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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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<S> <C>
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended DECEMBER 31, 1996
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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For the transition period from __________ to __________
Commission file number[0-24568]
INNKEEPERS USA TRUST
(Exact name of registrant as specified in its charter)
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<S> <C>
Maryland 65-0503831
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
306 Royal Poinciana Way, Palm Beach, Florida 33480
- --------------------------------------------- ------
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 835-1800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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Title of each class Name of each exchange on which registered
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, par value of $.01 per share
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the registrant's only class of common
stock, $.01 par value per share, as of March 21, 1997, was 22,322,817. The
aggregate market value of the common stock held by nonaffiliates of the
registrant as of March 21, 1997 was approximately $333,000,000.
Documents Incorporated by Reference
-----------------------------------
Portions of the 1996 Innkeepers USA Trust Annual Report to Shareholders to
be filed with the Securities and Exchange Commission are incorporated by
reference into Parts I and II hereof. Portions of the 1997 Innkeepers USA
Trust Proxy Statement to be filed with the Securities and Exchange Commission
within 120 days after the year covered by this Form 10-K with respect to the
Annual Meeting of Shareholders to be held on May 7, 1997 are incorporated by
reference into Part III hereof. Certain Exhibits to the Company's Registration
Statements on Form S-11 (Registration Nos. 33- 81362 and 33-95622) and on Form
S-3 (Registration No. 333-12809) are incorporated by reference into Part IV
hereto.
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TABLE OF CONTENTS
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FORM 10-K
REPORT
ITEM NO. PAGE
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 29
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters . . . . . . . . . . . . . 29
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . 31
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . 46
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . 46
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . 46
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
PART IV
Item 14. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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THIS REPORT CONTAINS AND INCORPORATES BY REFERENCE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND WORDS OF SIMILAR IMPORT. SUCH FORWARD-LOOKING
STATEMENTS RELATE TO FUTURE EVENTS AND THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY, AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY
TO BE MATERIALLY DIFFERENT FROM THE RESULTS OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. ATTENTION SHOULD BE PAID TO THE
VARIOUS FACTORS IDENTIFIED OR INCORPORATED BY REFERENCE IN THIS REPORT WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER, INCLUDING BUT NOT LIMITED TO THOSE
DISCUSSED IN THE SECTIONS ENTITLED "BUSINESS RISKS," "COMPETITION," "LEVERAGE,"
ENVIRONMENTAL MATTERS," TAX STATUS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "INTERNAL GROWTH STRATEGY" AND
"ACQUISITION STRATEGY." THE COMPANY IS NOT OBLIGATED TO UPDATE ANY SUCH
FACTORS OR TO REFLECT THE IMPACT OF ACTUAL FUTURE EVENTS OR DEVELOPMENTS ON
SUCH FORWARD-LOOKING STATEMENTS.
PART I
ITEM 1. BUSINESS
(a) GENERAL
OVERVIEW
Innkeepers USA Trust (the "Company") is a self-administered Maryland
real estate investment trust which specializes in the ownership of premier
upscale, extended-stay hotels. The Company has elected to be taxed as a real
estate investment trust ("REIT"). The Company, through a wholly-owned
subsidiary, owns an approximate 81.9% interest in Innkeepers USA Limited
Partnership (together with its subsidiaries, the "Partnership"). At December
31, 1996, the Partnership owned 32 hotels ("Hotels") with an aggregate of 3,912
rooms or suites in fourteen states, as follows:
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Number Number of Percentage of
State of Hotels Suites/Rooms Suites/Rooms
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California 6 909 23.2%
Florida 4 475 12.1
Michigan 4 404 10.3
New York 3 319 8.2
Pennsylvania 3 357 9.1
Colorado 2 284 7.3
Georgia 2 310 7.9
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Number Number of Percentage of
State of Hotels Suites/Rooms Suites/Rooms
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Massachusetts 2 264 6.8
Connecticut 1 96 2.5
Kansas 1 64 1.6
Maine 1 78 2.0
Maryland 1 176 4.5
New Jersey 1 96 2.5
Virginia 1 80 2.0
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32 3,912 100.0%
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The Company is one of the largest owners of Residence Inn by Marriott
hotels, a premium upscale, extended-stay brand. The following chart summarizes
information regarding the Hotels at December 31, 1996.
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Number of Number of
Franchise Affiliation Hotel Properties Suites/Rooms
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Extended stay hotels:
Residence Inn 20 2,323
-- -----
Limited service hotels:
Hampton Inn 8 1,059
Comfort Inn 2 227
Holiday Inn Express 1 164
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11 1,450
-- -----
Full service hotels:
Sheraton Inn 1 139
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Total 32 3,912
== =====
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The Hotels are leased to JF Hotel, Inc. (or other entities under
common ownership, collectively, the "Lessee"), pursuant to leases which provide
for rent based, in substantial part, on the room revenues of the Hotels
("Percentage Leases").
Of the 32 Hotels, the Company acquired the following 14 Hotels during
the year ended December 31, 1996:
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Hotel Number of Suites/Rooms
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Holiday Inn Express-Lexington, MA 164
Residence Inn-Cherry Hill, NJ 96
Residence Inn-Harrisburg, PA 80
Comfort Inn-Woburn, MA (A) 100
Residence Inn-Atlanta (Downtown), GA 160
Hampton Inn-Norcross, GA 150
Residence Inn-San Mateo, CA 159
Residence Inn-Silicon Valley I, CA 231
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Hotel Number of Suites/Rooms
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Residence Inn-Silicon Valley II, CA 247
Residence Inn-Denver (Downtown), CO 156
Residence Inn-Wichita (East), KS 64
Residence Inn-East Lansing, MI 60
Residence Inn-Grand Rapids, MI 96
Residence Inn-Portland, ME 78
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1,841
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(A) To be converted to a Hampton Inn
The Lessee operates 21 of the Hotels. Residence Inn by Marriott, Inc.
("Marriott"), a wholly-owned subsidiary of Marriott International, Inc.,
operates nine of the Hotels under agreements with the Lessee ("Marriott
Management Agreements"), and another unaffiliated party operates two of the
Hotels. The Hotels operated by the Lessee and the unaffiliated operator which
manages two Hotels are subject to franchise licenses ("Franchise Licenses").
The right to have the nine Marriott-managed Hotels operated as Residence Inn
hotels is contained in the Marriott Management Agreements.
RECENT DEVELOPMENTS
Acquisitions Completed in 1997-to-Date
In January 1997, the Partnership acquired a 126-suite Residence Inn in
Eden Prairie, Minnesota from an unaffiliated seller for approximately (a)
$10,630,000 in cash and (b) common units of limited partnership interest in the
Partnership ("Common Units") with an aggregate deemed value at closing of
approximately $620,000, based on the then-trading price of the Company's common
shares of beneficial interest, par value $.01 per share ("Common Shares"). In
February 1997, the Partnership acquired the 114-suite Residence Inn - Arlington,
Texas for approximately $10,500,000 in cash and the newly-developed 150-suite
Residence Inn - Addison, Texas for approximately $10,200,000 in cash and Common
Units with a deemed value at closing of approximately $4,300,000. All three of
these newly-acquired Residence Inn hotels are leased to the Lessee under
Percentage Leases and managed by Marriott under Marriott Management Agreements.
1996 Common Share Offering and Related Acquisitions
In October 1996, the Company completed an offering of 11.5 million
Common Shares and received net proceeds of approximately $117 million (the "1996
Offering"). The Company used a portion of the proceeds to complete the
acquisition of ten of the Hotels, including seven Residence Inn hotels (the
"DeBoer Hotels") acquired from affiliates of Jack P. DeBoer (the "DeBoer
Group"). The aggregate purchase prices for these ten Hotels was approximately
$142 million, paid with a combination of cash, Common Units, preferred units of
limited partnership interest in the Partnership ("Preferred Units"), and the
assumption of indebtedness (the "Assumed Indebtedness").
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DeBoer Hotels
The DeBoer Hotels were acquired from the DeBoer Group for a total
purchase price of approximately $108.5 million, consisting of (i) approximately
4,063,329 Preferred Units, which were assumed to have a value of $11.00 per
Preferred Unit, (ii) the assumption and immediate repayment of approximately
$38.4 million of outstanding mortgage indebtedness and (iii) the assumption of
the approximately $24.9 million of Assumed Indebtedness. Additionally, in
connection with the acquisition of the DeBoer Hotels by the Company, Marriott
received Common Units having a deemed value of $500,000 (the "Release Units")
in exchange for releasing the existing management contracts relating to such
Hotels.
The Preferred Units are convertible at any time into Common Units on a
one-for-one basis and, beginning in November 1998, may be redeemed for an
amount of cash equal to the then-trading value of a Common Share or, at the
option of the Company, one Common Share. Assuming full redemption of all
Common Units and Preferred Units and the issuance of Common Shares in exchange
therefor, the DeBoer Group would own approximately 14.1% of the Common Shares
currently outstanding. Following the acquisition of the DeBoer Hotels, Jack P.
DeBoer joined the Company's Board of Trustees. Marriott has the right, on or
after the first anniversary of the issuance of the Release Units, to redeem
each Release Unit for an amount of cash equal to the then-trading value of a
Common Share on the NYSE or, at the option of the Company, one Common Share.
Annual preferred distributions of $1.10 are payable on each Preferred
Unit, which may increase to up to $1.155 for each Preferred Unit, based on
increases in dividends payable on the Common Shares. Due to the potential
adverse tax consequences to members of the DeBoer Group that may result from a
sale of the DeBoer Hotels, the Company has agreed with the DeBoer Group that
for a period of up to ten years following the closing of the acquisition of the
DeBoer Hotels, (i) any taxable sale of a DeBoer Hotel will require the consent
of the applicable members of the DeBoer Group and (ii) the Company will
maintain at all times outstanding indebtedness of at least approximately $40
million, subject to reduction upon the occurrence of certain events, including
certain redemptions or taxable transfers of Preferred Units by the applicable
members of the DeBoer Group (the "Required Indebtedness"). In the event that
the Company fails to maintain the required level of indebtedness, the Company
will be liable for any resulting income tax liabilities incurred by the
applicable members of the DeBoer Group.
Marriott Management
At December 31, 1996, Marriott managed nine of the Company's Hotels,
including the DeBoer Hotels, the Residence Inn - Portland, Maine and the
Residence Inn - Atlanta (Downtown), Georgia under Marriott Management
Agreements. Marriott also manages the three Residence Inn hotels acquired in
1997-to-date, and the Company expects that Marriott will manage certain
additional Residence Inn hotels that may be acquired from Marriott or others
in the future, although no assurances can be made in this regard. Hotels
managed under Marriott Management
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Agreements are not subject to separate franchise agreements. The right to
operate these hotels as Residence Inn hotels is contained in the Marriott
Management Agreements.
The Marriott Management Agreements allow the hotels subject thereto to
be operated as Residence Inn hotels for an initial term of 13 years, provided
that the hotels maintain the standards of the Residence Inn system. The
Marriott Management Agreements may be extended by Marriott for an additional
term if the Company has achieved a specified return on its initial investment.
Marriott may terminate one or more of the Marriott Management Agreements upon
the occurrence of certain events, including the Lessee's failure to make any
payment or perform other covenants under the Marriott Management Agreements or
a bankruptcy of the Lessee or the Company. If a Marriott Management Agreement
is terminated for any reason other than a default by Marriott, the hotel to
which the agreement relates will not be entitled to operate thereafter as a
Residence Inn. Marriott may be terminated as manager of a hotel if certain
performance criteria set forth in the relevant Marriott Management Agreement
are not met in any two consecutive years beginning with the third anniversary
of the acquisition of the hotel, subject to certain exceptions and cure rights.
In that event, the Lessee may enter into a then-current form of Residence Inn
franchise license and, subject to Residence Inn system requirements and to the
Lessee being a then-approved franchisee, continue to operate the hotel as a
Residence Inn hotel.
The Lessee is responsible for making all payments to Marriott under
the Marriott Management Agreements. Under each Marriott Management Agreement,
the Lessee is required to pay to Marriott a base management fee, a system fee
and a marketing fee equal to specified percentages of certain revenues at the
relevant Hotel, and an incentive management fee equal to a specified percentage
of the Lessee's annual net operating income with respect to the Hotel, after
payment of Rent under the Percentage Lease for the Hotel.
NYSE
The Common Shares were listed for quotation on The Nasdaq Stock Market
until September 24, 1996 under the symbol "NKPR." The Company's Common Shares
were listed on the NYSE under the symbol "KPA" commencing September 25, 1996.
Line of Credit
In March 1996, the Company's collateralized line of credit ("Line of
Credit") with Nomura Asset Capital Corporation ("Lender") was increased to $70
million from $50 million. Additionally, the interest rate on the line of
credit was reduced from 225 to 175 basis points over the 30 day LIBOR rate.
The Line of Credit matures in March 1997. The Company has obtained a
commitment from the Lender to amend and expand the Line of Credit. The maximum
amount available under the amended Line of Credit will be $190 million,
including a collateralized facility in the maximum principal amount of $150
million and an uncollateralized facility in the maximum principal amount of $40
million. The maturity date on the amended Line of Credit would be extended to
March 2001. The interest rate on the amended Line of
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Credit would remain at 175 basis points over the 30 day LIBOR rate for the
collateralized facility and would be 195 basis points over the 30 day LIBOR
rate for the uncollateralized facility. The interest rate on the
uncollateralized facility may be reduced to 185 basis points over 30 day LIBOR
if the Company completes in the future certain permanent financing with the
Lender in the minimum principal amount of $50 million.
Investment Agreement of Lessee Shareholders.
The shareholders of the Lessee, Jeffrey H. Fisher, Chairman of the
Company, and Frederic Shaw, President of the Lessee, have agreed that from and
after the closing of the 1996 Offering they or their Affiliates will invest 75%
of the Lessee's net income (after distributions to pay taxes, establishment of
necessary working capital reserves, the payment of rent under the Percentage
Leases for the Hotels and the payment of management and other fees payable
under management agreements) in Common Shares (or Common Units, if necessary to
preserve the Company's REIT status). The Common Shares (or Common Units) will
be acquired either directly from the Company at the then-current market price
or in the open market, at the election of the Company's independent trustees
(the "Independent Trustees"). Messrs. Fisher and Shaw have agreed to hold any
such Common Shares (or Common Units) for at least one year after the date of
the applicable purchase. At December 31, 1996, the Lessee owned a total of
83,050 Common Shares in addition to the 418,595 Common Shares and Common Units
and the 84,608 Common Shares and Common Units beneficially owned by Mr. Fisher
and Mr. Shaw, respectively.
Second Permanent Loan
In March 1997, the Company fixed the interest rate on $42,000,000 of
borrowings previously outstanding under the variable interest rate Line of
Credit, by refinancing such amounts as a permanent loan from the Lender
("Permanent Loan"). The Permanent Loan bears interest at an 8.15% fixed annual
rate. Interest on the outstanding principal balance of the Permanent Loan will
begin to accrue at 13.15% if the outstanding principal balance is not paid in
full beginning after the 12th anniversary of the closing of the Permanent Loan.
The Permanent Loan may be prepaid in full without penalty on or after the 12th
anniversary of the closing of the loan, when the Company expects to pay off in
full any remaining principal balance and accrued interest on the Permanent
Loan. The Permanent Loan has scheduled principal amortization over a
twenty-year term commencing on the second anniversary of the closing of the
loan. The Permanent Loan is collateralized by mortgages on eight Hotels.
Strategic Alliance
The Company has entered into an alliance with Western International,
the nation's largest developer of Residence Inns and other Marriott brand
hotels. In conjunction with the alliance, the Company may have the opportunity
to acquire certain properties developed by Western International. The Company
acquired the Residence Inn-Addison, Texas and the Residence Inn-Arlington,
Texas in February 1997 from affiliates of Western International.
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Shelf Registration
In January 1997, the Company filed a shelf registration with the
Securities and Exchange Commission that will enable the Company to offer up to
an aggregate $250 million of securities, including Common Stock and Preferred
Stock in the future. The Company intends to use the net proceeds from the sale
of securities for general corporate purposes, which may include the acquisition
of additional hotel properties, making improvements to existing hotel
properties and the repayment of indebtedness.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT
The Company is in the business of acquiring equity interests in hotel
properties. See the Consolidated Financial Statements and notes thereto
included in Item 8 on this Form 10-K for certain financial information required
to be included in response to this Item 1.
(c) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company is a self-administered Maryland REIT which owned equity
interests in the 32 Hotels with an aggregate of 3,912 rooms as of December 31,
1996. Innkeepers Financial Corporation, a wholly-owned subsidiary of the
Company, owns an approximate 81.9% interest in and is the sole general partner
of Innkeepers USA Limited Partnership. The Hotels are owned both by Innkeepers
USA Limited Partnership directly and, as required by lenders or necessary to
maintain financing flexibility, in various subsidiary partnerships ("Subsidiary
Partnerships"). The Subsidiary Partnerships are owned 1% by either the Company
directly (in the case of one Subsidiary Partnership) or wholly-owned
subsidiaries of the Company, which serve as the sole general partners, and 99%
by Innkeepers USA Limited Partnership, which serves as the sole limited
partner. Innkeepers USA Limited Partnership and the Subsidiary Partnerships
are referred to herein collectively as the "Partnership."
In order for the Company to qualify as a REIT, neither the Company nor
the Partnership can operate hotels. Therefore, the Partnership leases the
Hotels to the Lessee pursuant to the Percentage Leases. The Percentage Leases
are designed to allow the Company to participate in growth in room revenues by
providing that a portion (ranging from approximately 68% to 70%) of each
Hotel's room revenues in excess of specified amounts will be paid by Lessee as
percentage rent.
INTERNAL GROWTH STRATEGY
The Company seeks to enhance shareholder value through internal growth
(i.e., increasing average daily rate and/or occupancy at the Hotels) primarily
by seeking to increase Cash Available for Distribution resulting from increased
revenue generated by (i) the Lessee's direct marketing programs and sales
management policies and procedures pursuant to the
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Percentage Leases, including its oversight of sales and marketing efforts at
Hotels by third-party operators, (ii) the management skill and broad-based
hotel operating experience of Marriott, (iii) selective renovation of the
Hotels, (iv) the possible development of new hotels on a selected basis in the
future and (v) the possible rebranding and repositioning of existing hotels on
a limited and selected basis.
Percentage Leases
The Percentage Leases are designed to allow the Company to participate
in growth in revenue at the Hotels. Under the Percentage Leases, once
applicable room revenues reach certain specified levels ("Revenue Break
Points") (subject to annual inflation adjustments), the Company will receive
between approximately 68% to 70% of incremental room revenues at the Hotels
("Percentage Rent"). For the year ended December 31, 1996, room revenues from
each Hotel exceeded the Revenue Break Points for the payment of the higher tier
Percentage Rent under the applicable Percentage Lease. The Percentage Leases
provide that annual Base Rent and the Revenue Break Points for the payment of
Percentage Rent will be adjusted annually based on changes in the CPI.
Sales Management
The Lessee uses market-oriented sales management programs to
coordinate, direct and manage the sales activities of personnel located at each
Hotel it operates or oversees. Weekly sales reports are generated by each
salesperson through the daily input of data that identifies all sales related
activities which have taken place during the day (e.g., appointments, sales
calls, direct mailings, incoming calls) and the results of such actions (e.g.,
appointments made, literature sent, rooms reserved). Each salesperson also
inputs any comments made by prospective or existing customers, the potential
for new or continued business and the timing of the follow-up action required.
Additionally, sales reports permit management to promptly evaluate a
salesperson's productivity as measured by the quantity of sales calls, sales
call results and number of group bookings. These sales reports also allow
comparisons of the ongoing sales efforts at the applicable Hotel to the
marketing and business plan established for each Hotel and allow management to
adapt the marketing and business plan accordingly. The third-party managers,
including Marriott, use focused, well-developed sales management programs at
the Hotels operated by those managers. The Company employs three regional
managers to oversee sales and marketing efforts at the Lessee-operated Hotels,
and to review those efforts at Hotels managed by third-parties.
Capital Improvements, Renovation and Refurbishment
The Percentage Leases require the Lessee to maintain the Hotels in a
condition that complies with their respective Franchise Licenses and the
Marriott Management Agreements, among other requirements. In addition, the
Company may upgrade the Hotels as needed to meet competitive conditions and
preserve asset quality and will renovate Hotels when the Company believes the
investment in renovations will provide an attractive return to the Company
through
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increased revenue under the Percentage Leases or is otherwise in the best
interests of the Company.
This strategy is designed to enhance internal revenue growth, to
preserve and increase the value of each Hotel and to maintain or increase each
Hotel's market share. The Company will schedule renovations to the Hotels in
order to implement this strategy and as otherwise may be required by a
particular franchisor in accordance with the applicable Franchise License or by
Marriott pursuant to the Marriott Management Agreements.
The Percentage Leases obligate the Partnership to make available to
the Lessee an amount equal to 4% of room revenue, per quarter, for use by the
Lessee (or Marriott, under the Marriott Management Agreements) to repair or
replace furniture, fixtures and equipment at the Hotels. The Lender has
required that the amount made available for such purposes for the eight Hotels
securing the Permanent Loan be 5% of room revenue of such Hotels. The
Partnership's obligation is cumulative and carries forward to the extent that
such amounts are not used by the Lessee (or Marriott).
ACQUISITION STRATEGY
The Company seeks to acquire additional hotels, primarily in the
premier upscale extended-stay segment and underperforming hotels that can be
renovated and converted to premium mid-price franchise brands. In particular,
the Company has increasingly emphasized the acquisition of hotel portfolios in
order to capitalize on the Company's efficiency and experience in acquisition
analysis and transaction structuring and to enable the Company to more rapidly
expand its hotel portfolio.
Target Markets. In general, the Company focuses on acquisitions in
markets with the following characteristics:
. high barriers to entry, such as the scarcity or high cost of land
for additional development, restrictive zoning, stringent local
development laws, extended permit-approval processes, and a
relatively low supply of competing hotels;
. historically stable demand generators, such as major corporate
office or retail complexes, airports, major universities and
medical centers with convenient access to major thoroughfares and
airports; and
. proximity to the Company's existing Hotels, where the Company may
draw upon its knowledge of local market conditions and develop
certain economies of scale.
Premier Upscale Extended-Stay Hotels. The Company has focused and
will continue to focus its acquisition strategy on premier upscale
extended-stay hotels primarily as a result of the following factors:
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. current social and economic changes resulting from the increased
number of corporate reorganizations and trends toward downsizing
and out-sourcing of various functions, the increased mobility of
the workforce and technological improvements, which have allowed
businesses to relocate outside of large metropolitan areas, all of
which have increased the demand for extended-stay hotels;
. the demand for hotel rooms by guests who stay longer than five
consecutive room nights has substantially exceeded the number of
currently existing extended-stay hotel rooms, according to industry
sources;
. extended-stay hotels offer a more consistent revenue stream due to
generally higher average occupancy and longer average stays by
guests than in traditional hotels; and
. the strong performance of the Company's existing portfolio of
premier upscale extended-stay hotels, which generated revenue per
available room for the applicable period, calculated by dividing
room revenue by available rooms ("REVPAR") growth of 11.2% for the
year ended December 31, 1996.
Underperforming Hotels. The Company will consider investments in
hotels with the potential for refurbishment and repositioning, on a limited and
selected basis, which meet the following criteria:
. poorly managed hotels which have the potential for increased
performance after the implementation of quality management and
association with a national franchisor;
. hotels in deteriorated physical condition which could benefit
significantly from renovations; and
. hotels in attractive locations that the Company believes could
benefit significantly by changing franchises to a brand the Company
believes is superior, such as Hampton Inn and Courtyard by
Marriott.
Turnkey Development
The Company may also seek to obtain certain of the benefits of
development without incurring certain of the risks of development, by (a)
acquiring newly-developed hotels or (b) contracting with developers to build
hotels that the Company will buy upon completion. The Company has established
and is pursuing relationships with certain developers, such as Western
International, who have established good relationships with the owners of the
Company's preferred hotel brands, including Marriott. The Company would seek
established developers who have demonstrated, among other things, the ability
to (a) find attractive sites which, when developed, would meet the Company's
acquisition criteria and (b) manage the franchise brand approval and
development processes.
10
<PAGE> 13
PROPERTY OPERATIONS
The Lessee
The Company believes that the quality of the on-site hotel operators
is important to the future growth in Percentage Lease revenue from the Hotels.
The Lessee leases all of the Hotels pursuant to the Percentage Leases and
operates 21 of the Hotels. Marriott operates twelve Residence Inn Hotels
(including three Hotels purchased in 1997) pursuant to the Marriott Management
Agreements. Marriott is the largest operator of upscale extended-stay hotels
in the U.S., with 108 extended-stay hotels under management as of August 9,
1996. The Company believes that Marriott's management of Hotels will enable
the Company to realize the benefits of Marriott's resources and broad-based
hotel operations experience in order to enhance the Company's ability to grow.
The Lessee is owned by Mr. Fisher and Mr. Shaw and employs currently
approximately 1,150 people. Under the Percentage Leases, the Lessee generally
is required to perform or provide for all operational and management functions
necessary to operate the Hotels. Such functions include accounting, periodic
reporting, ordering supplies, advertising and marketing, maid service, laundry,
and repair and maintenance. The Lessee employs three regional managers who
oversee the operation of all of the Hotels. The Lessee is entitled to all
revenue from the Hotels after payment of Rent under the Percentage Leases and
other operating expenses, including any management fees payable to third-party
managers.
The Hotels not operated under Marriott Management Agreements are
operated under franchise agreements and are licensed as Hampton Inn, Residence
Inn, Sheraton Inn, Comfort Inn or Holiday Inn Express hotels. The Partnership
has paid or will pay the cost of obtaining or transferring franchise license
agreements to the Lessee. The franchise agreements require the payment of fees
based on a percentage of hotel room revenue. These fees are paid by the
Lessee. The franchisors periodically inspect their licensed hotels to confirm
adherence to their operating standards. See "Properties -- The Percentage
Leases" for further information on the Percentage Leases.
COMPETITION
For Guests
The hotel industry, and the upscale extended-stay and mid-price
segments of the lodging market in which the Company operates, is highly
competitive. Competitive factors within the industry include room rates,
quality of accommodations, name recognition, service levels, reputation,
reservation systems, convenience of location and the supply and availability of
alternative lodging. The Hotels compete with other existing and new hotels in
their geographic markets. The extended-stay and mid-price segments of the
hotel industry have become more competitive recently, as several new
competitors have entered the market. Many of the Company's competitors have
substantially greater marketing and financial resources than the
11
<PAGE> 14
Company and the Lessee. Each of the Hotels is located in a developed area that
includes other hotels, many of which are competitive with the Hotels in their
locality. The number of competitive hotels in a particular area could have a
material adverse effect on the revenues derived from the Hotels or hotels
acquired in the future. Further, there can be no assurance that new or
existing competitors will not significantly reduce their rates or offer greater
convenience, services or amenities or significantly expand or improve hotels in
the market in which the Company competes or markets in which it will compete,
thereby materially adversely affecting the Company's business and results of
operations.
For Acquisitions
Competition exists for investment opportunities in upscale
extended-stay and mid-price hotels from entities organized for purposes
substantially similar to the Company's objectives as well as other purchasers
of hotels. The Company may be competing for such hotel investment
opportunities with entities that have substantially greater financial resources
than the Company or better relationships with franchisors, sellers or lenders.
These entities may also generally be able to accept more risk than the Company
prudently can manage. Competition may generally reduce the number of suitable
hotel investment opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell, thereby increasing prices.
BUSINESS RISKS
Dependence on Payments under Percentage Leases; Lack Of Control
Certain rules relating to the qualification of a REIT prohibit a REIT
from operating hotels. Therefore, the Company leases the Hotels to the Lessee
pursuant to the Percentage Leases. The Company's primary source of revenue is
rent payments under the Percentage Leases. The Company must rely on the Lessee
and any third-party managers retained by the Lessee, such as Marriott and TMH
Hotels, Inc. ("TMH"), an unaffiliated operator that manages two of the Hotels,
to operate effectively the Hotels in a manner that generates sufficient cash
flow to enable the Lessee to make the rent payments under the Percentage
Leases. Ineffective operation of the Hotels may result in the Lessee being
unable to pay rent to the Company, including the higher tier percentage rent
necessary for the Company to fund its current level of distributions to
shareholders.
The Company cannot operate the Hotels or participate in the decisions
affecting the daily operations of the Hotels. Other than as set forth in the
applicable Percentage Lease, the Company does not have the authority to require
a Hotel to be operated in a particular manner, or to govern any particular
aspect of its operation (e.g., setting room rates). Thus, even if the
Company's management believes a hotel is being operated inefficiently or in a
manner that does not result in a maximization of Rent to the Company, the
Company cannot require a change in the method of operation. The Company is
limited to seeking redress only if the Lessee violates the terms of the
Percentage Leases, and then only to the extent of the remedies set forth
therein.
12
<PAGE> 15
Growth Risks - Availability of Capital; Risks of Rapid Growth;
Dependence on Third Party Managers
The ability of the Company to implement its growth strategy depends on
access to capital necessary to invest in additional hotels through the use of
borrowings, subsequent issuances of Common Shares or other securities or
operating cash flow. The Company currently has an arrangement with one lender
to provide debt financing.
The Company's ability to grow is also dependent upon the ability of
the Lessee and any third-party manager retained by the Lessee, such as
Marriott, to manage effectively the Hotels, as well as any additional hotels in
which the Company invests. The Lessee's or third-party managers' ability to
operate additional hotels under Percentage Leases and/or management agreements
with Marriott or other third parties including TMH, 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 to operate in new geographic
locations. There can be no assurance that the Lessee or its third-party
managers will effectively operate the Hotels. In the event that the Lessee and
its third-party managers fail to effectively operate the Hotels, the Company's
internal growth strategy and acquisition strategy would be more difficult to
achieve and, therefore, Cash Available for Distribution to shareholders could
be adversely affected.
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels in general, including the Hotels, have an ongoing need for
renovations and other capital improvements, particularly in older structures,
including periodic replacement of furniture, fixtures and equipment at the
hotels. Under the terms of the Percentage Leases, the Company is obligated to
pay the cost of certain capital expenditures at the Hotels and pay for
furniture, fixtures and equipment. If these expenses exceed the Company's
estimate, the additional cost could have an adverse effect on the cash
available for distribution to shareholders. In addition, the Company may
acquire hotels in the future that require significant renovation. Renovation
of hotels involves certain risks, including 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
in the local geographic market.
Operating Risks
The Hotels are subject to all operating risks common to the hotel
industry. The hotel industry has experienced volatility in the past, as have
the Hotels, and there can be no assurance that such volatility will not occur
in the future. These risks include, among other things, economic recessions;
competition from other hotels; over-building in the hotel industry which has
adversely affected occupancy, ADR and REVPAR; increases in operating costs due
to inflation and other factors, 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; strikes and other
labor disturbances of hotel employees for
13
<PAGE> 16
hotels acquired by the Company in the future; increases in energy costs and
other expenses of travel; and adverse effects of general and local economic
conditions. These factors could decrease room revenue of the Hotels and
adversely affect the Lessee's ability to make payments of rent under the
Percentage Leases to the Company, including payments at the higher tier
percentage rent levels.
Risks of Operating Hotels under Franchise Licenses and Marriott
Management Agreements
The continuation of the franchise licenses under which certain of the
Hotels are operated is subject to specified operating standards and other terms
and conditions. The franchisors that have issued or will issue the franchise
licenses periodically inspect their licensed hotels to confirm adherence to
their operating standards. The failure of the Partnership or the Lessee to
maintain such standards respecting a Hotel or to adhere to such other terms and
conditions could result in the loss or cancellation of a franchise license.
The Marriott Management Agreements will allow the Hotels subject thereto to be
operated as Residence Inn hotels so long as the Company does not breach its
obligations under the Percentage Leases relating to such Hotels. Continued
operation of such Hotels as Residence Inn hotels also requires the Company to
make capital improvements as required by Marriott to maintain the hotel in
accordance with system standards. It is possible that a franchisor or
Marriott, as applicable, could condition the continuation of a franchise
license or a Marriott Management Agreement, as applicable, on the completion of
capital improvements which the Board of Trustees determines are too expensive
or otherwise not economically feasible in light of general economic conditions
or the operating results or prospects of the affected Hotel. In that event,
the Board of Trustees may elect to allow the franchise license or Marriott
Management Agreement to lapse or be terminated. In addition, when the term of
a franchise license or a Marriott Management Agreement expires, the franchisor
or Marriott has no obligation to issue a new franchise license or management
agreement, as applicable, for the Hotel. The loss of a franchise license or a
Marriott Management Agreement could have a material adverse effect upon the
operations or the underlying value of the Hotel covered by the franchise
license or a Marriott Management Agreement because of the loss of associated
name recognition, marketing support and centralized reservation systems
provided by the franchisor or Marriott. The loss of a franchise license or
Marriott Management Agreement for one or more of the Hotels could also have a
material adverse effect on rent under the Percentage Leases and Cash Available
for Distribution to shareholders.
Investment Concentration in Single Industry; Emphasis on Upscale
Extended-Stay Market Segment; and Emphasis on Residence Inn and Hampton Inn
Hotels
The Company's current growth strategy is to acquire operating hotels,
primarily premier upscale extended-stay hotels. The Company will not seek to
invest in assets selected to reduce the risks associated with an investment in
the hotel industry, and is subject to risks inherent in concentrating
investments in a single industry and in a single market segment within that
industry. The Company intends to emphasize the acquisition of Residence Inn
hotels in its
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<PAGE> 17
acquisition strategy. The Company will be subject to risks inherent in
concentrating investments in any franchise brand, in particular the Residence
Inn and the Hampton Inn brands, such as a reduction in business following any
adverse publicity related to a brand, which could have an adverse effect on the
Company's Rent under the Percentage Leases and Cash Available for Distribution
to shareholders.
Concentration of Investments in California, Florida and Michigan
Six of the 32 Hotels are located in California, and four are located
in each of Florida and Michigan. The concentration of the Company's
investments in California, Florida and Michigan could result in adverse events,
or conditions which affect those areas in particular, such as economic
recessions and natural disasters, having a more significant negative effect on
the operations of the combined Hotels, and ultimately cash distributions to
shareholders of the Company, than if the Company's investments were more
geographically diverse.
Ownership Limitation
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding shares of beneficial interest may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities). Furthermore, if any shareholder or group of
shareholders of the Lessee owns, actually or constructively, 10% or more of the
shares of beneficial interest of the Company, the Lessee could become a
related-party tenant of the Company and the Partnership, which likely would
result in loss of REIT status for the Company. For the purpose of preserving
the Company's REIT qualification, the Company's Declaration of Trust prohibits
direct or indirect ownership (taking into account applicable ownership
provisions of the Code) of more than 9.8% of the outstanding Common Shares or
any other class of outstanding shares of beneficial interest by any shareholder
or group (including affiliates of Mr. Fisher) subject to adjustment under
certain circumstances (the "Ownership Limitation"). Generally, the shares of
beneficial interest owned by related or affiliated owners will be aggregated for
purposes of the Ownership Limitation. The Board of Trustees has waived the
Ownership Limitation in the case of a specific mutual fund investment family on
one occasion. Any transfer of shares of beneficial interest that would prevent
the Company from continuing to qualify as a REIT under the Code will be void ab
initio, the intended transferee of such shares will be deemed never to have had
an interest in such shares, and such shares will be designated "Shares-in-
Trust." Further, the Company shall be deemed to have been offered Shares-in-
Trust for purchase at the lesser of the market price (as defined in the
Declaration of Trust) on the date the Company accepts the offer and the price
per share in the transaction that created such Shares-in-Trust (or, in the case
of a gift, devise or non-transfer event (as defined in the Declaration of
Trust), the market price on the date of such gift, devise or non-transfer
event). Therefore, the recordholder of shares of beneficial interest in excess
of the Ownership Limitation will experience a financial loss when such shares
are redeemed, if the market price falls between the date of purchase and the
date of redemption.
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<PAGE> 18
General Risks of Investing in Real Estate
The Hotels are subject to varying degrees of risk generally incident
to the ownership of real property. 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 hotels, 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, hurricanes and other natural
disasters (which may result in uninsured losses), acts of war, adverse changes
in zoning laws, and other factors which are beyond the control of the Company.
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions is limited. In particular, the Company may not sell any of the
DeBoer Hotels in a taxable transaction for a period of up to ten years
following the closing of the Offering, without the consent of the applicable
members of the DeBoer Group. Ceratin provisions of the Marriott Management
Agreement may also limit or delay the Company's ability to sell or refinance
the Hotels subject to such agreement.
Each Percentage Lease specifies comprehensive insurance to be
maintained on each of the Hotels, including liability, property and casualty
and extended coverage. Management of the Company believes that such specified
coverage is of the type and amount customarily obtained by owners of hotels
similar to the Hotels. Percentage 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 and hurricanes,
that may be uninsurable or not economically insurable and which may impact
certain of the Hotels.
