<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1997
REGISTRATION NO. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INNKEEPERS USA TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 65-0503831
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
306 ROYAL POINCIANA WAY
PALM BEACH, FLORIDA 33480
(561) 835-1800
(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 WAY
PALM BEACH, FLORIDA 33480
(561) 835-1800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copy to:
Mark A. Murphy, Esq.
Hunton & Williams
Riverfront Plaza, East
951 East Byrd Street
Richmond, Virginia 23219-4074
(804) 788-8685
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement in light of market
conditions and other factors.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box.[ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box.[x]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Aggregate Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class of to be Registered Offering Price Per Aggregate Registration
Securities to be Registered(1) (2) Unit(3) Offering Price(3) Fee(4)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Shares of beneficial interest,
$0.01 par value, per share $250,000,000 (5) $250,000,000 $75,758
Common Shares of beneficial interest,
$0.01 par value, per share
Warrants
===================================================================================================================================
</TABLE>
(1) This Registration Statement also covers delayed delivery contracts
that may be issued by the Registrant under which the party purchasing
such contracts may be required to purchase Preferred Shares or Common
Shares. Such contracts may be issued together with the specific
Offered Securities to which they relate. In addition, Offered
Securities registered hereunder may be sold either separately or as
units comprising more than one type of Offered Security registered
hereunder.
(2) The amount to be registered consists of up to $250,000,000 of an
indeterminate amount of Preferred Shares, Common Shares and Warrants.
(3) Estimated solely for purposes of calculating the registration fee.
Includes any consideration that will be received for Common Shares issued
upon conversion of Preferred Shares or upon the exercise of the Warrants.
(4) The registration fee has been calculated in accordance with Rule 457(o)
under the Securities Act of 1933, as amended.
(5) Omitted pursuant to General Instruction II.D of Form S-3 under the
Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 23, 1997
PROSPECTUS
$250,000,000
INNKEEPERS USA TRUST
SECURITIES
______________________
Innkeepers USA Trust (the "Company"), a self-administered Maryland real
estate investment trust, intends to issue from time to time its (i) Preferred
Shares of beneficial interest, $0.01 par value per share ("Preferred Shares"),
(ii) Common Shares of beneficial interest, $0.01 par value per share ("Common
Shares") and (iii) warrants to purchase Preferred Shares or Common Shares
("Warrants"), having an aggregate initial public offering price not to exceed
$250,000,000, on terms to be determined at the time of sale. The Preferred
Shares, the Common Shares and the Warrants offered hereby (collectively, the
"Offered Securities") may be offered, separately or as units with other Offered
Securities, in separate series, in amounts, at prices and on terms to be
determined at the time of sale and to be set forth in a supplement to this
Prospectus (a "Prospectus Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Preferred
Shares, the series designation and number of shares, the dividend, liquidation,
redemption, conversion, voting and other rights and the initial public offering
price; (ii) in the case of Common Shares, the number of shares and initial
public offering price; (iii) in the case of Warrants, the number and terms
thereof, the description and the number of securities issuable upon their
exercise, the exercise price, the terms of the offering and sale thereof and,
where applicable, the duration and detachability thereof; and (iv) in the case
of all Offered Securities, whether such Offered Securities will be offered
separately or as a unit with other Offered Securities. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information,
where applicable, concerning certain United States federal income tax
considerations relating to, and any listing on a securities exchange of, the
Offered Securities covered thereby.
The Offered Securities may be offered directly, through agents
designated from time to time by the Company, or to or through underwriters or
dealers. If any designated agents or any underwriters are involved in the sale
of Offered Securities, they will be identified and their compensation will be
described in the applicable Prospectus Supplement. See "Plan of Distribution."
No Offered Securities may be sold without delivery of the applicable Prospectus
Supplement describing such Offered Securities and the method and terms of the
offering thereof.
_____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_____________________
THE DATE OF THIS PROSPECTUS IS __________, 1997.
<PAGE> 3
IN CONNECTION WITH AN OFFERING OF SECURITIES, THE UNDERWRITERS, IF
ANY, FOR SUCH OFFERING MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR
MAINTAIN THE MARKET PRICES OF SUCH SECURITIES AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED
ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE EXCHANGE
ACT, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND WORDS OF SIMILAR IMPORT. SUCH FORWARD-LOOKING
STATEMENTS RELATE TO FUTURE EVENTS, THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY, AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY
OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING
STATEMENTS. PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THE PROSPECTUS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER, INCLUDING THOSE DISCUSSED IN THE SECTIONS ENTITLED "PROSPECTUS
SUMMARY," "RISK, FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS AND PROPERTIES." THE COMPANY
DISCLAIMS ANY OBLIGATION TO UPDATE ANY SUCH FACTORS OR TO PUBLICLY ANNOUNCE THE
RESULT OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at its Regional Offices at Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center,
New York, New York 10048, and can also be inspected and copied at the offices
of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Copies of such material can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the prescribed fees.
This Prospectus is part of a registration statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act
of 1933, as amended (the "Securities Act"). This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules of the Commission. For further
information, reference is made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-24568)
pursuant to the Exchange Act are incorporated herein by reference.
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995;
2. 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.
2
<PAGE> 4
3. The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1996, June 30, 1996 and September 30, 1996;
4. 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/A
on July 17, 1996, (c) November 12, 1996 and (d) November 22, 1996;
5. The description of the Common Shares of the Company included
in the Company's registration statement on Form 8-A, dated September 19, 1996;
6. Financial statements of the Liberty High Income Plus Limited
Partnership (referred to as the "Liberty Hotels", seven of the Current Hotels
purchased by the Company in October 1995) included in the Company's 8-K/A,
dated November 30, 1995;
7. Financial statements of the Fisher Initial Hotels included in
the Company's Form S-11 Registration Statement (File No. 33-95622); and
8. All other documents files with the Commission under the
Exchange Act prior to the termination of the Offering.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents which are incorporated herein by reference, other than exhibits to
such documents (unless such exhibits are specifically incorporated by reference
into such documents). Requests for such copies should be directed to
Innkeepers USA, 306 Royal Poinciana Way, Palm Beach, Florida 33480, Attention:
Corporate Secretary, telephone number (561) 835-1800.
