<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WINSTON HOTELS, INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C>
NORTH CAROLINA 56-1872141
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
2209 CENTURY DRIVE, SUITE 300
RALEIGH, NORTH CAROLINA 27612
(919) 510-6010
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT W. WINSTON, III
2209 CENTURY DRIVE, SUITE 300
RALEIGH, NORTH CAROLINA 27612
(919) 510-6010
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
WITH A COPY TO:
ALAN J. PRINCE, ESQ.
KING & SPALDING
191 PEACHTREE STREET
ATLANTA, GEORGIA 30303-1763
(404) 572-4600
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement in light of
market conditions and other factors.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
AMOUNT OF
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) FEE(3)(4)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value per share(3)...............
Preferred Stock, $.01 par value per share(3)............ $200,000,000 $60,607
===============================================================================================================
</TABLE>
(1) In no event will the aggregate maximum offering price of all securities
registered under this Registration Statement exceed $200,000,000. Any
securities registered hereunder may be sold separately or as units with
other securities registered hereunder.
(2) The proposed maximum offering price per unit (a) has been omitted pursuant
to General Instruction II.D. of Form S-3 and (b) will be determined, from
time to time, by the Registrant in connection with the issuance by the
Registrant of the securities registered hereunder.
(3) Subject to footnote (1), there is being registered hereunder an
indeterminate number of shares of Common Stock and Preferred Stock as may be
sold, from time to time, by Winston Hotels, Inc.
(4) Fee calculated pursuant to Rule 457(o).
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement relates to securities which may be offered from
time to time by Winston Hotels, Inc. (the "Company"). This Registration
Statement contains a form of basic prospectus (the "Basic Prospectus") relating
to the Company which will be used in connection with one or more offerings of
securities by the Company. The specific terms of the securities to be offered
will be set forth in a Prospectus Supplement relating to such securities.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 1, 1997
$200,000,000
WINSTON HOTELS, INC.
LOGO COMMON STOCK AND PREFERRED STOCK
---------------------
Winston Hotels, Inc. (the "Company") may from time to time offer (i) shares
of its common stock, $.01 par value per share (the "Common Stock"), and (ii) in
one or more series or classes, shares of its preferred stock, $.01 par value per
share ("Preferred Stock"), with an aggregate public offering price of up to
$200,000,000 (or its equivalent in another currency based on the exchange rate
at the time of sale) in amounts, at prices and on terms to be determined at the
time of offering. The Common Stock and Preferred Stock (collectively, the
"Securities") may be offered, separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each, a "Prospectus Supplement").
The specific terms of the 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, any initial
public offering price and (ii) in the case of Preferred Stock, the specific
designation and stated value per share, any dividend, liquidation, redemption,
conversion, voting and other rights, and all other specific terms of the
Preferred Stock. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the 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 also will contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on an interdealer quotation system or a securities
exchange of, the Securities covered by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
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 Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
series of Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN FACTORS RELATING TO AN
INVESTMENT IN 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 date of this Prospectus is , 1997.
<PAGE> 4
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 may be examined without
charge at, or copies obtained upon payment of prescribed fees from, the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and are also available for inspection and copying at the
regional offices of the Commission located at Seven World Trade Center, New
York, New York 10048 and at 500 West Madison Street, Chicago, Illinois
60661-2511. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding the Company. In addition, the Company's Common Stock currently is
traded on The Nasdaq Stock Market ("Nasdaq") and such reports, proxy and
information statements and other information concerning the Company can be
inspected and copied at The Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C. 20006-1506.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations promulgated thereunder, with respect to the
Securities. This Prospectus, which is part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and financial schedules thereto. For further information concerning
the Company and the Securities, reference is made to the Registration Statement
and the exhibits and schedules filed therewith, which may be examined without
charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices at the locations listed above. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company (File No. 0-23732)
with the Commission are incorporated herein by reference and made a part hereof:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(b) the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997;
(c) the Company's Current Report on Form 8-K dated May 7, 1996, as
amended by the Company's Current Report on Form 8-K/A filed with the
Commission on July 18, 1996; and the Company's Current Report on Form 8-K
dated July 11, 1997;
(d) the combined statements of income, equity and cash flows of the
Impac Acquisition Hotels (described in Note 1 to those financial
statements) for the year ended December 31, 1995, included in the Company's
Registration Statement on Form S-3 (File No. 333-03986); and
(e) the description of the Common Stock of the Company included in the
Company's Registration Statement on Form 8-A (File No. 0-23732), dated
March 23, 1994, including any amendment or report filed for the purpose of
updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and made a part hereof from the
date of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in any applicable Prospectus Supplement) or in
any other document subsequently filed with the Commission which also is deemed
to be incorporated by reference herein modifies
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<PAGE> 5
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 without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or 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: Winston Hotels, Inc., 2209 Century Drive,
Suite 300, Raleigh, North Carolina 27612, Attention: Secretary, telephone number
(919) 510-6010.
3
<PAGE> 6
THE COMPANY
The Company is a self-advised and self-administered equity REIT that,
either directly or through WINN Limited Partnership (the "Partnership"), owns 34
hotels as of July 29, 1997 (the "Hotels"), and is developing four Homewood
Suites(R) hotels, and one Courtyard by Marriott(R) hotel. In addition, the
Company has signed contracts or letters of intent to acquire four additional
hotels, which contain an aggregate of 520 rooms, for a total purchase price of
$30.1 million. The Company is the sole general partner of the Partnership and,
at July 29, 1997, owned an approximately 90.1% interest in the Partnership. The
following table sets forth, as of July 29, 1997, certain information regarding
the Company's hotels:
<TABLE>
<CAPTION>
FRANCHISE AFFILIATION NUMBER OF HOTELS NUMBER OF ROOMS
- --------------------- ---------------- ---------------
<S> <C> <C>
Hampton Inn(R)........................................ 15 1,809
Comfort Inn(R)........................................ 9 1,293
Homewood Suites(R).................................... 2 232
Comfort Suites(R)..................................... 2 277
Courtyard by Marriott(R).............................. 2 330
Hampton Inn & Suites(R)............................... 1 136
Holiday Inn Express(R)................................ 1 81
Holiday Inn Select(R)................................. 1 244
Quality Suites(R)..................................... 1 168
-- -----
Total....................................... 34 4,570
== =====
</TABLE>
The Company and Promus Hotels, Inc. ("Promus") have entered into various
agreements relating to the acquisition of hotels by the Company from Promus.
Specifically, the Company has agreed to purchase one additional Homewood Suites
hotel (the "Homewood Development Hotel") being developed by Promus. In addition,
Promus has granted the Company an option to purchase additional Homewood Suites
hotels (the "Homewood Option Hotels") during the three year period ending April
2000. The Company also has agreed to use its best efforts over an eight year
period to spend at least $100 million to acquire hotels from Promus or develop
hotels franchised by Promus, including the Homewood Development Hotel and the
Homewood Option Hotels. Promus has agreed to invest up to an additional $13.5
million in the Company's Common Stock from time to time, based on purchases by
the Company of the Homewood Development Hotel and Homewood Option Hotels. To
date, Promus has invested approximately $1.5 million in the Common Stock.
To enable the Company to qualify as a REIT, the Company or the Partnership,
as applicable, leases the Hotels to Winston Hospitality, Inc. (the "Lessee")
pursuant to leases (the "Percentage Leases") providing for rent payments based,
in part, on revenues from the Hotels ("Percentage Rent"). The Lessee pays rent
to the Company and the Partnership under the Percentage Leases and, in addition,
pays all franchise fees, management fees and other operating expenses of the
Hotels. The Lessee operates 24 of the Hotels, Interstate Management and
Investment Corporation ("IMIC") operates nine of the Hotels and Promus operates
one of the Hotels. Promus also will manage additional Homewood Suites hotels
developed by it and acquired by the Company.
The Company's growth strategy is to enhance shareholder value by increasing
Cash Available for Distribution (as defined herein) per share of Common Stock
through implementation of the Company's (i) internal growth strategy, (ii)
acquisition strategy, (iii) development strategy and (iv) rehabilitation
strategy. The Company's internal growth strategy is to establish and maintain a
high occupancy rate at each hotel followed by increases in average daily rate
("ADR"), which in turn increase Percentage Lease revenues to the Company. The
Company's acquisition strategy is to purchase hotels with strong, national
franchise affiliations in growth markets at prices that result in attractive
long-term returns. The Company seeks to acquire properties in locations with
relatively high demand for rooms, a relatively low supply of hotel properties
and barriers to easy entry into the hotel business, such as a scarcity of
suitable lots or zoning restrictions. The Company's development strategy has two
primary objectives: (i) adding high-quality hotels to its portfolio and (ii)
creating long-term returns to the Company that exceed those that can be achieved
through acquisitions. In considering development opportunities, the Company will
review the availability and
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<PAGE> 7
pricing of existing hotels for sale in the area that meet the Company's
acquisition criteria, the availability of lots suitable for development, the
costs and risks of developing and the availability of financing, as well as any
other factors the Company deems relevant. The Company's rehabilitation strategy
focuses on identifying underperforming hotel properties that would benefit
substantially from renovation and quality management. The Company, therefore,
may acquire hotel properties that could benefit from renovations, including
hotels requiring complete renovation. The Company intends to finance
acquisitions and development through the offering of the Securities or other
follow-on offerings, from borrowings under its available $125 million line of
credit (the "Line of Credit"), from joint venture agreements and from the
issuance of other debt or equity securities.
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its short taxable year ended December 31, 1994. A REIT is subject to a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its taxable income. In connection
with the Company's election to be taxed as a REIT, the Company's Articles of
Incorporation (the "Articles of Incorporation") impose certain restrictions on
the transfer and ownership of shares of Common Stock. See "Restrictions on
Ownership of Common Stock." The Company has adopted the calendar year as its
taxable year. The Articles of Incorporation limit consolidated indebtedness to
45% of the Company's investment in hotel properties, at its cost.
The Company will contribute all of the net proceeds from the sale of the
Securities offered hereby to the Partnership in exchange for units of
partnership interest in the Partnership ("Units"). Unless the context otherwise
requires, all references herein to the business and assets of the Company refer
to Winston Hotels, Inc., the Partnership and their respective subsidiaries, on a
consolidated basis.
The Company's executive offices are located at 2209 Century Drive, Suite
300, Raleigh, North Carolina 27612, and its telephone number is (919) 510-6010.
5
<PAGE> 8
RISK FACTORS
In addition to the other information contained in, or incorporated by
reference into, this Prospectus and any Prospectus Supplement, prospective
investors should carefully consider the following factors in evaluating an
investment in the Securities offered hereby.
DEVELOPMENT RISKS
The Company is currently developing five hotel properties and intends to
develop additional hotel properties as suitable opportunities arise. New project
development is subject to a number of risks, including risks of construction
delays or cost overruns that may increase project costs, and new project
commencement risks such as competition for suitable development sites, receipt
of zoning, occupancy and other required governmental permits and authorizations
and the incurrence of substantial development costs in connection with projects
that are not pursued to completion. The Company anticipates that its development
projects will be financed with the Line of Credit or other secured or unsecured
financing. There can be no assurances, however, that the Company will complete
the development of any projects it begins or that the development and
construction activities will be completed in a timely manner or within budget.
