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Filed Pursuant to Rule 424(B)(5)
Registration No. 333-3307
PROSPECTUS SUPPLEMENT
(To Prospectus dated July 30, 1996)
547,946 SHARES
RFS HOTEL INVESTORS, INC.
COMMON STOCK
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RFS Hotel Investors, Inc. (the "Company") is a self-advised equity
real estate investment trust ("REIT") that presently owns, through an
approximately 90.5% general partnership interest in RFS Partnership, L.P. (the
"Partnership"), 61 hotels (the "Hotels") with an aggregate of 8,811 rooms in 24
states. The Company's hotels operate as Hampton Inn(R) hotels, Residence Inn(R)
hotels, Holiday Inn Express(R) hotels, Holiday Inn(R) hotels, Comfort Inn(R)
hotels, Sheraton Four Points(R) hotels, a Sheraton(R) hotel, a Hawthorn Suites
hotel and a Courtyard by Marriott(R) hotel. The Partnership leases 60 of the
Hotels to lessees (collectively, the "Lessees") pursuant to leases providing
for the payment of rent based in part on the revenues from the hotels. One
Hotel is owned by a non-qualified REIT subsidiary of the Company and is
operated by a third party pursuant to a management agreement. Certain of the
Lessees are subsidiaries of Promus Hotel Corporation ("Promus").
All of the Common Stock offered hereby is being offered by the Company
which intends to utilize the proceeds to repay outstanding indebtedness under
its existing line of credit (the "Credit Line") and for working capital and
general corporate purposes. The Common Stock is traded on the New York Stock
Exchange ("NYSE") under the symbol "RFS". The last reported sale price of the
Common Stock on the NYSE on March 25, 1998 was $18.25 per share. To ensure
compliance with certain requirements related to qualification of the Company as
a REIT, 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" BEGINNING ON PAGE S-3 OF THIS PROSPECTUS SUPPLEMENT
AND PAGE 4 OF THE ENCLOSED PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC-
URITIES 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.
J.C. Bradford & Co. (the "Underwriter") has agreed to purchase the
shares of Common Stock from the Company at a price of $17.3375 per share,
resulting in aggregate proceeds to the Company of $9,500,014 before payment of
expenses by the Company estimated at $50,000, subject to the terms and
conditions of an Underwriting Agreement. The Underwriter intends to sell the
shares of Common Stock to the sponsor of a newly-formed unit investment trust
(the "Trust") at an aggregate purchase price of $9,650,014, resulting in an
aggregate underwriting discount of $150,000. See "Underwriting." Such sponsor
intends to deposit the shares of Common Stock into the Trust in exchange for
units in the Trust. The units of the Trust will be sold to investors at a price
based upon the net asset value of the securities in the Trust. For purposes of
this calculation, the value of the Common Stock as of the evaluation time for
units of the Trust on March 25, 1998 was $18.25 per share of Common Stock.
The shares of Common Stock are offered by the Underwriter subject to
delivery by the Company and acceptance by the Underwriter, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriter is expected to be made through the facilities
of The Depository Trust Company on or about March 30, 1998.
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J.C. BRADFORD & CO.
March 25, 1998
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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. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
such as the Company that file electronically with the Commission. The Common
Stock is listed on the NYSE and such reports, proxy statements and other
information concerning the Company can be inspected at the offices of the NYSE,
20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on
Form S-3 (of which this Prospectus is a part) under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference and the exhibits and schedules hereto. For further information
regarding the Company and the Common Stock offered hereby, reference is hereby
made to the Registration Statement and such exhibits and schedules.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File
No. 0-22164) are incorporated herein by reference and made a part hereof: (i)
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997; (ii) the proxy statement for the annual meeting of shareholders of the
Company to be held on April 30, 1998; and (iii) the description of the
Company's Common Stock contained in the Company's Registration Statement on
Form 8-A, filed with the Commission on August 1, 1996. All documents filed by
the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the securities shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the date of filing such documents.
The Company will provide without charge to each person to whom a copy
of this Prospectus Supplement and the accompanying 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: Corporate Secretary, telephone number (901) 767-7005.
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 Supplement to the extent that a statement
contained herein (or in the accompanying Prospectus) 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 Supplement or the
accompanying Prospectus.
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THE COMPANY
The following summary is qualified in its entirety by the more
detailed information included elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein or therein by reference. As used
herein, the term "Company" includes the Partnership and its subsidiary
partnerships. Certain matters discussed in this Prospectus Supplement and the
accompanying Prospectus, including documents incorporated by reference, may
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Forward-looking statements
are inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy and some of which might not even be anticipated.
Further events and actual results, financial and otherwise, may differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under the caption "Risk Factors" in the accompanying Prospectus
and in "Management's Discussion and Analysis of Results of Operations and
Financial Condition," included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 which is incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus.
The Company is a self-administered real estate investment trust
("REIT") which invests in hotel properties in the U.S. The Company is the sole
general partner of the Partnership and owns an approximately 90.5% interest in
the Partnership. Substantially all of the Company's business activities are
conducted through the Partnership. At March 1, 1998, the Partnership owned 61
operating hotel properties (the "Hotels") with an aggregate of 8,811 rooms
located in 24 states and had under development four additional hotels.
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 60 of the Hotels to the Lessees pursuant to leases
("Percentage Leases") which provide for annual 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 56 of the Hotels, four Hotels are operated by third
parties pursuant to management agreements with the Lessees and one Hotel is
operated by a third party pursuant to a management agreement with the Company.
The Company is a Tennessee corporation. The Company has elected to be
taxed as a REIT for federal income tax purposes. Its executive offices are
located at 850 Ridge Lake Boulevard, Suite 220, Memphis, Tennessee 38120 and
its telephone number is (901) 767-7005.
RISK FACTORS
An investment in the Company involves various risks. Prospective
investors should consider the factors described beginning on page 4 of the
Prospectus. In addition, the following factors should also be considered.
REAL ESTATE RISKS
NATURAL DISASTER
Certain of the Hotels located in California are in the general
vicinity of active earthquake faults, including the four full service hotels
acquired in January 1997. The Company did not obtain seismic risk analyses on
these Hotels, but instead 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 or 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 $5,000,000 per Hotel 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
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could materially and adversely affect the business of the Company and its
financial condition and results of operations and its ability to make
distributions to its shareholders.
RISKS RELATING TO YEAR 2000 ISSUE
Many existing computer programs were designed to use only two digits
to identify a year in the date field without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000. The Company is
addressing the "Year 2000" issue with respect to its operations. Failure of the
Company or its lessees or hotel operators to property or timely resolve the
"Year 2000" issue could have a material adverse effect on the Company's
business.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock
offered hereby are approximately $9.5 million. The Company will contribute the
net proceeds of the offering to the Partnership and after such contribution
will own an approximate 90.6% interest in the Partnership. The Partnership
intends to use the net proceeds to repay outstanding indebtedness under the
Credit Line and for working capital and general corporate purposes. Indebtedness
under the Credit Line bears interest at LIBOR plus 1.45% (approximately 7.1 %
per annum on March 19, 1998) and was incurred by the Company primarily to fund
hotel acquisitions and development.
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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. Hunton & Williams has acted as counsel to the Company and has reviewed
this summary and is of the opinion that it fairly summarizes the federal income
tax consequences that are likely to be material to a holder of the Common
Stock. The discussion does not address all aspects of taxation that may be
relevant to particular stockholders in light of their personal investment or
tax circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations (except as discussed below), financial
institutions or broker-dealers, and, except as discussed below, 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 and the opinion of Hunton & Williams
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 Internal Revenue Service (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 short 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.
The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retrospectively.
Hunton & Williams has acted as counsel to the Company in connection
with the IPO, the Company's prior secondary stock offerings, the Offering, and
the Company's election to be taxed as a REIT. In the opinion of Hunton &
Williams, the Company qualified to be taxed as a REIT for its taxable years
ended December 31, 1993 through December 31, 1997, and the Company's
organization and current method of operation will enable it to continue to
qualify as a REIT for its taxable year ending December 31, 1998 and in the
future. Investors should be aware, however, that opinions of counsel are not
binding upon the Service or any court. It must be emphasized that Hunton &
Williams' opinion is based on various assumptions and is conditioned upon
certain representations made by the Company as to factual matters, including
representations regarding the nature of the Company's properties, the
Percentage Leases, and the future conduct of the Company's business. Moreover,
such qualification and taxation as a REIT depend upon the Company's ability to
meet on a continuing basis, through actual annual operating results,
distribution, stock ownership, and other various qualification tests imposed
under the Code discussed below. Hunton & Williams will not review the Company's
compliance with those tests on a continuing basis. Accordingly, no assurance
can be given that the actual results of the Company's operation for any
particular taxable year will satisfy such requirements. For a discussion of the
tax consequences of failure to qualify as a REIT, see "Federal Income Tax
ConsiderationsAFailure to Qualify."
