotels after payment of rent under the Percentage Leases
and other operating expenses.
Pursuant to an agreement dated February 1, 1996 (the "Master Agreement"),
the Company and the Partnership have granted to RFS, Inc. a right of first offer
and right of first refusal (the "Right of First Refusal")) to lease hotels
acquired or developed by the Partnership or the Company until February 27, 2006,
subject to certain exceptions.
The Partnership must rely on the Lessees to generate sufficient cash flow
from the operation of the Hotels to enable the Lessees to meet the rent
obligations under the Percentage Leases. The obligations of the Lessees under
the Percentage Leases are unsecured.
The Company intends to lease two of the hotels currently under development
to an affiliate of Landcom Hospitality Management and one hotel currently under
development to an affiliate of Pinnacle Hotel Group.
THE PARTNERSHIP
The Company is the sole general partner of the Partnership (the "General
Partner") and is the holder of an approximately 90.5% interest in the
Partnership. The Limited Partners of the Partnership have the right to require
the redemption of their Units. At the sole option of the Company, each Unit may
be redeemed by the Company for either one share of Common Stock or cash equal to
the fair market value thereof at the time of such redemption. The Company
presently anticipates that it will elect to issue shares of the Company's Common
Stock hereunder upon redemption of Units rather than pay cash. Upon redemption
of outstanding Units, the Company's percentage ownership interest in the
Partnership, which is based on the number of outstanding Units, will increase.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Under the Company's Charter (the "Charter"), the Company is authorized to
issue 100,000,000 shares of Common Stock, $.01 par value, and 5,000,000 shares
of Preferred Stock, $.01 par value. At May 31, 1997, there were 24,389,000
shares of Common Stock outstanding and 973,684 shares of Series A Preferred
Stock outstanding.
The following information with respect to the capital stock of the Company
is subject to the detailed provisions of the Charter and the Company's Bylaws,
as currently in effect. These statements do not purport to be complete, or to
give full effect to the provisions of statutory or common law, and are subject
to, and are qualified in their entirety by reference to, the terms of the
Charter and Bylaws, which are exhibits to the Registration Statement.
COMMON STOCK
Subject to the provisions of the Charter described under "Restrictions on
Transfer of Capital Stock", the holders of Common Stock are entitled to one vote
per share on all matters voted on by shareholders, including elections of
directors. Except as otherwise required by law or provided in any resolution
adopted by the Board of Directors with respect to any series of Preferred Stock,
the holders of shares of Common Stock exclusively possess all voting power. The
Charter does not provide for cumulative voting in the election of directors.
Subject to any preferential rights of any outstanding series of Preferred Stock,
the holders of Common Stock are entitled to such distributions as may be
declared from time to time by the Board of Directors from funds available
therefor, and upon liquidation are entitled to receive pro rata all assets of
the Company available for distribution to such holders subject to rights of
holders of any outstanding series of Preferred Stock. All shares of Common Stock
issued are fully paid and nonassessable, and the holders thereof do not have
preemptive rights.
The Transfer Agent for the Common Stock is SunTrust Bank, Atlanta, Georgia.
The Common Stock is traded on the New York Stock Exchange under the symbol
"RFS." The Company will apply to the New York Stock Exchange to list the
Redemption Shares, and the Company anticipates that such shares will be so
listed.
PREFERRED STOCK
Preferred Shares may be issued from time to time, in one or more series, as
authorized by the Board of Directors. Prior to issuance of shares of each
series, the Board of Directors will set for each such series, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each series. The Board of Directors could authorize the issuance
of shares of Preferred Stock with terms and conditions that could have the
effect of delaying, deferring or preventing a takeover or other transaction
which holders of some, or a majority, of the shares of Common Stock might
believe to be in their best interests or in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
of Common Stock over the then market price of such shares of Common stock.
SERIES A PREFERRED STOCK. In February 1996, the Company issued 973,684
shares of Series A Preferred Stock ("Series A Preferred") to a wholly-owned
subsidiary of Doubletree Corporation that is one of the Lessees. The Series A
Preferred has a preference value of $19.00 per share (the "Preference Amount").
Each share of Series A Preferred is entitled to a fixed annual dividend of $1.45
per share payable when, as and if declared by the Board of Directors. Dividends
on the Series A Preferred are cumulative. Accumulated but unpaid dividends on
the Series A Preferred bear interest at a per annum rate of 7.6%. The Series A
Preferred is senior to the Common Stock and any other capital stock of the
Company which does not by its terms rank senior to or pari passu with the Series
A Preferred with respect to dividends and payments in the event of liquidation,
dissolution or winding up of the Company.
The holders of Series A Preferred are entitled to that number of votes
equal to the number of shares of Common Stock into which the Series A Preferred
is convertible from time to time, as such number may be adjusted from time to
time as described below. Currently, the holder of the Series A Preferred is
entitled to one vote per share. The holders of the Series A Preferred will vote
together as a group with the holders of the Common Stock on all matters
submitted to the Company's shareholders for approval.
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Any proposed amendment to the Company's Charter which creates a class of
Preferred Stock ranking senior to the Series A Preferred requires the approval
of the holders of 66-2/3% of the outstanding shares of Series A Preferred.
Upon liquidation, dissolution or winding up of the Company, the holder of
each share of Series A Preferred will be entitled to receive the Preference
Amount plus all accrued but unpaid dividends through the date of liquidation,
dissolution or winding up. Each share of Series A Preferred may be converted
into one share of Common Stock, subject to adjustments for stock splits, stock
dividends or similar events, at any time after February 27, 2003. Additionally,
at any time after February 27, 2003, the Company may redeem the Series A
Preferred for a price per share equal to the Preference Amount, plus all accrued
and unpaid dividends to and including the date fixed for redemption, subject to
the rights of the holder of Series A Preferred to convert the Series A Preferred
to shares of the Company's Common Stock after notice to the holders thereof and
opportunity for conversion. The holders of Series A Preferred are not entitled
to any preemptive rights.
If the Company no longer qualifies as a REIT, the Company must redeem all
shares of Series A Preferred Stock held by the current holder for a price per
share equal to the greater of (i) the Preference Amount or (ii) the weighted
average of the sales prices for the Company's Common Stock for all transactions
reported on the New York Stock Exchange, or other principal exchange on which
the Company's Common Stock is then traded, during the ten (10) business days
preceding the second business day prior to the date of redemption.
CHARTER AND BYLAW PROVISIONS
Restrictions on Transfer
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding stock. Specifically, no
more than 50% in value of the Company's outstanding stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year, and the Company must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months or during a proportionate part of a shorter
taxable year. See "Federal Income Tax Considerations -- Requirements for
Qualification." In addition, the Company must meet certain requirements
regarding the nature of its gross income in order to qualify as a REIT. One such
requirement is that at least 75% of the Company's gross income for each year
must consist of rents from real property and income from certain other real
property investments. The rents received by the Partnership from the Lessees
will not qualify as rents from real property, which likely would result in loss
of REIT status for the Company, if any shareholder or group of shareholders of
the Lessee owns, directly or constructively, 10% or more of the stock of the
Company. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests." Because the Board of Directors believes it is
essential for the Company to continue to qualify as a REIT, the Company's
Charter contains a provision limiting the ownership of shares of the Company's
stock (the "Ownership Limitation Provision").
The Ownership Limitation Provision provides that, subject to certain
exceptions specified in the Charter, no shareholder may own, or be deemed to own
by virtue of the attribution provisions of the Code, more than 9.9% of any class
of the outstanding stock of the Company (the "Ownership Limitation"). The Board
of Directors may, but in no event is required to, waive the Ownership Limitation
if evidence satisfactory to the Board of Directors is presented that such
ownership will not jeopardize the Company's status as a REIT. As a condition of
such waiver, the Board of Directors may require opinions of counsel satisfactory
to it and/or an undertaking from the applicant with respect to preserving the
REIT status of the Company. If shares of stock in excess of the Ownership
Limitation are issued or transferred to any person, or if a transfer or proposed
transfer causes or would cause the Company to be beneficially owned by fewer
than 100 persons, such issuance or transfer shall be null and void, and the
intended transferee will acquire no rights to the stock.
The Ownership Limitation Provision will not be automatically removed even
if the REIT provisions of the Code are changed so as to no longer contain any
ownership concentration limitation or if the ownership concentration limitation
is increased. Except as otherwise described above, any change in the Ownership
Limitation Provision would require an amendment to the Charter. Amendments to
the Charter require the affirmative vote of holders owning a majority of the
outstanding Common Stock. In addition to preserving the Company's status as a
REIT, the Ownership Limitation may have the effect of precluding an acquisition
of control
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of the Company without the approval of the Board of Directors. All certificates
representing shares of Common Stock will bear a legend referring to the
restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 9.9% of the outstanding capital stock and any shareholder
requested by the Company must file an affidavit with the Company containing the
information specified in the Charter with respect to their ownership of Common
Stock upon demand of the Board of Directors. In addition, each shareholder shall
upon demand be required to disclose to the Company in writing such information
with respect to the direct, indirect and constructive ownership of shares as the
Board of Directors deems necessary to comply with the provisions of the Code
applicable to a REIT or to comply with the requirements of any taxing authority
or governmental agency.
Any transfer of shares which would prevent the Company from continuing to
qualify as a REIT under the Code will be void ab initio to the fullest extent
permitted under applicable law, and the intended transferee of such shares will
be deemed never to have had an interest in such shares. Further, if, in the
opinion of the Board of Directors, (i) a transfer of shares would result in any
shareholder or group of shareholders acting together owning in excess of the
Ownership Limitation or (ii) a proposed transfer of shares may jeopardize the
qualification of the Company as a REIT under the Code, the Board of Directors
may, in its sole discretion, refuse to allow the shares to be transferred to the
proposed transferee. Finally, the Company may, in the discretion of the Board of
Directors, redeem any stock held of record by any shareholder in excess of the
Ownership Limitation, for a price equal to the lesser of (i) the market price on
the date of notice of redemption; (ii) the market price on the date of purchase;
or (iii) the maximum price allowed under the applicable provisions of the
Tennessee Code.
Staggered Board of Directors
The Charter provides that the Board of Directors is divided into three
classes of directors, each class constituting approximately one-third of the
total number of directors and with the classes serving staggered three-year
terms. The classification of directors will have the effect of making it more
difficult for shareholders to change the composition of the Board of Directors.
The Company believes, however, that the longer time required to elect a majority
of a classified Board of Directors will help to ensure continuity and stability
of the Company's management and policies.
The classification provisions also could have the effect of discouraging a
third party from accumulating large blocks of the Company's stock or attempting
to obtain control of the Company, even though such an attempt might be
beneficial to the Company and its shareholders. Accordingly, shareholders could
be deprived of certain opportunities to sell their shares of Common Stock at a
higher market price than might otherwise be the case.
Number of Directors; Removal; Filling Vacancies
The Charter and Bylaws provide that, subject to any rights of holders of
Preferred Stock to elect additional directors under specified circumstances, the
number of directors will consist of not less than three nor more than nine
persons, subject to increase or decrease by the affirmative vote of 80% of the
members of the entire Board of Directors. At all times a majority of the
directors shall be Independent Directors, except that upon the death, removal or
resignation of an Independent Director, such requirement shall not be applicable
for 60 days. There are eight directors currently, six of whom are Independent
Directors. The holders of Common Stock shall be entitled to vote on the election
or removal of directors, with each share entitled to one vote. The Bylaws
provide that, subject to any rights of holders of Preferred Stock, and unless
the Board of Directors otherwise determines, any vacancies will be filled by the
affirmative vote of a majority of the remaining directors, though less than a
quorum, provided that Independent Directors shall nominate and approve directors
to fill vacancies created by Independent Directors. Accordingly, the Board of
Directors could temporarily prevent any shareholder entitled to vote from
enlarging the Board of Directors and filling the new directorships with such
shareholder's own nominees. Any director so elected shall hold office until the
next annual meeting of shareholders.
A director may be removed with or without cause by the affirmative vote of
the holders of 75% of the outstanding shares entitled to vote in the election of
directors at a special meeting of the shareholders called for the purpose of
removing him.
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Limitation of Liability; Indemnification
The Charter provides that to the maximum extent that Tennessee law in
effect from time to time permits limitation of the liability of directors and
officers, no director or officer of the Company shall be liable to the Company
or its shareholders for money damages.
The Charter provides that the Company shall, to the fullest extent
permitted by Tennessee law, indemnify any director, officer, employee or agent
against any expense incurred by such person if the disinterested directors, the
shareholders or independent legal counsel determine that such person conducted
himself in good faith and (a) reasonably believed, in the case of conduct in his
official capacity with the Company, that his conduct was in the Company's best
interest and in all other cases, that his conduct was at least not opposed to
the Company's best interest and (b) in the case of any criminal proceeding, he
had no reasonable cause to believe his conduct was unlawful.
Any indemnification by the Company pursuant to the provisions of the
Charter described above shall be paid out of the assets of the Company and shall
not be recoverable from the shareholders. To the extent that the foregoing
indemnification provisions purport to include indemnification for liabilities
arising under the Securities Act, in the opinion of the Commission such
indemnification is contrary to public policy and is, therefore, unenforceable.
Amendment
The Company's Charter may be amended by the affirmative vote of the holders
of a majority of the shares of the Common Stock present at a meeting at which a
quorum is present, with the shareholders voting as a class with one vote per
share; provided, however, that the Charter provision providing for the
classification of the Board of Directors into three classes may not be amended,
altered, changed or repealed without the affirmative vote of at least 80% of the
members of the Board of Directors or the affirmative vote of holders of at least
75% of the outstanding shares of capital stock entitled to vote generally in the
election of directors, voting separately as a class. The Company's Bylaws may be
amended by the Board of Directors or by vote of the holders of a majority of the
outstanding shares of Common Stock, provided that provisions with respect to the
staggered terms of the Board of Directors cannot be amended without the
affirmative vote of 80% of the members of the entire Board of Directors or the
holders of 75% of the outstanding shares of capital stock entitled to vote
generally in the election of directors, voting separately as a class.
Operations
Pursuant to its Charter, the Board of Directors has a duty to ensure that
the Company meets the qualification requirements for a REIT under the Code.
TENNESSEE ANTI-TAKEOVER STATUTES
In addition to certain of the Company's Charter provisions discussed above,
Tennessee has adopted a series of statutes which may deter takeover attempts or
tender offers, including offers or attempts that might result in the payment of
a premium over the market price for the Common Stock or that a shareholder might
otherwise consider in its best interest.