The Company also intends to rehabilitate existing hotel properties that the
Company believes are underperforming and such rehabilitation projects will be
subject to the same risks as development projects.
RISKS OF RAPID GROWTH
Since the Company's May 1994 initial public offering (the "IPO"), the
number and geographic dispersion of the Company's hotel properties has increased
substantially. The Company's growth strategy contemplates additional hotel
acquisitions that meet its investment criteria, as well as hotel development,
further increasing the number and geographic dispersion of the hotel properties
in which it owns interests. The Company's ability to grow depends upon the
ability of the Lessee and any third-party manager retained by the Lessee to
manage effectively the Hotels, as well as any additional hotels in which the
Company invests. The Lessee's or its third-party managers' ability to operate
additional hotels under Percentage Leases or under management agreements, with
current staffing levels and office locations, may diminish as the Company
acquires additional hotels. Such growth may require the Lessee to hire
additional personnel, engage additional third-party managers, and operate in new
geographic locations.
DEPENDENCE ON RENT PAYMENTS UNDER PERCENTAGE LEASES;
LIMITED FINANCIAL RESOURCES OF THE LESSEE
The Company must rely on the Lessee, either directly or under contracts
with managers such as IMIC and Promus, to generate sufficient cash flow from the
operation of the Hotels to enable the Lessee to meet its rent obligations under
the Percentage Leases. Ineffective operation of the Hotels may result in the
Lessee being unable to pay rent to the Company and the Partnership as required
under the Percentage Leases. The obligations of the Lessee under the Percentage
Leases are unsecured. Other than inventory and working capital, the Lessee has
only nominal assets in addition to its rights and benefits under the Percentage
Leases. See "-- Hotel Industry Risks -- Competition."
ACQUISITION OF HOTELS WITH NO OPERATING HISTORY
The Homewood Development Hotel, the Homewood Option Hotels and the hotels
currently under development by the Company have no operating history. The
Company and the Lessee have negotiated, or will negotiate, the Percentage Rent
formulas for these hotels based on projections of occupancy and ADR for the area
in which each of these hotels is or will be located. Consequently, the Company
will be subject to risks that these hotels will not achieve anticipated
occupancy or ADR levels. Similarly, during the start-up period, room revenues
may be less than required to result in the payment of rent at levels that
provide the Company with an attractive return on its investments.
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<PAGE> 9
LACK OF CONTROL OVER OPERATIONS OF THE HOTELS
Neither the Company nor the Partnership can operate any hotel or
participate in the decisions affecting the daily operations of any hotel. Either
the Lessee under the Percentage Leases, or an operator such as IMIC and Promus
under management agreements with the Lessee, will control the daily operations
of the Hotels. Neither the Company nor the Partnership has the authority to
require any hotel to be operated in a particular manner, or to govern any
particular aspect of the daily operations of any hotel (e.g., setting room
rates). Thus, even if the Company's management believes the Hotels are being
operated inefficiently or in a manner that does not result in anticipated rent
payments to the Company or Partnership under the Percentage Leases, neither the
Company nor the Partnership may require a change to the method of operation. The
Company is limited to seeking redress only if the Lessee violates terms of the
Percentage Leases, and then only to the extent of the remedies set forth
therein.
HOTEL INDUSTRY RISKS
Operating Risks
The Hotels are subject to all operating risks common to the hotel industry.
These risks include: competition from other hotels; past over-building in the
hotel industry which has adversely affected occupancy and ADR; increases in
operating costs due to inflation, which increases have not in recent years been,
and may not necessarily in the future be, offset by increased room rates;
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 Lessee's ability
to make lease payments and, therefore, the Company's ability to make expected
distributions to shareholders. Further, decreases in room revenues of the Hotels
will result in decreased revenues to the Company and the Partnership under the
Percentage Leases and decreased Cash Available for Distribution (defined as net
income (loss), excluding gains (or losses) from debt restructuring or sales of
properties, plus depreciation and amortization and minority interest, minus
capital expenditures and principal payments of indebtedness) to the Company's
shareholders.
Competition
Competition for Guests. The hotel industry is highly competitive. The
Hotels compete with other hotel properties in their geographic markets. As
industry conditions continue to improve, new competing hotels may be opened in
the Company's markets and in markets in which the Company may acquire hotels in
the future.
The Midscale (Without Food & Beverage) segment of the hotel industry, which
includes Holiday Inn Express, Hampton Inn, Hampton Inn & Suites and Comfort Inn
hotels, and the Upscale segment of the hotel industry, which includes Courtyard
by Marriott and Homewood Suites, are experiencing a greater percentage increase
in room supply than other segments of the industry. Room supply for the Midscale
(Without Food & Beverage) segment grew 12.1% in 1995 and 14.7% in 1996, and room
supply for the Upscale segment grew 4.4% in 1995 and 5.7% for 1996, each as
compared to 1.2% in 1995 and 2.1% in 1996 for all U.S. hotels. Although growth
in demand for Upscale hotels (4.5% in 1995 and 6.0% in 1996) exceeded growth in
supply in each of these periods, respectively, growth in demand for Midscale
(Without Food & Beverage) hotels (11.7% in 1995 and 12.0% in 1996) was less than
growth in supply in each of these periods. Continued increases in supply could
result in decreased ADR, occupancy and revenue per available room ("REVPAR") at
the Company's hotels competing in the Midscale (Without Food & Beverage) and
Upscale segments.
Competition for Acquisitions. The Company competes for acquisition
opportunities with entities that have substantially greater financial resources
than the Company. These entities may generally be able to accept more risk than
the Company can prudently manage, including risks with respect to the
creditworthiness of a hotel operator or the geographic proximity of its
investments. Competition may generally reduce the number of suitable investment
opportunities offered to the Company and increase the bargaining power of
property owners seeking to sell. Further, the Company faces competition for
acquisition opportunities from other REITs and entities organized for purposes
substantially similar to the Company's objectives, including
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<PAGE> 10
entities which do not need to utilize a lessee to operate the hotel and who
therefore may be able to offer a higher price to sellers than can the Company.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
This seasonality, and the structure of the Percentage Leases, which provide for
a higher percentage of room revenues above stated equal quarterly levels to be
paid as Percentage Rent, can be expected to cause fluctuations in the Company's
quarterly lease revenues from the Percentage Leases. The lease revenues may vary
by season as a result of the tiered, progressive formulas under which Percentage
Rent is calculated.
Concentration of Investments; Proximity to Coast
Fourteen of the 34 Hotels are located in the State of North Carolina, with
six of the Hotels located in the Raleigh/Durham, North Carolina area and three
of the Hotels located in Wilmington, North Carolina. In the future, the Company
could increase the concentration of its investments in North Carolina and,
particularly, in the Raleigh/Durham area where the Company currently is
developing two hotels. The concentration of the Company's investments in North
Carolina could result in adverse events or conditions which affect those areas
particularly, such as increases in room supply, a hurricane or other natural
disaster, having a more significant negative effect on the operation of the
Hotels, and ultimately amounts available for distribution to shareholders of the
Company, than if the Company's investments were geographically diversified.
In addition to the Company's concentration of investment in North Carolina,
three of the Hotels are located in the metropolitan Atlanta area. The Company
also currently is developing a Homewood Suites hotel in Alpharetta, Georgia, a
suburb of Atlanta. The concentration of the Company's investments in one
metropolitan area can result in adverse events or conditions that affect that
metropolitan area having a more significant negative effect on the operations of
the Hotels and, ultimately, amounts available for distribution to shareholders
of the Company.
Several of the Hotels are located near the Atlantic Ocean and are exposed
to more severe weather than hotels located inland. These Hotels are also exposed
to salt water and humidity, which result in increased or more rapid wear on the
hotels' weatherproofing and mechanical, electrical and other systems. As a
result, the Company may incur additional expenditures for capital improvements.
Emphasis on Hampton Inn and Comfort Inn Hotels
Fifteen of the 34 Hotels are operated as Hampton Inn hotels; one is
operated as a Hampton Inn & Suites hotel; nine are operated as Comfort Inn
hotels; and two are operated as Comfort Suites hotels. The Company is subject to
risks inherent in concentrating investments in these franchise brands, such as a
decrease in business because of adverse publicity related to the brands.
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels have an ongoing need for renovations and other capital improvements,
particularly in older structures, including periodic replacement of furniture,
fixtures and equipment. Under the terms of the Percentage Leases, the Company
and the Partnership are obligated to pay the cost of certain capital
expenditures at the Hotels and to pay for furniture, fixtures and equipment.
Franchisors may also require periodic capital improvements to the Hotels as a
condition of retaining the franchise licenses. If these expenses exceed the
Company's estimate, the additional cost could have an adverse effect on Cash
Available for Distribution per share of Common Stock. In addition, the Company
intends to invest selectively in hotels that require significant renovation.
Renovation of hotels involves certain risks, including the possibility of
environmental problems, construction cost overruns and delays, uncertainties as
to market demand or deterioration in market demand after commencement of
renovation and the emergence of unanticipated competition from hotels.
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<PAGE> 11
CONFLICTS OF INTEREST
Because of the ownership in and positions with the Company and the Lessee
of affiliates of Charles M. Winston and Robert W. Winston, III, there are
inherent conflicts of interest in the ongoing lease and operation of the Hotels.
No Arm's Length Bargaining on Percentage Leases and Purchase Contracts for
Hotels Owned by Winston Affiliates
The terms of the Percentage Leases and the contracts pursuant to which the
Partnership acquired ten hotels in connection with the IPO (the "Initial
Hotels") and four other hotels (the "Affiliate Acquisition Hotels") in the past
from affiliates of Charles M. Winston and Robert W. Winston, III were not
negotiated on an arm's length basis. The Company believes, however, that the
terms of such agreements are fair to the Company. The Independent Directors
(directors who do not serve as officers or employees of the Company or its
subsidiaries and are not affiliates of any advisor to or lessee of any property
of the Company) and the Company obtained separate, independent appraisals of
each Affiliate Acquisition Hotel, each of which indicated a fair market value
that was greater than the purchase price of the related Affiliate Acquisition
Hotel. The Independent Directors determined that the acquisition of the Initial
Hotels and the Affiliate Acquisition Hotels was in the best interests of the
Company and its shareholders and approved the acquisition of such Hotels and the
terms of the Percentage Leases. The Company does not own any interest in the
Lessee. The Lessee is owned by Robert W. Winston, III, President and director of
the Company, and John B. Harris, Jr., President and director of the Lessee.
Because Mr. Winston is a director and shareholder of the Lessee, as well as an
officer and director of the Company, there is a conflict of interest with
respect to the enforcement and termination of the Percentage Leases.
