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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1997
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INNKEEPERS USA TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 65-0503831
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
306 ROYAL POINCIANA PLAZA
PALM BEACH, FLORIDA 33480
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFREY H. FISHER
INNKEEPERS USA TRUST
306 ROYAL POINCIANA PLAZA
PALM BEACH, FLORIDA 33480
(561) 835-1800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
DAVID C. WRIGHT, ESQ.
HUNTON & WILLIAMS
RIVERVIEW TOWER
900 S. GAY STREET, SUITE 2000
KNOXVILLE, TENNESSEE 37902
(423) 549-7700
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Title of Each Aggregate Proposed Maximum Proposed Maximum Amount
Class of Securities Amount to Be Offering Price Per Aggregate Offering Price (1) of
to be Registered Registered Unit(1)(2) Registration Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value 369,816 $13.96875 $5,165,867 $1,566.00
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) The registration fee has been calculated in accordance with Rule 457(c)
under the Securities Act of 1933, as amended, and based on the average of the
high and low sales prices of the Common Shares as reported on the New York
Stock Exchange on July 18, 1997.
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement as determined by
market conditions and other factors.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [X]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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CROSS-REFERENCE SHEET
<TABLE>
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ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Outside Front Cover Page; Prospectus Summary;
Risk Factors; The Company; Shares Available
for Future Sale; Federal Income Tax Considerations
4. Use of Proceeds.................................. Not Applicable
5. Determination of Offering Price.................. Outside Front Cover Page; Plan of Distribution
6. Dilution......................................... Not Applicable
7. Selling Security-Holders......................... Selling Shareholders
8. Plan of Distribution............................. Outside Front Cover Page; Plan of Distribution
9. Description of Securities to be
Registered....................................... Description of Shares of Beneficial Interest;
Description of Units
10. Interests of Named Experts and Counsel........... Not Applicable
11. Material Changes................................. Not Applicable
12. Incorporation of Certain Information by
Reference........................................ Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
</TABLE>
<PAGE> 3
SUBJECT TO COMPLETION, DATED JULY 23, 1997
PROSPECTUS
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR
AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND DECLARED EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THAT A FINAL PROSPECTUS IS DELIVERED. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE WHICH OFFER, SOLICITATION OR SALE WOULD BE
LAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
369,816 SHARES
INNKEEPERS USA TRUST
COMMON SHARES
This Prospectus relates to the possible issuance by Innkeepers USA Trust
(the "Company") of up to 369,816 common shares of beneficial interest (the
"Redemption Shares"), par value $.01 per share ("Common Shares"), of the
Company if, and to the extent that, certain current holders of units of limited
partnership interest ("Units") in Innkeepers USA Limited Partnership (the
"Partnership"), of which a wholly-owned subsidiary of the Company is the sole
general partner, tender such Units for redemption and, pursuant to the terms of
the agreement of limited partnership of the Partnership ("the Partnership
Agreement") the Company elects to acquire the Units for Common Shares. The
Partnership issued 369,816 Units (the "Redemption Units") in connection with
the purchase of certain hotel properties from unaffiliated sellers. Pursuant
to the Partnership Agreement, the holders of the Redemption Units may cause the
Partnership to redeem the Redemption Units at any time and, in such event, the
Company may acquire directly Redemption Units tendered for redemption in
exchange for Common Shares, on a one-for-one basis, or cash. The Redemption
Shares will be issued if and to the extent that the Company acquires the
Redemption Units for Common Shares. If the Partnership (rather than the
Company) redeems the Redemption Units, or if the Company acquires Redemption
Units for cash, Redemption Shares will not be issued. See "The Company" and
"Plan of Distribution."
The Common Shares are traded on the New York Stock Exchange under the
symbol "KPA." To ensure compliance with certain requirements related to the
Company's qualification as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended, the Company's Declaration of Trust
limits the number of Common Shares that may be owned by any single person or
affiliated group to 9.8% of the outstanding Common Shares (the "Ownership
Limitation") and restricts the transferability of Common Shares if the
purported transfer would prevent the Company from qualifying as a REIT. See
"Risk Factors--Limitation on Acquisition and Change in Control" and
"Description of Shares of Beneficial Interest--Certain Provisions of Maryland
Law and of the Company's Declaration of Trust and Bylaws."
SEE "RISK FACTORS" FOR CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE COMMON
SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The Company will not receive any cash proceeds from the issuance of the
Redemption Shares, but the Partnership has agreed to bear certain expenses of
registration of the issuance of the Redemption Shares under federal and state
securities laws. The Company will acquire Redemption Units in exchange for any
Redemption Shares that the Company may issue to Redemption Unit holders
pursuant to this Prospectus.
The date of this Prospectus is __________ __, 1997.
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission") pursuant to the Exchange
Act. Such reports, proxy statements and other information filed by the Company
may be examined and copied, upon payment of the prescribed fees, at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained by mail from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates or from the Commission's site on the World Wide
Web at http:\\www.sec.gov. The Common Shares are listed on the New York Stock
Exchange, and such reports, proxy and informational statements and other
information concerning the Company can be inspected and copied at the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington D.C. 20549, a Registration Statement on Form S-3 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the Common Shares offered pursuant to this Prospectus. This
Prospectus, which is part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits and
financial schedules thereto. For further information concerning the Company
and the Common Shares offered hereby, reference is made to the Registration
Statement and the exhibits and schedules filed therewith, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices at the locations listed above. Any
statements contained in this Prospectus concerning the provisions of any
document referred to herein are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
3-0-24568) are incorporated herein by reference:
(a) The Financial Statements of the DeBoer Hotels included in the
Company's Registration Statement on Form S-3 (No. 333-12809) dated
September 27, 1996.
(b) The Company's Current Reports on Form 8-K filed with the
Commission on (a) February 21, 1996, (b) May 23, 1996 as amended on
Form 8-K on July 17, 1996, (c) November 12, 1996, (d) November 22,
1996 and (3) July 18, 1997;
(c) Financial Statements of the Fisher Initial Hotels included in
the Company's Form S-11 Registration Statement (File No. 33-95622);
(d) Annual Report on Form 10-K for the year ended December 31, 1996;
(e) Quarterly Report on Form 10-Q for the three months ended
March 31, 1997;
(f) The description of the Common Shares of the Company included
in the Company's Registration Statement on Form 8-A, dated July 25,
1994; and
(g) The Company's Proxy Statement for the Annual Meeting of
Shareholders held on May 8, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the securities made hereby shall be
deemed to be incorporated by reference in this Prospectus and made a part
hereof from the date of the filing
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<PAGE> 5
of such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other document subsequently filed with the
Commission which also is deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any and all of the documents incorporated by reference herein (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should
be directed to Innkeepers USA Trust, 306 Royal Poinciana Plaza, Palm Beach,
Florida 33480 , Attention: Secretary, telephone (561) 835-1800.
-ii-
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus or incorporated by reference herein or therein. Unless the
context otherwise indicates, all references herein to (i) the "Company" include
Innkeepers USA Trust, its wholly-owned subsidiaries, Innkeepers USA Limited
Partnership and its subsidiary partnerships, which are owned 99% by Innkeepers
USA Limited Partnership and 1% by Innkeepers USA Trust or its wholly-owned
subsidiaries, (ii) the "Partnership" include Innkeepers USA Limited Partnership
and its subsidiary partnerships and (iii) the "JF Lessee" includes JF Hotel,
Inc. and its sister corporations, which lease hotels from the Company. This
Prospectus contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange
Act, which involve risks and uncertainties. The Company's actual results may
differ materially from the results discussed in such forward looking
statements. Factors that might cause such a difference include those discussed
in "Risk Factors" and in the Company's periodic reports filed with the
Securities and Exchange Commission.
THE COMPANY
The Company currently owns 47 Hotels containing an aggregate of 5,727
rooms located in 18 states (the "Hotels"). The Hotels include (i) 30 upscale
and two mid-priced extended-stay hotels, including 23 Residence Inn hotels, six
Summerfield Suites hotels, two Sierra Suites hotels and one Sunrise Suites
hotel and (ii) 15 mid-priced limited or full service hotels including 12
Hampton Inn hotels, one Comfort Inn hotel, one Holiday Inn Express hotel and
one Sheraton Inn hotel. The Company recently completed an acquisition (the
"Summerfield Acquisition") of nine hotels from the Summerfield Hotel
Corporation ("Summerfield"), which included six Summerfield Suites hotels, two
Sierra Suites hotels and one Sunrise Suites hotel (the "Summerfield Acquisition
Hotels"; all Hotels other than the Summerfield Acquisition Hotels are referred
to collectively as the "Current Hotels").
The Company has implemented a strategy of utilizing multiple lessees and
hotel management companies for its hotel properties. The Company leases 38 of
the Hotels to the JF Lessee and leases the nine Summerfield Acquisition Hotels
to an affiliate of Summerfield (the "Summerfield Lessee" and, together with the
JF Lessee, the "Lessees") pursuant to percentage leases (the "Percentage
Leases") which provided for the payment of rent based on a percentage of room
revenues ("Percentage Rent"). The JF Lessee has entered into management
contracts (the "Marriott Management Agreements") with Residence Inn by
Marriott, Inc., a subsidiary of Marriott International, Inc. ("Marriott") to
manage 12 of the Residence Inn Hotels and with TMH, Inc. to manage two of the
Residence Inn Hotels. The Summerfield Lessee has entered into agreements (the
"Summerfield Management Agreements") with Summerfield Suites Management
Company, L.P. ("Summerfield Management") to manage the Summerfield Acquisition
Hotels.
RISK FACTORS
Prospective investors and Unit holders should carefully consider the
matters discussed under "Risk Factors" before making an investment decision
regarding the Common Shares offered hereby.
TAX STATUS OF THE COMPANY
The Company elected to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its short taxable year ended December 31, 1994.
As a REIT, the Company generally will not be subject to federal income tax on
net income that it distributes to its shareholders. A REIT is subject to a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its annual taxable income.
Failure to qualify as a REIT will render the Company subject to federal income
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, and distributions to the shareholders in any such year
will not be deductible by the Company. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain federal, state and
local taxes on its income and property. In connection with the Company's
election to be taxed as a REIT, the Company's Declaration of Trust
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<PAGE> 7
imposes certain restrictions on the transfer of Common Shares. The Company has
adopted the calendar year as its taxable year. See "Description of Shares of
Beneficial Interest" and "Federal Income Tax Considerations."
SECURITIES TO BE OFFERED
This Prospectus relates to the possible issuance by the Company of up to
369,816 Redemption Shares if, and to the extent that, current holders of the
Redemption Units tender such Units for redemption and the Company acquires the
Redemption Units in exchange for Redemption Shares.
The Partnership issued 324,328 Redemption Units in connection with the
acquisition of the Residence Inn-Addison, Texas Hotel and 45,488 Redemption
Units in connection with the acquisition of the Residence Inn-Eden Prairie,
Minnesota Hotel. The Partnership has issued Units and preferred units of
limited partnership interest in the Partnership ("Preferred Units"; as used
herein, "Units" shall include "Common Units" and "Preferred Units" unless
otherwise stated) to other sellers of hotel properties, including the
Summerfield Acquisition Hotels, and intends to consider the issuance of Units
to sellers of hotel properties in connection with future acquisitions of hotel
properties. The holders of Units are limited partners ("Limited Partners") of
the Partnership. See "Shares Available for Future Sale."
All of the Redemption Units may be tendered by the holder to the
Partnership for redemption at any time. Pursuant to the Partnership Agreement,
the Company, in its sole discretion, may elect to acquire directly any
Redemption Units tendered to the Partnership for redemption, rather than
causing the Partnership to redeem such Redemption Units. The Company
anticipates that it generally will elect to acquire directly Redemption Units
tendered for redemption and that the Company will issue Redemption Shares
pursuant to this Prospectus in exchange therefor rather than paying cash. As a
result, the Company may from time to time issue up to 369,816 Redemption Shares
upon the acquisition of Redemption Units tendered for redemption. With each
such redemption, the Company's percentage interest in the Partnership will
increase. The Company is registering the issuance of the Redemption Shares to
provide the recipients thereof with freely tradable securities, but the
registration of such shares does not necessarily mean that any of such shares
will be issued by the Company.
The Company will not receive any cash proceeds from the issuance of any
Redemption Shares, but will acquire Redemption Units upon issuance of
Redemption Shares.
EACH LIMITED PARTNER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE REDEMPTION AND OWNERSHIP OF HIS UNITS,
THE OWNERSHIP AND SALE OF THE COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE
TAXED AS A REIT, INCLUDING THE STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH REDEMPTION, OWNERSHIP, SALE, AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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RISK FACTORS
Prospective investors and Unit holders should carefully consider the
following information in conjunction with the other information contained in
this Prospectus.
SPECIAL CONSIDERATIONS APPLICABLE TO REDEEMING UNIT HOLDERS
Tax Consequences of Redemption of Redemption Units. The exercise by a
holder of Redemption Units of the right to require the redemption of Redemption
Units will be treated for tax purposes as a sale of such Redemption Units by
the Limited Partner. Such a sale will be fully taxable to the redeeming
Limited Partner, and such redeeming Limited Partner will be treated as
realizing for tax purposes an amount equal to the sum of the cash or the value
of the Common Shares received in the redemption plus the amount of any
Partnership liabilities allocable to the redeemed Units at the time of the
redemption. It is possible that the amount of gain recognized or even the tax
liability resulting from such gain could exceed the amount of cash and the
value of the Redemption Shares received upon such disposition. See "Redemption
of Units--Tax Consequences of Redemption." In addition, the ability of the
Limited Partner to sell a substantial number of Redemption Shares in order to
raise cash to pay tax liabilities associated with the redemption of Redemption
Units may be restricted due to the Company's relatively low trading volume,
and, as a result of fluctuations in the price of the Common Shares, the price
the Limited Partner receives for such shares may not be equal to the value of
his Redemption Units at the time of redemption.
Potential Change in Investment Upon Redemption of Redemption Units. If a
Limited Partner exercises the right to require the redemption of his Redemption
Units, such Limited Partner may receive, either cash or Common Shares of the
Company in exchange for the Redemption Units. If the Limited Partner receives
cash, the Limited Partner will no longer have any interest in the Company, will
not benefit from any subsequent increases in share price and will not receive
any future distributions from the Company (unless the Limited Partner currently
owns or acquires in the future additional Common Shares or Units). Upon
redemption, a Limited Partner's right to receive distributions with respect to
the Redemption Units will cease and the Limited Partner will become a
shareholder of the Company with respect to any Redemption Shares issued upon
redemption. See "Redemption of Units--Comparison of Ownership of Units and
Common Shares."
RISK OF RAPID GROWTH; DEPENDENCE ON LESSEES AND THIRD-PARTY MANAGERS
The Company's ability to grow depends upon the ability of the Lessees and
any third-party manager retained by the Lessees, such as Marriott or
Summerfield Management, to manage effectively the Hotels, as well as any
additional hotels in which the Company invests. The Lessees' or any
third-party managers' ability to operate additional hotels under Percentage
Leases or management agreements, as applicable, with current staffing levels
and office locations, may diminish as the Company acquires additional hotels.
Such growth may require the Lessees to hire additional personnel, engage
additional third-party managers and operate in new geographic locations. In
order to qualify as a REIT, the Company cannot operate the Hotels or
participate in decisions affecting the daily operations of the Hotels. The
Lessees have limited assets and generally the Lessees must generate sufficient
cash flow from the operation of the Hotels, after payment of all operating
expenses, to fund the Lessees' rent obligations under the Percentage Leases.
There can be no assurance that the Lessees or their third-party managers will
effectively operate the Hotels. In the event that the Lessees and their
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 could be adversely
affected. If the Company terminates a Percentage Lease following a default
without the consent of the lender, a default could concurrently be triggered
under the Company's loan agreements, which could result in a foreclosure of the
Hotels securing borrowings under the Company's loan agreements. In addition, a
material default under a Percentage Lease could trigger cross-defaults under
one or more Percentage Leases, which could have a material adverse effect on
cash available for distribution.
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ACQUISITION OF HOTELS WITH LIMITED OPERATING HISTORY
Eight of the Hotels have little operating history, including five of the
Summerfield Acquisition Hotels. The Company and the Summerfield Lessee have
negotiated the Percentage Rent formulas for these Hotels based on certain
assumptions of occupancy and average daily rate ("ADR") for these Hotels on an
anticipated stabilized basis. Consequently, the Company will be subject to
risks that these Hotels will not achieve anticipated occupancy or ADR levels or
may not achieve such levels within anticipated time frames. Room revenues may
be less than required to result in the payment of Percentage Rent at levels at
a particular hotel that provide the Company with an attractive return on its
investment. Base Rent (as hereinafter defined) for the Summerfield Acquisition
Hotels reduces under the terms of the Summerfield Percentage Leases beginning
in 1999, when the rent becomes more weighted towards Percentage Rent. If the
room revenues at that time were less than currently anticipated, the rent
payable with respect to these Hotels would be lower than anticipated, which
could have a material adverse effect on cash available for distribution.
MULTI-HOTEL ACQUISITION RISKS
Since the Company's initial public offering ("IPO") in September 1994, the
Company has increasingly emphasized and intends to continue to emphasize
acquisitions of multiple hotels in a single transaction. Multiple-hotel
acquisitions are often more complex, require a larger investment of
management's time and may require additional financial and other resources than
single-hotel acquisitions. The risk that a multiple-hotel acquisition will not
close may be greater than in a single-hotel acquisition. Because due diligence
and other costs are generally greater in a multi-hotel acquisition than a
single-hotel acquisition, if the Company fails to close such acquisitions, its
cash available for distribution will be adversely affected. Another risk
associated with multiple-hotel acquisitions is that a seller may require that a
group of hotels be purchased as a package, even though one or more of the
hotels in the package do not meet the Company's investment criteria. In such
cases, the Company may purchase the group of hotels with the intent to re-sell
those that do not meet its criteria. In such circumstances, there is no
assurance as to whether the Company would or could sell such hotels, the price
at which they could be sold or limitations on resale imposed by the seller. In
addition to the customary risks attendant to acquiring hotels, such hotels
might reduce cash available for distribution if the Company sells them at a
loss. In addition, under the Code, a REIT's gain from the sale of a hotel
acquired with the intent to re-sell within four years of the date of
acquisition potentially could be subject to a 100% tax. See "Federal Income
Tax Consideration - Requirements for Qualification - Income Tests."
CONCENTRATION OF INVESTMENTS IN CALIFORNIA
Nine of the 47 Hotels are located in California. As a result, localized
adverse events or conditions, such as economic recessions and natural
disasters, could have a significant negative effect on the operations of the
combined Hotels, and ultimately cash available for distribution to shareholders
of the Company.
CONCENTRATION OF PERCENTAGE LEASE PAYMENTS
On a pro forma basis, for the year ended December 31, 1996, rent from five
of the Hotels (the Residence Inn-Mountain View, California, -San Mateo,
California, -Silicon Valley I, California, -Silicon Valley II, California and
the Summerfield Suites-Belmont, California) generated approximately 26% of the
aggregate rent payments to the Company under the Percentage Leases. Therefore,
the Company's cash available for distribution will be affected, to a large
degree, by the operating performance of these five Hotels.
INVESTMENT CONCENTRATION IN SINGLE INDUSTRY; EMPHASIS ON UPSCALE EXTENDED-STAY
MARKET SEGMENT
The Company's current growth strategy is to acquire primarily upscale
extended-stay hotels. The Company will not seek to invest in assets selected
to reduce the risks associated with an investment in that segment of the hotel
industry, and, therefore, is subject to risks inherent in concentrating
investments in a single industry and in a single market segment within that
industry. The upscale extended-stay segment is particularly dependent on
corporate training and consultant activity, both of which would be adversely
affected by an economic downturn. Therefore, the adverse effect on rent under
the Percentage Leases and cash available for distribution to shareholders
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<PAGE> 10
of the Company resulting from a downturn in the hotel industry or the failure
of the upscale extended-stay market segment to continue to grow in accordance
with expectations would be more pronounced than if the Company had diversified
its investments outside of the hotel industry or in additional hotel market
segments.
EMPHASIS ON ACQUIRING HOTELS WITH CERTAIN FRANCHISE AFFILIATIONS
The Company owns 47 Hotels. Twenty-three of the Hotels operate as
Residence Inn hotels and 12 operate as Hampton Inn hotels. The Summerfield
Acquisition Hotels include six Summerfield Suites hotels. The Company will be
subject to risks inherent in concentrating investments in any franchise brand,
in particular the Residence Inn, Summerfield Suites 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 distributions to shareholders. Furthermore, the
Summerfield Suites and Sierra Suites brands are relatively new brands with a
relatively small number of such hotels currently open (including only three
Sierra Suites Hotels) and do not currently have, and may not develop in the
future, substantial name recognition or effective reservation systems. If name
recognition and effective registration systems are not established, the
revenues from such hotels, and therefore, the Summerfield Lessee's obligation
to make Percentage Rent payments, particularly at the higher tier, may be
adversely affected in which case cash available for distribution would be
adversely affected. In addition, dependence upon a lessee, manager or major
franchisor such as Summerfield, Marriott or Promus, respectively, may adversely
affect the Company's ability to negotiate favorable contractual provisions with
such franchisors, lessees or managers.