Any statement contained in a document all or a portion of which is
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 subsequently filed document which also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any statement so modified shall not be deemed to constitute a
part of this Prospectus, except as so modified, and any statement so superseded
shall not be deemed to constitute a part of this Prospectus.
3
<PAGE> 5
THE COMPANY
The Company is a self-administered Maryland REIT which owns equity
interests in 33 hotels with an aggregate of 4,038 rooms in fifteen states (the
"Hotels") through Innkeepers USA Limited Partnership and its subsidiary
partnerships (collectively, the "Partnership") each of which is owned 99% by
Innkeepers USA Limited Partnership and 1% by the Company or its wholly-owned
subsidiaries. Innkeepers Financial Corporation, a wholly-owned subsidiary of
the Company (the "General Partner"), owns an approximately 81.9% interest in
Innkeepers USA Limited Partnership (the "Partnership") and is the sole general
partner of the Partnership.
The Company's executive offices are located at 306 Royal Poinciana
Way, Palm Beach, Florida 33480, and its telephone number is (561) 835-1800.
USE OF PROCEEDS
The Company will contribute the net proceeds of any sale of Offered
Securities to the Partnership in exchange for additional units of general
partnership interest. Unless otherwise set forth in the applicable Prospectus
Supplement, the net proceeds from the sale of any Offered Securities will be
used by the Company and the Partnership for general corporate purposes, which
may include repayment of indebtedness, making improvements to properties and
the acquisition of additional properties.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
The following table sets forth the Company's consolidated ratios of
earnings to fixed charges for the periods presented.
<TABLE>
<CAPTION>
Period From
September 30, 1994
(Inception) Through Year Ended Nine Months Ended Nine Months Ended
December 31, 1994 December 31, 1995 September 30, 1996 September 30, 1995
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Ratios of Earnings 3.01 2.59 2.48 2.82
to Fixed Charges
</TABLE>
The consolidated ratio of earnings to fixed charges was computed by
dividing earnings by fixed charges. To date, the Company has not issued any
Preferred Shares; therefore, the ratio of earnings to combined fixed charges
and preferred share dividends and the ratio of earnings to fixed charges are
the same. For purposes of computing the ratio, earnings have been calculated
by adding fixed charges to income before minority interest. Fixed charges
consist of interest expense and amortization of loan origination fees.
Prior to the completion of the Company's initial public offering
("IPO") on September 30, 1994, and intent to qualify as a REIT, the Company's
predecessor entities operated in a manner so as to minimize net taxable income
and were financed with debt. Consequently, the Company's predecessor entities
had net losses for the years ended December 31, 1991, 1992 and 1993 and net
income for the nine months ended September 30, 1994.
The computation of the ratio of earnings to fixed charges for such
periods indicates that earnings were inadequate to cover fixed charges by
approximately $2.0 million, $1.2 million, $.5 million for the years ended
December 31, 1991, 1992, and 1993, respectively. The ratio of earnings to
fixed charges for the nine months ended September 30, 1994 was 1.35. The
completion of the IPO on September 30, 1994, permitted the Company to reduce
indebtedness, resulting in an improved ratio of earnings to fixed charges
commencing with the period from September 30, 1994, to December 31, 1994.
4
<PAGE> 6
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
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
December 31, 1996, there were 22,322,498 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 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.
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.
5
<PAGE> 7
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 Independent Trustee provision in the Declaration of Trust
(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.
The Transfer Agent for the Common Shares is Harris Trust and Savings
Bank. The Common Shares are traded on the NYSE under the symbol "KPA." The
Company will apply to the NYSE to list the additional Common Shares to be sold
pursuant to any Prospectus Supplement, and the Company anticipates that such
shares will be so listed.
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.
The Preferred Shares will have the dividend, liquidation, redemption,
conversion and voting rights set forth below unless otherwise provided in the
Prospectus Supplement relating to a particular series of Preferred Shares.
Reference is made to the Prospectus Supplement relating to the particular
series of Preferred Shares offered thereby for specific terms, including: (i)
the title and liquidation preference per share of such Preferred Shares and the
number of shares offered; (ii) the price at which such series will be issued;
(iii) the dividend rate (or method of calculation), the dates on which
dividends shall be payable and the dates from which dividends shall commence to
accumulate; (iv) any redemption or sinking fund provisions of such series; (v)
any conversion provisions of such series; and (vi) any additional dividend,
liquidation, redemption, sinking fund and other rights, preferences,
privileges, limitations and restrictions of such series.
The Preferred Shares will, when issued, be fully paid and
nonassessable. Unless otherwise specified in the Prospectus Supplement
relating to a particular series of Preferred Shares, each series will rank on a
parity as to dividends and distributions in the event of a liquidation with
each other series of Preferred Shares and, in all cases, will be senior to the
Common Shares.
6
<PAGE> 8
DIVIDEND RIGHTS. Holders of Preferred Shares of each series will be
entitled to receive, when, as and if declared by the Board of Directors, out of
assets of the Company legally available therefor, cash dividends at such rates
and on such dates as are set forth in the Prospectus Supplement relating to
such series of Preferred Shares. Such rate may be fixed or variable or both
and may be cumulative, noncumulative or partially cumulative.