Conflicts Relating to Sale of the Initial Hotels and the Affiliate Acquisition
Hotels
The limited partners of the Partnership other than the Company (the
"Limited Partners"), including Robert Winston and Charles Winston (President and
Chairman of the Board of the Company, respectively), may have unrealized gain in
their interests in the Initial Hotels and the Affiliate Acquisition Hotels. The
Partnership's sale of any of those Hotels may cause adverse tax consequences to
the Limited Partners. Therefore, the interests of the Company and the Limited
Partners could conflict in connection with the disposition of one or more of
those 14 Hotels. However, decisions with respect to the disposition of all hotel
properties in which the Company invests will be made by a majority of the Board
of Directors, which majority must include a majority of the Independent
Directors when the disposition involves an Initial Hotel or an Affiliate
Acquisition Hotel.
REAL ESTATE INVESTMENT RISKS
General Risks
The Company's investments will be 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
Lessee, or an operator such as IMIC or Promus, to operate the Hotels in a manner
sufficient to maintain or increase revenues, to generate sufficient income in
excess of operating expenses and 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 and adverse changes in zoning laws, many of which
are beyond the control of the Company.
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Illiquidity of Real Estate
Real estate investments are relatively illiquid. 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. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions will be limited. Also, no assurances can be given that the market
value of any of the Hotels will not decrease in the future.
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 and
exposure to hazardous substances, including asbestos-containing materials
("ACMs") into the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with exposure to released hazardous substances, including ACMs. In connection
with the ownership of the Hotels, the Company, the Partnership, the Lessee or
any third-party manager, as the case may be, may be potentially liable for any
such costs. Phase I environmental site assessments ("ESAs") were obtained on all
of the Hotels prior to their acquisition. The purpose of Phase I ESAs 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 ESA reports have not revealed any environmental condition, liability or
compliance concern 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 condition, liability or concern. However, these
reports may not reveal all environmental conditions, liabilities or compliance
concerns. Further, there may be material environmental conditions, liabilities
or compliance concerns that arose at a Hotel after the related Phase I ESA
report was completed of which the Company is otherwise unaware.
Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be maintained on
each of the Hotels, including liability, fire and extended coverage. Management
believes such specified coverage is of the type and amount customarily obtained
for or by an owner on real property assets. Leases for subsequently acquired
hotels will contain similar provisions. However, there are certain types of
losses, generally of a catastrophic nature, such as earthquakes, floods,
hurricanes, and other acts of God, 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 maintaining appropriate insurance coverage on the Company's
investments at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost of
the Company's lost investment. Certain factors, including inflation, changes in
building codes and ordinances and environmental considerations, 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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Compliance with Americans with Disabilities Act and Other Changes in
Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that the Hotels
are substantially in compliance with these requirements, a determination that
the Company is not in compliance with the ADA could result in imposition of
fines or an award of damages to private litigants. In addition, changes in other
governmental rules and regulations or enforcement policies affecting the use and
operation of the Hotels, including changes to building codes and fire and life
safety codes, may occur. If the Company were required to make expenditures to
comply with the ADA or other changes in governmental rules and regulations, the
Company's ability to make distributions to its shareholders could be adversely
affected.
Fluctuations in Property Taxes
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which the Company invests may
increase or decrease as property tax rates change and as the properties are
assessed or reassessed by taxing authorities. If property taxes increase, the
Company's ability to make distributions to its shareholders would be adversely
affected.
RISKS OF LEVERAGE
All indebtedness incurred by the Company under the Line of Credit matures
on November 1, 1998 (the "Maturity Date"). There can be no assurance that the
Company will be able to extend or refinance any outstanding indebtedness under
the Line of Credit on the Maturity Date or that the terms of any refinancings or
extensions would be as favorable to the Company as the existing terms of the
Line of Credit. The Line of Credit is secured by 28 Hotels, which will increase
as the Company elects to fully utilize the $125 million maximum amount available
under the Line of Credit. If the Company is unable to obtain favorable
refinancing of its outstanding indebtedness at the Maturity Date or an extension
of the Line of Credit, it could be required to liquidate one or more Hotels or
lose one or more Hotels to foreclosure, either of which would result in
financial loss to the Company. If the Company's cash flow from the Hotels
securing the Line of Credit decreases such that the Company's borrowing
availability under the Line of Credit (the "Line Availability") is less than the
amount outstanding under the Line of Credit, the Company must either (i) provide
additional collateral to increase the Line Availability or (ii) repay the excess
of the amounts outstanding under the Line of Credit over the Line Availability.
The Line of Credit generally bears interest at the variable rate of LIBOR
plus 1.75%. Economic conditions could result in higher overall interest rates,
which could increase debt service requirements on variable rate debt and could
reduce the amount of Cash Available for Distribution.
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
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.
RISKS OF OPERATING HOTELS UNDER FRANCHISE AGREEMENTS
All of the Hotels are subject to franchise agreements. The Lessee holds the
franchise licenses for the Hotels. The Company guarantees the Lessee's
obligations to make franchise license payments under the franchise licenses for
the Hotels. Certain franchisors are requiring certain of the Hotels to be
operated under
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<PAGE> 14
conditional franchise licenses, subject to completion of certain capital
improvements prior to issuance of a permanent license. Failure to complete the
improvements in a manner satisfactory to a franchisor could result in the
cancellation of a franchise agreement. 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. Franchisors typically periodically inspect licensed
properties to confirm adherence to operating standards. The failure of a hotel
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 Lessee may seek to
obtain a suitable replacement franchise, or to operate the Hotel independent of
a franchise license. The loss of a franchise license could have a material
adverse effect upon the operations or the underlying value of the hotel covered
by the franchise because of the loss of associated name recognition, marketing
support and centralized reservation systems provided by the franchisor.
RISKS ASSOCIATED WITH HOMEWOOD DEVELOPMENT HOTEL
The Company has agreed to acquire one Homewood Developmental Hotel from
Promus shortly after such hotel is completed. Under the terms of the Company's
agreement with Promus, the Homewood Development Hotel will be built to
specifications set forth in that agreement. The Company's obligation to purchase
the Homewood Development Hotel is contingent upon the hotel meeting the
applicable construction specifications. Because the Homewood Development Hotel
is currently under development, there can be no assurances that such will be
completed to the specifications to which the Company has agreed, and, therefore,
there can be no assurances that the Company will acquire such hotel. In
addition, the Company's agreement to purchase the Homewood Development Hotel is
subject to the hotel's completion by a date specified in the agreement between
the Company and Promus. There can be no assurances that the Homewood Development
Hotel will be completed by such specified date, and, therefore, there can be no
assurances that the Company will acquire the Homewood Development Hotel.
EFFECT OF MARKET INTEREST RATES ON PRICE OF THE SECURITIES
One of the factors that may influence the price of the Securities in public
trading markets will be the annual yield from distributions by the Company on
the Common Stock and the annual yield on the Preferred Stock as compared to
yields on other financial instruments. Thus, an increase in market interest
rates will result in higher yields on other financial instruments, which could
adversely affect the market price of the Securities.
ABILITY OF BOARD OF DIRECTORS TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, development, financing, growth, operations, debt capitalization
and distributions are 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 limiting consolidated indebtedness to 45% of its investment in hotel
properties, at cost, without the approval of the holders of a majority of the
outstanding shares of Common Stock voting on such matter. The approval of
two-thirds of the number of shares of Common Stock entitled to vote thereon is
necessary to change the Company's policy of seeking to maintain its
qualification as a REIT.
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LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Ownership Limitation
The Ownership Limitation (as hereinafter defined), 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.
Authority to Issue Preferred Stock
The Articles of Incorporation authorize the Board of Directors to issue up
to 10,000,000 shares of Preferred Stock and to establish the preferences and
rights of any shares of Preferred Stock issued. The issuance of Preferred Stock
could have the effect of delaying or preventing a change in control of the
Company even if a change in control were in the shareholders' interest.
North Carolina Anti-Takeover Statutes
As a North Carolina corporation, the Company is subject to various statutes
which impose restrictions and require procedures with respect to certain
takeover offers and business combinations, including, but not limited to,
combinations with interested shareholders and share repurchases from certain
shareholders. See "Description of Capital Stock -- North Carolina Anti-Takeover
Statutes."
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 Internal Revenue Service (the
"Service") that it qualifies as a REIT, it previously has received, and will
receive at the closing of an offering of the Securities, 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 its shareholders. See "Federal Income Tax
Considerations -- Taxation of the Company."
If the Company were to fail to qualify as a REIT for 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 alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the Company also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. As a result, Cash
Available for Distribution would be reduced for each of the years involved.
Although the Company currently operates and intends to continue to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the Board of Directors,
with the consent of shareholders holding at least two-thirds of the Common Stock
entitled to vote thereon, to revoke the REIT election. See "Federal Income Tax
Considerations."
REIT Minimum Distribution Requirements; Possible Incurrence of Additional Debt
In order to qualify as a REIT, the Company generally is required each year
to distribute to its shareholders at least 95% of its taxable income (excluding
any net capital gain). In addition, the Company will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it
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with respect to any calendar year are less than the sum of (i) 85% of its
ordinary income for that year, (ii) 95% of its capital gain net income for that
year, and (iii) 100% of its undistributed taxable income from prior years.
The Company has made, and intends to continue to make, distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income consists primarily of its share
of the income of the Partnership, and the Company's Cash Available for
Distribution consists primarily of its share of cash distributions from the
Partnership and lease revenue under the Percentage Lease for the Hotel owned by
the Company directly. 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 costs 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 the Code and such other
factors as the Board of Directors deems relevant. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution Requirements."
Failure of the Partnership to be Classified as a Partnership for Federal Income
Tax Purposes, Impact on REIT Status
The Company previously has received, and will receive at the closing of an
offering of Securities, an opinion of its counsel stating that the Partnership
will be classified as a partnership, and not as a corporation or as an
association taxable as a corporation, 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, the Company likely would cease to qualify as a
REIT for a variety of reasons. Furthermore, the imposition of a corporate income
tax on the Partnership would reduce substantially the amount of Cash Available
for Distribution from the Partnership to the Company and its shareholders. See
"Federal Income Tax Considerations -- Tax Aspects of the Partnership."
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of any taxable year. Furthermore, if any
shareholder of the Lessee owns, actually or constructively, 10% or more of the
stock of the Company, the Lessee could become a related party tenant of the
Company, which likely would result in loss of REIT status for the Company. For
the purpose of preserving the Company's REIT qualification, the Articles of
Incorporation prohibit ownership of more than 9.9% of the outstanding shares of
any class of the Company's stock by any shareholder and its affiliates
(including the affiliates of Charles M. Winston and Robert W. Winston, III),
without Board approval, subject to adjustment as described below. See
"Restrictions on Ownership of Common Stock." Generally, the capital stock owned
by related or affiliated shareholders will be aggregated for purposes of the
Ownership Limitation (as hereinafter defined). 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. See "Federal Income Tax
Considerations -- Requirements for Qualification."