CONFLICTS OF INTEREST
Jeffrey H. Fisher is Chairman of the Board and Chief Executive Officer of
the Company, Frederic M. Shaw is Executive Vice President and Chief Operating
Officer of the Company and Messrs. Fisher and Shaw are the shareholders of the
JF Lessee. Rolf E. Ruhfus, who was appointed as a Trustee of the Company
effective June 20, 1997, is the Chairman of the Board of Summerfield, an
affiliate of which is the general partner of the Summerfield Lessee and
Summerfield Management. As a result, there are inherent conflicts of interest
in the ongoing lease, acquisition, disposition and operation of the Hotels, and
the interests of shareholders may not have been, and in the future may not be,
reflected solely in all decisions made or actions taken by officers and
Trustees of the Company.
Percentage Leases
Because Messrs. Fisher and Ruhfus are officers and equity owners of the JF
Lessee and the Summerfield Lessee, respectively, as well as trustees of the
Company, there is a conflict of interest with respect to the enforcement,
termination or extension of the Percentage Leases and the negotiation of the
terms of future percentage leases between such Lessees and the Company. The
economic interests of Messrs. Fisher and Ruhfus in the Lessees may result in
decisions relating to the Company's enforcement of its rights under the
Percentage Leases that do not solely reflect the interests of the Company's
shareholders.
Possible Competition From Hotels Developed by the Summerfield Hotel Corporation
Mr. Ruhfus is a Trustee of the Company and an equity owner of the
Summerfield Lessee and Summerfield Management, and certain of his affiliates
have in the past been, and continue to be, involved in the development of
hotels, including extended-stay hotels. Mr. Ruhfus is Chairman of the Board
and a principal shareholder of Summerfield, which is the developer and
franchisor of Summerfield Suites and Sierra Suites hotels. Hotels developed by
Mr. Ruhfus and his affiliates, including Summerfield Suites hotels, Sierra
Suites hotels and Sunrise Suites hotels, may compete with the Hotels for
guests, and other hotel companies with which Mr. Ruhfus is affiliated may
compete with the Company for acquisition opportunities. Accordingly, the
interests of the Company, Mr. Ruhfus and Summerfield could differ with respect
to the Company's Hotels or proposed acquisitions that are competitive with
hotels owned or being considered for acquisition or development by Mr. Ruhfus
and his affiliates.
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CONFLICTS RELATING TO SALES OF SUMMERFIELD ACQUISITION HOTELS
Due to the potential adverse tax consequences for certain Summerfield
affiliates that may result from the sale of any or all of the Summerfield
Acquisition Hotels, the Company has agreed that for a period of up to seven
years following the closing of the acquisition of the Summerfield Acquisition
Hotels, any taxable sale of a Summerfield Acquisition Hotel will require the
consent of the applicable Summerfield affiliates, which may cause the Company
to be unable to sell some or all of the Summerfield Acquisition Hotels in
circumstances in which it would be advantageous for the Company to do so. If
the Company sells a Summerfield Acquisition Hotel without such consent, the
Company could be liable for the tax liability on the built-in gain of the
Summerfield affiliates.
ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE ISSUANCE AND SALE ON MARKET PRICE
OF COMMON SHARES
The Company's Declaration of Trust authorizes the Board of Trustees to
issue up to 120,000,000 shares of capital stock, consisting of 100,000,000
Common Shares and 20,000,000 Preferred Shares. The Board of Trustees will be
able to issue an aggregate of 59,239,430 unissued and unreserved Common Shares
and to classify and issue all 20,000,000 unissued Preferred Shares. The
Company's acquisition strategy depends in part on access to additional capital
through sales and issuances of equity securities. The market price of the
Common Shares may be adversely affected by the availability for future sale and
issuance of such unissued and unreserved Common Shares and Preferred Shares.
In addition, the market price of Common Shares may also be adversely
affected by the availability for future sale and issuance of 7,237,463 Common
Shares that could be issued upon the redemption of Units and Preferred Units of
the Partnership. The Company has effected a shelf registration of 654,906
Common Shares issuable to certain limited partners of the Partnership upon
redemption of their Units so as to permit such shares to be freely tradeable.
The Company has also agreed to effect, on or before August 1, 1997, November 1,
1997 and November 1, 1998, shelf registrations of 369,816, 211,465, and
4,063,329 Common Shares, respectively, issuable upon redemption of Units and
Preferred Units outstanding and issued in connection with the acquisition of
various Current Hotels. In connection with the purchase of the Summerfield
Acquisition Hotels, certain affiliates of Summerfield received an aggregate of
1,937,947 Units (the "Summerfield Units"). In addition to its obligation to
effect a shelf registration of a substantial portion of the Common Shares
issuable upon the redemption of the Summerfield Units (the "Summerfield
Redemption Shares") on or before June 20, 1998 (and to effect a shelf
registration of the remainder of the Summerfield Redemption Shares on or before
June 20, 1999), the Company has granted the holders of the Summerfield Units
the right to require the Company to effect two underwritten offerings of the
Summerfield Redemption Shares upon demand by the holders thereof. The
existence of such shelf registration statements and demand registration rights,
and the ability of holders of Units to receive Common Shares in exchange for
their Units and to thereafter sell such Common Shares, may have an adverse
effect on the market price of the Common Shares.
Common Share Price Fluctuations
A number of factors may adversely influence the price of the Common Shares
in public trading markets, many of which are beyond the control of the Company.
In particular, an increase in market interests rates will result in higher
yields on other financial instruments and may lead purchasers of Common Shares
to demand a higher annual distribution rate on the price paid for the Common
Shares, which could adversely affect the market price of the Common Shares.
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THE COMPANY
The Company currently owns 47 Hotels containing an aggregate of 5,727
rooms located in 18 states. The Hotels include (i) 30 upscale and two
mid-priced extended-stay hotels, including 23 Residence Inn hotels, six
Summerfield Suites hotels, two Sierra Suites hotels and one Sunrise Suites
hotel and (ii) 15-mid-priced limited or full service hotels including 12
Hampton Inn hotels, one Comfort Inn hotel, one Holiday Inn Express hotel and
one Sheraton Inn hotel. The Company recently completed the Summerfield
Acquisition, which included six Summerfield Suite hotels, two Sierra Suites
hotels and one Sunrise Suites hotel.
The Company's executive offices are located at 306 Royal Poinciana Way,
Palm Beach, Florida 33480, and its telephone number is (561) 835-1800. The
Company also maintains a website at www.innkeepersusa.com.
THE PARTNERSHIP
A wholly-owned subsidiary of the Company controls the Partnership, a
Virginia limited partnership, as the sole general partner of the Partnership
(the "General Partner") and currently holds an approximately 76% interest in
the Partnership. Subject to certain holding periods, each Unit may be tendered
by the holder to the Partnership for redemption. Pursuant to the Partnership
Agreement, the Company may elect to acquire directly Units tendered for
redemption in exchange for either one Common Share or cash equal to the fair
market value thereof at the time of such redemption. The Redemption Shares
will be issued if and to the extent that the Company acquires the Redemption
Units for Common Shares. If the Partnership (rather than the Company) redeems
the Redemption Units, or if the Company acquires Redemption Units for cash,
Redemption Shares will not be issued. The Company presently anticipates that
it will elect to issue Common Shares in connection with each redemption of
Units rather than cash. With each acquisition of outstanding Units, the
Company's percentage ownership interest in the Partnership, which is based on
the number of Units owned by the Company in relation to all outstanding Units,
will increase. In addition, whenever the Company issues Common Shares, the
Company, through the General Partner, will contribute any net proceeds
therefrom to the Partnership, and the Partnership will issue additional Units
to the General Partner.
The General Partner has the full, complete and exclusive power under the
Partnership Agreement to manage and control the business of the Partnership.
The Board of Trustees of the Company manages the affairs of the Company by
directing the affairs of the Partnership through the Company's ownership of the
General Partner. The Partnership will continue until December 31, 2050, or
until sooner dissolved upon (i) the bankruptcy, dissolution or withdrawal of
the General Partner (unless the Limited Partners elect to continue the
Partnership), (ii) the sale or other disposition of all or substantially all of
the assets of the Partnership, (iii) the redemption of all limited partnership
interests in the Partnership (other than those held by the General Partner, if
any), or (iv) the election of the General Partner. The General Partner's
current interest in the Partnership entitles the Company to share in cash
distributions from, and in the profits and losses of, the Partnership
(including payments under the Percentage Leases) and entitles the Company to
vote on all matters requiring a vote of the partners.
THE LESSEES
For the Company to qualify as a REIT, the Company cannot operate hotels.
The Company, therefore, leases the Current Hotels to the JF Lessee and leases
the Summerfield Acquisition Hotels to the Summerfield Lessee. The JF Lessee
operates 24 of the Current Hotels third parties (including Marriott) operate 14
of the Current Hotels and Summerfield Management operates the nine Summerfield
Acquisition Hotels.
During the term of each Percentage Lease, the applicable Lessee is
obligated to pay to the Company (i) the greater of the fixed obligation of the
Lessee to pay a certain sum in annual rent under the Percentage Lease
regardless of the level of room revenue achieved ("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
specified percentages of room revenues for each of the Hotels in excess of
certain levels ("Revenue Break Points"). Generally, both the Base Rent and the
Revenue Break Points above which a higher percentage of room revenues is paid
as Percentage Rent are adjusted annually at the beginning of each calendar year
based upon the change in the CPI during the prior calendar year.
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JF Lessee
Mr. Fisher is the majority shareholder and Mr. Shaw is the other
shareholder of the JF Lessee. The JF Lessee leases all of the Current Hotels
and operates 24 of such Hotels. The JF Lessee has agreed not to operate any
hotels other than those owned by the Company.
Summerfield Lessee
The Summerfield Lessee is a newly formed affiliate of Summerfield, which
leases the nine Summerfield Acquisition Hotels. Mr. Ruhfus, a trustee of the
Company, is an officer and principal equity owner of the Summerfield Lessee and
Summerfield Management. The Summerfield Lessee has agreed not to engage in any
business other than leasing hotels owned by the Company.
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DESCRIPTION OF THE PARTNERSHIP AND UNITS
GENERAL
The Partnership (directly or through subsidiary partnerships) owns the
Hotels and leases the Hotels to the Lessees pursuant to the Percentage Leases.
A wholly-owned subsidiary of the Company is the general partner of the
Partnership and currently holds approximately 76% of the issued Units therein.
The remaining approximately 24% of the issued Units are currently held by
Limited Partners who received the Units in connection with the Partnership's
acquisitions of certain of the Hotels. The material terms of the Units,
including a summary of certain provisions of the Partnership Agreement, are set
forth below. The following description of the terms and provisions of the
Units and certain other matters does not purport to be complete and is subject
to and qualified in its entirety by reference to applicable provisions of
Virginia law and the Partnership Agreement. For a comparison of the voting and
other rights of holders of Units and the Company's shareholders, see
"Redemption of Units--Comparison of Ownership of Units and Common Shares."
Through the ownership of Units, the Limited Partners hold interests in the
Partnership and all holders of Units (including the General Partner) are
entitled to share in cash distributions from, and in the profits and losses of,
the Partnership. Subject to the rights of Preferred Units (described below),
distributions by the Partnership are made equally for each Unit outstanding.
Each Unit (other than the Preferred Units) generally receives distributions in
the same amount as the cash dividends paid by the Company on each Common Share.
The Limited Partners have the rights to which limited partners are
entitled under the Virginia Revised Uniform Limited Partnership Act. The
issuance of the currently outstanding Units were not registered pursuant to the
federal securities laws or any state securities law. The Units cannot be sold,
assigned, hypothecated, pledged, transferred or otherwise disposed of by a
holder unless they are so registered or unless an exemption from such
registration is available. In addition, the Partnership Agreement imposes
restrictions on the transfer of Units, as described below.
PREFERRED UNITS
In connection with the acquisition of certain Hotels, in 1996 the
Partnership issued the Preferred Units. The Preferred Units have a liquidation
preference of $11.00 per Preferred Unit and are convertible at any time into
Common Units on a one-for-one basis (the "Preferred Conversion Right"). In
November 2006, all then outstanding Preferred Units automatically convert into
Common Units. Annual distributions of $1.10 are payable on each Preferred
Unit, subject to increase to $1.155 for each Preferred Unit based on increases
in the annual dividends payable on the Common Shares. On or after the second
anniversary of issuance, the Preferred Units are redeemable for cash, or, at
the option of the Company, Common Shares on a one-for-one basis. So long as
any Preferred Units remain outstanding, the Partnership is prohibited from
issuing Units with income, distribution or liquidation rights that are superior
to or equal to the income, distribution or liquidation rights of the Preferred
Units unless immediately after such issuance (i) the value of all of the
outstanding superior Units would not exceed 18.7% of the value of all Units
outstanding and (ii) the value of all outstanding superior and equal Units
would not exceed (A) 22% of the value of all outstanding Units plus (B) the
aggregate value of the Preferred Units at issuance and minus (C) the value of
the remaining outstanding Preferred Units.
MANAGEMENT
The Partnership has been organized as a Virginia limited partnership
pursuant to the terms of the Partnership Agreement. Pursuant to the
Partnership Agreement, the General Partner, a wholly-owned subsidiary of the
Company, has full, exclusive and complete responsibility and discretion in the
management and control of the Partnership, and the Limited Partners have no
authority in their capacity as Limited Partners to transact business for, or
participate in the management activities or decisions of, the Partnership
except as required by applicable law. However, any amendment to the
Partnership Agreement that would affect the Limited Partners' right to tender
their Units for redemption (the "Redemption Rights") would require the consent
of Limited Partners (other than the General Partner) holding more than
two-thirds of the Units held by the Limited Partners. Any amendment to the
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<PAGE> 15
Partnership Agreement that would (i) affect the liquidation preference or
preferred distributions with respect to the Preferred Units or (ii) affect the
right of the holders of Preferred Units to exercise the Preferred Conversion
Right would require the consent of the Limited Partners holding more than
two-thirds of the Preferred Units held by such partners. Any amendment that
would (i) adversely affect the Limited Partners' rights to receive cash
distributions, (ii) alter the Partnership's allocations of income or loss, or
(iii) impose on the Limited Partners any obligations to make additional
contributions to the capital of the Partnership, would require the consent of
Limited Partners (other than the General Partner) holding more than two-thirds
of the Units held by each such class of Limited Partners adversely affected by
such amendment.
ABILITY TO ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
Subject to the terms of the Company's Declaration of Trust and any
agreements between the General Partner, the Company and the Partnership, the
General Partner and other persons (including officers, directors, trustees,
employees, agents and other affiliates of the General Partner and the Company)
are not prohibited under the Partnership Agreement from engaging in other
business activities, including business activities substantially similar or
identical to those of the Partnership, and the General Partner and the Company
will not be required to present any business opportunities to the Partnership
or to any Limited Partner.
BORROWING BY THE PARTNERSHIP
The General Partner is authorized under the Partnership Agreement to cause
the Partnership to borrow money and to issue and guarantee debt as it deems
necessary for the conduct of the activities of the Partnership. Such debt may
be secured by deeds to secure debt, mortgages, deeds of trust, pledges or other
liens on the assets of the Partnership. The General Partner may also cause the
Partnership to borrow money to enable the Partnership to make distributions in
an amount sufficient to permit the Company, so long as it qualifies as a REIT,
to avoid payment of the federal income tax.
REIMBURSEMENT OF GENERAL PARTNER; TRANSACTIONS WITH THE GENERAL PARTNER AND ITS
AFFILIATES
The General Partner will receive no compensation for its services as the
General Partner of the Partnership. However, as a partner in the Partnership,
the General Partner has the same right to allocations, payments and
distributions as other partners of the Partnership. In addition, the
Partnership will reimburse the General Partner and the Company for certain
expenses. See "--Operations."
Except as expressly permitted by the Partnership Agreement, neither the
General Partner nor any of its affiliates will sell, transfer or convey any
property to, or purchase any property from, the Partnership, directly or
indirectly, except pursuant to transactions that are determined by the General
Partner in good faith, in its sole and absolute discretion, to be fair and
reasonable.
LIABILITY OF GENERAL PARTNER AND LIMITED PARTNERS
The General Partner is liable for all general obligations of the
Partnership to the extent not paid by the Partnership. The General Partner is
not liable for the non-recourse obligations of the Partnership.
The Limited Partners are not required to make further capital
contributions to the Partnership after their respective initial contributions
are fully paid. Assuming that a Limited Partner acts in conformity with the
provisions of the Partnership Agreement, the liability of the Limited Partner
for obligations of the Partnership under the Partnership Agreement and the
Virginia Revised Uniform Limited Partnership Act will be limited, subject to
certain possible exceptions, to the loss of the Limited Partner's investment in
the Partnership.
The Partnership is qualified to conduct business in each state in which it
owns property and may qualify to conduct business in other jurisdictions.
Maintenance of limited liability may require compliance with certain legal
requirements of those jurisdictions and certain other jurisdictions.
Limitations on the liability of a limited partner for the obligations of a
limited partnership have not clearly been established in many states.
Accordingly, if it were
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<PAGE> 16
determined that the right, or exercise of the right by the Limited Partners, to
make certain amendments to the Partnership Agreement or to take other action
pursuant to the Partnership Agreement constituted "control" of the
Partnership's business for the purposes of the statutes of any relevant state,
the Limited Partners might be held personally liable for the Partnership's
obligations. The Partnership will operate in a manner that the General Partner
deems reasonable, necessary and appropriate to preserve the limited liability
of the Limited Partners.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Partnership Agreement generally provides that the General Partner will
incur no liability for monetary damages to the Partnership or any Limited
Partner for losses sustained or liabilities incurred as a result of errors in
judgment or of any act or omission if the General Partner acted in good faith.
In addition, the General Partner is not responsible for any misconduct or
negligence on the part of its agents, provided the General Partner appointed
such agents in good faith. The General Partner may consult with legal counsel,
accountants, consultants, real estate brokers and other consultants and
advisors, and any action it takes or omits to take in reliance upon the opinion
of such persons, as to matters which the General Partner reasonably believes to
be within their professional or expert competence, shall be conclusively
presumed to have been done or omitted in good faith and in accordance with such
opinion.
The Partnership Agreement also provides for indemnification of the General
Partner, the directors and officers of the General Partner, and such other
persons as the General Partner may from time to time designate, against any and
all losses, claims, damages, liabilities (joint or several), expenses
(including reasonable legal fees and expenses), judgments, fines, settlements,
and other amounts arising from any and all claims, demands, actions, suits or
proceedings, whether civil, criminal, administrative or investigative, that
relate to the operations of the Partnership in which such person may be
involved, or is threatened to be involved, provided that the Partnership shall
not indemnify any such persons if it is established that (i) the act or
omission of such person was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active
and deliberate dishonesty, (ii) such person actually received an improper
personal benefit in money, property or services, or (iii) in the case of any
criminal proceeding, such person had reasonable cause to believe that the act
or omission was unlawful.
SALE OF ASSETS
Under the Partnership Agreement, the General Partner generally has the
exclusive authority to determine whether, when and on what terms the assets of
the Partnership (including the Hotels) will be sold.
REMOVAL OF THE GENERAL PARTNER; TRANSFER OF GENERAL PARTNER'S INTEREST
Generally, the General Partner may not be removed by the Limited Partners.
Other than to a wholly-owned subsidiary of the Company, the General Partner
may not transfer any of its interests as a partner except in connection with a
merger or sale of all or substantially all of its assets. The General Partner
may not sell all or substantially all of its assets, or enter into a merger,
unless the sale or merger includes the sale of all or substantially all of the
assets of, or the merger of, the Partnership, with the holders of Units
receiving substantially the same consideration in such transaction as holders
of Common Shares.
TRANSFERABILITY OF INTERESTS
The General Partner may not withdraw from the Partnership voluntarily or
transfer or assign its interest in the Partnership unless the transaction in
which such withdrawal or transfer occurs results in the Limited Partners'
receipt of property in an amount equal to the amount they would have received
had they redeemed their Units immediately prior to such transaction, or unless
the successor to the General Partner contributes substantially all of its
assets to the Partnership in return for an interest in the Partnership. The
Limited Partners (other than the General Partner) may not transfer their
interests in the Partnership without the consent of the General Partner, which
consent may be withheld in the General Partner's sole discretion. The General
Partner may not consent to any transfer that would cause the Partnership to be
treated as a separate corporation for federal income tax purposes.