All six of the Hotels in California are located in areas that are
subject to earthquake activity. These Hotels are located in areas of high
seismic risk and were constructed under pre-1985 building codes. No assurance
can be given that an earthquake would not render significant damage to the
Hotels that have been constructed in compliance with more recent building
codes, or are in areas of lower seismic risk. Additionally, areas in Florida
where four of the Hotels are located may experience hurricane or high-wind
activity. The Company has earthquake insurance policies on the Hotels located
in California and hurricane insurance policies on the Hotels located in
Florida. The Company's Board of Trustees has used and will use its discretion
in determining amounts, coverage limits and deductibility provisions for
insurance, with a view to maintaining appropriate insurance coverage on the
Company's investments at a reasonable cost and on suitable terms, and may from
time to time elect not to carry earthquake or hurricane insurance. This may
result in insurance coverage that, in the event of a substantial loss, would
not be sufficient to pay the full current market value or current replacement
cost of the Company's lost investment. Inflation, changes in building codes
and ordinances, environmental considerations, and other factors also might make
it not feasible to use insurance proceeds to
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<PAGE> 19
replace a hotel after it 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 a Hotel.
Conflicts of Interest
Conflicts of interest exist between the Company, the Lessee and Mr.
Fisher (Chairman of the Board of Trustees and President of the Company and the
majority shareholder of the Lessee) with respect to the negotiation and
enforcement of the terms of the Percentage Leases. Conflicts also exist
related to possible adverse tax consequences to Mr. Fisher and his affiliates
upon a sale, refinancing or prepayment of indebtedness secured by certain
Hotels contributed to the Company by his affiliates. Additionally, the Company
relies substantially on Mr. Fisher and conflicting demands on his time occur,
which could lead to decisions which do not reflect solely the interests of the
Company's shareholders. Mr. Fisher and his affiliates may develop new hotels,
subject to certain limitations, which may materially affect the amount of time
Mr. Fisher has available to devote to the affairs of the Company. Hotels
developed by Mr. Fisher and his affiliates could compete with the Hotels or
hotels acquired in the future by the Company.
Mr. DeBoer, who is the largest shareholder of the Company, on a fully
diluted basis, and who serves as a Trustee of the Company, and certain of his
affiliates have in the past, and continue to be, involved in the development of
hotels, including extended-stay hotels. Mr. DeBoer is the President, Chairman
of the Board and a major shareholder of Candlewood Hotel Company, Inc.
("Candlewood"), a public hotel company that is the owner, operator and
franchisor of Candlewood hotels, an economy extended-stay hotel chain recently
founded by Mr. DeBoer. Hotels developed by Mr. DeBoer and his affiliates,
including Candlewood hotels, may compete with the Company's hotels for guests,
and other hotel companies with which Mr. DeBoer is affiliated, including
Candlewood, may compete with the Company for acquisition opportunities.
Accordingly, the interests of the Company and Mr. DeBoer could be different in
connection with matters relating to the Company's Hotels or proposed
acquisitions that are competitive with hotels owned or being considered for
acquisition or development by Mr. Deboer and his Affiliates.
Due to the potential adverse tax consequences to the DeBoer Group that
may result from the sale of or refinancing or prepayment of indebtedness
associated with the DeBoer Hotels, the Company has agreed with the DeBoer Group
that, for a period of up to ten years following the closing of the acquisition
of the DeBoer Hotels, (i) any taxable sale of a DeBoer Hotel will require the
consent of the applicable members of the DeBoer Group, which may cause the
Company to be unable to sell some or all of the DeBoer Hotels in circumstances
in which it would be advantageous to do so, and (ii) the Company will maintain
the Required Indebtedness.
LEVERAGE
To the extent the Company continues to incur debt, its debt service
requirements will reduce Cash Available for Distribution to shareholders.
Variable rate debt, such as the Line of
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<PAGE> 20
Credit, creates higher debt service requirements if interest rates increase,
which may decrease Cash Available for Distribution to shareholders. There can
be no assurances that the Company will be able to meet its debt service
obligations and, to the extent that it cannot, the Company risks the loss of
some or all of its assets, including the Hotels securing such debt, to
foreclosure. Changes in economic conditions could result in higher interest
rates on variable rate debt, including borrowings under the Line of Credit,
reduce the availability of debt financing generally or at rates deemed
favorable to the Company, reduce Cash Available for Distribution to
shareholders and increase the risk of loss upon a sale or foreclosure. While
it has not done so to date, the Company also may obtain one or more forms of
interest rate protection on variable rate debt (e.g., swap agreements or
interest rate cap contracts) and will consider additional long-term fixed-rate
financing to further hedge against the possible adverse effects of interest
rate fluctuations. Adverse economic conditions could cause the terms on which
borrowings become available to be less favorable than at present. 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 Hotels or lose one or more Hotels to foreclosure, either
of which could result in a material financial loss to the Company.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner
or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on such property. Such
laws often impose such liability without regard to whether the owner knew of,
or was responsible for, the presence of hazardous or toxic substances.
Furthermore, a person that arranges for the disposal or transports for disposal
or treatment of a hazardous substance at a property owned by another may be
liable for the costs of removal or remediation of hazardous substances released
into the environment at that property. The costs of remediation or removal of
such substances may be substantial, and the presence of such substances, or the
failure to promptly remediate such substances, may adversely affect the owner's
ability to sell real estate or to borrow using such real estate as collateral.
In connection with the ownership and operation of the Hotels, the Company, the
Partnership or the Lessee, as the case may be, may be potentially liable for
any such costs.
Phase I environmental site assessments ("ESAs") were obtained on all
Hotels acquired by the Partnership. The Company intends to obtain an ESA on
any other hotel acquired in the future. The ESAs are and were intended to
identify potential environmental contamination for which the Hotels may be
responsible. The ESAs included historical reviews of the Hotels, reviews of
certain public records, preliminary investigations of the sites and surrounding
properties, screening for the presence of hazardous substances, toxic
substances and underground storage tanks, and the preparation and issuance of a
written report. The ESAs did not include invasive procedures, such as soil
sampling or ground water analysis.
The ESAs have not revealed any environmental liability or compliance
concerns that the Company believes would have a material adverse effect on the
Company's business, assets, results of operations or liquidity, nor is the
Company aware of any such liability. Nevertheless,
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<PAGE> 21
it is possible that these ESAs do not reveal all environmental liabilities or
that there are material environmental liabilities or compliance concerns of
which the Company is unaware. Moreover, no assurances can be given that (i)
future laws, ordinances or regulations will not impose any material
environmental liability, or (ii) the current environmental condition of the
Hotels will not be affected by the condition of the properties in the vicinity
of the Hotels (such as the presence of leaking underground storage tanks) or by
third parties unrelated to the Partnership, the Lessee or the Company.
TAX STATUS
The Company has elected to be taxed as a REIT under Sections 856-860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its short taxable year ended December 31, 1994. If the Company qualifies for
taxation as a REIT, with certain exceptions, the Company will not be subject to
federal income tax at the Company level on its taxable income that is
distributed to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. Failure to
qualify as a REIT will render the Company subject to federal income tax
(including any applicable minimum tax) on its taxable income at regular
corporate rates and distributions to the holders of Common Shares in any such
year will not be deductible by the Company. If the Internal Revenue Service
were to challenge successfully the tax status of the Partnership or any
Subsidiary Partnership as a partnership for federal income tax purposes, the
Partnership or Subsidiary Partnership would be taxable as a corporation. In
such event, the Company would likely cease to qualify as a REIT for a variety
of reasons. Although the Company does not intend to request a ruling from the
Service as to its REIT status or the partnership status of the Partnership or
Subsidiary Partnerships, the Company has, in the past, obtained the opinion of
its legal counsel that, as of the date of the opinion, the Company qualifies as
a REIT. The opinion was based on certain assumptions and representations and
is not binding on the Service or any court. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain federal, state and
local taxes on its income and property.
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<PAGE> 22
ITEM 2. PROPERTIES
The following tables set forth certain information with respect to the
Hotels that were owned by the Company as of December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
NUMBER PROFORMA PROFORMA
YEAR OF SUITES/ ROOM LEASE
OPENED ROOMS REVENUE(1) PAYMENT(1) OCCUPANCY ADR REVPAR
------ ----- ---------- ---------- --------- --- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Residence Inn:
Fremont, CA . . . . . . . . . . . . 1985 80 $2,611,000 $1,205,000 85.95% $103.74 $89.16
Mountain View (Palo Alto), CA . . . 1985 112 4,560,000 2,645,000 92.55 120.19 111.24
San Jose, CA . . . . . . . . . . . 1986 80 2,826,000 1,352,000 93.65 103.07 96.53
San Mateo, CA . . . . . . . . . . . 1985 159 5,716,000 2,956,000 92.64 106.02 98.22
Silicon Valley I, CA . . . . . . . 1983 231 7,711,000 4,313,000 91.74 99.42 91.21
Silicon Valley II, CA . . . . . . . 1985 247 8,254,000 4,587,000 91.28 100.02 91.30
Denver (Downtown), CO . . . . . . . 1982 156 4,027,000 1,693,000 86.29 81.73 70.52
Denver (South), CO . . . . . . . . 1981 128 3,623,000 1,779,000 91.33 84.67 77.33
Windsor, CT . . . . . . . . . . . . 1986 96 2,538,000 1,042,000 82.10 87.97 72.22
Atlanta (Downtown), GA . . . . . . 1996 160 (2) 1,260,000(2) (2) (2) (2)
Wichita East, KS . . . . . . . . . 1981 64 1,506,000 578,000 81.10 79.30 64.31
Portland, ME . . . . . . . . . . . 1996 78 (2) 430,000(2) (2) (2) (2)
East Lansing, MI . . . . . . . . . 1984 60 1,385,000 581,000 85.16 74.08 63.09
Grand Rapids, MI . . . . . . . . . 1984 96 2,113,000 924,000 84.13 71.47 60.13
Troy (Central), MI . . . . . . . . 1986 152 4,198,000 2,132,000 93.35 80.83 75.46
Troy (Southeast), MI . . . . . . . 1985 96 2,530,000 1,188,000 85.83 83.88 71.99
Cherry Hill, NJ . . . . . . . . . . 1989 96 2,884,000 1,315,000 89.15 92.07 82.07
Binghamton, NY . . . . . . . . . . 1987 72 1,848,000 835,000 82.94 84.55 70.13
Harrisburg, PA . . . . . . . . . . 1988 80 2,100,000 903,000 84.84 84.52 71.71
Richmond, VA . . . . . . . . . . . 1986 80 2,112,000 933,000 88.49 81.52 72.14
Hampton Inn:
Naples, FL . . . . . . . . . . . . 1990 107 1,867,000 819,000 71.74 66.47 47.68
Tallahassee, FL . . . . . . . . . . 1993 93 1,674,000 842,000 81.84 60.11 49.19
West Palm Beach, FL . . . . . . . . 1986 136 1,845,000 655,000 67.73 54.72 37.06
Norcross, GA . . . . . . . . . . . 1996 150 (2) 665,000(2) (2) (2) (2)
Germantown, MD . . . . . . . . . . 1987 176 2,214,000 976,000 54.95 62.53 34.36
Albany/Latham, NY . . . . . . . . . 1990 126 2,040,000 1,005,000 72.38 61.12 44.23
Islandia (Long Island), NY . . . . 1988 121 2,588,000 1,232,000 76.45 76.45 58.44
Willow Grove (Philadelphia), PA . . 1991 150 3,245,000 1,743,000 82.22 71.90 58.12
Comfort Inn:
Woburn, MA(3) . . . . . . . . . . . 1981 100 (2) 210,000(2) (2) (2) (2)
Allentown, PA . . . . . . . . . . . 1990 127 1,913,000 987,000 73.56 55.95 41.15
Holiday Inn Express:
Lexington, MA(4) . . . . . . . . . 1971 164 2,635,000 992,000 67.95 64.60 43.90
Sheraton Inn:
Fort Lauderdale, FL . . . . . . . . 1988 139 2,493,000 1,173,000 83.86 58.45 49.01
Consolidated Total/
Weighted average . . . . . . . . . . .
3,912 $85,056,000 $43,950,000 82.49% $82.28 $67.87
- ------------------------ ===== =========== ===========
</TABLE>
(1) Represents Percentage Lease payments of rent from the Lessee to the
Partnership calculated on a proforma basis by applying the rent provisions
in the Percentage Leases using historical room revenues from the hotels for
the year ended December 31, 1996 as if the Partnership had owned the Hotels
and the Percentage Leases had been in effect since January 1, 1996.
20
<PAGE> 23
(2) Includes base rent of $2,565,000, but not percentage rent, under the
percentages leases for three newly developed hotels and one hotel closed
for a portion of 1996 due to renovation.
(3) The Company has received a commitment from Promus for a Hampton Inn
Franchise License for the Comfort Inn-Woburn, Massachusetts Hotel, subject
to the completion of certain renovations and improvements which are
expected to be completed during May 1997.
(4) The Company has received a commitment from Holiday Inn Franchising for a
Holiday Inn Express & Suites Franchise License for the Holiday Inn
Express-Lexington, Massachusetts hotel, subject to the completion of
certain renovations and improvements, which are expected to be completed in
May of 1997.
The following are more detailed descriptions of each of the Hotels:
<TABLE>
<CAPTION>
Hotel Location Competition
----- -------- -----------
<S> <C> <C>
UPSCALE EXTENDED-STAY(1):
1. Residence Inn . . . . . . Fremont, CA Woodfin Suites-Fremont, Crown
Sterling Suites-Fremont, Marriott
Courtyard-Fremont and Hilton-
Fremont/Newark
2. Residence Inn . . . . . . Mountain View Woodfin Suites-Sunnyvale,
(Palo Alto), CA Summerfield Suites-Sunnyvale and
Hyatt Rickey's-Palo Alto
3. Residence Inn . . . . . . San Jose, CA Marriott Courtyard-San Jose,
Pruneyard, Summerfield Suites and
Campbell Inn
4. Residence Inn . . . . . . San Mateo, CA Summerfield Suites, Holiday Inn and
Hotel Sofitel
5. Residence Inn-
Silicon Valley I . . . . Sunnyvale, CA Woodfin Suites-Sunnyvale,
Summerfield Suites-Sunnyvale,
Summerfield Suites-San Jose and
Homewood Suites
6. Residence Inn-
Silicon Valley II . . . . Sunnyvale, CA Woodfin Suites-Sunnyvale,
Summerfield Suites-Sunnyvale,
Summerfield Suites-San Jose and
Homewood Suites
7. Residence Inn . . . . . . Denver (Downtown), CO Holtz Suites, Embassy Suites and
Apartments, Holiday Inn, Oxford
Hotel and Burnsley
8. Residence Inn . . . . . . Denver (South), CO Woodfin Suites-Denver South, Holtz
Suites, Residence-Denver South,
Marriott Courtyard-Denver Tech
Center and Hyatt-Denver Tech Center
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
Hotel Location Competition
----- -------- -----------
<S> <C> <C>
9. Residence Inn . . . . Windsor, CT Homewood Suites-Bradley Airport,
Marriott Courtyard-Windsor, Clarion
Suites-Manchester/Hartford,
Sheraton-Bradley Airport,
Centennial Inn Suites-Farmington
and Holiday Inn-Bradley Airport
10. Residence Inn . . . . Atlanta (Downtown), Ritz Carlton, Marriott Marquis,
GA Quality Suites and Westin
11. Residence Inn . . . . Wichita East, KS Candlewood Suites, the Inn at
Tallgrass (country club), Club
House Inn, Marriott and North Rock
Inn
12. Residence Inn . . . . Portland, ME Embassy Suites, Marriott, Radisson,
Regency, corporate apartments and
beach house rentals
13. Residence Inn . . . . East Lansing, MI Clubhouse Inn, Comfort Inn,
Fairfield Inn, Quality Suites,
Marriott and Club Meridian
Apartments
14. Residence Inn . . . . Grand Rapids, MI Holiday Inn-Crowne Plaza, Hilton
Inn, New England Suites and
Lexington Hotel
15. Residence Inn . . . . Troy (Central), MI Hilton Suites-Auburn Hills, Hilton-
Northfield, Guest Quarters-Troy,
Marriott-Troy and Homewood Suites-
Warren
16. Residence Inn . . . . Troy (Southeast), MI Homewood Suites-Warren, Hilton
Suites-Auburn Hills, Residence Inn-
Warren and Guest Quarters-Troy
17. Residence Inn . . . . Cherry Hill, NJ Summerfield Suites-Mt. Laurel,
Clarion-Mt. Laurel, Travelodge-Mt.
Laurel and Hilton-Cherry Hill
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
Hotel Location Competition
----- -------- -----------
<S> <C> <C>
18. Residence Inn . . . . Binghamton, NY Holiday Inn-Vestal, Holiday Inn-
Hawley and Best Western-Regency
19. Residence Inn . . . . Harrisburg, PA Marriott-Harrisburg, Homewood
Suites-Mechanicsburg, Best Western
Crown-Harrisburg and Doubletree-
Harrisburg
20. Residence Inn . . . . Richmond, VA Marriott Courtyard-Richmond West,
Embassy Suites-Richmond West and
Hyatt-Richmond West
MID-PRICE:
21. Hampton Inn . . . . . Naples, FL Inn of Naples-Naples, Best Western
Naples Inn-Naples, Quality Inn-
Gulfcoast, Comfort Inn-Naples Bay,
Wellesley Inn-Naples and Courtyard
by Marriott-Naples
22. Hampton Inn . . . . . Tallahassee, FL Shoney's Inn-Tallahassee, La Quinta
Inn-Tallahassee, Cabot Lodge-
Tallahassee and Comfort Inn-
Tallahassee
23. Hampton Inn(3) . . . . West Palm Beach, FL Holiday Inn-Palm Beach
International Airport, Radisson
Suites-Palm Beach International
Airport, Wellesley Inn-West Palm
Beach, Comfort Inn-West Palm Beach
Turnpike and Best Western-West Palm
Beach
24. Hampton Inn . . . . . Norcross, GA Courtyard by Marriott-Norcross,
Holiday Inn Select-Norcross and
Marriott Hotel-Norcross
25. Hampton Inn(2) . . . . Germantown, MD Courtyard by Marriott-Gaithersburg,
Holiday Inn-Gaithersburg, Hilton-
Gaithersburg, Courtyard by
Marriott-Rockville and Woodfin
Suites-Rockville
26. Hampton Inn . . . . . Albany/Latham,NY Holiday Inn Express-Albany Airport,
Hampton Inn-Albany/Wolf Rd., Red
Roof Inn-Albany Airport, Comfort
Albany Airport, Best Western-
Clifton Park and Courtyard by
Marriott-Albany
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
Hotel Location Competition
----- -------- -----------
<S> <C> <C> <C>
27. Hampton Inn . . . . . Islandia (Long Hampton Inn-Commack, Holiday Inn-
Island), NY Ronkonkoma, Sheraton-Smithtown,
Best Western-Patchogue and
Radisson-Islandia
28. Hampton Inn . . . . . Willow Grove Courtyard by Marriott-Willow Grove,
(Philadelphia), PA Days Inn-Horsham, Residence Inn by
Marriott-Willow Grove and Holiday
Inn-Fort Washington
29. Comfort Inn(2)(3) . . Woburn, MA Red Roof Inn-Woburn, Courtyard by
Marriott-Woburn and Suisse Chalet-
Woburn
30. Comfort Inn . . . . . Allentown, PA Hampton Inn-Allentown, Holiday Inn-
Allentown, Comfort Suites-
Allentown/Bethlehem and Holiday
Express-Allentown
31. Holiday Inn Express(2) Lexington, MA Ramada Inn-Bedford, Howard Johnson-
Burlington and Travelodge-Bedford
32. Sheraton Inn(3) . . . Fort Lauderdale, FL Guest Quarters-Cypress Creek,
Marriott-Cypress Creek, Best
Western-Cypress Creek, Hampton Inn-
Fort Lauderdale/Cypress Creek and
Westin-Cypress Creek
- ----------------
</TABLE>
(1) Residence Inn hotels offer a standard amenities package that generally
includes a gatehouse with fireplace lounge, laundry facility, one or more
meeting rooms and kitchen facilities, a swimming pool, a whirlpool, a
picnic area with gas grill and an all-purpose sports court. Hampton Inn
hotels, Comfort Inn hotels and Holiday Inn Express hotels offer standard
amenities packages that generally include a complimentary continental
breakfast, a swimming pool and a meeting room. The Sheraton Inn-Fort
Lauderdale, Florida hotel's amenities include an outdoor heated swimming
pool, Tiki Bar, full service restaurant, exercise center and guest laundry
facilities.
(2) These Hotels were or are in the process of being renovated during the
period noted: the Hampton Inn-Germantown, Maryland hotel (1995), the
Holiday Inn Express-Lexington, Massachusetts hotel (beginning November 1,
1996) and the Comfort Inn-Woburn, Massachusetts hotel (beginning November
1, 1996). For the purposes of this footnote, a renovation is defined as a
substantial upgrade of guest rooms and/or public areas.
(3) Subject to long-term ground leases with third-party ground lessors.
THE PERCENTAGE LEASES
Each Percentage Lease contains the provisions described below, and the
Company intends that future percentage leases with respect to additional hotels
it may acquire will contain substantially similar provisions, although the
independent Trustees may, in their discretion, alter any of these provisions
with respect to any proposed percentage lease, depending on the
24
<PAGE> 27
purchase price paid, economic conditions and other factors deemed relevant at
the time. The Lessee will not lease or manage any hotel other than those owned
by the Company, the Partnership, the Subsidiary Partnerships or a similarly
structured entity created by the Company for the purpose of owning hotels.
Percentage Lease Terms. Each Percentage Lease has a non-cancelable
term of at least ten years, subject to earlier termination upon the occurrence
of defaults thereunder and certain other events described in the Percentage
Lease.
Amounts Payable Under the Percentage Leases. During the term of each
Percentage Lease, the Lessee is obligated to pay to the Partnership (i) the
greater of a fixed annual Base Rent or Percentage Rent, and (ii) certain other
amounts, including interest accrued on any late payments or charges (the
"Additional Charges"). Percentage Rent is based on percentages of room
revenues for each of the Hotels. For all Percentage Leases, both the Base Rent
and the Revenue Break Point in each Percentage Rent formula are (a) adjusted
annually for inflation and (b) in the case of the certain of the Hotels managed
by Marriott, increased to specified levels (not tied to inflation) in the first
years after execution. With respect to adjustments for inflation, the
adjustment will be calculated at the beginning of each calendar year based upon
the change in the CPI during the prior calendar year.
The following table sets forth the annual Base Rent and Percentage
Rent formulas for each Hotel under the Percentage Leases.
<TABLE>
<CAPTION>
ANNUAL BASE PERCENTAGE
HOTEL RENT RENT FORMULA
----- --------------- -----------------------------
<S> <C> <C>
RESIDENCE INN:
Fremont, CA . . . . . . . $ 410,000 30.0% of room revenue up
to $1,500,000, plus 68.0% of
room revenue in excess of
$1,500,000
Mountain View
(Palo Alto), CA. . . . . . 1,207,000 30.0% of room revenue up
to $1,200,000, plus 68.0% of
room revenue in excess of
$1,200,000
San Jose, CA . . . . . . . 520,000 30.0% of room revenue up
to $1,500,000, plus 68.0% of
room revenue in excess of
$1,500,000
San Mateo, CA . . . . . . 1,427,000 30.0% of room revenue up
to $2,450,000, plus 68.0% of
room revenue in excess of
$2,450,000
Silicon Valley I, CA . . . 2,154,000 30.0% of room revenue up
to $2,450,000, plus 68.0% of
room revenue in excess of
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
ANNUAL BASE PERCENTAGE
HOTEL RENT RENT FORMULA
----- --------------- -----------------------------
<S> <C> <C>
$2,450,000
Silicon Valley II, CA 2,244,000 30.0% of room revenue up
to $2,700,000, plus 68.0% of
room revenue in excess of
$2,700,000
Denver (Downtown), CO 684,000 30.0% of room revenue up
to $2,750,000, plus 68.0% of
room revenue in excess of
$2,750,000
Denver (South), CO 734,000 30.0% of room revenue up
to $1,800,000, plus 68.0% of
room revenue in excess of
$1,800,000
Windsor, CT . . . . 459,000 30.0% of room revenue up
to $1,800,000, plus 68.0% of
room revenue in excess of
$1,800,000
Atlanta (Downtown), GA 1,260,000 30.0% of room revenue up
to $3,100,000, plus 68.0% of
room revenue in excess of
$3,100,000
Wichita East, KS . 287,000 30.0% of room revenue up
to $1,175,000, plus 68.0% of
room revenue in excess of
$1,175,000
Portland, ME . . . 430,000 30.0% of room revenue up
to $1,200,000, plus 68.0% of
room revenue in excess of
$1,200,000
East Lansing, MI . 290,000 30.0% of room revenue up
to $950,000, plus 68.0% of
room revenue in excess of
$950,000
Grand Rapids, MI . 509,000 30.0% of room revenue up
to $1,350,000, plus 68.0% of
room revenue in excess of
$1,350,000
Troy (Central), MI 931,000 30.0% of room revenue up
to $1,900,000, plus 68.0% of
room revenue in excess of
$1,900,000
Troy (Southeast), MI 494,000 30.0% of room revenue up
to $1,400,000, plus 68.0% of
room revenue in excess of
$1,400,000
Cherry Hill, NJ . . 774,000 30.0% of room revenue up
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
ANNUAL BASE PERCENTAGE
HOTEL RENT RENT FORMULA
----- --------------- -----------------------------
<S> <C> <C>
to $1,700,000, plus 68.0% of
room revenue in excess of
$1,700,000
Binghamton, NY . . 455,000 32.0% of room revenue up
to $1,207,900, plus 70.0% of
room revenue in excess of
$1,207,900
Harrisburg, PA . . 554,000 30.0% of room revenue up
to $1,380,000, plus 68.0% of
room revenue in excess of
$1,380,000
Richmond, VA . . . 447,000 30.0% of room revenue up
to $1,325,000, plus 68.0% of
room revenue in excess of
$1,325,000
HAMPTON INN:
Naples, FL . . . . 410,000 33.5% of room revenue up
to $1,336,400, plus 70.0% of
room revenue in excess of
$1,336,400
Tallahassee, FL . . 350,000 30.0% of room revenue up
to $825,000, plus 70.0% of
room revenue in excess of
$825,000
West Palm Beach, FL 304,000 31.0% of room revenue up
to $1,619,100, plus 68.0% of
room revenue in excess of
$1,619,100
Norcross, GA . . . 665,000 30.0% of room revenue up
to $1,500,000, plus 68.0% of
room revenue in excess of
$1,500,000
Germantown, MD . . 490,000 32.0% of room revenue up
to $1,500,000, plus 69.5% of
room revenue in excess of
$1,500,000
Albany/Latham, NY . 662,000 35.0% of room revenue up
to $1,207,900, plus 70.0% of
room revenue in excess of
$1,207,900
Islandia
(Long Island), NY . 473,000 31.75% of room revenue up
to $1,516,300, plus 70.0% of
room revenue in excess of
$1,516,300
Willow Grove
(Philadelphia), PA 735,000 31.45% of room revenue up
to $1,372,380, plus 70.0% of
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
ANNUAL BASE PERCENTAGE
HOTEL RENT RENT FORMULA
----- --------------- -----------------------------
<S> <C> <C>
room revenue in excess of
$1,372,380
COMFORT INN:
Woburn, MA
(1) . . . 210,000 30.0% of room revenue up
to $1,350,000, plus 68.0% of
room revenue in excess of
$1,350,000
Allentown, PA . . . 497,000 36.5% of room revenue up
to $1,050,000, plus 70.0% of
room revenue in excess of
$1,050,000
HOLIDAY INN EXPRESS:
Lexington, MA . . . 500,000 27.0% of room revenue up
to $1,950,000, plus 68.0% of
room revenue in excess of
$1,950,000
SHERATON INN:
Fort Lauderdale, FL 359,000 31.0% of room revenue up
to $1,413,500, plus 68.0% of
room revenue in excess of
$1,413,500
-----------
$21,925,000
===========
</TABLE>
(1) A renovation of the Comfort Inn-Woburn, Massachusetts hotel was begun
in November 1996. Until the renovation project has substantially
commenced, the Percentage Rent will be fixed at $45,000 per month.
From the date on which the renovation project substantially commences
until the earlier of (i) April 1, 1997 or (ii) the first day of the
month following the date of the completion of the renovation project
(each a "Target Completion Date") no Base Rent is payable. On the
Target Completion Date, the Percentage Rent formula reverts to the
terms set forth in the above table.
Other than real estate and personal property taxes, ground lease rent
(where applicable), the cost of certain furniture, fixtures and equipment and
certain capital expenditures, and property and casualty insurance, which are
obligations of the Partnership, the Percentage Leases require the Lessee to pay
Base Rent, Percentage Rent, Additional Charges and the operating expenses of
the Hotels (including insurance, utility and other charges incurred in the
operation of the Hotels) during the terms of the Percentage Leases. The
Percentage Leases also provide for rent reductions and abatements in the event
of damage or destruction or a partial taking of any Hotel.
Maintenance and Modifications. Under the Percentage Leases, the
Partnership is required to pay for capital improvements at each Hotel. In
addition, the Percentage Leases obligate the Partnership to make available to
the Lessee for the repair, replacement and refurbishment of furniture, fixtures
and equipment in the Hotels, when and as deemed necessary by the Lessee, an
amount equal to 4% of room revenues, per quarter on a cumulative basis. (The
lender is requiring the Partnership to make available for such purposes of the
eight Hotels collateralizing the Permanent Loan 5% of room revenues at such
Hotels.) The Partnership's obligation is carried forward to the extent that
the Lessee has not expended such amount, and any unexpended amounts remain the
property of the Partnership upon termination of the Percentage Leases. In
addition, the Company intends to cause the Partnership to spend amounts
28
<PAGE> 31
in excess of the obligated amounts if necessary to comply with the reasonable
requirements of any franchise license or Marriott Management Agreement and
otherwise to the extent that the Company deems such expenditures to be in the
best interests of the Company. Otherwise, the Lessee is required, at its
expense, to maintain the Hotels in good order and repair and to pay for all
operating expenses of the Hotels.
The Lessee, at its expense, may make non-capital and capital
additions, modifications or improvements to the Hotels, provided that such
action does not significantly alter the character or purposes of the Hotels or
significantly detract from the value or operating efficiencies of the Hotels.
All such alterations, replacements and improvements shall be subject to all the
terms and provisions of the Percentage Leases and become the property of the
Partnership upon termination of the Percentage Leases. The Partnership owns,
with respect to the Hotels, substantially all personal property (other than
inventory, linens and other nondepreciable personal property) not affixed to,
or deemed a part of, the real estate or improvements thereon, except to the
extent that ownership of such personal property would cause the rent under a
Percentage Lease not to qualify as "rents from real property" for REIT income
test purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation, nor,
to its knowledge, is any material litigation threatened against the Company or
its properties, other than routine litigation arising in the ordinary course of
business and which is expected to be covered by the Company's liability
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information called for in this item is incorporated by reference
to the Company's 1996 Annual Report filed as Exhibit 13.1 to this Form 10-K.
29
<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
The information called for in this item with respect to the Company
and its predecessor is incorporated by reference to the 1996 Annual Report
filed as Exhibit 13.1 to this Form 10-K.
With respect to the Lessee, the following tables set forth (i)
selected historical financial data for the period September 30, 1994
(inception) through December 31, 1994 and the years ended December 31, 1996 and
1995 and (ii) selected pro forma financial information for the years ended
December 31, 1996 and 1995. The pro forma operating and other financial data
is presented as if the Hotels were owned as of the beginning of the periods
presented and, therefore, incorporates certain assumptions. The pro forma
information does not purport to represent what the Lessee's results of
operations actually would have been, or to project the Lessee's financial
position or results of operations at any future date or for any future period.
The following selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included below and incorporated by reference herein.
LESSEE
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Pro Forma(1)
------------------ ----------------
Year Year
Ended Period from Ended
December 31, September 30, 1994 December 31,
---------------- (Inception) ----------------
1996 1995 December 31, 1994 1996 1995
---- ---- ----------------- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Room revenue 58,501 24,412 3,404 $87,796 $78,154
Other revenue 4,222 1,895 372 6,052 5,304
------- ------ ----- ------- -------
Total revenue 62,723 26,307 3,776 93,848 83,458
Hotel operating expenses 32,274 13,696 2,041 48,863 44,437
------- ------ ----- ------- -------
Income before overhead expenses 30,449 12,611 1,735 44,985 39,021
and Percentage Lease payments
Percentage Lease payments 27,466 11,268 1,480 43,950 38,300
Overhead expenses 2,273 952 132 2,273 1,252
------- -------- ------- -------- -------
Net income (loss)(2) $ 710 $ 391 $ 123 $(1,238) $ (531)
======= ======= ======= ======= =======
</TABLE>
(1) The pro forma information does not purport to represent what the Lessee's
results of operations actually would have been if the Partnership had, in fact,
owned and leased to the Lessee the Hotels at the beginning of the periods
indicated, or to project the Lessee's results of operations for any future
period.
(2) The Lessee has elected status as a Subchapter S corporation for federal
income tax purposes and pays no corporate level tax on its net income.
30
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information called for in this item with respect to the Company
and its predecessor is incorporated by reference to the 1996 Annual Report
filed as Exhibit 13.1 to this Form 10-K.
The following is a discussion of the results of operations for the
Lessee. The Lessee commenced operations on September 30, 1994. Consequently,
comparison of the actual results for the year ended December 31, 1995 to the
period September 30, 1994 (inception) through December 31, 1994 is not
meaningful.
The Lessee -- Actual
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 ("1996") TO THE YEAR ENDED
DECEMBER 31, 1995 ("1995")
The Lessee had total revenue for 1996 of $62,723,000, consisting of
$58,501,000 of room revenue and $4,222,000 of other revenue. Room revenue
increased by $34,089,000, or 139.6% from $24,412,000 for 1995. This increase
was primarily due to the number of Hotels leased increasing from seven at
January 1, 1995 to 18 at January 1, 1996 and to 32 at December 31, 1996.
Percentage Lease payments, hotel operating expenses and overhead
expenses for 1996 were $27,466,000, $32,274,000, and $2,273,000, respectively.
Percentage Lease payments, hotel operating expense and overhead expenses
increased by $16,198,000 or 143.8%, $18,578,000 or 135.7%, and $1,321,000 or
138.8%, respectively from $11,268,000, $13,696,000 and $952,000 for 1995,
respectively. These increases were primarily due to the number of Hotels
leased increasing from seven at January 1, 1995 to 18 at January 1, 1996 and to
32 at December 31, 1996. Net income for 1996 was $710,000. Net income
increased $319,000, or 81.6%, from $391,000 for 1995.
The gross margin percentage remained relatively constant at 77.2% and
76.2% for 1996 and 1995, respectively. Net income as a percentage of gross
operating revenue remained relatively constant at 1.1% and 1.5% for 1996 and
1995, respectively.
SEPTEMBER 30, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
The Lessee had total revenue of $3,776,000, consisting of $3,404,000
of room revenue and $372,000 of other revenue. Percentage Lease payments,
hotel operating expenses and overhead expenses were $1,480,000, $2,041,000 and
$132,000, respectively, resulting in net income of $123,000.
The Lessee -- Pro Forma
The following pro forma information is presented as if the acquisition
of the Hotels had occurred at the beginning of the periods presented.
31
<PAGE> 34
COMPARISON OF 1996 TO 1995
The Lessee had total revenue for 1996 of $93,848,000 consisting of
$87,796,000 of room revenue and $6,052,000 of other revenue. Room revenue
increased by $9,642,000, or 12.3%, from $78,154,000 for 1995. Room revenue
increased 10.77% from 1996 to 1995 which excludes three newly developed hotels
and one hotel closed for a portion on 1996 due to renovation. This increase
was primarily due to an ADR increase of 6.8% and an occupancy increase of 3.5%.
Percentage Lease payments, hotel operating expenses and overhead
expenses for 1996 were $43,950,000, $48,863,000, $2,273,000, respectively.
Percentage Lease payments, hotel operating expenses and overhead expenses
increased by $5,650,000, or 14.8%, $4,426,000, or 10.0%, and $1,021,000, or
81.6%, respectively, from $38,300,000, $44,437,000 and $1,252,000, for 1995.
These increases were primarily due to increased REVPAR of 10.5% at the Hotels,
which excludes three newly developed hotels and one closed for a portion of
1996 due to renovation, which resulted in increased Percentage Lease payments
and increased variable expenses. Net loss for 1996 and 1995 was $1,238,000 and
$531,000, respectively.
The gross margin percentage remained relatively constant at 78.0% and
77.8% for 1996 and 1995, respectively. Net loss as a percentage of gross
operating revenue was 1.3% and 0.6% for 1996 and 1995, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are incorporated by reference from
the 1996 Annual Report filed as Exhibit 13.1 to this Form 10-K.
INNKEEPERS USA TRUST
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1996
and December 31, 1995
Consolidated Statements of Income for the years ended
December 31, 1996 and 1995 and the period September 30, 1994
(inception) through December 31, 1994
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1996 and 1995 and the period
September 30, 1994 (inception) through December 31, 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 and the period September 30, 1994
(inception) through December 31, 1994
Notes to Consolidated Financial Statements
32
<PAGE> 35
The following financial statements are included herein on the pages
indicated.
JF HOTEL, INC., JF HOTEL II, INC. AND JF HOTEL III, INC.