If the applicable Prospectus Supplement so provides, as long as any
Preferred Shares are outstanding, no dividends will be declared or paid or any
distributions be made on the Common Shares, other than a dividend payable in
Common Shares, unless the accrued dividends on each series of Preferred Shares
have been fully paid or declared and set apart for payment and the Company
shall have set apart all amounts, if any, required to be set apart for all
sinking funds, if any, for each series of Preferred Shares.
If the applicable Prospectus Supplement so provides, when dividends
are not paid in full upon any series of Preferred Shares and any other series
of Preferred Shares ranking on a parity as to dividends with such series of
Preferred Shares, all dividends declared upon such series of Preferred Shares
and any other series of Preferred Shares ranking on a parity as to dividends
will be declared pro rata so that the amount of dividends declared per share on
such series of Preferred Shares and such other series will in all cases bear to
each other the same ratio that accrued dividends per share on such series of
Preferred Shares and such other series bear to each other.
Each series of Preferred Shares will be entitled to dividends as
described in the Prospectus Supplement relating to such series, which may be
based upon one or more methods of determination. Different series of Preferred
Shares may be entitled to dividends at different dividend rates or based upon
different methods of determination. Except as provided in the applicable
Prospectus Supplement, no series of Preferred Shares will be entitled to
participate in the earnings or assets of the Company.
RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Shares will be entitled to receive out of the assets of the
Company available for distribution to shareholders the amount stated or
determined on the basis set forth in the Prospectus Supplement relating to such
series, which may include accrued dividends, if such liquidation, dissolution
or winding up is involuntary or may equal the current redemption price per
share (otherwise than for the sinking fund, if any provided for such series)
provided for such series set forth in such Prospectus Supplement, if such
liquidation, dissolution or winding up is voluntary, and on such preferential
basis as is set forth in such Prospectus Supplement. If, upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the amounts
payable with respect to Preferred Shares of any series and any other shares of
beneficial interest of the Company ranking as to any such distribution on a
parity with such series of Preferred Shares are not paid in full, the holders
of Preferred Shares of such series and of such other shares will share ratably
in any such distribution of assets of the Company in proportion to the full
respective preferential amounts to which they are entitled or on such other
basis as is set forth in the applicable Prospectus Supplement. The rights, if
any, of the holders of any series of Preferred Shares to participate in the
assets of the Company remaining after the holders of other series of Preferred
Shares have been paid their respective specified liquidation preferences upon
any liquidation, dissolution or winding up of the Company will be described in
the Prospectus Supplement relating to such series.
REDEMPTION. A series of Preferred Shares may be redeemable, in whole
or in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund, in each case upon terms, at the times,
the redemption prices and for the types of consideration set forth in the
Prospectus Supplement relating to such series. The Prospectus Supplement
relating to a series of Preferred Shares which is subject to mandatory
redemption shall specify the number of shares of such series that shall be
redeemed by the Company in each year commencing after a date to be specified,
at a redemption price per share to be specified together with an amount equal
to any accrued and unpaid dividends thereon to the date of redemption.
If, after giving notice of redemption to the holders of a series of
Preferred Shares, the Company deposits with a designated bank funds sufficient
to redeem such Preferred Shares, then from and after such deposit, all shares
called for redemption will no longer be outstanding for any purpose, other than
the right to receive the redemption price and the right to convert such shares
into other classes of stock of the Company. The redemption price will be
stated in the Prospectus Supplement relating to a particular series of
Preferred Shares.
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<PAGE> 9
Except as indicated in the applicable Prospectus Supplement, the
Preferred Shares are not subject to any mandatory redemption at the option of
the holder.
SINKING FUND. The Prospectus Supplement for any series of Preferred
Shares will state the terms, if any, of a sinking fund for the purchase or
redemption of that series.
CONVERSION RIGHTS. The Prospectus Supplement for any series of
Preferred Shares will state the terms, if any, on which shares of that series
are convertible into Common Shares or another series of Preferred Shares. The
Preferred Shares will have no preemptive rights.
VOTING RIGHTS. Except as indicated in the Prospectus Supplement
relating to a particular series of Preferred Shares, or except as expressly
required by Maryland law, a holder of Preferred Shares will not be entitled to
vote. Except as indicated in the Prospectus Supplement relating to a
particular series of Preferred Shares, in the event the Company issues full
shares of any series of Preferred Shares, each such share will be entitled to
one vote on matters on which holders of such series of Preferred Shares are
entitled to vote.
TRANSFER AGENT AND REGISTRAR. The transfer agent, registrar and
dividend disbursement agent for a series of Preferred Shares will be selected
by the Company and be described in the applicable Prospectus Supplement. The
registrar for shares of Preferred Shares will send notices to shareholders of
any meetings at which holders of Preferred Shares have the right to vote on any
matter.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
The Company's Declaration of Trust authorizes the Trustees to classify
or reclassify any unissued Common Shares or Preferred Shares, subject to any
ownership limitations, by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or
distributions, qualifications or terms or conditions of redemption.
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 waived 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).
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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.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Preferred Shares or
Common Shares. Warrants may be issued independently or together with any other
Offered Securities and may be attached to or separate from such securities.
Each series of Warrants will be issued under a separate warrant agreement (each
a "Warrant Agreement") to be entered into between the Company and a warrant
agent ("Warrant Agent"). The Warrant Agent will act solely as an agent of the
Company in connection with the Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any holders or
beneficial owners of Warrants. The following sets forth certain general terms
and provisions of the Warrants offered hereby. Further terms of the Warrants
and the applicable Warrant Agreement will be set forth in the applicable
Prospectus Supplement. If Warrants are issued, copies of the forms of Warrant
Agreement and the certificate evidencing the Warrants will, prior to such
issuance, be incorporated by reference in the Registration Statement of which
this Prospectus is a part, and the following summary is qualified in its
entirety by reference to such documents.