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POSSIBLE ADVERSE EFFECTS OF SHARES AVAILABLE FOR FUTURE SALE UPON PRICES OF
COMMON STOCK
The Company may elect to issue up to 1,705,596 shares of Common Stock to
holders of Units ("Unitholders") on a one-for-one basis upon the Unitholders'
exercise of redemption rights they have with respect to the Units. All of the
Unitholders will have certain registration rights with respect to the shares of
Common Stock received by them upon redemption of their Units. The Company may
also issue additional shares of Common Stock upon acquisition by the Company of
Homewood Suites hotels pursuant to an agreement with Promus. No prediction can
be made as to the effect, if any, that future sales of such shares of Common
Stock, the availability thereof for future sale, or the existence of such
registration rights may have upon the market price of the Common Stock, from
time to time, or upon the Company's ability to sell additional shares of Common
Stock in the future.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's (or its predecessor's)
consolidated ratios of earnings to fixed charges for the six months ended June
30, 1997, and for each of the last five fiscal years. There was no Preferred
Stock outstanding for any of the periods shown below. Accordingly, the ratio of
earnings to fixed charges and Preferred Stock dividends is identical to the
ratio of earnings to fixed charges.
<TABLE>
<CAPTION>
PREDECESSOR ENTITIES THE COMPANY
------------------------------ ----------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, JANUARY 1, 1994 JUNE 2, 1994 DECEMBER 31, SIX MONTHS
------------ TO JUNE 2, TO DECEMBER 31, ------------ ENDED
1992 1993 1994 1994 1995 1996 JUNE 30, 1997
---- ---- --------------- --------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges:(1)................ 1.05 1.48 1.46 15.09 4.28 5.85 4.58
</TABLE>
- ---------------
(1) The consolidated ratio of earnings to fixed charges was computed by dividing
earnings by fixed charges. Fixed charges consist of interest costs, whether
expensed or capitalized, amortization of Line of Credit fees, amortization
of interest rate caps and loan commitment fees.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company will contribute the net proceeds from the sale of the Securities to the
Partnership in exchange for Units having characteristics similar to those of the
Securities, and the Partnership expects to use such net proceeds for various
purposes, which may include the acquisition of additional hotel assets, the
repayment of outstanding indebtedness, the improvement and/or expansion of one
or more of its hotel properties or for working capital purposes. Prior to
utilization, the net proceeds will be invested in interest-bearing accounts and
short-term, interest-bearing securities, which investments are consistent with
the Company's intention to qualify for taxation as a REIT. Such investments may
include, for example, government and government agency securities, certificates
of deposit, interest-bearing bank deposits and mortgage loan participations.
DISTRIBUTION POLICY
In order to maintain its qualification as a REIT, the Company must
distribute to its shareholders at least 95% of its annual taxable income (which
does not include net capital gains). While future distributions paid by the
Company will be at the discretion of the Board of Directors of the Company and
will depend on the actual cash flow of the Company, its financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Code, and such other factors as the Board of Directors of the
Company deems relevant, it is the present intention of the Company to pay
regular quarterly distributions.
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DESCRIPTION OF CAPITAL STOCK
Under the Articles of Incorporation, the total number of shares of all
classes of stock that the Company has authority to issue is 60,000,000,
consisting of 50,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock. The description of the Company's Common Stock set forth below
describes certain general terms and provisions of the Common Stock to which any
Prospectus Supplement may relate. The following description does not purport to
be complete and is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws.
COMMON STOCK
Under the Articles of Incorporation, the Company has authority to issue up
to 50,000,000 shares of Common Stock. Under North Carolina law, shareholders
generally are not responsible for the Corporation's debts or obligations. At
July 29, 1997, the Company had outstanding 16,194,480 shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters voted on by shareholders, including election 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 such
shares exclusively possess all voting power. The Articles of Incorporation do
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. All shares of Common Stock will be fully paid
and nonassessable and the holders thereof will not have preemptive rights.
The Common Stock is subject to certain restrictions upon the ownership and
transfer thereof which were adopted for the purpose of enabling the Company to
preserve its status as a REIT. For a description of such restrictions, see
"Restrictions on Ownership of Common Stock."
The Common Stock currently is traded on Nasdaq under the symbol "WINN." The
Company has made application for the Common Stock to be listed on the New York
Stock Exchange. The transfer agent and registrant for the Company's Common Stock
is Wachovia Bank, N.A., Winston-Salem, North Carolina. The Company will apply to
Nasdaq or any securities exchange on which the Common Stock is listed to list
any additional shares of Common Stock to be sold pursuant to any Prospectus
Supplement.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of up to
10,000,000 shares of Preferred Stock from time to time, in one or more series,
to establish the number of shares in each series and to fix the designation,
powers, preferences and rights of each such series and the qualifications,
limitations or restrictions thereof. Because the Board of Directors has the
power to establish the preferences and rights of each class or series of
Preferred Stock, 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. The issuance of Preferred Stock
could have the effect of delaying or preventing a change in control of the
Company.
The applicable Prospectus Supplement will describe each of the following
terms that may be applicable in respect of any Preferred Stock offered and
issued pursuant to this Prospectus: (1) the specific designation, number of
shares, seniority and purchase price; (2) any liquidation preference per share;
(3) any maturity date; (4) any mandatory or option redemption or repayment dates
and terms or sinking fund provisions; (5) any dividend rate or rates and the
dates on which any dividends will be payable (or the method by which such rates
or dates will be determined); (6) any voting rights; (7) any rights to convert
the Preferred Stock into other securities or rights, including a description of
the securities or rights into which such Preferred Stock is convertible (which
may include other Preferred Stock) and the terms and conditions upon which such
conversions will be effected, including, without limitation, conversion rates or
formulas, conversion periods and other related provisions; (8) the place or
places where dividends and other payments with respect
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<PAGE> 19
to the Preferred Stock will be payable; and (9) any additional voting, dividend,
liquidation, redemption and other rights, preferences, privileges, limitations
and restrictions, including restrictions imposed for the purpose of maintaining
the Company's qualification as a REIT under the Code. Upon issuance and delivery
against payment therefor, all shares of the Preferred Stock offered hereby will
be duly authorized, fully paid and non-assessable.
The Preferred Stock will be subject to certain restrictions upon the
ownership and transfer thereof for the purpose of enabling the Company to
preserve its status as a REIT. See "Restrictions on Ownership of Common Stock."
ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
Number of Directors; Removal; Filling Vacancies
The Articles of Incorporation and Bylaws provide that, subject to any
rights of holders of Preferred Stock to elect additional directors under
specified circumstances, the number of directors will consist of not less than
three nor more than nine persons, subject to increase or decrease by the
affirmative vote of 80% of the members of the entire Board of Directors. At all
times a majority of the Directors shall be Independent Directors, except that
upon the death, removal or resignation of an Independent Director, such
requirement shall not be applicable for 60 days. The shareholders shall be
entitled to vote on the election or removal of directors, with each share
entitled to one vote. The Bylaws provide that, subject to any rights of holders
of Preferred Stock, and unless the Board of Directors otherwise determines, any
vacancies will be filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum, provided that Independent Directors shall
nominate and approve directors to fill vacancies created by Independent
Directors. Accordingly, the Board of Directors could temporarily prevent any
shareholder from enlarging the Board of Directors and filling the new
directorships with such shareholder's own nominees. Any director so elected
shall hold office until the next annual meeting of shareholders.
A director may be removed with or without cause by the vote of the holders
of 75% of the outstanding shares at a special meeting of the shareholders called
for the purpose of removing him.
Limitation of Liability; Indemnification
The Articles of Incorporation provide that to the maximum extent that North
Carolina law in effect from time to time permits limitation of liability of
directors and officers, no director or officer of the Company shall be liable to
the Company or its shareholders for money damages.
The Articles of Incorporation provide that the Company shall, to the
fullest extent permitted by North Carolina law, indemnify any director, officer,
employee or agent against any expense incurred by such person if the
disinterested directors, the shareholders or independent legal counsel determine
that such person conducted himself in good faith and (a) reasonably believed, in
the case of conduct in his official capacity with the Company, that his conduct
was in its best interest and in all other cases, that his conduct was at least
not opposed to the Company's best interest and (b) in the case of any criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful.
Any indemnification by the Company pursuant to the provisions of the
Articles of Incorporation described above shall be paid out of the assets of the
Company and shall not be recoverable from the shareholders. The Company has
purchased director and officer liability insurance for the purpose of providing
a source of funds to pay any indemnification described above. To the extent that
the foregoing indemnification provisions purport to include indemnification for
liabilities arising under the Securities Act, in the opinion of the Commission
such indemnification is contrary to public policy and, therefore, unenforceable.
Amendment
The Articles of Incorporation may be amended by the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock, with the
shareholders voting as a class with one vote per share. The Company's Bylaws may
be amended by the Board of Directors or by vote of the holders of a majority of
the outstanding shares of Common Stock.
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NORTH CAROLINA ANTI-TAKEOVER STATUTES
In addition to certain of the Articles of Incorporation provisions
discussed above, North Carolina has adopted a series of statutes that may deter
takeover attempts or tender offers, including offers or attempts that might
result in the payment of a premium over the market price for the Common Stock or
that a shareholder might otherwise consider in its best interest.
The Company is subject to the North Carolina Control Share Acquisition Act.
The provisions of this Act are triggered upon the acquisition by a person of
shares of voting stock of the Company that, when added to all other shares
beneficially owned by the person, would result in that person holding one-fifth,
one-third or a majority of the voting power in the election of directors. Under
the Control Share Acquisition Act, the shares acquired in such a transaction
that meet or exceed any of these thresholds ("Control Shares") have no voting
rights until conferred by the affirmative vote of the holders of a majority of
all outstanding voting shares, excluding those shares held by any person
involved or proposing to be involved in the acquisition of Control Shares, any
officer of the Company and any employee of the Company who is also a director of
the Company. If voting rights are conferred on the Control Shares, all
shareholders of the Company have the right to require that their shares be
redeemed at the highest price paid per share by the acquiror for any Control
Shares. The aggregate effect of these provisions may be to delay or prevent
attempts by other corporations or groups to acquire control of the Company
without negotiation with the Board of Directors.
The North Carolina Shareholder Protection Act requires the affirmative vote
of 95% of a corporation's voting shares to approve a "business combination" with
any person that beneficially owns more than 20% of the voting shares of the
corporation unless the fair price provisions of the Act are satisfied.
"Business combination" is defined by the statute as any merger or
consolidation of a corporation with or into any other corporation, or the sale
or lease of all or any substantial part of the corporation's assets to, or any
payment, sale or lease to the corporation or any subsidiary thereof in exchange
for securities of the corporation of any assets (except assets having an
aggregate fair market value of less than five million dollars) of any other
entity.