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<PAGE> 17
REDEMPTION RIGHTS FOR LIMITED PARTNERSHIP UNITS
Pursuant to the Partnership Agreement and the terms of various agreements
with limited partners who became Limited Partners after the IPO (the
"Redemption Agreements"), the Limited Partners have rights ("Redemption
Rights") which will enable them to cause the Partnership to redeem their
interests in the Partnership in exchange for Common Shares or, at the election
of the Company and when required in certain other circumstances, cash.
Generally, the redemption price will be paid in cash in the event that the
issuance of Common Shares to the redeeming Limited Partner would (i) result in
any person owning, directly or indirectly, Common Shares in excess of the
Ownership Limitation, (ii) result in shares of beneficial interest of the
Company being owned by fewer than 100 persons (determined without reference to
any rules of attribution), (iii) result in the Company being "closely held"
within the meaning of Section 856(h) of the Code, (iv) cause the Company to
own, actually or 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 (v) cause the acquisition of Common
Shares by such redeeming Limited Partner to be "integrated" with any other
distribution of Common Shares for purposes of complying with the Securities
Act. Redemption Rights of Limited Partners holding 654,906 Units are
currently exercisable and Redemption Rights will become exercisable by the
Limited Partners holding the Redemption Units at any time after July 31, 1997,
by the holders of 211,465 Units after November 1, 1997 by the holders of
4,063,329 Units after November 1, 1998, and by the holders of 1,572,860 of the
Summerfield Units after June 20, 1998 and by the holders of the remaining
365,086 Summerfield Units after June 20, 1999, provided that each Limited
Partner may not exercise Redemption Rights for less than 1,000 Units or, if
such Limited Partner holds less than 1,000 Units, all of the Units held by
such Limited Partner. In the future, it may become necessary to place
additional restrictions on the exercise of the Redemption Rights in order to
assure that the Partnership does not become a "publicly traded partnership"
that is treated as a corporation for federal income tax purposes. See
"Federal Income Tax Considerations--Tax Aspects of the Partnership." The
number of Common Shares issuable upon exercise of the Redemption Rights will
be adjusted upon the occurrence of share splits, mergers, consolidations or
similar pro rata share transactions, which otherwise would have the effect of
diluting the ownership interests of the Limited Partners or the shareholders of
the Company.
NO WITHDRAWAL BY LIMITED PARTNERS
No Limited Partner has the right to withdraw from or reduce or receive the
return of his capital contribution to the Partnership, except as a result of
the redemption or transfer of his Units pursuant to the terms of the
Partnership Agreement.
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS
The General Partner is authorized, without the consent of the Limited
Partners, to cause the Partnership to issue additional Units to the partners or
to other persons for such consideration and on such terms and conditions as the
General Partner deems appropriate. In addition, the General Partner may cause
the Partnership to issue to the General Partner additional Units, or other
additional partnership interests in different series or classes which may be
senior to the Units, in conjunction with an offering of securities of the
Company having substantially similar rights, for which the General Partner
makes a capital contribution to the Partnership of the proceeds of such
offering. Consideration for additional partnership interests may be cash or
any property or other assets permitted by Virginia law.
MEETINGS
The Partnership Agreement does not provide for annual meetings of the
Limited Partners, and the General Partner does not anticipate calling such
meetings.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may, with four exceptions, be made
by the General Partner without the consent of the Limited Partners. Any
amendment to the Partnership Agreement which would (i) affect
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the Redemption Rights, (ii) adversely affect the rights of the Limited Partners
to receive distributions payable to them under the Partnership Agreement, (iii)
alter the Partnership's profit and loss allocations or (iv) impose any
obligation upon the Limited Partners to make additional capital contributions
to the Partnership shall require the consent of Limited Partners holding more
than 66 2/3% of the Units held by the Limited Partners.
BOOKS AND REPORTS
The General Partner is required to keep the Partnership's books and
records at the specified principal office of the Partnership. The Limited
Partners have the right, subject to certain limitations, to inspect or to
receive copies of the Partnership's federal, state and local tax returns, a
list of the partners and their last known business addresses, the Partnership
Agreement, the Partnership certificate and all amendments thereto, information
about the capital contributions of each of the partners and any other documents
and information required under Virginia law. Any partner or his duly
authorized representative, upon paying duplicating, collection and mailing
costs, is entitled to inspect or copy such records during ordinary business
hours.
The General Partner will furnish to each Limited Partner, within 90 days
after the close of each fiscal year, an annual report containing financial
statements of the Partnership (or the Company, if consolidated financial
statements including the Partnership are prepared) for each fiscal year. The
financial statements will be audited by a nationally recognized firm of
independent public accountants selected by the General Partner. In addition,
within 45 days after the close of each fiscal quarter (other than the fourth
quarter), the General Partner will furnish to each Limited Partner a report
containing quarterly unaudited financial statements of the Partnership (or the
Company) and such other information as may be required by applicable law or
regulation or as the General Partner deems appropriate.
The General Partner will use reasonable efforts to furnish to each Limited
Partner, within 75 days after the close of each fiscal year of the Partnership,
the tax information reasonably required by the Limited Partners for federal and
state income tax reporting purposes.
CAPITAL CONTRIBUTIONS
The Company currently owns an approximately 76% interest in the
Partnership and the current Limited Partners aggregate interest in the Limited
Partnership will be approximately 24%. The Partnership Agreement provides that
if the Partnership requires additional funds at any time or from time to time
in excess of funds available to the Partnership from borrowing or capital
contributions, the General Partner or the Company may borrow such funds from a
third-party lender and lend such funds to the Partnership on the same terms and
conditions as are applicable to the General Partner's or the Company's, as
applicable, borrowing of such funds. Moreover, the General Partner is
authorized to cause the Partnership to issue partnership interests for less
than fair market value if (i) the Company has concluded in good faith that such
issuance is in the best interests of the Company and the Partnership and (ii)
the General Partner makes a capital contribution in an amount equal to the
proceeds of such issuance. Under the Partnership Agreement, the General
Partner generally is obligated to contribute the proceeds of a share offering
by the Company as additional capital to the Partnership. Upon such
contribution the General Partner will receive additional Units and the General
Partner's percentage interest in the Partnership will be increased on a
proportionate basis based upon the amount of such additional capital
contributions. Conversely, the percentage interests of the Limited Partners
will be decreased on a proportionate basis in the event of additional capital
contributions by the General Partner. In addition, if the General Partner
contributes additional capital to the Partnership, the General Partner will
revalue the property of the Partnership to its fair market value (as determined
by the General Partner) and the capital accounts of the partners will be
adjusted to reflect the manner in which the unrealized gain or loss inherent in
such property (that has not been reflected in the capital accounts previously)
would be allocated among the partners under the terms of the Partnership
Agreement if there were a taxable disposition of such property for such fair
market value on the date of the revaluation.
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REGISTRATION RIGHT
For a description of certain registration rights held by the Limited
Partners, see "Risk Factors--Adverse Effect of Shares Available for Future
Issuance and Sale or Market Price of Common Shares."
OPERATIONS
The Partnership Agreement requires that the Partnership be operated in a
manner that will enable the Company to satisfy the requirements for being
classified as a REIT, to avoid any federal income or excise tax liability
imposed by the Code, and to ensure that the Partnership will not be classified
as a "publicly traded partnership" for purposes of Section 7704 of the Code.
In addition to the administrative and operating costs and expenses
incurred by the Partnership, the Partnership will pay all administrative costs
and expenses of the Company and the General Partner (collectively, the "Company
Expenses") and the Company Expenses will be treated as expenses of the
Partnership. The Company Expenses generally will include (i) all expenses
relating to the formation and continuity of existence of the Company and the
General Partner, (ii) all expenses relating to the public offering and
registration of securities by the Company, (iii) all expenses associated with
the preparation and filing of any period reports by the Company under federal,
state or local laws or regulations, (iv) all expenses associated with
compliance by the Company and the General Partner with laws, rules and
regulations promulgated by any regulatory body and (v) all other operating or
administrative costs of the General Partner incurred in the ordinary course of
its business on behalf of the Partnership. The Company Expenses, however, will
not include any administrative and operating costs and expenses incurred by the
Company that are attributable to hotel properties or to partnership interests
in any subsidiary partnership of the Company.
TAX MATTERS; PROFIT AND LOSS ALLOCATIONS
Pursuant to the Partnership Agreement, the General Partner is the tax
matters partner of the Partnership and, as such, has the authority to handle
tax audits and to make tax elections under the Code on behalf of the
Partnership.
Income, gain and loss of the Partnership for each fiscal year generally is
allocated among the partners in accordance with their respective interests in
the Partnership, subject to compliance with the provisions of Code Sections
704(b) and 704(c) and the Treasury Regulations promulgated thereunder. See
"Federal Income Tax Considerations - Tax Aspects of the Partnership and
Subsidiary Partnerships."
DISTRIBUTIONS
Subject to the rights of holders of Preferred Units, the Partnership
Agreement provides that the Partnership will distribute cash from operations
(including net sale or refinancing proceeds, but excluding net proceeds from
the sale of the Partnership's property in connection with the liquidation of
the Partnership) on a quarterly (or, at the election of the General Partner,
more frequent) basis, in amounts determined by the General Partner in its sole
discretion, to the partners, for any fiscal year of the Partnership, in
accordance with their respective percentage interests in the Partnership. Upon
liquidation of the Partnership, after payment of, or adequate provision for,
debts and obligations of the Partnership, including the liquidation preference
of the Preferred Units and any loans made by partners, any remaining assets of
the Partnership will be distributed to all partners (other than holders of
Preferred Units) with positive capital accounts in accordance with their
respective positive capital account balances. If the General Partner has a
negative balance in its capital account following a liquidation of the
Partnership, it will be obligated to contribute cash to the Partnership equal
to the negative balance in its capital account. See "Preferred Units."
TERM
The Partnership will continue until December 31, 2050, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the General
Partner (unless the Limited Partners elect to continue the Partnership), (ii)
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<PAGE> 20
the sale or other disposition of all the assets of the Partnership (except for
such assets as the General Partner believes are required to wind up the affairs
of the Partnership), (iii) the redemption of all limited partnership interests
in the Partnership (other than those held by the General Partner, if any), or
(iv) the election by the General Partner.
SHARES AVAILABLE FOR FUTURE SALE
As of June 30, 1997, the Company had outstanding (or reserved for issuance
upon redemption of Units) 22,322,817 Common Shares. All of the up to 369,816
Redemption Shares issued pursuant to the Registration Statement of which this
Prospectus is a part will be tradeable without restriction under the Securities
Act.
Pursuant to the Partnership Agreement and the Redemption Agreements, the
Limited Partners (other than the Company) have Redemption Rights, which enable
them to cause the Company to redeem their Units and Preferred Units in exchange
for cash (or, at the election of the Company, Common Shares on a one-for-one
basis). The Redemption Rights may be exercised with respect to 211,645 Units
at any time after November 1, 1997. 4,063,329 Units are redeemable at any time
after November 1, 1998. After June 20, 1998, 1,572,860 of the Summerfield
Units and after June 20, 1999, 365,086 of the Summerfield Units are eligible
for redemption.
Common Shares issued to holders of Units upon exercise of the Redemption
Rights will be "restricted" securities under the meaning of Rule 144
promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144. As
described below, the Company has granted certain holders registration rights
with respect to Common Shares issued in redemption of Units.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from the
Company or any "Affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Shares or the average weekly
trading volume of the Common Shares during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the date of
acquisition of restricted shares from the Company or from any Affiliate of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an Affiliate of the Company at any time during the three months preceding
a sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
The Company has filed a registration statement with the Commission for the
purpose of registering the sale of shares of 658,717 Common Shares issuable
upon redemption of Units issued in connection with the IPO (the "Original
Units"). The Company has also agreed to effect, as soon as practicable after
the date on which the respective Units become eligible for redemption, one or
more registration statements with the Commission for the purpose of registering
the sale of Common Shares issuable upon redemption as set forth in "Risk
Factors--Adverse Effect of Shares Available for Future Issuance and Sale or
Market Price of Common Shares." Upon effectiveness of such registration
statements, those persons who receive Common Shares upon redemption of the
applicable Units may sell such shares in the secondary market without being
subject to the volume limitations or other requirements of Rule 144. The
Company will bear expenses incident to its registration requirements, except
that such expenses shall not include any underwriting discounts or commissions,
Securities and Exchange Commission or state securities registration fees,
transfer taxes or certain other fees or taxes relating to such shares.
Registration rights may be granted to future sellers of hotels to the Company
who elect to receive, in lieu of cash, Common Shares, Units, or securities
convertible into Common Shares.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Shares, or the perception that such sales could occur, may affect adversely
prevailing market prices of the Common
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<PAGE> 21
Shares. See "Risk Factors - Adverse Effect of Shares Available for Future
Issuance and Sale on Market Price of Common Shares" and "Partnership Agreement
- - Transferability of Interests."
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The Declaration of Trust of the Company provides that the Company may
issue up to 100,000,000 Common Shares, and 20,000,000 Preferred Shares. At
June 30, 1997, there were approximately 22,322,817 Common Shares outstanding and
no Preferred Shares outstanding.
As a Maryland real estate investment trust, the Company is subject to
various provisions of the Maryland General Corporation Law (the "MGCL") and
Title 8, as amended from time to time, of the Corporations and Associations
Article of the Annotated Code of Maryland (the "Maryland REIT Law"). Both the
Maryland REIT Law and the Company's Declaration of Trust provide that no
shareholder of the Company will be personally liable for any obligation of the
Company solely as a result of his status as a shareholder of the Company. The
Company's Bylaws further provide that the Company shall indemnify each
shareholder against any claim or liability to which the shareholder may become
subject by reason of his being or having been a shareholder or former
shareholder and that the Company shall pay or reimburse each shareholder or
former shareholder for all legal and other expenses reasonably incurred by him
in connection with any such claim or liability. In addition, it is the
Company's policy to include a clause in its contracts which provides that
shareholders assume no personal liability for obligations entered into on
behalf of the Company. However, with respect to tort claims, contractual
claims where shareholder liability is not so negated, claims for taxes and
certain statutory liability, the shareholders may, in some jurisdictions, be
personally liable to the extent that such claims are not satisfied by the
Company. Inasmuch as the Company carries public liability insurance which it
considers adequate, any risk of personal liability to shareholders is limited
to situations in which the Company's assets plus its insurance coverage would
be insufficient to satisfy the claims against the Company and its shareholders.
The following information with respect to the Common Shares and Preferred
Shares is subject to the detailed provisions of the Company's Amended and
Restated Declaration of Trust (the "Declaration of Trust" and Bylaws (the
"Bylaws"). These statements do not purport to be complete or to give full
effect to the provisions of statutory or common law, and are subject to and are
qualified in their entirety by reference to, the terms of the Declaration of
Trust and Bylaws, which are filed as exhibits to the Registration Statement.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or
series of shares of beneficial interest and to the provisions of the Company's
Declaration of Trust regarding Shares-in-Trust (as defined below), holders of
Common Shares are entitled to receive dividends if, as and when authorized and
declared by the Board of Trustees of the Company out of assets legally
available therefor and to share ratably in the assets of the Company legally
available for distribution to its shareholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all
known debts and liabilities of the Company. The Company has paid and intends
to pay quarterly dividends to its shareholders.
Each outstanding Common Share entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the election of
trustees, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of beneficial interest, the
holders of such Common Shares possess the exclusive voting power. There is no
cumulative voting in the election of trustees, which means that the holders of
a majority of the outstanding Common Shares can elect all of the trustees then
standing for election and the holders of the remaining shares of beneficial
interest, if any, will not be able to elect any trustees.
Holders of Common Shares have no conversion, sinking fund, redemption
rights or any preemptive rights to subscribe for any securities of the Company.
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<PAGE> 22
Common Shares have equal dividend, distribution, liquidation and other
rights, and have no preference, exchange or, except as expressly required by
the Maryland REIT Law, appraisal rights.
Pursuant to the Maryland REIT Law, a real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge, unless
approved by the affirmative vote of shareholders holding at least two-thirds of
the shares entitled to vote on the matter unless a lesser percentage (but not
less than a majority of all the votes entitled to be cast on the matter) is set
forth in the real estate investment trust's declaration of trust. The
Company's Declaration of Trust provides for approval by a majority of all the
votes entitled to be cast on the matter in all situations permitting or
requiring action by the shareholders except with respect to: (a) the
disqualification of the Company as a real estate investment trust or revocation
of its election to be taxed as a real estate investment trust (which requires
the affirmative vote of two-thirds of the number of Common Shares entitled to
vote on such matter at a meeting of the shareholders of the Company); (b) the
election of trustees (which requires a plurality of all the votes cast at a
meeting of shareholders of the Company at which a quorum is present); (c) the
removal of trustees (which requires the affirmative vote of the holders of
two-thirds of the outstanding voting shares of the Company); (d) the amendment
or repeal of the provision in the Declaration of Trust requiring that at least
a majority of the Trustees be "independent," as defined therein (the
"Independent Trustees") (which requires the affirmative vote of two-thirds of
the outstanding shares entitled to vote on the matter); (e) the amendment of
the Declaration of Trust by shareholders (which requires the affirmative vote
of a majority of votes entitled to be cast on the matter, except under certain
circumstances specified in the Declaration of Trust which require the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter); and (f) the termination of the Company (which requires the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter). A
declaration of trust may permit the trustees by a two-thirds vote to amend the
declaration of trust from time to time to qualify as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the "Code"), or the
Maryland REIT Law without the affirmative vote or written consent of the
shareholders. The Company's Declaration of Trust permits such action by the
Board of Trustees.
PREFERRED SHARES
Preferred Shares may be issued from time to time, in one or more series,
as authorized by the Board of Trustees. Prior to issuance of shares of each
series, the Board is required by the Maryland REIT Law and the Company's
Declaration of Trust to set for each such series, subject to the provisions of
the Company's Declaration of Trust regarding Shares-in-Trust, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each series. The Board could authorize the issuance of
Preferred Shares with terms and conditions that could have the effect of
delaying, deferring or preventing a takeover or other transaction which holders
of some, or a majority, of the Common Shares might believe to be in their best
interests or in which holders of some, or a majority, of the Common Shares
might receive a premium for their Common Shares over the then market price of
such Common Shares.
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RESTRICTIONS ON TRANSFER OF SHARES OF BENEFICIAL INTEREST
For the Company to qualify as a REIT under the Code, shares of beneficial
interest in the Company must be held by a minimum of 100 persons for at least
335 days in each taxable year subsequent to 1994 or during a proportionate part
of a shorter taxable year. In addition, at all times during the second half of
each taxable year subsequent to 1994, no more than 50% in value of the shares
of beneficial interest of the Company may be owned, directly or indirectly and
by applying certain constructive ownership rules, by five or fewer individuals
(the "5/50 Rule"). Because the Board of Trustees believes it is essential for
the Company to continue to qualify as a REIT, the Declaration of Trust
restricts the acquisition of Common and Preferred Shares (the "Ownership
Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Declaration of Trust, no shareholder may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 9.8% of the
outstanding Common Shares or more than 9.8% of any other class of outstanding
shares of beneficial interest. 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 increased the Ownership
Limitation in the case of a specific mutual fund investment family.
If any shareholder purports to transfer shares to a person and the
transfer, if effective, would result in (i) a person owning shares, directly or
constructively, in excess of the Ownership Limitation or (ii) the Company
failing to qualify as a REIT, the purported transfer shall 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."
Furthermore, 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.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported to
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or, if
the Common or Preferred Shares are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Common or Preferred Shares are listed or
admitted to trading or, if the Common or Preferred Shares are not listed or
admitted to trading on any national securities exchange, the last quoted price,
or if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or, if such system is no longer in
use, the principal other automated quotations system that may then be in use
or, if the Common or Preferred Shares are not quoted by any such organization,
the average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Common or Preferred Shares selected by the
Board of Trustees. "Trading Day" shall mean a day on which the principal
national securities exchange on which the Common or Preferred Shares are listed
or admitted to trading is open for the transaction of business or, if the
Common or Preferred Shares are not listed or admitted to trading on any
national securities exchange, shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
Any person who acquires or attempts to acquire Common Shares or Preferred
Shares in violation of the foregoing restrictions, or any person who owned
Common Shares or Preferred Shares that were transferred to a share trust, will
be required (i) to give immediately written notice to the Company of such event
and (ii) to provide to the Company such other information the Company may
request in order to determine the effect, if any, of such transfer on the
Company's status as a REIT.
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All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to the regulations under the Code) of the
outstanding Common Shares and Preferred Shares must, within 30 days after
January 1 of each year, provide to the Company a written statement or affidavit
stating the name and address of such direct or indirect owner, the number of
Common Shares and Preferred Shares owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
shareholder shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such ownership
on the Company's status as a REIT and to ensure compliance with the Ownership
Limitation.