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As a REIT, the Company generally is not subject to federal corporate
income tax on its net income that is distributed currently to its stockholders.
That treatment substantially eliminates the "double taxation" of income (i.e.,
taxation at both the corporate and stockholder levels) that generally results
from investment in a corporation. However, the Company will be subject to
federal income tax in the following circumstances. First, the Company will be
taxed at regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains. Second, under certain circumstances,
the Company may be subject to the "alternative minimum tax" 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 gross
income attributable to the greater of the amount by which the Company fails the
75% or 95% gross income test, multiplied by a fraction intended to reflect the
company's profitability. 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. To the extent that the Company elects to retain
and pay income tax on its net capital gain, such retained amounts will be
treated as having been distributed for purposes of the 4% excise tax. Seventh,
if the Company acquires any asset from a C corporation (i.e., a corporation
generally subject to full corporate-level tax) in a transaction in which the
basis of the asset in the Company's hands is determined by reference to the
basis of the asset (or any other asset) in the hands of the C corporation and
the Company recognizes gain on the disposition of such asset during the 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. See "Proposed Tax Legislation."
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 its capital
stock that are intended to assist the Company in continuing to satisfy the
share ownership requirements described in (v) and (vi) above.
For purposes of determining 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
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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 is owned by the REIT. 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 is deemed to be entitled to the gross income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership 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 Operating Partnership and
the Subsidiary Partnership 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 two requirements relating to the Company's gross income that must be
satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or
temporary investment income. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property or temporary investments, and from
dividends, other types of interest, and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. 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." In addition, the Company may furnish or
render a de minimis amount of "noncustomary services" to the tenants of a Hotel
other than through an independent contractor as long as the amount that the
Company receives that is attributable to such services does not exceed 1% of
its total receipts from the Hotel. For that purpose, the amount attributable to
the Company's noncustomary services will be at least equal to 150% of the
Company's cost of providing the services.
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Pursuant to the Percentage Leases, the Lessees lease from the
Operating Partnership or RFS Financing Partnership, L.P. (the "Subsidiary
Partnership") 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 Operating Partnership or the
Subsidiary Partnership (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 will be 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.
The Company believes that the Percentage Leases will be treated as
true leases for federal income tax purposes. Such belief is based, in part, on
the following facts: (i) the Operating Partnership or Subsidiary Partnership,
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 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 and property
and 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) the Lessees have indemnified the Operating Partnership or Subsidiary
Partnership against all liabilities imposed on the Operating Partnership or
Subsidiary Partnership 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, (vii) the Lessees are obligated to pay
substantial fixed rent for the period of use of the Hotels, (viii) the Lessees
stand to incur substantial losses (or reap substantial gains) depending on how
successfully they operate the Hotels, (ix) the Operating Partnership or
Subsidiary Partnership, as applicable, cannot use the Hotels concurrently
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to provide significant services to entities unrelated to the Lessees, and (x)
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
Operating Partnership and Subsidiary Partnership 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. In addition, the Charter prohibits transfers of
Common Stock or Preferred Stock that would cause the Company to own, actually
or constructively, 10% or more of the ownership interests in a tenant of the
Operating Partnership's or the Subsidiary Partnership's real property, within
the meaning of section 856(d)(2)(B) of the Code. 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 basis 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"). With respect to each
Hotel (or interest therein) that the Operating Partnership has acquired or will
acquire in exchange for Units, the initial adjusted basis 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 Operating Partnership has
acquired or will acquire for cash, the initial adjusted basis of the real
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and personal property contained in such Hotel generally equaled or will equal
the purchase price paid for the Hotel by the Operating Partnership. Such basis
generally will be allocated among real and personal property based on relative
fair market values. The Percentage Leases provide that the Adjusted Basis Ratio
for each Hotel shall not exceed 15%. With respect to each Hotel, the Company
believes either that the Adjusted Basis Ratio for the Hotel is less than 15% or
that any income attributable to excess personal property will not jeopardize
the Company's ability to qualify as a REIT. 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, other than within the 1% de minimis exception described
above, 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 Operating Partnership nor the Subsidiary
Partnership 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 with respect to the tenant of the property.
If a portion of the Rent from a Hotel does not qualify as "rents from
real property" because the Rent attributable to personal property 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% gross income test, during a taxable year exceeds 5% of the
Company's gross income during the year, the Company would lose its REIT status.
If, however, the 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 the related Lessee, (ii) the Company owns,
actually or constructively, 10% or more of the Lessee, or (iii) the Company
furnishes noncustomary services to the tenants of the Hotels, 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
Operating Partnership and the Subsidiary Partnership the Additional Charges. To
the extent that the Additional Charges represent either (i) reimbursements of
amounts that the Operating Partnership or Subsidiary Partnership 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 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.
The net income derived from any prohibited 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 Operating Partnership, or the
Subsidiary Partnership is held for sale to customers and that a sale of any
such asset will not be in the ordinary course of business of the Company, the
Operating Partnership, or the Subsidiary Partnership. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular property. Nevertheless, the Company
will attempt
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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 at the end of the third taxable year following the taxable year in which
the REIT acquired such property (or longer if an extension is granted by the
Secretary of the Treasury). The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day (i) on
which a lease is entered into with respect to such property that, by its terms,
will give rise to income that does not qualify 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 Operating
Partnership, or the Subsidiary Partnership will enter into hedging transactions
with respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of 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 Operating Partnership, or the
Subsidiary Partnership enters into an interest rate swap or cap contract,
option, futures contract, forward rate agreement, or similar financial
instrument to reduce interest rate risk with respect to indebtedness incurred
or to be 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. To
the extent that the Company, Operating Partnership, or the Subsidiary
Partnership hedges with other types of financial instruments or in other
situations, it may not be entirely clear how the income from those transactions
will be treated for purposes of the various income tests that apply to REITs
under the Code. The Company intends to structure any hedging transactions in a
manner that does not jeopardize its status as a REIT.
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 ConsiderationsATaxation of the Company,"
even if those relief provisions apply, a 100% tax would be imposed with respect
to the gross income attributable to the greater
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of the amount by which the Company fails the 75% or 95% gross income test,
multiplied by a fraction intended to reflect the Company's profitability.
Asset Tests
The Company, at the close of each quarter of each 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 Operating Partnership, the Subsidiary
Partnership, RFS Financing Corporation, and any other qualified REIT
subsidiary). See "Proposed Tax Legislation."
For purposes of the asset tests, the Company is deemed to own its
proportionate share of the assets of the Operating Partnership and the
Subsidiary Partnership, rather than its partnership interests in the Operating
Partnership and the Subsidiary Partnership. The Company believes that, as of
the date of the Offering, (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 Operating Partnership or the Subsidiary Partnership 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 test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an 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 or retained capital gains) to its stockholders in an
amount at least equal to (i) the sum of (A) 95% of its "REIT taxable income"
(computed without regard to the dividends paid deduction and its net capital
gain) and (B) 95% of the net income (after tax), if any, from foreclosure
property, minus (ii) the sum of certain items of noncash income. Such
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 may elect to retain and pay income tax on the net long-term capital gain
it receives in a taxable year. Any such retained amounts would be treated as
having been distributed by the Company for purposes of the 4%
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excise tax. The Company has made, and has represented that it will continue to
make, timely distributions sufficient to satisfy all annual distribution
requirements.
It is possible that, from time to time, the Company may experience
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, 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 stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations the Company must maintain
certain records and request on an annual basis certain information from its
stockholders designed to disclose the actual ownership of its outstanding
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
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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 Operating Partnership or
Subsidiary Partnership for federal tax purposes or treating one or more of its
partners as nonpartners. Any such action potentially could jeopardize the
Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as 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 stockholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will
they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders 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. STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends or retained capital
gains) will be taken into account by such U.S. stockholders as ordinary income
and will not be eligible for the dividends received deduction generally
available to corporations. As used herein, the term "U.S. stockholder" 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 stockholder has held his Common Stock. However, corporate
stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. The Company may elect to retain and pay income
tax on the net long-term capital gain it receives in a taxable year. In that
case, the Company's stockholders would include in income their proportionate
share of the Company's undistributed long-term capital gain. In addition, the
stockholders would be deemed to have paid their proportionate share of the tax
paid by the Company, which would be credited or refunded to the stockholders.
Each stockholder's basis in his Common Stock would be increased by the amount
of the undistributed long-term capital gain, included in the stockholder's
income, less the stockholder's share of the tax paid by the Company.