Under the Tennessee Investor Protection Act, unless a company's board of
directors has recommended a takeover offer to shareholders, no offeror
beneficially owning 5% or more of any class of equity securities of the offeree
company, any of which was purchased within one year prior to the proposed
takeover offer, may offer to acquire any class of equity securities of an
offeree company pursuant to a tender offer if, after the acquisition thereof,
the offeror would be directly or indirectly a beneficial owner of more than 10%
of any class of outstanding equity securities of the offeree company (a
"Takeover Offer"). However, this prohibition does not apply if the offeror,
before making such purchase, has made a public announcement of his intention
with respect to changing or influencing the management or control of the offeree
company, has made a full, fair and effective disclosure of such intention to the
person from whom he intends to acquire such securities, and has filed with the
Tennessee Commissioner of Commerce and Insurance (the "Commissioner") and with
the offeree company a statement signifying such intentions and containing such
additional information as the Commissioner by rule prescribes. Such an offeror
must provide that any equity securities of an offeree company deposited or
tendered pursuant to a Takeover Offer may be withdrawn by or on behalf of an
offeree at any time within seven days from the date the Takeover Offer has
become effective following filing with the Commissioner and the offeree company
and public announcement of the terms or after 60 days from the date the Takeover
Offer has become effective. If an offeror makes a Takeover Offer for less than
all the outstanding equity securities of any class, and if the number of
securities tendered is greater than the number
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the offeror has offered to accept and pay for, the securities shall be accepted
pro rata. If an offeror varies the terms of a Takeover Offer before its
expiration date by increasing the consideration offered to shareholders of the
offeree company, the offeror shall pay the increased consideration for all
equity securities accepted, whether accepted before or after the variation in
the terms of the Takeover Offer.
Under the Tennessee Business Combination Act, subject to certain
exceptions, no Tennessee corporation may engage in any "business combination"
with an "interested shareholder" for a period of five years following the date
that such shareholder became an interested shareholder unless prior to such date
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the shareholder becoming an
interested shareholder. Consummation of a business combination that is subject
to the five-year moratorium is permitted after such period when the transaction
(a) (i) complies with all applicable charter and bylaw requirements and (ii) is
approved by the holders of two-thirds of the voting stock not beneficially owned
by the interested shareholder, and (b) meets certain fair price criteria.
"Business combination" is defined by the statute as being any (i) merger or
consolidation; (ii) share exchange; (iii) sale, lease, exchange, mortgage,
pledge or other transfer of assets representing 10% or more of (A) the aggregate
market value of the corporation's consolidated assets, (B) the aggregate market
value of the corporation's shares, or (C) the corporation's consolidated net
income; (iv) issuance or transfer of shares from the corporation to the
interested shareholder; (v) plan of liquidation or dissolution proposed by the
interested shareholder; (vi) transaction or recapitalization which increases the
proportionate share of any outstanding voting securities owned or controlled by
the interested shareholder; or (vii) financing arrangement whereby any
interested shareholder receives, directly or indirectly, a benefit except
proportionately as a shareholder. "Interested shareholder" is defined as being
(i) any person that is the beneficial owner of 10% or more of the voting power
of any class or series of outstanding voting stock of the corporation or (ii) an
Affiliate or associate of the corporation who at any time within the five-year
period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of any class or
series of the outstanding stock of the corporation.
The Tennessee Greenmail Act prohibits a Tennessee corporation from
purchasing, directly or indirectly, any of its shares at a price above the
market value of such shares (defined as the average of the highest and lowest
closing market price for such shares during the 30 trading days preceding the
purchase and sale or preceding the commencement or announcement of a tender
offer if the seller of such shares has commenced a tender offer or announced an
intention to seek control of the corporation) from any person who holds more
than 3% of the class of securities to be purchased if such person has held such
shares for less than two years, unless the purchase has been approved by the
affirmative vote of a majority of the outstanding shares of each class of voting
stock issued by such corporation or the corporation makes an offer, of at least
equal value per share, to all holders of shares of such class.
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DESCRIPTION OF THE PARTNERSHIP UNITS
GENERAL
Substantially all of the Company's assets are held by, and all of its
operations are conducted through, the Partnership and subsidiaries of the
Partnership. The Company is the sole general partner of the Partnership (the
"General Partner") and holds at May 31, 1997 approximately 90.5% of the issued
Units therein. The remaining approximately 9.5% of the issued Units are held by
limited partners of the Partnership (the "Limited Partners"). The material
terms of the Units, including a summary of certain provisions of the
Partnership Agreement, are set forth below. The following description of the
terms and provisions of the Units and certain other matters does not purport to
be complete and is subject to and qualified in its entirety by reference to
applicable provisions of Tennessee law and the Partnership Agreement. For a
comparison of the voting and other rights of holders of Units and the Company's
shareholders, see "Redemption of Units -- Comparison of Ownership of Units and
Common Stock."
Through the ownership of Units, the Limited Partners hold interests in the
Partnership and all holders of Units (including the Company in its capacity as
General Partner) are entitled to share in cash distributions from, and in the
profits and losses of, the Partnership. The Company owns a number of Units equal
to the number of shares of Common Stock outstanding and owns Series A Preferred
Units equal to the number of shares of Series A Preferred Stock outstanding and
having economic terms comparable to the Series A Preferred Stock outstanding.
Distributions by the Partnership are made proportionately among the Units
allocable to the Common Stock and the Series A Preferred, respectively. As a
result, each Unit generally receives distributions in the same amount as the
cash dividends paid by the Company on each share of Common Stock or Series A
Preferred, as applicable.
The Limited Partners have the rights to which limited partners are entitled
under the Tennessee Revised Uniform Limited Partnership Act ("TRULPA"). The
Units are not registered pursuant to the federal securities laws or any state
securities law. The Units cannot be sold, assigned, hypothecated, pledged,
transferred or otherwise disposed of by a holder unless they are so registered
or an exemption from such registration is available. In addition, the
Partnership Agreement imposes restrictions on the transfer of Units, as
described below.
MANAGEMENT AND OPERATIONS
The Partnership is organized as a Tennessee limited partnership under
TRULPA pursuant to the terms of the Partnership Agreement. Pursuant to the
Partnership Agreement, the Company, as the sole General Partner of the
Partnership, has full, exclusive and complete responsibility and discretion in
the management and control of the Partnership, and the Limited Partners have no
authority to transact business for, or participate in the management activities
or decisions of, the Partnership.
The Partnership Agreement requires that the Partnership be operated in a
manner that will enable the Company to satisfy the requirements for being
classified as a REIT and to avoid any federal income tax liability.
ABILITY TO ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
Subject to the terms of the Company's Charter and any agreements between
the General Partner and the Partnership, the General Partner and other persons
(including officers, directors, employees, agents and other affiliates of the
Company) are not prohibited under the Partnership Agreement from engaging in
other business activities, including business activities substantially similar
or identical to those of the Partnership, and the General Partner will not be
required to present any business opportunities to the Partnership or to any
Limited Partner.
BORROWING BY THE PARTNERSHIP
The General Partner is authorized under the Partnership Agreement to cause
the Partnership to borrow money and to issue and guarantee debt as it deems
necessary for the conduct of the activities of the Partnership. Such debt may be
secured by deeds to secure debt, mortgages, deeds of trust, pledges or other
liens on the assets of the Partnership. The General Partner may also cause the
Partnership to borrow money to enable the Partnership to make distributions in
an amount sufficient to permit the General Partner, so long as it qualifies as a
REIT, to avoid payment of federal income tax.
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REIMBURSEMENT OF GENERAL PARTNER; TRANSACTIONS WITH THE GENERAL PARTNER AND
ITS AFFILIATES
The General Partner receives no compensation for its services as the
general partner of the Partnership. However, as a partner in the Partnership,
the General Partner has the same right to allocations, payments and
distributions as other partners of the Partnership. In addition, the Partnership
will reimburse the General Partner for all expenses it incurs relating to the
ownership and operation of, or for the benefit of, the Partnership and any
offering of Units, other partnership interests or shares of the Company's Common
Stock.
Except as expressly permitted by the Partnership Agreement, neither the
General Partner nor any of its affiliates will sell, transfer or convey any
property to, or purchase any property from, the Partnership, directly or
indirectly, except pursuant to transactions that are determined by the General
Partner in good faith, in its sole and absolute discretion, to be fair and
reasonable.
LIABILITY OF GENERAL PARTNER AND LIMITED PARTNERS
The General Partner is liable for all general obligations of the
Partnership to the extent not paid by the Partnership. The General Partner is
not liable for the non-recourse obligations of the Partnership.
The Limited Partners are not required to make further capital contributions
to the Partnership after their respective initial contributions are fully paid.
Assuming that a Limited Partner acts in conformity with the provisions of the
Partnership Agreement, the liability of the Limited Partner for obligations of
the Partnership under the Partnership Agreement and TRULPA will be limited,
subject to certain possible exceptions, to the loss of the Limited Partner's
investment in the Partnership.
The Partnership is qualified to conduct business in each state in which the
ownership of its properties requires such qualification and may qualify to
conduct business in other jurisdictions. Maintenance of limited liability may
require compliance with certain legal requirements of those jurisdictions and
certain other jurisdictions. Limitations on the liability of a limited partner
for the obligations of a limited partnership have not been clearly established
in many states. Accordingly, if it were determined that the right, or exercise
of the right by the Limited Partners, to make certain amendments to the
Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted "control" of the Partnership's business for the purposes
of the statutes of any relevant state, the Limited Partners might be held
personally liable for the Partnership's obligations.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Partnership Agreement generally provides that the General Partner will
incur no liability for monetary damages to the Partnership or any Limited
Partner for losses sustained or liabilities incurred as a result of errors in
judgment or of any act or omission if the General Partner acted in good faith.
In addition, the General Partner is not responsible for any misconduct or
negligence on the part of its agents, provided the General Partner appointed
such agents in good faith. The General Partner may consult with legal counsel,
accountants, consultants, real estate brokers and other consultants and
advisors, and any action it takes or omits to take in reliance upon the opinion
of such persons, as to matters which the General Partner reasonably believes to
be within their professional or expert competence, shall be conclusively
presumed to have been done or omitted in good faith and in accordance with such
opinion.
The Partnership Agreement also provides for indemnification of the General
Partner, the directors and officers of the General Partner, and such other
persons as the General Partner may from time to time designate, against any and
all losses, claims, damages, liabilities (joint or several), expenses (including
reasonable legal fees and expenses), judgments, fines, settlements, and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, that relate to the
operations of the Partnership in which such person may be involved, or is
threatened to be involved, provided that the Partnership shall not indemnify any
such persons if it is established that (i) the act or omission of such person
was material to the matter giving rise to the proceeding and either was
committed in bad faith or was the result of active and deliberate dishonesty,
(ii) such person actually received an improper personal benefit in money,
property or services, or (iii) in the case of any criminal proceeding, such
person had reasonable cause to believe that the act or omission was unlawful.
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SALE OF ASSETS
Under the Partnership Agreement, the General Partner generally has the
exclusive authority to determine whether, when and on what terms the assets of
the Partnership (including the Hotels) will be sold.
TRANSFER OF GENERAL PARTNER'S INTEREST
The General Partner may not transfer any of its interests as general or
limited partner except in connection with a merger or sale of all or
substantially all of its assets. The General Partner may not sell all or
substantially all of its assets, or enter into a merger, unless the sale or
merger includes the sale of all or substantially all of the assets of, or the
merger of, the Partnership with partners of the Partnership receiving
substantially the same consideration as holders of shares of Common Stock.
TRANSFERABILITY OF INTERESTS
The General Partner may not voluntarily withdraw from the Partnership or
transfer its interest in the Partnership unless the transaction in which such
withdrawal or transfer occurs results in the Limited Partners receiving property
in an amount equal to the amount they would have received had they exercised
their Redemption Rights immediately prior to such transaction, or unless the
successor to the General Partner contributes substantially all of its assets as
a capital contribution to the Partnership in return for an interest in the
Partnership. Except in certain limited circumstances, the Limited Partners may
not transfer their interests in the Partnership without the consent of the
General Partner, which the General Partner may withhold in its sole discretion.
The General Partner may not consent to any transfer that would cause the
Partnership to be treated as a separate corporation for federal income tax
purposes or that would require registration of the Limited Partner's Units under
the Securities Act or would otherwise violate federal or state securities laws.
The General Partner may require, as a condition of any transfer, that the
transferring Limited Partner assume all costs incurred by the Partnership in
connection with such transfer.
REDEMPTION RIGHTS FOR LIMITED PARTNERSHIP UNITS
The Limited Partners' Redemption Rights enable them to cause the redemption
of their Units for cash or, at the option of the Company, for shares of Common
Stock on a one-for-one basis. The redemption price will be paid in cash in the
event that the issuance of Common Stock to the redeeming Limited Partner (i)
would cause the Ownership Limitation to be exceeded by such partner, or any
other person (unless this condition is expressly waived by the Company for a
particular redemption transaction), or (ii) otherwise would jeopardize the REIT
status of the Company. The aggregate number of Units currently held by Limited
Partners is 2,569,609. The number of shares issuable upon exercise of the
Redemption Rights will be adjusted upon the issuance of additional Units to
existing or new Limited Partners or the occurrence of stock splits, mergers,
consolidations or similar pro rata share transactions, which otherwise would
have the effect of diluting the ownership interests of the Limited Partners or
the shareholders of the Company.
NO WITHDRAWAL BY LIMITED PARTNERS
No Limited Partner has the right to withdraw from or reduce or receive the
return of his capital contribution to the Partnership, except as a result of the
redemption or transfer of his Units pursuant to the terms of the Partnership
Agreement.
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS
The General Partner is authorized, without the consent of the Limited
Partners, to cause the Partnership to issue additional Units to the partners or
to other persons for such consideration and on such terms and conditions as the
General Partner deems appropriate. In addition, the General Partner may cause
the Partnership to issue to the General Partner additional Units, or other
additional partnership interests in different series or classes which may be
senior to the Units, in conjunction with an offering of securities of the
Company having substantially similar rights, in which the proceeds thereof are
contributed to the Partnership. Consideration for additional partnership
interests may be cash or any property or other assets permitted by TRULPA.
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MEETINGS
The Partnership Agreement does not provide for annual meetings of the
Limited Partners, and the General Partner does not anticipate calling such
meetings.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may, with four exceptions, be made
by the General Partner without the consent of the Limited Partners. Any
amendment to the Partnership Agreement which would (i) affect the Redemption
Rights, (ii) adversely affect the rights of the Limited Partners to receive
distributions payable to them under the Partnership Agreement, (iii) alter the
Partnership's profit and loss allocations or (iv) impose any obligation upon the
Limited Partners to make additional capital contributions to the Partnership
shall require the consent of each Limited Partner adversely affected.