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK
For the Company to qualify as a REIT under the Code, certain restrictions
apply to the ownership of shares of capital stock. See "Federal Income Tax
Considerations -- Requirements for Qualification." Because the Board of
Directors believes it is essential for the Company to continue to qualify as a
REIT, the Articles of Incorporation restrict the acquisition of shares of Common
Stock (the "Ownership Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Articles of Incorporation, 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, shares which would
cause the Company to be beneficially owned by fewer than 100 persons, shares
which would cause the Company to be "closely held," or shares which would cause
the Company to own 10% or more of a tenant of its property, 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 Articles of Incorporation. 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 referred to the restrictions described above.
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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 Articles of Incorporation 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.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Common Stock. The following
discussion does not address all aspects of taxation that may be relevant to
particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON STOCK, INCLUDING THE STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF
SUCH PURCHASE, OWNERSHIP, AND SALE, 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, effective for its short taxable year ended December 31, 1994. 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
qualify or remain qualified as a REIT for federal income tax purposes.
Hunton & Williams has acted as special tax counsel to the Company. Prior to
issuing Common Stock or Preferred Stock, the Company expects to receive an
opinion of Hunton & Williams as to its REIT qualification. Continued
qualification and taxation as a REIT will depend upon the Company's ability to
meet on a continuing basis, through actual annual operating results,
distribution levels, and stock ownership, the various qualification tests
imposed under the Code discussed below. No assurance can be given that the
actual results of the Company's operation for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "-- Failure to Qualify."
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
The Company believes that it qualified to be taxed as a REIT for its
taxable years ended December 31, 1994, December 31, 1995 and December 31, 1996,
and that its organization and current and proposed method of operation will
enable it to continue to qualify as a REIT for its taxable year ended December
31, 1997 and in the future. Prior to issuing Securities, the Company expects to
obtain an opinion of Hunton & Williams, special tax counsel, as to its REIT
qualification. Qualification and taxation as a REIT depend upon the Company's
ability to meet on a continuing basis, through actual annual operating results,
distribution levels, and stock ownership, the various qualification tests
imposed under the Code discussed below. No assurance can be given that the
actual results of the Company's operation for any taxable year will satisfy such
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requirements. For a discussion of the tax consequences of failure to qualify as
a REIT, see "-- Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from an investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its undistributed items of tax preference. Third, if the Company has (i) net
income from the sale or other disposition of "foreclosure property" that is held
primarily for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if the Company acquires any asset from a
C corporation (i.e., a corporation generally subject to full 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 "-- Pending Tax
Legislation."
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (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. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made by the Company
to be taxed as a REIT. The ownership of the Common Stock is sufficiently diverse
to allow the Company to satisfy requirements (v) and (vi). In addition, the
Company's Articles of Incorporation provide for restrictions regarding transfers
of the
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Common Stock that are intended to assist the Company in continuing to satisfy
the requirements described in clauses (v) and (vi) above.
For purposes of determining share ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401 (a), however, is not considered an individual and
the beneficiaries of trust are treated as holding shares of a REIT in proportion
to their actuarial interests in such trust for purposes of the 5/50 Rule.
The Company does not currently have any corporate subsidiaries, although it
may have corporate subsidiaries in the future. Code section 856(i) provides that
a corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of which
has been held by the REIT at all times during the period that such corporation
has been in existence. Thus, in applying the requirements described herein, any
"qualified REIT subsidiaries" acquired or formed by the Company will be ignored,
and all assets, liabilities, and items of income, deduction, and credit of such
subsidiaries will be treated as assets, liabilities, and items of income,
deduction, and credit of the Company.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, the Company's proportionate
share of the assets and gross income of the Partnership will be treated as
assets and gross income of the Company for purposes of applying the requirements
described herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, there are
three requirements relating to the Company's gross income that must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. Third, not more than 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year may be gain from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property, and (iii) certain real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property).
The specific application of these tests to the Company is discussed below.
Rent received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. 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, actually
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
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furnish or render services to the tenants of such property, other than through
an "independent contractor" who is adequately compensated and from whom the
Company derives no revenue. The "independent contractor" requirement, however,
does not apply to the extent the services provided by the Company are "usually
or customarily rendered" in connection with the rental of space for occupancy
only and are not otherwise considered "rendered to the occupant".
Pursuant to the Percentage Leases, the Lessee leases from the Partnership
(or, in the case of the Company-Owned Hotel, the Company) the land, buildings,
improvements, furnishings and equipment comprising the Hotels for a 10-year
period. The Percentage Leases provide that the Lessee is obligated to pay to the
partnership (or, in the case of the Company-Owned Hotel, the Company) (i) the
greater of a Base Rent or Percentage Rent and (ii) certain other Additional
Charges. The Percentage Rent is calculated by multiplying fixed percentages by
the gross room revenues for each of the Hotels. The Base Rent accrues and is
required to be paid monthly. Although Percentage Rent is due quarterly, with
respect to eleven of the Hotels, the Lessee will not be in default for
non-payment of Percentage Rent due in any calendar year if the Lessee pays,
within 90 days of the end of the calendar year, the excess of Percentage Rent
due and unpaid over the Base Rent paid by the Lessee with respect to such year.
With respect to the other Hotels, the Lessee will be in default for the
non-payment of Percentage Rent if it fails to pay, within 30 days of the end of
each calendar quarter, the excess of Percentage Rent due and unpaid over the
Base Rent paid year to-date with respect to such quarter.
In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property).
In addition, Code section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a lease
of property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property, (ii) the service recipient controls the
property, (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property), (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract, (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient, and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination of whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes. Such belief is based, in part, on the
following facts: (i) the Partnership (or, in the case of the Company-Owned
Hotel, the Company) and the Lessee intend for their relationship to be that of a
lessor and lessee and such relationship is documented by lease agreements, (ii)
the Lessee has the right to the exclusive possession, use, and quiet enjoyment
of the Hotels during the term of the Percentage Leases, (iii) the Lessee bears
the cost of, and is responsible for, day-to-day maintenance and repair of the
Hotels, other than the cost of maintaining underground utilities and structural
elements, and dictates how the Hotels are operated, maintained, and improved,
(iv) the Lessee bears all of the costs and expenses of operating the Hotels
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(including the cost of any inventory used in their operation) during the term of
the Percentage Leases (other than real and personal property taxes, property and
casualty insurance, and the cost of replacement or refurbishment of furniture,
fixtures and equipment, to the extent such costs do not exceed the allowance for
such costs provided by the Company or the Partnership, as applicable, under each
Percentage Lease), (v) the Lessee benefits from any savings in the costs of
operating the Hotels during the term of the Percentage Leases, (vi) in the event
of damage to or destruction of a Hotel, the Lessee is at economic risk because
it is obligated either (A) to restore the property to its prior condition, in
which event it will bear all costs of such restoration in excess of any
insurance proceeds, or (B) to offer to purchase the Hotel for an amount
generally equal to the fair market value of the property, less any insurance
proceeds, (vii) the Lessee has indemnified the Partnership (or, in the case of
the Company-Owned Hotel, the Company) against all liabilities imposed on the
Partnership (or, in the case of the Company-Owned Hotel, the Company) during the
term of the Percentage Leases by reason of (A) injury to persons or damage to
property occurring at the Hotels, (B) the Lessee's use, management, maintenance
or repair of the Hotels, (C) any environmental liability caused by acts or
grossly negligent failures to act of the Lessee, (D) taxes and assessments in
respect of the Hotels (other than real estate or personal property taxes), or
(E) any breach of the Percentage Leases or of any sublease of a Hotel by the
Lessee, (viii) the Lessee is obligated to pay substantial fixed rent for the
period of use of the Hotels, (ix) the Lessee stands to incur substantial losses
(or reap substantial gains) depending on how successfully it operates the
Hotels, (x) the Company or the Partnership, as applicable, cannot use the Hotels
concurrently to provide significant services to entities unrelated to the
Lessee, and (xi) the total contract price under the Percentage Leases does not
substantially exceed the rental value of the Hotels for the term of the
Percentage Leases.
If the Percentage Leases are characterized as service contracts or
partnership agreements, rather than as true leases, part or all of the payments
that the Partnership or the Company receives from the Lessee may not be
considered rent or may not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, the Company likely
would not be able to satisfy either the 75% or 95% gross income 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 Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel, must not be greater than 15% of the Rent
received under she applicable Percentage Lease. The Rent attributable to the
personal property in a Hotel is the amount that bears the same ratio to total
Rent for the taxable year as the average of the adjusted bases of the personal
property in the Hotel at the beginning and at the end of the taxable year bears
to the average of the aggregate adjusted bases of both the real and personal
property comprising the Hotel at the beginning and at the end of such taxable
year (the "Adjusted Basis Ratio"). The Adjusted Basis Ratio for each Hotel has
not exceeded 15%. In no event will the Partnership or the Company acquire
additional personal property for a Hotel to the extent that such acquisition
would cause the Adjusted Basis Ratio for that Hotel to exceed 15%. There can be
no assurance, however, that the Service will not assert that the personal
property acquired by the Partnership or the Company had a value in excess of its
appraised value, or that a court will not uphold such assertion. If such a
challenge were successfully asserted, the Adjusted Basis Ratio could exceed 15%
as to one or more of the Hotels, which in turn potentially could cause the
Company to fail to satisfy the 95% or 75% gross income test and thus lose its
REIT status.
Another requirement for qualification of the Rent as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the Percentage Leases are entered
into, (ii) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(iii) conform with normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Because the Percentage Rent is based on
fixed percentages of the gross room revenues from the Hotels that are
established in the Percentage Leases, and the Company has
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represented that the percentages (i) will not be renegotiated during the term 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).
A third 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 the Lessee. The constructive ownership rules of the Code 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 actually own any stock of the Lessee. Various Winston
Affiliates, which indirectly own interests in the Lessee, may acquire Common
Stock by exercising their Redemption Rights. The Partnership Agreement, however,
provides that if, upon a redemption of Units, the Company would own, actually or
constructively, 10% or more of any tenant, the Company must redeem the Units for
cash rather than Common Stock. The Articles of Incorporation likewise prohibit
any person from owning, actually or constructively, 9.9% or more of the Company.
Thus, the Company should never own, actually or constructively, 10% or more of
the Lessee. Furthermore, the Company has represented that, with respect to other
hotel properties that it acquires in the future, it will not lease any property
to a Related Party Tenant. However, because the Code's constructive ownership
rules for purposes of the Related Party Tenant rules are broad and it is not
possible to monitor continually direct and indirect transfers of shares of
Common Stock, no absolute assurance can be given that such transfers or other
events of which the Company has no knowledge will not cause the Company to own
constructively 10% or more of the Lessee at some future date.
A fourth requirement for qualification of the Rent as "rents from real
property" is that neither the Company nor the Partnership can 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 does not derive or receive any income.
Provided that the Percentage Leases are respected as true leases, the Company
should satisfy that requirement because the Company and the Partnership do not
perform, and will not perform, any services other than customary ones for the
Lessee. Furthermore, the Company has represented that, with respect to each
other hotel property that it acquires in the future, it will not perform
noncustomary services with respect to the tenant of the property. As described
above, however, if the Percentage Leases are recharacterized as service
contracts or partnership agreements, the Rent likely would be disqualified as
"rents from real property" because the Company and the Partnership would be
considered to furnish or render services to the occupants of the Hotels and to
manage or operate the Hotels other than through an independent contractor who is
adequately compensated and from whom the Company derives or receives no income.