The Ownership Limitation generally will not apply to the acquisition of
Common Shares or Preferred Shares by an underwriter that participates in a
public offering of such shares. In addition, the Board of Trustees, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Trustees may direct, may exempt a person from
the Ownership Limitation under certain circumstances. The Board of Trustees
has increased the Ownership Limitation in the case of a specific mutual fund
investment family. The foregoing restrictions will continue to apply until (i)
the Board of Trustees determines that it is no longer in the best interests of
the Company to attempt to qualify, or to continue to qualify, as a real estate
investment trust and (ii) there is an affirmative vote of two-thirds of the
number of Common Shares and Preferred Shares entitled to vote on such matter at
a regular or special meeting of the shareholders of the Company.
All certificates representing Common Shares or Preferred Shares will bear
a legend referring to the restrictions described above.
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<PAGE> 25
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and the
Declaration of Trust and Bylaws of the Company is subject to and qualified in
its entirety by reference to the Declaration of Trust and Bylaws of the
Company.
Classification of the Board of Trustees
The Bylaws provide that the number of trustees of the Company may be
established by the Board of Trustees but may not be fewer than three nor more
than nine. There are currently seven Trustees on the Board of Trustees. The
Trustees may increase or decrease the number of Trustees by a vote of at least
80% of the members of the Board of Trustees, provided that the number of
Trustees shall never be less than the number required by Maryland law and that
the tenure of office of a Trustee shall not be affected by any decrease in the
number of Trustees. Any vacancy will be filled, including a vacancy created by
an increase in the number of Trustees, by a majority of the remaining Trustees,
except that a vacancy resulting from an increase in the number of Trustees must
be filled by a majority of the entire Board of Trustees.
Pursuant to the Declaration of Trust, the Board of Trustees is divided
into three classes of trustees. Upon the expiration of their terms, Trustees
of each class are chosen for three-year terms and each year one class of
trustees will be elected by the shareholders. The Company believes that
classification of the Board of Trustees will help to assure the continuity and
stability of the Company's business strategies and policies as determined by
the Board of Trustees. Holders of Common Shares will have no right to
cumulative voting in the election of Trustees. Consequently, at each annual
meeting of shareholders, the holders of a majority of the Common Shares are
able to elect all of the successors of the class of trustees whose terms expire
at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent trustees more time consuming and difficult. At least
two annual meetings of shareholders, instead of one, will generally be required
to effect a change in a majority of the Board of Trustees. Thus, the
classified board provision could increase the likelihood that incumbent
Trustees will retain their positions. The staggered terms of Trustees may
delay, defer or prevent a tender offer, an attempt to change control of the
Company or other transaction that might otherwise involve a premium price for
holders of Common Shares and even though a tender offer, change of control or
other transaction might be in the best interest of the shareholders.
Removal of Trustees
The Declaration of Trust provides that a Trustee may be removed with or
without cause only by the affirmative vote of at least two-thirds of the
votes entitled to be cast in the election of Trustees. This provision, when
coupled with the provision in the Bylaws authorizing the Board of Trustees to
fill vacant trusteeships, precludes shareholders from removing incumbent
Trustees except upon the existence of cause for removal and a substantial
affirmative vote, and filling the vacancies created by such removal with their
own nominees.
Business Combinations
Under the MGCL, as applicable to Maryland real estate investment trusts,
certain "business combinations" (including a merger, consolidation, share
exchange or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland real estate
investment trust and any person who beneficially owns ten percent or more of
the voting power of the trust's shares or an affiliate of the trust who, at any
time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the
then-outstanding voting shares of beneficiary interest of the trust (an
"Interested Shareholder") or an affiliate thereof prohibited for five years
after the most recent date on which the Interested Shareholder becomes an
Interested Shareholder. Thereafter, any such business combination must be
recommended by the board of trustees of such trust and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by
holders of outstanding voting share of beneficial interest of the trust and (b)
two-thirds of the votes entitled to be
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cast by holders of voting shares of the trust other than shares held by the
Interested Shareholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the trust's
common shareholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for its shares. These provisions
of Maryland law do not apply, however, to business combinations that are
approved or exempted by the board of trustees of the trust prior to the time
that the Interested Shareholder becomes an Interested Shareholder.
Control Share Acquisition
The MGCL, as applicable to Maryland real estate investment trusts,
provides that "control shares" of a Maryland real estate investment trust
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of beneficial interest owned by the acquiror, by
officers or by trustees who are employees of the trust. "Control Shares" are
voting shares of beneficial interest which, if aggregated with all other such
shares of beneficial interest previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing trustees within one of the
following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control Shares do not include shares the
acquiring person is entitled to vote as result of having previously obtained
shareholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of trustees of the trust to call a special
meeting of shareholders to be held within 50 days of demand to consider the
voting rights of the shares. If no request for a meeting is made, the trust may
itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the trust may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote,
all other shareholders may exercise appraisal rights. The fair value of the
shares as determined for purposes of such appraisal rights may not be less than
the highest price per share paid by the acquiror in the control share
acquisition.
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the trust is a party
to the transaction or (b) to acquisitions approved or exempted by the
declaration of trust or bylaws of the trust.
The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's Common or Preferred Shares. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
Amendment
The Declaration of Trust may be amended by the affirmative vote of the
holders of at least a majority of all of the votes entitled to be cast on the
matter; provided, that certain provisions of the Declaration of Trust regarding
(i) disqualification of the company as a real estate investment trust, (ii)
Independent Trustees or the removal of Trustees, (iii) the restrictions on
transfer of the Common Shares and the Preferred Shares, (iv) amendments to the
Declaration of Trust, (v) the Debt Limitation (as defined in "-Operations"
below) and (vi) the termination of the Company may not be amended, altered,
changed or) repealed without the approval of two-thirds of all of the votes
entitled to be cast on the matter. The Company's Bylaws may be amended or
altered exclusively by the Board of Trustees or a committee thereof, except for
provision of the Bylaws relating to the sale of a certain Hotel and
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<PAGE> 27
transactions involving the Company in which an advisor, Trustee or officer has
an interest, which may be altered or repealed upon the vote of shareholders
holding at least two-thirds of the shares of the Company entitled to vote
generally in the election of Trustees.
Operations
The Company is generally prohibited from engaging in certain activities,
including incurring consolidated indebtedness, in the aggregate, in excess of
the limit set forth in the Company's Declaration of Trust that limits
consolidated indebtedness to 50% of the Company's investment in Hotels, at
cost, after giving effect to the Company's use of proceeds from any
indebtedness (the "Debt Limitation") and acquiring or holding property or
engaging in any activity that would cause the Company to fail to qualify as a
REIT.
Dissolution of the Company
Pursuant to the Company's Declaration of Trust, the dissolution of the
Company must be approved by the affirmative vote of two-thirds of all of the
votes entitled to be cast on the matter.
Advance Notice of Trustees' Nominations and New Business
The Bylaws of the Company provide that (a) with respect to an annual
meeting of shareholders, nominations of persons for election to the Board of
Trustees and the proposal of business to be considered by shareholders may be
made only (i) pursuant to the Company's notice of the meeting, (ii) by the
Board of Trustees or (iii) by a shareholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set forth in the
Bylaws and (b) with respect to special meetings of Shareholders, only the
business specified in the Company's notice of meeting may be brought before the
meeting of shareholders and nominations of persons for election to the Board of
Trustees may be made only (i) pursuant to the Company's notice of the meeting,
(ii) by the Board of Trustees or (iii) provided that the Board of Trustees has
determined that Trustees shall be elected at such meeting, by a shareholder who
is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
Anti-Takeover Effect of Certain Provisions of Maryland Law and the
Declaration of Trust and Bylaws
The business combination provisions and, if the applicable provision in
the Bylaws is rescinded, the control share acquisition provisions of the MGCL,
the provisions of the Declaration of Trust on classification of the Board of
Trustees and removal of Trustees and the advance notice provisions of the
Bylaws could delay, defer or prevent a transaction or a change in control of
the Company that might involve a premium price for holders of Common Shares or
otherwise be in their best interest.
Maryland Asset Requirements
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires 75% of the value of the Company's assets to be
real estate assets, government securities, cash and cash items, including
receivables. The Maryland REIT Law also prohibits the Company from using or
applying land for farming, agricultural, horticultural or similar purposes.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its declaration of trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit
or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. The Declaration of Trust of the Company contains such a provision
which eliminates such liability to the maximum extent permitted by Maryland
law.
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<PAGE> 28
The Declaration of Trust of the Company obligates the Company, to the
maximum extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former shareholder, Trustee, or officer or (b) any individual who,
while a Trustee of the Company and at the request of the Company, serves or has
served another corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a trustee, director, officer, partner, employee
or agent of such a corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise from or against any claim or liability to
which such person may become subject or which such person may incur by reason
of such service. The Bylaws of the Company obligate it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former Trustee or officer who is made a party to the proceeding by reason of
his service in that capacity, (b) any individual who, while a shareholder,
Trustee or officer of the Company and at the request of the Company, serves or
has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer or partner
of such corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise and who is made a party to the proceeding by reason of his
service in that capacity and (c) each shareholder or former shareholder for any
claim or liability to which he may become subject by reason of such status.
The Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any
of the capacities described above and to any employee or agent of the Company
or a predecessor of the Company. The Bylaws require the Company to indemnify
any present or former shareholder, trustee or officer who has been successful,
on the merits or otherwise, in the defense of any proceeding to which he is
made a party by reason of his service in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of
the Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the director of officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
OTHER MATTERS
The Common Shares trade on the New York Stock Exchange under the symbol
"KPA."
The transfer agent and registrar for the Company's Common Shares is Harris
Trust and Savings Bank, Chicago, Illinois.
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REDEMPTION OF UNITS
GENERAL
Pursuant to the Redemption Rights, each Limited Partner holding Redemption
Units may, subject to certain limitations, require that the Partnership redeem
all or a portion of such Redemption Units at any time after July 31, 1997, by
delivering a notice of exercise of redemption right to the Partnership. Upon
redemption, each Limited Partner will receive, at the option of the General
Partner, either (i) a number of Common Shares equal to the number of Redemption
Units redeemed (subject to certain anti-dilution adjustments) or (ii) cash in
an amount equal to the market value of the number of Common Shares he would
have received pursuant to (i) above. The market value of the Common Shares for
this purpose will be equal to the average of the closing trading prices of the
Company's Common Shares (or substitute information, if no such closing price is
available) generally for the ten consecutive trading days before the day on
which the redemption notice was received by the Partnership.
In lieu of the Partnership redeeming Redemption Units, the Company, in its
sole discretion, has the right to assume directly and satisfy the redemption
right of a Limited Partner described in the preceding paragraph. The Company
anticipates that it generally will elect to assume directly and satisfy any
redemption right exercised by a Limited Partner with respect to the Redemption
Units through the issuance of Redemption Shares, whereupon the Company will
acquire the Redemption Units being redeemed. Such an acquisition will be
treated as a sale of the Redemption Units to the Company for federal income tax
purposes. See "--Tax Consequences of Redemption." Upon redemption, a Limited
Partner's right to receive distributions with respect to the Redemption Units
redeemed will cease. A Limited Partner must request the redemption of at least
1,000 Redemption Units (or all of the Redemption Units held by such Limited
Partner, if less than 1,000 are so held).
EACH LIMITED PARTNER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE REDEMPTION AND OWNERSHIP OF HIS UNITS,
AND THE OWNERSHIP AND SALE OF THE COMMON SHARES AND OF THE COMPANY'S ELECTION
TO BE TAXED AS A REIT, INCLUDING THE STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH REDEMPTION, OWNERSHIP, SALE, AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes certain federal income tax
considerations that may be relevant to a Limited Partner who exercises his
right to require the redemption of his Units.
Tax Treatment of Redemption of Units. If the Company assumes and performs
the redemption obligation, the Partnership Agreement provides that the
redemption will be treated by the Company, the Partnership, and the redeeming
Limited Partner as a sale of Units by such Limited Partner to the Company at
the time of such redemption. In that event, such sale will be fully taxable to
the redeeming Limited Partner and such redeeming Limited Partner will be
treated as realizing for tax purposes an amount equal to the sum of the cash or
the value of the Common Shares received in connection with the redemption plus
the amount of any Partnership liabilities allocable to the redeemed Units at
the time of the redemption. The determination of the amount of gain or loss is
discussed more fully below.
If the Company does not elect to assume the obligation to redeem a Limited
Partner's Units and the Partnership redeems such Units for cash that the
Company contributes to the Partnership to effect such redemption, the
redemption likely would be treated for tax purposes in the same manner as the
scenario described in the preceding paragraph (i.e., as a sale of such Units to
the Company in a fully taxable transaction), although the matter is not free
from doubt. In that event, the redeeming Partner would be treated as realizing
an amount equal to the sum of the cash or the value of the Common Shares
received in connection with the redemption plus the amount of any Partnership
liabilities allocable to the redeemed Units at the time of the redemption. The
determination of the amount of gain or loss in the event of sale treatment is
discussed more fully below.
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If the Partnership chooses to redeem a Limited Partner's Units for cash
that is not contributed by the Company to effect the redemption (e.g., for cash
borrowed by the Partnership), such transaction would be treated as a redemption
for federal income tax purposes. In that event, the tax consequences would be
the same as those described in the previous paragraph, except that if the
Partnership redeems less than all of a Limited Partner's Units, the Limited
Partner would not be permitted to recognize any loss occurring on the
transaction and would recognize taxable gain only to the extent that the cash,
plus the amount of any Partnership liabilities allocable to the redeemed Units,
exceeded the Limited Partner's adjusted basis in all of such Limited Partner's
Units immediately before the redemption.
Tax Treatment of Disposition of Units by Limited Partner Generally. If a
Unit is redeemed in a manner that is treated as a sale of the Unit, or a
Limited Partner otherwise disposes of a Unit (other than in a transaction that
is treated as a redemption for tax purposes, such as a transaction described in
the preceding paragraph), the determination of gain or loss from such sale or
other disposition will be based on the difference between the amount considered
realized for tax purposes and the tax basis in such Unit. See "--Basis of
Units." Upon the sale of a Unit, the "amount realized" will be measured by the
sum of the cash and fair market value of other property (e.g., Common Shares)
received plus the amount of any Partnership liabilities allocable to the Unit
sold. To the extent that the amount of cash or property received plus the
allocable share of any Partnership liabilities exceeds the Limited Partner's
basis in the Unit disposed of, such Limited Partner will recognize gain. It is
possible that the amount of gain recognized or even the tax liability resulting
from such gain could exceed the amount of cash and the value of any other
property received upon such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount
realized upon the sale of a Unit attributable to a Limited Partner's share of
"unrealized receivables" of the Partnership (as defined in Section 751 of the
Code) exceeds the basis attributable to those assets, such excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in Partnership income, any rights to payment for services
rendered or to be rendered. Unrealized receivables also include amounts that
would be subject to recapture as ordinary income if the Partnership had sold
its assets at their fair market value at the time of the transfer of a Unit
(i.e., the excess of accelerated depreciation over straight line depreciation).
Basis of Units. In general, a Limited Partner who contributed property to
the Partnership in exchange for his Units had an initial tax basis in his Units
("Initial Basis") equal to his basis in the contributed property. In general,
a Limited Partner who was deemed at the time of the transactions resulting in
the issuance of the Units to have received his Units upon the contribution of
property by the partnership in which such Limited Partner was a partner,
followed by the liquidation of such partnership, had an Initial Basis equal to
his basis in his partnership interest at the time of such liquidation.
Similarly, in general, a Limited Partner who at the time of the transactions
resulting in the issuance of the Units contributed a partnership interest in
exchange for his Units had an Initial Basis in the Units equal to his basis in
the contributed partnership interest. A Limited Partner's Initial Basis in his
Units generally is increased by (i) such Limited Partner's share of Partnership
taxable income and (ii) increases in his share of liabilities of the
Partnership (including any increase in his share of liabilities occurring in
connection with the transactions resulting in the issuance of the Units).
Generally, such Limited Partner's basis in his Units is decreased (but not
below zero) by (A) his share of Partnership distributions, (B) decreases in his
share of liabilities of the Partnership (including any decrease in his share of
liabilities of the Partnership occurring in connection with the transactions
resulting in the issuance of the Units), (C) his share of losses of the
Partnership and (D) his share of nondeductible expenditures of the Partnership
that are not chargeable to capital (i.e., syndication expenses).
Potential Application of Disguised Sale Regulations to a Redemption of
Units. There is a risk that a redemption of Units may cause the original
transfer of property to the Partnership in exchange for Units to be treated as
a "disguised sale" of property. The Code and the Treasury Regulations
thereunder (the "Disguised Sale Regulations") generally provide that, unless
one of the prescribed exceptions is applicable, a partner's contribution of
property to a partnership and a simultaneous or subsequent transfer of money or
other consideration (including the assumption of or taking subject to a
liability) from the partnership to the partner will be presumed to be a sale,
in whole or in part, of such property by the partner to the partnership.
Further, the Disguised Sale Regulations provide generally that, in the absence
of an applicable exception, if money or other consideration is transferred by a
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partnership to a partner within two years of the partner's contribution of
property, the transactions are, when viewed together, presumed to be a sale of
the contributed property unless the facts and circumstances clearly establish
that the transfers do not constitute a sale. However, if, at the time of the
transaction resulting in the issuance of Units to a Limited Partner, such
Limited Partner did not intend to redeem such Units within two years of such
issuance, the transfers of property should not be viewed as a sale of the
contributed property to the Partnership even if the Units are redeemed within
two years of issuance. In addition, the Disguised Sale Regulations provide
that if two years have passed between the transfer of money or other
consideration and the contribution of property, the transactions will be
presumed not to be a sale unless the facts and circumstances clearly establish
that the transfers constitute a sale.
Accordingly, if a Unit is redeemed, the Service could contend that the
Disguised Sale Regulations apply because the Limited Partner will thus receive
cash or Common Shares subsequent to his previous contribution of property to
the Partnership. In that event, the Service could contend that the
transactions in connection with the issuance of the Units themselves were
taxable as a disguised sale under the Disguised Sale Regulations. Any gain
recognized thereby may be eligible for installment reporting under Section 453
of the Code, subject to certain limitations.
COMPARISON OF OWNERSHIP OF UNITS AND COMMON SHARES
Generally, the nature of an investment in Common Shares of the Company is
substantially equivalent economically to an investment in Units in the
Partnership. Since the Partnership makes distributions to its partners on a
per Unit basis and the Company, through a wholly-owned subsidiary of the
Company, owns one Unit for each outstanding Common Share, a holder of a Common
Unit Share generally receives the same distribution that a holder of a Common
Unit receives, and shareholders and Unit holders generally share in the risks
and rewards of ownership in the enterprise being conducted by the Company
(through Innkeepers Financial and the Partnership). However, there are some
differences between ownership of Units and ownership of Common Shares, some of
which may be material to investors.
The information below highlights a number of the significant differences
between the Partnership and the Company relating to, among other things, form
of organization, permitted investments, policies and restrictions, management
structure, compensation and fees, investor rights and federal income taxation,
and compares certain legal rights associated with the ownership of Units and
Common Shares, respectively. These comparisons are intended to assist Limited
Partners of the Partnership in understanding how their investment will be
changed if their Units are redeemed for Common Shares.
EACH LIMITED PARTNER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE REDEMPTION AND OWNERSHIP OF HIS UNITS,
THE OWNERSHIP AND SALE OF THE COMMON SHARES AND OF THE COMPANY'S ELECTION
TO BE TAXED AS A REIT, INCLUDING THE STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH REDEMPTION, OWNERSHIP, SALE, AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Form of Organization and Assets Owned. The Partnership is organized as a
Virginia limited partnership. The Company is organized as a Maryland REIT. The
Company elected to be taxed as a REIT under the Code commencing with its
taxable year ended December 31, 1994 and intends to maintain its qualification
as a REIT. The Company owns an interest in the Hotels through the
approximately 76% ownership interest in the Partnership held by the General
Partner.
Length of Investment. The Partnership has a stated termination date of
December 31, 2050, although it may be terminated earlier under certain
circumstances. See "The Company--The Partnership" and "Description of
Units--Term." The Company has a perpetual term and intends to continue its
operations for an indefinite time period.
Purpose and Permitted Investments. The Partnership may, subject to the
foregoing limitations, invest in or enter into partnerships, joint ventures or
similar arrangements and may own interests in any other entity. Under the
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Declaration of Trust, the purpose of the Company is generally to invest in,
acquire, hold, merge and dispose of property, including engaging in business as
a REIT under the Maryland REIT Law. Under its Declaration of Trust, the
Company may engage in any activities not inconsistent with law.