BOOKS AND REPORTS
The General Partner is required to keep the Partnership's books and records
at the specified principal office of the Partnership. The Limited Partners have
the right, subject to certain limitations, to inspect or to receive copies of
the Partnership's federal, state and local tax returns, a list of the partners
and their last known business addresses, the Partnership Agreement, the
Partnership certificate and all amendments thereto, information about the
capital contributions of each of the partners and any other documents and
information required under TRULPA. Any partner or his duly authorized
representative, upon paying duplicating, collection and mailing costs, is
entitled to inspect or copy such records during ordinary business hours.
The General Partner will furnish to each Limited Partner, within 90 days
after the close of each fiscal year, an annual report containing financial
statements of the Partnership (or the Company, if consolidated financial
statements including the Partnership are prepared) for each fiscal year. The
financial statements will be audited by a nationally recognized firm of
independent public accountants selected by the General Partner. In addition,
within 45 days after the close of each fiscal quarter (other than the fourth
quarter), the General Partner will furnish to each Limited Partner a report
containing quarterly unaudited financial statements of the Partnership (or the
Company) and such other information as may be required by applicable law or
regulation or as the General Partner deems appropriate.
The General Partner will use reasonable efforts to furnish to each Limited
Partner, within 75 days after the close of each fiscal year of the Partnership,
the tax information reasonably required by the Limited Partners for federal and
state income tax reporting purposes.
CAPITAL CONTRIBUTION
The Company has contributed to the Partnership the net proceeds of the
issuances of Common Stock and Series A Preferred as capital contributions in
exchange for Units. The Company holds at May 31, 1997 an approximately 90.5%
general partnership interest in the Partnership and the Limited Partners'
aggregate interest is approximately 9.5%. Upon each contribution of capital to
the Partnership, the property of the Partnership has been revalued to its fair
market value (based on the market price per share of the Common Stock at the
time, and the capital accounts of the partners have been adjusted to reflect the
manner in which the unrealized gain inherent in such property would be allocated
among the partners under the terms of the Partnership Agreement if there were a
taxable disposition of such property for such fair market value on the date of
the revaluation. The Partnership Agreement provides that if the Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Partnership from borrowing or capital contributions, the
General Partner may borrow such funds from a financial institution or other
lender and lend such funds to the Partnership on the same terms and conditions
as are applicable to the General Partner's borrowing of such funds. As an
alternative to borrowing funds required by the Partnership, the General Partner
may contribute the amount of such required funds as an additional capital
contribution to the Partnership. If the General Partner so contributes
additional capital to the Partnership, the General Partner will receive
additional Units, and the General Partner's percentage interest in the
Partnership will be increased on a proportionate basis based upon the amount of
such additional capital contributions and the value of the Partnership at the
time of such contributions. Conversely, the percentage interests of the Limited
Partners will be decreased on a proportionate basis in the event of additional
capital contributions by the General Partner. In addition, if the General
Partner contributes additional capital to the Partnership, the General Partner
will revalue the property of the Partnership to its fair market
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value (as determined by the General Partner), and the capital accounts of the
partners will be adjusted to reflect the manner in which the unrealized gain or
loss inherent in such property (that has not been reflected in the capital
accounts previously) would be allocated among the partners under the terms of
the Partnership Agreement if there were a taxable disposition of such property
for such fair market value on the date of the revaluation.
TAX MATTERS; PROFIT AND LOSS ALLOCATIONS
Pursuant to the Partnership Agreement, the General Partner is the tax
matters partner of the Partnership and, as such, has the authority to handle tax
audits and to make tax elections under the Code on behalf of the Partnership.
Profit and loss of the Partnership generally will be allocated among the
partners in accordance with their respective interests in the Partnership based
on the number of Units held by the partners.
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DISTRIBUTIONS
In connection with the Company's issuance of the Series A Preferred and the
contribution of the proceeds therefrom to the Partnership, the Partnership
issued to the Company Series A Preferred Units having distribution and
performance characteristics identical to the Series A Preferred. Quarterly
distributions by the Partnership with respect to the Series A Preferred Units
provide the Company the funds necessary to make distributions with respect to
the Series A Preferred.
The Partnership Agreement provides that the Partnership shall distribute
cash from operations (including net sale or refinancing proceeds, but excluding
net proceeds from the sale of the Partnership's property in connection with the
liquidation of the Partnership) quarterly, in amounts determined by the General
Partner in its sole discretion, to the partners in accordance with their
respective percentage interests in the Partnership. Upon liquidation of the
Partnership, after payment of, or adequate provision for, debts and obligations
of the Partnership, including any partner loans, any remaining assets of the
Partnership will be distributed to all partners with positive capital accounts
in accordance with their respective positive capital account balances. If the
General Partner has a negative balance in its capital account following a
liquidation of the Partnership, it will be obligated to contribute cash to the
Partnership equal to the negative balance in its capital account.
TERM
The Partnership will continue until December 31, 2050, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the General
Partner (unless the Limited Partners elect to continue the Partnership by
electing by unanimous consent a substitute General Partner within 90 days of
such occurrence), (ii) the sale or other disposition of all or substantially all
the assets of the Partnership, (iii) the redemption of all limited partnership
interests in the Partnership, or (iv) the election by the General Partner. Upon
dissolution and termination of the Partnership, the General Partner or any
liquidator will proceed to liquidate the assets of the Partnership after payment
of, or adequate provision is made for, all debts and obligations of the
Partnership in the order of priority set forth in the Partnership Agreement. To
the extent deemed advisable by the General Partner, appropriate arrangements,
including the use of a liquidating trust, may be made to ensure that adequate
funds are available to pay any contingent debts or obligations.
26
<PAGE> 28
SHARES AVAILABLE FOR FUTURE SALE
As of May 31, 1997, the Company had outstanding 24,389,000 shares of Common
Stock, all of which (other than those held by affiliates of the Company) are
tradeable without restriction under the Securities Act. All of the 2,244,934
Redemption Shares and the 324,675 Secondary Shares that may be issued or
sold hereunder from time to time will be tradeable without restriction under
the Securities Act. See "Registration Rights." In addition, at May 31, 1997,
the Company had reserved for issuance an aggregate of 1,785,000 shares pursuant
to awards under the Company's 1993 Restricted Stock and Stock Option Plan.
Shares issued to executive officers, key employees and directors pursuant
to the 1993 Plan, and shares issued to the Plan are "restricted" securities
under the meaning of Rule 144 promulgated under the Securities Act ("Rule 144")
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including the exemptions
contained in Rule 144. In general, under Rule 144 as currently in effect, a
person who has beneficially owned his shares for at least one year is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of 1% of the then-outstanding Common Stock or of the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. After shares are held for two years, any person
who is not deemed to be an "Affiliate" of the Company at any time during the 90
days preceding a sale is entitled to sell such shares in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements. Sales of shares by
affiliates will continue to be subject to the volume limitations.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, may affect adversely
prevailing market prices of the Common Stock. See "Risk Factors -- Effect on
Share Price of Shares Available for Future Sale."
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<PAGE> 29
SELLING SHAREHOLDERS
Selling Shareholders are those persons and entities named below who may
receive shares of Common Stock upon redemption of Units currently held by such
persons and entities. Because the Selling Shareholders may redeem all, some
or none of their Units, and may receive, at the Company's option, cash rather
than shares of Common Stock upon such redemptions, no estimate can be made of
the aggregate number of Secondary Shares which may be offered and sold by the
Selling Shareholders pursuant to this Prospectus. In the table below, all
Selling Shareholders are assumed to have redeemed all of their Units and
received Secondary Shares therefor, and to be selling all such Secondary Shares
pursuant to this Prospectus. The table sets forth as of May 31, 1997, and as
adjusted to reflect the sale of all the Secondary Shares, certain information
regarding the Selling Shareholders' ownership of shares of Common Stock.
<TABLE>
<CAPTION>
Percent of Outstanding
Prior to Offering After Offering(4) Common Stock(4)
----------------------------------- ----------------- -------------------------
Shares of Common
Stock and Secondary Shares Shares Prior to After
Selling Shareholder Units Owned Registered Hereunder(6) Owned Offering Offering
- ------------------- ----------- ----------------------- ----- -------- ----------
<S> <C> <C> <C> <C> <C>
H. Lance Forsdick, Sr.(1) 443,573(5) 20,573 423,000 1.7% 1.6%
Robert M. Solmson(2) 582,709(5) 5,609 577,100 2.2% 2.1%
The Robert M. Solmson 7,086(6) 7,086 -0- (3) (3)
Trust
RFS, Inc. 112,903(5) 77,903 35,000 (3) (3)
Michael H. Dubroff 37,503(6) 37,503 -0- (3) (3)
Charles M. Dubroff 36,853(6) 36,853 -0- (3) (3)
Michael Family Partnership 90,294(6) 90,294 -0- (3) (3)
Dubroff Family Partnership 47,417(6) 47,417 -0- (3) (3)
Dubfam, Inc. 1,437(6) 1,437 -0- (3) (3)
------- ------ -------
Total Selling
Shareholders 1,359,775 324,675 1,035,100
</TABLE>
- --------------------
(1) Mr. Forsdick has been a director of the Company since the Company was
formed in 1993.
(2) Mr. Solmson is Chairman of the Board of the Company, a position that he
has held since the Company was formed in 1993.
(3) Represents less than 1% of all outstanding shares of Common Stock of
the company.
(4) Assumes all Units currently held by the Selling Shareholder are redeemed
for shares of Common Stock and such shares are sold as Secondary Shares
hereunder.
(5) Includes 20,573, 5,609 and 77,903 Units currently owned by Mr. Forsdick,
Mr. Solmson and RFS, Inc. respectively.
(6) Represents Units currently owned by the named person or entity.
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<PAGE> 30
REDEMPTION OF UNITS
GENERAL
Pursuant to the Redemption Rights each Limited Partner may, subject to
certain limitations, require that the Partnership redeem all or a portion of his
Units at any time by delivering a notice of exercise of redemption right to the
Partnership. Upon redemption, the Partnership may elect to deliver to the
Limited Partner in redemption of the Units, either (i) a number of shares of
Common Stock equal to the number of Units redeemed (subject to certain
anti-dilution adjustments) or (ii) cash in an amount equal to the market value
of the number of such shares of Common Stock. The market value of the Common
Stock for this purpose will be equal to the average of the closing trading
prices of the Company's Common Stock (or substitute information, if no such
closing price is available) for the ten consecutive trading days before the day
on which the redemption notice was received by the Partnership.
In lieu of the Partnership redeeming Units, the Company, in its sole
discretion, has the right to assume directly and satisfy the Partnership's
redemption obligation described in the preceding paragraph. The Company
anticipates that it generally will elect to assume directly and satisfy any
redemption right exercised by a Limited Partner through the issuance of shares
of Common Stock by the Company (including Redemption Shares issued pursuant to
this Prospectus), whereupon the Company will acquire the Units being redeemed.
Such an acquisition will be treated as a sale of the Units to the Company for
federal income tax purposes. See "-- Tax Consequences of Redemption." Upon
redemption, a Limited Partner's right to receive distributions with respect to
the Units redeemed will cease.
A Limited Partner must notify the Company, as the General Partner, of his
desire to require the Partnership to redeem Units by sending a notice of
exercise of redemption right, in the form attached as an exhibit to the
Partnership Agreement, a copy of which is available from the Company.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes certain federal income tax
considerations that may be relevant to a Limited Partner who exercises his right
to require the redemption of his Units.
Tax Treatment of Redemption of Units. If the Company assumes and performs
the redemption obligation, the Partnership Agreement provides that the
redemption will be treated by the Company, the Partnership and the redeeming
Limited Partner as a sale of Units by such Limited Partner to the Company at the
time of such redemption. In that event, such sale will be fully taxable to the
redeeming Limited Partner and such redeeming Limited Partner will be treated as
realizing for tax purposes an amount equal to the sum of the cash or the value
of the Common Stock received in connection with the redemption plus the amount
of any Partnership liabilities allocable to the redeemed Units at the time of
the redemption. The determination of the amount of gain or loss is discussed
more fully below. If the Company does not elect to assume the obligation to
redeem a Limited Partner's Units and the Partnership redeems such Units for cash
or shares of Common Stock that the Company contributes to the Partnership to
effect such redemption, the redemption likely would be treated for tax purposes
as a sale of such Units to the Company in a fully taxable transaction, although
the matter is not free from doubt. In that event, the redeeming Limited Partner
would be treated as realizing an amount equal to the sum of the cash or the
value of the shares of Common Stock received in connection with the redemption
plus the amount of any Partnership liabilities allocable to the redeemed Units
at the time of the redemption. The determination of the amount of gain or loss
in the event of sale treatment is discussed more fully below.
If the Partnership chooses to redeem a Limited Partner's Units for cash
that is not contributed by the Company to effect the redemption, the tax
consequences would be the same as described in the previous paragraph, except
that if the Partnership redeems less than all of a Limited Partner's Units, the
Limited Partner would not be permitted to recognize any loss occurring on the
transaction and would recognize taxable gain only to the extent that the cash,
plus the amount of any Partnership liabilities allocable to the redeemed Units,
exceeded the Limited Partner's adjusted basis in all of such Limited Partner's
Units immediately before the redemption.
Tax Treatment of Disposition of Units by Limited Partner Generally. If a
Unit is redeemed in a manner that is treated as a sale of the Unit, or a Limited
Partner otherwise disposes of a Unit, the determination of gain or loss from
sale or other disposition will be based on the difference between the amount
considered realized for tax purposes and the tax basis in such Unit. See
"--Basis of Units." Upon the sale of a Unit, the "amount realized" will be
measured by the sum of the cash and fair market value of other property (e.g.,
Redemption Shares) received plus the amount of any Partnership liabilities
allocable to the Unit sold. To the extent that the amount of cash or property
received plus the allocable share of any Partnership liabilities exceeds the
Limited Partner's basis
29
<PAGE> 31
for the Unit disposed of, such Limited Partner will recognize gain. It is
possible that the amount of gain recognized or even the tax liability resulting
from such gain could exceed the amount of cash and the value of any other
property (e.g., Redemption Shares) received upon such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
upon the sale of a Unit attributable to a Limited Partner's share of "unrealized
receivables" of the Partnership (as defined in Section 751 of the Code) exceeds
the basis attributable to those assets, such excess will be treated as ordinary
income. Unrealized receivables include, to the extent not previously included in
Partnership income, any rights to payment for services rendered or to be
rendered. Unrealized receivables also include amounts that would be subject to
recapture as ordinary income if the Partnership had sold its assets at their
fair market value at the time of the transfer of a Unit.