If a portion of the Rent from a particular Percentage Lease does not
qualify as "rents from real property" because the Rent attributable to personal
property with respect to such Percentage Lease exceeds 15% of the total Rent for
a taxable year, the portion of the Rent that is attributable to personal
property will not be qualifying income for purposes of either the 75% or 95%
gross income test. If the Rent attributable to personal property that is
nonqualifying income, plus any other nonqualifying income, during a taxable year
exceeds 5% of the Company's gross income during such year, the Company would
lose its REIT status. In addition, if the Rent does not qualify as "rents from
real property" because either (i) the Percentage Rent is considered based on the
income or profits of the 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
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 both the 75%
and 95% gross income tests.
In addition to the Rent, the Lessee is required to pay to the Company or
the Partnership, as applicable, the Additional Charges. To the extent that the
Additional Charges represent either (i) reimbursements of amounts that the
Lessee is obligated to pay to third parties or (ii) penalties for nonpayment or
late payment of
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such amounts, the Additional Charges should qualify as "rents from real
property." To the extent, however, that the Additional Charges represent
interest accrued on the late payment of the Rent or the Additional Charges, the
Additional Charges should not qualify as "rents from real property," but instead
should be treated as interest that qualifies for the 95% gross income test.
The 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.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. All inventory required in the operation
of the Hotels will be purchased by the Lessee or its designee as required by the
terms of the Percentage Leases. Accordingly, the Company and the Partnership
believe that no asset owned by the Company or the Partnership is held for sale
to customers and that a sale of any such asset will not be in the ordinary
course of business of the Company or the Partnership. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular property. Nevertheless, the Company and
the Partnership will attempt to comply with the terms of safe-harbor provisions
in the Code prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company or
the Partnership can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real property)
and any personal property incident to such real property (i) that is acquired by
a REIT as the result of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness that such property secured and (ii)
for which such REIT makes a proper election to treat such property as
foreclosure property. However, a REIT will not be considered to have foreclosed
on a property where such REIT takes control of the property as a
mortgagee-in-possession and cannot receive any profit or sustain any loss except
as a creditor of the mortgagor. Under the Code, property generally ceases to be
foreclosure property with respect to a REIT on the date that is two years after
the date such REIT acquired such property (or longer if an extension is granted
by the Secretary of the Treasury). The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day (i) on
which a lease is entered into with respect to such property that, by its terms,
will give rise to income that does not qualify under the 75% gross income test
or any amount is received or accrued, directly or indirectly, pursuant to a
lease entered into on or after such day that will give rise to income that does
not qualify under the 75% gross income test, (ii) on which any construction
takes place on such property (other than completion of a building, or any other
improvement, where more than 10% of the construction of such, building or other
improvement was completed before default became imminent), or (iii) which is
more than 90 days after the day on which such property was acquired by the REIT
and the property is used in a trade or business that is conducted by the REIT
(other than through an independent contractor from whom the REIT does not derive
or receive any income). As a result of the rules with respect to foreclosure
property, if the Lessee defaults on its obligations under a Percentage Lease for
a Hotel, the Company terminates the Lessee's leasehold interest, and the Company
is unable to find a replacement Lessee
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for such Hotel within 90 days of such foreclosure, gross income from hotel
operations conducted by the Company with respect to 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.
The Company has entered into interest rate cap agreements to eliminate its
exposure to increases in interest rates under the Line of Credit. In the future,
the Company or the Partnership may, from time to time, enter into other 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 or the Partnership enters into
interest rate swap or cap contracts, such as the interest rate cap agreements
entered into by the Company in February 1995, to hedge any variable rate
indebtedness incurred to acquire or carry real estate assets, any periodic
income or gain from the disposition of such contracts should be qualifying
income for purposes of the 95% gross income test, but not the 75% gross income
test. Furthermore, any such contract would be considered a "security" for
purposes of applying the 30% gross income test. To the extent that the Company
or the Partnership hedges with other types of financial instruments or in other
situations, it may not be entirely clear how the income from those transactions
will be treated for purposes of the various income tests that apply to REITs
under the Code. The Company intends to structure any hedging transactions in a
manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions 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 federal income tax
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of those relief
provisions. As discussed above in "-- Taxation of the Company", even if those
relief provisions apply, a 100% tax would be imposed with respect to the net
income attributable to the greater of the amounts by which the Company failed
the 75% or 95% gross income tests. No such relief is available for violations of
the 30% income test.
Asset Tests
The Company, at the close of each quarter of its taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of
the mortgage does not exceed the value of the associated real property, and
shares of stock in 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 of real property, and an option to acquire real property (or a
leasehold of real property). Second, of the investments not included in the 75%
asset class, the value of any one issuer's securities owned by the Company may
not exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities (except for
its ownership interest in the Partnership or the stock of a subsidiary with
respect to which the Company has held 100% of the stock at all times during the
subsidiary's existence).
For purposes of the asset tests, the Company will be deemed to own its
proportionate share of the assets of the Partnership, rather than its general
partnership interest in the Partnership. The Company has represented that, at
all relevant times, (i) at least 75% of the value of its total assets has been,
and will be, represented by real estate assets, cash and cash items (including
receivables), and government securities and (ii) it has not owned, and will not
own, any securities that do not qualify for the 75% asset test (except for the
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stock of subsidiaries with respect to which it has held 100% of the stock at all
times during the subsidiary's existence). In addition, the Company has
represented that it will not acquire or dispose, or cause the 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 quarter in
which it arose.
Distribution Requirements
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and (B)
95% of its 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 would be subject to tax on the amount it does
not distribute 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 amount over
the amounts actually distributed. The Company has made, and intends to continue
to make, timely distributions sufficient to satisfy all annual distribution
requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, under certain of
the Percentage Leases, the Lessee may defer payment of the excess of the
Percentage Rent over the Base Rent paid by the Lessee for a period of up to 90
days after the end of the calendar year in which such payment was due. In that
case, the Partnership still would be required to recognize as income the excess
of the Percentage Rent over the Base Rent paid by the Lessee in the calendar
year to which such excess relates. Further, it is possible that, from time to
time, the Company may be allocated a share of net capital gain attributable to
the sale of depreciated property that exceeds its allocable share of cash
attributable to that sale. Therefore, the Company may have less Cash Available
for Distribution than is necessary to meet its annual 95% distribution
requirement or to avoid corporate income tax or the excise tax imposed on
certain undistributed income. In such a situation, the Company may find it
necessary to arrange for short-term (or possibly long-term) borrowings or to
raise funds through the issuance of additional shares of common or preferred
stock.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the Service interest based upon the amount of any
deduction taken for deficiency dividends.
Recordkeeping Requirement
Pursuant to applicable Treasury Regulations, in order to be able to elect
to be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its
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shareholders designed to disclose the actual ownership of its outstanding stock.
The Company has complied and will 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 availed of in
connection with a transaction (or series of related transactions) a principal
purpose of which is to reduce substantially the present value of the partners'
aggregate federal tax liability in a manner inconsistent with the intent of the
Partnership Provisions. The Anti-Abuse Rule states that the Partnership
Provisions are intended to permit taxpayers to conduct joint business (including
investment) activities through a flexible economic arrangement that accurately
reflects the partners' economic agreement and clearly reflects the partners'
income without incurring an entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions. The Anti-Abuse Rule 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, because the Anti-Abuse Rule
is extraordinarily broad in scope and is applied based on an analysis of all of
the facts and circumstances, there can be no assurance that the Service will not
attempt to apply the Anti-Abuse Rule to the Company. If the conditions of the
Anti-Abuse Rule are met, the Service is authorized to take appropriate
enforcement action, including disregarding the Partnership for federal tax
purposes or treating one or more of its partners as nonpartners. Any such action
potentially could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which the Company ceased to qualify as a REIT. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. For
purposes of determining whether distributions are made out of the Company's
current or accumulated earnings and profits, the Company's
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earnings and profits will be allocated first to the Preferred Stock and then to
the Common Stock. There can be no assurances that the Company will have
sufficient earnings and profits to cover distributions to holders of both the
Preferred Stock and the Common Stock. As used herein, the term "U.S.
shareholder" means a holder of Common Stock that for U.S. federal income tax
purposes is (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, (iii) an estate whose
income from sources without the United States is includible in gross income for
U.S. federal income tax purposes regardless of its connection with the conduct
of a trade or business within the United States, or (iv) any trust with respect
to which (A) a U.S. court is able to exercise primary supervision over the
administration of such trust and (B) one or more U.S. fiduciaries have the
authority to control all substantial decisions of the trust. Distributions that
are designated as capital gain dividends will be taxed as long-term capital
gains (to the extent they do not exceed the Company's actual net capital gain
for the taxable year) without regard to the period for which the shareholder has
held his Common Stock. However, corporate shareholders may be required to treat
up to 20% of certain capital gain dividends as ordinary income. Distributions in
excess of current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Stock, but rather will reduce the adjusted basis of such
stock. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a shareholder's Common Stock,
such distributions will be included in income as long-term capital gain (or
short-term capital gain if the Common Stock has been held for one year or less)
assuming the Common Stock is a capital asset in the hands of the shareholder. In
addition, any distribution declared by the Company in October, November, or
December of any year and payable to a shareholder of record on a specified date
in any such month shall be treated as both paid by the Company and received by
the shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses will be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Common Stock (or distributions treated as such)
will be treated as investment income only if a shareholder so elects, in which
case such capital gain will be taxed at ordinary income rates. The Company will
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital, and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a shareholder who has held such
stock for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent of distributions from the
Company required to be treated by such shareholder as long-term capital gain.
All or a portion of any loss realized upon a taxable disposition of the Common
Stock may be disallowed if other shares of the 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%,
and the tax rate on net capital gains applicable to individuals is 28%. Thus,
the tax rate differential
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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.
See "-- Pending Tax Legislation."
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (ii) provides
the Company with a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the applicable
requirements of the backup withholding rules. A shareholder who does not provide
the Company with his correct taxpayer identification number also may be subject
to penalties imposed by the Service. Any amount paid as backup withholding will
be creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their nonforeign status to the Company. In
April 1996, the Service issued proposed regulations regarding the backup
withholding rules as applied to Non-U.S. Shareholders. The proposed regulations
would alter the technical requirements relating to backup withholding compliance
and are proposed to be effective for distributions made after December 31, 1997.
See "-- Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension trust
do not constitute UBTI, provided that the shares of the REIT are not otherwise
used in an unrelated trade or business of the exempt employee pension trust.
Based on that ruling and on the intention of the Company to invest its assets in
a manner that will avoid the recognition of UBTI by the Company, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
the 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 shares 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 stock or (B) a group of pension trusts individually
holding more than 10% of the value of the Company's stock collectively owns more
than 50% of the value of the Company's stock. However, the Ownership Limitation
should prevent any Exempt Organization from owning more than 10% of the value of
the Company's stock.