Distributions in excess of current and accumulated earnings and
profits will not be taxable to a stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's 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 stockholder'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 stockholder. In addition, any distribution
declared by the Company in October, November, or December of any year and
payable to a stockholder of record on a specified date in any such month shall
be treated as both paid by the Company and received by the stockholder on
December 31 of such year, provided that the distribution is actually paid by
the Company during January of the following calendar year.
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Stockholders 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, stockholders generally will not be able
to apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which the stockholder 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
stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates. The Company will notify stockholders 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 STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of
the Common Stock by a stockholder 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 stockholder 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 stockholder 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.
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%.
The maximum tax rate on net capital gains applicable to noncorporate taxpayers
is 28% for sales and exchange of assets held for more than one year but not
more than 18 months, and 20% for sales and exchanges of assets held for more
than 18 months. The maximum tax rate on long-term capital gain from the sale or
exchange of "section 1250 property" (i.e., depreciable real property) held for
more than 18 months is 25% to the extent that such gain would have been treated
s ordinary income if the property were "section 1245 property." With respect to
distributions designated by the Company as capital gain dividends and any
retained capital gains that the Company is deemed to distribute, the Company
may designate (subject to certain limits) whether such a distribution is
taxable to its noncorporate shareholders at a 20%, 25, or 28% rate. 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. stockholders and the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless 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 stockholder who does not provide the Company
with his correct taxpayer identification number also may be subject to
penalties imposed by
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the Service. Any amount paid as backup withholding will be creditable against
the stockholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any
stockholders who fail to certify their nonforeign status to the Company. The
Service has issued final regulations regarding the backup withholding rules as
applied to non-U.S. stockholders. Those regulations alter the current system of
backup withholding compliance and are effective for distributions made after
December 31, 1998. See "Federal Income Tax Considerations--Taxation of Non-U.S.
Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
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. STOCKHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
has been made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS 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.
Distributions to Non-U.S. Stockholders 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 or retained
capital gains 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.
Stockholder's conduct of a U.S. trade or business, the Non-U.S. Stockholder
generally will be subject to federal income tax at graduated rates, in the same
manner as U.S. stockholders 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.
Stockholder 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. Stockholder 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. Stockholder files an IRS Form 4224
with the Company claiming that the distribution is effectively connected
income. The Service has issued final regulations that modify the manner in
which the
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Company complies with the withholding requirements. Those regulations are
effective for distributions made after December 31, 1998.
Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a stockholder to the extent that
such distributions do not exceed the adjusted basis of the stockholder'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. Stockholder's shares of Common
Stock, such distributions will give rise to tax liability if the Non-U.S.
Stockholder 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. Stockholder 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.
The Company is required 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. Stockholder 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. Stockholder as if such gain
were effectively connected with a U.S. business. Non-U.S. Stockholders thus
would be taxed at the normal capital gain rates applicable to U.S. stockholders
(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 stockholder 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. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder 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 continue to be a "domestically controlled REIT." In
addition, a Non-U.S. Stockholder that owned, actually or constructively, 5% or
less of the Company's outstanding Common Stock at all times during a specified
testing period will not be subject to tax under FIRPTA if the Common Stock is
"regularly traded" on an established securities market. Furthermore, gain not
subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment
in the Common Stock is effectively connected with the Non-U.S. Stockholder's
U.S. trade or business, in which case the Non-U.S. Stockholder will be subject
to the same treatment as U.S. stockholders with respect to such gain, or (ii)
the Non-U.S. Stockholder 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.
Stockholder would be subject to the same treatment as U.S. stockholders 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).
PROPOSED TAX LEGISLATION
On February 2, 1998, President Clinton released his budget proposal
for fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
potentially could affect the Company if enacted in final
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form. First, the Proposal would prohibit a REIT from owning, directly or
indirectly, more than 10% of the voting power or value of all classes of a C
corporation's stock (other than the stock of a qualified REIT subsidiary).
Currently, a REIT may own no more than 10% of the voting stock of a C
corporation, but its ownership of the nonvoting stock of a C corporation is not
limited (other than by the rule that the value of a REIT's combined equity and
debt interests in a C corporation may not exceed 5% of the value of a REIT's
total assets). That provision is proposed to be effective with respect to stock
in a C corporation acquired by a REIT on or after the date of "first committee
action" with respect to the provision. If enacted as presently proposed, that
provision would severely limit the use by the Company of taxable subsidiaries
to conduct businesses the income from which would be nonqualifying income if
received directly by the Company.
Second, the Proposal would require recognition of any built-in gain
associated with the assets of a "large" C corporation (i.e., a C corporation
whose stock has a fair market value of more than $5 million) upon its
conversion to REIT status or merger into a REIT. That provision is proposed to
be effective for conversions to REIT status effective for taxable years
beginning after January 1, 1999 and mergers of C corporations into REITs that
occur after December 31, 1998. This provision would require immediate
recognition of the "built-in gain" of an acquired C corporation that is
determined to be "large" if, at any time after December 31, 1998, the C
corporation merges into the Company.
OTHER TAX CONSEQUENCES
The Company, RFS Financing Corporation, the Operating Partnership, the
Subsidiary Partnership, or the Company's stockholders 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 stockholders may differ from the
federal income tax treatment described above. Consequently, prospective
stockholders 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 OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Operating Partnership and the Subsidiary Partnership (each is referred to
herein as a "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 Partnership's income and to deduct its distributive share of each
Partnership's losses only if each 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 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 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. The
Partnerships reasonably claimed partnership classification under the Treasury
regulations in effect prior to January 1, 1997, and the Partnerships intend to
continue to be treated as partnerships for federal income tax purposes. In
addition, the Company has represented that no Partnership will elect to be
treated as an association taxable as a corporation under the Check-the-Box
Regulations. The Partnerships will be treated as partnerships under the
Check-the-Box Regulations.
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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 Partnership qualifies for the Private Placement Exclusion. If
either Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, the
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 Partnerships will be classified as
partnerships for federal income tax purposes. Instead, at the closing of the
Offering, Hunton & Williams will deliver its opinion that, based on the
provisions of the partnership agreements of the Partnerships, certain factual
assumptions, and certain representations described in the opinion, each
Partnership will be treated for federal income tax purposes as a partnership
and not as a corporation or an association taxable as a corporation or as a
publicly traded partnership. Unlike a tax ruling, an opinion of counsel is not
binding upon the Service, and no assurance can be given that the Service will
not challenge the status of the Partnerships as partnerships for federal income
tax purposes. If such challenge were sustained by a court, the Partnerships
would be treated as corporations for federal income tax purposes, as described
below. The opinion of Hunton & Williams is based on existing law, which to a
great extent consists of administrative and judicial interpretation. No
assurance can be given that administrative or judicial changes would not modify
the conclusions expressed in the opinion.
If for any reason one of the Partnerships were taxable as a
corporation, rather than as a partnership, for federal income tax purposes, the
Company would not be able to qualify as a REIT. See "Federal Income Tax
Considerations-Requirements for Qualification-Income Tests" and "ARequirements
for Qualification-Asset Tests." In addition, any change in a Partnership's
status for tax purposes might be treated as a taxable event, in which case the
Company might incur a tax liability without any related cash distribution. See
"Federal Income Tax ConsiderationsARequirements for QualificationADistribution
Requirements." Further, items of income and deduction of such Partnership would
not pass through to its partners, and its partners would be treated as
stockholders for tax purposes. Consequently, such 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 Partnership's taxable income.
Income Taxation of Each Partnership and its Partners
Partners, Not the 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 Partnership's income,
gains, losses, deductions, and credits for any taxable year of such 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
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
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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 of the Partnerships, depreciation or
amortization deductions of the Partnerships generally are allocated among the
partners in accordance with their respective interests in the Partnership,
except to the extent that Code section 704(c) requires otherwise with respect
to the Hotels contributed to the Partnership in exchange for Units (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 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 Operating Partnership generally is equal to (i) the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) increased by (A) its allocable share of the
Operating Partnership's income and (B) its allocable share of indebtedness of
the Operating Partnership, and (iii) reduced, but not below zero, by (A) its
allocable share of the Operating 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 Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
interest in the Operating 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
Operating Partnership's distributions, or any decrease in the Company's share
of the indebtedness of the Operating 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 Operating 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 Operating Partnership. To the
extent that the Operating Partnership acquired or will acquire, as the case may
be, the Hotels in exchange for cash, the Operating 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 Operating Partnership. The Operating
Partnership depreciates such depreciable hotel property for federal income tax
purposes under the modified accelerated cost recovery system of depreciation
("MACRS"). Under MACRS, the Operating Partnership generally depreciates
furnishings and equipment over a seven-year recovery period using a 200%
declining balance method and a half-year convention. If, however, the Operating
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 Operating Partnership generally depreciates
buildings and improvements over a 39-year recovery period using a straight line
method and a mid-month convention. The Operating Partnership's initial basis in
Hotels acquired in exchange for Units for federal income tax purposes should be
the same as the transferor's basis in such Hotels on the date of acquisition by
the Operating Partnership. Although the law is not entirely clear, the
Operating Partnership generally depreciates 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 Operating Partnership's tax
depreciation deductions are allocated among the partners in accordance with
their respective interests in the Operating Partnership (except to the extent
that Code section 704(c) requires otherwise with respect to the Contributed
Hotels).