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Combined Balance Sheets at December 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Combined Statements of Income for the years ended
December 31, 1996 and 1995 and the period September 30, 1994
(inception) through December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Combined Statements of Shareholders' Equity for the
years ended December 31, 1996 and 1995 and the period
September 30, 1994 (inception) through December 31,
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Combined Statements of Cash Flows for the years ended
December 31, 1996 and 1995 and the period September 30, 1994
(inception) through December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
FINANCIAL STATEMENT SCHEDULES
- -----------------------------
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Schedule 3 - Real Estate and Accumulated Depreciation
at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
33
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
JF Hotel
We have audited the combined balance sheets of JF Hotel (as described
in Note 1) as of December 31, 1996 and 1995, and the related combined
statements of income, shareholders' equity and cash flows for the years ended
December 31, 1996 and 1995 and the period September 30, 1994 (inception)
through December 31, 1994. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of JF Hotel as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for the years ended December 31, 1996 and 1995 and the period September
30, 1994 (inception) through December 31, 1994 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
West Palm Beach, Florida
March 14, 1997
34
<PAGE> 37
JF HOTEL
COMBINED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,551 $ 2,900
Marketable securities 1,161 255
Accounts receivable, net 2,393 1,540
Due from affiliates 298 40
Inventory 67 27
Prepaid expenses 233 219
----------- -----------
Total current assets 9,703 4,981
Other assets 252 154
----------- -----------
Total assets $ 9,955 $ 5,135
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,150 $ 2,023
Accrued expenses 1,545 1,062
Payable to Manager 1,634
Other liabilities 785
Due to Partnership 3,541 2,048
----------- -----------
Total current liabilities 9,655 5,133
----------- -----------
Commitments and contingencies (Note 4)
Shareholders' equity:
Common shares, $1 par value, 3,000 shares authorized,
3,000 and 2,000 shares issued and outstanding at
December 31, 1996 and 1995, respectively 3 2
Unrealized gain on marketable securities 358
Retained earnings (deficit) (61)
----------- -----------
Total shareholders' equity 300 2
----------- -----------
Total liabilities and shareholders' equity $ 9,955 $ 5,135
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
35
<PAGE> 38
JF HOTEL
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 30, 1994
YEAR ENDED YEAR ENDED (INCEPTION)THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Gross operating revenue:
Rooms $ 58,501 $ 24,412 $ 3,404
Food and beverage 687 626 156
Telephone 2,231 743 112
Other 1,304 526 104
------- ------- --------
Gross operating revenue 62,723 26,307 3,776
Departmental expenses:
Rooms 12,404 5,132 752
Food and beverage 583 596 120
Telephone 850 381 59
Other 470 166 32
------- ------- -------
Total departmental profit 48,416 20,032 2,813
------- ------- --------
Unallocated operating expenses:
General and administrative 3,943 1,598 251
Franchise and marketing fees 4,492 1,941 269
Advertising and promotions 2,305 894 138
Utilities 3,235 1,505 181
Repairs and maintenance 3,073 1,195 187
Management fees 540 49
------- ------- --------
Total unallocated operating expenses 17,588 7,182 1,026
------- ------- --------
Gross profit 30,828 12,850 1,787
Insurance (379) (239) (52)
Lessee overhead (2,273) (952) (132)
Percentage lease expense (27,466) (11,268) (1,480)
-------- -------- --------
Net income $ 710 $ 391 $ 123
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
36
<PAGE> 39
JF HOTEL
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1996 and 1995
and the period September 30, 1994 (inception)
through December 31, 1994
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Common Shares
------------------ Unrealized
Gain on Retained Total
Marketable Earnings Shareholders'
Shares Par Value Securities (Deficit) Equity
------ --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 1,000 $ 1 $ 1
Net income $ 123 123
Dividends paid (75) (75)
------ --------- ---------- --------- ------------
Balance at December 31, 1994 1,000 1 48 49
------ --------- ---------- --------- ------------
JF Hotel II, Inc. issuance of common shares 1,000 1 1
Net income 391 391
Dividends paid (439) (439)
------ --------- ---------- ---------- ---------
Balance at December 31, 1995 2,000 2 2
JF Hotel II, Inc. issuance of common shares 1,000 1 1
Net income 710 710
Change in unrealized gain on marketable
securities $ 358 358
Dividends paid (771) (771)
------ --------- ---------- ---------- ----------
Balance at December 31, 1996 3,000 $ 3 $ 358 $ (61) $ 300
====== ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
37
<PAGE> 40
JF HOTEL
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 30, 1994
YEAR ENDED YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 710 $ 391 $ 123
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 28
Changes in operating assets and liabilities:
Accounts receivable (853) (1,306) (234)
Inventory (40) (11) (16)
Prepaid expenses (14) (55) (164)
Other assets (45) (91) (63)
Accounts payable 127 1,443 580
Accrued expenses 483 758 304
Payable to Manager 1,634
Other liabilities 785
Due to Partnership 1,493 1,955 93
--------------- --------------- --------------
Net cash provided by operating activities 4,308 3,084 623
--------------- --------------- --------------
Cash flows from investing activities:
Advances to affiliates (298)
Purchase of equipment (81)
Purchase of marketable securities (548) (255)
--------------- --------------- --------------
Net cash used in investing activities (927) (255)
--------------- --------------- --------------
Cash flows from financing activities:
Dividends paid (771) (439) (75)
Advances (payments) to shareholders 40 (40)
Issuance of common shares 1 1
--------------- --------------- --------------
Net cash used in financing activities (730) (478) (75)
--------------- --------------- --------------
Net increase in cash and cash equivalents 2,651 2,351 548
Cash and cash equivalents at beginning of period 2,900 549 1
--------------- --------------- --------------
Cash and cash equivalents at end of period $ 5,551 $ 2,900 $ 549
=============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
38
<PAGE> 41
JF HOTEL
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
JF Hotel, Inc., JF Hotel II, Inc. and JF Hotel III, Inc. (collectively "JF
Hotel" or the "Lessee") are under common control and were formed primarily to
lease and operate hotels owned by Innkeepers USA Trust (the "Company") through
Innkeepers USA Limited Partnership and its subsidiaries (collectively the
"Partnership"). As of December 31, 1996, approximately 81.9% of the
Partnership was owned by the Company. The principal shareholder of the Lessee
is also the President and Chairman of the Company. The Lessee commenced the
leasing and operation of seven hotels (the "Initial Hotels") on September 30,
1994 and at December 31, 1996 leases 32 hotels (the "Hotels") from the
Partnership.
The Lessee operates 21 of the Hotels, Residence Inn by Marriott, Inc. ("RIBM",
a wholly-owned subsidiary of Marriott International, Inc.) operates nine of the
Hotels, and an unaffiliated party ("TMH") operates two of the Hotels. The
financial statements of the nine hotels operated by RIBM are maintained on a
52/53 week period basis. The 1996 fiscal year ended on January 3, 1997.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents. Cash equivalents are placed
with reputable institutions and the balances may at times exceed federal
depository insurance limits.
The carrying amount of cash and cash equivalents approximates fair value.
MARKETABLE SECURITIES
Marketable securities, which primarily consist of 83,050 and 28,000 shares of
the Company's common stock at December 31, 1996 and 1995, respectively, are
classified as available for sale and are carried at market value. The
appreciation in value of the marketable securities, since purchase, is recorded
in shareholders' equity until realized.
INVENTORY
Inventory, consisting of food and beverage, is stated at the lower of cost
(generally, first-in, first-out) or market. Linens and uniforms are expensed
as incurred.
PREPAID EXPENSES
Prepaid expenses consist primarily of prepaid insurance.
REVENUE RECOGNITION
Revenue is recognized as earned. Credit evaluations are performed and an
allowance for doubtful accounts is provided against accounts receivable which
are estimated to be uncollectible.
FRANCHISE FEES
Each Hotel is operated under a franchise license which is held by the Lessee.
The cost of obtaining the franchise licenses is paid by the Partnership and the
continuing franchise fees (generally a percentage of room revenue) are paid by
the Lessee.
39
<PAGE> 42
ADVERTISING COSTS
Advertising costs are expenses as incurred. Included in franchise and
marketing fees are fees (generally a percentage of room revenue) payable to
marketing funds of the franchisors which were $1,728,000, $868,000 and $125,000
for the years ended December 31, 1996 and 1995 and the period ended December
31, 1994, respectively.
PERCENTAGE LEASE EXPENSE
Each Hotel is leased by the Partnership to the Lessee under a percentage lease
agreement ("Percentage Lease"). The Percentage Lease for each Hotel provides
for the payment to the Partnership of monthly percentage rent based on fixed
percentages of gross room revenue in excess of certain specified levels. The
Percentage Lease for each Hotel provides for minimum base rents in the event
that percentage rents do not exceed base rents.
Percentage lease expense is recognized as due to the Partnership under the
Percentage Leases from lease inception.
INCOME TAXES
The Lessee has elected S corporation status under the Internal Revenue Code.
Accordingly, the shareholders of the Lessee are taxed on an individual basis on
their proportionate share of the Lessee's taxable income. Consequently, no
provision for income taxes has been reflected in the financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. DUE FROM AFFILIATES
At December 31, 1996, Due From Affiliates consists of unreimbursed capital
expenditures and principal payments due from the Partnership and amounts owed
to partnerships controlled by the shareholders of the Lessee.
At December 31, 1995, Due From Affiliates consists of notes receivable from the
two principal shareholders which were repaid in 1996.
3. SHARE APPRECIATION RIGHTS
In 1994, the Lessee granted to certain officers an aggregate of 70,000 share
appreciation rights ("SAR") based on the performance of the Company's Common
Shares. The SAR's vest over a four year period, have been granted at an
exercise price of $10.00 and have a maximum term of ten years. No SAR's have
been exercised as of December 31, 1996. At December 31, 1996, the Lessee has
recognized $234,000 in compensation cost related to the SAR which is included
in Lessee Overhead in the accompanying combined statements of income.
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Lessee has future lease commitments for office space through 1998. Minimum
future rental payments under those noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1997 $131,000
1998 135,000
--------
$266,000
========
</TABLE>
40
<PAGE> 43
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS, CONTINUED
Rent expense, excluding Percentage Lease expense, was $219,000, $40,700 and
$7,100 for the years ended December 31, 1996 and 1995 and the period ended
December 31, 1994, respectively.
The Lessee has future minimum base lease commitments under the Percentage Lease
agreements to the Partnership through 2006. Minimum future base lease payments
under the Percentage Lease agreements are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1996 $ 21,925
1997 21,925
1998 21,925
1999 21,925
2000 21,925
Thereafter 92,000
</TABLE>
Inception dates for the Percentage Leases are as follows: September 30, 1994
(7), January 1995, March 1995, May 1995, October 1995 (8), February 1996, May
1996, August 1996, October 1996 (2), November 1996 (7), and November 1996.
The Lessee paid base rents of $10,212,000 and $4,793,000, and percentage rent,
in excess of base rents of $17,254,000 and $6,475,000 for the years ended
December 31, 1996 and 1995, respectively.
RIBM operates nine of the Hotels under a management agreement with the Lessee
(the "RIBM Management Agreement"). The RIBM Management Agreement has an initial
term of 13 years and provides for a base fee of 2% of gross revenues at the
managed hotels and an incentive fee which is 50% of available cash flow, as
defined. For seven of the Hotels only, the RIBM Management Agreement provides
for an incentive fee of 65% of available cash flow up to 3.5% of gross revenue
and 50% of available cash flow thereafter. The agreement also contains penalties
for early termination.
The right to operate the nine hotels as Residence Inns is contained in the RIBM
Management Agreement.
TMH operates two of the Hotels under management agreements with the Lessee (the
"TMH Management Agreements"). The TMH Management Agreements have terms of 5
years and provide for a base fee of 2% of gross revenues and an incentive fee
based on the performance of the hotels managed.
The Company has reimbursed the Lessee $100,000, $40,000, and $10,000 for the
use of office facilities for the years ended December 31, 1996 and 1995 and the
period ended December 31, 1994, respectively.
5. EMPLOYEE BENEFIT PLAN
In July 1996, the Lessee began sponsoring a defined contribution employee
benefit plan (the "Plan"). Substantially all employees who are age 21 or older
and have at least one year of service, as defined, are eligible to participate
in the Plan. Employees may contribute up to 15% of their compensation to the
Plan, subject to certain annual limitations. The Lessee currently does not
contribute to the Plan. The Lessee absorbs certain administrative expenses of
the Plan.
6. SUBSEQUENT EVENTS
In January and February 1997, the Partnership acquired and leased to the Lessee
three hotels.
41
<PAGE> 44
7. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma combined statement of operations and financial
information of the Lessee is presented as if the acquisition of the Hotels had
occurred on January 1, 1995. This unaudited pro forma statement of operations
and financial information is not necessarily indicative of the operating
results of the Lessee that would have occurred if the transactions had been
completed as of such dates, nor does it purport to represent the results of
operations for future periods.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1995
---------------- ----------------
<S> <C> <C>
Revenues:
Rooms $ 87,796 $ 78,154
Other 6,052 5,304
--------------- ---------------
93,84 83,458
Expenses:
Property operating costs and expenses 20,633 18,494
General and administrative 6,859 7,240
Franchise and marketing fees 6,753 5,276
Advertising and Promotions 3,092 3,152
Utilities 4,488 4,340
Repairs and maintenance 4,506 3,907
Management fees 1,968 1,242
Insurance 564 786
Lessee overhead 2,273 1,252
Percentage Lease payments(1) 43,950 38,300
--------------- -------------
Net Income (loss) $ (1,238) $ (531)
================ ==============
</TABLE>
(1) Includes base rent of $2,565,000, but not percentage rent, under the
Percentage Leases for three newly developed hotels, which had no substantive
operations for the periods presented, and one hotel closed for a portion of
1996 due to renovation.
42
<PAGE> 45
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Innkeepers USA Trust is
included in Exhibit 13.1 of this Form 10-K. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule on pages 44 and 45 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
West Palm Beach, Florida
March 14, 1997
43
<PAGE> 46
INNKEEPERS USA TRUST
SCHEDULE 3 - REAL ESTATE AND ACCUMULATED DEPRECIATION
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Cost Capitalized
Subsequent to Gross Amounts of Which
Initial Cost Acquisition Carried at Close of Period
------------ ----------- --------------------------
Buildings
Buildings and and Buildings and
Description Encumbrances Land Improvement Land Improvement Land Improvement
----------- ------------ ---- ----------- ---- ----------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Residence Inn:
Fremont, CA 3 $1,000,000 $ 4,675,247 $0 $ 102,095 $1,000,000 $ 4,777,342
Mountain View 3 3,700,000 12,283,463 0 104,469 3,700,000 12,387,932
(Palo Alto), CA
San Jose, CA 3 1,350,000 5,808,270 0 75,583 1,350,000 5,883,853
San Mateo, CA 4,600,000 15,148,774 0 0 4,600,000 15,148,774
Silicon Valley I, CA 6,330,000 23,232,485 0 0 6,330,000 23,232,485
Silicon Valley II, CA 4 5,450,000 25,292,711 0 0 5,450,000 25,292,711
Denver (Downtown), 1,210,000 7,989,641 0 0 1,210,000 7,989,641
CO
Denver (South), CO 3 1,105,000 7,714,756 0 308,774 1,105,000 8,023,530
Windsor, CT 3 1,150,000 4,712,293 0 199,998 1,150,000 4,912,291
Atlanta (Downtown), 1,550,000 15,063,629 0 325 1,550,000 15,063,954
GA
Wichita East, KA 525,000 3,429,683 0 0 525,000 3,429,683
Portland, ME 520,000 4,996,765 0 0 520,000 4,996,765
East Lansing, MI 5 385,000 3,830,424 0 0 385,000 3,830,424
Grand Rapids, MI 5 770,000 6,432,820 0 0 770,000 6,432,820
Troy (Central), MI 3 1,290,000 4,891,360 0 245,682 1,290,000 5,137,042
Troy (Southeast), MI 3 760,000 7,245,716 0 174,357 760,000 7,420,073
Cherry Hill, NJ 1 1,000,000 7,998,153 0 131,600 1,000,000 8,129,753
Binghamton, NY 1 720,000 5,293,506 0 70,007 720,000 5,363,513
Harrisburg, PA 1 770,000 5,662,329 0 89,928 770,000 5,752,257
Richmond, VA 3 600,000 5,154,740 0 44,615 600,000 5,199,355
Hampton Inn:
Naples, FL 1 690,000 4,782,493 0 256,492 690,000 5,038,985
Tallahassee, FL 1 500,000 4,242,469 0 5,722 500,000 4,248,191
West Palm Beach, FL 2 0 3,936,536 0 507,619 0 4,444,155
Norcross, GA 1,200,000 7,804,463 0 1,186 1,200,000 7,805,649
Germantown, MD 1 920,000 4,811,562 0 1,877,276 920,000 6,688,838
Albany/Latham, NY 1 850,000 7,974,632 0 178,106 850,000 8,152,738
Islandia (Long Island), 1 920,000 4,854,980 0 67,302 920,000 4,922,282
NY
Willow Grove 1 1,110,000 8,375,236 0 35,926 1,110,000 8,411,162
(Philadelphia), PA
Comfort Inn:
Woburn, MA 1 0 2,645,776 0 485,569 0 3,131,345
Allentown, PA 1 715,000 6,045,158 0 123,615 715,000 6,168,773
</TABLE>
<TABLE>
<CAPTION>
Life Upon
Which
Depreciation
Accumulated Net Date of Date of In Statement
Description Total Depreciation Book Value Construction Acquisition Is Computed
----------- ----- ------------ ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Residence Inn:
Fremont, CA $ 5,777,342 $ 153,433 $ 5,623,909 1985 1995 40
Mountain View 16,087,932 392,794 15,695,138 1985 1995 40
(Palo Alto), CA
San Jose, CA 7,233,853 187,343 7,046,510 1986 1995 40
San Mateo, CA 19,748,774 62,825 19,685,949 1985 1996 40
Silicon Valley I, CA 29,562,485 96,872 29,465,613 1983 1996 40
Silicon Valley II, CA 30,742,711 103,453 30,639,258 1985 1996 40
Denver (Downtown), 9,199,641 33,037 9,166,604 1982 1996 40
CO
Denver (South), CO 9,128,530 266,934 8,861,596 1981 1995 40
Windsor, CT 6,062,291 156,154 5,906,137 1986 1995 40
Atlanta (Downtown), 16,613,954 62,304 16,551,650 1996 1996 40
GA
Wichita East, KA 3,954,683 14,003 3,940,680 1981 1996 40
Portland, ME 5,516,765 20,717 5,496,048 1996 1996 40
East Lansing, MI 4,215,424 15,673 4,199,751 1984 1996 40
Grand Rapids, MI 7,202,820 26,516 7,176,304 1984 1996 40
Troy (Central), MI 6,427,042 168,921 6,258,121 1986 1995 40
Troy (Southeast), MI 8,180,073 234,387 7,945,686 1985 1995 40
Cherry Hill, NJ 9,129,753 101,267 9,028,486 1989 1996 40
Binghamton, NY 6,083,513 299,553 5,783,960 1987 1994 40
Harrisburg, PA 6,522,257 71,680 6,450,577 1988 1996 40
Richmond, VA 5,799,355 162,795 5,636,560 1986 1995 40
Hampton Inn:
Naples, FL 5,728,985 324,982 5,404,003 1990 1990 40
Tallahassee, FL 4,748,191 186,351 4,561,840 1993 1995 40
West Palm Beach, FL 4,444,155 1,072,761 3,371,394 1986 1986 40
Norcross, GA 9,005,649 32,177 8,973,472 1996 1996 40
Germantown, MD 7,608,838 506,851 7,101,987 1987 1995 40
Albany/Latham, NY 9,002,738 483,951 8,518,787 1990 1994 40
Islandia (Long Island), 5,842,282 423,826 5,418,456 1988 1992 40
NY
Willow Grove 9,521,162 945,863 8,575,299 1991 1991 40
(Philadelphia), PA
Comfort Inn:
Woburn, MA 3,131,345 18,312 3,113,033 1981 1996 40
Allentown, PA 6,883,773 276,273 6,607,500 1989 1995 40
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
Cost Capitalized
Subsequent to Gross Amounts of Which
Initial Cost Acquisition Carried at Close of Period
---------------------- -------------------- --------------------------
Buildings
Buildings and and Buildings and
Description Encumbrances Land Improvement Land Improvement Land Improvement
----------- ------------ ---- ----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn Express:
Lexington, MA 1 $ 875,000 $ 5,434,073 0 $ 346,103 $ 875,000 $ 5,780,176
Sheraton Inn:
Fort Lauderdale, FL 1 0 7,779,311 0 262,481 0 8,041,792
Corporate 0 0 0 172,386 0 172,386
----------- ------------ -- ----------- ----------- ------------
$42,565,000 $245,543,454 $0 $5,867,216 $42,565,000 $251,410,670
----------- ------------ -- ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
Life Upon
Which
Depreciation
Accumulated Net Date of Date of In Statement
Description Total Depreciation Book Value Construction Acquisition Is Computed
----------- ----- ------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Holiday Inn Express:
Lexington, MA $ 6,655,176 $ 103,805 $ 6,551,371 1971 1996 40
Sheraton Inn:
Fort Lauderdale, FL 8,041,792 1,569,450 6,472,342 1988 1988 40
Corporate 172,386 375 172,011 40
------------ ----------- ------------
$293,975,670 $8,575,638 $285,400,032
------------ ----------- ------------
</TABLE>
1. Collateralized by a $70 million line of credit.
2. Collateralized by Florida Mortgage Note.
3. Collateralized by a $30 million Term Loan.
4. Collateralized by California Mortgage Note.
5. Collateralized by Michigan Mortgage Note.
45
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACC
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's definitive pr
statement to be filed with the Securities and Exchange Commission within 1
says after the year covered by this Form 10-K with respect to its Annual
meeting of Shareholders to be held on May 7, 1997.
TEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive pr
statement to be filed with the Securities and Exchange Commission within 1
says after the year covered by this Form 10-K with respect to its Annual
meeting of Shareholders to be held on May 7, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
says after the year covered by this Form 10-K with respect to its Annual
meeting of Shareholders to be held on May 7, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
says after the year covered by this Form 10-K with respect to its Annual
meeting of Shareholders to be held on May 7, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K
a) FINANCIAL STATEMENTS
The following Financial Statements are included in this report on the
pages indicated.
46
<PAGE> 49
INDEX TO FINANCIAL STATEMENTS
JF HOTEL, INC., JF HOTEL II, INC. AND JF HOTEL III, INC.
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Combined Balance Sheets at December 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Combined Statements of Income for the years ended
December 31, 1996 and 1995 and the period September 30, 1994
(inception) through December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Combined Statement of Shareholders' Equity for the years
ended December 31, 1996 and 1995 and for the period September 30, 1994
(inception) through December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Combined Statement of Cash Flows for the years ended
December 31, 1996 and 1995 and for the period September 30, 1994
(inception) through December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
FINANCIAL STATEMENT SCHEDULES
----------------------------
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Schedule 3 - Real Estate and Accumulated Depreciation
at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
b) REPORTS ON FORM 8-K
On November 12, 1996, the Company filed a report with the Securities
and Exchange Commission ("SEC") on Form 8- K, which was amended by Form 8-K-A
filed under Item 5 of such form with the SEC on January 21, 1997, to report the
acquisition, on October 25, 1996, of the Residence Inn - Atlanta (Downtown),
Georgia and the Hampton Inn - Norcross, Georgia.
On November 22, 1996, the Company filed a report on Form 8-K to report
The acquisition, on November 7, 1996, of the seven DeBoer Hotels: Residence Inn
San Mateo, California; Residence Inn - Silicon Valley I, California;
Residence Inn - Silicon Valley II, California; Residence Inn - East Lansing,
Michigan; Residence Inn - Grand Rapids, Michigan; Residence Inn - Wichita East,
Kansas; and Residence Inn - Denver (Downtown), Colorado. The following
financial statements with respect to such Hotels were filed on Form 8-K-A on
January 21, 1997 as an amendment to the November 22, 1996 Form 8-K: (a) the
combined balance sheet and statements of operations, partners' deficit and cash
flows of the DeBoer Hotels as of December 31, 1994 and December 30, 1995 and
for each of the three fiscal years in the period
47
<PAGE> 50
ended December 31, 1995; and (b) pro forma financial information (unaudited) as
of September 30, 1996 and for the nine months ended September 30, 1996.
c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
----- -----------------------
<S> <C>
3.1 Amended and Restated Declaration of Trust of the Registrant (previously filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-11, Registration No. 33-81362 and incorporated herein by
reference)
3.2 Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Company's Registration Statement on
Form S-11, Registration No. 33-81362 and incorporated herein by reference)
4.1 Form of Common Share Certificate (previously filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-11, Registration No. 33-81362 and incorporated herein by reference)
10.1-A Second Amended and Restated Agreement of Limited Partnership of Innkeepers USA Limited Partnership
10.11 Form of Percentage Lease (previously filed as Exhibit 10.11 to the Company's Registration Statement on
Form S-11, Registration No. 33-81362 and incorporated herein by reference)
10.12 Form of Right of First Refusal and Option to Purchase (previously filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-11, Registration No. 33-81362 and incorporated herein by
reference)
10.14 Innkeepers USA Trust 1994 Share Incentive Plan (previously filed as Exhibit 10.14 to the Company's
registration statement on Form S-11, Registration No. 33-81362 and incorporated herein by reference)
10.15-A Innkeepers USA Trust Non-Employee Trustees' Share Option Plan
10.16 Form of Employment Agreement (previously filed as Exhibit 10.16 to the Company's Registration Statement
on Form S-11, Registration No. 33-81362 and incorporated herein by reference)
10.17 Form of Exclusive Hotel Development Agreement and Covenant Not to Compete (previously filed as Exhibit
10.17 to the Company's Registration Statement on Form S-11, Registration No. 33-81362 and incorporated
herein by reference)
10.19 Agreement of Purchase and Sale dated July 24, 1995 between Liberty High Income Plus Limited Partnership
and Innkeepers USA Limited Partnership for seven of the Hotels (previously filed as Exhibit 10.2 to the
Company's
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
----- -----------------------
<S> <C>
registration statement on Form S-11, Registration No. 33-95622 and incorporated herein by reference).
10.20 Agreement of Purchase and Sale dated August 8, 1995 between TMH Windsor Limited Partnership and
Innkeepers USA Limited Partnership for the Residence Inn - Windsor Hotel (previously filed as
Exhibit 10.3 to the Company's registration statement on Form S-11, Registration No. 33-95622 and
incorporated herein by reference).
10.21 Percentage Lease Agreement between Innkeepers USA Limited Partnership and JF Hotel, Inc. for the
Hampton Inn - West Palm Beach, Florida (previously filed as Exhibit 10.4 to the Company's registration
statement on Form S-11, Registration No. 33-95622 and incorporated herein by reference).
10.22 Consolidated Percentage Lease Agreement between Innkeepers USA Limited Partnership and JF Hotel, Inc.
for certain hotels (previously filed as Exhibit 10.5 to the Company's registration statement on Form
S-11, Registration No. 33-95622 and incorporated herein by reference).
10.23 Assignment of the Liberty Purchase Agreement, dated October 6, 1995, between Innkeepers USA Limited
Partnership and Innkeepers Financing Partnership, L.P. (previously filed as Exhibit 10.2 to the
Company's Form 8-K filed on October 20 1995 and incorporated herein by reference).
10.24 Assignment of the Windsor Purchase Agreement, dated October 6, 1995, between Innkeepers USA Limited
Partnership and Innkeepers Financing Partnership II, L.P. (previously filed as Exhibit 10.4 to the
Company's Form 8-K filed on October 20, 1995 and incorporated herein by reference).
10.25 Loan Agreement, dated as of October 6, 1995, between the Partnership and Nomura Asset Capital
Corporation (previously filed as Exhibit 10.5 to the Company's Form 8-K filed on October 20, 1995 and
incorporated herein by reference).
10.26 Employment Agreement between David Bulger and the Company (previously filed as Exhibit 10.10 to the
Company's registration statement on Form S-11, Registration No. 33-95622 and incorporated herein by
reference).
10.27 Seven Contribution Agreements, each dated as of September 16, 1996, between various partnerships and
Innkeepers USA Limited Partnership for the seven DeBoer Hotels (previously filed as Exhibits 2.1 - 2.7
to the Company's Form 8-K filed on November 22, 1996 and incorporated herein by reference).
13.1 1996 Annual Report to Shareholders
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C>
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
</TABLE>
(d) FINANCIAL STATEMENT SCHEDULES
Schedule 3 - Real Estate and Accumulated Depreciation at December 31, 1996
50
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
<TABLE>
<S><C>
INNKEEPERS USA TRUST
/s/ Jeffrey H. Fisher
------------------------------------------------------------
Chairman of the Board and President
/s/ David Bulger
------------------------------------------------------------
Treasurer and Secretary
(Principal Financial Officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and is the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jeffrey H. Fisher Chairman of the Board and March 28, 1997
-------------------------------------
Jeffrey H. Fisher President (Principal Executive
Officer)
/s/ Miles Berger Trustee March 28, 1997
-------------------------------------
Miles Berger
Trustee March __, 1997
-------------------------------------
C. Gerald Goldsmith
/s/ Bruce Zenkel Trustee March 28, 1997
-------------------------------------
Bruce Zenkel
/s/ Jack P. DeBoer Trustee March 28, 1997
-------------------------------------
Jack P. DeBoer
Trustee March __, 1997
-------------------------------------
Thomas Crocker
/s/ David Bulger Treasurer and Secretary March 28, 1997
-------------------------------------
David Bulger (Principal Financial Officer)
</TABLE>
51
<PAGE> 54
LIST OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
3.1 Amended and Restated Declaration of Trust of the Registrant (previously filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-11, Registration No. 33-81362 and incorporated herein by
reference)
3.2 Bylaws of the Registrant (previously filed as Exhibit 3.2 to the Company's Registration Statement on
Form S-11, Registration No. 33-81362 and incorporated herein by reference)
4.1 Form of Common Share Certificate (previously filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-11, Registration No. 33-81362 and incorporated herein by reference)
10.1-A Second Amended and Restated Agreement of Limited Partnership of Innkeepers USA Limited Partnership
10.11 Form of Percentage Lease (previously filed as Exhibit 10.11 to the Company's Registration Statement on
Form S-11, Registration No. 33-81362 and incorporated herein by reference)
10.12 Form of Right of First Refusal and Option to Purchase (previously filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-11, Registration No. 33-81362 and incorporated herein by
reference)
10.14 Innkeepers USA Trust 1994 Share Incentive Plan (previously filed as Exhibit 10.14 to the Company's
registration statement on Form S-11, Registration No. 33-81362 and incorporated herein by reference)
10.15-A Innkeepers USA Trust Non-Employee Trustees' Share Option Plan
10.16 Form of Employment Agreement (previously filed as Exhibit 10.16 to the Company's Registration Statement
on Form S-11, Registration No. 33-81362 and incorporated herein by reference)
10.17 Form of Exclusive Hotel Development Agreement and Covenant Not to Compete (previously filed as Exhibit
10.17 to the Company's Registration Statement on Form S-11, Registration No. 33-81362 and incorporated
herein by reference)
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
10.19 Agreement of Purchase and Sale dated July 24, 1995 between Liberty High Income Plus Limited Partnership
and Innkeepers USA Limited Partnership for seven of the Hotels (previously filed as Exhibit 10.2 to the
Company's registration statement on Form S-11, Registration No. 33-95622 and incorporated herein by
reference).
10.20 Agreement of Purchase and Sale dated August 8, 1995 between TMH Windsor Limited Partnership and
Innkeepers USA Limited Partnership for the Residence Inn - Windsor Hotel (previously filed as
Exhibit 10.3 to the Company's registration statement on Form S-11, Registration No. 33-95622 and
incorporated herein by reference).
10.21 Percentage Lease Agreement between Innkeepers USA Limited Partnership and JF Hotel, Inc. for the
Hampton Inn - West Palm Beach, Florida (previously filed as Exhibit 10.4 to the Company's registration
statement on Form S-11, Registration No. 33-95622 and incorporated herein by reference).
10.22 Consolidated Percentage Lease Agreement between Innkeepers USA Limited Partnership and JF Hotel, Inc.
for certain hotels (previously filed as Exhibit 10.5 to the Company's registration statement on Form
S-11, Registration No. 33-95622 and incorporated herein by reference).
10.23 Assignment of the Liberty Purchase Agreement, dated October 6, 1995, between Innkeepers USA Limited
Partnership and Innkeepers Financing Partnership, L.P. (previously filed as Exhibit 10.2 to the
Company's Form 8-K filed on October 20 1995 and incorporated herein by reference).
10.24 Assignment of the Windsor Purchase Agreement, dated October 6, 1995, between Innkeepers USA Limited
Partnership and Innkeepers Financing Partnership II, L.P. (previously filed as Exhibit 10.4 to the
Company's Form 8-K filed on October 20, 1995 and incorporated herein by reference).
10.25 Loan Agreement, dated as of October 6, 1995, between the Partnership and Nomura Asset Capital
Corporation (previously filed as Exhibit 10.5 to the Company's Form 8-K filed on October 20, 1995 and
incorporated herein by reference).
10.26 Employment Agreement between David Bulger and the Company (previously filed as Exhibit 10.10 to the
Company's registration statement on Form S-11, Registration No. 33-95622 and incorporated herein by
reference).
10.27 Seven Contribution Agreements, each dated as of September 16, 1996, between various partnerships and
Innkeepers USA Limited Partnership for the seven
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
DeBoer Hotels (previously filed as Exhibits 2.1 - 2.7 to the Company's Form 8-K filed on November 22,
1996 and incorporated herein by reference).
13.1 1996 Annual Report to Shareholders
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
</TABLE>
<PAGE> 1
SECOND AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
INNKEEPERS USA LIMITED PARTNERSHIP
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.01 Continuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.02 Name, Office and Registered Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.03 Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.04 Term and Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.05 Filing of Certificate and Perfection of Limited Partnership . . . . . . . . . . . . . . . . . . . . . 13
2.06 Certificates Describing Preferred Partnership Units . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE III
BUSINESS OF THE PARTNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.01 Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.02 Prohibited Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.03 Maintenance of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.01 Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.02 Additional Capital Contributions and Issuances of Additional Partnership Units . . . . . . . . . . . 17
4.03 General Partner Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.04 Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.05 Percentage Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.06 No Interest on Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.07 Return of Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.08 No Third Party Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE V
ALLOCATIONS; DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.01 Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.02 Distribution of Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.03 REIT Distribution Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.04 No Right to Distributions in Kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.05 Limitations on Return of Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.06 Distributions Upon Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.07 Substantial Economic Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VI
RIGHTS, OBLIGATIONS AND
POWERS OF THE GENERAL PARTNER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.01 Management of the Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.02 Pledge of General Partnership Units to Lender. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.03 Delegation of Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.04 Indemnification and Exculpation of Indemnitees . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.05 Liability of the General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.06 Expenditures by the Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.07 Outside Activities Redemption/Tender Offer of REIT Shares . . . . . . . . . . . . . . . . . . . . . . 37
6.08 Employment or Retention of Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.09 General Partner Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE VII
CHANGES IN GENERAL PARTNER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
7.01 Transfer of General Partnership Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
7.02 Admission of a Substitute or Successor General . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
7.03 Effect of Bankruptcy, Withdrawal, Death or Dissolution of a General Partner . . . . . . . . . . . . . 41
ARTICLE VIII
RIGHTS AND OBLIGATIONS
OF THE LIMITED PARTNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.01 Management of the Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.02 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.03 Limitation on Liability of Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.04 Ownership by Limited Partner of Corporate General Partner or Affiliate . . . . . . . . . . . . . . . 42
8.05 Redemption Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
8.06 Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.07 Class B Conversion Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
8.08 Automatic Conversion of Preferred Partnership Units . . . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
9.01 Purchase for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
9.02 Restrictions on Transfer of Limited Partnership Units . . . . . . . . . . . . . . . . . . . . . . . . 51
9.03 Admission of Substitute Limited Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
9.04 Rights of Assignees of Partnership Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
9.05 Effect of Bankruptcy, Death, Incompetence or Termination of a Limited Partner . . . . . . . . . . . . 55
9.06 Joint Ownership of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
10.01 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
10.02 Custody of Partnership Funds; Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
10.03 Fiscal and Taxable Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
10.04 Annual Tax Information and Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
10.05 Tax Matters Partner; Tax Elections; Special Basis Adjustments . . . . . . . . . . . . . . . . . . . . 57
10.06 Reports to Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE XI
AMENDMENT OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE XII
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
12.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
12.02 Survival of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
12.03 Additional Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.04 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.05 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.06 Pronouns and Plurals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.07 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.08 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.09 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
12.10 Company is not a Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
EXHIBITS
EXHIBIT A - Partners, Capital Contributions and Percentage Interests
EXHIBIT B - Notice of Exercise of Redemption Right
</TABLE>
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<PAGE> 5
SECOND AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP
OF
INNKEEPERS USA LIMITED PARTNERSHIP
RECITALS
Innkeepers USA Limited Partnership (the "Partnership") was formed as a
limited partnership under the laws of the Commonwealth of Virginia by a
Certificate of Limited Partnership filed with the Secretary of State of the
Commonwealth of Virginia on May 23, 1994, as amended by an Amended Certificate
of Limited Partnership filed on July 8, 1994. The Partnership originally was
governed by an Agreement of Limited Partnership dated May 23, 1994 (the
"Original Agreement") among Innkeepers USA Trust, a Maryland real estate
investment trust (the "Company"), as general partner, and Jeffrey H. Fisher and
Frederic Shaw, as limited partners.