The Prospectus Supplement will describe the following terms, where
applicable, of Warrants in respect of which this Prospectus is being delivered:
(a) the title of such Warrants;
(b) the aggregate number of such Warrants;
(c) the price or prices at which such Warrants will be issued;
(d) the designation, aggregate principal amount and terms of the
securities purchasable upon exercise of such Warrants;
(e) the designation and terms of the Offered Securities with which
such Warrants are issued and the number of such Warrants
issued with each such security;
(f) if applicable, the date on and after which such Warrants and
the related securities will be separately transferable;
(g) the price at which the securities purchasable upon exercise of
such Warrants may be purchased;
(h) the date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire;
(i) the minimum or maximum amount of such Warrants which may be
exercised at any one time;
(j) information with respect to book-entry procedures, if any;
(k) a discussion of material Federal income tax considerations;
and
(l) any other terms of such Warrants, including terms, procedures
and limitations relating to the exchange and exercise of such
Warrants.
PLAN OF DISTRIBUTION
The Company may sell Offered Securities in or outside the United
States to or through underwriters or may sell Offered Securities to investors
directly or through designated agents. Any such underwriter or agent involved
in the offer and sale of the Offered Securities will be named in the applicable
Prospectus Supplement.
Underwriters may offer and sell the Offered Securities at a fixed
price or prices, which may be changed, or from time to time at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as agents to offer and sell the Offered
Securities upon the terms and conditions set forth in any Prospectus
Supplement. Underwriters may sell Offered Securities to or through dealers,
and such dealers may receive compensation in the form of discounts, concessions
or commissions (which may be changed from time to time) from the underwriters
and/or from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of Offered Securities and any discounts,
concessions or commissions allowed by underwriters to
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participating dealers will be set forth in the applicable Prospectus
Supplement. Underwriters, dealers and agents participating in the distribution
of the Offered Securities may be deemed to be underwriters, and any discounts
and commissions received by them from the Company or from purchasers of Offered
Securities and any profit realized by them on resale of the Offered Securities
may be deemed to be underwriting discounts and commissions under the Securities
Act. Underwriters, dealers and agents may be entitled, under agreements
entered into with the Company, to indemnification against and contribution
toward certain civil liabilities, including liabilities under the Securities
Act.
If so indicated in the applicable Prospectus Supplement, the Company
will authorize dealers acting as the Company's agents to solicit offers by
certain institutions to purchase Offered Securities from the Company at the
public offering price set forth in such Prospectus Supplement pursuant to
Delayed Delivery Contracts (the "Contracts") providing for payment and delivery
on the date or dates stated in such Prospectus Supplement. Each Contract will
be for an amount not less than, and the principal amount of Offered Securities
sold pursuant to Contracts shall not be less nor more than, the respective
amounts stated in such Prospectus Supplement. Institutions with which
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and other institutions, but will in all cases be
subject to the approval of the Company. Contracts will not be subject to any
conditions except (i) the purchase by an institution of the Offered Securities
covered by its Contract shall not at the time of delivery be prohibited under
the laws of any jurisdiction in the United States to which such institution is
subject and (ii) the Company shall have sold to such underwriters the total
principal amount of the Offered Securities less the principal amount thereof
covered by Contracts. A commission indicated in the Prospectus Supplement will
be paid to agents and underwriters soliciting purchases of Offered Securities
pursuant to Contracts accepted by the Company. Agents and underwriters shall
have no responsibility in respect of the delivery or performance of Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with, and perform services for, the Company in the
ordinary course of business.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax
considerations that may be relevant to a prospective holder of Common Shares in
the Company. 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 Internal Revenue Service (the
"Service"), and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF
SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company elected to be taxed as a REIT under sections 856 through
860 of the Code, 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
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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 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 items of tax preference, if any. 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 nonetheless has maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the Company fails the 75% or 95% gross income test. Sixth,
if the Company should fail to distribute during each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually distributed.
Seventh, if the Company acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a transaction in
which the basis of the asset in the Company's hands is determined by reference
to the basis of the asset (or any other asset) in the hands of the C
corporation and the Company recognizes gain on the disposition of such asset
during the 10-year period beginning on the date on which such asset was
acquired by the Company, then to the extent of such asset's "built-in-gain"
(i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in-gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.
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 shares 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. For purposes of
determining stock 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
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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
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 has issued sufficient Common Shares with sufficient
diversity of ownership to allow it to satisfy requirements (v) and (vi) above.
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.
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 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." The Company's subsidiaries,
therefore, will not be subject to federal corporate income taxation, although
they may be subject to state and local taxes.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests, described below. Thus, the Company's
proportionate share of the assets, liabilities and items of income of the
Partnership and its subsidiary partnerships (the "Subsidiary Partnerships")
will be treated as assets, liabilities and items of income of the Company for
purposes of applying the requirements described herein.
Income Tests
In order for the Company to maintain its qualification as a REIT,
three requirements relating to the Company's gross income 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 a direct or indirect owner
of 10% or more of the Company, directly or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion
of rent attributable to such personal property will not qualify as "rents from
real property." Finally, for rents received to qualify as "rents from real
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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 percentage leases (the "Percentage Leases"), several
lessees (in the aggregate, "the Lessee") lease from the Partnership and the
Subsidiary Partnerships the land, buildings, improvements, furnishings and
equipment comprising each Hotel for a period ranging from ten (10) years to
thirteen (13) years. The Percentage Leases provide that the Lessee is
obligated to pay to the Partnership or the applicable Subsidiary Partnership
(i) the greater of base rent ("Base Rent") or percentage rent ("Percentage
Rent" and collectively, the "Rents"), and (ii) certain other additional charges
(the "Additional Charges"). The Percentage Rent is calculated by multiplying
fixed percentages by room revenues for each of the Hotels in excess of certain
levels. Both the Base Rent and the threshold room revenue amount in each
Percentage Rent formula will be adjusted for inflation. The adjustment will be
calculated at the beginning of each calendar year based on the change in the
CPI during the prior calendar year. The Base Rent accrues and is required to
be paid 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) or the potential for economic gain (e.g.,
appreciation) with respect to the property.