Additional Equity. The Partnership is authorized to issue Units and other
partnership interests to the partners or to other persons for such
consideration and on such terms and conditions as the General Partner, in its
sole discretion, may deem appropriate. In addition, the General Partner may
cause the Partnership to issue additional Units to the General Partner, or
other partnership interests in one or more different series or classes which
may be senior to the Units, in conjunction with the offering of securities of
the Company having substantially similar rights, for which the General Partner
shall make a capital contribution to the Partnership in an amount equal to the
proceeds of such offering. Consideration for additional partnership interests
may be cash or other property or other assets permitted by Virginia law.
Under the Declaration of Trust, the total number of shares of all classes
of stock that the Company has the authority to issue is 120,000,000, consisting
of 100,000,000 Common Shares and 20,000,000 Preferred Shares. No Preferred
Shares are outstanding or will be outstanding as of the date of this
Prospectus, and the Company has no present intention to issue Preferred Shares.
The Board of Trustees of the Company may issue, in its discretion, additional
equity securities consisting of Common Shares or Preferred Shares, provided,
however, that the total number of shares issued does not exceed the authorized
number of shares of beneficial interest set forth in the Company's Declaration
of Trust.
Borrowing Policies. The Company's Declaration of Trust limits
consolidated 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. For purposes of calculating the Company's consolidated
indebtedness, any indebtedness incurred by the Partnership is included.
Other Investment Restrictions. Other than restrictions precluding
investments by the Partnership that would adversely affect the qualification of
the Company as a REIT, there are no restrictions upon the Partnership's
authority to enter into certain transactions, including among others, making
investments, lending Partnership funds, or reinvesting the Partnership's cash
flow and net sale or refinancing proceeds.
Neither the Company's Declaration of Trust nor its Bylaws impose any
restrictions upon the types of investments made by the Company, except that
under the Declaration of Trust the Board of Trustees is prohibited from taking
any action that would terminate the Company's REIT status without the approval
of the holders of two-thirds of the outstanding Common Shares.
Management and Control. All management and control over the business of
the Partnership is vested in the General Partner of the Partnership, and no
Limited Partner of the Partnership has any right to participate in or exercise
management or control over the business of the Partnership. Upon the
occurrence of an event of bankruptcy or the dissolution of the General Partner,
such General Partner shall be deemed to be removed automatically; otherwise
generally, the General Partner may not be removed by the Limited Partners with
or without cause.
The Board of Trustees has exclusive control over the Company's business
and affairs subject to the restrictions in the Declaration of Trust and Bylaws.
The policies adopted by the Board of Trustees may be altered or eliminated
without a vote of the shareholders. Accordingly, except for their vote in the
elections or removals of trustees, shareholders have no control over the
ordinary business policies of the Company. The Board of Trustees cannot take
action to disqualify the Company as a REIT or revoke the Company's election to
qualify as a REIT, however, without the consent of the holders of two-thirds of
the outstanding Common Shares. See "Description of Shares of Beneficial
Interest--Certain Provisions of Maryland Law and of the Company's Declaration
of Trust and Bylaws"
Fiduciary Duties. Under Virginia law, the General Partner of the
Partnership is accountable to the Partnership as a fiduciary and, consequently,
is required to exercise good faith in all of its dealings with respect to
partnership affairs. However, under the Partnership Agreement, the General
Partner is under no obligation to take
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into account the tax consequences to any Limited Partner of any action taken by
it, and the General Partner will have no liability to a Limited Partner as a
result of any liabilities or damages incurred or suffered by or benefits not
derived by a Limited Partner as a result of an action or inaction of the
General Partner so long as the General Partner acted in good faith.
Under Maryland law, the Company's trustees must perform their duties in
good faith, in a manner that they believe to be in the best interests of the
Company and with the care an ordinarily prudent person would exercise under
similar circumstances. Trustees of the Company who act in such a manner
generally will not be liable to the Company for monetary damages arising from
their activities.
Management Limitation of Liability and Indemnification. The Partnership
Agreement generally provides that the General Partner will incur no liability
for monetary damages to the Partnership or any Limited Partner for losses
sustained or liabilities incurred as a result of errors in judgment or of any
act or omission if the General Partner acted in good faith. In addition, the
General Partner is not responsible for any misconduct or negligence on the part
of its agents provided the General Partner appointed such agents in good faith.
The General Partner may consult with legal counsel, accountants, consultants,
real estate brokers and such other persons and any action it takes or omits to
take in reliance upon the opinion of such persons, as to matters which the
General Partner reasonably believes to be within their professional or expert
competence, shall be conclusively presumed to have been done or omitted in good
faith and in accordance with such opinion. The Partnership Agreement also
provides for indemnification of the General Partner, the directors and officers
of the General Partner, and such other persons as the General Partner may from
time to time designate, against any and all losses, claims, damages,
liabilities (joint or several), expenses (including reasonable legal fees and
expenses), judgments, fines, settlements, and other amounts arising from any
and all claims, demands, actions, suits or proceedings, whether civil,
criminal, administrative or investigative, that relate to the operations of the
Partnership in which such person may be involved, or is threatened to be
involved, provided that the Partnership shall not indemnify any such person (i)
for an act or omission of such person that was material to the matter giving
rise to the proceeding and either was committed in bad faith or was the result
of active and deliberate dishonesty, (ii) such person actually received an
improper benefit in money, property or services or (iii) in the case of any
criminal proceeding, such person had reasonable cause to believe that the act
or omission was unlawful.
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its declaration of trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit
or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. The Declaration of Trust of the Company contains such a provision
which eliminates such liability to the maximum extent permitted by Maryland
law.
The Declaration of Trust of the Company obligates the Company, to the
maximum extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former shareholder, Trustee, or officer or (b) any individual who,
while a Trustee of the Company and at the request of the Company, serves or has
served another corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a trustee, director, officer, partner, employee
or agent of such a corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise from or against any claim or liability to
which such person may become subject or which such person may incur by reason
of such service. The Bylaws of the Company obligate it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former Trustee or officer who is made a party to the proceeding by reason of
his service in that capacity, (b) any individual who, while a shareholder,
Trustee or officer of the Company and at the request of the Company, serves or
has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer or partner
of such corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise and who is made a party to the proceeding by reason of his
service in that capacity and (c) each shareholder or former shareholder for any
claim or liability to which he may become subject by reason of such status.
The Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any
of the capacities described above and to any employee or
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agent of the Company or a predecessor of the Company. The Bylaws require the
Company to indemnify any present or former shareholder, trustee or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of
the Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the director of officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
Anti-Takeover Provisions. Except in limited circumstances, the General
Partner of the Partnership has exclusive management power over the business and
affairs of the Partnership. The General Partner generally may not be removed
by the Limited Partners with or without cause. Under the Partnership
Agreement, the General Partner may, in its sole discretion, prevent a Limited
Partner from transferring his interest or any rights as a Limited Partner
except in certain limited circumstances. The General Partner may exercise this
right of approval to deter, delay or hamper attempts by persons to acquire a
controlling interest in the Partnership. See "Description of Units."
The business combination provisions and, if the applicable provision in
the Bylaws is rescinded, the control share acquisition provisions of the MGCL,
the provisions of the Declaration of Trust on classification of the Board of
Trustees and removal of Trustees and the advance notice provisions of the
Bylaws could delay, defer or prevent a transaction or a change in the control
of the Company that might involve a premium price for holders of Common Shares
or otherwise be in their best interests. See "Description of Shares of
Beneficial Interest--Certain Provisions of Maryland Law and of the Declaration
of Trust and Bylaws."
Voting Rights. Under the Partnership Agreement, the Limited Partners have
voting rights only as to the dissolution of the Partnership and certain
amendments of the Partnership Agreement, as described more fully in "--Vote
Required to Dissolve the Partnership or the Company" below. Otherwise, all
decisions relating to the operation and management of the Partnership are made
by the General Partner. See "Description of Partnership and Units." The
Company, through a wholly-owned subsidiary, currently owns approximately 76% of
the outstanding Units. As Units held by Limited Partners are redeemed, the
Company's percentage ownership of the Units will increase. If additional Units
are issued to third parties, the Company's percentage ownership of the Units
will decrease.
Shareholders of the Company have the right to vote on, among other things,
a merger or sale of substantially all of the assets of the Company, certain
amendments to the Declaration of Trust, termination of the status of the
Company as a REIT, and dissolution of the Company. All Common Shares have one
vote per share, and the Declaration of Trust permits the Board of Trustees to
classify and issue Preferred Shares in one or more series having voting power
which may differ from that of the Common Shares. See "Description of Shares of
Beneficial Interest."
Amendment of the Partnership Agreement or the Declaration of Trust. The
Partnership Agreement may be amended by the General Partner without the consent
of the Limited Partners in any respect, except that certain amendments
affecting the fundamental rights of a Limited Partner must be approved by
consent of Limited Partners holding more than 66 2/3% of the Units held by the
Limited Partners. Such consent is required for any amendment that would (i)
affect the Redemption Rights, (ii) adversely affect the rights of Limited
Partners to receive
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distributions payable to them under the Partnership Agreement, (iii) alter the
Partnership's profit and loss allocations, or (iv) impose any obligation upon
the Limited Partners to make additional capital contributions to the
Partnership.
For a description of the vote of shareholders required to amend the
Company's Declaration of Trust, see "Description of Shares of Beneficial
Interest - Certain Provisions of Maryland Law and of the Company's Declaration
of Trust and Bylaws - Amendment."
Vote Required to Dissolve the Partnership or the Company. At any time
prior to December 31, 2050 (upon which date the Partnership shall terminate),
the General Partner may elect to dissolve the Partnership in its sole
discretion. Such dissolution shall also occur upon (i) the bankruptcy,
dissolution or withdrawal of the General Partner (unless the Limited Partners
elect to continue the Partnership and select a substitute general partner by
unanimous consent), (ii) the passage of 90 days after the sale or other
disposition of all or substantially all the assets of the Partnership or (iii)
the redemption of all limited partnership interests in the Partnership (other
than those held by the General Partner, if any).
Pursuant to the Company's Declaration of Trust, the Board of Trustees must
obtain approval of two-thirds of all of the votes entitled to be cast upon such
proposal in order to dissolve the Company.
Vote Required to Sell Assets or Merge. Under the Partnership Agreement,
the sale, exchange, transfer or other disposition of all or substantially all
of the Partnership's assets or merger or consolidation of the Partnership
requires only the consent of the General Partner. Pursuant to the Maryland
REIT Law, a real estate investment trust generally cannot merge, unless
approved by its board of trustees and the affirmative vote or written consent
of shareholders holding at least two-thirds of the shares entitled to vote on
the matter unless a lesser percentage (but not less than a majority of all of
the votes entitled to be case on the matter) is set forth in the real estate
investment trust's declaration of trust. The Company's Declaration of Trust
does not provide for a lesser percentage in such situations. Under the
Declaration of Trust, Board of Trustees approval and such two-thirds
affirmative vote of the Company's shareholders is required for any proposed
merger or consolidation of the Company or for the sale, lease, exchange or
transfer of substantially all of the Company's assets. No approval of the
shareholders is required for the sale of the Company's assets in the usual and
regular course of business.
Compensation, Fees and Distributions. The General Partner does not
receive any compensation for its services as General Partner of the
Partnership. As a partner in the Partnership, however, the General Partner has
the same right to allocations and distributions as other partners of the
Partnership. In addition, the Partnership will reimburse the General Partner
and the Company for all expenses incurred relating to the ongoing operation of
the Partnership and any offering of partnership interests in the Partnership or
capital shares of the Company. See "Description of the Partnership and
Units--Reimbursement of General Partner, Transactions with the General Partner
and Affiliates" and "Description of the Partnership and Units --Operations."
Liability of Investors. Under the Partnership Agreement and applicable
state law, the liability of the Limited Partners for the Partnership's debts
and obligations is generally limited to the amount of their investment in the
Partnership and Limited Partners are generally not liable for any debts,
liabilities, contracts or obligations of the Partnership.
Under Maryland law, the Company's shareholders are not personally liable
for the debts or obligations of the Company.
Nature of Investments. The Common Units constitute equity interests
entitling each Limited Partner to his pro rata share of cash distributions made
to the Limited Partners of the Partnership. The Partnership generally intends
to retain and reinvest proceeds of the sale of property or excess refinancing
proceeds in its business.
The Common Shares constitute equity interests in the Company. The Company
is entitled to receive its pro rata shares of distributions made by the
Partnership with respect to the Common Units, and each shareholder will be
entitled to his pro rata share of any dividends or distributions paid with
respect to the Common Shares. The
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dividends payable to the shareholders are not fixed in amount and are only paid
if, when and as declared by the Board of Trustees. In order to qualify as a
REIT, the Company must distribute at least 95% of its taxable income (excluding
capital gains), and any taxable income (including capital gains) not
distributed will be subject to corporate income tax.
Potential Dilution of Rights. The General Partner of the Partnership is
authorized, in its sole discretion and without the consent of the Limited
Partners, to cause the Partnership to issue additional limited partnership
interests and other equity securities for any partnership purpose at any time
to the Limited Partners or to other persons on terms and conditions established
by the General Partner.
The Board of Trustees of the Company may issue, in its discretion,
additional Common Shares and may have the authority to issue from the
authorized capital stock a variety of other equity securities of the Company
with such powers, preferences and rights as the Board of Trustees may designate
at the time. The issuance of additional Common Shares or other equity
securities may result in the dilution of the interests of the shareholders.
Liquidity. Subject to certain exceptions, a Limited Partner may not
transfer all or any portion of his Units without (i) obtaining the prior
written consent of the General Partner, which consent may be withheld in the
sole and absolute discretion of the General Partner, and (ii) meeting certain
other requirements set forth in the Partnership Agreement. Notwithstanding the
foregoing, subject to certain restrictions and more expansive rights in certain
cases, a Limited Partner may transfer his Units to (i) an immediate family
member (defined in the Partnership Agreement as an individual Limited Partner's
spouse, children and grandchildren) of an individual Limited Partner or any
trust in which the individual Limited Partner or his immediate family members
own, collectively, 100% of the beneficial interests or (ii) for a corporation
or other business entity to any of such Limited Partner's affiliates,
subsidiaries or any successor-in-interest of such Limited Partner, provided
that, in either case, such transferee is an "accredited investor" within the
meaning of Regulation D promulgated under the Securities Act. Limited Partners
should expect to hold their Units until they redeem them for cash or Common
Shares, or until the Partnership terminates. The right of a transferee in a
donative transfer to become a substituted Limited Partner also is subject to
the consent of the General Partner, which consent may be withheld in its sole
and absolute discretion. If the General Partner does not consent to the
admission of a transferee in a donative transfer, the transferee will succeed
to all economic rights and benefits attributable to such Units (including the
right of redemption) but will not become a Limited Partner or possess any other
rights of Limited Partners (including the right to vote on or consent to
actions of the Partnership). The General Partner may require, as a condition
of any transfer, that the transferring Limited Partner assume all costs
incurred by the Partnership in connection with such transfer.
The Common Shares are listed on the New York Stock Exchange under the
symbol "KPA." The breadth and strength of the secondary market for the Common
Shares at any time depends on, among other things, upon the number of shares
outstanding, the Company's financial results and prospects, the general
interest in the Company's and other real estate investments, and the Company's
dividend yield compared to that of other debt and equity securities.
Federal Income Taxation. The Partnership is not subject to federal income
taxes. Instead, each holder of Units includes its allocable share of the
Partnership's taxable income or loss in determining its individual federal
income tax liability. As of December 31, 1996, the maximum federal income tax
rate for individuals was 39.6%. Income and loss from the Partnership generally
is subject to the "passive activity" limitations. Under the "passive activity"
rules, income and loss from the Partnership that is considered "passive" income
or loss generally can be offset only against income and loss (including passive
loss carry-forwards from prior years) from other investments that constitute
"passive activities" (unless the Partnership is considered a "publicly traded
partnership," in which case income and loss from the Partnership can only be
offset against other income and loss from the Partnership). Income of the
Partnership, however, that is attributable to dividends or interest does not
qualify as passive income and cannot be offset with losses and deductions from
a "passive activity." Cash distributions from the Partnership are not taxable
to a holder of Units except to the extent they exceed such holder's basis in
its interest in the Partnership (which will include such holder's allocable
share of the Partnership's debt). See "--Basis of Units." Moreover, a holder
of Units must include its allocable share of the Partnership's income and loss
in income for its taxable year ending with or within the Partnership's taxable
year, whether or not such holder receives distributions
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from the Partnership. Each year, holders of Units will receive a Schedule K-1
tax form containing detailed tax information for inclusion in preparing their
federal income tax returns. Holders of Units are required in some cases, to
file state income tax returns and/or pay state income taxes in the states in
which the Partnership owns property, even if they are not residents of those
states, and in some such states (including Virginia) the Partnership is
required to remit a withholding tax with respect to such nonresidents.
The Company elected to be taxed as a REIT effective for its taxable year
ending December 31, 1994. So long as it qualifies as a REIT, the Company will
be permitted to deduct distributions paid to its shareholders, which
effectively will reduce (or eliminate) the "double taxation" that typically
results when a corporation earns income and distributes that income to its
shareholders in the form of dividends. A REIT, however, is subject to federal
income tax on income that is not distributed and also may be subject to federal
income and excise taxes in certain circumstances. The maximum federal income
tax rate for corporations currently is 35% and for individuals is 39.6%.
Dividends paid by the Company will be treated as "portfolio" income and cannot
be offset with losses from "passive activities." Distributions made by the
Company to its taxable domestic shareholders out of current or accumulated
earnings and profits will be taken into account by them as ordinary income.
Distributions that are designated as capital gain dividends generally will be
taxed as long-term capital gain, subject to certain limitations. Distributions
in excess of current or accumulated earnings and profits will be treated as a
non-taxable return of basis to the extent of a shareholder's adjusted basis in
its Common Shares, with the excess taxed as capital gain. Each year,
shareholders of the Company (other than certain types of institutional
investors) will receive IRS Form 1099, which is used by corporations to report
dividends paid to their shareholders. Shareholders who are individuals
generally should not be required to file state income tax returns and/or pay
state income taxes outside of their state of residence with respect to the
Company's operations and distributions. The Company may be required to pay
state income taxes in certain states.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations that
may be relevant to a prospective holder of the Common Shares is based on
current law, is for general information only, and is not tax advice. The
discussion contained herein does not address all aspects of taxation that may
be relevant to particular shareholders in light of their personal investment or
tax circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
The statements in this discussion are based on current provisions of the
Code, existing, temporary, and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the Service, and judicial decisions.
No assurance can be given that future legislative, judicial, or administrative
actions or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus with respect to the transactions
entered into or contemplated prior to the effective date of such changes.
EACH LIMITED PARTNER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE REDEMPTION AND OWNERSHIP OF HIS UNITS,
THE OWNERSHIP AND SALE OF THE COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE
TAXED AS A REIT, INCLUDING THE STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH REDEMPTION, OWNERSHIP, SALE, AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company elected to be taxed as a REIT under sections 856 through 860
of the Code, effective for its short taxable year ended December 31, 1994. The
Company believes that, commencing with such taxable year, it has been organized
and has operated in such a manner as to qualify for taxation as a REIT under
the Code, and the Company intends to continue to operate in such a manner, but
no assurance can be given that the Company will operate in a manner so as to
qualify or remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retrospectively.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from an investment in a corporation. However, the
Company will be subject to federal income tax in the following circumstances.
First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its undistributed items of tax preference. Third,
if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property (other
than foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the Company fails the 75% or 95% gross income test. Sixth,
if the Company should fail to distribute during each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such
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year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if the Company
acquires any asset from a C corporation (i.e., a corporation generally subject
to full corporate-level tax) in a transaction in which the basis of the asset
in the Company's hands is determined by reference to the basis of the asset (or
any other asset) in the hands of the C corporation and the Company recognizes
gain on the disposition of such asset during the 10-year period beginning on
the date on which such asset was acquired by the Company, then to the extent of
such asset's "built-in gain" (i.e., the excess of the fair market value of such
asset at the time of acquisition by the Company over the adjusted basis in such
asset at such time), such gain will be subject to tax at the highest regular
corporate rate applicable (as provided in Treasury Regulations that have not
yet been promulgated). The results described above with respect to the
recognition of "built-in gain" assume that the Company would make an election
pursuant to IRS Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in
order to elect and to maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes and complies with the recordkeeping
requirements of the Code and Treasury Regulations promulgated thereunder; and
(ix) that meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that conditions (i) to (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during
a proportionate part of a taxable year of less than 12 months. Conditions (v)
and (vi) will not apply until after the first taxable year for which an
election is made by the Company to be taxed as a REIT. The Company believes
that it has issued sufficient Common Shares with sufficient diversity of
ownership to allow it to satisfy requirements (v) and (vi). In addition, the
Company's Declaration of Trust provides for restrictions regarding transfer of
the Common Shares that are intended to assist the Company in continuing to
satisfy the share ownership requirements described in (v) and (vi) above. Such
transfer restrictions are described in "Description of Shares of Beneficial
Interest -- Certain Provisions of Maryland Law and of the Company's Declaration
of Trust and Bylaws -- Restrictions on Transfer."