The Original Agreement was amended and restated on September 30, 1994
(the "First Amended Agreement") to admit Additional Limited Partners to the
Partnership. The First Amended Agreement was amended on March 22, 1995 (the
"First Amendment to the First Amended Agreement") to (i) admit Innkeepers
Financial Corporation, a Virginia corporation (in its capacity as the general
partner of the Partnership, the "General Partner"), as the general partner and
a limited partner of the Partnership, (ii) provide for the withdrawal of the
Company as the general partner and a limited partner of the Partnership, and
(iii) amend and add provisions required to facilitate a financing secured by
Partnership assets.
The General Partner, for itself and on behalf of the limited partners
(the "Class A Limited Partners"), desires to (i) admit Additional Limited
Partners (the "Class B Limited Partners") to the Partnership, (ii) issue
preferred limited partnership units to the Class B Limited Partners, and (iii)
restate the First Amended Agreement, as modified by the First Amendment to the
First Amended Agreement, in its entirety.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, of mutual covenants
between the parties hereto, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree to amend the First Amended Agreement, as modified by the First Amendment
to the First Amended Agreement, to read in its entirety as follows:
<PAGE> 6
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the
meanings specified below:
"ACT" means the Virginia Revised Uniform Limited Partnership Act, as
it may be amended from time to time.
"ADDITIONAL LIMITED PARTNER" means a Person admitted to this
Partnership as a Limited Partner pursuant to Section 4.02 hereof.
"ADMINISTRATIVE EXPENSES" means (i) all administrative and operating
costs and expenses incurred by the Partnership, (ii) all administrative costs
and expenses of the General Partner and the Company, including any salaries or
other payments to Trustees, directors, officers and/or employees of the General
Partner and the Company, and any accounting and legal expenses of the General
Partner and the Company, which expenses, the Partners have agreed, are expenses
of the Partnership and not of the General Partner or the Company, and (iii) to
the extent not included in clause (ii) above, REIT Expenses; provided, however,
that Administrative Expenses shall not include any administrative and operating
costs and expenses incurred by the Company that are attributable to Properties
or partnership interests in Subsidiary Partnerships owned by the Company
directly.
"AFFILIATE" means (i) any Person that, directly or indirectly,
controls or is controlled by or is under common control with such Person, (ii)
any other Person that beneficially owns, directly or indirectly, 5% or more of
the outstanding capital stock, shares or equity interests of such Person, or
(iii) any officer, director, employee, partner or trustee of such Person or any
Person controlling, controlled by or under common control with such Person
(excluding trustees and persons serving in similar capacities who are not
otherwise Affiliates of such Person). For the purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the ownership
of voting securities, partnership interests or other equity interests.
"AGREED VALUE" means the fair market value of a Partner's non-cash
Capital Contribution as of the date such Capital Contribution was made, as
agreed to by the Partners. For purposes of this Agreement, the Agreed Value of
a Partner's non-cash Capital Contribution in exchange for Common Partnership
Units shall be equal to the number of Common Partnership Units received by such
Partner in exchange for non-cash property or an
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<PAGE> 7
interest therein or in connection with the merger of the partnership of which
such Person was a partner with and into the Partnership, multiplied by either
(i) the Public Offering Price, if the contribution was made at the time of the
Initial Offering, or (ii) if the contribution was made after the Initial
Offering, the "Market Price" on the date of the contribution calculated in
accordance with the second and third sentences of the definition of "Cash
Amount." The Agreed Value of a Partner's non-cash Capital Contribution in
exchange for Preferred Partnership Units shall be as determined by the
Partnership and such Partner. The names and addresses of the Partners, the
number of Partnership Units issued to each Partner, and the Agreed Value of
non-cash Capital Contributions are set forth on Exhibit A attached hereto
("Exhibit A").
"AGREEMENT" means this Second Amended and Restated Agreement of
Limited Partnership of the Partnership.
"CAPITAL ACCOUNT" has the meaning provided in Section 4.04 hereof.
"CAPITAL CONTRIBUTION" means the total amount of capital initially
contributed or agreed to be contributed, as the context requires, to the
Partnership by each Partner pursuant to the terms of the Agreement. Any
reference to the Capital Contribution of a Partner shall include the Capital
Contribution made by a predecessor holder of the Partnership Units held by such
Partner. The paid-in Capital Contribution shall mean the Cash Amount or the
Agreed Value of other assets actually contributed by each Partner to the
capital of the Partnership.
"CAPITAL TRANSACTION" means the refinancing, sale, exchange,
condemnation, recovery of a damage award or insurance proceeds (other than
business or rental interruption insurance proceeds not reinvested in the repair
or reconstruction of Properties), or other disposition of any Property (or the
Partnership's interest therein).
"CARRYOVER TRANSFEREES" are those Persons who receive from a
contributor of a Class B Hotel or a partner thereof, and at the relevant time
retain, a carryover tax basis, in whole or in part, in either Preferred
Partnership Units or Common Partnership Units into which the Preferred
Partnership Units were converted.
"CASH AMOUNT" means an amount of cash per Common Partnership Unit
equal to the value of the REIT Shares Amount on the date of receipt by the
General Partner of a Notice of Redemption. The value of the REIT Shares Amount
shall be based on the average of the daily "Market Price" of REIT Shares for
the ten consecutive trading days immediately preceding the date of such
valuation. The market price for each such trading day shall be: (i) if the
REIT Shares are listed or admitted to trading on any securities
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<PAGE> 8
exchange or the NASDAQ-National Market, the sale price, regular way, on such
day, or if no such sale takes place on such day, the average of the closing bid
and asked prices, regular way, on such day, (ii) if the REIT Shares are not
listed or admitted to trading on any securities exchange or the NASDAQ-National
Market, the last reported sale price on such day or, if no sale takes place on
such day, the average of the closing bid and asked prices on such day, as
reported by a reliable quotation source designated by the General Partner, or
(iii) if the REIT Shares are not listed or admitted to trading on any
securities exchange or the NASDAQ-National Market and no such last reported
sale price or closing bid and asked prices are available, the average of the
reported high bid and low asked prices on such day, as reported by a reliable
quotation source designated by the General Partner, or if there shall be no bid
and asked prices on such day, the average of the high bid and low asked prices,
as so reported, on the most recent day (not more than 10 days prior to the date
in question) for which prices have been so reported; provided that if there are
no bid and asked prices reported during the ten days prior to the date in
question, the value of the REIT Shares shall be determined by the General
Partner acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment, appropriate. In the
event the REIT Shares Amount includes rights that a holder of REIT Shares would
be entitled to receive, then the value of such rights shall be determined by
the General Partner acting in good faith on the basis of such quotations and
other information as it considers, in its reasonable judgment, appropriate.
"CERTIFICATE" means any instrument or document that is required under
the laws of the Commonwealth of Virginia, or any other jurisdiction in which
the Partnership conducts business, to be signed and sworn to by the Partners of
the Partnership (either by themselves or pursuant to the power-of-attorney
granted to the General Partner in Section 8.02 hereof) and filed for recording
in the appropriate public offices within the Commonwealth of Virginia or such
other jurisdiction to perfect or maintain the Partnership as a limited
partnership, to effect the admission, withdrawal, or substitution of any
Partner of the Partnership, or to protect the limited liability of the Limited
Partners as limited partners under the laws of the Commonwealth of Virginia or
such other jurisdiction.
"CLASS A LIMITED PARTNER" means any Person named as a Class A Limited
Partner on Exhibit A, and any Person who becomes a Substitute or Additional
Class A Limited Partner, in such Person's capacity as a Class A Limited Partner
in the Partnership.
CLASS B ADMISSION DATE" means the date on which a Class B Limited
Partner is admitted to the Partnership.
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<PAGE> 9
"CLASS B CONVERSION RIGHT" has the meaning provided in Section 8.07
hereof.
"CLASS B HOTELS" means the following hotels contributed to the
Partnership by the Class B Limited Partners: (1) Downtown Residence Inn,
Denver, Colorado, (2) Residence Inn, East Lansing, Michigan, (3) Residence Inn,
Kentwood, Michigan, (4) Residence Inn, Oakmead, California, (5) Residence Inn,
San Mateo, California, (6) Residence Inn, Sunnyvale, California, and (7)
Residence Inn East, Wichita, Kansas.
"CLASS B LIMITED PARTNERS" means any Person named as a Class B Limited
Partner on Exhibit A, and any Person who
becomes a Substitute or Additional Class B Limited Partner, in such Person's
capacity as a Class B Limited Partner in the Partnership.
"CLASS B PREFERENCE VALUE PER UNIT" means, with respect to each
Preferred Partnership Unit held by each Class B Limited Partner, the
liquidation preference value of $11.00 per Preferred Partnership Unit.
"CLASS B PREFERRED RETURN" means, on each Partnership Record Date
during each of the ten years following the date of this Agreement, the greater
of (i) an annualized amount equal to $1.10 per Preferred Partnership Unit or
(ii) the lesser of (A) the annualized amount per Common Partnership Unit paid
to the holders of the Common Partnership Units on that Partnership Record Date,
plus an annualized amount equal to $0.10 per Common Partnership Unit, or (B) an
annualized amount equal to $1.155 per Preferred Partnership Unit. The Class B
Preferred Return shall be cumulative and shall be prorated for any partial
calendar year.
"CLASS B REDEMPTION RIGHT" means the right of a Class B Limited
Partner to redeem his Preferred Partnership Units in accordance with the terms
and conditions of the Redemption and Registration Rights Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision of the Code as of the date hereof and any
succeeding provision of the Code.
"COMMISSION" means the U.S. Securities and Exchange Commission.
"COMMON PARTNERSHIP UNIT" means a fractional, undivided share of the
ownership interests in the Partnership issued hereunder to the General Partner
and the Class A Limited Partners. The allocation of Common Partnership Units
among the
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<PAGE> 10
General Partner and the Class A Limited Partners shall be as set forth on
Exhibit A, as may be amended from time to time. Upon any redemption, issuance
or transfer of Common Partnership Units, the General Partner shall prepare a
schedule in the form of Exhibit A reflecting the names of the then-current
Partners, their Common Percentage Interests or Preferred Percentage Interests,
and the number of Common Partnership Units or Preferred Partnership Units owned
by each Partner.
"COMMON PERCENTAGE INTEREST" means the percentage ownership interest
in the Common Partnership Units of each Partner that holds Common Partnership
Units, as determined by dividing the number of Common Partnership Units held by
such Partner by the total number of Common Partnership Units then outstanding.
"COMPANY" means Innkeepers USA Trust, a Maryland real estate
investment trust.
"CONVERSION FACTOR" means one (1), provided that in the event that the
Company (i) declares or pays a dividend on its outstanding REIT Shares in REIT
Shares or makes a distribution to all holders of its outstanding REIT Shares in
REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii) combines its
outstanding REIT Shares into a smaller number of REIT Shares, the Conversion
Factor shall be adjusted by multiplying the Conversion Factor by a fraction,
the numerator of which shall be the number of REIT Shares issued and
outstanding on the record date for such dividend, distribution, subdivision or
combination (assuming for such purposes that such dividend, distribution,
subdivision or combination has occurred as of such time), and the denominator
of which shall be the actual number of REIT Shares (determined without the
above assumption) issued and outstanding on such date. Any adjustment to the
Conversion Factor shall become effective immediately after the effective date
of such event retroactive to the record date, if any, for such event.
"DECLARATION OF TRUST" means the Amended and Restated Declaration of
Trust of the Company filed with the Secretary of State of Maryland, as amended
or restated from time to time.
"DISSOLUTION EVENT" means an event specified in Sections
2.04(a)(i)-(iv).
"DISTRIBUTION PERIOD" means the period between two consecutive
Partnership Record Dates.
"EVENT OF BANKRUPTCY" shall occur at such time as a Person: files a
petition or otherwise initiates proceedings to be adjudicated insolvent or
seeking an order for relief as a debtor under any chapter of the United States
Bankruptcy Code, as amended (11 U.S.C. Section Section 101 et seq.); files any
petition seeking any composition, reorganization, readjustment, liquidation,
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<PAGE> 11
dissolution or similar relief under the present or any future federal
bankruptcy laws or any other present or future applicable federal, state or
other statute or law relative to bankruptcy, insolvency or other relief for
debtors; seeks the appointment of any trustee, receiver, conservator, assignee,
sequestrator, custodian, liquidator (or other similar official) of the Person
or of all or any substantial part of the properties and assets of the Person;
makes any general assignment for the benefit of creditors; admits in writing
its inability to pay its debts generally as they become due; declares or
effects a moratorium on its debt; takes any action in furtherance of any of the
foregoing actions; or consents to or acquiesces in any of the foregoing
actions.
"FIRST CLASS B ADMISSION DATE" means the date on which the first Class
B Limited Partner is admitted to the Partnership.
"FUNDING LOAN" has the meaning provided in Section 4.03 hereof.
"GENERAL PARTNER" means Innkeepers Financial Corporation, a Virginia
corporation, and any Person who becomes a substitute or additional General
Partner as provided herein, and any of their successors as General Partner.
"GENERAL PARTNERSHIP UNITS" means a fractional, undivided share of the
ownership interest in the Partnership issued hereunder to the General Partner
in its capacity as the general partner of the Partnership.
"INDEMNITEE" means (i) any Person made a party to a proceeding by
reason of his status as the General Partner or a Trustee, director or officer
of the Partnership, the Company, or the General Partner, and (ii) such other
Persons (including Affiliates of the General Partner, the Company, or the
Partnership) as the General Partner or the Company may designate from time to
time, in its sole and absolute discretion.
"INDEPENDENT TRUSTEE" has the meaning given to that term in the
Declaration of Trust.
"INITIAL HOTELS" means the following hotels: (1) Hampton Inn - West
Palm Beach, Florida, 1505 Belvedere Road, West Palm Beach, Florida 33406; (2)
Hampton Inn - Naples, Florida, 3210 Tamiami Trail North, Naples, Florida 33940;
(3) Hampton Inn - Willow Grove (Philadelphia), Pennsylvania, 1500 Easton Road,
Route 611, Willow Grove, Pennsylvania 19090; (4) Hampton Inn - Islandia (Long
Island), New York, 1600 Veterans Memorial Highway, Islandia, New York 11722;
(5) Residence Inn - Binghamton, New York, 4610 Vestal Parkway, Vestal, New York
13850; (6) Hampton Inn - Albany/Latham, New York, 981 New Loudon Road, Cohoes,
New
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<PAGE> 12
York 12047; (7) Sheraton Inn - Fort Lauderdale, Florida, 2440 Cypress Creek
Road, Fort Lauderdale, Florida 33309.
"INITIAL OFFERING" means the initial offering and sale by the Company
and the purchase by the Underwriters (as defined in the Prospectus) of the
common shares of the Company for sale to the public.
"INSTRUMENTS" means mortgages, deeds of trust or deeds to secure debt
on the Properties securing one or more notes payable to the Lender.
"LENDER" means Nomura Asset Capital Corporation.
"LIBOR" means the London Interbank Offered Rate.
"LIMITED PARTNER" means any Person named as a Class A Limited Partner
or a Class B Limited Partner on Exhibit A, and any Person who becomes a
Substitute or Additional Limited Partner, in such Person's capacity as a
Limited Partner in the Partnership.
"LIMITED PARTNERSHIP UNIT" means a fractional, undivided share of the
ownership interests in the Partnership issued hereunder to the Limited
Partners.
"LOAN DOCUMENTS" means the Instruments and any other related loan
documents in favor of the Lender.
"LOSS" has the meaning provided in Section 5.01(g) hereof.
"MINIMUM PERCENTAGE INTEREST" means the lesser of (i) 1% or (ii) if
the total Capital Contributions to the Partnership exceed $50 million, 1%
divided by the ratio of the total Capital Contributions to the Partnership to
$50 million; provided, however, that the Minimum Percentage Interest shall not
be less than 0.2% at any time.
"NOTICE OF REDEMPTION" means the Notice of Exercise of Redemption
Right substantially in the form attached as Exhibit B hereto ("Exhibit B").
"PARTNER" means any General Partner or Limited Partner.
"PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in
Regulations Section 1.704-2(i). A Partner's share of Partner Nonrecourse Debt
Minimum Gain shall be determined in accordance with Regulations Section
1.704-2(i)(5).
"PARTNERSHIP MINIMUM GAIN" has the meaning set forth in Regulations
Section 1.704-2(d). In accordance with Regulations Section 1.704-2(d), the
amount of Partnership Minimum Gain is
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<PAGE> 13
determined by first computing, for each Partnership nonrecourse liability, any
gain the Partnership would realize if it disposed of the property subject to
that liability for no consideration other than full satisfaction of the
liability, and then aggregating the separately computed gains. A Partner's
share of Partnership Minimum Gain shall be determined in accordance with
Regulations Section 1.704-2(g)(1).
"PARTNERSHIP RECORD DATE" means the record date established by the
General Partner for the distribution of cash pursuant to Section 5.02 hereof,
which record date shall be the same as the record date established by the
General Partner for a distribution to its shareholders of some or all of its
portion of such distribution.
"PARTNERSHIP UNIT" means a Common Partnership Unit or a Preferred
Partnership Unit.
"PERSON" means any individual, partnership, corporation, joint
venture, trust or other entity.
"PERCENTAGE INTEREST" means the percentage ownership interest in the
Partnership of each Partner, as determined by dividing the number of
Partnership Units owned by a Partner by the total number of Partnership Units
then outstanding.
"PREFERRED PARTNERSHIP UNIT" means a fractional, undivided share of
the ownership interests in the Partnership issued hereunder to the Class B
Limited Partners. The allocation of Preferred Partnership Units among the
Partners shall be as set forth on Exhibit A, as may be amended from time to
time. Upon any redemption, issuance or transfer of Preferred Partnership
Units, the General Partner shall prepare a schedule in the form of Exhibit A
reflecting the names of the then-current Partners, their Common Percentage
Interests or Preferred Percentage Interests, and the number of Common
Partnership Units or Preferred Partnership Units owned by each Partner.
"PREFERRED PERCENTAGE INTEREST" means the percentage ownership
interest in the Preferred Partnership Units of each Partner that holds
Preferred Partnership Units, as determined by dividing the number of Preferred
Partnership Units held by such Partner by the total number of Preferred
Partnership Units then outstanding.
"PROFIT" has the meaning provided in Section 5.01(g) hereof.
"PROPERTY" or "PROPERTIES" means, as the case may be, any or all of
the hotel properties or other investments in which the Partnership holds an
ownership interest.
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<PAGE> 14
"PROSPECTUS" means the final prospectus delivered to purchasers of the
Company's common stock in the Initial Offering.
"PUBLIC OFFERING PRICE" shall mean the initial public offering price
set forth in the Prospectus.
"REDEEMING PARTNER" has the meaning provided in Section 8.05(a)
hereof.
"REDEMPTION AMOUNT" means either the Cash Amount or the REIT Shares
Amount, as selected by the General Partner in its sole discretion pursuant to
Section 8.05(c) hereof.
"REDEMPTION AND REGISTRATION RIGHTS AGREEMENT" means the Redemption
and Registration Rights Agreement among the Partnership, the Company and the
Class B Limited Partners, dated October __, 1996, which provides the holders of
Preferred Partnership Units with certain redemption and registration rights.
"REDEMPTION RIGHT" has the meaning provided in Section 8.05(a) hereof.
"REGULATIONS" means the Federal Income Tax Regulations issued under
the Code, as amended and as hereafter amended from time to time. Reference to
any particular provision of the Regulations shall mean that provision of the
Regulations on the date hereof and any succeeding provision of the Regulations.
"REIT" means a real estate investment trust under Sections 856 through
860 of the Code.
"REIT EXPENSES" means (i) costs and expenses relating to the formation
and continuity of existence of the Company and any Subsidiaries thereof
including the General Partner (which Subsidiaries shall, for purposes of this
definition, be included within the definition of Company), including taxes,
fees and assessments associated therewith, any and all costs, expenses or fees
payable to any Trustee, officer or employee of the Company, (ii) costs and
expenses relating to the public offering and registration of securities by the
Company and all statements, reports, fees and expenses incidental thereto,
including underwriting discounts and selling commissions applicable to any such
offering of securities, (iii) costs and expenses associated with the
preparation and filing of any periodic reports by the Company under federal,
state or local laws or regulations, including filings with the Commission, (iv)
costs and expenses associated with compliance by the Company with laws, rules
and regulations promulgated by a regulatory body, including the Commission, and
(v) all other operating or administrative costs of the Company incurred in the
ordinary course of its business,
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<PAGE> 15
either directly or through Subsidiaries, including the General Partner, on
behalf of the Partnership.
"REIT SHARE" means a common share of the Company.
"REIT SHARES AMOUNT" shall mean a number of REIT Shares equal to the
product of the number of Common Partnership Units offered for redemption by a
Redeeming Partner, multiplied by the Conversion Factor; provided that in the
event the Company issues to all holders of REIT Shares rights, options,
warrants or convertible or exchangeable securities entitling the shareholders
to subscribe for or purchase REIT Shares, or any other securities or property
(collectively, the "rights"), then the REIT Shares Amount shall also include
such rights that a holder of that number of REIT Shares would be entitled to
receive.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERVICE" means the Internal Revenue Service.
"SPECIFIED REDEMPTION DATE" means the first business day of the month
that is at least 10 business days after the receipt by the General Partner of
the Notice of Redemption.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"SUBSIDIARY PARTNERSHIP" means Innkeepers Financing Limited
Partnership, a Virginia limited partnership, Innkeepers Financing Partnership
II, L.P., a Virginia limited partnership, or any other partnership a majority
of the outstanding equity interests of which is owned, directly or indirectly,
by the Company or the Partnership.
"SUBSTITUTE LIMITED PARTNER" means any Person admitted to the
Partnership as a Limited Partner pursuant to Section 9.03 hereof.
ARTICLE II
PARTNERSHIP CONTINUATION AND IDENTIFICATION
2.01 CONTINUATION. The Partners hereby agree to continue the
Partnership pursuant to the Act and upon the terms and conditions set forth in
this Agreement.
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<PAGE> 16
2.02 NAME, OFFICE AND REGISTERED AGENT. The name of the
Partnership shall be Innkeepers USA Limited Partnership. The specified office
and place of business of the Partnership shall be 306 Royal Poinciana Way, Palm
Beach, Florida 33480. The General Partner may at any time change the location
of such office, provided the General Partner gives notice to the Partners of
any such change. The name and address of the Partnership's registered agent is
George C. Howell, III, Riverfront Plaza - East Tower, 951 E. Byrd St.,
Richmond, Virginia 23219. The sole duty of the registered agent as such is to
forward to the Partnership any notice that is served on him as registered
agent.
2.03 PARTNERS.
(a) The General Partner of the Partnership is Innkeepers
Financial Corporation, a Virginia corporation. Its principal place of
business shall be the same as that of the Partnership. The Partnership Units
that are owned by Innkeepers Financial Corporation from time to time shall be
deemed held by it in its capacity as the General Partner, up to the number of
Partnership Units required to give it a 1% Percentage Interest, and the balance
of such Partnership Units shall be deemed Limited Partnership Units held by
Innkeepers Financial Corporation in its capacity as a Class A Limited Partner.
(b) The Limited Partners shall be those Persons identified as
Limited Partners on Exhibit A, as amended from time to time. The Class B
Limited Partners hereby are admitted as Limited Partners.
2.04 TERM AND DISSOLUTION.
(a) The term of the Partnership shall continue in full
force and effect until December 31, 2050, except that, notwithstanding any
other provision of this Agreement or applicable law, the Partnership shall be
dissolved sooner upon the happening of any of the following Dissolution Events
and, with respect to subparagraph 2.04(i), the General Partner shall cease to
have any authority to act on behalf of, or any management powers with respect
to, the Partnership, including without limitation the power to file a
bankruptcy petition on behalf of the Partnership, immediately upon the
occurrence of such event:
(i) The occurrence of an Event of Bankruptcy as
to a General Partner or the retirement, expulsion,
resignation, removal, dissolution, death, insanity, or
withdrawal of a General Partner unless the business of the
Partnership is continued pursuant to Section 7.03(b) hereof;
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<PAGE> 17
(ii) The passage of 90 days after the sale or
other disposition of all or substantially all the assets of
the Partnership (provided that if the Partnership receives an
installment obligation as consideration for such sale or other
disposition, the Partnership shall continue, unless sooner
dissolved under the provisions of this Agreement, until such
time as such note or notes are paid in full);
(iii) The redemption of all Limited Partnership
Units (other than any of such units held by the General
Partner); or
(iv) The election by the General Partner that the
Partnership should be dissolved.
(b) Upon dissolution of the Partnership, the Partnership
shall not liquidate the Properties, except as expressly permitted by the
Instruments, without the consent of the Lender, which may continue to exercise
all of its rights under the Instruments and the other Loan Documents and shall
have the complete and independent ability to retain the Properties until all
related debt has been paid in full or otherwise completely discharged. After
all the debt on the Properties has been paid in full or completely discharged,
the General Partner (or its trustee, receiver, successor or legal
representative) shall amend or cancel the certificate and, in accordance with
Section 5.06 hereof, either liquidate the Partnership's assets and apply and
distribute the proceeds thereof or distribute the Partnership's assets.
2.05 FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP.
The General Partner shall execute, acknowledge, record and file at the expense
of the Partnership, the Certificate and any and all amendments thereto and all
requisite fictitious name statements and notices in such places and
jurisdictions as may be necessary to cause the Partnership to be treated as a
limited partnership under, and otherwise to comply with, the laws of each state
or other jurisdiction in which the Partnership conducts business.
2.06 CERTIFICATES DESCRIBING PREFERRED PARTNERSHIP UNITS. At the
request of a Class B Limited Partner, the General Partner shall issue a
certificate summarizing the terms of such Class B Limited Partner's interest in
the Partnership, including the number of Preferred Partnership Units owned and
the Preferred Percentage Interest represented by such Preferred Partnership
Units as of the date of such certificate. Any such certificate (i) shall be in
form and substance as approved by the General Partner, (ii) shall not be
transferable except in accordance with the terms hereof, and (iii) shall bear
the following legend:
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<PAGE> 18
The Preferred Partnership Units represented by this
certificate are governed by and transferable only in
accordance with the provisions of the Second Amended and
Restated Agreement of Limited Partnership of Innkeepers USA
Limited Partnership, as amended and restated.
ARTICLE III
BUSINESS OF THE PARTNERSHIP
3.01 PURPOSES. The purpose of the Partnership is to acquire, own,
hold, maintain, manage, operate, improve, develop, finance, pledge, encumber,
mortgage, sell, exchange, lease, dispose of and otherwise deal with Properties,
together with such other activities as may be necessary, advisable or
incidental in connection therewith.
3.02 PROHIBITED ACTIONS.
(a) Notwithstanding any other provision in this Agreement
and any provision of law that otherwise so empowers the Partnership, until such
time as all obligations of the Partnership represented by one or more notes
payable (the "Notes") to the Lender, which term includes its transferees,
successors and assigns, secured by the Instruments and the other related loan
documents, in each case in favor of Lender, shall be discharged and the liens
of the Instruments and the other Loan Documents shall be released from the
Properties, the Partnership shall not, without the consent of the Lender, do
any of the following:
(i) elect any new, additional or substitute
general partners;
(ii) take any action or suffer to exist any
circumstance that would constitute an "Event of Default" under
the Instruments or any of the other Loan Documents evidencing
or securing the obligations secured by the Instruments;
(iii) amend, alter, change or repeal any provision
of this Article III;
(iv) dissolve, wind up or liquidate, in whole or
in part, consolidate or merge with or into any other entity,
or convey, sell or transfer its properties and assets
substantially as an entirety to any entity, except as
expressly permitted by the Instruments and this Agreement;
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(v) engage in any business unrelated to the
Properties;
(vi) own any assets other than (1) those related
to, or derived from, the Properties or (2) a limited
partnership interest in a Subsidiary Partnership;
(vii) incur any indebtedness other than the debt
secured by the Instruments, unsecured trade payables and other
ordinary operating expenses (including property management
fees) related to the Properties and debt expressly permitted
by the Instruments;
(viii) suffer or permit to exist an Event of
Bankruptcy with respect to the Partnership;
(ix) own any property other than hotels that are
financed by the Lender;
(x) own any interest in a partnership other than
a Subsidiary Partnership; or
(xi) amend the Partnership Agreement of a
Subsidiary Partnership without the Lender's written consent.
(b) Notwithstanding any other provision in this Agreement
and any provision of law that otherwise so empowers the Partnership, the
Partnership shall not do the following:
(i) as long as any Class B Limited Partner that
is either a contributor of a Class B Hotel, a partner thereof
or a Carryover Transferee (each, an "Original Holder") holds
either any of the Preferred Partnership Units issued by the
Partnership on any Class B Admission Date in partial
consideration for the acquisition of one or more Class B
Hotels, or any of the Common Partnership Units that were
received by such Original Holder as a result of the conversion
of such Preferred Partnership Units pursuant to Section 8.07
hereof, for a period of 5 years after the First Class B
Admission Date, dispose of the real property comprising any
Class B Hotel in a transaction that would result in the
allocation of taxable income or gain by the Partnership to any
of such Original Holders under Section 704(c) of the Code; and
(ii) as long as the Original Holders, in the
aggregate, hold at least 40% of the aggregate value of the
Preferred Partnership Units issued by the Partnership on all
Class B Admission Dates in partial
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consideration for the acquisition of one or more Class
B Hotels, during the period beginning 5 years after the First
Class B Admission Date and ending 10 years after the First
Class B Admission Date, dispose of the real property
comprising any Class B Hotel in a transaction that would
result in the allocation of taxable income or gain by the
Partnership to any of the Original Holders under Section
704(c) of the Code. If the Partnership disposes of such real
property in violation of this Section 3.02(b)(ii), and
notwithstanding such prohibition, then in such event the
Partnership shall pay to the Original Holders the amount of
the federal and state income tax liability (together with any
interest and penalties thereon) of the Original Holders
attributable to such Code Section 704(c) allocation.
3.03 MAINTENANCE OF INDEBTEDNESS. For a period of 10 years
following the First Class B Admission Date, the Partnership shall maintain
indebtedness (above and beyond amounts guaranteed by William J. Hamrick and any
other guarantors) (the "Required Indebtedness") in an amount equal to the
lesser of: (A) $45,000,000 or (B) the aggregate negative capital account
balances of the contributors of the Class B Hotels. The Required Indebtedness
shall be reduced to the extent that the Original Holders redeem, in whole or in
part, their Preferred Partnership Units in exchange for REIT Shares, redeem
their Preferred Partnership Units in full for cash or otherwise dispose of
their Preferred Partnership Units (other than by a conversion to Common
Partnership Units) or die (the Preferred Partnership Units that are so
redeemed, disposed of, or held by transferees of deceased holders are referred
to as "Stepped-Up Basis Units"). In such a case, the Required Indebtedness
shall be reduced by an amount equal to the original Required Indebtedness prior
to any reduction multiplied by a fraction equal to (i) the aggregate negative
capital account balances of the contributors of the Class B Hotels listed on
Exhibit C to the Guaranty Agreement (the "Initial Negative Capital Accounts"),
minus the aggregate negative capital account balances associated with the
Stepped-Up Basis Units redeemed or transferred immediately prior to the
reduction of the Required Indebtedness, divided by (ii) the Initial Negative
Capital Accounts. If the Partnership fails to maintain such level of debt,
then the Partnership shall pay to the Class B Limited Partners the amount of
federal and state income taxes (together with interest and penalties) of the
Class B Limited Partners, which are created by the reduction in debt. To the
extent at the end of the ten (10) year period the Partnership has debt not
otherwise guaranteed, the Partnership, to the extent permitted by the lender,
will permit the Class B Limited Partners to guarantee such debt (or to enter
into reimbursement agreements with the Partnership or Affiliate of the
Partnership to whom such debt is recourse, if any); provided, however, that
nothing contained herein shall prevent the
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Partnership from incurring, retiring, repaying, or prepaying such debt at any
time after such ten (10) year period.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01 CAPITAL CONTRIBUTIONS. The General Partner has contributed to
the capital of the Partnership cash in an amount set forth opposite its name on
Exhibit A. The Class A Limited Partners have contributed to the capital of the
Partnership cash and/or interests in one or more of the Initial Hotels. The
Class B Limited Partners shall contribute to the capital of the Partnership the
Class B Hotels. The Agreed Values of the Limited Partners' Capital
Contributions are as set forth opposite the Limited Partners' names on
Exhibit A.
4.02 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL
PARTNERSHIP UNITS. Except as provided in this Section 4.02 or in Section 4.03,
the Partners shall have no right or obligation to make any additional Capital
Contributions or loans to the Partnership. The General Partner may contribute
additional capital to the Partnership, from time to time, and receive
additional Partnership Units in respect thereof, in the manner contemplated in
this Section 4.02.
(a) Issuances of Additional Partnership Units.
(i) General. Subject to Section 4.02(c) hereof, the
General Partner is hereby authorized to cause the Partnership
to issue such additional Partnership Units for any Partnership
purpose at any time or from time to time, to the Partners
(including the General Partner) or to other Persons for such
consideration and on such terms and conditions as shall be
established by the General Partner in its sole and absolute
discretion, all without the approval of any Limited Partners.
Any additional Partnership Units issued thereby may be issued
in one or more classes, or one or more series of any of such
classes, with such designations, preferences and relative,
participating, optional or other special rights, powers and
duties, including rights, powers and duties senior to Limited
Partnership Units, all as shall be determined by the General
Partner in its sole and absolute discretion and without the
approval of any Limited Partner, subject to Virginia law,
including, without limitation, (i) the allocation of items of
Partnership income, gain, loss, deduction and credit to each
such class or series of
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<PAGE> 22
Partnership Units; (ii) the right of each such class or series of
Partnership Units to share in Partnership distributions; and (iii) the
rights of each such class or series of Partnership Units upon
dissolution and liquidation of the Partnership; provided, however,
that no additional Partnership Units shall be issued to the General
Partner unless:
(1) the additional Partnership Units are
issued in connection with the issuance of shares of
or other interests in the Company, which shares or
interests have designations, preferences and other
rights, all such that the economic interests are
substantially similar to the designations,
preferences and other rights of the additional
Partnership Units issued to the General Partner by
the Partnership in accordance with this Section 4.02
and (2) except as provided in Section 4.02(a)(ii)
hereof, the General Partner shall make a Capital
Contribution to the Partnership in an amount which
(when combined with the amount of any capital
contributions to Subsidiary Partnerships that would
be necessary for the Company to maintain ownership
interests in the Subsidiary Partnerships equal to the
percentage set out in the definition of Minimum
Percentage Interest) is equal to the proceeds raised
in connection with the issuance of such shares of or
other interests in the Company.
Without limiting the foregoing, the General
Partner is expressly authorized to cause the
Partnership to issue Partnership Units for less than
fair market value, so long as the General Partner
concludes in good faith that such issuance is in the
best interests of the General Partner and the
Partnership.
(ii) Upon Issuance of New Securities. After the Initial
Offering, the Company agrees that it shall not issue any additional
REIT Shares (other than REIT Shares issued in connection with a
redemption pursuant to Section 8.05 hereof) or rights, options,
warrants or convertible or exchangeable securities containing the
right to subscribe for or purchase REIT Shares (collectively, "New
Securities") other than to all holders of REIT Shares, unless (A) the
General Partner shall cause the Partnership to issue to the General
Partner Partnership Units or rights, options, warrants
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<PAGE> 23
or convertible or exchangeable securities of the Partnership having
designations, preferences and other rights, all such that the economic
interests are substantially similar to those of the New Securities and
(B) the General Partner makes a Capital Contribution to the
Partnership in an amount which (when combined with the amount of any
capital contributions to Subsidiary Partnerships that would be
necessary for the Company to maintain ownership interests in the
Subsidiary Partnerships equal to the percentage set out in the
definition of Minimum Percentage Interest) is equal to the proceeds
from the issuance of such New Securities and from the exercise of
rights contained in such New Securities; provided, however, that the
Company may issue New Securities in connection with an acquisition of
a property to be held directly by the Company or a Subsidiary of the
Company, but if and only if, such direct acquisition and issuance of
New Securities have been approved and determined to be in the best
interest of the Company and the Partnership by a majority of the
Independent Trustees. Without limiting the foregoing, the Company is
expressly authorized to issue New Securities for less than fair market
value, and to cause the Partnership to issue to the General Partner
corresponding Partnership Units so long as (x) the Company concludes
in good faith that such issuance is in the best interest of the
Company and the Partnership (for example, and not by way of
limitation, the issuance of all REIT Shares and corresponding
Partnership Units pursuant to an employee tock purchase plan providing
for employee purchases of REIT Shares at a discount from fair market
value or employee stock options that have an exercise price that is
less than the fair market value of the REIT Shares, either at the time
of issuance or at the time of exercise), and (y) the General Partner
makes a Capital Contribution to the Partnership in an amount which
(when combined with the amount of any capital contributions to
Subsidiary Partnerships that would be necessary for the Company to
maintain ownership interests in the Subsidiary Partnerships equal to
the percentage set out in the definition of Minimum Percentage
Interest) is equal to the proceeds from such issuance to the
Partnership. By way of example, in the event the Company issues REIT
Shares for a cash purchase price and the General Partner makes a
Capital Contribution to the Partnership in an amount required hereby,
the General Partner shall be issued a number of additional Common
Partnership Units equal to the product of (A) the number of such REIT
Shares issued by the Company, multiplied by (B) a fraction, the
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<PAGE> 24
numerator of which is one hundred percent (100%), and the denominator
of which is the Conversion Factor in effect on the date of such
contribution.