In addition, Code section 7701(e) provides that a contract that
purports to be a service contract (or a partnership agreement) 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 whether a service contract should be treated as a lease is
inherently factual, the presence or absence of any single factor may not be
dispositive in every case.
The Company believes that the Percentage Leases will be treated as
true leases for federal income tax purposes because: (i) the Partnership or a
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 exclusive
possession and use and quiet enjoyment of the Hotels during the term of the
Percentage Leases, (iii) the Lessee bears the cost of, and will be responsible
for, day-to-day maintenance and repair of the Hotels, other than the cost of
certain capital expenditures, 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 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 or destruction to a Hotel,
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the Lessee is at economic risk because it will be 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 Hotel, less any insurance proceeds, (vii) the Lessee has indemnified the
Partnership against all liabilities imposed on the Partnership during the term
of the Percentage Leases by reason of (A) injury to persons or damage to
property occurring at the Hotels or (B) the Lessee's use, management,
maintenance or repair of the Hotels, (viii) the Lessee is obligated to pay
substantial fixed rent for the period of use of the Hotels, and (ix) the Lessee
stands to incur substantial losses (or reap substantial gains) depending on how
successfully it operates the Hotels.
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 a Subsidiary Partnership receives from the Lessee may
not be considered rent or may not otherwise satisfy the various requirements
for qualification as "rents from real property." In that case, the Company
likely would not be able to satisfy either the 75% or 95% gross income test
and, as a result, would lose its REIT status.
In order for the 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 a lease of
the real property comprising a Hotel must not be greater than 15% of the total
Rents received under the applicable 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 in
such Hotels is greater than 15% of the average adjusted bases of both the real
and personal property comprising such Hotel. As a consequence, a portion of
the revenues derived under the Percentage Lease applicable to such Hotel (the
portion attributable to the personal property) will not be considered "rents
from real property" unless the average adjusted basis of that hotel's personal
property is less than 15% of the average adjusted bases of both the real and
personal property at such hotel. The amount of any disqualified income under
such Percentage Lease, 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 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. The Company obtained appraisals of the
personal property at each Hotel that the Partnership acquired partially or
wholly in exchange for cash indicating that the appraised value of the personal
property at such hotel was 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 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
Adjusted Basis Ratio could exceed 15% with respect 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 a percentage or
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 in reality is 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
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renegotiated during the terms of the Percentage Leases in a manner that has the
effect of basing the Percentage Rent on income or profits and (ii) conform with
normal business practice, the Percentage Rent should not be considered based in
whole or in part on the income or profits of any person. Furthermore, the
Company has represented that, with respect to other hotels 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, actually 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. Jeffrey Fisher, who is the majority shareholder in
the Lessee, may acquire Common Shares or Preferred Shares by exercising their
Redemption Rights. The Partnership Agreement, however, provides that a
redeeming Limited Partner will receive cash, rather than Common or Preferred
Shares, at the election of the Company or if the acquisition of Common Shares
or Preferred 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, the Partnership's, or the Subsidiary 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 or
Preferred 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 a 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 transfers of Common or Preferred
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 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 hotels
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 the Rents do not qualify as "rents from real property" because the
Rents attributable to personal property exceed 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 the gross income tests.
Thus, if the Rents attributable to personal property, plus any other income
received by the Company in a taxable year that is nonqualifying income for
purposes of the 95% gross income test, 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 the income or profits of the Lessee,
(ii) the Company owns, actually or constructively, 10% or more of the Lessee,
or (iii) the Company furnishes noncustomary services to the tenants of the
Hotels, or manages or operates the Hotels, other than through a qualifying
independent contractor, none of the 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 test.
In addition to the Rents, the Lessee is required to pay to the
Partnership or the applicable Subsidiary Partnership the Additional Charges.
To the extent that the Additional Charges represent either (i) reimbursements
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of amounts that the Partnership or a Subsidiary Partnership is obligated to pay
to third parties or (ii) penalties for nonpayment or late payment of such
amounts, the Additional Charges should qualify as "rents from real property."
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 the sale of the property securing
the loan constitutes a "shared appreciation provision" (as defined in the
Code), income attributable to such participation feature will be treated as
gain from the sale of the secured property.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term
"prohibited transaction" generally includes a sale or other disposition
(whether by the Company, the Partnership or a Subsidiary Partnership) 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, or
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
qualifying income for purposes of the 75% gross income test), less expenses
directly connected with the production of such income. However, gross income
from such foreclosure property will qualify for purposes of the 75% and 95%
gross income tests. "Foreclosure property" is defined as any real property
(including interests in real property) and any personal property incident to
such real property (i) that is acquired by a REIT as the result of such REIT
having bid in such property at foreclosure, or having otherwise reduced such
property to ownership or possession by agreement or process of law, after there
was a default (or default was imminent) on a lease of such property or on an
indebtedness that such property secured and (ii) for which such REIT makes a
proper election to treat such property as foreclosure property. However, a
REIT will not be considered to have foreclosed on a property where such REIT
takes control of the property as a mortgagee-in-possession and cannot receive
any profit or sustain any loss except as a creditor of the mortgagor. Under
the Code, property generally ceases to be foreclosure property with respect to
a REIT on the date that is two years after the date such REIT acquired such
property (or longer if an extension is granted by the Secretary of the
Treasury). The foregoing grace period is terminated and foreclosure property
ceases to be foreclosure property on the first day (i) on which a lease is
entered into with respect to such property that, by its terms, will give rise
to income that does not qualify for purposes of the 75% gross income test or
any amount is received or accrued, directly or indirectly, pursuant to a lease
entered into on or after such day that will give rise to income that does not
qualify for purposes of the 75% gross income test, (ii) on which any
construction takes place on such property (other than completion of a building,
or any other improvement, where more than 10% of the construction of such
building or other improvement was completed before default became imminent), or
(iii) which is more than 90 days after the day on which such property was
acquired by the REIT and the property is used in a trade or business 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 conducted by the Company from such Hotel would cease to
qualify for the 75% and 95%
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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 nevertheless may qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
Those relief provisions generally will be available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations -- Taxation of the
Company," even if those relief provisions apply, a 100% tax would be imposed on
the net income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test. No such relief is available for
violations of the 30% income test.