Basis of Units. In general, a Limited Partner who was deemed at the time of
the transactions resulting in the issuance of the Units to have received his
Units upon liquidation of a partnership had an initial tax basis in his Units
("Initial Basis") equal to his basis in his partnership interest at the time of
such liquidation. Similarly, in general, a Limited Partner who at the time of
the transactions resulting in the issuance of the Units contributed a
partnership interest in exchange for his Units had an Initial Basis in the Units
equal to his basis in the contributed partnership interest. A Limited Partner
who purchased his Units had an Initial Basis in the Units equal to the purchase
price. A Limited Partner's Initial Basis in his Units generally is increased by
(i) such Limited Partner's share of Partnership taxable income and (ii)
increases in his share of liabilities of the Partnership (including any increase
in his share of liabilities occurring in connection with the transactions
resulting in the issuance of the Units). Generally, such Limited Partner's basis
in his Units is decreased (but not below zero) by (A) his share of Partnership
distributions, (B) decreases in his share of liabilities of the Partnership
(including any decrease in his share of liabilities of the Partnership occurring
in connection with the transactions resulting in the issuance of the Units), (C)
his share of losses of the Partnership and (D) his share of nondeductible
expenditures of the Partnership that are not chargeable to capital.
Potential Application of Disguised Sale Regulations to a Redemption of
Units. There is a risk that a redemption of Units may cause the original
transfer of property to the Partnership in exchange for Units to be treated as a
"disguised sale" of property. The Code and the Treasury Regulations thereunder
(the "Disguised Sale Regulations") generally provide that, unless one of the
prescribed exceptions is applicable, a partner's contribution of property to a
partnership and a simultaneous or subsequent transfer of money or other
consideration (including the assumption of or taking subject to a liability)
from the partnership to the partner will be presumed to be a sale, in whole or
in part, of such property by the partner to the partnership. Further, the
Disguised Sale Regulations provide generally that, in the absence of an
applicable exception, if money or other consideration is transferred by a
partnership to a partner within two years of the partner's contribution of
property, the transactions are, when viewed together, presumed to be a sale of
the contributed property unless the facts and circumstances clearly establish
that the transfers do not constitute a sale. The Disguised Sale Regulations also
provide that if two years have passed between the transfer of money or other
consideration and the contribution of property, the transactions will be
presumed not to be a sale unless the facts and circumstances clearly establish
that the transfers constitute a sale.
Accordingly, if a Unit is redeemed, the Service could contend that the
Disguised Sale Regulations apply because the Limited Partner will thus receive
cash or shares of Common Stock subsequent to his previous contribution of
property to the Partnership. In that event, the Service could contend that the
transactions in connection with the issuance of the Units themselves were
taxable as a disguised sale under the Disguised Sale Regulations. Any gain
recognized thereby may be eligible for installment reporting under Section 453
of the Code, subject to certain limitations.
COMPARISON OF OWNERSHIP OF UNITS AND SHARES OF COMMON STOCK
Generally, the nature of an investment in shares of Common Stock of the
Company is substantially equivalent economically to an investment in Units in
the Partnership. Since the Partnership makes distributions to its partners on a
per Unit basis and the Company owns one Unit for each outstanding share of
Common Stock and one Series A Preferred Unit for each outstanding share of
Series A Preferred Stock, a holder of a share of Common or Preferred Stock
generally receives the same distribution that a holder of the applicable Unit
receives, and shareholders and Unit holders generally share in the risks and
rewards of ownership in the enterprise being conducted by the Company (through
the Partnership). However, there are some differences between ownership of Units
and ownership of stock, some of which may be material to investors.
30
<PAGE> 32
The information below highlights a number of the significant differences
between the Partnership and the Company relating to, among other things, form of
organization, permitted investments, policies and restrictions, management
structure, compensation and fees, investor rights and federal income taxation,
and compares certain legal rights associated with the ownership of Units and
Common Stock, respectively. These comparisons are intended to assist Limited
Partners of the Partnership in understanding how their investment will be
changed if their Units are redeemed for Common Stock. THIS DISCUSSION IS SUMMARY
IN NATURE AND DOES NOT CONSTITUTE A COMPLETE DISCUSSION OF THESE MATTERS.
HOLDERS OF UNITS SHOULD CAREFULLY REVIEW THE BALANCE OF THIS PROSPECTUS AND THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART FOR ADDITIONAL
IMPORTANT INFORMATION ABOUT THE COMPANY.
Form of Organization and Assets Owned. The Partnership is organized as a
Tennessee limited partnership under TRULPA. The Company is a Tennessee
corporation. The Company elected to be taxed as a REIT under the Code commencing
with its taxable year ended December 31, 1993 and intends to maintain its
qualification as a REIT. The Company's principal asset is its ownership interest
in the Partnership, thereby giving the Company an investment in the hotel
properties and other assets owned by the Partnership.
Length of Investment. The Partnership has a stated termination date of
December 31, 2050, although it may be terminated earlier under certain
circumstances. See "The Company -- The Partnership" and "Description of Units --
Term." The Company has a perpetual term and intends to continue its operations
for an indefinite time period.
Purpose and Permitted Investments. The purpose of the Partnership includes
the conduct of any business that may be lawfully conducted by a limited
partnership formed under TRULPA, except that the Partnership Agreement requires
the business of the Partnership to be conducted in such a manner that will
permit the Company to be classified as a REIT under Section 856 of the Code,
unless the Company ceases to qualify as a REIT for reasons other than the
conduct of the business of the Partnership. The Partnership may, subject to the
foregoing limitation, invest in or enter into partnerships, joint ventures or
similar arrangements and may own interests in any other entity.
Under its Charter, the Company may engage in any lawful activity permitted
by the Tennessee Business Corporation Act.
Additional Equity. The Partnership is authorized to issue Units and other
partnership interests to the partners or to other persons for such consideration
and on such terms and conditions as the General Partner, in its sole discretion,
may deem appropriate. In addition, the General Partner may cause the Partnership
to issue to the Company additional Units, or other partnership interests in one
or more different series or classes which may be senior to the Units, in
conjunction with the offering of securities of the Company having substantially
similar rights, in which the proceeds thereof are contributed to the
Partnership. Consideration for additional partnership interests may be cash or
other property or other assets permitted by TRULPA.
Under the Charter, the total number of shares of all classes of stock that
the Company has the authority to issue is 105,000,000 consisting of 100,000,000
shares of Common Stock, $.01 par value, and 5,000,000 shares of Preferred
Stock. As of the date of this Prospectus, a total of 24,389,000 shares of
Common Stock and 973,684 shares of Series A Preferred are outstanding. The
Board of Directors of the Company may issue, in its discretion, additional
equity securities consisting of Common Stock or Preferred Stock, provided,
however, that the total number of shares issued does not exceed the authorized
number of shares of capital stock set forth in the Company's Charter. As long
as the Partnership is in existence, the proceeds of all equity capital raised
by the Company will be contributed to the Partnership in exchange for Units or
other interests in the Partnership.
Other Investment Restrictions. Other than restrictions precluding
investments by the Partnership that would adversely affect the qualification of
the Company as a REIT, there are no restrictions upon the Partnership's
authority to enter into certain transactions, including among others, making
investments, lending Partnership funds, or reinvesting the Partnership's cash
flow and net sale or refinancing proceeds.
Neither the Company's Charter nor its Bylaws impose any restrictions upon
the types of investments made by the Company.
Management and Control. All management and control over the business of the
Partnership are vested in the General Partner of the Partnership, and no Limited
Partner of the Partnership has any right to participate in or exercise
management or control over the business of the Partnership. Upon the occurrence
of an event of bankruptcy or the dissolution of the General Partner, such
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<PAGE> 33
General Partner shall be deemed to be removed automatically; otherwise, the
General Partner may not be removed by the Limited Partners with or without
cause.
The Board of Directors has exclusive control over the Company's business
and affairs subject to the restrictions in the Charter and Bylaws. The Board of
Directors is classified into three classes of directors, with each class serving
staggered three-year terms At each annual meeting of the shareholders, the
successors of the class of directors whose terms expire at that meeting will be
elected. The policies adopted by the Board of Directors may be altered or
eliminated without a vote of the shareholders. Accordingly, except for their
vote in the elections of directors, shareholders have no control over the
ordinary business policies of the Company. Under the Charter, the Board of
Directors cannot take action to disqualify the Company as a REIT or revoke the
Company's election to qualify as a REIT. See "Description of Capital Stock --
Charter and Bylaw Provisions."
Fiduciary Duties. Under Tennessee law, the General Partner of the
Partnership is accountable to the Partnership as a fiduciary and, consequently,
is required to exercise good faith in all of its dealings with respect to
partnership affairs. However, under the Partnership Agreement, the General
Partner is under no obligation to take into account the tax consequences to any
Limited Partner of any action taken by it, and the General Partner will have no
liability to a Limited Partner as a result of any liabilities or damages
incurred or suffered by or benefits not derived by a Limited Partner as a result
of an action or inaction of the General Partner so long as the General Partner
acted in good faith.
Under Tennessee law, the Company's directors must perform their duties in
good faith, in a manner that they believe to be in the best interests of the
Company and with the care an ordinarily prudent person would exercise under
similar circumstances. Directors of the Company who act in such a manner
generally will not be liable to the Company for monetary damages arising from
their activities.
Management Limitation of Liability and Indemnification. The Partnership
Agreement generally provides that the General Partner will incur no liability
for monetary damages to the Partnership or any Limited Partner for losses
sustained or liabilities incurred as a result of errors in judgment or of any
act or omission if the General Partner acted in good faith. In addition, the
General Partner is not responsible for any misconduct or negligence on the part
of its agents provided the General Partner appointed such agents in good faith.
The General Partner may consult with legal counsel, accountants, consultants,
real estate brokers and such other persons and any action it takes or omits to
take in reliance upon the opinion of such persons, as to matters which the
General Partner reasonably believes to be within their professional or expert
competence, shall be conclusively presumed to have been done or omitted in good
faith and in accordance with such opinion. The Partnership Agreement also
provides for indemnification of the General Partner, the directors and officers
of the General Partner, and such other persons as the General Partner may from
time to time designate, against any and all losses, claims, damages, liabilities
(joint or several), expenses (including reasonable legal fees and expenses),
judgments, fines, settlements, and other amounts arising from any and all
claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, that relate to the operations of the
Partnership in which such person may be involved, or is threatened to be
involved, provided that the Partnership shall not indemnify any such person (i)
for an act or omission of such person that was material to the matter giving
rise to the proceeding and either was committed in bad faith or was the result
of active and deliberate dishonesty, (ii) such person actually received an
improper benefit in money, property or services or (iii) in the case of any
criminal proceeding, such person had reasonable cause to believe that the act or
omission was unlawful.
The Company's Charter provides that, to the maximum extent that Tennessee
law in effect from time to time permits limitation of liability of directors and
officers, no director or officer of the Company shall be liable to the Company
or its shareholders for money damages. The Charter also provides that the
Company shall, to the fullest extent permitted by Tennessee law, indemnify any
director, officer, employee or agent against any expense incurred by such person
if the disinterested directors, the shareholders or independent legal counsel
determine that such person conducted himself in good faith and (a) reasonably
believed, in the case of conduct in his official capacity with the Company, that
his conduct was in the Company's best interest and in all other cases, that his
conduct was at least not opposed to the Company's best interest and (b) in the
case of any criminal proceeding, he had no reasonable cause to believe his
conduct was unlawful. Any indemnification by the Company pursuant to the
provisions of the Charter described above shall be paid out of the assets of the
Company and shall not be recoverable from the shareholders. The Company
currently purchases director and officer liability insurance for the purpose of
providing a source of funds to pay any indemnification described above. To the
extent that the foregoing indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act, in the opinion
of the Commission such indemnification is contrary to public policy and,
therefore, unenforceable.
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<PAGE> 34
Anti-Takeover Provisions. Except in limited circumstances, the General
Partner of the Partnership has exclusive management power over the business and
affairs of the Partnership. The General Partner may not be removed by the
Limited Partners with or without cause. Under the Partnership Agreement, the
General Partner may, in its sole discretion, prevent a Limited Partner from
transferring his interest or any rights as a Limited Partner except in certain
limited circumstances. The General Partner may exercise this right of approval
to deter, delay or hamper attempts by persons to acquire a controlling interest
in the Partnership. See "Description of Units."
Tennessee laws and the Company's Charter and Bylaws contain a number of
provisions that may have the effect of delaying or discouraging an unsolicited
proposal for the acquisition of the Company or the removal of incumbent
management. These provisions include, among others: (i) a staggered board of
directors; (ii) authorized capital stock that may be issued as Preferred Stock
in the discretion of the board of directors, with superior voting rights to the
Common Stock; and (iii) the Ownership Limitation Provision, designed to avoid
concentration of share ownership in a manner that would jeopardize the Company's
status as a REIT under the Code. See "Description of Capital Stock--Tennessee
Anti-Takeover Statutes."
Voting Rights. Under the Partnership Agreement, the Limited Partners have
voting rights only as to the dissolution of the Partnership and certain
amendments of the Partnership Agreement, as described more fully below.
Otherwise, all decisions relating to the operation and management of the
Partnership are made by the General Partner. See "Description of Units." As of
May 31, 1997, the General Partner held approximately 90.5% of the outstanding
Units. As Units held by Limited Partners are redeemed, the General Partner's
percentage ownership of the Units will increase. If additional Units are issued
to third parties, the General Partner's percentage ownership of the Units will
decrease.
Shareholders of the Company have the right to vote on, among other things,
a merger or sale of substantially all of the assets of the Company, certain
amendments to the Charter and dissolution of the Company. The Company is managed
and controlled by a board of directors consisting of three classes having
staggered, three-year terms of office. Each class is to be elected by the
shareholders at annual meetings of the Company. All shares of Common Stock have
one vote, and the Charter permits the Board of Directors to classify and issue
Preferred Stock in one or more series having voting power which may differ from
that of the Common Stock. See "Description of Capital Stock."
Amendment of the Partnership Agreement or the Charter. The Partnership
Agreement may be amended by the General Partner without the consent of the
Limited Partners in any respect, except that certain amendments affecting the
fundamental rights of a Limited Partner must be approved by consent of Limited
Partners holding more than 66 2/3% of the Units held by the Limited Partners.
Such consent is required for any amendment that would (i) affect the Redemption
Rights, (ii) adversely affect the rights of Limited Partners to receive
distributions payable to them under the Partnership Agreement, (iii) alter the
Partnership's profit and loss allocations, or (iv) impose any obligation upon
the Limited Partners to make additional capital contributions to the
Partnership.
Amendments to the Company's Charter must be approved by the Board of
Directors and by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders; provided, however, that the Charter provision providing
for the classification of the Board of Directors into three classes may not be
amended, altered, changed or repealed without the affirmative vote of at least
80% of the members of the Board of Directors or the affirmative vote of holders
of 75% of the outstanding shares of capital stock entitled to vote generally in
the election of directors, voting separately as a class.
Vote Required to Dissolve the Partnership or the Company. At any time prior
to December 31, 2050 (upon which date the Partnership shall terminate), the
General Partner may elect to dissolve the Partnership in its sole discretion.