For purposes of determining share ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or
a portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and the beneficiaries of such trust are treated as holding shares of
a REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
The Company currently has twelve corporate subsidiaries and may have
additional corporate subsidiaries in the future. Code section 856(i) provides
that a corporation that is a "qualified REIT subsidiary" shall not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of which
has been held by the REIT at all times during the period that such corporation
was in existence. Thus, in applying the requirements described herein, any
"qualified REIT subsidiaries" acquired or formed by the Company will be
ignored, and all assets, liabilities, and items of income, deduction, and
credit of such subsidiaries will be treated as assets, liabilities and items of
income, deduction, and credit of the Company. The Company's current
subsidiaries are "qualified REIT subsidiaries."
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
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income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, the Company's
proportionate share of the assets, liabilities, and items of income of the
Partnership and its subsidiary partnerships (the "Subsidiary Partnerships")
will be treated as assets and gross income of the Company for purposes of
applying the requirements described herein.
A REIT cannot qualify as such if, at the close of any REIT taxable year,
it has earnings and profits accumulated in non-REIT taxable years or in
non-REIT taxable years of a predecessor corporation. As both the Company and
the corporation that was merged into the Company immediately prior to the
closing of the Initial Offering (i) validly elected for all taxable years since
their organization to be taxed as pass-through entities under subchapter S of
the Code and (ii) have not succeeded to any earnings and profits accumulated
during a non-REIT taxable year, they did not have any earnings and profits
immediately prior to the commencement of the Company's first REIT taxable year,
and, therefore, the Company will not have any earnings and profits from
non-REIT taxable years.
Income Tests
In order for the Company to maintain its qualification as a REIT, there
are three requirements relating to the Company's gross income that must be
satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or
temporary investment income. Second, at least 95% of the Company's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property or temporary investments, and from
dividends, other types of interest, and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. Third, not more
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year may be gain from the sale or other
disposition of (i) stock or securities held for less than one year, (ii) dealer
property that is not foreclosure property, and (iii) certain real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property). The specific application of these tests to the Company
is discussed below.
Rents received by the Company will qualify as "rents from real property"
in satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the Company, or an owner of 10% or more of
the Company, actually or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."
Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
revenue. The "independent contractor" requirement, however, does not apply to
the extent the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant."
Pursuant to the Percentage Leases, the Lessee leases from the Partnership
and the Subsidiary Partnerships the land, buildings, improvements, furnishings,
and equipment comprising the Hotels for periods ranging from ten to thirteen
years. The Percentage Leases provide that the Lessee is obligated to pay to
the Partnership or the applicable Subsidiary Partnership (i) the greater of a
fixed rent (the "Base Rent") or a percentage rent (the "Percentage Rent")
(collectively, the "Rents") and (ii) certain other amounts, including interest
accrued on any late payments or charges (the "Additional Charges"). The
Percentage Rent is calculated by multiplying fixed percentages by the gross
room revenues for each of the Hotels. The Base Rent accrues and is required to
be paid
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monthly and the Percentage Rent (if any) accrues and is required to be paid
either monthly or quarterly, depending on the hotel.
In order for the Base Rent, the Percentage Rent, and the Additional
Charges to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement,
(iii) the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the operation of
the property or whether the lessee was required simply to use its best efforts
to perform its obligations under the agreement), and (iv) the extent to which
the property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the
risk of damage to the property).
In addition, Code section 7701(e) provides that a contract that purports
to be a service contract (or a partnership agreement) is treated instead as a
lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property, (ii) the service recipient
controls the property, (iii) the service recipient has a significant economic
or possessory interest in the property (e.g., the property's use is likely to
be dedicated to the service recipient for a substantial portion of the useful
life of the property, the recipient shares the risk that the property will
decline in value, the recipient shares in any appreciation in the value of the
property, the recipient shares in savings in the property's operating costs, or
the recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient,
and (vi) the total contract price does not substantially exceed the rental
value of the property for the contract period. Since the determination of
whether a service contract should be treated as a lease is inherently factual,
the presence or absence of any single factor may not be dispositive in every
case.
If the Percentage Leases are recharacterized as service contracts or
partnership agreements, rather than true leases, part or all of the payments
that the Partnership or the Subsidiary Partnerships receives from the Lessee
may not be considered rent or may not otherwise satisfy the various
requirements for qualification as "rents from real property." In that case,
the Company likely would not be able to satisfy either the 75% or 95% gross
income tests and, as a result, would lose its REIT status.
Based on the following facts, the Company believes that the Percentage
Leases will be treated as true leases for federal income tax purposes: (i) the
Partnership or Subsidiary Partnership, as applicable, and the Lessee intend for
their relationship to be that of a lessor and lessee and such relationship is
documented by lease agreements, (ii) the Lessee has the right to the exclusive
possession, use, and quiet enjoyment of the Hotels during the term of the
Percentage Leases, (iii) the Lessee bears the cost of, and is responsible for,
day-to-day maintenance and repair of the Hotels, other than the cost of certain
capital improvements, and dictates how the Hotels are operated, maintained, and
improved, (iv) the Lessee bears all of the costs and expenses of operating the
Hotels (including the cost of any inventory used in their operation) during the
term of the Percentage Leases (other than real estate and personal property
taxes, ground lease rent (where applicable), property and casualty insurance
premiums, the cost of certain furniture, fixtures, and equipment, and certain
capital expenditures), (v) the Lessee benefits from any savings in the costs of
operating the Hotels during the term of the Percentage Leases, (vi) in the
event of damage to or destruction of a Hotel, the Lessee is at economic risk
because it are obligated either (A) to restore the property to its prior
condition, in which event it will bear all costs of such restoration in excess
of any insurance proceeds, or (B) to purchase the Hotel for an amount generally
equal to the fair market value of the property, less any insurance proceeds,
(vii) the Lessee has indemnified the Partnership and Subsidiary Partnerships
against all liabilities imposed on the Partnership or Subsidiary Partnerships
during the term of the Percentage Leases by reason of (A) injury to persons or
damage to property occurring at the Hotels, (B) the Lessee's use, management,
maintenance or repair of the Hotels, (C) any environmental liability caused by
acts or grossly negligent failures to act of the Lessee, (D) taxes and
assessments in respect of the Hotels that are the obligations of the Lessee, or
(E) any breach of the Percentage
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Leases or of any sublease of a Hotel by the Lessee, (viii) the Lessee is
obligated to pay substantial fixed rent for the period of use of the Hotels,
(ix) the Lessee stands to incur substantial losses (or reap substantial gains)
depending on how successfully it operates the Hotels, (x) the Partnership and
Subsidiary Partnerships cannot use the Hotels concurrently to provide
significant services to entities unrelated to the Lessee, and (xi) the total
contract price under the Percentage Leases does not substantially exceed the
rental value of the Hotels for the term of the Percentage Leases.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. If the
Percentage Leases are characterized as service contracts or partnership
agreements, rather than as true leases, part or all of the payments that the
Partnership and Subsidiary Partnerships receive from the Lessee may not be
considered rent or may not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, the Company likely
would not be able to satisfy either the 75% or 95% gross income test and, as a
result, would lose its REIT status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property, leased in connection with the lease of the
real property comprising a Hotel, must not be greater than 15% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in a Hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in the Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). With respect to one recently-acquired Hotel, the
average adjusted basis of the personal property contained in the Hotel is
greater than 15% of the average adjusted bases of both the real and personal
property comprising such Hotel. As a consequence, the portion of the Rents
received with respect to that Hotel that are attributable to personal property
do not qualify as rents from real property. The amount of disqualified income
under the Percentage Lease for that Hotel, however, will not prevent the
Company from qualifying as a REIT or subject it to any federal income taxation.
With respect to each other Hotel that the Partnership has acquired or will
acquire partially or wholly in exchange for Units, the initial adjusted basis
of the personal property in such Hotel was less than 15% of the initial
adjusted bases of both the real and personal property comprising such Hotel.
Management of the Company has obtained appraisals of the personal property at
each Hotel that the Partnership acquired in exchange for cash indicating that
the appraised value of the personal property at such hotel is less than 15% of
the purchase price of such Hotel. If the Adjusted Basis Ratio with respect to
any Hotel exceeds 15% and the income attributable to excess personal property
would prevent the Company from qualifying as a REIT or would subject it to any
federal income taxation, a portion of the personal property at that Hotel will
be acquired or leased (other than from the Company, the Partnership, or a
Subsidiary Partnership) by the Lessee and the lease payments under the
Percentage Lease will be adjusted appropriately. Further, the Company
anticipates that any additional personal property that the Partnership or a
Subsidiary Partnership acquires will not cause the Company to lose its REIT
status or subject it to any federal income taxation. There can be no
assurance, however, that the Service would not assert that the personal
property acquired by the Partnership, the Company, or a Subsidiary Partnership
had a value in excess of the appraised value, or that a court would not uphold
such assertion. If such a challenge were successfully asserted, the Company
could fail the Adjusted Basis Ratio as to one or more of the Hotels, which in
turn potentially could cause the Company to fail to satisfy the 75% or 95%
gross income test and thus lose its REIT status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will
qualify as "rents from real property" if it is based on percentages of receipts
or sales and the percentages (i) are fixed at the time the Percentage Leases
are entered into, (ii) are not renegotiated during the term of the Percentage
Leases in a manner that has the effect of basing Percentage Rent on income or
profits, and (iii) conform with normal business practice. More generally, the
Percentage Rent will not qualify as "rents from real property" if, considering
the Percentage Leases and all the surrounding circumstances, the arrangement
does not conform with normal business practice, but is in reality used as a
means of basing the Percentage Rent on income or profits. Since the Percentage
Rent is based on fixed percentages of the gross revenues from the Hotels that
are established in the Percentage Leases, and the Company has represented that
the percentages (i) will not be renegotiated during the
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terms of the Percentage Leases in a manner that has the effect of basing the
Percentage Rent on income or profits and (ii) conform with normal business
practice, the Percentage Rent should not be considered based in whole or in
part on the income or profits of any person. Furthermore, the Company has
represented that, with respect to other hotel properties that it acquires in
the future, it will not charge rent for any property that is based in whole or
in part on the income or profits of any person (except by reason of being based
on a fixed percentage of gross revenues, as described above).
A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of the Lessee. The constructive ownership rules generally provide that if
10% or more in value of the shares of the Company are owned, directly or
indirectly, by or for any person, the Company is considered as owning the
shares owned, directly or indirectly, by or for such person. The Company does
not own directly any stock of the Lessee. The limited partners of the
Partnership, including Mr. Fisher, who is the majority shareholder in the
Lessee, may acquire Common Shares by exercising their Redemption Rights. The
Partnership Agreement, however, provides that a redeeming limited partner will
receive cash, rather than Common Shares, at the election of the Company or if
the acquisition of Common Shares by such partner would cause the Company to
own, actually or constructively, 10% or more of the ownership interest 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. The Declaration of Trust likewise
prohibits a shareholder of the Company from owning Common Shares that would
cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's, the Partnership's or the
Subsidiary Partnership's real property, within the meaning of Section
856(d)(2)(B) of the Code. Thus, the Company should never own, actually or
constructively, 10% or more of the Lessee. Furthermore, the Company has
represented that, with respect to other hotels that it acquires in the future,
it will not rent any property to a Related Party Tenant. However, because the
Code's constructive ownership rules for purposes of the Related Party Tenant
rules are broad and it is not possible to monitor continually direct and
indirect transferors of Common Shares, no absolute assurance can be given that
such transfers or other events of which the Company has no knowledge will not
cause the Company to own constructively 10% or more of the Lessee at some
future date.
A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render noncustomary services to
the tenants of the Hotels, or manage or operate the Hotels, other than through
an independent contractor who is adequately compensated and from whom the
Company itself does not derive or receive any income. Provided that the
Percentage Leases are respected as true leases, the Company should satisfy that
requirement because the Company, the Partnership, and the Subsidiary
Partnerships are not performing any services other than customary ones for the
Lessee. Furthermore, the Company has represented that, with respect to other
hotel properties that it acquires in the future, it will not perform
noncustomary services with respect to the tenant of the property. As described
above, however, if the Percentage Leases are recharacterized as service
contracts or partnership agreements, the Rents likely would be disqualified as
"rents from real property" because the Company would be considered to furnish
or render services to the occupants of the Hotels and to manage or operate the
Hotels other than through an independent contractor who is adequately
compensated and from whom the Company derives or receives no income.
If a portion of the Rents from a particular Hotel does not qualify as
"rents from real property" because the amount attributable to personal property
exceeds 15% of the total Rents for a taxable year, the portion of the Rents
that is attributable to personal property will not be qualifying income for
purposes of either the 75% or 95% gross income tests. Thus, if such Rents
attributable to personal property, plus any other nonqualifying income, during
a taxable year exceed 5% of the Company's gross income during the year, the
Company would lose its REIT status. If, however, the Rents do not qualify as
"rents from real property" because either (i) the Percentage Rent is considered
based on income or profits of the Lessee, (ii) the Company owns, actually or
constructively, 10% or more of the Lessee, or (iii) the Company furnishes
noncustomary services to the tenants of the Hotels, or manages or operates the
Hotels, other than through a qualifying independent contractor, none of the
Rents would qualify as "rents from real property." In that case, the Company
likely would lose its REIT status because it would be unable to satisfy either
the 75% or 95% gross income tests.
In addition to the Rents, the Lessee is required to pay to the Company or
the Partnership, as applicable, the Additional Charges. To the extent that the
Additional Charges represent either (i) reimbursements of amounts that
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the Lessee is obligated to pay to third parties or (ii) penalties for
nonpayment or late payment of such amounts, the Additional Charges should
qualify as "rents from real property." To the extent however, that the
Additional Charges represent interest that is accrued on the late payment of
the Rents or the Additional Charges, the Additional Charges should not qualify
as "rents from real property," but instead should be treated as interest that
qualifies for the 95% gross income test.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. Furthermore, to the extent that interest from a loan that
is based on the residual cash proceeds from sale of the property securing the
loan constitutes a "shared appreciation provision" (as defined in the Code),
income attributable to such participation feature will be treated as gain from
the sale of the secured property.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of a trade or business. All inventory
required in the operation of the Hotels will be purchased by the Lessee or its
designee as required by the terms of the Percentage Leases. Accordingly, the
Company believes that no asset owned by the Company, the Partnership, or a
Subsidiary Partnership is held for sale to customers and that a sale of any
such asset will not be in the ordinary course of business of the Company, the
Partnership, or a Subsidiary Partnership. Whether property is held "primarily
for sale to customers in the ordinary course of a trade or business" depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. Nevertheless, the Company will attempt
to comply with the terms of safe-harbor provisions in the Code prescribing when
asset sales will not be characterized as prohibited transactions. Complete
assurance cannot be given, however, that the Company can comply with the
safe-harbor provisions of the Code or avoid owning property that may be
characterized as property held "primarily for sale to customers in the ordinary
course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real
property) and any personal property incident to such real property (i) that is
acquired by a REIT as the result of such REIT having bid in such property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law, after there was a default (or
default was imminent) on a lease of such property or on an indebtedness that
such property secured and (ii) for which such REIT makes a proper election to
treat such property as foreclosure property. However, a REIT will not be
considered to have foreclosed on a property where such REIT takes control of
the property as a mortgagee-in-possession and cannot receive any profit or
sustain any loss except as a creditor of the mortgagor. Under the Code,
property generally ceases to be foreclosure property with respect to a REIT on
the date that is two years after the date such REIT acquired such property (or
longer if an extension is granted by the Secretary of the Treasury). The
foregoing grace period is terminated and foreclosure property ceases to be
foreclosure property on the first day (i) on which a lease is entered into with
respect to such property that, by its terms, will give rise to income that does
not qualify under the 75% gross income test or any amount is received or
accrued, directly or indirectly, pursuant to a lease entered into on or after
such day that will give rise to income that does not qualify under the 75%
gross income test, (ii) on which any construction takes place on such property
(other than completion of a building, or any other improvement, where more than
10% of the construction of such building or other improvement was completed
before default became imminent), or (iii) which is more than 90 days after the
day on which such property was acquired by the REIT and the property is used in
a trade or business that is conducted by the REIT (other than through an
independent contractor from whom the REIT itself does not derive or receive any
income). As a result of the rules with respect to foreclosure property, if the
Lessee defaults on its obligations under a Percentage Lease for a Hotel, the
Company terminates the Lessee's leasehold interest, and the Company is unable
to find a replacement Lessee for such Hotel within 90 days of such foreclosure,
gross income from hotel operations
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conducted by the Company from such Hotel would cease to qualify for the 75% and
95% gross income tests. In such event, the Company likely would be unable to
satisfy the 75% and 95% gross income tests and, thus, would fail to qualify as
a REIT.
It is possible that, from time to time, the Company, the Partnership, or a
Subsidiary Partnership will enter into hedging transactions with respect to one
or more of its assets or liabilities. Any such hedging transactions could take
a variety of forms, including interest rate swap contracts, interest rate cap
or floor contracts, futures or forward contracts, and options. To the extent
that the Company, the Partnership, or a Subsidiary Partnership enters into an
interest rate swap or cap contract to hedge any variable rate indebtedness
incurred to acquire or carry real estate assets, any periodic income or gain
from the disposition of such contract should be qualifying income for purposes
of the 95% gross income test, but not the 75% gross income test. Furthermore,
any such contract would be considered a "security" for purposes of applying the
30% gross income test. To the extent that the Company, the Partnership, or a
Subsidiary Partnership hedges with other types of financial instruments or in
other situations, it may not be entirely clear how the income from those
transactions will be treated for purposes of the various income tests that
apply to REITs under the Code. The Company intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the (i) Company's failure to meet
such tests is due to reasonable cause and not due to willful neglect, (ii) the
Company attaches a schedule of the sources of its income to its return, and
(iii) any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of those relief
provisions. As discussed above in "Federal Income Tax Considerations --
Taxation of the Company," even if those relief provisions apply, a tax would be
imposed with respect to the net income attributable to the excess of 75% or 95%
of the Company's gross income over its qualifying income in the relevant
category, whichever is greater. No such relief is available for violations of
the 30% income test.
Asset Tests
The Company, at the close of each quarter of its taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the mortgage
balance does not exceed the value of the associated real property, and shares
of other REITs. For purposes of the 75% asset requirement, the term "interest
in real property" includes an interest in land and improvements thereon, such
as buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold in real
property, and an option to acquire real property (or a leasehold in real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in the Partnership, the Subsidiary Partnerships, and any qualified
REIT subsidiary.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of one or more
nonqualifying assets. If the condition described in clause (ii) of the
preceding sentence were not satisfied, the Company still could avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the quarter in which it arose.
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Distribution Requirements
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and
(B) 95% of the net income (after tax), if any, from foreclosure property, minus
(ii) the sum of certain items of noncash income. Such distributions must be
paid in the taxable year to which they relate, or in the following taxable year
if declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment date after such
declaration. To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates. Furthermore, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed.
The Company has made, and intends to continue to make, timely distributions
sufficient to satisfy all annual distribution requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, under one of the
Percentage Leases, the Percentage Rent is not due until 30 days after the end
of the calendar quarter. In that case, the Partnership still would be required
to recognize as income the Percentage Rent in the calendar quarter to which it
relates. Further, it is possible that, from time to time, the Company may be
allocated a share of net capital gain attributable to the sale of depreciated
property that exceeds its allocable share of cash attributable to that sale.
Therefore, the Company may have less cash available for distribution than is
necessary to meet its annual 95% distribution requirement or to avoid corporate
income tax or the excise tax imposed on certain undistributed income. In such
a situation, the Company may find it necessary to arrange for short-term (or
possibly long-term) borrowings or to raise funds through the issuance of
additional common or preferred shares of beneficial interest.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirements for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, in order to be able to elect
to be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its shareholders designed to disclose
the actual ownership of its outstanding stock. The Company intends to comply
with such requirements.
Partnership Anti-Abuse Rule
The U.S. Department of the Treasury has issued a final regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions") that authorizes the Service, in certain abusive
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or series of related transactions) a principal purpose of
which is to reduce substantially the present value of the partners' aggregate
federal tax liability in a manner inconsistent with the intent of the
Partnership Provisions. The Anti-Abuse Rule states that the Partnership
Provisions are intended to permit taxpayers to conduct joint business
(including investment) activities through a flexible economic arrangement that
accurately reflects the partners' economic agreement and clearly reflects the
partners' income without incurring an entity-level tax. The purposes for
structuring a transaction involving a partnership are determined based on all
of
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the facts and circumstances, including a comparison of the purported business
purpose for a transaction and the claimed tax benefits resulting from the
transaction. A reduction in the present value of the partners' aggregate
federal tax liability through the use of a partnership does not, by itself,
establish inconsistency with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners
have the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption.