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SALE OF THE COMPANY'S OR A PARTNERSHIP'S PROPERTY
Generally, any gain realized by the Company or a 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 Partnership on the
disposition of the Hotels contributed by the limited partners of the Operating
Partnership (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
Partnership's 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 Partnership on the disposition of the Contributed Hotels will
be allocated among the partners in accordance with their respective percentage
interests in the Partnership.
The Company's share of any gain realized by a Partnership on the sale
of any property held by a Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the 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 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 Partnership's trade
or business.
UNDERWRITING
Pursuant to the terms and subject to the conditions of the
Underwriting Agreement (the "Underwriting Agreement") between the Company and
J.C. Bradford & Co. (the "Underwriter") the Underwriter has agreed to purchase
from the Company, and the Company has agreed to sell to the Underwriter,
547,946 shares of Common Stock.
The Underwriter intends to sell the shares of Common Stock to Nike
Securities L.P., which intends to deposit such shares, together with shares of
common stock of other entities also acquired from the Underwriter, into a
newly-formed unit investment trust (the "Trust") registered under the
Investment Company Act of 1940, as amended, in exchange for units in the Trust.
The Underwriter is not an affiliate of Nike Securities L.P. or the Trust. The
Underwriter intends to sell the shares of Common Stock to Nike Securities L.P.
at an aggregate purchase price of $9,650,014. It is anticipated that the
Underwriter will also participate as sole underwriter in the distribution of
units of the Trust and will receive compensation therefor.
Pursuant to the Underwriting Agreement, the Company has agreed to
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
Underwriter may be required to make in respect thereof.
Until the distribution of the shares of Common Stock is completed,
rules of the Securities and Exchange Commission may limit the ability of the
Underwriter to bid for and purchase shares of Common Stock. As an exception to
these rules, the Underwriter is permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. It is not currently anticipated that the Underwriter will engage
in any such transactions in connection with this offering.
If the Underwriter creates a short position in the Common Stock in
connection with this offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement, the
Underwriter may reduce that short position by purchasing shares in the open
market.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the shares. In addition,
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neither the Company nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
In the ordinary course of business, the Underwriter and its affiliates
have engaged, and may in the future engage, in investment banking transactions
with the Company.
EXPERTS
The consolidated financial statements and financial statement schedule
of RFS Hotel Investors, Inc. as of December 31, 1997 and 1996 and for each of
the three years in the period ended December 31, 1997 are incorporated in
this Prospectus Supplement and the accompanying 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 Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of RFS, Inc. as December 31,
1997 and 1996 and for the years then ended have been incorporated in this
Prospectus Supplement and the accompanying Prospectus by reference to the
Company's Annual Report on Form 10-K, in reliance on the report of KPMG Peat
Marwick LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby, as well as
certain legal matters relating to the company, will be passed upon for the
Company by Hunton & Williams, Richmond, Virginia. The description of federal
income tax consequences contained in the section of the Prospectus Supplement
entitled "Federal Income Tax Considerations" is based on the opinion of Hunton
& Williams. Certain legal matters related to the offering will be passed upon
for the Underwriter by Chapman and Cutler, Chicago, Illinois. Chapman and
Cutler will rely upon the opinion of Hunton & Williams as to certain matters of
Tennessee law.
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PROSPECTUS
RFS HOTEL INVESTORS, INC.
COMMON STOCK
PREFERRED STOCK
DEPOSITARY SHARES
-----------------
RFS Hotel Investors, Inc. (the "Company") may issue from time to time
(i) shares of Common Stock, $.01 par value ("Common Stock"), (ii) shares of
Preferred Stock, $.01 par value ("Preferred Stock") and (iii) depositary shares
representing entitlement to all rights and preferences of a fraction of a share
of Preferred Stock of a specified series and represented by depositary receipts
("Depositary Shares") having an aggregate initial public offering price not to
exceed $250,000,000. The Common Stock, Preferred Stock and the Depositary
Shares offered hereby (collectively, the "Offered Securities") may be offered in
separate series, in amounts, at prices and on terms to be determined at the time
of sale and to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Common Stock,
the number of shares and initial public offering price; (ii) in the case of
Preferred Stock, the series designation and number of shares, the dividend,
liquidation, redemption, conversion, voting and other rights, the initial public
offering price and whether interests in the Preferred Stock will be represented
by Depositary Shares. In addition, such specific terms may include limitations
on direct or beneficial ownership and restrictions on transfer of the Offered
Securities, in each case as may be appropriate to preserve the status of the
Company as a real estate investment trust ("REIT") for federal income tax
purposes.
The applicable Prospectus Supplement will also contain information,
where applicable, concerning certain United States federal income tax
considerations relating to, and any listing on a securities exchange of, the
Offered Securities covered thereby.
The Offered Securities may be offered directly, through agents
designated from time to time by the Company, or to or through underwriters or
dealers. If any designated agents or any underwriters are involved in the sale
of Offered Securities, their names, and any applicable purchase price, fee,
commission or discount arrangement with, between or among them will be set forth
or will be calculable from the information set forth, in the applicable
Prospectus Supplement. See "Plan of Distribution." No Offered Securities may
be sold without delivery of the applicable Prospectus Supplement describing such
Offered Securities and the method and terms of the offering thereof.
See "Risk Factors" commencing on page 4 for a discussion of certain
factors that should be considered by prospective purchasers of the Offered
Securities.
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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE DATE OF THIS PROSPECTUS IS JULY 30, 1996.
<PAGE> 24
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"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices at Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the prescribed fees.
This Prospectus is part of a registration statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"). This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules of the Commission. For further
information, reference is made to the Registration Statement. In addition, the
Company's Common Stock is quoted on the Nasdaq Stock Market, and reports and
other information concerning the Company may be inspected at the Nasdaq Stock
Market at 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under
the Exchange Act, Commission File Number 34-0-22164 are hereby incorporated by
reference in this Prospectus: (i) the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, (ii) the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, (iii) the description of the Common
Stock contained in the Company's Registration Statement on Form 8-A filed on
July 30, 1993, under the Exchange Act, including any reports filed under the
Exchange Act for the purpose of updating such description, (iv) the Company's
Form 8-K filed with the Commission on March 14, 1996, (v) the proxy statement
filed with the Commission on March 18, 1996 for the Company's annual meeting of
shareholders for 1996, (vi) the proxy statement filed with the Commission on
May 17, 1996 for the Company's special meeting of shareholders held on June 21,
1996 and (vii) the Company's Form 8-K filed with the Commission on July 8,
1996. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act prior to the termination of the offering of all of
the Offered Securities shall be deemed to be incorporated by reference herein.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, in any accompanying Prospectus Supplement relating to a
specific offering of Offered Securities or in any other subsequently filed
document, as the case may be, which also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus or any accompanying Prospectus
Supplement.
The Company will provide on request and without charge to each person
to whom this Prospectus is delivered a copy (without exhibits) of any or all
documents incorporated by reference into this Prospectus. Requests for such
copies should be directed to RFS Hotel Investors, Inc. 889 Ridge Lake Boulevard,
Suite 100, Memphis, Tennessee 38120, Attention: Secretary, (901) 767-5154.
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<PAGE> 25
THE COMPANY
The Company is a self-administered real estate investment trust
("REIT") formed as a Tennessee corporation in 1993 to make investments in hotel
properties. The Company completed its initial public offering in August 1993.
The Company is the sole general partner of RFS Partnership, L.P. (the
"Partnership") and owns an approximately 98.7% interest in the Partnership.