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TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the Company. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a foreign corporation). The
Company expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Shareholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income. The Service issued proposed regulations in April 1996 that
would modify the manner in which the Company complies with the withholding
requirement.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
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, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
In August 1996, the U.S. Congress passed the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a U.S. business. Non U.S. Shareholders thus would be taxed at the
normal capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Distributions subject to FIRPTA also may be
subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that is designated by the Company as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
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<PAGE> 34
Gain recognized by a Non-U.S. Shareholder upon a sale of his 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 foreign persons. Because the Common Stock is publicly traded,
no assurance can be given that the Company is or will continue to be a
"domestically controlled REIT". In addition, a Non-U.S. Shareholder 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 Company's Common Stock is "regularly traded" on an
established securities market (e.g., the Nasdaq Stock Market on which the Common
Stock is currently traded). Furthermore, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the Common Stock is
effectively connected with the Non-U.S. Shareholder's U.S. trade or business, in
which case the Non-U.S. Shareholder would be subject to the same treatment as
U.S. shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the Common Stock were to
be subject to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to
the same 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 foreign corporations).
OTHER TAX CONSEQUENCES
The Company, the Partnership, and the Company's shareholders may be subject
to state or local taxation in various state or local jurisdictions, including
those in which it or they own property, transact business, or reside. The state
and local tax treatment of the Company and its shareholders may not conform to
the federal income tax consequences discussed above. CONSEQUENTLY, PROSPECTIVE
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE
AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.
TAX ASPECTS OF THE PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Partnership. The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
Classification as a Partnership
The Company is entitled to include in its income its distributive share of
the Partnership's income and to deduct its distributive share of the
Partnership's losses only if the Partnership is classified for federal income
tax purposes as a partnership rather than as an association taxable as a
corporation. An entity will be classified as a partnership rather than as a
corporation or an association taxable 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.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make an
election, it generally will be treated as a partnership for federal income tax
purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnership, 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 by a taxing
authority on or before May 8, 1996 that the classification of the entity was
under examination. The Partnership intends to continue to be treated as a
partnership under the Check-the-Box Regulations. In addition, the Company has
represented that (a) the Partnership will not elect to be treated as an
association taxable as a corporation for federal income tax
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<PAGE> 35
purposes under the Check-the-Box Regulations and (b) neither the Partnership nor
any partner thereof was notified in writing by a taxing authority on or before
May 8, 1996 that the classification of the Partnership was under examination.
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 be treated as a corporation for federal income tax purposes unless at least
90% of such partnership's gross income for a taxable year 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
applicable to REITs (the "90% Passive-Type Income Exception"). See
"-- Requirements for Qualifications -- Income Tests." 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 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 owner's interest in 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 attributable to the flow-
through entity is to permit the partnership to satisfy the 100-partner
limitation. The Company believes that the Partnership qualifies for the Private
Placement Exclusion and that if the Partnership were 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 Partnership has not requested, and does not intend to request, a ruling
from the Service that it will be classified as a partnership for federal income
tax purposes. Instead, prior to issuing Securities, the Company expects to
obtain an opinion of Hunton & Williams that the Partnership will be treated for
federal income tax purposes as a partnership and not as a corporation or an
association taxable as a corporation. No assurance can be given that the Service
will not challenge the status of the Partnership as a partnership for federal
income tax purposes. If such challenge were sustained by a court, the
Partnership would be treated as a corporation for federal income tax purposes,
as described below.
If for any reason the Partnership 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 "-- Requirements for Qualification -- Income
Tests" and "-- Requirements for Qualification -- Asset Tests." In addition, any
change in the Partnership's status for tax purposes might be treated as a
taxable event, in which case the Company might incur a tax liability without any
related cash distribution. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution Requirements."
Further, items of income and deduction of the Partnership would not pass through
to its partners, and its partners would be treated as shareholders for tax
purposes. Consequently, the 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 the Partnership's
taxable income.
Income Taxation of the Partnership and its Partners
Partners, Not the Partnership, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of the Partnership's income, gains,
losses, deductions, and credits for any taxable year of the Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution from the Partnership.
33
<PAGE> 36
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704 (b) of the Code if they
do not comply with the provisions of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
The Partnership's allocations of taxable income, gain and loss are intended to
comply with the requirements of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department 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 Agreement, depreciation or amortization deductions of
the Partnership 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 Contributed Hotels owned
by the Partnership. In addition, gain on the sale of a Contributed Hotel owned
by the Partnership will be specially allocated to the contributing Partner or
Partners (including the Company, if applicable) to the extent of any "built-in"
gain with respect to such Contributed Hotel for federal income tax purposes. The
application of section 704(c) to the Partnership is not entirely clear, however,
and may be affected by Treasury Regulations promulgated in the future.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Partnership generally is equal to (i) the amount of
cash and the basis of any other property contributed to the Partnership by the
Company, (ii) increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership, and (iii)
reduced, but not below zero, by (A) its allocable share of the Partnership's
loss and (B) the amount of cash distributed to the Company, and by constructive
distributions resulting from a reduction in the Company's share of indebtedness
of the Partnership.
If the allocation of the Company's distributive share of the Partnership's
loss would reduce the adjusted tax basis of the Company's interest in the
Partnership below zero, the recognition of such loss will be deferred until such
time as the recognition of such loss would not reduce the Company's adjusted tax
basis below zero. To the extent that the Partnership's distributions, or any
decrease in the Company's share of the indebtedness of the Partnership (such
decrease being considered a constructive cash distribution to the Company),
would reduce the Company's adjusted tax basis below zero, such distributions
(including such constructive distributions) will constitute taxable income to
the Company. Such distributions and constructive distributions normally will be
characterized as capital gain, and, if the Company's interest in the Partnership
has been held for longer than the long-term capital gain holding period
(currently one year), the distributions and constructive distributions will
constitute long-term capital gain.
Depreciation Deductions Available to the Partnership. To the extent that
the Partnership has acquired or will acquire, as the case may be, the Hotels in
exchange for cash, the Partnership's initial basis in such Hotels for federal
income tax purposes generally is or will be equal to the purchase price paid by
the Partnership. The Partnership generally depreciates such depreciable hotel
property for federal income tax purposes under the modified accelerated cost
recovery system of depreciation ("MACRS"). Under MACRS, the 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 Partnership places more than 40% of its furnishings and equipment
in service during the last three months of a taxable year, a mid-quarter
34
<PAGE> 37
depreciation convention must be used for the furnishings and equipment placed in
service during that year. Under MACRS, the Partnership generally depreciates
buildings and improvements over a 39-year recovery period using a straight line
method and a mid-month convention. The Partnership has acquired some of the
Hotels in exchange for Units. In addition, the Company acquired one of the
Hotels pursuant to a merger of the corporation that owned that Hotel into the
Company. The Partnership's or the Company's, as the case may be, initial basis
in such Hotels for federal income tax purposes should be the same as the
transferor's basis in such Hotels on the date of acquisition by the Partnership.
Although the law is not entirely clear, the Partnership and the Company
generally depreciate such depreciable hotel property for federal income tax
purposes over the same remaining useful lives and under the same methods used by
the transferors. The Partnership's tax depreciation deductions are allocated
among the partners in accordance with their respective interests in the
Partnership (except to the extent that the Partnership is required under Code
section 704(c) to use a method for allocating depreciation deductions
attributable to the Contributed Hotels or other contributed properties that
results in the Company receiving a disproportionate share of such deductions).
SALE OF THE COMPANY'S OR THE PARTNERSHIP'S PROPERTY
Generally, any gain realized by the Company or the 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 the Partnership on the disposition of
the Contributed Hotels will be allocated first to the partners who contributed
those hotels under section 704(c) of the Code to the extent of such partners'
"built-in gain" on those Hotels at the time of the disposition for federal
income tax purposes. The contributing partners' "built-in gain" on the
Contributed Hotels sold will equal the excess of the Contributing Partners'
proportionate share of the book value of those Hotels as reflected in the
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 Board of Directors has adopted a policy to
which the Winston Affiliates have consented that any decision to sell a Hotel
will be made by a majority of the Independent Directors. See "Risk
Factors -- Conflicts of Interest."
The Company's share of any gain realized by the Partnership on the sale of
any property held by the 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 "-- 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 Partnership 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 the Partnership's trade or business.
PENDING TAX LEGISLATION
Both houses of the U.S. Congress have passed legislation known as the
Revenue Reconciliation Act of 1997 (the "Act") that would modify certain Code
provisions relating to REIT qualification. First, REITs no longer would be
subject to the 30% gross income test. Second, income and gain from the sale of
all instruments entered into by a REIT to hedge interest rate risk with respect
to debt incurred to acquire or carry real estate assets, including interest rate
swap or cap agreements, options, futures and forward rate contracts, and other
similar financial instruments, would be qualifying income for purposes of the
95% income test. Third, a REIT that complied with all the requirements for
ascertaining the ownership of its outstanding shares in a taxable year and did
not have reason to know that it violated the 5/50 Rule would be deemed to have
satisfied the 5/50 Rule for such taxable year. Fourth, amounts received by a
REIT with respect to real or personal property for noncustomary services
furnished by the REIT to its tenants or for operating such property
("Impermissible Tenant Service Income") would qualify as "rents from real
property" as long as the amount of Impermissible Tenant Service Income received
by the REIT with respect to a property did not exceed one percent of the REIT's
gross income from the property during the taxable year. The amount treated
35
<PAGE> 38
as received by the REIT for any service (or operation of property) would not be
less than 150% of the REIT's direct cost of such service or operation. Fifth, a
REIT could elect to retain and pay income tax on its net long-term capital gain.
In such a case, the REIT's shareholders would include in income their
proportionate share of the REIT's undistributed long-term capital gain and would
be deemed to have paid their proportionate share of the tax paid by the REIT.
Sixth, amounts includible in a REIT's income by reason of cancellation of
indebtedness would not be subject to the 95% distribution requirement. The
proposed legislation described above, if enacted in its present form, would be
effective for taxable years beginning after the date of enactment of the Act.
The Act also would reduce the tax rate on long-term capital gains
applicable to individuals from 28% to a maximum of 20%. That legislation is
proposed to be effective for sales or exchanges occurring after May 6, 1997.
There can be no assurance, however, that any of such proposed legislation will
be enacted into law.
President Clinton has proposed legislation separate from the Act that would
require a REIT to recognize built-in gain immediately upon the acquisition of an
asset with built-in gain from a large C corporation (i.e., a C corporation the
fair market value of whose stock exceeds $5 million at the time of the transfer
of the asset). If such legislation is enacted as currently written, if a REIT
failed to qualify as REIT, no relief provisions applied, and the REIT reelected
REIT status after the four-year disqualification period, upon such reelection,
the REIT would be required to recognize any built-in gain associated with its
assets. The proposed legislation, if enacted in its present form, would be
effective for transfers of assets made after December 31, 1997.