Such dissolution shall also occur upon (i) the bankruptcy, dissolution or
withdrawal of the General Partner (unless the Limited Partners elect to continue
the Partnership), (ii) the passage of 90 days after the sale or other
disposition of all or substantially all the assets of the Partnership or (iii)
the redemption of all limited partnership interests in the Partnership (other
than those held by the General Partner, if any). The Limited Partners may, at
any time within 90 days after any such occurrence, elect to reconstitute and
continue the business of the Partnership by selecting a substitute general
partner by unanimous consent.
Under Tennessee law, the Board of Directors must obtain approval of holders
of a majority of the outstanding Common Stock entitled to vote upon such
proposal in order to dissolve the Company.
Vote Required to Sell Assets or Merge. Under the Partnership Agreement, the
sale, exchange, transfer or other disposition of all or substantially all of the
Partnership's assets or merger or consolidation of the Partnership requires only
the consent of the General Partner. Under Tennessee law, the sale of all or
substantially all of the assets of the Company or any merger or consolidation
33
<PAGE> 35
of the Company requires the approval of the Board of Directors and holders of a
majority of the outstanding shares of Common Stock. No approval of the
shareholders is required for the sale of less than all or substantially all of
the Company's assets.
Compensation, Fees and Distributions. The Company does not receive any
compensation for its services as General Partner of the Partnership. As a
partner in the Partnership, however, the General Partner has the same right to
allocations and distributions as other partners of the Partnership. In addition,
the Partnership will reimburse the General Partner for all expenses incurred
relating to the ongoing operation of the Partnership and any offering of
partnership interests in the Partnership or capital stock of the Company.
The directors and officers of the Company receive compensation for their
services.
Liability of Investors. Under the Partnership Agreement and applicable
state law, the liability of the Limited Partners for the Partnership's debts and
obligations is generally limited to the amount of their investment in the
Partnership and are not liable for any debts, liabilities, contracts or
obligations of the Partnership.
Under Tennessee law, the Company's shareholders are not personally liable
for the debts or obligations of the Company.
Nature of Investments. The Units constitute equity interests entitling each
Limited Partner to his pro rata share of cash distributions made to the partners
of the Partnership. The Partnership generally intends to retain and reinvest
proceeds of the sale of property or excess refinancing proceeds in its business.
The shares of Common Stock constitute equity interests in the Company. The
Company is entitled to receive its pro rata shares of distributions made by the
Partnership with respect to the Units, and each shareholder will be entitled to
his pro rata share of any dividends or distributions paid with respect to the
Common Stock. The dividends payable to the shareholders are not fixed in amount
and are only paid if, when and as declared by the Board of Directors. In order
to qualify as a REIT, the Company must distribute at least 95% of its taxable
income (excluding capital gains), and any taxable income (including capital
gains) not distributed will be subject to corporate income tax.
Potential Dilution of Rights. The General Partner of the Partnership is
authorized, in its sole discretion and without the consent of the Limited
Partners, to cause the Partnership to issue additional limited partnership
interests and other equity securities for any partnership purpose at any time to
the Limited Partners or to other persons on terms and conditions established by
the General Partner.
The Board of Directors of the Company may issue, in its discretion,
additional shares of Common Stock and may have the authority to issue from the
authorized capital stock a variety of other equity securities of the Company
with such powers, preferences and rights as the Board of Directors may designate
at the time. The issuance of additional shares of either Common Stock or other
similar equity securities may result in the dilution of the interests of the
shareholders.
Liquidity. Subject to certain exceptions, a Limited Partner may not
transfer all or any portion of his Units without (i) obtaining the prior written
consent of the General Partner, which consent may be withheld in the sole and
absolute discretion of the General Partner, and (ii) meeting certain other
requirements set forth in the Partnership Agreement. Notwithstanding the
foregoing, subject to certain restrictions, a Limited Partner may transfer his
Units to (i) a member of a Limited Partner's Immediate Family or a trust for the
benefit of a member of a Partner's Immediate Family in a donative transfer that
does not involve the receipt of any consideration or (ii) an organization that
qualifies under Section 501(c)(3) of the Code and that is not a private
foundation within the meaning of Section 509(b) of the Code, provided that, in
either case, such transferee is an "accredited investor" within the meaning of
Regulation D promulgated under the Securities Act. Limited Partners should
expect to hold their Units until they redeem them for cash or shares of Common
Stock, or until the Partnership terminates. The right of a transferee in a
donative transfer to become a substituted Limited Partner also is subject to the
consent of the General Partner, which consent may be withheld in its sole and
absolute discretion. If the General Partner does not consent to the admission of
a transferee in a donative transfer, the transferee will succeed to all economic
rights and benefits attributable to such Units (including the right of
redemption) but will not become a Limited Partner or possess any other rights of
Limited Partners (including the right to vote on or consent to actions of the
Partnership). The General Partner may require, as a condition of any transfer,
that the transferring Limited Partner assume all costs incurred by the
Partnership in connection with such transfer.
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The Redemption Shares, except Secondary Shares not sold under a
Registration Statement under the Securities Act, will be freely transferable as
registered securities under the Securities Act. The Common Stock is listed on
the New York Stock Exchange under the symbol "RFS." The breadth and strength of
this secondary market will depend, among other things, upon the number of shares
outstanding, the Company's financial results and prospects, the general interest
in the Company's and other real estate investments, and the Company's dividend
yield compared to that of other debt and equity securities.
Federal Income Taxation. The Partnership is not subject to federal income
taxes. Instead, each holder of Units includes its allocable share of the
Partnership's taxable income or loss in determining its federal income tax
liability. Income and loss from the Partnership generally is subject to the
"passive activity" limitations. Under the "passive activity" rules, income and
loss from the Partnership that is considered "passive" income or loss generally
can be offset against income and loss (including passive loss carry-forwards
from prior years) from other investments that constitute "passive activities"
(unless the Partnership is considered a "publicly traded partnership," in which
case income and loss from the Partnership can only be offset against other
income and loss from the Partnership). Income of the Partnership, however, that
is attributable to dividends or interest does not qualify as passive income and
cannot be offset with losses and deductions from a "passive activity." Cash
distributions from the Partnership are not taxable to a holder of Units except
to the extent they exceed such holder's basis in its interest in the Partnership
(which will include such holder's allocable share of the Partnership's debt).
Each year, holders of Units will receive a Schedule K-1 tax form containing
detailed tax information for inclusion in preparing their federal income tax
returns. Holders of Units are required in some cases, to file state income tax
returns and/or pay state income taxes in the states in which the Partnership
owns property, even if they are not residents of those states, and in some such
states (including Tennessee) the Partnership is required to remit a withholding
tax with respect to such nonresidents.
The Company elected to be taxed as a REIT effective for its taxable year
ending December 31, 1993. So long as it qualifies as a REIT, the Company will be
permitted to deduct distributions paid to its shareholders, which effectively
will reduce (or eliminate) the "double taxation" that typically results when a
corporation earns income and distributes that income to its shareholders in the
form of dividends. A REIT, however, is subject to federal income tax on income
that is not distributed and also may be subject to federal income and excise
taxes in certain circumstances. The maximum federal income tax rate for
corporations currently is 35% and for individuals is 39.6%. Dividends paid by
the Company will be treated as "portfolio" income and cannot be offset with
losses from "passive activities." Distributions made by the Company to its
taxable domestic shareholders out of current or accumulated earnings and profits
will be taken into account by them as ordinary income. Distributions that are
designated as capital gain dividends generally will be taxed as long-term
capital gain, subject to certain limitations. Distributions in excess of current
and accumulated earnings and profits will be treated as a non-taxable return of
basis to the extent of a shareholder's adjusted basis in its Common Stock, with
the excess taxed as capital gain. Each year, shareholders of the Company (other
than certain types of institutional investors) will receive IRS Form 1099, which
is used by corporations to report dividends paid to their shareholders.
Shareholders who are individuals generally should not be required to file state
income tax returns or pay state income taxes outside of their state of residence
with respect to the Company's operations and distributions. The Company may be
required to pay state income taxes in certain states.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Common Stock. The discussion
does not address all aspects of taxation that may be relevant to particular
shareholders in light of their personal investment or tax circumstances, or to
certain types of shareholders (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, foreign corporations,
and persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws.
The statements in this discussion are based on current provisions of the
Code, existing, temporary, and currently proposed Treasury regulations
promulgated under the Code ("Treasury Regulations"), the legislative history of
the Code, existing administrative rulings and practices of the Service, and
judicial decisions. No assurance can be given that future legislative, judicial,
or administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus Supplement with
respect to the transactions entered into or contemplated prior to the effective
date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP, AND SALE OF
THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company elected to be taxed as a REIT under sections 856 through 860 of
the Code commencing with its taxable year ended December 31, 1993. The Company
believes that, commencing with such taxable year, it has been organized and has
operated in such a manner as to qualify for taxation as a REIT under the Code,
and the Company intends to continue to operate in such a manner, but no
assurance can be given that the Company will operate in a manner so as to
continue to qualify as a REIT.
Qualification and taxation as a REIT depend upon the Company's ability to
meet on a continuing basis, through actual annual operating results, the
distribution levels, stock ownership, and other various qualification tests
imposed under the Code discussed below. No assurance can be given that the
actual results of the Company's operation for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "Federal Income Tax Considerations-Failure to
Qualify."
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retrospectively.
As a REIT, the Company generally is not subject to federal corporate income
tax on its net income that is distributed currently to its shareholders. That
treatment substantially eliminates the "double taxation" of income (i.e.,
taxation at both the corporate and shareholder levels) that generally results
from an investment in a corporation. However, the Company will be subject to
federal income tax in the following circumstances. First, the Company will be
taxed at regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains. Second, under certain circumstances,
the Company may be subject to the "alternative minimum tax" on its undistributed
items of tax preference. Third, if the Company has (i) net income from the sale
or other disposition of "foreclosure property" that is held primarily for sale
to customers in the ordinary course of business or (ii) other nonqualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if the Company acquires any asset from a
C corporation (i.e., a corporation generally subject to full
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corporate-level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other asset) in the hands of the C corporation and the Company recognizes gain
on the disposition of such asset during the 10-year period beginning on the date
on which such asset was acquired by the Company, then to the extent of such
asset's "built-in gain" (i.e., the excess of the fair market value of such asset
at the time of acquisition by the Company over the adjusted basis in such asset
at such time), such gain will be subject to tax at the highest regular corporate
rate applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more directors or trustees; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding capital stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of each taxable year (the "5/50
Rule"); (vii) that makes an election to be a REIT (or has made such election for
a previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations promulgated thereunder; and (ix) that meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. The Company has issued sufficient Common
Stock with sufficient diversity of ownership to allow it to satisfy requirements
(v) and (vi). In addition, the Company's Charter provides for restrictions
regarding transfer of the Common Stock and Series A Preferred that are intended
to assist the Company in continuing to satisfy the share ownership requirements
described in (v) and (vi) above.
For purposes of determining share ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and the beneficiaries of such trust are treated as holding shares of
a REIT in proportion to their actuarial interests in the pension trust for
purposes of the 5/50 Rule.
The Company currently has one corporate subsidiary, RFS Financing
Corporation, and may have additional corporate subsidiaries in the future. Code
section 856(i) provides that a corporation that is a "qualified REIT subsidiary"
shall not be treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a "qualified REIT subsidiary" shall be
treated as assets, liabilities, and items of income, deduction, and credit of
the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital
stock of which has been held by the REIT at all times during the period such
corporation was in existence. Thus, in applying the requirements described
herein, any "qualified REIT subsidiaries" of the Company are ignored, and all
assets, liabilities, and items of income, deduction, and credit of such
subsidiaries are treated as assets, liabilities and items of income, deduction,
and credit of the Company. RFS Financing Corporation is a "qualified REIT
subsidiary." Consequently, RFS Financing Corporation is not subject to federal
corporate income taxation, although it may be subject to state and local
taxation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share
(based on the REIT's interest in partnership capital) of the assets of the
partnership and will be deemed to be entitled to the gross income of the
partnership attributable to such share. In addition, the assets and gross income
of the partnership retain the same character in the hands of the REIT for
purposes of section 856 of the Code, including satisfying the gross income and
asset tests, described below. Thus, the Company's proportionate share of the
assets, liabilities, and items of income of the Partnership and RFS Financing
are treated as assets and gross income of the Company for purposes of applying
the requirements described herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, there are
three requirements relating to the Company's gross income that must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from
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prohibited transactions) for each taxable year must consist of defined types of
income derived directly or indirectly from investments relating to real property
or mortgages on real property (including "rents from real property" and, in
certain circumstances, interest) or temporary investment income. Second, at
least 95% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property or
temporary investments, and from dividends, other types of interest, and gain
from the sale or disposition of stock or securities, or from any combination of
the foregoing. Third, not more that 30% of the Company's gross income (including
gross income from prohibited transactions) for each taxable year may be gain
from the sale or other disposition of (i) stock or securities held for less than
one year, (ii) dealer property that is not foreclosure property and not
otherwise eligible for a regulatory safe harbor, and (iii) certain real property
held for less than four years (apart from involuntary conversions and sales of
foreclosure property). The specific application of these tests to the Company is
discussed below.
Rent received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person; provided, however, that an
amount received or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, for rents received to
qualify as "rents from real property," the Company generally must not operate or
manage the property or furnish or render services to the tenants of such
property, other than through an "independent contractor" who is adequately
compensated and from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by the Company are "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant."
Pursuant to the Percentage Leases, the Lessees lease from the Partnership
and RFS Financing the land, buildings, improvements, furnishings, and equipment
comprising the Hotels, for terms of 15 years. The Percentage Leases provide that
the Lessees are obligated to pay to the Partnership and RFS Financing (i) the
greater of Base Rent or Percentage Rent (collectively, the "Rent") and (ii)
"Additional Charges" or other expenses, as defined in the Percentage Leases.
Percentage Rent is calculated by multiplying fixed percentages by room revenues
(and food and beverage revenues, if applicable) for each of the Hotels. Both
Base Rent and the thresholds in the Percentage Rent formulas are adjusted for
inflation. Base Rent accrues and is required to be paid monthly and Percentage
Rent is payable quarterly.
In order for Base Rent, Percentage Rent, and the Additional Charges to
constitute "rents from real property," the Percentage Leases must be respected
as true leases for federal income tax purposes and not treated as service
contracts, joint ventures, or some other type of arrangement. The determination
of whether the Percentage Leases are true leases depends on an analysis of all
the surrounding facts and circumstances. In making such a determination, courts
have considered a variety of factors, including the following: (i) the intent of
the parties, (ii) the form of the agreement, (iii) the degree of control over
the property that is retained by the property owner (e.g., whether the lessee
has substantial control over the operation of the property or whether the lessee
is required simply to use its best efforts to perform its obligations under the
agreement), and (iv) the extent to which the property owner retains the risk of
loss with respect to the property (e.g., whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property) or the
potential for economic gain (e.g., appreciation) with respect to the property.