Substantially all of the Company's business activities are conducted through
the Partnership. At June 30, 1996, the Partnership owned 49 hotel properties
with an aggregate of 6,905 rooms located in 22 states and had entered into
contracts to acquire or is developing eight additional hotel properties with an
aggregate of 790 rooms. 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 RFS, Inc. or
another wholly-owned subsidiary of Doubletree Corporation (collectively
the "Lessees") pursuant to leases ("Percentage Leases") which provide for rent
equal to the greater of (i) fixed base rent or (ii) percentage rent based on a
percentage of gross room revenue, and food and beverage revenue, if any at the
hotels. The Lessees operate 45 of the 49 hotels leased from the Partnership at
June 30, 1996 and the remaining hotels are operated by third parties pursuant
to management agreements with RFS, Inc. Prior to February 27, 1996,
substantially all of the equity interests of RFS, Inc. were owned by Robert M.
Solmson and H. Lance Forsdick. Messrs. Solmson and Forsdick are directors, and
Mr. Solmson is Chairman of the Board and Chief Executive Officer, of the
Company. Effective February 27, 1996, a wholly-owned subsidiary of Doubletree
Corporation was merged into RFS, Inc., with RFS, Inc. surviving the Merger as
a wholly-owned subsidiary of Doubletree Corporation.
The Company is a Tennessee corporation. Its executive offices are
located at 889 Ridge Lake Boulevard, Suite 100, Memphis, Tennessee and its
telephone number is (901) 767-5154.
USE OF PROCEEDS
Unless otherwise set forth in the applicable Prospectus Supplement, the
Company intends to contribute the net proceeds of any sale of Offered Securities
by the Company to the Partnership in exchange for additional units of
partnership interest. Unless otherwise set forth in the applicable Prospectus
Supplement, the net proceeds from the sale of any Offered Securities will be
used by the Company and the Partnership for general purposes, which
may include repayment of indebtedness, acquisition and development of additional
hotel properties and to fund improvements to hotel properties.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of
earnings to fixed charges for the periods shown.
<TABLE>
<CAPTION>
Three Months
For the Period Year Ended December 31, Ended March 31,
August 13, 1993 ------------------------ ------------------
to December 31, 1993 1994 1995 1995 1996
-------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to 207:1 102:1 35:1 79:1 10:1
Fixed Charges
</TABLE>
For purposes of computing this ratio, earnings have been calculated by
adding fixed charges (excluding capitalized interest) to income before minority
interest. Fixed charges consist of interest cost, whether expensed or
capitalized, and amortization of loan costs.
Prior to the completion of the Company's initial public offering
("IPO") on August 13, 1993 and intent to qualify as a REIT, the Company's
predecessor entities operated in a manner so as to minimize net taxable income
and were capitalized primarily with debt. As a result, the Company's
predecessor entities had net aggregate losses for the fiscal years ended
December 31, 1990 and 1991 and the period January 1, 1993 to August 12, 1993.
Consequently, the computation of the ratio of earnings to fixed charges for
such periods indicates that earnings were inadequate to cover fixed charges by
approximately $1.8
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<PAGE> 26
million, $1.3 million and $.4 million for the fiscal years ended December 31,
1991 and 1992, and the period January 1, 1993 to August 12, 1993, respectively.
The completion of the Company's IPO on August 13, 1993, permitted the Company
to reduce indebtedness, resulting in an improved ratio of earnings to fixed
charges beginning in the period from August 13, 1993 (closing of the IPO) to
December 31, 1993.
RISK FACTORS
Prospective investors should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before purchasing the Offered Securities as they may be issued from
time to time in the future. Prospectus Supplements relating to the Offered
Securities may contain forward-looking statements. The Company wishes to
caution readers that the following important factors, among others, in some
cases have affected, and in the future could affect, the Company's results of
operations and could cause the Company's results of operations and could cause
the Company's results of operations to differ materially from those expressed
in any forward looking statements made in a Prospectus Supplement.
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
reductions in revenue from the Hotels or in the net operating income of the
Lessees or otherwise. Although failure on the part of the Lessees 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. may not be operating hotels leased from the Company in a manner
which is satisfactory to the Company.
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 in the past has adversely
affected occupancy and
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<PAGE> 27
room rates; increases in operating costs due to inflation and other factors
which may not be offset by increased room rates; significant dependence on
business and commercial travelers and tourism; increases in energy costs and
other expenses of 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 distributions to
shareholders. Additionally, decreases in revenues of the Hotels will result in
decreased percentage rent to the Partnership under the Percentage Leases.
Competition
The Hotels compete with other hotel properties in their geographic
markets. As industry conditions improve, new competing hotels may be opened in
the Company's existing markets and in markets in which the Company may acquire
hotels in the future.
As a result of improving conditions in the hotel industry, management
believes hotel acquisition activity has increased. Therefore, the Company may
experience increased competition for investment opportunities, including
competition from other hotel REITS and other entities. Competition generally
may reduce the number of suitable investment opportunities offered to the
Company and increase the bargaining power of property owners seeking to sell.
Investment in Single Industry
The Company's current strategy is to acquire interests in hotel
properties. The Company does not seek to invest in assets selected to reduce
the risks associated with an investment in real estate in the hotel industry,
and is subject to risks inherent in investments in a single industry.
Seasonality
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.
REAL ESTATE INVESTMENT RISKS
General Risks
The Company's investments 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 is dependent upon the ability of the
Lessees to operate the Hotels in a manner sufficient to maintain or increase
revenues and to generate sufficient income in excess of operating
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<PAGE> 28
expenses to make rent payments under the Percentage Leases. Income from the
Hotels may be adversely affected by adverse changes in national economic
conditions, adverse 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 estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of God, including
earthquakes 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.
Value and Liquidity 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.
Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be
maintained on each of the Company's hotels, including liability, fire and
extended coverage of the type and amount which management believes is
customarily obtained for or by an owner on real property assets. 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 its discretion in determining
amounts, coverage limits and deductibility provisions of insurance, with a view
to requiring appropriate insurance 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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<PAGE> 29
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 hazardous or toxic substances, or the failure to remediate such 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 may also be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether
or not such facility is or ever was owned or operated by such person. Certain
environmental laws and common law principles could be used to impose liability
for 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. Thus, if such
liability were to arise in connection with the ownership of its hotels, the
Company or the Partnership may be potentially liable for any such costs.
Phase I environmental site assessments ("ESAs") have been obtained on
all of the Hotels from a qualified independent environmental engineering firm.
The purpose of Phase I ESAs audits is to identify potential sources of
contamination for which the Hotels may be responsible and to assess the status
of environmental regulatory compliance. The Phase I ESAs have not revealed any
environmental liability or compliance concerns that the Company believes would
have a material adverse effect on the Company's business, assets or results of
operations, nor is the Company aware of any such liability or concerns. The
Phase I ESAs, however, did not include invasive procedures, such as soil
sampling or groundwater analysis.
Americans with Disabilities Act
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 its
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. If the Company were
required to make modifications to comply with the ADA, the Company's ability to
make expected distributions to its shareholders could be adversely affected.
Property Taxes
Each Hotel and real estate generally is subject to real property
taxes. The real property taxes on hotel properties in
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<PAGE> 30
which the Company invests may increase or decrease as property tax rates change
and as the properties are assessed or reassessed by taxing authorities.
RELIANCE ON BOARD OF DIRECTORS; NO CONTROL OVER OPERATIONS OF THE HOTELS
Shareholders have no right or power to take part in the management of
the Company except through the exercise of voting rights on certain specified
matters. The Board of Directors is responsible for managing the Company. In
addition, the Company has no control over the Lessees' day-to-day management of
the operation of the Hotels.
RISKS OF LEVERAGE; NO LIMITS ON INDEBTEDNESS
At a special meeting of shareholders on June 21, 1996, the Company's
shareholders approved an amendment to eliminate the Company's charter debt
limitation. The Company has a $75 million Credit Line to provide, as
necessary, working capital, funds for investments in additional hotel
properties and cash to make distributions. The interest rate on the Credit
Line is the 90-day LIBOR rate plus 1.75%. 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 or the
Partnership.
There can be no assurances that the Company, upon the incurrence of
debt, 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
one or more of the Hotels, to foreclosure. Adverse economic conditions could
result in higher interest rates which could increase debt service requirements
on floating rate debt and could reduce the amounts available for distribution
to shareholders. The Company may obtain one or more forms of interest rate
protection (swap agreements, interest rate cap contracts, etc.) to hedge
against the possible adverse effects of interest rate fluctuations. 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.
FRANCHISE RISKS
All but one of the Hotels, the Executive Inn in Tupelo, Mississippi,
is subject to franchise agreements with national franchisors. The franchisors
have required the Partnership to undertake and complete certain capital
improvements as a condition to the extension of the franchise agreements.
Prior to
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<PAGE> 31
completion of the improvements, the franchisors will permit the operation of
the Hotels under conditional licenses. Failure to complete the improvements in
a manner satisfactory to the franchisors could result in the cancellation of
the franchise agreements. In addition, hotels in which the Company invests
subsequently may be operated pursuant to franchise agreements. The
continuation of the franchises is subject to specified operating standards and
other terms and conditions. The failure of a Hotel, the Partnership or the
Lessees 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 or 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 Company and
the Lessees 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.