Asset Tests
The Company, at the close of each quarter of each taxable year, also
must satisfy two tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by cash or
cash items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the principal
balance of a mortgage does not exceed the value of the associated real
property, and shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold of real property, and an option to acquire real property (or a
leasehold of real property). Second, of the investments not included in the
75% asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the value of the Company's total assets and the Company
may not own more than 10% of any one issuer's outstanding voting securities
(except for its ownership interest in the Partnership, a Subsidiary Partnership
or a qualified REIT subsidiary).
For purposes of the asset tests, the Company will be deemed to own its
proportionate share of the assets of the Partnership and each Subsidiary
Partnership, rather than its partnership interest in the Partnership or such
Subsidiary Partnership. The Company has represented that, at all times since
it has operated so as to qualify as a REIT, (i) at least 75% of the value of
its total assets has been represented by real estate assets, cash and cash
items (including receivables), and government securities and (ii) it has not
owned (A) securities of any one issuer the value of which exceeded 5% of the
value of the Company's total assets or (B) more than 10% of any one issuer's
outstanding voting securities (except for its interests in the Partnership, the
Subsidiary Partnerships, and any qualified REIT subsidiary). In addition, the
Company has represented that it will not acquire or dispose, or cause the
Partnership or a Subsidiary Partnership to acquire or dispose, of assets in the
future in a way that would cause it to violate either asset test.
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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 the asset test requirements at the close of the preceding
calendar quarter and (ii) the discrepancy between the value of the Company's
assets and the asset tests either did not exist immediately after the
acquisition of any particular asset or was not wholly or partly caused by the
acquisition of one or more nonqualifying assets (i.e., the discrepancy arose
from changes in the market values of its assets). If the condition described
in clause (ii) of the preceding sentence were not satisfied, the Company still
could avoid disqualification by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which it arose.
Distribution Requirements
The Company, in order to avoid corporate income taxation of the
earnings that it distributes, is required to distribute with respect to each
taxable year dividends (other than capital gain dividends) to its shareholders
in an aggregate 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
federal income 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 the 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 a 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 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.
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 shares. The Company
intends to continue to comply with such requirements.
Partnership Anti-Abuse Rule
The U.S. Treasury Department 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
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involving partnerships, to disregard the form of the transaction and recast it
for federal tax purposes as the Service deems appropriate. The Anti-Abuse Rule
applies where a partnership is formed or utilized in connection with a
transaction (or series of related transactions) with a principal purpose of
substantially reducing the present value of the partners' aggregate federal tax
liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects the
partners' economic agreement and clearly reflects the partners' income without
incurring any entity-level tax. The purposes for structuring a transaction
involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that
elects to be treated as a REIT contributes substantially all of the proceeds
from a public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners
have the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption.
The example concludes that the use of the partnership is not inconsistent with
the intent of the Partnership Provisions and, thus, cannot be recast by the
Service. However, the Redemption Rights do not conform in all respects to the
redemption rights described 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 Company's 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, or (iii) an estate whose income is 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
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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 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 a shareholder is a limited partner) against
such income. In addition, taxable distributions from the Company generally
will be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Common Shares (or
distributions treated as such), however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company will notify shareholders after the
close of the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital,
and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON 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 shares 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 gain or ordinary income 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 indefinitely by individuals. 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
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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 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 from 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 stock only if (i) the UBTI Percentage is at least 5%,
(ii) the Company qualifies as a REIT by reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as
holding shares of the Company in proportion to their actuarial interests in the
pension trust, and (iii) either (A) one pension trust owns more than 25% of the
value of the Company's 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 non-U.S.
corporation). The Company expects to withhold U.S. income tax at the rate of
30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Company or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that
the distribution is effectively connected income. The Service issued proposed
regulations in April 1996 that would modify the manner in which the Company
complies with the withholding requirements. Distributions in excess of current
and accumulated earnings and profits of the Company will not be taxable to a
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<PAGE> 23
shareholder to the extent that such distributions 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 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, amounts so withheld are
refundable to the extent it is determined subsequently that such 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. trade or business. Non-U.S.
Shareholders thus would be taxed at the normal capital gain rates applicable to
U.S. shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to a 30% branch profits tax
in the hands of a non-U.S. corporate shareholder not entitled to treaty relief
or exemption. The Company is required to withhold 35% of any distribution that
is designated by the Company as a capital gains dividend. The amount withheld
is creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his 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 non-U.S. persons. It is currently anticipated
that the Company will be a "domestically controlled REIT" and, therefore, the
sale of the Common Shares will not be subject to taxation under FIRPTA.
However, because the Common Shares are publicly traded, no assurance can be
given that the Company will continue to be a "domestically controlled REIT."