The example concludes that the use of the partnership is not inconsistent with
the intent of the Partnership Provisions and, thus, cannot be recast by the
Service. However, the Redemption Rights do not conform in all respects to the
redemption rights contained in the foregoing example. Moreover, the Anti-Abuse
Rule is extraordinarily broad in scope and is applied based on an analysis of
all of the facts and circumstances. As a result, there can be no assurance
that the Service will not attempt to apply the Anti-Abuse Rule to the Company.
If the conditions of the Anti-Abuse Rule are met, the Service is authorized to
take appropriate enforcement action, including disregarding the Partnership for
federal tax purposes or treating one or more of its partners as nonpartners.
Any such action potentially could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which the Company ceased to qualify as a REIT. It is
not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Shares that
for U.S. federal income tax purposes is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of any political subdivision
thereof, (iii) an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United
States, or (iv) any trust with respect to which (A) a U.S. court is able to
exercise primary supervision over the administration of such trust and (B) one
or more U.S. fiduciaries have the authority to control all substantial
decisions of the trust. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held his Common Shares.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a shareholder to
the extent that they do not exceed the adjusted basis of the shareholder's
Common Shares, but rather will reduce the adjusted basis of such shares. To
the extent that such distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a shareholder's Common
Shares, such distributions will be included in income as long-term capital gain
(or short-term capital gain if the Common Shares have been held for one year or
less) assuming the
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Common Shares are capital assets in the hands of the shareholder. In addition,
any distribution declared by the Company in October, November, or December of
any year and payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any
net operating losses or capital losses of the Company. Instead, such losses
would be carried over by the Company for potential offset against its future
income (subject to certain limitations). Taxable distributions from the
Company and gain from the disposition of the Common Shares will not be treated
as passive activity income and, therefore, shareholders generally will not be
able to apply any "passive activity losses" (such as losses from certain types
of limited partnerships in which the shareholder is a limited partner) against
such income. In addition, taxable distributions from the Company and gain from
the disposition of Common Shares generally will be treated as investment income
for purposes of the investment interest limitations. The Company will notify
shareholders after the close of the Company's taxable year as to the portions
of the distributions attributable to that year that constitute ordinary income,
return of capital, and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Common Shares by a shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Shares have been held
for more than one year and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of Common Shares by a shareholder who
has held such stock for six months or less (after applying certain holding
period rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain. All or a portion of any loss realized upon a taxable
disposition of the Common Shares may be disallowed if other Common Shares are
purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is
39.6%, and the tax rate on net capital gains applicable to individuals is 28%.
Thus, the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital or ordinary may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against an individual's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (ii) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A shareholder who does not provide the Company
with his correct taxpayer identification number also may be subject to
penalties imposed by the Service. Any amount paid as backup withholding will
be creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions to
any shareholders who fail to certify their nonforeign status to the Company.
The Service issued proposed regulations in April 1996 regarding the backup
withholding rules as applied to Non-U.S. Shareholders. The proposed
regulations would alter the technical requirements relating to backup
withholding compliance and are proposed to be effective
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for distributions made after December 31, 1997. See "Federal Income Tax
Considerations -- Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject
to taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Common Shares with debt, a portion
of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17), and (20), respectively, of Code section 501(c) are subject to
different UBTI rules, which generally will require them to characterize
distributions from the Company as UBTI. In addition, in certain circumstances,
a pension trust that owns more than 10% of the Company's shares is required to
treat a percentage of the dividends from the Company as UBTI (the "UBTI
Percentage"). The UBTI Percentage is the gross income derived by the Company
from an unrelated trade or business (determined as if the Company were a
pension trust) divided by the gross income of the Company for the year in which
the dividends are paid. The UBTI rule applies to a pension trust holding more
than 10% of the Company's shares only if (i) the UBTI Percentage is at least
5%, (ii) the Company qualifies as a REIT by reason of the modification of the
5/50 Rule that allows the beneficiaries of the pension trust to be treated as
holding shares of the Company in proportion to their actuarial interests in the
pension trust, and (iii) either (A) one pension trust owns more than 25% of the
value of the Company's shares or (B) a group of pension trusts individually
holding more than 10% of the value of the Company's shares collectively owns
more than 50% of the value of the Company's shares.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Shares is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade
or business, the Non-U.S. Shareholder generally will be subject to federal
income tax at graduated rates, in the same manner as U.S. shareholders are
taxed with respect to such distributions (and also may be subject to the 30%
branch profits tax in the case of a Non-U.S. Shareholder that is a foreign
corporation). The Company expects to withhold U.S. income tax at the rate of
30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Company or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that
the distribution is effectively connected income. The Service issued proposed
regulations in April 1996 that would modify the manner in which the Company
complies with the withholding requirements.
Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the shareholder's Common
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<PAGE> 50
Shares, but rather will reduce the adjusted basis of such stock. To the extent
that such distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a Non-U.S. Shareholder's Common Shares,
such distributions will give rise to tax liability if the Non-U.S. Shareholder
would otherwise be subject to tax on any gain from the sale or disposition of
his Common Shares, as described below. Because it generally cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the entire
amount of any distribution normally will be subject to withholding at the same
rate as a dividend. However, a Non-U.S. Shareholder can file a claim for
refund with the Service for the overwithheld amount to the extent it is
determined subsequently that a distribution was, in fact, in excess of the
current and accumulated earnings and profits of the Company.
In August 1996, the U.S. Congress passed the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits. That
statute is effective for distributions made after August 20, 1996.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Shareholders thus would be taxed at
the normal capital gain rates applicable to U.S. shareholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty relief or exemption. The Company is
required to withhold 35% of any distribution that is designated by the Company
as a capital gains dividend. The amount withheld is creditable against the
Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. However, because the Common Shares are
publicly traded, no assurance can be given that the Company is or will continue
to be a "domestically controlled REIT." In addition, a Non-U.S. Shareholder
that owns, actually and constructively, 5% or less of the Company's shares
throughout a specified "look-back period" will not recognize gain on the sale
of his shares taxable under FIRPTA if the shares are trades on an established
securities market. Furthermore, gain not subject to FIRPTA will be taxable to
a Non-U.S. Shareholder if (i) investment in the Common Shares is effectively
connected with the Non-U.S Shareholder's U.S. trade or business, in which case
the Non-U.S. Shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the Common Shares were
to be subject to taxation under FIRPTA, the Non-U.S. Shareholder will be
subject to the same treatment as U.S. shareholders with respect to such gain
(subject to applicable alternative minimum tax, a special alternative minimum
tax in the case of nonresident alien individuals, and the possible application
of the 30% branch profits tax in the case of non-U.S. corporations
OTHER TAX CONSEQUENCES
The Company, the Partnership, the Subsidiary Partnerships, and the
Company's shareholders may be subject to state or local taxation in various
state or local jurisdictions, including those in which it or they own property,
transact business, or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, PROSPECTIVE
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<PAGE> 51
-
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF
STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.
TAX ASPECTS OF THE PARTNERSHIP AND SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Partnership and the Subsidiary Partnerships (each of the Partnership and the
Subsidiary Partnerships is referred to herein as a "Hotel Partnership"). The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
Classification as a Partnership
The Company will be entitled to include in its income its distributive
share of each Hotel Partnership's income and to deduct its distributive share
of each Hotel Partnership's losses only if each Hotel Partnership is classified
for federal income tax purposes as a partnership rather than as a corporation
or an association taxable as a corporation. An entity will be classified as a
partnership rather than as a corporation for federal income tax purposes if the
entity (i) is treated as a partnership under Treasury regulations, effective
January 1, 1997, relating to entity classification (the "Check-the-Box
Regulations") and (ii) is not a "publicly traded" partnership.
Pursuant to the Check-the-Box Regulations, an unincorporated entity with
at least two members may elect to be classified either as an association or as
a partnership. If such an entity fails to make an election, it generally will
be treated as a partnership for federal income tax purposes. The federal
income tax classification of an entity that was in existence prior to January
1, 1997, such as the Hotel Partnerships, will be respected for all periods
prior to January 1, 1997 if (i) the entity had a reasonable basis for its
claimed classification, (ii) the entity and all members of the entity
recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (iii) neither
the entity nor any member of the entity was notified in writing on by a taxing
authority or before May 8, 1996 that the classification of the entity was under
examination. Each Hotel Partnership had a reasonable basis for its claimed
classification under the Treasury Regulations in effect prior to January 1,
1997 and intends to continue to be classified as a partnership for federal
income tax purposes. In addition, the Company has represented that no Hotel
Partnership will elect to be classified as an association taxable as a
corporation under the Check-the-Box Regulations.
A "publicly traded" partnership is a partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market (or the substantial equivalent thereof). A publicly traded
partnership will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for a taxable year
consists of "qualifying income" under section 7704(d) of the Code, which
generally includes any income that is qualifying income for purposes of the 95%
gross income test applicable to REITs (the "90% Passive-Type Income
Exception"). See "Federal Income Tax Considerations-Requirements for
Qualification -- Income Tests." The U.S. Treasury Department has issued
regulations effective for taxable years beginning after December 31, 1995 (the
"PTP Regulations") that provide limited safe harbors from the definition of a
publicly traded partnership. Pursuant to one of those safe harbors (the
"Private Placement Exclusion"), interests in a partnership will not be treated
as readily tradable on a secondary market or the substantial equivalent thereof
if (i) all interests in the partnership were issued in a transaction (or
transactions) that was not required to be registered under the Securities Act
of 1933, as amended, and (ii) the partnership does not have more than 100
partners at any time during the partnership's taxable year. In determining the
number of partners in a partnership, a person owning an interest in a
flow-through entity (i.e., a partnership, grantor trust, or S corporation) that
owns an interest in the partnership is treated as a partner in such partnership
only if (a) substantially all of the value of the owner's interest in the
flow-through entity is attributable to the flow-through entity's interest
(direct or indirect) in the partnership and (b) a principal purpose of the use
of the flow-through entity is to permit the partnership to satisfy the
100-partner limitation. Each Hotel Partnership qualifies for the Private
Placement Exclusion. If a Hotel Partnership is considered a publicly traded
partnership under the PTP Regulations because it is deemed to have more than
100 partners, such Hotel Partnership should not be treated as a corporation
because it should be eligible for the 90% Passive-Type Income Exception.
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<PAGE> 52
If for any reason a Hotel Partnership were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company
would not be able to qualify as a REIT. See "Federal Income Tax Considerations
- -- Requirements for Qualification -- Income Tests" and "-- Requirements for
Qualification -- Asset Tests." In addition, any change in a Hotel
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Distribution Requirements." Further, items of income and
deduction of such Hotel Partnership would not pass through to its partners, and
its partners would be treated as shareholders for tax purposes. Consequently,
such Hotel Partnership would be required to pay income tax at corporate tax
rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing such Hotel Partnership's
taxable income.
Income Taxation of Each Hotel Partnership and its Partners
Partners, Not the Hotel Partnerships, Subject to Tax. A partnership is
not a taxable entity for federal income tax purposes. Rather, the Company will
be required to take into account its allocable share of each Hotel
Partnership's income, gains, losses, deductions, and credits for any taxable
year of such Hotel Partnership ending within or with the taxable year of the
Company, without regard to whether the Company has received or will receive any
distribution from such Hotel Partnership.
Hotel Partnership Allocations. Although a partnership agreement generally
will determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes under section 704(b) of the
Code if they do not comply with the provisions of section 704(b) of the Code
and the Treasury Regulations promulgated thereunder. If an allocation is not
recognized for federal income tax purposes, the item subject to the allocation
will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. Each Hotel Partnership's allocations of taxable income
and loss are intended to comply with the requirements of section 704(b) of the
Code and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal
income tax purposes in a manner such that the contributor is charged with, or
benefits from, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain
or unrealized loss is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax basis of such property at the time of contribution. The Treasury
Department has issued regulations requiring partnerships to use a "reasonable
method" for allocating items affected by section 704(c) of the Code and
outlining several reasonable allocation methods. The Partnership generally has
elected to use the traditional method for allocating Code section 704(c) items
with respect to Hotels that it acquires in exchange for Units.
Under the partnership agreement for each Hotel Partnership, depreciation
or amortization deductions of the Hotel Partnership generally will be allocated
among the partners in accordance with their respective interests in the Hotel
Partnership, except to the extent that the Hotel Partnership is required under
Code section 704(c) to use a method for allocating tax depreciation deductions
attributable to the Hotels or other contributed properties that results in the
Company receiving a disproportionately large share of such deductions. In
addition, gain on sale of a Hotel will be specially allocated to the Limited
Partners to the extent of any "built-in" gain with respect to such Hotel for
federal income tax purposes. Because the Partnership generally has elected to
use the traditional method for allocating Code section 704(c) items with
respect to the Hotels that it acquires in exchange for Units, the Company (i)
may be allocated lower amounts of depreciation deductions for tax purposes with
respect to such Hotels than would be allocated to the Company if such Hotels
were to have a tax basis equal to their fair market value at the time of
contribution and (ii) may be allocated taxable gain in the event of a sale of
such Hotels in excess of the economic profit allocated to the Company as a
result of such sale. These allocations possibly could cause the Company to
recognize taxable income in excess of cash proceeds, which might adversely
affect the Company's ability to comply with the REIT distribution requirements,
although the Company does not anticipate that this event
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<PAGE> 53
will occur. The application of section 704(c) to the Hotel Partnerships is not
entirely clear, however, and may be affected by Treasury Regulations
promulgated in the future.
Basis in Hotel Partnership Interest. The Company's adjusted tax basis in
its partnership interest in a Hotel Partnership generally is equal to (i) the
amount of cash and the basis of any other property contributed to the Hotel
Partnership by the Company, (ii) increased by (A) its allocable share of the
Hotel Partnership's income and (B) its allocable share of indebtedness of the
Hotel Partnership, and (iii) reduced, but not below zero, by (A) the Company's
allocable share of the Hotel Partnership's loss and (B) the amount of cash
distributed to the Company, including constructive cash distributions resulting
from a reduction in the Company's share of indebtedness of the Hotel
Partnership.
If the allocation of the Company's distributive share of the Hotel
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Hotel Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss
would not reduce the Company's adjusted tax basis below zero. To the extent
that the Hotel Partnership's distributions, or any decrease in the Company's
share of the indebtedness of the Hotel Partnership (such decrease being
considered a constructive cash distribution to the partners), would reduce the
Company's adjusted tax basis below zero, such distributions (including such
constructive distributions) will constitute taxable income to the Company.
Such distributions and constructive distributions normally will be
characterized as capital gain, and if the Company's partnership interest in the
Hotel Partnership has been held for longer than the long-term capital gain
holding period (currently one year), the distributions and constructive
distributions will constitute long-term capital gain.
Depreciation Deductions Available to the Partnership. To the extent that
a Hotel Partnership has acquired Hotels for cash, the Hotel Partnership's
initial basis in such Hotels for federal income tax purposes generally was
equal to the purchase price paid by the Hotel Partnership. The Hotel
Partnerships depreciate such depreciable Hotel property for federal income tax
purposes under either the modified accelerated cost recovery system of
depreciation ("MACRS") or the alternative depreciation system of depreciation
("ADS"). The Hotel Partnerships use MACRS for furnishings and equipment.
Under MACRS, the Hotel Partnerships generally depreciate such furnishings and
equipment over a seven-year recovery period using a 200% declining balance
method and a half-year convention. If, however, a Hotel Partnership places
more than 40% of its furnishings and equipment in service during the last three
months of a taxable year, a mid-quarter depreciation convention must be used
for the furnishings and equipment placed in service during that year. The
Hotel Partnerships use ADS for buildings and improvements. Under ADS, the
Hotel Partnerships generally depreciate such buildings and improvements over a
40-year recovery period using a straight line method and a mid-month
convention. However, to the extent that a Hotel Partnership has acquired
Hotels in exchange for Units, the Hotel Partnership's initial basis in each
Hotel for federal income tax purposes should be the same as the transferor's
basis in that Hotel on the date of acquisition. Although the law is not
entirely clear, the Hotel Partnerships generally depreciate such depreciable
property for federal income tax purposes over the same remaining useful lives
and under the same methods used by the transferors. A Hotel Partnership's tax
depreciation deductions are allocated among the partners in accordance with
their respective interests in the Hotel Partnership (except to the extent that
the Hotel Partnership is required under Code section 704(c) to use a method for
allocating depreciation deductions attributable to the Hotels or other
contributed properties that results in the Company receiving a
disproportionately large share of such deductions).
Sale of the Partnership's or a Subsidiary Partnership's Property
Generally, any gain realized by a Hotel Partnership on the sale of
property held for more than one year will be long-term capital gain, except for
any portion of such gain that is treated as depreciation or cost recovery
recapture. Any gain recognized by a Hotel Partnership on the disposition of
the Hotels will be allocated first to the Limited Partners under section 704(c)
of the Code to the extent of their "built-in gain" on those Hotels for federal
income tax purposes. The Limited Partners' "built-in gain" on the Hotels sold
will equal the excess of the Limited Partners' proportionate share of the book
value of those Hotels over the Limited Partners' tax basis allocable to those
Hotels at the time of the sale. Any remaining gain recognized by a Hotel
Partnership on the disposition of the Hotels will be allocated among the
partners in accordance with the applicable partnership agreement.
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<PAGE> 54
The Company's share of any gain realized by a Hotel Partnership on the
sale of any property held by the Hotel Partnership as inventory or other
property held primarily for sale to customers in the ordinary course of the
Hotel Partnership's trade or business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Such prohibited
transaction income also may have an adverse effect upon the Company's ability
to satisfy the income tests for REIT status. See "Federal Income Tax
Considerations -- Requirements For Qualification -- Income Tests" above. The
Company, however, does not presently intend to allow the Hotel Partnerships to
acquire or hold any property that represents inventory or other property held
primarily for sale to customers in the ordinary course of the Company's, the
Partnership's or a Subsidiary Partnership's trade or business.
PLAN OF DISTRIBUTION
This Prospectus relates to the possible issuance by the Company of up to
369,816 Redemption Shares if, and to the extent that, current holders of the
Redemption Units tender the Redemption Units for redemption and the Company
elects to redeem the Redemption Units for Redemption Shares. The Company is
registering the issuance of the Redemption Shares, to make it possible to
provide Redemption Unit holders with freely tradeable securities upon issuance
of Redemption Units. However, registration of the Redemption Shares does not
necessarily mean that any of such shares will be issued by the Company.
The Company will not receive any cash proceeds from the issuance of the
Redemption Shares. The Company may from time to time issue up to 369,816
Redemption Shares in exchange for Redemption Units tendered for redemption.
The Company (or the General Partner) will acquire the Redemption Units in
exchange for each Redemption Share. Consequently, with each such redemption,
the Company's percentage interest in the Partnership will increase.
EXPERTS
The consolidated financial statements and related financial statement
schedule of Innkeepers USA Trust, as of December 31, 1995 and 1996, and for the
period September 30, 1994 (inception) through December 31, 1994 and the years
ended December 31, 1995 and 1996; the combined financial statements of the JF
Lessee as of December 31, 1995 and 1996 and for the period September 30, 1994
(inception) through December 31, 1994 and the years ended December 31, 1995 and
1996; the combined financial statements of the Fisher Initial Hotels as of
December 31, 1992 and 1993 and June 30, 1994 and for the years ended December
31, 1991, 1992 and 1993 and the six months ended June 30, 1994; the financial
statements of Amerimar Cherry Hill Associates Limited Partnership as of
December 31, 1995 and for the year ended December 31, 1995 and the financial
statements of BA Harrisburg Associates as of December 31, 1995 and for the year
ended December 31, 1995; the combined financial statements of the DeBoer Hotels
as of December 30, 1994 and December 29, 1995 and for each of the three fiscal
years in the period ended December 29, 1995; and the combined financial
statements of the Summerfield Acquisition Hotels as of January 3, 1997 and for
the fiscal year then ended; all of which have been incorporated by reference in
this Prospectus have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their reports thereon incorporated by reference
herein. Such financial statements and financial statement schedule are
incorporated herein by reference in reliance upon such reports given on their
authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the Common Shares offered pursuant to this
Prospectus will be passed upon for the Company by Hunton & Williams.