(b) Certain Deemed Contributions of Proceeds of Issuance
of Shares. In connection with any and all issuances of REIT Shares, the
General Partner shall make a Capital Contribution to the Partnership which
(when combined with the amount of any capital contributions to Subsidiary
Partnerships that would be necessary for the Company to maintain ownership
interests in the Subsidiary Partnerships equal to the percentage set out in the
definition of Minimum Percentage Interest) is equal to the proceeds raised in
connection with such issuance as required above, provided that if the proceeds
actually received by the Company are less than the gross proceeds of such
issuance as a result of any underwriter's discount or other expenses paid or
incurred in connection with such issuance, then the General Partner shall be
deemed to have made a Capital Contribution to the Partnership which (when
combined with the amount of any capital contributions to Subsidiary
Partnerships that would be necessary for the Company to maintain ownership
interests in the Subsidiary Partnerships equal to the percentage set out in the
definition of Minimum Percentage Interest) is equal to the amount of the gross
proceeds of such issuance and the Partnership shall be deemed simultaneously to
have paid such offering expenses in connection with the required issuance of
additional Partnership Units to the General Partner for such Capital
Contribution pursuant to Section 4.02(a) hereof.
(c) Issuance of Superior and Pari Passu Partnership
Units. The Partnership may issue at any time Partnership Units that have
income, distribution, and liquidation rights subordinate to the income,
distribution, and liquidation rights of the Preferred Partnership Units.
However, as long as the Preferred Partnership Units remain outstanding (the
"Limitation Period"), the Partnership may issue Partnership Units with income,
distribution, or liquidation rights that are superior to ("Superior Partnership
Units") or the same as ("Pari Passu Partnership Units") the income,
distribution, or liquidation rights of the Preferred Partnership Units if, and
only if, immediately after such issuance (i) the value of all of the Superior
Partnership Units that would be outstanding immediately after such issuance
would not exceed an amount equal to 18.7% of the aggregate value of the total
outstanding partnership interests in the Partnership immediately after such
issuance ("Total Equity"), and (ii) the value of all of the Pari Passu
Partnership Units and the Superior Partnership Units, taken together, that
would be outstanding immediately after such issuance would not exceed an amount
equal to (A) 22% of the Total Equity, plus (B) the value of the Preferred
Partnership Units issued to the DeBoer Affiliated Partnerships, minus (C) the
value of such remaining outstanding Preferred Partnership Units. For
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<PAGE> 25
purposes of this Section 4.02(c), Total Equity shall include (i) all Preferred
Partnership Units, (ii) all Common Partnership Units held by the General
Partner, the Company and the Class A Limited Partners and (iii) all Superior
Partnership Units and Pari Passu Partnership Units held by (or to be issued to)
the General Partner, the Company or others. For purposes of this Section
4.02(c), (A) the deemed value of any Preferred Partnership Units, Superior
Partnership Units and Pari Passu Partnership Units outstanding and to be
outstanding shall be the aggregate liquidation preference value of such
Partnership Units, and (B) the deemed value of any Common Partnership Units
shall be the number of such Partnership Units outstanding multiplied by the
reported closing share price of one common share of beneficial interest of the
Company on the business day prior to the issuance on Nasdaq or the exchange on
which such shares are then primarily traded. The restrictions in this
paragraph shall terminate when the Preferred Partnership Units are no longer
outstanding. During the Limitation Period, the Partnership may not issue
Superior Partnership Units in exchange for non-cash property. None of the
limitations in this paragraph shall prevent the Partnership from issuing
Preferred Partnership Units in connection with the acquisition of the 7
Residence Inn hotels owned by partnerships controlled by Jack P. DeBoer.
(d) Minimum Percentage Interest. In the event that
either a redemption pursuant to Section 8.05 hereof or an additional Capital
Contribution by the General Partner would result in the Limited Partners (other
than the General Partner), in the aggregate, owning less than the Minimum
Percentage Interest, the General Partner and the Limited Partners shall form
another partnership and contribute sufficient Limited Partnership Units
together with such other Limited Partners so that such partnership owns at
least the Minimum Percentage Interest.
(e) 1994 Plan and Trustees' Plan. The Company has
established the 1994 Plan and Trustees' Plan (as defined in the prospectus for
the Initial Offering) and may from time to time establish other compensation or
other incentive plans to provide incentives to its Trustees, executive officers
and certain key employees. The following examples are illustrative of the
operation of the provisions of Section 4.02(a)(ii) with respect to issuances of
New Securities to such Trustees, officers and employees:
(i) If the Company awards REIT Shares to any such
Trustee, officer or other employee (A) the General Partner
shall, as soon as practicable, contribute to the Partnership
(to be thereafter taken into account for the purposes of
calculating any cash distributable to the Partners) an amount
which (when combined with the amount of any capital
contributions to Subsidiary Partnerships that would be
necessary for the Company to
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<PAGE> 26
maintain ownership interests in the Subsidiary Partnerships
equal to the percentage set out in the definition of Minimum
Percentage Interest) is equal to the price, if any, paid to
the Company by such party for such REIT Shares, and (B) the
General Partner shall be issued by the Partnership a number of
additional Common Partnership Units equal to the product of
(1) the number of such REIT Shares issued by the Company,
multiplied by (2) a fraction, the numerator of which is one
hundred percent (100%), and the denominator of which is the
Conversion Factor in effect on the date of such contribution;
(ii) If the Company awards an option or warrant
relating to REIT Shares, whether or not qualifying as an
incentive stock option under the Code, to any Trustee, officer
or other employee, then the Partnership shall grant to the
General Partner a corresponding option or warrant to acquire
Partnership Units. Upon the exercise of such option or
warrant, (A) the General Partner shall, as soon as practicable
after such exercise, contribute to the capital of the
Partnership (to be thereafter taken into account for the
purposes of calculating distributable cash) an amount equal to
the exercise price, if any, paid to the Company by such
exercising party in connection with the exercise of the option
or warrant, and (B) the General Partner shall be issued by the
Partnership a number of additional Common Partnership Units
equal to the product of (1) the number of REIT Shares issued
by the Company in satisfaction of such exercised option or
warrant, multiplied by (2) a fraction, the numerator of which
is one hundred percent (100%), and the denominator of which is
the Conversion Factor in effect on the date of such
contribution; and
(iii) If the Company grants any Trustee, officer
or employee share appreciation rights, performance share
awards or other similar rights ("Incentive Rights"), then
simultaneously, the Partnership shall grant the General
Partner corresponding and economically equivalent rights.
Consequently, upon the cash payment by Company to its
Trustees, officers or employees pursuant to such Incentive
Rights, the Partnership shall make an equal cash payment to
the General Partner.
4.03 GENERAL PARTNER LOANS. The General Partner may from time to
time advance funds to the Partnership for any proper Partnership purpose as a
loan ("Funding Loan"), provided that any such funds must first be obtained by
the General Partner from a third party lender, or from the Company which must
obtain such
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<PAGE> 27
funds from a third party lender, and then all of such funds must be loaned by
the General Partner to the Partnership on the same terms and conditions,
including principal amount, interest rate, repayment schedule and costs and
expenses, as shall be applicable with respect to or incurred in connection with
such loan with such third party lender. Except for Funding Loans, the General
Partner and the Company shall not incur any indebtedness for borrowed funds;
provided, however, that any loan proceeds received by the Company may be
distributed to its shareholders or other equity holders if such loan and
distribution have been approved and determined to be necessary to enable the
Company to maintain its status as a REIT under Sections 856 through 860 of the
Code by a majority of the Independent Trustees.
4.04 CAPITAL ACCOUNTS. A separate capital account (a "Capital
Account") shall be established and maintained for each Partner in accordance
with Regulations Section 1.704-1(b)(2)(iv). If (i) a new or existing Partner
acquires additional Partnership Units in exchange for more than a de minimis
Capital Contribution, (ii) the Partnership distributes to a Partner more than a
de minimis amount of Partnership property as consideration for Partnership
Units, or (iii) the Partnership is liquidated within the meaning of Regulation
Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue the property of
the Partnership to its fair market value (as determined by the General Partner
and taking into account Section 7701(g) of the Code) in accordance with
Regulations Section 1.704-1(b)(2)(iv)(f). When the Partnership's property is
revalued by the General Partner, the Capital Accounts of the Partners shall be
adjusted in accordance with Regulations Sections 1.704-1(b)(2)(iv)(f) and (g),
which generally require such Capital Accounts to be adjusted to reflect the
manner in which the unrealized gain or loss inherent in such property (that has
not been reflected in the Capital Accounts previously) would be allocated among
the Partners pursuant to Section 5.01 if there were a taxable disposition of
such property for its fair market value (as determined by the General Partner
and taking into account Section 7701(g) of the Code) on the date of the
revaluation. The Capital Accounts of the Partners shall be adjusted based on
the hypothetical assumption that all of the outstanding Preferred Partnership
Units that had not previously been converted into Common Partnership Units were
converted into Common Partnership Units on the day after the Class B Admission
Date (the "Conversion Assumption"); provided, however, that if the aggregate
Capital Accounts of the Class B Limited Partners with the Conversion Assumption
is less than the aggregate Capital Accounts of the Class B Limited Partners
without the Conversion Assumption, the Capital Accounts of the Partners shall
be adjusted without the Conversion Assumption.
4.05 PERCENTAGE INTERESTS. If the number of outstanding
Partnership Units increases or decreases during a taxable year,
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(i) the General Partner and each Class A Limited Partner's Common Percentage
Interest shall be adjusted to a percentage equal to the number of Common
Partnership Units held by such Partner divided by the aggregate number of
outstanding Common Partnership Units, (ii) each Class B Limited Partner's
Preferred Percentage Interest shall be adjusted to a percentage equal to the
number of Preferred Partnership Units held by such Partner divided by the
aggregate number of outstanding Preferred Partnership Units, and (iii) each
Partner's Percentage Interest shall be adjusted to a percentage equal to the
number of the Partnership Units held by such Partner divided by the aggregate
number of the outstanding Partnership Units. If the Partners' Percentage
Interests are adjusted pursuant to this Section 4.05, gross income of the
Partnership, Profits, and Losses for the taxable year in which the adjustment
occurs shall be allocated between the part of the year ending on the day when
the Partnership's property is revalued by the General Partner and the part of
the year beginning on the following day either (i) as if the taxable year had
ended on the date of the adjustment or (ii) based on the number of days in each
part. The General Partner, in its sole discretion, shall determine which
method shall be used to allocate gross income of the Partnership, Profits, and
Losses for the taxable year in which the adjustment occurs. The allocation of
gross income of the Partnership, Profits, and Losses for the earlier part of
the year shall be based on the Common and Preferred Percentage Interests before
adjustment, and the allocation of gross income of the Partnership, Profits, and
Losses for the later part shall be based on the adjusted Common and Preferred
Percentage Interests.
4.06 NO INTEREST ON CONTRIBUTIONS. No Partner shall be entitled to
interest on its Capital Contribution.
4.07 RETURN OF CAPITAL CONTRIBUTIONS. No Partner shall be entitled
to withdraw any part of its Capital Contribution or its Capital Account or to
receive any distribution from the Partnership, except as specifically provided
in this Agreement. Except as otherwise provided herein, there shall be no
obligation to return to any Partner or withdrawn Partner any part of such
Partner's Capital Contribution for so long as the Partnership continues in
existence.
4.08 NO THIRD PARTY BENEFICIARY. No creditor or other third party
having dealings with the Partnership shall have the right to enforce the right
or obligation of any Partner to make Capital Contributions or loans or to
pursue any other right or remedy hereunder or at law or in equity, it being
understood and agreed that the provisions of this Agreement shall be solely for
the benefit of, and may be enforced solely by, the parties hereto and their
respective successors and assigns. None of the rights or obligations of the
Partners herein set forth to make Capital Contributions or loans to the
Partnership shall be deemed an
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<PAGE> 29
asset of the Partnership for any purpose by any creditor or other third party,
nor may such rights or obligations be sold, transferred or assigned by the
Partnership or pledged or encumbered by the Partnership to secure any debt or
other obligation of the Partnership or of any of the Partners. In addition, it
is the intent of the parties hereto that no distribution to any Limited Partner
shall be deemed a return of money or other property in violation of the Act.
ARTICLE V
ALLOCATIONS; DISTRIBUTIONS
5.01 ALLOCATIONS.
(a) Gross Income. Gross income of the Partnership for each
fiscal year of the Partnership shall be allocated to the Class B Limited
Partners in proportion to their Preferred Percentage Interests until the
aggregate amount of gross income allocated to the Class B Limited Partners
under this Section 5.01(a) for the current and all prior years equals the
aggregate amount of the Class B Preferred Return paid to the Class B Limited
Partners pursuant to Sections 5.02(a)(i), 5.06(a)(i), 8.07 and 8.08 for the
current and all prior years.
(b) Profit and Loss. After the allocation of gross income
pursuant to Section 5.01(a), Profit and Loss of the Partnership for each fiscal
year of the Partnership shall be allocated among the Partners in accordance
with their respective Common Percentage Interests.
(c) Minimum Gain Chargeback. Notwithstanding any provision
to the contrary, (i) any expense of the Partnership that is a "nonrecourse
deduction" within the meaning of Regulations Section 1.704-2(b)(1) shall be
allocated among the Partners in accordance with the Partners' respective Common
Percentage Interests, (ii) any expense of the Partnership that is a "partner
nonrecourse deduction" within the meaning of Regulations Section 1.704-2(i)(2)
shall be allocated in accordance with Regulations Section 1.704-2(i)(1), (iii)
if there is a net decrease in Partnership Minimum Gain within the meaning of
Regulations Section 1.704-2(f)(1) for any Partnership taxable year, items of
gain and income shall be allocated among the Partners in accordance with
Regulations Section 1.704-2(f) and the ordering rules contained in Regulations
Section 1.704-2(j), and (iv) if there is a net decrease in Partner Nonrecourse
Debt Minimum Gain within the meaning of Regulations Section 1.704-2(i)(4) for
any Partnership taxable year, items of gain and income shall be allocated among
the Partners in accordance with Regulations Section 1.704-2(i)(4) and the
ordering rules contained in Regulations Section 1.704-2(j). A Partner's
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"interest in partnership profits" for purposes of determining its share of the
nonrecourse liabilities of the Partnership within the meaning of Regulations
Section 1.752-3(a)(3) shall be such Partner's Common Percentage Interest.
(d) Qualified Income Offset. If a Limited Partner receives
in any taxable year an adjustment, allocation, or distribution described in
subparagraphs (4), (5), or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that
causes or increases a negative balance in such Partner's Capital Account that
exceeds the sum of such Partner's shares of Partnership Minimum Gain and
Partner Nonrecourse Debt Minimum Gain, as determined in accordance with
Regulations Sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated
specially for such taxable year (and, if necessary, later taxable years) items
of income and gain in an amount and manner sufficient to eliminate such
negative Capital Account balance as quickly as possible as provided in
Regulations Section 1.704-1(b)(2)(ii)(d). After the occurrence of an
allocation of income or gain to a Limited Partner in accordance with this
Section 5.01(d), to the extent permitted by Regulations Section 1.704-1(b),
items of expense or loss shall be allocated to such Partner in an amount
necessary to offset the income or gain previously allocated to such Partner
under this Section 5.01(d).
(e) Capital Account Deficits. Loss shall not be allocated to
a Limited Partner to the extent that such allocation would cause a deficit in
such Partner's Capital Account (after reduction to reflect the items described
in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum
of such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse
Debt Minimum Gain. Any Loss in excess of that limitation shall be allocated to
the General Partner. After the occurrence of an allocation of Loss to the
General Partner in accordance with this Section 5.01(e), to the extent
permitted by Regulations Section 1.704-1(b), Profit shall be allocated to such
Partner in an amount necessary to offset the Loss previously allocated to such
Partner under this Section 5.01(e).
(f) Allocations Between Transferor and Transferee. If a
Partner transfers any part or all of its Partnership Units, and the transferee
is admitted as a substitute Partner as provided herein, the distributive shares
of the various items of Profit and Loss allocable among the Partners during
such fiscal year of the Partnership shall be allocated between the transferor
and the substitute Partner either (i) as if the Partnership's fiscal year had
ended on the date of the transfer, or (ii) based on the number of days of such
fiscal year that each was a Partner without regard to the results of
Partnership activities in the respective portions of such fiscal year in which
the transferor and the transferee were Partners. The General Partner, in its
sole discretion, shall determine which method shall be used to
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allocate the distributive shares of the various items of Profit and Loss
between the transferor and the substitute Partner.
(g) Definition of Profit and Loss. "Profit" and "Loss" and
any items of income, gain, expense, or loss referred to in this Agreement shall
be determined in accordance with federal income tax accounting principles, as
modified by Regulations Section 1.704-1(b)(2)(iv), except that Profit and Loss
shall not include items of income, gain and expense that are specially
allocated pursuant to Section 5.01(a), 5.01(c), 5.01(d), or 5.01(e). All
allocations of income, Profit, gain, Loss, and expense (and all items contained
therein) for federal income tax purposes shall be identical to all allocations
of such items set forth in this Section 5.01, except as otherwise required by
Section 704(c) of the Code and Regulations Section 1.704-1(b)(4). The General
Partner shall use the traditional method for allocating items of income, gain,
and expense as required by Section 704(c) of the Code relating to the Class B
Hotels. Otherwise, the General Partner shall have the authority to elect the
method to be used by the Partnership for allocating items of income, gain, and
expense as required by Section 704(c) of the Code and such election shall be
binding on all Partners.
5.02 DISTRIBUTION OF CASH.
(a) The General Partner shall distribute cash on a
quarterly (or, at the election of the General Partner, more frequent) basis, in
an amount determined by the General Partner in its sole discretion, to the
Partners who are Partners on the Partnership Record Date with respect to such
quarter (or other distribution period), as follows:
(i) First, to the Class B Limited Partners in
accordance with their respective Preferred Percentage
Interests on the Partnership Record Date until the Class B
Limited Partners have received an amount equal to the excess,
if any, of (A) their cumulative Class B Preferred Return for
the current and all prior years over (B) the sum of all prior
Class B Preferred Return distributions to the Class B Limited
Partners pursuant to this Section 5.02(a)(i) and Sections 8.07
and 8.08 hereof; and
(ii) Thereafter, to the Partners in accordance with
their respective Common Percentage Interests on the
Partnership Record Date;
provided, however, that if a new or existing Partner acquires additional
Partnership Units in exchange for a Capital Contribution on any date other than
a Partnership Record Date, the cash distribution attributable to such
additional Partnership Units for the Partnership Record Date following the
issuance of
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such additional Partnership Units shall be reduced in the proportion that the
number of days that such additional Partnership Units are held by such Partner
bears to the number of days in the relevant Distribution Period; and further
provided, that if a Class B Limited Partner converts all or a portion of its
Preferred Partnership Units into Common Partnership Units pursuant to Section
8.07 hereof on any date other than a Partnership Record Date, on the succeeding
Partnership Record Date, such Class B Limited Partner shall receive the sum of
(i) a pro rata portion of the Class B Preferred Return for such Partnership
Record Date attributable to the portion of the Distribution Period prior to and
including the date of the conversion and (ii) a pro rata portion of the amount
such Partner is entitled to receive as a holder of Common Partnership Units,
which amount is attributable to the portion of the Distribution Period
following the date of the conversion.
(b) In no event may a Partner receive a distribution of
cash with respect to a Partnership Unit if such Partner is entitled to receive
a dividend with respect to a REIT Share for which all or part of such
Partnership Unit has been or will be redeemed.
5.03 REIT DISTRIBUTION REQUIREMENTS. The General Partner shall use
its reasonable efforts to cause the Partnership to distribute amounts
sufficient to enable the General Partner to distribute to the Company amounts
sufficient to enable the Company (i) to meet its distribution requirement for
qualification as a REIT as set forth in Section 857(a)(1) of the Code and (ii)
to avoid any federal income or excise tax liability imposed by the Code.
5.04 NO RIGHT TO DISTRIBUTIONS IN KIND. Except as otherwise
provided herein, no Partner shall be entitled to demand property other than
cash in connection with any distributions by the Partnership.
5.05 LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS.
Notwithstanding any of the provisions of this Article V, no Partner shall have
the right to receive and the General Partner shall not have the right to make,
a distribution which includes a return of all or part of a Partner's Capital
Contributions, unless after giving effect to the return of a Capital
Contribution, the sum of all Partnership liabilities, other than the
liabilities to a Partner for the return of his Capital Contribution, does not
exceed the fair market value of the Partnership's assets.
5.06 DISTRIBUTIONS UPON LIQUIDATION.
(a) Upon liquidation of the Partnership, after payment of, or
adequate provision for, debts and obligations of the
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Partnership, including any Partner loans, any remaining assets of the
Partnership shall be distributed in the following order of priority:
(i) First, to the Class B Limited Partners in
proportion to their respective Preferred Percentage Interests
the amount of any accrued but unpaid Class B Preferred Return
for the current and all prior years;
(ii) Second, to each Class B Limited Partner the
greater of (1) the Class B Preference Value per Unit
multiplied by the number of Preferred Partnership Units held
by such Partner, (2) such Partner's positive Capital Account
balance that is attributable to Preferred Partnership Units,
or (3) the amount such Partner would have received upon the
liquidation of the Partnership if such Partner had converted
its Preferred Partnership Units into Common Partnership Units
pursuant to Section 8.07 hereof immediately prior to the
liquidation; and
(iii) Thereafter, to the Class A Limited Partners and
the General Partner with positive Capital Accounts in
accordance with their respective positive Capital Account
balances.
The Capital Account of each Partner shall be determined after all adjustments
made in accordance with Sections 5.01 and 5.02 hereof resulting from
Partnership operations and from all sales and dispositions of all or any part
of the Partnership's assets.
(b) If the amount to which a Class B Limited Partner is
entitled to receive pursuant to Sections 5.06(a)(i) and (ii) equals or exceeds
the fair market value of one or more of the Class B Hotels contributed to the
Partnership by such Partner, such Partner shall have the option to have such
Class B Hotel or Hotels distributed to such Partner. Before any distribution
of Partnership assets in kind, all adjustments shall be made to the Capital
Accounts of each Partner in accordance with Sections 5.01 and 5.02 hereof for
the amount of Profit and Loss that would have been credited or charged if such
assets had been sold at their fair market value and the Capital Account of each
Partner shall be adjusted to reflect the distribution of such assets as though
the adjusted basis of such assets to the Partnership were equal to the fair
market value of such assets. The fair market value of a Class B Hotel shall be
as mutually agreed upon by the General Partner and the Class B Limited Partner
to whom the Class B Hotel is to be distributed. If the General Partner and
such Class B Limited Partner are unable to agree upon the fair market value of
the Class B Hotel after a 20-day negotiation period, either party may have the
fair market value of the Class B Hotel determined by appraisal by appointing an
appraiser having the
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qualifications set forth below to determine the same and by notifying the other
party of such appointment within 20 days after the expiration of such 20-day
negotiation period. If the other party shall fail to notify the first party,
within 20 days after its receipt of notice of the appointment by the first
party, of the appointment by the other party of an appraiser having the
qualifications set forth below, the appraiser appointed by the first party
shall alone make the determination of such fair market value. Appraisers
appointed by the parties shall be members of the Appraisal Institute (MAI), and
shall have at least 10 years' experience in the valuation of properties similar
to the Class B Hotel in the greater metropolitan area in which the Class B
Hotel is located. If each party shall appoint an appraiser having the
aforesaid qualifications, and if such two appraisers cannot, within 30 days
after the appointment of the second appraiser, agree upon the determination
hereinabove required, then they shall select a third appraiser, which third
appraiser shall have the aforesaid qualifications, and if they fail so to do
within 40 days after the appointment of the second appraiser they shall notify
both parties, and either party shall thereafter have the right, on notice to
the other, to apply for the appointment of the third appraiser to the chapter
of the American Arbitration Association or its successor organization located
in the greater metropolitan area of the Property, or, if no such chapter is
located in such metropolitan area, in the greater metropolitan area closest to
the Class B Hotel in which such a chapter is located. Each appraiser shall
render its decision as to the fair market value of the Class B Hotel within 30
days after the appointment of the third appraiser, and shall furnish a copy
thereof to the General Partner and the Class B Limited Partner. The fair
market value of the Class B Hotel shall then be calculated as the average of:
(i) the fair market value determined by the third appraiser, and (ii) whichever
of the fair market values determined by the first two appraisers is closer to
the fair market value determined by the third appraiser; provided, that, if the
fair market value determined by the third appraiser is higher or lower than
both fair market values determined by the first two appraisers, such fair
market value determined by the third appraiser shall be disregarded and the
fair market value of the Class B Hotel shall then be calculated as the average
of the fair market values determined by the first two appraisers. The fair
market value of the Class B Hotel as so determined shall be binding and
conclusive upon the Partnership and the Class B Limited Partner. Each party
shall bear the cost of its own appraiser and the costs of appointing, and the
expenses of, the third appraiser shall be shared equally by the Partnership and
the Class B Limited Partner.
(c) Any distributions pursuant to this Section 5.06 shall
be made by the end of the Partnership's taxable year in which the liquidation
occurs (or, if later, within 90 days after the date of the liquidation). To
the extent deemed advisable by
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the General Partner, appropriate arrangements (including the use of a
liquidating trust) may be made to assure that adequate funds are available to
pay any contingent debts or obligations of the Partnership.
(d) If the General Partner has a negative balance in its
Capital Account following a liquidation of the Partnership, as determined after
taking into account all Capital Account adjustments in accordance with Sections
5.01 and 5.02 resulting from Partnership operations and from all sales and
dispositions of all or any part of the Partnership's assets, the General
Partner shall contribute to the Partnership an amount of cash equal to the
negative balance in its Capital Account and such cash shall be paid or
distributed by the Partnership to creditors, if any, and then to the Limited
Partners in accordance with Section 5.06(a). Such contribution by the General
Partner shall be made by the end of the Partnership's taxable year in which the
liquidation occurs (or, if later, within 90 days after the date of the
liquidation).
5.07 SUBSTANTIAL ECONOMIC EFFECT. It is the intent of the Partners
that the allocations of Profit and Loss under the Agreement have substantial
economic effect (or be consistent with the Partners' interests in the
Partnership in the case of the allocation of losses attributable to nonrecourse
debt) within the meaning of Section 704(b) of the Code as interpreted by the
Regulations promulgated pursuant thereto. Article V and other relevant
provisions of this Agreement shall be interpreted in a manner consistent with
such intent.
ARTICLE VI
RIGHTS, OBLIGATIONS AND
POWERS OF THE GENERAL PARTNER
6.01 MANAGEMENT OF THE PARTNERSHIP.
(a) Except as otherwise expressly provided in this Agreement,
the General Partner shall have full, complete and exclusive discretion to
manage and control the business of the Partnership for the purposes herein
stated, and shall make all decisions affecting the business and assets of the
Partnership. Subject to the restrictions specifically contained in this
Agreement, the powers of the General Partner shall include, without limitation,
the authority to take the following actions on behalf of the Partnership:
(i) to acquire, purchase, own, lease and dispose of any
real property and any other property or assets that the
General Partner determines are necessary or
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appropriate or in the best interests of the business of the
Partnership;
(ii) to construct buildings and make other improvements
on the properties owned or leased by the Partnership;
(iii) to borrow money for the Partnership, issue
evidences of indebtedness in connection therewith, refinance,
guarantee, increase the amount of, modify, amend or change the
terms of, or extend the time for the payment of, any
indebtedness or obligation to the Partnership, and secure such
indebtedness by mortgage, deed of trust, pledge or other lien
on the Partnership's assets;
(iv) to pay, either directly or by reimbursement, for
all operating costs and general administrative expenses of
the General Partner or the Partnership, to third parties or to
the General Partner as set forth in this Agreement;
(v) to lease all or any portion of any of the
Partnership's assets, whether or not the terms of such leases
extend beyond the termination date of the Partnership and
whether or not any portion of the Partnership's assets so
leased are to be occupied by the lessee, or, in turn,
subleased in whole or in part to others, for such
consideration and on such terms as the General Partner may
determine;
(vi) to prosecute, defend, arbitrate, or compromise any
and all claims or liabilities in favor of or against the
Partnership, on such terms and in such manner as the General
Partner may reasonably determine, and similarly to prosecute,
settle or defend litigation with respect to the Partners, the
Partnership, or the Partnership's assets; provided, however,
that the General Partner may not, without the consent of all
of the Partners, confess a judgment against the Partnership;
(vii) to file applications, communicate, and otherwise
deal with any and all governmental agencies having
jurisdiction over, or in any way affecting, the Partnership's
assets or any other aspect of the Partnership business;
(viii) to make or revoke any election permitted or
required of the Partnership by any taxing authority;
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(ix) to maintain such insurance coverage for public
liability, fire and casualty, and any and all other insurance
for the protection of the Partnership, for the conservation of
Partnership assets, or for any other purpose convenient or
beneficial to the Partnership, in such amounts and such types,
as it shall determine from time to time;
(x) to determine whether or not to apply any insurance
proceeds for any property to the restoration of such property
or to distribute the same;
(xi) to retain legal counsel, accountants, consultants,
real estate brokers, and such other persons, as the General
Partner may deem necessary or appropriate in connection with
the Partnership business and to pay therefor such reasonable
remuneration as the General Partner may deem reasonable and
proper;
(xii) to retain other services of any kind or nature in
connection with the Partnership business, and to pay therefor
such remuneration as the General Partner may deem reasonable
and proper;
(xiii) to negotiate and conclude agreements on behalf of
the Partnership with respect to any of the rights, powers and
authority conferred upon the General Partner;
(xiv) to maintain accurate accounting records and to
file promptly all federal, state and local income tax returns
on behalf of the Partnership;
(xv) to distribute Partnership cash or other
Partnership assets in accordance with this Agreement;
(xvi) to form or acquire an interest in, and contribute
property to, any further limited or general partnerships,
joint ventures or other relationships that it deems desirable
(including, without limitation, the acquisition of interests
in, and the contributions of property to, its Subsidiaries and
any other Person in which it has an equity interest from time
to time);
(xvii) to establish Partnership reserves for working
capital, capital expenditures, contingent liabilities, or any
other valid Partnership purpose; and
(xviii) to take such other action, execute, acknowledge,
swear to or deliver such other documents and instruments, and
perform any and all other acts the
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General Partner deems necessary or appropriate for the
formation, continuation and conduct of the business and
affairs of the Partnership and to possess and enjoy all of the
rights and powers of a general partner as provided by the Act.
Except as otherwise provided herein, to the extent the duties of the General
Partner require expenditures of funds to be paid to third parties, the General
Partner shall not have any obligations hereunder except to the extent that
Partnership funds are reasonably available to it for the performance of such
duties, and nothing herein contained shall be deemed to authorize or require
the General Partner, in its capacity as such, to expend its individual funds
for payment to third parties or to undertake any individual liability or
obligation on behalf of the Partnership.
(b) In no event shall the General Partner incur or allow to
exist indebtedness in excess of the amount permitted pursuant to the debt
limitation contained in the Declaration of Trust.
6.02 PLEDGE OF GENERAL PARTNERSHIP UNITS TO LENDER. The General
Partner shall be permitted to pledge its General Partnership Units to the
Lender under the Instruments and in the event that Lender or any other party
should take possession of such General Partnership Units under the terms of the
related Instruments, it shall be admitted as a Substitute General Partner upon
compliance with the conditions of Section 7.02.
6.03 DELEGATION OF AUTHORITY. The General Partner may delegate any
or all of its powers, rights and obligations hereunder, and may appoint,
employ, contract or otherwise deal with any Person for the transaction of the
business of the Partnership, which Person may, under supervision of the General
Partner, perform any acts or services for the Partnership as the General
Partner may approve.
6.04 INDEMNIFICATION AND EXCULPATION OF INDEMNITEES.
(a) The Partnership shall indemnify an Indemnitee from and
against any and all losses, claims, damages, liabilities (joint or several),
expenses (including reasonable legal fees and expenses), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative or
investigative, that relate to the operations of the Partnership as set forth in
this Agreement in which any Indemnitee may be involved, or is threatened to be
involved, as a party or otherwise, unless it is established that: (i) the act
or omission of the Indemnitee was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active
and
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deliberate dishonesty; (ii) the Indemnitee actually received an improper
personal benefit in money, property or services; or (iii) in the case of any
criminal proceeding, the Indemnitee had reasonable cause to believe that the
act or omission was unlawful. The termination of any proceeding by judgment,
order or settlement does not create a presumption that the Indemnitee did not
meet the requisite standard of conduct set forth in this Section 6.04(a). The
termination of any proceeding by conviction or upon a plea of nolo contendere
or its equivalent, or an entry of an order of probation prior to judgment,
creates a rebuttable presumption that the Indemnitee acted in a manner contrary
to that specified in this Section 6.04(a). Any indemnification pursuant to
this Section 6.04 shall be made only out of the assets of the Partnership.
(b) The Partnership may reimburse an Indemnitee for
reasonable expenses incurred by an Indemnitee who is a party to a proceeding in
advance of the final disposition of the proceeding upon receipt by the
Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's
good faith belief that the standard of conduct necessary for indemnification by
the Partnership as authorized in this Section 6.04 has been met, and (ii) a
written undertaking by or on behalf of the Indemnitee to repay the amount if it
shall ultimately be determined that the standard of conduct has not been met.
(c) The indemnification provided by this Section 6.04 shall
be in addition to any other rights to which an Indemnitee or any other Person
may be entitled under any agreement, pursuant to any vote of the Partners, as a
matter of law or otherwise, and shall continue as to an Indemnitee who has
ceased to serve in such capacity.
(d) The Partnership may purchase and maintain insurance, on
behalf of the Indemnitees and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expenses that
may be incurred by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
(e) For purposes of this Section 6.04, the Partnership shall
be deemed to have requested an Indemnitee to serve as fiduciary of an employee
benefit plan whenever the performance by it of its duties to the Partnership
also imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute fines within the meaning of this Section 6.04; and actions
taken or omitted by the Indemnitee with respect to an employee benefit plan in
the performance of its duties for
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a purpose reasonably believed by it to be in the interest of the participants
and beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the indemnification provisions set
forth in this Agreement.
(g) An Indemnitee shall not be denied indemnification in
whole or in part under this Section 6.04 because the Indemnitee had an interest
in the transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.04 are for the benefit
of the Indemnitees, their heirs, successors, assigns and administrators and
shall not be deemed to create any rights for the benefit of any other Persons.
6.05 LIABILITY OF THE GENERAL PARTNER.
(a) Notwithstanding anything to the contrary set forth in
this Agreement, the General Partner shall not be liable for monetary damages to
the Partnership or any Partners for losses sustained or liabilities incurred as
a result of errors in judgment or of any act or omission if the General Partner
acted in good faith.
(b) The Limited Partners expressly acknowledge that the
General Partner is acting on behalf of the Partnership, that the General
Partner is under no obligation to consider the separate interests of the
Limited Partners (including, without limitation, the tax consequences to
Limited Partners) in deciding whether to cause the Partnership to take (or
decline to take) any actions, and that the General Partner shall not be liable
for monetary damages for losses sustained, liabilities incurred, or benefits
not derived by Limited Partners in connection with such decisions, provided
that the General Partner has acted in good faith.
(c) Subject to its obligations and duties as General Partner
set forth in Section 6.01 hereof, the General Partner may exercise any of the
powers granted to it under this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agents. The General
Partner shall not be responsible for any misconduct or negligence on the part
of any such agent appointed by it in good faith.
(d) Notwithstanding any other provisions of this Agreement or
the Act, any action of the General Partner on behalf of the Partnership or any
decision of the General Partner to
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refrain from acting on behalf of the Partnership, undertaken in the good faith
belief that such action or omission is necessary or advisable in order (i) to
protect the ability of the Company to continue to qualify as a REIT or (ii) to
prevent the Company from incurring any taxes under Section 857, Section 4981,
or any other provision of the Code, is expressly authorized under this
Agreement and is deemed approved by all of the Limited Partners.
(e) Any amendment, modification or repeal of this Section
6.05 or any provision hereof shall be prospective only and shall not in any way
affect the limitations on the General Partner's liability to the Partnership
and the Limited Partners under this Section 6.05 as in effect immediately prior
to such amendment, modification or repeal with respect to matters occurring, in
whole or in part, prior to such amendment, modification or repeal, regardless
of when claims relating to such matters may arise or be asserted.
6.06 EXPENDITURES BY THE PARTNERSHIP. The General Partner and the
Company are hereby authorized to pay compensation for accounting,
administrative, legal, technical, management and other services rendered to the
Partnership. All of the aforesaid expenditures (including Administrative
Expenses) shall be made on behalf of the Partnership, and the General Partner
or the Company shall be entitled to reimbursement by the Partnership for any
expenditure (including Administrative Expenses) incurred by it on behalf of the
Partnership which shall be made other than out of the funds of the Partnership.
The Partnership shall also assume, and pay when due, all Administrative
Expenses.