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 would be subject to the
same treatment as U.S. shareholders with respect to such gain (subject to
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals, and the possible application of the 30%
branch profits tax in the case of non-U.S. corporations).
OTHER TAX CONSEQUENCES
The Company, the General Partner, the Company's other qualified REIT
subsidiary, the Partnership, the Subsidiary Partnerships, or the Company's
shareholders may be subject to state or local taxation in various state or
local jurisdictions, including those in which it or they own property, transact
business, or reside. The state and local tax treatment of the Company and its
shareholders may not conform to the federal income tax consequences discussed
above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN
THE COMPANY.
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TAX ASPECTS OF THE PARTNERSHIP AND THE 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 or before May 8, 1996 that the
classification of the entity was under examination. A "publicly traded"
partnership is a partnership whose interests are traded on an established
securities market or are readily tradable on a secondary market (or the
substantial equivalent thereof). A publicly traded partnership will be treated
as a corporation for federal income tax purposes unless at least 90% of such
partnership's gross income for a taxable year consists of "qualifying income"
under section 7704(d) of the Code, which generally includes any income that is
qualifying income for purposes of the 95% gross income test applicable to REITs
(the "90% Passive-Type Income Exception"). See "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.
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.
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<PAGE> 25
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 recently 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 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
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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 is 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 the Partnership or a Subsidiary
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 the
Partnership or a Subsidiary Partnership on the disposition of the Hotels will
be allocated first 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 the Partnership or a
Subsidiary Partnership on the disposition of the Hotels will be allocated among
the partners in accordance with the applicable partnership agreement.
The Company's share of any gain realized by the Partnership or a
Subsidiary Partnership on the sale of any property held by the Partnership or a
Subsidiary Partnership as inventory or other property held primarily for sale
to customers in the ordinary course of the Partnership's or a Subsidiary
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 Partnership or a Subsidiary Partnership
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.
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LEGAL OPINIONS
The validity of the Offered Securities will be passed upon for the
Company by Hunton & Williams, Richmond, Virginia.
EXPERTS
The consolidated financial statements and related financial statement
schedule of Innkeepers USA Trust, as of December 31, 1994 and 1995, and for the
period September 30, 1994 (inception) through December 31, 1994 and the year
ended December 31, 1995; the combined financial statements of JF Hotel, Inc.
and JF Hotel II, Inc. as of December 31, 1994 and 1995 and for the period
September 30, 1994 (inception) through December 31, 1994 and the year ended
December 31, 1995; 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 combined financial statements of the DeBoer Hotels as of December 30, 1994
and December 31, 1995 and for the years ended December 31, 1993, December 30,
1994 and December 31, 1995; and 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;
all of which have been incorporated by reference in this Prospectus have all
been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth
in their reports thereon incorporated by reference in this Registration
Statement. 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.
In addition, the financial statements of Liberty High Income Plus
Limited Partnership (referred to as the "Liberty Hotels") as of December 30,
1994 and December 31, 1993 and for the 52-week periods ended December 30, 1994,
December 31, 1993 and January 1, 1993 have been incorporated by reference
herein and in the Registration Statement, in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
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<PAGE> 28
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 . . . . . . . . . . . $ 75,758
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . 10,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,758
</TABLE>
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS
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 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 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
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<PAGE> 29
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.
ITEM 16. EXHIBITS
4.1 Form of Common Share Certificate (previously filed as Exhibit
4.1 to the Company's Form S-11 Registration Statement,
Registration No. 33-81362 and incorporated herein by
reference)
4.2 Second Amended and Restated Partnership Agreement of the
Partnership (previously filed as Exhibit 4.2 to the Company's
Form S-3 Registration Statement, Registration No. 333-12809
and incorporated herein by reference)
5.1 Opinion of Hunton & Williams
12.1 Statement re Computation of Ratios
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of KPMG Peat Marwick LLP
24.1 Powers of Attorney (included on signature page)
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.
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<PAGE> 30
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 foregoing provisions or otherwise,
the registrant has been advised that the in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted against the registrant by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes 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.
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<PAGE> 31
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 January, 1997.