In addition, Code section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) will be treated instead as a
lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property, (ii) the service recipient
controls the property, (iii) the service recipient has a significant economic or
possessory interest in the property (e.g., the property's use is likely to be
dedicated to the service recipient for a substantial portion of the useful life
of the property, the recipient shares the risk that the property will decline in
value, the recipient shares in any appreciation in the value of the property,
the recipient shares in savings in the property's operating costs, or the
recipient bears the risk of damage to or loss of the property), (iv) the service
provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient, and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination whether a service
contract should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.
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Based on the following facts, the Company believes that the Percentage
Leases will be treated as true leases for federal income tax purposes: (i) the
Partnership or RFS Financing, as applicable, and the Lessees intend for their
relationship to be that of a lessor and lessee and such relationship is
documented by lease agreements, (ii) the Lessees have the right to the exclusive
possession, use, and quiet enjoyment of the Hotels during the term of the
Percentage Leases, (iii) the Lessees bear the cost of, and are responsible for,
day-to-day maintenance and repair of the Hotels, other than the cost of
maintaining underground utilities and structural elements and the cost of
capital improvements, and dictate how the Hotels are operated, maintained, and
improved, (iv) the Lessees bear all of the costs and expenses of operating the
Hotels (including the cost of any inventory used in their operation) during the
term of the Percentage Leases (other than real estate taxes, property insurance
premiums and, under certain Percentage Leases, casualty insurance premiums), (v)
the Lessees benefit from any savings in the costs of operating the Hotels during
the term of the Percentage Leases, (vi) in the event of damage to or destruction
of a Hotel, the Lessees are at economic risk because they are obligated either
(A) to restore the property to its prior condition, in which event they may,
under certain Percentage Leases, be required to bear all costs of such
restoration in excess of any insurance proceeds, or (B) to offer to purchase the
Hotel for an amount generally equal to the fair market value of the property,
less any insurance proceeds, (vii) the Lessees have indemnified the Partnership
or RFS Financing against all liabilities imposed on the Partnership or RFS
Financing during the term of the Percentage Leases by reason of (A) injury to
persons or damage to property occurring at the Hotels, (B) the Lessees' use,
management, maintenance or repair of the Hotels, (C) any environmental liability
caused by acts or grossly negligent failures to act of the Lessees, (D) taxes
and assessments in respect of the Hotels that are the obligations of the
Lessees, or (E) any breach of the Percentage Leases or of any sublease of a
Hotel by the Lessees, (viii) the Lessees are obligated to pay substantial fixed
rent for the period of use of the Hotels, (ix) the Lessees stand to incur
substantial losses (or reap substantial gains) depending on how successfully
they operate the Hotels, (x) the Partnership or RFS Financing, as applicable,
cannot use the Hotels concurrently to provide significant services to entities
unrelated to the Lessees, and (xi) the total contract price under the Percentage
Leases does not substantially exceed the rental value of the Hotels for the term
of the Percentage Leases.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. If the Percentage
Leases are characterized as service contracts or partnership agreements, rather
than as true leases, part or all of the payments that the Partnership and RFS
Financing receive from the Lessees may not be considered rent or may not
otherwise satisfy the various requirements for qualification as "rents from real
property." In that case, the Company likely would not be able to satisfy either
the 75% or 95% gross income test and, as a result, would lose its REIT status.
In order for the Rent to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the
Percentage Rent must not be based in whole or in part on the income or profits
of any person. The Percentage Rent, however, will qualify as "rents from real
property" if it is based on percentages of receipts or sales and the percentages
(i) are fixed at the time the Percentage Leases are entered into, (ii) are not
renegotiated during the term of the Percentage Leases in a manner that has the
effect of basing Percentage Rent on income or profits, and (iii) conform with
normal business practice. More generally, the Percentage Rent will not qualify
as "rents from real property" if, considering the Percentage Leases and all the
surrounding circumstances, the arrangement does not conform with normal business
practice, but is in reality used as a means of basing the Percentage Rent on
income or profits. Since the Percentage Rent is based on fixed percentages of
the gross revenues from the Hotels that are established in the Percentage
Leases, and the Company has represented that the percentages (i) will not be
renegotiated during the terms of the Percentage Leases in a manner that has the
effect of basing the Percentage Rent on income or profits and (ii) conform with
normal business practice, the Percentage Rent should not be considered based in
whole or in part on the income or profits of any person. Furthermore, the
Company has represented that, with respect to other hotel properties that it
acquires in the future, it will not charge rent for any property that is based
in whole or in part on the income or profits of any person (except by reason of
being based on a fixed percentage of gross revenues, as described above).
Another requirement for qualification of the Rent as "rents from real
property" is that the Company must not own, actually or constructively, 10% or
more of any Lessee. The constructive ownership rules generally provide that, if
10% or more in value of the stock of the Company is owned, directly or
indirectly, by or for any person, the Company is considered as owning the stock
owned, directly or indirectly, by or for such person. The Company does not own
any stock of the Lessees. However, one of the Lessees owns the Series A
Preferred Stock of the Company. In addition, the limited partners of the
Partnership may acquire Common Stock (at the option of the Partnership or the
Company) by exercising their "Redemption Rights." The Partnership Agreement,
however, provides that a redeeming limited partner may not exercise its
Redemption Right if and to the extent the delivery of Common Stock upon the
exercise of such right would (i) result in such partner or any other person
owning, directly or indirectly, Common Stock in excess of the "Ownership Limit,"
(ii) result in Common Stock being owned by fewer than 100 persons, (iii) result
in the Company being "closely held" within the meaning of section 856(h) of the
Code, (iv) cause the Company to own, actually or
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constructively, 10% or more of the ownership interests in a tenant of the
Partnership's or RFS Financing's real property, within the meaning of section
856(d)(2)(B) of the Code, or (v) cause the acquisition of Common Stock by such
partner to be "integrated" with any other distribution of Common Stock for
purposes of complying with the registration provisions of the Securities Act of
1933, as amended. The Charter likewise prohibits a shareholder of the Company
from owning Common Stock or Preferred Stock if such ownership would cause the
Company to fail to qualify as a REIT. Thus, the Company should never own,
actually or constructively, 10% of more of any Lessee. Furthermore, the Company
has represented that, with respect to other hotel properties that it acquires in
the future, it will not rent any property to a Related Party Tenant. However,
because the Code's constructive ownership rules for purposes of the Related
Party Tenant rules are broad and it is not possible to monitor continually
direct and indirect transfers of Common Stock, no absolute assurance can be
given that such transfers or other events of which the Company has no knowledge
will not cause the Company to own constructively 10% or more of a Lessee at some
future date.
A third requirement for qualification of the Rent as "rents from real
property" is that the Rent attributable to the personal property leased in
connection with the Percentage Lease with respect to a Hotel must not be greater
than 15% of the total Rent received under the Percentage Lease. The Rent
attributable to the personal property contained in a Hotel is the amount that
bears the same ratio to total Rent for the taxable year as the average of the
adjusted bases of the personal property at the beginning and at the end of the
taxable year bears to the average of the aggregate adjusted bases of both the
real and personal property contained in the Hotel at the beginning and at the
end of such taxable year (the "Adjusted Basis Ratio"). If the Rent attributable
to personal property leased in connection with a Percentage Lease exceeds 15% of
the total Rent for a taxable year, the portion of the Rent that is attributable
to personal property will not be qualifying income for purposes of either the
75% or 95% gross income test. Thus, if such Rent attributable to personal
property, plus any other income that is nonqualifying income for purposes of the
95% income test, during a taxable year exceeds 5% of the Company's gross income
during the year, the Company would lose its REIT status. With respect to each
Hotel (or interest therein) that the Partnership has acquired or will acquire in
exchange for Units, the initial adjusted bases of both the real and personal
property contained in such Hotel generally was or will be the same as the
adjusted bases of such property in the hands of the previous owner. With respect
to each Hotel (or interest therein) that the Partnership has acquired or will
acquire for cash, the initial adjusted basis of the real and personal property
contained in such Hotel generally equalled or will equal the purchase price paid
for the Hotel by the Partnership. Such basis generally will be allocated among
real and personal property based on relative fair market values. With respect to
each Hotel, the Company believes either that the Adjusted Basis Ratio for the
Hotel is less than 15% or that any nonqualifying income attributable to excess
personal property will not jeopardize the Company's ability to qualify as a
REIT. The Percentage Leases provide that the Adjusted Basis Ratio for each Hotel
shall not exceed 15%. There can be no assurance, however, that the Service would
not challenge the Company's calculation of an Adjusted Basis Ratio, or that a
court would not uphold such assertion. If such a challenge were successfully
asserted, the Company could fail to satisfy the 95% or 75% gross income test and
thus lose its REIT status.
A fourth requirement for qualification of the Rent as "rents from real
property" is that the Company cannot furnish or render noncustomary services to
the tenants of the Hotels, or manage or operate the Hotels, other than through
an independent contractor who is adequately compensated and from whom the
Company itself does not derive or receive any income. Provided that the
Percentage Leases are respected as true leases, the Company should satisfy that
requirement, because neither the Partnership nor RFS Financing performs any
services other than customary ones for the Lessees. Furthermore, the Company has
represented that, with respect to other hotel properties that it acquires in the
future, it will not perform noncustomary services for the tenant of the
property.
If the Rent from a particular hotel property does not qualify as"rents from
real property" because either (i) the Percentage Rent is considered based on the
income or profits of a Lessee, (ii) the Company owns, actually or
constructively, 10% or more of a Lessee, or (iii) the Company furnishes
noncustomary services to a Lessee, or manages or operates the Hotels, other than
through a qualifying independent contractor, none of the Rent from that hotel
property would qualify as "rents from real property." In that case, the Company
likely would lose its REIT status because it would be unable to satisfy either
the 75% or 95% gross income test.
In addition to the Rent, the Lessees are required to pay to the Partnership
and RFS Financing the Additional Charges. To the extent that the Additional
Charges represent either (i) reimbursements of amounts that the Partnership or
RFS Financing is obligated to pay to third parties or (ii) penalties for
nonpayment or late payment of such amounts, the Additional Charges should
qualify as "rents from real property." However, to the extent that the
Additional Charges represent interest that is accrued on the late payment of the
Rent or Additional Charges, such Additional Charges will not qualify as "rents
from real property," but instead should be treated as interest that qualifies
for the 95% gross income test.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued
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generally will not be excluded from the term "interest" solely by reason of
being based on a fixed percentage or percentages of receipts or sales.
Furthermore, to the extent that interest from a loan that is based on the
residual cash proceeds from the sale of the property securing the loan
constitutes a "shared appreciation provision" (as defined in the Code), income
attributable to such participation feature will be treated as gain from the sale
of the secured property.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. All inventory required in the operation
of the Hotels will be owned by the Lessees under the terms of the Percentage
Leases. Accordingly, the Company believes no asset owned by the Company, the
Partnership, or RFS Financing is held for sale to customers and that a sale of
any such asset will not be in the ordinary course of business of the Company,
the Partnership, or RFS Financing. Whether property is held "primarily for sale
to customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular property. Nevertheless, the Company will attempt to comply with
the terms of safe-harbor provisions in the Code prescribing when asset sales
will not be characterized as prohibited transactions. Complete assurance cannot
be given, however, that the Company can comply with the safe-harbor provisions
of the Code or avoid owning property that may be characterized as property held
"primarily for sale to customers in the ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. However, gross income from such
foreclosure property will qualify under the 75% and 95% gross income tests.
"Foreclosure property" is defined as any real property (including interests in
real property) and any personal property incident to such real property (i) that
is acquired by a REIT as the result of such REIT having bid in such property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law, after there was a default (or default
was imminent) on a lease of such property or on an indebtedness that such
property secured and (ii) for which such REIT makes a proper election to treat
such property as foreclosure property. However, a REIT will not be considered to
have foreclosed on a property where such REIT takes control of the property as a
mortgagee-in-possession and cannot receive any profit or sustain any loss except
as a creditor of the mortgagor. Under the Code, property generally ceases to be
foreclosure property with respect to a REIT on the date that is two years after
the date such REIT acquired such property (or longer if an extension is granted
by the Secretary of the Treasury). The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day (i) on
which a lease is entered into with respect to such property that, by its terms,
will give rise to income that does not qualify for purposes of the 75% gross
income test or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give rise to
income that does not qualify for purposes of the 75% gross income test, (ii) on
which any construction takes place on such property (other than completion of a
building, or any other improvement, where more than 10% of the construction of
such building or other improvement was completed before default became
imminent), or (iii) which is more than 90 days after the day on which such
property was acquired by the REIT and the property is used in a trade or
business which is conducted by the REIT (other than through an independent
contractor from whom the REIT itself does not derive or receive any income). As
a result of the rules with respect to foreclosure property, if a Lessee defaults
on its obligations under a Percentage Lease for a Hotel, the Company terminates
the Lessee's leasehold interest, and the Company is unable to find a replacement
lessee for such Hotel within 90 days of such foreclosure, gross income from
hotel operations conducted by the Company from such Hotel would cease to qualify
for the 75% and 95% gross income tests. In such event, the Company likely would
be unable to satisfy the 75% and 95% gross income tests and, thus, would fail to
qualify as a REIT.
It is possible that, from time to time, the Company, the Partnership, or
RFS Financing will enter into hedging transactions with respect to one or more
of its assets or liabilities. Any such hedging transactions could take a variety
of forms, including interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, and options. To the extent that the
Company, the Partnership, or RFS Financing enters into an interest rate swap or
cap contract to hedge any variable rate indebtedness incurred to acquire or
carry real estate assets, any periodic income or gain from the disposition of
such contract should be qualifying income for purposes of the 95% gross income
test, but not the 75% gross income test. Furthermore, any such contract would be
considered a "security" for purposes of the 30% gross income test. To the extent
that the Company, the Partnership, or RFS Financing hedges with other types of
financial instruments or in other situations, it may not be entirely clear how
the income from those transactions will be treated for purposes of the various
income tests that apply to REITs under the Code. The Company intends to
structure any hedging transactions in a manner that does not jeopardize its
status as a REIT.
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If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations-Taxation of the Company,"
even if those relief provisions apply, a 100% tax would be imposed with respect
to the net income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test. No such relief is available for
violations of the 30% income test.
Asset Tests
The Company, at the close of each quarter of its taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of
the mortgage does not exceed the value of the associated real property, and
shares of other REITs. For purposes of the 75% asset test, the term "interest in
real property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold in real
property, and an option to acquire real property (or a leasehold in real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in the Partnership, RFS Financing, RFS Financing Corporation, and any
other qualified REIT subsidiary).