EFFECT OF MARKET INTEREST RATES ON PRICE OF OFFERED SECURITIES
One of the factors that may influence the price of the Offered
Securities in public trading markets is the annual yield from distributions by
the Company on the price paid for the Offered Securities as compared to yields
on other financial instruments. Thus, an increase in market interest rates
will result in higher yields on other financial instruments, which could
adversely affect the market price of the Offered Securities.
CHANGES IN POLICIES
The major policies of the Company, including its policies with
respect to acquisitions, financing, growth, operations, debt capitalization and
distributions, have been 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. The Company cannot change
its policy of seeking to maintain its qualification as a REIT without the
approval of its shareholders.
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<PAGE> 32
LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Ownership Limitation
The Ownership Limitation, which provides that no shareholder 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 acquisition of control of the
Company by a third party without the approval of the Board of Directors.
Staggered Board
The Board of Directors of the Company has three classes of directors
with terms of the classes expiring in 1997, 1998 and 1999. 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 a change in control were in the
shareholders' interest.
Tennessee Anti-Takeover Statues
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.
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. Although the Company has
not requested, and does not expect to request, a ruling from the Service that
it qualifies as a REIT, it previously has received an opinion of its counsel
that, based on certain assumptions and representations, it so qualifies.
Investors should be aware, however, that opinions of counsel are not binding on
the Service or any court. The REIT qualification opinion only represents the
view of counsel to the Company based on counsel's review and analysis of
existing law, which includes no controlling precedent. Furthermore, both the
validity of the opinion and the continued qualification of the Company as a
REIT will depend on the Company's continuing ability to meet various
requirements concerning, among other things, the ownership of its outstanding
stock, the nature of its assets, the sources of its income, and the amount of
its distributions to the shareholders 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 its
shareholders in computing its taxable income and would be subject to federal
income tax (including any applicable minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain Code
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<PAGE> 33
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, Cash Available for Distribution to the shareholders would be
reduced for each of the years involved. Although the Company currently
operates and intends to continue to operate in a manner intended 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 two-thirds
of the shareholders, to revoke the REIT election.
REIT Minimum Distribution Requirements
In order to qualify as a REIT, 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 is subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85%
of its ordinary income, (ii) 95% of its capital gain net income for that year
and (iii) 100% of its undistributed taxable income from prior years.
The Company intends to make distributions to its shareholders to
comply with the 95% distribution requirement and to avoid the nondeductible
excise tax. The Company's income will consist primarily of its share of the
income of the Partnership, and the Company's Cash Available for Distribution
will consist primarily of its 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 to borrow funds on a short-term basis to
meet the 95% distribution requirement and to avoid the nondeductible excise
tax. For federal income tax purposes, distributions paid to shareholders may
consist of ordinary income, capital gains, nontaxable return of capital, or a
combination thereof. The Company will provide its shareholders with an annual
statement as to its designation of the tax characterization of distributions.
The requirement to distribute a substantial portion of the Company's net
taxable income could cause the Company to distribute amounts that otherwise
would be spent on future acquisitions, unanticipated capital expenditures or
repayment of debt, which would require the Company to borrow funds or to sell
assets to fund the cost of such items.
Distributions by the Partnership are determined by the Company's
Board of Directors and are 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
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<PAGE> 34
the Code and such other factors as the Board of Directors deems relevant.
Failure of the Partnership to be Classified as a Partnership for
Federal Income Tax Purposes; Impact on Real Estate Investment Trust
Status
The Company has not requested and does not expect to request, a ruling from the
Internal Revenue Service that the Partnership will be classified as a
partnership for federal income tax purposes. If the Service were to challenge
successfully the tax status of the Partnership as a partnership for federal
income tax purposes, the Partnership would be taxable as a corporation. In
such event, since the value of the Company's ownership interest in the
Partnership constitutes more than 10% of the Partnership's voting securities
and exceeds 5% of the value of the Company's assets, the Company would cease to
qualify as a REIT. Furthermore, the imposition of a corporate tax on the
Partnership would substantially reduce the amount of cash available for
distribution to the Company and its shareholders.
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, not
more than 50% in value of outstanding stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). 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 (the "Ownership Limitation"). Generally, the capital stock owned by
affiliated owners is aggregated for purposes of the Ownership Limitation. The
Ownership Limitation could have the effect of delaying, deferring or preventing
a takeover or other transaction in which holders of some, or a majority, of the
Common Stock might receive a premium for their shares of Common Stock over the
then prevailing market price or which such holders might believe to be
otherwise in their best interests.
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<PAGE> 35
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 June 30, 1996, there were
24,369,000 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 filed as 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 will be fully paid and nonassessable, and the holders thereof will
not have preemptive rights.
The Transfer Agent for the Common Stock is SunTrust Bank, Atlanta,
Georgia. The Common Stock is traded on the Nasdaq Stock Market under the
symbol "RFSI." The Company will apply to the Nasdaq Stock Market or any
exchange on which the Common Stock may be listed to list the additional shares
of Common Stock to be sold pursuant to any Prospectus Supplement, and the
Company anticipates that such shares will be so listed.
PREFERRED STOCK
The following description of the terms of the Preferred Stock sets
forth certain general terms and provisions of the Preferred Stock to which a
Prospectus Supplement may relate. Specific terms of any series of Preferred
Stock offered by a Prospectus Supplement will be described in that Prospectus
Supplement. The description set forth below is subject to and qualified in its
entirety by reference to the Articles of Amendment to the Charter fixing the
preferences, limitations and relative rights of a particular series of Preferred
Stock.
GENERAL. Under the Charter, the Board of Directors of the Company is
authorized, without further shareholder action, to provide for the issuance of
up to 5,000,000 shares of Preferred Stock, in such series, with such
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or other provisions, as may be fixed
by the Board of Directors. As a result, the Board of Directors may afford the
holders of any series or class of Preferred Stock preferences, powers, and
rights, voting or otherwise, senior to the rights of holders of Common Stock.
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The Preferred Stock will have the dividend, liquidation, redemption,
conversion and voting rights set forth below unless otherwise provided in the
Prospectus Supplement relating to a particular series of Preferred Stock.
Reference is made to the Prospectus Supplement relating to the particular series
of Preferred Stock offered thereby for specific terms, including: (i) the title
and liquidation preference per share of such Preferred Stock and the number of
shares offered; (ii) the price at which such series will be issued; (iii) the
dividend rate (or method of calculation), the dates on which dividends shall be
payable and the dates from which dividends shall commence to accumulate; (iv)
any redemption or sinking fund provisions of such series; (v) any conversion
provisions of such series; and (vi) any additional dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges, limitations
and restrictions of such series.
The Preferred Stock will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the Prospectus Supplement relating to a particular
series of Preferred Stock, each series will rank on a parity as to dividends and
distributions in the event of a liquidation with each other series of Preferred
Stock and, in all cases, will be senior to the Common Stock.
DIVIDEND RIGHTS. Holders of Preferred Stock of each series will be
entitled to receive, when, as and if declared by the Board of Directors, out of
assets of the Company legally available therefor, cash dividends at such rates
and on such dates as are set forth in the Prospectus Supplement relating to such
series of Preferred Stock. Such rate may be fixed or variable or both and may
be cumulative, noncumulative or partially cumulative.
If the applicable Prospectus Supplement so provides, as long as any
shares of Preferred Stock are outstanding, no dividends will be declared or paid
or any distributions be made on the Common Stock, other than a dividend payable
in Common Stock, unless the accrued dividends on each series of Preferred Stock
have been fully paid or declared and set apart for payment and the Company shall
have set apart all amounts, if any, required to be set apart for all sinking
funds, if any, for each series of Preferred Stock.
If the applicable Prospectus Supplement so provides, when dividends
are not paid in full upon any series of Preferred Stock and any other series of
Preferred Stock ranking on a parity as to dividends with such series of
Preferred Stock, all dividends declared upon such series of Preferred Stock and
any other series of Preferred Stock ranking on a parity as to dividends will be
declared pro rata so that the amount of dividends declared per share on such
series of Preferred Stock and such other series will in all cases bear to each
other the same ratio that accrued dividends per share on such series of
Preferred Stock and such other series bear to each other.
Each series of Preferred Stock will be entitled to dividends as
described in the Prospectus Supplement relating to such series, which may be
based upon one or more methods of determination. Different series of Preferred
Stock may be entitled to dividends at different dividend rates or based upon
different methods of determination. Except as provided in the applicable
Prospectus Supplement, no series of Preferred Stock will be entitled to
participate in the earnings or assets of the Company.
RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Stock will be entitled to receive out of the assets of the
Company available for distribution to shareholders the amount stated or
determined on the basis set forth in the Prospectus Supplement relating to such
series, which may include accrued dividends, if such liquidation, dissolution or
winding up is involuntary or may equal the current redemption price per share
(otherwise than for the sinking fund, if any provided for such series) provided
for such series set forth in such Prospectus Supplement, if such liquidation,
dissolution or winding up is voluntary, and on such preferential basis as is set
forth in such Prospectus Supplement. If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to Preferred Stock of any series and any other shares of stock of the
Company ranking as to any such distribution on a parity with such series of
Preferred Stock are not paid in full, the holders of Preferred Stock of such
series and of such other shares will share ratably in any such distribution of
assets of the Company in proportion to the full respective preferential amounts
to which they are entitled or on such other basis as is set forth in the
applicable Prospectus Supplement. The rights, if any, of the holders of any
series of Preferred Stock to participate in the assets of the Company remaining
after the holders of other series of Preferred Stock have
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been paid their respective specified liquidation preferences upon any
liquidation, dissolution or winding up of the Company will be described in the
Prospectus Supplement relating to such series.
REDEMPTION. A series of Preferred Stock may be redeemable, in whole or
in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund, in each case upon terms, at the times,
the redemption prices and for the types of consideration set forth in the
Prospectus Supplement relating to such series. The Prospectus Supplement
relating to a series of Preferred Stock which is subject to mandatory redemption
shall specify the number of shares of such series that shall be redeemed by the
Company in each year commencing after a date to be specified, at a redemption
price per share to be specified, together with an amount equal to any accrued
and unpaid dividends thereon to the date of redemption.
If, after giving notice of redemption to the holders of a series of
Preferred Stock, the Company deposits with a designated bank funds sufficient to
redeem such Preferred Stock, then from and after such deposit, all shares called
for redemption will no longer be outstanding for any purpose, other than the
right to receive the redemption price and the right to convert such shares into
other classes of stock of the Company. The redemption price will be stated in
the Prospectus Supplement relating to a particular series of Preferred Stock.
Except as indicated in the applicable Prospectus Supplement, the
Preferred Stock is not subject to any mandatory redemption at the option of the
holder.
SINKING FUND. The Prospectus Supplement for any series of Preferred
Stock will state the terms, if any, of a sinking fund for the purchase or
redemption of that series.
CONVERSION AND PREEMPTIVE RIGHTS. The Prospectus Supplement for any
series of Preferred Stock will state the terms, if any, on which shares of that
series are convertible into or redeemable for shares of Common Stock or another
series of Preferred Stock. The Preferred Stock will have no preemptive rights.
VOTING RIGHTS. Except as indicated in the Prospectus Supplement
relating to a particular series of Preferred Stock, or except as expressly
required by Tennessee law, a holder of Preferred Stock will not be entitled to
vote. Except as indicated in the Prospectus Supplement relating to a particular
series of Preferred Stock, in the event the Company issues full shares of any
series of Preferred Stock, each such share will be entitled to one vote on
matters on which holders of such series of Preferred Stock are entitled to vote.
Under Tennessee law, the affirmative vote of the holders of a majority
of the outstanding shares of all series of Preferred Stock entitled to vote,
voting as a separate voting group, or of all outstanding votes of all series of
Preferred Stock equally affected, as a voting group, will be required for (i)
the authorization of any class of stock ranking prior to or on a parity with
Preferred Stock or the increase in the number of authorized shares of any such
stock, (ii) any increase in the number of authorized shares of Preferred Stock
and (iii) certain amendments to the Charter that may be adverse to the rights of
Preferred Stock outstanding.
TRANSFER AGENT AND REGISTRAR. The transfer agent, registrar and
dividend disbursement agent for a series of Preferred Stock will be selected by
the Company and be described in the applicable Prospectus Supplement. The
registrar for shares of Preferred Stock will send notices to shareholders of any
meetings at which holders of Preferred Stock have the right to vote on any
matter.
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. The Series A Preferred has a par value
of $.01 per share and 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
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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 Stock
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. 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 Series A Preferred.
Upon liquidation, dissolution or winding up of the Company, the holders
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 Stock to convert their shares to
shares of the Company's Common Stock after notice to the holders thereof and
opportunity for conversion. The holders of Series A Preferred Stock 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 Nasdaq Stock Market, 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.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may, at its option, elect to offer fractional shares of
Preferred Stock, rather than full shares of Preferred Stock. In such event, the
Company will issue to the public receipts for Depositary Shares, each of which
will represent a fraction (to be set forth in the Prospectus Supplement relating
to a particular series of Preferred Stock) of a share of a particular series of
Preferred Stock as described below.
The shares of any series of Preferred Stock represented by Depositary
Shares will be deposited under a Deposit Agreement (the "Deposit Agreement")
between the Company and the depositary named in the applicable Prospectus
Supplement (the "Depositary"). Subject to the terms of the Deposit Agreement,
each owner of a Depositary Share will be entitled, in proportion to the
applicable fraction of a share of Preferred Stock represented by such Depositary
Share, to all the rights and preferences of the Preferred Stock represented
thereby (including dividend, voting, redemption and liquidation rights).
The Depositary Shares will be evidenced by depositary receipts issued
pursuant to the Deposit Agreement ("Depositary Receipts"). Depositary Receipts
will be distributed to those persons purchasing the fractional shares of
Preferred Stock in accordance with the terms of the offering. If Depositary
Shares are issued, copies of the forms of Deposit Agreement and Depositary
Receipt will be incorporated by reference in the Registration Statement of which
this Prospectus is a part, and the following summary is qualified in its
entirety by reference to such documents.
Pending the preparation of definitive engraved Depositary Receipts, the
Depositary may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
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thereof to all the rights pertaining to) the definitive Depositary Receipts but
not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and temporary Depositary Receipts will be
exchangeable for definitive Depositary Receipts at the Company's expense.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock to the record holders
of Depositary Shares relating to such Preferred Stock in proportion to the
number of such Depositary Shares owned by such holders. The Depositary shall
distribute only such amount, however, as can be distributed without attributing
to any holder of Depositary Shares a fraction of one cent, and the balance not
so distributed shall be added to and treated as part of the next sum received by
the Depositary for distribution to record holders of Depositary Shares.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, unless the Depositary determines that it is not feasible to
make such distribution, in which case the Depositary may, with the approval of
the Company, sell such property and distribute the net proceeds from such sale
to such holders.
The Deposit Agreement will also contain provisions relating to the
manner in which any subscription or similar rights offered by the Company to
holders of the Preferred Stock shall be made available to the holders of
Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
If a series of Preferred Stock represented by Depositary Shares is
subject to redemption, the Depositary Shares will be redeemed from the proceeds
received by the Depositary resulting from the redemption, in whole or in part,
of such series of Preferred Stock held by the Depositary. The redemption price
per Depositary Share will be equal to the applicable fraction of the redemption
price per share payable with respect to such series of Preferred Stock.
Whenever the Company redeems shares of Preferred Stock held by the Depositary,
the Depositary will redeem as of the same redemption date the number of
Depositary Shares representing the shares of Preferred Stock so redeemed. If
fewer than all the Depositary Shares are to be redeemed, the Depositary Shares
to be redeemed will be selected by lot or pro rata as may be determined by the
Depositary.
After the date fixed for redemption, the Depositary Shares so called
for redemption will no longer be outstanding and all rights of the holders of
the Depositary Shares will cease, except the right to receive the money,
securities, or other property payable upon such redemption and any money,
securities, or other property to which the holders of such Depositary Shares
were entitled upon such redemption upon surrender to the Depositary of the
Depositary Receipts evidencing such Depositary Shares.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of Preferred
Stock are entitled to vote, the Depositary will mail the information contained
in such notice of meeting to the record holders of the Depositary Shares
relating to such Preferred Stock. Each record holder of such Depositary Shares
on the record date (which will be the same date as the record date for the
Preferred Stock) will be entitled to instruct the Depositary as to the exercise
of the voting rights pertaining to the amount of Preferred Stock represented by
such holder's Depositary Shares. The Depositary will endeavor, insofar as
practicable, to vote the amount of Preferred Stock represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all action which may be deemed necessary by the Depositary in
order to enable the Depositary to do so. The Depositary may abstain from voting
shares of Preferred Stock to the extent it does not receive specific
instructions from the holders of Depositary Shares representing such Preferred
Stock.