INNKEEPERS USA TRUST,
a Maryland real estate investment trust (Registrant)
By: /S/ David Bulger
------------------------------------------------
David Bulger
Secretary
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jeffrey H. Fisher or David Bulger
or any one of them, his or her attorneys-in-fact and agents, each with full
power of substitution and resubstitution for him or her in any and all
capacities, to sign any or all amendments or post-effect amendments to this
Registration Statement or a Registration Statement prepared in accordance with
Rule 462 of the Securities Act, and to file the same, with exhibits thereto and
other documents in connection herewith or in connection with the registration
of the Common Stock under the Securities Exchange Act of 1934, as amended, with
the Securities and Exchange Commission, granting unto each of such
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary in connection with such matters
and hereby ratifying and confirming all that each of such attorneys-in-fact and
agents or his or her substitutes may 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 January, 1997
by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/S/ Jeffrey H. Fisher Chairman of the Board and Chief Executive Officer
- --------------------------------------------------- (principal executive officer)
Jeffrey H. Fisher
/S/ Bruce Zenkel Trustee
- ---------------------------------------------------
Bruce Zenkel
/S/ Miles Berger Trustee
- ---------------------------------------------------
Miles Berger
/S/ C. Gerald Goldsmith Trustee
- ---------------------------------------------------
C. Gerald Goldsmith
/S/ Jack P. DeBoer Trustee
- ---------------------------------------------------
Jack P. DeBoer
/S/ David Bulger Chief Financial Officer and Secretary (principal
- --------------------------------------------------- accounting and financial officer)
David Bulger
</TABLE>
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<PAGE> 32
EXHIBIT INDEX
<TABLE>
<S> <C>
4.1 Form of Common Share Certificate (previously filed as Exhibit 4.1 to the Company's Form S-11
Registration Statement, Registration No. 33-81362 and incorporated herein by reference)
4.2 Second Amended and Restated Partnership Agreement of the Partnership (previously filed as Exhibit 4.2
to the Company's Form S-3 Registration Statement, Registration No. 333-12809 and incorporated herein by
reference)
5.1 Opinion of Hunton & Williams
12.1 Statement re Computation of Ratios
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of KPMG Peat Marwick LLP
24.1 Powers of Attorney (included on signature page)
</TABLE>
<PAGE> 1
Exhibit 5.1
FILE NO.: 48714.1
January 23, 1997
Board of Trustees
Innkeepers USA Trust
306 Royal Poinciona Way
Palm Beach, Florida 33400
Registration Statement on Form S-3
Relating to $250,000,000 Issue Amount
of Unallocated Securities
Ladies and Gentlemen:
We have acted as counsel to Innkeepers USA Trust, a Maryland
real estate investment trust (the "Company"), in connection with the
registration by the Company of an aggregate of $250,000,000 of its (i)
preferred shares of beneficial interest, $0.01 par value per share ("Preferred
Shares"), (ii) common shares of beneficial interest, $0.01 par value per share
("Common Shares"), and (iii) warrants to purchase Preferred or Common Shares
("Warrants") on terms to be determined at the time of sale (the Preferred
Shares, Common Shares and Warrants are referred to collectively, as the
"Securities"), as set forth in the Registration Statement on Form S-3 (the
"Registration Statement") that is being filed on the date hereof with the
Securities and Exchange Commission (the "Commission") by the Company pursuant
to the Securities Act of 1933, as amended. The Securities are to be issued in
one or more series and are to be sold from time to time as set forth in the
Registration Statement, the Prospectus contained therein (the "Prospectus") and
any amendments or supplements thereto.
In rendering this opinion, we have relied upon, among other things,
our examination of such records of the Company and
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<PAGE> 2
certificates of its officers and of public officials as we have deemed
necessary.
Based upon the foregoing and the further qualifications stated below,
we are of the opinion that:
1. The Company is a real estate investment trust duly formed,
validly existing and in good standing under the laws of the State of Maryland;
and
2. When (a) the terms of any class or series of the Securities
have been authorized by appropriate corporate action of the Company and (b) the
Securities have been issued and sold upon the terms and conditions set forth in
the Registration Statement, the Prospectus and the applicable supplement to the
Prospectus, then the Preferred Shares and the Common Shares will be legally
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement and to the statement made in reference
to this firm under the caption "Legal Matters" in the Registration Statement.
Very truly yours,
/s/ Hunton & Williams
II-7
<PAGE> 1
Exhibit 12.1
STATEMENT OF COMPUTATION OF RATIOS
(in thousands)
Historical
<TABLE>
<CAPTION>
Period From
September 30, 1994
(Inception) Through Year Ended Nine Months Ended Nine Months Ended
December 31, 1994 December 31, 1995 September 30, 1996 September 30, 1995
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
EARNINGS:
Net Income $ 368 $ 3,467 $ 6,382 $ 2,216
Minority Interest 52 397 444 311
Fixed Charges 209 2,428 4,625 1,386
----- ------- -------- -------
Earnings $ 629 $ 6,292 $ 11,451 $ 3,913
FIXED CHARGES:
Interest Expense $ 61 $ 1,989 $ 4,005 $ 1,095
Amortization of Loan
Origination Fees 148 439 620 291
----- ------- ------- -------
Fixed Charges $ 209 $ 2,428 $ 4,625 $ 1,386
FIXED CHARGE
COVERAGE RATIO(1) 3.01 2.59 2.48 2.82
- ---------------
(1) Computed as earnings divided by fixed charges.
</TABLE>
II-8
<PAGE> 1
EXHIBIT 23.2
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 22, 1996, on our
audits of the consolidated financial statements and financial statement
schedule of Innkeepers USA Trust as of December 31, 1995 and 1994, and for the
year ended December 31, 1995, and for the period September 30, 1994 (inception)
to December 31, 1994, and our report dated March 22, 1996, on our audits of the
combined financial statements of JF Hotel, Inc. and JF Hotel II, Inc., as of
December 31, 1995 and 1994 and for the year ended December 31, 1995, and for
the period September 30, 1994 (inception) to December 31, 1994, which reports
are included in Innkeepers USA Trust's 1995 Annual Report on Form 10-K
incorporated by reference herein; the incorporation by reference of our reports
dated April 19, 1996 on our audits of the financial statements of 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 dated July 17, 1996 incorporated by reference herein; the
incorporation by reference of our report dated August 4, 1994 except for 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; and 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
31, 1994 and 1995 and for each of the three fiscal years in the period ended
December 31, 1995 which report is included in Innkeepers USA Trust's Form S-3
(File No. 333-12809) incorporated by reference herein.
We also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
West Palm Beach, Florida
January 22, 1997
II-9
<PAGE> 1
Exhibit 23.3
Consent of Independent Auditors
The Partners
Liberty High Income Plus Limited Partnership:
We consent to incorporation by reference in the registration statement on Form
S-3 of Innkeepers USA Trust of our report dated February 20, 1995 with respect
to the balance sheets of Liberty High Income Plus Limited Partnership as of
December 30, 1994 and December 31, 1993 and the related statements of
operations, changes in partners' equity (deficit) and cash flows for the
52-week periods ended December 30, 1994, December 31, 1993, and January 1, 1993
which report appears in the Form 8-K/A of Innkeepers USA Trust dated November
30, 1995 and to the reference to our firm under the heading "Experts" in the
registration statement.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 22, 1997
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