PLAN OF DISTRIBUTION
The Company may sell the Securities in or outside the United States to or
through underwriters and also may sell Securities directly to other purchasers
or through agents. The Prospectus Supplement with respect to the Securities will
set forth the terms of the offering of the Securities, including the name or
names of any underwriters, dealers or agents, the initial public offering price,
any underwriting discounts and other items constituting underwriters
compensation, any discounts or concessions allowed or reallowed or paid to
dealers, and any interdealer quotation system or securities exchanges on which
the Securities may be listed.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of Securities, underwriters may receive
compensation from the Company or from purchasers of Securities, for whom they
may act as agents, in the form of discounts, concessions, or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions, or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers, and agents that participate in the distribution
of Securities may be deemed to be underwriters, and any discounts or commissions
they receive from the Company and any profit on the resale of Securities they
realize may be deemed to be underwriting discounts and commissions under the
Securities Act. Any such underwriter or agent will be identified, and any such
compensation received from the Company will be described, in the Prospectus
Supplement relating thereto. Unless otherwise set forth in the Prospectus
Supplement relating thereto, the obligations of the underwriters or agents to
purchase the Securities will be subject to conditions precedent and the
underwriters will be obligated to purchase all the Securities described in any
applicable Prospectus Supplement if any are purchased. The initial public
offering price and any discounts or concessions allowed or reallowed or paid to
dealers may be changed from time to time.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock which is currently traded on Nasdaq. Any shares of
Common Stock sold pursuant to a Prospectus Supplement will be listed on Nasdaq
or any other exchange on which the Common Stock is then traded, subject to
official notice of issuance. The Company may elect to list any series of
Preferred Stock on Nasdaq or 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
Securities, but will not be obligated to
36
<PAGE> 39
do so and may discontinue any market making at any time without notice.
Therefore, no assurance can be given as to the liquidity of the trading market
for the Securities.
Under agreements the Company may enter into, underwriters, dealers, and
agents who participate in the distribution of Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, or be customers of, the Company in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
at the public offering price set forth in such Prospectus Supplement pursuant to
delayed delivery contracts ("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 aggregate principal amount of Securities
sold pursuant to Contracts shall be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial 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 Securities covered by its
Contracts 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)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1995 and the consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 1996 and 1995 and the period June 2, 1994
through December 31, 1994 and the financial statement schedule as of December
31, 1996; the balance sheets of the Lessee as of December 31, 1996 and 1995 and
the statements of income, shareholders' equity and cash flows for the years
ended December 31, 1996 and 1995 and the period June 2, 1994 through December
31, 1994; the combined statements of income, equity and cash flows for the year
ended December 31, 1995 of the Impac Acquisition Hotels (described in Note 1 to
those financial statements); and the combined statements of income, capital
deficiency and cash flows of the Initial Hotels (described in Note 1 to those
financial statements) for the five months ended June 2, 1994; all incorporated
by reference in this Prospectus, have been incorporated herein in reliance on
the reports of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the Securities will be passed upon for the Company by King
& Spalding, Atlanta, Georgia. In addition, the description of federal tax
consequences contained in the Prospectus under the caption "Federal Income Tax
Considerations" is based upon the opinion of Hunton & Williams, Richmond,
Virginia. King & Spalding will rely on an opinion of local counsel with respect
to all matters involving North Carolina law.
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======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 4
Risk Factors.......................... 6
Ratio of Earnings to Fixed Charges.... 15
Use of Proceeds....................... 15
Distribution Policy................... 15
Description of Capital Stock.......... 16
Restrictions on Ownership of Common
Stock .............................. 18
Federal Income Tax Considerations..... 19
Plan of Distribution.................. 36
Experts............................... 37
Legal Matters......................... 37
</TABLE>
======================================================
======================================================
[LOGO]
$200,000,000
WINSTON HOTELS, INC.
COMMON STOCK
PREFERRED STOCK
-------------------------
PROSPECTUS
-------------------------
, 1997
======================================================
<PAGE> 41
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the Securities.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee........ $60,607
Nasdaq Stock Market......................................... *
Printing and mailing........................................ *
Accountant's fees and expenses.............................. *
Blue Sky fees and expenses.................................. *
Counsel fees and expenses................................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Company, generally, limit the
liability of the Company's directors and officers to the Company and the
shareholders for money damages to the fullest extent permitted from time to time
by the laws of the State of North Carolina. The Articles of Incorporation also
provide, generally, for the indemnification of directors and officers, among
others, against judgments, settlements, penalties, fines and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities except in
connection with a proceeding by or in the right of the Company in which the
director was adjudged liable to the Company or in connection with any other
proceeding, whether or not involving action in his official capacity, in which
he was adjudged liable on the basis that personal benefit was improperly
received by him. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors and officers of the Company pursuant to the foregoing provisions or
otherwise, the Company has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
The Company has purchased director and officer liability insurance for the
purpose of providing a source of funds to pay any indemnification described
above.
ITEM 16. EXHIBITS
<TABLE>
<C> <C> <S>
4.1 -- Form of Share Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-11 (Registration No. 33-76602))
*5.1 -- Opinion of King & Spalding
*8.1 -- Form of Opinion of Hunton & Williams as to Tax Matters
12.1 -- Statement Regarding Computation of Ratios
*23.1 -- Consent of King & Spalding (included in Exhibit 5.1)
*23.2 -- Consent of Hunton & Williams (included in Exhibit 8.1)
23.3 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (included on signature page)
</TABLE>
II-1
<PAGE> 42
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (the "Securities
Act"), each filing of the registrant's annual report pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-2
<PAGE> 43
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 44
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Raleigh, State of North Carolina, on the 1st day of
August, 1997.
WINSTON HOTELS, INC.
By: /s/ ROBERT W. WINSTON, III
------------------------------------
Robert W. Winston, III
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 1st day of August, 1997. Each of the directors
and/or officers of Winston Hotels, Inc. whose signature appears below hereby
appoints Robert W. Winston, III and Philip R. Alfano, and each of them
severally, as his attorney-in-fact to sign in his name and behalf, in any and
all capacities stated below, and to file with the Commission any and all
amendments, including post-effective amendments, to this registration statement,
making such changes in the registration statement as appropriate, and generally
to do all such things in their behalf in their capacities as officers and
directors to enable Winston Hotels, Inc. to comply with the provisions of the
Securities Act of 1933, and all requirements of the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CHARLES M. WINSTON Chairman of the Board August 1, 1997
- ----------------------------------------------------- (Principal Executive
Charles M. Winston Officer)
/s/ ROBERT W. WINSTON, III Chief Executive Officer, August 1, 1997
- ----------------------------------------------------- President and Director
Robert W. Winston, III
/s/ PHILIP R. ALFANO Senior Vice President, August 1, 1997
- ----------------------------------------------------- Chief Financial Officer
Philip R. Alfano and Secretary (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ JAMES H. WINSTON Director August 1, 1997
- -----------------------------------------------------
James H. Winston
/s/ THOMAS F. DARDEN, II Director August 1, 1997
- -----------------------------------------------------
Thomas F. Darden, II
/s/ RICHARD L. DAUGHERTY Director August 1, 1997
- -----------------------------------------------------
Richard L. Daugherty
/s/ PAUL FULTON Director August 1, 1997
- -----------------------------------------------------
Paul Fulton
/s/ EDWIN B. BORDEN Director August 1, 1997
- -----------------------------------------------------
Edwin B. Borden
</TABLE>
II-4
<PAGE> 45
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
4.1 -- Form of Share Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-11 (Registration No. 33-76602))
*5.1 -- Opinion of King & Spalding
*8.1 -- Form of Opinion of Hunton & Williams as to Tax Matters
12.1 -- Statement Regarding Computation of Ratios
*23.1 -- Consent of King & Spalding (included in Exhibit 5.1)
*23.2 -- Consent of Hunton & Williams (included in Exhibit 8.1)
23.3 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (included on signature page)
</TABLE>
- ---------------
* To be filed by amendment.
II-5
<PAGE> 1
EXHIBIT 12.1
WINSTON HOTELS, INC.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
JUNE 30, 1997
<TABLE>
<CAPTION>
The Company Predecessor Entities
--------------------------------------------- -------------------------------
Years Ended June 2, January 1, Years Ended
Six Months ---------------------- 1994- 1994- --------------------
Ended December December December June December December
June, 31, 31, 31, 2, 31, 31,
1997 1996 1995 1994 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income before allocation to minority interest 8,343,932 13,787,499 8,384,855 3,063,576 558,787 1,379,887 154,629
Minority interest (610,522) (785,621) (416,658) (186,629) (357,174) (833,128) (54,629)
---------- ---------- ---------- --------- --------- --------- ---------
Net income 7,733,410 13,001,878 7,968,197 2,876,197 201,613 546,759 100,000
========== ========== ========== ========= ========= ========= =========
Fixed charges:
Interest expense 1,491,976 2,367,747 2,387,713 192,783 1,215,020 2,891,766 3,223,751
Capitalized interest 403,782 148,173 0 0 0 0 0
Amortization of LOC fees, caps and commit. fees 319,392 297,707 167,287 24,673 0 0 0
---------- ---------- ---------- --------- --------- --------- ---------
Total fixed charges 2,215,150 2,813,627 2,555,000 217,456 1,215,020 2,891,766 3,223,751
========== ========== ========== ========= ========= ========= =========
Earnings 10,155,300 16,452,953 10,939,855 3,281,032 1,773,807 4,271,653 3,378,380
========== ========== ========== ========= ========= ========= =========
Ratio of earnings to combined fixed charges 4.58 5.85 4.28 15.09 1.46 1.48 1.05
========== ========== ========== ========= ========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
Winston Hotels, Inc. on Form S-3 of our report dated January 10, 1997, on our
audits of the consolidated financial statements of Winston Hotels, Inc. as of
December 31, 1996 and 1995, and for the years ended December 31, 1996 and 1995
and the period June 2, 1994 through December 31, 1994, of our report dated
January 10, 1997, on our audit of the financial statement schedule of Winston
Hotels, Inc. as of December 31, 1996, of our report dated March 5, 1997, on our
audits of the financial statements of Winston Hospitality, Inc. as of December
31, 1996 and 1995, and for the years ended December 31, 1996 and 1995 and the
period June 2, 1994 through December 31, 1994, and of our report dated
September 21, 1994, on our audits of the combined statements of income, capital
deficiency and cash flows of the Initial Hotels (described in Note 1 to those
financial statements) for the five months ended June 2, 1994, appearing in the
1996 Annual Report on Form 10-K of Winston Hotels, Inc. filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1934. We
also consent to the incorporation by reference in this registration statement
of Winston Hotels, Inc. on Form S-3 of our report dated February 21, 1996, on
our audit of the combined statements of income, equity and cash flows of the
Impac Acquisition Hotels (described in Note 1 to those financial statements)
for the year ended December 31, 1995, appearing in the registration statement
on Form S-3 (File No. 333-03986) of Winston Hotels, Inc. filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933. We
also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
July 29, 1997