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WITHDRAWAL OF STOCK
Upon surrender of Depositary Receipts at the principal office of the
Depositary (unless the related Depositary Shares have previously been called
for redemption), and subject to the terms of the Deposit Agreement, the owner
of the Depositary Shares evidenced thereby will be entitled to delivery of whole
shares of Preferred Stock and all money and other property, if any, represented
by such Depositary Shares. Partial shares of Preferred Stock will not be
issued. If the Depositary Receipts delivered by the holder evidence a number
of Depositary Shares in excess of the number of Depositary Shares representing
the number of whole shares of Preferred Stock to be withdrawn, the relevant
Depositary will deliver to such holder at the same time a new Depositary
Receipt evidencing such excess number of Depositary Shares. Holders of shares
of Preferred Stock thus withdrawn will not thereafter be entitled to deposit
such shares under the Deposit Agreement or to receive Depositary Shares
therefor. The Company does not expect that there will be any public trading
market for the Preferred Stock, except as represented by the Depositary Shares.
AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment that materially
and adversely alters the rights of the holders of Depositary Shares will not be
effective unless such amendment has been approved by the holders of at least a
majority of the Depositary Shares then outstanding. The Deposit Agreement may
be terminated by the Company or the Depositary only if (i) all outstanding
Depositary Shares have been redeemed or (ii) there has been a final distribution
in respect of the Preferred Stock in connection with any liquidation,
dissolution or winding up of the Company and such distribution has been
distributed to the holders of Depositary Receipts.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental
charges arising solely from the existence of the depositary arrangements. The
Company will pay charges of the Depositary in connection with the initial
deposit of the Preferred Stock and any redemption of the Preferred Stock.
Holders of Depositary Receipts will pay other transfer and other taxes and
governmental charges and such other charges, including a fee for the withdrawal
of shares of Preferred Stock upon surrender of Depositary Receipts, as are
expressly provided in the Deposit Agreement to be for their accounts.
MISCELLANEOUS
The Depositary will forward to holders of Depository Receipts all
reports and communications from the Company that are delivered to the
Depositary and that the Company is required to furnish to holders of Preferred
Stock.
Neither the Depositary nor the Company will be liable if it is
prevented or delayed by law or any circumstance beyond its control in
performing its obligations under the Deposit Agreement. The obligations of the
Company and the Depositary under the Deposit Agreement will be limited to
performance in good faith of their duties thereunder and they will not be
obligated to prosecute or defend any legal proceeding in respect of any
Depositary Shares or Preferred Stock unless satisfactory indemnity is
furnished. They may rely upon written advice of counsel or accountants, or upon
information provided by persons presenting Preferred Stock for deposit, holders
of Depositary Receipts or other persons believed to be competent and on
documents believed to be genuine.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company
notice of its election to do so, and the Company may at any time remove the
Depositary in which event the Company will appoint a successor Depositary after
delivery of the notice of resignation or removal.
RESTRICTIONS ON OWNERSHIP
In order to safeguard the Company against an inadvertent loss of REIT
status, the Deposit Agreement will contain provisions restricting the ownership
and transfer of Depositary Shares. Such restrictions will be described in the
applicable Prospectus Supplement and will be referenced on the applicable
Depositary Receipts.
RESTRICTIONS ON TRANSFER OF CAPITAL STOCK
For the Company to qualify as a REIT under the Internal Revenue Code
of 1986, as amended (the "Code"), shares of capital stock must be held by a
minimum of 100 persons for at least 335 days in each taxable year or during a
proportionate part of a shorter taxable year. In addition, at all times during
the second half of each taxable year, no more than 50% in value of the shares
of beneficial interest of the Company may be owned, directly or indirectly and
by applying certain constructive ownership rules, by five or fewer individuals
(the "5/50 Rule").
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Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Charter restricts the acquisition of shares
of Common Stock (the "Ownership Limitation"). The Board of Directors intends to
include in the Articles of Amendment to the Charter with respect to any future
series of Preferred Stock restrictions on the acquisition of shares of such
series similar to those applicable to Common Stock.
The Ownership Limitation 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 the outstanding
shares of Common Stock. 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 ownership in excess of such amount 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 or an
undertaking from the applicant with respect to preserving the REIT status of the
Company. If shares in excess of the Ownership Limitation, or shares which would
cause the Company to be beneficially owned by fewer than 100 persons, are issued
or transferred to any person, such issuance or transfer shall be null and void
and the intended transferee will acquire no rights to the shares.
The Ownership Limitation 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. Any change in the Ownership Limitation would require an amendment to
the Charter. In addition to preserving the Company's status as a REIT, the
Ownership Limitation may have the effect of precluding an acquisition of control
of the Company without the approval of the Board of Directors. All certificates
representing shares of capital 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, 5% or more of the outstanding Common 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 shares within 30 days after January 1 of each year. 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 Business Corporation Act.
PLAN OF DISTRIBUTION
The Company may sell Offered Securities in or outside the United States
to or through underwriters or may sell Offered Securities to investors directly
or through designated agents. Any such underwriter or agent involved in the
offer and sale of the Offered Securities will be named in the applicable
Prospectus Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price
or prices, which may be changed, or from time to time at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as agents to offer and sell the Offered Securities
upon the terms and conditions set forth in any Prospectus Supplement.
Underwriters may sell Offered Securities to or through dealers, and such dealers
may receive compensation in the form of
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discounts, concessions or commissions (which may be changed from time to time)
from the underwriters and/or from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of Offered Securities and any discounts,
concessions or commissions allowed by underwriters to participating dealers will
be set forth in the applicable Prospectus Supplement. Underwriters, dealers and
agents participating in the distribution of the Offered Securities may be deemed
to be underwriters, and any discounts and commissions received by them from the
Company or from purchasers of Offered Securities and any profit realized by them
on resale of the Offered Securities may be deemed to be underwriting discounts
and commissions under the Securities Act. Underwriters, dealers and agents may
be entitled, under agreements entered into with the Company, to indemnification
against and contribution toward certain civil liabilities, including liabilities
under the Securities Act.
Unless otherwise specified in the related Prospectus Supplement, each
series of Offered Securities will be a new issue with no established trading
market, other than the Common Stock which is currently traded on the Nasdaq
Stock Market. The Company may elect to list any series of Preferred Stock or
Depositary Shares on the Nasdaq Stock Market or on an exchange, but is not
obligated to do so. It is possible that one or more underwriters may make a
market in a series of Offered Securities, but will not be obligated to do so and
may discontinue any market marking at any time without notice. Therefore, no
assurance can be given as to the liquidity of the trading market for the Offered
Securities.
If so indicated in the applicable Prospectus Supplement, the Company
will authorize dealers acting as the Company's agents to solicit offers by
certain institutions to purchase Offered Securities from the Company at the
public offering price set forth in such Prospectus Supplement pursuant to
Delayed Delivery Contracts (the "Contracts") providing for payment and delivery
on the date or dates stated in such Prospectus Supplement. Each Contract will
be for an amount not less than, and the principal amount of Offered Securities
sold pursuant to Contracts shall not be less nor more than, the respective
amounts stated in such Prospectus Supplement. Institutions with which
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and other institutions, but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Offered Securities covered by
its Contract shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the United States to which such institution is subject and
(ii) the Company shall have sold to such underwriters the total principal amount
of the Offered Securities less the principal amount thereof covered by
Contracts. A commission indicated in the Prospectus Supplement will be paid to
agents and underwriters soliciting purchases of Offered Securities pursuant to
Contracts accepted by the Company. Agents and underwriters shall have no
responsibility in respect of the delivery or performance of Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with, and perform services for, the Company in the
ordinary course of business.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the
Company by Hunton & Williams.
EXPERTS
The consolidated financial statements of the Company incorporated by
reference in its annual report on Form 10-K for the period ended December 31,
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants, as
set forth in their report thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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<PAGE> 43
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PROSPECTUS SUPPLEMENT
<S> <C>
Available Information......................................S-2
Incorporation of Certain Documents by Reference............S-2
The Company................................................S-3
Risk Factors...............................................S-3
Use of Proceeds............................................S-4
Federal Income Tax Considerations..........................S-5
Underwriting...............................................S-21
Experts....................................................S-22
Legal Matters..............................................S-22
PROSPECTUS
Available Information........................................2
Incorporation of Certain Documents by Reference..............2
The Company..................................................3
Use of Proceeds..............................................3
Risk Factors ................................................4
Restrictions on Transfer of Capital Stock....................18
Plan of Distribution.........................................19
Legal Matters................................................20
Experts......................................................20
</TABLE>
547,946 SHARES
RFS HOTEL INVESTORS, INC.
COMMON STOCK
------------------------------
P R O S P E C T U S
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J.C. BRADFORD & CO.
MARCH 25, 1998
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