6.07 OUTSIDE ACTIVITIES REDEMPTION/TENDER OFFER OF REIT SHARES.
(a) Subject to Section 6.09 hereof, the Declaration of Trust
and any agreements entered into by the General Partner or its Affiliates,
including the Company, with the Partnership or a Subsidiary, any officer,
director, employee, agent, trustee, Affiliate or shareholder of the General
Partner and the Company shall be entitled to and may have business interests
and engage in business activities in addition to those relating to the
Partnership, including business interests and activities substantially similar
or identical to those of the Partnership. Neither the Partnership nor any of
the Limited Partners shall have any rights by virtue of this Agreement in any
such business ventures, interests or activities. None of the Limited Partners
nor any other Person shall have any rights by virtue of this Agreement or the
partnership relationship established hereby in any such business ventures,
interests or activities, and the General Partner and the Company shall have no
obligation pursuant to this Agreement to offer any interest in any such
business ventures, interests and activities to the Partnership or any Limited
Partner, even if such opportunity is of a character
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which, if presented to the Partnership or any Limited Partner, could be taken
by such Person.
(b) In the event the Company redeems any REIT Shares, then
the General Partner shall cause the Partnership to purchase from it a number of
Common Partnership Units as determined based on the application of the
Conversion Factor on the same terms that the Company redeemed such REIT Shares.
Moreover, if the Company makes a cash tender offer or other offer to acquire
REIT Shares, then the General Partner shall cause the Partnership to make a
corresponding offer to the General Partner to acquire an equal number of Common
Partnership Units held by the General Partner. In the event any REIT Shares
are redeemed by the Company pursuant to such offer, the Partnership shall
redeem an equivalent number of the General Partner's Common Partnership Units
for an equivalent purchase price based on the application of the Conversion
Factor.
6.08 EMPLOYMENT OR RETENTION OF AFFILIATES.
(a) Any Affiliate of the General Partner or the Company may
be employed or retained by the Partnership and may otherwise deal with the
Partnership (whether as a buyer, lessor, lessee, manager, furnisher of goods or
services, broker, agent, lender or otherwise) and may receive from the
Partnership any compensation, price, or other payment therefor which the
General Partner determines to be fair and reasonable.
(b) The Partnership may lend or contribute to its
Subsidiaries or other Persons in which it has an equity investment, and such
Persons may borrow funds from the Partnership, on terms and conditions
established in the sole and absolute discretion of the General Partner. The
foregoing authority shall not create any right or benefit in favor of any
Subsidiary or any other Person.
(c) The Partnership may transfer assets to joint ventures,
other partnerships, corporations or other business entities in which it is or
thereby becomes a participant upon such terms and subject to such conditions as
the General Partner deems are consistent with this Agreement and applicable
law.
(d) Except as expressly permitted by this Agreement, neither
the General Partner nor any of its Affiliates shall sell, transfer or convey
any property to, or purchase any property from, the Partnership, directly or
indirectly, except pursuant to transactions that are on terms that are fair and
reasonable to the Partnership.
6.09 GENERAL PARTNER PARTICIPATION. The Company and the General
Partner agree that all business activities of the Company and its Subsidiaries,
including the General Partner, including
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activities pertaining to the acquisition, development and/or ownership of
hotels or other property, shall be conducted through the Partnership; provided,
however, that the Company or a Subsidiary other than the General Partner is
allowed to make a direct acquisition, but if and only if, such acquisition is
made in connection with the issuance of New Securities, which direct
acquisition and issuance have been approved and determined to be in the best
interest of the Company and the Partnership by a majority of the Independent
Trustees. The General Partner also agrees that all borrowings shall constitute
Funding Loans, subject to the exceptions set forth in Section 4.03 hereof.
ARTICLE VII
CHANGES IN GENERAL PARTNER
7.01 TRANSFER OF GENERAL PARTNERSHIP UNITS.
(a) Other than to a wholly-owned Subsidiary of the Company,
the General Partner may not transfer any of its General Partnership Units or
withdraw as a General Partner except as provided in Section 6.01(b) or Section
7.01(c) or in connection with a transaction described in Section 7.01(d).
(b) The Company agrees that, either directly or through the
General Partner (or another "qualified REIT subsidiary," as defined in Section
856(i) of the Code), agrees that it will at all times own at least a 20%
Percentage Interest.
(c) The General Partner shall not engage in any merger,
consolidation or other combination with or into another Person, other than the
Company, or sale of all or substantially all of its assets. Except as
otherwise provided in Section 6.07(b) or Section 7.01(d) hereof, the Company
shall not engage in any merger, consolidation or other combination with or into
another Person or sale of all or substantially all of its assets, or any
reclassification, or any recapitalization or change of outstanding REIT Shares
(other than a change in par value, or from par value to no par value, or as a
result of a subdivision or combination of REIT Shares) (a "Transaction"),
unless (i) the Transaction also includes a merger of the Partnership or sale of
substantially all of the assets of the Partnership as a result of which all
Limited Partners will receive for each Limited Partnership Unit an amount of
cash, securities, or other property equal to the product of the Conversion
Factor and the greatest amount of cash, securities or other property paid in
the Transaction to a holder of one REIT Share in consideration of one REIT
Share, provided that if, in connection with the Transaction, a purchase, tender
or exchange offer ("Offer") shall have been made to and accepted by the holders
of more than 50 percent of the outstanding REIT Shares, each holder of Limited
Partnership
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Units shall be given the option to exchange its Partnership Units for the
greatest amount of cash, securities, or other property which a Limited Partner
would have received had it (A) exercised its Redemption Right and (B) sold,
tendered or exchanged pursuant to the Offer the REIT Shares received upon
exercise of the Redemption Right or Class B Conversion Right immediately prior
to the expiration of the Offer; and (ii) no more than 75 percent of the equity
securities of the acquiring Person in such Transaction shall be owned, after
consummation of such Transaction, by the Company, the General Partner or
Persons who were Affiliates of the Partnership, the Company or the General
Partner immediately prior to the date on which the Transaction is consummated.
(d) Notwithstanding Section 7.01(c), the Company may merge
into or consolidate with another entity if immediately after such merger or
consolidation (i) substantially all of the assets of the successor or surviving
entity (the "Survivor"), other than Common Partnership Units held by the
General Partner, are contributed to the Partnership as a Capital Contribution
in exchange for Common Partnership Units with a fair market value equal to the
value of the assets so contributed as determined by the Survivor in good faith
and (ii) the Survivor expressly agrees to assume, or acknowledge and ratify,
all obligations of the General Partner hereunder. Upon such contribution and
assumption, the Survivor shall have the right and duty to amend this Agreement
as set forth in this Section 7.01(d). The Survivor shall in good faith arrive
at a new method for the calculation of the Cash Amount and Conversion Factor
for a Limited Partnership Unit after any such merger or consolidation so as to
approximate the existing method for such calculation as closely as reasonably
possible. Such calculation shall take into account, among other things, the
kind and amount of securities, cash and other property that was receivable upon
such merger or consolidation by a holder of REIT Shares and/or options,
warrants or other rights relating thereto, and to which a holder of Limited
Partnership Units could have acquired had such Partnership Units been redeemed
immediately prior to such merger or consolidation. Such amendment to this
Agreement shall provide for adjustment to such method of calculation which
shall be as nearly equivalent as may be practicable to the adjustments provided
for with respect to the Conversion Factor. The above provisions of this
Section 7.01(d) shall similarly apply to successive mergers or consolidations
permitted hereunder.
7.02 ADMISSION OF A SUBSTITUTE OR SUCCESSOR GENERAL PARTNER. A
Person shall be admitted as a substitute or successor General Partner of the
Partnership only if the following terms and conditions are satisfied:
(a) the Person to be admitted as a substitute or additional
General Partner shall have accepted and agreed to be bound by all the terms and
provisions of this Agreement by
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executing a counterpart thereof and such other documents or instruments as may
be required or appropriate in order to effect the admission of such Person as a
General Partner, and a certificate evidencing the admission of such Person as a
General Partner shall have been filed for recordation and all other actions
required by Section 2.05 hereof in connection with such admission shall have
been performed;
(b) if the Person to be admitted as a substitute or
additional General Partner is a corporation or a partnership it shall have
provided the Partnership with evidence satisfactory to counsel for the
Partnership of such Person's authority to become a General Partner and to be
bound by the terms and provisions of this Agreement and shall agree that any
claim for indemnification by such Person's shareholders, directors, trustees,
officers or partners shall be subordinated to the Partnership's obligation to
the Lender; and
(c) counsel for the Partnership shall have rendered an
opinion (relying on such opinions from other counsel and the state or any other
jurisdiction as may be necessary) that the admission of the person to be
admitted as a substitute or additional General Partner is in conformity with
the Act, that none of the actions taken in connection with the admission of
such Person as a substitute or additional General Partner will cause (i) the
Partnership to be classified other than as a partnership for federal income tax
purposes, or (ii) the loss of any Limited Partner's limited liability.
7.03 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A
GENERAL PARTNER.
(a) Upon the occurrence of an Event of Bankruptcy as to a
General Partner or the withdrawal or dissolution of a General Partner (except
that, if a General Partner is on the date of such occurrence a partnership, the
withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a
partner in, such partnership shall be deemed not to be a dissolution of such
General Partner if the business of such General Partner is continued by the
remaining partner or partners), the Partnership shall be dissolved and
terminated unless the Partnership is continued pursuant to Section 7.03(b)
hereof.
(b) Following the occurrence of an Event of Bankruptcy as to
a General Partner or the withdrawal or dissolution of a General Partner (except
that, if a General Partner is on the date of such occurrence a partnership, the
withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a
partner in, such partnership shall be deemed not to be a dissolution of such
General Partner if the business of such General Partner is continued by the
remaining partner or partners), the Limited Partners, within 30 days after such
occurrence, may elect to
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reconstitute the Partnership and continue the business of the Partnership for
the balance of the term specified in Section 2.04 hereof by selecting, subject
to Section 7.02 hereof and any other provisions of this Agreement, a substitute
General Partner that is acceptable to the Lender by unanimous consent of the
Limited Partners. If the Limited Partners elect to reconstitute the
Partnership and admit a substitute General Partner, the relationship with the
Partners and of any Person who has acquired an interest of a Partner in the
Partnership shall be governed by this Agreement.
ARTICLE VIII
RIGHTS AND OBLIGATIONS
OF THE LIMITED PARTNERS
8.01 MANAGEMENT OF THE PARTNERSHIP. The Limited Partners shall not
participate in the management or control of Partnership business nor shall they
transact any business for the Partnership, nor shall they have the power to
sign for or bind the Partnership, such powers being vested solely and
exclusively in the General Partner.
8.02 POWER OF ATTORNEY. Each Limited Partner hereby irrevocably
appoints the General Partner his true and lawful attorney-in-fact, who may act
for each Limited Partner and in his name, place and stead, and for his use and
benefit, to sign, acknowledge, swear to, deliver, file and record, at the
appropriate public offices, any and all documents, certificates, and
instruments as may be deemed necessary or desirable by the General Partner to
carry out fully the provisions of this Agreement and the Act in accordance with
their terms, which power of attorney is coupled with an interest and shall
survive the death, dissolution or legal incapacity of the Limited Partner, or
the transfer by the Limited Partner of any part or all of his Partnership
Units.
8.03 LIMITATION ON LIABILITY OF LIMITED PARTNERS. No Limited
Partner shall be liable for any debts, liabilities, contracts or obligations of
the Partnership. A Limited Partner shall be liable to the Partnership only to
make payments of his Capital Contribution, if any, as and when due hereunder.
After his Capital Contribution is fully paid, no Limited Partner shall, except
as otherwise required by the Act, be required to make any further Capital
Contributions or other payments or lend any funds to the Partnership.
8.04 OWNERSHIP BY LIMITED PARTNER OF CORPORATE GENERAL PARTNER OR
AFFILIATE. No Limited Partner shall at any time, either directly or
indirectly, own any stock or other interest in the General Partner or in any
Affiliate thereof, including the
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Company, if such ownership by itself or in conjunction with other stock or
other interests owned by other Limited Partners would, in the opinion of
counsel for the Partnership, jeopardize the classification of the Partnership
as a partnership for federal income tax purposes. The General Partner shall be
entitled to make such reasonable inquiry of the Limited Partners as is required
to establish compliance by the Limited Partners with the provisions of this
Section 8.04.
8.05 REDEMPTION RIGHT.
(a) Subject to Section 8.05(c), on or after the date that is
one (1) year after the closing of the Initial Offering, each Class A Limited
Partner (other than the General Partner and any Class B Limited Partner who
becomes a Class A Limited Partner upon conversion of some or all of its
Preferred Partnership Units) shall have the right (the "Redemption Right") to
require the Partnership to redeem on a Specified Redemption Date all or a
portion of the Common Partnership Units held by such Limited Partner at a
redemption price equal to and in the form of the Redemption Amount. The
Redemption Right shall be exercised pursuant to a Notice of Redemption
delivered to the General Partner by the Class A Limited Partner who is
exercising the Redemption Right (the "Redeeming Partner"); provided, however,
that no Class A Limited Partner may deliver to the General Partner more than
two (2) Notices of Redemption during each calendar year. A Class A Limited
Partner may not exercise the Redemption Right for less than one thousand
(1,000) Common Partnership Units or, if such Limited Partner holds less than
one thousand (1,000) Common Partnership Units, all of the Common Partnership
Units held by such Partner. The Redeeming Partner shall have no right, with
respect to any Common Partnership Units so redeemed, to receive any
distribution paid with respect to Common Partnership Units if the record date
for such distribution is on or after the Specified Redemption Date.
(b) Notwithstanding the provisions of Section 8.05(a), the
General Partner may, in its sole and absolute discretion, assume directly and
satisfy a Redemption Right by paying to the Redeeming Partner the Redemption
Amount on the Specified Redemption Date, whereupon the General Partner shall
acquire the Common Partnership Units offered for redemption by the Redeeming
Partner and shall be treated for all purposes of this Agreement as the owner of
such Common Partnership Units. In the event the General Partner shall exercise
its right to satisfy the Redemption Right in the manner described in the
preceding sentence, the Partnership shall have no obligation to pay any amount
to the Redeeming Partner with respect to such Partner's exercise of the
Redemption Right, and each of the Redeeming Partner, the Partnership, and the
General Partner shall treat the transaction between the General Partner and the
Redeeming Partner as a sale of such Partner's Common Partnership Units to the
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General Partner for federal income tax purposes. Each Redeeming Partner agrees
to execute such documents as the Company may reasonably require in connection
with the issuance of REIT Shares upon exercise of the Redemption Right.
(c) The Partnership or the General Partner, as the case may
be, shall pay the Cash Amount to a Redeeming Partner as the Redemption Amount
for such Partner if (i) the acquisition of REIT Shares by such Partner on the
Specified Redemption Date would (A) result in such Partner or any other person
owning, directly or indirectly, REIT Shares in excess of the "Ownership Limit,"
as defined in the Declaration of Trust and calculated in accordance therewith,
except as provided in the Declaration of Trust, (B) result in REIT Shares being
owned by fewer than 100 persons (determined without reference to any rules of
attribution), except as provided in the Declaration of Trust, (C) result in the
Company being "closely held" within the meaning of Section 856(h) of the Code,
(D) cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, or (E) cause
the acquisition of REIT Shares by such Partner to be "integrated" with any
other distribution of REIT Shares for purposes of complying with the
registration provisions of the Securities Act or (ii) the Partnership or the
General Partner, as the case may be, so elects in its sole discretion. Any
Cash Amount to be paid to a Redeeming Partner pursuant to this Section 8.05
shall be paid within sixty (60) days after the initial date of receipt by the
General Partner of the Notice of Redemption relating to the Common Partnership
Units to be redeemed; provided, however, that such sixty (60) day period may be
extended for up to an additional one hundred eighty (180) days to the extent
required for the Company to cause additional REIT Shares to be issued to
provide financing to be used to make such payment of the Cash Amount.
Notwithstanding the foregoing, the General Partner and the Partnership agree to
use their best efforts to cause the closing of the acquisition of redeemed
Common Partnership Units hereunder to occur as quickly as reasonably possible.
(d) Each certificate, if any, evidencing REIT Shares that may
be issued in redemption of Common Partnership Units under this Section 8.05
shall bear a restrictive legend in substantially the following form:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"), or any state
securities law. No transfer of the Shares represented by this
certificate shall be valid or effective unless (A) such transfer is
made pursuant to an effective registration statement under the Act or
(B) the holder of the securities
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proposed to be transferred shall have delivered to the company either
a no-action letter from the Securities and Exchange Commission or an
opinion of counsel (who may be an employee of such holder) experienced
in securities matters to the effect that such proposed transfer is
exempt from the registration requirements of the Act which opinion
shall be reasonably satisfactory to the company."
(e) The redemption rights of each Class B Limited Partner and
each Class B Limited Partner who becomes a Class A Limited Partner upon
conversion of some or all of its Preferred Partnership Units are set forth in
the separate Redemption and Registration Rights Agreement of even date herewith
that is incorporated by reference into this Agreement.
8.06 REGISTRATION.
(a) Shelf Registration. At the request of a Class A Limited
Partner, the Company agrees to file with the Commission, no earlier than
September 30, 1995, a shelf registration statement under Rule 415 of the
Securities Act, or any similar rule that may be adopted by the Commission (the
"Shelf Registration"), with respect to all of the REIT Shares that may be
issued in redemption of Common Partnership Units under Section 8.05 above (the
"Redemption Shares"). The Company will use its best efforts to have the Shelf
Registration declared effective under the Securities Act no later than October
15, 1995 (the "Target Effective Date") to permit the disposition of the
Redemption Shares by the holders thereof in accordance with the method or
methods of disposition specified by the holders, and to keep the Shelf
Registration continuously effective until the earlier of (i) October 15, 1997
(the "Shelf Registration Period"), (ii) the date when all of the Redemption
Shares are sold thereunder, or (iii) the date on which all of the holders of
Redemption Shares, pursuant to Rule 144 under the Securities Act, may sell the
Redemption Shares without registration under the Securities Act. The Company
further agrees to supplement or make amendments to the Shelf Registration, if
required by the rules, regulations or instructions applicable to the
registration form utilized by the Company or by the Securities Act or rules and
regulations thereunder for the Shelf Registration. Notwithstanding the
foregoing, if for any reason the effectiveness of the Shelf Registration is
delayed or suspended or it ceases to be available for sales of Redemption
Shares thereunder, the Shelf Registration Period shall be extended by the
aggregate number of days of such delay, suspension or unavailability. No
provision of this Agreement shall require the Company to file a registration
statement on any form other than Form S-3.
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(b) Registration and Qualification Procedures. The Company is required by the
provisions of Section 8.06(a) hereof to use its best efforts to have the Shelf
Registration declared effective under the Securities Act by October 15,
1995. Accordingly, the Company will:
(i) prepare and file with the Commission a
registration statement, including amendments thereof and
supplements relating thereto, with respect to the Redemption
Shares;
(ii) use its best efforts to cause the
registration statement to be declared effective by the
Commission;
(iii) keep the registration statement effective and
the related prospectus current throughout the Shelf
Registration Period; provided, however, that the Company shall
have no obligation to file any amendment or supplement at its
own expense or the Partnership's expense more than ninety (90)
days after the effective date of the registration statement;
(iv) furnish to each holder of Redemption Shares
such numbers of copies of prospectuses, and supplements or
amendments thereto, and such other documents as such holder
reasonably requests;
(v) register or qualify the securities covered by
the registration statement under the securities or blue sky
laws of such jurisdictions within the United States as any
holder of Redemption Shares shall reasonably request, and do
such other reasonable acts and things as may be required of it
to enable such holders to consummate the sale or other
disposition in such jurisdictions of the Redemption Shares;
provided, however, that the Company shall not be required to
(i) qualify as a foreign corporation or consent to a general
and unlimited service or process in any jurisdictions in which
it would not otherwise be required to be qualified or so
consent or (ii) qualify as a dealer in securities; and
(vi) keep the holders of Redemption Shares advised
as to the initiation and progress of the registration.
(c) Allocation of Expenses. The Partnership shall pay all
expenses in connection with the Shelf Registration, including without
limitation (i) all expenses incident to filing with the National Association of
Securities Dealers, Inc., (ii) registration fees, (iii) printing expenses, (iv)
accounting and legal fees and expenses, except to the extent holders of
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Redemption Shares elect to engage accountants or attorneys in addition to the
accountants and attorneys engaged by the Partnership or the Company, (v)
accounting expenses incident to or required by any such registration or
qualification and (vi) expenses of complying with the securities or blue sky
laws of any jurisdictions in connection with such registration or
qualification; provided, however, the Partnership shall not be liable for (A)
any discounts or commissions to any broker attributable to the sale of
Redemption Shares, or (B) any fees or expenses incurred by holders of
Redemption Shares in connection with such registration which, according to the
written instructions of any regulatory authority, the Partnership is not
permitted to pay.
(d) Indemnification.
(i) In connection with the Shelf Registration,
the Company, the General Partner and the Partnership agree to
indemnify holders of Redemption Shares within the meaning of
Section 15 of the Securities Act, against all losses, claims,
damages, liabilities and expenses (including reasonable costs
of investigation) caused by any untrue, or alleged untrue,
statement of a material fact contained in the Shelf
Registration, preliminary prospectus or prospectus (as amended
or supplemented if the Company shall have furnished any
amendments or supplements thereto) or caused by any omission,
or alleged omission, to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses are caused by any untrue
statement, alleged untrue statement, omission, or alleged
omission based upon information furnished to the Company
expressly for use therein. The Company, the General Partner
and each officer, Trustee, director and controlling person of
the Company and the General Partner shall be indemnified by
each holder of Redemption Shares covered by the Shelf
Registration for all such losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation)
caused by any such untrue, or alleged untrue, statement or any
such omission, or alleged omission, based upon information
furnished to the Company expressly for use therein in a
writing signed by the holder.
(ii) Promptly upon receipt by a party indemnified
under this Section 8.06(d) of notice of the commencement of
any action against such indemnified party in respect of which
indemnity or reimbursement may be sought against any
indemnifying party under this Section 8.06(d), such
indemnified party shall notify
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the Company in writing of the commencement of such action, but
the failure to so notify the Company shall not relieve it of
any liability which it may have to any indemnified party
otherwise than under this Section 8.06(d) unless such failure
shall materially adversely affect the defense of such action.
In case notice of commencement of any such action shall be
given to the Company as above provided, the Company shall be
entitled to participate in and, to the extent it may wish,
jointly with any other indemnifying party similarly notified,
to assume the defense of such action at its own expense, with
counsel chosen by it and reasonably satisfactory to such
indemnified party. The indemnified party shall have the right
to employ separate counsel in any such action and participate
in the defense thereof, but the fees and expenses of such
counsel (other than reasonable costs of investigation) shall
be paid by the indemnified party unless (i) the Company, the
General Partner or the Partnership agrees to pay the same,
(ii) the Company or the General Partner fails to assume the
defense of such action with counsel reasonably satisfactory to
the indemnified party or (iii) the named parties to any such
action (including any impleaded parties) have been advised by
such counsel that representation of such indemnified party and
the Company and/or the General Partner by the same counsel
would be inappropriate under applicable standards of
professional conduct (in which case the General Partner shall
not have the right to assume the defense of such action on
behalf of such indemnified party). No indemnifying party
shall be liable for any settlement entered into without its
consent.
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(e) Contribution.
(i) If for any reason the indemnification
provisions contemplated by Section 8.06(d) are either
unavailable or insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages or liabilities
referred to therein, then the party that would otherwise be
required to provide indemnification or the indemnifying party
(in either case, for purposes of this Section 8.06(e), the
"Indemnifying Party") in respect of such losses, claims,
damages or liabilities, shall contribute to the amount paid or
payable by the party that would otherwise be entitled to
indemnification or the indemnified party (in either case, for
purposes of this Section 8.06(e), the "Indemnified Party") as
a result of such losses, claims, damages, liabilities or
expense, in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party and the Indemnified
Party, as well as any other relevant equitable considerations.
The relative fault of the Indemnifying Party and Indemnified
Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact
related to information supplied by the Indemnifying Party or
Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to
include any legal or other fees or expenses reasonably
incurred by such party. In no event shall any holder of
Redemption Shares covered by the Shelf Registration be
required to contribute an amount greater than the dollar
amount of the proceeds received by such holder from the sale
of Redemption Shares pursuant to the registration giving rise
to the liability.
(ii) The parties hereto agree that it would not be
just and equitable if contribution pursuant to this Section
8.06(e) were determined by pro rata allocation (even if the
holders or any underwriters or all of them were treated as one
entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. No person
or entity determined to have committed a fraudulent
misrepresentation (within the meaning of Section 11(f)
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of the Securities Act) shall be entitled to contribution from
any person or entity who was not guilty of such fraudulent
misrepresentation.
(iii) The contribution provided for in this Section
8.06(e) shall survive the termination of this Agreement and
shall remain in full force and effect regardless of any
investigation mae by or on behalf of any Indemnified Party.
(f) Listing on Securities Exchange. If the Company shall
list or maintain the listing of any shares of Common Stock on any securities
exchange or national market system, it will at its expense and as necessary to
permit the registration and sale of the Redemption Shares hereunder, list
thereon, maintain and, when necessary, increase such listing to include such
Redemption Shares.
(g) POST-CONVERSION REGISTRATION RIGHTS. The registration
rights of each Class B Limited Partner and each Class B Limited Partner who
becomes a Class A Limited Partner upon conversion of some or all of its
Preferred Partnership Units into Common Partnership Units pursuant to Section
8.07 hereof are set forth in the separate Redemption and Registration Rights
Agreement of even date herewith that is incorporated by reference into this
Agreement.
8.07 CLASS B CONVERSION RIGHT. Each Class B Limited Partner shall
have the right (the "Class B Conversion Right") to require the Partnership to
convert all or a portion of the Preferred Partnership Units held by such
Partner into Common Partnership Units on a one-for-one basis at any time. If
on such date any portion of the Class B Preferred Return is accrued but unpaid,
the Partnership shall pay such amount to the Class B Limited Partners in the
form of cash, a demand promissory note having an initial principal balance
equal to such amount and bearing an annual interest rate of 10.5%, or Common
Partnership Units having a value equal to such amount, at the election of each
Class B Limited Partner. For purposes of the preceding sentence, the value of
a Common Partnership Unit shall equal the "Market Price" of a REIT Share
(calculated in accordance with the second and third sentences of the definition
of "Cash Amount") on the date of the conversion. If a Class B Limited Partner
converts some, but not all, of his Preferred Partnership Units into Common
Partnership Units, such Partner shall be considered both a Class A Limited
Partner and a Class B Limited Partner. Upon the conversion of all Preferred
Partnership Units held by a Class B Limited Partner, such Partner shall not
longer be a Class B Limited Partner and shall be classified solely as a Class A
Limited Partner.
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8.08 AUTOMATIC CONVERSION OF PREFERRED PARTNERSHIP UNITS. On the
tenth anniversary of the First Class B Admission Date, the Preferred
Partnership Units will be converted automatically into Common Partnership Units
on a one- for-one basis. If on such date any portion of the Class B Preferred
Return is accrued but unpaid, the Partnership shall pay such amount to the
Class B Limited Partners in the form of cash, a demand promissory note having
an initial principal balance equal to such amount and bearing an annual
interest rate of 10.5%, or Common Partnership Units having a value equal to
such amount, at the election of each Class B Limited Partner. For purposes of
the preceding sentence, the value of a Common Partnership Unit shall equal the
"Market Price" of a REIT Share (calculated in accordance with the second and
third sentences of the definition of "Cash Amount") on the date of the
conversion. Upon the automatic conversion of the Preferred Partnership Units
into Common Partnership Units, the Class B Limited Partners shall become Class
A Limited Partners.
ARTICLE IX
TRANSFERS OF LIMITED PARTNERSHIP UNITS
9.01 PURCHASE FOR INVESTMENT.
(a) Each Limited Partner hereby represents and warrants to
the General Partner and to the Partnership that the acquisition of his
Partnership Units is made as a principal for his account for investment
purposes only and not with a view to the resale or distribution of such
Partnership Units.
(b) Each Limited Partner agrees that he will not sell, assign
or otherwise transfer his Partnership Units or any fraction thereof, whether
voluntarily or by operation of law or at judicial sale or otherwise, to any
Person who does not make the representations and warranties to the General
Partner set forth in Section 9.01(a) above and similarly agree not to sell,
assign or transfer such Partnership Units or fraction thereof to any Person who
does not similarly represent, warrant and agree.
9.02 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP UNITS.
(a) Except as otherwise provided in Section 9.02(d) hereof,
no Limited Partner (other than the General Partner) may offer, sell, assign,
hypothecate, pledge or otherwise transfer his Limited Partnership Units, in
whole or in part, whether voluntarily or by operation of law or at judicial
sale or otherwise (collectively, a "Transfer") without the written consent of
the General Partner, which consent may be withheld in the sole discretion of
the General Partner. Except as provided in Section 7.01(c) or in connection
with a transaction described in Section 7.01(d), the General Partner may not
Transfer its
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Limited Partnership Units without the written consent of a majority-in-interest
of the Limited Partners (other than the General Partner), which consent may be
withheld in the sole discretion of such Limited Partners. The General Partner
may require, as a condition of any Transfer, that the transferor assume all
costs incurred by the Partnership in connection therewith.
(b) Except with respect to a Transfer described in Section
9.02(d)(iv), no Limited Partner may effect a Transfer of his Limited
Partnership Units, in whole or in part, if, in the opinion of legal counsel for
the Partnership, such proposed Transfer would require the registration of the
Limited Partnership Units under the Securities Act or would otherwise violate
any applicable federal or state securities or "Blue Sky" law (including
investment suitability standards).
(c) No transfer by a Limited Partner of his Limited
Partnership Units, in whole or in part, may be made to any Person if (i) in the
opinion of legal counsel for the Partnership, the transfer would result in the
Partnership's being treated as an association taxable as a corporation (other
than a qualified REIT subsidiary within the meaning of Section 856(i) of the
Code) or (ii) such transfer is effectuated through an "established securities
market" or a "secondary market (or the substantial equivalent thereof)" within
the meaning of Section 7704 of the Code or, in the opinion of legal counsel to
the Partnership, such transfer otherwise would result in the Partnership being
treated as a "publicly traded partnership" within the meaning of Section 7704
of the Code and the Regulations thereunder (including any Regulations that have
a prospective effective date).
(d) Section 9.02(a) shall not apply to the following
transactions, except that the General Partner may require that the transferor
assume all costs incurred by the Partnership in connection therewith:
(i) any Transfer by a Class A Limited Partner pursuant
to the exercise of its Redemption Right under Section 8.05
hereof;
(ii) any Transfer by a Class B Limited Partner pursuant
to the exercise of its Class B Redemption Right, the exercise
of its Class B Conversion Right under Section 8.07 hereof, or
the automatic conversion of the Class B Limited Partners'
Preferred Partnership Units pursuant to Section 8.08 hereof;
(iii) any Transfer by a Limited Partner that is a
corporation or other business entity to any of its Affiliates
or subsidiaries or to any successor in interest of such
Limited Partner;
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(iv) in connection with the liquidation of a Class B
Limited Partner that is a partnership, any distribution of
Preferred Partnership Units by such Class B Limited Partner to
its partners who meet the "Accredited Investor" qualifications
set forth in Rule 501(a) of Regulation D of the Securities Act
of 1933, as amended, and who provide the General Partner with
a completed questionnaire establishing such status as an
"Accredited Investor;"
(v) any donative Transfer by an individual Limited
Partner to his immediate family members or any trust in which
the individual or his immediate family members own,
collectively, 100% of the beneficial interests. For purposes
of this Section 9.02(c)(iii), the term "immediate family
member" shall be deemed to include only an individual Limited
Partner's spouse, children and grandchildren;
(vi) any Transfer by a Class B Limited Partner that is
a partnership in connection with a merger of such Class B
Limited Partner into another Class B Limited Partner that is a
partnership;
(vii) any Transfer by a Class B Limited Partner to
Marriott International, Inc. of up to an aggregate amount of
175,000 Preferred Partnership Units;
(viii) any Transfer by a Class B Limited Partner to
an (i) organization that is described in Section 501(c)(3) of
the Code and exempt from federal income tax under Section
501(a) of the Code, (ii) a private foundation as defined in
Section 509 of the Code or a charitable trust as defined in
Section 4947(a)(1) or (a)(2) of the Code, each of which has at
least $5,000,000 in total assets; and
(ix) to the extent permitted under the applicable
Contribution Agreement between a Class B Limited Partner and
the Partnership, any pledge by such Class B Limited Partner of
Preferred Partnership Units to a creditor of such Class B
Limited Partner and any Transfer pursuant to such creditor's
foreclosure on the Preferred Partnership Units pledged to such
creditor.
(e) Any Transfer in contravention of any of the provisions of
this Article IX shall be void and ineffectual and shall not be binding upon, or
recognized by, the Partnership.
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<PAGE> 58
9.03 ADMISSION OF SUBSTITUTE LIMITED PARTNER.
(a) Subject to the other provisions of this Article IX, an
assignee of the Limited Partnership Units of a Limited Partner (which shall be
understood to include any purchaser, transferee, donee, or other recipient of
any disposition of such Limited Partnership Units) shall be deemed admitted as
a Limited Partner of the Partnership only upon the satisfactory completion of
the following:
(i) The assignee shall have accepted and agreed to be
bound by the terms and provisions of this Agreement by
executing a counterpart or an amendment thereof, including a
revised Exhibit A, and such other documents or instruments as
the General Partner may require in order to effect the
admission of such Person as a Limited Partner.
(ii) To the extent required, an amended Certificate
evidencing the admission of such Person as a Limited Partner
shall have been signed, acknowledged and filed for record in
accordance with the Act.
(iii) The assignee shall have delivered a letter
containing the representation set forth in Section 9.01(a)
hereof and the agreement set forth in Section 9.01(b) hereof.
(iv) If the assignee is a corporation, partnership
or trust, the assignee shall have provided the General Partner
with evidence satisfactory to counsel for the Partnership of
the assignee's authority to become a Limited Partner under the
terms and provisions of this Agreement.
(v) The assignee shall have executed a power of
attorney containing the terms and provisions set forth in
Section 8.02 hereof.
(vi) The assignee shall have paid all reasonable
legal fees of the Partnership and the General Partner and
filing and publication costs in connection with his
substitution as a Limited Partner.
(vii) In the case of an assignee of the Limited
Partnership Units of a Limited Partner (other than the General
Partner), the assignee has obtained the prior written consent
of the General Partner to its admission as a Substitute
Limited Partner, which consent may be given or denied in the
exercise of General Partner's sole and absolute discretion.
- 54 -
<PAGE> 59
(viii) In the case of an assignee of the Limited
Partnership Units of the General Partner except in the case of
a transaction described in Section 7.01(c) or (d) (in which
case no consent is necessary), the assignee has obtained the
prior written consent of a majority-in-interest of the Limited
Partners (other than the General Partner) to its admission as
a Substitute Limited Partner, which consent may be given or
denied in the exercise of such Limited Partners' sole and
absolute discretion.
(b) For the purpose of allocating profits and losses and
distributing cash received by the Partnership, a Substitute Limited Partner
shall be treated as having become, and appearing in the records of the
Partnership as, a Partner upon the filing of the Certificate described in
Section 9.03(a)(ii) hereof or, if no such filing is required, the later of the
date specified in the transfer documents or the date on which the General
Partner has received all necessary instruments of transfer and substitution.
(c) The General Partner shall cooperate with the Person
seeking to become a Substitute Limited Partner by preparing the documentation
required by this Section and making all official filings and publications. The
Partnership shall take all such action as promptly as practicable after the
satisfaction of the conditions in this Article IX to the admission of such
Person as a Limited Partner of the Partnership.
9.04 RIGHTS OF ASSIGNEES OF PARTNERSHIP UNITS.
(a) Subject to the provisions of Sections 9.01 and 9.02
hereof, except as required by operation of law, the Partnership shall not be
obligated for any purposes whatsoever to recognize the assignment by any
Limited Partner of his Partnership Units until the Partnership has received
notice thereof.
(b) Any Person who is the assignee of all or any portion of a
Limited Partner's Limited Partnership Units, but does not become a Substitute
Limited Partner and desires to make a further assignment of such Limited
Partnership Units, shall be subject to all the provisions of this Article IX to
the same extent and in the same manner as any Limited Partner desiring to make
an assignment of his Limited Partnership Units.
9.05 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A
LIMITED PARTNER. The occurrence of an Event of Bankruptcy as to a Limited
Partner, the death of a Limited Partner or a final adjudication that a Limited
Partner is incompetent (which term shall include, but not be limited to,
insanity) shall not cause the termination or dissolution of the
- 55 -
<PAGE> 60
Partnership, and the business of the Partnership shall continue if an order for
relief in a bankruptcy proceeding is entered against a Limited Partner, the
trustee or receiver of his estate or, if he dies, his executor, administrator
or trustee, or, if he is finally adjudicated incompetent, his committee,
guardian or conservator, shall have the rights of such Limited Partner for the
purpose of settling or managing his estate property and such power as the
bankrupt, deceased or incompetent Limited Partner possessed to assign all or
any part of his Partnership Units and to join with the assignee in satisfying
conditions precedent to the admission of the assignee as a Substitute Limited
Partner.
9.06 JOINT OWNERSHIP OF UNITS. Partnership Units may be acquired
by two individuals as joint tenants with right of survivorship, provided that
such individuals either are married or are related and share the same home as
tenants in common. The written consent or vote of both owners of any such
jointly held Partnership Units shall be required to constitute the action of
the owners of such Partnership Units; provided, however, that the written
consent of only one joint owner will be required if the Partnership has been
provided with evidence satisfactory to the counsel for the Partnership that the
actions of a single joint owner can bind both owners under the applicable laws
of the state of residence of such joint owners. Upon the death of one owner of
Partnership Units held in a joint tenancy with a right of survivorship, the
Partnership Units shall become owned solely by the survivor as a Limited
Partner and not as an assignee. The Partnership need not recognize the death
of one of the owners of jointly-held Partnership Units until it shall have
received notice of such death. Upon notice to the General Partner from either
owner, the General Partner shall cause the Partnership Units to be divided into
two equal portions of units, which shall thereafter be owned separately by each
of the former owners.