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<PAGE> 55
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON SHARES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER
OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
---------------------
Page
----
AVAILABLE INFORMATION................................ i
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE........................................... i
PROSPECTUS SUMMARY................................... 1
RISK FACTORS......................................... 3
DESCRIPTION OF THE PARTNERSHIP AND UNITS............. 9
SHARES AVAILABLE FOR FUTURE SALE..................... 15
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST......... 16
REDEMPTION OF UNITS.................................. 24
FEDERAL INCOME TAX CONSIDERATIONS.................... 33
PLAN OF DISTRIBUTION................................. 49
EXPERTS.............................................. 49
LEGAL MATTERS........................................ 49
---------------------
================================================================================
INNKEEPERS USA TRUST
369,816 SHARES
COMMON SHARES
---------------------
PROSPECTUS
------------
, 1997
------------
================================================================================
<PAGE> 56
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee .................................. $ 1,566
Accounting fees and expenses ......................................................... 10,000
Blue Sky fees and expenses ........................................................... 1,000
Legal fees and expenses .............................................................. 10,000
Printing ............................................................................. 5,000
Miscellaneous ........................................................................ 5,000
=======
TOTAL ............................................................ $32,566
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit
or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. The Declaration of Trust of the Company contains such a provision
which eliminates such liability to the maximum extent permitted by the Maryland
REIT Law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to (a) any present or former Trustee or officer or (b) any individual who,
while a Trustee of the Company and at the request of the Company, serves or has
served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a trustee,
director, officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
The Bylaws of the Company obligate it, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any present or former
Trustee or officer who is made a party to the proceeding by reason of his
service in that capacity or (b) any individual who, while a Trustee of the
Company and at the request of the Company, serves or has served another real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a trustee, director, officer
or partner of such real estate investment trust, corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise and who is made
a party to the proceeding by reason of his service in that capacity. The
Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any
of the capacities described above and to any employee or agent of the Company
or a predecessor of the Company. The Bylaws require the Company to indemnify a
Trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity.
Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as is permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made
II-1
<PAGE> 57
a party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission
was unlawful. However, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation. In accordance with
the MGCL, the Bylaws of the Company require it, as a condition to advancing
expenses, to obtain (a) a written affirmation by the Trustee or officer of his
good faith belief that he has met the standard of conduct necessary for
indemnification by the Company as authorized by the Bylaws and (b) a written
statement by or on his behalf to repay the amount paid or reimbursed by the
Company if it shall ultimately be determined that the standard of conduct was
not met.
<TABLE>
<CAPTION>
ITEM 16. EXHIBITS.
<S> <C> <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 by reference herein)
3.1(a) - Amendment of Declaration of Trust of the Registrant (previously filed as Exhibit 3.1 to Registration Statement on Form
S-11 (Registration No. 33-81362) and incorporated by reference herein)
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 by reference herein)
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 by reference herein)
5.1* - Opinion of Hunton & Williams
8.1* Opinion of Hunton & Williams with respect to certain tax matters.
10.1 - Second Amended and Restated Agreement of Limited Partnership of Innkeepers USA Limited Partnership (previously
filed as Exhibit 4.2 to Registration Statement on Form S-3 (Registration No. 333-12809) and incorporated by
reference herein)
23.1* - Consent of Coopers & Lybrand L.L.P.
23.2 - Consent of Hunton & Williams (included in Exhibit 5.1)
24.1 - Power of Attorney (located on the signature page of this Registration Statement)
</TABLE>
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<PAGE> 58
* Filed herewith
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made of the securities registered hereby, a post-effective amendment to this
registration statement (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; provided, however, that the undertakings set forth in subparagraphs
(i) and (ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the registrant pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in this registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 15 above or
otherwise, the registrant has been advised that the in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted against the registrant by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate
II-3
<PAGE> 59
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 60
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Palm Beach, State of Florida, on the 23rd day of
July , 1997.
INNKEEPERS USA TRUST,
a Maryland real estate investment trust
(Registrant)
By: /s/ Jeffrey H. Fisher
------------------------------------------
Jeffrey H. Fisher
Chairman of the Board , President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Mark A. Murphy and David Bulger, and each or either of them, his true and
lawful attorney-in-fact with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement and any registration statement that is to be effective upon filing
pursuant to Rule 424(b) under the Securities Act of 1933, as amended, and to
cause the same to be filed with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
granting to said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
or desirable to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all acts and things that said attorneys-in-fact and agents, or
either of them, or their substitutes or substitute, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the 23rd day of July , 1997 by
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Jeffrey H. Fisher
- ------------------------------ Chairman of the Board, President and
Jeffrey H. Fisher Chief Executive Officer (Principal Executive Officer)
/s/ Bruce Zenkel Trustee
- ------------------------------
Bruce Zenkel
</TABLE>
II-5
<PAGE> 61
<TABLE>
<S> <C>
/s/ Miles Berger Trustee
- ------------------------
Miles Berger
/s/ G. Geral Goldsmith Trustee
- ------------------------
C. Gerald Goldsmith
Trustee
- ------------------------
Rolf E. Ruhfus
/s/ Jack P. DeBoer Trustee
- ------------------------
Jack P. DeBoer
/s/ Thomas J. Croker Trustee
- ------------------------
Thomas J. Crocker
/s/ David Bulger Vice President and Treasurer
- ------------------------ (Principal Accounting and Financial Officer)
David Bulger
</TABLE>
II-6
<PAGE> 1
EXHIBIT 5.1
July 23, 1997
Innkeepers USA Trust
306 Royal Poinciana Way
Palm Beach, Florida 33480
Gentlemen:
We have acted as counsel for Innkeepers USA Trust, a Maryland real
estate investment trust (the "Company"), in connection with the
Registration Statement on Form S-3 (the "Registration Statement"), filed
under the Securities Act of 1933, as amended, with respect to the
registration of 369,816 shares of beneficial interest, $0.01 par value
(the "Shares"), being offered by the Company as described in the
Registration Statement.
In connection therewith, we have relied upon, among other things,
our examination of such documents, records of the Company, certificates
of its officers and public officials, as we have deemed necessary for
purposes of the opinion expressed below.
Based upon the foregoing, and having regard for such legal
considerations as we have deemed relevant, we are of the opinion that
the issuance of the Shares as described in the Registration Statement
has been validly authorized and, upon issuance of the Shares as
described in the Registration Statement, the Shares will be legally
issued, fully paid and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the
heading "Legal Matters" therein.
Very truly yours,
HUNTON & WILLIAMS
<PAGE> 1
EXHIBIT 8.1
July 23, 1997
Innkeepers USA Trust
306 Royal Poinciana Way
Palm Beach, Florida 33480
Innkeepers USA Trust
Qualification as
Real Estate Investment Trust
Ladies and Gentlemen:
We have acted as counsel to Innkeepers USA Trust, a Maryland real estate
investment trust (the "Company"), in connection with the preparation of a Form
S-3 registration statement filed with the Securities and Exchange Commission
("SEC") on July 23, 1997 (No. 333-_____), as amended through the date hereof
(the "Registration Statement"), with respect to the possible issuance by the
Company of up to 369,816 common shares ("Redemption Shares") of beneficial
interest, par value $0.01 per share, of the Company (the "Common Shares") if,
and to the extent that, the current holders of 369,816 units of limited
partnership interest ("Units") in Innkeepers USA Limited Partnership, a
Virginia limited partnership (the "Operating Partnership"), tender such Units
for redemption and the Company elects to redeem the Units for Common Shares.
You have requested our opinion regarding certain U.S. federal income tax
matters.
The Company, through the Operating Partnership and its subsidiary
partnerships (the "Subsidiary Partnerships"), currently owns 47 hotels and
associated personal property (the "Current Hotels"). The Company, or a
wholly-owned subsidiary of the Company, owns a 1% general partnership interest,
and the Operating Partnership owns a 99% limited partnership interest, in each
Subsidiary Partnership. The Operating Partnership and Subsidiary Partnerships
lease (i) 38 of the Current Hotels to JF Hotel, Inc., a Virginia corporation,
and its affiliated sister corporations (collectively, the "JF Lessee") pursuant
to substantially similar operating leases (the "JF Leases") and (ii) nine of
the Current Hotels to an affiliate of Summerfield Hotel Corporation (the
"Summerfield Lessee") pursuant to substantially similar operating leases (the
"Summerfield Leases" and, together with the JF Leases, the "Leases"). The JF
Lessee operates 24 of the Current Hotels. A wholly-owned subsidiary of
Marriott International, Inc., a Delaware corporation, operates and manages 12
of the Current Hotels on behalf of the JF Lessee pursuant to substantially
similar management agreements (the "Marriott Management Agreements") with the
JF Lessee. TMH Hotels, Inc., a Kansas corporation, operates and manages two of
the Current Hotels on behalf of the JF Lessee pursuant to substantially similar
management agreements (the "TMH Management Agreements") with the JF Lessee. An
affiliate of Summerfield Hotel Corporation operates and manages
<PAGE> 2
nine of the Current Hotels on behalf of the Summerfield Lessee pursuant to
substantially similar management agreements (the "Summerfield Management
Agreements" and, together with the Marriott Management Agreements and the TMH
Management Agreements, the "Management Agreements") with the Summerfield
Lessee.
In giving the opinions set forth herein, we have examined the following:
1. the Company's Amended and Restated Declaration of Trust, as filed with the
Department of Assessments and Taxation of the State of Maryland on September
21, 1994, as amended on October 4, 1995 and September 18, 1996;
2. the Company's Amended and Restated By-Laws;
3. the prospectus contained as part of the Registration Statement (the
"Prospectus");
4. the Second Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated as of November 1, 1996 (the "Operating Partnership
Agreement"), among the Company, Innkeepers Financial Corporation, as general
partner ("IFC"), and several limited partners;
5. the partnership agreements of the Subsidiary Partnerships, which are listed
on Exhibit A attached hereto;
6. the Leases;
7. the Management Agreements; and
8. such other documents as we have deemed necessary or appropriate for purposes
of this opinion.
In connection with the opinions rendered below, we have assumed, with your
consent, that:
1. each of the documents referred to above has been duly authorized, executed,
and delivered; is authentic, if an original, or is accurate, if a copy; and has
not been amended;
2. during its taxable year ending December 31, 1997 and subsequent taxable
years, the Company has operated and will continue to operate in such a manner
that makes and will continue to make the representations contained in a
certificate, dated the date hereof and executed by a duly appointed officer of
the Company (the "Officer's Certificate"), true for such years;
3. the Company will not make any amendments to its organizational documents,
the Operating Partnership Agreement, or the partnership agreement of any
Subsidiary Partnership after the date of this opinion that would affect its
qualification as a real estate investment trust (a "REIT") for any taxable
year;
<PAGE> 3
4. each partner (each, a "Partner") of the Operating Partnership, other than
IFC, that is a corporation or other entity has a valid legal existence;
5. each Partner, other than IFC, has full power, authority, and legal right to
enter into and to perform the terms of the Operating Partnership Agreement and
the transactions contemplated thereby; and
6. no action will be taken by the Company, the Operating Partnership, the
Subsidiary Partnerships, or the Partners after the date hereof that would have
the effect of altering the facts upon which the opinions set forth below are
based.
In connection with the opinions rendered below, we also have
relied upon the correctness of the representations contained in the Officer's
Certificate.
Based on the factual matters in the documents and assumptions set
forth above, the representations set forth in the Officer's Certificate, the
discussions in the Prospectus under the caption "Federal Income Tax
Considerations" (which are incorporated herein by reference), and without
further investigation as to such factual matters, we are of the opinion that:
(a) the Company qualified to be taxed as a REIT pursuant to
sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"), for its taxable years ended December 31,
1994 through December 31, 1996, and the Company's organization and
current and proposed method of operation will enable it to
continue to qualify as a REIT for its taxable year ended December
31, 1997, and in the future; and
(b) the descriptions of the law contained in the Prospectus under
the caption "Federal Income Tax Considerations" are correct in all
material respects, and the discussions thereunder fairly summarize
the federal income tax considerations that are likely to be
material to a holder of the Redemption Shares.
We have performed no due diligence and have made no efforts to
verify the accuracy and genuineness of the documents and assumptions set forth
above, and the representations set forth in the Officer's Certificate. We will
not review on a continuing basis the Company's compliance with such documents,
assumptions or representations. Accordingly, no assurance can be given that the
actual results of the Company's operations will satisfy the requirements for
qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the
Code and the Treasury regulations thereunder (the "Regulations"), published
administrative interpretations thereof, and published court decisions. The
Internal Revenue Service has not issued Regulations or administrative
interpretations with respect to various provisions of the Code relating to REIT
qualification. No assurance can be given that the law will not change in a way
that will prevent the Company from qualifying as a REIT.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement. In giving this consent, we do not admit that we are
in the category of persons whose consent is
<PAGE> 4
required by Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations promulgated thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal income tax matters
addressed herein, and no other opinions are rendered with respect to other
federal tax matters or to any issues arising under the tax laws of any other
country, or any state or locality. We undertake no obligation to update the
opinions expressed herein after the date of this letter. This opinion letter
is solely for the information and use of the addressee, and it may not be
distributed, relied upon for any purpose by any other person, quoted in whole
or in part or otherwise reproduced in any document, or filed with any
governmental agency without our express written consent.
Very truly yours,
Hunton & Williams
<PAGE> 5
EXHIBIT A
SUBSIDIARY PARTNERSHIP AGREEMENTS
1. the Limited Partnership Agreement of Innkeepers Financing Partnership,
L.P., a Virginia limited partnership, dated March 20, 1995, between Innkeepers
USA Trust, as general partner, and Innkeepers USA Limited Partnership (the
"Operating Partnership"), as limited partner;
2. the Limited Partnership Agreement of Innkeepers Financing Partnership II,
L.P., a Virginia limited partnership, dated October 6, 1995, between Innkeepers
Financial Corporation II, as general partner, and the Operating Partnership, as
limited partner;
3. the Limited Partnership Agreement of Innkeepers Financing Partnership III,
L.P., a Virginia limited partnership, dated March 6, 1997, between Innkeepers
Financial Corporation III, as general partner, and the Operating Partnership,
as limited partner;
4. the Limited Partnership Agreement of Innkeepers Residence San Mateo, L.P., a
Virginia limited partnership, dated October 25, 1996, between Innkeepers
Residence San Mateo, Inc., as general partner, and the Operating Partnership,
as limited partner;
5. the Limited Partnership Agreement of Innkeepers Residence Sili I, L.P., a
Virginia limited partnership, dated October 25, 1996, between Innkeepers
Residence Sili I, Inc., as general partner, and the Operating Partnership, as
limited partner;
6. the Limited Partnership Agreement of Innkeepers Residence Sili II, L.P., a
Virginia limited partnership, dated October 25, 1996, between Innkeepers
Residence Sili II, Inc., as general partner, and the Operating Partnership, as
limited partner;
7. the Limited Partnership Agreement of Innkeepers Residence Denver-Downtown,
L.P., a Virginia limited partnership, dated October 25, 1996, between
Innkeepers Residence Denver-Downtown, Inc., as general partner, and the
Operating Partnership, as limited partner;
8. the Limited Partnership Agreement of Innkeepers Residence Atlanta-Downtown,
L.P., a Virginia limited partnership, dated October 25, 1996, between
Innkeepers Residence Atlanta-Downtown, Inc., as general partner, and the
Operating Partnership, as limited partner;
9. the Limited Partnership Agreement of Innkeepers Residence Wichita East,
L.P., a Virginia limited partnership, dated October 25, 1996, between
Innkeepers Residence Wichita East, Inc., as general partner, and the Operating
Partnership, as limited partner;
10. the Limited Partnership Agreement of Innkeepers Residence East Lansing,
L.P., a Virginia limited partnership, dated October 25, 1996, between
Innkeepers Residence East Lansing, Inc., as general partner, and the Operating
Partnership, as limited partner;
11. the Limited Partnership Agreement of Innkeepers Residence Portland, L.P., a
Virginia limited partnership, dated October 25, 1996, between Innkeepers
Residence Portland, Inc., as general partner, and the Operating Partnership, as
limited partner;
12. the Limited Partnership Agreement of Innkeepers Residence Grand Rapids,
L.P., a Virginia limited partnership, dated October 25, 1996, between
Innkeepers Residence Grand Rapids, Inc., as general partner, and the Operating
Partnership, as limited partner;
<PAGE> 6
13. the Limited Partnership Agreement of Innkeepers Hampton Norcross, L.P., a
Virginia limited partnership, dated October 25, 1996, between Innkeepers
Hampton Norcross, Inc., as general partner, and the Operating Partnership, as
limited partner;
14. the Limited Partnership Agreement of Innkeepers Residence Eden Prairie,
L.P., a Virginia limited partnership, dated January 1, 1997, between Innkeepers
Residence Eden Prairie, Inc., as general partner, and the Operating
Partnership, as limited partner;
15. the Limited Partnership Agreement of Innkeepers Residence Arlington (TX),
L.P., a Virginia limited partnership, dated January 24, 1997, between
Innkeepers Residence Arlington, Inc., as general partner, and the Operating
Partnership, as limited partner;
16. the Limited Partnership Agreement of Innkeepers Residence Addison (TX),
L.P., a Virginia limited partnership, dated January 24, 1997, between
Innkeepers Residence Addison, Inc., as general partner, and the Operating
Partnership, as limited partner;
17. the Limited Partnership Agreement of Innkeepers Hampton Schaumburg, L.P.,
dated as of June 26, 1997, between Innkeepers Hampton Schaumburg, Inc., as
general partner, and the Operating Partnership, as limited partner;
18. the Limited Partnership Agreement of Innkeepers Hampton Lombard, L.P.,
dated as of June 26, 1997, between Innkeepers Hampton Lombard, Inc., as general
partner, and the Operating Partnership, as limited partner;
19. the Limited Partnership Agreement of Innkeepers Hampton Westchester, L.P.,
dated as of June 26, 1997, between Innkeepers Hampton Westchester, Inc., as
general partner, and the Operating Partnership, as limited partner;
20. the Limited Partnership Agreement of Innkeepers Summerfield General, L.P.,
dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner;
21. the Limited Partnership Agreement of Innkeepers Sunrise Tinton Falls, L.P.,
dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner;
22. the Limited Partnership Agreement of Innkeepers Summerfield Mt. Laurel,
L.P., dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner;
23. the Limited Partnership Agreement of Innkeepers Summerfield No. 1, L.P.,
dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner;
24. the Limited Partnership Agreement of Innkeepers Summerfield No. 2, L.P.,
dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner;
25. the Limited Partnership Agreement of Innkeepers Summerfield No. 3, L.P.,
dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner;
26. the Limited Partnership Agreement of Innkeepers Summerfield No. 4, L.P.,
dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner;
27. the Limited Partnership Agreement of Innkeepers Summerfield No. 5, L.P.,
dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner;
<PAGE> 7
28. the Limited Partnership Agreement of Innkeepers Summerfield No. 6, L.P.,
dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner; and
29. the Limited Partnership Agreement of Innkeepers Summerfield No. 7, L.P.,
dated as of July 2, 1997, between Innkeepers Financial Corporation IV, as
general partner, and the Operating Partnership, as limited partner.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Innkeepers USA Trust on Form S-3 of our report dated March 14, 1997 on our
audits of the consolidated financial statements of Innkeepers USA Trust as of
December 31, 1995 and 1996 and for the period September 30, 1994 (inception) to
December 31, 1994 and the years ended December 31, 1995 and 1996, 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, 1995 and 1996 and for
the period September 30, 1994 (inception) to December 31, 1994 and the years
ended December 31, 1995 and 1996 which reports are included, or incorporated by
reference, in Innkeepers USA Trust's 1996 Annual Report on Form 10-K
incorporated by reference herein; the incorporation by reference of our report
dated August 4, 1994 except Note 6 as to which the date is March 30, 1995 on
our audits of the combined financial statements of the Fisher Initial Hotels as
of December 31, 1992 and 1993 and June 30, 1994 and for the years ended
December 31, 1991, 1992 and 1993 and the six months ended June 30, 1994 which
report is included in Innkeepers USA Trust's Form S-11 (File No. 33-95622)
incorporated by reference herein; the incorporation by reference of our reports
dated April 19, 1996 on our audits of the financial statements Amerimar Cherry
Hill Associates and BA Harrisburg Associates as of and for the year ended
December 31, 1995, which reports are included in Innkeepers USA Trust's Form
8-K-A filed on July 17, 1996 incorporated by reference herein; to the
incorporation by reference of our report dated August 30, 1996, on our audits
of the combined financial statements of the DeBoer Hotels as of December 30,
1994 and December 29, 1995 and for each of the three fiscal years in the period
ended December 29, 1995 which report is included in Innkeepers USA Trust's Form
S-3 (File No. 333-12809) incorporated by reference herein; and the
incorporation by reference of our report dated July 3, 1997 on our audits of
the combined financial statements of the Summerfield Acquisition Hotels as of
January 3, 1997 and for the fiscal year then ended which report is included in
Innkeepers USA Trust's Form 8-K filed on July 18, 1997 incorporated by
reference herein.
We also consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
West Palm Beach, Florida
July 23, 1997