For purposes of the asset tests, the Company is deemed to own its
proportionate share of the assets of the Partnership and RFS Financing, rather
than its partnership interests in the Partnership and RFS Financing. The Company
believes that, as of the date of this Prospectus, (i) at least 75% of the value
of its total assets is represented by real estate assets, cash and cash items
(including receivables), and government securities and (ii) it does not own any
securities that do not satisfy the 75% asset test. In addition, the Company does
not intend to acquire or dispose, or cause the Partnership or RFS Financing to
acquire or dispose, of assets in the future in a way that would cause it to
violate either asset test.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset tests arose from changes in the market values of its assets and was
not wholly or partly caused by the acquisition of one or more nonqualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
Distribution Requirements
The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute dividends (other than capital
gain dividends) to its shareholders in an amount at least equal to (i) the sum
of (A) 95% of its "REIT taxable income" (computed without regard to the
dividends paid deduction and its net capital gain) and (B) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment date after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular ordinary and capital gains corporate
tax rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% nondeductible excise tax on the excess of such required distribution over
the amounts actually distributed. The Company has made, and has represented that
it will continue to make, timely distributions sufficient to satisfy all annual
distribution requirements.
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It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, it is possible
that, from time to time, the Company may be allocated a share of net capital
gain attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. In addition, the Company may incur
expenditures (such as repayment of loan principal) that do not give rise to a
deduction. Therefore, the Company may have less cash available for distribution
than is necessary to meet its annual 95% distribution requirement or to avoid
corporate income tax or the excise tax imposed on certain undistributed income.
In such a situation, the Company may find it necessary to arrange for short-term
(or possibly long-term) borrowings or to raise funds through the issuance of
additional shares of common or preferred stock.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the Service interest based upon the amount of any
deduction taken for deficiency dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, in order to be able to elect
to be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its shareholders designed to disclose
the actual ownership of its outstanding capital stock. The Company has complied
and intends to continue to comply with such requirements.
Partnership Anti-Abuse Rule
The U.S. Department of the Treasury has issued a final regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions") that authorizes the Service, in certain abusive
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) with a principal purpose
of substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible arrangement that accurately reflects the partners'
economic agreement and clearly reflects the partners' income without incurring
any entity-level tax. The purposes for structuring a transaction involving a
partnership are determined based on all of the facts and circumstances,
including a comparison of the purported business purpose for a transaction and
the claimed tax benefits resulting from the transaction. A reduction in the
present value of the partners' aggregate federal tax liability through the use
of a partnership does not, by itself, establish inconsistency with the intent of
the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. However,
the Redemption Rights do not conform in all respects to the redemption rights
contained in the foregoing example. In addition, because the Anti-Abuse Rule is
extraordinarily broad in scope and is applied based on an analysis of all of the
facts and circumstances, there can be no assurance that the Service will not
attempt to apply the Anti-Abuse Rule to the Company. If the conditions of the
Anti-Abuse Rule are met, the Service is authorized to take appropriate
enforcement action, including disregarding the Partnership or RFS Financing for
federal tax purposes or treating one or more of its partners as nonpartners. Any
such action potentially could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will
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they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which the Company ceased to qualify as a REIT. It is
not possible to state whether in all circumstances the Company would be entitled
to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. For
purposes of determining whether distributions are made out of the Company's
current or accumulated earnings and profits, the Company's earnings and profits
will be allocated first to the Series A Preferred and then to the Common Stock.
There can be no assurances that the Company will have sufficient earnings and
profits to cover distributions to holders of both the Series A Preferred and the
Common Stock. As used herein, the term "U.S. shareholder" means a holder of
Common Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership, or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate whose income from sources without
the United States is includible in gross income for U.S. federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States, or (iv) any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the administration of such
trust and (B) one or more U.S. fiduciaries have the authority to control all
substantial decisions of the trust.
Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the shareholder has held his Common Stock. However, corporate shareholders
may be required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Stock, but rather will reduce the
adjusted basis of such stock. To the extent that such distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
shareholder's Common Stock, such distributions will be included in income as
long-term capital gain (or short-term capital gain if the Common Stock has been
held for one year or less) assuming the Common Stock is a capital asset in the
hands of the shareholder. In addition, any distribution declared by the Company
in October, November, or December of any year and payable to a shareholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the shareholder on December 31 of such year,
provided that the distribution is actually paid by the Company during January of
the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which the shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Common Stock (or distributions treated as such)
will be treated as investment income only if the shareholder so elects, in which
case such capital gains will be taxed at ordinary income rates. The Company will
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital, and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a shareholder who has held such
stock for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent of distributions from the
Company required to be treated by such shareholder as long-term capital gain.
All or a portion of any loss realized upon a taxable disposition of the Common
Stock may be disallowed if other shares of Common Stock are purchased within 30
days before or after the disposition.
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CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the tax rate on net capital gains applicable to individuals is 28%. Thus,
the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital or ordinary may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against an individual's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company reports to its U.S. shareholders and the Service the amount of
distributions paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to distributions paid unless such
holder (i) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact, or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their nonforeign status to the Company. The Service issued
proposed regulations in April 1996 regarding the backup withholding rules as
applied to non-U.S. shareholders. The proposed regulations would alter the
current system of backup withholding compliance and are proposed to be effective
for distributions made after December 31, 1997. See "Federal Income Tax
Considerations--Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, amounts distributed by the Company to
Exempt Organizations generally should not constitute UBTI, provided that the
Common Stock is not otherwise used in an unrelated trade or business of the
Exempt Organization. However, if an Exempt Organization finances its acquisition
of Common Stock with debt, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts, and qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17), and (20), respectively, of Code
section 501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions from the Company as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of the Company's
stock is required to treat a percentage of the dividends from the Company as
UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income derived by
the Company from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies to a pension trust holding
more than 10% of the Company's stock only if (i) the UBTI Percentage is at least
5%, (ii) the Company qualifies as a REIT by reason of the modification of the
5/50 Rule that allows the beneficiaries of the pension trust to be treated as
holding stock of the Company in proportion to their actuarial interests in the
pension trust, and (iii) either (A) one pension trust owns more than 25% of the
value of the Company's capital stock or (B) a group of pension trusts
individually holding more than 10% of the value of the Company's capital stock
collectively owns more than 50% of the value of the Company's capital stock.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
has been made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
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Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a non-U.S. corporation). The
Company expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Shareholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income. The Service issued proposed regulations in April 1996 that
would modify the manner in which the Company complies with the withholding
requirements.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the extent
that such distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's shares of Common
Stock, such distributions will give rise to tax liability if the Non-U.S.
Shareholder otherwise would be subject to tax on any gain from the sale or
disposition of his shares of Common Stock, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. However, a Non-U.S. Shareholder can
file a claim for refund with the Service for the overwithheld amount to the
extent it is determined subsequently that a distribution was, in fact, in excess
of the current and accumulated earnings and profits of the Company.
In August 1996, the U.S. Congress enacted the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of its current and accumulated earnings and profits. Consequently,
although the Company intends to withhold at a rate of 30% on the entire amount
of any distribution, to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Shareholders thus would be taxed at the
normal capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Distributions subject to FIRPTA also may be
subject to a 30% branch profits tax in the hands of a non-U.S. corporate
shareholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that is designated by the Company as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his shares of
Common Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by non-U.S. persons. However, because the shares of
Common Stock are traded publicly, no complete assurance can be given that the
Company is or will be a "domestically controlled REIT." In addition, a Non-U.S.
Shareholder that owns, actually and constructively, 5% or less of the Company's
shares throughout a specified "look-back" period will not recognize gain on the
sale of his shares taxable under FIRPTA if the shares are traded on an
established securities market. Gain not subject to FIRPTA will be taxable to a
Non-U.S. Shareholder if (i) investment in the Common Stock is effectively
connected with the Non-U.S. Shareholder's U.S. trade or business, in which case
the Non-U.S. Shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of Common Stock were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
the same treatment as U.S. shareholders with respect to such gain (subject to
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals, and the possible application of the 30%
branch profits tax in the case of non-U.S. corporations).
46
<PAGE> 48
OTHER TAX CONSEQUENCES
The Company, RFS Financing Corporation, the Partnership, RFS Financing, or
the Company's shareholders may be subject to state and local taxation in various
state or local jurisdictions, including those in which it or they transact
business, own property, or reside. The state and local tax treatment of the
Company and its shareholders may differ from the federal income tax treatment
described above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Common Stock.
TAX ASPECTS OF THE PARTNERSHIP AND RFS FINANCING
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Partnership and RFS Financing (each is referred to herein as a "Hotel
Partnership"). The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification as a Partnership
The Company is entitled to include in its income its distributive share of
each Hotel Partnership's income and to deduct its distributive share of each
Hotel Partnership's losses only if each Hotel Partnership is classified for
federal income tax purposes as a partnership rather than as a corporation or an
association taxable as a corporation. An entity will be classified as a
partnership rather than as a corporation for federal income tax purposes if the
entity (i) is treated as a partnership under Treasury regulations, effective
January 1, 1997, relating to entity classification (the "Check-the-Box
Regulations") and (ii) is not a "publicly traded" partnership. Pursuant to the
Check-the-Box Regulations, an unincorporated entity with at least two members
may elect to be classified either as an association taxable as a corporation or
as a partnership. If such an entity fails to make an election, it generally will
be treated as a partnership for federal income tax purposes. The federal income
tax classification of an entity that was in existence prior to January 1, 1997,
such as the Hotel Partnerships, will be respected for all periods prior to
January 1, 1997 if (i) the entity had a reasonable basis for its claimed
classification, (ii) the entity and all members of the entity recognized the
federal tax consequences of any changes in the entity's classification within
the 60 months prior to January 1, 1997, and (iii) neither the entity nor any
member of the entity was notified in writing on or before May 8, 1996 that the
classification of the entity was under examination. Each Hotel Partnership has a
reasonable basis for claiming classification as a partnership under the Treasury
regulations in effect prior to January 1, 1997. In addition, no Hotel
Partnership will elect to be treated as an association taxable as a corporation
for federal income tax purposes under the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market (or the substantial equivalent thereof). A publicly traded partnership
will not be taxed as a corporation, however, if 90% or more of its gross income
consists of "qualifying income" under section 7704(d) of the Code, which
generally includes any income that is qualifying income for purposes of the 95%
gross income test (the "90% Passive-Type Income Exception"). The U.S. Treasury
Department has issued regulations effective for taxable years beginning after
December 31, 1995 (the "PTP Regulations") that provide limited safe harbors from
the definition of a publicly traded partnership. Pursuant to one of those safe
harbors (the "Private Placement Exclusion"), interests in a partnership will not
be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all interests in the partnership were issued in a
transaction (or transactions) that was not required to be registered under the
Securities Act of 1933, as amended, and (ii) the partnership does not have more
than 100 partners at any time during the partnership's taxable year. In
determining the number of partners in a partnership, a person owning an interest
in a flow-through entity (i.e., a partnership, grantor trust, or S corporation)
that owns an interest in the partnership is treated as a partner in such
partnership only if (a) substantially all of the value of the person's interest
in the flow-through entity is attributable to the flow-through entity's interest
(direct or indirect) in the partnership and (b) a principal purpose of the use
of the flow-through entity is to permit the partnership to satisfy the
100-partner limitation. Each Hotel Partnership qualifies for the Private
Placement Exclusion. If either Hotel Partnership is considered a publicly traded
partnership under the PTP Regulations because it is deemed to have more than 100
partners, the Hotel Partnership should not be treated as a corporation because
it should be eligible for the 90% Passive-Type Income Exception.
The Company has not requested, and does not intend to request, a ruling
from the Service that the Hotel Partnerships will be classified as partnerships
for federal income tax purposes. If for any reason a Hotel Partnership were
taxable as a corporation, rather than as a partnership, for federal income tax
purposes, the Company would not be able to satisfy the income and asset
requirements for REIT status. See "Federal Income Tax Considerations-
Requirements for Qualification-Income Tests" and "-Requirements for
Qualification-Asset Tests." In addition, any change in a Hotel Partnership's
status for tax purposes might be
47
<PAGE> 49
treated as a taxable event, in which case the Company might incur a tax
liability without any related cash distribution. See "Federal Income Tax
Considerations-Requirements for Qualification-Distribution Requirements."
Further, items of income and deduction of such Hotel Partnership would not pass
through to its partners, and its partners would be treated as shareholders for
tax purposes. Consequently, such Hotel Partnership would be required to pay
income tax at corporate tax rates on its net income and distributions to its
partners would constitute dividends that would not be deductible in computing
such Hotel Partnership's taxable income.
Income Taxation of Each Hotel Partnership and its Partners
Partners, Not the Hotel Partnerships, Subject to Tax. A partnership is not
a taxable entity for federal income tax purposes. Rather, each partner is
required to take into account its allocable share of each Hotel Partnership's
income, gains, losses, deductions, and credits for any taxable year of such
Hotel Partnership ending within or with the taxable year of such partner,
without regard to whether the partner has received or will receive any
distribution from the Hotel Partnership.
Tax Allocations With Respect to Contributed Properties. Pursuant to section
704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
generally is equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Department of the Treasury has
issued regulations requiring partnerships to use a "reasonable method" for
allocating items affected by section 704(c) of the Code and outlining several
reasonable allocation methods.
Under the partnership agreements with respect to the Hotel Partnerships,
depreciation or amortization deductions of the Hotel Partnerships generally are
allocated among the partners in accordance with their respective interests in
the Hotel Partnership, except to the extent that Code section 704(c) requires
otherwise with respect to the Hotels contributed to the Hotel Partnership in
exchange for partnership interests therein (the "Contributed Hotels"). In
addition, gain on the sale of a Contributed Hotel will be specially allocated to
the limited partners who contributed the Hotel to the extent of any "built-in"
gain with respect to such Hotel for federal income tax purposes. The application
of section 704(c) to the Hotel Partnerships, however, is not entirely clear and
may be affected by Treasury Regulations promulgated in the future.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally is equal to (i) the amount of
cash and the basis of any other property contributed to the Partnership by the
Company, (ii) increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership, and (iii)
reduced, but not below zero, by (A) its allocable share of the Partnership's
loss and (B) the amount of cash distributed to the Company, and by constructive
distributions resulting from a reduction in the Company's share of indebtedness
of the Partnership.