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.01 BOOKS AND RECORDS. At all times during the continuance of
the Partnership, the Partners shall keep or cause to be kept at the
Partnership's specified office true and complete books of account in accordance
with generally accepted accounting principles, including: (a) a current list
of the full name and last known business address of each Partner, (b) a copy of
the Certificate of Limited Partnership and all certificates of amendment
thereto, (c) copies of the Partnership's federal, state and local income tax
returns and reports, (d) copies of the Agreement and any financial statements
of the Partnership for the three most recent years and (e) all documents and
information required under the Act. Any Partner or his duly authorized
representative, upon paying the costs of collection, duplication
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<PAGE> 61
and mailing, shall be entitled to inspect or copy such records during ordinary
business hours.
10.02 CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS.
(a) All funds of the Partnership not otherwise invested shall
be deposited in one or more accounts maintained in such banking or brokerage
institutions as the General Partner shall determine, and withdrawals shall be
made only on such signature or signatures as the General Partner may, from time
to time, determine.
(b) All deposits and other funds not needed in the operation
of the business of the Partnership may be invested by the General Partner in
investment grade instruments (or investment companies whose portfolio consists
primarily thereof), government obligations, certificates of deposit, bankers'
acceptances and municipal notes and bonds. The funds of the Partnership shall
not be commingled with the funds of any other Person except for such
commingling as may necessarily result from an investment in those investment
companies permitted by this Section 10.02(b).
10.03 FISCAL AND TAXABLE YEAR. The fiscal and taxable year of the
Partnership shall be the calendar year.
10.04 ANNUAL TAX INFORMATION AND REPORT. Within 75 days after the
end of each fiscal year of the Partnership, the General Partner shall furnish
to each person who was a Limited Partner at any time during such year the tax
information necessary to file such Limited Partner's tax returns as shall be
required by law.
10.05 TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS.
(a) The General Partner shall be the Tax Matters Partner of
the Partnership within the meaning of Section 6231(a)(7) of the Code. As Tax
Matters Partner, the General Partner shall have the right and obligation to
take all actions authorized and required, respectively, by the Code for the Tax
Matters Partner. The General Partner shall have the right to retain
professional assistance in respect of any audit of the Partnership by the
Service and all out- of-pocket expenses and fees incurred by the General
Partner on behalf of the Partnership as Tax Matters Partner shall constitute
Partnership expenses. In the event the General Partner receives notice of a
final Partnership adjustment under Section 6223(a)(2) of the Code, the General
Partner shall either (i) file a court petition for judicial review of such
final adjustment within the period provided under Section 6226(a) of the Code,
a copy of which petition shall be mailed to all Limited Partners on the date
such petition is filed, or (ii) mail a written notice to all Limited
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<PAGE> 62
Partners, within such period, that describes the General Partner's reasons for
determining not to file such a petition.
(b) Except as otherwise provided herein, all elections
required or permitted to be made by the Partnership under the Code shall be
made by the General Partner in its sole discretion.
(c) In the event of a transfer of all or any part of the
Partnership Units of any Partner, the Partnership, at the option of the General
Partner, may elect pursuant to Section 754 of the Code to adjust the basis of
the Properties. Notwithstanding anything contained in Article V of this
Agreement, any adjustments made pursuant to Section 754 shall affect only the
successor in interest to the transferring Partner and in no event shall be
taken into account in establishing, maintaining or computing Capital Accounts
for the other Partners for any purpose under this Agreement. Each Partner will
furnish the Partnership with all information necessary to give effect to such
election.
10.06 REPORTS TO LIMITED PARTNERS.
(a) The books of the Partnership shall be audited annually as
of the end of each fiscal year of the Partnership by accountants selected by
the General Partner, who shall be the same accountants responsible for the
examination of the Company's books. The General Partner shall determine and
prepare an annual balance sheet, a statement of partners' capital as of the end
of such year, as well as statements of cash flow and income, all in accordance
with generally accepted accounting principles and accompanied by an independent
auditor's report (collectively, the "Financial Statements"), together with all
supplementary schedules and information prepared by the accountants related
thereto. As a note to such Financial Statements, the General Partner shall
prepare a schedule of all loans to the Partnership. Such schedule shall
demonstrate that loans have been made, used, carried on the books of the
Partnership (and repaid, if applicable) in accordance with the provisions of
this Agreement. Within 90 days after the end of each fiscal year, the General
Partner shall transmit the Financial Statements to the Limited Partners. The
General Partner also shall prepare quarterly unreviewed Financial Statements
and shall transmit such statements to the Limited Partners within 45 days of
the end of each fiscal quarter of the Partnership.
(b) Any Partner shall further have the right to a private
audit of the books and records of the Partnership, provided such audit is made
for Partnership purposes, at the expense of the Partner desiring it and is made
during normal business hours.
- 58 -
<PAGE> 63
ARTICLE XI
AMENDMENT OF AGREEMENT
The General Partner may amend this Agreement in any respect; provided,
however, that the following amendments shall require the consent of the
following Partners:
(a) any amendment affecting the operation of the
Redemption Right requires the consent of Limited Partners (other than the
General Partner) holding more than 66 2/3% of the Percentage Interests of the
Limited Partners (other than that held by the General Partner);
(b) any amendment affecting the operation of the Class B
Conversion Right, the Class B Preferred Return, or the Class B Preference Value
per Unit requires the consent of the Class B Limited Partners holding more than
66 2/3% of the Preferred Percentage Interests; and
(c) any amendment that would (i) affect the operation of
the Conversion Factor, (ii) adversely affect the rights of the Limited Partners
to receive the distributions payable to them hereunder, (iii) alter the
Partnership's allocations of Profit and Loss, or (iv) impose on the Limited
Partners any obligation to make additional Capital Contributions to the
Partnership, requires the affirmative vote of 66 2/3% of the Percentage
Interests held by each class of Limited Partner (other than the General
Partner) adversely affected by such amendment.
ARTICLE XII
GENERAL PROVISIONS
12.01 NOTICES. All communications required or permitted under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or upon deposit in the United States mail, registered,
postage prepaid return receipt requested, to the Partners at the addresses set
forth in Exhibit A; provided, however, that any Partner may specify a different
address by notifying the General Partner in writing of such different address.
Notices to the Partnership shall be delivered at or mailed to its specified
office.
12.02 SURVIVAL OF RIGHTS. Subject to the provisions hereof limiting
transfers, this Agreement shall be binding upon and inure to the benefit of the
Partners and the Partnership and their respective legal representatives,
successors, transferees and assigns.
- 59 -
<PAGE> 64
12.03 ADDITIONAL DOCUMENTS. Each Partner agrees to perform all
further acts and execute, swear to, acknowledge and deliver all further
documents which may be reasonable, necessary, appropriate or desirable to carry
out the provisions of this Agreement or the Act.
12.04 SEVERABILITY. If any provision of this Agreement shall be
declared illegal, invalid, or unenforceable in any jurisdiction, then such
provision shall be deemed to be severable from this Agreement (to the extent
permitted by law) and in any event such illegality, invalidity or
unenforceability shall not affect the remainder hereof.
12.05 ENTIRE AGREEMENT. This Agreement and exhibits attached hereto
constitute the entire Agreement of the Partners and supersede all prior written
agreements and prior and contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
12.06 PRONOUNS AND PLURALS. When the context in which words are
used in the Agreement indicates that such is the intent, words in the singular
number shall include the plural and the masculine gender shall include the
neuter or female gender as the context may require.
12.07 HEADINGS. The Article headings or sections in this Agreement
are for convenience only and shall not be used in construing the scope of this
Agreement or any particular Article.
12.08 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original copy and all of
which together shall constitute one and the same instrument binding on all
parties hereto, notwithstanding that all parties shall not have signed the same
counterpart.
12.09 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia.
12.10 COMPANY IS NOT A PARTNER. The Company is not a Partner of the
Partnership. The Company is a party to this Agreement solely to make certain
agreements with the parties hereto and to facilitate certain transactions
provided for herein. The Company has not, and shall not be deemed to have,
committed to take or refrain from taking any action or agreed with the parties
hereto with respect to any matter other than as specifically set forth herein.
The Company shall not be liable for any obligations of the Partnership or any
monetary damages for losses sustained or liabilities incurred by the
Partnership or the Partners.
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<PAGE> 65
IN WITNESS WHEREOF, the parties hereto have hereunder affixed their
signatures to this Second Amended and Restated Agreement of Limited
Partnership, all as of the ____ day of October 1996.
GENERAL PARTNER:
INNKEEPERS FINANCIAL CORPORATION, a
Virginia corporation
By: ______________________________
Name: ____________________________
Its: ______________________________
CLASS A LIMITED PARTNERS:
____________________________________
Jeffrey H. Fisher
____________________________________
Frederic Shaw
*
--------------------------------------
Viola Holtz
*
--------------------------------------
Marvin L. Lader
*
--------------------------------------
Diane Savage
*
--------------------------------------
Martin A. List
*
--------------------------------------
Larry Ochstein
*
--------------------------------------
Julian C. Shoor Trust
- 61 -
<PAGE> 66
*
--------------------------------------
Robert E. List, Trustee for
Karen A. List
*
--------------------------------------
V. H. Nusbaum, Jr.
*
---------------------------------------
Jerome H. Tishman
*
--------------------------------------
Arnold L. & Marilyn Lampert
*
--------------------------------------
Tina & Emmanuel Newmark
*
--------------------------------------
Stanley C. & Janet F. Imerman
*
--------------------------------------
Barnat Holdings Limited Partnership
*
--------------------------------------
Melan Holdings Limited Partnership
*
--------------------------------------
Robert E. List Co. Profit Sharing
Plan
*
---------------------------------------
Jerome Fisher
- 62 -
<PAGE> 67
*
---------------------------------------
David R. Jacobson
*
---------------------------------------
Max Tochner, Trustee
for Karen A. List Trust
*By:
---------------------------------
Jeffrey H. Fisher,
Attorney in Fact
RESIDENCE INN BY MARRIOTT, INC.,
a Delaware corporation
By:
------------------------------
Name:
Its:
- 63 -
<PAGE> 68
CLASS B LIMITED PARTNERS:
-------------------------
DENVER DOWNTOWN RESIDENCE ASSOCIATES,
L.P., a Kansas limited partnership
By:
--------------------------------
Name: Jack P. DeBoer
Its: General Partner
EAST LANSING RESIDENCE ASSOCIATES,
a Kansas general partnership
By:
--------------------------------
Name: Jack P. DeBoer
Its: General Partner
KENTWOOD RESIDENCE ASSOCIATES,
a Kansas general partnership
By:
--------------------------------
Name: Jack P. DeBoer
Its: General Partner
OAKMEAD RESIDENCE ASSOCIATES,
L.P., a Kansas limited partnership
By:
--------------------------------
Name: Jack P. DeBoer
Its: General Partner
SAN MATEO RESIDENCE ASSOCIATES,
L.P., a Kansas limited partnership
By:
--------------------------------
Name: Jack P. DeBoer
Its: Co-Partner
- 64 -
<PAGE> 69
By: RHLP, a Washington limited
partnership, its Co-Partner
By:
-----------------------------
Name:
-----------------------------
Its: General Partner
SUNNYVALE RESIDENCE ASSOCIATES,
L.P., a Kansas limited partnership
By:
---------------------------------
Name: Jack P. DeBoer
Its: General Partner
WICHITA EAST RESIDENCE ASSOCIATES,
L.P., a Kansas limited partnership
By:
---------------------------------
Name: Jack P. DeBoer
Its: General Partner
RESIDENCE INN BY MARRIOTT, INC.,
a Delaware corporation
By:
---------------------------------
Name:
Its:
- 65 -
<PAGE> 1
INNKEEPERS USA TRUST
TRUSTEES' SHARE INCENTIVE PLAN
AMENDED AND RESTATED AS OF SEPTEMBER 23, 1994
<PAGE> 2
ARTICLE I
DEFINITIONS
1.01. Affiliate means any "subsidiary" or "parent" corporation (within
the meaning of Section 424 of the Code) of the Company, including an entity
that becomes an Affiliate after the adoption of this Plan.
1.02. Award Date means the date of the first Board meeting after each annual
meeting of the Company's shareholders.
1.03. Board means the Board of Trustees of the Company.
1.04. Committee means the committee appointed by the Board to administer
the Plan.
1.05. Company means Innkeepers USA Trust.
1.06. Fair Market Value means, on any given date, the current fair market
value of a Share as determined pursuant to subsection (a) or (b) below.
(a) While the Company is a Non-Public Company, Fair Market Value
shall be determined by the Board using any reasonable method in good faith.
(b) While the Company is a Public Company, Fair Market Value shall
be determined as follows: if the Shares are not listed on an established stock
exchange, the Fair Market Value shall be the reported "closing" price of a
Share in the New York over-the-counter market as reported by the National
Association of Securities Dealers, Inc. If the Shares are listed on an
established stock exchange or exchanges, Fair Market Value shall be deemed to
be the highest closing price of a Share reported on that stock exchange or
exchanges or, if no sale of Shares shall be made on any stock exchange on that
day, then the next preceding day on which there was a sale. For purposes of
this definition, the term
<PAGE> 3
"Public Company" means an entity that has sold securities pursuant to an
effective registration statement on Form S-11 filed pursuant to the Securities
Act of 1933, as amended and the term "Non-Public Company" means an entity that
has never sold securities pursuant to an effective registration statement on
Form S-11 filed pursuant to the Securities Act of 1933, as amended. 1.07.
First Award Date means the date that the registration statement relating to the
Company's initial public offering of Shares is declared effective by the
Securities and Exchange Commission.
1.07. First Award Date means the date that the registration statement
relating to the Company's initial public offering of Shares is declared
effective by the Securities and Exchange Commission.
1.08. Founding Trustee means a Participant who is a member of the Board on
the First Award Date.
1.09. Non-Founding Trustee means a Participant who is neither a Founding
Trustee nor a Reelected Trustee.
1.10. Option means an option that entitles the holder to purchase Shares
from the Company on the terms set forth in Article IV of this Plan.
1.11. Participant means a member of the Board who, on the First Award Date
or applicable Award Date, is not an employee or officer of the Company or an
Affiliate and who is not a member of the Committee. Participant also means an
individual who is not an employee of the Company or an Affiliate and who is
elected or appointed a member of the Board other than at an annual meeting of
the Company's shareholders.
1.12. Plan means the Innkeepers USA Trust Trustees' Share Incentive Plan.
1.13. Reelected Trustee means a Participant who, during the term of this
Plan, ceases to be a member of the Board but is subsequently elected or
appointed to the Board.
2
<PAGE> 4
1.14. Shares means the common shares of the Company.
ARTICLE II
PURPOSES
The Plan is intended to (i) assist the Company in recruiting and
retaining trustees and (ii) promote a greater identity of interest between
Participants and shareholders by enabling Participants to participate in the
Company's future success.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Committee. The Committee
shall have authority to grant Options and award Shares upon such terms (not
inconsistent with the provisions of the Plan) as the Committee may consider
appropriate. In addition, the Committee shall have complete authority to
interpret all provisions of the Plan; to adopt, amend, and rescind rules and
regulations pertaining to the administration of the Plan; and to make all other
determinations necessary or advisable for the administration of the Plan. The
express grant in the Plan of any specific power to the Committee shall not be
construed as limiting any power or authority of the Committee. Any decision
made, or action taken, by the Committee or in connection with the
administration of the Plan shall be final and conclusive. No member of the
Committee shall be liable for any act done in good faith with respect to the
Plan. All expenses of administering the Plan shall be borne by the Company.
3
<PAGE> 5
ARTICLE IV
OPTIONS
4.01. Grant of Options to Founding Trustees and Participants Elected
at Annual Meeting. This Section 4.01 does not apply to Participants described
in the first sentence of Section 4.02. Each Founding Trustee shall be granted
an Option for 5,000 Shares on the First Award Date. Each Non-Founding Trustee
shall be granted, on the first Award Date on which he is a member of the Board,
and each Reelected Trustee shall receive, on the first Award Date after his
reelection to the Board, an Option for a number of Shares determined in
accordance with Section 4.03. Subject to the provisions of Article VII, an
Option granted under this Section 4.01 shall be exercisable with respect to
1000 Shares on the first Award Date after the date on which such Option was
granted, provided that the Participant is then a member of the Board, and with
respect to an additional 1000 Shares subject to such Option on each successive
Award Date, provided that the Participant is then a member of the Board.
4.02. Grant of Options to Other Participants. This Section 4.02 applies to
Participants (other than Founding Trustees) who are elected or appointed to the
Board other than at an annual meeting of the Company's shareholders. Each
Participant to whom this Section 4.02 applies shall be granted, on the date of
such appointment or election to the Board, an Option for a number of Shares
determined in accordance with Section 4.03. Subject to the provisions of
Article VII, an Option granted under this Section 4.02 shall be exercisable
with respect to 1000 Shares on the first anniversary of the date the Option was
4
<PAGE> 6
granted, provided that the Participant is then a member of the Board, and with
respect to an additional 1000 Shares subject to such Option on each successive
anniversary of the date the Option was granted, provided that the Participant
is then a member of the Board. This Section 4.02 shall be effective as of the
First Award Date, provided that the Company's shareholders approve the
amendments to the Plan submitted to shareholders at the 1996 annual meeting of
the Company's shareholders.
4.03. Number of Shares Subject to Options. Options granted (a) in 1995
shall cover 4,000 Shares; (b) in 1996 shall cover 3,000 Shares; (c) in 1997
shall cover 2,000 Shares; and (d) in 1998 shall cover 1,000 Shares.
4.04 Option Price and Payment. The price per share for Shares purchased on
the exercise of an Option shall be the Fair Market Value on the date that the
Option is granted. Payment of the Option price shall be made in cash, cash
equivalent acceptable to the Committee, by the surrender of Shares or a
combination thereof. If Shares are surrendered in payment of the Option price,
the Shares surrendered must have an aggregate Fair Market Value (determined as
of the day preceding the exercise date) that, together with any cash or cash
equivalent paid, is not less than the Option price for the number of Shares for
which this Option is being exercised.
4.05. Exercise. To the extent that an Option has become exercisable in
accordance with Section 4.01 or 4.02, as applicable, it may be exercised
whether or not the Participant is a member of the Board on the date or dates
of exercise. An Option may be exercised with respect to any number of whole
Shares less than the full number for which the Option could be exercised. A
partial exercise of an Option shall not affect the right to exercise the
Option from time to time in accordance with this Plan with respect to the
remaining Shares subject
5
<PAGE> 7
to the Option. All Options shall be evidenced by Agreements that shall be
subject to the applicable provisions of this Plan and to such other provisions
as the Committee may adopt.
4.06. Maximum Option Period. The maximum period during which an Option may
be exercised shall be ten years from the date of grant. In the event of the
Participant's death, the Option may be exercised by the Participant's estate
or by such person or persons who succeed to the Participant's rights by will
or the laws of descent and distribution following the Participant's death
until the expiration of the Option period. Participant's estate or such person
or persons may exercise the Option with respect to all or part of the number
of Shares for which participant could have exercised the Option on the date of
his death.
4.07. Nontransferability. An Option granted under this Plan shall be
nontransferable except by will or by the laws of descent and distribution.
During the lifetime of the Participant to whom an Option is granted, the
Option may be exercised only by the Participant. No right or interest of a
Participant in any Option shall be liable for, or subject to, any lien,
obligation, or liability of such Participant.
4.08. Shareholder Rights. No Participant shall have any rights as a
shareholder with respect to Shares subject to his or her Option until the date
of exercise of such Option.
4.09. Shares Subject to Options. Upon the exercise of any Option, the
Company may deliver to the Participant (or the Participant's broker if the
Participant so directs), Shares from its previously authorized but unissued
Shares.
6
<PAGE> 8
ARTICLE V
SHARE AWARDS
5.01. Grant of Share Awards to Founding Trustees and Participants
Elected at Annual Meeting. This Section 5.01 does not apply to Participants
described in the first sentence of Section 5.02. Each Founding Trustee will be
awarded 7500 Shares on the First Award Date. Each Non-Founding Trustee will be
awarded, on the first Award Date on which he is a member of the Board, a whole
number of Shares having an aggregate Fair Market Value on that date that as
nearly as possible equals, but does not exceed, $75,000. Each Reelected
Trustee will be awarded, on the first Award Date following his reelection to
the Board, a number of Shares having an aggregate Fair Market Value on that
date that as nearly as possible equals, but does not exceed (i) $75,000 minus
(ii) the Fair Market Value of any Shares previously awarded to him under this
Article V that had vested pursuant to this Section 5.01 or Section 5.02, as
applicable. For purposes of the preceding sentence, the Fair Market value of
the previously awarded Shares shall be determined as of the date such Shares
were issued to the Participant.
Twenty percent (20%) of the Shares issued to a Participant under
this Section 5.01 shall be immediately and fully vested as of the First Award
Date or Award Date, as applicable. On each subsequent Award Date on which the
Participant is a member of the Board, an additional twenty percent (20%) of the
Shares issued to such Participant shall become fully vested; provided, however,
that if such subsequent Award Date falls in 1994, no additional Shares that
were awarded as of the First Award Date shall become vested on that date. If a
Participant is not a member of the Board on any Award Date on which a
7
<PAGE> 9
portion of the Shares issued to him would otherwise become vested under this
section, (a) no additional Shares shall become vested on that date, and (b) the
Participant shall have no further right to or interest in any Shares issued to
him under the Plan that were not vested prior to that date.
5.02. Grant of Share Awards to Other Participants. This Section applies to
Participants (other than Founding Trustees) who are elected or appointed to the
Board other than at an annual meeting of the Company's shareholders. Each
Participant to whom this Section 5.02 applies will be awarded, on the date of
such appointment or election, a whole number of Shares having an aggregate Fair
Market Value on that date that as nearly as possible equals, but does not
exceed, $75,000. Each Reelected Trustee to whom this Section 5.02 applies will
be awarded, on the date of his appointment or election to the Board, a number
of Shares having an aggregate Fair Market Value on that date that as nearly as
possible equals, but does not exceed (i) $75,000 minus (ii) the Fair Market
Value of the Shares previously awarded to him under this Article V that had
vested pursuant to Section 5.01 or this Section 5.02, as applicable. For
purposes of the preceding sentence, the Fair Market value of the previously
awarded Shares shall be determined as of the date such Shares were issued to
the Participant.
Twenty percent (20%) of the Shares issued to a Participant under
this Section 5.02 shall be immediately and fully vested as of the date the
Shares are granted to the Participant. On each subsequent anniversary of the
date the Shares were granted, an additional twenty percent (20%) of the Shares
issued to such Participant shall become fully vested if Participant is a member
of the Board on that date. If a Participant is not a member
8
<PAGE> 10
of the Board on any date on which a portion of the Shares issued to him would
otherwise become vested under this section, (a) no additional Shares shall
become vested on that date, and (b) the Participant shall have no further right
to or interest in any Shares issued to him under the Plan that were not vested
prior to that date.
This Section 5.02 shall be effective as of the First Award Date,
provided that the Company's shareholders approve the amendments to the Plan
submitted to shareholders at the 1996 annual meeting of the Company's
shareholders.
5.03. Transferability. A Participant may not pledge, exchange,
hypothecate, bequeath, or otherwise transfer any Shares issued to such
Participant under the Plan until such Shares are vested pursuant to
Section 5.01 or 5.02, as applicable. Any transfer of Shares permitted under
this Plan is subject to restrictions imposed by federal and state securities
and other laws.
5.04. Shareholder Rights. Until such time as a Share issued to a
Participant under this Plan is vested pursuant to Section 5.01 or 5.02, as
applicable, the Company shall retain custody of the certificate evidencing such
Share and shall hold a stock power endorsed in blank with respect to such
Share, which stock power is to be provided to the Company by the Participant as
soon as reasonably possible after the date on which Shares are issued to him.
A Participant will have the right to vote all Shares issued to him under this
Plan and to receive all dividends thereon, for as long as the Participant
continues to serve as a member of the Board, notwithstanding that a portion of
the Shares issued to the Participant is not vested pursuant to Section 5.01 or
5.02, as applicable. On the date that the Participant ceases to be a member of
the Board, all voting rights and all rights to receive dividends with
9
<PAGE> 11
respect to any Shares not yet vested pursuant to section 5.01 or 5.02, as
applicable, shall immediately terminate.
5.05. Shares Subject to Awards. Upon the award of Shares in accordance
with this Article V, the Company may issue Shares from its authorized but
unissued Shares.
ARTICLE VI
ADJUSTMENT IN AGGREGATE OUTSTANDING OPTIONS AND SHARE AWARDS
UPON CHANGE IN COMMON SHARES AND
ADJUSTMENT IN OPTIONS AND SHARE AWARDS MADE THEREAFTER
The provisions of this Plan shall be revised as the Committee
shall determine to be equitably required in the event that (a) the Company (i)
effects one or more Share dividends, Share split-ups, subdivisions or
consolidation of Shares or (ii) engages in a transaction to which Section 424
of the Code applies or (b) there occurs any other event which, in the judgment
of the Committee, necessitates such action. Any determination made under this
Article VI by the Committee shall be final and conclusive.
The issuance by the Company of shares of any class, or
securities convertible into shares of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares of obligations of
the Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number
of shares that will be issued as of any applicable Award Date.
10
<PAGE> 12
ARTICLE VII
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
No Shares shall be issued and no certificates for Shares shall
be delivered under the Plan except in compliance with all applicable federal
and state laws and regulations (including, without limitation, withholding tax
requirements), any listing agreement to which the Company is a party, and the
rules of all domestic stock exchanges on which the Company's Shares may be
listed. The Company shall have the right to rely on an opinion of its counsel
as to such compliance. Any certificate issued to evidence Shares issued under
the Plan may bear such legends and statements as the Committee may deem
advisable to assure compliance with federal and state laws and regulations. No
Shares shall be issued and no certificate for Shares shall be delivered under
the Plan until the Company has obtained such consent or approval as the
Committee may deem advisable from regulatory bodies having jurisdiction over
such matters.
ARTICLE VIII
GENERAL PROVISIONS
8.01. Unfunded Plan. The Plan, insofar as it provides for awards,
shall be unfunded, and the Company shall not be required to segregate any
assets that may at any time be represented by awards under the Plan. Any
liability of the Company to any person with respect to any award to be made
under the Plan shall be based solely upon any contractual obligations that may
be created pursuant to the Plan. No such obligation of the Company
11
<PAGE> 13
shall be deemed to be secured by any pledge of, or other encumbrance on, any
property of the Company.
8.02. Rules of Construction. Headings are given to the articles and
sections of the Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation, or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.
ARTICLE IX
AMENDMENT
The Board may amend from time to time or terminate the Plan at
any time; provided, however, that no amendment may become effective until
shareholder approval is obtained if the amendment materially (a) increases the
aggregate number of Shares that may be issued under this Plan (other than an
adjustment authorized under Article VI), (b) increases the benefits to be
awarded under the Plan or (c) changes the class of individuals eligible to
become Participants. The preceding sentence to the contrary notwithstanding,
the Plan may not be amended more than once every six months other than to
comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act of 1974, or the rules thereunder.
12
<PAGE> 14
ARTICLE X
DURATION OF PLAN
No Shares may be awarded and no Options may be granted under the
Plan after the Award Date in 1998. An award of Shares during the term of the
Plan shall remain in effect in accordance with its terms notwithstanding the
expiration of the Plan.
ARTICLE XI
EFFECTIVE DATE OF PLAN
Shares may be issued under the Plan on the First Award Date,
provided that the Plan has been approved (at a duly held shareholders' meeting
at which a quorum is present) by a majority of the votes cast by the Company's
shareholders, voting either in person or by proxy, or by unanimous consent of
the Company's shareholders. Options may be granted under this Plan upon its
adoption by the Board, but no Option will be effective or exercisable unless
this Plan is approved by shareholders in accordance with the preceding
sentence.
13
<PAGE> 1
Exhibit 13.1
INNKEEPERS USA TRUST 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Innkeepers USA Trust (the "Company") commenced operations on September 30,
1994. The Company owns an 81.9% equity interest in Innkeepers USA Limited
Partnership (with its subsidiary partnerships, the "Partnership") at December
31, 1996 and has elected to be taxed as a real estate investment trust ("REIT").
The Partnership owns 32 Hotels (the "Hotels") in 14 states at December 31, 1996.
The 32 Hotels are comprised of 20 Residence Inn by Marriott, 8 Hampton Inns, 2
Comfort Inns, 1 Sheraton Inn and 1 Holiday Inn Express.
The Partnership leases the Hotels to JF Hotel, Inc. (or other entities under
common ownership, collectively the "Lessee") pursuant to leases which provide
for rent based, in substantial part, on the room revenues of the Hotels
("Percentage Leases"). The Lessee operates 21 of the Hotels, Residence Inn by
Marriott, Inc., a wholly-owned subsidiary of Marriott International, Inc.
operates nine of the hotels, and an unaffiliated party manages two of the
hotels. The 11 managed hotels are managed under management agreements between
the respective manager and the Lessee. The non Marriott-managed hotels operate
under franchise licenses held by the Lessee, the cost of obtaining which was
paid for by the Partnership. The right to operate the nine Marriott-managed
Hotels as Residence Inns is contained in the Marriott management agreements.
Continuing franchise and management fees are paid by the Lessee.
The Company acquired the following hotel properties during the year ended
December 31, 1996:
<TABLE>
<CAPTION>
Number of
Hotel Suites/Rooms
- ---------------------------------------------------------------------
<S> <C>
Holiday Inn Express - Lexington, MA 164
Residence Inn - Cherry Hill, NJ 96
Residence Inn - Harrisburg, PA 80
Comfort Inn - Woburn, MA (A) 100
Residence Inn - Atlanta (Downtown), GA 160
Hampton Inn - Norcross, GA 150
Residence Inn - San Mateo, CA 159
Residence Inn - Silicon Valley I, CA 231
Residence Inn - Silicon Valley II, CA 247
Residence Inn - Denver (Downtown), CO 156
Residence Inn - Wichita (East), KS 64
Residence Inn - East Lansing, MI 60
Residence Inn - Grand Rapids, MI 96
Residence Inn - Portland, ME 78
(A) To be converted to a Hampton Inn.
</TABLE>
Hotels
The following chart summarizes information regarding the Hotels at December
31, 1996.
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms
- ----------------------------------------------------------------------------
<S> <C> <C>
Extended stay hotels:
Residence Inn 20 2,323
- ----------------------------------------------------------------------------
Limited service hotels:
Hampton Inn 8 1,059
Comfort Inn 2 227
Holiday Inn Express 1 164
- ----------------------------------------------------------------------------
11 1,450
Full service hotels:
Sheraton Inn 1 139
- ----------------------------------------------------------------------------
Total 32 3,912
============================================================================
</TABLE>
Pro forma revenue per available room ("REVPAR") for the Hotels, presented as
if the acquisition of the Hotels had occurred at the beginning of the periods
presented, increased 10.5% for the year ended December 31, 1996 as compared to
the year ended December 31, 1995. Results were excluded for such comparison for
the Residence Inn -- Atlanta (Downtown), Georgia, the Residence Inn -- Portland,
Maine, and the Hampton Inn -- Norcross, Georgia, each of which was initially
opened in mid or late 1996, and the Comfort Inn -- Woburn, Massachusetts, which
was closed for renovation during a portion of 1996. Management believes the
growth in REVPAR at the Hotels reflects the results of the Company's focused
acquisition strategy, the continued implementation of professional management
techniques by the Lessee and third party management and improving industry
conditions. The following table sets forth pro forma information with respect to
occupancy, average daily rate ("ADR") and REVPAR for the year ended December 31,
1996 as compared to the year ended December 31, 1995. No assurance can be given
that the trends reflected in the following table will continue or that
occupancy, ADR and REVPAR will not decrease due to changes in national or local
economic, hospitality or other industry conditions.
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended Percentage
December 31, 1996 December 31, 1995 Change
- ------------------------------------------------------------------
<S> <C> <C> <C>
Occupancy 82.49% 79.74% 3.5%
ADR $82.28 $77.05 6.8%
REVPAR $67.87 $61.45 10.5%
</TABLE>
Results of Operations
The following is a discussion of the results of operations for the Company.
The Company commenced operations on September 30, 1994. Consequently, comparison
of the actual results for the year ended December 31, 1995 to the period
September 30, 1994 (inception) through December 31, 1994 is not meaningful.
<PAGE> 2
12 INNKEEPERS USA TRUST
The Company -- Actual
Comparison of the Year Ended December 31, 1996 ("1996") to the Year Ended
December 31, 1995 ("1995")
The Company had revenues of $28,377,000, consisting of $27,466,000 of
Percentage Lease revenue from the Lessee and $911,000 of other revenue for 1996
compared with $11,465,000, $11,268,000 and $197,000, respectively, for 1995.
Depreciation and amortization, amortization of loan origination fees, and
amortization of unearned trustees' compensation ("Depreciation and
Amortization") were $8,424,000 in the aggregate for 1996 compared with
$3,661,000 for 1995. Real estate and personal property taxes and property
insurance were $2,803,000 for 1996 compared with $1,105,000 for 1995. Interest
expense for 1996 was $5,839,000 compared with $1,989,000 for 1995. Interest
expense for 1996 consisted primarily of interest incurred on borrowings
outstanding under the Company's $70 million line of credit ("Line of Credit")
and $30 million term loan ("Term Loan"). Interest expense for 1995 consisted
primarily of interest incurred on borrowings outstanding under the Line of
Credit and a mortgage note collateralized by one hotel property located in
Florida (the "Florida Mortgage Note"). Net income before minority interest was
$9,749,000, or $0.65 per share, for 1996 compared with $3,864,000, or $0.57 per
share, for 1995. Funds from Operations (income before minority interest and
depreciation) was $17,170,000, or $1.18 (weighted average) per share, for 1996
compared with $7,015,000, or $1.03 per share, for 1995.
Percentage Lease revenue, Depreciation and Amortization, interest expense and
real estate and personal property taxes and property insurance increased
substantially for 1996 compared with 1995, primarily due to the number of hotels
owned increasing from seven at January 1, 1995 to 18 at January 1, 1996 and to
32 at December 31, 1996.
September 30, 1994 (Inception) Through December 31, 1994
For the period September 30, 1994 through December 31, 1994, the Company had
revenues of $1,519,000, consisting of $1,480,000 of Percentage Lease revenue
from the Lessee and $39,000 of other revenue. Depreciation and Amortization were
$663,000. Real estate and personal property taxes and property insurance were
$159,000. Interest expense was $61,000, which consisted solely of interest on
the Florida Mortgage Note. Net income before minority interest was $420,000, or
$0.08 per share. Funds from Operations was $900,000, or $0.17 per share.
The Company -- Pro Forma
The following pro forma information is presented as if the acquisition of the
Hotels had occurred at the beginning of the periods presented.
Comparison of 1996 to 1995
Pro forma Percentage Lease revenue increased by approximately $5,650,000, or
14.8%, from $38,300,000 in 1995 to $43,950,000 in 1996 (including base rent of
$2,565,000, but no percentage rent, under the Percentage Leases for the three
newly developed Hotels and one Hotel closed for a portion of 1996 due to
renovation). The increase was primarily due to a 6.8% increase in ADR and a 3.5%
increase in occupancy at the Hotels. As a percentage of total revenue, total pro
forma expenses decreased from 72.0% for 1995 to 62.9% for 1996 as a result of
expenses remaining relatively constant while pro forma total revenue increased.
Liquidity and Capital Resources
The Company's principal source of liquidity is rent payments from the Lessee
under the Percentage Leases, and the Company is dependent on the Lessee to make
such payments to provide cash for additional hotel investment, debt service,
distributions, capital expenditures on its hotels, and working capital. The
Company believes that its cash provided by operations will be adequate to meet
its liquidity needs, which primarily include funding distributions and paying
operating expenses. The Company also currently expects to fund its growth
objectives in part by accessing the capital markets and exchanging equity for
hotel properties as necessary and as market conditions permit.
Cash and cash equivalents at December 31, 1996 were $44,739,000, including
approximately $287,000 which the Partnership is required, under the Percentage
Leases, to make available to the Lessee for the replacement and refurbishment of
furniture, fixtures and equipment. Additionally, cash and cash equivalents
includes approximately $4,100,000 that is held in escrow to pay for insurance,
taxes, and capital expenditures pertaining primarily to the thirteen Hotels that
collateralize the Line of Credit and the eight Hotels that collateralize the
Term Loan.
Net cash provided by operating activities for the year ended December 31,
1996 was $17,194,000.