If the allocation of the Company's distributive share of the Partnership's
loss would reduce the adjusted tax basis of the Company's interest in the
Partnership below zero, the recognition of such loss will be deferred until such
time as the recognition of such loss would not reduce the Company's adjusted tax
basis below zero. To the extent that the Partnership's distributions, or any
decrease in the Company's share of the indebtedness of the Partnership (such
decrease being considered a constructive cash distribution to the Company),
would reduce the Company's adjusted tax basis below zero, such distributions
(including such constructive distributions) will constitute taxable income to
the Company. Such distributions and constructive distributions normally will be
characterized as capital gain, and, if the Company's interest in the Partnership
has been held for longer than the long-term capital gain holding period
(currently one year), the distributions and constructive distributions will
constitute long-term capital gain.
Depreciation Deductions Available to the Hotel Partnerships. To the extent
that a Hotel Partnership acquired or will acquire the Hotels in exchange for
cash, the Hotel Partnership's initial basis in such Hotels for federal income
tax purposes generally was or will be equal to the purchase price paid by the
Hotel Partnership. The Hotel Partnerships depreciate such depreciable hotel
property for federal income tax purposes under the modified accelerated cost
recovery system of depreciation ("MACRS"). Under MACRS, the Hotel Partnerships
generally depreciate furnishings and equipment over a seven-year recovery period
using a 200% declining balance method and a half-year convention. If, however, a
Hotel Partnership places more than 40% of its furnishings and equipment in
service during the last three months of a taxable year, a mid-quarter
depreciation convention must be used for the furnishings and equipment placed in
service during that year. Under MACRS, the Hotel Partnerships generally
depreciate buildings and improvements over a 39-year recovery period using a
straight line method and a mid-month convention. A Hotel Partnership's initial
basis in Contributed Hotels for federal income tax purposes should be the same
as the transferor's basis in such Hotels on the
48
<PAGE> 50
date of acquisition by the Hotel Partnership. Although the law is not entirely
clear, the Hotel Partnerships intend to depreciate such depreciable hotel
property for federal income tax purposes over the same remaining useful lives
and under the same methods used by the transferors. The Hotel Partnerships' tax
depreciation deductions will be allocated among the partners in accordance with
their respective interests in the applicable Hotel Partnership (except to the
extent that Code section 704(c) requires otherwise with respect to the
Contributed Hotels).
SALE OF THE COMPANY'S OR A PARTNERSHIP'S PROPERTY
Generally, any gain realized by the Company or a Hotel Partnership on the
sale of property held by it for more than one year will be long-term capital
gain, except for any portion of such gain that is treated as depreciation or
cost recovery recapture. Any gain recognized by a Hotel Partnership on the
disposition of the Contributed Hotels will be allocated first to the partners
who contributed those hotels under section 704(c) of the Code to the extent of
such partners' "built-in gain" on those Hotels at the time of the disposition
for federal income tax purposes. The contributing partners' "built-in gain" on
the Contributed Hotels sold will equal the excess of the contributing partners'
proportionate share of the book value of those Hotels as reflected in the Hotel
Partnerships' capital accounts over the contributing partners' adjusted tax
basis allocable to those Hotels at the time of the sale. Any remaining gain
recognized by the Hotel Partnerships on the disposition of the Contributed
Hotels will be allocated among the partners in accordance with their respective
percentage interests in the applicable Hotel Partnership.
The Company's share of any gain realized by a Hotel Partnership on the sale
of any property held by a Hotel Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Hotel
Partnership's trade or business will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Income Tests". Such
prohibited transaction income also may have an adverse effect upon the Company's
ability to satisfy the income tests for REIT status. The Company, however, does
not presently intend to acquire or hold or allow the Hotel Partnerships to
acquire or hold any property that constitutes inventory or other property held
primarily for sale to customers in the ordinary course of the Company's or a
Hotel Partnership's trade or business.
49
<PAGE> 51
PLAN OF DISTRIBUTION
This Prospectus relates to (i) the possible issuance by the Company of the
Redemption Shares if, and to the extent that, holders of Units tender such Units
for redemption and the Company elects, pursuant to the Partnership Agreement,
to redeem the Units for shares of Common Stock, and (ii) the offer and sale
from time to time of Secondary Shares by the Selling Shareholders. The Company
is registering the Redemption Shares and the Secondary Shares for sale to
provide the holders thereof with freely tradeable securities. The registration
of the Redemption Shares and the Secondary Shares does not necessarily mean
that any of the Redemption Shares will be issued by the Company or any of the
Secondary Shares will be offered or sold by the Selling Shareholders thereof.
The Company will not receive any proceeds from the offering and sale of
the Secondary Shares by the Selling Shareholders or from the issuance of the
Redemption Shares, although the Company will acquire Units from such Limited
Partners in exchange for Redemption Shares. The Secondary Shares may be sold
from time to time to purchasers directly by any of the Selling Shareholders
Alternatively, the Selling Shareholders may from time to time offer the
to or through broker-dealers or agents. In connection with any such sale, any
such broker or agent may act as agent for the Selling Shareholders or may
purchase from the Selling Shareholders all or may purchase from the Selling
Shareholders all or a portion of the Secondary Shares as principal and may be
made pursuant to one or more of the methods described below. Such sales may be
made on the New York Stock Exchange ("NYSE") or other exchanges on which the
Common Stock is then traded, in the over-the-counter market, in negotiated
transactions or otherwise at prices related to the then-current market prices
or at prices otherwise negotiated. Broker-dealers or agents may receive
compensation in the form of commissions from the Selling Shareholders and/or
the purchasers of Secondary Shares for whom they may act as agent. The Selling
Shareholders and any dealers or agents that participate in the distribution of
Secondary Shares may be deemed to be "underwriters" within the meaning of the
Securities Act, and any profit on the sale of Secondary Shares by them and any
commissions received by any such dealers or agents may be deemed to be
underwriting commissions under the Securities Act.
The Secondary Shares may also be sold in one or more of the following
transactions: (a) block transactions in which a broker-dealer may sell all or a
portion of such shares as agent but may position and resell all or a portion of
the block as principal to facilitate the transaction; (b) purchases by any
such broker-dealer as principal and resale by such broker-dealer for its own
account pursuant to a Prospectus Supplement; (c) a special offering, an
exchange distribution or a secondary distribution in accordance with applicable
NYSE or other stock exchange rules; (d) ordinary brokerage transactions and
transactions in which any such broker-dealer solicits purchasers; (e) sales "at
the market" to or through a market maker or into an existing trading market, on
an exchange or otherwise, for such shares; and (f) sales in other ways not
involving market makers or established trading markets, including direct sales
to purchasers. In effecting sales, broker-dealers engaged by the Selling
Shareholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or other compensation from the Selling
Shareholders in amounts to be negotiated immediately prior to the sale that
will not exceed those customary in the types of transactions involved.
Broker-dealers may also receive compensation from purchasers of the Redemption
Shares which is not expected to exceed that customary in the types of
transactions involved.
At a time a particular offer of Secondary Shares is made, a Prospectus
Supplement, if required, will be distributed which will set forth the names of
any broker-dealers or agents and any commissions and other terms constituting
compensation from the Selling Shareholders and any other required information.
The Secondary Shares may be sold from time to time at varying prices determined
at the time of sale or at negotiated prices.
In order to comply with the securities laws of certain states, if
applicable, the Secondary Shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the Secondary Shares may not
be sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
All expenses incident to the offering and sale of the Redemption Shares and
Secondary Shares, if any, other than commissions, discounts and fees of
underwriters, broker-dealers or agents, shall be paid by the Company.
EXPERTS
The consolidated financial statements of RFS Hotel Investors, Inc. as of
December 31, 1996 and 1995 and for the three years in the period ended December
31, 1996 and the related financial statement schedule as of December 31, 1996
are incorporated in this Prospectus by reference to the Company's Annual Report
on Form 10-K. The financial statements of the GUS Hotels as of and for the year
ended December 31, 1995 are incorporated in this Prospectus by reference to the
Company's Current Report on Form 8-k-A dated February 14, 1997. The above said
financial statements and financial statement schedule have been so
incorporated in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of RFS, Inc. as of December 31, 1996 are
incorporated in this Prospectus by reference to the Company's Annual Report on
Form 10-K. The above said financial statements have been so incorporated in
reliance on the report of KPMG Peat Marwick LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered pursuant
to this Prospectus will be passed upon for the Company by Hunton & Williams.
50
<PAGE> 52
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK, IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH
IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information.................................................... 2
Incorporation of Certain Documents
by Reference............................................................ 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 15
Description of Capital Stock............................................. 16
Description of the Partnership Units..................................... 21
Shares Available for Future Sale......................................... 27
Selling Shareholders..................................................... 28
Redemption of Units...................................................... 29
Federal Income Tax Considerations........................................ 36
Plan of Distribution..................................................... 50
Experts.................................................................. 50
Legal Matters............................................................ 50
</TABLE>
----------------
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--------------------------------------------------------------
--------------------------------------------------------------
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RFS HOTEL INVESTORS, INC.
2,569,609 SHARES
COMMON STOCK
--------------
PROSPECTUS
--------------
______ __, 1997
--------------------------------------------------------------
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<PAGE> 53
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee...........$ 13,772.73
Accounting fees and expenses.................................. 5,000.00
Legal fees and expenses....................................... 10,000.00
Printing...................................................... 3,000.00
Miscellaneous................................................. 6,227.27
------------
TOTAL............................................$ 40,000.00
============
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Charter of the Company, generally, limits the liability of the
Company's directors and officers to the Company or its shareholders for money
damages to the fullest extent permitted from time to time by the laws of
Tennessee. The Charter also provides, generally, for the indemnification of
directors and officers, among others, against judgments, settlements, penalties,
fines, and reasonable expense actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in those
or other capacities except in connection with a proceeding by or in the right of
the Company in which the director was adjudged liable to the Company or in
connection with any other proceeding, whether or not involving action in his
official capacity, in which he was adjudged liable on the basis that personal
benefit was improperly received by him. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 (the "Securities Act") may
be permitted to directors and officers of the Company pursuant to the foregoing
provisions or otherwise, the Company has been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
The Company currently purchases director and officer liability insurance
for the purpose of providing a source of funds to pay any indemnification
described above.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C> <C>
3.1 - Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-11
(Registration No. 33-63696) and incorporated by reference herein)
3.2 - Charter of RFS Hotel Investors, Inc. (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3
(Registration No. 333-3307) and incorporated by reference herein)
3.3 - Bylaws of RFS Hotel Investors, Inc. (filed as Exhibit 4.2 to the Company's Registration Statement
on Form S-3 (Registration No. 333-3307) and incorporated by reference herein)
4.1 - Fourth Amended and Restated Agreement of Limited Partnership of RFS Partnership, L.P. (filed as Exhibit 3.3(b)
to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (Registration No. 34-0-
22164) filed with the Commission on March 31, 1997 and incorporated by reference herein)
5.1* - Opinion of Hunton & Williams
23.1* - Consent of Coopers & Lybrand, LLP
23.2* - Consent of KPMG Peat Marwick LLP
23.3* - Consent of Hunton & Williams (included in Exhibit 5.1)
24.1 - Power of Attorney (located on the signature page of this Registration Statement)
</TABLE>
- --------------
* Previously filed
** Filed herewith
II-1
<PAGE> 54
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; provided, however, that the undertakings set forth in subparagraphs
(i) and (ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the registrant pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above or
otherwise, the registrant has been advised that the in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted against the registrant by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by
II-2
<PAGE> 55
the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 56
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-3
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Memphis, State of Tennessee, on the 27th day of June, 1997.
RFS HOTEL INVESTORS, INC.
a Tennessee corporation
(Registrant)
By: *
-----------------------------
Robert M. Solmson
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed on the 27th day of
June, 1997 by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Chairman of the Board and Chief Executive Officer
---------------------------- (Principal Executive Officer)
Robert M. Solmson
* President and Director
----------------------------
Minor W. Perkins
/s/ Michael J. Pascal Secretary and Treasurer (Principal Financial
---------------------------- Officer and Principal Accounting Officer)
Michael J. Pascal
* Director
----------------------------
Bruce E. Campbell
</TABLE>
II-4
<PAGE> 57
<TABLE>
<S> <C>
* Director
----------------------------
H. Lance Forsdick
* Director
----------------------------
R. Lee Jenkins
Director
----------------------------
Harry J. Phillips, Sr.
* Director
----------------------------
Michael S. Starnes
* Director
----------------------------
John W. Stokes, Jr.
By: /s/ Michael J. Pascal
----------------------------
Michael J. Pascal
(attorney-in-fact for
the persons indicated)
</TABLE>
II-5
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
3.1 - Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-11
(Registration No. 33-63696) and incorporated by reference herein)
3.2 - Charter of RFS Hotel Investors, Inc. (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3
(Registration No. 333-3307) and incorporated by reference herein)
3.3 - Bylaws of RFS Hotel Investors, Inc. (filed as Exhibit 4.2 to the Company's Registration Statement
on Form S-3 (Registration No. 333-3307) and incorporated by reference herein)
4.1 - Fourth Amended and Restated Agreement of Limited Partnership of RFS Partnership, L.P. (filed as Exhibit 3.3(b)
to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (Registration No. 34-0-
22164) filed with the Commission on March 31, 1997 and incorporated by reference herein)
5.1* - Opinion of Hunton & Williams
23.1** - Consent of Coopers & Lybrand, L.L.P.
23.2** - Consent of KPMG Peat Marwick L.L.P.
23.3* - Consent of Hunton & Williams (included in Exhibit 5.1)
24.1* - Power of Attorney (located on the signature page of this Registration Statement)
</TABLE>
- --------------
* Previously filed.
** Filed herewith.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
RFS Hotel Investors, Inc. on Form S-3 of our report dated January 22, 1997 on
our audits of the consolidated financial statements of RFS Hotel Investors,
Inc. as of December 31, 1996 and 1995 and for the three years in the period
ended December 31, 1996 and the related financial statement schedule as of
December 31, 1996, which report is included in the Company's Annual Report on
Form 10-K, and our report dated October 30, 1996 on our audit of the financial
statements of the GUS Hotels as of and for the year ended December 31, 1995,
which report is included in the Company's Current Report on Form 8-K-A dated
February 14, 1997. We also consent to the reference of our firm under the
caption "Experts."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Memphis, Tennessee
June 27, 1997
<PAGE> 1
Exhibit 23.2
Accountants' Consent
The Board of Directors
RFS, Inc.:
We consent to incorporation by reference in the Registration Statement
(No. 333- ) on Form S-3 of RFS Hotel Investors, Inc. of our report dated
January 20, 1997, relating to the consolidated balance sheet of RFS, Inc. and
subsidiary as of December 31, 1996, and the related consolidated statements of
operations, stockholder's equity, and cash flows for the year ended December
31, 1996, which report is included in the 1996 annual report on Form 10-K of
RFS Hotel Investors, Inc. and to the reference to our firm under the heading
"Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
Memphis, Tennessee
June 27, 1997