Net cash used in investing activities was $109,714,000 for the year ended
December 31, 1996. This was comprised primarily of the Company acquiring a
Holiday Inn Express Hotel in Lexington, Massachusetts for approximately
$7,000,000 in cash, Residence Inn Hotels in Cherry Hill, New Jersey and
Harrisburg, Pennsylvania for an aggregate of approximately $16,800,000 in cash,
a Comfort Inn Hotel (to be reflagged as a Hampton Inn after the completion of
renovations) in Woburn, Massachusetts for approximately $3,000,000 in cash, a
Residence Inn Hotel in Atlanta (Downtown), Georgia and a Hampton Inn in
Norcross, Georgia for an aggregate of approximately $27,800,000 in cash, and
seven Residence Inn Hotels ("DeBoer Residence Inns") (San Mateo, California,
Silicon Valley I, California, Silicon Valley II, California, Denver (Downtown),
Colorado, Wichita (East), Kansas, East Lansing, Michigan and Grand Rapids,
Michigan) for approximately $38,367,000 in cash.
<PAGE> 3
INNKEEPERS USA TRUST 13
The total purchase price for the DeBoer Residence Inns was $108,500,000 and also
consisted of the assumption of approximately $24,936,000 in long-term
indebtedness and the issuance of approximately $44,697,000 of preferred units of
limited partnership interest in the partnership ("Preferred Units") and $500,000
of common units of limited partnership interest in the partnership ("Common
Units"). Lastly, a Residence Inn Hotel in Portland, Maine was acquired for
approximately $5,300,000 in cash and $859,000 in Common Units. The Company
agreed with the sellers of the DeBoer Residence Inns that the Company would
maintain for a period of up to ten years after the closing outstanding
indebtedness of at least approximately $40 million, subject to reduction upon
the occurrence of certain events, including certain redemptions or taxable
transfers of Preferred Units. In the event that the Company fails to maintain
the required indebtedness, the Company may be liable for the resulting income
tax liabilities incurred by the sellers. In addition, the Company agreed
generally not to dispose of any DeBoer Residence Inn in a taxable transaction
for ten years after the closing.
Net cash provided by financing activities was $135,166,000 for the year ended
December 31, 1996, reflecting proceeds from long-term debt of $46,307,000,
including $32,475,000 in borrowings under the Line of Credit, to (a) purchase
the Holiday Inn Express Hotel in Lexington, Massachusetts, Residence Inn Hotels
in Cherry Hill, New Jersey and Harrisburg, Pennsylvania and the Comfort Inn
Hotel in Woburn, Massachusetts and (b) make deposits toward the purchase of the
Residence Inn Hotel in Atlanta (Downtown), Georgia and the Hampton Inn in
Norcross, Georgia. The Company also completed a 11,500,000 common share
follow-on offering ("Offering"), receiving net proceeds of $117,038,000. A
portion of the Offering proceeds were used to acquire the DeBoer Residence Inns
and to complete the acquisition of the Residence Inn Hotels in Portland, Maine
and Atlanta (Downtown), Georgia and the Hampton Inn in Norcross, Georgia. The
Offering proceeds were also used to pay down the Line of Credit in the amount of
approximately $11,800,000, and the remainder was invested in cash and cash
equivalents.
The Company (and the Partnership) paid an aggregate of $11,025,000 in
distributions to holders of Common Shares, Common Units and Preferred Units
during the year ended December 31, 1996. The Company paid distributions of $0.90
per Common Share and Common Unit in 1996. Annual preferred distributions of
$1.10 are payable on each Preferred Unit, which may increase up to $1.155 for
each Preferred Unit, based on increases in distributions payable on the Common
Shares. The Preferred Units are convertible at any time into Common Units on a
one-for-one basis. After the second anniversary of the closing of the DeBoer
Residence Inns, the holders of the Preferred Units may redeem their Units for
Common Shares of the Company or, at the election of the Company, an equivalent
value of cash. Under federal income tax law provisions applicable to a REIT, the
Company is required to distribute at least 95% of its taxable income to maintain
its status as a REIT.
In making additional investments in hotel properties, the Company may incur,
or cause the Partnership to incur, indebtedness to make such investments. The
Company may also incur indebtedness to meet distribution requirements imposed on
a REIT under the Code to the extent that working capital and cash flow from the
Company's investments are insufficient to make such distributions. The Company's
Declaration of Trust limits aggregate indebtedness to 50% of the Company's
investment in hotel properties, at cost, after giving effect to the Company's
use of proceeds from any indebtedness (" Debt Limitation"). The Company's
consolidated indebtedness is 31% of its investment in hotels, at cost, at
December 31, 1996. At December 31, 1996, the Company had outstanding
indebtedness of approximately $100,740,000. Approximately 48% of the Company's
indebtedness at December 31, 1996 bore interest at a fixed rate.
The Company's long-term debt at December 31, 1996 consisted of (a) the
Florida Mortgage Note, and mortgage notes collateralized by one hotel property
located in California (the "California Mortgage Note") and two hotel properties
located in Michigan (the "Michigan Mortgage Note"), (b) outstanding borrowings
under the Line of Credit and (c) the Term Loan. Twenty-five of the 32 hotels
owned by the Company at December 31, 1996 collateralized this indebtedness.
The Florida Mortgage Note is payable in equal monthly installments of
$23,526 including interest at a fixed rate of 5.0% per annum through January
2002, at which time all outstanding principal and interest is due. The
outstanding principal balance on the Florida Mortgage Note was approximately
$3.6 million and $3.7 million at December 31, 1996 and 1995, respectively.
The California Mortgage Note is payable in equal monthly installments of
$141,331 including interest at a fixed rate of 10.35% per annum through June
2010, at which time all outstanding principal and interest is due. The
outstanding principal balance on the California Mortgage Note was approximately
$14.9 million at December 31, 1996.
The Michigan Mortgage Note is payable in monthly interest only payments, at a
variable interest rate based upon the 30-day yield of tax exempt securities
selected by an independent party, through December 1, 2014, at which time all
outstanding principal and interest is due. The Michigan Mortgage Note is also
collateralized by irrevocable letters of credit collateralized by two hotel
properties located in Michigan. The interest rate and outstanding principal
balance on the Michigan Mortgage Note was 3.9% and $10.0 million, respectively,
at December 31, 1996.
Outstanding borrowings under the Line of Credit bear interest at the 30-day
LIBOR rate plus 175 basis points. The interest rate on borrowings under the Line
of Credit at December 31, 1996 was 7.1% and the Line of Credit expires March
1997. The outstanding principal balance on the Line of Credit was approximately
$42.2 million and $11.9 million at December 31, 1996 and 1995, respectively.
<PAGE> 4
14 INNKEEPERS USA TRUST
The Company has negotiated and obtained from the Line of Credit lender a
commitment for an amended and expanded line of credit, which is expected to
close on or about April 1, 1997. The Company's Line of Credit will be increased
to $190 million (from $70 million), of which $40 million will be
uncollateralized. The maturity date on the amended Line of Credit would be
extended to March 2001. The interest rate on the amended Line of Credit would
remain at 175 basis points over the 30-day LIBOR rate for the collateralized
portion and would be 195 basis points over the 30-day LIBOR rate for the
uncollateralized portion.
The Term Loan, obtained from the Line of Credit lender, matures in twenty
years and bears interest at an 8.17% fixed annual rate. The Term Loan has
scheduled principal amortization over a twenty-year term commencing on the
second-year anniversary of the Term Loan. Interest on the outstanding principal
balance of the Term Loan will accrue at 13.17% if the outstanding principal
balance is not paid in full by the 12th year of the Term Loan. The Term Loan may
be prepaid in full without penalty on and after the 12th anniversary of the
closing of the loan, when the Company expects to pay off the loan in full. The
outstanding principal balance on the Term Loan was $30 million at December 31,
1996 and 1995. The Term Loan is collateralized by eight Residence Inn Hotels.
In March 1997, the Company fixed the interest rate on $42,000,000 of
borrowings previously outstanding under the variable interest rate Line of
Credit by refinancing such amounts as a Term Loan from the Line of Credit lender
("Second Term Loan"). The Second Term Loan bears interest at an 8.15% fixed
annual rate. Interest on the outstanding principal balance of the Second Term
Loan will begin to accrue at 13.15% if the outstanding principal balance is not
paid in full beginning after the 12th anniversary of the closing of the Second
Term Loan. The Second Term Loan may be prepaid in full without penalty on or
after the 12th anniversary of the closing of the loan, when the Company expects
to pay off the loan in full. The Second Term Loan has scheduled principal
amortization over a twenty-year term commencing on the second anniversary of the
closing of the loan. The Second Term Loan is collateralized by mortgages on
eight hotels, including five hotels previously collateralizing the line of
credit and three previously unencumbered hotels. Upon the closing of the Second
Term Loan, the Company had fixed the interest rate on substantially all of its
total outstanding indebtedness at that time.
The Company, in the future, may seek to increase the amount of its credit
facilities, negotiate additional credit facilities, or issue corporate debt
instruments, all in compliance with the Debt Limitation. Any debt incurred or
issued by the Company may be secured or unsecured, short-term or long-term,
fixed or variable interest rate and may be subject to such other terms as the
Board of Trustees of the Company deems prudent.
The Percentage Leases require the Partnership to make available to the Lessee
an amount equal to 4.0% of room revenues from all of the Hotels, on a monthly
basis, for the periodic replacement or refurbishment of furniture, fixtures and
equipment at the Hotels. The Partnership made available to the Lessee
approximately $6,412,000 for hotel renovations from September 30, 1994 to
December 31, 1996. The Second Term Loan requires that the Partnership make
available for such purposes at the Hotels collateralizing that loan 5% of room
revenues from such Hotels. The Company intends to cause the expenditure of
amounts in excess of such obligated amounts if necessary to comply with the
reasonable requirements of any franchise agreement and otherwise to the extent
that the Company deems such expenditures to be in the best interests of the
Company.
Management believes that the amounts required to be made available by the
Partnership will be sufficient to meet required expenditures for furniture,
fixtures and equipment at the Hotels. The Company currently intends to pay for
the cost of capital improvements and any additional furniture, fixture and
equipment requirements from undistributed cash or, to the extent that
undistributed cash is insufficient to pay such costs, the Line of Credit.
Provisions comparable to those described above in the Percentage Leases for the
Hotels are expected to be included in the Percentage Lease for any other hotel
in which the Company invests.
In January 1996, the Company completed certain renovations to convert its
Germantown, Maryland hotel to a Hampton Inn. The Company is in the process of
converting the Comfort Inn Hotel in Woburn, Massachusetts to a Hampton Inn and
has expended $439,000 at December 31, 1996 for such conversion. The Company
anticipates that the Hotel will reopen as a Hampton Inn in May 1997.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. The Hotels' operations historically
reflect higher occupancy rates and ADR during the second and third quarters for
the 28 Hotels located outside of Florida and higher occupancy rates and ADR
during the first and fourth quarters for three of the four Hotels located in
Florida. To the extent that cash flow from operating activities from the Hotels
for a quarter is insufficient to generate Percentage Lease revenue necessary to
fund all of the distributions for such quarter, the Company may maintain the
annual distribution rate by funding seasonal-related shortfalls with available
cash or borrowings under the Line of Credit.
Inflation
Operators of hotels, including the Lessee and any third-party manager
retained by the Lessee, in general possess the ability to adjust room rates
quickly. However, competitive pressures have limited and may in the future limit
the ability of the Lessee and any third-party manager retained by the Lessee to
raise room rates in response to inflation.
<PAGE> 5
INNKEEPERS USA TRUST 15
<TABLE>
<CAPTION>
(in thousands, except share and per share data
December 31, 1996 1995
- ---------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Investment in hotel properties:
Land $ 42,565 $ 17,380
Buildings and improvements 251,411 112,899
Furniture and equipment 32,644 16,245
- ---------------------------------------------------------------------------------------------
326,620 146,524
Accumulated depreciation (17,560) (10,137)
- ---------------------------------------------------------------------------------------------
Net investment in hotel properties 309,060 136,387
Cash and cash equivalents 44,739 2,093
Due from Lessee 3,541 2,048
Deferred expenses, net 2,718 2,300
Other assets 299 511
- ---------------------------------------------------------------------------------------------
Total assets $ 360,357 $ 143,339
=============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 100,740 $ 45,636
Accrued expenses -- public offering 0 415
Accounts payable and other accrued expenses 915 431
Distributions payable 5,217 2,487
Minority interest in Partnership 45,880 6,124
- --------------------------------------------------------------------------------------------
Total liabilities 152,752 55,093
=============================================================================================
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred Shares, $0.01 par value, 20,000,000 shares
authorized, no shares issued or outstanding 0 0
Common Shares, $0.01 par value, 100,000,000 shares
authorized, 22,322,498 and 10,817,883 shares issued
and outstanding at December 31, 1996 and December 31,
1995, respectively 223 108
Additional paid-in capital 213,692 90,659
Unearned trustees' compensation (138) (185)
Distributions in excess of net earnings (6,172) (2,336)
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 207,605 88,246
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 360,357 $ 143,339
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 6
16 INNKEEPERS USA TRUST
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the Period
September 30,
1994
Year Year (Inception)
Ended Ended Through
December 31, December 31, December 31,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C>
Percentage lease revenue $ 27,466 $ 11,268 $ 1,480
Other revenue 911 197 39
- -----------------------------------------------------------------------------------------------------------
Total revenue 28,377 11,465 1,519
- -----------------------------------------------------------------------------------------------------------
Expenses:
Depreciation and amortization 7,510 3,182 500
Ground rent 376 336 83
Interest expense 5,839 1,989 61
Amortization of loan origination fees 867 439 148
Real estate and personal property
taxes and property insurance 2,803 1,105 159
General and administrative 1,186 510 133
Amortization of unearned trustees' compensation 47 40 15
- -----------------------------------------------------------------------------------------------------------
Total expenses 18,628 7,601 1,099
- -----------------------------------------------------------------------------------------------------------
Income before minority interest 9,749 3,864 420
Minority interest, common (531) (397) (52)
Minority interest, preferred (729) 0 0
===========================================================================================================
Net income $ 8,489 $ 3,467 $ 368
===========================================================================================================
Net income per common share $ 0.65 $ 0.57 $ 0.08
===========================================================================================================
Weighted average number of common shares
and common share equivalents outstanding 13,828,831 6,835,534 5,382,600
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 7
INNKEEPERS USA TRUST 17
For the Years Ended December 31, 1996, 1995 and for the Period September 30,
1994 (Inception) Through December 31, 1994
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
Common Shares Additional Unearned Distributions Total
------------------------ Paid-in Trustees' in Excess of Shareholders'
Shares Par Value Capital Compensation Net Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994
(inception) 4,723,883 $ 47 $ 39,742 $ (300) $ 0 $ 39,489
Amortization of unearned
trustees' compensation 0 0 0 15 0 15
Distribution declared 0 0 0 0 (915) (915)
Accrued expenses-- public offering 0 0 (62) 0 0 (62)
Forfeiture of Trustee common shares (6,000) 0 (60) 600 0
Net income 0 0 0 0 368 368
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 4,717,883 47 39,620 (547) 38,895
================================================================================================================================
Amortization of unearned
trustees' compensation 0 0 0 40 0 40
Distributions declared 0 0 0 0 (5,256) (5,256)
Accrued expenses-public offering 0 0 (394) 0 0 (394)
Common share offering 6,100,000 61 51,433 0 0 51,494
Net Income 0 0 0 0 3,467 3,467
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 10,817,883 108 90,659 (185) (2,336) 88,246
================================================================================================================================
Amortization of unearned
trustees' compensation 0 0 0 47 0 47
Distributions declared 0 0 0 0 (12,325) (12,325)
Accrued expenses-public offering 0 0 (18) 0 0 (18)
Common share offering 11,500,000 115 116,923 0 0 117,038
Dividend reinvestment and
share purchase plan, net 804 0 (38) 0 0 (38)
Conversion of common units 3,811 0 0 0 0 0
Allocation from minority interest 0 0 6,166 0 0 6,166
Net income 0 0 0 0 8,489 8,489
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 22,322,498 $ 223 213,692 $ (138) $ (6,172) $ 207,605
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 8
18 INNKEEPERS USA TRUST
(in thousands, except supplemental non-cash financing activities)
<TABLE>
<CAPTION>
For the Period
Year Year September 30, 1994
Ended Ended (Inception)
December 31, December 31, Through
1996 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,489 $ 3,467 $ 368
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,557 3,222 515
Amortization of loan origination fees 867 439 148
Minority interest, common and preferred 1,260 397 52
Change in operating assets and liabilities:
(Increase) decrease in:
Due from lessee (1,493) (1,955) (93)
Deferred expenses, net (182) 49 76
Other assets 212 (75) (393)
Increase (decrease) in:
Advances 0 0 (700)
Accounts payable and other accrued expenses 484 (619) 697
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 17,194 $ 4,925 $ 670
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in hotel properties (109,104) (90,485) (172)
Payments paid for franchise fees (610) (344) 0
Deposit on Acquisition Hotels 0 (100) 0
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $(109,714) $(90,929) $ (172)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments due to affiliates 0 0 (571)
Proceeds from long-term debt 46,307 53,842 0
Payments on long-term debt (16,139) (11,978) (23)
Payments for dividend reinvestment plan (38) 0 0
Payments on accrued expenses -- public offering (397) (4) (1,170)
Common distributions paid (10,296) (4,397) 0
Preferred distributions paid (729) 0 0
Proceeds from common share offering, net 117,038 51,494 0
Loan origination fees paid (580) (2,315) 0
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 135,166 $ 86,642 $(1,764)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 42,646 $ 638 $(1,266)
Cash and cash equivalents at beginning of period 2,093 1,455 2,721
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 44,739 $ 2,093 $ 1,455
====================================================================================================================
Supplemental cash flow information:
Interest paid $ 5,704 $ 1,884 $ 14
</TABLE>
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
The Company incurred $62,000 of accrued expenses -- public offering which was
recorded in additional paid in capital for the period September 30, 1994
through December 31, 1994.
The Company incurred $394,000 of accrued expenses public offering which
was recorded in additional paid in capital for the year ended December
31, 1995.
The Company incurred $18,000 of accrued expenses -- public offering
which was recorded in additional paid in capital for the year ended
December 31, 1996.
The Company issued 91,991 Common Units aggregating $850,000 for the
acquisition of a hotel property for the year ended December 31, 1995.
The Company issued 119,473 of Common Units aggregating $1,359,000 and
4,063,329 of preferred units aggregating $44,697,000 for the acquisition
of 8 hotel properties for the year ended December 31, 1996.
The Company assumed $24,936,000 of long-term indebtedness in the
acquisition of 3 hotel properties for the year ended December 31,
1996.
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 9
INNKEEPERS USA TRUST 19
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION
Innkeepers USA Trust (the "Company") commenced operations on September 30,
1994. The Company owns an 81.9% equity interest in Innkeepers USA Limited
Partnership (with its subsidiary partnerships, the "Partnership") at December
31, 1996 and has elected to be taxed as a real estate investment trust ("REIT").
The Partnership owns 32 Hotels (the "Hotels") in 14 states at December 31, 1996.
The 32 Hotels are comprised of 20 Residence Inn by Marriott, 8 Hampton Inns, 2
Comfort Inns, 1 Sheraton Inn and 1 Holiday Inn Express.
The Partnership leases the Hotels to JF Hotel, Inc. (or other entities
under common ownership, collectively the "Lessee") pursuant to leases which
provide for rent based, in substantial part, on the room revenues of the Hotels
("Percentage Leases").
An officer and shareholder of the Company is also an officer and principal
shareholder of the Lessee.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the Partnership after elimination of all significant intercompany accounts and
transactions.
INVESTMENT IN HOTEL PROPERTIES
Hotel properties are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets of 5 and 40
years. Asset and accumulated depreciation accounts are relieved for dispositions
with resulting gains or losses recorded in the Statements of Income. Maintenance
and repairs are the responsibility of the Lessee. Major additions and
improvements are capitalized. The Company periodically evaluates the carrying
value of hotel properties to measure and recognize the possible impairment of
these assets. The Company believes that no such impairment existed on these
assets at December 31, 1996.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents. Cash equivalents are placed
with reputable institutions and the balances may at times exceed federal
depository insurance limits.
DEFERRED EXPENSES
Deferred expenses consist primarily of loan origination fees and franchise
fees and are recorded at cost. Amortization is computed using the straight-line
method over the original lives of the franchise agreements which range from
approximately 3 to 13 years. Loan origination fees are amortized using the
interest method over the original term of the Company's $70 million line of
credit ("Line of Credit") and $30 million term loan ("Term Loan") which is 3 and
12 years, respectively.
MINORITY INTEREST
Minority interest in the Partnership represents the limited partners'
proportionate share in the equity of the Partnership. Income is allocated to
minority interests based on the weighted average percentage ownership throughout
the year.
REVENUE RECOGNITION
Percentage Lease revenue is recognized as earned from the Lessee under each
Percentage Lease agreement. The Company must rely on the Lessee to generate
sufficient cash flow from the operation of the Hotels to enable the Lessee to
meet the rent obligations under the Percentage Leases. The obligations of the
Lessee under the Percentage Leases are unsecured. The Lessee has only nominal
assets, other than working capital, and has met all rent obligations under the
Percentage Leases.
NET INCOME PER COMMON SHARE
Net income per Common Share is computed by dividing income before minority
interest less preferred unit distributions, if applicable, by the weighted
average number of Common Shares and Common Share equivalents outstanding. Common
units of limited partnership interest in the Partnership ("Common Units") and
common share options are considered Common Share equivalents. The preferred
units are not considered Common Share equivalents and are not included in the
computation of net income per common share because of their antidilutive effect
on net income per common share.
DISTRIBUTIONS
The Company intends to pay regular quarterly distributions which are
dependent upon receipt of distributions from the Partnership.
INCOME TAXES
The Company has elected to be taxed as a real estate investment trust under
the Internal Revenue Code commencing with its taxable period ended December 31,
1994. Accordingly, no provision for federal income taxes has been reflected in
the financial statements. Earnings and profits, which will determine the
taxability of distributions to shareholders, will differ from net income
reported for financial reporting purposes primarily due to the differences for
federal tax purposes in the estimated useful lives used to compute depreciation.
For the year ended December 31, 1995, $0.69 of the total distribution
declared of $0.84 is ordinary income and $0.15 is a return of capital. For the
year ended December 31, 1996, $0.71 of the total distribution declared of $0.90
is ordinary income and $0.19 is a return of capital.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
<PAGE> 10
20 INNKEEPERS USA TRUST
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of approximately $4.4 million and $1.4
million that is required to be held in escrow accounts as specified primarily by
the terms of the Company's Line of Credit and Term Loan at December 31, 1996 and
December 31, 1995, respectively. The restricted cash and cash equivalents is to
be used to pay for insurance, taxes, furniture, fixtures, equipment and capital
expenditures pertaining to the thirteen Hotels that collateralize the Line of
Credit and the eight Hotels that collateralize the Term Loan.
3. LONG-TERM DEBT
Long-term debt consists of (a) mortgage notes collateralized by one hotel
property located in Florida (the "Florida Mortgage Note"), one hotel property
located in California (the "California Mortgage Note") and two hotel properties
located in Michigan (the "Michigan Mortgage Note"), (b) outstanding borrowings
under the Line of Credit, and (c) the Term Loan.
The Florida Mortgage Note is payable in equal monthly installments of $23,526
including interest at a fixed rate of 5.0% per annum through January 2002 at
which time all outstanding principal and interest is due. The outstanding
principal balance on the Florida Mortgage Note was approximately $3.6 million
and $3.7 million at December 31, 1996 and 1995, respectively.
The California Mortgage Note is payable in equal monthly installments of
$141,331, including interest at a fixed rate of 10.35% per annum through June
2010, at which time all outstanding principal and interest is due. The
outstanding principal balance on the California Mortgage Note was approximately
$14.9 million at December 31, 1996.
The Michigan Mortgage Note is payable in monthly interest only payments at a
variable interest rate based upon the 30- day yield of tax exempt securities
selected by an independent party through December 1, 2014, at which time all
outstanding principle and interest is due. The Michigan Mortgage Note is also
collateralized by irrevocable letters of credit collateralized by the same two
hotel properties located in Michigan. The interest rate and outstanding
principal balance on the Michigan Mortgage Note is 3.9% and $10.0 million,
respectively, at December 31, 1996.
Outstanding borrowings under the Line of Credit bear interest at the 30-day
LIBOR rate plus 175 basis points. The interest rate on borrowings under the Line
of Credit at December 31, 1996 was 7.1% and the Line of Credit expires March
1997. The outstanding principal balance on the Line of Credit was approximately
$42.2 million and $11.9 million at December 31, 1996 and 1995, respectively.
The Term Loan matures in twenty years and bears interest at an 8.17% fixed
annual rate. The Term Loan has scheduled principal amortization over a
twenty-year term commencing on the second year anniversary of the Term Loan.
Interest on the outstanding principal balance of the Term Loan will accrue at
13.17% if the outstanding principal balance is not paid in full by the twelfth
year of the Term Loan. The outstanding principal balance on the Term Loan was
$30 million at December 31, 1996 and 1995.
Substantially all of the Company's assets at December 31, 1996, other
than the hotel properties collateralizing the Florida, California and Michigan
Mortgage Notes and seven unencumbered hotel properties, are pledged as
collateral on the Line of Credit and Term Loan.
The approximate scheduled principal payments to be made in future years
are as follows (in thousands)(see Note 9):
<TABLE>
<S> <C>
1997 $ 600
1998 1,100
1999 1,900
2000 2,400
2001 2,400
Thereafter 92,340
- ----------------------------------
$100,740
==================================
</TABLE>
4. SHARE OPTION PLAN
The Company has adopted a share option plan which covers employees and
officers of the Company. The Company has reserved 800,000 Common Shares for
issuance upon the exercise of options under the plan. The plan provides for the
granting of incentive share options, non-qualified options and restricted common
shares. The option price of share options may not be less than the fair market
value of the Common Shares at the date of grant. The Company has granted 110,000
incentive share options and 140,000 non-qualified options to an officer of the
Company, who is also a trustee, at an exercise price of $10.00 per share. In
February 1996, the Company granted an additional 156,000 non-qualified options
to the officer at an exercise price of $9.75. The incentive share options vest
over a ten-year period and the non-qualified options vest over a five-year
period, except for the 156,000 non-qualified options granted in February 1996,
of which 32,000 vest in each of September 1996, 1997 and 1998, and 60,000 vest
in September 1999. The Company has also granted 20,000 incentive share options
to an officer of the Company at an exercise price of $8.875, which vest over a
three-year period. No options were exercised as of December 31, 1996.
The Company has also adopted a share incentive plan which covers non employee
trustees and provides for the granting of incentive share options and restricted
common shares ("Restricted Common Shares").
The Company has issued 7,500 Restricted Common Shares to each of its four
independent trustees, which shares vest over five years at a rate of 1,500
shares per year beginning in 1994. The common shares are subject to forfeiture
if the trustee does not remain a trustee of the Company for the
<PAGE> 11
INNKEEPERS USA TRUST 21
specified vesting period. Due to the resignation of a trustee, effective
December 19, 1994, 6,000 Restricted Common Shares have been forfeited.
Additionally, the Company has granted an aggregate of 15,000 non-qualified
options to three of its non-employee trustees at an exercise price of $10.00 per
share.
The following unaudited pro forma net income and net income per common share
of the Company is presented as if compensation cost for the Company's share
option grants were recorded in the statements of income. The pro forma net
income and net income per common share is not necessarily indicative of the
operating results of the Company nor does it purport to represent the results of
operations of future periods.
The fair value of each share option granted is estimated on the date of grant
using the Black-Scholes Option-Pricing Model with the following assumptions: (1)
dividend of 6.7%, (2) expected volatility of approximately 23%, (3) risk-free
interest rate of 5.5% to 6.9%, and (4) expected life of 7 years. Compensation
cost is generally recognized as the fair value of each share option granted
minus the exercise price of each share option granted and, on a pro forma basis
was $60,000 and $6,000 for the years ended December 31, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995
- ----------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $8,489 $8,429 $ 3,467 $3,461
Net Income Per
Common Share $0.65 $0.65 $ 0.57 $ 0.56
</TABLE>
5. ACQUISITIONS
In February 1996, the Partnership acquired an existing hotel from an
unaffiliated party for approximately $7,000,000 in cash. In May 1996, the
Partnership acquired two existing hotels from an unaffiliated party for an
aggregate of approximately $16,800,000 in cash.
In August 1996, the Partnership acquired an existing hotel from an
unaffiliated party for approximately $3,000,000 in cash.
In October 1996, the Partnership acquired two newly-constructed hotels
from an unaffiliated party for an aggregate of approximately $27,800,000 in
cash.
In November 1996, the Partnership acquired seven existing hotels in a single
transaction from seven separate but affiliated sellers which were unaffiliated
from the Company for a purchase price of $108,500,000. The purchase price
consisted of approximately $38,367,000 in cash, the assumption of approximately
$24,936,000 in long-term indebtedness and the issuance of approximately
$44,697,000 of preferred units (4,063,329 preferred units) and $500,000 in
Common Units (43,956 Common Units).
In November 1996, the Partnership acquired a newly-constructed hotel from
an unaffiliated party for approximately $5,300,000 in cash, and $859,000 in
Common Units (75,517 Common Units).
6. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Pursuant to the Partnership's Partnership Agreement, limited partners who
hold Common Units at December 31, 1996 have redemption rights ("Redemption
Rights") which enable them to redeem their Common Units in exchange for Common
Shares on a one-for-one basis or, at the Company's option, an equivalent amount
of cash at any time after September 30, 1995 or, in the case of 91,991 Common
Units after October 7, 1997 and 119,473 Common Units, after October 1997. The
aggregate number of Common Shares issuable upon exercise of the such redemption
rights is 866,370 at December 31, 1996.
Additionally, limited partners who hold preferred units of limited
partnership interest in the Partnership ("Preferred Units") at December 31, 1996
have Redemption Rights which enable them to redeem their Preferred Units in
exchange for Common Shares on a one-for-one basis or, at the Company's option,
an equivalent amount of cash at any time after November 1, 1998. The aggregate
number of Common Shares issuable upon exercise of such Redemption Rights is
4,063,324 at December 31, 1996.
Annual preferred distributions of $1.10 are payable on each Preferred Unit,
which may increase up to $1.155 for each Preferred Unit, based on increases in
dividends payable on the Common Shares. The Preferred Units have a preference
value of $11.00 per unit and will be converted into Common Units on the tenth
anniversary of the Preferred Units issuance unless previously converted.
The Hotels are operated under franchise or management agreements as Hampton
Inn, Residence Inn by Marriott, Sheraton Inn, Holiday Inn Express or Comfort Inn
hotels. The Partnership has paid the cost of obtaining or transferring franchise
license agreements to the Lessee. The franchise and management agreements
require the payment of fees based on a percentage of hotel revenue. These fees
are paid by the Lessee, which holds any franchise licenses.
The Partnership is obligated to pay the costs of certain capital
improvements, real estate and personal property taxes and property insurance.
Additionally, the Partnership must make available to the Lessee on a monthly
basis an amount equal to 3.0% of room revenues through December 31, 1994 and
4.0% of room revenues thereafter, for the periodic replacement or refurbishment
of furniture, fixtures and equipment at the Hotels. The amount of cash and cash
equivalents allocated for availability to the Lessee is approximately $287,000
and $98,000 at December 31, 1996 and December 31, 1995, respectively.
The Partnership earned Percentage Lease revenue of $27,466,000, $11,268,000
and $1,480,000 for the years ended December 31, 1996 and 1995 and for the period
September 30, 1994 (inception) through December 31, 1994, respectively. The
Lessee owed the Company approximately $4,209,000 and $2,182,000 in Percentage
Lease revenue under the Percentage Leases at December 31, 1996 and December 31,
1995, respectively. The Company evaluated
<PAGE> 12
22 INNKEEPERS USA TRUST
the creditworthiness of the Lessee and has determined that an allowance for
doubtful accounts is not warranted. The Company has not incurred any losses
pertaining to Percentage Lease receivables for the year ended December 31, 1996.
The Lessee has future minimum base lease commitments under the Percentage
Lease agreements to the Partnership through the year 2006. Minimum future base
lease revenue, under the Percentage Lease agreements, are as follows
(in thousands):
<TABLE>
<CAPTION>
Year Amount
- --------------------------------------
<C> <C>
1997 $21,925
1998 21,925
1999 21,925
2000 21,925
2001 21,925
Thereafter 92,000
</TABLE>
At December 31, 1996, the Company's Declaration of Trust limited the
consolidated indebtedness of the Company to 50.0% of the Company's investment in
hotels, at cost, after giving effect to the Company's use of proceeds from any
indebtedness. The Company's consolidated indebtedness is approximately 31% of
its investment in hotels, at cost, at December 31, 1996.
The Partnership has two fifty-year term leases expiring July 2034 and
May 2035, respectively, and a 98-year term lease expiring October 2083, on the
land underlying three of its hotel properties. Minimum annual rent payable under
these leases is approximately $442,000 in the aggregate.
The Company has paid $100,000, $40,000 and $10,000 to the Lessee for
usage of office facilities for the years ended December 31, 1996 and 1995 and
for the period September 30, 1994 (inception) through December 31, 1994,
respectively. This amount has been recorded in general and administrative
expense in the Statements of Income.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value due
to the short maturity of these instruments.
The fair value of long-term debt approximates the carrying amount and is
estimated based on current rates offered to the Company for similar debt.
9. SUBSEQUENT EVENTS
ACQUISITIONS
In January 1997, the Partnership acquired an existing hotel from an
unaffiliated party for approximately $10,630,000 in cash and approximately
$620,000 in Common Units.
In February 1997, the Partnership acquired an existing hotel for $10,500,000
in cash and a newly developed hotel for approximately $10,200,000 in cash and
approximately $4,300,000 in Common Units, from an unaffiliated party.
LINE OF CREDIT
In March 1997, the Company has obtained a commitment to increase its Line of
Credit to $190 million (from $70 million), of which $40 million is
uncollateralized. The maturity date on the line of credit was also extended to
March 2001. The interest rate on the Line of Credit is 175 basis points over the
30-day LIBOR rate for the collateralized portion and is 195 basis points over
the 30-day LIBOR rate for the uncollateralized portion. Additionally, in March
1997, $42,000,000 of the outstanding principal balance on the Line of Credit was
refinanced as a term loan ("Second Term Loan"). The Second Term Loan matures in
twenty years and bears interest at an 8.15% fixed annual rate. The Second Term
Loan has scheduled principal amortization over a twenty-year term commencing on
the second-year anniversary of the Second Term Loan.
10. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma condensed statement of operations and financial
information of the Company is presented as if the acquisition of the Hotels had
occurred on January 1, 1995. The unaudited pro forma statement of operations and
financial information is not necessarily indicative of the operating results of
the Company that would have occurred if the transactions had been completed as
of such dates, nor does it purport to represent the results of operations for
future periods.
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995
- -------------------------------------------------------------------
Operating Data:
<S> <C> <C>
Percentage lease revenue $ 43,950(A) $ 38,300(A)
Total revenue $ 44,450 $ 38,800
- -------------------------------------------------------------------
Depreciation and amortization 13,300 13,300
Interest expense 8,000 8,000
Real estate and personal property
taxes and property insurance 4,100 4,100
Total expenses 27,950 27,950
- -------------------------------------------------------------------
Income before minority interest 16,500 10,850
Minority interest, common (611) (401)
Minority interest, preferred (4,470) (4,470)
Net income $ 11,419 $ 5,979
Net income per common share $ 0.52 $ 0.28
===================================================================
Weighted average number of
Common Shares and Common
Share equivalents outstanding 23,189 23,189
</TABLE>
(A) Includes base rent of $2,565,000, but not percentage rent, under the
Percentage Leases for three newly developed hotels and one hotel closed for
a portion of 1996 due to renovation.
<PAGE> 13
INNKEEPERS USA TRUST 23
Report of Independent Accountants
To the Board of Directors and Shareholders
Innkeepers USA Trust
We have audited the accompanying consolidated balance sheets of Innkeepers
USA Trust as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
December 31, 1996 and 1995, and the period September 30, 1994 (inception)
through December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innkeepers USA
Trust as of December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for the years ended December 31, 1996 and 1995,
and the period September 30, 1994 (inception) through December 31, 1994 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
West Palm Beach, Florida
March 14, 1997
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
Innkeepers USA Trust, a Maryland real estate investment trust
the "Company"), operates principally through two entities, (i) Innkeepers
financial Corporation, a Virginia corporation ("IFC"), which is a wholly-owned
subsidiary of the Company, and (ii) Innkeepers USA Limited Partnership, a
Virginia limited partnership (the "Partnership"), of which IFC owns an
approximately 81.9% interest. All of the Company's hotels are owned by the
partnership or subsidiary limited partnerships which are owned 99% by the
partnership and 1% by either the Company directly or corporations which are
holly-owned by the Company.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Innkeepers USA Trust on Form S-3 (file no. 333-20309), Form S-3 (file no.
333-01026) and Form S-3 (file no. 333-12809) of our report dated March 14, 1997
on our audits of the consolidated financial statements of Innkeepers USA Trust
as of December 31, 1996 and 1995, and for the years ended December 31, 1996 and
1995, and the period September 30, 1994 (inception) through December 31, 1994;
our report dated March 14, 1997 on our audit of the financial statement
schedule of Innkeepers USA Trust as of December 31, 1996; and our report dated
March 14, 1997 on our audits of the combined financial statements of JF Hotel,
Inc., JF Hotel II, Inc. and JF Hotel III, Inc. as of December 31, 1996 and
1995, and for the years ended December 31, 1996 and 1995, and the period
September 30, 1994 (inception) through December 31, 1994, which reports are
included in, or incorporated by reference, in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
West Palm Beach, Florida
March 28, 1997
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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0
0
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